ITAT Deletes GP Addition Over Alleged Waste Stock Discrepancy in Tax Audit Report

Shakti Polyweave Private Limited succeeded before the Ahmedabad ITAT after the Tribunal held that the Assessing Officer wrongly rejected books of account and estimated gross profit merely on the basis of an alleged discrepancy in waste stock reporting in the tax audit report. The Tribunal further held that once the primary addition forming the basis of reopening failed, other additions made during reassessment could not survive.

The dispute arose after the Assessing Officer reopened the assessment for AY 2018-19 alleging understatement of closing stock of wastage. According to the AO, the figures disclosed in Clause 35(bc) of the tax audit report showed that the assessee had understated waste stock by 11,00,715 kilograms. On this basis, the AO concluded that closing stock was undervalued by about Rs.61.28 lakh and rejected the books under Section 145(3).

The assessee explained that the so-called discrepancy arose because plastic waste generated during manufacturing was reprocessed into granules and reused in production. It submitted that the tax audit report format did not contain a separate column for disclosing reprocessed waste used internally. Detailed documentary evidence, including job-work invoices, confirmations from job workers, transport records and a Chartered Accountant’s certificate, was furnished to establish that the waste had actually been reprocessed and consumed in manufacturing activity.

The Tribunal noted that the Revenue could not point out any defect in the documentary evidence filed by the assessee. It observed that the Assessing Officer merely made general allegations without identifying any actual discrepancy in the figures certified by the job workers or the Chartered Accountant. The Bench held that the assessee had satisfactorily explained the alleged anomaly in the tax audit report and therefore rejection of books was unjustified.

The Tribunal further observed that even otherwise, the gross profit addition lacked any rational basis. It noted that the GP rate declared by the assessee during the relevant year was 18.15%, which was only marginally lower than the immediately preceding year and even higher than the average GP of earlier years. Accordingly, the estimated GP addition of Rs.74.64 lakh was deleted.

The Tribunal also deleted additions made under Sections 40(a)(ia) and 36(1)(va), relating respectively to TDS disallowance and delayed PF contribution. Relying on judicial precedents including Ranbaxy Laboratories Ltd. and Jet Airways (India) Ltd., the Tribunal held that once the addition forming the basis of reassessment itself did not survive, the Assessing Officer could not sustain other additions unrelated to the recorded reasons for reopening.

For AY 2019-20, the Tribunal restored the issue relating to disallowance of deduction under Section 80G back to the Assessing Officer. The Bench observed that the assessee had not been granted proper opportunity to cross-examine persons whose statements were relied upon by the Revenue for alleging bogus donations.

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