1973 (2) TMI 31 - HC - Income Tax

Estimated Income - Rejection Of Accounts - discrepancy between the books stock and the statement given to bank - assessee explained that the inflated figures shown to the bank was for obtaining higher loan facilities - Whether estimation would be justified, if the books were not adversely commented upon

Summary

Issues Involved:
1. Discrepancies between stock account and stock declaration to the bank.
2. Justification for rejecting the assessee's explanation regarding the discrepancies.
3. Legality of the Tribunal's finding on the possession of unaccounted stock of kappas.
4. Applicability of previous judicial decisions on stock declaration discrepancies.

Detailed Analysis:

1. Discrepancies between Stock Account and Stock Declaration to the Bank:
The assessee, a Hindu undivided family engaged in ginning and selling cotton, reported a net loss for the assessment year 1960-61. The Income-tax Officer (ITO) found discrepancies between the stock account and the stock declaration given to the bank as of December 31, 1959. Specifically, the discrepancies were:
- Cotton: 80 candies pledged vs. 20 candies per book.
- Cotton seeds: 3,500 bags pledged vs. 2,100 bags per book.
- Kappas: 900 pothis pledged vs. nil per book.

The assessee explained that the discrepancies were due to sales and rough estimates made for obtaining higher loans from the bank. The ITO accepted the explanation for cotton but not for cotton seeds and kappas, estimating unaccounted income at Rs. 1,23,000 for 1960-61 and Rs. 6,150 for 1961-62.

2. Justification for Rejecting the Assessee's Explanation:
The Appellate Assistant Commissioner (AAC) accepted the assessee's explanation, attributing the discrepancies to the practice of inflating stocks for higher loans. However, the Tribunal partially disagreed, accepting the explanation for cotton seeds but not for kappas. The Tribunal noted that the bank's inspection was cursory, and the inflation of kappas stock was not credible given the large discrepancy. The Tribunal restored the additions made by the ITO to Rs. 70,000 for 1960-61 and Rs. 3,500 for 1961-62.

3. Legality of the Tribunal's Finding on the Possession of Unaccounted Stock of Kappas:
The Tribunal's decision was challenged on the grounds that there was no material evidence to support the finding of unaccounted kappas stock. The court noted that the Tribunal considered various factors, including the bank's inspection reports and the varying explanations provided by the assessee. The Tribunal found that the explanations were inconsistent and not credible, leading to the conclusion that the kappas stock was inflated for obtaining loans.

4. Applicability of Previous Judicial Decisions on Stock Declaration Discrepancies:
The court reviewed several judicial decisions cited by the assessee's counsel:
- India Motor Parts & Accessories (P.) Ltd. v. Commissioner of Income-tax: The court held that stock declarations for loans could not be the sole basis for rejecting the method of accounting. However, this case was distinguished as it involved valuation discrepancies, not stock quantity discrepancies.
- State of Tamil Nadu v. Indian Crafts and Industries: The court found that inflated production figures for obtaining quotas did not justify reopening assessments. This was also distinguished as it involved production figures, not stock discrepancies.
- Commissioner of Income-tax v. Ramakrishna Mills (CBE) Ltd: This case involved corroboration of book entries with returns to the Textile Commissioner, which was not applicable here due to the lack of such corroboration.

The court concluded that the Tribunal was justified in rejecting the assessee's explanation and making an estimate based on the stock declarations. The discrepancies were significant enough to warrant rejection of the assessee's books of account.

Conclusion:
The court answered both questions referred to it in the affirmative, upholding the Tribunal's findings. The assessee was ordered to pay the costs of the revenue, with counsel's fee set at Rs. 250.