No Income Tax Addition can be made Solely Based on Hypothecated Stock Disclosure to Bank: ITAT [Read Order]

The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) ruled that income additions cannot be made solely based on the difference between stock disclosed to a bank and that recorded in audited accounts.

Raj Kumar Puglia, the assessee, filed his return of income on 28.09.2012, declaring Rs. 2,74,604, which was processed under Section 143(1) of the Income Tax Act, 1961. The case was selected for scrutiny, and statutory notices were duly issued. The assessee maintained a cash credit facility with State Bank of India, Sainthia Branch

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The Assessing Officer (AO) obtained stock details that were submitted by the assessee to the bank. Upon comparing, AO noticed that the hypothecated stock statements with the audited books of account showed an excess of Rs. 12,10,038 to the bank. AO treated this excess as an unexplained investment under Section 69 and added it to the assessee’s income.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s addition, observing that the assessee failed to disprove the findings regarding excess stock and provided no material evidence to rebut the discrepancy.

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On further appeal before the ITAT, the assessee’s counsel, represented by Dilip Chatterjee,  argued that inflated stock figures were furnished only to secure enhanced credit limits from the bank and that the books of accounts, duly audited, reflected the true financial position. They submitted that the hypothecated stock statement was not a reliable basis for an addition when the audited records were intact and unchallenged.

The single-member bench comprising Rajesh Kumar (Accountant Member) observed that it is a well-known practice for businessmen to inflate stock figures before banks for loan purposes and that audited books of account carry greater evidentiary value unless found defective.

The tribunal explained that without physical verification or contrary evidence, no addition could be sustained based merely on inflated stock statements filed before banks. The tribunal set aside the order of the CIT(A) and directed the AO to delete the addition. The assessee’s appeal was allowed.

To Read the full text of the Order CLICK HERE

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