COMMISSIONER OF INCOME TAX AHMEDABAD III vs. RIDDHI STEEL AND TUBES PVT. LTD

Brief facts necessary for the purpose of adjudication are capsulized hereinafter ­

1 Assessee­respondent is engaged in the business of manufacturing MS Seamless pipes. For the A.Y 2009­10, the return of income was filed showing income of Rs. 72,41,714/=. Case of the assessee was selected for scrutiny and a notice under section 143 (2) of the Act was issued.

2 The   Assessing   Officer   noted   that   the   respondent­assessee   had shown secured loan of Rs. 13,78,76,163/=; which included   cash credit facility   from   Canara   Bank   against   hypothecation   of   stock   of   Rs. 11,03,22,151/=. It was further noticed that the closing stock, as per the books   was   shown   at   Rs.   6,86,41,931/=   and   a   copy   of   the   bank   stock statement as on 31 st March 2009 which was furnished by it to the Bank for securing the cash credit was much higher.

3 On seeking the explanation, it was explained by the assessee that the difference in the stock as per the audited books of account and the stock, as per the statement furnished to the Bank against the cash credit [hypothecated limit] was for the purpose of availing the credit from the Bank. It was contended by the assessee­respondent that the stock as on 31 st  March 2009; as shown to the Bank, was only on estimating and inflated   figures   for   the   purpose   of   continuing   the   credit   facility   was tendered. The stock of  2654.640 MT of materials which was purchased on the invoice dated 31 st March 2009 was not in fact received on 31 st March 2009, but, the same was physically  received in the month of April 2009. The Assessing Officer having noted all these facts had added an amount of Rs. 10,39,75,306/=  under   section  69B  of the  Act,  being  an amount  of difference in quantity and value of stock shown in the books of account vis­a­vis the one presented to the Bank. The Assessing Officer discussed the judgment of this Court rendered in case of Commissioner of Income­ tax v. Veerdip Rollers (P) Limited, reported in [2010] 323 ITR 341 (Guj) and distinguished the same on the ground that in the said judgment, there was a difference only of the valuation, however, in the matter before the Assessing Officer, there was  difference both in the quantity as well as the value of the stock. Yet another decision sought to be relied upon is rendered in the case of CIT v. Arrow Exim Private Limited, reported in [2010] 320 CTR 293. According to the Assessing Officer, the assessee in that case had produced the stock register, books of account as well as bills for   verification   and   the   explanation   of   the   assessee   was   satisfactory. There was an existing stock with the assessee and the difference was for availing higher credit facility. It has also gone to an extent of saying that various High Court decisions cited by it in its order were not put to the notice of the High Court prior to delivery of the judgment in the case of Arrow   Exim   Private   Limited   [Supra]   and   accordingly,   added   the aforementioned   sum   to   the   income   of   the   assessee   and   also   initiated penalty   proceedings   under   section   271   {1}   (c)   of   the   Act   against   the assessee.

4 Aggrieved by the same, the assessee preferred appeal before the CIT {A} which, by an Order dated 25 th  May 2012, allowed partially the appeal of the assessee by a detailed reasonings. 2.5 CIT   [A],   as   noted   above,   concurred   with   the   findings   of   the Assessing Officer by a detailed reasonings.

6 However, the aggrieved assessee approached the Tribunal which had independently examined the entire issue holding in favour of the assessee and against the revenue, resultantly, this appeal by the Revenue, proposing the aforementioned questions of law.

Learned counsel Ms. Paurami Sheth appearing for the Revenue has vehemently submitted that the present Appeal deserves to be entertained in as much as here, it is not only the question of valuation of the stock shown on a higher side to the Bank, but, there is also a question of difference in the quantity of the stock shown in the books of account and the statement furnished to the banking authorities. She further urged that the decisions of this Court she is conscious of and yet in absence of any contention in respect of the quantity, the order of the Tribunal must be held to be  perverse,  and therefore, a close scrutiny is required of the question proposed before this Court.

Having thus heard learned counsel for the Revenue and on careful extensive examination of the material on the record, we are essentially of the opinion that the issue is in the realm of factual matrix and does not propose any substantial question of law.

At the outset, it is necessary to refer to the judgment of this Court rendered   in  case   of  CIT,   Central­II   v.   M/s.   Meico   Boards   Private Limited [Tax Appeal No. 2041 of 2010 :: Decided on 5 th December 2011] where this Court was examining the central question with respect to description of the closing stock ie., the one reflected in the statement submitted   to   the   Bank   for   the   purpose   of   hypothecation   of   goods   as compared to the stock statement filed before the Income­tax authorities.

1 In that matter, in a statement sent to the Bank on 27 th March 2006, the stock shown was of Rs. 98.68 lacs, whereas, in the stock register as per the books maintained by the assessee for the purpose of Income­tax as on 31 st March 2006, the stock was valued at Rs. 52.13 lacs. Thus, there was a difference of Rs. 46.55 lacs.

2 The Tribunal in that case had noted that the statement supplied to the Bank was on the estimate basis and assessee satisfactorily explained the discrepancy and that the statement given to the Bank was made on higher side for availing higher loan facility. Upon physical verification, the actual stock worth Rs. 49.80 lacs was found.

3     In this background, the Court noted thus ­ “Having heard learned counsel for the parties, we find no question of law arising. The assessee had been contending that the valuation of the stock supplied to the Bank did not reflect the accurate or the correct picture. The statement was drawn on the basis of estimation and such estimate is based on the higher side to borrow higher loan. The closing stock reflected in the books maintained for income-tax reflects the correct picture. The Tribunal accepted such version, taking note of various facts noted above including the discrepancy on the date of survey between the two statements as well as improved gross profit rate for the year under consideration. Counsel for the assessee was justified in referring to the decision of this Court in case of Commissioner of Income-tax v. Arrow Exim (P) Limited, reported in [(2010) 230 CTR 293 (Guj)] wherein under similar circumstances, the Court was pleased to uphold the decision of the Tribunal.”

The Court relied upon a decision in case of CIT v. Arrow Exmi (P) Limited [Supra], which is essentially depended upon by the Tribunal. In the said decision, there was a difference in the value of the closing stock, hypothecated   and   not   pledged   with   Bank   which   were   inflated   in   the statement given to the bank to avail higher credit facilities. The same was accepted   by   the   Tribunal   on   the   ground   that   the   assessee’s   books   of account and the accounting system have been found to be genuine and is supported by requisite vouchers, etc. The Court held, thus ­ “5. The much emphasis given by learned counsel Mrs. Mauna Bhatt that the Tribunal has erred in making this observation that it was for the A.O to establish that the sale is not genuine and the observation that the A.O has failed to establish any unaccounted purchases outside the books of account to establish that the stock as per the books is incorrect, is contrary to the material on record when admittedly the statement before the bank is different than the books of account. However, this submission referring to this observation has to be considered in light of the entire discussion wherein the Tribunal has, referring to the CIT (A) order in detail has accepted the explanation given by the assessee and in that context has stated that when the books of account or the accounting system has been found to be genuine supported by vouchers, etc., the addition was not justified.

It is required to be mentioned that the stocks are hypothecated and not pledged, which was explained by the assessee and therefore in order to avail higher credit facilities the statement was given, but the stock was with the assessee, and therefore, the submissions are misconceived.”

This Court in case of  CIT v. Veerdip Rollers Private Limited [Supra]   had   dismissed   the   appeal   at   the   admission   stage   where   the addition was made under Section 69B of the Act by the Assessing Officer on account of difference in the closing stock furnished before the banking authorities   for   availing   higher   credit   facilities   as   against   the   same disclosed   in   the   books   of   account   furnish   before   the   Income­tax authorities. Various decisions had been discussed by the Tribunal in its order and reproducing all of them, the Court deemed it fit to dismiss the appeal in limine.

The Tribunal in the case on hand, as could be noted from the order impugned,   extensively   culled   out   the   gist   of   these   judgments   and reproduced all the tests set­out by way of guidelines by the Court in such eventualities and after applying all these tests to the facts of the instant case,   the   Tribunal   held   that   both   –   Assessing   Officer   and   CIT   [A] committed error in adding huge amount without any valid or legal basis. It would be apt to reproduce relevant tests capsulized by the Tribunal for the purpose of appreciating the correctness of the decision of the Tribunal. “16 (iii) On perusal of the decisions as referred to above, it is gathered that Courts have laid down that additions cannot be made on account of difference arising in the quantity and value of stock shown in the books of account and the statement furnished to the banking authorities, admittedly to avail higher credit facilities. Courts have laid down the following guidelines while dealing with the issues : (a) The stock in quantity and value is inflated on estimate basis in the statement furnished to the banking authorities to avail higher financial credits; (b) The inflated and estimated stock is hypothecated and not pledged; (c) No actual physical verification of stock is carried out by the officer of banking authorities during the year or as on the date of valuation of stock; (d) The assessee has maintained stock register; (e) The assessee’s books of account are not found to be defective or non-genuine by A.O; (f) The books of account maintained by the assessee are accepted by the Central Excise and/or Sales Tax Department.”

1 On elaborating each guideline with reference to the facts on record, the Tribunal upheld the say of the assessee.

The entire emphasis of the Revenue is that the decisions of this Court only pertain to the value of the stock and not on the  factum  of difference in the quantity of the stock shown in the books of account and in the documents furnished to the banking authorities for the purpose of availing credit facilities/loan. However, this version is not acceptable in as much as the Tribunal has noted that there was no physical verification of the stock by the banking authorities as on 31 st  March 2009. Although much reliance was placed by the Assessing Officer and CIT [A] on the godown visit by the Bank Manager after closing of the year  ie., on 25 th April 2009, however, no physical verification and counting of the stock took place during such visit and even otherwise, the Bank   Manager’s report indicates that 3000 tonnes of Coil was already included in the stock of the month of March 2009 and because of such inclusion, the stock position of March 2009 has shown the increase in quantity. It also found that the stock register was maintained by the assessee giving complete quantity details; including month­wise details of raw materials, finished goods and semi­finished goods.

1 Again, the Court cannot be oblivious of the fact that the assessee had been subjected to statutory audit under the Companies Act, 1956 and also tax audit under the Income­tax Act. No errors were found at any stage in the report submitted by these auditors and for the past eight years,   the   assessee   had   been   following   continuously/consistently   the method of accounting, as provided under section 145 of the Act, valuing the closing stock and inventory, as provided under section 145 A of the Act. The assessee was also subjected to Excise and VAT and the books of account were found genuine and no discrepancies were found even by the Excise Audit report for the period January 2009 to December 2009 which was carried out by the Excise Revenue Audit Team, wherein the Excise Department,   after   a   detailed   scrutiny   of   the   books   of   account,   stock register, excise records, accepted the books of account and other records maintained   by   the   assessee   to   be   true,   correct;   except   finding   few discrepancies in so far as inventory is concerned.

2       It is a settled law, as rightly held by the Tribunal, that only on account of inflated statements furnished to the banking authorities for the purpose of availing of larger credit facilities, no addition can be made if there appears to be a difference between the stock shown in the books of account and the statement furnished to the banking authorities. If, for the purpose   of   fulfilling   the   margin   requirements   of   the   bank   purely   on inflated estimate basis, when the stock statement had reflected  inflated value of the stock, in wake of otherwise satisfactory explanation, both ­ for the purpose of value as well as quantity, we find no reason to interfere with the order of the Tribunal.

As a parting note, it needs to be mentioned that the Tribunal also made an extensive exercise of calling for the financial ratios of seven years and of the current year under appeal and also held  empathetically that after giving effect to the additions made by the Assessing Officer, the financial   statement   would   get   completely   distorted;   if   such   inclusion/ addition as made by the Assessing Officer is allowed to continue.

Tax Appeal raises no question of law much less substantial question of law. When all the aspects have been extensively considered in light of the decisions rendered by this Court time and again, it was not for the Assessing Officer and CIT [A] to disregard the decisions by presenting the facts   in   distorted   and   truncated   manner.   Tribunal’s   decision   being flawless,  deserves no interference.

Tax appeal stands disposed of accordingly. {M.R Shah, J.} {Ms. Sonia Gokani, J.} Prakash*