2018 (1) TMI 85 - AT - Income Tax

Addition on account of alleged decline in gross profit/net profit - applying the provisions of section 145 - in its report, Statutory Auditor noted that auditor is unable to comment on the accuracy of the valuation of the inventories of finished goods - rejection of books of accounts - Held that - The method of valuation of inventory followed by the assessee is year to year same. Furthermore, the assessee has maintained complete quantitative details also. No defects have been pointed out by the AO in the books of account other than what is stated by the Auditor. To invoke provisions of section 145(3) of the Act it is necessary that accounts of the assessee suffers from latent, patent and glaring errors. In the present case, we do not find any such finding by the ld AO. Further, the assessee has given detailed reason for the down fall in the gross profit also. Further, the details of valuation of closing stock of the manufactured goods as per retail method were also filed before the lower authorities and no infirmity was found in the same. In view of this, we do not find any reason to sustain the orders passed by the lower authorities with respect to the invocation of provisions of section 145(3) of the Act and consequently, making the addition to the total income of assessee. In the result Ground No. 1 to 3 of the appeal are allowed.

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145 of the Income Tax Act, 1961.
2. Addition on account of alleged decline in gross profit/net profit.
3. Denial of deduction under Section 80IC.
4. Charging of interest under Sections 234A, 234B, 234C, and 234D of the Income Tax Act, 1961.
5. Violation of principles of natural justice.

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts under Section 145:
The assessee, a company engaged in the manufacturing and sale of processed food products, filed its returns for the Assessment Years 2010-11 and 2011-12. The Assessing Officer (AO) rejected the books of accounts under Section 145 of the Income Tax Act, 1961, citing the statutory auditor's inability to comment on the accuracy of the valuation of inventories of finished goods. The AO noted a decline in the net profit ratio from 15.19% to 10.72% and estimated the net profit at 15.19% of the previous year, leading to an addition of ?1,56,06,861 for AY 2010-11 and ?2,02,27,358 for AY 2011-12. The CIT(A) upheld the AO's decision based on the previous year's order.

2. Addition on Account of Alleged Decline in Gross Profit/Net Profit:
The assessee argued that the valuation of finished products was done based on unit costing, considering raw materials, packing, and overheads. The retail method was used for valuation, which is permissible under Accounting Standard 2. The tribunal found no defects in the books of accounts other than the auditor's note and held that the method of valuation was correct and consistently followed. The tribunal concluded that the provisions of Section 145(3) were incorrectly invoked, and the additions were unjustified. Consequently, the additions of ?1,56,06,861 for AY 2010-11 and ?2,02,27,358 for AY 2011-12 were deleted.

3. Denial of Deduction under Section 80IC:
The assessee claimed deductions under Section 80IC, which were denied by the AO. The tribunal noted that if the additions on account of gross profit were deleted, the issue of deduction under Section 80IC would become redundant. Since the additions were deleted, the denial of deduction under Section 80IC was also reversed.

4. Charging of Interest under Sections 234A, 234B, 234C, and 234D:
The assessee contested the charging of interest under Sections 234A, 234B, 234C, and 234D. The tribunal did not provide a detailed discussion on this issue, but since the primary additions were deleted, the consequential interest charges would also be impacted.

5. Violation of Principles of Natural Justice:
The assessee argued that the assessment was made in violation of the principles of natural justice, without providing adequate opportunity for cross-examination and confronting adverse material. The tribunal acknowledged these concerns, emphasizing the need for fair hearing and proper consideration of evidence.

Conclusion:
The tribunal allowed the appeals for both AY 2010-11 and AY 2011-12, deleting the additions made by the AO and reversing the rejection of the books of accounts under Section 145. The denial of deduction under Section 80IC was also reversed, and the consequential interest charges were impacted. The tribunal highlighted the importance of following proper valuation methods and adhering to principles of natural justice in assessment proceedings.