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TaxTMI 
TaxTMI 
TaxTMI 
2012 (5) TMI 654
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.... Sl. No. Addition Amount (Rs.) 1. Unexplained investment in purchases 1,19,43,361 2 Profit on the above @ 5% 5,89,677 3 Disallowance u/s. 40A(3) 1,38,670 4 Excess cash balance 10,00,000 5 Unexplained investment in assets 1,17,600 6 Profit on undisclosed sales 92,000 3. The facts relating to the addition towards value of stock difference between the stock statement given to the bank and that was shown in the books as unexplained investment in purchases, the Assessing Officer addressed a letter to the Indian Overseas Bank, Nalgonda on 9.9.2008 and obtained the details of the monthly closing stocks furnished by the assessee to the bank in connection with availing the loan facility. When compared with the figures furnished to bank, the closing stocks shown to bank appear to be very high or not at all matching with the figures shown to the Department. When questioned about the same, the assessee replied vide letter dated 28.6.2009 that regarding the closing stock of Rs. 55,06,000 shown to the bank on 31.3.2007, if the assessee do not declare the required and sufficient stock to the bank the loan account will not be renewed or continued, hence it has shown the above....
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....hri. T. Ramanaiah, the then Br. Manager, IOB, Nalgonda, vide letter dated 22.9.2009 stated that they have inspected the stocks and found the stock were more or less equivalent to the stocks statements submitted to the bank. He confirmed that the stocks were available in the showroom/godown as per the stock statements submitted by them every month (and as per the copies of stock statements enclosed along with the Department letter). The statement given in their letter dt. 12.8.2009 is not correct. From the above, the Assessing Officer drew conclusion that the banks do not accept the inflated values of stocks and in case of any huge variation, details of stock will be called for. Further, in no case the bank authorities do not extent the credit facility to a particular party without verifying the stock position. He therefore, concluded that the assessee's argument that 'for continuation and renewal of loan facility the values of stocks are inflated and what is shown to bank is not correct' was firmly confuted by the bank authorities. During the course of hearing on 5,10.2009, the letter of the Branch Manager was put forth to the assessee calling for explanation. Once agai....
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.... statement purchases of Rs. 54,39,747 and unaccounted purchases of Rs. 10 lakhs was also there. The assessee further stated that the Assessing Officer had not considered cash out flow for the car loan repayment, income-tax payment, partner's drawings and assets purchased. The assessee had also filed a cash flow statement before the Assessing Officer. After considering the above statements, the Assessing Officer concluded that it is an established fact that there is an excess balance of cash available to the extent of Rs. 10 lakhs as on 31.3.2007. He further stated in the order that the Balance Sheet of the assessee does not depict any other liabilities except IOB, Nalgonda, and car loan for which the account copies have already been furnished and these amounts cannot be altered. As the cash balance available as on 31.3.2007 was worked out to Rs. 21,24,707, the assessee's balance sheet results in a deficit of Rs. 10 lakhs on the liabilities side, which was nothing but profit and could be balanced by increasing the profit of the assessee to that extent and accordingly Rs. 10 lakhs was treated as profit of the assessee and added to the income returned. 7. In respect of the fi....
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....on practice. It is not correct to state that the assessee is allowed to go through the letter referred to by the AO of the then Branch Manager. He has only shown it stating that as per that letter the stocks were more. The assessee never read the contents of the letter. Otherwise it would have asked for cross examination and evidence for visit by the Manager to the assessee's premises. Even otherwise it is not right practice to put across some material and elicit opinion without providing sufficient time to understand the contents of the material. When some material is proposed to be used against the assessee it is duty of the Assessing Officer to provide such material in advance and elicit objections on the same. The AR further submitted that without there being source there cannot be income. As submitted earlier this is the first year of business and within few days of commencement of business there could not have been so much of undisclosed income to invest in purchases. The assessee has only availed cash credit account and not a key loan account. For the purpose of cash credit account it is required to give stock statement. Therefore, it is used to give inflated stock state....
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....he orders of the lower authorities and submitted that the contention of the assessee that the assessee was not allowed to go through the contents of the letter of the Branch Manager so as to offer his explanation is not correct. The letter of the Branch Manager was put forth to the assessee during the course of hearing on 05.10.2009 and again vide letter dated 11.11.2009 the Assessing Officer had given an opportunity to assessee to explain the unaccounted stock to the tune of Rs. 1,19,43,361/-. The assessee all along has been reiterating the stand that they have shown the inflated value of the stocks to the Bank for continuing the CC loan facility and the figures submitted to the bank were totally fictitious. However, the Assessing Officer could rebut the claim of the assessee through the letter of Shri. T. Ramanaiah, the then Branch Manager, IOB, Nalgonda, received in the o/o ITO, Nalgonda on 22.9.2009, that "we have inspected the stocks and found the stock were more or less equivalent to the stocks statements submitted to the Bank. I confirm that the stocks were available in the showroom / godown as per the stock statements submitted by them every month (and as per the copies of ....
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....s of account. It was explained by the assessee that the stock statement furnished to the bank was on estimate basis. On the other hand, the stock shown in the assessment proceedings was based on actual physical verification. As such there was no reason to reject the books of account of the assessee and no addition is called for solely on account of the difference in value of stock submitted to the bank and value of the stock shown in the accounts presented for assessment. We place reliance on the following judgements. a) CIT v. Pioneer Breeding Farms (295 ITR 78) (Mad) b) CIT v. Udaipur Chemicals & Fertilizers (P) Ltd., 211 CTR 191 c) Coimbatore Spinning & Weaving Co. Ltd. v. CIT (95 ITR 375) (Mad) d) Dhansiram Agarwalla v. CIT (111 CTR 39) (Gau) e) Century Foams (P) Ltd. v. CIT (123 CTR 342) (All) f) V. Rajan v. CIT (96 ITR 64) (Mad) g) S. Murugappa Chettiar v. CIT (71 CTR 154) (Ker) 15. This ground is allowed. 16. The next ground is with regard to addition of Rs. 5,89,677 being the estimation of profit at 5% on the unaccounted sales of Rs. 1,19,43,361. This addition is on the basis of the presumption that the assessee sold unaccounted stock on the basis of stock statemen....
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....ty of funds to purchase the assets, the addition cannot be made. Accordingly the addition is deleted and the ground raised by the assessee is allowed. 20. The next issue is with regard to addition of Rs. 92,000 towards unrecorded sales., The learned AR submitted that this addition was made without appreciating the fact that there could not have been very much difference in the stock in one day. It would have been sold earning profit. The Assessing Officer observed that there was a difference of Rs. 18.40 lakhs in the stock between the figures of the last two days of the month, i.e., between the stock at the end of the days 30.3.2007 and 31.3.2007. When it was questioned that as to why the difference of closing stock amounting to Rs. 18.4 lakhs between 30.3.2007 and 31.3.2007 could not be treated as sales for the assessment year under consideration, the assessee in its reply dated 12.8.2009 stated that the figures given in the statement given to the bank are not correct and they were given for renewing the credit facility. 21. We have heard both the parties on this issue. The difference is due to stock statement furnished to the bank and the stock in the books. We have, elsewhere ....
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....een held in the concluding paras of 4 and 5 of the judgement of High Court cited supra, as follows: "4. The pattern of assessment under the IT Act is given by s. 29 which states that the income from profits and gains of business shall be computed in accordance with the provisions contained in ss. 30 to 43D. Sec. 40 provides for certain disallowances in certain cases notwithstanding that those amounts are allowed generally under other sections. The computation under s. 29 is to be made under s. 145 on the basis of the books regularly maintained by the assessee. If those books are not correct or complete, the Income tax Officer may reject those books and estimate the income to the best of his judgement. When such an estimate is made it is in substitution of the income that is to be computed under s. 29. In other words, all the deductions which are referred to under s. 29 are deemed to have been taken into account while making such an estimate. This will also mean that the embargo placed in s. 40 is also taken into account. 5. No doubt there is big difference between profit earned with own capital and profit earned with borrowed capital and such a difference could have been taken i....