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TMI Blog2018 (12) TMI 982X X X X Extracts X X X X X X X X Extracts X X X X ..... t that the AO has given elaborate details and basis as to why the books of a/c of the assessee did not give the correct picture of its financial affairs." 3. This appeal is filed by the Deputy Commissioner Of Income Tax, Circle, 19 (1), New Delhi (the learned AO) against the order of The Commissioner Of Income Tax (Appeals) - 7, New Delhi (the learned CIT - A) dated 3/3/2015 for assessment year 2010 - 11 wherein the learned AO has raised following grounds of appeal:- a. on the facts and in the circumstances of the case, the learned CIT (A) has erred in deleting the disallowance of INR 3 5188221/- made by the AO in respect of expenses incurred out of books by rejecting the books of account by giving a clear finding of facts that the assessee company had suppressed its promotion expenses to inflate the claim of deduction under section 80 IC of the Income Tax Act, 1961. b. On the facts and in the circumstances of the case, the learned CIT (A) has erred in holding that the books of accounts was not properly rejected as per the provisions of section 145 of the act. Despite the fact that the AO has given elaborate details and basis as to why the books of accounts of the assessee did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of which is reproduced as under thereto, the assessee did not furnish any detail and simply stated as under vide reply dated 25.2.2013:- "2.The unit is manufacturing electrical items like ceiling fans, water heater, mixer grinders, fresh air fans etc. and is using hundreds of components for its manufacturing. Some of the parts are manufactured inside the premises, some are procured on job work basis from the vendors and some are bought from the open market. These are then assembled to manufacture the finished product." 3.3 From the facts noted above, it is clear that the assessee did not want to disclose as to how much raw material is required for manufacturing a fan. It is a very strange case wherein the Chartered Accountant of the firm certified consumption of various items at the time of audit but the same were changed during the course of assessment proceedings and after issue of questionnaire by this office. Both the charts filed at the time of filing of return and filed during the assessment proceedings on 25.2.2013 are reproduced hereunder:- Chart furnished at the time of filing of return of income Quantitative details in respect of goods manufactured Description Un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn Rod 634830 639232 8 Body for water heaters(42082) 37951 42082 Total 5130622 5795170 3.5 From perusal of above it is clear that in terms of percentage, the assessee has disclosed manufacturing expenses at 46.9% (5130622/ 10925792 X 100) as against consumption comes on the basis of quantity produced at 54.9%(5795170 10925792 X 100). The total production expenses of the assessee are Rs. 43,98,52,763/- and accordingly the 8% suppression of production expenses by the assessee comes at Rs. 3,51,88,221/ - and accordingly the gross profit of the assessee is Rs. 10,68,437/- against Rs. 3,99,52,596/- as disclosed by the assessee which means the assessee company is not earning any profit from this business but enhanced its profit by suppressing production expenses just to claim deduction u/s 80IC. The assessee was confronted on this point and in compliance thereto the AR of the assessee furnished written reply dated 25.2.2013 as under:- "This is to certify that we have audited and signed the Balance sheet and Profit & Loss account of M/s Omnia Appliances Pvt. Ltd. having its registered office at 29-B, Prehlad Market, D.B. Gupta Road, Karol Bagh, New Delhi-110005, for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. of starter Amount 1 0130 3.3.2010 732 1,13,460 2 0131 4.3.2010 456 70,680 3 1696 5.3.2010 1230 2,06,640 4 0134 5.3.2010 660 1,02,300 5 0135 6.3.2010 624 96,720 6 0136 7.3.2010 600 93,000 7 0137 8.3.2010 582 90.210 8 1713 8.3.2010 1020 171360 9 0142 9.3.2010 570 98,646 10 0140 9.3.2010 576 89,280 11 0144 10.3.2010 528 84,480 12 0143 10.3.2010 576 89,280 13 1724 10.3.2010 570 95,760 14 0145 11.3.2010 1116 1,78,560 15 1739 11.3.2010 510 85,740 16 0148 12.3.2010 606 96,960 17 0153 14.3.2010 834 1,33,440 18 1755 14.3.2010 1110 1,86,660 19 0154 15.3.2010 1092 1,74,720 20 0156 16.3.2010 726 1,19,790 21 0155 16.3.2010 834 1,37,610 22 0157 17.3.2010 630 1,03,950 23 0158 17.3.2010 720 1,18,800 24 1780 17.3.2010 1050 1,77,480 25 1785 18.3.2010 540 91,680 26 0159 18.3.2010 582 96,030 27 0160 18.3.2010 756 1,24,740 28 1815 22.3.2010 1170 1,98,300 29 0170 23.3.2010 648 1,02,384 30 1823 23.3.2010 780 1,32,600 31 0171 24.3.2010 816 1,28,928 32 0172 25.3.2010 720 1,13,760 33 1841 25.3.2010 1350 2,26,920 34 1855 27.3.2010 720 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction of Rs. 1,86,76,062/- u/s 80IC. 6.1. I have noted from the order that the AO is proceeding with a pre-conceived notion. The AO has stated that the appellant was showing excessive profits by suppressing expenses to claim enhanced deductions u/s 80IC. In any case then there exempt u/s 80IC. 6.2. During the course of assessment proceedings, the AR of the appellant furnished a letter stating that in the financial statements wrong quantative details of consumption of raw materials was printed. This however, would have no impact on the PAL A/c or balance sheet. The AO however rejected the claim of the appellant and invoked section 145(3). 6.3. The AO then stated that the appellant would have incurred expenses outside books of account and estimated such expenses at Rs. 3,51,88,221/-. I am unable to comprehend by what logic the estimation of expenses has been done. The AO did not make any inquiries, did not mention the defect in the books of account, did not state what type of expenses were incurred out of books. 6.4. The AO in the order has clearly stated that various details and documents were examined on test check basis. The AO has nowhere stated that purchases were v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is rejection of accounts regularly maintained it is the right of appellant to be given opportunity to explain defects - Accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. The AO has to prove satisfactorily that the account books are incorrect or incomplete before the AO can reject the accounts. Rejection of accounts should not be done light-heartedly. Though it may not be possible to lay down the exact circumstances in which the accounts should be rejected as unreliable or incorrect, the accounts may be rejected as unreliable if important transactions are omitted or if proper particulars and vouchers are not forthcoming or if they do not include entries relating to a particular class of business. The appellant should be given an opportunity on his failure to satisfactorily explain the defects. 6.13. It, therefore, follows that appellant's account books are to be accepted, unless, on verification, they disclosed any faults or defects, which cannot be reasonably and satisfactorily explained by the appellant [R.B. Jerraram Fataehchand (Sugar Deptt) v CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the accounts. 6.17. The AO has not given an opportunity to the appellant before invoking section 145. This is an essential prerequisite of any proceeding that the AO cannot draw an adverse inference against the appellant without giving an opportunity and a fair and just chance to the appellant to give its submissions. Principles of natural justice should have been followed. 6.18. There is no basis on which the AO has disallowed expense of Rs. 3,51,88,221/-. The addition of this amount is deleted. The deduction u/s 80IC is allowed to the appellant. The ground of appeal is ruled in favour of the appellant." 6. Learned departmental representative vehemently supported the order of the learned assessing officer and extensively read para number 3 of the assessment order and stated that as the books of accounts of the assessee are not reliable the provisions of section 145 (3) are applied by the learned assessing officer and rejected them. He submitted that when the assessee company has suppressed the production expenses and thereby and hence the profit just to claim the higher deduction under section 80 IC of the act. The books of accounts of the assessee cannot be relied. He f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the addition made by the learned assessing officer is not sustainable and the learned Commissioner of income tax appeals has correctly deleted the whole addition. 8. We have carefully considered the rival contention and perused the orders of the lower authorities. The learned assessing officer was of the view that that assessee showing excessive profits by suppressing various expenses just to claim enhances deduction under section 80 IC of the act. Due to the quantity details of the fence manufactured by the assessee with respect to the details of the raw material consumed the learned assessing officer was of the view that raw material consumed is not in consonance with the production shown by the assessee. He therefore referred to the various quantitative details submitted by the assessee and reach data conclusion that assessee has suppressed its production expenses by 8% and enhance the profit to claim the deduction under section 80 IC INR 4 35188221/- and therefore he disallowed the deduction claimed by the assessee under section 80 IC of INR 18676062 and further made an addition on account of undisclosed expenditure incurred by the assessee out of the books of accounts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gible 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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