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TMI Blog2020 (5) TMI 575X X X X Extracts X X X X X X X X Extracts X X X X ..... eport on the same. It has been held by Supreme Court in the case of Saraswati Industrial Syndicate Ltd. Vs. CIT reported in [1999] 237 ITR 1 (SC) wherein it has been held that the Assessing Officer is not entitled to make observations on technical matters, for which there is no material on record. Thus, the action of Ld. AO deserves to be held bad in law. 1.2 That, the Ld. CIT(A) has further erred in upholding the application of provisions of section 145(3) of the Act merely by alleging that the primary record of production was not maintained by assessee by completely ignoring the fact that daily production recorded maintained at mines was itself the primary record of production. Therefore, the action of Ld. AO in rejecting the books of account of assessee deserves to be held bad in law. 2. On the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in sustaining the trading addition of Rs. 70,00,000/- out of the addition of Rs. 75,00,000/-made arbitrarily by Ld. AO being a lump sum / estimated addition without any basis. Thus, the addition of Rs. 70,00,000/- sustained by Ld. CIT(A) deserves to be deleted." 2. Briefly stated, the facts of the case are t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endra Minerals and Bhanwar Sales Corporation. The transactions with these concerns are required to be verified with the similar transactions of outside parties. Thereafter, in the final findings recorded by the AO at Para 10 of his order, the AO has listed down the purchases made for trading purpose from various parties amounting to Rs. 1,13,06,791/- and held that from the perusal of trading sales, it reveals that gross profit rate in trading of clay varies from 18.57% to 32.85%. It is also seen that the assessee has made purchases from its sister concern M/s Hemendra Minerals at higher rate as compared to other concerns hence the gross profit earned on such transaction is lower. Similarly, when sales are made to sister concern, the gross profit earned is lower. Hence it is not possible to verify the actual gross profit earned by the assessee on the trading of clay & clay powder. The said findings of the AO have been confirmed by the ld CIT(A), however, there is no reasoning which is discernable from the order of the ld CIT(A) on the basis of which he has confirmed the findings of the AO. 5. During the course of hearing, the ld AR submitted that as regards the trading activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer has talked about expenses on account of diesel and oil consumption as not fully verifiable, mining expenses which are higher than the preceding year and not subject to verification, and increase in the transportation and cartage expenses as compared to previous year. However in the final findings so recorded by the Assessing Officer, he has restricted his findings limited to discrepancies in consumption of diesel, and expenses pertaining to transportation and cartage. As per the Assessing Officer, on the basis of test check basis of the vouchers produced by the assessee, it is found that the expenses have been incurred on number of vehicles which are not owned by the assessee. It was further observed that the expenses pertaining to sister concern M/s Hemendra Minerals were also debited in the accounts of the assessee. Further, the assessee has lifted 100 litres of diesel however, the assessee did not maintain day to day consumption of the diesel so lifted. Regarding transportation and cartages expenses, it was noticed by the Assessing Officer that as against claim of Rs. 6,87,269/- in the preceding year, the assessee has claimed transportation expenses of Rs. 30,85,671/- and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find that there are also gaps and reluctance on part of the assessee in coming forward with appropriate explanation and filing documentation in support thereof. In overall view of the matter, we find that discrepancy so highlighted by the AO in respect of these two expense heads in terms of non-verifiability need to be read along with other discrepancies to arrive at the final conclusion regarding non-reliability of books of accounts which we shall be discussing in the subsequent paragraphs. 11. Now coming to the main issue of suppression of production by the assessee and apparently the main reason for rejection of books of accounts as discernable from the assessment order. 12. In the show cause notice, the Assessing Officer has stated that the production shown by the assessee is to be verified vis-a-vis the facts revealed from the examination of the records produced and examination of the mining mate (the person employed at the site) and other factors. It was found that the firm is running mines at 3 places. In the process of mining, firstly the overburden is removed to reach the clay bed and for the purposes, the excavator & the dumper/tipper are mainly hired and labour is hir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as per show-cause notice and rebut the submissions of the assessee and finally held as under: "9. In view of the detailed discussion and factual verification supported with the norms of the industry as well as after allowing leverage for all contingencies and further keeping in mind the volume of men and machinery employed by the assessee on the available mine at the time of relevant year i.e, F.Y 2009-10, I have come to the conclusion that the assessee's A/R's submission is without any valid basis and not supported with the primary records as such is not tenable and it is established that the assessee has suppressed production at least to the tune of 29,925.30 MT of clay which is valued at Rs. 66,43,417/-." Against the said findings of the AO, the assessee carried the matter in appeal before the ld. CIT(A) who has since confirmed the said findings and now the assessee is in appeal against the said findings. 13. During the course of hearing, the ld. AR submitted that books of accounts of assessee were subject to audit by qualified chartered accountant and who had not pointed out any defect in the books so examined. The appellant had produced such audited books of accounts alo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to maintain such and such type of primary record for production. 14. It was further submitted that the appellant could not making any sales from the mines without issuing the ravana, and the bills were made for all the ravana issued by the appellant, which were verified while doing the royalty assessment by the mining department. No difference was pointed out by the Mining Officer in the production declared by the appellant and sales made in the assessment made. In support of such contention, Copy of royalty assessment Order, copy of monthly return for the fraction period, details of production at mines and dispatches from the mines with reconciliation with the production and dispatches as per monthly returns shown by the appellant and assessed by the mining office were furnished before lower authorities, however the same were brushed aside without pointing out any single discrepancy therein. Moreover, ld. AO has also not found any sales without issuing sale bills. 15. It was submitted that in the instant case, production register itself is Primary record, wherein no discrepancies have been pointed out by the Royalty Department or by the AO, thus the allegations made by ld. AO a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the very generalized statement of one Shri Raghvendra, the mining mate, whose main responsibility is safety of mine. The ld.CIT (A) has just confirmed the same by merely stating that ld.AO has derived the suppressed production in logical manner, without appreciating that AO has merely done round about and rather reverse working and even for this working ld. AO has taken estimated generalized figure instead of a specific and day-to-day production figure which are maintained by assessee. 18. Without prejudice to above, it was further submitted that estimation of production by considering overburden removal, length and width of the space available for mining depth / height of instant mine, volume and density of clay etc. is purely a technical matter. It would be appreciated that AO is not entitled to make his own estimation upon technical issues as has been held by Hon'ble Supreme Court in the case of Saraswati Industrial Syndicate Ltd. Ltd. reported in 237/ITR 1/ 103 Taxman 395 (SC). Thus, if at all, ld.AO had any reservations in accepting the production declared by assessee, proper course of action was to seek the opinion of Mining department officials and only if the same is fou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... help of excavators as well through manual labour wherever machines cannot reach. 21. It was further submitted that in order to understand the mining process in detail, during the course of assessment proceedings ld.AO recorded statements of two persons, one Sh. Raghavendra [mining mate of Guda Radhera I mines and another Sh. Rupa Ram (Labour)]. Both these persons were not responsible for quantity of mined clay on day-to-day basis or even otherwise also. In the statements so recorded, various questions were asked about the procedure and mining process, mainly overburden removal, digging of mine etc. Apart from it Shi Raghvendra was asked about quantum of production with machines and without machines, which was not exactly in his domain. Same is evident from the perusal of the statement of Shri Raghvendra. It is seen that at Q. No. 4 he was asked about who are working on mine where he is working and what are their works. He has replied that his work is related to safety of mine and to tell the labour for work for digging (as to where and to what depth labour should dig considering the overall safety of mines). Shri Mittal was Mining engineer and overall incharge. He also stated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equent calculations. Further, learned Assessing officer has considered that 8 M.T. productions is done by the manual labour per day per labour by placing heavy reliance on the part statement of Shri Rupa Ram labour recorded on 18.02.2013. After relating the statements of above two persons, ld.AO observed that as Sh. Raghavendra stated that 200 M.T. clay was produced by the manual labour per day and Sh. Roopa Ram mentioned that per day manual production per labour is 8 M.T. Accordingly, 25 labour are required continuously to produce the 200 M.T. clay @ 8 M.T. per day per labour, which was not at all the actual position in the assessment year 2010-11. In period relevant to A.Y. 2010-11 on an average 20 labours were appointed in all and that too not continuously as per actual attendance of labours for excavation of clay by adopting 23 working days (as considered by the learned assessing officer). 25. It was submitted that even for the argument sake, if it is presumed that each labour gives 8 MT production per day uniformly (but not admitting) the tentative production would be worked out as below: Month Number of labours Working days Total attendance of male lab our for Production ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... calculation of suppressed production is the statement of Shri Raghavendra Singh Mining Mate which were recorded on 18.02.2013 who stated prevailing general working position at the mines. Other than that no evidence for the suppressed production and sale of the same by the appellant was given by the assessing officer. At this juncture, it is submitted that ld. AO in remand report, has commented that "As per standards, the density of the clay is found to be 2400/kg/m3 to 2600/kg/m3, whereas the AO has taken the density at just 1122/kg/m3, thus if the density is taken as per the standards of engineering, the suppressed production would have been much more." In this regard also, it is mentioned that ld. AO has given a generalized observations. Had there been actually increase in production considering density as per standards (as mentioned), ld.AO would have been definitely re computed the same, which has not been done by AO. In fact, in reply to remand report, assessee has furnished calculation of production by adopting density of clay as stated by ld.AO, which has not resulted in any change in production. All these facts lead to the conclusion that formulas adopted by ld.AO in re c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . in Kg Production Per day In M.T. Production Per unit in M.T. April,09 17820 925 25 51.90 37.00 18.50 May,09 16365 658 25 40.21 26.32 13.16 June,09 14520 706 26 48.62 27.15 13.58 July,09 12420 775 27 62.40 28.70 14.35 Aug.,09 16005 1099 24 68.66 45.79 22.90 Sept.,09 21405 1049 25 49.01 41.96 20.98 Oct.,09 18855 960 25 50.91 38.40 19.20 Nov.,09 19202 968 23 50.41 42.08 14.03 Dec.,09 21746 825 27 37.94 30.55 10.18 Jan.,10 21472 750 24 34.93 31.25 10.42 Feb.,10 15641 790 24 50.51 32.91 10.97 Mar.,10 18290 1080 25 59.05 43.20 14.40 In the month of August, normal mesh powder is grinded 1036 M.T. and high Mesh is 63 M.T., hence per unit production is increased. In the month of January, 2010 normal mesh powder grinded 622 M.T. and high mesh powder grinded 128 M.T. and due to moisture in the material per unit production decreased. In all the other months the consumption of unit are normally ranging within 40 to 60 Kg. as informed to the learned assessing officer during the course of assessment proceedings. 29. It was further submitted that the assessee has declared GP rate of 13.02% during the year und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant could not controvert the finding of the AO that the appellant had failed to produce primary records of the production. The quantity of the production shown in the अधिशुल्क निर्धारण प्रपत्र is also based only on the books of accounts of the appellant. The authority issuing अधिशुल्क निर्धारण प्रपत्र has not made any independent inquiry to find out the actual production of the appellant nor the authority keeps its own independent record for the production made in the mines of the appellant. It was accordingly held by the ld CIT(A) and rightly so that the AO is not bound to accept the quantity of the production shown in the अधिशुल्क निर्धारण प्रपत्र as correct when he had pointed out various discrepancies and defects in the books of accounts of the appellant. The AO has w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch comes to 17.92% of the production declared. Applying the same proportion in respect of other two mines, the AO worked out the suppressed production in respect of other two mines No. 2/95 and 7/96. Further, the Assessing Officer assumed that the production of SGRS grade clay & C grade clay is in 4.1 ratio and basis the sale value is recorded in the books of accounts, has worked out the suppressed production of Rs. 63,13,099/- during the year. Further, the AO has alleged that the assessee has not produced the primary records like the dispatch receipts to truck drivers for taking the clay so dug out from the mining area to storage area and from there, for dispatch to the customers. 33. Per contra, the contention of the ld AR on behalf of the assessee is that the production register in which entries of production are made on daily basis is the basic and primary record. It was further submitted that its mining operation comes under the jurisdiction of State Mining Department wherein both extraction/production and dispatches are closely monitored by the Mining Department at the check post before the clay is finally dispatched to the customers and ravana receipts are issued to truck ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as further submitted that ld. AO has estimated the quantum of production by applying certain formulas in a clumsy and round about manner which were not at all required and moreover the basic figure for the same has been taken purely on estimated basis on the very generalized statement of one Shri Raghvendra, the mining mate, whose main responsibility was of safety of mine. The ld.CIT (A) has just confirmed the same by merely stating that ld.AO has derived the suppressed production in logical manner, without appreciating that AO has merely done in a roundabout manner and rather reverse working and even for this working, ld. AO has taken estimated generalized figure instead of a specific and day-to-day production figures which are maintained by assessee and duly submitted during the course of assessment proceedings. 34. We agree with the contention so advanced by the ld. AR that as far as the determination of quantum of clay which can be extracted/produced from mines is concerned, it is clearly a complex and technical matter involving understanding of the topography of the area where mines are located, the methodology and process of extraction/production involved, the machinery and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t runs into 48 pages. At more places than one, it was pointed out that the stock available on ground, cannot be compared or verified with reference to the RG-I register. It was also pointed out that by-products or waste materials, such as slag, was treated by the Assessing Officer as the main product or an income yielding material and the conclusions were arrived at, only on the basis of assumptions. We agree with the findings recorded and view expressed by the Tribunal. 17. An Income Tax Officer cannot carry out the functions of an authority under the Central Excise Act and arrogate to himself the power to determine the quantity of production, or to utter a final word on the intricacies of the manufacturing process, that too, without referring to any reliable material. The Assessing Officer, in the instant case, was totally unsuited for undertaking the activity of determining the exact production of the material, which itself involves very complicated procedures." 35. Similarly, the Hon'ble Supreme Court in the case of Saraswati Industrial Syndicate Ltd. (Supra) has held that neither the ITO nor the High Court were entitled to make statements of technical matters for which no b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Revenue rest. The question for consideration here is not the potential extraction of clay rather the actual clay which has been extracted from the mines and which has been sold/dispatched during the year under consideration and which has not been disclosed in the return of income and what credible material is available on record in support of such findings. We however find that there is no material on record and no finding recorded by the AO that quantum of clay so determined by him as part of suppressed production has been actually dispatched and sold and more so, when the assessee's activities comes under the jurisdiction of State Mining Department and both its production and dispatches are closely monitored by the Mining Department. As held by the Hon'ble High Court in case of CIT vs. Shri Girija Smelters (P) Ltd (supra), the occasion to levy income tax would arise, only when the product in question was found or alleged to have been sold, and the sale proceeds, constituting income were not reflected in the returns. It was not even alleged that the product shown in the form of discrepancies, was sold at all. Further, we find that royalty assessments were carried out by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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