2015 (3) TMI 1364 - AT - Income Tax

Addition by estimating the raw material consumption @ 53% as against 55.22% as per books of account and records - HELD THAT - As for the AO s observation that some of the expenditure is supported by self-made vouchers, the mere fact that some expenditure is supported with self-made vouchers can never be reason enough which is sustainable in the eyes of law to reject the books of account as a whole. In case the A.O. was not satisfied about the authenticity of the support for this expenditure, nothing prevented him from exploring the possibilities of disallowance with respect to that expenditure. The course of action he adopted i.e. in rejecting the books of account though only to the extent of consumption of material cannot be given any judicial approval. It is also to be noted that consumption of raw material in year to year even under ideal circumstances can never be the same because there are many variables governing the consumption of raw material. The A.O. was thus clearly in error in resorting to the impugned disallowance. CIT(A) has also not dealt with any of these aspects but has proceeded with his seemingly erudite discussion on the legal position though without properly establishing the fundamental facts. In view of these discussions and bearing in mind the entirety of the case, we are of the considered view that the authorities below was in error so far as their stand on disallowance of ₹ 33,01,961/- on raw material consumption is concerned. We, therefore, direct the Assessing Officer to delete the impugned disallowance. Addition of bad debs in respect of NTPC, Rihandnagar - HELD THAT - The impugned disallowance is devoid of any legally sustainable merit. There is no dispute that this debt was so written off and yet the disallowed is made only because a certificate from the debtor is not produced. The conditions laid down for allowance and bad debt are clearly satisfied in the case and the disallowance, therefore, deserves to be deleted. We direct the A.O. to do so. Ground no.2 is thus allowed. Disallowance on adhoc basis of various administrative expenses - HELD THAT - We find that the disallowance is made purely on the basis of surmises and conjectures and without pointing out any specific defects in the vouchers in support of these expenses. We are unable to see any legally sustainable merits in this kind of approach based on sweeping generalisation for making disallowance. We direct the A.O. to delete the same. Ground no.3 is thus allowed. Disallowance being 5% of the total wages paid as against disallowance being 10% of the total wages paid - HELD THAT - Disallowance is made purely on the basis of surmises and conjectures and without pointing out any specific defects in the vouchers in support of these expenses. We are unable to see any legally sustainable merits in this kind of approach based on sweeping generalisation for making disallowance. We direct the A.O. to delete the same. Ground no.4 is thus allowed.

Summary

Issues:
1. Disallowance of raw material consumption
2. Disallowance of bad debts
3. Adhoc disallowance of administrative expenses
4. Disallowance of wages paid

Analysis:

Issue 1: Disallowance of raw material consumption
The appeal was against the addition of Rs. 33,01,961 by estimating raw material consumption at 53% instead of 55.22% as per the books. The Assessing Officer (A.O.) rejected the consumption figures provided by the assessee, citing inconsistencies in material consumption for retreading tyres of the same size. The A.O. invoked section 145(3) to estimate consumption at 53%. However, the Tribunal found the A.O.'s approach flawed, emphasizing that material consumption varies based on tyre conditions. No defects were found in the books, and self-made vouchers alone were insufficient to reject the accounts. The Tribunal directed the A.O. to delete the disallowance, granting relief to the assessee.

Issue 2: Disallowance of bad debts
The A.O. disallowed Rs. 2,10,958 as bad debts due to the absence of a certificate from the debtor, NTPC, Rihandnagar. The Tribunal noted that the debt was written off, meeting the conditions for bad debt allowance. As the debtor certificate was the sole reason for disallowance, the Tribunal directed the A.O. to delete the disallowance, allowing the appeal on this ground.

Issue 3: Adhoc disallowance of administrative expenses
The A.O. disallowed Rs. 1,00,000 out of various administrative expenses on an ad-hoc basis, citing unverifiable nature and cash payments through self-made vouchers. The Tribunal found the disallowance speculative and lacking specific defects in expense vouchers. Consequently, the A.O. was directed to delete the disallowance, granting relief to the assessee.

Issue 4: Disallowance of wages paid
The A.O. disallowed 5% of total wages paid, amounting to Rs. 1,53,721, based on unverifiable nature and lack of proper bills and vouchers. The Tribunal found the disallowance arbitrary and lacking specific defects in vouchers. The A.O. was directed to delete the disallowance, allowing the appeal on this ground.

In conclusion, the Tribunal allowed the assessee's appeal, directing the A.O. to delete the disallowances related to raw material consumption, bad debts, adhoc administrative expenses, and wages paid. The Stay Application filed by the assessee was dismissed as infructuous.