Punjab and Haryana High Court held that unsigned stock statements cannot shield taxpayers who enjoyed overdraft benefits, as Justices Jagmohan Bansal and Yashvir Singh Rathor dismissed the appeal. Filed by Loomba Manufacturing Syndicate, it challenged Income Tax Appellate Tribunal, Chandigarh.
PUNJAB: In a recent ruling, the Punjab and Haryana High Court held that a taxpayer cannot avoid income-tax additions simply by arguing that stock statements submitted to a bank were unsigned when the taxpayer had benefited from an overdraft (OD) facility based on those very statements.
The bench of Justices Jagmohan Bansal and Yashvir Singh Rathor dismissed the appeal and upheld the assessment.
The appeal before the High Court was filed by M/s Loomba Manufacturing Syndicate, Ludhiana under Section 260A of the Income-tax Act, 1961, challenging an order of the Income Tax Appellate Tribunal (ITAT), Chandigarh that had sustained income-tax additions based on stock statements furnished to a bank to obtain an overdraft facility.
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In an earlier round of litigation, the appellant had filed Income Tax Reference No. ITR-295-1995, which was decided by the High Court by an order dated 06.08.2004. the High Court had indicated that unsigned stock statements could not alone justify a tax addition and remanded the matter, directing the tax authorities to allow the assessee to prove that the statements were not signed and to permit cross-examination of the bank official responsible.
During the remand, the bank’s deputy manager explained the standard procedure for overdraft facilities against hypothecated stock, including preparation and confirmation of stock statements by partners.
The court said,
“the assessee was entitled to cross-examine Shri B.N. Seth. It observed that even if Seth’s statement related only to banking procedures, the assessee had the right to challenge his views on stock records. The court further held that unsigned stock statements, which were neither filed nor authenticated by the partners, could not alone justify an addition.”
The court concluded that denying the assessee an opportunity to cross-examine Shri B.M. Seth had caused prejudice. It directed the Tribunal to allow the assessee to prove that the stock statement was not signed and to permit cross-examination of the bank manager or his successor. The Tribunal was also permitted to seek a remand report and pass a fresh order in accordance with law.
Pursuant to these directions, the matter was reconsidered by the ITAT and remanded to the Assessing Authority. In its order dated 27.12.2006, the Assessing Authority again held that the stock declared in the bank statements should be relied upon. During the proceedings, Shri Anmol Sharma, Deputy Manager of State Bank of India, Ludhiana, was examined.
He stated that due to the age of the records, relevant documents had been destroyed. However, he explained the standard banking procedure, confirming that stock statements were prepared by the godown keeper and signed by the firm before submission. Unsigned statements were not accepted, and such records formed the basis for determining drawing power.
The Assessing Authority found it unlikely that incorrect stock statements would be submitted, as overdraft facilities depended on them. It relied on ITAT’s earlier analysis showing detailed records of opening, receipt, issue, and closing stock, which could not have been fabricated independently by bank staff.
Subsequently, the assessee’s appeal was dismissed by the Commissioner (Appeals) on 20.02.2008 and later by the ITAT on 09.02.2009, thereby affirming the earlier findings.
The appeal involved following substantial questions of law:-
i. Whether in the facts and circumstances of the case, the addition made in non-compliance with the order of this Court dated 06.08.2004 is legally sustainable in the eyes of the law?
ii. Whether in the facts and circumstances of the case, the impugned orders are liable to be set aside as the relevant record had been weeded out by the bank and the main issue of the stock statement being signed or not by any of the partner of the firm remained unanswered?
The appellant’s counsel argued that the Assessing Authority was not justified in making additions based on stock statements that were not signed by any of the assessee’s partners. It was further contended that the respondent failed to properly follow the Court’s directions and relied solely on such statements.
On the other hand, the respondent’s counsel submitted that all authorities had reached consistent findings and that no legal issue, particularly any substantial question of law, arose for consideration.
The court noted that:
- The overdraft benefit based on the stock disclosure was undisputed.
- The bank’s procedures clearly connected the stock statements with drawing power extended to the borrower.
- Given that the assessee accepted and availed the overdraft based on those statements, it was improbable that the statements were fabricated or irrelevant to its business.
Accordingly, the High Court upheld the concurrent findings of the tax authorities, CIT(A), and ITAT that the stock statements were reliable for making the income addition, and dismissed the appeal.
Case Title: M/S Loomba Manufacturing Syndicate Ludhiana Vs Commissioner of Income Tax Ludhiana (ITA-623-2009)
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