J&K&L High Court Upholds Income Tax Addition After Taxpayer Gave Inflated Stock Statement To Bank

The Jammu & Kashmir and Ladakh High Court on Wednesday upheld an addition to taxable income made on the basis of a stock statement furnished by a taxpayer to a bank while availing a cash credit facility, holding that the tax authorities were justified in relying on the declaration where discrepancies with the books of account remained unexplained.

A Division Bench of Chief Justice Arun Palli and Justice Rajnesh Oswal dismissed an appeal filed by Ajay Food Products challenging an addition made by the Income Tax Department on the basis of stock statements submitted to the bank.

The dispute arose when the taxpaying business submitted a stock statement to the State Bank of India while availing a cash credit facility. In that statement, the firm set out the quantity and value of its raw materials and finished goods and certified that the figures reflected the true and accurate stock position in line with its books of accounts.

When the matter later came up during assessment, the assessing officer examined the firm's books and sought the stock statement filed with the bank. A comparison of the two revealed a significant mismatch between the stock recorded in the books and the figures declared to the bank. The officer consequently made an addition of Rs 7,77,218 to the assessee's taxable income.

The Commissioner of Income Tax (Appeals) later modified the addition to Rs 7,00,000 by allowing a 10% margin on account of estimation in the valuation of stocks reflected in the hypothecation statement. The Income Tax Appellate Tribunal, Amritsar Bench, subsequently dismissed the assessee's appeal, prompting the present appeal before the High Court.

The High Court had earlier framed two substantial questions of law, including whether a notional addition to the returned income could be sustained when the books of accounts had not been rejected and whether the tribunal's order was based on an incorrect appreciation of law.

Before the court, the taxpayer argued that the inflated figures furnished to the bank were merely estimates given to secure a higher cash credit facility and did not reflect the actual stock position.

Rejecting the contention, the bench noted that the statement furnished to the bank specifically disclosed both the quantity and value of stock and carried a certification by the assessee confirming that the figures reflected the correct stock position.

“Thus, there was a clear admission on the part of the appellant with regard to both the quantity and value of the stock lying with it,” the court observed.

Holding that the discrepancy remained unexplained, the court said the tax authorities were entitled to rely on the declaration made to the bank.

“In view of the foregoing discussion, we hold that the Assessing Authority was justified in making the addition to the taxable income on the basis of the statement furnished by the appellant to the bank,” the bench said while answering the first substantial question of law against the taxpayer.

The court also disapproved of the practice of inflating stock declarations to banks for securing higher credit limits, observing that such conduct has been described in judicial precedents as amounting to “commercial immorality”.

Finding no illegality or perversity in the orders of the tax authorities and the tribunal, the High Court answered both the substantial questions of law against the taxpayer and dismissed the appeal.