ACIT CIR 16(1), MUMBAI V. SOUND ENTERTAINMENTS, MUMBAI

ITA 2610/MUM/2010

• Counselvise Citation: 261019914 RSA 2010
• Duration Of Justice: 1 year(s) 4 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 03-05-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 05-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G P TRIVEDI
• Assessee Lawyers: RAJESH B SHAH
• Keywords: Bonafide belief; Difference of opinion
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E MUMBAI BEFORE SHRI R.S. SYAL (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM) ITA NO. 2610/MUM/2010 ASSESSMENT YEAR 2004-05 THE ACIT, MATRU MANDIR, MUMBAI-400 007 VS. M/S. SOUND ENTERTAINMENTS, 52-D, CHOTANI BLDG., JYOTI ESTATE, PROCTOR ROAD, GRANT ROAD, MUMBAI-400 007 PAN-AACFS4173L (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI G.P. TRIVEDI RESPONDENT BY: SHRI RAJESH B. SHAH DATE OF HEARING : 11.08.2011 DATE OF PRONOUNCEMENT: 26.8.2011 O R D E R PER ASHA VIJAYARAGHAVAN (JM) THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED AG AINST THE ORDER DATED 15.1.2010 PASSED BY THE LD. CIT(A)-27 FOR THE ASSESSMENT YEAR 2004- 05. 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE HAS CAR RIED ON A BUSINESS DEALING IN VCDS AND DVDS AND FOLLOWED MERCANTILE SY STEM OF ACCOUNTING AND VALUED THE CLOSING STOCK ON THE BASIS OF COST OR MARKET PRICE WHICHEVER IS LESS. THE ASSESSING OFFICER HAD ASKED FOR DETAILS OF CLOSING STOCK VIDE LETTER DT. 31.08.2006. ACCORDINGLY THE ASSESSEE FILED THE DETAILS. AFTER GOING THROUGH THE DETAILS AND SUBMISSIONS IN THIS REGARD THE AO REJECTED THE BOOKS OF ACCOUNT BY INVOKING PROVISIONS U/S. 145(3) OF TH E I.T. ACT. ITA NO. 2610/M/2010 2 3. IN THE QUANTUM APPEAL, THE FACTS ARE AS FOLLOWS: THE ASSESSEE DEALS IN GOODS AND RIGHTS. ON EXAMIN ATION OF RIGHTS, IT WAS FOUND THAT IT CONTAINS VARIOUS RIGHT S EITHER PURCHASED DURING THE YEAR OR DURING THE LAST MANY PREVIOUS YE ARS. RIGHTWISE DETAILS OF SALES HAVE NOT BEEN FURNISHED ON THE PRE TEXT THAT IT IS NOT POSSIBLE. HOWEVER, THE ASSESSEE HAS WRITTEN OFF RI GHTS AT HIS SWEET WILL AND NOT ON THE BASIS VARIOUS NUMBERS OF YEARS. THE DETAILS OF WRITE OFF MADE BY THE ASSESSEE ARE MARKED AS ANNEXURE-A. ON THIS POINT VIDE WRITTEN SUBMISSION DT. NIL, THE ASSESSEE HAS ARGUED AS UNDER: WE HAVE TO STATE THAT OUR CLIENTS ARE FOLLOWING THE SYSTEM FOR VALUATING OF CLOSING STOCK AT COST OR MARKET PRICE WHICHEVER IS LOWER. DURING THE YEAR PREVIEW OUR CLIENTS HAVE WR ITTEN OFF RIGHTS OF SOME FILMS AS THE REVENUE FROM THESE FILM S ARE NIL OR NEGLIGIBLE. WE WOULD LIKE TO STATE THAT ACCOUNTING STANDARD 2(REVISED) ISSUED BY THE ICAI STATED AS FOLLOWS: INVENTORIES SHOULD BE VALUED AT THE LOWER OF COST A ND NET REALIZABLE VALUE. THEREFORE IN VIEW OF THE ABOVE, THE STOCK VALUATION METHOD FOLLOWED BY THE ASSESSEE IS CORRECT AND SHOULD BE A LLOWED. 4. THE ASSESSING OFFICER HELD AS FOLLOWS: I HAVE CONSIDERED THE ABOVE SUBMISSION OF THE ASSE SSEE AND ON THE FACTS OF THE CASE, IT IS NOT APPLICABLE IN THE CASE OF THE ASSESSEE BECAUSE ASSESSEE HAS NOT FURNISHED RECEIPT S FROM EACH RIGHT PURCHASED AND NO EVIDENCE OF ANY SORT HAS BEE N PRODUCED TO JUSTIFY THAT THE VALUE DEDUCTED BY IT IS BASED O N ANY EVIDENCE. 5. ON FURTHER APPEAL, THE LD. CIT(A) CONFIRMED THE ORDER OF THE AO AND THE HONBLE ITAT ALSO HELD AS FOLLOWS: WE HAVE GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND ALSO CAREFULLY HEARD THE COUNSELS. WE HAVE ALSO GON E THROUGH THE RELEVANT PAGES IN THE PAPER BOOK FILED AS WELL AS A NNEXURES APPENDED TO THE ORDER OF LEARNED CIT(A) GIVING THE DETAILS F ILED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER AS WELL AS THE LEARNED CIT(A). ASSESSEE HAS FOLLOWED A METHOD OF AMORTIZATION OF THE COST O F COPY RIGHT AMOUNT AND HAS NEVER WRITTEN OFF THE FULL VALUE IN THE FIR ST YEAR OF ACQUISITION. THE QUESTION THEREFORE IS WHETHER THE AMORTIZATION METHOD FOLLOWED BY ITA NO. 2610/M/2010 3 THE ASSESSEE OR THE ONE SUBSTITUTED BY THE LEARNED CIT(A) ASSESSING OFFICER WAS CORRECT, AND WHETHER THE ASSESSING OFFI CER WAS EMPOWERED TO DO SO. ASSESSEES ARGUMENT IS THAT THOUGH IT AMO RTIZED OVER A GIVEN VALIDITY PERIOD ACCORDING TO THE AGREEMENT ACQUIRIN G RIGHT TO A TITLE, BUT WHERE IT FINDS THAT IT IS NO MORE COMMERCIALLY FEAS IBLE TO EXPLOIT SUCH RIGHT, FULL WRITE OFF OF REMAINING BALANCE IS EFFEC TED. THIS ACCORDING TO THE ASSESSEE IS DONE BASED ON ITS KNOWLEDGE REGARDI NG THE VALUE OF THE TITLE AND ITS PROSPECTS AS ALSO ITS SALES DATA. NO DOUBT, CONSISTENCY IN VALUATION OF STOCK IS A KEY FACTOR IN DETERMINING P ROFITS OF AN UNDERTAKING. VARIATION IN THE METHODOLOGY ADOPTED F OR VALUATION OF STOCK WOULD RESULT IN DISTORTION OF PROFIT. IN THE I NSTANT CASE, THE ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE THAT A C ONSISTENT METHOD WAS FOLLOWED BY HIM. THOUGH IT IS STATED THAT WRITE OFF ARE EFFECTED WHEN THERE ARE NO SALES, WE FIND FROM PAPER BOOK PA GE NO.36 RELATING TO THE TITLE FISTS OF FURY AND PAGE NO.33 RELATING TO THE TITLE KILLER INSTINCT THAT SALES REALIZATION WERE THERE EVEN IN Y EARS AFTER EFFECTING SUCH WRITE OFFS. THEREFORE, ASSESSEES CONTENTION T HAT IT WAS FOLLOWING A CONSISTENT BASIS FAILS. AS FOR THE SUBSTITUTION OF THE VALUATION BY THE ASSESSING OFFICER, WE FIND THAT THE ASSESSING OFFIC ER HAS ADOPTED THE PERIOD AS MENTIONED BY THE ASSESSEE ITSELF IN THE S TATEMENT CALLED DETAILS OF RIGHT AS ON 31.03.2004 FILED BY IT BEF ORE THE ASSESSING OFFICER. EVEN IN THE TWO CASES WHERE LEARNED CIT(A) AR POINTED OUT THAT THE YEAR WISE AMORTIZATION AMOUNT CONSIDERED B Y THE ASSESSING OFFICER WAS NOT RIGHT, THE CONTENTION SEEMS TO BE M ISCONCEIVED IN AT LEAST FOR ONE ITEM. IN THE CASE OF TITLE 100 FAVORI TE FAIRY TALES GIVEN AT PAGE 23 OF THE PAPER BOOK, THOUGH THE VALIDITY PERI OD IS MENTIONED AS 7 YEARS THIS ITEM ALSO APPEARS AT SERIAL NO. 38 OF THE LIST GIVEN BEFORE THE ASSESSING OFFICER, AND HERE NO VALIDITY PERIOD WHATSOEVER HAS BEEN MENTIONED, THEREBY MEANING THAT ASSESSEE HAD PERPET UAL RIGHTS OVER IT. HOWEVER, IN THE CASE OF TWO TITLES VIZ, JOCK & ROAD TO BALI AND ARCHIES WEIRD MYSTERY GIVEN AT PAPER BOOK PAGE NOS. 24 & 25 AND CONSIDERED BY THE ASSESSING OFFICER, FROM SERIAL N OS. 39 & 40 OF THE STATEMENT FURNISHED BY THE ASSESSEE BEFORE HIM, IT SEEMS THAT THERE HAS BEEN SOME ERROR IN CALCULATION MADE BY THE ASSE SSING OFFICER. HE HAS ADOPTED RS.9,375/- INT EH FORMER CASE AGAINST R S.12,500/- AND RS.19,500/- AGAINST RS.78,000/- IN THE LATTER CASE. EXCEPT FOR THESE MATHEMATICAL MISTAKES WHAT THE ASSESSING OFFICER HA D DONE WAS TO CONVERT THE METHOD FOLLOWED BY THE ASSESSEE WHICH I TSELF WAS BY AMORTIZING ITS COPY RIGHT EXPENSES OVER VARIOUS YEA RS, TO A MORE SCIENTIFIC METHOD WHERE SUCH AMORTIZATION WERE SPRE AD TO THE LIFE PERIOD OF SUCH RIGHTS. LEARNED ASSESSING OFFICER HA S CORRECTLY GIVEN CREDIT TO THE ASSESSEE FOR THOSE CASES WHERE ASSESS EE HAD CLAIMED LESS WHEN COMPARED TO THAT ALLOWABLE OVER THE AMORTIZATI ON PERIOD. AS FOR THE CASES CITED BY THE LEARNED AR, IN TIPS CASSETTE S & RECORD CO. VS. ACIT (SUPRA), THE QUESTION WAS WHETHER COPY RIGHTS EXPENSES FOR ACQUIRING ORIGINAL SOUND TRACKS WERE TO BE TREATED AS CAPITAL OR REVENUE. BUT, THESE ARE NOT RELATABLE TO THE FACTS OF THE CASE IN OUR HAND SINCE ASSESSEE HIMSELF HAD AMORTIZES HIS COPY RIGHT EXPENSES AND ITA NO. 2610/M/2010 4 NO SUCH CLAIM FOR TREATING IT AS REVENUE EXPENDITUR E IN ONE GO WAS MADE BY IT IN THE FIRST YEAR OF ACQUISITION OF SUCH RIGHTS. AS FAR AS THE CASE OF M. SUBRAMANIAN VS. DCIT (42 I TD 676) DECIDED BY THE MADRAS BENCH OF THIS TRIBUNAL, THE Q UESTION RAISED WAS AGAIN WHETHER EXPENDITURE INCURRED FOR OBTAINING RI GHTS TO REPRODUCE FILM SONGS WAS OF CAPITAL OR REVENUE NATURE. THIS I SSUE DOES NOT ARISE IN THE GIVE CASE. IN THE CASE OF SUPER CASSETTE INDU STRIES PVT. LTD. VS. CIT (41 ITD 530) DECIDED BY THE DELHI BENCH OF THIS TRIBUNAL ALSO THE QUESTION WAS WHETHER EXPENSES FOR OBTAINING RIGHT O F REPRODUCTION OF VIDEO SOUND AND MUSIC FROM MASTER PLAYER WAS OF A C APITAL OR REVENUE NATURE. THESE DECISIONS WILL NOT BE OF ANY HELP TO THE ASSESSEE SINCE ASSESSEE ITSELF HAD NOT CLAIMED SUCH EXPENDITURE TO BE REVENUE IN NATURE IN ONE GO BUT AMORTIZED IT OVER A NUMBER OF YEARS. HOWEVER, AT THE SAME TIME, WE FIND THAT ASSESSING OFFICER HAS M ADE CALCULATION MISTAKES IN ARRIVING AT THE FIGURE OF AMOUNTS TO BE ADDED ON ACCOUNT OF CLOSING VALUATION OF THE RIGHTS FOR TITLES LIKE 100 FAVORITE FAIR TALES, JOCK & ROAD TO BALI, ARCHIES WEIRD MYSTERY, BENEATH CHARADE AND AT WAR WITH THE ARMY, SINGING ENGLISH, PANCHRATNA STOR IES ETC., BECAUSE THE AMORTIZATION PERIOD VIS--VIS COST CONSIDERED F OR WRITE OFF DO NOT APPEAR TO TALLY. AS FOR THE APPLICATION OF SECTION 145(3), WHICH ACCORDING TO THE ASSESSEE WAS NOT CALLED FOR, THERE IS NO DOUBT THAT ASSESSING OFFICER WAS, JUSTIFIABLY, NOT SATISFIED R EGARDING THE CORRECTNESS AND COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, AND HENCE HE HAD THE POWER TO MAKE SUCH CHANGES FOR ARR IVING AT THE CORRECT FIGURE. THUS, WE FIND NO FAULT IN THE METHO DOLOGY ADOPTED BY THE LEARNED ASSESSING OFFICER FOR VALUING THE CLOSI NG COPY RIGHTS. JUST BECAUSE OF ASSESSING OFFICER HAD ACCEPTED ASSESSEE S METHOD IN THE ASSESSMENT FOR AN EARLIER PREVIOUS YEAR DOES NOT ME AN THAT HE IS COMPELLED TO DO SO IN A SUBSEQUENT YEAR ALSO WHEN I NCONSISTENCY IN VALUATION IS MANIFEST ITSELF ON THE RECORD. HOWEVER , WE FIND IT APPROPRIATE TO REMIT THE MATTER BACK TO THE LEARNED ASSESSING OFFICER FOR THE SOLE PURPOSE OF CORRECTING THE MISTAKES AS STATED ABOVE IN THE CALCULATIONS MADE BY HIM AND TO CORRECTLY ASCERTAIN THE DISALLOWANCES THAT IS TO BE MADE ON ACCOUNT OF EXCESS CLAIM MADE BY THE ASSESSEE FOR VALUATION OF ITS CLOSING COPY RIGHTS. IN THE RE SULT GROUND NOS. 1 TO 3 OF THE ASSESSEE IS DISPOSED OFF AS MENTIONED ABOVE. 6. SUBSEQUENTLY, THE PENALTY PROCEEDINGS WERE INITIATE D BY THE AO U/S. 271(1)(C) AND LEVIED PENALTY OF RS. 11,22,000/-. 7. THE FACTS OF THE CASE ARE THAT DURING THE COURS E OF ASSESSMENT PROCEEDINGS AN ADDITION OF RS.32,27,528/- WAS MADE. THE ADDITION WAS ON GROUND OF CLOSING STOCK. THE ASSESSEE CARRIED ON A BUSINESS DEALING IN VCDS ITA NO. 2610/M/2010 5 AND DVDS AND FOLLOWED MERCANTILE SYSTEM OF ACCOUNTI NG AND VALUED THE CLOSING STOCK ON THE BASIS OF COST OR MARKET PRICE, WHICHEVER IS LESS. IT WAS STATED THAT THE ASSESSEE WAS BUYING FILM RIGHTS FOR MAKING DVDS AND VCDS IN THE VARIOUS YEARS AND THEY HAD WRITTEN OFF RIGHTS O F VARIOUS FILMS AS THE REVENUE FROM THESE FILMS WERE NIL OR NEGLIGIBLE. TH EREFORE, THE RIGHTS WHICH WERE NOT SELLING IN THE MARKET WERE WRITTEN OFF BY THE ASSESSEE FOLLOWING THE ABOVE PROCEDURE. IT WAS STATED THAT WRITE OFF IS AS PER RULE 9B OF THE I.T. ACT, 1961 WHICH ALLOWS FILM DISTRIBUTORS TO WRITE OFF TH E COST OF THE FILM INCLUDING THOSE TAKEN ON LEASE IN THE YEAR OF THE RELEASE OF THE FILM. HOWEVER, THE AO HAS HELD THAT THE ASSESSEE HAD NOT PRODUCED THE REC EIPT OF EACH RIGHT PURCHASED AND THERE WAS NO EVIDENCE OF ANY SORT TO JUSTIFY THE VALUE DEDUCTED BY IT. ON THE CONTRARY THE AO HAS GIVEN E XAMPLES TO SHOW THAT THE ASSESSEE HAD UNDERWRITTEN THE VALUE OF THE RIGHTS. HENCE, THE VALUE OF THE EXCESS RIGHT WRITTEN OFF BY THE ASSESSEE WAS DISALL OWED BY THE AO AND ALLOWED ON PRO RATA BASIS FOR THE NUMBER OF YEARS F ROM WHICH THE RIGHT HAD BEEN PURCHASED AFTER APPLICATION OF SEC.145(3). THI S ADDITION WAS CONFIRMED BY THE CIT(A) AND IT WAS HELD THAT THERE WAS AN UND ERVALUATION OF CLOSING STOCK OF RIGHTS OF THE FILM. HENCE, THE AO HAS HELD THAT THE QUANTUM OF ADOPTING THE METHOD OF WRITE OFF BY THE ASSESSEE TO UNDERVALUE THE CLOSING STOCK WAS AS PER HIS SWEET WILL AND WITH A MOTIVE T O REDUCE THE INCOME RIGHTLY CHARGEABLE TO TAX. HENCE THE AO WAS OF THE OPINION THAT THE INTENTION OF THE ASSESSEE WAS TO EVADE PAYMENT OF TAXES BY CONCEALIN G CORRECT PARTICULARS OF INCOME AND AO THEREFORE IMPOSED MINIMUM PENALTY OF RS.11,22,000/-. 8. BEFORE THE LD. CIT(A), THE LD. COUNSEL FOR THE A SSESSEE IN THE PENALTY PROCEEDINGS ARGUED THAT IN THIS CASE CONCEALMENT H AS NOT BEEN PROVED BY THE AO AND IT WAS JUST A DIFFERENCE OF OPINION OF M ETHOD OF VALUATION OF CLOSING STOCK OF FILM RIGHTS PURCHASED. THE AR OF THE ASSESSEE EXPLAINED THAT THE ASSESSEE HAS BEEN FOLLOWING A CONSISTENT M ETHOD OF VALUATION OF CLOSING STOCK ON THE BASIS OF WHICH THEY HAD WRITT EN OFF THE VALUES OF FILMS WHICH HAD NIL OR NEGLIGIBLE SALES DURING THE ASSESS MENT YEAR. THE LD. AR ALSO SUBMITTED THAT THE ADDITIONS WERE MADE ON THE BASIS OF DETAILS GIVEN BY THE ITA NO. 2610/M/2010 6 ASSESSEE AND IT WAS NOT BASED ON ANY NEW FACTS DISC OVERED BY THE AO UNEARTHING CONCEALMENT. 9. THE AR EMPHASIZED THAT THEY HAD BEEN FOLLOWING CONSISTENTLY A METHOD OF VALUATION OF CLOSING STOCK WHICH WAS BASE D ON THE ACCOUNTING STANDARDS OF THE INSTITUTE OF CHARTERED ACCOUNTANTS. IT WAS SUBMITTED THAT THE VALUATION OF RIGHTS AND PRE-RECORDED CDS WAS DONE O N THE BASIS OF SET NORMS FOR WHICH FULL DETAILS WERE THERE AND THEY WERE FOL LOWING THE SAME SYSTEM IN THE EARLIER YEARS AND IT WAS NOT DISTURBED BY THE I. T. DEPARTMENT WHILE PASSING ASSESSMENT ORDER UP TILL A.Y. 2003-04. 10. THE AR FURTHER SUBMITTED THAT THE AO HAS APPLIE D THE PROVISIONS OF SEC.145(3) AND REJECTED THE METHOD OF AMORTIZATION FOLLOWED BY THE ASSESSEE AND APPLIED HIS OWN METHOD OF AMORTIZATION ON A PRO RATA BASIS. THIS ORDER HAS BEEN CONFIRMED BY THE HON'BLE ITAT FOR THE REAS ONS THAT IN 2 CASES OF RIGHTS, SALES WERE AFFECTED IN THE SUBSEQUENT YEAR AFTER THE YEAR IN WHICH THE WRITE OFFS WERE MADE. 11. IT HAS BEEN POINTED OUT BY THE AR THAT MERELY BE CAUSE AN ADDITION MADE HAS BEEN CONFIRMED IN APPEAL DOES NOT MEAN THA T THE ASSESSEE HAS CONCEALED PARTICULARS OF INCOME OR FURNISHED INACCU RATE PARTICULARS OF INCOME. 12. THE AR FURTHER RELIED ON THE DECISION OF ITAT P UNE BENCH IN THE CASE OF M/S. KAMBAY SOFTWARE INDIA PVT. LTD VS DCIT 31 S OT 153. HE FURTHER CLAIMED THAT AS PER THIS JUDGEMENT OF TH E HON'BLE ITAT IN THEIR CASE ALSO IT CANNOT BE SAID THAT THEY HAD FILED INA CCURATE PARTICULARS OF INCOME. THEY HAD BEEN FOLLOWING THE AMORTIZATION ME THOD REGULARLY. THE LD. AO BEING DISSATISFIED WITH THE METHOD FOLLOWED BY T HE ASSESSEE REPLACED THE AMORTIZATION METHOD OF THE ASSESSEE. THIS DOES NOT AMOUNT TO CONCEALMENT OF INCOME BECAUSE THE ASSESSEE WAS FOLLOWING THE ME THOD REGULARLY. ITA NO. 2610/M/2010 7 13. IT WAS SUBMITTED THAT SEC.145A CLEARLY STATES TH AT THE VALUATION OF PURCHASE AND SALE OF GOODS AND THE INVENTORY FOR TH E PURPOSE OF DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD, PROFITS AND GAINS OF BUSINESS SHALL BE IN ACCORDANCE WITH THE METHOD OF ACCOUNTANCY REGULA RLY EMPLOYED BY THE ASSESSEE AND THEY WERE FOLLOWING THIS METHOD AS PER REQUIREMENT OF LAW CONTINUOUSLY AND AS IN THE PREVIOUS YEARS. THERE WA S NO DISPUTE OVER THE FACT THAT ASSESSEES METHOD OF VALUATION OF CLOSING STOC K HAD BEEN LOWER IN COST OR NET REALIZABLE VALUE. 14. IT WAS SUBMITTED THAT THE MERE CHANGE IN METHOD OF VALUATION BY THE AO CANNOT BE TREATED AS FURNISHING OF INACCURATE PA RTICULARS OF INCOME. IT HAS ALSO BEEN STATED THAT AS REGARDS CONCEALMENT OF INC OME, THEY HAD DISCHARGED THEIR ONUS BY OFFERING A BONA FIDE EXPLANATION. IN T HE FACTS OF THE CASE, THEY HAD OFFERED AN EXPLANATION FOR WRITING OFF, SO IT C OULD NOT BE SAID THAT NO EXPLANATION WAS OFFERED. IT WAS ONLY THAT DIFFERENT METHOD WAS TAKEN IN THE VALUATION OF RIGHTS AND THE ASSESSEES METHOD WAS R EJECTED AND ANOTHER METHOD WAS APPLIED BY THE AO. 15. THE LD. CIT(A) HELD AS FOLLOWS: THIS CONTENTION OF THE APPELLANT APPEARS TO BE COR RECT. THIS IS A CASE WHERE THE APPELLANT WAS FOLLOWING ONE SYSTEM O F VALUATION OF CLOSING STOCK OF RIGHTS OF FILMS. THIS METHOD OF VA LUATION OF STOCK BY AMORTIZATION OF THE RIGHTS, TAKING THE VALUE AT NIL WAS NOT ACCEPTED BY THE AO DURING THE CURRENT YEAR AND HE CHANGED THE M ETHOD OF VALUATION AND APPLIED A DIFFERENT METHOD ON THE BAS IS OF WHICH AN ADDITION WAS MADE, WHICH HAS BEEN SUSTAINED IN APPE AL. HOWEVER, AS STATED BY THE APPELLANT THE ADDITION HAS NOT BEEN M ADE ON ACCOUNT OF ANY NEW FACTS UNEARTHED BY THE AO. ALL THE FACTS WE RE ON RECORD. IT WAS JUST A DIFFERENT INTERPRETATION OF THE FACTS AN D AS RIGHTLY STATED BY THE APPELLANT, THE ADDITION HAS NOT BEEN MADE ON AN Y FACTS CONCEALED BY THE APPELLANT OR THE AO HAS NOT STATED THAT THE APPELLANT HAS FILED ANY FACTS WHICH HAVE BEEN FOUND TO BE INACCURATE, S O THAT IT CANNOT BE SAID THAT INACCURATE PARTICULARS OF INCOME HAD BEEN FILED. THE DECISION OF THE HON'BLE ITAT IN THE CASE OF KAMBAY SOFTWARE HAS BEEN DISCUSSED ABOVE IS CLEARLY APPLICABLE IN THE CASE O F THE ASSESSEE AND A CLAIM WAS MADE BY THE APPELLANT UNDER A BONA FIDE B ELIEF WHICH HAS BEEN REJECTED BY THE AO. THE EXPLANATION WAS OFFERE D BY THE APPELLANT ITA NO. 2610/M/2010 8 REGARDING THE CLAIM MADE WHICH HAS NOT BEEN ON RECO RD BY THE AO TO SHOW THAT APPELLANT HAD CONCEALED PARTICULARS OF IN COME OR FILED INACCURATE PARTICULARS OF INCOME. HENCE, THE DECISI ON OF THE HON'BLE ITAT PUNE WOULD BE CLEARLY APPLICABLE IN THIS CASE. THEY HAVE FURTHER RELIED UPON THE DECISION IN THE CASE OF HON'BLE BOM BAY HIGH COURT IN THE CASE OF JAYANT VEGIOS OILS & CHEMICALS PVT. LTD . WHEREIN THE HON'BLE JUDGES HAD HELD THAT PENALTY COULD NOT BE L EVIED WHERE IT COULD BE SAID THAT THE LAPSE WAS NOT DELIBERATE AND AT THE HIGHEST. IT WAS AN ADVERTENT ERROR OF JUDGEMENT. THEREFORE, NO PENALTY COULD BE IMPOSED. THEY HAVE ALSO RELIED UPON THE DECISION OF THE HON' BLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. HARSHVA RDHAN CHEMICALS AND MINERALS LTD. [2003] 259 ITR 212 NO PENALTY F OR CONCEALMENT IF THE CLAIM OF THE ASSESSEE IS DEBATABLE OR ARGUABLE. IF THE CLAIM OF THE DEDUCTION OF THE EXPENDITURE IS EITHER DEBATABLE OR CONTROVERSIAL OR EVEN ARGUABLE, IN SUCH CASES IT CANNOT BE SAID THAT THE ASSESSEE HAS CONCEALED ANY INCOME OR FURNISHED INACCURATE PARTIC ULARS OF INCOME FOR EVASION OF TAX AND HENCE, PENALTY CANNOT BE LEVIED U/S. 271(1)(C) OF THE ACT, 1961. CONSIDERING ALL THESE JUDICIAL PRONO UNCEMENTS IN THE FACTS OF THE PRESENT CASE, WHERE THE APPELLANT HAD FOLLOWED A SYSTEM OF VALUATION OF CLOSING STOCK CONTINUING FROM THE P REVIOUS YEARS WHICH WAS NOT ACCEPTED BY THE AO IN THIS YEAR AND CHANGED ON THE BASIS OF WHICH ADDITION WAS MADE, IT CANNOT BE SAID THAT APP ELLANT HAD CONCEALED THEIR INCOME OR FURNISHED INACCURATE PART ICULARS OF INCOME AS NO NEW FACTS HAD BEEN BROUGHT OUT BY THE AO WHILE M AKING THE ADDITION. THE ADDITION WAS BASED ON FACTS PROVIDED IN THE RETURN OF INCOME. IT IS JUST BASED ON DIFFERENCE OF OPINION A ND INTERPRETATION. HENCE, THIS WAS NOT A CASE OF CONCEALMENT OF INCOME AND NO PENALTY U/S. 271(1)(C) IS LEVIABLE AND THE SAME IS DELETED. HENCE, THE ONLY GROUND OF APPEAL IS ALLOWED. 16. AGGRIEVED, REVENUE IS IN APPEAL BEFORE US AND H AS RAISED THE FOLLOWING GROUNDS: 1. THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN DELETI NG THE PENALTY OF RS.11,22,000/- U/S. 271(1)(C) OF THE ACT, 1961 STAT ING THAT IT WAS CASE OF MERE DIFFERENCE OF OPINION BETWEEN THE ASSESSING OFFICER AND THE ASSESSEE IN THE VALUATION OF CLOSING STOCK AND NO N EW FACTS WERE BROUGHT ON RECORD BY THE AO TO SHOW THAT THE ASSESS EE HAD CONCEALED PARTICULARS OF INCOME OR FILED INACCURATE PARTICULA RS OF INCOME. 2. THE LD. CIT(A) ERRED IN ACCEPTING THE FACT THAT THE ASSESSEE FRAUDULENTLY CHANGED THE BASIS OF VALUATION AND ALS O FAILED TO PRODUCE EVIDENCE TO SUPPORT THE BASIS OF VALUATION. ITA NO. 2610/M/2010 9 3. THE LD. CIT(A) ERRED IN FOLLOWING THE DECISION OF H ON'BLE ITAT IN THE CASE OF M/S. KAMBAY SOFTWARE INDIA PVT. LTD. 17. THE LD. DEPARTMENTAL REPRESENTATIVE SHRI G.P. T RIVEDI RELIED ON THE ORDER OF DELHI HIGH COURT IN THE CASE OF CIT VS ZOO M COMMUNICATION (P) LTD. 191 TAXMAN 179(DELHI) IN WHICH IT HAS BEEN HELD THA T IF THE ASSESSEE MAKES A CLAIM WHICH IS NOT ONLY INCORRECT IN LAW, BUT IS AL SO WHOLLY WITHOUT ANY BASIS AND EXPLANATION FURNISHED BY HIM FOR MAKING SUCH A CLAIM IS NOT FOUND TO BE BONAFIDE, EXPLANATION 1 TO SEC. 271(1)(C) WOULD COM E INTO PLAY AND ASSESSEE WILL BE LIABLE TO PENALTY. HE FURTHER SUBMITTED TH AT IN THIS CASE QUANTUM APPEAL HAS BEEN CONFIRMED BY THE TRIBUNAL AS THE CL AIM WAS NOT FOUND TO BE BONAFIDE AND THEREFORE THE SAME IS LIABLE TO BE VIT IATED BY PENALTY PROCEEDINGS. 18. THE LD. COUNSEL FOR THE ASSESSEE MADE THE FOLLO WING SUBMISSIONS: THE ASSESSEE WAS FOLLOWING THE CONSISTENT METHOD OF VALUATION OF RIGHTS AND PRERECORDED CDS AT THE END OF THE ACC OUNTING PERIOD ON FOLLOWING BASIS : PRERECORDED VCDS & DVDS COST OR NET REALIZABLE VALUE WHICH EVER IS LOWER AS PER ACCOUNTING STANDARD 2 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA FILE DISTRIBUTION RIGHTS WRITTEN OFF IN THE 1 ST YEAR OF ACQUISITION WRITTEN OFF IN EACH OF THE SUBSEQUENT YEARS 1 AGREEMENT VALUE IS LESS THAN RS.10 LACS SUBJECT TO POINT 3 BELOW 25% OF THE AGREEMENT VALUE BALANCE AMOUNT EQUALITY OVERBALANCE NUMBER OF YEARS 2 AGREEMENT VALUE IS MORE THAN RS.10 LACS SUBJECT TO POINT 3 55% OF THE AGREEMENT VALUE - DO - 3 IF NO VCD OR DVD COULD BE SO IN RESPECT OF ANY FILM RIGHT DUE TO NO DEMAND FULL VALUE OF RIGHTS FULL VALUE OF RIGHTS AS AT BEGINNING OF THE YEARS BASED ON THE ABOVE METHOD THE ASSESSEE HAD WRITTEN OFF VARIOUS RIGHTS FOR WHICH NO OR NEGLIGIBLE SALES WER E MADE DURING THE ASSESSMENT YEAR. THIS METHOD WAS CONSISTENTLY FOLLO WED BY ASSESSEE FROM YEAR TO YEAR AND NOT DISPUTED BY INCOME TAX DE PARTMENT WHILE 1 ITA NO. 2610/M/2010 10 COMPLETING ASSESSMENT UP TO A.Y. 2003-04 INCLUDING FOR ORDERS UNDER 143(3) FOR A.Y. 2002-03. THE LEARNED ASSESSING OFFICER APPLYING PROVISIONS O F SECTION 145(3) REJECTED THE METHOD OF AMORTIZATION FOLLOWED BY THE ASSESSEE AND REPLACED THE SAME WITH HIS METHOD OF AMORTIZATI ON ON PRO RATA BASIS. THE DISALLOWANCE WAS MADE ON THE BASIS OF DE TAILS OF RIGHT SUBMITTED BY THE ASSESSEE TO THE LEARNED CIT(A)/ AS SESSING OFFICER. AS REGARDS THE CONCEALMENT IT IS RESPECTFULLY SUBMI TTED THAT THE ASSESSEE HAS DISCHARGED ITS ONUS BY OFFERING A BONA FIDE EXPLANATION, AS REQUIRED BY EXPLANATION 1 WHICH IS AS FOLLOWS : THIS DEEMING FICTION COMES INTO PLAY WHERE IN RESP ECT OF ANY FACTS MATERIAL TO THE COMPUTATION OF THE TOTAL INCOME OF ANY PERSON UNDER THIS ACT (I) THE ASSESSEE FAILS TO PRO VIDE AN EXPLANATION, (II) THE ASSESSEE PROVIDES AN EXPLANAT ION WHICH IS FOUND TO BE FALSE, AND (III) THE ASSESSEE PROVIDES AN EXPLANATION WHICH HE FAILS TO SUBSTANTIATE AND HE FAILS TO PROV E THAT THE EXPLANATION WAS BONA FIDE AND THAT ALL THE FACTS NE CESSARY FOR THE SAME AND MATERIAL FOR COMPUTATION OF INCOME HAV E BEEN DULY DISCLOSED BY THE ASSESSEE. IN THE FACTS OF THE CASE THE ASSESSEE HAS OFFERED AN EXPLANATION FOR METHOD OF WRITING OFF HENCE IT CANNOT BE SAID T HAT THE ASSESSEE HAS FAILED TO OFFER AN EXPLANATION. ALSO THE ASSESSEE CANNOT BE SAID TO HAVE PROVIDED A N EXPLANATION WHICH IS FALSE. EVEN THE LEARNED CIT(A) ITAT HAS DISAPPROVED THE METHOD FOLLOWED BY ASSESSEE ONLY ON THE GROUND THAT IN 2 CASES SALES WERE THERE IN SUBSEQUENT YEARS OF WRITE OFF. THE ASSESSEE HAS DULY FURNISHED ALL THE RELEVANT FA CT MATERIAL TO THE COMPUTATION OF INCOME. THE ASSESSEE HAS FURNISHED THE EXPLANATION WHICH WA S BONAFIDE AS THE SAME WAS : BASED ON THE METHOD FOLLOWED YEAR AFTER YEAR BY THE ASSESSEE AND THE SAME WAS ACCEPTED BY DEPARTMEN T. THE ASSESSEE WAS UNDER BONAFIDE BELIEF THAT AS PER THE ACCOUNTING STANDARD-2 ISSUED BY THE ICAI THE ASSESSEE HAS CORRECTLY WORKED OUT THE VALUATION OF RIGHTS. THE ASSESSEE WAS FOLLOWING LOWER OF THE COST OR NET REALIZABLE VALUE FOR VALUATION OF RIGHTS WHICH WAS FOLLOWED YE AR AFTER YEAR AND WAS PROPERLY DISCLOSED TO THE ASSESSING OFFICER IN TAX AUDIT REPORT FILED WITH HIM. ITA NO. 2610/M/2010 11 IT WAS ONLY FOR THE DIFFERENT VIEW TAKEN THAT METHOD OF VALUING OR RIGHTS WAS REJECTED AND REPLACED BY THE ANOTHER METHOD OF ASSESSING OFFICER. THE ASSESSEE COULD HAVE CLAIMED THE WHOLE EXPENDITU RE FOR ACQUISITION OF RIGHTS AS PER POINT NO.5 OF THE CIRC ULAR NO.154 DATED 5.12.1974 ISSUED BY CBDT ON THE SUBJECT OF ASSESSME NT OF FILM PRODUCERS AND DISTRIBUTORS-AMORTISATION OF COST OF PRODUCTION OF FILMS AND ACQUIRING OF DISTRIBUTION RIGHTS, THE ASSESSEE HAS AMORTISED VALUE OF THE RIGHTS ON A WELL DEFINED BASIS SHOWS THE BON AFIDE OF THE ASSESSEE. 19. THE LD. COUNSEL FOR THE ASSESSEE SHRI RAJESH B. SHAH ALSO RELIED ON THE VARIOUS CASE LAWS: 1) CIT, AHMEDABAD VS RELIANCE PETROPRODUCTS (P) LTD., 2) KANBAY SOFTWARE INDIA (P) LTD. VS DCIT 31 SOT 153 3) CIT VS HARSHVARDHAN CHEMICALS & MINERAL LTD. 133 T AXMAN 320 (RAJ) 4) HIGH COURT OF BOMBAY IN THE CASE OF JAYANT VEGOILS & CHEMICALS (P) LTD. VS CIT 20. IN OUR OPINION THE ASSESSEE IS CARRYING ON BUSIN ESS OF RECORDING FILMS ON VCDS & DVDS AND SELLING THE SAME AFTER PURCHASIN G THE RIGHTS RELATING TO SUCH FILMS. AFTER ENTERING INTO SUCH AGREEMENTS WIT H PRODUCERS/OTHER FILM DISTRIBUTORS, ASSESSEE MAKES ON A MASTER TAPE A MAS TER CDR AND THEN WHAT IS KNOWN IN COMMERCIAL TERMINOLOGY A STAMPER FROM SUCH CDR AND THEREAFTER RECORDS THE SAME ON DVDS AND VCDS AFTER PURCHASING BLANK DVDS AND VCDS FROM MARKET. SUCH DVDS AND VCDS ARE SOLD IN THE MAR KET. AT THE END OF EVERY PREVIOUS YEAR, ASSESSEE VALUES THE RIGHTS AND PRERECORDED CASSETTES FOR THE PURPOSE OF VALUATION OF CLOSING STOCK. FOR VALU ATION OF RIGHTS PURCHASED AT THE YEAR END THE ASSESSEE WAS FOLLOWING ACCOUNTING STANDARD 2 (REVISED) ISSUED BY THE ICAI AND THEREBY ADOPTING LOWER OF COST OR NET REALIZABLE VALUE. THE SAID FACTS WERE ALSO MENTIONED IN THE TAX AUDIT REPORT WHICH WAS FILED BEFORE THE LEARNING ASSESSING OFFICER. 21. WE FIND THAT ITA NO. 2610/M/2010 12 (1) THE ASSESSEE HAS BEEN FOLLOWING OF CONSISTENT M ETHOD OF VALUATION OF RIGHTS AND THEY WERE FOLLOWING THE SAME SYSTEM I N THE EARLIER YEARS WHICH WAS ACCEPTED BY THE IT DEPARTMENT UPTO 2002-0 4. (2) THE METHOD OF VALUATION OF CLOSING STOCK WAS B ASED ON THE ACCOUNTING STANDARDS OF THE INSTITUTE OF CHARTERED A CCOUNTANTS. (3) THE AO BEING DISSATISFIED BY THE METHOD FOLLOW ED BY THE ASSESSEE REPLACE THE AMORTIZATION METHOD OF THE ASSESSEE. TH E MERE CHANGE IN METHOD OF VALUATION BY THE AO CANNOT BE TREATED AS FURNISHING OF INACCURATE PARTICULARS OF INCOME. IT IS ONLY THAT ASSESSEES METHOD WAS REJECTED AND AN ANOTHER METHOD WAS APPLIED BY THE A O. (3.1) THE RATIO OF THE DECISION IN THE CASE OF CIT VS HARSHVARDHAN CHEMICALS & MINERAL LTD. 133 TAXMAN 320 (RAJ) IS AP PLICABLE WHEREIN IT HAS BEEN HELD AS FOLLOWS: THE FINDING OF THE TRIBUNAL THAT WHEN THE ASSESSEE HAS CLAIMED SOME AMOUNT THOUGH THAT IS DEBATABLE, IN SU CH CASES, IT CANNOT BE SAID THAT THE ASSESSEE HAS CONCEALED ANY INCOME OR FURNISHED INACCURATE PARTICULARS FOR EVASION OF THE TAX. IN VIEW OF THE FINDINGS OF THE TRIBUNAL (4). THE FULL DETAILS WERE AVAILABLE BEFORE THE AO AND IT CANNOT BE SAID THAT THE ASSESSEE HAD FILED INACCURATE PARTICU LARS OF INCOME. THERE WAS NO DISPUTE OVER THE FACT THAT ASSESSEES METHOD OF VALUATION OF CLOSING STOCK HAD BEEN LOWER IN COST OR NET REAL IZABLE VALUE. NO NEW FACTS HAVE BEEN BROUGHT OUT BY THE AO HIMSELF. ALL THE FACTS WERE ALREADY ON RECORD. (5) THE ASSESSEE HAS OFFERED A BONAFIDE EXPLANATION FOR WRITING OFF. (6) TAKING THE TOTALITY OF ALL THE FACTS AVAILABLE, WE ARE INCLINED TO FOLLOW THE RATIO OF THE DECISION IN THE CASE OF CI T VS RELIANCE PETRO PRODUCTS 189 TAXMAN 322(SC) WHEREIN IT HAS BEEN HE LD AS FOLLOWS: ITA NO. 2610/M/2010 13 THE WORD PARTICULARS MUST MEAN THE DETAILS SUPPL IED IN THE RETURN, WHICH ARE NOT ACCURATE, NOT EXACT OR CORREC T, NOT ACCORDING TO TRUTH OR ERRONEOUS. IN THE INSTANT CA SE, THERE WAS NO FINDING THAT ANY DETAILS SUPPLIED BY THE ASSESSE E IN ITS RETURN WERE FOUND TO BE INCORRECT OR ERRONEOUS OR FALSE. SUCH NOT BEING THE CASE, THERE WOULD BE NO QUESTION OF INVIT ING THE PENALTY U/S. 271(1)(C). 22. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER PRONOUNCED ON THIS 26 TH DAY OF AUGUST, 2011 SD/- SD/- (R.S. SYAL) ( ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 26 TH AUGUST, 2011 RJ COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI ITA NO. 2610/M/2010 14 DATE INITIALS 1. DRAFT DICTATED ON: 18 . 8 . 2011 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 19.08.2011 SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: SR. PS/PS 6. ORDER PRONOUNCED ON: SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: SR. PS/PS 9. DATE ON WHICH FILE GOES TO AR 10. DATE OF DISPATCH OF ORDER: