1975 (3) TMI 33 - AT - Income Tax

Summary

Issues:
Addition of Rs. 1,80,000 to the gross profit, rejection of book results by ITO and AAC, inflation of purchase prices, excessive wastage, discrepancies in manufacturing accounts, excessive consumption of stores, estimation of income, scrutiny of purchases, sales, and gross profit rate.

Analysis:
The appeal concerned the addition of Rs. 1,80,000 to the gross profit of a private limited company, which was initially rejected by the ITO. The ITO made the addition based on inflation of purchase prices, excessive wastage, discrepancies in manufacturing accounts, and excessive consumption of stores. The AAC agreed with the rejection of book results but reduced the addition to Rs. 1,80,000.

The ITO found that the purchase prices were inflated, leading to the excess amount being pocketed by a specific individual. The AAC and the company's counsel conceded that the accounting method did not allow for proper income deduction, necessitating an estimate. The company disputed the grounds for addition, arguing that the wastage was not excessive and that discrepancies in manufacturing accounts did not warrant specific additions.

The Departmental Representative argued that the inflation of purchases was proven, justifying the addition. After hearing both parties, the Tribunal concluded that some addition to the income had to be sustained due to the defective nature of the books of account. The Tribunal scrutinized the purchases, sales, and gross profit rate, ultimately directing an addition of Rs. 70,000 to be made.

The Tribunal found the ITO's reasons for rejecting the books unconvincing, especially regarding excessive wastage and discrepancies in manufacturing accounts. The Tribunal also dismissed the grounds related to excessive consumption of stores, as acknowledged by the AAC in his order. The overall picture, including past profit/loss trends and production quality, led the Tribunal to determine the final addition to the income.

In conclusion, the appeal was partly allowed, and the Tribunal directed the ITO to substitute the addition figure at Rs. 70,000 based on the scrutiny of purchases and overall circumstances of the case.