TMI Blog2012 (11) TMI 501X X X X Extracts X X X X X X X X Extracts X X X X ..... 0kgs 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. Partly allowed in favour of assessee Discrepancy in stock valuation – Between MIS statement and books - No variation in quantities mentioned but only in valuation of the stock - Difference arose due to different valuation rate adopted – Held that:- Just because MIS statement prepared by factory manager was found, no addition can be made without examining whether the rates adopted on the quantity was not according to the accounting principles. No such exercise was undertaken by AO. Since assessee accounted the stock according to the principle of accountancy being followed and certified by management and auditors, we agree with the argument that variation cannot be brought to tax as undisclosed income on the basis of difference in valuation in books. In favour of assessee Deduction u/s 80HHC – AO argued that there are sales proceeds includes proceeds other then export proceeds - Held that:- Where book results can neithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( b ) Stock of Work in Process Rs. 11,75,608 ( c ) Stock of Raw Materials Rs. 71,700 Rs. 62,07,542 During the search proceedings, the search party verified the stock records of your appellant The stock as per the stock records has been recorded by the search party in Annexure 'D' of the Panchanama. The physical stock of your appellant at the factory premises was also verified by the search party. The physical stock of finished products, raw materials and work in process, has been mentioned by the search party in Annexures 'A2', 'B' and 'C' respectively of the Panchnama. (a) Stock of finished products : Rs. 49,60,234 The stock of finished products found by the search party during the course of search proceedings was as under: Sr. No. Description No. of Barrels Wt. of material in each barrel (in Kgs.) Qty. (in Kgs.) Rate (Rs.) Value (Rs.) 1 P.T.B.C.H.A. 321 180 57,780 58.78 39,74,108 2 O.T.B.C.H.A. 42 180 7,560 130.44 9,86,126 Against the above stock, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 foreign parties. Thus the above mentioned goods are not taken in finished goods, till the approval received from foreign parties. Thus the above goods are not shown in excise records as finished goods." Your appellant made further submissions on this issue vide its letter dated 27.10.99 as under: "This has been the practice followed by the company from many years. We are enclosing the finished goods excise records of our company for the year ended 31.03.1997 and 31.03.1998 where the excise records show Nil stock but the balance sheets show stock of finished goods: Year Ended Excise Records copy enclosed Balance Sheet Stock of finished goods 31.03.97 31.03. 97 Show NIL Product St. Acetate Qty (Kg.) (Rs.) Value PTBCH 3,590 5,43,857 PTBCHA 3,670 2,29,260 OTBCHA 22,320 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 stock of finished goods found during the search have been duly recorded by your appellant in its profit and loss account for the financial year 1997-98. The details of such sales were also provided to the learned DCIT during the Assessment proceedings vide letter dated 24th August, 1999. Therefore, it cannot be said that such stock would not have been disclosed by the appellant for the purposes of the I.T. Act. In fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever 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 158BH which read as under: "Save as otherwise provided in this Chapter, all other provisions of this Act shall apply to assessment made tinder this Chapter". Your appellant submits that nowhere in Chapter XIV-B, has it been provided that the assessee is not entitled to benefit of deductions under Chapter VI-A against undisclosed income. Therefore, your appellant is clearly entitled to the benefit of deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 Qty (Kg.) Total Value (Rs.) Catalyst A 50.9 25,450 HCO 1,850 46,250 Total 71,700 Your appellant submits that the stock records of your appellant in respect of the above two items were not verified by the search party, as on the date of search. Even in Panchnama it has not been menti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts 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. Accordingly, he treated the difference of Rs. 655,000 as undisclosed income on account of unaccounted closing stock for Assessment Year 1997-98. Your appellant submits that nowhere in the reply, the production officer has categorically stated that the value on 31.3.97 as Rs. 1,12,15,000. The production officer has merely sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earch 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, therefore, cannot subscribe to the observations of the revenue authorities, that this is a case of undisclosed income and could be assessed under Chapter XIVB. Chapter XIVB is a specific chapter for assessment of "undisclosed income" of the assessee. In the instant case, except in the case of raw materials d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,780 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 showed the excise records as on 31.3.97 (before search) and 31.3.98 (after the search) where in excise records showed Nil stock but closing stock was reflected at Rs. 27,30,892 and Rs. 9,58,781/-respectively (details in page 4 of this order). Further explained that the finished goods are exported to an extent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, 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 variation, which was less than 5% of the total valuation. The explanation was not accepted. Learned Counsel in the course of arguments referred to MIS statement seized (APB 16) and valuation in Balance Sheet (schedule 17.1 at APB 96) and explanation given to AO at Page 32. As can be seen the MIS statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 which show export proceeds being received by the assessee, we feel that the deduction as claimed u/s 80HHC should be allowed to the assessee, within the premise of section 158BH. The order of CIT(A), is thus set aside on this issue and we direct the AO to allow the deduction u/s 80HHC as claimed by a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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