TaxTMI 
TaxTMI 
2018 (3) TMI 472
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....ssee. Later, the assessment proceedings u/s. 153A read with Sec. 143(3) of the Act were concluded by the AO. Appeals before the Tribunal have been filed by the revenue for the AYs 2007-08 to 2010-11. Basic issue raised by the revenue relates to the addition made by the AO on account of alleged suppression of production of sponge iron and sales which has been deleted by the Ld. CIT(A). In the memorandum of appeal for the AY 2007-08 the following grounds were raised by the department. "i) In the facts and circumstances of the case, Ld. CIT(A) is erred in deleting the addition of Rs. 6,14,07,072/- on the basis of additional evidence & documents etc. without giving opportunity to the AO to examine the same. ii) In the facts and circumstances of the case, the CIT(A) is erred in accepting fresh evidence and documents violating the provision under Rule 46A of the I. T. Rules, 1962. For the rest of the three years, the revenue has submitted revised grounds of appeal. 3. During hearing both the parties had agreed that the issues raised by the revenue in all the four years are same. The revised grounds of appeal for the rest of the three years are exactly the same exc....
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....fficials of Enforcement Range regarding use of high quality iron ore in assessee's sponge iron plants gets support from Page no. 1 to 159 of MKJ-113 containing the sample analysis of incoming iron ore to Chaliama Steel plant and of iron ore of Ghatkuri Mines which shows that the Fe content of these iron ore were more than 63% in most of the samples. Page no. 1 of MKJ-113 even shows the Fe content upto 66.8%. Similar analysis of raw materials have been made and kept in CSP-61, CSP-56, CSP-67, CSP-32 etc which show that the sponge iron plants were consuming high grade of iron ore the average of which is more than 63%. 8.2 To arrive at a conclusion regarding production of sponge iron from these high grade iron ore, the Deputy Commissioner of Sales Tax consulted the Dean (sponsored research, industrial consultancy and continuing education) of NIT, Rourkela who communicated that 1.5 MT of iron ore is required for production of 1.000 MT of sponge iron. On the basis of this report, the Deputy Commissioner of Sales Tax in his order of assessment concluded the suppression of production of sponge iron ore to the extent of 12,897.640 MT for Rs. 15,47,71,776 for the entire period ....
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....he order of the Deputy Commissioner of Sales Tax has been upheld in the forum of first appellate authority i.e. Addl. Commissioner of Sales Tax (Central Zone). It is fact that the assessee has further agitated the matter at a higher forum but the matter is pending there. As such, simply because of the fact that the assessee has agitated the matter at a higher forum assessee's cause cannot be helped. 8.5 In view of the above discussion, I am of the firm opinion that the production of the sponge iron in the sponge iron factory of the assessee at Karakolha, Barbil has been understated. However the logic of the Sales Tax authority behind adopting that 1.59 MT of iron ore is required to produce 1.000 MT of sponge iron is not very clear when a technical expert has already quantified that 1.5 MT of iron ore is required for production of 1.000 MT of sponge iron. The ratio quantified by the technical expert is therefore adopted in the case as per calculation below: The average sale price of sponge iron for each of the Financial years is tabulated as per figures of audited Balance Sheet of Rungta Mines Ltd. Karakolha Plant: Financial Year Sales Amount Quantity ....
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....the due date of filing of return. However an amount of Rs. 6,50,697.56 was not paid by the due date of filing of return. As such an amount of Rs. 6,50,698 is disallowed u/s. 43B." 5. Aggrieved by the order of the AO, the assessee preferred an appeal before the Ld. CIT(A), who was pleased to delete the addition made by the AO by observing as under: "I have perused the impugned order. I have also considered the arguments of the Ld AR and the material placed by him on record. I find from the impugned order that the AO has pointed out no defect or mistake in the books of account or other relevant documents that were produced before him in course of the assessment proceedings. The AO has not even rejected the books of the assessee. I therefore find merit in the contention that the AO under the circumstances was not authorised to disturb the book results and assume imaginary production that too without there being any positive material on record to support his allegations. The AO has certainly erred in law as well as on facts in resorting to estimation by applying yield ratio when he had found no defect in the books of account and when there was no material or evidence to sup....
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....stage that iron ore from Ghatkuri Mines (Jharkhand) was never utilised in the sponge iron factory at Karakolha (Orissa) and therefore its Fe content was not relevant in so far as the composition of iron ore utilised in the sponge iron factory at Karakolha (Orissa) was concerned. I find that this contention was not disputed by the AO in his assessment order. I find that the seized documents MKJ-113 contained records of iron ore received in the sponge iron factory at Chaliama (Jharkhand) and sample analysis of iron ore extracted from the Ghatkuri Mines (Jharkhand). But then, iron ore received in the sponge iron factory at Chaliama (Jharkhand) has no relevance to the composition of iron ore utilised in the sponge iron facto at Karakolha (Orissa). Similarly, the documents marked CSP-32, 56, 61 & 7 were seized from the office of Chaliama Steel Plant at Chaibasa (Jharkhand) which pertain to the sponge iron factory at Chaliama and therefore has no relevance in so far as the composition of iron ore utilised in the sponge iron factory at Karakolha (Orissa) was concerned. I have perused the seized documents MKJ -85 & 88 which were gate receipt registers of the factory at Karakolha containing....
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.... iron ore could possibly be prescribed without appreciating the various other factors which also contribute to the yield ratio. But even otherwise, the AO erred on facts as well for he has not considered the expert view in its entirety in as much as the Dean had clearly stated that the consumption of iron ore per ton of Sponge iron will be more than 1.5 ton if the Fe content in the iron ore was less than 65%. I find merit and substance in the contention of the Ld AR that the assumed imaginary production of sponge iron and its clandestine removal and subsequent sale is not backed by any positive material evidence found in the search. For, the AO has discussed no seized material in the impugned order that even remotely supported his allegations of excess production or its subsequent sale. I also find merit in the argument that there was no recovery of evidence or document suggesting commensurate investment in undisclosed assets or unaccounted expenses which could corroborate the assumption of undisclosed profits to the tune of Rs. 34.86 crores as alleged by the AO in his assessment orders for the financial years 2006-07 to 2009-10. 21. I find from the impugned order that the....
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....y acceptable standard yield ratio could possibly be suggested for consumption of raw material. The AO however blindly applied the yield ratio of 1.5 and ignored this vital aspect that there could be no standard pattern for consumption of raw material. The AO missed the caution that was clearly sounded by the Dean that no standard formula could possibly be laid down for the input-output ratio. I also note that the yield ratio of 1.5 as suggested by the Dean was based on his personal knowledge 'and his discussions with some producers and so such yield ratio could not be universally applied to all sponge iron factories. The AO was therefore not justified in mechanically applying the yield ratio of 1.5 to the sponge iron factory of the assessee. The Dean had also clarified that the yield ratio will vary from plant to plant depending on the composition and quality of raw material and the operating conditions. The AO however failed to consider such factors as the composition and quality of raw material and also the operating conditions before applying the yield ratio of 1.5 in the case of the assessee. The Dean had opined that the consumption of iron ore per ton of sponge iron would ....
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....'s sponge iron factory at Karakolha utilised iron ore having Fe content of 65%. In such factual background, the pre-condition for applying the yield ratio of 1.5 that the Fe content should be 65% is not satisfied in the case of the assessee. The Dean has clearly made his point that the consumption of iron ore per ton of sponge iron will be more than 1.5 ton if the Fe content in the iron ore was less than 65%. The AO thus has erred on facts in applying the yield ratio of 1.5 without even verifying the basic requirement that the iron ore utilised in the sponge iron factory should have Fe content of 65%. The Dean in his technical opinion has also stated that the yield ratio will depend on the operating conditions but no such analysis seems to have been undertaken by the AO. I find that the AO has not even considered in the impugned order the operating conditions of the sponge iron factory as a factor before applying the yield ratio of 1.5. Under the circumstances, I am of the considered view that no standard formula can be prescribed for the yield ratio as it was depended on various factors such as the composition and quality of raw material and the operating conditions and theref....
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.... (up to 31.07.09) to produce 67907.470 MT, 68707.340 MT, 81430.550 MT and 33403.290 MT of sponge iron during that respective periods which calculates the ratio only at 1.67 MT of iron ore to 1.00 MT of sponge iron, thus understating the production. It was finally concluded in the said order that the entire iron ore being high grade at 63% in the own admission of the Manager, Commercial on application of SION, the production was understated by 12897.640 MT since the same should have been at 264346.298 MT out of iron ore of 420310.615 MT instead of disclosed at 251448.650 MT, thereby sales suppression of Rs. 15,47,71,776/-. 9. It was also contended by the Ld. DR that from a perusal of page 7 of the sales tax assessment order that as per the report of Vigilance Wing of Balasore division by the STO in course of inspection at the Jagang mines and office Barbil, they seized certain written slips, documents, registers, challans, tax invoices etc. concerning their business transactions for the period 2008-09 to 2009-10. According to AO (Sales Tax) all the seized documents were subsequently cross verified with the books of account produced by the assessee which resulted in the reported s....
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....ts issued by the mining authorities. The First Appellate Authority concluded that the allegation of sale suppression of 2796.18 MT of iron ore fines has no merit and, therefore, deleted the addition. 12. Another addition made by the Sales Tax Authority was in regard to alleged suppression of sales of sized iron ore and iron ore fines on the basis of document like monthly progress report seized by the sales tax authorities on their surprise visit to mines and related office premises. It was pointed out by the Ld. AR that this addition has nothing to do with the impugned addition made by the AO which is relating to the alleged suppression of sales of sponge iron emanating from alleged understatement of production in the sponge iron plant. It was brought to our notice that the addition made by the AO (Income-tax) relates to the addition on account of alleged suppression of sales of sponge iron ore on estimate basis based on some standard input output norms (SION). Even otherwise the Ld. AR contended that the additions made by the Sales Tax Authorities on account of sales of sized iron ore and iron ore fines has been substantially reduced by their First Appellate Authority as is app....
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....in the sponge iron factory at Karakolha (Orissa) and, therefore, the seized documents CSP 32, 56, 61 and 67 which were seized from the office of Chaliama Steel Plant at Chaliama (Jharkhand) have no relevant whatsoever to the iron ore utilized in the sponge iron factory at Karakolha (Orissa). The Ld. AR took pains to point out that the sponge iron factory at Karakolha (Orissa) utilized iron ore from the mines situated in Orissa which was evident from the very same seized documents MKJ 85 and MKJ 88 which were gate receipt registers of the factory at Karakolha containing all the relevant details such as date of entry and exit, vehicle number, weight and specification of raw materials and also the source of raw materials. The Ld. AR also brought to our notice that the assessee had produced before the AO copy of form E & J containing account of procurement and transportation of minerals/ores as per the Orissa Minerals (Prevention of theft, smuggling and illegal mining and regulation of possession, storage, trading and transportation) Rules 2007 in support of its contention. The Ld. AR contended that the sponge iron factory at Karakolha utilized iron ore having Fe content around 63%. Th....
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....The Ld. AR drew our attention to the annual accounts of some reputed Orissa based plant owned companies like Tata Sponge Iron Ltd., Orissa Sponge Iron & Steel Ltd. and MSP Steel & Power Ltd. which are also engaged in production of sponge iron. These reports are available in public domain and are placed in the paper book from pages 88 to 98. The yield shown by such companies along with those of the assessee in the FYs 2006-07 to 2009-10 may be summarized as under: Financial Year Tata Sponge Iron Ltd. Orissa Sponge Iron & Steel Ltd. MSP Steel & Power Ltd. Rungta Mines Ltd. (Assessee) 2006-07 1.59 1.51 2.09 1.65 2007-08 1.68 1.55 2.04 1.69 2008-09 1.63 1.61 2.45 1.67 2009-10 1.59 1.79 1.93 1.65 14. Drawing our attention to the yield ratio shown by the aforesaid company it was submitted by the Ld. AR that there can be no universal and uniformal accepted standard for the yield ratio which was depending on various factors and consequently the sam....
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.... We have heard rival submissions, perused the assessment order, order of Ld. CIT(A), sales tax assessment order passed by Dy. Commissioner of Sales Tax, Jaipur Range and First Appellate Authority, Additional Commissioner of Sales Tax, Central Zone order and other case laws and documents available in the paper book. The main issue that requires adjudication in the present appeal is whether the assessee during the financial year has actually produced sponge iron in excess of what has been recorded in its statutorily maintainable records; and thereafter then removed such excess production clandestinely from its factory, for its subsequent sale in the market. We note that there was a search at the factory premises of sponge iron division at Karakolha, Barbil, Orissa on 18.08.2009 by the Sales Tax Authorities from where they had made seizure of one express duplicate book which led them to make an assessment of suppression of sales of 2796.18 MT iron ore fines thereby made an addition of Rs. 55,92,360/- which has been later deleted by the First Appellate Authority, Additional Commissioner of Sales Tax, Central Zone. The Sales Tax Authorities have seized two monthly performance reports fo....
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....that 1.5 MT of iron ore is required for production of 1.000MT of sponge iron. Further the AO noted in the notice that on the basis of this report (Dean report from NIT), the Dy. Commissioner of Sales Tax in his order of assessment concluded the suppression of production of sponge iron ore to the extent of 12,897.640 MT which was valued for Rs. 15,47,71,776/- for the entire period of 1st April, 2006 to 31st July, 2009 after taking the ratio that 1.59 MT of iron ore required to produce 1.000 MT of sponge iron. When the assessee was confronted by the notice with the aforesaid facts, the AO acknowledges that the assessee has brought to the notice of the AO that the AO's reliance on page nos. 1 to 159 of MKJ 113 was misplaced because it contains the sample analysis of incoming iron ore to Chaliama Steel Plant and iron ore of Ghatkuri mines which shows the Fe content of the iron ore more than 63% and even up to 66.8% are of iron ore of Ghatkuri mines which are situated in the State of Jharkhand; and the assessee's plant in question are in State of Orissa and that the iron ore from those mines situated at Jharkhand has never been transported to its sponge iron factory at Karakolha, Barbil....
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....nical expert was adopted by the AO and then he made the computation which is given in page 8 of the order of AO. Thereafter, he took note of the fact that since no excess closing stock has been detected in the books of the assessee, the AO inferred that the assessee has sold the suppressed production and consequently understated the sales. The AO also noted that as the processing of the same amount of iron ore as recorded in the books of account has resulted in the suppressed production and the consequent suppressed sale, no additional expenses has been incurred by the assessee over and above the expenses debited in the P&L Account. Therefore, the AO concluded that the entire suppressed sale of Rs. 6,14,07,072/- for the year needs to be added back to the total income of the assessee and he made an addition of the said amount, which was challenged by the assessee before the Ld. CIT(A), who was pleased to delete the addition. The revenue is challenging the action of the Ld. CIT(A) by preferring this appeal. 18. We note that during the appellate proceedings, the Ld. CIT(A) took note of the fact that the AO has not pointed out any defect or mistake in the books of account maintained....
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....nforcement Range (Sales Tax) regarding use of high quality iron ore in assessee's sponge iron plant at Karakolha, Barbil (Orissa). The AO took support from documents placed at page 1 to 159 of MKJ 113 containing the sample analysis of Fe content in the incoming iron ore to Chaliama Steel Plant and iron ore extracted from Gatkuri mines, which shows that the Fe content of this iron ore was more than 63% in most of the samples collected. According to the AO, page no. 1 of MKJ 112 even shows that the Fe content was up to 66.8%. Similar analysis of raw materials have been made and kept in computer discs seized which are marked as CSP 61, CSP 56, CSP 67, CSP 32 etc. which according to AO, goes on to show that the sponge iron plant at Karakolha, Barbil (Orissa) were consuming high grade of iron ore and the average of Fe content of the iron ore is more than 63%. These aforesaid adverse facts were communicated to the assessee, to elicit the assessee's version in respect to the contents of the seized documents pursuant to which the AO formed the opinion that the Fe content of iron ore consumed by the assessee at its Karakolha Plant was more than 63%. The assessee pursuant to the notice, repl....
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....n the State of Jharkhand and documents marked as 1 to 159 of MKJ 113 which are the sample analysis of incoming iron ore to Chaliama Steel Plant and iron ore of Gatkuri mines are in respect of iron ore in the State of Jharkhand and has nothing to do with Steel Plant and mines situated in the State of Orissa. Therefore, the reliance made by the AO to allege that the iron ore at Karakolha mines, Orissa is of higher grade i.e. more than 63% Fe content is erroneous and based on irrelevant material which has nothing to do with the steel plant situated at Orissa where iron ore from the mines situated in Orissa only has been used as evident from statutorily mandated Form 'E' & 'J' of mining Rules and seized gate passes/register MKJ 85 & 88. We note that the AO has heavily relied on the Investigation report of the Enforcement Officials of the State Commercial Tax Wing of Orissa and assessment order of the Deputy Commissioner of Sales Tax to form an opinion that the Fe content of iron ore used at the steel plant at Karakolha is of higher grade i.e. more than 63% Fe content. We have gone though the order of assessment passed by the Deputy Commissioner of Sales Tax, Jaipur Range which is place....
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....bed. We also take note of the fact that though the AO (income tax) has heavily relied on the orders of the Sales Tax Authorities has not taken into consideration this relevant piece of evidence which was submitted by the assessee before the AO Sales Tax to show that the iron ore used at the Karakolha plant, Orissa had Fe content ranging from 62.79% to 63.23% and that it was not giving consistent results. The AO who is a quasi judicial authority when exercising such a power, should act fairly and ought to have taken into consideration this relevant piece of evidence produced by the assessee albeit before Sales Tax Authorities, when the main issue before him was the question of fact as to what was the Fe content of iron ore used in the Karakolha sponge iron factory? So, the most important question before him (i.e. AO) was whether the assessee's sponge iron plant at Karkolha consumed iron ore which had Fe content more than 65%? The non-consideration of this important piece of evidence which has been recorded by AO, Sales Tax in his order, ought not to have been ignored, when adjudicating the issue of Fe content which also makes the order of AO a quasi judicial authority fragile in the....
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....e average requirement of raw material i.e. iron ore - 1.5 tons when Fe content in the ore is 65% to produce a ton of sponge iron, under average Indian conditions. From the opinion it is discerned that the production of sponge iron may vary if the conditions are different and thereafter, Dean states that consumption per ton of sponge iron : Iron ore - 1.5 ton (with Fe content in the ore 65%). Thereafter, he adds that if it is less there will be more consumption. The Dean of NIT based his opinion own knowledge and general discussion with some producers and he admits the fact that no direct data is available in any reference book. He also acknowledges the fact that the yield ratio vary from plant to plant depending on (i) composition, (ii) quality of raw material and (iii) the operating conditions. An analysis of the aforesaid letter/technical opinion of the Dean of NIT goes on to support the contention of the assessee. The main question of fact that had to be brought on record by the AO was to be find out as a matter of fact the Fe content of the iron ore used in the sponge iron factory at Karakolha, Barbil, which he has not done. No attempts or endeavour was made by the Sales Tax Au....
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....uction of the sponge iron, the allegation of suppression of production of sponge iron cannot stand. With reference to the Ld. DR's contention that one express duplicate book was found it suggested suppression of sales, we note that on appeal the First Appellate Authority at page 59 has deleted the addition and has clearly given a finding that there was no suppression of sales and the First Appellate Authority has held at page 59 of paper book as under: "On cross verification of the entries made in page 1 and page 2 of the seized register from 22.5.09 to 1.6.09 with the return of Form E for the month of May 2009 & June 2009 at this forum, it is found that all the entries in the seized register showing transportation of iron ore fines to the Railway siding have been duly reflected in the return in Form E submitted to DDM, Joda Circle, Odisha. Further, on verification of the copies of transit pass issued by the mining authorities it is found that iron ore fines have been transported from Karakohla Sponge Iron plant to Railway siding between 22.5.09 to 1.6.09 and the seal & signature of the mining authorities have been put on the back of transit pass. The quantum of iron ore f....
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....red for the three companies, but it has also varied in different year for the same company. The Ld. CIT(A) has referred to the SION as given by the Director General of Foreign Trade and the Andhra Pradesh Pollution Control Board wherein different SION are stated. The Ld. CIT(A)'s observation in this regard is reproduced below: I also find substance in the argument that no universal and uniformly acceptable standard for consumption of iron ore can be prescribed without appreciating the various other factors such as the quality and composition of raw materials and operating conditions which also contribute to the yield ratio. The material placed on record also suggests that the yield ratio can vary from plant to plant and even from year to year for the same plant. I have perused the relevant pages of the annual reports of Tata Sponge Iron Ltd, Orissa Sponge Iron & Steel Ltd and MSP Steel & Power Ltd which are also engaged in production of sponge iron in the state of Orissa. I find that the yield ratio has not only differed for the 3 companies but it has also varied in different years for the same company. The Directorate General of Foreign Trade has in its standard input out....
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.... has gone through the financial result of similar companies located at Orissa, and which are engaged in the same activity as that of the assessee company. The annual reports of three companies i) M/s. Tata Sponge Iron Ltd., (ii) M/s. Orissa Sponge Iron & Steel Ltd. and (iii) M/s. MSP Steel & Power Ltd. have been looked into by the ld CIT(A) and compared the consumption of iron ore with that of assessee company which is as under: Financial Year Tata Sponge Iron Ltd. Orissa Sponge Iron & Steel Ltd. MSP Steel & Power Ltd. Rungta Mines Ltd. (Assessee) 2006-07 1.59 1.51 2.09 1.65 2007-08 1.68 1.55 2.04 1.69 2008-09 1.63 1.61 2.45 1.67 2009-10 1.59 1.79 1.93 1.65 26. The aforesaid chart was drawn by the Ld. CIT(A) after perusal of the annual report of the aforesaid companies which are in public domain and cannot be termed as additional evidence. The Ld. CIT(A) who is discharging the appellate jurisdiction over the decision of a quasi ju....
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....ay Sponge Iron Ltd are that the assessee was engaged in the business of manufacturing of sponge iron. The STO found in course of the assessment proceedings that the assessee had shown the yield ratio of 1.65 meaning thereby that 1.65 MT of iron ore was required for producing 1 MT of sponge iron. The STO however relied on the expert view of the professor of NIT, Rourkela that l.6 MT of iron ore should produce 1 MT of sponge iron. The STO concluded that the assessee suppressed its production of sponge iron and then estimated the excess production by applying the yield ratio of l.6. The Hon'ble Tribunal reversed the order of the STO by holding as under: We have heard the counsels, gone through the impugned order of first appeal along with the order of the assessment vis-a-vis the grounds of appeal. As it appears the appellant State has harped upon the ratio of sponge iron and iron ore as finished product and raw material respectively to be 1: 1.6 as observed by the professor of the NIT, Rourkela and basing on which the learned STO re-determined the final production of sponge iron by rejecting the respondent's ratio of 1 : 1.65. On going through order of assessment we ....
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.... appeared to be not based on a strong footing as established law is that to disbelieve and assessee's version the revenue has to bring in positive evidences to counter with. The appellate authority has not thrown any light on the aspect of existence of any fixed formula for consumption of raw materials and receipt of finished products and as per that formula what should be the quality of the raw materials, when the claim of the appellant that inferior quality raw materials were utilized by him, the same should have been controverted on due analysis of the purchase invoices of raw materials. It has also not been reasoned out as to how the 1.700 MT is high and 1.650 MT is just and proper. While the orders of appeal and assessment remained silent on this point, the appellant has come up with a written submission that he purchased iron ore from open market having a Fe contents of 62% or less whereas the Central Excise Department's circular to be the ratio of 1.500 : 1.000 MT with categorical mention that aforesaid ratio is achievable if the Fe content of iron ore is 67% or more. The expert view of the scientist working with NIT, Rourkela expressed in his letter dt.29- 09-2004 t....
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.... ratio. From the discussions stated above, we note that the yield ratio can vary from plant to plant and even differ from year to year based on the capacity of the plant, the efficiency of the staff, maintenance of the plant, electricity consumption etc. The Fe content of the iron ore also varies from geographical location of mine to mine, season to season etc. So, there cannot be any universal and uniformly acceptable standard for consumption of iron ore. The Fe content in an iron ore is a scientific fact and which can be determined by scientific test conducted at Laboratory equipped for finding that. However, in the instant case, the AO failed to collect samples of the iron ore during search conducted on 06.02.2012 (even the sales tax official who raided on 18.08.2009 failed to do so) and sent it for examination at a laboratory to find out the Fe content of the iron ore utilized at its Karakolha plant at Orissa, thus making the estimation of excess production based on imaginary figures without any scientific base. The AO in this case has blindly based his estimation on the opinion of the Dean of NIT. As stated earlier, the Fe content of iron ore is a scientific fact which can be ....