ITO, WARD - 49 (1), KOLKATA, KOLKATA vs. MD. JEARUL HAQUE, NORTH 24 PARGANAS

In Ground No. 1 raised in this appeal, the Revenue has challenged the action of the ld. CIT(Appeals) in deleting the addition of Rs.1,22,77,957/- made by the Assessing Officer on account of difference of stock between the books of account and stock statement submitted by the assessee to the Bank. ./2011 Assessment year: 2008-2009 Page 2 of 8

The assessee in the present case is an individual, who is engaged in the business of dealing in cement and building materials under the name and style of his proprietary concern ‘M/s. Maa Builders & Hardware’. The return of income for the year under consideration was filed by him on 30.09.2008 declaring total income of Rs.2,97,450/-. During the course of assessment proceedings, the Assessing Officer gathered the information from the Bank of the assessee i.e. S.B.I., Habra Branch regarding the stock declared by the assessee as on 31.03.2008. The said information revealed that the value of stock declared by the assessee to Bank as on 31.03.2008 was Rs.1,69,60,000/- as against the closing stock of Rs.46,82,043/- declared by the assessee in the books of account. In this regard, explanation offered by the assessee that higher stock was declared to the Bank to get larger loan facility was not found acceptable by the Assessing Officer. According to him, there was no evidence produced by the assessee to show that the value of stock declared to the Bank was wrong and that the value of stock declared in the books of account only was sacrosanct. Accordingly, relying on the decision of the Hon’ble Madras High Court in the case of Coimbatore Spinning & Weaving Co. Ltd. –vs.- CIT reported in 95 ITR 375, he added the difference of Rs.1,22,77,957/- in the value of stock declared by the asseessee to Bank to its total income in the assessment completed under section 143(3) vide an order dated 24.12.2010.

Against the order passed under section 143(3), an appeal was preferred by the assessee before ld. CIT(Appeals) disputing, inter alia, the addition made by the Assessing Officer on account of difference in stock. During the course of appellate proceedings before the ld. CIT(Appeals), it was submitted by the assessee that the assessment of his income could not be made by the Assessing Officer on the basis of a statement that had been given by him to the Bank for availing higher credit facility. It was contended that the impugned addition was made by the Assessing Officer only on the basis of such statement furnished to the Bank without making any attempt to find out the correctness of said ./2011 Assessment year: 2008-2009 Page 3 of 8 statement. It was submitted that the books of account regularly maintained by the assessee were produced before the Assessing Officer and no defect whatsoever was pointed out by him in the said books. It was contended that the books of account of the assessee were accepted by the Assessing Officer and the addition made by him on the basis of stock declared by the assessee at a higher value to Bank for specific purpose alone was not sustainable. In support of this contention, reliance was placed by the assessee on the decision of the Hon’ble Madras High Court in the case of CIT –vs.- N. Swami reported in 241 ITR 363 (Mad.) and that of Hon’ble Rajasthan High Court in the case of CIT –vs.- Relaxo Footwear [2000] reported in 123 Taxman 322 (Raj.). As regards the decision of the Hon’ble Madras High Court in the case of Coimbatore Spinning & Weaving Co. Ltd. (supra) relied upon by the Assessing Officer, it was contended on behalf of the assessee before the ld. CIT(Appeals) that the same was distinguishable on facts and the reliance of the Assessing Officer on the said case for making the addition on account of higher stock declared by the assessee to the Bank was clearly misplaced.

The submissions made by the assessee before him were forwarded by the ld. CIT(Appeals) to the Assessing Officer for later comments. In the remand report submitted to the ld. CIT(Appeals), the Assessing Officer offered his comments on the submissions made by the assessee and after taking into consideration the same, the counter-comments offered by the assessee and the entire material available on record, the ld. CIT(Appeals) proceeded to decide the issue relating to the addition made by the Assessing Officer on account of higher value of stock declared to the Bank. First of all, he found that the case of M/s. Coimbatore Spinning & Weaving Co. Ltd. relied upon by the Assessing Officer was distinguishable on facts, inasmuch as, books of account of the assessee in the said case were not found acceptable by the Assessing Officer by pointing out certain specific defects and the same, therefore, were found to be unreliable to prove that the value of stock disclosed by the asseessee in the books of account was a true position. The ld. CIT(Appeals) thereafter ./2011 Assessment year: 2008-2009 Page 4 of 8 discussed the various case laws cited by the assessee in support of his case on the issue under consideration and applying the legal position emerging from the said judicial pronouncements to the facts of the assessee’s case, he finally held, for the following reasons, that the addition made by the Assessing Officer merely on the basis of higher value of stock declared by the asseessee to Bank was not sustainable. “The legal position that emerges from the above discussed judicial pronouncements, including the ones relied upon by the A.O., is that in cases where an assessee has obtained credit limit from bank against hypothecation of stock and there is difference in the stock declared to the bank and the stock as per assessee's books of account, no addition can be made just for the reason that the assessee had declared larger stock to the bank if the assessee had maintained regular books of account in which no defect was found by the assessing authority or the books of account had not been rejected. The mere fact that the assessee had made a statement by itself to the bank cannot be treated as irrebuttable presumption against the assessee and the figures of the stock reported to the bank authorities cannot be taken at their face value as true and the assessing authority cannot make addition merely referring to the statement given by the assessee to the bank.

In the instant case, the assessee has maintained regular books of account which were duly audited by tax auditors. The auditors had not pointed out any defect in the accounts of the assessee. In his remand report the A.O. has explicitly stated that before passing order under section 143(3), all the documents filed by the assessee were examined and it was found that those were at par with the accounts submitted before the Department. These observations of the A.O. clearly prove that the stock disclosed to the Department by the assessee was the correct one and was as per the assessee's books of account. No part of purchases or sales disclosed by the assessee has been found to be inflated or bogus by the A.O. No defect has been pointed out by the A.O. in the assessee's books of account nor have they been rejected by him.

We have heard the arguments of both the sides and also perused the relevant material available on record. The ld. D.R. has strongly relied on the order of the Assessing Officer on this issue in support of the Revenue’s case and contended that the decision of the Hon’ble Madras High Court in the case of Coimbatore Spinning & Weaving Co. Ltd. (supra) relied upon by the Assessing Officer may be taken into consideration to decide the issue. However, as observed by the ld. CIT(Appeals) in his impugned order and further reiterated by the ld. Counsel for the assessee at the time of hearing before us, the facts involved in the case of Coimbatore Spinning & Weaving Co. Ltd. before the Hon’ble Madras High Court, were distinguishable on facts, inasmuch as the books of account maintained by the assessee in the said case were found to be unreliable by the Assessing Officer by pointing out material and specific defects and it was a case where stock was placed by the assessee with the Bank. In the present case, no defect whatsoever has been pointed out by the Assessing Officer in the books of account maintained by the assessee and this is a case where the assessee has hypothecated the stock and not placed with the Bank, we find ourselves in agreement with the ld. CIT(Appeals) that the case of Coimbatore Spinning & Weaving Co. Ltd. decided by the Hon’ble Madras High Court is distinguishable on facts and the reliance of the Assessing Officer thereon was clearly misplaced. Before the ld. CIT(Appeals) as well as before us, various case laws have been cited on behalf of the assesese including the decision of the Coordinate Bench of this Tribunal, wherein a similar issue was decided in favour of the assessee in the identical facts and circumstances. In one of such decision rendered in the case of ITO –vs.- Shri Manik Mukherjee (ITA No. 1033/KOL/2013 dated 27.06.2014), no defect whatsoever was pointed out by the Assessing Officer in the books of account maintained by the assessee and addition was made to the total income of the assesese solely on the basis of higher value of stock declared to the Bank. This addition was held to be unsustainable by the Tribunal observing that the addition solely based upon the stock statement submitted to the bank was not justified, especially when the higher value of stock to the Bank was ./2011 Assessment year: 2008-2009 Page 6 of 8 claimed to be declared by the assessee to avail more credit facility and the thing was brought on record by the Assessing Officer to show that the stock declared by the assessee in the books of account was not correct. A similar issue has been taken by the Hon’ble Gujarat High Court in the case of CIT –vs.- Riddhi Steel & Tubes Pvt. Ltd. reported in 220 Taxman 148 (Guj.) and cited by the ld. Counsel for the assessee, wherein it was held that only on account of inflated statements furnished to the Banking authorities for the purpose of availing larger credit facilities, no addition could be made on account of difference between the stock shown in the books of account and in the statement furnished to the banking authorities. Keeping in view the ratio of these case laws cited by the ld. Counsel for the assessee and having regard to the facts of the case including the fact that no defect has been pointed out by the Assessing Officer in the books of account of the assessee showing the same to be unreliable, we are of the view that the addition made by the Assessing Officer merely on the basis of inflated higher value of stock submitted to the Bank was not sustainable. In this view of the matter, we uphold the impugned order of the ld. CIT(Appeals) deleting the addition made by the Assessing Officer on this issue and upholding the same, we dismiss Ground No. 1 of the Revenue’s appeal.

In Ground No. 2, the Revenue has challenged the action of the Assessing Officer in deleting the addition of Rs.16,145/- made by the Assessing Officer on account of interest on Fixed Deposits.

During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee is having a Fixed Deposit of Rs.5,50,000/- with Bank, on which interest during the year under consideration was accrued to the extent of Rs.32,750/-. Since the assessee had disclosed such interest only to the extent of Rs.16,605/- in his computation of income, the balance amount of Rs.16,145/- was added by the Assessing Officer to the total income of the assessee. Before the ld. CIT(Appeals), it was pointed out by the assessee that although interest of ./2011 Assessment year: 2008-2009 Page 7 of 8 Rs.16,605/- only was offered in the computation of total income, the balance amount of Rs.16,145/- was separately included under the head “income from other sources” in the Profit & Loss Account. This claim of the assessee was found to be correct by the ld. CIT(Appeals) on verification of the relevant documents. Accordingly, the addition made by the Assessing Officer on this issue was deleted by him.

After having considered the rival submissions and perusing the relevant material available on record, we find that the assessee having offered the entire interest income of Rs.32,750/- during the year under consideration as found by the ld. CIT(Appeals) on verification of the relevant documentary evidence, the addition of Rs.16,605/- made by the Assessing Officer separately had resulted in double addition and the ld. CIT(Appeals) is fully justified in deleting the same. We, therefore, uphold the impugned order of the ld. CIT(Appeals) on this issue and dismiss Ground No.2 of the Revenue’s appeal.

In Ground No. 3, the Revenue has challenged the action of the ld. CIT(Appeals) in deleting the addition of Rs.43,680/- made by the Assessing Officer on account of proportionate disallowance of interest allegedly attributable to interest-free loan given by the assessee.

During the course of assessment proceedings, it was noticed by the Assessing Officer that the assesese has advanced a loan of Rs.3,12,000/- to his wife free of interest. He also found that substantial interest on borrowed fund was paid by the assessee and the same was claimed as deduction. He, therefore, worked out the interest attributable to the loan advanced by the assessee to his wife at Rs.43,680/- and made a disallowance to that extent.

On appeal, ld. CIT(Appeals) deleted the said disallowance made by the Assessing Officer after having found that the assessee was having ./2011 Assessment year: 2008-2009 Page 8 of 8 sufficient own funds in the form of capital, who advanced the loan to his wife free of interest.

After considering the rival submissions and perusing the relevant material available on record, it is observed that the assessee was having own capital of more than Rs.10 lakhs during the year under consideration as found by the ld. CIT(Appeals) and since the same was more than sufficient to advance a loan of Rs.3,12,000/- to his wife, we find ourselves in agreement with the ld. CIT(Appeals) that the said loan was not given by the assessee out of borrowing funds so as to warrant any disallowance out of interest. The impugned order of the ld. CIT(Appeals) on this issue is, therefore, upheld dismissing Ground No. 3 of the Revenue’s appeal.

In the result, the appeal of the Revenue is dismissed.