By TIOL News Service

RAIPUR, FEB 13, 2018: THE ISSUE BEFORE THE TRIBUNAL IS - Whether books of account can be said to be prone to rejection, merely because the quantity of raw material consumed and finished goods produced have been quantified with some degree of estimation. NO IS THE ANSWER.

Facts of the case:

The Revenue Department preferred present appeal challenging the action of CIT(A) in deleting the addition made by AO on account of direct & indirect expenses by invoking provisions of section 145(3). The Department also challenged the action of CIT(A) in deleting the disallowance of Rs.3,69,635/- made by AO on account of depreciation on crane. At the outset, the AR contended that the CIT(A) had not upheld the action of AO in rejecting books of account u/s 145(3) on the ground that merely because the quantity of raw material consumed and finished goods produced have been quantified with some degree of estimation, the books of account could not be said to be unreliable or prone to rejection.

Tribunal held that,

++ it is seen that the rejection of books of account is based on low gross profit, constant yield and maintenance of quantitative records in respect of issue of raw material, production and burning loss which is not on the basis of actual weighment. The assessee has rightly pointed out that working of gross profit, in respect of core business by the AO is incorrect. The gross profit of core business should have been worked out by the AO after excluding commission income also. As per working furnished by assessee, the gross profit from core business after excluding commission income, is 0.39% as against gross loss of 0.67% of immediately preceding year and thus, it is better. Secondly, the assessee has maintained quantitative details as required under Excise rules. Monthly returns are also submitted to the Excise Authorities and no discrepancy was noticed so as to establish that the yield shown by assessee is unreasonable or on lower side in comparison to yield prevailing in this line of industry. It is a matter on record that assessee has maintained quantitative records of raw material consumed and finished product produced. The books of accounts were subject to tax audit which was produced before the AO together with bills and vouchers and the same was examined by test check. The AO has not come across any material defect in account so as to hold that any profit has been suppressed. If there is no suppression of material facts, the authority cannot embark upon a speculative lent of notional profits;

++ it was also not in dispute that assessee had maintained books of account regularly and these were duly audited u/s 44AB and the quantitative details were prepared and were duly audited. The variation in percentage of GP/NP or payments in cash, in the absence any cogent reasons could not, by itself, have been a ground to hold that proper income of assessee cannot be deduced from the accounts maintained by it and consequently, could not have been a ground to reject the accounts invoking section 145(3). There was no finding in the assessment order of AO that the actual cost of finished goods purchased by assessee was less than what was declared in the account books. Therefore, it was held that merely because the quantity of raw material consumed and finished goods produced have been quantified with some degree of estimation, the books of account could not be said to be prone to rejection. As assessment had to be completed on the basis of records and material available before the AO and personal knowledge and excitement on events and extraneous facts should not lead the AO to a State of affairs where the salient/primary/direct evidences were overlooked and should not influence the AO for resorting to adhoc additions/disallowances.

(See 2018-TIOL-241-ITAT-RAIPUR)