2021 (3) TMI 551 - AT - Income Tax

Addition of expenses claimed under the head power and fuel - CIT-A deleted the addition observing that the AO was wrong in making addition merely on noticing some difference in the chart prepared by the assessee viz-a-viz details furnished by the assessee in the Annual report while ignoring the other facts that the power was also used in other units - Whether the information furnished in the annual report can be basis for making the disallowance? - HELD THAT - In our considered view the answer stands in negative. It is because to make the disallowance of the expenses the AO has to establish the fact that the expenses were bogus or were not incurred in connection with the business. But the AO has not brought anything on record suggesting that the expenses were bogus or these expenses were not incurred in the course of the business. Assessee has incurred more expenses under the head power and fuel as discussed above in comparison to the immediate preceding assessment year which resulted the high cost of production to the assessee but the same cannot be disallowed on the reasoning that the assessee has incurred more expenses than the immediate preceding assessment year. It is because the test which has been provided under 37 of the Act is that any expense which is not capital in nature/ personal in nature incurred in course of the business has to be allowed while computing income under the head business profession. Indeed the cost incurred by the assessee under the head power and fuel is not capital in nature and there was no allegation by the AO that such expenditure was not incurred in the course of the business. As such the AO cannot decide to allow or disallow the expenses on noticing difference between the annual report and the details submitted by the assessee during the assessment proceedings until and unless there are supporting evidences. Accordingly we do not find any infirmity in the order of the learned CIT (A). Hence the ground of appeal of the revenue is dismissed. Addition made on account of excess consumption of raw material - differences as pointed by the AO was due to the fact that at time of survey under section 131(1) of the Act the income tax inspector collected data with respect to 11 major item of raw material only whereas it is consuming 68 type raw material - CIT-A deleted the addition - HELD THAT - Admittedly the inspector of income tax Act collected the details at the time of visit in the factory premises of the assessee with respect to the 11 items whereas the assessee has issued 68 items to its factory. Thus what is referred is that the entire basis of disallowance made by the AO is not sustainable for the simple reason that the AO should have made comparison of all the items which were issued to the factory. It is also pertinent to note that there was no doubt raised by the AO on the genuineness of the purchases claimed by the assessee as well as the stock statement maintained at the factory. In other words there cannot be any addition merely on the basis of difference noticed by the AO in consumption of raw material between the details collected by the inspector and the information furnished by the assessee in its financial statement until and unless it is brought on record that the assessee has made bogus purchases. Accordingly we do not find any infirmity in order of learned CIT (A). Addition on account of suppression of sale at Bareilly and Nandesari plant - CIT (A) deleted the addition made by the AO by observing the AO has not pointed any mistakes in the books of accounts and in the bills vouchers and only relied upon the data collected by inspector in pursuance to section 131 - HELD THAT - The primary onus lies upon the assessee to reconcile the difference in the amount of sales shown in the books of accounts viz a viz the sales amount obtained during the survey under section 131 of the Act. In fact the assessee has made submissions to match the figures of sales quantity as recorded by the inspector of income tax without bringing any material on record. Thus we are of the view that the assessee has failed to discharge the onus imposed upon it. The entire amount of suppressed sale cannot be treated as income of the assessee. It is because there was no evidence available with the AO that the assessee has made any investment in such suppressed sale. In the absence of documentary evidence we are of the view that the amount of gross profit will only be subject matter of addition with respect to such unaccounted transaction. It is undoubtedly a business transaction. Addition of the gross profit to the total income of the assessee on account of such purchases will meet the end of justice. In view of the above we direct the AO to make the addition to the extent of the amount of the gross profit embedded in such suppressed sale. Hence the ground of appeal of the revenue is partly allowed.

Summary

Issues Involved:
1. Deletion of addition on expenses out of power and fuel.
2. Deletion of addition on account of excess consumption of raw material.
3. Deletion of addition on account of suppression of sales at Bareilly and Nandesari plants.
4. Alleged violation of principles of natural justice by the CIT(A) in accepting additional evidence.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Expenses Out of Power and Fuel:
The Revenue contested the deletion of Rs. 4,71,53,581/- added by the AO on account of power and fuel expenses. The AO found discrepancies in the consumption of power and fuel based on the annual report and the details provided by the assessee. The AO disallowed the expenses citing inflation and discrepancies in the consumption data. The CIT(A) deleted the addition, stating that the AO did not consider the power consumed in utilities, workshops, administrative offices, laboratories, and other non-productive units. The CIT(A) noted that the AO failed to point out any mistakes in the audited books of accounts and bills and vouchers. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO did not establish that the expenses were bogus or not incurred in connection with the business.

2. Deletion of Addition on Account of Excess Consumption of Raw Material:
The AO disallowed Rs. 2,28,41,828/- for excess consumption of raw material at the Nandesari plant, based on a discrepancy between the annual report and data collected under section 131. The CIT(A) deleted the addition, noting that the AO only considered major raw materials and not the total consumption. The CIT(A) also pointed out that the AO did not verify the books of accounts and bills and vouchers. The Tribunal agreed with the CIT(A), stating that the AO should have considered all raw materials and verified the records before making the addition.

3. Deletion of Addition on Account of Suppression of Sales at Bareilly and Nandesari Plants:
a. Bareilly Plant: The AO added Rs. 36,77,078/- for alleged suppression of sales based on discrepancies in the sales figures. The assessee explained that the discrepancy was due to stock transfers to a godown, which the AO did not verify. The CIT(A) accepted the assessee's explanation and deleted the addition. The Tribunal upheld the CIT(A)'s decision, noting that the AO misunderstood the stock transfer as sales.

b. Nandesari Plant: The AO added Rs. 92,66,496/- for suppressed sales based on discrepancies between the sales data and the annual report. The CIT(A) deleted the addition, stating that the AO did not verify the books of accounts and relied solely on the data collected under section 131. The Tribunal partially agreed with the CIT(A), stating that only the gross profit from the suppressed sales should be added to the income, not the entire sales amount, as per the Gujarat High Court's decision in CIT vs. President Industries.

4. Alleged Violation of Principles of Natural Justice by the CIT(A) in Accepting Additional Evidence:
The Revenue claimed that the CIT(A) violated the principles of natural justice by accepting additional evidence without providing an opportunity to the AO. The Tribunal found no evidence to support this claim and dismissed the ground, holding that there was no violation of rule 46A of the Income Tax Rules.

Conclusion:
The Tribunal upheld the CIT(A)'s decision on the deletion of additions related to power and fuel expenses and excess consumption of raw material. It partially upheld the CIT(A)'s decision on the suppression of sales, directing the AO to add only the gross profit from the suppressed sales. The Tribunal found no violation of natural justice in the CIT(A)'s acceptance of additional evidence. The appeal filed by the Revenue was partly allowed.