2013 (12) TMI 1370 - HC - Income Tax

Difference in value of stock as per stock statement submitted to bank and stocks as per books - Held that - The assessee s income was to be assessed on the basis of the material required to be considered for the assessment and not on the basis of the statements given to third party - The burden of showing undisclosed income was on the revenue - That burden cannot be said to be discharged by referring to the statements given by the assessee to the bank, and making it the foundation for adding the difference in the stock as his income - The CIT had accepted the books of accounts and had found that all the purchases and sales are vouched - The stock registers were maintained by the assessee in ordinary course of business - No defects were pointed out in maintenance of such registers, nor there was any other information or material to doubt their correctness - The statements given by the assessee to the bank for obtaining overdraft facility, in the practice prevalent to overstate the stocks to obtain overdraft facility could not be treated to add the entire difference and that too in respect to only one of the items namely the zinc - Decided against Revenue.

Issues Involved:
1. Addition of Rs. 10,78,886/- due to discrepancies in stock statements.
2. Application of Section 69-B of the I.T. Act.
3. Justification of addition limited to Rs. 6,14,720/- for zinc only.
4. Rejection of reference applications by the Tribunal.
5. Tribunal's error in law regarding the addition of stock discrepancies.

Issue-wise Detailed Analysis:

1. Addition of Rs. 10,78,886/- due to discrepancies in stock statements:
The respondent-assessee, a private limited company, declared a loss of Rs. 2,67,520/- in its return. However, the Income-tax Officer (A.O) assessed a total income of Rs. 10,92,020/- by making a major addition of Rs. 10,78,886/- due to discrepancies in stock statements submitted to the Hindustan Commercial Bank compared to the books of account. The discrepancies involved three items: zinc, galvanized tubes, and black tubes, with the peaks taken as the basis for the addition.

2. Application of Section 69-B of the I.T. Act:
The Tribunal initially upheld the A.O's addition by applying Section 69-B, which deals with unexplained investments, due to the discrepancy in stocks declared to the bank versus the books of account. The Tribunal reversed the C.I.T.(A)'s deletion of the addition and sustained the entire amount. However, upon a Misc. Application by the assessee, the Tribunal recalled its earlier order for the limited purpose of determining the quantum of addition.

3. Justification of addition limited to Rs. 6,14,720/- for zinc only:
The Tribunal, in its subsequent order, upheld the addition of Rs. 6,14,720/- for the zinc discrepancy while deleting the remaining Rs. 4,64,166/- for the other two items. The Tribunal's decision to limit the addition to the highest discrepancy for zinc was challenged by both the revenue and the assessee. The revenue argued that the Tribunal should have added discrepancies for all items, while the assessee contended that no addition was justified given the verification of purchases and sales.

4. Rejection of reference applications by the Tribunal:
The Tribunal rejected the department's reference application under Section 256 (1) against its order, stating no question of law arose. Similarly, the assessee's reference application was initially rejected but later recalled by the Tribunal. The High Court stayed the Tribunal's order recalling the reference application, leading to further proceedings.

5. Tribunal's error in law regarding the addition of stock discrepancies:
The Tribunal's approach in adding only the discrepancy for zinc was criticized. The High Court found that the Tribunal erred in law by not considering the entire context and only focusing on one item without proper justification. The High Court emphasized that the burden of proving undisclosed income lies with the revenue, which cannot be discharged merely by discrepancies in bank statements without corroborative evidence. The Tribunal's partial acceptance of discrepancies for zinc alone was seen as arbitrary and indicative of departmental bias.

Conclusion:
The High Court decided the questions framed by the Tribunal in favor of the assessee and against the revenue. The court held that the income assessment should be based on material evidence and not on inflated stock statements given to third parties like banks. The department was directed to calculate the tax accordingly, dismissing the Tribunal's addition of Rs. 6,14,720/- for zinc as unjustified.

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