TaxTMI 
TaxTMI 
1988 (10) TMI 78
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....pertaining to addition of Rs. 4,37,080 sustained by the CIT (A) in first appeal of the assessee wherein addition of Rs. 5,78,650 made by the ITO came to be challenged. The said addition has been made on the ground that the quantities and values of carpets, wool-yarn, etc., shown to the bank were higher as on31st March, 1981, against the quantities and values of stocks shown by the assessee-appellant in its books of account. Facts are more than detailed in the orders of the two lower authorities and going through the same the learned counsel for the assessee while challenging the said additions, contended that the said addition is purely based on the statement furnished to the bank by the appellant and on the basis of printed certificates appended at the end of such weekly statements, the form of which has been prescribed by the bank. He submitted that such certificates show that the constituents of the bank certify and declare the stocks mentioned in their statement as its own property and its preliminary rights to so offer the stock to the bank. It was also being stated that none else expected that the bank could have any lien of the said stocks. The learned counsel for the assess....
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.... and key account. We allow drawing power upon the account on the basis of stock statement submitted by them. The keys of the factory premises where the stocks are pledged remains with the borrowers and they can take out or deposit goods as and when they like without prior information/permission from the Bank". The learned counsel had, therefore, submitted that the only account i.e. C.C.(F.T.) account, wherein the loan facilities ha been availed of by the appellant during the previous year was nothing but simple hypothecation of goods and the said goods were lying entirely with the assessee and the assessee had full power and liberty to deal with the same. He further submitted that the conclusion of the CIT (A) that the said stocks as per the weekly statement submitted in March, 1981 represented stock pledged with bank as lying in control of the bank is clearly erroneous and not supported by any evidence. After drawing our attention to the relevant papers in background of the dispute, on the assessee's compilation, the learned counsel for the assessee also drew our attention to copy of the bank account with regard to C.C. (F.T.) account. He submitted that all withdrawals from the sa....
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....nd purchase, the learned counsel for the assessee submitted that the appellant had shown higher quantity of carpets on 28th Aug., 1980, which was at 12,000 sq. ft. and also repeated the same figure on 26th Sept., 1980 and 29th Oct., 1980. He pointed out that a perusal of the bank account during the months of Sept., October and November would show that withdrawals from these bank accounts were considerable as against the deposits money which were only to the tune of less than Rs. 85,000. 4.1. Similarly the learned counsel for the assessee submitted that the appellant had shown higher quantity of Rs. 20,000 sq. ft., to the bank on 21st Jan., 1981, in order to finance the next major export vide bill dt.12th Feb., 1981for the export sales of Rs. 6,76,459. He drew our attention to the bank account and transactions indicated therein during Dec., 1980 and Jan., 1981, where the withdrawals were considerable. He further pointed out that statement so furnished to the bank had no co-relation in reality or connection with the stocks so admitted. As on27th Feb., 1981the appellant had admitted stocks and the drawing power of the same was only Rs. 6,61,875, whereas the assessee had drawn sums ....
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....garh Bench decisions for which he was not ready with citations, but promised to furnished the same. 5. The learned D.R. on the other hand mainly relied on the orders of the two lower authorities and Madras High Court decision in the case of Coimbatore Spinning and Weaving Company vs. CIT (1974) 95 ITR 375 (Mad), wherein their Lordships had held the practice of over-stating the stock to the bank as unethical. He also relied on Indore Bench decision in the case of M/s Precision Electricals and Electronics Pvt. Ltd. vs. IAC, being ITA No. 611/Ind/83, dt. 6th Feb., 1985 which had relied on Madras High Court decision reported in 95 ITR 375 (Mad). He submitted that Indore Bench in the above referred decision had held that practice of business house declaring the stocks to the bank for the purpose of getting higher loan is not an ethical practice. The Tribunal is not expected to take judicial notice of such sub-standard morality on the part of the assessee. The learned Departmental Representative drew our attention to Madras High Court decision reported in 95 ITR 375 (Mad) wherein the High Court had held in the same way which was followed by Indore Bench of the Tribunal. 5.1. The le....
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....e to the bank were not accurate and the same was done in order to obtain higher loan facility only. The Hon'ble High Court, according to him, had confirmed the conclusion of the Tribunal and found that the variation in the stocks, between the books and that submitted to the banks were explained by the assessee saying that the stock declaration to the banks were only estimates and not accurate. 7. After taking into consideration the rival submissions and carefully perusing the facts including the letter of the Bank, detailed copies of the bank account and statement of the partner, we are of the view that the said addition cannot be sustained. The learned CIT (A) had come to the finding that the stocks in the C.C.(F.T.). Account were pleaded by the assessee with the bank. Undoubtedly the bank had used the term 'pledge' in its communication, but at the same time it had also explained that the stocks were only in the custody of the appellant and it could be dealt with by the appellant without any intervention of the bank. The same were in the custody of the assessee itself. Another loan facility account, namely "Lock and Key" account was an account wherein the assessee had pledged i....
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....of the stock statements, the bank had allowed the borrower to withdraw the amount from his account, after maintaining the required margin. It was also stated that such type of credit facility is based mainly on the confidence of the bank on the financial soundness of the borrower and he is free to buy and sell goods so hypothecated. The control over the goods is exclusively that of the borrower and the bank has only a constructive and hypothetical lien on it. 8.2. in view of the letters of the bank, already considered above, and the present statement made by the Branch Manager of the State Bank ofIndia, extracted above, we are of the view that C.C.(F.T.) account is not against the pledge of goods but only on hypothecation of goods. 9. Now what remains to be seen is whether assessee's version to the bank with regard to the quantities of the stocks represent correct position and existence of such stocks. We find on perusal of statements of stocks furnished on one hand to the bank, containing quantities of carpets in sq. ft. in round figures and on the other hand from the perusal of bank account and come unhesitatingly to the conclusion that evidence on record clearly show that ....
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....ank were not actually possessed by it. It appears that its avernment that it had shown higher stocks in order to avail higher loan facility is reasonable. This is what was stated by the partner, who was examined by the IAC (Assessment). His statement had not been proved by any evidence to be incorrect and nothing contrary to the same has been brought on record. This addition on this score does not appear to be based on evidence and material on record. 14. Before we part with the matter we would like to deal with the proposition canvassed by the learned Departmental Representative that the Tribunal is not expected to take judicial notice of the sub-standard morality on the part of the assessee. It is true that bald statement by the assessee that it had so inflated its quantity of stock to the bank, in order to avail of more funds, cannot be relied upon as such. The Hon'ble Madras High Court had held in 95 ITR 375 (Mad) that heavy burden lies on the assessee. We had occasion to deal with identical issue in ITA No. 344/Chd/83, to which one of us was a party, which is reported in Bhagwati Rice Traders case (1985) 18 TLR 938 (ChdTrib). In that case there was discrepancy in the statem....
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....of accounts have been pointed out on behalf of the Revenue. That being the position, relying upon the judgment of the Hon'ble Madras High Court in 93 ITR 49, we sustain the order of the CIT (A) deleting the addition. No interference with his order is called for." 15. In the instant case as well there was a check by the Sales-tax Department as it was by Food Corporation of India in the case of Bhagwati Rice Traders before Chandigarh Bench, We are also fortified by Bombay Bench decision of the Tribunal in ITA No. 6720/(Bom)/84, which is also reported in (1985) 18 ITR 448 (Bom), in which all the three types of loan facilities have been discussed at length. The decision reported in (1976) Taxation 43(6) 47 (Chd-Trib) also supports the contention of the assessee. Undoubtedly the Indore Bench decision apparently seems to support the contention of the Revenue, but due to distinction in facts the said decision cannot be fatal to assessee's claim, according to us. Even if two view theory is taken into consideration, especially when we have our own decision in case of Bhagwati Rice Traders the action of the CIT (A) is to be reversed. 16. The Hon'ble Madras High Court had also held in 9....