2014 (1) TMI 845 - AT - Income Tax

Deletion of disallowance made on account of restriction of claim of waste/scrap & loss Melting process involved in the manufacture or not Held that - The Assessing Officer has rejected the book results of the Assessee mainly for the reason that the Assessee did not produce the prescribed cost records though it was mandatorily required to maintain the same - From the covering letter addressed to the Assessing Officer by the Assessee it is seen that the Assessee had furnished the details called for by the Assessing Officer - CIT(A) has also noted that all the relevant records in respect of scrap generation and burning loss, daily production records, Excise record along with month wise summary of consumption, production data was furnished before Assessing Officer but the Assessing Officer could not find any discrepancy in the details submitted by the Assessee. Even the scrap percentage and process loss percentage are comparable with the earlier years - the Assessee had produced excise record and production record for verification before Assessing Officer and before him - Assessing Officer has not pinpointed any specific defect in the books of account of the Assessee thus, CIT(A) was justified in holding that there was no basis for the Assessing Officer to reject the waste/scrap claimed by the Assessee and estimate the generation of scrap at 5% of material consumed and production loss at 1% of the total production - The Assessee had failed to produce cost records which it was statutorily required to maintain but the same was neither produced before Assessing Officer or CIT(A) though the Assessee claims that the various records prescribed have been maintained by it - The Assessee has not given any valid justification for not producing the aforesaid records for verification though it claimed to have maintained the same Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Deletion of disallowance made on account of restriction of claim of waste/scrap and loss amounting to Rs. 8,18,12,227.
2. Non-appreciation of the fact that there is no melting process involved in the manufacturing process adopted by the assessee, leading to an unjustifiably high level of loss claimed.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance on Account of Waste/Scrap and Loss:

The Revenue appealed against the CIT(A)'s decision to delete the disallowance of Rs. 8,18,12,227 made by the Assessing Officer (AO) on account of waste/scrap and process loss. The AO had observed that the assessee claimed a scrap rate of 15.56% and a process loss of 5.95%, which he deemed excessive given the manufacturing process. The AO directed the assessee to produce the buyers of the scrap along with their documents, but the assessee could not produce all the parties and requested the AO to conduct an inquiry. The AO rejected the book results under Section 145 of the Act due to the absence of cost records and estimated the scrap generation at 5% and process loss at 1%, leading to the disallowance.

CIT(A) considered the additional evidence provided by the assessee and the remand report from the AO. CIT(A) found that the AO did not conduct the necessary inquiries with the parties to whom the scrap was sold, despite being provided with their details. The AO also did not find any discrepancies in the records submitted by the assessee, which included daily production records, excise records, and month-wise summaries. CIT(A) noted that the assessee maintained proper accounts audited under the Income Tax Act and the Companies Act, and the records met the requirements of Section 209(1)(d) of the Companies Act. CIT(A) concluded that the AO's rejection of the book results and estimation of scrap generation and process loss were based on surmises and conjectures without specific defects in the books of accounts. Therefore, CIT(A) deleted the addition of Rs. 8,18,12,227.

2. Non-appreciation of the Manufacturing Process:

The AO argued that the manufacturing process did not involve any melting process, making the claimed loss unjustifiably high. The AO required the assessee to maintain cost records as prescribed under Section 642(1) read with Section 209(1)(d) of the Companies Act, 1956. Despite the auditors' report stating that cost records were maintained, the assessee did not produce them for verification. The AO justified the rejection of books and estimation of production loss due to the absence of these details.

The assessee contended that it had submitted all necessary details, including stage-wise production details, consumption, and production data for previous years. The assessee provided names and addresses of the parties to whom the scrap was sold, but the AO did not conduct any inquiries. The assessee maintained that the scrap generated and sold was subject to excise duty and sales tax, and all relevant records were produced before the AO, who found no discrepancies. The assessee also highlighted that no additions were made on account of process loss and scrap generation in previous assessments.

Upon review, the Tribunal found that the AO had not pinpointed specific defects in the books of accounts and had not conducted necessary inquiries. The CIT(A) noted that the GP and NP ratios and scrap and process loss percentages were comparable to previous years. The Tribunal concluded that the AO's rejection of the waste/scrap claim and estimation of scrap generation and process loss lacked basis. However, considering the totality of facts, the Tribunal deemed a lumpsum addition of 30%, rounded off to Rs. 25 lacs, as justifiable.

Conclusion:

The Tribunal partly allowed the Revenue's appeal, directing that the addition be restricted to Rs. 25 lacs instead of Rs. 8,18,12,227. The decision was pronounced in open court on 12-07-2013.