DCIT - 8(3), MUMBAI vs. M/S S.M.ENERG TEKNIK AND ELECTRONICS LIMITED, MUMBAI

This appeal, filed by the Revenue, being 04-01-2013 passed by learned Commissioner of Income Tax (Appeals)- 18, 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 25-3-2009 passed by the learned Assessing Officer (hereinafter called the “A.O.”) under section 271(1)(c) of the Income Tax Act, 1961(Hereinafter called “the Act”).

The grounds raised by the Revenue in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) reads as under:-

At the time of hearing before us, none appeared on behalf of the assessee company when the appeal was called for hearing. There was also no appearance by the assessee company on the earlier occasion when the appeal was fixed for hearing on 09-07-2014. The notices were duly served on the assessee company even through the ld. DR . The ld. Counsel for the assessee company filed letter for adjournment on the hearing fixed on 02-03-2015, however, the Bench did not function on 02-03-2015 . We are proceeding to dispose of this appeal after hearing the ld. D.R.

The brief facts of the case are that the assessee company is engaged in the business of manufacturing of textile processing machineries. The return of income was filed by the assessee company for the assessment year 2003-04 on 24.11.2003 declaring total loss of Rs.3,44,59,980/- . The return of income was processed u/s 143(1) of the Act on 29.11.2003. Thereafter, scrutiny assessment was completed u/s 143(3) read with Section 143(2) of the Act after making certain disallowances/additions whereby the AO determined the ITA 2663/Mum/2013 3 reduced loss at Rs. 58,10,321/- , vide assessment orders dated 31.01.2006 passed u/s 143(3) of the Act. During the course of the assessment proceedings u/s 143(3) read with Section 143(2) of the Act , it was observed by the A.O. that the closing Work-in-Progress of Rs. 65,77,000/- was net of diminution in the value of the inventories by Rs. 1.95 crores. The assessee company’s contention was that closing WIP as at 31-03-2003 had been revalued after technical evaluation of the materials obtained by the assessee company which were in the position to be sent for delivery but were not accepted by the customers due to non-fulfillment of commitments by the buyer owing to lean period in the textile industry and the assessee company is trying to utilize the material in other similar jobs and accordingly stock has been carried at net realizable value which is in compliance with Accounting Standards AS-2 prescribed by the Institute of Chartered Accountants of India. The contention of the assessee company was rejected by the A.O. in the quantum assessment proceedings on the ground that the assessee company is following mercantile system of accounting consistently and no change has been adopted during the year. There was no mention in the tax audit report regarding the change in the method of valuation of the WIP. In support, the A.O. relied on the decision of Hon’ble Supreme Court in the case of British Paints India Ltd., (1993) 199 ITR 44(SC). The A.O. also referred to Section 145 of the Act and disallowed diminution of WIP by Rs. 1.95 crores and added the same to the income of the assessee company , vide assessment orders dated 31.01.2006 passed u/s. 143(3) of the Act.

CIT v. India Sea Foods, 105 ITR 708 (Ker) 2. Naginchand Shiv Sahai v. CIT, 61 ITR 534 3. CIT v. Gates Foam & Rubber Co., 91 ITR 467 (Ker).

Before the learned CIT(A) , the assessee company submitted that the goods were in a position to be sent to the customer for delivery but were not accepted by the customers which is mainly owing to the textile industry going through lean period since last few years and the customers have not fulfilled their commitment by refusing to take deliveries , hence the value of the closing WIP as at the year end as on 31-03-2003 as shown in the books of accounts was reduced by Rs.1.95 crores based on technical evaluation obtained by the assessee company regarding valuation of the material based on net realizable value which is consistent with Accounting Standards AS-2 issued by the ICAI. The assessee company submitted that the claim made of the reduced WIP as at 31-03-2003 by Rs.1.95 crores was duly declared in the return of income filed with the Revenue and complete facts were disclosed in the audit report as under:-

Aggrieved by the orders dated 04-01-2013 of the learned CIT(A), the Revenue is in appeal before the Tribunal.

The ld. D.R. submitted that the quantum addition has been sustained by the learned CIT(A). No appeal has been filed by the assessee company with respect to the quantum assessment before the Tribunal and hence the order of the learned CIT(A) has attained finality. The ld. D.R. supported the order of the A.O.

We have heard the arguments of ld. D.R. and perused the material available on record including case laws relied upon . We have observed from the facts emerging from the records that the assessee company has reduced the closing WIP by Rs. 1.95 crores as at 31-03-2003 which is due to the diminution in the valuation in the inventories owing to the rejection of the goods by the overseas customers by not accepting the deliveries of goods and non-fulfillment of their commitments owing to lean period in textile industry, hence the closing WIP being inventories were devalued by the assesssee company by Rs.1.95 crores based on the technical evaluation obtained with respect to the valuation of these inventoriess on net realizable value which was lower than the cost by Rs.1.95 crores , the goods were been manufactured by the assessee company as to the client specifications. There is a proper declaration of the adoption of said reduced closing WIP by Rs.1.95 crores in the return of income filed with the Revenue and also in the Audited Balance Sheet as also in the audit report filed with the Revenue. The quantum additions of Rs.1.95 crores have been made by the Revenue with respect to devaluation of the closing WIP by Rs.1.95 crores, which were ITA 2663/Mum/2013 8 confirmed by the learned CIT(A) against which the assessee company has not filed second appeal with the Tribunal and the same attained finality. But the mere acceptance of quantum additions by the tax-payer are not sufficient enough to fasten and saddle the tax-payer with the penalty u/s 271(1)(c) of the Act is now the settled proposition of law. The Revenue has to prove that the tax-payer has furnished in-accurate particulars of income or concealed the particulars of income and the tax-payer offers no explanation or the explanation is found to be false , or such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona-fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, as per the mandate of Section 271(1)(c) of the Act read with explanation. The assessee company has made proper disclosure with respect to the valuation of closing WIP in the return of income filed with the Revenue and also in the Audited Balance Sheet and the Audit report filed with the return of income with the Revenue. During the assessment proceedings u/s 143(3) read with Section 143(2) of the Act, proper explanations were given by the assessee company as well during appellate proceedings with the learned CIT(A) during quantum, although the same did not found favour with the Revenue , which also attained finality after confirmation by the learned CIT(A) in quantum proceedings . The assessee company has given bona fide explanations and was also able to substantiate with respect to devaluation of closing WIP by Rs. 1.95 crores owing to not acceptance of the goods by the customers due to non-fulfillment of their commitments owing to lean period in textile industry. The said goods being closing WIP (inventories) were devalued as per technical evaluation obtained by the assessee company based on the net realizable value which was lower than the cost by Rs.1.95 crores, which method of valuation of inventories is consistent with the Accounting Standard AS-2 prescribed by the ICAI . The goods which were made by the assessee company as to the specification of the customers and which were not accepted for ITA 2663/Mum/2013 9 delivery due to non fulfillment of commitments by the buyers will in the normal circumstances have lower value as the goods were manufactured as per the specific requirements of a specific clients which may not found acceptability with the other clients, which in any case were valued by the assessee company after obtaining technical evaluation keeping in view net realizable value which was lower than cost, which method of valuation of inventories is consistent with the accounting standard AS-2 which stipulate that the inventories shall be valued at cost or net realizable value whichever is lower .The Revenue has not controverted the said technical evaluation obtained by the assessee company with any cogent adverse material to prove that there was an deliberate attempt made by the assessee to evade taxes or defraud revenue , by concealing particulars of income or furnishing of in- accurate particulars of income. The assessee company made a bona-fide claim which ultimately did not found favour with the Revenue . Proper disclosures were made in the return of income filed with the Revenue and in the Audited Balance Sheet and the Auditor’ report . The said explanations were also furnished during the assessment and the first appellate proceedings before the learned CIT(A) in quantum additions albeit not accepted. The assessee company has discharged its primary onus so far as penalty proceedings u/s 271(1)(c) of the Act are concerned by bringing forth bona-fide explanation duly substantiated by the reasons for devaluing closing WIP being inventories by Rs.1.95 crores as per reasons set out above, which is not rebutted by the Revenue with cogent incriminating or adverse material or to show that there was an deliberate attempt on part of the assessee company to evade taxes or defraud revenue. The said claim of reduced closing WIP by Rs.1.95 crores made by the assessee company backed with technical evaluation obtained on net realizable value being lower than cost , is consistent with Accounting Standards AS-2 issued by ICAI backed with proper declaration in the return of income, Audited Balance Sheet and Auditors Report which claim did not ultimately found favour with the ITA 2663/Mum/2013 10 Revenue , will not make the assessee company exigible for penalty u/s 271(1)(c) of the Act. Merely because the assessee company in the instant case has accepted the addition in the quantum assessment proceedings which had attained finality , will not make the assessee automatically liable for penalty u/s 271(1)(c) of the Act whereby proper and bonafide explanations backed by sound reasoning and declarations as set out above are furnished by the assessee company , and more-so the revenue impact in quantum additions is tax neutral as the closing WIP of relevant previous year shall be opening WIP of immediately succeeding financial year and any adjustment to closing WIP has to be necessarily followed by corresponding adjustment to opening WIP of immediately succeeding financial year making it tax neutral whereby no prejudice is caused to the Revenue. Moreover, the claim of the assessee company is being made by following Accounting Standard AS-2 which requires closing inventory to be valued at cost or net realizable value whichever is lower and the closing WIP being valued on net realizable value which was lower than the cost in the instant case . The ratio of the decision of Hon’ble Supreme Court in the case of Reliance Petro products Private Limited (supra) is squarely applicable in the instant case. We do not find any infirmity in the well reasoned and detailed order dated 04-01-2013 passed by the learned CIT(A) deleting the penalty of Rs.71,66,250/- (with respect to the afore-stated addition of Rs.1.95 crores) levied by the A.O. and we uphold the same. Thus, we order the deletion of the penalty of Rs.71,66,250/- (with respect to the afore-stated addition of Rs.1.95 crores) levied u/s 271(1)(c) of the Act by the AO with respect to the devaluation of the closing WIP being inventories by Rs.1.95 crores by the assessee company vide our detailed discussions and reasoning as set out above. We order accordingly.