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2019 (2) TMI 1696

..... AY 2012-13 being the value of closing stock of sub-grade fines having cost can be considered to be ‘undisclosed income’ found in the course of search so as to warrant penalty u/s 271AAB ? - HELD THAT:- Levy of penalty under Section 271AAB is mandatory and automatic and therefore in the matter of levy of penalty the AO had no discretion once the assessee admits of any undisclosed income in his statement u/s 132(4) of the Act. Such a view goes against the words used in section 271AAB and section 274. We note that if the intention of the Legislature to levy the penalty was mandatory and automatic then the right of appeal u/s 246A would not have been provided for by the Legislature against the order of penalty passed u/s 271AAB. We also note that while enacting Section 271AAB the Legislature has consciously used the word ‘may’ in contradistinction to the word ‘shall’ in the opening words of Section 271AAB of the Act. The choice of the expression ‘may’ and not ‘shall’ in the opening Section of 271AAB shows that the Legislature did not intend to make the levy of penalty statutory, automatic and binding on the AO but the AO was g .....

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..... order of CIT(A). We accordingly uphold the CIT(A)’s order for the aforesaid reasoning and reject the Revenue’s appeal. - ITA No.1601/KOL/2017 (ASSESSMENT YEAR-2012-13) - 1-2-2019 - Sh. A.T.Varkey, Judicial Member And SH. A.L.Saini, Accountant Member Appellant by Sh. A.K.Singh, CIT DR Respondent by Sh. A.K.Tulsyan, FCA And Ms. Sikha Agarwal, ACA ORDER A.T.Varkey, This appeal filed by the Revenue against the order dated 17.04.2017 passed by CIT(A)-21, Kolkata for AY 2012-13 is against the action of Ld.CIT(A) in deleting the penalty levied by the AO u/s 271AAB of the Income Tax Act, 1961 (in short Act ). 2. Brief facts of the case are that search & seizure operation u/s 132 of the Act were drawn in the name of M/s. Aryan Mining & Trading Corporation Pvt. Ltd. and Others on 13.09.2012 and on subsequent days. During the course of search, Sh. Pradeep Kumar Saraf has given statement u/s 132(4) of the Act and an amount of ₹ 59,09,00,000/- was offered to tax in the relevant AY 2012-13. In the assessment framed u/s 143(3), the AO noted that the main business activity of the group is that they are owners of manganese, Iron ore mines and Mining & selling of such .....

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..... course of search and the same was offered for taxation in the return. The AO also stated that since search & seizure proceedings was conducted against the assessee, provisions of section 271AAB of the Act is applicable. He also stated that the conditions laid down in section 271AAB (i)(a) are fulfilled and therefore it is a fit case for imposition of penalty u/s 271AAB of the Tax Act 1961. 4. Aggrieved the assessee preferred an appeal before the CIT(A) who was pleased to delete the same by holding as under:- "1 have considered the findings given by the AO in the penalty order and submissions made by the AR during the appellate proceedings. The AO has imposed the penalty in a routine manner. I find that the disclosure has been made on the basis of survey report prepared by the company to ascertain the stock of iron ore fines lying in the mines area as the same are now usable by manufactures having pelleting facilities. Previously the fines were waste products used for land filling and making roads and subsequently the sale of fines are accounted in the books of accounts on cash basis year after year. Raising cost of fines has been taken as "NIL" because the same .....

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..... ation u/s 132 in this case no incriminating evidences regarding concealment / undisclosed income in the form of cash seizure / papers / documents / stock etc. were found and seized. Nothing incriminating evidences were found regarding ₹ 59,09,00,000/- worked out by applying estimated rate on the quantity of iron ore fines claimed to be part of the regular production and was offered for taxation by the assessee suomoto in order to buy peace of mind Even the same was not taken as per the accounting principle as the same is by product/waste and its cost is NIL. I also find that neither the officers in the investigation wing in the post search investigation nor the Assessing Officer during assessment process found any discriminating evidence of undisclosed income other than the statement of the assessee for making the disclosure of ₹ 59,09,00,000/-. Further, I find that the AO has levied penalty u/s 271AAB(l)(a). This section reads like sum computed at the rate of ten per cent of the undisclosed income of the specified previous year. Undisclosed income has been defined in the explanation to section 271AAB. Thus, it is clear that in order to levy penalty two things are essen .....

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..... ng to the assessee company, the full quantities of iron ores raised by the assessee are duly accounted in the stock register maintained in the normal course of business. Our attention was drawn to the important fact that the assessee has reported to the Director General of Mines in the statutory form H-1 in which the quantity of production of sized ores and sub-grade fines are reported and Ld.AR drew our attention to Paper Book page No.64 to 87 i.e. Form H-1 which was duly filed by the assessee company with the Director General of Mines in respect of sized ore and sub-grade fines. According to assessee, the Form H-1 which is filed before the Director General of Mines is as per the stock register maintained by the assessee company at the mining site. It was brought to our notice that the officers of the Mining Department regularly visit mine heads for inspection and to verify the stock register maintained by the assessee company. Thus, it was contended by the Ld.AR that the stock of screen fines are properly maintained and are part of regular books of accounts (stock register maintained by the assessee company). Our attention was drawn to the details of stock as per Form H-1for F.Y. .....

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..... on. 10. It was also brought to our notice that the different kind of iron ores with Fe content are mined/raised by the assessee company and except for the fines which are below 55%, the assessee has been maintaining stock and its value and drew our attention to the charts (infra) which is reproduced as under:- FY 2010-11 SIZE Mines Sum of Qty Sum of Ex CLO (5 TO 18 MM) 342928.000 1628161248 CRUSHED / NATURAL FINES 367872. 490 592158647 LUMP (40TO 200 MM) 363597.780 1175929751 LUMP (10 TO 40 MM) 205952.220 551160356 SUB GRADE LUMP 17335.410 9480637 SUB GRADE SCREEN FINES 50962.250 50387491 Grand Total IRON 1348648.150 4007278129 LUMP-MN 16688.560 145804116 GRAND TOTAL 1365336.710 4153082244.920 FY 2011-12 ITEM Mines Sum of Qty Sum of Ex CLO (5 TO 18 MM) 350190.659 2044751679 CRUSHED FINES / NATURAL FINES 308650.225 752024712 LUMP ( 40 TO 200 MM) 290260.845 1393258339 LUMP (10 TO 40 MM) 409618.244 1669747493 SUB GRADE LUMP ( 40 TO 200 MM) 4912.050 6385665 SUB GRADE LUMP (10 TO 40 MM) 1495.390 1944007 SUB GRADE SCREEN FINE 170884.410 248187824 Total IRON 1536011.823 6116299719 LUMP-MN 4853.130 29462041 GRAND TOTAL 1540864.953 6145761760.085 11. It was also brought to our notice that s .....

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..... Sandeep Chandak (supra) he distinguished it, which we will state infra. Thus, according to ld AR, the additional income of ₹ 59,09,00,000/- offered in the statement u/s 132(4) was by way of valuation of closing stock of sub-grade fines which formed part of the regular stock records and hence did not qualify as unaccounted stock which may be treated as undisclosed income of the assessee. Therefore the order of ld CIT(A) deleting the penalty does not be disturbed. 12. We have given our thoughtful consideration to the rival submissions, perused the materials on record, considered the applicable legal provisions and scrutinized the judicial precedents relied upon. The sum and substance of the issue to be adjudicated in the present appeal is whether the income offered by the assessee in its return for AY 2012-13 being the value of closing stock of sub-grade fines having cost of ₹ 59,09,00,000/- can be considered to be undisclosed income found in the course of search so as to warrant penalty u/s 271AAB of the Act. Before dealing with this issue, it will be appropriate to discuss the relevant factual background. It is undisputed fact that the assessee has been operating mines .....

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..... ounted in the stock records as well as financial records and its value was duly included in the value of opening stock. The Ld. AR brought to our attention that in the assessment order u/s 153A/143(3) for the AY 2011-12 the AO had accepted the method of accounting employed by the assessee where under the value / cost of extracting sub-grade Fines in stock was taken at NIL. We find that the said method of accounting was consistently followed in all the past years and in none of the assessment orders passed for any of the preceding years the AO had disputed or questioned the method of valuation followed by the assessee in respect of sub-grade Fines. The Ld. AR also brought to our attention that as and when the sub-grade Fines were sold the entire sale proceeds were considered as income in the year of sale and this method was also regularly followed and accepted by the Revenue in the past as well as in the relevant year under consideration. We therefore find that the assessee has been consistently following a particular method of stock valuation in preparation of its annual financial accounts. As per the method consistently followed and accepted by the Revenue, the stock of sub-grade .....

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..... equent year. 15. It is also material to take note of the judgment of the Hon ble Supreme Court in the case of Chainrup Sampatram v. CIT reported in 24 ITR 481, approving the underlying rule that the closing stock is to be valued at cost or market price, whichever is the lower, and that it is now generally accepted as an established rule of commercial practice and accountancy. In that judgment the Hon ble Apex Court also observed that the valuation of closing stock cannot be construed to be a source of income because for the simple reason that the value of inventory adopted at the end of one previous year constitutes the value of opening inventory for the subsequent previous year and therefore allowable as deduction in the subsequent year. The relevant extracts from this judgment is reproduced below: 16. From the foregoing decisions of the judicial authorities we find that in the assessee s case, it always reported the details of production as well as inventory of sub-grade fines to the Indian Bureau of Mines as required under the relevant laws governing the assessee s mining operations and such details were available in public domain. In respect of production and stock of sub-grade .....

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..... mt. Of sub grade screen fines was lying in Narayanposhi iron ore mines. However, you have taken closing stock value of this sub grade fines as NIL. Further, you have made your own calculation and production cost of sub grade screen fines was taken as 168.59 per ton. Please explain. Ans- The quantity of sub grade screen fines mentioned in the seized documents is correct but this is a material which has no raising cost. It is a material which has no raising cost. It comes automatically with high grade of iron ore which is sold in the open market as such it has correctly been taken as NIL value. But we do not want to dispute mistakenly valuation made by our staff in the said documents and we admit the same and will be accounted in our books of accounts i.e. Aryan Mining & Trading Corporation (P) Ltd. Q-10 Why not other expenses were included in cost of production of sub grade screen fines. Please reconcile your cost of production after adding of other expenses. Ans- As already explained to the answer in the Q.No..9 At the best the total value of the sub grade screen fines can be ₹ 250 per Mt. considering all the cost of whatever the nature. Q-11 Do you want to add, alter or .....

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..... sub-grade Screen Fines are automatically generated with high grade Iron Ore either at the time of Raising or Crushing. The sub-grade Fines did not have market earlier and as such it was dumped by the assessee at its Mining Sites without making valuation of the same. The entire process cost was absorbed by the high value marketable ores and no cost was apportioned for being attributable to the sub-grade Screen Fines. As the cost was 'NIL', the valuation of sub-grade Screen Fines stock was also being taken as NIL. The sales of sub-grade Screen Fines are made and reflected in the accounts. 7.2 However, during the F.Y.2012-13, the management of the assessee company decided to quantify the stock of sub-grade Screen Fines and estimate its approximate cost. A surveyor was appointed for that purpose. The A/R of the assessee company explained that the seized document contained, the quantification and estimated apportionment of cost of sub-grade Screen Fines as evaluated by the surveyor. The stock of sub-grade Screen Fines was estimated at 22,06,030 MT and apportioned cost attributable to-the sub-grade Fines at ₹ 168.59/- per Metric Tonne. The break-up of the same submitted by .....

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..... 1st day of the relevant financial year i.e. 01/04/2011, the assessee was already holding sub-grade fines of 20,04,540 MT in stock, which went up to 2363615.16 MT by 31/03/2012. Even though as on 31/03/2011,quantity of subgrade fines in stock reported to DG, Mines was 20,04,540 MT, the same AO accepted its valuation at NIL in the assessment order framed u/s 153A/143(3) for AY 2011-12. However with reference to letter dated 01/06/2012 and the statement recorded u/s 132(4) and with reference to the suo-moto offer made while filing of return, the AO assessed the value of entire 23,63,615.15 MT at the rate of ₹ 250/Ton as income of the assessee for AY 2012-13. We therefore find that save & except for voluntary offer made by the assessee there was no incriminating material found as a result of which any new undisclosed asset or income was discovered in the course of search. Had it been a case that unaccounted or undisclosed stock was found as a result of or in the course of search carried out at the assessee s premises on 13/09/2012 then in such case, value of such undisclosed stock would have been assessed as undisclosed income for the AY 2013-14 being the previous year of it .....

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..... Commissioner or Principal Commissioner or Commissioner before the date of search; or (ii) any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted. 21. From the foregoing definition of undisclosed income we find that this expression is given a definite and precise meaning and the word has not been described in an inclusive manner so as to enable the tax authorities to give wider or elastic meaning which would enable them to bring within its ambit the species of income not specifically covered by the definition. From bare perusal of the definition of the word undisclosed income we find that in order to bring a receipt or specie of income within the meaning of the said expression, it is obligatory for the AO to demonstrate and prove that the income is represented either wholly or partly by any money, bullion, jewellery or other valuable article or thing found in the course of search u/s 132 and which was .....

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..... #39;s accountant from which the AO could compute the income of the assessee from the said transaction which amount assessee declared during search and which was duly returned and which figure was accepted by the AO. According to Ld. AR, the fact that search happened on 01.08.2012 need to be taken note of since undisputedly there was enough and more time for the assessee to submit the accounts during proceedings which fact has been taken note of and concurred by the Ld. CIT(A). Thereafter, the Ld. AR drew our attention to the definition of undisclosed income given under section 271AAB which reads as under: "Penalty where search has been initiated. '271AAB. (1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the 1st day of July, 2012, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him,- (a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee- ******** Explanation - For the purposes of this section, - (a) .......... (b) .......... (c) "und .....

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..... d in the other document maintained by the assessee which was retrieved during search cannot be termed as "undisclosed Income" in the definition given u/s. 271AAB of the Act. Since ₹ 3 cr. cannot be termed as "Undisclosed Income" as per sec. 271AAB of the Act, no penalty can be levied against the assessee. Therefore, we uphold the order of the Ld. CIT(A) on the aforesaid reasoning rendered by us. 24. We note that it has been the submission of the AO as well as the Ld. DR before us that the levy of penalty under Section 271AAB is mandatory and automatic and therefore in the matter of levy of penalty the AO had no discretion once the assessee admits of any undisclosed income in his statement u/s 132(4) of the Act. Such a view goes against the words used in section 271AAB and section 274 of the Act. For saying so we note that if the intention of the Legislature to levy the penalty was mandatory and automatic then the right of appeal u/s 246A would not have been provided for by the Legislature against the order of penalty passed u/s 271AAB of the Act. We also note that while enacting Section 271AAB the Legislature has consciously used the word may in contradist .....

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..... le the words shall be liable under sub section (1) of section 158BFA of the Act that are entitled to be mandatory, the words may direct in sub section 2 there of intended to directory'. In other words, while payment of interest is mandatory levy of penalty is discretionary. It is trite position of law that discretion is vested and authority has to be exercised in a reasonable and rational manner depending upon the facts and circumstances of the each case. Plain reading of section 271AAB and 274 of the Act indicates that the imposition of penalty u/s 271AAB of the Act is not mandatory but directory. Accordingly we hold that the penalty u/s 271AAB is not mandatory but to be imposed on merits of the each case. 25. As far as to the judgment of the Hon ble Allahabad High Court in the case of Pr.CIT vs Sandeep Chandak (supra) is concerned, we note that the facts of the present case are materially distinguishable from the facts involved in that judgment, wherein the surrender and the specific manner in which such un-disclosed income has been derived and was not recorded in any document before search. However in the case in hand as discussed in the foregoing, it is a matter of record t .....

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..... the assessee has raised no objection before the AO in this regard. Secondly, last line of the notice clearly mentions section 271AAB. Thirdly, the assessee has given reply to said notice which shows that the assessee fully comprehended the implication of the notice that it is for section 271AAB. The assessee has also challenged that the principles of natural justice has not followed by the AO. The detailed submissions of A.R in this regard has already been reproduced above. The A.R did not produce any evidence to show that he was not given proper opportunity of hearing. It is clear from the penalty order that the AO has given penalty notice and which was also replied by the assessee. Therefore, in my opinion, principle of natural justice has not been violated. Thus in view of above discussion penalty imposed by AO u/s 271AAB of the Act is confirmed. Thus it was found by the Hon ble High Court that the mistake in mentioning the section in the show cause notice is covered under section 292BB and the AO will get the benefit of the same. The said decision will not help the case of the revenue so far as the issue involves the merits of levy of penalty under section 271AAB. As regards th .....

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..... come has been derived. 
 (ii) Substantiates the manner in which the undisclosed income was derived; and 
 (iii) On or before the specified date- (A) pays the tax, together with interest, if any, in respect of the undisclosed income; and (B) furnishes the return of income for the specified previous year declaring such undisclosed income therein; (b) a sum computed at the rate of twenty per cent of the undisclosed income of the specified previous year, if such assessee- (i) in the course of the search, in a statement under sub-section (4) of section 132, does not admit the undisclosed income; and (ii) on or before the specified date- (A) declares such income in the return of income furnished for the specified previous year; and (B) pays the tax, together with interest, if any, in respect of the undisclosed income;
(c) a sum which shall not be less than thirty per cent but which shall not exceed ninety per cent of the undisclosed income of the specified previous year, if it is not covered by the provisions of clauses (a) and (b). (2) No penalty under the provisions of clause (c) of sub-section (1) of section 271 shall be imposed upon the assessee in respect of the un .....

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..... being heard. Once the opportunity is given to the assessee, the penalty cannot be mandatory and it is on the basis of the facts and merits placed before the A.O. Once the A.O. is bound by the Act to hear the assessee and to give reasonable opportunity to explain his case, there is no mandatory requirement of imposing penalty, because the opportunity of being heard and reasonable opportunity is not a mere formality but it is to adhere to the principles of natural justice. Hon ble A.P. High Court in the case of RadhakrishnaVihar in ITTA No.740/2011 while dealing with the penalty u/s 158BFA held that we are of the opinion that while the words shall be liable under sub section (1) of section 158BFA of the Act that are entitled to be mandatory, the words may direct in sub section 2 there of intended to directory . In other words, while payment of interest is mandatory levy of penalty is discretionary. It is trite position of law that discretion is vested and authority has to be exercised in a reasonable and rational manner depending upon the facts and circumstances of the each case. Plain reading of section 271AAB and 274 of the Act indicates that the imposition of penalty u/s 271AAB of .....

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