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2001 (11) TMI 217 - AT - Income Tax

Issues Involved:
1. Deletion of addition of Rs. 4,97,250 on account of unexplained difference in stock.
2. Sustaining of addition of Rs. 50,000 by CIT(A).

Summary:

Issue 1: Deletion of Addition of Rs. 4,97,250 on Account of Unexplained Difference in Stock
The Department contended that the CIT(A) erred in deleting the addition of Rs. 4,97,250 made due to the unexplained difference in stock declared to the bank and in the trading account filed with the return of income. The Department argued that the higher stock shown to the bank was to obtain a higher cash credit limit and that no adverse inference could be drawn if the statement given to the bank was verified by the assessee. The CIT(A) held that since there was no physical verification of the stock by the bank, the difference could not be treated as the assessee's income. The Tribunal noted that the AO made the addition based on stock statements submitted to the bank, which included stock of agriculturists lying in the assessee's godown. The Tribunal emphasized that in cases of hypothecation, physical verification of stock is not done, and the figures reported to the bank cannot be taken at face value. The Tribunal cited several judgments, including CIT vs. Prem Singh & Co., CIT vs. General Metal Works, and CIT vs. N. Swamy, which supported the view that inflated stock statements to banks for obtaining loans do not justify additions. Consequently, the Tribunal found no justification for the AO's addition and deleted it.

Issue 2: Sustaining of Addition of Rs. 50,000 by CIT(A)
The assessee appealed against the sustaining of the Rs. 50,000 addition by the CIT(A), arguing that it was unreasonable and based on surmises. The CIT(A) had sustained this addition on the grounds that the assessee was not maintaining any stock record. The Tribunal noted that the AO did not reject the assessee's books of account and did not find any mistakes in the method of accounting or the sales/purchases entered in the books. The Tribunal reiterated that the stock statements submitted to the bank were estimated to obtain a higher cash credit limit and were not subject to physical verification. The Tribunal, following its reasoning in the deletion of the Rs. 4,97,250 addition and supported by various judgments, concluded that no addition was warranted. Therefore, the Tribunal set aside the CIT(A)'s order sustaining the Rs. 50,000 addition and deleted the entire addition made by the AO.

Conclusion:
The Tribunal dismissed the Department's appeal and allowed the assessee's appeal, resulting in the deletion of the entire addition made by the AO on account of the difference in stock based on stock statements furnished to the bank and as shown in the books of account.

 

 

 

 

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