2017 (3) TMI 100 - AT - Income Tax

Rejection of books of accounts - substantial increase in the amount of wastage as compared to previous year - Held that - On perusal of documents available on record, it is noted that the percentage of wastage during the year is 8.93% as against 15.8% in A.Y. 2010-11. The detailed working thereof has been reproduced above. Further, the turnover has, in fact, decreased from ₹ 21.85 crore to ₹ 16.59 crore during the year. Therefore, on both account, there is clearly an actual inaccuracy which has crept in or wrongly appreciated by the Assessing Officer which has resulted in rejection of books of accounts. Other reason mentioned for rejecting the books of accounts has been the decrease in the GP rate vis- -vis last year and non-maintenance of quantitative details in terms of raw material and finished goods account. On perusal of the record, it is noted that the fall in GP rate has been reasonably explained by the assessee through facts and figures and as far as the quantitative details of raw material and finished goods are concerned, the same have been appropriately disclosed in the Tax Audit Report and therefore, details have been submitted during the course of assessment and the appellate proceedings. In the light of above, we do not see any justifiable reason for rejection of books of accounts in the instant case. Further, no reasonable basis has been given for estimating the GP rate by the lower authorities. Taking into consideration the fact that in the previous years as well as in the subsequent years, the books of accounts have been accepted by the Revenue, we do not see any justifiable basis for rejection of books of accounts in the instant year. - Decided in favour of assessee. Disallowance of office expenses - Held that - No specific expenditure has been identified by the Assessing officer which calls for disallowance either in terms of the said expenditure being bogus in nature or not incurred for the purposes of business carried on by the assessee. There is no basis for disallowance on adhoc basis in the eyes of law. In the result, the disallowance made by the Assessing officer and sustained by the ld CIT(A) is deleted.- Decided in favour of assessee.

Issues Involved:
1. Invocation of Section 145(3) of the Income Tax Act.
2. Application of Gross Profit (GP) rate.
3. Disallowance of various expenses.
4. Levy of interest under Sections 233B and 234D.

Issue-wise Detailed Analysis:

1. Invocation of Section 145(3) of the Income Tax Act:
The assessee, involved in manufacturing and trading stones, faced scrutiny due to a significant decrease in gross profit (GP) and net profit (NP) rates compared to the previous year. The Assessing Officer (AO) rejected the books of accounts under Section 145(3) due to discrepancies in wastage claims, incomplete inventory details, and unexplained high expenditure on freight and packing material. The AO estimated the GP rate at 47.23%, averaging the preceding year's GP rate of 49.74% and the current year's 44.71%.

The assessee contested the rejection, arguing that the stock register and expenditure details were maintained and certified by the Tax Audit report. The decrease in GP was attributed to increased raw material costs and decreased turnover. The CIT(A) upheld the rejection of books but adjusted the GP rate to 46%.

Upon review, the Tribunal found that the AO had inaccurately assessed the wastage percentage and overlooked the detailed quantitative records provided by the assessee. The Tribunal concluded that there was no justifiable reason for rejecting the books of accounts, as the fall in GP was reasonably explained and the quantitative details were appropriately disclosed.

2. Application of Gross Profit (GP) Rate:
The AO applied a GP rate of 47.23%, which was contested by the assessee, who declared a GP rate of 44.71%. The CIT(A) revised this to 46%, considering the decrease in turnover and increased raw material costs. The Tribunal, however, found no reasonable basis for the lower authorities' estimation of the GP rate and noted that the books of accounts were accepted in previous and subsequent years. Consequently, the Tribunal ruled that the AO was not justified in rejecting the books and making the GP addition, allowing the assessee's ground on this issue.

3. Disallowance of Various Expenses:
The AO disallowed 20% of expenses under several heads, including conveyance, office, staff welfare, telephone, vehicle repairs, foreign travel, and sales promotion, totaling ?61,06,705/-, due to lack of supporting documents like call registers and logbooks. The CIT(A) reduced the disallowance to 10%.

The assessee argued that the disallowances were made on an ad hoc basis without specific evidence of non-business use or personal expenses. The Tribunal agreed, stating that no specific expenditure was identified as bogus or non-business related, and there was no legal basis for an ad hoc disallowance. Thus, the Tribunal deleted the disallowances, allowing the assessee's ground on this issue.

4. Levy of Interest under Sections 233B and 234D:
The assessee contested the levy of interest under Sections 233B and 234D, which was deemed consequential. The Tribunal dismissed this ground as it was consequential in nature.

Conclusion:
The appeal filed by the assessee was partly allowed, with the Tribunal ruling in favor of the assessee on the major issues of rejection of books of accounts, GP rate estimation, and disallowance of expenses. The levy of interest was dismissed as consequential. The order was pronounced in the open court on 28/02/2017.

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