TMI Blog2010 (11) TMI 649X X X X Extracts X X X X X X X X Extracts X X X X ..... day of search have been taken into books of accounts and they form part of the manufacturing and trading account of the assessee - In view of disclosure in the hands of the company/individual same has to be taken for telescoping with regards to other additions or surrender that are otherwise called for on the basis of seized material - 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) - Appeal is dismissed - ITA Nos. 975 to 981/Pn/2008, ITA No. 857/Pn/2008, ITA Nos. 968 to 974/Pn/2008, ITA No. 856/Pn/2008, - - - Dated:- 30-11-2010 - Shailendra Kumar Yadav, G.S. Pannu, JJ. A.S. Singh for the Revenue S.K. Tulsiyan for the Assessee ORDER By the Bench:- 1. The captioned 16 appeals relate to two assessees of the same group and are directed against commonly worded respective orders of the CIT(A) for asst. yrs. 2000-01 to 2006-07. ITA Nos. 975/Pn/2008 to 981/Pn/2008 are the appeals of the Revenue in the case of SRJ Peety Steels (P) Ltd., and ITA No. 857/Pn/2008 is the cross-app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt 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 in spite of there being clinching evidence that the books of accounts are defective?" 5. The main issue involved is the addition made by the AO 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 AO 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 year covered by proceedings under s. 153A are not reliable and consequently he invoked s. 145(3) of the Act and rejected the books of accounts for all the years under consideration. Having rejected the books of account, 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 in the case of both the companies for each year under consideration and made certain additions on the said count. The matter was carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,000 2005-06 36,36,600 85,85,000 Nil 2006-07 67,60,000 24,22,660 Nil 7. From the above table, it was stated that each year the assessee had sufficient net profits which were not considered by the AO. The losses incurred by the assessee cannot the sound basis for rejection of books of accounts. The AO 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 AO for rejection of books of account relates to unaccounted stock. The allegation of the AO 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 asst. yr. 2006-07. According to the assessee, the inception of Dhanlakshmi Sponge Iron was during asst. yr. 2005-06 and its production had begun from 30th June, 2005. The AO was not justified in rejecting the books of accounts for asst. yrs. 2000-01 to 2005-06 on the basis of events occurring during asst. yr. 2006-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipulates 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 asst. yr. 2006-07." The AO 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 the 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 dt. 18th March, 2006 in which on many of the documents he has stated that his brother Surendra Peety will provide the necessary explanation. Please go through the relevant documents and furnish your say. Ans. As I have already stated earlier, I have just started dealing in MS rounds, MS ingot and coal. Papers at Nos. 3 to 92 are related to the said trading. The total of the sales recorded on these papers is as follows:- Credit sale Wt. (MT) Amount M.S. round 313.315 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e books. So, it was not justified to reject the books of account for asst. yrs. 2000-01 to 2004-05 on the basis of advances pertaining to asst. yr. 2005-06. In this regard, the assessee further relied on the written submissions dt. 28th Dec., 2007 discussed above. The stand of the assessee that the AO 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 Dhanlakshmi 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 Dhanlakshmi Sponge Iron was during asst. yr. 2005-06 and its production had begun from 30th June, 2005 as state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eety 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 (P) 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 asst. yr. 2006-07, Rs. 3,46,000 for asst. yr. 2006-07 for purchase of stores and spares of M/s Dhanlakshmi Sponge Iron. The inception of Dhanlakshmi Sponge Iron was during asst. yr. 2005-06 and its production had begun from 30th June, 2005. Therefore, the AO was not justified in rejecting the books of account for asst. yrs. 2000-01 to 2005-06 on the basis of the events occurred during asst. yr. 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 AO rejected the submission by saying that there would be equal probability of the above factors in every month. This is difficult to understand. The AO 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 AO 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 AO has himself agreed that there may be factors outside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 420.80 January, 2006 3133.16 5952800 1899.94 211.52 3525.68 393.52 February, 1006 3082.27 5763680 1869.95 181.53 3413.67 331.40 March, 2006 311.61 5253680 1688.41 -0.01 36017.98 70440580 5702.03 18. The per MT electricity consumption shown by the assessee was taken as the basis for calculation of excess production, e.g. in the abovementioned table it was observed that 1688 units per MT is the lowest per MT consumption. Therefore, taking 1688 as the basis for the year under consideration i.e., 2005-06 (asst. yr. 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. 19. Once the expected production is worked out from the above formula, it was compared with the actual monthly production for the month shown by the assessee. The difference between the expected production and the actual produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rant rejection. (G) No incriminating material whatsoever has been found as a result of search in respect of asst. yrs. 2000-01 to 2005-06, hence AO's suspicion and apprehensions with regard to 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 asst. yrs. 2000-01 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 asst. yr. 2006-07 is worked out on the basis of seized material inventoried as A/1, dt. 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 (gross profit). (K) The appellant made alternate plea for giving benefit of telescope vis-avis 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. Asstt. CIT, Tribunal, Third Member cit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessed under 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 IT Act, 1961. Copies of the audited accounts for all the years under consideration are attached as pp. 1-216 of the paper book. The cost records of the company are audited under s. 233B of the Companies Act, 1956. Copies of the audited reports for all the years under consideration are attached as pp. 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 pp. 413 to 417 of the paper book and claimed to be certified before the authorities below. On-the-spot verification of stocks is carried out at frequent intervals by the concerned excise officials. Year end stock audit is carried out by the concerned bank officials by an external agency. Copies of the stock audit report for all t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st. yr. 2005-06 and had commenced production only on 30th June, 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 AO was that it had constantly incurred business losses in spite 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 AO. 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-a-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 AO 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 fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 of the Act or whose books of account, other documents or any assets are requisitioned under s. 132A after 31st May, 2003. The second proviso to s. 153A 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 s. 132 or requisition under s. 132A shall abate. In other words, if on the date of initiation of search or requisition under s. 132 or s. 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 s. 153A 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 abovementioned assessment years assessment can be made under s. 153A 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 defe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... J Peety Group, Jalna covering the premises of the assessee company as well. Prior to the search, the returns of income for the asst. yrs. 2000-01 to 2005-06 had already been filed under s. 139(1) of the Act accompanied by all requisite documents and proceeding under 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 under 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 were 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-a-vis electricity consumption which has been placed before the authorities below along with the returns for each year:- Asst. yr. Electricity consumption Production (MT) Yearly average consumption (units) 2000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 AO 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 composition of the liquid metal which has to be finally cast into ingots/billets. The AO failed to appreciate these facts and did not attempt to est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Table below:- Page No. Details 1 2 Letter from supplier to company not relevant 3-4 Report of sales deliveries of MS bars with reference to truck No., gross weight, tare weight, net weight and date 5 Report of sales quantity in bundles dt. 16th March, 2006 6 Report of sales with reference to size, quantity bundles 7 Details of other parties weighments done at SRJ scale Not relevant 8 Single line page Sales register Sale dates 15th March, 2006 to 16th March, 2006 and quantity 432.385 9-13 Sales register print with reference to sale No vehicle No., party's name, bundle, size, quantity and rate 14 Written memo of sales to party of scrap 15-26 Weighment slip of sales 27 Components of various metals and non-metals 28-34 Weighment slip of sales 35 Cover sheet of weightment slips 36-92 Weighment slip of sales 93 List of exhibits-not relevant 94-95 Blank cheques-not relevant 96 Bank balance of HD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were examined, analyzed and utilized for working out undisclosed income of the assessee for asst. yr. 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 asst. yr. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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