2018 (9) TMI 1684 - AT - Income Tax

Rejection of books of accounts - profit estimation - rejecting books of account and thereafter applying a G.P. rate of 16.54% to the turnover is not upheld by CIT-A - Held that - CIT(A) has correctly observed that GP rate cannot be static year after year and it is impacted by various economic factors and market conditions which admittedly are beyond the control of an individual taxpayer. Similarly, he has taken note of the fact that the records regularly maintained under the Excise Law cannot be ignored as these are relevant for Income Tax purposes also and in fact are complimentary to the income tax proceedings as these justify the production aspect with regard to the manufacturing quality, sizes, quantum of finished goods, raw material and other consumables on a day-to-day basis. In the face of the complete quantitative information in connection with purchases, production and sales details available to the AO who has not pointed out any defect with evidence in the audited books of accounts and there is no such finding of fact that the assessee has inflated the cost of raw material or cost of manufacturing or suppressed its sale prices order, or that it has made purchases of raw material or sale of finished goods outside the books. Since the quantum of production and turnover has been accepted, the rejection of books of accounts in the peculiar facts and circumstances has been held to be inapplicable and we find no good reason available on record on the basis of which the said conclusion can be varied. - Decided against revenue

Summary

Issues Involved:
1. Deletion of addition of ?81,11,115/- by the CIT(A) after rejecting the assessee's books of account under Section 145(3) of the Income Tax Act, 1961.
2. Non-upholding of the rejection of books of account under Section 145(3) by the CIT(A) despite deficiencies pointed out by the Assessing Officer (AO).

Detailed Analysis:

Issue 1: Deletion of Addition of ?81,11,115/-
The Revenue challenged the deletion of an addition of ?81,11,115/- made by the AO after rejecting the assessee's books of account under Section 145(3). The AO observed a decline in the Gross Profit (GP) rate over the years and discrepancies in electricity consumption patterns. The AO required the assessee to justify these discrepancies and, upon finding the explanations unsatisfactory, applied a GP rate of 16.54% based on previous years, resulting in the addition.

The CIT(A) deleted the addition, noting that the AO did not provide specific evidence of defects in the assessee's books. The CIT(A) emphasized that minor fluctuations in the GP rate are normal and influenced by various economic factors. The CIT(A) also highlighted that the assessee maintained complete quantitative records, which were examined and found satisfactory by the Excise Department, thus complementing the income tax records.

Issue 2: Non-Upholding of Rejection of Books of Account
The AO rejected the books of account citing inconsistent electricity consumption and lack of corroborative evidence for the variations. The AO argued that higher electricity consumption without corresponding production increases indicated suppressed production and sales. The CIT(A) disagreed, stating that the AO did not point out specific defects or evidence of inflated costs or suppressed sales. The CIT(A) also noted that the records maintained under excise laws are relevant and complementary to income tax proceedings.

The CIT(A) found that the AO's reasons for rejecting the books were insufficient, as the assessee provided detailed explanations for the variations, including factors like power supply quality, mechanical breakdowns, and efficiency of labor. The CIT(A) concluded that the slight fall in the GP rate did not justify rejecting the books and applying a higher GP rate.

Legal Precedents and Conclusion
The Revenue cited the Supreme Court decision in Melton India, where higher electricity consumption with lower production justified rejecting the books. However, the CIT(A) and the Tribunal found this inapplicable as the assessee's production had increased despite lower electricity consumption. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO did not find any specific defects in the books and that the records were thoroughly examined and found satisfactory.

The Tribunal concluded that the CIT(A) correctly observed that the GP rate cannot be static and is influenced by various factors. The Tribunal also noted that the records maintained under excise laws are relevant for income tax purposes. Thus, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the addition and not uphold the rejection of the books of account.

Judgment:
The appeal of the Revenue was dismissed, and the order pronounced in the Open Court on 09.05.2018.