When excess stocks attract a penalty

Surveys are one way to find out if taxpayers are discharging their income-tax obligations correctly. They help gather information to detect tax evasion, broaden the tax base, check whether the books of account are correctly maintained, collect information concerning taxpayers, do a surprise check of cash inventory, and so on. In brief, a survey under the Income-Tax Act, 1961 (Act) means collection of data or information for the purposes of the Act.

Section 133A of the Act confers powers of survey on specified tax authorities, which can be conducted at places where assessees carry on their business or profession or where books of account or other documents, cash or other valuable articles or things relating to the business or profession are kept. One of the areas of enquiry during surveys is to verify the accuracy of inventories (stocks) and whether the same are correctly accounted for in working out the profit and gain of the business or profession for levy of income-tax.

No explanation

There are instances when, during surveys, excess stocks vis-à-vis stocks recorded in the books of account are discovered, concerning which the taxpayers are not able to give an explanation. Apparently, such excess stocks represent undisclosed income of the assessees. Can a penalty for concealment of income u/s 271(1)(c) of the Act can be imposed in respect of such excess stocks found during surveys?

Sec 271(1)(c) of the Act provides for levy of penalty for concealment or for furnishing inaccurate particulars of income. Assessees, when confronted with the situation of excess stock, offer the same for taxation by filing revised returns and claim that penalty for concealment u/s 271(1)(c) of the Act cannot be imposed on them.

Three possibilities

The position of excess stock found during a survey, from the point of view of concealment penalty, can be examined from the following angles:

Information about excess stock may relate to the period for which income-tax return has been filed and assessment completed. In such a situation, in the absence of any plausible or satisfactory explanation, penalty for concealment can be levied on the excess stock detected during survey and found unrecorded in the books of account, on the basis of which a return has been filed and assessment completed.

The excess stock found may relate to the period for which return has been filed, but the time limit for notice u/s 143(2) of the Act has not expired. If the same has not been accounted for in the return filed, then the excess stock not declared will be liable for penalty, despite the fact that the assessee has declared such income in the revised return filed. In the case of K.C. Builders v. Asst. Commissioner (2004) 265 ITR 562 (SC), the court decided that penalty for concealment is leviable, where revised return is filed after detection of income suppressed during survey.

The excess stock information may relate to the period for which return has yet to be filed. In such a situation, if the income represented by excess stock is included in the return filed after survey, then there would be no concealment case and penalty u/s 271(1)(c) cannot be imposed.

(The author is a former Chairman, CBDT.)

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