IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR -------------------------------------------------------- (1) INCOME TAX APPEAL No. 121 of 2005 C I T UDAIPUR V/S M/S LAXMI ENGG. INDUSTRIES (2) INCOME TAX APPEAL No. 122 of 2005 C I T UDAIPUR V/S M/S LAXMI ENGG. INDUSTRIES (3) INCOME TAX APPEAL No. 124 of 2005 C I T UDAIPUR V/S M/S LAXMI ENGG.INDUSTRIES Mr. K. K. BISSA, for the appellant / petitioner Mr. SANJEEV JOHARI, for the respondent Date of Order : 18.3.2008 HON'BLE SHRI N P GUPTA,J. HON'BLE SHRI DEO NARAYAN THANVI,J. REPORTABLE ORDER ----- These three appeals arise out of the common judgment of the learned Tribunal dt. 14.7.2003. Appeals relate to different assessment years, with respect to same assessee, and have been filed by the Revenue, involving common question, and therefore, are being decided by this common order. The necessary facts are that assessment was made for different years, under Section 143(3)/250 of the Income Tax Act by the Assessing Officer. We need not go into other aspects of the assessment order, and would better like to mention the facts only about the precise question involved in these appeals, on which these appeals have been admitted being:- “Whether in the facts and circumstances of the case, the additions made in the income of the assessee by the Assessing Officer on account of difference in the stock valuation as per statement given to the bank and as per the books of account were justified?” The Assessing Officer found, that in the balance sheet the assessee had shown the closing stock of the goods at a particular amount in different assessment years, while the statement submitted by the assessee to the Bank for the purpose of obtaining financial assistance, did also come to the notice of the Assessing Officer, wherein a higher valuation of the stock was given, and therefore, the Assessing Officer, after making certain calculation, added the different amounts, as income of the assessee from undisclosed source. In so making these additions, the learned Assessing Officer relied upon a judgment of Madras High Court, in Coimbtore Spinning and Weaving Co. Ltd. Vs. Commissioner of Income Tax, reported in 95 ITR-375. The assessee unsuccessfully assailed the order in appeal before 2 the learned Commissioner Income Tax (Appeals), who negated the contention, though partly allowed the appeal, vide order dt. 18.7.2002. The matter was further carried in appeal before the Tribunal. The learned Tribunal considered the matter from different aspects, as contended by the rival parties, with respect to each of the assessment year, and also considered the judgment in Coimbatore Spinning and Weaving Co.'s case, so also some five judgments cited on the side of the assessee, and recorded a finding as under:- “.....perusal of the facts of the case we find that in the case under consideration for all the assessment years the stock was merely hypothecated to the bank and the goods remaining under the possession and control of the assessee which were not physically verified at the time of hypothecation. Such verification is made by the bank only when the goods are pledged with them. Besides, we find that the AO had not been able to point out any discrepancy in the quantity of stock hypothecated to the bank and the quantity of stock as per books of accounts.” Thus, in this regard the appeal was allowed. Perusal of the impugned orders of the Assessing Officer, Appellate Authority, and the Tribunal, does show, that the explanation furnished by the assessee was, that he had shown inflated figure of the valuation of the stock to the bank for availing better financial assistance, and the other contention raised was about, as to how the price of the stock is to be calculated, by taking into account the cost of manufacture etc. 3 Before proceeding further, we feel it better to deal with the cases cited on either side, as in our view, the bare discussion thereof would be enough to decide the appeal. On the side of the Revenue, strongest reliance has been placed on the Coimbatore Spinning and Weaving Co.'s case, rather that judgment only has been relied upon, to contend, that when the stocks are inflated in the statement given in the bank for obtaining overdraft, and loan facilities, such a practice is not recognised in commercial circles, or by court, and even if such a practice exists, the Tribunal is not expected to take judicial notice of such substandard morality. A heavy burden is on the assessee to prove, that the account books alone give a correct picture. In that case, the assessee had hypothecated stock to the bank, being a case of pledge, and there was considerable discrepancy between the stock of cotton as per the assessee's books of accounts, and the stock declared to the bank. The High Court in that case had noticed, that admittedly excess stock of C.O.4, and Cambodia cotton had been declared to the bank, and an excess comes to 1,73,237 lbs. valued at Rs. 2,29,132, and the assessee's submission was, that the stock of all the verities had to be taken together, on an overall basis, and if so taken, there was an excess of 6631 lbs. as per its 4 books, that it is possible that it committed a mistake in declaring the quantity, in respect of each of the verities of cotton, and so on. In that case the explanation given by the assessee was not accepted by the authorities below, and the Madras High Court found it to be a question of fact, by holding, that the finding of the learned Tribunal that there were excess stock cannot be interfered with by the High Court, as it is exclusively a matter for the Tribunal to accept or reject the assessee's explanation, on the facts and circumstances of the case. Therefore, the rejection of the explanation was upheld by the High Court. On the other hand, learned counsel for the assessee has relied upon the following judgments:- 1. Commissioner of Income Tax Vs. Relaxo Footwear reported in (2003) 259 ITR-744 2. Commissioner of Income Tax Vs. APCOM Computers P. Ltd. Reported in (2007) 292 ITR-630 3. Commissioner of Income Tax Vs. Sidhu Rice and General Mills reported in (2006) 281 ITR-428 4. Commissioner of Income Tax Vs. N.Swamy reported in (2000) 241 ITR-363 5. Commissioner of Income Tax Vs. Sri Padmavathi Cotton Mills(1999) 236 ITR-340 6. Commissioner of Income Tax Vs. General Metal Works reported in (1998) 172 ITR-173 5 7. Commissioner of Income Tax Vs. Prem Singh & Company reported in (1987) 163 ITR-434. Prem Singh & Co.'s case was a case, where the Delhi High Court was considering the question, as to whether on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition made by the Income Tax Officer as income of the assessee from undisclosed sources, on account of the difference in the position of stock, as disclosed by the books of accounts, and as shown in the account of stock hypothecated with the bank, and it was found, that the Tribunal referred to the practice of filing inflated lists for the purpose of getting a loan, and also referred to the fact, that for the purpose of a loan the stock would be valued at market price, whereas in the books it would be valued at cost. The Tribunal also noticed, that the accounting period closed on 12.4.1977, whereas the figures obtained from the bank were as on 1.3.1977. With recapitulating this, the High Court held, that the conclusions of the Tribunal were purely of fact, and no question of law arises, and the appeal of the Revenue was dismissed. Then, in General Metal Works' case the facts were, that a discrepancy was found in the stock disclosed in the books of accounts, and the stock hypothecated to the bank, inasmuch as the certificate of the bank showed, that the 6 assessee had hypothecated 180 kgs. stainless steel sheets, 2301 kgs. stainless steel utensils and other items, while the account books showed nil stock of stainless steel sheets, and 455 kgs. of stainless steel utensils. The Income Tax Officer made addition, which was deleted by the Commissioner, as well as the Tribunal. The explanation submitted by the assessee was, that the head office had transferred stock worth Rs. 3,80,446 to the branch office, which was sold by the branch office till the date of hypothecation, but the statement of account was not sent by the branch office to the head office, and therefore, the head office remained under impression, that the stock transferred to the branch office remained intact, and was hypothecated to the bank. Then, regarding 180 kgs of stainless steel sheets, the explanation was, that the entire material was damaged, therefore, it was shown as nil in the statement, but overdraft facility was availed by hypothecating the said stock with the bank. It was submitted by the assessee, that the stock was merely hypothecated with the bank, which means, that the goods remained in the possession and control of the assessee, and that they were not physically verified at the time of the hypothecation, in which regard the letter from the Bank Manager was also produced, which was relied upon by the learned Tribunal. The High Court dismissed the appeal, by finding all these conclusions to be finding of fact, not giving rise to any question of law. 7 Then, in Sri Padmavathi Cotton Mills' case, again, the assessee showed in his return the closing stock as on 30.6.81 at 30851 kgs. of cotton and finished goods, whereas it had declared the closing stock at 31660 kgs. to the bank, for the purpose of obtaining loan. The value of the discrepant amount was Rs. 1,47,557, which was added. In that case the Tribunal found, that the assessee had been maintaining accounts, and the accounts had not been rejected by the Department on the ground of not representing the correct stock position. Accordingly, the addition was deleted. Then in appeal, the judgment in Coimbatore Spinning and Weaving Co.'s case was relied upon by the Revenue. However, the High Court found, that there is no material to show, that the stock balance declared by the assessee to the bank was as per the actual quantities, and that, there is no finding by the Appellate Tribunal that the stock declared to the bank was based on actual quantity, so also, that there is no evidence to show, that the bank actually verified the stock and found it to tally with the stock declared to it by the assessee. Considering this it was found, that a finding on the question, as to what is the correct quantum of closing stock, is a pure question of fact, and since the finding of the Tribunal was arrived at on the basis of the material on record, therefore, it was found that no question of law arises. 8 Then, N. Swamy's case is again a judgment of Madras High Court, wherein there was a difference between the value of the stock as given in the return, and as given to the bank, which difference was added as income of the assessee from undisclosed sources. Contention raised was, that the value of the stock as stated by him in declaration given by him to the bank was inflated, and that, he had not suppressed that value of the stock, and that, there was no income from undisclosed sources. Then, the matter went to the Tribunal. There was difference of opinion between the Accountant Member and the Judicial Member. Then, the matter was referred to the Vice President, who concurred with the Judicial Member, and held, that the loan taken by the assessee from the bank was not on key loan account, and that, no verification was made by the bank officials, of the stock disclosed by the assessee, that there was no material to show, that the assessee had undisclosed income, the Tribunal found the judgment in Coimbatore Spinning and Weaving Co.'s case to be distinguishable. Before the High Court again, strong reliance was placed on Coimbatore Spinning and Weaving Co.'s case only, and the conclusions recorded in Coimbatore Spinning and Weaving Co.'s case were reproduced, and then it was found by the High Court to be little difficult to agree with those observations. It was found, that the assessee's income is to be assessed by the Income tax Officer on the basis of the material which is required to be considered for the purpose of assessment 9 ordinarily, and not on the basis of the statement which the assessee may have given to a third party, unless there is material to corroborate that statement of the assessee given to a third party, even if it be a bank, rather the mere fact, that the assessee had made such a statement, by itself, cannot be treated as having resulted in an irrebuttable presumption, against the assessee. The burden of showing, that the assessee had undisclosed income, is on the Revenue, which cannot be said to be discharged by merely referring to the statement given by the assessee to a third party, in connection with a transaction, which was not directly related to the assessment, and making that the sole foundation, for a finding, that the assessee had deliberately suppressed his income. Then it was also found, that on the facts of that case (in Coimbatore Spinning and Weaving Co.'s case), the explanation was not accepted by the authorities below, and interference was declined, on the ground of it being a finding of fact, while in the case in hand, i.e. N. Swamy's case, it was a reverse situation, where the Tribunal had accepted the explanation, which acceptance was also found to be a question of fact, and interference was declined. Then, in Sidhu Rice and General Mill’s case, as per the statement furnished to the bank, there was stock of rice at 2300 quintals, whereas as per the balance sheet there was stock of 818.30 quintals, and addition of Rs. 10 4,44,510/- had been made by the assessing officer, which was set aside in appeal interalia on the ground, that it was a case of hypothecation of stock, and there was no evidence, to the effect, that the stock hypothecated with the bank were ever verified by the bank. The Tribunal also affirmed this finding, and also found, that 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. Then, the High Court declined to interfere, holding it to be a finding of fact, arrived at on the basis of material on record. Then in APCOM Computers' case again, in practically identical circumstances interference with the conclusions of the Tribunal was declined by the High Court. It was observed, that the purchase and sales were supported by vouchers, and the Assessing Officer had not pointed out any suppression of sales or purchase, there was finding by the authorities below, that the statement given to the bank was on estimate basis, without any actual physical verification. Then it was also found, that no detailed inventory was also available in the statement made to the bank, except a mere value declared for overdraft purposes to the bank, there were no detailed items of stocks in support of the declared value. 11 Then, the last judgment relied upon, is a Division Bench judgment of this Court, in Relaxo Footwear's case, where the application moved by the Revenue for calling for reference, in identical circumstances, was dismissed in limine, finding, that the Tribunal on appreciation of evidence, including the result of investigation, and details contained in the form of statement of stock, submitted to the bank, has reached a definite finding, that the statement to the bank was motivated one, and it did not reflect the true position of the stock position, but was rightly reflected in the books of accounts. After a review of all the judgments cited at the bar, we are of the view, that of course, in Coimbatore Spinning & Weaving Co.'s case it has been observed, that the alleged practice showing inflated figure to the bank is not recognised in commercial circles or by court, and the Tribunal is not expected to take judicial notice of such substandard morality, but then, the plethora of judgments cited on the side of the assessee, do clearly show, that there can be circumstances, where there may be difference in the quantity of stock, as appearing in the balance sheet, and as appearing in the hypothecation made to the bank, and that if there is any explanation coming forward for the discrepancy, then the addition need not be made, and that, sufficiency or reliability of the explanation, offered by the assessee, is a question of fact, and the 12 findings thereon, as recorded by the learned Tribunal, cannot be interfered with by the High Court, as it does not give rise to any substantial question of law. With this, so far as the case in hand is concerned, it stands at much higher footing, inasmuch as positive finding of fact has been recorded by the learned Tribunal, which may be repeated by us, being as under:- “...Besides, we find that the AO had not been able to point out any discrepancy in the quantity of stock hypothecated to the bank and the quantity of stock as per books of accounts.” In our view, on the face of this finding, even if there is some difference in the valuation of the said quantity of the stock in the balance sheet, as against the valuation shown in the bank, it cannot be said to be resulting into any income from undisclosed sources, coming to the assessee, capable of being added in his income. Thus, the question, as formulated, is answered against the Revenue, and in favour of the assessee. The appeals are, therefore, dismissed. ( DEO NARAYAN THANVI ),J. ( N P GUPTA ),J. /sushil/ 13