Loading judgment…
Facts
The assessee appealed against a penalty order under section 271(1)(c) of the Income Tax Act, 1961, which was confirmed by the Ld.CIT(A). The penalty was levied in relation to additions made for disallowance of Rs.10,98,60,039/- and Rs.51,28,196/-, and for under-valuation of closing stock amounting to Rs.1,08,42,289/-. A key issue was whether the Assessing Officer had recorded the necessary satisfaction for initiating penalty proceedings in the original assessment order.
Held
The Tribunal held that the penalty on the first two issues (disallowances) was not leviable because the Assessing Officer had not recorded the requisite satisfaction in the original assessment order, as mandated by section 271(1)(c). Regarding the under-valuation of closing stock, the Tribunal found the issue to be debatable, with divergent views on how foreign exchange fluctuations should be treated in stock valuation. Consequently, penalty on this issue was also deleted.
Key Issues
Whether penalty under section 271(1)(c) can be levied when the AO's satisfaction is not recorded in the assessment order, and whether penalty is leviable on a debatable issue concerning the valuation of closing stock including foreign exchange fluctuations.
Sections Cited
271(1)(c), 143(3), 43A, 40A(3), 37(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI AMITABH SHUKLA
आदेश / O R D E R
PER ABY T. VARKEY, JM:
1. This is an appeal preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)/NFAC (hereinafter referred to as ‘the Ld.CIT(A)‘), Delhi, dated 07.06.2024 for AY 2009-10 confirming the penalty levied u/s.271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act‘).
This appeal challenges the penalty levied by AO u/s.271(1)(c) of the Income Tax Act, which has been confirmed by Ld CIT(A). In this regard, history of the quantum assessment, which formed the foundation of impugned penalty was brought to our notice that in the first/original- assessment order (quantum) u/s 143(3) passed by the AO dated 05.02.2013, the AO didn’t record any satisfaction about levy of penalty u/s.271(1)(c) of the Act, which was challenged by the assessee before Ld CIT(A) & finally before this Tribunal; and the Tribunal vide order dated 18.09.2018 was pleased to confirm the action of the AO (i) disallowing Rs.10,98,60,039/- u/s.43A of the Act & (ii) disallowance u/s.40A(3) of the Act to the tune of Rs.51,28,196/- and set aside for de novo assessment in respect of additions made by AO which related to under valuation of closing stock to the tune of Rs.1,08,42,289/-. Thereafter, the AO has given effect to the order of the Tribunal in respect of issue relating to under valuation of closing stock vide order dated 31.12.2019, [second/giving effect order by AO] wherein, the AO reiterated the addition made to the tune of Rs.1,08,42,289/-. In the said giving effect order, the AO is noted to have made for the first time his endorsement in respect of initiation of penalty u/s.271(1)(c) of the Act; and thereafter, the AO is noted to have levied penalty after taking notice of the fact that this Tribunal has confirmed the action of the Ld.CIT(A) in respect of disallowance u/s.37(1) r.w.s.43A to the tune of Rs.10,98,60,039/- and disallowance u/s.40A(3) to the tune of Rs.51,28,196/- as well as the order giving effect dated 31.12.2019 wherein he has reiterated the addition in respect of valuation of closing stock of Rs.1,08,42,289/- has levied total penalty u/s.271(1)(c) of the Act of Rs.11,17,80,905/- relating to all three (3) issues.
The main plea of the assessee is that the AO ought not to have considered during the penalty proceedings on issues in respect of the following addition (i) disallowance made of Rs.10,98,60,039/- and (ii)
Rs.51,28,196/- which undisputedly emanated from the Original Assessment order dated 05.02.2013 u/s.143(3) of the Act for AY 2009-10 wherein the AO in his assessment order has not made any endorsement about his satisfaction of proceeding against the assessee for levy of penalty u/s.271(1)(c) of the Act [as mandatorily required sub section (l) of section 271 of the Act] which omission on part of AO is discernable from a perusal of the assessment order dated 05.02.2013 kept at Page Nos.1-20 of the Paper Book [and especially at Page No.18 of the Paper Book]. In the absence of AO’s satisfaction in the course of assessment proceedings, as required under required sub section (l) of section 271 of the Act, in the Original Assessment order dated 05.02.2013 u/s.143(3) of the Act, vitiates levy of penalty on two (2) issues confirmed by Tribunal by order dated 18.09.2018 by relying on the following decisions:
In Commissioner of Income-tax, Vijayawada vs Lotus Constructions [2015] 55 taxmann.com 182 (Andhra Pradesh), the Hon'ble HC held as below: "Where intention or satisfaction to initiate penalty proceedings under section 271(1)(c) was not evident from order of assessment, penalty proceedings could not be initiated" In Chennakesava Pharmaceuticals vs Commissioner of Income-tax [2013] 30 taxmann.com 385 (Andhra Pradesh), it was held that – "Assessing Officer should record in assessment order his satisfaction that assessee had either concealed income or furnished inaccurate particulars of income in his return before imposing penalty".
In the light of the facts discussed and judicial precedents cited supra, we find force in the submission of the assessee and hold that no penalty u/s.271(1)(c) of the Act could have been levied by the AO in respect of two additions/disallowance i.e. Rs.10,98,60,039/- & Rs.51,28,196/- which is directed to be deleted.
Coming to the next penalty which is surviving is noted to be in respect of Rs.1,08,42,289/- i.e. regarding under valuation of closing stock.
The assessee is noted to have imported goods to the extent of Rs.63,16,57,471/- from South Korea. The assessee has determined the total valuation of closing stock at Rs.16,78,96,048/- out of which Rs.9,77,59,604/- was related to imported goods. Since the assessee couldn’t furnish the foreign exchange loss relevant to the stock-in-trade which forms part of the closing stock, the foreign exchange loss relevant to the closing stock has been determined by the AO at Rs.1,08,42,289/- while arriving at the closing stock valuation. As this has resulted in under- valuation of closing stock, the amount of Rs.1,08,42,289/-, the Assessing Officer added as under-valuation of closing stock to the total income of the assessee. On appeal before the Ld.CIT(A), he confirmed it since the assessee couldn’t furnish the details justifying valuation of closing stock.
Hence, the Ld CIT(A) upheld the action of AO determining the under- valuation of closing stock, which decision was remitted back by the Tribunal vide order dated 18.09.2018 to the file of the AO for fresh adjudication and the AO is noted to have reiterated the addition and later the AO has imposed the impugned penalty on it for furnishing of inaccurate particulars of income.
According to the Ld.AR, the main allegation of AO was that the assessee hasn’t taken in to account the foreign exchange loss for the purposes of valuation of closing stock viz the foreign exchange loss of Rs.1,08,42,200/- has to be taken into account while arriving at the closing stock valuation. In this regard, the assessee submits that it had debited an operating loss of Rs.7,00,40,024/- due to foreign exchange fluctuations as per Accounting Standard-11 [effects of foreign exchange rates]. And in respect of valuation of closing stock, the assessee has followed Accounting Standard-2 "Inventories” and as a result had recorded the inventory at lower of cost or realizable value. And submitted that the loss on foreign exchange fluctuation pertaining to outstanding receivable doesn’t constitute a cost for the purposes of Accounting Standard-2 by relying decision of Bangalore Tribunal in the case of IBM Global Services India (P.) Ltd. v. DCIT (2008) 114 ITD 254 and Mumbai Tribunal in the case of Kodak India Ltd. v. ACIT (2011) 12 taxmann.com 140 as well as the decision in the case of Arjav Diamonds v. CIT, wherein it was held that foreign exchange loss cannot be added to the cost of inventories by observing as under:
“……Normally, the expenditure/ loss incurred due to foreign exchange fluctuation on account of actual payments would be a parameter kept in mind for deciding the sale price of the stock that a prudent businessman would like to recover the said expenditure/ loss when the stocks are sold and would not increase the value of the closing stock and thereby increase the profits before actual realization of the same. Therefore, the foreign exchange fluctuation loss cannot be added to the cost of inventories. In view of the above, we are of the view that the Revision order carried out by PCIT is without any basis and on merits also the assessee has a case, hence, we set aside the revision order passed by PCIT and allow the appeal of the assessee."
8. Further, the Ld.AR fairly brought to our notice that the AO has adopted a contrary position to the above judicial precedents and held that the foreign exchange loss would increase the value of the closing stock, which view was endorsed by Delhi Tribunal in the case of Oil and Natural Gas [1999] 69 ITD 69 wherein, it was observed as under:
"In a case where the increase in ability occurs in a subsequent accounting year, a question might conceivably arise as to whether the assessee was entitled to reopen its accounts for the earlier year when the raw material was imported, consumed and was represented by the corresponding credit by way of sale or closing stock. According to the mercantile system of accounting, the additional cost of raw material should ordinarily form part of the purchase price of raw material of the year in which such raw material was imported, consumed and represented by corresponding sales or closing stock. That may require reopening of the accounts of earlier year and then to make necessary adjustments in respect of increased liability in that very year. Section 43A was enacted to forestall such a claim in relation to loss on account of fluctuations in foreign exchange rate in respect of capital assets. It seeks to ensure that the enhanced liability is added to the actual cost of the asset only in the subsequent previous year in which such liability accrued”.
According to the Ld.AR, the aforesaid view has been accepted by the Hon’ble Calcutta High Court in the case of CIT v. Bharat General & Textile Industries Ltd. [1986] 157 ITR 158 as well as in the case of Bestobell (India) Ltd. v. CIT [1979] 2 Taxman 62.
10. Therefore, according to the Ld.AR, it can be seen that two views are possible and assessee has adopted a recognized practice for valuing its closing stock, which has found acceptance by Tribunal as cited at para 6 supra, therefore, the issue is debatable, and hence no penalty is leviable in such cases. Accordingly, when the issue is debatable or there is difference in opinion (how to value closing stock), penalty is not attracted and to support such a contention he placed reliance on the judicial precedent of CIT v Rellance Petroproducts [2010] 322 ITR 158 (SC) wherein it was held that mere difference of opinion cannot tantamount to the assessee either concealing income or furnishing inaccurate particulars of income by observing as under:
“9………. We must hasten to add here that in this case, there is no finding that any details supplied by the assessee in its return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty u/s.271(1)(c) of the Act. A mere making of the claim, which is not sustainable in law by itself, will not amount to furnishing inaccurate particulars regarding the Income of the assessee. Such clam made in the return can’t amount to the accurate particulars…
We do not agree, as the assessee had furnished all the details of its expenditure as well as income in its return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part, it was up to the authorities to accept its claim in the return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, is our opinion, attract the penalty u/s.271(1)(c). If we accept the contention of the Revenue then in case of every return where the claim made is not accepted by AO for any reason, the assessee will invite penalty u/s.271(1)(c). That is clearly not the intendment of the legislature"
For the aforesaid preposition, he relied on the following judicial precedents also:
• CIT v. Sivananda Steels Ltd. [2002] 256 (TR 683 (Mad) • CIT v. Calcutta Credit Corporation [1987] 166 ITR 29 (Cal) • Burmah Shell Of Storage Distributing Company of India Ltd. v. ITO [1978] 112 ITR 582 (Cal)
Per contra, the Ld.DR submits that there is concealment of income in the facts of the case and therefore, the AO has rightly levied penalty which has been confirmed by the Ld.CIT(A) which doesn’t require any interference from the part of this Tribunal.
Having taken note of the aforesaid detailed discussion, we find that the main plea of the assessee is that penalty is not leviable on a debatable issue and brought to our notice that the action of assessee valuing the closing stock was in line with the ratio decision of the Mumbai Tribunal in the case of M/s. Arjav Diamonds (supra) and notes that there are divergent views on this issue, so the ibid issue is held to be debatable.
We note that the action of assessee valuing the closing stock was in line with that of the ratio decision of the Mumbai Tribunal in the case of M/s.Arjav Diamonds v. CIT dated 03.06.2019 in wherein the Tribunal on this issue has accepted similar methodology of valuing closing stock and the Tribunal is noted to have held as under:
We noted that from the above and came to conclusion that the loss on account of foreign exchange fluctuation is recognized in terms of AS-11. The said accounting standard clearly states that a foreign currency transaction should be recorded on initial recognition in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. It further states that each Balance Sheet date, foreign currency monetary items should be reported using the closing rate and non-monetary items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of transaction. In other words, the revaluation of creditors or debtors or the loss incurred on the actual of payment is not to be considered for the purpose of reporting the non-monetary items, like closing stock. Secondly, the foreign exchange loss incurred is not an item of cost, and rather it is a revenue outflow or an expenditure provided by prudence depending on the date of payment or the Balance Sheet Date and therefore, it cannot be added to the cost of the inventory even under the AS-2. Even for a moment it is accepted that the increase in foreign exchange rate would yield a higher value of the unsold stocks, still it would amount that it would go to add the realizable value and not the cost of the said stocks. Thus, considering the principle that as a matter of prudence stocks are valued at lower of the cost or the realizable value, such increase in realizable value has no bearing on the profits computed. Normally, the expenditure/ loss incurred due to foreign exchange fluctuation on account of actual payments would be a parameter kept in mind for deciding the sale price of the stock that a prudent businessman would like to recover the said expenditure/ loss when the stocks are sold and would not increase the value of the closing stock and thereby increase the profits before actual realization of the same. Therefore, the foreign exchange fluctuation loss cannot be added to the cost of inventories. In view of the above, we are of the view that the Revision order carried out by PCIT is without any basis and on merits also the assessee has a case, hence, we set aside the revision order passed by PCIT and allow the appeal of the assessee.
Since the Revenue couldn’t contradict that the assessee has followed AS-11 (in respect of debiting loss due to foreign exchange fluctuation) & AS-2 while valuing closing stock and as a result has recorded the inventory at lower of cost or realizable value, which is in line with the Mumbai Tribunal in the case of M/s.Arjav Diamonds (supra), and merely because the AO adopted another view upheld by Mumbai Tribunal in the case of Oil and Natural Gas (supra), penalty u/s.271(1)(c) of the Act is not leviable on this issue and we direct deletion of it on this score.
In the result, appeal filed by the assessee is allowed.
And Stay Application filed by the assessee is infructuous in the light of us disposing the appeal itself, and therefore, Stay Application stands dismissed.
Order pronounced on the 23rd day of April, 2025, in Chennai.