HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 10 / 2015 M/s Gems & Gems (Registered Partnership Firm).5, Bardiya Colony, Jaipur., Through Its Partner Abhin Jain S/o Sh. Rajendra Kumar Jain, Aged 33 Years Approx, B/c Jain. Appellant Versus 1. Commissioner of Income Tax-II, New Central Revenue Building Statue Circle, Jaipur. 2. Assistant Commissioner of Income Tax ,Circle-5 New Central Revenue Building Statue Circle, Jaipur. Respondents For Appellant(s) : Mr. Naresh Gupta For Respondent(s) : Mr. K.D.Mathur & Mr. Prateek Kedawat for Mr. R.B.Mathur HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 12/09/2017 1. By way of this appeal, appellant has challenged judgment and order of Tribunal whereby Tribunal has allowed appeal of department reversing view taken by CIT(A). 2. This Court while admitting appeal on 20.12.2016, framed following substantial question of law: Whether on facts and in circumstances of case, in recording finding of reversal, ITAT acted on total misconception in ignoring appellant s explanation made in quantum proceedings and important materials on record and in applying wholly mistaken tests in sustaining penalty u/s 271(1)(c) of Act? (2 of 16) [ITA-10/2015] 3. facts of case on basis of synopsis submitted by appellant are that appellant partnership firm is engaged in business of manufacturing processing and trading of various types of precious and semi-precious stones. appellant has been maintaining complete books of accounts including stock register, quantity wise and weight wise separately for each type of stone. It has been valuing its closing stock of stones consistently following same system and method of valuation as accepted by revenue in earlier years at cost or market price whichever is less. value of stone being subjective satisfaction of buyer is dependent on their liking or disliking or suitability in this line of trade. saleable stock of superior quality are purchased first by customers, after assortment of find items as per buyer s choice; and at end of year, only inferior quality of stones remained in stock having minimal value even less than cost price. Accordingly, appellant valued its stock at end of year as per their ability, experience and commercial expediency, deducting cost of sold stock from total stock of particular stone. In order to ascertain cost price of sold stock, gross profit is deducted from sale value of sold stock; thereafter, cost price so ascertained of sold stock is deducted from total cost of stock at end of year of particular stone; resulting into cost of stock of inferior quality at end of year is valued. 4. Counsel for appellant contended that pursuant to notice issued against present appellant appellant has (3 of 16) [ITA-10/2015] appeared before AO and observations which are made by AO reads as under :- assessee is engaged in manufacturing and trading of precious and semi precious stones. During year consideration, assessee has shown sales of Rs. 3,46,54,366/- and shown gross profit of Rs. 31,80,702/- i.e. 9.18% as against sales of Rs. 85,18,891/- and gross profit of Rs. 14,76,311/- i.e. 17.32% in A.Y. 2005-06 and sales of Rs. 99,28,907/- and gross profit of 19,88,760/- i.e. 20.3% in A.Y. 2004-2005. Regarding trading results assessee contended that its sales are increased four times as compared to A.Y. 2005-06 and three and half times as compared to A.Y. 2004-05. It also contended that assessee is maintaining complete quantitative details including day to day stock register, details of which have been filed along with Tax Audit Report with return. During course of examination it was noticed that assessee has maintain details of opening stock, purchases and sales in quantity only and no quality-wise details have been maintained. On examination of various purchase vouchers it is noticed that same stone has been purchased at varied prices. Therefore, books results of assessee are not subject to any verification and provisions of section 145(3) are applicable in this case. 5. Against assessment which was made, representative of assessee has replied on 13.12.2008, which reads as under:- AR of assessee vide reply dated 13.12.2008 submitted as under- correct valuation of stock would come to Rs. 1,05,59,312/- instead of Rs. 92,24,226/- and G.P. Rate declared during year is lower in compare to earlier year. After further mutual discussion and put end to litigation as assessee does not want to enter into unnecessary litigation and to purchase peace of mind assessee is agreeable for addition of Rs. 15 lacs in trading results.The assessee does not want to enhance in closing stock to cause of unnecessary carry forwarding and adjusting value of closing stock. assessee is agreeing to addition to put end to matter and to purchase peace of mind as he does (4 of 16) [ITA-10/2015] not want to enter into unnecessary litigation with Department. I have considered facts of case and submission of assessee. On facts discussed above it is found that provisions of section 145(3) is clearly applicable in this case. Therefore, trading addition of Rs. 15 lakh is made and added to income of assessee. 6. Considering above, he has taken us to order of CIT(A) which reads as under:- 2.3 I have carefully considered relevant facts and circumstances, in light of rival stands of AO and Ld. AR, viz. issue under consideration. From above, it can be seen that concealment penalty was imposed by AO, primarily, for reasons and findings discussed in assessment order only. addition in present case is made towards valuation of closing stock of Emerald Cut Stock, on agreed basis, u/s. 145(3) of Act. In other words impugned addition was made on assumption or guess basis towards valuation of closing stock of appellant, while rejecting valuation offered by appellant, thereof. In this regard, it is settled law that assessment proceeding and penalty proceeding is different in nature and also requires to be dealt in different manner. In instant case, it true that discrepancies observed, during assessment proceedings, were found sufficient to make addition u/s 145(3), on such accounts. However, from penalty order it is perceived that AO has not spelt out any other additional and concrete grounds to justify imposition of penalty towards such addition, per say. In this regard recent judgment of supreme court in case of Reliance Petro Products Pvt. Ltd. (322 ITR 158) is found relevant, wherein it has been held that merely rejection of any claim made by assessee will not, automatically, entail to concealment penalty, unless some inaccurate particulars are filed in this regard. Moreover, in view of various related decisions, including of Apex Court {In case of Sangrur Vanaspati Mills(303 ITR 53) (P&H), subsequently affirmed by Hon'ble Supreme (5 of 16) [ITA-10/2015] Court (308 ITR 18) (St.)} and Jurisdictional High Court, {in case of Shiv Lal Tak (251 ITR 373) (Raj)}, it is held that no concealment penalty can be imposed in case, where addition has been made on estimated basis. Since, as discussed above, in instant case quantum addition was made u/s 145(3) of Act on estimate basis, therefore, in my considered opinion AO's action of imposition of penalty u/s 271(1)(c) of Act, on such addition, is not justified and also contrary to spirit of relevant law. In view of above, penalty u/s 271(1)(c) is hereby cancelled. 7. He has also contended that Tribunal has wrongly relied on judgment of Mak Data P. Ltd. vs. Commissioner of Income Tax-II, (2013) 358 ITR 593 (SC) decided on 30.10.2013, which reads as under:- However, in present case appellant firm not only furnished details and explanation during assessment proceedings justifying its valuation of closing stock of Emerald Cut (India) as mentioned Supre and in letter dated 20.10.2008 (Annexure-5) but also furnished its explanation in penalty proceeding by way of written submissions filed before AO, CIT(A) and ITAT. appellant categorically stated that valuation of stock was as per cost and market price whichever less is. And further stated that better quality of stones are purchased by customers at first after assortment and only inferior quality of stones remains in stock at end of year which in any way does not fetch same cost price that of better quality of stones sold. AO sought to value closing stock as per historical cost method which is practicable not possible in this line of trade in view of modus operandi explained and stated in para-3 supra. Otherwise, in instant case there was no attempt to evade tax inasmuch as, valuation of stock at end of year would have direct impact on value of opening stock of next year and increase of valuation of closing stock in this year would have reduced in income (6 of 16) [ITA-10/2015] of next year resulting to no tax impact finally. In instant case, revenue has failed to detect any evasion of tax like case of Mak Data. Unlike Mak Data case, in instant case, agreed addition was not for concealed income proved by documentary evidence. In instant case of appellant, addition was not proposed based on documentary evidence impounded/seized during course of survey or search like case of Mak Data. Apparently, in instant case agreed addition on account trading addition was voluntarily on estimate basis to buy peace and to avoid litigation. As such, case of Mak Data is not applicable to case of appellant. case of Mak Data is not applicable to case of appellant at all and ITAT has grossly erred in making it applicable to case of appellant to sustain penalty. 8. Counsel for appellant has relied upon in case of Commissioner of Income-Tax vs. Bindal Jewellers, [2002] 257 ITR (Raj), observed as under:- On other hand, learned counsel for respondent has contended that learned Tribunal, on basis of material on record and fact that goods of better quality carrying higher value were sold during course of accounting year and goods of inferior quality were left, came to conclusion after scrutinising evidence. It is submitted that proper accounts were kept and that even Income Tax Officer has not pointed out any defect in percentage in recovery of finished goods and, as such, no question of law can be referred on finding of fact arrived at by Tribunal. Reliance has been placed on CWT v. Sara Varghese (Mrs.) [1991]187 ITR 450(Ker). We have heard learned counsel for parties and perused material on record. value may differ from asset to asset and place to place with different person and value of closing stock cannot be mathematically calculated. money value attributed to stock should be decided and estimated by concerned authority in reasonable and judicial manner on basis of (7 of 16) [ITA-10/2015] facts and circumstances of case available before him. In instant case, finding recorded by learned Tribunal cannot be said to be perverse. No question of law for reference is made out. Consequently, reference application under Section 256(2) of Income Tax Act, 1961 is dismissed. 9. Counsel for appellant has also relied upon in case of Commissioner of Income-Tax vs. Reliance Petroproducts Pvt. Ltd., [2010] 322 ITR 158 (SC), observed as under:- 8.A glance at this provision would suggest that in order to be covered, there has to be concealment of particulars of income of assessee. Secondly, assessee must have furnished inaccurate particulars of his income. Present is not case of concealment of income. That is not case of Revenue either. However, Learned Counsel for Revenue suggested that by making incorrect claim for expenditure on interest, assessee has furnished inaccurate particulars of income. As per Law Lexicon, meaning of word "particular" is detail or details (in plural sense); details of claim, or separate items of account. Therefore, word "particulars" used in Section 271(1)(c) would embrace meaning of details of claim made. It is admitted position in present case that no information given in Return was found to be incorrect or inaccurate. It is not as if any statement made or any detail supplied was found to be factually incorrect. Hence, at least, prima facie, assessee cannot be held guilty of furnishing inaccurate particulars. Learned Counsel argued that "submitting incorrect claim in law for expenditure on interest would amount to giving inaccurate particulars of such income". We do not think that such can be interpretation of concerned words. words are plain and simple. In order to expose assessee to penalty unless case is strictly covered by provision, penalty provision cannot be invoked. By any stretch of imagination, making incorrect claim in law cannot tantamount to furnishing inaccurate particulars. In Commissioner of Income (8 of 16) [ITA-10/2015] Tax, Delhi v. Atul Mohan Bindal MANU/SC/1496/2009MANU/SC/1496/2009 : 2009 (9) SCC 589 where this Court was considering same provision, Court observed that Assessing Officer has to be satisfied that person has concealed particulars of his income or furnished inaccurate particulars of such income. This Court referred to another decision of this Court in Union of India v. Dharamendra Textile Processors MANU/SC/4448/2008MANU/SC/4448/2008 : 2008 (13) SCC 369 as also, decision in Union of India v. Rajasthan Spg. & Wvg. Mills 2009 (13) SCC 448 and reiterated in para 13 that (page 13 of 317 ITR): 13. It goes without saying that for applicability of Section 271(1)(c), conditions stated therein must exist. 9. Therefore, it is obvious that it must be shown that conditions under Section 271(1)(c) must exist before penalty is imposed. There can be no dispute that everything would depend upon Return filed because that is only document, where assessee can furnish particulars of his income. When such particulars are found to be inaccurate, liability would arise. In Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai and Anr. MANU/SC/3182/2007MANU/SC/3182/2007 : 2007 (6) SCC 329 this Court explained terms "concealment of income" and "furnishing inaccurate particulars". Court went on to hold therein that in order to attract penalty under Section 271(1) (c), mens rea was necessary, as according to Court, word "inaccurate" signified deliberate act or omission on behalf of assessee. It went on to hold that Clause (iii) of Section 271(1) provided for discretionary jurisdiction upon Assessing Authority, inasmuch as amount of penalty could not be less than amount of tax sought to be evaded by reason of such concealment of particulars of income, but it may not exceed three times thereof. It was pointed out that term "inaccurate particulars" was not defined anywhere in Act and, therefore, it was held that furnishing of assessment of value of (9 of 16) [ITA-10/2015] property may not by itself be furnishing inaccurate particulars. It was further held that assessee must be found to have failed to prove that his explanation is not only not bona fide but all facts relating to same and material to computation of his income were not disclosed by him. It was then held that explanation must be preceded by finding as to how and in what manner, assessee had furnished particulars of his income. Court ultimately went on to hold that element of mens rea was essential. It was only on point of mens rea that judgment in Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai and Anr. was upset. In Union of India v. Dharamendra Textile Processors (cited supra), after quoting from Section 271 extensively and also considering Section 271(1)(c), Court came to conclusion that since Section 271(1)(c) indicated element of strict liability on assessee for concealment or for giving inaccurate particulars while filing Return, there was no necessity of mens rea. Court went on to hold that objective behind enactment of Section 271(1)(c) read with Explanations indicated with said Section was for providing remedy for loss of revenue and such penalty was civil liability and, therefore, willful concealment is not essential ingredient for attracting civil liability as was case in matter of prosecution under Section 276C of Act. basic reason why decision in Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai and Anr. (cited supra) was overruled by this Court in Union of India v. Dharamendra Textile Processors (cited supra), was that according to this Court effect and difference between Section 271(1)(c) and Section 276C of Act was lost sight of in case of Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai and Anr. (cited supra). However, it must be pointed out that in Union of India v. Dharamendra Textile Processors (cited supra), no fault was found with reasoning in decision in Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai and Anr. (cited supra), where Court explained meaning of terms "conceal" and inaccurate". It was only ultimate inference in Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai and Anr. (10 of 16) [ITA-10/2015] (cited supra) to effect that mens rea was essential ingredient for penalty under Section 271(1)(c) that decision in Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai and Anr. (cited supra) was overruled. 10. We are not concerned in present case with mens rea. However, we have to only see as to whether in this case, as matter of fact, assessee has given inaccurate particulars. In Webster's Dictionary, word "inaccurate" has been defined as: not accurate, not exact or correct; not according to truth; erroneous; as inaccurate statement, copy or transcript. 11.We have already seen meaning of word "particulars" in earlier part of this judgment. Reading words in conjunction, they must mean details supplied in Return, which are not accurate, not exact or correct, not according to truth or erroneous. We must hasten to add here that in this case, there is no finding that any details supplied by assessee in its Return were found to be incorrect or erroneous or false. Such not being case, there would be no question of inviting penalty under Section 271(1)(c) of Act. mere making of claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding income of assessee. Such claim made in Return cannot amount to inaccurate particulars. 13. In this behalf observations of this Court made in Sree Krishna Electricals v. State of Tamil Nadu and Anr. MANU/SC/0628/2009MANU/SC/0628/2009 : (2009) 23VST 249 (SC) as regards penalty are apposite. In aforementioned decision which pertained to penalty proceedings in Tamil Nadu General Sales Tax Act Court had found that authorities below had found that there were some incorrect statements made in Return. However, said transactions were reflected in accounts of assessee. This Court, therefore, observed: So far as question of penalty is concerned items which were not included in turnover (11 of 16) [ITA-10/2015] were found incorporated in appellant's account books. Where certain items which are not included in turnover are disclosed in dealer's own account books and assessing authorities include these items in dealer's turnover disallowing exemption, penalty cannot be imposed. penalty levied stands set aside. 10. Counsel for appellant has further relied upon in case of Shiv Lal Tak vs. Commissioner of Income-Tax, [2001] 251 ITR 373 (Raj.),observed as under:- 14. It may be noticed that in Explanation I to sec. 271(1)(c), as recast, while expression "failure to return total assessed income as not arising on account of any fraud or wilful negligence on part of assessee" does not find place but clause (b) read with proviso (ii) makes it abundantly clear that where difference in assessed income and returned income is not arising on account of any gross or wilful negligence on part of assessee' still no penalty is leviable. statute has clearly drawn distinction between furnishing deliberate, false explanation by assessee and explanation, which may not be false but is not accepted because assessee was not able to substantiate it. While there is no relaxation in rigour of Explanation in raising presumption against assessee in former case, in latter class of cases, statute itself relaxes its rigour by directing that where in respect of any amount, added or disallowed and any explanation is offered by such person (assessee) which is not accepted because assessee has failed to substantiate same, but such explanation is bona fide and all facts relating to same and material to computation of total income has been disclosed by him, Explanation shall not apply. In other words, cases under clause (A) of Explanation I are those where explanation furnished by assessee falls in category of fact 'disproved' whereas cases where explanation so furnished falls in category of fact 'not proved.' expressions 'proved' disproved' and 'not proved' has well known, distinct connotation in legal terminology, as may be apparent from provisions of Indian Evidence Act. (12 of 16) [ITA-10/2015] As per interpretation clause, fact is said to be 'disproved' when after considering matter before it, court either believes that it does not exist or considers its non-existence so probable that prudent man ought under circumstances of particular case, to act upon supposition that it does not exist. In contrast, fact is said to be 'proved' when after considering mailer before it, court either believes it to exist or considers its existence so probable that prudent man ought under circumstances in particular case, to act upon supposition that it exists. In juxta position, expression 'not proved' denotes fact is said to be 'not proved' when it is neither proved nor disproved. With this, it is of significance that while with addition of income or disallowance of expenses is attached, presumption about non-disclosure or concealment of particulars of such additions or expenses, no such presumption about existence of lack of 'bona fide' of assessee is raised in case falling under clause (B) of Explanation. On contrary, on finding explanation as was existent or disproved, reasonable inference of lack of bona fide can be drawn, mere failure to substantiate explanation as fact not proved, can not raise presumption about deliberate concealment and lack of bona fide. In such events, question of bona fide has to be proved as fact like any other fact on preponderance of probability uninfluenced with any presumption. 15. In first place, we find in present case that even during course of assessment, it was not case of rejecting explanation furnished by assessee, before making any additions in its income. Once no explanation was said to be tested and rejected by Assessing Officer before converting, question Of invoking Explanation I itself would not have arisen however. Explanation I was attracted for purpose of giving jurisdiction to Assessing Officer for initiating proceedings. It could not have further taken place of conclusive proof so as to discard explanation furnished by assessee, (13 of 16) [ITA-10/2015] for very same reason for which result shown by him in Books of Accounts has been rejected, not by rejecting explanation furnished by assessee but by accepting explanation furnished by assessee that he does not have necessary material to verify each and every detail of expenses and therefore, gross profit rate on receipts has been taken by assessee. Once plea of assessee has been accepted during course of assessment and additions have been made at his behest, question of making additions by rejecting explanation, which was not sustainable or could not be substantiated, would not arise and in that event, question of bona fides of assessee could not be doubted. 11. Counsel for appellant has further relied upon in case of Commissioner of Income-Tax vs. Sangrur Vanaspati Mills Ltd., [2008] 303 ITR 53 (P&H), observed as under:- 7. order passed by ITAT is based upon two decisions of this court in CIT vs. Ravail Singh and Co. [2002] 254 ITR 191 and Harigopal Singh v. CIT [2002] 258 ITR 85. In both these decisions, this court has held that in order to attract clause (c) of Section 271(1) of Act, it is necessary that there must be concealment by assessee of particulars of his income or furnishing of inaccurate particulars of such income. provisions of ass3essed on estimate basis and additions are made therein. It was held that when addition had been made on basis of estimate and not on account of any concrete evidence of concealment, then penalty was not leviable. similar view was also taken by this court in CIT v. Dhillon Rice Milles [2002] 256 ITR 447, where addition was made by Assessing Officer by estimating yield of super phak as well as of chhilka and also price of chhilka, that addition was reduced by Commissioner of Income-tax (Appeals). However, penalty levied by Assessing Officer was deleted by Commissioner of Income-tax (Appeals). order of Commissioner of (14 of 16) [ITA-10/2015] Income-tax (Appeals) was confirmed by ITAT and appeal filed by Revenue against said order of ITAT was dismissed by this court, on ground that Assessing Officer had made additions on basis of estimate of yield of phak and chhilka and estimate of price and that estimate would not ipso facto lead to penalty. 12. Counsel for respondent has contended that view taken by Tribunal is just and proper. He has relied upon decision of Supreme Court in Mak Data s case (supra) which reads as under:- 7. AO, in our view, shall not be carried away by plea of Assessee like "voluntary disclosure", "buy peace", "avoid litigation", "amicable settlement", etc. to explain away its conduct. question is whether Assessee has offered any explanation for concealment of particulars of income or furnishing inaccurate particulars of income. Explanation to Section 271(1) raises presumption of concealment, when difference is noticed by AO, between reported and assessed income. burden is then on Assessee to show otherwise, by cogent and reliable evidence. When initial onus placed by explanation, has been discharged by him, onus shifts on Revenue to show that amount in question constituted income and not otherwise. 8. Assessee has only stated that he had surrendered additional sum of Rs. 40,74,000/- with view to avoid litigation, buy peace and to channelize energy and resources towards productive work and to make amicable settlement with income tax department. Statute does not recognize those types of defences under explanation 1 to Section 271(1)(c) of Act. It is trite law that voluntary disclosure does not release Appellant-Assessee from mischief of penal proceedings. law does not provide that when Assessee makes voluntary disclosure of his concealed income, he had to be absolved from penalty. 9. We are of view that surrender of income in this case is not voluntary in sense that offer of (15 of 16) [ITA-10/2015] surrender was made in view of detection made by AO in search conducted in sister concern of Assessee. In that situation, it cannot be said that surrender of income was voluntary. AO during course of assessment proceedings has noticed that certain documents comprising of share application forms, bank statements, memorandum of association of companies, affidavits, copies of Income Tax Returns and assessment orders and blank share transfer deeds duly signed, have been impounded in course of survey proceedings Under Section 133A conducted on 16.12.2003, in case of sister concern of Assessee. survey was conducted more than 10 months before Assessee filed its return of income. Had it been intention of Assessee to make full and true disclosure of its income, it would have filed return declaring income inclusive of amount which was surrendered later during course of assessment proceedings. Consequently, it is clear that Assessee had no intention to declare its true income. It is statutory duty of Assessee to record all its transactions in books of account, to explain source of payments made by it and to declare its true income in return of income filed by it from year to year. AO, in our view, has recorded categorical finding that he was satisfied that Assessee had concealed true particulars of income and is liable for penalty proceedings Under Section 271 read with Section 274 of Income Tax Act, 1961. 10. AO has to satisfy whether penalty proceedings be initiated or not during course of assessment proceedings and AO is not required to record his satisfaction in particular manner or reduce it into writing. scope of Section 271(1)(c) has also been elaborately discussed by this Court in Union of India v. Dharmendra Textile Processors MANU/SC/4448/2008 : (2008) 13 SCC 369 and CIT v. Atul Mohan Bindal MANU/SC/1496/2009 : (2009) 9 SCC 589. 13. He contended that taking into consideration above, view taken by Tribunal is required to be upheld. 14. We have heard learned counsel for appellant as well as respondent. 15. From order of AO, it seems that because of pressure, appellant has surrendered amount and (16 of 16) [ITA-10/2015] observations which has been made by AO which we have already reproduced above, it clearly shows that it is case of consent and CIT(A) while considering decision of Supreme Court in case of Commissioner of Income Tax vs. Reliance Petroproducts Pvt. Ltd., (2010) 322 ITR 158 (SC) and other decisions which we have referred in above paragraphs, Tribunal was not justified in holding that correct statement of valuation of closing stock was not filed alongwith return. 16. In that view of matter, view taken by CIT(A) is required to be accepted and order of Tribunal is quashed and set aside. 17. issue is answered in favour of assessee and appeal stands allowed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. Chouhan/66 Gems & Gems v. Commissioner of Income-tax-II, Jaipur / Assistant Commissioner of Income-tax , Jaipur