9911796707
TMI Blog2012 (10) TMI 353X X X X Extracts X X X X X X X X Extracts X X X X ..... ies and as gross profit shown in the return of income filed by the assessee. 5. The Assessing Officer has made the addition by observing as under: "The details of purchase, sales, gross profits admitted by the assessee and arrived at by the Excise Department are given below: Arrived at by the Central Excise Department Admitted by the assessee Difference Purchase 11,53,08,053 6,14,30,596 (include purchase from inter state and import) 5,38,77,457 Sales 13,47,38,635 7,42,69,319 6,04,67,316 Closing stock 1,40,96,088 (Add stores) 34,96,834 1,75,92,922 1,83,30,146 7,37,224 Gross profit 3,70,23,504 2,65,93,494 1,04,03,010 From the above it Is clear that the assessee has purchased raw materials from various places, part of which Is out of books and sold it mainly to the concerns as discussed above and part of which Is out of books. After discussion, the assessment is finalized as under.- When the above discrepancies are questioned, the representative has stated that "The details of quantity value of ingots" purchased by the assessee as reproduced by you are jotting contained in a piece of paper and the same are not corroborated by any evidence and this is only on the bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appellant is in appeal regarding the additions(i) to (iv). The additions were disputed on the following effective grounds: 1) The Income tax Officer failed to appreciate the submissions of the appellant that the show cause notice is an unproved fact and cannot be the basis of assessment. 2) The Income tax officer ought to have appreciated that the show cause notice is the first step of adjudication and the adjudication has not yet been completed. 3)The Income tax Officer failed to appreciate that the veracity of various pieces of evidences relied by the Central Excise department are under scrutiny and none of the allegations of the Central excise had been proved. 4) The Income tax Officer ought to have appreciated that the veracity of the tapes seized have been questioned and their reliability is not free from doubt. 5) The Income tax Officer ought not to have adopted the gross profit as per the show cause notice of the Central Excise department especially when the net profit disclosed by the appellant was higher than the net profit as per the record relied by the Central Excise department. 6) The Income tax Officer ought to have appreciated that the sale of scrap and ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the seized document is Rs. 3,70,23,504/- and as per the Profit and loss account, the gross profit is Rs. 2,65,93,944/-. The Assessing Officer had added the difference between the two conveniently ignoring the net profit disclosed by the seized document. The Central excise department had found that the seized profit and loss account to be reliable and in that event the whole document is reliable and not that portion that suits the interests of the revenue. As the profit disclosed by the appellant is higher than the profits that had been arrived at by the Central Excise no addition is called for. b) The claim of the Assessing Officer that the expenses that had been debited to the profit and loss account seized by the Central Excise over and above what had been debited to the profit and loss account filed along with the return on the ground that the provisions of Sec 69C prohibit the allowance of the expenses that had been added as unexplained expenditure is totally misplaced. The proscription for disallowance of expenses is in reference to unexplained expenditure and not unaccounted expenditure. The expenditure contained in the seized profit and loss account are fully explained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zed by the Central Excise authorities are given in para. 3.1 of the assessment order. Copy of seized P&L a/c is available as pages 1 & 2 of Paper Book. Copy of P&L alc filed along with the return is available as page 3 of Paper Book. As per these documents, gross profit suppressed by the assessee is Rs. 1,04,30,010. These figures stand accepted by the assessee also. Since the assessee has claimed all the expenses eligible under the I.T. Act in its profit and loss account filed along with the return, AO. did not make any adjustments to the net profit or other revenue expenses. On appeal, CIT(A) held that CEGAT has treated the P&L a/c seized in this case as reliable document. According to ClT(A) a document has to be relied on in toto and not in parts. Accordingly the addition was deleted. ClT(A) failed to note that * Central Excise authorities are only concerned with unaccounted production of excisable goods and hence they considered only the opening and closing stock as well as purchases, manufacturing costs and sales. The analysis made by CEGAT on such issues stands accepted by assessee and hence AO. also adopted such figures to arrive at the G.P. * Central Excise author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Central Excise Department, at Rs. 3,70,23,504/- and taken the gross profit of the assessee from the Profit & Loss Account filed alongwith the return as Rs. 2,65,93,494/- and made the addition of the difference amount of Rs. 1,04,30,010/-. He submitted that the seized Profit & Loss Account also showed expenses of Rs. 2,09,16,980/- which was not taken by the Assessing Officer. He took the figures from the Profit & Loss Account filed by the assessee alongwith the return of income for the year ended 31.3.2004. He stated that the Assessing Officer is not justified in adopting the figures which are favourable to it from the seized document and not adopting the figures which are not favourable to it while making the addition to the income of the assessee. The Assessing Officer cannot be allowed to blow hot and cold at the same time. He submitted that from the seized Profit & Loss Account filed at pages 1 & 2 of the paper book by the Department, it can be seen that the profit of the assessee is only Rs. 37,09,619/-. Whereas in the return of income, the assessee had shown a net profit of Rs. 74,18,135/-. He also argued that the CIT(A) has further recorded in his order at page 4 para 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se Department is concerned with the manufacturing account only and therefore, they verified the seized document only upto gross profit and they have not verified the expenses revealed by the seized document. The expenses revealed by the seized document were also not examined by the Assessing Officer or by the auditor of the assessee-company and they were at variance with the audited Profit & Loss Account. As these expenses were not examined by anybody, the CIT(A) was not justified in holding the seized document as reliable in respect of the expenses. The DR also pointed out from the seized document that the expenses were claimed under the heads conversion charges, furnace charges and others, the nature of which was not known and therefore, it is not ascertainable whether they are allowable as deduction under the I.T Act or not. 12. The A.R of the assessee, on the other hand, supported the order of the CIT(A) and submitted that it was not open to the Department to accept some of the entries from the seized document and reject others. 13. We find that it is not in dispute that the seized Profit & Loss Account was not prepared by the assessee for disclosing the same either to the Ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd dismiss this ground of appeal of the Revenue. 15. Ground No.3 of the appeal of the Revenue is directed against the order of the CIT(A) in deleting the addition of Rs. 16,04,300/- representing payments outside the books for the purchase of land and machinery. 16. The Assessing Officer has made the addition by observing as under: Rs. "According to memorandum of understanding executed on 20.10.2002, the consideration for land and building and plant & machinery is Rs. 3.06 crores. A summon dated 20.12.2006 was issued to Mr.S.P.Sathiamoorthy, a turnkey person of the firm and a statement was recorded from him on 26.12.2006. According to him, the total amount received by him on various dates are Rs. 2.59 crores. On verification of books of account, it is seen that the following amount was recorded on various dates, by cheque/draft: Rs. 84,00,000 } Rs. 30,00,000 } paid towards machinery Rs. 42,00,000 paid towards land and building Rs. 1,56,00,000 But as discussed above amount received from Mr.Sathiyamoorthy is Rs. 2.59 crores. Balance amount paid out of books is Rs. 1,03,00,000 (2.59 crores - 1.56 crores) For which the partners of the firm has offered a sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remand report the Assessing Officer had not only sought to sustain the addition on account of the unexplained investment of Rs. 16,04,300/- but also to enhance the same. In response to this apart from the grounds already mentioned above the appellant had submitted as under: 1. "The other addition is in respect of alleged unaccounted investment in the capital of the firm by the partners. In this regard it is respectfully submitted that there is no additional investment at all. The addition is made on the basis of the claim of the turnkey operator that he is due a higher sum of money than that had been admitted by the appellant to be payable. This cannot constitute any income in the hands of the appellant. While one can understand that if the turnkey operator claims to have received higher amount than what was admitted by the appellant to be unexplained investment, it cannot be unexplained investment when the claim is that more money is payable to him. Thus the addition is in the first place due to mis-application of law and rules of accountancy and deserves to be deleted. 2. Even assuming without admitting that it is case of unexplained investment, the firm had come in to existenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence of Rs. 1,22,83,764 is unexplained investment of assessee firm. In fact the seized documents viz. MOU between the erstwhile partners and partners of the assessee firm shows that land and building was purchased for Rs. 3.06 crores and machinery for another sum of Rs. 1.34 crores [pages 13 to 33 of paper Book]. ClT(A) however deleted the addition on the reasoning that investment in business made by the firm is prior to commencement of its business and hence cannot be treated as income of the assessee firm. For this proposition he relied on the decision of the apex court in CIT Vs Bharat Engineering & Construction Co. reported in 83 ITR 187. The decision of CIT(A) is not maintainable on account of the following reasons: * This decision was considered by the Calcutta High Court in CIT vs Ashok Timber Industries (125 ITR 336) and held that the decision is not applicable under the 1961 Act since as per the wordings in sec. 68, even an amount credited on the very first day of accounting year can be assessed as income of the accounting year for which books are maintained. Similar view was held in Basantipur Tea Co. (P) Ltd. Vs ClT (Cal) 180 ITR 261. * Further, in this case the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it is evident from the seized document itself that total payment made by the assessee was Rs. 2,40,72,137/- upto 31.3.2004 and the other amounts were payable by the assessee subsequently and in the statement recorded on 26.12.2006 by Shri S.P.Sathiamoorthy he has stated the amount received by him till that date and therefore, on the basis of such statement, the Assessing Officer was not justified in making the addition to the income of the assessee. It was submitted that such an explanation was also given before the Assessing Officer which was not accepted by him. 20. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. During the course of search by the Central Excise Department, two MoUs in respect of purchase of land and building and plant and machinery entered into by the assessee were seized. According to one MoU, the assessee has agreed to purchase plant and machinery for Rs. 1.34 crores. According to the other MoU, the assessee agreed to purchase land and building alongwith plant and machinery and along with land yet to be acquired by the vendor at an aggregate amount of Rs. 3.06 crores. The Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that receipt of any amount more than Rs. 2,42,95,702/- was made by the assessee before 31.3.2004. The A.R also pointed out that the seized MoU itself reveals the amount paid by the assessee on various dates upto 31.3.2004 which works out to Rs. 2,40,72,137/-. Thus, on the basis of the aforesaid seized MoU, the addition made by the Assessing Officer is untenable. 24. We find force in the argument of the DR that the CIT(A) was not justified in deleting the addition by assuming that the payments for land and building and plant and machinery were made prior to commencement of production and therefore, in earlier previous year. We find that it is not in dispute that the seized MoU itself records the various dates on which various payments were made by the assessee to the vendor for purchase of assets in question. We also find that as per the seized MoU the total payment made by the assessee upto 31.3.2004 comes to Rs. 2,40,72,137/-. Thus, on the basis of statement recorded of Shri S.P.Sathiamoorthy on 26.12.2006 wherein he admitted receipt of Rs. 2.59 crores from the assessee cannot be assumed as entire Rs. 2.59 crores was received by him prior to 31.3.2004. We find that the Revenue ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition of Rs. 12,62,857/- is not warranted. 27. The DR before us argued that as no cost was involved in respect of runners and raisers which is a by-product, the CIT(A) should not have deleted this addition. 28. On the other hand, the A.R submitted that these sales were included in the seized Profit & Loss Account and after such inclusion net profit as per the seized Profit & Loss Account comes to Rs. 37,09,619/- whereas the assessee has disclosed net profit of Rs. 74,18,134.82, therefore, separate addition of Rs. 12,62,857/- was not warranted. 29. We find that the issue is covered by our decision in respect of Ground No.1 of this appeal. In our considered opinion, the seized Profit & Loss Account is to be considered in totality and it is not fair and reasonable to pick one or two figures from the seized Profit & Loss Account and ignore the other figures stated therein. We find that after inclusion of Rs. 12,62,857/- in the seized Profit & Loss Account, the net profit was Rs. 37,09,619/- only whereas the net profit disclosed by the assessee in the return of income was much more than the said amount. Therefore, in our considered opinion, separate addition of Rs. 12,62,857/- was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that the estimate made by the CIT(A) is on the basis of relevant material and therefore, requires no interference by us. We, therefore, dismiss this ground of appeal of the Revenue. 37. Ground No.3 of the appeal is directed against the order of the CIT(A) in deleting the addition of Rs. 21,32,923/- representing unaccounted sale of runners and raisers. 38. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. According to the Assessing Officer, the assessee has removed 135.110 MT of by- product, waste and scrap during the period from April 2004 to June 2004 valued at Rs. 21,32,923/- as these were not recorded in the books of account of the assessee and as it did not involve any separate cost to the assessee, the Assessing Officer added Rs. 21,32,923/- to the income of the assessee. 39. On appeal, the CIT(A) deleted this addition by observing that the runners and raisers generated during the course of production are not sold in the market and rather they are consumed again by the assessee in its manufacturing process. 40. The DR before us argued that the CIT(A), in arriving at the above conclusion has igno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the current year of Rs. 1,75,92,922/- and added the difference amount of Rs. 7,37,224/- to the income of the assessee. 45. On appeal, the CIT(A) deleted this addition by observing that the opening stock of current year of Rs. 1,83,30,146/- claimed by the assessee is as per the closing stock shown in the return of income of last year and as in the last year the net profit as per the Profit & Loss Account filed with the return of income was more than the net profit disclosed as per the disclosed Profit & Loss Account and therefore, the Profit & Loss Account filed alongwith the return of income was accepted for the purpose of determining taxable income of the assessee. As a natural corollary to this the opening stock has to be accepted at Rs. 1,83,30,146/-. 46. The DR relied upon the order of the Assessing Officer and reiterated the reasons recorded by the Assessing Officer. 47. The A.R of the assessee supported the order of the CIT(A). 48. We find that it is an established position of law that the closing stock of one year is to be accepted as the opening stock of the immediately succeeding year. We find that the closing stock of Rs. 1,83,30,146/- as disclosed in the Profit & Lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,309/-. The Assessing Officer observed that the gross profit rate for the year was very low when compared to the earlier years i.e. 11.21% in assessment year 2004-05 and 9.81% in assessment year 2005-06. He, therefore, taking the average of the gross profit rate of these two years arrived at the gross profit rate of 10.50%. By applying this gross profit rate to the suppressed sales of Rs. 5,17,75,925/-, he arrived at the gross profit at Rs. 54,36,416/- which was added to the income of the assessee as unaccounted income from suppressed production. 52. On appeal, the CIT(A) deleted the addition on the ground that the gross profit rate obtained for the current year must be preferred to the rate obtained in the earlier year. Further, 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. 53. The DR has supported the order of the Assessing Officer whereas the A.R of the assessee has supported the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lower authorities and materials available on record. In the instant case, the Assessing Officer observed from the return of income filed by the assessee that the assessee has claimed deduction for transport charges of Rs. 16,72,463/- paid to M/s S.K. Transports and Rs. 2,17,897/- paid to Shri Umesh totaling to Rs. 18,90,360/- on which TDS was not deducted by the assessee. In reply to the show cause notice why the expenditure should not be disallowed u/s 40(a)(ia) of the Act, the assessee submitted that for invoking the provisions of section 40(a)(ia), expenditure claimed should be u/s 30 to 38 and since the freight charges were incurred in bringing the raw material to the factory of the assessee was part of cost of raw material was deductible u/s 28 and not u/s 30 to 38 of the Act. Therefore, the provisions of section 40(a)(ia) were not applicable to the facts of the case of the assessee. The Assessing Officer did not accept the said explanation of the assessee. He observed that the nature of business of M/s S.K.Transports shows that they act as transport contractors acting like a bridge between the lorry owners and other customers and therefore, section 194C was attracted and sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 40(a)(ia) does not arise. However, in a case where the assessee purchased goods on premises of the supplier and it was the duty of the assessee to get its goods transported from the premises of the supplier to its own factory in such circumstances, the assessee was responsible for deducting tax on payment of freight as per the provisions of I.T Act and the assessee claimed deduction for its transporting expenses which can be disallowed u/s 40(a)(ia) on incurring of a default specified in that section. We also observe that the assessee has also not filed any material to show that the suppliers were to supply the goods at the factory of the assessee. In our considered opinion, 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. Therefore, it shall be in the interest of justice to restore this issue back to the file of the Assessing Officer for proper verification and thereafter adjudication afresh as per law. Needless to mention that before re-adjudicating the issue afresh, the Assessing Officer shall allow rea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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