2017 (1) TMI 1199 - AT - Income Tax

Additions towards difference in stock u/s 69B - Additions towards difference in closing stock based on the stock statement submitted to the bank - Held that - A.O. made additions solely on the basis of stock statement, ignoring the deposition given by the bank manager in the cross examination proceedings. The bank manager clearly explained that he was satisfied with the utilization of the funds based on the scrap available at the factories purchased from the official liquidator by the sister concern and that he considered the said stock for the purpose of sanctioning the loan. The bank manager in the cross examination proceedings clearly retracted from his earlier statement that before the A.O., he had explained the general procedure followed for sanctioning open cash credit loan and further follow up action for verification of stock hypothecated to the bank without referring to the case of the assessee. In the cross examination proceedings, he has categorically admitted that the loan sanctioned to the assessee is a mortgage loan based on the security given by the partners and obtaining stock statement is only a procedural formality. Therefore, we are of the view that the A.O. was completely erred in relying upon the stock statement without pointing out any defects in the books of accounts. Though the A.O. has relied upon plethora of judgements to come to the conclusion that additions can be made towards difference in stock based on the books of accounts and stock statement submitted to the bank, the case laws relied upon by the A.O. are not applicable to the facts of the case. Thus we are of the view that the A.O. was erred in making additions towards difference in closing stock based on the stock statement submitted to the bank. The CIT(A) after considering the relevant details has rightly deleted additions made by the A.O. - Decided against revenue Addition towards gross profit on sales disclosed in the stock statement submitted to the bank - Held that - we find force in the arguments of the assessee for the reason that the assessee has maintained regular books of accounts which were audited u/s 44AB of the Act. The auditor has not made any comments in respect of books of accounts and also valuation of closing stock. Therefore, we are of the view that there is no reason for the A.O. to reject books of accounts and estimate gross profit without referring to any discrepancies in the books of accounts in respect of sales as well as purchases. In so far as additions towards gross profit on the basis of stock statement, in the preceding paragraph, we hold that stock statement submitted to the banks cannot be considered as true and correct. Therefore, we are of the view that the A.O. was erred in estimating gross profit on the basis of sales disclosed in the stock statement. - Decided against revenue

Summary

Issues Involved:
1. Addition towards unexplained investment based on stock discrepancy under Section 69B of the Income Tax Act.
2. Addition towards gross profit estimation based on sales discrepancy.

Detailed Analysis:

1. Addition towards unexplained investment based on stock discrepancy under Section 69B of the Income Tax Act:

The case involves a partnership firm engaged in trading iron scrap, which filed returns for the assessment years 2007-08 and 2008-09. The Assessing Officer (A.O.) observed discrepancies between the closing stock declared in the books and the stock statements submitted to the bank. The A.O. issued a show-cause notice to the assessee, questioning the difference and treating it as unexplained investment under Section 69B of the Income Tax Act.

The assessee explained that the stock statement submitted to the bank included stock lying at the premises of customers and stock proposed to be purchased, which was not reflected in the books. The bank manager's deposition supported this by stating that the loan was sanctioned based on the collateral security and not solely on the stock.

The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's explanation, noting that the stock statement was prepared for loan purposes and did not reflect the actual stock. The CIT(A) found that the A.O. failed to point out any defects in the books of accounts or stock registers maintained by the assessee and thus deleted the additions made under Section 69B.

The Appellate Tribunal upheld the CIT(A)'s decision, agreeing that the A.O. erred in relying solely on the stock statement submitted to the bank without identifying any discrepancies in the books of accounts. The Tribunal noted that the stock statement submitted to the bank could not be considered accurate for tax purposes, as it was inflated to secure a higher loan.

2. Addition towards gross profit estimation based on sales discrepancy:

The A.O. also made an addition towards gross profit based on the difference in sales disclosed in the stock statement submitted to the bank and the books of accounts. The assessee contended that the nature of their business made it impractical to maintain detailed stock records, and the stock statement submitted to the bank included stock proposed to be purchased, which was not reflected in the books.

The CIT(A) deleted the addition, noting that the A.O. did not point out any discrepancies in the books of accounts or evidence of suppressed sales turnover. The CIT(A) concluded that the stock statement submitted to the bank could not be considered accurate for estimating gross profit.

The Appellate Tribunal upheld the CIT(A)'s decision, agreeing that the A.O. erred in estimating gross profit based on the stock statement submitted to the bank. The Tribunal noted that the assessee's books of accounts were audited, and no discrepancies were found by the auditor. Therefore, the A.O. had no basis to reject the books of accounts and estimate gross profit.

Conclusion:

The appeals filed by the revenue for the assessment years 2007-08 and 2008-09 were dismissed. The Tribunal upheld the CIT(A)'s decision to delete the additions made by the A.O. towards unexplained investment under Section 69B and gross profit estimation, based on the stock statement submitted to the bank. The Tribunal emphasized that the stock statement submitted to the bank could not be considered accurate for tax purposes and that the A.O. failed to identify any discrepancies in the books of accounts.