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2015 (10) TMI 734 - ITAT BANGALORE

2015 (10) TMI 734 - ITAT BANGALORE - TMI - Rejection of books of accounts - addition made for suppression of turnover - Held 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. .....

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inted out the requirement of injecting washed iron ore for the new kiln, and pointed out these to be the reason why there were excess consumption of coal and electricity during the months of October to December 2005, these should not have been brushed aside lightly by the lower authorities.

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 let .....

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a noted by the sales-tax authorities. Hon'ble Allahabad High Court in CIT v. Subhash Chand (2004 (8) TMI 27 - ALLAHABAD High Court) 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 .....

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Adv For the Respondent : Shri P Dhivahar, JCIT ORDER Per Abraham P George, Accountant Member In this appeal filed by assessee, it is aggrieved that the books of account were rejected by the AO and an addition made for suppression of turnover was confirmed by the CIT (A), albeit with some reduction, vide order dt.25.03.2013, for the assessment year 2006-07. 2. Facts apropos are that assessee, a manufacturer of sponge iron had filed its return of income declaring nil income. Assessee had sales tur .....

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109,46,99,293/-, assessee had net profit of ₹ 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, .....

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y, 2006. Thus as per the assessee, only half of the coal capacity of 60000 MTs were available during the relevant previous year. With regard to excess consumption of coal and iron ore, reply of the assessee was that it was due to the trial run and experimentation done in the new kiln. 4. On receiving the above reply, AO made a study of the purchase of coal during the various months of the relevant previous year. He found that assessee had purchased 16,544 MT and 10,016 MT of coal in the months o .....

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mption of iron ore/ coal / diesel / power and found that during the months of October to December 2005, production in MT of iron ore did not show a rational ratio, vis-a-vis, the consumption of coal and power. 5. AO was also in possession of certain information from the Joint Director, Directorate General of Central Excise Intelligence (DGCEI) in which it was stated as under: "the assessee manufactures sponge iron etc., searches were conducted at the office, factory and residential premises .....

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to the AO, during the months of April, July, August and October 2005 and February 2006, there was no consumption of iron ore, but there was production of iron ore as per the stock register produced. There was no corresponding reduction in fuel and power. Further as per the AO, assessee was maintaining iron ore stock in the vicinity of 37,000 MTs all through the entire year, when the total consumption of iron ore for the entire year was only 32,000 MT. In other words, according to him there was .....

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n 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 ₹ 8,450).. Rs.2,23,33,350/- He made an addition of ₹ 2,23,33,350/- without allowing any reduction for expenditure. According to him, all expenditure for such increased production an .....

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t was completed by making the above mentioned additions. Aggrieved, assessee moved in appeal before the CIT (A). 9. Argument of the assessee before the CIT (A) was that there was no defect in the books of account and additions were based on assumptions and surmises. According to assessee, returns were filed after conducting tax audit prescribed u/s.44AB of the Act and there was no defect in the books of account pointed out either by the tax auditor or the AO. Assessee submitted that rejection of .....

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ined. So far as the letter from DGCEI was concerned, submission of the assessee was that survey by the Central Excise Department was conducted in financial year 2007-08 and therefore the discrepancy, if any, pointed out by the Central Excise authorities pertained to the subsequent year and not the relevant previous year. Even otherwise, there was no determination of the magnitude estimated by AO, by any of these authorities. Assessee also pointed out that even reputed companies like Sponge Iron .....

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In so far as excess stock of iron ore being maintained, submission of the assessee was that procurement of iron ore had to be 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 .....

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nt of the assessee. However, according to the CIT (A), instead of making an addition of ₹ 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 averaging the net profit margin for A. Ys. 2007-08 and 2008-09. Thus, he brought down the addition to ₹ 1,68,07,200/-. Since the profit was estimated on turnover, CIT .....

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not able to show any specific defect in the books of account. Variation in consumption of electricity, or consumption of raw material in a few months itself would not be a reason to reject the books of account. As per the Ld. AR, assessee had produced sufficient evidence to show that a new kiln was being operationalised during the previous year entailing high consumption of electricity as well as coal. In any case, as per the Ld. AR, the consumption standards taken by the AO as industrially acc .....

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e were focussed on operationalising the second kiln. In any case, as per the Ld. AR, consumption of higher coal and iron ore could not be translated to excess production and excess sale. Reliance was placed on the decision of the Delhi Bench of the ITAT in ITO v. Jaintex Apparels (P) Ltd [(2014) 49 taxmann.com.169] and Rajkot Bench in M/s. Raghuvir Cotton Ginning & Pressing Pvt. Ltd v. DCIT [ITA.571/Rjt/2012, dt 07.03.2014]. Reliance was also placed on the judgment of Hon'ble Allahabad H .....

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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. .....

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stated that it was operationalising a second kiln and this fact was not disputed by the lower authorities. When a new kiln is being operationalised for which the assessee had produced invoices in support of procurement of machinery and also pointed out the requirement of injecting washed iron ore for the new kiln, and pointed out these to be the reason why there were excess consumption of coal and electricity during the months of October to December 2005, these should not have been brushed aside .....

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80 1891 119.90 10.29 0.60 3.81 0.24 Aug'05 2210 2432 110 2652 120 13.38 0.60 3.96 0.17 Sept'05 3125 3439 110 3750 120 14.40 0.46 4.24 0.13 Oct'05 1040 1144 110 1248 120 13.27 1.20 4.24 0.40 Nov'05 1540 1695 110 1848 120 14.40 0.90 4.24 0.27 Dec'05 1985 2190 110 2382 120 13.87 0.60 8.48 0.40 Jan'06 2760 3036 110 3312 120 10.41 0.30 8.48 0.30 Feb'06 2170 2387 110 2604 120 13.01 0.50 8.48 0.39 Mar'06 2590 2849 110 3108 120 16.04 0.6 - Total 29082 32008 34897 13. The .....

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e books of account unless such statistical data are striking enough to show that the book results have been exaggerated and no man with common 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 reflect .....

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t 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 main raw materials are iron ore which is purchased locally from local registered dealers. The other raw materials are coal which is purchased from local r .....

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d by way of import. The dealer has also effected purchases of pig iron from local registered dealers and interstate dealers. However the sponge iron used in the manufacture of ingots is manufactured by the dealer. As regards the manufacture of TMT bars, the MS ingots manufactured by the dealer are used apart from purchases from local registered dealers. For the process of manufacture of TMT bars, the dealer has also effected purchases of MS billets from local registered dealers. The dealer has a .....

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ufacture or trading. However these goods are classified under the category of exempt goods and no input tax deduction is claimed. For all the process of manufacture, the dealer has used electricity, coal and diesel. The electricity used for heating the furnace, coal is used for re-rolling plant as fuel & as raw material for manufacture of sponge iron. The diesel is used for D.G. sets for generation of power. However no input tax deduction is claimed as regards purchase of diesel. The dealer .....

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