2005 (6) TMI 499 - AT - Income Tax

Summary

Issues Involved:
1. Ad hoc addition of Rs. 1,75,000 to the closing stock of medicines and consumables.
2. Rejection of books of account by the Assessing Officer.
3. Consistency in the accounting method.
4. Non-maintenance of stock register.
5. Compliance with Section 145 of the Income-tax Act.
6. Requirement of notice under Section 142(1) before passing an order under Section 144.
7. Valuation of closing stock and its impact on opening stock of the next year.

Issue-wise Detailed Analysis:

1. Ad hoc Addition of Rs. 1,75,000 to the Closing Stock:
The Assessing Officer (AO) made an ad hoc addition of Rs. 1,75,000 to the closing stock of medicines and consumables, rejecting the books of account maintained by the assessee. The AO observed that the true profits could not be determined in the absence of stock records. The CIT (Appeals) confirmed this addition, stating that the stock was not verifiable and true profit could not be worked out. The CIT (Appeals) noted that the appellant's method of raising bills at the end of the month from the sister concern complicated the matter and did not reflect the real inventory picture.

2. Rejection of Books of Account by the Assessing Officer:
The AO rejected the books of account under Section 145(3) of the Income-tax Act, citing the absence of stock records. The CIT (Appeals) upheld this decision, emphasizing that the stock available at any given time could not be verified without bills and that the method of accounting did not provide a true picture of the inventory.

3. Consistency in the Accounting Method:
The assessee argued that it had been following the same accounting policies since 1987, treating all purchases of medicines and consumables as expenses and not determining or accounting for the stock at year-end. The assessee contended that this consistent practice should not be disturbed. However, the AO and CIT (Appeals) did not accept this argument, stating that the method did not allow for the determination of true profits.

4. Non-maintenance of Stock Register:
The assessee admitted to not maintaining any stock records for medicines, surgical items, and other consumables, citing the numerous items involved. The CIT (Appeals) and AO found this unacceptable, as it prevented verification of the stock. The Tribunal also noted that the absence of a stock register meant the true profits could not be determined.

5. Compliance with Section 145 of the Income-tax Act:
The assessee claimed compliance with Section 145, arguing that the accounts were maintained on an accrual basis except for the consumption of medicines and consumables, which were accounted for on a purchase basis. The AO and CIT (Appeals) found this mix of accounting methods unacceptable, particularly after the amendment in Section 145(1) post-1-4-1997, which required a consistent method for all items.

6. Requirement of Notice under Section 142(1) before Passing an Order under Section 144:
The assessee argued that the AO could not pass an order under Section 144 without issuing a notice under Section 142(1). The Tribunal found that the assessment was framed under Section 143(3)/144, with notices under Section 143(2) issued, and the details called for were furnished by the assessee. Therefore, the Tribunal did not find any illegality in the assessment process.

7. Valuation of Closing Stock and its Impact on Opening Stock of the Next Year:
The assessee contended that any change in the closing stock would require a corresponding change in the opening stock of the next year, rendering the addition ineffective. The Tribunal rejected this argument, citing the decision in Melmould Corpn. v. CIT, which stated that the value of the closing stock of the preceding year must be the value of the opening stock in the next year. The Tribunal found that the AO was justified in estimating the closing stock value at Rs. 1,75,000, but modified it to Rs. 1,25,000, considering it more reasonable.

Conclusion:
The Tribunal concluded that the tax authorities rightly rejected the book results and estimated the closing stock. However, it found the valuation of the unused closing stock at Rs. 1,75,000 to be on the higher side and modified it to Rs. 1,25,000. The appeal filed by the assessee was partly allowed.