Income Tax Appellate Tribunal - Chandigarh
Deputy Commissioner Of Income Tax vs Hindustan Milk Food Mfrs. Ltd. on 30 November, 2004
Equivalent citations: (2005)94TTJ(CHD)436
ORDER
D.R. Singh, J.M.
1. These two appeals filed by the Revenue against the respective orders of the CIT(A) in appeal No. 248/IT/CIT(A)/1993-94 and appeal No. 248/IT/CIT(A)/1993-94, dt. 17th Nov., 1997, have been heard together and are being disposed of through this common order because one of the issues involved in these appeals pertaining to penalty imposed under Section 271(1){c) on account of the addition of sales-tax liability is identical, for the sake of convenience.
2. In appeal No. 161/Chd/1998, the Revenue has taken the following effective ground :
"On the facts and circumstances of the case, the CIT(A) has erred in cancelling penalty amounting to Rs. 3,87,525 imposed under Section 271(1)(c) of the IT Act, 1961."
3. In appeal No. 160/Chd/1998, the Revenue has taken the following effective ground :
"On the facts and circumstances of the case, the CIT(A) has erred in cancelling penalty amounting to Rs. 68,14,654 imposed under Section 271(1)(c) of the IT Act, 1961."
4. The relevant and material facts for the disposal of the issue involved in the ground of appeal taken by the Revenue, as borne out from the orders of tax authorities below, for asst. yr. 1983-84 are that after the orders of appellate authorities, the confirmed addition on account of surtax liability was Rs. "35,54,011 and on account of inclusion of excise duty in the closing stock was Rs. 63,69,269 and on account of the valuation of closing stock was Rs. 22,64,798. The AO, after initiating penalty proceedings under Section 271(1)(c) and after considering the reply dt. 27th Dec., 1993, of the assessee, rejected the contention of the assessee and levied total penalty under Section 271(1)(c) of IT Act of Rs. 68,14,654 @ 100 per cent on the tax sought to be evaded.
5. Aggrieved with the order of the AO, the assessee filed an appeal before the CIT(A) and contended that the AO has not made any specific allegation, either in the assessment order or in the penalty notice as to whether the assessee has concealed the particulars of its income or has furnished inaccurate particulars of its income. The assessee contended that because of the material defect, the initiation of penalty proceedings under Section 271(1)(c) against the assessee was improper. The assessee further contended that it has been using the absorption cost method for valuation of its closing stock upto asst. yr. 1981-82. However, during the asst. yr. 1982-83, the assessee has changed the method of valuing the closing stock and adopted the direct cost method and adoption of the change in method has also been upheld by the Tribunal in principle. Further, that the AO had not applied the order of Tribunal correctly because, once the change in method in valuation of closing stock adopted by the assessee had been accepted by Tribunal, merely sustaining of quantum addition would not make the assessee guilty of concealing the particulars of its income or furnishing inaccurate particulars of its income. The assessee further contended that the AO has wrongly levied a penalty on account of deduction of the amount of excise duty on the unsold stocks while valuing the closing stock of finished goods because from asst. yr. 1985-86, onwards, the decision of Special Bench of Tribunal has been following the assessee's own case in which the claim of the assessee in taking the excise duty while valuing the unsold golds in the closing stock, was correct in law. Though the decision (supra) was not -available with the Tribunal when it decided the assessee's appeal for asst. yr. 1983-84 but because of the factual and legal position, no penalty should have been levied under Section 271(1)(c) of IT Act. Lastly, regarding the penalty imposed by the AO on account of deduction claimed, due to surtax liability, amounting to Rs. 34,54,011, the assessee contended before the CIT(A) that the deduction was claimed in view of the decision of Bombay Bench of the Tribunal in ITA No. 3068/Bom/1972-73 in the case of Benett Coleman & Co. Ltd. v. ITO and the Pune Bench of the Tribunal in the case of Sandwick Asia Ltd. v. ITO in ITA Nos. 622-624/N/1975-76. That the assessee's claim was bona fide is further confirmed from the decisions of the Gauhati High Court in the cases of Makum Tea Co. (India) Ltd. and Anr. v. CIT (1989) 178 ITR 453 (Gau) and in the case of Doom Dooma Tea Co. Ltd. v. CIT (1989) WO ITR 126 (Gau), where the Gauhati High Court held that surtax liability is deductible under Section 37(1) of the IT Act, 1961. Since the claim was made in a bona fide manner to keep alive its legal claim and the assessee was still in litigation before the Supreme Court, therefore, the penalty under Section 271(1)(c) on this ground could not be levied as the assessee had not concealed any facts nor it has furnished inaccurate particulars of its income. It had made a bona fide claim based on judicial pronouncements.
6. The CIT(A), after considering the submission of the assessee and by placing reliance on the decisions of various authorities, deleted the impugned addition while passing a detailed order.
7. The facts of the appeal of the Revenue filed for asst. yr. 1985-86, pertaining to levy of penalty under Section 271(1)(c) on account of claim of deduction of surtax liability amounting to Rs. 6,71,039 are identical to the facts and issue of imposition of penalty under Section 271(1)(c) in respect of surtax liability, so, the same are not reproduced hereinagain for the sake of brevity.
8. We have considered the rival contentions of the learned representatives of both the parties, perused the record and carefully gone through the orders of tax authorities below.
9. In the instant appeals, the first point required to be considered by us is whether the claim of the deduction by the assessee in its return was on account of its bona fide belief of its deducibility under the Act.
10. The AO imposed the first penalty under Section 271(1)(c) on account of the change in the method of valuation of closing stock from absorption costing method to direct costing method. The direct costing method applied by the assessee has been upheld by the Tribunal. There remained certain quantum additions for which the penalty under Section 271(1)(c) was imposed by the AO. In our opinion, in these facts, the change in the system of valuation of closing stock adopted by the assessee was a bona fide claim which was brought to the notice of the AO by the assessee itself. Therefore, there was neither any concealment of income nor furnishing of inaccurate particulars of income by the assessee, so, the CIT(A), in a well reasoned and well discussed order, while placing reliance on the various decisions mentioned in his order, has rightly concluded that the AO was not justified in imposing the impugned penalty under Section 271(1){c) or the addition of Rs. 22,64,798 on account of change in the method of valuation of closing stock.
11. The second penalty under Section 271(1)(c) imposed by the AO is on account of deduction claimed on the excise duty paid on closing stock by the assessee.
12. The assessee has valued its closing stock of finished goods lying uncleared in its premises and has deducted a sum of Rs. 63,69,269 on account of excise duty on the unsold stocks. This addition was confirmed by the Tribunal. Later, on similar facts, the Special Bench of Delhi Tribunal in the case of ITO v. Food Specialities Ltd. (1994) 48 TTJ (Del)(SB) 642 : (1994) 206 ITR 119 (Del)(AT)(SB) has held that excise duty was not part of manufacturing cost and the change affected by the assessee in valuation of its closing stock by excluding the element of excise duty from unsold goods was proper and that no addition on account of excise duty could be made to the closing stock of unsold goods lying in the assessee's warehouse. This decision was not available before the Tribunal while deciding the appeal of the assessee for asst. yr. 1983-84, but in the subsequent year from asst. yr. 1986-87, onwards, the Special Bench decision has been followed in the case of the assessee and the additions made have been deleted. It means that in view of this factual and legal position, the claim of the assessee in taking the excise duty while valuing the unsold goods in closing stock was correct, so, the assessee cannot be said to have furnished any inaccurate particulars in this regard. On the contrary, we find that the assessee had made a legal claim, so, there was no concealment of income. Hence, we are of the opinion that on these facts and in view of the legal position, the claim of the assessee was bona fide and did not call for any penalty under Section 271(1)(c) and, therefore, the penalty imposed under Section 271(1)(c) in respect of deduction claimed on account of excise duty while valuing the closing stock by the AO has been rightly deleted by the CIT(A). Accordingly, the order of the CIT(A), in this regard, is upheld.
13. Now, we shall take up the third penalty levied by the AO under Section 271(1)(c) on the claim of surtax in both the assessment years under consideration. The point whether the assessee could claim deduction on account of surtax liability now stands settled by the decision of the Supreme Court, reported in the cases of Smith Kline French (India) Ltd. Etc. v. CIT (1996) 219 ITR 581 (SC), A.V. Thomas & Co. Ltd. v. CIT (1986) 159 ITR 431 (Ker) and Highway Cycle Industries Ltd. v. CIT (1989) 178 ITR 601 (P&H), wherein it has been held that the assessee cannot claim any deduction on account of surtax liability. The learned counsel for the assessee has also conceded on this point. But, the question required to be decided by us is whether the deduction claimed by the assessee on account of surtax liability in the relevant assessment year under consideration, was bona fide or not.
14. The admitted facts are that deduction claimed on account of surtax in earlier years in the case of the assessee was pending before the Supreme Court for asst. yrs. 1972-73 to 1974-75.
15. The assessee claimed that since the apex Court till the assessment years under consideration had not decided the issue, so, in order to keep its claim alive, it claimed the deduction on account of surtax liability. This fact was even clearly mentioned by the assessee in the IT returns. Till the decision of the apex Court regarding this issue, there were various decisions, few of which were in favour of the assessee and others were in favour of the Revenue, so, the assessee relying upon the decision of Bombay Bench in ITA No. 3068/Bom/1972-73 in the case of Benett Coleman & Co. Ltd. v. ITO and Anr. decision of the Pune Bench of the Tribunal in the case of Sandwick Asia Ltd. v. ITO in ITA Nos. 622 to 624/N/1975-76, had made this claim.
16. It is also not in dispute that the assessee had also filed appeals before the jurisdictional High Court in respect of the earlier years. From these facts, it is evident that in assessment years under consideration, there were two divergent views of the various authorities on this issue. In these facts, the deduction claimed by the assessee to keep the issue alive, could be called bona fide under the bona fide belief that the same was allowable to the assessee. Hence, we are of the opinion that because of the bona fide claim made by the assessee, the penalty under Section 271(1)(c) is not exigible as also held in CIT v. Swananda Steels Ltd. (2002) 256 ITR 683 (Mad), accordingly, the same has been rightly deleted by the CIT(A). The order of the CIT(A), in this regard, is upheld.
17. In the end, we would like to dispose of the legal issue whether the AO has assumed proper jurisdiction in initiating penalty proceedings under Section 271(1)(c) against the assessee. In the case of CIT v. Munish Iron Store (2003) 263 ITR 484 (P&H), their Lordships observed that the jurisdiction to impose penalty flows from the recording of the satisfaction of the AO regarding concealment of income. In case there is a defect in the assumption of jurisdiction, it cannot be cured. In this case, the Tribunal deleted the penalty on the ground that while finalising the assessment the AO did not record satisfaction in term of section under Section 271(1)(c). So, penalty imposed under Section 271(1)(c) was cancelled.
18. The High Court held, the reasons assigned by the Tribunal for cancellation of penalty were legally correct. Similar view was taken by the Delhi High Court in the case of Diwan Enterprises v. CIT and Ors. (2000) 246 ITR 571 (Del) and in the case of CIT v. Ram Commercial Enterprises Ltd. (2000) 246 ITR 568 (Del). It means that recording of satisfaction by the AO before initiating penalty proceedings was mandatory and in case no satisfaction was recorded by the AO as to whether the assessee has concealed particulars of income or has furnished inaccurate particulars of income, the penalty proceedings initiated by the AO are illegal and invalid, and the penalty under Section 271(1)(c) imposed by the AO is liable to be cancelled.
19. Now, keeping in view the mandatory requirement of recording satisfaction by the AO before initiation of penalty proceedings under Section 271(1)(c) against the assessee, we revert to the facts of the instant cases of the assessee. In the instant cases, besides making additions for surtax liability, excise liability on account of change in the method of valuation of closing stock adopted by the AO, various other additions pertaining to different items were made by the AO in the assessment order. On going through the assessment orders, we find that only at the end of the assessment orders, the AO has mentioned that the penalty proceedings were being initiated separately. Except this noting, the AO has not mentioned a word regarding his satisfaction as to whether the assessee has concealed particulars of income or has furnished inaccurate particulars of income in the entire assessment order. We further find that even in the penalty notice issued under Section 274 r/w Section 271(1)(c) of IT Act as well as in subsequent notices issued to the assessee, the AO has not specified the reason why the assessee was considered to have concealed its income or to have furnished inaccurate particulars of its income and as to for what default the opportunity for levy of penalty under Section 271(1)(c) was being afforded to the assessee and for which item the assessee was required to file reply against levy of penalty under Section 271(1)(c). Hence, from these facts, it is evident that the AO before invoking the jurisdiction to impose penalty under Section 271(1)(c), has not recorded the mandatory satisfaction in terms of Section 271(1)(c) while finalising the assessment, so, in view of the decision (supra) of Punjab & Haryana High Court, the impugned penalties imposed by the AO for asst. yrs. 1983-84 and 1985-86 in the case of the assessee were invalid and, therefore, the impugned penalties imposed by the AO are liable to be cancelled. Accordingly, on account of non-fulfilment of this mandatory requirement of recording satisfaction before initiating penalty proceedings under Section 271(1)(c) against the assessee by the AO, the impugned penalty amounts in respective assessment years under consideration are rightly cancelled by the CIT(A).
20. For the reasons recorded hereinabove, in our order, the well reasoned and well discussed orders passed by the CIT(A) in cancelling the impugned penalty amounts for asst. yrs. 1983-84 and 1985-86, under consideration before us, are upheld and ground of appeal in both appeals filed by the Revenue is rejected.
21. In the result, both the instant appeals filed by the Revenue are dismissed.