2009-VIL-336-ITAT-DEL

Equivalent Citation: TTJ 125, 810,

Income Tax Appellate Tribunal DELHI

Date: 04.09.2009

ASSISTANT COMMISSIONER OF INCOME-TAX.

Vs

JYOTI WOOLLEN MILLS.

BENCH

Member(s)  : D. R. SINGH., A. K. GARODIA.

JUDGMENT

The Revenue has filed the present appeal against the order of CIT(A), Karnal, dt.10th Nov., 2008in ITA No. IT/77/PIT/CIT(A)/KNL/2007-08 for the asst. yr. 2005-06 taking the following ground of appeal:

"On the facts and circumstances of the case, the learned CIT(A) has erred on facts and in law in deleting the addition of Rs. 17,45,954 on account of difference in the value of closing stock as per working given by the AO in the assessment order."

2. In brief the facts relating to impugned addition of Rs. 17,45,954 are that the assessee is in the business of manufacturing of woollen and shoddy yarn and has taken loan against hypothecation of stock and debtors from SBI, Panipat. During assessment proceedings AO found that assessee has submitted a statement of stock to the bank as on 21st March, 2005 showing the value of the stock at Rs. 35,55,589 whereas stock as per books and balance sheet as on 31st March, 2005 was shown at Rs. 23,38,886 which was submitted with the return of income, therefore, by recalculating the other figures of manufacturing trading account for the period 22nd March, 2005 to 31st March, 2005, AO found that stock has been shown lower by Rs. 17,45,954 and, therefore, made addition of the same under s. 69 of the IT Act, 1961.

3. Aggrieved, the assessee filed an appeal and submitted before the CIT(A) and contended that the addition made by the AO was without any basis because the AO made the addition mainly by recasting the trading account for a brief period of 10 days from 22nd March, 2005 to 31st March, 2005, whereas the assessee is a partnership concern and is engaged in woollen shoddy yarn manufacturing and dealings. Appeal under reference pertains to the financial year 2004-05 relevant to 2005-06 assessment year.

3.1 Regular books of accounts on mercantile system of accountancy were maintained, which were supported by sales-purchases bills, vouchers, bank statements and various registers prescribed by the Government. And quantitative stock details duly maintained and furnished with the return.

3.2 Return declaring income at Rs. 5,76,000 was filed on28th Oct., 2005along with chartered accountant audit report and various relevant details. Case of the assessee was selected for scrutiny under s. 143(2) of the IT Act, 1961, as such detailed reply to questionnaire and notices issued from time to time were complied with, month-wise purchases and sales chart was also filed. No defects or irregularity were found or detected from the accounts.

3.3 Closing stock was also valued as per method consistently adopted by the assessee. Contrary to this the AO estimated the manufacturing expense and applied a GP rate at 22.06 per cent. Recasted manufacturing-cum-trading account for the period 22nd March, 2005 to 31st March, 2005 and worked out closing stock of Rs. 40,84,840 as on 31st March, 2005 against closing stock of Rs. 23,38,886 and thus made an addition of Rs. 17,45,954 to the income taking income from other sources. Thus summarizing his arguments the learned Authorised Representative for the assessee submitted that-

(i) Sales is no basis to arrive at the amount of manufacturing expenses of a particular period.

(ii) There is no such law to determine the income or statement in mid of a period, cannot be accrued and is always on estimate basis.

(iii) Difference in method of valuation otherwise consistently applied cannot be applied.

(iv) Quantitative stock details, and valuation given to the bank was estimated only to obtain finances from the bank hence it did not have direct relation with the value of closing stock.

4. In support of the contentions the assessee relied upon the decision of Bombay High Court in the case of CIT vs. Acrow India Ltd. (2008) 298 ITR 447 (Bom), wherein their Lordships held:

"Where the value of stock is not accepted the burden is on the Revenue to show that the value is incorrect and it cannot be discharged by merely referring to a statement of the assessee to a third party. Held that the Tribunal had clearly held that the valuation of stock declared to the bank was not suppressed from the Revenue. The valuation by the assessee could not be rejected."

5. The assessee has also filed a certificate from the bank stating that the stock is only under hypothecation and not under "lock and key" of the bank. The assessee has also filed details of purchases of raw material and valuation of closing stock.

6. Further, that since the stock was only under hypothecation of the bank and not under lock and key kept by the bank on difference of valuation of closing stock, no addition could be made. Learned Authorised Representative for the assessee relied upon the following case laws:

(i) Beekay Appliances (P) Ltd. vs. Dy. CIT (2007) 158 Taxman 67 (Del)(Mag);

(ii) CIT vs. Apcom Computers (P) Ltd. (2007) 292 ITR 630 (Mad);

(iii) CIT vs. Khan & Sirohi Steel Rolling Mills (2006) 200 CTR (All) 595;

(iv) United Commercial Bank vs. CIT (1999) 156 CTR (SC) 380 : (1999) 240 ITR 355 (SC);

(v) Chhatar Extractions (P) Ltd. vs. ITO (2004) 85 TTJ (Asr)(TM) 405;

(vi) CIT vs. Sidhu Rice & General Mills (2004) 192 CTR (P&H) 349;

(vii) CIT vs. Acrow India Ltd.

7. On considering the submissions of the assessee the CIT(A) deleted the impugned addition mainly on the reasoning that the addition on account of difference in stock given to the bank and as per books may be made when it is clear on the basis of the facts of the case that the quantity of the stock given to the bank was higher than the quantity as per the books and the stock was either pledged or counted and verified by the bank officials but in a case where difference in the quantity of stock does not exist and the stock is neither pledged nor verified by the bank officials then no addition can be made. In the case of the assessee, the stock is not pledged but it was merely hypothecated and quantitative details given to the bank tallies with the details filed before the IT authorities and the stock was not verified by the bank officials. At the same time, AO has not been able to bring on record any evidence or fact to show that there was a difference in the quantity of the stock given to the bank and shown in the books of accounts or the assessee possessed a larger quantity of stock than declared to the IT authorities, therefore, the additions deserve to be deleted on the basis of facts as well as law.

8. In support of the conclusion the CIT(A) relied upon the case laws reproduced and analysed as under:

(i) Coimbatore Spinning & Weaving Co. Ltd. vs. CIT (1974) 95 ITR 375 (Mad) :

In the said case, AO had rejected books of accounts for various reasons and Hon'ble High Court has held that heavy burden lies on the assessee to prove that the books of accounts alone give a correct picture. In the case of the assessee, AO has neither found any patent defect in the books of accounts of the assessee nor rejected the books of accounts, whereas, assessee has claimed that stock declared to the IT authorities is as per the books of accounts, audited by a chartered accountant and accepted by other Government Department. Similarly, the trading account prepared by the AO does not have proper basis, particularly, manufacturing overheads have been wrongly allocated by the AO and therefore, the assessee has discharged the burden to prove that the stock given to the IT authorities is as per the books of accounts and gives the correct picture, therefore, this case law is not applicable to facts of the case of the assessee.

(ii) Jai Chand Kanji & Co. vs. CIT (1986) 51 CTR (Raj) 272 : (1986) 157 ITR 451 (Raj):

In the said case, Hon'ble High Court has held that discrepancy between stocks as pledged with the bank and as recorded in the books of accounts was not satisfactorily explained, the assessee had shown 103 bundles of GC sheets in the books of accounts, whereas, 208 bundles of GC sheets were pledged with the bank. Whereas, in the case of the assessee stock was not pledged with the bank but only hypothecated and the bank officials did not count the stock at all and the details given to the bank were only estimated value of stock, whereas, quantity of stock tallies in both the statements, therefore, this case law is not applicable to facts of the case of the assessee.

(iii) Century Foams (P) Ltd. vs. CIT (1995) 123 CTR (All) 342 : (1994) 210 ITR 625 (All):

In the said case, Hon'ble High Court has held that if there was actual discrepancy in the stock hypothecated and stock shown in the books of accounts and assessee failed to explain the difference then additions can be made. In the said case, the difference was not only in the valuation of the stocks but also in the items of the stock hypothecated which was certified as checked and acted upon by the bank after due verification. But in the case of the assessee, quantitative detail of stock is same in both the statements and it was never certified as checked or verified by the bank and therefore, it cannot be said that there was actual discrepancy in the stocks hypothecated and the stock shown in the accounts.

(iv) Kaila Sweet Supplier vs. CIT (1998) 100 Taxman 59 (All):

In the said case, Hon'ble High Court has held that if the information furnished to the bank contains not only the items of the stock but also their quantity and the assessee did not discharge the burden cast on him then the addition can be made. But in the case of the assessee, admittedly, information furnished to the bank has the same quantity of the stock as given to the AO, therefore, this case law is not applicable to facts of the case of the assessee.

(v) Dhansiram Agarwalla vs. CIT (1993) 111 CTR (Gau) 39 : (1993) 201 ITR 192 (Gau):

In the said case, Hon'ble High Court has held that stock as disclosed to the bank is generally inflated to get larger overdraft is untenable because it is merely a statement and assessee did not offer any other explanation as regards discrepancy between value of stock disclosed to bank and as shown in the balance sheet and there was no material to show that bank did not exercise effective control, whereas, the loan was under the category "lock and key loans". Whereas, in the case of the assessee, the stock is only hypothecated and not under the "lock and key" of the bank and bank has admittedly not verified the stock. Therefore, this case law is not applicable to facts of the case of the assessee.

(vi) Ramanlal Kacharulal Tejmal vs. CIT (1983) 32 CTR (Bom) 293 : (1984) 146 ITR 368 (Bom):

In the said case, Hon'ble High Court has held that addition under s. 69 is justified on account of stock discrepancy in goods pledged with the bank and stock as per books. In the said case, assessee was supplying finance to 3 firms and had taken loan by pledging 268 fully pressed cotton bales with the bank. On inquiry, assessee claimed that these cotton bales belong to Ramanlal & Co. to whom the assessee was supplying finance, whereas, in the books of Ramanlal & Co., only 48 such cotton bales were in stock. Whereas, in the case of the assessee stock is not pledged but merely hypothecated and quantitative details tallies in both the statements and bank has not verified the stock, therefore, this case law is not applicable to facts of the case of the assessee.

9. Before us learned Departmental Representative for the Revenue except placing reliance on the reasoning given in the order of AO has not been able to controvert the finding of facts recorded in the order of CIT(A) nor was able to cite any case law wherein a view contrary to the view taken in the decisions relied upon by the CIT(A) has been taken.

10. On the other hand learned Authorised Representative for the assessee, reiterating the submissions made before the CIT(A) again referred to the same case law and mainly contended that no addition could be made on account of the difference in the quantity of the stock hypothecated to the bank and the one reflected in the books of account as is clear from the case law discussed by the CIT(A) and that the CIT(A) rightly deleted the impugned addition.

11. On considering the submissions of both the parties, perusing the records and going through the orders of tax authorities below as well as the case law, we find that in the instant case it is not in dispute that the credit facility was extended by the bank to the assessee against hypothecation of stock and the valuation of the stock declared to the bank was higher than actual stock available in the books of accounts and this inflation of the stock was done by the assessee to obtain higher credit limit from the bank. Hence, in our opinion on the basis of the case law the CIT(A) in a well-reasoned order has rightly deleted the impugned addition because in the instant case the AO has not brought on record any evidence to show that the assessee was in fact in possession of higher quantity of stock, therefore, mere comparison of the stock declared to the bank and the one shown in the books of accounts the addition could not be made on the difference between the two. Accordingly, the order of CIT(A) in deleting the impugned addition is upheld and ground of appeal taken by the Revenue is rejected.

12. In the result, the appeal filed by the Revenue is dismissed.

 

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