9911796707
TMI Blog2010 (11) TMI 713X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner of Income-tax (Appeals)-II, Agra has erred in law and on the facts of the case in considering the investment in unaccounted stock as apart of the business income without having any supporting evidence in this regard and ignoring the legal position that under the provisions of Income-tax Act the investment in unaccounted stock found at the time of survey has first to be worked out on the date of survey (i.e. 25-9-2000) and such investment has to be considered as "Income from Other Sources" unless it is proved otherwise by the assessee which has not been done in this case. (3) That the learned Commissioner of Income-tax (Appeals)-II, Agra has erred in law and on the facts of the case in accepting the rate of excess stock of scrap on the date of survey at the rate of Rs. 5,000 per M.T. Instead of prevailing rate of Rs. 7,000 per M.T. The learned Commissioner of Income-tax (Appeals) is not justified in not giving categorical finding for the valuation of unaccounted stock of 400 M.T. scrap found at the time of survey merely on the inference drawn that the entire exercise is academic only. (4) That the learned Commissioner of Income-tax (Appeals)-II, Agra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnished by the assessee in this respect or without insisting upon the assessee to furnish the comparable figures of power tariff and consumption for the year under consideration and immediately preceding year. (9) Having confirmed the rejection of books of account excessive consumption of electricity, excessive wastage and application of gross profit rate as reasonable in principle, the learned CIT(A)-II, Agra has erred in law and on the facts of the case in not applying the same gross profit rate on estimated sales or on the sales of Rs. 40,17,534 determined by himself. (10) That the decision of learned Commissioner of Income-tax (Appeals)-II, Agra being erroneous in law and on facts deserves to be quashed and that of the Assessing Officer deserves to be restored. (11) That the appellant craves leave to add or alter any or more ground or grounds of appeal as may be deemed fit at the time of hearing of appeal." 3. The grounds raised by the assessee read as under :- "(1) That the order of the ld. CIT (Appeals)-II, Agra is bad in law and on the facts of the case, so far as it pertains to the trading addition of Rs. 14,60,500. (2) That ld. CIT (Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year despite making a higher sale a G.P. of 1.69 per cent has been shown by the assessee. Accordingly, for the gross loss shown of Rs. 9,24,763 the assessee was required to produce the evidence. 6. In response to this, the following submissions were made by the assessee justifying the valuation of stock as on date of survey and gross loss. The same are reproduced from pages 2 and 3 of the Assessment Order :- "(1) The following stock found at the date of survey was valued as under :- (i) Iron Scrap 400 MT @ 5000 Rs. 20.00 lakhs (ii) Pig Iron 13.467 MT @ 9000 Rs. 1.21 lakhs (iii) Sponge Iron 1.532 MT @ 6400 Rs. .10 lakhs (iv) Forgings 287 Pcs. @ 240 Rs. .69 lakhs Total Rs. 22.00 lakhs It is clear that major item involved is iron scrap. The rate of iron scrap purchased by assessee during the year vary between Rs. 3,645 per mt. to Rs. 7,000 per mt. Depending upon the quality of scrap. The scrap mentioned as above was estimated worth Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t period cannot be justified." Moreover, even when books of account are rejected, it does not automatically lead to rejection of sales and GP and thereby estimating the same. Kindly take note of CST v. Pilot Shoe Factory [1977] 39 STC 95, 98 (All.) according to which "merely because the books of account of the assessee are rejected as unreliable, it could not be said that the turnover returned by the assessee must necessarily be rejected and that such turnover should be estimated at a higher figure than returned by the assessee. In spite of such rejection of the assessee's books of account, whether the turnover returned by him should be accepted or whether a higher turnover should be estimated by the assessing authority, must depend upon the facts and circumstances of each case." As far as gross profit rate during the year is concerned, in fact there is no fall, rather it has increased. Gross loss appearing in the profit and loss account amounting to Rs. 9,24,763 is due to a technical mistake whereby income of Rs. 22 lakhs, which pertains to purchases has wrongly been considered after the GP, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue Justification of rate applied 1. Sponge Iron 5.000 MT 3.468 MT 1.532 MT 6650 PMT 10187 Bill dated 4-8-2000 HEG Ltd. 2. Pig Iron 88.000 MT 74.553 MT 13.467 MT 8650 PMT 116490 Bill dated 9-7-2000 of Jaiswal Neco Ltd., Raipur 3. Forging 3980 Pcs 3693 Per Piece 307 Piece 240 Per Piece 73680 Rate as stated by assessee 4. Scrap 450 MT 50 MT 400 MT 7000 PMT 2800000 Bill dated 14-8-2000 of Rajjo Bhai, Agra. Total 3000357 In view of above discussion, the value of unaccounted stock of Rs. 30,00,357 as discussed above will be added to the income of the assessee as undisclosed investment in stock under section 69 of the Income-tax Act, 1961 under the head 'Income from Other Sources'." 8. On account of the above reasoning the Assessing Officer rejected the books of account of the assessee under section 145(3) of the Act and estimated the sale at Rs. 5 crores as against Rs. 4,51,76,535 shown by the assessee. The reasons of the Assessing Officer as found recorded in the Assessment Order read as under :- "As regards trading results, the assessee could not give an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of unaccounted stock. Considering all the facts and circumstances of the case, sales are estimated at Rs. 5,00,00,000 as against Rs. 4,51,76,535." 9. In view of the fact that the sales had been estimated the Assessing Officer applied the N.P. rate of 0.43 per cent on the basis of last year's position with the following reasoning thereby making addition of Rs. 2,15,000 :- "As regards application GP or NP rate on estimated sales it maybe pointed out that in the earlier year on sales of Rs. 5,77,78,286, the assessee had declared net profit of Rs. 2,50,487 excluding other income and depreciation, the percentage of net profit comes to 0.43 per cent. Since from the comparison of expenses incurred in the year under consideration vis-a-vis expenses incurred last year, it is seen that though the sales have gone down this year as compared to last year but the expenses has been increased, and most of such expenses are not supported by proper evidence/vouchers. In view of it, it is held that the correct method to work out the income of the assessee is to apply net profit rate on estimated sales subject to depreciation. On applying net profit rate 0.43 per cent on estimated sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll have nullifying effect on the net profit. The position would have been different had the entire excess stock been not sold and would have found place in the closing stock. As this is not the case and the closing stock of scrap is of only 90 MT which also includes the purchases made after the survey, in my opinion, by enhancing the value of the excess stock, there would be no material effect on the net profit. This being the position, in my opinion, no interference is required to be made in the valuation of the excess stock as shown by the assessee in the return of income. This ground of appeal is, therefore, allowed." 12. Similarly, while dealing with rejection of books of account and the application of the net profit rate on the estimation of sales made as well as on the addition made on account of excessive wastage in melting and treating the valuation of excess stock found in survey as income from other sources and not as a business income. The issue is addressed by the CIT(A) in paras 4 to 4.6 as being interlinked and is found discussed in pages 6 to 18." 13. Against the rejection of books of account and the manner in which the trading addition was maintained the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of higher tariff effective from Sept. 2000. For the balance he states that the same is on account of lower production." 18. Accordingly, on account of the above, the CIT(A) was of the view that the contention of increase in cost of raw material and change in the product mix being the reasons for adversely affecting the trading result of the assessee were given up on behalf of the assessee. The only reason given by the assessee for the fall in the gross profit in fact for incurring a gross loss was the enhanced power charges. The necessary discussion thereon which led the CIT(A) to give the resultant relief which is agitated by both the sides is reproduced hereunder for ready reference :- "From the above, it can be seen, that at the concluding stage of the appellate hearing, the AR admitted that neither the cost of raw material nor the change in product mix has adversely affected the trading results of the assessee. Thus, now the only reason given by the assessee for the fall in the gross profit rather incurring of the gross loss, is the enhanced power charges. It is seen that in real terms the assessee has shown the power charges higher by about Rs. 32 lakhs as compared to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed by the assessee is abnormal. His view is supported by an article published on Sponge Iron Industries in India in Iron and 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 advantageous. However, Sponge Iron gives a lower yield compared to pig iron/scrap. The article further states that the use of Sponge Iron/DRI in electric are furnace varies in the range of 83 per cent to 89 per cent while the yield from scrap is around 93 per cent to 94 per cent. As this article clearly states that the yield from sponge iron is 83 per cent to 89 per cent while from pig iron the same is 93 per cent to 94 per cent, the AR's contention that the Assessing Officer has not correctly understood the article does not appear to be correct. Similarly, the authorised person of Process and Product Development Centre whose report was submitted by the appellant, in his statement given before the Assessing Officer has stated that the certificate was given on the basis of the quality of the scrap given for testing. It is seen that this person in the statement has stated that if the product m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, after considering the additional power charges of Rs. 11 lakhs, which have been accepted by me above, in real terms there is now a gross profit of Rs. 6,66,237 [Rs. 11,00,000 (-) Rs. 4,33,763] in the manufacturing account which on the sales of Rs. 4,01,07,534 (Rs. 3,71,86,534 + 29,21,000) comes to 1.66 per cent 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. During the appellate proceedings, the AR, however, contended that since the assessee had surrendered Rs. 22 lakhs on account of excess stock, telescoping of the trading addition is required to be allowed to the appellant. I find force in the aforesaid submissions of the AR. However, telescoping of the trading addition can be allowed only for the pre-survey period i.e., April, 2000 to the date of survey. It is seen that till the date of survey the consumption of raw material and out put were 1543 MT and 1251 MT, and in the post-survey period, the same were 1592 MT and 1278 MT. It can thus be seen that the consumption and production wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d an amount of Rs. 22 lakhs on account of unaccounted stock. The CIT(A) took into cognizance the fact that as per the books of account the amount of scrap was only 50 MT whereas what was found at the time of survey was more than 8 times that amount. Thus, in view of the staggering quantity of 450 MT which was actually found on the premises of the assessee as against 50 MT as per books, the rejection of books of account and estimation of sales accordingly was held to be justified. The Assessing Officer had relied upon the judgment of the Delhi High Court in the case of Action Electricals v. Dy. CIT [2003] 132 Taxman 640 which too was held to be applicable. 22. Apart from that the CIT(A) for holding the action of the Assessing Officer took cognizance of the fact by recording an observation that as per the assessee's books the majority of sales were in cash. In fact the entire sale of stock 901.842 MT of Rs. 79,90,000 was claimed which was shown to have been received in cash. A major portion of the sale of finished goods in cash. Moreover, out of the total sales of Rs. 3,71,86,534 of the finished goods Rs. 157.48 lakhs was claimed in regard to sale of ADB Hubs, as such, the entire s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d stock of more than 8 times of what had been recorded in its books of account was against it. The said stock was found according to the CIT(A) lying in open area by the survey party totalling 450 MT despite the so called check by the Excise records. Thus, it clearly demonstrated according to the CIT(A) that the Excise record or for that matter the Excise Department has no control or subversion over the assessee's purchases, consumption and production. 24. These aforementioned facts and findings which stand unrebutted before us. Accordingly in the facts as they stand, we find no good reason to interfere with the finding of the CIT(A) and uphold the action of the CIT(A) in confirming the action of the Assessing Officer in regard to rejection of the books of account of the assessee under section 145(3) of the Act. 25. A perusal of the line of argument initially taken by the assessee and subsequently abandoned in regard to the application of rates and the loss claimed by it, it is seen that the assessee had given up the arguments of the increase in cost of raw material and change in product mix and has confined his arguments to the increase in power expenses. In view of the fact tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue it is seen that the consumption of electricity in the year under consideration which issue has been restored for verification may also have a hearing on the amount of finished products produced by the assessee thereby the amount available for wastage would also be affected. Accordingly, we do not give any finding on this aspect and restore this issue also back to the file of the CIT(A) who may examine the issue from the perspective of the assessee in regard to increase in the electricity tariff and the expenses on account of consumption of electricity and may also take into consideration the wastage claimed by the assessee considering the past history of the assessee the specific facts on record and a comparison in this line of business with other identically situated persons using in Sponge Iron/DRI/Pig Iron in electric are furnace. 28. In regard to the N.P. rate on the trading result which has been taken in the immediately preceding assessment year in the peculiar facts and circumstances the CIT(A) shall apply the same rate. 29. In regard to the value of the unaccounted stock which is accepted by the assessee in terms of the surrender made during the survey at Rs. 22 lak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... detected by the Government Departments - Sales Tax Department of U.P. and concerned States, Excise Departments and other departments. Considering the above facts and also the fact that addition was made under section 69, for the purpose of valuation of excess stock of scrap, the only rate which may be reasonably applied is prevailing rate of scrap at Agra on the date of survey or immediately before the survey. The rate of average quality of scrap in U.P. in the year 2000-01 was about Rs. 7,000 to 8,000 PMT which is evident not only from the fact that assessee itself had purchased scrap at the rate of Rs. 6,800 to Rs. 7,000 PMT during the relevant period (Reference- purchase bills of M/s Chaman Steel Traders, Agra dated 9-5-2000 and 13-6-2000, Nabi Iron Scrap Traders, Agra bill dated 15-6-2000 and 14-7-2000 Ram Scrap House, Agra bill dated 29-6-2000 and 10-7-2000) but also from the value of scrap shown by M/s BS Agriculture Industries Ltd., Nunhai, Agra, assessment year 2001-02 in-which case also a survey was conducted in July 2000. Besides if price was less than Rs. 6,800 or Rs. 7,000 PMT then, assessee would not have purchased at the rate of Rs. 7,000 PMT. In case assessee is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riff needs to be examined on facts and would have a direct bearing on the issue. The issue of value of scrap in the peculiar facts and circumstances could not have been scuttled as an academic issue in view of the fact that the assessee has not been able to demonstrate or give any evidence before the Assessing Officer or the CIT(A) except general arguments ignoring the named parties, dates, bills and rates confronted to the assessee from its own records. Since no rebuttal by documentary evidence has come from the assessee except general arguments with no basis, we consider it appropriate to accept the rate adopted by the Assessing Officer as Rs. 7,000 per MT as the same is based on documentary evidences confronted to the assessee from its own records with named parties, dates and rates. Accordingly, ground Nos. 3 and 4 of the revenue are allowed. In view of the fact that the issue of trading addition and the percentage of wastage etc. has been restored back to the file of the CIT(A). Accordingly, ground Nos. 1, 3, 4, 5 and 6 of the assessee stands so restored to the file of the CIT(A). While considering the appeal of the assessee and revenue the CIT(A) shall also address the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate additions so made by the Assessing Officer. 3. The ld. CIT (Appeals) after accepting the correctness of decision to reject accounts under section 145(3) proceeded to make a trading addition of Rs. 29,21,000 on account of excessive wastage holding the same to be sales and by allowing telescoping to the extent of Rs. 14,60,500 against surrendered income. He, thus, directed resultant addition of Rs. 14,60,000 as against the estimated income of Rs. 2,15,000 and excessive wastage claimed at Rs. 6,72,200 assessed by the Assessing Officer. 4. As regards enhancement of value to undeclared stock surrendered as business income from Rs. 22,00,000 to Rs. 30,00,357 and assessing the same as income from other sources, the ld. CIT (Appeals) accepted the claim of the assessee that the income so surrendered is to be assessed as his income from business. On the enhancement of value of stock, he considered that the entire exercise is academic only and held that no interference is required to be made in the valuation of the excess stock as shown by the assessee in the return of income. The ground in appeal by assessee before him, thus stood allowed. 5. First of all, I proceed to deal with reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viated from the valuation taken by the Survey Party merely on the plea that the values as given by the assessee have been placed in making the valuation by the Survey Party. It was, therefore, necessary for the ld. CIT (Appeals) to have verified this fact from the survey report as to whether the survey team had accepted the value upon verification of facts such as the quality of scrap and average price thereof on the basis of some reliable material before it or it had acted mechanically on the dictates of the assessee. The assessee also had explained that part of these stocks were available with it from earlier years. The Assessing Officer did not deny this fact. Rather the Assessing Officer has recorded a finding at internal page 6 of the assessment order that the assessee has claimed excessive wastage. This fact stands confirmed by the ld. CIT (Appeals) also. If that were the position, the stocks out of such excessive wastage essentially were forming part of the stocks found at the time of survey. The Assessing Officer himself is found to have valued such excessive wastage at the rate of Rs. 5,000 per M.T. which is equal to the rate adopted for excessive scrap found at the time o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng a speaking order thereon. A reasonable and effective opportunity of being heard to the parties, shall be afforded before taking decision on this issue. 8. As regards the excess stock found at the time of survey, the assessee admitted the same to be his undeclared stock of business and surrendered the same as his income from business. Entries of such excess stock were accordingly made in the stock register as well as in the books of account maintained in the regular course of business. Income on account of surrender was shown as its business income in the profit and loss account filed with the return of income. The assessee also explained in assessment proceedings before the Assessing Officer that there were some old stocks of scrap having lower rate which fact stands recorded at internal page 4 of the assessment order. The Assessing Officer himself is found to have recorded a finding that the assessee has claimed excessive wastage at 14.02 per cent as against allowable wastage of 10 per cent and thus worked out the excess wastage at 134.4 M.T. Some stock from such excessive claim of scrap can be said to have generated with the assessee from the production of the year under con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come of Rs. 22,00,000 made by the assessee as his business income which factually were secreted profits of his business. Under the peculiar facts and circumstances, and when the assessee had explained the nature and source of the undeclared stock as his business income, the findings of fact reached by the ld. CIT (Appeals) in accepting the excess stock of Rs. 22,00,000 as assessee's income from business is on appreciation of facts and circumstances already set out, but the revenue in appeal before Tribunal has not shown the same to be unsupported by any evidence nor any perversity in findings of fact was demonstrated in appeal before Tribunal. I, therefore, do not find any factual or legal infirmity in the decision of the ld. CIT (Appeals) in accepting the assessee's declaration of income on account of undeclared stock as its business income. Setting aside the order of assessment on that account, the action of telescoping of the sale proceeds of excessive wastage with the surrendered amount, therefore, does not call for any interference even though the quantum that needs to be telescoped may remain to be decided when the matter goes back to him for making assessment of total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as unrecorded sales, a trading addition of Rs. 29,21,000 has been worked out. He also took into account the additional power tariff of Rs. 11,00,000 paid by the assessee and worked out a gross profit rate at 1.66 per cent as the sales of manufactured goods at Rs. 401.07 lakhs disclosed as per books of account of the assessee which was comparable to the trading result of the earlier year. He, however, taking note of the fact that there is a surrender of income by Rs. 22.00 lakhs on account of survey, a telescoping of income equivalent to 50 per cent of such trading of Rs. 29,21,000 at Rs. 14,60,500 was directed to be allowed. The rest of the addition of Rs. 14,60,500 was directed to be made against which both the parties are in appeal in aforesaid grounds. 13. The ld. counsel for the assessee contends that the assessee had suffered a net loss from the business even after accounting for the surrendered business income of Rs. 22.00 lakhs. He had agitated estimation of sales, application of net profit rate as well as the separate additions before ld. CIT (Appeals). The ld. CIT (Appeals) while confirming the rejection of accounts, had fallen in error in not accepting melting loss at 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ground Nos. 6 and 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 material on which excessive wastage has been worked is available out of recorded purchases and revenue has nowhere doubted nor recorded a finding about suppression of investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 16. In the result, both the appeals stand allowed partly for statistical purposes only. REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 Re.: Reference to Hon'ble President, ITAT under section 255(4) of the Income-tax Act in ITA Nos. 95/Agra/2005 by revenue and 97/Agra/2005 by assessee for assessment year 2001-02 in the case of M/s. Ratan Industries (P.) Ltd., 10/22, Katra Wazir Khan, Hathras Road, Agra. There being difference in opinion, the following questions are being forwarded to the Hon'ble President, ITAT under section 255(4) of the Income-tax Act for referring the same to the Third Member: "(i) On the facts and circumstances, whether there is justification to set as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Act : "(i) On the facts and circumstances, whether there is justification to set aside the decision of ld. CIT (Appeals) with regard to acceptance of valuation of undeclared stock of scrap found at the time of survey for passing a speaking order thereon or that the values adopted at the rate of Rs. 7,000 per M.T. taken by the Assessing Officer is to be restored. (ii) On the facts and findings whether the ld. Judicial Member is justified in her decision to direct ld. CIT (Appeals) to address on ground No. 2 in appeal by revenue as the same stands covered by the directions given by her in assessee's appeal or that the decision reached by the ld. Accountant Member in rejecting the said ground in appeal by revenue upholding decision of ld. CIT (Appeals) to accept surrendered income as assessee's business income is a correct and justified decision. (iii) Whether on the facts and findings and in view of decision of ld. Judicial Member at para 25 of the order to restore the issue to ld. CIT (Appeals) and at para 30 to allow the same ground No. 4 in appeal by revenue, is it proper to uphold her both these decisions or that the decision taken by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 3,71,404 in the profit and loss account. The Assessing Officer noted that there was unaccounted stock to the extent of Rs. 30,00,357 found during the course of survey while the assessee surrendered Rs. 22,00,000 only. The value of Rs. 30,00,357 has been re-worked out by the Assessing Officer on the basis of material as specified under page 4 of the assessment order. He also noted that the books of account were not maintained on day-to-day basis and the cash book was written only up to 22-9-2000. The assessee, even though accepted during the course of survey that some of the purchases and expenses have been incurred between 22-9-2000 to the date of survey, but these items could not be entered. It was also noted that there were variations in the items of the closing stock as on 31-3-2000 vis-a-vis opening stock as on 1-4-2000. It was also noticed that on consumption of 3200.116 M.T. of raw material, wastage was shown at 454.155 M.T. which gives the percentage of wastage at 14.20 per cent while normal wastage in this line of business is between 7 per cent and 10 per cent mainly due to burning loss. Due to these discrepancies, the Assessing Officer rejected the books of account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee which was credited to the profit and loss account. The Assessing Officer has valued it at the rate of Rs. 7,000 per M.T. The value of the unaccounted scrap was Rs. 20,00,000 which was included in the amount of Rs. 22,00,000 surrendered by the assessee. Thus, the Assessing Officer valued the scrap more by Rs. 8,00,000. My attention was also invited towards the copies of the purchase bills of the scrap which are available at pages 1 to 11 of the paper book. Thus, it was contended that the learned Judicial Member was not correct in law in setting-aside the order of ld. CIT(A) and restoring the order of the Assessing Officer. 6. The learned DR, on the other hand, relied on the decision of the learned Judicial Member. 7. I have carefully considered the rival submissions along with the order of both the learned Members. In my opinion, the learned Assessing Officer was not correct in law in valuing the unaccounted scrap at the rate of Rs. 7,000 per M.T. merely on the basis of purchase of 2.070 M.T. of scrap. The assessee has submitted all the purchase bills in respect of the scrap from 1-4-2000 to 25-9-2000. The average rate of the scrap vary from Rs. 4,337.46 per M.T. to Rs. 7,000 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income so surrendered should be assessed under the head "Income from business". 9. The learned A.R. before us supported the order of the learned Accountant Member while the ld. DR supported the order of the learned Judicial Member. The learned DR relied on the order of the Gujarat High Court in the case of Fakir Mohmed Haji Hasan v. CIT [2001] 247 ITR 290/[2002] 120 Taxman 11 and contended that during the course of survey unaccounted stock was found with the assessee. The addition relate to the investment made in such undisclosed stock under section 69 of the Income-tax Act. He vehemently contended that Gujarat High Court has clearly laid down that deemed income which are covered under the provisions of sections 69, 69A, 69B and 69C cannot be assessed under the head "Profits and gains from business or profession". This can be assessed only under the head "Income from other sources". 10. I have carefully considered the rival submissions along with the order of the learned Judicial Member and that of the learned Accountant Member. The learned Accountant Member treated the assessee's declaration of income on account of undeclared stock as his business and therefore, did not fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , subject to the provisions of the Act. It will be seen from section 69A of the Act that where the bullion, jewellery or other valuable article is not recorded in the books of account and there is no explanation about the nature and source of its acquisition, or the explanation is not satisfactory, the value thereof may be deemed to be the income of the assessee of the financial year immediately preceding the assessment year in which the assessee is found to be the owner of such bullion, etc. 6.1 The scheme of sections 69, 69A, 69B and 69C would show that in cases where the nature and source of investments made by the assessee or the nature and source of acquisition of money, bullion, etc. owned by the assessee or the source of expenditure incurred by the assessee are not explained at all, or not satisfactorily explained, then, the value of such investments and money, or value of articles not recorded in the books of account or the unexplained expenditure may be deemed to be the income of such assessee. It follows that the moment a satisfactory explanation is given about such nature and source by the assessee, then the source would stand disclosed and will, therefore, be known and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestment or acquisition and the value of such gold was not recorded in the books of account, nor the nature and source of its acquisition explained, there could arise no question of treating the value of such gold, which was deemed to be the income of the assessee, as a deductible trading loss on its confiscation, because, such deemed income did not fall under the head of income "Profits and gains of business or profession". 11. From the perusal of the said judgment, it is apparent that the Hon'ble Gujarat High Court has categorically held that the undisclosed investments which are deemed to be the income of assessee in accordance with the provisions of sections 69, 69A, 69B and 69C, cannot be assessed under the head "Income from business or profession". This income has to be assessed under the head "Income from other sources". No contrary decision has been brought to our knowledge by the learned AR even though sufficient opportunity was provided to the learned AR. In view of the decision of the Gujarat High Court, I am of the view that the income in respect of deficiency in the inventory has to be assessed as income from other sources, not under the head "Income from business or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit being earned on the sale of scrap separately. The Assessing Officer has estimated the sales under the facts and circumstances of the case at Rs. 5 crores. The sales so estimated, in my opinion, would have taken both the activities of manufacturing as well as trading of the scrap and other goods dealt by the assessee. Since no separate addition was ever made by the Assessing Officer and even the CIT(A) has not also enhanced the assessment in this regard, therefore, in my opinion, the ground No. 4 taken by the revenue does not emanate from the order of the CIT(A). In my opinion, the department cannot raise this ground of appeal at this stage before the Tribunal when no such addition has separately been made by the Assessing Officer in the assessment order. I do not agree with the learned Judicial Member while allowing the ground No. 4 of the revenue's appeal. In my opinion, the learned Accountant Member has rightly dismissed the ground No. 4 of revenue's appeal in his conclusion. Accordingly, I agree with the learned Accountant Member so far as the question No. 3 is concerned and I am of the view that the ground No. 4 in revenue's appeal has to be dismissed being infructuous and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e went in appeal before the CIT(A) and before the CIT(A) he initially contended that there was gross loss due to the increased cost of raw material, higher power charges and change in product mix. It was also contended that the power charges had increased considerably, but subsequently he gave the contention that there is increase in the cost of raw material and change in product mix. The CIT (Appeals) sustained the addition to the extent of Rs. 14,60,000 by observing as under : "Thus, now the only reason given by the assessee for the fall in the gross profit rather incurring of the gross loss, is the enhanced power charges. It is seen that in real terms the assessee has shown the power charges higher by about Rs. 32 lakhs as compared to the preceding year. Though in terms of rupees the power charges in the year under reference are lower as compared to the preceding year but after considering the fall in production, the same are in effect higher by about Rs. 32 lakhs. For this increase, one of the reasons given by the appellant is the enhanced power tariff which was increased from September, 2000. The AR in his submissions dated 8-12-2004 has mentioned that because of the increase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnace varies in the range of 83 per cent to 89 per cent while the yield from scrap is around 93 per cent to 94 per cent. As this article clearly states that the yield from sponge iron is 83 per cent to 89 per cent while from pig iron the same is 93 per cent to 94 per cent. the AR's contention that the Assessing Officer has not correctly understood the article does not appear to be correct. Similarly, the authorised person of Process and Product Development Centre whose report was submitted by the appellant, in his statement given before the Assessing Officer has stated that the certificate was given on the basis of the quality of the scrap given for testing. It is seen that this person in the statement has stated that if the product mix is of pig iron/iron scrap then the wastage is 8 per cent to 10 per cent and if the sponge iron is used then the same is about 15 per cent and another 2 per cent to 3 per cent oxidation loss is there. When he was asked as to when the wastage is of this magnitude then how the certificate of 21 per cent was given by him, it was stated that 15 per cent old iron scrap included some iron and steel dust because of which the wastage was above the normal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that it would be just and fair if a trading addition of Rs. 29,21,000 is made in the appellant's case. During the appellate proceedings, the AR, however, contended that since the assessee had surrendered Rs. 22 lakhs on account of excess stock, telescoping of the trading addition is required to be allowed to the appellant. I find force in the aforesaid submissions of the AR. However, telescoping of the trading addition can be allowed only for the pre-survey period i.e., April, 2000 to the date of survey. It is seen that till the date of survey the consumption of raw material and out put were 1543 MT and 1251 MT, and in the post-survey period, the same were 1592 MT and 1278 MT: It can thus be seen that the consumption and production were almost the same in both the periods. Consequently 50 per cent of the above trading addition can be held to be pertaining to the survey period and to this extent only the same can be telescoped against the excess stock surrendered by the assessee. Thus, out of the total addition of Rs. 29,21,000, addition to the extent of Rs. 14,60,500 would stand telescoped against the surrender of Rs. 22 lakhs made by the assessee and the remaining amount of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven by him in view of the fact that in the sample given to him 15 per cent old iron scrap which included some iron and steel dust also as such the wastage certified by him of the sample was much above the normal wastage. It is seen that the Assessing Officer has taken cognizance of the fact that the wastage in this line of business was generally 7 per cent to 10 per cent and CIT(A) has given a finding that in the year under consideration the assessee has used 54 per cent of pig iron/iron scrap and 46 per cent of small iron in the circumstances taking a liberal view he has taken average wastage of 13 per cent. 27. Accordingly, on considering the facts available and the point at issue it is seen that the consumption of electricity in the year under consideration which issue has been restored for verification may also have a hearing on the amount of finished products produced by the assessee thereby the amount available for wastage would also be affected. Accordingly, we do not give any finding on this aspect and restore this issue also back to the file of the CIT(A) who may examine the issue from the perspective of the assessee in regard to increase in the electricity tariff and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit embedded in sales for which net profit rate was adopted and a separate ground Nos. 6 and 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 material on which excessive wastage has been worked is available out of recorded purchases and revenue has nowhere doubted nor recorded a finding about suppression of investment in such consumption of goods which are deemed as sales on account of excessive claim of wastage worked out at 254 M.T. by ld. CIT (Appeals) as against the quantity of 134.44 M.T. calculated by the Assessing Officer. Under the peculiar facts the entire amount of such sales could not have been added as income of the assessee though the same could have been taken as a basis for estimating reasonable amount of total sales of the business for applying a profit/loss rate thereon or assessing income or loss of the year under consideration, as there is no material or finding on record about suppression of investment in acquiring the goods which are subject-matter of such deemed sales. This view also finds support from the judgment rendered by Hon'ble High Court of Gujarat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee. This section requires the Assessing Officer to make the assessment determining total income or loss of the assessee to the best of his judgment after giving an opportunity of being heard to the assessee. While making the assessment it is incumbent upon the Assessing Officer to take into account all the relevant material, which the Assessing Officer has gathered. There is difference between the assessment made on the basis of assessee's accounts and that made on "best judgment" basis. The Hon'ble Supreme Court has categorically laid down in the case of State of Orissa v. Maharaja Shri B.P. Singh Deo [1970] 76 ITR 690 (SC), that the mere fact that the material placed by the assessee before the Assessing Officer is unreliable, does not empower the Officer to make an arbitrary order. The power to make the best judgment assessment is not arbitrary one. The Assessing Officer in making a best judgment assessment does not possess abs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cept 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 earlier years were not given by the assessee. To that extent I agree with the view of the ld. Judicial Member, as in my opinion the net profit rate achieved in the immediately preceding year will be the relevant material on record on the peculiar facts of this case. I do agree with the Judicial Member that the consumption of the electricity will have direct bearing on the cost of the production. Similarly, the claim of wastage by the assessee in the earlier years will also be a relevant factor to decide what wastage should be allowed to the assessee keeping in view the nature of the business of the assessee and other identically situated units consuming the sponge iron and pig iron in electrical furnace. Once the higher wastage are recorded, the natural inference will be that there will be excess production, which not being accounted for, would have been sold outside the books of account by the assessee. To the exten ..... X X X X Extracts X X X X X X X X Extracts X X X X
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