ORDER
Sanjay Arora, A.M.
1. The Appeal by the revenue and the cross objection by the assessee are directed against the order of the Commissioner (Appeals)-II, Baroda dated 20-12-2004 for assessment year 2001-02.
2. The first ground of the revenue’s appeal relates to the deletion of addition of Rs. 13,26,614 made by the assessing officer under Section 69 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act).
3. The brief facts of the case are that the assessee’s business premises was surveyed under Section 133A of the Act on 20-10-2000, whereat the stock valued at Rs. 17,63,992 was inventorised, as against the book stock amounting to Rs. 6,46,240. Of the said difference of Rs. 11, 17,752 on account of excess stock found, the assessee succeeded in its claim that stock amounting to Rs. 3,42,247 belonged to its two sister concerns, namely, M/s. Harish Garments and M/s. Udharam Asumal Mamnani (HUF) which were also in the same trade of retailing of garments and operating from the same business premises. As such, the balance difference of Rs. 7,75,505 was admitted during the survey as income from unexplained investment in stock and declared by the assessee in its return of income for the relevant assessment, ie., assessment year 2001-02.
4. During the course of assessment proceedings, however, the assessing officer observed wide variation between the book stock and the stock statements submitted by the assessee to the bank for availing of credit facilities from it against hypothecation of stock. He, therefore, inferred the excess investment (with reference to the book stock) as submitted to the bank, as the assessee’s unexplained investment, and valuing the stock at its purchase price, worked out the deemed income with reference to the peak value of stock, ie., Rs. 26,21,865 as obtaining as at 30-6-2000, allowing credit for the book stock as at that date as also the stock surrendered on survey operation, or at Rs. 13,26,614 for which amount addition was effected under Section 69 to the returned income.
5. Before the Commissioner (Appeals), to whom the matter was taken by the assessee, it contended that the stock statements as submitted to the bank had no relation whatsoever with the physical stock as lying with it from time to time, being guided solely by the consideration for availment of bank credit from its banker M/s. Anand Mercantile Co-operative bank Ltd., which extended it credit on the strength of its stock statement at the rate of 60 per cent thereof. It sought to substantiate its claim by adverting to the fact that it had furnished the stock statement for Rs. 21,34,705 on the morning of 20-10-2000, ie., the date of survey, before commencement of the survey proceedings, in order to renew its credit facilities of Rs. 15 lakhs with the Bank, while admittedly, the stock with it on that date was only Rs. 17,63,992 as discovered on survey. It supported its action in so doing on the basis that its not so doing would attract penal interest by the bank; it does not maintain any day to day stock register so that the same is only estimated, and which again is only based on the consideration of bank credit; the stock with it is only hypothecated to the bank and not pledged so that the bank retains no effective control over stock which always remained with it; the stock of it’s two sister concerns was also included in that reported to the bank as they were not enjoying any credit facility with any bank. It further contended that as the peak difference sought to be taken into account is as at 30-6-2000, which date falls prior to the date of survey, the stock difference, if any, as at that date, would get covered in the stock difference as found out and surrendered at the time of survey ie., dated 20-10-2000. It also cited certain decisions of ITAT in support of its claim where it contended that the submission of inflated stock to the bank has been accepted as normal trade practice. The assessing officer, however, did not accept the assessee’s contentions, distinguishing the ITAT orders cited by the assessee on the ground that in the present case the stock holding in excess to the book stock stands established through the survey operations, and effected the impugned addition of Rs. 13,26,614 as unexplained investment under Section 69 of the Act. Similar pleadings were made before the learned Commissioner (Appeals), who after summarizing the submissions of both the assessee as well as the assessing officer concluded in assessee’s favour thus:
4.22 The facts of the case of appellant are found to be quite distinguishable from the legal pronouncements in the decisions cited above. The appellant’s case being a survey case where excess stock as per books and as per physically found at the time of survey has already been considered as additional income while filing return and further the shortfall in GP as noticed by the assessing officer has also been done away by upholding GP addition made by the assessing officer in the preceding ground. In other words, an additional income of Rs. 7,75,050 has already been disclosed as a result of survey (apart from Rs, 3,42,247 being additional income disclosed in the case of sister concerns of appellant) and further addition of Rs. 1,49,888 has been sustained now, which aggregates to Rs. 9,24,938 (Rs. 7,75,050 + Rs. 1,49,888). It is also noticed that additional income has been credited to profit and loss account and not to trading account of appellant. Considering these facts and also detailed reasons stated in para 4.14 above I hold that it is not fit case to uphold further addition of Rs. 13,26,624 invoking the provisions of Section 69 of the Act. The assessing officer is, therefore, directed to delete the addition made in the case of appellant of Rs. 13,26,614 towards excess stock treated as unexplained.
6. Before us, both the parties relied upon the orders of the authorities below as favourable to them.
7. We have heard both the parties as well as perused the material on record. For reasons mentioned hereinafter, we are not persuaded by the arguments of the learned authorised representative which are a reiteration of those cited before the learned Commissioner (Appeals), and who, in our opinion, has misdirected himself in holding what he does. The inference in GP rate to an unrealistically high level, if the addition on account of unexplained investment were to be upheld it appears has weighed, and in no inconsiderable measure, in deciding this matter. This, to our mind, is a gross misconception as the addition on account of low GP rate (in respect of books sales) has nothing to do with the income deemed to be so on account of unsatisfactory explanation as to its nature and source, of an investment, under Section 69 of the Act. Rather, if that were to be a criteria, the only thing to be seen would be the, adequacy of the GP rate, and further, even the addition as finally sustained by him would enhance the total gross profit to Rs. 14.35 lakhs, which works to be a fabulous figure of 57.6 per cent on the reported sales of Rs. 24.90 lakhs during the year. In fact, as the GP as deducted from the bank statement (2796 approximately) matches with that being shown by the assessee (up to the pre-survey period), it, rather, only implies that the assessee was engaging in sales (trading activity) outside of its books of account. The issue, therefore, that arises for consideration is whether, in the facts of the present case, ie., where the assessee was admittedly carrying stock in excess of that reflected in its books of account in respect of its business, can it be said to have made any investment outside its books of account, considering that the excess stock as at the date of survey (20-10-2000) stands surrendered for tax, and if so, its quantum. In other words, the resolution of the issue boils down to drawing an inference as to the quantum of stock held by it during the course of the year on the basis of its statements of the stock held by it from time to time furnished to its bank for the purpose of availment of, and in terms of, the credit facilities being enjoyed by it therefrom. Towards this we find, that the assessee states that its statements are guided solely by the consideration of availment of bank finance and which is dependent upon the value thereof, determined at its purchase price, i.e., at the rate of 60 per cent thereof. However, it has not brought forth any evidence to support this averment, by, say, showing the amount of credit availed by it at different times during the year with reference to the corresponding bank statements. This exercise has not been made by the assessing officer as well, who has proceeded to treat the bank statements as sacrosanct and as exhibiting the true state of affairs, so that the amount of stock as reflected in those statements is actual to that held by the assessee from time to time during the year. The assessing officer has, no doubt, drawn strength from the fact that it stands established, in consequence of survey operation, that the assessee was, in fact, carrying stock in excess of that recorded in its books of account. However, the issue here is not whether the assessee was holding excess stock with reference to its books and also reporting this excess stock to its bank, but of its quantum.
8. The judicial pronouncements, which have been advanced in plenty by both sides, we feel, would not be of much value in deciding the matter in view of the peculiar facts of the case. In fact, the very existence of substantial case law in favour of either side, itself goes to show that the issue is largely one of fact, so that the side/party which is able to adduce better evidence before the adjudicating authority, succeeds. No doubt, however, having said that we cannot but take cognizance of the judicial view of the practice of submission of inflated stock statements to the banks, which, believing in their correctness, extend credit to their borrowers. In the judgment in the case of Coimbatore Spinning & Weaving Co. Ltd. v. CIT the Hon’ble Madras High Court has, condemning this practice, observed that the Tribunals /Courts are not expected to take judicial notice of such sub-standard morality on the part of tho assessees so as to enable them to go back on their own statement given to the banks as to the stock held or hypothecated by them. And that, a heavy burden lies on the assessee to prove that the books of account alone gives a correct picture and its own statement given to the bank was motivated. In the facts of the case, however, we find that, courtesy the survey operations, the burden of the assessee in proving that its books did not reflect the true picture and the statements submitted to the bank are, in fact, inflated, is amply discharged. And, therefore, it would be incorrect, as well as inconsistent with the facts on record to ignore the same, the income to be taxed being the real one. However, it is also a matter of fact that the stock of the assessee, or any business entity for that matter, cannot be held at constant levels throughout the year. As such ” the assessee’s plea that its entire excess stock stands discovered and surrendered at the time of survey cannot be accepted. The very fact that its stock varies from month to month, and which would only be in response to the business needs, would exhibit this. Rather, we observe that stock held by it generally is to the tune of Rs. 25 to Rs. 26 lakhs throughout the year except for the months ending August, September and October, 2000. As such, the only plausible inference is that the stock generally held by it is higher (by about Rs. 7 to Rs. 8 lakhs) than that held in the months of August to October. This, coupled with the fact that the stock as found at the time of survey i.e., Rs. 17.63 lakhs matches with that declared by it to the bank as at 30-9-2000 and 30-10-2000, would impel us to hold that its peak stock is about Rs. 7.50 lakhs higher than that held by it in these months and which also cover the date of survey. This observation, though compelling in the facts and circumstances of the case, would need to factor in some of the arguments taken by the assessee before the authorities below to see if they merit acceptance, and if so, their impact on the aforesaid finding.
(a) The assessee successfully pleaded that the difference in stock with reference to which the addition was sought to be made being for the month of June which falls prior to the date of survey, the same would stand covered. This argument only needs to be stated to be rejected as the stock is not a constant quantity but varies from day to day, and even otherwise, as stated earlier, the stock, even for the post survey period rises to the level of June, 2000.
(b) The assessee’s averment of the stock as submitted to the bank on the morning of 20-10-2000, i.e., the date of survey, at Rs. 21,34,705, when it admittedly held stock only worth Rs. 17,63,992, and as such, the inference of inflation of stock over and above that held by it, is also not acceptable. As, firstly, this ground, which is one of fact, was -lot taken by it before the assessing officer but only before the CIT (A) for the first time and for that reason ought not to have been taken cognizance of by the latter, and then, if so, only after remanding it back to the assessing officer for his consideration. Secondly, we find that there was no reason for the assessee to have filed the stock statement, which it apparently files on a monthly basis, on 20-10-2000, having already so done on 30-9-2000, so that the next statement fell due only on 30/31-10-2000. Further, we observe that the stock statements had been sought by the assessing officer directly from the bank ie., AMCB, Anand, which vide their letter dated 30-8-2003 furnished the same to him and which did not contain the stock statement dated 20-10-2000.
(c) That the stock of the two sister concerns of the assessee also lies in its business premises as these sister concerns also operate from the same, and as they were not enjoying any credit facilities, the assessee also declares the stock belonging to them to its bank. This claim of the assessee appears plausible as it is a fact borne out by the record that the stock discovered at the time of survey ie., Rs. 17.64 lakhs included stock of Rs. 3.42 lakhs belonging to its two sister concerns, and which was, therefore, reduced therefrom for surrender purposes. However, we also find that the assessing officer has, not accepting the assessee’s contention in this respect on the ground that it would be indeed surprising that the assessee submits stock belonging to its sister concerns to its bank, not made any investigation in the matter. The reality of a business practice, whether right or wrong, has to be adjudged on the basis of evidence, or, in its absence, on the basis of preponderance of probabilities, so that the assessing officer’s ground of rejection thereof, to our mind, is legally infirm. Howover, the assessee’s statement would need to be verified on facts, ie., whether the said two sister concerns whose stock also lies at its business premises, enjoy any credit facility from any bank against the security of stock and, if not, it would only be reasonable to allow credit for the amount of stock as per their books of account as at 30-6-2000, ie., the date with reference to which the peak value of unexplained investment has been reckoned. For the determination of book stock as on 30-62000, in the absence of any stock register, the stock as arrived at on application of their average GP rate (for the relevant year) may be substituted. Further, as the two sister concerns also carry stock in excess of their book stock, and which was also surrendered at the time of survey in their hands, and accepted by the department, at Rs. 1,06,572 and Rs. 2,35,675 respectively, credit for the same would also be merited on the premise that the two sister concerns, also in the same trade, carried at least this much stock in excess of their respective book stock as at 20-6-2000, and which assumption is only reasonable under the circumstances. However, the credit would only follow the ‘prior’ allowance of credit in respect of book stock (as at 30-6-2000), ie., be allowed only if credit for book stock is allowed.
(d) The Commissioner (Appeals) has also observed that the assessee’s stock as at 1-4-2000, and also as at 30-4-2000, is at variance with that given to the bank as at 30-4-2000. He, therefore, infers that the difference in the stock figures also existed at the beginning of the year. We suppose that by saying so, albeit not expressly, he belied his belief that the entire stock difference could not be attributed to this year and that it would have been carried by the assessee from the preceding year. This contention also only needs to be said to be rejected, as firstly, the onus to establish the same is squarely on the assessee, who, we find, has not raised any such argument before the assessing officer, and secondly, the deeming of the unexplained investment as income is only by virtue of a legal fiction so that the same would be attracted when the assessee is found to have made the impugned investment, especially considering that the assessee has itself accepted the excess stock with it as at the date of survey as income for the relevant assessment year.
9. In view of the foregoing, we uphold the addition made by the assessing officer to the extent of Rs. 26,21,865 subject to reduction made to the extent of stock of its two sister concerns as at 30-6-2000, in terms of our observations in this respect at para 8(c) above. The addition of Rs. 7,75,505 on the basis of stock found on survey would be simultaneously deleted; the addition being sustained on the basis of peak value of stock.
10. Ground Nos. 2 and 3 are general in nature and do not call for any specific adjudication.
CO. No. 99/Ahd./2005
11. The first ground of the assessee in the cross objection relates to the confirmation of addition on account of Gross Profit made by the assessing officer at Rs. 1,49,888.
12. Addition in this case was made by the assessing officer after observing the sharp decline in the GP rate in the post-survey period in comparison to the preceding periods as under:
Period
Gross Profit Rate
From 1-4-1998 to 31-3-1999
25.66%
From 1-4-1999 to 31-3-2000
24.81%
From 1-4-2000 to 20-10-2000
26.20%
From 1- 11-2000 to 31-3-2001
11.63%
The learned Assessing officer, before effecting the impugned addition, considered all the arguments and evidence led by the assessee and stated his findings in clear terms which found acceptance of the learned Commissioner (Appeals).
13. Before us, the learned authorised representative repeated the arguments as made before the authorities below, while the learned departmental Representative relied on the orders of the authorities below.
14. We find that the assessing officer has passed a very reasoned order, and conversely, the assessee has not led any evidence in its favour, relying only upon general assertions and which again are not borne out of record, and rather, are inconsistent therewith. The lean period which it speaks of bears the GP rate of 26.20 per cent. Also, its contention of the inapplicability of the division of the trading account for the year into two parts i.e., pre-and-post survey periods is not tenable, in view of the fact that all the figures therein are derived from its regular books of account and the closing stock ie., Rs. 6,46,240 (as at 20-10-2000) is the value at which it itself availed credit of in the survey operations for reckoning of the excess stock. As such, we uphold the order of the learned Commissioner (Appeals) on this ground.
15. The second ground of the assessee’s Cross Objection is in respect of the confirmation of the disallowance of travel expenses of Rs. 12,250 claimed by it as business expenditure. The said expenditure was disallowed by the assessing officer on the ground that no evidence, whatsoever, was furnished by the assessee to substantiate the same, and which also found concurrence of the learned Commissioner (Appeals). The learned authorised representative contended that it was difficult and impractical to obtain vouchers for certain types of expenses, which, though incurred for the purpose of business, as in the present case where it was in respect of the travel undertaken by the partners to various places such as Bombay, Surat, Ahmedabad, Jaipur by rail or road, besides expenses on boarding and lodging for purchases from those places, and which was also the assessee’s contention before the lower authorities. It also cited the decision of the ITAT, Jodhpur in the case of Lake Palace Hotels & Motels (P.) Ltd. v. Dy. CIT (2003) 81 TTJ (Jodh.) 657. The learned departmental Representative, on the other hand, relied upon the orders of the assessing officer and Commissioner (Appeals).
16. We have heard both the parties as also perused through the judgment cited. The expenditure for travel by rail or road, as well as on boarding and lodging expenses, is not one for which evidence would be difficult or impracticable to obtain in the normal course as was the case for the expenses, being Misc. expenses, under reference in the decision cited. Nevertheless, it is highly unlikely that the assessee would not have incurred this expenditure, which is nominal by all counts, for the purpose stated. As such, we are of the opinion that though unevidenced, it would not be appropriate to uphold the disallowance of the said expenditure in the facts of the present case. The orders of the authorities below on this point, therefore, stand reversed.
17. The third and the final ground in the Cross Objection is against confirmation of disallowance of staff welfare expenses for Rs. 9,500. This amount has been disallowed, in the absence of any evidence being furnished before the assessing officer as well the Commissioner (Appeals). However, the assessee had explained before both the authorities below that the same related to hospital expenses of an employee of the firm – Shri Bharat Bhai, who got his leg fractured in a minor accident while going to Nadiad for business purposes. Under the peculiar facts and circumstances of the case, we do not think the assessee’s explanation is unrealistic. Also, considering the nature of the expenditure which arose in the exigencies of the situation, it would not have been very practical to collect the necessary evidence. Also, we believe that the assessing officer, if doubtful of the assessee’s explanation, should have, instead of just brushing it aside, called for some circumstantial or collateral evidence. We, therefore, uphold the assessee’s claim and delete the addition of Rs. 9,500.
18. In the result, the Appeal of the revenue as well as the Cross Objection of the assessee, are both partly allowed.