M/S S & K GRAINS PROCESSING PVT. LTD.,BURDWAN vs. ACIT, CIR-2, BURDWAN, BURDWAN

The issue raised in ground no 1 relates to the addition of Rs. 18,91,011/- made by the A.O. and confirmed by the Ld. CIT (A) on account of undervaluation of closing stock.

The assessee in the present case is a company which is engaged in the business of running a rice mill. The return of income for the year under consideration was filed by it on 30.09.2008 declaring a total income at NIL. During the course of assessment proceedings, it was noticed by the A.O. that the value of closing stock of paddy, rice & rice bran as on 31.03.2008 was declared by the assessee company to M/s. S & K Grains Processing Pvt. Ltd. its bank at Rs. 49,80,000/- as against the value of closing stock of Rs. 30,88,989/- declared in its books of account. According to the A.O., there was thus an undervaluation of closing stock to the extent of Rs. 18,91,011/- by the assessee and the said amount was added by him to the total income of the assessee.

The addition made by the A.O. on account of alleged undervaluation of closing stock was challenged by the assessee in the appeal filed before the Ld. CIT. During the course of appellate proceedings before the Ld. CIT (A), the assessee company did not produce books of account or other documents in support of the value of closing stock shows in the books of account. As noted by the Ld. CIT (A) in the impugned order, the assessee company also could not produce other evidence to show that the closing stock position as shown by it in the books of account was correct. The only contention raised on behalf of the assessee before the Ld. CIT (A) was that the value of closing stock declared to the bank was inflated and this was the common practice ordinarily followed in the course of business. The Ld. CIT (A) I did not find merit in this contention raised on behalf of the assessee and proceeded to confirm the addition made by the A.O. on account of undervaluation of closing stock for the following reasons given in his impugned order: “While it is a fact that such a practice is in the ordinary course of business indulged in merely to get a higher credit from the bank, it nevertheless has to be established by the appellant that this was indeed the case. The appellant has not produced the details of the stock report submitted to the bank. He has not even produced books of account during appeal. It may be the case that the A.O. has found no defects in the books of account, but that does not necessarily imply that out of books stock could not have been present and shown to the bank. This has to be proved by the M/s. S & K Grains Processing Pvt. Ltd. appellant, who is admittedly making a false statement to a government agency – the bank. It was the onus if the appellant to show a correlation between the ordinary books of account stock and the stock report submitted before the bank to show that the stock report submitted to the bank did indeed include the stock present in the books. It is only then that he could have taken the plea that the A.O. should have rejected the books of account. This onus became more onerous in view of the fact that the appellant was admittedly making false statements and submitting fabricated statements to the bank. The appellant has not discharged his onus at all either during assessment or appeal proceedings. In view of this, his plea cannot be expected to be accepted merely on its prima facie value. The stand of the A.O. does not, in my opinion stand refuted and is accordingly confirmed.”

I have heard the arguments of both the sides on this issue and also perused the relevant material available on record. The learned counsel for the assessee inter alia has relied on the decision of Hon’ble Madras High Court in the case of CIT vs N. Swamy 241 ITR 363 in support of the assessee’s case wherein the order of the Tribunal deleting the addition made by the A.O. on account of undervaluation of closing stock on the basis of excess value of stock declared by the assessee to bank was upheld by the Hon’ble Madras High Court by observing that the assessee’s income is to be assessed by the ITO on the basis of the material which is required to be considered for the purpose of assessment and ordinarily not on the basis of the statement which the assessee may have made to a third party like bank. In my opinion, there cannot be a quarrel on this proposition that no addition can be made to the total income of the assessee on the basis of value of stock declared by the assessee to bank which is inflated. Even the learned DR has not disputed this proposition. He however has submitted that when there is a difference between the closing stock shown by the assessee in his M/s. S & K Grains Processing Pvt. Ltd. books of account and the closing stock as declared by the assessee to bank, the onus is on the assessee to establish that the value declared in the books of account is correct and the value declared to the bank is inflated. He has contended that this onus is not discharged by the assessee in the present case in as much as he could not support and substantiate the value of closing stock shown in the books of account by producing the relevant stock record or other documentary evidence despite a specific opportunity afforded by the Ld. CIT (A) in this regard. A perusal of the stock statement furnished by the assessee at page no 29 of the Paper Book also shows that there were only three items i.e. paddy, rice and rice bran that were lying in the closing stock as on 31.03.2008 and the assessee, therefore, could have established the correctness of the quantities and rates of these three items as declared in the books of account by producing the relevant documentary evidence especially when the value of these items lying in the closing stock as declared by the assessee to bank was substantially higher which was claimed to be inflated. Since the assessee has not done this exercise, I restore this issue to the file of the A.O. for giving one more opportunity to the assessee to do this exercise. Ground no 1 of the assessee’s appeal is accordingly treated as allowed for statistical purposes.

The issue involved in ground no 2 relates to the addition of Rs. 45,908/- made by the A.O. and confirmed by the Ld. CIT (A) on account of disallowance of expenditure claimed to be incurred by the assessee on purchase of gunny bags.