| SooperKanoon Citation | sooperkanoon.com/71830 |
| Court | Income Tax Appellate Tribunal ITAT Amritsar |
| Decided On | Nov-12-2001 |
| Judge | H Karwa, N Saini |
| Appellant | income Tax Officer |
| Respondent | Devi Dayal Rice Mills |
16th Dec., 1993, involving common issues, were heard together, so these are being disposed of by this consolidated order for the sake of convenience.
"1 On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs. 4,97,250 made on account of unexplained difference in the stock declared to the bank and declared in the trading account filed along with the return of income on the ground that the purpose for the disclosure of higher stock to the bank was to get higher cash credit limit and further that no adverse inference can be drawn if the statement given to the bank was verified by the assessee to be correct. The learned CIT(A) further erred, in holding that since there was no physical verification of the quantity and the valuation thereof by the bank authority, the difference cannot be created as assessee's income.
2. The learned CIT(A) has grossly erred in allowing the assessee's appeal. He has accorded recognition to a substandard morality on the part of the assessee to say that the higher stock had been shown with a view to obtaining higher credit facility. He has set an unhealthy judicial predecent when he held that no adverse inference can be drawn of his statement duly verified by a person. It may further be submitted that admittedly, there is cleavage in the judicial opinion on the point but preponderance on the judicial opinion is in favour of the Revenue. But the assessee's case is marked by distinction as in its case, the difference in valuation is due to the difference in the quantity of stock as shown to the bank and to the Department and not due to difference in the valuation shown to the bank and to the Department of the same stock. There is no judgment of any High Court in favour of the assessee where the difference had been found in the quantity of stock shown to the bank and to the Department.
3. It is prayed that the order of the learned CIT(A) may be vacated and that of the AO be restored.
4. That the appellant craves leave to add or amend the grounds of appeal before the appeal is heard and disposed of." 2. That addition of Rs. 50,000 sustained/made by the learned CIT(A) is most unreasonable, unjustified and based on surmises.
It is, therefore, prayed that addition of Rs. 50,000 may kindly be dropped." 4. The relevant facts related to the issue involved in brief are that during the year under consideration, the assessee derived income from the running of a rice sheller. During the assessment proceedings, the AO noticed that there was difference in the stock shown in the books of account and copies of stock statements furnished by the assessee to the bank. The AO examined the stock statement and the stook shown in the books on 30th Oct., 1989, 31st Dec. 1989 and 28th Feb., 1990, and noticed the discrepancy. The discrepancy was brought to the notice of the assessee who vide its letter stated that number of agriculturists kept their paddy in their godown to be sold on the convenient date. It was also stated that the stock was not reflected in the books till the same was sold. It was further stated that the variation of stock reflected in the books of account and in the bank statements was due to the fact that in order to avail higher limit from the bank, the stocks of agriculturists lying in assessee's godowns had also been included while filing the statement in the bank. The AO did not accept the contention of the assessee and made the addition of Rs. 4,97,250 on the basis of difference in stock.
5. In the first appeal before the learned CIT(A) it was submitted that the stock statement submitted to the bank was not subject to any verification by the bank officer. It was also pleaded that the stock position as shown to the Department was as per the inventory made at the time of close of the year and the stock position as shown to the bank was for a different purpose, since the aseessee wanted higher C/C limit for its business, the stock shown to the bank was on the higher side. It was because of the inflation in the stock shown to the bank.
The limit of the assessee was increased from Rs. 4,00,000 to Rs. 7,00,000. The bank certificate was also filed whereby it had been certified that the assessee was having a hypothecation of the stocks with the bank and the stock shown during the year 1989-90 was not physically verified. It was explained that practice of declaring higher stock to the bank was purely for the purpose of getting higher loan and availing higher cash credit limit for the purpose of business. The assessee also submitted before the learned CIT(A) that the explanation and the evidence produced at the time of assessment was not countered and no defect was found in the books of account. The reliance was also placed on the various judgments mentioned in the order of the learned CIT(A). After considering the submissions of the assessee, the learned CIT(A) observed that the stock as disclosed to the bank could not be compared with the actual stock, since the purposes for the disclosure of stock to the bank was to get higher cash credit limit, and the same cannot be made the basis for the rejection of books of account resulting into an addition. It was further observed that the addition could have been made on that ground only if there were defects and discrepancies in the books of account or the G.P. declared by the assessee was considerably low. The learned CIT(A) further observed that there was no physical verification of the quantity and the valuation thereof by the bank authority, the difference in the valuation as shown by the assessee to the bank and as per record of the assessee should not have been made the basis for the addition, however, some addition could be made on that account as the assessee was not maintaining any stock record. Accordingly, the learned CIT(A) sustained the addition of Rs. 50,000 and deleted the other additions made by the AO.6. Being aggrieved the Department is in appeal against the deletion of addition while the assessee is in appeal against the sustaining of addition of Rs. 50,000.
7. The learned authorised representative reiterated the arguments placed before the authorities below and also submitted that the books of the assessee were not rejected by the AO and it was clarified before the authorities below that all the statements submitted to the bank were estimated to get the more benefit of cash credit limit.
It was also pleaded that apart from the hypothecation of stock, collateral securities were also furnished to the bank and due to that reason physical verification of the stock held by the assessee was not carried out by the bank authorities because their interest was saved by the collateral securities which was sufficient to cover the cash credit limit granted to the assessee. The learned authorised representative further stressed that the assessee has not credited any amount in the books of account. So there was no justification in making addition under Section 69 of the IT Act. He further stated that the AO did not point out any mistake in the method of accounting employed by the assessee as well as the sales/purchases entered in the books of account. So there was no justification in making the addition. He further relied on the various judgments viz. : (7) Rose Carpet v. ITO (1989) 33 TTJ (Del) 401 (ITAT Delhi 'D' Bench).
8. In his rival submissions, the learned Departmental Representative strongly supported the order of the AO and also submitted that the assessee verified the stock statements submitted to the bank so it cannot be said that it was not in possession of the higher stock.
Therefore, the AO was justified in making the addition and the learned CIT(A) without appreciating the facts was not justified in deleting the addition.
9. We have heard both the parties and carefully gone through the material available on the record. In the instant case, it appears that the AO made the addition only on the basis of the stock statements submitted to the bank. In the instant case, it is noticed that the contention of the assessee that the stock statement furnished to the bank was inflated and that statement also included the stock of the agriculturists lying in the godown of the assessee was not controverted by the AO. It is well settled that there is a real difference between pledging and hypothecation because in the case of the pledging, the goods remain under the lock and key of the bank and, therefore, are liable to be physically checked and examined but in the case of the hypothecation such goods remain in the custody of the assessee and the physical verification of the goods hypothecated to the bank is normally not done. The figures reported to the bank authorities cannot be taken at their face value as true and correct and the AO cannot make additions on such basis. It is evident that the statements submitted to the bank were on estimate basis for hypothecation of goods and not for pledging of the goods. We accordingly see no justification on the part of the AO to make addition particularly when no apparent mistakes in the books of account maintained by the assessee, and the method of accounting employed was noticed by him. The Hon'ble Delhi High Court in the case of CIT v. Prem Singh & Co. (supra) observed as under: "The controversy before the Tribunal arose because the list of goods hypothecated to Laxmi Commercial Bank differed from the stock-in-hand as disclosed by the account books of the assessee. The ITO came to the conclusion that the extra stock disclosed in the list filed with the bank was the undisclosed income of the assessee.
The Tribunal, however, referred to the practice of filing inflated lists for the purpose of getting a loan and also referred to the fact that for the purpose of a loan the stock would be valued at market price, whereas in the books it would be valued at cost.
The Tribunal also noted that the accounting period closed on 12th April, 1977, whereas the figures obtained from the bank were as on 1st March, 1977. We think that no question of law arises as the stock indicated by the assessee's account books have been accepted by the Tribunal and this is a conclusion of fact from which no question of law arises. The petition is accordingly dismissed. No costs." In the case of CIT v. General Metal Works (supra) the Hon'ble Allahabad High Court observed as under: "The Tribunal found that the stock was merely hypothecated with the bank which mean that the goods remained in the possession and control of the assessee and that they were not physically verified at the time of hypothecation and mistake arose because part of the stock was damaged and part of it was used in manufacturing but was still erroneously hypothecated and there were delays in communication regarding stock between the branch office and the head office. The Tribunal deleted the addition. On an application to direct reference: it was held that dismissing application, that the finding recorded by the Tribunal was a pure finding of fact and the deletion of the amount added by the ITO on account of discrepancy in accounts regarding stock was justified." In the case of CIT v. Vighyan Chemicals Industries (supra), the Hon'ble Allahabad High Court observed as under: "That the Tribunal had accepted the explanation furnished by the assessee that the part of the stock pledged with the bank was that of the third party. The Tribunal having believed the version of the assessee and the evidence placed before it, in our opinion, it again does not give rise to any question of law." In the case of CIT v. Gopal Rice (supra), the Hon'ble Allahabad High Court held as under: "The assessee, a registered firm, was engaged in the business of running a rice mill. The stock of paddy was shown as 4,459 quintals in the statement sent to the bank whereas in the levy register only 2,569 quintals were recorded. The amount of Rs. 3,78,270 attributable to this difference was assessed as income from unexplained investment. The appellate authority concluded that the inspection made by the officers of the Regional Food Controller was more thorough and constituted a better evidence than the inspection, if any, made by the bank officers.
Relying on the same, the appellate authority deleted the addition of Rs. 3,78,270 which was upheld by the Tribunal. On an application to direct reference : Held, dismissing the application, that the assessing authority merely relied on the conveyance charged on the inspection made by the bank officials which admittedly was indirect evidence. The Tribunal placed reliance on the levy register, on the basis of which the inspection was made by the official of the Regional Food Controller. This was a finding of fact and no question of law arose." Similarly, in the case of the CIT v. N. Swamy (supra), the Hon'ble Madras High Court held as under: "The assessee had shown the value of the stock in its books of account. The ITO thought that the figures relating to the value of the stocks in the book could not be regarded as the correct value of the stocks as the assesses had given a declaration to the bank from which it had obtained overdraft facilities and in its declaration valued the stock at a figure higher than that in the books of the assessee. The ITO computed the difference between 'the value as recorded in the books and that found in the declaration to the bank and treated the same as income from undisclosed sources. The assessee had contended that the value of the stocks as stated by him in the declaration given to the bank was inflated, that he had not suppressed the value of the stock, and that there was no income from undisclosed sources. The AAC to whom the assessee appealed, reduced the amount of the addition from Rs. 34,070 to Rs. 26.000. On appeal to the Tribunal, the Tribunal deleted the addition. On a reference : Held, that the Tribunal had accepted the explanation of the assessee. The Tribunal had exercised its jurisdiction and the question decided by it was a question of fact. Therefore, there was no scope for interference with the order of the Tribunal." In the case of Rose Carpets v. ITO (supra) the Hon'ble Tribunal Delhi 'D' Bench held that: "Where the evidence on record showed that assessee had inflated the stock merely to obtain larger funds from bank and in fact there was no excess stock, no addition on account of difference between the stock shown in books and that shown in the statements submitted to bank could be made.
In the case of ITO v. Jagdip Kanjibhai (supra), the Tribunal Ahmedabad 'C' Bench vide its order dt. 26th March, 1998, held that : "Where goods were hypothecated with banks and not pledged and stock statements submitted to the bank were on estimate basis, AO cannot make addition under Section 69 on the basis of higher value shown in those statements than stock declared in books.
It is also relevant to point out that one of the Members of this constitution is also the author of the decision reported at (2000) 66 TTJ (Ahd) 199 in the case of ITO v. Jagdip' Kanjibhai (supra). So by respectfully following the aforesaid decision of the Ahmedabad 'C' Bench of Tribunal and also keeping in view the various judgments reproduced hereinabove and also keeping in view the totality of the facts and circumstances of the present case as discussed above, we are of the considered view that no addition was called for and, therefore, we set aside the order of the learned CIT(A) in sustaining the addition of Rs. 50,000. Accordingly, the whole of the addition made by the AO on account of difference in the stock on the basis of stock statements furnished to the bank and as shown in the books of account is deleted.
10. In the result, the appeal of the Department is dismissed and that of the assessee is allowed.