2018 (6) TMI 1841 - AT - Income Tax

Manufacturing and sale of finished goods outside the books of account - HELD THAT - We find that no justification whatsoever has been given by the AO as to why the value of semi finished goods sold to its sister concern should not be considered in the total production of the yr for the purpose of determining the percentage of scrap generated. There is no material on record on the basis of which the suspicion of the AO can be supported that over and above the semi finished goods the assessee produced finished goods we note that the CIT(A) has given a categoric finding that the AO has neither rejected books of account nor brought out any evidences to support the suspicion that there was unaccounted manufacturing and sale of finished goods nor has AO made out any case that there were unaccounted sales. Addition having been made on suspicion in peculiar facts we find has correctly been deleted by the CIT(A). In the absence of any infirmity the departmental ground is dismissed Disallowance of Expenses - HELD THAT - On a careful consideration of the same we find that admittedly the disallowances have been made and been sustained by the AO and the CIT(A) respectively without any cogent reason. The books of account have been produced. Evidences supporting the claim are available on record. In the absence of any rebuttal on the same the AO or for that matter the tax authorities are not justified to enter into the terrain for determining the reasonableness of the expenditure. The legal position on the said aspect is well settled. Respectfully following the precedent ground No. 2 of the assessee is allowed.

Issues Involved:
1. Deletion of addition made by the AO on account of manufacturing and sale of finished goods outside the books of account.
2. Sustaining ad-hoc disallowances out of repair and maintenance expenses, building repair expenses, and general expenses.
3. Confirming ad-hoc disallowance out of total expenditure under the head 'Discount and Rebates'.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Manufacturing and Sale of Finished Goods Outside the Books of Account:
The Revenue challenged the deletion of the addition of Rs. 25,60,84,653/- made by the AO due to alleged unaccounted manufacturing and sale of finished goods. The AO's addition was based on the observation that the assessee did not show 'Sales Return sold as it is' for the year under assessment, unlike the previous years, and instead showed the sale of semi-finished goods to its subsidiary. The AO concluded that the percentage of scrap generated was higher than the average of the previous years, indicating unaccounted production and sale of finished goods.

However, the CIT(A) deleted the addition, noting that the AO had not provided concrete evidence to support the claim of unaccounted manufacturing and sale. The CIT(A) emphasized that the AO did not reject the books of accounts or point out discrepancies in the manufacturing, stock, or scrap registers. The AO's conclusions were based on assumptions without factual evidence. The ITAT upheld the CIT(A)'s decision, agreeing that the AO had not justified excluding the semi-finished goods from the total production for determining the scrap percentage. The ITAT found no material evidence to support the AO's suspicion of unaccounted production and sale, thus dismissing the Revenue's appeal.

2. Sustaining Ad-hoc Disallowances out of Repair and Maintenance Expenses, Building Repair Expenses, and General Expenses:
The assessee contested the ad-hoc disallowances sustained by the CIT(A) at 10% out of repair and maintenance expenses, building repair expenses, and general expenses. The ITAT noted that in a similar case for the 2008-09 assessment year, it had remanded the issue back to the AO for verification of bills and vouchers, as there was no instance cited to show that the expenses were unsupported by bills and vouchers. Following the precedent, the ITAT set aside the impugned order on these issues and directed the AO to verify the bills and vouchers and pass a speaking order in accordance with the law.

3. Confirming Ad-hoc Disallowance out of Total Expenditure under the Head 'Discount and Rebates':
The assessee also challenged the ad-hoc disallowance of 10% out of the total expenditure under the head 'Discount and Rebates'. The AO had disallowed Rs. 17.33 lacs, citing a decrease in gross turnover and an unexplained increase in discount and rebate expenses. The CIT(A) confirmed the disallowance, but the ITAT noted that in the preceding assessment year, a similar disallowance had been deleted due to the lack of any material evidence showing the expenses were not genuine or verifiable.

The ITAT reiterated that the reasonableness of expenditure should be judged from the businessman's perspective, not the Revenue's. The ITAT found that the AO had made the disallowance without any cogent reason or evidence of inadmissible expenses. The ITAT allowed the assessee's ground, emphasizing that the tax authorities should not determine the reasonableness of the expenditure without concrete evidence.

Conclusion:
The ITAT dismissed the Revenue's appeal and partly allowed the assessee's appeal, setting aside the ad-hoc disallowances for verification and deleting the disallowance under 'Discount and Rebates' due to lack of evidence. The judgment underscores the importance of concrete evidence and proper verification in making and sustaining additions or disallowances in tax assessments.

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