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G. Santhanam, Accountant Member

1. These two appeals are by the assessee of which one relates to the disallowance of depreciation and investment allowance of the machinery installed and the other relates to the levy of penalty under Section 271(1)(c) of the Income-taxAct, 1961. The appeals relate to the assessment year 1986-87 and the relevant previous year ended on 31-3-1986.

2. The assessee is a limited company engaged in the manufacture and sale of cotton yarn. The appellant had purchased a 380 KVA generator set from M/s. Batliboi & Co. Ltd., Coimbatore on 5-3-1986 at a cost of Rs. 8,60,000. It had also purchased an LR High Speed Comber from M/s. Lakshmi Machine Works Ltd., Coimbatore on 8-3-1986 for a price of Rs. 6,87,506. It is not in dispute that the generator in question arrived at the factory site of the appellant on 7-3-1986 and the engine and other components of the generator were assembled on the permanent foundation at the mill premises on 10-3-1986 under the supervision of M/s. Batliboi & Co. Ltd. Nor is it in dispute that the comber engine was erected before 31-3-1986. The dispute is only on the limited issue whether these two machineries were put to use before 31-3-1986 so as to be eligible for depreciation and investment allowance. The learned Dy. CIT (Asst.) was of the view that the generator set was neither installed nor commissioned before 31-3-1986 on the basis of the enquiries conducted by her. Sri P.V. Wilson in his statement before the Inspector dated 26-11-1987 had stated with respect to the generator engine No. 25143985 pre-installation inspection of the engine was done on 8-5-1986 and on 12-5-1986 certain defects were pointed out to the customer and on 14-5-1986 New Engine Performance Inspection (NEPI in short) was prepared and the engine was commissioned after the completion of the installation [page 8(1) of the assessee's paper book]. The assessing authority had also noted that the appellant's General Manager in his letter dated 15-5-1987 to M/s. Palghat Diesel Sales and Service, Palghat (page 12 of the departmental paper book) had categorically stated that the generator engine was installed only on 19-6-1986 and has worked only for 1600 hrs and that it had developed certain defects for which he had requested repairs free of cost. Yet in another letter dated 22-5-1987 (page 13 of the departmental paper book) M/s. Batliboi & Co. Ltd., had advised M/s. Palghat Diesel Sales and Service to attend to the repairs mentioning that the generator engine which was commissioned on 19-6-1986 had clocked only for 1600 hrs, but had failed on 14-5-1987. As per the letter of M/s. Imperial Engineering Co., Cochin, the commissioning of the generator was only on 20-6-1986. No doubt the Dy. CIT (Asst.) had noticed that the log book maintained by the appellant which was recorded by her in the course of her inspection of the factory revealed that the generator was put to use during the latter half of March 1986, but she was of the view that in the wake of materials collected by her from the suppliers of the engine for the generator and also the service agents at Palghat the entries in the log book are not believable. Further, it was only in respect of this particular generator for a limited period that log book entries bore the initials of the General Manager but the log book maintained for other generators did not bear such initials and, therefore, the log book entries were created as an after-thought to support the version of the assessee. She had also examined the Electrical Engineer on the staff of the appellant who had asserted that the generator was put to use though unofficially with effect from 14-3-1986 with the help of their own staff. The Managing Director of the appellant-company was also examined who had stated that the generator was installed and with temporary connections the same was put to use prior to 31-3-1986 on an emergency basis because the old generator which was in use had failed all of a sudden in the month of March 1986. Thus rejecting the contention of the assessee, on the basis of the materials collected from M/s. Palghat Diesel Sales and Service, Palghat and the correspondence referred to in this paragraph above, she came to the conclusion that the generator set was commissioned only subsequent to the close of the previous year and, therefore, the appellant was not entitled for deduction of depreciation and investment allowance on the same for the assessment year 1986-87. For the same reason, she initiated action under Section 271(1)(c) of the Income-tax Act, 1961, for concealment of particulars of income.

  25-3-1986      -  Reported Madras Spinners - Case opening
checking.
26-3-1986      -  Levelling complete - comb shaft.
27-3-1986      -  Detaching roll head stock complete.
29-3-1986      -  Table guide piece waste box.
31-3-1986         Back side complete. Preparation of for trial run.
1-4-1986       -  Waiting for motor go to LMW.
2-4-1986       -  Trial run.
3-4-1986       -  Waste checking.
4-4-1986       -  Relieving.
 

From the above she concluded that the trial run was carried out only on 2-4-1986 and the comber was worked on 3-4-1986 with good cotton. She rejected the contention of the appellant that the comber was put into operation on 29-3-1986 itself with the help of its own maintenance people and when the Super Sales Agencies put it into operation on 31-3-1986 the motor shaft got cut on that day and hence there was replacement which resulted in restarting of the comber on 3-4-1986. Therefore, she concluded that the erection of the comber was completed only on 3-4-1986 and the assessee was not entitled to depreciation and investment allowance on the same for the assessment year 1986-87. For these reasons she levied penalty under Section 271(1)(c) of the IT Act. The assessee carried the matter in appeal. Same contentions were reiterated before the first appellate authority. The learned first appellate authority held that in the light of the materials collected by the learned Dy. CIT (Asst.), the assessee's version that it had installed the generator set and brought it into use before the end of the previous year cannot be accepted. The log book entries were rightly rejected by the Assessing Officer. Therefore, the generator set was not brought to use during the previous year. As far as the comber is concerned, he held that the extracts of the weekly reports pin-pointed the date of actual user of the comber after the end of the previous year. Hence the assessee's version was not believable. For these reasons, he confirmed the disallowances and the levy of penalty under Section 271(1)(c). The assessee is on further appeal.

A. : We commissioned the Gen. set unauthorisedly for the emergency purposes. The only record available to support is our own log book which would show that the engine was first operated on 14-6-1986. That is why you will find them in the G.M's letter that the commissioning of the Gen. set is on 19-6-1986 which is for the record purposes whereas with the temporary electrical connections it was commissioned prior to 31-3-1986.

Q. 5 : If your diesel log book is to show all the hours of running of the Generator set why it does not show the running of the engine on 17th, 18th and 19th of June which is evidenced by the records mentioned in your company and in the Palghat Diesel Sales and Services?

A. : We might have used log sheets. But I am not in a position to produce them before you.

The statement of Shri Pushparaj is supported by entries in the Log Book of the concerned generator. The log book for the concerned generator contained the entries for trial run on 14-3-1986 and the time of operation appeared to be from 8.00 a.m. to 3.00 p.m. Similar entries appear on 15, 18, 23, 24, 27, 29 and 30th of March. In all these folios which contained entries, the General Manager has affixed his signature in addition to that of the operator. The Assessing Officer rejected the log book entries in respect of the impugned generator for the period from 14-3-1986 to 30-3-1986 on the ground that in the case of the log book entries maintained for other generators, the General Manager did not affix his signature. The log book in our opinion is a contemporaneous record. The appellant explains the presence of the signature of the General Manager in the relevant folios pertaining to the impugned generator as due to the fact that as the generator was unofficially used during that period, the operator had obtained the authorisation for such unauthorised user from the General Manager who had signed the relevant pages in token of his approval. The other generators were put to official use as and when they were used and, therefore, the General Manager did not sign the log books maintained for such generators. The explanation of the assessee appears to be plausible. When the assessee clandestinely puts an asset to use - clandestine in the sense that no permission was obtained from the Chief Electrical Inspector of the Government of Kerala-it was but natural, for the operator to expect authorisation of such clandestine user from the General Manager-in-charge of the factory. Further the log book was not suo motu produced by the assessee. Therefore, there is force in the contention of the learned counsel for the appellant that the General Manager was not previously informed of the Assessing Officer's visit to the factory and therefore it cannot be said that the General Manager had occasion to fabricate entries in the log book in anticipation of her visit. Therefore, a legal presumption can be drawn that the log books found with the appellant along with other books recovered and impounded in the course of survey or inspection by the governmental authorities were genuine and the entries therein represented the true state of affairs. The Electrical Engineer has emphatically stated that he is conversant with the work connected with the generator. The assessee is not the user of the generator for the first time. There was an old generator in use since 1983. It had its own panel boards for supply of electricity and other electrical installations and the appellant was generating power with the aid of these electrical installations. It is on record that there was break down of the generator of 1983 origin in the second half of March 1986 as will be evident from the emergency call report dated 18-3-1986 (page 27 of the assessee's paper book) and the further report dated 20-3-1986 (page 28 of the assessee's paper book). These are borne out by records of the service representatives of Cummins Diesel Sales and Services India Ltd., Madurai, whose reports are to be found in the paper book of the assessee from page 26 to page 29. The appellant had also complained to M/s. Batliboi & Co. Ltd., about the break down of the old generator in its letter dated 24-3-1986 and M/s. Batliboi & Co. Ltd. in turn requested the supplier of the turbocharger to immediately arrange replacement even though the warranty period has expired. Then there is on record a returnable gate pass No. 1154 by which turbocharger was sent for repairs on 25-3-1986. So we come to the conclusion that the first generator has failed at least from 18-3-1986. With the failure of the first generator and if the controversial generator had not been brought to use (though clandestinely) obviously the production should have suffered as Kerala is a State notorious for low voltage, power shedding and frequent power failures. In page 36 of the paper book the appellant has given the details of such power shedding and low voltage for the entire month of March 1986 and the relevant date on and from 15-3-1986 is as follows :