V RAJASEKHARAN NAIR Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is a Hindu undivided family carrying on business in ginning and sale of cotton. It owned a ginning factory. For the assessment year 1960-61, it returned a net loss of Rs. 5, 391. On a scrutiny of the assessee's accounts, the Income-tax Officer found the following discrepancies between the stock account and the stock declaration given by the assessee to the bank as on December 31, 1959 Quantity pledged Stock aswith the bank per bookCotton 80 candies 20 candies Cotton seeds 3, 500 bags. 2, 100 bags Kappas 900 pothis nilTHE assessee was called upon to explain the above discrepancy, THE assessee's explanation was as followsSo far as cotton was concerned, there was a sale of 112 candies on December 31, 1959, and if the stock of cotton is taken into account, the actual stock as per the assessee's books of account would be 132 candies. As regards the cotton seeds, the assessee stated that there was a sale of 104 bags on December 31, 1959, and if this was taken into account, there would be a stock of 2, 204 bags. THE declaration to the bank was made only on a rough estimate of the stock without any physical verification. It was also stated that the assessee inflated the stock of cotton seeds for the purpose of obtaining a higher loan from the bank and this is a normal practice resorted to by the ginning factories to cover the loan desired by them. As regards the stocks of kappas, the assessee stated that it had in its possession 153 pothis belonging to the customers who brought the same for ginning and this stock was inflated and shown as 900 pothis in the declaration given to the bank with a view to get a higher loanTHE Income-tax Officer accepted the explanation of the assessee only as regards the discrepancy in the cotton stock, but he did not accept the assessee's explanation with regard to the discrepancies in the stocks of cotton seeds and kappas. He took the view that there must have been large transactions in cotton seeds and kappas outside the books and the income from these transactions had not been accounted for in the books of account. He, therefore, estimated the income from these transactions at Rs. 1, 23, 000 and added to the income returned by the assesseeFor the assessment year 1961-62, the assessee had filed a return admitting an income of Rs. 41, 237.

(2.) TAKING the addition made to the income for the assessment year 1960-61, the Income-tax Officer estimated the profit from the transactions outside the accounts in the assessment year 1961-62 at Rs. 6, 150 and added that amount to the income declared by the assesseeThe assessee preferred appeals to the Appellate Assistant Commissioner against the said additions made by the Income-tax Officer in the assessment years 1960-61 and 1961-62. The Appellate Assistant Commissioner, however, felt that the discrepancies in respect of cotton seeds and Kappas were due to the fact that the assessee has resorted to the inflation of the stocks as on December 31, 1959, for the purpose of raising a higher loan from the bank, and that the Income-tax Officer is not justified in rejecting the explanation of the assessee. In that view, the Appellate Assistant Commissioner set aside the additions made in both the yearsThe revenue filed appeals before the Tribunal contending that the Appellate Assistant Commissioner was not justified in accepting the assessee's explanation with regard to the discrepancies between the stock shown as pledged to the bank and the stock as per the assessee's books as on December 31, 1959. As the Income-tax Officer has accepted the explanation given by the assessee as regards the discrepancy in the stocks of cotton as on December 31, 1959, the Tribunal considered only the discrepancies in the stocks of cotton seeds and kappas. As regards the discrepancy in the stock of cotton seeds, the Tribunal took note of the fact that the loan from the bank was an open loan, that, the stock of cotton seeds actually continued to be in the physical possession of the assessee, that in view of the nature of the loan it is possible that the stocks should have been inspected by the bank in a cursory manner and that the discrepancy might be due to a rough estimate made of the total stock. In that view, the Tribunal chose to accept the assessee's explanation as regards the discrepancy in the stock of cotton seeds. With regard to the discrepancy in the stocks of kappas, however, the Tribunal was not inclined to accept the assessee's explanation that the stocks were inflated for the purpose of getting a higher loan from the bank.

(3.) THE decision in that case proceeded on the basis that the valuation of stocks for obtaining loan from the bank will not detract from the lar method adopted by the assessee of valuing the closing stock at a notional figure having regard to the market conditionsIn our view the said decision cannot apply to the facts of this case where there has been a large discrepancy in the stocks disclosed by the books and the stocks declared to the bank, giving room for doubt as to the correctness of the entries made in the assessee's accountsReference is also made to a decision of this court in State of Tamil Nadu v. Indian Crafts and Industries, to which one of us was a party. In that case the assessee, in order to obtain a quota to import a higher quantum of raw material, inflated production figures in his application to the Director of Industries and Commerce. But he was always granted by the Director of Industries only less than 1/4th of the quantum applied for. THE actual quantity allotted has been properly accounted for in the books of the assessee. But the assessing officer, relying on the figures furnished in the application for import licence, reopened the assessment of the assessee under section 16 of the Tamil Nadu General Sales Tax Act on the ground that the account books did not reflect properly the actual production. THE Sales Tax Tribunal held that there was no suppression. This court, on a revision by the State, held that merely because the assessee conducted himself in a manner which was not conducive to ethics, the taxing officer could not invoke the provisions of reassessment and penalise him, and that the finding of the Tribunal that the assessee utilised in his business only the actual quantum of raw material granted by the Director of Industries and that had been duly accounted for in the books of account was essentially a finding of fact which could not be interfered merely on the basis of suspicion. In that case, the Sales Tax Appellate Tribunal, which is the final fact-finding authority, has held that the assessee had received only less than 1/4th of the quantity applied for and that has been duly accounted for by the assessee and this has been accepted by this court. On these findings, it was held that the statement made by the assessee in his application to the Director of Industries asking for higher quantity cannot be a ground for reopening the assessment completed earlier.