2014 (12) TMI 922 - AT - Income Tax

Rejection of books by the AO u/s 145(3) Held that - Book rejection u/s. 145(3) can be resorted to if true income of the assessee cannot be deduced from the assessee s books if it follows incorrect method of accounting - AO has merely pointed out certain defects in the bills or vouchers and also incorrect claims - The AO has not observed any defect in the method of accounting per se - The incorrect claims and defects in the bill, may lead to disallowance on the specific grounds pertaining to them - these are not grounds for rejection of assessee s books of accounts without any specific reasons attributed for doing so - assessee s contention is accepted on this ground. Labour and manufacturing expenses disallowed Held that - Assessee s contention cannot be accepted that the matter has been squarely covered by the Tribunal s order - AO has not pointed out any specific defects in the labour and wages payment claims either from the submissions made by the assessee or through any independent investigation - AO has merely arrived at the purported inflation of such claim from comparison made with the corresponding expenses during the previous year - In the absence of any specific defect in the accounting or any evidence which may warrant any re computation of such claim, the AO s estimated addition cannot be upheld. Addition made on account of GP deleted by AO Fall in GP by 1% substantiated or not Held that - CIT(A) rightly was of the view that the AO has not observed any defect in the method of accounting and further incorrect claim and defect in the bills of expenses may lead to disallowance on specific grounds but cannot be the reason for rejection of assessee s books of accounts - with respect to the labour and wages payments, he has noted that AO has not pointed out any specific defects either from the submissions made by the Assessee or through any independent investigation - Revenue has not brought any material on record to controvert the findings of CIT(A) Decided against revenue.

Summary

Issues involved:
1. Rejection of addition made by the AO on account of Gross Profit (GP).
2. Disagreement with AO's decision to reject the books of accounts.
3. Disallowance of labour and manufacturing expenses.
4. Addition on account of GP estimation.

Issue 1: Rejection of addition made by the AO on account of Gross Profit (GP):
The AO had estimated the GP after rejecting the book results under section 145(3) of the Act. The Assessee's appeal before CIT(A) resulted in the deletion of the addition. The CIT(A) held that the rejection of books under section 145(3) can only be done if the true income cannot be deduced from the books due to incorrect accounting methods. As the AO had not pointed out any specific defects in the method of accounting, the CIT(A) ruled in favor of the Assessee. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO's estimation of GP without specific defects in the Assessee's bookkeeping was unjustified.

Issue 2: Disagreement with AO's decision to reject the books of accounts:
The AO rejected the books of accounts under section 145(3) due to observed defects in bills and vouchers, such as unsigned factory expenses bills and unverifiable claims like laser cutting charges and multiple names on electricity bills. However, the CIT(A) disagreed with the rejection, stating that defects in specific claims do not warrant overall book rejection without accounting method defects. The Tribunal supported the CIT(A)'s decision, emphasizing the absence of specific reasons for book rejection.

Issue 3: Disallowance of labour and manufacturing expenses:
The AO disallowed a significant amount of labour and manufacturing expenses, but the CIT(A) found no specific defects in the claims. The Assessee cited previous ITAT decisions to support their claim, but the Tribunal noted that the issues were not identical to the current year. The Tribunal disagreed with the AO's estimated addition, as no specific defects in accounting or evidence were presented to justify the disallowance. Consequently, the addition on this ground was directed to be deleted.

Issue 4: Addition on account of GP estimation:
The AO estimated a fall in GP ratio without specific defects in the Assessee's bookkeeping, leading to an addition. The Assessee appealed the addition, and the CIT(A) and the Tribunal both ruled in favor of the Assessee. They held that without specific defects in the bookkeeping method, estimating the GP ratio was unjustified. The Tribunal deleted the addition based on GP estimation, aligning with the CIT(A)'s decision.

In conclusion, the Tribunal dismissed the Revenue's appeals for both assessment years, upholding the CIT(A)'s decisions to delete the additions made by the AO. The Tribunal emphasized the importance of specific defects in bookkeeping methods to justify additions or rejections, ruling in favor of the Assessee in all the issues raised.