2018 (3) TMI 472 - AT - Income Tax

Excess production of sponge iron - clandestine removal of excessively produced sponge iron - Held that - In the facts and circumstances of the case we note that other than some documents the AO had no other evidence/material to suggest that the assessee s Karakolha in Orissa steel plant was using iron ore which had Fe content more than 65% without doing so the allegation of suppression of production of sponge iron is merely on the basis of suspicion surmises and conjectures which cannot stand scrutiny in the eyes of law when the assessee was able to place on record the Laboratory Report which certified that the assessee s plant at Karakolha Orissa used iron ore which had Fe content between 62.79% to 63.23%. The veracity of the Laboratory Report have not been challenged or found to be invalid by the Department. In such a scenario without finding defect in the books of account or without finding fault with the Laboratory Report that certified the Fe content of the iron ore used by the assessee at Karakolha Orissa for production of the sponge iron the allegation of suppression of production of sponge iron cannot stand. There can be no universal and uniformly acceptable standard for consumption of iron ore for production of sponge iron. It has to be appreciated that the various other factors like quality composition of raw materials operating conditions etc which contribute to the yield ratio. From the discussions stated above we note that the yield ratio can vary from plant to plant and even differ from year to year based on the capacity of the plant the efficiency of the staff maintenance of the plant electricity consumption etc. Nothing has been brought on record by the AO directly/indirectly to show that there was clandestine removal of excessively produced sponge iron from its plant. We note that the AO has not found any defect in respect to the quantitative details furnished by the assessee which tallied with the books of account maintained by the assessee in its regular course of its business and without rejecting the books of account and that too as stipulated u/s. 145(3) of the Act the AO ought not to have estimated the excess production of sponge iron. - Decided against revenue

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this case are:

• Whether the Assessing Officer (AO) was justified in making additions on account of alleged suppression of production and sales of sponge iron by applying a standard yield ratio without rejecting the assessee's books of account;
• Whether the AO's reliance on the Sales Tax Department's assessment order and technical opinion of the Dean of NIT, Rourkela, was legally and factually sustainable;
• Whether the application of a uniform input-output ratio (yield ratio) for iron ore consumption in sponge iron production is valid given the variability in raw material quality and operating conditions;
• Whether the appellate authority (CIT(A)) erred in admitting and relying on additional evidence and documents without providing the AO an opportunity to examine the same, allegedly violating Rule 46A of the Income-tax Rules, 1962;
• Whether the findings of suppression of sales and production by the Sales Tax Authorities can be relied upon for income tax additions when such matters are pending or have been reversed in other cases;
• Whether the AO's estimation of suppressed production and sales without independent scientific verification or rejection of books of account was legally tenable;
• Whether the facts and evidence on record support the conclusion of clandestine removal and sale of excess sponge iron production by the assessee;
• Whether the CIT(A) was justified in deleting the additions made by the AO on the above grounds.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality and validity of AO's addition based on estimation without rejection of books of account

Legal framework and precedents: Section 145(3) of the Income-tax Act, 1961, mandates that the AO can make an assessment to the best of his judgment under section 144 only if he is not satisfied with the correctness of the accounts. Without rejecting the books of account, the AO cannot resort to estimation of income. This principle is supported by judicial precedents including the Karnataka High Court decision in CIT vs. Anil Kumar & Co.

Court's interpretation and reasoning: The Tribunal noted that the AO did not point out any defect or reject the books of account maintained by the assessee. Therefore, the AO was not authorized to disturb the book results and make an addition based on an assumed or estimated production. The Tribunal concurred with the CIT(A)'s finding that estimation without rejection of books is unsustainable in law.

Application of law to facts: The AO's addition was based on an assumed yield ratio applied mechanically without rejecting the books or finding any discrepancies therein. The Tribunal held that such addition is contrary to the statutory provisions and judicial principles.

Conclusion: The AO's addition on estimated suppressed production without rejecting the books of account was legally untenable and liable to be deleted.

Issue 2: Reliance on Sales Tax Department's assessment and technical opinion of Dean of NIT, Rourkela

Legal framework and precedents: While the AO may consider findings of other statutory authorities, such reliance must be supported by relevant and admissible evidence, and the AO must independently verify facts pertinent to the case. The technical opinion must be relevant and applicable to the facts of the case.

Court's interpretation and reasoning: The AO heavily relied on the Sales Tax assessment order which concluded suppression based on input-output norms and on the technical opinion of the Dean of NIT that 1.5 MT of iron ore is required to produce 1 MT of sponge iron if Fe content is 65% or more. However, the Tribunal observed that the AO ignored crucial facts: the iron ore used by the assessee's plant in Orissa had Fe content around 63%, as per laboratory reports produced by the assessee and accepted by the Sales Tax authorities. Further, the AO relied on sample analyses and seized documents relating to a different plant in Jharkhand, which had no relevance to the Orissa plant.

The Tribunal also noted that the Dean of NIT's opinion was a general technical view based on personal knowledge and discussions, explicitly stating that no uniform standard exists and that consumption varies depending on raw material quality and operating conditions. The AO failed to consider these caveats and applied the yield ratio mechanically.

Application of law to facts: The AO did not independently verify the Fe content of iron ore used in the assessee's plant, nor did he consider the laboratory reports on record. The AO's reliance on irrelevant seized documents and general technical opinion without factual verification was erroneous.

Treatment of competing arguments: The assessee demonstrated through seized gate registers and statutory forms that the plant used iron ore sourced from Orissa mines, not Jharkhand. The AO did not dispute these facts. The CIT(A) accepted the assessee's submissions and laboratory reports, and the Tribunal concurred.

Conclusion: The AO's reliance on the Sales Tax order and Dean's opinion without proper verification was misplaced. The additions based on such reliance were unsustainable.

Issue 3: Applicability of uniform yield ratio for iron ore consumption in sponge iron production

Legal framework and precedents: The yield ratio or input-output norms vary depending on factors such as quality and composition of raw materials, plant operating conditions, and geographical variations. No universal standard can be rigidly applied. This principle is supported by judicial decisions and expert opinions.

Court's interpretation and reasoning: The Tribunal agreed with the CIT(A) that the yield ratio varies from plant to plant and year to year. The DGFT and Andhra Pradesh Pollution Control Board provide differing norms. The Tribunal examined annual reports of comparable companies and found variations in yield ratios, further supporting the absence of a uniform standard.

Application of law to facts: The AO's mechanical application of 1.5 MT iron ore per MT sponge iron, assuming Fe content over 65%, was not justified given the evidence of lower Fe content and varying operational factors.

Conclusion: The AO erred in applying a uniform yield ratio without considering the scientific and operational variability, rendering the addition unsustainable.

Issue 4: Admission and reliance on additional evidence by CIT(A) without opportunity to AO (Rule 46A)

Legal framework: Rule 46A of Income-tax Rules, 1962, requires that the AO be given an opportunity to examine additional evidence before the CIT(A) admits it during appellate proceedings.

Court's interpretation and reasoning: The Tribunal observed that the CIT(A) based his decision primarily on material already on record before the AO. The additional documents considered by the CIT(A) were publicly available annual reports and government publications, which do not constitute additional evidence requiring AO's opportunity under Rule 46A.

Application of law to facts: The CIT(A)'s reliance on public domain documents and comparison with other companies' yield ratios was within his appellate powers and did not violate Rule 46A.

Conclusion: No violation of Rule 46A occurred; the CIT(A) was entitled to take judicial notice of publicly available information.

Issue 5: Reliance on Sales Tax orders and their status in appellate proceedings

Legal framework: Findings of other statutory authorities like Sales Tax authorities can be considered but are not binding on the Income Tax authorities. Pending appeals or reversed orders in similar cases affect the probative value of such findings.

Court's interpretation and reasoning: The CIT(A) noted that in other similar cases, the Sales Tax Tribunal had reversed the orders relying on the Dean of NIT's opinion. The Tribunal found that the Sales Tax appellate authority had deleted additions based on express duplicate books and substantially reduced other additions. The CIT(A) did not misstate facts regarding the status of Sales Tax orders.

Application of law to facts: The Tribunal held that the AO's reliance on the Sales Tax order was misplaced especially when the Sales Tax appellate authority had deleted or reduced additions on similar grounds.

Conclusion: The AO's reliance on Sales Tax orders pending or reversed in other cases was not sustainable.

Issue 6: Evidence of clandestine removal and sale of excess sponge iron production

Legal framework: To sustain addition on account of suppressed production and clandestine sale, direct, indirect, or circumstantial evidence such as discrepancies in stock, security records, transport documents, and receipt of sale proceeds must be established.

Court's interpretation and reasoning: The Tribunal found no evidence on record indicating clandestine removal or sale of excess sponge iron. No incriminating documents or assets were found during search. No excess closing stock was detected. The AO's assumption was based on surmises and conjectures without material support.

Application of law to facts: The absence of any corroborative evidence invalidated the AO's addition on this ground.

Conclusion: The addition for clandestine removal and sale was not justified.

Issue 7: Whether CIT(A)'s deletion of addition was justified

Court's interpretation and reasoning: The CIT(A) gave a detailed reasoned order analyzing the facts and law, including examination of seized documents, laboratory reports, technical opinions, and comparable company data. The CIT(A) found the AO's estimation arbitrary and unsupported by evidence, and correctly held that no universal yield ratio applies.

Application of law to facts: The Tribunal concurred with the CIT(A)'s findings and reasoning, holding that the addition was neither sustainable in law nor on facts.

Conclusion: The deletion of the addition by the CIT(A) was justified and upheld.

3. SIGNIFICANT HOLDINGS

"I find from the impugned order that the AO has pointed out no defect or mistake in the books of account or other relevant documents that were produced before him in course of the assessment proceedings. The AO has not even rejected the books of the assessee. I therefore find merit in the contention that the AO under the circumstances was not authorised to disturb the book results and assume imaginary production that too without there being any positive material on record to support his allegations."

"No universal and uniformly acceptable standard for consumption of iron ore can be prescribed without appreciating the various other factors such as the quality and composition of raw materials and operating conditions which also contribute to the yield ratio... The material placed on record also suggests that the yield ratio can vary from plant to plant and even from year to year for the same plant."

"The AO has no independent data regarding the Fe content in iron ore utilised in the sponge iron factory at Karakolha (Orissa). The AO therefore relied on the investigation report of the Enforcement Officials of the State Commercial Tax Wing of Orissa and the assessment order of the Deputy Commissioner of Sales Tax to conclude that the sponge iron factory at Karakolha had utilised iron ore having Fe content over 63%. ... There is no positive material on record to suggest that assessee's sponge iron factory at Karakolha utilised iron ore having Fe content of 65%."

"The Dean of NIT... has clearly placed on record the factual position... that the yield ratio will vary from plant to plant depending on the composition and quality of raw material and the operating conditions... The AO however blindly applied the yield ratio of 1.5 and ignored this vital aspect... The AO was therefore not justified in mechanically applying the yield ratio of 1.5 to the sponge iron factory of the assessee."

"When the books of account of the assessee has not been rejected and assessment having not been framed u/s. 144 of the Act, the AO cannot resort to an estimation of income and such exercise by AO is not sustainable."

"The allegation of suppression of production of sponge iron cannot stand... without finding defect in the books of account or without finding fault with the Laboratory Report that certified the Fe content of the iron ore used by the assessee."

"No material has been brought on record by the AO directly/indirectly to show that there was clandestine removal of excessively produced sponge iron from its plant."

"The appellate authority enjoys plenary & co-terminus powers as that of AO while deciding the appeal before him... entitled to take judicial notice of events relevant to issue for adjudication... cannot be faulted."

Final determination: The AO's addition on account of alleged suppression of production and sales of sponge iron based on estimated yield ratio without rejection of books, without independent verification of iron ore quality, and without evidence of clandestine removal, was unsustainable. The CIT(A)'s deletion of the addition was justified and upheld. The appeals filed by the revenue were dismissed.