2011 (1) TMI 573 - AT - Income Tax

Valuation of undeclared stock of scrap - Surrender of additional income, whether to be taxed as business income - addition on account of excessive consumption / wastage - Estimation of income (net profit rate) - Rejection of book of accounts - Non speaking order - Held that AO was not correct in law in valuing the unaccounted scrap @ Rs.7000 per M.T. merely on the basis of purchase of 2.070 M.T. of scrap - assessee has placed sufficient material for working out the average rate of excess stock of scrap at Rs. 4593 per M.T - there is sufficient material and evidence produced by the assessee to prove that the average rate of scarp is Rs. 4593 per M.T - Decided in favour of the assessee by way of remand to CIT(A) whether the amount surrendered by the assessee in respect of excess stock found during the course of survey be assessed under the head income from business or as income from other sources - held that the undisclosed investments which are deemed to be the income of assessee in accordance with the provisions of sections 69, 69A, 69B and 69C, cannot be assessed under the head income from business or profession - While computing the total income, this income has to be separately added in the total income and cannot be shown by crediting in the profit and loss account - Held that surrendered income of unaccounted stock is treated as income from other sources Regarding addition on account of net profit by estimating it @ .43% on estimated sales of Rs. 5.00 crores at Rs. 2,15,000 - There is difference between the assessment made on the basis of assessee s accounts and that made on best judgment basis - This is a fact that the action of the Assessing Officer rejecting the books of account by invoking the provisions of section 145(3) got confirmed - Assessing Officer must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter - There is nothing in section 144 for holding an assessment made by an officer u/s. 144 without conducting a local enquiry and without recording the details and results of that enquiry cannot have been made to the best of his judgment within the meaning of that section - Once the higher wastage are recorded, the natural inference will be that there will be excess production, which not being accounted for, would have been sold outside the books of account by the assessee - Held that under the facts and circumstances, the issue relating to the consumption of electricity and wastage on account of consumption of raw material is restored to the file of the CIT(A) and separate addition on trading account can be made for the excess consumption/wastage of raw material as deemed sales - Appeal is allowed by way of remand

Summary

Issues Involved:
1. Valuation of undeclared stock of scrap.
2. Classification of surrendered income as "business income" or "income from other sources".
3. Separate profit on sale of scrap.
4. Estimation of wastage and its impact on profits.
5. Application of net profit rate based on previous year's data.

Detailed Analysis:

1. Valuation of Undeclared Stock of Scrap:
The primary issue was whether the valuation of undeclared stock of scrap found during the survey should be set aside or if the value adopted by the Assessing Officer (AO) at Rs. 7000 per M.T. should be restored. The learned Accountant Member restored the issue to the file of the CIT(A) for a speaking order, while the learned Judicial Member set aside the CIT(A)'s order and restored the AO's valuation.

The Tribunal noted that the average rate of scrap based on purchase bills varied from Rs. 4337.46 to Rs. 7000 per M.T., with an average of Rs. 4593.55 per M.T. The survey team valued the scrap at Rs. 5000 per M.T., and the AO's valuation at Rs. 7000 was based on an exceptional purchase rate. It was concluded that the CIT(A) should have verified the survey report and analyzed the AO's basis for differing from it. The Tribunal agreed with the Accountant Member, setting aside the CIT(A)'s order and restoring the issue for a fresh speaking order.

2. Classification of Surrendered Income:
The second issue was whether the surrendered income due to excess stock should be assessed as "income from business" or "income from other sources". The Judicial Member held it should be assessed as "income from other sources", while the Accountant Member considered it "income from business".

The Tribunal referred to the Gujarat High Court's decision in Fakir Mohmed Haji Hasan v. CIT, which held that deemed income under sections 69, 69A, 69B, and 69C should be assessed as "income from other sources" if the nature and source of investment are not satisfactorily explained. The Tribunal agreed with the Judicial Member that the surrendered income should be assessed as "income from other sources".

3. Separate Profit on Sale of Scrap:
The third issue was whether separate profit on the sale of scrap should be worked out and added to the income. The Judicial Member allowed the Revenue's ground of appeal, while the Accountant Member dismissed it.

The Tribunal noted that the AO estimated the sales at Rs. 5 crores, which included both manufacturing and trading activities, without making a separate addition for profit on the sale of scrap. Since no separate addition was made by the AO or CIT(A), the Tribunal found the ground of appeal by the Revenue to be infructuous and agreed with the Accountant Member to dismiss it.

4. Estimation of Wastage and Its Impact on Profits:
The fourth issue involved the estimation of wastage due to melting loss and its impact on profits. Both Members restored the issue to the CIT(A) but with different directions.

The Tribunal noted that the AO made an addition for excess wastage and estimated sales at Rs. 5 crores. The CIT(A) sustained part of the addition, considering increased power charges but found the wastage claimed by the assessee to be excessive. The Tribunal agreed with the Judicial Member that the issue should be examined in light of past history and specific increases in electric tariff. The Tribunal also agreed with the Accountant Member that the CIT(A) should consider the impact of surrendered business income and other expenses while estimating the income.

5. Application of Net Profit Rate:
The fifth issue was whether to apply a net profit rate based on the immediately preceding year. The Judicial Member directed to apply the same rate, while the Accountant Member provided detailed directions for estimating sales and considering various factors.

The Tribunal agreed with the Judicial Member that the net profit rate from the preceding year should be applied, considering the peculiar facts of the case. The Tribunal also agreed that the CIT(A) should examine the impact of electricity consumption and wastage on the production and profits.

Conclusion:
The Tribunal provided a detailed analysis and directions for each issue, ensuring a comprehensive and fair assessment based on the facts and relevant legal principles. The matters were restored to the CIT(A) for fresh consideration with specific guidelines to ensure a just and equitable resolution.