ORDER
R.V. Easwar, J.M.
1. This appeal by the Department is directed against the order passed by the CIT(A)-XXVII, Mumbai, on 26th March, 2003, by which he cancelled the penalty of Rs. 3,31,560 imposed on the assessee under Section 271(l)(c) of the IT Act.
2. The assessee was a lady engaged in the manufacture of school bags, the demand for which is at its peak in the months of April to August. The assessee was enjoying cash credit limit of Rs. 4,00,000 from the bank. For the year ending 31st March, 1997, which is the year under appeal, the stock of raw material was shown at Rs. 3,12,000 in the books of account. There was no stock of finished goods. However, in the stock statement sent to the bank, the assessee declared stock of Rs. 5,39,175 which consisted of raw material of Rs. 1,12,050 and finished goods of Rs. 4,27,125. While completing the assessment, the AO took note of the above and considered the amount of Rs. 4,27,125 as the assessee’s income. The assessee took a position before the AO that the stock figures given to the bank were inflated with the view to obtain maximum credit facilities and that the book figure was the correct stock figure.
The AO did not accept the explanation for the reasons given by him in the assessment order. The main reason given was that the assessee did not furnish the details of the stock despite opportunities given. The assessee carried the matter upto the Tribunal without success. The penalty proceedings were then initiated for concealment of income. In the course of the penalty proceedings, the assessee submitted various details relating to the stock of Rs. 3,12,000 as per her books. The AO, however, took the view that the details submitted during the penalty proceedings were fabricated and not reliable, especially in the absence of the books of account being produced. The AO also held that the assessee’s contention that it is a normal trade practice to submit inflated stock statement to the bank for availing of higher credit facility was not tenable because the bank normally takes care to get the goods insured in its favour, which means that the stock position submitted to the bank is checked by the bank staff and if the statement filed before them is found to be incorrect, they would have brought this to the notice of the assessee as well as bank immediately. He, therefore, took the view that the stock figure of Rs. 4,27,125 given in respect of the finished goods to the bank, reflected the correct stock position. Since this stock did not find a place in the books of account, he held that the assessee is guilty of concealment of income. Accordingly, he levied a penalty of Rs. 3,31,560 at 200 per cent of the tax sought to be evaded.
3. On appeal, the CIT(A) examined the matter in detail and held that it was highly probable that the assessee did furnish inflated stock figure to the bank since she enjoys a cash credit limit of Rs. 4,00,000, whereas the actual stock was only Rs. 3,12,000. He also noticed that in several judgments, including the judgment of the Hon’ble Bombay High Court in the case of CIT v. M. Bhuta & Co. , the explanation of the assessee that the normal trade practice is to inflate the figures of stock submitted to the bank has been accepted both for assessment and for penalty purposes. He also took the view that, the AO was not right in rejecting the details filed by the assessee in the course of penalty proceedings. He held that before rejecting the documentary evidence as false and fabricated, the AO should have conducted more enquiries instead of basing his finding on supposing that the stock is supposed to be insured and the bank staff normally checks them for any inflation. He also held that the assessee’s explanation was bona fide and, therefore, Expln. 1(B) below Section 271(l)(c) was not attracted to the case. Accordingly, he cancelled the penalty.
4. The Department is in appeal before the Tribunal and the learned Departmental Representative contended that the CIT(A) erred in cancelling the penalty. According to the learned Departmental Representative, the assessee did not produce any material before the AO in the course of the assessment proceedings that whatever materials were produced in the course of the penalty proceedings were not supported by books of account or other evidence, that the AO did in fact take note of the details but found that they were false and fabricated and that in these circumstances, Expln. 1(B) applied to the case. The assessee, according to him, was unable to substantiate her explanation as narrated above. It was further submitted that the onus is heavily on the assessee to show that the explanation is bona fide and this onus has not been discharged. It was submitted that in these circumstances, the AO rightly imposed the penalty.
5. On the other hand, the learned Counsel for the assessee submitted that the assessee did not receive any order for school bags after August, 1996, and that there was no sale after January, 1997. The normal trade practice is to inflate the stock figure given to the bank with a view to obtain the higher credit facilities. It was pointed out that in the present case though in the books stock of raw materials was Rs. 3,12,000, the assessee had shown raw materials of only Rs. 1,12,050 to the bank and it was only in the case of finished goods that she had shown Rs. 4,27,125 to the bank as against nil stock in the books. It was submitted that the finding of the AO in the penalty proceedings that the bank staff would have pointed out the inflation as they were regularly checking the stock is not correct because the stock statement as on 31st March, 1997, was given to the bank by the assessee only in October, 1997, and, therefore, the bank could not have got the stock verified in March itself, as noted by the AO. It was further submitted that the stock valuation was fully supported by the details given by the assessee in the course of the penalty proceedings (pp. 50-110 of the paper book) and that the AO had no justification to say that these details were false or fabricated. It was submitted with reference to Expln. 1(B) below Section 271(l)(c) that assessee’s explanation that it is a normal trade practice to inflate the stock given to the bank was a bona fide explanation since such an explanation has been accepted in several decisions of the High Courts. The standard of proof reguired to establish a negative fact is very high and is almost impossible to achieve and, therefore, it was not possible for the assessee to discharge such onus except to point out to the prevalent trade practice and the preponderance of the probabilities of the case. According to the learned Counsel for the assessee, in order to invoke Expln. 1(B) below to Section 271(l)(c), the AO has not only to say that the assessee was unable to substantiate his explanation, but he has further to say that the explanation was not made bona fide and that the assessee did not place all the facts material to the computation of the income before the AO. On the basis of these submissions, the learned Counsel for the assessee pleaded that the order of the CIT(A) should be confirmed.
6. On a careful consideration of the matter, I am of the view that the decision taken by the CIT(A) does not require any interference. The AO did not say that the assessee cannot furnish any details regarding stock in the course of the penalty proceedings. He has stated that the details are false and fabricated. These are very serious charges and merely because these details were not produced before the AO in the course of the assessment proceedings, it cannot be said that they were false or fabricated. The AO has not examined the details in an attempt to point out any defect or lacuna therein. The relevant details are at pp. 50-110 of the paper book and they contain the comparative chart of gross profit, quantitative particulars and valuation of the dosing stock as on 31st March, 1997, details of labour charges paid, details of purchase and sales, etc. No justification is given in the penalty order in support of the finding that these details were false or fabricated. In order that Expln. 103) can be invoked, it is necessary that following conditions are present :
1. The assessee is unable to substantiate the explanation;
2. The explanation is not bona fide; and
3. All the facts relating to the computation of the income were not furnished by the assessee.
In my opinion, all the facts relating to the computation of the stock as on 31st March, 1997, were furnished before the AO in the course of the penalty proceedings. The assessee has furnished an explanation for the difference in the stock shown in the books and the stock shown to the bank. The explanation is that the stock figure given to the bank was inflated because the cash credit facility was Rs. 4 lakhs whereas the actual stock was only Rs. 3,12,000, which means that the assessee would not be able to avail of the entire credit facility. This explanation is plausible explanation and reflects the trade practice generally adopted by businessmen, as has been referred to in the several authorities cited at p. 2 of the compilation of judgments filed before him. The assessee’s explanation cannot be said to be mala fide because there is no evidence to show that the bank staff had checked the stock figure furnished by the assessee at Rs. 5,39,175 and found the same to be false or incorrect. In fact, the assessment order itself records the fact that the stock statement as on 31st March, 1997, was given to the bank only in October, 1997, and this means that the bank staff could not have got it verified in the month of March itself. In my view, all the three conditions required for invoking Expln. 103) below to Section 271(l)(c) should be satisfied. None of them has been satisfied in the present case. In this view of the matter, I hold that the order of the CIT(A) cancelling the penalty imposed on the assessee requires no interference. The same is upheld and the appeal filed by the Department is dismissed.
7. In the result, the appeal is dismissed.