2016 (12) TMI 1241 - AT - Income Tax

Penalty levied u/s 271(1)(c) - undervaluation of value of closing stock of diamond by applying average rates - assessee applied rates based on value of grade/variety of diamonds in stock by applying cost or market value which ever is lower of the relevant grade/variety of diamond - Held that - Keeping in view the facts and circumstances of the case, average rate cannot be applied in the manner as applied by Revenue and no cogent adverse material has been brought on record by the Revenue to disprove the basis of valuation adopted by the assessee for valuing stock of diamond based on variety/grade of diamond. No enquiries or examinations have been conducted by the Revenue to value the closing stock of diamonds based on grades/variety of diamond , and merely applied the average rates knowing well that there are as many 6000-8000 grades/varieties of diamond wherein price of diamond substantially varies from one grade to the other, hence, the additions as made by the AO in quantum itself are not prima-facie not sustainable. In any case, the assessee did not file second appeal with the Tribunal with respect to quantum assessment and accepted the appellate order of learned CIT(A) partly allowing the appeal in quantum assessment, owing to the reason that the partner of the assessee Mr Sameer Jhaveri was not well and ultimately expired on 08-05-2009 and the wife of the said Mr. Sameer Jhaveri was not interested in persuing the business as well litigation with the Revenue. In any case , the closing stock of this assessment year would become the opening stock of the next year and ultimately it has got no effect on the taxes payable to Revenue and revenue effect is tax neutral as there is no loss to the Revenue. The penalty levied by the A.O. and as confirmed/sustained by learned CIT(A) is not sustainable in the eyes of law keeping in view peculiar facts and circumstances of the case and the bonafide explanations submitted by the assessee - Decided in favour of assessee

Issues Involved:
1. Confirmation of penalty under Section 271(1)(c) of the Income Tax Act, 1961.
2. Alleged undervaluation of closing stock of diamonds.
3. Maintenance of proper stock registers and records.
4. Revenue neutrality of the addition made to the closing stock.

Detailed Analysis:

1. Confirmation of Penalty under Section 271(1)(c) of the Income Tax Act, 1961:
The primary issue was whether the penalty of ?11,95,050 levied under Section 271(1)(c) for allegedly furnishing inaccurate particulars of income should be confirmed. The assessee argued that there was no concealment of income and that the additions made by the Assessing Officer (AO) were based on estimates and not on any concrete evidence of inaccurate particulars.

2. Alleged Undervaluation of Closing Stock of Diamonds:
The AO observed that the assessee had undervalued the closing stock of diamonds by ?22,76,454. The AO noted discrepancies in the valuation rates, where the closing stock was valued at ?3319.70 per carat, significantly lower than the average purchase rate of ?6936.18 per carat and the rate of diamonds issued for manufacturing at ?12128.50 per carat. The assessee contended that diamonds were purchased in mixed lots, and the lower quality diamonds were retained in stock, justifying the lower valuation of the closing stock.

3. Maintenance of Proper Stock Registers and Records:
The AO and the Commissioner of Income Tax (Appeals) [CIT(A)] criticized the assessee for not maintaining a detailed stock register that could substantiate the quality, quantity, rates, and values of the diamonds. The assessee argued that maintaining such detailed records was impractical due to the large number of diamond grades (6000-8000) and that the valuation was based on cost or market price, whichever was lower.

4. Revenue Neutrality of the Addition Made to the Closing Stock:
The assessee argued that any addition to the closing stock would become the opening stock of the next year, neutralizing the effect on profits and taxes. The CIT(A) rejected this argument, stating that each assessment year is distinct and separate, and taxes must be computed for each year independently.

Tribunal's Findings:

On Penalty under Section 271(1)(c):
The Tribunal found that the assessee had provided a plausible and bona fide explanation for the valuation of the closing stock. It was noted that the assessee had maintained sufficient records and had made full disclosures at the time of filing the return of income. The Tribunal concluded that the penalty under Section 271(1)(c) was not sustainable as the assessee had not concealed any particulars of income or furnished inaccurate particulars.

On Alleged Undervaluation of Closing Stock:
The Tribunal observed that the Revenue had not conducted any detailed inquiry or examination to disprove the assessee's method of valuation. The application of average rates by the AO was deemed inappropriate given the wide variation in diamond grades and values. The Tribunal held that the additions made by the AO were not sustainable.

On Maintenance of Proper Stock Registers:
The Tribunal accepted the assessee's explanation regarding the impracticality of maintaining detailed records for each diamond grade. It was noted that the assessee had produced relevant records and reconciled the quantities of diamonds dealt with.

On Revenue Neutrality:
The Tribunal agreed with the assessee's argument that the addition to the closing stock in one year would be neutralized in the next year, making the issue revenue-neutral. This further supported the Tribunal's decision to delete the penalty.

Conclusion:
The Tribunal allowed the appeal, deleting the penalty of ?11,95,050 levied under Section 271(1)(c) of the Income Tax Act, 1961. The Tribunal found that the assessee had provided a bona fide explanation for the valuation of the closing stock and had not concealed any particulars of income or furnished inaccurate particulars. The decision emphasized the importance of maintaining proper records and the impracticality of maintaining detailed records for items with numerous grades and variations.

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