TMI Blog2019 (2) TMI 1696X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 given discretion in the matter of levy of penalty. Our foregoing view finds support in the decision in the case of ACIT Vs Marvel Associates ( 2018 (3) TMI 946 - ITAT VISAKHAPATNAM ) which inturn relied on Hon ble Andhra Pradesh High Court ratio in Radha Krishna Vihar ( 2018 (2) TMI 1595 - TELANGANA AND ANDHRA PRADESH HIGH COURT ) . Section 145A of the Income-tax Act, which deals with the method of valuation of stock for the purposes of Section 145 of the Act, requires the assessee to follow any of accepted methods of stock valuation on the condition that the method once adopted must be followed consistently. We therefore find that following the consistent method of valuation followed in the past and accepted by the Revenue even in the financial accounts for the year ending 31.03.2012, the assessee had valued the stock of subgrade Fines at NIL. Having regard to these facts therefore we do not find any infirmity in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... af 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 ores. The AO noted that that the key person of the group is Sh. PradeepKumar Saraf who had offered additional income on account of stock valuation of ₹ 59,09,00,000/- for AY 2012-13.The AO further noted that the assessee had filed its return of income declaring the total income of ₹ 4,29,12,93,850/- which included the offered income of ₹ 59,09,00,000/-. Thereafter, the assessment was completed on 28.04.2014 determining the total income of ₹ 4,34,83,03,850/- after making certain additions. Thereafter, penalty proceedings was initiated on the disclosed amount of ₹ 59,09,00,000/- u/s 271AAB of the Act. 3. During the course of penalty proceedings, the assessee submitted such offering of ₹ 59,09,00,000/- was on account of sub grade fines. In the course of search an internal in-house departmental (assessee s own) survey repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 get automatically generated while mining the seized ore and other products. I find that every year the assessee company submits report to the Director General of Mines in which the quantity of production of sized ore and fines are reported. Thus' the said seized document is part of regular books of accounts and not an incriminating document. I find that the assessee made a disclosure by taking estimated amount of ₹ 250/- per MT of Iron ore fines. I find that the AO has taken the undisclosed income of the assessee on the amount declared suo moto by the assessee (for which no incriminating evidence, papers / documents, stock, cash etc were found during the search operation in order to buy peace of mind and avoid any further litigation. The assessee has brought on record the case law of Dilip N Shroffvs CIT (2007) 291 ITR 519 (SC). In thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 essential (1) undisclosed income and (2) specified previous year. Here in this case ₹ 50,09,00,000/- was offered for taxation by the assessee suomoto in the statement recorded at the time of search. From the ratio decided by the Hon'ble Supreme Court in the case of Sudarshan Silk Saries (sputa), it is clear that only the statement of the assessee without any corroborating evidence cannot be the only basis for levying penalty. The Honble Supreme Court has also categorically decided the ratio that penalty cannot be levied on the amount offered by the assessee in order to buy peace of mind [in the case of Sudarshan Silk 5aries (supra). Thus, respectfully following the ratio decided by the Honble Supreme Court, the AO is directed to delete the penalty o/s 271AAB(l) on the Suo Moto disclosure of ₹ 59,09,00,000/-. Accordingly, asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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. 2010-11 (A.Y. 2011-12) and F.Y 2011-12 (A.Y.2012-13) which is reproduced hereunder:- Grade (% of Fe content) Opening stock of mine-head Production Dispatches from mine-head Closing stock at mine-head (1)Lumps: (a) 58% to below 60% 6,578,840 6,407.440 171.400 (b) 60% to below 62% 5.440 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.2012 which means that stock of the fines below 55%, for both these years was reported to the Director General of Mines before the date of search on 13.09.2012 (before two month in respect to 2012-13). 9. The ld AR further contented that the assessee company has been consistently treating the value of the iron ore fines Fe content below 55% at NIL, since it was treated as waste /by product and when the sale of this fines takes place, it is readily offered as income which practice the assessee has been consistently following and has been accepted as such by the Department in respect of AY 2009-10, for which scrutiny assessment was conducted u/s 147/143(3) and order was passed on 18.03.2016 which is placed at page 62 of the Paper Book. It was also brought to our notice that in AY 2011-12, the same practice was consistently followed and the value of fines below 55% Fe content was taken as NIL and whenever sales materialized, the said income was offered for taxation. 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 bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LUMP-MN 4853.130 29462041 GRAND TOTAL 1540864.953 6145761760.085 11. It was also brought to our notice that since the fines below Fe content 55% was treated as waste, it used to be accumulated and thus got piled up for years in the mining areas of the assessee company. And these were used for land filling or to make roads within mines and whenever sales took place it was duly recorded in the books on cash basis. Since the stocks of sub grade iron ore fines were getting piled up for years due to absence of demand, its value was never accounted in the books. However in recent times due to shortage of quality ore, even the sub grade fines were attracting regular orders and therefore the management of the assessee company was contemplating to account the same in its financial accounts and, therefore, an internal survey was conducted by the assessee company itself to quantify the actual quantity and value of the fines available in stock at the mines. The internal audit/survey by the assessee company had presented its report and was in possessio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered 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 in the State of Orissa and the assessee extracts iron ore as well as manganese ore. The ore extracted from the womb of the mother earth is a natural product, which cannot straightaway be used for industrial purposes. In the circumstances therefore the ore extracted from the womb of the mother earth, which is called run-of-the-mines ( ROM ) is required to be processed. Further the processed ore is required to be segregated according to the sizes and for such purpose the processed ore called as lumps is required to be screened and washed with the use of machinery called washeries. The end product is the lump ore, which is segregated according to the sizes as also according to the Fe content and such finished product i.e., Iron Ore is sold by the mines. In this process however certain dust-like ore is produced which is known in the mining parlance as Fines. Such fines are considered to be waste generated in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Fines was always valued at NIL although the details of such stocks were regularly reported by the assessee to the Indian Bureau of Fines in the prescribed Form. We therefore find that the assessee followed a particular method in respect of reporting of stock of sub-grade fines in all the past assessments and following such consistent method, in the accounts for the year ended 31st March 2012 also, the value of stock of sub-grade fines was taken at NIL. 13. Section 145A of the Income-tax Act, which deals with the method of valuation of stock for the purposes of Section 145 of the Act, requires the assessee to follow any of accepted methods of stock valuation on the condition that the method once adopted must be followed consistently. We therefore find that following the consistent method of valuation followed in the past and accepted by the Revenue even in the financial accounts for the year e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 fines appropriate stock records were also maintained at the mines. However in the financial accounts the stock of sub-grade fines was not separately disclosed for the reason that no separate and identifiable cost was incurred by the assessee for extracting sub-grade fines, not having any ready market. However as and when any price was actually realized, the entire sale proceeds were accounted as income in the year of sale. This accounting practice and method of valuation regularly followed by the assessee was accepted by the Revenue in all the past assessments framed u/s 143(3) or 153A as the case may be. 17. From the documents on record we find that the issue with regard to addition on account of valuation of inventory of sub-grade fines arose primarily because of the letter dated 01/06/2012 which was found and seized in the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 modify the statement? Ans- Yes, on behalf of Aryan Mining Trading Corporation (P) Ltd., I make a disclosure of an additional income of ₹ 61/- (sixty one) crore on account of the value of sub grade screen fines as mentioned in the seized documents PKS/1, Page No.1 to 5 and further sub grade screen fines generated during the current year up to date of around 2,30,000 mt. The year wise break-up is as under: F.Y 2011-12 - 55.15 crore (2206000 mt @ 250 per ton) F.Y 2012-13 - 5.85 crore (230000 mt approx) Total - 61.00 crores (Rs. Sixty one crores) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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 the A/R is ₹ 145.54 as cost incurred up to the process of Screening plus allocation of overhead of ₹ 23.05/- totalling to ₹ 168.59/- per MT. The submission made by the AR is based on estimation only. Therefore, apportionment of process cost attributable to the sub-grade Screen Fines at ₹ 168.59 per MT is not accurate or free from error. Hence, to take a more realistic apportionment of cost attributable to the production of sub-grade Screen Fines, the cost is taken at ₹ 250/- per Metric Tonnes. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade 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 s discovery and not AY 2012-13. We however find that the impugned addition of ₹ 59,09,00,000/- is based on the quantity of stock of sub-grade fines reported to DG, Mines by the assessee on 03/07/2012 in prescribed Form H1. The said annual return in Form H1 was filed in compliance with the Mining Regulations governing operations of assessee s mine and therefore such return came within the expression other documents maintained in regular course of business as used in Explanation (c) to Section 271AAB of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 not recorded on or before the date of search in the books of accounts or other documents maintained in the normal course relating to such previous year or otherwise not disclosed to the Commissioner before the date of search. From the bare perusal of the assessment order and the penalty order, we note that the assessee had voluntarily included ₹ 59.09 crores on account of valuation of sub-grade fines as its income for AY 2012- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) undisclosed income means-- (i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has-- (A) n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 given discretion in the matter of levy of penalty. Our foregoing view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 that in the stock records regularly maintained at the Mines, the assessee had maintained proper quantitative records in respect of production of sub-grade fines. We also note that apart from maintaining stock records, the assessee also reported inventory of sub-grade fines held at Narayanposhi Iron Ore Mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the decision of Kolkata Benches of the Tribunal in the case of DCIT vs. AmitAgarwal (supra), we find that the said decision was subsequently recalled by the Tribunal and a fresh order dated 14th March, 2018 was passed by the Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 undisclosed income referred to in sub-section (1). Section 158BFA(2): (2) The Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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