VIJAY PAL RAO, JUDICIAL MEMBER
AND RAJENDRA, ACCOUNTANT MEMBER

Paresh M. Shah for the Appellant.
Mourya Pratap for the Respondent.

ORDER

Rajendra, Accountant Member - Challenging the order dt.28.01.2011 of the CIT(A)-26,Mumbai,Assessee has filed following Grounds of Appeal:

The appellant craves leave to ad, amend, alter vary and / or withdraw any or all the above grounds of appeal.
Grounds of appeal filed by the assessee in appeal no. 3349/Mum/2011 read as under:

The appellant craves leave to add, amend, alter very and /or withdraw any or all the above grounds of appeal.

ITA No.3348/Mum/2011:

2. Assessee, an individual engaged in the business of manufacturing and export of watches, filed his return of income on 30.10.2006 declaring total income of Rs.25.29 lakhs. Assessing officer (AO) finalised the assessment u/s.143(3) of the Act, on 04.11.2008, determining the total income at Rs.32.59 lakhs. During the course of hearing before us, Authorised Representative (AR) of the assessee did not press ground no.1 and 2. Hence, same stand dismissed as not pressed.

3. Ground no. 3 is about disallowance of depreciation. During the assessment proceedings, AO found that assessee had claimed depreciation of Rs. 5.29 lakhs in its proprietary concern M/s Dicen Industries (DI), that out of the said depreciation Rs. 3.57 lakhs and Rs. 10,272/0 had been claimed for factory building and plant and machinery respectively. AO observed that no manufacturing activity were carried out during the year in the factory building, that assessee had only purchased watches legally from India and had exported the same to foreign countries. Relying upon the order of the Hon'ble jurisdictional High Court delivered in case of Dinesh Kumar Gulabchand Agarwal v. CIT [2004] 267 ITR 768/141 Taxman 62 (Bom.), he held that depreciation was allowable only when the assets had actually been used during the year under consideration and not if the assets were merely kept ready for use. He further held that assessee had carried out only trading activities, that no manufacturing activities were undertaken by him. Finally, depreciation on the factory building, amounting to Rs. 3.57 lakhs and on Plant & Machinery of Rs. 10,272/- was disallowed.

4. Aggrieved by the order of the AO, assessee filed an appeal before the First Appellate Authority (FAA).Before him assessee argued that he had installed the Plant & Machinery and factory was working during the year under consideration, that business assets were put to use, that assessee was entitled for depreciation, that factory building in Plant & Machinery was included in block assets. After considering the submission of the assessee and the assessment order, FAA held that assessee had failed to demonstrate with any evidence that factory building as well as Plant & Machinery was actually used for any manufacturing activities carried out by the proprietary concerned i.e. DI, that assets had not been used during the year under consideration, that AO had rightly placed on the cases of Dinesh Kumar Gulabchand Agarwal (supra), Dy. CIT v. Yellamma Dasappa Hospital [2007] 290 ITR 353/159 Taxman 58 (Kar.) and CIT v. Oriental Coal Co. Ltd. [1994] 206 ITR 682/76 Taxman 240 (Cal.). Finally, he upheld the order of the AO.

5. Before us, AR stated that factory building and plant & machinery were ready for use, assessee was proprietor of three concerns, on a query by the bench he stated that in the earlier years and in the subsequent years, AO had been allowed depreciation on the factory and plant & machinery, while passing order u/s 143(3) of the Act, he relied upon the cases of L.Ve. Vairavan Chettiar v. CIT [1969] 72 ITR 114 (Mad.), CIT v. Visvanath Bhaskar Sathe [1937] 5 ITR 621 (Bom.), CIT v. Dalmia Cement Ltd. [1945] 13 ITR 415 (Patna), CIT v. Refrigerations & Allied Industries Ltd. [2001] 247 ITR 12/[2000] 113 Taxman 103 (Delhi), Capital Bus Services(P.) Ltd. v. CIT [1980] 123 ITR 404/4 Taxman 309 (Delhi), G R Shipping Ltd. v. Dy. CIT [IT Appeal No. 822 (Mum.) of 2005, dated 17-7-2008] Liquidators of Pursa Ltd. v. CIT [1954] 25 ITR 265 (SC), CIT v. Vayithri Plantation Ltd. [1981] 128 ITR 675 (Mad.), CIT v. G.N. Agrawal [1996] 217 ITR 250/[1994] 75 Taxman 30 (Bom.) and Swati Synthetics Ltd. v. ITO [2010] 38 SOT 208 (Mum.). Departmental Representative stated that the assessee had not used the building, plant and machinery during the year under appeal, that use of assets was a precondition for allowing depreciation. He supported the order of the FAA.

6. We have heard the rival submissions and perused the material before us. We find that AO and FAA had disallowed the claim of the assessee on the ground that assessee had not used the assets for business during the year under consideration. We find that in the matter of Dineshkumar Gulabchand Agrawal (supra), Hon'ble jurisdictional High Court has dealt with the identical issue. In that matter the assessee had argued that assets were ready for use and therefore depreciation was rightly claimed by him, even though he had not used the asset. The AO, the FAA and the Tribunal held that the assessee was not entitled to claim depreciation if the asset was not used. Before the Hon'ble the assessee contended that even if the vehicle was not actually used but since it was ready for use, he was entitled to claim the benefit of depreciation on such assets. Referring to the judgment of Whittle Anderson Ltd. v. CIT [1971] 79 ITR 613 (Bom.), Hon'ble Court held that in the above judgment, Bombay High court was concerned with the interpretation of the expression "use" or "used", whereas in the case to be decided by it interpretation of the word "used" had to be deliberated upon. Finally, Hon'ble Court held as under:

"It appears that after the above judgment, there was an amendment to section 32 of the Income-tax Act. The word "used" denotes actually used and not merely ready for use. The expression "used" means actually used for the purposes of the business. The view is taken by the Tribunal. In this view of the matter, no substantial question of law is involved."

Assessee challenged the order of the Hon'ble High Court before the Hon'ble Apex Court, but his SLP was dismissed by the Court.

From the above discussion, it is clear that for claiming depreciation, assessee must prove use of asset and in the case under consideration AO and the FAA had given a categorical finding that the assessee had not used the assets during the year under appeal. On a specific question by the Bench about allowance of depreciation in earlier years on same assets the AR of the assessee could not throw any light or produce any evidence, though he claimed that in subsequent years the AO had allowed depreciation. In our opinion, if in later years depreciation was allowed it must have been proved by the assessee that it had used the assets. But, in the year under appeal there is no evidence of use of assets. AR has not brought to our notice any judgment of the jurisdictional high court which had reversed the judgment of Dineshkumar Gulabchand Agrawal (supra). In these circumstances, following the above mentioned decision of the Hon'ble Bombay High Court, we decide effective ground of appeal against the assessee. Appeal filed by the assessee stands dismissed.

ITA No. 3349/Mum/2011 :

7. While finalising the assessment for the year under appeal, AO initiated penalty proceedings u/s 271(1)(c) of the Act. During the assessment proceeding, AO had made following additions to the income of the assessee:

AO was the opinion that additions made under the head depreciation of assets, LTCG and 80IB of the Act, had to be considered as concealment of income. While passing the penalty order, he held that assessee had not carried out any manufacturing activities during the year, that he had only purchased watches locally from India and had exported outside the country. Referring to the decisions of various High Courts including the decision Dinehskumar Gulabchand Agarwal (supra), he held that depreciation was not allowable because assets had been not actually put to use during the year. With regard to disallowance of exemption claimed u/s 10(38) of the Act, in respect of LTCG of Rs.49,829/-, he held that assessee had sold shares of M/s. Nova Capacitors Ltd., resulting in LTCG of Rs. 49,829/-, that in the return of income he claimed the said amount as exemption u/s. 10(38), that the assessee had not paid Security Transaction Tax (STT) on the whole transaction, that LTCG was not allowable for non-payment of STT. During the assessment proceedings, AO found that in the case of M/s. J & J Precision Industries, one of the proprietary concernes of the assessee, an amount of Rs. 2,28,780/- was credited on account of profit and sale of machinery, that assessee claimed deduction u/s.80IB for the said amount in his return of income, that as per the provisions of the Act profit and gain derived from the industrial under -taking were eligible for the deduction, that sale of machinery could not be taken as profit derived from industrial undertaking. He levied penalty, amounting to Rs.2,23,127/-,u/s.271(1)(c) of the Act.

8. During the appellate proceedings before the FAA, AR contended that it was a case of simple disallowance of some claim u/s.32,10(38) and 80IB,that there was a disallowance of miscellaneous expenditure for want of some independent bills and vouchers which could not be presumed to be concealment of any taxable income, that no penalty can be levied merely on the basis of disallowance of some claim, that penalty could not also be levied merely on the basis of difference of opinion, that he had submitted all the required details and had not concealed any particulars of income either in return of income or during the assessment proceedings.

FAA held that the assessee had intentionally claimed depreciation on factory building and Plant & Machinery knowing well that there was no manufacturing activities were carried out, that the assessee had concealed taxable income by way of filing less return of income. As regards claim of exemption u/s.10(38) in respect of Long Term Capital Gain of Rs.49,829/-, FAA held that the assessee had intentionally claimed exempt knowingly well that transaction was not done through stock exchange and no Security Transaction Tax was paid, that said fact was in possession of the assessee, that there was no reason whatsoever to claim exemption u/s.10(38) of the Act, that it was not the case of simple disallowance of any particular claim by the AO, that the assessee had included the capital gain in taxable income under the pretence that he had fulfilled all the conditions entitling him for claiming exemption u/s 10(38) of the Act, that during the course of assessment proceedings AO had unearthed the information that shares transaction were not rotated through authorized stock exchange and no STT was paid, that in such a situation there was no reason to give impression in return of income that he had fulfilled all the conditions for claim of such exemption, that the AO was justified in levying penalty u/s.271(1)(c).

He further held that that deduction u/s 80IB of the Act, amounting to Rs.2,62,323/- was claimed by the assessee even though he had not derived profits/gains from Industrial undertaking, that the assessee had earned income on account of sale of machinery, that income from sale of machinery could not be termed profit derived from Industrial undertaking , that the assessee had ignored the auditors' report given in Form No. 10CCB,that the auditors had certified the profits and gains derived from undertaking which were allowable u/s 80IB to the extent of Rs.2,28,54,198/-, that while filing the return of income, that the assessee had deliberately increased the quantum of deduction by Rs.2,62,323/- and has claimed deduction u/s. of Rs.2,31,16,521/-, that inspite of auditors clear-cut directions and observations about the accounts, the assessee had inflated the deduction u/s.80IB, that the assessee had intentionally suppressed the taxable income by way of furnishing of inaccurate particulars of income and has concealed the taxable income, that it was not a simple case of disallowance of claim but was a case of intentional claim of wrong deduction which had been unearthed by the AO with due diligence while scrutinizing the records of the assessee. Finally, he upheld the penalty levied by the AO.

9. Before us, AR contended that depreciation was claimed on the assets under the bonafide belief, that even ready to use assts were entitled for deprication, that the AO had not doubted the existence of the assets, that mere disallowance of a claim should not result in levy of penalty. With regard to claim made u/s.80IB and 10(38),he stated claims were result of inadvertent mistakes. DR argued that the assessee had not used the assets but had claimed the depreciation, that there was no basis for claiming other two deductions, that no STT was paid by the assessee.

10. We have heard the rival submissions and perused the material. First we would like to discuss the deduction/exemption claimed u/s. 80IB and 10 (38) of the Act. It is a fact that the assessee had not paid not STT tax and non-payment of said tax was within the knowledge of the assessee. Even then the assessee made a claim u/s.10(38)of the Act. Such a claim cannot be termed an inadvertent mistake. Assessees are required to file return showing the correct taxable income and not to claim a deduction/exemption/rebate that is not due to them. If two views are possible for such a claim assessee can have benefit of existence of two possible views. But, in the case under consideration two possible or conflicting views are not possible. It is a simple case of concealment of income and filing of inaccurate particular. Similar is the position of claim made u/s.80IB.We find that the auditors had expressly made a note in notes to the accounts and determined the quantum of eligible 80IB deduction. But, the assessee increased it by Rs.2.62 lakhs. Ignoring the tax audit report and making an enhanced claim is certainly concealment of income. Therefore, confirming the order of the FAA, hold that AO had rightly levied penalty for the said two amounts u/s.271 (1)(c)of the Act and the FAA was justified in confirming the same. As far as penalty levied for claim of depreciation is concerned, in our opinion, two views were possible about the claim at the time of filing of return of income. Certain decision clearly hold that if the assets are ready for use depreciation can be claimed. As far as quantum appeal is concerned, there is no doubt that FAA was justified in following the judgment of the jurisdictional high court while deciding the appeal filed by the assessee against the said disallowance. As the assessee had not produced any evidence of use of the assets during the year under consideration, so, FAA was justified in following the judgment of the Hon'ble Bombay High Court and decide the issue against the assessee. But, as per the established principles of tax jurisprudence addition or disallowance of any amount should not result in automatic levy of penalty u/s.271(1)(c)of the Act. In our opinion explanation of the assessee was bonafide and two views were possible about the claim. Therefore, penalty we reverse the order of the FAA to that extent. In short, penalty levied for 80IB deduction and 10(38) exemption is confirmed, whereas penalty for disallowance of depreciation is deleted.

Effective ground of appeal is decided in favour of the assessee, in part.

As a result, appeal no.3348 stands dismissed and appeal no.3349 is partly allowed.