2016 (7) TMI 729 - AT - Income Tax

Profit on sale of deficit stock - whether the entire deficit stock has to be taken as profit of the assessee or the profit element embedded in the deficit stock has to be taken as income of the assessee? - Held that - The Assessing Officer himself has taken only 20% of gross profit on the deficit stock arrived by him. Therefore, it is obvious that the Revenue intended to take only the profit element embedded in the deficit stock. In other words, the presumption was that the deficit stock was sold by the assessee outside the books and the profit on such sale is liable for taxation. Therefore, what we have to do is, we have to estimate the profit on the so-called sale of deficit stock to the extent of ₹ 55,75,603/- Coming to the gross profit, the Assessing Officer determined the gross profit at 20%. The Assessing Officer has not taken the past history of the assessee or the profit, etc. of the similarly placed industries. The Assessing Officer without any basis determined the profit at 20%. The assessee otherwise claims before this Tribunal that the profit in this kind of industry is 12 to 15%. Therefore, this Tribunal is of the considered opinion that estimation of profit at 15% of the deficit stock of ₹ 55,75,603/- would meet the ends of justice. Accordingly, the orders of the authorities below are modified and the Assessing Officer is directed to take 15% on the deficit stock of ₹ 55,75,603/- as income of the assessee for the year under consideration. - Decided partly in favour of assessee

Summary

Issues:
Estimation of profit on the deficit stock

Analysis:
The appeal concerns the estimation of profit on the deficit stock for the assessment year 2009-10. The Assessing Officer claimed to have taken physical inventory during a survey and estimated the deficit stock at ?98,61,818. The appellant disputed this, arguing that the stock was spread over a large area, making accurate physical inventory impossible. The appellant contended that the manufacturing cost estimation of 24% by the Assessing Officer was excessive, as the normal manufacturing cost in similar circumstances ranges from 10% to 15%. The CIT(Appeals) reduced the deficit stock to ?55,75,603 but did not consider the profit element appropriately, leading to a discrepancy in the final assessment.

The Departmental Representative argued that the physical inventory was conducted properly during the survey, and the accuracy was certified by the appellant's employees. The Managing Director did not dispute the inventory process. The Assessing Officer estimated the deficit stock at ?2,70,85,031, with a 20% gross profit leading to an addition of ?54,17,006. The CIT(Appeals) confirmed the deficit stock at ?55,75,603, justifying the addition made by the Assessing Officer based on the profit estimation.

The Tribunal found that the physical inventory was indeed taken by the Revenue authorities, and the accuracy was certified by the appellant's employees. The closing stock as per books was ?3,69,46,849, and the sales as per tax returns were ?17,18,04,430. The Tribunal agreed with the deficit stock estimation by the CIT(Appeals at ?55,75,603, which was not challenged by the Revenue. The Tribunal then deliberated on whether the entire deficit stock should be considered as profit or only the profit element embedded in it. Considering the Assessing Officer's intention to tax only the profit element, the Tribunal directed the estimation of profit at 15% of the deficit stock amounting to ?55,75,603.

In conclusion, the Tribunal partially allowed the appeal, modifying the orders of the lower authorities and directing the Assessing Officer to consider 15% of the deficit stock amount as income for the relevant year.