2020 (5) TMI 575 - AT - Income Tax

Rejection of books of accounts - Suppressed production - determination of quantum of clay which can be extracted/produced from mines - HELD THAT - AO has proceeded ahead and basis his own investigation and understanding of the mining process involved, and basis his own calculation and understanding of variables has worked out the quantum of clay which could be extracted from one of the mines owned by the assessee without referring the matter to the domain experts in the field of mining such as geologists and mining engineers. AO in the instant case, was totally unsuited for undertaking the activity of determining the exact production of the material, which itself involves very complicated procedures. Such calculation AO has determined the shortfall or suppression in the clay production vis- -vis production disclosed by the assessee in respect of one of the mines. Using the same percentage of suppressed production, he has proceeded ahead and worked out proportionate suppression of production in the other two mines without getting into specific of functioning of such mines which again cannot be accepted. Without getting into the merits of the formula so arrived by the AO as we find ourself not competent enough to comment upon, we find that effectively, the AO has tried to determine the quantum of clay which could potentially be extracted from the mines and that s where whole case of the Revenue rest. The question for consideration here is not the potential extraction of clay rather the actual clay which has been extracted from the mines and which has been sold/dispatched during the year under consideration and which has not been disclosed in the return of income and what credible material is available on record in support of such findings. There is no material on record and no finding recorded by the AO that quantum of clay so determined by him as part of suppressed production has been actually dispatched and sold and more so, when the assessee s activities comes under the jurisdiction of State Mining Department and both its production and dispatches are closely monitored by the Mining Department As held in case of CIT vs. Shri Girija Smelters (P) Ltd 2014 (10) TMI 890 - TELANGANA AND ANDHRA PRADESH HIGH COURT the occasion to levy income tax would arise, only when the product in question was found or alleged to have been sold, and the sale proceeds, constituting income were not reflected in the returns. Not even alleged that the product shown in the form of discrepancies, was sold at all. Royalty assessments were carried out by the Mining Department without any adverse findings and copy of royalty assessment orders, copy of monthly returns, details of production at mines and dispatches from the mines and reconciliation thereof were admittedly furnished before the lower authorities and even acknowledged by the CIT(A) and no discrepancy has been highlighted therein either by the AO or by the ld CIT(A) and there is no material on record which highlight dispatches from the mines without paying the requisite royalty.There is no basis for alleging suppression of production by the assessee and the findings of the lower authorities are hereby set-aside. - Decided in favour of assessee.

Summary

Issues Involved:
1. Rejection of Books of Account under Section 145(3) of the Income Tax Act, 1961.
2. Trading Addition of ?70,00,000/-.

Issue-wise Detailed Analysis:

1. Rejection of Books of Account under Section 145(3) of the Income Tax Act, 1961:

The Assessing Officer (AO) rejected the books of accounts maintained by the assessee, invoking Section 145(3) of the Income Tax Act, 1961, due to various discrepancies in the production of clay, production of clay powder, trading of clay and clay powder, and the expenses debited in the trading account. The AO issued a show cause notice and found that the books of accounts were unreliable based on discrepancies such as unlinked purchases and sales, transactions with sister concerns, and unverifiable expenses on diesel, oil, mining, and transportation.

The assessee contended that the trading activities with related parties were at prevailing market rates and that different qualities of clay led to varying profits. It was argued that no specific instance of higher payments to related concerns was pointed out by the AO. The Tribunal found that merely because gross profit rates varied, trading results could not be rejected without specifying reasons or corroborative material. The AO's findings lacked specific third-party comparables and failed to demonstrate how purchases and sales were at variance with market transactions. The Tribunal concluded that the AO's findings on trading results were not borne out of any specific findings and thus could not be accepted.

Regarding the production of clay powder, the Tribunal noted that the AO did not mention any specific discrepancies in the show cause notice or the assessment order. Therefore, the rejection of books of accounts on this ground was not accepted.

For discrepancies in expenses, the AO observed that expenses on diesel and oil, mining, and transportation were not fully verifiable. The Tribunal found that while expenses pertaining to sister concerns could not be allowed, the AO should have employed an appropriate audit methodology rather than expecting the assessee to produce documentation linking all expenses with sales bills. The Tribunal noted gaps and reluctance on the part of the assessee in providing explanations and documentation.

The main issue of suppression of production was based on the AO's estimation of production using generalized statements and assumptions. The AO calculated the production of clay using data from a mining mate and assumed a certain ratio of different grades of clay. The Tribunal found that the AO's calculations were based on assumptions and lacked specific findings. The Tribunal emphasized that the AO should have sought the opinion of domain experts from the State Mining Department before arriving at conclusions on technical matters. The Tribunal cited case law to support the view that the AO was not competent to determine production quantities without expert input. The Tribunal concluded that there was no basis for alleging suppression of production and set aside the findings of the lower authorities.

2. Trading Addition of ?70,00,000/-:

The AO made a lump sum trading addition of ?75,00,000/-, which was reduced to ?70,00,000/- by the Commissioner of Income Tax (Appeals) [CIT(A)]. The addition was based on alleged suppression of production and other discrepancies. The assessee argued that the books of accounts were audited and no defects were pointed out by the auditor. The assessee provided detailed explanations and reconciliations, which were not accepted by the AO.

The Tribunal found that the AO's calculations were based on generalized assumptions and lacked specific evidence of suppressed production and sales. The Tribunal noted that the royalty assessments by the Mining Department did not show any adverse findings and that the production records were accepted by the Mining Department. The Tribunal emphasized that the AO's findings were not supported by credible material and set aside the trading addition.

Conclusion:

The Tribunal allowed the appeal of the assessee, setting aside the rejection of books of accounts and the trading addition made by the AO. The Tribunal emphasized the need for specific findings and expert opinions in technical matters and found that the AO's conclusions were based on assumptions and lacked credible evidence. The Tribunal directed the deletion of the addition of ?70,00,000/- and upheld the assessee's contentions.