TMI Blog2007 (6) TMI 231X X X X Extracts X X X X X X X X Extracts X X X X ..... tion was confirmed. The assessee was a builder and was following completed project method of accounting. At that relevant point of time assessee was carrying out two different projects; one is a commercial project known as 'Centre Point' situated at S.V. Road, Santacruz (W), Mumbai and another residential project at 14th Road, Khar West, Mumbai. Besides following the completed project method of accounting, the assessee has been consistently valuing the work-in-progress at cost since the very beginning. During the assessment proceedings the Assessing Officer has examined the tax audit report and notes from accounts pertains to 1998-99. In the tax audit report column No. 2 regarding method of accounting employed, the auditors states as "Accrual basis. There is no change in method of accounting as employed in the preceding previous year". However, in column No. 3, regarding the method of valuation of opening and closing stock in trade the tax auditor states, "At cost or market value whichever is lower". The Assessing Officer observed that in the tax audit report pertains to earlier previous years, i.e., 1997-98, 1996-97 and 1995-96 the auditors, regarding the method of valuation of op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39,109. Against this penalty order assessee preferred an appeal before the CIT(A) but did not find favour with him. 3. Now the assessee has preferred an appeal before the Tribunal with the submission that the assessee has made the full disclosure and has not concealed anything from the Revenue authorities. The disallowance was made on account of a legal issue, which is subject-matter of litigation, and not on account of any fact that was concealed by the assessee from the revenue. In these circumstances it cannot be held that the assessee has ever concealed any income or filed inaccurate particulars. He further placed reliance upon the judgment of the Apex Court in the case of Hindustan Steel Ltd v. State of Orissa [1972] 83 ITR 26 in which it has been held that "an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceedings and penalty not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or guilty of conduct, contumacious or dishonest, or acted in a conscious disregard to its obligation. Penalty will also not be imposed merely because it is lawful to do so. The assessee has raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this contention he placed reliance upon the following judgments: (i) Rupam Mercantile Ltd v. Dy. CIT [2004] 91 ITD 237 (Ahd.) (TM). (ii) H.P. State Forest Corpn. Ltd. v. Dy. CIT [2005] 93 ITD 442 (Chd.). (iii) Southern Gas Fittings (P.) Ltd. v. Dy. CIT [2002] 80 ITD 202 (Chennai). Mr. Y.P. Trivedi, Sr. Advocate for the assessee has also invited our attention to the fact that he has made the valuation of the closing stock on the basis of the opinion rendered by the Chartered Accountant/Tax Professionals. Our attention in this regard was invited to para 6 of the report of the auditors to the shareholders prepared by J.D. Pandya Co., Chartered Accountants, in which he has stated that in their opinion the valuation of closing stock is fair and proper in accordance with the accepted accounting principles. These facts were also explained in the notes on accounts to the Profit Loss Account. Before preparing the Balance Sheet for the impugned assessment year the assessee has also obtained the opinion from the Tax Consultant Mr. G.S. Sabins on this issue and he has advised the assessee that the assessee can claim the loss arising on account of fall in the value of work-in-pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Dajibhai Kanjibhai [1991] 189 ITR 41 (Bom.). 7. The learned DR, on the other hand, besides placing reliance upon the orders of the lower authorities has invited our attention to the judgment of the Apex Court in the case of CIT v. S.V. Angidi Chettiar [1962] 44 ITR 739 and the judgment of the Allahabad High Court in the case of Shyam Biri Works (P.) Ltd v. CIT[2003] 259 ITR 625 in support of his contention that satisfaction is not required to be recorded specially in the assessment order as action to initiate penalty itself is satisfaction of the Assessing Officer. The learned DR further contended that the assessee has changed the method of valuation only in this year to reduce the profit earned on the commercial project. In the succeeding years he reverted back to the old method of accounting. Assessee has been following the project completion method and under that method there is no requirement to revalue the cost of project prior to its completion and more so when the project is only 34 per cent complete. Accounting Standard VII does not provide for any adjustment of estimated loss against the profit of any other project. The foreseeable loss may be estimated on the basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,966." 9. Likewise in Schedule D (Annexure to Balance Sheet) it has been mentioned that the work-in-progress was valued at cost or market value whichever is lower. In Schedule K, i.e., Notes on Accounts, a specific note in this regard was given by the assessee. For the sake of reference we extract the relevant note as under: "2. Change in accounting Policies: The method of valuation of stock hitherto employed by the company was at "Cost". From this year onwards the company has decided to value the stock at "Cost or net realisable value whichever is lower". Had this change not been made the valuation of closing stock would have been higher by Rs. 42,296,966 and the profit would have been higher by Rs. 42,296,966." 10. Having carefully examined this disclosure made by the assessee while filing the return of income we are of the view that though the assessee has changed the method of valuation of closing stock and claimed loss against the profit earned in the commercial project it cannot be held that the assessee is guilty of concealment or furnishing inaccurate particulars. Moreover, this is not a case for the revenue. They have levied the penalty after invoking Explanation 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not able to substantiate and also fails to prove that such explanation is bona fide and that all the facts relating to the computation of total income have been disclosed by him. It is true that the said explanation lays down the rule of evidence and it automatically applies to a case where a penalty proceeding under section 271 (1)(c) has been initiated. The consequences from the application of Explanation 1 follows as a matter of law. If the assessee fails to offer an explanation or his explanation is found to be false or the assessee is not able to substantiate the explanation, the presumption that he has concealed particulars of income, is bound to be drawn. The fact, however, remain that the presumption available under Explanation 1 cannot be drawn unless the case of the assessee falls under either of the clause, viz. clause (A) or clause (B). 12. During the course of hearing the learned counsel for the assessee has invited our attention to the fact that against the order of the Tribunal in quantum appeal, assessee has preferred an appeal before the High Court and it was admitted after framing substantial question of law. Since the claim of the assessee is of legal in nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect that assessee had failed to offer an explanation is inapplicable. The second part of the clause (A) of the Explanation would be attracted if the explanation offered by the assessee is found to be false. Assessee had clearly indicated in trading and P L 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 kilometres 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 been disallowed at the time of assessment. It was mainly because the assessee had resorted to estimate in determining the value of the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee cannot be considered to have been found to be false. In this view of the matter, Explanation 1 (A) is not attracted. The assessee had disclosed all the material facts. The assessee also disclosed that the percentage of reduction was on estimate. Nothing was concealed in regard to the claim. If all disallowances attract penalty under section 271(1)(c), then the taxpayers would not be free to make claims which are perceived to be genuine. The revenue pas not established beyond doubt that the explanation offered by the assessee is false. The second part of the Explanation 1(B) to section 271(i)(c) is attracted where an explanation is offered by the assessee but the same is not substantiated and the assessee fails to prove that the explanation is bona tide and all the material facts had been disclosed. It has got to be borne in mind that the second part of the Explanation 1 (B) does not get automatically attracted if the explanation offered by the assessee is not substantiated unless the assessee fails to prove that all the material facts have been disclosed. The assessee having disclosed all the material facts in regard to the claim made in respect of the valuation of the closing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while raising the claim, though the claim mayor may not sustain. At this stage we have to see whether assessee has bona fide belief for making a change in method of valuation. Taking into account all the relevant facts we are of the view that the assessee had the bona fide belief in making a change in the method of valuation of work-in-progress. Hence Explanation 1 to section 271(1)(c) is not attracted. 17. With regard to another argument of the assessee that the Assessing Officer did not record the satisfaction on concealment of income or furnishing of inaccurate particulars by the assessee, we find on a careful perusal of the assessment order that though the Assessing Officer has discussed the claim of the assessee in this regard and recorded the statement of Shri S.G. Nadkarni, registered valuer in his assessment order, and has also given reasons in his order for non-acceptance of the explanation of the assessee but it did not record any satisfaction regarding concealment of income or furnishing of inaccurate particulars or with regard to invocation Explanation 1 to section 271(1) in the assessment order. Whereas according to section 271(1)(c) the Assessing Officer must be sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of assessment proceedings that penalty provisions are attracted, ITO issues consequential notice. There was no dispute with regard to the record of satisfaction of the Assessing Officer before initiating penalty proceedings. 21. The sole dispute before us is whether the satisfaction is to be properly recorded in clear terms or specifically worded in the assessment order or mere mentioning a word "penalty under section 271 (1)(c) be initiated" is sufficient to hold that the Assessing Officer has satisfaction in initiating the penalty proceedings under section 271 (1)(c) of the Act. This issue was examined by the Delhi High Court in the case of Shri Ram Commercial Enterprises. In the light of the judgment of the Apex Court in the case of S.V. Angidi Chettiar their Lordship have categorically held that the assessing authority is to confirm its own opinion and record its satisfaction before initiating penalty proceedings. Merely because the penalty has been initiated it cannot be assumed that satisfaction was arrived at in the absence of the same being spelt out by the order of the assessing authorities. We also examined the judgment of the Apex Court in the case of S.V. Angidi Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of CIT v. Vikas Promoters (P.) Ltd [2005] 277 ITR 337 and made it more clear that satisfaction is required to be properly recorded in clear terms in the assessment order. Their Lordship have held that Assessing Officer simply gave direction to issue challan for penalty under section 271 (1)(c) without recording any satisfaction for levying penalty in the assessment order and this order ex facie suffers from vice of non-application of mind and therefore penalty was rightly set aside. In this judgment their Lordship have also recorded the exact wording of the assessment order. For the sake or reference the wordings which were used in the assessment order is extracted as "penalty proceedings under section 271(1)(c) are initiated separately". Their Lordship have categorically held that this narration is not sufficient. The satisfaction is not to be in the mind of the Assessing Officer but must be reflected from the record. Their Lordship have again echoed the view taken by the court in Shri Ram Commercial Enterprises Ltd. of which the relevant observations are extracted hereunder: "A bare reading of the provisions of section 271 and the law laid down by the Supreme Court makes it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the conditions which attracted penalty under section 271(1)(c) before conclusion of the assessment proceedings and in the absence of record of satisfaction the penalty under section 271(1)(c) cannot be levied. 25. Turning to the case in hand we find that in the entire body of the assessment order no satisfaction regarding any condition which attracts penalty under section 271(1)(c) was recorded though the Assessing Officer has discussed the veracity of the explanation of the assessee. The Assessing Officer has simply put a footnote "issue penalty notice under section 271(1)(c)". This narration does not mean to be a satisfaction of the Assessing Officer about the existence of any of the conditions which attracts penalty under section 271 (1)(c). In the case of S.V. Angidi Chettiar in which emphasis was made by the Revenue, the footnote in the assessment order by the Assessing Officer state that action under section 28 pari materia to section 271 (1)(c) had been taken for concealment of income and this footnote was held to be proper satisfaction by the Apex Court. But in this case this type of footnote was not there and the Assessing Officer has simply issued direction to iss ..... 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