ITO - 13(2)(4), MUMBAI vs. MANOJKUMAR BERIWAL, MUMBAI

O R D E R PER RAM LAL NEGI, JM: These two appeals have been filed by the Revenue against the order dated 24.10.2013 and 10.06.2014 passed by the ld. CIT(A)-24, Mumbai. Vide the Revenue has challenged the order passed by the ld. CIT(A) whereby the ld. CIT(A) has partly allowed the appeal filed by the appellant-assessee against the assessment order passed u/s. 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter). Vide the second appeal, the Revenue has challenged the order passed by the ld. CIT(A) whereby the ld. CIT(A) has allowed the appeal filed by the assessee against the penalty order passed u/s. 271(1)(c) of the Act and deleted the penalty levied by the AO. Both the appeals pertain to the same assessee, hence, the 2 ITA Nos. 553 & 5815/M/14 (A.Y.1999-2000) ITO vs. Shri ManojKumar Beriwal same were heard together and are being disposed of by this common order for the sake of convenience. ITA No. 553/Mum/2014 (A.Y. 1999-2000)

7. Before us, the ld. Departmental Representative (DR) submitted that the ld. CIT(A) has wrongly deleted the addition made by the A.O. Since the assessee has failed to explain the discrepancy pointed out by the A.O., the A.O. has rightly made the addition to the income of the assessee after treating the amount in question as unexplained investment. Accordingly, the findings of the ld. CIT(A) is contrary to the evidence on record.

8. On the other hand, the ld. Counsel for the assessee relying on the order passed by the ld. CIT(A) submitted that the ld. CIT(A) has rightly deleted the addition made by the A.O. as the AO has passed the assessment order u/s 144 of the Act without affording a reasonable opportunity of being heard to the assessee. The AO has based his findings on the basis of letter issued by the Bank and the stock statement submitted by the assessee in connection with availing cash credit facilities. Since, the assessee had given the figures just to avail loan/credit facilities, the AO has wrongly relied upon the same. The findings of the Ld. CIT(A) are based on the principles of law laid down by the Hon’ble Gujarat High court in CIT vs. Verrdip Rollers (P) Ltd. 323 ITR 34 (Guj.), which has been upheld by the Hon’ble Supreme Court, therefore, there is no merit in the revenues appeal and the same is liable to be dismissed.

4 & 5815/M/14 (A.Y.1999-2000) ITO vs. Shri ManojKumar Beriwal 9. We have heard the rival submissions and perused the material on record. We noticed that the A.O. has passed the ex parte order by relying on the letter dated 09.3.2002 issued by the Union Bank of India and stock statement of the assessee, as on 31.3.1999, made available by the said bank. Similarly, the A.O. further relied on the letter issued by the Manager of the Bank confirming verification of the stock shown by the assessee in his stock statement. The stock statement disclosed the value of closing stock at Rs. 1,45,93,000/- including unpaid stock of Rs. 23,02,000/-. Since, the assessee did not file any explanation AO made an addition of Rs 1,22,91,000/- (Rs. 1,45,93,000-23,02,00) During the appellate proceeding, the stock statement dated 31.3.1999 and letter dated 19.12.2005 were made available, containing confirmatory remarks of the bank officials regarding the stock held by the assessee. The assessee contended that the figures given to the Bank are just for availing credit facilities and there is no direct or indirect nexus with the book of account, audited balance sheet. The assessee also produced the audited balance sheet reflecting the actual figures. The ld. CIT(A) has deleted the addition holding that the addition in question made on the basis of inflated stock statement furnished by the assessee to avail the cash credit facility was not justified. The relevant portion of the order passed by the ld. CIT(A) is reproduced below: “4.1.2 Thus, it becomes clear from earlier para that assessee submitted a stock statement as on 31.03.1999 to the Union Bank of India, S.T. Road, Mumbai to avail of cash credit facility from the bank, however, the existence of the stock of goods of steel as mentioned in stock statement as on 31/3/1999 was not physically verified and inspected by the bank officials while sanctioning the cash credit drawing power limit of Rs.88.00 Lacs to the assessee as per the signature dated 09/4/1999 appearing on the stock statement as on 31/3/1999 signed by the assessee. This is further confirmed by the letter dated 19/12/2005 of the Union Bank to the Assessing Officer wherein "they had pleaded their inability to file stock inspection report based on stock available with the assessee as on 31/3/1999, but had enclosed the godown inspection report dated 28/11/1998 duly signed and stamped by the bank officials". This means that Union Bank could trace out and file godown inspection report dated 28/11/1998 signed by the bank officials but could not trace out the godown 5 & 5815/M/14 (A.Y.1999-2000) ITO vs. Shri ManojKumar Beriwal inspection report of stock held by assessee in office/godown as on 31/3/1999. Only plausible reason can be that the godown inspection report was not prepared and, therefore, not available with the Bank. Moreover, even if Union Bank Officials have made remarks on letter dated 22/3/2002 (not available) of the Assessing Officer to them, remarks appear to have been mad without verifying the basic records like godown inspection report but only on the basis of the "Unverified Stock Statement as on 31/3/1999 signed by the assessee" for sanctioning the cash credit limit of Rs. 88 lacs to the assessee. Thus, material evidence for consideration is the stock statement as on 31/3/1999 furnished by the assessee to the bank to avail of cash credit limits which formed the basis of additions of Rs.1,21,31,700/- by way of undisclosed stock and whether toe details submitted in it were correct or not. 4.1.3 Thus, facts that emerged out of assessee's submissions and discussions made above are as follows: 1) Assessee was not given an opportunity to furnish an explanation and cross examine the bank officials on whose certificates of verification, the Assessing Officer relied and made addition of Rs. 1,21,31,700/- by way of undisclosed stock. ' 2) Bank had sanctioned cash credit limits on hypothecation of stock and since the drawing power limits were fixed on the basis of stock-in-trade the assessee had inflated figures of stock in trade 3) Assessee had mentioned a hypothetical quantity to avail of higher cash credit facility and the bank neither had the control over the movement of stock nor had ever verified the stock statement/nor correlated the stock quantity with purchases and sales. 4) Assessee had maintained proper books of account 5) Copy of the verification report prepared out by the bank was never given, 6) Sales tax authorities had subjected assessee's case to deep scrutiny and assessments were finalized by them without pointing out any discrepancy, 7) Assessee had adopted the closing figure of stock of Rs. 1,59,300/- as on 31/3/1999 as the opening figure of stock as on 01/4/1999 while preparing the P&L Account for the year ended 31/3/2000 relevant to AY 2000-01, 6 & 5815/M/14 (A.Y.1999-2000) ITO vs. Shri ManojKumar Beriwal 8) Ultimately, the advances given by the bank to the assessee were treated as NPA, that is, non performing assets and the business was closed by the assessee and at that time no such stock was found by the bank authorities on the basis of which additions were made and finally a one time settlement was arrived at with the bank which was honored by the assessee by selling his mortgaged property. 4.1.4 All these facts clearly point out that assessee inflated figures of closing stock in trade as on 31/3/1999 to avail of/continue with the cash credit facility from the Union Bank of India, S.T. Road, Mumbai branch and furnished a false statement of stock as on 31/3/1999 to the bank and this stock statement was not verified/inspected by the bank officials at the time of granting/allowing/continuing the cash credit facility to the assessee. Assessing Officer had specifically relied on this statement of inflated stock of goods as on 31/3/1999 furnished by the assessee to the bank and made additions of Rs. 1,21,31,700/- by way of undisclosed stock in the assessment order. Lastly, the AR's reliance on the case laws especially the judgments in the case of OT vs. Laxmi Engineers Industries 308 ITR 27^ High Court of Rajasthan and CTT vs. Verrdip Rollers (P) Ltd. 323 ITR 34, (Guj.), appears to be applicable to the assessee's case. The gist of the decision of Veerdip Rollers (P) Ltd. (Supra) is as under:- "Addition was made under section 69B of the Income Tax Act, 1961, on the account of difference between the closing stock furnished in a statement to the bank for availing of credit facility and that shown in the books of account furnished before the income-tax authorities. The Tribunal deleted the addition on the ground that the statement submitted by the assessee to the bank was on estimate basis and the value of the stock was inflated to avail of greater credit from the bank and that there was no justification for making any addition on the allegation of inflated stock shown to bank. On appeal:-

Held, dismissing the appeal, that the Tribunal had considered whether the issue of stock shown in the books of account was genuine or not and there was no reason to hold that the finding of the Tribunal was perverse. [The Supreme Court has dismissed the special leave petition filed by the department against this judgment: see (2008) 307 ITR (St.) 3]". It is seen from the above decision of the Hon'ble High Court of Gujarat (SLP filed by the dept was dismissed by Hon'ble Supreme Court "that the "fact 7 & 5815/M/14 (A.Y.1999-2000) ITO vs. Shri ManojKumar Beriwal of the assessee’s case are similar, as in the assessee's case also the physical verification of stock hypothecated to the Bank was not verified and in the light of this, I hold that the above decision of the Hon'ble High Court is applicable to the assessee's case. Following the above decisions and also in view of the facts of the case and after going through all the written submissions, I am of the opinion that the additions of Rs.1,21,31,700/- in respect of undisclosed stock made on the basis of inflated stock statement furnished by the assessee to avail of cash credit facility was not justified and the/ same is/hereby deleted. Assessee's ground of appeal is allowed on this ground.”

10. We notice that the assessee had mentioned quantity of stock to avail higher cash credit facility. The bank had never verified stock statements as it had no control over the moment of stock. The advances given by the Bank to the assessee were treated as NPA and the business was closed by the assessee and at that time no stock was found by the bank authorities. The assessee has demonstrated before the Ld. CIT(A) that inflated stock statement was submitted to the bank in order to avail credit facilities. In our considered opinion, the findings of the ld. CIT(A) is based on evidence on record and the principles of law laid down by the Hon’ble Gujarat High Court in CIT vs. Verrdip Rollers (P) Ltd (supra). In our considered opinion the Ld. CIT(A) has rightly deleted the addition made by the AO on the basis of the communication received from the Bank discussed above. Hence, we do not find any infirmity in the impugned order to interfere with the same. We, therefore, uphold the said order and dismiss the appeal of the Revenue. ITA No. 5815/Mum/2014

11. The Revenue has challenged the appellate order passed by the ld. CIT(A), whereby the ld. CIT(A) has allowed the appeal of the assessee and deleted the penalty levied u/s. 271(1)(c) of the Act on the ground that the addition has been deleted in the quantum of appeal. The department has challenged the impugned order on the following effective grounds:

8 & 5815/M/14 (A.Y.1999-2000) ITO vs. Shri ManojKumar Beriwal 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the penalty levied u/s.271(1)(c) of the I T Act, 1961, by holding that the quantum addition is deleted.