2024 (5) TMI 158 - AT - Income Tax

Disallowance of raw material consumption - scope of rejecting the books of account - adopting method of estimation to make an addition due to increase in raw material consumption - as per DR there is corelated increase in sales as compared to increase in raw material consumption and the onus to give reason was on assessee - HELD THAT - When the AO is resorting to any ad hoc disallowance on the basis of some estimation, he is rejecting the books of accounts without recording the specific reasons. Mere deviation in percentage of consumption of raw materials cannot be a ground for rejecting the books of account and entering in the realm and guesswork of estimation without inquiring into the genuineness of the purchases. The Hon'ble Gujarat High Court in the case of CIT Vs. Dhiraj R. Rungta 2014 (4) TMI 711 - GUJARAT HIGH COURT held that once rejection of books of account is justified under section 145 of the Act, no other addition can be made referring the same set of books to the income of the assessee. In the present case, the AO used the same set of books of accounts to estimate the disallowance which is not justifiable. CIT (A) also adopted the same method of AO accepting the books of accounts on one hand and making ad hoc addition on other hand but at lower percentage of disallowance. When the books of accounts are regularly maintained and are duly audited without any adverse opinion or comments of an auditor, they are to be taken as correct unless there are adequate reasons to indicate that they are incorrect or unreliable. Thus, the onus is upon Revenue to show that either the books of accounts maintained by assessee are incorrect or incomplete or that the method of accounting adopted by him was such that true profits of the assessee cannot be deduced therefrom. Neither AO nor Ld. CIT(A) has demonstrated specific defects in the books of accounts, therefore adopting method of estimation to make an addition due to increase in raw material consumption is not justifiable. Accordingly we delete the addition made by Ld. CIT(A) restricting the disallowance to 15% only. This ground of the assessee is allowed.

Summary

Issues involved:
The appeal involves issues related to disallowance of increased material consumption and late payment of employee's contribution to PF/ESIC u/s 36(1)(va) of the Income Tax Act, 1961.

Disallowance of Increased Material Consumption:
The assessee, a manufacturer of plastic products, challenged the disallowance made by the AO regarding the rise in material consumption. The AO added back a significant amount to the total income of the assessee based on the increase in consumption. The CIT(A) upheld a portion of the disallowance. The assessee contended that the increase in consumption was due to the inclusion of Job work Charges under the cost of raw material. The books of accounts were duly audited, and no undisclosed production was found. The Tribunal observed that mere deviation in the percentage of raw material consumption cannot justify rejecting the books of accounts. The Gujarat High Court precedent was cited to emphasize that if books are rejected under section 145, no further additions can be made based on the same books. Since no specific defects were shown in the books of accounts, the estimation method for the addition was deemed unjustifiable. Consequently, the Tribunal deleted the addition made by the CIT(A) and allowed this ground of the assessee.

Late Payment of Employee's Contribution to PF/ESIC:
The AO also added an amount towards the late payment of employee's contribution to PF/ESIC. This addition was challenged by the assessee in the appeal. However, the counsel for the assessee did not press this ground during the proceedings. As a result, this ground was dismissed.

General Ground:
The third ground raised by the assessee was of a general nature and did not require separate adjudication. The Tribunal partly allowed the appeal of the assessee in light of the above considerations.