TaxTMI 
TaxTMI 
2013 (1) TMI 422
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....ee herein. It is pertinent to note that both the Managing director and the director are running steel units in their individual capacities also. Consequent to the search operations carried in the hands of its Managing Director, the AO initiated assessment proceedings u/s 153C of the Act in the hands of the assessee company herein for the years under consideration. While completing the said assessment, the AO made additions in business income on account of suppression of sales for all the years under consideration and also made additions u/s 68 of the Act in some of the years. The assessee challenged the validity of initiation of proceedings u/s 153C of the Act and also the various additions made by filing appeal before Ld CIT(A), but could get only partial relief. While granting relief, the Ld CIT(A) substantially reduced the additions by changing the method of computation of suppressed business income. Aggrieved by his order, both the parties are in appeal before us challenging the order of first appellate authority on the points decided by him against each of them. 3. We shall first take up the appeals filed by the assessee. The grounds raised by the assessee relate to the fol....
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.... have heard the rival contentions on this issue. It is an undisputed fact that the Managing Director of the assessee company, i.e. Shri K.P.Ummer has confessed about the suppression of purchases and sales in the sworn statement taken u/s 132(4) of the Act. The relevant question and answers are extracted below:- "Q. No.13 - Have you properly maintained accounts relating to scrap purchases, finished goods, sales etc of your establishments. Ans.:- In scrap purchase 90% is imported scrap and sponge iron. Details of its purchases have been properly accounted. 10% includes local purchase. 90% of the local purchase has been accounted. 10% of local purchase has not been accounted. 8% of the sales also has not been accounted. Q. No.14 - You have said in your earlier question that 8% of the sales have not been accounted. What did you do with the profit so obtained from the sales. Ans.:- Money obtained from such unaccounted sales have been utilised for purchasing property in my name and also for the house which is under construction." These questions and answers given by the Managing director clearly in....
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....nfronting the documents obtained by the AO from the third parties. It is noticed that the AO primarily relied upon certain documents obtained though the Commercial taxes department, i.e., the report of KSIDC about the steel industry, for arriving at the suppressed business income. From the assessment order, it is not clear as to whether those documents were confronted with the assessee or not. However, we notice that the assessee has given its view on those documents in the notes filed before the Ld CIT(A) and the first appellate authority has also duly considered them while framing his order. Hence, the violation of natural justice at the level of the AO, if any, has been made good at the level of Ld CIT(A). This is clear from the following observations made by Ld CIT(A). "11. I have carefully considered the relevant facts and provisions of law with regard to the issue involved. I find that Assessing Officer has made substantial addition relying on information gathered by Commercial Taxes Authorities from KSIDC Ltd. The information so relied upon by the Assessing Officer was apparently not made available to the appellant before using the same against the appe....
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....he years 2003-04 to 2006-07, prior to the search and survey proceedings, on the basis of audited accounts. However, the AO decided to reject the book results for the following reasons, which is narrated in Page 8 & 9 of assessment order:- "(i) The search conducted by the Department on 6/9/2007 at the business premises of the assessee also revealed indicative but serious defects. On that day the Director Shri Ummer deposed that there are serious defects in his books of account: Q.13: "Do you record the scrap purchase as well as furnished goods in your books of accounts exactly? Ans: 90% of the scrap purchases include imported scrap and sponge iron. All these purchases have come into accounts correctly. But there are 10% local purchases. 90% of the local purchases are also accounted. As such 10% of the local purchase has not come into account. 8% of sales are also not recorded in the books of accounts. Q.14: You have stated in reply to my earlier question that 8% of sales are unaccounted. What have you done by the profit you earned from such sale? Ans: I have deployed the una....
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....duction COST PER M.T. OF INGOT PRODUCED : Rs. VALUE OF SUPPRESSI ON: Rs. 2003-2004 *235090 293.865 **112.5 181.362 *13167 2387993 2004-2005 2,47,464 3,09.330 125.920 183.410 *13860 2542062 2005-2006 78,13,320 6250.656 6145.747 104.909 14590 1530622 2006-2007 88,08,288 7046.630 6741.735 304.895 15358.42 4682712 2007-2008 88,66,080 7092.864 6392.115 700.749 15484.45 10850712 2008-09 93,20,496 7456.397 6872.815 583.582 16752.39 9776359 TOTAL 3,52,90,738 2,81,55,877 2,62,78,332 18,77,545 89212.26 31770460 *Since the assessee did not supply the required data estimated @ 5% decrease for each preceding year **Since the assessee did not supply the required data estimated @ 10% decrease for each preceding year. 7. M.S. FLATS & RODS: Asst Year Power consumption Production as per norms (in tonnes) Production as per return Suppressed Production COST PER M.T. OF INGOT PRODUCE D: Rs. VALUE OF SUPPRESSION : Rs. 2003-2004 *1265845 *12658.450 **4428.367 8230.083 *16591.58 136550080 2004-2005 ....
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....f the assessment order whereas the appellant started production of ingots only from 19th March, 2004. -In para 7 of the assessment the Assessing Officer, for A.Y. 2003-04 indicated estimation of power consumption and production as per return respectively 5% and 10% less than A.Y. 2004-05 but adopted higher figures than for A.Y. 2004- 05. -The Assessing Officer aggregated estimated suppressed production of ingots along with estimated suppressed production of MS Flats and rods and applied gross profit rate declared for A.Y. 2008-09 to work out undisclosed profit without appreciating the fact on record that ingots were produced basically for own consumption as raw material for production of MS flats and rods. -The Assessing Officer applied gross profit rate of 14.61% for all the assessment years by stating the same to be GP declared by the appellant for A.Y. 2008-09. As against the same, the GP declared by the appellant for A.Y. 2008-09 was only 9.73%. This factor itself resulted in huge addition. -Gifts and loans totalling to Rs. 1,37,50,000 as unexplained credit were wrongly added in A.Y. 2006-07....
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....ide by Dy. Commissioner (Appeals) vide order dated 10.11.2010. I have gone through this order and find that the appellate authority has pointed out defaults in the working of stock by the Intelligence Officer in following words: "The Intelligence Officer is considering the opening stock as on 6.11.2006 and physical stock on 16.11.2006. Without considering the production consumption, sales from 6.11.2006 upto inspection, the physical stock verification is found to be not in order." 13. The Ld CIT(A) also noticed that the power theft incident that occurred in the assessee's factory did not have much consequence, since the power connection was disconnected only for five days. Accordingly, the Ld CIT(A) held that this fact in itself cannot justify the determination of substantial unaccounted production, as done by the Assessing officer. 14. The AO had placed reliance on the report given by KSIDC, which was supplied to him by the Commercial taxes department, for determining the "power factor", as stated earlier. However, the Ld CIT(A) noticed that the commercial taxes department had also placed reliance on the report of KSIDC in the identical way for estimati....
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....n, he contended that disregarding the certificate of the chartered engineer without assigning a valid reason by the Intelligence Officer is unsustainable. Considering the entire facts and circumstances of the case, I am of the view that the Intelligence Officer could not give any satisfactory explanation either for placing reliance on the report of KSIDC or for rejecting of certificates issued by the chartered engineer and other competent authorities. Considering the above facts, I am of the view that only after conducting test run in the appellant's industry, that the Intelligence Officer can reach a definite conclusion as to the power required for production of 1 MS ingots. For that purpose, if necessary, he can seek the assistance of experts in the field. After conducting such test run and determining the actual electricity required for production of 1 MT of MS ingots, the Intelligence Officer is upto estimate the production of MS ingots based on such findings. Thereafter, he can determine whether there is any suppressed turnover on the basis of which findings he shall also be eligible to impose necessary penalty on the appellant". ....
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....id not bring on record any specific and gross defects in the books of accounts of the appellant to justify resorting to estimation of production on the basis of electricity consumption and that too on the basis of project report with KSIDC collected from commercial taxes authorities". 15. The Ld CIT(A) noticed that the case law relied upon by the AO for making estimate of production on the basis of power consumption was also not correct. In this regard, the Ld CIT(A) has observed as under:- "The decisions relied upon by the Assessing officer have been dealt with by the learned counsel for the appellant in para 6 & 7 of written submission of 23rd November 2010. The learned counsel for the appellant has also placed reliance on the following two judicial pronouncements: 1. Amar Ispat Pvt. Ltd Vs. CCE, Thane-1 (2009) 235 ELT 487 (TRI Mumbai) 2. R.A. Castings Pvt Ltd Vs. CCE, Meerut-1 (2009) 237 ELT 674 (TRI Delhi) In the above judicial pronouncements it was held that electric consumption was not an abstract figure and was to depend on many factors s....
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....or production of MS products, viz., MS flats and rods and noticed that there is no abnormal fluctuation in power consumption over the years and in fact, the efficiency level has increased gradually. The relevant observations are extracted below:- "There is also no abnormal fluctuation in power consumption over the years. In a similar manner Appellant had shown power consumption in MS Flats rods as under:- A.Y. Power consumption (Units) Production of MS Flats and rods (MT) Power consumption (units per MT) 2003-04 1001832 3109.113 322.22 2004-05 1031272 3619.091 284.95 2005-06 1402598 5467.121 256.55 2006-07 1370070 5581.166 245.48 2007-08 1379660 5875.753 234.81 2008-09 1275300 5982.440 231.17 It is seen that there is also no abnormal or abrupt fluctuation in power consumption over the years. The efficiency has gradually gone up over the years. 18. Based upon the factual findings narrated above and also based upon further deficiencies noticed in the approach of the AO, the Ld CIT(A) concluded that the estimation of huge unaccounted turnover made by the A....
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....s carried out by the assessee. The AO had adopted the basis of "Power consumption factor" supplied by the KSIDC, which was proved to be unreliable. It is pertinent to note that the KSIDC is a financial institution and it processes the project reports submitted by the prospective borrowers. The "power consumption factor" submitted by the KSIDC is based on such project reports. The report given by KSIDC has got the heading viz., "NORMS AND ASSUMPTIONS UNDERLYING COST OF PRODUCTION". The said heading itself clearly shows that the "Power consumption factor" is an assumption/norm fixed by KSIDC for processing the project reports. There cannot be any dispute that the KSIDC, being a financial institution, cannot be considered as a technical expert and hence reliance placed by the AO on the said report, in our view, is totally wrong. 20. On the contrary, the inspection carried out by an independent person named Mr. M. Jacob Varghese has vindicated the power consumption figures reported by the assessee. The Ld CIT(A) has also given a specific finding that there was no abnormal or abrupt fluctuation in the average power consumption over the years and in fact the efficiency level of power ....
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....; The above deposition of the Director of the appellant company clearly admits that the turnover was suppressed to the tune of about 8%. The argument of the learned counsel for the appellant that above statement was only with reference to proprietory concern of Mr. Ummer does not have much merit for the reason that Mr. Ummer replied with reference to the business activities of all his establishments which obviously did include the appellant company. In view of above deposition, another argument of the learned counsel for the Appellant that proper books of accounts were maintained and were duly audited also does not have much merits. This is more so for the reason that in the above deposition (Q.10) it was further admitted that actual stock was not taken but was adopted based on output percentage. He further admitted that income earned from unaccounted activity was utilized for purchasing property in his name and for house which was under construction (Q.14). It is further seen that the above deposition of Mr. Ummer is of general nature describing the modus operandi of his establishments without reference to any specific assessment year and was thus applicable to all the assessment ....
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.... 4.00% 2006-07 4.59% 2007-08 6.10% 2008-09 9.73% The Ld CIT(A) took the view that the fluctuation in the rate of Gross Profit declared over the years is unreasonable. Accordingly he took the view that the Gross Profit may be estimated uniformly @ 6.50% for the assessment years 2003-04 to 2007-08. Since the assessee had declared the rate of Gross profit for the assessment year 2008- 09 at 9.73%, the Ld CIT(A) held that the same rate may be adopted for that year. Accordingly he calculated the Gross Profit on the enhanced turnover (108% of the disclosed turnover) and deducted there from the amount of gross profit declared by the assessee and sustained the addition to the extent of the difference. The workings made by Ld CIT(A) is given below:- A.Y. 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Turnover shown 2,13,80,091 4,96,31,400 11,10,77,961 10,83,58,188 11,78,68,416 15,95,89,148 @Turnover estimated 2,30,90,498 5,36,01,912 11,99,64,198 11,70,26,843 12,72,97,889 17,23,56,280 #Gross profit thereon 15,00,882 34,84,125 77,97,673 76,06,745 82,74,363 1,67,70,266 GP declared ....
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....on made by the Managing director is an important piece of evidence. Generally the details regarding suppression of purchases and sales are within the personal knowledge of the parties who are indulging in such type of activities. If the assessee had not indulged in such kind of trade practices, there would not have been any occasion for the Managing director to give a statement about the suppression of purchases and sales. Hence, in the facts and circumstances of the case, in our view, it would be very much reasonable to presume that the assessee was indulging in suppression of purchases and sales. Since the managing director himself has deposed that the sales suppression was to the tune of 8%, in our view, the Ld CIT(A) was justified in determining the sales suppression at 8% of the total turnover, particularly in view of the fact that the department has not seized any material to make estimate of sales suppression in any other manner. 28. The next question relates to the gross profit rate to be adopted for estimating the income for all the years. There cannot be any dispute that the rate of gross profit depends upon various factors like purchase quantity/rate, sales quantity/r....
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..... Thus the abnormal variation for these two years stand explained. Besides the above, the Ld CIT(A) has not brought on record any material to suspect the rate of gross profit declared by the assessee over the years. We may also observe here that the assumption made by the AO that the gross profit rate declared for the assessment year 2008-09 is the correct rate to be adopted for all the years is also not based on any material. Under these circumstances, we find no reason to adopt a rate of gross profit, which is altogether different from Gross profit rate declared by the assessee, for estimating the undisclosed income. Under the facts and circumstances of the case, particularly in view of the discussions made supra, we are of the view that it would be just and reasonable, if the Gross profit rate declared by the assessee in various years is adopted to determine the undisclosed income of the respective years. We accordingly order that the undisclosed income shall be determined in the following manner. (a) To determine the total turnover at 108% of the disclosed turnover. (b) To determine the amount of Gross Profit by applying the rate of G....
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.... assessment year 2007-08. By placing reliance on the decision of Hon'ble Allahabad High Court in the case of Jagmohan Ram Ram Chandra Vs. CIT (153 CTR 193), the AO held that the assessment of the very same amount again in the hands of assessee company is legally valid, even though it has already been assessed in the hands of Shri K.P. Ummer. 33. Before Ld CIT(A), the assessee submitted that the sum of Rs.1,37,50,000/- was received by the assessee during the financial year relevant to the assessment year 2007-08 and hence the AO was wrong in assessing the same in the asst. year 2006-07. In the same manner, the sum of Rs.60,21,000/- pertaining to the asst. year 2008-09 was wrongly assessed by the AO in the asst. year 2007-08. The assessee also contended that the decision rendered in the case of Jagmohan Ram Ram Chandra (Supra), shall not apply to the facts of the instant case on the ground that in the case of Jagmohan Ram Ram Chandra (Supra), the decision rested upon the genuineness of the transactions. It was submitted that the genuineness was not an issue in the instant case and accordingly it was contended that the said decision shall not apply to the facts of the instant case.....
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.... and managing the business affairs of the appellant company in a single handed manner but was also having substantial and ostensible sources of income in his individual capacity and was also assessed to tax with the same Assessing Officer. The basic spirit behind deeming provisions of sec. 68 was that the beneficiary of a loan transaction should be brought to tax if the creditworthiness of the loanee was not established. These were deeming provisions and there was underlying presumption that an assessee having unaccounted funds was bringing in money through accommodation entries so that such unaccounted funds are available for his use in the books of accounts even when the funds appear in the books as loans from persons lacking creditworthiness and capacity to advance the loans. The funds brought in by Mr. K.P. Ummer in the books of the appellant company as borrowings, in no manner, makes the appellant company as beneficiary as Mr. Ummer was free to withdraw the funds at any point of time as he stood as creditor in the books of accounts of the appellant company. In the previous year relevant to A.Y.2007-08 for which the borrowings of Rs. 1,37,50,000 have been identified by the Asse....