2018 (10) TMI 1637 - AT - Income Tax

Rejection of books of accounts - estimations of the Gross Profit @ 9% - assessee did not provide to the AO. the details of consumption of raw material (seeds) vis- -vis yields, separately in respect of different types oils (cotton, mustard and ground nut, etc.) extracted from different seeds, when there is huge variation in the market price of these oils - Held that - Consistent with the view taken by the co-ordinate bench in assessee s own case for AY 2011-12, we are of the considered view that the AO was erred in rejection of books of account u/s 145(3) without recording any reasons as to how books of account maintained by the assessee are inconsistent with regular method of accounting fattened and accounting standards. In absence of any finding as to incorrectness in books of account or stock details, merely for the reason that there is fall in gross profit ratio, the books of account cannot be rejected u/s 145(3), more particularly, when the assessee has reconciled difference in gross profit ratio with necessary evidences. AO was erred in estimating gross profit on total sales to make additions. Although the CIT(A) has accepted the contentions put-forth by the assessee to delete addition made by the AO towards estimation of gross profit, yet, he has sustained adhoc disallowance of ₹ 1 crore by following his predecessor s order. But fact remains that the addition sustained by CIT(A) was deleted by ITAT, on further appeal by the assessee. Accordingly, we set aside the order of CIT(A) in confirming the adhoc addition of ₹ 1 crore and direct the AO to delete addition made towards estimation of gross profit in total. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition on account of gross profit estimation and rejection of books under Section 145.
2. Adhoc disallowance of ?1,00,00,000.

Detailed Analysis:

1. Deletion of Addition on Account of Gross Profit Estimation and Rejection of Books Under Section 145:

The revenue appealed against the deletion of the addition made by the Assessing Officer (AO) on account of estimating the gross profit at 9% and rejecting the books under Section 145 of the Income-tax Act, 1961. The AO had noticed a significant decline in the gross profit ratio from the previous year and found the assessee's explanations unsatisfactory. As a result, the AO rejected the books of account and estimated the gross profit at 9%, leading to an addition of ?48,97,12,103.

The assessee contended that the decline in gross profit was due to an increase in raw material costs and reclassification of certain expenses from selling and distribution to manufacturing costs. The CIT(A) partly allowed the appeal by sustaining a lump sum addition of ?1 crore and deleting the rest.

The Tribunal found that the AO's rejection of the books was not justified as the assessee had provided plausible reasons for the decline in gross profit, supported by evidence. The Tribunal noted that similar issues had been addressed in the assessee's favor in the previous assessment year (AY 2011-12) by the ITAT, where the addition made by the AO was deleted. The Tribunal upheld the CIT(A)’s decision to delete the majority of the addition and directed the AO to delete the entire addition made towards gross profit estimation.

2. Adhoc Disallowance of ?1,00,00,000:

The assessee appealed against the CIT(A)’s decision to sustain an adhoc disallowance of ?1 crore. The CIT(A) had followed his predecessor's order without assigning specific reasons for the disallowance.

The Tribunal observed that the AO had not made any adverse comments on the books of account maintained by the assessee and had ignored the detailed explanations and evidence provided. The Tribunal found that the CIT(A) had accepted the assessee's contentions regarding the reasons for the decline in gross profit but had still sustained the adhoc disallowance without proper justification.

The Tribunal referred to its decision in the assessee's own case for AY 2011-12, where a similar adhoc addition was deleted. Consistent with this view, the Tribunal set aside the CIT(A)'s order confirming the adhoc addition of ?1 crore and directed the AO to delete the addition entirely.

Conclusion:

The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal, directing the deletion of the entire addition made towards gross profit estimation and the adhoc disallowance of ?1 crore. The Tribunal emphasized that the AO had erred in rejecting the books of account and estimating the gross profit without proper justification, and the CIT(A) had wrongly sustained the adhoc disallowance. The Tribunal's decision was pronounced in the open court on 10th October 2018.