1. This appeal by the revenue is against the cancellation of penalty imposed under Section 271(1)(c) of the Income-tax Act, 1961. We are concerned with the assessment year 1985-86. The previous year of the assessee ended on 31-3-1985. The assessee is a registered firm doing business in textile both in wholesale and retail sales. The assessee filed its return of income on 9-10-1987 disclosing a total income of Rs. 2,21,320. On 17-9-1985 a search covering the business premises, administrative office and residence of the partners took place to have the correct stock position of the assessee. During the search operations, the officials seized account books, invoices and other papers in respect of the financial affairs of the assessee. The assessee did not cooperate with the department and approached the High Court of Kerala for appointing a Commission to ascertain the stock position and stalled the independent stocktaking and valuation by the department. The High Court appointed two Advocates as Commissioners.
They took the inventory and found the value of the stock as on 17-9-1985 at Rs. 1,15,38,803. They also noted that the stock found at the business premises included defective and damaged stock of the value of Rs. 23,49,210 (on the basis of tag price) and the value of such defective and damaged stock as per the assessee was at Rs. 7,80,224.
2. Subsequent to the search, the assessee was required to get its accounts audited. It was complied with. In the trading account furnished along with the return, the assessee valued the closing stock at Rs. 38 lakhs. According to the assessee an inventory of the closing stock as on 31 -3-1985 had been prepared and the consolidated closing stock inventory with the summation of closing stock as on 31-3-1985 and was kept inside a cover which was one of the items seized by the department. But the department denied the allegation. According to the Assessing Officer, the stock as detailed in 335 sheets of paper with a total value of Rs. 86,52,322 represented the assessee's closing stock as on 31 -3-1985. The plea of the assessee was that the aforesaid sheets of paper only contained details of the stock taken periodically in the various Sections during the year and not the closing stock as on 31-3-1985 and the value of the closing stock as on 31-3-1985 was only Rs. 38 lakhs. But the above plea was not accepted by the Assessing Officer and held that the value of closing stock as on 31 -3 -1985 was Rs. 86,52,322 and since the same was arrived at on the basis of the selling rate, the Assessing Officer allowed a deduction of 9 per cent representing the gross profit margin from the value of the stock and arrived at a stock value of Rs. 78,73,614. The difference of Rs. 40,73,614 was added to the total income of the assessee. The assessee appealed to the CIT (Appeals) who did not agree with the view of the Assessing Officer that 335 papers contained details of stock at Rs. 86,52,322 which represented the closing stock as on 31-3-1985. The plea of the assessee that if proper reduction was given for the damaged and defective goods which formed part of the stock of the assessee, the stock value declared by the assessee at Rs. 38 lakhs would be correct.
He also disagreed with the view of the Assessing Officer that goods worth Rs. 40 lakhs was sold outside the books in the first six months of the year ended on 31 -3-1986. After analysing the evidence on record, the CIT (Appeals) observed as follows : Taking all these factors into consideration, this is only a fit case for estimating the closing stock as on 31 -3-1985 on the basis of preponderance of probabilities. Therefore, the question before me is what should be the correct estimate of closing stock as on 31-3-1985 on the basis of material available on record.
Even if I accept the argument of the appellant's representative that the value of closing stock should be done on the basis of the valuation ascertained by the Commissioners appointed by the Department as on 17-9-1985 there is a difference of Rs. 7.84 lakhs.
The claim of the appellant's damaged cloths cannot be accepted as there is no evidence in support of this claim. From the materials on record and various evidences analysed by me, I came to the conclusion that there is only a suppression of stock which can be estimated to the tune of Rs. 10 lakhs. Therefore, I would justify a lump sum addition of Rs. 10 lakhs in this case on account of defect in the maintenance of stock register. Hence, the appellant gets a relief of Rs. 30,73,814 on this account.
Penalty proceedings started under Section 271 (1) (c) of the Act in the course of the assessment proceedings on the ground that the assessee suppressed its stock as on 31 -3-1985 and thereby concealed its income.
The Assessing Officer did not take into account the addition of Rs. 10 lakhs sustained by the CIT (Appeals) but quantified the concealed income at Rs. 7,84,522, which is worked out as under :the Commission's report Rs. 1,15,33,803 Less : GP of 11.8% (as accepted Rs. 13,61,579 ---------------- by the department) Rs. 1,01,77,224 Add : Sales till 17-9-1985 Rs. 10456630 17-9-1985 Rs. 1,48,15,450 ---------------- Stock as on 31-3-1985 Rs. 45,84,522 Less : Stock as on 31 -3-1985 assessee Rs. 38,00,000 --------------- [See para 5 of 271 (1)(c) Rs. 7,84,522 order] ---------------- According to the assessee the unaccounted stock as per the Commission's report is Rs. 7.84 lakhs and due allowance should be given for damaged stock and if proper deduction is allowed for damaged stock, there would not be any difference in the closing stock disclosed by it, which is worked out as under: obtained Rs. 13,66,112 ------------- report Rs. 93,36,754 Add : Sales till 17-9-1985 Rs. 1,04,56,630 Less: GP @ 11.8% Rs. 12,33,882 Rs. 92,22,748 --------------- ------------- Less : Purchases till 17-9-1985 Rs. 1,48,15,450 --------------- Closing stock as on 31-3-1985 Rs. 37,44,052 --------------- The contention of the assessee that it should be given deduction for the damaged and defective goods did not find favour with the Assessing Officer. The assessee further contended that the learned CIT (Appeals) had simply estimated the excess stock at Rs. 10 lakhs without any logic and after rejecting all the contentions raised by the assessee. The Assessing Officer found that the assessee has accepted the valuation of the Commissioner as proper as it did not prefer any appeal. She rejected the contention of the assessee for deduction in respect of the damaged stock. According to her, the balance-sheet filed by the assessee clearly showed that the valuation of closing stock had been systematically done for each year giving due allowance to the dead stock, cut piece and damaged stock. This is evidenced from the fact that for the assessment year 1981-82 the closing stock had been valued at Rs. 28,67,029. In order to arrive at the correct value of sound stock, the assessee in its accounts had taken the benefit of reducing this valuation by Rs. 10,961 towards 'dead stock' and a further sum of Rs. 9,710 towards 'cut piece and damaged stock". After deducting the value for dead stock, cut piece, damaged stock etc., the closing stock had been disclosed at Rs. 28,57,358. For the assessment year 1982-83, the total closing stock was valued at Rs. 28,56,947 from which the value of 'dead stock, cut piece and damaged' Rs. 15,446 had been deducted. For the assessment year 1983-84 also the total value of the closing stock had been shown at Rs. 27,40,960 and after deducting the value of 'dead stock', cut piece and damaged Rs. 23,843 the balance has been shown as closing stock in the balance-sheet. Hence, she found that the assessee is not entitled to get any deduction for the damaged and defective stocks. She further held that as the assessee had not produced any solid material or even a solitary evidence to show that it possessed dead stock/damaged stock worth Rs. 25 lakhs at the time of physical inspection conducted by the department. According to the Dy.
CIT (Assessment), the assessee tendered false statement of affairs with the Department which the assessee knew and believed to be false with a definite motive to reduce its tax burden. The mens rea in this case is well established since the assessee was caught red-handed with the possession of excess stock of Rs. 7.84 lakhs which the Department could quantify to the satisfaction of the assessee since the entire proceedings of the stocktaking was carried out before an Honourable Commission appointed by the Court. The assessee accumulated stock outside the books of account and the same had been established only by the concrete steps taken by the Department in the form of search operation under Section 132 of the Act, systematic stock valuation and scrutinising various papers and documents maintained by the assessee which were seized as a result of search. Hence, she held that the assessee's accumulation of excess stock to the tune of Rs. 7.84 lakhs would not have been brought to light, if the department had not conducted the search. Therefore, according to her this is a fit case to impose penalty. Thus, she imposed a penalty of Rs. 4,80,570 under Section 271(1)(c) of the Act.
3. Being aggrieved by this imposition of penalty, the assessee went in appeal to CIT (Appeals), before whom it was contended that Rs. 10 lakhs sustained by the CIT (Appeals) in quantum appeal was only on the basis of an estimate and no evidence whatsoever had been adduced for the finding that the assessee had suppressed the stock as on 31-3-1985. The claim of the assessee that the stock as on 31 -3-1985 included the damaged and defective goods and the value of which as per the tag price was Rs. 25,01,794 was not accepted either the Assessing Officer or the CIT (Appeals) in quantum appeal. However, that such claim of assessee was true would be evident from a perusal of the report of the Commission appointed by the Kerala High Court for the purpose of taking inventory of the stock. In its report, the Commission has referred more than once to the presence of the dead and damaged stock in the stock found on 17-9-1985. Such damaged and defective stock had been sold by the assessee in the subsequent year in a reduction sale for Rs. 13,66,112 thus resulting in a loss of Rs. 11,35,682 as compared to the value of the stock on the basis of the tag price. The assessee had maintained complete accounts in respect- of such reduction sale in the form of separate sale bills, sale registers, etc. and the Assessing Officer should have examined the assessee's claim after due scrutiny of such evidence. It was further argued before the CIT (Appeals) in the penalty proceedings that in the absence of a proper valuation of stock inventory as on 31-3-1985, the alleged finding of suppression of stock has no factual basis and was only a presumption on the part of the Assessing Officer. Hence, there was no concealment of stock invoking the provisions of Section 271(1)(c) to levy penalty against the assessee. The learned Commissioner (Appeals) went through the report of the Commission appointed by the High Court and extracted certain portion of the Commission report in respect of dead and damaged goods on 17-9-1985 both in the wholesale and retail sections. The CIT (Appeals) found that as per the stock statement as on 17-9-1985 the value of the damaged goods on the basis of the tag price was as such of Rs. 23,49,210 and the estimated value of such damaged goods has been shown by the assessee at Rs. 7,80,224. Hence, he concluded that in the light of the findings of the Commission the claim of the assessee that if due allowance was given for the bad and damaged goods the closing stock shown at Rs. 38 lakhs would be correct. He also found that in the appeal for 1986-87 the CIT (Appeals) deleted Rs. 4,80,000 holding that the damaged stock should have been sold in the assessment year 1986-87.
He sustained an addition of Rs. 10 lakhs on a lump sum basis for the assessment year 1985-86 on account of non-availability of stock register of the assessee as on 31 -3-1985 and it was sustained on an estimate basis only but was not based on any actual findings of unaccounted stock as on 31-3-1985. He found that it could not be said that the assessee had held any unaccounted stock as on 31-3-1985 and thus concealed its income. He also placed reliance on the decision in CIT v. Shri Pawan Kumar Dalmia [1987] 168 ITR 1 (Ker.) and cancelled the levy of penalty. Hence, the revenue is aggrieved and in second appeal before the Tribunal.
4. We have heard the parties to the dispute. On a careful consideration of the rival submissions and perusal of the records, we feel that there is no justification to interfere with the order of the CIT (Appeals).
According to the assessee the value of the stock as on 31 -3-1985 was Rs. 38 lakhs. The Dy. CIT (Assessment) valued the stock at Rs. 45,54,522. The contention of the assessee is that the closing stock of the assessee included the dead and damaged stock, the value of which has to be deducted from the value of the entire stock. The fact that the department had searched the business premises as well as the residential premises of the partners is not disputed. The Hon'ble High Court has also appointed a Commission and their report had shown that there were dead and damaged stock to the extent Rs. 23,49,210. In view of the above, we have to hold that the deduction in respect of the value of defective and damaged goods has to be allowed. It is also brought in evidence that the assessee used to conduct the reduction sale and they have maintained proper accounts for the same. This contention is accepted by the first appellate authority. As against this, nothing is brought out to show that the assessee has not maintained any proper accounts in respect of the reduction sales of the dead and damaged stock. Further, the CIT (Appeals) in the quantum appeal sustained the addition of Rs. 10 lakhs only on the estimate basis though he might have used the expression 'suppression'. The sustenance of Rs. 10 lakhs in the quantum appeal by the CIT (Appeals) on estimate basis is not a concrete evidence to support the case of the revenue that the assessee had suppressed its stock. The mere fact that the assessee had not agitated the issue further before the Tribunal cannot be held against the assessee. The assessee, it is told, was tired of litigation and had settled down for the addition.
The inventory was taken in the previous year ending on 31-3-1986 relevant to the assessment year 1986-87. The fact that there were damaged and defective stocks in the inventory has been brought out clearly in the Commission's report. Normally the proper approach should have been to quantify the excess inventory at the time of stocktaking and consider the same for assessment in the previous year in which such inventory was taken for purpose of addition under Section 69 of the Act. Strangely in this case the revenue went backwards to ascertain the inventory as on 31-3-1985 in relation to the assessment year 1985-86.
Such an exercise is not permissible in law in the light of the provisions of Section 69 of the Act under which the unexplained investment, if any, should be assessed in the financial year in which such investment was found. Therefore, even the estimate of Rs. 10 lakhs as done by the CIT (Appeals) in the quantum appeal is not on firm footing and to levy penalty on the basis of such estimate would be wholly unjustified besides being on very feeble ground. Even assuming that such a course is permissible the Commission has found the existence of damaged and defective or dead stocks on the date of the inventory. The assessee's explanation that such damaged, defective or dead stock was already in existence as on 31 -3-1985 and they were valued at the price at which they were realised subsequently is not improbable or unreasonable especially when the department has not found any material to say that the assessee acquired the damaged or defective material only subsequent to 31 -3-1985. That the defectives were sold subsequently is on record. Further, for a dealer with such huge turn over, the existence of damaged, defective or dead stock is a normal incident of trade either due to efflux of time or due to fashion changes. Further, in this case long before the appellant furnished its return on 9-10-1987 all the materials pertaining to the stock were with the revenue and therefore there is nothing which the assessee could conceal and in this view of the matter, the CIT (Appeals) rightly relied on the decision of the Kerala High Court in Shri Pawan Kumar Dalmia's case (supra). Further, the alleged concealment was quantified not on the basis of the quantities of different varieties of stock read with their costs. Rattier, it was on the basis of the value of the materials and the tag price as reduced by the average gross profit.
Further, the assessee has reconciled the stock found by the Commission as follows:-Sound stock valued at selling price Rs. 91,89,590Damaged Stock Rs. 23,49,213 ---------------valued at selling price Rs. 25,01,794 ---------------Add : Sales till 17-9-1985 Rs. 1,04,56,630Less: Average G.P. actually realised Rs. 13,66,112 --------------- We have gone through the re-concilation statement. The Assessing Officer has not questioned the gross profit rate adopted by the assessee nor has she disputed the sale of damaged goods on reduction sale effected by the assessee, for which details have been furnished at page 24 of the paper book nor the purchases or sales up to the date of the inventory on 17-9-1985 have been called to question. In the circumstances, we hold that the assessee has re-conciled the value of stock as on 31-3-1985 and thus has explained the value adopted. As a result, we hold that there was no suppression of stock as alleged by the revenue and the CIT (Appeals) rightly vacated the levy of penalty.