2013 (9) TMI 51 - HC - Income Tax

Rejection of books of accounts - Whether Tribunal was legally correct in upholding the rejection of accounts and in sustaining the addition for sums aggregating Rs. 49,13,859/- as had been made in the assessment, on the ground that the burning loss as claimed by the assessee was excessive - Held that - there has to be some burning loss during the process of rolling. But then again, in our opinion, and in view of Smith s report cannot be to the extent of 4.2% or 4% - when the assessee has not computed his closing stock by way of actual weighment, the extent of burning loss on this account admissible to the assessee remained a question of estimate which, in our opinion, can vary from persons to person and stage to stage - so far as burning loss during the course of rolling of assessee s own produced ingots and billets is concerned, the burning loss @ 3% will met the ends of justice. Even though provisions of sub-section (1) of Section 145 of the Act has rightly been invoked, the estimate of income has to be based on some materials. The Commissioner of Income Tax (Appeals) had taken into consideration various factors while accepting the burning loss shown by the appellant which in our considered opinion the Tribunal had failed to advert into - Matter remitted back - Decided partly in favour of assessee.

Summary

Issues Involved:

1. Interpretation of Section 145(2) of the Income Tax Act regarding the rejection of accounts and the addition of sums based on excessive burning loss claimed by the assessee.
2. Verification of the burning loss from production records and its acceptance by Excise Authorities and the Assessing Officer.
3. Reliance on previous Tribunal orders in the assessee's own case for earlier assessment years without considering the distinguishing features of the manufacturing process.

Detailed Analysis:

Issue 1: Interpretation of Section 145(2) and Rejection of Accounts

The Tribunal upheld the rejection of the appellant's accounts under Section 145(2) of the Income Tax Act, sustaining an addition of Rs. 49,13,859/- due to the claimed excessive burning loss. The Assessing Officer found that the closing stock was declared based on visual inspection rather than actual quantity or value determination. Consequently, the Assessing Officer applied a best judgment assessment, concluding that the burning loss claimed (4.1% for own production and 4% for TISCO billets) was excessive. The officer, relying on the S.H. John M. Smith report and comparisons with another manufacturer, M/s J.K. Iron and Steel Co. Ltd, fixed the burning loss at 2.5% for own production and 2% for TISCO billets, resulting in significant additions to the income.

Issue 2: Verification of Burning Loss

The Tribunal held that the burning loss claimed by the assessee was excessive, despite being verifiable from day-to-day production records with no defects found by Excise Authorities or the Assessing Officer. The Commissioner of Income Tax (Appeals) had accepted the burning loss based on various factors presented by the appellant, including the nature of the furnace and the type of fuel used. The Tribunal, however, did not consider these factors and relied solely on the Smith report, which suggested that burning loss in oil-fired furnaces should not exceed 2.5%. The Tribunal's decision was based on the Smith report's guidelines without verifying the specific conditions and variables of the appellant's manufacturing process.

Issue 3: Reliance on Previous Tribunal Orders

The Tribunal placed reliance on its earlier orders in the assessee's case for the assessment years 1988-89 and 1989-90, where the issue of production record verifiability did not consider the distinguishing features of the manufacturing process. The Commissioner of Income Tax (Appeals) had noted that the appellant's furnace and production conditions were different from those considered in the Smith report and the case of J.K. Iron & Steel Co. Ltd. The Tribunal, however, did not examine these distinguishing factors and reversed the Commissioner's findings without addressing the specific conditions of the appellant's manufacturing process.

Conclusion and Order:

The High Court found that the Tribunal failed to examine the various factors considered by the Commissioner of Income Tax (Appeals) in accepting the burning loss shown by the appellant. The Tribunal had relied solely on the Smith report and the rejection of trading results under Section 145(1) without considering the detailed explanations provided by the appellant. The High Court set aside the Tribunal's order and remanded the matter for fresh determination, instructing the Tribunal to consider the Joint Plant Committee report dated 23rd June 2000 and refix the burning loss in accordance with law. The appeal was allowed in part, focusing on the limited issue of reassessing the burning loss.