Facts of the Case

The assessee had submitted stock statements to its banker showing stock quantities and values higher than those reflected in its books of account. The inflated figures were furnished for obtaining financial facilities from the bank.

During assessment proceedings, the Assessing Officer treated the excess stock shown to the bank as representing undisclosed stock and made an addition to the assessee's income.

The matter reached the Income Tax Appellate Tribunal, which recorded a factual finding that the stock recorded in the books of account represented the actual stock position and that the books correctly reflected the inventory held by the assessee.

Based on these findings, the Tribunal deleted the addition made by the Assessing Officer.

Aggrieved by the Tribunal's order, the Revenue filed an appeal before the Delhi High Court under Section 260A of the Income-tax Act, 1961.

 

Issues Involved

  1. Whether stock statements furnished to a bank showing higher stock can, by themselves, justify an addition as undisclosed stock under the Income-tax Act?
  2. Whether the Assessing Officer can treat the differential stock as undisclosed stock when the actual stock recorded in the books of account is found to be correct?
  3. Whether any substantial question of law arises from the Tribunal's factual findings regarding the correctness of stock recorded in the books?

 

Petitioner’s Arguments (Revenue)

  • The Revenue contended that the assessee had disclosed higher stock to the bank.
  • According to the Revenue, the excess stock reflected in the bank statements indicated the existence of undisclosed stock.
  • It was argued that the Assessing Officer was justified in making an addition based on the discrepancy between the stock shown to the bank and the stock reflected in the books of account.
  • The Revenue sought reversal of the Tribunal's order deleting the addition.

 

Respondent’s Arguments (Assessee)

  • The assessee submitted that the stock statements furnished to the bank were inflated only for obtaining financial accommodation.
  • It was argued that the actual stock maintained and reflected in the books of account was correct.
  • The Tribunal had already recorded a factual finding that the books correctly represented the stock position.
  • Since no excess physical stock was found and the books were accepted as correct, no addition could be sustained merely on the basis of inflated statements furnished to the bank.

 

Court Findings

The Delhi High Court observed that the assessee had indeed shown inflated stock to the bank for obtaining financial accommodation.

However, the Court noted that a categorical finding of fact had been recorded that the actual stock shown in the books of account was correctly reflected and represented the true stock position.

The Court held that in such circumstances it was not open to the Assessing Officer to treat the stock as undisclosed merely because a higher figure had been disclosed to the bank.

The Court further observed that an identical issue had already been considered in an earlier decision where reliance was placed upon the judgment in CIT v. Prem Singh & Co., 163 ITR 434.

The High Court accepted the Tribunal's factual findings and found no legal infirmity in its conclusion.

 

Court Order

  • The appeal filed by the Revenue was dismissed.
  • The Delhi High Court upheld the order of the Income Tax Appellate Tribunal.
  • The addition made on the basis of inflated stock statements furnished to the bank was not sustainable where the books of account correctly reflected the actual stock.
  • No substantial question of law arose for consideration.

 

Important Clarification

The judgment does not lay down that inflated statements furnished to banks are acceptable or irrelevant. The ruling clarifies that for income-tax purposes, an addition cannot automatically be made merely because higher stock figures were declared to a bank.

Where reliable evidence and factual findings establish that the stock recorded in the books of account is correct and represents the actual stock position, the difference between bank declarations and book records alone cannot justify an addition as undisclosed stock.

The decision emphasizes the importance of factual verification and evidentiary findings rather than relying solely upon statements furnished to financial institutions.

Relevant Sections Involved

  • Section 69 of the Income-tax Act, 1961 (Unexplained Investments / Undisclosed Assets)
  • Section 260A of the Income-tax Act, 1961 (Appeal to High Court

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:13333-DB/AKS03092009ITA3852009_112805.pdf

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