2019 (1) TMI 1056 - AT - Income Tax

Rejection of books of accounts - fall in GP rate - whether assessee made sales outside the books of accounts or inflated any expenditure? - Held that - The explanation that the very nature of the manufacturing process made it difficult to have any reasonable and determinable correlation of individual output vis- -vis the input appears to be plausible one. Consistent accounting policies were being followed by the assessee and similar records were being maintained in earlier years. AO has failed to adduce any cogent evidence to suggest any serious defect or discrepancy in the books of accounts or bring on record any material to establish that the assessee made any sales outside the books of accounts or inflated any expenditure. A mere fall in the GP Rate could only be a ground for making further in-depth inquiries but could not be by themselves a ground for rejection of books of account since in terms of statutory provisions of Section 145(3), the books could be rejected only in situation where Ld. AO was not satisfied about the correctness or completeness of the accounts of the assessee. This condition, in the present case, in our opinion, has remained unfulfilled. Similar additions were made in the quantum assessment for AYs 2011-12 & 2012-13. The matter for AY 2011-12 reached up-to the level of this Tribunal wherein the Tribunal rejected the stand of revenue in rejecting assessee s books of accounts. During impugned AY, the Ld. first appellate authority, relying upon the stand of Tribunal in AY 2011-12, has over-ruled the stand of Ld. AO in rejecting the books and estimating the income on the basis of GP rate. Nothing on record suggest that the aforesaid order of the Tribunal for AY 2011-12 has ever been overruled by any competent judicial authority. There is no change in the material facts or circumstances during impugned AY - The stand of Ld. AO in rejecting the books of accounts u/s 145(3) and making addition on the basis of GP rate could not be upheld and therefore, we see no reason to interfere with the impugned order. - decided against revenue Disallowance u/s 40(a)(ia) - depreciation u/s 32 disallowed - Held that - Depreciation being statutory allowance in nature and not an actual outgoing for the assessee and therefore, could not be disallowed by applying the provisions of Section 40(a)(ia). The assessee s appeal stands allowed.

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145(3) and estimation of Gross Profit (GP) rate.
2. Disallowance under Section 40(a)(ia) for failure to deduct tax at source on software payment.

Detailed Analysis:

1. Rejection of Books of Accounts and Estimation of Gross Profit Rate:

The assessee, a corporate entity engaged in manufacturing, refining, and trading of edible oil and vanaspati, was assessed for AY 2013-14. The Assessing Officer (AO) noted a fall in the Gross Profit Rate from 3.55% to 3.03% despite an increase in turnover from ?898 Crores to ?942.30 Crores. The AO rejected the books of accounts under Section 145(3) due to the absence of quantitative details of consumption of input materials vis-à-vis individual output products and estimated the GP rate at 9%, resulting in an addition of ?56.27 Crores to the income of the assessee.

The CIT(A) overruled the AO’s decision, relying on the Tribunal’s order for AY 2011-12, and remitted the matter back to the AO to verify the comparison of GP Rate. The Tribunal found that the assessee maintained extensive stock details and consistent accounting policies. The inability to provide quantitative details of individual outputs was due to the nature of the manufacturing process, which made such correlation impractical. The Tribunal noted that no discrepancies or serious defects were found in the books of accounts, and a mere fall in GP Rate could not justify the rejection of books. The Tribunal upheld the CIT(A)’s decision, dismissing the revenue’s appeal.

2. Disallowance under Section 40(a)(ia) for Software Payment:

The AO disallowed ?7.43 Lacs under Section 40(a)(ia) for failure to deduct tax at source under Section 194J on software payment to Technet Software Solutions. The assessee argued that the expenditure was capitalized and only depreciation was claimed, which is a statutory allowance and should not be disallowed under Section 40(a)(ia).

The CIT(A) initially deleted the addition, following the decision of the Vishakhapatnam Tribunal in Merilyn Shipping & Transports Vs. ACIT, but later rejected the rectification application citing the decision in Spaco Carburettors (I) Ltd. The Tribunal, however, found that depreciation is a statutory deduction and not an outgoing expenditure, and therefore, the provisions of Section 40(a)(ia) do not apply. The Tribunal agreed with the assessee, citing the decision in Skol Breweries Ltd., and allowed the assessee’s appeal.

Conclusion:

The revenue’s appeal regarding the rejection of books of accounts and estimation of GP rate was dismissed. The assessee’s appeal concerning the disallowance under Section 40(a)(ia) was allowed, affirming that depreciation is a statutory allowance and not subject to disallowance for non-deduction of tax at source.