2016 (10) TMI 705 - AT - Income Tax

Rejection of books of accounts - Held that - The assessee has furnished the Daily Stock Account of Copper Scrap and also the Job Work done by M/s. Kwality Tubes & Capillaries along with reference of challan, quantity, production loss etc. the assessee has also filed copy of RG 23A Register demonstrating that all the transactions were duly recorded. The assessee has also given ledger account of conversion charges of sister concerns and also copy of Form No. 16A. In respect of difference in conversion charges as per TDS Certificates and what was debited, it is stated that the difference of ₹ 19,30,603/- is due to the Credit of CENVAT included in the goods sent for job work and goods received from job work through the credit notes received from M/s. New India Extrusions Pvt. Ltd. on which though TDS is deducted but not debited to Conversion Charges A/c but to CENVAT Credit A/c. The difference of ₹ 2,77,796/- is due to the Credit Note of Discount received from M/s. SAM Enterprises on 31.03.2009 but on which TDS was already deducted earlier. Thus there is no error and difference of ₹ 22,08,399/- (1930603 277796) is reconciled. It is stated that these credit notes were produced before the AO but were not understood by the AO. It is stated that these objections of the AO that the difference could not be explained is contrary to the facts. It is further stated that books of accounts were duly submitted before the AO as the AO himself has noted in the assessment order that books of accounts, bills and vouchers etc. were examined on test check basis. We find that the AO has noted that in spite of repeated opportunity, the assessee has not submitted the books of account after the date 9.9.2011 on which the assessee was required to justify the defect as mentioned above to cross verify the contention of the assessee. We find force in the contention of the ld. Counsel for the assessee that assessee had submitted plausible explanation to the defects as pointed out by the AO. We also noticed that in the paper book the assessee has given certificate that except document at sl. No. 10, all other documents were part of the record of the lower authorities. Therefore, it can be inferred that these materials were available before the AO. The AO has not given any finding on this evidences, therefore, in our considered view, the AO was not justified in rejecting the books of account without properly examining the same and giving a specific finding on the material so placed before him. The books of account cannot be rejected in a casual manner and proceed to estimation of GP merely on the basis of past history of the assessee. If the assessee is able to demonstrate that the facts and circumstances were different from the earlier years resulting into fall in GP ratio, the GP rate adopted by the AO on the basis of past history would not be a better guide. After considering the totality of the facts and circumstances of the case, we are of the considered view that the AO was not justified in rejecting the books of account.

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145(3) of the Income Tax Act, 1961.
2. Estimation of gross profit rate.
3. Deletion of addition on account of late payment of ESI contribution.

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts:
The assessee's books of accounts were rejected by the Assessing Officer (AO) under Section 145(3) of the Income Tax Act, 1961, due to discrepancies such as non-inclusion of certain stock items, undervaluation of scrap, and incomplete production details. The AO noted a significant fall in gross profit (GP) and discrepancies in stock records, including missing entries for copper wire purchases and undervaluation of scrap at ?200 per kg. The AO also questioned payments made to sister concerns and discrepancies in conversion charges. The assessee argued that the fall in GP was due to a drop in raw material prices and selling prices, which was not properly verified by the AO. The Tribunal found merit in the assessee's explanations, noting that the AO did not thoroughly verify the records, including the stock register and Central Excise audit reports. The Tribunal concluded that the AO was not justified in rejecting the books of accounts without proper examination and specific findings, and thus set aside the impugned orders for a fresh assessment.

2. Estimation of Gross Profit Rate:
The AO estimated the GP rate at 9.18% based on the previous year's rate, resulting in a trading addition of ?63,37,152/-. The CIT (Appeals) reduced the GP rate to 6%, resulting in a reduced addition of ?30,42,043/-. The Tribunal, however, set aside the issue of rejection of books of accounts for fresh assessment, thereby nullifying the estimation of profit based on the past GP rate. The Tribunal emphasized that the AO should have verified the reasons for the fall in GP, including the impact of raw material prices and selling prices, before making any estimation.

3. Deletion of Addition on Account of Late Payment of ESI Contribution:
The AO made an addition of ?15,864/- for late payment of ESI contribution. The CIT (Appeals) deleted this addition, following the Supreme Court judgment in the case of Vinay Cement Ltd., which allows for delayed payment if made before filing the return of income. The Tribunal upheld the CIT (Appeals)' decision, citing consistent judicial pronouncements in favor of the assessee, including the Supreme Court and other high court judgments, confirming that the delayed payment of ESI contributions made before the due date of filing the return is allowable.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes, setting aside the rejection of books of accounts and the estimation of GP for fresh assessment. The revenue's appeal was dismissed, upholding the deletion of the addition for late ESI contribution. The Tribunal emphasized the need for proper verification and objective examination of records before rejecting books of accounts and making profit estimations.