2019 (7) TMI 641 - AT - Income Tax

Penalty u/s 271(1)(c) - under- valuation of closing stock and higher claim of depreciation - HELD THAT - We straightway notice that both the additions/disallowances are tax neutral over period of time and thus taxation cannot be escaped perennially on the aforesaid two items. Over-Valuation of stock in one year would result in higher valuation of opening stock in other year and profit will be accordingly adjusted downwards in the subsequent assessment years. Same is the case with depreciation allowance. This apart, the assessee has independently offered explanation for such error which cannot be bracketed in the realm of mala fide per se. The variation in the valuation of stock is less than 3%. The method of valuation adopted by the assessee in sync with the method adopted by the AO in the earlier years and is also a recognized method. Importantly, no difference in net quantitative tally has been brought on record. The valuation of stock embodies certain degree of subjectivity and is not an entirely objective process. Thus, where a fair and plausible explanation has been offered by the assessee for ascertainment of value of closing stock, the pre-requisites for invoking Explanation-1 to sec. 271(1)(c) are not, in our view, satisfied. A mere wrongful claim or a bona fide error could not automatically invite stringent penalty. The assessee in our view has successfully offered explanation which is reasonable commensurate in the circumstances. The depreciation allowance also claimed for the full year is not entirely without any basis. The ownership of the property was actually transferred in favour of the assessee and such property was hold for more than 180 days. An error committed by higher claim of depreciation would not automatically lead to consequences in the form of penalty of stringent nature. We thus find merits in the plea of the assessee for cancelling the penalty on these additions. The order of the CIT(A) is accordingly set aside and the AO is directed to cancel the penalty on both counts. - Decided in favour of assessee.

Summary

Issues:
1. Penalty imposed under section 271(1)(c) for under-valuation of closing stock and higher claim of depreciation for A.Y. 2008-09.

Analysis:
The appeal was filed against the penalty order passed by the Assessing Officer (AO) under section 271(1)(c) of the Income Tax Act, 1961 concerning the assessment year 2008-09. The AO made additions/disallowances on two items: under-valuation of closing stock of jewellery and wrong claim of depreciation on building. The penalty proceedings were initiated based on these additions, and a penalty at the rate of 100% was imposed for the alleged concealment of income. The assessee then appealed to the Commissioner of Income Tax (Appeals) [CIT(A)] without success, and subsequently, appealed before the Tribunal. The arguments put forth by both the assessee and the Department were considered in detail.

Regarding the under-valuation of closing stock, the assessee's representative argued that the method of valuation adopted by the assessee was in line with the approach taken by the AO in previous years. The difference in valuation was minimal, around 2.75%, and the assessee had modified the valuation method to comply with the AO's approach. It was contended that there was no mala fide intent on the part of the assessee, and the explanation offered was reasonable. The Tribunal found that the valuation of stock involves subjectivity and recognized the explanation provided by the assessee as plausible. Therefore, the Tribunal concluded that the penalty under section 271(1)(c) was not justified for the under-valuation of closing stock.

Regarding the wrong claim of depreciation on the building, the assessee's representative argued that the full-year depreciation claim was based on the purchase date of the building. The AO allowed depreciation for half a year, assuming the building was put to use for less than six months. The Tribunal noted that the ownership of the property was transferred to the assessee, and the error in claiming higher depreciation did not warrant a stringent penalty. The Tribunal found merit in the assessee's plea to cancel the penalty on both counts. Consequently, the order of the CIT(A) was set aside, and the AO was directed to cancel the penalty on the under-valuation of closing stock and higher claim of depreciation.

In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing that the penalty on the additions made by the AO was not justified considering the explanations provided and the tax-neutral nature of the discrepancies over time.