2023 (6) TMI 47 - HC - Income Tax

Addition on account of discrepancy in stock - Whether the CIT(Appeals) was right in ignoring the remand report furnished by the AO? - Whether closing stock was duly established during the assessment proceedings? - HELD THAT - As could be seen from the remand report nine copies of stock statement filed by the assessee as forwarded by the bank were enclosed. Copy of the said internal inspection report of the bank has been annexed in the paper book from which it is seen that the stock statement as on 31st October, 2004 valued at Rs.23.37 lacs was also noted in the said report. When we perused the order passed by the CIT(A) dated 15th October, 2007 we find that there is absolutely no reference to the remand report. Whether the assessee could be taxed based upon the inflated stock shown in the stock statement submitted to the bank? - This issue is no longer res integra and has been decided in the Commissioner of Income Tax vs. N. 1998 (9) TMI 27 - MADRAS HIGH COURT as held that the assessee s income is to be assessed by the income tax officer on the basis of the material which was 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, even if it be a bank. Mere fact that the assessee had made such a statement by itself cannot be treated as having resulted in an irrebuttable presumption against the assessee. The burden of showing that the assessee had undisclosed income is on the revenue. That burden cannot be said to be discharged by merely referring to the statement given by the assessee to a third party in connection with the transaction which was not directly related to the assessment and making that the sole foundation for a finding that the assessee had deliberately suppressed his income. Law on the subject having been well-settled, it is the burden upon the Assessing Officer to show that the assessee had undisclosed income and merely by referring to a bank statement the assessment could not have been completed. However, on facts, the assessee s case, is better placed. We say so because that the CIT(A) had called for a remand report and the remand report clearly brings out all the facts and also encloses the inspection report submitted by the bank which reflects the correct details. CIT(A) and the learned Tribunal had committed an error in not accepting the case of the assessee. Decided in favour of assessee.

Summary

Issues:
1. Ignoring remand report by Commissioner of Income Tax (Appeals)
2. Discrepancy in stock assessment and undisclosed investment

Issue 1: Ignoring remand report by Commissioner of Income Tax (Appeals):
The case involved an appeal under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal. The main issue was whether the Commissioner of Income Tax (Appeals) was correct in disregarding the remand report provided by the Assessing Officer. The appellant's contention was that the CIT(A) failed to consider crucial aspects highlighted in the remand report, which included clarifications on the stock valuation and inspection by the bank. The remand report emphasized that the stock shown in the accounts was based on the stock register maintained by the assessee and was supported by the bank's inspection report and stock statements. The appellant argued that the CIT(A) overlooked these significant details, leading to an erroneous decision. The court analyzed precedents like Commissioner of Income Tax vs. N. Swami and Commissioner of Income Tax vs. Acrow India Ltd., establishing that the burden of proving undisclosed income lies with the revenue authority and mere reliance on a bank statement is insufficient for assessment. Consequently, the court held that the CIT(A) and the Tribunal erred in not considering the remand report and sided with the appellant, setting aside the assessment orders.

Issue 2: Discrepancy in stock assessment and undisclosed investment:
Another crucial aspect of the case was the discrepancy in stock assessment and the addition made on account of undisclosed investment. The appellant raised questions regarding the correctness of the addition concerning stock discrepancies, especially in transactions with Annapurna Fertilizers. The court noted that the appellant's explanation for discrepancies was related to routine stock submissions to the bank for credit purposes, emphasizing that the stock valuation was an estimate and not a reflection of actual stock levels. The court referred to legal precedents to establish that the revenue authority must prove the existence of undisclosed income with concrete evidence, and a mere statement to a third party, like a bank, is insufficient for taxation purposes. Given the detailed clarifications provided in the remand report, the court found in favor of the appellant, concluding that the CIT(A) and the Tribunal had erred in upholding the addition based on inadequate assessment of stock valuation. Consequently, the court allowed the appeal, answering the substantial questions of law in favor of the assessee and setting aside the assessment orders.