Closing Stock Addition Deleted for Wrongly Deducting Sales Value: ITAT Delhi

Blackrock Securities Private Limited Vs DCIT (ITAT Delhi)

Sales Value Cannot Be Subtracted From Stock At Cost—Delhi ITAT Deletes “Suppressed Closing Stock” Addition

Summary: The Delhi Bench of the Income-tax Appellate Tribunal has deleted an addition made for alleged suppression of closing stock after finding that the Assessing Officer had committed a fundamental accounting error by subtracting the sales value of shares from the opening stock and purchases recorded at cost. The Tribunal held that the Assessing Officer failed to account for the profit or loss embedded in the sales figure. It also deleted a disallowance under section 14A because the assessee had not earned any exempt income during the year.

Facts of the case

The assessee was engaged in trading in shares and securities. For AY 2018-19, it filed its return on 7 October 2018 declaring nil income after reporting a current-year loss of ₹20,66,694.

The case was selected for compulsory scrutiny. During the assessment proceedings, the Assessing Officer examined the purchase and sales ledgers and noticed the following figures:

• Opening stock of shares: ₹92,23,701;
• Purchases during the year: ₹12,91,194;
• Sales during the year: ₹53,12,935; and
• Closing stock declared by the assessee: ₹36,02,141.

The Assessing Officer added the opening stock and purchases, arriving at total available stock of ₹1,05,14,895. From this amount, he deducted the sales figure of ₹53,12,935 and concluded that the closing stock should have been ₹52,01,960.

Since the assessee had disclosed closing stock of only ₹36,02,141, the Assessing Officer treated the difference as suppressed closing stock and made an addition.

Assessee’s explanation

The assessee explained that the Assessing Officer had compared figures that were not recorded on the same basis.

Opening stock, purchases and closing stock were recorded at cost, whereas sales represented the actual sale consideration or market price received. Therefore, the sales figure included the profit or loss arising upon disposal of the shares.

The Assessing Officer’s formula would have been correct only if the figure deducted from the available stock was the cost of goods sold, and not the actual sales proceeds.

The assessee also furnished a scrip-wise and quantity-wise stock reconciliation. It explained that the closing stock consisted only of 60,000 shares of Shree Ganesh Jewellers valued at ₹60.04 per share, aggregating to approximately ₹36.02 lakh. These shares formed part of the opening stock and remained unsold at the end of the year.

All other shares forming part of the opening stock, as well as shares of Ess Dee Aluminium Ltd. purchased during the year, had been sold. The resulting profit or loss was already recorded in the books.

Addition sustained by NFAC

The Assessing Officer did not accept the explanation. He continued to apply the arithmetic formula of opening stock plus purchases minus sales and treated the resulting figure as closing stock.

The Commissioner (Appeals)/NFAC also sustained the addition without identifying any specific defect in the assessee’s scrip-wise stock reconciliation.

The assessee therefore approached the Tribunal.

Tribunal’s decision on closing stock

The Tribunal found that the Assessing Officer had proceeded on the basis of a mere arithmetic movement of stock rather than examining the actual scrip-wise movement of shares.

The stock summary demonstrated that the assessee had correctly recorded the quantity and value of the opening stock. All opening-stock shares except those of Shree Ganesh Jewellers had been sold during the year. The shares of Shree Ganesh Jewellers alone remained and were therefore properly carried forward as closing stock.

The assessee had earned profits on certain share transactions and suffered losses on others. Those results were already reflected in the books. The shares of Ess Dee Aluminium purchased and sold during the year had also generated a profit which was recorded.

By deducting sales proceeds from stock valued at cost, the Assessing Officer effectively ignored the profit or loss element and added it once again as part of closing stock.

The Tribunal held that the stock movement recorded by the assessee was proper and deleted the addition in full.

Section 14A disallowance

The Assessing Officer also noticed that the assessee held shares capable of yielding exempt income. Since no suo motu disallowance had been made, he invoked section 14A read with Rule 8D and disallowed ₹77,966, calculated at 1% of the average value of investments.

The assessee contended that it had not earned any exempt income during the year.

The Tribunal accepted that no exempt income had been earned and held that section 14A was therefore inapplicable. The disallowance of ₹77,966 was also deleted.

The assessee’s appeal was allowed in full.

Author’s comments

The decision illustrates a basic but important accounting principle: stock recorded at cost cannot be reconciled by deducting sales recorded at selling price.

The proper formula is:

Opening stock at cost + purchases at cost – cost of goods sold = closing stock at cost.

Actual sales cannot replace the cost of goods sold because sales include the gross profit or loss. If sales value is deducted directly, the balancing figure will wrongly absorb the trading result into the closing stock.

For example, goods costing ₹100 sold for ₹120 leave no closing stock, though the Assessing Officer’s approach would produce a negative or distorted stock figure because it mixes cost with selling price. Similarly, where goods are sold at a loss, the same formula artificially inflates the supposed closing stock.

In share-trading cases, the safer method is a scrip-wise, quantity-wise and value-wise reconciliation showing opening quantity, purchases, sales and closing quantity. Once that reconciliation matches the demat statement, purchase records and sales ledger, a broad arithmetic formula cannot replace the actual stock movement.

The decision is also important because the Assessing Officer had not identified any particular unrecorded share or discrepancy in quantity. The addition arose entirely from an incorrect accounting formula. An addition for suppressed closing stock requires evidence that stock existed but was omitted or undervalued; it cannot rest on a comparison of incompatible figures.

There is a minor numerical inconsistency in the order. The difference between ₹52,01,960 and ₹36,02,141 is ₹15,99,819, whereas the grounds and certain portions refer to ₹15,99,891. This appears to be a transposition error and does not affect the Tribunal’s conclusion.

On section 14A, the ruling reiterates that the mere holding of shares capable of yielding dividends is insufficient where no exempt income was actually earned during the relevant year. The existence of investments or stock-in-trade alone cannot justify a mechanical Rule 8D disallowance.

The central message is straightforward: an accounting addition cannot be sustained by mixing cost figures with sales value, and section 14A cannot be invoked merely because shares were held when no exempt income arose.

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, DELHI BENCH ‘SMC’

1. This appeal is filed by the assessee against the order passed by the ld. Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre, Delhi [for short ‘ld. CIT (A)] dated 02.03.2026 for the Assessment Year 2018-19 raising following grounds of appeal :-

“1. The Ld. Commissioner of Income Tax (Appeals) has erred in law and in fact in confirming an addition of Rs.15,99,891/- on account of alleged suppression of closing stock with total disregard to the facts and circumstances of the case.

2. The Ld. Commissioner of Income Tax (Appeals) further failed to appreciate that the said working of alleged suppression of closing stock was against and contrary to the accounting principles.

3. The Ld Commissioner of Income Tax (Appeals) has further failed to point out of any defect in the working of the assessee and failed to controvert the same.

4. The Ld Commissioner of Income Tax (Appeals) has erred in confirming the addition when the Assessing Officer has wrongly taken the value of sales as opposed to cost of goods sold while working out the value of closing stock.

5. The Ld Commissioner of Income Tax (Appeals) has further erred in confirming the addition of Rs.77,966/- made by the Assessing Officer u/s 14A of Income Tax Act, when no exempt income was earned by the Assessee.

6. The Ld Commissioner of Income Tax (Appeals) has further erred in confirming the action of the Assessing Officer in making the disallowance u/s 14A, when no satisfaction before involving and making the addition was recorded by the Assessing Officer.”

2. Brief facts of the case are, the return of income for assessment year 2018-19 was filed by the assessee on 07.10.2018 declaring nil income. The assessee declared current year’s loss at Rs.(-)20,66,694. The return was processed under Section 143(1) of the Income-tax Act, 1961 (for short ‘the Act’). The case was selected for compulsory scrutiny. Accordingly, notices under Section 143(2) and 142(1) were issued and served on the assessee along with questionnaire. In response, assessee e-filed various details and documents as called for.

3. The assessee is engaged in the business of trading in shares and securities. During assessment proceedings, the AO observed from the purchase ledger and sales ledger that the closing stock of shares held by the assessee as on 31.03.2018 was Rs.36,02,141/-. The assessee has shown opening stock of shares at Rs.92,23,701/- and during the year assessee has purchased shares of Rs.12,91,194/-. He observed that assessee has suppressed the closing stock. Accordingly, in order to verify the same, a show-cause notice was issued to the assessee. In response, assessee submitted as under

“In the matter of Ms Blackrock Securities Pvt Ltd New Delhi ITBA/AST/F/143(3)(SCN) 2020-21/1031836691(1) Assessment Year 2018-2019

We are in receipt of your Honours Draft order dated 27.03.2021. In respect to the contentions raised by Your Honour, we furnish our objections as under-

REGARDING ALLEGED VALUATION OF CLOSING STOCK BY RS.1592819

It may be submitted that your Honour has stated that the value of closing stock should be Rs.52,01,960 while it is alleged that the same has wrongly been stated at Rs.36,02,141 and the further alleged that the assessee has understated the stock by Rs.15,99.819 (Rs.5201960 Less Rs.3602141)

To arrive at this proposition, Your Honour has worked out as under-

Your Honour has thus treated all the items at cost only, which is not the case. Your Honours allegation would be correct if instead of the figure of “Sales”, your Honour had considered “Cost of Good sold”. The Opening Stock, Purchases and closing stock are at cost, while the figure of sales is the actual sales consideration which leads to the determination of element of profit/loss as the case may be. The same are not on the same platform, i.e. the same are not mentioned at cost, and hence the same are not comparable.

The assessee’s working is correct which is as under-

Your Honours proposition was correct only when in place of “Sales Your Honour would have used the figure of “Cost of Goods Sold which is (Sales reduced by Gross margin earned) or (Sales increased by Gross Loss). (Annexure-1)

The details of Opening Stock, closing stock at cost and sales of shares with gross profit /loss are being furnished vide a separate annexure attached. It may further be explained that the closing stock represents the 60000 shares of Shree Ganesh Jewellers (@ Rs 60.04 per share), which formed part of the opening stock of the assessee as on 01.04.2017. All other shares which were held as opening stock and also which were purchased during the year, have already been sold. This can be verified from the annexure being furnished before your Honour. Thus the closing stock consists of 60000 shares of Shree Ganesh Jewellers (@ Rs.60.04 per share), which formed part of the opening stock of the assessee as on 01.0.2017 and a fact which cannot be disputed In view of the same, no adverse inference nay kindly be drawn. We shall be pleased to furnish any other clarification if desired.”

4. After considering the submissions of the assessee, the AO observed that the assessee has purchased shares for the value of Rs.12,91,194/- during the year and considering the opening closing stock, assessee had total stock of shares of Rs.1,05,14,895. The sales ledger reveals that assessee had sold shares for total value of Rs.53,12,935/- during the year. Therefore, the closing stock should be Rs.52,01,960/-. Since the assessee has declared closing stock of shares of Rs.36,02,141/-, he came to the conclusion that assessee has suppressed the closing stock to the extent of Rs.15,99,891/-.

5. Further, AO observed that assessee was holding investment in shares, which give rise to the exempt income to the assessee. He observed that assessee had opening stock of shares of Rs.92,23,701/- and declared closing stock of shares of Rs.36,02,141/-, whereas the correct stock should have been Rs.52,01,960/-. After analyzing the month-wise purchase and sales and month-wise closing stock, he observed that assessee has not disallowed the expenditure under Section 14A of the Act. Accordingly, a notice was issued to the assessee. In response, assessee has submitted that assessee has not earned any exempt income, therefore, provision of Section 14A is not applicable in its case. After considering the above submissions, AO proceeded to invoke the provisions of Section 14A read with Rule 8D. Accordingly, he proceeded to make 1% of the average investment as disallowance under Section 14A to the extent of Rs.77,966/-.

6. Aggrieved with the above order, assessee preferred an appeal before the NFAC, Delhi and filed detailed submissions. After considering the detailed submissions, ld. CIT (A) sustained the additions made by the AO.

7. Aggrieved with the above order, assessee filed an appeal before us.

8. At the time of hearing, ld. AR of the assessee submitted that the AO misunderstood the stock statement submitted by the assessee. He submitted that the stock movement has to be based on opening stock plus purchases during the year and AO has reduced the sales value to determine the closing stock. In this regard, he brought to our notice page 4 of the assessment order, wherein assessee has submitted the stock summary. He submitted that the stock movement should be considered line-wise, therefore, assessee had purchased Ess Dee Aluminium Ltd. shares during the year and sold the same and booked the profit. With regard to other stocks held by the assessee as opening stock, the assessee has sold the same during the year and booked the profit and sales during the year. Whatever the difference between the value of sales and the opening stock itself, difference is already recorded in the books as profit or loss. With regard to closing stock, he submitted that the value of opening stock in the case of Shree Ganesh Jewellers shares was retained as closing stock. Therefore, the AO has not understood the stock movement and the profit element which was declared by the assessee was once again added to the closing stock. Therefore, he prayed that the addition made by the AO may be deleted.

9. With regard to Section 14A disallowances, ld. AR submitted that assessee has not earned any exempt income, hence the provisions of Section 14A cannot be applied.

10. On the other hand, ld. DR of the revenue relied on the findings of the lower authorities.

11. Considering the rival submissions and material placed on record. I observed that AO has proceeded to make the addition on the basis of arithmetic movement of closing stock rather than movement of stock on the basis of script-wise. We observed that the stock summary submitted by the assessee, which are reproduced by the AO at page 4 of the assessment order and the same is reproduced below:-

12. From the above, the assessee has properly recorded the opening stock on the basis of quantity and value. The assessee had sold all the shares held in opening stock except shares of Shree Ganesh Jewellers. What is left as closing stock is the only share of Shree Ganesh Jewellers retained as closing stock. That alone can be retained as closing stock. It is fact on record that assessee has sold some of the shares in losses and some of the scripts in profits. The same are declared in his books. Even assessee has purchased shares of Ess Dee Aluminium Ltd. and sold the same and earned the profit, which was already declared in the books. Therefore, the stock movement declared by the assessee in its books of account is proper and just. Therefore, the addition made by the AO with wrong interpretation of stock movement is accordingly deleted.

13. With regard to Section 14A disallowances, it is fact on record that assessee has not earned any exempt income during the year. Therefore, the provisions of Section 14A are not applicable. Accordingly, the same deleted. In the result, the appeal filed by the assessee is allowed.

14. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on this 18th day of September, 2026.