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TMI Blog2010 (11) TMI 722X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Fakir Mohmed Haji Hasan (2000 -TMI - 14629 - GUJARAT High Court) in which it was 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" - Held that: undisclosed income will be treated as income from other sources Whether separate profit on sale of scrap be worked out and added to the income of the assessee instead of working out the composite income from both the manufacturing of the goods and sale of scrap as business profit - Assessing Officer did not agree with the wastage shown by the assessee and made a separate addition on account of excess wastage - Held that: 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 - Appeal is dismissed Regarding estimation of the gross profit rate on the estimated sales after accepting the additional power charges incurred by the assessee during the year to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idering 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 while considering the reasonableness of the profit rate has erred in law and on the facts of the case in not giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (Appeals)-II was not justified in confirming the act of the Assessing Officer in respect of rejection of books of account under section 145 of the Act. (3) That ld. CIT (Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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.5,000 per mt. based upon its quality to which the survey team also agreed. We are enclosing herewith some bills of purchase of iron scrap at the rate of Rs.3,645 and Rs.4, 000 per mt. as against the value adopted Rs.5,000 per mt. Now because iron scrap has no uniform quality, that is the reason why there is a big difference of rate between d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, whereas the same should have been considered before GP. Thus actual GP works out to Rs.12,75,237. i.e., (22,00,000 - 9,24,763), giving a GP rate of 2.82 per cent as against 1.69 per cent in the immediately preceding year. As earlier explained in out reply dated 15-1-2004 that the same has been possible due to change in the product mix of raw material. In view of the above, first of all, books of account should not be rejected. However, even if the same are rejected, trading r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 any satisfactory reply/explanation with regard to the following defects in his books of account:- 1. unaccounted stock Rs.30,00,357 was found against which assessee had surrendered Rs.22,00,000 at the time of survey. 2. books of account was not being maintained in day to day course of business which is evident from the fact that cash b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 of Rs.5,00,00,000, net profit works out to Rs.2,15,000." 10. The Assessing Officer also made an addition on account of wastage to the tune of Rs.6,72,200 giving the following reasons:- "It is also held that since excessive wastage has been shown by the assessee so wastage is allowed at the rate of 10 per cent as against 14.2 per cent claimed by the assessee. The quantity of allowable wastage works out to 319.82 MT. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is in appeal. The assessee is also in appeal against the partial relief given on account of melting loss and on the presumption of the tax authorities that the assessee has sold its excess wastes as finished goods. 14. The revenue on the other hand is agitated by the relief granted by the CIT(A) and also the manner of treatment of the addition made of unaccounted stock has been given specific ground Nos. 1 to 9 agitat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eason 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 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscussion, 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 sale which is about 42 per cent of the total sale were again disclosed as sale not open to verification as this too was in cash as the sales were claimed to have been made to person operating on a small scale. Similarly, a major part of sale of CIT casting amounting to Rs.73.25 lakhs again was made in cash. Thus total sales of the finished goods is in cash and as such not open for verification. Verification was conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chases, 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 that the assessee has claimed a higher wastage and in view of ground Nos. 4, 7, 8 and 9 of the revenue we consider it appropriate in the peculiar facts and circumstances of the case where the books of account cannot be relied upon in regard to the amount of wastage and finished products sold since the consumption of electricity is one of the direct costs which would impact the production we consider it appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne 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 lakhs which the Assessing Officer as per the discussion held at page 4 has valued at Rs.30,00,357. The relevant portion has been reproduced in the earlier part of this order. We find that the specific dates and bill Nos. have been confronted to the assessee and these dates are closed to the date of survey the parties have also been named therein. Before the CIT(A) general arguments have been advanced in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 contending that scrap was purchased at lesser price than Rs.7,000 PNT, then it should prove with evidence as to from where it had purchased scrap at lesser rate and how the same reached to its premises but assessee has not produced or filed any such evidence. It is also pertinent that the assessee had sold the same scrap in Jan. 2001 and Feb. 2001 at the rate of Rs.9,000 PMT. This suggests that asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates 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 Nos. 1 and 2 raised by the revenue which also stand covered in the direction given in assessee's appeal. Issues addressed in ground Nos. 5 to 11 of the revenue would be covered by the directions given in regard to wastage, trading addition. 31. In the result, appeal of the revenue is partly allowed for statistical purposes and the appeal of the assessee is also partly allowed for statistical purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.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 revenue's ground Nos. 1 to 3 in appeal which relate to acceptance of assessee's stand by the ld. CIT (Appeals) that income from unaccounted stock found at the time of survey was assessable as its business income and valuation declared at Rs.22,00,000 itself is to be accepted as correct. 6. Having heard the parties and upon careful perusal of material on record, I find that the ld. CIT (Appeals) did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 of survey at his premises by the survey team as well. This vital fact ought to have been considered while assessing the value of excess stock found at the time of survey. Since the materials were available on the record of authorities below, a conclusion as such, to say that the exercise is academic only and therefore, the values declared by the assessee need to be accepted, could not have possibly been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 consideration and were available with its excessive stock found in survey. It is also a fact that the stocks so worked out to be excessive were found mixed with other stocks held in the business by the assessee, and the same were used for carrying the business only. The only source of income admitted by the Assessing Officer is found from the activities of manufacturing and trading only. No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me 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 or loss to the best of his judgment in respect of decision in assessee's separate grounds in appeal dealt hereinafter in this order. As a result, ground No. 2 in appeal by the revenue stands rejected and ground Nos. 1 and 3 in appeal by revenue stands allowed for statistical purposes only. 9. Ground No. 4 in revenue's appeal relates to the claim to work out separate profit on sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 20.93 per cent but restricted the claim only to 13 per cent and directed addition of the whole amount even though the investment in purchases was recorded. The assessee had suffered gross loss due to increase in power tariff by Rs.11.06 lakhs and further Rs.21.00 lakhs on excessive power consumption as compared to the immediately preceding year. There has, thus been a higher wastage bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 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 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 esti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quent 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 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 direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icial 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 the ld. Accountant Member to reject ground No. 4 in appeal by revenue to work out separate profit on sale of scrap for assessment as income is a correct and justified decision? (iv) Whether on the facts and findings and in law, the decision to restore the matter to the ld. CIT (Appeals) to work out afresh the claim and addition of excessive wastage which are deemed as sales with reference to limited directions or that no such separate addition on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the assessee under section 145(3). The assessee has declared the sales at Rs.4,51,76,535 which were estimated by the Assessing Officer at Rs.5,00,00,000, as in the immediately preceding year, the assessee made sales at Rs.5,77,78,286. The Assessing Officer also noted that the assessee has shown loss at Rs.9,24,763 while in the preceding year he has shown G.P. at the rate of 1.69 per cent and the assessee could not prove the fall in G.P. The Assessing Officer, after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 per M.T. The average of all the purchases comes to Rs.4,593.55 per M.T. The learned Accountant Member, in my opinion, has correctly observed that the learned CIT(A) did not record reasons for reaching a conclusion that the valuation of excess stock as shown by the assessee in return at Rs.22,00,000, was not justified. This is the fact that the assessee has placed sufficient material for working out the average rate of excess stock of scrap at Rs.4,593 per M.T. The learned CIT(A) h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dition 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 find any factual or legal infirmity in the decision of the CIT(A) in this regard. His reasoning for arriving at this finding is that the assessee admitted the excess stock found at the time of survey and surrendered the same as income from business. He observed that the Assessing Officer has admitted that the excess stock of 250 M.T. represents the excess production/sale which has not been accounted for by the assessee in the books and, therefore, the assessee was justified in tel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 the income would be treated under the appropriate head of income for assessment as per the provisions of the Act. However, when these provisions apply because no source is disclosed at all on the basis of which the income can be classified under one of the heads of income under section 14 of the Act, it would not be possible to classify such deemed income under any of these heads including income from "other sources" which have to be sources known or explained. When the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 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 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. To that extent, I agree with the view taken by the learned Judicial Member. This answers the question No. (ii) referred to me. 12. The question No. 3 referred to me arise out of the ground No. 4 taken by the revenue in its appeal claiming that separate profit on sale of scrap be worked out and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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 not being arisen out of the order of CIT(A). 14. Question No. 4 as well as 5 referred to me have arisen out of ground Nos. 3 to 6 of assessee's appeal and ground Nos. 8 and 9 of revenue's appeal. Ground Nos. 3 to 6 of assessee's appeal relate to the wastage due to melting loss while ground Nos. 8 and 9 of revenue's appeal relate to the estimation of the gross profit rate on the estimated sales after accepting the additional power charges incurred by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 increased tariff, additional amount of Rs.11.06 lakhs had to be paid. This fact could not be controverted by the Assessing Officer also. This being the position, to this extent, the appellant's explanation regarding lower gross profit rate/gross loss deserves to be accepted. However, after giving credit of Rs.11 lakhs there is still a gap of Rs.21 lakhs for the enhanced power charges and consequently the gross loss of Rs.22,54,763 [Rs.33,54,763(-) Rs.11,00,000]. For this incr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 wastage. In my opinion, from these facts, it can be safely concluded that while in the sponge iron the wastage is between 15 per cent to 18 per cent in pig iron/iron scrap wastage is around 8 per cent to 10 per cent. If ill product mix both the items are used then the average wastage would be around 10 per cent to 12 per cent. It is seen that the appellant in the year under reference has used 54 per cent of pig iron/iron scrap and 46 per cent of sponge iron meaning thereby ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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.14,60,000 would be further added in the income of the assessee. These grounds of appeal are, therefore, disposed of accordingly." 16. Both the assessee as well as the revenue came in appeal before the Tribunal. The learned Judicial Member restored this issue back to the file of CIT(A) by observing as under: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ron/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 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/DRL Pig Iron in electric arc 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 fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in CIT v. President Industries [2002] 258 ITR 654. Keeping in view the entire conspectus of the case, the separate trading addition of Rs.29,21,000 so made is hereby directed to be deleted, even though the action to allow telescoping of business income up to the date of survey against surrendered income of Rs.22,00,000 in principle is neither disputed by ld. Departmental Representative nor found erroneous. The consequent addition of Rs.14,60,500 directed to be made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 absolute arbitrary authority to assess the income at any figure as he likes. Although he is not bound by strict judicial principles, he should be guided by the Rules of Justice, equity and good conscience. The Assessing Officer must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be fair estimate of the proper figure of assessment, and for this purpose he must be able to take int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant 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 extent there is production on account of excess wastage, in my opinion, the sale consideration worked out on such excess production has to be added separately since the assessee has surrendered the excess scrap stock. There is nothing wrong in telescoping the trading addition so allowed to the extent of the additions made on account of investment in excess stock as on the date of survey. I, therefore, agree with the order of the ld. Judicial Member on both the questions. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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