AO couldn’t make addition of unaccounted stock when he failed to point out defects in book of accounts

IT : Where Assessing Officer could not point out any defect in books of account maintained by assessee, he was not supposed to make addition of unaccounted closing stock being difference in stock on mathematical calculation

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[2015] 54 taxmann.com 361 (Kolkata - Trib.)

IN THE ITAT KOLKATA BENCH 'A'

Squar Concern

v.

Income-tax Officer

P.K. BANSAL, ACCOUNTANT MEMBER
AND MAHAVIR SINGH, JUDICIAL MEMBER

IT APPEAL NO. 1316 (KOL.) OF 2011
[ASSESSMENT YEAR 2006-07]

SEPTEMBER  11, 2014 

Section 145 of the Income-tax Act, 1961 - Method of accounting - Valuation of stock (Scope of) - Assessment year 2006-07 - Whether where Assessing Officer could not point out any defect in books of account maintained by assessee, he was not supposed to make addition of unaccounted closing stock being difference in stock on mathematical calculation - Held, yes [Para 4][In favour of assessee]

FACTS

■		The assessee was a wholeseller of medicines. During assessment proceedings, the Assessing Officer made certain addition to assessee's income on account of excess valuation of closing stock.
■		The Commissioner (Appeals) confirmed said addition.
■		On second appeal:

HELD

■		It is found from the records that the assessee has produced complete books of account audited by chartered accountant, auditor's report under section 44AB, details of purchases, sales, list of creditors and debtors as disclosed in the balance-sheet and Assessing Officer thoroghly checked the books of account with copies of bills, vouchers and other documents to his satisfaction but could not find any defect in the same as is evident from the assessment order as well as order of Commissioner (Appeals).
■		The Assessing Officer issued show-cause notice asking for explanation of undisclosed investment in purchases, being excess purchases revealed from the confirmations obtained from parties under section 133(6) at Rs. 18,59,336 but the assessee reconciled the entire figure including closing stock and purchases and sales, which was enquired by the Assessing Officer. The assessee submitted reconciliation statement vis a vis stock statement as per books of account.
■		The assessee made mistake inadvertently by submitting the figure of closing stock as on 1-3-2006 at Rs. 39,61,159 as against actual figure of the closing stock as per the books of account of Rs. 13,19,983 as on 1-3-2006. The assessee explained that this mistake occurred only due to the fact that these figures are relating to inflation of stock for availing credit facilities, i.e., enhancement of credit limit with Bank from Rs. 20 lakhs to 30 lakhs.
■		It may be noted from the assessment order as well as order of Commissioner(Appeals) that none of the authorities below have taken recourse to the provisions of section 145(2) rejecting the books result of the assessee despite complete books of account including the bills, vouchers and other details were submitted and no defects were pointed out by the lower authorities and books results were never rejected. The assessee took the matter before Additional Commissioner under section 144A who directed the Assessing Officer to supply of copies of accounts obtained from respective suppliers under section 133(6). the Assessing Officer supplied copies of confirmation of suppliers and assessee reconciled the figure of alleged of investment in purchase at Rs. 18,59,336.
■		The Assessing Officer by verifying the books of account by obtaining accounts from respective suppliers under section 133(6), verified purchase returns, details of cheque payments, other journal entires, books of account, sales purchases but could not point out any defect except working out a mathematical exercise for making addition of excess stock. The assessee is a wholesaler of medicines and numerous entires are taking place amongst creditors and debtors incorporating different adjustments throughout the year. But assessee at the end of the year reconciled the respective balances incorporating the final differential in the month of March, 2006.
■		The closing stock inadvertently assessed as on 1-3-2006 at Rs. 39,61,159 only for the reason that all the adjustments including credit notes against purchases were shown in the month of March, 2006. Apart from merits and reconciliation of the statements and closing stock figures the vital point here to be decided is when the assessee has reconciled the books of account, whether he can go in for making addition of closing stock. When the Assessing Officer could not point out any defect in the books of account he is not supposed to make addition of unaccounted closing stock being difference in stock on mathematical calculation. [Para 4]
■		In view of the provision of section 145, the Assessing Officer has to examine the accounts of the assessee and has to consider the following questions:

(a)		whether, the assessee has regularly employed any of the methods of accounting or not?
(b)		if regular method of accounting is there, whether, the profit can be properly deduced from the method employed or not?
(c)		whether, the books of account of the assessee are correct or not? And
(d)		whether the accounts maintained are complete or not and there is no significant omission therein.

■		If the Assessing Officer's finding on all the four questions is in affirmative, then, assessee's profit is to be computed on the basis of his accounts. In such facts of the case, neither the first proviso to section 145(1) nor section 145(2) can be invoked. The expression 'in the opinion of the Assessing Officer' in the first proviso to section 145(1) does not confer a mere discretionary power in the context, it is a must statutory duty on the Assessing Officer to examine the method of accounting employed and to whether or not it has been regularly employed and whether the income, profits and gains of the assessee could be properly deduced therefrom. In the instant case the Assessee (sic-Assessing Officer) nowhere applied the first proviso to section 145(1) or 145(2). In the absence of the same, the Assessing Officer has no power to make addition of closing stock as made in the present case. [Para 5]
■		Even on the merits of the case the assessee has explained the discrepancy by filing the reconciliation statement. The assessee made mistake inadvertently by submitting the figure of closing stock as on 1-3-2006 at Rs. 39,61,159 as against actual figure of the closing stock as per the books of account of Rs. 13,19,983 as on 1-3-2006. The assessee explained that this mistake occurred only due to the fact that these figures are relating to inflation of stock for availing credit facilities, i.e., enhancement of credit limit with Bank. In view of the above facts and circumstances of the case, it is held that the assessee has reconciled the figure of closing stock and no addition on account of undisclosed stock can be made. [Para 6]
■		In the result, assessee's appeal is allowed. [Para 7]