TaxTMI 
TaxTMI 
2019 (11) TMI 922
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....l the assessment years. That apart, for assessment 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 unaccounte....
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....ling Mill Division to be lower, the AO has not substantiated the relevance 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....
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....he past in the office of DCIT-1(2), Raipur on the issue of lower yield, and in fact declared less yield than that declared by the appellant. 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 yie....
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....he is able to buy raw material at competition rates, in such a situation, it cannot be said that the books of accounts are not reliable merely due to low 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. Descript....
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....s any incriminating document; that no striking discrepancy was observed in stock/inventory; that the appellant got into this notorious practice of earning undisclosed income only commencement 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 ....
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..... Reason must be recorded by the AO that any undisclosed income belongs to the appellant. The Material itself should not be vague, indefinite, distinct or remote. If there is no rational or intangible nexus between the material and 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....
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....to be unreasonable and without any substance in as much as why would a person go for backward integration (SMS Division) and then sell its own intermediary product and at the same time buy the same product from the open market. It is a matter of common 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. ....
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....rocedure followed by the appellant company for recording the quantity of production of finished goods, it is seen that the said Senior Manager has stated in his statement that the appellant company engages the Foreman who is responsible for section sitting and for keeping track of quantity of finished 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 S....
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....uantity recorded in the loose slips tallies with the quantity recorded in the regular books of accounts, excise records and excise returns; that as the Excise returns is being filed on monthly basis, therefore, after filing of Exercise Return such loose papers become redundant and that is the reasons said 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 merel....
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....ed during the course of assessment proceedings and the AO has not made any adverse comment on the same. According to the assessee the yield in this AY is better in comparison to the preceding assessment year which was also covered by scrutiny assessment under section 143(3) of the Act. The addition in question is not based on such material 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 q....
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.... W.D. Estate P Ltd. (1993) 46 TTJ (Bom.) 143 : 45 ITD 473. 7.27 Similar ratio was laid down by the Hon‟ble High Court of Delhi in Commissioner of Income Tax Vs. Discovery Estates Pvt. Ltd. vide order dated 18th February 2013 356 ITR 159 (Delhi). I do find considerable force in the submission of the appellant that no unrecorded asset/investment was found during 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 ....
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....he Hon‟ble High Court of Delhi in Commissioner of Income Tax Vs. Smt. Poonam Rani (2010) 326 ITR 223. From the ratio of the aforesaid decision, it is also quite clear that the Courts have taken judicial note of the "estimation" i.e. recording of financial transactions with certain degree of estimation in the books of accounts. Drawing reference from the aforesaid decision, in my considered view, merely because 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 reas....
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....circumstances of the case, as also decisions relied upon by the appellant and those cited above, I am of the view that there was no finding to the extent that the accounts were not correct and complete or that the A.O was of the opinion that the income could not be deduced from the accounts maintained by the appellant. 7.35 The AO has not brought any material on record to disbelieve the book result shown by the appellant. If there is no suppression of material 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 con....
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....e quantity appearing in the Excise Registers was cross checked with the entries in the Excise Returns and the same was found to be in order and tallying with the Excise Records. The inventory appearing in the Excise Records and Excise Returns was found to be the same as in financial records i.e. the books of accounts and Audited financial statements. Undisputedly, the production was meticulously routed through the appellant‟s daily production register / Excise Records. The entries therein were 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)....
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....07, 2007-08 and 2008-09. It is self evident from the above referred assessment orders u/s 143(3) that the books of accounts of the appellant were accepted in all these years and yield declared by the appellant was also accepted. Even during the survey proceedings, no incriminating document was found which is evident from the fact that no addition was made in the scrutiny assessment, for the year in which survey proceedings took place, on the basis of incriminating document. The case of appellant finds support from decision in Sukhadia Jamnadas 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 suppressi....
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....ntained regular books of account and sales / purchase or verifiable and vouched, recorded and supported by raw material consumption register and finished goods register and was also subjected to excise duty and its production declared for the instant years had duly been accepted by the Excise Department after verification. The case of the appellant certainly finds support from the decision in the case of N. Raja Pullaiah Vs. Dy CTO (1969) 73 ITR 224 (AP). 7.52 As regards variation in Power Consumption and for that matter variation in consumption of other raw material, it 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 ....
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....hough there must necessarily be guess-work in the matter, it must be honest guess-work." These observations received the imprimatur of the Supreme Court in State of Kerala vs. C. Velukutty (1966) 60 ITR 239 (SC) in the following words : "The Privy Council, while recognizing that an assessment made by an officer to the best of his judgment involved some guess-work, emphasized that he must exercise his judgment after taking into consideration the relevant material." Identical observations made by the Judicial Committee in Seth Gurmukh Singh vs. CIT (1992) 194 ITR 507 (All) : TC1R.357 were approved by the Supreme 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 ....
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.... the settled position that though the AO has very wide powers and is not fettered by technical rules of evidence and pleadings, there is one overriding restriction on his judgment and that is, that, he must act honestly and diligently on the material, howsoever inadequate it was, and not vindictively, capriciously or arbitrarily. "Probability cannot be construed as material evidence to form an opinion by the AO to conclude an assessment and for drawing adverse inference against the appellant unless there is evidence to substantiate such probable inference." Assessment has to be made based on the real income theory, 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....
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....oper 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. 7.2 The Ld. AR further submitted that the Assessing Officer 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 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....
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....pecific enquiry in order to find out the percentage of yield declared by the other assessee engaged in similar line of business. It is noted from such comparison that the yield declared by the different assessees in the same year is not uniform, conversely every assessee declared different yield. Not even a single comparable instance was found declaring yield of 89%. That further, action of the Assessing Officer in rejecting the books of accounts merely due to the reason that the yield achieved by the assessee is less than the yield percentage i.e.89% which has not been achieved even by other assessees engaged in similar line of business. 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 As....
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....served that "consumption of power in itself is not an evidence to prove or disprove the production of finished goods." We further observe that in the case of St. Teressa's Oil Mill (761 ITR 365) and Sulabh Marbles (P.) Ltd. (205 CTR 464) decided by the Hon'ble Kerala and Rajasthan High Court has held that "disparity in electricity consumption cannot be the criteria for rejection of accounts and for making ad-hoc additions. The assessee had maintained regular books of account and the Assessing Officer had not come across any unaccounted purchase or suppressed sale. In these circumstances, only on the basis of power consumption, no addition could 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 f....