T. ABDUL MAJEED vs COMMISSIONER OF INCOME TAX.

K. NARAYANA KURUP, J. :

This IT Reference arises out of the reference made by the Tribunal, Cochin Bench in RA No. 8 (Coch)/1981 arising out of ITA No. 8 (Coch)/81 for the asst. yr. 1977-78 to this Court on the following facts.

The assessee is carrying on the business in textiles under the name and style "Textile Centre" at Ernakulam. For the asst. yr. 1977-78, the assessee filed a return declaring an income of Rs. 85,200, closing stock credited to trading account valued at Rs. 10,36,384.75 and the gross profit disclosed was at Rs. 5,67,261 which comes to 5.85 per cent. But on the basis of certain papers seized in the course of search under s. 132(1) of the IT Act, as per the stock inventories seized, the closing stock as on 31st December, 1976 comes to Rs. 12,17,727.

The ITO, alleging that there is an understatement of the closing stock to the extent of Rs. 1,81,341 sent a draft assessment proposing to add this amount as the un-disclosed income of the assessee. To the draft assessment, the assessee filed objections before the ITO as well as the IAC stating that the stock inventory prepared by the assessee as on 30th December, 1976 and seized by the Department was prepared in a hurry on a single day on which date, there were sales. The said inventory contained a lot of mistakes and duplications and there was excess reflected and subsequently on 31st January, 1977 the assessee had taken a correct inventory and the stock as on 31st December, 1976 was arrived at deducting the value of sales effected during the month of January at Rs. 10,36,384.75. It was also stated that in the seized inventory damaged goods were also noted, but the same was not taken into consideration for preparing the P&L a/c. The value of damaged goods, according to the assessee, comes to Rs. 25,000 on a very moderate estimate. The IAC rejected the explanation of the assessee regarding the mistakes such as duplication in the entries but allowed a sum of Rs. 10,000 towards the value of damaged goods. The ITO, as per Annexure A order accordingly added a sum of Rs. 1,71,531 being the amount of understatement in closing stock. Aggrieved by Annexure A order of the ITO, the assessee filed an appeal before the CIT(A) reiterating his objection in the above lines. The CIT(A) as per Annexure B order rejected all the objections of the assessee and confirmed Annexure A order of the ITO. Aggrieved by Annexure B order of the CIT(A) assessee went in appeal to the Tribunal who by Annexure C order rejected the appeal on all counts, sustaining the addition made by the ITO and also rejecting the contention of the assessee regarding the levy of interest under s. 139(8) and s. 215 of the IT Act holding that they have already upheld the addition and in that light the assessee would not be entitled to the reduction or cancellation of the interest. The petitioner then moved this Court in OP No. 960 of 1962-R and in accordance with the judgment of this Court in the aforesaid writ petition, the Tribunal was directed to draw up the statement of the case to this Court. In compliance with the direction, the Tribunal drew up the statement of the case and referred the following questions to this Court for its opinion.

"(1) Was the Tribunal justified in law in treating the sum of Rs. 1,71,341 - the alleged understatement in closing stock - as the income of the assessee totally ignoring the statement filed before it demonstrating the excess in stock and also by rejecting the plea of duplication of entries without assigning any proper and valid reasons ? Is not the said findings and conclusion perverse and rest on mere conjuctures and surmises ?

(2) Was the Tribunal justified in law in not considering the legality of the levy of interest under s. 139(8) and s. 215 of the IT Act ? Is the levy of interest on the above counts valid and justified in law ?"

Heard counsel on both sides.

As regards the first question, namely, the understatement in closing stock, we are unable to pursuade ourselves to accept the contention raised by the assessee in this reference. According to the assessee, the addition of the sum of Rs. 1,71,531 by the Revenue being the amount of understatement in closing stock cannot be sustained in the light of the explanation furnished by him to the effect that the stock inventory prepared by him was done in a hurry on a single day when there were sales and the said inventory contained a lot of mistakes and duplications. The assessee had a further case that goods worth Rs. 25,000 was damaged, but only a sum of Rs. 10,000 was allowed on this account which is arbitrary. All these contentions were carefully considered by the authorities below in a three tier proceedings namely the ITO, CIT(A) and Tribunal and found against the assessee. It is the definite case of the Revenue that the contentions of the assessee that there were duplicate entries in the closing stock entries are totally untenable. The claim of the assessee that there was duplication in the closing stock inventory in respect of several items remains unsubstantiated. As a matter of fact, it is found by the authorities below that the stock was taken very carefully and meticulously measuring each bale and each piece separately thereby obviating any possibility of duplication. The finding entered into by the statutory authorities on this point is essentially a finding of fact bereft of any question of law and the said finding is neither perverse nor based on mere conjectures or surmises. Accordingly, we uphold the said finding on the question of duplication in the closing stock inventory. The first question is, therefore, answered in the affirmative, in favour of the Revenue and against the assessee.

As regards the second question regarding the legality of the levy of interest under s. 139(8) and s. 215 of the IT Act, learned counsel for the Revenue in fairness conceded that the matter is squarely covered by the decision of the Honble Supreme Court in Central Provinces Manganese Ore Co. Ltd. Vs. Commissioner of Income Tax, wherein it has been held that inasmuch as the levy of interest is a part of the process of assessment, it is open to an assessee to dispute the levy in appeal provided he limits himself to the ground that he is not liable to the levy at all. In the above view of the matter, the second question has to be answered in the negative, in favour of the assessee and against the Revenue.

The reference is answered as above.