Section 35(6): tax on goods not accounted for
A stock difference becomes a deemed supply, assessed at the officer's determination of value.
Section 35(6) provides that where a registered person fails to account for the goods in accordance with Section 35(1), the proper officer shall determine the amount of tax payable on the goods not accounted for as if such goods had been supplied by that person, and the provisions of Section 73 or 74 shall apply to the determination of tax. A stock shortage discovered in an audit or a search is therefore treated as a supply, with tax, interest and penalty.
How the finding arises
A physical stock verification during a search or an audit, compared with the book stock.
A reconciliation of purchases, production and sales that leaves a quantity unexplained.
Excess stock, which the department treats as unaccounted purchases and therefore as evidence of unaccounted sales.
A difference between the stock in the financial statements and the stock records.
The answers that work
Process loss and normal wastage, supported by a technical study, historical percentages and industry norms. An assertion without a study fails.
Goods lying at a job worker's premises, at a depot, or in transit, supported by challans and the job work register.
Measurement and unit of measure differences, particularly in bulk goods weighed rather than counted.
Timing: goods received or dispatched but not yet booked, supported by the gate register.
Where the shortage is genuine, quantify it and pay; the interest and penalty consequence of contesting a real shortage is worse than the tax.
What to do on Monday
Commission a process loss study for every significant product line and refresh it periodically.
Maintain a job work register and a goods in transit register that reconcile to the stock ledger monthly.
Reconcile physical to book stock at least quarterly and document the explanations.
Where a genuine shortage exists, quantify and pay rather than contest.
This page states the general position. A reader with a specific question on their own facts may write to the GST practice at AMLEGALS.
Write to the GST practiceQuestions we are asked on this
Is a stock shortage automatically a supply?
Section 35(6) treats goods not accounted for as if supplied. The answer is to account for them, not to argue the deeming provision.
How is the value determined?
By the proper officer under the valuation provisions. Where you have contemporaneous sale prices, produce them, because the officer's estimate is usually higher.
Is process loss accepted?
With a technical study and historical data, generally yes. Without one, rarely.
Is credit available on the deemed supply?
The deeming provision creates an output liability. Credit already availed on those inputs is a separate question that is frequently raised as well.
What about excess stock?
The department treats it as unaccounted purchase and infers unaccounted sales. Reconcile it to purchases and to the job work register.
In this cluster
- GST audit under Section 65: the clock, your rights and the first reply
- Special audit under Section 66: when an accountant is appointed against you
- ADT-01 to ADT-04: the audit paper trail
- The eleven findings that appear in almost every departmental audit
- GSTR-9 and GSTR-9C: reconciliation exposure and correction strategy
- Turnover reconciliation between GST, income tax and the financial statements
- E-invoicing non compliance: consequences and cure
- Audit objections versus anti evasion investigation: two different files
- Building the audit defence file before the audit begins
GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.