1984 (8) TMI 132 - AT - Income Tax

Summary

Issues Involved:
1. Discrepancy between book stock and stock statement submitted to the bank.
2. Validity and implications of the stock statement submitted to the bank.
3. Burden of proof regarding the correctness of book stock versus bank stock statement.
4. Applicability of legal precedents to the facts of the case.

Detailed Analysis:

1. Discrepancy between book stock and stock statement submitted to the bank:
The primary issue revolves around the discrepancy of Rs. 2,00,626 between the values of book stock and the stock as intimated to the bank. The assessee, a registered firm, returned a loss of Rs. 1,26,180 for the assessment year 1980-81. However, the Income Tax Officer (ITO) added Rs. 2,00,626 to the income, converting the loss into a profit of Rs. 77,570. The discrepancy arose because the stock values reported to the bank were significantly higher than those in the books.

2. Validity and implications of the stock statement submitted to the bank:
The assessee argued that the stock statement submitted to the bank was not real and was intended solely to avail a cash credit limit of Rs. 1 lakh. The ITO, however, found this explanation unacceptable, relying on the decision of the Madras High Court in Coimbatore Spg. & Wvg. Co. Ltd. v. CIT [1974] 95 ITR 375, which held that the Tribunal should not take judicial notice of any practice of declaring larger stocks to banks for higher loans.

3. Burden of proof regarding the correctness of book stock versus bank stock statement:
The Tribunal emphasized that when there is a discrepancy between book stock and stock statement submitted elsewhere, the burden lies heavily on the assessee to prove that the book stock is correct. The Tribunal referenced the Madras High Court's observation that "heavy burden lies on the assessee to prove that the books of account alone give the correct picture, and the sworn statements given to the banks were motivated."

4. Applicability of legal precedents to the facts of the case:
The Tribunal distinguished the facts of the present case from those in Coimbatore Spg. & Wvg. Mills' case and aligned them more closely with Ramakrishna Mills Ltd.'s case. In the latter, the High Court had accepted the book stock over the bank statement due to the absence of physical verification and other corroborative evidence. The Tribunal noted that in the present case, there was no physical verification of stock by the bank, and the stock declared to the bank exceeded the total consumption for the entire year, suggesting that the bank statement was not based on actuals.

Conclusion:
The Tribunal concluded that the facts of the case did not justify the addition of Rs. 2,00,626. The stock statement submitted to the bank could not be taken at face value, especially given the lack of physical verification and the excessive quantities reported. The Tribunal allowed the appeal and deleted the addition, aligning its reasoning with the principles established in Ramakrishna Mills Ltd.'s case.

Result:
The appeal was allowed, and the addition of Rs. 2,00,626 was deleted.