9911796707
TMI Blog2013 (1) TMI 422X X X X Extracts X X X X X X X X Extracts X X X X ..... he Managing director and the director are running steel units in their individual capacities also. Consequent to the search operations carried in the hands of its Managing Director, the AO initiated assessment proceedings u/s 153C of the Act in the hands of the assessee company herein for the years under consideration. While completing the said assessment, the AO made additions in business income on account of suppression of sales for all the years under consideration and also made additions u/s 68 of the Act in some of the years. The assessee challenged the validity of initiation of proceedings u/s 153C of the Act and also the various additions made by filing appeal before Ld CIT(A), but could get only partial relief. While granting relief, the Ld CIT(A) substantially reduced the additions by changing the method of computation of suppressed business income. Aggrieved by his order, both the parties are in appeal before us challenging the order of first appellate authority on the points decided by him against each of them. 3. We shall first take up the appeals filed by the assessee. The grounds raised by the assessee relate to the following issues:- (a) Validity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disputed fact that the Managing Director of the assessee company, i.e. Shri K.P.Ummer has confessed about the suppression of purchases and sales in the sworn statement taken u/s 132(4) of the Act. The relevant question and answers are extracted below:- "Q. No.13 - Have you properly maintained accounts relating to scrap purchases, finished goods, sales etc of your establishments. Ans.:- In scrap purchase 90% is imported scrap and sponge iron. Details of its purchases have been properly accounted. 10% includes local purchase. 90% of the local purchase has been accounted. 10% of local purchase has not been accounted. 8% of the sales also has not been accounted. Q. No.14 - You have said in your earlier question that 8% of the sales have not been accounted. What did you do with the profit so obtained from the sales. Ans.:- Money obtained from such unaccounted sales have been utilised for purchasing property in my name and also for the house which is under construction." These questions and answers given by the Managing director clearly indicate that there was suppression of purchases and sales in all the es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iced that the AO primarily relied upon certain documents obtained though the Commercial taxes department, i.e., the report of KSIDC about the steel industry, for arriving at the suppressed business income. From the assessment order, it is not clear as to whether those documents were confronted with the assessee or not. However, we notice that the assessee has given its view on those documents in the notes filed before the Ld CIT(A) and the first appellate authority has also duly considered them while framing his order. Hence, the violation of natural justice at the level of the AO, if any, has been made good at the level of Ld CIT(A). This is clear from the following observations made by Ld CIT(A). "11. I have carefully considered the relevant facts and provisions of law with regard to the issue involved. I find that Assessing Officer has made substantial addition relying on information gathered by Commercial Taxes Authorities from KSIDC Ltd. The information so relied upon by the Assessing Officer was apparently not made available to the appellant before using the same against the appellant before drawing an adverse inference. This is evident from the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of audited accounts. However, the AO decided to reject the book results for the following reasons, which is narrated in Page 8 & 9 of assessment order:- "(i) The search conducted by the Department on 6/9/2007 at the business premises of the assessee also revealed indicative but serious defects. On that day the Director Shri Ummer deposed that there are serious defects in his books of account: Q.13: "Do you record the scrap purchase as well as furnished goods in your books of accounts exactly? Ans: 90% of the scrap purchases include imported scrap and sponge iron. All these purchases have come into accounts correctly. But there are 10% local purchases. 90% of the local purchases are also accounted. As such 10% of the local purchase has not come into account. 8% of sales are also not recorded in the books of accounts. Q.14: You have stated in reply to my earlier question that 8% of sales are unaccounted. What have you done by the profit you earned from such sale? Ans: I have deployed the unaccounted money received from such transaction in purchasing immovable property in my name and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 362 *13167 2387993 2004-2005 2,47,464 3,09.330 125.920 183.410 *13860 2542062 2005-2006 78,13,320 6250.656 6145.747 104.909 14590 1530622 2006-2007 88,08,288 7046.630 6741.735 304.895 15358.42 4682712 2007-2008 88,66,080 7092.864 6392.115 700.749 15484.45 10850712 2008-09 93,20,496 7456.397 6872.815 583.582 16752.39 9776359 TOTAL 3,52,90,738 2,81,55,877 2,62,78,332 18,77,545 89212.26 31770460 *Since the assessee did not supply the required data estimated @ 5% decrease for each preceding year **Since the assessee did not supply the required data estimated @ 10% decrease for each preceding year. 7. M.S. FLATS & RODS: Asst Year Power consumption Production as per norms (in tonnes) Production as per return Suppressed Production COST PER M.T. OF INGOT PRODUCE D: Rs. VALUE OF SUPPRESSION : Rs. 2003-2004 *1265845 *12658.450 **4428.367 8230.083 *16591.58 136550080 2004-2005 1031644 10316.440 2888.805 7427635 *17464.83 129722382 2005-2006 1402598 14025.980 5467.121 8558.859 18384.03 157346155 2006-2007 1370070 13700.700 5581.166 8119.534 19351.61 157125896 2007-2008 1379660 13796.600 6124.485 7672.115 18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed production of ingots along with estimated suppressed production of MS Flats and rods and applied gross profit rate declared for A.Y. 2008-09 to work out undisclosed profit without appreciating the fact on record that ingots were produced basically for own consumption as raw material for production of MS flats and rods. -The Assessing Officer applied gross profit rate of 14.61% for all the assessment years by stating the same to be GP declared by the appellant for A.Y. 2008-09. As against the same, the GP declared by the appellant for A.Y. 2008-09 was only 9.73%. This factor itself resulted in huge addition. -Gifts and loans totalling to Rs. 1,37,50,000 as unexplained credit were wrongly added in A.Y. 2006-07 whereas they pertained to A.Y. 2007-08. -In a similar manner, gifts totalling to Rs.60,21,000/- as unexplained credit were wrongly added in A.Y. 2007-08 whereas they pertained to A.Y. 2008-09. From the above, it is obvious that the Assessing Officer passed the assessment order in haste without taking into account correct facts on record and without affording due opportunity to the appellant and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be not in order." 13. The Ld CIT(A) also noticed that the power theft incident that occurred in the assessee's factory did not have much consequence, since the power connection was disconnected only for five days. Accordingly, the Ld CIT(A) held that this fact in itself cannot justify the determination of substantial unaccounted production, as done by the Assessing officer. 14. The AO had placed reliance on the report given by KSIDC, which was supplied to him by the Commercial taxes department, for determining the "power factor", as stated earlier. However, the Ld CIT(A) noticed that the commercial taxes department had also placed reliance on the report of KSIDC in the identical way for estimating the sales in the hands of the assessee and levying consequential penalty. The matter was taken up in appeal by the assessee and the penalty imposed was set aside by the appellate authority of commercial taxes department. The Ld CIT(A) also noticed that the KSIDC has issued a clarification in its letter dated 20.11.2008, wherein it is stated that the power factor that was given in its appraisal report is purely theoretical in nature and it cannot be taken as a basis for assessing sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. Considering the above facts, I am of the view that only after conducting test run in the appellant's industry, that the Intelligence Officer can reach a definite conclusion as to the power required for production of 1 MS ingots. For that purpose, if necessary, he can seek the assistance of experts in the field. After conducting such test run and determining the actual electricity required for production of 1 MT of MS ingots, the Intelligence Officer is upto estimate the production of MS ingots based on such findings. Thereafter, he can determine whether there is any suppressed turnover on the basis of which findings he shall also be eligible to impose necessary penalty on the appellant". The Assessing Officer placed reliance on the information collected from Commercial Taxed Deptt. who in turn had collected information from KSIDC. The information collected from KSIDC by the Commercial Taxes Deptt. could not justify the penalty as is evident from the above appellate order. Further to above, KSIDC issued a clarification dated 20.11.2008 to the Intelligence Officer, Squad No. 1 Kottayam that data furnished with regard to the power factor being purely theretical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; "The decisions relied upon by the Assessing officer have been dealt with by the learned counsel for the appellant in para 6 & 7 of written submission of 23rd November 2010. The learned counsel for the appellant has also placed reliance on the following two judicial pronouncements: 1. Amar Ispat Pvt. Ltd Vs. CCE, Thane-1 (2009) 235 ELT 487 (TRI Mumbai) 2. R.A. Castings Pvt Ltd Vs. CCE, Meerut-1 (2009) 237 ELT 674 (TRI Delhi) In the above judicial pronouncements it was held that electric consumption was not an abstract figure and was to depend on many factors such as, quality of scrap used, number of break downs, electricity failures, power cut/voltage fluctuations etc." 16. The Assessing officer had referred to a test report conducted by Mr. M Jacob Varghese in paragraph 7.2 of the assessment order and in the remand report dated 05- 10-2010 filed before the Ld CIT(A), the AO has stated as under:- "8.2 The norms prescribed by Kerala State Industrial Development Corporation Ltd (KSIDC) which was in conjunction with the order of the Departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2004-05 1031272 3619.091 284.95 2005-06 1402598 5467.121 256.55 2006-07 1370070 5581.166 245.48 2007-08 1379660 5875.753 234.81 2008-09 1275300 5982.440 231.17 It is seen that there is also no abnormal or abrupt fluctuation in power consumption over the years. The efficiency has gradually gone up over the years. 18. Based upon the factual findings narrated above and also based upon further deficiencies noticed in the approach of the AO, the Ld CIT(A) concluded that the estimation of huge unaccounted turnover made by the AO was not supported by any specific evidence and hence the said estimates are not sustainable. The relevant observations are extracted below:- "I further find that the Assessing officer even did not adopt correct figures for arriving at the above estimations. The Assessing Officer did not take into account the job work of 1496.621 MT in A.Y. 2003-04 and thus wrongly adopted production of 4428.367 MT by the appellant as against only 1612.492 MT production of MS Flats and rods done by the appellant. In a similar manner, the Assessing Officer wrongly adopted and estimated production of Ingots for A.Y. 2003-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be any dispute that the KSIDC, being a financial institution, cannot be considered as a technical expert and hence reliance placed by the AO on the said report, in our view, is totally wrong. 20. On the contrary, the inspection carried out by an independent person named Mr. M. Jacob Varghese has vindicated the power consumption figures reported by the assessee. The Ld CIT(A) has also given a specific finding that there was no abnormal or abrupt fluctuation in the average power consumption over the years and in fact the efficiency level of power consumption per MT of production has increased significantly over the years. There cannot be any dispute that it is possible to suspect about suppression of production if there was any abnormal fluctuation in power consumption or if there was no improvement at all in the average power consumption per MT of production. The Ld CIT(A) has also taken note of the fact that the huge level of unaccounted production estimated by the AO would require corresponding level of working capital, machinery and labour force, which were not proved to be available with the assessee. Absence of such a king of huge resources, itself proves the fact that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e so for the reason that in the above deposition (Q.10) it was further admitted that actual stock was not taken but was adopted based on output percentage. He further admitted that income earned from unaccounted activity was utilized for purchasing property in his name and for house which was under construction (Q.14). It is further seen that the above deposition of Mr. Ummer is of general nature describing the modus operandi of his establishments without reference to any specific assessment year and was thus applicable to all the assessment years i.e. from A.Y. 2004-04 to 2008-09. A fair judicious and honest attempt in such set of circumstances to arrive at income earned by the appellant out of such unaccounted business activity is duly approved by the Apex Court in the case of CST vs. H.M. Esufali,, H.M. Abdulali (1973) 90 ITR 271 (SC). To that extent therefore this judicial pronouncement of the Apex Court was also applicable for determination of income for all the assessment years i.e., from A.Y. 2003-04 to 2008-09. I, thus, do not find much merit in the arguments of the learned counsel for the appellant that the deposition was relevant only for the A.Y. 2008-09. In view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e workings made by Ld CIT(A) is given below:- A.Y. 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Turnover shown 2,13,80,091 4,96,31,400 11,10,77,961 10,83,58,188 11,78,68,416 15,95,89,148 @Turnover estimated 2,30,90,498 5,36,01,912 11,99,64,198 11,70,26,843 12,72,97,889 17,23,56,280 #Gross profit thereon 15,00,882 34,84,125 77,97,673 76,06,745 82,74,363 1,67,70,266 GP declared 4,77,905 28,95,929 44,39,040 49,77,598 71,86,254 1,55,25,482 Addition sustained 10,22,977 5,88,195 33,58,683 26,29,147 10,88,109 12,44,784 @108 % of the turnover shown #9.73 for A.Y. 2008-09 and 6.5% for other years. 25. From the foregoing discussions, in our view, following two issues emerge for our consideration and both the parties are aggrieved on these two issues:- (a) Whether the Ld CIT(A) is justified in determining the suppressed sales at 8% of the disclosed turnover. (b) Whether the Ld CIT(A) is justified in adopting the rate of Gross Profit at 6.5% for assessment years 2003-04 to 2007-08. The department is aggrieved in adopting the rate of Gross profit at 9.73% for asst. year 2008-09. 26. We have already upheld t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that the department has not seized any material to make estimate of sales suppression in any other manner. 28. The next question relates to the gross profit rate to be adopted for estimating the income for all the years. There cannot be any dispute that the rate of gross profit depends upon various factors like purchase quantity/rate, sales quantity/rate, variation of rates, cost of manufacture and its variation etc. A significant variation in one of the factors would badly affect the gross profit rate. A significant increase in the selling rate would boost the rate of gross profit. This point was exactly clarified by the assessee before the Ld CIT(A) with regard to the variation of rate of Gross profit for the assessment year 2008-09. The first appellate authority has also extracted the workings given by the assessee in paragraph 11.7 of his order. The workings given by the assessee disclosed the fact that the sharp rise in the selling rate of finished goods has helped in the increase of Gross profit rate for the assessment year 2008-09 by 6.02%. 29. Accordingly, the Ld CIT(A) has given a specific finding that the effect of increase in prices in the year relevant to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs is adopted to determine the undisclosed income of the respective years. We accordingly order that the undisclosed income shall be determined in the following manner. (a) To determine the total turnover at 108% of the disclosed turnover. (b) To determine the amount of Gross Profit by applying the rate of Gross profit disclosed by the assessee for the respective assessment years on the turnover determined in (a) above. (c) From the amount computed in (b) above, to deduct the Gross profit already disclosed by the assessee. (d) The resultant figure is the undisclosed income of the respective years. The order of Ld CIT(A) on this issue is modified accordingly. 31. We have already noted that the assessee originally worked out the rate of gross profit for the assessment year 2008-09 at 14.61% and later modified it to 9.73%. During the course of hearing, the Ld D.R submitted that the revised workings submitted by the assessee needs verification at the end of the AO. We agree with the said plea and accordingly direct the AO to verify the G.P rate workings for the assessment year 2008-09 after affording oppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the instant case on the ground that in the case of Jagmohan Ram Ram Chandra (Supra), the decision rested upon the genuineness of the transactions. It was submitted that the genuineness was not an issue in the instant case and accordingly it was contended that the said decision shall not apply to the facts of the instant case. 34. The Ld CIT(A) was convinced with the submissions made by the assessee and accordingly deleted the assessment of cash credits in both the years viz., assessment year 2006-07 and 2007-08. The observations made by the Ld CIT(A) are extracted below:- "20. I have carefully considered the relevant facts and provisions of law with regard to the issue involved. I find that as per specific details elaborated in para 8.3 of the assessment order the identified borrowings from Mr. K.P. Ummer of Rs. 1,37,50,000 are pertaining to A.Y. 2007-08 and therefore, no addition was justified in A.Y. 2006-07. In a similar manner, identified borrowings from Mr. K.P. Ummer of Rs. 60,21,000 are pertaining to A.Y. 2008-09 and therefore, this addition was no justified in A.Y. 2007-08. I further find that whereas the Assessing Officer is disbelieving cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borrowings, in no manner, makes the appellant company as beneficiary as Mr. Ummer was free to withdraw the funds at any point of time as he stood as creditor in the books of accounts of the appellant company. In the previous year relevant to A.Y.2007-08 for which the borrowings of Rs. 1,37,50,000 have been identified by the Assessing Officer, I find that as against Nil opening balance, the credit balance to the account of Mr. K.P. Ummer at the year end is only Rs. 1,24,39,096 i.e. much lesser figure than the one identified by the Assessing Officer. In a similar manner, I find that in the previous year relevant to A.Y. 2008-09 for which the borrowings of Rs. 60,21,000 have been identified by the Assessing Officer, I find that as against opening balance of Rs. 1,24,39,096, the credit balance to the account of Mr. K.P. Ummer at the year end is only Rs. 82,19,246 i.e. much lesser figure than the one identified by the Assessing Officer taken together for A.Ys. 2007-08 and 2008-09 and in fact there is net withdrawal by him in this year. It is therefore, apparent that Mr. K.P. Ummer was the actual beneficiary and was in actual command of such funds and if there was any defect in the sour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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