Assistant Commissioner of Income Tax Vs. Srj Peety Steels (P) Ltd. (ITAT Pune) – When noting incriminating was found in the course of search relating to any of the assessment years, the assessments for such years could not be disturbed; further, consumption of the electricity for the manufacture of mild steel ingots / billets depends on various factors and the AO did not attempt to establish a direct nexus between production and electricity consumed and therefore no addition was called for.
IN THE INCOME TAX APPELLATE TRIBUNAL
Pune Bench B, Pune
Before Shri Shailendra Kumar Yadav, Judicial Member
and Shri G.S. Pannu, Accountant Member
I.T.A. No. 975 to 981/PN/2008, A.Y. 2000- 01 to 2006- 07
Asstt. CIT Central Cir. Aurangabad Vs. SRJ Peety Steels pvt. Ltd.,
ITA No. 857/PN/2008 : A.Y. 2006-07 SRJ Peety Steels pvt. Ltd., Vs. Asst. CIT Cent. Cir. Aurangabad
ITA No. 968 to 974/PN/2008, A.Y. 2000-0 1 to 2006-07
Asstt. CIT Cent. Cir. Aurangabad Vs. Sri Om Rolling Mills Pvt. Ltd.,
ITA No. 856/PN/2008 : A.Y. 2006-07Sri Om Rolling Mills Pvt. Ltd., Vs. Asstt. CIT Cent. Cir. Aurangabad
The captioned 16 appeals relate to two assesses of the same group and are directed against commonly worded respective orders of the CIT(A) for A.Y. 2000-0 1 to 2006-07. ITA No. 975/PN/2008 to 981/PN/2008 are the appeals of the revenue in the case of SRJ Peety Steels Pvt. Ltd., and ITA No. 857/PN/2008 is the cross appeal of the assessee. Similarly, ITA No. 968/PN/2008 to 974/PN/2008 are the appeals of the revenue in the case of Sri Om Rolling Mills and ITA No. 856/PN/2008 is the cross appeal of the assessee for A.Y. 2006-07 only. Since it was the common point between the parties and that the facts and circumstances in both the assesses are similar, we pass a consolidated order for the sake of convenience and brevity.
2. Before we proceed to deal with the dispute involved in each appeal, it would be appropriate to briefly touch upon the background of the captioned dispute. Both the captioned assesses are private limited companies incorporated under the provisions of the Companies Act, 1956 and are inter alia engaged in the business of ingots/billets etc. In this case, a search action u/s 132 of the Act was carried out by the department at the business and residential premises of the Directors of the assessee-companies on 17-3-2006. As a consequence of such search action, the Assessing Officer has framed the impugned assessment in terms of section 153A of the Act (hereinafter referred to “Act” in short) for the captioned seven assessment years. The returns of income filed by two assesses in response to notices issued u/s 153A of the Act were subjected to scrutiny assessment u/s 143(3)/144 of the Act wherein the total income was determined at a higher figure than those returned. Against the additions made, the assessees carried the matter in appeal before the CIT(A). The CIT(A) allowed full relief in relation to A.Y. 2000-01 to 2005-06 and allowed partial relief in A.Y. 2006-07. In the assessment years 2000-01 to 2005-06 and 2006-07 the revenue is in appeal challenging respective reliefs allowed by the CIT(A) whereas the assessee in its cross appeal is contesting partial sustenance of addition by the CIT(A) in A.Y. 2006-07.
3. In this background both the parties had taken up for discussions the appeal in ITA No. 975/PN/2008 in the case of Sri SRJ Peety Steels Pvt. Ltd., for A.Y. 2000-01 to appreciate the controversy. In this background, we may now consider the dispute as mentioned in the aforesaid appeals.
4. Grounds of appeal of the revenue in ITA No. 975/PN/2008 for A.Y. 2000-0 1 are as under :
“1. Whether on the facts and in the circumstances of the case the CIT(A) was justified in deleting the addition at Rs. 3,41,454/- on account of suppressed profit.
2. On the facts and in the circumstances of the case whether the CIT(A) was justified in holding that the rejection of the books of accounts was not valid inspite of there being clinching evidence that the books of accounts are defective. “
5. The main issue involved is the addition made by the Assessing Officer on account of alleged suppressed production. The said addition has been made uniformly in all the seven assessment years in respect of both the aforesaid companies. The Assessing Officer on the basis of certain factors came to the conclusion that the books of accounts in respect of both the companies, maintained by the respective assessees for each years covered by proceedings u/s 153A are not reliable and consequently he invoked section 145(3) of the Act and rejected the books of accounts for all the years under consideration. Having rejected the books of account, the Assessing Officer devised a statistical formula on the basis of electricity consumption that was applied uniformly in order to work out certain production and resultant concealed income in the case of both the companies for each year under consideration and made certain additions on the said count. The matter was carried before the first appellate authority wherein the assessee raised following issues:
“1. The genesis of rejection of books of accounts – whether justified and reasonable.
2. Whether statistical formula, based on electricity consumption, can be applied uniformly to he production unit for each year, without taking cognizance of other factors, playing a vital role in any production unit, and that are subject to variation due to some inherent and some extraneous factors as well.
3. Whether inference and conclusions drawn by the Assessing Officer about suppressed production of the company draw support from/get substantiated by any other corroborative evidence, such as unexplained assets or expenditure, investment, etc.
4. Whether, in the instant case, framing and passing of assessment orders u/s 144 of the Act is correct and justified.”
6. The Assessing Officer observed that the assessee has consistently incurred business losses inspite of increase in turnover. Hence, the books of accounts submitted by the assessee and those seized on CD format were examined. The stand of the assessee was that the books of accounts of the assessee for all these years are statutorily audited under the Companies Act, 1956 and Income-tax Act, 1961. The records of the company are audited under the Companies Act, 1956, Income-tax Act, 1961. The cost records of the company are audited u/s 234B of the Companies Act,1956. The Excise records are audited at regular intervals by the personnel of the Central Excise Department. On the spot verification of stocks are carried at frequent intervals by the Excise Officials, Year and Stock Audit is carried by the bank officials, by an external agency. The Assessing Officer did not consider these relevant facts and has relied only on the fact that the assessee had incurred losses which, as submitted above, are completely out of context in the matter of computation of income.
The financial results of the assessee are as follows:
|A.Y.||Profit before depreciation||Net profit
|Taxable profit after set off b/f business loss|
7. From the above table, it was stated that each year the assessee had sufficient net profits which were not considered by the Assessing Officer. The losses incurred by the assessee cannot the sound basis for rejection of books of accounts. The Assessing Officer ought to have appreciated that incurring of loss is a normal incidence of business as incurring of a profit and there is nothing in law that a businessman should always incur profit.
8. The second observation of the Assessing Officer for rejection of books of account relate to unaccounted stock. The allegation of the Assessing Officer for rejecting the books of account that during the search action at Dhanlaxmi Sponge Iron, the Managing Director of the company had offered Rs. 25 lakhs as undisclosed income on account of excess stock for A.Y. 2006-07. According to the assessee, the inception of Dhanlaxmi Sponge Iron was during A.Y. 2005-06 and its production had begun from 30-6-2005. The Assessing Officer was not justified in rejecting the books of accounts for A.Y. 2000-0 1 to 2005-06 on the basis of events occurring during A.Y. 2006-07. Thus, the Assessing Officer failed to consider the reply furnished by the assessee vide submission dated 28- 12-2007. For the sake of brevity, the written submissions dated 28-12-2007 is reproduced as under:
“In case the Dhanlakshmi sponge Iron a unit of SRJ Peety Steels (P) Ltd. There was no difference in the quantity of the sponge iron found and mentioned in the stock register as alleged in your above mentioned show cause notice. The opening stock on 17-3-2006 as per the stock register was 84,780 MT and that found was also 84,780 MT. There was no difference in the raw material i.e. iron ore also which was 51581.700 MT as per the stock registers maintained. Practically speaking the weighment of the said stock of iron ore by us also would have taken more than 15 days as the same should have been loaded in trucks, weighed and then the weighed truck unloaded and unloaded again for weighing the same.”
9. In this background, the stand of the assessee is that the authorized officers present in the premises of Dhanlakshmi Sponge Iron were reluctant to go through the laborious and time consuming process involved in a systematic stock checking, they persuaded the Managing Director for a handsome declaration on account of stocks. Accordingly, an amount of Rs. 27 lakhs was offered for taxation on account of 3525.690 MT iron ore and Rs. 4 lakhs approximately on other accounts. The declaration should be judged from the following angles.
“i). There was a departure from the set procedure for stock valuation which are normally carried out in the course of survey and search to find out unaccounted stock. There was no stocktaking, no drawing of the trading account on the date of search to find out either deficit or excess stock to draw an adverse conclusion against the appellant. ii) Merely because the appellant agreed to declare the amount without any specific infirmity having been noticed in the books by the officers of the department, cannot be a ground for rejection of books. Taxability of an amount has to be determined by the department in accordance with the provisions of law but not otherwise. There could be thousand and one reasons for offering some amount for taxation which is quite usual in course of survey and search. The department is no stranger to the same. But that could not be a reason for rejection of books under section 145 of I.T. Act which stipulates specific conditions. In the case of the appellant, the amount was declared to buy peace of mind and settle the matter as would be evident from the course of events and the admitted income was shown under the head ‘other sources’ for A.Y. 2006-07.”
The Assessing Officer has assumed unaccounted production and sale on the basis of some notings in the loose slips found at the residence of Shri Shantilal where all the members of Peety family reside. With regards to loose papers found in he possession of Shri Surendra S. Peety the relevant question and answer is reproduced as under:
“Q.5: I am showing you the answer of Sri Jitendra S. Peety to Q.No. 11 of the statement dated 18-3-2006 in which on many of the documents he has stated that his brother
Surendra Peety will provide the necessaryexplanation. Please go through the relevant documents and furnish your say.
Ans.As I have already stated earlier, I have just started dealing in M.S. Rounds, MS ingot and Coal. Paper AT No. 3 to 92 are related to the said trading. The total of the sales recorded on these papers are as follows:
|Credit sale||Wt.(MT)||Amt. Rs.|
I offer the G.P @ 1.5% on the above sales at Rs. 1,50,000/- approx. as the undisclosed income from the said source. The entire purchase as well as sales are on credit basis and as and when payment is received from the debtors, payment to the creditors will be made.”
10 In this background, it was submitted that though the premises of the companies were searched, not an iota of evidence regarding unaccounted production was found to indicate that the bars and ingots represent unaccounted production of the assessee M/s. SRJ Peety Steels Pvt. Ltd., which is a separate assessable entity, whose accounts are statutorily audited by various authorities. As the notings on the said papers were accepted by Sri Surendra the income from the same was returned by him in his return of income for the assessment year 2006-07 filed in compliance to the notice u/s 153A and the tax due on the same was also paid. Without prejudice to the above, the stand of the assessee was that in A.Y. 2006-07 the assessee was entitled to carry on trading of those commodities and the business was in nascent stage when the search took place. Consequent to search, there was total disruption of the business and the same could not take off as the suppliers as well as the customers were not interested in co-operating with Sri Surendra and hence the business was discontinued. The assessee could not confirm the transaction as the parties with whom he had dealings were reluctant to come forward after search. In this background, the stand of the assessee was that any stock found during the course of search in its business of manufacturing of ingots iron cannot be the sound basis for rejecting the books of accounts of the earlier year in which the business was on different kind. So the evidence relating to one year differently placed cannot be imported for the earlier years.
11 Another reason for rejection of books of account related to advance taken. These advances were unsecured loans taken by the assessee during A.Y. 2005-06. The stand of the assessee was that all unsecured loans taken during A.Y. 2005-06 were in fact squared up in A.Y. 2006-07. These loans do not pertain to A.Y. 2000-01 to 2004-05. All these transactions are recorded in the books. So, it was not justified to reject the books of account for A.Y. 2000- 01 to 2004-05 on the basis of advances pertaining to A.Y. 2005-06. In this regard, the assessee further relied on the written submissions dated 28-12-2007 discussed above. The stand of the assessee that the Assessing Officer did not consider that the issue of the cheque and the presentation of the same does in no way affect the profitability of the company but it only shifts the liability from that of the unsecured loan to Dena Bank which is a secured loan. It was submitted without prejudice to the fact that the assessee filed confirmation of accounts with the loan creditors. Thus, the regular transaction cannot be construed as a defect to reject the books of account.
12 Another basis for rejection of books of account that during scrutiny of records of Dhanlaxmi Sponge Iron, certain cash payments were found to have been made to raw material creditor – Bhatia International, Indore. According to the assessee, these were all accounted payments during the previous year 2005- 06. The inception of Dhanlaxmi Sponge Iron was during A.Y. 2005-06 and its production had begun from 30-6-2005as stated above. Therefore, the Assessing Officer was not justified in rejecting the books of accounts for A.Y. 2000-0 1 to 2005-06 on the basis of events which occurred during A.Y. 2006-07.
13 Another basis for rejecting the books of account by the Assessing Officer is that the consultancy charges were paid without deducting tax at source for assessment year 2006-07. The stand of the assessee in this regard is that these payments were made for services rendered to Dhanlaxmi Sponge Iron. As stated earlier, the inception of Dhanlakshmi sponge Iron was during A.Y. 2005-06 and its production had begum from 30-6-2005. The Assessing Officer was not justified in rejecting the books of accounts for A.Y. 2000-01 to 2005-06 on the basis of events occurred during A.Y. 2006-07. The Assessing Officer failed to consider the submissions of the assessee dated 28-12- 2007 as mentioned as above that the payments made on account of consultancy fees to various persons on which no tax was deducted at source, has been added back in the computation of income for the A.Y. 2006- 07 and the same has been claimed as an expenditure in the year during which the said tax was duly paid. It has no sound basis for rejection of books of account. The stand of the assessee was that for computation of income there are separate provisions in the statute without any overlapping. Therefore, the provisions of section 145 cannot be imported for any infringement of another section on a different context.
14 Another ground for rejection of books of accounts was the excessive claim of burning loss. In this background, it was submitted that the assessee failed to consider the detailed reply given by it on variations in burning losses vide written submissions dated 22- 10-2007 which was not dislodged by the Assessing Officer The minimum of burning loss reported by the assessee during all the years was 1.73%. The Assessing Officer considered the burning loss of 2.46%/2.08% as reasonable and has arithmetically worked out the value of burning loss in excess of2.46%/2.08%. The Assessing Officer failed to appreciate the comparable results of similarly placed situation before reaching to the conclusion of excess burning loss.
15 Another reason for rejection of books of accounts was unaccounted purchases of stores and spares. The Assessing Officer referring to certain loose papers found during the search at the residential premises of shantilal G. Peety and purported to pertain to purchase of stores and spares. The stand of the assessee in this regard was that there is no evidence that alleged purchase of stores and spares was actually made by the assessee, SRJ Peety Steels Pvt. Ltd. Therefore, the same could not be made the basis for rejecting the books of accounts of the assessee company in absence of evidence on record. Without prejudice to above, it was stated that the assessee has offered an additional income/undisclosed expenditure for A.Y. 2006-07, Rs. 3,46,000/- for A.Y. 2006-07 for purchase of stores and spares of M/s. Dhanlaxmi Sponge Iron. The inception of Dhanlaxmi Sponge Iron was during A.Y. 2005-06 and its production had begun from 30-6-2005. Therefore, the Assessing Officer was not justified in rejecting the books of account for A.Y. 2000-01 to 2005-06 on the basis of the events occurred during A.Y. 2006-07. The books of account could not be rejected on mere defects pertaining to an isolated area and if any stray defect is noticed the assessment can be cured to the extent of such defects. Moreover after the assessee has offered the amount for taxation on this account primarily motivated by a desire to settle the matter to avoid protracted litigation. So it cannot be the sound basis for drawing an adverse conclusion with regards to all other years in which this issue was not cropped up.
16 Another reason for rejecting the books of account is inconsistent electricity consumption. In this regard, the stand of the assessee was that the Assessing Officer has simply taken the lowest electricity consumption for a month in the whole year and treated the production in that month as the correct production and then proceeded to arrive at the production figure by multiplying the production in the books by the ratio of production to the electricity consumption for the month in which electricity consumption was minimum. The method of computing the so-called suppressed production is not based on cogent reasons. The Assessing Officer has gone by supposition but not by actual detection which is not justified. The entire method in this regard is based on pre-supposition and lacks scientific basis. The Assessing Officer has failed to examine the entire manufacturing process carried out by the assessee. He has not gone into the quality of raw materials, nor has he bothered to take the type of technology used by the assessee. The Assessing Officer has also not taken strength from comparable case of similarly placed situation. The factors responsible for variation in electricity consumption have been explained by the assessee in his detailed written submissions dated 22-10-2007 where the main points of the same are reproduced as under:
“Improper supply by MSEB, which deficits the melting efficiency, lower the voltage supply level, higher the consumption of electricity. Notably, voltage supply varies on a daily basis which would at once be clear if some comparable cases had been studied by the Assessing Officer before jumping to conclusions.
Reheating of the material due to the interruptions in supply, when the heat is in process and there is an interruption in supply, the raw material has to be heated again using electricity though the same was used earlier, without giving the final product. Notably supply is notoriously erratic in a place like Jalana, which would at once have been clear if some comparable cases had been studied by the Assessing Officer before jumping to hypotheses and conclusions.
Reheating of the material due to the breakdown in equipment or machinery which is quite usual in a manufacturing process : when the heat is in process and there is a breakdown in equipment or machinery, the raw material has to be heated again using electricity though the same was used earlier, without giving the final product.
To manufacture the final product number of machines have to be used and unexpected breakdown of any one machine consumes electricity again.
Reprocessing due to metallurgical reasons and quality control, changes in the settings of the generator panel.
The Assessing Officer rejected the submission by saying that there would be equal probability of the above factors in every month. This is difficult to understand.
The Assessing Officer has not examined the issues in detail; instead he says in para 8.4 of his order: “A look at the details compares monthly electricity consumption…”. Had the Assessing Officer gone into the reasonableness of the explanation and technical details adduced by the appellant instead of merely evaluating the technical issues in a casual and isolated manner with a cursory look into monthly electricity consumption without any support from other comparable cases, his conclusions would have been significantly different.
It may also be seen that Assessing Officer has himself agreed that there may be factors outside the control of appellant which may affect electricity consumption. However, he makes an allowance of 10% over and above the lowest monthly consumption in the year. The basis of allowing this over the lowest monthly consumption in the year is not scientific and therefore arbitrary. Further, even the basis of arriving at this 10% has not been spelt out by the Assessing Officer”
17 In this background, the CIT(A) called for a remand report and the Assessing Officer has submitted his remand report inter alia in his remand report has justified the reasons for rejection of books of accounts on the ground of
(a) unreliable books of accounts;
(b) unaccounted production and sale;
(c) inconsistency in the electricity consumption;
(d) furnishing of wrong/incorrect particulars and mis0 representation of facts during assessment proceedings;
(e) unaccounted purchases of stores and spares; and (f) inconsistent burning loss.
After rejecting the books of accounts, the Assessing Officer determined the suppressed production. Since the electricity was the major raw material outside the control of the assessee, it was considered the basis for determining the suppressed production as mentioned in the following chart.
|Month||Production MT||Electricity consumption||Units/MT||Difference in
electricity consumption per MT of TMT Bars
production (Taking the lowest PMT
|Expected Production||Suppressed production|
18. The per metric tons electricity consumption shown by the assessee was taken as the basis for calculation of excess production, e.g. in the above mentioned table it was observed that 1688 units per MT is the lowest per metric ton consumption. Therefore, taking 1688 as the basis for the yearunder consideration i.e. 2005-06 (A.Y. 2006-07) the expected production was worked out for the remaining 11 months. The formula is given as under:
Expected production for the month = No. of units consumed in the month divided by PMT consumption in the lowest month during the year.
G. No incriminating material whatsoever has been found as a result of search in respect of AY 2000-0i to 2005-06, hence Assessing Officer’s suspicion and apprehensions with regard results reflected in the books of accounts, holding the same as not reliable, are held as misplaced and ill founded.
H. As a result of no evidence in respect of AY 2000-0 1 to 2005-06 of suppressed production, additions on account of the same in these years are deleted in toto.
I. Addition on account of suppressed production in AY 2006-07 is worked out on the basis of seized material inventoried as A/1, dated 15th and 16th March 2006, and figures are taken for the entire year of 300 working days.
J. The addition thus worked out is Rs.75,05,160/- (GP).
K. The appellant made alternate plea for giving benefit of telescope vis-à-vis surrender of income on account of manufacturing items made by it at the time of search valuing Rs. 51,52,257/- on which taxes were duly paid.
L. Appellant’s request for telescope is found reasonable and accepted, drawing support from the decision in the case of Rameshwar Lal Soni vs. ACIT of Jodhpur, ITAT, Third Member (cited supra) which, in turn, relies on the judgment of Hon’ble Supreme Court of India in the case of Anantharam Veersinghaiah & Co. Vs. CIT (cited supra). Thus net addition on account of suppressed production remains at Rs. 23,53,160/- only.
M. Appellant’s contentions, agitating application of section 144 in its case, are accepted as application of section 144 is not found tenable, on the basis of facts, and also in the eyes of law.
N. Appellant’s ground of appeal related to charging of interest is dismissed for all the years under consideration.
Appellant’s request for intervention at the stage of initiation of penalty u/s 27 1(1)(c) is dismissed for all the years under consideration.”
21. The revenue has opposed the relief granted by the CIT(A) while the learned AR opposed the sustenance of addition made by the Assessing Officer The learned Dr made detailed submissions in this regard and he took us through various details of the paper book to strongly support the order of the Assessing Officer On the other hand, the learned AR contended that the Assessing Officer was not justified in rejecting the books of account on various count. He drew our attention to every point of rejection of books of account and also opposed the addition made by the Assessing Officer as discussed above and practically supported the order to the extent the relief granted by the CIT(A) and opposed the order of the CIT(A) to the extent additions are sustained by him.
22. After going through the rival submissions and material on record, we find that the assessee is a private limited company incorporated under the Companies Act and is engaged in the business of ingots and billets used for production of MS bars and TMT bars. The major input component in the manufacturing of mild steel ingots/billets after mild steel scrap is electricity. The Mild Steel scrap is introduced in a furnace which with the help of electricity is transformed into liquid metal which is then cast into ingots/billets by pouring the liquid in the moulds. Dhanlakshmi Sponge Iron is a branch of SRJ Peety Steels Pvt. Ltd. Where sponge iron is also manufactured.
23. The returns of income for A.Y. 2000-0 1 to 2005-06 were duly filed us 139(1) of the Act accompanied by all requisite documents such as form 3CA, 3CD under the provisions of section 44AB of the Act. The said returns were processed u/s 143(1) of the Act and no defects therein were pointed out. In this regard, the main emphasis of the assessee was that the books of accounts of the assessee for all these years were statutorily audited under the Companies Act, 1956 and the Income-tax Act 1961. Copies of the audited accounts for all the years under consideration are attached as pages 1-216 of the paper book. The cost records of the company are audited u/s 233B of the Companies Act, 1956. Copies of the audited reports for all the years under consideration are attached as pages 217 to 416 of the paper book and claimed to be certified before the authorities below. According to the assessee, the excise records are looked into at regular intervals by the personnel of the Central Excise Department. Copies of the audited excise records for all the years under consideration are attached as pages 413 to 417 of the paper book and claimed to be certified before the authorities below. On the spot verification of stocks are carried at frequent intervals by the concerned Excise Officials. Year end stock audit is carried by the concerned Bank Officials by an external agency. Copies of the stock audit report for all the years under consideration are attached as pages 418 to 499 of the paper book and certified to be filed before the authorities below. Sales-tax assessments have been carried on regularly and from the A.Y. 2006-07, audit report u/s 61 of the Maharashtra Value Added Tax Act, 2002 has also been filed. Copies of the sales tax assessment order for the earlier years and MVAT audit report for A.Y. 2 006-07 are attached as pages 500 to 542 of the paper book and again claimed to be certified before the authorities below and not disputed by the learned DR.
24. As discussed above, a search was conducted in the residential and business premises of SRJ Peety group, Jalna on 17-3-2006. Consequently notices u/s 153A were issued for all the years under consideration and the returns of income were filed on 29-8-2006 declaring NIL income for each year.
25. As stated above, certain papers were found at the residence of Shri Shantilal J. Peety inventoried as annexure A1 which contained the details of sale of TMT bars of different dimensions and ingots on 15th and 16th March 2006. Shri Surendra S. Peety stated that these papers belong to trading transaction in TMT bars and ingots in his individual account. The income from the same was returned by him in his return of income for A.Y. 2006-07 filed in compliance to the notice u/s 153A and the tax due on the same was also paid.26. The Assessing Officer mainly relying on the events occurring in A.Y. 2006-07 in case of Dhanlaxmi Sponge Iron and considered it the base for rejecting the books of accounts of SRJ Peety Steels Pvt. Ltd. For A.Y. 2000-0 1 to 2005-06. All along the stand of the assessee has been that the unaccounted stocks, advances taken, cash payments on accounted expenditure, No TDS on consultancy charges and unaccounted purchase of stores and spares cannot form the basis for rejecting the books of accounts of SRJ Peety Steels Pvt. Ltd. For A.Y. 2000-0 1 to 2005-06 as these issues were related to Dhanlaxmi Sponge Iron for A.Y. 2006-07. These matters were dealt in detail by the assessee in its submission dated 28-12-2008. The copy of the said written submission is placed at pages 613 to 635 of the paper book certified to be before the authorities below. The stand of the assessee is that Dhanlakshmi Sponge Iron was established in the A.Y. 2005-06 and had commenced production only on 30-6-2005, so rejecting the books of SRJ and that too for a period before the commencement of production is not justified. Another reason for rejecting the books of the assessee as per the Assessing Officer was that it had constantly incurred business losses inspite of the increase in turnover. In this regard, the stand of the assessee has been that the assessee had sufficient net profits which have been overlooked by the Assessing Officer Without prejudice to the above the stand of the assessee has been that even otherwise even if an assessee continuously incurs losses which are duly supported by his books that cannot be the reason for rejection of the books vis-à-vis addition in question which is subject matter of these appeals
27. Having convinced that the assessee company indulges in unaccounted production and sale, the Assessing Officer went on to compute the suppressed production on the basis of electricity consumption for all the years under consideration. He has simply taken the lowest electricity consumption for a month in the whole year and treated the production in that month as the correct production and then proceeded to arrive at his production figure by multiplying the production in the books by the ratio of production to the electricity consumption for the month in which electricity consumption was minimum. There may be various factors excess consumption of electricity. The consumption of electricity depends on quality of raw material used for ultimate finished production and the consumption of electricity is also affected by irregular supply of electricity. Sometimes, there is break in electricity supply. In case of such break down in the supply of electricity while the above raw material is already in the furnace, the consumption will automatically increase because same raw material would be heated twice for making the finished products by consumption of electricity. This aspect of the excess consumption in the above said manner in the business of steel manufacturing has not been duly considered by the Assessing Officer As discussed above, vide order u/s 144 r.w.s. 143(3) of the Act on 31-12-2007 for A.Y. 2006-07inter alia the Assessing Officer made an addition of Rs. 3,60,57,000/- on account of suppressed profits. For the A.Y. 2000-0 1 to 2005-06 the assessment was made u/s 153A r.w.s. 144 of the Act making the following additions.
|Amount of addition (Rs.)|
28. The CIT(A) has allowed the appeal of the assessee for A.Y. 2000-0 1 to 2005-06 by holding that the rejection of books of account for these years is not justified. The CIT(A) rightly observed that simply because there are variation in monthly consumption of electricity the Assessing Officer was not justified in rejecting the books of account for earlier years and computing the suppressed production on this basis alone. At the same time, he extrapolated sale figures pertaining to only two days as mentioned in the aid seized paper and determining the sales for the whole year pertaining to A.Y. 2006-07 of 300 days at Rs. 36,25,68,150/- and determining the profit on the same at Rs. 75,05,116/-. This addition has been made by invoking the provisions of section 1 53A read with section 144 of the Act.
29. Let us analyze the provisions of section 153A of the Act which applies to a person in respect of whom a search is initiated under section 132 of the Act or whose books of account, other documents or any assets are requisitioned under section 132A after May 31, 2003. The second proviso to seciton 1 53A makes it clear that assessment or reassessment relating to any assessment year falling within the period of six assessment years pending on the date of initiation of the search under section 132 or requisition u/s 132A shall abate. In other words, if on the date of initiation of search or requisition u/s 132 or section 132A any assessment or reassessment proceeding is initiated relating to any assessment year falling within the period of six assessment years, it shall stand abated and the assessing authority cannot proceed with such pending assessment after initiation of search or requisition as the case may be but assessment or reassessment can be done under section 1 53A of the Act in cases of completed assessments or in cases where assessments have not been framed due to non-filing of returns etc. For the above mentioned assessment years assessment can be made under section 1 53A on the basis of entire material including that found during course of search. The word ‘abatement’ means the act of eliminating or nullifying or suspension or defeat of a pending action.
30. We find that the CBDT circular dated 15-9-2003 explained the scope and effect of new assessment proceedings in search cases i.e. section 153A to 153C in paras 65.5 to 65.11 , relevant portions of which are reproduced below: 65.5 The Assessing Officer shall assess or reassess the total income of each of these six assessment years. Assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years pending on the date of initiation of the search under section 132 or requisition under section 132A, as the case may be, shall abate. It is clarified that the appeal, revision or rectification proceedings pending on the date of initiation of search under section 132 or requisition shall not abate. Save as otherwise provided in the proposed section 153A, section 153B and section 1 53C, all other provisions of this Act shall apply to the assessment or reassessment made under section 153A. It is also clarified that assessment or reassessment made under section 1 53A shall be subject to interest, penalty and prosecution, if applicable. In the assessment or reassessment made in respect of an assessment year under this section, the tax shall be chargeable at the rate or rates as applicable to such assessment year.
65.6 The new section 153B provides for the time limit completion of search assessments. It provides that the Assessing Officer shall make an order of assessment or reassessment in respect of each assessment year, falling within six assessment years under section 1 53A within a period of two years from the end of the financial year in which the last of the authorizations for search under section 132 or for requisition under section 132A was executed.
65.9 The new section 153C provides that where an Assessing Officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belong or belongs to a person other than the person referred to in section 1 53A, then the books of account, or documents or assets seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed against such other person and issue such other person notice and assess or reassess income of such other person in accordance with the provisions of section 153A.”
31. In the present case, the search was initiated on 17-3-2006 in the residential and business premises of SRJ Peety group, Jalna covering the premises of the assessee company as well. Prior to the search, the returns of income for the A.Y. 2000-01 to 2005-06 had already been filed u/s 139(1) of the Act accompanied by the all requisite documents and proceeding u/s 143(1) of the Act stood completed. During the course of search no incriminating materials were found relating to aforesaid years which could have been added back in the proceedings u/s 153A. The details regarding the consumption of electricity for the production for each of the year under consideration was very well placed before the authorities below in the Director’s report of each year. The same has not been disputed by the revenue. The tax audit report also contained the unit production of each year which was accepted year after year along with the returns and no query was ever raised by the department. The following chart shows the year-wise production vis-à-vis electricity consumption which has been placed before the authorities below along with the returns for each year.
|A.Y.||Electricity Consumption||Production (M.T.)||Year average consumption Units
33. In view of above factual and legal position we find that the additions in question in A.Y. 2000-0 1 to 2005-06 are not corresponding to the seized material found during the course of search. The relevant income-tax returns for said years were filed prior to the search in normal course disclosing the particulars of subject matters were already on record. The returns have already been accepted and no assessment as such could be said to be pending on the date of initiation of search and abated in light of the provisions of section 1 53A.34. Without prejudice to above, with regards to invoking the provisions of section 145 of the Act, according to which in case the Assessing Officer is snot satisfied about the correctness or completeness of accounts of the assessee or where no method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144. Section 145 gives the power to Assessing Officer to reject the book in certain circumstances after considering the following aspects.
(a) Whether the assessee has regularly employed a method of accounting?
(b) Whether the annual profits can be properly deduced from the method employed?
(c) Whether the accounts maintained are correct and complete?
35. Without prejudice to above, we find that having rejected the books of accounts of the assessee company for all the years under consideration, the AO devised a statistical formula on the basis of electricity consumption that was applied uniformly in order to work out certain production and resultant concealed income for each year under consideration. The Assessing Officer could not substitute the same by cogent reasoning. He has simply taken the lowest electricity consumption for a month in the whole year and treated the production in that month as the correct production and then proceeded to arrive at his production figure by multiplying the production in the books by the ratio of production to the electricity consumption for the month in which electricity consumption was minimum. The method of computing the so called suppressed production is not justified in absence of sound basis for same.
36. The consumption of the electricity for the manufacture of mild steel ingots/billets depends on various factors like quality of raw material which is the major input, voltage of the supply, power’ interruptions, mechanical and electrical ‘breakdowns and the chemical compositi9n of the liquid metal which has to be finally cast into ingots/billets. The Assessing Officer failed to appreciate these facts and did not attempt to establish a direct nexus between the production and electricity consumed for the manufacture of Round/TMT Bars and arrived to a conclusion that there is an excess consumption of electricity resulting in suppressed production and alleging that the assessee company has indulged in unaccounted production.
37. None of the evidence collected as a result of search or detected during the course of assessment pertains to the A.y”s 2000-0 1 to 2005-06. It is an accepted fact that each year of the assessment is independent and evidences found relating to A. Y. 2006-07 cannot have an adverse impact on the assessments of the assessee company from the A.y”s 2000-01 to 2005-06. Therefore, rejection of books for these years purely on the ground that there has been divergence in the consumption of electricity and application of Section 144 is not at all justified. Accordingly additions have rightly been deleted in A.Y. 2000-0 1 to 2005-06 in both the cases.
38. Appeals of the assesses for A.Y. 2006-07
During the course of search at the residential and business premises of SRJ Peety Group, Jalna on 17.03.2006, and on the basis of certain papers found at the residence of Shri Shantilal 1. Peety (where all the members of the Peety group reside) inventoried as Annexure A-I pertaining to the trading business of Sri Surendra S Peety, it was observed that the assessee company indulges in unaccounted production and sales of TMT bars and Ingots outside its books of accounts. List of the Inventory of papers found in the residential premises of Peety Group marked as Annexure-l on the basis of which Sales figures were extrapolated are attached as Pages 724-796 of the Paper Book.
39. The addition was calculated at Rs. 75,05,160 for the A.Y. 2006-07, being the gross profit on suppressed production, which was worked out on the basis of seized material inventoried as all and the figures were taken for the entire year of 300 working days. The addition was then telescoped to Rs. 23,53,160/1 by allowing Rs. 51,52,257/- which the appellant company had voluntarily offered as undisclosed income on account of stores and raw materials. Being aggrieved by the said order of the Ld. C.I.T.(A), the appellant is now in appeal before us regarding the addition made on account of suppressed production.
40 In this regard, the contents of these papers are summarized in the table below:
|2.||Letter from supplier to company Not relevant|
|3,4||Report of sales deliveries of MS Bars w.r.t. Truck No, Gross weight, Tare weight, Net weight, Date|
|5.||Report of sales qty. in Bundles dated 16-3-06|
|6.||Report of Sales w.r.t. Size, Qty. Bundles|
|7.||Details of other parties weighments done at SRJ Scale
|8.||Single Line Page – Sales Register
Sale date 15-3-06 to 16-3-06 and Qty. –
|9-13||Sales register print w.r.t. Sale No. vehicle no. party name, Bundle, size, qty. rate|
|14||Written memo of sales to party of scrap|
|15-26||Weighment slip of sales|
|27||Components of various metals and non
|2 8-34||Weightment slip of sales|
|35||Coversheet of weightment slips|
|3 6-92||Weighment slip of sales|
|93||List of exhibits – not relevant|
|94-95||Blank cheques – not relevant|
|96||Bank balance of HDFC A/c of companies|
|9 7-99||Rough working of orders|
|100||Copy of Dena Bank DD|
|101||Chemical composition details|
|102||Budgeted expenditure on employees|
|103||Details required for audit|
|104-105||Unaccounted purchases of stores offered to income in SRJ
Peety steels Pvt. Ltd.
|106||Copy of page 100 (repeated)|
41. These papers were found in the bedroom of Sri Surendra S Peety who accepted the notings on the said paper and stated that these papers belong to his trading transaction in TMTbars and ingots in his individual account. The income from the same amounting to Rs. 1,50,0001- was returned by him in his return of income for the A.Y. 2006-07 filed in compliance to the notice u/s 153A and the tax due on the same was also paid. The trading income as per the quantity summed from loose sheets offered in case of Shri Surendra Peety for A.Y. 2006-07 is as follows:
42. These loose sheets primarily contain the weighment slips of goods, copies of the Sales register, some notings about in comings and report print. The Assessing Officer has taken the total quantity and multiplied it with the average rate to arrive at a decision that there have been suppressed sales of goods worth Rs. 98 lakhs. In appeal, the CIT(A) with regards to suppressed production in case of assessee for A.Y. 2006-07 observed that in earlier years i.e. A.Y. 2000-0 1 to 2005-06 a statistical formula based on electricity consumption cannot be adopted as it gives unscientific result that is far from reality on the ground level. The CIT(A) already observed that resorting to such a formula has resulted in abnormally high pitched assessments. At the same time, the CIT(A) observed that incriminating material recovered from the premises of family member showing purchase and sale of items, outside books, that are produced by both the concerns cannot be ignored. Accordingly, said seized documents were examined, analyzed and utilized for working out undisclosed income of the assessee for A.Y. 2006-07. As observed above, the CIT(A) did not accept Shri Surendra Peety’s contention earlier that the said document related to his personal business of trading in the items that are actually produced by these two companies of the group. The CIT(A) also did not accept Shri Surendra Peety’s surrender of Rs. 1,50,000/- in his personal assessment on account of the same. The figures of purchase and sale reported on the said document are taken as production of the two companies outside their books of accounts. The figures are for two dates, i.e. 15th and 16th March 2006. the same are extrapolated for the entire year as there is a strong presumption that this kind of unaccounted production and sale was there throughout the year, more so when expansion of the unit had also been completed in A.Y. 2005-06. The period taken for calculation of unaccounted production is 300 days for each company because that is the normal working period in the entire year. Thereafter GP rate as declared in the audited books was applied to work out unaccounted income. The working in this regard is given hereunder.
1. SRJ Peety Steels Pvt. Ltd.
Sale of 2 days Value for 2 days Qty. for 300 days Sale value (Rs.)
119.020 MT Rs. 24,17,121/- 17860.50 MT 36,25,68,150
2. Shree Om Rolling Mills Pvt. Ltd.
Sale of 2 days Value for 2 days Qty. for 300 days Sale value (Rs.)
313.315 MT 74,85,836 46,997 112,27,25,400
Sale value (Rs.) Gross profit Gross profit (Rs.)
SRJ 36,25,68,150 2.07% 75,05,160/-
SOM 112,27,25,400 1.87% 2,09,94,965/-
43. Thus taking the overall view of undisclosed income of the assessee by working at Rs. 75,05,116/- based on the evidence found during the course of search, the addition of Rs. 3,60,57,000/- in A.Y. 2006-07 in the case of SRJ was restricted to Rs. 75,05,116/-. Regarding telescopy, it was observed that following disclosures have been made by the assessee.
(i) Rs, 13,35,322/- Stores
(ii) Rs. 36,66,935/- Items in Dhanlaxmi
(iii) Rs. 1,50,000/- Declaration by Surendra Peety on the basis of seized documents
Rs. 51,52,257/- Total
were surrendered by the assessee on the day of search have been taken into books of accounts and they form part of the manufacturing and trading account of the assessee. Therefore, only GP should be worked out on the amount of undisclosed production (supra) and the surrenders made on account of above items should be telescoped into. In the light of the above mentioned surrender and proposal for addition on account of suppressed production on the basis of A/i, the CIT(A) observed that the funds are available from intangible additions (suppressed production) made in its case by the A.O were sustained in the appeal. In view of disclosure in the hands of the company/individual has to be taken for telescoping with regards to other additions or surrender that are otherwise called for on the basis of seized material. The CIT(A) was therefore of the view that the intangible addition on account of suppressed production made in the case of assessee was available in the form of fund to the assessee for rotating the same in incurring the expenditure/investment in raw material/stores for which separate addition/surrender of Rs. 36,66,935/- and Rs. i3,35,322/- for material and stores respectively was made. Since the assessee has voluntarily surrendered these amounts and paid taxes thereon, its request for telescoping the same into the intangible addition sustained on account of suppressed production was found reasonable by the CIT(A). In addition to the same, declaration made by Shri Surendra Peety of GP on account of the same seized document A/i also needs to be set off against the addition sustained. Accordingly, net addition of Rs. 23,53,i60/- (Rs. 75,05,ii6/- minus Rs. 5i,52,257/-_ was sustained which is a reasoned finding of the CIT(A) needs no interference from our side. Similar relief granted in the case of Shree Om Rolling Mills Pvt. Ltd., based on same facts is also upheld. We uphold the same. It is pertinent to mention here that all the cases relied upon by the parties have been taken into consideration though the same have not been specifically discussed.
44. In the result, the appeals of the revenue for all the years are dismissed and assessee’s appeal for a.y. 2006-07 in both the cases are also dismissed.
Order pronounced on the 30th November 2010.