2016 (1) TMI 984 - AT - Income Tax

Rejection of books of accounts - applicability of section 145 - CIT(A) deleting the application u/s145 - Held that - AO has nowhere rejected the sales or purchase of assessee vis- -vis other manufacturing expenses incurred by assessee during the year. We find that AO, after rejecting the books of accounts, had presumed that no prudent business man would sell the goods less than the manufacturing cost. However, there is no restriction under any law that assessee cannot sale the product less than its manufacturing cost. Moreover, it was the first year of its business of the assessee and assessee was not having expert knowledge of its business intricacies. We further find that AO has disallowed the loss incurred by assessee without any rational ground. Whereas the AO had not pointed out any material defect in the books of accounts of the assessee, the mere fact that for certain reason, the assessee could not earn better margin of profit, cannot be the reason to believe that the assessee returned less profit than what it actually earned. Possibility of unstable market condition cannot be ruled out. The Tribunal, therefore, deleted the trading additions. We do not find any additional evidence having been admitted by the Ld. CIT(A) except comparative chart of expenses. The Ld. DR was unable to point out as to what was the fresh evidence on the basis of which the Ld. CIT(A) allowed relief to the assessee. Even the ground of appeal of the Revenue in this regard is very vague. - Decided in favour of assessee.

Issues Involved:
1. Deletion of application under Section 145 of the Income Tax Act.
2. Deletion of disallowance of loss of Rs. 84,40,567/- based on fresh evidence violating Rule 46A(3) of the Income Tax Rules.
3. Deletion of disallowance of loss of Rs. 84,40,567/- due to variations in amounts furnished under Section 142(1) and collected under Section 133(6).

Issue-wise Detailed Analysis:

1. Deletion of Application Under Section 145 of the Income Tax Act:

The Revenue contended that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in deleting the application under Section 145 of the Income Tax Act. The Assessing Officer (AO) had rejected the books of accounts of the assessee due to several discrepancies noted in the audit report, including inadequate internal data, incomplete cost records examination, improper records of speculative profit, self-made vouchers, differences in records from responses to Section 133(6) notices, lack of stock register, and discrepancies in TDS certificates.

The CIT(A) allowed the appeal in favor of the assessee, stating that the books of accounts were maintained as per Accounting Standards and excise law, and the rejection of books was not justified.

The Tribunal found that the AO did not provide sufficient reasons for rejecting the books of accounts and relied on procedural lapses highlighted by the auditor. The Tribunal emphasized that the AO must consider whether the assessee regularly employed a method of accounting, whether annual profits can be properly deduced, whether the accounts are correctly maintained, and whether there are no significant omissions. As the AO did not record any findings on these aspects, the Tribunal held that the rejection of books of accounts was not justified and dismissed the Revenue's ground.

2. Deletion of Disallowance of Loss of Rs. 84,40,567/- Based on Fresh Evidence Violating Rule 46A(3):

The Revenue argued that the CIT(A) erred in deleting the disallowance of Rs. 84,40,567/- on the basis of fresh evidence without following the provisions of Rule 46A of the Income Tax Rules. The AO had disallowed the loss claimed by the assessee, stating that the assessee did not justify the trading loss.

The CIT(A) allowed the claim of the assessee, noting that the accounts were maintained as per the provisions of law, and no discrepancy was found relating to purchase and sale. The CIT(A) observed that while it is unusual for the sale price to be less than the cost price, it is not an essential condition for a business enterprise, and the AO did not provide any evidence to support his contention.

The Tribunal found that the AO did not reject the sales or purchase of the assessee or other manufacturing expenses. The AO presumed that no prudent businessman would sell goods below manufacturing cost, but there is no legal restriction against it. The Tribunal noted that the assessee was in its first year of business and faced high production costs. The AO disallowed the loss without pointing out material defects in the books of accounts. The Tribunal held that the CIT(A) did not admit any fresh evidence except a comparative chart of expenses, and the Revenue's ground was vague. The Tribunal upheld the CIT(A)'s order and dismissed the Revenue's appeal.

3. Deletion of Disallowance of Loss of Rs. 84,40,567/- Due to Variations in Amounts Furnished Under Section 142(1) and Collected Under Section 133(6):

The Tribunal addressed the common issue raised by the Revenue regarding the deletion of the disallowance of Rs. 84,40,567/- due to variations in amounts furnished under Section 142(1) and collected under Section 133(6). The Tribunal reiterated that the AO did not reject the sales or purchase of the assessee or other manufacturing expenses. The AO presumed that no prudent businessman would sell goods below manufacturing cost, but there is no legal restriction against it. The Tribunal noted that the assessee was in its first year of business and faced high production costs. The AO disallowed the loss without pointing out material defects in the books of accounts. The Tribunal held that the CIT(A) did not admit any fresh evidence except a comparative chart of expenses, and the Revenue's ground was vague. The Tribunal upheld the CIT(A)'s order and dismissed the Revenue's appeal.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the application under Section 145 of the Income Tax Act and the disallowance of loss of Rs. 84,40,567/-. The Tribunal found that the AO did not provide sufficient reasons for rejecting the books of accounts and disallowing the loss claimed by the assessee. The Tribunal emphasized that the AO must consider specific aspects before rejecting the books of accounts and that there is no legal restriction against selling goods below manufacturing cost. The Tribunal held that the CIT(A) did not admit any fresh evidence except a comparative chart of expenses, and the Revenue's grounds were vague. The Tribunal's order was pronounced in the open court on 04/12/2015.

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