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Facts
A survey was conducted at the assessee company's premises, and a director admitted to a stock discrepancy of Rs. 5,88,00,000/- during the survey. The Assessing Officer made an addition based on this, considering it as unaccounted stock. The assessee argued that a tentative trading account was used, which did not include all expenses, leading to an incorrect stock valuation.
Held
The Tribunal held that the addition made by the Assessing Officer was not justified. The CIT(A) had rightly deleted the addition because the tentative trading account used was found to be inaccurate as it did not consider crucial expenses like direct manufacturing costs and salaries/wages.
Key Issues
Whether the addition of Rs. 5,88,00,000/- on account of stock discrepancy, admitted in a tentative trading account during survey, is sustainable when the assessee later provides a correct trading account excluding all relevant expenses.
Sections Cited
69B, 115BBE, 133A, 143(3), 131, 142(1), 143(2), 37
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
Before: SHRI R. K. PANDA & SHRI VINAY BHAMORE
ORDER
PER VINAY BHAMORE, JM:
This appeal filed by the Revenue is directed against the order dated 08.04.2024 passed by Ld. CIT(A), Pune-12 [‘Ld. CIT(A)’] for the assessment year 2018-19.
The Revenue has raised the following grounds of appeal :-
1. Whether on the facts and in the circumstances of the case, the Ld. CIT (A) has erred in law and in facts by deleting the addition made as per provisions of section 698 r.w.s. 115BBE of the 1.T. Act on declaration made of Rs. 5,88,00,000/- on account of excess stock found during survey for which assessee failed to offer any satisfactory explanation during the survey as well as assessment proceedings.
2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in law and in facts by not appreciating the facts that the assessee has failed to offer the declaration made of Rs. 5,88,00,000/- during the course of survey action in it's return of income for the year under consideration.
3. The appellant craves leave to add, alter, modify, delete and amend any of the grounds, as per the circumstances of the case.”
Facts of the case, in brief, are that the assessee is company engaged in the business of manufacturing and trading of pharmaceutical products and packaging material and is also engaged in the manufacturing of goods on job work basis. A survey action u/s 133A of the IT Act was conducted on 26.10.2017 at the business premises of the assessee at various locations situated in Aurangabad and Pune and books of accounts were impounded during the course of survey actions. The assessee company e-filed its return of income on 31.10.2018 declaring total income of Rs.3,09,13,320/-. Thereafter, the case of the assessee company was selected for scrutiny under manual selection as per CBDT guidelines and notice u/s 143(2) of the IT Act, 1961 was issued on 27.09.2019 and duly served upon the assessee. Notice u/s 142(1) of the Act, 1961 along with detailed questionnaire was issued on 08.01.2020 and served upon the assessee.
During the course of assessment proceedings, the Assessing Officer noticed that Shri Nishikant Jain, one of the director of the assessee company had declared additional income of Rs.5,88,00,000/- for assessment year 2018-19 as per statement recorded on oath u/s 131 of the IT Act during the course of survey. He noted that the assessee company had offered only Rs.2,49,42,962/- on account of written off creditors balance in its ITR. However, the assessee had not offered Rs.5,88,00,000/- for taxation in its ITR as declared during the course of survey on account of excess stock. In this regard, the Assessing Officer has issued a notice u/s 142(1) of the Act on 11.09.2021 and the assessee was requested to explain why the unrecorded/excess stock valued at Rs.5,88,00,000/- should not be treated as “deemed income” u/s 69B of the IT Act and accordingly taxed u/s 115BBE of the IT Act. In response to the notice, the assessee filed its reply vide letter dated 13.09.2021. The reply of the assessee had been considered by the Assessing Officer but not found to be acceptable. In view of the above facts, the Assessing Officer passed assessment order u/s 143(3) on 18.09.2021 & assessed total income of Rs.9,11,00,970/- by making addition of Rs.5,88,00,000/- on account of unaccounted/excess stock u/s 69B and Rs.13,87,650/- on account of disallowance u/s 37 of the Act but tax to be calculated as per provisions of section 115BBE of the IT Act on amount of Rs.5,88,00,000/-.
After considering the reply of the assessee, Ld. CIT(A) partly allowed the appeal. However, addition of Rs.5,88,00,000/- due to difference in physical stock and tentative trading account was deleted in full by observing as under :- “5.2.6 I have considered the facts of the case, contention of AO and submissions made by the appellant before me. Briefly stating, the facts are that a survey action was carried out in the premises of the appellant on 26th October, 2017 u/s 133A of the Income Tax Act. During course of survey statement of Shri Nishikant Jain (director of the appellant company) was recorded. The said director during the course of survey had submitted a Tentative trading Account. The survey officer observed that there was a difference in the closing stock as per the tentative trading account vis-à-vis physical stock found during the survey. The director at question no. 14 of his statement had accepted the stock discrepancy of Rs. 5,88,00,000/- and also agreed to offer the same for taxation. 5.2.7 The AO, however, did not find the disclosure made by the appellant regarding stock discrepancy in the ROI. The AO made the addition in the hands of the appellant by invoking the provision of section 69B r.w.s. 115BBE of the Act. 5.2.8 I have perused the submission filed by the appellant during the course of the assessment proceedings and also the submission filed before me during the appellant proceedings.
5.2.9 I find force in the contention of the appellant that the tentative trading account does not include direct expenses and salary and wages. Thus, the trading account based on such fundamental defect would not depict meaningful analysis. The action of AO in making the tentative trading account as a basis of making the addition is not correct. 5.2.10 Further, on perusal of the details submitted during the assessment proceedings, it is observed that the appellant had submitted details regarding direct expenses and employees' benefit expenses incurred and actually paid prior to survey. Further, the appellant had also demonstrated that if both these expenses are considered then the tentative trading account prepared by the director would not give the stock discrepancy. This fact again shows that the tentative trading account cannot be considered as a basis of comparison. 5.2.11 I also find merit in the contention of the appellant that the amount of direct expenses and employees' benefit expenses incurred by the appellant till the date of survey and for the complete year are comparable with similar expenses of earlier years. It is further observed that all these details were also submitted during the assessment proceedings, however, the same were not considered by the AO. The contention of the appellant that the direct expenses and the employees' benefit expenses incurred in earlier years had been accepted by the department. 5.2.12 It is also observed that during the course of survey action, no documentary evidence was found with regard to the excess stock. Further it is also observed that the purchases were also not doubted by the AO. 5.2.13 Thus, the addition of Rs.5,88,00,000/- deserves to be deleted for the detailed reasons as stated above. The Clubbed Ground No.1 is, therefore, allowed.”
It is this order against which the Revenue is in appeal before this Tribunal.
Ld. DR appearing from the side of the Revenue submitted before us that the order passed by Ld. CIT(A) is unjustified. Ld. DR submitted before us that the Revenue is only challenging the deletion of addition of Rs.5,88,00,000/- made by the Assessing Officer due to difference in physical stock found on the date of survey and the value of closing stock appearing in the trading account prepared by the assessee on the date of survey & which was also admitted by the director of the assessee company in its statement recorded at the time of the survey. The other relief allowed by the Ld. CIT(A) is not under challenge. Ld. DR further submitted before the Bench that the director of the assessee company himself accepted in his statement recorded at the time of survey that he will disclose extra income of Rs.5,88,00,000/- in the return of income and pay the due taxes accordingly. Since the additional income as agreed by the director was not disclosed in the return of income filed by the assessee company, the Assessing Officer made addition of Rs.5,88,00,000/- and Ld. CIT(A) without any reasonable basis deleted the above addition. Accordingly, it was prayed before the Bench to set-aside the order passed by Ld. CIT(A) on this issue and confirm the order passed by the Assessing Officer on this issue.
8. Ld. AR appearing from the side of the assessee furnished a paper-book & relied on the order passed by Ld. CIT(A) & prayed that there is no infirmity in the order of Ld. CIT(A) and requested to confirm the same.
We have heard Ld. Counsels from both the sides & perused the material available on record including paper-book furnished by the assessee. In this regard, we find that a survey u/s 133A was conducted at the premises of the assessee company on 26-10-2017. The director of the assessee company in the statement recorded at the time of survey agreed to disclose the additional income of Rs.5,88,00,000/- in his return of income over and above the regular income. But no such additional income was offered to tax in the return of income and, therefore, the Assessing Officer added the above amount of Rs.5,88,00,000/- to the total income of the assessee u/s 69B of the IT Act along-with other additions. In first appeal, after considering the submissions of the assessee, Ld. CIT(A) deleted the whole of the addition of Rs.5,88,00,000/-. It was the main contention of the assessee before Ld. CIT(A) that the trading account prepared on the date of survey was a tentative trading account. The director of the assessee company was an engineer and not from the accounting background and due to this reason he forgot to consider the direct manufacturing expenses of Rs.4.38 crores and also did not consider salary and wages of Rs.2.83 crores in the tentative trading account which ultimately resulted in wrong value of closing stock. In this regard, we further find that in the questions and answers recorded at the time of survey in question no.14, the survey officer herself talks about the tentative trading account provided by the director of the assessee company and this itself proves that the trading account prepared by the assessee at the time of survey was not an accurate trading account prepared on the basis of books of accounts but certainly was a tentative trading account as was accepted by survey officer i.e. ACIT, Circle-2, Aurangabad. For ready reference the Question No.14 & Ans. is reproduced below :- “Q.No.14 During the course of survey proceedings conducted (on 26/10/2017) at your premises M.190, MIDC, Aurangabad, the tentative trading account was provided by you in respect of M-190, Aurangabad L-12, Aurangabad, L-24, Aurangabad and Bhosari, Pune which amounts to Rs. 19,02,00,000/- But the actual physical stock taken at the respective premises is of the value of Rs.24,90,00,000/- and does not match with the tentative trading account provided by you. The amount of the difference in stock is to the tune of Rs.5,88,00,000/-. How do you explain this large discrepancy in the stock as per trading account and physical stock found at the premise? Ans. On this issue of difference in stock, I accept the above discrepancy in stock. I want to further incorporate the differential stock in our books of accounts and hence, offer the Rs.5,88,00,000/- corresponding to the said stock for taxation during FY 17-18.”
We further find that the direct manufacturing expenses of Rs.4.38 crores were incurred by the assessee prior to date of survey and the salary and wages of Rs.2.83 crores were also incurred prior to date of survey and the Assessing Officer has not objected to these figures which also proves the contention of the assessee. In this regard, the correct trading account upto the date of survey was prepared and produced before the Assessing Officer as well as before Ld. CIT(A). Admittedly the direct manufacturing expenses & salary & wages were not considered by the director while preparing the tentative trading account which affected the value of closing stock to a great extent & when correct trading account was prepared on the basis of books of accounts the mistake was found & accordingly the other amount declared at the time of survey were disclosed in the return of income but the so called difference of Rs 5,88,00,000/- wrongly admitted by the director was not offered to tax since there was no such difference & it had arisen