2021 (4) TMI 497 - AT - Income Tax

Penalty u/s 271AAA - undisclosed income recovered in search operation u/s 132 - estimation of Gross Profit @ 3.68% - assessment was completed at an income on account of estimation of gross profit rate due to difference in stock as per the books of accounts and the stock as per the physical inventory taken - contention of the assessee that the discrepancy in stock was due to malfunction in the ERP software - HELD THAT - Though, assessee's explanation was not accepted by the Assessing Officer, the assessee has demonstrated with evidence that due to malfunction of the software, the accounts could not be completed in time and that the assessee had to approach the Company Law Board with a petition to extend the date for adoption of audited accounts. This petition was accepted by the Company Law Board and the offence was compounded. Therefore, in our considered opinion, the assessee had a reasonable explanation for the discrepancy found in stock and due credence should have been given to this explanation. Therefore, it cannot be said that the assessee had no explanation to offer regarding the difference in stock. Further, the amount on which the penalty has been imposed is only an ad-hoc addition based on average gross profit rate and does not relate directly to any undisclosed income unearthed during the course of search. In such a situation, it is our considered opinion that the imposition of penalty u/s 271AAA is not sustainable - Decided in favour of assessee.

Summary

Issues:
Imposition of penalty under section 271AAA for undisclosed income based on estimation of gross profit rate.

Analysis:
The appeal was against the penalty of ?1,15,230 imposed under section 271AAA of the Income Tax Act, 1961. The case involved a search and seizure action under section 132 of the Act at various business premises. The assessee had filed the return after the due date, declaring income at Nil with a current year loss. The assessment was completed at an income of ?11,52,314 due to a difference in stock as per the books of accounts and physical inventory. The penalty was imposed at 10% of the alleged undisclosed income. The assessee challenged the penalty on various grounds, including the lack of undisclosed income discovery and the ad-hoc nature of the addition.

The Authorized Representative argued that the discrepancy in stock was due to a technical problem in the new ERP software, and there was no undisclosed income. The AR emphasized that the penalty was unjustified as it was based on an ad-hoc addition using the average gross profit rate. The AR also presented evidence of the assessee's bonafide actions, such as seeking an extension for adopting annual accounts due to software issues.

The CIT-DR contended that the penalty was rightly imposed as the assessee had not rectified the stock discrepancy existing for three years. The CIT-DR argued that the issue arose from data migration, not malfunction, justifying the penalty.

The Tribunal analyzed the facts and relevant legal provisions. It noted that the penalty under section 271AAA requires undisclosed income, which was not directly established in this case. The Tribunal found that the addition based on gross profit estimation was ad-hoc and not linked to any undisclosed income discovered during the search. Considering the technical software issue and the bonafide actions of the assessee, the Tribunal concluded that the penalty imposition was unsustainable. Thus, the Tribunal allowed the appeal and deleted the penalty.

In conclusion, the Tribunal set aside the penalty imposed under section 271AAA, emphasizing the lack of undisclosed income discovery and the ad-hoc nature of the addition based on gross profit estimation. The Tribunal's decision favored the assessee, highlighting the reasonable explanation provided for the stock discrepancy and the absence of direct evidence of undisclosed income, leading to the penalty deletion.