ITAT Jabalpur

Waidhan Engineering & Industries (P) Ltd. v. Joint Commissioner of Income-tax

60 taxmann.com 440

IT APPEAL NOS 187 (JAB.) OF 2014

S.A. NO. 14 (JAB.) OF 2014

Order Dated.- MARCH  27, 2015 

Ratio

Mere fact that some expenditure was supported with self made vouchers can never be reason enough to reject books of account as a whole.

Full Text

I.C. Sudhir and Pramod Kumar

For the Appellant: K. Kumar

For the Respondent:  Abhishek Shukla

ORDER

Pramod Kumar, Accountant Member

This is an appeal filed by the assessee and is directed against the order dated 25th August, 2014 passed by the learned CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2010-11.

2. In the first ground of appeal, the assessee has raised grievance against ld. CIT(A)'s confirming the stand taken by the A.O. in respect of addition of Rs.33,01,961/- by estimating the raw material consumption @ 53% as against 55.22% as per books of account and records.

3. Briefly stated, the relevant material facts are like this. The assessee is engaged in the business of, inter alia, retreading of tyres. During the course of scrutiny assessment proceedings, the A.O. noticed that the gross profit rate shown by the assessee has gone down vis-à-vis earlier years. When the matter was examined further, he found that the cost of consumption of raw material was shown in the current year at 55.22 % of the total turnover whereas in the immediately preceding year the consumption of raw material was only 50.14% of the turnover. It was also noted that in the financial year 2007-08, the said percentage was even lower at 48.86 %. The A.O. then verified the details of manufacturing and noted certain anomalies in the sense that for the same size of type retreaded, consumption varied substantially as evident from the following chart:

Size of Tyre Retreaded	Consumption	Serial No. and Date
18.00*25	98.200 Kg	17(10) Dtd. 11/05/2009
18.00*25	98.200 Kg	17(15) Dtd. 11/05/2009
18.00*25	96.200 Kg	11(7) Dtd. 10/05/2009
21.00*35	197.30 Kg	20(1) Dtd. 10/05/2009
21.00*35	195.800 Kg	19(2) Dtd. 10/05/2009
21.00*35	198.300 Kg	23(5) Dtd. 09/05/2009

4. The A.O. also noted that certain payments to labour and other similar type of expenses were made through "self made vouchers". It was in this backdrop he required the assessee to show cause as to why the provisions of section 145(3) not be invoked. It was explained by the assessee that in a manufacturing concern, it is unrealistic to expect that the rate of martial consumption, GP or NP will remain static over different years. It was also explained that the result shown by the assessee was duly supported by books of account and no defects have been pointed out. The assessee also submitted that there is increasing trend in the cost of coal, power, fuel labour and all other manufacturing overheads whereas the tenders once accepted has to be completed irrespective of any increase of manufacturing expenses including cost of material. However, the A.O. was not impressed with any of the explanations given by the assessee. He was of the view that in the present case there is no mechanism to verify the correctness of the consumption except to compare the fact of the consumption in retreading of one tyre with consumption in another tyre of the same size. On this test, noted the A.O., the figures given by the assessee inspire no confidence. Accordingly, the A.O. proceeded to reject the consumption figures as shown by the assessee and adopt the same at 53%. While doing so, he observed as follows:—

"Assessee's submission on application of section 145(3) is rejected as the assessee's reply on the subject is general and also that the assessee has said nothing on rubber consumption except quoting the price rise in the purchase.

The issue has been raised during the assessment proceeding and confronted to the assessee, why material issue register is to be treated to have been kept in regular course of activities. The reply and answer of the assessee was given. Considering facts as discussed above, the provision of 145(3) is applicable in this case and looking to the nature of business, past history, explanation of the assessee, it will be reasonable in the case of the assessee to estimate consumption of raw material at 53% (while last year it was 50.14% but looking to the fact of rise in prices of material and also contract on lower rates, it has been considered reasonable to estimate raw material consumption in the manufacturing cost process at 53%). If raw material consumption is taken in A.Y. 2010-11 at 53%, as discussed above, the cost of raw material consumption is worked out at the total turnover of Rs14,85,90,291/-, at Rs.7,87,52,854/- as against claim of the assessee at Rs.8,20,54,815/-. The difference of both the amount comes at Rs.33,01,961/- which is nothing but inflation of cost of consumption in the trading account by the assessee. Hence, treating the amount of Rs.33,01,961/- as excessive claim in the consumption of raw material, is disallowed and added in the income of the assessee as extra profit.

(Addition: Rs.33,01,961/-)"

5. Aggrieved by the stand so taken by the A.O., the assessee carried the matter in appeal before the ld. CIT(A) but without any success.

6. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. We have noted that the basic reason in rejecting the consumption of material as shown by the assessee is the variation in consumption of material in respect of two tyres of the same size. This approach, however, proceeds on the fallacious assumption that the consumption of material in retreading tyres of the same size will be exactly the same irrespective of the condition of tyre which is sought to be retreaded. It is elementary that the consumption of material in the process of retreading of tyre would depend upon the condition in which tyres are to be retreaded. The process of retreading a tyre as such that they cannot be uniform in consumption of material in respect of all tyres of same size. For example, in some cases some casings are repaired while some other casings are discarded and this decision as to which casings is to be repaired and which is to be discarded would essentially depend on the condition in which the casings are. Clearly, therefore, from the fundamental assumption which is the foundation of the impugned addition is devoid of any merits. In any event, no defects have been noticed in the books of account. As for the AO's observation that some of the expenditure is supported by self-made vouchers, the mere fact that some expenditure is supported with self-made vouchers can never be reason enough which is sustainable in the eyes of law to reject the books of account as a whole. In case the A.O. was not satisfied about the authenticity of the support for this expenditure, nothing prevented him from exploring the possibilities of disallowance with respect to that expenditure. However, the course of action he adopted i.e. in rejecting the books of account though only to the extent of consumption of material cannot be given any judicial approval. It is also to be noted that consumption of raw material in year to year even under ideal circumstances can never be the same because there are many variables governing the consumption of raw material. The A.O. was thus clearly in error in resorting to the impugned disallowance. The ld. CIT(A) has also not dealt with any of these aspects but has proceeded with his seemingly erudite discussion on the legal position though without properly establishing the fundamental facts. In view of these discussions and bearing in mind the entirety of the case, we are of the considered view that the authorities below was in error so far as their stand on disallowance of Rs.33,01,961/- on raw material consumption is concerned. We, therefore, direct the Assessing Officer to delete the impugned disallowance. The assessee gets the relief accordingly. Ground no.1 is thus allowed.

7. In the second ground of appeal, the assessee is aggrieved by the ld. CIT(A)'s confirming the order of A.O. disallowing bad debs of Rs.2,10,958/- in respect of NTPC, Rihandnagar.

8. So far as this disallowance is concerned, the disallowance was made for the short reason that the assessee was asked to furnish the certificate from NTPC, Rihandnagar, that the NTPC has finally not considered the amount of Rs.2,10,958/- reasonable as correct amount and accordingly bill was reduced by NTPC and the assessee did not produce certificate even on asking to produce such certificate.

9. Aggrieved by the stand so taken, the assessee carried the matter before the ld. CIT(A) but without any success. The assessee is aggrieved and is in further appeal before us.

10. Having heard the rival contention perused the material on record, we are of the considered view that the impugned disallowance is devoid of any legally sustainable merit. There is no dispute that this debt was so written off and yet the disallowed is made only because a certificate from the debtor is not produced. The conditions laid down for allowance and bad debt are clearly satisfied in the case and the disallowance, therefore, deserves to be deleted. We direct the A.O. to do so. Ground no.2 is thus allowed.

11. In ground no.3, the assessee has raised the grievance against the ld. CIT(A)'s confirming the disallowance on adhoc basis to the extent of Rs.1,00,000/- out of various administrative expenses.

12. As far as this disallowance is concerned, the A.O. has made the same by observing as follows :—

"The assessee has incurred staff welfare expenses at Rs.6,41,735/-, Puja Expenses at Rs.1,19,455/-, Liquidated Damages at Rs.4,32,692/-, Travelling expenses at Rs.31,90,265/- (including Rs.4,61,186/- for directors), Conveyance at Rs.2,94,237/-, Vehicle Running Expenses at Rs.4,17,921/-, General Expenses at Rs.1,22,769/-, Recruitment Expenses at Rs.1,13,906/-, total of which comes to Rs.53,32,980/-. The above expenses by nature are not verifiable. As these are very small expenses and looking to the nature of the payment, it has been made in cash through self made vouchers, even full identity of recipient is not kept. In the circumstances, an adhoc addition of Rs.3,00,000/- is made out of these expenses, and the same is disallowed and added in the income of the assessee." (Addition: Rs.3,00,000/-)

13. When the matter was carried before the ld. CIT(A), the ld. CIT(A) upheld the disallowance in principle but restricted he same to Rs.1,00,000/-. The assessee is not satisfied and is in further appeal before us.

14. Having heard the rival contentions and perused the material on record, we find that the disallowance is made purely on the basis of surmises and conjectures and without pointing out any specific defects in the vouchers in support of these expenses. We are unable to see any legally sustainable merits in this kind of approach based on sweeping generalisation for making disallowance. We direct the A.O. to delete the same. Ground no.3 is thus allowed.

15. In ground no.4, the assessee is aggrieved by the ld. CIT(A)'s confirming the disallowance of Rs.1,53,721/- being 5% of the total wages paid as against disallowance of Rs.3,07,442/- being 10% of the total wages paid.

16. As far as this disallowance is concerned, the A.O. has made the same by observing as follows :—

"The assessee has claimed wages (which is part of manufacturing expense) at Rs.30,74,421/-, in the year under consideration which was @ 2.07% of total turnover, whereas it was at Rs.24,68,771/- in previous year @ 1.82% of total turnover of the previous year. The fact has been communicated to the assessee that this expense by nature is not fully verifiable in absence of complete record and justification of expenses as per proper bills and vouchers which was not kept, out of which, many are made from self made vouchers. In the circumstances, disallowance of 10% of wages amount of Rs.30,74,421/-, worked out at Rs.3,07,442/- is made and added in the income of the assessee. (Addition: Rs.3,07,442/-)"

17. When the matter was carried before the ld. CIT(A), the ld. CIT(A) upheld the disallowance in principle but restricted the quantum of disallowance to 5% of expenditure. The assessee is not satisfied and is in further appeal before us.

18. Having heard the rival contentions and perused the material on record, we find that the disallowance is made purely on the basis of surmises and conjectures and without pointing out any specific defects in the vouchers in support of these expenses. We are unable to see any legally sustainable merits in this kind of approach based on sweeping generalisation for making disallowance. We direct the A.O. to delete the same. Ground no.4 is thus allowed.

19. In the result, appeal filed by the assessee is allowed.

20. As we have allowed the appeal of the assessee, Stay Application filed by the assessee is rendered as infructuous. Thus, the Stay Application of the assessee is dismissed as infructuous.

21. In the result, appeal filed by the assessee is allowed and the Stay Application filed by the assessee is dismissed.

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