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This appeal by the assessee for assessment year 2004-05 arises out of the order of CIT(A)-XVII, New Delhi.

2. The only issue for consideration relates to confirming the penalty u/s 271(1)(c) of the I.T. Act, 1961. The relevant grounds of appeal are reproduced as under:

"1. On the facts and circumstances of the case, the order passed by CIT(A) confirming the penalty u/s 271(1)(c) is bad both in the eye of law and on facts.

2. On the facts and circumstances of the case, the CIT(A) has erred both on facts and in law in confirming penalty of ` 124,50,425/- u/s 271(1)(c) on the addition made by Assessing Officer on account of valuation of loose tools.

3. The facts of the case stated in brief are that the assessee is a public sector undertaking of the Govt. of India. During the course of assessment proceedings, the Assessing Officer observed that the assessee had made change in its accounting policy in respect of writing off of the loose tools from a period of three years to one year. The opening inventory of loose tools amounting to ` 32,12,000/- and loose tools of value of ` 21,82,000/- issued during the year were charged to revenue account. The Assessing Officer held that loose tools were part of plant and machinery u/s 32 of the Act and, therefore, the same could not be claimed as revenue expenditure. The Assessing Officer treated the tools as capital expenditure and allowed deprecation @ 25%.

6. On appeal before the CIT(A), it was submitted by the assessee that the assessee is a PSU of the Govt. of India and, their accounts are audited by the C&AG. These accounts were laid before the Parliament. It was also submitted that the assessee had neither concealed any income nor furnished any inaccurate particulars of income. The Ld.AR of the assessee submitted that the AS-2 was revised in 1999. The assessee had disclosed in its annual report that they have changed the method of accounting. In para.10 of the Notes of the annual report, it has been clearly mentioned that in line with AS- 2, the company had changed the accounting policy of writing off loose tools over a period of three years to charging of such loose tools in the year of issue of use. Consequently, the opening inventory of loose tools amounting to ` 32.12 lakhs had been charged to revenue during the current year. Further, loose tools amounting to ` 21,52,000/- issued during the relevant year have also been charged to revenue account. Consequently, the profit for the year was lower at ` 28.69 lakhs. Ld.AR of the assessee placed reliance on various decisions including the decision of Hon'ble Supreme Court in the case of Addl.CIT vs. Jeevan Lal Shah, 205 ITR 244, wherein it has been held that Explanation 1 to section 271(1)(c) introduced by the Finance Act, 1964 shifts the burden of proof on the assessee to establish that the failure to return correct income was not on account of fraud or gross or willful neglect.

7. The CIT(A) considered the arguments of the assessee. He observed that the assessee had debited a sum of ` 41.20 lakhs to the P&L A/c on account of loose tools written off. The assessee had relied on AS-2 issued by Institute of Chartered Accountants of India to justify its claim, but AS-2 is only guidelines. The income which is chargeable to tax is required to be computed in accordance with the provisions of the I.T. Act, 1961 and not as per guidelines issued by Institute of Chartered Accountants of India. The assessee had failed to explain as to how AS-2 was applicable in its case and how the life of loose tools changed from three years to one year. The Tribunal in the quantum appeal had rejected the contention of the assessee and has held that AS-2 was not applicable in the case of the assessee. The Ld.CIT(A) has further noted that penalty u/s 271(1)(c) of the Act is civil liability and mens rea is not required to be established by the Revenue. He further observed the decisions relied upon by the assessee were distinguishable on facts and were of no help to the assessee. The Hon'ble Madras High Court in the case of CIT vs. Thirupati Kumar Khemka, 291 ITR 122 has held that as in economic offences, statutory liability to pay tax is a strict liability where the question of proving beyond the shadow of doubt the existence of bona fide belief does not arise. He also placed reliance on the decision of Hon'ble Delhi High Court in the assessee of Escorts Finance Ltd., 266 CTR(Del.) 105 wherein it has been held that where deduction u/s 35 of the Act is claimed, which was not admissible, was not a bona fide error and levy of penalty was upheld. The Ld.CIT(A) relying on various decisions has held that penalty in the case of the assessee was leviable. He accordingly confirmed the penalty levied by the Assessing Officer.