2010 (11) TMI 649 - AT - Income Tax

Tax Tribunal: Additions for multiple years deleted, partial addition sustained for one year. Revenue's appeals dismissed.

The Tribunal upheld the deletion of additions for AYs 2000-01 to 2005-06, finding the rejection of books and the statistical formula unjustified. For AY ... Search and seizure - Suppression of profits - Rejection of book of accounts - assessee company indulges in unaccounted production and sale, the AO went on to compute the suppressed production on the basis of electricity consumption for all the years under consideration - CBDT Circular dt. 15th Sept., 2003 explained the scope and effect of new assessment proceedings in search cases - Held that: The returns have already been accepted and no assessment as such could be said to be pending on the date of initiation of search and abated in light of the provisions of s. 153A Regarding rejection of book - It is an accepted fact that each year of the assessment is independent and evidences found relating to asst. yr. 2006-07 cannot have an adverse impact on the assessments of the assessee company from the asst. yrs. 2000-01 to 2005-06 - rejection of books for these years purely on the ground that there has been divergence in the consumption of electricity and application of s. 144 is not at all justified assessee's stand was that whatever stores and material were surrendered by the assessee on the day of search have been taken into books of accounts and they form part of the manufacturing and trading account of the assessee - In view of disclosure in the hands of the company/individual same has to be taken for telescoping with regards to other additions or surrender that are otherwise called for on the basis of seized material - Since the assessee has voluntarily surrendered these amounts and paid taxes thereon, its request for telescoping the same into the intangible addition sustained on account of suppressed production was found reasonable by the CIT(A) - Appeal is dismissed Issues Involved:1. Deletion of addition on account of suppressed profit.2. Validity of rejection of books of accounts.3. Justification of statistical formula based on electricity consumption.4. Inference of suppressed production from other corroborative evidence.5. Correctness of framing and passing assessment orders under Section 144 of the Income Tax Act.Detailed Analysis:1. Deletion of Addition on Account of Suppressed Profit:The primary issue was the addition made by the Assessing Officer (AO) on account of alleged suppressed production. The AO concluded that the books of accounts maintained by the assessees were not reliable and invoked Section 145(3) of the Income Tax Act to reject the books. The AO then devised a statistical formula based on electricity consumption to estimate suppressed production and resultant concealed income. The CIT(A) allowed full relief for assessment years (AYs) 2000-01 to 2005-06 and partial relief for AY 2006-07, leading to appeals by both the Revenue and the assessee.2. Validity of Rejection of Books of Accounts:The AO rejected the books of accounts citing several reasons, including consistent business losses, unaccounted stock, advances taken, cash payments, non-deduction of tax at source on consultancy charges, and excessive claim of burning loss. The assessees argued that their books were statutorily audited under the Companies Act and the Income Tax Act, and the AO failed to consider these audits and other relevant factors. The CIT(A) found the rejection of books for AYs 2000-01 to 2005-06 unjustified, noting that no major irregularities were found in the books for these years.3. Justification of Statistical Formula Based on Electricity Consumption:The AO used a statistical formula based on electricity consumption to estimate suppressed production. The assessees contended that this method was not scientifically justified, as electricity consumption can vary due to factors like quality of raw materials, voltage supply levels, and mechanical breakdowns. The CIT(A) agreed with the assessees, stating that no fixed parameters or statistical formula could be applied uniformly for determining suppressed production without considering the books of accounts.4. Inference of Suppressed Production from Other Corroborative Evidence:The AO inferred suppressed production from loose papers found during the search, which indicated unaccounted production and sales. The assessees argued that these papers did not pertain to the years under consideration and that no direct evidence of unaccounted production was found for AYs 2000-01 to 2005-06. The CIT(A) concluded that no incriminating material was found for these years, and therefore, the AO's suspicion was misplaced.5. Correctness of Framing and Passing Assessment Orders Under Section 144:The AO framed assessment orders under Section 144, which allows for best judgment assessment when the books of accounts are rejected. The CIT(A) found that the AO's application of Section 144 was not justified, especially for AYs 2000-01 to 2005-06, as the rejection of books was not warranted.Conclusion:The Tribunal upheld the CIT(A)'s decision to delete the additions for AYs 2000-01 to 2005-06, finding that the rejection of books and the use of a statistical formula based on electricity consumption were not justified. For AY 2006-07, the Tribunal sustained a partial addition based on seized material but allowed the assessees' plea for telescoping, reducing the net addition. The appeals of the Revenue were dismissed, and the assessees' appeals for AY 2006-07 were also dismissed.