TMI Blog2004 (12) TMI 312X X X X Extracts X X X X X X X X Extracts X X X X ..... tice under section 148 on 6-1-1992 as, according to him, the income of the assessee had escaped assessment on the ground that for assessment year 1983-84, claim of the assessee for deduction under sections 80HH and 80-I was rejected by the Department. During the course of assessment proceedings, the Assessing Officer had noticed that assessee had disclosed work-in-progress at Rs. 44,27,42,081 with a note (net of provisions Rs. 2,12,18,295). However, on perusal of the balance-sheet, the Assessing Officer did not find any such provision. Accordingly, inquiry was made. It was explained on behalf of the assessee that the value of closing stock has been reduced on account of deterioration of old stocks. It was claimed that a report had been received from the concerned officers about the deterioration of old stocks and auditors had also suggested making assessment of such stocks for the purpose of presenting a true picture of profits in the balance-sheet. According to the assessee, the method of valuation of closing stock always adopted by the assessee was "cost or market price, whichever is lower" on the basis of which the value of stock has been reduced by Rs. 2,12,18,295. The Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption that assessee had changed the method of valuation from cost to net realizable value and that the assessee has failed to substantiate its explanation as to how the value of closing stock has fallen. The learned counsel for the assessee further contended that the Assessing Officer has not recorded any satisfaction in the assessment order that assessee has concealed the particulars of income or filed inaccurate particulars of such income. According to the ld. Counsel, in the absence of recording of such satisfaction in the assessment order, penalty imposed under section 271(1)(c) is bad in law. In support of the contention, reliance has been placed on the following decisions:- (i) CIT v. Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 (Delhi) (ii) Dy. CIT v. R.J. Wood Co. (P.) Ltd, [2002] 76 TTJ (All.) 387 (iii) Subhash Gupta (Individual) v. Dy. CIT [2003] 85 ITD 167 (Jp.) (TM) (iv) Asstt. CIT v. Aggarwal Sanitary Hardware Co. [2004] 82 TTJ (Chd.) 501 (v) Ram Nath Chadha v. Asstt. CIT [2004] 82 TTJ (Asr.) 331 (SMC) (vi) 263 ITR 414 (P H) (sic) 5. The ld. D.R., on the other hand, relied upon the assessment order to refute the claim of the assessee. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m in taxable income under a bona fide belief that he is not liable so to include it, it would not be right to condemn the return as false return inviting imposition of penalty. 8. It was further contended that the assessee being a Government company, its Directors or other employees are not connected with sharing of profits. They are only interested in running the affairs of the company in consideration of salary. Therefore, no motive can be attributed to the Directors or employees for reduction of stocks or alleged suppression of profits for the purpose of evading tax. According to the ld. Counsel, it is one Department of Government paying tax to the other Government Department and, therefore, there could be no intention to suppress the profits for evasion of tax. Reliance has been placed on the decision of Bombay Bench of the Tribunal in the case of ITO v. Hindustan Petroleum Corpn. Ltd. [1986] 16 ITD 574, where in the case of a Government Company, the Tribunal held that there could be no deliberate intention on the part of the assessee-company to underestimate its income. 9. Referring to the observations of the CIT(A) on page 9 of his order that the corporation had understat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the same year i.e. 1990. It was contended that the Revenue has failed to appreciate that the certificate given by the Divisional Officers was admittedly given in the year 1990 at the time of completion of the audited balance-sheet but the fact remains that there were number of inspection reports received during the year 1986-87 regarding the inspection of old timber stocks having deteriorated. 11. The ld. Counsel for the assessee contended that it is a case of an assessee who had offered bona fide explanation, which was rejected by the Department. The addition has been made for want of sufficient proof regarding the value of timber having deteriorated to the extent of 50 per cent. It was thus contended that penalty cannot be sustained merely on the ground that in the quantum appeal, addition made by the Assessing Officer has been sustained. In this connection, reliance has been placed on the following decisions:- (i) CIT v. Kerala Spinners Ltd. [2001] 247 ITR 541 (Ker.); (ii) Shiv Lal Tak v. CIT [2001] 251 ITR 373 (Raj.); (iii) National Textiles v. CIT [2001] 249 ITR 125 (Guj.); and (iv) CIT v. Jalaram Oil Mills [2002] 253 ITR 192 (Guj.). According to the ld. Couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agazine [1993] 213 ITR 64 (Delhi). The ld. Counsel for the assessee further contended that Explanation 1 to section 271(1)(c) casts a duty on the Assessing Officer to first record reasons that there has been concealment of income and then seek explanation of the assessee and thereafter penalty can be imposed only if any amount is found to be concealed or explanation found to be false. According to the ld. Counsel, the Assessing Officer has failed to record any such finding in the assessment order. The ld. Counsel heavily placed reliance on the decision of the Supreme Court in the case of K.C. Builders v. Asstt. CIT [2004] 265 ITR 562. According to the ld. Counsel, there has been no intention to conceal the income or furnish inaccurate particulars of income and accordingly penalty in this case is not warranted. 14. The ld. Counsel for the assessee further pointed out that according to the Revenue, there is a defect in the method of accounting adopted by the assessee in regard to valuation of closing stock. In the event of defect in the method of accounting, penalty is not warranted. In support of this proposition, reliance has been placed on the following decision:- (i) CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value of stock to the tune of more than Rs. 2 crores. Our attention was also invited to the decision of the Tribunal in quantum appeal in assessee's own case where it has been observed that it was the Managing Director who had suggested that the value of closing stock of work-in-progress in Chopal and Chamba Divisions could be less than 50 per cent and 25 per cent of their cost respectively. According to the ld. D.R. the Board's Resolution dated 22-8-1990 was passed in pursuance of the suggestion of the Managing Director arbitrarily and without any basis. Our attention was also drawn to the findings of the CIT(A) wherein various factors have been mentioned for sustaining the penalty imposed under section 271(1)(c). 17. The ld. D.R. further contended that the assessee had all along adopted the method of valuation of work-in-progress 'at cost price' and that the reduction in the value of stocks on the basis of alleged lower market price was adopted only for the year under appeal but the said method was neither adopted in the earlier years nor in the subsequent assessment years. Our attention was invited to the finding of the Tribunal in quantum appeal that the assessee has fail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come or furnish inaccurate particulars of such income, it was contended that such an argument is inconsequential as the penal provisions have been enacted to ensure compliance and discipline. It was contended that if the Government Corporations are held to be not liable to penalty for the default, the discipline would be lost and it will be taken as blanket licence to take liberty with tax compliance. It was further contended by the ld. D.R. that without prejudice to the above arguments, if lack of motivation is accepted for the sake of arguments, the penalty is chargeable for gross and wilful negligence. The ld. D.R. further contended that as per the decision of the Supreme Court in the case of Jeevan Lal Sah, the principle laid down in the case of CIT v. Anwar Ali [1970] 76 ITR 696, is no longer applicable after 1-4-1964 and as per the Explanation to section 271(1)(c), there is presumption of concealment of income or furnishing of inaccurate particulars of income. The assessee has failed to furnish evidence to rebut the presumption under the Explanation to section 271(1)(c) and to offer any bona fide explanation. According to the Id. D.R., the assessee has made false entries in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Assessing Officer in making the addition but without any success. The Tribunal also in the second appeal confirmed the addition made by the revenue authorities. It has been observed by the Tribunal that the assessee has reduced the value of stocks on estimate basis and that in earlier years, the assessee had all along valued its closing stock at cost. The addition was thus confirmed. The Assessing Officer had imposed the penalty @ 200 per cent of the tax sought to be evaded. The CIT (A) has upheld the levy but has reduced the quantum of the penalty to 100 per cent of the tax sought to be evaded. The issue before us is as to whether the assessee can be held to have concealed the income or furnished inaccurate particulars of income. On consideration of facts and circumstances of this case, there can be no two opinions that the assessee has not concealed the income insofar as the word "conceal" means to hide or to withhold or not to disclose. This requires some positive action on the part of the person concerned. For this, following observations of the Apex Court may be relevant:- "'Concealment' inherently carries with it the element of mens rea. The fact that some figure or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (B) such person offers an explanation, which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him. Then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed." There have been amendments in Explanation 1 to section 271(1)(c) at more than once. Explanation 1 was substituted w.e.f. 1-4-1976. The said Explanation was further amended in the year 1986. The Explanation, which is applicable in this case which has been reproduced above, contemplates as under:- "Where in respect of any facts material to the computation of total income the assessee (A) fails to offer an explanation or offers an explanation which is found to be false, or (B) offers an explanation which is unsubstantiated and fails to prove that all the material facts have been disclosed." In neither of the circumstances, the assessee is deemed to have concealed the particulars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... damaged stocks, the value of which was reduced subsequently, were prepared upto 31-3-1987. (ii) ** (iii) The officers who were in charge of these divisions as on 31-3-1987 had never proposed reduction in the value of stocks and had never certified that these had not damaged and were of lesser market value. (iv) The Board's Resolution dated 22-8-1990 could not be given retrospective effect and could not be used for educing the value of stocks as on 3-3-1987. (v) the casual certificates given by the Divisional Managers in charge of Chamba and Chopal divisions in August, 1990 did not mention anywhere that the value of stock was to be reduced as on 31-3-1987. They were only mentioning the condition of the stocks in August 1990. They were not even the concerned officers in charge of these divisions as on 31-3-1987. (vi) The claim of the appellant that no reliance should be placed on the statements given by Shri R.C. Gupta, Divisional Manager, Chamba and Shri Chandresh Sharma, Divisional Manager, Chopal cannot be accepted. In fact the appellant took the decisions by relying upon the certificates given by these 2 officers. Therefore, they were the witnesses of the appellant. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidence, whatsoever, to show that such stock was sold at a price shown in the closing stock or at a lesser price in the subsequent year. In fact on the basis of details furnished by the assessee before the CIT(A), she has noted that average sale price in Chopal and Chamba Divisions was Rs. 2,875 per cubic metre and Rs. 3,969 per cubic metre respectively as compared to the rate of Rs. 1,726 and Rs. 431 cubic metre in the respective Divisions adopted by the assessee. Moreover, the assessee has not been able to file any evidence in the form of subsequent sales to show that such stock had in fact been sold at the price at which the same was valued. Therefore, in the absence of any details having been furnished by the assessee either before the authorities below or even before us to show that the market value of the stock was the same as adopted by the assessee, we are unable to accept the contention of the assessee that the stock was valued at market price. 8. Now the relevant question is, what was the value of the closing stock as on 31st March, 1987? It is an accepted position that the value of the closing stock has to be adopted at cost price or at market price, whichever is less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e subsequent event of 1990. The advance tax has to be paid in the previous year i.e. before 31-3-1987. The assessee could not have anticipated the decrease in value of the closing stock based on certificates in 1990, during the financial year 1986-87. This should have been taken into account for estimating the income of the assessee for the assessment year under reference for the purpose of payment of advance tax. After including such stock, the estimated income should have been more than Rs. 3 crores after excluding some other disputed additions. This should have formed the basis for payment of advance tax, which means that the assessee should have paid about Rs. 1.5 crores by way of advance tax. As against this, the assessee has paid only advance tax of Rs. 40 lakhs or so as admitted by the ld. Counsel, which falls far short of the assessed tax. Therefore, it could not be said that the idea of reduction in the value of closing stock of work-in-progress in both the Divisions was at the instance of auditors given at the time of auditing the accounts for the assessment year 1986-87. Moreover, the assessee has not been able to explain as to why the changed method of valuing the closi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the following effect:- (i) That the assessee had valued its timber stock under section 271B of 1981-82 lying in Chamba, Chopal and Narwa Divisions at net realizable value by reducing the work-in-progress by Rs. 2,12,18,295, and that this fact was disclosed by the assessee itself in the balance sheet. The accounts of the assessee were audited by statutory auditors, namely, M/s. Lamba Biz Co. on 10-9-1990, who have duly approved the valuation of stocks and had not given any adverse remarks in their audit report. The accounts of the assessee were examined by the Controller Auditor General of India who have also approved the valuation of closing stock and have given no adverse remarks; (ii) That the authorities in the quantum assessment have wrongly recorded a finding that assessee had failed to prove that the condition of stocks pertaining to the year 1981-82 had deteriorated. In this connection, reliance has been placed on the evidence produced before the revenue authorities, copy whereof has been placed in the paper book also at pages 43 to 47 in the form of inspection reports received during the year 1986-87 regarding inspection of old timber stocks which had deteriora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al for the purpose of section 271(1)(c) is to consider the explanation of the assessee as to whether the claim made by the assessee, which was found to be inadmissible in assessment proceedings, was a false claim or a bona fide claim and that all the material facts had been disclosed by the assessee. We have repeatedly pointed out that assessee had clearly indicated in trading and profit loss a/c. about the reduction in value. All the information regarding the claim was furnished by the assessee before the revenue authorities. It is evident from records that the reports about the deterioration of old stocks had been received by the assessee from the concerned divisions during the financial year relevant to assessment year under appeal. The internal auditors had also advised the assessee to work out the realizable value in respect of the deteriorated stocks. The assessee, admittedly, was unable to carry out actual inspection of the entire deteriorated stocks spread over several kilometers in radius. The reduction in value has been adopted on estimate. If the assessee had been able to prepare the details of the stocks deteriorated at various places, perhaps the claim could not have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be spread out over the area of entire Division. It may be a few hundred kilometers. Qn. Could you indicate what part of proportion would be B-Class and would be C-Class out of this? Ans. The classification is done by our Marketing Division after the timber reaches the Sale Depot. I would not be able to indicate the proportion. 28. From the above replies, it emerges that the certificates issued by the Divisional Managers in the year 1990 are based on the inspection reports and monthly reports received from subordinate staff and not at the instance of the management. Since the matter was to be considered by the Board in March, 1990, the Divisional Officers had been summoned to give the certificates so that the Board of Directors could be apprised and convinced about the adoption of lesser value for the deteriorated stocks. The conduct of the assessee, according to our perception, is not contumacious in regard to disclosure of facts material for assessment. The assessee had made a claim on the basis of a conscious decision by the Board of Directors. There was no objection by the statutory auditors or by the Controller General of India. The revenue did not allow the claim and a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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