2018 (12) TMI 982 - AT - Income Tax

Rejection of books of account - suppressed production expenses just to inflate profit for claiming deduction u/s 80IC - assessee has shown the higher profit in the books of accounts to claim the excess deduction under section 80IC - Held that - Provisions of section 80IC(7) provides that the provisions contained in subsection 5 and subsection 7 12 of section 80IA shall so far as may be applied to the eligible undertaking or enterprise under that section. On looking at the provisions of subsection 10 of section 80 IA. Provides that where it appears to the assessing officer that owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person or for any other reason the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the assessing officer sale, in computing the profits and gains of such eligible business for the purposes of the deduction under that section, take the amount of profits as may be reasonably deemed to have been derived there from. On careful reading of the order of the learned assessing officer, we do not find that how the assessing officer has come to a conclusion that assessee is showing more than ordinary profits in its books of accounts. According to us, Such analysis has to be with respect to the profits of the comparable units. No such comparable units were examined by the learned assessing officer for holding that assessee has suppressed the contention of the raw material by 8%. AO has not traced that if the material consumption has been under booked by the assessee, whether the assessee is holding excess stock in the books of accounts then what assessee actually physically hold. Naturally when the assessee as under booked the consumption and in real sense has consumed the material higher than what is recorded in the books of accounts then such closing stock itself is inflated of the raw material to the extent of under booking of the raw material consumption. If the consumption of INR 80 is to be replaced by the consumption of rupees hundred then correspondingly the stock, which is overstated by INR 20 in books is also required to be reduced. Further, it is not the case of the AO that quantitative details, which are also subject to excise of the closing stock is incorrect. In that particular sense the whole exercise carried out by the assessing officer is devoid of any merit. The allegation of the AO is that assessee has shown the higher profit in the books of accounts to claim the excess deduction under section 80IC. To show the higher profit the assessee either might have inflated the assets or have understated certain liabilities, in absence of this, the profitability cannot be shown at higher figure. The corresponding effect of the higher profit has not been identified by the learned assessing officer. No indication has also been drawn by the assessing officer that how the assessee has inflated its profit and correspondingly inflated its assets or deflated its liabilities. According to us This is the simple accounting concept which should have been followed by the learned assessing officer before making the addition. - Decided against revenue.

Summary

Issues Involved:

1. Deletion of disallowance of ?3,51,88,221/- made by the AO in respect of expenses incurred out of books.
2. Rejection of books of account under Section 145 of the Income Tax Act, 1961.
3. Suppression of promotion expenses to inflate the claim of deduction under Section 80IC of the Income Tax Act, 1961.

Detailed Analysis:

1. Deletion of Disallowance of ?3,51,88,221/-:

The Revenue's primary contention was that the assessee suppressed production expenses to inflate profits and claim higher deductions under Section 80IC. The AO found discrepancies in the quantitative details of raw material consumption and concluded that the assessee had suppressed production expenses by 8%, resulting in an addition of ?3,51,88,221/-. The CIT(A) deleted this addition, stating that the AO's estimation lacked a logical basis and was not supported by any inquiry or evidence. The Tribunal upheld the CIT(A)'s decision, noting that the AO did not find any defects in the corrected quantitative details provided by the assessee, which were certified by a Chartered Accountant. The Tribunal emphasized that the AO's calculations were based on arithmetic assumptions without concrete evidence.

2. Rejection of Books of Account under Section 145:

The AO rejected the assessee's books of account under Section 145(3), citing discrepancies in the quantitative details of raw materials. The CIT(A) and the Tribunal both found that the AO's rejection was unjustified. The Tribunal highlighted that the AO did not provide sufficient reasons or evidence to prove that the books were unreliable. The Tribunal referred to various legal precedents, emphasizing that accounts regularly maintained in the course of business should be accepted unless there are strong reasons to indicate they are unreliable. The Tribunal also noted that the AO failed to give the assessee an opportunity to explain the alleged defects, violating principles of natural justice.

3. Suppression of Promotion Expenses to Inflate Deduction under Section 80IC:

The AO alleged that the assessee suppressed promotion expenses to inflate profits and claim higher deductions under Section 80IC. However, the CIT(A) found that the AO's estimation of suppressed expenses lacked a logical basis and was not supported by any evidence. The Tribunal agreed with the CIT(A), stating that the AO's calculations were based on assumptions without any concrete evidence. The Tribunal also noted that the AO did not find any discrepancies in the corrected quantitative details provided by the assessee. The Tribunal concluded that the AO's rejection of the books of account and the disallowance of the deduction under Section 80IC were not justified.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition of ?3,51,88,221/- and allow the deduction under Section 80IC. The Tribunal found that the AO's rejection of the books of account and the estimation of suppressed expenses were based on assumptions without concrete evidence. The Tribunal emphasized the importance of following principles of natural justice and providing the assessee an opportunity to explain alleged defects in the books of account.