2010 (11) TMI 632 - AT - Income Tax

Reassessment - Addition - It was found that there was understatement of stock of 87191 bags of sugar as the quantity of stock pledged with the bank was in excess of what appeared in the books of account of the assessee - the company s entire closing stock is reconciled with the Excise Records which is verified, confirmed and certified by the Excise Officials from time to time - Since the quantity of sugar manufactured and sold during the year is not in doubt, if there is any difference arising in the closing stock then it automatically originates from the opening stock of finished sugar - It is apparent that finished stock of sugar of the season 1996-97 to the tune of 84,258 Qtls. cannot exist as on 31.03.1999 and the Bank statements are wrong as confirmed by the Excise records duly verified, confirmed and certified by the Excise Inspector - Hence, it proves that the total non-existing stock of sugar of 87,191 Qtls. (84,258 2,933) as appearing in the Bank statement is wrong and cannot be relied upon for making any addition on the company - It is not a case of simple hypothecation where goods remain in the possession of the assessee. Therefore, the burden is on the assessee to prove that what was stated in the stock statement submitted to the bank was not correct and what is existing in the books is the real state of affairs - Held that onus shall lie upon the assessee to prove as according to sworn statement submitted to bank, the assessee has submitted the quantity of stock on the strength of which it has drawn the money from the bank - Decided in favour of the assessee by way of remand to CIT(A)

Summary

Issues Involved:
1. Validity of reassessment under Section 147 of the Income Tax Act, 1961.
2. Alleged change of opinion by the Assessing Officer.
3. Requirement of "reason to believe" versus "reason to suspect" for reassessment.
4. Addition of Rs. 11.39 crores due to alleged difference in closing stock.
5. Rejection of assessee's books of accounts and supporting evidence.
6. Basis of addition on bankers' statement without rejecting assessee's books.
7. Determination of total income at nil after adjusting brought forward losses.

Issue-wise Detailed Analysis:

1. Validity of Reassessment under Section 147:
The reassessment proceedings were initiated based on information from the assessee's bankers that the stock pledged with the bank was higher than the stock recorded in the assessee's books. The reassessment was contested by the assessee on the grounds that it was incorrect and should be cancelled.

2. Alleged Change of Opinion by the Assessing Officer:
The assessee argued that the reassessment constituted a mere change of opinion since the original assessment under Section 143(3) had already accepted the books of accounts and audited accounts, including quantitative details of stock. Therefore, the reassessment was claimed to be void.

3. Requirement of "Reason to Believe" versus "Reason to Suspect":
The assessee contended that the Assessing Officer must have a "reason to believe" that income had escaped assessment, not merely a "reason to suspect." The lack of evidence to support the belief that income had escaped assessment was argued to render the reassessment proceedings void ab initio.

4. Addition of Rs. 11.39 Crores Due to Alleged Difference in Closing Stock:
The reassessment added Rs. 11.39 crores to the assessee's income due to an alleged difference in the closing stock of sugar reported to the Central Bank of India. The assessee argued that this addition was based on conjecture and should be deleted.

5. Rejection of Assessee's Books of Accounts and Supporting Evidence:
The assessee maintained that its closing stock was supported by GRI Form of Excise Records and RT-7 of Central Excise records, which were audited by statutory auditors. These positive evidences were allegedly ignored by the Assessing Officer.

6. Basis of Addition on Bankers' Statement Without Rejecting Assessee's Books:
The assessee argued that the addition was based solely on the bankers' statement without rejecting the assessee's books of accounts, which was erroneous and bad in law.

7. Determination of Total Income at Nil After Adjusting Brought Forward Losses:
The total income was determined at nil after adjusting brought forward losses of Rs. 13,54,38,651/-, which the assessee claimed was wrong and bad in law.

Judgment Analysis:

The Tribunal noted that the reassessment was initiated due to a discrepancy in the stock reported to the bank and the stock recorded in the assessee's books. The assessee had shown a closing stock of 310,934 bags of sugar, while the stock pledged with the bank was 398,125 bags, indicating an understatement of 87,191 bags.

The assessee's explanation that the difference was due to a wrong statement given to the bank by the previous management was not accepted by the Assessing Officer. The CIT (A) confirmed the addition, stating that the difference in stock was not explained with irrebuttable evidence.

The Tribunal observed that the burden of proof lay on the assessee to demonstrate that the stock statement submitted to the bank was incorrect. The Tribunal also noted that the stock statement submitted to the bank as on 31st March 1998 was not signed by the assessee, reducing its evidentiary value.

In the interest of justice, the Tribunal restored the matter to the CIT (A) for re-adjudication. The CIT (A) was directed to give the assessee a reasonable opportunity of hearing and to produce evidence showing that the stock statement submitted to the bank was incorrect. The onus was on the assessee to prove that the quantity of stock reported to the bank was not the correct quantity available as of 31st March 1999.

Conclusion:

The appeal was allowed for statistical purposes, and the matter was remanded to the CIT (A) for re-adjudication with specific directions to verify the correctness of the stock statements and the evidence provided by the assessee. The Tribunal emphasized the need for proper verification from both the assessee's records and the bank officials to ascertain the truth.