Income Tax Appellate Tribunal - Chandigarh
H.P. State Forest Corpn. Ltd. vs Dy. Commissioner Of Income-Tax, Spl. ... on 24 December, 2004
Equivalent citations: [2005]93ITD442(CHD), (2005)94TTJ(CHD)792
ORDER
M.A. Bakshi, Vice President
1. Appeal of the assessee for assessment year 87-88 is directed against the order dated 26.12.95 of the CIT(A), Shimla and the dispute is relating to penalty Under Section 271(1)(c) of Rs. 1,06,09,1 50 sustained by the CIT(A) out of Rs. 2,01,18,300 imposed by the AO. We have heard the parties and perused the records.
2. Relevant facts briefly stated are that the assessee is a Govt. owned company wherein the Govt. of Himachal Pradesh holds 100% shares. The company is engaged in the business of extraction of timber and resin from forests. For assessment year 87-88, the assessee had filed the return on 30.3.90 declaring income of Rs. 58,27,000, which was subsequently revised on 30.3.91 to Rs. 72,60,868. The original return had been processed Under Section 143(1)(a) on 27.3.91. After receipt of the revised return, the AO issued notice Under Section 148 on 6.1.92 as, according to him, the income of the assessee had escaped assessment on the ground that for assessment year 83-84, claim of the assessee for deduction Under Section 80HH and 80I was rejected by the Department. During the course of assessment proceedings, the AO had noticed that assessee had disclosed work-in-progress at Rs. 44,27,42,081 with a note (net of provisions Rs. 2,12,18,295). However, on perusal of the balance-sheet, the AO did not find any such provision. Accordingly, inquiry was made. It was explained on behalf of the assessee that the value of closing stock has been reduced on account of deterioration of old stocks. It was claimed that a report had been received from the concerned officers about the deterioration of old stocks and auditors had also suggested making assessment of such stocks for the purpose of presenting a true picture of profits in the balance-sheet. According to the assessee, the method of valuation of closing stock always adopted by the assessee was "cost or market price, whichever is lower" on the basis of which the value of stock has been reduced by Rs. 2,12,18,295. The AO sought evidence from the assessee and since the AO did not find sound basis for reduction in the value of closing stock, he made addition to the income of the assessee of Rs. 2,12,18,295. Assessee appealed to the CIT(A) but without success. The Tribunal also confirmed the addition by holding that the reduction in value was not supported by sufficient evidence and that the reduction was done on estimation. In the course of assessment proceedings, the AO had initiated penalty proceedings Under Section 271(1)(c) and though the assessee pleaded that penalty Under Section 271(1)(c) was not attracted in this case yet the AO imposed a penalty of Rs. 2,12,18,295. Assessee appealed to the CIT(A). The CIT(A) has upheld levy of penalty Under Section 271(1) (c), so, however, the quantum has been reduced to 100% as against 200% imposed by the AO. The penalty of Rs. 1,06,91,418 has thus been confirmed out of the levy of Rs. 2,12,18,295/-.
3. The ld. Counsel for the assessee contended before us that assessee had neither concealed the income nor furnished inaccurate particulars of its income. The assessee has always adopted the method of valuation of the closing stock on the basis of cost or market price whichever is lower. In the year under appeal, on the basis of the report of the officers and the observation of the auditors, assessee had reduced the value of the stocks lying since 81-82 in Chhamba, Chopal and Narwa Divisions, at net realizable value. The reduction in value was on estimate basis as suggested by the Divisional Officers of the Corporation. According to the ld. Counsel for the assessee, the information about the reduction in the value of the stocks was clearly indicated in the Statement of accounts filed along with the return of income. Necessary details were also furnished before the Assessing Officer at the time of assessment. The accounts of the assessee were subjected to statutory audit. The statutory auditors, namely, M/s Lamba Vij & Co., have duly approved the valuation of stocks and no adverse remarks have been given in the audit report. The Controller & Auditor General of India has also not adversely commented upon the valuation of stock as per their report placed on record.
4. It was further contended that the AO has wrongly proceeded on the assumption that assessee had changed the method of valuation from cost to net realizable value and that the assessee has failed to substantiate its explanation as to how the value of closing stock has fallen. The learned Counsel for the assessee further contended that the AO has not recorded any satisfaction in the assessment order that assessee has concealed the particulars of income or filed inaccurate particulars of such income. According to the ld. Counsel, in the absence of recording of such satisfaction in the assessment order, penalty imposed Under Section 271(1)(c) is bad in law. In support of the contention, reliance has been placed on the following decisions:-
i) CIT v. Ram Commercial Enterprises Ltd., 246 ITR 568 (Del);
ii) Dy. CIT v. R.J. Wood & Co. (P) Ltd., 76 TTJ 387 (All);
iii) Subhash v. (Individual) v. DCIT, 78 TTJ 692 (Jaipur)(JM);
iv) ACIT v. Aggarwal Sanitary & Hardware & Co., 82 TTJ 501 (Chd.);
v) Ram Nath 82 TTJ 331 (Asr.); &
vi) 263 ITR 414 (P&H).
5. The ld. D.R., on the other hand, relied upon the assessment order to refute the claim of the assessee. According to the ld. D.R., a perusal of the assessment order reveals that the AO had recorded the satisfaction for issue of notice Under Section 271(1)(c) and, therefore, there is no merit in this contention advanced on behalf of the assessee.
6. We have given our careful consideration to the rival contentions. It is observed from the assessment order that the AO has recorded his satisfaction in regard to proceedings Under Section 271(1)(c). The relevant portion of the assessment order is reproduced hereunder:-
"This would mean an addition to the income disclosed by Rs. 2,12,18,295/-. Since there is no justification for reduction in the value of work-in-progress particularly three years after the close of the accounting period, it is clear that under valuation has been done with a view to evade tax liability. Proceedings Under Section 271(1)(c) are accordingly initiated."
The contention on behalf of the assessee that Assessing Officer has failed to record the satisfaction in regard to proceedings Under Section 271(1)(c) is, therefore, not well founded and accordingly rejected.
7. The second ground on which the assessee has challenged the levy of penalty is that there has neither been any concealment of income nor furnishing of inaccurate particulars of income. According to the ld. Counsel, the word 'concealment' means to hide or to withhold or not disclose. It requires some positive action on the part of the person concerned. In this connection, reliance has been placed on the decision of Bangalore Bench of the Tribunal in the case of Dr. Velayudha Nair v. ITO, 84 ITD 227(Bang.). It was further contended that in the case of the assessee, full facts relating to the valuation of stock of the three Divisions on net realizable value was disclosed in the balance-sheet. There was nothing hidden which was discovered by the Department. It was accordingly contended that the assessee cannot therefore, be said to have concealed any particulars of income. Relying upon the same decision of the Bangalore Bench of the Tribunal, referred to above, it was contended that the return couldn't be false unless there is an element of deliberateness in it. Relying upon the decision of the Supreme Court in the case of Cement Marketing Co. of India v. ACST, 124 ITR 15, it was contended that where the assessee does not include a particular item in taxable income under a bona fide belief that he is not liable so to include it, it would not be right to condemn the return as false return inviting imposition of penalty.
8. It was further contended that the assessee being a Govt. company, its Directors or other employees are not connected with sharing of profits. They are only interested in running the affairs of the company in consideration of salary. Therefore, no motive can be attributed to the Directors or employees for reduction of stocks or alleged suppression of profits for the purpose of evading tax. According to the ld. Counsel, it is one Department of Govt. paying tax to the other Govt. Department and, therefore, there could be no intention to suppress the profits for evasion of tax. Reliance has been placed on the decision of Bombay Bench of the Tribunal in the case of ITO v. Hindustan Petroleum Corporation Ltd., 16 ITD 574 (Bom.), where in the case of a Govt. Company, the Tribunal held that there could be no deliberate intention on the part of the assessee company to underestimate its income.
9. Referring to the observations of the CIT(A) on page 9 of his order that the corporation had understated its taxable income and the onus under Explanation 1 to Section 271(1)(c) was not discharged, the ld. Counsel contended that the assessee had filed an explanation and explained the circumstances under which the closing stock of timber in three Divisions was valued at net realizable value and even proof of deterioration of stock was furnished as per the evidence on record at pages 43 to 47 of the paper book. The ld. Counsel for the assessee further contended that once the assessee furnished a plausible explanation, the onus of proving the concealment of income shifts to the Department. Reliance in support of the contention has been placed on the following decisions:-
i) Nuchem Ltd. v. DCIT, 49 ITD 441 ( Del);
ii) Raj Motors v. ITO, 54 ITD 542 (Del)(SMC);
iii) Kumar Agencies (India) v. ACIT, 87 ITD 69 (Mum.)(TM);
Further reliance was placed on the Delhi Bench of the Tribunal in the case of Nuchem Ltd. v. DCIT, 47 ITD 487(Del.), wherein it was held that when the assessee has disclosed all material facts pertaining to the computation of income and the same were not found to be false but additions/disallowances were made on account of difference of opinion, it cannot be said that the assessee has concealed the particulars of income or furnished inaccurate particulars thereof.
10. According to the ld. Counsel, the Department has not brought any material on record to establish that the explanation offered by the assessee in respect of valuation of some of the timber stocks in Chamba, Chopal and Nawar Divisions is false. It was pointed out that the assessee has filed all the materials in support of the damaged stocks in the shape of report received in the Head Office from the three Divisions and that the valuation of closing stock was duly approved by the Auditors and promptly disclosed in the balance-sheet. According to the ld. Counsel, the AO has rejected the claim of the assessee on the ground that the assessee had failed to establish that the timber had deteriorated justifying the fall in its value by 50% and 25% in B class and C class timber. The ld. Counsel also pointed out that another reason given by the AO for rejecting the claim is that the Divisional Officers gave the certificate of damage caused to the stock in the year 1990 and Board's Resolution was also passed in the same year i.e. 1990. It was contended that the Revenue has failed to appreciate that the certificate given by the Divisional Officers was admittedly given in the year 1990 at the time of completion of the audited balance-sheet but the fact remains that there were number of inspection reports received during the year 86-87 regarding the inspection of old timber stocks having deteriorated.
11. The ld. Counsel for the assessee contended that it is a case of an assessee who had offered bona fide explanation, which was rejected by the Department. The addition has been made for want of sufficient proof regarding the value of timber having deteriorated to the extent of 50%. It was thus contended that penalty cannot be sustained merely on the ground that in the quantum appeal, addition made by the AO has been sustained. In this connection, reliance has been placed on the following decisions:-
i) CIT v. Kerala Spinning Ltd., 247 ITR 541 (Ker);
ii) Shiv Lal Tak v. CIT, 251 ITR 373(Raj.);
iii) National Textiles v. CIT 249 ITR 125(Guj.) &;
iv) CIT v. Jalaram Oil Mills, 253 ITR 192(Guj.).
According to the ld. Counsel, the principles laid down in the aforementioned cases is that where the explanation of the assessee is not false but merely not accepted because the assessee failed to substantiate it, it cannot raise the presumption about deliberate concealment of income or lack of bona fide and that penalty cannot be imposed in such cases.
12. It was further contended that the issue as to whether the old stocks of timber lying with the assessee had deteriorated to the extent of 50% of its value is a matter of opinion. The addition has been sustained merely on the basis of an opinion. There is thus a difference of opinion on the basis of which addition has been sustained. Penalty in such circumstances is not justified, contended the ld. Counsel. For this, reliance has been placed on the following decisions:-
i) CIT v. Prem Das (No. 1), 248 ITR 234 (P&H);
ii) Durga Kamal Rice Mills v. CIT, 265 ITR 25 (Cal.);
iii) CIT v. Harshvardhan Chemicals & Mineral, 259 ITR 212 (Raj.).
Referring to the contention of the revenue in the written submissions, it was contended that the mere fact that the addition has been confirmed by the ITAT does not justify levy of penalty. For this, reliance has been placed on the following decisions:-
i) CIT v. Inden Bislers, 240 ITR 943 (Mad.);
ii) CIT v. Bharat Minerals Sales Corporation, 253 ITR 419 (Cal.);
Relying upon the decision of the Calcutta High Court in the cases of CIT v. Bimal Kumar Damani, 261 ITR 87, and Durga Kamal Rice Mills v. CIT, 265 ITR 25, it was contended that the observations of the Tribunal in quantum proceedings cannot be taken as conclusive finding for the purpose of levy of penalty for the concealment.
13. The ld. Counsel for the assessee further pointed out that there is contradiction in the order of the CIT(A) insofar as on the other hand, it has been held that the decision of the Supreme Court in the case of CIT v. Anwar Ali, 76 ITR 696, is not applicable as the said decision relates to the law prior to 1.4.64 but, on the other hand, the CIT(A) has relied upon the following decisions, which are based on the Explanation 1 to Section 271(1)(c) prior to its substitution w.e.f. 1.4.76:-
i) Vishwakaram Industries v. CIT, 235 ITR 652 (P&H)(FB);
ii) CIT v. Shama Magazine, 213 ITR 64 (Delhi).
The ld. Counsel for the assessee further contended that Explanation 1 to Section 271(1)(c) casts a duty on the Assessing Officer to first record reasons that there has been concealment of income and then seek explanation of the assessee and thereafter penalty can be imposed only if any amount is found to be concealed or explanation found to be false. According to the ld. Counsel, the AO has failed to record any such finding in the assessment order The ld. Counsel heavily placed reliance on the decision of the Supreme Court in the case of K.C. Builders v. ACIT, 265 ITR 562 (SC). According to the ld. Counsel, there has been no intention to conceal the income or furnish inaccurate particulars of income and accordingly penalty in this case is not warranted.
14. The ld. Counsel for the assessee further pointed out that according to the Revenue, there is a defect in the method of accounting adopted by the assessee in regard to valuation of closing stock. In the event of defect in the method of accounting, penalty is not warranted. In support of this proposition, reliance has been placed on the following decision:-
i) CIT v. M.M. Rice Mills, 253 ITR 17(P&H);
ii) CIT v. Bhoj Raj & Co., 247 ITR 696 (P&H).
15. The ld. Counsel for the assessee further contended that where assessee had made a wrong claim on account of sales tax, deduction Under Section 80HH and 80I or depreciation, it was laid down that penalty cannot be imposed Under Section 271(1)(c). For this reference has been made to the decision of the Madhya Pradesh High Court in the case of CIT v. Ram Singhani Dall Mills, 254 ITR 264 (MP), Rajasthan High Court in the case of CIT v. Harshvardhan Chemicals & Mineral Ltd., 259 ITR 212 (Raj.), and the decision of the Gujarat High Court in the case of CIT v. Hotel Sabar Pvt. Ltd., 264 ITR 381. Reliance has also been placed on the decision of Jaipur Bench of the Tribunal in the case of Subhash Gupta v. DCIT, 85 ITD 167(Jp.)(TM), in support of the contention that where entire disclosure is made and an explanation is given about the reasons and background of the claim, sales and purchases have been recorded and disclosed in the balance-sheet, it cannot be said that the assessee has failed to substantiate its explanation.
16. In reply, the ld. D.R. has also filed written submissions before us and reliance has been placed on the same. It was contended before us that on the facts and in the circumstances of this case, penalty Under Section 271(1)(c) is justified. Our attention was invited to the findings of fact recorded by the AO which, according to the ld. D.R., clearly indicate that the reduction in the stocks was not based on any reports of the Forest Officers and that the regional managers of various areas had been summoned to Shimla only in the year 1990 and asked to give the certificates regarding deterioration of stocks. It was contended that the timber logs were spread over thousands of square meters area and rib record regarding the condition of each of these logs was separately available with the assessee. That the Divisional Officers who had certified the deterioration of stocks had not physically inspected the stocks and that they had no idea regarding the market value of the work-in-progress. According to the ld. D.R., the documentary evidence produced by the assessee in the form of MRP where some Junior Officials had mentioned that the quality of timber is bad was not sufficient for reduction in the value of stock to the tune of more than Rs. 2 crores. Our attention was also invited to the decision of the Tribunal in quantum appeal in assessee's own case where it has been observed that it was the Managing Director who had suggested that the value of closing stock of work-in-progress in Chopal and Chamba Divisions could be less than 50% and 25% of their cost respectively. According to the ld. D.R., the Board's Resolution dated 22.8.90 was passed in pursuance of the suggestion of the Managing Director arbitrarily and without any basis. Our attention was also drawn to the findings of the CIT(A) wherein various factors have been mentioned for sustaining the penalty imposed Under Section 271(1)(c).
17. The ld. D.R. further contended that the assessee had all along adopted the method of valuation of work-in-progress "at cost price" and that the reduction in the value of stocks on the basis of alleged lower market price was adopted only for the year under appeal but the said method was neither adopted in the earlier years nor in the subsequent assessment years. Our attention was invited to the finding of the Tribunal in quantum appeal that the assessee has failed to substantiate its claim that the market value of the closing stock was less as compared to the other stocks. It was further contended that the Tribunal has observed that no evidence could be produced by the assessee to establish that the said stocks had been sold subsequently at lesser value than the market value. The ld. D.R. further contended that the assessee had adopted value of stocks as on 31.3.87 on the basis of events taking place in the year 1990. Relying upon the decision of Supreme Court in the case of CIT(Addl.) v. Jeevan Lal Sah, 205 ITR 244(SC), it was contended that mens rea is no longer required to be proved for the purpose of levy of penalty Under Section 271(1)(c). It was further contended the CIT(A) has rightly rejected the claim of the assessee "that it being a Govt. owned Corporation, no guilty mind could be attributed to it". According to the ld. D.R., the Corporation belongs to the State Govt. and taxes are payable to the Central Govt. and, therefore, there is no merit in the contention advanced on behalf of the assessee that there would be no advantage to the assessee in reducing the tax liability. The ld. D.R. further contended that as per the auditor's report, there is no change in the method of accounting when in fact there has been a change in the method of valuation of closing stock in the year under appeal. The assessee had shown the stocks as net of a provision of Rs. 2,12,18,295/- when no provision had been made in the balance sheet. It was further contended the claim of the assessee that the value of stocks was adopted at market price on the recommendation of the auditors is not based on facts. The claim of the assessee that the valuation was done after detailed study is also contrary to the facts on record. The claim of the assessee that physical examination of logs of timber is not carried out is also on record.
18. It was further contended the Corporation did not have special privileges under the Income-tax Act. It did not enjoy the right to arbitrarily reduce the taxable income as it pleases. According to the ld. D.R., if the payment of correct tax were considered to be inconsequential in the case of Govt. Corporations, then there would be no need to bring them to tax net.
19. Referring to the contention advanced on behalf of the assessee that the management had no motivation to conceal the income or furnish inaccurate particulars of such income, it was contended that such an argument is inconsequential as the penal provisions have been enacted to ensure compliance and discipline. It was contended that if the Govt. Corporations are held to be not liable to penalty for the default, the discipline would be lost and it will be taken as blanket licence to take liberty with tax compliance. It was further contended by the ld. D.R. that without prejudice to the above arguments, if lack of motivation is accepted for the sake of arguments, the penalty is chargeable for gross and wilful negligence. The ld. D.R. further contended that as per the decision of the Supreme Court in the case of Jeevan Lal Sah (supra), the principle laid down in the case of CIT v. Anwar Alt, 76 ITR 696, is no longer applicable after 1.4.1964 and as per the Explanation to Section 271(1)(c), there is presumption of concealment of income or furnishing of inaccurate particulars of income. The assessee has failed to furnish evidence to rebut the presumption under the Explanation to Section 271(1)(c) and to offer any bona fide explanation. According to the ld. D.R., the assessee has made false entries in the books of account reducing the value of the closing stock and as such the taxable income has been suppressed. In these circumstances, penalty is warranted. Reliance has been placed on the decision of the Kerala High Court in the case of CIT v. Gates Foam & Rubber Co., 91 ITR 467, Punjab & Haryana High Court decisions in the cases of Vishwakarma Industries v. CIT, 135 ITR 652 and CIT v. Surinder Singh 160 ITR 456, and Delhi High Court's decision in the case of ACIT v. Shama Magazine, 213 ITR 64. It has accordingly been pleaded that levy of penalty may be sustained and the appeal of the assessee dismissed.
20. We have given our careful consideration to the rival contentions. The issue before us is as to whether the assessee can be said to have concealed the income or furnished inaccurate particulars of income. In this case, the assessee had filed return of income on the basis of books of account regularly maintained. The closing stock has been valued at cost price or market price, whichever is lower. In earlier years, the cost price has been adopted for the valuation of closing stock. However, in the year under appeal, some stocks classified as B class and C class in three forest divisions has been valued at lower than the cost price on the ground that the quality of the stocks had considerably deteriorated resulting in the fall in its market price below the cost price. It is the claim of the assessee that deterioration of old stocks was reported by the concerned officers and that the value of the stock was reduced on the advice of internal auditors. The claim of the assessee is disputed by the revenue authorities. In the assessment, the Assessing Officer made the addition of Rs. 2,12,18,295/- on the ground that the assessee had failed to establish that value of stocks had gone down to the extent of 25% to 50% of the cost. It has also been pointed out that the Board of Directors had taken the decision for reduction in the value of stocks sometime in the year 1990 and the Divisional Forest Officers had also given their report nearly at the same time in the year 1990 when the value of stocks has been adopted as on 31.3.87. It has also been pointed out by the AO that the reduction in value is not based on actual valuation but on estimate basis. The assessee had filed an appeal against the decision of the AO in making the addition but without any success. The Tribunal also in the second appeal confirmed the addition made by the revenue authorities. It has been observed by the Tribunal that the assessee has reduced the value of stocks on estimate basis and that in earlier years, the assessee had all along valued its closing stock at cost. The addition was thus confirmed. The AO had imposed the penalty @ 200% of the tax sought to be evaded. The CIT(A) has upheld the levy but has reduced the quantum of the penalty to 100% of the tax sought to be evaded. The issue before us is as to whether the assessee can be held to have concealed the income or furnished inaccurate particulars of income. On consideration of facts and circumstances of this case, there can be no two opinions that the assessee has not concealed the income insofar as the word "conceal" means to hide or to withhold or not to disclose. This requires some positive action on the part of the person concerned. For this, following observations of the Apex Court may be relevant:-
"Concealment" inherently carries with it the element of mensrea. The fact that some figure or some particulars have been disclosed, even if it takes out the case from non-disclosure, would not by itself take the case out of the purview of furnishing inaccurate particulars. Mere omission from the return of an item of receipt amounts neither to concealment nor to deliberate furnishing of inaccurate particulars of income, unless and until there is some evidence to show or circumstances are found from which it can be gathered that the omission was attributed to an intention or desire on the part of the assessee to hide or conceal the income so as to avoid imposition of tax thereon."
In this case, assessee had disclosed all the facts before the AO in regard to reduction of the value of the closing stock. The AO on consideration of the evidence furnished by the assessee held that sufficient evidence was not led by the assessee to support the claim that the value of stocks had gone down to the extent of reduction effected by the assessee in its valuation. Therefore, if one were only to consider the main provision of Section 271(1)(c), it would not be difficult for us to hold that assessee has not concealed the income. So, however, one has to consider provisions of Section 271(1)(c) r/w Explanations which as per the decision of the Supreme Court in the case of K.P. Madhusudhanan v. CIT, 251 ITR 99, is part of the main section and its express invocation is not necessary before the same is applied. Therefore, we have to consider the issue in the light of the Explanation (1) to Section 271(1)(c). It would be useful to refer to the provisions of Section 271(1)(c) under which the penalty has been imposed. Relevant portion of Section 271 is reproduced hereunder:-
"271.(1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act is satisfied that any person:-
(a) ... ... ...
(b) ... ... ...
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty, -
(i) .. .. ..
(ii) .. .. ..
(iii) .. .. ..
Explanation 1.- Where in respect of any facts material to the computation of the total income of any person under this Act, -
(A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or (B) such person offers an explanation, which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him.
Then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of Clause (c) of this subsection, be deemed to represent the income in respect of which particulars have been concealed."
There have been amendments in Explanation 1 to Section 271(1)(c) at more than once. Explanation 1 was substituted w.e.f. 1.4.1976. The said Explanation was further amended in the year 1986. The Explanation, which is applicable in this case which has been reproduced above, contemplates as under:-
"Where in respect of any facts material to the computation of total income the assessee (A) fails to offer an explanation or offers an explanation which is found to be false, or (B) offers an explanation which is unsubstantiated and fails to prove that all the material facts have been disclosed.
In either of the circumstances, the assessee is deemed to have concealed the particulars of the amount, which is consequently added or disallowed in the assessment.
There is vital distinction between Clause (A) and Clause (B) of the Explanation which is noticeable. The deeming fiction contained in the Explanation that the amount added or disallowed, represented income in respect of which particulars have been concealed will apply as per (A) if no explanation is given by the assessee or if an explanation has been given, the same is found to be false. Under this Explanation, the onus is on the assessee to show that there is no concealment or furnishing of inaccurate particulars of income. However, if the assessee has furnished an explanation, which has not been found to be false, Explanation 1(A) will not apply. Explanation 1(B) will be attracted if the assessee furnishes an explanation but the same is not substantiated. The presumption under this Explanation, however, is rebuttable and it can be rebutted if the assessee is able to establish that all the particulars relating to computation of income have been disclosed. This view is supported by the decision of Rajasthan High Court in the case of Raghuvir Soni v. ACIT, 258 ITR 239 (Raj.), decision of Punjab & Haryana High Court in the case of CIT v. Lal Chand Tirath Ram, 225 ITR 675 (P&H) and the decision of Madras High Court in the case of CIT v. G.R. Rajendran, 259 ITR 109 (Mad.). Thus the Explanation (1)(B) will cease to operate if the assessee proves that the explanation furnished is bona fide and all the particulars relating to computation of income have been disclosed.
21. We, therefore, proceed to consider as to whether the assessee has discharged the onus required under the Explanation 1 to Section 271(1)(c). As already pointed out, the assessee has given an explanation. Therefore, the deeming provision as per Clause (A) of Explanation 1 to the effect that assessee had failed to offer an explanation is inapplicable. The second part of the Clause (A) of the Explanation would be attracted if the explanation offered by the assessee is found to be false. For this, the findings of the revenue authorities shall have to be considered. The following findings have been recorded by the CIT(A) in his order:-
"i) Admittedly upto 31.3.87 no proposal for reduction in value of work in progress regarding timber lying with Chamba and Chopal divisions had been made. No physical details of old and damaged stocks, the value of which was reduced subsequently, were prepared upto 31.3.87.
iii) The officers who were in charge of these divisions as on 31.3.87 had never proposed reduction in the value of stocks and had never certified that these had not damaged and were of lesser market value.
iv) The Board's Resolution dated 22.8.90 could not be given retrospective effect and could not be used for educing the value of stocks as on 3.3.87.
v) The casual certificates given by the Divisional Managers in charge of Chamba and Chopal divisions in August, 1990 did not mention anywhere that the value of stock was to be reduced as on 31.3.87. They were only mentioning the condition of the stocks in August 1990. They were not even the concerned officers in charge of these divisions as on 31.3.87.
vi) The claim of the appellant that no reliance should be placed on the statements given by Shri R.C. Gupta, Divisional Manager, Chamba and Shri Chandresh Sharma, Divisional Manager Chopal cannot be accepted. In fact the appellant took the decisions by relying upon the certificates given by these 2 officers. Therefore, they were the witnesses of the appellant. The AO had the right to cross-examine them and had rightly exercised his right."
22. The findings recorded by the Tribunal in the quantum appeal also assume importance in determining the issue as to whether the explanation given by the assessee can be said to have been found to be false. We may reproduce the relevant portion as under:-
"4...................
.........................She noted that the assessee had grossly erred in adopting the rate of Rs. 1726 per cubic metre for B-Class wood and rate of Rs. 438 per cubic metre for C-Class wood. As per the auctions done by the assessee during March, 1987, the average price in Chamba Timber Depot was Rs. 2875 per cubic metre and in Chopal Division the average rate was Rs. 3969 per cubic metre. Therefore, the assessee's contention that market value would be Rs. 1726 per cubic metre for B-Class wood and Rs. 438 per cubic metre for C-Class wood was without any basis. She also noted that auctions were of mixed lots and, therefore, the average rate should have been applied. Only small margin could be given for any damage to a fraction of the stocks. Thus she noted that if market value had to be adopted as the basis, the same would be much higher than cost price and, therefore, instead of any reduction in the value of these lots of wood, there should have been some increase on this count. She, therefore, noted that assessee had not shown any basis for reduction in the value of closing stock of work-in-progress.
"7..............It may be noted that the assessee had all along been showing the value of work-in-progress in respect this stock right from assessment year 83-84 to 86-87 at cost price. Further, the assessee had reduced the value of closing stock of the work-in-progress at Chopal and Chamba Divisions for the assessment year under reference alone. The assessee had not followed the changed method of valuation in the subsequent assessment years. This fact was clearly admitted by the ld. Counsel during the course of assessment proceedings.........................................................................
In fact during the course of assessment proceedings and even before the CIT(A) the assessee could not substantiate its claim that the market value of the closing stock was less as compared to other stock. She has recorded a finding that the value of the old stock would be more in view of the fact that it got seasoned with the passage of time. Further, the assessee has not been able to lead any evidence, whatsoever, to show that such stock was sold at a price shown in the closing stock or at a lesser price in the subsequent year. In fact on the basis of details furnished by the assessee before the CIT(A), she has noted that average sale price in Chopal and Chamba Divisions was Rs. 2875 per cubic metre and Rs. 3969 per cubic metre respectively as compared to the rate of Rs. 1726 and Rs. 431 cubic metre in the respective Divisions adopted by the assessee. Moreover, the assessee has not been able to file any evidence in the form of subsequent sales to show that such stock had in fact been sold at the price at which the same was valued. Therefore, in the absence of any details having been furnished by the assessee either before the authorities below or even before us to show that the market value of the stock was the same as adopted by the assessee, we are unable to accept the contention of the assessee that the stock was valued at market price.
8. Now the relevant question is, what was the value of the closing stock as on 31st March, 1987? It is an accepted position that the value of the closing stock has to be adopted at cost price or at market price, whichever is less on the last day of the accounting year. Subsequent events cannot affect the valuation of the closing stock. In this case, the certificates of the three Divisional Managers suggesting reduction of value of the closing stock in Chamba and Chopal Divisions were given in Aug., 1990, i.e. after more than three years. A perusal of the certificates shows that the position indicated therein is on the date of the certificate. It does not relate back to the value as on 31.3.87. If the value of closing stock is found to be deteriorating with the passage of time, the value indicated on 16.8.90 is bound to be different from the value as on 31.3.87, as it would have led further reduction in the value during the passage of three years' time. Therefore, the same value as on 22.8.90 could have not been reduced as on 31.3.87 even though the accounts for that assessment year were at audit stage. Moreover, all the three Divisional Managers had come to Shimla to attend a meeting called for some other purpose. Obviously, they did not bring along with them the relevant records of the closing stock as the meeting was not called for such purpose. Another significant fact, which requires to be taken note of, is that these Divisional Managers were not working in the respective Division on 31.3.87. How could they give certificates in Aug., 1987 indicating the value of closing stock as on 31.3.87 in the absence of any supporting records? We have also referred to the statements of Divisional Managers recorded by the AO at the time of assessment. In their statements they have stated that reduction of 25% or 50% in the value of closing stock was only a guess work and was not based on any definite reports. In the absence of such definite material, the reduction in the valuation of the closing stock could not be said to be based on concrete and definite material.
9. We have also tried to look into the surrounding circumstances of the case. Now as mentioned above, the value of the closing stock has to be taken on the last date of the accounting year, i.e. 31.3.87. Reliance in this regard is placed on the judgment of Delhi High Court in the case of CIT v. Kamani Metals & Alloys Ltd., cited supra. It means that the value of the closing stock of work-in-progress at Chopal and Chamba Divisions would have been more by Rs. 2,12,18,295 as on 31.3.87 if we ignore the subsequent event of 1990. The advance tax has to be paid in the previous year i.e. before 31.3.87. The assessee could not have anticipated the decrease in value of the closing stock based on certificates in 1990, during the financial year 86-87. This should have been taken into account for estimating the income of the assessee for the assessment year under reference for the purpose of payment of advance tax. After including such stock, the estimated income should have been more than Rs. 3 crores after excluding some other disputed additions. This should have formed the basis for payment of advance tax, which means that the assessee should have paid about Rs. 1.5 crores by way of advance tax. As against this, the assessee has paid only advance tax of Rs. 40 lacs or so as admitted by the ld. Counsel, which falls far short of the assessed tax. Therefore, it could not be said that the idea of reduction in the value of closing stock of work-in-progress in both the Divisions was at the instance of auditors given at the time of auditing the accounts for the assessment year 86-87. Moreover, the assessee has not been able to explain as to why the changed method of valuing the closing stock of work-in-progress of both the Divisions was not adopted for the subsequent years and why such change was made only for the assessment year under reference. Having regard to these facts and circumstances of the case, we are of the view that CIT(A) was justified in coming to the conclusion that change in the method of valuing the closing stock made by the assessee was arbitrary, without any basis and, therefore, rightly confirmed the addition of Rs. 2,12,18,295/- on account of valuation of closing stock. We confirm her order and dismiss all the grounds of appeal relating to this issue."
23. Before we proceed further, we consider it necessary to deaf with the issue, as to whether the findings given in the assessment proceedings are relevant and admissible material in penalty proceedings. In our considered view, one need not ponder much on the case law in view of the decision of the Supreme Court in the case of CIT v. Khoday Eswarsa & Sons, 83 ITR 369 (SC). Their Lordships of the Supreme Court have laid down that findings given in the assessment proceedings would be relevant and admissible and relevant material in the penalty proceedings. But those findings cannot operate as resjudicata because the considerations that arise in penalty proceedings are different from those in assessment proceedings. The following decisions also support the view that the findings in the assessment proceedings do not operate as a resjudicata and that the considerations that arise in penalty proceedings are different from those in assessment proceedings:-
i) CIT v. Bimal Kumar Damani, 261 ITR 87 (Cal);
ii) CIT v. Garg Engineering Co., 235 ITR 451 (All.);
iii) CIT v. Chandrakant M. Tolia, 220 ITR 438 (Mad.).
24. On the basis of above principles of law we proceed to consider as to whether in view of the findings recorded in quantum proceedings, the explanation of the assessee can be said to have been found to be false. Their Lordships of the Supreme Court in the case of Cement Marketing Co. of India v. A.C.S.T., 124 ITR 15(SC), laid down that the word "false" involves an element of deliberateness. For this purpose we will have thus to consider the explanation of the assessee in regard to the findings recorded in assessment proceedings, including the findings recorded by the Tribunal in quantum proceedings. The explanation of the assessee is to the following effect:-
i) That the assessee had valued its timber stock Under Section 271B 81-82 lying in Chamba, Chopal and Narwa Divisions at net realizable value by reducing the work-in-progress by Rs. 2,12,18,295/- and that this fact was disclosed by the assessee itself in the balance sheet. The accounts of the assessee were audited by statutory auditors, namely, M/s Lamba Biz & Co. on 10.9.90, who have duly approved the valuation of stocks and had not given any adverse remarks in their audit report. The accounts of the assessee were examined by the Controller & Auditor General of India who have also approved the valuation of closing stock and have given no adverse remarks;
ii) That the authorities in the quantum assessment have wrongly recorded a finding that assessee had failed to prove that the condition of stocks pertaining to the year 81-82 had deteriorated. In this connection, reliance has been placed on the evidence produced before the revenue authorities, copy whereof has been placed in the paper book also at pages 43 to 47 in the form of inspection reports received during the year 86-87 regarding inspection of old timber stocks which had deteriorated;
iii) That the AO has rejected the claim of the assessee on the basis of statement of Divisional Forest Officers who could not confirm the basis for estimation of the deterioration up to 50%;
iv) That a bona fide explanation was furnished before the revenue authorities that it was on the basis of inspection reports and the advice of the internal auditors an assessment of deterioration of stocks was made and value reduced on estimate. That it was not possible for the assessee to inspect large forest areas in which the stocks were scattered but it was on the basis of the reports of the forest officers sent in the year 86-87 that further inquiry was conducted and reports of the Divisional Officers obtained. The matter was taken up with the Board of Directors who do not have any personal interest in the income of the Corporation;
v) That the AO observed that has not analyzed the statement of forest officers judiciously. The forest officers have confirmed the deterioration of stocks and justification for adoption of the realizable value in respect of the damaged/deteriorated stocks. The AO has heavily relied upon the fact that the report of the forest officers was obtained sometime in the year 1990. According to the assessee, the process of evaluation had started with the inspection reports received in the assessment year 86-87 itself. Since the audit took place sometime in the year 1990, reports of the Divisional Managers were obtained in order to make fair assessment of the diminishing of the value in the old stocks. The mere fact that the valuation has been made on estimate does not establish the amount of the assessee to deliberately reduce the income for the purpose of taxation.
25. It is the case of the assessee that penalty Under Section 271(1)(a) has also been upheld by the Tribunal on the ground that during the financial year, the events taking place in the year 1990 could not be the basis of estimation of income in the financial year 1986-87. So, however, the return of income has been filed in the year 1990 after the process of assessment of value was completed and the approval of the Board of Directors.
26. The explanation of the assessee regarding the circumstances under which the claim was made is relevant for consideration for the purpose of levy of penalty. Therefore, what is material for the purpose of Section 271(1)(c) is to consider the explanation of the assessee as to whether the claim made by the assessee, which was found to be inadmissible in assessment proceedings, was a false claim or a bona fide claim and that all the material facts had been disclosed by the assessee. We have repeatedly pointed out that assessee had clearly indicated in trading and profit & loss a/c about the reduction in value. All the information regarding the claim was furnished by the assessee before the revenue authorities. It is evident from records that the reports about the deterioration of old stocks had been received by the assessee from the concerned divisions during the financial year relevant to assessment year under appeal. The internal auditors had also advised the assessee to work out the realizable value in respect of the deteriorated stocks. The assessee, admittedly, was unable to carry out actual inspection of the entire deteriorated stocks spread over several kilometers in radius. The reduction in value has been adopted on estimate. If the assessee had been able to prepare the details of the stocks deteriorated at various places, perhaps the claim could not have been disallowed at the time of assessment. It was mainly because the assessee had resorted to estimate in determining the value of the deteriorated stocks that the claim was not accepted by the Department. It is also not unknown that the Govt. Corporations have to follow a set procedure for taking decisions. It is not surprising that the Board of the Directors of the Corporation met only in the year 1990 to consider the report regarding the value to be adopted in respect of the deteriorated closing stocks. The fact remains that the decision taken by the Board of Directors who do not have any personal interests in the Corporation was not found defective by the internal auditors or by statutory auditors. The statutory auditors had audited the accounts including the valuation in respect of the deteriorated stocks. The Controller £ Auditor General of India had also approved the accounts of the assessee without any blinkers in respect of the valuation of closing stock.
27. It is also pertinent to mention that the AO has heavily relied upon the statements of Divisional Officers who had confirmed that the reports furnished by them were not on the basis of actual inspection of the closing stock in the year 1987. Whereas some of the replies given by the Divisional Officers have been highlighted by the Assessing Officer, we are reproducing below the relevant replies from the statement of Dr. Chandresh Sharma, DFO, Sundernagar who had been questioned about the statement issued by him regarding the deterioration of stocks and adoption of its value as on 31.3.87:-
Qn. The certificate had been given in the year 1990. Was the certificate given on the basis of memory?
Ans. It was not on the basis of memory but based on the fact that the lots were inspected by me at various times and various reports received from my subordinate staff regarding the condition of these lots (emphasis supplied).
Qn. When did you last inspect these lots prior to Aug., 1990?
Ans. I do not remember.
Qn. What are the specific records on the basis of which you came to the conclusion given in your certificate?
Ans. There are no other records except monthly reports received from the subordinate staff(emphasis supplied).
Qn. How did you arrive at the percentage of 50%?
Ans. It is general statement and is not exact.
Qn. What would be approximate area over which these would be lying?
Ans. This would be spread out over the area of entire Division. It may be a few hundred kilometers.
Qn. Could you indicate what part or proportion would be B-Class and would be C-Class out of this?
Ans. The classification is done by our Marketing Division after the timber reaches the Sale Depot. I would not be able to indicate the proportion.
28. From the above replies, it emerges that the certificates issued by the Divisional Managers in the year 1990 are based on the inspection reports and monthly reports received from subordinate staff and not at the instance of the management. Since the matter was to be considered by the Board in March, 1990, the Divisional Officers had been summoned to give the certificates so that the Board of Directors could be apprised and convinced about the adoption of lesser value for the deteriorated stocks. The conduct of the assessee, according to our perception, is not contumacious in regard to disclosure of facts material for assessment. The assessee had made a claim on the basis of a conscious decision by the Board of Directors. There was no objection by the statutory auditors or by the Controller General of India. The revenue did not allow the claim and assessee had to pay tax in respect of the disallowed claim.
29. On the one hand there are findings of fact recorded in assessment proceedings, on the other hand, the explanation of the assessee creates a dent or so to say a doubt in favour of the assessee. Since as per well established principles of law, the benefit of doubt is bound to be given to the assessee, in our considered view, on the basis of claims of the assessee and counter claims of the Revenue, it cannot be said that the explanation furnished by the assessee has been proved to be false. As already pointed out, the word "false" involves an element of deliberateness. Since the assessee had made a claim, which was open for scrutiny and assessment, the mere fact that the assessee had estimated the deterioration in stocks and had finally taken a decision only in the year 1990 does not justify the inference that the explanation of the assessee has been proved to be false. On the basis of the evidence on record and taking the totality of the facts and circumstances of this case into consideration, we are of the considered view that the explanation offered by the assessee cannot be considered to have been found to be false. In this view of the matter, Explanation 1(A) is not attracted. The assessee, in our view, had disclosed all the material facts. The assessee also disclosed that the percentage of reduction was on estimate. Nothing was concealed in regard to the claim. If all disallowances attract penalty Under Section 271(1)(c), then the taxpayers would not be free to make claims which are perceived to be genuine. The revenue has not, in our view, established beyond doubt that the explanation offered by the assessee is false.
30. We now proceed to consider as to whether assessee's case is covered under Explanation 1(B) to Section 271(1)(c). The second part of the said Explanation 1(B) to Section 271(1)(c) is attracted where an explanation is offered by the assessee but the same is not substantiated and the assessee fails to prove that the explanation is bona fide and all the material facts had been disclosed. In our considered view, it has got to be borne in mind that the second part of the Explanation 1(A) does not get automatically attracted if the explanation offered by the assessee is not substantiated unless the assessee fails to prove that all the material facts have been disclosed. In this case, it is the claim of the revenue that the explanation offered by the assessee is not substantiated. In our considered view, once the claim made by the assessee of allowance or deduction is not substantiated, the consequences are that assessee suffers tax in respect of the claim disallowed in assessment. As already pointed out, the mere disallowance of claim for any reason including the reason of the claim not having been substantiated with sufficient evidence, the disallowance does not automatically result in levy of penalty. The assessee having disclosed all the material facts in regard to the claim made in respect of the valuation of the closing stock, we are of the considered view that the onus which is placed by the Explanation 1(8) to Section 271(1)(c) upon the assessee stood discharged. We are, therefore, of the considered view that penalty Under Section 271(1)(c) is not warranted in this case. The same is accordingly deleted.
31. In the result, the appeal of the assessee is allowed.