2014 (11) TMI 280 - AT - Income Tax

Rejection of books of accounts u/s 145(3) Valuation of closing stock of paddy basmati Held that - The assessee had given detailed reasoning before AO for adopting the market rate at ₹ 1841/- per qtl. in respect of valuation of paddy basmati stock - Assessee had duly explained that it used to purchase Poosa basmati and pure basmati but the entire stock was entered into stock register without making any such distinction - The assessee had also pointed out that the market rate of Pusa Basmati was ₹ 1500/- whereas pure basmati was ₹ 2040/- per qtl. But assessee had adopted rate of ₹ 2133/- per qtl. in respect of pure basmati the AO has adopted the rate from the last bill - The assessee s contention that it is in respect of only one variety of pure basmati and, therefore, could not be taken as the basis for valuing the entire stock, which included the Pusa basmati - purchase bills clearly showed that the assessee was making purchases of Pusa basmati as well as pure basmati, the estimation made by assessee of market rate for valuation of stock, could not be faulted and invocation of penal provisions was not justified as the assessee s explanation could not be branded with any mala fide relying upon COMMISSIONER OF INCOME-TAX Versus RELIANCE PETROPRODUCTS PVT. LTD. 2010 (3) TMI 80 - SUPREME COURT the order of the CIT(A) is set aside. Confirmation of penalty u/s 271(1)(c) - Genuineness of assessee s explanation - Held that - The bill is dated 23-9-2006 and that is also one of the reasons given by the AO for making disallowance, observing that GR is pre-dated - This cannot be a basis for arriving at any adverse conclusion - Thus, there is overwhelming evidence to come to the conclusion that the supply to the assessee was made on 23-9-2006 - it cannot be lost sight of that the goods were supplied from Delhi to Karnal, which is not very far so as to take a period of one month for delivery of goods - on account of non-furnishing of evidence of installation of transformer, a vie could be taken against the assessee in assessment proceedings but when it comes to levy of penalty, there has to be a concrete evidence on record, establishing that assessee made a false claim, to saddle the assessee with penalty, demonstrating that the explanation furnished by the assessee was false thus, the order of the CIT(A) levying penalty u/s 271(1)(c) is to be set aside Decided in favour of assessee.

Summary

Issues Involved:
1. Penalty for alleged under-valuation of closing stock of paddy basmati.
2. Penalty for alleged excess claim of depreciation.

Issue-wise Detailed Analysis:

1. Penalty for Alleged Under-valuation of Closing Stock of Paddy Basmati:
The assessee, engaged in milling paddy and trading/exporting rice, declared a gross profit of Rs. 4,43,57,855 on sales of Rs. 18,22,69,316 at a G.P. rate of 24.34%. The assessing officer (AO) noted a discrepancy in the valuation of the closing stock of paddy basmati, valued by the assessee at Rs. 1841 per quintal. The AO found that the assessee had purchased paddy basmati at Rs. 2138 per quintal from Panna Lal Rakesh Kumar on 30-3-2007 and thus adopted this rate for valuation, resulting in an addition of Rs. 40,38,867.

The assessee argued that it purchased various types of paddy basmati, including Pusa Basmati and pure basmati, and valued the closing stock based on market prices. The AO rejected this explanation due to the absence of separate accounts for different types of basmati and invoked section 145(3) to reject the books of account.

The penalty proceedings were initiated under section 271(1)(c), and the CIT(A) confirmed the penalty. However, the Tribunal found that the assessee had provided a detailed and bona fide explanation for the valuation of the closing stock. The Tribunal relied on the Supreme Court's decision in Reliance Petro Products (322 ITR 150), which held that making an incorrect claim in law does not amount to furnishing inaccurate particulars of income. The Tribunal concluded that the penalty was not justified as the assessee's explanation was not mala fide and set aside the order of the CIT(A).

2. Penalty for Alleged Excess Claim of Depreciation:
The AO disallowed 50% of the depreciation claimed by the assessee on a new transformer, noting discrepancies in the documentation. The bill for the transformer was dated 23-9-2006, but the GR was dated 22-9-2006, and there was an alleged alteration in the date on Form ST-38 Inward from 23-10-2006 to 23-9-2006. The AO concluded that the assessee failed to prove the transformer was installed and put to use before 30-9-2006, resulting in a disallowance of Rs. 60,000.

The Tribunal found that the evidence, including the GR and ST-38 Inward form, supported the assessee's claim that the transformer was received on 23-9-2006. The Tribunal noted that the distance between Delhi and Karnal was not significant enough to justify a one-month delivery period. The Tribunal emphasized that while the AO could take a view against the assessee in assessment proceedings, concrete evidence was required to levy a penalty. The Tribunal concluded that the assessee's explanation was not false and set aside the CIT(A)'s order confirming the penalty.

Conclusion:
The Tribunal canceled the penalty levied under section 271(1)(c) for both the alleged under-valuation of closing stock and the alleged excess claim of depreciation. The assessee's appeal was allowed, and the order was pronounced in open court on 3.9.2014.