Allahabad High Court
Commissioner Of Income Tax vs Khan And Sirohi Steel Rolling Mills on 7 January, 2005
Equivalent citations: (2006)200CTR(ALL)595
Bench: R.K. Agrawal, Prakash Krishna
JUDGMENT
1. The Tribunal, Delhi, has referred the following two questions of law under s. 256(2) of the IT Act, 1961 (hereinafter referred to as the Act) for opinion to this Court :
1. Whether the Tribunal's order deleting the addition of Rs. 13,96,080 is not vitiated on account of its failure to consider all relevant facts ?
2. Whether the assessee had discharged its onus of proving that the stock statement submitted by it to the bank showed inflated figures ?
2. The matter relates to the asst. yr. 1979-80.
3. Briefly stated, the facts giving rise to the present reference are as follows :
The assessee-respondent has been carrying on the business in re-rolling of M.S. rods. It has taken overdraft facility from the State Bank of India, Bulandshahar. On 31st March, 1979, i.e., on the last day of the accounting year, an amount of Rs. 5,10,114 was outstanding under the overdraft facility. The said overdraft was stated to have been secured against the plants, machinery and building. The ITO during the course of assessment proceedings found that the stock as per balance sheet was only Rs. 2,33,631 and the value of the fixed assets including building and machinery was Rs. 1,55,000. The total of these two sums comes to Rs. 3,83,000. It was much below the overdraft obtained. He was of the view that as the overdraft facility was to the tune of Rs. 5,10,114 and was higher than the stocks shown in the books of assessee, the assessee was indulging in out-of-book transactions. The explanation offered by the assessee with regard to the above discrepancy was rejected by the ITO and he made an addition to the assessee's income on the above terms. The assessment order was confirmed in appeal by the CIT(A). However, in further appeal by the assessee, the Tribunal allowed the appeal of the assessee and deleted the additions made by the ITO on the finding that there are authorities to show that the practice of declaring higher stock to the bank to get higher loan facility is a fact of life.
4. Heard Shri Shambhu Chopra, the learned standing counsel for the Revenue, and perused the orders of the authorities below. The learned standing counsel submitted that the Tribunal was not justified in deleting the addition made by the ITO on account of unexplained investment in the trading account, income from undisclosed sources. We have given careful consideration to the aforesaid submission of the learned counsel.
5. The ITO asked the assessee to get certificate from the bank regarding the loan outstanding as well as the security furnished. The assessee filed a letter dt. 15th Dec, 1982, to the State Bank of India. A perusal of the said letter shows that the bank has taken the value of the stocks as represented by the assessee through the stock statement dt. 19th Feb., 1979. The assessee also produced copy of the stock statement which was given to the bank on 19th Feb., 1979. It has been found by the CIT(A) that the goods hypothecated to the State Bank of India were the properties of the assessee which were purchased by them against the full payment. The goods were valued according to the market rate and were fully insured. The Tribunal observed that wrong declaration of the stock to the bank could not warrant any addition. It observed that the statement submitted by the assessee was not verified by the bank officials. The stocks were only hypothecated and not pledged. The ITO could not point out any defect in the trading account of the assessee and the books of account maintained by it which has also been accepted by the Central Excise Department as well as by the Sales-tax Department and could not be disbelieved. The Tribunal has placed reliance on the following cases :
1. India Motor Parts & Accessories (P) Ltd. v. CIT .
2. CIT v. Ram Krishna Mills (Coimbatore) Ltd. (1974) 93 ITR 49 (Mad).
3. Coimbatore Spinning & Weaving Company Ltd. v. CIT
4. Gaindamal Handa & Sons v. CIT (1980) 18 CTR (P&H) 210
5. Swadeshi Cotton Company Ltd. v. CIT .
6. The above cases lay down that it is a practice to inflate stocks with a view to obtain higher overdraft facilities from the banks. In the case of Swadeshi Cotton Company (supra), the goods pledged with the bank were higher than the book stock. The ITO, therefore, rejected the book results and estimated GP of 10 per cent on sales and consequently made addition in the income.
The explanation given by the assessee was that it inflated the value and quantity of the stocks in the bank declaration to obtain a number of drafts from the bank. This explanation was accepted by the Tribunal. The matter came up before this Court and it was held that Tribunal's decision was correct.
7. The Tribunal has also found that there was actually no verification of the stock made by any bansk official. The learned standing counsel could not point out any contrary decision to show that a practice to inflate stocks hypothecated with the bank with a view to avail higher overdraft facilities, is not prevalent in business community.
8. In view of the fact that the explanation has been accepted by the Tribunal we do not find any error in the order of the Tribunal.
In view of the above, we answer both the questions referred to us in the affirmative, i.e., in favour of assessee and against the Revenue.
However, there shall be no order as to costs.