2015 (6) TMI 1189 - AT - Income Tax

Tribunal rules no penalty for understated closing stock value under Income-tax Act

The Tribunal overturned the penalty imposed under section 271(1)(c) of the Income-tax Act, 1961 for understating closing stock value. The Tribunal held ... Penalty u/s 271(1)(c) - difference in the value of stock shown by the assessee and as estimated by the AO by applying the rate of last purchase bill dated 28.3.2009 - HELD THAT:- The only basis of addition is the estimate of valuation made by the AO in valuing the closing stock @ ₹ 200.50 per bag, being the cost price of cement bags vide last purchase bill dated 28.3.2009. Apart from this estimate made by the AO, there is nothing to show that the way in which the assessee valued its closing stock was incorrect. This divulges that the addition has been made only on the basis of estimate made by the AO. It is a settled legal position that when income is estimated, then, there can be no question of imposing penalty u/s 271(1)(c) . The Hon’ble Delhi High Court in CIT vs. Aero Traders Pvt. Ltd., [2010 (1) TMI 32 - DELHI HIGH COURT] , has held that no penalty u/s 271(1)(c) can be imposed when income is determined on estimate basis. Similar view has been taken by the Hon’ble P&H High Court in Harigopal Singh vs. CIT [2002 (8) TMI 65 - PUNJAB AND HARYANA HIGH COURT] and the Hon’ble Gujarat High Court in CIT vs. Subhash Trading Company, [1995 (11) TMI 37 - GUJARAT HIGH COURT] . In view of the foregoing precedents it is apparent that when the bedrock of instant penalty is the estimate of valuation of closing stock, the same cannot be sustained. Thus Penalty deleted - decided in favour of assessee. Issues involved:Penalty under section 271(1)(c) of the Income-tax Act, 1961 for understating closing stock value.Analysis:Issue 1: Imposition of PenaltyThe appeal concerned the penalty imposed by the Assessing Officer (AO) under section 271(1)(c) of the Income-tax Act, 1961, upheld by the Commissioner of Income Tax (Appeals) (CIT(A)), amounting to Rs. 45,100 for the assessment year 2009-10. The penalty was based on the difference in the valuation of closing stock as per the assessee's records and the valuation estimated by the AO. The AO valued the closing stock at Rs. 6,25,961 based on the last purchase bill, resulting in an addition of Rs. 2,40,381, which led to the penalty imposition. However, it was argued that the mere difference in valuation does not necessarily imply concealment of income or furnishing inaccurate particulars of income.Issue 2: Acceptance of AdditionThe assessee had accepted the addition made by the AO regarding the valuation of closing stock and did not challenge it further. The Tribunal noted that the acceptance of an addition in the quantum proceedings does not automatically warrant the imposition of a penalty. Citing precedents, it was highlighted that quantum proceedings and penalty proceedings are distinct, and the confirmation of an addition in quantum proceedings does not mandate the imposition of a penalty. The Tribunal referred to judgments by the Calcutta High Court and the Kerala High Court to emphasize this point.Issue 3: Basis of AdditionThe only basis for the addition made by the AO was the estimate of valuation of closing stock, which was solely based on the cost price of cement bags as per the last purchase bill. The Tribunal observed that there was no evidence to suggest that the assessee's method of valuing the closing stock was incorrect, indicating that the addition was made purely on the basis of an estimate by the AO. Citing legal precedents, including judgments by the Delhi High Court, Punjab & Haryana High Court, and Gujarat High Court, the Tribunal concluded that when income is estimated, the imposition of a penalty under section 271(1)(c) is not justified. Therefore, the Tribunal ordered the deletion of the penalty amounting to Rs. 45,100.In conclusion, the Tribunal allowed the appeal, overturning the imposition of the penalty and ordering the deletion of the penalty amount.