2019 (2) TMI 1696 - AT - Income Tax

Tribunal Upholds CIT(A) Decision to Delete Penalty for Non-disclosure of Income

The Tribunal upheld the CIT(A)'s decision to delete the penalty imposed under Section 271AAB of the Income Tax Act. It found that the disclosed income did ... Penalty u/s 271AAB - search & seizure operation u/s 132 - ‘undisclosed income’ for the purposes of levy of penalty - whether the income offered by the assessee in its return for AY 2012-13 being the value of closing stock of sub-grade fines having cost can be considered to be ‘undisclosed income’ found in the course of search so as to warrant penalty u/s 271AAB ? - HELD THAT:- Levy of penalty under Section 271AAB is mandatory and automatic and therefore in the matter of levy of penalty the AO had no discretion once the assessee admits of any undisclosed income in his statement u/s 132(4) of the Act. Such a view goes against the words used in section 271AAB and section 274. We note that if the intention of the Legislature to levy the penalty was mandatory and automatic then the right of appeal u/s 246A would not have been provided for by the Legislature against the order of penalty passed u/s 271AAB. We also note that while enacting Section 271AAB the Legislature has consciously used the word ‘may’ in contradistinction to the word ‘shall’ in the opening words of Section 271AAB of the Act. The choice of the expression ‘may’ and not ‘shall’ in the opening Section of 271AAB shows that the Legislature did not intend to make the levy of penalty statutory, automatic and binding on the AO but the AO was given discretion in the matter of levy of penalty. Our foregoing view finds support in the decision in the case of ACIT Vs Marvel Associates (2018 (3) TMI 946 - ITAT VISAKHAPATNAM) which inturn relied on Hon’ble Andhra Pradesh High Court ratio in Radha Krishna Vihar (2018 (2) TMI 1595 - TELANGANA AND ANDHRA PRADESH HIGH COURT). Section 145A of the Income-tax Act, which deals with the method of valuation of stock for the purposes of Section 145 of the Act, requires the assessee to follow any of accepted methods of stock valuation on the condition that the method once adopted must be followed consistently. We therefore find that following the consistent method of valuation followed in the past and accepted by the Revenue even in the financial accounts for the year ending 31.03.2012, the assessee had valued the stock of subgrade Fines at NIL. Having regard to these facts therefore we do not find any infirmity in the accounts and find merit in the Ld. AR’s submissions that no undisclosed income could be inferred merely because in the accounts the value of stock of sub-grade fines was taken as NIL. Department has been consistently accepting the assessee's method of accounting employed whereby it valued the sub-grade Fines in stock at NIL and the gross proceeds realized on sale was assessed by way of income in the year on sale which is evident from the income-tax assessments framed for the all the preceding years. Therefore following the Rule of consistency we do not find any infirmity in the assessee’s stand regarding valuation of sub-grade fines at NIL. In the circumstances the inventory of sub-grade fines whose value was considered as additional income cannot be considered to be ‘undisclosed income’ found as a result of search so as to attract the rigors of Section 271AAB because such inventory was found recorded in other business records regularly maintained in the course of assessee’s business. Levy of penalty under Section 271AAB was automatic. Since in the foregoing paragraphs we have held that the income of ₹ 59.09crores offered by the assessee while filing of the return of income did not come within the ken of ‘undisclosed income’ defined in clause (c) of Explanation to Section 271AAB, we hold that the penalty levied under that Section was unsustainable and for the aforesaid reasoning we confirm the order of CIT(A). We accordingly uphold the CIT(A)’s order for the aforesaid reasoning and reject the Revenue’s appeal. Issues Involved:1. Validity of the penalty levied under Section 271AAB of the Income Tax Act, 1961.2. Determination of whether the disclosed income qualifies as 'undisclosed income' under Section 271AAB.3. Consistency in the method of stock valuation and its acceptance by the Revenue.4. Applicability of judicial precedents and the discretionary nature of penalty under Section 271AAB.Detailed Analysis:1. Validity of the Penalty under Section 271AAB:The primary issue was the validity of the penalty levied by the Assessing Officer (AO) under Section 271AAB of the Income Tax Act, 1961. The AO imposed a penalty on the disclosed amount of Rs. 59,09,00,000/- considering it as 'undisclosed income.' The CIT(A) deleted the penalty, observing that the AO imposed it in a routine manner without considering the specific facts and circumstances of the case. The CIT(A) noted that the disclosure was made based on an internal survey report prepared by the company, not by the Income Tax Department, and that the stock of sub-grade fines was part of the regular books of accounts.2. Determination of 'Undisclosed Income':The core issue was whether the disclosed income of Rs. 59,09,00,000/- qualifies as 'undisclosed income' under Section 271AAB. The assessee argued that the disclosed amount was on account of sub-grade fines, which were automatically generated as a by-product during the mining process and had no separate cost of raising. The assessee maintained that the stock of sub-grade fines was reported to the Director General of Mines and was part of the regular books of accounts. The CIT(A) held that since no incriminating evidence was found during the search and the stock was part of the regular production, the disclosed amount did not qualify as 'undisclosed income.'3. Consistency in Stock Valuation:The assessee consistently treated the value of sub-grade fines with Fe content below 55% as NIL in its books, as these fines were considered waste. This method was consistently followed and accepted by the Revenue in previous assessments. The CIT(A) noted that the method of valuation was consistent and accepted by the Revenue in the past, and the stock of sub-grade fines was regularly reported to the Indian Bureau of Mines. The Tribunal upheld this view, emphasizing the principle of consistency in stock valuation.4. Applicability of Judicial Precedents and Discretionary Nature of Penalty:The Tribunal referred to several judicial precedents, including the Supreme Court's decision in Dilip N Shroff vs CIT and Sundharsan Silk and Sarees, which held that the imposition of penalty is not automatic and requires the AO to exercise discretion considering the relevant factors. The Tribunal also noted that the penalty under Section 271AAB is not mandatory but discretionary. The Tribunal relied on the decision of the coordinate Bench in DCIT vs Manish Agarwala, which held that entries found in 'other documents maintained in regular course of business' do not come within the ken of 'undisclosed income' under Section 271AAB. The Tribunal concluded that the disclosed income did not qualify as 'undisclosed income' and upheld the CIT(A)'s order deleting the penalty.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order deleting the penalty under Section 271AAB. The Tribunal concluded that the disclosed income of Rs. 59,09,00,000/- did not qualify as 'undisclosed income' as it was part of the regular stock records and was consistently reported to the Indian Bureau of Mines. The Tribunal emphasized the discretionary nature of the penalty under Section 271AAB and the importance of consistency in stock valuation.