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TMI Blog2011 (1) TMI 573X X X X Extracts X X X X X X X X Extracts X X X X ..... iness or profession - While computing the total income, this income has to be separately added in the total income and cannot be shown by crediting in the profit and loss account - Held that: surrendered income of unaccounted stock is treated as income from other sources Regarding addition on account of net profit by estimating it @ .43% on estimated sales of Rs. 5.00 crores at Rs. 2,15,000 - There is difference between the assessment made on the basis of assessee's accounts and that made on "best judgment" basis - This is a fact that the action of the Assessing Officer rejecting the books of account by invoking the provisions of section 145(3) got confirmed - Assessing Officer must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter - There is nothing in section 144 for holding an assessment made by an officer u/s. 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 - Once the higher wastage are recorded, the natural inference will be that there will be excess production, which not being accounted f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as directed by the Learned Accountant Member. (v) . Whether on the facts and in law, the Ld. Judicial Member is justified in directing to apply a net profit rate on the basis of immediately preceding year on the sales estimated or that there is no justification under the peculiar facts to apply net profit rate on that basis but to estimate income with reference to relevant material on record in the manner as provided u/s. 144 of the Act. " 2. Although both the Members have mentioned the brief facts in respect of the cross appeals filed by the assessee as well as the Revenue and all these questions arise out of the various grounds taken in the appeals filed by the Revenue as well as the assessee, yet for disposing of the questions referred to me, it is necessary for me to refer to the brief facts of the case even at the cost of repetition. 3. The facts of the case are that the assessee has derived income from manufacturing and trading of ADV Hubs, Crank Shafts and Ingots. During the year under consideration, the assessee returned nil income after claiming depreciation at Rs. 8,37,871. There had been a survey conducted u/s. 133A of the Income-tax Act on 25.09.2000 in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000. Separate addition in respect of investment in unaccounted stock were made u/s. 69 of the Act for Rs. 30,00,357 alongwith other disallowances and additions in respect of excessive wastage etc. 4. The question No. 1 relates to the valuation of unaccounted stock of scrap found at the time of survey. This arises out of the ground Nos. 1 3 of the Revenue's appeal. The learned Accountant Member has restored the issue to the file of learned CIT(A) while the learned Judicial Member has set aside the order of the ld. CIT(A) deleting the addition made by the Assessing Officer and restored his order. 5. The learned A.R. before me vehemently contended that the assessee has surrendered a sum of Rs. 22,00,000 during the course of survey by valuing the excessive scrap @ Rs.5000per M.T. My attention was drawn towards page Nos. 34 and 36 of first paper book and it was pointed out that the average rate on the basis of purchase of scrap comes to Rs. 4593.55 per M.T. The rates of the scarp depend on the quality of the scarp. 90% of the scrap is purchased at the rate below Rs. 5,000 per M.T. It is only 2 M.T. scrap which was purchased @ Rs.7000 per M.T. which was exceptional rate and was onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee before the CIT(A). The survey team has also worked out the value of the excessive stock of scrap @ Rs. 5000 per M.T. after having physical verification. The assessing Officer, in my opinion, could not have valued the unaccounted scrap @ Rs. 7000per M.T. merely on the basis of one purchase of 2.00 M.T. The learned CIT(A), therefore, should have verified the survey report and have analysed as to what is the basis adopted by the Assessing Officer differing with the survey report. Therefore, under these peculiar facts and circumstances of the case, I have to agree with the learned Accountant Member, as he has restored the issue to the file of the CIT(A) even though I noted that there is sufficient material and evidence produced by the assessee to prove that the average rate of scarp is Rs. 4593 per M.T. As a Third Member, my jurisdiction is limited only to agree with one Member or to disagree with the other Member. I, therefore, answer the first question agreeing with the learned Accountant Member setting aside the order of the ld. CIT(A) and restoring the issue of valuation of scrap to the file of the CIT(A) for passing a speaking order thereon. 8. The second question ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has to be assessed under the head "income from business". The learned Judicial Member, on the other hand, was of the view that the unaccounted stock surrendered by the assessee was not in his books of account. The assessee was not maintaining the regular books of account. The income so surrendered cannot be the income which can be assessed under the head "income from business or profession. This is an undisputed fact that there was deficiency found in the inventory of the assessee during the course of survey. The survey party has valued the stock. The assessee has surrendered the inventory for Rs. 22,00,000. The income so surrendered is deemed to be the income of the assessee u/s. 69 of the Income-tax Act, as the assessee could not prove the nature and source of investment made in the inventory. I have gone through the decision of Hon'ble Gujarat High Court in the case of Fakir Mohmed Haji Hasan v. CIT (supra). In this decision when the addition was made in respect to the unexplained gold on the question whether the income can be assessed under the head "income from business" or income from other sources, the Hon'ble High Court has held as under : "6. Under section 4 of the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9C will not apply, in which event, the provisions regarding deductions, etc. applicable to the relevant head of income under which such income falls will automatically be attracted. 6.2. The opening words of section 14 "Save as otherwise provided by this Act" clearly leave scope for "deemed income" of the nature covered under the scheme of sections 69, 69A, 69B and 69C being treated separately, because such deemed income is not income from salary, house property, profits and gains of business or profession, or capital gains, nor is it income from "other sources" because the provisions of sections. 69, 69A, 69B and 69C treat unexplained investments, unexplained money, bullion, etc. and unexplained expenditure as deemed income where the nature and source of investment, acquisition or expenditure, as the case may be, have not been explained or satisfactorily explained. Therefore, in these cases, the source not being known, such deemed income will not fall even under the head "income from other sources". Therefore, the corresponding deductions, which are applicable to the incomes under any of these various heads, will not be attracted in case of deemed incomes which are covered under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red the same alongwith the orders of the authorities below as well as that of the learned Judicial Member and learned Accountant Member. I noted from the assessment order that the Assessing Officer has not made any separate addition estimated as profit on the sale of excess stock of the scrap found during the course of survey and surrendered by the assessee. The Assessing Officer rejected the books of account of the assessee. The rejection of books of account was confirmed by the CIT(A) as well as by the orders of both the Members on which there is no dispute. The Assessing Officer after rejecting the books of account estimated the sales at Rs.5.00 crores and applied a net profit @ 0.43% and worked out the net profit at Rs. 2,15,000 but in computation shown Rs. 2,45,000 even though the assessee has claimed in its Income-tax return net loss after crediting in the profit and loss account the surrendered amount of Rs. 22,00,000 on account of excess scrap found during the course of survey. The Assessing Officer did not agree with the wastage shown by the assessee and made a separate addition on account of excess wastage. He also made separate addition in respect of unaccounted excess s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear in the peculiar facts and circumstances of the case while the learned Accountant Member directed the quantum of the sale to be estimated afresh by considering the melting loss and oxidation factors etc. in the right perspective. He further directed that the CIT(A) will consider the impact of the surrendered business income on the profit that may be worked out by present facts of the year under consideration such as increase in power tariff, fixed wages bills, higher expenditure on power and electricity, rise in cost of production and other selling administration and finance expenses and not to apply the net profit rate of earlier year as in his opinion, the same could not form a basis under the facts situation of the year under consideration. 15. I heard the rival submissions and carefully considered the same. I noted that the Assessing Officer in this case made the addition on account of net profit by estimating it @ .43% on estimated sales of Rs. 5.00 crores at Rs. 2,15,000 (even though in the computation, figure has been taken at Rs. 2,45,000)- Alongwith this, the Assessing Officer made the addition on account of excess wastage at Rs. 6,72,200. The Assessing Officer noted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not varied. It has not been shown by the appellant that in past also on account of lower production, the assessee had 10 incur gross loss. It is rather seen that in assessment year 1999-2000 also, the assessee had shown the production at 2772 MT as against 2530 MT in this year and had still shown gross profit rate of 2.58% and not gross loss. This shows that the lower production does not adversely effect the trading result and certainly not to the extent as claimed in this year. These facts support the AO's observation that the book results shown by the assessee do not reflect the correct picture and the assessee had indulged in unaccounted production/sales. The case can be seen from another angle also. As mentioned above, the assessee has shown the wastage of 669.710 MT which is about 21% of the total consumption of 3200 MT: In my opinion, the AO 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 Steel Review, November 2004. In this article, on page 36 it is clearly mentioned that in terms of quality and productivity use of sponge Iron as cold charge is more advant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee in the books. It is seen that the average selling rate of finished goods comes to Rs. 11,500 PMT as can be seen from Schedule "H" to the balance sheet. If this rate is applied (excluding excise duty) on the excess production of 254 MT then the unrecorded sales come to Rs. 29,21,000. In my opinion, this amount is required to be added in the manufacturing and trading account of the assessee. If this amount is added then the gross loss in the manufacturing business is reduced to Rs.4,33,763 [Rs.33,54,763 (-) Rs. 29,21,000]. Thus, even after this addition, there is a gross loss of Rs.4,33,763 in the manufacturing account. In my opinion after considering the additional power charges of Rs. 11 lacs, which have been accepted by me above in ,real terms there is now a gross profit of Rs.6,66,237 [Rs. 11,00,0001- (-) Rs. 4,33,763 in the manufacturing account which on the sales of Rs. 4,01,097,534 (Rs. 3,71,86,534 + 29,21,000) comes to 1.66% and compare well with the trading results shown by the assessee in earlier year(s). In view of the above discussion, I am of the opinion that it would be just and fair if a trading addition of Rs. 29,21,000 is made in the appellant's case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n electric tariff rate which may have a bearing on this issue also as such by this the amount of wastage and the utilisation of the same for producing finished goods and the addition in the trading result which may so warrant would be accordingly so considered on which aspect both the assessee and the department are aggrieved. 26. In regard to the wastage claimed by the assessee it is seen that the report of the authorized person of Process and Product Development Centre, Mr. Joshi certifying wastage of 21 % has been considered to be not relevant in view of the fact that it was based on a specific product mix which was given by the assessee the said person's statement as per the material available on record and found discussed on page 17 of the impugned order. The statement has been recorded wherein Mr. Joshi has stated that in the product mix of pig iron and iron scrap the wastage is 8% to 10% and if sponge iron is used then the wastage is about 15% apart from 2% - 3% of oxidation loss. The certificate of 21 % was given by him in view of the fact that in the sample given to him 15% old iron scrap which included some iron and steel dust also as such the wastage certified by him o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the additions made and assessment of income, the Ld. CIT(Appeals) ought to have corrected that by making a reasoned order on the points or basis what he honestly believed to be a fair estimate of income of the assessee after taking into consideration the relevant material that had come on his record. The ld. CIT(Appeals) , however did not give any reason or basis not to accept the estimation of income made by the Assessing Officer by estimating sales or application of net profit rate applied by him. Nor did he give any reason for not accepting the plea of the appellant that the estimation so made has no rationale and this being an abnormal year, net profit rate on the basis of earlier year's profit rate could not be applied for determination of his income for the year under consideration. The Ld. CIT(Appeals) also did not show as to why the entire amount of alleged sale of excess wastage claimed needs to be added and not the estimated profit embedded in sales for which net profit rate was adopted and a separate grounds Nos.6 7 in that respect had also been taken by the assessee in appeal before him. It is also evident from record that the quantity weighing 3200 M. T. of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under consideration. The parties shall be afforded a reasonable and effective opportunity of being heard so that reliable evidence in support of their claim is adduced by them before he takes decision in accordance with law for estimating total income or loss of the year under consideration with reference to relevant material on record as envisaged by the provisions of section 144 of the Act. Accordingly, ground No. 1 in appeal by assessee stands allowed and ground Nos. 3 to 6 in that appeal stand allowed for statistical purposes only. Consequent to this, ground Nos. 5 to 10 in Revenue's appeal are also allowed for statistical purposes only." 18. This is a fact that the action of the Assessing Officer rejecting the books of account by invoking the provisions of section 145(3) got confirmed. Section 145(3) of the Income tax Act empowers the Assessing Officer to make the assessment in the manner provided u/s. 144 if the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee or where the method of accounting provided in sub-section (1) or accounting standard as notified in sub-section (2) has not been regularly followed by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mate. Such estimate must be based on adequate and relevant material. What is irrelevant material depends on the facts and circumstances of the case. In my opinion, the earlier years' results of assessee's business are the relevant material until and unless it is proved otherwise. If the nature of the business of the assessee is same under the ordinary circumstances, it is presumed that the result of the business of the assessee will remain the same under the normal circumstances. The authorities below have given sufficient opportunity to the assessee so far the application of the net profit rate is concerned. The ld. AR could not produce any evidence neither before us nor before the authorities below why the net profit as has been achieved by the assessee in the earlier year could not be applied to the current year. The only argument of the assessee relate to the increase in the power expenses and higher wastage. Except these two attributes, in my opinion, there is nothing wrong in directing the CIT(A) while restoring the matter to his file on these issues that the net profit rate has to be applied as has been taken in the preceding assessment year as the net profit rate of other e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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