2002 (7) TMI 416 - AT - Income Tax

Tribunal decision: Stock discrepancies set aside, cash payments disallowed under section 40A(3), interest levy upheld.

The Tribunal partly allowed the appeal by setting aside the addition on account of stock discrepancies but upheld the disallowance under section 40A(3) ... Unexplained investments Issues Involved:1. Sustenance of addition on account of difference in stock.2. Disallowance under section 40A(3) for cash payments.3. Levy of interest as consequential in nature.Issue-wise Detailed Analysis:1. Sustenance of Addition on Account of Difference in Stock:The primary issue concerns the sustenance of an addition of Rs. 2,57,920 due to discrepancies between the closing stock as per the books (Rs. 9,88,280) and the stock statement hypothecated with the bank (Rs. 7,14,395). The Assessing Officer (AO) noted discrepancies in quantitative sales and valuation basis, concluding a difference of Rs. 2,88,990 on 18 items. Despite the books being audited and no defects found in purchases and sales, the AO made the impugned addition, arguing that the figures given to the bank were on an ad hoc basis.The assessee contended that the stock statements furnished to the bank were ad hoc and not reflective of the actual stock, as the business involved manufacturing automobile plastic components for reputed manufacturers, which were not sold in the open market. The assessee maintained regular books in accordance with a consistent accounting method, and no defects were pointed out by the AO. The stock was under hypothecation, and the statement given to the bank was merely a formality.The CIT(A) confirmed the addition but allowed relief of Rs. 31,070 for certain items valued at cost in the balance sheet but at market value in the bank statement.The assessee argued that if the value of closing stock is increased, the opening stock in the succeeding year will also increase, offsetting any addition made. The stock statement given to the bank was a formality, and no discrepancy in quantitative tally was found by the AO, ST authorities, or Excise authorities.Upon review, the Tribunal considered various case laws and found that the stock statement given to the bank was merely a formality, and the bank's interest was secured by a mortgage of land and building. The AO did not find any discrepancy in the books or the method of accounting followed. The Tribunal concluded that no addition could be made based on the stock statement given to the bank and set aside the order of the CIT(A), allowing this ground of the assessee's appeal.2. Disallowance under Section 40A(3) for Cash Payments:The second issue pertains to the disallowance of Rs. 30,392 for violation of section 40A(3) due to cash payments to two parties: Royal Plastics Delhi (Rs. 18,720) and for electrical repair material (Rs. 11,672). The assessee contended that these parties were new and demanded cash payments, relying on Board's Circular No. 220 dated 31-5-1977.The CIT(A) upheld the disallowance, stating that no evidence was provided to prove that the parties demanded cash payments or to establish their identity.Before the Tribunal, the assessee again relied on Circular No. 220 but failed to provide evidence of the payees' identities or that cash payments were demanded due to exceptional circumstances. The Tribunal found no merit in this ground and dismissed it as devoid of merit.3. Levy of Interest as Consequential in Nature:Both parties agreed that the levy of interest is consequential in nature. The Tribunal directed the AO to allow consequential reliefs to the assessee.Conclusion:The appeal was partly allowed, with the Tribunal setting aside the addition on account of stock discrepancies but upholding the disallowance under section 40A(3) for cash payments. The levy of interest was directed to be consequential.