2016 (7) TMI 729 - AT - Income Tax

Tribunal adjusts income, directs 15% deficit stock amount as income, overturns profit estimation.

The Tribunal partially allowed the appeal, directing the Assessing Officer to consider 15% of the deficit stock amount as income for the relevant year, ... Deficit stock - survey and physical inventory - profit element embedded in stock - estimation of gross profitSurvey and physical inventory - deficit stock - Validity of the physical inventory taken during survey and the contention that inventory was not properly taken - HELD THAT: - There was a survey at the assessee's premises on 13.03.2009 and the Revenue recorded physical stock quantified at Rs. 98,61,818/-. The record shows the inventory was taken in consultation with and accuracy certified by the assessee's employees, and the Managing Director did not dispute the manner of inventory. The Tribunal held that, in these circumstances, it is too late for the assessee to challenge the manner in which the inventory was taken and the physical inventory recorded by the Revenue must be accepted for the purposes of assessment. [Paras 5]The physical inventory taken during the survey is accepted and the assessee's challenge thereto is rejected.Deficit stock - profit element embedded in stock - estimation of gross profit - Whether the entire deficit stock or only the profit element embedded in the deficit stock is assessable as income and the appropriate rate of gross profit to be applied - HELD THAT: - The Assessing Officer computed a deficit stock (by his method) and applied 20% gross profit, but the CIT(A) determined the deficit stock at Rs. 55,75,603/-, a figure not appealed by Revenue. The Assessing Officer's adoption of 20% was made without reference to the assessee's past experience or industry norms. The Tribunal concluded that the Revenue's intention in making the addition was to tax the profit element arising from alleged outside-the-books sales of the deficit stock rather than the entire deficit stock. Having regard to the assessee's submission that typical profit in the industry is 12-15% and the absence of any material supporting a 20% rate, the Tribunal found that applying 15% gross profit to the accepted deficit stock of Rs. 55,75,603/- is reasonable and meets the ends of justice. [Paras 6, 7, 8]Only the profit element embedded in the deficit stock is taxable; the Assessing Officer is directed to assess 15% of Rs. 55,75,603/- as the income of the assessee.Final Conclusion: The appeal is partly allowed: the physical inventory taken during survey is upheld and, on the deficit stock determined by the CIT(A) at Rs. 55,75,603/-, only the profit element is assessable; the Assessing Officer is directed to compute income at 15% of that deficit stock for Assessment Year 2009-10. Issues:Estimation of profit on the deficit stockAnalysis: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 Rs. 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 Rs. 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 Rs. 2,70,85,031, with a 20% gross profit leading to an addition of Rs. 54,17,006. The CIT(Appeals) confirmed the deficit stock at Rs. 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 Rs. 3,69,46,849, and the sales as per tax returns were Rs. 17,18,04,430. The Tribunal agreed with the deficit stock estimation by the CIT(Appeals at Rs. 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 Rs. 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.