LAKSHMI JEWELLERY Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee in this case is a partnership firm carrying on business in the purchase and sale of gold jewellery. For the income -tax asst. year 1973 -74, the firm filed a return declaring an income of Rs. 73,163. In declaring this income, the value of the closing stock of gold and gold jewellery was accounted in the books at Rs. 3,72,311 based on an inventory prepared. During the course of the assessment enquiry, the ITO called upon the assessee to furnish particulars relating to the valuation of closing stock. On perusing the particulars, the ITO was of the view that the closing stock was undervalued. While the assessee valued the closing stock of gold jewellery, standard gold, etc., at Rs. 3,72,311, the ITO arrived at a value of Rs. 4,53,524, the difference between the two figures being Rs. 81,213. The ITO found that the opening stock was not valued by the assessee on the same basis as was adopted by the ITO for valuing the closing stock. He accordingly valued the opening stock also on the same basis and found that the value of the opening stock was required to be increased by Rs. 44,414. Deducting the adjustments made on account of opening stock valuation, eventually , the ITO arrived at the undervaluation of closing stock at Rs. 36,799. He added this to the income returned by the assessee.

(2.) IT would appear that the assessment made by the ITO making the above adjustments was accepted by the assessee without filing an appeal. Before completing the assessment, the ITO issued a notice under S. 274 of the IT Act requiring the assessee to show cause why penalty should not be levied for concealment of income or for furnishing inaccurate particulars of such income. The assessee sent a detailed reply to the ITO's show -cause notice. It was found that statutorily the penalty in this case had to be levied by the Inspecting Assistant CIT. Consequently, the record was forwarded by the ITO to the IAC who, after giving the assessee an opportunity of being heard, passed an order under S. 271(1)(c) of the IT Act levying penalty of Rs. 36,799 which incidentally corresponds to the amount of undervaluation of closing stock. It may be pertinent to mention at this stage that the IAC did not seek to levy the penalty under the substantive provision of S. 271(1) (c) of the Act. He levied the penalty by invoking the Explanation to S. 271(1)(c) of the IT Act which provides a fiction concerning concealment of income if the assessed income exceeds the returned income by 20 per cent.

(3.) THE assessee filed an appeal against the order of the IAC before the Tribunal. The Tribunal confirmed the order levying penalty and dismissed the appeal filed by the assessee. One significant fact that has to be mentioned at this stage is that before the Tribunal, the Revenue did not seek to sustain the order of penalty levied by the IAC by recourse to the Explanation under S. 271(1)(c) of the Act nor did the Tribunal consider it appropriate to apply the Explanation to S. 271(1)(c) of the Act to the facts of the present case for the purpose of affirming the penalty levied. Before the Tribunal, the Revenue justified the levy of penalty under the substantive provision of S. 271(1)(c) of the Act itself and the Tribunal dealt with the case accordingly. On a consideration of all the evidence, the Tribunal recorded a finding that there is enough material in the present case to come to the conclusion that the assessee was clearly guilty of concealing its income by undervaluing the closing stock and consequently penalty was exigible under S. 27)(1)(c) of the Act straightaway without having recourse to the Explanation at all. Against the order of the Tribunal, the assessee filed an application under S. 256(1) of the Act requiring the Tribunal to refer the case to this Court. The Tribunal having rejected the assessee's request, an application under S. 256(2) of the Act was filed and this Court directed the Tribunal to state a case for the consideration of this Court and refer the following questions of law :