Merely on basis of statement made to banking authorities to avail larger credit facilities, additions cannot be made on account of difference arising in quantity and value of stock shown in books of account and statement furnished to banking authorities
If expenditure has been subject matter of tax deduction at source and compliance to Chapter XVII-B has been made, then no disallowance can be made under section 40(a)(ia) on presumption basis
Where assessee claimed lower amount of depreciation in return, it could make fresh claim before appellate authorities
[2013] 36 taxmann.com 369 (Ahmedabad - Trib.)
IN THE ITAT AHMEDABAD BENCH 'A'
Riddhi Steel & Tubes (P.) Ltd.
v.
Assistant Commissioner of Income-tax, Range -5, Ahmedabad*
MUKUL KR. SHRAWAT, JUDICIAL MEMBER
AND T.R. MEENA, ACCOUNTANT MEMBER
AND T.R. MEENA, ACCOUNTANT MEMBER
IT APPEAL NO. 1329 (AHD.) OF 2012
[ASSESSMENT YEAR 2009-10]
[ASSESSMENT YEAR 2009-10]
APRIL 12, 2013
I. Section 69B, read with section 145, of the Income-tax Act, 1961 - Undisclosed investments [Closing stock] - Assessment year 2009-10 - Whether merely relying upon statement furnished to banking authorities, additions cannot be made on account of difference arising in quantity and value of stock shown in books of account and statement furnished to banking authorities, admittedly to avail higher credit facilities - Held, yes [Para 16] [In favour of assessee]
II. Section 40(a)(ia) of the Income-tax Act, 1961 - Business disallowance - Interest, etc., paid to resident without deduction of tax at source - Assessment year 2009-10 - Whether if expenditure has been subject matter of tax deduction at source and if compliance to Chapter XVII-B has been made, then no disallowance can be made under section 40(a)(ia) on presumption basis - Held, yes - Assessee had made provision on account of TDS payable to contractor, but it could produce challan of lesser sum - Assessing Officer worked out expenditure on reverse working mechanism and disallowed same under section 40(a)(ia) - However, he could not point out any such instance where tax was not deducted or deducted but not paid while assessee submitted that on each and every expenditure for contractor's payment, tax had been deducted at source and paid wherever it was applicable - Whether, in interest of justice, matter was to be remitted to Assessing Officer for re-adjudication - Held, yes [Para 6] [Matter remanded]
III. Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/rate of [Fresh claim] - Assessment year 2009-10 - Assessee in return of income had claimed depreciation at lower amount - However, same was rightly quantified in Tax Audit Report in Form No. 3CD - Upon realization, assessee claimed differential in depreciation - However, Assessing Officer did not allow same on ground that said fresh claim was not made in revised return of income, and, in view of Goetze (India) Ltd. v. CIT [2006] 157 Taxman 1 (SC), Assessing Officer could not consider fresh claim - Commissioner (Appeals) sustained said order - Whether since Supreme Court's decision bars only Assessing Officer but not appellate authorities to entertain fresh/new, claim, Assessing Officer was directed to allow differential in depreciation to assessee - Held, yes [Para 11] [In favour of assessee]
FACTS-I
| ■ | The Assessing Officer noticed that there was difference between stock declared to bank and stock reflected as closing stock and made addition under section 69B to assessee's income. | |
| ■ | The Commissioner (Appeals) sustained the addition made by the Assessing Officer after holding that (a) the discrepancies in stock were never explained by the assessee with the help of books of account, bills, vouchers, etc.; (b) stock hypothecated to bank was physically verified by the banker on 25-4-2009; and (c) the difference in stock was detected at the end of year. The Commissioner (Appeals) had further held that the assessee could not prove any linkage of purchase of steel vide bills with the inventory of stocks furnished to the bank, and accordingly, the Commissioner (Appeals) had rejected contention of assessee that stock were included in the stock statement furnished to the bank. | |
| ■ | On second appeal: |
HELD-I
| ■ | Courts have laid down that additions cannot be made on account of difference arising in the quantity and value of stock shown in the books of account 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 account are not found to be defective or non-genuine by Assessing Officer; | |
| (f) | The books of account maintained by the assessee are accepted by the Central Excise and/or Sales Tax department. |
| ■ | Applying these tests to the facts of the present case, the following conclusions emerge: | |
| ■ | Applying test (a) the stock details have been inflated purely on estimate basis in the statement furnished to bank to avail larger credit facilities. This aspect is duly supported by the fact that the assessee had already borrowed an amount of Rs. 11.03 crores from bank as at 31-3-2009, and therefore, by making upward adjustment of 30 per cent thereon for margin required to be maintained as per the loan agreement entered with the bank, the value of stock was estimated and inflated to Rs. 17.09 crores so as to justify the amount already drawn from the bank. | |
| ■ | Applying test (b), in the present case, stock is only hypothecated 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), there was no physical verification of stock by the bank authorities as on 31-3-2009. A perusal of Commissioner (Appeals) order reveals that he has placed a great reliance on the godown visit of Bank Manager on 25-4-2009. However, the said reliance is completely misplaced inasmuch as firstly, this is not even the case of the Assessing Officer who made the addition. Secondly the said visit took place on 25-4-2009, 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 conveniently overlooked and ignored by the Commissioner (Appeals) | |
| ■ | Applying test (d), the assessee has maintained stock register giving complete quantitative details including month-wise details of raw materials, finished goods and semi-finished goods. In fact these details have been placed on record before the Assessing Officer which is not controverted by the Assessing Officer and books of account of the assessee has not been found to be defective or non-genuine by Assessing Officer. | |
| ■ | Applying test (e) the assessee having been subjected to statutory audit under the Companies Act, 1956, also subjected to tax audit under the Income-tax Act, and none of these auditors had qualified their reports in any manner whatsoever. In fact the assessee has been filing regular returns since last 8 years and has been consistently following method of accounting as prescribed under section 145 and valuing closing stock and inventories as prescribed under section 145A. No such practices have been questioned or doubted or found to be erroneous by the Assessing Officer. | |
| ■ | Applying test (f), the assessee is subjected to excise and VAT and none of these authorities have noticed or for that matter taken any action against assessee for the alleged stock discrepancy. In fact it was found from Excise Audit Report for the period Jan' 2009 to Dec' 2009 which was carried out by Excise Revenue Audit team that the excise department, after detailed scrutiny of the books of account, stock registers, excise records, has accepted the books of account and other record maintained by the assessee to be true, correct and except few discrepancies in so far as inventory is concerned. The period of audit covers 31-3-2009. If the assessee has in fact purchased and stored such unaccounted stock allegedly shown to the bank, it is impossible not to leave a single trail more so when the assessee is a manufacturer and not a trader. It is not possible to acquire unaccounted stock, carry out manufacturing activities, consume energy, remove the finished stock and sale away the same in the market. Therefore, there was considerable force in the submission of the assessee that the books of account were found to be genuine and recorded appropriately and no such kind of discrepancies were found to be noted in the Excise Audit Report which could remotely suggest that it had invested in unexplained stock which is not recorded in books of account. [Para 16 (iii)] | |
| ■ | If the discrepancies of stock at 3119.037 & 441.647 MT valued Rs. 10.39 crore accepted as suppressed stock then same is to be included in closing stock of assessment year 2009-10 and opening stock of assessment year 2010-11 which would again give distorted position of accounting result for assessment year 2010-11. The Assessing Officer had also not brought on record any evidence of purchase and sale made outside the book in assessment year 2009-10. Therefore, the entire set of facts of the case falls within the parameters/ guidelines framed by the Hon'ble High Courts, and 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 account and the statement furnished to the banking authorities. [Para 16(iv)] | |
| ■ | Independent of these tests, it was also found that the assessee had also explained difference of 2654 MT out of total difference of 3119.037 MT. The assessee had received 2654 MT stock on 7-4-2009 which was recorded in register on 7-4-2009 and since the invoices of the same were dated 31-3-2009, the same was included in the stock statement furnished to Bank for showing the stock position as on 31/3/2009 though these purchases were accounted for in the books of account after 31-3-2009. As regards the remaining difference of 465.037 MT, as held earlier, the same was purely on inflated estimate basis so as to fulfil margin requirements of the bank. Hence, contention of assessee that the stock statement was furnished to the bank on estimated basis to avail larger credit facilities was to be accepted. [Para 16 (v)] | |
| ■ | There is another angel which is required to be considered while deciding this issue and that is the effect in the financial statements on account of addition made by Assessing Officer. [Para 16(vi)] | |
| ■ | Going through the financial ratios for assessment years 2006-07 to 2012-13, it is seen that the Gross Profit ratio is ranging from 6.96 per cent to 9.34 per cent, whereas, after including the addition made for the current year, the gross profit ratio would show 24.78 per cent as against actual ratio of 7.75 per cent for the current year under appeal. Similarly net profit ratio is ranging from 0.69 per cent to 1.54 per cent and after including the addition made for the current year, the net profit ratio would show 18.31 per cent as against actual ratio of 1.28 per cent for the current year under appeal. In the same way, stock-in-trade ratio is ranging from 9.31 per cent to 12.69 per cent and after including the addition made for the current year, the same would show 28.27 per cent as against actual ratio of 11.24 per cent for the current year under appeal. | |
| ■ | Hence, after including the addition made by the Assessing Officer, the financial statement would completely be distorted and will not show the correct, true and fair view, which is one more factor which substantiates the finding that the figure of stock was inflated, ad hoc and estimated purely for the bank without there being any actual stock acquired by the assessee. Therefore, in any way, the addition made by the Assessing Officer is not justified and the same is hereby directed to be deleted. [Para 16 (vi)] |
FACTS-II
| ■ | The assessee had made provisions on account of TDS payable to contractor, but it could produce challan of lower amount. | |
| ■ | The Assessing Officer worked out expenditure on reverse working mechanism, i.e., (Rs. 3,863/2 per cent) and disallowed the same under section 40(a)(ia) for non-deposition of tax deducted at source. | |
| ■ | The Commissioner (Appeals) also sustained the disallowance made by the Assessing Officer. | |
| ■ | On second appeal: |
HELD-II
| ■ | The Assessing Officer has made disallowance of expenditure under section 40(a)(ia) only on the basis of reversal of entries made regarding provision for TDS payable on contractors payment. The Assessing Officer had not brought on record any such instance of expenditure, on which tax was not deducted or deducted but not paid so, in the absence of which disallowance cannot be made under section 40(a)(ia). Further, assessee submitted that on each and every expenditure for contractor's payment, tax had been deducted at source and paid wherever it was applicable. If expenditure has been subject matter of tax deduction at source and if compliance to Chapter XVII-B has been made, then no disallowance can be made under section 40(a)(ia) on presumption basis. Therefore, in the interest of justice, the issue was set aside to the file of Assessing Officer. [Para 6] |
CASES REFERRED TO
Goetze (India) Ltd. v. CIT [2006] 157 Taxman 1 (SC) (para 7), CIT v. Meico Bonds (P.) Ltd. [Tax Appeal No. 2041 of 2010] (para 14(i)), CIT v.Arrow Exim (P.) Ltd. [Tax Appeal No. 1973 of 2008, dated 11-1-2010] (para 14(i)) CIT v. Veerdip Rollers (P.) Ltd. [2010] 323 ITR 341 (Guj.)(para 14(i)), CIT v. Khan & Sirohi Rolling Mills [2006] 152 Taxman 224 (All.) (para 14(i)), CIT v. N. Swamy [2000] 241 ITR 363/[2002] 125 Taxman 233 (Mad.) (para 14(i)) and CIT v. Chemmeens [1994] 207 ITR 909/[1992] 64 Taxman 355 (Ker.) (para 15).
Tushar P. Hemani for the Appellant. Shelley Jindal for the Respondent.
ORDER
T.R. Meena, Accountant Member - This is an appeal at the behest of the assessee which has emanated from the order of CIT(A)-XI, Ahmedabad, dated 25.05.2012 for A.Y. 2009-10. The effective grounds of appeal are as under:
| "1. | The Id. CIT(A) has erred in law and on facts of the case in confirming the action of ld. AO in making disallowance of an expenditure amounting to Rs. 1,93, 150/- u/s 40(a)(ia) of the Act purely on guess work and without appreciating the facts that no such expenditure was debited to Profit & Loss account and consequently there was no violation of TDS provisions. | |
| 2. | The ld. CIT(A) has erred in law and on the facts of the case in not maintaining the ground raised with regard to differential amount of depreciation of Rs. 7,62,206/- after holding that the same was not disallowed by the ld. AO and therefore the Appellant cannot have any grievance against the assessment order. | |
| 3. | The ld. CIT(A) ought to have appreciated the facts that the ld. AO has dealt with the issue with regard to claim of the Appellant to allow depreciation at Rs. 86,01,248/-as given in the Tax Audit Report as against Rs. 78,39,042/- shown in the Return of Income, however, the ld. AO has not allowed the differential amount of Rs. 7,62,206/- as deduction while computing assessable income, and therefore, the Appellant can have grievances against such action of the ld. AO. | |
| 4. | The action of Id. CIT(A) in not adjudicating the ground on merits in as much as law is patently bad, untenable and illegal in the eyes of law. | |
| 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 Id. 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 Id. 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 artificial and hyper technical distinctions given by the ld. CIT(A) for not following the decision of the Hon'ble Jurisdictional High Court is nothing but an attempt not to follow binding decision which amount to contemptuous defiance of the law of the land which is not permissible under any circumstances and should not be allowed to be perpetuated. | |
| 10. | Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. | |
| 11. | The Id. CIT(A) has erred in law and on the facts of the case in onfirming the action of Id. AO in charging interest u/s 234A/B/C of the Act. | |
| 12. | The Id. CIT(A) has erred in law and on the facts of the case in confirming the action of ld. AO in initiating penalty proceedings u/s 271(l)(c) of the Act." |
2. Ground No.1 challenged in the grounds of appeal is regarding disallowance of expenditure of Rs. 1,93,150/- u/s 40(a)(ia) of the Act. During the course of assessment proceedings, the assessing officer was of the view that the Assessee has made provisions of Rs. 49,255/- on account of TDS payable on Contractor , whereas the assessee could produce challan of Rs. 45,392/- only. Accordingly, the assessing officer worked out expenditure amounting to Rs.1,93,150/-on reverse working mechanism i.e (Rs. 3,863/2%) and disallowed the same u/s 40(a)(ia) of the Act for non-deposition of tax deducted at source.
3. The CIT(A) also sustained the disallowance made by the assessing officer after holding the assessee could not furnish the details of account in which excess provisions of TDS payable amounting to Rs. 3,863/- was made.
4. Now the assessee is before us against the said action of the assessing officer. The ld. Counsel submitted that both the lower authorities have failed to appreciate that the Assessee had made excessive provisions by Rs. 3,863/- on account of TDS payable on contractors payment, and it was not a case that the Assessee has failed to deduct tax at source or deducted tax at source but not deposited with the Government Treasury account, inasmuch as it was also not 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 the basis of reversal of entries made regarding provision for TDS payable on contractors payment. The assessing officer has not brought on record any such instance of expenditure, on which tax is not deducted or deducted but not paid so, and in the absence of which disallowance cannot be made u/s 40(a)(ia) of the Act. Further Ld. Counsel has drawn our attention to pg. nos.140-147 of P/B and submitted that on each and every expenditure for contractor's payment, tax has been deducted at source and paid wherever it is applicable. We are of the firm view that if the expenditure has been subject matter of tax deduction at source and if the compliance to the Chapter XVII-B has been made then no disallowance can be made u/s 40(a)(ia) of the Act on presumption basis. Therefore, 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 on pg. nos.140-147 of P/B and find out as to whether tax has been deducted at source on the expenditure as contented by the ld. Counsel or not, and if the compliance has been made then no disallowance should be made u/s 40(a)(ia) of the Act on presumptive basis.
7. Ground nos. 2 to 5 challenged in the Grounds of Appeal are regarding disallowance of differential depreciation amounting to Rs. 7,62,206/-. The Assessee in the Return of Income has inadvertently claimed depreciation at Rs. 78,39,042/-, however, the same was rightly quantified at Rs. 86,01,248/- in the Tax Audit Report in Form No. 3CD. During the course of the assessment proceedings, upon realization when the assessee claimed the differential depreciation, the assessing officer did not allow differential depreciation amounting to Rs. 7,62,206/- after holding that the said fresh claim was not claimed in the revised return of income, and therefore, in view of Goetze (India) Ltd. v. CIT [2006] 157 Taxman 1 (SC), it cannot be allowed.
8. The CIT(A) has not adjudicated this issue on the ground that since AO has not made addition of Rs. 7,62,206/-, the assessee cannot be said to be aggrieved against the order of AO, and therefore, the same is not maintainable as per provisions of S. 246A of the Act.
9. The ld. Counsel argued that the Assessee had already made a claim of depreciation in the return of income and it was only a matter of quantification of amount of depreciation, and therefore, it was not a fresh / 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 (India) Ltd. (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 (India) Ltd. (supra) bars only AO but not the Appellate Authorities to entertain fresh / new claim made before AO without filing revised return of income. Therefore, we accept the claim as made by the Assessee and direct the Assessing Officer to allow the differential depreciation amount of Rs. 7,62,206/- after verifying the claim as made in the Tax Audit Report in Form No. 3CD.
12. Ground nos.6 to 10 challenged in the grounds of appeal are regarding making addition of Rs. 10,39,75,306/- u/s 69B of the Act. The AO has made addition on account of difference between stock declared to the Canara Bank and stock reflected as closing stock as at 31st March, 2009, details given on pg. no.8 para 9.2 of the assessment order, is summarized as under :
| Particulars | Quantity (MT) | Amount (Rs.) |
| Raw Material | ||
| As per Statement furnished to Bank | 4854.782 | 14,68,86,248 |
| As per Books | 1735.745 | 5,70,72,922 |
| Difference added by AO (A) | 3119.037 | 8,98,13,326 |
| Finished Goods | ||
| As per Statement furnished to Bank | 694.918 | 2,40,19,071 |
| As per Books | 253.271 | 98,57,091 |
| Difference added by AO (B) | 441.647 | 1,41,61,980 |
| Total (A+B) | 10,39,75,306 |
13. The CIT(A) has sustained the addition made by the AO after holding that (a) the discrepancy in stock were never explained by the Assessee with the help of books of account, bills, vouchers etc.; (b) stock hypothecated to Canara Bank were physically verified by the banker on 25/04/2009 and (c) the difference in stock was detected at the end of year i.e on 31st March, 2009. The CIT(A) has further held that the Assessee could not prove any linkage of purchase of 2654 M.T. of steel vide bills dated 31/03/2009 with the inventory of stocks as on 31/03/2009 furnished to the Canara bank, and accordingly, CIT(A) has rejected the contention of the assessee that stock of 2645 M.T. for which bills were raised by SAIL on 31/03/2009 were included in the stock statement furnished to the Canara Bank.
14(i). The Ld. Counsel at the first place argued before us that the entire issue is covered by the Gujarat High Court decisions in the case of CIT v. Meico Bonds (P.) Ltd. bearing Tax Appeal No.2041 of 2010 (pg.nos.1-4 of P/B) and CIT v. Arrow Exim (P.) Ltd. [Tax Appeal No. 1973 of 2008, dated 11-1-2010]. The Ld. Counsel has further relied upon CIT v. Veerdip Rollers (P.) Ltd. [2010] 323 ITR 341 (Guj.); CIT v. Khan & Sirohi Rolling Mills [2006] 152 Taxman 224 (All.) and CIT v. N. Swamy [2000] 241 ITR 363/[2002] 125 Taxman 233 (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 non- genuine 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 semi-finished goods has been placed on records before both the lower authorities (Pgs.17 to 22 @ 18 & 20 of P/B)(Pg.75 of P/B being part of Company's Audit Report); admittedly, AO has not pointed out any defects in the books of accounts maintained by the Assessee and has accepted the same, and accordingly relying on the decisions cited above, it was argued that no addition can be made merely relying on the statement furnished to the bank without brining on record any evidentiary proof to establish that the assessee had undisclosed income.
14(iii). Ld. Counsel further submitted that the assessee has been subjected to tax audit and tax auditor has qualified the report in any manner which is at pages 35-54 of the Paper book filed before us. It was further submitted that the assessee is subjected to excise and VAT and none of these authorities have taken any action against assessee for the alleged stock discrepancy.
14(iv). The Counsel further submitted that most importantly, there was an Excise Revenue Audit wherein the excise department, after detailed scrutiny of the books of accounts, stock registers, excise records, has accepted the books of accounts and other record maintained by the assessee to be true, correct and without any discrepancies in so far as inventory is concerned. Such report was placed on record at pages 165-166 of the paper book.
14(v). The Counsel while drawing attention to page 10 of the assessment order submitted that if the addition as suggested by the assessing officer is made, the book result viz. GP and NP as also the stock turnover ratio would show highly abnormal picture compared to other comparable years. Ld. Counsel, upon direction from the Bench, placed on record a statement containing these three ratios from A.Y. 2006-07 to A.Y. 2012-13 to substantiate his argument.
14(vi). The Ld. Counsel further, drawing attention to the letter furnished on 05/12/2011 to the AO enclosed on pg. nos.17 to 22 of P/B, argued that the Assessee had submitted quantitative details (month wise) in respect of Raw Materials, Finished Goods and Semi-finished goods to prove that entire stock register was maintained and the stock recorded in the books of account was correct, which has not been controverted by the AO.
14(vii). Insofar as the contention of CIT(A) that the bank manager has inspected the assessee's godown on 25/04/2009 and verified the stock declared to the Bank, the Ld. Counsel has argued that the said inspection report was for the "Godown" 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 drew out attention to pg. no.220 of P/B and submitted that the bank manager while preparing inspection report on 25/04/2009 has also noted that the Assessee had received 2654 MT stock which has been included in the stock statement for the month of March, 2009.
14(ix). Insofar as the balance difference of 465.037 MT stock (3119.037 MT - 2654 MT) is concerned, Ld. Counsel further submitted that during the course of hearing, the stock statement was furnished purely on estimated basis and taking into account the requirement of margin of 30%. By drawing attention to pg. nos.68 read with 217, the ld. Counsel submitted that the Assessee had already borrowed an amount of Rs. 11.03 Crores from Canara Bank as at 31/03/2009, and therefore, making upward adjustment of 30% thereon for margin required to be maintained by the Bank, the value of stock was worked out at Rs. 17.09 Crores on estimated basis (Pg. no.217 of P/B) so as to fulfill the requirements of the loan agreement entered into with Canara Bank. Accordingly, the Ld. Counsel closed his argument by submitting that the stock statement was furnished on estimated basis taking into account the borrowed amount as of 31/03/2009 and requirement to maintain 30% margin over and above the borrowed amount.
15. Ld. CIT DR supported the orders of the lower authorities. He further put emphasis of the order of CIT(A) more particularly paras6.2 to 6.7. He thus submitted that lower authorities have passed proper order requiring no interference at all. He further relied upon CIT v. Chemmeens [1994] 207 ITR 909/[1992] 64 Taxman 355 (Ker.), wherein the ITAT deleted the addition on the basis of inconsistency of earlier year not on merit e.g. the assessee inflates the stock for getting higher margin of credit.
16(i). We have at length heard both the sides. We agree with the arguments of the Ld. Counsel of the Assessee that the case of the Assessee is covered by the Gujarat High Court decisions in the case of Arrow Exim (P.) Ltd. (supra) and Meico Bonds (P.) Ltd. (supra). It is seen that Hon'ble the Gujarat High Court in the case of Arrow Exim (P.) Ltd. (supra) has confirmed the order of ITAT and CIT(A) in deleting addition made u/s 69B of the Act under identical circumstances of the case after making observations that (a) the stock statement showing inflated quantity and value of stock was furnished to the banking authorities to avail more credit facilities; (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 (P.) 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 (P.) Ltd. (supra) has further strengthened the view taken in Arrow Exim (P.) 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 error in the order of Tribunal in accepting that (a) the assesse inflated the value of the stocks in the bank declaration to obtain a number of drafts from the bank; (b) there was actually no verification of the stock made by any bank official; (c) the stocks were only hypothecated and not pledged; (d) the income - tax officer could not point out any defect in the trading accounts of the assessee and (e) the books of accounts maintained by the assessee has also been accepted by the Central Excise Department as well as by the Sales Tax Department could not be disbelieved.
16(iii). On perusal of the decisions as referred above, it is gathered that Hon'ble Courts have laid down 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 or non-genuine by AO; | |
| (f) | The books of accounts maintained by the assessee are accepted by the Central Excise and / or Sales Tax Department. |
Applying these tests to the facts of the present case, the following conclusions emerge:
Applying test (a), we find that the stock details have been inflated purely on estimate basis in the statement furnished to bank to avail larger credit facilities. This aspect is duly supported by the fact that the Assessee had already borrowed an amount of Rs. 11.03 Crores from Canara Bank as at 31/03/2009, and therefore, by making upward adjustment of 30% thereon for margin required to be maintained as per the loan agreement entered with the Bank, the value of stock was estimated and inflated to Rs. 17.09 Crores so as to justify the amount already drawn from the Bank.
Applying test (b), we further find that in the present case, stock is only hypothecated 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 conveniently overlooked and ignored by the CIT(A).
Applying test (d),We further find that the assessee has maintained stock register giving complete quantitative details including month-wise details of Raw Materials, Finished Goods and Semi-finished goods. In fact these details have been placed on record before the AO (Pg. Nos. 17 to 22 @ 18 & 20 of P/B), which is not controverted by the AO and books of accounts of the assessee has not been found to be defective or non-genuine by AO.
Applying test (e),We further find that the assessee has been subjected to statutory audit under the Companies Act, 1956, also subjected to tax audit under the Income Tax Act, and none of these auditors had qualified their reports in any manner whatsoever. In fact the assessee has been filing regular returns since last 8 years and has been consistently following method of accounting as prescribed u/s 145 and valuing closing stock and inventories as prescribed u/s 145A of the Act. No such practices have been questioned or doubted or found to be erroneous by the AO.
Applying test (f), we find that the assessee is subjected to excise and VAT and none of these authorities have noticed or for that matter taken any action against assessee for the alleged stock discrepancy. In fact on perusal of pg. nos.165-166 of paper book placed before us, we find Excise Audit Report for the period Jan'2009 to Dec'2009 which was carried out by Excise Revenue Audit team wherein the excise department, after detailed scrutiny of the books of accounts, stock registers, excise records, has accepted the books of accounts and other record maintained by the assessee to be true, correct and except few discrepancies in so far as inventory is concerned. We find that the period of audit covers 31st March, 2009. If the assessee has in fact purchased and stored such unaccounted stock allegedly shown to the bank, it is impossible not to leave a single trail more so when the assessee is a manufacturer and not a trader. It is not possible to acquire unaccounted stock, carry out manufacturing activities, consume energy, remove the finished stock and sale away the same in the market. We therefore find considerable force in the submission of the counsel for the assessee that the books of accounts are found to be genuine and recorded appropriately and no such kind of discrepancies were found to be noted in the Excise Audit Report 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 recorded in R.G.23 A register on 7thApril 2009 (Pgs. 210 to 214 of P/B),and 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 though these purchases were accounted for in the books of accounts after 31/03/2009. As regards the remaining difference of 465.037 MT, as held earlier, the same was purely on inflated estimate basis so as to fulfill margin requirements of the Bank. Hence, we accept the contention of Ld. Counsel that the stock statement was furnished to the Canara bank on estimated basis to avail larger credit facilities.
16(vi). There is another angle which is required to be considered while deciding this issue and that is the effect in the financial statements on account of addition made by AO. To verify the same, during the course of hearing, we called for the actual financial ratios for 7 years and for the current year under appeal after giving effect to the addition made by the AO, which would show results as under :
| Parameters | AY 2006-07 | AY 2007-08 | AY 2008-09 | Results as shown by the Assessee AY 2009-10 |
| Gross Profit | 26332662 | 27814168 | 37648224 | 47326840 |
| Turnover | 304229927 | 395692659 | 506977341 | 610575238 |
| Percentage | 8.66% | 7.03% | 7.43% | 7.75% |
| Net Profit | 2100700 | 4611189 | 6242279 | 7797575 |
| Turnover | 304229927 | 395692659 | 506977341 | 610575238 |
| Percentage | 0.69% | 1.17% | 1.23% | 1.28% |
| Stock-in-trade | 34717925 | 36842936 | 51938382 | 68641931 |
| Turnover | 304229927 | 395692659 | 506977341 | 610575238 |
| Percentage | 11.41% | 9.31% | 10.24% | 11.24% |
| Parameters | After including addition of Rs. 10.40 crs. AY 2009-10 | AY 2010-11 | AY 2011-12 | AY 2012-13 |
| Gross Profit | 151301876 | 61967833 | 91443364 | 137825226 |
| Turnover | 610575238 | 890096455 | 1196543944 | 1475315486 |
| Percentage | 24.78% | 6.96% | 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-in-trade | 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 under appeal. In the same way, Stock-in-trade ratio is ranging from 9.31% to 12.69% and after including the addition made for the current year, the same would show 28.27% as against actual ratio of 11.24% for the current year under appeal.
Hence, after including the addition made by the AO, the financial statement would completely be distorted and will not show the correct, true and fair view, which is on more factor which substantiates our finding that the figure of stock was inflated, adhoc and estimated purely for showing to the bank without there being any actual stock acquired by the assessee. Therefore in any which way, the addition made by the assessing officer is not justified and the same is hereby directed to be deleted.
17. Ground no.11 is consequential to the above finding. The A.O. is directed to take decision as per law.
18. Ground no.12 is pre-mature. Therefore, no adjudication is required.
19. In the result, the assessee's appeal is partly allowed
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