Excess Stock declared to bank is taxable as Unexplained Investment

Suraj Bhan Oil Private Limited Vs DCIT (Madhya Pradesh High Court)

The entire controversy revolves around the question as to whether the assessee has been able to provide explanation for difference of stock between the stock submitted to the bank as on 28/3/2005 and the stock indicated in the audit report for the period ending 31/03/2005 relating to raw material, stock-in-process and finished goods. No evidence has been produced by the assessee of sale and purchase of raw material and finished goods during the period 28.03.2005 to 31.03.2005 as found by the Assessing Officer in the previous assessment order, as well as, set aside assessment order, as affirmed by the Tribunal. Hence, the entire gamut of matter is in the realm of facts and does not give rise to substantial question of law. Even otherwise, as has been held in catena of decisions by different High Courts, the practice followed by Industrialists declaring larger than actual quantity of stock to the Bank for the purpose of getting higher loans or over-draft facility, in fact, is not recognized as conforming to the fiscal discipline by Courts, Authorities and Tribunals. Such a tendency tantamount to commercial immorality for obtaining unjustified gains in the form of higher credit facility or loans etc. by showing incorrect statement of stock position to the Bank. In any case, the burden lies upon the assessee to reconcile the difference of stock position presented to the bank with the stock position mentioned in the books of accounts/audit report (Dhansi Ram Aga Vs. CIT (201 ITR 192, Gauhati High Court, Ramanlal Kacharulal Tejmal Vs. CIT (146 ITR 368 (Bom), Pooranlal Raj Kumar Vs. CIT (107 CTR Cal. 27), CIT Vs. A. Yunuskunju (189 ITR 672, Kerala), CIT Vs. South India Rubber Products (166 ITR 687 (Kerala) and Coimbatore Spng. & Wvg. Co. Ltd. Vs. CIT (1974)95 ITR 375, referred to).

Once the Assessing Officer finds that there was excess stock, in absence of explanation by the assessee, the conclusion is inescapable that the excess stock, if any, was from undisclosed sources. Further, once the assessee’s explanation, if any, has not been accepted, the resultant position is that there was excess stock un-disclosed in the books of accounts and non disclosure was only with a view to suppress the income.

Consequently, this Court up-helds the order of Assessing Officer dated 31/3/2013 (Annexure P/4) and that of the Income Tax Appellate Tribunal dated 5/4/2021 (Annexure P/6) taking the view that the excess stock represented the income of the assessee from undisclosed sources.

FULL TEXT OF THE JUDGMENT/ORDER OF MADHYA PRADESH HIGH COURT

This appeal, under section 260A of the Income Tax Act, 1961 (for short “the Act”), at the instance of assessee, is directed against the order dated 5/4/2021 (Annexure P/6) of the Income Tax Appellate Tribunal, Agra Bench, Agra.

2. The assessee-Company filed return of income for assessment year 2005-2006 on 29/10/2005 declaring total income of Rs.1,68,917/-. The assessment was completed under section 143(3) of the Act on 31/12/2007 at total income of Rs.2,80,56,498/-. The return was processed under section 143(1) of the Act on 21/1/2006. The case was selected for scrutiny. Therefore, notice under section 143(2) of the Act dated 16/10/2006 was issued and served upon the assessee in time.

3. The assessee-Company, during the period relevant to assessment year 2005-2006, was engaged in manufacturing and trading of edible oils and grains. It declared its total turnover of Rs.30,64,07,764/- as against turnover of Rs.16,56,31,644/-. The NP (Net Profit) for year under consideration was declared at Rs.6,18,151/- as against NP of Rs.13,92,831/- declared in the preceding year. The stock statement received from State Bank of India, Commercial Branch, Gwalior on 14/12/2007 was also examined. The Assessing Officer found difference in closing stock of raw material, stock-in-process and finished goods, as well as, in the quantity of stock. Therefore, notice under section 142(1) of the Act dated 27/12/2007 was issued to the assessee-Company. The asseessee-Company was called upon to explain and give justification for difference in closing stock position. The assessee-Company was required to reconcile the position of closing stock with reference to the books of accounts, purchase and sale vouchers, expense vouchers, bills and all bank statements. It was also required to furnish details of purchase and sale pertaining to 28-03-2005, 29-03-2005, 30-03-2005 and 31-03-2005. Though the assessee-Company’s representative appeared in the Office of Assessing Officer with documents such as cash book, ledger, bills, purchase file, sales bill book, yet without stock register. The assessee was called upon to reocncile the opening stock, closing stock with reference to the quantity, but they were not able to explain and reconcile the quantity of stock shown in the audit report and the quantity shown in stock statement furnished to the State Bank of India. The assessee also failed to give details of purchase and sale for the last days i.e. 28-03-2005 to 31-03-2005. As such, the same remained un-verified. Likewise, the assessee also failed to produce Mandi tax receipts etc. in respect of purchase made, if any. Consequently, the Assessing Officer found the value of stock shown in stock statement submitted to State Bank of India reflecting raw material, stock-in-process and finished goods (opening and closing stock item-wise, quantity-wise, rate-wise and value-wise) far in excess to the value of stock shown in the audit report and the difference was to the tune of Rs.2,71,47,665/-. The assessee-Company, despite opportunity afforded, could not either reconcile the difference or explain the reasons therefor. Consequently, the Assessing Officer found that the aforesaid difference amount, since was not shown in the books of accounts of the assessee-Company maintained for the year under consideration, therefore, the same was un-explained investment in stock from un-disclosed sources. As a result, the same was added to the total income of the assessee-Company under section 69B of the Act.

4. On appeal before the Commissioner under section 250 of the Act (for brevity “CIT(A)”), though the appellate Authority vide its order dated 14/5/2009 (Annexure P/2) held that the assessee had not been able to reconcile the difference in two statements by and large, yet reduced the addition, as discussed in internal pages 16 and 17 of the order (Annexure P/2).

5. The Revenue preferred an appeal before the Income Tax Appellate Tribunal. The Tribunal in paragraph 5 of its order dated 31/5/2011 has discussed the issue in detail. The Tribunal observed that CIT(A) deleted the addition ignoring the fact that unreadable stock position was submitted to the bankers as on 28-03-2005, whereas the balance sheet carries the stock position as on 31-03­2005. The onus, therefore, lied upon the assessee-Company to reconcile the stock from 28-03-2005 to 31-03-2005 by calculating the details of the products purchases and sales. The order of CIT(A) was found to be erroneous as deletion had been made on the premise that addition was based on difference in stock position submitted to the Bank vis-a-vis the books of accounts in different dates without verifying the stock position in the books of accounts and other documents indicating quantity of raw material, stock-in-process and finished goods, whereas the burden was on the assessee to reconcile the unreadable stock position as on 28.03.2005 sent to the Bank with the stock position shown in the balance sheet as on 31.03.2005. That was not done. Hence, the Tribunal, in the fitness of things, set aside the order of CIT(A) remanding the case to the Assessing Officer to again afford an opportunity to the assessee to explain the difference as aforesaid and, thereafter, re-adjudicate the issue in accordance with law.

6. The set aside assessment was framed on 31.03.2013 (Annexure P/4). The Assessing Officer in a tabular format explained the difference of raw material, stock-in-process and finished goods as per bank statement as on 28.03.2005 and as per audit report. The same reads thus:-

ISSUES FOR ADDITION
The difference of raw material, stocking process and finished goods
between as per bank statement as on 28.03.2005

The difference of stock amounting Rs.2,71,47,665/- should be added u/s 69B of the Income Tax Act. Because the stock detail in the bank as on 28.03.2005 was submitted by the assessee only. It appeared the stock valued in the audit report is erroneous and not genuine because assessee could not produce the details of purchase, processing and sale between 28.03.2005 to 31.03.2005. Without any documentary evidence the submission produced by the assessee can not be considered. Assessee was provided full opportunity to produce the documentary evidences regarding difference of excessive stock but he failed to follow the same. So stock as on 28.03.2005 is considered genuine and excessive stock of Rs.2,71,47,665/- is considered as income of the assessee.”

Thus, despite opportunity afforded to the assessee, he could not produce the details of purchase, processing and sale between 28.03.2005 to 31.03.2005. Therefore, in absence of documentary evidence in that behalf, the stock details given to the Bank as on 28.03.2005 were found to be actual, in contrast to the stock valued in the audit report for the period ending 31.03.2005 and, therefore, the difference between the two i.e. Rs.2,71,47,665/- has again been added to the income of assessee under section 69B of the Act.

7. On appeal, the Commissioner in paragraph 5.1.1 of his order dated 22/2/2017 (Annexure P/5) has deleted the addition by referring to a chart indicating stock position as on 28.3.2005 (wrongly typed as 28.03.2008) submitted to the Bank with the stock position as per stock register on 28.03.2005.

8. On appeal before the Income Tax Appellate Tribunal by the Revenue, the Tribunal discussed the issue in paragraph 10 of its judgment dated 5/4/2021 (Annexure P/6). The Tribunal has critically dealt with the issue and opined that the assessee-Company failed to produce the evidence explaining sale and purchase of stock during the period 28.03.2005 to 31.03.2005 before the Assessing Officer. That apart, the CIT(A) was found to have maintained blissful silence on the aforesaid issue and avoided to verify purchase and sale transfer and corresponding effect on balance sheet and profit and loss account. Thereafter, in paragraphs 11 and 12, the Tribunal has also critically examined the difference in raw material quantity shown to the Bank in the form of statement of stocks and the one shown in the balance sheet which was found to be Rs.1,66,71,441/- (9,886.25 Qntls), likewise the difference in stock-in-process quantity was found to be (-) Rs. 16,60,400/- and difference in finished goods quantity was found to be Rs.1,21,36,624/-. Therefore, the assessee was bound to explain the aforesaid difference either before the AO or before CIT (Appeal) or before the Tribunal. The same was not done. Consequently, the order of CIT(Appeal) was set aside.

9. Now, the assessee is in appeal before this Court with the submission that the order of Assessing Officer dated 31.03.2013 (Annexure P/4) and that of Income Tax Appellate Tribunal dated 5/4/2021 (Annexure P/6) are wrong, inter alia contending that the CIT (Appeal) had thoroughly examined the difference of stock of raw material, stock-in-process and finished goods referring to the books of accounts, balance sheet and audit report and, therefore, proposed a question as to whether the Tribunal was justified in setting aside the order of CIT(Appeal) and allowing the addition made by Assessing Officer as undisclosed income of Rs.2,71,47,665/- to the income of assessee under section 69B of the Act. In support of his contentions, learned counsel has placed reliance on decision of the High Court of Gujarat in Tax Appeal No. 83/2007 (Commissioner of Income Tax, Rajkot-I Vs. Veerdip Rollers P. Ltd.) affirmed by the Apex Court.

10. This Court has carefully perused the order of Assessing Officer, CIT (Appeal) and Income Tax Appellate Tribunal. As a matter of fact, the entire controversy revolves around the question as to whether the assessee has been able to provide explanation for difference of stock between the stock submitted to the bank as on 28/3/2005 and the stock indicated in the audit report for the period ending 31/03/2005 relating to raw material, stock-in-process and finished goods. No evidence has been produced by the assessee of sale and purchase of raw material and finished goods during the period 28.03.2005 to 31.03.2005 as found by the Assessing Officer in the previous assessment order, as well as, set aside assessment order, as affirmed by the Tribunal. Hence, the entire gamut of matter is in the realm of facts and does not give rise to substantial question of law. Even otherwise, as has been held in catena of decisions by different High Courts, the practice followed by Industrialists declaring larger than actual quantity of stock to the Bank for the purpose of getting higher loans or over-draft facility, in fact, is not recognized as conforming to the fiscal discipline by Courts, Authorities and Tribunals. Such a tendency tantamount to commercial immorality for obtaining unjustified gains in the form of higher credit facility or loans etc. by showing incorrect statement of stock position to the Bank. In any case, the burden lies upon the assessee to reconcile the difference of stock position presented to the bank with the stock position mentioned in the books of accounts/audit report (Dhansi Ram Aga Vs. CIT (201 ITR 192, Gauhati High Court, Ramanlal Kacharulal Tejmal Vs. CIT (146 ITR 368 (Bom), Pooranlal Raj Kumar Vs. CIT (107 CTR Cal. 27), CIT Vs. A. Yunuskunju (189 ITR 672, Kerala), CIT Vs. South India Rubber Products (166 ITR 687 (Kerala) and Coimbatore Spng. & Wvg. Co. Ltd. Vs. CIT (1974)95 ITR 375, referred to).

Once the Assessing Officer finds that there was excess stock, in absence of explanation by the assessee, the conclusion is inescapable that the excess stock, if any, was from undisclosed sources. Further, once the assessee’s explanation, if any, has not been accepted, the resultant position is that there was excess stock un-disclosed in the books of accounts and non disclosure was only with a view to suppress the income.

Consequently, this Court up-helds the order of Assessing Officer dated 31/3/2013 (Annexure P/4) and that of the Income Tax Appellate Tribunal dated 5/4/2021 (Annexure P/6) taking the view that the excess stock represented the income of the assessee from undisclosed sources. The judgment cited by learned counsel for the appellant, in fact, is distinguishable on facts. In that case, there was no variation or difference in quantity of stocks of raw material etc. shown in the books of accounts and that sent to the Bank, but there was difference in valuation and for the reasons stated in the order of the Tribunal, the Apex Court did not choose to interfere in the said order in its discretionary jurisdiction under Article 136 of the Constitution of India. Hence, the said judgment is of no assistance to the appellant.

The appeal fails and is, accordingly, dismissed.