2016 (7) TMI 966 - HC - Income Tax

Rejection of books of accounts - Held that - It will not be out of place to mention here that the assessee is a manufacturing unit and it has to pay the excise duty. It is the specific contention of the assessee that the books of accounts maintained by it are tallying and the excise duty is paid on that basis. The stock register is not tallying with the other books of account only because some of the items were not deleted from the stock register. Taking into account the decision of this Court, not maintaining the day-today stock register is not a ground to reject the books of account. The question posed for our consideration is answered in favour of the assessee and it is held that the Tribunal has erred in upholding the action of the Respondent in rejecting the books of accounts of the Assessee under Section 145 (2) of the Act and further erred in confirming the part of the addition on estimated basis against the revenue - Decided in favour of assessee Penalty 271(1)(c) - Held that - When the Tribunal found that there was neither concealment of income on the part of the assessee nor there was furnishing of inaccurate particulars, but the disallowance was made only on the ground of estimation, no case was made out for levying of penalty and therefore the Tribunal concurred with the findings of the CIT (Appeals). Tribunal has erred in confirming the penalty under section 271 (1) (c) of the Act - Decided in favour of assessee

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145(2) of the Income Tax Act.
2. Confirmation of part of the addition on an estimated basis.
3. Imposition of penalty under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

Issue 1: Rejection of Books of Accounts under Section 145(2)
The primary issue revolves around whether the Income Tax Appellate Tribunal (the Tribunal) was justified in upholding the Assessing Officer's (AO) decision to reject the books of accounts of the assessee under Section 145(2) of the Income Tax Act. The AO based his decision on discrepancies in the stock register, lack of a day-to-day stock register, and differences between the stock register and audited books. The CIT (Appeals) disagreed, noting that the change in accounting methods for modvat did not warrant rejection of the books and that the AO contradicted himself regarding the production of books. The Tribunal, however, sided with the AO, emphasizing the lack of day-to-day quantitative records and the use of pencil entries, thereby justifying the rejection of the book results.

Issue 2: Confirmation of Part of the Addition on an Estimated Basis
The Tribunal confirmed a partial addition on an estimated basis, reducing the AO's addition from ?12.25 lakhs to ?6 lakhs. The CIT (Appeals) had initially allowed the assessee's appeal, stating that the AO's application of Section 145(2) was incorrect and that no major defects were found in the books of accounts. However, the Tribunal upheld the AO's action, citing discrepancies in the stock register and the assessee's failure to maintain proper records as justifications for the estimated addition.

Issue 3: Imposition of Penalty under Section 271(1)(c)
The third issue pertains to the imposition of a penalty under Section 271(1)(c) of the Income Tax Act, which was challenged in Tax Appeal No.1782 of 2010. The Tribunal had imposed this penalty, but the CIT (Appeals) had deleted it, arguing that the disallowance was based on an estimate and not on any concealment or inaccurate particulars of income. The High Court supported this view, referencing the case of Navjivan Oil Mills v. CIT, where it was held that penalties should not be imposed when additions are made on an estimated basis.

Conclusion:
The High Court concluded that the Tribunal erred in upholding the AO's rejection of the books of accounts and the estimated addition. It cited precedents where the absence of a day-to-day stock register alone was insufficient to reject books of accounts. The Court also noted that the penalty under Section 271(1)(c) was unjustified as the disallowance was based on estimation rather than any concealment or inaccurate particulars. Consequently, both Tax Appeal No.1196 of 2007 and Tax Appeal No.1782 of 2010 were allowed, setting aside the Tribunal's orders.