Andhra Pradesh H.C : The assessee in this case is a partnership firm carrying on business in the purchase and sale of gold jewellery.

Counsel Appeared

A. Satyanarayana, for the Assessee : M. Suryanarayana Murthy & A.V. Krishna Koundinya, for the Revenue

Y.V. ANJANEYULU, J.:

The assessee in this case is a partnership firm carrying on business in the purchase and sale of gold jewellery. For the income-tax asst. yr. 1973-74, the firm filed a return declaring an income of Rs. 73,163. In declaring this income, the value of the closing stock of gold and gold jewellery was accounted in the books at Rs. 3,72,311 based on an inventory prepared. During the course of the assessment enquiry, the ITO called upon the assessee to furnish particulars relating to the valuation of closing stock. On perusing the particulars, the ITO was of the view that the closing stock was undervalued. While the assessee valued the closing stock of gold jewellery, standard gold, etc., at Rs. 3,72,311, the ITO arrived at a value of Rs. 4,53,524, the difference between the two figures being Rs. 81,213. The ITO found that the opening stock was not valued by the assessee on the same basis as was adopted by the ITO for valuing the closing stock. He accordingly valued the opening stock also on the same basis and found that the value of the opening stock was required to be increased by Rs. 44,414. Deducting the adjustments made on account of opening stock valuation, eventually , the ITO arrived at the undervaluation of closing stock at Rs. 36,799. He added this to the income returned by the assessee.

2. It would appear that the assessment made by the ITO making the above adjustments was accepted by the assessee without filing an appeal. Before completing the assessment, the ITO issued a notice under s. 274 of the IT Act requiring the assessee to show cause why penalty should not be levied for concealment of income or for furnishing inaccurate particulars of such income. The assessee sent a detailed reply to the ITO’s show-cause notice. It was found that statutorily the penalty in this case had to be levied by the Inspecting Assistant CIT. Consequently, the record was forwarded by the ITO to the IAC who, after giving the assessee an opportunity of being heard, passed an order under s. 271(1)(c) of the IT Act levying penalty of Rs. 36,799 which incidentally corresponds to the amount of undervaluation of closing stock. It may be pertinent to mention at this stage that the IAC did not seek to levy the penalty under the substantive provision of s. 271(1) (c) of the Act. He levied the penalty by invoking the Explanation to s. 271(1)(c) of the IT Act which provides a fiction concerning concealment of income if the assessed income exceeds the returned income by 20 per cent.

The assessee filed an appeal against the order of the IAC before the Tribunal. The Tribunal confirmed the order levying penalty and dismissed the appeal filed by the assessee. One significant fact that has to be mentioned at this stage is that before the Tribunal, the Revenue did not seek to sustain the order of penalty levied by the IAC by recourse to the Explanation under s. 271(1)(c) of the Act nor did the Tribunal consider it appropriate to apply the Explanation to s. 271(1)(c) of the Act to the facts of the present case for the purpose of affirming the penalty levied. Before the Tribunal, the Revenue justified the levy of penalty under the substantive provision of s. 271(1)(c) of the Act itself and the Tribunal dealt with the case accordingly. On a consideration of all the evidence, the Tribunal recorded a finding that there is enough material in the present case to come to the conclusion that the assessee was clearly guilty of concealing its income by undervaluing the closing stock and consequently penalty was exigible under s. 27)(1)(c) of the Act straightaway without having recourse to the Explanation at all.

Against the order of the Tribunal, the assessee filed an application under s. 256(1) of the Act requiring the Tribunal to refer the case to this Court. The Tribunal having rejected the assessee’s request, an application under s. 256(2) of the Act was filed and this Court directed the Tribunal to state a case for the consideration of this Court and refer the following questions of law :

” 1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the assessee had concealed the particulars of its income by deliberately furnishing inaccurate particulars of closing stock and, therefore, was liable to penalty under s. 27)(1)(c) of the IT Act, 1961 ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in its finding that the assessee bad concealed the particulars of its income when the authority levying the penalty held that the assessee was deemed to have concealed income or furnished inaccurate particulars of income in terms of the Explanation to s. 271(1)(c) of the IT Act for the reason that the income returned was less than 80per cent of the income assessed ? “

5. That is how this reference is laid before us for consideration. We have heard learned counsel, Sri A. Satyanarayana, for the assessee, and learned standing counsel for the Revenue, Sri M. S. N. Murthy. The main thrust of the argument of Mr. Satyanarayana is that in the facts and circumstances of the case, it is impossible to state that the Revenue has established concealment so as to justify the levy of penalty under s. 271(1)(c) of the Act. Learned counsel points out that the assessee has been carrying on business for quite some time. An attempt was made to verify the valuation of closing stock in connection with the asst. yr. 1971-72 and the assessee was called upon to furnish the basis for closing stock valuation. In response to that enquiry, the ssessee gave the necessary particulars and explained the method evolved or valuing the closing stock. Inviting our attention to the explanation given by the assessee in connection with the asst. yr. 1971-72, learned counsel pointed out that the gold jewellery was valued at Rs. 16 per gram as the market price was found to be Rs. 17 and the customary deduction of rupee one per gram in respect of the old jewellery was effected. After scrutiny of the explanation given by the assessee, the ITO did not think it necessary to interfere with the valuation of closing stock for the asst. yr. 1971-72. Learned counsel submitted that the account books of the assessee were rejected and the assessment was made by invoking the proviso to s. 145 of the Act. The effect of making such a best judgment assessment estimating the gross profit is to record the finding that correct profits cannot be deduced from the accounts maintained by the assessee. Learned counsel further pointed out that even for the asst. yr. 197273, the account books of the assessee were rejected and an assessment was made by estimating the gross profit. With this background relating to the completion of assessment of past years, learned counsel submits, the assessee did not attach great sanctity or significance to the valuation of the closing stock for the asst. yr. 1973-74, yet he did not act recklessly by taking the value at a capricious figure. It is pointed out that even for the present assessment year, gold jewellery was valued at Rs. 17 per gram, the market price being Rs. 18 per gram. It is further pointed out that it is open to the assessee to value the gold either at the market value or at the cost price. In the present case, the assessee would have been perfectly justified in valuing the closing stock even at Rs. 16 per gram which was the cost for the asst. yr. 1971-72. As regards the value of standard gold, learned counsel submits, there is no dispute, as it was properly valued at Rs. 24 per gram which was the market value.

6. Learned counsel also refers to the explanation given by the assessee that the old jewellery which forms part of the closing stock does not move fast in view of the changing trends in fashion and sooner or later all the old jewellery would have to be melted and remade into new jewellery which would result in loss of weight in the process of melting and also result in loss of value of precious stones embedded in the gold jewellery.

7. Learned counsel submits that all the above factors were taken into consideration in valuing the gold jewellery and also the standard gold. There was not the slightest endeavour on the part of the assessee to deliberately undervalue the closing stock. Learned counsel pointed out that as the support to levy the penalty with reference to the Explanation under s. 271(1)(c) of the Act is discarded by the Revenue, the validity or otherwise of the penalty levied would have to be determined keeping in mind the principles governing the levy of penalty for escapement of income under the substantive provision of s. 271(1)(c) of the Act. Learned counsel reiterated that in order to justify the levy of penalty, the burden heavily lies on the Revenue to show that there was deliberate and conscious concealment of income by the assessee. It is claimed that there is no such material in the present case. The average cost of Rs. 21 worked out by the ITO for the purpose of closing stock valuation is again based on certain assumptions. Learned counsel urges that these assumptions cannot be held to be valid merely because the assessee did not file an appeal against the estimate made by the ITO and the consequential addition made in the valuation of the closing stock. Learned counsel pointed out that the Tribunal was carried away by a feeling that the figures adopted by the ITO were wholly sacrosanct and thereby the assessee could be charged with the act of concealment of income. Learned counsel submits on these grounds that the levy of penalty is totally unwarranted in the facts and circumstances.

8. With equal vehemence, learned counsel for the Revenue sought to sustain the penalty. He asked as to what further burden has to be discharged by the Revenue when the closing stock valuation made by the ITO was accepted by the assessee without filing an appeal. Learned standing counsel urged that this Court should not entertain any plea by the assessee regarding the correctness or otherwise of the estimate made by the ITO of the closing stock as the assessee clearly accepted the correctness of the valuation made by the ITO. Learned standing counsel, therefore, put forth his case on the plea that once the valuation of the ITO is accepted as absolutely true, nothing further needs to be done by the ITO to establish concealment. Learned standing counsel submits that the facts in the present case speak for themselves and it must be held that the Revenue was able to establish concealment of income in the present case so as to warrant levy of penalty.

9. Before we consider the submissions made by either side, we would like to make it clear that the correctness or otherwise of the penalty levied in the present case has been examined by us only with reference to the substantive provision contained in s. 271(1)(c) of the Act. We have not considered the question with reference to the Explanation to s. 271(1)(c) of the Act. As we have already pointed out, although the IAC levied the penalty by taking recourse to the Explanation to s. 271(1)(c) of the Act, the Revenue discarded that stand before the Tribunal and even before us, the Revenue did not urge that the Explanation is applicable.

10. If the correctness or otherwise of the levy of penalty has to be examined with reference to the fulfilment of the conditions prescribed by s. 271(1)(c) of the Act, we have no doubt whatsoever that the Revenue failed to establish these ingredients in the present case. It should not be forgotten that this is a case where the Revenue had been making flat rate assessments in the past years. Some kind of enquiry was made in the asst. yr. 1971-72 regarding the mode of closing stock valuation and when the assessee gave the necessary particulars and explanation, the Revenue did not think it necessary to pursue the matter and verify whether the closing stock was properly valued but was content by rejecting the assessee’s accounts and making a best judgment assessment under the proviso to s. 145 of the Act. Obviously, therefore, the assessee did not attach great significance to evolving a very systematic and scientific method of valuation of closing stock. Some rough and ready method was evolved by him in the past years and admittedly the same method was followed in the present year. The particulars furnished by the assessee would categorically show that there was no departure from the principle evolved by the assessee for valuing the closing stock for the asst. yr. 1973-74. There is substantial old jewellery lying in stock at the end of the year. It is common knowledge that old jewellery lying in a gold shop does not move fast and eventually, it will have to be re-made into new jewellery conforming to the changing trends in fashions. In the present case, the ITO himself found that the assessee had purchased in the accounting year relevant to the assessment year under consideration old jewellery of 15,710 gms. Apart from this, some old jewellery from the previous stocks must also have been brought in. The stock of the old jewellery at the end of the year was found to be 15,661 gms. Whether this old jewellery relates entirely to the purchases made during relevant the assessment year, i.e., 1973-74, or only a part of it related to this year and a part brought forward from the previous years, the fact remains that its value has to be determined on a rough and ready basis without reference to the market value. Even so, the assessee’s explanation was that the market rate was found to be Rs. 18 and making a customary deduction of Re. 1, he valued the gold jewellery at Rs. 17 per gram which was also the basis adopted for the asst. yrs. 1971-72 and 1972-73. It cannot, therefore, he said that the assessee had acted inconsistently in the matter of valuing the closing stock. The valuation method adopted by the ITO is a matter of conviction so far as the ITO is concerned and it cannot be said that the average cost of Rs. 21 per gram can be realised on the sale of old jewellery. While the ITO may hold a genuine belief that the old jewellery would realise the market value of Rs. 21 worked out on an average, the assessee is entitled to submit that the old jewellery would not realise that value. There is much to be stated in favour of both the assumptions. It is difficult to sustain the argument that because the assessee accepted the valuation made by the ITO, if necessarily indicated the correctness of the estimate made by the ITO. The assessee might not have appealed against the assessment for a variety of reasons. It is not necessary to seek what these reasons are ; the best guess is that the assessee wanted to make peace by accepting the assessment without further appeal. That, in our opinion, does not entitle the Tribunal to draw a conclusion that the assessee necessarily accepted the estimate of the closing stock valuation by the ITO.

On almost identical system of accounting adopted in the past years, the ITO thought it fit to make assessments by estimating gross profits and did not think it necessary to put the assessee on the alert to evolve a scientific and systematic method of valuing the closing stock. The assessee cannot, therefore, be blamed for not evolving any such method when the Revenue itself discarded the accounts of the assessee in the past years as not being trustworthy and estimated the profits at a flat rate. There is force in the submission of Mr. Satyanarayana that while valuing the closing stock for ascertaining the profits, the assessee went by his usual method adopted in the past years and did not think that the ITO would act in a manner different from what he did in the past years. As long as an inconsistent behaviour on the part of the assessee is not shown in the method of valuation of closing stock adopted for 1973-74 assessment, the Revenue would not be justified in attaching any blame on the assessee or for the matter of that of having concealed income by undervaluing the closing stock.

We need not reiterate the principles governing the levy of penalty under s. 271(1)(c) of the Act as these are too well- settled. If we may refer to the most celebrated judgment of the Supreme Court in this matter in CIT vs. Anwar Ali (1970) 76 ITR 696, the requirement for levying a penalty under s. 271(1)(c) is that the Revenue must straightaway discharge its obligation to prove concealment positively. If there is no evidence on the record except the explanation given by the assessee which explanation is either found to be false or is unacceptable to the Revenue, it does not follow that escapement has been established. The finding given in the assessment proceedings for determining or computing the tax is not conclusive. It may be good evidence and it is open to the assessee to establish his case during the course of penalty proceedings even though the assessment as such has been accepted.

We may also refer to the Full Bench decision of this Court in CIT vs. Abdul Bakshi & Bros. (1986) 58 CTR (All) 13 : (1986) 160 ITR 94 which reiterates the legal position that penalty proceedings are entirely distinct from assessment proceedings and howsoever relevant and good the findings in the assessment proceedings may be, they are not conclusive so far as the penalty proceedings are concerned. That was a case where penalty was levied by invoking the Explanation to s. 271(1)(c) of the Act and this Court held that merely because the evidence was disbelieved in the assessment proceedings, it cannot be said that the assessee failed to discharge the initial burden of explaining the source or origin of cash credits having the limited effect of discharging the initial burden. The burden is far more greater on the Revenue where penalty is sought to be justified not with reference to the Explanation to s. 271(1)(c) of the Act but with reference to the provisions contained in this substantive section itself.

Having regard to the aforesaid facts and circumstances, we are clearly of the view that the Revenue failed to establish concealment of income warranting levy of penalty under s. 271(1)(c) of the Act. We, therefore, answer question No. 1 in the negative, i.e., in favour of the assessee and against the Revenue.

In the view that we have taken on question No. 1, it is not necessary to deal with question No. 2.

16. The reference is answered accordingly.

No costs.

[Citation : 171 ITR 649]