Books Can Not Be Rejected on Surmise: ITAT Ahmedabad Grants Complete Relief to Shakti Polyweave

Case Details

Since both appeals relates to same assessee, hence both were disposed by this common order for the sake of convenience.

First, we take up the assessee’s appeal in ITA No.2403/Ahd/2025 for the AY 2018-19.

Background & Facts

Shakti Polyweave Private Limited is an Ahmedabad-based manufacturer of technical textile products, primarily HDPE/LDPE (High Density Polyethylene/Low Density Polyethylene) laminated and unlaminated fabrics. It generates plastic wastage as a natural by-product of the production process. This Wastage is not disposed but sent back to job workers for reprocessing into granules and then reintroduced into the manufacturing process as raw material.

The Reassessment Proceedings

For AY 2018-19, the assessee had filed its return of income declaring a total income of Rs. 35,06,53,550 & the case was subsequently selected for reopening under Section 148 of the Income Tax Act, 1961.

AO made three separate additions to the declared income:

1. 74,64,822 on account of low Gross Profit (GP), applied as 0.25% of gross turnover by rejection of the books of account under Section 145(3) of the Act
2. 11,83,044 under Section 40a(ia) of the Act, on account of contract charges paid without effecting deduction of tax at source (TDS);
3. 18,73,024 under Section 36(1) of the Act, on account of belated payment of employees’ contribution to the Provident Fund (PF).

Resultantly, the total income for AY 2018-19 was assessed at Rs.36,11,74,440 against the declared income of Rs.35,06,53,550.

Assessee carried matter before CIT(A), who dismissed the appeal in limeline on account of non-participation of assessee in proceedings. CIT(A) held that he found no reason to interfere with the findings of the AO.

The assessee then approached the ITAT. Before the Tribunal, the assessee’s counsel did not press the ground relating to the in limine dismissal, agreeing instead to argue the case entirely on merits. Grounds 2 and 3 relating to the validity of the notice under Section 148 and the CBDT Notification No. 18/2022 were also not pressed.

ISSUE 1: Wastage / Closing Stock Discrepancy and the GP Addition

AO’s Findings

The entire AO’s reassessment rested on a single observation: that the figures reported in Point No. 35.bc of the Tax Audit Report (Form 3CD)

The schedule pertaining to By-Products showed understatement of closing stock of wastage or sold outside the books to the tune of 11,00,715 Kgs.

Point No. 35.bc requires the tax auditor to disclose following details:

AO’s Working vs. Assessee’s Position

Assessee’s Submission

Assessee submitted that the plastic wastage generated during manufacturing is not merely discarded. It is a recoverable by-product that the he reprocesses into granules through external job-workers. Once reprocessed, these granules are reintroduced into his own manufacturing process as raw material & he also stated that 3CD format for Point No. 35.bc (By-Products schedule) does not contain a column for ‘reprocessed waste used as raw material’. Hence its inadequate for disclosing a recycling operation, hence there is no mechanism to reflect the reprocessed quantity under this head.

He also submitted below documentary evidences

• A detail showing the complete quantity of wastage sent to each job-worker for reprocessing, with invoice-level breakdowns.
• Sample copies of invoices from the three job-workers, whose aggregate reprocessed quantity of 11,04,710 Kg closely matched the 11,00,715 Kg noted by the AO
• Individual letters/certificates from all three job-workers confirming that they had undertaken job-work for reprocessing plastic wastage for the assessee.
• Certificate from chartered accountant certifying accurate closing stock, Mfg. process followed by an entity & No arithmetical no arithmetical error in the quantities reported under Sr. No. 35.bc.

The AO’s Rejection

The AO rejected the assessee’s comprehensive explanation on two stated grounds:

• That the figures certified by the CA in his certificate differed from those contained in the letters filed by the three job-worker parties.
• That it was not clear whether the CA possessed expertise in the manufacturing process, valuation of stock, or in the two kinds of wastage generated in manufacturing.

On these grounds, the AO invoked Section 145(3) to reject the books of account and estimated the income by applying a GP addition of 0.25% of gross turnover.

Tribunal Holding

Tribunal observed both grounds & found neither of them sustainable by telling that:

“The only infirmity noted by the AO with respect to the same in the assessment order is that the amounts of scrap reprocessed by the job-workers as certified by them did not tally with the amounts certified by the CA in his Certificate. There is no specific instance of such discrepancy noted in the assessment order, however, we have gone through the contents of the CA’s certificate and the certificate furnished by the job-workers, and we find no anomaly in figure of wastage processed by them. It is abundantly clear, therefore, that the assessee had clearly demonstrated that there was no case of understated stock of wastage.”

The rejection of books of accounts by the AO is, therefore, set aside so also as a consequence the estimation of income of the assessee to the tune of Rs. 74,64,822/-

Tribunal also stated that after rejection of books of accounts, the AO was required to make a fair estimation of the profits earned by the assessee based on some cogent material

ISSUE 2 & 3: Regarding disallowance us 40 & 36

The primary addition of Rs.74,64,822 on account of escaped income (the alleged understated stock), the AO proceeded to make two further disallowances: Rs.11,83,044 under Section 40a(ia) for non-deduction of TDS on contract payments, and Rs.18,73,024 under Section 36(1)(va) for belated PF deposit. Neither of these formed parts of the reasons recorded for reopening the assessment.

Tribunal Observation

that if the addition made on account of alleged understatement of stock of waste, for which reason the case of the assessee was reopened, does not survive, the AO has no jurisdiction to make addition on any other issue

reliance placed on

• CIT v. Jet Airways (I) Ltd. (2011) 331 ITR 236 (Bombay HC)
• Ranbaxy Laboratories Ltd. v. CIT (2011) 336 ITR 131 (Delhi HC)
• Valmik Thapar v. DCIT (Delhi HC)……..

Jurisdictional principal

“Where the AO makes an addition on the basis of the reasons for reopening, but that addition is subsequently deleted in appellate proceedings, the additions made on other grounds (which did not form part of the original reasons for reopening) also do not survive. The jurisdictional basis is assessed at the point when it ultimately fails whether at the assessment stage or on appeal”

 Hence, the addition on account of alleged income found to have escaped assessment has been deleted, the addition made on the other counts, i.e. u/s.40a(ia) of the Act and 36(1)(va) of the Act do not survive and are, accordingly, deleted.

Let’s take up the assessee’s appeal in ITA No.2404/Ahd/2025 for the AY 2019-20.

Nature of Disallowance

The AO disallowed Rs.13,25,500 claimed as deductions under Section 80G of the Act given to four entities.

Basis of disallowances

On the basis of information received from the Investigation Wing (IW) following a search and seizure operation conducted under Section 132 of the Act on 2 February 2021. According to the IW’s report, certain unregistered/unrecognized political parties and charitable organizations including, allegedly, the recipient of the Rs.2,50,000 donation was involved in a racket of providing bogus donation receipts.

Relying solely on this information, the AO disallowed the deduction claimed under Section 80G in respect of all four donations, treating them as bogus.

Assessee’s Submission

Assessee fight up against denial of natural justice that:

• The AO had not shared the adverse material in his possession with the assessee
• The AO had not given the assessee an opportunity to cross-examine the

persons whose statements were being relied upon

Tribunal Decision

Tribunal Held that AO was unable to controvert the specific point that the assessee had not been given an opportunity of cross-examination. Hence, the Tribunal restored the entire matter to the file of the AO with a direction to re-adjudicate afresh after giving the assessee a proper opportunity of hearing.

OUTCOME AT GLANCE