ORDER
Sunil Kumar Yadav, Judicial Member
1. This appeal is filed by the assessee against the order of the Commissioner (Appeals) confirming the penalty levied under Section 271(1)(c) of the Income Tax Act.
2. The brief facts borne out from the record in this regard are that the assessee-company has filed its return of income for assessment year 1998-99 declaring total income at Nil The assessment was made at the total income of Rs. 4,13,70,580. One of the additions was made for an amount of Rs. 4,22,96,966 which is crucial to the present penalty proceedings. This addition was confirmed by the Commissioner (Appeals) by holding that the assessee has departed from the well-accepted method of determining income of business for this year by way of claiming loss on account of valuation of work-in-progress. The assessee preferred an appeal before the Tribunal but the addition was confirmed. The assessee was a builder and was following completed project method of accounting. At that relevant point of time assessee was carrying out two different projects; one is a commercial project known as ‘Centre Point’ situated at S.V. Road, Santacruz (W), Mumbai and another residential project at 14th Road, Khar West, Mumbai. Besides following the completed project method of accounting, the assessee has been consistently valuing the work-in-progress at cost since the very beginning. During the assessment proceedings the Assessing Officer has examined the tax audit report and notes from accounts pertains to 1998-99. In the tax audit report column No. 2 regarding method of accounting employed, the auditors states as “Accrual basis. There is no change in method of accounting as employed in the preceding previous year”. However, in column No. 3, regarding the method of valuation of opening and closing stock in trade the tax auditor states, “At cost or market value whichever is lower”. The assessing officer observed that in the tax audit report pertains to earlier previous years, i.e., 1997-98, 1996-97 and 1995-96 the auditors, regarding the method of valuation of opening and closing stock in trade, have consistently stated “At cost”. It was also B mentioned in the notes by the auditor that due to change in method of valuation, profit has decreased by Rs. 4,22,96,966. In the report of the auditors to the shareholders, at Sr. No. 6, the auditors have, inter alia, mentioned “that the closing stock which was valued at cost in the preceding year has been valued at cost or market value whichever is lower. If the basis of valuation had not been changed, the closing stock and the profit for the year would have been higher by Rs. 4,22,96,966.” The assessing officer has further observed that the method of valuation of stock hitherto employed by the company was at “Cost”. For this year onwards the company has decided to value the stock at cost or net realizable value whichever is lower. The assessing officer, however, observed that during the previous year relevant to the assessment year 1998-99, the commercial project, i.e., Centre Point was completed and the assessee had earned a huge profit of Rs. 5,17,81,188 on part sale of the said project. So far as the residential project is concerned, it was still in the progress and was far from completion. It was completed only to the extent of 34 per cent by the end of the previous year under consideration. The assessing officer observed that since the assessee has been following the project completion method, it should have offered the profit of Rs. 5,17,81,188, which itself is a part of the commercial project, to tax. But the assessee for the obvious reasons did not do so. Rather he got the stock in trade work-in-progress relating to the residential project revalued at market value. Accordingly the value of work-in-progress was reduced from Rs. 10,83,96,966 to Rs. 6,61,00,000 and the loss of Rs. 4,22,96,966 arising on account of such revaluation was adjusted against the profit of the completed commercial project. This method of accounting was not acceptable to the revenue and he discarded the same and recomputed the profit resulting into addition of Rs. 4,22,96,966 which was later confirmed by the Tribunal. On this addition the assessing officer has initiated the penalty proceedings under Section 271(1)(c) of the Income Tax Act and after invoking Explanation 1 to Section 271(1)(c) the assessing officer imposed the penalty at the maximum, i.e., 300 per cent of tax evaded at Rs. 4,34,39,109. Against this penalty order assessee preferred an appeal before the Commissioner (Appeals) but did not find favour with him.
3. Now the assessee has preferred an appeal before the Tribunal with the submission that the assessee has made the full disclosure and has not concealed anything from the revenue authorities. The disallowance was made on account of a legal issue, which is subject-matter of litigation, and not on account of any fact that was concealed by the assessee from the revenue. In these circumstances it cannot be held that the assessee has ever concealed any income or filed inaccurate particulars. He further placed reliance upon the judgment of the Apex court in the case of Hindustan Steel Ltd. v. State of Orissa in which it has been held that “an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceedings and penalty not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or guilty of conduct, contumacious or dishonest, or acted in a conscious disregard to its obligation. Penalty will also not be imposed merely because it is lawful to do so. The assessee has raised the claim under the bona fide belief that the amount claimed as loss is allowable expenditure. He further placed reliance upon the judgment of the Burmah Shells Oil Storage & Distribution Co. of India Ltd. v. ITO. in support of his contention that rejection of legal plea raised by the assessee cannot give rise to concealment. He further placed reliance upon the judgment of the Apex court in the case of CIT v. Anwar Ali in which it has been held that merely because of explanation offered by the assessee in respect of a given item is rejected it does not amount to concealment of income. Similar view was further expressed by the Apex court in the case of CIT v. Khoday Eswarsa & Sons .
4. The learned Counsel for the assessee further contended that the assessee’s residential project which was under construction, suffered a huge loss on account of a slump in the market and the proposed buyers who have booked flats started claiming refunds. This project was completed in assessment year 2000-01. The loss suffered by it was also accepted by the assessing officer. The assessing officer has observed that only 34 per cent of the project was completed whereas the fact is otherwise. If the cost of land is included the project was completed at 82 per cent though the assessee has claimed it at 65 per cent. Before valuing this work-in-progress at the market rate the project under construction was got valued by the valuer and on his report the value of work-in-progress was reduced.
5. The learned Counsel for the assessee further contended that the assessee has not concealed any facts from the revenue nor did he furnish inaccurate particulars. He simply calculated work-in-progress after having the project valued by the valuer under the bona fide belief that the work-in-progress can be valued at the market rate by making necessary change in method of valuation for this year. The assessing officer has invoked Explanation 1 to Section 271(1)(c) but has not approved that the assessee has either failed to furnish an explanation or explanation furnished by it is false or the assessee is not able to substantiate it or failed to prove that such explanation is bona fide. Since the revenue cannot prove these ingredients which are necessary to invoke Explanation 1, penalty under Section 271(1)(c) cannot be levied. In support of this contention he placed reliance upon the following judgments:
(i) Rupam Mercantile Ltd, v. Dy. CIT (2004) 91 ITD 237 (Ahd.) (TM).
(ii) H.P. State Forest Corpn. Ltd. v. Dy. CIT (2005) 93 ITD 442 (Chd.).
(iii) Southern Gas Fittings (P) Ltd. v. Dy. CIT (2002) 80 ITD 202 (Chennai).
Mr. Y.P. Trivedi, Sr. Advocate for the assessee has also invited our attention to the fact that he has made the valuation of the closing stock on the basis of the opinion rendered by the Chartered Accountant/Tax Professionals. Our attention in this regard was invited to para 6 of the report of the auditors to the shareholders prepared by J.D. Pandya & Co., Chartered Accountants, in which he has stated that in their opinion the valuation of closing stock is fair and proper in accordance with the accepted accounting principles. These facts were also explained in the notes on accounts to the Profit & Loss Account. Before preparing the Balance Sheet for the impugned assessment year the assessee has also obtained the opinion from the Tax Consultant Mr. G.S. Sabins on this issue and he has advised the assessee that the assessee can claim the loss arising on account of fall in the value of work-in-progress against other income for the current year. He has also pointed out that the assessee was always able to prove that the market value of the stock is correctly adopted by it. Assessing Officer cannot legally challenge the method adopted by the assessee. The opinion given by the Tax Consultant is placed on record at page Nos. 28 – 32 of the compilation. The assessee has also taken a further opinion from P.D. Desai & Co. in this regard and they have advised him to claim the loss suffered in valuation of work-in-progress against the other income of the assessee. As such the assessee has claimed the loss in valuation of work-in-progress on the basis of the legal advise received from the Tax Consultants. The learned Counsel for the assessee has also placed reliance upon the order of the Tribunal in the case of Arts Module v. ITO (IT Appeal No. 9302 (Bom.) of 1992). The learned Counsel for the assessee has also invited our attention to the Accounting Standard VII according to which the change in accounting policy is permissible and provision for foreseeable loss can be made. Our attention was also invited to the Accounting Standard VII dealing with Recognition of Expected Losses, according to which, when it is probable that total contract cost will exceed total contract revenue, the expected loss should be recognized as an expense immediately. Since the assessee has revalued the work-in-progress and made a change in the valuation of stock on the basis of legal opinion its claim cannot be called to be mala fide and since it is raised under bona fide belief Explanation 1 to Section 271(1)(c) cannot be invoked.
6. The learned Counsel for the assessee further contended that before initiating the penalty proceedings the assessing officer has not recorded his satisfaction with regard to the concealment of income by the assessee or furnishing of inaccurate particulars or with regard to Explanation 1 to Section 271(1)(c). In the absence of any record of satisfaction, the penalty cannot be levied as repeatedly held by the various High Courts in the following judgments:
(i) CIT v. Ram Commercial Enterprises Ltd. (2000) 246 ITR 5681 (Delhi).
(ii) CIT v. Munish Iron Store (2003) 263 ITR 4842 (Punj. & Har.).
(iii) CIT v. Ganesh Prasad Badri Prasad & Co. .
(iv) CIT v. Super Metal Re-Rollers (P) Ltd. (2004) 265 ITR 82 (Delhi).
(v) CIT v. Dajibhai Kanjibhai (1991) 189 ITR 415 (Bom.).
7. The learned DR, on the other hand, besides placing reliance upon the orders of the lower authorities has invited our attention to the judgment of the Apex court in the case of CIT v. S.V. Angidi Chettiar and the judgment of the Allahabad High Court in the case of Shyam Biri Works (P) Ltd. v. CIT in support of his contention that satisfaction is not required to be recorded specially in the assessment order as action to initiate penalty itself is satisfaction of the assessing officer. The learned DR further contended that the assessee has changed the method of valuation only in this year to reduce the profit earned on the commercial project. In the succeeding years he reverted back to the old method of accounting. Assessee has been following the project completion method and under that method there is no requirement to revalue the cost of project prior to its completion and more so when the project is only 34 per cent complete. Accounting Standard VII does not provide for any adjustment of estimated loss against the profit of any other project. The foreseeable loss may be estimated on the basis of “total contract cost and revenue” of the same project. As such the estimation of loss of Khar Project adjusted against the Centre Point project is against the Accounting Standards. The learned DR also commented on the expert opinion and has stated that the expert opinion were not properly considered by the assessee before revaluing the work-in-progress. On the point of satisfaction it was contended that the order of the assessing officer contained detailed discussion of facts and position of law and reasons for penalty under Section 271(1)(c). With regard to Clause (b) of Explanation 1 to Section 271(1) it was contended that the onus is upon the assessee to prove his explanation to be bona fide and if he fails to do so penalty under Section 271(1)(c) is attracted.
8. Having heard the rival submissions and from a careful perusal of the record we find that undisputedly assessee had been following the project completion method and during the year under account its commercial project was completed and the residential project at Khar was in progress. If the cost of land is excluded from the project 34 per cent construction work was done. Assessee had changed the method of valuation of closing stock and revalued the work-in-progress. In earlier years work-in-progress was valued at cost but in the impugned assessment year it was valued at market rate resulting into loss in valuation of work-in-progress. The loss suffered in this residential project was adjusted to the profit earned in the commercial project on its complexion. Assessee has made declaration in B this regard by putting a note in the Balance Sheet and Profit & Loss Account and also in auditors’ report to the shareholders. Assessee has also given the reasons for change in method of valuation of the work-in-progress. A copy of auditors’ report to shareholders is also placed on record and its para 6 reads as under:
6. In our opinion the valuation of closing stock is fair and proper in accordance with normally accepted accounting principles. However there has been a change in the basis of valuation of closing stock as compared to preceding year. The closing stock which was valued at ‘Cost’ in the preceding year has been valued at ‘Cost or Market Value’ whichever is lower. If the basis of valuation had not been changed the closing stock and the profit for the year would have been higher by Rs. 42,296,966.
9. Likewise in Schedule D (Annexure to Balance Sheet) it has been mentioned that the work-in-progress was valued at cost or market value whichever is lower. In Schedule K, i.e., Notes on Accounts, a specific note in this regard was given by the assessee. For the sake of reference we extract the relevant note as under:
2. Change in accounting Policies:
The method of valuation of stock hitherto employed by the company was at “Cost”. From this year onwards the company has decided to value the stock at “Cost or net realisable value whichever is lower”. Had this change not been made the valuation of closing stock would have been higher by Rs.42,296,966 and the profit would have been higher by Rs. 42,296,966.
10. Having carefully examined this disclosure made by the assessee while filing the return of income we are of the view that though the assessee has changed the method of valuation of closing stock and claimed loss against the profit earned in the commercial project it cannot be held that the assessee is guilty of concealment or furnishing inaccurate particulars. Moreover, this is not a case for the revenue. They have levied the penalty after invoking Explanation 1 to Section 271(1)(c), the deeming provision, according to which where an assessee failed to offer an explanation or offers an explanation which is found to be false by the assessing officer or the assessee was not able to substantiate and fails to prove such explanation as bona fide, then the amount added or disallowed in computing total income shall for the purpose of Clause (c) of Sub-section (1) of Section 271 be deemed to represent the income in respect of which particulars have been concealed. In order to understand the scope of Explanation 1 we extract it as under:
Explanation 1:Where in respect of any f acts material to the computation of the total income of any person under this Act,
(A) Such person fails to offer an explanation or offers an explanation which is found by the assessing officer to be false, or
(B) Such person offers an explanation which he is not able to substantiate (and rails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him), then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purpose Clause (c) of this sub-section be deemed to represent the income in respect of which particulars have been concealed.
11. From bare reading of this provision, we are of the view that penalty under Section 271(1)(c) can be issued where the assessing officer is satisfied that the assessee has concealed particulars of his income or has furnished inaccurate particulars of such income. Explanation 1 to Section 271(1)(c) provides that amount added or disallowed in computing the total income of a person falling under Clause (A) or (B) of Explanation 1 shall, for the purpose of Section 271(1)(c), be deemed to represent the income in respect of which particulars has been concealed. Explanation 1 refers to two situations in which presumption of concealment created by Explanation 1 is available. The first situation is where the assessee, in respect of any facts material to the computation of his total income, fails to offer an explanation or offers an explanation which is found by the assessing officer or the CIT to be false. The second situation is where the assessee, in respect of any facts material to the computation of his total income, offers an explanation which he is not able to substantiate and also fails to prove that such explanation is bona fide and that all the facts relating to the computation of total income have been disclosed by him. It is true that the said explanation lays down the rule of evidence and it automatically applies to a case where a penalty proceeding under Section 271(1)(c) has been initiated. The consequences from the application of Explanation 1 follows as a matter of law. If the assessee fails to offer an explanation or his explanation is found to be false or the assessee is not able to substantiate the explanation, the presumption that he has concealed particulars of income, is bound to be drawn. The fact, however, remain that the presumption available under Explanation 1 cannot be drawn unless the case of the assessee fails under either of the clause, viz, Clause (A) or Clause (B).
12. During the course of hearing the learned Counsel for the assessee has invited our attention to the fact that against the order of the Tribunal in quantum appeal, assessee has preferred an appeal before the High Court and it was admitted after framing substantial question of law. Since the claim of the assessee is of legal in nature, penalty under Section 271(1)(c) cannot be initiated for rejection of the claim of the assessee. In this regard our attention was invited to the order of the Tribunal’s Third Member in the case of Rupam Mercantile Ltd (supra) in which it has been held that the plea or claim, which has been already admitted by the High Court, which give rise to substantial question of law, cannot be treated to be fabulous or mala fide as to attract levy of penalty under Section 271(1 )(c) of the Act.
13. In the case of H.P. State Forest Corpn. (supra) the Tribunal examined the scope of both the part of Explanation 1 and explained how far the explanation called to be bona fide. The Tribunal has concluded that the assessee, having valued its stock of timber lower than cost price on account of considerable deterioration on the basis of reports of the employees of concerned division, disclosed all the material facts in respect of such valuation before the authorities. Hence it cannot be said that explanation of the assessee was false simply because the assessment of deterioration was made on the basis of estimates. Since the Tribunal has examined the scope of Explanation 1 to Section 271(1)(c), we prefer to extract the same as under:
The deeming fiction contained in the Explanation that the amount added or disallowed, represented income in respect of which particulars have been concealed will apply as per (A) if not Explanation is given by the assessee or if an explanation has been given, the same is found to be false. Under this Explanation, the onus is on the assessee to show that there is no concealment or furnishing of inaccurate particulars of income. However, if the assessee has f urnished an explanation, which has not been f ound to false, Explanation 1(A) will not apply. Explanation 1(B) will be attracted if the assessee fumishes an explanation but the same is not substantiated. The presumption under this Explanation, however, is rebuttable and it can be rebutted if the assessee is able to establish that all the particulars relating to computation of income have been disclosed. Thus, the Explanation (1)(B) cease to operate if the assessee proves that the explanation f urnished is bona fide and all the particulars relating to computation of income have been disclosed. The assessee has given an explanation. Therefore, the deeming provision as per Clause (A) of Explanation 1 to the effect that assessee had f ailed to offer an explanation is inapplicable. The second part of the Clause (A) of the Explanation would be attracted if the explanation offered by the assessee is f ound to be false. Assessee had clearly indicated in trading and P&L A/c about the reduction in value. All the inf ormation regarding the claim was f urnished by the assessee before the revenue authorities. It is evident f rom records that the reports about the deterioration of old stocks had been received by the assessee from the concerned divisions during the financial year relevant to assessment year under appeal. The internal auditors had also advised the assessee to work out the realizable value in respect of the deteriorated stocks. The assessee, admittedly, was unable to carry out actual inspection of the entire deteriorated stocks spread over several kilornetres in radius.
The reduction in value has been adopted on estimate. If the assessee had been able to prepare the details of the stocks deteriorated at various places, perhaps the claim could not have been disallowed at the time of assessment. It was mainly because the assessee had resorted to estimate in determining the value of the deteriorated stocks that the claim was not accepted by the department. It is also not unknown that the Government corporations have to follow a set procedure for taking decisions. It is not surprising that the Board of the Directors of the corporation met only in the year 1990 to consider the report regarding the value to be adopted in respect of the deteriorated closing stocks. The fact remains that the decision taken by the Board of Directors who do not have any personal interests in the corporation was not found defective by the internal auditors or by statutory auditors. The statutory auditors had audited the accounts including the valuation in respect of the deteriorated stocks. The Comptroller and Auditor General of India had also approved the accounts of the assessee without any blinkers in respect of the valuation of closing stock. The certificates issued by the divisional managers in the year 1990 are based on the inspection reports and monthly reports received from subordinate staff and not at the instance of the management. Since the matter was to be considered by the Board in March, 1990, the divisional officers had been summoned to give the certificates so that the Board of Directors could be apprised and convinced about the adoption of lesser value for the deteriorated stocks. The conduct of the assessee is not contumacious in regard to disclosure of facts material for assessment.
The assessee had made a claim on the basis of a conscious decision by the Board of Directors. There was no objection by the statutory auditors or by the Comptroller General of India. Sinceasper well-established principles of law, the benefit of doubt is bound to be given to the assessee, on the basis of claims of the assessee and counter-claims of the revenue , it cannot be said that the explanation f urnished by the assessee has been proved to be false. The word “false” involves an element of deliberateness. Since the assessee had made a claim, which was open for scrutiny and assessment, the mere fact that the assessee had estimated the deterioration in stocks and had finally taken a decision only in the year 1990 does not justify the inference that the explanation of the assessee has been proved to be false. On the basis of the evidence on record and taking the totality of the facts and circumstances of this case into consideration, the explanation offered by the assessee cannot be considered to have been found to be false. In this view of the matter, Explanation 1(A) is not attracted. The assessee had disclosed all the material facts. The assessee also disclosed that the percentage of reduction was on estimate. Nothing was concealed in regard to the claim. If all disallowances attract penalty under Section 271(1)(c), then the taxpayers would not be free to make claims which are perceived to be genuine. The revenue has not established beyond doubt that the explanation offered by the assessee is false. (Paras 20,21, 26, 28 and 29)
The second part of the Explanation 1(B) to Section 271(1)(c) is attracted where an explanation is offered by the assessee but the same is not substantiated and the assessee f ails to prove that the explanation is bona fide and all the material facts had been disclosed. It has got to be borne in mind that the second part of the Explanation 1(B) does not get automatically attracted if the explanation offered by the assessee is not substantiated unless the assessee fails to prove that all the material facts have been disclosed. The assessee having disclosed all the material facts in regard to the claim made in respect of the valuation of the closing stock, the onus which is placed by the Explanation l(B)to Section 271(1)(c) upon the assessee stood discharged. Therefore, penalty under Section 271(1)(c)is not warranted.
14. The scope of Explanation 1 has been recently examined by this Bench of the Tribunal in the case of Asstt. CIT v. Pole Trading Co. (P) Ltd. (IT Appeal Nos. 5358 and 5683) in which it has been held that where the assessee has made disclosures, or relevant facts before the revenue authorities and it is from the disclosure made by the assessee the Assessing Officer has made out a case for disallowance/addition after rejecting the explanation of the assessee, unless the explanation proves to be false or mala fide, Explanation 1 cannot be invoked.
15. In the light of the above legal proposition if we examine the facts of the case we would find that the assessee has made full disclosure to the Revenue authorities with regard to its change in valuation of work-in-progress resulting into a substantial reduction of profit. The valuation was done on the basis of the legal advice of tax experts, whose opinion are also placed on record at page Nos. 28 to 40 of the compilation. The valuation was done on the basis of the valuation report prepared by the valuer. While doing so Accountancy Standard was also examined. For levying the penalty under Section 271(1)(c) of the Act by invoking Explanation 1 it is to be seen whether the assessee has raised the claim under a bona fide belief. We have carefully examined the expert opinion with regard to change in method of valuation of closing stock and we find that the assessee was advised to do so, if he succeeds in establishing that the market value of stock is really as adopted by it and for this purpose assessee has obtained the valuation report from the valuer. He has taken the opinion in this regard from two experts and both of them advised that the theory of underlying rule that the closing stock is to be valued at cost or market price whichever is lower and it is now generally accepted as an established rule of Commercial rule and Accountancy. Loss suffered in this process cannot be disregarded merely because it is based on estimates.
16. Since the assessee had made change in the method of valuation in this year on the basis of expert opinion, Accountancy Standard and valuation report it cannot be held that he was not having bona fide belief while raising the claim, though the claim may or may not sustain. At this stage we have to see whether assessee has bona fide belief for making a change in method of valuation. Taking into account all the relevant facts we are of the view that the assessee had the bona fide belief in making a change in the method of valuation of work-in-progress. Hence Explanation 1 to Section 271(1)(c) is not attracted.
17. With regard to another argument of the assessee that the Assessing Officer did not record the satisfaction on concealment of income or furnishing of inaccurate particulars by the assessee, we find on a careful perusal of the assessment order that though the assessing officer has discussed the claim of the assessee in this regard and recorded the statement of Shri S.G. Nadkarni, registered valuer in his assessment order, and has also given reasons in his order f or non-acceptance of the explanation of the assessee but it did not record any satisfaction regarding concealment of income or furnishing of inaccurate particulars or with regard to invocation Explanation 1 to Section 271(1) in the assessment order. Whereas according to Section 271(1)(c) the assessing officer must be satisfied that the assessee has concealed particulars of his income or furnished inaccurate particulars of such income. Now the question comes whether the recording of satisfaction in clear terms in the order is required or mere mentioning at the bottom of the assessment order that penalty to be initiated in sufficient to hold that the assessing officer has satisfaction before initiating penalty under Section 271(1)(c) of the Income Tax Act. The assessee has placed reliance upon the following judgments in support of his contention that recording of satisfaction should be properly worded in the assessment order. Mere writing a word that penalty to be initiated does not suffice to hold that assessing officer was satisfied with regard to concealment of income or furnishing of inaccurate particulars.
(i) Ram Commercial Enterprises Ltd. ‘s case (supra)
(ii) Super Metal Re-Rollers ‘s case (supra)
(iii) Munish Iron Stores case (supra)
(iv) Ganesh Prasad Badri Prasad & Co. ‘s case (supra)
(v) Dajibhai Kanjibhai’s case (supra)
(vi) D.M. Manasviv. CIT (1972) 86 ITR 557 (SC)
18. Since the assessing officer has not recorded his satisfaction in the assessment order the initiation of penalty is not valid.
19. The learned DR, on the other hand, has placed reliance on the judgment of the Apex court in the case of S.V. Angidi Chettiar (supra) in support of his contention that if it has been written at the bottom of the assessment order that penalty to be initiated, it amounts to valid satisfaction of the assessing officer. The learned DR has also commented on the judgment referred to by the assessee in this regard and submitted that the assessing officer has discussed the explanation furnished by the assessee in detail and the rejection of the explanation itself amounts to satisfaction of the assessing officer that it is a deemed concealment by furnishing of inaccurate particulars f or the purpose of Explanation 1 to Section 271(1)(c) of the Act.
20. Having heard the rival submissions and from a careful perusal of record we find that in the case of D. M. Manasvi (supra) and S.V. Angidi Chettiar’s case (supra) it has been held that satisfaction of the Assessing Officer is required for initiating penalty proceedings under Section 271(1)(c). But before feeling satisfied for initiating penalty proceedings, the assessing officer need not issue notice to the assessee and it is sufficient if, after being satisfied in the course of assessment proceedings that penalty provisions are attracted, Income Tax Officer issues consequential notice. There was no dispute with regard to the record of satisfaction of the assessing officer before initiating penalty proceedings.
21. The sole dispute before us is whether the satisfaction is to be properly recorded in clear terms or specifically worded in the assessment order or mere mentioning a word “penalty under Section 271(1)(c) be initiated” is sufficient to hold that the assessing officer has satisfaction in initiatingthe penalty proceedings under Section 271(1)(c) of the Act. This issue was examined by the Delhi High Court in the case of Ram Commercial Enterprises (supra). In the light of the judgment of the Apex court in the case of S.V. Angidi Chettiar (supra) their Lordship have categorically held that the assessing authority is to confirm its own opinion and record its satisfaction before initiating penalty proceedings. Merely because the penalty has been initiated it cannot be assumed that satisfaction was arrived at in the absence of the same being spelt out by the order of the assessing authorities. We also examined the judgment of the Apex court in the case of S.V. Angidi Chettiar (supra) in which the Lordship of the Apex court has categorically held that “The power to impose penalty under Section 28 depends upon the satisfaction of the Income Tax Officer in the course of proceedings under the Act; it cannot be exercised if he is not satisfied about the existence of conditions specified in Clause (d), (b) or (c) before the proceedings are concluded. The proceeding to levy penalty has, however, not to be commenced by the Income Tax Officer before the completion of the assessment proceedings by the Income Tax Officer. Satisfaction before conclusion of the proceeding under the Act, and not the issue of a notice or initiation of any step for imposing penalty is a condition for the exercise of the jurisdiction. There is no evidence on the record that the Income Tax Officer was nol; satisfied in the course of the assessment proceeding that the firm had concealed its income. The assessment order is dated 10-11-1951, and there is an endorsement at the foot of the assessment order by the Income Tax Officer that action under Section 28 had been taken for concealment of income indicating clearly that the Income Tax Officer was satisfied in the course of the assessment proceeding that the firm had concealed its income.”
22.The Punjab and Haryana High Court have also examined this issue and have expressed a similar view in the case of Munish Iron Store (supra) by holding that the assessing officer has finalized the assessment on the basis of revised return filed by the assessee without recording any satisfaction as to concealment of income. Hence the Tribunal rightly cancelled. the penalty under Section 271(1)(c) of the Act in the light of the judgment of the Apex court in the cases of D. M. Manasvi (supra) and Jain Bros. v. UOI . The Madhya Pradesh High Court has also expressed the same view in the case of Ganesh Prasad Badri Prasad & Co. (supra). Their Lordship had held that Explanation 1 to Section 271(1)(c) does not authorise the department just to issue notice for giving false explanation and to proceed against the assessee without prima facie recording that assessee is guilty of concealment. The Hon’ble Delhi High Court again examined the issue in the light of its own judgment in the case of Ram Commercial Enterprises Ltd. (supra) and the judgment of the Apex court in the case of S. V. Angidi Chettiar (supra) which has been solely relied by the revenue in the case of CIT v. Vikas Promoters (P.) Ltd. (2005) 277 ITR 3371 and made it more clear that satisfaction is required to be properly recorded in clear terms in the assessment order. Their Lordship have held that assessing officer simply gave direction to issue challan for penalty under Section 271(1)(c) without recording any satisfaction for levying penalty in the assessment order and this order ex facie suffers from vice of non-application of mind and therefore penalty was rightly set aside. In this judgment their Lordship have also recorded the exact wording of the assessment order. For the sake or reference the wordings which were used in the assessment order is extracted as “penalty proceedings under Section 271(1)(c) are initiated separately”. Their Lordship have categorically held that this narration is not sufficient. The satisfaction is not to be in the mind of the assessing officer but must be reflected from the record. Their Lordship have again echoed the view taken by the court in Ram Commercial Enterprises Ltd. (supra) of which the relevant observations are extracted hereunder:
A bare reading of the provisions of Section 271 and the law laid down by the Supreme court makes it clear that it is the assessing authority which has to form its own opinion and record its satisfaction before initiating the penalty proceedings. Merely because the penalty proceedings have been initiated, it cannot be assumed that such a satisfaction was arrived at in the absence of the same being spell out by the order of the assessing authority. Even at the risk of repetition we would like to state that the assessment order does not record the satisfaction as warranted by Section 271 for initiating the penalty proceedings.
As we have already held that the question suggested by the revenue does not arise as a question of law from the order of the Tribunal, no fault can be found with the Tribunal rejecting the department’s application under Section 256(1) of the Act.
23. Undisputedly, this issue was not examined recently by the jurisdictional High Court. The Lordships of Bombay High Court have, however, examined this issue way back in 1991 in the case of Dajibhai Kanjibhai (supra) and they were of the view that power to impose penalty depend upon the satisfaction of the Income Tax Officer in the course of proceedings under the Act. It cannot be exercised if he is not satisfied and has not recorded his satisfaction about the existence of conditions specified in Clauses (d), (b) and (c) before the proceedings are concluded. The relevant observation of the jurisdictional High Court in this regard are abstracted as under:
In our judgment, the legal position in this regard is now well-settled. In view of the Supreme Court’s decision in CIT v. S. V. Angidi Chettiar , power to impose penalty under Section 28 of the old Act corresponding to Section 271 of the new Act depends upon the satisfaction of the Income Tax Officer in the course of the proceedings under the Act, It cannot be exercised if he is not satisfied and has not recorded his satisfaction about the existence of the conditions specified in Clauses (a), (b) and (c) before the proceedings are concluded. There is no evidence on record to show that the Income Tax Officer, in this case, was satisfied in the course of the assessment proceedings. Therefore, we must hold that the penal provisions of Section 271(1)(c) were not attracted in this case.
24. The majority of the High Courts, including the jurisdictional High Court, have taken the view that there should be recording of satisfaction about the existence of the conditions which attracted penalty under Section 271(1)(c) before conclusion of the assessment proceedings and in the absence of record of satisfaction the penalty under Section 271(1)(c) cannot be levied.
25. Turning to the case in hand we find that in the entire body of the assessment order no satisfaction regarding any condition which attracts penalty under Section 271(1)(c) was recorded though the assessing officer has discussed the veracity of the explanation of the assessee. The assessing officer has simply put a footnote “issue penalty notice under Section 271(1)(c)”. This narration does not mean to be a satisfaction of the assessing officer about the existence of any of the conditions which attracts penalty under Section 271 (l)(c). In the case of S. V. Angidi Chettiar in which emphasis was made by the revenue , the footnote in the assessment order by the assessing officer state that action under Section 28 pari materia to Section 271(1)(c) had been taken for concealment of income and this footnote was held to be proper satisfaction by the Apex Court. But in this case this type of footnote was not there and the assessing officer has simply issued direction to issue notice under Section 271(1)(c) which cannot be called to be a record of proper satisfaction for initiating penalty proceedings. We are, therefore, of the considered view that penalty under Section 271(1)(c) cannot be levied in the absence of proper satisfaction of existence of any of the conditions which attract penalty. We, therefore, of the view that penalty in the instant case cannot be levied either for want of satisfaction or on account of Explanation 1 to Section 271(1)(c) of the Act. Hence we delete the same.
26. In the result, appeal of the assessee is allowed.