Molex Mafatlal Micron Ltd.,, Gandhinagar v. The Income tax Officer,Ward-GNR Ward-3,, Gandhinagar

ITA 475/AHD/2008 | 2004-2005
Pronouncement Date: 17-09-2010 | Result: Allowed

Appeal Details

RSA Number 47520514 RSA 2008
Assessee PAN AABCM3173G
Bench Ahmedabad
Appeal Number ITA 475/AHD/2008
Duration Of Justice 2 year(s) 7 month(s) 8 day(s)
Appellant Molex Mafatlal Micron Ltd.,, Gandhinagar
Respondent The Income tax Officer,Ward-GNR Ward-3,, Gandhinagar
Appeal Type Income Tax Appeal
Pronouncement Date 17-09-2010
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted C
Tribunal Order Date 17-09-2010
Date Of Final Hearing 07-09-2010
Next Hearing Date 07-09-2010
Assessment Year 2004-2005
Appeal Filed On 08-02-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH AHMEDABAD BENCH AHMEDABAD BENCH AHMEDABAD BENCH C CC C BEFORE BEFORE BEFORE BEFORE SHRI SHRI SHRI SHRI MUKUL MUKUL MUKUL MUKULKUMAR KUMAR KUMAR KUMAR SHRAWAT SHRAWAT SHRAWAT SHRAWAT JUDICIAL JUDICIAL JUDICIAL JUDICIAL MEMBER MEMBER MEMBER MEMBER AND AND AND AND SHRI N.S.SAINI SHRI N.S.SAINI SHRI N.S.SAINI SHRI N.S.SAINI ACCOUNTANT ACCOUNTANT ACCOUNTANT ACCOUNTANT MEMBER MEMBER MEMBER MEMBER ITA NO. 475 /AHD/ 2008 ASSESSMENT YEAR :2003-04 MOLEX MAFATLAL MICRON LTD. C-788 G.I.D.C. SECTOR-25 GANDHINAGAR. VS. INCOME TAX OFFICER GANDHINAGAR WARD-3 GANDHINAGAR. PAN/GIR NO. : AABCM 3173G (A PPELLANT ) .. ( RESPONDENT ) ITA NO. 606 /AHD/ 20 08 ASSESSMENT YEAR :2003-04 INCOME TAX OFFICER GANDHINAGAR CIRCLE GANDHINAGAR. VS. MOLEX MAFATLAL MICRON LTD. C-788 G.I.D.C. SECTOR-25 GANDHINAGAR. APPELLANT BY : SHRI SANJAY R. SHAH. RESPONDENT BY: SHRI K. M. MAHESH SR. D. R. O R D E R PER N.S.SAINI ACCOUNTANT MEMBER :- THESE ARE TWO APPEALS ONE FILED BY THE ASSESSEE AND THE OTHER FILED BY THE REVENUE AGAINST THE COMMON ORDE R OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-GANDHIN AGAR DATED 19-11-2007. 2. GROUND NO.1 OF THE APPEAL READS AS UNDER:- 1. THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) GANDHINAGAR IS ERRONEOUS AND REQUIRES TO BE MODIFIED. IT IS SUBMITTED THAT IT BE SO HELD NOW. 3. AT THE TIME OF HEARING THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT THIS GROUND OF - -- - 2 22 2 - -- - APPEAL IS GENERAL IN NATURE AND THEREFORE THIS GROU ND OF APPEAL REQUIRES NO ADJUDICATION BY US. 4. GROUND NO.3 OF THE APPEAL READS AS UNDER:- 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)HAS ERRED IN CONFIRMING PENALTY UNDER SECTION 271(1)(C) OF T HE INCOME TAX ACT 1961 IN RESPECT OF DISALLOWANCE OF `.58 95 228/- PERTAINING TO THE REJECTING OF GOODS. IN THE FACTS AND CIRCUMSTANCES OF THE CASE IT IS SUBMITTED THAT NO P ENALTY UNDER SECTION 271(1)(C) IS LEVIABLE. IT IS SUBMITTE D THAT IT BE SO HELD NOW. 3.1. THE APPELLANT HAS NOT CONCEALED ANY INCOME OR HAS NOT FURNISHED ANY INACCURATE PARTICULARS OF INCOME AND HENCE NO PENALTY UNDER SECTION 271(1)(C) OF THE INCOME TAX A CT. IN THE FACTS AND CIRCUMSTANCES OF THE CASE IT IS SUBMITTED THAT NO PENALTY UNDER SECTION 271(1)(C) IS REQUIRED TO BE L EVIED. IT IS SUBMITTED THAT IT BE SO HELD NOW. 5. THE GROUNDS OF APPEAL RAISED BY THE REVENUE READ S AS UNDER:- 1. THAT LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) HAS ERRED IN LAW AND ON FACTS IN DIRECTING TO LEVY PENA LTY UNDER SECTION 271(1)(C) ADOPTING THE CONCEALED INCOME AT `.58 95 288/- AS AGAINST THE CONCEALED INCOME OF `.88 87 492/-. 2 THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE PROVISION MADE F OR GENERAL OBSOLESCE AS PER COMPANYS ACT IS NOT RELEV ANT FOR THE PURPOSE OF COMPUTING THE INCOME OF THE ASSESSEE UNDER THE INCOME TAX ACT 1961. 6. SINCE THE FACTS AND ISSUE INVOLVED IN THE ABOVE GROUNDS OF APPEAL ARE COMMON THEY ARE BEING DISPOSED OF TOGETH ER AS UNDER. 7. THE BRIEF FACTS OF THE CASE ARE THAT ADDITION OF `.88 87 407/- MADE WHILE COMPLETING THE ASSESSMENT UNDER SECTION 143(3) WITH REGARD TO THE PROVISION FOR OBSOLESCENCE OF INVENTO RY. BESIDES THE FACT THAT PROVISION OF ANY EXPENSES IS NOT AN ALLOW ABLE EXPENSE UNDER THE INCOME TAX ACT THE ASSESSING OFFICER ALS O DID NOT ALLOW IT ON THE GROUND THAT BY THIS PROCESS THE APPELLANT HA D REDUCED ITS - -- - 3 33 3 - -- - INCOME EXIGIBLE TO TAX BY THE SUM OF `.88 87 492/- FOR THE YEAR UNDER CONSIDERATION BY UNDERVALUATION OF THE CLOSI NG STOCK WHOSE ENTRY HAS BEEN REVERSED IN THE IMMEDIATE FOLLOWING YEAR. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) UPHELD THE ADDITION AFTER DETAILED SCRUTINY WHICH FURTHER REVEALED THA T THE PROVISION MADE CONSISTED OF A SUM OF `.58 95 288/- FOR THE RE JECTED MATERIALS AND `.29 83 275/- FOR SLOW MOVING ITEMS ON THE BAS IS OF INTERNAL LAID DOWN NORMS. 8. CONSEQUENTLY THE ASSESSING OFFICER PASSED THE P ENALTY ORDER UNDER SECTION 271(1)(C) WHICH IS UNDER APPEAL TRE ATING THE SUM OF `.88 87 492/- AS CONCEALED INCOME AND LEVYING THE M INIMUM PENALTY OF `.32 66 154/-. 9. IN APPEAL BEFORE THE LEARNED COMMISSIONER OF IN COME TAX (APPEALS) THE ASSESSEE SUBMITTED THAT DURING THE YE AR THE APPELLANT MADE PROVISIONS FOR OBSOLESCENCE OF INVEN TORY FOR `.1 12 41 069/- CONSISTING OF `.58 95 287/- OF REJ ECTED MATERIALS FROM MOLEX HONG KONG AND `.53 45 781/- BEING THE PR OVISION AS PER THE COMPANY POLICY OF NON-MOVING AND SLOE MOVING IT EMS. SINCE THERE ALREADY EXISTED AN OPENING PROVISION OF `.23 62 506/- THE NET PROVISION MADE DURING THE YEAR WAS `.88 78 562/-. I T WAS STATED THAT THE SAID PROVISION WAS MADE AS PER THE COMPANY S POLICY LAID DOWN IN THE CONTEXT. COPIES OF SOME INTERNAL INSTRU CTIONS WERE ALSO FILED. 10. IT WAS FURTHER STATED THAT IN RESPECT OF EXPOR T OF GOODS COMPANY WAS INFORMED THAT GOODS WERE REJECTED BECAU SE OF THE QUALITY ISSUE AND ACCORDINGLY THE SALE ENTRY WAS RE VERSED AND THE CORRESPONDING STOCK WAS SHOWN IN THE INVENTORY AND AS PER THE COMPANYS POLICY TO PROVIDE FOR 100% COST WAS DULY PROVIDED FOR IN THE BOOKS OF ACCOUNTS FOR `.58 95 288/-. 11. IT WAS FURTHER STATED THAT AS PER THE COMPANIES ACT A MANUFACTURING COMPANY IS SUPPOSED TO PROVIDE AND ST ATE ABOUT - -- - 4 44 4 - -- - THE ADEQUATE PROVISION IN RESPECT OF UNSERVICEABLE AND DAMAGED STOCK IN ITS ACCOUNTS. OTHERWISE THE AUDITORS WOULD HAVE COMMENTED ADVERSELY ON IT. AS PER AUTHORISED REPRES ENTATIVE THE FACT THAT THE PROVISION WAS REVERSED NEXT YEAR ON T HE SALE OF THE REJECTED MATERIAL AND HENCE OFFERED FOR TAXATION NE XT YEAR GOES TO SHOW THAT NO TAX WAS SOUGHT TO BE EVADED. AS PER TH E AUTHORISED REPRESENTATIVE ANY ADDITION DOES NOT NECESSARILY I MPLY CONCEALMENT AND PENALTY. THERE HAS BEEN NO CONCEALM ENT AND IN FACT THE ASSESSING OFFICER RAISED A QUESTION ABOUT ADMISSIBILITY OF ITS CLAIM ONLY BECAUSE THE CLAIM WAS PROPERLY DISCL OSED. EVEN AFTER THE ADDITION HAD BEEN MADE THE TOTAL INCOME UNDER THE PROVISIONS OF INCOME TAX ACT IS NIL. FURTHER IT HAS BEEN ADM ITTED BY THE AUTHORITIES THAT THE SUBSTANTIAL PROVISIONS HAS BEE N WRITTEN BACK IN THE IMMEDIATELY NEXT YEAR AND SUCH INCOME HAD BEEN OFFERED TO TAX THEREFORE NO LOSS TO THE REVENUE IN THE YEAR OR IN THE SUBSEQUENT YEAR. IT WAS STATED THAT THERE IS NO CO NSCIOUS EFFORTS ON THE APPELLANTS PART TO CONCEAL THE INCOME OR TO FURNISH INACCURATE PARTICULARS OF INCOME. IT WAS CLAIMED TH AT APPELLANT HAD A BONA FIDE BELIEF THAT THE PROVISION IS ALLOWABLE FOR DEDUCTION IN THE YEAR IT WAS MADE. BOTH THE ASSESSING OFFICER A ND THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) AGREED TO THE PROPOSITION THAT THE APPELLANT SHOULD GET DEDUCTION AT LEAST IN THE YEAR SUCH LOSS IS ACTUALLY INCURRED INSTEAD OF YEAR IN WHICH PROVISION WAS MADE. EVEN AFTER CHANGE IN THE YEAR OF DEDUCTIBILIT Y TAX LIABILITY OF NONE OF THE YEAR HAS CHANGED. HENCE THE LEARNED AUT HORISED REPRESENTATIVE OF THE ASSESSEES ASSERTION WAS THAT THE APPELLANT CANNOT BE PENALIZED MERELY BECAUSE ASSESSING OFFICE R TOOK A VIEW DIFFERENT FROM THAT ADOPTED BY THE ASSESSEE. 12. LEARNED COMMISSIONER OF INCOME TAX(APPEALS) AFT ER CONSIDERING THE SUBMISSIONS OF THE LEARNED AUTHORIS ED REPRESENTATIVE OF THE ASSESSEE OBSERVED AS UNDER :- 5.3 THE MATTER HAS BEEN GIVEN DUE CONSIDERATION AND AFTER SERIOUS THOUGHT I AM AFRAID I AM UNABLE TO AGREE WITH THE AUTHORISED REPRESENTATIVE. WHAT HAS HAPPENED IN THIS - -- - 5 55 5 - -- - CASE IS LITTLE BEYOND MAKING THE PROVISIONS AS PER THE COMPANYS POLICY OR ACTING ACCORDING TO COMPANIES A CT. COMPANIES DO MAKE PROVISION FOR OBSOLESCENCE AS TH EY DO FOR WARRANTIES OR LEAVE ENCASHMENT OR BAD DEBTS ETC . TO GET A CORRECT IDEA ABOUT THE LIKELY PROFITS OF THE YEAR. MAKING OF PROVISIONS ITSELF WILL BE A VERY UNNOCUOUS AND TRAN SPARENT ACT WHICH WILL GENERALLY ROUTINELY BE DISALLOWED A S AN EXPENSE AS PER THE SCHEME OF INCOME TAX ACT. HOWEVE R THE MATTER SOMETIMES GETS COMPLICATED IN CASE WE SEE TH E ACCOUNTING ENTRIES PASSED IN MAKING SUCH PROVISION. IN THE INSTANT CASE AS STATED IN THE SUBMISSION OF THE AUT HORISED REPRESENTATIVE THE TOTAL PROVISION MADE CONSISTED OF TWO PARTS (I) `.29 83 275/- FOR GENERAL OBSOLESCENCE AN D (II) `.58 95 288/- TOWARDS THE REJECTION OF MATERIAL. AS STATED THE MATERIAL EXPORTED HAD STILL NOT REACHED BACK WITH T HE APPELLANT AND IT HAD ONLY GOT THE INFORMATION OF RE JECTION FROM ITS HONG KONG ASSOCIATES. ENTRIES WERE PASSED (I) REDUCING THE SALES (II) ENHANCING THE CLOSING STOCK (III) MAKING PROVISION UNDER THE HEAD OBSOLESCENCE OF INVENTORY. 5.4. THEREFORE ASSESSEE DID WHAT WAS IN SPIRIT AGA INST THE ACTUAL STATE OF AFFAIRS. WHATEVER BE COMPANYS INTE RNAL POLICIES THE VALUE OF REJECTED MATERIAL IN HAND WA S ACCOUNTED FOR AND NULLIFIED IN TERMS OF PROVISION FOR OBSOLESCENCE OF INVENTORY. THIS WAS CLEARLY AN INA CCURATE DESCRIPTION OF THE SITUATION. BESIDES THE OTHER STA TUTORY LAWS LIKE CENTRAL EXCISE WHERE REJECTED GOODS GET RECORD ED IN A PARTICULAR FASHION ON PHYSICAL RETURN OF THE GOODS THIS METHOD HAS ALSO LET TO A SITUATION WHERE SALES SHOW N WERE LESS AND REJECTIONS REMAINED OUT OF FOCUS THROUGH T HE PROCESS OF PROVISION. 5.5. GIVEN THE JUDICIAL POSITION ONE WOULD AGREE W ITH THE AUTHORISED REPRESENTATIVE THAT AT THE PRELIMINARY S TAGE ITSELF THERE HAS TO BE SOME PRIMA-FACIE FACT OF CONCEALMEN T OR HOLDING BACK OF INFORMATION TO ATTRACT EXPLANATION- 1 TO SECTION 271(1)(C). IN THE INSTANT CASE IT IS CLEAR THAT PRIMA- FACIE THE ASSESSING OFFICER HAS SHOWN THAT ASSESSEE HAS FURNISHED INACCURATE PARTICULARS IN ITS ACCOUNTS BY INCLUDING THE REJECTION OF GOODS STILL WITH ITS BUYER IN THE PROVISION FOR OBSOLESCENCE AND INCLUDING THEM UNDER THE PROVISION FOR OBSOLESCENCE AND FURTHER THEREBY TAKING ITS VALUATI ON AT NIL. 5.6. THE AUTHORISED REPRESENTATIVE HAS BEEN VEHEMEN TLY ARGUING AS TO WHERE IS THE CONCEALMENT. EVERYTHING WAS RIGHT IN FRONT OF THE DEPARTMENT. HOWEVER I THINK THE ME THOD ADOPTED WAS NOT TRANSPARENT AND IT WAS ONLY AFTER T HE DEPARTMENTS SCRUTINY THE SAME CAME TO LIGHT. I ALS O THINK THAT IT WAS INTENDED TO REDUCE ITS TAXABILITY IN TH E CIRCUMSTANCES. THIS IS BECAUSE IF THE ASSESSEE HAD ACCOUNTED FOR SO-CALLED REJECTION ON THE ADVISE OF THE MOLEX H. K. (WHOSE GOODS NEVER REACHED BACK TO THE APPELL ANT TILL - -- - 6 66 6 - -- - THE YEAR ENDED) WITHOUT MAKING THE PROVISION ITS CLOSING STOCK WOULD HAVE BEEN HIGHER AND THE RESULTANT BOOK PROFIT WOULD HAVE BEEN HIGHER. THE APPELLANTS INCOME HAS BEEN DETERMINED UNDER SECTION 115JB. A HIGHER BOOK PROFI T WOULD HAVE LET TO HIGHER TAXABILITY. 5.7. THE FACT THAT IT WAS A PLANNED MANNER OF REDUC ING TAXABILITY IS WELL VINDICATED BY THE APPELLANT WRIT ING BACK A MAJOR PORTION OF THE INVENTORY INCLUDING THAT PERTA INING TO REJECTION AMOUNTING TO `.75 73 681/- IN THE NEXT FINANCIAL YEAR AFTER THE SALE OF THE REJECTED LOT. HENCE IT IS CLEAR THAT IN ANY CASE VALUATION OF THAT INVENTORY AT ZERO WAS NOT PROPER AS THE APPELLANT ADOPTED THROUGH ITS ACCOUNT ING PROCESS. 5.8. THEREFORE CONSIDERING ALL THE ASPECT OF THE I SSUE INVOLVED WHILE I HOLD THAT THE PROVISION FOR OBSOL ESCENCE MADE WITH RESPECT TO THE NON MOVING OR SLOW MOVING ITEM NET AMOUNT OF WHICH CAME TO `.29 83 275/- WAS AS PE R THE STANDARD PRACTICE OF THE COMPANY THE REST OF THE A MOUNT OF `.58 95 228/- PERTAINING TO REJECTION OF THE GOODS WHICH WAS INCLUDED UNDER THAT PROVISION WAS A METHOD TO CAMOU FLAGE THE TRUE STATE OF AFFAIRS AND HENCE I HAVE NO HESI TATION IN HOLDING THAT THE APPELLANT PROVIDED INACCURATE PART ICULARS OF INCOME AMOUNTING TO `.58 95 288/- WHICH LED TO CONC EALMENT OF TRUE INCOME AND CONSEQUENTLY THE EVASION OF TAX. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IN THE INSTANT CASE THE ASSESSEE MADE PROVISION OF `.88 87 407/- IN RESPECT OF OBSOL ETE AND REJECTED STOCK. THIS PROVISION CONSISTED OF TWO AMOUNTS NAME LY `.29 83 275/- ON ACCOUNT OF OBSOLETE AND SLOW MOVIN G STOCK AND `.58 95 288/-ON ACCOUNT OF REJECTED GOODS BY THE BU YER. THE LEARNED ASSESSING OFFICER DISALLOWED THE ABOVE CLAI M OF PROVISION WHICH WAS CONFIRMED BY THE APPELLATE AUTHORITIES AL SO. THE LEARNED ASSESSING OFFICER ALSO LEVIED PENALTY UNDER SECTION 271(1)(C) OF `.32 66 154/- IN RESPECT OF ABOVE DISA LLOWANCE. 14. ON APPEAL LEARNED COMMISSIONER OF INCOME TAX ( APPEALS) DELETED THE PENALTY LEVIED IN RESPECT OF DISALLOWAN CE OF `.29 83 275/- AND UPHELD THE PENALTY LEVIED IN RESP ECT OF DISALLOWANCE OF `.58 95 288/-. - -- - 7 77 7 - -- - 15. BEING AGGRIEVED BY THE AFORESAID ORDER OF THE L EARNED COMMISSIONER OF INCOME TAX (APPEALS) BOTH THE PARTI ES ARE IN CROSS APPEAL BEFORE US. 16. IN RESPECT OF PENALTY RELATING TO `. 29 83 275/ - THE LEARNED DEPARTMENTAL REPRESENTATIVE POINTED OUT THAT AS PER THE POLICY OF THE ASSESSEE COMPANY THE ASSESSEE COMPANY USED TO MAKE PROVISION IN RESPECT OF INVENTORY WHICH WERE MORE T HAN THREE MONTHS OLD BY MAKING A PROVISION AT THE RATE 1.5% O F THE VALUE OF INVENTORY. 17. ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENT ATIVE AS THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFAC TURING OF PROFESSIONAL GRADE CONNECTOR WHOSE LIFE WAS MUCH MO RE THAN THREE MONTHS THEREFORE AN INVENTORY OF THREE MONTH S OR MORE CANNOT BE TREATED AS OBSOLETE. THEREFORE HE SUBMIT TED THAT THE LEARNED ASSESSING OFFICER WAS JUSTIFIED IN LEVYING PENALTY UNDER SECTION 271(1)(C). 18. ON THE OTHER HAND THE LEARNED AUTHORISED REPRES ENTATIVE OF THE ASSESSEE SUBMITTED THAT SIMILAR PROVISIONS WERE ALSO MADE IN EARLIER YEARS WHICH WAS ACCEPTED BY THE DEPARTMENT. THE PROVISION OF `.29 83 275/- WAS BASED ON THE CONSISTENT SYSTEM FOLLOWED BY THE ASSESSEE YEAR AFTER YEAR AND IT CANNOT BE ALLEG ED THAT THE ASSESSEE HAS CONCEALED PARTICULARS OF INCOME. 19. WE FIND THAT THE LEARNED DEPARTMENTAL REPRESENT ATIVE COULD NOT CONTROVERT THE SUBMISSION OF THE ASSESSEE AND T HE FINDING OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) THA T THE PROVISION OF `.29 83 275/- WAS MADE ON THE BASIS OF CONSISTENTLY FOLLOWING STANDARD POLICY OF THE ASSESSEE COMPANY. FURTHER THE SUBMISSION OF THE ASSESSEE THAT SIMILAR PROVISION M ADE IN THE EARLIER YEAR WERE ACCEPTED BY THE DEPARTMENT ALSO C OULD NOT BE REBUTTED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE . ON THE ABOVE FACTS AND CIRCUMSTANCES WE FIND NO ERROR IN THE ORDER OF THE - -- - 8 88 8 - -- - LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IN DEL ETING THE PENALTY LEVIED UNDER SECTION 271(1)(C) IN RESPECT O F THE AFORESAID DISALLOWANCE OF `.29 83 275/- AS THE ASSESSEE CANNO T HELD AS GUILTY OF CONCEALMENT OF THE ABOVE INCOME. WE THEREFORE DO NOT FIND ANY MERIT IN THE APPEAL OF THE REVENUE AND ACCORDINGLY THE SAME IS DISMISSED. 20. IN RESPECT OF THE PENALTY LEVIED IN RELATING TO PROVISION OF `.58 95 288/- THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD RECEIVED O RDER OF THE ABOVE AMOUNT FROM M/S. MOLEX HONG KONG. THESE PRO DUCTS WERE MANUFACTURED FOR THE SPECIFIC REQUIREMENT AND COULD NOT BE USED BY OTHER CLIENTS. AS PER THE REPORT FROM QUALITY AS SURANCE DEPARTMENT OF THE ASSESSEE COMPANY IT WAS NOT POSS IBLE TO RECTIFY THE DEFECT IN THE GOODS AND ACCORDINGLY PROVISION W AS MADE IN THE YEAR UNDER CONSIDERATION. HOWEVER THE ASSESSEE GOT CUSTOMER FOR THE ABOVE GOODS IN THE IMMEDIATELY SUCCEEDING YEAR AND THE ASSESSEE COULD SELL THE SAID REJECTED GOODS FOR `.7 5 73 681/- WHICH WAS SHOWN AS INCOME IN THAT YEAR IN ITS ENTIRETY. HE ALSO POINTED OUT THAT THE ASSESSED INCOME FOR THE YEAR UNDER APP EAL EVEN AFTER DISALLOWANCE OF ENTIRE AMOUNT OF `.88 87 492/- WAS NIL. THUS THE ASSESSEE COULD NOT HAVE GAINED ANY TAX ADVANTAGE BY MAKING THE PROVISION IN THE YEAR UNDER CONSIDERATION AND BY SH OWING THE RELEVANT AMOUNT AS INCOME IN THE SUBSEQUENT YEAR AN D THEREFORE IT CANNOT BE ALLEGED THAT PROVISION WAS MADE WITH A N INTENTION TO AVOID PAYMENT OF TAX. 21. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REPR ESENTATIVE SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 22. WE FIND THAT THE LEARNED COMMISSIONER OF INCOM E TAX(APPEALS) HAS RECORDED ITS FINDING AS UNDER :- 5.7. THE FACT THAT IT WAS A PLANNED MANNER OF REDUCING TAXABILITY IS WELL VINDICATED BY THE APPEL LANT WRITING BACK A MAJOR PORTION OF THE INVENTORY INCLUDING THA T - -- - 9 99 9 - -- - PERTAINING TO REJECTION AMOUNTING TO `.75 73 681/- IN THE NEXT FINANCIAL YEAR AFTER THE SALE OF THE REJECTED LOT. HENCE IT IS CLEAR THAT IN ANY CASE VALUATION OF THAT INVE NTORY AT ZERO WAS NOT PROPER AS THE APPELLANT ADOPTED THROUGH ITS ACCOUNTING PROCESS. 23. THUS FROM THE ABOVE IT IS OBSERVED THAT IT IS NOT IN DISPUTE THAT THE ASSESSEE HAS DISCLOSED ENTIRE AMOUNT OF `. 58 95 228/- WHICH HAS BEEN CLAIMED AS DEDUCTION IN THIS YEAR AS INCOME OF THE ASSESSMENT YEAR 2004-05. THUS FROM THE ABOVE FACT IT IS OBSERVED THAT THE ASSESSEE IS SHOWING THE VALUE OF REJECTED INVENTORY OF `.58 95 288/- AS NIL DURING THE YEAR UNDER CONSIDER ATION HAS CLAIMED DEDUCTION OF `.58 95 288/- DURING THE YEAR UNDER CONSIDERATION BUT HAS DISCLOSED THE SAME AS ITS INC OME IN THE IMMEDIATELY SUCCEEDING YEAR. IN OTHER WORDS TAKIN G BOTH THE YEARS TOGETHER THE ASSESSEE HAS NOT CONCEALED ANY I NCOME BUT HAD DISCLOSED THE AMOUNT AS INCOME OF THE ASSESSMENT YE AR 2004-05 WHICH IT SHOULD HAVE DISCLOSED AS INCOME OF THE ASS ESSMENT YEAR 2003-04. FURTHER IT IS OBSERVED FROM THE ORDER OF ASSESSMENT THAT THE ASSESSED INCOME OF THE ASSESSEE WAS NIL. THUS I T IS OBSERVED THAT THE ASSESSEE HAS NOT EARNED ANY TAX ADVANTAGE BY VALUING INVENTORY OF `.58 95 288/- AS NIL DURING THE YEAR U NDER CONSIDERATION. THE LEARNED COMMISSIONER OF INCOME T AX (APPEALS) HAS NOT ACCEPTED THE ABOVE FACT ON THE GROUND THAT IF THE ASSESSEE WOULD NOT HAVE MADE THE PROVISION IN THE BOOKS OF A CCOUNT THEN ITS BOOK PROFIT WOULD HAVE BEEN MORE BY `.58 95 288/-. IN OUR CONSIDERED OPINION THE ABOVE OBSERVATION OF THE LEA RNED COMMISSIONER OF INCOME TAX(APPEALS) IS NOT TENABLE IN LAW AS PENALTY UNDER SECTION 271(1)(C) IS LEVIABLE IN RESP ECT OF CONCEALMENT OF INCOME AND NOT FOR MAKING A PROVISIO N IN THE BOOKS OF ACCOUNT WHICH ACCORDING TO THE DEPARTMENT SHOULD NOT HAVE BEEN MADE. TO EXPLAIN THE ABOVE IN THE INSTANT CAS E IF AFTER MAKING PROVISION IN THE BOOKS OF ACCOUNT THE ASSESS EE WOULD HAVE ADDED THIS PROVISION IN THE COMPUTATION OF TOTAL IN COME THEN THE BOOK PROFIT WOULD HAVE REMAINED THE SAME AND THE DE PARTMENT COULD HAVE NEVER ALLEGED THE ASSESSEE OF ANY CONCEA LMENT OF - -- - 10 1010 10 - -- - INCOME. FURTHER THE BOOK PROFIT IS THE PROFIT WHI CH THE ASSESSEE DISCLOSES TO ITS SHAREHOLDERS IN THE AGM SUBJECT TO CERTAIN SPECIFIED ADJUSTMENTS PROVIDED IN EXPLANATION TO SECTION 115J B AND THEREFORE ADJUSTMENT MADE IN THE COMPUTATION OF T OTAL INCOME DOES NOT EFFECT THE BOOK PROFIT. THUS IN OUR CONS IDERED OPINION THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) WAS NOT JUSTIFIED IN REJECTING THE EXPLANATION OF THE ASSESSEE. FURTHER THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS NOT DISPUTED THE FI NDING OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) THAT TH E ASSESSEE HAS DISCLOSED MORE INCOME BY `.58 95 288/- IN THE A SSESSMENT YEAR 2004-05 BECAUSE OF MAKING OF PROVISION OF THE SAME AMOUNT IN THE ASSESSMENT YEAR 2003-04. KEEPING IN VIEW THE ABOVE UNDISPUTED FACTS AND THE FACT THAT ASSESSEES ASSESSED INCOME WAS NIL FOR THE YEAR UNDER CONSIDERATION EVEN AFTER THE DISALLOWANC E MADE IN THE ASSESSMENT SHOWS THAT THERE COULD NOT HAVE BEEN ANY MALAFIDE REASON FOR THE ASSESSEE TO SHOW THE VALUE OF REJECT ED INVENTORY AS NIL AND DISCLOSING THE SAME AS INCOME OF THE ASSESS MENT YEAR 2004-05. ON THE ABOVE FACTS IN OUR CONSIDERED OPI NION THE BONAFIDE OF THE EXPLANATION OF THE ASSESSEE IS UNDI SPUTABLE AND THEREFORE THE PENALTY LEVIED UNDER SECTION 271(1)( C) IN RESPECT OF AFORESAID DISALLOWANCE IS NOT MAINTAINABLE. WE THER EFORE DELETE THE PENALTY UNDER SECTION 271(1)(C) IN RESPECT OF A BOVE DISALLOWANCE OF `.58 95 288/- AND ALLOW THE GROUND OF APPEAL OF THE ASSESSEE. 24. GROUND NO.2 OF THE APPEAL READS AS UNDER:- 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPE ALS) HAS ERRED IN HOLDING THAT NOTICE FOR INITIATING PENALTY PROCEEDINGS WAS VALIDLY ISSUED. 2.1. IT IS SUBMITTED THAT THE WHILE ISSUING THE NOT ICE UNDER SECTION 271(1)(C) ASSESSING OFFICER HAS NOT MENTIONED WHETHER THE PENALTY IS LEVIABLE DUE TO CONCEALMENT OF INCOME OR FURNISHING OF INACCURATE PARTICULARS OF INCOME. 2.2. IT IS SUBMITTED THAT WHILE ISSUING THE NOTICE UNDER SECTION 271(1)(C) THE ASSESSING OFFICER HAD NOT RECORDED S ATISFACTION FOR INITIATION OF PENALTY PROCEEDINGS IN THE ASSESS MENT ORDER. - -- - 11 1111 11 - -- - 2.3. IT IS SUBMITTED THAT NOTICE ISSUED UN DER SECTION 271(1)(C) LACKS PRINCIPLES OF NATURAL JUSTICE AND THEREFORE IT IS NOT VALID. ACCORDINGLY THE NOTICE AND CONSEQUENTLY THE ORDER IMPOSING PENALTY NEED TO BE QUASHED. IT IS SUBMITTED THAT IT BE SO HELD NOW. 25. GROUND NO. 4 OF THE APPEAL READS AS UNDER:- 4. WITHOUT PREJUDICE TO ABOVE IT IS SUBMIT TED THAT THERE WAS NO CHANGE IN THE TOTAL INCOME OF THE ASSESSEE N OR THERE WAS ANY CHANGE IN TAX LIABILITY OF THE ASSESSEE. IN THE FACTS AND CIRCUMSTANCES OF THE CASE IT IS SUBMITTED THAT IN A BSENCE OF ANY CHANGE IN TAX LIABILITY OF THE ASSESSEE NO TAX CAN BE SOUGHT TO HAVE BEEN EVADED AND HENCE NO PENALTY UNDER SECTION 271(1)(C) OUGHT TO HAVE BEEN LEVIED. IT IS SUBMITTE D THAT IT BE SO HELD NOW. 4.1 THE LEARNED ASSESSING OFFICER ERRED IN NOT APPRECIATING THAT EXPLANATION 4 TO SECTION 271(1)(C) DEALS WITH THE SITUATION WHERE THE ADDITION HAS EFFECT OF (I) REDUCING LOSS DECLARED IN THE RETURN; OR (II) CONVERTING THAT LOSS INTO INCOM E. IN THE PRESENT CASE THE RETURNED AND ASSESSED INCOME REMA INS NIL. IT IS THEREFORE SUBMITTED THAT EXPLANATION4 IS NOT APPLICABLE IN THE PRESENT CASE AND ACCORDINGLY THE AMOUNT OF TAX SOUGHT TO BE EVADED IS NIL. IT IS SUBMITTED THAT IT BE SO HELD NOW. 26. IN VIEW OF OUR FINDING IN GROUND NO.3 OF THE AP PEAL OF THE ASSESSEE THE ABOVE GROUNDS OF APPEAL TAKEN BY THE A SSESSEE HAS BECOME ACADEMIC IN NATURE AND REQUIRES NO ADJUDICAT ION BY US. 27. IN THE RESULT THE APPEAL OF THE ASSESSEE IS AL LOWED AND THAT OF THE REVENUE IS DISMISSED. ORDER SIGNED DATED AND PRONOUNCED IN THE COURT ON 17 TH DAY OF SEPTEMBER 2010. SD/- SD/- (MUKUL SHRAWAT ) ( N.S. SAINI ) JUDICIAL MEMBER A CCOUNTANT MEMBER AHMEDABAD: ON THIS 17 TH DAY OF SEPTEMBER 2010 COMPILED AND COMPARED BY: PATKI - -- - 12 1212 12 - -- - COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)-GANDHINAGAR. 5. THE DR AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER //TRUE COPY// (DY./ASSTT.REGISTRAR) ITAT AHMEDABAD DATE INITIALS 1. DRAFT DICTATED ON 7-9-2010 -------------- ----- 2. DRAFT PLACED BEFORE AUTHORITY 8-9-2010 ----- -------------- 3. DRAFT PROPOSED & PLACED 8-9-2010 ----------- -------- JM BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED 16-9-2010 ----- -------------- JM/AM BY SECOND MEMBER 5. APPROVED DRAFT COMES TO P.S 17-9-2010 --- ----------------- 6. KEPT FOR PRONOUNCEMENT ON 17-9-2010 ---- ---------------- 7. FILE SENT TO THE BENCH CLERK ---------------- -------------------- 8. DATE ON WHICH FILE GOES TO THE ---------------- -------------------- 9. DATE OF DISPATCH OF ORDER ---------------- - --------------------