2009 (9) TMI 83 - AT - Income Tax

Addition u/s. 69 - Addition on difference in the value of closing stock - Assessee is in the business of manufacturing of woollen and shoddy yarn and has taken loan against hypothecation of stock and debtors - As per assessee AO made the addition mainly by recasting the trading account for a brief period of 10 days from 22nd March, 2005 to 31st March, 2005, whereas the assessee is a partnership concern and is engaged in woollen shoddy yarn manufacturing and dealings - CIT(A) deleted the impugned addition mainly on the reasoning that the addition on account of difference in stock given to the bank and as per books may be made when it is clear on the basis of the facts of the case that the quantity of the stock given to the bank was higher than the quantity as per the books and the stock was either pledged or counted and verified by the bank officials but in a case where difference in the quantity of stock does not exist and the stock is neither pledged nor verified by the bank officials then no addition can be made. HELD THAT - As we find that in the instant case it is not in dispute that the credit facility was extended by the bank to the assessee against hypothecation of stock and the valuation of the stock declared to the bank was higher than actual stock available in the books of accounts and this inflation of the stock was done by the assessee to obtain higher credit limit from the bank. Hence, in our opinion on the basis of the case law the CIT(A) in a well-reasoned order has rightly deleted the impugned addition because in the instant case the AO has not brought on record any evidence to show that the assessee was in fact in possession of higher quantity of stock, therefore, mere comparison of the stock declared to the bank and the one shown in the books of accounts the addition could not be made on the difference between the two. Accordingly, the order of CIT(A) in deleting the impugned addition is upheld and ground of appeal taken by the Revenue is rejected. Appeal filed by the Revenue is dismissed.

Summary

Issues involved:
- Addition of Rs. 17,45,954 on account of difference in the value of closing stock
- Whether the addition made by the AO was justified
- Whether the stock valuation discrepancy warranted an addition under section 69 of the IT Act, 1961

Analysis:

Issue 1: Addition of Rs. 17,45,954 on account of difference in the value of closing stock

The Revenue filed an appeal against the order of CIT(A) regarding the addition of Rs. 17,45,954 on account of a difference in the value of closing stock. The assessee, engaged in manufacturing, had shown discrepancies in stock values to the bank and in the books. The AO made the addition under section 69 of the IT Act, 1961, based on the recalculated figures of the manufacturing trading account. The CIT(A) deleted the addition, emphasizing that discrepancies in stock values for hypothecation purposes did not warrant an addition unless there was concrete evidence of actual stock discrepancy.

Issue 2: Justification of the addition made by the AO

The assessee contended that the addition by the AO lacked a valid basis as it was mainly done by recasting the trading account for a brief period. The assessee maintained regular books of accounts on a mercantile system, supported by various documents and details. The AO estimated manufacturing expenses and applied a GP rate, leading to the addition. The CIT(A) noted that the stock was hypothecated, not pledged, and the bank did not verify the stock. The CIT(A) emphasized that the AO failed to provide evidence of actual stock discrepancy, leading to the deletion of the addition.

Issue 3: Warrant for addition under section 69 of the IT Act, 1961

The case law cited by the assessee supported the contention that discrepancies in stock valuation for hypothecation purposes did not automatically justify additions under section 69. The CIT(A) relied on precedents to establish that unless there was concrete evidence of actual stock discrepancy or possession of higher stock quantity, additions based solely on differences in stock values for hypothecation purposes were not warranted. The Tribunal upheld the CIT(A)'s decision to delete the impugned addition, as the Revenue failed to provide evidence of actual stock discrepancy.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition of Rs. 17,45,954 on account of the difference in the value of closing stock. The Tribunal emphasized the lack of concrete evidence from the Revenue to prove actual stock discrepancy, thereby supporting the CIT(A)'s reasoned decision.