2019 (12) TMI 683 - AT - Income Tax

Addition on account of unproved expenses - Lack of response from the creditors/purchase party - HELD THAT - CIT(A) has considered all the aspects and dimensions of the issues including the detailed reconciliation and explanation by the assessee. CIT(A) has specifically noted that the addition can not be made for lack of response from the creditors/purchase party and more so when the assessee was called upon to explain the balance standing in the credit of a party at the last moment by providing details and books of suppliers on whom the assessee has no control. Under these facts and circumstances, we are in agreement with the conclusion of CIT(A) that disallowance is uncalled for. Accordingly, we uphold the order of CIT(A) by dismissing the ground raised by the Revenue. Addition of income representing unaccounted production - assessee is engaged in the business of production of bread for Britannia Industry Ltd. on contractual basis. The entire raw material is supplied by the Britannia Industry Ltd which go into the manufacturing processes - HELD THAT - In this case the addition was primarily based upon the excess consumption of fuel to the extent of 24638 litters. We observe that the assessee was contract manufacturer of Britannia Industry Ltd. and was operating under the direct control and supervision of Britannia Industry Ltd. and was not allowed to do or manufactured bread for any other outside party. We also note that the excess consumption of fuel was within the standard norms as has been observed by CIT(A) by comparing the actual and standard consumption in the preceding and succeeding year and came to the conclusion that the estimation of unaccounted sale on the basis of excess consumption of fuel is wrong and against the provisions of the Act. We are quite convinced with the conclusion drawn by the Ld. CIT(A) on this issue as the AO has made addition on hypothetical basis not appreciating the facts in correct perspective. Accordingly, we are uphold the order of ld CIT(A) by dismissing the ground raised by the revenue.

Summary

Issues Involved:
1. Deletion of addition on account of unproved expenses.
2. Deletion of addition on account of income representing unaccounted production.

Detailed Analysis:

1. Deletion of Addition on Account of Unproved Expenses:

Facts:
- The AO called for information under section 133(6) of the Act from some parties with whom the assessee had business transactions. Some replies were received, while others were not.
- Discrepancies were found in the details provided by the assessee and the information gathered by the AO.
- The AO added a sum of ?3,28,32,575/- to the income of the assessee due to unproved expenses.

Appellate Proceedings:
- The CIT(A) deleted the disallowance, noting that the AO informed the appellant of non-service/no reply from various creditors only ten days before passing the assessment order.
- The CIT(A) observed that the AO accepted confirmations from four parties but objected to the lack of supporting bills, vouchers, and other details.
- The CIT(A) emphasized that the onus lies on the person making the claims and that addition cannot be made solely for lack of response from creditors.
- The CIT(A) noted that the AO did not discuss the issues with the appellant and failed to understand the nature of the appellant's business.

Tribunal's Decision:
- The Tribunal agreed with the CIT(A) that disallowance of ?3,28,32,575/- was uncalled for, as the addition was made for lack of response from creditors and the assessee was asked to provide details at the last moment.
- The Tribunal upheld the order of the CIT(A) by dismissing the ground raised by the Revenue.

2. Deletion of Addition on Account of Income Representing Unaccounted Production:

Facts:
- The assessee is engaged in the production of bread for Britannia Industry Ltd. on a contractual basis.
- The AO found discrepancies in the amount shown in Form 26AS and the P&L account.
- The AO rejected the books of accounts under section 145(3) of the Act, estimating unaccounted sales at ?2,02,64,478/- due to excess consumption of fuel.

Appellate Proceedings:
- The CIT(A) allowed the appeal, noting that the appellant merely carried out job work for Britannia Industry Ltd. and received conversion charges.
- The CIT(A) agreed that actual consumption of power and oil can vary from estimated rates and that variance need not indicate unaccounted production without corroborative evidence.

Tribunal's Decision:
- The Tribunal observed that the assessee was a contract manufacturer under the direct control of Britannia Industry Ltd. and could not manufacture bread for other parties.
- The Tribunal noted that excess consumption of fuel was within standard norms and that the AO's addition was based on hypothetical assumptions.
- The Tribunal upheld the order of the CIT(A) by dismissing the ground raised by the Revenue.

Conclusion:
The Tribunal dismissed the appeal of the Revenue, upholding the CIT(A)'s deletion of additions on account of unproved expenses and unaccounted production. The Tribunal found that the AO's additions were not substantiated by adequate evidence and were based on hypothetical assumptions. The decision was pronounced in the open court on 09.12.2019.