1. The assessee has filed this appeal against the order of the Commissioner of Income-tax (appeals) passed in appeal No. 259/2003-04 dated 23-9-2004, against the ad hoc addition of Rs. 1,75,000 made by the assessing officer on account of closing stock of medicines and consumables by rejecting the books of account maintained by the assessee.
2. The material and relevant facts for the disposal of the issues involved in the grounds of appeal are that during the course of assessment proceedings the assessing officer noticed that the assessee was not showing any opening and closing stock. The assessee explained to the assessing officer that it was following accounting policy of 'cash basis' in relation with consumption of medicines and consumables.
It was further explained that since the stock records for surgical and drugs etc. were numerous in number, such records had never been maintained and as such the purchases of such items were accounted as expenditure. The assessing officer did not agree and observed that the true profits of the appellant could not be worked out in the absence of stock records. He rejected the books of account and taking recourse to provisions of Section 145(3) of the Income Tax Act, he estimated the value of stock lying with the appellant under the head 'Medicines and consumables' and printing and stationery at Rs. 1,75,000 and Rs. 25,000 respectively.
3. The assessee filed an appeal against the order of the assessing officer and contended before the CIT (Appeals) that all the purchases of medicines and consumables were treated as expense and stock at year end was neither determined nor accounted for. It was also explained that the appellant-firm was following the practice of showing purchases of such items on accrual basis. In this respect copy of ledger account was also filed which showed that the billing of such items were done on last date of each month. It was repeated before me that the practice was being followed by the appellant for last many years and could not be disturbed by the assessing officer. In support of this stand, the appellant's representative cited several decisions.
4. After considering the submissions of the assessee the Commissioner of Income Tax (Appeals) observed that the assessee made the purchases towards the end of the month and consumption thereof was not verifiable in the absence of stock register, though it was true that the purchases were entered in the ledger account on the last day of each month. The Commissioner of Income Tax (Appeals) further observed that the stock available with the assessee at any given point of time could not be verified in the absence of the bills. The raising of composite bills only at the end of the month for all the purchases made during the month further complicated the matter it would not give the real picture of the inventory. Thereafter the Commissioner of Income Tax (Appeals) confirmed the addition of Rs. 1,75,000 made by the assessing officer in respect of medicines and consumables while concluding as under: The main ground for addition made by the assessing officer is that the stock is not verifiable and true profit from the business cannot be worked out. This conclusion is supported from the fact of the method of raising bills only at the month end from the sister concern. The assessing officer is also correct in concluding that it is not at all possible to consume all items purchased in the same month and, therefore, there has to be some stock available at the end of the year. This is the reason that he has estimated the stock lying with the appellant at Rs. 1,75,000 in respect of medicines and consumables. The arguments of the appellant's representative that purchases were accounted on accrual basis is also very strange. The question raised by the assessing officer cannot be explained by the method of accounting purchases on accrual basis. If it is established that at the end of the year there was some stock and that has not been declared, the addition made on this count is justified.
In view of the above mentioned factual position, the addition made by the assessing officer of Rs. 1,75,000 in respect of medicines and consumables is confirmed." 5. Before me, the learned Authorised Representative for the assessee, in the written submissions as well as in oral arguments submitted that since 1987 the assessee-firm has been filing its return of incomes with almost similar compositions of income, assets and liabilities consisting following the same accounting policies. Owing to accounting expediency for numerous items of medicines and consumables consumed for numerous patients in/at nursing home, all such purchases are treated as expense, therefore, stock at the end is neither determined in any manner nor accounted as such. The assessee has furnished each and every information and document asked/directed by the assessing officer on receipt of notices under Section 143(2) of the Income Tax Act. The assessee has not maintained any stock records for medicines, surgical and drugs and other consumables as they were numerous in number.
6. Thereafter, assailing, the orders of the tax authorities below the learned Authorised Representative submitted before me that the purchases and all expenses have always been accounted on accrual basis except consumption of medicines and consumables which are accounted on purchase basis.
The learned Authorised Representative further contended that non-maintenance of stock register by the assessee was duly mentioned in the financial statement as well as audited by the auditors in their audit report, so the question of its production was not possible. He further contended that the allegation of the purchases towards end of the month is factually wrong despite the true facts and features thereof were duly explained during the assessment proceedings as well as during first appellate proceedings, but both the authorities for the reasons best known to them have ignored the same. Fact is/remains that - purchases in accordance with the needs of the Nursing Home are made regularly on day-to-day basis from the suppliers who raise one bill on monthly basis, for commercial and accounting expediency.
7. Further, since same accounting policy on consistent basis from year to year has been followed, the profit/loss of the assessee-firm is not affected, since neither the closing-stock nor opening-stock thereof is being accounted. Elaborately, since closing stock has never been accounted, therefore obviously, opening stock of such items neither exists in accounting - statements nor has been added/ incorporated by the learned Assessing Officer in the financial statements, which neutralizes the effect/ impact of above unrealistic, unreasonable and injudicious addition on estimate basis.
8. The learned Authorised Representative further contended that the concept of principle of accounting of stock (closing /opening) may-be/is pertinent and mandatory for items /goods/ materials/ things manufactured and/or traded-in by an assessee, whereas in the case of the appellant/ assessee-firm the medicines & consumables (viz. numerous types of medical Gases, Cotton, Bandages, Dettol/Betadine /Spirit, Gauges, Sutures, Tapes, Injectible-vials, syringes, Plaster-of -Paris, Chemicals for Laboratory and X-rays etc.) in question are not the goods/materials traded or sold (or even held for selling) but are consumables/ things which are paltry/nominal in nature that get consumed while serving/ treating numerous patients. The patients are not billed in specific terms for such medicines and consumables since the patients are charged professional services-fee for medical treatment rendered to them.
9. In support of his contentions that as the subject-matter /issue relating to the amounts of medicines and consumables in past has been examined by the assessing officer and accepted the same without any objection, so the assessing officer is precluded from taking a different view in the year under consideration, the learned Authorised Representative relied upon following citations:CIT v. Neo Poly Pack (P.) Ltd. (2000) 112 Taxman 363 (Delhi) wherein it was laid down that "Strictly speaking, resjudicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year, but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not at all be appropriate to allow the position to be changed in a subsequent year." CIT v. A.R.J. Security Printers (2003) 131 Taxman 297 (Delhi) wherein it has been held that- "Though each assessment year is independent of the other, yet for the sake of consistency and for the purpose of finality in all litigations, including litigation arising out of fiscal statutes, earlier decisions on the same question should not be reopened, unless some fresh facts are found in subsequent year." The above referred rulings are further supported by the rulings of the Apex court in the following cases: 10. The learned Authorised Representative further contended that the provisions of sub-section I as well as 2 of Section 145 have been duly complied with by the assessee-firm and so the assessing officer was not justified in observing that the accounts of the assessee are not maintained in such a manner that the true profits of the assessee could not be worked out as is clear from the foregoing arguments. The learned Authorised Representative placed reliance on following case law in support of his contentions: Ram Pyare Satish Kr. v. Income Tax Officer 98 Taxman 135 (Delhi Trib.) wherein it has been held that - " Proviso to Section 145(1) cannot be invoked merely because of absence of quantitative stock record, specifically when the correctness of the fact that entire purchases and sales recorded in the books of account were fully supported by vouchers and by the entries made in the regular books of account, had not been disputed. The assessing officer, on the basis of some specific mistake or discrepancy has to give a specific finding as to whether the proviso to Section 145(1) or Section 145(2) is applicable on the facts of the case." CIT v. Modi Rubber Ltd. (1998) 99 Taxman 248 (Delhi) wherein it was held that "A taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts and for that purpose.... A method of accounting adopted by trader consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping account.... Whether income, profits and gains can or cannot be properly deduced from the method of accounting regularly adopted by the assessee is a question of fact." 11. The learned Authorised Representative lastly contended that the impugned order under Section 144 by the learned Assessing Officer is not sustainable in law since prior notice under Section 142(1) for the said purpose was not issued or served to the appellant/ assessee-firm.
Such ruling has been given in the case of CIT v. Dr. K.C. Verma (2003) 132 Taxman 598 (Delhi).
12. On the other hand, the learned Departmental Representative for the revenue, contended that admittedly in this case the assessee is running a hospital, pathological lab., X-ray, CT Scan, and ECG etc. and consuming medicines as well as other consumable articles. Consumables are essential for running these machines in the Nursing Home of the assessee. The assessee has admitted that it is not maintaining any stock register for Income-tax purpose, but it is strange that the assessee even does not maintain any register or follow any system for having internal control regarding the purchase of the items and supply of the same to its staff and nurses in order to know what item is finished or is going to finish or what item is required to be purchased. This strange system of the assessee even maintained during past, neither appeals to reason nor can be accepted for the Income-tax purpose because the assessee's counsel has admitted during the arguments before the Tribunal that at any point of time the assessee cannot get its stock verified. Further that after 1-4-1997 in view of the amendment in Section 145(1) the assessee could not be allowed to maintain mix system of accounting as it was mandatory for it to either book the medicines and consumables on cash basis or on accrual basis.
In the instant case the assessee is booking these items on cash basis whereas in respect of all other items it is maintaining accrual basis/ following mercantile system. The learned Departmental Representative further contended that since in the instant case in the absence of stock register it was not possible to know the true value of the closing stock in the P & L account, hence the true profits of the assessee could not be worked out and, by taking recourse to the provision of Section 143(3) of the Income Tax Act, the assessing officer has rightly estimated the value of the stock lying with the assessee under the head 'Medicines & consumables stores' at Rs. 1,75,000 by taking the monthly average of the purchases which were made in the year to the extent of about Rs. 15 lakhs, because the assessee must be having at least one or one and a half month stock at the end of the previous year relevant to assessment year under consideration so, the assessing officer had the basis to estimate the stock at Rs. 1,75,000, more so, when the assessee has shown.
13. Lastly, the learned Departmental Representative relying upon the following observations of the Apex Court in the case of CIT v. British Paints India Ltd. submitted that in the light of these observations all the case law relied upon by the learned Authorised Representative for the assessee, stands negated and the addition made by the assessing officer stands justified.
It is not only the right, but the duty of the assessing officer to consider whether or not the books disclose the true state of accounts and the correct income can be deduced therefrom. It is incorrect to say that the Officer is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past. There is no estoppel in these matters and the Officer is not bound by the method followed in the earlier years.
Valuation of the stock-in-trade at cost or market value, whichever is the lower, is a matter entirely within the discretion of the assessee. But whichever method he adopts, it should disclose a true picture of his profits and gains. If, on the other hand, he adopts a system which does not disclose the true state of affairs for the determination of tax, even if it is ideally suited for other purposes of his business, such as the creation of a reserve, declaration of dividends, planning and the like, it is the duty of the assessing officer to adopt such method of computation as he deemes appropriate for proper determination of the true income of the assessee.
Section 145 confers sufficient power upon the assessing officer - nay, it imposes a duty upon him - to make such computation in such manner as he determines for deducing the correct profits and gains.
This means that where accounts are prepared without disclosing the real cost of the stock-in-trade, albeit on sound expert advice in the interest of efficient administration of the business, it is the duty of the assessing officer to determine the taxable income by making such computation as he thinks fit." 14. The learned Departmental Representative for the revenue, further assailing the argument of the learned Authorised Representative for the assessee, that any change in the closing stock would also require change in the opening stock of the next year so the addition made in the closing stock would have a zero effect and no addition is required to be made, submitted that there neither any need nor any duty is cast upon the assessing officer to make the change to the value of the opening stock in the next year. In support of this contention, the learned Departmental Representative relied upon the decisions in Melmould Corpn. v. CIT and 15. The learned Departmental Representative lastly contended that in the instant case the learned Authorised Representative for the assessee has admitted that the purchases in the last month in the year under consideration as per pages 13 and 14 of the paper-book were to the tune of Rs. 1.25 lakhs with regard to the material under consideration so, the tax authorities below rightly made/sustained the impugned addition of Rs. 1,75,000 considering the un-used closing stock at the end of the year, treating the same to be stock for one and a half month.
16. I have considered the rival contentions of both the parties, perused the records and carefully gone through the orders of the tax authorities below and also took into consideration the case law relied upon by both the parties.
17. In the land-mark judgment in the case of British Paints (supra) their Lordships of the Apex Court, for computing the profits, laid down significant guidelines, one of which was that the assessing officer was not bound to accept the system of accountancy regularly employed by the assessee if the correctness of the same has not been questioned in the past and he is further not bound by the method followed in the past by the assessee in case the books maintained by the assessee do not disclose true state of the accounts and the correct income of the assessee cannot be deduced. The other guideline laid down by the Hon'ble Apex Court was that the assessee may adopt any method, but it should disclose a true picture of assessee's profits and gains, but in case it does not then, even if it is ideally suited to the assessee for its business purposes, the assessing officer can adopt any other appropriate method for computing the true income of the assessee.
Lastly, where the accounts are prepared by the assessee without disclosing the real cost of the stock-in-trade, it is the duty of the assessing officer to determine the taxable income by making such computations as he thinks fit for deducing the correct profits and gains.
18. In the instant case the assessee is not maintaining any stock register. During the course of arguments, the assessee admitted before me that by the system of accounting followed by him he is unable to get his stock verified at any one point of time during the entire year under consideration. It means that the learned Authorised Representative admitted that the accounts prepared by the assessee and system adopted by him for the purchase of the items under consideration before me and consumption of the same cannot disclose the real cost of the stock-in-trade at any point of time in the year under consideration. This means that the system of accounting followed by the assessee cannot disclose the correct profits and gains. From the guidelines laid down by the Apex Court in the case (supra) and applying the same to the instant case of the assessee, I am of the opinion that the assessing officer has rightly rejected the account books of the assessee and estimated the value of the stock for working out the profits of the assessee. He has also not committed any illegality in not accepting the accounting system followed by the assessee, which was also followed by him in the past, when admittedly in the existing facts the real cost of the stock-in-trade cannot be deduced from such method followed by the assessee for determining the correct taxable income of the assessee.
19. I may also mention here that though in the instant case the assessee is not maintaining stock register for Income-tax purposes, but it is strange that he even does not maintain any register or follow any system for having an internal control regarding the purchase of the items and supply of the same to its staff and nurses in order to know which item is finished or is about to finish or which item needs to be purchased. Hence, I am of the opinion that the strange system followed by the assessee in the year under consideration even if followed in the past, cannot be accepted for the Income-tax purposes because such system does not disclose the true profits of the assessee and, therefore, in the year under consideration, the same has been rightly discarded by the assessing officer. I have also considered the citations (supra) relied upon by the assessee on this point and find that none of the citations (supra) apply to the facts of the instant case of the assessee because in none of the citations (supra) it was laid down that even if the profits and the gains of the assessee were not deducible from the method of accounting regularly followed by the assessee, the assessing officer cannot reject the same in the year under consideration. Hence, in my view the citations (supra) relied upon by the assessee are not applicable to the facts and circumstances of the instant case of the assessee.
20. Another argument advanced by the learned Authorised Representative for the assessee before me, regarding issue of notice under Section 142(1) before passing an order under Section 144, is that the assessing officer without issuing a notice under Section 142(1) could not have passed an order under Section 144.
21. In the instant case, the assessment has been framed by the assessing officer under Section 143(3)/144 of the Income Tax Act as is apparent from the assessment order. Notice under Section 143(2) has also been issued against the assessee from time to time and, thereafter the assessment has been framed. In these facts it cannot be said that the assessment has been framed under Section 144 without issue of notice under Section 142(1) because in this case earlier the case of the assessee was proceeded under Section 143(1) and on account of selected scrutiny by issue of notice under Section 143(2) the assessing officer framed the assessment under Section 143(3)/144. Otherwise too, I find that in this case before completing the assessment the details have been called from the assessee and the same have been furnished by the assessee and after-considering the same, the assessing officer has passed the assessment order. In this view of the matter the ratio of the case (supra) relied upon by the learned Authorised Representative for the assessee, do not apply to the facts of the case of the assessee and I do not find any illegality in the assessment framed by the assessing officer.
22. Another argument advanced by the learned Authorised Representative for the assessee before me was that any change in the closing stock would require a change in the opening stock of the next year and so the effect of the addition made in the closing stock would be zero and hence, no addition is called for. This contention of the learned Authorised Representative for the assessee has no force in the light of the decision of Hon'ble Bombay High Court in Melmould Corpn's case (supra) wherein their Lordships have observed that the value of the closing stock of the preceding year must be the value of the opening stock in the next year. The change, therefore, has to be effected by adopting the new method for valuing the closing stock, which will, in its turn, become the value of the opening stock of the next year, which means that if the change is effected in the closing stock of the year under consideration the change would have to be effected in the opening stock of the next year, but it does not mean that because of this reason no addition should be made in the closing stock of the assessee if warranted under the facts and circumstances of the case of the assessee. Accordingly, this contention of the learned Authorised Representative for the assessee, is rejected.
23. For the reasons stated above, I have come to a conclusion that the tax authorities below have rightly rejected the book results and estimated the closing stock of the assessee.
24. Now coming to the valuation of the closing stock, in my opinion, the unused closing stock at the end of the year at Rs. 1,75,000 is on a higher side because in the orders of the tax authorities below they have not given any basis for estimation of the same at Rs. 1,75,000, however, during the course of arguments, the learned Departmental Representative for the revenue, contended that undisputedly in this case purchases in the last month of the year under consideration were to the tune of Rs. 1,25,000 so, taking the unused closing stock at the end of the year for one and a half month, the tax authorities below were justified in taking the closing stock value at Rs. 1,75,000. On the other hand, the learned Authorised Representative for the assessee, submitted that the unused stock value taken for one and a half months is on a higher side and it should be taken for the last 15 days only.
25. Considering the arguments of both the parties, I am of the opinion that it would be fair and reasonable to take the value of the unused stock available with the assessee in the last one month of the year under consideration only as the closing stock of the assessee and the same is valued at Rs. 1,25,000, which is equivalent to the purchases made in the last month of the year under consideration.
Accordingly, the order of the Commissioner (Appeals) is modified to this extent and the ground of appeal taken by the assessee is allowed in part.