2013 (11) TMI 1432 - AT - Income Tax

Valuation of stock discrepancy between stock statements filed in Bank and stock shown in books of accounts - Held that - The practice of declaring higher stock to the bank to get higher loan facility, is a fact of life Following CIT vs. Shree Padmavathy Cotton Mills 1997 (3) TMI 26 - MADRAS High Court - The books of account had not been rejected by the department as not representing the correct stock position; and that the assessee had declared a higher quantity of closing stock to the bank for the purpose of securing a loan - The Tribunal arrived at the conclusion that the closing stock declared in the return filed by the assessee was based on the books of account and it should be accepted rather than the closing stock as declared to the bank - The inspection by the bank officials was only indirect evidence and the same should not be relied upon Following Parimisetti Seetharamamma vs. CIT 1965 (4) TMI 21 - SUPREME Court - The assessee s income is to be assessed by the ITO on the basis of material which is required to be considered for the purpose of assessment and ordinarily not on the basis of the statement which the assessee may have given to a third party, unless there is material to corroborate that statement of the assessee given to a third party - Decided against Revenue.

Issues Involved:
1. Validity of the CIT (A)'s order.
2. Deletion of the addition of Rs. 8,13,31,097/- due to the discrepancy between stock statements filed with the bank and those shown in the books of accounts.
3. Applicability of Section 69 of the Income Tax Act, 1961.
4. Acceptance of the explanation provided by the assessee regarding the discrepancy in stock valuation.

Issue-wise Detailed Analysis:

1. Validity of the CIT (A)'s Order:
The department contended that the CIT (A)'s order was not correct in law and facts. The CIT (A) had deleted the addition made by the AO on account of the difference in stock value as per the statement submitted to the bank by the assessee and the value of the stock statement furnished during the assessment proceedings. The CIT (A) held that the books of accounts had not been rejected and the addition was made towards unexplained investment under Section 69 of the Income Tax Act, 1961, where provisions of Section 145 were not applicable.

2. Deletion of the Addition of Rs. 8,13,31,097/-:
The AO added the excess value of the item-wise stock shown by the assessee in the stock statement submitted to the bank to the value of the closing stock shown in the balance sheet. The CIT (A) deleted this addition, accepting the assessee's explanation that the stock statement filed with the bank was for availing maximum credit limit and was prepared without physically verifying the stock and without consulting its value as per books of accounts. The CIT (A) also noted that the valuation in the bank statement was at market value, whereas in the books it was at cost price. The CIT (A) found that the stock as per books was more than the stock as per the bank statement after adjusting the gross profit margin, indicating no revenue leakage.

3. Applicability of Section 69 of the Income Tax Act, 1961:
The department argued that the addition was made under Section 69, which deals with unexplained investments not recorded in the books of accounts. However, the assessment order did not explicitly invoke Section 69. The CIT (A) observed that the stock as per books was Rs. 13,27,89,412/-, which was higher than the stock calculated by reducing the gross profit margin from the bank statement value. Therefore, the addition under Section 69 was not justified.

4. Acceptance of the Explanation Provided by the Assessee:
The assessee explained that the stock statement submitted to the bank was inflated to avail maximum credit limit and was not based on physical verification. The CIT (A) accepted this explanation, noting that the bank had not verified the stock and had certified that the stock statement was on an estimate basis. The CIT (A) also considered that the books of accounts were not rejected by the AO and that the purchases and sales were duly supported by vouchers with no discrepancies found. The CIT (A) relied on various case laws, including 'CIT vs. Shree Padmavathy Cotton Mills' and 'CIT vs. Gopal Rice Mills', which supported the practice of declaring higher stock to banks for securing loans.

Conclusion:
The CIT (A)'s order was upheld, and the appeal filed by the department was dismissed. The CIT (A) correctly deleted the addition of Rs. 8,13,31,097/- made by the AO, as the stock statement submitted to the bank was on an estimate basis and the books of accounts were not rejected. The addition under Section 69 was not applicable, and the explanation provided by the assessee regarding the discrepancy in stock valuation was accepted.

← Previous Next →