2014 (6) TMI 572 - AT - Income Tax

Rejection of books of accounts u/s 145(3) of the Act - Confirmation of addition by adopting GP @ 23.338% of the Act Held that - The result disclosed by the regularly maintained books of account cannot be rejected unless it is found that the books of account maintained are either incomplete or unreliable or method of accounting employed is such on the basis of which correct profit of the assessee cannot be deduced - the assessee maintained regular books of account which were duly audited and the stock register was also duly maintained by the assessee - no material was brought on record to show that any transaction made by the assessee was not recorded in the books of account - no material was brought on record to show that the method of accounting employed by the assessee was not a regular or consistent method or a method from which the correct profit of the assessee could not be deduced - disproportionate increase in expenses under any head by itself does not empower the Revenue to reject the book results - Such a situation only creates a doubt and requires the AO to verify the genuineness of the expenditure with caution - the AO cannot reject such expenses without finding that any bogus or non-business expenditure or capital expenditure has been debited. Revenue could not bring any material on record to show that any bogus expenditure or non-verifiable expenses were debited under any head of expenses - the wholesale rejection of book result was not warranted - reasons given for rejecting the book results was inability of the assessee to properly explain the reason for decline in gross profit for disproportionate increase in expenses in three heads - the reason could at best present a case where the AO ought to have verified the books with caution and make due inquiries but does not empower the AO to reject the book results. The breakage claimed during the year worked out to 0.61% of the total production which compares favourably with the breakage of 1.22% accepted by the Department in the case of the assessee in the AY 2007- 08 and 1.08% accepted in the AY 2008-09 - no addition in respect of breakage claimed in the year is also warranted - the entire addition is not sustainable Decided in favour of Assessee. Deletion of gross profit on unaccounted production Held that - CIT(A) was of the view that the assessee contended before him that the assessee never admitted that the projected production worked out on the basis of comparative quantitative consumption of fuel was actual production of the year - no material was brought by the Revenue to show that the assessee admitted at any time that its actual production during the year was 17,63,930 square metres and not 17,11,343 square metres as recorded in the audited books of account. No material was brought before us to controvert the finding of the CIT(A) to the effect that the quantity of fuel consumption may vary in manufacturing of glazed tiles from one period to other period for various reasons and the comparison of fuel consumption in absolute terms as against quantity is improper, the manufacturing process of the assessee with regard to the nature of fuel used was changed during the year. Moreover, we find that no specific defect in the correctness and completeness of the audited accounts of the assessee could be brought on record by the Revenue. It was not open to the Revenue to brush aside the result disclosed from books of account - absolutely no material was brought on record by the Revenue to show that the assessee actually produced quantity more than what has been disclosed in the books of account or made any sale which was not recorded in the books of account - variation in the amount of consumption of fuel could have been a ground for careful scrutinizing of the facts, but it by itself does not empower the AO to assume some undisclosed production and thereby make addition to the result disclosed by the regularly maintained books of account there was no infirmity in the order of the CIT(A) Decided against Revenue. Deletion of additional depreciation on electric installation Held that - Following DCIT Vs. Datacraft India Limited 2010 (7) TMI 642 - ITAT, MUMBAI - where electric installations were part of plant and machinery, the assessee was entitled to depreciation at the rate applicable to plant and machinery and not electric installations and allowed the appeal of the assessee revenue could not point out any specific error in the order of the CIT(A) - the claim for depreciation on electrical installation at the rate applicable to plant and machinery to the assessee is allowed Decided against Revenue.

Summary

Issues Involved:
1. Addition of Rs 60,71,567/- by the Assessing Officer by adopting a gross profit (GP) rate of 23.338% after rejecting the books of account under section 145(3) of the Income Tax Act.
2. Deletion of addition of Rs 27,20,045/- made on account of gross profit on unaccounted production.
3. Deletion of addition of Rs 1,34,569/- made on account of additional depreciation on electric installation.

Detailed Analysis:

1. Addition of Rs 60,71,567/- by the Assessing Officer by adopting a GP rate of 23.338%:

The assessee, engaged in manufacturing and trading of glazed tiles, appealed against the addition of Rs 60,71,567/- made by the Assessing Officer by adopting a GP rate of 23.338% after rejecting the books of account under section 145(3) of the Income Tax Act. The Assessing Officer observed discrepancies in the books of accounts, including a fall in gross profit rate and net profit rate, and substantial variations in fuel consumption vis-`a-vis production. The Assessing Officer issued a show cause notice to the assessee regarding the suppressed production on account of excess fuel consumption. The assessee argued that the manufacturing process required significant fuel and electricity, and the increase in fuel cost was due to higher rates. The Commissioner of Income Tax (Appeals) confirmed the addition, noting that the appellant's explanation for the fall in GP was not convincing and that the appellant had shown abnormal expenses compared to earlier years. The Tribunal, however, found that the assessee maintained regular books of account, which were duly audited, and no material was brought on record to show any unrecorded transactions or that the method of accounting was not consistent. The Tribunal concluded that the wholesale rejection of book results was not warranted and deleted the addition of Rs 60,71,567/-.

2. Deletion of addition of Rs 27,20,045/- made on account of gross profit on unaccounted production:

The Revenue appealed against the deletion of the addition of Rs 27,20,045/- made on account of gross profit on unaccounted production. The Assessing Officer observed that the fuel consumption increased abnormally in the assessment year under consideration, while production did not increase proportionately. The Assessing Officer assumed that the assessee made unaccounted production and applied a GP rate on the sale value of such excess production. The Commissioner of Income Tax (Appeals) deleted the addition, noting that there could be various reasons for variance in fuel consumption, and the comparison of absolute value of fuel consumption was improper. The Tribunal upheld the deletion, stating that no specific defect in the correctness and completeness of the audited accounts was pointed out, and no material was brought on record to show that the assessee produced more than what was disclosed in the books of account. The Tribunal found that the variation in fuel consumption could warrant careful scrutiny but did not justify assuming undisclosed production and making an addition based on conjectures and surmises.

3. Deletion of addition of Rs 1,34,569/- made on account of additional depreciation on electric installation:

The Revenue also appealed against the deletion of the addition of Rs 1,34,569/- made on account of additional depreciation on electric installation. The assessee claimed depreciation at the rate of 15% on electric installations, considering them part of plant and machinery. The Assessing Officer allowed depreciation at the rate of 10% as per Income Tax Rules. The Commissioner of Income Tax (Appeals) allowed the assessee's claim, following the decisions of the Tribunal in similar cases, which held that electric installations forming part of plant and machinery should be depreciated at the rate applicable to plant and machinery. The Tribunal found no error in the order of the Commissioner of Income Tax (Appeals) and upheld the deletion of the disallowance of Rs 1,34,569/-.

Conclusion:

The Tribunal allowed the assessee's appeal by deleting the addition of Rs 60,71,567/- and upheld the Commissioner of Income Tax (Appeals)'s deletion of the additions of Rs 27,20,045/- and Rs 1,34,569/-, thereby dismissing the Revenue's appeal. The Tribunal emphasized the importance of maintaining regular books of account, the necessity of specific defects to reject book results, and the proper categorization of electric installations for depreciation purposes.