2020 (4) TMI 850 - AT - Income Tax

Unaccounted sale - excess stock of finished goods of iron ore (manganese ore) - Assessee not explained the entire shortfall (in physical stock), which he estimated at 35% of the alleged excess book-stock (36,400 MT) - HELD THAT - There is no reason to, as the assessee does, club the two types of materials, or the iron ore component therein, in seeking to justify the difference/s as found. In doing so, it in fact removes the very basis of the Revenues case. That is, to begin with, there is a complete mis-appreciation of the Revenue s case. State of the assessee s approach in the matter, since accepted, i.e., in principle, by the ld. CIT(A), to be completely misfounded. The complete disharmony between the figures makes a travesty of the assessee s methodology in explaining the difference. While the total difference per the same, and which it therefore seeks to explain, is 36,400 MT, it justifies a difference for a much higher figure of 1,14,250 MT through the certificate of the consulting Geologist. That is, the same has no relation to the obtaining difference between the physical and book figures per its own calculation, which it seeks to justify. The said certificate is, in fact, again a misrepresentation by the assessee, and has rightly been not accepted by any authority. Ascertainment of Difference in stock - Held that - One could regard the price variation between the two product categories, i.e., lumps and fines, as on account of mineral recovery due to the products physical properties, primarily, the particle size. While the lumps could be easily crushed into fines, making the two equivalent, it may be difficult to, or at least involve cost and technology, to coalesce fines into lumps, resulting in a lower price for the latter. In fact, as explained during hearing, the transportation cost itself, where the technology is not available locally, exceeds the selling price. A product may be saleable at ₹ 3000 (say), while the other lot may not fetch more than ₹ 1000 (say) or even ₹ 500 (say). Surely, the latter is subgrade relative to the former; the price differential across lumps and fines, inasmuch as there is no segregation between the two in the physical stock-taking, being more than 750% ((3050/400) x 100) (Table 4B). As afore-noted (para 4.4), there is no segregation of processed iron ore stock into lumps and fines (see Table 1A). While the assessee consistently maintains of iron ore being saleable in the iron grade class 50%-55%, with that below 50% being sub-grade, per Gd. 5 of its Appeal it claims to be selling iron ore in the grade class 57%-60%, belying its stand of the limitation of the physical processes being carried out by it to improve the iron grade beyond 55%. It thus tacitly admits to projecting incorrect facts, as well as evading royalty, paid on its entire sales in the grade category below 55% . Mention here be also made to the statement of NS, reproduced at page 26 of the impugned order, stating iron ore being saleable in the grade category 54%-55%. If that is indeed so, which fact could be easily proved, or called upon to, the entire material below 54% would stand to be classified as subgrade. Quantification of the income that has escaped assessment - Held that - Differece between an excess physical stock and excess book-stock, representing opposite situations, even as, as explained hereinbefore, results in an inference of escapement of income from tax and, accordingly, liable to be brought to tax, albeit at different amounts, representing valuation/s thereof. While a positive difference (excess physical stock) would translate into an addition irrespective of any addition made on that count (or for undisclosed assets), it may not necessarily be so in the case of a negative difference (excess bookstock), which indicates, among others, unaccounted disposal of the relevant stock (i.e., as of the date of the physical verification), so that income concomitant to that disposal had escaped assessment (as on that date). Conclusion The different quantities/figure are not liable to be reconciled and, accordingly, no case for any reconciliation of different figures, or for any addition on the basis of the said categorizations, is accordingly made out, either toward excess physical or book stock. The excess stock is, under the circumstances, only being so/notional. While a positive difference (excess physical stock) would translate into an addition irrespective of any addition made on that count (or for undisclosed assets), it may not necessarily be so in the case of a negative difference (excess bookstock), which indicates, among others, unaccounted disposal of the relevant stock (i.e., as of the date of the physical verification), so that income concomitant to that disposal had escaped assessment (as on that date). It is, accordingly, open to the assessee to make out a case that the past unaccounted income, since admitted and returned, arose on account of such undisclosed disposal. That is, the said escaped income, being sought to be brought to tax for the current year, had already suffered tax in an earlier year. Again, a further clarification may be in order. That is, in a case as the present one, where the escapement of income is on account of unaccounted disposal, the assessee realizes it s value (₹ 100, say), which gets disclosed/returned on the corresponding asset/money being discovered (by the Revenue). The income on this sale, however, would only be after deducting its cost, incurred and reflected in accounts (₹ 40, say), i.e., ₹ 60. This is as the balance ₹ 40, though realized through sale, continues to be reflected in accounts, albeit does not represent an actual capital (of the reporting entity). This needs to be borne in mind, and once again emphasizes the need for bringing the accounts to actuals. The orders of the Revenue authorities are accordingly set aside, and additions deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether any addition under section 69A or 69B, i.e., toward excess stock of finished goods of iron ore (manganese ore) is maintainable.
2. Whether any addition toward excess book-stock of any saleable material is called for.
3. The value at which the addition/s, if any, is to be made.

Detailed Analysis:

1. Addition under Section 69A or 69B for Excess Stock of Finished Goods:
The primary contention was whether the excess stock of iron ore found during the search operation should lead to an addition under section 69A or 69B. The Revenue's case was based on the physical stock found being in excess of the book stock, indicating unaccounted production and sales. The assessee argued that the excess stock was due to the inclusion of sub-grade material, which was not properly accounted for in the books. The Tribunal found the assessee's explanation to be without merit and upheld the Revenue's approach of considering the physical stock of finished goods separately from sub-grade material.

2. Addition Toward Excess Book-Stock:
The Tribunal considered whether any addition was warranted for excess book-stock. It was noted that if the book-stock of finished iron ore was in excess, it implied unaccounted removal (sale) up to that date, leading to an inference of unaccounted income. The Tribunal agreed with the Revenue that the addition should be made at the gross profit rate on the sale value of the excess book-stock, as the cost of such stock would have already been absorbed in the books.

3. Valuation of Addition:
The Tribunal discussed the valuation of the addition, whether it should be at cost or sale value. It concluded that the sale (net realizable) value should be considered for the addition, as the cost of excavation and processing had already been absorbed in the books. The Tribunal also noted that the gross profit rate should be adjusted for royalty costs, and the average sale rate for the period up to October 2014 should be used for valuation.

Conclusion:
The Tribunal found that the assessee's books of account could not be regarded as properly maintained and that the excess stock of finished goods indicated unaccounted production and sales. The Tribunal upheld the Revenue's approach of making additions based on the physical stock found and the gross profit rate on the sale value of the excess book-stock. The Tribunal advised the assessee to maintain proper records to avoid future discrepancies and potential tax liabilities. The appeals of the assessees were allowed, and the Revenue's appeals were dismissed.