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TMI Blog2013 (11) TMI 517X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, in the interest of justice, we set aside this issue to the file of Assessing Officer and direct him to verify the details as furnished by the Assessee and find out as to whether tax has been deducted at source on the expenditure - Decided in favour of assessee. Addition u/s 69B - Difference between stock declared to the Canara Bank and stock reflected as closing stock - Held that:- additions cannot be made on account of difference arising in the quantity and value of stock shown in the books of accounts and the statement furnished to the banking authorities, admittedly to avail higher credit facilities. Courts have laid down the following guidelines while dealing with the issue: - (a) The stock in quantity and value is inflated on estimate basis in the statement furnished to the banking authorities to avail higher financial credits; - (b) The inflated and estimated stock is hypothecated and not pledged; - (c) No actual physical verification of stock is carried out by the officer of banking authorities during the year or as on date of valuation of stock; - (d) The assessee has maintained stock register; - (e) The assessee’s books of accounts are not found to be defective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Both the lower authorities have failed to allow / grant legitimate deduction with regard to differential depreciation of Rs.7,62,206/-, which ought to have been allowed to the Appellant. 6. The ld. CIT(A) has erred in law and on the facts of the case in confirming the action of ld. AO in making huge addition of Rs. 10,39,75,306/-u/s 69B of the Act. 7. The ld. CIT(A) has further erred in law in erroneously holding that Bank Manager had inspected godown of the appellant on 25/04/2009. Firstly there is no such inspection report of any physical verification and secondly even as per the CIT(A) the said alleged inspection of stock took place on 26/04/2009 whereas the addition is made for the so called discrepancy of stock as on 31/03/2009. 8. Alternatively and without prejudice to above, the Appellant has explained stock worth of 2654 M.T. out of alleged unexplained stock of 3319.037 M.T. and therefore addition to that extent may be deleted. 9. Ld. CIT(A) has erred in not following and respecting the decision of Hon ble Jurisdiction High Court in the case of Arrow Exim Ltd (230 CTR 293) which was directly covering the issue in favour of the appellant. The art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot the case of AO that on certain expenditure, tax had not been deducted and / or paid. Ld. Counsel further drew our attention to pg. nos.17 to 21 @ 18 of P/B, para 6 and pg. nos.140 to 147 of P/Bregarding details of entire amount of expenditure of various expenditure including contract payment and deduction of tax at source thereon, and it was argued that the Assessee has duly deducted tax at source and deposited the same in due time on entire amount of all the expenditure including contract payment wherever applicable. It was further argued that even Tax Auditor has categorically stated that the Assessee has complied with the provisions of Chapter XVII-B of the Act. The Ld. Counsel finallyargued that both the lower authorities have failed to bring on record such expenditure on which tax has not been deducted or deposited as per scheme of the Act, and in absence of which no disallowance can be made u/s 40(a)(ia) of the Act. 5. Ld. DR has relied upon the orders of the CIT(A) and AO. 6. We have heard both the sides and gone through the orders of both the lower authorities. It is seen that the assessing officer has made disallowance of expenditure u/s40(a)(ia) of the Act only on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h / new claim before AO. It was further argued that even if it is treated as a fresh / new claim, then also, the Supreme Court decision in the case of Goetze (supra) bars only AO to entertain any fresh / new claim without filing revised return of income.However the Appellate Authorities are not barred to allow the same, and accordingly reliance was placed on various authorities including Goetze (supra) itself. The Ld. Counsel further argued that CIT(A) while dismissing this ground on the technical ground failed to appreciate that grievances cannot be restricted only to addition / disallowance made by AO, instead it can also have grievance against the action of AO in not allowing any claim made by the Assessee, and therefore, the CIT(A) ought to have adjudicated the ground on merits and ought to have allowed the claim made by the Assessee. 10. Ld. DR has relied upon order of both the lower authorities. 11. We have heard the Counsels of both sides and gone through the orders of AO and CIT(A). We agree with the arguments made by the Ld. Counsel that the Supreme Court decision in the case of Goetze (supra) bars only AO but not the Appellate Authorities to entertain fresh / new clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied upon CIT vs. Veerdip Rollers (P) Ltd. - 323 ITR 341 (Guj.); CIT vs. Khan Sirohi Rolling Mills 200 CTR 595 (All.) and CIT vs. N. Swamy - 241 ITR 363 (Mad.). After placing reliance on these decisions, it was submitted that the Hon ble Courts, after making following observations, has held that merely relying on statement given to a bank, addition cannot be made in the hands of the assessee and onus is on revenue to prove that the assessee has undisclosed income : (a) The stock is inflated in the statement furnished to the bank to avail larger credit facilities; (b) The inflated stock was hypothecated and not pledged; (c) The assessee has maintained stock register; (d) The assessee books of accounts are not found to be defective or nongenuine by AO. 14(ii). The Ld. Counsel further submitted that the stock detail has been inflated in the statement furnished to bank to avail larger credit facilities, which is not denied by AO; admittedly, the stock was hypothecated and not pledged; Quantitative details (month wise) of raw materials, finished goods and semifinished goods has been placed on records before both the lower authorities (Pgs.17 to 22 @ 18 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down and not for the physical verification of stock and even inspection of stock on 25/04/2009 can never be taken as physical verification of stock as at 31/03/2009. No one would be in a position to take physical verification of stock on 25/04/2009 for the stock lying on 31/03/2009. At page no. 217 of the paper book, the total value of goods shown 17.09 crore. Thereafter, margin @ 30% at Rs. 5.12 crore had been reduced and net value had been calculated Rs.11.96 crore and sanction limit was shown Rs.10 crore till 04.05.2009 whereas this loan was sanctioned by the Bank at Rs.11.03 crore as on 31.03.2009. 14(viii). The Ld. Counsel further explained the difference to the extent of 2654 MT out of total difference of 3119.037 MT by submitting that the Assessee had received 2654 MT stock on 07/04/2009 which was very well recorded in R.G.23 A register in April 2009 (Pgs. 210 to 214 of P/B), since the invoices of the same were dated 31/03/2009, the same was included in the stock statement furnished to Canara bank for showing the stock position as on 31/03/2009.However the same was not accounted for in the books of accounts upto 31/03/2009.The Ld. Counsel to further support his argument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (b) the stocks were hypothecated and not pledged and (c) the books of accounts are not found to be defective or non-genuine by the AO. (d) The assessee explained the difference either on account of inflated valuation of stock or excess quantity shown to bank. We further find that Hon ble the Gujarat High Court in the case of Meico Bonds Pvt. Ltd. (supra) has also confirmed the order of ITAT in deleting the addition made on account of understatement and undervaluation of stock after making observations that (a) the assessee had been contending that the valuation supplied to the Bank did not reflect the accurate or the correct picture; (b) the statement was drawn on the basis of estimation and such estimate is based on higher side to borrow higher loan and (c) the closing stock reflected in the books maintained for income-tax reflects the correct picture. Hon ble Gujarat High Court in the case of Meico Bonds Pvt. Ltd. (supra) has further strengthened the view taken in Arrow Exim Pvt. Ltd. (supra). 16(ii) This view is further supported by Hon ble Allahabad High Court s decision in the case of Khan Sirohi Rolling Mills (supra), wherein also, the Hon ble Court did not find any err ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hecated with the bank and not pledged. Unlike pledge, under hypothecation, the stock is not kept in lock and key of the bank. Therefore the submission of the assessee that the figure of closing stock was estimated and inflated with a view to meet the margin requirements of the bank can be accepted. Applying test (c), we also find that there was no physical verification of stock by the Bank authorities as on 31/03/2009. A perusal of CIT(A) order reveals that he has placed a great reliance on the godown visit of Bank Manager on 25/04/2009. However, the said reliance is completely misplaced in as much as firstly, this is not even the case of the assessing officer who made the addition. Secondly the said visit took place on 25/04/2009 i.e. much after the close of the year under consideration. Thirdly, the said visit was only a godown visit and not physical verification and counting of stock. Fourthly and most importantly, in the very inspection report the Bank Manager himself notes that in so far as 3000 tonnes of coil is concerned, the same was included in the stock of Month of March, 2009. Because of this inclusion, stock position of March shows increase. This aspect is convenientl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port which could remotely suggest that the Assessee has invested in unexplained stock which is not recorded in books of accounts. 16(iv). If the discrepancies of stock at 3119.037 441.647 MT valued Rs.10.39 crore accepted as suppressed stock than same is to be included in closing stock of A.Y. 09-10 opening stock of A.Y. 10-11 which would be again give distorted position of accounting result for A.Y. 10-11. The ld. AO had not brought on record any evidence of purchase and sale made outside the book in A.Y. 09-10. Therefore, the entire set of facts of the case falls within the parameters / guidelines framed by Hon ble the High Courts, and we are of the view that merely relying on the statement furnished to the banking authorities to avail larger credit facilities, addition cannot be made on account of difference between the quantity and value of stock shown in the books of accounts and the statement furnished to the banking authorities. 16(v). Independent of these tests, we also find that the assessee has also explained the difference to the extent of 2654 MT out of total difference of 3119.037 MT. We find that the Assessee had received 2654 MT stock on 07/04/2009 which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .96% 7.64% 9.34% Net Profit 111772611 13737397 17686422 17025992 Turnover 610575238 890096455 1196543944 1475315486 Percentage 18.31% 1.54% 1.48% 1.15% Stock-intrade 172616967 112963244 128033129 174150936 Turnover 610575238 890096455 1196543944 1475315486 Percentage 28.27% 12.69% 10.70% 11.80% 16(vii) Going through the financial ratios furnished by Ld. Counsel from A.Ys.2006-07 to 2012-13 it is seen that the Gross Profit ratio is ranging from 6.96% to 9.34%, whereas, after including the addition made for the current year, the Gross Profit ratio would show 24.78% as against actual ratio of 7.75% for the current year under appeal. Similarly Net Profit ratio is ranging from 0.69% to 1.54% and after including the addition made for the current year, the Net Profit ratio would show 18.31% as against actual ratio of 1.28% for the current year ..... 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