In Squar Concern vs. Income Tax Officer, the Tribunal held that the AO should not make addition of unaccounted stock when he failed to detect defect in book of accounts.

Facts of the case:

The assessee was a wholesaler of medicines. The assessee filed his return of income stating the total turnover during the year at Rs.3,19,10,213 and closing stock at Rs.30,60,896. The gross profit was disclosed at Rs.19,47,472 i.e., @ 6.10 %. While examining the books, the AO arrived at the closing stock as on 31st March, 2006 at Rs.63,05,709. Accordingly, the difference in closing stock being Rs.32,44,813 was added as undisclosed investment in stock.

On appeal to the Commissioner (Appeals), the additions were confirmed. Aggrieved by the order, assessee appealed to the Tribunal.

It was held that:

The Tribunal noted that the assessee had produced complete books of account audited by chartered accountant, auditor’s report under s. 44AB of the Act. The AO thoroughly checked the books of account with copies of bills, vouchers and other documents. However, he could not find any defect in the same.

In reply to the show cause notice issued by the AO, the assessee submitted reconciliation statement in relation to the stock statement as per books of accounts. The assessee admitted that mistake occurred while submitting the figure of closing stock as on 1-3-2006 at Rs.39,61,159 as against actual figure of Rs.13,19,983. 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.

The assessee cleared that 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.

The Tribunal was of view that when the AO 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. Thus, when the assessee has reconciled the books of account, the AO shall not make additions to closing stock.

The Tribunal highlighted the provisions of section 145, where the AO has to examine the accounts of the assessee and has to consider the following questions:

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

If answers to all the four questions are in affirmative, then, assessee’s profit shall be computed based on his accounts.

In view of the above findings of the case, it was held that the assessee has reconciled the figure of closing stock and thus, no addition of undisclosed stock shall be made.

The Tribunal held that the addition of unaccounted stock shall not be made if defect in books of accounts not detected.Hence, the appeal of the assessee was allowed.

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