CI.T vs. M/S MODERN FARM SERVICES

The assessee is a registered firm deriving its income from sale of Massey Ferguson tractors as also their spare parts etc. For the assessment year 1981-82 return declaring income of Rs.43,971/- was filed by the assessee on 29.9.1981. Assessment was completed under Section 143(3) of the Income Tax Act, 1961 (for short, the Act) at a net taxable income of Rs.10,54,390/- which, interalia, included addition of Rs.7 lacs on account of difference in stock declared in the books of accounts and in the hypothecation statement given by the assessee to the bank. In appeal filed by the assessee, the Commissioner of Income Tax (Appeals), Jalandhar [for short, the CIT(A)] vide its order of 26.9.1986 deleted the additions. The revenue's appeal challenging this order of the first appellate authority was dismissed by the Tribunal vide its consolidated order of 12.12.1991 passed for the assessment years 1981-82 and 1983-84. 3. Assessment order (Annexure A-1) for the assessment year 1981-82 and assessment order (Annexure A-2) for the assessment year 1983- 84 reveal that stock pertaining to tractors was found differently listed in the statement furnished to the bank as compared to the entries in the books of accounts. Rejecting version of the assessee that statement of stock furnished to the bank authorities is generally inflated to get more loan from the bank and concluding that in fact the stock in the books of accounts had been deflated and actual position of stock had not been reflected therein, the Assessing Officer had made an addition of Rs.7 lacs in each of assessment years. As already noticed, the CIT(A) and the Tribunal had disagreed with the findings of the Assessing Officer (for short, the AO). Consequently, finding of addition of Rs.7 lacs made by the AO was reversed.

We have heard counsel for the parties while going through the paper book.

The revenue has claimed that the assessee was bound by its own Yag Dutt 2013.11.18 12:46 integrity of this document -3- admission qua quantum of stock made in statement supplied to the bank and thus there was no escape for it. It is claimed that findings of the Tribunal confirming the order of CIT(A) deleting addition of Rs.7 lacs made by the AO, is mis-founded because statement supplied to the bank regarding stock position is checked in due course of business and genuineness of the same could not be doubted.

Per contra, stand of the assessee is that the stock statement supplied to the bank is prepared with an idea to get maximum credit facilities and in fact the same does not represent to a genuine stock position, which is correctly reflected only in the books of accounts. It is thus urged that the CIT(A) as also the Tribunal were right in deleting the addition made by the AO on account of difference in value of stock hypothecated with the bank, in comparison to the stock reflected in the books of accounts of the assessee.

When rival claims of the parties are evaluated in the interface of factual matrix and other attending circumstances, it is clear that the AO while making addition of Rs.7 lacs in each assessment year acted upon a presumption that books of accounts had suppressed the sales whereas stock statement furnished to the bank was correct. It is noteworthy that this conclusion drawn by the AO is not based on any verification of stock statement submitted to the bank authorities so as to raise a finger at the genuineness of books of accounts. Not only this, the AO had not rejected the books of accounts of the assessee and no resort was made to provisions of Section 145 of the Act.

Looking from another angle, books of accounts prepared in regular course of business have got presumption of truth whereas no such presumption is available to stock statement furnished to the bank for purpose of availing credit facilities. No doubt, such presumption of truth attached to books of accounts is rebuttable but for that rebuttal, the AO was required to Yag Dutt 2013.11.18 12:46 integrity of this document -4- make reference to report of the bank regarding physical verification of hypothecated stock of the assessee. In absence of reference to such verification report of the bank qua hypothecated stock as per statement furnished by the assessee, oversized treatment to stock statement of the assessee in derogation to the entries of the books of accounts, was not correct. The Tribunal was thus right in affirming the order of CIT(A) whereby deletion of addition of Rs.7 lacs was made by the AO merely on presumption of correctness of statement of hypothecated stock submitted to the bank.

Resultantly, the question referred to this Court for opinion is answered in favour of the assessee and against the revenue.

Whether Reporters of local papers may be allowed to see the judgment?

Whether to be referred to the Reporters or not?

Whether the judgment should be reported in the Digest? Yag Dutt 2013.11.18 12:46 integrity of this document