Whether higher stock declared to bank attracts Section 69?

Section 69 of Income Tax Act deals with the cases of unexplained investments which have been made by the assessee but not accounted for in his books of accounts if any maintained and for which no satisfactory explanation is offered by the assessee.

I have seen some cases where higher stock than actual is declared by assesses to their bankers for availing more credit and at the time of assessment u/s 143(3) of Income Tax Act such assesses face difficulties to explain such higher stock declared to their bankers, if the assessing officer summons such stock statements from the bankers for the purpose of making assessment.

The question arises whether such statements furnished to third party by the assessee can be relied upon to take action u/s 69 of Income Tax Act and such difference in actual stock and stock declared to the bank be treated as unexplained investment by the assessing officer?

Some useful Judgments on this point are provided as follows which I got the opportunity to go through recently:

In an earlier judgment on this point favouring revenue namely Coimbatore Spinning and Weaving Co. Ltd. v CIT[1974] 95 ITR 375(Mad.) it was held by the Madras High court that “the alleged practice said to be followed by business houses of declaring larger stocks to the banks for the purpose of getting higher loans or overdraft facilities has neither been shown to exist nor recognized in commercial circles or by courts, and even assuming that such a practice exists, the Tribunal is not expected to take judicial notice of such sub-standard morality on the part of the assessees so as to enable them to go back on their own sworn statements given to the banks as to the stocks held or hypothecated by them in the banks”

However the Madras High court in a judgment favouring assessee in case of CIT v N. Swami [2000] 241 ITR 363(Mad.)  held that the assessee’s income is to be assessed by the ITO on the basis of the material which is required to be considered for the purpose of assessment and ordinarily not on the basis of the statement which the assessee may have given to a third party unless there is material to corroborate that statement of the assessee given to a third party, even if it be a bank. The mere fact that the assessee had made such a statement by itself cannot be treated as having resulted in an irrebuttable presumption against the assessee. The burden of showing that the assessee has undisclosed income is on the revenue. That burden cannot be said to be discharged merely referring to the statement given by the assessee to a third party in connection with a transaction which was not directly related to the assessment and making that the sole foundation for a finding that the assessee .

In a similar case of CIT v. Relaxo Footwear [2002] 123 Taxman 322(Raj.) it was held that where the tribunal accepted the assessee’s explanation that the stock statement submitted to the bank was to make it easier for the assessee to have availed higher credit facility by inflating the stock position to the bank, it was justified in deleting addition on account of the discrepency between the stock shown in the books of account and the stock shown in the statement of the bank.

In yet another case Ashok Kumar v. ITO 201 CTR(J&K) 178 it was held that where stock shown in the books of account is properly verified and valued as per cost, no addition should be made on account of inflated stock statement furnished to the bank.

In the case of CIT v. Khan & Sirohi Steel Rolling Mills 200 CTR (All.) 595 it was held that if the inflated stock statement filed with bank, was not verified by bank officials, the assessee’s explanation that the stock statement furnished to the bank was inflated can be accepted in view of the prevailing circumstances.

However in a recent case of B.T Steels Ltd. v. CIT decided in favour of revenue on 06/10/2010 by Punjab & Haryana High court, it is held that “ The assessee had given stock statement to the bank which was at variance with entries in books of account. No doubt, it was a statement to a third party, but neither the said statement was denied by the assessee nor any valid explanation furnished about the discrepancy. On the other hand, the verification from the bank showed that the assessee had excess stock, which justified addition to the income.

Conclusion: Whether difference in the statement of value of stock furnished to the bank and entries in the books of account, justifies addition, is a question of fact in each individual case. The object of the assessment is to tax the real income of the assessee. The assessing officer has to determine the same on the basis of books of accounts and other material available. Burden of showing taxable income is on the revenue. The said burden can be discharged by drawing appropriate inference from the material on record.

 In my humble view mere fact that there exist a difference between the actual stock and the stock declared to the bank should not be a basis for making addition u/s 69 unless there is some further evidence to corroborate the same.

Amit Bajaj Advocate
Bajaj & Bajaj Advocates,
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Milap Chowk, Jalandhar city.
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