2010 (11) TMI 722 - AT - Income Tax

Survey - Addition - unaccounted stock - Surrender of income - Rejection of book of accounts - Non speaking order - ssessee has derived income from manufacturing and trading of ADV Hubs, Crank Shafts and Ingots - Held that Assessing Officer was not correct in law in valuing the unaccounted scrap at the rate of Rs.7,000 per M.T. merely on the basis of purchase of 2.070 M.T. of scrap - assessee has submitted all the purchase bills in respect of the scrap from 1-4-2000 to 25-9-2000. The average rate of the scrap vary from Rs.4,337.46 per M.T. to Rs.7,000 per M.T - Appeal is allowed by way of remand to CIT(A) for passing a speaking order 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 - assessee was not maintaining the regular books of account - The income so surrendered is deemed to be the income of the assessee under section 69 of the Income-tax Act, as the assessee could not prove the nature and source of investment made in the inventory - Gujarat High Court in the case of Fakir Mohmed Haji Hasan (2000 -TMI - 14629 - GUJARAT High Court) in which it was 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 . This income has to be assessed under the head Income from other sources - Held that undisclosed income will be treated as income from other sources Whether separate profit on sale of scrap be worked out and added to the income of the assessee instead of working out the composite income from both the manufacturing of the goods and sale of scrap as business profit - Assessing Officer did not agree with the wastage shown by the assessee and made a separate addition on account of excess wastage - Held that the department cannot raise this ground of appeal at this stage before the Tribunal when no such addition has separately been made by the Assessing Officer in the assessment order - Appeal is dismissed Regarding estimation of the gross profit rate on the estimated sales after accepting the additional power charges incurred by the assessee during the year to the extent of Rs.11,00,000 - Assessing Officer has rightly observed that the wastage claimed by the assessee is abnormal. His view is supported by an article published on Sponge Iron industries in India in Iron and Steel Review, November 2004 - It is seen that this person in the statement has stated that if the product mix is of pig iron/iron scrap then the wastage is 8 per cent to 10 per cent and if the sponge iron is used then the same is about 15 per cent and another 2 per cent to 3 per cent oxidation loss is there - Held that it would be just and fair if a trading addition of Rs.29,21,000 is made in the appellant s case - There is nothing in section 144 for holding an assessment made by an officer under section 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 - 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 - the matter shall go to the regular Bench

Summary

Issues Involved:
1. Valuation of unaccounted stock.
2. Classification of surrendered income.
3. Separate profit calculation for scrap sales.
4. Assessment of excessive wastage and net profit rate.

Issue-Wise Detailed Analysis:

1. Valuation of Unaccounted Stock:
The primary issue revolves around the valuation of unaccounted stock found during a survey. The assessee valued the excess stock at Rs.22,00,000, whereas the Assessing Officer (AO) revalued it at Rs.30,00,357, applying a rate of Rs.7,000 per MT for scrap. The CIT(A) accepted the assessee's valuation, stating that enhancing the value would have no material effect on the net profit. The Judicial Member disagreed, restoring the AO's valuation, while the Accountant Member suggested a remand to the CIT(A) for a speaking order. The Third Member concurred with the Accountant Member, leading to a remand for a detailed evaluation.

2. Classification of Surrendered Income:
The dispute here is whether the surrendered income on account of excess stock should be classified as "Income from Business" or "Income from Other Sources." The AO classified it under "Income from Other Sources" as per section 69 of the Income-tax Act, supported by the Gujarat High Court's decision in Fakir Mohmed Haji Hasan, which states that deemed income under sections 69, 69A, 69B, and 69C cannot be classified under regular income heads. The Judicial Member upheld this view, while the Accountant Member considered it business income. The Third Member agreed with the Judicial Member, confirming it as "Income from Other Sources."

3. Separate Profit Calculation for Scrap Sales:
The revenue argued for a separate profit calculation for scrap sales, which the AO did not initially do. The Judicial Member allowed this ground, while the Accountant Member dismissed it, noting that the AO's estimation of sales already included both manufacturing and trading activities. The Third Member sided with the Accountant Member, dismissing the revenue's ground as it did not arise from the CIT(A)'s order.

4. Assessment of Excessive Wastage and Net Profit Rate:
The AO added Rs.6,72,200 for excessive wastage and applied a net profit rate of 0.43% to the estimated sales. The CIT(A) adjusted this, considering additional power charges and reducing the trading addition. Both Members agreed to remand the issue to the CIT(A) for a detailed examination, but differed on the application of the net profit rate. The Judicial Member directed using the previous year's rate, while the Accountant Member suggested considering all relevant factors, including increased costs and wastage. The Third Member agreed with the Judicial Member on applying the previous year's net profit rate and restoring the issue to the CIT(A) for a fresh assessment considering electricity consumption and wastage.

Conclusion:
Both appeals by the revenue and the assessee are partly allowed for statistical purposes, with specific issues remanded to the CIT(A) for detailed examination and application of the previous year's net profit rate. The classification of surrendered income as "Income from Other Sources" is upheld.