Stock items of different value cannot be taken as basis for computing stock position

When value of items traded differs it cannot be taken as basis for computing the stock position specially when quantitative details available – ITAT 

In a recent judgment, ITAT Delhi deleted GP rate addition holding that the value of each item traded may differ and cannot be taken as basis for computing the stock position more particularly when the quantitative details are available

ABCAUS Case Law Citation:
4949 (2025) (12) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) National Faceless Appeal Centre in upholding GP rate addition to the income of the assessee. 

The case of the appellant assessee was selected for scrutiny under CASS. According to the Assessing Officer (AO) the assessee was not maintaining proper stock records and there was negative stock in two months as per calculation made by the AO on the basis of value of stock.

The assessee denied such allegation and claimed that she was maintaining day to day stock register which was also produced before the AO for verification.

However, the AO ignored the stock register and rejected the books of accounts invoking provisions of section 145(3) of the Act and estimated gross profit rate (GP rate) to determine the taxable income.

Before the Tribunal the assessee contended that the AO was swayed by the remarks by the Tax Auditor that stock register was not produced for examination thus he had not verified the stock details, if any, maintained by the assessee.

It was further submitted that AO tabulated the month-wise purchases and sales and after reducing the amount of G.P. declared, he worked out the month-wise cost of goods sold and computed closing stock on monthly basis.

It was the submission of the assessee that applying the above methodology the AO observed that as per this working there was negative stock in the month two months and therefore, the AO was of the opinion that books of accounts of the assessee were not reliable and he rejected the books of accounts.

The Tribunal observed that assessee was maintaining day to day stock register containing inward and outward of goods on daily basis and the AO had failed to point out any specific defect in any of the entries contained therein.

As evident from the assessment order, the AO had worked out the deficiency of stock in two months. However, AO had calculated the stock position in terms of value and has failed to point out any error in the quantitative tally submitted by the assessee.

The Tribunal opined that the value of each item traded may differ and cannot be taken as basis for computing the stock position more particularly when the quantitative details are available.

The Tribunal further noted that assessee had traded in different type of products which were nearly hundred products and it is settled proposition that the G.P. rate cannot remain static for different item.

The Tribunal observed that there was no deficiency in quantitative terms therefore, the observations of the AO that the books of accounts of the assessee did not depict true & fair view of the transaction carried out by the assessee could not be agreed to.

The Tribunal pointed out that when the assessee had successfully demonstrated that it had no negative stock on daily basis in terms of the quantity, allegation of the AO of deficiency in stock cannot be accepted. Besides this, the AO had not identified any specific instance defect in the books of accounts maintained by the assessee nor in the stock records. Therefore, there was no reason to disbelieve the books of accounts maintained by the assessee in regular course which are duly audited by the statutory Auditors.

With respect to the application of G.P. rate , the Tribunal observed that AO had applied G.P. rate of immediately preceding year where the turnover of the assessee was of much less than the turnover in the year under appeal. It is the settled principle of business that higher turnover could be achieved by lowering the profit margins. In the instant case, turnover of the assessee increased multi-fold which fact cannot be ignored by estimating the income.

Accordingly, the Tribunal held that that provisions of section 145(3) could not have been invoked in the present case, G.P. rate declared by the assessee cannot be disturbed. 

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