J.R. PACKAGES (P) LTD.,HOSUR vs. DCIT, COIMBATORE

This appeal of the assessee is directed against the order of the Commissioner of Income Tax (Appeals) – II, Coimbatore, dated 25.11.2013 and pertains to assessment year 2009-10.

Sh. N. Devanathan, the Ld.counsel for the assessee, submitted that the only issue arises for consideration is with regard to estimation of profit on the deficit stock. According to the Ld. counsel, there was a survey in the premises of the assessee on 13.03.2009. The Assessing Officer claims that physical inventory of stock was taken and it was estimated at `98,61,818/-. According to the Ld. counsel, the stock, namely, the papers were spread over several acres of land. Therefore, it is not possible for the Assessing Officer to take physical inventory of the stock. Therefore, the first contention of the Ld.counsel is that the physical inventory taken by the Assessing Officer is not correct. The Assessing Officer has taken sample stock and estimated the same at `98,61,818/-. The exact stock was not taken by the Assessing Officer. According to the Ld. counsel, the Assessing Officer estimated the manufacturing cost at 24%. According to the Ld. counsel, the manufacturing cost is not 24% and the estimation made by the Assessing Officer is on the higher side. On a query from the Bench – what would be the reasonable manufacturing cost? The Ld.counsel very fairly submitted that the manufacturing cost in normal circumstances is around 10% to 15% and definitely not at 24%. Therefore, according to the Ld. counsel, the addition made by the Assessing Officer on the deficit stock is not justified.

Referring to the order of the CIT(Appeals), the Ld.counsel for the assessee submitted that the CIT(Appeals) computed the deficit stock at `55,75,603/- as against the deficit stock computed by the Assessing Officer at `2,70,85,031/-. The Assessing Officer, after computing the deficit stock at `2,70,85,031/-, has taken the gross profit at 20% and made the addition of ` 54,17,006/-. According to the Ld. counsel, the deficit stock estimated by the Assessing Officer is not correct. According to the Ld. counsel, the CIT(Appeals) estimated the deficit stock at `55,75,603/-. According to the Ld. counsel, 20% cannot be the profit of the assessee. The assessee is in the manufacturing industry and has to incur several expenditure to maintain machinery. Therefore, at the best, according to the Ld. counsel, the profit would vary from 12% to 15%. Therefore, the CIT(Appeals) while restricting the deficit stock at `55,75,603/-, ought to have taken the profit on the deficit stock of `55,75,603/-.

On the contrary, Shri M.S.V.M. Prasad, the Ld. Departmental Representative, submitted that admittedly there was survey operation in the premises of the assessee on 13.03.2009. Physical inventory was taken and the Assessing Officer computed the deficit stock at `2,70,85,031/-. The physical stock of inventory was taken in consultation with the employees of the assessee. The accuracy of the physical stock was also certified by the assessee’s employees. Therefore, at this stage, the assessee cannot say that the inventory was not taken properly. The Ld. D.R. further submitted that the Managing Director of the assessee-company has not disputed the manner in which the physical inventory was taken.

We have considered the rival submissions on either side and perused the relevant material available on record. There was a survey in the premises of the assessee on 13.03.2009. The Assessing Officer estimated the physical stock found during the course of survey, at `98,61,818/-. The assessee disputed the manner in which the inventory was taken. The contention of the assessee before this Tribunal is that it is impossible for the Revenue to take the physical stock of the assessee since it was spread over several acres of land. The fact remains that the Revenue took the physical inventory and the employees of the assessee have also certified the accuracy of the inventory taken by the Revenue authorities. The Managing Director of the assessee-company has not disputed the inventory taken by the Revenue. Therefore, it is too late for the assessee to contend before this Tribunal that the inventory was not taken properly.

Now coming to the actual stock found by the Assessing Officer, the closing stock as per the books was `3,69,46,849/-. The sales as per the sales tax return was `17,18,04,430/-. The Assessing Officer added 20% as gross profit to the extent of `3,43,60,886/- and ultimately estimated the deficit stock at `2,70,85,031/-. The CIT(Appeals), however, estimated the deficit stock at `55,75,603/-. This deficit stock computed by the CIT(Appeals) is not challenged by the Revenue. In other words, the Revenue has not filed any appeal against the order of the CIT(Appeals) determining the deficit stock at `55,75,603/-.

Now the question arises for consideration is 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? 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/-

Now 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.

In the result, appeal of the assessee is partly allowed.