1990 (10) TMI 116 - AT - Income Tax

Summary

Issues Involved:
1. Discrepancy in stock declared to the bank versus stock register.
2. Validity of the addition made by the ITO based on the discrepancy.
3. Reliance on third-party verification of stock registers.
4. Applicability of legal precedents.

Summary:

1. Discrepancy in Stock Declared to the Bank vs. Stock Register:
The assessee, a registered firm running a rice mill, disclosed an income of Rs. 31,983. The ITO found variations between the stock declared to the bank for hypothecation and the figures in the stock register, with a peak difference of Rs. 15,91,527. The ITO added this amount as undisclosed income.

2. Validity of the Addition Made by the ITO:
The ITO assumed that the excess stock must have been sold off and added Rs. 1,07,986 as profit from these sales. The assessee appealed, arguing that the stock registers were verified by various government authorities and that the stock declared to the bank was inflated to secure loans. The CIT(Appeals) upheld the ITO's order, relying on several judicial decisions.

3. Reliance on Third-Party Verification of Stock Registers:
The assessee maintained that the stock registers were regularly checked by authorities like the civil supplies department, sales tax department, and marketing committee, all of whom found no discrepancies. The assessee argued that the figures given to the bank were approximate and for hypothecation purposes only, not pledges.

4. Applicability of Legal Precedents:
The Tribunal noted that the stock registers had been verified by multiple authorities and found correct. The Tribunal preferred this evidence over the bank statements, citing the Supreme Court's decision in Indore Malwa United Mills Ltd. v. State of Madhya Pradesh, which emphasized considering all relevant materials. The Tribunal distinguished the cases cited by the Department, noting differences in facts, particularly the distinction between hypothecation and pledge.

Conclusion:
The Tribunal concluded that the addition made by the ITO could not be sustained due to the consistent third-party verification of the stock registers. Consequently, the addition of Rs. 1,07,986 for assumed profit was also deleted. The appeal was allowed.