2017 (12) TMI 1692 - AT - Income Tax

Rejection of books of accounts - Addition invocation of provisions of section 145(3) - HELD THAT - Looking at the accounting standard for inventory valuation we do not find any infirmity in the method of techniques of measurement of cost as well as cost formula used by the assessee. The assessee in fact has followed the accounting standard only. We find that provision of section 145(3) are incorrectly invoked by the AO and confirmed by the ld CIT(A) because the valuation method is correct and therefore, it does not impact the correctness or completeness of the account of the assessee. In fact it makes the accounts of the assessee complete and correct. AO has applied the past year s gross profit ratio in that year also the valuation of the inventory was on similar basis therefore, if opinion of the AO is accepted then it cannot be said that accounts of previous year were correct and complete. The method of valuation of inventory followed by the assessee is year to year same. The assessee has maintained complete quantitative details also. No defects have been pointed out by the AO in the books of account other than what is stated by the Auditor. To invoke provisions of section 145(3) of the Act it is necessary that accounts of the assessee suffers from latent, patent and glaring errors. In the present case, we do not find any such finding by the AO. Further, the assessee has given detailed reason for the down fall in the gross profit also. Further, the details of valuation of closing stock of the manufactured goods as per retail method were also filed before the lower authorities and no infirmity was found in the same. In view of this, we do not find any reason to sustain the orders passed by the lower authorities with respect to the invocation of provisions of section 145(3) of the Act and consequently, making the addition to the total income of assessee - Decided in favour of assessee.

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145 of the Income Tax Act, 1961.
2. Addition on account of alleged decline in gross profit/net profit.
3. Denial of deduction under Section 80IC.
4. Violation of principles of natural justice.
5. Charging of interest under Sections 234A, 234B, 234C, and 234D of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Rejection of Books of Accounts under Section 145 of the Income Tax Act, 1961
The assessee, a company engaged in manufacturing and selling processed food products, challenged the rejection of its books of accounts by the Assessing Officer (AO) under Section 145. The AO's action was based on the statutory auditor's report, which expressed inability to comment on the accuracy of inventory valuation. The AO noted a decline in the net profit ratio from 15.19% to 10.72% and issued a show-cause notice. Despite the assessee’s explanation, the AO invoked Section 145 and estimated the net profit at 15.19%, resulting in an addition of ?1,56,06,861 for AY 2010-11 and ?2,02,27,358 for AY 2011-12. The CIT(A) upheld the AO's decision based on the previous year's order.

The Tribunal found that the assessee's method of inventory valuation using the retail method was consistent with Accounting Standard 2 and had been accepted by the revenue in previous years. The Tribunal concluded that the AO's invocation of Section 145(3) was incorrect as the valuation method did not affect the correctness or completeness of the accounts. Thus, the rejection of books was not justified.

Issue 2: Addition on Account of Alleged Decline in Gross Profit/Net Profit
The Tribunal observed that the AO made additions based on the previous year's gross profit ratio without pointing out specific defects in the books of accounts. The assessee provided detailed explanations for the decline in gross profit, which were not adequately considered by the lower authorities. The Tribunal held that the addition to the gross profit was unwarranted as the assessee maintained complete quantitative details verified by excise authorities, and no defects were found in the books. Consequently, the Tribunal deleted the additions of ?1,56,06,861 for AY 2010-11 and ?2,02,27,358 for AY 2011-12.

Issue 3: Denial of Deduction under Section 80IC
The assessee contended that if the additions to gross profit were upheld, the corresponding deduction under Section 80IC should be allowed. However, since the Tribunal deleted the additions, this issue became redundant. The Tribunal noted that the assessee's claim for deduction under Section 80IC was covered by a CBDT circular, which the lower authorities failed to consider.

Issue 4: Violation of Principles of Natural Justice
The assessee argued that the AO violated the principles of natural justice by not providing an opportunity for cross-examination and not confronting adverse material. The Tribunal found that the AO's actions were based on the auditor's report without giving the assessee a fair chance to explain or rectify the issues. The Tribunal emphasized the importance of following natural justice principles and providing adequate opportunities for the assessee to present its case.

Issue 5: Charging of Interest under Sections 234A, 234B, 234C, and 234D of the Income Tax Act, 1961
The assessee challenged the charging of interest under Sections 234A, 234B, 234C, and 234D. The Tribunal noted that these grounds were either general or consequential to the main issues. Since the primary additions were deleted, the interest charges would also need to be recalculated accordingly.

Conclusion:
The Tribunal allowed the appeals for both AY 2010-11 and AY 2011-12 partly, primarily by deleting the additions made by the AO and rejecting the invocation of Section 145. The Tribunal emphasized the correctness of the assessee's inventory valuation method and the necessity of adhering to principles of natural justice. The appeals were thus decided in favor of the assessee, with directions to delete the disputed additions and reconsider the interest charges.