TaxTMI 
TaxTMI 
2019 (11) TMI 922
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....ent year 2012-13, there is another ground which leads to "give credit of cash Rs. 13,00,000/- seized during the course of search operation u/s.132 of the Income Tax Act, 1961 (hereinafter referred to as "the Act‟) as prepaid taxes while computing tax liability of the assessee." First, we would adjudicate the ground relating to "issue of the lower yield declared by the assessee". ITA Nos.232 to 235/RPR/2014 ( By Revenue) A.Ys. 2009-10 to 2012-13 4. The facts on this issue are that the Assessing Officer observed that the assessee company is engaged in the manufacturing of rerolled products such as heavy steel structural, joist, girder. It has two divisions namely Steel Melting Shop (SMS) and Rolling Mill Division (RMD). SMS division uses sponge iron, pig iron and melting scrap as raw material to manufacture billets and blooms and RMD uses these billets and blooms to produce further re-rolled products such as heavy steel, structural etc. It is the case of the Assessing Officer that at times billets and blooms produced by the assessee are also sold in open market. The Assessing Officer noticed that evidences of unaccounted production by the assessee company by suppressing its....
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....nce and significance of these mathematical calculations pertaining to Rolling Mill Division. The AO has reproduced various mathematical calculations and tables containing data consumptions of power, sponge iron, production, average consumption, highest and lowest consumption etc. The AO ultimately zeroed down to the issue of yield declared by the appellant in SMS Division. The AO has not substantiated the nexus between the mathematical calculations of highest and lowest consumption of power, raw material etc. with yield of 89% adopted by the AO. The AO has merely stated that the SMS division shows yield in the vicinity of 84% which is quite low as compared to the yield being shown by other manufacturers of CG, however, wherefrom the AO derived this figure of 89% is best known to the AO only. The undersigned made an attempt to work out the average yield in the industry based on data available from the Department itself. 7.3 The appellant has submitted that despite repeated requests made before the AO, the basis of adopting yield in the case of SMS Division at 89% was not provided. With a view to make the comparison of yield declared by other assesses engaged in similar line of bus....
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....ant. In none of the comparable case received from DCIT-1(2), Raipur, such standard yield of 89% was adopted despite of the fact that all the comparable cases declared yield much less than 89% and even less than that declared by the appellant." 5.2 The Ld. CIT(A) analyzed the financial results of the appellant and a comparison of GP and NP rate which was drawn between GP and NP rate declared by the appellant and the comparable cases received from DCIT- 1(2), Raipur which is on record and thereafter, the Ld. CIT(A) observed as under: "7.8 I have carefully compared the financial results of the appellant company with the financial results of other comparable cases as received from DCIT-1(2), Raipur. As is self-explanatory from the details tabulated above, in my considered view, the financial results declared by the appellant are found to be better in comparison to most of the comparable instances in terms of GP rate as well as NP rate and even in terms of yield. It is also observed that there is no direct co-relation between GP rate and yield, for instance, the yield declared by Super Iron and Steel Private Limited in financial year 2008-09 is 84.65% which is marginally higher than ....
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....w yield. 7.9 It is a matter on record that the appellant has maintained quantitative records of raw material consumed and finished product produced. The books of accounts were subjected to tax audit as well as audit under Company Law which were produced before the AO together with bills and vouchers and the same were examined by test check. The appellant has furnished the copies of excise returns filed by the appellant on monthly basis in Form-ER-1 for finished goods and in Form ER-6 for raw materials, the same are placed in paper book. I had carefully analyzed various columns and details furnished by the appellant on monthly basis to the Central Excise Department. It is gathered that in Form ER-1, the appellant has given the details on monthly basis viz. Chapter heading, Description of goods, Units of quantity, Opening balance, quantity manufactured, quantity cleared, closing stock, Assessable value, Type of clearance, Excise duty payable etc. In Form ER-6, the appellant furnished the details on monthly basis viz. Description of principal inputs, Quantity code, Opening Balance, Receipt, taken for use in the manufacture of dutiable and exempted finished goods, removed as such for....
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....ommencement of production in SMS division and was not doing such thing till it had Rolling Mill. 7.13 The findings of the AO at Para 1.2 on Page No.14 of the assessment order are discussed hereunder: (1) Regarding stock, as stated supra, the AO has not drawn any adverse inference as regards difference in inventory. (2) Regarding capacity utilization, the allegation of the AO that the actual production is much less than the installed capacity has been negated by the appellant by placing on record actual production data i.e. quantitative information with reference to weighted installed capacity based on actual number of days during which the production process is going on. On the matter of capacity utilization, I do find that the assumption of the AO that the factory will remain in operation for 365 days is quite hypothetical as the AO has completely ignored the fact that there would be weekly offs/holidays apart from national holidays and routine maintenance. I am convinced with the explanation tendered by the appellant regarding capacity utilization and in view thereof, I am of the considered opinion that the capacity utilization cannot be said to be lower as presumed by the ....
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....nd the satisfaction that a person has "undisclosed income‟, the conclusion would not deserve acceptation. Then the satisfaction is vitiated. 7.15 In the instant case, the AO has completely failed to record the reasons based on material available as the AO has not referred to even a single seized document which could be regarded as incriminating document and used as an evidence to even remotely support the conclusion of the AO. The AO seems to have blown out of proportion merely on the basis of mathematical and mechanical calculations. The AO has laid too much emphasis on statistics, those statistics which cannot be said to have been gathered as a result of search only. The statistics relied upon by the AO are those which are quite routinely called for even during the regular assessment proceedings u/s.143(3). The AO has not stated what according to him should have been the average consumption of power, sponge iron etc. Another fact noticed is that the case of the appellant was under scrutiny assessment for three consecutive years i.e. in AY.2006-07, 2007-08 and 2008-09 where regular assessments were made under scrutiny and the yield was shown by the appellant was not disput....
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....on knowledge that the businessman goes for backward integration when he is able to produce goods indigenously at a cost lower than the purchase cost from market. The AO has duly accepted the purchase of blooms and billets that are recorded in the books of accounts of the appellant and consumed in its Rolling Mill Division therefore, it is hard to believe that the appellant must have sold its intermediary product when its own production was not sufficient to meet its domestic requirement. 7.18. From page No.11 to Page No.13 of the assessment order, the AO has reproduced the extract of the statement recorded during the course of search of the following persons: (a) Shri Murari Singh (b) Shri Anil Singh (c) Shri D Satyanarayan From the aforesaid statements, the AO has made an attempt to emphasize that there is absence of uniform/scientific methodology for measurement of input of raw material. 7.19 I have carefully perused the statement of Shri Murari Singh, General Manager ( Steel Melting Shop) recorded during the course of proceedings u/s.132 on 22.06.2011. In the said statement, in answer of question No.3, Mr. Murari Singyh had categorically stated that the actual averag....
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....hed goods being produced. It has also been explained in the said statement that the Site In charge gives the details of quantity produced in slip to the Senior Manager and then the same is passed on to the Accounts Section for passing entries in the computer system and only thereafter such slips are destroyed. From the perusal of the said statement, I do not find any infirmity in the procedure/system adopted by the appellant company in as much as the search team did not find any irregularity in the production quantity mentioned in the slip vis-à-vis production quantity entered in the regular books of accounts of the appellant company in the computer system. It is also seen that in response to Question No.10, the said Senior Manager has elaborately given statement on the system followed by the appellant company on receipt of any sales order. In response to question No.15, the said Senior Manager has categorically stated that the production team of the appellant company carried out physical inspection/verification of stock for determining the yield and burning loss, he has also stated that the production team carried out physical inspection every 1 to 2 months and based on the....
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.... loose papers are destroyed, at this juncture, I find that neither in the show cause notice nor in the assessment order there is any whisper of any such loose paper which bears the figure of production and which the appellant failed to reconcile with the entries in the regular books of accounts and Excise records/returns. In the absence of any specific instance having been brought on record by the AO, I am constrained to construe the allegation of the AO as mere bald statement. 7.22 In the case of the ACIT Vs. M/s. Balajee Structural (I) Pvt. Ltd. (supra), the Jurisdictional Bench Hon‟ble ITAT had an occasion to decide identical issue and the Hon‟ble Tribunal has observed as under: " ..........We find the assessee in his submissions before the AO had explained the reasons for variation in the yield. However, the AO has not considered the same and merely mentioned that the explanation given by the assessee is not found to be acceptable. We find merit in the submission of the ld. Counsel for the assessee that when the production results are closely monitored by the Excise Department who had accepted the same and when the Department has no other material to prove that ....
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.... and the addition has been made only on presumptions and surmises and is not justified. The AO has also not made out any comparable cases. In such situation the addition in question made by the AO is not justified same were rightly deleted by reasoned findings, we uphold the same." The low yield in comparison to the bench mark adopted by the Assessing Officer basis whereof is still in the dark and has not come on the surface, in the absence of any cogent reasons could not, by itself have been a ground to hold that proper income of the assessee cannot be deduced from the accounts maintained by it and consequently, could not have been a ground to reject the accounts invoking section 145(3) of the Act. The variation in yield and consumption of power etc. could be for various reasons. There is no finding by the Assessing Officer that actual quantity of finished goods sold by the assessee was more than what it was shown in the accounts books on the strength of documentary evidence. 7.24 It is seen that the AO has not pointed out any suppression of production based on any cogent and incriminating material against the assessee. Material showing financial nexus can only be a valid basi....
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....g the course of search. The significance of tangible disproportionate asset having been found as a result of search was emphasized in Mangilal Rameshwarlal Soni (HUF) Vs. Assistant Commissioner of Income Tax, (2004) 83 TTJ (jd) 770 : (2004) 4 SOT 680 (jd) 7.28 I find no unrecorded asset or investment was found during the course of search with which undisclosed income of such magnitude could be correlated i.e. deployment of undisclosed income. This factor was given due cognizance in Bansal Strips (P) Ltd. & Ors. Vs. Commissioner of Income Tax (2006) 100 TTJ (Del) 665 : (2006) 99 ITD 177 ( Del) by the Hon‟ble ITAT, Delhi A Bench as circumstantial evidence. 7.29. The Hon‟ble Supreme Court had put an embargo on the leeway i.e. flexibility of Assessing Officers in Dhakeswari Cotton Mills Ltd. Vs. Commissioner of Income Tax (1954) 26 ITR 775 (SC). The significance of considering the evidences in favour and against the assessee was emphasized by the Hon‟ble Supreme Court in Omar Salay Mohamed Sait Vs. Commissioner of Income Tax (1959) 37 ITR 151 (SC) 7.30 Undisputedly the appellant did furnish explanation on all the documents seized during the course of search, the....
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....e certain transactions are recorded on the basis of estimation will not make the accounts liable for rejection u/s. 145, particularly when the estimation is not strikingly high or low either in comparison to past trend or comparable cases, incidentally, none of these facts are prevailing in the case of the appellant. 7.33 The Hon'ble High Court of Delhi laid stress upon the material and evidences and brushed aside adversities held merely on the basis of suspicion and conjectures in Commissioner of Income Tax Vs, Ram Pistons & Rings Ltd. vide order dated 16th February 2012 (2012) 80 CCH 055 Del HC. 7.34 It is settled principle of law that the A.O has to bring on record specific defect in the books of accounts of the appellant as a result of which reasonable profits cannot be deduced. The A.O examined the audited books of account but had not pointed out any specific discrepancy nor has he detected any suppression in sales or inflation in purchases/expenses. No evidence whatsoever was brought on record to prove that, the appellant, in fact, earned more than that returned as per the books of account kept in the regular course of business. The assessment order is evidence to the....
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....terial facts, the Authority cannot embark upon a speculative assessment of notional profits. The assessment should be based on cogent facts and there should be no vindictiveness or arbitrariness in passing the assessment order. The estimated additions made by the AO do not bear any relationship with the specific defects in books of accounts and the AO cannot be permitted to make arbitrary addition. 7.36 The core thing to be seen is the evidence found which will be the basis for making the assessment. Coming to the facts of the case, the AO estimated the unaccounted production and sales based on benchmark yield of 89% in case of SMS Division . The entire estimated suppressed sale has been treated as profit. I am convinced that the determination of undisclosed income in this case is merely on the basis of presumptions and on an estimate basis. Search assessment has to be framed on the basis of some material, which in this case is raw material consumed in SMS division for manufacturing of blooms and billets in furnace. No other materials or asset details were found during the course of search. 7.37 The question of best judgment is ruled out and therefore the application of any for....
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....re definitely co-relatable to the entries in the stock register, enabling an easy stock tally, if one was so required. However, the AO did not deem it fit to carry out the exercise of tallying the stock as per these entries in the two types of books. He merely went by the alleged suppressed yield. Various submissions regarding reasons for variation in consumption of power, furnace oil, yield etc. were duly furnished by the appellant. The appellant did not furnish the comparable instances and also demonstrated with technical details of production. These copious evidences were wrongly ignored by the AO. Commissioner of Income Tax Vs. Hindustan Tin Works Ltd. (2007) 291 ITR 290 (Del) : (2007) 164 TAXMAN 529. 7.41. A careful reading of the decision in Commissioner of Income Tax Vs. R.K. Rice Mills (2009) 319 ITR 173 : (2009) 185 TAXMAN 107 (P&H) the Hon‟ble High Court had upheld the deletion of addition and it leads to an irresistible conclusion that there cannot be any rejection of books of accounts merely because the yield declared by the assessee is lower in comparison to other assessees engaged in similar line of business. 7.42 The notoriety that appellant suppressed the ....
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....nadas Maganlal Vs. Income Tax Officer (2008) 13 DTR (Guj) 149, the Hon‟ble High Court of Gujarat. 7.47 The Hon‟ble High Court of Bombay in R.B. Bansilal Abirchand Spinning & Weaving Mills Ltd. Vs. Commissioner of Income Tax (1970) 75 ITR 260 (BOM) has held that "Merely by comparison of the percentage of losses in a particular year, it is not possible to say with any reasonable certainty that the increase in the percentage of loss must be attributable and must lead to a reasonable inference of suppression of production." 7.48 In the instant case also, the ultimate addition has been made on the basis of alleged suppression of yield / unaccounted production. Except making comparison of yield achieved by the appellant with A.O‟s own standardized yield percentage of 89%, the A.O has not brought on record any evidence, given the fact that the present proceedings are culminating from the search proceedings, as a matter of fact the search team could not come across even a single document which even indicates of appellant‟s indulgence into any such suppression of yield or unaccounted sales. It is not the case of the A.O that the buyers of alleged unaccounted sale....
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.... has been held that the mere variation in power consumption cannot be construed as reasonable ground for rejecting the books of accounts and estimation of income. In PONDY METAL & ROLLING MILLS (P) LTD. Vs. DEPUTY COMMISSIONER OF INCOME TAX ITAT, DELHI "B‟ BENCH (2007) 107 TTJ (Del) 336. The case of the appellant finds support from the decision in the case of Mahabir Prasad Jagdish Prasad vs. CST 27 STC 337 (All) and decision of the Hon'ble High Court of Rajasthan in Kay Polyplast Ltd. vs. Additional Commissioner of Income-Tax (2008) 9 DTR (Raj) 163. 7.53 I find that no margin for estimation of suppressed sales and income has been allowed even in those cases where instances of suppression of sales has been found on the basis of incriminating material except for the period for which suppression has been unearthed based on cogent and documentary evidence, undisputedly, in the case of the appellant, nothing incriminating has been found, therefore, as held in Deputy Commissioner of Income Tax Vs. Royal Marwar Tobacco Product (P) Ltd. (2009) 120 TTJ (Ahd) 387 : (2008) 16 DTR 129. 7.54 Mere variation in Power cannot be a ground for holding adversity was held in Income Tax Offic....
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....eme in Dhakeswari Cotton Mills Ltd. vs. CIT (1994) 205 ITR 45 (Gau) : TC1R.508. 7.57 As emphasized by the Supreme Court in State of Kerala vs. C Velukutty (1966) 60 ITR 239 (SC) though there is an element of guess-work in best judgment assessment, it should not be a wild one and should have a reasonable nexus to the available material and the circumstances of each case. Likewise, it has been laid down by the Supreme Court in the case of State of Orissa vs. Maharaja Shri B.P. Singh Deo (1970) 76 ITR 690 (SC) : TC11R.251 that "The mere fact that the material placed by the assessee before the assessing authority is unreliable does not empower those authorities to make an arbitrary order. The power of levy assessment on the basis of best judgment is not an arbitrary power; it is an assessment on the basis of best judgment. In other words, that assessment must be based on some relevant material. It is not a power that can be exercised under the sweet will and pleasure of concerned authorities. The basis of estimate or the basis of computation should be disclosed by the assessing authority, or otherwise the best judgment assessment may be quashed. In Anand Rice & Oil Mills vs. CIT (197....
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...., i.e. income to be determined for taxation must in variable be proved to have been the correct quantum of income earned by the appellant during the relevant previous year and the one presumed to have been earned. The presumptions and hypothetical estimations and observations made by the AO for making the impugned estimated addition, were extraneous, irrelevant and opposed to the facts obtaining from the record. The fate of the appellant could not be decided by the AO on mere surmises or probabilities ( Northern Bengal Jute Mills Trading Co. Ltd. Vs. CIT ( 1968) 70 ITR 407 (Cal.). The mere existence of reasons for suspicion would not tantamount to evidence ( Cal. HC in Narayan Chandra Baidya Vs. CIT (1951) 20 ITR 287 (Cal.) 7.58. It is indeed a case of frivolous addition with facts identical to the facts in the case of Bharti Airtel Limited Vs. ACIT (ITAT Delhi). Looking to the facts and circumstances of the case as also decisions cited above, the addition made by the AO is held to be baseless and without any evidence., hence the rejection of books of accounts is held to be invalid and addition made by the AO on account of alleged suppression of yield is deleted." , 6. At the ti....
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....the assessee. Material showing financial nexus can only be a valid basis for holding suspicion or making the addition. Unfortunately, not a single document showing any financial dealing by the assessee has been referred to either in the assessment order or even during the course of hearing, despite the liberty granted to the assessee. The facts and circumstances of the present case reveal that the Assessing Officer just brushed aside the objections/submissions and contentions raised by the assessee and evidences placed on record. The Assessing Officer made mechanical addition of the difference between the unaccounted production/sales worked out on the basis of 89% yield suspected by the Assessing Officer that must been achieved by the assessee. 7.3 The Ld. AR further referred to the Para 7.48 of the Ld. CIT(A)'s order wherein the Ld. CIT(A) observed that the ultimate addition has been made on the basis of alleged suppression of yield/ unaccounted production. Except making comparison of yield achieved by the assessee with the Assessing Officer's own standardized yield percentage of 89%, the Assessing Officer has not brought on record any evidence given the fact that the present pro....
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....s. The Assessing Officer has not brought on record the manner in which he has worked out yield of 89% in SMS Division. 9. In the case of M/s. Ramesh Steel Industries Vs. DCIT-1(1), Raipur, ITA No.48 of 2015, the Hon'ble Chhattisgarh High Court has held and observed that "the power of the Assessing Officer under Section 145(3) is not absolute but was regulated and circumscribed by statutory provisions." That further "power consumption in an industry may vary for various reasons. Under Section 145(3) of the Income Tax Act, the jurisdiction of the Assessing Officer arises if he was not satisfied about the correctness of the accounts of the assessee. However, the Assessing Officer should give specific reasons for rejecting books of accounts." 10. In the instant case, the Assessing Officer calculated yield of 89% and has also calculated consumption of power and difference thereto pertaining to production and has held that the books of accounts are therefore not reliable and rejected the books of account while resorting to Section 145(3) of the Act. As per the legal principles laid down by the Hon'ble Chhattisgarh High Court (supra.) that this power is not unfettered and it has to be u....
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.... be or sustained." 13. It is apparent from the records that the Assessing Officer has not brought on record any evidence stating lower or suppression of sales by the assessee. He tried to support his case by showing deficiency in power consumption by the assessee. But the Hon'ble High Courts have held without any direct corroborative evidences on low yield or suppressed sales, the disparity of power consumption cannot be the sole ground or reason for making addition by the Assessing Officer. 14. In view of the aforesaid examination of facts and judicial pronouncements, we find the order of the Ld. CIT(A) is absolutely correct and therefore, the same does not call for any interference. Thus, ground relating to "issue of the lower yield declared by the assessee" in all the appeals for all the assessment years are therefore dismissed. 15. The next issue is there only in the assessment year 2012-13. Ground Nos. 3 and 4 of the appeal Memo filed by the Revenue for the assessment year 2012-13 pertains to "giving credit of cash of Rs. 13,00,000/- seized during the course of search operation u/s.132 of the Income Tax Act, 1961 (hereinafter referred to as "the Act‟) as prepaid taxes....