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2017 (1) TMI 1199 - ITAT VISAKHAPATNAM

2017 (1) TMI 1199 - ITAT VISAKHAPATNAM - TMI - Additions towards difference in stock u/s 69B - Additions towards difference in closing stock based on the stock statement submitted to the bank - Held that:- A.O. made additions solely on the basis of stock statement, ignoring the deposition given by the bank manager in the cross examination proceedings. The bank manager clearly explained that he was satisfied with the utilization of the funds based on the scrap available at the factories purchased .....

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s, he has categorically admitted that the loan sanctioned to the assessee is a mortgage loan based on the security given by the partners and obtaining stock statement is only a procedural formality. Therefore, we are of the view that the A.O. was completely erred in relying upon the stock statement without pointing out any defects in the books of accounts. Though the A.O. has relied upon plethora of judgements to come to the conclusion that additions can be made towards difference in stock based .....

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tock statement submitted to the bank - Held that:- we find force in the arguments of the assessee for the reason that the assessee has maintained regular books of accounts which were audited u/s 44AB of the Act. The auditor has not made any comments in respect of books of accounts and also valuation of closing stock. Therefore, we are of the view that there is no reason for the A.O. to reject books of accounts and estimate gross profit without referring to any discrepancies in the books of accou .....

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D SHRI G. MANJUNATHA, ACCOUNTANT MEMBER For The Appellant : Shri K. Hariprasad Rao and Shri T. Satyanandham, DRs For The Respondent : Shri S. Rama Rao, AR ORDER PER G. MANJUNATHA, Accountant Member: These are two appeals filed by the revenue directed against common order passed by the Commissioner of Income Tax (A), Vijayawada dated 9.11.2012 for the assessment year 2007-08 and 2008- 09. Since, the facts are identical and issues are common, they are clubbed, heard together and disposed-off by wa .....

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called as the Act ) were issued. In response to notices, the authorized representative of the assessee appeared from time to time and produced books of accounts and other relevant details called for. During the course of assessment proceedings, the A.O. noticed that the assessee is into the business of trading in iron scrap mainly purchased scrap by public auction from South Central Railway and official liquidator of companies goes into liquidation. The A.O. further observed that as per the aud .....

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he assessee for the purpose of obtaining open cash credit loan. 3. In response to notice u/s 133(6) of the Act, the bank vide its letter dated 5.11.2009 furnished stock statements from May 06 to March, 08 along with details of immovable properties pledged as collateral securities. The A.O. to verify the authenticity of the documents furnished by the bank summoned the bank manager of State Bank of India, Development Banking division, Vijayawada. In response to summons dated 22.12.2009, the bank m .....

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declared in the stock statement submitted to the bank. Therefore, issued a show cause notice to the assessee and asked to explain why the difference in stock as per books of accounts and stock statement submitted to the bank shall not be treated as unexplained investment u/s 69B of the Act. 4. In response to show cause notice, the assessee submitted that it is in the business of trading in iron scrap purchased mainly from South Central Railway and M/s. New Star Iron Scrap Private Limited, a sist .....

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has purchased goods from the customers, because of the nature of the stock and statement submitted to the bank includes stocks lying in the godowns of the customers, therefore, the statement submitted to the bank cannot be relied upon as true and correct. It was further submitted that it has borrowed loans from the bank by mortgaging personal immovable properties of the partners and stock statement is submitted to the bank is merely for obtaining loan and do not contain the real stock either pu .....

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k, includes stock lying in the godowns or places of purchase of the customers, however, these stocks were not considered in the books of accounts of the assessee and only advances paid to M/s. New Star Iron Scrap Private Limited is taken in the books of accounts. The assessee further submitted that the bank manager has explained the procedure followed by the bank for sanction of open cash credit loan and further followup action in respect of verification of stock hypothecated to bank, but he did .....

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its value. The A.O. further held that the assessee in a fiduciary capacity in respect of stocks declared to the banks would not have resorted to exaggerate the stock position, as there was a possibility of the bank officials checking the stocks and any manipulation discovered by the banks would be viewed against the assessee. The A.O. further held that the bank manager has categorically accepted that the bank periodically verifies the stocks hypothecated with the bank and the drawing power is f .....

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btaining higher loan and the assessee has failed to disclose true and correct stock to the department. The A.O. by referring to various judicial precedents, further held that where the courts have not accepted stock statement furnished by the bank, when the assessee maintained regular stock books and also there was no quantitative differences. In this case, there is a huge difference in stock claimed in the books of accounts and submitted to the banks and accordingly, the case law relied upon by .....

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the CIT(A), the assessee reiterated the submissions made before the A.O. The assessee further submitted that the A.O. was erred in arriving at the conclusion of closing stock of the assessee, based on the stock statement furnished by the assessee inspite of the fact that the said stock statement is factually incorrect. The assessee further submitted that it has submitted stock statement to the bank considering its own stock as well as stock lying in the place of purchase of goods based on the ad .....

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bank manager dated 22.12.2009 which was not supplied to the assessee during the course of assessment proceedings. The A.O. has given an opportunity to the assessee for cross examination of the bank manager. After the outcome of the cross examination, the A.O. has viewed that the cross examination undertaken by the assessee may not facilitate to weaken or qualify the earlier deposition of the bank manager dated 22.12.2009 and in the absence of any material alteration to the contents of the earlie .....

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f cross examination, the bank manager has categorically stated that the loan has been sanctioned based on the securities mortgaged to the bank and also based on the stocks proposed to be purchased by the assessee on the basis of advance released to the customer. The assessee further submitted that the stock statements were prepared taking into consideration all the stocks available at the premises of the company which are acquired by M/s. New Blue Star Iron Scrap Private Limited. This aspect was .....

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ther the stocks available at their godown at Autonagar were also verified. The A.O. without considering the factual position of the case, simply disbelieved the statement given by the Bank manager to make additions towards stock differences solely based on the stock statement submitted to the bank which is incorrect. 8. The CIT(A), after considering the explanations of the assessee and also taken into account the remand report of the A.O., held that the stock statement furnished to the bank by t .....

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stock statement furnished to the bank for the purpose of sanction of the loan. Further, he agreed that his first statement was an explanation with regard to the general practice, as he clearly admitted that at the time of recording the statement he did not verify the file of the assessee. Therefore, the statement of the bank manager recorded during the course of assessment proceedings need not be relied upon. With these observations deleted additions made by the A.O. towards difference in closi .....

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ing the outcome of cross examination of the bank manager. The Ld. CIT(A) failed to consider the affirmations made by the bank manager in cross examination that there does not any contradiction and the stock position reported by the assessee was subject to physical verification by the banker on 4 to 5 periodical occasions. The Ld. CIT(A) ought to have considered that the branch manager affirmed that there were no events where the stock was used to avail credit limits by different concerns of the .....

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e because the assessee is having huge stock in its possession as such it has converted its loan into OCC account by offering its stock as security. Although the scrap purchased was not removed from the factory premises, it cannot be said that the scrap so purchased did not form part of assessee s stock. The bank manager clearly stated that the mortgaged loan was granted on the basis of value of the properties mortgated and also stocks reported to the bank, therefore, the CIT(A) was erred in not .....

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d from official liquidator of Companies goes on liquidation through its sister concern M/s. New Blue Star Iron Scrap Private Limited. The assessee being a partnership firm is not eligible to participate in the bidding process for purchase of stock from official liquidator, entered into agreement with its sister concern M/s. New Blue Star Iron Scrap Private Limited for purchase of scrap. The assessee has borrowed cash credit loan from the bank which was directly credited to M/s. New Blue Star Iro .....

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ee has not finalized the purchase and only an advance is given for purchase of stock, and advance paid is considered in the books of accounts. The A.O. without understanding the peculiar facts of the case, simply gone on the basis of the stock statements to make additions, which is incorrect. 11. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The A.O. made additions towards difference in value of stock as per books .....

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arries higher stock than disclosed in the books of accounts. The A.O. further observed that the stock statement submitted to the banks is true and correct which was further supported by the deposition of the bank manager, wherein the bank manager has stated that the bank has periodically verifies the stock hypothecated to bank, therefore, it cannot be considered as stock statement submitted to bank is merely an inflated figure for the purpose of obtaining higher loan. According to the A.O. the a .....

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erence with necessary evidences. In the absence of proper evidences, additions can be made towards difference in value of closing stock as per books of accounts and stock shown in the stock statements submitted to bank. 12. It is the contention of the assessee that stock shown in the stock statement submitted to the bank includes stock proposed to be purchased from M/s. New Blue Star Iron Scrap Private Limited. The assessee further contended that its being a firm not eligible to participate in t .....

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. New Blue Star Iron Scrap Private Limited, which was further supported by the deposition of the bank manager wherein the bank manager clearly stated that the loan is sanctioned based on the strength of the collateral security mortgaged to the bank and also the loan proceeds is directly credited to the customer account. The assessee further contended that the A.O. has not pointed out any discrepancies in the books of accounts and stock books to say that the closing stock disclosed in the books o .....

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any reference to item of stock. Therefore, the A.O. was incorrect in disbelieving the books of accounts and statement of the bank manager before making additions towards difference in closing stock. 13. Having heard both the parties and considered materials on record, we find that the A.O. himself has admitted that there is no difference in quantity of stock as per books of accounts and stocks submitted to the banks. The A.O. made additions solely on the basis of stock statement without pointin .....

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value of the stock, because this is the usual practice adopted by the businessman by inflating the stock of the assets in order to avail better financial help from the banks. The A.O. has not mentioned or observed any deviation from accounting principles adopted by the assessee for valuation of closing stock. He had also not found any defects in the books of accounts of the assessee or any bogus purchases and sales to come to the conclusion that the books of accounts along with stock registers .....

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eld by it and also stock proposed to be acquired from the customers lying in the godowns or places of purchase. This fact was supported by the admission of the bank manager, wherein the bank manager categorically admits that OCC loan sanctioned to the assessee is a mortgage loan based on the strength of the properties mortgaged to the bank, but not based on stock held by the assessee. The bank manager further stated that the assessee has approached for higher credit limit for the purpose of paym .....

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e also proved the fact that it has paid advance for purchase of stock also considered the stock proposed to be purchased in the stock statement submitted to the bank. Therefore, we are of the view that the A.O. was erred in considering stock statement submitted to the bank for making additions towards difference in stock u/s 69B of the Act. 15. Coming to the facts of the present case. The assessee is in the business of trading in scrap, which is mainly purchased from South Central Railway and M/ .....

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r while deposing before the A.O. stated that the bank has sanctioned loan to the assessee for the purpose of purchase of stock from M/s. New Blue Star Iron Scrap Private Limited and the loan proceeds have been directly credited to the bank. The bank manager further admits that the loan is sanctioned on the basis of strength of the security but not based on the stock held by the assessee. 16. The A.O. made additions solely on the basis of stock statement, ignoring the deposition given by the bank .....

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manager in the cross examination proceedings clearly retracted from his earlier statement that before the A.O., he had explained the general procedure followed for sanctioning open cash credit loan and further follow up action for verification of stock hypothecated to the bank without referring to the case of the assessee. In the cross examination proceedings, he has categorically admitted that the loan sanctioned to the assessee is a mortgage loan based on the security given by the partners and .....

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f the case. 17. Considering the facts and circumstances of the case, we are of the view that the A.O. was erred in making additions towards difference in closing stock based on the stock statement submitted to the bank. The CIT(A) after considering the relevant details has rightly deleted additions made by the A.O. We do not see any reason to interfere with the order of Ld. CIT(A). Hence, we inclined to uphold CIT(A) order and reject ground raised by the revenue. 18. The next issue that came up .....

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d either in the purchase bills or sale bills and detailed description of stock is not possible. The A.O. has not pointed out any discrepancies with regard to the non-disclosure of either purchase or sale in the books of accounts. The A.O. made additions merely on the basis of stock statement submitted to the bank without any evidence to state that the assessee has suppressed sales turnover. 19. Having heard both sides, we find force in the arguments of the assessee for the reason that the assess .....

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