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income-tax Officer Vs. General Metal Works - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1985)14ITD438(Delhi)
Appellantincome-tax Officer
RespondentGeneral Metal Works
Excerpt:
.....of stocks both at the branch as well as at the head office. the head office was at bulandshahr and branch office was at delhi. the assessee had furnished stock statement to the bankers as on 28-2-1979 showing stainless steel utensils weighing 2,300 kgs. and stainless steel sheets at 180 kgs. this comprised of the stocks of the assessee at the head office as well as at the branch office at delhi. the ito during the course of assessment proceedings found that there was wide difference between the details furnished by the bank and the stock as on 28-2-1979. the main difference was in the items of stainless steel sheets and stainless steel utensils. the position according to the bank statement was that the stock of stainless steel sheets was 180 kgs. valued at rs. 11,160 whereas according to.....
Judgment:
1. This is an appeal by the department pertaining to the assessment year 1979-80.

2. The assessee is a registered firm. It derives income from manufacture and sale of stainless steel utensils and underground water handpumps. The assessee had obtained overdraft facilities from the bankers by way of hypothecation of stocks both at the branch as well as at the head office. The head office was at Bulandshahr and branch office was at Delhi. The assessee had furnished stock statement to the bankers as on 28-2-1979 showing stainless steel utensils weighing 2,300 kgs. and stainless steel sheets at 180 kgs. This comprised of the stocks of the assessee at the head office as well as at the branch office at Delhi. The ITO during the course of assessment proceedings found that there was wide difference between the details furnished by the bank and the stock as on 28-2-1979. The main difference was in the items of stainless steel sheets and stainless steel utensils. The position according to the bank statement was that the stock of stainless steel sheets was 180 kgs. valued at Rs. 11,160 whereas according to the assessee's books of account, there was no stock of sheets at all. The stock of utensils was 3,201 kgs. as per bank's statement whereas the same was only 455 kgs. in head office and branch office both. Further, it was found that there was no stock of moulding leather rings, nut bolts valued at Rs. 17,650 as per bank's certificate. According to the books of account, there was no such stock at the relevant time. On account of this discrepancy, the ITO directed the assessee to explain as to why the value of the difference in the stock showed in the statement furnished to the bank and the books of account should not be added as income of the assessee from undisclosed sources.

3. In response to the service of a show-cause notice, the assessee vide its letter dated 26-3-1983 explained as under : In response to your kind enquiry regarding the alleged discrepancy between the stock statement rendered to the State Bank of India and the actual stock position with us, it is submitted that the actual quantity of stock held by the assessee far exceeded the quantity shown to the bank in the matter of stainless steel utensils and raw materials.

According to the bank statement, finished utensils weigh about 230 kgs. and stainless steel sheets at 180 kgs. The brief facts are that the total quantity of stainless steel utensils held by the assessee at branch office amounted to Rs. 3,80,446. As the exact stock position was not readily available with the head office in respect of stocks at branch, in a hurry the accountant bifurcated the stock into utensils and stainless steel sheets. In actual, there were only stainless steel utensils lying in the branch and the total quantity wcightwise was much more than indicated to the bank. Thus, there was no understatement of the stock position so far as the assessee is concerned.

The ITO was not satisfied with the said explanation. The ITO after considering the contentions of the assessee and the material on record opined as under : So far as stainless steel sheets are concerned, there is no reason why the assessee should have shown any stock of sheets in the bank statements, if there was no such stock and even if it was not aware of the correct position of stocks with the branch. This is so, as there was no question of there being any stock of sheets in the branch. Hence, the assessee's contention that the stocks at branch were bifurcated into utensils and sheets in hurry has no basis.

Similar is the position with regard to moulding, leather rings and nut bolts, etc. The only item for consideration, therefore, that remains is the stock of utensils. The assessee's contention that there were stocks worth Rs. 3,80,446 with the branch is not borne out from the records. There were no sales in the branch in the month of March 1979. The stock of utensils with the branch as on 31-3-1979 was only 431 kgs. Therefore, this could be the only stock available with the branch on 28-2-1979 also. The assessee's contention is that till February 1979, goods worth Rs. 10,84,082 had been sent on consignment to the branch. Against the same total payments of Rs. 7,03,636 only had been received. Therefore, the balance of Rs. 3,80,446 was treated by the assessee to be stock available with the branch and the same was declared to the bank. It is unbelievable that the true and correct position with regard to the sales and stock available at the branch was not known to the head office and the partners of the firm were not aware that the outstanding amount from the branch was not invested in stocks but was in the form of trade debtors. All these facts do clearly indicate that the assessee was having stocks outside the books. The value of the same is as under: i. Stainless steel sheets (180 kgs.) Rs. at the rate of Rs. 62 per kg.

11,160 ii. Stainless steel utensils 1,845 kgs. (2,301-455) at the rate of Rs. 80 per kg.

1,47,600iii. Moulding rent, leather rings and nut bolts, etc.

17,650 ---------- The aforesaid amount of Rs. 1,76,410 was, therefore, proposed to be added as the assessee's income from undisclosed sources. It was contended by the assesses before the learned IAC, Ghaziabad, that as far as parts are concerned, the ITO has completely overlooked the fact that it is a manufacturing concern and the components were used for the manufacture of pumps from 1-3-1979 to 31-3-1979. It was further contended that the limit granted by the bank was against hypothecation of goods, and a charge against the machinery. The custody of goods remained with the assessee and only hypothetical charge vested with the bank. The assessee was required to give monthly statements, but the bank carried out only occasional test checks. The assessee also filed a certificate dated 2-8-1982 of State Bank of India, Bulandshahr, in support of its contention. In the certificate, it is also stated that system is based on the credibility of the borrower. On the directions of the IAC, the assessee's contention regarding parts utilised in the month of March 1979 was examined. Again, on the directions of the IAC, it was also ascertained from the bank as to what were the dates of inspection and whether any discrepancy was found out by the bank at the time of inspection. The assessee submitted that the same item was shown as moulding weighing 22,200 kgs. at the rate of Rs. 5 per kg. If the contention of the assessee that parts were subsequently used in the month of March 1979 in the manufacture of hand-pumps, is accepted, the discrepancy would work out to about Rs. 9,000 only as against Rs. 17,650 proposed to be added in this respect. The contention of the assessee that the same items were shown twice once as handpumps and then as moulding, is without any corroborative evidence, and cannot be accepted. The bank, in their letter dated 7-8-1982, have clearly mentioned that the stocks were inspected, inter alia, on 28-2-1979. On further inquiry, they have stated that as per bank records, there is no mention that there was any discrepancy in the stock statements submitted by the borrower on the dates of inspection. Therefore, the assessee's contention that the system was based on credibility and the bank was actually not verifying the stocks, even on inspection dates, cannot be accepted. As already stated above, the stocks were not available even in the branch office and, therefore, the contention that the branch office stocks were shown to the bank also cannot be accepted. The fact is that the assessee had stocks outside the books of account which were shown to the bank. In view of categorical confirmations from the bank regarding the dates of inspection and the fact that no discrepancy was found by them at the time of inspection the contention of the assessee cannot be accepted. In accordance with the directions of the learned IAC, therefore, the addition on this account is restricted to Rs. 1,68,410 [excluding Rs. 8,000 out of item No. (3) amounting to Rs. 17,650 above relating to moulding, etc.].

4. Being aggrieved with the order of the ITO, the assessee took up the matter in appeal. Inter alia, it was explained that the appellant manufactures stainless steel utensils at Bulandshahr and it has sales office at Delhi. After the utensils were manufactured, they were transferred to Delhi for sale. The appellant debits the price of the goods to the branch office and on receipt of money representing the sale proceeds, necessary credit was given to the branch. On 28-2-1979, a sum of Rs. 3,80,446.40 was due as outstanding from the Delhi branch on account of goods supplied to the branch. No sale statement or information had been received by the appellant from the branch at the head office at Bulandshahr. It was claimed by the appellant that it was under a genuine and bona fide belief, in the absence of any information of sales from the branch, that the goods had not been sold by the branch office and that these were in stock-in-trade at Delhi. On the basis of the above understanding, the stock position as on 28-2-1979 was declared by the appellant to the bank. It was also claimed that no one from the head office has visited the branch during the month of February 1979. Thus, it was contended that though the stock had already been sold by the branch, yet because no money had been remitted from the Delhi branch to the head office at Bulandshahr, the appellant had included these stocks in the statement rendered to the bank. The learned Commissioner (Appeals) after considering the contentions of the appellant and the material on record was of the view that the assessee had given satisfactory reasons as to why the discrepancy arose.

According to the Commissioner (Appeals), the stock of the branch office though disposed of earlier was declared in the bank, because head office had no such information at the time when the stocks were declared in the bank. Consequently, the learned Commissioner (Appeals) was of the view that the addition of Rs. 1,68,410 was uncalled for.

5. Before the Tribunal, on behalf of the revenue, it was contended that finding of the Commissioner (Appeals) is not correct and is also not supported by the evidence on record and hard facts of life. Stock of utensils with the branch as on 31-3-1979 was only 431 kgs. There were no sales in the month of March. Therefore, this could be the only stock available with the branch on 28-2-1979. The ITO discussed all the contentions of the assessee and after going through the material on record and considering the contentions of the assessee, it was rightly held that the discrepancy between the stock as per the books of account of the assessee and the statement given to the bank with whom the stocks were hypothecated remained totally unexplained. The contention of the assessee that the total quantity of stainless steel utensils held by the assessee at the branch office at the relevant date amounted to Rs. 3,80,446 was not supported by any material on record. The contention of the assessee that at the relevant time the exact stock position of the branch office was not readily available as such, the statement to the bank was submitted on estimate basis can hardly be believed. According to the revenue, when the assessee was giving its statement in the bank regarding its stocks, it does not stand to reason that the assessee will give the stock position without getting it verified from the branch office at Delhi. The sales at the branch office took place on 3-2-1979, 14-2-1979, 27-2-1979 and 28-2-1979. If those sales are excluded, then the statement of stocks disclosed by the assessee in the bank on 28-2-1979 becomes an incorrect figure. It was for the assessee to prove the discrepancy but no convincing material was produced by the assessee. The stock registers produced by the assessee are not reliable because they were not regularly maintained.

Even they were not signed by the proper authorities at the time when the statement was submitted to the bank regarding the position of the stocks of the assessee. Many papers in the said stock registers are lying unused. Thus, it was submitted that the addition made by the ITO was perfectly supported by the material on record but the learned Commissioner (Appeals) deleted the same on insufficient grounds. The decisions relied on by the Commissioner (Appeals) are not applicable on the facts of the case. In those cases, the High Court proceeded with the finding of facts arrived at by the Tribunal.

6. The counsel for the assessee supported the order of the Commissioner (Appeals). Mainly, it was submitted that there was no understatement and there was no discrepancy between the stock of statement given to the State Bank of India and the actual stock in possession with the assessee. In this respect, it was contended that the total quantity of stainless steel utensils, etc., held by the assessee at the branch office amounted to the value of Rs. 3,80,446. As the exact stock position was not readily available with the head office at Bulandshahr in respect of the stock at the branch, in hurry the accountant bifurcated the stocks into utensils and stainless steel. In actual fact, there were only stainless steel utensils lying in the branch and the total quantity and weight was much more than indicated to the bank.

Thus, it was contended that there was no understatement of the stocks so far as the assessee was concerned.

7. After hearing the parties and considering the material on record, in our opinion, the contention of the revenue has substance. From the figures given in the assessment order, it is clear that there was wide difference between the details furnished by the bank on the basis of the declaration given by the assessee and the stocks as on 28-2-1979.

This is specifically with regard to the stainless steel sheets and stainless steel utensils. The position is that according to the bank's statement, the stock of stainless steel sheets was 180 kgs. valued at Rs. 11,160, whereas according to the assessee's books of account, there was no stock of sheets at all. The stock of stainless steel utensils was 2,301 kgs. as per bank statement whereas the same was only 455 kgs.

(of the value of Rs. 24,431) in the head office and branch office both.

There was stock of moulding leather, ring, nut bolts valued at Rs. 17,650, as per bank's certificate, whereas the assessee had not been able to point out any such stock as per books of account.

8. Thus, it is clear that there was material discrepancy between the stocks as per books of account of the assessee (not reliable) and the declaration given by the State Bank of India with whom the stocks were pledged on the relevant date, namely, 28-2-1979. The contention of the assessee that actual stock position in the branch office as on 28-2-1979 was not readily available as such the stock was declared on estimate basis to the bank is not acceptable. Such explanation is against the hard facts of life and also does not stand to reason. From the material on record, it comes out that in the branch the sales took place on 3-2-1979, 14-2-1979, 27-2-1979 and 28-2-1979 to the extent of 489.700 kgs., 470.850 kgs., 540.250 kgs. and 525.600 kgs., respectively. The statement to the bank was given regarding the stocks of the head office and the branch office as on 28-2-1979. When the stock was disposed of in the branch on the aforesaid dates and particularly after 3-2-1979 and 14-2-1979, it does not stand to reason why on 28-2-1979, those sales in the branch office could not be noticed by the assessee at the time when the statement was given to the bank.

9. We may point out that distance between head office at Bulandshahr and branch office at Delhi is not far off and the stock position of the branch can easily be verified and known from Bulandshahr within few hours. On the face of such facts, it can hardly be believed that when the statement to the bank was furnished regarding the stock position of the articles concerned, it does not stand to reason that the assessee was not aware about its stock position with the bank at that time. Even the bank in their letter dated 7-8-1982 clearly stated that the stocks were inspected, inter alia, on 28-2-1979. The material on record, however, does prove that on behalf of the bank the inspection of the stocks was made regularly. This is also clear from the certificate given by the bank. It means that on 28-2-1979 when the bank inspected the stocks at headquarters, the stocks were available which were disclosed to the bank. The only discrepancy is that the stocks recorded in the books of account in the head office and in the branch office was much less than it was declared to the bank. As a matter of fact, the stock in excess which was declared was outside the books of the head office. From the aforesaid facts, it is established that such stocks were not available in the branch office. So the only reasonable conclusion which can be drawn is whatever excess stock was disclosed to the bank was outside the books and was lying in the head office at Bulandshahr. At the time of arguments nothing was pointed out to show that the certificate given by the bank is not genuine. The learned Commissioner (Appeals) without going into the material on record and hard facts of life, deleted the addition on insufficient grounds. The learned ITO has discussed this point in detail. We agree with the reasoning given by the ITO.10. We agree with the contention of the revenue that the account books maintained by the assessee were not reliable. The stock registers relied by the assessee and also produced before the Tribunal for verification were also not. found reliable because they were not maintained regularly. Even they were not regularly signed by the appropriate authority. Many papers in the said stock registers are lying unused. So the account books including the stock registers maintained by the assessee are not reliable.

11. Looking to the aforesaid facts and evidence on record coupled with the hard facts of life, we are of the view that the addition of Rs. 1.68,410 made by the ITO is to be sustained. The finding of the learned Commissioner (Appeals) to the contrary is not correct.


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