UGANDA INDUSTRIES COMPANY Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is a registered partnership firm carrying on business of running a ginning and pressing factory and an oil mill. The assessment year under reference is 1970 -71, the previous year being Samvat year 2025, which commenced on October 22, 1968, and ended on November 9, 1969. It should be noted that the Tribunal in the statement of case has stated that the previous year ended on October 30, 1970, which is patently erroneous. In the course of the assessment proceedings for the year under reference, the Income -tax Officer noticed that the assessee had a cash credit account with the Bank of Baroda. The assessee used to take loans from the bank by hypothecation of its goods. The Income -tax Officer, therefore, called for the details of the goods hypothecated with the bank as on certain dates and cross -checked this information with the books of account of the assessee. He found that on March 7, 1969, the assessee had hypothecated 200 bales of cotton valued at Rs. 1,45,000 and 34,000 kilograms of unginned cotton valued at Rs. 68,000. He further found that on March 25, 1969, the assessee had hypothecated 1,20,000 kilograms of cotton seeds valued at Rs. 9,000. On scrutiny of the assessee's stock register, the Income -tax Officer found that on March 7, 1969, the assessee did not possess 200 bales of cotton and 34,000 kilograms of unginned cotton. He further found that the assessee had stock of cotton seeds of only 2,457 kilograms as against 1,20,000 kilograms hypothecated as shown in its statement to the bank on March 25, 1969. The Income -tax Officer, therefore, called upon the assessee to explain the above discrepancy.

(2.) THE assessee's explanation was that 200 bales of cotton and 34,000 kilograms of unginned cotton said to have been pledged on March 7, 1969, belonged to one M/s. Prabhudas Narandas and Bros. of Porbandar and, since the said party was in need of money and to finance it, the assessee had made use of the overdraft facility which it had with the bank. The said M/s. Prabhudas Narandas and Bros. had overdraft facilities up to Rs. 4 lakhs, but when they needed finance beyond this limit, they used to take financial help from the assessee, if its (assessee s) overdraft facility was not exhausted. According to the assessee. it took loan from the bank hypothecating the goods belonging to M/s. Prabhudas Narandas and Bros., and in turn advanced this loan to M/s. Prabhudas Narandas and Bros. It was submitted that the insurance premium in respect of the said goods hypothecated with the bank was also paid by M/s. Prabhudas Narandas and Bros. It was further pointed out that there was debit balance in the account of M/s. Prabhudas Narandas and Bros. with the assessee and the assessee had charged interest on it which interest amount was paid over to the bank. As regards the cotton seeds, the assessee's explanation was that since its limit of overdraft on hypothecation of cotton and kapas (unginned cotton) was exhausted, it had, in order to obtain further facilities beyond the limit, hypothecated cotton seeds weighing 1,20,000 kilograms which were embedded in the unginned cotton of which it had a sufficient stock with it on the day of hypothecation, that is, March 25, 1969.

(3.) BEING dissatisfied with this order of the Income -tax Officer, the assessee carried the matter in appeal before the Appellate Assistant Commissioner who accepted the assessee's contention that 200 bales of cotton as well as 34,000 kilograms of unginned cotton hypothecated with the bank belonged to M/s. Prabhudas Narandas and Bros. and the assessee hypothecated the said goods for purposes of obtaining advance from the bank so as to finance the said M/s. Prabhudas Narandas and Bros. The Appellate Assistant Commissioner also accepted the assessee's contention with regard to 1,20,000 kilograms of cotton seeds. Since, according to the AAC, the assessee had sufficient stock of unginned cotton on the said date which contained cotton seeds of over 1,80,000 kilograms, it was observed by him that this was the usual practice with businessmen to take advance on cotton seeds embedded in unginned cotton. He, therefore, accepted the assessee's explanation as regards the cotton seeds also. In that view of matter, he deleted all the three additions made by the Income -tax Officer.