2018 (6) TMI 160 - AT - Income Tax

Suppression of production leading to the suppression of sale as well as determination of gross profit on estimated basis - statement u/s 133A was recorded on 21-01-2015, wherein, the excess production loss was observed - Held that - The addition was solely made on the basis of the statement furnished by the production manager of the assessee at the time of survey. The lower authorities have not brought any iota of evidence suggesting that the assessee has suppressed the production leading to suppressed sale out the books. Here it is pertinent to note that the CBDT has discouraged to its officers to make the addition on the basis of the statements and without bringing any tangible materials for any addition/disallowance. Keeping in view the guidelines issued by the CBDT from time to time regarding the statements obtained during search and survey operation, it is undisputedly clear that the lower authorities have not collected any other evidence to prove the suppressed production other than the statement. - Decided against revenue

Issues Involved:
1. Deletion of addition on account of suppression of production and sale out of books.
2. Deletion of addition on account of estimation of gross profit.
3. Rejection of books of accounts by the Assessing Officer (AO).

Detailed Analysis:

Issue 1: Deletion of Addition on Account of Suppression of Production and Sale Out of Books

The Revenue challenged the deletion of the addition of ?4,57,82,539/- made by the AO for alleged suppression of production and sales. The AO's basis for this addition was the statement recorded during a survey under Section 133A of the Income Tax Act, 1961, which indicated a maximum loss of 5.6% in the manufacturing process. However, the assessee had shown a processing loss of 6.9%, leading the AO to treat the excess loss of 1.3% as suppressed production and consequently, suppressed sales.

The CIT(A) deleted the addition, observing that the AO did not consider the increase in closing stock of work-in-progress, which would negate the alleged suppression. The CIT(A) noted that the AO failed to undertake a quantitative analysis of unaccounted production and did not account for significant investments made by the assessee in improving production efficiency. Furthermore, no evidence of unaccounted sales was found during the survey. The CIT(A) concluded that the assessee had not suppressed its production by 4,45,355 kgs, and directed the deletion of the addition.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO made the addition based solely on the statement recorded under Section 133A without any corroborative evidence. The Tribunal highlighted that the statement from FY 2014-15 could not be applied to AY 2012-13 without supporting evidence. The Tribunal also referenced CBDT instructions discouraging additions based solely on statements obtained during surveys.

Issue 2: Deletion of Addition on Account of Estimation of Gross Profit

The AO observed a consistent reduction in the gross profit (GP) and net profit (NP) ratios over the years and concluded that the financial statements did not reflect the true income of the assessee. The AO rejected the books of accounts under Section 145(3) and estimated the GP ratio, leading to an addition of ?3,81,75,944/-.

The CIT(A) deleted this addition, noting that the AO did not point out any specific defects in the books of accounts. The CIT(A) referenced several judicial precedents, including the Gujarat High Court's decision in CIT vs. Symphony Comfort System Limited, which held that a mere fall in GP ratio does not justify rejection of books of accounts if no specific defects are found. The CIT(A) concluded that the AO's action was not justified and that no addition was required on this count.

The Tribunal agreed with the CIT(A), stating that the AO's rejection of the books and estimation of GP were not supported by any evidence of defects in the books of accounts. The Tribunal reiterated that the AO's addition was based merely on the statement recorded during the survey, which lacked corroborative evidence.

Issue 3: Rejection of Books of Accounts by the Assessing Officer (AO)

The AO rejected the books of accounts under Section 145(3), citing that the financial statements did not reflect the true income of the assessee. The CIT(A) found this rejection unjustified, as no specific defects were pointed out in the books of accounts, which were duly audited under various statutory requirements.

The Tribunal upheld the CIT(A)'s findings, emphasizing that the AO did not bring any material evidence to support the rejection of the books. The Tribunal noted that the books were audited and no discrepancies were found by the auditors or other regulatory authorities.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order to delete the additions made by the AO on account of alleged suppression of production and sales, and the estimation of gross profit. The Tribunal emphasized the lack of corroborative evidence and specific defects in the books of accounts, aligning with judicial precedents and CBDT guidelines.

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