Income Tax Appellate Tribunal - Amritsar
Narbada Steel Ltd. vs Assistant Commissioner Of Income Tax on 25 January, 2007
Equivalent citations: (2007)108TTJ(ASR)741
ORDER
Joginder Pall, A.M.
1. By this order, we shall dispose of this appeal of the assessee filed against the order of the CIT(A), Jammu, with headquarters at Amritsar for the asst. yr. 2001-2002.
2 At the outset, the learned Counsel for the assessee submitted that ground Nos. 1 and 2 which are general in nature are not pressed. He further submitted that ground Nos. 15 and 16 relating to sustaining of disallowances out of telephone expenses, miscellaneous expenses, local conveyance and depreciation are also not pressed. Therefore, these grounds are dismissed as not pressed.
3. The first effective issue raised in this appeal relates to sustaining the action of the AO for rejecting the books of account. Related to this is the next issue regarding sustaining an addition of Rs. 59,29,708. The relevant material facts of the case are that the assessee filed return declaring income of Rs. 42,21,930 on 31st Oct. 2001. This return was accompanied by P&L a/c, audit report in Form 3CA and 3CD along with the balance sheet and other related accounts. The case was processed under Section 143(1) and thereafter picked up for scrutiny. The assessee was engaged in the business of manufacture of steel ingots from the scrap, etc. and job work. The assessee had shown net profit (in short, 'NP') of Rs. 19,64,845 on total sales of Rs. 32,58,95,895 which worked out to 0.60 per cent as against NP rate of 2.16 per cent on sales of Rs. 29,62,06,466 shown in the last year. Thus, the AO observed that there was a substantial fall in NP rate as compared to earlier assessment year. The AO also observed that there was substantial fall in GP rate of 4.20 per cent of the last year to Order 21 per cent of the assessment year under consideration. When confronted, the assessee submitted that the fall in GP rate was due to decrease in the sale price of the finished goods and increase in the cost of raw material during the accounting period relevant to assessment year under consideration. The AO also observed that the assessee had shown excessive wastage at 7.24 per cent. The assessee explained that the wastage depended upon consumption of various types of scrap, i.e., industrial scrap, domestic scrap or imported scrap which is not of standard quality. The AO called upon the assessee to furnish details of manufacturing process, components of raw materials, issue of raw material and as to how the raw material, finished goods, etc. were accounted for in the books of account including wastage and percentage of yield. The assessee failed to file such details before the AO. The AO further called upon the assessee to file month-wise production chart indicating raw materials purchased, issued for production, finished goods produced, wastage claimed, etc. The assessee submitted a reply stating that these details were enclosed as annexure to the reply, but no such details were actually filed. The AO thereafter analysed the nature of raw material consumed i.e. scrap and found that almost 60 per cent of the scrap used by the assessee was imported scrap where the wastage was minimum. The AO also observed that the assessee had not maintained day-to-day quantitative details indicating position about opening stock, purchases of raw materials, raw materials issued for production, finished goods manufactured and wastage. The AO, therefore, observed that book results were not reliable and appeared to have been mechanically tallied to show the result according to its choice. He also made enquiries with the mill owners and found that the wastage shown in their cases was much low as claimed by the assessee. No such details of enquiries made, with whom made and the percentage of wastage shown have been mentioned in the assessment order. Thus, the AO rejected the book results and restricted the wastage to 5 per cent as against 7.24 per cent shown by the assessee. This resulted in addition of Rs. 59,29,708.
4. Being aggrieved, the assessee filed an appeal before the CIT(A), where action of the AO to reject the book results and addition of Rs. 59,29,708 made by the AO were challenged. During the course of appeal proceedings, the assessee also requested the learned CIT(A) for admission of additional evidence in the form of monthly/daily consumption of raw material, production and sale returns filed with Central Excise Department and certificate from the Central Excise Department regarding the raw material consumed and the finished goods produced. The learned CIT(A) admitted such evidence. The same was forwarded to the AO and his remand report was obtained. It was submitted before the CIT(A) that the action of the AO for restricting wastage to 5 per cent was neither factually correct nor justified. It was submitted that the contention of the AO that use of mixed scrap and wastage were not authenticated with any documentary evidence such as day-to-day working or monthly working of production and consumption was not correct as the assessee had already produced excise records, day-to-day production registers and other books of account from where it was clear that such information was being maintained. It was also argued that the contention of the AO that no wastage results in consumption of imported scrap were contradictory because the AO had himself allowed 2 per cent wastage on imported scrap. Thus, it was argued that even consumption of imported scrap results in wastage. It was also submitted that there was no hard and fast rule that imported scrap would show wastage of 2 per cent only. It was submitted that the Excise and ST authorities had found no defects in the books of account of the assessee and, therefore, the allegation of the AO that these books were mechanically tallied was not correct. It was also argued that while making the addition, the AO had referred to enquiry made with some other mill owners. Neither any name of mill owner was given nor the results thereof were confronted to the assessee. It was submitted that on these basis, the wastage shown by the assessee could not be disallowed or restricted. It was also submitted that the book results of the assessee have all along been accepted and no addition was made. It was submitted that in the asst. yrs. 1998-99, 1999-2000 and 2000-01, wastage shown at 7.30 per cent, 7.42 per cent and 7.16 per cent had been accepted by the Department. It was submitted that wastage shown by the assessee at 6.74 per cent was lower than shown and accepted by the Revenue for the earlier assessment years. Relying on the principle of consistency, it was submitted that the wastage of the appellant could not be rejected. It was also argued that no defects in the books of account maintained by the assessee have been pointed out. There is no evidence that the assessee had made sales or purchases outside the books of account and the books of account were also subjected to periodical checks by the Excise authorities. The respective dates on which such records were checked were also mentioned. The learned CIT(A) considered these submissions. He observed that as per assessee's own admission the GP rate of the assessee declined from 4.20 per cent to Order 21 per cent. The NP rate had also declined from 2.16 per cent in the immediately preceding year to Order 60 per cent. He also observed that the yield percentage also declined from 91.84 per cent in the asst. yr. 1999-2000 to 89.57 per cent in the year under consideration. He further observed that in the tax audit report filed along with the return of income, the auditors had failed to give any quantitative details in respect of finished goods, yield percentage, etc. Besides, the quantitative details relating to purchases of raw materials, issued for consumption on daily basis, production of finished goods, wastage, yield, etc. were not given in spite of the fact that assessee was asked to furnish these details during appeal proceedings. He also observed that though assessee claimed to have enclosed these details along with the reply yet these were never furnished. He also observed that even the quantitative statements filed during the appeal proceedings were incomplete as the same did not contain the complete information in the form of opening stock of raw material, purchases made, raw material issued for production, consumption of raw material and finished products, etc. Only the part information regarding consumption of scrap and production of finished products has been shown in the chart filed during the appeal proceedings. He, therefore, observed that the additional evidence furnished during the course of appeal proceedings does not help the assessee because such information was neither verifiable from the books of account nor the same was complete because neither the opening stock nor the purchases, raw material issued, etc. are indicated in the chart. He further noticed that during the course of assessment proceedings, the assessee submitted that the wastage was 7.24 per cent. However, as per chart filed during appeal proceedings, the wastage was shown at 6.74 per cent. By referring to information contained in the return of income, tax audit report, the learned CIT(A) observed that the consumption of raw material was shown at 28,598.415 MT and production was shown at 25,615.385 MT. On the basis of these figures, resultant wastage worked out 10.42 per cent. Thus, the learned CIT(A) observed that the assessee had shown three figures of wastage i.e. 7.24 per cent, 6.74 per cent and 10.42 per cent for the same assessment years. The learned CIT(A), therefore, observed that the books of account including the information about the production records, as filed by the assessee at various stages of assessment and appeal proceedings could not be relied upon. As regards fall in GP rate, the learned CIT(A) observed that the assessee's explanation was that same was due to increase in the cost of raw material and decrease in sale price of finished goods. But while working out the sale price of finished products (ingots), the assessee had reduced an amount of Rs. 4,41,12,468 being value on account of excise duty. The learned CIT(A) observed that the assessee had not given any explanation as to why first of all excise duty should be reduced out of the sales figures for the purpose of working out the sale price per metric ton, nor the assessee had explained as to how the excise duty had increased from Rs. 1.60 crores in the immediately preceding assessment year to Rs. 4.41 crores in the year under consideration, though there was a marginal increase in the turnover in the two assessment years. He observed that if the excise duty was not reduced from the sale figures, the price per metric ton during the year under consideration worked out to 12,336 MT as compared to 11,316 per metric ton during the immediately preceding year. Thus, he observed that the assessee's explanation for fall in GP rate due to reduction in sale price of finished products was not correct. He also observed that the assessee failed to produce any sale bills to substantiate the contention that the sale price of steel ingots had been reduced as compared to immediately preceding assessment years. Similarly, no evidence was furnished to indicate the increase in purchase price of raw material. Thus, he rejected the assessee's contention that fall in GP rate was due to increase in cost of raw material and fall in sale price of finished goods. Taking notice of all these facts, the learned CIT(A) observed that the books of account, stock and manufacturing records maintained by the assessee were not reliable. Accordingly, he upheld the action of the AO for rejection of book result. He also relied on the judgment of Hon'ble Supreme Court in the case of Kishinchand Chellaram v. CIT , the judgment of Hon'ble Punjab & Haryana High Court in the case of Punjab Trading Co. v. CIT (1964) 53 ITR 335 (P & H) and the judgment of Hon'ble Orissa High Court in the case of Ratanlal Ompiakash v. CIT . He also relied on the judgment of Hon'ble High Court in the case of Raza Textiles Ltd. v. CIT . The learned CIT(A) further added that the assessee failed to produce any stock register and day-to-day production register containing complete details in the original form before him in spite of the fact that such registers were required to be produced during the appellate proceedings. Thus, the so-called chart furnished has no evidentiary value in the absence of supportive register. Thus, taking notice of these facts, the learned CIT(A) held that the AO was justified in rejecting the book results.
4.1 As regards the addition made by the AO after rejecting the book results, the learned CIT(A) observed that the figures given by the assessee for working out the sales per metric ton and GP rate were neither reliable nor the method of working of such figures was logical or rational in the context of exclusion of excise duty from the sales figures before working out the trading results. He also observed that the assessee's contention that two registers of daily stock account indicating the details of opening stock, quantity manufactured, quantity sold and closing stock were not borne out by the records as the AO had recorded categorical finding that no such registers were produced before him during the assessment proceedings. Taking into account these facts, the learned CIT(A) observed that there was sufficient merit in the action of the AO for considering the wastage as excessive coupled with fall in GP rate as compared to earlier assessment year. He also observed that the assessee has not been able to explain the fall in GP rate. Thus, the learned CIT(A) upheld the addition of Rs. 59,29,708 made by the AO. The assessee is aggrieved by the order of the CIT(A). Hence, this appeal before this Bench.
5. The learned Counsel for the assessee, Sh. P.N. Arora, reiterated the submissions which were made before the authorities below. He submitted that the assessee had maintained complete books of account duly audited by the auditors', audit report in Form 3CD was also submitted along with the return. A copy of the same has been placed at pp. 232 to 252 of the paper book. He submitted that the items manufactured by the assessee being excisable, the books of account and records maintained by the assessee were subjected to periodical check by Central Excise authorities. He submitted that in the audit report, the auditors have mentioned details of opening stock, purchases made during the previous year, consumption during the previous year, sales, closing stock, etc. He submitted that necessary statements of monthly as well as daily consumption of raw material, production of finished goods and wastage were also filed before the CIT(A) and these details were referred to the AO for remand report. However, he submitted that some of these details were not filed before the AO during the course of assessment proceedings. But, the learned CIT(A) admitted such evidence and referred the same to the AO. The appeal was decided after obtaining remand report of the AO. He submitted that the authorities below have referred to contradictory figures given by the assessee in respect of wastage. He submitted this happened because in the quantitative chart enclosed with the return of income, wastage was wrongly arrived at on the percentage of production/quantity manufactured at 7.24 per cent whereas the same was required to be arrived at on the basis of total raw material consumed. However, this mistake was corrected before the AO and correct wastage at 6.75 per cent was shown. He submitted that book results have been rejected on the basis that the assessee had not maintained the stock tally, wastage shown was excessive and GP rate was low. He also drew our attention to p. 7 of the paper book which contains year-wise details of the wastage shown. He submitted that as against burning loss shown at 6.75 per cent of the assessment year under consideration, the same was shown and accepted at 7.37 per cent, 7.42 per cent and 7.16 per cent for the asst. yrs. 1998-99, 1999-2000 and 2000-01. Thus, the conclusion drawn by the authorities below that the burning loss shown was excessive as compared to earlier assessment year is not correct. He then referred to pp. 544 to 547, which, is assessee's letter addressed to AO explaining the reasons for fall in GP rate. He submitted that it was explained that the fall in NP rate was due to increase in the cost of inputs and as compared to sale price resulting in reduction in NP rate from 4.20 per cent to Order 21. He submitted that the authorities below have not at all considered this aspect and there are no comments on the same. Drawing our attention to p. 600 of the paper book which is a summary of highlights of Budget changes for the financial year 2000-01 relevant to asst. yr. 2001-02, the learned Counsel submitted that there was substantial increase in excise duty to 16 per cent as against the fixed percentage. This resulted in substantial increase in the excise duty from Rs. 1.60 crores to the earlier years to Rs. 4,41,12,468. Thus, the GP rate should have been worked out by excluding component of excise duty because the assessee got only sale price excluding the excise duty. He further submitted that the past history of the case is acceptance in all the five assessment years where assessments have been completed under scrutiny. Even though the burning loss was on the higher side, the same was accepted and no trading addition was made. Relying on the judgment of Hon'ble Supreme Court in the case of Beiger Paints India Ltd. v. CIT , the learned Counsel for the assessee submitted that principle of consistency deserved to be respected by the Revenue. He further submitted that the same figures of production were accepted by the authorities below. He submitted that a certificate to this effect was filed from the excise authorities and copy placed at p. 63 of the paper book. This was also referred to the AO which is obvious from p. 64 of the paper book as the matter was referred to the AO. He further submitted that even book results are rejected, the AO is duty-bound to make fair and reasonable estimate based on the past history of the case. In this regard, he relied on the decision of Tribunal, Amritsar Bench, in the case of New Kashmir Steel Rolling Mills v. Asstt. CIT in ITA No. 22/Asr/2005 for the asst. yr. 2001-02 (a copy is placed at pp. 558 to 581 of the paper book). He specifically drew our attention to para 11 of the aforesaid order, where these aspects have been discussed by the Tribunal. He submitted that since the past history of the case was accepted, no trading addition was called for. He further stated that while contesting the above appeal, the Tribunal also referred to the expert report of John M. Smith and the decision of Tribunal, Allahabad Bench, in the case of Asstt. CIT v. Mohan Steel Ltd. in ITA Nos. 1961 and 1962/All/1992 for the asst. yrs. 1988-89 and 1989-90 and it was held that since the business of the assessee was not the same, no addition could be made in the case of the assessee by comparing the burning loss of the assessee with that of Mohan Steel Ltd. (supra). Thus, he concluded his arguments by saying that no trading addition was called for in the present case.
6. The learned Departmental Representative, on the other hand, forcefully supported the orders of the authorities below. He submitted that the basis for rejecting the book results and making the impugned addition was decline in NP rate from 2.16 per cent to Order 6 per cent, decline in GP from 4.2 per cent to Order 21 per cent and decline in yield from 91.84 per cent to 89.57 per cent. In reply, the assessee had merely stated that the decline in NP rate and GP rate was due to fall in sale rate and increase in raw material costs. He submitted that onus was on the assessee to furnish specific evidence to prove this point that fall in GP rate and NP rate resulted due to increase in the costs of inputs and fall in sale price. The submissions made were general and were not supported by specific details either before the AO or before the CIT(A). He further stated that production of books was not enough. The assessee was required to substantiate its claim by giving specific details of the increase in the costs by showing bills in respect of items sold in the earlier years and assessment year under consideration. The assessee submitted that increase in wastage was due to non-homogenous scrap used as raw material. This submission was not substantiated. In fact, the AO analysed the purchases and found that 60 per cent of the raw material was imported where wastage was minimum. The learned Departmental Representative submitted that here also, the assessee failed to furnish any specific evidence to show how the scrap was non-homogenous, how it was different from earlier years and how such difference resulted in higher wastage. Further, the assessee was asked to furnish stock register containing day-to-day details and position in regard to the opening stock, raw material consumed, issued for production, finished goods and wastage, etc. He submitted that even month-wise details of these items had not been filed. He submitted that the learned CIT(A) has specifically recorded findings on p. 6 of the impugned order and p. 590 of assessee's paper book that assessee failed to give quantitative details for purchase of raw material issued for consumption on daily basis, production obtained and closing stock, etc. However, the assessee failed to furnish such details either before the AO or before the CIT(A). In order to find out the variation in yield, it was necessary to examine the production process and come to a conclusion about the yield difference as per material consumed. However, the assessee never furnished such information. He further stated that the assessee had been giving different picture about the burning loss. At one point, the assessee claimed the burning loss at 7.24 per cent and at other place, the assessee stated the same was 6.75 per cent and still it was stated that the burning loss was 10.42 per cent. He particularly drew our attention to tax audit report (copy placed at pp. 152 to 156 of the paper book). Drawing our attention to items at Col. 28A(iii), (vi), (vii), (viii), 28A(i) to (iii) and 28A(vi), the learned Departmental Representative submitted that auditors had conveniently omitted to furnish details like yield of finished products percentage of yield, shortage/excess, if any, and similar details in respect of item (B) were not furnished. Regarding para B of Col. 8, the learned Departmental Representative submitted that auditors had mentioned the figures of production at 25,615.385 MT of steel ingots. He then referred to p. 517 of the paper book where in addition to steel ingots weighing 25,615.385 MT, the assessee had given further details of production in the form of runners and risers weighing 881.125 MT and skull weighing 172.115 MT. He submitted that these figures were not included by the auditors in the tax audit report filed by the assessee. He submitted that this was done only with a view to show lesser burning loss. The learned Departmental Representative submitted that this is pure and simple manipulation and jugglery of figures. The same does not give any authentic picture of the burning loss. He submitted that the assessee's contention that the wastage worked out to 6.75 per cent because the production of steel ingots, runners and risers and steel skull was 26,668.625 MT was factually incorrect because in the tax audit report, the auditors had shown production at 25,615.385 MT. The consumption of raw material at 28,598.415 MT shown in the tax audit report at per which the wastage worked out to 10.42 per cent. He further stated that assessee's contention that the production should also include runners and risers was not correct because runners and risers are melted back and are not part of the production. The assessee was required to tally all these figures with the books which he has not been able to do. He submitted that there were contradictory figures of burning loss. The first working showed the wastage at 10.42 per cent was correct because the same included only the production of ingots i.e. item which is exactly being manufactured by the assessee. Besides, the assessee must show how the wastage worked out in the earlier assessment years because like can be compared with a like. He cannot include certain items like risers and runners which are melted back and are not part of the production if the same was not done in the earlier assessment years. He further submitted that the assessee has reduced excise duty of Rs. 4,41,12,468 for working out the NP rate on the ground that for the assessment year under consideration, the assessee had to pay ad valorem-excise duty. This claim was not substantiated. There is also no explanation regarding increase in excise duty from Rs. 1.60 crores to Rs. 4.41 crores. He also submitted that there is no evidence to show that the assessee had used more sponge iron scrap in the assessment year under consideration because as per assessee's own admission at p. 596 of the paper book, it is stated that only 4.24 per cent of sponge iron out of total scrap for manufacturing was used. The majority of the scrap melted was imported where the wastage was much less. He further submitted whatever information was supplied during the appellate proceedings before the CIT(A), the same was also incomplete and non-verifiable from the books. This finding has been clearly recorded by the CIT(A) in the impugned order. He further stated that the contention of the assessee that it had produced two stock registers before the CIT(A) was factually false because the learned CIT(A) at p. 10 of the impugned order has recorded a categorical finding that no such details were filed. Thus, in the light of these facts of the case, the learned Departmental Representative submitted that the AO had no option but to reject the book results and estimate the income by applying wastage of 5 per cent. He submitted that in the case of sister-concern, namely, New Kashmir Steel Rolling Mills, where the wastage was shown at 5.59 per cent, the AO accepted the wastage to 5 per cent and made the addition accordingly. Relying on the decision of Tribunal, Amritsar Bench, in the case of New Kashmir Steel Rolling Mills, Jammu v. Asstt. CIT ITA No. 22/Asr/2005 for the asst. yr. 2001-02 (a copy placed at pp. 558 to 581 of the paper book), the learned Departmental Representative submitted that the books of account were rightly rejected and income estimated by the AO was fair and reasonable. Thus, he submitted that the order of the CIT(A) does not merit any interference.
7. The learned Counsel for the assessee by way of rejoinder submitted that reliance of the learned Departmental Representative on the order of the Tribunal in the case of its sister-concern, namely, New Kashmir Steel Rolling Mills, Jammu v. Asstt. CIT (supra) was misplaced because in that case the facts were totally different inasmuch as the item being manufactured was Saria from steel ingots supplied by the assessee itself. He submitted that in case of manufacture of Saria from steel ingots, the percentage of wastage is bound to be less. He further stated that the contention of the learned Departmental Representative that the information was manipulated is not correct. Drawing our attention to p. 7 of the paper book, the learned Counsel for the assessee submitted that even for working out the burning loss of the earlier assessment years, runners and risers and skull have been treated as part of the production as is done for the assessment year under consideration. He further submitted that these details were filed before the AO. Drawing our attention to p. 460 of the paper book, the learned Counsel submitted that it may be seen from copy of the entry of order sheet made on 7th Aug., 2003 that the books of account consisting of ledgers, cash books and invoices for purchases produced and test checked. Thus, it is not correct to say that the assessee has not furnished the bills and vouchers during the course of assessment proceedings. He submitted that during the course of assessment proceedings, it was pointed out that inadvertently the auditors had not included the production of 881.125 MT of runners and risers of steel and 172.115 MT of skull scrap in the tax audit report. He referred to p. 464 of the paper book where the correct working was submitted before the authorities below. He further stated that the submissions regarding fall in NP rate and GP rate due to increase in the cost of inputs and fall in the same price were made before the AO during the course of assessment proceedings which has not been dealt with by the authorities below. Thus, he submitted that no addition was called for.
8. We have heard both the parties at some length and given our thoughtful consideration to the rival contentions, gone through the facts, evidence and material placed on record as well as the orders of the authorities below. The assessee has filed a comprehensive paper book running into more than 600 pages. However, during the course of arguments of the case only few pages not more than 50 to 60 were referred to We have taken into account relevant pages of the paper book to which our attention has been drawn. Now, the first issue which requires to be decided by this Bench is whether the AO was justified in rejecting the book results. It is no doubt true that the accounts of the assessee were audited which were accompanied with the tax audit report in Form No. 3CD filed along with the return. Copy of the audit report is at pp. 151 to 156 of the paper book. Column(A) of para 28 required auditors to give information about the opening stock, purchases during the previous year, consumption during the previous year and closing stock. These details have been given. However, the auditors have conveniently omitted to furnish information about the yield of finished products, percentage of yield, shortage/excess, if any. As per Item (B) of the same column, the auditors were also required to indicate the shortage/excess, if any, of the production. However, this information has not been given in the audit report. As per col. 18 of the said report, the assessee was also required to indicate the particulars of payments made to persons specified under Section 40A(2)(b) of the Act. The auditors had mentioned as per Annex. B. However, Annex. B has not been enclosed with the audited accounts. During the course of submissions made before the Bench, it was stated by the learned Counsel that the major sales of finished products i.e. steel ingots have been made to its sister-concern, namely, M/s New Kashmir Rolling Mills, Jammu, but the details of sales made to the said concern have not been indicated. Thus, the auditors who could have authenticated such information with specific details have omitted certain vital aspects of the case. Now, admittedly, while reporting production of finished products made out of raw material consumed, the auditors had shown production of steel ingots at 25,615.385 MT. There is no mention about the production of runners and risers weighing 881.125 MT and skull weighing 172.115 MT respectively which was subsequently submitted. Thus, on the basis of figures of production reported in audit report, yield percentage worked out to 89.57 per cent thereby showing wastage/loss of 10.42 per cent referred to by the CIT(A) in the impugned order. In addition, the AO has consistently stated that the assessee had not produced any stock register indicating day-to-day quantitative details of opening stock of raw material, purchases, consumption, items manufactured and the closing stock of raw materials and items produced. The learned CIT(A) has categorically reported on p. 6 of the impugned order that even during the appellate proceedings, the quantitative statements filed are incomplete in the sense that these details did not contain complete information required to be maintained in the day-to-day stock register. What the assessee has furnished was only a part information and the same did not amount to maintaining of day-to-day stock register. He has, therefore, observed that even after taking into account the additional information furnished by the assessee, it was clear that the assessee had not maintained any day-to-day stock register containing complete information of the nature required to be maintained in such register. Coupled with the facts is that the assessee has been reporting different figures of burning loss and wastage i.e. 7.24 per cent and subsequently 6.75 per cent. Further, on the basis of the figures of consumption of raw material and production reported by the auditors in the audit report, wastage/loss worked out to 10.42 per cent. It is also a fact that there was a substantial fall in GP rate from 4.20 per cent of the last year to Order 21 per cent of the assessment year under consideration and steep fall in NP rate from 2.16 per cent of the last year to Order 60 per cent of the assessment year under consideration. Thus, taking into account the totality of these facts and circumstances of the case, we are of the considered opinion that the AO was justified in rejecting the book results. Similar issue was considered by the Tribunal, Amritsar Bench, in the case of assessee's sister-concern, namely, New Kashmir Steel Rolling Mills v. Asstt. CIT, in ITA No. 22/Asr/2005 for the asst. yr. 2001-02 (copy placed at pp. 558 to 581 of the paper book) where the action of the AO for rejection of book results was upheld by recording following findings in paras 9 and 10 of its order and by referring to various judgments:
9. We have heard both the parties and given our thoughtful consideration to the rival contentions, examined the facts, evidence and material placed on record. We have also gone through the orders of the authorities below and referred to the relevant pages of the paper book to which our attention has been drawn. The first issue that requires to be decided in this case is whether the authorities below were justified in rejecting the book results. The AO has mainly given the reason for rejection of book results as high percentage of burning loss shown by the assessee as compared to the burning loss disclosed in the case of Asstt. CIT v. Mohan Steel Limited (supra) decided by the Tribunal, Allahabad Bench, and also expert report of Mr. John M. Smith. It is also a fact that the GP declared by the assessee for the assessment year under consideration was low as compared to earlier assessment years. The specific ground for rejection of book results was taken before the CIT(A). During the course of appeal proceedings, the learned CIT(A) has looked into the relevant assessment record himself. Since the powers of CIT(A) are co-terminus with that of AO and the assessee had taken specific ground for rejection of book results, there cannot be any objection to his referring to the assessment record. Such reference to the assessment record could either be in favour or against the assessee. Therefore, the objection raised before this Bench by the learned Counsel in this regard is not tenable.
10. Now, after referring to the assessment record, the learned CIT(A) has examined the audit report filed in Form No. 3CD. A copy of the same is also placed at pp. 63 to 70 of the paper book. Column 28 of the audit report required the auditors to give specific details in the case of a manufacturing concern of raw materials, finished products, bye-products in terms of opening stock, purchases during the previous year, consumption during the previous year, sales during the previous year, yield of finished products, percentage of yield and shortage/wastage, if any. On p. 70 of the paper book, the. auditors have mentioned that as per quantitative statement attached with the balance sheet. However, a copy of the same is at p. 74 of the paper book. The learned CIT(A) has mentioned that complete quantitative details in respect of these items had not been filed and only a chart showing valuation of closing stock as on 31st March, 2001 had been filed. The chart placed on p. 74 of the paper book does not contain information in the manner required in col. 28 of the audit report. Besides, there is also a grave doubt whether day-to-day details of the quantity of raw material available, consumed, production obtained in terms of units and the burning loss, etc. were maintained. Thus, the absence of such details coupled with low percentage of GP and higher percentage of burning loss enabled the authorities below to come to a conclusion that book results were not reliable. The learned CIT (A) has relied on the judgment of jurisdictional High Court of Punjab & Haryana in the case of Punjab Trading Co. v. CIT (supra), where it was held that omission to maintain day-to-day production register coupled with low yield justified rejection of book results. The learned CIT (A) has also relied on the judgment of Bombay High Court in the case of Dhondiiam Dallichand v. CIT (supra). Further, the learned Departmental Representative has also relied on the judgment of Punjab & Haryana High Court in the case of Harchaian Dass Textiles Mills v. CIT (supra), where the rejection of books of account on account of higher percentage of wastage was upheld. The learned Counsel for the assessee has relied on the judgment of Jammu & Kashmir High Court in the case of International Foiest Co. v. CIT (supra), where it was held that rejection of book results merely on account of low yield could not be a ground for rejection of book results because the yield would vary from year to year to large extent depending on several factors. In the case before the Jammu & Kashmir High Court, there was no charge against the assessee that it had not maintained day-to-day quantitative details of production as in the present case. Now, whether the book results are liable to be rejected or not is to be seen in the light of facts of each case. Since the facts of the case are distinguishable from the facts of the case of International Forest Co. v. CIT (supra), we are of the opinion that the judgment of Jammu & Kashmir High Court is not applicable to the facts of the present case. Thus, in the light of above facts and circumstances, we are of the considered opinion that the learned CIT(A) was justified in sustaining the action of the AO for rejection of book results.
The facts of the present case are almost identical to the facts of the aforesaid case. Therefore, the decision in the abovementioned case would squarely apply to the facts of the present case. Respectfully following the same and for detailed reasons given above, we confirm the action of the authorities below in rejecting the book results. This ground of appeal is dismissed.
9. Now, the next aspect that requires to be decided by this Bench relates to estimation of income. It is settled law that even if book results are rejected, the AO is duty-bound to make a fair and reasonable estimate of income based on evidence and material on record. He is expected to make best judgment assessment as provided under Section 144 of the Act. No doubt, the estimation of income involves certain amount of guesswork but such guesswork has to be reasonable and fair and cannot be arbitrary and capricious. Reliance in this regard is placed on the judgment of Privy Council in the case of CIT v. Laxminarain Badridas (1937) 5 ITR 170 (PC) where it has been held as under:
Under Section 23(4) of the IT Act, the officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He 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 a fair estimate of the proper figure of assessment and for this purpose he must be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by, and assessments of, the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guesswork in the matter, it must be honest guesswork. In that sense too, the assessment must be, to some extent, arbitrary. The section places the officer in the position of a person whose decision as to amount in final and subject to no appeal, but whose decision, if it can be shown to have been arrived at without any honest exercise of judgment, may be revised or reviewed by the CIT under the powers conferred upon that official by Section 33.
Now, for the purpose of estimating income, the AO can refer to the past history of the case which acts as a good guide for determination of the income. The AO can also refer to the comparative cases to see whether the GP rate shown by the assessee is fair and reasonable. However, comparison with other cases must take into account the total turnover, the favourable or unfavourable conditions of the assessee vis-a-vis comparable cases, etc. Similar observations were made by the Bench while deciding the case of New Kashmir Steel Rolling Mills v. Asstt. CIT (supra). Now, we find that even though the AO has mentioned that both GP rate and NP rate were quite low as compared to the earlier assessment years, yet the basis for making the impugned addition as adopted by the AO is the wastage. The GP rate and NP rate has not been made the basis of making the impugned addition. No doubt, as per details given in the audit report by the auditors, burning loss/wastage worked out to 10.42 per cent. However, during the course of assessment proceedings and proceedings before the CIT(A), the assessee had given the revised working showing loss at 6.75 per cent. It was found that the auditors had given only the figures of production of steel ingots at 25,615.35 MT but production of runners and risers weighing 881.125 MT and skull which is a kind of scrap weighing 172.115 MT were not included in the production. These figures were duly included while furnishing revised figures of loss at 6.75 per cent. It was also submitted that working of wastage/loss at 7.24 per cent was wrong because the same was worked out by taking the total wastage and the production, whereas the correct way of working out the loss/wastage was production out of consumption of raw materials. The contention of the assessee that burning loss/wastage actually worked out to 6.75 per cent appears to be correct because the same was required to be worked out on the basis of consumption of raw materials. The contention of the learned Departmental Representative that different working given by the assessee shows manipulation of the figures is without any merit. We find that Schedule 'H' of the audited accounts indicates the sales of the assessee at Rs. 31,77,77,453. Page 167 of the paper book indicates sales of steel ingots at Rs. 31,45,58,552 and sales of runners and risers at Rs. 32,18,900. The details of closing stock appeared at p. 171 of the paper book which show stock of runners and risers at 15.775 MT. This means that the out of runners and risers manufactured in the assessment year under consideration weighing 881.125 MT, the assessee had sold 766.355 MT for an amount of Rs. 32,18,900 and was left with a closing stock of 15.775 MT. If the contention of the Revenue that these were manipulated figures of runners and risers as the same were nothing but scrap recycled into production was accepted then the question is wherefrom the assessee had made sales of Rs. 32,18,900 of runners and risers. Similar sales worth Rs. 33,15,285 had been made in the immediately preceding assessment year relevant to the asst. yr. 2000-01. The figures of sales formed part of audited account filed along with the return. Thus, we are unable to accept the submissions of the learned Departmental Representative that the runners and risers were nothing but part of the scrap and the assessee had only manipulated the figures.
10. The other item which was omitted by the auditors from production was steel skull weighing 172.115 MT. No sales of the same have been shown at p. 167 of the paper book. Page 171 of the paper book shows closing stock of skull at 1.720 MT which means that the remaining quantity of 170.395 MT was recycled along with scrap. Whatever steel ingots were produced in the accounting year under reference, the same would also include production made from steel skull. Therefore, this item cannot be strictly called as part of the production for the reason that the same would need to be added to the scrap consumed by the assessee as the production is inclusive of the same. In fact, even for the earlier assessment year, whatever skull was produced was again recycled along with the scrap and did not yield any sale to the assessee. To this extent, the contention of the learned Departmental Representative that skull was nothing but was part of scrap, appeared to be correct. However, like has to be compared with the like. The details of wastage given at p. 7 of the paper book which have not been controverted by the Revenue show that even for the earlier years, production of the assessee was inclusive of three items i.e. steel ingots, runners and risers and skull for working the wastage, etc. If we include these three items in production, the same works out at 26,668.625 MT out of consumption of raw material weighing 28,598.415 MT. The same would show wastage at 6.75 per cent. In similar manner, the percentage of wastage worked out for the asst. yrs. 1998-99, 1999-2000 and 2000-01 was at 7.37 per cent, 7.42 per cent and 7.16 per cent, respectively. Thus, the wastage and burning loss for the assessment year under reference was the lowest as compared to earlier assessment years which has been accepted by the Revenue. As regards the working given by the assessee at 7.24 per cent, there was a mistake on the part of the assessee in computing the wastage by taking figures of wastage with production whereas the wastage was to be worked out with reference to total quantity of raw material consumed. This was also corrected during the course of proceedings before the authorities below. That being so the case would not warrant trading addition at all in the light of past history of the case. 10.1 As regards the submissions of the assessee that fall in GP rate was due to quantum jump in the excise duty and increase in cost of inputs, we have observed that as against excise duty of Rs. 1.60 crores of the last year, the excise duty for the assessment year under consideration was Rs. 4,41,12,468. Admittedly, the same was collected from the customers and was a part of the sale proceeds. That being so, the GP rate would be higher than the earlier assessment year because excise duty paid is debited to P&L a/c and not to manufacturing account. Similarly, the excise duty collected from the customers and paid by the assessee would not make any difference so far as NP rate is concerned. But, at the same time, the assessee had taken plea that there was an increase in the cost of raw material as compared to earlier assessment years. The Revenue could have verified this fact by calling for specific details of invoices of last year and comparing the same with purchase and sale rates of the assessment year under reference. The assessee has submitted a copy of order sheet notings made by the AO during the course of assessment proceedings at pp. 460 to 461 of the paper book. The same shows that the assessee had not only produced books of account consisting of ledgers, cash books but also invoices for purchases which were also test checked. There is nothing in the order sheet that the assessee was asked to produce comparative purchase/sale rate of the two assessment years and the assessee failed to furnish the same. In fact, hearing of the case started on 25th Oct., 2002 and was concluded on 5th Feb., 2004. During the course of the same, the assessee furnished detailed information. If the AO wanted to compare the same, he could have specifically asked for and commented about the nature of bills produced or which were not produced before rejecting such submissions either during the course of assessment proceedings or during the course of remand proceedings. Similarly, the learned CIT(A) ought to have followed the same course, if the AO had failed to do so. But, in the absence of any specific comments made by the authorities below, it could not be said that the submissions of the assessee were without any substance. In any case, since the basis of the addition is not fall in GP rate or NP rate and the basis of addition is higher wastage shown by the assessee in comparison to earlier assessment years which is factually incorrect, we are of the opinion that mere variation in the GP and NP rate would not warrant any addition which is not the basis for impugned addition. However, it appears that during the course of assessment proceedings, the AO raised the issue of sale of finished goods to its sister-concern, namely, M/s Kashmir Steel Rolling Mills Jammu. The assessee vide letter dt. 30th Sept., 2003 (copy placed at pp. 546 and 547 of the paper book) stated that variation in the price of finished goods sold to M/s Kashmir Steel Roiling Mills during the same day was due to variation in price of finished goods sold due to market fluctuation. The assessee also stated that the rates were collected from Mandi Gobindgarh on telephone and there was eventually no written record of market fluctuations as such. This point had not been examined/pursued further by the authorities below as to whether the rates at which sales were made to the sister-concern were as per market rates moreso when the assessee claimed increase in the costs of inputs. In any case, the AO had not made this as basis for making the impugned addition. The AO has also not drawn any adverse inference on this account. Therefore, this fact cannot be held against the assessee.
11. Lastly, we may further mention that the AO has not given any basis whatsoever for adopting the wastage at 5 per cent. No comparable case has been cited by the AO. Further, the AO has mentioned that enquiries were got made with other mill owners who had shown lower rate of wastage. Neither the name of any mill owner nor the wastage shown by such mill owner have been mentioned, in the assessment order. No such enquiry report has been confronted to the assessee. Therefore, any evidence or material collected at the back of the assessee without confronting the same cannot be used against the assessee. The case of its sister-concern viz., M/s New Kashmir Steel Rolling Mills, is not comparable to this case because the item being manufactured by that unit is different from the case of assessee. On the contrary, we find that the past history of the case shows acceptance of higher percentage of wastage. In fact, p. 7 of the details placed before us shows that the percentage of wastage for the assessment year under consideration at 6.75 per cent was the lowest as compared to the assessment years from 1995-96 to 2000-01. Thus, we do not find any justification for the authorities below in making/sustaining an addition of Rs. 59,29,708 on account of excessive wastage. We may further add that on identical facts in the case of New Kashmir Steel Rolling Mills v. Asstt. CIT (supra), addition made by the AO was deleted. The decision in that case is also applicable to the facts of present case.
12. Thus, in the light of detailed reasons given above, we are of the considered opinion that the learned CIT(A) was not justified in sustaining the impugned addition. We, therefore, set aside the order of the CIT(A) and delete the impugned addition. Accordingly, ground Nos. 5 to 14 relating to this trading addition of Rs. 59,29,708 are allowed.
13. The last ground relates to charging of interest under Sections 234B, 234C and 234D. Briefly stated, the facts of the case are that the AO charged interest under the aforesaid sections at the time of completing assessment. The learned Counsel for the assessee submitted that assessee should be allowed consequential relief. Accepting this contention, we direct the AO to allow consequential relief at the time of giving effect to this order. This ground of appeal is disposed of these terms.
14. In the result, the appeal filed by the assessee is partly allowed.