2012 (11) TMI 501 - AT - Income Tax

Undisclosed income u/s 158BC Discrepancy in stock of finished products and work in progress Addition on account of inter-se stock position at various stages in the production line - Held that - As the stock register of furnished goods is kept for central excise purpose and products are not 100% pure & require further processing. Pre-shipment goods pending approval are recorded for MIS purposes but not for central excise purposes as it may require further processing in case the sample was not approved. As search occurred during the middle of year and sales made out of the stock of finished products have been only recorded later and exported and have been duly accounted for in books, there is no need to treat the value as undisclosed income. In favour of assessee Discrepancy in stock of raw materials Assessee accepting that there is a discrepancy of 730 kgs in an item But the AO was not agree with the view of assessee Held that - After considering the arguments and examining the documents placed on record, only addition of 730kgs value of HCO was required to be confirmed. Even though assessee explanation was that the stock could be out of earlier issued for process, the same cannot be accepted in the absence of reconciliation, so to that extent the addition required to be confirmed. Partly allowed in favour of assessee Discrepancy in stock valuation Between MIS statement and books - No variation in quantities mentioned but only in valuation of the stock - Difference arose due to different valuation rate adopted Held that - Just because MIS statement prepared by factory manager was found, no addition can be made without examining whether the rates adopted on the quantity was not according to the accounting principles. No such exercise was undertaken by AO. Since assessee accounted the stock according to the principle of accountancy being followed and certified by management and auditors, we agree with the argument that variation cannot be brought to tax as undisclosed income on the basis of difference in valuation in books. In favour of assessee Deduction u/s 80HHC AO argued that there are sales proceeds includes proceeds other then export proceeds - Held that - Where book results can neither be altered nor have been rejected/altered by the revenue authority and which show export proceeds being received by the assessee. Therefore, the deduction as claimed u/s 80HHC should be allowed to the assessee, within the premise of section 158BH. In favour of assessee

Summary

Issues Involved:
1. Assessment of undisclosed income due to discrepancies in stock valuation and quantities.
2. Denial of deduction under Section 80HHC of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Assessment of Undisclosed Income Due to Discrepancies in Stock Valuation and Quantities:

Background:
The appeal concerns the assessment of undisclosed income following a search and seizure operation conducted by the Income Tax Department on 23.10.1997. The department disputed the valuation and quantities of raw materials, work in progress, and finished products found at the assessee's factory premises.

Assessee's Submissions:
The assessee argued that the stock of finished products, work in process, and raw materials should not be treated as undisclosed income. They provided detailed explanations and evidence, including excise records and sales documentation, to support their claim that the stock discrepancies were due to differences in internal records and excise records.

Tribunal's Findings:
The Tribunal analyzed the case under Chapter XIVB, which deals with the assessment of undisclosed income. It noted that the assessment of undisclosed income should be based on transactions not recorded in the books of account. The Tribunal found no evidence of excess or shortage of finished stocks, nor any violations of excise records or sales tax regulations. The discrepancies were primarily due to inter-se stock positions within the production line, not overall stock positions.

Detailed Analysis:

(A) Stock of Finished Products and Work in Progress (Rs. 61,35,842):
The Tribunal noted that the finished products and work in progress were recorded for Management Information System (MIS) purposes but not in excise records until they were ready for export. The assessee provided evidence of subsequent exports and proper accounting in the profit and loss account. The Tribunal agreed with the assessee's contention that the stock should not be treated as undisclosed income, as there was no evidence of sales outside the books or income generated outside the books.

(B) Stock of Raw Materials (Rs. 71,700):
The Tribunal examined the stock records and found that the discrepancy in the stock of HCO (730 kgs) was the only issue. The stock of Catalyst A was accounted for. The Tribunal confirmed the addition for the discrepancy in HCO but deleted the rest.

(C) Stock Valuation as on 31.3.2007 (Rs. 6,55,000):
The Tribunal found that the discrepancy in stock valuation was due to different valuation methods used in MIS statements and financial accounts. The MIS statement was prepared based on current estimates, while the financial accounts followed a weighted average method. The Tribunal accepted the assessee's explanation and deleted the addition.

Conclusion:
The Tribunal modified the order of the CIT(A) and directed the AO to delete the additions related to stock of finished products, work in progress, and raw materials, except for the confirmed discrepancy in HCO. The total relief granted was Rs. 61,89,292.

2. Denial of Deduction Under Section 80HHC:

Assessee's Argument:
The assessee argued that the deduction under Section 80HHC, which is based on export proceeds, should be allowed. They provided evidence that the purported additions under finished goods were actually exported, and the proceeds were realized.

Tribunal's Findings:
The Tribunal noted that there was no evidence to suggest that the export proceeds or book results should be altered. The book results were not rejected or altered by the revenue authority, and the export proceeds were duly accounted for. The Tribunal directed the AO to allow the deduction under Section 80HHC as claimed by the assessee.

Conclusion:
The Tribunal set aside the order of the CIT(A) on this issue and directed the AO to allow the deduction under Section 80HHC on the amount sustained by the Tribunal.

Final Judgment:
The appeal filed by the assessee was partly allowed, with significant relief granted on the assessment of undisclosed income and the allowance of deduction under Section 80HHC.