ACIT Vs Thatavarthi Ramesh Babu Kanuru (ITAT Visakhapatnam)
It is no doubt true that the initial burden is upon the assessee to prove the correct value of the stock held by the assessee and he has to prove that the value reflected in the books of accounts is correct but the fact remains that the courts have time and again accepted the fact that in open loan system, the parties tend to inflate figures of quantity as well as rate merely to enjoy higher cash credit limits. In the instant case, the assessee filed monthly VAT returns based on the same books of accounts and the same was accepted without making any additions. Neither the bank authorities nor the assessing officer made any effort to verify the actual stock to prove that there is existence of unaccounted stock under these circumstances and consistent with the view taken by the ITAT and various High Courts, we hold that the assessing officer has not made out a case for making an addition referable to unaccounted stock as well as determining the profit on the alleged sale of such unaccounted stock. Under the circumstances, we uphold the order passed by the learned Commissioner (Appeals).
FULL TEXT OF THE ITAT JUDGMENT
This appeal by the revenue is directed against order passed by the Commissioner (Appeals), Vijayawada and it pertains to the assessment year 2011- 12. Following grounds were urged by the revenue:–
1. The order of the learned . Commissioner (Appeals) is erroneous on facts and in circumstances of the case.
2. The learned Commissioner (Appeals) erred in observing that there is no evidence to show that the bank authorities had actually verified the stock ignoring the certification given by the Bank Authorities that the stock is subjected to random verification at regular intervals.
3. The learned Commissioner (Appeals) ignored the fact that there is no stock register and this fact was certified by the Auditor in his Audit Report and simply shifted the onus to prove the unaccounted stock to the assessing officer.
4. The learned Commissioner (Appeals) ought to have considered the ratio of the decisions of the Hon’ble Supreme Court in the case ofChuharmal v. CIT (1988) 172 ITR 250 (SC)and Hon’ble High Court of Madras in the case of Coimbatore Spg. & Wvg. Co. Ltd. v. CIT (1974) 93 ITR 375 (Mad).
5. The learned Commissioner (Appeals) failed to take cognizance of the fact that assessee did not bring any direct or circumstantial evidence to prove that the statements given to the banks are motivated.
6. The learned Commissioner (Appeals) ought to have confirmed the addition of unaccounted investment in stock of Rs. 23,59,339 for the reasons elaborately discussed in the statement of facts.
7. The learned Commissioner (Appeals) ought to have sustained the addition of Rs. 2,74,153 and Rs. 8,69,416 towards suppression in gross profit since assessing officer has followed well established procedure in adopting the average of gross profit.
2. At the outset, it may be noticed that under rule 8 of the Appellate Tribunal Rules, 1962 the parties to the dispute have to file the grounds by making them concise. In other words, they should not be argumentative. Quoting of case law and referring to facts in detail, more particularly filing statement of facts before the Tribunal is contrary to the said rule. Form 35 earmarks space for “Statement of facts” whereas there is no such mention in Form 36, essentially on account of the fact that the assessing officer, who is the adjudicating authority had already taken into consideration all the facts and they would be recorded copiously in the assessment order and hence it need not be elaborated again. Before the quasi-judicial authority such as Commissioner (Appeals), the assessee is given one opportunity to project the facts from its perspective. Before the Tribunal, order of the Commissioner (Appeals) is challenged and if the findings are perverse or contrary to law, the assessing officer is entitled to send a brief memo to the departmental representative to enable him to put forth his plea, but he is not entitled to file statement of facts. On the top of it, in ground No. 6, the appellant submits that the learned Commissioner (Appeals) ought to have confirmed the addition of unaccounted investment in stock “for the reasons elaborately discussed in the statement of facts”. This, in our view, is not permissible. We therefore, do not consider either ground no.6 or the statement of facts filed before us. The learned Departmental Representative was however given full opportunity to put forth the case of the revenue while challenging the order passed by Commissioner (Appeals) and in fact, the learned Departmental Representative did not either refer to statement of facts or any of the case law or sections mentioned in the statement of facts.
3. Facts in brief are that the assessee, as a proprietary concern, was engaged in the business of manufacture of hosiery and readymade garments and sale thereof. For the year under consideration, the return was originally processed under section 143(1) of the Income Tax Act, 1961 (hereinafter called as ‘the Act’) but later on taken up for scrutiny under CASS. During the course of examination, the assessing officer noticed that the assessee availed open cash credit facility from Andhra bank to meet the working capital requirement by hypothecation of inventory and receivables. Assessee was called upon to furnish the stock details (hypothecated) as on 31-3-2010 and 31-3-2011. The assessee, accordingly furnished the details. The assessing officer noticed that the value of closing stock declared to Andhra Bank, as on 31-3-2011 was Rs. 62,72,919 whereas as per the books of accounts, the value of closing stock as on 31-3-2011 was Rs. 39,13,580. The bank stated that the stock was valued at cost price or market price, whichever is lower, which means that both the stock reported by the bank and recorded in the books of accounts are based on the cost price only. It was thus concluded that the difference in value of stocks was only because of the difference in quantity of stock and not because of inflated value.
4. In this regard, he observed that ordinarily the books of accounts are presumed to be true and correct unless proved otherwise. He further observed that the onus is upon the assessee to prove the facts correctly since the statement of stock as well as entries in the books of accounts are within the personal knowledge of the assessee. He also relied upon the decision of Hon’ble Supreme Court in the case of Chumanmal (172 ITR 250), wherein it was held that statutory principle of common law jurisprudence embedded in section 110 of the Evidence Act could be applied to the taxation proceedings. In the opinion of the assessing officer, the onus is heavily upon the assessee and if the assessee alleges that the bank statement is incorrect, then he has to establish the same by bringing on record some direct or circumstantial evidence and he cannot get away just by making a statement that it was to avail higher over draft facility. Reliance was also placed upon the decision of Hon’ble Madras High Court in the case of Coimbatore Spinning and Weaving Company (93 ITR 375), wherein the Court observed that sub-standard morality on the part of the assessee should not be encouraged since it is opposed to public policy. assessing officer has also relied upon several decisions for taking a stance that when assessee fails to maintain stock register and if he fails to give proper stock price to the bank, adverse consequences flowing from such act must follow and he has every right to apply his best discretion on facts of the case. In his opinion, the excess stock of Rs. 23,59,339 referable to the difference between stock statement given to the bank and the stock mentioned in the books of accounts has to be treated as unexplained investment and accordingly added the same.
5. The assessing officer made an addition of Rs. 2,74,153 towards suppression of gross profit. As per the returns of income filed, the gross profit rate for the 3 consecutive assessment years are as under:
