TMI Blog2020 (4) TMI 850X X X X Extracts X X X X X X X X Extracts X X X X ..... icate of the consulting Geologist. That is, the same has no relation to the obtaining difference between the physical and book figures per its own calculation, which it seeks to justify. The said certificate is, in fact, again a misrepresentation by the assessee, and has rightly been not accepted by any authority. Ascertainment of Difference in stock - Held that:- 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 cost and technology, to coalesce fines into lumps, resulting in a lower price for the latter. In fact, as explained during hearing, the transportation cost itself, where the technology is not available locally, exceeds the selling price. A product may be saleable at ₹ 3000 (say), while the other lot may not fetch more than ₹ 1000 (say) or even ₹ 500 (say). Surely, the latter is subgrade relative to the former; the price differential across lumps and fines, inasmuch as there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it may not necessarily be so in the case of a negative difference (excess bookstock), which indicates, among others, unaccounted disposal of the relevant stock (i.e., as of the date of the physical verification), so that income concomitant to that disposal had escaped assessment (as on that date). It is, accordingly, open to the assessee to make out a case that the past unaccounted income, since admitted and returned, arose on account of such undisclosed disposal. That is, the said escaped income, being sought to be brought to tax for the current year, had already suffered tax in an earlier year. Again, a further clarification may be in order. That is, in a case as the present one, where the escapement of income is on account of unaccounted disposal, the assessee realizes it s value (₹ 100, say), which gets disclosed/returned on the corresponding asset/money being discovered (by the Revenue). The income on this sale, however, would only be after deducting its cost, incurred and reflected in accounts (₹ 40, say), i.e., ₹ 60. This is as the balance ₹ 40, though realized through sale, continues to be reflected in accounts, albeit does not represent an actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u of Mines, Nagpur (IBM) and Mineral Exploration Corporation Ltd., Nagpur (MECL) for carrying out volumetric measurements and chemical analysis (of the samples) at the Keolari and Dhamki mines respectively. The IBM s report dated 04/12/2014, furnished having regard to MECL s report dated 29/11/2014, is as under: BLOCK A Table 1A Location of Dump Volume Density as per Mining Quantity (MT) MECL 1 313.40 3 940.200 MECL 3 1,757.30 3 5,271.900 MECL 2,4,7,12 15 19,695.00 3 59,083.500 MECL 8,9A,10,1 11 16,322.00 3 48,966.300 MECL 14 557.10 3 1,671.300 MECL 13 6,487.40 3 19,462.200 MECL 13 141.80 3 425.400 MECL 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopments 2. Laterite 2,376.750 3. Manganese 9,875.195 4. ROM 44,800.000 Gross Total 102374.600 5 Sub Grade Dump 1,92,400.000 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 P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess book-stock inasmuch as the assessee had not kept any record in respect of the waste/low-grade material used for such purposes, i.e., laying of roads, ramps, retaining wall, back-filling, etc. While the same did not find acceptance with the AO, it did, i.e., in principle, by the ld. CIT(A). In his view, however, it could not be said that the assessee had thereby explained the entire shortfall (in physical stock), which he estimated at 35% of the alleged excess book-stock (36,400 MT). 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 ₹ 3300 pmt, which he reduced to ₹ 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., ₹ 662.48 lacs (23,660 MT x ₹ 2800 pmt), he, accordingly confirmed the addition for ₹ 335.81 lakhs, deleting the balance addition of ₹ 2646.04 lacs (₹ 2981.85 lacs ₹ 335 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, and which could not therefore be installed by the assessee-firm itself; its site being located close to the National Highway. Prior thereto, and even subsequent thereto, however, the low-grade material continued to be used for various purposes, viz. filling of dumps; roads; pits and ramps; retaining wall, which is a continuous activity, with in fact the low-grade material being regularly shown in the monthly returns under the head Dump workings . Complete records are available for the material sold to SSI for further processing 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the balance 65% (23,660 MT), he applied the gross profit rate disclosed by the assessee for the current year, estimating its sale value by lowering that adopted by the AO, to ₹ 2800 pmt, on being shown price variability. His action in doing so is wholly untenable. No case for an addition, to any extent, is made out. He would, on a query by the Bench, confirm that the returns agree with the books of account, based as they were on the records being maintained by the assessee-firm. He could, however, offer no satisfactory explanation/answer to the basis of the sale rate of ₹ 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t dated 04.12.2014, reproduced (in the scanned form) at pages 9-11 of the assessment order, the iron (Fe) recovery in the sub-grade dumps (4 in number), quantified at 43,271.43 MT, has accordingly been taken by it at 36,780.71 MT (at pg. 11). The assessee is therefore justified in including the iron ore component of the sub-grade dump in comparing the book-stock with the physical stock. Two, Sh. Ghanshyam Patel, the Mining Manager, retracted his statement/s dated 16.10.2014 and 17.10.2014 vide a sworn affidavit dated 04.10.2016 (PB-2, pg. 182), 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 ₹ 400 pmt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stinguishing it from the subgrade material; the latter being not readily saleable, and being now (since January, 2015) sold to the beneficiation plants at a fraction of the price fetched for the finished stock. We say so as while finished-good is on physical stock-taking found to be in excess, the subgrade found short (i.e., at 43,271.43 MT, as against a book-stock of 1,92,400 MT), so that correct categorization becomes crucial. However, we observe no dispute either as regards the quantity of the iron ore found in various dumps or as to its classification (as finished-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, con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44800.00 b) Dump workings 192400.00 NIL 192400.00 3. Grade-wise Production, Despatches, Stock and Ex-Mine of Processed ore: Grades (% of Fe content) Opening stock at mine head Production Dispatches from mine head Closing stock at mine-head Ex-mine price (Rs./MT) i.) Lumps :- a) Below 55% 17724.885 NIL 960.725 16764.16 950 b) 55% to below 58% NIL NIL NIL NIL NIL c) 58% to below 60% NIL NIL NIL NIL NIL d) 60% to below 62% NIL NIL NIL NIL NIL e) 62% to below 65% N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Consignee name and Registration number as allotted by Indian Bureau of Mines to the Buyer # # Quantity Sale value Country Quantity F.O.B. Value (Rs.) Below 55% FINES Below 55% LUMPS Domestic sale Sagar Stone Inds . Ashtvinayak Trd. IBM/12676/2012 Sun flag IBM/560/2011 3762.76 960.725 ₹ 1100 per tonn ₹ 3050 per tonn NONE NIL NIL ## consignee name and Registration number as allotted by the Indian Bureau of Mines to the buyer (to indicate separately if more than one buyer) for the top five despatches in terms of Quantity for the remaining con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm 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 ₹ 1100 pmt. The sale under the Lumps category is to the pellet plants, at rates varying from ₹ 2000 pmt to ₹ 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, should the ROM continue to be not processed; in fact, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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) value of the stock, to the extent in excess of book s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imilarly, 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 be added would therefore be the gross profit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied 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 case, be with reference to that obtainin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 940.200 52.92 DUMP NO. A 2. MECL 3 1,757.30 3 5,271.900 51.52 DUMP NO. C 3. MECL 2,4,7,12 15 19,695.00 3 59,083.500 50.12 DUMP NO. B 4. MECL 8,9A,10,1 11 16,322.00 3 48,966.300 51.73 DUMP NO. D 5. MECL 14 557.10 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guise of the latter, unsaleable material. It is nobody s case that the assessee had excavated more material (from earth) than that disclosed. And, this, despite the admitted illegal extraction, stated by the assessee to be to the tune of 39,000 MT, which led to the suspension of its license for a time during the current year, as the said extra excavation does not necessarily imply undisclosed production, but only of it being not in terms of the mining plan. Sure, the positive and negative differences do not match, the excess physical stock (of finished goods) being 90,359 MT, as against the short physical stock (of sub-grade material) at 1,49,129 MT (1,92,400 43,271), or at a difference of 58,770 MT (i.e., 1,49,129 90,359). But, then, it is not required to be, nor it is anybody s case that the same should match. It is patent that the waste and sub-grade material had been used extensively toward laying roads and ramps; building retaining wall; repairs; pit-filling, etc., and toward which no adjustment has been made by the assessee in its accounts at any time. This, rather, forms the cornerstone of the assessee s case and, in fact, represents an admitted position (refer para 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntradicts its claim of the iron grade, in view of the limitation of the physical processes being carried out by it, does not exceed 55%, for which grade class, i.e., below 55% , royalty is accordingly paid by it on its entire sales. Further, its case is completely inconsistent with the mining process, as explained and borne out from the record. The 85% iron ore is in the raw stock, freshly excavated material, and not in the sub-grade material, which is the outcome of processing, stated to be at 80% (70%) (of the processed ore), with the balance 20% (30%) being the finished stock (refer para 4.3), divided, as explained, equally between lumps and fines . Reference, here, may also be drawn to para 4 of the IBM report dated 12/1/2017 (PB-1, pgs. 96-97), wherein it clarifies that the sub-grade material is generated from ROM. The reference to the iron recovery in the sub-grade material, stated to be at 85% by IBM (refer Table 1B), is incomprehensible. Why, the iron content in the finished goods (Table 1A) is itself at a maximum of 54.32% (Table 5), with the assessee paying royalty on all its sales in the grade class below 55% . The IBM has, while stating of the iron recovery a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the difference in the stock of finished goods, found physically in excess, by applying the yield of finished goods to the raw material stock, found short. The finished goods, to the extent now in excess, i.e., on being so reckoned, in books, is notionally reconverted into raw material, stating it to be wasted. Could, one wonders, there be anything more bizarre and de hors logic and facts than this! It is all this that led us to state of the assessee s approach in the matter, since accepted, i.e., in principle, by the ld. CIT(A), to be completely misfounded. The complete disharmony between the figures makes a travesty of the assessee s methodology in explaining the difference. While the total difference per the same, and which it therefore seeks to explain, is 36,400 MT, it justifies a difference for a much higher figure of 1,14,250 MT through the certificate of the consulting Geologist. That is, the same has no relation to the obtaining difference between the physical and book figures per its own calculation, which it seeks to justify. The said certificate is, in fact, again a misrepresentation by the assessee, and has rightly been not accepted by any authority. If the quantit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so includes raw stock (ROM), as well as laterite and manganese ores, as well as their component in the sub-grade material, making the reference by us to the example of raw material (qua a manufacturing process) equally applicable. ROM is raw stock, not physically taken, nor compared, and at a constant in the assessee s returns for the past several months (also refer para 4.3). There is no question of the iron content therein, stated to be in the range of 48%-50%, being taken into account in comparing the inventory of finished goods. It is perhaps on realizing its folly in doing so, that the assessee revises it s calculation to 36,400 MT, i.e., less than 1/3 of the original. Clearly, the ld. CIT(A) did not apply his mind to the assessee s explanation, even as, as it appears, it is due to his being not fully satisfied therewith that he accepts it in part. 4.7 Finding no merit in the assessee s case, with that of the Revenue, being based on undisputed, nay, admitted facts, on a firm basis, we are now at least broadly speaking, in a position to conclude the matter in light of the discussion and analysis in the forgoing paragraphs (paras 4.1 to 4.6). So, however, there are ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alities) gets reflected in the very idea or notion of the Threshold Value . The IBM regularly, after consultation with different stakeholders, declares the threshold value for different ores in the country. The threshold value (TV) of a mineral is defined as: The threshold value of minerals means limit prescribed by the Indian Bureau of Mines from time to time based on the beneficiability and/or marketability of a mineral for a given region and a given time, below which a mineral obtained from mining can be discarded as waste. (source: India Gazette Notification dated 16/10/2009/emphasis, in italics, ours) As per the said Notification (copy on record), the threshold value of iron ore (Hematite) is 45%. Accordingly, an iron ratio below 45% is to be regarded as waste, though as per the mining rules the same is not to be removed (from the mining site), but stacked separately thereat on the premise that today s waste is tomorrow s wealth. A future technology may enable commercially viable extraction of iron from the iron content below that ratio. The waste though could be and, rather, is to be used for various collateral purposes, viz. laying roads and ramps, repairs, build ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29 (in the impugned order) is incorrect, perhaps due to typographical errors; the same being 7 28 Respectively. From assessee s stand point, however, this may not be of much significance. There is no hard and fast categorization as to what constitutes subgrade, which would stand to fall in a range based on technology, besides the market dynamics. Thus when the assessee says of iron ore being a finished good in the grade 50%-55%, it does not imply, as the Revenue, and we must concede, for no particular fault of its , considers the same as being a single class, saleable at the same rate. Further, how could a material liable to be recycled/reprocessed, with a view to being upgraded, lead to any addition for difference in quantity based on such categorization? Why, if, as stated, the ROM itself contains iron grade at 50%- 51% (or even 48%-50%, as stated by NS in answer to other questions, viz. Q. 7 of the statement dated 07/1/2015), a grade class of 50% or even 51% is hardly saleable. The claim, per Gd. 5 of ₹ 2800 (or ₹ 3050) as representing the rate of iron grade 57%-60%, has to be understood in this context, i.e., as applicable to higher grade categories, even as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E GENERATION OF SUB GRADE MINERAL WITH REFERENCE TO THRESHOLD VALUES AND PROPOSAL FOR STACKING FOR NEXT FIVE YEARS No generation of sub grade is proposed during proposal period. 6.3 QUANTITY AND GRADE OF SUB-GRADE MATERIAL AVAILABLE AT THE MINE AS ON DATE DULY SUPORTED BY PLANS AND SECTION As no sub grade material hence not applicable. (emphasis, by italics, ours) Page 35 of MP-2 contains category-wise updated reserves with grade (indicated end use grade with analysis) as well as marginal grade. The Fe content the iron ore is stated at 52.22% to 57.20%. The average grade for the iron ore lumps and iron ore fines is stated beneath at 52.9% and 55.55% respectively. It is thus clear that the material falling between 45% to 55% has been, considering the demand from the industry, being iron steel and cement industries in the main, which is in the range of 55%, has been regarded by IBM (in MP-2) as subgrade. As the average Fe content in ROM is, as per it, at 55% plus (pg. 36), therefore no sub-grade is stated to be generated during the plan period, i.e., at pages 14,29 58 (of MP-2). This is also borne out by the average grade, considered as falling between 52 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd fair state of affairs, does not, to our mind, have any direct income implication. In Conclusion 5.1 The matter, thus, on a review thereof in its entirety (refer paras 4.1 to 4.8), in our considered opinion, comes to much ado about nothing. The different quantities/figure are not liable to be reconciled and, accordingly, no case for any reconciliation of different figures, or for any addition on the basis of the said categorizations, is accordingly made out, either toward excess physical or book stock. The excess stock is, under the circumstances, only being so/notional. This, thus, answers Q.(a) (b) at para 4.1 supra. The assessee, despite that it s books of account cannot be regarded as properly maintained, succeeds. The assessee, though, is advised to maintain proper records; much of the present mess, as we are constrained to describe the present imbroglio, arising for lack of the same, i.e., apart from the lack of proper presentation of facts and non-appreciation of the Revenue s case by the assessee. It needs to be appreciated that only proper records could form the basis of a proper assessment, and which may require restatement of various figures. This is also ..... X X X X Extracts X X X X X X X X Extracts X X X X
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