2018 (1) TMI 1153 - AT - Income Tax

Trading addition - shortage / excess of the goods - independent inquiry on the basis of the information received from the Central Excise Department - Held that - The basis of making addition by the Assessing Officer was that during the survey operation, the Central Excise Department found there was excess of raw material. It is the contention of the assessee that the ld. CIT(A) has not taken into consideration the fact that some scrap was generated during the manufacturing process, which gave difference between the raw material and finished goods. As assessee has contended that the first appellate authority under the Central Excise Act i.e. Commissioner of Appeal-1, Central Excise vide order dated 02/1/2013 has given a finding that there was no sufficient material on record to establish clandestine removal on clearance by the appellant. It is stated by the assessee that on the date of survey, actual production of MS Bars was 29668.220 MT whereas consumption of MS Ingots was 31781.160 MT resulting into burning loss of 1015.810 MT, scrap generation of 1018.865 MT and mis roll of 78.265 MT. We find that this fact is not considered by the ld. CIT(A) while deciding this issue. Had the ld. CIT(A) taken into account this fact that this addition would not have been sustained. - Decided against revenue.

Summary

Issues Involved:
1. Rejection of books of account under Section 145(3) of the Income Tax Act, 1961.
2. Trading addition of ?52,35,630/- by the Assessing Officer.
3. Confirmation of trading addition of ?20,11,527/- by CIT(A).
4. Alleged excess stock of ?52,35,630/- found during a survey by the Central Excise Department.
5. Application of GP rate of 3.20% by CIT(A).

Issue-wise Detailed Analysis:

1. Rejection of Books of Account under Section 145(3):
The Assessing Officer (AO) rejected the books of account of the assessee under Section 145(3) of the Income Tax Act, 1961, due to discrepancies found during a survey conducted by the Central Excise Department. The survey revealed a shortage of 250.04 MT of raw material (MS Ingots) and an excess of 202.995 MT of finished goods (MS TMT bars) valued at ?52,35,630/-. The CIT(A) upheld the rejection of the books of account, citing that the shortage of raw material accounted for the excess of finished goods. However, the Tribunal noted that the AO did not carry out any independent enquiry and relied solely on the information from the Central Excise Department.

2. Trading Addition of ?52,35,630/- by the Assessing Officer:
The AO made an addition of ?52,35,630/- to the income of the assessee, alleging that the excess stock found during the survey was not recorded in the books of account. The assessee argued that the discrepancy was due to the conversion of raw material into finished goods and that the actual weighment of goods was not done. The Tribunal observed that the AO failed to appreciate the fact that the stock of raw material and finished goods was not weighed accurately, and the discrepancy could be due to human error.

3. Confirmation of Trading Addition of ?20,11,527/- by CIT(A):
The CIT(A) partially allowed the appeal of the assessee, reducing the addition from ?52,35,630/- to ?20,11,527/-. The CIT(A) applied a GP rate of 3.20% to the total turnover, resulting in a trading addition of ?20,11,527/-. The Tribunal noted that the CIT(A) did not consider the fact that the excess stock of finished goods was due to the conversion of raw material and that the discrepancy was minor. The Tribunal directed the AO to delete the addition sustained by the CIT(A).

4. Alleged Excess Stock of ?52,35,630/- Found During Survey:
The Central Excise Department conducted a survey on 23/12/2009 and found an excess stock of 202.995 MT of finished goods valued at ?52,35,630/-. The assessee argued that the discrepancy was due to the conversion of raw material into finished goods and that the weighment of goods was not done accurately. The Tribunal observed that the first appellate authority under the Central Excise Act had given a finding that there was no sufficient material on record to establish clandestine removal of goods by the assessee.

5. Application of GP Rate of 3.20% by CIT(A):
The CIT(A) applied a GP rate of 3.20% to the total turnover of ?121,80,17,278/-, resulting in a trading addition of ?20,11,527/-. The assessee argued that the GP rate applied by the CIT(A) was without any basis and that the GP rate declared by the assessee for the preceding years was lower. The Tribunal noted that the CIT(A) did not consider the past trading results of the assessee and that the GP rate applied was not based on any comparative case.

Conclusion:
The Tribunal allowed the cross objection of the assessee and directed the AO to delete the addition sustained by the CIT(A). The Tribunal dismissed the appeal of the revenue, noting that the AO did not carry out any independent enquiry and relied solely on the information from the Central Excise Department. The Tribunal emphasized that the discrepancy in stock was due to human error and that the actual weighment of goods was not done accurately.