ORDER
B.L. Chhibber, A.M.
February, 2002
1. The only grievance projected in this appeal by the Revenue is that the learned CIT(A) is not justified in deleting the penalty of Rs. 2,19,240 levied by the AO under Section 271(1)(c) of the IT Act, 1961.
2. There was a survey under Section 133A on the premises of the assessee-firm and its two sister concerns, viz., M/s Kunden Fabrics and M/s Kunden Saree Shoppee on 4th Oct., 1988. In the course of this action, the survey party found that there was excess stock and they computed the value of such stock by applying a GP rate of 20 per cent at Rs. 3,18,402. At that point of time, the firm agreed for the addition of Rs. 3,18,402 on account of excess stock computed by the survey party at Rs. 3,18,402. However, at the time of filing the return, this addition was not made to the declared income. In the course of assessment proceedings, the assessee offered this amount for addition. The assessee challenged the addition before the CIT(A) who vide her order dt. 18th Feb., 1993, reduced the addition by Rs. 40,000 and sustained an addition of Rs. 2,78,402. The AO initiated penalty proceedings under Section 271(1)(c) and after giving an opportunity of being heard to the assessee levied a penalty of Rs. 2,19,240 which is equal to 150 per cent of the tax sought to be evaded.
3. The assessee appealed to the learned CIT(A) and advanced detailed arguments which are summarised as follows :
(1) The survey party had inventorised the huge stock of three different firms in some 5 to 6 hours; actually it takes 3 to 4 days to count the physical stock of various firms and, therefore, there is every possibility of omission or commission on the part of the survey party.
(2) The values had been stated by the salesmen of the three firms and they were not knowing the cost price of each saree and told the overvalued prices of most of the items.
(3) There were three more sister concerns doing the same business in the same premises. The stock as a whole was counted and the AO had not considered the shortage of stock found in the other concern i.e., M/s Kunden Fabrics.
(4) While valuing the alleged excess stock, the AO applied a GP rate of about 18 per cent whereas the actual rate of profit is 20 per cent.
(5) The survey party had to go to Inter-Department Table Tennis & other sports tournaments on 4th Oct., 1988, and, therefore, finished the counting of physical stock of various firms hurriedly and in haste,
4. After considering the arguments of the assessee, the learned CIT(A) observed that four sister concerns were doing business from the same premises and considering the extent of business of these concerns, the stock held by these firms might have been in bulk quantities and hence, it is quite possible that some mistakes might have occurred in recording the value of stock, but that did not mean that the assessee-firm wanted to conceal its income or furnish inaccurate particulars thereof. Further, the assessee had stated that the stock was valued on the basis of rates told by the salesmen whereas the stock should have been valued by adopting the cost price/purchase price and this aspect also resulted in valuation of stock at a higher figure. The CIT(A) deleted the impugned penalty further observing as under :
“It is also seen that the addition was agreed upon just to. buy peace of mind and also under the bona fide belief that no penalty under Section 271(1)(c) would be levied. Thus, considering the totality of the facts and circumstances of the case, I feel the AO has failed to establish any concealment nor could the AO prove that the appellant has furnished any inaccurate particulars of its income. Thus, taking into account the appellant’s submission, the case laws cited and also the decision of the Supreme Court in the case of Sir Shadilal Sugar & General Mills Ltd. v. CIT (1987) 168 ITR 705 (SC), I feel the penalty levied under Section 271(1)(c) deserves to be cancelled and the same is hereby cancelled.”
5. Shri Shishir Agarwal, the learned Departmental Representative, submitted that excess stock was found during the course of survey and though the assessee agreed to surrender this excess stock in the return of income, but the assessee did not do so and hence it cannot be said that it was an agreed addition and accordingly the judgment of the Hon’ble Supreme Court in the case of Sir Shadilal Sugar & General Mills Ltd. and Anr. v. CIT (1987) 168 ITR 705 (SC) will not apply to the facts of the present case. He relied upon the judgment of the Kerala High Court in the case of CIT v. K.P. Madhusudanan (2000) 246 ITR 218 (Ker) wherein the Hon’ble Kerala High Court has explained Sir Shadilal’s case (supra) and submitted that penalty was clearly leviable. He placed reliance on the decision of Hon’ble Bombay High Court in the case of Western Automobiles (India) v. CIT (1978) 112 ITR 1048 (Bom), in Krishna Kumari Chamanlal and Anr. v. CIT and Anr. (1996) 217 ITR 645 (Bom) and CIT v. D.K.B. & Co.
6. Shri S.N. Doshi, the learned counsel for the assessee, submitted that though the difference in stock was not agreeable to the assessee, Still for the purpose of avoiding litigation and for buying peace of mind the assessee declared this difference. However, it is true that at the time of filing return, this addition was not made. But that was a mistake and the same was rectified because during the course of assessment proceedings, the assessee offered this amount for addition. He further submitted that the survey party took just 5 hours for inventorising the stock as against nearly 4 days needed for taking the stock and that the stock difference is on account of estimation of value of stock and estimation of percentage of gross profit. He drew our attention to the details of stock position found as on 4th Oct., 1988, in the cases of the three firms which is as under :
Name
Shortage of stock
Excess of stock
Declaration/ additions
made
Kunden Silk
Nil
2,78,402
2,78,402
Kunden Fabrics
3,16,041
Nil
3,16,041
Kunden Saree Shoppee
3,73,315
Nil
5,00,000
6,89,356
2,78,402
10,94,443
He submitted that in fact there is shortage of stock of Rs. 6,89,356 (-) Rs. 2,78,402 = Rs. 4,10,954 and in respect of all the three firms, the assessee had made a declaration of Rs. 10,94,443. Despite this position, the assessee agreed for the addition. Therefore, merely agreeing for addition does not constitute concealed income. In support of his contention, he relied upon the decision of the Hon’ble Bombay High Court in D.M. Dahanukar v. CIT (1967) 65 ITR 280 (Bom). He submitted that the assessee never admitted that the excess stock was its concealed income and the assessee has only taken the benefit of capitalisation. He also placed reliance on the decisions in CIT v. Bhimji Bhanjee & Co. (1984) 146 ITR 145 (Bom) and CIT v. Kiran & Co. (1996) 217 ITR 326 (Bom).
7. We have considered the rival submissions and perused the facts on record. As is clear from the facts of the case, survey was conducted on the assessee and its two sister concerns situated in the same premises on 4th Oct., 1988. During the course of survey, difference was calculated by applying a GP rate of 18.21 per cent while the assessee submitted that the normal GP was 20 per cent. The assessee appealed to the CIT(A) who allowed a relief of Rs. 40,000 and that shows that the addition was made by the AO. purely on estimation. As pointed out, there are three different concerns carrying on same business in the same premises and from the chart reproduced in para 6 supra, it is noted that at the time of survey while taking stock of these concerns, goods got mixed up as a result of which overall shortage of stock was found at Rs. 4,10,954 against which Kundan Saree Shoppee declared Rs. 5 lakhs which covers this overall shortage of Rs. 4,10,954. Despite this position, the assessee agreed for an addition, but merely agreeing for addition does not constitute concealed income as held by the Hon’ble Bombay High Court in the case of D.M. Dahanukar (supra). In fact, the entire addition is based on estimate by applying GP and while such an addition may be justified [however, the CIT(A) has deleted an addition of Rs. 40,000 against which Revenue is not in appeal] in quantum assessment, it does not constitute concealed income of the assessee and accordingly, in our opinion, penalty is not exigible in view of the judgments of the Hon’ble Bombay High Court in Bhimji Bhanjee & Co. (supra) and Kiran & Co. (supra). Accordingly, we agree with the findings of the CIT(A) and decline to interfere.
8. In the result, the appeal is dismissed.
U.B.S. Bedi, J.M.
25th Feb., 2002
9. I have had an occasion to go through the proposed order of the learned AM Despite my best efforts and persuasions to myself, I have not been able to agree with either findings or the conclusion with respect to confirmation of deletion of the penalty of Rs. 2,19,240 levied by the AO under Section 271(1)(c) of the IT Act, 1961.
10. The Department has challenged the deletion of penalty of Rs. 2,19,240 by the learned CIT(A) imposed by the AO under Section 271(1)(c). There was a survey under Section 133A on the premises of the assessee-firm and its two sister concerns, viz., M/s Kunden Fabrics and M/s Kunden Saree Shoppee on 4th Oct., 1988. In the course of this action, the survey party found that there was excess stock and they computed the value of such stock at Rs. 3,18,402 and at that point of time, the firm agreed for the addition of Rs. 3,18,402 on account of excess stock computed by the survey party at Rs. 3,18,402 on the basis of valuation given by assessee at the time of survey. However, while filing the return of income, this addition was not made in the income declared by the assessee. However, in the course of assessment proceedings, the assessee offered this amount of addition and the AO noted at pp. 3 and 4 of his order as under:
“There was a survey under Section 133A of the Act, in the business premises on 4th Oct., 1988, when the inventory of the stock was found in assessee’s business premises was taken and the tentative trading account as on the date of survey was drawn. After making certain corrections as pointed out by the assessee under this office letter dt. 14th Feb., 1989, an excess stock of Rs. 3,86,417 as worked out in the letter dt. 14th Feb., 1989, was intimated to the assessee for addition for the asst. yr. 1988-89. During the course of the assessment proceedings for the asst. yr. 1988-89, however, the assessee took the stand that since the survey took place only on 4th Oct., 1988, the discrepancy in stock is relatable to the asst. yr. 1989-90 and not to asst. yr, 1988-89. The said discrepancy is, as such, considered during this year i.e., asst. yr. 1989-90. It is in this behalf noticed that the assessee has not shown the addition on account of the discrepancy found during the said survey in its return of income. This position is accepted by the assessee and its representative vide the order sheet entry dt. 17th March, 1992. As mentioned earlier the position of the excess stock found during the survey of Rs. 3,86,417 was communicated to the assesses under this office letter dt. 14th Feb., 1989, referred to earlier. In this connection, it was argued on behalf of the assessee that while working out the excess stock of Rs. 3,86,417, as per this office letter dt, 14th Feb., 1989, the rate of GP adopted was at 16.75 per cent. The assessee under its letter dt. 3rd Nov., 1988, however, has requested to take the GP at 20 per cent, due to good sales during this year and on that basis, the stock difference at Rs. 1,79,159, as mentioned in the assessee’s letter dt, 3rd Nov., 1988, During the course of the assessment proceedings, it was further argued by the assessee’s representative that at least the GP rate be taken, for the purposes of stock difference on the date of survey, at 18.21 per cent, which is the GP declared by the assessee in its return of income; as the assessee done so good sales and so on his own has shown the GP of 18.21 per cent in the return and the stock difference arrived at accordingly.
The assessee’s argument in this behalf is considered. In my opinion, considering that the assessee has shown the GP of 18.21 per cent this year, the GP percentage at 18.21 per cent can be taken now, as against the 16.75 per cent considered at the time of survey and also against the assessee’s request to take it at 20 per cent as mentioned earlier. Thus, by taking the GP rate at 18.21 per cent as shown by the assessee the revised position based on this office letter dt. 14th Feb., 1989, comes as under:
Stock as per books
Stock as inventorised
Opening stock
14,01,660
Total as per the
original inv.
17,13,003
Purchases
22,83,720
Less : Mistake in
calculation
82,735
Carriage inward
20.047
16,30,068
Packing expenses
15,423
GP at 18.21 % on Sales of 39,03,385
6,01,546
Less : GP at
18.21 % on above
2,96,835
43,22,416
Sales as per inventory
13,33,233
Less : sales
33,03,585
Less : Stock as per
books
10,14,831
10,14,831
3,18,402
Thus, even if we adopt the GP rate of 18.21 per cent as shown by the assessee there comes the difference on account of excess stock as on the date of survey of Rs. 3,18,402, which the assessee has not shown in the return, as admitted by it. This difference of Rs. 3,18,402 is accordingly liable for inclusion in the assessee’s income, since this income is not shown, in the return, penalty proceedings under Section 271(1)(c) of the Act, are separately initiated.”
11. However, with respect to the AO’s order the assessee challenged the addition before the learned CIT(A) who vide order dt. 18th Feb., 1993, reduced the addition by Rs. 40,000 by holding this to be belonging to Kunden Fabric and sustained the addition of Rs. 2,78,402. The AO initiated the penalty proceedings under Section 271(1)(c) and after giving due notice to the assessee and considering his reply, levied penalty of Rs. 2,19,240 being 150 per cent of the tax sought to be evaded with respect to excess stock found. The assessee challenged the action of the AO in appeal and the learned CIT(A) vide order dt. 5th April, 1994, relying upon the decision of the Hon’ble Supreme Court in the case of Sir Shadilal Sugar & General Mills Ltd. and Anr. v. CIT (1987) 168 ITR 705 (SC), cancelled such penalty, against which the Revenue has come up in appeal.
12. The learned Departmental Representative, while relying upon the basis and reasoning as given by the AO has further pleaded that the excess stock was found during the course of survey and as the assessee had agreed to surrender this excess stock in the return of income but did not do so at the time of filing of the return and hence it cannot be said that the assessee either acted bona fidely or voluntarily and has agreed for the addition on account of excess stock found and admitted by the assessee at the time of survey or thereafter. Accordingly, the judgment of the Hon’ble Supreme Court in the case of Sir Shadilal Sugar and General Mills Ltd. v. CIT (supra) will not apply to the facts of the present case. Moreover, said judgment has been held to be no good law in recent judgment of the Hon’ble Supreme Court by larger Bench in the case of K.P. Madhusudanan v. CIT (2001) 251 ITR 99 (SC) whereby Kerala High Court’s decision pronounced earlier has been upheld and pleaded for vacating the order of the learned CIT(A). Further reliance was placed on the decisions of the Bombay High Court in the case of Western Automobilies (India) v. CIT (1978) 112 ITR 1048 (Bom), in Krishna Kumari Chamanlal and Anr. v. CIT and Anr. (1996) 217 ITR 645 (Bom) and CIT v. D.K.B. & Co. It was thus emphasized that it is a clear case of concealment and penalty is exigible. Therefore, the learned CIT(A) was unjustified in deleting the penalty. It was, therefore, urged for restoration of the order of the AO imposing penalty.
13. The learned counsel for the assessee submitted that though the difference in stock was not agreeable to the assessee, still for the purpose of avoiding litigation and for buying peace of mind, the assessee declared this difference. However, it is true that at the time of filing return, this addition was not made. But that was a mistake and the same was rectified because during the course of assessment proceedings, the assessee offered this amount for addition. He further submitted that the survey party took just 5 hours for inventorising the stock as against nearly 4 days needed for taking the stock and that the stock difference is on account of estimation of value of stock and estimation of percentage of gross profit. He drew the attention of the Bench to the details of stock position found as on 4th Oct., 1988, in the cases of the three firms which is as under :
Name
Shortage of stock
Excess of
stock
Declaration/ additions
made
Kunden Silk
Nil
2,78,402
2,78,402
Kunden Fabrics
3,16,041
Nil
3,16,041
Kunden Saree Shoppee
3,74,315
Nil
5,00,000
6,89,356
2,78,402
10,94,443
He submitted that in fact there is shortage of stock of Rs. 6,89,356 (-)Rs. 2,78,402 (=) Rs. 4,10,954 and in respect of all the three firms the assessee had made a declaration of Rs. 10,94,443. Despite this position, the assessee agreed for the addition. Therefore, merely agreeing for addition does not constitute concealed income. In support of his contention, he relied upon the decisions of the Hon’ble Bombay High Court in D.M. Dahanukar v. CIT (1967) 65 ITR 280 (Bom). He submitted that the assessee never admitted that the excess stock was its concealed income and the assessee has only taken the benefit of capitalisation. He also placed reliance on the decisions in CIT v. Bhimji Bhanjee & Co. (1984) 146 ITR 145 (Bom) and CJT v. Kiran & Co. (1996) 217 ITR 326 (Bom).
14. I have considered the rival submissions, gone through the orders of the authorities below as well as record and the case law cited. It is undisputed fact that the assessee in this case is found to have excess stock recorded in the books of accounts which was duly admitted by the assessee at the time of survey, for which the ultimate addition to the extent of Rs. 2,78,402 has been upheld after giving all possible and allowable relief to the assessee in quantum appeal. The basis for working out the excess stock is the value of goods as conveyed by the assessee at the time of survey and the gross profit of 18.21 per cent declared by the assessee and accepted by the AO in the assessment proceedings for the year under consideration. Despite having strongly resisted the inclusion of income on account of excess stock found and valued in the income for the asst. yr. 1988-89, on the ground that the survey in this case has been conducted on 4th Oct., 1988, and this date falls in the asst. yrs. 1989-90 and not in 1988-89, so the addition in this respect was not made in the asst. yr. 1988-89 but the assessee did not include/disclose such income in the return filed for asst. yr. 1989-90. Hence, it cannot lead to the conclusion that there was no intention on the part of the assessee to conceal its income when the return was filed and as such the assessee cannot escape from levy of penalty. To have excess stock than recorded in the books of accounts cannot be said to be without the knowledge of the assessee and an intention to conceal the same is very much there when the same was agreed but was omitted to be disclosed in the return of the income. Had there been no scrutiny of the case, the assessee would not have come forward to disclose and include the income involved in the acquisition of the excess stock. As per decided cases, the penalty of concealment is exigible even on estimated income and a reference in this regard can usefully be made to the latest decision of the Hon’ble Supreme Court in the case of B.A. Balasubramaniam & Bros. Co. v. CIT.
15. Therefore, in view of facts and circumstances, and in the light of various Courts’ decision, as cited by the learned Departmental Representative including that of the Hon’ble Supreme Court cited supra, I am of the considered opinion that on the facts of the present case, the penalty under Section 271(1)(c) is clearly exigible and the AO is very much justified in imposing the same and the learned CIT(A) is not justified at all in deleting such penalty. Therefore, while accepting the plea of the Revenue, I set aside the order of the learned CIT(A) and restore that of the AO so far as imposition of the penalty is concerned. As regards quantum of penalty at 150 per cent is concerned, I find the same is on higher side. So, considering the facts and circumstances of the case and while upholding the imposition of penalty, I restrict the quantum of penalty to 100 per cent instead of 150 per cent imposed by the AO. So far as reliance of assessee’s counsel on case law as mentioned in earlier part of the order is concerned, the same is distinguishable and not found to be applicable to the facts of the present case, as such, is of no help to the assessee.
16. As a result, the appeal of the Revenue gets partly accepted.
REFERENCE UNDER Section 255(4) OF IT ACT, 1961
B.L. Chhibber, A.M.
5th March, 2002
1. As there is a difference of opinion between the AM and the JM, the matter is being referred to the President of the Tribunal with a request that the following question may be referred to a Third Member or to pass such orders as the President may desire :
“Whether, on the facts and in the circumstances of the case, the CIT(A) is justified in deleting the penalty levied under Section 271(1)(c) of the IT Act, 1961 ?”
M.K. Chaturvedi, Vice-President (as Third Member)
7th March, 2003
1. This appeal came before me as a Third Member to express my opinion on the following question :
“Whether, on the facts and circumstances of the case, the CIT(A) is justified in deleting the penalty levied under Section 271(1)(c) of the IT Act, 1961 ?”
2. I have heard the rival submissions in the light of material placed before me and precedents relied upon. On 4th Oct., 1988, there was a survey action under Section 133A of the IT Act, 1961 (hereinafter called the Act), at the premises of the assessee-firm and its two sister concerns, viz., M/s Kunden Fabrics and M/s Kunden Saree Shoppee. In the course of this action, the survey party found that there was excess stock.
3. Vide letter dt. 3rd Nov., 1988, the assessee submitted before the AO that as per the calculation of the Department the actual stock in the shop was valued at Rs. 14,26,076. As such, according to this valuation, the excess stock was Rs. 3,19,076. The assessee objected this valuation. It was said that this valuation was crept with the following discrepancies in the calculation :
(i) There was error in calculation to the tune of Rs. 82,935.
(ii) The stock belonging to M/s Kunden Fabrics of Rs. 76,000 was kept in the air-conditioned room along with the stock of the assessee. This was counted by mistake.
(iii) The stock figure of Rs. 14,26,076 was ascertained by accounting for estimated gross profit at 16.75 per cent as per last year. According to the assessee, the same was good in the relevant year. The margin of profit increased to about 20 per cent.
4. It was stated that the mistake in calculation may be corrected. The stock as counted at the time of survey should be reduced by Rs. 1,68,935, so the actual stock should be Rs. 12,57,141. The trading stock came to Rs. 10,77,982. Therefore, according to the assessee, the excess stock was to the tune of Rs. 1,79,159 only.
5. During the course of assessment proceedings it was further argued by the assessee’s representative that at least the GP rate be taken for the purposes of stock difference on the date of survey, at 18.21 per cent. This rate of GP was declared by the assessee in its return of income. AO considered this argument. Since this year the assessee has reflected GP of 18.21 per cent, AO accepted that rate as against the 16.75 per cent considered at the time of survey. After considering the GP rate at 18.21 per cent, the excess stock came to Rs. 3,18,402. AO made the addition of this amount in the return.
6. Being aggrieved of this addition, the assessee preferred appeal there against before the CIT(A). The CIT(A) held that the AO has accepted the calculation mistake to the extent of Rs. 82,935. As far as stock worth Rs. 76|000 belonging to the sister concern, AO has not accepted the assessee’s contention on the ground that in the case of M/s Kunden Fabrics this contention was not accepted. On the basis of the appellate order in the case of M/s Kunden Fabrics, CIT(A) held that stock worth Rs, 40,000 should be considered as belonging to M/s Kunden Fabrics. The addition to the tune of Rs. 36,000 was maintained on this account.
7. The learned AM, while deleting, the penalty, concluded that the entire addition was based on estimate. Shri G.S. Singh, learned CIT Departmental Representative vehemently opposed this finding. It was stated that the addition was not based on estimate. Besides, the learned AM was not correct in stating that the value of such stock was arrived at by applying a GP rate of 20 per cent. Admittedly, the AO applied 18.21 per cent rate of GP. He also opposed the observation in the order of learned AM that the firm agreed for the addition of Rs. 3,18,402 on account of excess stock computed by the survey party. It was stated that this figure was arrived at during the assessment proceedings. Besides, the very fact that the assessee preferred appeal against that addition shows that the addition was not acceptable to the assessee. In the assessment proceedings the assessee did not offer this amount for addition, as stated in the order of learned AM. Shri G.S. Singh stated that the learned AM proceeded on the basis that the assessee agreed for the addition and merely agreeing for the addition does not constitute concealed income. He deleted the addition by applying the decision of the jurisdictional High Court rendered in the case of D.M. Dahanukar v. CIT (1967) 65 ITR 280 (Bom).
8. In regard to the observation of the learned AM that the assessee never admitted that the excess stock was its concealed income and the assessee has only taken the benefit of capitalisation, the learned counsel for the assessee expressed doubt. It was stated that the assessee did not take the benefit of capitalisation. As such, the learned AM was not correct on this aspect.
9. The other cases, on the basis of which the learned AM deleted the penalty are :
(1) CIT v. Bhimji Bhanjee & Co. (1984) 146 ITR 145 (Bom); and
(2) CIT v. Kiran & Co. (1996) 217 ITR 326 (Bom)
10. In the case of D.M. Dahanukar v. CIT (supra), dividend income was not shown in the year of declaration owing to ignorance of law. Subsequently, it was included in the revised return for the year of declaration. The question before the Hon’ble High Court was whether mere omission amounts to concealment or deliberate furnishing of inaccurate particulars. On this factual backdrop the Hon’ble High Court has held that mere omission will not amount to concealment. The facts of the present case are different.
11. In the case of CIT v. Bhimij Bhanjee & Co. (supra), the assessee was unable to produce evidence to prove the genuineness of cash credits. The amount was assessed as income from undisclosed sources. The Hon’ble High Court has found that the assessee nowhere admitted the factum of concealment. The AO did not add the said amount as income from business. The addition was made under the head “Income from undisclosed sources”. As such, the penalty was deleted. In this case the assessee never admitted this to be its income. In the present case the assessee admitted the excess stock as its income. As such, the facts of the present case are different.
12. In the case of CIT v. Kiran & Co. (supra), during the search operation under Section 132 of the Act, discrepancies were detected in the stock. The assessee offered the amount with a stipulation that penalty might be waived. The Hon’ble High Court has held that the offer for settlement was not an evidence for concealment of income. In the present case there was no offer for settlement. As such, in the facts of the present case, this decision cannot be applied.
13. Shri G.S. Singh, learned CIT Departmental Representative submitted that the assessee accepted during the survey proceedings the factum of excess stock. In the return the assessee did not reflect the excess stock, as accepted at the time of survey. The addition was not made on agreed basis. It was agitated before the CIT(A). Although the assessee claimed that its GP was 20 per cent, but the CIT(A) found that as per the return it was only 18.21 per cent. The CIT(A) allowed relief of Rs. 40,000 on the ground that some stock relates to the sister concern. The assessee accepted the order of the CIT(A). No second appeal was filed before the Tribunal. The penalty was not levied on the basis of valuation of stock. It was levied on the excess stock found at the time of survey. It is not correct to say that the Department valued the stock. At best it could be said that the amount of Rs. 36,000 which was included in Rs. 3,18,402 was on estimated basis.
14. Shri G.S. Singh placed his reliance on the decision of the apex Court rendered in the case of Union of India and Anr. v. Banwari Lal Agarwal (1999) 238 ITR 461 (SC). In this case the assessee contended before the Court that the assessment was made on the basis of a compromise arrived at between the assessee and the CIT. The apex Court has held that there was no evidence to show that the assessment was made in pursuance of a mutual understanding that no penal action would be taken against the
assessee. Besides, there is no provision in the Act sanctioning such a compromise.
15. The very fact that the assessee filed appeal against the order of AO clearly demonstrates that the addition was not on agreed basis. As such, the facts of (1999) 238 ITR 461 (SC) (supra) are not germane to adjudicate the issue.
16. Shri G.S. Singh further relied on the decision of the Hon’ble Calcutta High
Court rendered in the case of CIT v. Bijay Iron Stores (2001) 252 ITR 408 (Cal). In this case certain account books and loose papers
were seized during search operations. Additions were made and penalty was
also imposed. The Tribunal held that the penalty could not be imposed on mere
additions to income. The Hon’ble High Court reversed the order of the Tribunal
and held that the Tribunal was not justified as there was evidence of
concealment of income and also admission of concealment. In the present case
I find that the fact of additional stock was accepted before the Revenue
authorities.
17. Reliance was also placed on the decision of the apex Court rendered in the case of Padmasundara Rao (Decd.) and Ors. v. State of Tamil Nadu and Ors. (2002) 255 ITR 147 (SC). Further, he relied on the decision of the Hon’ble Kerala High Court rendered in the case of CIT v. Sree Krishna Trading Co. (2002) 253 ITR 645 (Ker). In this case the Hon’ble High Court has held that in penalty proceeding initiated under Section 271(1)(c), Expln. 1 of the Act, the burden is on the assessee to explain the concealment and establish that he has not concealed the particulars.
18. Shri S.N. Doshi, learned counsel for the assessee, vehemently argued that the stock was not estimated but the valuation of the stock was estimated. He did file an affidavit dt. 3rd March, 2003. In this affidavit it was alleged that the sales price stated in the inventory was label/tag price and the Department made the valuation on the estimated basis. It was stated that in the business of sarees there is a practice of attaching label/tag to the varieties. The price is conveyed by the salesman to the customers. The actual sale price is decided by the owner. It is not the tag price or the label price. It is strange that this fact was not brought to the notice of the Revenue at any stage. Even before the Tribunal no argument in this regard was ever made. For the first time this argument was canvassed before me. Considering all the surrounding facts, I find no merit in this argument. Accordingly I decline to accept the same.
19. To buttress the point of estimate, it was further argued that the survey party completed the valuation work within 4 to 5 hours. It is impossible to have a value of stock of more than Rs. 1.50 crores within such a short time. It was alleged that the survey party considered the price based on tags.
20. This argument is not tenable. In the counter-affidavit it Was stated that the survey party contained sufficient number of staff members, The inventory of stock was prepared during the course of survey operation, which contained serial number, description, quantity, sale price and total. The said inventory was prepared by the survey officials and confirmed by the partner of M/s Kunden Silk by signing each page of the said inventory. Signature of the survey incharge officer was also made on each page of the inventory. The very fact that the assessee at its own accepted the fact of excess stock indicates that what the assessee was agitating was not the valuation of stock. It only pointed out the errors crept in the amount of stock taken by the survey party. That error was appropriately corrected. The other argument of the assessee was in regard to the GP rate. This argument was also accepted. In regard to the stock of sister concern, the CIT(A), on due consideration, reduced the amount. As such, the argument of the assessee on this aspect appears only to be an afterthought.
21. The learned counsel for the assessee submitted that before the Division Bench, the contention that the difference in stock was on estimated basis, was accepted by the learned AM, therefore, he did not make further contention as to the sale price taken on the basis of label or tag price. I find no merit in this argument. There is no material to say so.
22. The learned counsel for the assessee placed reliance on various precedents to show that penalty cannot be levied on the estimated additions. In the case of Harigopal Singh v. CIT (2002) 258 ITR 85 (P&H) the Hon’ble High Court has held that since the AO and the Tribunal adopted different estimates in assessing the income of the assessee, it could not be said that the assessee had concealed the particulars of his income so as to attract Clause (c) of Section 271(1) of the Act.
23. In the case of CIT v. Smt. K. Meenakshi Kutty (2002) 258 ITR 494 (Mad) it was held by the Hon’ble High Court that the Tribunal had clearly held that the estimate given by the assessee was not the result of any gross or wilful negligence and that penalty was not called for. On this factual backdrop, cancellation of the penalty was held valid.
24. It is true that if the addition is made on purely estimated basis, then penalty could be deleted following the aforesaid precedents. But in the Present case I find that penalty to the extent of Rs. 36,000 only was on the basis of estimate. No other amount can be said to be added on the basis of estimate.
25. I have considered the prescription of Expln. 1 to Section 271(1)(c) of the Act also. This Explanation reads as under:
“Explanation 1 : Where in respect of any facts 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 AO or the CIT(A) to be false, or
(B) such person offers an explanation which he is not able to substantiate and fails 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 purposes of Clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed.”
26. In the present case the assessee offered an explanation. But the assessee was not able to substantiate the explanation. The bona fide of the explanation was not proved beyond the shadow of doubt. Where a presumption is raised by virtue of the provisions of the Explanation, the burden lies on the assessee to prove the fact that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part. No special mode of proving is given in that section and so the same may be proved by the assessee like any other fact. In other words, it is open to the assessee either to give a positive explanation and adduce evidence to substantiate the same or without giving any positive explanation or producing evidence to establish from the materials on record that the failure to return the correct income was not caused by any fraud or gross or wilful neglect on his part. When the Expln. 1 to Section 271(1)(c) of the Act provides that “unless he proves”, the emphasis is obviously on proof of the fact and not on the furnishing of an explanation.
27. A return cannot be said to be false unless there is an element of deliberateness in it. It is possible that even where the incorrectness of the return is claimed to be due to want of case on the part of the assessee and there is no reasonable explanation forthcoming from the assessee for such want of care, the deliberateness may be inferred and the return may be liable to be branded as a false return. But where the assessee does not include a particular item in the taxable income under a bona fide belief that he is not liable so to include it, it would not be right to condemn the return as a false return. But the existence of the bona fide belief must be explained by the assessee.
28. In regard to the sustenance of the addition of Rs. 36,000 it could be said
that there is possibility of inclusion of stock of the sister concern. The addition
was based on certain inferences and surmises. The CIT(A) deleted the addition
to the extent of Rs. 40,000 and maintained the addition of Rs. 36,000. It was
purely on estimate. As such, in my opinion, penalty cannot be maintained on
this account. I, therefore, concur with the decision of the learned AM on this
aspect.
29. Apropos the balance amount, I am of the opinion that the addition was not on estimated basis. The fact of concealment was proved. The excess stock was found at the time of survey. The valuation was given by the assessee only. At the assessment stage the assessee made a request only for reducing the amount on the ground of mistake in figure, inclusion of sister concerns’ stock and the GP rate. To the extent of mistake in figure and inclusion of sister concerns’ stock, the request of the assessee was accepted wholly and partly. The request regarding the GP figure was also considered. The assessee wanted adjustment of GP at the rate of 20 per cent. The AO found that the assessee disclosed GP of 18.21 per cent in the year under consideration. As such, he took the figure as disclosed by the assessee. No mistake has crept on that count. It cannot be said that the valuation was on the estimated basis. I, therefore, agree with the reasoning given by the learned JM on this count.
30. The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority.
U.B.S. Bedi, J.M.
7th March, 2003
1. As there was a difference of opinion between the AM and the JM, following question was referred to a Third Member :
“Whether, on the facts and circumstances of the case, the CIT(A) is justified in deleting the penalty levied under Section 271(1)(c) of the IT Act, 1961 ?”
2. The learned Vice-President, Shri M.K. Chaturvedi, sitting as Third Member by his opinion dt. 7th March, 2003, has concurred with the view of the JM. In accordance with the majority view, while upholding the imposition of penalty under Section 27l(1)(c) except in relation to addition of Rs. 36,000, we restrict the quantum of penalty to 100 per cent instead of 150 per cent imposed by the AO.
3. As a result, appeal of the Revenue gets partly accepted.
