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TMI Blog2019 (11) TMI 207X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng: On 20th March, 2015, search proceedings u/s 132 of the Income-tax Act 1961 were undertaken in respect of the company. The search proceedings were effectively concluded vide panchnama dated 20th day of March 2015. The surplus stock of leather measuring 1356456 sq ft. of ₹ 6,04,95,915/- found during the course of physical verification of inventory during the month of January -February was subsequently disclosed in the statement recorded in course of proceedings u/s 132 of the Income tax Act 1961 has been duly accounted for in books of accounts It is observed that disclosure for the balance amount of stock amounting to ₹ 4,70,54,450/- was disclosed in the group company namely M/s New Horizon Ltd. in view of the above, penalty proceedings u/s 271AAB of the I.T.Act is initiated. 3. Along with the order of assessment, the AO issued notice u/s. 274 read with section 271 of the Act wherein the AO put the assessee on notice for offence u/s. 271 (1) ( c) of the Act ( which is per-se-defective because both the limbs of the section 271(1) ( c) has been given without striking out which specific offence is proposed to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s taken during the Search Seizure operation. 4. In view of above discussion the value of stock difference clearly represents undisclosed income coming under the purview of explanation (c) to section 271AAB, as it was not recorded in the books of accounts on or before the date of search. The year in question being a specified year, I consider it a fit case for imposition of penalty u/s 271AAB. It is seen that the assessee paid advance tax ₹ 1.5 crores and TDS was ₹ 7,07,027/-. After the assessment, there was a demand of ₹ 1,06,834/-, though the assessment was completed as per the returned income of the assessee including the undisclosed stock accounted and added in income. This show that the assessee has not deposited the entire tax and interest on the disclosed income. Hence, it falls within the purview of the Section 271AAB(c). Moreover, the assessee could not submit any explanation as to how the surplus of such huge stock was there. It is often the raw skin are being purchased in cash through the traders. The assessee has failed to submit any explanation or evidence or mode showing the relevant purchases which resulted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of excess/ shortage detected on physical inspection was prepared by the Accounting staff. Based on the report of the accounts executive, value of excess inventory found on inspection was ascertained at ₹ 6,04,95,915/-. On completing stock taking exercise the instructions were issued to the respective unit heads for incorporating correction entries in the stock records by suitably increasing the physical quantities of the respective inventory items. Accordingly necessary entries in the stock records were passed in the month of March 2015 itself. It is further noted from the facts on record that the search started on 20/03/2015 was temporarily concluded on that date and a prohibitory order u/s 132(3) was placed and thereafter the search was resumed as , the office premises at Geeta Bhawan, P-33 CIT Road, Scheme VIM(S), Kolkata- - 700 054 on 05/05/2015. A fresh panchnama was prepared on 05/05/2015 in respect of documents and found seized in the course of resumed search. From the inventory of documents seized it is noted that in document ID Marked NHL/PO /1 containing Pages 1 to 20 comprised of the documents relating to inventory inspection reports prepared by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this regard it is pertinent to refer to the definition of the 'undisclosed income' as contained in Explanation to Section 271AAB which reads as follows: Explanation: For the purposes of this Section (c) undisclosed income means- (i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has- (A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or (B) otherwise not been disclosed to the Principal Chief Commissioner or] Chief Commissioner or Principal Commissioner or Commissioner before the date of search; or . (ii) any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was assessed at ₹ 6,62,16,740/- which inter alia included income of ₹ 6,04,95,915/- with reference to which alone the penalty was imposed. In arriving at the assessed income, the AO had made disallowance of ₹ 2,92,805/- out of business promotion expenses. The tax of ₹ 1 ,06,834/ - referred to by the AO as payable in the impugned penalty order related to disallowance made out of business promotion expenses. Admittedly the amount disallowed was not considered by the AO to be 'undisclosed income' for the purposes of Section 271AAB of the Act. I therefore find that the AO s allegation that the assessee had not paid tax interest on the income of ₹ 6,04, 95, 915/- and for that reason the assessee was not entitled to benefit of 271AAB(a) is also found to be factually untenable. For the reasons set out in the foregoing therefore, I hold that the penalty levied u/s. 271AAB(c) in respect of excess stock is deleted. 5. Aggrieved, the revenue has preferred this appeal and the assessee has preferred an application under Rule 27 of the Income Tax Appellate Rule 1963. 6. We first of all will take up the Revenue s appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the stock inspection report prepared by Jahangir Badsa, Accounts Executive of the assessee, and submitted to Mr. Harish Gupta, Production Manager dated 18.03.2015, there was difference of 13,56,456 sq ft of leather between physical stock and stock records. The value of such excess stock belonging to the assessee was estimated by him at ₹ 6,04,95,912/-. As per this report the discrepancy was found on physical verification conducted on 28-02-2015 (prior to the date of search). A copy of this report was also marked to Mr. Gopal Naredi, MD of the assessee company who then instructed the Production Head to reconcile the difference and also to account the shortage/excess while preparing the final accounts for the year ended 31-03-2015. The relevant notings of the Director appear in document bearing identification mark NHL/PO/1 at Page 12 [Page 57 of the paperbook]. When confronted with these documents, the Director of the assessee in his statement u/s 132(4) [which is at Page 34 to 44 of the paper book], stated that the excess stock found on physical inspection will be offered as income of the group for the FY 2014-15 and the tax due shall also be paid in due course. In his statem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is accepted, then the very purpose of enacting Section 271AAB shall stand defeated. According to ld. CIT, DR once the assessee in his statement u/s. 132(4) admitted of earning income and which as per the seized documents was not found recorded in the books of accounts regularly maintained, then the same constituted undisclosed income . He then claimed that the levy of penalty u/s 271AAB was automatic since as per the relevant provisions, levy of penalty was mandatory. He also submitted that the findings of the coordinate Bench of this Tribunal in the case of the associate company, M/s New Horizon Ltd in ITA No.2127/Kol/2017 dated 28-08-2019, was not relevant in deciding the present apepal because the question decided by the Tribunal in that case was whether the excess stock found could be assessed as assessee s income by way of unexplained investment and not whether the same constituted undisclosed income for the purposes of Section 271AAB. He therefore urged for reversing the order of the ld. CIT(A) and restore the penalty levied. 8. Per contra, Shri Damle, the ld. AR fully supported the order of the ld. CIT(A). He submitted that the ld. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to the rival submissions, perused the materials on record, considered the applicable legal provisions and scrutinized the judicial precedents relied upon. The sum and substance of the issue to be adjudicated in the present appeal is whether the income offered by the assessee in its return for AY 2015-16 being the value of closing stock of ₹ 6,04,95,912/- can be considered to be 'undisclosed income' found in the course of search so as to warrant levy of penalty u/s 271AAB of the Act. It is noted that on 20-03-2015, the assessee s Director had deposed before the Investigating Officer admitting income of ₹ 15 crores on behalf of the assessee and the group companies / persons. On that date certain documents and material were placed under prohibitory order which was lifted on 5/6 May 2015. Hence, it can be safely presumed that the papers found on 5th May 2015 by the Investigation Officer had already been in the safe custody of the Department during the period between 20-3-2015 and 6-5-2015, when the prohibitory was in force. We note that no material has been brought on record by the AO to show that during the course of search the authorized off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... namely, M/s New Horizon Limited (supra). As noted in the preceding paras, the internal team had carried out physical inspection of stock and found excess stock of ₹ 10,75,50,362/- of which ₹ 6,04,95,912/- belonged to the assessee company and the remaining ₹ 4,70,54,450/- belonged to M/s New Horizon Limited. Like the assessee, M/s New Horizon Limited also incorporated the excess stock found in the stock records for the FY 2014-15 and the same formed part of the closing stock disclosed in the annual audited financial statements. In the assessment order passed u/s 143(3), the AO treated the value of excess stock of ₹ 4,70,54,450/- as undisclosed income of the assessee and therefore did not allow its set off against business loss of the relevant year. On appeal the ld. CIT(A) held that the excess stock was found by the internal team prior to the search and therefore did not constitute undisclosed income or unexplained investment and the same was regular business income of the said assessee. On appeal, this Tribunal by its order dated 28.08.2019 upheld the order of the ld. CIT(A), by observing as under: 6. We have considered the rival sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regular business income for the year under consideration. 11. We thus note that, 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. 12. Before parting, it is also pertinent to deal with the ld. CIT, DR s argument that the excess stock found was undisclosed income of the assessee because as per the admission made by the assessee s Director in the stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternal 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. 14. In this regard, gainful reference can be made to the decision of the Hon ble Karnataka High Court in the case of Pr. CIT Vs Deccan Mining Syndicate Pvt Ltd (105 taxmann.com 137). In the decided case also the assessee had filed a letter dated 04-06-2010 before the Investigation Officer informing that there were certain discrepancies in the stock records and the physical stock. It was claimed that the difference was not on account of unexplained purchases but wrong entries passed regarding the inward, outward, despatch and consumption of materials. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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