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M/s Gems & Gems (Registered Partnership Firm) Versus The Commissioner of Income Tax-II, The Assistant Commissioner of Income Tax

2017 (11) TMI 727 - RAJASTHAN HIGH COURT

Penalty u/s 271(1)(c) - stock valuation - addition made towards the valuation of closing stock of Emerald Cut Stock, on the agreed basis, u/s. 145(3) - Held that:- From the order of AO, it seems that because of the pressure, the appellant has surrendered the amount. It is a case of consent and the CIT(A) while considering the decision of Supreme Court in case of Commissioner of Income Tax vs. Reliance Petroproducts Pvt. Ltd., (2010 (3) TMI 80 - SUPREME COURT) and other decisions the Tribunal was .....

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nal has allowed the appeal of the department reversing the view taken by the CIT(A). 2. This Court while admitting the appeal on 20.12.2016, framed the following substantial question of law: Whether on the facts and in the circumstances of the case, in recording the finding of reversal, the ITAT acted on total misconception in ignoring the appellant s explanation made in quantum proceedings and the important materials on record and in applying wholly mistaken tests in sustaining the penalty u/s .....

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method of valuation as accepted by the revenue in earlier years at cost or market price whichever is less. The value of the stone being subjective satisfaction of the buyer is dependent on their liking or disliking or suitability in this line of trade. The saleable stock of superior quality are purchased first by the customers, after assortment of find items as per buyer s choice; and at the end of the year, only the inferior quality of the stones remained in stock having minimal value even les .....

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tone; resulting into the cost of the stock of inferior quality at the end of the year is valued. 4. Counsel for the appellant contended that pursuant to the notice issued against the present appellant the appellant has appeared before the AO and the observations which are made by the AO reads as under :- The assessee is engaged in manufacturing and trading of precious and semi precious stones. During the year consideration, the assessee has shown sales of ₹ 3,46,54,366/- and shown gross pr .....

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ative details including day to day stock register, the details of which have been filed along with Tax Audit Report with the return. During the course of examination it was noticed that the assessee has maintain the details of opening stock, purchases and sales in quantity only and no quality-wise details have been maintained. On examination of various purchase vouchers it is noticed that the same stone has been purchased at varied prices. Therefore, books results of the assessee are not subject .....

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d to litigation as the assessee does not want to enter into unnecessary litigation and to purchase peace of mind the assessee is agreeable for an addition of ₹ 15 lacs in trading results.The assessee does not want to enhance in closing stock to cause of unnecessary carry forwarding and adjusting the value of closing stock. The assessee is agreeing to the addition to put an end to the matter and to purchase peace of mind as he does not want to enter into unnecessary litigation with the Depa .....

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The issue under consideration. From the above, it can be seen that the concealment penalty was imposed by the AO, primarily, for the reasons and findings discussed in the assessment order only. The addition in the present case is made towards the valuation of closing stock of Emerald Cut Stock, on the agreed basis, u/s. 145(3) of the Act. In other words the impugned addition was made on assumption or guess basis towards the valuation of the closing stock of the appellant, while rejecting the va .....

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to justify the imposition of penalty towards such addition, per say. In this regard the recent judgment of supreme court in the case of Reliance Petro Products Pvt. Ltd. (322 ITR 158) is found relevant, wherein it has been held that merely rejection of any claim made by the assessee will not, automatically, entail to the concealment penalty, unless some inaccurate particulars are filed in this regard. Moreover, in view of various related decisions, including of the Apex Court {In the case of San .....

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tion of penalty u/s 271(1)(c) of the Act, on such addition, is not justified and also contrary to the spirit of the relevant law. In view of the above, the penalty u/s 271(1)(c) is hereby cancelled. 7. He has also contended that the Tribunal has wrongly relied on the judgment of Mak Data P. Ltd. vs. Commissioner of Income Tax-II, (2013) 358 ITR 593 (SC) decided on 30.10.2013, which reads as under:- However, in the present case the appellant firm not only furnished the details and explanation dur .....

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ment and only the inferior quality of stones remains in stock at the end of the year which in any way does not fetch the same cost price that of better quality of stones sold. The AO sought to value the closing stock as per historical cost method which is practicable not possible in this line of trade in view of the modus operandi explained and stated in para-3 supra. Otherwise, in the instant case there was no attempt to evade the tax inasmuch as, valuation of stock at the end of the year would .....

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was not proposed based on documentary evidence impounded/seized during the course of survey or search like the case of Mak Data. Apparently, in the instant case the agreed addition on account trading addition was voluntarily on estimate basis to buy peace and to avoid litigation. As such, the case of the Mak Data is not applicable to the case of the appellant. The case of the Mak Data is not applicable to the case of the appellant at all and the ITAT has grossly erred in making it applicable to .....

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onclusion after scrutinising the evidence. It is submitted that proper accounts were kept and that even the Income Tax Officer has not pointed out any defect in the percentage in recovery of the finished goods and, as such, no question of law can be referred on the finding of fact arrived at by the Tribunal. Reliance has been placed on CWT v. Sara Varghese (Mrs.) [1991]187 ITR 450(Ker). We have heard learned counsel for the parties and perused the material on record. The value may differ from as .....

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reference application under Section 256(2) of the Income Tax Act, 1961 is dismissed. 9. Counsel for the appellant has also relied upon in case of Commissioner of Income-Tax vs. Reliance Petroproducts Pvt. Ltd., [2010] 322 ITR 158 (SC), observed as under:- 8. A glance at this provision would suggest that in order to be covered, 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. Present is n .....

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271(1)(c) would embrace the meaning of the details of the claim made. It is an admitted position in the present case that no information given in the Return was found to be incorrect or inaccurate. It is not as if any statement made or any detail supplied was found to be factually incorrect. Hence, at least, prima facie, the assessee cannot be held guilty of furnishing inaccurate particulars. The Learned Counsel argued that "submitting an incorrect claim in law for the expenditure on intere .....

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ANU/SC/1496/2009MANU/SC/1496/2009 : 2009 (9) SCC 589 where this Court was considering the same provision, the Court observed that the Assessing Officer has to be satisfied that a person has concealed the particulars of his income or furnished inaccurate particulars of such income. This Court referred to another decision of this Court in Union of India v. Dharamendra Textile Processors MANU/SC/4448/2008MANU/SC/4448/2008 : 2008 (13) SCC 369 as also, the decision in Union of India v. Rajasthan Spg. .....

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ncome. When such particulars are found to be inaccurate, the liability would arise. In Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai and Anr. MANU/SC/3182/2007MANU/SC/3182/2007 : 2007 (6) SCC 329 this Court explained the terms "concealment of income" and "furnishing inaccurate particulars". The Court went on to hold therein that in order to attract the penalty under Section 271(1) (c), mens rea was necessary, as according to the Court, the word "inaccurate& .....

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, therefore, it was held that furnishing of an assessment of the value of the property may not by itself be furnishing inaccurate particulars. It was further held that the assessee must be found to have failed to prove that his explanation is not only not bona fide but all the facts relating to the same and material to the computation of his income were not disclosed by him. It was then held that the explanation must be preceded by a finding as to how and in what manner, the assessee had furnish .....

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bility on the assessee for the concealment or for giving inaccurate particulars while filing Return, there was no necessity of mens rea. The Court went on to hold that the objective behind enactment of Section 271(1)(c) read with Explanations indicated with the said Section was for providing remedy for loss of revenue and such a penalty was a civil liability and, therefore, willful concealment is not an essential ingredient for attracting civil liability as was the case in the matter of prosecut .....

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out that in Union of India v. Dharamendra Textile Processors (cited supra), no fault was found with the reasoning in the decision in Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai and Anr. (cited supra), where the Court explained the meaning of the terms "conceal" and inaccurate". It was only the ultimate inference in Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai and Anr. (cited supra) to the effect that mens rea was an essential ingredient for the penal .....

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rate statement, copy or transcript. 11. We have already seen the meaning of the word "particulars" in the earlier part of this judgment. Reading the words in conjunction, they must mean the details supplied in the Return, which are not accurate, not exact or correct, not according to truth or erroneous. We must hasten to add here that in this case, there is no finding that any details supplied by the assessee in its Return were found to be incorrect or erroneous or false. Such not bein .....

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T 249 (SC) as regards the penalty are apposite. In the aforementioned decision which pertained to the penalty proceedings in Tamil Nadu General Sales Tax Act the Court had found that the authorities below had found that there were some incorrect statements made in the Return. However, the said transactions were reflected in the accounts of the assessee. This Court, therefore, observed: So far as the question of penalty is concerned the items which were not included in the turnover were found inc .....

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oticed that in the Explanation I to sec. 271(1)(c), as recast, while the expression "failure to return the total assessed income as not arising on account of any fraud or wilful negligence on the part of assessee" does not find place but clause (b) read with proviso (ii) makes it abundantly clear that where difference in the assessed income and returned income is not arising on account of any gross or wilful negligence on the part of assessee' still no penalty is leviable. The stat .....

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ered by such person (assessee) which is not accepted because the assessee has failed to substantiate the same, but such explanation is bona fide and all the facts relating to same and material to the computation of total income has been disclosed by him, the Explanation shall not apply. In other words, the cases under clause (A) of the Explanation I are those where explanation furnished by the assessee falls in the category of a fact 'disproved' whereas cases where an explanation so furn .....

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umstances of the particular case, to act upon the supposition that it does not exist. In contrast, a fact is said to be 'proved' when after considering the mailer before it, the court either believes it to exist or considers its existence so probable that a prudent man ought under the circumstances in particular case, to act upon the supposition that it exists. In juxta position, the expression 'not proved' denotes a fact is said to be 'not proved' when it is neither prov .....

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drawn, mere failure to substantiate the explanation as a fact not proved, can not raise a presumption about deliberate concealment and lack of bona fide. In such events, question of bona fide has to be proved as a fact like any other fact on preponderance of probability uninfluenced with any presumption. 15. In the first place, we find in the present case that even during course of assessment, it was not a case of rejecting the explanation furnished by the assessee, before making any additions .....

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Accounts has been rejected, not by rejecting the explanation furnished by the assessee but by accepting the explanation furnished by the assessee that he does not have necessary material to verify each and every detail of the expenses and therefore, gross profit rate on the receipts has been taken by the assessee. Once the plea of the assessee has been accepted during the course of assessment and additions have been made at his behest, the question of making additions by rejecting explanation, w .....

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. In both these decisions, this court has held that in order to attract clause (c) of Section 271(1) of the Act, it is necessary that there must be concealment by the assessee of the particulars of his income or furnishing of inaccurate particulars of such income. The provisions of ass3essed on estimate basis and additions are made therein. It was held that when the addition had been made on the basis of estimate and not on account of any concrete evidence of concealment, then the penalty was no .....

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by the ITAT and the appeal filed by the Revenue against the said order of the ITAT was dismissed by this court, on the ground that the Assessing Officer had made the additions on the basis of the estimate of the yield of phak and chhilka and an estimate of the price and that the estimate would not ipso facto lead to penalty. 12. Counsel for the respondent has contended that the view taken by the Tribunal is just and proper. He has relied upon the decision of the Supreme Court in Mak Data s case .....

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ference is noticed by the AO, between reported and assessed income. The burden is then on the Assessee to show otherwise, by cogent and reliable evidence. When the initial onus placed by the explanation, has been discharged by him, the onus shifts on the Revenue to show that the amount in question constituted the income and not otherwise. 8. Assessee has only stated that he had surrendered the additional sum of ₹ 40,74,000/- with a view to avoid litigation, buy peace and to channelize the .....

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w that the surrender of income in this case is not voluntary in the sense that the offer of surrender was made in view of detection made by the AO in the search conducted in the sister concern of the Assessee. In that situation, it cannot be said that the surrender of income was voluntary. AO during the course of assessment proceedings has noticed that certain documents comprising of share application forms, bank statements, memorandum of association of companies, affidavits, copies of Income Ta .....

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ered later during the course of the assessment proceedings. Consequently, it is clear that the Assessee had no intention to declare its true income. It is the statutory duty of the Assessee to record all its transactions in the books of account, to explain the source of payments made by it and to declare its true income in the return of income filed by it from year to year. The AO, in our view, has recorded a categorical finding that he was satisfied that the Assessee had concealed true particul .....

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