Income Tax Appellate Tribunal - Chandigarh
M/S Kirpalu Strips, Gobindgarh vs Ito, W-1, Mandi Gobindgarh on 11 November, 2020
आयकर अपील य अ धकरण,च डीगढ़ यायपीठ "A", च डीगढ़
IN THE INCOME TAX APPELLATE TRIBUNAL,
CHANDIGARH BENCHES 'A', CHANDIGARH
ी एन.के. सैनी, उपा य एवं ी सतबीर %संह गोदारा, याय)क सद*य
BEFORE SHRI N.K. SAINI, VICE PRESIDENT & SHRI SATBEER SINGH
GODARA, JUDICIAL MEMBER
आयकर अपील सं./ ITA No. 818/Chd/2019
नधा रण वष / Assessment Year : 2010-11
M/s Kirpalu Strips, बनाम Income Tax Officer,
Loha Bazar, Ward-1,
Mandi Gobindgarh. Mandi Gobindgarh.
थायी लेखा सं./PAN No: AAJFK 7532 Q
अपीलाथ /Appellant यथ /Respondent
आयकर अपील सं./ ITA No. 879/Chd/2019
नधा रण वष / Assessment Year : 2010-11
Income Tax Officer, बनाम M/s Kirpalu Strips,
Ward-2, Mandi Gobindgarh, Hq. C/o- Radhey Shyam
New Libra Kothi, Railway Road, Traders, Loha Bazar, Mandi
Sirhind, Distt. Fatehgarh Sahib- Gobindgarh.
140406.
थायी लेखा सं./PAN No: AAJFK 7532 Q
अपीलाथ /Appellant यथ /Respondent
नधा रती क ओर से/Assessee by: Shri Parikshit Agarwal (CA)
राज व क ओर से/ Revenue by: Smt. Meenakshi Vohra (Addl.CIT)
सन
ु वाई क तार$ख/Date of Hearing : 09/11/2020
उदघोषणा क तार$ख/Date of Pronouncement: 11/11/2020
आदे श/ORDER
PER: SATBEER SINGH GODARA, J.M.:
Th e se a ss e ss e e 's a n d R e ve n ue 's cr os s ap pea l s fo r t h e A.Y .
20 10 - 1 1 ar is e ag a i ns t t h e CIT ( A)' s P at ia l a or d er d at ed 27/ 0 3/2 0 19 pas s ed i n app e a l No . 2 5/ I T/ C IT( A )/ PT A/ 13 - 1 4 i nvo lvin g pr oc e e d i ng U/s 143 ( 3 ) of t h e Inc om e Ta x Ac t, 1 9 6 1 ( i n s hort , t h e Ac t ).
2 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO He a rd bot h t he pa r ti e s . C as e f i le /re c o rds per us ed .
2. Th e as s es s e e 's ap p ea l i n I T A No . 8 18/ C h d /2 0 1 9 r a is e s t h e fol l ow i ng s ubs t a nt i v e gro u nds :
"1. That on the facts, circumstances and legal position of the case, the Worthy CIT(A) in its order dated 27/03/2019 has erred in passing that order in contravention of the provisions of Section 250(6) of the Income Tax Act, 1961.
2. That on law, facts and circumstances of the case, the Worthy CIT(A) was not justified in confirming the action of Ld.AO wherein he had rejected the books of accounts of the appellant merely on suspicion of higher production on the basis of electricity consumption.
3. That on law, facts and circumstances of the case, the Worthy CIT(A) has erred in confirming the action of Ld. AO wherein he had made addition of Rs. 13,04,677/- on account of alleged unaccounted Gross Profit on alleged unaccounted production."
3. The Revenue's cross appeal No. 879/Chd/2019 canvasses the following grounds:
"1. Whether on the facts and in the circumstances of the case, the ld.
CIT(A) is correct in deleting the addition of Rs. 1,62,54,188/- made by the Assessing Officer on account of unaccounted investment in unaccounted production.
2. That it is prayed that the order of ld. CIT(A), Patiala be set aside and that of the Assessing Officer be restored."
4. L ear ne d a u t h or iz e d re pre se n ta tiv e v eh e m e nt ly c o n t e nd ed dur i ng t h e c o urs e o f h e ar in g t ha t bo t h t h e l ow e r a ut ho r it i e s hav e err e d i n la w a n d on f ac ts in r e j e c ti ng t h e as s es s ee's b o oks o f ac co u nt f o l lo w ed by th e a l le ge d g ro ss pr ofit i n t h e n a t ur e o f t he al l eg ed u na c c o u nt ed gros s p rof it e l e m en t of R s . 13, 0 4, 67 7/- ma d e i n t h e co urs e of as s es s me n t d at ed 0 8/0 3/ 20 1 3 a s u phe ld i n t he CI T( A)'s ord e r.
3 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO
5. Th e R ev e n u e's ca s e ; go i ng b y its av e rm e n t s o n t he gr o u nd rais ed i n c r os s a pp ea l i n I T A No. 8 79 /C h d /2 01 9, is t h at t h e C IT( A ) oug h t to h a ve u ph e ld t he u n ac c ou nt ed inv e s tm e n t in stock add it i on of Rs . 1, 6 2, 5 4, 1 8 8. 7 8 m a de i n t h e c our s e of a s s es s me nt.
It ve h em e n t l y h ig h l ig ht e d t he f ac t t h at s in c e t he As se s sin g O ff ic e r ha d no t ic ed var i at io n in t h is ta x pa ye r's po wer c ons um pt io n ex c e e d in g 15 % t ol er a nc e m a rg i n t her eof , t h e s am e suff ic i e nt l y i nd ic a t e d it to h av e b e e n i n vo lv e d i n u na c c o un t e d pr od u ct i on a nd sa l e of t h e m a nuf a c tur e d i t e ms .
6. We hav e g i ve n our th o u gh t f ul c on s i d era ti o n to riv al pl ea di ngs . W e no t ic e th a t t h e CIT (A ) c om mo n d is c u ss i o n q ua t h e as se s se e's t w i n g r iev a nc e s as we l l a s R ev e nu e 's so le su bs ta n t iv e grou n d h er e in abo v e r e ads as u nd er :
"05. The Appellant firm filed a return of income on 27.09.2010 declaring income of Rs. 2,62,388/- and assessment was concluded in the case under section 143(3) on 08.03.2013 at an assessed income of Rs 1,78,21,250/- inter-alia making an addition of Rs. 13,04,676.90 on account of undisclosed production and Rs. 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.
4 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO 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 the rejection of production record, rejection of books of accounts and estimation of unaccounted production.
06 Grounds of Appeal 2 to 4 During the course of the assessment proceedings the Ld. A.O. has sought to establish that one of the major factors of production in the manufacturing process of the Appellant electric power. The Ld. AO analyzed the specific production process of the appellant and the issue of alleged unaccounted production (para 4.0 of the assessment order) and his findings are summarized as under:
i. The process involves heating of raw material ad passing the same through various rollers to get final finished goods that may vary as per requirement of sizes/ sections.
ii. Power production is directly proportional to the production iii. To make finer sizes/ sections more power per metric tonne (hereinafter PMT) is used.
6.1 The Ld. AO has further sought to establish that the production of finished goods is directly proportional to the units of electricity consumed. In order to co-relate the consumption of electricity vis-a-vis the production shown, the Ld. A.O. collected the granular data regarding metered electricity consumption from the Electricity board.
The A.O. further analyzed this data; the data and analysis finds reproduction in five analytical reports that form part of the assessment orders as annexure A to E. Annexure-A inter-alia depicts the quantity in metric tons of finished goods produced on a given day, electricity units consumed on that day as well as the PMT of electricity units consumed 5 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO with respect to the finished goods produced on that particular day as per the production records of the appellant. It was observed that the electricity consumption PMT. of finished goods varies from 1.46 units to 725.74 units while the average for the entire year is 305.81 units/pmt. The Annexure-B extracts the data with regards to the specific dates on which per metric ton of finished goods electricity consumed is low, while the production of finished goods is very high. Annexure-C shows the days on which the per metric ton of finished goods electricity units consumed is very high whereas the resultant production of finished goods is very low. Further, there are certain days when there is high consumption of electricity, but no production of finished goods has been reported as per the production records. The details 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,
6 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO 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 taken at the per metric tonne level, there is negligible power variation vi. mill condition, motor, break-down of machinery, vii. different load taken by other machines not related with production, and labour efficiency etc. viii. The appellant maintains a size wise production register and the same is verifiable with reference to the production/ sale invoices.
ix. That excise registers are audited by excise agencies and no anomaly has been pointed out.
6.3 The Ld. AO has analyzed the reply of the appellant and not accepted it in toto (Para 4.3.2 to 4.4 of the assessment order). The analyses is summarized as under:
i. No evidence of daily record of production of finished goods detailing size/quality have been furnished ii. The variations cannot be explained with reference to differential power consumed for different sizes iii. No evidence that thinner sections produced on days of higher power consumption or larger section on days of low power consumption produced iv. The onus lies on the appellant to prove that particular class of raw material used on a particular day.
a. No daily record of type of raw material used/ finished good produced b. Form IV does not record size/ quality v. The miscellaneous reasons cited apply to all days whether having normal high or low consumption vi. The reasons do not explain the large variation especially where there are days when there is no production though significant power consumption
7 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO vii. Excise audit has not been conducted on a daily basis and each has to make their own decision based on data available.
6.4 The Ld. AO after rebutting the submissions of the appellant went on the reject the books of accounts u/s 145(3) of the Act holding that he was not satisfied with the correctness of the books of account of the appellant for determination of the profit of the business for the reasons detailed in the assessment order. The Ld AO has relied upon a number of salutary judicial precedents including Melton India vs. Commissioner of Trade of Tax (UP) Appeal No. (Civil) 373 of 2007 (SC), Sh. Ganpati Embroidery Pvt. Ltd. vs. CIT 16 DTR (P & H) and Kanchwala Gems vs. JCIT 288 ITR 10 (SC).
The A.O., thereafter, adopted the value of electricity consumed PMT. on the basis of minimum average value for a period of 30 days assuming that within a period of 30 days 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 Rs. 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 production was worked out as Rs. 1304676.9.
8 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO That a number of units with a manufacturing process similar to the Appellant and where subjected to investigation has been stated supra ; to examine the issue of legitimate variation in consumption a detailed study has been conducted by a Committee, constituted by the Principal CIT Patiala, with a view to examine the variation in the consumption of electricity vis-a-vis the production of finished goods in the rolling mills and induction furnaces of the area. The committee, a broad-based multimember body, had the additional Commissioner of Income Tax, Range, Mandi Gobindgarh as its head and all the AO's of the range as its members. It was assisted by the experts from the National Institute of the Secondary Steel Technology (NISST) and the industry representatives. I have accessed its report from the Addl. CIT, Range, Mandi Gobindgarh. Its relevant excerpt reads as under:
"Thereafter, to ascertain the amount of variation in consumption of electricity per metric ton of finished goods produced of similar sizes and odd sizes, the AOs carried out on the spot verification by running some of the rolling mills on a fix period of time 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, the Committee 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 the reason of variation of electricity of less than 15% alone, books of account may not be rejected. Pursuant to the report of the Committee, 9 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO the AO's have followed this norm while making assessments in similar cases 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, electricity consumption in the manufacturing of 23 micron goods was less than that in manufacturing 12 micron goods. It was explained that the appellant was now manufacturing goods of 12 micron, which requires more electricity consumption as compared to the goods of 23 micron as the length of 12 micron is more than the length of 23 micron. The weight of 23 micron is 33 gm. per sq. meter, whereas the weight of 12 micron is almost half i.e. 17 gram per sq. meter, and therefore to manufacture 1 kg. goods of 12 micron the consumption of electricity is almost double than the consumption of electricity for manufacture of 1 kg. of 23 micron.
10 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO 6.2 The Hon'ble Apex did not accept the contention of the applicant and stated as under:
Ordinarily, when electricity consumption goes up, a reasonable inference can be drawn that the production will also have gone up. If the electricity consumption is going up but the production is seen to be going down, a reasonable inference can, prima facie, be drawn that there was suppression of production and consequently suppression of sales in order to avoid sales tax.
The appellant also had not maintained separate accounts for its own manufacturing and the job work, and it could not inform which raw materials have been used in the manufacturing of job work and which goods have been used on the assessee's own manufacturing.
In view of the above, we agree with the High Court that excessive power consumption, prima facie, establishes the assessee's intention to suppress the production and the turn over.
6.3 The fact in the instant case are similar to the Melton case and in my considered view the rejection of production records and consequently the books of accounts appears sound. The A.O may proceed under Section 145(3) under any of the following circumstances:
(a) Where he is not satisfied about the correctness or completeness of the accounts
(b) Where method of accounting cash or mercantile has not been regularly followed by the assessee.
(c) Accounting Standards as notified by the Central Government have not been regularly followed by the assessee.
6.4 Hon'ble Madras High Court in the case of Alagappa Cement Pvt. Ltd.
Vs. CEGAT & CCE, Trichy (2010-TIOL-770-HC-MAD-CX)has held that the Revenue cannot be faulted for demanding duty on the steel ingots which could have been manufactured by consuming excess quantity of electricity.
11 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO 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 marshalled and inference drawn from such fact is reasonable.
ii. The Principles of Natural Justice have been observed as the appellant has been offered a reasonable opportunity to explain its case both during assessment / appellate proceedings iii. The days of production have been removed and the average of the higher and lower production PMT has been taken, in addition the safe harbor of 15 % has been kept in account.
It is therefore, my considered view that the burden of proof on the department to establish that the production records are unreliable has squarely been discharged and the onus shifted on the appellant who has failed to discharge the same.
12 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO The method of computing the suppressed production is not based on cogent reasons and has scientific basis. Allowance of 15% variation is not arbitrary. The Ld. Assessing Officer has examined the entire manufacturing process carried out by the assessee and examined the stated issue of quality of raw materials, by shifting the frame of reference to a month; there is near equal probability of the factors is such as raw material variation/ power failure, breakdown etc. Further the appellant's additional evidence with regards to the detailed physical records seen by the excise and VAT departments has also been considered supra.
Finding
1. That Electricity is an important factor of production is in the manufacturing process of the appellant is established beyond a shred of doubt.
2. Further the Appellant having a turnover in excess of Rs 1 crore and getting its books audited was subject to maintaining production records adequate to the business of the appellant and that the Auditor was required to give findings similar to CARO, 2004( even though the Appellant is not a company). In addition, the Profit and loss accounts of the appellant are derived from the primary production registers. In the event the production registers do not inspire confidence the confidence in the veracity of the books gets severely dented
3. The principle stated above has been upheld by the Hon'ble Supreme Court in the case of Melton India vs. Commissioner of Trade of Tax (UP) Appeal No. (Civil) 373 of 2007 (SC) and Kanchwala Gems vs. JOT 288 ITR 10 (SC) and followed by the jurisdictional High court Sh. Ganpati Embroidery Pvt. Ltd. vs. CIT 16 DTR (P & H).
4. Further the variation in power consumption 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 13 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO 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 the production records and subsequently the books of accounts of the appellant. I uphold the decision of the Appellant to reject the books of Accounts as per the provisions of Section 145(3) of the Act. The estimation of production and income thereafter, too deserves to be upheld as the Ld AO has judicially given credit for the holidays.
7. The estimate taken for determining GP is also in my considered view fair and reasonable.
The appellant does not succeed on Grounds of Appeal 2 and 3 the rejection of books u/s 145(3) and consequent estimation of Gross profit and the addition of Rs. 13,04,676.90 is confirmed.
07. Ground of appeal No. 4 : This ground of appeal agitates the addition regards to the undeclared investment in stock of the appellant. The submission of the appellant on this ground of appeal is as under:
"The Ld AO has calculated the unaccounted income of Rs. 175.59 lacs during the year under consideration. But we are sorry to say that Ld AO has failed to establish where this money is lying. It is only a hypothetical figure that was neither earned nor invested in any asset The Ld AO has failed to establish that the Assessee invested such a huge amount in any new or existing asset. It is worthwhile to mention that the excise and vat officials who visited the factory premises from time to time did not find any abnormality in the raw material or finished goods. It means the above profits if so earned must have been invested in any new asset and if the Ld AO has any knowledge about that asset then he is at liberty to sell the property but he is requested to pay the due 14 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO taxes levied on the firm and keep the surplus as a reward for his services to the department
10. Last but not the least, the Ld AO has made an addition of unaccounted investments used for unaccounted production. Unaccounted investment means, the Assessee firm purchased the raw material and did not disclose the liability of sundry creditors in its books of accounts. After production, sold the material and not entered the recoveries of sundry debtors in his regular books of accounts. Ultimately, it is the net amount (sundry debtors-sundry creditors) or amount of gross profit as accepted by the Ld AO on this unaccounted production amounting to Rs. 13,04,676.90 is taxable and not the Rs.175.59 lacs. The Ld AO failed to appreciate the fact that it is the 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. Af t er g i v i ng t ho u gh tf u l c o n s id era ti on t o t h e a bov e st at ed riva l a r gum e nt s, w e f i nd no me r i t i n t h e R e v e n u e's s t a nd t h at t h e Ass es s i ng O f f i ce r's thr e e fo ld ed a c t i on i nt e r a l i a i n r e je c t i ng t he as se s se e's boo ks o f ac c o un t f ol l o we d by gr os s pr of it el e m e n t o n al l eg ed u nac c o un t ed pr od uct i on of R s . 1 3, 0 4, 6 77 / - as we l l as u nac c ou n t e d i n v e s t men t i n s t oc k of R s. 1, 62, 5 4 , 18 8.7 8. C as e rec or ds in di ca te t h a t t h is is s u e of re j e c t io n of b ook s of a cc ou nt bas ed o n d if fe r e n c e i n po wer c o ns um pt io n o f t he r e lev a nt p rev io us 15 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO yea r t ur n i n g a c t t o b e ex c es s iv e t h a n t h e s o c a l l ed t o l er ab l e l im i t of 1 5% is n o m o r e r e s - in t gr a . Th i s Tri bu n a l's c oor d i na t e b enc h dec is i on ITO Vs M /s Ba ba Ba l ak N at h St e e ls Pv t . L t d. i n I T A No .
44/ C h d/ 2 0 19 da t e d 0 6/ 08 / 2 01 9 h as r ej ec te d R eve n ue ' s id e nt ic a l st an d a s fo l lo ws :
"3 . Th e b ri e f fa cts re l a ti n g to th e i s s u e u n de r co n s i de r a ti o n a r e th a t t he a s s e s s e e com p a ny i s en ga ge d i n m a nu fa ct ur i ng o f S te el pro du c ts . D u ri ng th e as s e s s m e nt pro cee d i n gs , t h e As s e s s i n g o f fi ce r a s k ed t he a s s es s ee t o fu rn i s h d e tai l s of da i l y pr od u ct i o n of fi ni s h ed go od s as we l l as th e de ta i l s o f th e ma nu fa ct u ri n g pr o ce s s i n v ol v e d. O n e x am i na ti o n o f t he de ta i l s , t h e As s es s i ng o ff i ce r o b s er v ed t ha t t h e a m o un t of e l ect ri ci t y co ns um e d wa s di r e ct l y re l at e d t o t he pr od u c ti o n of f i ni s h e d g o od s . I n or de r t o c o -r el a t e t he c on s u m p ti on o f e l ect ri ci t y vi s -à -v i s p ro d u ct i o n s ho wn , the As s e s s i n g o ff i ce r ga t h er ed i n fo rm at i on re ga rd i n g th e con s um pt i o n of e l ect ri ci t y fr om t h e E l ect ri ci ty B oa r d . Th e As s e s s i n g o ff i c e r an al y ze d t h e c on s u m pt i o n d at a of e l e c tri ci ty v i s - a v i s t he pr od uc t i o n o f fi n i s h e d g oo ds a nd ob s er v ed th a t t he re we r e wi d e v a ri a ti o n i n r a ti o of el ect ri ci t y u ni t s co ns u me d to p er m et ri c to n s o f fi n i s he d g oo ds pr o du ce d du ri n g t he y e ar. He f urt he r o b s e rv ed th a t on s om e d ay s , el e ctr i c un i ts co n s um e d we re ve ry l o w whe re as f i n i s he d go od s pr odu ced we re v e ry hi g h g i v i n g a v e ry l ow v al u e o f e l e ctr i c u n i ts co ns u m e d to pe r to n of f i ni s he d g oo ds , w he re a s o n s om e ot he r da ys , el ect r i c un i ts co ns u m ed we re v er y h i gh wh er e a s th e f i n i s he d g oo ds pr od uce d w er e v er y l e s s g i v i ng a v er y hi g h va l ue o f el ec t r i c un i ts c o ns u me d p er m e tr i c u ni t of f i n i s he d go od s . H e fu rt he r ob s e rv ed t ha t e v en on some d ay s tho u g h t he re w as e l ect ri ci t y co n s um p t i on y et n o p ro d u c t i on w a s s ho wn . H e
16 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO f urt he r n ot e d t h a t o t he rw i s e o n o t he r d ay s , th er e w a s al s o a ba l a n ce an d co n s i s t en cy i n cons um p t i o n o f e l ect ri c u ni t s v i s - a- v i s pr od uc t i on of fi n i s he d g oo ds . H e , th er ef or e , o bs e rv e d th a t i t i n di c a te d t h a t t h e dai l y p ro du ct i on re cor de d b y th e as s es s ee of t he fi n is h ed go o d s w as no t co rre c t an d , h en ce , no t re l i a b l e . H e ob se rv e d t ha t t h e da t a r el a ti n g t o t he d ai l y pr od uc t i o n ha d n ot be e n m a i nt a i n e d as pe r a c tu a l pr od uc t i o n. W h en co nf ro nte d i n t hi s re s pe ct , t he a s s e s s ee e xp l ai n ed t h at t he c o ns u m pti o n o f el ec t ri ci t y wa s de pe nd e n t on va ri o us f ac t o r s as de t ai l e d i n h i s r e pl y wh i ch h as be e n re pr od u ce d by t h e As s e s s i n g of f i cer i n th e a s s es s m en t o r d e r. Th e As s es s i ng o ff i ce r, ho we ve r , w a s n o t s a t i s f i ed wi th th e ab ov e re pl y o f th e as s e s s e e. H e u l ti m a te l y he l d th a t t h e as s es s ee com p a ny w a s i n vo l v ed i n u na cc ou n te d p ro d u c ti o n o f f i ni s h ed g oo ds whi ch r e s ul t ed i n u n a c cou n te d s al es a n d pu r ch as e s . H e , t he r e f or e, he l d t h a t t h e s al e a nd p ur ch as e f i gur e s i n t he b oo k s of ac co u n t o f th e as s es s ee w er e n o t cor re ct a n d he a c co rd i ngl y r e je cte d th e b oo ks o f a cc o un ts of th e as s es s ee b y i nv o ki n g t h e pr ov i s i o n s o f s e cti o n 145 ( 3 ) of th e Inc o me - ta x Ac t , 19 61 ( i n s hor t 'th e Ac t') a nd p ro ce e de d to f ra m e th e as s e s s m e nt i n th e m a n ne r a s p ro v i de d u /s 14 4 of th e Ac t . H e t he re af te r wo rk e d ou t t h e u na cc o u n te d i nco m e of t he a s s e s s ee on acco u n t of u n ac co un te d pr od uc t i o n a nd ad de d t he s a me t o t he i n co m e o f t he as s es s ee .
4. Be i ng a gg ri e ve d f ro m th e a b ov e o rd er o f th e As s e s s i n g of f i cer th e a s s e s s e e p re f er re d a ppe al be fo re th e CIT( A) .
5. Be fo re L d. CIT ( A ) , t h e a s s e s s e e f i l ed deta i l e d s ub m i s s i o ns . It wa s al s o br o ug h t i nt o t he kn owl ed g e of the CIT ( A) t ha t s ub s e qu en t t o t he p as s i n g of th e ab o v e s ta te d i mp u g ne d as s es s me nt o rde r , a d et ai l e d s t u dy w a s ca r ri e d ou t b y a 17 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO Co m mi t te e he a de d b y th e A d di t i on al C o m m i s s i on er of I nc o me Ta x , R a ng e , M a n d i G ob i n d g ar h ha vi n g al l t h e As s e s s i n g of f i cer s o f t he R ang e a s i t s me m be rs . T he co m mi t te e w a s as s i s te d b y th e e x pe rt s f ro m t he N IS S T ( N a ti o na l I n s ti t ut e of th e S e con d a ry S t e el T ech no l og y ) a n d a l s o t he i nd us t ry re pr es en t a ti v e s . O n the b a s i s o f t he re p o rt o f t he c om m i t t e e, i t w as d eci d e d t h a t i f t he v ar i at i on i n t h e co ns u m p t i o n of t he e l ect ri ci t y i s w i th i n t he r an ge of 1 5% of t he y ea rl y a v er a g e con s um p ti o n o f p o we r, t h e bo ok r es ul t s s h o u l d be a c cep t e d. Th at p ur s u a n t t o t h e re po rt of t he C om m i tt ee , th e As s e s s i n g O ff i cer s ha v e f ol l o we d th i s no rm whi l e m ak i n g as s es s m e nt i n s i m i l a r c a s e s a nd ha s a cce pt ed t he bo ok re s ul t s i f t h e v ar i at i o n i s wi th i n 1 5% wi n d ow . I t wa s , t he re f or e , p l ea de d th a t th e b ook r es u l t s of t he a s s es s ee f or t he as s es s me nt y ea r 20 12-1 3 s ho ul d a l s o be a c cep te d a nd c o ns e qu e n tl y , t he ad di t i on s h o ul d b e de l e te d. Th e L d . C IT ( A) go t v er i fi e d fr om th e As s e s s i n g o ff i ce r t he ab ov e con te n t i on s o f t he a s s e s s ee wh i c h wa s re po rt ed to b e co r r ec t by t h e As s es s i n g o ff i ce r. Th e L d. CIT ( A) t he r e af te r he l d t ha t o n ce a n i s s ue ha s be e n de ci d ed o n m er i ts i n a s ub s eq ue n t y ea r , i t w ou l d n o t b e ap p r op r i at e t o t ak e a di f fe re n t v i ew fo r t he ye ar un d e r con s i de ra ti o n . H e , t he re fo re , r el y i n g u p o n t he r ep or t o f t h e Co m mi t te e con s t i t u t e d b y t he P r i n ci p al Co mm i s s i on er of Inc o m e Ta x, P a ti a l a he l d tha t as de ci d e d by t he C om m i t t e e , th e as s e s s e e was en ti t l ed to be ne f i t o f 15% v ar i at i on i n con s um p ti o n of e l ect ri ci ty pe r m e tr i c to n o f f i ni s he d g o o d s pr od uce d f ro m t h e a v er ag e w o r ke d out on y e arl y b as i s a n d th e v a ri a ti o n u p t o 15 % wo ul d n o t wa rr an t an y a dv e rs e cog ni z a n ce . H e a cc ord i n g l y he l d t h a t s i n ce p ur s ua nt to t he re po r t of t he com m i tt e e , th e As s es s i ng o ff i ce r h as al r e a dy f ol l o wed t h i s no r m wh i l e m a ki n g t he as s e s s m e nt i n s i m i l a r cas es a n d i n s am e s e t of ci r cum s t a n ce s ha s a c cep te d t he 18 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO bo ok s r es ul ts s ho w n i n o th e r c as e s , h en ce , fo l l o wi ng t he pr i n ci p l e of co n s i s te ncy , he h el d th a t th e bo ok s re s u l t s s ho w n by t he as s e s s e e com pa ny f or th e y e ar un d e r con s i de ra ti o n n ee d t o be a c ce pt e d , as we l l . H e t he re fo re , s e t as i de th e a ct i o n o f t he As s e s s i n g o ff i ce r i n r eje cti n g t he bo ok s o f a c cou n t a n d di r ec t ed t h e As s es s i ng o ff i ce r t o a c cep t th e boo k re s ul t s s h ow n by t he as s es s e e an d d el e te d t he ad di t i on s s o m a d e by t he As s es s i ng of fi c er on e s ti m a ti o n ba s i s . "
8. L ear ne d a u t ho r iz e d r epr e s e nt a t iv e ne x t s u bm it s t ha t ye t an ot her c oor d in at e b e nc h i n ITO V s M/s H a ns c o Ir o n & S t e e l P Lt d. i n I T A N o . 3 9 7/ C hd / 20 1 7 a n d I T O Vs M/s Ka i l as h S te e l R o l l i ng Mi l ls i n IT A N o. 39 8 / C hd/ 2 0 1 7 d at ed 03/ 1 0/2 0 1 7 h as a l so de c l i n e d th e R ev e n ue 's i d e n t ic a l a rg u me n ts a s f ol lo w s:
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 appeals.
4. I have heard submissions and perused the material available on record. It is seen that the Co-ordinate Bench in the aforesaid order of the ITAT had an occasion to consider the facts as under :
19 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO "4. The brief facts relating to the issue under consideration are that the assessee company run a furnace Unit and is engaged in the production of Ingots. During the assessment proceedings, the Assessing officer asked the assessee to furnish details of daily production of finished goods as well as the details of the manufacturing process involved. The Assessing officer further observed that the amount of electricity consumed was directly related to the production of finished goods. In order to co-relate the consumption of electricity vis-à-vis production shown, the Assessing officer gathered information regarding the consumption of electricity from the Electricity Board. The Assessing officer analyzed the consumption data of electricity vis-a vis the production of finished goods and observed that there were wide variation in ratio of electricity units consumed to per metric tons of finished goods produced during the year. He observed that the lowest units consumed for production of one metric ton of finished goods were 1117.17 units and the highest electric units consumed for production of one metric ton of finished goods were 1188.12 units. He further observed that on some days, electric units consumed were very low whereas finished goods produced were very high giving a very low value of electric units consumed to per ton of finished goods, whereas on some other days, electric units consumed were very high whereas the finished goods produced were very less giving a very high value of electric units consumed per metric unit of finished goods. He further observed that even on some days though there was electricity consumption yet no production was shown. He further noted that otherwise on other days, there was also a balance and consistency in consumption of electric units vis-a-vis production of finished goods. He, therefore, observed that it indicated that the daily production recorded by the assessee of the finished goods was not correct and, hence, not reliable. He observed that the data relating to the daily production had been maintained as per actual production. When confronted in this respect, the assessee explained that the consumption of electricity 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 20 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO 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 compared the same with that shown in the books of account of the assessee and estimated the unaccounted production for each month. Thereafter, on the basis of average sales rate, the value of total unaccounted production was estimated. Then adopting the gross profit rate shown by the assessee, the unaccounted profit out of the unaccounted production was worked out. Secondly the peak unaccounted production for the relevant month was determined and by multiplying the average sale rate of finished goods, the unaccounted investment was worked out. The Assessing officer in this way worked out the total unaccounted income of the assessee out of the unaccounted production at Rs. 86,88,365/- and added back the same to the income of the assessee."
4.1 Perusal of the impugned order shows that facts have been considered in the following manner :
5.2 The report of the AO was called for on the written submissions of the appellant. In the report, sent vide letter No. ITO/W-l/MGG/2016- 17/2227 dated 02.12.2016, the A.O. has tried to defend the rejection of books of account on the basis of reasoning given in the assessment order. However, regarding appellants contention w.r.t. the extent of variation in the consumption of electricity pmt of finished goods, the AO conveyed as under:
"a} The assesses in its written submission has contended that 15% variation on yearly average consumption of power for production of each metric tone of finished goods was accepted in the A.Y. 2013-14. The contention of the assesses is correct as a committee was constituted by the worthy Pr. Commissioner of Income Tax, Patiala to verify the normal variation in consumption of electricity for manufacturing each metric tonne of finished goods. On the basis of report of the committee which was headed by Addl. Commissioner of Income Tax, Range Mandi Gobingarh having all the AO's of Mandi Gobindgarh as member and technical person of NISST. It was decided by the committee that 15% variation from average consumption of power for producing of each metric tonne 21 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO of finished goods should be accepted. As such the cases of for the A. Y. 2013-14 were decided by following these guidelines.
b) The contention of the assesses that his case for the A. Y. 2012-13 falls within 15% variation has been verified from record and found to be correct."
4.2 Considering the factual background, 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 Rs.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 Range as its members. The committee was assisted by the experts from the NISST [National Institute of the Secondary Steel Technology] and also the industry representatives. On the basis of the report of the Committee, it was decided that if the variation in the consumption of electricity is within the range of 15% of the yearly average consumption of power, the book results should be accepted. Accordingly, its book results were accepted for the A.Y. 2013-14. Therefore, its book results for the A.Y. 2012-13 should also be accepted and consequently, the additions should be deleted.
The contention of the appellant company has been verified from the AO and as quoted above, he has reported it correct. There is a decision of the Hon'ble Punjab and Haryana High Court in the case of a CIT vs. Rieta Biscuits Co. (P) Ltd (2009) 309 ITR 154 wherein their Lordships have held that "keeping in view the principles of 22 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO consistency once the issue on the merits has been decided against the revenue on the same issue during the subsequent assessment years, we do not deem it appropriate to take a different view on a technical reason. Accordingly, without specifically opining on the issue on the merits, the reference is decided against the revenue".
On a careful consideration of the totality of facts and circumstances on record, I'm of the view that the plea of the appellant company merits consideration. It is a matter of fact that a detailed study has been conducted by a Committee, constituted by the Principal CIT Patiala, with a view to examine the variation in the consumption of electricity vis-a-vis the production of finished goods in the rolling mills and induction furnaces of the area. The committee, a broad-based multimember body, had the additional Commissioner of Income Tax, Range, Mandi Gobindgarh as its head and all the AO's of the range as its members. It was assisted by the experts from the National Institute of the Secondary Steel Technology (NISST) and the industry representatives. I have accessed its report from the JOT, Range, Mandi Gobindgarh. It's relevant excerpt reads as under:
"Thereafter, to ascertain the amount of variation in consumption of electricity per metric ton of finished goods produced of similar sizes and odd sizes, the AOs carried out on the spot verification by running some of the rolling mills on a fix period of time 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 circumstances and accepted the book results shown by the assessees which includes the appellant as well. In view of this and also placing reliance on the decision of the Hon'ble jurisdictional Punjab and Haryana High Court in the case of a 23 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO CIT vs. Rieta Biscuits Co. (P) Ltd (2009) 309 ITR 154,1 am of the view that the book results shown by the appellant company for the year under consideration need to be accepted as well. Consequently, the action of the AO in respect of rejection of books of account by resorting to Sec. 145(3) of the IT. Act is not upheld. The AO is directed to accept the book results shown by the appellant. The twin additions made by the AO on account of unaccounted profits and unaccounted investment are also deleted as a consequence.
4.3 In the facts, as they stand, it is evident that the point at issue is fully covered in favour of the assessee. Accordingly, in the absence of any change in facts, circumstances or position of law, the impugned order is upheld and the departmental appeal is dismissed."
9. Co up l ed w i t h t h is , it is a ls o no t ic e d t h at th e CI T( A) 's orde r its elf h o ld th e a ss e ss ee t o h av e a lr e ady s uc c e ed e d o n th e s am e iss u e i n th e pr ec e d i ng a s se s sm en t y ea r ( su pr a) w h ic h has a tt a in ed fin a l ity . W e h o ld i n t he s e f ac ts a nd c irc ums t anc es t ha t b ot h of t he as se s se e's s u bs t a nt iv e gro u n ds c h a l l e n g i ng c orr ec t n e s s o f t he low er a u t h or it ies ' a ct io n r ej ec t i n g i t s bo oks o f a cc ou n t as we l l as add i n g gr o ss p rof i t e l em e n t o n a l l e g ed u nac c ou n t e d p r oduc t io n o f Rs . 13, 0 4, 6 7 7 /- d es er ve to b e ac c e pt e d. Sam e r ea so n i ng f ol l o ws i n Re ve n ue's c r os s a ppe a l IT A No 87 9 /C hd / 2 01 9 a s we l l r a is i ng t he so le s ubs t an t ive is su e of un a c co u nt e d i nv es tm e nt i n s t oc k o f Rs . 1, 6 2, 54 , 1 8 8 .7 8 be i ng the n ec es s ar y co ns e qu e n ce of o ur for ego i ng d e t ai ls. Th e as s es s ee 's ap pe a l i n IT A N o. 8 1 8/ C hd/ 20 1 9 is ac c ep t e d a nd R ev e n ue 's c r o ss ap p ea l i n IT A N o. 8 79/ C hd/ 20 1 9 fai ls t h ere f or e .
10. Th e as s es s ee 's a p p ea l i n I T A N o . 8 18 / C h d/2 0 19 is al lo w ed an d R e v en u e's c ro s s a ppea l i n I T A N o. 8 7 9 / Ch d/ 2 0 19 is d is mis s e d.
O rde re d a c c or d i ng l y .
24 ITA 818 & 879/Chd/2019 M/s Kirpalu Strips Vs ITO A co py o f t h is c o mm on o rd er b e p lac ed in t h e r es p e ct iv e c as e fi le s.
O r der pr on ou n c e d i n t h e o pe n c ou r t on 1 1 t h N ov em b er, 20 2 0 .
Sd/- Sd/-
एन.के. सैनी, सतबीर %संह गोदारा
(N.K. SAINI) (SATBEER SINGH GODARA)
उपा य याय)क सद*य /Judicial Member
)दनांक /Dated: 11/11/2020
*Ranjan
आदे श क त+ल,प अ-े,षत/ Copy of the order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. आयकर आयु.त/ CIT
4. आयकर आयु.त (अपील)/ The CIT(A)
5. ,वभागीय त न1ध, आयकर अपील$य आ1धकरण, च3डीगढ़/ DR, ITAT,
CHANDIGARH
6. गाड फाईल/ Guard File
आदे शानुसार/ By order,
सहायक पंजीकार/ Assistant Registrar