Hon'ble Aditya Nath Mittal, J.
1. We have heard Shri Shambhu Chopra, learned counsel appearing for the department. Shri R.S. Garg appears for the assessee.
2. Brief fact, giving rise to the reference, is set out as follows:-
3. The respondent-assessee is a private limited company engaged in the manufacture and sale of black steel tubes and galvanized steel tubes. For the year under consideration, it had filed its return declaring a loss of Rs. 2, 67, 520/-. The assessment was completed by the Income-tax Officer, Central Circle-IV, Kanpur (A.O) vide order under Section 143 (3) read with Section 144-B of the I.T. Act dated 25.9.1984 on a total income of Rs. 10, 92, 020/-. The AO made a major addition of Rs. 10, 78, 886/- on account of difference in respect of three items of stock in the stock statements submitted to the Hindustan Commercial Bank, with whom such stocks were hypothecated for availing the overdraft facility, and the stocks as per books of account. The Assessing Officer took the 'peaks' of each of the item, as per details given below as the basis, for making the addition.
Item Date on which difference is noted Excess quantity (In M.T.) Value (Rs.)
1. Zinc 17.11.80 45.200, 6, 14, 720
2. Galvanised Tubes 31.12.80 50.411, 3,03,066
3. Black tubes 17.2.81 32.220, 1, 61, 100
4. The entire addition was deleted by the Commissioner of Income-tax (Appeals), Kanpur (C.I.T.(A)) vide order dated 14.3.85. On an appeal by the revenue, the Tribunal by its order dated 30.10.85 in I.T.A. No. 919 (Alld) of 1985, set aside the order of the C.I.T. (A) and remanded the issue. By an order dated 22.12.86 passed by the C.I.T. (A) in pursuance of the directions of the Tribunal, the entire addition of Rs. 10, 78, 886/- was found unsustainable and hence deleted.
5. In appeal by the revenue, the Tribunal by its order dated 6.11.1990 in I.T.A. No. 447 (Alld) of 1987, held that this was a fit case where provisions of Section 69-B could be applied for sustaining the addition of Rs. 10, 78, 886/- arising out of the discrepancy of stocks declared to the bank vis-a-vis the stocks found in the books of account. The order of the C.I.T. (A) was reversed and the entire addition made by the A.O, upheld.
6. On a Misc. Application moved by the assessee, the Tribunal by its order in MA. No. 67 (Alld) of 1991 dated 30.7.1993 recalled its earlier order dated 6.11.1990, for the limited purpose of finding out as to what was the quantum of the addition on account of excess stocks declared to the bank.
7. The reference application filed by the department under Section 256 (1) of the I.T. Act against the Tribunal's order dated 30.7.1993 was rejected by the Tribunal vide order in R.A. No. 163 (Alld) of 1993 dated 29.12.1993 on the ground that no question of law arises out of the Tribunal's order dated 30.7.1993. The Department filed a reference application u/s 256 (2) of the I.T. Act before the Hon'ble Allahabad High Court.
8. The assessee had also filed a reference application under Section 256 (1) of the I.T. Act against the Tribunal's order dated 6.11.1990, which was rejected vide order dated 8.9.1993 in R.A. No. 24 (Alld) of 1991, on the ground that the Tribunal's order, which was the basis of the reference application, has been partially recalled (vide order dated 30.7.1993) and hence the reference application had become infructuous.
9. The assessee moved a misc. application for recalling the order of the Tribunal dated 8.9.1993, passed in R.A. No. 24 (Alld)/1991, on which the Tribunal by its order dated 22.12.1993 in M.A. No. 95 (Alld) of 1993, recalled its order dated 8.9.1993.
10. Against the order of the Tribunal dated 22.12.1993 in M.A. No. 95 (Alld) of 1993, the department filed a writ petition in High Court. By order dated 18.4.1994 in Civil misc. Writ Petition No. 392 of 1994, the Hon'ble Court stayed the operation of the Tribunal's order dated 22.12.1993, until further orders.
11. The appeal was restored by the Tribunal on the limited issue, by order in M.A. No. 67 (Alld) of 1991 dated 30.7.1993. The issue was decided by it vide its order dated 28.4.1995 in I.T.A. No. 445 (Alld) of 1992. Out of the addition of Rs. 10, 78, 886/-, made on account of difference in the value of three items of stocks, shown in the stock statements given to the bank and as per books of account, the addition of Rs. 6, 14, 720/- representing the value of difference in the stock of zinc, which was the highest of the three amounts, was upheld; the balance addition deleted.
12. Both the revenue and the assessee sought references to the High Court. The reference made by the assessee was decided on 16.7.2012, by deciding the question of law in favour of assessee and against the revenue.
13. In the reference made by the revenue, the Tribunal has found that since its order dated 22.12.93, recalling the order dated 8.9.93 was stayed by the High Court, the question out of the Tribunal's order dated 28.4.95 does not arise. The Tribunal thereafter re-framed the question and referred it to the High Court as follows:-
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in limiting the addition made on account of difference in the value of stocks declared to the Bank and the value of stocks as per account books, to the highest amount of Rs. 6, 14, 720/- for zinc item only, ignoring the difference of rs. 4, 64, 166/- in the value of other two items of stocks?".
14. On the assessee's reference application the Tribunal has referred the following question for the opinion of the High Court as follows:-
"Whether on a true and correct interpretation of the relevant provisions of law, the Tribunal was legally correct in upholding the addition of Rs. 6, 14, 720/- to the income of the assessee, on account of alleged discrepancy in the stock statement of zinc as submitted to the Bank.?
15. Shri Shambhu Chopra, learned counsel appearing for the revenue submits that the Tribunal, having found that the assessee had given exaggerated valuation to the bank for overdraft facility, and having formed an opinion that some addition was called for filing wrong statement in the bank while accepting the book results, committed an error in law in holding that the entire irregularity could not be converted into money value and that same could not be added to the income of assessee, erred in restricting itself to adding the discrepancy in the stock of 'zinc' only. On the same reasoning the Tribunal was required to add the discrepancy in the account of 'black tubes', to the extent of highest of Rs. 1, 61, 100/- and the discrepancy in stock of 'galvanized tubes', to the highest of Rs. 3, 03, 066/-.
16. Shri Shambhu Chopra has relied upon Swadeshi Cotton Mills Co. Ltd. vs. Commissioner of Income Tax, Kanpur 1980 (125) ITR 33 (All) and Swadeshi Cotton Mill Co. Ltd v. Commissioner of Income Tax, 1989 (180) ITR 651 (All). In the first case this Court held that where the assessee-company carrying on the business of manufacturing yarn and cloth had disclosed a loss in its Pondicherry unit in the assessment year 1960-61, the ITO, from information gathered from the bank about the goods pledged, found that the goods pledged with the bank were in excess of the stock as per books and rejected the book result. Applying a gross profit rate at 10% on sales, the I.T.O, added a profit of Rs. 15 lakhs odd. The explanation given by the assessee was that its Chief Executive Officer at Pondicherry had inflated the value to obtain a large overdraft in the bank. The Tribunal accepted the explanation, but observed that the assessee had failed to furnish any particulars to justify the action of the Chief Executive Officer in regard to the entire discrepancy and maintained the addition for the year 1958-59. For the relevant assessment year 1960-61 the facts and circumstances were in pari materia. The High Court held that the finding recorded by the Tribunal, that the proviso to Section 13 of the Act of 1922 was applicable, had been arrived at after consideration of all the facts of the case, which was a pure finding of fact, and which could not be questioned in the reference.
17. In the second case, the High Court held that there was a discrepancy in the preceding year as well as the assessment year in question regarding the value of stock declared to the bank, which was found in excess of the value of the stock as disclosed in the assessee's books of account. There was a similar discrepancy in the immediately preceding year and thus the addition to income made as a consequence was upheld by the High Court. The addition on account of difference between the value of stock declared to the bank and the value of stock as per the assessee's stock book was assessable for the subsequent assessment year as well.
18. Shri R.S. Garg, learned counsel appearing for the assessee submits that the entire purchases and sales were verified. The findings of the CIT regarding the verification of purchase and sale and books of accounts were affirmed by the Tribunal. The statement given to the banks was mostly in round figures. The stock, as per the statement given to the bank, was less than the stock as per books on same dates. On some other dates it was found to be more. For example the stock of zinc as per statement submitted to the bank on 6.4.80 was 83.700 MTs, whereas in the books it was shown as 67.500 MTs. Similarly as on 30.6.80 and 31.5.80 the figures given to the bank of zinc and H.R. Strips were in round figures. On 17.2.81 the quantity of zinc as per bank was in round figure as 70 MTs, whereas in stock register it was 48.5651 MTs. The stock statement given to the bank was thus on a estimate basis and mostly in round figures. The CIT had found that the statements submitted to Indian Standards Institution, Kanpur and Indian Bureau of Mines, Nagpur were on the basis of stock register and as per books. The steel tubes are regulated by Essential Commodities Act, and the distribution has to be as per specified standards and bears ISI marks. Relying upon Uganda Industries Co. vs. CIT 29 Taxman 226 (Gujarat High Court) and Jain Plywood Agency in ITA No. 74/Delhi/85 decided by ITAT, Delhi Bench on 31.7.1986, the CIT did not find the addition of Rs. 10, 78, 886/- to be correct. The CIT(A) thereafter observed:- "... The book results of the assessee have all along been accepted and the gross profit declared this year is 9.7% as against gross profit of 9.4% in asstt. Year 80-81 and 7.7% in asstt. Year 79-80. Sales of the asseee have also increased in this year from last year. No other comparable case has been pointed out where the gross profit declared is more than the gross profit declared by the assessee. Books of accounts have been maintained. Purchases and sales are vouched, stock register maintained by the assessee gives reasonable details and, therefore, it cannot be said that sales have to be estimated and gross profit rate has to be applied."
19. Shri R.S. Garg submits that on the findings recorded by the CIT (A) there was absolutely no justification for ITAT to have added the maximum of the difference of stock of zinc. In the statements given to the bank and in the books, the ITAT has adopted a slipshod attitude in adding only one of the items, which shows that it did not apply its mind and added the difference of stock in one of the items without considering the question of law raised before it.
20. Shri R.S. Garg has relied upon CIT, Meerut v. Khan & Sirohi Steel Rolling Mills (2006) 152 Taxman 224 (All) decided on 7.1.2005. In this case the Court held that where the Tribunal has recorded the finding, that actually there was no verification of stocks made by the bank official, the practice of inflating the stock hypothecated with the bank with a view to avail higher overdraft facilities, and the acceptance of the explanation by the Tribunal did not call for any interference. The Allahabad High Court followed Swadeshi Cotton Mills Co. Ltd v. CIT (1980) 125 ITR 33 (All) (supra). In CIT vs. Das Industries (I.T. Ref. No. 32 of 1996) decided on 8.7.2005 it was held that where the explanation of the assessee that the stock figures were inflated to get more credit facility from bank, no addition could be made in respect of difference between the value of stocks shown in the books of accounts and the value disclosed to the bank, when the bank did not physically verified and certified the stock available with the assessee.
21. We find it difficult to accept the observations of the Tribunal. The assessee's income was to be assessed on the basis of the material, which was required to be considered for the assessment and not on the basis of the statements which the assessee may have given to third party. The burden of showing that the assessee had undisclosed income was on the revenue. That burden cannot be said to be discharged by referring to the statements given by the assessee to the bank, and making it the foundation for adding the difference in the stock as his income.
22. In Parimisetti Seetharamamma v. Commissioner of Income-tax (1965) 57 ITR 532 (SC) the Supreme Court held that the burden is on the revenue to prove that the income sought to be taxed is within the taxing provisions and that there was in fact income which could be added to the petitioner's income for assessment.
23. The question, whether the explanation offered by the assessee is acceptable or not, is a pure question of fact, and that the High Court will not ordinarily examine the correctness of such finding on a reference. In this case, we find that the Tribunal erred in law in interfering with the findings recorded by the CIT, who had accepted the books of accounts and had found that all the purchases and sales are vouched. The stock registers were maintained by the assessee in ordinary course of business. There were no defects pointed out in maintenance of such registers, nor there was any other information or amterial to doubt their correctness and therefore, it cannot be said that the sales have to be estimated and the gross profit rates had reconsidered. The CIT had found the gross profit to be progressive, and that no comparable case was pointed, where the profit was more in respect of the same industry comparable to the profits declared by the assessee. The statements given by the assessee to the bank for obtaining overdraft facility, in the practice prevalent to overstate the stocks to obtain overdraft facility could not be treated to add the entire difference and that too in respect to only one of the items namely the 'zinc'. The Tribunal further committed an error in partly allowing the appeal and substituting only Rs.6, 14, 720/- (the discrepancy in stock of 'zinc') without giving any reasons as to why if he had accepted the discrepancy in the stock of 'zinc', he ignored the discrepancy in the stock of 'black tubes' and 'galvanised tubes'. There was no reason given by the Tribunal for picking up of difference in the stock of 'zinc' alone demonstrating the departmental bias, to add something to justify the exercise of appellate powers.
24. For the aforesaid reasons, we decide the questions framed by the Tribunal in the reference application against the revenue and in favour of the assessee.
25. The department may proceed to calculate the tax accordingly.
Dt.06.8.2012 RKP/