2004 (1) TMI 325 - AT - Income Tax

Rejection of books of accounts - suppression of sales or purchases - stock of gold jewellery - Statements of auditor recorded u/s 131 - Addition on account of local turnover - Unexplained investment by not showing wastage of gold - Deduction u/s 80HHC. HELD THAT - The basis for rejection of the books of accounts by the AO and the CIT(A) has been that there are cuttings overwriting use of fluid and some of the totals made in pencil besides totalling and posting errors in the cash book ledger. The AO has also indulged in surmises whereby he has stated that totals in pencils gives a free hand to the assessee to change the figures. The cutting overwriting use of fluid totals with pencils cannot by itself be the basis for rejection of books of accounts unless these are corroborated with some other material or evidence such as sales purchases or the expenditure outside the books of accounts which has been incorporated or adjusted by way of overwriting or cutting. No such instance has been pointed out by the AO or the CIT(A) despite the fact that books of accounts and vouchers were impounded and continues to be in his custody. As regards the second contention of the AO that there are totalling/posting errors in books of accounts and stock records the assessee has explained these errors and the impact of these errors have already been taken into consideration in the P L a/c on the basis of which the return has been filed. So on this ground also the results declared by the assessee cannot be disturbed. We may further point out that even rejected books of accounts do not lose the character of material or evidence despite mistakes and AO cannot ignore these books of accounts altogether. Even rejected books of accounts are valid piece of evidence. Further rejection of books of accounts is not justified when mistakes in the books of accounts are of general or technical nature and there is no evidence of suppression of sales/purchases income or expenditure as has been held in the case of 1996 (3) TMI 514 - KERALA HIGH COURT . Accordingly we hold that the CIT(A) was not justified in upholding the rejection of books of accounts. Addition on account of local turnover - We find that the AO has made the addition on the basis that assessee has failed to produce the purchase invoices and books of accounts are not reliable whereas the CIT(A) has confirmed the addition on the ground that looking to the facts of the case estimation of 5 per cent of total turnover as concealed profits is more than justified. Thus there are two different basis adopted for sustaining the addition by the AO and the CIT(A) respectively. But in our view both the basis adopted by the AO and the CIT(A) are wrong and addition on this ground need to be deleted. For sustaining an addition there has to be some basis. The AO is not supposed to make a pure guesswork. The various case laws cited by the authorised representative on this point supports the case of the assessee. As regards the stand of the CIT(A) as discussed above the assessee having taken into account all the differences pointed out in the books of accounts while preparing P L a/c there were no reason for sustaining the addition. Accordingly we hold that addition of Rs. 15, 50, 005 is without any basis and the same is deleted. Unexplained investment by not showing wastage of gold - This is an admitted fact that assessee is getting the jewellery manufactured from Karigars and not doing himself. If that be so then the loss in making even if it there has to be at the end of the Karigar. The CIT(A) in her order has held that the appellant has not produced any evidence to support his claim that wastage is borne by the Karigar. However this is an allegation by the Revenue that the wastage has not been shown. The onus is on Revenue to prove that there is wastage and that wastage has been borne by the assessee and has been met from unexplained sources. The assessee in his statement has explained the procedure and method being adopted by him. That procedure and method cannot be rejected by shifting onus upon him. The addition has been made u/s 69C and that be so the onus will be on Revenue to establish that there is an unexplained expenditure incurred by the assessee. After taking into consideration the argument and the material before us we hold that addition of Rs. 4, 00, 000 is unjustified and the same is deleted. Deduction u/s 80HHC - It is for the chartered accountant to decide how he issues such report. The assessee cannot enforce anything on the chartered accountant. Moreover as per Form 10CCAC which is the prescribed form the chartered accountant is not required to do the audit for issue of this certificate. He is required to examine the accounts and records. In this case the assessee has furnished the report in the prescribed form and the chartered accountant having confirmed in his statement recorded u/s 131 having issued the certificate the requirement of s. 80HHC(4) gets complied with and the deduction cannot be denied on the basis of certificate being not based on proper auditing of accounts. Accordingly we hold that CIT(A) was not justified in denying benefit of deduction u/s 80HHC and the assessee be allowed deduction u/s 80HHC of the Act. The certificate of chartered accountant is based on the profits and gains as computed by the assessee and once the AO does not agree with the profits and gains of business or profession as computed by the assessee then he is required to suitably modify the deduction u/s 80HHC based on the profits and gains of business or profession computed by him. We are in agreement with the contention of the learned counsel in this regard. Accordingly we direct that the deduction u/s 80HHC be computed on the basis of assessed profits or gains of business as finally assessed after taking into consideration addition if any. In the result the appeal filed by the assessee is partly allowed.

Summary

Issues Involved:
1. Rejection of books of accounts.
2. Addition on account of local turnover.
3. Addition on account of unexplained investment by not showing wastage of gold.
4. Denial of exemption u/s 80HHC.
5. Levy of interest u/s 234B.

Summary:

1. Rejection of Books of Accounts:
The assessee's books of accounts were rejected by the AO due to discrepancies such as totalling and posting errors, use of fluid, and overwriting. The CIT(A) upheld the rejection but deleted the addition of Rs. 17,55,882 for various errors. The Tribunal found that the AO's rejection was arbitrary and that the discrepancies were clerical errors that had been rectified in the final P&L account. The Tribunal held that the CIT(A) was not justified in upholding the rejection of books of accounts.

2. Addition on Account of Local Turnover:
The AO added Rs. 15,50,005 assuming the assessee was doing local business, estimating 5% of export turnover as local business. The CIT(A) confirmed this addition. The Tribunal found that the addition was made on surmises and conjectures without any material evidence. The Tribunal deleted the addition, stating that the AO's and CIT(A)'s bases for the addition were wrong.

3. Addition on Account of Unexplained Investment by Not Showing Wastage of Gold:
The AO made an addition of Rs. 19,50,231 for unexplained investment due to not showing wastage in manufacturing jewellery, which the CIT(A) reduced to Rs. 4,00,000. The Tribunal held that any wastage would be a business expenditure allowable u/s 37 and that the onus was on the Revenue to prove unexplained expenditure. The Tribunal deleted the addition of Rs. 4,00,000.

4. Denial of Exemption u/s 80HHC:
The AO denied the exemption u/s 80HHC due to the absence of a bank certificate of export and realisation. The CIT(A) upheld the denial, stating the CA certificate was not based on proper auditing. The Tribunal found that the assessee had complied with the requirement of furnishing the CA certificate and that the CIT(A)'s reasoning was unjustified. The Tribunal allowed the deduction u/s 80HHC and directed that it be computed based on the assessed profits.

5. Levy of Interest u/s 234B:
The Tribunal found that there was no specific direction by the AO for the levy of interest u/s 234B in the assessment order. Following the Supreme Court judgment in CIT vs. Ranchi Club Ltd. and the Delhi High Court judgment in CIT vs. Kishan Lal (HUF), the Tribunal held that interest cannot be charged without a specific order and directed the deletion of the interest.

Conclusion:
The appeal filed by the assessee was partly allowed, with the Tribunal providing relief on several grounds, including the rejection of books of accounts, addition on account of local turnover, unexplained investment, denial of exemption u/s 80HHC, and levy of interest u/s 234B.