By Jagdish T. Punjabi | Prachi Parekh
Chartered Accountants | Devendra Jain
Advocate
18 Ace Steel Fab (P) Ltd. vs. DCIT TS-311-ITAT-2021 (Del) A.Y.: 2010-11; Date of order: 12th April, 2021 Section 271AAA
Penalty – Search case – Specified previous year – Addition made by taking the average gross profit rate cannot be considered to be assessee’s undisclosed income for the purpose of imposition of penalty u/s 271AAA
FACTS
In the course of a search operation u/s 132(1), the value of stock inventory on that particular day was found to be lower than the value of stock as per the books of accounts. The A.O. concluded that the assessee made sales out of the books. He called upon the assessee to show cause why an addition of Rs. 15,53,119 be not made by taking a gross profit rate of 4.6% on the difference of stock of Rs. 3,13,12,889. In response, the assessee submitted that the discrepancy in stock was only due to failure of the accounting software. The A.O. did not accept this contention and made an addition of Rs. 11,52,314. The quantum appeal, filed by the assessee to the CIT(A), was dismissed.
The A.O. imposed a penalty u/s 271AAA which was confirmed by the CIT(A).
Aggrieved by the order of the CIT(A) confirming the imposition of penalty u/s 271AAA, the assessee preferred an appeal to the Tribunal.
HELD
The Tribunal noted that the question for its consideration is whether an addition made by taking the average gross profit rate can be considered to be the assessee’s undisclosed income for the purpose of imposition of penalty u/s 271AAA.
Although the A.O. had not accepted the contention of the assessee that the discrepancy in stock was due to malfunctioning of the ERP software, the assessee had demonstrated with evidence that due to malfunction of the software the accounts could not be completed in time and the assessee had had to approach the Company Law Board with a petition to extend the date for adoption of audited accounts. The petition of the assessee was accepted and the offence was compounded. The Tribunal held that the assessee had a reasonable explanation for the discrepancy found in stock and due credence should have been given to this explanation. It cannot be said that the assessee had no explanation to offer regarding the difference in stock. It also noted that penalty has been imposed only on an ad hoc addition made based on average gross profit rate and does not relate directly to any undisclosed income unearthed during the course of the search. In such a situation, penalty u/s 271AAA was not sustainable, hence the Tribunal set aside the order passed by the CIT(A) and deleted the impugned penalty.
