Kalpesh Classes

Excess stock submitted to bank for more facility

There is a tendency in India for businessmen to inflate the value of their stocks with a view to avail of a higher cash credit facility. These stock statements may be used by assessing officers to make additions to the taxable income shown in the tax return by the concerned assessee.​​ There has been a conflict in judicial opinion on the question whether such stock statements filed with banks could be relied on as cogent evidence for making additions to the returned income.

Under section 143(3) of the Income-Tax Act, 1961, an assessment can only be framed by an assessing officer on the basis of materials and documents which are in his possession. No hard and fast rule can be laid down by the court to define the sort of material on which the assessing officer's estimate of income should be based ( Gangaram vs CIT ( 5 ITR 464, 484 )). The material need not be direct evidence; it may be circumstantial evidence ( CIT vs Kameshwar ( 1 ITR 94,106 ( PC ). The word ``material'' is here used advisedly, because the assessing officer is not continued to what would be evidence in a court of law. He may use his local knowledge ( Forest Side Properties vs Pearce ( 39 TC 665, 678 ( CA )). ``Past history' may be legitimate material, but that is not sufficient by itself without more, to justify assessment in a particular year'', for there must be some material related to the accounting year to justify a finding of concealed income ( Bansidhar vs CIT ( 23 ITR 353, 360 )).

The assessing officer may disbelieve the oral testimony of the assessee and other witnesses and hold that certain items in the accounts represent profits from undisclosed sources ( Chowkchand vs CIT ( 41 ITR 465 )). He may reject account books which he believes to be false and unreliable, although there may be no direct and definite evidence to prove them incorrect ( Gangaram vs CIT ( 5 ITR 464, 484 )).​​ ``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'' ( Nihorilal vs CIT ( 19 ITR 240, 246 )). However, if the assessing officer proposes to make an estimate in disregard of the evidence oral or documentary, led by the assessee, he should be fairness disclose to the assessee the material on which he is going to found that estimate (Gurumukh Singh vs CIT ( 12 ITR 393 ( FB )).

The assessing officer is not debarred from relying on private sources of information, which sources he may not disclose to the assessee at all ( CIT vs Khemchand ( 8 ITR 159 )). However, in case he proposes to use against the assessee the result of any private inquiry made by him, he should communicate to the assessee the substance of such information so as to put the assessee in possession of full particulars of the case he is expected to meet and should further give him sufficient opportunity to meet it ( Bhogilal vs CIT ( 74 ITR 692 )).

This principle is established by the judgment of the Supreme Court in Dhakeswari Cotton Mills Ltd vs CIT ( 26 ITR 775,783 ), and applied by that Court in Kishinchand Chellaram vs CIT ( 125 ITR 713 ), where as assessment based on the result of private inquiries conducted behind the back of the assessee was set aside.

In CIT vs N Swamy ( 241 ITR 363 ), the assessee had shown the value of the stock in its books of account. The assessing officer thought that the figures relating to the value of the stocks in the books could not be regarded as the correct value of the stocks, as the assessee had given a declaration to the bank from which it had obtained overdraft facilities and, in its declaration, valued the stock at a figure higher than that in the books of the assessee.

The assessing officer computed the difference between the value as recorded in the books and that found in the declaration to the bank and treated the same as income from undisclosed sources. The Madras High Court held that the assessee's income was to be​​ assessed by the assessing officer on the basis of the material which was required to be considered for the purpose of assessment and ordinarily not on the basis of the statement which the assessee may have given to a third party unless there was material to corroborate that statement of the assessee given to a third party, even if it be a bank.

The mere fact that the assessee had made such a statement by itself could be treated as having resulted in an irrebuttable presumption against the assessee. The burden of showing that the assessee had undisclosed income was on the revenue. That burden could not be said to be discharged by merely referring to the statement given by the assessee to a third party in connection with a transaction which was not directly related to the assessment and making that the sole foundation for a finding that the assessee had deliberately suppressed his income.

Unexplained cost of construction​​ 

In Smt. Prem Kumari Mudria v. Asstt. CIT [2008]​​ 166 Taxman 1​​ (Raj.), the Assessing Officer made an addition on the basis of valuation report taking CPWD rates whereas the Commissioner (Appeals) allowed a reduction of 20 per cent from the CPWD rates to match the local PWD rates and such action attained finality after the seal of Rajasthan High Court.​​ 

In this case, the assessee had maintained only self-made vouchers and that too only for wood, labour, gitti, sand and bricks, etc., without any supporting evidences for which reason the Assessing Officer rejected the books of account.

Cash consideration in property sale transaction​​ 

It was on the basis of a statement of the seller, who having received cash consideration chose to offer it in her return, that the authorities in Malik Bros. (P.) Ltd. v. CIT [2007]​​ 162 Taxman 43​​ (Delhi) made subject to tax such sum under section 69 as unexplained investment in the hands of the purchaser. The purchaser did not avail the opportunity to cross-examine the seller to save himself except for approaching the settlement commission and, thus, had to suffer.

Documentary evidence is superior then oral evidence

Where the assessee had purchased a property from his uncles for a consideration specified in the registered sale deed, but the assessee claimed that no amount was paid on the basis of oral evidence of the uncles, the inference of the Assessing Officer that the amount shown to have been paid in the sale deed was actually paid, was upheld by the High Court in Paramjit Singh v. ITO [2010] 323 ITR 588 (P&H).​​ The High Court pointed out that oral evidence is not conclusive as against the documentary evidence under section 91 and 92 of the Indian Evidence Act, 1872 and upheld the inference of the Assessing Officer that the consideration not having been accounted by the assessee was correctly treated as income from undisclosed sources.