D. Manmohan, V.P.
1. These two appeals involve an identical issue and they arise out of the orders passed by the CIT(A)-8, Mumbai wherein penalty levied by the AO having been affirmed by the learned CIT(A), assessee challenged before us by contending that the addition made in the assessment proceedings is only on account of the addition agreed upon by the assessees before the Central Excise authority under the KVSS scheme whereas the circumstances indicate that it was neither a case of concealment nor furnishing of inaccurate particulars of income and hence it is not a fit case for levy of penalty.
2. The facts in both the appeals being identical the facts mentioned in the case of M/s. Mardia Extrusions Ltd. are reproduced herein to highlight the issue before us. The assessee, M/s. Mardia Extrusions Ltd. was engaged in the business of manufacturing Brass Rods, Brass Tubes, Brass Wires, etc. by utilising the raw material such as Brass Billets, Brass Ingots, etc. On 01.10.1993 a search was carried out at the business premises of the assessee by the Excise Department wherein they found certain excess stock on which duty has not been paid. As per the Panchanama dated 30.09.1993/01.10.1993 the excess stock was to the tune of Rs.17,29,340/- whereas the shortage was to the tune of Rs.13,59,120/-. Stock taking was done in the presence of one of the Directors of the assessee company by the Investigation Authorities. Based on the investigation, conducted by the Excise Authority, duty was collected by the Central Excise Department. Though it was noticed by the Central Excise Department that the assessee has not maintained proper Registers, which resulted in excess stock and shortage of stock, at the time of filing the return of income under the Income Tax Act assessee has not furnished any details with regard to the search conducted by the Central Excise Authorities and merely filed the return of income declaring total income of Rs.27,16,859/- on 30.11.1994. The return was also accompanied by Tax Audit report under section 44AB of the Act. The said return was processed under section 143(1) of the Act on 03.02.1995 and subsequently taken up for scrutiny on issuing notice under sections 143(2) and 142(1) of the Act. During the course of assessment proceedings the assessee was confronted with the information received from the Central Excise Authority regarding evasion of duty of Rs.2,59,401/- and seizure of goods by the Excise Department to the tune of Rs.17,29,340/- in the course of search on 30.09.1993/01.10.1993.
3. In reply thereto the assessee submitted that the Central Excise Authority estimated value of finished stock and raw materials based upon "eye sight basis calculation" which was labelled as physical stock taking. In fact it is a case of miscalculation since they have not considered the burning losses that take place in the process of manufacturing of finished products. The Excise Department has also not taken into consideration certain dispatches and receipt of material of the assessee. In short the case of the assessee was that excess or shortage of stock was not found by proper verification of stock. It was thus contended that there is no excess stock, if burning losses, which is in the range of 10%, and also generation of scrap, etc. are taken into consideration.
4. The AO observed that during the long duration of stock taking process the assessee could not properly reconcile the stock. If there is any objection with regard to the methodology adopted by the Central Excise Authority the assessee should have raised such objection before them. It is also stated that the excess/shortage reflected in the Annexure to the Panchanama made by the Excise Authority shows that they have maintained distinction between raw material and finished excisable goods which shows that there is shortage in the quantity of brass billets whereas the brass rods, bras tubes and brass pipes are in excess. Therefore the assessee's contention that brass rods, brass tubes and brass wire are manufactured out of brass billets (which are in shortage) is not entirely acceptable.
5. Considering the duration of the search (i.e. 3 days) and the nature of manufacturing process of the assessee, the AO concluded that estimation of undisclosed stock in the premises of the assessee at Rs.16,00,000/- would be most reasonable and accordingly added the same to the total income declared by the assessee. Simultaneously penalty proceedings were initiated.
6. Assessees challenged the orders passed by the AO by preferring an appeal before the CIT(A) XX, Mumbai wherein it was contended that the excess and shortage of stock found by the Excise Authority was due to the fact that they had erred in classifying the goods properly and they have not verified the stock properly. Further, the search proceedings were carried on for nearly three days and during this period various products were manufactured; the excess/shortage was found because the Excise Authority had not taken into account the products manufactured or under manufacturing process and also the scrap generated. It was also submitted that burning losses, etc. were not properly taken into account.
7. The learned CIT(A) partly accepted the contention of the assessees. The learned CIT(A) observed that the Excise Authority carried out stock taking process properly in the presence of the Directors as well as the Panchas who have signed the Panchanama. If the assessees herein noticed any shortage or discrepancy, the same could have been pointed out during the time of stock taking itself, which was not done by the assessees. Therefore, he concluded that the plea of the assessees, that stock taking was not properly carried out, need not be given any weightage. He, however, observed that the undisclosed stock, estimated at Rs.16,00,000/- is without any basis, since both excess and shortage was taken into consideration for making addition, that too, on estimate basis only. Though the fact remains that there has been excess stock/shortage of stock, as verified by the Excise Authority, in his opinion the difference between excess and shortage should be taken into consideration, which works out to Rs.3,72,320/- and the AO was accordingly directed to modify the order by treating the differential sum of Rs.3,72,320/- as undisclosed stock. In the case of M/s. Mardia Tubes Ltd. the addition sustained was to the tune of Rs.6,779,560/-.
8. It is necessary to notice here that the assessees herein approached the designated authorities under the Central Excise Act, under Kar Vivad Samadhan Scheme (KVSS), wherein the duty leviable on account of excess stock and shortage of stock was offered to tax to purchase peace with the Department and it was accordingly accepted.
9. Consequent to the additions made and confirmed by the CIT(A) as well as the ITAT the AO initiated proceedings under section 271(1)(c) of the Act. In response thereto the assessees have requested the AO to drop the penalty proceedings by contending that there was no wilful default and there is no conscious breach of law on the part of the assessees herein. In the case of Mardia Extrusions Ltd. it was submitted that the assessee company suffered heavy loss in business and was declared as sick industrial company. Under the circumstances it has offered the disputed amount under the Central Excise Act by availing the benefit under KVS scheme, 1998. In the case Mardia Tubes Ltd. it was submitted that the amount was offered by the assessee under KVSS to avoid litigation and to buy peace. The addition was made only on estimate basis and hence it is not a fit case for levy of penalty.
10. The AO rejected explanation of the assessees. He observed that Explanation 1 to section 271(1)(c) raises presumption of concealment when an addition is made by the AO and once the addition is confirmed the burden is upon the assessee to rebut such presumptions by tendering valid/satisfactory explanation. Acceptance by the assessees of the excess stock under KVSS before the Central Excise Authorities clearly establishes that the assessees have deliberately concealed particulars of income by suppressing the value of stock and hence he levied penalty @100% on the tax sought to be evaded with reference to the additions made in the respective assessment years.
11. Aggrieved, assessees contended before the first appellate authority that the estimate of undisclosed stock was without any basis and this plea of the assessee was accepted by the learned CIT(A) while restricting the addition to the difference between the value of excess stock and shortage of stock. Thus the explanation of the assessees is not found to be false and the addition is only based on estimate on which penalty is not leviable.
12. The CIT(A) was not convinced with the submissions made on behalf of the assessees. By relying upon the decision of the Hon'ble Apex Court in the case of Dharmendra Textile Processors 306 ITR 277 the learned CIT(A) concluded that in the light of Explanation 1 to section 271(1)(c) of the Act Revenue need not prove mens rea to initiate penalty proceedings. Since the assessees have not voluntarily offered the disallowance for taxation and had offered explanations which are false and not bonafide, it is a fit case to invoke Explanation 1 to section 271(1)(c) of the Act. She also observed that acceptance of excess stock by the assessees under KVSS before the Central Excise Authorities clearly establishes that the assessees have deliberately concealed particulars of income by suppressing the value of stock. Accordingly she confirmed the orders passed by the AO.
13. Aggrieved by the orders passed by the CIT(A), assessees are in appeal before us. The learned counsel for the assessee submitted that the addition of Rs.4,86,788/Rs.6,79,560/- respectively was accepted by the assessees herein before the Central Excise Authorities under KVSS merely to buy peace and to avoid litigation. The very fact that the additions made by the AO was reduced substantially in further appeals highlights that the addition was made merely on estimate basis and mere addition does not in itself prove that it amounts to concealment of income. It was also contended that the learned CIT(A) wrongly relied upon the decision of the Apex Court in the case of Dharmendra Textile Processors (supra) overlooking the fact that the principles laid down in the case of Reliance Petropoducts Pvt. Ltd. 322 ITR 158 (SC) is applicable to the cases in hand. The learned counsel for the assessees submitted that the assessees have tendered explanation to highlight that there was no basis for estimating the excess stock as well as shortage of stock for the purpose of making addition under section 69A of the Act. In fact the first appellate authority, in the quantum proceedings, admitted that the estimates made by the AO are without any basis. Assessees have also tendered an explanation that burning losses, etc. were not properly taken into account at the time of the search conducted by the Excise Authorities but in order to purchase peace with the Department the assessees herein opted to settle the issue under KVSS but at the same time elaborate explanation was furnished before the AO as well as the CIT(A), which was not found to be false. Merely because the assessees have accepted the addition under KVSS, tax authorities ought not to have proceeded on the assumption that the explanation of the assessees' was false. The learned counsel for the assessee strongly relied upon the decision of the Hon'ble Apex Court in the case of Reliance Petroproducts Pvt. Ltd. (supra) to submit that where an addition is made on estimate basis penalty should not be levied under section 271(1)(c) of the Act since assessees have tendered explanation, supported with sufficient material, which was not found to be false. It was also contended that the search was conducted by the Central Excise Authorities in 1993 and application under KVSS was filed by the assessees herein only on 30.01.1999 and prior to the said date the assessees having challenged the additions, they could not have offered the impugned amount to tax in the respective income tax returns. The assessments in the case of both the assessees were completed prior to the filing of applications under KVSS. It cannot therefore be stated that the assessees accepted the addition but at the same time did not offer the same in their income tax returns.
14. On the other hand, the learned D.R. strongly relied upon the orders passed by the tax authorities. The case of the learned D.R. is that the search was carried out by the Central Excise Authorities for three days and they have listed out in the Panchanama the value of excess goods referable to finished and semi-finished excisable goods and at the same time listed out the shortage of goods referable to raw material which in itself proves that the assessees have not maintained books properly, which resulted in additions made by the Central Excise Authorities and for the same reason the AO made the additions. Though the additions were reduced in the light of the amount offered to tax under KVSS, the fact remains that to the extent of the additions admitted the assessees could not furnish any evidence to show that the addition made by the AO is not in accordance with law. In other wards once the addition is confirmed Explanation 1 to section 271(1)(c) comes into play and it is for the assessees to prove that the addition is not maintainable or at least they should give an explanation which can be substantiated. In the instant case it could not be shown that discrepancy in stock found by the Excise Department is on eye sight basis only; in fact the stock taking process was done in the presence of the Directors of the respective companies. He thus strongly relied upon the orders passed by the learned CIT(A).
15. We have carefully considered the rival submissions and perused the record. It is not in dispute that under Explanation 1 to section 271(1)(c) of the Act the initial burden is placed upon the assessees to prove that the addition confirmed by the AO is not the concealed income of the assessees. In other words the assessees have to prove that it was not on account of furnishing inaccurate particulars of income; the explanation of the assessees should be supported by proper reasoning. The AO as well as the CIT(A) relied upon the decision of the Hon'ble Apex Court in the case of Dharmendra Textile Processors; It is well settled principle of law that the initial burden is upon the assessee to establish that it had not deliberately concealed particulars of income. Subsequent to the aforecited judgment the Hon'ble Apex Court had an occasion to consider identical issue in the case or Reliance Petroproducts Pvt. Ltd (supra) wherein the Hon'ble Apex Court observed that making an incorrect claim in law may not tantamount to furnishing inaccurate particulars. The Hon'ble Apex Court further observed that everything would depend upon the return filed because that is the only document where assessee can furnish his particulars of income. When such particulars are found to be incorrect, the liability would arise. No doubt, the learned counsel for the assessees relied upon the above mentioned judgment but the fact is that in the case of the two assessees before us it was not a case of incorrect claim of deduction under law, by furnishing all the particulars of income. According to the AO the difference between the excess stock and closing stock would reveal that the assessees purchased stock using unexplained money and therefore the addition is maintainable under section 69A of the Act. The assessees herein could not point out that the unexplained stock found by the Central Excise Authorities was merely on "eye sight basis". The search proceedings continued for three days and the Panchanama was written in presence of the Directors of the respective companies. If burning losses, etc. were not properly taken into consideration that issue could have been raised before the Central Excise Authorities at the time of preparing the Panchanama or immediately thereafter. No such efforts appear to have been made by the assessees herein. The assessees filed the returns of income on 30.11.1994 whereas the search was conducted by the Central Excise Authorities in 1993. When the assessees approached the authorities under KVSS, it appears that the issue concerning excess/shortage of stock which escaped levy under Central Excise Act was pending before the CEGAT, as could be noticed from Form- 1B placed before us. No evidence, whatsoever, was furnished before the AO/CIT(A) to show that a specific issue was raised before the Central Excise Authorities with regard to the correctness of the value of excess stock or shortage of stock and the plea of burning losses, etc. which was claimed to have been overlooked by the Central Excise Authorities. Even before us no material, whatsoever, was placed to indicate that the addition made and ultimately confirmed by the AO is not in accordance with law. Therefore, in our opinion, the assessees' explanation is not substantiated with any material and hence we do not find any infirmity in the orders passed by the learned CIT(A). We therefore confirm the penalty levied by the AO by upholding the orders passed by the CIT(A) and dismiss the appeals filed by the assessees herein.
Order pronounced in the open court on 13th February, 2013.