2018 (8) TMI 265 - AT - Income Tax

Addition on account of estimated excess consumption - rejection of books of accounts u/s 145(3) - Held that - AO accepted book result of the assessee in preceding and subsequent Assessment Years 2007-08 and 2009-10 in scrutiny assessment u/s 143(3) of the Act and no additions of similar nature have been made. In Assessment Year 2010-11 also, AO accepted the book result of the assessee, as submitted, u/s 143(3) of the IT Act. Therefore instead of re-casting the trading account per month, AO should have brought some independent and concrete material on record to reject book results in Assessment Year in appeal. AO issued a show-cause notice for rejection of books of account on 29.12.2010. The assessee filed the reply as well as document and produced the books of account before the AO immediately on 31.12.2010, denying the allegation of the AO. The AO instead of appreciating the explanation of the assessee in a proper perspective with reference to the material available on record passed the assessment order on the same day on 31.12.2010. AO without verifying the fact from the books of accounts of the assessee and record nature of business of the assessee rejected the books of accounts without any just reasons. The reasons given by the AO were based only upon the data supplied by the assessee. AO on the basis of details supplied by the assessee prepared trading account monthly and also re-casted the stocks and other items for the purpose of rejecting the book result of the assessee. AO without bringing any material fact against the assessee on record made the addition against the assessee. It appears to be a case of hypothetical calculations made by the AO on the basis of entries in the books of accounts for making the additions against the assessee without any justification. Further, AO has not pointed out if assessee violated any accounting standards prescribed by rules for maintenance of books of accounts. It is a case of hurried assessment framed by the AO without verifying the facts from the record of the Revenue Department particularly when in preceding and subsequent assessment years, the similar claim of assessee have been accepted by the AO. CIT(A) on proper appreciation of facts and material on record correctly did not agree with the findings of the AO. During the proceeding before Tribunal, no material have been produced to rebut the findings on fact recorded by the Ld. CIT(A) in favour of the assessee - No justification for the AO to reject the books of accounts u/s 145(3) of the Act or to make the addition. - decided in favour of assessee

Summary

Issues Involved:
1. Deletion of addition on account of estimated excess consumption.
2. Rejection of books of accounts under Section 145(3) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Estimated Excess Consumption:

The Assessing Officer (AO) noted significant variations in the Gross Profit (G.P.) rates across different months, with some months showing negative G.P. rates. The AO suspected that adjustments were made in the last quarter to evade taxes, citing variable purchases and direct expenses inconsistent with sales. The AO recalculated the monthly trading accounts using stock values from bank statements and found discrepancies, leading to the conclusion that the books of accounts did not present a true and fair picture. The AO also noted suspicious transactions with certain parties and potential round-tripping of money. Consequently, the AO made an addition of ?1,77,73,854/- to the income of the assessee based on the alleged artificial excess consumption of materials.

The assessee challenged this addition, explaining that the business involves manufacturing various styles of garments with different cycles and varying profit margins. The assessee maintained proper books of accounts, audited and supported by invoices and other documents. The assessee argued that the AO's method of preparing monthly trading accounts from tally data was misleading and did not reflect the actual business operations. The Ld. CIT(A) accepted the assessee’s explanation, noting that the AO's calculations were hypothetical and not based on concrete evidence. The Ld. CIT(A) found that the assessee provided sufficient documentation to substantiate the actual consumption and production figures, leading to the deletion of the addition.

2. Rejection of Books of Accounts under Section 145(3):

The AO rejected the books of accounts under Section 145(3) of the Income Tax Act, citing inconsistencies and unreliability in the records. The AO observed that some bills were processed exceptionally fast, while others were delayed by several months, indicating potential manipulation. The AO also noted that the assessee's creditors remained unverifiable, and the stock records provided to the bank did not match the books of accounts. The AO concluded that the books did not reflect the true state of affairs and invoked Section 145(3) to reject them.

The assessee contended that the books of accounts were maintained consistently as in previous years, which had been accepted by the Revenue. The assessee explained the nature of the business, where different styles and types of garments lead to variations in G.P. rates. The assessee provided detailed explanations and supporting documents, including confirmations from suppliers and job workers. The Ld. CIT(A) found that the AO did not pinpoint specific defects in the books and relied on hypothetical calculations. The Ld. CIT(A) held that the AO failed to provide cogent reasons for rejecting the books and that the assessee's accounting system was regularly followed and audited. Consequently, the Ld. CIT(A) accepted the books of accounts and deleted the additions made by the AO.

Conclusion:

The Tribunal upheld the Ld. CIT(A)'s decision, noting that the AO's rejection of the books of accounts and the subsequent addition were not justified. The Tribunal emphasized the importance of consistency in tax proceedings and found that the AO did not bring any independent material to substantiate the rejection of the books. The Tribunal confirmed that the assessee provided adequate explanations and documentation to support the business operations and consumption figures. Therefore, the appeal of the Revenue was dismissed, and the findings of the Ld. CIT(A) were upheld.