TMI Blog2010 (11) TMI 713X X X X Extracts X X X X X X X X Extracts X X X X ..... me for assessment as per the provisions of the Act - it is apparent that the Hon’ble Gujarat High Court has categorically held that the undisclosed investments which are deemed to be the income of assessee in accordance with the provisions of sections 69, 69A, 69B and 69C, cannot be assessed under the head "Income from business or profession - Appeal is allowed br way of remand. Computation of profit on sale of scrap - held that:- Since no separate addition was ever made by the Assessing Officer and even the CIT(A) has not also enhanced the assessment in this regard, the department cannot raise this ground of appeal at this stage before the Tribunal. Telescoping of profit - estimated addition - held that:- Once the higher wastage are recorded, the natural inference will be that there will be excess production, which not being accounted for, would have been sold outside the books of account by the assessee. To the extent there is production on account of excess wastage, in my opinion, the sale consideration worked out on such excess production has to be added separately since the assessee has surrendered the excess scrap stock. There is nothing wrong in telescoping the trading add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in law and on the facts of the case in not giving credence to the fact that almost the entire unaccounted stock of scrap was sold by the assessee at the rate of Rs. 9,000 per M.T. (purchase price Rs. 5,000 per M.T. as shown by the assessee) without having undergone the same through direct or indirect manufacturing process and without incurring any manufacturing expenses thereon. Moreover, sale of scrap was not the regular business of the assessee, therefore, the profit on sale of excess stock of scrap was to be worked out separately from the manufacturing business of the assessee. (5) That the learned Commissioner of Income-tax (Appeals)-II, Agra while working out the trading addition of Rs. 29,21,000 has erred in law and on the facts of the case in excluding himself the purchase and sale of scrap from the total purchase and sale shown by the assessee without having given any finding for not working out the assessee s income under different heads and not including the income from other sources shown by the assessee in trading results. (6) That while telescoping the half amount of the trading addition i.e., Rs. 14,60,000 against the excess stock surrendered by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 145 of the Act. (3) That ld. CIT (Appeals)-II was unjustified in not accepting the melting loss of 20.93 per cent as shown by the appellant and deciding it to be 13 per cent only, which is on a very lower side. (4) That ld. CIT (Appeals)-II has arbitrarily assumed that so called excess wastage is sold by assessee as finished goods, without there being any evidence of the same. (5) That ld. CIT (Appeals)-II has arbitrarily not accepted the melting result of sample test conducted by Process and Product Development Centre (A Central Govt. Organisation) according to which melting loss was 20.18 per cent. (6) That the ld. CIT (Appeals)-II failed to appreciate the fact that many a times, re-melting is also required, in case output produced is hard in quality; which causes additional melting loss. This fact has altogether been ignored." 4. The relevant facts of the case are that the assessee derives income from manufacturing and trading of ADB Hubs, Crank Shafts and Ingots. The assessee returned a nil income after claiming depreciation of Rs. 8,37,871. In view of the fact that survey under section 133A was conducted on 25-9-2000 notices under sections 143( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst the value adopted Rs. 5,000 per mt. Now because iron scrap has no uniform quality, that is the reason why there is a big difference of rate between different purchases of scrap. Since the value was adopted taking into consideration all the facts prevalent at that time, there remains no room of any variation to be applied in the rates based upon one or two bills of purchases, the quality of which may substantially vary. As regards valuation of pig iron, sponger iron and forgings in concerned, their average cost price is Rs. 7,090, Rs. 4,969 and Rs. 219 respectively as against the value adopted Rs. 9,000, Rs. 6,400 and Rs. 240. In view of the above facts and reasoning, we strongly plead that there cannot be any legal ground for adopting any other value for that stock. Moreover it will have no impact on profits of assessee because there will be similar change in purchases also. It is also important to note that in respect of excess stock found, passing of financial entry in the books of account does not alter the profitability of the assessee in the given case. The impact in profitability comes through entry in the stock register only, which is duly done. The ultimate im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to change in the product mix of raw material. In view of the above, first of all, books of account should not be rejected. However, even if the same are rejected, trading results should not be disturbed. If some comparable case is to be considered, the said case may kindly be intimated to us with full details so that we may distinguish our case, because to the best of our knowledge there is no comparable case in Agra. (3) We are also filing confirmation letters from creditors, as required by you." 7. Considering the reply of the assessee on account of the following reasons the value of unaccounted stock was taken at Rs. 30,00,357. The relevant portion from the Assessment Order is reproduced hereunder : "The reply of the assessee has been considered. But in absence of supporting evidence to justify the reply the same has no force. At the time of survey, some unaccounted stock as under was found and the value of unaccounted stock was taken at the rate stated by the assessee whereas after scrutiny of purchase bills it is found that there was under valuation of unaccounted stock because the rate of scrap prevalent at the time of survey was at Rs. 7 per kg. or Rs. 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. unaccounted stock Rs. 30,00,357 was found against which assessee had surrendered Rs. 22,00,000 at the time of survey. 2. books of account was not being maintained in day to day course of business which is evident from the fact that cash book was written only up to 22-9-2000. 3. the assessee in his statement had accepted that some of the purchases and expenses have been incurred between 22-9-2000 to the date of survey and such items could not be entered. 4. there are variations in items of closing stock as on 31-3-2000 vis-a-vis opening stock as on 1-4-2000 such as quantity of MS scrap as on 31-3-2000 was shown 188.749 MT and no stock of other Crank Shafts was shown (Annexure B of Audit report filed with Return for assessment year 2000-01) whereas as per Annexure E filed with Return for assessment year 2001-02, quantity of MS scrap is shown at 253.540 MT and 6756 pieces of other Crank Shafts have been shown. 5. On consumption of 3200.116 MT of raw material, wastage is shown at 454.155 MT which gives the percentage of wastage at 14.20 per cent which is abnormally high. Normally wastage in this line of the business is between 7 per cent to 10 per cent, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the following reasons : "It is also held that since excessive wastage has been shown by the assessee so wastage is allowed at the rate of 10 per cent as against 14.2 per cent claimed by the assessee. The quantity of allowable wastage works out to 319.82 MT. Balance wastage 134.44 MT (454.155 - 319.82) claimed by the assessee is disallowed. If value of wastage material is taken at the rate of Rs. 5,000 PMT, the value of such excessive wastage claimed works out to Rs. 134.44 MT Rs. 5,000 = Rs. 6,72,200. This amount will further be added to the income of the assessee." 11. Aggrieved by this the assessee went in appeal before the First Appellate Authority who confirmed the action of rejection of books of account. However, in regard to the valuation of unaccounted stock at the time of survey at Rs. 30,00,357 as against Rs. 22 lakhs surrendered by the assessee the CIT(A) after calling forth for the comments of the Assessing Officer in regard to the submissions made by the assessee and considering the rejoinder of the assessee came to the following conclusion : "(3.4) I have carefully considered the facts of the case, the submissions of the AR and the apposition of law. In my ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee has sold its excess wastes as finished goods. 14. The revenue on the other hand is agitated by the relief granted by the CIT(A) and also the manner of treatment of the addition made of unaccounted stock has been given specific ground Nos. 1 to 9 agitated by the revenue have already been reproduced in the beginning of this order. 15. A perusal of the impugned order shows that the CIT(A) has maintained the rejection of books of account which issue has specifically been discussed in para 4.6 from pages 11 to 14 of the impugned order. 16. The estimation of profit which was challenged by the assessee before the CIT(A) in regard to which initial contention on behalf of the assessee was that the gross loss has occurred on account of increased cost of raw material, higher power charges, and change in product mix. The contention was put forth that the cost of raw material had increased more than the increase in selling rate and the power charges has also considerably increased. It was also argued that the product mix had also changed inasmuch as a higher percentage of sponge iron was consumed as compared to preceding year. As per the discussion which takes place at page 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering the fall in production, the same are in effect higher by about Rs. 32 lakhs. For this increase, one of the reasons given by the appellant is the enhanced power tariff which was increased from September, 2000. The AR in his submissions dated 8-12-2004 has mentioned that because of the increased tariff, additional amount of Rs. 11.06 lakhs had to be paid. This fact could not be controverted by the Assessing Officer also. This being the position, to this extent, the appellant s explanation regarding lower gross profit rate/gross loss deserves to be accepted. However, after giving credit of Rs. 11 lakhs there is still a gap of Rs. 21 lakhs for the enhanced power charges and consequently the gross loss of Rs. 22,54,763 [Rs. 33,54,73 (-) Rs. 11,00,000]. For this increase in power charges and consequently the gross loss the appellant could not give any satisfactory reply nor could it produce any evidence in support of the claim. The only explanation given by the AR was that the same was on account of lower production. In my opinion, this explanation cannot be accepted. Even if there was lower production, the same would not justify the enhanced power charges of about Rs. 22 lakhs no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 2 per cent to 3 per cent oxidation loss is there. When he was asked as to when the wastage is of this magnitude then how the certificate of 21 per cent was given by him, it was stated that 15 per cent old iron scrap included some iron and steel dust because of which the wastage was above the normal wastage. In my opinion, from these facts, it can be safely concluded that while in the sponge iron the wastage is between 15 per cent to 18 per cent in pig iron/iron scrap wastage is around 8 per cent to 10 per cent. If in product mix both the items are used then the average wastage would be around 10 per cent to 12 per cent. It is seen that the appellant in the year under reference has used 54 per cent of pig iron/iron scrap and 46 per cent of sponge iron meaning thereby both the items have been used almost in the same proportion. This being the position, taking a liberal view the average wastage of 13 per cent seems to be reasonable in the appellant s case in this year. As in the preceding year, the case was not scrutinized and the wastage was not examined by the department, the same cannot be taken as precedence or an accepted position by the department. Thus, if the average wastag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to this extent only the same can be telescoped against the excess stock surrendered by the assessee. Thus, out of the total addition of Rs. 29,21,000, addition to the extent of Rs. 14,60,500 would stand telescoped against the surrender of Rs. 22 lakhs made by the assessee and the remaining amount of Rs. 14,60,000 would be further added in the income of the assessee. These grounds of appeal are, therefore, disposed of accordingly." 19. At the outset we propose to consider ground No. 2 raised by the assessee in regard to which the contention of the learned A.R. has been that the books of account in the peculiar facts and circumstances of the case should not have been rejected. 20. Learned D.R., on the other hand, has relied upon the impugned order. 21. We have heard the rival submissions and perused the material available on record. The relevant finding in regard to this issue as has been discussed in the Assessment Order at pages 4 and 5 on account of which the sales were estimated at Rs. 5 crores has already been brought out in the earlier part of this order. A perusal of the same would show that during the survey the assessee surrendered an amount of Rs. 22 lakhs on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed to have been made to person operating on a small scale. Similarly, a major part of sale of CIT casting amounting to Rs. 73.25 lakhs again was made in cash. Thus total sales of the finished goods is in cash and as such not open for verification. Verification was considered necessary especially in the background that the selling of ADB Hubs and CI casting are stated to have gone down. In contrast the selling rate of Ingot which has increased has been disclosed by way of cheque. 23. The claim of gross loss of Rs. 9,24,763 on the sale of 4.51 crores also could not be substantiated by the assessee especially in view of the fact that as against higher sales in the immediately preceding assessment year the assessee had shown a G.P. of more than 1.60 per cent. The assessee has been found to be not capable of explaining the steep fall in the trading results. Moreover, the wastage claimed by the assessee is also not open to verification. The reliance placed upon the finished goods and excisable item and as such these details had been shown to the Excise record has not been considered to be of any help to the assessee. The CIT(A) was of the view that the fact that huge unaccounted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r facts and circumstances of the case where the books of account cannot be relied upon in regard to the amount of wastage and finished products sold since the consumption of electricity is one of the direct costs which would impact the production we consider it appropriate to restore this issue back to the file of the CIT(A) who shall examine the issue in the light of the past history in regard to electrical consumption and also give a specific finding as to the specific increase in electric tariff rate which may have a bearing on this issue also as such by this the amount of wastage and the utilisation of the same for producing finished goods and the addition in the trading result which may so warrant would be accordingly so considered on which aspect both the assessee and the department are aggrieved. 26. In regard to the wastage claimed by the assessee it is seen that the report of the authorised person of Process and Product Development Centre Mr. Joshi certifying wastage of 21 per cent has been considered to be not relevant in view of the fact that it was based on a specific product mix which was given by the assessee the said person s statement as per the material available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the earlier part of this order. We find that the specific dates and bill Nos. have been confronted to the assessee and these dates are closed to the date of survey the parties have also been named therein. Before the CIT(A) general arguments have been advanced in view of the fact that more than 8 and half time of unaccounted stock was found vis-a-vis the recorded stock as per the assessee s books the Assessing Officer in the remand proceedings confronted the assessee with the rates as applicable within U.P. which during the said period was about Rs. 7,000 to Rs. 8,000 per MT. The fact that so much quantity could not have come from outside the State as necessary documentation with regard to the Sales Tax Department and Excise Department is not available with the assessee, we are of the view that it was rightly concluded by the Assessing Officer that the purchases were made from U.P. The local rate was confronted which was Rs. 7,000 to Rs. 8,000 per MT. Reference was made to the following Remand Report dated 1-12-2004 of the Assessing Officer which is reproduced in pages 3 and 4 of the impugned order at para 3.2. For ready reference the same is reproduced as under : "It is sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchased scrap at lesser rate and how the same reached to its premises but assessee has not produced or filed any such evidence. It is also pertinent that the assessee had sold the same scrap in Jan. 2001 and Feb. 2001 at the rate of Rs. 9,000 PMT. This suggests that assesee s plea of taking value of same scrap at the rate of Rs. 5,000 does not prima facie appear to be correct. In view of above facts, circumstances and evidences of the case, the contentions of the assessee that average price of scrap was Rs. 5,000 PMT is without any cogent basis. Contrary to it, there are good and sufficient evidences, as discussed above, to prove that the rate of scrap in the Sep. 2000 was Rs. 7,000 PMT or more. Therefore, valuation of excess stock of scrap at the rate of Rs. 7,000 made in assessment is quite reasonable and justified and deserves to be sustained." 30. Apart from this, the Assessing Officer also referred to the fact that if the price was less than Rs. 6,800 or Rs. 7,000 MT the very fact that the assessee itself purchased at Rs. 7,000 per MT as per the bills confronted to it the acceptance of lesser prices would be contrary to evidence. The Assessing Officer also took into consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Nos. 5 to 11 of the revenue would be covered by the directions given in regard to wastage, trading addition. 31. In the result, appeal of the revenue is partly allowed for statistical purposes and the appeal of the assessee is also partly allowed for statistical purposes. B.R. Jain, Accountant Member. - In these cross appeals, the Assessing Officer has recorded a finding that the accounts of the assessee are not correct and complete and accordingly by invoking provisions of section 145(3) of the Act, he rejected the accounts. This action of the Assessing Officer stands confirmed by the ld. CIT (Appeals). The ld. Judicial Member has upheld the decision on this count and rejected the ground No. 2 in appeal by the assessee. With the conclusion so reached, I have no difference with her. However, unable to agree with certain other issues and as no fruitful discussion could take place, I proceed to write my separate order thereon. 2. Briefly, the facts are that after application of provisions of section 145(3) of the Act, the Assessing Officer estimated the sales at Rs. 5 crores as against declared sales of Rs. 451.76 lakhs. On the estimated sales of Rs. 5 crores, a net profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unaccounted stock found at the time of survey was assessable as its business income and valuation declared at Rs. 22,00,000 itself is to be accepted as correct. 6. Having heard the parties and upon careful perusal of material on record, I find that the ld. CIT (Appeals) did not record reasons for reaching a conclusion that the valuation of the excess stock, as shown by the assessee in the return of income at Rs. 22,00,000 has to be accepted, even though the assessee had placed sufficient material in the shape of purchase invoices showing average value of such excess stock of wastage at Rs. 4,593 per M.T. but accepted the rate at Rs. 5,000 per M.T. only to cooperate the department in the survey proceedings. A detailed letter dated 8-12-2004 and 15-7-2004 placed at pages 28 and 35 with the appeal memo in that respect along with vouchers was also available on his record. The assessee also had objected to the rate of Rs. 7,000 per M.T. applied by the Assessing Officer. The ld. CIT (Appeals) thereafter took a remand report from the Assessing Officer on such evidence which allegedly had not been produced before him. The Assessing Officer though supported his stand yet made no adverse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of excess stock found at the time of survey. Since the materials were available on the record of authorities below, a conclusion as such, to say that the exercise is academic only and therefore, the values declared by the assessee need to be accepted, could not have possibly been reached unless proper reasoning thereof had been given by passing a speaking order thereon. The need to pass a speaking order has been emphasized in Siemens Engg. Mfg. of India Ltd. v. Union of India AIR 1976 SC 1785, 1789 in following words : "The rule requiring reasons to be given in support of an order, like the principle of audi alteram partem (hear the other side), a basic principle of natural justice which must inform every quasi-judicial process and this rule must be observed in its proper spirit and mere pretence of compliance with it would not satisfy the requirement of law." Differently put, necessity to give reasons which disclose proper appreciation of the problem posed before the court needs no emphasizing. Apart from informing the aggrieved party to the proceedings of the reasons, which it may be able to demonstrate in the higher forum as erroneous or irrelevant, it also enables th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out to be excessive were found mixed with other stocks held in the business by the assessee, and the same were used for carrying the business only. The only source of income admitted by the Assessing Officer is found from the activities of manufacturing and trading only. No other source of income has been found or detected by the Assessing Officer nor by the survey party. No documentary or other evidence was found as a result of survey on 25-9-2000 from which it could be discerned that the assessee made investment in the financial year immediately preceding the assessment year that can be said to have not been recorded in the books of account. The Assessing Officer also did not dispute the fact that the part of the scrap found in survey was available from earlier years. He simply valued the excess stock with reference to the date of survey, as the stocks were found in that year itself. Section 69 lays heavy burden on revenue to show that it is unexplained investment of the financial year immediately preceding the assessment year under consideration. In the absence of any evidence, having been brought on record that investment was made in the financial year immediately preceding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er in this order. As a result, ground No. 2 in appeal by the revenue stands rejected and ground Nos. 1 and 3 in appeal by revenue stands allowed for statistical purposes only. 9. Ground No. 4 in revenue s appeal relates to the claim to work out separate profit on sale of scrap instead working out composite income from both the manufacturing of goods and sale of scrap as its business profits. 10. Having heard the parties and under the peculiar facts of this case, I do not find any merit in revenue s ground in appeal. The Assessing Officer himself estimated the sales at Rs. 5,00,00,000 and applied a rate for net income thereon to work out assessee s income from business. The sales so estimated are found to have been taken by treating the activity of manufacturing as well as trading of scrap and other goods dealt by the assessee as one and the composite business activity in applying a net profit rate of 0.43 per cent on the sales so estimated. Having done that, there lies nothing in the mouth of the Assessing Officer now to say and find out fault with the order of the superior authority that it should have worked out the profit on trading of scrap for assessment as its income sepa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the investment in purchases was recorded. The assessee had suffered gross loss due to increase in power tariff by Rs. 11.06 lakhs and further Rs. 21.00 lakhs on excessive power consumption as compared to the immediately preceding year. There has, thus been a higher wastage but all relevant factors such as loss due to oxidation and factors for higher melting loss were not considered while working out excessive wastage by the ld. CIT (Appeals). The assessee had given detailed reasons for gross loss in the year under consideration and are clearly spelt out in his letters dated 8-12-2004 and 15-7-2004 which shows that fixed wage bill during the year was higher as also that the sale prices did not increase corresponding to increase in cost of raw materials and other inputs. This year s results therefore, were abnormal and as such net profit rate on the basis of past year could not have been applied for working out additions. There were no factual and legal basis to have sustained additions or directing addition to the extent of Rs. 14,60,500. It was, therefore, prayed to delete the additions and accept the net loss disclosed by the assessee as the same are supported by vouchers and ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 254 M.T. by ld. CIT (Appeals) as against the quantity of 134.44 M.T. calculated by the Assessing Officer. Under the peculiar facts the entire amount of such sales could not have been added as income of the assessee though the same could have been taken as a basis for estimating reasonable amount of total sales of the business for applying a profit/loss rate thereon or assessing income or loss of the year under consideration, as there is no material or finding on record about suppression of investment in acquiring the goods which are subject-matter of such deemed sales. This view also finds support from the judgment rendered by Hon ble High Court of Gujarat in CIT v. President Industries [2002] 258 ITR 654/124 Taxman 654. Keeping in view the entire conspectus of the case, the separate trading addition of Rs. 29,21,000 so made is hereby directed to be deleted, even though the action to allow telescoping of business income up to the date of survey against surrendered income of Rs. 22,00,000 in principle is neither disputed by Ld. Departmental Representative nor found erroneous. The consequent addition of Rs. 14,60,500 directed to be made by ld. CIT (Appeals) on that account is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time of survey for passing a speaking order thereon or that the values adopted at the rate of Rs. 7,000 per M.T. taken by the Assessing Officer is to be restored. (ii) On the facts and findings whether the ld. Judicial Member is justified in her decision to direct ld. CIT (Appeals) to address on ground No. 2 in appeal by revenue as the same stands covered by the directions given by her in assessee s appeal or that the decision reached by the ld. Accountant Member in rejecting the said ground in appeal by revenue upholding decision of ld. CIT (Appeals) to accept surrendered income as assessee s business income is a correct and justified decision. (iii) Whether on the facts and findings and in view of decision of ld. Judicial Member at para 25 of the order to restore the issue to ld. CIT (Appeals) and at para 30 to allow the same ground No. 4 in appeal by revenue, is it proper to uphold her both these decisions or that the decision taken by the ld. Accountant Member to reject ground No. 4 in appeal by revenue to work out separate profit on sale of scrap for assessment as income is a correct and justified decision ? (iv) Whether on the facts and findings and in law, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d justified decision? (iv) Whether on the facts and findings and in law, the decision to restore the matter to the ld. CIT (Appeals) to work out afresh the claim and addition of excessive wastage which are deemed as sales with reference to limited directions or that no such separate addition on trading account can be made for alleged excessive consumption/wastage that are deemed as sales and only profit thereon can be added as directed by the Learned Accountant Member. (v) Whether on the facts and in law, the ld. Judicial Member is justified in directing to apply a net profit rate on the basis of immediately preceding year on the sales estimated or that there is no justification under the peculiar facts to apply net profit rate on that basis but to estimate income with reference to relevant material on record in the manner as provided under section 144 of the Act." 2. Although both the Members have mentioned the brief facts in respect of the cross appeals filed by the assessee as well as the revenue and all these questions arise out of the various grounds taken in the appeals filed by the revenue as well as the assessee, yet for disposing of the questions referred to me, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... immediately preceding year, the assessee made sales at Rs. 5,77,78,286. The Assessing Officer also noted that the assessee has shown loss at Rs. 9,24,763 while in the preceding year he has shown G.P. at the rate of 1.69 per cent and the assessee could not prove the fall in G.P. The Assessing Officer, after noting that the assessee has shown net profit in the preceding year at the rate of 0.43 per cent, applied the same net profit rate to the estimated sales of Rs. 5,00,00,000 and worked out net profit at Rs. 2,15,000. Separate addition in respect of investment in unaccounted stock were made under section 69 of the Act for Rs. 30,00,357 along with other disallowances and additions in respect of excessive wastage etc. 4. The question No. 1 relates to the valuation of unaccounted stock of scrap found at the time of survey. This arises out of the ground Nos. 1 and 3 of the revenue s appeal. The learned Accountant Member has restored the issue to the file of learned CIT(A) while the learned Judicial Member has set aside the order of the ld. CIT(A) deleting the addition made by the Assessing Officer and restored his order. 5. The learned A.R. before me vehemently contended that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) did not record reasons for reaching a conclusion that the valuation of excess stock as shown by the assessee in return at Rs. 22,00,000, was not justified. This is the fact that the assessee has placed sufficient material for working out the average rate of excess stock of scrap at Rs. 4,593 per M.T. The learned CIT(A) has also called for the remand report from the Assessing Officer on such evidences. These evidences were not produced by the assessee before the Assessing Officer. The Assessing Officer supported the rate of Rs. 7,000 per M.T., but did not make any adverse comment on the evidences filed by the assessee before the CIT(A). The survey team has also worked out the value of the excessive stock of scrap at the rate of Rs. 5,000 per M.T. after having physical verification. The Assessing Officer, in my opinion, could not have valued the unaccounted scrap at the rate of Rs. 7,000 per M.T. merely on the basis of one purchase of 2.00 M.T. The learned CIT(A), therefore, should have verified the survey report and have analysed as to what is the basis adopted by the Assessing Officer differing with the survey report. Therefore, under these peculiar facts and circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss stock found at the time of survey and surrendered the same as income from business. He observed that the Assessing Officer has admitted that the excess stock of 250 M.T. represents the excess production/sale which has not been accounted for by the assessee in the books and, therefore, the assessee was justified in telescoping the amount against the surrendered income of Rs. 22,00,000 as his business income and factually this represents the secrete profits of the business of the assessee. The assessee in his opinion explained the nature and source of undisclosed stock as his business income and, therefore, the CIT(A) after appreciation of facts took the view that this income has to be assessed under the head "Income from business". The learned Judicial Member, on the other hand, was of the view that the unaccounted stock surrendered by the assessee was not in his books of account. The assessee was not maintaining the regular books of account. The income so surrendered cannot be the income which can be assessed under the head "Income from business" or profession. This is an undisputed fact that there was deficiency found in the inventory of the assessee during the course of survey ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e no source is disclosed at all on the basis of which the income can be classified under one of the heads of income under section 14 of the Act, it would not be possible to classify such deemed income under any of these heads including income from "other sources" which have to be sources known or explained. When the income cannot be so classified under anyone of the heads of income under section 14, it follows that the question of giving any deductions under the provisions which correspond to such heads of income will not arise. If it is possible to peg the income under anyone of those heads by virtue of a satisfactory explanation being given, then these provisions of sections 69, 69A, 69B and 69C will not apply, in which event, the provisions regarding deductions, etc. applicable to the relevant head of income under which such income falls will automatically be attracted. 6.2 The opening words of section 14 "Save as otherwise provided by this Act" clearly leave scope for "deemed income" of the nature covered under the scheme of sections 69, 69A, 69B and 69C being treated separately, because such deemed income is not income from salary, house property, profits and gains of busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d loss account. To that extent, I agree with the view taken by the learned Judicial Member. This answers the question No. (ii) referred to me. 12. The question No. 3 referred to me arise out of the ground No. 4 taken by the revenue in its appeal claiming that separate profit on sale of scrap be worked out and added to the income of the assessee instead of working out the composite income from both the manufacturing of the goods and sale of scrap as business profit. The ld. Judicial Member allowed the ground of appeal of the revenue under para 30 of his order while the learned Accountant Member dismissed the ground taken by the revenue. 13. I heard the rival submissions and carefully considered the same along with the orders of the authorities below as well as that of the learned Judicial Member and learned Accountant Member. I noted from the assessment order that the Assessing Officer has not made any separate addition estimated as profit on the sale of excess stock of the scrap found during the course of survey and surrendered by the assessee. The Assessing Officer rejected the books of account of the assessee. The rejection of books of account was confirmed by the CIT(A) as w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and ground Nos. 8 and 9 of revenue s appeal. Ground Nos. 3 to 6 of assessee s appeal relate to the wastage due to melting loss while ground Nos. 8 and 9 of revenue s appeal relate to the estimation of the gross profit rate on the estimated sales after accepting the additional power charges incurred by the assessee during the year to the extent of Rs. 11,00,000. The learned Judicial Member and learned Accountant Member have restored the issue to the file of the CIT(A). While restoring the issue to the file of the CIT(A), the learned Accountant Member gave certain directions. The learned Judicial Member also directed with regard to the net profit rate on the trading result to apply the same rate as has been worked out in the immediately preceding year in the peculiar facts and circumstances of the case while the learned Accountant Member directed the quantum of the sale to be estimated afresh by considering the melting loss and oxidation factors etc. in the right perspective. He further directed that the CIT(A) will consider the impact of the surrendered business income on the profit that may be worked out by present facts of the year under consideration such as increase in power ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, to this extent, the appellant s explanation regarding lower gross profit rate/gross loss deserves to be accepted. However, after giving credit of Rs. 11 lakhs there is still a gap of Rs. 21 lakhs for the enhanced power charges and consequently the gross loss of Rs. 22,54,763 [Rs. 33,54,763(-) Rs. 11,00,000]. For this increase in power charges and consequently the gross loss the appellant could not give any satisfactory reply nor could it produce any evidence in support of the claim. The only explanation given by the AR was that the same was on account of lower production. In my opinion, this explanation cannot be accepted. Even if there was lower production, the same would not justify the enhanced power charges of about Rs. 22 lakhs nor does it justify the gross loss of more than Rs. 22 lakhs. It is not that in past, the production has not varied. It has not been shown by the appellant that in past also on account of lower production, the assessee had to incur gross loss. It is rather seen that in assessment year 1999-2000 also, the assessee had shown the production at 2772 MT as against 2530 MT in this year and had still shown gross profit rate of 2.58 per cent and not gross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in pig iron/iron scrap wastage is around 8 per cent to 10 per cent. If ill product mix both the items are used then the average wastage would be around 10 per cent to 12 per cent. It is seen that the appellant in the year under reference has used 54 per cent of pig iron/iron scrap and 46 per cent of sponge iron meaning thereby both the items have been used almost in the same proportion. This being the position, taking a liberal view the average wastage of 13 per cent seems to be reasonable in the appellant s case in this year. As in the preceding year, the case was not scrutinized and the wastage was not examined by the department, the same cannot be taken as precedence or an accepted position by the department. Thus, if the average wastage of 13 per cent is accepted then on the total consumption of 3200 MT the wastage comes to 416 MTR as against 669.710 MT claimed by the assessee. The excess wastage claimed by the assessee comes to about 254 MT. As rightly stated by the Assessing Officer in the remand report dated 1-12-2004, this excess wastage of 254 MT represents the excess production/sale which has not been accounted for by the assessee in the books. It is seen that the average ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee as well as the revenue came in appeal before the Tribunal. The learned Judicial Member restored this issue back to the file of CIT(A) by observing as under : "25. A perusal of the line of argument initially taken by the assessee and subsequently abandoned in regard to the application of rates and the loss claimed by it, it is seen that the assessee had given up the arguments of the increase in cost of raw material and change in product mix and has confined his arguments to the increase in power expenses. In view of the fact that the assessee has claimed higher wastage and in view of ground Nos. 4, 7, 8 and 9 of the revenue we consider it appropriate in the peculiar facts and circumstances of the case where the books of account cannot be relied upon in regard to the amount of wastage and finished products sold since the consumption of electricity is one of the direct costs which would impact the production we consider it appropriate to restore this issue back to the file of the CIT(A) who shall examine the issue in the light of the past history in regard to electrical consumption and also give a specific finding as to the specific increase in electric tariff rate which may h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... history of the assessee the specific facts on record and a comparison in this line of business with other identically situated persons using in Sponge Iron/DRL Pig Iron in electric arc furnace. 28. In regard to the N.P. rate on the trading result which has been taken in the immediately preceding assessment year in the peculiar facts and circumstances the CIT(A) shall apply the same rate. 17. The learned Accountant Member also restored the issue to the file of the CIT(A) with the following directions : "15. After hearing the parties and careful perusal of material on record, it is found that the action to reject accounts by invoking provisions of section 145 of the Act stands confirmed. Having rejected the accounts, sub-section (3) of section 145 of the Act requires an Assessing Officer to make an assessment in the manner provided under section 144 of the Act. The procedure prescribed under section 144 of the Act is that the Assessing Officer, after taking into account all relevant material which has been gathered and after giving assessee an opportunity of being heard shall make the assessment of total income or loss to best of his judgment and determine the sum payable by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,21,000 so made is hereby directed to be deleted, even though the action to allow telescoping of business income up to the date of survey against surrendered income of Rs. 22,00,000 in principle is neither disputed by ld. Departmental Representative nor found erroneous. The consequent addition of Rs. 14,60,500 directed to be made by ld. CIT (Appeals) on that account is also directed to be deleted and the issue of estimating income is restored back to the file of ld. CIT (Appeals) so that when the matter goes back to him, he only adopts reasonable amount of sales as against the estimates of Rs. 5,00,00,000 made by the Assessing Officer. Needless to add the quantum of sales estimated on account of excess claim of wastage shall have to be worked out afresh by considering the melting loss and oxidation factor etc. in the right perspective. He shall also consider the impact of surrendered business income on the net profit that may be worked out by appraising facts of the year under consideration such as increase in power tariff, fixed wage bill, higher expenditure on power and electricity, rise in cost of production and other selling administration and finance expenses and not to apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be guided by the Rules of Justice, equity and good conscience. The Assessing Officer must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be fair estimate of the proper figure of assessment, and for this purpose he must be able to take into consideration local knowledge and repute in regard to the assessee s circumstances, and his own knowledge of previous returns by and assessments of the assessee and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guess-work in the matter, it must be honest guess-work. There is nothing in section 144 for holding an assessment made by an officer under section 144 without conducting a local enquiry and without recording the details and results of that enquiry cannot have been made to the best of his judgment within the meaning of that section. The best judgment is to be based on a fair and proper estimate of assessee s income and the inference to be drawn from the available material should be properly inferable inference. The assessment is to be based on material to the exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed separately since the assessee has surrendered the excess scrap stock. There is nothing wrong in telescoping the trading addition so allowed to the extent of the additions made on account of investment in excess stock as on the date of survey. I, therefore, agree with the order of the ld. Judicial Member on both the questions. Accordingly, I hold that under the facts and circumstances, the issue relating to the consumption of electricity and wastage on account of consumption of raw material is restored to the file of the CIT(A) and separate addition on trading account can be made for the excess consumption/wastage of raw material as deemed sales. In respect of question No. 5, in my opinion, there is nothing wrong in the direction given to the ld. CIT(A) to work out the net profit by applying a rate as has been taken in the immediately preceding assessment year on the facts and circumstances of the case. 19. Now, the matter shall go to the regular Bench. Per P.K. Bansal, Accountant Member. - There being difference of opinion between both Members constituting the Bench, five questions in relation to the matter were referred to the Third Member, by Hon ble President under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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