SATISH CHANDRA, J. - (1.) SWADESHI Cotton Mills, the assessee, is engaged in the manufacture and sale of yern and cloth. Its head-office is at Kanpur. It has a branch factory at Pondicherry. It purchased the Pondicherry unit in 1956. For the asst. yr.. 1957-58, the assessee disclosed a gross loss of Rs. 4,50,283 on sales of Rs. 66,16,643 in respect of its Pondicherry unit. The ITO rejected the book version on a variety of grounds, and assessed the company in respect of its Pondicherry unit by applying a gross profit rate of 9 per cent. One of the items on which the ITO rejected the book version of the assessee- company's case related to the statement of stock position of the Pondicherry unit. The ITO held there was an understatement to the tune of Rs. 9 lacs. On appeal, the AAC substantially agreed with the ITO but estimated the quantum of understatement at Rs. 5 lacs. On further appeal the Tribunal discussed the matter elaborately and ultimately came to the conclusion that the proper estimate of the understatement of the stock of cloth was Rs. 2,50,000.
(2.) AT the instance of the assessee, the Tribunal has referred for our opinion the following question of law :-- "Whether there was any relevant material for the Tribunal to maintain an addition of Rs. 2,50,000 to the assessee's taxable income" ? The Tribunal found that the overdraft limit of the assessee's Pondicherry unit with the United Commercial Bank was Rs. 16 lacs. The Chief Executive Officer at Pondicherry desired to increase the overdraft limit. The assessee had hypothecated its stock with the bank to secure overdrafts. Under the agreement, the overdraft limit was to be 75 percent of the value of the stock hypothecated with the bank. The Tribunal, after discussing the material available on the record, held that the Chief Executive Officer devised a scheme of furnishing the daily stock report to the bank after inflating the figures. The inflation resulted in increasing the stock position with the result that the Pondicherry unit availed of an overdraft upto a limit of Rs. 25 lacs.
(3.) THE Tribunal considered the various clauses of the deed of hypothecation between the assessee and the bank. It emphasised that the difference between the book version of the assessee and the statements sent by it to the bank showed that there was an inflation in the stock position to the extent of Rs. 11 lacs and odd. In view of the various clauses of the deed of hypothecation, it came to the conclusion that had the disparity of stock been to the extent of Rs. 11 lacs, it would not have gone unnoticed by the bank. It went on to hold that it would be unreasonable to accept that the assessee inflated the stock both in quantity and in value to the extent of Rs. 11,63,740 and the bank could not notice it. Since the goods were not pledged but only hypothecated, with the result that the assessee continued to retain the actual custody of the stocks with itself, there was scope for inflating both quantity and value of the stocks, with a view to avail of a larger overdraft. On an overall consideration of all these aspects, the Tribunal came to the conclusion that it would just and proper to estimate the value of understatement of the closing stock at Rs. 2,50,000.;