Durga Traders Vs. Ito - Court Judgment

Excerpt:
this appeal of the assessee for the assessment year 1991-92 is directed against the order dated 30-12-2002, of commissioner (appeals), karnal.the dispute involved is relating to penalty under section 271(l)(c) of rs. 1,44,852.the relevant facts, briefly stated, are that the assessing officer in this case had made assessment under section 143(3). during the scrutiny of account, the assessing officer found that the closing stock had been valued by the assessee at lesser value than its cost. when asked to explain the reasons, it was claimed that the closing stock was of inferior quality and accordingly, the market price which was lower than the cost price was adopted for valuation of the closing stock. the explanation of the assessee was rejected by the assessing officer with reference to sales made by the assessee in the beginning of the subsequent assessment year at a higher rate than the rate adopted for valuation of the closing stock. the assessing officer worked out the difference in the closing stock at rs. 2,64,570. the assessing officer had also made some other additions. on appeal, the learned commissioner (appeals) allowed relief of rs. 4,380 and sustained addition of rs. 2,60,190.penalty proceedings under section 271(l)(c) had been initiated. though the assessee objected to the initiation of proceedings under section 271(l)(c), the assessing officer imposed penalty of rs. 1,44,852.the assessee is in appeal before us. the learned counsel for the assessee contended that the assessee is a manufacturer of rice and had adopted the method of valuation of closing stock at cost or market price, whichever is lower. since the market price of the defective stock was lower than the cost, the lower value was accordingly adopted.the assessing officer did not accept.the claim of the assessee for want of sufficient evidence to support the claim made by the assessee. so however, there was no evidence on record to establish that the assessee had adopted lower rate for valuation of the closing stock with a view to reduce the income. the learned counsel contended that the mere fact that the addition was made by the assessing officer is not sufficient for levy of penalty under section 271(l)(c). it was contended that it is well settled law that penalty cannot be imposed solely on the ground that the addition has been sustained. according to the learned counsel, assessment proceedings and penalty proceedings are two independent proceedings and it is necessary for the revenue to refer to the circumstances, apart from the findings in the assessment order, justifying the imposition of penalty.the learned counsel also contended that the penalty imposed under section 271(l)(c) is invalid insofar as there has been no valid initiation in this case. referring to the finding of the assessing officer in the assessment order, it was pointed out that in regard to the addition of rs. 15,241 made by the assessing officer, a specific finding has been recorded for concealment of income for which penalty proceedings under section 271(l)(c) have been initiated. there is no finding in the assessment order in regard to the addition of rs. 2,64,570 to that effect. relying upon the decisions of the delhi high court in the case of cit v. ram commercial enterprises ltd. (2001) 167 ctr (del) 321, diwan enterprises v. cit (2001) 167 c'fr (del) 324, cit v. super metal re-rollers (p) ltd. (2004) 265 itr 82 (del) and the decision of the jurisdictional high court in the case of cit v. munish iron store (2003) 263 itr 484 (p&h), it was contended that recording of satisfaction of the assessing officer regarding concealment of income or, furnishing of inaccurate particulars of income is necessary for imposition of penalty under section 271(l)(c). reference was made to the assessment order where the assessing officer simply mentioned that "notice under section 271(l)(c) has been issued for concealment of income of rs. 15,241 on account of bank interest". in regard to the under valuation of closing stock, it has been mentioned that "notice under section 271(l)(c) has been separately issued". our attention was also invited to the notice issued by the assessing officer, copy of which has been placed on record, wherein the inapplicable portion has not been struck off. it was pointed out that the printed notice is for concealment of income or furnishing of inaccurate particulars of income. the assessing officer has not struck off the inapplicable portion so as to confront the assessee with the actual charge for which penalty was to be imposed. it was accordingly, pleaded that penalty imposed under section 271(l)(c) may be deleted. the learned counsel further pointed that the assessee did not derive any financial benefit by adopting the lesser value in the closing stock in the year under appeal as credit has been given to the assessee in the opening stock in the subsequent year. according to the learned counsel, whereas additional tax demanded as a result of the addition in the year under appeal works out to rs. 43,736, the benefit that accrued to the assessee by taking credit in the opening stock in the subsequent year works out to rs. 55,330. it was accordingly, pleaded that the assessee had no benefit to undervalue the stock.the learned departmental representative, on the other hand, contended that there is a categorical finding on undervaluation of closing stock in the assessment order which has been confirmed by the commissioner (appeals) as well as by the tribunal. according to the departmental representative, no additional material is required to be placed on record in the penalty proceedings when the addition made in the assessment stands confirmed. in this connection, reliance has been placed on the following decisions.sunam rice & dal mills v. ito we have given, our careful consideration to the rival contentions. it is not disputed in this case that the addition made by the assessing officer was substantially upheld by the commissioner (appeals). the relief allowed by the commissioner (appeals) is only rs. 4,380. the tribunal has also confirmed the addition in regard to the value of the closing stock. the explanation of the assessee for adopting lower value of the closing stock has not been accepted for want of evidence.whereas addition may be justified in the assessment of the assessee, it is well settled law that the facts and circumstances of the case have got to be considered afresh in penalty proceedings and that the penalty cannot be levied solely on the basis of the reasons given in the original order of the assessment. their lordships of supreme court in the case of cit v. khoday eswarsa & sons (1972) 83 ttr 369 (sc) held that "no doubt, the original assessment proceedings for computing the tax may be a good item of evidence in the penalty proceedings-, but penalty cannot be levied solely on the basis of the reasons given in the original order of assessment". in this case, the assessing officer has not referred to any circumstances justifying the inference that the assessee has consciously concealed the income. the penalty has been imposed solely on the basis of addition made by the assessing officer having been upheld by the tribunal. the explanation of the assessee regarding the defective stocks having lower value has neither been established to be wrong, nor is there any material on record from which an inference could be drawn that the assessee has consciously concealed the income.moreover, in this case, the assessing officer has given directions in the assessment order in regard to the various additions including addition of rs. 15,241. no specific satisfaction in regard to the amount of rs. 2,64,570 has been recorded by the assessing officer either for concealment of income or furnishing of inaccurate particulars of income. the notice issued to the assessee also does not indicate as to whether the penalty proceedings have been initiated for concealment of income or for furnishing of inaccurate particulars of income. their lordships of punjab & haryana high court in the case of cit v. munish iron store (supra) have held that "the jurisdiction to impose penalty flows from recording of the satisfaction of the assessing officer regarding concealment of income. in case there is a defect in the assumption of jurisdiction, it cannot be cured." in that case, the assessing officer finalised the assessment under section 143(3) on the basis of the revised return filed by the assessee. the assessing officer had directed initiation of proceedings under section 271(l)(c) for levy of penalty. after considering the reply of the assessee, the assessing officer had levied the penalty under section 271(l)(c), the tribunal deleted the penalty on the ground that while finalising the assessment, the assessing officer did not record satisfaction in terms of section 271(l)(c). on appeal, the high court held that cancellation of the penalty was legally correct and the order passed by the tribunal did not give rise to any question of law, much less a substantial question of law. their lordships of delhi high court in the case of cit v. super metal re-rollers (supra) held that "a bare reading of the provisions of section 271 of the income tax act, 1961, 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 spelt out by the order of the assessing authority". before their lordships, it was claimed that the satisfaction of the assessing officer as contemplated in section 271(l)(c) of the act was inherent in the queries raised by him during the course of the assessment proceedings and that the assessing officer had directed the issue of notice for levy of penalty under the section after being satisfied that the assessee had concealed the particulars of its income. their lordships of delhi high court held that it was not sufficient. their lordships relied upon their own decision in the case of cit v. ram commercial enterprises ltd. (supra) and also upon the decisions of the supreme court in the case of d.m manasvi v. cit (1972) 86 itr 557 (sc) and cit v. s. v. angidi chet-bar (1962) 44 itr 739 (sc).a perusal of the assessment order reveals that whereas the assessing officer had recorded satisfaction in regard to initiation of penalty proceedings for addition of rs. 15,241, no such satisfaction was recorded in respect of addition of rs. 2,64,570 (reduced to rs. 2,60,190). in the absence of such satisfaction recorded by the assessing officer, the penalty imposed by the assessing officer is invalid. following the decision of the jurisdictional high court in the case of cit v. munish iron store (supra), we hold that the penalty under section 271(l)(c) in this case is bad in law in the absence of valid initiation under section 271(l)(c).even on merits, taking the totality of the facts and circumstances of the case referred to elsewhere in this order, into consideration, we are of the view that penalty under section 271(l)(c) in this case is not warranted. we accordingly, cancel the levy of penalty under section 271(l)(c).

Judgment:
This appeal of the assessee for the assessment year 1991-92 is directed against the order dated 30-12-2002, of Commissioner (Appeals), Karnal.

The dispute involved is relating to penalty under section 271(l)(c) of Rs. 1,44,852.

The relevant facts, briefly stated, are that the assessing officer in this case had made assessment under section 143(3). During the scrutiny of account, the assessing officer found that the closing stock had been valued by the assessee at lesser value than its cost. When asked to explain the reasons, it was claimed that the closing stock was of inferior quality and accordingly, the market price which was lower than the cost price was adopted for valuation of the closing stock. The explanation of the assessee was rejected by the assessing officer with reference to sales made by the assessee in the beginning of the subsequent assessment year at a higher rate than the rate adopted for valuation of the closing stock. The assessing officer worked out the difference in the closing stock at Rs. 2,64,570. The assessing officer had also made some other additions. On appeal, the learned Commissioner (Appeals) allowed relief of Rs. 4,380 and sustained addition of Rs. 2,60,190.

Penalty proceedings under section 271(l)(c) had been initiated. Though the assessee objected to the initiation of proceedings under section 271(l)(c), the assessing officer imposed penalty of Rs. 1,44,852.

The assessee is in appeal before us. The learned counsel for the assessee contended that the assessee is a manufacturer of rice and had adopted the method of valuation of closing stock at cost or market price, whichever is lower. Since the market price of the defective stock was lower than the cost, the lower value was accordingly adopted.

The assessing officer did not accept.the claim of the assessee for want of sufficient evidence to support the claim made by the assessee. So however, there was no evidence on record to establish that the assessee had adopted lower rate for valuation of the closing stock with a view to reduce the income. The learned counsel contended that the mere fact that the addition was made by the assessing officer is not sufficient for levy of penalty under section 271(l)(c). It was contended that it is well settled law that penalty cannot be imposed solely on the ground that the addition has been sustained. According to the learned counsel, assessment proceedings and penalty proceedings are two independent proceedings and it is necessary for the revenue to refer to the circumstances, apart from the findings in the assessment order, justifying the imposition of penalty.

The learned counsel also contended that the penalty imposed under section 271(l)(c) is invalid insofar as there has been no valid initiation in this case. Referring to the finding of the assessing officer in the assessment order, it was pointed out that in regard to the addition of Rs. 15,241 made by the assessing officer, a specific finding has been recorded for concealment of income for which penalty proceedings under section 271(l)(c) have been initiated. There is no finding in the assessment order in regard to the addition of Rs. 2,64,570 to that effect. Relying upon the decisions of the Delhi High Court in the case of CIT v. Ram Commercial Enterprises Ltd. (2001) 167 CTR (Del) 321, Diwan Enterprises v. CIT (2001) 167 C'FR (Del) 324, CIT v. Super Metal Re-Rollers (P) Ltd. (2004) 265 ITR 82 (Del) and the decision of the jurisdictional High Court in the case of CIT v. Munish Iron Store (2003) 263 ITR 484 (P&H), it was contended that recording of satisfaction of the assessing officer regarding concealment of income or, furnishing of inaccurate particulars of income is necessary for imposition of penalty under section 271(l)(c). Reference was made to the assessment order where the assessing officer simply mentioned that "notice under section 271(l)(c) has been issued for concealment of income of Rs. 15,241 on account of bank interest". In regard to the under valuation of closing stock, it has been mentioned that "notice under section 271(l)(c) has been separately issued". Our attention was also invited to the notice issued by the assessing officer, copy of which has been placed on record, wherein the inapplicable portion has not been struck off. It was pointed out that the printed notice is for concealment of income or furnishing of inaccurate particulars of income. The assessing officer has not struck off the inapplicable portion so as to confront the assessee with the actual charge for which penalty was to be imposed. It was accordingly, pleaded that penalty imposed under section 271(l)(c) may be deleted. The learned counsel further pointed that the assessee did not derive any financial benefit by adopting the lesser value in the closing stock in the year under appeal as credit has been given to the assessee in the opening stock in the subsequent year. According to the learned counsel, whereas additional tax demanded as a result of the addition in the year under appeal works out to Rs. 43,736, the benefit that accrued to the assessee by taking credit in the opening stock in the subsequent year works out to Rs. 55,330. It was accordingly, pleaded that the assessee had no benefit to undervalue the stock.

The learned Departmental Representative, on the other hand, contended that there is a categorical finding on undervaluation of closing stock in the assessment order which has been confirmed by the Commissioner (Appeals) as well as by the Tribunal. According to the Departmental Representative, no additional material is required to be placed on record in the penalty proceedings when the addition made in the assessment stands confirmed. In this connection, reliance has been placed on the following decisions.Sunam Rice & Dal Mills v. ITO We have given, our careful consideration to the rival contentions. It is not disputed in this case that the addition made by the assessing officer was substantially upheld by the Commissioner (Appeals). The relief allowed by the Commissioner (Appeals) is only Rs. 4,380. The Tribunal has also confirmed the addition in regard to the value of the closing stock. The explanation of the assessee for adopting lower value of the closing stock has not been accepted for want of evidence.

Whereas addition may be justified in the assessment of the assessee, it is well settled law that the facts and circumstances of the case have got to be considered afresh in penalty proceedings and that the penalty cannot be levied solely on the basis of the reasons given in the original order of the assessment. Their Lordships of Supreme Court in the case of CIT v. Khoday Eswarsa & Sons (1972) 83 TTR 369 (SC) held that "No doubt, the original assessment proceedings for computing the tax may be a good item of evidence in the penalty proceedings-, but penalty cannot be levied solely on the basis of the reasons given in the original order of assessment". In this case, the assessing officer has not referred to any circumstances justifying the inference that the assessee has consciously concealed the income. The penalty has been imposed solely on the basis of addition made by the assessing officer having been upheld by the Tribunal. The explanation of the assessee regarding the defective stocks having lower value has neither been established to be wrong, nor is there any material on record from which an inference could be drawn that the assessee has consciously concealed the income.

Moreover, in this case, the assessing officer has given directions in the assessment order in regard to the various additions including addition of Rs. 15,241. No specific satisfaction in regard to the amount of Rs. 2,64,570 has been recorded by the assessing officer either for concealment of income or furnishing of inaccurate particulars of income. The notice issued to the assessee also does not indicate as to whether the penalty proceedings have been initiated for concealment of income or for furnishing of inaccurate particulars of income. Their Lordships of Punjab & Haryana High Court in the case of CIT v. Munish Iron Store (supra) have held that "The jurisdiction to impose penalty flows from recording of the satisfaction of the assessing officer regarding concealment of income. In case there is a defect in the assumption of jurisdiction, it cannot be cured." In that case, the assessing officer finalised the assessment under section 143(3) on the basis of the revised return filed by the assessee. The assessing officer had directed initiation of proceedings under section 271(l)(c) for levy of penalty. After considering the reply of the assessee, the assessing officer had levied the penalty under section 271(l)(c), The Tribunal deleted the penalty on the ground that while finalising the assessment, the assessing officer did not record satisfaction in terms of section 271(l)(c). On appeal, the High Court held that cancellation of the penalty was legally correct and the order passed by the Tribunal did not give rise to any question of law, much less a substantial question of law. Their Lordships of Delhi High Court in the case of CIT v. Super Metal Re-Rollers (supra) held that "A bare reading of the provisions of section 271 of the Income Tax Act, 1961, 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 spelt out by the order of the assessing authority". Before their Lordships, it was claimed that the satisfaction of the assessing officer as contemplated in section 271(l)(c) of the Act was inherent in the queries raised by him during the course of the assessment proceedings and that the assessing officer had directed the issue of notice for levy of penalty under the section after being satisfied that the assessee had concealed the particulars of its income. Their Lordships of Delhi High Court held that it was not sufficient. Their Lordships relied upon their own decision in the case of CIT v. Ram Commercial Enterprises Ltd. (supra) and also upon the decisions of the Supreme Court in the case of D.M Manasvi v. CIT (1972) 86 ITR 557 (SC) and CIT v. S. V. Angidi Chet-bar (1962) 44 ITR 739 (SC).

A perusal of the assessment order reveals that whereas the assessing officer had recorded satisfaction in regard to initiation of penalty proceedings for addition of Rs. 15,241, no such satisfaction was recorded in respect of addition of Rs. 2,64,570 (reduced to Rs. 2,60,190). In the absence of such satisfaction recorded by the assessing officer, the penalty imposed by the assessing officer is invalid. Following the decision of the jurisdictional High Court in the case of CIT v. Munish Iron Store (supra), we hold that the penalty under section 271(l)(c) in this case is bad in law in the absence of valid initiation under section 271(l)(c).

Even on merits, taking the totality of the facts and circumstances of the case referred to elsewhere in this order, into consideration, we are of the view that penalty under section 271(l)(c) in this case is not warranted. We accordingly, cancel the levy of penalty under section 271(l)(c).