2023 (9) TMI 372 - AT - Income Tax

Profits estimation on sale of expired stock - difference in opening stock by applying GP rate of 17.63% - HELD THAT - The factum of the stock having expired has been accepted by the AO as well as by the ld CIT(A) which in turn means that such stock has crossed its expiry date and therefore the same cannot be sold to the customers. There is nothing on record that such expired stock has been sold by the assessee. We therefore find that mere non-accounting of the expired stock as part of the opening stock wouldn t have any impact on the profitability so declared by the assessee for the reason that such expired stock would again form part of the closing stock at the end of the financial year. Similarly whether such stock has been destroyed or returned will not have any impact on the profitability so declared and what efforts have been taken by the assessee or should have been taken by the assessee are not relevant consideration for the reason that the same doesn t affect the profitability so declared by the assessee as the assessee has not claimed any loss on account of writing off of such expired stock which otherwise it is entitled to. In light of aforesaid discussions and in the entirety of facts and circumstances of the case there is no basis to impute profits on the alleged sale of expired stock and the addition so made is directed to be deleted.Appeal of the assessee is allowed.

Summary

Issues involved:
The issues involved in this case are the treatment of expired stock as saleable stock, application of gross profit rate, and the addition made by the Assessing Officer.

Treatment of expired stock:
The Assessing Officer (AO) observed a significant difference in the opening stock for the relevant financial year compared to the closing stock for the previous year. The assessee explained that the difference was due to the detection of expired stock during a stock audit, which had to be destroyed as per legal requirements. However, the AO disagreed with this explanation, stating that expired medicines should have been returned to the manufacturer according to the Drugs and Medicines Act. The AO treated the expired stock as saleable stock and applied a gross profit rate, resulting in an addition to the assessee's income.

Appeal before CIT(A):
The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that the treatment of expired stock as saleable stock was incorrect. The assessee claimed that there was a clerical error in the accounting process, and the addition based on the gross profit rate was unwarranted. However, the CIT(A) upheld the AO's decision, stating that the assessee failed to provide evidence of efforts to return the expired products to the manufacturer. The CIT(A) also noted inconsistencies in the opening stock for different assessment years.

Appeal before ITAT:
The assessee further appealed to the Income Tax Appellate Tribunal (ITAT), challenging the CIT(A)'s decision. During the hearing, the assessee reiterated that the expired stock had not been sold and should not impact the declared profitability. The ITAT considered the facts and concluded that the expired stock, not being accounted for in the opening stock, did not affect the profitability declared by the assessee. The ITAT directed the deletion of the addition made by the AO based on the alleged sale of expired stock.

Conclusion:
The ITAT allowed the appeal of the assessee, ruling that there was no basis to impute profits on the alleged sale of expired stock. The ITAT held that the expired stock, even if not accounted for in the opening stock, would not impact the profitability declared by the assessee. Therefore, the addition made by the AO was directed to be deleted.

This summary provides a detailed overview of the legal judgment, focusing on the treatment of expired stock, application of gross profit rate, and the final decision by the ITAT in favor of the assessee.