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Baiton Cables (P.) Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Jaipur
Decided On
Reported in(1985)12ITD388(JP.)
AppellantBaiton Cables (P.) Ltd.
Respondentincome-tax Officer
.....there been any deliberate intention to exclude the stocks, why would any entry be made in the next year's stock records mr. borad questioned. he further relied on cit v. khoday eswarsa & sons [1972] 83 itr 369 (sc), addl. cit v. sadiq ali & bros.[1973] 92 itr 276 (j&k) and cit v. meghraj ramchandra [1974] 97 itr 559 (pat.), for the proposition that it is by genuine mistake that the stocks were excluded in the assessment year 1970-71 as the same were included in stocks for the assessment year 1971-72. mr. borad further stated that even after including the value of these stocks in the assessment year 1970-71, the assessed income is nil as the company had unabsorbed depreciation, development rebate as well as brought forward losses. when the company was not to pay any taxes due.....
1. These appeals are by the assessee and they are directed against the imposition of penalties under Sections 271(1)(c) and 273 of the Income-tax Act, 1961 ('the Act'). For the sake of convenience, they are being disposed of by this common order. The assessment years involved are 1970-71 and 1971-72.

2. Assessment year 1970-71 : Mr. M.L. Borad, the learned representative of the assessee-company, submitted that in the year, copper weighing 9,149 kgs. was purchased for a value of Rs. 1,28,065. This was duly entered in the stock register. The entire copper purchased was issued for conversion to Extrusion India (P.) Ltd., Jaipur. The copper having been issued was shown as such in the stock register and the stock record thus showed a nil balance. At the year end, stock balance as per stock records, was extracted and valued and the fact that the copper belonging to the company was issued for extrusion, was overlooked. This resulted in omission of copper from the stocks. This mistake was detected by the company only during the course of assessment proceedings for the assessment year 1971-72. The accounting years of the company ended on 31-12-1969 and 31-12-1970 for the assessment years 1970-71 and 1971-72, respectively. The ITO was explained that there was no deliberate attempt on the part of the assessee not to include the stocks. The omission was made as stock was excluded from the stock register, which showed nil balance. The same was included in the stock register for the assessment year 1971-72 by mistake on the part of the stores department. Had there been any deliberate intention to exclude the stocks, why would any entry be made in the next year's stock records Mr. Borad questioned. He further relied on CIT v. Khoday Eswarsa & Sons [1972] 83 ITR 369 (SC), Addl. CIT v. Sadiq Ali & Bros.

[1973] 92 ITR 276 (J&K) and CIT v. Meghraj Ramchandra [1974] 97 ITR 559 (Pat.), for the proposition that it is by genuine mistake that the stocks were excluded in the assessment year 1970-71 as the same were included in stocks for the assessment year 1971-72. Mr. Borad further stated that even after including the value of these stocks in the assessment year 1970-71, the assessed income is nil as the company had unabsorbed depreciation, development rebate as well as brought forward losses. When the company was not to pay any taxes due to losses of earlier years, there could be no mala fide intention for furnishing inaccurate particulars. Mr. Borad relied on CIT v. Jaora Oil Mill [1981] 129 ITR 423 (MP) for the proposition that when the assessed income is nil, there can be no levy of penalty for concealment. He further stated that penalty could not be levied on the basis of certain observations in the assessment order. For this proposition, he relied on CIT v. V.L. Balakrishnan [1981] 130 ITR 138 (Mad ), Addl. CIT v.Noor Mohd. & Co. [1974] 97 ITR 705 (Raj.). Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) and Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 (SC), and some Tribunal judgments. He, therefore, pleaded that penalty has been wrongly levied and the orders must be quashed.

3. For the department, Mr. S.S. Ruhela, submitted that the omission of stocks was detected by the ITO at the time of assessment. The company, during the course of proceedings for the assessment year 1971-72, volunteered that the goods being purchased in 1970-71, the stocks be included in the assessment year 1970-71. This clearly proves the mala fide intention of the assessee and, therefore, has been rightly observed as furnishing of inaccurate particulars. Similarly, in the next year also, the ITO detected an omission of stocks of a value of Rs. 43,000. Mr. Ruhela further argued that in a penalty matter, the Tribunal cannot come to a contrary view from the one taken by it in the quantum appeal. For this proposition, he relied on 110 ITR (Mad.) (sic). He also stated that the penalty having been levied after 1-4-1976, Explanation 1 to Section 271(1)(c) is attracted and, therefore, penalty has been rightly levied. For this, he relied on James Finlay & Co. Ltd. v. CIT [1983] 144 ITR 423 (Cal.).

4. We have heard the parties. Basically, penalty for concealment can be levied only when there is any concealment; concealment always presupposes deliberate intention. All omissions need not be concealments, while all concealments are always omissions. This important distinction must always be borne in mind while deciding an issue as to whether it is an omission or concealment. The term omission has been defined as something that has been left out or something that has been neglected, while concealment means to place something out of sight. In the instant case, the stock had been omitted due to (a) stock being valued as per balance shown in the stock records ; (b) neglect of making an entry in the stock register of the processed copper, when it was received in January 1970 ; (c) lack of proper care by stores in not comparing the physical stocks into the balance as per stock register ; (d) care not being exercised by the accounts department properly by making a financial entry of the goods having been issued for conversion ; (e) care not being taken for examining and comparing the income earned with the materials purchased and issued. Had the accounts department been more vigilant by recording a financial entry in respect of goods which are issued to outsiders for conversion, this omission could have been avoided. The omission could have come to light, had the company made a financial adjustment entry in the year when the processed goods were received. This lack of effective system and procedure has resulted in the comedy of errors. The error was, thus, unintentional and, therefore, not deliberate. The ITO as well as the Commissioner (Appeals) have failed to appreciate this factual position.

We, therefore, are of the view that this was purely a mistake and not a deliberate attempt to furnish inaccurate particulars or with a view to conceal income. Explanation 1 to Section 271(1)(c), effective from 1-4-1976, reads as under: Where in respect of any facts material to the computation of the total income of any person under this Act,-- (A) such person fails to offer an explanation or offers an explanation which is found by the Income-tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) to be false, or (B) such person offers an explanation which he is not able to substantiate, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of Clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed.

We have already held earlier that the stocks have come to be omitted by sheer mistake and there was no deliberate attempt. The ITO had come to the conclusion that there was a deliberate attempt to conceal as it was at his instance, the mistake came to be located. The omission having happened due to lack of effective accounting procedures, it cannot be given the colour of deliberation. The explanation offered has also not been found to be false nor the assessee had failed to substantiate the explanation offered by it. We are, therefore, of the view that Explanation 1 to Section 271(1)(c) does not get attracted and, accordingly, we quash the penalty imposed of Rs. 1,30,000 for the assessment year 1970-71.

(a) In the quantum appeal, the Commissioner (Appeals) had observed that: (i) The assessee had conceded in writing that it has no objection to the estimation of gross profit rate at the rate of 14 per cent, as against the declared gross profit rate at 7.72 per cent--addition made to the trading account Rs. 1,04,950.

(ii) Excess stock of 2,710 kgs. of copper was found in excess, which was taken at the average purchase price of Rs. 18 per kg.--addition made undisclosed source Rs. 42,820 (sic).

(i) Excise authorities had conducted a search of the premises and have found that the records maintained by the assessee as not reliable.

(ii) Since the assessee had not appealed to the Tribunal against the addition made to trading account and having promptly conceded to gross profit rate being adopted at 14 per cent for fear of further enhancement, it is thus obvious that the rate applied by the ITO is very reasonable. Since income assessed being more by 20 per cent than the returned incomes, the Explanation to Section 271(1)(c) gets attracted, and the assessee having not discharged his onus that the difference is not due to any fraud, etc., he confirmed the penalty of Rs. 1,04,950, which is equal to trading addition made.

(iii) For the excess stock found, the assessee has stated that burning loss, etc., has not been considered, which explanation was found to be incorrect as the stock was in excess and not short. The amount added as Undisclosed sources of Rs. 42,820 was also held as concealed and the penalty to that extent was also upheld. (ii) Various judicial pronouncements had held that routine trading additions cannot be the basis for levy of penalty under Section 271(1)(c).

(iii) The assessee had discharged his onus in explaining the fall in gross profit by the fact of increase in raw material prices, increase of discount allowed to buyers from five per cent to ten per cent and further the entire sales are vouched and stock register maintained.

(iv) The excess stock arrived at by the ITO is due to peculiar method of working.

(v) The assessee being a company is an artificial juridical person, is incapable of any conscious concealment of income or furnishing inaccurate particulars.

(vi) The penalty has been levied without the full satisfaction of the ITO.7. Mr. Ruhela reiterated the fact brought out by the Commissioner (Appeals) as well as the ITO and pleaded that the penalty has been rightly levied.

8. We have heard the parties. In this year, for two basic reasons of fact, the penalty has been levied : (i) The assessee-company conceding to the gross profit rate of 14 per cent being applied to the estimated sales of Rs. 16 lakhs which resulted in the trading addition of Rs. 1,04,950.

(ii) The total of stocks of copper issued for manufacture and that on hand at the year end was found to be more by 2,710 kgs. over to the aggregate of opening stock and the purchases.

8.1 We shall take up the penalty levied equal to the quantum of trading addition. The following question arises in this regard. Can it be said that the duty and obligation of an assessee in explaining the fall in gross profit by mere reasons comes to an end The answer is emphatically 'No'. The assessee could have very easily substantiated the increase in prices of raw materials purchased by furnishing a statement showing comparative prices of the two years along with the quantities. The statement would have brought out the increase in prices, had (a) the same quantity of materials as that of last year was purchased in the year; and (b) increase in prices due to additional quantity purchased. The sum total of (a) and (b) would indicate the amount by which there would be a reduction in the gross profit.

Similarly, the statement of discount provided to buyers, would have shown (a) additional discount provided on the same quantity of sales as of last year ; and (b) and discount provided due to additional sales in the year.

The sum total of (a) and (b) again would have indicated the amount by which gross profit stands reduced. The assessee, instead of carrying out its duties of putting the facts properly either during the course of assessment proceedings or the penalty proceedings, points out the legal proposition that penalty cannot be levied in respect of routine trading additions. It is beyond our comprehension that the non-acceptance of results, as per accounts duly audited, could be termed as routine addition. The trading addition cannot be a routine addition at all in the present case especially when the addition has been conceded to by the assessee. This tantamounts to acceptance of concealment or furnishing of inaccurate particulars of income. We, therefore, uphold the penalty levied on this account.

9. As regards the excess stock, we observe from the order of the Tribunal as well as of the ITO that the total quantity of opening stock and purchases are as under :as closing stock for 1970-71) 12,546.237Purchases 70,405.800 82,952.037 (A)Issues 47,550.960Closing stock 38,111.916 85,662.876 (B) What was asked from the assessee was how the total of issues and the closing stock of raw material exceeded the total quantity of opening stock and purchases of raw material The reply by the assessee was that the method adopted by the ITO was peculiar and that he had failed to take note of the burning wastage, transit loss, etc. Can it be said that explanation offered by the assessee is reasonable or plausible The answer has to be 'No'. How can any one issue more quantity than what he has in stores This can happen only in one situation, when purchases of materials are not recorded in the books. Here again, the company had failed to provide the quantitative tally of materials stock on the opening date purchases of the year, issues for production and closing stocks with the stock records and the production records. Even before us, the company has not made any effort in this regard from which the only construction could be that the company through its officers, who conduct its affairs, had deliberately furnished inaccurate particulars. The penalty on this account is also upheld. The total penalty levied of Rs. 1.50 lakhs is, therefore, confirmed.

10. Penalty under Section 273 for the assessment year 1971-72 : Mr.

Borad submitted that the imposition of penalty under Section 273(1) of Rs. 2,600 for the assessment year 1971-72, was as a consequence of assessments made on an income of Rs. 52,820 as against the returned loss of Rs. 94,950. Penalty has been imposed for wrong filing of estimate for advance tax. The loss has been turned into a positive income due to additions made, which additions were unexpected of by the assessee. The estimate filed was on the basis of the assessee's records. Therefore, no penalty is leviable at all as income-tax becomes payable as a consequence of additions only.

11. Mr. Ruhela for the department submitted that the assessee had conceded to the trading addition of Rs. 1,04,950 and the excess stock found could not be explained. This clearly establishes the fact that the assessee had filed a wrong estimate and that penalty has been rightly imposed.

12. The parties have been heard. Since this appeal follows the penalty appeal under Section 271(1)(c) for reasons recorded in paras 8, 9, 10 above, we hold that the estimate filed was improper and inaccurate and, therefore, confirm the penalty of Rs 2,600. The result is, that the assessee's appeal for the assessment year 1970-71 is allowed and that of 1971-72 is dismissed.

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