2015 (9) TMI 17 - AT - Income Tax

Penalty u/s 271(1)(c) - whether change of accounting system which resulted valuation of stock at a lower side do not show deliberate intention of the assessee of furnishing inaccurate particulars/ concealment of facts - CIT(A) deleted addition - Held that - The assessee had submitted its explanation before the AO at the time of assessment proceedings as well as penalty proceedings. The assessee has changed the method of valuation of closing stock which will automatically be the opening stock of subsequent year. The assessee had duly disclosed complete particulars regarding change in the method of valuation of stock in process from cost plus expenses to estimated realizable value which was mentioned by the assessee in its annual report of the company and tax audit report that in the Modern Thread Unit the valuation of stock in process had been changed from cost plus expenses to net realizable value. The valuation of work in process had been done as per AS-2 issued by Institute of Chartered Accountant of India. Further the company had been closed on 20-08-2001 and valuation of stock was done on 31-03-2002. Thus there was no production carried out by the company since 31-03-2002. The ld. DR could not controvert this findings of the ld. CIT(A). The cases relied on by the assessee are squarely applicable to the case of the assessee. Therefore in view of the above facts and circumstances of the case we confirm the order of the ld. CIT(A). - Decided against revenue.

Summary

Issues Involved:
1. Deletion of penalty imposed under Section 271(1)(c) of the Income Tax Act.
2. Change in the method of valuation of closing stock.
3. Justification for the change in the method of valuation of closing stock.
4. Disclosure of particulars regarding the change in the method of valuation.
5. Applicability of Accounting Standards and Companies Act provisions.
6. Whether the change in valuation method resulted in concealment of income or furnishing inaccurate particulars.
7. Interpretation of legal precedents and their applicability to the case.

Detailed Analysis:

1. Deletion of Penalty Imposed under Section 271(1)(c) of the Income Tax Act:
The Revenue appealed against the order of the CIT(A)-II, Jaipur, which deleted the penalty of Rs. 7,65,060/- imposed by the AO under Section 271(1)(c). The AO had imposed the penalty on the grounds that the change in the accounting system, which resulted in a lower valuation of stock, indicated that the assessee furnished inaccurate particulars or concealed facts. However, the CIT(A) found no deliberate intention by the assessee to furnish inaccurate particulars or conceal facts, and thus, deleted the penalty.

2. Change in the Method of Valuation of Closing Stock:
The assessee had changed its method of valuation of closing stock from "cost plus expenses" to "estimated realizable value," resulting in a higher claim of loss by Rs. 21.43 lacs. The AO did not find this change justified and made additions to the income on account of this change.

3. Justification for the Change in the Method of Valuation of Closing Stock:
The assessee justified the change in the method of valuation by stating that the business was incurring consistent losses and had been declared a sick company by BIFR. The stock valuation change was disclosed in the annual report and tax audit report. The CIT(A) observed that the change was consistent with Accounting Standard-2 (AS-2) issued by the Institute of Chartered Accountants of India, which mandates that inventories should be valued at the lower of cost or net realizable value.

4. Disclosure of Particulars Regarding the Change in the Method of Valuation:
The assessee had disclosed the change in the method of valuation in Note 18 of Schedule 15 of the annual report and in Annexure B of the tax audit report. The CIT(A) noted that the assessee made a complete disclosure regarding the change, and there was no concealment of income or furnishing of inaccurate particulars.

5. Applicability of Accounting Standards and Companies Act Provisions:
The CIT(A) and the assessee argued that the change in valuation was in compliance with AS-2 and the Companies Act, which requires that the financial statements give a true and fair view of the state of affairs of the company. The change was made to reflect the net realizable value of the stock, as the plant had been closed, and no production was carried out.

6. Whether the Change in Valuation Method Resulted in Concealment of Income or Furnishing Inaccurate Particulars:
The CIT(A) concluded that the change in the method of valuation was bona fide and consistent with accounting standards. The CIT(A) relied on various legal precedents to support the view that mere disallowance of a claim does not automatically lead to the imposition of penalty. The Tribunal upheld this view, stating that the assessee had made a bona fide claim and disclosed all relevant particulars.

7. Interpretation of Legal Precedents and Their Applicability to the Case:
The CIT(A) and the Tribunal referred to several legal precedents, including the Supreme Court judgment in CIT vs. Reliance Petro Products (P) Ltd., which held that mere making of a claim, which is not sustainable in law, does not attract penalty. Other cases cited include CIT vs. Devson Logistics (P) Ltd., CIT vs. IFCI Limited, and CIT vs. HP State Forest Corporation Limited, which supported the view that penalty cannot be imposed if the assessee has made full disclosure and the claim is bona fide.

Conclusion:
The Tribunal confirmed the order of the CIT(A) deleting the penalty imposed by the AO under Section 271(1)(c). The Tribunal found that the assessee had made a bona fide change in the method of valuation of closing stock, fully disclosed the particulars, and complied with accounting standards. The appeal of the Revenue was dismissed.