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2020 (10) TMI 989 - AT - Income TaxAddition of low gross profits after rejecting the books of accounts u/s 145(3) - HELD THAT - AO cannot reject the books of accounts for the reasons where the assessee does not maintain the stock register. Accordingly, we note that the reasons which were based by the AO for rejecting the books of accounts are not sufficient enough and cogent. Books of accounts of the assessee are not liable to be rejected as per the provisions of Section 145(3) of the Act. Accordingly, we conclude that once the books of accounts of the assessee are not liable to be rejected then its book profit should be accepted in the given facts and circumstances. No infirmity in the order of the Learned CIT (A) and direct the AO to delete the addition made by him. Disallowance of interest expenses u/s 36(1)(iii) - assessee has acquired a machinery loan which was put to use only after 2ndJuly 2007 - AO was of the view that the interest paid by the assessee up- to the date i.e. 2ndJuly 2007 when the machinery was put to use should be capitalized under Section 36(1)(iii) - HELD THAT -On perusal of the installation report placed we note that the machine was installed on 2ndJune 2007 which implies that it was ready to use on that date. Therefore, the disallowance of the interest expenses should be limited to the extent pertaining to two months only. Assessee has also utilized its own funds in the purchase of machineries in addition to the borrowed fund from the bank. Accordingly, CIT (A) excluded the amount of own fund utilized by the assessee while working out the amount of interest expenses to be capitalized. These facts, have not been disputed by the Learned DR at the time of hearing - No infirmity in the order of the Learned CIT (A). Hence, the ground of appeal of the Revenue is dismissed.
Issues Involved:
1. Deletion of the addition of ?1,40,79,756/- on account of low gross profits. 2. Restriction of interest expenses to ?4,93,853/- for capitalization under Section 36(1)(iii). Detailed Analysis: 1. Deletion of the Addition on Account of Low Gross Profits: The Revenue challenged the CIT(A)'s decision to delete the addition of ?1,40,79,756/- made by the AO due to low gross profits after rejecting the books of accounts under Section 145(3) of the Act. The AO compared the gross profit for the year under consideration with the preceding and succeeding years and found a significant decline. The AO also noted the high percentage of paper purchased to sales and the lack of quantitative details of purchases and sales. The assessee explained that the decline was due to a change in business model and technology, resulting in increased wastage and free sampling to customers. The AO rejected these explanations, deeming the books of accounts unreliable due to the absence of quantitative details. However, the CIT(A) found that higher raw material consumption warranted further investigation but was not a valid reason to reject the books. The CIT(A) noted that the assessee had provided quantitative details, which the AO ignored. The CIT(A) concluded that the AO had not identified specific defects in the audited financial statements and thus could not reject the books under Section 145(3). Upon appeal, the Tribunal upheld the CIT(A)'s decision, emphasizing that mere variations in gross profit or the absence of a stock register are insufficient grounds to reject books of accounts. The Tribunal cited precedents, including the Hon'ble Rajasthan High Court's ruling in Malani Ramjivan Jagannath vs. ACIT, which held that lower gross profit rates alone do not justify rejecting books of accounts. The Tribunal found no specific defects identified by the AO and concluded that the books of accounts were not liable to be rejected, directing the AO to delete the addition. 2. Restriction of Interest Expenses for Capitalization: The Revenue contested the CIT(A)'s decision to reduce the disallowance of interest expenses from ?8,04,747/- to ?4,93,853/- for capitalization under Section 36(1)(iii). The AO found that the assessee's machinery loan was put to use after 2nd July 2007 and capitalized interest expenses up to that date. The assessee argued that the interest attributable to the machinery loan was ?42,08,928/-, and the machine was installed on 2nd June 2007, thus interest should be capitalized only for two months. The AO, in a remand report, partially agreed, suggesting a disallowance of ?8,51,045/-. The CIT(A) further reduced this to ?4,93,853/-, considering the assessee's own funds used for machinery purchase. The Tribunal upheld the CIT(A)'s decision, noting that the machine was installed on 2nd June 2007, and the assessee used its own funds. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The books of accounts were not rejected due to insufficient grounds, and the interest expenses were correctly limited for capitalization. The order was pronounced on 22nd October 2020 at Ahmedabad.
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