2018 (10) TMI 280 - AT - Income Tax

Penalty levied u/s 271(1)(c) - addition made on difference in closing stock - AO alleges that assessee has undervalued its closing stock - Held that - Assessee during the assessment proceedings has duly explained the difference in the quantity of closing stock as discussed above but the AO has not pointed out any defect/infirmity in the submission of the assessee. It is a fact that the penalty proceedings are different with the assessment proceedings. To levy the penalty, there has to be some deliberate act on the part of the assessee either for concealing of the income or furnishing the inaccurate particulars of income. It is an undisputed fact that the closing stock of one year becomes the opening stock of the subsequent year. Thus, it can be inferred that if the assessee has shown less amount of closing stock then the assessee will carry forward the same to the next year at lesser value which shows there will be no effect on the tax liability of the assessee except the fact that the tax liability of one year will shift to another year. We also note that the assessee cannot be benefited by showing less amount of closing stock as it will become opening stock of the subsequent year. Therefore we are of the view that the act of the assessee for showing less closing stock cannot be said as deliberate. Closing stock for the year under consideration was shown less as pointed out by the AO. Thus, the assessee has to bear more burden of tax in the year under consideration. If the assessee has not made any adjustment, then it will bear more burden of the tax. It is because the assessee in the year under consideration has declared the higher amount of closing stock, but in the subsequent year, the assessee has shown less amount of opening stock which will lead in the enhancement of the profit of the assessee. Thus, we can conclude that there cannot be a deliberate act on the part of the assessee in declaring less amount of closing stock. - Decided in favour of assessee.

Summary

Issues Involved:
1. Confirmation of penalty levied under Section 271(1)(c) of the Income Tax Act on the addition made due to the difference in closing stock.

Detailed Analysis:

Issue 1: Confirmation of Penalty under Section 271(1)(c)

The appeal concerns the confirmation of a penalty levied under Section 271(1)(c) of the Income Tax Act by the Commissioner of Income Tax (Appeals)-XX, Ahmedabad. The penalty was based on an addition of ?6,82,062/- due to an alleged undervaluation of closing stock by the assessee.

Facts and Background:
The assessee, a partnership firm engaged in the manufacturing and export of chemicals, reported its closing stock in its financial statements. The Assessing Officer (AO) identified discrepancies in the quantities reported for Cobalt Sulphate and Itenogen Blue CB, leading to an addition of ?6,82,062/- to the total income of the assessee. The AO initiated penalty proceedings under Section 271(1)(c) for concealment of income and furnishing inaccurate particulars.

Assessee's Argument:
The assessee contended that there was no actual difference in the closing stock as all material facts were provided during the assessment. The discrepancy was accepted to avoid litigation and maintain peace of mind. The assessee argued that there was no conscious concealment or furnishing of inaccurate particulars, thus no penalty should be imposed. The assessee relied on the judgment of the Hon'ble Gujarat High Court in National Textiles vs. CIT.

CIT(A)'s Findings:
The CIT(A) upheld the penalty, noting that the assessee had accepted the undervaluation during assessment proceedings. The CIT(A) referenced several judgments, including:
1. A.M. Shah & Co. vs. CIT (Gujarat High Court)
2. CIT vs. Zoom Communication P. Ltd. (Delhi High Court)
3. MAK Data Pvt. Ltd. vs. CIT (Hon’ble Apex Court)

Tribunal's Analysis:
The Tribunal examined whether the penalty under Section 271(1)(c) was justified. Key points considered included:
- The assessee had explained the stock difference during assessment, and the AO did not identify any defects in the explanation.
- The penalty proceedings are distinct from assessment proceedings, requiring proof of deliberate concealment or inaccurate particulars.
- The closing stock of one year becomes the opening stock of the next, suggesting no long-term tax benefit from undervaluation.
- The assessee's acceptance of the discrepancy was to avoid litigation and not an admission of deliberate concealment.

The Tribunal referenced the Gujarat High Court's judgment in National Textiles, emphasizing that penalty requires material evidence of income concealment and conscious intent.

Conclusion:
The Tribunal found that the assessee's actions did not constitute deliberate concealment or furnishing of inaccurate particulars. The penalty under Section 271(1)(c) was deemed inappropriate, and the appeal was allowed, reversing the orders of the lower authorities.

Result:
The appeal of the assessee was allowed, and the penalty levied under Section 271(1)(c) was deleted.