SHANTA SALSES CORPORATION,JAIPUR vs. ITO, JAIPUR

Briefly stated, the facts of the case are that the assessee owns 3 mines situated at Radhera and Sankhla Ki Basti in and around the vicinity of Bikaner and engaged in the business of mining of the clay. The assessee also owns 3 grinding units for converting clay lumps into clay powder and these units are situated at Guda. The assessee is also engaged in trading of clay. It purchases clay from the 3rd parties and supply to its prospective customers. It filed its return of income declaring total income at Rs. 1,80,105/ which was selected for scrutiny and assessment was completed u/s 143(3) of the Act, 1961 vide order dated 25.03.2013 wherein, interalia, addition of Rs.75,00,000/- was made by the Assessing officer which on appeal, has been reduced to Rs.70,00,000/- by 2 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur the ld CIT(A). Against the addition so sustained by ld. CIT(A), the assessee is now in appeal before us.

During the course of assessment proceedings, the Assessing Officer rejected the books of accounts maintained by the assessee by invoking of provisions of section 145(3) of the Act. As per the Assessing Officer, the books of accounts maintained by the assessee are not found to be reliable in view of the various discrepancies discussed in the assessment order regarding the production of clay at various mines, production of clay powder, trading of clay and clay powder as well as the expenses debited in the trading account. In this regard, a show cause was issued by the Assessing Officer dated 22.02.2013 and in response, the assessee filed its submission dated 08.03.2013 and which was taken on record and thereafter, the AO has recorded his finding. It would therefore, be relevant to refer to each of the discrepancies as noted by the Assessing Officer, the reply so filed by the AO and findings so recorded by the Assessing officer.

Firstly regarding trading of clay and clay powder, in the show cause notice, the Assessing Officer has stated that on test check basis of the traded goods, total purchases of Rs. 14,06,54,17/- are not linked with the sales as sales items are composite as traded goods as well as manufactured goods. Therefore, the verification with regard to the sale of traded goods as well as goods in stock cannot be ascertained and as such the sales items are not subject to verification. It was further stated by the AO in the show-cause notice that the assessee has shown purchase and sale to sister concern namely M/s Hemendra Minerals and Bhanwar Sales Corporation. The transactions with these concerns are required to be verified with the similar transactions of outside parties. Thereafter, in the final findings recorded by the AO at Para 10 of his order, the AO has listed down the purchases made for trading purpose 3 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur from various parties amounting to Rs 1,13,06,791/- and held that from the perusal of trading sales, it reveals that gross profit rate in trading of clay varies from 18.57% to 32.85%. It is also seen that the assessee has made purchases from its sister concern M/s Hemendra Minerals at higher rate as compared to other concerns hence the gross profit earned on such transaction is lower. Similarly, when sales are made to sister concern, the gross profit earned is lower. Hence it is not possible to verify the actual gross profit earned by the assessee on the trading of clay & clay powder. The said findings of the AO have been confirmed by the ld CIT(A), however, there is no reasoning which is discernable from the order of the ld CIT(A) on the basis of which he has confirmed the findings of the AO.

During the course of hearing, the ld AR submitted that as regards the trading activities with the persons specified u/s 40A(2)(b) is concerned, the same are at the prevailing market rates. The details of the same were furnished before learned Assessing officer during the course of hearings and it was submitted that in Shri Kolayatji, there were different areas of clay, where different quality of clay was found and purchases was made from the different parties as per requirement. The quantity purchased is directly resold after adding profit. The profit earned on trading of different types of clay will vary and is not the same. It is therefore submitted that no disallowance is warranted on this account more particularly when no specific instance has been pointed by ld.AO wherein assessee has made payment to related concerns at higher than market rate.

We find that merely because gross profit rate in trading of clay varies from 18.57% to 32.85%, trading results cannot be rejected without specifying the reasons or any corroborative material on record which dispute such trading results. Further purchases and sales from sister concern have been disputed 4 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur holding that the purchases are at higher rate and sales at lower rate. However, there is nothing on record in terms of third party comparable as to how such purchases and sales are at variance with any third party transactions undertaking similar transactions under identical conditions. The assessee has also submitted that different quality of clay were purchased and sold and therefore, trading margins will also vary and cannot be static in respect of every transaction. Therefore, the finding of the AO that the trading results cannot be accepted is not borne out of any specific finding so recorded by him and therefore, cannot be accepted.

Now coming to discrepancy in production of clay powder as stated by the AO, we find that there is no mention of the said discrepancy in the show cause notice issued by the Assessing Officer. Further, there is no finding which has been recorded by the Assessing Officer highlighting the specifics of any discrepancy so noticed by him. Therefore, merely stating that the books of accounts are not reliable as far as it relates to production of clay powder cannot be accepted in absence of any findings recorded in the assessment order.

Now coming to the discrepancies noticed in the expenses debited in the trading account. In the show cause notice, the Assessing Officer has talked about expenses on account of diesel and oil consumption as not fully verifiable, mining expenses which are higher than the preceding year and not subject to verification, and increase in the transportation and cartage expenses as compared to previous year. However in the final findings so recorded by the Assessing Officer, he has restricted his findings limited to discrepancies in consumption of diesel, and expenses pertaining to transportation and cartage. As per the Assessing Officer, on the basis of test check basis of the vouchers produced by the assessee, it is found that the expenses have been incurred on 5 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur number of vehicles which are not owned by the assessee. It was further observed that the expenses pertaining to sister concern M/s Hemendra Minerals were also debited in the accounts of the assessee. Further, the assessee has lifted 100 litres of diesel however, the assessee did not maintain day to day consumption of the diesel so lifted. Regarding transportation and cartages expenses, it was noticed by the Assessing Officer that as against claim of Rs. 6,87,269/- in the preceding year, the assessee has claimed transportation expenses of Rs. 30,85,671/- and therefore, the assessee was asked to produce complete bills and vouchers as well as to link transportation and cartages expenses with sales bills. In response, the assessee filed details and records which were put to test check by the AO. The assessee has also explained that due to increase in production increase in fares, the expenses have increased during the year. It was however held by the AO that the assessee could not link the entire transportation and cartages expenses with the sales bills and the expenses have increased 5 times whereas increase in production of clay is only 0.64% as compared to preceding year. Further, the assessee’s contention that number of trips of the dumper has increased due to removing of some quantity of over burden was also not found acceptable as the assessee has never produced data regarding quantity of over burden removal.

During the course of hearing, the ld AR submitted that the reason for increase in expenses in comparison to the previous year is due to revision of rates of daily wages paid to the manual labours, rate increased for the payment made to outside labour for removal of overburden, transportation charges, machine working of outside parties and dumpers working for removal of overburden with machine. Further, production has also increased from the last year and so is the overburden removal increased, hence the expenses related to the production and removal of overburden are on the higher side. Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur 10. We find that as far as expenses pertaining to sister concern is concerned, the same clearly cannot be allowed in the hands of the assessee company, however, at the same time, given that there are transactions of purchase from the same sister concern, it needs to be determined whether the transportation expenses are part of assessee’s obligation or not. Further, the Assessing officer is right in examining the transportation expenses with the sales generated by the assessee especially where there is increase in expenditure as compared to last year but given the volume and scale of operations, appropriate audit methodology needs to be employed and sample size to be identified to verify these expenses rather than expecting the assessee to produce documentation linking the entire transportation and cartages expenses with the sales bills may be practically not feasible. At the same time, on perusal of records, we also find that there are also gaps and reluctance on part of the assessee in coming forward with appropriate explanation and filing documentation in support thereof. In overall view of the matter, we find that discrepancy so highlighted by the AO in respect of these two expense heads in terms of non-verifiability need to be read along with other discrepancies to arrive at the final conclusion regarding non-reliability of books of accounts which we shall be discussing in the subsequent paragraphs.

Now coming to the main issue of suppression of production by the assessee and apparently the main reason for rejection of books of accounts as discernable from the assessment order.

In the show cause notice, the Assessing Officer has stated that the production shown by the assessee is to be verified vis-a-vis the facts revealed from the examination of the records produced and examination of the mining mate (the person employed at the site) and other factors. It was found that the firm is running mines at 3 places. In the process of mining, firstly the 7 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur overburden is removed to reach the clay bed and for the purposes, the excavator & the dumper/tipper are mainly hired and labour is hired on daily wages. The expenses of excavator & dumper/tipper are booked under the head “mining expenses” and expense of tractor & trolley is booked under the head “Cartage expenses”. The detail of labour on contract is maintained in wages register of overburden removal. However, the assessee does not maintain his own record of the work done by the hired machines i.e excavator & dumpers. Further, no details are maintained by the assessee of the work done by the excavator & dumpers owned by the assessee. Thus, the extent & purpose of utilization of the excavators & dumpers is not reflected. Similarly, quantity of work done by the regular paid workers is also not reflected in any books. Thereafter, he referred to the period for which the excavators & dumpers have been hired from external agencies during the year. Further, he referred to the calculation of density of the clay by using the data shown in its sorting payment register. Thereafter, the Assessing Officer referred to the statement of the mining mate and basis his understanding of facts and figures, he determined that in respect of mine no. 8/96, 1.243 feet of clay is dug out in a day with the help of excavator & labour. Similarly with labour only, the clay dugout & dispatched is 0.355 feet per day. Thereafter, basis the dimension of the clay bed and working days, the Assessing Officer has worked out the production for the year amounting to 168,756/- tones in respect of mine No. 8/96 as against 143,099 tons of production shown by the assessee. Basis the same, he arrived at the finding that the assessee has suppressed production to the tune of 25,657 tons which comes to 17.92% of the production declared. Applying the same proportion in respect of other two mines, the AO worked out the suppression of production in respect of other two mines No. 2/95 and 7/96. Further, the Assessing Officer assumed that the production of SGRS grade clay & C grade clay is in 4.1 ratio and basis the sale value is recorded in the books of accounts, has worked out the suppressed production of Rs. 63,13,099/- 8 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur during the year and the assessee was accordingly issued a show cause notice. In response, the assessee filed its submission which was considered however, not found acceptable and the relevant findings of the AO are contained at paras 7 to 9 of the assessment order wherein effectively, he reiterates his initial findings as per show-cause notice and rebut the submissions of the assessee and finally held as under: “9. In view of the detailed discussion and factual verification supported with the norms of the industry as well as after allowing leverage for all contingencies and further keeping in mind the volume of men and machinery employed by the assessee on the available mine at the time of relevant year i.e, F.Y 2009-10, I have come to the conclusion that the assessee’s A/R’s submission is without any valid basis and not supported with the primary records as such is not tenable and it is established that the assessee has suppressed production at least to the tune of 29,925.30 MT of clay which is valued at Rs 66,43,417/-.”

During the course of hearing, the ld. AR submitted that books of accounts of assessee were subject to audit by qualified chartered accountant and who had not pointed out any defect in the books so examined. The appellant had produced such audited books of accounts alongwith the supporting vouchers before ld.AO during the course of assessment proceedings, which were examined on test check basis by the learned assessing officer and no discrepancy whatsoever was observed. However, ld.AO has invoked the provisions of section 145(3) and has rejected the books of accounts alleging that assessee could not produce the primary records like the dispatch receipt to truck drivers for taking clay from base to storage area, 9 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur counter foil of ravana receipts for dispatch from storage place to customer and vehicle wise diesel consumption and details of usage of own excavators and dumpers. In this regard, it is submitted that ld.AO has misunderstood the dispatch receipts issued to truck drivers for taking clay to the storage area as primary records, whereas the same is in the nature “Memorandum record” and the production register, in which entries of production are made on day to day basis constitutes the basic and primary records. Similarly, ravana receipts issued to trucks carrying produce from storage place to customer are issued by the mining department for the purpose of determination of royalty and cross checking as to whether royalty paid by assessee is correct or not. Also, so far as vehicles owned by assessee are used for the purpose of business (more particularly when nature of vehicles is such which cannot be used for personal purposes). It is not practically possible to maintain record as to which particular excavator removed how much over burden and worked for so much hour in a day and similarly which particularly dumper carried this much over burden by working for so much hours in one particular day. It is precisely because of this reason that even mining department has not put any statutory obligation on mines to keep such record. Thus, it is evident that there is no requirement for maintaining vehicle wise consumption and details of usage of excavators and dumpers by any law enforcing agency. As regards Income Tax is concerned, it is submitted that section 44AA of the Income Tax Act does not specify any specific type of books of accounts required to be maintained by businessmen and rather simply says that assessee should maintain such books of accounts as would enable the AO to compute the total income of assessee in accordance with provisions of Income Tax Act. Thus, Income Tax Act also does not impose any legal obligation to maintain such and such type of primary record for production.

It was further submitted that the appellant could not making any sales from the mines without issuing the ravana, and the bills were made for all the 10 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur ravana issued by the appellant, which were verified while doing the royalty assessment by the mining department. No difference was pointed out by the Mining Officer in the production declared by the appellant and sales made in the assessment made. In support of such contention, Copy of royalty assessment Order, copy of monthly return for the fraction period, details of production at mines and dispatches from the mines with reconciliation with the production and dispatches as per monthly returns shown by the appellant and assessed by the mining office were furnished before lower authorities, however the same were brushed aside without pointing out any single discrepancy therein. Moreover, ld. AO has also not found any sales without issuing sale bills.

It was further submitted that the AO for invoking provisions of section 145 (3) has derived support from the judgment of Hon'ble Rajasthan High Court in the case of Commissioner of Income-tax v/s Narendra Mohan Paliwal 271 ITR 347 (Raj). In that case, the assessee was making underweight invoices and this fact was evident from the documents found during the course of search. The assessee in that case had not produced any books of accounts during the course of assessment proceedings. Thus the facts of the case were entirely different from the case of appellant where, all the dispatches from the mines are made by issuing the ravana in Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur serial number(s) (booklets issued by the mining department) and entry is made in the ravana register maintained at mines. The ravana is checked by the mining department representative near to the weigh bridge and if any truck is found without ravana or any weight difference is found out, the same is seized and is released only after paying royalty equal to the sale amount and a hefty penalty which ranges between Rs. 1,000 to Rs. 1,00,000/. In ravana register, the actual weight is written from the weight slip and bills are prepared as per actual weight.

The ld AR further explained the mining process and submitted that the mining of clay is done in open cast mines and the first step is to determine the mining site through digging of a test pit and once the mining site is determined, the first process is the removal of overburden, which extends upto 40-60 feet depth. Thereafter, the clay bed is reached which extends upto 25-30 feet. Once, the clay from the first layer is removed, the process of refilling of the pit is started. Overburden is removed with the help of excavators as well through manual labour wherever machines cannot reach.

It was further submitted that in order to understand the mining process in detail, during the course of assessment proceedings ld.AO recorded statements of two persons, one Sh. Raghavendra [mining mate of Guda Radhera I mines and another Sh. Rupa Ram (Labour)]. Both these persons were not responsible for quantity of mined clay on day-to-day basis or even otherwise also. In the statements so recorded, various questions were asked about the procedure and mining process, mainly overburden removal, digging of mine etc. Apart from it Shi Raghvendra was asked about quantum of production with machines and without machines, which was not exactly in his domain. Same is evident from the perusal of the statement of Shri Raghvendra. It is seen that at Q. No. 4 he was asked about who are working on mine where he is working and what are their works. He has replied that his work is related 14 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur to safety of mine and to tell the labour for work for digging (as to where and to what depth labour should dig considering the overall safety of mines). Shri Mittal was Mining engineer and overall incharge. He also stated that details related to production are looked after by Shri Murlidharji. For the sake of ready reference his statement is reproduced: eSa0 'kkUrk lsYl dWkiksZjs’ku esa ftl ekbZUl ij vki dke djrs gS ml Q. No. 4 ekbZUl ij vki dke djrs gS] ml ekbZUl ij vkSj dkSu dkSu O;fDr dke djrs gS rFkk D;k dke djrs gS+ \ 1. ekbZUl ij Jh feÙky] ekbZfuax baftfu;j gSA Ans. 2- Jh cDlhnku & QksjeSu ds in ij gS 3- Jh jk?kosUnz flag & ekbZfuax eSu 4- Jh eqjyh/kj & eqfue & ikfj;sij

In this regard, it was submitted that ld.AO has worked out quantum of excavation by misapplying the statements of Sh. Raghavendra and Sh. Rupa Ram, therefore it would not be out of place to mention here the relevant extracts of statements of the two persons recorded. Statements of Sh. Raghavendra (Mining Mate): iz-5 vki ftl ekbZUl ij dke djrs gS ml ekbZUl ds Function dh iwjh tkudkjh ns o ekbZUl dh lkbZt D;k gS vkSj Working vHkh yscy @ Lrj ij py jgh gS vkSj ekpZ] 2010 ls fdl Lrj ij py jgh Fkh ? mÙkj ekbZUl esa ge ekbZfuax baftfu;fjax ds funsZ’k ij Overburden gVkrs gS rFkk Overburden gVkus ds ckn ¼Dysa½ Clay rks vkrk gS rks Production djrs gSA Overburden rFkk Production steps esa fd;k tkrk gSA Ist step 50 pt. pkSM+h gksrh rFkk Average Height gj LVsi es 20 Ft. gksrh gSA bl rjg ls Overburden gVkrs gq, Clay bed rd igqaprs gS rc rd 3 Steps cu tkrs gSA Overburden dgh dgh 40 Ft. gksrk gS rks dgh 60 Ft. gksrk gSA vuqeksnu 60 Ft. ij gksrk gSA tgk Overburden de gksrk gS ogk Clay bed Hkh de gksrk gSA 60 Ft. Overburden tgk gksrk gS ogk vuqeksnu 30 Ft. dk Clay bed gksrk gSA Mine 360 Ft. pkSM+h gSA Overburden gVkus ds fy, Excavator L&T dEiuh dk bLrseky gksrk gS rFkk 3 Tipper / dumper bLrseky gksrs gSA Excavator L&T Overburden dks [kksnk tkrk gS rFkk vius Arm / bucket ls Tipper es Mkyk tkrk gSA gj 5 ls 10 feuV esa ,d Tipper Hkj tkrk gSA ,d Tipper esa djhc 12 Vu Overburden vkrk gSA gj Tipper dh fcYVh Issue gksrh gSA Excavator Machine dk eqfue Issue djrk gS ftldh Copy Overburden Unload djus ds ckn gekjh Company ds equhe dks ns nsrs gSA Excavator ekbZUk ds Working Hours ds nkSjku dke djrk gSA ekbZUk ds Working Hours lqcg 9-00 cts ls 'kke 5-00 cts rd gksrs gSA ftles ,d ?kUVs dk Lunch gksrk gSA Excavator dEiuh ds [kqn ds Hkh gS rFkk fdjk;s ij Hkh fy, tkrs gSA blh izdkj MEij @ Tipper Hkh dEiuh ds [kqn ds gS rFkk fdjk;s ij Hkh fy, tkrs gSA tc fdlh dh Excavator e’khu o dumper ,d lkFk yxrs gS rks Excavatpr us fdruk 16 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur dke fd;k] fdrus ?kUVs dke fd;k] ;g ugh fxuk tkrk Tipper dh Number of Trips fxus tkrs gSA Per Trip Tipper dk :i;s 150@& pktZ gksrk gSA ,d fnu esa ,d Excavator e’khu djhcu 60 ls 70 Tipper Hkj nsrh gS] bldk eryc gS fd gj fnu es djhcu 720 ls 840 Vu Overburden Remove gks tkrk gSA ,d Step dks [kksnus es ;k cukus es 360 Ft. pkSMkbZ] 50 Ft. yEckbZ o 20 Ft. dh mpkbZ dk Overburden Remove gksrk gSA ;g fudkyus esa djhc 15 fnu dk le; yxrk gSA bl rjg ls 3 Steps ;kuh 60 Ft. dh xgjkbZ ij Clay bed vkrk gS tks fd vukseu 30 Ft. dh xgjkbZ rd gksrk gSA vHkh ekbZUl dk Extension ;k c<+ksrjh L Shape gks jgh gSA ekbZUl ds dksus esa e’khu ;kfu fd Excavator dks ?kqeus dh txg ugh feyrh ogk eSU;wvy Labour dk bLrseky djds VªsDVj es Overburden Mkydj Remove gksrk gSA ,d VªsDVj es djhcu 3 Vu Overburden vkrk gSA blh rjg Production ds fy, Hkh ,d Excavator e’khu o djhcu 3 Tipper dke esa vkrs gSA Production es Hkh Overburden Removal dh rjg gh dkMZ gksrk gSA ;gak ij Hkh dksuksa es eSU;wvy Labour dke djrh gSA eSU;wvy labour Sieving sorting dk Hkh dk;Z djrh gSa Production es djhc 8 ls 10 yscj dk;Z djrh gS] T;knk le; yscj [kqnkbZ dk dke djrh gSA eky bdBBk gksus ij t:jr ds vuqlkj Sorting djrh gSA Sorting es 2 xzsM dh Sorting gS] White ;k xzs dyj dh feVV~h dks SGRS Gr. dgrs gS rFkk ckdh jax dh feVV~h vks& ckjhd pwjk feVV~h C xzsM dgykrh gSA SGRS Grade es Lumps gksrs gSA SGR Grade dk pwjk Hkh C xzsM es 'kkfey gks tkrk gSA Sortingds fy, Regular Labour dk bLrseky ugh gksrk gSA ;g dk;Z Bsds dh Labour djrh gSA bl yscj dks dksbZ Instruction nsus dk dke o mudk dk;Z mudk Supervision djus dk dk;Z eqjyh/kj equhe th djrs gSA eSa Production esa Excavator e’khu rFkk eSU;wvy yscj dk supervision dk dk;Z djrk gwWA Excavator e’khu ls gj fnu djhcu 700 Vu eky fudyrk gSA eSU;wvyh 200 Vu fudyrk gSA Åij Hkh eSus 700 Vu crk;k gS mles yscj }kjk [kksnk x;k eky Hkh 'kkfey gSA dHkh dHkh Excavator ugh pyrh gS] dsoy yscj dke djrh gSA rc 200 Vu dk Ptoduction gksrk gSA T;knkrj le; Excavator e’khu jk/ksjk] xq<+k es jgrh gS] efgus es ,d ;k nks fnu ds fy, gh e’khu nqljh Mine ij gh tkrh gSA 3 e’khu Excavator e’khu es ls djhc djhc 2 blh Mine ij jgrh gSA 3 Excavator e’khu bl jk/ksjk xq<+k ij pyrh jgrh gSA 2 e’khu [kqn dh gS rFkk ,d fdjk;s okyh e’khu o mlds lkFk 2&3 Tipper jgrs gSA dEiuh dh [kqn dh e’khu esa ls ,d Excavator Overburden Remove es jgrk gS rFkk ,d Production es jgrk gSA fdjk;k dk Excavator ges’kk Overburden Removal es jgrk gSA 17 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur 24. From perusal of above, it is evident that what was asked from mining mate Sh. Raghavendra Singh was regarding functioning of mine and at which level, mines were operating and further at which level the same was operating since March 2010. In response to such question, he explained production process at length, however throughout his statements he has mentioned the details “in present”, i.e. at the time of recording of statements on 18.02.2013 and at no point of time he stated that production “was being” carried out a particular level in past since 2010. In fact, in his subsequent questions, i.e. in Q. 6, he has mentioned that he has even stated that he was not involved in the work of Overburden removal and had answered Question No. 5 on estimate basis. However, ld.AO has misconstrued the same as level of operation of FY 2009-10, and thus has made such data as basis of all his subsequent calculations. Further, learned Assessing officer has considered that 8 M.T. productions is done by the manual labour per day per labour by placing heavy reliance on the part statement of Shri Rupa Ram labour recorded on 18.02.2013. After relating the statements of above two persons, ld.AO observed that as Sh. Raghavendra stated that 200 M.T. clay was produced by the manual labour per day and Sh. Roopa Ram mentioned that per day manual production per labour is 8 M.T. Accordingly, 25 labour are required continuously to produce the 200 M.T. clay @ 8 M.T. per day per labour, which was not at all the actual position in the assessment year 2010-11. In period relevant to A.Y. 2010-11 on an average 20 labours were appointed in all and that too not continuously as per actual attendance of labours for excavation of clay by adopting 23 working days (as considered by the learned assessing officer).

It was submitted that even for the argument sake, if it is presumed that each labour gives 8 MT production per day uniformly (but not admitting) the tentative production would be worked out as below: Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur Month Number of Working Total attendance of Production labours days male lab our for done @ 8 Production in 23 M.T. days April,09 26 23 559 4,472 May,09 19 23 388 3,104 June,09 20 23 396 3,158 July,09 21.5 23 422 3,376 Aug.,09 21.5 23 415 3,320 Sept.,09 20 420 3,360 23 Oct.,09 21 23 427 3,416 Nov.,09 21 23 327 2,616 Dec.,09 22 23 285 2,280 Jan.,10 19.5 23 279 2,232 Feb.,10 20 23 262 2,096 Mar.,10 15.5 23 230 1,840 Total 35,280 Whereas the learned assessing officer had taken the clay production by manual labour for 23 days of working @ 200 M.T. per day for the year. This much of the production can only be possible with more than 33 labours working each day considering on an average 6 MT production by each labour per day. Even as per AO’s assumption of average production of 8 MT per labour, at least 25 labours each day would be required. However, from perusal of details of attendance register of labour working for production, which gives the actual position of labour employed on day-to-day basis, it is seen that in the month of March, 2010, it was as low as 15.5 and in most of the months it was 20-21 labours. Hence, presumption of AO completely contrary to the facts on record. Hence, the manual labour production so presumed by the learned assessing officer at 55,200 M.T. deserves to be ignored being not based on correct facts. 19 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur It is submitted that even as per AO’s presumption number of labour working in the mines and as per his attendance the production would work out at 35,280 M.T. only. As such the learned assessing officer had taken 19,920 M.T. more production in his calculation. As per calculation, the appellant did not have external excavator for 17.5 days out of the total working days of 276 days. The production effected by it is 17.5 x 500 = 8,750 M.T. The total effect of the above working is 19,920 +8,750 = 28,670 M.T. less production by the appellant from his calculation of production.- to be modified suitably as AO has already given benefit of 17.5 days. As per learned assessing officer calculation the total production at Radhera I mines comes to 1,40,086 M.T. (168756 - 28670). The appellant had shown the total production of 1,43,099 M.T. There is no suppression of production by the appellant as calculated by the learned assessing officer. On the similar basis, there is no suppressed production in other mines.

It was further submitted that calculation of suppressed production is the statement of Shri Raghavendra Singh Mining Mate which were recorded on 18.02.2013 who stated prevailing general working position at the mines. Other than that no evidence for the suppressed production and sale of the same by the appellant was given by the assessing officer. At this juncture, it is submitted that ld. AO in remand report, has commented that “As per standards, the density of the clay is found to be 2400/kg/m3 to 2600/kg/m3, whereas the AO has taken the density at just 1122/kg/m3, thus if the density is taken as per the standards of engineering, the suppressed production would have been much more.” In this regard also, it is mentioned that ld. AO has given a generalized observations. Had there been actually increase in production considering density as per standards (as mentioned), ld.AO would have been definitely re computed the same, which has not been done by AO. In fact, in reply to remand report, assessee has furnished calculation of 20 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur production by adopting density of clay as stated by ld.AO, which has not resulted in any change in production. All these facts lead to the conclusion that formulas adopted by ld.AO in re computation of production are generalized and not based on the technicalities involved. In fact, in the assessment of A.Y. 2012-13, ld.AO applied the same formula as adopted in A.Y. 2010-11 and recomputed the production shown by assessee, however eventually arrived at a conclusion that “The assessee had shown production of 295072.800 MT of clay from all the three mines where as the production calculated as per the formulae applied in previous year the production comes to 196891MT, thus the production shown by assessee during the year under consideration is more than the production estimated hence the mining results of the assessee are accepted.” . It is thus submitted that the formula applied has no direct bearing on the computation made and further confirm the contention of assessee that presumption of ld.AO that the figures of production stated by mining mate Raghavendra and labour Roopa Singh are pertaining to A.Y. 2010-11 is contrary to the facts.

It was further submitted that once the turnover declared by assessee is accepted, there is no reason to reject the quantum of production. It is thus clear that there is no suppressed production of clay at mines. More particularly when, the day to day production is noted in the production register maintained at the mines and dispatches made from the mines were entered in ravana register and actual weight is written from the weight slips and bills were prepared for it. There is no mistake pointed out by the learned assessing officer in the sales bills issued during the year. Then there was no reason to calculate the undisclosed income of the appellant and make addition of Rs. 66,43,417/- without mentioning any discrepancy in the sale bills. Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur 28. With respect to allegation of ld.AO regarding variation in electricity consumption in factories pointed out by Ld. A.O, it was submitted that there is no variation in the consumption of electricity at factories. In the assessment order, the Ld. A.O. erroneously calculated consumption by dividing units of electricity by production in MT, whereas production after converting in Kg. is to be divided by the unit of electricity consumed. The chart showing the production of clay powder of factories as per unit consumption of electricity is as under: Month Units of Production Worki Production Production Production Electricity of clay ng Per unit Per day Per unit Consumed powder in Days consumption In M.T. in M.T. M.T. of Elec. in Kg April,09 17820 925 25 51.90 37.00 18.50 May,09 16365 658 25 40.21 26.32 13.16 June,09 14520 706 26 48.62 27.15 13.58 July,09 12420 775 27 62.40 28.70 14.35 Aug.,09 16005 1099 24 68.66 45.79 22.90 Sept.,09 21405 1049 25 49.01 41.96 20.98 Oct.,09 18855 960 25 50.91 38.40 19.20 Nov.,09 19202 968 23 50.41 42.08 14.03 Dec.,09 21746 825 27 37.94 30.55 10.18 Jan.,10 21472 750 24 34.93 31.25 10.42 Feb.,10 15641 790 24 50.51 32.91 10.97 Mar.,10 18290 1080 25 59.05 43.20 14.40 In the month of August, normal mesh powder is grinded 1036 M.T. and high Mesh is 63 M.T., hence per unit production is increased. In the month of January, 2010 normal mesh powder grinded 622 M.T. and high mesh powder grinded 128 M.T. and due to moisture in the material per unit production decreased. In all the other months the consumption of unit are normally ranging within 40 to 60 Kg. as informed to the learned assessing officer during the course of assessment proceedings. Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur 29. It was further submitted that the assessee has declared GP rate of 13.02% during the year under consideration, which was 13.69% in immediately preceding year despite of around 20% increase in turnover. In other words, there is just marginal decrease in GP rate. Also, if trading addition of Rs. 70,00,000/- as confirmed by CIT(A) is added back to the GP, it would result in GP rate as high as 23.37%, which is exorbitantly high to achieve practically. It is thus submitted that trading addition of Rs.70 lacs is completely imaginary and deserves to be deleted. In support, reliance was placed on the decision in case of Income Tax Officer Vs. Chohtan Construction Co. 84 TTJ 693 (Jodh) and Sardar Kehar Singh Vs. Commissioner of Income Tax and Others 195 ITR 769 (Raj). In view of above, it was submitted that trading addition confirmed by ld. CIT(A) at Rs.70 lacs deserves to be deleted.

The ld DR is heard who has submitted that the AO has discussed in detail in the assessment order the discrepancies /defects in the books of account of the assessee and had come to a conclusion that production of clay at mines and also the production of clay powder, quantity of clay and clay powder traded by the assessee recorded in the books of accounts are not reliable. Further, the expenses debited in the trading account were also found not verifiable by the AO. Hence, the books of accounts of the assessee were rightly rejected by the AO under section 145(3) of the I.T. Act, 1961 and confirmed by the ld CIT(A). It was further submitted that after rejection of books of accounts, the AO has made addition of Rs.75,00,000/- to profit declared by the assessee on account of suppressed production of Rs.66,43,417/- and other discrepancies noticed by him. On the other hand, the assessee has no doubt furnished a detailed working of the production to show that there was not suppression of production and has also filed copies of the vf/k’kqYd fu/kkZj.k izi= in respect of all the three mines alongwith the reconciliation statement reconciling the quantity of production shown in the vf/k’kqYd fu/kkZj.k izi= 23 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur with the quantity of production shown in the books of appellant. It was however submitted that the appellant could not controvert the finding of the AO that the appellant had failed to produce primary records of the production. The quantity of the production shown in the vf/k’kqYd fu/kkZj.k izi= is also based only on the books of accounts of the appellant. The authority issuing vf/k’kqYd fu/kkZj.k izi= has not made any independent inquiry to find out the actual production of the appellant nor the authority keeps its own independent record for the production made in the mines of the appellant. It was accordingly held by the ld CIT(A) and rightly so that the AO is not bound to accept the quantity of the production shown in the vf/k’kqYd fu/kkZj.k izi= as correct when he had pointed out various discrepancies and defects in the books of accounts of the appellant. The AO has worked out the quantity of suppressed production in very scientific and logical manner, keeping in view the entire working environment of the mines of the appellant. In view of the facts discussed by the AO in the assessment order, the action of the AO rejecting the book results by invoking the provisions of section 145(3) of the I.T. Act, 1961 is to be upheld. It was further submitted that inspite of discrepancies so noticed by the AO and also by ld CIT(A), the latter is more than reasonable as he has restricted the addition of Rs. 75,00,000/- made by the AO to Rs. 70,00,000/- and no further relief may be granted to the assessee. He accordingly relied on the findings of the lower authorities.

We have heard the rival submissions and perused the material available on record and carefully examined the factual matrix of the matter.

In respect of one of the mines owned by the assessee, we find that the Assessing officer has estimated the quantum of suppressed production by considering the removal of overburden from such mine by the excavators and dumpers hired from the external agencies as well as those owned by the Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur assessee. Thereafter, he referred to the period for which the excavators & dumpers were hired from external agencies and used during the year. Further, he referred to the calculation of density of the clay by using the data shown in its sorting payment register. Thereafter, the Assessing Officer referred to the statement, of Shri Raghvendra, one of the mining mate employed at the site, recorded during the course of assessment proceedings and basis his understanding of facts and figures, he determined the length and width of clay beds available for mining, volume and density of clay and has worked out that 1.243 feet of clay is dug out in a day with the help of excavator & labour and where only manual labour is employed, he determined that labour is able to dig out 0.355 feet of clay per day. Thereafter, basis the dimension of the clay bed so determined by him and estimated working days available with the assessee to carry out mining operations, the Assessing Officer has worked out the production amounting to 168,756/- tones of clay in respect of mine No. 8/96 as against 143,099 tons of clay production as shown by the assessee. Basis the same, he arrived at the finding that the assessee has suppressed production to the tune of 25,657 tons which comes to 17.92% of the production declared. Applying the same proportion in respect of other two mines, the AO worked out the suppressed production in respect of other two mines No. 2/95 and 7/96. Further, the Assessing Officer assumed that the production of SGRS grade clay & C grade clay is in 4.1 ratio and basis the sale value is recorded in the books of accounts, has worked out the suppressed production of Rs. 63,13,099/- during the year. Further, the AO has alleged that the assessee has not produced the primary records like the dispatch receipts to truck drivers for taking the clay so dug out from the mining area to storage area and from there, for dispatch to the customers.

Per contra, the contention of the ld AR on behalf of the assessee is that the production register in which entries of production are made on daily basis is 25 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur the basic and primary record. It was further submitted that its mining operation comes under the jurisdiction of State Mining Department wherein both extraction/production and dispatches are closely monitored by the Mining Department at the check post before the clay is finally dispatched to the customers and ravana receipts are issued to trucks by the mining department for the purpose of determination of royalty. It was further submitted that the assessee could not making any sales from the mines without the ravana receipts, and the bills were made for all the ravanas issued and no difference was pointed out by the Mining Department in the production and sales declared by the assessee. In support of such contention, copy of royalty assessment orders, copy of monthly returns, details of production at mines and dispatches from the mines with reconciliation with the production and dispatches as per monthly returns declared by the assessee and assessed by the Mining Department were furnished before lower authorities, however the same were not considered nor any discrepancy was pointed out. It was further submitted that royalty assessment was made by the Mining Department after verifying all the records maintained i.e. production register, ravana register and sales bills etc. There is no difference in the day to day production shown by the assessee and worked out by mining department officials and that recorded in the production register maintained at the mines. There is also no difference in production and dispatches made by the appellant as shown in the royalty assessment made by the mining department. Regarding observations of the ld. CIT(A) that such royalty assessment by Mining Department were based on the examination of same books, it was submitted that the same is not correct as ravanas were issued by the department itself, they have the records of all the ravana issued, which are reconciled with the Ravana given to the truck drivers. At check post barrier, vehicle is weighed and after cross checking and matching the mined item as well as its weight, the truck is allowed to leave and royalty is charged accordingly. Thus, the assessment done by mining department is a 26 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur reconciliation of their record with assessee’s record. It was further submitted that verification of the production done at mines comes under the jurisdiction of Mining Department where officials have more technical knowledge and are more equipped for computing/verifying production shown from mines and whose assessment should be given credence and should be accepted by Income Tax Department unless some contrary positive evidence or material is brought on record which demonstrate suppressed production and ultimate sale thereof. It was further submitted that ld. AO has estimated the quantum of production by applying certain formulas in a clumsy and round about manner which were not at all required and moreover the basic figure for the same has been taken purely on estimated basis on the very generalized statement of one Shri Raghvendra, the mining mate, whose main responsibility was of safety of mine. The ld.CIT (A) has just confirmed the same by merely stating that ld.AO has derived the suppressed production in logical manner, without appreciating that AO has merely done in a roundabout manner and rather reverse working and even for this working, ld. AO has taken estimated generalized figure instead of a specific and day-to-day production figures which are maintained by assessee and duly submitted during the course of assessment proceedings.

We agree with the contention so advanced by the ld. AR that as far as the determination of quantum of clay which can be extracted/produced from mines is concerned, it is clearly a complex and technical matter involving understanding of the topography of the area where mines are located, the methodology and process of extraction/production involved, the machinery and labour employed as well as various environmental and related regulatory matters. Therefore, where the Assessing officer had some apprehension in terms of non declaration of the requisite production/extraction, as we can see from reading of initial part of the assessment order, in our view, he is well within his jurisdiction to carry out further examination and can also record the 27 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur statement of employees of the assessee working at the mining sites but at the same time, before arriving at the final conclusion, he should have referred the matter to the State Mining Department and sought the opinion and assistance of the domain experts in the field of mining who have the requisite qualification and experience in the matter. We find that similar matter had come up for consideration before the Hon’ble Andhra Pradesh High Court in case of CIT vs. Shri Girija Smelters (P) Ltd., (Supra) wherein the relevant findings read as under:

Similarly, the Hon’ble Supreme Court in the case of Saraswati Industrial Syndicate Ltd. (Supra) has held that neither the ITO nor the High Court were entitled to make statements of technical matters for which no basis has been laid down on record and the relevant findings reads as under:- “6. We can understand that the authorities declined to rely the experts' opinion because he was not produced for cross-examination. But neither the ITO nor, indeed, the High Court were entitled to make statements on 29 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur technical matters for which no basis had been laid on the record by either the revenue or the assessee. If the High Court was of the view that further material was required, the appropriate course was to require the Tribunal to take further evidence and draw up a supplemental statement of case.”

In the instant case, however, we find that the Assessing Officer has proceeded ahead and basis his own investigation and understanding of the mining process involved, and basis his own calculation and understanding of variables has worked out the quantum of clay which could be extracted from one of the mines owned by the assessee without referring the matter to the domain experts in the field of mining such as geologists and mining engineers. Such an action on the part of the Assessing officer cannot be upheld especially in light of aforesaid decisions wherein the Courts have held that “an Income Tax Officer cannot carry arrogate to himself the power to determine the quantity of production, or to utter a final word on the intricacies of the manufacturing process, that too, without referring to any reliable material. The Assessing Officer, in the instant case, was totally unsuited for undertaking the activity of determining the exact production of the material, which itself involves very complicated procedures.” Further, we find that basis such calculation, the Assessing officer has determined the shortfall or suppression in the clay production vis-à-vis production disclosed by the assessee in respect of one of the mines. Further, using the same percentage of suppressed production, he has proceeded ahead and worked out proportionate suppression of production in the other two mines without getting into specific of functioning of such mines which again cannot be accepted. Without getting into the merits of the formula so arrived by the Assessing officer, as we find ourself not competent enough to comment upon, we find that effectively, the AO has tried to determine the quantum of clay which could potentially be extracted from the 30 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur mines and that’s where whole case of the Revenue rest. The question for consideration here is not the potential extraction of clay rather the actual clay which has been extracted from the mines and which has been sold/dispatched during the year under consideration and which has not been disclosed in the return of income and what credible material is available on record in support of such findings. We however find that there is no material on record and no finding recorded by the AO that quantum of clay so determined by him as part of suppressed production has been actually dispatched and sold and more so, when the assessee’s activities comes under the jurisdiction of State Mining Department and both its production and dispatches are closely monitored by the Mining Department. As held by the Hon’ble High Court in case of CIT vs. Shri Girija Smelters (P) Ltd (supra), the occasion to levy income tax would arise, only when the product in question was found or alleged to have been sold, and the sale proceeds, constituting income were not reflected in the returns. It was not even alleged that the product shown in the form of discrepancies, was sold at all. Further, we find that royalty assessments were carried out by the Mining Department without any adverse findings and copy of royalty assessment orders, copy of monthly returns, details of production at mines and dispatches from the mines and reconciliation thereof were admittedly furnished before the lower authorities and even acknowledged by the ld CIT(A) and no discrepancy has been highlighted therein either by the AO or by the ld CIT(A) and there is no material on record which highlight dispatches from the mines without paying the requisite royalty. In light of aforesaid discussions, we therefore find that there is no basis for alleging suppression of production by the assessee and the findings of the lower authorities are hereby set-aside.

In light of aforesaid discussions and in the entirety of facts and circumstances of the case, we donot find any justifiable basis for rejection of 31 Ms Shanta Sales Corporation, Jaipur Vs. ITO, Jaipur books of accounts by the Assessing officer. Consequentially, the addition so made by the AO and confirmed by the ld CIT(A) is hereby set-aside and directed to be deleted.