2024 (6) TMI 409 - AT - Income Tax

Levy of penalty u/s 271(1)(c) - addition on account of addition of closing stock - allegation of lack of clear finding on concealment of income or furnishing inaccurate particulars - HELD THAT - CIT(A) confirmed the addition only on account of addition of closing stock. He thereafter goes on to levy penalty on account of addition confirmed by the CIT(A), but in the calculation of the penalty levied, which forms part of the order of the AO, the AO levies penalty on other addition made u/s 36(1)(iii) of the Act also, which addition as per his own admission, was deleted by the CIT(A) However, at para-5.3 of the same order, wherein he levied penalty at the rate of 100% of the tax sought to be evaded, he calculated concealed income at Rs. 34,60,005/- which includes the addition made under section 36(1)(iii) of the Act, which stood deleted by the CIT(A) -This clearly shows the total non-application of mind by the AO while levying the penalty. This fact of addition made by the AO in quantum proceedings and confirmed by the CIT(A) has been corroborated by the orders of the AO and the ld.CIT(A) in quantum proceedings, which were placed before us. Other glaring aspect which comes out from the assessment order is that both the AO and the CIT(A) have not given any reasons as to how the mere addition on account of valuation of closing stock made to the income of the assessee tantamounted to furnishing inaccurate particulars/concealment of the income related to the same. On going through the order of both the AO and the CIT(A), we are unable to understand what the addition exactly pertained to in relation to the valuation of the closing stock. The penalty order passed by the AO makes no mention either of the facts or the basis for the addition made. Therefore, there is no method for understanding as to how he arrived at the conclusion that the addition made on account of valuation of closing stock tantamounted to furnishing inaccurate particulars of income for the levy of penalty under section 271(1)(c) of the Act. Thus basis for arriving at the finding that the addition on account of valuation of closing stock tantamounted to furnishing inaccurate particulars of income for the levy of penalty under section 271(1)(c) of the Act, is completely absent both in the assessment order and even in the CIT(A) s order. It appears that both the authorities have proceeded on the assumption that the addition made to the income of the assessee automatically tantamount to concealment/furnishing of inaccurate particulars of income, which is contrary to the law, which has been settled in the case of CIT Vs. Reliance CIT Vs. Reliance Petro Products Pvt. Ltd. 2010 (3) TMI 80 - SUPREME COURT Therefore, we hold, the penalty is not sustainable. Even otherwise, despite the AO and the CIT(A) making no effort to bring out the facts of the case leading to the addition made on account of valuation of the closing stock, the same were gone into by us from the assessment order and the order of the ld.CIT(A) in quantum proceedings. Addition on account of valuation of closing stock is merely on account of difference in the basis of valuation of WIP adopted by the department and that adopted by the assessee. The assessee s justification for the method adopted by it, has not been countered or found fault in the same by the Revenue. We have noted that the assessee s explanation was that it had allocated actual cost, while the department s stand was that it ought to have allocated cost on estimate basis. The explanation of the assessee appears to be bona fide to us regarding the valuation of closing stock adopted by it. Therefore, in these facts and circumstances, merely because the addition on account of valuation of closing stock has been confirmed by the ld.CIT(A) the assessee cannot be said to have concealed or furnished inaccurate particulars of income - Decided in favour of assessee.

Summary

Issues:
Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961 for Assessment Year 2015-16 based on short valuation of closing stock.

Detailed Analysis:

1. Grounds Raised by the Assessee:
The appellant contested the penalty order under section 271(1)(c) passed by the Assessing Officer, arguing that a clear finding on concealment of income or furnishing inaccurate particulars was lacking. The appellant provided explanations regarding the valuation of closing stock and argued for tax-neutral additions due to an increase in stock value. The appellant's contentions were supported by the CIT (A) in the quantum appeal, emphasizing a bona fide explanation and challenging the justification for penalty imposition.

2. Application of Mind by Revenue Authorities:
The penalty was deemed unsustainable due to the lack of application of mind by both the Assessing Officer and the CIT (A). The penalty was levied without proper consideration of facts, as evidenced by discrepancies in the AO's penalty order calculations. The authorities mechanically confirmed the penalty without justifying how the valuation of closing stock led to concealment or furnishing of inaccurate particulars of income.

3. Basis for Penalty Imposition:
The AO and CIT (A) failed to provide reasons for linking the addition related to closing stock valuation to concealment or furnishing inaccurate particulars of income. The absence of a clear basis for the penalty under section 271(1)(c) indicated a lack of understanding or justification for the penalty imposition.

4. Merits of the Case:
Upon reviewing the quantum proceedings and explanations provided by the appellant, it was concluded that the difference in valuation methods for closing stock did not warrant penalty imposition. The appellant's method of cost allocation was deemed justifiable, and the Revenue's disagreement did not establish concealment or inaccuracies in income particulars.

5. Conclusion and Decision:
The penalty levied on two additions, one of which was already deleted by the CIT (A), was deemed unsustainable. The penalty amount was directed to be deleted, highlighting the failure of the Revenue authorities to establish a valid basis for penalty imposition. The appeal of the assessee was allowed, emphasizing the lack of factual or legal grounds for sustaining the penalty under section 271(1)(c) of the Act.