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I. T. A. No. 438/ KB of 1983-84, decided on 25th November, 1986.
--S. 32--Assessee adopted two modes of valuing of his stocks one for overdraft purposes to be obtained from Bank and other for the purposes of Income-tax Officer assessing on finding explanation of assessee as unsatisfactory and unacceptable made addition of the difference without confronting assessee with the letter of information obtained from the Bank during assessment proceedings--Effect-Application of principles of natural justice- Duty of Assessing Officer before making such addition highlighted.
The assessee needed some overdraft facility and for that purpose they applied to the bank. The assessee supplied to the bank not only balance-sheet but also pro forma invoices of machinery showing the current value thereof. The assessee gave price of their stock worked out on "retail price basis" whereas in the balance-sheet it was shown on "unit at cost basis" It is also established by evidence on record that the Income-tax Officer obtained the information from the bank about the value of the assets and stock declared to them. When he discovered that the value of the stock and assets shown to the bank was higher than that which was mentioned in the balance-sheet, he asked for the explanation of the assessee and found it unsatisfactory and unacceptable. Consequently he added the difference in value of stock and assets declared to the bank and as reflected in the balance-sheet. During the process of assessment proceeding he did not confront the assessee with the letter of the bank:
his order is vitiated on this ground alone because he has very much relied upon this piece of evidence with which the assessee was never confronted. Under the totality of the circumstances if the Income-tax Officer had confronted the assessee with the letter of the bank whereby he got the declared value of the assets and the stock to the bank, the assessee would have invited his attention to the fact that he had given to the bank the replacement value alongwith the balance-sheet and perhaps he would have come to a different conclusion than what he did. All the Officers dispensing justice should always keep in mind that the principles of natural justice have come down to us as crystallised mode of centuries old civilised human behaviour and whenever they are violated not only miscarriage of justice is caused but it also culminates in considerable waste of time and expenses as has, happened in this case.
Before making colossal addition of concealed income of huge amount the Income-tax Officer would have been very much well-advised to find out as to whether the assessee had added any new machinery then shown in his books. It appears from record that his Inspector visited the assessee several times but he never pointed out any addition muchless an addition of heavy amount. As far as declaration to the banks is concerned, it is an open secret that Commercial Banks in Pakistan are accepting the replacement value of assets and stocks as against the book value for the purpose of granting overdraft, It is thus obvious that the mere difference between the replacement value and book value in absence of any other evidence, cannot be taken into consideration for working out the concealed income of an assessee.
The figures furnished by assessee to the Bank for purposes of obtaining an overdraft were not concerned with the actual stock valuation for determining the trading results for purposes of ascertaining the profit and gains derived from this business.
This difference between two modes of calculation of valuation would not justify the rejection of method followed by the assessee for ascertainment of its income.
Ehsan E. Tariq, D.R. for Appellant.
Muhammad Arif for Respondent.
Date of hearing: 12th November, 1986.
.--This is an appeal at the instance of the department against the order of the Commissioner of Income-tax (Appeals) recorded by him in I.T.A. No. CIT (A)/Z-2/1570 for assessment year 1980-81 dated 22nd May, 1983.
2. The facts of the case are that the assessee had originally filed a return of loss of Rs.4,90,703 which was assessed at Rs.2,34,910. Re-opening proceedings were started and the addition was made at Rs.16,04,844 resulting in a total income of Rs.13,69,928 for the year which was again set off against the brought forward losses of earlier years aggregating to Rs.5,99,977. The total income after giving effect to all these losses arrived at Rs.7, 69, 951.
3. The Income-tax Officer had received information from Chartered Bank, Karachi Office regarding the O. D. loan obtained by the assessee- company against the stock and other assets hypothecated by the company with the bank. The statement furnished by the assessee showed the plant and machinery and stocks and outstanding bills valued at Rs. 24, 90, 300 against the total value declared at Rs. 8, 85, 456. The explanation for difference of Rs.16,04,844 in valuation was called for from the assessee and a notice was given by the income-tax Officer as under:--
As per balance-sheet as on 30-6-1980 your stock in trade has been shown at Rs.5,595,671 as under:--
| (a) Raw material | Rs. 2,14, 292 |
| (b) Packing material | Rs.1,60,110 |
| (c) Finished goods | Rs.2,11,269 |
| Besides you have also shown bills receivable considered goods at | Rs.2,08,995 |
| | |
| In the balance-sheet you have also shown your' fixed assets at: | Rs. 80,790 |
| Total value of assets as per balance-sheet. | Rs.8,85,456 |
This is noteworthy that as per auditor's report the stock value has been certified by the Managing Director. Against the above assets you have obtained O. D. from the Chartered Bank against 'M1, hypothecation/ Mortgage of your movable and immovable assets. The balance of O. D. as at 30-6-1980 as per your balance-sheet has been declared at Rs.7,73,256. However, the stock reports submitted by you to your Banker from time to time, which have been duly checked and verified by the Bank Authority show that you had declared the value of your stock in trade at Rs.9,90,300 and the value of your fixed assets (plant and machinery) at Rs.15,00,000 as detailed below:--
| Value of plant and machinery Rs. | 15,00,000.00 |
| Raw Material | 2, 69, 397.45 |
| Packing material | 2,58,701.19 |
| Finished goods | 2,72,403.34 |
| Outstanding bills | 1, 98, 798.40 |
| Rs.24,90,300.38(sic) |
Income-tax Officer further incorporated in his notice that:----
"In view of the above discrepancies i.e. the difference value of stocks and assets declared by you to your banker and duly verified by your banker at Rs.24,90,300 and the stocks and assets at Rs.8,85,456 as per your balance-sheet as at Rs.20-6-1980, you are hereby required to explain by 1-4-1982 as to why the difference of the same being Rs.16,04,844 should not be treated as your stocks and assets outside the books of account and treating the same as your concerned income adjustment of Rs.2,34,916 already assessed under section 62 for 1980-81 besides taking penal action under section 111(1) and also initiating prosecution proceeding, under section 117 of Income-tax Ordinance, 1979."
4. The assessee filed an explanation in response to the same on 1st April, 1982 in which he had denied that there was any stock or other assets kept outside the books of accounts and also stated that the fixed assets were shown in the balance-sheet at cost less depreciation charged in the accounts and that the figures provided to the bank stood at Rs.15 lakhs which was the estimated market value of the plant and machinery as on that date. The Income-tax Officer added the difference of Rs.16,04,844 being the difference of stock and assets submitted to the bank by the assessee vide letter dated 6-7-1980 and assets value in the balance-sheet as at 30-6-1980 at. Rs.8,85,456. The assessee preferred an appeal.
5. The learned Commissioner of Income-tax (Appeals) in appeal considered all the arguments advanced on behalf of the appellant and the reasons given by the Income-tax Officer in his order. The learned Commissioner of Income-tax (Appeals) incorporated in his order on pages 2, 3, 4 and also 5 the relevant portions of the assessment order. The learned Commissioner of Income-tax (Appeals) then incorporated the arguments of the learned Authorised Representative of the assessee from page 5 onwards upto the end of page 7 and then considered the arguments of the appellant vis-a-vis the observations of the Assessing Officer. The learned Commissioner of Income-tax (Appeals) very aptly carne to the conclusion that the whole dispute revolved around the words "current replacement value". He observed that if these words meant actual stock and machinery in the possession of the appellant as against book value declared by the assessee, then the assessee must lose the appeal, but conversely if the current replacement value connotes the idea that old assets if replaced by new assets, it would be available at a price different than the book value of the assets, no case could be built out against the appellant. He further observed that the appeal before him was to be disposed of against this background. The learned Commissioner of Income-tax (Appeals) then considered the different statement and also the statement submitted by the company as on 30-6-1980 as under:-
| Replacement value of plant and machinery | Rs.15,00,000.00 | < [if supportMisalignedRows]> |
| Raw Materials | Rs. 2,60.397.45 | < [if supportMisalignedRows]> |
| Packing Material | Rs. 2,58,701.00 | < [if supportMisalignedRows]> |
| Finished Products | Rs. 2, 72, 403.34 | < [if supportMisalignedRows]> |
| Outstanding bills | Rs.1,98,798.40 | < [if supportMisalignedRows]>
He also considered the affidavit of the Managing Directors that during the period from 1958 to 30th June, 1980 no new plant or machinery was installed by the company excepting the normal additions from year to year as shown in the books of accounts and that the closing stock has been shown at cost of market whichever was lower, whereas the value of the stock as declared to the bank was estimated at the net realisable value of the stocks. C.I.T. (A) also considered the case on which the assessee's representative had relied it Messrs India Motor Parts and Accessories (P) Ltd. v. Commissioner of Income-tax (1976) 33 Tax 15 and after considering all the relevant facts, he deleted the addition of Rs.16,04,844.
6. The learned Departmental Representative now urged that the Commissioner of Income-tax (Appeals) was not correct in deleting the addition and that the arguments of the Income-tax Officer are correct. He again referred to the different parts of the assessment order as well as of the Commissioner of Income-tax (Appeals) order specially pages 5 and 6 and urged to restore the order of the Income-tax Officer.
7. Mr. Muhammad Arif, the learned counsel for the respondent urges that the order of the Commissioner of Income-tax (Appeals) is most correct. He urged that the Commissioner of Income-tax (Appeals) not only incorporated in detail the arguments but also the arguments advanced on behalf of the assessee by him (he being the representative before the Commissioner of Income-tax (Appeals)). He urged that the income-tax Officer had fallen into a manifest error by treating the "current replacement value" to be the real value and also by not accepting the value of stock which had been declared to the bank on estimate basis being a realizable value. He further urged that the respondent assessee got the loan in order to increase the business, which had been done by him. Further, he urged that the effect of this was reflected in subsequent year 1985-86, when the assessee declared the profit of over a million rupees. Lastly, he urged that the Income-tax Officer had absolutely no evidence at all to make the additions.
8. After hearing both the learned representatives we hold that the figures which have been incorporated above from the order of the Commissioner of Income-tax (Appeals) on page 5 as well as from page 10, do establish that the Income-tax Officer has committed grievous mistake by failing to appreciate the real facts. There is absolutely no doubt that the difference as reflected from the comparative figures incorporated above, that it was due to addition of replacement value of Rs. 15, 00, 000 as well as to estimate the value of the finished products at Rs.2,72,403 as against Rs.2,21,269 as well as the value of packing material at Rs.2,58,701 against Rs.1,60,110 even the value of the raw material was declared to the bank at Rs.2,60,398 as against Rs.2,14,292. It would be of interest to further note that as regards the outstanding balances the assessee declared a lesser value of about Rs.10,000 to the bank, i.e. declared Rs.1,98,798 as against the amount outstanding in the balance-sheet at Rs.2,08,995. Thus the assessee had not at all concealed anything. The addition is based on total misappreciation of facts and without any basis. The deletion by the Commissioner of Income-tax (Appeals) was very correct and undoubtedly he has passed a good order appreciating all the facts, and -making a factual good analysis. The order of the Commissioner of Income-tax (Appeals) is confirmed.
9. The departmental appeal being devoid of any merit fails and stands dismissed.
.--I have very carefully gone through the order proposed by my learned brother and I agree with him that the departmental appeal is devoid of any merit and should be dismissed. However, I feel very much constrained, with due respect to learned brother, to highlight other aspects of the facts involved which have given rise to this appeal
It appears that the respondent needed some overdraft facility and for that purpose they applied to the bank. It further appears that they supplied to the bank not only balance-sheet but also pro forma invoices of machinery showing the current value thereof. It also appears that the respondent gave price of their stock worked out on "retail price basis" whereas in the balance-sheet it was shown on "unit at cost-basis". It is also established by evidence on record that the Income-tax Officer obtained the information from the bank about the value of the assets and stock declared to them. When he discovered that the value of the stock and assets shown to the bank was higher than that which was mentioned in the balance-sheet, he asked for the explanation of the respondent and found it unsatisfactory and unacceptable. Consequently he added the difference in value of stock and assets declared to the bank and as reflected in the balance-sheet. It also appears that during the process of assessment proceeding he did not confront the respondent with the letter of the bank. In my humble opinion his order is vitiated on this ground alone because he has very much relied upon this piece of evidence with which the respondent was never confronted. Under the totality of the circumstances I feel that if the Income-tax Officer had confronted the respondent with the letter of the bank whereby he got the declared value of the assets and the stock to the bank, the respondent would have invited his attention to the fact that he had given to the bank the replacement value alongwith the balance-sheet and perhaps he would have come to a different conclusion than what he did. In my humble opinion all the officers dispensing justice should always keep in mind that the principles of natural justice have come down to us as crystallise mode of centuries old civilised human behaviour and whenever they are violated not only miscarriage of justice is caused but it also culminates in considerable waste of time and expenses as has happened in this case.
Moreover, I also feel constrained to observe that before making, colossal addition of concealed income of Rs.16,04,844 the Income-tax Officer would have been very much well-advised to find out as to whether the respondent had added any new machinery then shown in his books. It appears from record that his Inspector visited the factory several times but he never pointed out any addition muchless an addition more than Rs.16, 00, 000. As far as declaration to the banks is concerned, it is an open secret that Commercial Banks in Pakistan are accepting the replacement value of asset and stocks as against the book value for the purposes of granting overdraft. It is thus obvious that the mere difference between the replacement value and book value in absence of any other evidence cannot be taken into consideration for working out the concealed income of an assessee. My this observation is very much fortified by a decision of Madras High Court reported as (1976) 33 Tax 15. India Motor Parts and Accessories (P) Ltd. v. C.I.T. In this case the assessee had adopted two modes of valuing of stock i.e. (i) for overdraft purposes to be obtained from State Bank of India and (ii) for the purposes of Income-tax. The Income-tax Officer, like this case, made the addition of the difference but the Appellate Assistant Commissioner ordered its deletion. However, on further appeal his order was reversed by the Tribunal but on reference the learned Division Bench of Madras High Court made the following observation:--
"- - - - -In fact the only reason adduced by him fort rejecting the valuation in question was that in the valuation of these stocks furnished by the assessee to the State Bank of India the different mode of calculation was adopted by them: We think that this difference would not justify the rejection of method followed by the assessee for ascertainment of its income under the Income-tax Act. What section 13 contemplates is the method of accounting for the purposes of disclosing its income in profits. The figures furnished by him to the State Bank of India for purposes of obtaining an overdraft are not concerned with the actual stock valuation for determining the trading results for purposes of ascertaining the profit and gains derived from this business. For all these reasons we must hold that the addition made by the Income-tax Officer is unsustainable."
M.B.A./364/T Appeal dismissed.
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