Inflated Stock Statement to Bank for Higher Cash Credit Amounts to Commercial Immorality: J&K HC Upholds ₹7.7 Lakh Addition [Read Order]

The High Court of Jammu & Kashmir and Ladakh has held that the practice of declaring higher stock quantities to the banks with the objective of securing higher cash credit facilities amounts to Commercial Immorality.

This was held by the Division Bench which has clearly emphasized that such actions with the objective of securing unjustified financial benefits cannot be countenanced in law.

The Appellant, Ajay Food Products which is a partnership firm engaged in the manufacturing of Soya

Nuggets availed a cash credit facility from the State Bank of India (SBI). On September 25, 2000, the Appellant in its stock statement to the bank claimed higher quantities of raw materials and finished goods compared to what was reflected in the books of account.

Further, the books reflected 20,666 Kgs of Soya DOC, but the Appellant claimed 60,000 Kgs in the bank's stock statement. During the assessment the Assessing Officer (AO) noticed this discrepancy.

However, the appellant confessed that he inflated the figures to get a higher credit limit on the assumption that the bank would not verify the stock as immovable property was already given as collateral.

The appellant’s counsel argued that giving inflated estimates was a common business practice relying on the decision of the co-ordinate bench of the Tribunal in the case of Ashok Kumar vs. ITO.

However, the revenue department argued that no such practices are allowed by law relying on various High Court decisions where such commercial immorality was disapproved.

The Bench consisting of Chief Justice Arun Palli and Justice Rajnesh Oswal differentiated this case from previous ones by observing that in this particular case it was specifically certified by the appellant that it was a true and accurate stock position in conformity with permanent books.

Accordingly, the Court observed that there was a huge unexplained discrepancy of approximately 39,500

Kgs in raw materials. Hence, the court upheld the addition by observing that since the appellant had mentioned both quantity and value it was justified in treating it as undisclosed income and thus,the appeal was dismissed.

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