2012 (10) TMI 353 - AT - Income Tax

Addition on account of difference in P&L Difference of Gross profit between audited P&L and seized P&L account by Excise department AO made addition on the basis of difference amount Held that - As the net profit disclosed in the return of income is more than the net profit revealed by the seized P&L. Either the complete P&L as per the seized document is to be accepted or completely rejected as unreliable. It was not open to the Revenue to accept only the manufacture account from the seized paper as correct and to ignore the expenses revealed by the seized paper. No material has been brought on record by the AO to show that the expense revealed by the seized document under the heads conversion charges, furnace expenses and others are not tenable while computing the total income as per IT. Act. It also reveals that the expenses revealed by the seized P&L Account also contain certain expenses which were not allowable u/s 28 to 44AC. Issue decides against revenue. Addition on account of out of books of accounts - Purchase of land & building and P&M prior to commencement of production Addition made by AO on the basis of MoU s found during search Vendor admitted receipt of Rs. 2.59 Crores from the assessee Whereas Balance Sheet of the assessee reveals that the assessee has paid Rs. 2.42 Crore - Held that - As concluding from the facts purchase has been made in in earlier previous year. MoU itself records the various dates on which various payments were made by the assessee. Revenue has brought no material, that the assessee has paid any amount more than Rs. 2.42 crores before 31.3.2004 against the purchase of assets. Issue decides in favour of assessee GP ratio on unrecorded sales Whether AO can apply higher % of GP rate than the rate of % of GP accepted by revenue on sale already recorded in books of accounts - Held that - The rate of gross profit of the current year is very relevant than the gross profit rate of the earlier year unless it is shown that the profit earned on the unrecorded sales were actually more than the profit earned on recorded sales of the relevant year. Ground of appeal decides in favour of assessee. Addition on account of unaccounted sale AO argued that assessee has removed 135.110 MT of by- product, waste and scrap on the basis of seized documents by Excise department Assessee contended that what was sold was re-rollers which was written as RR in the seized documents Held that - The assessee has also not brought any material before us to show that sale of re-rollers were recorded in the books of account of the current year. In the absence of any seized document and the order of the CESAT, we are not in a position to adjudicate this issue completely. Issue remand back to AO. Addition on account of difference in opening stock AO found difference between closing stock as per the seized P&L Account of the preceding year, which was found correct by the CESAT and the opening stock which was as per the closing stock disclosed by the assessee in the immediately preceding year Held that - As found that the closing stock of Rs. 1,83,30,146/- as disclosed in the P&L Account filed alongwith the return of income of the immediately preceding year on the basis of which taxable income of the assessee was arrived as the opening stock of the current year. No addition required. Issue decides in favour of assessee Addition on account of unaccounted income earned from suppressed production - Central Excise Authorities worked out the average consumption of power per MT at 725 units as against 1150 units per MT shown in the production records of the assessee On basis of this AO work out suppressed production of 2903.54 MT Calculate GP rate on the basis of average of two earlier years instead of current year - Held that - As concluded from the facts that the Revenue has accepted that the gross profit in respect of disclosed sales achieved by the assessee in A.Y. 2004-05 was 11.21%, A.Y. 2005-06 was 9.81% and in the year under consideration was 0.79%. In such a situation the gross profit rate found for the disclosed sales of the current year is a better parameter to estimate the gross profit on undisclosed sales than the gross profit secured by the assessee in earlier years. Issue decides in favour of assessee Disallowance u/s 40(a)(ia) for non-deduction of TDS on contract payments u/s 194C - Assessee has claimed deduction for transport charges on which TDS was not deducted Assessee contended Sec. 40(a)(ia) were applicable only to expenses covered u/s 30 to 38 and that the freight charges paid by the assessee for bringing the material to the factory of the assessee were part of the purchase cost and were deductible u/s 28 Held that - Whom the transporters had the contract for transporting of the goods, whether with the assessee or with the suppliers. Hence, the same needs to be verified from the purchase bills of the assessee and other connected documents. Since both the parties have not filed the relevant materials before us, we are unable to adjudicate the issue completely. Issue remand back to AO.

Summary

Issues Involved:
1. Deletion of addition representing the difference in gross profit.
2. Deletion of addition representing payments outside the books for the purchase of land and machinery.
3. Deletion of addition representing the sale proceeds of runners and raisers.
4. Deletion of addition representing the difference in opening stock.
5. Deletion of addition representing the unaccounted income earned from suppressed production.
6. Deletion of disallowance u/s 40(a)(ia) for non-deduction of TDS on contract payments.

Issue-Wise Detailed Analysis:

1. Deletion of Addition Representing the Difference in Gross Profit
The Revenue's grievance was against the CIT(A)'s deletion of the addition of Rs. 1,04,30,010/-, representing the difference in gross profit as per the Profit & Loss Account prepared based on actual production and sale found during a search by the Central Excise Authorities and the gross profit shown in the return of income filed by the assessee. The Assessing Officer (AO) made the addition based on discrepancies between the figures of purchases, sales, and gross profit as per the Central Excise Department and those admitted by the assessee. The CIT(A) deleted the addition, arguing that the seized Profit & Loss Account was found reliable by the Central Excise Appellate Tribunal and that the entire document, including expenses, should be accepted as reliable. The Tribunal upheld the CIT(A)'s decision, emphasizing that the entire seized document should be accepted or rejected in toto, and the net profit disclosed by the assessee was higher than that revealed by the seized document.

2. Deletion of Addition Representing Payments Outside the Books for the Purchase of Land and Machinery
The AO added Rs. 16,04,300/- to the income of the assessee, representing payments outside the books for the purchase of land and machinery. This addition was based on the difference between the amount acknowledged by the vendor and the amount recorded in the assessee's books. The CIT(A) deleted the addition, reasoning that the investment in the factory was made prior to the commencement of business and should be assessed in the hands of the partners, not the firm. The Tribunal upheld the CIT(A)'s decision, finding no material evidence to show that the assessee paid any amount more than what was recorded in the books before 31.3.2004.

3. Deletion of Addition Representing the Sale Proceeds of Runners and Raisers
The AO added Rs. 12,62,857/- to the income of the assessee, representing the sale proceeds of runners and raisers not accounted for in the regular books of account. The CIT(A) deleted the addition, noting that the seized Profit & Loss Account already included these sales, and the net profit disclosed by the assessee was higher than that revealed by the seized document. The Tribunal agreed with the CIT(A), emphasizing that the seized document should be considered in totality and not selectively.

4. Deletion of Addition Representing the Difference in Opening Stock
The AO added Rs. 7,37,224/- to the income of the assessee, representing the difference in opening stock as per the seized Profit & Loss Account and the audited Profit & Loss Account. The CIT(A) deleted the addition, stating that the opening stock should be accepted as per the closing stock disclosed in the return of income of the last year. The Tribunal upheld the CIT(A)'s decision, reiterating that the closing stock of one year is the opening stock of the immediately succeeding year.

5. Deletion of Addition Representing the Unaccounted Income Earned from Suppressed Production
The AO added Rs. 54,36,416/- to the income of the assessee, representing unaccounted income from suppressed production, based on the average consumption of power per MT and the gross profit rate of earlier years. The CIT(A) deleted the addition, arguing that the gross profit rate of the current year should be preferred, and there was no incentive for non-disclosure of income as the income of the unit was exempt u/s 80-I. The Tribunal upheld the CIT(A)'s decision, noting that the market conditions of the current year were different from earlier years, and the gross profit rate of the current year was a better parameter for estimation.

6. Deletion of Disallowance u/s 40(a)(ia) for Non-Deduction of TDS on Contract Payments
The AO disallowed Rs. 18,90,360/- u/s 40(a)(ia) for non-deduction of TDS on transport charges paid to M/s S.K. Transports and Shri Umesh. The CIT(A) deleted the disallowance, stating that the freight charges were part of the purchase cost and deductible u/s 28, not u/s 30 to 38, and hence, the provisions of section 40(a)(ia) were not applicable. The Tribunal restored the issue back to the AO for proper verification, noting that the contract for transport of materials needed to be verified from the purchase bills and other connected documents.

Conclusion
The appeals filed by the Revenue for assessment years 2004-05, 2005-06, and 2006-07 were partly allowed for statistical purposes, with certain issues remanded back to the AO for further verification and adjudication. The Tribunal upheld the CIT(A)'s decisions on several grounds, emphasizing the need for consistency and reliability in considering seized documents and the importance of proper verification of facts and figures.