2014 (6) TMI 106 - AT - Income Tax

Additions - Job work on behalf of principle - Rejection of books of accounts u/s 145 - non maintaining the stock register of raw material and closing stock - assessee claimed abnormal burning loss during the year and GP rate also have fallen down Held that - There was a decline in the GP rate compared to preceding year but converging charges in gross have been increased substantially - The raw material is supplied by the sister concern which has been processed by the assessee on job work basis on behalf of the sister concerned, AIA Engineering Co. Ltd. The ld. A.O. had not brought on record that assessee s job receipt compared to other parties of similar nature of work, were booked on lower rates as decided in assessee own case for the earlier year, it has been held that average job work realized has fallen compared to preceding year - The entire job work also subject to TDS - The stock register was impounded by the Department and was possession with the department which could be examined by the AO at the time of assessment - The assesee had maintained day-to-day stock register - The assessee does not have any stock for its own - The entire raw material was given by the Principal which after manufacturing returned back the same to the Principal - The entire burning loss belonged to the Principal not the assessee - The burning loss has not been claimed in the p&l account - the assessee wholly depended on the job work of the Principal - No outside job work was performed by the assessee thus, the order of the CIT(A) is set aside Decided in favour of Assessee. Deletion of disallowance of freight inward, outward and octroi expenses Held that - CIT(A) rightly was of the view that the freight and octroi expenditure claimed by the assessee has incurred on purchase of consumable and store material, cannot be disturbed - Freight inward did not comprise of any freight paid for raw material on behalf of the Principal - The total consumables purchased during the year was Rs.2.07 crore which includes refractories, ramming mass etc. Octroi of Rs. 7.02 lacs was paid on the stores and consumables purchased during the year - Freight outward was incurred for loading, unloading and freight for moving the used moulding sand and other scrap materials out of factory premises to be taken to a remote place for disposal - Coolie / cartage was paid for loading, unloading and freight for moving the castings in process for job work outside our factory premises for such job work and bringing it back to the factory - The freight and octroi expenditure shown in the agreement was for incoming the raw material and on sending back casting was borne by the Principal - both the expenses are different the order of the CIT(A) is upheld Decided against Revenue. Deletion of suppressed conversion charges Held that - Following The Deputy Commissioner of Income Tax, Circle-5, Versus M/s. Reclamation Welding Ltd. 2012 (11) TMI 232 - ITAT, AHMEDABAD - The issue cannot be decided without complete data as the parties have not furnished the industry-wise loss or the history of the loss for last 4/5 years, the loss incurred during various process, percentage of loss in each process, comparison of such loss in difference processes industry wise and various assessment year-wise & other comparative instances and factors like type of machinery used, claim of manufacturer of machines as to the amount of loss likely to occur when work is done on their machines thus, the matter is remitted back to the AO for fresh adjudication Decided in favour of Revenue.

Issues Involved:
1. Addition of Rs. 64,09,187/- to the Gross Profit by the Assessing Officer (AO).
2. Rejection of books of account under Section 145 of the Income Tax Act.
3. Deletion of addition of Rs. 48,04,034/- made on account of disallowance of Freight Inward, Outward & Octroi expense.
4. Deletion of addition of Rs. 1,10,27,492/- made on account of suppressed conversion charges.

Issue-wise Detailed Analysis:

1. Addition of Rs. 64,09,187/- to the Gross Profit by the AO:
The assessee declared a Gross Profit (GP) of Rs. 4,62,27,426/- on sales of Rs. 19,69,19,616/-, resulting in a GP rate of 22.57%, which was lower than the preceding year's GP rate of 26.37%. The AO noted several discrepancies, including the non-maintenance of a stock register, abnormal burning loss, and the controlled nature of transactions with the associate enterprise. The AO applied a GP rate of 26.73% (based on the preceding year) to the sales, resulting in a shortfall of Rs. 64,09,187/-. The CIT(A) upheld this addition, citing manipulation of receipts and lack of effort to revise job charges.

2. Rejection of books of account under Section 145 of the Income Tax Act:
The AO rejected the assessee's books of account under Section 145 due to non-maintenance of a stock register and abnormal burning loss. The assessee argued that the books were audited and that the stock register was impounded by the AO. The Tribunal noted that the assessee maintained a stock register as prescribed by the Central Excise Department and that the entire revenue depended on the principal, AIA Engineering Co. Ltd. The Tribunal found no reason to confirm the CIT(A)'s order and allowed the assessee's appeal.

3. Deletion of addition of Rs. 48,04,034/- made on account of disallowance of Freight Inward, Outward & Octroi expense:
The AO disallowed the expense, citing an agreement that specified AIAE would bear the freight and octroi expenses. The CIT(A) deleted the addition, referencing the Tribunal's decision for AY 2003-04, which found no evidence that the expenses were for raw materials or finished goods related to the principal. The Tribunal upheld the CIT(A)'s order, noting that the expenses were for consumables and store materials, not raw materials or finished goods.

4. Deletion of addition of Rs. 1,10,27,492/- made on account of suppressed conversion charges:
The AO added Rs. 1,10,27,492/- for suppressed conversion charges, based on an estimated burning loss of 5%. The CIT(A) deleted the addition, following the Tribunal's decision for earlier years. The Tribunal noted that the assessee's processes involved various stages with inherent losses and that the AO had not provided contrary evidence. The Tribunal set aside the issue for re-examination by the AO, consistent with its approach in earlier years.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the addition to GP and the rejection of books of account. It upheld the CIT(A)'s deletion of the disallowance of freight and octroi expenses. The issue of suppressed conversion charges was remitted back to the AO for re-examination. The orders were pronounced in open court on 16.05.2014.

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