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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri A. T. Varkey, JM & Dr. (Shri) Arjun Lal Saini, AM ]
PER SHRI A.T. VARKEY, JM
This is an appeal preferred by the revenue against the order of the ld. CIT (Appeals) [ in short, ld. CIT(A) ], 21, Kolkata dated 04-07-2017 deleting the penalty levied by the AO u/s. 271AAB of the Income-tax Act, 1961 ( in short, the Act’’).
The brief facts of the case as noted by AO while passing the assessment order ( not dated) for the A.Y 2015-16 is that the assessee filed its return of income on 30.09.2015 disclosing the total income of Rs. 6,59,23,930/- and thereafter, the AO with reference to the assessee’s disclosure made of Rs. 6,04,95,912/- in respect of under valuation of stock observed as under:- “4. Disclosure made of Rs.6,04,95,912/· in respect of undervaluation of stock. The assessee was requested to-show cause as to why the undervaluation of physical stock of Rs. 10.75 Crore, detected during the course of search in respect of the main companies of the group viz. New Horizon Ltd and Industrial Safety Products Pvt. Ltd., should not be treated as suppression of profit made by the assessee company during the year under consideration and added back to the total income of cause the assessee stated that,
The excess stock found on physical verification that is related to the company is amounting to Rs. 6,04,95,912/- and have been properly accounted for in the books for financial year 2014-15. The same has also 1 I.T.A No. 2128/Kol/2017 A.Y 2015-16 M/s. Industrial Safety Products P.Ltd.
been disclosed in the disclosure petition dated 06.05.2015. The excess stock found during 'the course of physical verification has been duly accounted and hence there is no question of suppression of profit made by the company and the profit reflected in Statement of profit & Loss includes the same. We would like to draw attention to Note No.37 of the Financial Statement in this respect."
It is observed fro note 37 that the auditor has stated the following:
“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 Rs.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 Rs. 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. “
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 charged against the assessee) as well as against levy of sec. 271AAB of the Act vide notice dt. 31.3.2016 ( refer to page 63 of paper book) and, thereafter, the AO levied the penalty u/s. 271AAB of the Act after observing as under:-
The submission of the assessee has been carefully perused. It was seen that the stock was taken on 20.03.2015 and the valuation of the stock was found to be Rs. 6,04,95,915/- more than the valuation as per the books of the assessee in respect of this assessee company as on the date of the Search & Seizure operation. It is pertinent to say that only 10 days were left from the end of the financial year. So the assessee's submission that "the stock taking exercise resulting in identification of excess stock was conducted by the company voluntarily and same was done which prior to the date of Search" is not at all acceptable. It is only because of the Search & Seizure operation that the huge undisclosed 2 I.T.A No. 2128/Kol/2017 A.Y 2015-16 M/s. Industrial Safety Products P.Ltd.
stock was found and inventoried. It is quite a common process that the staff of the assessee whose premises has been searched often assists the officers conducting the valuation of stock as they are well conversant with the qualities, quantities and price of the items. This does not mean that the assessee has voluntarily made the valuation of stock. No evidence could be submitted by the assessee showing that the assessee was in the process of entering the huge undisclosed stock in his books-of- accounts. The submission of the assessee regarding that stock was at different premises is also not correct. In Schedule 13 of the audited accounts, it is seen that that the stock of raw-materials as on 31.03.2014 was Rs. 8,94,66,761/- whereas stock of raw-materials as on 31.03.2015 was Rs. 14,03,00,966/- which is more than 5.1 crores than the last year's figure. In respect of finished goods, the closing stock as on 31.03.2014 was Rs. 2,96,304/- and as on 31.03.2016 it is Rs. 1,26,64,946/-. So it is more by 1.24 crores and about 42 times of the last year's figure. There is no reason for such huge increase in closing stock during the normal course of business. It is only due to the Search & Seizure operation, the assessee was forced to disclose the exact closing stock as on 31.03.2015 as only 10 days back during the Search & Seizure operation on 20.03.2016 the actual stock was taken during the Search & Seizure operation.
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 Rs. 1.5 crores and TDS was Rs. 7,07,027/-. After the assessment, there was a demand of Rs. 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 the undisclosed stock. Hence, penalty is imposed u/s 271AAB(c). “
Aggrieved, the assessee preferred an appeal before the ld. CIT(A), who was pleased to delete the same by observing as under:-
On examination of the penalty order in juxtaposition with the assessment order, I however note that the AO's findings in the assessment order are 3 I.T.A No. 2128/Kol/2017 A.Y 2015-16 M/s. Industrial Safety Products P.Ltd.
materially different from the AO's findings in the penalty order. According to penalty order the excess stock was detected and its value was ascertained on the date of search i.e. 20/03/2015 According to AO the excess stock was found as a result of search opera ions conducted on 20/03/2015. On careful perusal of panchnama prepared on 20/03/2015, I however find that the said panchnama does not contain an annexure giving particulars of the inventory found and valued by the search party on the date of search. There is nothing in the assessment order or in the penalty order from which one can infer that in the course of search any inventory inspection was carried out so as to determine excess stock, held by the assessee on the date of search. n the contrary I find that on Page-2 of the assessment order, the AO extracted from the Notes on Accounts given by the auditor which certified that the surplus stock of leather measuring 13,56,456 sq ft Rs.6,04,95,915/ - was found during the course of physical verification of inventory during the months of January/February 2015 and this was subsequently disclosed in the statement recorded in the proceedings u/s 132 of the Act and has been duly accounted for in books of accounts. It is further noted from the submissions of the A/R and also from the documents on record that in the month of January/February 2015, the Units-in-charge of the appellant company were instructed to conduct comprehensive physical verification of the inventory held at different manufacturing locations and report the differences, if any and also to identify & report quantities of unusable& obsolete items. Accordingly stock taking exercise was carried out at different manufacturing locations in February /March 2015 and detailed inventory inspection reports prepared at these locations were forwarded to the Head Office in Kolkata in first week of March 2015. The inventory found on physical inspection was compared with the stock records and the valuation 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 Rs6,04,95,915/-. 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 the respective unit heads wherein they had reported finding of excess quantities of inventory on 4 I.T.A No. 2128/Kol/2017 A.Y 2015-16 M/s. Industrial Safety Products P.Ltd.
physical inspection. The said seized papers also included the inventory valuation statement prepared at the Head Office and the instructions issued for incorporating necessary entries for correction of stock records. It therefore appeared that the documents indicating excess inventory of material came to the knowledge of the Investigating Officer only on 05/05/2015 when the search was resumed and the related documents were found and seized. I also find that with reference to the document» found in the course of search the assessee's explanation was recorded by the authorized officer only on 05/05/2015. In his written statement, the assessee had put forth its explanation with reference to the documents found relating to excess inventory. These documents considered cumulative therefore lead to conclusion that the Investigating Officer did not conduct inventory inspection on the date of search i.e 20/03/2015 as alleged by the AO in the impugned order. In fact neither in the panchanama there is any reference to the inventory inspection nor even in the order u/s. 143(3), the AO has claimed that excess inventory was found or detected only as a result of the search of the search by the Investigation tem. On the contrary the material information available in the records showed that the inventory inspection was conducted by the assessee prior to the date of search and even the instructions for incorporating the necessary adjustmententries were issued prior to the search and all the relevant documents in this regard were found in the course of search conducted on 05/05/2015 which was beyond 31/03/2015 being the last date of the previous year. In view of the foregoing facts therefore I find that the AO's finding in impugned penalty order that excess stock was detected on 20/03/2015 and it was as a consequence Or search is factually incorrect. On the contrary I find that the entries regarding excess stock were incorporated in the stock, records much prior to the search conducted on 05/05/2015 and therefore I find merit in the A/R's submissions that the assessee had suo moto incorporated the excess stock in its books in the normal course of its business and therefore the sum of Rs. 6,04,95,915/- cannot be considered to be 'undisclosed income'.
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- 5 I.T.A No. 2128/Kol/2017 A.Y 2015-16 M/s. Industrial Safety Products P.Ltd.
(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 to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted.]
If one examines the aforesaid definition in the context of the facts obtained in the appellant's case then I find that the stock inspection report came to the knowledge .of the Investigation Department and it was seized only on 05/05/2015. It therefore appears that neither the IT Department w was aware of its content nor assessee's statement in respect of inventory inspection exercise was recorded by the Authorized Officer prior to such date. In any business organization which maintains substantial inventory, conducting of physical inventory inspection is an ordinary feature. Any discrepancies found on physical inspection vis-a- vis inventories as 'per stock records are then adjusted at periodic intervals. In the appellant's case after such exercise was conducted in the month of February 201 5, necessary adjustment entries in the stock records were made by the assessee prior to the date of search on 05/05/2015 when the relevant documents were found & seized. At the time when the relevant documents concerning inventory inspection were seized by the authorized officer, entries in the stock records incorporating the excess stock had already been made. In such factual background therefore I find that the value of excess stock found on physical inspection did not come within the ambit of the expression 'undisclosed income' defined for the purposes of Section 271AAB of the Act. I also note at save & except the inventory inspection and valuation statements which were suomoto prepared by the assessee prior to the date of search, no other incriminating evidence or material was found or unearthed which would in any manner establish that such excess stock was acquired out of -undisclosed sources. In the circumstances therefore I hold that excess inventory found on physical inspection in the course of stock taking inspection and which was accounted in the appellant's stock records did not represent assessee's undisclosed income for which penalty u/s 271AAB could be levied.
I further find that the entire tax along with interest due on the returned income of Rs.6,59,23,926/ -; was fully paid by the assessee prior to the filing of return. It appeared that the total Income was assessed at 6 I.T.A No. 2128/Kol/2017 A.Y 2015-16 M/s. Industrial Safety Products P.Ltd.
Rs.6,62,16,740/- which inter alia included income of Rs.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 Rs.2,92,805/- out of business promotion expenses. The tax of Rs.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 Rs. 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.”
Aggrieved, the revenue has preferred this appeal and the assessee has preferred an application under Rule 27 of the Income Tax Appellate Rule 1963.
We first of all will take up the Revenue’s appeal wherein it has objected to the relief allowed by the ld. CIT(A) by deleting the penalty on the ground that the income of Rs.6,04,95,912/- with reference to which penalty was levied did not constitute “undisclosed income”. Before dealing with the submissions of the parties, it is pertinent to set out in brief the facts leading to the levy of penalty. A search u/s 132 of the Act was conducted at the assessee’s premises on 20-03-2015. On that date the search was temporarily concluded and certain documents and other material was placed under a seal in accordance with Section 132(3) of the Act. The search thereafter, was conducted and concluded on 5/6 May 2015. On the first day of search i.e. 20-03-2015, the assessee’s Director had deposed before the Department u/s. 132(4) admitting income of Rs. 15 crores (on behalf of the group companies/directors). On 05-05-2015 when the documents placed in joint custody were seized by the authorized officer, he noticed that the seized documents inter alia included reports prepared by the internal team of the assessee who conducted physical verification of the stock at various manufacturing locations belonging to the assessee company as also M/s New Horizon Limited, an associate company. With reference to the stock verification reports, statement of Shri Gopal Naredi, principal promoter of both the companies was recorded by the authorized officer in terms of Section 132(4). In the said statement which was followed by an explanatory statement dated 05-05-2015 available at Pages 7 I.T.A No. 2128/Kol/2017 A.Y 2015-16 M/s. Industrial Safety Products P.Ltd.
34 to 44 of the paper book, the Director explained that as a matter of internal control the instructions were issued in January/February 2015 to the respective Unit Heads to carry out the physical inspection of the raw materials and other stock at respective locations and reconcile the stock physically found with the stock records. The Unit Heads were also directed to identify the slow moving and damaged stock and take steps to dispose such stock. It was clarified by the Director that the internal teams conducted physical inspection of stock in February 2015 and details of the stock found on physical inspection was communicated to the head office at Kolkata in the month of March 2015. Copies the inventory inspection reports as seized by Department on 05- 05-2015 bearing identification mark NHL/PO/1 are at Pages 49 to 59 of the paper book. As per 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 Rs.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 statement, Shri Naredi admitted that the total value of excess stock was Rs.10,75,50,362/- of which Rs.6,04,95,912/- belonged to the assessee company and the remaining Rs.4,70,54,450/- belonged to M/s New Horizon Limited. Subsequent to submission of the stock inspection report, the excess stock found was incorporated in the stock records of the assessee for the FY 2014-15 and accordingly in the closing stock disclosed in the annual audited financial statements for the year ended 31-03-2015, the value of excess stock found was credited to the P&L Account of the relevant year. Accordingly in the income returned for the AY 2015-16, the 8 I.T.A No. 2128/Kol/2017 A.Y 2015-16 M/s. Industrial Safety Products P.Ltd.
assessee took into account the excess value of stock. In Note No. 37 of the audited balance sheet, the auditor made the following disclosure, which the AO incorporated in his order u/s 143(3).
“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 Rs.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"
At the time of hearing of the appeal, the ld. CIT, DR assailed the order of the ld. CIT(A) on various grounds. According to him, such stock of leather would not have come to light but for the search u/s 132 conducted by the Department on 20-03- 2015 and 05-05-2015. He submitted that in the statement u/s 132(4) of the Act, the Director of the assessee had himself admitted that the seized documents pertained to excess stock which was not recorded in the books and therefore he had offered to pay tax on such income while filing the return for the AY 2015-16. The very fact that the stock found in such large quantity was not recorded in the stock records clearly substantiated the AO’s finding that value of such excess stock was nothing but undisclosed income which got unearthed only as a consequence of search conducted on 20-03-2015. The ld. CIT, DR claimed that if the interpretation of the ld. CIT(A) of the expression ‘undisclosed income’ 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 9 I.T.A No. 2128/Kol/2017 A.Y 2015-16 M/s. Industrial Safety Products P.Ltd.
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.
Per contra, Shri Damle, the ld. AR fully supported the order of the ld. CIT(A). He submitted that the ld. CIT, DR was factually wrong in claiming that the excess stock would not have been found but for the search conducted by the Department. Drawing attention to the panchanama as also the discussion in the assessment order, he submitted that at no time either in the course of search or thereafter did the authorized officers of the Department conducted physical verification of stock consequent to which the excess quantities of raw material were found. On the contrary the stock inspection reports came to the notice of the authorized officer only on 05-05-2015 when the search resumed. Drawing attention to the audit report which the AO reproduced in the assessment order, the ld. AR submitted that the assessee by then had already incorporated value of excess stock in its stock records as well as financial books for the year ended 31st March 2015. He therefore submitted that much prior to the date on which the authorized officer became aware about the seized documents bearing identification mark NHL/PO/1, which consisted stock verification reports, the assessee had already incorporated value of excess stock in its books of accounts. Drawing attention to the provisions of Section 227 of the Companies Act, 1956 and the rules framed thereunder, requiring the auditors to furnish report on specified issues, he submitted that preparation of physical stock verification report was a regular feature of book keeping of any body corporate and therefore the stock inspection reports which the internal team of the assessee prepared prior to search constituted “any other document” which was maintained in the regular course of business. He submitted that the seized documents found in the course of search established beyond any doubt that the excess quantity of stock was detected in the course of physical verification conducted on 28-02-2015 i.e. much prior to the date on which the search proceedings were initiated. The ld. AR relied on the order of the coordinate Bench of this Tribunal in the case of assessee’s associate company viz., M/s New Horizon Ltd (supra), wherein on the identical facts this Tribunal held that the excess stock of 10 I.T.A No. 2128/Kol/2017 A.Y 2015-16 M/s. Industrial Safety Products P.Ltd.
Rs.4,70,54,450/- did not constitute ‘unexplained investment’ but constituted its ‘business income’. He therefore urged to uphold the order of the ld. CIT(A).
We have given our thoughtful consideration 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 Rs.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 Rs.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 officers of the Department had conducted physical inspection of the stock because of which excess quantities of raw leather was detected and consequent to which the additions were made towards undisclosed stock. In fact we find that in the assessment order the AO himself assessed the sum of Rs.6,04,95,912/- on the ground of ‘undervaluation’ of stock and not as value of ‘undisclosed stock’. We also note that in support of inclusion of Rs.6,04,95,912/- in the assessed total income, the AO merely referred to the auditors’ note in the audited annual financial account where the auditor certified that the surplus stock of leather measuring 13,56,456 square feet of Rs.6,04,95,912/- found during the course of physical verification of inventory during the month of February 2015 was accounted for in the books of accounts for the FY 2014-15. We therefore find merit in the ld. AR’s contention that well before the search on 20.03.2015, the assessee had internally conducted stock taking exercise and detected the discrepancy in stock and the same was reported to the assessee’s managing director on 18-03-2015 i.e. well before the commencement of search on 20-03-2015. We also note that the seized records 11 I.T.A No. 2128/Kol/2017 A.Y 2015-16 M/s. Industrial Safety Products P.Ltd.
revealed that prior to commencement of search, the MD of the assessee had issued instructions to the respective unit heads to reconcile the stocks with records and incorporate the difference in the company’s books for the financial year ending on 31- 03-2015. All these facts considered cumulatively show that difference in stock of Rs.6,04,95,912/- had been identified by the internal team of the assessee itself much prior before the search commenced on 20-03-2015. We note that although the internal stock inspection documents were found on 20-03-2015, these were taken note of by the authorized officer only in the course of search which resumed on 05-05-2015. Statement of assessee’s managing director which was recorded u/s 132(4), in no way changed the facts as narrated above and thus, the difference in stock of Rs. 6,04,94,125/- cannot be called as ‘undisclosed income’.
We find that the issue as to whether the excess stock found by the internal team of the assessee constitutes undisclosed income / unexplained investment was considered by the coordinate bench of this Tribunal in the case of assessee’s associate concern 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 Rs.10,75,50,362/- of which Rs.6,04,95,912/- belonged to the assessee company and the remaining Rs.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 Rs.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 submissions and also perused the relevant material available on record. It is observed that physical 12 I.T.A No. 2128/Kol/2017 A.Y 2015-16 M/s. Industrial Safety Products P.Ltd.
verification of stock was carried out by the assessee-company in the month of January and February, 2015 as a matter of internal control and surplus stock of Rs.4,70,54,450/- found on such physical verification was duly incorporated by the assessee-company in its books of account in the month of March, 2015 itself. A search under section 132 of the Act was conducted in the case of the assessee and the same commenced on 20.03.2015 was temporarily concluded when Prohibitory Order was issued. The said Prohibitory Order then was revoked and the search was commended on 05.05.2015 when the statements prepared in the month of January and February, 2015 showing excess stock on physical verification was found by the Searched Team. It is thus not a case where this surplus stock can be said to have been found as a result of search representing any undisclosed income of the assessee. On the other hand, the physical verification of stock was carried out by the assesese- company on its own as a matter of internal control in the month of January and February, 2015 well before the search and the surplus stock found on such physical verification having been accounted for by the assessee-company in its books of account in the month of March, 2015 itself, the same, in our opinion, cannot be treated as unexplained investment of the assessee, which is chargeable to tax under section 69. Keeping in view all these facts of the case, we are of the view that the amount in question representing excess stock found on physical verification carried out by the assessee-company on its own well before the search action and duly accounted for in the books of account of the assessee-company constituted its business income. As noted by the ld. CIT(Appeals) in his impugned order, the Assessing Officer himself in the case of M/s. Industrial Safety Products Pvt. Limited, a sister concern of the assessee had brought to tax the value of similar excess stock in identical facts and circumstances as regular business income of the assessee. We, therefore, find ourselves in agreement with the ld. CIT(Appeals) that the value of surplus stock in the facts and circumstances of the assessee’s case did not represent assessee’s unexplained investment under section 69 and it constituted its regular business income for the year under consideration.”
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 13 I.T.A No. 2128/Kol/2017 A.Y 2015-16 M/s. Industrial Safety Products P.Ltd.
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.
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 statement u/s 132(4), it was not recorded in the books of accounts at the time of search. In this regard, we note that the assessee is a body corporate who is required to maintain and prepare its accounts in conformity with the provisions of the Companies Act. These accounts are required to be audited and the Auditor of the company is required to furnish his report in the manner prescribed in Section 227 of the Companies Act, 1956 and the rules made thereunder. We find that the Central Government has prescribed the Form of auditor’s report in which the auditor is required to report his findings on the matters specified in the Order issued by the Central Government. In Para (ii)(a), (b) & (c) of the notified order, the Auditor is required to give his report on the following matters:
(a) whether physical verification of inventory has been conducted at reasonable intervals by the management;
(b) are the procedures of physical verification of inventory followed by the management reasonable and adequate in relation to the size of the company and the nature of its business. If not, the inadequacies in such procedures should be reported;
(c) whether the company is maintaining proper records of inventory and whether any material discrepancies were noticed on physical verification and if so, whether the same have been properly dealt in the books of accounts.
From the above we note that the auditor has to certify as to whether the physical verification of the inventory is conducted by the company at reasonable intervals and whether the procedures followed are reasonable and adequate. The auditor is also required to report whether any material discrepancies were noticed on physical verification and whether they were properly dealt with in the books of accounts. From the Form of the audit report prescribed by the Central Government, we 14 I.T.A No. 2128/Kol/2017 A.Y 2015-16 M/s. Industrial Safety Products P.Ltd.
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.
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. The AO added the difference in stock to the total income of the assessee and levied penalty u/s 271(1)(c) treating it to be ‘unexplained investment’ of the assessee. On appeal the coordinate Bench of the Tribunal at Bangalore found that this difference was noted as a consequence of the information provided by the assessee and that it was a not a case where undisclosed stock was detected at the time of search on taking physical inspection. The Tribunal further observed that no case was made out by the Revenue that the excess stock represented purchases made outside the books of accounts. It further held that the higher value of stock shown the books at the close of the relevant year constituted opening stock of the subsequent year and therefore the entire exercise was tax neutral. For the reasons as aforesaid the Tribunal deleted the penalty levied by the AO in respect of addition made on account of excess stock. On appeal by the 15 I.T.A No. 2128/Kol/2017 A.Y 2015-16 M/s. Industrial Safety Products P.Ltd.
Revenue u/s 260A, the Hon’ble Karnataka High Court upheld the order of the Tribunal and SLP there against has been dismissed by the Hon’ble Supreme Court on 15-04- 2019.
For the foregoing reasons therefore we do not find any infirmity in the order of the ld. CIT(A) holding that the sum of Rs.6,04,95,912/- did not constitute ‘undisclosed income’ of the assessee within the meaning of the said expression as set out in Section 271AAB of the Act. Consequently therefore the ld. CIT(A)’s action of deleting the penalty is upheld.
Since we have upheld the order of the ld. CIT(A), the assessee’s application in terms of Rule 27 objecting to the validity of the initiation of penalty proceedings by issue of notice under Section 274 read with Section 271 is only academic in nature and therefore we do not deem it necessary to adjudicate the same separately.
In the result, the appeal of the Revenue is dismissed.
Order Pronounced in the Open Court on 31st October, 2019
Sd/- Sd/- Arjun Lal Saini A.T. Varkey Accountant Member Judicial Member Dated 31st -10-2019
PP(Sr.P.S.) Copy of the order forwarded to: 1. Appellant/Revenue: The ACIT, CC 3(3) Kolkata Aaykar Bhawan Poorva, E M Bye Pass 110 Shanti Pally, 4th Fl., Kolkata-107. 2 Respondent/Assessee: M/s. Industrial Safety Products Pvt. Ltd P-33 CIT Road, Scheme VIM, Kolkata-54. 3. CIT, 4. CIT(A), Kolkata. 5. DR, Kolkata Benches, Kolkata **PP/SPS True Copy By By Order Assistant Registrar ITAT Kolkata
16 I.T.A No. 2128/Kol/2017 A.Y 2015-16 M/s. Industrial Safety Products P.Ltd.