2016 (5) TMI 866 - AT - Income Tax

Penalty levied u/s.271(1)(c) - undervaluation of WIP - Held that - Merely because the assessee company in the instant case has accepted the addition in the quantum assessment proceedings which had attained finality , will not make the assessee automatically liable for penalty u/s 271(1)(c) of the Act whereby proper and bonafide explanations backed by sound reasoning and declarations as set out above are furnished by the assessee company , and more-so the revenue impact in quantum additions is tax neutral as the closing WIP of relevant previous year shall be opening WIP of immediately succeeding financial year and any adjustment to closing WIP has to be necessarily followed by corresponding adjustment to opening WIP of immediately succeeding financial year making it tax neutral whereby no prejudice is caused to the Revenue. Moreover, the claim of the assessee company is being made by following Accounting Standard AS-2 which requires closing inventory to be valued at cost or net realizable value whichever is lower and the closing WIP being valued on net realizable value which was lower than the cost in the instant case . The ratio of the decision of Hon ble Supreme Court in the case of Reliance Petro products Private Limited 2010 (3) TMI 80 - SUPREME COURT is squarely applicable in the instant case. We do not find any infirmity in the well reasoned and detailed order dated 04-01-2013 passed by the learned CIT(A) deleting the penalty levied by the A.O. and we uphold the same. - Decided in favour of assessee

Issues Involved:
1. Deletion of penalty levied under Section 271(1)(c) of the Income Tax Act, 1961 for undervaluation of Work-in-Progress (WIP) by ?1.95 crores.

Detailed Analysis:

1. Background and Grounds of Appeal:
The appeal by the Revenue challenges the order of the Commissioner of Income Tax (Appeals) [CIT(A)] that deleted the penalty levied under Section 271(1)(c) for the assessment year 2003-04. The penalty was imposed for alleged undervaluation of WIP by ?1.95 crores, which the Assessing Officer (A.O.) claimed deviated from the consistent method of accounting to lower taxable income. The Revenue argued that WIP should be valued at cost and the method adopted by the assessee was arbitrary and ad hoc.

2. Facts of the Case:
The assessee, a company engaged in manufacturing textile processing machinery, filed a return declaring a total loss of ?3,44,59,980, which was later reduced to ?58,10,321 after certain disallowances/additions by the A.O. The A.O. observed that the closing WIP was net of a diminution in value by ?1.95 crores, which the assessee justified based on technical evaluation and compliance with Accounting Standards AS-2. The A.O. rejected this contention, citing the consistent mercantile system of accounting and absence of any mention of change in the tax audit report, relying on the Supreme Court decision in British Paints India Ltd.

3. Penalty Proceedings:
During penalty proceedings, the A.O. held that claiming excessive deduction amounted to concealment of income. The A.O. imposed a penalty of ?71,66,250 under Section 271(1)(c), relying on several judicial precedents and the Supreme Court decisions in Dharmendra Textile Processors and Gold Coin Health Foods P. Ltd.

4. CIT(A) Decision:
The CIT(A) deleted the penalty, observing that the goods were not accepted by customers due to a lean period in the textile industry, leading to a reduction in WIP value by ?1.95 crores based on technical evaluation. The CIT(A) noted that the assessee had disclosed all material facts in the return and audit report, and there was no concealment or submission of inaccurate particulars. The CIT(A) relied on the Supreme Court decision in Reliance Petro Products Private Limited, concluding that the penalty was not sustainable.

5. Tribunal's Analysis:
The Tribunal noted that the assessee had made proper disclosures in the return and audit report. The assessee's explanation for devaluing WIP was bona fide and substantiated by technical evaluation, consistent with Accounting Standard AS-2. The Tribunal emphasized that mere acceptance of quantum additions does not automatically lead to penalty under Section 271(1)(c). The Revenue failed to prove that the assessee furnished inaccurate particulars or concealed income. The Tribunal upheld the CIT(A)'s order, finding no infirmity in the detailed reasoning provided.

Conclusion:
The Tribunal dismissed the Revenue's appeal, confirming the deletion of the penalty of ?71,66,250 levied under Section 271(1)(c) for the devaluation of closing WIP by ?1.95 crores. The decision was pronounced in the open court on 16th May 2016.

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