Commissioner of Income Tax vs Nellai Trading Automobile Agency

P.P.S. Janarthana Raja, J.—The above tax case appeal is directed against the order of the Income Tax Appellate Tribunal in ITA No.

182/Mds/2004 dated 27.01.2006, raising the following substantial question of law.

Whether in the facts and circumstances of the case, the Tribunal was right in deleting the penalty u/s 271(1)(c) when the assessee has

undisputedly concealed the particulars of his income and furnished inaccurate particulars of such income?

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the explanation that the stock received in March were

not included in their inventory as they remained unpacked is sufficient to avoid penal action u/s 271(1)(c)?

2.1. The revenue is the appellant. The relevant assessment year is 1996-97 and the corresponding year ended on 31.3.1996. The assessee is a

firm engaged in the business of dealership in motor cycles, mopedes and spares of TVS Suzuki Ltd. The assessee filed its return of income

admitting total income as Rs. 6,19,370/-. During the course of scrutiny, the Assessing Officer found that purchase of spares from M/s. T.V.S.

Suzuki Ltd. to the extent of Rs. 1,63,967/- was not admitted either under sales or in the closing stock even though purchases were entered in the

purchase ledger. The assessee agreed to the addition and the assessment was accordingly completed by adding the above amount towards closing

stock.

2.2. Later, the Assessing Officer found that there were certain discrepancies in the quantitative particulars of stock in the invoices totalling Rs.

1,63,966.79 and also the same were not accounted for under sales or in the closing stock as on the last day of the accounting year. The Assessing

Officer initiated penalty proceedings u/s 271(1)(c) of the Income Tax Act (hereinafter referred to as ''the Act'') and also issued notice u/s 274 of

the Act. On receipt of show cause notice, the assessee has offered the following explanation:

Certain items of stock which were not loaded in the racks, were omitted to the included in the stock inventory. Some items, which were

received during the month of March, remained unpacked and the Manager, who was in charge of taking stock inventory, did not include these

items in the inventory.

The Manager was entrusted with the work of taking stock inventory, due to the preoccupation of the partners in connection with the

construction of a building by a sister concern of the assessee-firm. The partners also did not choose to verify the correctness of the stock

inventory, as the net profit margin was higher.

2.3. After considering the above explanation, the Assessing Officer by order dated 23.08.1999 levied a penalty of Rs. 1,00,000/-. On appeal at

the instance of the assessee, the Commissioner of Income Tax (Appeals) by order dated 22.10.2003, allowed the appeal holding that it was not a

fit case for levy of penalty and therefore penalty of Rs. 1,00,000/- imposed by the Assessing Officer was cancelled. Aggrieved against the order of

the first appellate authority, the Revenue preferred an appeal before the Income Tax Appellate Tribunal. By order dated 27.01.2006, the Income

Tax Appellate Tribunal dismissed the appeal preferred by the revenue and confirmed the order of the first appellate authority. Hence the present

appeal by revenue.

The learned Counsel appearing for the Revenue submits that the Tribunal had failed to see that omission to admit the correct stock is deliberate

and the penalty u/s 271(1)(c) of the Act is correctly levied by the lower authority after proper scrutiny.

It was submitted before the first appellate authority that the batch of spares received from the principal M/s. TVS Suzuki Limited amounting to

Rs. 1,63,966/- were not included in the inventory by mistake as they were lying in packed condition and as the partners were busy with the

construction of a show room of their sister concern, the Manager of the firm was asked to take stock of the inventory, who committed the mistake

of taking only the stock which were loaded on the racks ignoring the packed items. The omission was not detected even by the Chartered

Accountant because the income was much higher than the last year''s income even without including the above stock and as such it escaped the

attention of the Chartered Accountant. It was further submitted that it was a bona fide mistake without any intention to conceal or suppress the

taxable income and in any case this should be allowed as a deduction in the subsequent year and also the goods in question were received at the

fag end of the year as seen from the invoices. That apart, the explanation of the assessee that the omission occurred due to the mistake of the

Manager in not including the packed items has not been found to be false by the Assessing Officer. The explanation offered by the assessee seems

to be plausible one. After hearing both the parties, the first appellate authority as well as the second appellate authority found that the explanation

offered by the assessee was reasonable one. The tribunal based on the materials and the evidence available on record, came to the conclusion that

there was no intention to conceal the income and that it was a genuine mistake because there is no falsehood in the explanation offered by the

assessee.

The above findings of the Tribunal are well founded. We do not find any infirmity or illegality in the order of the Tribunal.

Our above view is supported by the decision in Commissioner of Income Tax Vs. Best Supply Agency, , whereunder it is held that the mistake

committed by the person who maintained the register cannot be attributed against the assessee and therefore penalty proceedings u/s 271(1)(c) of

the Act cannot be initiated as there is no concealment. Again in Commissioner of Income Tax Vs. Susai Kalyanamandapam Pvt. Ltd., , it is held

that there is no legal fiction regarding the existence of mens rea under Explanation 1 to Section 271(1)(c) of the Income Tax Act.

Of course, Mr. J. Narayanaswamy, learned Counsel appearing for the revenue invited our attention to the decision of this Court in Sree

Nithyakalyani Textiles Ltd. Vs. Dy Commissioner of Income Tax, . But, in the said case, the authorities concurrently found that there was a

deliberate undervaluation of stock, whereas in the instant case, both the first appellate authority as well as the second appellate authority found that

there was no intention to conceal the income.

Finding no substantial question of law arises for our consideration, the appeal is dismissed. No costs.