ITAT Ahmedabad Deletes ₹74.64 Lakh Addition After Waste Stock Discrepancy Was Adequately Explained

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) deleted a ₹74.64 lakh addition made against Shakti Polyweave Private Limited towards estimated gross profit. The tribunal held that the company had adequately explained the alleged discrepancy in wastage stock reported in its tax audit report and that rejection of its books of account was unjustified.

The bench of Judicial Member Siddhartha Nautiyal and Accountant Member Annapurna Gupta partly allowed the assessee's appeals for Assessment Years 2018-19 and 2019-20, with the latter being partly allowed for statistical purposes.

The tribunal held that once the primary ground for reopening the assessment failed, the Assessing Officer could not sustain additions on unrelated issues such as alleged failure to deduct tax at source and delayed provident fund deposits.

The tribunal observed:

“It is abundantly clear, therefore, that the assessee had clearly demonstrated that there was no case of understated stock of wastage” and that “there was no reason at all for rejecting the books of accounts of the assessee and estimating the GP earned by the assessee.”

The Income Tax Department had reopened the company's assessment on the ground that it had allegedly understated closing stock of wastage by 11,00,715 kilograms. The Assessing Officer relied on Clause 35(bc) of the tax audit report and concluded that the company had understated closing stock worth ₹61.28 lakh.

Shakti Polyweave contended that the discrepancy arose because plastic waste generated during manufacturing was recycled and reprocessed into granules. These granules were reused in production. According to the company, the tax audit report format did not contain a separate column for disclosure of reprocessed waste consumed internally.

The company produced invoices, delivery records, confirmations from job workers, and a certificate issued by its chartered accountant to show that the entire quantity of waste had been reprocessed and reused. The tribunal noted that the Revenue could not point out any defect in these documents.

Rejecting the Assessing Officer's reasoning, the tribunal held that the estimation of profits lacked any cogent basis.

The tribunal also noted that the company's gross profit rate for the relevant year was broadly consistent with earlier years and did not justify the addition.