2011 (9) TMI 1089 - AT - Income Tax

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145(3) of the I.T. Act.
2. Estimation of Gross Profit (GP) rate and addition of Rs. 16,47,501/- for alleged low GP.
3. Disallowance of deduction under Section 80IB on Vatav Kasar income.
4. Disallowance of deduction under Section 80IB by reworking written down value of assets.

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3):
The assessee, a manufacturer of textile machineries and parts, filed a return of income showing a GP rate of 19.13% on a turnover of Rs. 16,47,50,195/-. The Assessing Officer (AO) noticed discrepancies between the auditor's remarks and the assessee's submissions, including lack of a day-to-day stock register, increased raw material consumption ratio, and unverifiable stock details. The AO rejected the books of accounts citing these reasons and referenced decisions from various courts, including the Hon'ble ITAT Mumbai in the case of Samir Diamonds Exports Ltd. and the Hon'ble Allahabad High Court in the case of Awadhesh Pratap Singh Abdul Rehman and Brothers. The CIT(A) upheld the AO's decision, noting similar issues in the previous year.

2. Estimation of Gross Profit (GP) Rate and Addition of Rs. 16,47,501/-:
The AO estimated the GP rate at 21.13%, leading to an addition of Rs. 16,47,501/-. The assessee argued that the fall in GP was due to increased raw material costs and severe competition, maintaining that complete stock records were kept as per Excise Rules. The CIT(A) upheld the AO's decision, noting that the facts were consistent with the previous year where the rejection of books and GP addition were confirmed. However, the Tribunal, referencing its decision in the assessee's own case for the previous year, found that the fall in GP was explained by increased raw material prices and other expenses, thus deciding in favor of the assessee and allowing the ground raised.

3. Disallowance of Deduction under Section 80IB on Vatav Kasar Income:
The AO disallowed the deduction under Section 80IB on Vatav Kasar income of Rs. 1,46,231/-, stating it was not derived from industrial undertaking, referencing decisions from the Hon'ble Supreme Court. The CIT(A) upheld this decision. However, the Tribunal, following its earlier decision, concluded that Vatav Kasar income, being on account of short payments and rate differences of purchases, should be included in the business profits for calculating deduction under Section 80IB. The Tribunal directed the AO not to reduce this income from the business profits for the purpose of the deduction.

4. Disallowance of Deduction under Section 80IB by Reworking Written Down Value of Assets:
The AO reworked the written down value of assets for calculating deduction under Section 80IB, following the decision of the ITAT, Special Bench in the case of Vahid Paper Converters. The CIT(A) upheld this decision. The Tribunal, referencing its decision in the assessee's own case for the previous year, found no reason to interfere with the CIT(A)'s order and dismissed the assessee's ground.

Conclusion:
The appeal was partly allowed. The Tribunal decided in favor of the assessee regarding the rejection of books of accounts and the estimation of GP rate, following its earlier decision. It also directed the AO to include Vatav Kasar income in the business profits for the purpose of Section 80IB deduction. However, the Tribunal upheld the disallowance of deduction under Section 80IB by reworking the written down value of assets, consistent with the decision in the case of Vahid Paper Converters.