ORDER
K.S. Vishwanathan, Vice President
1. The assessee, a registered firm, is running a rice mill at Mahatpur. The income returned disclosed an income of Rs. 31,983. The assessee has maintained stock registers, which showed purchase of paddy PR-106 and IR-8. Stock registers show separately the quantities purchased under both these varieties. Similarly, the rice produced from both the varieties are disclosed separately. The assessee had an overdraft facility with the Punjab National Bank, Jalandhar. They were allowed a facility of Rs. 6 lakhs against the hypothecation of stock. The ITO compared the stock as declared by the assessee for hypothecation with the figures given in the stock register. He found that there were variations. The stock declared under hypothecation to the bank, on many dates, were much more than what was found in the stock register. The peak difference in value was Rs. 15,91,527. After consideration of the assessee’s objections, the ITO held that this amount represented the assessee’s income not disclosed in the books and added the same.
2. At the end of the year, the stock with the assessee did not reflect this excess noticed by the ITO. He assumed that the excess must have been sold off. Since the assessee had disclosed a profit rate of 10.3%, he assumed that, on the sale of the stock outside the books, the assessee must have derived similar rate of profit. He added Rs. 1,07,986.
3. The assessee appealed. In the ground of appeal, it was submitted that there was no valid material with the ITO to reject the books of account. It was pointed out that the stock registers maintained by the assessee have been examined by several Govt. authorities, like the civil supplies authorities, the sales tax authorities and the market committee authorities. It was also submitted that the stock declared to the bank was only for hypothecation, i.e., it was not pledged. There could be inflation of the figures to get accommodation. It was further submitted before the CIT(Appeals) at the time of hearing that there was no need to show any excess of stock since the limit of hypothecation was Rs. 5 lakhs and under pledge Rs. 2 lakhs. It was submitted that the assessee had never utilised the loan allowed on pledge. They have utilised only the loan covered by hypothecation for which there was sufficient stock, even otherwise, in their stock register. They had also relied upon the decision of the Supreme Court in the case of Indore Malwa United Mills Ltd. v. State of Madhya Pradesh [1966] 60 ITR 41, decision of the Madras High Court in the case of CIT v. Ramakrishna Mills (Coimbatore) Ltd. [1974]
93 ITR 49 and the Delhi High Court decision in CIT v. Prem Singh & Co. [1987] 163 ITR 434.
4. The CIT(Appeals) after considering the submissions, upheld the order of the ITO. In arriving at this decision, he relied upon the decision of the Punjab and Haryana High Court in CIT v. Khalsa Engg. Works [1987] 163 ITR 436, the decision of the Kerala High Court in the case of CIT v. South Indian Rubber Products [1987] 166 ITR 687/34 Taxman 60 and the decision of the Supreme Court in the case of CIT v. v. S.P. Jain [1973] 87 ITR 370.
5. The assessee is in further appeal before us. Shri Bansal, appearing for the assessee, submitted that the entire addition made by the ITO was without any basis. He submitted that the assessee is admittedly maintaining stock register. These stock registers are checked from time to time by the various governmental authorities, like civil supplies deptt., the sales tax department, the marketing committee etc. He produced before us photo copies of the stock register which showed that the authorities have signed on various dates as evidence of their having checked up stock and found it correct. He also referred to the report dated 18-12-1987 by the officer from the civil supplies department, that he had physically verified the stock and found it to be correct. Copies of the Monthly Statements of purchases of paddy have been submitted to the sales tax authorities based on the stock register and they have not found any error therein. Similarly, he submitted before us the Fortnightly Statements, sent to the civil supplies authorities. It is true, he submitted, that there is difference in figures of stock in the statements sent to the bank regarding hypothecation of the stock. He submitted that these are only hypothecation and do not represent advance on pledge of goods. The assessee has no godown of its own, nor have they taken godowns on hire. Therefore, it was not possible to keep in lock and key any stock to the satisfaction of the banking authorities. In hypothecation statements, the assessee furnishes only approximate figures and these cannot be taken to be correct. The stock has to be shown to cover the hypothecation loans. The bankers have not raised any objection because he submitted that the loans taken arc otherwise secured by the securities offered by the partners themselves. He then relied upon the decisions, which the assessee had placed before the CIT(Appeals) and submitted that, on these facts, no addition could have been made.
6. Shri Kapur, the learned Departmental Representative, submitted that the assessee had not disputed the stock position, as submitted to the bank authorities. There is difference between the figures and it is for the assessee to prove how this difference arose. He then submitted that it is not correct to say that the assessee had utilised only the hypothecation loan. They have also utilised loan on pledge and even here, there is a difference. He pointed out that, on 5-12-1987, PR-106 paddy, as shown in the Pledge Account, was 2,478 Qtls. 45 Kgs., but, in the register, it was only 1,826 Qtls. 7 Kgs. The maximum difference arose in the Pledge Account itself on 19-121987,on which there was adifferencc of 964Qtls. 89Kgs., thecost of this at Rs. 158 per Qtl. itself would come to Rs. 1,52,452. He also relied upon the decisions considered by the CIT(Appeals) while disposing of the appeal.
7. We have considered the submissions. As Shri Kapur, Departmental Representative pointed, when the assessee had furnished certain figures to the banks and these figures differ from the stock register, it is for the assessee to prove, which one is correct. The assessee had, in our opinion, accepted that the onus is on them and had referred to certain facts to show that the figures, as per the stock register, are correct. Now, the statements given to the bank regarding the goods with them hypothecated to the bank, is of interest only to the assessee and the bank. These statements are not available to any other authority. Whereas the position of the stock, as reflected in the. stock register, is a matter of interest to many other authorities, all the Govt. departments have access to these registers and have a right to be satisfied that these registers disclose correct state-of-affairs. We have seen that the stock registers have been considered and verified by several authorities. We have noticed that the civil supplies authorities have, from time to time, checked both the paddy register as well as rice registers. They have not noticed any discrepancies. The sales tax authorities are very much interested in the purchase tax, arising from the paddy and sale of rice. They have also satisfied that the figures given in the stock registers are correct. As Shri Bansal, for the assessee, pointed out, the Fortnightly Statements have been sent to the civil supplies department. They had not raised any doubts about its correctness. Similarly, the statements have been furnished to the sales-tax authorities also. On 18-12-1986, the civil supplies authorities had visited the assessee’s premises and had satisfied himself regarding the existence of the stock, as disclosed in the registers. He has given a certificate, a copy of which has been furnished before the authorities as well as before us. He has not noticed any discrepancy. It would appear that, under ihe Punjab Agricultural Produce Marketing General Rules 1962, under Section 33 A and Rules 31(4) and 35(3) an inspection of the account books with reference to the stock has to be undertaken. Such an inspection was done for this year on 29-12-1986 and the inspecting authorities have satisfied themselves regarding the correctness of the stock, as shown in the assessee’s books.
8. We are now confronted with this position that the stock, as disclosed in the registers, had been checked from time to time by various authorities and they have not found any discrepancy. As against this, the assessee itself has disclosed higher stock to the bank. If one should go by the evidence, one would prefer that evidence where third parties have checked and verified the correctness of the stock. That is the stock, as given in the stock register.
9. We have also before us a statement showing the quantity of stock hypothecated to the bank as per the statement and the quantity of stock given in the stock register. This statement starts from 3rd of October 1987. In the month of October, the stock shown to the bank was less than the stock shown in the registers. Obviously, this shows that the assessees were not disclosing the stock to the bank as per their stock register. But the Department has no grievance, because stock disclosed in the register is much more than that. The difficulty arises only from the latter half of November, when the stock disclosed to the bank is more than the stock shown in the register. On 21-11-1987, theassessee had disclosed 10,574 Qtls of paddy PR-106, as against 9.926 Qtls. in the stock register. This is the starting point of the difference in the stock position. The other variety of paddy, i.e., IR-8 and the quantity of rice tallies in both the statements. On 20-11-1987, the paddy PR-106, as per the hypothecation statement, was 6,964 Qtls. but in the stock, there was 6,426 Qtls. In the statements sent on 5-12-1987 and 12-12-1987,thequantityofPR-106paddywas kept at 2347, whereas actually they had with them 1826 Qtls. only. In the subsequent statements in the month of December paddy PR-106 was kept constant at 2035 Qtls whereas in the stock register, the figure was 1513 Qtls.
10. Then comes the figures given on 9-1-1988. This is the date on which, according to the ITO, there was maximum difference. Here, as per bank statement, paddy stock of PR-106 was 3413 Quintals, whereas, in the stock register, it was 413 only. It is very easy to see that the assessee had merely added the figure of “3” in front of “413”. This 3,000 Quintals of paddy accounts for most of the additions. On the face of it, the addition of 3,000 quintals of paddy to the stock would require considerable amount of infrastructure facilities, like transport, godowns etc. One cannot conceive how so much stock can be brought in without the concerned Govt. authorities, like civil supplies, sales tax and marketing committee being unaware of it. We must consider the question in the background of all these materials. The law on the point is very clear. The Supreme Court had an occasion to consider this issue in the case of lndore Malwa United Mills Ltd. (supra). In that case the State Govt had levied an Industrial tax on the profit of the Textile Mills based only on the Sale Contract Register. Many other registers reflecting the entire process of manufacture were ignored for this purpose. The Supreme Court held that, as the assessee had produced before the authorities all its registers, it was the duty of the authorities to definitely come to one conclusion or the other in regard to the reliability of these accounts. It was not open for them to choose some of the registers and ignore others. Thus, the principle is clear. The Department cannot merely rely on the bank statements. They have to consider all other materials. In the case of Ramakrishna Mills (Coimbatore) Ltd. (supra) the department found discrepancy between the stock in the books of account and its declarations for overdraft facilities. The High Court found that the declarations to the bank were only rough estimates, whereas in the returns submitted to the Textile Commissioner, the assessee had declared stocks which agreed with their books. So they held, no addition could be made. In this case, we have found that the stock held by the assessee has been checked and found correct by very many Govt. authorities. So that has to be preferred rather than the bank statements.
11. The Delhi High Court has also made a similar pronouncement in the case of Prem Singh & Co. (supra).
12. We would now consider the decisions relied upon by the Department. The first case is that of the Punjab and Haryana High Court in the case of Khalsa Engg. Works (supra). That was not a case of hypothecation. That was a case of pledge of goods. According to the banking practice, goods pledged are under the control of banks whereas the goods hypothecated are not. This is the essential difference between this case and the assessees. Secondly, the facts of the case do not show, whether any other authorities had checked the position of stock. So this case is distinguishable on facts. In the case of South Indian Rubber Products (supra) also, the assessee had pledged goods with the bank. There, as in the earlier case, the goods were totally under the control of the bank and they could be released only by the bank authorities. Here also, there is no third party who had checked up the stock register.
13. In the case of Gaindamal Handa & Sons v. CIT, the assessee was a re-rolling mill. It enjoyed overdraft facilities against the pledged as well as hypothecation stocks. On comparison of stocks as per its stock register with the stock pledged and hypothecated with the bank, the ITO found a number of discrepancies. The Tribunal found that the stock particulars furnished to the bank had evidentiary value. But they also found that the quantities mentioned were not based on actual measurements, but were estimates. They also accepted that there was a tendency to over-estimate quantity. In these circumstances, they held that a margin of 5 % could be considered as reasonable addition. The High Court found that the Tribunal’s finding was reasonable on the facts. It will be seen from this that the finding was given on the facts of the case. It will also be seen that the stock was both hypothecated as well as pledged. In the case before us, the stock is only hypothecated. So this decision is not an authority to hold that the entire stock discrepancy should be added as income.
14. Shri Kapur, for the Department had submitted that the assessee had made use of the advance allowed on pledge of goods also. He had referred to the position regarding the pledge of goods on 15-12-1987 and 19-12-1987. But we find that these were figures taken from the hypothecation statement. Identical figures appear there also. The assessee had been repeatedly asserting before us that they had not made use of the advance on pledge at all. In the face of this, we must have some evidence to show that the assessee had pledged goods also. We do not have any such evidence. On the other hand, in the photo copies of the statements furnished to the bank, from time, to time, we find that they had referred only to the hypothecation figures. So, we have to accept the assessee’s submission that they have not pledged any stock with the bank and there was only hypothecation. Shri Kapur had referred to a statement given by Shri Manmohan Singh, Assistant Manager, Punjab National Bank, recorded on 18-5-1990. We have gone through the statement. Shri Manmohan Singh was not the person in charge of the bank during the relevant time. He has only guessed that his predecessor “must have gone through all the formalities in terms and conditions before granting the credit limit under hypothecation”. In the next paragraph, he had explained the bank’s role in allowing an advance under Pledge Account. These are only of academic interest since we are not dealing with the Pledge Account. We do not find any thing in the statement which could be used against the assessee.
15. Under these circumstances, we are of the opinion that the addition made on account of discrepancy in the stock cannot be sustained. This has to be deleted. As a consequence the addition made on account of profit on the assumption that these stocks must have been disposed of also cannot be sustained.
16. In the result, the appeal is allowed.