2019 (1) TMI 1600 - AT - Income Tax

Addition on account of the excess burning loss - understated production/suppressed production - GP addition - HELD THAT - We find that the Ld.CIT(A) in appeal though upheld the AO s view in not considering the order passed by his predecessor in respect of A.Y. 2010-11 in appeal in deleting the addition simply on the ratio of non-applicability of principle of res-judicata as held by the Hon ble Madras High Court we however cannot ignore the same since the Appellate Order was confirmed by the Co-ordinate Bench on 2018 (12) TMI 1670 - ITAT AHMEDABAD . However we appreciate the trouble taken by the Ld.CIT(A) in the impugned judgment is adopting the rational method by taking the latest profitable Assessment Year 2014-15 as standard GP to compute GP addition As already mentioned that the GP ratio is on decline and the same has become negative in A.Y.2015-16 therefore the latest profitable assessment year i.e. 2014-15 is taken as standard GP to compute the GP addition. If the standard GP at 4.65% is accepted then the GP addition for A.Y.2012-13 and A.Y.2013- 14 is computed at 5, 25, 667/- and 1, 58, 614/- respectively. Hence it is considered quite fair and reasonable to compute the GP addition for A.Y.2012-13 at 5, 25, 667/-. As all the expenditure has already been accounted while computing the basic GP percentage of 4.48 no further deduction for any expenses can be given.

Summary

Issues Involved:
1. Deletion of addition on account of excess burning loss.
2. Rejection of books of account under section 145 of the Income Tax Act, 1961.
3. Comparative analysis of Gross Profit (GP) ratio.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Excess Burning Loss:
The Revenue contested the deletion of an addition of ?1,79,12,777 out of a total addition of ?1,84,38,444 made on account of excess burning loss. The burning loss shown by the assessee ranged from 7.64% to 10%, which the Revenue argued was very high for the assessee’s line of business. The assessee, engaged in re-rolling steel and manufacturing various steel products, filed its return of income declaring a total income of ?30,82,260. The case was selected for scrutiny, and a show cause notice was issued due to the absence of details furnished by the assessee regarding stock, production, and burning loss. The Assessing Officer (AO) estimated the burning loss at 2% of the total input of raw material, leading to an addition of ?1,84,38,444 as undisclosed income.

2. Rejection of Books of Account under Section 145 of the Income Tax Act, 1961:
The AO rejected the assessee's books of account under section 145(3) of the Act, citing substantial defects and unreliability in the accounting of burning loss and other losses. The AO argued that the assessee presented its accounts in a way to conform to comparable cases without actually recording the losses at various stages. The AO's view was that the books did not reflect the true state of affairs of the business, leading to the rejection of the trading account results.

3. Comparative Analysis of Gross Profit (GP) Ratio:
On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] considered the comparative chart of turnover and GP percentage for the immediate preceding three years. The CIT(A) confirmed a GP addition of ?5,25,667 and deleted the balance amount of ?1,79,12,777. The CIT(A) adopted a rational method by taking the latest profitable assessment year (2014-15) as the standard GP to compute the GP addition, considering the declining GP ratio over the years. The CIT(A) upheld the rejection of books of account but critically analyzed the AO's rationale and deemed it fair to compute the GP addition based on the latest profitable year.

Judgment:
The Tribunal noted that the business activities of the assessee and the entity in the cited case of Mohan Steels were different, making the comparison invalid. The Tribunal also referred to the assessee's own case for Assessment Year 2010-11, where the addition was deleted based on the absence of specific defects found by the AO. The Tribunal found no infirmity in the CIT(A)'s method of computing the GP addition and confirmed the deletion of ?1,79,12,777 while upholding the addition of ?5,25,667.

The appeals by the Revenue for both Assessment Years 2012-13 and 2013-14 were dismissed. The cross objections by the assessee for both years were also dismissed as not pressed.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the major portion of the addition made on account of excess burning loss and confirmed the rational method adopted for computing the GP addition. The rejection of the books of account under section 145 was upheld, but the Tribunal found the AO's addition excessive and not sustainable. The appeals and cross objections were dismissed, confirming the CIT(A)'s order.