2017 (11) TMI 1364 - AT - Income Tax

Nature of expenditure - Treatment to extension fee - Capital Expenditure or revenue expenditure - Held that - CIT(Appeals) has given a categorical finding that the said extension fee was paid lump sum once before installation of the machine. This finding has also not been controverted by the Ld. counsel for assessee. In view of the same, we have no hesitation in holding that the expenditure incurred by the assessee was linked to the installation of machinery as held by the Ld.CIT(Appeals) and is attributable to the cost of machinery and is thus capital expenditure. - Decided against assessee. Rejection of books of account of the assessee u/s 145(3) - trading addition - Held that - Assessee had explained each and every discrepancy pointed out by the Assessing Officer vis- -vis the difference in the stock submitted to the bank and that recorded in the books of account. The contention of the Ld. counsel for assessee that the stocks reflected in the books were based on the stocks as per Excise record maintained, which were duly audited by the Excise Department and that all sales and purchases were duly vouched and supported by bills and even assessed by the Sales Tax Department, have not been controverted by the Revenue. The assessee has demonstrated by way of a certificate filed from the bank that the last inspection for the year was undertaken on 1.2.2010 for verifying the stock statement on 31.12.2009 which again has not been controverted by the Ld. DR. No cognizance therefore can be taken of this report for the purpose of determining the stock as at the end of the year. . There is therefore merit in the contention of the Ld. counsel for assessee that having furnished a satisfactory explanation, there was no reason to make any addition by relying on the stock statement submitted to the Bank . Thus the assessee has demonstrated by way of a certificate filed from the bank that the last inspection for the year was undertaken on 1.2.2010 for verifying the stock statement on 31.12.2009 which again has not been controverted by the Ld. DR. No cognizance therefore can be taken of this report for the purpose of determining the stock as at the end of the year. There is therefore merit in the contention of the Ld. counsel for assessee that having furnished a satisfactory explanation, there was no reason to make any addition by relying on the stock statement submitted to the Bank As far the non-maintenance of wages register, the assessee having produced the same pertaining to the months of April, 2009, October, 2009 and March, 2010 and also the challans in respect of EPF deposits, we hold that it cannot be said that the assessee was not maintaining primary records of wages register. Even the vouchers for firewood were duly produced before the lower authorities and were explained to them as to why no bills pertaining to the same were present since as explained by the assessee, firewood was purchased from petty farmers from the unorganized sector who did not raise or maintain any bill books. Therefore, in view of the above, it cannot be said that there was any material discrepancy in the books of account of the assessee by virtue of which the true profits of the assessee could not be determined so as to warrant the rejection of books of account u/s 145(3) of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Treatment of extension fee as capital expenditure versus revenue expenditure.
2. Rejection of books of account under Section 145(3) of the Income Tax Act, 1961.
3. Estimation of additional taxable income after rejecting books of account.

Detailed Analysis:

1. Treatment of Extension Fee as Capital Expenditure versus Revenue Expenditure:
The assessee challenged the treatment of extension fees paid to the Forest Department, Haryana, as capital expenditure instead of revenue expenditure. The Assessing Officer (AO) had disallowed ?9,00,000/- debited as extension fees in the Profit & Loss Account, treating it as capital expenditure necessary for acquiring the right to manufacture, which was essential for installing and operating the machinery. The AO added the balance of ?7,65,000/- to the income after allowing depreciation. The CIT(Appeals) upheld this view, stating that the extension fee was paid as a lump sum before the installation of the machinery and was essential for initiating profit generation, thus linking it to the cost of the machinery. The Tribunal found no infirmity in the CIT(Appeals) decision and held that the expenditure incurred by the assessee was indeed capital in nature. Consequently, the ground of appeal raised by the assessee was dismissed.

2. Rejection of Books of Account under Section 145(3) of the Income Tax Act, 1961:
The AO rejected the books of account of the assessee under Section 145(3) due to discrepancies such as differences in stock submitted to the bank and that shown in the books, non-maintenance of primary records for salary payments, and non-production of certain vouchers. The CIT(Appeals) upheld the rejection but modified the estimation of additional taxable income. The assessee contended that no such defects existed and provided explanations for each discrepancy. The Tribunal found merit in the assessee's contentions, noting that the stocks reflected in the books were based on audited Excise records and verified by the Sales Tax Department. The Tribunal also noted that the inspection report from the bank was not confronted to the assessee and thus could not be relied upon. Consequently, the Tribunal held that there was no material discrepancy warranting the rejection of books of account under Section 145(3).

3. Estimation of Additional Taxable Income after Rejecting Books of Account:
Following the rejection of the books of account, the AO estimated the gross profit by averaging the gross profit ratio of the last three years, resulting in an addition of ?45,27,827/- to the income. The CIT(Appeals) reduced this addition to ?26,76,022/- based on discrepancies in stock statements and other defects. The Tribunal, however, found that the assessee had satisfactorily explained the discrepancies and that the books of account reflected the true affairs of the business. Consequently, the Tribunal set aside the order of the CIT(Appeals) and deleted the addition made by the AO.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal upheld the treatment of extension fees as capital expenditure but set aside the rejection of books of account and the consequent addition to the income. The detailed analysis and explanations provided by the assessee were found satisfactory, leading to the deletion of the additional taxable income estimated by the AO.