2013 (4) TMI 66 - AT - Income Tax

Unexplained investment in stock - stock statement submitted to bank - CIT(A) deleted the addition - Held that - The assessee is required to explain its stock position, however, there may be difference in valuation but here the contention of the assessee is that before bank valuation of stock was based on the weight is incorrect. No material has been brought on record before us to substantiate that the limit granted by bank to assessee were fully exhausted. Further the observation of the CIT (A) that the declaration of higher stock to bank is out of business expediency and not an offence is not supported by any material on record. Matter remanded back for fresh examination to the A.O. and he should bring on record the correct factual position that whether the sales made by assessee is on the basis of weight or numbers, whether the stock submitted to the Bank was in Kgs. or in numbers and whether the assessee has been submitting higher stock figures as compared to its book stock to bank in the past and for earlier months in the year under appeal. Addition on account of interest expenses - CIT (A) deleted the addition - Held that - CIT (A) gave a finding that Shri Jayantibhai Maniar was the son of another partner and was also an employee of the firm. The A.O. has made an addition as the assessee had advanced interest free loan out of the interest bearing funds. The advance given by the firm was for the business expediency. In favour of assessee.

Issues Involved:
1. Addition of Rs. 30,92,616/- on account of unexplained investment in stock.
2. Addition of Rs. 22,660/- on account of disallowance of interest expenses.

Issue-wise Detailed Analysis:

1. Addition of Rs. 30,92,616/- on account of unexplained investment in stock:

During the assessment proceedings, the Assessing Officer (A.O.) observed that the assessee had availed a secured loan by hypothecating stock from Sihor Mercantile Co-operative Bank. The A.O. issued a notice under section 133(6) to the Bank and obtained details of the stock. The physical verification of stock carried out by the Bank on 22-3-2006 showed a value of Rs. 34,03,218/-, while the stock statement as on 31-3-2006 showed Rs. 39,97,454/-. However, the closing stock in the assessee's balance sheet was only Rs. 9,04,838/-. The A.O. concluded that the difference of Rs. 30,92,616/- represented unaccounted stock and added it as undisclosed income.

The CIT (A) deleted the addition, stating that the exaggerated stock statements were submitted to the bank to procure maximum benefits and there was no evidence of unexplained investment in stock. The CIT (A) noted that the A.O. had not pointed out any defects in the books of account or established that the appellant made excess payments for purchasing the stock.

The Revenue appealed, arguing that the stock position was physically verified by the bank and the assessee admitted the value of stock. The CIT (A)'s general statement about exaggerated stock statements was unsupported by material evidence. The Revenue relied on various High Court decisions, including the Gauhati High Court in Dhansiram Agarwalla vs. CIT.

The Tribunal found that the assessee's explanation of stock differences (reporting in kilograms vs. numbers) was unsubstantiated. The Tribunal noted the necessity for the A.O. to re-examine the matter, considering whether the sales were based on weight or numbers and if higher stock figures were consistently reported to the bank. The issue was remitted to the A.O. for a fresh decision.

2. Addition of Rs. 22,660/- on account of disallowance of interest expenses:

The A.O. observed that the assessee had granted an interest-free loan of Rs. 1,51,067/- to the son of a partner, who was also the Manager of the firm. The A.O. disallowed the interest expense, calculating it at 15% of the loan amount, resulting in an addition of Rs. 22,660/-. The assessee argued that the loan was for business purposes.

The CIT (A) deleted the addition, recognizing the managerial role of the partner's son and the business prudence in supporting key employees during crises. The CIT (A) emphasized the circumstantial benefits derived by the firm.

The Revenue appealed, relying on the Delhi High Court decision in Punjab Stainless Steel Industries vs. CIT, where the plea of commercial expediency was not established. However, the Tribunal upheld the CIT (A)'s decision, noting that the loan was for business expediency and the facts were distinguishable from the cited case. The Tribunal found no reason to interfere with the CIT (A)'s order and dismissed the Revenue's ground.

Conclusion:
The appeal of the Revenue was partly allowed, with the issue of unexplained investment in stock remitted for re-examination and the disallowance of interest expenses dismissed.

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