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TMI Blog2020 (11) TMI 767X X X X Extracts X X X X X X X X Extracts X X X X ..... ished goods as per the report of the Committee. He has also observed that pursuant to the report of committee, the AO have also followed this norm while making assessment in similar type of cases and have accepted the book results shown by the assesses. No infirmity in the order of the CIT(A) while directing the Assessing officer to accept the books results shown by the assessee for this year also and to delete the additions made by the Assessing officer on account of unaccounted profits / unaccounted investment made on estimation basis - Decided in favour of assessee. - ITA No. 818/Chd/2019, ITA No. 879/Chd/2019 - - - Dated:- 11-11-2020 - Shri N.K. Saini, Vice President And Shri Satbeer Singh Godara, Judicial Member For the Assessee : Shri Parikshit Agarwal (CA) For the Revenue : Smt. Meenakshi Vohra (Addl.CIT) ORDER PER: SATBEER SINGH GODARA, J.M.: These assessee s and Revenue s cross appeals for the A. Y. 2010 - 11 arise against the CIT(A) s Patiala order dated 27/03/2019 passed in appeal No. 25/IT/CIT(A)/PTA/13 - 14 involving proceeding U/s 143 (3) of the Income Tax Act, 1961 (in short, the Act). Heard both the parties. Case file/records peru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rievances as well as Revenue s sole substantive ground hereinabove reads as under: 05. The Appellant firm filed a return of income on 27.09.2010 declaring income of ₹ 2,62,388/- and assessment was concluded in the case under section 143(3) on 08.03.2013 at an assessed income of ₹ 1,78,21,250/- inter-alia making an addition of ₹ 13,04,676.90 on account of undisclosed production and ₹ 1,62,54,188.78/- on account of investments in stock for the. Aggrieved by the additions the appellant is in appeal. 5.1 Brief facts of the case: The appellant firm was one of the many manufacturers of steel and similar industries in the Mandi Gobindgarh and surroundings region which were investigated with regards to alleged undisclosed production based, in part, on the inconsistent consumption of electricity qua the unit production of finished goods. The issue has elicited considerable debate and a scientific study of the processes was also conducted as shall be discussed infra. 5.2. Grounds of Appeal: Grounds of Appeal 1 and 6 is general ; Ground No. 5 is consequential; are not adjudicated upon; grounds of appeal 2 to 4 are taken together; these relate to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ils are reproduced in the assessment order. It was also observed that close to these days electricity consumption is almost same with high production of finished goods. Annexure-D shows the details of days where the factory was closed on which there was low consumption of electricity and no production of finished goods. The Annexure-E shows the electricity units consumed per metric ton of finished goods produced over 30 day periods. 6.2 The Ld. AO's sought the appellant's explanation of the glaring anomalies and the appellant vide his reply dated 12.0.2013 and 05.03.2013 made a submission reproduced in para 4.3.1 of the Assessment order. To summarize in brief the appellant submitted that that the consumption of electricity depends on various factors as under: i. Frequent power failure power cuts, grid failures, voltage fluctuations and huge consumption of power to reheat the raw material ii. delay or time lag in the recording of production in the books, iii. Difference in type and quality of raw material used, iv. The end product required and the higher the number of stands used; the more the power consumption v. If the scale of production is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys various types of raw materials would have been used and other factors contributing to the variation in consumption of electricity PMT of finished goods would have been taken care of. Further, the Ld AO removed from consideration the electric consumption for the days the unit remained closed. The Ld. A.O. thereafter took the minimum units consumed i.e. 198.38 units. Using this as the real production basis , the Ld. A.O. estimated the unaccounted production. The A.O. gave some relief for the electricity units not related to production due to closed days and, thereafter, computed the actual electricity consumed for 12 months on the basis of 198.38 units PMT. of production as per chart reproduced in the assessment order. The A.O. estimated the quantum of finished goods produced and, thereafter, estimated the unaccounted production for each month after deducting the finished goods produced during the months shown in the books of accounts. Thereafter, on the basis of average sales rate total unaccounted production of ₹ 16254188.78 was estimated in monetary terms and then adopting the gross profit rate shown by the appellant, the unaccounted profit out of the unaccounted produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in similar set of circumstances and accepted the book results shown by the assessees which includes the appellant as well if the variation is within the 15% window. 6.5 During the appellate proceedings the Ld AR for the appellant submitted written submissions on 29.05.2014 which is not reproduced here for the sake of brevity. The appellant's submission was shared with the Ld. AO and remand report was sought from the Ld AO who pointed out that in the appellant's case the variation is greater than 15% Discussion Determination 6.6 The Ld. AO has placed considerable reliance on the judgment of the apex court in the case of Melton India vs. Commissioner of Trade of Tax (UP) Appeal No. (Civil) 373 of 2007 (SC) cited supra. A discussion of the case would be in order. 6.6.1 In line with the appellant's submission in this case, in the Melton case the concerned appellant has argued that power consumption for different end products/raw material were different. The concerned appellant: explained that during the period in question it had switched over from production of 23 micron goods to production of 12 micron goods. According to it, electric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y consuming excess quantity of electricity. 6.5 The Ld.,AO has clearly established that the day to day records of production quality and size wise were not maintained or produced. Cases where day-to-day manufacturing or production account is not maintained becomes a fit case for rejection of books of accounts. Reliance is placed on the following other judicial precedents :- i. The decision of the Hon'ble Allahabad High Court Bharat Milk Products v. Commissioner of Income Tax 128 ITR 682, Allahabad; and ii. Punjab Trading Co. Ltd v. CIT53 ITR 335 Punjab; 6.6 In the case of Brijbhushan Lal Praduman Kumar v CIT[1978] 115 ITR 524 the Apex Court held that estimate after rejection of books must be fair and honest. The authority making best judgement, although arbitrariness cannot be avoided in such an estimate, the same must not be capricious but should have a reasonable nexus to the available material and the circumstances of the case. 6.7 Further, in a best judgment case the Indian Evidence Act has to be particularly adhered to in while estimating production/GP. In the instant case it is my considered view that: i. Facts have been properly marsh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sumption is in excess of the 15% window mentioned supra. 5. In contra to the above, there are arguments that the statistical benchmark of 15% is arbitrary and that a sustained variation of 14% may be a greater risk to revenue that above 15% days for a limited number of days during an assessment year. Further it may also be argued that such a statistical model punishes those who report a higher GP against those who under report. Alternately unmetered power consumption is also a reality in this country while these arguments do merit attention in general; the impugned appeal has to be decided based on the facts available. 6. The Ld AR has also cited a decision of my predecessor where in his order on similar facts the my Ld. Predecessor has asked the AO to restrict the variation and undisclosed production to the months/cycles where the variation in power is in excess of 15%. I humbly beg to differ with the decision of the Ld predecessor. It is my considered view that where the variation exceed the safe harbour of 15% the entire books do not inspire confidence. In my considered view that the anomalies in the power consumption vis-avis production do not inspire confidence in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e own unaccounted money that needs to be taxed. In this case, the unaccounted money means unaccounted sundry debtors {minus(-)} unaccounted sundry creditors or it represents the unaccounted profits.. I find considerable force in the submission of the Ld AR; I have also examined the records and it is clear that the minimum stock of raw material as per the books of accounts was much more than the peak stock needed for unaccounted production. Thus giving the benefit of telescoping, in my considered view no addition is called for on this ground of appeal. Appellant's request for telescoping is found reasonable and accepted, relying on the judgment of Hon'ble Supreme Court of India in the case of Anantharam Veer Singhaiah Co. Vs. CIT 980 AIR 1146. The appeal on this ground of appeal is allowed. 7. After giving thoughtful consideration to the above stated rival arguments, we find no merit in the Revenue s stand that the Assessing Officer s three folded action inter alia in rejecting the assessee s books of account followed by gross profit element on alleged unaccounted production of ₹ 13,04,677/- as well as unaccounted investment in stock of ₹ 1,62,54, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of electricity was dependent on various factors as detailed in his reply which has been reproduced by the Assessing officer in the assessment order. The Assessing officer, however, was not satisfied with the above reply of the assessee. He ultimately held that the assessee company was involved in unaccounted production of finished goods which resulted in unaccounted sales and purchases. He, therefore, held that the sale and purchase figures in the books of account of the assessee were not correct and he accordingly rejected the books of accounts of the assessee by invoking the provisions of section 145 (3) of the Income- tax Act, 1961 (in short ' the Act') and proceeded to frame the assessment in the manner as provided u/s 144 of the Act. He thereafter worked out the unaccounted income of the assessee on account of unaccounted production and added the same to the income of the assessee. 4. Being aggrieved from the above order of the Assessing officer the assessee preferred appeal before the CIT(A). 5. Before Ld. CIT(A), the assessee filed detailed submissions. I t was also brought into the knowledge of the CIT(A) that subsequent to the passing of the above s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stimation basis. 8. Learned authorized representative next submits that yet another coordinate bench in ITO Vs M/s Hansco Iron Steel P Ltd. in ITA No. 397/Chd/2017 and ITO Vs M/s Kailash Steel Rolling Mills in ITA No. 398/Chd/2017 dated 03/10/2017 has also declined the Revenue s identical arguments as follows: 3. Since the present appeals are filed by the Revenue, the ld. Sr.DR was required to address the issue. Reliance was placed on the assessment order, The ld. AR submitted that the issue is covered in his favour by a group of nine cases wherein a consolidated order dated 28.04.2017 in ITA 392/CHD/2017 in the case of ITO, Ward-1 Vs M/s Dhiman Steel Rolling Mills and eight other assessees pertaining to 2011-12, 2012-13 assessment years was relied upon. In the facts of the present case also, referring to para 5.2 of the impugned order, attention was invited to the reference made to the Committee constituted by Pr. CIT, Patiala which, it was noted, had been directed to verify the normal variation in consumption of electricity for manufacturing each metric ton of finished goods. The orders, it was submitted have been passed adhering to the said directions in both the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectricity was dependent on various facts as detailed in his reply dated 16.3.2015 which has been reproduced by the Assessing officer in the assessment order dated 26.3.2015. The Assessing officer, however, was not satisfied with the above reply of the assessee. He ultimately held that the assessee company was involved in unaccounted production of finished goods which resulted in unaccounted sales and purchases. He, therefore, held that the sale and purchase figures in the books of account of the assessee were not correct and he accordingly rejected the books of account of the assessee by invoking the provisions of section 145(3) of the Income-tax Act, 1961 (in short 'the Act') and proceeded to frame the assessment in the manner as provided u/s 144 of the Act. He, thereafter estimated the income of the assessee on the basis of minimum valuation of average of electric unit consumed per metric ton of finished goods produced for over the period of 10 days. He took the lower average value of electric units consumed per metric ton of average finished goods over a period of 10 days and on this basis, and calculated the actual month wise production of the assessee. He com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the CIT(A) deleted the addition holding as under: 5.3 I have considered the facts of the case as also the submissions and the report of the Ld. AO. Undoubtedly, the only reason leading to the rejection of the books of accounts of the appellant company, which runs an furnace unit, was desperate consumption of electricity vis-a- vis the production of finished goods. Thereafter, as detailed earlier, the AO, on the basis of average purchase rate, went on to estimate unaccounted production in monetary terms and then adopting the gross profit rate shown by the appellant worked out unaccounted profit out of unaccounted production on the basis of average sale rate. Besides, the peak unaccounted production for the relevant month was determined and by multiplying with the average purchase rate of finished goods the unaccounted investment was worked out This finally resulted into additions on the basis unaccounted investment and unaccounted profit at ₹ 57,93,183/-. The appellant company has now contended that recently, a detailed study was carried out by a Committee headed by the Additional Commissioner of Income Tax, Range, Mandi Gobindgarh having all the AO's of the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me and noticed quite appreciable variation in the consumption of electricity per metric ton of finished goods in similar sizes as well as odd sizes. The technical experts from national Institute of secondary steel technology (NISST), Mandi Gobindgarh also opined that given the nature of technology, raw materials and finished goods, substantial variation in the number of electricity units for production of one metric ton of finished goods inter day basis, are bound to be there. Based on its finding of facts, it has decided to give benefit of 15% variation in consumption of electricity per metric ton of finished goods produced from the average worked out on yearly basis . Meaning, thereby that 15% variation in the number of electricity units consumed per metric ton of finished goods as compared to the average consumption of electricity units per metric ton of finished goods is the industrial norm warranting no adverse cognizance. Hence, because of that reason alone, books of account should not be rejected. Indeed, as stated above, pursuant to the report of the Committee, the AO's have followed this norm while making assessments in similar cases and in similar set of circum ..... X X X X Extracts X X X X X X X X Extracts X X X X
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