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TMI Blog2012 (11) TMI 501X X X X Extracts X X X X X X X X Extracts X X X X ..... ling for detailed explanation from the assessee, with regard to inter-se discrepancies on stock quantities of Raw Materials, Work-in-Progress and finished products made an addition of Rs. 62,07,542/-, in the assessment framed as undisclosed income u/s 158BC. The additions have been made u/s 69B of the Income Tax Act. 5. The assessee is in the business of manufacturing Aroma & Specialty Chemicals at its factory premises located at Koregaon Bhima, Taluka Shirur, Distt. Pune, and exports thereon having its registered office at Bhandup (W), Mumbai. 6. In the proceedings for assessment of undisclosed income under Chapter XIVB of the I.T. Act, the assessee company made the following submissions before the AO and also reiterated the same before the CIT(A) (as per SOF before the CIT(A)), which are reproduced as under : "1. Stock of finished products, work in process and raw materials treated as undisclosed income - Rs. 62,07,542. The alleged undisclosed income of Rs. 62,07,542 is bifurcated as under: (a) Stock of Finished Products Rs. 49,60,234 (b) Stock of Work in Process Rs. 11,75,608 (c) Stock of Raw Materials Rs. 71,700 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of material in process" in Annexure "C". What is your say for this disparity (Difference)? Ans: PTBCHA of 57,780 Kg. and OTBCHA of 7,560 Kg. is not 100% pure that can be delivered as per orders. The same is to be given minor treatment i.e. purification, blending, purging by poring Nitrogen gas etc. The difference may be for reason. During the assessment proceedings also, your appellant was asked to explain the variation between the stock found by the search party and the stock recorded in excise records. The appellant filed its explanation vide its letter dated 11.8.99. The explanation of the appellant is reproduced herein below: "The above goods are treated as finished goods for MIS purpose, but for excise records these goods are not treated as finished goods, because these goods are meant for exports against pre-shipment sample approval from the foreign parties. We send pre-shipment sample to the foreign parties for approval. If they approve the goods, the goods are shown in excise records as finished goods and dispatched to the parties. In case some objection is raised by the foreign parties, the goods are further processed, washed and blended to the requirement of the forei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. Your appellant submits that the value of the finished products found during the search cannot be treated as undisclosed income of your appellant in view of the definition of the undisclosed income given in Section 158B(b). The definition of undisclosed income is reproduced as under: "Undisclosed income includes any money bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property winch has not been or would not have been disclosed for the purposes of this Act." Your goodself will observe from the above definition that the undisclosed income is an income which has not been or would not have been disclosed for the purposes of the Income-tax Act. The words "would not have been disclosed" refer to those assets or transaction for which occasion for disclosure did not arise - say, in a case where the asset is acquired in a period for which accounting year is not over. Your appellant submits that the sales made out of the stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he date of search cannot be treated as undisclosed income of the appellant merely on the premise that such stock was not recorded in the excise records of the appellant. The contention of the learned DCIT that the goods must find its place either in raw material stock register or finished goods stock register cannot be accepted, because once the raw materials are issued for production, such raw materials can never find place in raw material register. In view of the above submissions, your appellant prays that the undisclosed income of Rs. 49,60,234 assessed by the learned DCIT in respect of value of finished goods as on the date of search should be deleted. Without prejudice to the above submissions, your appellant submits that the stock of finished goods found by the search party as on the date of search was subsequently exported out of India. The details of such export sales were furnished to the learned DCIT during the assessment proceedings. Therefore, the learned DCIT should have allowed deduction under Section 80HHC against alleged undisclosed income in respect of stock of finished goods. In this regard, your appellant draws your kind attention to the provisions of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 69B of the IT Act for Assessment Year 1998-99. Reiterating the submissions made earlier as regards the stock of finished goods, your appellant submits that such stock of work in process, though not recorded in the stock register cannot be treated as undisclosed income of the appellant for the reason that such stock is properly dealt with by your appellant while preparing its accounts as on the last day of the financial year. In view of this, the learned DCIT he directed to delete Rs. 11,75,608 being the value of work in process as on the date of the search. Without prejudice to the above submissions and reiterating the submissions made earlier as regards the stock of finished goods, it is prayed that the learned DCIT be directed to allow due deduction under section 80HHC on the undisclosed income of Rs. 11,75,608. Moreover, it is submitted that the learned DCIT has not mentioned in his order that the stock work in progress treated as undisclosed income as on the date of search will be allowed as opening stock to your appellant in its normal assessment for the remaining period of Assessment year 1998-99. (c) Stock of Raw Materials Rs. 71,700 Description ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statement. The following explanation was given by your appellant vide letter dated 11.8.1999: "The stock statement found at the time of search is only a MIS statement prepared by the Factory Manager every month to give an indication of the inventory situation. The method of stock valuation followed in financial accounts is weighted average for raw materials, packing materials and stores and spares. The rates taken in the MIS statement found at the time of search are current estimated rates to reflect approximate position of inventory. Thus, there is hound to be difference between the stock statement found at the time of search and financial accounting statement. Moreover, the difference is only 5%." The above contention of your appellant was not accepted by the learned DCIT. The learned DCIT in his order has mentioned that the production officer has stated that the value of closing stock as on 31.3.97 was Rs. 1,12,15,000. He never stated that this is a MIS statement prepared by the factory manager to give an indication of the inventory situation. According to the DCIT, statement of production officer is a categorical one giving the actual stock position as on 31.3.97. Accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese special provisions, the assessment of undisclosed income can be done only in the circumstance that the fact or transaction has not been entered in the books of account and not forming part of computation of income as per section 158BA(3). 12. This is a case where there are stocks found on the date of search in the quantity movement from raw material, work in progress and finished products, within the factory premises. There has been no arguments, till date either by the A.O., CIT(A) or by the DR at the time of search that there has been either excess or shortage of finished stocks which would lead to generation of undisclosed income to the assessee. There has been no argument from the revenue side that there has been any violation of either excise records, sales tax or any revenue non compliance. In fact, the entire case of the department has been built on the fact that internal, production line stock positions are at variance. 13. It is also seen that the revenue authority have not disputed the overall stock positions records, which have been found by the search party, but what has been disputed, is the inter-se stock position at various stages in the production line. We, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k of finished products in process and work-in-process. The second type is (B) stock of raw materials. The third type is (C) difference in valuation of stock as on 31.3.07. These are dealt with as under: (A) Stock of finished products and work in progress-Rs. 61,35,842/-. 15. The seizure party inventorised 57,780 kgs of PTBCHA valued at Rs. 39,74,108, 7560 kgs of OTBCHA valued at Rs.9,86,126 and stock in process of Rs. 11,75,608. In the course of search itself the production officer explained that stock register of furnished goods is kept for central excise purpose whereas 'material in processing' register listed 2.5 kgs each of the above two products. Further for the discrepancy in quantity, it was further explained that the above products are not 100% pure and require further processing. In the course of assessment proceedings, assessee further explained with the excise record details that the finished products are recorded only when products are ready for export. Pre-shipment goods pending approval are recorded for MIS purposes but not for central excise purposes as it may require further processing in case the sample was not approved. In support of the above contentions it sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s item by assessee. AO did not accept and made addition of entire amount. After considering the arguments and examining the documents placed on record, we are satisfied that the stock of catalyst A was accounted as imported catalyst at 50.9 kgs (Rs. 25,450) and stock of HCO at 1120 kgs.(Rs. 28,000). Therefore, only addition of 730kgs value of HCO was required to be confirmed. Even though assessee explanation was that the stock could be out of earlier issued for process, the same cannot be accepted in the absence of reconciliation, so to that extent the addition required to be confirmed. (C) Stock valuation as on 31.3.2007 17. An addition of Rs. 6,55,000 was made under this head on the reason that MIS statement found during the search as on 31.3.07 indicate the stock valuation at Rs. 1,12,15,000/- whereas the stock valuation was shown at Rs. 1,05,60,287/- in the books of account. There is no variation in quantities mentioned but only in valuation of the stock. It was explained that MIS statement was prepared by the factory manager on the basis of current estimates, whereas the company as a policy followed 'weighted average' for raw materials, packing materials etc. therefore the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and direct the AO to delete the addition made at Rs. 61,89,292 on stock of finished and work in process and raw material. (Rs. 61,35,842+Rs. 25450+28000). Further the valuation difference of Rs. 6,55,000 was also stands deleted. 20. The assessee is also agitating the denial of deduction u/s 80HHC by the revenue authority. 21. Deduction u/s 80HHC is based on export proceeds, therefore, in a search case, where evidence is formed to show that there are proceeds other then export proceeds, deduction can either be denied or may be restricted to the export proceeds only. But in the case at hand, there is no evidence, either found in the course of search or deduced by the revenue authority to show that this is a circumstance under which export proceeds or even the book results could be altered for the purposes of calculation of deduction u/s 80HHC. In fact, as submitted before the CIT(A), purported addition under the finished goods, were actually exported and its proceeds were realized by the assessee, of which, all the details had been furnished to the AO. 22. In such a circumstance, where book results can neither be altered nor have been rejected/altered by the revenue authority and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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