2014 (2) TMI 847 - HC - Income Tax

Rejection of books of accounts u/s 145 of the Act Estimation of GP rate @2%, whether on lower side or higher side - Held that - The AO as well as the Tribunal noticed a rather irregular pattern of output by the assessee in comparison to the electricity consumption - the average production from using of power consumption widely fluctuated from month to month - The explanation rendered by the assessee was not accepted - the Tribunal noted that in addition to such fluctuation in the output ratio, the assessee also did not record the work in progress in its books of accounts - The Tribunal has rightly recorded that the CIT (Appeals) thus effectively and essentially rejected the books of accounts of the assessee - In addition to wide fluctuation in the productivity compared to the electricity consumption, significant factor was that the assessee had not recorded the work-in-progress in the books of accounts. The assessee has produced no evidences - If the oil output was vastly different for different oil seeds, which was the reason for fluctuation in productivity, the assessee could have easily demonstrated from the books of accounts and other literature - Merely suggesting that the Gujarat Electricity Board would issue the bills for minimum contracted units without full consumption, is merely stating the obvious thus, the ground does not involve any substantial question of law Decided against Assessee. Addition on account of gross profit ratio Both Revenue and Assessee are in appeal regarding the estimation of GP ratio Held that - In the absence of any satisfactory explanation, the fact provides a reasonable basis for working out the suppressed production on the basis of units of power consumed in remaining months of the year thus, the additions made were sustained by the Tribunal - The issue is based on appreciation of material on record - The Tribunal having given its consideration and having adopted the GP rate of 2% by giving its own reasons thus, no substantial question of law arises for consideration Appeal Rejected for both revenue and assessee.

Summary

Issues Involved:
1. Rejection of books of accounts by the Assessing Officer.
2. Sustaining addition based on gross profit rate estimation by the Tribunal.

Detailed Analysis:

1. Rejection of Books of Accounts:

The primary issue was whether the Income Tax Appellate Tribunal (ITAT) was justified in vacating the action of the Commissioner of Income Tax (Appeals) [CIT (A)], who had held that there were no defects in the books of accounts of the appellant. The Assessing Officer (AO) had rejected the books of accounts due to irregular patterns of electricity consumption compared to output and made additions accordingly. The CIT (A) had allowed the appeal of the assessee, deleting the addition. However, the Tribunal restored part of the additions made by the AO, leading to the present appeal.

The Tribunal observed significant discrepancies in the production records compared to electricity consumption. It noted that the production figures were inconsistent with the power consumed, with considerable fluctuations in the output ratio. For instance, the average production per unit of power varied widely from month to month, with no satisfactory explanation provided by the assessee. Additionally, the assessee failed to record work-in-progress in its books, further questioning the accuracy of the accounts. The Tribunal concluded that the books of accounts were not maintained correctly and completely, justifying their rejection.

2. Sustaining Addition Based on Gross Profit Rate Estimation:

The second issue was whether the ITAT was right in sustaining an addition of Rs.1.49 crores based on an estimated gross profit (GP) rate of 2%, down from the AO's rate of 2.46%. The Tribunal had previously restored the matter to itself after the High Court remanded it, observing that the Tribunal had not provided independent reasons for rejecting the CIT (A)'s estimation of gross profit.

Upon re-examination, the Tribunal justified the adoption of a 2% GP rate by analyzing the production details and power consumption. It noted that the assessee's reported average production per unit of power in April 2004 provided a reasonable basis for estimating suppressed production in other months. The Tribunal calculated the suppressed production and sales, concluding that even a modest GP margin of 2% on such suppressed sales would result in a significant addition. The Tribunal also considered the initial investment in raw materials outside the books. It sustained the addition of Rs.1.49 crores, as it was not challenged by the Revenue and was deemed reasonable.

Conclusion:

The High Court dismissed the appeal, finding no substantial question of law. It upheld the Tribunal's decision to reject the books of accounts based on irregular electricity consumption patterns and the lack of recorded work-in-progress. It also supported the Tribunal's estimation of the GP rate at 2%, considering the detailed analysis and justification provided. The appeal was dismissed, affirming the Tribunal's findings and the sustained addition of Rs.1.49 crores.