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TMI Blog2015 (10) TMI 734X X X X Extracts X X X X X X X X Extracts X X X X ..... profit of Rs. 3,78,34,910/- and for A. Y. 2008-09 against turnover of Rs. 109,46,99,293/-, assessee had net profit of Rs. 8,17,33,948/-, which translated to margins of 6.32% and 7.47% respectively. As against this, its profit margins for the impugned assessment year was only 0.46%. 3. In view of the above difference in profit rates, AO made a verification of the books of account. According to him, assessee had consumed 32,008.50 MT of iron ore and had used 34,897.800 MT of coal to produce 29082 MT of sponge iron during the relevant previous year. According to him, consumption of coal was more than iron ore which was very unlikely because industrial norms stated that for one MT of sponge iron only 1 to 1.1 MT of coal and 1.3 to 1.4 MT of iron ore were required to be used. Further as per the AO, assessee was having installed capacity of 60,000 MT against which production was only 29,082 MT. When this was brought to its notice, assessee's reply was that it had during the relevant previous year installed a new kiln wich started functioning only in January, 2006. Thus as per the assessee, only half of the coal capacity of 60000 MTs were available during the relevant previous year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 6. Based on the above grounds, AO came to a conclusion that assessee had shown more consumption of coal and iron ore but had shown less production of sponge iron and the parameters adopted by the assessee for working out the production were incorrect. According to him, there was suppression of sales and excess production which were not accounted by the assessee. Such suppression was worked out as under : Consumption of coal.. 34897.800 MT Consumption of iron ore.. 32008.500 MT In the ratio of 1.1 : 1 for production of 1 MT of sponge iron, actual production of sponge iron.. 31,725 MT Production shown by assessee.. 29,082 MT Suppressed production.. 2643 MT Average selling price of sponge iron per ton adopted by assessee.. Rs.8450/- Suppressed sale (2,643 MT x Rs. 8,450).. Rs.2,23,33,350/- He made an addition of Rs. 2,23,33,350/- without allowing any reduction for expenditure. According to him, all expenditure for such increased production and suppressed sales were already charged to the profit and loss account. 7. An addition was also made for shortage of stock of 205.6 MT which as per the AO was not properly explained by the assessee. Though the assessee m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done when it was available and according to the market situation and it was always the endeavour of the assessee to have adequate cushioning so as to ensure uninterrupted production. 9. However, CIT (A) was not impressed by the above arguments. According to him, assessee had failed to give a separate break-up of expenditure on coal and electricity consumption for testing and stabilisation of the new kiln. As per the CIT (A), assessee had more production from one kiln than with two kilns. Assessee could not explain the discrepancies pointed out by the AO. As per the CIT (A), even if extra consumption of coal and electricity were considered to be true, assessee ought to have capitalised such expenditure since the new kiln was yet to start production. He therefore held that AO was justified in invoking the Section 145(3) of the Act, and rejecting the books of account of the assessee. However, according to the CIT (A), instead of making an addition of Rs. 2,23,33,350/- for suppressed turnover, it would be better to apply profit rate of 6.90% on the total turnover for the impugned assessment year for ascertaining the correct profit. The rate of 6.90% was arrived at by the CIT (A) by av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y high which indicated suppressed production. The stock maintained was 30000 MT of iron ore, all through, whereas the consumption for the whole year was only about 32000 MTs. Production during the period April to December 2005, was much higher to that in January to March 2006, when two kilns were working. As per Ld. DR, CIT (A) had given considerable relief to the assessee by applying the average profit rate on the turnover and sustaining the addition only to this extent. According to him, the order of CIT(A) was fair and ought not to be disturbed. 12. We have perused the orders and heard the rival contentions. What we note is that AO all through the assessment order has not brought out any specific defect in the books of account produced by the assessee. No doubt he mentioned that assessee had consumed 34897.80 MT of coal and 32008.50 MT of iron ore but had given production of only 29082 MT of sponge iron. It is not known from where the AO found the norm that 1 to 1.1 MT of coal and 1.3 to 1.4 MT of iron ore was the standard requirement for producing 1 MT of sponge iron. Assessee had stated that consumption of these raw material was dependent on the moisture and dust content, ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n prudence will accept such book results. Assessee no doubt had purchased large quantity of coal during the months of October and November, 2005, but in the same two months, the purchase of iron ore was much lower. Purchase of large quantity of coal and maintenance of iron ore stock cannot be termed as defect in accounts when the purchases were duly reflected in the books and the stock register. As to the letter received by the AO from DGCEI it is not disputed that the survey done by the Central Excise were after the relevant previous year. Assessee cannot be saddled with any addition for suppressed sale based on a survey conducted in a succeeding year when the excess stock found at the time of survey is not collated with the production data for the preceding year. In any case, the sales-tax assessment order for the relevant previous year placed at paper book pages 82 to 85 show that books of account of the assessee were maintained in the usual course of business, were verified, and no defects were found. Relevant paras of the order dt.25.03.2010 is reproduced hereunder : "The dealer is a manufacturer of sponge iron, steel ingots & TMT bars. For the process of manufacture, the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 4% on sale of sponge iron, MS Ingots, TMT Bars etc. The dealer has also effected interstate sales and has charged and collected CST at 4% against 'C' forms. The books of accounts of the dealer are maintained in the usual course of business and in a verifiable manner. No discrepancies are noticed except for the below mentioned anomaly." 14. Reading of the above order also go to show that assessee was not a simple producer of sponge iron but they were doing many other activities and there was no defects or lacuna noted by the sales-tax authorities. Hon'ble Allahabad High Court in CIT v. Subhash Chand (supra) has clearly held that the records of the assessee once accepted by the sales-tax authorities, could not be given a go-by by the Income-tax authorities. Rejection of the books of account u/s.145(3) of the Act has got very serious consequence on an assessee and cannot be done in a light hearted manner unless such defects are manifested in the books of account and can be pointed out with certainty. We are of the opinion that there was no occasion or instances of this nature pointed out by the AO in the assessment order, except for generalisations based on hypothetic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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