2015 (3) TMI 1115 - AT - Income Tax

Tribunal rejects sales estimation based on electricity consumption, partly allows assessee's appeal.

Mahaveer Steel Re-Rolling Mills Versus The Asst. Commissioner of Income Tax, Circle-2, Aurangabad and vice-versa

The Tribunal found that the rejection of books of accounts and the estimation of suppressed sales based on electricity consumption were not justified. ... Addition on account of profit arising on the suppressed sales - calculation by estimating the production on the basis of alleged electricity consumption - rejection of books of account - Held that:- In the cross appeals filed by the assessee and the Revenue, we hold that there is no merit in the order of Assessing Officer in rejecting the books of account under section 145 of the Act. Consequently, the ground of appeal No.3 raised by the assessee is allowed. Further we also delete the addition made on account of gross profit arising on the suppressed sales worked out on the basis of alleged electricity consumption and consequently, the grounds of appeal Nos.4 and 5 raised by the assessee are also allowed. Further, the addition made on account of working capital requirement is also deleted . Hence, the grounds of appeal Nos.3 to 6 raised by the assessee are thus, allowed. - Decided in favour of assessee Issues Involved:1. Validity of the assessment order.2. Legality of the notice issued under section 148 of the Income Tax Act, 1961.3. Rejection of books of accounts under section 145(1) of the Income Tax Act, 1961.4. Estimation of gross profit on suppressed sales.5. Basis for calculating suppressed sales using electricity consumption.6. Addition under the head working capital requirement.Detailed Analysis:1. Validity of the Assessment OrderThe assessee contended that the assessment order passed by the assessing officer is 'bad in law' and should be cancelled. However, this ground was not elaborated upon in the judgment, and it was not a focal point of the decision.2. Legality of the Notice Issued Under Section 148The assessee argued that the notice issued under section 148 of the Income Tax Act, 1961, was 'bad in law' and should be quashed. This issue was not pressed by the assessee during the proceedings and was dismissed as 'not pressed.'3. Rejection of Books of Accounts Under Section 145(1)The Assessing Officer (AO) rejected the books of accounts under section 145(1) based on the alleged suppression of production and sales, calculated using electricity consumption as a proxy. The CIT(A) upheld this rejection. However, the Tribunal found that similar issues had been addressed in the case of M/s. SRJ Peety Steels Pvt. Ltd., where the rejection of books of accounts based on electricity consumption was not justified. The Tribunal concluded that the AO was not justified in rejecting the books of accounts solely on this basis, and this ground of appeal by the assessee was allowed.4. Estimation of Gross Profit on Suppressed SalesThe AO estimated the gross profit on suppressed sales using a 4% rate, based on information from the Central Excise & Customs Authorities. The CIT(A) upheld the estimation but modified the calculation method. The Tribunal, referencing the case of M/s. SRJ Peety Steels Pvt. Ltd., found that the estimation based on electricity consumption was not sustainable. The Tribunal deleted the addition made on account of gross profit arising from suppressed sales and allowed the relevant grounds of appeal by the assessee.5. Basis for Calculating Suppressed Sales Using Electricity ConsumptionThe AO used electricity consumption data to estimate suppressed production and sales, assuming 1026 units of electricity per MT of production. This method was contested by the assessee, who argued that various factors affect electricity consumption. The Tribunal found that similar issues had been addressed in the case of M/s. SRJ Peety Steels Pvt. Ltd., where it was held that such estimations based on electricity consumption were not justified. The Tribunal deleted the additions made on this basis.6. Addition Under the Head Working Capital RequirementThe AO made an addition for working capital required for the alleged suppressed production. The CIT(A) reduced this addition significantly. The Tribunal, referencing the case of M/s. SRJ Peety Steels Pvt. Ltd., found that since the main addition on account of suppressed production was deleted, the addition for working capital requirement also did not survive. The Tribunal deleted the addition and dismissed the related grounds of appeal by the Revenue.Conclusion:The Tribunal concluded that the rejection of books of accounts and the estimation of suppressed sales based on electricity consumption were not justified. Consequently, the additions made on these bases were deleted. The appeals of the assessee were partly allowed, and the appeals of the Revenue were dismissed. The findings in the case of M/s. SRJ Peety Steels Pvt. Ltd. were extensively referenced and applied to the present case.