2010 (2) TMI 953 - AT - Income Tax

Rejection of books of account - turnover and net profit rate had increased substantially while the gross profit declined marginally - Assessing Officer rejected the book results and made estimated addition since the assessee was not maintaining day-to-day consumption records, even when no defects were noticed in the books of account maintained by the assessee Held that - Calculations made by the Assessing Officer were wrong because though the Assessing Officer reduced the receipt from sister-concern, he did not reduce the corresponding cost nor considered the effect of opening and closing stock of work-in-progress and raw material - there is no material on record for estimating the production nor there is any material to show that the assessee sold any production outside the books of account - there was no ground for rejecting the book results and making any trading addition - no specific discrepancies or defects in the books of account of the assessee have been pointed out nor was any material brought to notice to establish that purchases or expenses were inflated or receipts suppressed, there was no justification in invoking the provisions of section 145 of the Act - appeal of the revenue is dismissed

Issues Involved:
1. Deletion of disallowance/addition of Rs. 31,68,116 being devised loss.
2. Addition of Rs. 28,62,745 on account of production outside the books of account.
3. Addition of Rs. 3,43,532 due to undervaluation of closing stock of work-in-progress.
4. Rejection of the books of account under section 145(3) read with section 144 of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance/Addition of Rs. 31,68,116 Being Devised Loss:
The Assessing Officer (AO) observed that the assessee did not provide monthly quantitative details of production and consumption of raw materials, leading to the rejection of book results under section 145(3) and determination of income under section 144. The AO calculated a loss per metre of cloth processed and made an addition of Rs. 31,68,116. However, the Commissioner of Income-tax (Appeals) [CIT(A)] found that the gross profit (GP) and net profit (NP) rates were higher than the previous year and no specific defects like unaccounted sales or expenses were pointed out. The CIT(A) concluded that the AO's calculations were incorrect and the addition was based on wrong assumptions. The CIT(A) allowed the appeal, deleting the addition.

2. Addition of Rs. 28,62,745 on Account of Production Outside the Books of Account:
The AO estimated the production capacity based on common knowledge and industry norms, concluding that the assessee's actual production was significantly underreported. The AO added Rs. 28,62,745 as net profit on the unaccounted production. The CIT(A) rejected this addition, stating that the AO's estimates were hypothetical and not based on any documentary evidence, survey, or technical report. The CIT(A) emphasized that such additions must be grounded in verifiable facts and not mere assumptions.

3. Addition of Rs. 3,43,532 Due to Undervaluation of Closing Stock of Work-in-Progress:
The AO adopted an average daily production figure to estimate the work-in-progress, resulting in an addition of Rs. 3,43,532. The assessee argued that the actual figures from the RG-1 register should be used instead of theoretical averages. The CIT(A) agreed, noting that the AO's figures were theoretical and not based on actual production records. Consequently, the CIT(A) deleted the addition, accepting the figures shown by the assessee.

4. Rejection of the Books of Account Under Section 145(3) Read with Section 144 of the Income-tax Act:
The AO rejected the books of account due to the absence of quantitative details and perceived defects in the records. However, the CIT(A) found that the GP and NP rates were higher than the previous year, and no specific defects like unaccounted sales or expenses were identified. The CIT(A) concluded that the rejection of books was unjustified, especially when the overall financial performance was better than the previous year. The CIT(A) relied on judicial precedents, emphasizing that the absence of a stock register alone does not warrant rejection of books unless coupled with other significant factors.

Conclusion:
The ITAT upheld the CIT(A)'s findings, agreeing that the AO's additions were based on incorrect assumptions and lacked concrete evidence. The ITAT emphasized that low profit or absence of stock register alone cannot justify the rejection of books of account without specific defects or discrepancies. The appeal by the revenue was dismissed, affirming the deletion of the additions made by the AO.

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