2015 (9) TMI 322 - AT - Income Tax

Rejection of books of accounts - trading addition - CIT(A) deleted the addition - CIT(A) deleting the addition made by the AO on account of undisclosed sale - whether assessee could not prove that the scrap was retained by the job workers? - Held that - The assessee s regular books of account cannot be rejected on the basis of the issues like stock of oil and lubricants and consumables stores which constitutes day to day purchases and the stock is comparatively small. Besides such items being inflammable on preponderance of probabilities also can t be stored in huge quantity. Similarly, maintaining the consolidated trading account of manufacturing and job work also cannot be a reason to reject the books of account inasmuch as they are interconnected. Assessee deals in manufacturing and job working for self and others.The books of account are maintained on consistent accounting practices in earlier years and no such rejection has been made. The books of account were upheld in earlier years. AO rejected the books of account in AY 2006-2007 ITAT found that these defects are not major and the books of account of the assessee cannot be rejected on ipse dixit. Apropos scrap generation, there is no evidence at all to show that vendors or sub-vendors returned the scrap which was sold by the appellant outside the books of account. As evident, the job workers had not returned the scrap to the appellant, sub vendors including M/s. Alankar Automobiles (P) Ltd. had shown income from sale of scrap of ₹ 3,30,000/- in its books of account. There being no evidence on the record to suggest that these sub-vendors had ever returned the scrap to assessee, no adverse inference can be drawn against the appellant merely on surmise and conjectures. Apropos trading additions, assessee had furnished quantitative details of raw materials consumed, finished goods produced, scrap generated and burning loss. Consequently there was no justification in the rejection of books of the assessee, therefore no estimation of GP can be resorted to in the given facts and circumstances. The AO s allegation that the job charges paid to sister concerns is in violation of Section 40A(2)(b) was not established by citing any projection of unreasonableness or comparative cases. Similarly, non-returned of scrap by sister concerns is comparable with unrelated concerns and held to be a customary practice in this trade. Relevant TDS was deducted from the job workers which were duly paid in the Govt. treasury and no discrepancy whatsoever was indicated in this behalf. Since the books of account are upheld, there is no question of applying the estimation of gross profit. Besides, assessee s GP is better than assessment year 2006-07 and 2007-08. In assessment year 2006-07, ITAT dismissing revenue appeal, in assessee s own case upheld the gross profit rate at declared GP of 14.54%. Thus the assessee gross profit is as long as 14.54%. Therefore, the current year gross profit rate cannot be held to be low. See ACIT vs. M/s. Pushp Enterprises 2015 (3) TMI 1019 - ITAT JAIPUR - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of trading addition of Rs. 93,94,856/- made by the AO after rejection of books of account u/s 145(3).
2. Deletion of addition of Rs. 12,77,984/- on account of undisclosed sale related to scrap retained by job workers.

Issue-wise Detailed Analysis:

1. Deletion of Trading Addition of Rs. 93,94,856/-:
Background: The assessee, a public limited company engaged in manufacturing and job work of bearing races and bush, maintained and audited books of account as per the Companies Act and Income-tax Act. The AO rejected the books citing discrepancies, including non-maintenance of a quality stock register for raw materials, oil, and lubricants, and issues with the verifiability of job work payments to sister concerns.

Assessee's Arguments:
- The books were duly audited and supported by records.
- Oil and lubricants were allowable as revenue expenditure in the year of purchase.
- The method of accounting and excise compliance was consistent with previous years.
- The rate of job work paid to associated and non-associated concerns was comparable with earlier years and other job workers.
- The scrap generated by job workers was not returned to the principal, which was a market practice.

CIT(A)'s Observations:
- Books of account cannot be rejected based on stock of oil and lubricants and consumables stores.
- Maintaining a consolidated account cannot be a reason for rejection as the assessee could segregate and provide the figures.
- Books of account were consistently maintained in earlier years without rejection.
- The rejection of books in AY 2006-2007 was not upheld by ITAT as the defects were not major.

ITAT's Findings:
- The AO's rejection of the books was not justified as the assessee provided quantitative details of raw materials, finished goods, scrap generated, and burning loss.
- No unreasonableness or comparative cases were cited by the AO to support the allegation of unreasonable job charges paid to sister concerns.
- The GP rate declared by the assessee was better than in previous years, and there was no justification for estimating GP.

2. Deletion of Addition of Rs. 12,77,984/- on Account of Undisclosed Sale:
Background: The AO added Rs. 12,77,984/- to the total income, alleging undisclosed sales based on discrepancies in the ER-1 register and the books of account.

Assessee's Arguments:
- The difference in scrap value between the ER-1 register and the books of account was due to the scrap retained by job workers, which was a part of job cost to the assessee.
- The ER-1 register showed the value of scrap for excise duty purposes, not actual sales.
- The job workers did not return the scrap, which was supported by customary practice and excise rules.

CIT(A)'s Observations:
- No evidence suggested that vendors or sub-vendors returned the scrap to the appellant.
- The concept of real income and actuality of the situation was relevant, and no real income accrued to the appellant from the scrap not returned by job workers.
- The addition of Rs. 12,77,984/- was directed to be deleted.

ITAT's Findings:
- The AO's presumption of sales outside the books was not supported by any material evidence.
- The scrap retained by job workers was part of the job cost, and the difference in ER-1 and books was reconciled.
- The AO's allegations were based on assumptions and conjectures without concrete evidence.

Conclusion:
The ITAT upheld the CIT(A)'s order, finding no infirmity in the deletion of the trading addition of Rs. 93,94,856/- and the addition of Rs. 12,77,984/- on account of undisclosed sales. The appeal by the Revenue was dismissed, and the CIT(A)'s detailed and reasoned findings were affirmed. The order was pronounced in the open court on 26.06.2015.