2018 (6) TMI 1105 - AT - Income Tax

Addition on account of difference in valuation of stock as reflected in the accounts of the assessee and as shown in the stock statement submitted to the bank - Held that - As held by the Hon ble Madras High Court in the case of Apcom Computers Pvt. Ltd. (2006 (10) TMI 124 - MADRAS HIGH COURT), difference in value of stock based on the inflated stock statement given by the assessee to bank for obtaining higher loan facilities on an estimate basis without any actual physical verification could not be treated as the undisclosed income of the assessee. To the similar effect is the decision in the case of Relaxo Footwear (2001 (11) TMI 14 - RAJASTHAN HIGH COURT) wherein it was held that no addition could be made to the income of the assessee on the basis of stock statement submitted to the bank which was deliberately inflated by the assessee only to get higher limit of credit from bank. Delete the addition of ₹ 10,00,890/- made by the AO and confirmed by the Ld. CIT(A) on the basis of inflated value of stock declared by the assessee to the bank for availing higher credit facility. - Decided in favour of assessee.

Issues Involved:
Addition made on account of difference in valuation of stock between accounts and stock statement submitted to the bank.

Detailed Analysis:

Issue 1: Addition on account of difference in valuation of stock
The case involved an appeal against the addition of ?10,00,890 made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) on the grounds of a variance in the valuation of stock as per the accounts of the assessee and the stock statement submitted to the bank. The AO determined the total income of the assessee after finding a significant difference in the value of closing stock as declared to the bank for cash credit facility and as per the balance sheet. Despite the assessee failing to provide a satisfactory explanation for the discrepancy, the AO made the addition to the total income of the assessee in the assessment under section 143(3) read with rule 263.

Issue 2: Appeal before CIT(A)
The assessee appealed the AO's decision before the Commissioner of Income Tax (Appeals) challenging the addition made on account of the difference in the valuation of closing stock. The CIT(A) upheld the AO's addition, citing clear discrepancies in the quantity of stock unexplained by the assessee. Referring to a similar case, the CIT(A) emphasized that discrepancies in stock quantities, especially when unexplained, warrant the confirmation of additions made by the AO. The CIT(A) relied on judgments highlighting the importance of accurate stock valuation and the consequences of discrepancies in stock statements submitted to banks.

Issue 3: Tribunal's Decision
During the Tribunal proceedings, the Hon'ble Tribunal considered the arguments presented by both sides and reviewed the relevant material on record. Despite the CIT(A) supporting the revenue's case, the Tribunal found in favor of the assessee. Citing decisions from the Hon'ble Madras High Court and the Hon'ble Rajasthan High Court, the Tribunal concluded that differences in stock valuation, based on inflated stock statements submitted for obtaining higher loan facilities without physical verification, should not be treated as undisclosed income. Relying on these judicial pronouncements, the Tribunal deleted the addition made by the AO and confirmed by the CIT(A) based on the inflated stock value declared to the bank for credit facility, ultimately allowing the appeal of the assessee.

In conclusion, the Tribunal's decision emphasized the importance of accurate stock valuation and highlighted that discrepancies in stock statements submitted to banks for credit facilities, without physical verification, should not lead to additions in the assessee's income. The judgment provided a significant precedent regarding the treatment of stock valuation variances and underscored the need for proper explanation and verification in such cases.

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