2015 (6) TMI 766 - AT - Income Tax

Undisclosed closing stock - difference in the value of stock shown to the bank by the assesses in their stock statements issued to the bank and as declared to the income tax department in their returns of income - Held that - AO relied on the statement of the bank manager in which he stated that physical verification of the stock was carried out, in support of his finding that the appellant possessed larger quantity of stock than the stock as per books of account, but the AO has not been able to prove that the stock lying at various sites at Madhya Pradesh as per stock statement dated 20.03.2010 were actually inspected/counted to substantiate the above said finding because the bank officers has not been able to produce the record of the movement of any bank officer from Bathinda to Madhya Pradesh and the records relating to actual counting of stocik. As far as the finding of the AO that the physical verification was proved from the drawing power register, I find tat the drawing power register is not authentic on account of non recording of vital information by the bank officers with regard to date of filing of stock statement and date of physical verification of stock. The AO has also not been able to rebut the contention of the A/R of the appellant that the stock was inflated in the stock statement to avail credit from the bank. Thus, the action of the AO of relying on the statement of the bank manager, the stock statement and the drawing power register for making addition on account of difference in stock, is not justified on facts It is an admitted fact that no stock statement was filed by the assessee on 31.03.2010 and the last stock statement was available on record is dated 20.03.2010, which has been utilized by the AO for making addition on account of difference in stock as per stock dated 20.03.2010 and balance sheet as on 31.03.2010. This fact also goes against the department, as no addition for the difference in stock as on 31.03.2010 could be made by relying on the stock statement dated 20.03.2010. In view of the above, all the grounds of the Revenue are dismissed - Decided against revenue Addition on non charging of interest from debtors - CIT(A) deleted the addition - Held that - no infirmity in the order of the ld. CIT(A), since no advance has been made during the year and as such no addition can be made. - Decided against revenue

Summary

Issues Involved:
1. Difference in closing stock figures reported to the bank and disclosed in IT returns.
2. Physical verification of stock by bank authorities.
3. Reliability of Drawing Power (DP) Register.
4. Rejection of books of account by the Assessing Officer (AO).
5. Addition on account of non-charging of interest from debtors.

Issue-wise Detailed Analysis:

1. Difference in Closing Stock Figures:
The primary issue in all the appeals was the discrepancy between the closing stock figures reported to the bank and those disclosed in the Income Tax (IT) returns. The AO made additions based on the higher stock figures reported to the bank. The assessees argued that the stock figures provided to the bank were inflated to avail higher credit limits and were not physically verified.

2. Physical Verification of Stock:
The AO relied on the statements of bank managers and the Drawing Power (DP) Register to assert that the stock was physically verified by bank authorities. However, the assessees contested this, stating that the stock was scattered across different locations and states, making physical verification impractical. The Tribunal found that the AO failed to provide concrete evidence of physical verification and that the statements of bank managers were based on procedural assumptions rather than actual verification.

3. Reliability of DP Register:
The DP Register was heavily relied upon by the AO to justify the additions. However, the Tribunal noted several deficiencies in the DP Register, such as the absence of dates for stock statement submissions, blank columns for accountant initials, and missing signatures of the inspecting officers. These deficiencies undermined the reliability of the DP Register as evidence of physical verification.

4. Rejection of Books of Account:
The AO did not point out any specific defects in the books of account or invoke the provisions of Section 145(3) of the Income Tax Act to reject the books. The Tribunal emphasized that without rejecting the books of account, the AO could not make additions based on discrepancies in stock figures reported to the bank.

5. Addition on Account of Non-Charging of Interest from Debtors:
In the case of Euro Infrastructure & Power Ltd., the AO made an addition for non-charging of interest from debtors with brought forward debit balances. The Tribunal upheld the CIT(A)'s decision to delete the addition, noting that no fresh advances were made during the year, and the balances were merely carried forward.

Conclusion:
The Tribunal dismissed the Revenue's appeals, finding that the AO's reliance on the DP Register and bank managers' statements was insufficient to justify the additions. The Tribunal also upheld the CIT(A)'s decisions regarding the non-rejection of books of account and the deletion of additions for non-charging of interest from debtors. The Tribunal emphasized the need for concrete evidence and proper procedural adherence in making such additions.