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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI C.N. PRASAD & SHRI RAMIT KOCHAR
सुनवाई क" तार"ख /Date of Hearing : 08-08-2016 घोषणा क" तार"ख /Date of Pronouncement : 27-10-2016 आदेश / O R D E R
PER RAMIT KOCHAR, Accountant Member
1. This appeal, filed by the assessee, being 26th September, 2012 passed by learned Commissioner of Income Tax (Appeals)- 39, Mumbai (hereinafter called “the CIT(A)”), for the assessment year 2003-04, the appellate proceedings before the learned CIT(A) arising from the penalty order dated 28th October, 2009 passed by the learned Assessing Officer (hereinafter called “the AO”) u/s 271(1)(c) of the Income Tax Act,1961 (Hereinafter called “the Act”).
ITA 7110/Mum/2012 2
The grounds of appeal raised by the assessee in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) read as under:-
“1. The learned Commissioner of Income Tax (Appeals) Central VI, Mumbai, erred in confirming the penalty of Rs.11,95,050/ - u/s. 271 (1)( c) levied by the learned A.O. without appreciating the fact that your appellant has not concealed any particulars of income.
1.1 Your appellant submits that the learned A.O. made the following additions. a) On account of loss of gold on mfg. Rs. 58,558/- b) On account of valuation of diamonds Rs.22,76,454/- Total Rs. 23,25,012 ------------------- 1.2 Your appellant submits that any addition made to the closing stock will become the opening stock of next year and hence the profit of the next year will reduce to that extent.
1.3 Your appellant submits that your appellant has maintained quantity -wise stock and there is no difference in the stock. The learned A.O. while passing the order has adopted the average rate of stock and purchase price without giving technical or commercial reason.
1.4 Your appellant submits that the value shown by your appellant is correct, however the learned A.O. while passing order enhance the value of the stock and made the addition.
1.5 The learned CIT(A) ought to have considered this aspect and ought not to have confirmed the levy of penalty.
1.6 Your appellant further submits that on the facts and Circumstances of the case, the penalty levied u/s 271(1)(c) be deleted.
1.7 Your appellant, therefore, submits that the penalty of Rs. 11,95,050/- levied u/s 271(1)(c) be deleted.”
The Brief facts of the case are that during the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act, it was observed by the A.O. that the assessee has undervalued the closing stock of diamonds by Rs. 22,76,454/-. The A.O.’s assessment order is reproduced as under:-
ITA 7110/Mum/2012 3 “Valuation of closing stock of diamonds: During the course of assessment proceedings, the assessee was specifically asked to give the quantitative tally of consumption of' various raw materials during the year by adopting standard quantity of consumption require in production of one unit of finished goods, then multiplying it with total number of pieces of that particular item produced during the year. The standard consumption so arrived at should then be compared with actual consumption of various raw materials for the production of finished goods during tile year and the discrepancy between the standard consumption and actual consumption of raw materials should be compared and explanation offered for the discrepancies, if any. It was further asked to give the details of quantity of various raw materials which goes into manufacture of one unit of finished goods like gold, diamonds, etc. of various carats.
In response, the assessee failed to give any explanation in respect of the consumption of raw material and discrepancies in consumption as per standard consumption and actual consumption. In this regard on close scrutiny of the statement giving quantitative details of stock of raw materials and finished goods as per Annexure 'F' to the Tax Audit Report in Form 3CD it is noticed that the assessee has given the following particulars in respect of diamonds:-
Stock Carat Value(in Rs) Rate per carat(Rs.) Opening stock 951.100 37,02,605 3892.97 Purchases 335.02 2,32,23,760 6936.18 Issued for jewellery 199.44 24,18,909 12128.50 manufacturing Closing stock 1086.68 36,07,456 3319.70 Even cursory look at the above table will make it clear that the assessee has valued the closing stock at the rates lower than the purchase price or opening stock. It is also noted that the diamonds issued for manufacture of jewellery is valued at a substantially high rates compared to the cost of opening stock and purchases made during the year. For example, the opening stock of diamonds is valued at the rate of Rs. 3892.97 pet carat and the purchases are made at the rate of Rs. 6936.18 carats, ITA 7110/Mum/2012 4 whereas the diamonds issued for jewellery is valued at Rs. 12128.50 per carat. In the whole process, the assessee has increased the manufacturing cost of jewellery manufactured out of the issued diamonds, as also the valuation of closing stock of diamonds is valued less to that extent thereby reducing the profit. The discrepancy found as tabled above was shown to the assessee and requested for explanation for higher rate of diamonds issued for manufacturing and a lower rate adopted for valuation of closing stock.
In response; the assessee vide letter dated 09.01.2006 submitted as under:-
"We have opening stock of diamonds 951.10 cts. amounting to Rs. 37,02,605/- and we have purchased during the year the diamonds of 335.02 cts. amounting to Rs. 23,23,760/-. The average rate comes to Rs. 6,936/-. If your honour see the details of purchases made are from Rs. 3,500/- per cts. to Rs. 18,000/- per cts. which depends upon colour, clarity, cut and carats. The diamonds are purchased in lots or packets which are mixed diamonds and after buying diamonds, we assort diamond from the packet into different quality and sizes. The goods are then issued to the Karigars from these assortments to make a particular piece of jewellery. Depending on the type of jewellery to be made, better/weaker quality goods and smaller/bigger sizes of diamonds are issued and rest is kept in stock for other jewellery to be made later. The stock which are balance are basically lower quality of diamonds which are normally issue for manufacturing as and when low cost jewellery demands by the customer. When stock is taken, it is valued cost or market price which is lower. The values are basically typical and depend upon the carat, quality, clarity and cut.
Looking the above facts, the value is determined and taken in closing stock is correct".
The submission made by the assessee is duly considered. The assessee did not make an attempt to explain as to why the valuation of diamonds issued for manufactured items made at the rate abnormally high than the purchase price or the cost of opening stock. Further, the assessee failed to substantiate the ITA 7110/Mum/2012 5 claim of valuation of closing stock of diamonds at the rate much lower than the purchase price or cost of opening stock. The assessee's' contention that the diamonds are purchased in lots of different carets is not and selected items are used in jewellery and the balance diamonds are of lower quality is not supported by necessary evidence since as seen from the purchase bill of diamonds produced by the assessee, the different types of diamonds are not mentioned but only a total weight of diamonds in carets is shown and the total price of such diamonds is mentioned in the purchase bill. In the absence of details different type of diamonds purchased, it is not known as to what quantity of a particular type of diamonds is purchased by the assessee. In such a case it was very much essential on the part of the assessee to maintain a detailed record of stock of diamonds giving different category wise diamonds with quantity, rate and value. The assessee is not maintaining any such stock register.
As given above, the assessee has increased the cost of production of jewellery by increasing the value of diamonds utilized in such jewellery. Also, the valuation of closing stock of diamonds has been done at the cost lower than the cost to the assessee. This has been done for no obvious reason. It is required to be noted that the assessee has valued the diamonds per carat irrespective of the quality of diamonds. Further, the assessee also knows the quality and quantity of diamonds lying in the opening stock, values of which are known to him. As mentioned above, the assessee is not maintaining the proper stock register in respect of such a valuable item of jewellery. By not maintaining the proper stock register which will give the details of quality, quantity, rates and values of diamonds lying in the stock, it is open to the assessee to manipulate the things by assigning the values of diamond as per its wish and will and as convenient to it to the diamonds lying in the closing stock.
Without prejudice to the above discussion, it was very essential on the part of the assessee to show that the value of diamonds, which is a costly raw material of the assessee, issued for jewellery as well as the values of diamonds lying in the closing stock is the true value. In the absence of the same, I decline to accept the valuation done by the assessee in respect of the diamonds lying in the closing stock. I therefore proceed to adopt the average rate at which the diamonds were purchased during the relevant previous year and the opening stock, which works out to Rs. 5,414.57 per carat. Accordingly, the valuation of closing stock of ITA 7110/Mum/2012 6 diamonds is calculated at Rs. 58,83,910/-. The difference of Rs. 22,76,454/- is added to the total income.”
The A.O. initiated the penalty proceedings u/s 271(1)(c) of the Act for filing inaccurate particulars of income and also issued notice asking the assessee to explain as to why penalty u/s 271(1)(c) of the Act should not be levied. In reply the assessee submitted that the A.O. had made additions in respect of the assessment year 2003-04 as under:- a) On account of loss of gold on mfg. Rs. 48,558/- b) On account of valuation of Diamonds Rs. 22,76,454/- Total Rs. 23,25,012/- ________________ It was submitted by the assessee that the ld. CIT(A) deleted the addition on account of loss of gold on manufacturing Rs. 48,558/- in appeal against quantum assessment orders, while the A.O. made additions of Rs. 22,76,451/- in the assessment year 2003-04 to the closing stock on account of undervaluation of the stock as at 31-03-2003 which will become opening stock as at 01-04-2004, and the profit will reduce by Rs. 22,76,451/- in the next year i.e. assessment year 2004-05, thus increase in valuation of stock in one year was neutralized in the immediate next year and does not result in increase in the profit , hence no concealment of income. It was submitted that inspite of the addition made by the A.O. of Rs. 22,76,451/-, the taxable income was nil on account of business loss as per the return of income of Rs. 6,87,207 and set off of brought forward loss of Rs. 16,37,810/-. The assessee submitted that it has duly filed all the details of purchases, sales, various expenses debited to P&L account and they were verified by the AO with the return of income filed by the assessee. Hence it was submitted that the assessee has maintained proper books of accounts and submitted the required details which were duly verified by the A.O. and no discrepancy was found. Thus, it was submitted that neither the assessee has furnished ITA 7110/Mum/2012 7 inaccurate particulars of income nor concealed any income. It was submitted that during the course of assessment proceedings , the assessee submitted the following particulars in respect of diamonds:- Stock Carat Value(in Rs) Rate per carat(Rs.) Opening stock 951.100 37,02,605 3892.97 Purchases 335.02 2,32,23,760 6936.18 Issued for jewellery 199.44 24,18,909 12128.50 manufacturing Closing stock 1086.68 36,07,456 3319.70 It was submitted that there is no dispute in respect of quantitative records of opening stock, purchases, issued for Jewellery manufacturing and closing stock . It was submitted that all the quantitative figures submitted by the assessee were accepted by the A.O. and hence no inaccurate particulars were furnished by the assessee. It was submitted that valuation of the cut and polished diamonds is highly complex and the value is assigned item-wise while the A.O. adopted the average rate of opening stock and purchase price without giving any technical or commercial reasons. It was submitted that the rate per carat of diamond varies and the average rate adopted by the A.O. cannot be applied. It depends on clarity, looks and shape etc. Even the piece of same size will have different valuation on account of size, shape, cut, clarity , look etc. . The quantity remains the same, but as per the requirement of the customers, they go on mixing all the stock and then make assortment depending upon size, shape, cut, clarity, looks etc. This activity takes lot of time and it is not possible and practicable to keep detailed records of each assortment and is a impossible task. Aggrieved by the assessment order of the A.O.in quantum , It was submitted that the assessee preferred appeal before the ld. CIT(A) but was not satisfied with the order of the ld. CIT(A) in quantum proceedings and wanted to file further appeal before the Tribunal. However, Mr. Sameer Jhaveri, one of the partner was not feeling well and expired on 08-05-2009 and the wife of Mr. Sameer Jhaveri had to look after her minor daughter and aged mother in law hence she was neither interested ITA 7110/Mum/2012 8 in pursuing the business nor further litigation. It was submitted that the assessee has not furnished any inaccurate particulars and the adoption of the average rate by the AO is subjective and not the conclusive proof of furnishing of inaccurate particulars of income by the assessee. The A.O. in penalty proceedings u/s 271(1)(c) of the Act observed that the assessee is not maintaining proper stock register in respect of diamond jewellery and hence it is possible to manipulate the things conveniently as regards the diamonds lying in the closing stock. The A.O. observed that it was very essential to show the true value of the diamonds lying in the closing stock. It was observed by the AO that learned CIT(A) has concluded that if the assessee is honest, it could at least give separate indication in respect of the weight and value of very high value diamonds separately in the purchase invoices/stock register to distinguish them from cheaper lot and hence the learned CIT(A) also confirmed addition in quantum assessment. With respect to the contention of the assessee that no penalty u/s 271(1)(c) of the Act can be levied as the income is reduced to Nil on account of business loss cannot be accepted for the reason that Section 271(1)(c) of the Act was amended w.e.f. 01.04.2002 i.e. from assessment year 2002-03 onwards according to which penalty u/s 271(1)(c) of the Act can be levied even if the assessed income is negative. Thus, the A.O. concluded that the assessee concealed the particulars of income by furnishing inaccurate particulars of income in respect of valuation of closing stock whereby the AO levied penalty u/s 271(1)(c) of the Act of 150% of the amount of tax sought to be evaded by the assessee which comes to Rs. 11,95,050/- , vide penalty order dated 28-10- 2009 .
Aggrieved by the penalty order u/s 271(1)(c) of the Act dated 28.10.2009 passed by the A.O. , the assessee filed its first appeal before the ld. CIT(A).
ITA 7110/Mum/2012 9
Before the ld. CIT(A), the assessee reiterated the submissions which were made before the A.O.. The A.O took the view that in the absence of proper stock register detailing the value of such highly priced items , it was not possible to ascertain the quality, quantity, rates and values of diamonds lying in stock , it is open for the assessee to easily manipulate the value of the diamonds by assigning values as per its whim and fancy. The assessee contended that any addition made to the closing stock would become the opening stock of the next year and as such it has got no effect on the tax. It was contended that there are different grades of diamonds which are almost 6000 to 8000 grades based on cut, clarity, carat and colour and in order to get advantage of better pricing, the assessee always purchased mixed lots of diamonds which contained both good and lower quality of diamonds. The assessee submitted that the purchase bill did not show the value of each individual diamond and it was not practically feasible to be shown as such. It was submitted that the assessee always used better diamonds out of purchases of the mixed lots and the lower quality diamonds were always retained in stock which resulted in the closing inventory being lower than the average purchase price. Thus, the assessee submitted that bona-fide explanations were submitted and hence it could not be said that the assessee concealed its income by furnishing inaccurate particulars of income and penalty could not be levied u/s 271(1)(c) of the Act and prayed for deletion of penalty levied by the AO. The assessee also raised legal arguments before the learned CIT(A) as under: a) That penalty provisions are penal in nature, some amount of culpable negligence or willful omission must be established before penalty is imposed.
ITA 7110/Mum/2012 10 b) The penalty can be imposed only if it is shown that the explanation offered is not merely improbable and unsatisfactory, but incorrect and false. c) The penalty proceedings are separate and distinct from assessment proceedings. The findings given in the assessment proceedings, though relevant are not material alone to justify the imposition of penalty. There should be further material to justify the imposition of penalty by finding that there is concealment of income or furnishing of inaccurate particulars of income by the assessee. It was submitted that in the case of the assessee, all the necessary facts have been disclosed and hence there is no concealment of income. d) Penalty will not be exigible merely because an addition is made on estimate basis and since there is difference of opinion as regards the estimation of income, it could not be said that the assessee had concealed particulars of income. e) It was submitted that since all the facts were disclosed by the assessee during the assessment proceedings, no penalty is exigible.
The ld. CIT(A) after considering the facts of the case, assessment order of the AO and submissions of the assessee, rejected the contentions of the assessee and observed that from the details of the quantitative particulars of stock as furnished by the assessee, the A.O. had observed that there was a clear discrepancy in the manner in which the stock was being valued especially when it could be clearly seen that the closing stock was valued at an abnormally low rate vis-a-vis the cost of opening stock/purchase price/items of diamonds issued for manufacture. There appears to be a case for under valuation of closing stock thereby leading to under-statement of profit for the ITA 7110/Mum/2012 11 year. For the year under consideration, the rate per carat was shown at Rs.3319.70 as against the average rate of Rs. 12,128.50 per carat in respect of' diamonds issued for manufacture of jewellery. At the same time, the average rate of purchase of diamonds during the year was at Rs. 6936.18 per carat. The learned CIT(A) observed that only explanation coming from the assessee is that the diamonds were purchased in mixed lots, the stock as held contains lower quality diamonds and that the purchase bills do not contained the detailed particulars such as the quality, rate etc. of the items , but only the total weight and the total value and hence not feasible to furnish finer details. The learned CIT(A) observed that there is merit in contentions of the AO that there is an ample scope to the assessee to manipulate the values with regard to valuation of stock. The assessee has not produced any credible evidence or material in order to substantiate the valuation/ evidence quantitative particulars as furnished by the assessee along with the return of income filed with the Revenue. The assessee having not furnished the details of quality , quantity , rate and value of diamonds lying in the stock, the assessee has confounded its position giving room for misgivings as regards the valuation carried out by the assessee. The learned CIT(A) also rejected the contention of the assessee that the addition so made is revenue neutral and hence not liable for penalty as each assessment year is distinct and separate and taxable income has to be computed for each year and due taxes paid thereon. The ld. CIT(A) held that the assessee is duty bound to furnish all the particulars of its income. The inaccurate particulars in the return of income resulted in to understatement of the total income chargeable to tax , thus leading to concealment of income. Thus, the ld. CIT(A) confirmed/sustained the penalty of Rs. 11,95,050/- levied by the A.O. u/s 271(1)(c) of the Act for furnishing of inaccurate particulars of income by the assessee vide appellate orders dated 26/09/2012. ITA 7110/Mum/2012 12
Aggrieved by the appellate orders dated 26/09/2012 passed by the ld. CIT(A) , the assessee filed second appeal before the Tribunal.
The ld. Counsel for the assessee reiterated the submissions as were made before the authorities below and submitted that the ld. CIT(A) rejected the contentions of the assessee with respect to the addition made on account of estimates of valuation of diamonds. The ld. CIT(A) vide orders dated 10-02- 2009 in quantum proceedings partly allowed the appeal of the assessee while rejected the contentions of the assessee with respect to additions to closing stock based on difference in valuation of closing stock, and one of the partners of the assessee firm Mr. Sameer Javeri wanted to contest the appellate order of the ld. CIT(A) in quantum proceedings, however, he was not keeping well and expired on 8-5-2009 and since his wife had to look after her minor daughter and aged mother-in-law, she was not interested in business and also did not continue the litigation. The additions were although not accepted by the assessee in quantum proceedings , but the same were accepted by the assessee under the above circumstances. It was submitted that the increase in the valuation of closing stock in one year is neutralized in the immediate next year by an higher opening stock by equivalent amount and does not result ultimately in the increase in profits, so there is no concealment of income. It is submitted that the assessee had purchased diamonds in lots which were mixed / assorted diamonds and after buying the diamonds, the assessee assort diamonds from the packets into different quality and sizes and the diamonds are issued from these assortments to make a particular piece of jewellery, hence, the value of the diamonds is determined as per cost or market price whichever is lower. The A.O. has applied average rate which is not correct and the additions have been made arbitrarily. The ld. Counsel submitted that all the details were submitted before the authorities below of the various jewelleries made out of the diamonds. The ld. Counsel drew our attention to the replies submitted before ITA 7110/Mum/2012 13 the authorities below which are placed at paper book page 68 to 110 and also page 37 to 54 of paper book filed with the Tribunal and submitted that no addition can be made on this account. He also drew our attention to the tax audit report filed and submitted that the auditors have duly verified all the records. It was submitted that it is normal to have different rates per carat of diamond. He submitted that closing stock of this year would become the opening stock of the next year and as such it has got no effect on the tax and no prejudice is caused to the Revenue. The ld. Counsel submitted that the allegation of not maintaining the records is not correct. There are different types of diamonds which are of 6000-8000 grades and the rate of diamond also varies depending upon the size, shape, cut, clarity , look etc. and it is not possible to keep separate records of diamond as there are large types of diamond. As per the requirement of the customers, they go on mixing all the stock and then make assortment depending upon size, shape, cut, clarity, looks etc.. This activity takes lot of time and it is not possible and practicable to keep detailed records of each assortment which is an impossible task. The additions have been made on suspicion which is not sustainable in the eye’s of law and more-so no penalty is exigible keeping in view the facts and circumstances of the case. The ld. Counsel relied on the following judicial decisions:-
CIT v. Reliance Petroproducts (P) Ltd. (2010) 322 ITR 158 (SC) 2. Union of India v. Rajasthan Spinning & Weaving Mills (2009) 224 CTR 0001 (SC). 3. Dilip N. Shroff v. JCIT (2007) 291 ITR 0519 (SC)
The ld. D.R. submitted that the assessee has not maintained proper stock register and higher rates are applied for issue of diamond for manufacturing jewellery while closing stock is valued at lower value leading to ITA 7110/Mum/2012 14 lower profit being offered for tax. The ld. CIT(A)’s appellate order in quantum was accepted by the assessee and no appeal had been filed before the Tribunal. The ld. D.R. relied on the orders of authorities below.
In the ld. Counsel for the assessee, in the rejoinder, submitted that this is the only year when the additions have been made by the Revenue based on valuation of stock and in none of the other years any additions have been made by the Revenue on this account.
We have considered the rival contentions and also perused the material available on record including the case laws relied upon. We have observed that the assessee is engaged in the business of diamonds whereby the assessee purchases assorted diamonds depending upon size, shape, cut, clarity , look etc. which is stated to be a normal business practice followed by the assessee. The assessee has produced the relevant records before the authorities below for reconciling the quantities of diamond dealt with. It is also stated that there are 6000-8000 grades of diamonds depending upon size, shape, cut, clarity , look etc. and it is stated by the assessee that it is not possible and practicable to keep detailed separate records of each grade/variety of diamond. The assessee has stated that from the assorted diamonds so purchased wherein in the purchase invoice, there are no separate mention of different assorted diamonds , the assessee issues diamond of higher grades first and applies estimated rates for issue based on valuation , while the stock left in the closing stock is of inferior quality which is valued at lower rates. The Revenue has rejected this contention of the assessee but has made any enquiry to bring on record any evidence to controvert the same. The Revenue had made addition to the closing stock of the impugned assessment year on the charge of undervaluation of value of closing stock of diamond by applying average rates , while the assessee has applied rates based on value of grade/variety of diamonds in stock by ITA 7110/Mum/2012 15 applying cost or market value which ever is lower of the relevant grade/variety of diamond. Keeping in view the facts and circumstances of the case, average rate cannot be applied in the manner as applied by Revenue and no cogent adverse material has been brought on record by the Revenue to disprove the basis of valuation adopted by the assessee for valuing stock of diamond based on variety/grade of diamond. No enquiries or examinations have been conducted by the Revenue to value the closing stock of diamonds based on grades/variety of diamond , and merely applied the average rates knowing well that there are as many 6000-8000 grades/varieties of diamond wherein price of diamond substantially varies from one grade to the other, hence, the additions as made by the AO in quantum itself are not prima-facie not sustainable. In any case, the assessee did not file second appeal with the Tribunal with respect to quantum assessment and accepted the appellate order of learned CIT(A) partly allowing the appeal in quantum assessment, owing to the reason that the partner of the assessee Mr Sameer Jhaveri was not well and ultimately expired on 08-05-2009 and the wife of the said Mr. Sameer Jhaveri was not interested in persuing the business as well litigation with the Revenue. In any case , the closing stock of this assessment year would become the opening stock of the next year and ultimately it has got no effect on the taxes payable to Revenue and revenue effect is tax neutral as there is no loss to the Revenue. We have observed that the assessee has maintained sufficient records which were produced before the authorities below , while the Revenue has not brought on record cogent and specific adverse material to disprove the contentions of the assessee . In our considered view, the penalty levied by the A.O. and as confirmed/sustained by learned CIT(A) is not sustainable in the eyes of law keeping in view peculiar facts and circumstances of the case and the bonafide explanations submitted by the assessee as set-out above which is a plausible and possible bona-fide explanation and is covered by explanation 1 to Section 271(1)(c) of the Act . Further, we have observed that the assessee has made full ITA 7110/Mum/2012 16 disclosure at the time of filing return of income and it could not be said that the assessee had concealed particulars of income or had furnished in- accurate particulars of income to be brought within the mandate of penalty provisions as are contained in Section 271(1)(c) of the Act. Hence, the penalty levied by the AO u/s 271(1)(c) of the Act and as confirmed/sustained by the learned CIT(A) is hereby ordered to be deleted. We order accordingly.
In the result, appeal filed by the assessee in 2003-04 is allowed.