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TMI Blog2017 (1) TMI 1199X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the management, therefore, issued a notice and asked to furnish the details of stock along with valuation of closing stock. Since, the assessee could not furnish details of stock, the A.O. addressed a letter to the bank of the assessee and requested to submit details of stock hypothecated by the assessee for the purpose of obtaining open cash credit loan. 3. In response to notice u/s 133(6) of the Act, the bank vide its letter dated 5.11.2009 furnished stock statements from May 06 to March, 08 along with details of immovable properties pledged as collateral securities. The A.O. to verify the authenticity of the documents furnished by the bank summoned the bank manager of State Bank of India, Development Banking division, Vijayawada. In response to summons dated 22.12.2009, the bank manager appeared and he was examined and the statement was recorded. The bank manager deposing before the A.O., explained the procedure of sanction of open cash credit loans and verification of stock hypothecated to the bank. Based on the stock statement, admission of the bank manager that the assessee has been sanctioned open cash credit and also based on the stock hypothecated to bank, the A.O. op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the bank manager has explained the procedure followed by the bank for sanction of open cash credit loan and further followup action in respect of verification of stock hypothecated to bank, but he did not explain the position of the assessee, therefore, the deposition given by the bank manager cannot be considered as evidence. 5. The A.O. after considering the explanations of the assessee, held that since the assessee has not maintained regular stock registers disclosing the particulars of purchases, sales as well as stock held at the end of the year, the stock statement submitted to the bank is considered as the correct stock statement, which reflects the true and correct state of stock and its value. The A.O. further held that the assessee in a fiduciary capacity in respect of stocks declared to the banks would not have resorted to exaggerate the stock position, as there was a possibility of the bank officials checking the stocks and any manipulation discovered by the banks would be viewed against the assessee. The A.O. further held that the bank manager has categorically accepted that the bank periodically verifies the stocks hypothecated with the bank and the drawing power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admission of additional evidences, the assessing officer has provided a copy of the sworn deposition of the bank manager dated 22.12.2009 which was not supplied to the assessee during the course of assessment proceedings. The A.O. has given an opportunity to the assessee for cross examination of the bank manager. After the outcome of the cross examination, the A.O. has viewed that the cross examination undertaken by the assessee may not facilitate to weaken or qualify the earlier deposition of the bank manager dated 22.12.2009 and in the absence of any material alteration to the contents of the earlier deposition, the deposition given by the bank manager dated 22.12.2009 will hold good without any deviation. 7. The CIT(A) forwarded copy of remand report of the A.O. to the assessee for its comments. The assessee vide his rejoinder dated 4.3.2011 submitted that the bank manager in his cross examination dated 22.12.2009 has explained general procedure followed for sanction of open cash credit loan and further followup action in respect of stock hypothecated to the bank. However, in the course of cross examination, the bank manager has categorically stated that the loan has been san ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence in closing stock as per stock statement submitted to the bank and disclosed in the books of accounts u/s 69B of the Act. Similarly, the CIT(A) deleted additions made by the A.O. towards gross profit addition on undisclosed sales. Aggrieved by the CIT(A) order, the revenue is in appeal before us. 9. The Ld. D.R. submitted that the Ld. CIT(A) is erred in deleting the additions made by the A.O., towards unaccounted closing stock without considering the facts narrated by the A.O. in the remand report regarding the outcome of cross examination of the bank manager. The Ld. CIT(A) failed to consider the affirmations made by the bank manager in cross examination that there does not any contradiction and the stock position reported by the assessee was subject to physical verification by the banker on 4 to 5 periodical occasions. The Ld. CIT(A) ought to have considered that the branch manager affirmed that there were no events where the stock was used to avail credit limits by different concerns of the partners which established the existence of excessive closing stock. The Ld. CIT(A) failed to consider that the loan was paid to sister concern directly for purchase of scrap and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tock, and advance paid is considered in the books of accounts. The A.O. without understanding the peculiar facts of the case, simply gone on the basis of the stock statements to make additions, which is incorrect. 11. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The A.O. made additions towards difference in value of stock as per books of accounts and the stock statement submitted to the bank. The A.O. was of the opinion that the assessee failed to explain the difference between the value of closing stock as per the books of accounts and as per the stock statement submitted to the bankers. The A.O. further was of the opinion that the assessee has not disclosed true and correct stock position, even though it has carried huge stock which is evident from the fact that the assessee has submitted stock statement to the bank which carries higher stock than disclosed in the books of accounts. The A.O. further observed that the stock statement submitted to the banks is true and correct which was further supported by the deposition of the bank manager, wherein the bank manager has stated that the bank has p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of closing stock as well as quantitative details of stock submitted in the financial statements. The auditor clearly stated that because of peculiar facts of the case, the quantitative details of the stock cannot be furnished. The A.O. himself has admitted that the assessee has purchased stock and sold on lot basis without any reference to item of stock. Therefore, the A.O. was incorrect in disbelieving the books of accounts and statement of the bank manager before making additions towards difference in closing stock. 13. Having heard both the parties and considered materials on record, we find that the A.O. himself has admitted that there is no difference in quantity of stock as per books of accounts and stocks submitted to the banks. The A.O. made additions solely on the basis of stock statement without pointing out any defects in the books of accounts or stock books maintained by the assessee. The assessee categorically proves that it is impractical to maintain stock books because of peculiar facts of the business and hence, the stock is submitted based on the stock proposed to be purchased from the customers on the basis of advance given for purchase of stocks. We find mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank for making additions towards difference in stock u/s 69B of the Act. 15. Coming to the facts of the present case. The assessee is in the business of trading in scrap, which is mainly purchased from South Central Railway and M/s. New Blue Star Iron Scrap Private Limited, a sister concern of the assessee. The assessee has paid advance to M/s. New Blue Star Iron Scrap Private Limited for purchase of stock. The assessee claims that it has borrowed loan from the bank for the purpose of purchase of scrap from M/s. New Blue Star Iron Scrap Private Limited. This fact was supported by the findings of the A.O. in his assessment order, wherein the A.O. has called upon the bank manager and recorded his statement. The bank manager while deposing before the A.O. stated that the bank has sanctioned loan to the assessee for the purpose of purchase of stock from M/s. New Blue Star Iron Scrap Private Limited and the loan proceeds have been directly credited to the bank. The bank manager further admits that the loan is sanctioned on the basis of strength of the security but not based on the stock held by the assessee. 16. The A.O. made additions solely on the basis of stock statement, ign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are also verifiable. It is further submitted that stock details in case of iron scrap is not possible as only weights and lots can be mentioned either in the purchase bills or sale bills and detailed description of stock is not possible. The A.O. has not pointed out any discrepancies with regard to the non-disclosure of either purchase or sale in the books of accounts. The A.O. made additions merely on the basis of stock statement submitted to the bank without any evidence to state that the assessee has suppressed sales turnover. 19. Having heard both sides, 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 s ..... 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