TaxTMI 
TaxTMI 
2019 (2) TMI 1696
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....ed u/s 143(3), the AO noted that the main business activity of the group is that they are owners of manganese, Iron ore mines and Mining & selling of such ores. The AO noted that that the key person of the group is Sh. PradeepKumar Saraf who had offered additional income on account of stock valuation of Rs. 59,09,00,000/- for AY 2012-13.The AO further noted that the assessee had filed its return of income declaring the total income of Rs. 4,29,12,93,850/- which included the offered income of Rs. 59,09,00,000/-. Thereafter, the assessment was completed on 28.04.2014 determining the total income of Rs. 4,34,83,03,850/- after making certain additions. Thereafter, penalty proceedings was initiated on the disclosed amount of Rs. 59,09,00,000/- u/s 271AAB of the Act. 3. During the course of penalty proceedings, the assessee submitted such offering of Rs. 59,09,00,000/- was on account of sub grade fines. In the course of search an internal in-house departmental (assessee's own) survey report (not prepared by the Income Tax Dept) was found regarding sub-grade screen fines lying in the mines. It was also explained that sub-grade screen fines comes automa....
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....the sale of fines are accounted in the books of accounts on cash basis year after year. Raising cost of fines has been taken as "NIL" because the same get automatically generated while mining the seized ore and other products. I find that every year the assessee company submits report to the Director General of Mines in which the quantity of production of sized ore and fines are reported. Thus' the said seized document is part of regular books of accounts and not an incriminating document. I find that the assessee made a disclosure by taking estimated amount of Rs. 250/- per MT of Iron ore fines. I find that the AO has taken the undisclosed income of the assessee on the amount declared suo moto by the assessee (for which no incriminating evidence, papers / documents, stock, cash etc were found during the search operation in order to buy peace of mind and avoid any further litigation. The assessee has brought on record the case law of Dilip N Shroffvs CIT (2007) 291 ITR 519 (SC). In this case law the Hon'ble Supreme Court has held that imposition of penalty is not automatic. Levy of penalty is not only discretionary in nature, but such discretion if req....
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....ed income of the specified previous year. Undisclosed income has been defined in the explanation to section 271AAB. Thus, it is clear that in order to levy penalty two things are essential (1) undisclosed income and (2) specified previous year. Here in this case Rs. 50,09,00,000/- was offered for taxation by the assessee suomoto in the statement recorded at the time of search. From the ratio decided by the Hon'ble Supreme Court in the case of Sudarshan Silk &Saries (sputa), it is clear that only the statement of the assessee without any corroborating evidence cannot be the only basis for levying penalty. The Honble Supreme Court has also categorically decided the ratio that penalty cannot be levied on the amount offered by the assessee in order to buy peace of mind [in the case of Sudarshan Silk & 5aries (supra). Thus, respectfully following the ratio decided by the Honble Supreme Court, the AO is directed to delete the penalty o/s 271AAB(l) on the Suo Moto disclosure of Rs. 59,09,00,000/-. Accordingly, assessee's appeal on ground No. 1 is allowed." 5. Aggrieved by the aforesaid action of the CIT(A), the Revenue is before us. ....
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....tained by the assessee company. Thus, it was contended by the Ld.AR that the stock of screen fines are properly maintained and are part of regular books of accounts (stock register maintained by the assessee company). Our attention was drawn to the details of stock as per Form H-1for F.Y. 2010-11 (A.Y. 2011-12) and F.Y 2011-12 (A.Y.2012-13) which is reproduced hereunder:- Grade (% of Fe content) Opening stock of mine-head Production Dispatches from mine-head Closing stock at mine-head (1)Lumps: (a) 58% to below 60% 6,578,840 6,407.440 171.400 (b) 60% to below 62% 5.440 520,214.400 519,816.550 403,290 (c) 62% to below 65% 3,712,980 531,866.250 531,004.660 4,574,570 Total (LUMP) 10,297.260 1,052,080.650 1,057,228.650 5,149.260 (2) Fines (a) Below 55% 2,004,540.558 567,595.100 170,884.410 2,401,251.248 (b) 55% to below 58% 5,470.400 5,470.400 (c) 60% to belo....
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....2. 490 592158647 LUMP (40TO 200 MM) 363597.780 1175929751 LUMP (10 TO 40 MM) 205952.220 551160356 SUB GRADE LUMP 17335.410 9480637 SUB GRADE SCREEN FINES 50962.250 50387491 Grand Total IRON 1348648.150 4007278129 LUMP-MN 16688.560 145804116 GRAND TOTAL 1365336.710 4153082244.920 FY 2011-12 ITEM Mines Sum of Qty Sum of Ex CLO (5 TO 18 MM) 350190.659 2044751679 CRUSHED FINES / NATURAL FINES 308650.225 752024712 LUMP ( 40 TO 200 MM) 290260.845 1393258339 LUMP (10 TO 40 MM) 409618.244 1669747493 SUB GRADE LUMP ( 40 TO 200 MM) 4912.050 6385665 SUB GRADE LUMP (10 TO 40 MM) 1495.390 1944007 SUB GRADE SCREEN FINE 170884.410 248187824 Total IRON 1536011.823 6116299719 LUMP-MN 4853.130 29462041 GRAND TOTAL 1540864.953 6145761760.085 11. It was ....
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.... respect to the Revenue's reliance on the order of the Hon'ble Allahabad High Court in Sandeep Chandak (supra) he distinguished it, which we will state infra. Thus, according to ld AR, the additional income of Rs. 59,09,00,000/- offered in the statement u/s 132(4) was by way of valuation of closing stock of sub-grade fines which formed part of the regular stock records and hence did not qualify as unaccounted stock which may be treated as 'undisclosed income' of the assessee. Therefore the order of ld CIT(A) deleting the penalty does not be disturbed. 12. We have given our thoughtful consideration to the rival submissions, perused the materials on record, considered the applicable legal provisions and scrutinized the judicial precedents relied upon. The sum and substance of the issue to be adjudicated in the present appeal is 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 of Rs. 59,09,00,000/- can be considered to be 'undisclosed income' found in the course of search so as to warrant penalty u/s 271AAB of the Act. Before dealing with this issue, it will be appropriate to discuss the r....
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....ounts of the assessee company. The remaining fines which were not in the nature of sub-grade Fines were accounted in the stock records as well as financial records and its value was duly included in the value of opening stock. The Ld. AR brought to our attention that in the assessment order u/s 153A/143(3) for the AY 2011-12 the AO had accepted the method of accounting employed by the assessee where under the value / cost of extracting sub-grade Fines in stock was taken at NIL. We find that the said method of accounting was consistently followed in all the past years and in none of the assessment orders passed for any of the preceding years the AO had disputed or questioned the method of valuation followed by the assessee in respect of sub-grade Fines. The Ld. AR also brought to our attention that as and when the sub-grade Fines were sold the entire sale proceeds were considered as income in the year of sale and this method was also regularly followed and accepted by the Revenue in the past as well as in the relevant year under consideration. We therefore find that the assessee has been consistently following a particular method of stock valuation in preparation of its annual....
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....that position to be sustained by not challenging the order, it would. not be at all appropriate to allow the position to be changed in a subsequent year." 15. It is also material to take note of the judgment of the Hon'ble Supreme Court in the case of Chainrup Sampatram v. CIT reported in 24 ITR 481, approving the underlying rule that the closing stock is to be valued at cost or market price, whichever is the lower, and that it is now generally accepted as an established rule of commercial practice and accountancy. In that judgment the Hon'ble Apex Court also observed that the valuation of closing stock cannot be construed to be a source of income because for the simple reason that the value of inventory adopted at the end of one previous year constitutes the value of opening inventory for the subsequent previous year and therefore allowable as deduction in the subsequent year. The relevant extracts from this judgment is reproduced below: 16. From the foregoing decisions of the judicial authorities we find that in the assessee's case, it always reported the details of production as well as inventory of sub-grade fines to the Indian Bureau of Mines as....
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.... Q-9 As per the seized documents vide ID Mark, PKS/1 pages 1 to 5, It was found that a survey was conducted by mines departments and it was found that total quantity as on 16.05.2012 of 2206030 mt. Of sub grade screen fines was lying in Narayanposhi iron ore mines. However, you have taken closing stock value of this sub grade fines as NIL. Further, you have made your own calculation and production cost of sub grade screen fines was taken as 168.59 per ton. Please explain. Ans- The quantity of sub grade screen fines mentioned in the seized documents is correct but this is a material which has no raising cost. It is a material which has no raising cost. It comes automatically with high grade of iron ore which is sold in the open market as such it has correctly been taken as NIL value. But we do not want to dispute mistakenly valuation made by our staff in the said documents and we admit the same and will be accounted in our books of accounts i.e. Aryan Mining & Trading Corporation (P) Ltd. Q-10 Why not other expenses were included in cost of production of sub grade screen fines. Please reconcile your cost of production after adding of other expenses. ....
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....of the search. The relevant findings of the AO in Para 7.1 to 7.3 of the assessment order u/s 143(3) was as follows: 7.1 The submission made by the assessee was considered. The main process involve in the raising of Iron Ore are Excavation, Raising, Screening and Crushing. The sub-grade Screen Fines are automatically generated with high grade Iron Ore either at the time of Raising or Crushing. The sub-grade Fines did not have market earlier and as such it was dumped by the assessee at its Mining Sites without making valuation of the same. The entire process cost was absorbed by the high value marketable ores and no cost was apportioned for being attributable to the sub-grade Screen Fines. As the cost was 'NIL', the valuation of sub-grade Screen Fines stock was also being taken as NIL. The sales of sub-grade Screen Fines are made and reflected in the accounts. 7.2 However, during the F.Y.2012-13, the management of the assessee company decided to quantify the stock of sub-grade Screen Fines and estimate its approximate cost. A surveyor was appointed for that purpose. The A/R of the assessee company explained that the seized document contained, the qua....
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....of paper-book, we note that in these returns apart from reporting the production quantities of sized ores and fines; the assessee had also reported the production and stock of sub-grade fines for the respective financial years. From these figures we note that as on the 1st day of the relevant financial year i.e. 01/04/2011, the assessee was already holding sub-grade fines of 20,04,540 MT in stock, which went up to 2363615.16 MT by 31/03/2012. Even though as on 31/03/2011,quantity of subgrade fines in stock reported to DG, Mines was 20,04,540 MT, the same AO accepted its valuation at NIL in the assessment order framed u/s 153A/143(3) for AY 2011-12. However with reference to letter dated 01/06/2012 and the statement recorded u/s 132(4) and with reference to the suo-moto offer made while filing of return, the AO assessed the value of entire 23,63,615.15 MT at the rate of Rs. 250/Ton as income of the assessee for AY 2012-13. We therefore find that save & except for voluntary offer made by the assessee there was no incriminating material found as a result of which any new undisclosed asset or income was discovered in the course of search. Had it been a case that unaccounted or undisclo....
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....d in the course of a search under section 132, which has- (A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or (B) otherwise not been disclosed to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner before the date of search; or (ii) any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted. 21. From the foregoing definition of 'undisclosed income' we find that this expression is given a definite and precise meaning and the word has not been described in an inclusive manner so as to enable the tax authorities to give wider or elastic meaning which would enable them to bring within its ambit the species of income not specifically covered by the definition. From bare perusal of the d....
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....ries which are found in 'other documents maintained in regular course of business', it does not come within the ken of 'undisclosed income' as defined in clause (c) of Explanation to Section 271AAB of the Act. "7. Finally, the Ld. AR submitted that during the search, the search party found the records of the assessee's transactions in speculative commodity from the drawer of assessee's accountant from which the AO could compute the income of the assessee from the said transaction which amount assessee declared during search and which was duly returned and which figure was accepted by the AO. According to Ld. AR, the fact that search happened on 01.08.2012 need to be taken note of since undisputedly there was enough and more time for the assessee to submit the accounts during proceedings which fact has been taken note of and concurred by the Ld. CIT(A). Thereafter, the Ld. AR drew our attention to the definition of undisclosed income given under section 271AAB which reads as under: "Penalty where search has been initiated. '271AAB. (1) The Assessing Officer may, notwithstanding anything contained in any other provisions of ....
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....m Other Sources" which was accepted by the AO in toto. We note that since the income under question (Rs. 3 cr.) was in fact entered in the "other documents" maintained in the normal course relating to the AY 2013-14, which document was retrieved during search, hence, the amount of Rs. 3 cr. offered by the assessee does not fall in the ken of "undisclosed income" defined in Sec. 271AAB of the Act. So, Rs. 3 cr. which was commodity profit recorded in the other document maintained by the assessee which was retrieved during search cannot be termed as "undisclosed Income" in the definition given u/s. 271AAB of the Act. Since Rs. 3 cr. cannot be termed as "Undisclosed Income" as per sec. 271AAB of the Act, no penalty can be levied against the assessee. Therefore, we uphold the order of the Ld. CIT(A) on the aforesaid reasoning rendered by us. 24. We note that it has been the submission of the AO as well as the Ld. DR before us that the 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 ag....
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....fore the A.O. Once the A.O. is bound by the Act to hear the assessee and to give reasonable opportunity to explain his case, there is no mandatory requirement of imposing penalty, because the opportunity of being heard and reasonable opportunity is not a mere formality but it is to adhere to the principles of natural justice. Hon'ble A.P. High Court in the case of RadhakrishnaVihar in ITTA No.740/2011 while dealing with the penalty u/s 158BFA held that 'we are of the opinion that while the words shall be liable under sub section (1) of section 158BFA of the Act that are entitled to be mandatory, the words may direct in sub section 2 there of intended to directory'. In other words, while payment of interest is mandatory levy of penalty is discretionary. It is trite position of law that discretion is vested and authority has to be exercised in a reasonable and rational manner depending upon the facts and circumstances of the each case. Plain reading of section 271AAB and 274 of the Act indicates that the imposition of penalty u/s 271AAB of the Act is not mandatory but directory. Accordingly we hold that the penalty u/s 271AAB is not mandatory but to be imposed on merits o....
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....ee as reveals in the reply filed by the assessee against the said show cause notice. Hence the Hon'ble High Court has held as under :- " The ld. A.Rs have also challenged that the caption of the notice mentioned only Section 271 and not 271AAB. In this respect, the copy of notice has been produced by the ld. A.R. before me. It is seen that the ld. A.R is correct in observing that the section of penalty has not been correctly mentioned by the AO in the caption. However, the AO will get the benefit of section 292BB of the Income Tax Act, 1961 because firstly, the assessee has raised no objection before the AO in this regard. Secondly, last line of the notice clearly mentions section 271AAB. Thirdly, the assessee has given reply to said notice which shows that the assessee fully comprehended the implication of the notice that it is for section 271AAB. The assessee has also challenged that the principles of natural justice has not followed by the AO. The detailed submissions of A.R in this regard has already been reproduced above. The A.R did not produce any evidence to show that he was not given proper opportunity of hearing. It is clear ....
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....1AAB of the Act which reads as under; 271AAB [Penalty where search has been initiated]:
(1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the 1 st day of July, 2012, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him- (a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee- (i) in the course of search, in a statement under sub-section (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived. 
 (ii) Substantiates the manner in which the undisclosed income was derived; and 
 (iii) On or before the specified date- (A) pays the tax, together with interest, if any, in respect of the undisclosed income; and (B) furnishes the return of income for the specified previous year declaring such undisclosed income therein; (b) a sum computed at the rate of twenty per cent of the undiscl....
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....ds used are 'AO may direct' and 'the assessee shall pay by way of penalty'. Similar words are used section 158BFA(2) of the Act. The word may direct indicates the discretion to the AO. Further, sub section (3) of section 271AAB of the Act, fortifies this view. Sub section (3) of section 271AAB: The provisions of section 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section. 7. The legislature has included the provisions of section 274 and section 275 of the Act in 271AAB of the Act with clear intention to consider the imposition of penalty judicially. Section 274 deals with the procedure for levy of penalty, wherein, it directs that no order imposing penalty shall be made unless the assessee has been heard or has been given a reasonable opportunity of being heard. Therefore, from plain reading of section 271AAB of the Act, it is evident that the penalty cannot be imposed unless the assessee is given a reasonable opportunity and assessee is being heard. Once the opportunity is given to the assessee, the penalty cannot be mandatory and it is on the basis of the facts and merits placed before the A.....