TMI Blog2009 (10) TMI 915X X X X Extracts X X X X X X X X Extracts X X X X ..... , in the sense that the first ground relates to the addition made for the pre-search period whereas the second ground relates to the addition made in the post-search period. Since both the grounds are connected they are dealt with in a consolidated manner. 3. The brief facts in this connection are that there was search under Section 132 of the Act in the assessee s premises, its associate concerns and the residences of its directors on 23-1-1992. One of the materials seized during the search was a file containing the report of chemical analysis. The chemical analysis report was prepared after testing the material in the laboratory of the assessee s factory at Khadi. The reports contained an analysis in a standard proforma both for copper and brass products. They contained details for the period from 31-5-1991 to 6-1-1992, the pre-search period. On the basis of these reports, the AO worked out the production of the brass products at 332.9 M.Ts. and copper products at 397.6 M.Ts. The total came 730.5 M.Ts. As against these figures revealed in the reports seized during the search, the production as per the books of account showed production of 202.1 M.Ts. of brass items and 137.1 M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aturia in which he has said that the burning loss at the melting stage was 1% to 2%. 9. For the above reasons, the AO rejected the book results under Section 145(3) and proceeded to compute the undisclosed profit earned by the assessee on the unrecorded production of 391.3 M.Ts. of brass and copper items. As regards the brass items, according to the assessee s books of account the average sale price came to ₹ 104.50 per kg. as against the purchase price of ₹ 105.00 per kg. The AO rejected the purchase price since the book results had been rejected by him and proceeded to compute the same at ₹ 80 per kg. based on the purchase price of ₹ 70 to 83 per kg. of scrap. The difference between the sale price and purchase price was thus calculated at ₹ 24.50 per kg. As per the chemical analysis report, the unrecorded production of brass items was 1,30,727 kgs. The total unrecorded production was taken to be of the value of ₹ 32,02,811/-. Similar calculations were made for copper items and the undisclosed income arising out of unrecorded production of 2,60,519 kgs. was taken at ₹ 1,04,20,760/-. Thus, the unrecorded profits were calculated at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduction is 30. d) Mr.Bhatti from whose custody the register was seized has stated that the monthly production was 55 to 60 MTs. which if calculated on yearly basis will only be slightly more than the production shown in the seized books. At least three parties have confirmed in writing that they have received the goods from the assessee as shown in the challans and other registers. e) If, as alleged by the AO, as high as 90% of the production was shown outside the books then certainly there must be some evidence showing corresponding unaccounted purchases which would have been found during the search. No such evidence was however found. f) The production shown as per the books tallies as per the excise records and also tallies with the statement given by three main parties to whom the assessee sold goods. g) No stock outside the books was found during the search. h) No transport receipt or evidence of any sort was found showing despatch of the unrecorded production. i) The average rate of sale of copper was wrongly taken at ₹ 155 per kg. as against the average rate of ₹ 147 per kg. which has been worked out by the assessee after taking t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On behalf of the assessee it was urged that this order should be followed. Calculations were given to the effect that if the order of the Tribunal is followed, the addition to be sustained for the pre-search period would be ₹ 4,03,804/- and for the post-search period it would be ₹ 1,36,612/-. These calculations are based on the earlier order of the Tribunal where 1% of the sale price was taken as the profit. In respect of copper the average sale price as per the AO s calculations was ₹ 155 per kg. If 1% thereof is taken as the profit, it means the profit per kg. would be ₹ 1.55. Applying this to 2,60,519 kgs. of unrecorded production, the profit assessable would be ₹ 4,03,804/- in respect of copper. On similar basis and applying the sale price of ₹ 104.50 for brass items on 1,30,727 kgs. of unrecorded production, the profit assessable would be ₹ 1,36,612/-. The argument of the learned CIT-DR however was that the order of the Tribunal for the assessment year 1990-91 and 1991-92 cannot automatically apply because in those years there was no search and no materials have been found against the assessee, whereas for the year under appeal the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the four month period at 364 MTs. It is to be remembered that the two month period of April and May, 1991 cannot be strictly described as post-search period. It is merely that the chemical analysis report and the other seized papers pertained to the period of eight months from June, 1991 to January, 1992. Even if one can assume reasonably that once the department has struck under Section 132 thereafter it is expected that the assessee would not indulge in manipulative practices at least for some period, that would exclude only the two months of February and March, 1992, as the search actually took place on 23-1-1992. In respect of the months of April and May, 1991, strictly speaking there was no direct evidence of unrecorded production but there is no reason to think that the manner in which the assessee carried on business during this two month period would have been different from the way in which it was carrying on business for the eight month period commencing from June, 1991. We are therefore not impressed with the submission made on behalf of the assessee that no addition can be made for unrecorded production in the months of April and May, 1991. In our opinion the AO was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ports, receipts and despatch registers, statement of Gulshan Katuria etc. We are therefore of the opinion that the addition if any for unrecorded production and sale outside the books of account has to be made on the basis of the seized material. 18. It was then submitted on behalf of the assessee that in para-12.3 of the order of the Tribunal in the assessee s own case for the assessment years 1990- 91 and 1991-92 the Tribunal has, after rejecting the assessee s books of account, held that it would meet ends of justice if 1% in both the years is added on the estimated sales as against 10% estimated by the AO. It must be remembered that in those years before the Tribunal it was only a question of estimating the profits of the assessee. The AO had mentioned four reasons for rejecting the books including the reason that the assessee recorded only 1/10th of the job work receipts and suppressing the balance. It is perhaps this reason given by the AO that has prompted the learned counsel for the assessee to contend that there is similarity in the facts in those years and in the year under appeal and therefore that decision has to be applied. There is no doubt a reference in the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form the basis for ascertaining the actual production. The figure of 730.5 Mts. compares well with the figure of 685 MTs. arrived at on the basis of the statement of Khaturia which in turn is based on the chemical analysis report. Even the despatch and receipt registers indicate production of 28 MTs. for ten days which means the monthly production would be around 84 MTs. which also broadly accords with statement of Khaturia. It is therefore clear that no fault can be found with the finding of the AO that there is suppression of the unrecorded production of brass and copper items. The AO has taken the suppression of copper items at 260.5 MTs. or 2,60,590 kgs. and the suppression of the brass items at 130.80 MTs. or 1,30,627 kgs. This is on the basis that the production as per the seized records was 730.5 MTs. against which the assessee has shown in its books only 339.2 MTs. for both the items. The CIT(A) has made much of the AO s finding that the assessee was showing only 10% of the production and suppressing 90% thereof. This is not entirely correct. Though in para-5.7 of the assessment order the AO has given statistics on the basis of the registers maintained by the assessee to pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 02,810/-). Deducting the disclosure of ₹ 96.00 lakhs made in the course of the search and included also in the profit and loss account, the addition to be made comes to ₹ 19,39,418/-. The same is sustained for both brass and copper items for the pre-search period. 23. As regards the post-search period, we have already seen in para-16 that the suppressed production for the months of April and May 1991 can be estimated at 182 MTs. We agree with the AO s observation that separate details for brass and copper items were not available for these two months. We have to therefore estimate the profit for these two months. We have already seen that the profit on the suppressed production for the eight month period from June, 1991 to January, 1992 can be worked out at ₹ 1,15,39,418/-. The average monthly profit would be ₹ 14,42,427/- dividing ₹ 1,15,39,418/- by 8. For the two months of April and May, 1991, the suppressed profits would be ₹ 14,42,427/- x 2 which could come to ₹ 28,84,854/-. The same is sustained out of the addition of ₹ 68,11,785/- made by the AO. As already held in para- 16, for the months of February and March, 1992 no ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hadi but paper arrangement was made to show as if they were. 26. The AO also noted that the assessee made payment by cheques to Shreyas Metachem who immediately made payment to the assessee s sister concerns viz. Mardia Copper Industries, Mardia Metal Agency and Mardia Industries, from whom it had purchased the goods for allegedly being transported to the assessee. The AO thus found that the funds of the assessee were routed to its sister concerns through the medium of Shreyas Metachem. When this was pointed out, Shreyas Metachem seems to have clarified that it had shown purchases from the sister concerns of the assessee and sold the same to the assessee so that the assessee can avail of the bill discounting facility from the bank. 27. From the above facts, the AO concluded that the purchases of 45,600 kgs. valued at ₹ 51,08,219/- were bogus purchases and accordingly disallowed the same. 28. Before the CIT(A), the assessee raised several contentions which are summarised as follows: a) Shreyas Metachem have confirmed the sale to the assessee (brass tubes). b) These brass tubes have purchased by Shreyas Metachem from sister concerns of the assessee. c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ines may be disallowed by the Assessing Officer. In view of these facts, the addition of ₹ 51,08,219/- is deleted. 29. The revenue is in appeal and strong reliance is placed on the findings and reasoning of the AO. It is submitted vehemently that the finding of the CIT(A) that if Mahakali Roadlines had not transported the goods, they might have been transported by some other transporter is totally unacceptable and is a mere surmise and no relief ought to have been given on that basis. It is also pointed out that the irregularities in the challans pointed out by the AO and the statement of the partner of Mahakali Roadlines belie the assessee s claim that the purchases were genuine. On the other hand, the learned counsel for the assessee pointed out that the revenue has only disputed the transportation and the other evidence such as the records maintained by the assessee have not been impeached and therefore , the AO was not justified in disallowing the purchases as bogus merely on the basis of the discrepancy in the transportation claim. It is further pointed out that the purchases from Shreyas Metachem which were not transported through Mahakali Roadlines have been accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o believe that Shreyas Metachem first purchased the goods from the sister concerns of the assessee and then sold them to the assessee in order to facilitate the assessee to enjoy credit for 90 days. It is not known why the assessee cannot enjoy the same credit facility from the sister concerns themselves directly and should adopt such a devious course. The cheques issued by the assessee to Shreyas Metachem have been used by that company to pay for the purchases it allegedly made from the sister concerns of the assessee. The amounts have thus found their way to the assessee s sister concerns and thus remained in the control of the group. In the judgment of the Hon ble Gujarat High Court cited supra there was no evidence to show that bogus vouchers have been given to the assessee or that any part of the payments made by the assessee by cheque came back to the assessee in any form. In the present case however, Mahakali Roadlines admitted both in the course of the statement as well as during the cross-examination by the assessee that he had issued bogus lorry receipts for cash payment of as little as ₹ 20/- per receipt. In the cited judgment the sellers had given statements befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arges but not the purchases. We are totally unable to understand or appreciate the logic of the observation. If the claim of transportation of the goods is found to be bogus or not genuine, the logical result would not only be that the transportation charges should be disallowed but since the fact that the goods were transported itself stands disproved or unproved, the purchases also stand unproved. It is not proper for the CIT(A) to give the benefit of doubt to the assessee, by observing that the goods might have been transported by some other transporter. Even the assessee has no case that the goods were transported by some other transporter. The CIT(A) in our opinion was not justified at all in making the aforesaid observation and also in making it part of his reasoning for deleting the disallowance. 33. For the above reasons, we reverse the order of the CIT(A) and restore the disallowance of ₹ 51,08,219/- . The ground is allowed. 34. The fourth ground relates to the loss of ₹ 28,27,448/- which was allowed by the CIT(A) out of the loss of ₹ 33,71,188/- claimed by the assessee on sale of brass billets, (wrongly stated in the grounds as ingots). As regards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.33,71,188/- ============ 37. Before the CIT(A) the submissions were reiterated and the CIT(A) accepted the same partly. He held that the purchase of brass tubes, incurring of manufacturing expenses to convert them into billets and the sale in the market were all genuine and they have not been doubted by the AO. He also held that the AO was not justified in computing the loss at ₹ 33,71,188/-. According to him the correct method was to compare the cost of the raw materials with prevailing market rate. He noted that as per the version of MMTC, a Government of India undertaking, the market price of brass tubes was ₹ 107/- per kg. The CIT(A) applied the same in respect of 1,08,748 kgs. of brass tubes purchased by the assessee, as against ₹ 112/- applied by the AO to rework the loss. This came to ₹ 28,27,448/-, he thus gave relief of ₹ 28,27,448/- and sustained the balance of ₹ 5,43,748/-. 38. The revenue is in appeal reiterating the views of the AO . On behalf of the assessee it is argued that there was no dispute about the purchase price of the brass tubes or the quantity purchased, that the sale of brass billets at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40. The fifth ground in the department s appeal relates to the loss of ₹ 96,581/- on the trading of same day transactions. The AO found that the assessee purchased some materials and sold them at a lower rate on the same day and thus declared a loss of ₹ 96,581/-. These were brass rods purchased at ₹ 100/- per kg. from a group concern on 23-3-1992 and sold for ₹ 89/- per kg on the same day to Jash Metal Corporation, Bombay. When asked to explain the assessee gave the usual arguments viz. that it is the normal business transactions, that it is supported by the evidence and that the loss was incurred because the assessee had an advance order from Jash Metal Corporation for a lower grade which had to be complied with, but in the meantime the price had risen. The AO did not accept this story. He also noted that the assessee could not support its claim that it received an advance order at a lower rate from Jash Metal Corporation and why it should have accepted the same. He accordingly disallowed the loss. 41. On appeal, the CIT(A) deleted the disallowance of ₹ 96,581/- holding that neither the purchase nor the sale was disproved nor was there any mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the deductions can be claimed by a newly established industrial undertaking under both the sections from the gross total income. Earlier the Hon ble Gujarat High Court had held in CIT Vs. Amod Stamping, (2005) 274 ITR 176 that the special deduction under section 80I should also be given against the profits and gains without the same being reduced by the special deductions admissible under section 80HH. What the department contends, which is supported by the order of the Special Bench (supra) is not applicable to the present case. The department s objection is that both the deductions cannot be given against the gross total income in such a manner that it would become a negative figure. That controversy does not arise in the present case. We accordingly hold, respectfully following, the judgments cited supra, that the decision of the CIT(A) is correct. The same is upheld and the ground is dismissed. 45. The seventh and last ground in the appeal is against the relief of ₹ 5,39,580/- allowed by the CIT(A) on account of sale of scrap. While completing the assessment, it was noticed that the disclosure of ₹ 102 lakhs made by the assessee during the search, against ident ..... X X X X Extracts X X X X X X X X Extracts X X X X
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