TMI Blog2012 (10) TMI 353X X X X Extracts X X X X X X X X Extracts X X X X ..... cement of production – Addition made by AO on the basis of MoU’s found during search – Vendor admitted receipt of Rs. 2.59 Crores from the assessee – Whereas Balance Sheet of the assessee reveals that the assessee has paid Rs. 2.42 Crore - Held that:- As concluding from the facts purchase has been made in in earlier previous year. MoU itself records the various dates on which various payments were made by the assessee. Revenue has brought no material, that the assessee has paid any amount more than Rs. 2.42 crores before 31.3.2004 against the purchase of assets. Issue decides in favour of assessee GP ratio on unrecorded sales – Whether AO can apply higher % of GP rate than the rate of % of GP accepted by revenue on sale already recorded in books of accounts - Held that:- The rate of gross profit of the current year is very relevant than the gross profit rate of the earlier year unless it is shown that the profit earned on the unrecorded sales were actually more than the profit earned on recorded sales of the relevant year. Ground of appeal decides in favour of assessee. Addition on account of unaccounted sale – AO argued that assessee has removed 135.110 MT of by- product, wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee were part of the purchase cost and were deductible u/s 28 – Held that:- Whom the transporters had the contract for transporting of the goods, whether with the assessee or with the suppliers. Hence, the same needs to be verified from the purchase bills of the assessee and other connected documents. Since both the parties have not filed the relevant materials before us, we are unable to adjudicate the issue completely. Issue remand back to AO. - I.T.A.Nos.1633 to 1635/Mds/2010 - - - Dated:- 13-7-2012 - SHRI N.S. SAINI AND SHRI CHALLA NAGENDRA PRASAD, JJ. Appellant by : Shri Shaji P. Jacob, Addl. CIT Respondent by : Shri S.Srivatsan, CA ORDER PER N.S. SAINI, ACCOUNTANT MEMBER These are the appeals filed by the Revenue against separate orders passed by the CIT(A), Tiruchirapalli, dated 21.7.2010, for assessment years 2004-05, 2005-06 and 2006-07. 2. Since all these appeals relate to the same assessee and were argued by the DR together, they are being disposed of by this consolidated order. 3. In I.T.A.No.1633/Mds/2010 for assessment year 2004-05, Ground Nos.1 and 5 are general in nature and hence, requires no adjudication by us. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rked out by the central Excise Department was purely based on the papers/material evidence/documents seized from various places as mentioned above. In this case the a firm not only suppressed the sales, but suppressed the purchase also. Therefore, instead of making addition on percentage of Gross profit the entire difference of Gross profit Le admitted by the assessee and arrived at by the excise department is added with the total income (Rs. 3,70,23,504 2,65,93,494) 1,04,30,010 6. On appeal by the assessee, the CIT(A) has deleted the addition by observing as under: 2. The appellant is a manufacturer of steel ingots having its factory at Karaikal. The unit was established during the year 31.03.2004 and the first year of its operation was the year ended 31.03.2004. There was a search in the premises of the appellant on 07.06.2004 by the Department of Central Excise and consequent on the search certain incriminating documents were seized. These included inter alia a profit and loss- account and a memorandum of understanding for purchase and erection of plant and machinery. 3. During the course of assessment for the year 2004-05 the Assessing Officer noticed these seized d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e show cause notice that had formed the very basis of the assessment is less than the investment recorded by the appellant. 10) The Income Tax Officer failed to appreciate that the additional business income derived from the undertaking is also eligible for deduction under section 80-IB. 4. During the period between the date of assessment order and this date the Central Excise Appellate Tribunal had heard the appeal of the appellant on the Central Excise laws and had given a finding that the profit and loss ac is reliable document. Therefore, the income of the appellant as per the said profit and loss account is to be adopted. 5. In the meanwhile a remand report was called for by me from the Assessing Officer who had furnished the remand report and had supported the assessment made regarding the inclusion of the gross profit of Rs. 1,04,30,010/- while it had suggested that the addition for runners and risers and scrap are not called for. This remand report was discussed with the appellant who had submitted the following submissions in respect of the addition on account of gross profit: The main addition to the income returned is a sum of Rs. 1,04,30,010/- representi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be reliable it is reliable in toto and not in parts. I find that there is merit in the contention of the appellant that Sec 69 C applies to unexplained expenditure and not in respect of undisclosed expenditure. The explanation of the appellant that the expenses were met out of the undisclosed revenue and thus the entire expenditure is explained is, in my view tenable. This view is fortified by the decision reported in 321 ITR 154 that succinctly addressed the issue in a similar case where during the course of search certain materials were seized that bore testimony to unaccounted income and unaccounted expenditure. The Hon'ble High Court concluded that the unaccounted income had funded the unaccounted expenditure and therefore the expenditure is not unexplained. The factual situation in the present case is almost identical. The expenditure debited to the profit and loss account had obviously come out of the gross profit additionally brought to tax by the assessing officer and therefore the contention of the assessing Officer that such expenditure is unexplained cannot be sustained. In the light of the above I direct the addition of Rs. 1,04,30,010 to be deleted. 7. The DR, in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance with the books of accounts audited by them though such P L a/c was available when they conducted the audit. Still the ClT(A) directed the A.O. to accept such items of expenditure without anybody (i.e either the A.O or assessee s own statutory auditors) examining it. These facts are discussed in detail in the Remand report filed by the A.O. [ pages 5 to 11 of Paper Book]. A.O. has considered only the difference in G.P. on the basis of the findings by Central excise authorities. For other entries in the P L a/c. A.O. relied on the P L a/c certified by the Auditors of the assessee. Even if ClT(A) wanted the A.O. to consider such seized P L a/c as a reliable document, he should have examined the items in the P L a/c in the background of the provisions contained in sections 30 to 43D or directed the A.O. to do that exercise. In fact some heads of expenses appearing in the seized P L a/c reads as "Conversate", "Furnace", "Other" etc. Nobody knows the nature of such expenses and under which section of the I.T. Act such expenses are allowable. There is variation in "salary a/c" which was not clarified. 8. The A.R of the assessee submitted that assessee commenced production on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out at the premises of the assessee on 24.6.2004. During the course of the search, certain documents were found and seized by the Central Excise Department which included a Profit Loss Account as on 31.3.2004. The Assessing Officer observed that the figures of purchases, sales and various other expenses disclosed in the audited Profit Loss Account are at variance with the figures reflected by the seized Profit Loss Account. The Assessing Officer observed that the gross profit as per the audited Profit Loss Account comes to Rs. 2,65,93,494/- and the gross profit as per the seized Profit Loss Account was worked out by him at Rs. 3,70,23,504/-. In other words, according to the Assessing Officer, the gross profit as per the seized document was more by Rs. 1,04,30,010/- than the gross profit disclosed in the audited Profit Loss Account. Therefore, the Assessing Officer added Rs. 1,04,30,010/- to the income of the assessee. 10. On appeal, the CIT(A) deleted the addition by observing that the net profit disclosed as per the audited Profit Loss Account is much more than the net profit revealed from the seized document. It is not open to the Department to accept some of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into consideration the expenses under the head consumable stores whereas for working out the gross profit as per the seized document at Rs. 3,70,23,504/- the Assessing Officer has not taken into consideration the expenses of Rs. 1,02,89,714/- revealed by the seized Profit Loss Account. When gross profit is worked out by considering the expenses under the head consumable stores as per the seized Profit Loss Account, the gross profit comes to Rs. 2,67,35,790/- and not Rs. 3,70,23,504/- as considered by the Assessing Officer. Be that as it may. We find that no material has been brought on record by the Assessing Officer to show that the expense revealed by the seized document under the heads conversion charges, furnace expenses and others are not tenable while computing the total income as per the provisions of the Income-tax Act. We find from the audited Profit Loss Account that the expenses claimed therein include expenses under the heads conversion charges and furnace charges. We find that it was not the case of the Assessing Officer that the expenses revealed by the seized Profit Loss Account also contain certain expenses which were not allowable u/s 28 to 44AC and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability (in the list of creditors). Further he has stated that the assessee firm has paid Rs. 42 lakhs towards land and building, Rs. 134 lakhs towards machinery. And requested that total investments reported by the firm is Rs. 2,61,20,000 which is higher than the sum stated by Mr.Sathiyamoorthy. But according to books, the assessee has paid for machinery only a sum of Rs. 1,14,00,000/- on various dates, which was confirmed by the assessee s representative at the time of previous hearings and a written statement was also given which is reproduced hereunder: Particulars Debtors Credits 134,00,000 1.4.03 by purchase Various machinery As per uou credited To cheque 867826 15,00,000 3.4.03 -do- 867827 15,00,000 3.4.03 -do- 867828 5,00,000 3.4.03 -do- 867829 5,00,000 5.4.03 -do- 867830 10,00,000 5.4.03 -do- 867831 10,00,000 30.4.03 -do- 867834 20,00,000 30.4.03 Pay order of KBL 22,00,000 11.7.03 KBL taken loan 25,00,000 19.7.03 -do- 5,00,000 1,14,00,000 1,14,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to come in the earlier previous years when the firm had not commenced any business or in the current year prior to commencement of business. If the investment is in the current year the income earning apparatus is not in place at the time of investment. So it is highly improbable and against human probability to presume that the investment should have come from the firm. Therefore relying on the decision of the apex court in 83 ITR 187, I hold that the addition on this ground is not sustainable and hence delete the same. 18. The DR, in the written submission, has stated as under: As per the MOU dated 20-10-2002 seized by the Central Excise authorities, assessee firm purchased the assets of this business from the erstwhile firm for Rs. 3.06 crores. In the assessment order A.O. relied on the statement by one of the buyer that he received Rs. 2.59 crores and gave credit for Rs.1,56,00,000 accounted in the books as well as sum of Rs. 85,02,000 declared by various partners in A.Y. 2003-04 and 2004-05 which leaves a difference of Rs. 17,98,000. However A.O. found that total investments as per the revised balance sheet is 2,62,95,700 out of which Rs. 20 lakhs is yet to be paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounted income in the very first year of production is an accepted fact in this case. ClT(A) in para. 8 held that investment in factory has to be made prior to commencement of business and hence it was made in earlier years. This finding is perverse as it is against the documentary evidence available on record. For eg. Art. 111(2) [ page 18 of Paper Book] speaks about payment of Rs. 88 lakhs only after commissioning of a furnace. Similarly Article 111(3), (4) (5) [ page 32 33 of Paper Book] speaks about payments after commissioning of furnace. Pages 29 31 of Paper Book evidences various payments made by assessee during the year. All these documentary evidences contradicts the finding of ClT(A). If A.O. made request for enhancement of assessment and ClT(A) failed to make enhancement, A.O. can file appeal on this issue before the ITAT as held in Popular automobiles Vs ClT (Ker) 187 ITR 86. 19. The A.R of the assessee submitted that the assessee has commenced production on 8.5.2003 and the year ended on 31.3.2004. was the first year of operation of the assessee, therefore, it cannot be said that the assessee has earned undisclosed income out of its earlier operation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,700/-. The Assessing Officer, considering the difference in the amount of Rs. 2.59 crores which was acknowledged by the vendor as received from the assessee and Rs. 2,42,95,700/- revealed as paid by the assessee worked out to Rs. 16,04,300/- and added the same to the income of the assessee. 21. On appeal, the CIT(A) deleted the addition of Rs. 16,04,300/- on the ground that the purchase of land and building and plant and machinery are items which are purchased before commencement of production by the assessee and therefore, the same cannot be out of undisclosed income of the assessee. 22. The DR before us submitted that the above decision of the CIT(A) was not justified and for which he placed reliance on the decisions of Hon'ble Calcutta High Court in the case of CIT vs Ashok Timber Industries, 125 ITR 336 (Cal) and Basantipur Tea Co.(P) Ltd vs CIT, 180 ITR 261 (Cal) and submitted that the decision of the Hon'ble Supreme Court in the case of CIT vs Bharat Engineering Construction Co., 83 ITR 187(S.C) is not applicable in the instant case. He also submitted that the finding of the CIT(A) that payments for acquisition of assets in question were made before the commencement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e partners of the firm namely, Shri S.P.Muthuramalingam and Smt. Radha in assessment years 2003-04 and 2004-05 as their undisclosed income invested in purchase of factory but as per the MoU, the cash has been paid on various dates by Shri M.Somasundaram, partner. We do not find any force in this argument of the successor Assessing Officer. In our considered view, the successor Assessing Officer has no power to review the order of his predecessor. Further, no material has been brought on record by the Assessing Officer to show that Rs. 85.02 lakhs was not handed over by the said Shri S.P.Muthuramalingam and Smt. Radha, partners for purchase of land and building and Shri M.somasundaram has paid the amount out of the funds of the firm and not from contribution made by Shri S.P.Muthuramalingam and Smt. Radha. In the above facts of the case, in our considered view, the addition made by the Assessing Officer and the enhancement proposed by the Assessing Officer are untenable. We accordingly dismiss the ground of the Revenue. 25. In Ground No.4 of the appeal of the Revenue, the grievance is that the CIT(A) erred in deleting the addition of Rs. 12,62,857/- representing the sale proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lower authorities and materials available on record. In the instant case, the Assessing Officer has estimated gross profit at Rs. 22,20,492/- on unrecorded sales of Rs. 1,87,02,473/- on the basis of gross profit rate of 11.21% based on preceding year s result. 33. On appeal, the CIT(A) estimated such gross profit at Rs. 18,34,713/- being 9.81% on the basis of rate of gross profit accepted for the year under consideration on disclosed sales. 34. The DR argued before us that the books of account of the year under consideration were not reliable as unrecorded sales were found and therefore, the gross profit rate of the current year should not have been applied and gross profit rate of preceding year should alone have been applied for determining the gross profit on unrecorded sales. 35. The A.R of the assessee supported the order of the CIT(A) and pointed out that in respect of disclosed sales of the current year, the Assessing Officer has accepted gross profit which comes to 9.81% and the same was more relevant for estimating the gross profit of the current year. 36. We find that it is not in dispute that the gross profit of the current year accepted by the Department on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us have not produced copy of the seized document and order of the CEGAT. We find that these are also not disclosed in the order of the CIT(A). The CIT(A) deleted the addition merely relying on the submission of the assessee without verifying the contents of the seized document. In the absence of any seized document and the order of the CEGAT, we are not in a position to adjudicate this issue completely. The assessee has also not brought any material before us to show that sale of re-rollers were recorded in the books of account of the current year. In the above circumstances, in our considered opinion, it shall be in the interest of justice to restore this issue back to the file of the CIT(A) for adjudication afresh after proper verification in the light of the discussion made hereinabove by passing a speaking order. Needless to mention that the CIT(A) shall allow reasonable opportunity of hearing to both the parties before adjudicating the issue afresh. We order accordingly. Thus, this ground of appeal of the Revenue is allowed for statistical purposes. 43. Ground No.4 of the appeal is directed against the order of the CIT(A) in deleting the addition of Rs. 7,37,224/- represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) erred in deleting the addition of Rs. 22,20,492/- representing the unaccounted income earned from suppressed production. 51. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. In the instant case, the Assessing Officer observed that there was a search at the premises of the assessee on 24.6.2004 conducted by the Anti- Evasion unit Trichy Central Excise Commissionrate, during the course of which various incriminating documents were seized. The seized materials included daily production sheets for 26.5.2004, 27.5.2004, 14.6.2004 to 17.6.2004. These sheets contained the details of heat number and weight of ingots produced. Based on these details, the Central Excise Authorities worked out the average consumption of power per MT at 725 units as against 1150 units per MT shown in the production records of the assessee. The Assessing Officer further noted that at the rate of 725 units of power per MT total production for the consumption of 78,03,072 units works out to 10762.860 MT of MS ingots as against 7859.320 MT of production shown by the assessee. Thus, the assessee had suppressed production of 2903.54 MT. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be very relevant for determining the profit of another year. In the instant case, we find that the Revenue has accepted that the gross profit in respect of disclosed sales achieved by the assessee in assessment year 2004-05 was 11.21%, assessment year 2005-06 was 9.81% and in the year under consideration was 0.79%. Thus, this accepted fact on record establishes that market condition in the year under consideration was not the same as was prevalent in the earlier year. We agree with the finding of the CIT(A) that in such a situation the gross profit rate found for the disclosed sales of the current year is a better parameter to estimate the gross profit on undisclosed sales than the gross profit secured by the assessee in earlier years. We further find that the Revenue has brought no material on record to controvert the finding of the CIT(A) that the assessee s explanation that the additional income as estimated by the Assessing Officer had already been offered under the head Other income appears plausible specially when there is no evidence to controvert the claim and on the fact there is no incentive for non-disclosure of income as the income of the unit is exempt u/s 80-I. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ia) were not applicable to the case of the assessee. 59. The DR supported the order of the Assessing Officer whereas the A.R of the assessee supported the order of the CIT(A). 60. We find that the contention of the assessee is that the raw materials were purchased from the suppliers who entered into a supply agreement and were required to supply the material at the factory gate of the assessee. The expenditure incurred on freight charges was included in the bills by the suppliers. The assessee contended that though the freight charges were included in the bills of the suppliers the payments were made by the assessee through the lorry drivers on behalf of the suppliers and debited to the account of the suppliers. Therefore, the contract for transport of materials was between the suppliers of the materials and the transporters and not between the assessee and the transporters. If at all TDS was required to be deducted, it was to be deducted by the suppliers and not by the assessee. 61. When the Bench asked the DR with whom the transporters had the contract for transporting of the goods, whether with the assessee or with the suppliers, the DR submitted that none of the authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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