AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2020 (4) TMI 850
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....ircumstances of the case, and the respective cases of the parties being the same for both the assessees, the appeals were posted for hearing and, accordingly, heard together. The firms are also related inasmuch as Sh. Nitin Sharma has 50% share in both the firms, as also in M/s. Sagar Stone Industries, Jabalpur, another associate concern. For the sake of convenience, we shall, for narration purposes, state the facts with reference to Shobha Minerals (Kevlari) (with reference to which the appeals were argued), noting the differences, where deemed relevant, for Shobha Minerals (Dhamki), in brackets. Both the firms, as also Sagar Stone Industries (SSI), were subject to search and seizure operation u/s.132(1) of the Act on 16/10/2014, which covered both their office premises and mining sites. The assessee had, vide lease deed dated 19/6/2007 (29/8/1992), been granted lease of 4.03 hectares (3.60 H.) of land at Village Kevlari (Gandhigram), District Sihora, from the mining department of the state government of Madhya Pradesh. The assessment and valuation of stock in case of mining being a technical matter, assistance, by issuing commissions u/s.131(1)(d), was obtained by the Revenue fro....
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....y the assessee firm 2) Subgrade Dump Includes Road, Ramps & Other Developments 2. Laterite 2,376.750 3. Manganese 9,875.195 4. ROM 44,800.000 Gross Total 102374.600 5 Sub Grade Dump 1,92,400.000 Total 2,94,774.600 (emphasis, by underlining, ours) The assessee, in the view of the Assessing Officer (AO), thus, had an excess stock of iron ore at 90,358.945 MT (i.e., 1,35,681.600 - 45,322.655) as on 31/10/2014. (The corresponding figure for Shobha Minerals (Dhamki) is 16,828.812 MT, the threshold limit being 10%, on which royalty was being paid, even as MECL reported the average grade of stock to be in the range of 13%-18%). The excess physical stock meant that the assessee was engaged in under-reporting of production and, consequently, out-of-book sales of ore production. This was further sought to be refurbished by the AO with reference to the statements u/s. 132(4) of Sh. Ghanshyam Patel, Mining Manager, dated 17/10/2014 and Sh. Nitin Sharma (NS)(during search & seizure on Samdariya Group (SG) in May, 2013). Sh. Ghanshyam Patel, in answer to Questions 11, 12, and 16, admitted to multiple (3 - 4) t....
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.... with the AO, it did, i.e., in principle, by the ld. CIT(A). In his view, however, it could not be said that the assessee had thereby explained the entire shortfall (in physical stock), which he estimated at 35% of the alleged excess book-stock (36,400 MT). The balance 65% (i.e., 23,660 MT) remained unexplained, implying its unaccounted sale. The AO had also gone wrong in valuing the same at Rs. 3300 pmt, which he reduced to Rs. 2800 pmt on the premise that the sale rate would vary over different grades of iron. Again, it was trite that the stock would be valued at cost, so that the escapement of income from tax was the excess of the sale value over cost. Applying the obtaining gross profit rate (50.69%) on the said out-of-books sales, i.e., Rs. 662.48 lacs (23,660 MT x Rs. 2800 pmt), he, accordingly confirmed the addition for Rs. 335.81 lakhs, deleting the balance addition of Rs. 2646.04 lacs (Rs. 2981.85 lacs - Rs. 335.81 lacs). Aggrieved, both the assessee and the Revenue are in appeal. The respective cases 3.1 Before us, the assessee's case, represented by Sh. Rahul Bardia, was that it was not disputing the reports by the technical agencies, i.e., the IBM and MECL, but....
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....s; roads; pits and ramps; retaining wall, which is a continuous activity, with in fact the low-grade material being regularly shown in the monthly returns under the head 'Dump workings'. Complete records are available for the material sold to SSI for further processing by it, as also with SSI. It is only thereafter, i.e., January, 2015 (the month from which SSI commenced operations) onwards, that the said material could, upon incurring cost, be converted into saleable material, the price of which is very sensitive to the iron (Fe) ratio, fetching for lower grades thereof in the iron ore a price as low as Rs. 400 pmt. The mineral content (viz. iron, manganese and laterite ores) in the various stocks, thus, has to be considered while comparing the book-stock with the physical stock, and which has not been. This constitutes the major flaw in the AO's working, which though has been set right, accepting the assessee's claim, by the ld. CIT(A). It is by taking the iron ore ratio in the subgrade material that the same works to 2,08,862.655 MT, resulting in, thus, a surplus, i.e., an 'excess' book-stock, which (excess) is again only apparent, and stands sufficiently explained by the assess....
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....e for an addition, to any extent, is made out. He would, on a query by the Bench, confirm that the returns agree with the books of account, based as they were on the records being maintained by the assessee-firm. He could, however, offer no satisfactory explanation/answer to the basis of the sale rate of Rs. 2800 pmt adopted by the ld. CIT(A), whose order does not state any. 3.2 The ld. CIT-DR, Sh. Meena, would, on the other hand, submit, equally vehemently, that the assessee had no case and, in fact, had been allowed unwarranted relief by the first appellate authority. The reports by the Government Agencies, which are technical experts in the field, specifically requisitioned by the Revenue, are not disputed, even as clarified by Sh. Bardia in his pleadings. Where, then, is the scope for taking any different view in the matter; the physical stock (as determined by IBM) and book-stock (as per the assessee's returns) of iron-ore, and thus the wide difference between them, being admitted? It is a clear case for application of sections 69A/69B, with the Revenue in fact not extrapolating the difference over the preceding years, which in fact it ought to have done, particularly given....
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....luding the iron ore component of the sub-grade dump in comparing the book-stock with the physical stock. Two, Sh. Ghanshyam Patel, the Mining Manager, retracted his statement/s dated 16.10.2014 and 17.10.2014 vide a sworn affidavit dated 04.10.2016 (PB-2, pg. 182), which was furnished before the AO in the course of the assessment proceedings. It was explained that the TP dated 15.10.2014 was for transportation of construction material, purchased by SSI, thereto, which was necessitated due to the said material having been dumped (by the supplier) near Keolri mine site, as there was no approach road to the site of SSI. On query, he confirmed the valuation of the sub-grade dump stock (as at the year-end) to be nil, as the entire excavation/production cost had been already absorbed in the respective years, i.e., toward production of finished goods and, further, that it's sale value was at Rs. 400 pmt. He would though add that both the AO and the ld. CIT(A) had not considered the assessee's alternate plea, made without prejudice, i.e., that inasmuch as the entire excavation cost, as incurred, had already been absorbed (in valuing the bookstock of finished goods), the excess physical sto....
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....nd to be in excess, the 'subgrade' found short (i.e., at 43,271.43 MT, as against a book-stock of 1,92,400 MT), so that correct categorization becomes crucial. However, we observe no dispute either as regards the quantity of the iron ore found in various dumps or as to its classification (as finished-good or subgrade). The processed iron ore in dumps, quantified at 1,35,681.6 MT (by IBM), which quantity is not in dispute, would stand to be categorized as finished iron ore, as done by IBM (& adopted by the Revenue), considering that the grade thereof varies between 50.12% to 54.32% (refer para 2), which agrees with the consideration by the assessee of that with grade below 50% as subgrade, coupled with the fact of the assessee paying royalty on the sale of finished goods under the grade class 'below 55%' (refer paras 2, 3.1). The quantity of laterite and manganese ores has neither been physically taken nor, consequently, compared. How can, then, even as ld. CIT-DR argues, the AO be faulted with? 4.3 Before we may examine the assessee's case, it would be relevant to, and we accordingly begin by, delineating the mining process as explained by the assessee per its' various submissio....
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.... a) Below 55% 17724.885 NIL 960.725 16764.16 950 b) 55% to below 58% NIL NIL NIL NIL NIL c) 58% to below 60% NIL NIL NIL NIL NIL d) 60% to below 62% NIL NIL NIL NIL NIL e) 62% to below 65% NIL NIL NIL NIL NIL f) 65% and above NIL NIL NIL NIL NIL ii) Fines:- g) Below 55% 30821.255 1500.00 3762.760 28558.495 950 h) 55% to below 58% NIL NIL NIL NIL NIL i) 58% to below 60% NIL NIL NIL NIL NIL j) 60% to below 62% NIL NIL NIL NIL NIL k) 62% to below 65% NIL NIL NIL NIL NIL l) 65% and above NIL NIL NIL NIL....
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....al' stage (open cast working) to 'finished goods', leaving the quantity in the sub-grade dump, being reported under the head 'Dump workings', undisturbed, except where there is an accretion thereto. This also explains why the raw material is constant, except where production for the month comes out of the existing ROM and not from fresh excavation. Monthly reports for June to October, 2014, placed on record (PB-2, pgs. 2266), did not contain the report for June, 2014 (for iron ore), but for November, 2014 instead, and was therefore placed on record. The production data for the period June to November, 2014, as reported, is as under: Table 4B Production/Month (of 2014) June July August September October November Total (MT) Lumps 5000 (2775) 8000 8000 - (3050) - (3050) 1000 (2000) 22,000 Fines 15000 (975) 12000 (1750) 12000 (1750) 2000 (1100) 1500 (1100) 1500 (400) 44,000 Total 20000 20000 20000 2000 1500 2500 66000 NB: Qty. in MT. Figures in brackets represent the reported sale rate in Rs./MT; sale quantity is not stated in the Table. The entire production for the months of June ....
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....e of iron ore being saleable in the grade class 50%-55%, with that below 50% being liable to be regarded as sub-grade; the assessee paying royalty on sale of finished goods under the grade class 'below 55%' (also see para 4.2, Table 3). 4.4 At this stage we may digress to address the question as to if the saleable iron ore, as physically found, is to be valued at cost, as being alternatively contended by the assessee, or at its sale (net realizable) value (refer para 1.3; Q.(c) at para 4.1 above). This assumes significance as where the physical stock of iron ore is found to be in excess of the book-stock thereof, as the Revenue contends, the same may be of little or no consequence, given that the only cost suffered toward the same, being a resource extracted from earth, is its' excavation cost, and which may be nominal in comparison to its' sale value. In fact, even toward the same, the assessee contends to have already incurred and claimed the cost against its' disclosed production, so that no unexplained cost stands incurred, so as to result in any addition in assessment qua the undisclosed production. In our view, the sale (or net realizable) value of such stock is liable to ....
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....uld be argued that the same stands disposed of in books subsequent to 31.10.2014 (i.e., with reference to which date the comparison between the physical and book-stock is being made), so that the profit on its disposal stands duly accounted through such subsequent sales, precluding any separate addition, as made by the ld. CIT(A). There can, however, be no presumption that the said subsequent sale, on which in fact royalty stands duly suffered (& paid), does not represent actual sale, which it purports to, and particularly considering that there is no cessation of production, with the assessee rather claiming that the said period marks the beginning of the season; the period June to October being an off-season due to rains. Why, one may ask, would the assessee act inimical to itself by continuing to perpetuate and, resultantly, further compound an error. Besides, the said sales can only be presumed to be duly receipted by the purchaser (buyer), producing goods on that basis, i.e., represent actual sales. There is neither any contention toward nor any basis for us to presume otherwise. Here it needs to be appreciated that while in case of a trading/manufacturing concern the out-of-b....
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....oval, i.e., in principle. He has, however, in our view, committed two errors. One, the gross profit rate, inasmuch as no royalty is paid on the out-of-books (or undisclosed) sales, is to be considered after adjustment (addback) of royalty cost incurred, where the gross profit rate is reckoned upon deducting that cost, as is the case (PB-2, pgs. 135-138). Two, there is no stated basis, and neither could Sh. Bardia inform us of any, for the adopted sale rate of Rs. 2800 pmt. The goods having been regarded as sold during the year, and prior to 31/10/2014, it is the average sale rate for this period (i.e., April to October, 2014), and as reflected in accounts, that shall have to be taken for the purpose. We are acutely aware of the vast difference in the sale rates of lumps and fines. However, there is no classification of the physical stock found into lumps and fines. It is thus not possible to state precisely the excess book-stock, product-wise. The presumption would therefore be of the same obtaining in the same ratio as appearing in accounts, i.e., as on 31/10/2014, being at 16,764.16 MT (lumps) and 28,558.495 MT (fines) (refer Table 3 at para 4.3), i.e., in the ratio of 1: 1.704. ....
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....e assessee contends for inclusion of the stock of ROM (i.e., 44,800 MT) as well (after excluding waste at the rate of 5%). The reason for this approach is stated to be in view of the Mining Plan (for: 2013-14 to 2017-18)(MP-2), as approved, assessing that to be the ratio of the iron ore in the excavated material, the balance 15% being laterite and manganese ores, at 10% and 5% respectively; the waste material being nil. The IBM, vide its' report dated 04/12/2014, clarifies the iron recovery in the subgrade dump (43,271.43 MT) to be at 85%, i.e., 36,780.71 MT. It is perhaps this that led the assessee to consider 85% as the iron ore component in the sub-grade material, and draw comparison on that basis. We may here also refer to the average grade in the various dumps as reported by MECL: Table 5 NAME OF THE AREA: KEOLARI MINES M/s. SHOBHA MINERAL, DIST. JABALPUR Sr. No. LOCATION OF DUMP VOLUME BULK DENSITY TONNAGE AVERAGE GRADE (Fe %) REMARKS 1. MECL 1 313.40 3 940.200 52.92 DUMP NO. A 2. MECL 3 1,757.30 3 5,271.900 51.52 DUMP NO. C 3. MECL 2,4,7,1....
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....ings/results, one positive and one negative, corroborate each other. It is this that led the AO to infer that the assessee was masquerading its' finished goods stock as sub-grade material, i.e., representing the former, being saleable, in the guise of the latter, unsaleable material. It is nobody's case that the assessee had excavated more material (from earth) than that disclosed. And, this, despite the admitted illegal extraction, stated by the assessee to be to the tune of 39,000 MT, which led to the suspension of its' license for a time during the current year, as the said extra excavation does not necessarily imply undisclosed production, but only of it being not in terms of the mining plan. Sure, the positive and negative differences do not match, the excess physical stock (of finished goods) being 90,359 MT, as against the short physical stock (of sub-grade material) at 1,49,129 MT (1,92,400 - 43,271), or at a difference of 58,770 MT (i.e., 1,49,129 - 90,359). But, then, it is not required to be, nor it is anybody's case that the same should match. It is patent that the waste and sub-grade material had been used extensively toward laying roads and ramps; building retaining w....
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....d to be sensitive to the Fe ratio, is another, though as we shall presently see, related aspect of the matter. In fact, per its Ground 5, the assessee states of the price of Rs. 2800 pmt being applicable to the iron grade 57%-60%, which contradicts its' claim of the iron grade, in view of the limitation of the physical processes being carried out by it, does not exceed 55%, for which grade class, i.e., 'below 55%', royalty is accordingly paid by it on its' entire sales. Further, its' case is completely inconsistent with the mining process, as explained and borne out from the record. The 85% iron ore is in the raw stock, freshly excavated material, and not in the sub-grade material, which is the outcome of processing, stated to be at 80% (70%) (of the processed ore), with the balance 20% (30%) being the finished stock (refer para 4.3), divided, as explained, equally between 'lumps' and 'fines'. Reference, here, may also be drawn to para 4 of the IBM report dated 12/1/2017 (PB-1, pgs. 96-97), wherein it clarifies that the sub-grade material is generated from ROM. The reference to the iron recovery in the sub-grade material, stated to be at 85% by IBM (refer Table 1B), is incompreh....
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.... material, explaining the now short-fall thereof (i.e., physically), to be wasted or deployed toward development works, though not accounted in books. Drawing a parallel with the more common manufacturing process, it amounts to reconciling the difference in the stock of finished goods, found physically in excess, by applying the yield of finished goods to the raw material stock, found short. The finished goods, to the extent now in excess, i.e., on being so reckoned, in books, is notionally reconverted into raw material, stating it to be wasted. Could, one wonders, there be anything more bizarre and de hors logic and facts than this! It is all this that led us to state of the assessee's approach in the matter, since accepted, i.e., in principle, by the ld. CIT(A), to be completely misfounded. The complete disharmony between the figures makes a travesty of the assessee's methodology in explaining the difference. While the total difference per the same, and which it therefore seeks to explain, is 36,400 MT, it justifies a difference for a much higher figure of 1,14,250 MT through the certificate of the consulting Geologist. That is, the same has no relation to the obtaining differ....
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....12/2016 to IBM, the same is at 1,13,582.6 MT, and which perhaps also explains the said certificate, found as without any definite basis. In this letter the assessee, in seeking to explain the difference in finished (processed) iron ore, also includes raw stock (ROM), as well as laterite and manganese ores, as well as their component in the sub-grade material, making the reference by us to the example of 'raw material' (qua a manufacturing process) equally applicable. ROM is raw stock, not physically taken, nor compared, and at a constant in the assessee's returns for the past several months (also refer para 4.3). There is no question of the iron content therein, stated to be in the range of 48%-50%, being taken into account in comparing the inventory of finished goods. It is perhaps on realizing its' folly in doing so, that the assessee revises it's calculation to 36,400 MT, i.e., less than 1/3 of the original. Clearly, the ld. CIT(A) did not apply his mind to the assessee's explanation, even as, as it appears, it is due to his being not fully satisfied therewith that he accepts it in part. 4.7 Finding no merit in the assessee's case, with that of the Revenue, being based on ....
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....n the physical stock-taking, being more than 750% ((3050/400) x 100) (Table 4B). As afore-noted (para 4.4), there is no segregation of processed iron ore stock into lumps and fines (see Table 1A). This concept (of varying qualities) gets reflected in the very idea or notion of the 'Threshold Value'. The IBM regularly, after consultation with different stakeholders, declares the threshold value for different ores in the country. The threshold value (TV) of a mineral is defined as: 'The threshold value of minerals means limit prescribed by the Indian Bureau of Mines from time to time based on the beneficiability and/or marketability of a mineral for a given region and a given time, below which a mineral obtained from mining can be discarded as waste.' (source: India Gazette Notification dated 16/10/2009/emphasis, in italics, ours) As per the said Notification (copy on record), the threshold value of iron ore (Hematite) is 45%. Accordingly, an iron ratio below 45% is to be regarded as waste, though as per the mining rules the same is not to be removed (from the mining site), but stacked separately thereat on the premise that today's waste is tomorrow's wealth. A future tec....
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....r no such answer/s, and for which we have perused the entire statement of NS (PB-2, pgs 211 - 319), which in fact is in hindi language. The relevant questions & answers, are as under: NB: the reference to Qs. 8 & 29 (in the impugned order) is incorrect, perhaps due to typographical errors; the same being 7 & 28 Respectively. From assessee's stand point, however, this may not be of much significance. There is no hard and fast categorization as to what constitutes subgrade, which would stand to fall in a range based on technology, besides the market dynamics. Thus when the assessee says of iron ore being a finished good in the grade 50%-55%, it does not imply, as the Revenue, and we must concede, for no particular fault of its', considers the same as being a single class, saleable at the same rate. Further, how could a material liable to be recycled/reprocessed, with a view to being upgraded, lead to any addition for difference in quantity based on such categorization? Why, if, as stated, the ROM itself contains iron grade at 50%- 51% (or even 48%-50%, as stated by NS in answer to other questions, viz. Q. 7 of the statement dated 07/1/2015), a grade class of 50% or even 51% is ....
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....rejects likely to be generated.' , as well as per Chapter VI, titled 'Handling of Waste/Subgrade material' (at page 58). Paras 6.2 & 6.3 thereof are relevant, and read as under: '6.2 RATE OF YEAR-WISE GENERATION OF SUB GRADE MINERAL WITH REFERENCE TO THRESHOLD VALUES AND PROPOSAL FOR STACKING FOR NEXT FIVE YEARS No generation of sub grade is proposed during proposal period. 6.3 QUANTITY AND GRADE OF SUB-GRADE MATERIAL AVAILABLE AT THE MINE AS ON DATE DULY SUPORTED BY PLANS AND SECTION As no sub grade material hence not applicable.' (emphasis, by italics, ours) Page 35 of MP-2 contains category-wise updated reserves with grade (indicated end use grade with analysis) as well as marginal grade. The Fe content the iron ore is stated at 52.22% to 57.20%. The average grade for the iron ore lumps and iron ore fines is stated beneath at 52.9% and 55.55% respectively. It is thus clear that the material falling between 45% to 55% has been, considering the demand from the industry, being iron & steel and cement industries in the main, which is in the range of 55%, has been regarded by IBM (in MP-2) as subgrade. As the average Fe content in ROM is, as per it, at 55% plus (....
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....ssee puts it, i.e., laying roads, ramps, for using for construction, etc. His statement, thus, apart from being apiece with the other evidence as to the assessee's accounts not representing true and fair state of affairs, does not, to our mind, have any direct income implication. In Conclusion 5.1 The matter, thus, on a review thereof in its entirety (refer paras 4.1 to 4.8), in our considered opinion, comes to much ado about nothing. The different quantities/figure are not liable to be reconciled and, accordingly, no case for any reconciliation of different figures, or for any addition on the basis of the said categorizations, is accordingly made out, either toward excess physical or book stock. The 'excess' stock is, under the circumstances, only being so/notional. This, thus, answers Q.(a) & (b) at para 4.1 supra. The assessee, despite that it's books of account cannot be regarded as properly maintained, succeeds. The assessee, though, is advised to maintain proper records; much of the present mess, as we are constrained to describe the present imbroglio, arising for lack of the same, i.e., apart from the lack of proper presentation of facts and non-appreciation of the Rev....
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....counts (Rs. 40, say), i.e., Rs. 60. This is as the balance Rs. 40, though realized through sale, continues to be reflected in accounts, albeit does not represent an actual capital (of the reporting entity). This needs to be borne in mind, and once again emphasizes the need for bringing the accounts to actuals. The orders of the Revenue authorities are accordingly set aside, and additions deleted. 5.2 The case of Shobha Minerals (Dhamki), as was a common contention of the parties before us, is also the same. No separate arguments in it's respect were made. Rather, as we observe, while the average bulk density of finished good is 3.5, that with a lower density (2.5) (at 95, 613.45 MT), qualifying as waste, has also been included while computing the total finished good stock of 1,22,744.75 MT, in the MECL's report (PB-1, pg. 93). No separate adjudication for its' appeals is accordingly called for, and our adjudication for Shobha Minerals (Kevlari), shall equally apply to the appeals in relation to this assessee. 6. In the result, appeals of the assessees are allowed and the Revenue's appeals are dismissed. Order pronounced in the open court on February 24, 2020 ===========....