2010 (6) TMI 880 - AT - Income Tax

Summary

Issues Involved:
1. Rejection of books of account u/s 145 of the Income Tax Act, 1961.
2. Deletion of addition made on account of suppression of production.
3. Deletion of addition made on account of disallowance of interest expenses.
4. Deletion of addition made on account of disallowance of interest on cash balance.

Summary:

Issue 1: Rejection of books of account u/s 145 of the Income Tax Act, 1961
The Learned Assessing Officer (A.O.) rejected the books of account of the assessee, a Private Limited Company engaged in manufacturing M.S and CTD Bars, citing large variations in electricity consumption vis-à-vis production. The A.O. invoked section 145(3) and estimated suppressed production based on electricity consumption, leading to an addition of Rs. 92,89,426/- to the income of the assessee. The Learned Commissioner of Income Tax (Appeals) [CIT(A)] held that the rejection was unjustified as the assessee maintained proper books audited under the Companies Act and u/s 44AB of the Income Tax Act, with no defects found by the auditors or excise authorities.

Issue 2: Deletion of addition made on account of suppression of production
The A.O. calculated suppressed production by comparing electricity consumption and production figures, estimating a suppression of 414.910 MT valued at Rs. 92,89,426/-. The CIT(A) deleted this addition, noting that the A.O. failed to provide material evidence of unaccounted manufacturing and sales or unaccounted purchases of raw materials. The CIT(A) also referenced the ITAT Delhi decision in Pondy Metal & Rolling Mills (P) Ltd., which held that high electricity consumption alone cannot justify rejecting accounts or estimating suppressed production.

Issue 3: Deletion of addition made on account of disallowance of interest expenses
The A.O. disallowed Rs. 55,000/- of interest expenses, alleging that an interest-free loan of Rs. 5,00,000/- was given to a party. The CIT(A) deleted this disallowance, accepting the assessee's argument that it had sufficient interest-free funds (share capital and free reserves of Rs. 1,02,16,696/- and unsecured loans of Rs. 38,86,415/-) to cover the loan, and thus, no interest-bearing funds were used.

Issue 4: Deletion of addition made on account of disallowance of interest on cash balance
The A.O. disallowed Rs. 33,000/- of interest on the grounds that the assessee maintained a cash balance of Rs. 3,00,000/- while withdrawing money from the bank for business purposes. The CIT(A) deleted this addition, stating that maintaining cash in hand is a business prerogative and not indicative of non-business use. The CIT(A) found no evidence that the cash was used for non-business purposes.

Conclusion:
The appeal of the revenue was dismissed, with the Tribunal confirming the CIT(A)'s order on all grounds. The Tribunal found no error in the CIT(A)'s findings and held that the A.O. failed to provide sufficient evidence to support the additions made.