TMI Blog2017 (2) TMI 635X X X X Extracts X X X X X X X X Extracts X X X X ..... - - - Dated:- 6-2-2017 - Shri S. S. Godara, JM and Shri Manish Borad, AM. For The Appellant by Shri S. N. Soparkar, with Parin Shah, AR For The Respondent by Shri James Kurien, Sr.DR ORDER PER Manish Borad, Accountant Member . This appeal of assessee for Asst. Year 2007-08 is directed against the order of ld. CIT(A)-II, Surat, dated 05/02/2013 vide appeal No.CIT(A)-II/CC-1/153/2011-12 arising out of order u/s 271(1)(c) of the IT Act, 1961 (in short the Act) framed on 20.09.2011 by DCIT, CC-1, Surat. Assessee has raised following grounds of appeal :- 1) The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the action of the Id. A. O. in levying penalty u/s 271(1)(c) of the Act to the tune of ₹ 99,66,060/- in respect of the addition made on account of alleged undervaluation of closing stock. 2) It is, therefore, prayed that the above penalty confirmed by the learned Commissioner of Income Tax (Appeals) may please be deleted. 3) The Appellant prays for granting such other relief as may be deemed just and proper by your Honours considering the factual and legal aspects of the case of the appellant. 4) T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 274 r.w.s. 271(1)(c) of the Act for furnishing of inaccurate particulars and concealment of income. 3. In quantum appeal, assessee lost both before the first appellate authority and the Income-tax Appellate Tribunal. 4. In the penalty proceedings u/s 271(1)(c) of the Act ld. Assessing Officer vide penalty order dated 20.09.2011 imposed penalty of ₹ 99,66,060/- being 100% of the tax sought to be evaded by observing as under :- 6.1 In the instant case, the detection of suppression and concealment of income and wrongful claims clearly satisfies that some circumstances leading to the reasonable conclusion that the amount does represent the assessee's income. Further, the establishment of suppression of income and subsequent failure in the penalty proceedings to adduce any evidence in support of claims made, clearly establishes the act of conscious concealment with intention to evade taxes. The utter failure of the assessee to furnish any documentary evidence in support of its contentions clearly indicates the existence of mens rea and the guilty conscience of the assessee during the assessment as well as the penalty proceedings. These circumstances and/or state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income of any person under this Act,- (A) such person fails to offer an explanation or offers an explanation which is found by the 28[Assessing] Officer or the [Commissioner (Appeals)] [or the Commissioner] to be false, or ' : , , , . (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 subsection, be deemed to represent the income in respect of which particulars have been concealed. Therefore, the assessee comes under the preview of Explanation 1 of section 271 and is liable for levy of penalty u/s271(l)(c) of the I.T. Act, 1961 Further, logically and inescapably, this case falls within the mischief of section 271(l)(c). The case of the assessee clearly attracts the penal provision of section 271(l)(c) and on the facts of the case, satisfied that the assessee is at fault in regards to the provision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted, would give rise to presumption that the issue is debatable and that therefore, penalty should be deleted. In the instant case, the Hon'ble Gujarat High Court while admitting Tax Appeal No.834 of 2011 has ordered as under: We have heard Mr. J.P.Shah, the learned counsel assisted by Mr. M.J.Shah learned counsel for the appellant. Admit. We formulate the substantial question of law as under; Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the closing stock of polished diamonds was undervalued to the extent of ₹ 2,96,08,019/-. 4.1 The Hon'ble Jurisdictional High Court in the case of CIT-I vs Prakash S.Vyas has clarified that mere admission of an appeal by the Honorable High Court can not without there being anything be an indication that the issue is debatable one so as to delete the penalty under section 271(1)(c). The instant case is squarely covered by the above judgment and therefore, the appellant's claim to delete the penalty on the ground that quantum appeal has been admitted by honorable High court, is rejected 4.2 As regards merit of addition by the Assessing off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .87 carat was lower than the cost. No evidence is produced by the assessee to establish this contention. The sale bills produced by the assessee in respect of sale of diamonds from April.2007 onwards cannot be said to be the evidences for lower market value of the part of the closing stock as on 31.03.2007 as neither description nor quantity of lot wise stock tallies with the sale bills. The assessee has not kept quality wise or lot wise stock register so as to correlate sale instances with particular lot of losing stock of polished diamond. In the above circumstances, we agree with the revenue's contention that the assesses selected sale bills where the sale rate of diamond was comparatively lower and ignored the sale bill where sale rate was substantially higher. Therefore, we hold that the assessee was unable to establish that market value of part of closing stock of polished diamond was lower than the cost. The A.O. has worked out the value of closing stock on average cost method basis. No discrepancy in the working of the A.O. is pointed out by the assessee. The learned counsel for the assessee also contended that the GP/NP for the year under consideration is better than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxmann.com 425 (HP) where penalty was levied on the addition made on valuation of closing stock. The Honorable high court in this case has noted that the assessee was a Government Corporation and its accounts were audited by the GAG and therefore there did not appear to be falsehood in the accounts. In the instant case Assessing Officer has proved falsehood on the valuation of closing stock as appellant has taken selected sales bills in subsequent months for valuation of closing stock as on 31.03.2007. Section 271(1)(c), to the extent it is relevant, provides for imposition of penalty in case the Assessing Officer, in the course of any proceedings under the Act, is satisfied that any person had concealed particulars of his income or had furnished inaccurate particulars of such income. The Explanation 1 to subsection (1) of section 271 provides that where in respect of any facts material to the computation of the total income of any person, such person fails to offer an explanation or offers an explanation which is found to be false or he 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R) submitted that assessee is in the business of purchase, sale, export and manufacturing of diamonds since last many years and is consistently following the method of valuing stock at cost or market price whichever is less. All necessary details which included quantitative records of rough diamonds purchased, finished diamonds manufactured and carat wise details duly linked with purchase and sale invoices are kept. Further books of accounts are regularly audited and there is consistent increase in gross profit rates. Also during the course of assessment proceedings apart from issue of valuation of closing stock no other evidence or observation has been detected by the Revenue authorities which can prove that assessee has filed inaccurate particulars or concealed particulars of income. 7. As regards valuation of closing stock is concerned ld. AR further submitted that we have been consistently following the method of valuing closing stock at cost or market price whichever is less which has not been objected in past. Quantitative details as filed by the assessee in its income tax return and tax audit report have been found to be correct by the Revenue authorities and there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 77 of the paper book. Further ld. Assessing Officer after disregarding the valuation of closing stock made by assessee has adopted a new method of valuation of closing stock i.e. at cost by taking the figures from the books of assessee itself and calculating the average cost at ₹ 9943.64 per carat. This shows that assessee has furnished correct particulars of income and the only issue remained about the basis of rates adopted for valuing closing stock. In such circumstances where there is a bona fide claim of assessee of consistently applying a particular method of valuing to closing stock duly supported by relevant evidences and also in the given facts when the quantum addition confirmed by the Tribunal has been admitted by the Hon. Jurisdictional High Court as a substantial question of law there cannot be a case of imposing penalty for concealment of particulars of income of furnishing of inaccurate particulars of income u/s 271(1)(c) of the Act. Ld. AR referred and relied on the following judgments/decision :- 1. Judgement of Hon. Gujarat High Court in the case of Valimkbhai H. Patel 280 ITR 487. 2. Judgment of Hon. Himachal Pradesh High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. We have heard both the parties and perused the material placed before us. It is undisputed fact that the assessee is following cost or market value whichever is lower , method for valuation of the closing stock. The AO determined the cost of the closing stock of polishing diamonds at ₹ 13,27,06,527/-. The value of the closing stock disclosed by the assessee was ₹ 10,30,98,508/-. He therefore worked out the difference of ₹ 2,96,08,019/-. The working given by the AO at page no.4 of the assessment order reads as under: Total production of polished diamond (Z) 52894.75 Carat Total cost of consumption of rough diamond (A) ₹ 47,63,19,661 Total manufacturing cost (B) ₹ 4,96,46,473 Total cost for production of polished diamond C=A+B ₹ 52,59,66,134 Average cost of polished diamond D=C/Z 9943.64 per carat Closing stock of polished diamond E 13345.87 carat So valuation of closing stock of polished diamond is ExD= ₹ 13,27,06,527 Closing stock of polished diamond shown in books ₹ 10,30,98,508 Difference ₹ 2,96,08,019 6. The assessee has not disputed the correctness of the above working of the cost of the closing stock of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21 F/C White S11 20.44 22 F/C White VS1 113.04 23 F/C White S11 35.71 24 Cut Polished Diamond 1072.85 25 White Tappers S1 100.00 26 White Tappers PK 4 78.00 27 White Buggets PK 4 116.00 28 White BuggetsS1 3 48.00 29 Cut Polished Diamond 187.36 30 Cut Polished Diamond 45.89 31 Cut Polished Diamond 250.15 32 White BGTS PK 2 (PL) 185.55 33 White BGTS PK 2 (PL) 11.96 34 D/C TLB NTS SI 1 (PL) 2.03 35 D/C TLB NTS PK 1 0. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... White PK 2 30.00 66 F/Cut White PK 3 21.51 67 White Fullcut PK 2 19.07 68 White Fullcut PK 1 3.50 69 White Fullcut PK 2 44.00 70 White Fullcut PK 2 22.31 71 F/C White S1-3 143.83 72 F/C White PK 1 154.28 73 White TAPP S1 31 37.12 74 F/C Black Dia 55.67 75 F/C Black Dia. 61.52 76 F/C Black Dia. 65.76 77 F/C Black Dia. 35.94 78 F/C Black Dia. 51.98 79 F/C Black Dia. 66.19 80 F/C Black Dia. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.00 45.89 353.153 10 CUT POLISHED DIAMONDS 1 7,594.19 250.15 1,899,687 11 WHITE BGTS PK -2 (PL) 8 9,029.05 185.55 1,675,340 12 WHITE BGTS PK -2 (PL) 8 9,029.05 11.96 107,987 13 D/C TL8 NTS SI-I (PL) 8 9,119.00 2.03 18,512 14 D/C TLB NTS PK-1 (PL) 8 8,704.05 0.54 4,700 15 CUT POLISHED DIAMONDS 23 9,900.00 505.35 5,002,965 16 CUT POLISHED DIAMONDS 8 8,729.43 231.32 2,019,292 17 WH BUG 1-3 12 7,150.80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34 TAP+BUG TTLB PK-12 15 5,252.00 140.00 735,280 35 TAP+BUG TLB PK-12 15 4,444.00 20.26 90.035 36 D CUT TTLB PK-12 15 3,636.00 236.25 859,005 37 D.CUT WHITE PK 18 7,272.00 172.17 1,252,020 38 CUT POLISHED DIAMONDS 4 7,271.00 1445.20 10,608,049 39 D/CUT WHITE PK-3 19 8,515.50 382.00 3,252,921 40 D/C 12 TTLC DIAMONDS 23 8,312.75 45.98 382,220 41 F/CUT TOP TTLB VS 25 8,718.25 190.42 1,660,129 42 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32,711 59 F/C BLACK DIA 31 1,604.00 88.00 141,152 60 BUG WH PK -3 31 2,406.00 50.90 122,465 61 BUG WH PK -2 31 2,807.00 60.00 168,420 62 CUT POLISHED DIAMONDS 44 9,600.00 528.27 5,071,392 63 F CUT TTLC VS 2 33 8,621.50 32.35 278,906 64 CUT POLISHED DIAMONDS 48 9,001.00 250.09 2,251,060 65 P/C WHITE 13 40 3,609.00 303.60 1,095,892 TOTAL [A] 9,405.61 63,917,981 For remaining stock of 394 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the basis of average cost method . The contention of the learned counsel before us is that the market value of the 9405.61 carrat of the diamonds was lower than the cost. This contention of the assessee is based upon the sale of the diamonds in the subsequent year. The AO has recorded the finding that the sale bills are for ITA No.3010/Ahd/2010 five months in the next year. The details of these sale bills are given by the assessee and are reproduced by us above in para no.7. When we compared the details of the closing stock, which is given in para no.6, with the details of sales bill, which is given in para-7, we do not find even a single lot comparable with each other. In the details of the closing stock, first item is of cut and polished diamond of 185.99 carrat. However, there is no sale bill for the sale of 185.99 carrat of cut and polished diamond. Similar is the position with regard to each and every lot of stock of diamond. Not a single lot given in the stock of polished diamonds compares with the sale bill submitted by the assessee in support of his contention that market value of the diamond was lower. Moreover, the AO at page no.11 and 12 of his order has given the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20.08.07 38 14150.09 10. If we consider the entire details, it is obvious that the assessee has taken the inventory of the closing stock lot-wise, however, neither the cost nor the market value of each lot is given by the assessee. In the next year, the assessee continued its business of purchasing rough diamond, its cutting and polishing and sale of polished diamond. Sale of diamond was at different rates varying from ₹ 1212/- per carat to ₹ 44,076/- per carat. The assessee has picked up the sale instances where the diamonds were sold at a price below the cost price and ignored the sale instances where the diamonds were sold at a price much higher than the cost price. As we have already mentioned, the value of diamond varies because of quality as well as size of the diamonds. This value varies in the case of rough diamonds as well as polished diamonds. The assessee has not given either the cost or market value of each lot of closing stock of diamond. If we peruse the sale given by the assessee, we find that the sale value of the diamond varies from ₹ 1212 per carrat to ₹ 9900/- per ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration is better than earlier years, therefore, the valuation of the closing stock should not be disturbed. We are unable to accept this contention of the learned counsel, if the assessee has not valued the closing stock ITA No.3010/Ahd/2010 correctly, the AO can certainly make the correct valuation of the closing stock. 11. The learned counsel has also made an alternate claim that if the AO changes the method of valuation of closing stock, the opening stock should also be valued in the identical manner as the closing stock. In support of this contention, he has relied upon the several decisions, which are reproduced by us in para-3 above. In our opinion, in this case, the AO has not modified the method of accounting for valuation of the closing stock. The method of assessee for valuing the closing stock at cost or market value whichever is lower is not disturbed by AO. What is disturbed by the AO is the working by the assessee with regard to the market value of the closing stock. As we have already mentioned, in support of lower market value of the closing stock, the assessee has only given a few sale instances in the subsequent year which did not co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the particulars of his income or furnished inaccurate particulars of such income. He may direct that such person shall pay by way of penalty. (i)and (Income-tax Officer,)** *- (iii) in the cases referred to in Clause (c) or Clause (d). in addition to tax if any, payable by him, a sum which, shall not be less than, but which shall not exceed three tunes, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or fringe benefit the furnishing of inaccurate particulars of such income or fringe benefits: Explanation 1- Where in respect of any fact: material to the computation of the total income of any person under this Act, (A) Such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or. the- Commissioner (Appeals) or the CIT to be false, or (B) such person offers an explanation on 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 rho total income- of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 carats and 660.33 carats were standing in the closing stock sheet as on 31.3.2007 placed at page 44 and 45 of the paper book which contains list of closing items of which market value is less than the average cost of diamonds of ₹ 9943/- per carat, in the books of account. During the course of assessment proceedings ld. Assessing Officer was not convinced with the valuation portion of closing stock being valued at market price because of the sale value taken by the assessee and the ld. Assessing Officer was not convinced with the method so adopted and accordingly he applied the average cost of ₹ 9943/- on the overall closing stock of the assessee as on 31.3.2007. Now looking to these facts with an angle of adjudicating that whether assessee has furnished inaccurate particulars of income or concealed particulars of income, we find that even the Co-ordinate Bench vide its order in quantum appeal has not raised any doubt about the quantitative records maintained by the assessee and have even mentioned that we find that assessee has bifurcated the closing stock of 13,345.87 carat into 86 lots. However he has not given either cost or market value of each lot. This phra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of deterioration of old stock. That was being done on estimation on the basis of the reports made by various officers of the Corporation. That estimation was not accepted mainly on the ground that the reports were made and resolution was passed by the board after the assessment year was over and, therefore, they could not be given retrospective benefit. It had not been found that the claim of the assessee that the wood had rotted and deteriorated was false. It was nobody s case that the assessee fudged the amounts, the books of account or tried to create false evidence. The claim made by the assessee might not have been accepted by the revenue but it could not be said that the assessee furnished inaccurate particulars to such an extent that penalty should be imposed upon it. There did not appear to be falsehood in the accounts though the system of calculating the depreciation might have been improper. The assessee was a Government Corporation. Its accounts were duly audited and even the Comptroller and Auditor General had gone through and approved the accounts of the Corporation. In such circumstances, merely because the assessee had claimed depreciation which claim was not accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the issue has held that this amount has to be included in the closing stock of the year under appeal and simultaneously has to be considered in the opening stock in subsequent year. Thus we find that the net result to the addition of the income of the assessee is zero as addition is made in one year whereas deduction is allowed in the subsequent year. Further the Assessing Officer as well as the CIT(A) has not allowed the deduction for payment of ₹ 25,000 to M/s. Proplus Management and ₹ 20,000 to Sh. K.K. Paul on the ground that evidence for rendering of services could not be filed. In these facts we are of the view that though the Assessing Officer was of the view that no services were rendered by the two persons - M/s. Proplus Management and Sh. K.K. Paul, but it cannot be said that the assessee filed inaccurate particulars of income or concealed its income. The Hon'ble Supreme Court in the case of Cement Marketing Co. of India Ltd. v. Asstt. C/T124 ITR 15 has held that unless the filing of an inaccurate return is accompanied by a guilty mind, penalty cannot be imposed. If the view canvassed on behalf of the revenue were accepted, the result would be that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Co. of India Ltd. v. Asstt. CST[\WQ} 124JTRJL52 has held that unless the filing of an inaccurate return is accompanied by a guilty mind, penalty cannot be imposed. It has been further held that return cannot be false unless there is an element of deliberateness in it. Where the assessee does not include a particular item in the taxable turnover under bona fide belief that he is not liable so as to include the same, it would not be right to treat the return as a false return inviting imposition of penalty. Thus, we are of the view that the order of the Tribunal does not suffer from any illegality and no substantial question of law aiises in the appeal and the same is dismissed in iimine. 16. Further we also observe that a similar issue came up before the Co-ordinate Bench, Ahmedabad in the case of D. Subhashchandra Co. vs. ACIT in ITA No.2805/Ahd/2006 for AY 2003-04 wherein the issue has been decided by observing as under :- No doubt where there is a fall in the value of the goods and the goods could not be sold even at cost, the assessee is permitted to value the goods at an estimated realizable value. But the estimated net realizable value must be based on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s dealing in diamonds. Whenever rough diamonds are issued, expected yield is noted on the packets and these details are verified by the assessee or its representative when cut and polished diamonds are received from the labourers. The assessee could not run its business without getting the accounts of each and every piece of diamond. The AO in this case has valued the stock at average cost which will be less than the realizable value as the assessee has shown the GP rate @ 13.81 per cent and valuing the stock at average cost, when it is less than realizable value is well recognized method of valuation of closing stock and duly recognized by AS-2 and prudency principles of accounting. The assessee in this case since could not prove the net realizable value, therefore, the natural inference will be against the assessee. The AC has rightly valued the closing stock of the polished diamonds at average cost by adopting per carat rate and accordingly, the order of the AO is confirmed. 17. In the light of above judicial pronouncements and our discussion in the preceding paragraphs about the facts of the case of assessee, in the given case where the assessee who is dealing into the busin ..... 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