2004 (11) TMI 282 - AT - Income Tax

Summary

Issues Involved:
1. Penalty under Section 271(1)(c) for change in the method of valuation of closing stock.
2. Penalty under Section 271(1)(c) for deduction claimed on excise duty paid on closing stock.
3. Penalty under Section 271(1)(c) for deduction claimed on surtax liability.
4. Jurisdiction of the AO in initiating penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Penalty under Section 271(1)(c) for change in the method of valuation of closing stock:
The AO imposed a penalty under Section 271(1)(c) due to the change in the method of valuation of closing stock from the absorption costing method to the direct costing method. The Tribunal upheld the direct costing method applied by the assessee. The CIT(A) concluded that the change in the system of valuation of closing stock was a bona fide claim brought to the AO's notice by the assessee itself. Therefore, there was neither any concealment of income nor furnishing of inaccurate particulars of income by the assessee. The CIT(A) rightly concluded that the AO was not justified in imposing the impugned penalty under Section 271(1)(c) for the addition of Rs. 22,64,798 on account of the change in the method of valuation of closing stock.

2. Penalty under Section 271(1)(c) for deduction claimed on excise duty paid on closing stock:
The AO imposed a penalty for the deduction claimed on excise duty paid on the closing stock by the assessee. The assessee valued its closing stock of finished goods lying uncleared in its premises and deducted a sum of Rs. 63,69,269 on account of excise duty on the unsold stocks. This addition was confirmed by the Tribunal. However, the Special Bench of Delhi Tribunal later held that excise duty was not part of manufacturing cost and the change in valuation of closing stock by excluding the element of excise duty was proper. This decision was not available when the Tribunal decided the appeal for the assessment year 1983-84, but it was followed in subsequent years. Hence, the claim of the assessee was bona fide and did not call for any penalty under Section 271(1)(c). The CIT(A) rightly deleted the penalty imposed by the AO.

3. Penalty under Section 271(1)(c) for deduction claimed on surtax liability:
The AO imposed a penalty for the deduction claimed on surtax liability. The Supreme Court has held that the assessee cannot claim any deduction on account of surtax liability. However, the assessee claimed the deduction to keep its claim alive, pending the Supreme Court's decision. The assessee relied on favorable decisions from other authorities and filed appeals before the jurisdictional High Court. The deduction claimed by the assessee was bona fide and made under the bona fide belief that it was allowable. Therefore, the penalty under Section 271(1)(c) was not exigible, and the CIT(A) rightly deleted the penalty.

4. Jurisdiction of the AO in initiating penalty proceedings under Section 271(1)(c):
The jurisdiction to impose penalty flows from the recording of the satisfaction of the AO regarding concealment of income. In the case at hand, the AO did not record satisfaction as to whether the assessee concealed particulars of income or furnished inaccurate particulars of income. The AO only mentioned that penalty proceedings were being initiated separately at the end of the assessment orders. The AO did not specify the reason for considering the assessee to have concealed its income or furnished inaccurate particulars of its income. Therefore, the penalty proceedings initiated by the AO were illegal and invalid. The CIT(A) rightly cancelled the impugned penalties imposed by the AO for the assessment years 1983-84 and 1985-86.

Conclusion:
The CIT(A) upheld the deletion of penalties imposed by the AO under Section 271(1)(c) for the assessment years 1983-84 and 1985-86. The CIT(A) concluded that the claims made by the assessee were bona fide and did not call for any penalty. Additionally, the AO did not record the mandatory satisfaction before initiating penalty proceedings, rendering the penalties invalid. The Tribunal upheld the CIT(A)'s decision, and both appeals filed by the Revenue were dismissed.