The Punjab and Haryana High Court observed that no Addition can be made to net profit without recomputing trading result under Section 145(1) of the Income Tax Act, 1961.
The A.O estimated the visible wastage at 8% and invisible wastage at 1.25%. Accordingly, the A.O worked out the excess wastage at 22,199 Kgs being quantity of yarn as in stock or sold out. Taking the value of closing stock of yarn shown by the assessee at Rs.154.44 per Kg., the A.O worked out the addition at Rs.34,28,414/- (i.e 154.44 X 22,199 Kgs) and added the same to income of the assessee.
It was submitted by the counsel that no defect was pointed out in the consumption or production register of the assessee or in the method of accounting regularly appointed by the assessee and thus the addition was made without resorting to the proviso to Section 145 of the Income Tax, 1961 and contrary to the assessment orders passed for AY 1975-76 onwards, wherein higher wastage was accepted.
Thus, it was submitted that the A.O went on an erroneous presumption by assuming that the percentage of wastage of 13.04% is excessive just by looking at the data of previous two years without appreciating the fact that the wastage of percentage accepted by the department varied from year to year because it depended not only on the quality of machinery installed but also the quality of raw material used, quality of production and the quality of the labour and other variables.
It was further pointed out before the CIT(A) that in the A.Y.1977-78, the wastage of 16.43% was accepted while in the A.Y.1982-83, where production records for three months have been taken into consideration, wastage of 8.66% was accepted.
A Division Bench of Justices Sanjeev Prakash Sharma and Sudeepti Sharma observed that “The closing stock is valued as per the computation by the assessee regarding the profits and losses and if the books of account of the assessee including rate at which closing stock had been valued are accepted by the Assessing Officer, the addition to the net profit could not be made without re-computing the trading result of the assessee and if as per Section 145(1) of the Act, the trading account of the assessee are accepted to be correct and complete, the Assessing Officer without re-computing cannot make additions to the net profit. Thus, the addition of Rs.34,28,414/- on account of excessive shortage is held to be not sustainable in the eyes of law.”
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