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आदेश/Order
Per Sanjay Garg, Judicial Member:
The present appeal has been preferred by the Revenue against the order dated 24.4.2017 of the Commissioner of Income Tax (Appeals), Patiala [hereinafter referred to as ‘CIT (A)’].
2. The Revenue in this appeal has taken following grounds of appeal:- -Chd-2017 M/s Raja Fat & Foods Pvt Ltd, Rajpura 2
1. In the facts and circumstances of the case, whether the Ld. CIT(A) was correct in deleting the addition made by the Assessing Officer on account of difference in Stock as per stock statement filed before Bank and as per books, even when the assessee never denied the authenticity of stock statement filed before the Bank authorities.
2. It is prayed that the order of Ld. CIT(A) be sent aside and that of the AO be restored.
3. The appellant craves leave to add or amend any grounds of appeal before the appeal is heard and finally disposed off.
The brief facts of the case are that the assessee is a private limited company and running a unit engaged in the manufacturing of Poultry feed in the name and style of ‘Raja Fats & Feeds Pvt. Ltd’. The assessee was required to maintain books of account as per the provisions of the Company’s Act, 1956 and duly audited by the Chartered Accountant u/s 44AB of the Income Tax Act, 1961 (in short 'the Act'). During the assessment proceedings, the Assessing Officer noticed that the assessee had obtained secured loans form Punjab National Bank against hypothecation of the stock. The Assessing Officer vide letter dated 24.9.2014 requested the Manager of the Punjab National Bank to supply copy of the stock statement furnished by the assessee to the bank on different dates. The Manager of the Bank vide his letter dated 4.2.2014 supplied the copy of the stock statement. The Assessing Officer -Chd-2017 M/s Raja Fat & Foods Pvt Ltd, Rajpura 3 compared the stock statement supplied by the assessee to the bank with the stock statement as per the books of account and noted that there was a difference of Rs. 1,81,57,649/- in the stock as shown in the books of account or to say that there was shortage of stock to the aforesaid extent in the books of account. On being asked to explain in this respect, the assessee explained as under:-
“Further to your reply dated 21.11.2014 as we had mentioned in our reply that the quantities / value in the stock statement were as on 28.03.2011 and not as on 31.03.2011. Secondly these were given on an estimated basis as it is not possible to take inventory of stock every month, keeping in view the large number of items of raw material and large quantities of stock held as on a particular date. It is only on the close of financial year i.e. on 31 s t of March every year, that actual stock taking is done and actual figures are shown in the Balance sheet. It is our humble submissions that the difference in the stock as in the stock statement and as per balance sheet is also mainly due to shortage in production which is 3.61% of total material consumed. This shortage is due to the fact that most of the items of raw material consumed by us have moisture content which become dry due to passage of time and lose weight. Some amount of raw material is also used in the manufacturing process. During the year in question we consumed a total of 308686.43 Quintal of raw material which gave us a finished product of 297550.00 Qtl. (after shortage). In quantity terms the shortage was 11136 quintals i.e. 3.61%. The difference in quantity in stock as per Balance Sheet and as per stock statement is also 10753 quintal which -Chd-2017 M/s Raja Fat & Foods Pvt Ltd, Rajpura 4 is almost similar to the quantity lost in production."
However, the Assessing Officer did not get satisfied with the above reply of the assessee. He further called upon the Manager of the bank and recorded his statement u/s 131 of the Income Tax Act, 1961. After considering the statement of the bank Manager, the Assessing Officer noted that the stock statement given to the bank being duly signed and verified by the assessee carried the presumption of truth and the assessee was bound with the same. He further observed that since there was a difference of Rs. 1,81,57,649/- between the stock statement given to the bank and the stock statement recorded in the books of account, he, therefore, made the addition of the aforesaid amount by invoking the provisions of section 69 of the Act.
4. Being aggrieved by the above order of the Assessing Officer, the assessee preferred appeal before the Ld. CIT(A). However, the Ld. CIT(A) deleted the additions so made by the Assessing Officer by observing as under:-
“4.2 I have perused the assessment order and considered the submissions putforth by the appellant as also the facts on record. The appellant is a private limited company incorporated under the Companies Act 1956. It is mandatorily required to keep complete books of account including quantitative details of stock etc. It is clear from the facts on record that the -Chd-2017 M/s Raja Fat & Foods Pvt Ltd, Rajpura 5 appellant submitted stock statement to the bank as on 28.03.2012 whereas it has furnished audited balance sheet and profit and loss account for the period ending on 31.03.2012. The assessing officer has compared the stock figures on two different dates and not surprisingly found the difference which became the basis for making addition u/s 69 of the Act. The appellant further explained that it had submitted estimated stock figures to the bank and the difference is on account of wastage which is booked on the last day of the financial year. That the stock statement submitted to the bank contained details of 13 stock items of which 11 are of raw material and the remaining two comprised of bardana and poultry feed. A perusal of the stock summary which is a part of the final accounts shows that the appellant deals in more than 40 items of raw material. It is noticed that the AO did not consider many of the items such as Mdoc oil (219.80 Qtls), poultry feed supplement (79.50 Qtls) and sunflower (324.01 Qtls) together valued at Rs. 31,17,261/- while calculating the stock difference. Further, the quantity of poultry feed was taken at 79.50 Qtl whereas as per books it was 84.00 Qtls. The poultry feed has been valued @ Rs. 3750/-per Qitl whereas the appellant has valued it @ Rs. 2200/-per Qtl . The AO is required to consider these items in his calculation and the valuation should be in accordance with the method of valuation regularly followed by the appellant. During the assessment proceedings, the AO has not challenged the valuation shown by the appellant at any stage. Therefore, it cannot be changed arbitrarily. It is further borne out from the records that there was a difference of Rs. 143.17 lacs in the value of stock as on 01.04.2011 as submitted to the bank and as declared in .the balance sheet. The value of opening stock was taken at Rs. 313.81 Lacs as per the statement submitted to the bank and at Rs. 170.60 Lacs as per the balance sheet. Similarly the value of closing stock as submitted to the bank was at Rs. 332.70 Lacs and as declared in the balance sheet -Chd-2017 M/s Raja Fat & Foods Pvt Ltd, Rajpura 6 at Rs. 183.70 . Thus, there was a difference of Rs. 149.0 Lacs in the valuation of closing stock as well. It bears no reiteration that the method of accounting followed for valuation of closing stocks should be applied in respect J of the valuation of the opening stock also. The appellant company furnished estimated figures of stock to the bank to avail higher drawing power and it has no relevance with the actual stockholding of the company.
In his deposition before the AO, the bank officer stated that the stock is to be physically verified as per bank guidelines and that the authorities can inspect the stock and surprise visit. He also confirmed the authenticity of stock statement and list of sundry debtors submitted by the appellant company as per bank record. However, at the time of his cross- examination by the counsel of the appellant, the same officer stated that there was no fixed time schedule for vising the visiting the premises to get the physical verification of stock and that the physical verification is done "at random and on approximation". In response to the query whether the stocks were physically verified by the bank as on 28.03.2012 the bank Officer replied "I do not know because I was not posted at that time in this branch". Further in response to the query whether the inventory of each stock statement submitted by the borrowers is checked for accuracy, he replied that "there is no such practice. We do not check the item wise calculations". And finally in response to the query "can you provide some documentary evidence whether the contents of the stock statement were physically verified by the branch officer", the officer replied," in our record, there is no other such document except stock statement submitted by the borrower". In his examination by the AO the bank officers confirmed that “the facts stated by me in my statement dated 18.11.2014 are correct”. A careful perusal of the disposition of the bank Officer brings out the clear -Chd-2017 M/s Raja Fat & Foods Pvt Ltd, Rajpura 7 fact that even though the bank officials are required to verify the stock statement submitted by the borrower by visiting concerned premises, there is no evidence that it was actually done. Moreover, it was also categorically stated by the officer that item wise calculations are not checked by the bank. Therefore, nothing incriminating comes out of the statement of the bank Officer against the appellant company.
In CIT v Sidhu Rice and Gen Mills (2004) 72 CCH 461 (P&H), the Hon'ble jurisdictional High Court held that when the AO fails to bring any material on record showing that the assessee has actually possessed a larger quantity of Stockt those reflected in the balance sheet, the addition made on that count deserves to be deleted. The AO placed reliance on the decision of the Hon'ble Karnataka High Court in the case of Recon Machine Tool Private Limited versus CIT 286 ITR 637 (Kar). In that case the assessee had failed to substantiate its explanation in this regard. Similarly, in BT steels Ltd versus CIT 328 ITR 471 (P&H), another case law relied upon by the AO, the bank had actually verified the stock held by the assessee and the assessee failed to furnish explanation regarding difference in the stock. In the case of the appellant, if its explanation that the difference in quantity of stock was due to wastage shown at 3.61% in bank statement is considered, then only negligible difference remains. In the case of CIT versus Sanspareils Greenlands Private Limited (2013) 85 CCH 0113 (All.), the Hon'ble Allahabad High Court has held that the stock position reflected in the properly maintained books of account should be taken as correct and not the one reflected in the statement submitted to the bank for availing higher drawing power.
In the present case the AO has not adversely commented on the maintenance of books. These have, in fact, been accepted by him. He did not give any -Chd-2017 M/s Raja Fat & Foods Pvt Ltd, Rajpura 8 adverse finding regarding purchases and sales. In the absence of any finding with regard to any unrecorded transaction in respect of purchases and sales, the action of the AO in holding that the stock statement furnished to the bank for availing higher limit reflects the true stock position cannot be upheld. Consequently the addition of Rs. 1,81,57,649/- on that count is not sustainable. Accordingly, the same is ordered to be deleted. Hence, this ground of appeal is allowed.”
5. Being aggrieved by the aforesaid order of the Assessing Officer the Revenue has come in appeal before us.
We have heard the rival contentions of the Ld. Authorized Representatives of both the parties.
The Ld. DR has relied upon the findings of the Assessing Officer and has further submitted the following written submissions:-
“1. During the course of assessment proceedings it came to notice that the quantitative details of various items SI. No. 1 to 12, furnished by the assessee alongwith the quantity of various items weighing 8336.44 quintals and value thereof disclosed is at Rs. 1,43,21,621/-. Whereas the statement of stock submitted to the bank, the quantity of various items was 39620 quintal and value of which was at Rs. 3,30,78,280/-. Thus the difference in stock as per books of accounts and as submitted and certified by the Bank was more by Rs. 1,87,56,649/- and in terms of quantity the stock was access 31284 quintal.
In this case the assessee has not maintained any stock register as admitted by it and stated that on 31st March every year actual stock taking is done but the assessee failed to -Chd-2017 M/s Raja Fat & Foods Pvt Ltd, Rajpura 9 furnish any documentary evidence for actual stock taken on 31-03-2012. The assessee attempted to explain the difference in stock and for this purpose also filed mathematical sheets working out the shortage on a percentage of product which has neither any basis nor as per the approved stock accounting system. The stock loss is different from production/manufacture. Once the raw material is issued for production/manufacturing any loss in manufacturing is absorbed in the yield. This loss can not be reflected in stock losses. Thus the loss of stock of material is not affected by production/manufacturing process as the same was never issued for production and available in the godowns.
3. Further, for verification of stock discrepancy as indicated above, the Bank Manager was examined u/s 131 and also cross examined by the assessee. The Bank official admitted that after receipt of stock statement from the party the stock is to be physically verified as per Bank guidelines and even the Bank authorities can inspect the stock on surprise visit. In his statement u/131 the Manager also confirmed that the stock statement of M/s Raja Fat & Feeds Pvt. Ltd., Rajpura ought to be as true and correct as per Bank norms and it was also admitted that the stocks shown to the Bank in stock statement is supposed to be remained as such, on a particular date with the party at his business premises and godowns. In question no. 12 vide statement recorded u/s 131 dated 19-03-2015 during the cross examination it was admitted that "yes I had truly stated that after receipt of stock statement from the party. The stock is to be physically verified and the stock statement furnish by the party was treated as true and correct." Thus the actual availability of stock with the assessee in terms of quantity and amount was supported by statements submitted to the Bank by the assessee and admitted by the Bank Manager in his statement. The assessee is as an afterthought making an unsuccessful attempt to cover up the discrepancy in the quantity of stock as brought out by the AO in the assessment order.
The assessee relied on case law ITO Vs Devi Dayal Rice Mills (2002) 75 TTJ 0024 dated 12th November, 2001. It -Chd-2017 M/s Raja Fat & Foods Pvt Ltd, Rajpura 10 is submitted that there is little difference between hypothecation and pledge as both involves creation of charge on the stock. Which in pledge the possession of the stock is with the bank, whereas in hypothecation the possession remains with the client. In both cases the stock statement has to be true and correct and the onus of the assessee is not relaxed because the stock is hypothecated.
The facts of the case are also similar to the facts of the case in the case of B.T. Steels Ltd., 328 ITR 471 jurisdictional High Court of Punjab and Haryana. In that case the statement of stock was furnished before the bank in terms of quantity and value and in this case also the stock statement furnished in the bank is also in terms of quantity and value are supported or admitted by the statement of bank manager. In that case the Hon'ble High Court has held as under:-
"The judgment relied upon is distinguishable on the facts. There is no doubt about the proposition that the burden of proving taxability of income is on the Revenue, as held in Parimisetti Seetharamamma v. CIT [1965] 57 ITR 532 (SCj, referred to in the above judgment. For discharging the said burden, it is not necessary that some positive evidence must be led by the Revenue. In a given case, even by drawing inference from the material available, if explanation of the assessee is found to be unreliable, the claim of the assesee can be rejected. In such situation, the burden on the Revenue can be held to have been discharged. In the present case, the assessee had given stock statement to the bank which was at variance with entries in books of account. No doubt, it was a statement to a third party, but neither the said statement was denied by the assessee nor any valid explanation furnished about the discrepancy. On the other hand, the verification from the bank showed that the assessee had excess stock, which justified addition to the income. In these facts, the judgment relied upon is distinguishable. In Chauhan Papers Pvt. Ltd., on the facts, it was found by the Tribunal that the statement -Chd-2017 M/s Raja Fat & Foods Pvt Ltd, Rajpura 11 furnished to the bank did not Justify the addition. Therein, the assessment was made on the basis of gross profit rate and there was no discrepancy in figure of purchases or sales. This court held that in the absence of perversity of findings, no substantial question of law arises for consideration."
On the other hand, the Ld. AR of the assessee has explained that, in fact, there was no difference of stock as alleged by the Assessing Officer. He has submitted that, in fact, the stock statement to the bank was given on 28.2.2012, however, the Assessing Officer has taken note of the statement in the books of account as on 31.3.2012 without considering the relevant fact that as per the regular accounting policy followed by the assessee, the assessee books the shortage at the end of the financial year i.e. 31 s t March of every year. The Ld. Counsel in this respect has relied upon the table of yield chart for five years. The Ld. Counsel has further submitted that after claiming the shortage occurred in the manufacturing process, there would remain no / negligible difference in the stock statement. The Ld. Counsel has further submitted that even there was difference in the opening stock as given in the bank statement as compared with the balance sheet.
The Assessing Officer though has taken the difference between the closing stock, however, ignored the difference between the opening stock. After the credit of opening stock is given to the assessee, the resultant difference will be negligible. The relevant -Chd-2017 M/s Raja Fat & Foods Pvt Ltd, Rajpura 12 part of the submissions made by the assessee in this respect is reproduced as under:-
“The grounds of challenge on behalf of the assessee can be summarized as under: a. The addition was made without rejection of books of accounts and the addition was made which will ultimate affected on manufacturing account and gross profit earned. b. The Ld AO failed to consider the wastage of 3.61 % booked on material consumed during full year 2011-12 relevant to assessment year 2012-13.i.e wastage of 10655.62 Qtl on material consumed of 295169.71 Qtl. c. The ld. assessing officer has made addition on account of difference in closing stock (as declared in bank statement as on 28.03.2012 and As per books as on 31.03.2012). whereas difference in opening stock(as declared in bank statement as on 28.03.2011 and As per books as on 31.03.2012) was not considered. d. The addition on account of closing stock was made by reconciling closing stock on different dates i.e to bank on 28.03.2012 and in books on 31.03.2013. e. There is no dispute on wastage claimed by the assessee and yield shown by it and books results were accepted in to-to. ……”
“That the assessing officer made the aforesaid addition by relying on the Stock Statement dated 28.03.2012 furnished by the assessee to the lending Bank (PB Page 10, at the top of the page), however, by comparing the figure of stock as on 28.03.2012 (as given to Bank) with the stock as on 31.03.2012 (reported to the department), without considering the most important fact that as per the regular accounting policy followed by the assessee, the assessee books the shortage at the end of the year on 31st March of every year, wherein the yield chart for the five years is as under:
TABLE A Yield Chart for five years i.e. Assessment year 2010-11 to 2014-15 Assessment Material Goods % o f Shortage Year Consumed Produced yield -Chd-2017 M/s Raja Fat & Foods Pvt Ltd, Rajpura
13 2010-11 3,04,123.62 2,92,970 96.33 3.67 2011-12 2,95,169.71 2,84,520 96.39 3.61 2012-13 3,08,686.43 2,97,550 96.39 3.61 2013-14 3,27,448.26 3,15,604.90 96.38 3.62 2014-15 3,88,887.46 3,74,654 96.34 3.66
Therefore, after claiming the shortage occurred in the manufacturing process, the stock was declared in the Manufacturing Account and thereafter the difference remained negligible, the said fact is further fortified by the Ld. CIT(A) who has recorded a categorical finding, at Page 10 Para Top, on this aspect which reads as under:
"In the case of the appellant if its explanation that the difference in quantity of stock was due to wastage shown at 3.61 % in bank statement is considered, than only negligible difference remains."
Further, the value of stock (as per stock statement given to the lending bank) after allowing shortage as per yield chart (TABLE A), showing that the difference remains negligible, is as under:
TABLE B PARTICULARS (AY 2012-13) AMOUNT Rs. In Lakhs Stock as per Stock Statement dated 28.03.2011 given to the lending 313.81 Bank Less: Shortage to be booked on 31.03.2011 as per regularly accepted 150.74 accounting policy) (3.61 % of Material Consumed (yield)) calculated in Table C Resultant Figure of stock on 31.03.2011 163.07 (after reducing shortage from the Stock as on 28.03.2011) Opening stock as on 01.04.2011 declared to the Department forming part of regular books of accounts was Rs.169.49 lakhs therefore the difference is very minimal and the admitted fact is that the figures are provided to the bank on estimations.
Stock as per Stock Statement dated 28.03.2012 given to the lending . 332.70 Bank Less: Shortage (booked on 31.03.2012 as per regularly accepted 176.67 accounting policy) ( 3.61 % of Material Consumed) (yield) calculated in Table C 156.03 -Chd-2017 M/s Raja Fat & Foods Pvt Ltd, Rajpura
14 Closing stock as on 31.03.2012 declared to the Department forming part of regular books of accounts was Rs.182.5 lakhs therefore the difference is very minimal and the admitted fact is that the figures are provided to the bank on estimations.
TABLE C CALCULATION OF SHORTAGE For FY 2011-12 For FY 2012-13 Purchases Rs.417486364 Purchases Rs.501970940 Less : Purchase Rs.4621256 Less : Purchase return Rs.5168415 return (1) (1) Net Purchase (2) Rs.412865108 Net Purchase (2) Rs.496802525
Total Quantity 291844 Qds Total Quantity 313354.97 Qtls Purchased (3) Purchased (3)
Per Unit Cost Rs.1414.67 per Qd Per Unit Cost (4) (2)/(3) Rs. 1585.43 per (4) Qtl (2)/(3) Material 295169.71 Qd Material Consumed (5) 308686.43 Qtl Consumed (5) Shortage (6) ((5) 10655.62 Qd Shortage (6) ((5) x 11143.58 Qtl x 3.61%) 3.61%) Total Shortage (7) Total Shortage Rs. 15074273 Rs.17667371 (7) ((6) x (4)) (6) x (4))
Now, therefore its crystal clear that the Ld. A.O. during the course of assessment proceedings when failed to made any addition, called for the Stock Statement from the Bank, and without even looking into the items of stock made the impugned High Pitched assessment on presumptions conjectures and surmises. It is important to mention here that the difference calculated by the Ld. A.O. was with respect to the Closing Stock, whereas forgot to appreciate that there is a difference in the Opening Stock also, considering the same there becomes negligible difference, the Table showing difference in opening stock and closing stock is as under:
TABLE D PARTICULARS (AY 2012-13) AMOUNT Rs. In Lakhs
OPENING STOCK AS PER BANK STATEMENT 313.81 OPENING STOCK AS PER BALANCE SHEET 169.49 -Chd-2017 M/s Raja Fat & Foods Pvt Ltd, Rajpura 15 DIFF. IN OPENING STOCK 144.32
CLOSING STOCK AS PER BANK STATEMENT 332.7 CLOSING STOCK AS PER BALANCE SHEET 182.5
DIFFERENCE IN CLOSING STOCK 150.2
It is submitted that Ld. A.O. miserably failed to appreciate that no addition in Trading/Manufacturing Account can be made unless or until the A.O. records finding about any defect in the Books of Account, the Ld. A.O. admittedly failed to point out any single defect in the Books of Account, further for the said proposition of law the assessee places reliance on the order of Hon'ble Tribunal, Jabalpur Bench, in the case tided as Assistant Commissioner of Income Tax vs. Govindram Kakwani reported as (2004) 90TTJ 0981 (Jabalpur T)
Para 6. We have considered the rival submissions. It is settled law that the trading addition could be made only if the books of account have been rejected on cogent reasons and the proviso to s. 145 of the Act has been applied . In the instant case, this has not been done. The AO has also accepted the purchases and sales. We also find that the book results declared by the assessee in the year under consideration was much better as compared to earlier three years. Under the circumstances, no trading addition was warranted. The CIT(A) appreciated these facts and deleted the addition. We do not find any infirmity in the same and while upholding his findings, we dismiss the ground of appeal raised by the Revenue. ………..”
9. After considering the rival submissions, we find that there is no infirmity in the order of the CIT(A). The Ld. CIT(A) after considering the facts and circumstances of the case has noted that the assessee has duly explained the difference in the valuation of the stock as given to the bank and as compared with the books of account of the assessee. The Ld. CIT(A) has rightly observed that -Chd-2017 M/s Raja Fat & Foods Pvt Ltd, Rajpura 16 the method of accounting followed for valuation of the closing stock should have been applied in respect of the valuation of the opening stock also. The Ld. CIT(A) has rightly noted from the statement of the Bank Manager that the stock was not physically verified by the bank at the spot. The assessee has duly explained through the charts that if the adjustment of shortage usually booked on the last date of the financial year as per the regular accounting policy followed by the assessee taken into consideration, there remains no / negligible difference between the stock statement given to the bank. The Ld. Counsel for the assessee in this respect has also explained that the stock statement given to the bank was on estimation basis and that the minor difference in this respect was required to be ignored.
In view of the above, we do not find any infirmity in the order of the CIT(A) in this respect on this issue. There is no merit in the appeal of the Revenue and the same is accordingly dismissed.
In the result, the appeal of the Revenue is hereby dismissed
Order pronounced in the Open Court on 27.02.2020.