Income Tax Appellate Tribunal - Chennai
Shree Laxmi Jewellery Ltd., Chennai vs Department Of Income Tax on 6 September, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
CHENNAI BENCH 'C' : CHENNAI
[BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER
AND SHRI N.S. SAINI, ACCOUNTANT MEMBER]
I.T.A.Nos.1959 & 1960/Mds/2010
Assessment years : 2006-07 & 2007-08
The ACIT vs M/s Shree Laxmi Jewellery Ltd
Company Circle VI(2) 99, Usman Road
Chennai T. Nagar
Chennai 600 017
[PAN - AAACL1289M ]
(Appellant) (Respondent)
Appellant by : Shri K. Meghanath Chowhan, Jt. CIT/DR
Respondent by : Shri T. Banusekar
ORDER
PER HARI OM MARATHA, JUDICIAL MEMBER:
The above captioned appeals have been filed by the Revenue against separate orders of the ld. CIT(A), Chennai, dated 6.9.2010. I.T.A.No. 1959/Mds/2010
2. In this appeal of the Revenue, for assessment year 2006-07, only one issue regarding deletion of addition of ` 56,36,194/- added on account of alleged change of method of valuation of the closing stock is involved. The facts apropos this issue are that the assessee- company is engaged in the manufacturing of Gold Jewellery and also :- 2 -: ITA 1959&1960/10 doing import and export of Bullion. On 26.3.2007, a survey u/s 133A was conducted in the business premises of the assessee-company and discrepancy in the valuation of Diamond jewellery was found. It was found that the Diamond Jewellery was being valued with reference to gold weight and gold rate without taking into account the value of Diamond. When so pointed out the assessee took into account the valuation of the Diamond and offered it by filing a revised return for assessment years 2004-05 to 2006-07, as under:
A.Y Addition in Addition in Difference Loss Net loss opening closing stock carried carried stock after after forward forward separating separating Diamond Diamond (A) (B) (B-A) As per After giving original effect to (C) return 04-05 -- 1,671,476.83 1,671,476.83 4,359,272 2,687,795 05-06 1,671,476.83 2,474,278.7 802,801.87 5,228,090 2,753,813 06-07 2,474,278.2 -2,467,273 -4,941,551.2 5,887,193 8,344,467
3. For assessment year 2006-07, which is under reference, it was found that value of closing stock has been reduced by ` 24,67,273/-. In the original return, the closing stock was valued on the basis of 'average cost method' and the finished goods on the basis of 'first in first out' (FIFO) method as against which in the revised return, the valuation of entire stock was done on the basis of 'average cost method'. The undisputed facts of this issue are that the assessee has been following the 'average cost method' in respect of the entire :- 3 -: ITA 1959&1960/10 stock for the last many years and in the revised return filed within time as prescribed u/s 139(5), has also adopted the same method i.e 'average cost method', but in the original return filed for this year the assessee had adopted FIFO method. The Assessing Officer considered this act of the assessee as insidious and therefore, has insisted that the assessee cannot change the method by breaking the consistent method followed regularly. Hence, by ignoring all arguments of the assessee, he has valued the stock on the basis of FIFO method. Against this, the assessee filed first appeal and the ld. CIT(A) has reversed his finding by holding in para 5 of his order as under:
" 5. I have considered the contents of the assessment order as well as the arguments of the learned authorized representative. It is clear that the appellant has been constantly following average cost method of valuation of closing stock. In the original return filed, the appellant has wrongly calculated stock at FIFO method and later on corrected the same, by filing revised return. Revised return was filed well within the time allowed under section 139(5). Section 139(5) clearly provides an opportunity to the assessee to correct the mistake, if any in the return of income filed, provided such revised return is filed within the time allowed under section 139(5). I do not understood why the Assessing Officer has not accepted the legitima1e right of the assessee in filing revised return to correct any mistake. Even the addition was tax- neutral, it had resulted in increase in the value of stock and consequently reduction in carry forward loss. The effect of both changes put together would have neutralized the effect on income of next assessment year also.":- 4 -: ITA 1959&1960/10
4. Now the Revenue is aggrieved. It was argued by the ld.DR that the assessee has shifted to FIFO method but when pointed out, it has adopted the consistent method followed by it for the last many years i.e 'average cost method'. On the other hand, the ld.AR has given the same reasoning as is averred in the extracted paragraph from the order of the ld. CIT(A). He has sternly argued that the provision of revision has been provided to correct any mistakes if any committed while filing original return of income.
5. We have examined the rival stands in the light of the obtaining facts of the case. A query was put to both ld.AR and ld.DR and it was ascertained that the assessee has been following the 'average cost method' for the last many assessment years and has followed the same method subsequently. The assessee has revised the return within the permitted time and thus, it is a valid return of income which has to be treated to have been filed for assessment year 2006-07. A valid revised return substitutes the original return of income. The original return was filed based on FIFO method. This has to be ignored and substituted by the valid revised return in terms of the express provisions of the Income-tax Act, 1961. Therefore, we do not find any infirmity in the finding of the ld. CIT(A) who has agreed with the submission of the assessee by accepting the revised return. We :- 5 -: ITA 1959&1960/10 are in agreement with both ld.AR and the ld. CIT(A) and confirm the impugned deletion.
6. In the result, the appeal of the Revenue stands dismissed. I.T.A.No. 1960/Mds/2010
7. This appeal of the Revenue, for assessment year 2007-08, is directed against the order of the ld. CIT(A) dated 6.9.2010 vide which he has deleted the penalty of ` 13,06,422/- imposed on the assessee by the Assessing Officer u/s 271(1)(c) of the Act, vide order dated 22.4.2010.
8. The facts leading to the levy of the impugned penalty are that the assessment order for the year under consideration was passed u/s 143(3) on 23.12.2009 arriving at a taxable income of ` 1,31,11,288/- as against the loss of ` 6,49,103/- declared by the assessee-company. The following additions were made in the assessment order:
1. Trading account - Gold & Jewellery ` 1,04,861
2. Valuation of Diamond ` 35,04,170
3. Stone ` 2,72,200 Total ` 38,81,231
9. Consequently, the Assessing Officer initiated penalty proceedings and issued a notice dated 23.12.2009 u/s 274 r.w.s 271(1)(c) of the :- 6 -: ITA 1959&1960/10 Act, seeking explanation against the proposed penalty. In compliance thereof, on 9.2.2010, the assessee filed a detailed written submission stating as under:
"With reference to the above, penalty proceedings under section 271(1)(c) have been initiated for the above assessment year and we are in receipt of this authority's notice in this regard.
In this connection it is submitted as follows:
We are assessed to tax by this authority. For the assessment year 2007-08, we have filed a return of income admitting a total income of ` 92,08,400/- and the return was processed u/s 143(1). Subsequently the case was selected for scrutiny by issue of notice u/s 143(2). This authority completed the assessment u/s 143(3) by order dated 23.12.2009 assessing the total income at ` 1,31,11,288/- and raising a demand of ` 18,87,138/-.
In completing the assessment this authority has disallowed a sum of ` 35,04,170/- on account of the following:
a) Trading account - Gold 1,04,861
b) Valuation of Diamond 35,04,170
c) Stone 2,72,200
d) Cash discrepancy 3,460
e) Dividend disallowed u/s
14A as per Rule 8D 18,200
Total 39,02,891
In this connection, we submit the following :
1. We have reconciled the physical stock and book stock and there is very small difference, if stock of both the firms Shree Laxmi Jewellery Ltd., and Laxmi Export are considered together.
2. There was small percentage of shortfall of gold and sale of such shortfall of gold is used for the purchase of diamond.:- 7 -: ITA 1959&1960/10
Hence we submit that when, your kind authority has added gross profit on sale of such gold, then addition on account of excess of diamond, which is purchased out of such accepted amount of sale of gold, does not arise.
3. We have agreed to the addition of case of diamonds only to buy peace from the department.
4. We have cooperated fully during the assessment proceeding.
5. We have paid the tax demanded by way of request for the adjustment of refund due.
6. The difference in stock is merely 2% of total stock, which is very negligible.
In this connection attention of this authority is also drawn to the decision of the Supreme Court in the case of Akbar Badruddin Jiwani V. Collector of Customs Bombay (1990) AIR 1579 (SC) where it has been held that "no penalty can be imposed merely because of the default and that the levy of penalty which clearly is the matter of discretion of the authority concerned necessarily involves mens rea (guilty mind) of the tax payer to be established by the revenue before imposing the penalty. The levy of penalty has also been held to be not automatic or mandatory but clearly discretionary and the discretion has necessarily to be exercised having regard to the facts and circumstances of the case, in a fair and objective manner".
Attention of this authority is also drawn to the decision of the Supreme Court in Hindustan Steel Limited V State of Orissa (1972) 83 ITR 26 (SC) where the Supreme Court explains the scope of penal provision as under:
"An order imposing penalty for failure to carry out a statutory obligation is the result of quasi judicial proceedings, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all :- 8 -: ITA 1959&1960/10 the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to Impose penalty, when there is technical or venial breach of the provisions of the Act, or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute".
It is further submitted that penalty proceedings are independent of the proceedings of the assessment.
Since we have not made any effort to conceal particulars of income/furnish inaccurate particulars of income, no penalty u/s 271(1)(c)can be levied. In this context attention of this authority is drawn to the meaning of the term "conceal" which means that there has to be a deliberate act on the part of the assesses (Hindustan Steel Ltd. V. State of Orissa (1972) 82 ITR
26) which is not so in this case.
In light of the above facts and in light of the decisions cited above, it is most humbly prayed that this authority may be pleased to drop the proceedings of penalty initiated under sections 271 (1)(c).
It is further prayed that this authority may be pleased to give us an opportunity of being heard before taking the final decision in the matter.
We shall be pleased to furnish any further information that this authority may require in this regard. "
10. After rejecting the above submissions of the assessee, the Assessing Officer came to the conclusion that it is a fit case for levy of penalty. But he has not defined under which one of the two defaults of section 271(1)(c) of the Act this penalty is being levied. When this penalty was challenged before the ld. CIT(A), he has found favour with :- 9 -: ITA 1959&1960/10 the assessee by canceling the entire penalty. Now the Revenue is aggrieved. Following grounds have been raised:
"1. The order of the ld. CIT(A) is contrary to law and facts of the case.
2.1. The learned CIT(A) has erred in deleted the penalty levied u/s.271 (1 )(c) of ` 13,06,422/- .
2.2 The learned CIT(A) has erred in holding that since the Assessing Officer has added gross profit on sale of gold addition on account of excess diamond which is purchased out of such accepted amount of sale of gold does not arise.
2.3 The learned CIT(A) failed to appreciate that addition on account of gross profit on sale of gold was ` 1,04,861 only which cannot explain the excess diamond found during survey of ` 35,04,170.
2.4 The learned CIT(A) ought to have upheld the Assessing Officer's order in view of the decisions of the Hon'ble Supreme Court in the case of K P Madhusudanan (251 ITR 99) and Hon'ble High Court of Kerala in the case of K Mahim Vs CIT (149 ITR 737)
3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the ld. CIT(A) may be set aside and that of the Assessing Officer restored."
11. We have heard the rival oral submissions and have perused the entire record circumspectiously. With regard to addition made on account of excess Diamond noticed during survey, it was argued by the ld.DR that the penalty qua this addition has been wrongly deleted because the addition on account of gross profit on sale of gold at ` 1, 04,861/- cannot explain the excess Diamond found during survey of ` 35,04,170/-. It was further argued that the ld. CIT(A) has not :- 10 -: ITA 1959&1960/10 considered extra Diamond at all. On the contrary, the ld.AR has supported the finding of the ld. CIT(A), who has stated that apart from estimating the addition, proper tax has been paid thereon. This addition is only an estimated addition on which no penalty can be imposed.
12. After hearing both sides, we find that there was a small percentage of shortfall of gold and sale price of such shortfall of gold may have been used for the purchase of Diamond as has been claimed. When gross profit on sale of this gold has been added, the addition on account of excess Diamond, apparently, and probably used in purchase out of accepted amount of sale of gold would have not resulted in further addition on account of excess Diamond but the assessee has agreed to this addition on account of cost of Diamond to buy peace from the Department. The assessee has paid entire tax on this offered amount, therefore, in our considered opinion, this cannot be a fit case for levy of penalty u/s 271(1)(c) of the Act in view of the provisions of section 273B of the Act. In so far as difference in stock is concerned, this is merely 2% of the total stock and the same can be ignored because in calculating such items and valuation thereof, a small difference is always possible. Inasmuch as such a :- 11 -: ITA 1959&1960/10 small difference in valuation cannot tantamount to either concealment of particulars of income or to furnishing of inaccurate particulars of income. There are no two opinions about the settled position of law that regular assessment proceedings and penalty proceedings are two entirely different subjects which operate in distinct and separate spheres so much so that entirely different parameters are applicable for making quantum addition and for levying penalty under section 271(1)(c) of the Act. There can be no dispute with regard to the position of law that under section 271(1)(c) a penalty can be levied only if either the act of "concealment of particulars of income" or "furnishing of inaccurate particulars of income" is found to have been committed by the assessee. These are two different omissions or defaults, albeit, they refer to deliberate act on the part of the assessee. A mere omission or negligence would not constitute a deliberate act of either suppressio veri or suggestio falsy. By the mere reason of such concealment or of furnishing of inaccurate particulars alone, the assessee does not, ipso facto, become liable to a penalty. Imposition of penalty is not at all automatic. Meaning thereby, any addition in quantum would not lead to automatic levy of penalty and this is also true in respect of furnishing of inaccurate particulars of income. Not only is the levy of penalty discretionary in :- 12 -: ITA 1959&1960/10 nature but the discretion has to be exercised keeping the relevant factors in mind and the approach of the taxman must be fair and objective. This subject has been a matter of great controversy. Finally, after referring to the decisions in the case of Dilip N. Shroff vs JCIT & Another, 291 ITR 519, Union of India vs. Dharmendra Textile Processors [2008] 13 SCC 369, as well as Union of India vs Rajasthan Spg. & Wvg. Mills [2009] 13 SCC 448, the Hon'ble Supreme Court in the case of CIT vs Reliance Petroproducts Pvt. Ltd, 322 ITR 158, has recently held as under:
"A glance at the provisions of section 271(1)(c) of the Income-tax Act, 1961, suggests that in order to be covered by it, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The meaning of the word "particulars" used in section 271(1)(c) would embrace the details of the claim made. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous.
Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or :- 13 -: ITA 1959&1960/10 erroneous or false there is no question of inviting the penalty under section 271 (1)(c). A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars."
13. Therefore, we are of the considered of the opinion that this is not a case of either concealment of income or of furnishing of inaccurate particulars of income. The Assessing Officer is not even certain about the alleged default having been committed by the assessee. Hence, on any of the counts, penalty cannot be imposed in this case. Consequently, we confirm the finding of the ld. CIT(A) in deleting the impugned penalty.
14. In the result, both the appeals of the Revenue stand dismissed.
The order pronounced in the open court on 05.08.11.
Sd/- Sd/-
(N.S. SAINI) ( HARI OM MARATHA )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 5th August, 2011
RD
Copy to: Appellant /Respondent/CIT(A)/CIT/DR