Section 145 — Method of accounting — Rejection of accounts — Addition cannot be made simply on the basis of closing stock without considering the opening stock.
Facts:
The assessee was engaged in the business of manufacture of papers. He had shown purchases of packing material and colour and chemicals as on 31- 3-2005. Also, he had shown closing stock of colour and chemicals as on 31-3-2005, but no amount of packing material was shown in the closing stock. On being asked by the AO as to why the purchases of packing material purchased on the last day of the accounting period were not shown in the closing stock, it was submitted:
(1) that the packing material shown as purchased on last day was actually purchased in earlier months, which due to some computer error were posted on 31-3-2005; (2) that such packing material was consumed during the process; and
(3) that entire packing material remains after the end of year becomes obsolete and, therefore, it was not shown in the closing stock.
The Assessing Officer having noticed that there could be a possibility that some purchases made in the previous year could have been booked during the year, held that the book results were not acceptable. He, therefore, rejected the books of account of the assessee and made a certain addition to his income.
The assessee on the appeal before the CIT(A) had submitted that the packing material is used by him within a period of 7 to 15 days and the same is recognised as expenditure. Further, it was submitted that such practice is followed consistently.
Before the CIT(A), the assessee relied upon the decision of the ITAT, Chandigarh Bench in the case of ACIT v. Ram Sahai Wool Combers (P.) Ltd., (2002) 120 Taxman 84 (Mag.) in which it was held that the addition on account of closing stock cannot be made in case the assessee is consistently showing the purchases as expense.
Relying on the decision of the ITAT in the above case, the learned CIT(A) held that in respect of packing material, there was consistent practice of showing the entire purchase of packing material as consumed. Once this consistent practice was accepted, merely not including the stock of packing material in the closing stock could not be a reason for invoking section 145(3) or making the addition.
On second appeal by the Revenue —
Held:
In case the Assessing Officer felt that such purchases were entered on the last day of the accounting period, then he could have made an investigation to enquire about the genuineness of the purchases. However, he had not taken any step to verify as to whether such purchases were genuine or not. It was not the case of the Revenue that the purchases were not genuine. Moreover, in case the AO wanted to change the method of valuation of closing stock, then he was also required to consider opening stock on the same basis as he had taken for the closing stock. The assessee was following a consistent method of valuing the closing stock by including the packing material as consumed at the time of purchase.
Hence, the Assessing Officer had rejected the books of account on an improper ground. Further, the addition cannot be made simply on the basis of closing stock without considering the opening stock.
