9911796707
TMI Blog2020 (4) TMI 850X X X X Extracts X X X X X X X X Extracts X X X X ..... e cases of the parties being the same for both the assessees, the appeals were posted for hearing and, accordingly, heard together. The firms are also related inasmuch as Sh. Nitin Sharma has 50% share in both the firms, as also in M/s. Sagar Stone Industries, Jabalpur, another associate concern. For the sake of convenience, we shall, for narration purposes, state the facts with reference to Shobha Minerals (Kevlari) (with reference to which the appeals were argued), noting the differences, where deemed relevant, for Shobha Minerals (Dhamki), in brackets. Both the firms, as also Sagar Stone Industries (SSI), were subject to search and seizure operation u/s.132(1) of the Act on 16/10/2014, which covered both their office premises and mining sites. The assessee had, vide lease deed dated 19/6/2007 (29/8/1992), been granted lease of 4.03 hectares (3.60 H.) of land at Village Kevlari (Gandhigram), District Sihora, from the mining department of the state government of Madhya Pradesh. The assessment and valuation of stock in case of mining being a technical matter, assistance, by issuing commissions u/s.131(1)(d), was obtained by the Revenue from Indian Bureau of Mines, Nagpur (IBM) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 Total 2,94,774.600 (emphasis, by underlining, ours) The assessee, in the view of the Assessing Officer (AO), thus, had an excess stock of iron ore at 90,358.945 MT (i.e., 1,35,681.600 - 45,322.655) as on 31/10/2014. (The corresponding figure for Shobha Minerals (Dhamki) is 16,828.812 MT, the threshold limit being 10%, on which royalty was being paid, even as MECL reported the average grade of stock to be in the range of 13%-18%). The excess physical stock meant that the assessee was engaged in under-reporting of production and, consequently, out-of-book sales of ore production. This was further sought to be refurbished by the AO with reference to the statements u/s. 132(4) of Sh. Ghanshyam Patel, Mining Manager, dated 17/10/2014 and Sh. Nitin Sharma (NS)(during search & seizure on Samdariya Group (SG) in May, 2013). Sh. Ghanshyam Patel, in answer to Questions 11, 12, and 16, admitted to multiple (3 - 4) trips on a single transit-pass (TP), justifying the non-recording of the weight on the TP dated 15/10/2014 on that basis. Further, the seized material (S-4/LPS - 13)(pgs. 1 - 131) (of the search on SG in May, 2013) revealed unaccounted cash sales by Shobha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The balance 65% (i.e., 23,660 MT) remained unexplained, implying its unaccounted sale. The AO had also gone wrong in valuing the same at Rs. 3300 pmt, which he reduced to Rs. 2800 pmt on the premise that the sale rate would vary over different grades of iron. Again, it was trite that the stock would be valued at cost, so that the escapement of income from tax was the excess of the sale value over cost. Applying the obtaining gross profit rate (50.69%) on the said out-of-books sales, i.e., Rs. 662.48 lacs (23,660 MT x Rs. 2800 pmt), he, accordingly confirmed the addition for Rs. 335.81 lakhs, deleting the balance addition of Rs. 2646.04 lacs (Rs. 2981.85 lacs - Rs. 335.81 lacs). Aggrieved, both the assessee and the Revenue are in appeal. The respective cases 3.1 Before us, the assessee's case, represented by Sh. Rahul Bardia, was that it was not disputing the reports by the technical agencies, i.e., the IBM and MECL, but the inference/s drawn by the Revenue authorities there-from. The AO had, on receipt of the assessee's reply dated 09/12/2016, called for its' comments thereto from the IBM, which was responded to by the latter only on 12/1/2017, even as the assessment, get ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocessing by it, as also with SSI. It is only thereafter, i.e., January, 2015 (the month from which SSI commenced operations) onwards, that the said material could, upon incurring cost, be converted into saleable material, the price of which is very sensitive to the iron (Fe) ratio, fetching for lower grades thereof in the iron ore a price as low as Rs. 400 pmt. The mineral content (viz. iron, manganese and laterite ores) in the various stocks, thus, has to be considered while comparing the book-stock with the physical stock, and which has not been. This constitutes the major flaw in the AO's working, which though has been set right, accepting the assessee's claim, by the ld. CIT(A). It is by taking the iron ore ratio in the subgrade material that the same works to 2,08,862.655 MT, resulting in, thus, a surplus, i.e., an 'excess' book-stock, which (excess) is again only apparent, and stands sufficiently explained by the assessee per its' reply dated 15/12/2016 (PB-2, pgs. 1-21). The said excess, he would continue, is on account of the non-adjustment of the waste/subgrade material toward filling of pits, roads, ramps, retaining wall, referred to earlier. Surely, the same can only be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion/answer to the basis of the sale rate of Rs. 2800 pmt adopted by the ld. CIT(A), whose order does not state any. 3.2 The ld. CIT-DR, Sh. Meena, would, on the other hand, submit, equally vehemently, that the assessee had no case and, in fact, had been allowed unwarranted relief by the first appellate authority. The reports by the Government Agencies, which are technical experts in the field, specifically requisitioned by the Revenue, are not disputed, even as clarified by Sh. Bardia in his pleadings. Where, then, is the scope for taking any different view in the matter; the physical stock (as determined by IBM) and book-stock (as per the assessee's returns) of iron-ore, and thus the wide difference between them, being admitted? It is a clear case for application of sections 69A/69B, with the Revenue in fact not extrapolating the difference over the preceding years, which in fact it ought to have done, particularly given the assessee's history of the searches/surveys in the past resulting in discovery of undisclosed income/assets. Further, there has been extra/unauthorized excavation, in contravention of the Mining Plan, detected on physical verification by IBM in January, 2014, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was furnished before the AO in the course of the assessment proceedings. It was explained that the TP dated 15.10.2014 was for transportation of construction material, purchased by SSI, thereto, which was necessitated due to the said material having been dumped (by the supplier) near Keolri mine site, as there was no approach road to the site of SSI. On query, he confirmed the valuation of the sub-grade dump stock (as at the year-end) to be nil, as the entire excavation/production cost had been already absorbed in the respective years, i.e., toward production of finished goods and, further, that it's sale value was at Rs. 400 pmt. He would though add that both the AO and the ld. CIT(A) had not considered the assessee's alternate plea, made without prejudice, i.e., that inasmuch as the entire excavation cost, as incurred, had already been absorbed (in valuing the bookstock of finished goods), the excess physical stock thereof, irrespective of its' quantum, would stand to be valued at nil. This is as the value of the excess stock is to be at cost, representing the money expended/invested by the assessee on its' acquisition/production. 3.4 The hearing, which was spread over tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed-good or subgrade). The processed iron ore in dumps, quantified at 1,35,681.6 MT (by IBM), which quantity is not in dispute, would stand to be categorized as finished iron ore, as done by IBM (& adopted by the Revenue), considering that the grade thereof varies between 50.12% to 54.32% (refer para 2), which agrees with the consideration by the assessee of that with grade below 50% as subgrade, coupled with the fact of the assessee paying royalty on the sale of finished goods under the grade class 'below 55%' (refer paras 2, 3.1). The quantity of laterite and manganese ores has neither been physically taken nor, consequently, compared. How can, then, even as ld. CIT-DR argues, the AO be faulted with? 4.3 Before we may examine the assessee's case, it would be relevant to, and we accordingly begin by, delineating the mining process as explained by the assessee per its' various submissions before the Revenue, as well as during hearing, and also consider the manner of its' reporting. The excavation, after removal of the topsoil (overburden/OB), is firstly placed at the pit-head. This is also called ROM (run on mill), and is reported in the monthly returns under the section 'Open cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 3762.760 28558.495 950 h) 55% to below 58% NIL NIL NIL NIL NIL i) 58% to below 60% NIL NIL NIL NIL NIL j) 60% to below 62% NIL NIL NIL NIL NIL k) 62% to below 65% NIL NIL NIL NIL NIL l) 65% and above NIL NIL NIL NIL NIL iii) Concentrates NIL NIL NIL NIL ....... 4. Details of deductions used for computation of Sale price (Ex-Mine)(Rs./Tonnes) Deduction claimed Unit (Rs. Tonne) Remarks a) Cost of transportation (indicate loading station and Distance from in Remarks) 200 NONE b) Loading and Unloading charges 300 NONE c) Railway freight if applicable (indicate destination and distance) NIL NONE d) Port Handling charges/export date (indicate name of port) NIL NONE e) Charge for Sampling and Analysis 50 NONE f) Rent for the plot at stocking yard NIL Own g) Other charges (specify clearly 400 Separating materials & dewatering expenditure Total (a) to (g) 950 NONE 5. Sales/despatches effected for domestic consumption and for Exports: Grade Name of despatch (indicate whether for sale or captive consumption or Export) For domestic Consumption For Export &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... save of laterite ore, at 500 MT for June, 2014 and, further, in the form of 'lumps' and 'fines'. The iron ore produced during October & November, 2014 is entirely 'Fines', at 1500 MT each, sold at 3762.760 MT (to SSI) at Rs. 1100 pmt. The sale under the 'Lumps' category is to the pellet plants, at rates varying from Rs. 2000 pmt to Rs. 3050 pmt. The accretion to the stock of subgrade, again in no particular ratio, is only for July & August, 2014, at 10,000 MT each, for which period the iron ore production is at 40,000 MT. It is thus clear that: a) the production may be of iron ore only, i.e., without any waste generation, or of the sub-grade material, as for the months of June, Sept. to Nov., 2014; b) the iron ore production from Keolari Mines is of less than 55% grade, though falls under two categories, 'Lumps' and 'Fines', varying largely in their sale values, which also vary drastically within the same category. This could not be without some basis; c) the production of manganese and laterite ores is not a concomitant of the iron ore production; is of nominal quantity (and value), with no sales for the months of June to October, 2014. Why, it is not clear, or understood, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in excess of the book-stock. Its cost of excavation is, firstly, at 50% (approx.) of the sale value, given the disclosed gross profit rate of 50.69%, which profit is in fact higher than that for the preceding years. However, the assessee does not admit of any excess stock at any stage, which thus continues to remain out-of-books (accounts). Thus, while the assessee has this stock as on 31.10.2014, i.e., where so, the same is neither taken into account during the year, nor at the year-end, so that its value escapes being taken into account and, thus, in computing income. The cost (of excavation & processing) thereof, even as argued by the assesse itself, stands already absorbed as part of the regular cost of production. This aspect is in fact irrelevant. Even if regarded as incurred separately, i.e., out-of-books, inasmuch as there is nothing to show that the regular per unit cost of production is inflated to absorb the cost of the undisclosed production, such cost, which stands to be incurred prior to any realization in respect of the excess physical stock, would stand to be disallowed under section 69C, per proviso thereto. As such, either way, the entire sale (net realizable) va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erstatement of yield, arise only on account of, similarly, out-of-books purchase, in case of a mining concern, the raw stock is to be excavated from earth and does not require acquisition, at a cost, from any outside agency. The excess book-stock, implying the stock being sold outof-books and, further, prior to the date of search, would thus have income implication despite the sale of finished goods in that (or higher) quantity subsequent thereto, which (sale), in the case of a running concern, is a continuous affair. The next question is the quantification of the income that has escaped assessment. The same would be at the gross profit (or trading margin) obtaining. The reason is simple. Being part of the book-stock, i.e., production, duly accounted, which remains undisposed in accounts (though not found physically), cost thereof would stand already borne and duly reflected in accounts. There can be no presumption otherwise. Why, the same would stand to be valued (at cost) as at the year-end, so that reckoning it at its' sale value for income adjustment, as the ld. CIT-DR submits, would imply a double accounting for cost and, thus, an excess addition to that extent. The income to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r either category, would accordingly be applied to the excess book-stock of both lumps and fines, as arrived at on the basis of their respective productions and the book sales thereof during this period. Further, another observation would be in order. Sure, each year Each year is a separate and independent unit of assessment and, further, sanctity is to be accorded to the closed accounts. So, however, in the assessee's case, as stated both the assessment order (para 7.1.9) and the impugned order (para 6.2.11), a search the case of some of Samdariya Group (in May, 2013), has led to the discovery and seizure of material indicating undisclosed cash sales by the assessee, since admitted, and toward which it has since offered income. That is, there is material on record toward undisclosed cash sales in the earlier years. It is accordingly open for the assessee to contend that the said sales be off-set against the out-of-book sales imputed qua the excess book-stock, and that no further addition qua the said sales be made for the current year. The only difference would be that the sale rate for the said sale as well as the gross profit (albeit adjusted for royalty) thereon would, in that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 557.10 3 1,671.300 54.32 DUMP NO. F 6. MECL 13 6,487.40 3 19,462.200 50.4 DUMP NO. E1 7. MECL 13 141.80 3 425.400 50.4 DUMP NO. E2 8. MECL 13 3.60 3 10.800 50.4 DUMP NO. E3 TOTAL 45227 135681.6 CU Mtr Te/Cu Mtr The grade, it may be clarified, only refers to the content percentage therein, so that a 55% grade implies an iron content to that extent, and does not signify any qualitative attribute. This in fact appears incomprehensible to a logical mind, as the only difference between a 50% (say) and 55% (say) grade would imply a 5% (55% - 50%) difference in iron content, so that both should be saleable with a price differential corresponding to that difference. Rather, in that case the prices would be quoted on a hundred percent grade (hypothetical though) basis, and the price for any particular grade - to be determined on chemical analysis, arrived at accordingly. In fact this is done in many a trade, viz. chemical industry; the prices being quoted on 100% basis. Further, the obtaining pricing model may not be in total agreement therewith, but a variant thereof, as it may well be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .6 of the assessment order), and which resulted in the IBM abandoning the assessment of the total excavation by the assessee, even as argued by Sh. Bardia, the assessee's counsel, himself (refer para 3.1). Of what value, then, the certificate (dated 06/12/2016) from the Geologist (PB-2, pg. 139), justifying user of subgrade material for such purposes at 1,14,250 MT? The draft mining plan (2013-14 to 2017-18), which stands subsequently approved by IBM, submitted in February, 2013, reports the sub-grade dump quantity at 1,66,600 MT. The quantity as per books as on 31/01/2013, i.e., immediately before the submission of the draft Mining Plan in February, 2013, is 2,05,000 MT, exhibiting thus a difference of 38,400 MT, i.e., before the beginning of the current plan period. There is accordingly no reason to, as the assessee does, club the two types of materials, or the iron ore component therein, in seeking to justify the difference/s as found. In doing so, it in fact removes the very basis of the Revenues' case. That is, to begin with, there is a complete mis-appreciation of the Revenue's case. Two, it violates the basic principle of comparison, i.e., like with like. They iron grade ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... early referred to the Mining Plan 2 (pg. 58), and which is the iron ore ratio in the raw stock (ROM) - and not of the iron content, much less in the sub-grade, the balance 15% (of ROM) being laterite and manganese ores. Why, the assessee itself admits of a substantial part of the sub-grade being unusable wast (refer para 9 of its' letter dated 15/12/2016 /PB-2 (pgs. 1-21), and para 26 of it's letter dated 23/11/2017, reproduced in the impugned order, appearing at pg. 37 thereof). Couple this with the information as to a large part (80%) of the processed iron ore bearing low-grade iron. Where, then, one may ask, is the scope of iron recovery at 85% therefrom? Pg. 36 of MP-2 is the chemical analysis of ROM stock of iron ore, stated to be at 85% of the total mineral. The average iron (Fe) content stated is 55.36% - the balance being other compounds, viz. Fe2O3; SiO2; Al2O3, etc., even as explained by NS during hearing. This is also borne out by the sample analysis reports in MP-1 (for 2008-09 to 2012-13). The assesse in fact itself, vide its' Gd. 5, states of iron content in the subgrade to be at 50%, i.e., as stated during hearing. The sub-grade material is by definition low grade ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .e., toward road/ramps, retaining wall, back-filling, etc. could be reasonably worked out, the same would have been by the technical agencies commissioned by the Revenue, the IBM and MECL, computing the total excavation by the assessee since inception, as per the mandate given thereto by the Revenue, and which could then be compared with the reported excavation. There is no whisper, much less authenticated data, on the surface area of the roads/ramps laid down over the years, which has to be done, by own admission, time and again, for providing access to the pits/mine heads. Similarly qua the other jobs carried out, viz. the dimensions of the benches, retaining wall, etc., explained to be built for security reasons, or the pit sizes filled-up. Washing off of roads; loss of material, etc. on account of rains, also emphasized by Sh. Bardia, is another factor for which no reasonable estimate is possible. Why, as afore-noted, a considerable portion of the mining area was, as the photographs seek to show, gets submerged in water during and after the rainy season, as indeed is stated to be the position. In fact a significant proportion of the material, being accumulated since inception, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e matter that needs to be considered. Also, the disagreement between the reported production figures and that which ought to arise, i.e., given the various submissions and explanations (summarized in Tables 3, 4A and 4B), is far from settled/explained. Why should, as afore-noted (para 4.3), there be a vast price difference between lumps and fines - both containing, as explained, same iron grade (50%-55%), on one hand, as well as, on the other, internally, i.e., between different lots of the same product type; the obtaining price differential in the 'lump' and 'fine' categories being at over 50% and 400% respectively (Table 4B). Answer/s to these questions, or addressing the same - which must be with reference to an authentic source or the conduct of its' business by the assessee, or both, is extremely relevant, and an order dehors the same, would be inchoate. One could regard the price variation between the two product categories, i.e., lumps and fines, as on account of mineral recovery due to the products' physical properties, primarily, the particle size. While the lumps could be easily crushed into fines, making the two equivalent, it may be difficult to, or at least involve co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lling-up pits and dumps, etc. And it is this, i.e., the varying qualities of finished goods, that led us to talk (at para 4.6) about the mixing of the different batches bearing different grades of iron, both with a view to upgrade it, making it either saleable or otherwise enhancing its marketability and/or price quotient. That is, there is a distinct possibility of the said material, even if not saleable, as where the iron grade is below 50%, being recycled, which may also be resorted to upgrade the same. As such, the narration along side the low-grade material in Table 4A (at pg. 17) must read as: '(recycled/sold as sub-grade to beneficiation plants)'. Continuing further, it cannot but be otherwise. The subgrade material is practically valueless, i.e., vis-a-vis the finished good, which itself gets sold, depending upon its iron grade, with a wide price variability, being as low as Rs. 400 pmt (Table 4B), so that any businessman would not dump material unless there is no scope for up-gradation. It is this, as well as the lack of a consistent, clear response, enunciating its' case, by the assessee, that has led to a confusion as to what distinguishes a finished-good from a subgrad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e grade class, cannot be ruled out. No dump falling in that category (57%-60%) was however found (Table 5), even as MECL took as many as 15 samples (from the eight dumps), i.e., more than one sample for larger dumps. In any case, from the tax point of view, it would matter only if there is an understatement of consideration. The purchase orders (POs) from its' buyers, specifying the iron grade, inasmuch as price would only be with reference thereto, or the chemical analysis reports accompanying the sale consignments, in substantiation thereof, could establish the same. Again, the non-correlation of the production of finished and subgrade does not, in view of the foregoing, carry any particular significance. We have, in arriving at the aforesaid finding/s, also considered and given regard to the approved Mining Plans, i.e., MP-1and MP-2. As aforenoted (para 4.6), page 36 of MP-2 states of the average iron grade of ROM at 55.36%. In Chapter I thereof, under section 'Development', the following is noted under the heading 'Achievement' (pg. 14): 'ACHIEVMENT Considering the low grade Fe value demand from beneficiation plant the earlier called low grade material earlier which has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry or to the Pelletaization plants. Any grade not directly saleable would get sold for up-gradation to the beneficiation plants, as stated in Chapter I. It is this that led the IBM to not regard any excavation during the plan period (2013-14 to 2017-18) as subgrade. This also explains, and is in fact broadly in agreement with the assessee's claim, considered so, of the iron ore being not saleable when the iron grade falls below 54%, so that 1,34,010.3 MT (out of the total finished stock of 1,35,681.6 MT) would stand to be regarded as subgrade. On the other hand, as seen, the actual generation, stated to be in the grade class 48%-50%, is below 55%, as considered in MP-2. It is this that led the assessee to regard it, where not directly saleable to pelletaization plants, as subgrade. In fact, there is reference to, in Chapter-VII (page 59), of iron grade 45%-55% being sold to beneficiation plants (10mm - 100mm) and fines (> 10mm) being sold to brokers (Fe: 44%-48%); Washeries (Fe:52%57%) and Pelletaization plants (Fe:58%-60%). That is, the situation is neither static nor rigid and, besides, a function of technology and market dynamics. 4.8 The statement of Sh. Ghanshyam Patel, Minin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... btain, imperiling the assessee for all times. Any future search or survey at its' business premises, etc., would lead to a fresh charge of understatement of income being imputed on the basis of the obtaining difference/s, and which also has penalty and prosecution implications. It may also be relevant here to mention (and which would at the same time also address the reference to the assessee's past, whereat searches on it (or another) yielded undisclosed wealth, which was admitted and duly returned by it (for AYs. 2011-12 & 2012-13), paying tax thereon), that there is a qualitative difference, even otherwise apparent, between an excess physical stock and excess book-stock, representing opposite situations, even as, as explained hereinbefore, results in an inference of escapement of income from tax and, accordingly, liable to be brought to tax, albeit at different amounts, representing valuation/s thereof. While a positive difference (excess physical stock) would translate into an addition irrespective of any addition made on that count (or for undisclosed assets), it may not necessarily be so in the case of a negative difference (excess bookstock), which indicates, among others, u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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