Raw material consumption disallowance overturned as revenue failed to prove specific defects in accepted books under section 145

ITAT Ahmedabad allowed the assessee's appeal against disallowance of raw material consumption. The AO and CIT(A) made ad hoc additions based on estimated percentage increases in raw material consumption without rejecting books of account under section 145. The tribunal held that mere deviation in consumption percentage cannot justify rejecting books of account without inquiring into purchase genuineness. Since books were regularly maintained and audited without adverse comments, revenue failed to demonstrate specific defects. The tribunal deleted the addition, ruling that estimation methods are unjustifiable when books are accepted as correct.

---

---

Issues involved:
The appeal involves issues related to disallowance of increased material consumption and late payment of employee's contribution to PF/ESIC u/s 36(1)(va) of the Income Tax Act, 1961.

Disallowance of Increased Material Consumption:
The assessee, a manufacturer of plastic products, challenged the disallowance made by the AO regarding the rise in material consumption. The AO added back a significant amount to the total income of the assessee based on the increase in consumption. The CIT(A) upheld a portion of the disallowance. The assessee contended that the increase in consumption was due to the inclusion of Job work Charges under the cost of raw material. The books of accounts were duly audited, and no undisclosed production was found. The Tribunal observed that mere deviation in the percentage of raw material consumption cannot justify rejecting the books of accounts. The Gujarat High Court precedent was cited to emphasize that if books are rejected under section 145, no further additions can be made based on the same books. Since no specific defects were shown in the books of accounts, the estimation method for the addition was deemed unjustifiable. Consequently, the Tribunal deleted the addition made by the CIT(A) and allowed this ground of the assessee.

Late Payment of Employee's Contribution to PF/ESIC:
The AO also added an amount towards the late payment of employee's contribution to PF/ESIC. This addition was challenged by the assessee in the appeal. However, the counsel for the assessee did not press this ground during the proceedings. As a result, this ground was dismissed.

General Ground:
The third ground raised by the assessee was of a general nature and did not require separate adjudication. The Tribunal partly allowed the appeal of the assessee in light of the above considerations.

---