INCOME-TAX APPEAL NO.104/KB OF 1984-85, DECIDED ON 20TH SEPTEMBER, 1990. VS INCOME-TAX APPEAL NO.104/KB OF 1984-85, DECIDED ON 20TH SEPTEMBER, 1990.
1991 P T D (Trib.) 979
[Income-tax Appellate Tribunal Pakistan]
Before Alvi Abdul Rahim, Accountant Member and Muhammad Mujibullah
Siddiqui, Judicial Member
Income-Tax Appeal No.104/KB of 1984-85, decided on 20/09/1990.
(a) Income-tax Ordinance (XXXI of 1979)---
----S.13(1)(aa)---Definite information---Existence or absence of defects in books of accounts is an irrelevant factor in case where the Assessing Officer had definite information about business carried on "outside books of accounts."
1989 P T D (Trib.) 508 ref.
(b) Income-tax Ordinance (XXXI of 1979)---
----S.13(1)(aa)---When Assessing Officer finds that books of accounts arc false, because of evidence with him, he is not required to examine them to find such defects which justify their rejection---Where Assessing Officer had evidence in the form of assessees own admission about a certain quantity of goods, he need not examine the stock register in circumstances.
Miss Aasia's case PLD 1979 SC 949 ref.
(c) Income-tax Ordinance (XXXI of 1979)---
----S.13(1)(aa)---Addition---Quantities of goods in hand,' as intimated to the Bankers for hypothecation were more than quantities recorded in the books of accounts by the assessee---Assessing Officer, held, was justified in making addition to the declared income for higher quantities of goods hypothecated with the bank.
In the year under consideration the bank never raised any objection about shortage in the quantity of goods hypothecated with it. Furthermore, the assessee had not produced any evidence to the effect that physical check was not carried out and that the banks knew that quantities of stock were over-stated. It was also noted that the stock was insured for a sum of Rupees 30 lakhs. At no point of time the assessee indicated stock of this magnitude in his books. A businessman was not likely to incur unnecessarily higher amount of expenditure in the form of higher premium. He would pay premium on the actual or lower value of goods in stock. For these reasons the I.T.O. was justified in making addition to the declared income for higher quantities of goods hypothecated with the bankers.
The bankers were not concerned with the value assigned to the closing inventory by the management and/or the' auditors for the purpose of preparing balance sheet. The bank's purpose was served by the stock position reports submitted by the borrowers and by the physical check that the bank carried out to safeguard its interest. It was for the assessee to establish that goods of this value were nut available. In the absence of any statement of the bank officials there was no reason to believe that the bankers did not carry out physical check to safeguard their interest.
(d) Income-tax Ordinance (XXXI of 1979)---
----S.13(1)(aa)---Addition---Suppressed stock of goods---Assessing Officer was not required to prove incorrectness of books of accounts, which did not record transactions of suppressed stock of goods and was not under any obligation to dig out evidence to establish modus operandi of assessee who carried on business in the parallel economy as well as in a legal manner---Assessing Officer was required to place on record evidence to the effect that the assessee had not disclosed entire quantity stock in trade in his books.
1989 P T D (Trib.) 508 ref.
(e) Income-tax Ordinance (XXXI of 1979)---
----S.13(1)(aa)---Deemed income---Addition---Procedure and formalities to be observed by Assessing Officer stated---Failure of Assessing Officer to disclose to assessee his intention to invoke the provision of S.13(l)(aa) --- Effect.
If any assessee is found to have made any investment and he is unable to offer explanation about nature and source of such investment the amount of investment shall be deemed to be income of the assessee. In order to levy tax on such a deemed income an I.T.O. has to obtain specific approval of his I.A.C., and has also to give a show-cause notice to the assessee to submit his explanation about action under section 13(1)(aa). Unless these basic requirements are fulfilled the. I.T.O. cannot make such an addition. In the present case the formalities required by section 13(1)(aa) had not been fulfilled. The I.T.O. while issuing notice under section 62 asked the. assessee to reconcile discrepancy between the two figures of stocks. he did not disclose his intention to invoke provisions of section 13(1). Moreover, no permission was obtained from his I.A.C. as is required by second proviso to section 13(1)(aa). Therefore, addition of amount which was the difference in value of stock hypothecated with the bank and value of stock mentioned in books did not have the backing of law as contained in section 13(1)(aa). But the I.T.O. could make addition for the profit earned on sales made with the help of concealed inventory. Therefore, Department was to see if profit of specified amount could be reasonably expected from stock-in-trade concealed by the assessee.
Aga Kafeel Barik, D.R. for Appellant.
I.N. Pasha for Respondent.
Date of hearing: 19th August, 1990.
ORDER
ALVI ABDUL RAHIM, ACCOUNTANT MEMBER.---The Income Tax Officer made an addition of Rs.13,64,555 for the reason that the assessee, hereinafter referred to as the respondent, had not disclosed inventory of this value. On appeal the addition was deleted. Against the decision of learned C.I.T. (A) the department has filed this appeal before us. We quote below brief facts, relevant to the issue in dispute before us, from the order against which this appeal has been riled.
"The appellant have been obtaining overdraft facilities from United Bank Ltd. against hypothecation of stock, personal guarantee of Directors. On enquiry, the learned assessing officer came to know that the appellant had declared stocks ranging between Rs.22,42,800 to Rs.41,34,000 on various dates. The position of stock declared asaper various stock receipts can be summarised as under:--
| S. No | Stock as per report dated | | Rupees |
| 1. | Stock as per report dated | 13-1-1979 | 22,42,800 |
| 2. | do | 1-3-1979 | 24,34,800 |
| 3. | do | 31-3-1979 | 25,98,200 |
| 4. | do | 30-6-1979 | 23,36,800 |
| 5. | do | 31-7-1979 | 30,06,476 |
| 6. | do | | 41,34,000 |
| 7. | do | 31-10-1979 | 31,35,800 |
| 8. | do | 31-12-1979 | 26,84,600 |
"The appellant declared stock to bank on various dates to the extent as indicated above. The stock was also got insured for Rs.30 lacs. The learned assessing officer found that contrary to the quantum of stock declared to the bank to the extent indicated as above, the appellant declared closing stock worth Rs.13,84,203 only in their balance sheet. The learned assessing officer asked the appellant to explain the discrepancy and not being satisfied with the explanation of the appellant made an addition of Rs.13,64,555 to the declared income which is the difference between the value of stock as .declared to bank on 31st December, 1979 and as shown in the balance sheet i.e. Rs.26,84,600 minus Rs.13,84,203."
2. Before making the addition of Rs.13,64,555 the I.T.O. issued a show cause notice to the assessee. The relevant .part is quoted from .assessment, order:--
"Please refer to the proceedings for the year referred to above.. You have shown your closing stock in the balance sheet at Rs.13;84,203 for the year ended 31-12-1979. As per stock register- there appears four items. in stock. But the information received from the Bank is showing balance on 3-12-1979 Rs.26,84,600 and the items of stock noted therein- are 9 in numbers. Please reconcile the discrepancy and furnish your reconciliation by 18-5-1983:"
The reply to this notice as well as I.T.O's.. observations on the issue are also quoted from the assessment order:
"The A.R. of the assessee filed a detailed explanation 'vide his letter dated 30-5-1983 wherein it was contended as under:--
(1) The assessee also, like other importers, had furnished to the Bank inflated and non-existent quantum of stocks for the sole purpose of obtaining overdraft.
(2) The quantum of stock included in the Bank Report had no resemblance with the factual state of affairs.
(3) Indubious or fictional, non-existent or inflated quantum of stocks in the Bank report has no bearing whatsoever. on the method of accounting regularly employed by the assessee.
(4) That to comply with the requirements of the bankers the assessee was forced to fictionally include in the Bank reports stock which in fact had already been sold out, and did not exist on 31-12-1979.
The above explanation is not at all plausible for the following reasons:
(1) It is obligatory on part of the Bank Manager to verify the stock physically to satisfy that the stock hypothecated is not less than the quantity and value declared in the stock reports. This fact is also evident from `Sanction Advice' issued by UBL head Office. Thus, an inference will be drawn in . favour of the proposition that verification was conducted by. Bank Manager to comply with the statutory requirements.
(2) The stock is insured for Rs.30 lacs as is evident from assessee's ownadmission on the stock report dated 13-1-1979.
(3) The stock position was duly signed and verified by the Directors of the Company or all the stock reports submitted to the Bank.
(4) Sales are mostly on cash basis and unverifiable. The credit sales are only of Rs.295,314. The following are the few examples of unverifiable sales:--
(i) C.M. No.6387 dated 30-9-1979 M/s. Munwas & Sons Rs.4,998.00
(ii) C.M. No.6389 dated 30-9-1979 M/s. Mehboob & Bros. Rs.4,984.37
(iii) C.M. No.6309 dated 18-8-1979 M/s. Shakil & Co. Rs.4,999.85
(iv) C.M. No.6138 dated 23-6-1979 M/s. Sadiq Traders. Rs.4,974.41",
The learned C.I.T. (A) deleted addition for the reasons that are quoted below from his order:--
"I am of the view that:
(1) The learned assessing officer has failed to prove that the books of accounts maintained by the appellant are unreliable as he has failed to pin point any suppression of purchases, sales or any other transaction;
(2) That there is no evidence on record to establish the physical existence of stock aggregating Rs.26,84,600 or over and above the stock as declared as per books of the appellant.
(3) In view of United Bank Ltd.'s letter dated 21-1-1981 it is proved that the goods were imported through them and kept in their custody and further that no advance was given by United Bank Ltd. to make purchases from local market. This factor alone is sufficient to prove that the bankers were in beyond the sanctioned limit of the appellant on accepting fictitious stock reports.
(4) The view expressed in para 3 above is proved further by the fact that the: bankers were admittedly in the possession of the copy of audited balance sheet which showed stock position at Rs. 13,84,203 and not Rs.26,84,600."
3. Mr. LN Pasha, the learned counsel for the respondent fully supports the order passed by the learned C.I.T (A). He submitted that for false statement made to bankers the respondent could not be penalised because the I.T.O. has failed to point out any defect in the books of account including the stock register, which were submitted to the I.T.O. for his examination. Describing modus operandi he submitted that in each stock position reported submitted to the bank; the assessee indicated the closing stock at the same Figure as the total amount of imports. In other words the stock was not reduced by the sales made from time to time. The learned D.R. submitted that in the case of some items the value of stock reported to the bankers did go change from date to date. Mr. Pasha did in challenge this observation of the learned D.R. Mr. Pasha further submitted that books of accounts were also accepted in the past. He emphatically mentioned that the I.T.O has failed to prove that the respondent made purchases, which were not reflected in the books of accounts. His next argument is that though the loan agreement provides for monthly physical check of stock bank officials did not carry out any such inspection. Thirdly, he stated the case is different from our case reported as 1989 PTD (Trib) 508. In this reported case the addition made by the LT.O was upheld by us because larger quantities were indicated to the bankers. According to Mr. Pasha this decision was given because the assessee, in that case, did not submit stock register for examination. In the appeal before us Mr. Pasha submitted stock register. On the other hand Mr. Aga Kafeel Barik, the learned D.R. supports the order passed by the I.T.O. His arguments are that the I.T.O. has mentioned defects in accounts. He also objected to letter of U.B.L. dated 22-1-1984 which was considered by the learned CIT (A) to give relief. This letter was issued after the assessment order was finalized. The learned CIT (A) has -not given any reason for entertaining this letter which could be produced earlier on. The contents of the letter are as under:
M/s. Mundrawal Trading Co. Ltd.,
515/, Qamer House, M.A.Jinnah Road, Karachi.
Re: Your cash credit account No. 7091
Reference your letter dated 19-1-1984, we confirm that we did not grant you any advance except on the basis of goods imported by you through us.
We further confirm that in accordance with the terms of sanction from our Head Office, we only granted to you the advance on imported goods imported through and not on any local purchase.
We also confirm that you had filed audited statement of trading account and balance sheet for the years 1979 and 1980 with us which incorporated the stocks physically possessed by you.
Thanking you.
Yours faithfully,
(S.M. Badruddin)
Assistant Vice President"
Mr. Pasha, in reply, stated that this letter does not amount to additional piece of evidence as it supports terms of loan agreements. He further submitted that the department has not objected specifically, in the grounds of appeal, to acceptance of additional evidence by the learned CIT (A).
4. Before considering the issue in dispute before us we may quote from our order reported as, 1989 PTD (Trib.) 508, to which Mr. Pasha had made a reference:
"We feel that the addition made to the manufacturing and trading result is not on account of non-verification of the debit or credit sides of the manufacturing and trading account. In fact, the addition is for income generated by transactions carried on with the help of stock of goods which is not recorded in the books of accounts. In other words the addition is for income from parallel business which is not reflected in the books of accounts presented before the ITO. The ITO with the help of assessee's own statement filed with the Bank and the annual financial accounts established that the respondent company had suppressed quantities of goods. In such cases the assessing officer is justified in making the additions to the declaredgross profit even if there are no defects in the books of account which contain entries of goods recorded therein. The existence of defects in the books. a pre-requisite to reject the declared results and estimates income from sales of goods purchased and recorded in the books of accounts. For example if purchases are verifiable, but sales are not verifiable and/or not supported by quantitative analysis and declared gross profit is low, the I.O.T. can estimate sales at a higher figure and calculate gross profit by applying a higher G.P. rate to estimated sales. An illustration may clarify the point:
| A defective Trading Account |
| Purchases | Rs.1,000 | Sales 1,200 |
| G.P | 200 | |
| | Rs.1.200 | Rs.1.200 |
| A Trading Account without defect |
| Purchases | Rs.1,000 | Sales1,333 |
| G.P | 333 | |
| | 1,333 | 1,333 |
In both the cases, purchases are verifiable. Therefore, the correct amount of purchases is recorded in the books of accounts. However, in the first illustration sales are not verifiable; in the second illustration sales are verifiable. The gross profit rate in the first illustration is 16.6 % while in the second illustration it is 25%. After establishing that sales arc not verifiable the ITO can estimate sales at Rs.1,333 and apply G.P. rate of 25% in the first case with the help of following formula:
Declared sales (-) Declared G.P.x 100
100 (-) G.P. rate to be applied
For this action no burden is placed on the ITO to find out the customers to whom goods were actually sold. Similarly, when periodical quantitative analysis of production activity is not presented by an assessee the I.T.O. can restrict the manufacturing expenses and/or manufacturing wastage to a reasonable extent. In both cases presumption is that a part of goods purchased and recorded in the books of accounts was either sold at a lower rate or that sales were not recorded at all. To make such types of additions the I.T.O. is required to establish that books of accounts suffer from defects and that better trading results are declared in parallel cases. After establishing defects in the books of accounts he is not required to bring on record evidence of actual transactions made at lower rates. However, in so far as transactions outside books of accounts are concerned, the assessing officer has to establish with the help of positive evidence that in addition to the purchases recorded in books of accounts the assessee is also carrying on buying and selling transactions which are not recorded in the books of accounts. To make such addition the ITO has to rely on some evidence. He cannot make additions for transactions outside books of accounts merely by holding that books of accounts suffer from defects. As a matter of fact the existence or absence of defects in books of accounts is an irrelevant fact to make additions for transactions outside the books of accounts. For making such additions positive evidence of suppressed stock or specific instances of buying and selling transactions have to be unearthed by the assessing officer. In such cases the appellate authorities have to see if the evidence brought on record by the I.T.O. is sufficient enough to justify his action."
We have quoted extensively from. our order because it contains discussion on the points raised by Mr. Pasha about I.T.O.s. failure so point out defects in account. In the last three sentences of the above quotation we have held that existence or absence of defects in books of accounts is an irrelevant factor in case where the I.T.O. has definite information about business carried on A "outside books of accounts". For these reasons the argument of Mr. Pasha about I.T.O.s. failure to detect defects in accounts is held to be invalid.
5. Now we take up the next argument of Mr. Pasha which pertains to maintenance of stock register. Though it was produced before the ITO no defects were pointed out by the I.T.O. According to Mr. Pasha this shortcoming makes the addition untenable. This argument is not valid. A stock register or for that matter any set of books is to be examined if apparently business transactions are faithfully recorded therein. In case an I.T.O. finds that books of accounts are false, because of evidence with him, he is not required to examine them to find such defects which justify their rejection. In this respect we arc relying on the judgment of the Supreme Court in the case of Miss Aasia PLD 1979 SC 949. A relevant portion is quoted below:-
"The, Assessing Officer was not bound to rely on all the evidence produced by the assessee in case he was not satisfied about it. He was entitled to reject the account believed by him to be a false and unreliable although there may be no direct and definite evidence to prove their incorrectness. There is no rule of law compelling a Judge to accept evidence, even though it is uncontradicted, which he believes to be a pack of lies (in re: Baghat Halwai) 3 ITC 48. In this connection in Ganga Ram Balamokand v. Commissioner of Income Tax Punjab 1937 ITR 464 it was held that the law does not impose any burden on the Income Tax Authority to prove by positive evidence that the accounts are unreliable or that the figure at which they assess is the correct figure. On the other hand the question of unreliability of accounts is a question of fact and primarily falls for the determination of tae Income-tax Authorities alone. If, therefore, it is once decided by them that the accounts are fictitious or unreliable their finding capricious and injuridical. In matters like those a very wide discretion vests in the Income Tax Authorities in view of exigencies of the case, and the control exercisable on them is very meagre. What alone has to be seen in such cases is whether the discretion has been judicially exercised and if it is once found to be so exercised, no Court can interfere with the order. In this connection their Lordships of the Privy Council in Commissioner of Income Tax, United and Central Provinces v. Badridas Ramrai Shop, Alkola AIR 1937 PC 133 has held that the assessing officer must make what he honestly believes to be a honest estimate of the proper figure assessment, and for this purpose he must be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guess work of the matter, it must be honest guess work. In that sense too the assessment must necessarily be arbitrary."
In the case before us the I.T.O. had evidence in the form of assessee's own admission about a certain quantity of goods. He also found the explanation unsatisfactory. Under the circumstances he need not examine the stock register.
6. Mr. Pasha has also submitted that the bank officials did not carry out any physical check of the stock though loan agreement says that physical check is to be made at least once a month. In other words the bank officials were a party to the malpractice because they knew that the goods hypothecated with them were much less in quantity than what was stated in the reports submitted by the assessee. This is merely a statement because Mr. Pasha has not supported it with any authority.
7. Recently a similar case came up before the honourable Supreme Court. It is reported as 1990 PTD 821. We quote from pages 824-25 as under:--
"3. In addition to the above, during the said year the assessee also purchased grams and after conversion into Dal, used to sell it. In connection with that business the assessee had obtained an overdraft facility from the National Bank of Pakistan. According to the assessee the company had a closing stock of 21,656 maunds and 26 seers of grams with its declared value at Rs.3,88,717. But the Income-tax Officer on enquiry from the Bank, was able to ascertain that according to these record the total stock of the gram pledged with the Bank weighed 87,140 maunds of the value of Rs.13,07,180 against the declared value of Rs.3,88,71.7. The assessee was given an opportunity by the Income-tax Officer to explain the discrepancy. The assessee in their reply explained that the position of stock was overstated to the Bank in order to secure greater credit facility and accommodation from them. But the Income tax officer found it impossible to believe that the stocks could have been overstated to the extent of almost 400 percent. as alleged. He therefore, rejected the explanation of the assessee on account of the under valuation of the stock of dal/grams and treated it as income from undisclosed source.
4. Aggrieved by the order the assessee went up in appeal before the Income Tax Appellate Tribunal (Pakistan) Lahore. But the Tribunal by the order, dated 25th January, 1977 rejected the appeal, maintaining the additions made by the Income-tax Officer. This resulted in the filing of the reference in the High Court out of which the present appeal has arisen. In the reference following questions were referred to the High Court.
(a) Whether in the facts and circumstances of the case there is any legal and relevant evidence on the record in respect of the finding that the applicant had 64,491 maunds, 14 seers grams in excess of the closing stock of 21,651 maunds, 26 seers shown by the applicant in its account?
(b) Whether having regard to the fact that the applicant-assessee, during the whole of the account year in question, purchased only 34,761 maunds of grams, there was any valid reason or ground for the Tribunal to hold that the applicant-assessee had a closing stock of 87.145 maunds of grams at the end of the accounting year?
(c) Whether in the facts and circumstances of the case the Tribunal and the Income Tax Officer could lawfully add the value of 64,491 maunds, 14 seers of grams to the closing stock without at the same time allowing deduction of the corresponding purchase price of the alleged excess quantity?
(d) Whether on the facts and in the circumstances of the case the addition of Rs.9,18,368 representing the value of the alleged suppressed closing stock of gram is not arbitrary and perverse?
5. The High Court considering the questions observed that the findings are based on ample material received from the Bank and the explanation submitted by the assessee was not considered to be satisfactory. Accordingly, the High Court held that "in these circumstances we have. no hesitation in holding that the Tribunal was justified in relying on the material supplied by the Bank and that finding, by the Tribunal that the assessee had 64,491 maunds, 14 seers of grams in excess of the declared closing stock of 21,653 maunds 26 seers, is based on cogent and relevant evidence adduced on the record. The Tribunal in agreement with the Income Tax Officer was justified in rejecting the accounts produced by the assessee."
8. We have considered the issue in dispute. In this case it is an admitted fact that quantities of goods in hand, as intimated to bankers, are more than quantities recorded in the books of accounts. Secondly, as per terms of loan agreement the bank officials were to undertake physical check of stock. We quote the relevant clause from the assessment order:
"Any goods duly insured. Insurance policy to contain Bank clause. Fortnightly stock reports must be obtained and stocks to be physically checked by the Manager/Officer at least once a month."
Thirdly in the year under consideration the bank never raised any objection about shortage in the quantity of goods hypothecated with it. Fourthly, the respondent has not produced any evidence to the effect that physical check was not carried out and that the bankers knew that quantities of stock were over-stated. Fifthly we have also noted that the stock was insured for a sum of Rs. 30 lakhs. At no point' of time the assessee indicated stock of this magnitude in his books. A ` businessman is not likely to incur unnecessarily higher amount of expenditure in the form of higher premium. He would pay premium on the actual or lower value of goods in stock. For these reasons we hold that the I.T.O. was justified in making addition to the declared income for higher quantities of goods hypothecated with the bankers. Before concluding we may mention that the reasons given by the learned CIT, (A) in support of his decision are not convincing. The I.T.O. is not required to prove incorrectness of books of accounts, which do not record transactions of suppressed stock of goods. This has been discussed in detail in our order reported as 1989 PTD (Trib.) 508; a relevant portion has been quoted in para. 4 of this order. Similarly, the I.T.O. is under no obligation to dig out evidence to establish modus operandi of a person who carries on business in the parallel economy as well as in a legal manner. He is required to place on record evidence to the effect that the assessee has not disclosed entire quantity of stock-in-trade in his books. The bankers are not concerned with the value assigned to the closing inventory by the management and/or the auditors for the purpose of preparing balance sheet. The bank s purpose is served by the stock position reports submitted by the borrowers and by the physical check that the bank carries out to safeguard its interest. Lastly, the learned CIT (A) has erred in stating that the I.T.O. failed to place evidence on h record that stock worth Rs.26,84,600 did exist. In this connection it is for the assessee to establish that goods of this value were not available. In the absence of any statement of the bank officials we have no reason to believe that the banker did not carry out physical check to safeguard their interest. The bank had a very vital interest in quantities of goods in store because this was the security for loaf. advanced. We cannot presume that the bank officials jeopardised their interest to accommodate the assessee.
8-A. Now we have to see if the addition of Rs.13,64,555 is proper or it is not on the higher side. The stock-in-trade, which is not recorded in books of accounts, is utilised for earning income like the inventory which is recorded in books of accounts. Thus, it yields income in the form of gross profit earned on the sales made with the help of suppressed inventory. Secondly, it has to be seen if this suppressed stock of goods was acquired with the help of "white money" or through untaxed income. In the case of concealed stock-in-trade two types of additions can be made to the declared income. The first addition falls in the scope of section 13(1)(aa) which is quoted below:
"13. Unexplained investment etc., deemed to be income-(1) where ... ... ... ....
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(aa) the assessee is found to have made any investment or is found to be the owner of any money or valuable article in any year; ... .... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... and the assessee offers no explanation about the nature and source of such sum, investment acquisition of the money of valuable article, excess amount or the money from which the expenditure was met, as the case may be, or the explanation offered by him is not, in the opinion of the Income tax Officer, satisfactory, the sum so credited, the value of the investment, the money or the value of the article, the excess amount or the amount of the expenditure, as the case may be, shall be deemed to be the income of the assessee of such income year chargeable to tax under this Ordinance".
If any assessee is found to have made any investment and he is unable to offer explanation about nature and source of such investment the amount of investment shall be deemed to be income of the assessee. In order to levy tax on such a deemed income an ITO has to obtain specific approval of his I.A.C. and has also to give a show-cause notice to the assessee to submit his explanation about action under section 13(1)(aa). Unless these basic requirements are fulfilled the I.T.O. cannot make such an addition. In the case before us the formalities required by section 13(1)(aa) have not been fulfilled. The I.T.O. while issuing notice under section 62 asked the assessee to reconcile discrepancy between the two figures of stocks, he did not disclose his intention to invoke provisions of section 13(1)(aa). Moreover, no permission was obtained from his IAC as is required by second proviso to section 13(1). Therefore, amount of Rs.13,64,555 which is the difference in value of stock hypothecated with the bank and value of stock mentioned in books does not have the backing of law as contained in section 13(1)(aa). But the ITO can make addition for the profit earned on sales made with the help of concealed inventory. The addition made by the I.T.O. in the case reported as 1989 PTD (Trib.) 508 was upheld by us on this ground. We have, therefore, to see if profit of Rs.13,64,555 can be reasonably expected from stock-in-trade concealed by the respondent. The value of stock reported to the bank and as mentioned in the stock register is as under:
| | Bank | Books |
| 13-1-1979 | 22,42,800 | 12,73,072 |
| 1-3-1979 | 24,34,800 | 8,89,495 |
| 31-3-1979 | 25,98,200 | 9,68,302 |
| 30-6-1979 | 28,36,800 | 7,03,030 |
| 31-7-1979 | 30,06,475 | 15,24,134 |
| 1-10-1979 | 41,34,000 | 6,66,167 |
| 31-10-1979 | 31,35,800 | 10,83,418 |
| 31-12-1979 | 26,84,600 | 13,20,045 |
The value of stock as reflected in books of account is has been worked out by the counsel of the assessee and the learned D.R. A careful analysis of the figures quoted above will reveal that average stock, as per books available for rotation can be determined at Rs.12,50,000 nearly. On the other hand, the average stock available as per statements furnished by the assessee to the bank can be safely calculated at Rs. 30,00,000. As the declared sales amount to Rs.44,13,438 the stock-turnover ratio, on the basis of inventory of Rs.12,50,000, will be 1:3:53. If the same stock-turnover ratio is applied to inventory of Rs.30,00,000 the sale will amount to Rs.1,05,90,000. Gross profit on these sales will amount to Rs.7,96,368 on the basis of 7.52% rate declared by the respondent. Gross profit amounting to Rs.3,34,357 has been recorded in the books of account. Thus, gross profit to the extent of Rs.4,62,011 has been suppressed. Generally no separate set up is maintained to carry on business in the black economy. The same office facilities are utilised. While a part of daily sales are recorded in books of accounts the other part is omitted. Therefore, no extra expenses for administration of black economy are incurred. There may be some expenses of very small magnitude which are not claimed against gross profit recorded in the books. Therefore, we determine income from concealed stock at Rs.4,50,000. We, therefore, reduce the addition of Rs.13,64,555 to Rs.4,50,000 only after vacating order of the learned CIT(A) and by holding that the I.T.O. was in possession of evidence which indicated that actual stock-in-trade of the respondent was much more than the quantities of goods recorded in respondent's books.
9. The appeal filed by the department succeeds in the manner and to the extent indicated above.
M.B.A./1202/TAppeal accepted.