By TIOL News Service

AHMEDABAD, MAY 22, 2018: THE ISSUE is - Whether stock discrepancy in books of account can be resulted into subsequent addition based on Gross Profit. And the answer is YES.

Facts of the case:

The assessee company, engaged in manufacturing chemicals, had returned loss for the relevant AY. This return was accepted without scrutiny. Subsequently, the AO noted that there was discrepancy in the stock between the assessee's books of accounts and stock statement given to the bank. The assessee tried to explain that the said discrepancy was on account of the stock in transit. However, issued the reopening notice. During the reassessment proceeding, the AO rejected the assessee's books of accounts. Further, it was also recorded that the assessee had declared excessive loss as compared to the normal range of evaporation reported in the trade. The AO adjusted the assessee's Gross Profit rate by making an addition of Rs.38.93 lakhs but, no separate addition was made on account of excessive loss reported by the assessee. While concluding the proceeding, a sum of Rs. 35.67 was added as assessee's undisclosed income. When the matter reached before the Tribunal, the assessee submitted that the AO failed to make addition on the reasons cited for issuing the reopening notice. However, this submission was not accepted by the Tribunal. The Tribunal held that the AO had not made any separate addition on the reasons recorded in light of the general addition of Rs.31.98 lakhs made under the revised Gross Profit ratio.

High Court held that,

++ the prime contention of the assessee before us was based on the ratio of the judgment of this Court in Mohmed Juned Dadani's case. This Court, in the said judgment, has held that in the reassessment proceedings, if the AO makes no addition on the reasons recorded by him for reopening the assessment, he, thereafter, cannot make additions on other grounds. In the present case, the reason for reopening the assessment was described in the stock reported by the assessee in its books of account, as compared to the stock reported to the bank. The assessee's contention before the AO was that this discrepancy was on account of transit of stock. Contrary to what was canvassed before us, we do not find that the AO has accepted such explanation of the assessee. He merely recorded it and thereafter, examined the materials on record;

++ two things emerge from such exercise; firstly, he did not accept the assessee's declared evaporational loss of raw materials and secondly, he noticed that the assessee was unable to produce the books of accounts on the ground that the Sales Tax Department had impounded them. He, therefore, proceeded to frame the best judgment assessment. He was of the opinion that the Gross Profit shown by the assessee was low. He made adjustments by citing reasons, which resulted into the additions being made. No where can we see that the AO has accepted the assessee's contention that the stock discrepancies stood explained. The AO noted that in view of the Gross Profit addition, the evaporational loss has not been separately added. The Gross Profit addition, being global in nature, would also include the stock discrepancy. No where do we find that the AO dropped his prime objection to the stock discrepancy cited as a reason for reopening the assessment.

(See 2018-TIOL-953-HC-AHM-IT)