1973 (2) TMI 137 - HC - Income Tax

Summary

Issues Involved:
1. Discrepancy in stock declaration to the bank versus stock as per books.
2. Tribunal's acceptance of assessee's explanation regarding discrepancies in cotton and cotton seeds.
3. Tribunal's rejection of assessee's explanation regarding discrepancies in kappas.
4. Legal justification for the Tribunal's finding of unaccounted stock of kappas.

Detailed Analysis:

1. Discrepancy in Stock Declaration to the Bank vs. Stock as per Books:
The primary issue revolves around the discrepancies identified by the Income-tax Officer between the stock account and the stock declaration given by the assessee to the bank as on December 31, 1959. Specifically, the discrepancies were noted in the quantities of cotton, cotton seeds, and kappas. The assessee explained that the declaration to the bank was made on a rough estimate without physical verification and that the stock of cotton seeds was inflated to secure a higher loan from the bank, a common practice among ginning factories.

2. Tribunal's Acceptance of Assessee's Explanation Regarding Discrepancies in Cotton and Cotton Seeds:
The Income-tax Officer accepted the explanation regarding the discrepancy in cotton stock but rejected the explanation for cotton seeds and kappas. The Appellate Assistant Commissioner, however, believed the discrepancies were due to stock inflation for loan purposes and set aside the additions made by the Income-tax Officer. The Tribunal, upon appeal, accepted the explanation regarding cotton seeds, noting that the loan was an open loan and the stock continued to be in the assessee's possession, suggesting that the discrepancy might be due to a rough estimate.

3. Tribunal's Rejection of Assessee's Explanation Regarding Discrepancies in Kappas:
The Tribunal did not accept the assessee's explanation for the kappas discrepancy, which was that the stock was inflated to obtain a higher loan. The Tribunal restored the additions made by the Income-tax Officer, amounting to Rs. 70,000 for the year 1960-61 and Rs. 3,500 for the year 1961-62. The Tribunal considered the bank's letter stating that the stocks were inspected and found to agree with the declaration, indicating that the stocks were likely inspected, albeit cursorily.

4. Legal Justification for the Tribunal's Finding of Unaccounted Stock of Kappas:
The Tribunal's decision was challenged on the grounds that there was no material to support the finding of unaccounted stock of kappas. The court noted that the Tribunal had considered various factors, including the history of the business, sales of kappas, and electricity consumption. The Tribunal found that the explanations provided by the assessee were inconsistent and not credible. The court emphasized that the Tribunal's rejection of the assessee's explanations was based on the large discrepancy and the bank's verification of the stocks.

The court upheld the Tribunal's findings, stating that the discrepancy in the stock declaration was a material basis for rejecting the assessee's books of account and making an estimate. The court referenced several decisions, including India Motor Parts & Accessories (P.) Ltd. v. Commissioner of Income-tax and State of Tamil Nadu v. Indian Crafts and Industries, but found that these cases did not apply to the facts at hand due to the significant discrepancy in stocks.

In conclusion, the court answered both questions in the affirmative, affirming the Tribunal's decision and holding that the Tribunal had material to support its finding of unaccounted stock of kappas and that the finding was legally justified. The assessee was ordered to pay the costs of the revenue, with counsel's fee set at Rs. 250.