2018 (5) TMI 1638 - AT - Income Tax

Addition on account of discrepancy in value of stock statement furnished to the bank and the value of stock reflected in the audited financials - addition made taking note of the statement of assets hypothecated against cash credit by the assessee from Overseas Bank of India, after comparing it with the assessee s balance sheet as on 31.03.2010 - Held that - It was a practice to inflate stock to draw higher credit from bank and without physical verification of stock by bank, the stock statement furnished by assessee to bank cannot be the sole basis to draw adverse view against assessee. Therefore the explanation of assessee is accepted by us, in the absence of physical verification by Bank of the stock as on 31.03. 2010. As there are divergent views on this issue by other Hon ble High Courts,thus decision favorable for the assessee needs to be taken, we accept the explanation rendered by the assessee company for the difference in stock position between statement given to the Bank as well as that given in the balance sheet. - Decided in favour of assessee. Disallowance of excessive claim of the expenditure - assessee had started the new line of business which was manufacturing of bricks - Held that - Referring to fact that the assessee is remitting royalty to the Government of West Bengal for excavation of mud and new machines purchased by the assessee for excavation of mud for which assessee had incurred cost of ₹ 27,48,000/-for the Hitachi Hydraulic Excavator powered by Isuzu Engine on 12.11.09 and the truck purchase for ₹ 8,00,000/- and that the electronic equipment (Tough Rider) at the cost of ₹ 3,74,400/- goes on to show that the assessee had set up the unit for manufacture bricks and the royalty to Govt for excavating mud and coal and electricity consumption, labour payments booked and sales of bricks, VAT documents filed are facts which throw light that assessee had started manufacturing and sale of bricks this year and has thus justified its expenditure for production of bricks as stated above - Decided in favour of assessee. Addition account of share application money introduced into the company - Held that - ll the three directors of the company were filing I.T. Returns and the amounts has been adjusted from their remuneration and thus the source of the introduction of the share application money has been explained. We also note that all the three were residing at the same house, therefore expenditure in the house was common and so the remuneration from the company could be adjusted for purchase of shares of own company is a plausible explanation in the facts of the case. Therefore since the assessee has discharged the onus casted upon it in respect of introduction of share application money, the Assessing Officer ought not to have made addition - Decided in favour of assessee. Disallowance of depreciation on machinery - assessee did not produce the purchase bill of the machinery and could not explain the source of investment of the capital expenditure - Held that - We note that the assessee had not only set up the manufacturing but also started production of the same which are revealed from the fact that the consumption of electricity has gone up from 51,163/- to 5,46,270/- and the fuel and oil was booked for the first time was to the tune of ₹ 11,14,250/-, coal consumed for the first time to the tune of ₹ 15,93,830/- and labour charged of ₹ 25,25,210/- etc., all these facts goes on to show that the assessee had set up manufacturing and started production and sales of the bricks which is corroborated by the VAT details which emanating from Page No.37 to 41 of the Paper Book, details of which is given in Page No.36. Thus the assessee has been able to prove that it has made addition to machinery (fixed assets) - Decided in favour of assessee.

Issues Involved:
1. Discrepancy in the value of stock statement furnished to the bank and the value of stock reflected in the audited financials.
2. Disallowance of excessive claim of expenditure.
3. Addition on account of share application money introduced into the company.
4. Disallowance of depreciation on machinery (fixed assets).

Issue-wise Detailed Analysis:

1. Discrepancy in the value of stock statement furnished to the bank and the value of stock reflected in the audited financials:
The assessee challenged the addition of ?37,59,520/- due to discrepancies between the stock statements provided to the bank and the audited financials. The Assessing Officer (AO) noted that the stock statements to the bank showed an average monthly stock of ?69,72,800/-, whereas the closing stock as per the assessee's financials was ?32,13,280/- as on 31-03-2010. The AO treated the difference as undisclosed income. The assessee explained that the accountant responsible for maintaining the books had passed away, and the books could not be retrieved. The Tribunal accepted the explanation, noting that the stock statements to the bank were not physically verified and that it is common practice to inflate stock figures to avail higher credit facilities. The Tribunal referenced several High Court decisions supporting this view and concluded that the stock statements to the bank cannot be the sole basis for adverse inferences. Thus, the addition was deleted.

2. Disallowance of excessive claim of expenditure:
The AO disallowed ?65,89,841/- as excessive expenditure, noting a significant increase in expenses compared to the previous year. The assessee explained that it had started a new business of brick manufacturing, which incurred additional expenses such as coal, labor, fuel, and electricity. The Tribunal found the explanation plausible, noting that the expenses were related to the new business and were supported by audited financials and other documents. The Tribunal emphasized that the AO should have conducted further inquiries if there were doubts about the expenses. Consequently, the addition was deleted.

3. Addition on account of share application money introduced into the company:
The AO added ?6,00,000/- as unexplained investment, questioning the identity, creditworthiness, and genuineness of the share application money introduced by the directors. The assessee provided evidence that the directors had introduced the money from their remuneration, which was adjusted as share application money. The Tribunal noted that the directors were family members, their identities were established, and the source of the funds was explained. The Tribunal found no basis for the addition and directed its deletion.

4. Disallowance of depreciation on machinery (fixed assets):
The AO disallowed ?3,73,282/- of depreciation, questioning the purchase of machinery and the source of investment. The assessee provided evidence of purchasing machinery for the new brick manufacturing business, including invoices and payment details. The Tribunal found that the assessee had set up the manufacturing unit and started production, supported by increased electricity consumption and other expenses. The Tribunal concluded that the depreciation claim was justified and directed its allowance.

Conclusion:
The appeal was partly allowed, with the Tribunal deleting the additions related to stock discrepancy, excessive expenditure, share application money, and depreciation disallowance. The Tribunal emphasized the importance of proper verification and the need for reasonable cause in the absence of books of accounts.

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