Excess Stock Can’t be Treated as Undisclosed Income if Assessee Identified Diff. Much Prior to Commencement of Search

Case Details: PCIT vs. Industrial Safety Products (P.) Ltd. - [2023] 154 taxmann.com 433 (Calcutta)

Judiciary and Counsel Details

• T. S. Sivagnanam, CJ. & Hiranmay Bhattacharyya, J.
• Smarajit Roy Chowdhury & Soumen Bhattacharya, Advs. for the Appellant.
• Ranjeet Kumar Muraka, Sr Adv., Vivek Muraka & Dibanath Dey, Advs. for the Respondent.

Facts of the Case

A search was conducted on the premises of the assessee’s group companies. Assessing Officer (AO), while completing the assessment for the relevant assessment year, issued a show cause notice to the assessee, calling upon it to explain the under-valuation of physical stock.

In response, the assessee stated that the excess stock of leather found during the physical verification of inventory from January to February 2014 had been properly accounted for in the books for the financial year 2014-15, and the same had also been disclosed.

Rejecting the explanation offered, AO treated under-valued stock as undisclosed income.

On appeal, the CIT(A) deleted the additions made by AO. Aggrieved-AO filed an appeal to Calcutta High Court.

High Court Held

The High Court held that no material had been brought on record by the AO to show that during the search, the authorized officer had conducted a physical inspection of the stock, because of which excess quantities of raw leather were detected. Consequently, additions were made towards undisclosed stock.

It was found that well before the search, the assessee had internally conducted a stock-taking exercise and detected the discrepancy in stock, and the same was reported. Before the commencement of the search, the managing director had instructed the respective unit heads to reconcile the stocks and records and incorporate differences in the books for the said financial year.

Further, the assessee is a corporate body that is required to maintain and prepare its accounts in conformity with the provisions of the Companies Act. The accounts must be audited, and the auditor must furnish his report in the manner prescribed. After taking note of the auditor’s report as well as the stock inspection report, it was found that such an inspection report was prepared at the instance of the assessee as a matter of internal control, and the same was drawn up much before the date of search.

Therefore, the difference in stocks had been identified by the internal team of the assessee itself much prior to the commencement of the search. Accordingly, the action taken by AO wasn’t correct.

List of Cases Reviewed

• Pr. CIT v. Deccan Mining Syndicate (P.) Ltd. [2019] 105 taxmann.com 135/263 Taxman 341 (SC) (para 13);
• Food Corporation of India v. State of Punjab AIR 2001 SC 250 (para 13);
• Amrit Food v. CCE 2006 taxmann.com 857 (SC) (para 13);
• CIT v. SSA’s Emerald Meadows [2016] 73 taxmann.com 241 (Kar.) (para 13);
• CIT v. Manjunatha Cotton & Ginning Factory [2013] 35 taxmann.com 250/218 Taxman 423/359 ITR 565 (Kar.) (para 13) and
• Pr. CIT v. Brijendra Kumar Poddar [ITAT No. 215 of 2018, dated 23-11-2021] (Cal.) (para 13) followed.

List of Cases Referred to

• Pr. CIT v. Deccan Mining Syndicate (P.) Ltd. [2019] 105 taxmann.com 138/263 Taxman 341 (SC) (para 9),
• Food Corporation of India v. State of Punjab AIR 2001 SC 250 (para 11),
• Amrit Food v. CCE 2006 taxmann.com 857 (SC) (para 12),
• CIT v. SSA’s Emerald Meadows [2016] 73 taxmann.com 241 (Kar.) (para 13),
• CIT v. Manjunatha Cotton & Ginning Factory [2013] 35 taxmann.com 250/218 Taxman 423/359 ITR 565 (Kar.) (para 13),
• CIT v. SSA’S Emerald Meadows [2016] 73 taxmann.com 248/242 Taxman 180 (SC) (para 13) and
• Pr. CIT v. Brijendra Kumar Poddar [ITAT No. 215 of 2018, dated 23-11-2021] (para 13).