Addition based on negative stock, calculated by AO by preparing monthly trading account not sustainable

Brief of the Case

ITAT Chandigarh held In the case of DCIT vs. M/s Smart Value Product & Services Ltd. that no defects in the purchases and sales have been pointed out by the AO. The assessee produced complete books of account, sales and purchase vouchers. However, the Assessing Officer, on imaginary basis, prepared month-wise trading account for making addition against the assessee. In this way also Assessing Officer found a negative stock in the books of account of assessee which is not permissible in law. Thus, the Assessing Officer in his own way has prepared the trading account for enhancing the GP despite the fact that it is well settled that book results are drawn on annual basis. The Assessing Officer did not found any unrecorded purchases. No sales were found outside the books of account. Therefore, the extra profit arrived at by the assessee on month-wise could not be sustained. It is also well settled that profit rate cannot be uniform in each month.

Facts of the Case

A return declaring income of Rs. 65,59,669/- was filed on 30.09.2009 which was subsequently revised at the same income. The assessee company follows a direct marketing business model and derives income from retail trading of various consumer goods. The assessee has declared gross turnover to the tune of Rs.91,90,10,669/-against which net profit has been declared to the tune of Rs. 1,06,69,510/- which gives effective NP rate of 1.16%. On examination the AO noticed that G.P. rate was not mentioned in the audit report. The same was calculated by the AO from the figures available in the P & L Account, Balance Sheet and details of the month wise purchases and sales as supplied by the assessee.

The assessee was asked to substantiate the figure of closing stock in the balance sheet as on 31.3.09 amounting to Rs. 1.83 crores on the basis of calculations done on month wise and quarter wise trading accounts by applying the computed GP rate of 51.16%. The AO observed that the company made almost consistent sales but the purchases were not commensurate with the sales. Further, the company tried to make its stock positive by making more purchases from January,2009 to March,2009.

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