GANDHI PAREKH INVESTMENT CORP.LIMITED,MUMBAI vs. ITO 1 (1)(4), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य लेखा सद�य राजे�� राजे�� केकेकेके अनुसार अनुसार PER RAJENDRA, AM- लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order dated 11.12.2013 of the CIT(A)-1,Mumbai the assessee has filed the present appeal.Effective ground of appeal is about confirming of penalty levied u/s.271(1)(c)of the Act. Brief Facts: 2.Assessee-company,engaged in the business of manufacturing chemicals,filed its return of income on 01/12/2003 declaring total loss of Rs. 1.94 crores.The Assessing Officer (AO) completed assessment on 21/03/2006,u/s.143 (3) of the Act,determining the income of the assessee at Rs.(-)12.14lakhs.During the assessment proceedings,the AO found that it had claimed Rs.1.82 crores as provision for loss of stock and had debited the said amount in the profit and loss account. After considering the submission of the assessee with regard to the claim,the AO held that the assessee had made merely a provision in the year under appeal,that the loss claimed by it had not been quantified by any authority, that it was only statement of the assessee that the stock had no realisable value,that there was no supporting evidence to substitute the claim, that the claim made by the assessee was not genuine.Aggrieved by the order of

4670/M/14-Gandhi the AO,the assessee preferred an appeal before the First Appellate Authority(FAA)who confirmed the order of the AO. Meanwhile,he initiated penalty proceedings. In its reply to the show cause notice of penalty, the assessee stated that all the activities relating to the business had effectively stopped during the year, that the provision for loss was due to the non-availability of the buyer to buy obsolete stock line with the company,that the stock being chemical product shelf-life was over,that it became hazardous waste,that Gujarat Pollution Control Board had asked the assessee to dispose-off the waste at their chemical waste disposable site,that it had to incur expenditure for disposal of the hazardous chemical waste,that the provision for loss on stock had become necessary to show a true and fair view of the state of affairs of the company as per the requirements of the Companies Act,that the stock had no realisable value, that the assessee had no option but to provide for the loss in the value of the stock, that it had never utilised any benefit in any subsequent year due to the provision for loss on stock, it had filed for details and had disclosed all the facts with proper explanation relating to the about disallowance during the assessment proceedings,that it had neither concealed in effect not had filed any inaccurate particulars,that the disallowance was based purely on the difference of opinion on the treatment of loss claimed by the assessee, that the difference did not amount to concealment or furnishing of inaccurate particulars, that the claim was made under bona-fide belief that same was legally allowable. After considering the submission of the assessee, the AO held that the assessee had not furnished any supporting documents/evidences even during the appellate proceedings to establish its own of identity shoves, that his predecessor had noted that the assessee became a member of an environment control board only on 11/03/ 2006, that the letter of Gujarat Pollution Control Board was dated 27/09/2005,that the assessee had concealed the particulars of 4670/M/14-Gandhi its income as well as had filed inaccurate particulars.Therefore,he levied a penalty of Rs. 67.13 lakhs under section 271 (1) (c) of the Act.

3.During the appellate proceedings,before the FAA,the assessee stated that it had debited the P&L account by an amount of Rs. 1.81 crores, being provision for loss on stock, that the stock was old and was no longer realisable,that the provision pertained to the finished goods which were manufactured in the year 1998-99 and the semi-finished goods which were attempted to be manufactured in that year,that in chemical industries goods were not at all realisable after more than four years,that in order to present a true and fair view of its financial position the net realisable value of the stock was taken nil,that the stock in question had not at all been sold or used in any subsequent year,that the treatment given by the assessee to the said loss was as per the provisions of Accounting Standards (AS)-2,that the value of the inventory was taken at the lower cost or net realisable value,that the assessee did not prefer appeal before the Tribunal in the quantum proceedings as even after the addition the net income of the assessee was in negative,that it was constantly making losses,that it would have no chance of any benefit in terms of carry-forward and set off,that assessee had not claimed any benefit in the subsequent years, that it had no motive whatsoever to overstate the losses.The assessee relied upon the case of Reliance Petro Products (322 ITR 158)and argued that mere making of a claim which was disallowed was not sufficient to impose concealment penalty. After considering the assessment order,penalty order and the submission of the assessee, the FAA held that the stock was neither ascertained nor actually ceased to exist as such,that the claim was made in the return without producing any supporting evidences,that it was clear case of furnishing inaccurate particulars of income,that the order of the then FAA,who had confirmed the addition had become final,that the claim was made by the assessee under the 4670/M/14-Gandhi head provisions, that the claim was not ascertained.He referred to the case of Param Jewells(P.)Ltd. (131 ITD ) and upheld the order of the AO.

4.Before us, the Authorised Representative (AR) stated that the assessee had made provision for loss of stock as provided in the AS-2,that it had filed all the necessary details about the provision made , that there was no concealment of income,that the stock could not be sold in subsequent years,that the assessee was suffering losses,that the chemicals had short shelf-life,that stock was not usable. He referred to the page 14 of the paper book.The Departmental Representative (DR) supported the order of the AO and the FAA.

5.We have heard the rival submissions and perused the material before us.We find that the assessee had made a provision for claimed Rs.1.82 crores as provision for loss of stock and had debited the said amount in the profit and loss account,that it had received notice from pollution control authorities of government of Gujarat,that it was directed to destroy the obsolete stock,that provision was made as per AS-2,that it had made provisions for the semi- finished goods of 1999, that the AO had a different opinion about the treatment to be given to the stock.In our opinion, when two legal interpretations are plausible and there is an honest and bona fide difference of opinion, penalty for concealment or furnishing of inaccurate particulars,should not and cannot be imposed.If the view taken by the assessee requires consideration and is reasonably arguable,it should not be penalised for taking the position.It is said that taxing statutes are complex and there can be a bona fide difference of opinion on legal interpretation and understanding of a provision. It is said that so long as the assessee has not concealed any material fact or the factual information given by him has not been found to be incorrect,he will not be liable to imposition of penalty under section 271(1)(c) of the Act,even if the claim made by him is unsustainable in law,provided that he either substantiates 4

4670/M/14-Gandhi the explanation offered by him or the explanation, even if not substantiated,is found to be bona fide.If the explanation is neither substantiated nor shown to be bona fide,Explanation 1 to section 271(1)(c) would come in to play and the assessee will be liable to for the prescribed penalty. Principles of taxation jurisprudence say that in order to justify the levy of penalty,two factors must co-exist, (i) there must be some material or circumstances leading to the reasonable conclusion that the amount does represent the assessee’s income and (ii)the amount in question was not disclosed by the assessee in his return. Explanation filed by the assessee,about the disputed amount plays a vital role in deciding the justification of levying concealment penalty.In the matter before us,the assessee had disclosed all the necessary details.In our opinion, explanation filed by the assessee in that regard was bona fide.Secondly, it is an accepted principle of tax-jurisprudence that additions made during assessment proceedings cannot result in automatic levy of penalty.A patent wrong and inadmissible claim,made against the clear cut provisions of the Act,falls under the category of filing of inaccurate particulars of income resulting in concealment.In the matter before us,no wrong claim was made.The assessee had made entries in the books of accounts as per the mandate of AS-2.So,it cannot be held that it had concealed its particulars of income.It is not the case of the AO that the assessee had not disclosed the fact of obsoleteness of the stock or notice from the state government authorities.Therefore,there was no justification of invoking the provisions of section 271(1)(c)of the Act.Making additions or disallowing certain expenses during the assessment proceedings is totally different from invoking penal provisions.There is no provision in the Act of automatic levy of penalty for the additions/disallowances made.So,we are of the opinion that there was no furnishing of inaccurate particulars and that the explanation given by the assessee was bonafide. Here,we would like to refer to the matter of Reliance

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