Once ITO Accepts Rate At Which Closing Stock Was Valued, No Addition To Net Profit Can Be Made Without Recomputing Trading Result U/s 145(1): Punjab & Haryana HC

Finding that the stock production and consumption records were maintained under the supervision of the Excise Authorities and there is no objection raised with regard to the said stock by the ITO, the Punjab & Haryana High Court held that the Assessing Officer could not have proceeded on a presumption alleging higher wastage shown by the assessee.

The High Court found that in the present case, the Assessing Officer has accepted the closing stock and further accepted the trading account to be correct and complete and without computing afresh, as per the proviso to Section 145(1) of the Income tax Act, the Assessing Officer has made addition to the account of wastage.

A Division Bench of Justice Sanjeev Prakash Sharma and Justice Sudeepti Sharma observed that “The closing stock is valued as per the computation by the assessee regarding the profits and losses and if the books of account of the assessee including rate at which closing stock had been valued are accepted by the Assessing Officer, the addition to the net profit could not be made without recomputing the trading result of the assessee and if as per Section 145(1) of the Act, the trading account of the assessee are accepted to be correct and complete, the Assessing Officer without re-computing cannot make additions to the net profit”. (Para 16)

As per the brief facts of the case, the assessee had shown wastage of 76,336 Kgs on consumption of 5,85,295 Kgs which worked out to 13.04% as against wastage shown @ 8.66% of last year on spinning of worsted yarn. When the assessee was confronted with such abnormal increase in wastage, the assessee explained the variation due to product mix manufactured by the assessee during this year as compared to last assessment year. The assessee also pointed out that besides, bulk production in single shade and larger lot was made, that due to shortage and dearth of Govt. business the company had to switch its production plans to manufacture material for the civil market. This necessitated spinning of worsted yarn in small lots of different shades and involved recombing process also. As a result of this overall wastage increased as compared to the last year. However, the AO found the explanation given by the assessee untenable and estimated the visible wastage at 8% and invisible wastage at 1.25%. Accordingly, the AO worked out the addition at Rs.34,28,414/- and added the same to income of assessee.

The Bench found that the assessee's books of accounts, trading account and the stock has been found to be within the satisfaction of the Income Tax authorities and the Assessing Officer had accepted the same.

The wastage of 13.04% shown by the assessee has been held to be more higher than the wastage shown for the previous year i.e. 8.66%, added the Bench.

However, from the perusal of the record, as maintained by the assessee, shown in the tabular form for the various assessment years from 1975-76 upto 1983-84, the Bench found that the wastage percentage was varying from 13.64% and increased upto 16.43% and decreased to 8.66% only for a period of three months in the year 1982-83, while in the year 1983-84 remained consistent to 13.04%.

Thus, the Bench observed that it cannot be said that the wastage has been shown on the higher side for the year 1983-84, and the Income Tax Authorities had accepted the earlier wastage percentage without any demur.

The Bench pointed that the income-tax department throughout accepted the trading account of the assessee and there is no dispute regarding the quantity of cotton shown to be consumed as per the books of account maintained by the assessee and no material to show and to establish that the increase in percentage of wastage was attributable to any suppression of weight or any suppression of production.

The Assessing Officer without mentioning any irregularity in the accounts and accepting it could not make addition without giving any reasoning and fresh computation, added the Bench.

Hence, the High Court held the addition of Rs.34,28,414/- on account of excessive shortage to be not sustainable in the eyes of law.

Counsel for Petitioner/ Assessee: Radhika Suri

Counsel for Respondent/ Revenue: Pridhi Jaswinder Sandhu

Case Title: M/s Shree Digvijaya Woollen Mills Ltd Verses Commissioner of Income-Tax

Case Number: ITR-3-2010 (O&M)

2024 LiveLaw (PH) 133

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