Income Tax Appellate Tribunal - Ahmedabad
Income Tax Officer vs Jagdip Kanjibhai on 26 March, 1998
Equivalent citations: (2000)66TTJ(AHD)199
ORDER
B.L. CHHIBBER, AM:
The only ground raised in this appeal by the Revenue reads as under
"The learned Commissioner (Appeals) has erred in law and on facts in deleting the addition of Rs. 1, 19,648 representing alleged discrepancy in the value of closing stock."
2. The assessee, an individual, carries on business in medicines. He had obtained overdraft facilities from two banks, namely, the Mehsana Nagrik Sahakari Bank (Rs. 1,50,000) and Sarvoday Comm. Co.-op. Bank (Rs. 65,643) during the year from which stock was hypothecated to the banks. In comparing the stock statements given to the banks with the book stock as at the end of the year, the assessing officer noticed that the stock that should have been there as at the end of the year with reference to the stock statement given to the banks would be Rs. 3,16,353 as against the stock declared in the books at Rs. 1,96,705. Therefore, there was alleged undervaluation of stock to the tune of Rs. 1, 19, 648. It was submitted before the assessing officer that the stock statements were given to the banks on estimate basis so as to avail better loan facilities and since this stock was hypothecated and not pledged, there was no physical verification by the banks. The bank allowed the loans on the basis of good reputation and creditworthiness of the assessee and there was no sanctity to the stock statements given to the banks which were merely on estimate basis. The assessee also requested the assessing officer to examine the bank manager under S. 131 to verify the aforesaid averment, but this was not done by the assessing officer on the ground that the onus was clearly on the assessee to prove that stock statements given to the banks were not on actual basis. He accordingly made an addition of Rs. 1, 19,648 as unexplained investment under section 69 of the Act.
3. On appeal the Commissioner (Appeals) deleted the addition observing as under
"On careful consideration of the facts and circumstances of the case, I am of the view that the stock statement as given to the banks could not be considered and treated as absolute evidence in regard to the actual position of the stock lying with the appellant especially when the stock was merely hypothecated and not pledged and there was no physical verification by the bank at any stage. It is a matter of record that the stock statement was not being submitted regularly and the statements were not even submitted as at the end of the accounting year and the bank had to issue reminder to furnish stock statements as a matter of formality. The appellant even requested to examine the bank manager in this regard but this request was turned down by the Income Tax Officer on the ground that the onus was on the appellant to prove that the stock statement was not real. This is not correct inasmuch as, the stock statement was submitted to the bank and on further enquiry with the bank it would have been brought on record as to whether the bank was physically verifying the stock or merely accepting the stock statement at its face value as a matter of routine formality. The GP rate in the account of medicine and provision was fair and reasonable as compared to the gross profit rates obtained in the past and subsequent years, If the value of the closing stock would increase as indicated by the Income Tax Officer, the GP rate in medicines account would go up 30 per cent which is not a practicable proposition inasmuch as the selling price of the medicine is fixed by the Government and such abnormal margin of profit is not allowed in medicines sale. The Income Tax Officer has not brought anything on record to prove that the closing stock declared by the appellant was wrong except relying on the routine stock statement submitted to the bank for getting overdraft limit as allowed. The sales-tax authorities have accepted the turnover and book results of sales and stock, etc. In view of these reasons, the addition of Rs. 1, 19,648 made under section 69 of the Act towards the alleged discrepancy in closing stock is deleted."
4. Shri Rameshchander, the learned departmental Representative, submitted that the stock pledged by the assessee with the two banks exceeded the stock available with the assessee on the last day of the previous year and accordingly the assessing officer was justified in making the impugned addition. In support of his contention he relied upon the judgment of Gauhati High Court in the case of Dhansiram Agarwalla v. CIT (1993) 111 CTR (Gau) 39 : (1993) 201 ITR 192 (Gau). Shri N.R. Divatia, the learned counsel for the assessee submitted that when the stock was merely hypothecated to the bank, possession remained with the assessee and since there was no physical verification of the stock by the banks no credence can be given to the stock declared to the banks. The stock statements were not given to the banks on regular basis and not even on the last day of the accounting year and there were constant reminders from the banks for submission of the stock statements. In support of his contention, a letter dt. 31st May, 1988, from the bank manager, Mehsana Nagarik Sahakari Bank Ltd, was relied upon in which the bank manager had reminded the need for submission of stock statement. The learned counsel, therefore, submitted that the submission of stock statements was a mere formality. He further submitted that there was no intention to show undervaluation of stock because higher closing stock would have been the opening stock of the next year and since the assessee had higher income in the next assessment year, the impugned opening stock would have reduced the profit of that year. In support of his contentions he relied upon the following judgments
1. Uganda Industries v. CIT (1986) 158 ITR 567 (Guj);
2. CIT v. Ramakrishna Mills (Coimbatore) Ltd, (1974) 93 ITR 49 (Mad);
3. Circular No. 293/14/78/IT(Inv), dt. 29th Aug., 1980 of CBDT;
4. Ramniklal & Bros. v. Income Tax Officer (ITA No. 717/Ahd/1989, dt. December, 1993);
5. Bansal Sons v. Income Tax Officer (1995) 53 ITJ (Chd) 523;
6. Rose Carpet v. Income Tax Officer (1989) 33 TTJ (Del) 401,
7. CIT v. Premsingh (1986) 56 CTR (Del) 275: (1987) 163 ITR 434 (Del);
8. Assistant Commissioner v. Axia Engg. Co. (1996) 54 77J (Chd) 4 10;
9. Income Tax Officer v. Lavkush Hosiery (1983) 37 CTR (Trib) 71 ; and
10. ITAT Del. Bench 'D', Rajesh Gulati v. Income Tax Officer (1998) Taxman 7th Feb., 1998.
5. We have considered the rival submissions and perused the facts on record.
It is admittedly a case where goods were hyphothecated with the two banks and not pledged with the two banks. There is a real difference between pledging and hypothecation because in the case of pledging, the goods remain under the lock and key of the bank authorities and or, therefore, liable to be physically checked and examined. But in the case of hypothecation such goods remain in the custody of the assessee and the physical verification of the goods hypothecated to the bank is normally not done. As is commonly known, there are variety of reasons in commercial and business practice where assessees who obtain loan from banks report more figures of stock in hand than what is actually with them, in order to show that the bank is safe and secure and its interest is not in jeopardy. The figures reported in such fashion to the bank authorities cannot be taken at their face value as true and correct and the assessing officer cannot make addition on such basis. It is evident that the statements submitted to the two banks were on estimate basis for hypothecation of goods and not pledging of the goods. Accordingly we do not find any infirmity in the finding of the learned Commissioner (Appeals) reproduced above. The reliance placed by the learned departmental Representative on the judgment of Hon'ble Gauhati High Court cited supra is distinguishable because that was a case of pledging of goods and not of hypothecation of goods.
6. In the light of above discussion we hold that there was no justification for the impugned addition of Rs. 1, 19,648 and decline to interfere.
7. In the result, the appeal is dismissed.