Penalty for concealment of particulars of income.

The assessee, a registered firm of two partners, was doing business in the manufacture and sale of tea in Ceylon. In the assessment year 1955-56, the previous year of which ended on 31st March, 1955, the assessee made a return of income of Rs. 1,74,711. In arriving at its profits it valued the closing stock of tea in a very peculiar manner. It did not adopt either the cost price or the prevailing selling price on the last day of the account year. While the average cost per pound of tea was Rs. 1.27 and the selling price on the last day of the account year ranged between Rs. 1.30 and 1.75, the assessee adopted the value of 50 cents per pound. In addition, a certain stock of tea, which, according to the Income-tax Officer, had actually been sold, was not brought in for the computation of the profits, but treated as part of the closing stock. Taking the abovementioned quantity as actually sold and valuing the remaining quantity of stock of tea at Rs. 1.30 per pound, the Income-tax Officer arrived at a total of Rs. 74,763 as the figure that should have been properly displayed in the accounts. Since the value as shown by the assessee was only Rs. 26,853, he added the difference of Rs. 47,910 to the assessable income On appeal, the Appellate Assistant Commissioner reduced the addition to Rs. 39,125.

There was a further appeal to the Tribunal. The Tribunal remanded the matter to the Appellate Assistant Commissioner. As a result of this remand, the Appellate Assistant Commissioner enhanced the addition to Rs. 63,997. On a further appeal, the Appellate Tribunal reduced the addition to Rs. 35,790. In so far as this addition is concerned, that matter has become final, and it is no longer in question.

In the assessment order, the Income-tax Officer observed that the assessee had furnished inaccurate particulars of its income and issued a notice under section 28(3) of the Act. This was in due course followed by the levy of a penalty of Rs. 42,000. Against this levy of penalty, an appeal was taken to the Appellate Assistant Commissioner, who agreed that the under-valuation of the closing stock could only have been for the purpose of understating the income and that this conduct of the assessee invoked the penalty under section 28(1)(c) of the Act. He however reduced the quantum of penalty to Rs. 35,000.

On further appeal, the Tribunal took the view that the novel method of valuing the closing stock at a ridiculously low price which was attempted by the assessee for the first time in the relevant accounting year was with intent to conceal the income. At the same time, it took the view that the penalty was excessive as “the attempt at concealment was such that can easily be detected by the Income-tax Officer even by a cursory check”. The Tribunal accordingly reduced the penalty to only Rs. 5,000.

On the application of the assessee, to this Court, the Tribunal was directed to state a case and refer the following question for the determination of this Court:

“Whether on the facts and in the circumstances of the case, the levy of penalty of Rs. 5,000 under section 28(1)(c) of the Act is valid in law ?”

Mr K. Srinivasan, learned Counsel for the assessee, concedes that the method of valuation of the closing stock is a new one that was adopted for this year only. Though the claim was initially put forward that this was a method which was followed in previous years as well, that plea was abandoned. Nevertheless, Mr. Srinivasan urges that it cannot be held that in under-valuing the closing stock, the assessee had furnished inaccurate particulars of its income. He also points out that in imposing the penalty, the Tribunal had taken the view that half the closing stock had already been sold previously and urges that this view is inconsistent with the decision of the appropriate appellate authorities in the quantum appeals, where it was held that though that quantity out of the closing stock was under a contract of sale, the sale transaction no