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:
|Asst. Year||Gross profit|
By taking the average percentage of gross profit, the suppression of gross profit was worked out by the assessing officer
6. Aggrieved by the order of the assessing officer, assessee preferred an appeal before the Tribunal. It was contended that the monthly stock statements furnished to bank from time to time are usually prepared by a junior clerk who does not have authentic knowledge of value of stock and they are ordinarily based on approximation basis without bothering about accuracy in terms of quantity and value of the stock, just to satisfy the drawing power in OCC limits, even with inflated figures. It was thus submitted that the value of stock submitted to bank will never be accurate both in terms of quantity and value and would not tally with the amount reflected in the books of accounts. It was also stated that a comparative statement both for purchases and sales – as per the stock statement submitted to Andhra Bank and as per the audited books, says that purchases for April, 2010 and September, 2010 was wrongly taken with significant figures and thus the total purchases were excessively reported to the bank, whereas for October, 2010, the sales figures were erroneously reported and thus, the total sales were less reported during the entire financial year 2010-11. It was thus contended that no addition can be made merely because of the difference in the value of stock furnished to the bank for obtaining OD facility.
7. As regards the alleged suppression in gross profit, it was contended that the fall in rate of gross profit, compared to the earlier year was only 0.37%. Profit rate varies from year to year and in fact the assessee has declared higher rate of profit in the succeeding year. Thus, no addition is maintainable by averaging the gross profit declared in different years.
8. It may not be out of place to mention that the assessing officer has estimated the gross profit on unaccounted sales, referable to the difference in stock (closing stock as disclosed to the Andhra bank and the stock mentioned in the books of accounts) and accordingly added a sum of Rs. 8,69,416. In this regard, the assessee contended that the addition is unwarranted since it is merely based on the stock statement given to the bank though the fact remains that there was no suppression of stock, which could have been sold.
9. The learned Commissioner (Appeals) observed that the stock shown in the bank account was merely to satisfy the drawing power from the bank and it was an open cash credit facility in which event, the assessing officer has to bring some cogent material such as purchases/sales invoices, which were not reflected in the books, to prove the existence of unaccounted stock. Learned Commissioner (Appeals) also observed that any excess unaccounted stock could have been found by physical verification. There is no evidence to show that the bank authorities had actually verified the stock and tallied them with the stock declared to them and even the assessing officer has not done that exercise. The books of accounts maintained by the assessee were in agreement with VAT returns filed before State Commercial Tax authorities and there was nothing on record to suggest that any unaccounted stock was noticed by the commercial tax authorities. The books of the assessee were not rejected by the assessing officer and thus addition cannot be made on presumption basis “when there is no unaccounted stock, the question of selling the same and deriving profit would not arise.” Under these circumstances, the learned Commissioner (Appeals) deleted the addition by observing as under:–
“After careful consideration of the facts prevailed in this case, I found force in the arguments of the learned Authorised Representative. The assessing officer made addition only on the basis of statement obtained from bank. In the absence of stock register, to establish the unaccounted stock, the assessing officer should have made some exercise to bring on record some corroborative evidence such as abnormal increase in production cost, electricity charges, transportation etc., which are attributable to the unaccounted stock to prove the existence of such stock and production of finished goods by processing the same. However, no such exercise was done by the assessing officer. Further, no evidence such as any purchase/sale bills which are not reflected in books of account was also found. In such circumstances, I am unable to accept the stand taken by the assessing officer that there was unaccounted stock and the appellant derived profit on sale of such stock. Hence, the additions made towards unaccounted investment in stock and suppressed gross profit on sale of such stock are deleted.”
10. Similarly, with regard to the estimate of profit, the learned Commissioner (Appeals) observed that profit varies from year to year depending upon the facts and circumstances prevailing in that particular year, which is very common in any line of business. However, taking into consideration, the fact that there was certain deficiencies in the maintenance of books of accounts, the learned Commissioner (Appeals) directed the assessing officer to estimate the profit at 36.50%, in line with the profit admitted in the immediately preceding year.
11. Aggrieved by the order of the learned Commissioner (Appeals), revenue is in appeal before the Tribunal. Learned Departmental Representative strongly relied upon the order passed by the assessing officer to submit that the facts, which are within the personal knowledge of the assessee cannot be proved by the assessing officer and he is entitled to take a reasonable view in the circumstances of the case. Since the assessee admittedly claims to have filed wrong statement before the bank authorities, the burden is upon the assessee to prove that the quantitative particulars and the rate mentioned therein to the bank authorities, is not correct as otherwise addition is maintainable and profit thereon can be estimated on the ground of deemed sale. Similarly, with regard to the estimate of profit, by averaging 3 years gross profit rate, the learned Departmental Representative submits that the procedure followed by the assessing officer is a well established procedure and the learned Commissioner (Appeals) should not have substituted the rate adopted without any basis.
12. On the other hand, the learned Counsel for the assessee filed written submissions, comparative statements of purchase and sale, as per the books of accounts submitted to bank as well as monthly VAT returns filed and also relied upon the following case law to contend that if the stocks are hypothecated and not pledged with bank, merely because some higher figure is adopted in the statement given to the bank, that should not be a reason for making an addition, particularly when the assessee’s books of accounts and the accounting system is genuine and supported by vouchers:–
1. (2010) 230 CTR 0293 (Gujarat HC)
2. (2006) 200 CTR 0595 (Allahabad HC)
3. (2000) 241 ITR 0363 (Madras HC)
4. (1987) 163 ITR 0434 (Delhi HC)
5. (2007) 292 ITR 0630 (Madras HC)
6. ITA No. 271/Vizag/2012
7. ITA No. 1007/Hyd/2011
13. It was also contended that the profit rate estimated by the learned Commissioner (Appeals) do not call for interference.
14. We have carefully considered the rival submission and perused the record. We have also carefully gone through the case law relied upon by the assessing officer as well as the learned Counsel for the assessee. 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).
15. Similarly, with regard to the estimate of gross profit, there cannot be any uniform basis for estimating gross profit. There is no dispute with regard to the fact that there were deficiencies in the maintenance of books of accounts. When the assessing officer as well as Commissioner (Appeals) agreed on this issue, it may not be proper to substitute the case of the assessing officer by an Appellate Authority, without any cogent reasons. Since the assessing officer followed an acceptable basis such as averaging the 3 years profit rate, we are of the view that the order of the learned Commissioner (Appeals) on this aspect deserves to be modified and we uphold the order of the assessing officer of estimating the average rate of 36.85%. The order of the learned Commissioner (Appeals) is modified accordingly.
16. In the result, the appeal filed by the revenue is partly allowed.