2014 (2) TMI 942 - AT - Income Tax

Substitution of addition on account of suppression of sales Estimation of wastage not considered Held that - The AO is not justified in rejecting the books of account by invoking Provisions of Section 145(3) of the Act the additions made by the AO are liable to be deleted - The objection of the DR that the CIT(A) has not relied upon the CGCRI Report, Calcutta , the AR has pointed out that the in the same report it has been mentioned that the said organization is not involved production practice and they are not sure to what extent their opinion will be useful for the purpose of the assessee thus, the report of CGCRI, Calcutta alone cannot be the basis for rejection of books of account and making an estimation of wastage - CIT(A) was not justified in ignoring other material which was placed before him thus the CIT(A) was not justified in sustaining the applicability of Section 145(3) of the Act Decided against Revenue. Application of Section 145(3) of the Act Held that - The CIT (A) has applied the provision of section 145(3) only on the technical ground which cannot be the defect in the eyes of law - CIT (A) has not point out specific defects in the books of accounts and without pointed out any defects in the books of accounts the provision of 145(3) cannot be applied Relying upon Madnani Construction Corporation (P) Ltd. Vs. CIT 2006 (12) TMI 79 - GAUHATI HIGH COURT - When the AO has neither expressed his dissatisfaction about the correctness or completeness of the accounts nor any error is pointed out in P&L a/c and Audited report, the powers of best judgment cannot be invoked - Without pinpointing any defect much less any material defect in the books of account of the assessee regularly maintained, provision of Section 145(3) of the Act cannot be invoked - The provision of Section 145(3) of the Act has been wrongly invoked thus, any addition made as a consequence of invoking of Section 145(3) has to go Decided in favour of Assessee. No specific defect much less any material defect has been pointed out by the AO in the books of account of the assessee duly maintained during the course of this regular business - The other issues regarding adoption of a particular gross profit rate is not tenable in the eyes of law thus, no trading addition can be made in the hands of the company on account of trading activities thus, the entire addition made by the AO deleted Decided in favour of Assessee.

Summary

Issues Involved:
1. Substitution of the addition made by the AO on account of suppression of yield/sales.
2. Application of provision of Section 145(3) by CIT(A) without pointing out specific defects.
3. Application of gross profit rate by CIT(A) without giving opportunity to the appellant.
4. Discrepancies in books of account and rejection of books by AO.

Issue-wise Detailed Analysis:

1. Substitution of Addition on Account of Suppression of Yield/Sales:
The Revenue contested the CIT(A)'s decision to substitute the addition of Rs. 3,72,92,789/- made by the AO due to alleged suppression of yield/sales with a trading addition of Rs. 60,60,400/-. The AO's estimation was based on the CGRI report, which suggested a wastage rate of 25%. The Tribunal found that similar issues in previous years (2001-02, 2004-05, 2005-06, 2006-07, and 2007-08) had been resolved in favor of the assessee, with the ITAT and CIT(A) accepting the wastage claimed by the assessee. The Tribunal upheld the CIT(A)'s substitution, dismissing the Revenue's appeal.

2. Application of Provision of Section 145(3):
The assessee argued that the CIT(A) confirmed the application of Section 145(3) without identifying specific defects in the method of accounting, stock register, or production register, except for low gross profit rate and transportation charges paid to a sister concern. The Tribunal noted that without pinpointing any material defects in the books of account, the provision of Section 145(3) could not be invoked. The Tribunal referenced several case laws supporting this view and concluded that the invocation of Section 145(3) was unjustified, thereby allowing the assessee's appeal.

3. Application of Gross Profit Rate:
The CIT(A) applied a gross profit rate of 24.25% as against the 22.59% declared by the assessee, leading to a trading addition of Rs. 60,60,400/-. The assessee contended that this application was arbitrary and based on guesses, without providing any opportunity to the appellant. The Tribunal found that the CIT(A) had made an arbitrary estimation without any material defects in the books of account. The Tribunal allowed the assessee's appeal, rejecting the arbitrary application of the gross profit rate.

4. Discrepancies in Books of Account and Rejection of Books by AO:
For the assessment year 2009-10, the AO noted several discrepancies in the books of account, such as a high loss rate, questionable purchases from sister concerns, and lack of records for intermediary processes. The AO rejected the books of account under Section 145(3) and made a trading addition of Rs. 5,93,70,607/-. The CIT(A) reduced this to Rs. 26,45,868/-. The Tribunal found that the AO had not pointed out any specific defects in the books of account and that the issues raised were similar to those in the previous year. The Tribunal concluded that the rejection of books and the trading addition were unjustified, allowing the assessee's appeal and dismissing the Revenue's appeal.

Conclusion:
The Tribunal dismissed the Revenue's appeals and allowed the assessee's appeals for both assessment years 2008-09 and 2009-10, emphasizing that the application of Section 145(3) and the arbitrary estimation of gross profit rates were unjustified without specific defects in the books of account. The Tribunal upheld the CIT(A)'s decisions where they aligned with prior Tribunal rulings favoring the assessee.