ITAT upheld addition for stock difference as per books and in Statement submitted to Banks

IN THE ITAT KOLKATA BENCH ‘SMC’

Estee Exports (P.) Ltd.

Versus

Income-tax Officer

IT Appeal No. 424 (Kol.) of 2012
[ASSESSMENT YEAR 2006-07]

AUGUST  9, 2012

ORDER

Smt. Diva Singh, Judicial Member

This is an appeal filed by the assessee against the order dated September 30, 2011 of the Commissioner of Income-tax (Appeals)-VI, Kolkata, pertaining to the assessment year 2002-03 on the following grounds :

“1. That on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in confirming the addition made by the Assessing Officer of Rs. 2,60,020 on the ground of difference in stock as per books of account and stock statement submitted to bank, though the reasons for such difference was duly explained and that in fact the stock shown as per books of account was correct.

2. That on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) ought to have held that the appellant is maintaining regular books of account including stock ledger which contains the quantity of each purchase and sale and as such no addition could be sustained on the ground of higher stock shown to bank as the stock was hypothecated and not pledged and the stock as per books of account was accepted by the Department as opening stock in the subsequent year.

3. That on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in confirming the dis allowance of Rs. 94,244 out of interest incurred for the appellant’s business.

4. That your appellant reserves the right to adduce any further ground or grounds, if necessary, at or before the hearing of the appeal.”

2. The relevant facts of the case are that the assessee, who is engaged in the business of trading in iron and steel, returned an income of Rs. 42,866 by way of filing a return on October 30, 2002. After having been processed under section 143(1), the same was subjected to scrutiny and the total income was computed at Rs. 3,54,260 by the Assessing Officer. Being aggrieved by the same, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals).

3. A perusal of the impugned order shows that the facts qua the addition made by the Assessing Officer in the first round are discussed in paragraph 1 of the same, which is reproduced for ready reference.

“1. Suppression of stock-Addition thereof

During the course of hearing, it has been observed that the assessee- company availed itself of cash credit facility with the Punjab National Bank, Brabourne Rd. Br., Kol. A reference was made to the Manager, Punjab National bank to furnish details regarding the securities pledged for availing the cash credit facility, it was informed by the Punjab National Bank that no security was pledged. However, the stocks belonging to the company and in the name of the company are hypothecated/charged to the bank. Copies of stock statement for the financial year 2001-02 are also furnished. A perusal of the stock statement submitted to the bank, by the assessee- company as on March 31, 2002, reveals that total stock on that date was 213.138 mt, value of which was Rs. 46,27,535 as against Rs. 43,67,515 reflected in the profit and loss account. Therefore, there was a difference of stock of Rs. 2,60,020. Accordingly, the authorized representative was asked to explain the difference between the stock statement filed before the bank and to that of the Income-tax Department. He was also asked to explain as to why the same should not be added to the total income. He was further asked to produce the stock book. The assessee- company, vide their letter dated March 31, 2005, explained the difference due to the fact that consignment No. 80224 made in the USA weighing 39.60 MT was in transit and delivered to the company on April 12, 2002. Since the letter of credit and all other documents were received by the bank, they have shown the same in the stock. They further contended that there was also cash sale of 7.5 mt at Rs. 35,000 per mt amounting to Rs. 2,62,500 in the month of March, 2002, which was taken in the total sales for the month of March, 2002. In this context, it is to be mentioned that the authorized representative was categorically asked to produce the stock book, which he failed to produce. The explanations furnished by the assessee- company cannot be accepted in the absence of stock book. In the absence of the stock book, the difference of stock is treated as suppression and the same is added to the total income of the assessee- company.”

4. The said action was upheld by the Commissioner of Income-tax (Appeals). However, the Tribunal, vide its order dated January 24, 2007 in I.T.A. No. 238/Kol/06, restored the issue vide paragraph 5.1 observing as under :

“We find that the addition of Rs. 2,60,020 was made by the Assessing Officer and confirmed by the learned Commissioner of Income-tax (Appeals) in absence of production of books of account as well as stock register and availability of physical stock. Considering the submissions of learned counsel for the assessee that given an opportunity he will reconcile the difference in the stock as well as produce the stock register, we, therefore, in the interest of justice, are of the considered opinion that the matter should go back to the file of the Assessing Officer for fresh adjudication. The Assessing Officer shall give adequate opportunity of being heard to the assessee as per law.”

5. The proceedings before the Assessing Officer under section 143(3) read with section 254, which has given rise to the present proceedings, have been extracted in paragraph 4 of the impugned order. Aggrieved by which the assessee went in appeal before the Commissioner of Income-tax (Appeals), who, vide his detailed findings in paragraphs 7 to 13, confirmed the action of the Assessing Officer, considering the arguments of the assessee that as per the details given to the bank, the assessee had included the possession of the stock, which was in transit at the high seas and as per what has been given along with the return, the value of the said goods were not included, which has resulted in the discrepancy in the figures. A perusal of the impugned order shows that the Assessing Officer, vide his report No. ITO Wd-5(3)/Kol/R.R./11-12/109, dated June 23, 2011 made the following detailed submission :

“The assessee- company has/had filed stock statement before Punjab National Bank, Brabourne Road branch as on March 31, 2002. The copy of the stock statement is enclosed herewith for your records and perusal. As per this statement filed by the assessee, the assessee was in possession of 213.138 mt. of goods having a value of Rs. 46,27,535. It is relevant to bring to your notice that as per the statement the entire stock of 213.138 mt. of goods were lying at 87, M.D. Road, Kolkata-6. This has been stated by the assessee before the bank in the said report. The assessee in its books of account has shown a quantity of 180.927 mt. valued at Rs. 43,67,515. Thus, there is a difference of 32.211 mt. of goods and a value difference of Rs. 2,60,020. The assessee has claimed that in the stock statement given to the bank, they had included 39.60 mt. of goods which were being imported from the U.S.A. being defective/secondary T.F.S. mixed sheets lacquered. In the course of various proceedings the assessee has all throughout given the break-up of 180.927 mt. stock as per the balance-sheet as follows :

From the above, it is seen that as per the assessee its stock of defective/secondary T.F.S. mixed lacquered was 40.189 mt.

Now coming to the stock statement filed before the bank it is seen that the stock of defective/secondary T.F.S. mixed lacquered sheet was 40.189 m.t. This shows that the stock of defective/secondary T.F.S. mixed lacquered sheet as per books of the assessee and the stock statement given to the bank matches exactly. This also mean that the claim of the assessee that it had included 39.6 mt. of defective/secondary T.F.S. mixed lacquered sheet in the stock statement given to the bank which was yet to be reviewed in transit is an incorrect statement. The import invoice dated February 26, 2002 clearly mentions that 39.6 m.t. was defective/secondary T.F.S. mixed lacquered sheets being imported by the assessee, This invoice is not in dispute rather depending on this invoice the assessee tried to reconcile its stock difference. As stated above that there is no difference between the stock as per books and stock as per bank in import of defective//secondary T.F.S. mixed lacquered sheets. The submission of the assessee and its attempt to reconcile the stock difference is a false submission, mainly to escape the imposition of tax.

From the above, it is evident that the explanation of the assessee with respect to 39.6 mt is found to be false and the said import invoice does not support the case of the assessee, as being the excess stock is arriving out of different items not being secondary/defective T.F.S. mixed lacquered sheets.

With respect to the cash sale of 7.5 mt of defective/secondary T.F.S. mixed lacquered sheets, it is submitted that the closing stock as per books of account, of the assessee is 180.927 m.t., which is arrived after considering the sale of 7.5 m.t. on March 14, 2002 the sale being a cash sale would have been duly incorporated in the assessee’s books of account on the date of sale and as a result of sale entry the stock had already stood reduced. This being so there is no reason as to reduce 7.5 m.t. This is also an afterthought to make a weak attempt to reconcile the difference between the stock quality finished before the bank and stock quality as per books. The statement given before the bank was on or after March 31, 2002 while the sale had taken place on March 14, 2002. The assessee had not given any explanation to justify the fact of not considering the sale of 7.5 m.t. at the time of preparation of stock statement which was filed before the bank.

From the above submission and the sequence of events it is evident that the assessee has failed to reconcile or give proper explanation. The explanation given by the assessee has been proved to be a false explanation in view of the facts narrated herein above. It is, therefore, hereby submitted that the sale addition of Rs. 2,60,020 should be upheld.”

6. A perusal of the impugned order further shows that the assessee was required to reconcile the chart and stock valuation. The assessee relied upon a computer generated stock statement stating that it is automatically generated. The Commissioner of Income-tax (Appeals) reproduced the order sheet of the Assessing Officer dated November 19, 2007 narrating the following facts :

“Mr. D.P. Saraf F.C.A., authorized representative for the assessee appeared and furnished a copy of ledger about stock in quantity, a copy in respect to payment of customs duty, a invoice dated (copy) February 26, 2002 reg. purchase from ledger balance-a copy of stock-dated March 31, 2002, quantitative copy, a copy of high sea sale bill in respect to transfer/sale mode to Jugal Kishore, site-which are placed in file after verification with books of account.

It is shown to the authorized representative that the assessee has taken plea before the Honorable Income-tax Appellate Tribunal that the bank has taken the stock on the letter of credit received by the bank. The Honorable Income-tax Appellate Tribunal also asked the authorized representative to produce stock register but as per form No. 3CD there was no stock register. The authorized representative stated that the stock register is self-generated. Then it is shown to the authorized representative that the assessee under his signature has given the stock statement before the bank as stock as on March 31, 2002. The authorized representative also filed a copy of bill entry regarding sale of goods as endorsed by the Customs Department, which is placed on file after examination.

The assessee is being asked to file explanation in this regard by November 26, 2007.

In respect to sale of share and dis allowance of interest under section 36(1)(iii) about rate of interest the assessee’s books of account are verified and found o.k.”

7. The assessee filed further written submissions on August 4, 2011 which are reproduced in paragraph 9 of the impugned order of the Commissioner of Income-tax (Appeals). For ready reference, the same is also reproduced :

“With reference to the above, we duly made our submission earlier and also submitted our letter of June 28, 2011 in reply to your various queries. Besides, we received a letter No. ITO Wd. 5(3)/Kol/10-11/61 dated May 31, 2011 fixing the date on June 7, 2011 along with necessary documents in connection with remand report. In compliance whereof the undersigned duly appeared and explained the reasons of difference between the stock as per books of account and stock statement given to the bank and the Assessing Officer was satisfied with the said explanation and did not raise any query. The stock ledger was also in the file of the Assessing Officer for which in the assessment order he mentioned that “no stock ledger was produced”. The said stock ledger/stock register was regularly maintained showing all the items of purchases and sales day to day showing quantity of each purchases and sales. Besides all the books of account including purchase bills and sales bills were produced before the then Assessing Officer at the time of assessment proceedings and no false purchases and/or sales were found at that time nor any other anomaly was detected in such books of account. It is also to be narrated here that your appellant is a company whose books of account, bills, vouchers and other relevant documents are being subject matter of audit and tax audit and as such the closing stock reflected in the said accounts is true and correct and the said closing stock was shown as opening stock in the next year which was duly accepted by the then Assessing Officer. It is understood that the Assessing Officer has submitted a remand report before your honor in which he has stated. It is seen that as per the assessee its stock of defective/secondary T.F.S. mixed lacquered was 40.189 m.t. Now coming to the stock statement filed before the bank it is seen that the stock of defective/secondary T.F.S. mixed lacquered sheet was 40.189 m.t. This shows that the stock of defective/secondary T.F.S. mixed lacquered sheet as per books of the assessee and the stock statement given to the bank matches exactly. This also mean that the claim of the assessee that it had included 39.6 m.t. of defective/secondary T.F.S. mixed lacquered sheet in the stock statement given to the bank which was yet to be reviewed by the company as the same was in transit is an incorrect statement. The Assessing Officer failed to appreciate that the goods which was in transit was a different item known as defective/secondary. T.F.S. sheets whereas the items 40.189 m.t. as per books of account is defective/secondary TFS mixed lacquer cut from coils”. The Assessing Officer without there being any basis and evidence thereof was quite unjustified in holding “that the submission of the assessee and its attempt to reconcile the stock difference is a false submission mainly to escape the imposition of tax”. Due to his failure to understand the real impact he has wrongly stated that the submission of the assessee and its attempt to reconcile the stock difference is a false submission, mainly to escape the imposition of tax. In case the Assessing Officer could not understand our submission regarding reconciliation of stock he should have asked us again by making a query which he did not, as a result we presumed that he has understood the stock reconciliation. It is submitted before your honour that the goods was hypothecated to the bank and not pledged. Moreover, the explanation given by your appellant is true and correct. We have also to draw your kind attention to the following observation of the Honorable High Court of Punjab and Haryana in the case of CIT v. Sidhu Rice and General Mills [2006] 281 ITR 428 (P&H) “that the Commissioner of Income-tax (Appeals) and the Tribunal have recorded concurrent findings of fact that the credit facility was against hypothecation of stock and not against pledge. It was also observed that except for the photocopy of the stock statement allegedly furnished to the bank, the Assessing Officer has not brought any material on record to show that the assessee, in fact, possessed stocks as reflected in the said statement as against the stock depicted in the balance-sheet. It was also found that the books of account were regularly maintained by the assessee and had been accepted by the Department . . . The Tribunal and the Commissioner of Income-tax (Appeals) on the basis of the material on record have taken a possible view which has not been shown to be perverse. Thus, in the absence of any substantial question of law no case has been made out for interference in the concurrent findings of fact recorded by the two authorities. Accordingly, the appeal is dismissed in limine. Recently the Honorable High Court of Gujarat has also held by his judgment dated January 11, 2010 in the case of CIT v. Arrow Exim P. Ltd. as under :

Held : “that the much emphasis given by the counsel for the Revenue that the Tribunal has erred in making this observation that it was for the Assessing Officer to establish that the sale is not genuine and the observation that the Assessing Officer has failed to establish any unaccounted purchases outside the books of account to establish that the stock as per books is incorrect, is contrary to the material on record when admittedly the statement before the bank is different than the books of account. However, this submission referring to this observation has to be considered in the light of the entire discussion wherein the Tribunal has, referring to the order of the Commissioner of Income-tax (Appeals) in detail has accepted the explanation given by the assessee and in that context has stated that when the books of account or the accounting system has been found to be genuine supported by vouchers, etc., the addition was not justified. It is required to be mentioned that the stocks are hypothecated and not pledged, which was explained by the assessee and therefore in order to avail higher credit facilities the statement was given, but the stock was with the assessee, and therefore the submissions are misconceived. In view of the discussion made herein above, the findings arrived at by the Commissioner of Income-tax (Appeals) as well as the Tribunal cannot be interfered with”.

8. Taking note of the fact that the assessee files a computer generated stock register whereas as per the order sheet on March 31, 2005 of the Assessing Officer, the learned authorized representative for the assessee failed to produce the stock register. In these facts, the Commissioner of Income-tax (Appeals), vide paragraphs 11 to 13, upheld the action of the Assessing Officer observing as under :

“11. I have perused the earlier assessment records and did not find the copy of stock register (now being produced by the assessee) so it was not produced during the original assessment. The assessment records have a purchase register, general ledger but not the copy of the stock register. The stock register produced by the assessee is a computer generated stock ledger. The said stock ledger was never produced by the assessee in the earlier assessment proceedings or appellate proceedings before the Commissioner of Income-tax (Appeals) before the matter was set aside by the Honorable Income-tax Appellate Tribunal. The assessee produced this computer generated print out of two pages only during the reassessment proceedings before the Assessing Officer being carried out in response to the directions of the Honorable Income-tax Appellate Tribunal setting aside the original assessment order. The register produced does not inspire confidence that it was a part of the original software programme since if it was being generated on every entry then there was no chance for the assessee to calculate the closing stock wrongly by any chance and further fact of non-production of the same and non-submissions any explanation regarding the difference between the closing stock reflected in the books of account and submitted to the bank. Even after categorical direction given by the Assessing Officer, the assessee did not produce any type of closing stock. The explanation of the assessee regarding taking into consideration of the purchases in advance receipt of the material and subtracting twice the quantity of cash sales are not reliable as genuine mistake of the assessee for furnishing the wrong statement. The assessee has tried to match the quantities which are not apparently believable. The Assessing Officer has given elaborate reasons for the addition and the difference in quantity and quality of the stocks in the assessment order and in the remand report. Therefore, the explanation of the assessee regarding the difference in the closing stock is rejected.

12. The Honorable Bombay High Court in the case of Ramanlal Kacharulal Tejmal v. CIT [1984] 146 ITR 368 (Bom) has upheld the addition made on the basis of information received from the bank regarding stock placed with it which was more in quantity then what was reflected in the income-tax return.

13. Therefore, it is held that the assessee has failed to give proper explanation for the difference between the stock reflected in the books of account and submitted to the bank authorities. Therefore, the addition Rs. 2,60,020 is upheld.”

9. Aggrieved by this, the assessee is in appeal before the Tribunal. The learned authorised representative placed heavy reliance on the fact that these were goods in transit and this fact is borne out from page 39 of the paper book, the invoice number of which is 957370 dated February 26, 2002 of Lafer Blanc Inc. which has been accounted for by the assessee in its books of account at the value of Rs. 5 lakhs or for the next year on its arrival and the said document was before the Assessing Officer and the Commissioner of Income-tax (Appeals) who have not given due credence to the said document. It was his submission that the assessee had included in the stock position given to the bank the goods which were at high seas in order to obtain a higher loan and it was the case of hypothecation.

10. The learned Departmental representative, on the other hand, heavily relying upon the impugned order, submitted that all along the case of the assessee has been that stock register was not called for by the Assessing Officer and when opportunity was given to the assessee, he is relying upon the computer generated stock register and the impugned order sufficiently demonstrates that opportunity to produce the stock register was given by the Assessing Officer in the first round. It was his argument that he relies on the orders for the finding that the same is not reliable. Inviting attention to paper book page 29, it was his submission that if the closing stock figure is taken along with the submission of the assessee stating that the goods of 40.80 m.t. were in transit then the total closing stock would be 220 mt Inviting attention to page 5 of the Commissioner of Income-tax (Appeals), it was his submission that this document has been taken into consideration by the Commissioner of Income-tax (Appeals). As per the assessee, the amount of closing stock available with the assessee including the goods in transit have been given to the bank, even in such a case, the figures do not reconcile. Inviting attention to the same, it was submitted that first the assessee states that the entire stock of 213.138 m.t. of goods were lying at 87, M.D. Road, Kolkata-700 006. As per the statement given before the bank and as per the books of account of the assessee, it is 180.927 m.t. Then the assessee states that the goods weighing 39.60 m.t. were imported from the U.S.A. Thus, attempting to reconcile the difference considering the fact that the document referred to February 26, 2002 which is placed at paper book page 39 talks about 40.173 m.t., stock of defective/secondary T.F.S. mixed lacquered sheets, it was his argument that the figures are not reconcilable. Attention was further invited to paper book page 23 on the basis of which, it was his submission that though in the year under consideration, the sales increased from Rs. 29.59 lakhs odd to Rs. 2 crores 42 lakhs odd, the gross profit has reduced from 70 per cent. to 20 per cent. At each stage and from every angle, the case of the assessee rings hollow and the assessee has not attempted to justify any of these irreconcilable facts.

11. Having heard the rival submissions and perused the materials available on record and having gone through the various documents and the findings arrived at in the impugned order, I am of the view that in the peculiar facts and circumstances of the case, in the facts as it stand, the ground raised by the assessee deserves to be rejected. Even when the arguments advanced on behalf of the assessee are accepted for the moment, it is seen that the figures do not reconcile even then. Thus the assessee despite being given more than sufficient opportunity has not been able to explain the discrepancy in stock. No new document or evidence has been brought to the notice of the Bench, nor has the assessee been able to show how the document has been wrongly considered. As such neither on facts nor on law the assessee’s explanation is acceptable, as the alleged practice on which reliance is being placed that larger stock shown to the bank for the purpose of getting higher loan or overdraft. The said practice cannot be given judicial notice. Reliance is placed upon Coimbatore Spinning & Weaving Co. Ltd. v. CIT [1974] 95 ITR 375 (Mad); Ramanlal Kacharulal Tejmal v. CIT [1984] 146 ITR 368  and Dhansiram Agarwalla v. CIT [1993] 201 ITR 192 (Gau.). The assessee’s ground is rejected.

12. Qua the second issue agitated by the assessee wherein an addition of Rs.94,244 made as attributable to investments resulting in earning exempt income, which action was confirmed by the Commissioner of Income-tax (Appeals) holding that the money was invested out of own kitty and the assessee’s common fund of share capital and reserve in surplus were not sufficient to make it as investment out of own capital. The learned authorized representative placed reliance on the decision of the co-ordinate Bench of the Tribunal in the case of Dy. CIT v. Bush Tea & (P.) Ltd. in I.T. A. No. 994/Kol/2010 stating that dis allowance at one per cent. may be made relying upon the accepted practice of the Kolkata Benches, which is consistently being followed. The learned Departmental representative did not oppose the said prayer, stating that the accepted legal precedence at the Kolkata Benches may be applied. Accordingly, in the light of the arguments advanced by the parties taking note of the judgment of the Mumbai High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81, which states that rule 8D would not be applicable retrospectively and would be applicable with effect from 2008-09 assessment year. Respectfully following the order of the Tribunal, the 14A dis allowance is restricted to one per cent. of total exempt income. The ground No. 2 is allowed.

13. In the result, the appeal of the assessee is partly allowed.