COMMISSIONER OF INCOME TAX Vs. RUDRAPPAN AND COMPANY

JUDGEMENT

(1.) THE assessees are a firm of cotton merchants in Coimbatore. THEy purchase raw cotton or kappas, gin them, in their factory and sell the out-turn of cotton and cotton seeds. At any given moment of time, their factory and godowns will be filled with stocks of kappas, cotton seeds and cotton in various stages of manufacture. THE stocks would be held either loose or in bales, bags and the like. THE assessees had overdraft and key-loan facilities with a nationalised bank. THE bank used to advance key-loans and open loans, on the security of the assessees' stocks of kappas, lint and cotton seeds. THE assessees used to declare to the bank their stock of pledged goods on the basis of which the bank used to advance loans from time to time. THE assessees' declarations of stocks were supposed to be verified by the inspecting staff of the bank. But it never was claimed by the bank that their verification was hundred per cent. accurate. It was stated, for instance, that where stocks were held loose and also where work was in progress, the bank's inspecting staff merely accepted without a word the assessee's statement as to the quantity.

(2.) IN the course of proceeding for the assessee's assessments to income-tax for 1959-60 and 1960-61, the ITO got hold of the assessee's applications for key-loans and other secured loans from the bank. He then compared the stocks declared by the assessees to the bank in those statements with the stocks as disclosed by the assessees in their own accounts on crucial days. His examination revealed that the stocks of goods in the accounts fell short of the stocks declared to the bank. The value of the difference between the two amounted to Rs. 94,900 in one year and Rs. 81,845 in the other year. The officer pinned down the assessees to the declarations to the bank and held that they represented their true stocks and not the lesser quantity disclosed in their accounts. He accordingly added Rs. 94,900 and Rs. 81,845 respectively in the assessee's assessments to income-tax for 1959-60 and 1960-61. The AAC of INcome-tax, on appeal by the assessee, was prepared to take a somewhat realistic view of the figures of stocks declared by the assessees to the bank to hold that the figures were got up for the express purpose of getting the loan accommodation. He did not think that the assessees could have suppressed stocks worth in for an estimate of his own in the matter. His view was that at best Rs. 50,000 and Rs. 42,000 respectively can alone be regarded as understatement of stocks in the two years. IN that view, he sustained the additions made by the ITO in the assessments only to that extent.

(3.) MR. Jayaraman, learned standing counsel for the Department, took a somewhat lofty line in argument. He said that the assessees who had solemnly declared their stocks to a nationalised bank and had obtained loans on the strength of those declarations, cannot be heard to say in their income-tax assessments that no weight should be given to those declarations. Learned counsel stated that the assessees should not be allowed to get away with that kind of double-talk and escape penalty. According to learned counsel, some sanctity must be attached to a verified declaration given by a borrower to a bank, especially when, on the strength of that declaration, he had obtained financial accommodation from the bank. Learned counsel further submitted that in the present case the assessees had declared their stocks before the bank on a solemn declaration by them as to the quality and the quantity of the stocks declared. In the circumstances, it was proper to hold that the declaration by the assessees to the bank disclosed the real state of affairs, and, to the extent that the accounts disclosed a lesser quantum of stocks, the assessees must be held clearly to have suppressed particulars of their income.