2025 (9) TMI 216 - AT - Income Tax

Appeal allowed: audited books and product-wise yield method accepted; s.145(3) not invoked; additions and depreciation deleted

Vitrang Export Industries, Gujarat Versus The ITO, Ward – 2 (1) (1), Rajkot

Vitrang Export Industries, Gujarat Versus The ITO, Ward – 2 (1) (1), Rajkot - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the assessing officer could make an addition on account of alleged low production yield of groundnut oil by applying laboratory seed-yield percentages to inshell groundnut inputs without invoking section 145(3) or rejecting book results. 2. Whether laboratory reports seized during survey (relating to seed oil content from prior years and from independent laboratories in the belt) constitute sufficient material to compute suppressed production for the whole year and justify additions to income. 3. Whether factual and accounting records (audited books, product-wise quantity records, and consistent historical treatment) preclude disturbing the book result in the absence of formal rejection under section 145(3). 4. Whether an unexplained difference between purchases shown in party-ledgers and purchases disclosed in audited accounts justifies an addition for purchases outside books. 5. Whether depreciation claimed on allegedly computer-generated/incomplete invoices for solvent plant machinery can be disallowed where the assessee produces bills, bank payments, auditor's certificate, ledger entries and tax-form evidence of purchase and installation. ISSUE-WISE DETAILED ANALYSIS - Addition for low yield of groundnut oil (Issues 1-3 consolidated) Legal framework: Assessing officer's power to estimate income/production based on independent material and survey findings; doctrine that book results may be disturbed upon recording reasons and/or invoking section 145(3) where books are unreliable; burden on revenue to establish suppressed production/sales that give rise to income. Precedent treatment: A jurisdictional High Court decision on substantially similar facts, where concurrent findings of appellate authorities that the assessing officer's method was incorrect and that laboratory reports related to seeds (not inshell groundnuts) led to an unwarranted enhancement, was relied upon and followed by the Tribunal. Interpretation and reasoning: The Tribunal examined the technical manufacturing process (two-stage oil recovery where husk remains during initial crushing), the nature of laboratory reports (yield from bare seeds in laboratory scale), and the assessee's contemporaneous records (audited accounts, product-wise quantity details, prior acceptance of the methodology by department and appellate authorities). The assessing officer's computation applied seed-yield percentages to inshell groundnuts after deducting husk, producing a higher theoretical yield and treating the difference as suppressed production; this methodology was held to be a misapplication of the technical evidence and inconsistent with industry practice and the assessee's long-standing accepted figures. The Tribunal emphasized that survey laboratory reports pertained to seed-content yields and to earlier years, and did not constitute year-long proof of suppressed production or suppressed sales; mere disturbance of production figures, without corresponding evidence of sales/income, does not produce taxable income. The Tribunal also noted that the AO had not recorded any rejection of books under section 145(3), and the remand report admitted absence of such noting. Ratio vs. Obiter: Ratio - where laboratory reports measure seed oil-content only and the assessee's integrated manufacturing process and audited records consistently show lower overall recovery, the assessing officer cannot, by applying seed-yield percentages to inshell inputs, compute suppressed production for the year and make additions absent proper rejection of books and independent evidence of suppressed sales. Obiter - observations on regional fertility/soil factors and choice of specific laboratory averages as industry standard beyond the factual matrix. Conclusions: The addition for alleged low yield (whether the figure is Rs. 1.51 crores or Rs. 3.34 crores as rectification/mathematical variance) was deleted. The Tribunal followed the High Court's reasoning distinguishing earlier cases and found AO's method arbitrary and misapplied; therefore grounds 1-3 allowed. The Tribunal clarified its decision would apply even if revenue later amends the figure upward by rectification, since the substantive approach was held to be unsustainable. ISSUE-WISE DETAILED ANALYSIS - Purchases outside books (Issue 4) Legal framework: Addition for unexplained purchases requires that ledger/record discrepancies be unexplained and onus lies on assessee to demonstrate genuineness and reconcile figures with audited schedules. Precedent treatment: Authorities consistently require reconciliation between party ledgers and audited schedules; isolated ledger figures that include taxes or multiple product entries may differ from schedule totals, and the assessee's explanation and documentary reconciliation can negate an addition. Interpretation and reasoning: The AO compared party-ledger totals with schedule figures and added the difference. The assessee produced an item-wise detailed chart reconciled with schedule 8 of the balance sheet and argued the ledger contained taxes/other product purchases leading to apparent variance. The Tribunal examined schedule 8 vis-à-vis ledger accounts and found no material difference; in view of the reconciliation presented and verifiable ledger entries, the AO's addition lacked support. Ratio vs. Obiter: Ratio - where the assessee furnishes item-wise reconciliation matching the audited schedule and ledger entries, an addition for purchases outside books is not sustainable. Obiter - remarks on the general onus of proof resting with the assessee were reiterated but applied to facts. Conclusions: Addition of Rs. 10,22,875/- on account of purchases outside books was deleted; ground 4 allowed. ISSUE-WISE DETAILED ANALYSIS - Disallowance of depreciation on solvent machinery (Issue 5) Legal framework: Claim to depreciation requires proof of bona fide purchase, payment and installation in business premises; AO may disallow where vouchers are unreliable or there is no evidence of transportation/installation. Documentary proof (invoices, bank payments, auditor's certificate, ledger entries, statutory forms) ordinarily suffices to establish entitlement. Precedent treatment: Tax authorities may verify invoices for authenticity; however, where adequate corroborative documentary evidence of purchase and payment exists, allowance of depreciation is appropriate. Interpretation and reasoning: The AO disallowed depreciation on the ground that submitted invoices were computer-generated and lacked complete descriptions and there was no proof of transportation/installation. The assessee produced original bills, bank payment evidence, ledger entries, auditor's certificate and statutory tax-form evidence indicating purchase and installation. The Tribunal found these documents were before the lower authorities and sufficiently established the genuineness of the transactions and installation at business premises. Ratio vs. Obiter: Ratio - where the assessee produces invoices supported by bank payments, auditor's certification and statutory forms confirming acquisition and installation, depreciation disallowance for lack of transportation/installation evidence is not warranted. Obiter - comment that AO's suspicion based on invoice format alone is insufficient absent additional adverse material. Conclusions: Disallowance of depreciation of Rs. 1,72,250/- was deleted; ground 5 allowed. FINAL DISPOSITION (combined effect) The Tribunal allowed grounds 1-5 in favour of the assessee: deletions of additions for alleged low yield, purchases outside books and disallowed depreciation. The Tribunal applied technical analysis of manufacturing process, corroborative documentary evidence and a controlling appellate/high-court precedent to conclude the assessing officer's estimations and evidential inferences were unsustainable on the record.