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TMI Blog2019 (11) TMI 207X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 effective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sclosed stock in his books-ofaccounts. 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. 4. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32 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 Rs. 6,04,95,915/-. On completing stock taking exercise the instructions were issued to the respective unit heads for incorporating correction entries in the stock records b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 decidi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nitiated. 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 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). 9. 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove and thus, the difference in stock of Rs. 6,04,94,125/- cannot be called as 'undisclosed income'. 10. 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 int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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." 11. 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 is squarely applicable according to which value of excess stock cannot be considered to be 'undisclosed income' and consequently therefore no p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 14. 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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