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2010 (11) TMI 713 - AT - Income TaxSurvey - value of unaccounted stock of scrap - No speaking order - asessee derives income from manufacturing and trading of ADB Hubs, Crank Shafts and Ingots - In the statement recorded at the time of survey the assessee surrendered an amount of Rs. 22,00,000 as his additional income on the date of survey due to discrepancy in the stock - assessee has submitted all the purchase bills in respect of the scrap from 1-4-2000 to 25-9-2000 - Assessing Officer supported the rate of Rs. 7,000 per M.T., but did not make any adverse comment on the evidences filed by the assessee before the CIT(A) - Appeal is allowed 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 - It follows that the moment a satisfactory explanation is given about such nature and source by the assessee, then the source would stand disclosed and will, therefore, be known and the income would be treated under the appropriate head of income for assessment as per the provisions of the Act - it is apparent that the Hon ble Gujarat High Court has categorically 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 - Appeal is allowed br way of remand. Computation of profit on sale of scrap - held that - Since no separate addition was ever made by the Assessing Officer and even the CIT(A) has not also enhanced the assessment in this regard, the department cannot raise this ground of appeal at this stage before the Tribunal. Telescoping of profit - estimated addition - held that - 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. To the extent there is production on account of excess wastage, in my opinion, the sale consideration worked out on such excess production has to be added separately since the assessee has surrendered the excess scrap stock. There is nothing wrong in telescoping the trading addition so allowed to the extent of the additions made on account of investment in excess stock as on the date of survey.
Issues Involved:
1. Valuation of unaccounted stock. 2. Classification of surrendered income. 3. Separate profit calculation for scrap sales. 4. Excess wastage and its impact on trading results. 5. Application of net profit rate. Detailed Analysis: 1. Valuation of Unaccounted Stock: The primary issue revolves around the valuation of unaccounted stock of scrap found during the survey. The Assessing Officer (AO) valued the unaccounted stock at Rs. 30,00,357 against the assessee's valuation of Rs. 22,00,000. The AO based the valuation on the rate of Rs. 7,000 per MT, citing a purchase bill dated 14-8-2000. The assessee contended that the average rate of scrap was Rs. 4,593.55 per MT, with the survey team agreeing to a valuation of Rs. 5,000 per MT. The learned Accountant Member found that the CIT(A) did not record reasons for accepting the assessee's valuation and emphasized the need for a speaking order. The learned Judicial Member, however, restored the AO's valuation. The Third Member agreed with the learned Accountant Member, setting aside the CIT(A)'s order and remanding the issue for a fresh speaking order. 2. Classification of Surrendered Income: The second issue concerns whether the surrendered income due to discrepancies in stock should be classified as "Income from Business" or "Income from Other Sources." The AO treated the surrendered income under section 69 as "Income from Other Sources," while the assessee claimed it as "Income from Business." The learned Accountant Member supported the assessee's claim, noting that the excess stock represented secret profits from business activities. The learned Judicial Member, referencing the Gujarat High Court's decision in Fakir Mohmed Haji Hasan v. CIT, held that such deemed income under sections 69, 69A, 69B, and 69C cannot be classified under any specific head of income, including "Income from Business," and must be treated as "Income from Other Sources." The Third Member concurred with the learned Judicial Member, classifying the surrendered income as "Income from Other Sources." 3. Separate Profit Calculation for Scrap Sales: The revenue argued for a separate profit calculation for the sale of scrap, distinct from the manufacturing business. The AO had not made any separate addition for this, and the CIT(A) did not enhance the assessment on this ground. The learned Judicial Member allowed the revenue's appeal, while the learned Accountant Member dismissed it, noting that the issue did not arise from the CIT(A)'s order. The Third Member agreed with the learned Accountant Member, dismissing the revenue's ground as infructuous. 4. Excess Wastage and Its Impact on Trading Results: The AO disallowed excess wastage, valuing it at Rs. 6,72,200, and made a trading addition of Rs. 29,21,000. The CIT(A) partially allowed the assessee's claim, accepting additional power charges of Rs. 11,00,000 but maintaining a trading addition of Rs. 14,60,000 after telescoping the surrendered income. Both Members restored the issue to the CIT(A) for re-examination. The learned Judicial Member directed the CIT(A) to apply the net profit rate from the preceding year, while the learned Accountant Member emphasized considering the impact of increased power expenses and other relevant factors, not strictly adhering to the previous year's net profit rate. The Third Member agreed with the learned Judicial Member on applying the preceding year's net profit rate and considering the impact of increased power expenses and wastage. 5. Application of Net Profit Rate: The AO applied a net profit rate of 0.43% based on the preceding year's results. The CIT(A) and both Members agreed to restore the issue to the CIT(A) for re-evaluation. The learned Judicial Member directed applying the preceding year's net profit rate, while the learned Accountant Member suggested a broader consideration of relevant factors. The Third Member agreed with the learned Judicial Member, directing the CIT(A) to apply the net profit rate from the preceding year, considering the peculiar facts and circumstances of the case. Conclusion: - Valuation of Unaccounted Stock: Issue remanded to CIT(A) for a fresh speaking order. - Classification of Surrendered Income: Classified as "Income from Other Sources." - Separate Profit Calculation for Scrap Sales: Revenue's ground dismissed. - Excess Wastage and Its Impact on Trading Results: Issue remanded to CIT(A) for re-examination, applying the preceding year's net profit rate. - Application of Net Profit Rate: Directed to apply the preceding year's net profit rate, considering increased power expenses and wastage. Result: Both appeals of the revenue and the assessee are partly allowed for statistical purposes.
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