2017 (8) TMI 375 - HC - Income Tax

Rejection of books of accounts - Applicability of section 145(3) - additions on account of excessive wastage - input/output ratio inconsistency - Estimation of wastage In Production of bone china wares - Held that - Inconsistency which has been duly explained by the assessee vide letter dated March 26, 2004 and the second objection by the Assessing Officer was that the sister concern M/s. Bharat Potteries Ltd. has declared more yield and more gross profit, has also been explained by the assessee vide the same letter dated March 26, 2004. Therefore, the inconsistency in the input/output ratio in various months the reasons for which has been explained by the assessee, cannot be the basis for rejection of books of account. The yield and gross profit rate declared by the assessee can also not be the basis for rejection of books of account since M/s. Bharat Potteries Ltd. is manufacturing maximum of stoneware crockery and for many other reasons which were explained by the assessee vide its letter dated March 26, 2004 which was ignored by the Assessing Officer and the Assessing Officer has not pointed out any specific defects in the purchases, sales, opening stock and closing stock of the assessee and the Assessing Officer has not brought on record any cogent material to prove that the assessee has sold the under-production out of the books of account. The objection of the learned Departmental representative that the learned Commissioner of Income-tax (Appeals) has not relied upon the CGCRI report, Calcutta, the learned authorised representative has pointed out that in the same report it has been mentioned that the said organisation is not involved production practice and they are not sure to what extent their opinion will be useful for the purpose of the assessee and in such circumstances and facts of the case, the report of CGCRI, Calcutta alone cannot be the basis for rejection of the books of account and making an estimation of wastage - Decided in favour of assessee.

Issues Involved:
1. Deletion of additions on account of excessive wastage.
2. Rejection of books of account invoking provisions of section 145(3) of the Income-tax Act.
3. Deletion of additions under section 69C on account of difference in closing stock and non-genuine expenditure.
4. Justification of the Income-tax Appellate Tribunal's reliance on external reports and evidence.

Detailed Analysis:

1. Deletion of Additions on Account of Excessive Wastage:
The appellant challenged the Tribunal's decision to delete additions made by the Assessing Officer (AO) concerning excessive wastage. The AO had restricted the wastage to 25%, whereas the Tribunal accepted a higher wastage percentage based on the CGCRI report. The Tribunal noted that the assessee's books were audited, and the production was subject to excise duty, with no defects found in purchases, sales, opening stock, and closing stock. The Tribunal concluded that the wastage declared by the assessee was reasonable and supported by industry standards and external reports. The court upheld this view, noting that the nature of bone china crockery justified the higher wastage percentage.

2. Rejection of Books of Account Invoking Provisions of Section 145(3) of the Income-tax Act:
The AO invoked section 145(3) to reject the assessee's books of account, citing inconsistencies in the input/output ratio and comparing the yield with a sister concern. The Tribunal found that these inconsistencies were explained by the assessee and that the AO did not point out specific defects in the books of account. The Tribunal emphasized that the AO failed to provide cogent material evidence of unrecorded production. The court agreed with the Tribunal, stating that the reasons provided by the assessee were sufficient, and the rejection of books based on the given grounds was unjustified.

3. Deletion of Additions under Section 69C on Account of Difference in Closing Stock and Non-Genuine Expenditure:
The AO made additions under section 69C for differences in closing stock and non-genuine expenditure. The Tribunal deleted these additions, citing the lack of specific defects pointed out by the AO in the assessee's records. The Tribunal also noted that the AO did not bring any substantial evidence to prove that the assessee had unaccounted production. The court upheld the Tribunal's decision, reinforcing that the AO's basis for these additions was not substantiated by concrete evidence.

4. Justification of the Income-tax Appellate Tribunal's Reliance on External Reports and Evidence:
The Tribunal relied on the CGCRI report and other industry publications to support the assessee's declared wastage. The AO's objection to this reliance was dismissed by the Tribunal, which noted that the CGCRI report was specific to the industry and provided a reasonable estimate of wastage. The court supported the Tribunal's reliance on this external evidence, stating that it was appropriate given the nature of the industry and the specific circumstances of the case.

Conclusion:
The court dismissed all the appeals, affirming the Tribunal's decisions on all counts. The court emphasized that the AO's rejection of books and additions based on excessive wastage and unaccounted production were not justified by substantial evidence. The Tribunal's reliance on external reports and the assessee's explanations were deemed reasonable and appropriate. The court clarified that the AO and the Department could reassess the situation in subsequent years based on any improvements in industry practices and machinery.

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