2015 (10) TMI 734 - AT - Income Tax

Rejection of books of accounts - addition made for suppression of turnover - Held that - AO all through the assessment order has not brought out any specific defect in the books of account produced by the assessee. No doubt he mentioned that assessee had consumed 34897.80 MT of coal and 32008.50 MT of iron ore but had given production of only 29082 MT of sponge iron. It is not known from where the AO found the norm that 1 to 1.1 MT of coal and 1.3 to 1.4 MT of iron ore was the standard requirement for producing 1 MT of sponge iron. Assessee had stated that consumption of these raw material was dependent on the moisture and dust content, operational environment and plant technology used. Assessee had also stated that it was operationalising a second kiln and this fact was not disputed by the lower authorities. When a new kiln is being operationalised for which the assessee had produced invoices in support of procurement of machinery and also pointed out the requirement of injecting washed iron ore for the new kiln, and pointed out these to be the reason why there were excess consumption of coal and electricity during the months of October to December 2005, these should not have been brushed aside lightly by the lower authorities. Purchase of large quantity of coal and maintenance of iron ore stock cannot be termed as defect in accounts when the purchases were duly reflected in the books and the stock register. As to the letter received by the AO from DGCEI it is not disputed that the survey done by the Central Excise were after the relevant previous year. Assessee cannot be saddled with any addition for suppressed sale based on a survey conducted in a succeeding year when the excess stock found at the time of survey is not collated with the production data for the preceding year Asssessee was not a simple producer of sponge iron but they were doing many other activities and there was no defects or lacuna noted by the sales-tax authorities. Hon ble Allahabad High Court in CIT v. Subhash Chand (2004 (8) TMI 27 - ALLAHABAD High Court) has clearly held that the records of the assessee once accepted by the sales-tax authorities, could not be given a go-by by the Income-tax authorities. Rejection of the books of account u/s.145(3) of the Act has got very serious consequence on an assessee and cannot be done in a light hearted manner unless such defects are manifested in the books of account and can be pointed out with certainty. We are of the opinion that there was no occasion or instances of this nature pointed out by the AO in the assessment order, except for generalisations based on hypothetical standards, the source of which was never authenticated. The additions, in our opinion, had no legs to stand. Such additions stand deleted. - Decided in favour of assessee.

Issues Involved:
1. Rejection of books of account by AO.
2. Addition for suppression of turnover.
3. Discrepancies in consumption of raw materials.
4. Information from Directorate General of Central Excise Intelligence (DGCEI).
5. Additional addition for shortage of stock.
6. CIT (A)'s decision on profit rate application.

Detailed Analysis:

Issue 1: Rejection of Books of Account by AO
The assessee, a manufacturer of sponge iron, was aggrieved by the AO's rejection of its books of account. The AO based his decision on the low profit margins for the assessment year 2006-07 compared to subsequent years. The AO noted discrepancies in the consumption of raw materials and production figures, which led to the rejection of the books under Section 145 of the Income Tax Act. The CIT (A) upheld the rejection, stating that the assessee failed to provide a separate break-up of expenditure for the new kiln's testing and stabilization.

Issue 2: Addition for Suppression of Turnover
The AO concluded that the assessee showed more consumption of coal and iron ore but less production of sponge iron, indicating suppressed sales. The AO calculated the suppressed production at 2,643 MT, leading to an addition of Rs. 2,23,33,350/-. The CIT (A) reduced this addition by applying an average profit rate of 6.90% on the total turnover, bringing the addition down to Rs. 1,68,07,200/-.

Issue 3: Discrepancies in Consumption of Raw Materials
The AO found that the consumption of coal and iron ore did not align with industrial norms for producing sponge iron. The assessee explained that the excess consumption was due to the trial run and experimentation with a new kiln. The AO, however, did not accept this explanation, citing that the consumption ratios were irrational. The CIT (A) also noted that the assessee did not capitalize the extra consumption costs for the new kiln.

Issue 4: Information from Directorate General of Central Excise Intelligence (DGCEI)
The AO received information from the DGCEI indicating that the assessee was involved in clandestine clearance of goods and suppressing production details. Although the AO could not obtain further materials from DGCEI, he used this information to support his conclusion of suppressed sales. The assessee argued that the DGCEI survey pertained to a subsequent year and not the relevant previous year.

Issue 5: Additional Addition for Shortage of Stock
The AO made an additional addition for a shortage of 205.6 MT of stock, calculated at Rs. 6,45,790/-. The assessee's explanation of possible variations due to transit loss, moisture loss, and weighbridge differences was not accepted by the AO.

Issue 6: CIT (A)'s Decision on Profit Rate Application
The CIT (A) decided to apply an average profit rate of 6.90% on the total turnover instead of the specific addition calculated by the AO. This approach was based on the average profit margins of the subsequent years 2007-08 and 2008-09. The CIT (A) did not adjudicate on the other disallowances as the profit was estimated on turnover.

Conclusion:
The Tribunal found that the AO did not point out any specific defects in the books of account. The variations in raw material consumption were explained by the assessee and were not adequately disputed by the lower authorities. The Tribunal noted that statistical data alone could not justify the rejection of books of account. The Tribunal also considered the sales-tax assessment order, which found no discrepancies in the books of account. Consequently, the Tribunal held that the additions made by the AO had no basis and deleted them, allowing the appeal of the assessee.

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