2010 (7) TMI 833 - AT - Income Tax

Additions based on electricity consumption - addition made by the Assessing Officer by taking aid of complex methodology to arrive at the number of units consumed ; he (Assessing Officer) assumed that it was run on 3 shifts basis (40% discount factor considered towards possible use for one shift load shedding etc., ) and thereafter it was further assumed that the machinery used by the assessee was of a higher quality on which assessee would have obtained 2.5 kg of wool per unit of electricity consumed and again assumed a specific sale value and the percentage of G.P. so as to ultimately arrive at the suppressed income. Held that - There is no evidence on record to show that the assessee s machinery was an imported machinery having 50 HP motor capacity. There is nothing on record to suggest that machine could be run with four persons for three shifts. Even going by the standard prescription in the brochure of the machine manufacturers 3 workers are required to run the machine for one shift and the Income Tax Inspector having reported to the Assessing Officer that only 4 workers were employed at assessee s factory it is strange to notice that the Assessing Officer proceeded on the assumption that the factory would have worked for 3 shifts (after considering over all discount factor on various counts). There is no evidence on record to show that the assessee has either suppressed sales or purchased raw material without reflecting the same in its books. Having regard to the fact that there was no evidence to prove that 50 HP motor was not utilised by the assessee learned CIT(A) proceeded on the assumption that 40 HP was used to produce steel wool. It was not a case of pilferage of electricity in which event the very basis for making the addition falls to ground. Mere alleged disparity in consumption of electricity cannot be a reason for estimating the turnover since production depends upon various factors and any addition made to estimate suppressed sales on the basis of consumption of electricity deserves to be deleted since it has no scientific basis. - Additions deleted - Decided in favor of assessee.

Issues Involved:
1. Validity of reopening of assessments under section 148 of the Income Tax Act.
2. Estimation of income based on alleged power theft and consequent suppression of production and sales.
3. Methodology used by the Assessing Officer (AO) for estimating the income.
4. Admission and consideration of additional evidence by the Commissioner of Income Tax (Appeals) [CIT(A)].
5. Reliance on the Chartered Engineer's Report and judicial precedents.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessments:
The assessee-firm contended that the reopening of assessments was invalid due to lack of independent evidence beyond the MSEB investigation, which was dismissed by the Special Judge. The CIT(A) admitted additional evidence and called for a remand report from the AO, who justified the reopening based on the information from MSEB and the prima facie evidence of power theft. The Tribunal held that the AO had "reason to believe" that income had escaped assessment, affirming the reopening of assessments as lawful.

2. Estimation of Income Based on Alleged Power Theft:
The AO estimated the total income by assuming higher electricity consumption than reported, leading to a presumed increase in production and sales. The CIT(A) partly upheld this estimation but adjusted the production yield and gross profit rate. The Tribunal found that the estimation methodology was flawed and arbitrary, lacking evidence of suppressed sales or unaccounted raw material purchases. The Tribunal noted that the Additional Sessions Judge had acquitted the assessee of power theft, undermining the basis for the AO's estimation.

3. Methodology Used by the AO for Estimating Income:
The AO's methodology involved complex assumptions about the machinery's operation, production yield, sale price, and gross profit. The CIT(A) adjusted some assumptions but still relied on arbitrary estimates. The Tribunal criticized the lack of evidence supporting the AO's assumptions, such as the machinery's capacity and the number of shifts worked. The Tribunal emphasized that the AO's approach was arbitrary and unsupported by concrete evidence.

4. Admission and Consideration of Additional Evidence by CIT(A):
The CIT(A) admitted additional evidence, including the Chartered Engineer's Report, which contradicted the AO's assumptions about the machinery's production capacity. The Tribunal supported the CIT(A)'s decision to admit the additional evidence but criticized the CIT(A) for not fully relying on it and instead making arbitrary adjustments to the production yield.

5. Reliance on the Chartered Engineer's Report and Judicial Precedents:
The Chartered Engineer's Report indicated a lower production capacity than assumed by the AO. The Tribunal found that the CIT(A) should have given more weight to this expert report. The Tribunal also referenced judicial precedents that emphasized the unreliability of estimating production solely based on electricity consumption, noting that such estimates lack scientific basis and can lead to arbitrary conclusions.

Conclusion:
The Tribunal concluded that the reopening of assessments was lawful but the methodology for estimating income was flawed and arbitrary. The Tribunal set aside the additions made by the AO and partly upheld by the CIT(A), emphasizing the need for concrete evidence and a scientific basis for income estimation. The appeals filed by the assessee were partly allowed.

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