SHIVA STEELS,MUMBAI vs. INCOME TAX OFFICER, 19(3)(1), MUMBAI

Briefly stated, facts of the case are that the assessment in this case was completed u/s. 143(3) dated 18-03-2013, wherein, the AO brought to tax a sum of Rs. 79,47,896/-, being the excess stock as per figures given by the assessee to the bank as compared to the figures in the books of accounts as on 31-03-2010. The assessee thereafter carried the matter in

During the course of hearing, the Ld. AR drawn our reference to the comparative stock statement as given to the bank and stock statement as per the balance sheet and it was submitted that as far as the physical stock of raw materials and semi finished goods is concerned, same is in fact on a higher side in the books of accounts as against the figures given in the statement to the bank. Further, as far as the finished goods and scrap is concerned, it was submitted that again, there is no difference in the physical quantity of the stock. It was submitted that the major difference is in respect of the machines spares and that too, on account of the valuation of the machines spares. In this regard, our reference was drawn to the assessee’s paper book pages 2-4, wherein, the assessee has given the physical quantity of the machines spares in terms of bearings, backup roll and work roll and it was submitted that where the same is compared with the physical quantity as reflected in the books of accounts, there is no difference and it is only in the terms of value, there is difference in the valuation of the machines spares wherein, a higher value of Rs. 85,96,000/- has been shown as against the figure of Rs. 17,03,068/- in the books of accounts.

It was further submitted that as far as the physical stock in the books of accounts is concerned, not all stock was shown as part of year-end inventory which has apparently been considered by the AO, as there were certain spares which was purchased for the maintenance of the machines and they were either capitalized or debited to the profit and loss account and in this regard, our reference was drawn to the following table and the contents thereof reads as under:

It was submitted that all these details along with the copy of invoices, the bank statements reflecting the payment made to the parties and the corresponding account statement was duly submitted during the course of remand proceedings and therefore, these details and supporting

The Ld. DR has been heard who has drawn our reference to the impugned order, wherein, the Ld. CIT(A) has referred to the written submissions filed by the assessee as well as the fact that the remand report was called from the AO. It was submitted, as evident from the remand report dated 16/09/2024, the assessee has not submitted any evidences which were claimed to be submitted before the Ld. CIT(A) for necessary verification and therefore, the contentions raised by the Ld. AR, that all the details have been duly submitted before the AO is not factually correct and in any case, the same need proper verification and where the Bench so decide, the matter may be remitted to the file of the AO for necessary verification.

In his submissions, the Ld. AR drawn our reference to the rejoinder dated 26/05/2025 filed before the ld CIT(A) in response to the remand report submitted by the AO and it was submitted that in its rejoinder, the assessee has categorically stated that it has filed detailed submission on 14-06-2016 containing all the relevant documents as well as the detailed description of the inventories as well as the supporting documents and in spite of the submissions of all these documentation, the AO has said that no details have been submitted. It was accordingly submitted that all the necessary details are already on record and therefore, the matter may be decided instead of remanding it to AO.

We have heard the rival contentions and perused the material available on record. The limited issue under consideration relates to addition on account of excess stock shown by the assessee in its stock statement submitted to the bank for availing credit facility as against the stock reflected in the books of the account. It is the claim of the assessee that as far as the physical stock of raw materials and semi finished goods is

In this regard, what is relevant to examine is the physical quantity of machine spares purchased by the assessee, the price at which such machine spares have been purchased, the value at which machine spares are reflected in the books of accounts and the value of such machines spares as per stock statement submitted to the bank. Where there is no difference in the physical stock of machine spares as recorded in the books of accounts and as submitted to the bank, what next to be seen is the value at which they are purchased and reflected in the books of accounts and whether the same is supported by the purchase invoices or not. Where there is no difference in the purchase value and the value at which the stock is reflected in the books of accounts, in absence of any corroborative evidence that the assessee has made unaccounted purchases of such machine spares at values higher than what has been recorded in the books of accounts, no addition can be made in the hands of the assessee. The same is a settled legal position and there cannot be any dispute in this regard.

Extending the said analogy further, where the assessee artificially inflates the value of the stock (and not the physical quantity) for the purposes of availing extended or higher credit limits from the banks, the same consequences follow and no addition can be made in the hands of the assessee in absence of any corroborative material on record. The purpose of the stock statement is to demonstrate and provide adequate security to the bank on the strength of which the bank is providing credit facility to the assessee and where the stock statement is inflated, the bank is at liberty to verify and scrutinize the same, at the same time, the AO is also at liberty to examine the same, however, to hold that the assessee has made unexplained investment in stock basis solely such statement is something which cannot be sustained. The Bombay High Court in case of Acrow India Ltd (supra), while upholding the findings of the Tribunal that valuation of the stock declared by the assessee was in fact inflated one and at the same time, correct value of the stock declared by the assessee was not suppressed from the Revenue, held that the burden of proof is on Revenue to prove under valuation of stock and the same cannot be discharged by merely referring to the statement of the assessee to the bank, being a third party. In the instant case, the transaction of sale and purchase of machine spares is between the seller and the assessee and therefore, the transaction documents and exchange of consideration is between the seller and the assessee and not with the bank. The bank is not a party to the said transaction and has not financed the purchase of machine spares. The role of bank came subsequently once the assessee has purchased and made the investment in such stock and therefore, relying on such statement is not a conclusive proof of under-valuation of stock by the assessee. The Co-ordinate Bench in case of Arcee Ispat Udyog Ltd (supra) also held that it is a usual practice of the borrowers to furnish inflated stock statement to the bank to cover up their cash credit limit

In light of the aforesaid discussion, in the instant case, we find that though the assessee has submitted certain explanation during the course of assessment proceedings, however, necessary reconciliation and documentary evidence explaining the difference in valuation of stock has only been furnished during the course of appellate proceedings, however, the same has not been verified by the AO in the remand proceedings and in absence thereof, no specific finding has been recorded. In such circumstances, we deem it appropriate to remand the matter to the file of the AO to examine the same in light of aforesaid discussion and decide the matter a fresh after providing reasonable opportunity to the assessee.

In the result, the appeal of the assessee is allowed for statistical purposes.