2013 (11) TMI 269 - AT - Income Tax

Estimation of extra consumption by the Company - suppression of production and sale by 10% - estimation of income - Held that - Commissioner(A) estimated extra consumption by 20% - CIT(A) has given a finding that the working of the extra consumption made by the AO could not be upheld in toto because it suffers from various infirmities - AO had worked out the consumption in case of many items on the basis of the formula/information given on the packing material and without considering the material procured by the assessee or explanation offered by him. He has further recorded that it is also noticed that there were arithmetical mistakes in case of working made in some of the products, and has observed that the explanation about the average/loss given by the assessee cannot be brushed aside because the monograph issued by Indian Pharma Copia is a more authentic and reliable evidence. Assessee has furnished a chart showing the difference which remained un-reconciled even after the fresh working made after taking into account the arithmetical mistakes, loss, average etc - CIT(A) has recorded that the extra consumption remained un-reconciled by the assessee worked out at 14.12% as per the annexed chart. In these facts, it would be most reasonable and proper to estimate the extra consumption at 15% as against 20% estimated by the CIT(A), as the assessee has filed a chart showing extra consumption remained un-reconciled at 14.12% and this ground of appeal, in this issue is partly allowed - Directed to work out the extra consumption at 15% as against 20% directed by the CIT(A). Estimation of G.P. rate - Estimatimation of profit element at 38% on the ground of extra consumption made by the CIT(A) Held that - Entire amount of extra consumption could not be added as income in the hands of the assessee, and that only profit element shown could be added as income. The CIT(A) has estimated the average GP at 35% as fair and reasonable estimate of income, considering the GP rate declared by the assessee in the relevant year as well as in the other years. There being no mistake in the order of the CIT(A), on this issue and his estimate of GP at 35% being most reasonable, the same is upheld, and the ground of the appeal of the assessee, on this issue is dismissed Decided against the Assessee.

Summary

Issues involved:
1. Rejection of books of accounts by the department for assessment years 2008-2009 and 2007-2008.
2. Estimation of extra consumption at different percentages by the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) (CIT(A)).
3. Determination of profit element on extra consumption.

Analysis:

Issue 1: Rejection of books of accounts
- The department rejected the account books of the assessee due to unexplained discrepancies that the assessee failed to reconcile, leading to the rejection upheld by the CIT(A).
- The CIT(A) found the accounts to be incorrect and incomplete based on the discrepancies that remained unexplained by the assessee.
- The rejection of books of accounts was deemed justified, and the order of the CIT(A) confirming the rejection was upheld.

Issue 2: Estimation of extra consumption
- For the assessment year 2008-2009, the AO estimated extra consumption at 25%, while the CIT(A) estimated it at 10%.
- The CIT(A) based the estimation on explanations provided by the assessee, evidence produced, and arithmetical mistakes pointed out by the assessee.
- The CIT(A) considered the extra consumption at 10% to be reasonable and upheld this estimation, as it was supported by authentic evidence.
- In the assessment year 2007-2008, the CIT(A) estimated extra consumption at 20% compared to the AO's 40% estimation.
- The CIT(A) found the AO's working to have various infirmities and discrepancies, leading to the decision to estimate extra consumption at 20%.
- The CIT(A) directed the AO to work out the extra consumption at 15% instead of the initially estimated 20% due to un-reconciled discrepancies shown by the assessee.

Issue 3: Determination of profit element on extra consumption
- The CIT(A) justified estimating the profit element at 36% for the assessment year 2008-2009, considering the GP rate declared by the assessee in relevant years.
- The CIT(A) applied a rational and material-based approach in estimating the profit element and rejected the idea of adding the entire unaccounted sales as income.
- Similarly, for the assessment year 2007-2008, the CIT(A) estimated the profit element at 35% as a fair and reasonable estimate of income based on the GP rate declared by the assessee.
- The CIT(A) upheld the estimation of GP at 35% as the most reasonable approach, dismissing the appeal on this issue.

Conclusion:
- The rejection of books of accounts was upheld for both assessment years.
- The estimation of extra consumption was adjusted by the CIT(A) based on evidence and discrepancies, leading to revised percentages.
- The determination of the profit element on extra consumption was deemed fair and reasonable by the CIT(A) for both assessment years, considering the GP rates declared by the assessee.

The judgments delivered by the judges were detailed and supported by reasoning, ensuring a fair assessment of the issues raised by the assessee and the Revenue for the respective assessment years.