Addition of Purchases Made in March Month to Closing Stock on the assumption of under-utilization quashed by ITAT

Addition of purchases made in March month to closing stock on the assumption that items purchased in month of March could not be consumed utilized fully not accepted and quashed by ITAT.

ABCAUS Case Law Citation:
955 2016 (06) ITAT
Assessment Year: 2009-10
Date/Month of Judgment/Order: June, 2016

Brief Facts of the Case:
The assessee was a limited company engaged in the business of manufacturing and export of iron and steel forging. During the course of assessment proceedings, The AO made an adhoc disallowance of materials purchased during the month of March being the last month of the financial year of the relevant assessment year. The AO held that out of the total expenditure of Rs. 94.72 lacs on materials, Rs. 11.28 lacs were incurred in the month of March. He further held that since the assessee had not been able to prove/justify that all the materials purchased in month of March had been utilized,  all the materials purchased in the month of march could not have been utilised by 31st of the month and out of this, material worth Rs. 5 lacs only would have been used and therefore there has to be a closing stock balance of Rs. 6,28,939/-

Aggrieved, the assessee filed an appeal before CIT(A) and submitted that materials are procured at the time of requirement and issued the same for production. The appellant company was following this practice for last several years no such disallowance was made in assessment completed for earlier years. It was not feasible for appellant company to maintain separate store for the concerned materials and therefore, it was procuring the material at the time of need as the major markets for procurement of material were nearby. It was also submitted that the material purchased were standard products easily available in the market. It was also pointed out that disallowance of expenses was claimable as an expense for the next year. CIT(A) deleted the disallowance holding it adhoc and arbitrary addition made on surmises and conjectures.

Aggrieved the revenue went in appeal before ITAT in the present appeal.

Important excerpts from ITAT Judgment:

There cannot be stock of the material when it was purchased on need basis. Further in previous year also there is no opening stock therefore it cannot be said that explanation of the assessee is not proper. In any way the closing stock of this year becomes opening stock of next year and therefore at the most there would be shifting of profit from one year to another year and tax rates being same for both the years the issue would be tax neutral. Furthermore reading purchases of fuel it was not the case of ld AO that the bils of the material are not available or material has not been procured. Stating that purchases have been made in cash cannot be the basis for making disallowance . For cash purchases exceeding specified monetary limit is disallowable u/s 40 A(3) of the act. No such disallowance has been made by the ld AO. In view of this , We do not find any infirmity in the order of the Ld. CIT(A) hence, we confirm the order of Ld. CIT(A) in deleting the disallowance on account of expenses of tools and fuel expenses.