2022 (10) TMI 947 - AT - Income Tax

Addition on account of unaccounted production and stock - AO rejected the books of accounts of the assessee and estimated the wastage in production in both the units of the assessee - C.I.T. (A) holding that the action of the A.O. of rejecting the books of account without taking into consideration all the facts and figures is not correct - AO find various discrepancies with regard to consumption of raw material used for production of tiles and noted that the assessee has not shown the correct figure in its books of account and assessee has not made available the correct data of production of tiles - AO rejected the books of accounts of assessee by taking view that assessee failed to show actual per square meter consumption of raw material and failed to disclose actual per square meter consumption of raw material in its account therefore correct profit cannot be deduced from the books of account - HELD THAT - AO estimated average wastage @ 3% and 2% of gross consumption of raw material for Dora unit and Hoskote unit respectively. Assessing officer adopted average wastage on ad hoc basis without any justification nor any comparable stances was brought on record to adopt such wastage. The Assessing Officer failed to provide any material supporting the working of average rate for both the units. Further we find that the Assessing officer made addition by computing the revised production by adopting lowest value of consumption ratio as based so as to arrive at a greater production quantity and on such basis worked out the suppressed production of 3348104 square meters from the books of account. AO applied average rate of closing stock of Rs. 138.10 square meter and computed value of suppressed production of Rs.46, 23, 73, 162/-. We also noted that suppressed production computed by Assessing Officer is without any basis as he adopted ad hoc wastage rate to compute net consumption as against the wastage rate of 4.54% and 4.48% shown by the assessee. And further in order to maximise the value of revised production the assessing officer arbitrarily adopted the lowest consumption ratio of January 2009 for Dora unit and February 2009 for Hoskote unit. Assessing Officer has failed to bring any material to support his working that ratio of waste material adopted by him is appropriate for taking such base. Thus working adopted by the Assessing Officer is not only erroneous being not based on scientific basis as he had adopted lowest consumption ratio for the purpose of making addition. We find merit in the submissions of assessee that even if slight changes in the consumption ratio is made the entire addition made by AO would be nil as per the working given - We are also in agreement with the submissions of assessee that if the average consumption of all the months is taken and substitute the figures in the working of the AO accepting the wastage ratio used by the AO the entire addition would be deleted. In such circumstances we find merit in the submissions of assessee that the method adopted by assessee is more scientific as it takes into consideration all the factors affecting the consumption in a year. Further by taking yearly average the fact of fluctuation is diluted and it gives a more scientific picture of state of affairs. The Assessing officer adopted only onemonth average which does not represent a proper sample for working out of consumption for whole year. We do not find any merits in the grounds of appeal raised by the revenue and thus we affirm the order of ld CIT(A) with our additional findings. Grounds of appeals raised by the revenue is dismissed.

Issues Involved:
1. Rejection of books of account by the Assessing Officer (AO).
2. Addition on account of unaccounted production and stock.
3. Determination of wastage percentage in raw material consumption.
4. Comparison of production data with industry standards and other units.

Issue-wise Detailed Analysis:

1. Rejection of Books of Account by the Assessing Officer (AO):
The AO rejected the books of account of the assessee for the assessment years (AY) 2009-10 and 2011-12, citing discrepancies in the consumption of raw materials and production of tiles. The AO noted significant fluctuations in the consumption of raw materials per square meter of tile produced and issued a show-cause notice to the assessee. The assessee responded, arguing that the rejection was not valid, citing various factors affecting production and consumption, such as the type and quality of tiles, moisture content, and impurities in the raw materials. The AO, however, was not satisfied and invoked Section 145(3) of the Income Tax Act, 1961, to reject the books of account. The AO's decision was based on the assumption that the data provided by the assessee was fabricated and that the wastage ratio claimed was on the higher side.

2. Addition on Account of Unaccounted Production and Stock:
The AO estimated the wastage at 3% for the Dora unit and 2% for the Hoskote unit, based on industry standards for wet and dry processes, respectively. The AO then calculated the net consumption of raw materials and estimated the production for the entire year using the average consumption ratios for January 2009 (Dora unit) and February 2009 (Hoskote unit). This led to an addition of Rs. 46,23,73,162/- to the income of the assessee on account of unaccounted production and stock. The AO's methodology involved using the lowest consumption ratios to maximize the estimated production, which was challenged by the assessee as being arbitrary and flawed.

3. Determination of Wastage Percentage in Raw Material Consumption:
The assessee argued that the wastage ratios used by the AO were arbitrary and not supported by any material evidence. The assessee provided detailed explanations and evidence, including audited accounts, excise returns, and comparable industry data, to support their claimed wastage ratios of 4.54% and 4.48% for the Dora and Hoskote units, respectively. The assessee also highlighted that the AO's method of using the lowest consumption ratios for a single month was not representative of the entire year's production and consumption.

4. Comparison of Production Data with Industry Standards and Other Units:
The assessee provided data from comparable industries, such as Somani Tiles and Orient Tiles, to demonstrate that their production and wastage ratios were in line with industry standards. The manufacturing loss percentages for these comparable companies were similar to those claimed by the assessee. The ld. CIT(A) reviewed this data and found that the figures provided by the assessee matched the audited accounts and excise returns. The ld. CIT(A) concluded that the AO's rejection of the books of account was not justified, as the AO had ignored relevant factors affecting production and consumption.

Conclusion:
The Tribunal upheld the order of the ld. CIT(A), who had deleted the addition made by the AO and rejected the AO's decision to reject the books of account. The Tribunal found that the AO's methodology was flawed and not based on scientific principles. The Tribunal agreed with the assessee's argument that using yearly averages provided a more accurate picture of production and consumption, and that the AO's reliance on data from a single month was not appropriate. Consequently, the appeals of the revenue for both AY 2009-10 and 2011-12 were dismissed.

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