2017 (2) TMI 635 - AT - Income Tax

Penalty u/s 271(1)(c) - addition made on account of alleged undervaluation of closing stock - Held that - The assessee who is dealing into the business of diamond having a wide range of varieties and there is uncertainty about correct valuation of such items even then assessee had properly maintained quantitative records, proper books of account duly audited, consistent adoption of method of valuation at cost price or at market price whichever is less and the basis of finding by the Revenue for valuing of closing stock at average cost taken from the records of assessee itself, clearly shows that assessee has not furnished inaccurate particulars of income nor has it concealed any particular of income and in such case where there is only a claim of valuation of closing stock by certain method which is bonafidely deemed correct by the assessee but not accepted by the Revenue, we are of the confirmed view that assessee should not have been visited with penalty u/s. 271(1)(c) of the Act. We accordingly delete the penalty u/s 271(1)(c) - Decided in favour of assessee

Issues Involved:
1. Levy of penalty under Section 271(1)(c) of the Income Tax Act, 1961 for alleged undervaluation of closing stock.

Issue-Wise Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c) for Undervaluation of Closing Stock:

The primary issue in this case was whether the penalty under Section 271(1)(c) of the Income Tax Act, 1961, was justified for the alleged undervaluation of closing stock by the assessee. The assessee, a partnership firm engaged in the diamond business, consistently followed the method of valuing closing stock at "cost or market value whichever is less." During the assessment proceedings, the Assessing Officer (AO) observed that the assessee valued the closing stock based on sale prices of stock sold after the financial year-end, which allegedly led to undervaluation. The AO rejected the assessee's valuation method and recalculated the closing stock based on the average cost, resulting in an addition of ?2,96,08,019 to the declared income and initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars and concealment of income.

Penalty Proceedings and AO's Observations:
The AO imposed a penalty of ?99,66,060, being 100% of the tax sought to be evaded, on the grounds that the assessee failed to provide any documentary evidence to support its valuation method, indicating mens rea and a guilty conscience. The AO applied the five tests laid down by the jurisdictional Tribunal for determination of culpability and levy of penalty, concluding that the assessee deliberately attempted to defraud the Revenue by underreporting income.

CIT(A) and Tribunal's Findings:
The CIT(A) upheld the penalty, rejecting the assessee's argument that the substantial question of law admitted by the Gujarat High Court in the quantum appeal made the addition debatable, thus not warranting penalty. The CIT(A) emphasized that the mere admission of an appeal by the High Court does not indicate that the issue is debatable. The Tribunal, in the quantum appeal, noted that the assessee failed to provide lot-wise cost or market value details and selectively used sale instances where sale prices were lower than the cost, ignoring higher sale prices, thus justifying the AO's valuation based on average cost.

Assessee's Arguments:
The assessee argued that it consistently followed the method of valuing stock at "cost or market price whichever is less" and provided quantitative records and sales bills to support its valuation. The assessee contended that the AO's method of valuing closing stock at average cost was a new method, and the quantum addition admitted by the High Court as a substantial question of law indicated a bona fide claim, thus penalty under Section 271(1)(c) was not justified.

Tribunal's Decision:
The Tribunal, after considering the rival contentions and relevant judicial pronouncements, observed that the assessee maintained proper quantitative records and books of account, and consistently adopted a method of valuation. The Tribunal noted that the issue was about the basis of rates adopted for valuing closing stock and not about furnishing inaccurate particulars or concealment of income. The Tribunal referred to several judicial precedents, including the Supreme Court's decision in CIT vs. Reliance Petro Products (P) Ltd., which held that making a claim not sustainable in law does not amount to furnishing inaccurate particulars. The Tribunal concluded that the assessee's method of valuation was bona fide and supported by relevant evidence, and the penalty under Section 271(1)(c) was not warranted.

Conclusion:
The Tribunal allowed the assessee's appeal, deleting the penalty of ?99,66,060 imposed under Section 271(1)(c) of the Income Tax Act, 1961, for the alleged undervaluation of closing stock. The decision emphasized that the assessee's consistent method of valuation, supported by proper records and evidence, did not constitute furnishing inaccurate particulars or concealment of income.

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