2019 (11) TMI 207 - AT - Income Tax

Penalty u/s. 271AAB - value of excess stock considered to be undisclosed income - HELD THAT - As in M/S. NEW HORIZONS LIMITED 2019 (9) TMI 859 - ITAT KOLKATA on the identical factual matrix this Tribunal held that it was not a case where the surplus stock was found as a result of search, representing any undisclosed income of the assessee. On the other hand, the Tribunal found that the physical verification was carried out by the assessee on its own as a matter of internal control in the month of February 2015, well before the search and the surplus stock found on such physical verification having been accounted for by the assessee in its books in the month of March 2015 itself cannot be treated as unexplained investment. Since the facts of the assessee s case are identical, the finding of the coordinate Bench is squarely applicable according to which value of excess stock cannot be considered to be undisclosed income and consequently therefore no penalty u/s 271AAB could be levied. From the Form of the audit report prescribed by the Central Government, we thus find that in order that the auditor gives his report in the prescribed form, every company is required to conduct physical verification of the inventory at reasonable intervals and furnish to the auditor the report prepared on such verification and also satisfy him whether the discrepancies found on such verification were properly dealt with in the books of accounts. We have therefore no hesitation in holding that the stock inspection reports prepared by the internal team of the assessee and found by the search party constituted other documents maintained in the ordinary course of business carried on by the assessee. As noted earlier, such inspection report was prepared at the instance of the management as a matter of internal control and the same was drawn up much prior to the date of search. Having regard to these material facts, we therefore do not find merit in the ld. CIT, DR s argument that the excess stock found noted in the stock inspection report prepared by the internal team of the assessee constituted undisclosed income unearthed as a consequence of search. No infirmity in the order of the ld. CIT(A) holding that the sum did not constitute undisclosed income of the assessee within the meaning of the said expression as set out in Section 271AAB of the Act - Decided in favour of assessee

Summary

Issues Involved:
1. Whether the excess stock found during a search operation constitutes "undisclosed income" under Section 271AAB of the Income-tax Act, 1961.
2. Validity of the penalty levied under Section 271AAB of the Income-tax Act, 1961.
3. Whether the stock inspection reports prepared by the internal team before the search can be considered as "other documents" maintained in the ordinary course of business.

Issue-wise Detailed Analysis:

1. Whether the excess stock found during a search operation constitutes "undisclosed income" under Section 271AAB of the Income-tax Act, 1961:

The core issue was whether the excess stock valued at ?6,04,95,912/- found during the search operation could be treated as "undisclosed income." The assessee argued that the stock was identified through an internal audit conducted in February 2015, well before the search on 20-03-2015. The stock was duly accounted for in the books of accounts for the financial year ending on 31-03-2015. The CIT(A) found that the stock inspection was conducted by the assessee's internal team and not by the search party, and the relevant documents were only seized on 05-05-2015. Thus, the excess stock was not "undisclosed income" as it was already recorded in the books before the search. The Tribunal upheld this view, stating that the stock inspection was part of the company's regular internal control and was accounted for before the search, thus not constituting "undisclosed income."

2. Validity of the penalty levied under Section 271AAB of the Income-tax Act, 1961:

The Assessing Officer (AO) imposed a penalty under Section 271AAB, claiming the excess stock was "undisclosed income." However, the CIT(A) noted discrepancies between the assessment order and the penalty order. The CIT(A) observed that the AO's claim that the excess stock was detected solely due to the search was incorrect. The Tribunal agreed, finding that the internal audit and stock reconciliation were conducted before the search, and the stock was accounted for in the books. Consequently, the penalty under Section 271AAB was deemed inappropriate and was deleted.

3. Whether the stock inspection reports prepared by the internal team before the search can be considered as "other documents" maintained in the ordinary course of business:

The Tribunal examined whether the stock inspection reports prepared by the internal team constituted "other documents" maintained in the ordinary course of business. It was observed that the stock inspection was a regular feature of the company's internal control, conducted in compliance with the Companies Act, 1956. The Tribunal held that these reports, prepared before the search and found during the search, were indeed part of the regular business documents. Consequently, the excess stock recorded in these reports could not be classified as "undisclosed income."

Conclusion:

The Tribunal upheld the CIT(A)'s decision, concluding that the excess stock identified was part of the regular business process and was accounted for before the search. Therefore, it did not constitute "undisclosed income," and the penalty under Section 271AAB was not warranted. The appeal by the revenue was dismissed, and the penalty was deleted.