Income Tax Appellate Tribunal - Mumbai
Dhiraj A. Sharma vs Income-Tax Officer on 18 March, 1992
ORDER
G.K. Israni, Judicial Member
1. By these four appeals, the assessee has challenged the orders of the learned Commissioner (Appeals) upholding the penalties levied under Sections 271(l)(c) and 273(2)(c) in relation to the assessment years 1987-88 and 1988-89.
2. The assessee, an individual, was carrying on business as a jeweller in the name of M/s. Sangeeta Jewellers. The return was filed declaring income at Rs. 1,22,506 on September 14, 1987, for the assessment year 1987-88. For the assessment year 1988-89, the return was filed on July 19, 1988, showing income at Rs. 1,47,410. During the course of the assessment proceedings for the assessment year 1988-89, it was noticed by the Income-tax Officer that the assessee had undervalued the closing stock. The Income-tax Officer required the assessee to furnish the basis and details of valuation of closing stock. Compliance was re'quired to be made on September 25, 1989. The assessee, in terms of the letter purporting to be dated September 16, 1989, offered for revaluation of closing stock and, as a necessary consequence, offered an additional income of Rs. 3,54,724 for the assessment year 1988-89. The assessee submitted before the Income-tax Officer that the business had come to him only in the assessment year 1986-87 on account of the sudden death of his father. The assessee had filed the returns as worked out by his employees/accountant. The working of the closing stock was not available with him. He had, therefore, recalculated the value of closing stock following the weighted average method and had offered to be assessed on additional income to avoid litigation and buy peace. The assessee also requested for bifurcation of income for the assessment years 1988-89 and 1987-88, The assessments were completed accordingly.
3. Proceedings under Section 271(l)(c) were initiated for both the years. Since the assessee had not paid advance tax due commensurate with the. income assessed as a result of revaluation of stock, proceedings under Section 273(2)(c) were also initiated. For the two assessment years, penalties of Rs. 1,14,630 and Rs. 65,598 were levied under Section 271(l)(c) and penalties of Rs. 9,335 and Rs. 5,998 were levied under Section 273(2)(c). The penalties have been confirmed by the learned Commissioner (Appeals) giving rise to the present appeals by the assessee.
4. The main thrust of the argument of learned counsel for the assessee was two fold. The first limb of his argument was that the mistake in the valuation of the closing stock was bona fide and, therefore, no penalty for concealment could be imposed. According to learned counsel, the assessee, allegedly a young boy of around 18 years, had inherited the business from his father only in the assessment year 1986-87. He was not conversant with all the aspects of the returns and the valuation of closing stock and filing of returns of income. He was not properly guided by his staff. As such, the mistake in the valuation of stock was a bona fide one and no penalty for concealment could validly be imposed. The second limb of the argument of learned counsel was that where the income declared in a return has been found to be low only on account of incorrect valuation of stock, such case can, in no circumstances, be treated as one of concealment of income so as to attract penalties. In a case involving undervaluation of stocks, there is never any attempt to avoid tax. The only possible result is that of postponement of payment of tax. Therefore, the act of undervaluation of stock should never be visited with penalty for concealment. During the course of his arguments, learned counsel for the assessee also referred to the fact that the assessee, during the course of the assessment proceedings, on being required to explain the valuation of stock, had voluntarily filed revised returns declaring additional income. This voluntariness on the part of the assessee clearly indicated that there was no mens rea or intentional concealment by the assessee so as to attract penalties.
5. As against the above, it was submitted by the learned Departmental Representative that although, during the two years in question, the assessee had made purchases of fresh stock at prices much higher than the rates adopted for opening stock, yet he valued the closing stock at rates lower than those adopted for the opening stock and those at which the purchases were made during the two years in question. This clearly indicated that this was a gross and blatant and intentional act of undervaluation of stock so as to escape tax liability for the two years under appeal. Such act. of the assessee cannot validly be regarded as bona fide so as not to constitute concealment of income. The revised returns filed by the assessee could not also validly be regarded as voluntary ones inasmuch as they were filed only after the Income-tax Officer had commenced enquiries into the question of valuation of stock and had required the assessee to explain the basis of valuation. In support of his arguments, the learned Departmental Representative relied upon the decision of the Madras High Court in the case of Rathnam and Co. v. IAC [1980] 124 ITR 376 and the decision of the Hyderabad Bench of the Tribunal in the case of Katika Ramulu and Bros. v. ITO [1989] 31 ITD 1.
6. Now, so far as the penalties under Section 271(l}(c) are concerned, the learned Commissioner (Appeals) has dealt with the issue in paragraph 5 of his impugned order relating to those penalties, which reads as under :
" 5. I have considered the submissions on behalf of the appellant carefully. I have also looked into the facts of the case. In assessment year 1987-88, the assessment Was completed on a total income of Rs. 3,51,770 as against the returned income of Rs. 1,22,506. The variation was mainly attributable to the addition of Rs. 2,29,265 based on revaluation of closing stock. In assessment year 1988-89, the total income determined was Rs. 2,95,430 as against the returned income of Rs. 1,47,410. In this year also assessed income was higher mainly on account of the additions towards undervaluation of stock at Rs. 1,25,449. The appellant's main crux of argument to exclude his case from the penal consequences of Section 271(l)(c) is that the discrepancy in valuation of stock was bona fide and that the offer of additional income based on correct valuation was voluntary. The claim, however, is not found to be correct on scrutiny of the assessment order and consideration of the sequence of events. Firstly, it is seen that in the assessment year 1987-88, the opening stock was valued at the rate of Rs. 1,536 per 10 gms, whereas the closing stock was valued at Rs. 1,200 per 10 gms. This was in spite of the fact that the average purchase price was Rs. 1,728 per 10 gms. In the assessment year. 1988-89, the closing stock was valued at the rate of Rs. 1,116 per 10 gms. as against opening stock at the rate of 1,240 per 10 gms. and the average purchase price at Rs. 2,135 per 10 gms. Thus it would be seen that in the assessment years 1987-88 and 198,8-89, the closing stock valuations were made at rates lower than the rates adopted for the opening stock and that at which purchases were made during the year. There is no ostensible explanation for this practice other than the desire to understate the income. When the price had gone up at a rapid rate there was no bona fide explanation for valuing the closing stock at rates lower than the opening stock and purchase price. In the circumstances, I am of the view that the discrepancy in valuation of closing stock was not bona fide. Further, even the offer of revaluation and additional income could not be accepted as voluntary. As stated by the Assessing Officer she had already taken note of the discrepancy in the closing stock and had required the appellant to furnish the basis of valuation on September 25, 1989. The appellant made the offer to be assessed at a higher income, vide letter dated September 16, 1989. However, this letter was filed before the Assessing Officer only on October 11, 1989.
Obviously, the date of the letter was advisedly typed as September 16, 1989, to project the claim that the offer was voluntary. As the letter was filed before the Assessing Officer only on October 11, 1989, it would be difficult to accept that the offer was made before the Department became aware about it. As a matter of fact, it was clear from the order sheet notings that the Assessing Officer had already taken note of the discrepancy and was trying to offer an opportunity to the appellant to explain his case. In the circumstances, when neither the discrepancy was bona fide nor the offer of additional income was voluntary there was nothing to take away the case of the appellant from the applicability of the provisions of Section 27l(l)(c). The assessment orders have become final as no appeals were filed against them. The additions have also in the circumstances become final. The decisions relied upon by the appellant are clearly distinguishable as in those cases penalty was not held exigible as the offer of additional income was voluntary on discovery of discrepancy. As discussed earlier, the facts of the appellant's case were entirely different. In the above circumstances, I am of the view that penalty under Section 271(l)(c) was clearly exigible in the appellant's case. As the Assessing Officer levied the penalty at the minimum there is no reason to modify her orders. Both the penalties are accordingly approved and the appeals are dismissed."
7. It would be seen from the aforesaid that, whereas for the assessment year 1987-88, the opening stock was valued at the rate of 1,536 per 10 gms. the closing stock was valued at Rs. 1,200 per 10 gms. This was in spite of the fact that the average purchase price was Rs. 1,728 per 10 gms. For the assessment year 1988-89, the closing stock was valued at the rate of Rs. 1,116 per 10 gms. as against the opening stock at the rate of Rs. 1,240 per 10 gms. although the average purchase price during the year was Rs. 2,135 per 10 gms. Thus, the closing stock valuations were made at rates much lower than the rates adopted for valuing the opening stock and the rates at which the purchases were made during the two years. The adoption of this manner of valuation by the assessee cannot be held to be tenable either under the file (first in first out) method or under the weighted average method of valuation. In the assessment year 1988-89, the average purchase price was at a higher rate of Rs. 2,213 per 10 gms. yet the assessee chose to value his closing stock at such low a rate as Rs. 1,116 per 10 gms., which is almost 50 per cent, of the rate of purchase price. This gross disparity between the two rates clearly indicates that the act of the assessee in undervaluing his stock could not be unintentional, inadvertent or bona fide. This is a blatant and intentional act and gross undervaluation of closing stock so as to escape tax liability for the two years. As regards the voluntary nature of the disclosure of additional income, here again, it would be difficult to accept the argument of learned counsel that the revised returns were filed voluntarily and before the detection of the concealment by the Income-tax Officer. It was only when the Income-tax Officer found that the closing stock was not properly valued and required him to explain the basis thereof that the assessee, in compelling circumstances, chose to file revised returns. Filing of revised returns in such circumstances cannot be held to be voluntary so as to allow the assessee to escape the consequences of a previous act of concealment. The fact of the assessee being a young man and of his having taken over the business on the death of his father in the assessment year 1986-87 cannot, in the circumstances of the case, be held to be of a material significance so as to warrant a conclusion that the mistake was unintentional and bona fide and therefore, could save the assessee from the consequences of the provisions of Section 271(l)(c). We, therefore, conclude that the learned Commissioner (Appeals) was eminently justified in coming to the conclusion that penalty under Section 271(l)(c) was clearly exigible in the assessee's case. As the Income-tax Officer had levied the penalties at the minimum, there was no case to modify her penalty orders passed under Section 271(l)(c) of the Act.
8. As regards the penalties levied under Section 273(2)(c), it was urged by learned counsel that the higher estimate could not be filed as the obligation to file the higher estimate arose on account of the offer of additional income on the basis of the revised valuation of closing stock. Here again, similar contentions were made which have been rejected by us in relation to the penalties levied under Section 271(l)(c). For similar reasons, we hold that the penalties under Section 273(2)(c) have been properly levied and confirmed. No case for our interference therein is made out.
9. In the result, all the four appeals by the assessee are found to be having no merit and shall, therefore, stand dismissed.
R.K. Bali, Accountant Member
10. Have carefully and respectfully gone through the judgment proposed by my learned brother, Judicial Member, in this appeal. However, with great respect, I find myself unable to agree with the decision arrived at by him relating to the confirmation of penalties levied under Section 271(l)(c) although with regard to the penalties levied under Section 273(2)(c), I am in agreement with my learned brother that the order passed by the first appellate authority relating to the confirmation of penalties levied under Section 273(2)(c) relating to the assessment years 1987-88 and 1988-89 deserves to be upheld.
11. With regard to the penalties levied under Section 271(l)(c), the facts of the case have been discussed broadly in para 2 of the proposed order of my learned brother, the Judicial Member and the legal arguments raised on behalf of the assessee have been summarised in para 4. It is undisputed that, there has been undervaluation of closing stock for both the assessment years under consideration and this fact was noticed by the Assessing Officer during the course of assessment proceedings for the assessment year 1988-89. It will be pertinent to refer to the penalty order passed by the Assessing Officer under Section 271(l)(c) for the assessment year 1988-89 in which the relevant portion of assessment order for the assessment year 1988-89 as well as the reply given by the assessee in the course of assessment proceedings as well as the penalty proceedings have been incorporated :
"The assessee is carrying on business as jeweller in the name and style of M/s. Sangeeta Jewellers as a proprietary concern. During the course of assessment proceedings, it is noticed that the assessee has undervalued the closing stock. It was noticed that for the assessment year 1987-88, the assessee valued the opening stock at Rs. 1,536 per 10 gms. The average purchase price during the year was Rs. 1,728 per 10 gms. The valuation of closing stock was adopted at Rs. 1,200 per 10 gms. which amounted to undervaluation of stock. For the assessment year 1988-89, the assessee valued the opening stock at Rs. 1,200 per 10 gms. The closing stock is at 4,610.904 gms. valued at Rs. 1,116 per 10 gms. During the year, it has effected purchase of 6,198.348 gms. at an average price of Rs. 2,135 per 10 gms. He sold 6,531.625 gms. of gold at an average rate of Rs. 2,533 per 10 gms. Therefore, in this year also, the assessee has undervalued the closing stock.
During the course of assessment proceedings for the assessment year 1988-89, a question was raised about the valuation of closing stock in that year at Rs. 5,35,964, i.e., 1,162 per 10 gms. of gold. It was pointed out in the order sheet as under :
A: " That the assessee is having closing stock of gold amounting to Rs. 5,35,964, the method is adopted as base method of the assessment year 1980-81 and remaining at the rate of average method. The assessee will furnish the complete details of this and also method adopted in earlier years. In absence of any proper adopted/accepted method why should closing stock not be calculated at the current rates ? The assessee will furnish the above details possibly by September 25, 1989, at 11 a.m. "
As a result of the above enquiries, the assessee, vide his letter dated September 16, 1989, revised the value of closing stock at Rs. 8,90,688 as per the weighted average method as against Rs. 5,35,964, declared earlier and filed revised return of income on October 23, 1989, disclosing income of Rs. 5,02,135 as against Rs. 1,47,412 originally shown, the contents of the assessee's letter are reproduced below :
' I am carrying on business in jewellery in the name and style of M/s. Sangeeta Jewellers, my proprietary concern. Assessment year 1986-87 was the first year in which the profits of this business were offered for tax by me. Since prior to that the income had been offered for tax in the hands of my father late Achalchand Sharma. After his death, the business has come to me.
Since I was only a beginner in the jewellery business, I had a lot of difficulties and had to place reliance on the old staff and accountant of my father. On the basis of accounts prepared by them, I had filed my returns for the assessment years 1986-87, 1987-88 and 1988-89. The old accountant is no longer with me.
While going through my accounts for the various years with the help of my new accountant and consultant I have been unable so far to determine the basis of valuing these closing stock of gold from year to year since the working papers apparently have not been preserved by the old accountant. Faced with this difficulty I have started afresh. I have been advised that the adopting of the weighted average method for valuing closing stock would be an appropriate method. Hence, regardless of the method adopted in the past, since I am not in a position to presently explain or comment upon the same, I have prepared afresh working on "the basis of my performance and applying the weighted average method, derived the closing stock value of gold ornaments in accordance with the said method.
B : For this purpose, I have taken my purchases at a uniform 24 ct. by converting purchases of all categories of different earatage into corresponding 24 carat figures.
As a result of this working, I find that as against the closing stock of Rs. 5,35,964 as on Samvat year 2043 (relevant to the assessment year 1988-89) my closing stock should be valued at Rs. 8,90,688 as per the weighted average method. The closing stock value of my gold ornaments as on Samvat year 2043 (October 23, 1987) may be revised accordingly. You are requested to kindly treat my return for the assessment year 1988-89 as amended accordingly, i.e., the income be increased by Rs. 3,54,724. However, if it is thought necessary that this difference in stock, i.e., Rs. 3,54,724 should be distributed over the preceding years as well, the same may kindly be done either as rectification or, if thought necessary by my filing fresh income-tax returns as you may kindly guide.
I respectfully submit that this declaration and offer of additional income being made by me should be treated as being fully voluntary having been made suo motu and prior to detection by the Department.
In view of the circumstances explained above, you are requested to kindly treat this case most sympathetically and refrain from charging any interest or levying any penalties in connection with this declaration.'
12. The assessee's contention that the additional income offered for taxation should be treated as being fully voluntary having been made suo motu and prior to detection by the Department is not accepted. As a substantial portion of income concealed pertained to the assessment year 1987-88, this assessment was also taken up for scrutiny after obtaining previous approval of the Deputy Commissioner of Income-tax, Range 22, Bombay. Notice under sections 143(2) and 142(1) of the Income-tax Act, 1961, were issued and sent to the assessee along with a letter dated October 26, 1989, which reads as under :
'I am enclosing notices under sections 143(2) and 142(1) of the Income-tax Act, for the assessment-year 1987-88. Under the provisions of section 142(1) of the Income-tax Act, you are requested to make your submissions on the following ;
The opening stock of gold ornaments as worked out by you after conversion into 24 carat is 4182 grams valued at Rs. 6,29,715, i.e., at Rs. 1,505 per 10 grams. The closing stock of the same assessment year of 4,622 grams was originally valued at Rs. 7,09,999, i.e., at Rs. 1,536 per 10 gms. Prima facie the valuation of closing stock at Rs. 1,536 as against the valuation of opening stock at Rs. 1,505 cannot be considered as gross undervaluation of stock. Thus, I do not find any substantial ground for revaluation of stock of the assessment year 1986-87. As regards the assessment year 1987-88, it is seen that the opening stock on hand is valued at Rs. 1,536 per 10 gms. The average purchase price during the year was Rs. 1,728 per 10 gms. In the circumstances, the valuation of closing stock at Rs. 1,200 per 10 gms. amounts to gross undervaluation of stock resulting in deliberate concealment of income. The assessee being a proprietary concern he had notice to bring down the income from around 5 lakhs to around Rs. 2,25,000. In the assessment year 1987-88, it is seen that the closing stock is valued at Rs. 1,212 per 10 gms. which has no relevance to the value of opening stock or the average purchase price of the current year. There is no substance in your contention that you are not aware of the method of valuation of closing stock. Your attempt to pass on the liability to the accountant is equally unacceptable. Then the closing stock of 4,266 gms, is valued at Rs. 7,09,999. The gross undervaluation of stock is apparent on records and it could not have escaped your attention. You are, therefore, aware of the gross undervaluation of stock.
In the course of assessment proceedings for the assessment year 1988-89, I have raised the question of valuation of closing stock in that year by you at Rs. 5,35,964, i.e., 1,162 per 10 gms. of gold. It has been pointed out in the Order Sheet that the assessee is having closing stock of gold amounting to Rs. 5,35,964. The method is adopted as the base method. The assessee will furnish the above details positively by September Prima facie it is as a result of these enquiries that you have revised the value of closing stock in the revised trading account of the assessment year 1987-88 revised by you in which closing stock is now valued at Rs. 8,28,942 as against the original value of Rs. 5,99,478. You will please explain why your assessment could not be completed by taking the closing stock value at Rs. 8,28,942 and why penalty proceedings under Section 271(l)(c) should not be initiated. On this basis, the addition to the trading account due to revaluation of closing stock will be Rs. 2,29,269. "
13. After taking into account all the facts of the case and discussions made with the assessee's representative, income of Rs. 2,29,265 was added for the assessment year 1987-88 and Rs. 1,25,449 was added for the assessment year 1988-89 treating it as income from undisclosed sources.
14. The assessee has not filed an appeal against the above order and accepted the entire addition and taxes have also been paid except interest under Section 217 for which decision is still awaited from higher authorities.
15. In response to the show-cause notice under Section 271(l)(c), the assessee replied, vide letters dated February 14, 1990, and April 11, 1990, stating as under :
"I had revalued the closing stock of the assessment year 1988-89 at Rs. 8,90,688 as against Rs. 5,35,964 as per declaration letter dated September 16,1989. Thus the difference of Rs. 4,54,724, I offered as income being fully voluntary having been suo motu and prior to detection by the Department.
C : My father, the late Shri Achal Nath Sharma, expired suddenly before one and half years leaving me in the dark about the business activity, accounts, family affairs, social obligations, etc. In view of the above fact, I had lot of difficulties and placed reliance on the old staff and accountant of my father. I had filed my return for the assessment years 1986-87 to 1988-89 according to the accounts prepared by them since the working papers apparently have not been preserved by the old accountant in the records, therefore, I was unable to say about the stock valuation method. As per para No. 3 on page No. 2 of my said letter, I made my request before you as regardless of method adopted in the past, and not being in a position to presently explain or comment upon the same, I have been advised and prepared fresh working applying the weighted average method of stock valuation.
Madam, on inquiry being made with the old accountant and staff member, I came to know that the stock was valued on the basis of cost or market price whichever is lower, followed by the last in first out method. I have gone through the working of the closing stock valuation and to state that the valuation is done on the basis of the above method. This method is an accepted accounting method and the same was adopted from year to year also. To avoid the litigation with the Department and to keep peace in mind once again, I keep my own words and paying the taxes accordingly.
There is no change so far as the physical quantity of the closing stock is concerned, the undervaluation of the closing stock was due to bona fide change in the method of valuation of stock. As I found that the weighted average method is the more scientific and systematic method of valuing closing stock and to keep peace in mind, I have not appealed against the assessment for these reasons. Under bona fide belief that stock valuation was done in good faith and acting honestly, there is no gross or wilful neglect on my part."
16. The assessee has also relied on the judgment in the following cases :
1. K. P. Kandasami Mudaliar and Sons v. CIT [1985] 156 ITR 638 (Mad).
2. Lakshmi Jewellery v. CIT [1988] 171 ITR 649 (AP).
3. CIT v. Dr. (Kum.) M. Dubey [1388] 171 ITR 144 (MP).
I have gone through the contentions of the above judgments. The facts of the assessee's case are not similar to the above. As already held in an earlier paragraph, i.e., concealment is detected by the Department and it cannot be said to be a voluntary declaration. Gross undervaluation is apparent from record and could not have escaped the attention of the assessee. Therefore, prima facie it is as a result of the enquiries of closing stock made by the Department that the assessee has come forward with a disclosure and offered Rs. 3,54,723 as additional income. Therefore, it is deliberate concealment. I, therefore, levy penalty of Rs. 65,598 being the minimum penalty at 100% of the concealed income. This order has been passed with the prior approval of the Dy. Commissioner of Income-tax, Range 22, Bombay, vide his order No. DCR22/Approval/90-91, dated June 26, 1990."
17. A perusal of the order sheet entry whose compliance was required by the Assessing Officer by September 25, 1989, which has been reproduced in the penalty order at 'A' above will indicate that the method of valuation as explained by the representative of the assessee to the Assessing Officer was claimed to be " as base method of assessment year 1980-81 and remaining at the rate of average method". The expression used (as noted by the Assessing Officer in the order sheet) does not refer to any proper method of valuation. However, the fact remains that there was definite undervaluation and this fact was pointed out by the Assessing Officer to the assessee. The assessee, vide his letter dated September 16, 1989, which was, however, filed in the office of the Income-tax Officer on October 11, 1989, enhanced the valuation of closing stock for the assessment year 1988-89 to Rs. 8,90,688 instead of Rs. 5,35,964 on the basis of weighted average method and thus offered additional income of Rs. 3,54,724 for assessment in the assessment year 1988-89. In the above letter, an offer was made that if the difference in closing stock of Rs. 3,54,724 is required to be distributed over the preceding years as well, the assessee was prepared for it and for that he sought necessary guidance from the Assessing Officer. In the letter dated September 16, 1989, which has been reproduced in the penalty order and which has been incorporated in para 11 of this order also, at the portion marked 'B' it is mentioned that, for the purpose of preparing the trading account, the assessee has taken the purchases at a uniform 24 carat by converting purchases of all categories of different caratage into corresponding 24 carats. This practice of the assessee naturally will affect the valuation of purchases of gold ornaments. A perusal of the trading accounts--original as well as revised filed by the assessee for both the assessment years indicate that the assessee was having substantial old jewellery lying in the closing stock at the beginning as well as the end of each of the accounting years under consideration. It is common knowledge that old jewellery lying in a gold shop does not move fast and eventually it has to be re-made into new jewellery conforming to the changed trends in fashion. This process of melting the old jewellery will result in loss of baser metals like copper or cadmium, etc., used in the manufacturing of jewellery. Apart from this, old jewellery bought during the accounting period will also undergo same process which will also affect the valuation eventually. The question of valuation of old jewellery in the closing stock cannot be scientifically determined as it will be difficult to categorically state as to whether the old jewellery relates entirely to the purchases made during the assessment years under consideration or only a part of it related to the years in dispute and part of it was brought forward from the previous years. As such, the fact remains that the valuation of stock has to be determined on a rough and ready basis without reference to the market value. The argument taken by the assessee that valuation was done on a mixed basis being the cost or market price, whichever is lower together with principle LIFO (last in first out) was adopted as a consequence of which the valuation of closing stock was at a much lesser figure than the average purchase price or for that matter even the opening stock has to be considered in the context of purchases of different carats of gold ornaments being converted into 24 carats and then taken into the trading account. The assessee himself realised the incorrectness of this method and accordingly when confronted by the Assessing Officer during the course of assessment proceedings for the assessment year 1988-89, he offered to increase the valuation of the closing stock by adopting the weighted average method and offered additional income for taxation. However, this action alone of the assessee will not make him guilty of deliberate concealment of income particularly so as the assessee inherited the business only about 1 1/2 years prior to the commencement of the assessment proceedings as a result of the death of his father Sh. Achal Nath Sharma on account of heart attack, which fact has been conveyed to the Assessing Officer, vide letters dated February 14, 1990 and April 11, 1990, in response to penalty notices under Section 271(l)(c), which have been incorporated in the penalty order passed under Section 271{l)(c) and marked 'C' in the reproduced portion of the penalty order in the earlier paragraph.
18. It is undisputed thatihe alleged concealment of income for both the years is due to the valuation of closing stock only. There is no suppression of sales or enhancement of purchases or inflation of other expenses. It has been held by the Hon'ble Supreme Court in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481 that it is -a misconception to think that any profit "arises out of the valuation of the closing stock" . . . Valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period, and can in no sense be regarded as the ' source' of such profits." Thus ,it has to be held that in a case involving undervaluation of stock, there is never a conscious attempt to evade tax as the only possible result of undervaluation is that of postponement of tax particularly so as the quantity of gold ornaments in the closing stock have not been disputed by the Assessing Officer and the addition is made only on account of the undervaluation of the accepted quantity of gold ornaments. The fact that the assessee has accepted the additions made by the Assessing Officer and has not filed any appeals will not be sufficient to hold the assessee guilty of concealment of income as held by the Hon'ble Supreme Court in the case of Sir Shadilal Sugar and General Mills Ltd. v. CIT [1987] 168 ITR 705, wherein it is held at page 706 (headnote) that from the assessee agreeing to additions to his income, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such admission, i.e., when the assessee realises the true position, it does not dispute certain disallowances but that does not absolve the Revenue from proving the mens rea of quasi-criminal offence.
19. Keeping in view the totality of the facts and circumstances of the case, I am of the opinion that, if the assessee has, in his endeavour to buy peace, offered for taxation enhanced valuation of the stock on the basis of weighted average method as suggested by the Assessing Officer, he has suffered taxation for his negligence in accepting the acts of omission/ commission by his previous accountant--may be as instructed by his late father Shri Achal Nath Sharma, he should not be further penalised by holding him guilty of conscious and deliberate concealment. Accordingly, the penalties under Section 271(l)(c) levied by the Assessing Officer for both the assessment years under consideration are directed to be deleted.
20. As regards the penalties levied under Section 273(2)(c), it is found by the learned first appellate authority that, even on the basis of returns filed originally, the advance tax paid by the assessee was less than what was required under the relevant provisions and under these circumstances there was a clear failure to discharge the obligation as provided under Section 209A(4) of the Income-tax Act by the assessee. Since the penalties levied by the Assessing Officer as well as confirmed by the first appellate authority are the minimum leviable under the Act, we have no hesitation in confirming the order passed by the learned first appellate authority in this regard.
21. In the result the appeals relating to penalties under Section 271(l)(c) in I.T.A. Nos. 6063 and 6064 (Bom) of 1991, are allowed whereas the appeals relating to penalties under Section 273(2){c) in I.T.A. Nos. 6065 and 6066 (Bom) of 1991, are dismissed.
ORDER OF REFERENCE TO THIRD member
22. Since there is a difference of opinion between the learned Judicial Member and the learned Accountant Member in the grounds of appeal raised by the assessee in his appeals, we hereby frame the point of difference for opinion of the Hon'ble President under Section 255(4) of the Income-tax Act as under :
" Whether, on the facts and in the circumstances of the case, the learned Commissioner (Appeals) was not justified in upholding the penalties levied under Section 271(l)(c) of the Income-tax Act, 1961?"
ORDER OF THIRD MEMBER
23. As the learned Members differed on the issue involved in the appeals, the President of the Income-tax Appellate Tribunal has referred the following question under Section 255(4) of the Income-tax Act, 1961 (" the Act").
" Whether, on the facts and in the circumstances of the case, the learned Commissioner (Appeals) was not justified in upholding the penalties levied under Section 271(l)(c) of the Income-tax Act, 1961?"
24. The assessee is an individual and carries on a proprietary business as a jeweller in the name and style of M/s. Sangeeta Jewellers. The assessment years are 1987-88 and 1988-89 and the relevant previous years are Samvat year 2042 (ending on November 2, 1986) and Samvat year 2043 (ending on October 23, 1987), respectively.
25. For the years under consideration, the assessee had filed returns on September 14, 1987, and July 19, 1988, declaring total incomes of Rs. 1,22,506 and Rs. 1,47,410 respectively.
26. The Income-tax Officer had called upon the assessee to appear before her on September 25, 1989, in connection with the assessment for the assessment year 1988-89. The income-tax practitioner for the assessee had applied for adjournment and requested the Income-tax Officer to fix the hearing on September 10, 1989, which the Income-tax Officer had acceded to. It appears that, on September 10, 1989, some discussion took place and the assessee was required to explain regarding the undervaluation of stock by September 25, 1989, as could be gathered from the following extract from the order for the assessment year 1988-89.
" During the course of assessment proceedings, it is noticed that the assessee has undervalued the closing stock. The assessee has opening stock of 4,944.181 gms. and valued it at Rs. 1,240 per 10 grams. The closing stock is 4,610.904 gms. valued at Rs. 1,116 per 10 grams. During the year it has effected purchase of 6,198.348 gms. at an average price of Rs, 2,135 per 10 gms. He sold 6,531.625 gms. or gold at an average rate of Rs. 2,533 per 10 grams. On bifurcation of the position of preceding year, i.e., assessment year 1987-88, it was noticed that opening stock was valued at Rs. 1,536 per 10 gms. The average purchase price during the year was Rs. 1,728 per 10 gms. The valuation of closing stock was adopted at Rs. 1,200 per 10 gms. which amounted to undervaluation of stock. "
27. Vide his letter dated September 16, 1979, which was filed in the office of the Income-tax Officer on October 11, 1989, the assessee explained his case and offered for taxation Rs. 3,54,724 as under :
"As a result of this working, I find that as against the closing stock of Rs. 5,35,964 as on Samvat year 2043 (relevant to the assessment year 1988-89) my closing stock should be valued at Rs. 8,90,688 as per the weighted average method. The closing stock value of my gold ornaments as on Samvat year 2043 (23-10-1987) may be revised accordingly. You are requested to kindly treat my return for the assessment year 1988-89 as amended accordingly, i.e., the income be increased by Rs. 3,54,724. However, if it is thought necessary that this difference in stock, i.e., Rs. 3,54,724 should be distributed over the preceding years as well, the same may kindly be done either as rectification or if thought necessary, by my filing fresh income-tax returns, as you may kindly guide.
I respectfully submit that this declaration and offer of additional income being made by me should be treated as being fully voluntary having been made suo motu and prior to detection by the Department.
In view of the circumstances explained above, you are requested to kindly treat this most sympathetically and refrain from charging any interest or levying any penalties in connection with this declaration."
28. Thereafter, on December 29, 1989, assessments for both the years under consideration were framed wherein the Income-tax Officer made additions of Rs. 2,29,265 in the first year and Rs. 1,25,449 in the second year on account-of undervaluation of stock as income from undisclosed sources. Simultaneously, the Income-tax Officer initiated proceedings under Section 274/271 (l)(c) of the Act and called upon the assessee to show cause why penalty should not be imposed under Section 271(l)(c) of the Act for the income concealed by him. The assessee resisted the action of the Income-tax Officer, vide his letter dated February 14, 1990, and that of his chartered accountants, M/s. Chunnilal & Co. dated April 11, 1990. The Income-tax Officer however, was not satisfied with the assessee's explanation and imposed penalty of Rs. 1,14,630 and Rs. 65,598, respectively, under Section 271(l)(c) of the Act, vide her orders both dated June 27, 1990.
29. In appeal before the Commissioner of Income-tax (Appeals), the assessee once again urged that no penalty should be imposed under Section 271(l)(c) of the Act. The Commissioner of Income-tax (Appeals), however, vide his consolidated order dated March 27, 1991, upheld the action of the Income-tax Officer as under :
" 5.1 have considered the submissions on behalf of the appellant carefully. I have also looked into the facts of the case. In the assessment year 1987-88, the assessment was completed on a total income of Rs. 3,51,770 as against the returned income of Rs. 1,22,506. The variation, was mainly attributable to the addition of Rs. 2,29,265 based on revaluation of closing stock. In the assessment year 1988-89, the total income determined was Rs. 2,95,430 as against returned income of Rs. 1,47,410. In this year also assessed income was higher mainly on account of the additions worked towards undervaluation of stock at Rs. 1,25,449. The appellant's main crux of argument to exclude his case from the penal consequences of Section 271(l)(c) is that the discrepancy in valuation of stock was bona fide and that the offer of additional income based on correct valuation was voluntary. The claim, however, is not found to be correct on scrutiny of the assessment order and consideration of the sequence of events. Firstly, it is seen that in the assessment year 1987-88, the opening stock was valued at the rate of Rs. 1,536 per 10 gms. whereas the closing was valued at Rs. 1,200 per 10 gms. This was in spite of the fact that the average purchase price was Rs. 1,728 per 10 gms. In the assessment year 1988-89, the closing stock was valued at the rate of Rs. 1,240 per 10 gms. and the average purchase price at Rs. 2,135 per 10 gms. Thus it would be seen that in the assessment years 1987-88 and 1988-89, the closing stock valuations were made at rates lower than the rates adopted in the opening stock and that at which purchases were made during the year. There is no ostensible explanation for this practice other than the desire to understate the income. When the price had gone up at a rapid rate, there was no bona fide explanation for valuing the closing stock at rates lower than the opening stock and the purchase price. In the circumstances, I am of the view that the discrepancy in valuation of closing stock was not bona fide. Further, even the offer of revaluation and additional income could not be accepted as voluntary. As stated by the Assessing Officer, she had already taken note of the discrepancy in the closing stock and had required the appellant to furnish the basis of valuation on September 25, 1989. The appellant made the offer to be assessed at higher income, vide letter dated September 16, 1989. However, this letter was filed before the Assessing Officer only on October 11, 1989. Obviously, the date of letter was advisedly typed as September 16, 1989, to project the claim that the offer was voluntary. As the letter was filed before the Assessing Officer only on October 11, 1989, it would be difficult to accept that the offer was made before the Department became aware about it. As a matter of fact, it was clear from the order sheet notings that the Assessing Officer had already taken note of the discrepancy and was trying to offer an opportunity to the appellant to explain his case. In the circumstances, when neither the discrepancy was bona fide nor the offer of additional income was voluntary there was nothing to take away the case of the appellant from the applicability of the provisions of Section 271(l)(c). The assessment order has become final as no appeals were filed against them. The additions have also, in the circumstances, become final. The decisions relied upon by the appellant are clearly distinguishable as in those cases penalty was not held exigible as the offer of additional income was voluntary on discovery of discrepancy. As discussed earlier the facts of the appellant's case were entirely different. In the above circumstances, I am of the view that the penalty under Section 271(l)(c) was clearly exigible in the appellant's case. As the Assessing Officer levied the penalty at the minimum there is no reason to modify her orders. Both the penalties are accordingly approved and the appeals are dismissed."
30. Thereafter, the assessee came up in appeal before the Tribunal. The learned Judicial Member has upheld the action of the income-tax authorities as under :
" It would be seen from the the aforesaid that whereas for the assessment year 1987-88, the opening stock was valued at the rate of Rs. 1,536 per 10 gms. the closing stock was valued at Rs. 1,200 per 10 gms. This was in spite of the fact that the average purchase price was Rs. 1,728 per 10 gms. For the assessment year 1988-89, the closing stock was valued at the rate of Rs. 1,116 per 10 gms. as against the opening stock at the rate of Rs. 1,240 per 10 gms. although the average purchase price during the year was Rs. 2,135 per 10 gms. Thus the closing stock valuations were made at rates much lower than the rates adopted for the opening stock and the rates at which the purchases were made during the two years. The adopting of this manner of valuation by the assessee cannot be held to be tenable either under the file (first in first out) method or under the weighted average method of valuation. In the assessment year 1988 89, the average purchase price was as high a rate as Rs. 2,213 per 10 gms. yet the assessee chose to value his closing stock at such a low rate as Rs. 1,116 per 10 gms. which is almost 50 per cent, of the rate of purchase price. This gross disparity between the two rates clearly indicates that the act of the assessee in undervaluing his stock could not be unintentional, inadvertent or bona fide. This is a blatant and intentional act of gross undervaluation of closing stock so as to escape tax liability for the two years. As regards the voluntary nature of the disclosure of additional income, here again, it would be difficult to accept the argument of the learned counsel that the revised returns were filed voluntarily and before the detection of the concealment by the Income-tax Officer. It was only when the Income-tax Officer found that the closing stock was not properly valued and required him to explain the basis thereof that the assessee, in compelling circumstances, chose to file revised returns. Filing of revised returns, in such circumstances, cannot be held to be voluntary so as to allow the assessee to escape the consequences of a previous act of concealment. The fact of the assessee being a young man and of his having taken over the business on the death of his father in the assessment year 1986-87 cannot, in the circumstances of the case, be held to be of material significance so as to warrant a conclusion that the mistake was unintentional and bona fide and, therefore, could save the assessee from the consequences of the provisions of Section 271(l)(c). We, therefore, conclude that the learned Commissioner (Appeals) was eminently justified in coming to the conclusion that penalty under Section 271(l)(c) was clearly exigible in the assessee's case. As the Income-tax Officer had levied the penalties at the minimum, there was no case to modify her penalty orders passed under Section 271(l)(c) of the Act."
31. The learned Accountant Member in spite of making the following observation :
"It is undisputed that there has been an undervaluation of closing stock for both the assessment years under consideration and this fact was noticed by the Assessing Officer during the course of assessment proceedings for the assessment year 1988-89.
However, the fact remains that there was definite undervaluation and this fact was pointed out by the Assessing Officer to the assessee.
The assessee himself realised the incorrectness of this method and accordingly when confronted by the Assessing Officer during the course of assessment proceedings for assessment year 1988-89, he offered to increase the valuation of the closing stock by adopting the weighted average method and offered additional income for taxation. However, this action alone of the assessee will not make him guilty of deliberate concealment of income particularly so as the assessee inherited the business only about 1 1/2 years prior to the commencement of the assessment proceedings as a result of the death of his father, Sh. Achal Nath Sharma, on account of heart attack, which fact has been conveyed to the Assessing Offiper, vide letters dated February 14,1990, and April 11,1990, in response to penalty notices under Section 271(l)(c) which have been incorporated in the penalty order passed under Section 271(l)(c) and marked 'C in the reproduced portion of the penalty order in earlier paragraph", deleted the penalty as under :
" 14. Keeping in view the totality of the facts and circumstances of the case, I am of the opinion that if the assessee has, in his endeavour to buy peace, offered for taxation enhanced valuation of the stock on the basis of weighted average method as suggested by the Assessing Officer he has suffered taxation for his negligence in accepting the acts of omission/commission by his earlier accountant--may be as instructed by his late father, Sh. Achal Nath Sharma, he should not be further penalised by holding him guilty of conscious and deliberate concealment. Accordingly, the penalties under Section 27l(l)(c) levied by the Assessing Officer for both the assessment years under consideration are directed to be deleted."
32. Learned counsel for the assessee reiterated the submissions which were made before the Income-tax authorities as well as before the Tribunal and vehemently argued that I should prefer the view expressed by the learned Accountant Member. In this connection, he referred to the background of the case like sudden death of the assessee's father who was earlier carrying on the proprietary business, the age and experience of the assessee, the assessee's dependence on his accountant and other members of the staff, etc., etc. He also pointed out that, for the assessment year 1986-87, even though there was some discrepancy, the Income-tax Officer himself has not initiated proceedings under Section 271(l)(c) of the Act. He placed reliance on the decision of the Hon'ble Supreme Court in the case of Sir Shadilal Sugar and General Mills Ltd. [1987] 168 ITR 705 and of the Hon'ble Bombay High Court in the case of Haji Gaffar Haji Dada Chini [1988] 169 ITR 33. He also placed before me a copy of the order of the Tribunal in the case of JVf/s. G.R. Traders (pages 104 to 117 of the paper book), wherein, according to him, on identical facts and circumstances obtaining in that case, the Tribunal was pleased to cancel the penalty imposed under Section 271(l)(c) of the Act. Finally, learned counsel for the assessee submitted that since prosecution proceedings have been started against the assessee, a lenient and sympathetic view should be taken in favour of the assessee.
33. Learned representative for the Department, on the other hand, strongly relied on the order of the learned Judicial Member and supported the action of the income-tax authorities. He took pains to explain and demonstrate that, but for the 'detection by the Income-tax Officer, the assessee would not have come forward with the disclosure of additional income aggregating to Rs. 3,54,724. He, therefore, urged that I should agree with the view taken by the learned Judicial Member.
34. I have carefully considered the rival submissions of the parties as well as gone through the orders of my learned colleagues and the material to which my attention was drawn by the parties and I am inclined to agree with the view taken by the learned Judicial Member. It is not possible to accept the submissions made on behalf of the assessee about his ignorance or his not knowing as to how the valuation of the stock was made in his books of account. When the Income-tax Officer probed into the matter and wanted to determine the true income of the assessee, she called upon the assessee to explain how the valuation of stock (closing/ opening) was made. At this stage, the assessee came out with a disclosure of concealed income of Rs. 3,54,724 which he offered for taxation with a request" to kindly treat most sympathetically and refrain from charging any interest or levying any penalties in connection with this declaration." Therefore, I entirely agree with the submissions made on behalf of the Revenue that, but for the detection of concealed income by the Income-tax Officer, the assessee would not have come forward with the disclosure of additional income aggregating to Rs. 3,54,724.
35. The reported decisions relied upon by the assessee would not be of much help to him. In the case of Sir Shadilal Sugar and General Mills Ltd. [1987] 168 ITR 705, the Hon'ble Supreme Court was dealing with a case under the corresponding provisions of the Indian Income-tax Act, 1922, which are materially different from the one with which we are concerned in the present appeals. The word " deliberate " has been deleted since long in the relevant provision of the Act, which is applicable in the instant case.
36. Similarly, the decision in the case of Haji Gaffar Haji Dada Chini [1988] 169 ITR 33 (Bom), would not be of any help to the assessee, in view of the sweeping changes made in Section 271(l)(c) of the Act from time to time. In this view of the matter, I agree with the conclusion arrived at by the learned Judicial Member that penalty under Section 271(l)(c) of the Act was exigible in the instant case.
37. The matter will now go back before the regular Bench for decision, according to the majority opinion.