ASSISTANT COMMISSIONER OF INCOME TAX (CENTRAL), JABALPUR vs. M/S SHOBHA MINERALS (KEVLARI), JABALPUR

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 1 IN THE INCOME TAX APPELLATE TRIBUNAL JABALPUR BENCH, JABALPUR BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI SANJAY ARORA, ACCOUNTANT MEMBER ITA No.51/JAB/2018 Assessment Year:2015-16 M/s. Shobha Minerals (Kevlari) vs. Asst. CIT, 765 Near Anand Talkies, Central Circle, Napier Town, Jabalpur Jabalpur [PAN: ABIFS 4245A] ITA No.77/JAB/2018 Assessment Year:2015-16 Asst. CIT(Central), vs. M/s. Shobha Minerals (Kevlari) Jabalpur 765 Near Anand Talkies, Napier Town, Jabalpur [PAN: ABIFS 4245A] (Appellant) (Respondent) ITA No.52/JAB/2018 Assessment Year:2015-16 M/s. Shobha Minerals (Dhamki) vs. Asst. CIT, 765 Near Anand Talkies, Central Circle, Napier Town, Jabalpur Jabalpur [PAN: ABMFS5899N] ITA No.78/JAB/2018 Assessment Year:2015-16 Asst. CIT(Central), vs. M/s. Shobha Minerals (Dhamki) Jabalpur 765 Near Anand Talkies, Napier Town, Jabalpur [PAN: ABMFS 5899N] (Appellant) (Respondent)

Appellant by Shri Rahul Bardia, CA Shri Darshan, Singh, Advocate

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 2 Respondent by Shri H.P. Meena, DR Date of hearing 13/12/2019 Date of pronouncement 24 /02/2020

O R D E R Per Sanjay Arora, AM: This is a set of four appeals, being cross appeals for assessment year (AY) 2015-16 in respect of two Assessees, being two partnership firms in the business of mining of Iron ore (Shobha Minerals (Kevlari)) and Manganese ore (Shobha Minerals (Dhamki)), contesting their assessments for the said year under section 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter), since partly confirmed by the Commissioner of Income Tax (Appeals)-1, Jabalpur (‘CIT(A)’) vide his separate orders dated 17/1/2018 & 18/1/2018.

The background facts 2. The facts and circumstances of the case, and the respective cases of the parties being the same for both the assessees, the appeals were posted for hearing and, accordingly, heard together. The firms are also related inasmuch as Sh. Nitin Sharma has 50% share in both the firms, as also in M/s. Sagar Stone Industries, Jabalpur, another associate concern. For the sake of convenience, we shall, for narration purposes, state the facts with reference to Shobha Minerals (Kevlari) (with reference to which the appeals were argued), noting the differences, where deemed relevant, for Shobha Minerals (Dhamki), in brackets. Both the firms, as also Sagar Stone Industries (SSI), were subject to search and seizure operation u/s.132(1) of the Act on 16/10/2014, which covered both their office premises and mining sites. The assessee had, vide lease deed dated 19/6/2007 (29/8/1992), been granted lease of 4.03 hectares (3.60 H.) of land at Village Kevlari (Gandhigram), District

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 3 Sihora, from the mining department of the state government of Madhya Pradesh. The assessment and valuation of stock in case of mining being a technical matter, assistance, by issuing commissions u/s.131(1)(d), was obtained by the Revenue from Indian Bureau of Mines, Nagpur (IBM) and Mineral Exploration Corporation Ltd., Nagpur (MECL) for carrying out volumetric measurements and chemical analysis (of the samples) at the Keolari and Dhamki mines respectively. The IBM’s report dated 04/12/2014, furnished having regard to MECL’s report dated 29/11/2014, is as under: BLOCK A Table 1A Location of Dump Volume Density as per Quantity (MT) Mining MECL 1 313.40 3 940.200 MECL 3 1,757.30 3 5,271.900 MECL 2,4,7,12 & 15 19,695.00 3 59,083.500 MECL 8,9A,10,1&11 16,322.00 3 48,966.300 MECL 14 557.10 3 1,671.300 MECL 13 6,487.40 3 19,462.200 MECL 13 141.80 3 425.400 MECL 13 3.60 3 10.800 Total 1,35,681.600

BLOCK B Table 1B Location of Volume Bulk Quantity Average Grade Remark Dump Density (MT) (Fe %) G 1 423.8 3.06 1296.82 Sample has not Sub Grade been collected Dump by MECL G 2 517.3 3.06 1582.93 Sub Grade Dump G 3 12915 3.06 39518.67 Sub Grade Dump G 4 285.3 3.06 873.01 Sub Grade

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 4 Dump Total 14141 43,271.43 (MT => Metric Tonnes) As per the reports submitted by MECL, the average iron grade of the saleable stock of iron ore (1,35,681.6 MT/Table 1A) was in the range of 50% and above, varying between a low of 50.12% (Dump B) to a high of 54.32% (Dump F) (reproduced at pages 12 & 13 of the assessment order). No samples were drawn by it from the sub-grade dumps. Sh. Nitin Sharma, partner, in his sworn statement on 7/1/2015 and 8/1/2015, stated that the firm was paying royalty to the Minerals Department (of the State Government) on sale of iron ore at iron grade below 55%. The relevant part of the statement is also extracted at page 26 of the impugned order. The same therefore meant that the entire stock of 1,35,681.6 MT of iron ore was saleable as regular production. These results were compared with the details of the stock-in-hand as reported by the assessee to IBM (i.e., the Regional Controller of Mines, Jabalpur) per it’s monthly return, i.e., as on 31/10/2014, as under: Table 2 Sr. No. Particulars Quantity (MT) as on Remark 31.10.2014 1. Iron-Ore 45,322.655 1) As per mining 2. Laterite 2,376.750 return filed by 3. Manganese 9,875.195 the assessee 4. ROM 44,800.000 firm Gross Total 102374.600 2) Subgrade 5 Sub Grade Dump 1,92,400.000 Dump Includes Road, Ramps & Other Developments Total 2,94,774.600 (emphasis, by underlining, ours) The assessee, in the view of the Assessing Officer (AO), thus, had an excess stock of iron ore at 90,358.945 MT (i.e., 1,35,681.600 – 45,322.655) as on

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 5 31/10/2014. (The corresponding figure for Shobha Minerals (Dhamki) is 16,828.812 MT, the threshold limit being 10%, on which royalty was being paid, even as MECL reported the average grade of stock to be in the range of 13%-18%). The excess physical stock meant that the assessee was engaged in under-reporting of production and, consequently, out-of-book sales of ore production. This was further sought to be refurbished by the AO with reference to the statements u/s. 132(4) of Sh. Ghanshyam Patel, Mining Manager, dated 17/10/2014 and Sh. Nitin Sharma (NS)(during search & seizure on Samdariya Group (SG) in May, 2013). Sh. Ghanshyam Patel, in answer to Questions 11, 12, and 16, admitted to multiple (3 - 4) trips on a single transit-pass (TP), justifying the non-recording of the weight on the TP dated 15/10/2014 on that basis. Further, the seized material (S-4/LPS – 13)(pgs. 1 – 131) (of the search on SG in May, 2013) revealed unaccounted cash sales by Shobha Minerals (Kevlari), which was admitted per sworn statement/s, filing returns by it surrendering an aggregate amount of Rs.813.97 lacs for AYs. 2011-12 & 2012-13 (incorrectly noted at Rs. 401.44 lacs in the impugned order). Accordingly, applying a sale rate of Rs.3300 per MT (pmt), i.e., as on sales to Sunflag Iron & Steel (P.) Ltd., Bhandara, during the relevant year, to the excess stock of 90,358.945 MT of iron ore, he proposed an addition for Rs. 2981.85 lacs. The assessee, in reply, filed on 19/12/2016, explained the excess stock on the basis of the material lying in the subgrade dumps (1,92,400 MT)(refer Table 2). The subgrade dumps contained, besides unusable waste, also valuable minerals, viz. iron ore, manganese, laterite, etc. As per the mining plan (which prescribes the standard quantity of these constituents in the subgrade waste) for 2013-14 to 2017-18, approved by IBM, the iron ore component is 85%, with manganese & laterite ores being at 5% and 10% respectively. The AO, thus, had gone wrong in not including the iron ore constituent in the low-grade material, or 1,63,540 MT

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 6 (i.e., 85% of 1,92,400 MT), considering which the iron ore stock works to 2,08,862.655 MT (i.e., 45,322.655 MT + 1,63,540 MT). There was, accordingly, an excess book-stock of 73,181.055 MT (i.e., 2,08,862.655 – 1,35,681.600), or 36,400.34 MT (if the iron ore component (at 85%) in the sub-grade dump (43,271.43 MT), or 36,750.715 MT, is also taken into account), i.e., instead of a shortfall of 90,358.945 MT, as inferred by the AO. Further, it is undisputed that the overburden (i.e., the initial excavation of the top soil), had been used for filling pits, laying roads, building retaining wall, back-filling, etc. No excavated material could, in fact, as per the Mining Act, be removed from the site without permission and, besides, this material is to be used for these purposes. This explains the excess book-stock inasmuch as the assessee had not kept any record in respect of the waste/low-grade material used for such purposes, i.e., laying of roads, ramps, retaining wall, back-filling, etc. While the same did not find acceptance with the AO, it did, i.e., in principle, by the ld. CIT(A). In his view, however, it could not be said that the assessee had thereby explained the entire shortfall (in physical stock), which he estimated at 35% of the alleged excess book-stock (36,400 MT). The balance 65% (i.e., 23,660 MT) remained unexplained, implying its unaccounted sale. The AO had also gone wrong in valuing the same at Rs. 3300 pmt, which he reduced to Rs. 2800 pmt on the premise that the sale rate would vary over different grades of iron. Again, it was trite that the stock would be valued at cost, so that the escapement of income from tax was the excess of the sale value over cost. Applying the obtaining gross profit rate (50.69%) on the said out-of-books sales, i.e., Rs. 662.48 lacs (23,660 MT x Rs. 2800 pmt), he, accordingly confirmed the addition for ₹. 335.81 lakhs, deleting the balance addition of Rs. 2646.04 lacs (Rs. 2981.85 lacs – Rs. 335.81 lacs). Aggrieved, both the assessee and the Revenue are in appeal.

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 7 The respective cases 3.1 Before us, the assessee’s case, represented by Sh. Rahul Bardia, was that it was not disputing the reports by the technical agencies, i.e., the IBM and MECL, but the inference/s drawn by the Revenue authorities there-from. The AO had, on receipt of the assessee's reply dated 09/12/2016, called for its’ comments thereto from the IBM, which was responded to by the latter only on 12/1/2017, even as the assessment, getting time barred on 31/12/2016, was accordingly proceeded with by the AO, framing assessment/s on 23/12/2016. The assessment order/s is, thus, sans the consideration of the said reply, or, in any case, the IBM’s comments thereto, while that by the ld. CIT(A) is upon considering the same. The first appellate authority had, however, gone wrong in accepting the assessee’s explanation in part. The assessee had since 2008 being accumulating both waste and subgrade material, which could neither be disposed of nor processed further – and which would also be apparent from the monthly returns being filed with the office of the Regional Controller of Mines, Jabalpur, and had therefore to be used for pit-filling, etc. It is in fact on account of this, i.e., the extensive use of overburden (top soil), waste, and other subgrade material for the purpose by the assessee over the years, that the IBM did not estimate the excavation by the assessee to date through the volumetric exercise, which the Revenue had required it to, restricting its’ engagement to an assessment of the inventory at the site by, again, volumetric exercise, the weight of different dumps being worked out on the basis of the bulk density (as per the approved mining plan). It was only recently that a technology had been developed and made commercially viable, enabling a cost-effective retrieval of iron (and other minerals) from the low-grade material (i.e., with iron ratio below 50%). The assessee had accordingly applied for processing of such material in 2012, for which sanction was accorded vide the approved Mining Plan on 28/5/2013 (PB-2, pg. 157)(MP-2).

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 8 A beneficiation plant had accordingly been set-up by SSI, in progress at the time of search, in December, 2014, to which sub-grade material was being sold since January, 2015. This was as the beneficiation process had pollution issues, and which could not therefore be installed by the assessee-firm itself; its’ site being located close to the National Highway. Prior thereto, and even subsequent thereto, however, the low-grade material continued to be used for various purposes, viz. filling of dumps; roads; pits and ramps; retaining wall, which is a continuous activity, with in fact the low-grade material being regularly shown in the monthly returns under the head ‘Dump workings’. Complete records are available for the material sold to SSI for further processing by it, as also with SSI. It is only thereafter, i.e., January, 2015 (the month from which SSI commenced operations) onwards, that the said material could, upon incurring cost, be converted into saleable material, the price of which is very sensitive to the iron (Fe) ratio, fetching for lower grades thereof in the iron ore a price as low as Rs. 400 pmt. The mineral content (viz. iron, manganese and laterite ores) in the various stocks, thus, has to be considered while comparing the book-stock with the physical stock, and which has not been. This constitutes the major flaw in the AO’s working, which though has been set right, accepting the assessee’s claim, by the ld. CIT(A). It is by taking the iron ore ratio in the subgrade material that the same works to 2,08,862.655 MT, resulting in, thus, a surplus, i.e., an ‘excess’ book-stock, which (excess) is again only apparent, and stands sufficiently explained by the assessee per its’ reply dated 15/12/2016 (PB-2, pgs. 1-21). The said excess, he would continue, is on account of the non-adjustment of the waste/subgrade material toward filling of pits, roads, ramps, retaining wall, referred to earlier. Surely, the same can only be broadly assessed, and not to a precise quantity, i.e., due to the very nature of the exercise. In this regard, it may be relevant to state that an inspection of the assessee’s site was carried out by IBM in January, 2014,

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 9 noting certain violations under the provisions of the Mineral Conservation and Development Rules, 1988. Vide its’ letter dated 13/01/2014, it was accordingly alleged by IBM that the mining operations by the assessee were not being carried out in accordance with the approved scheme, determining an extra excavation to the extent of 10 metre depth. The assessee’s mining operations were accordingly suspended vide its’ order dated 05/02/2014. The matter, on a complaint being filed by IBM, travelled to the court of the Magistrate, who was pleased to order the release of the suspension upon payment of penalty of ₹.35,000 by the assessee (vide order dated 25/3/2014/PB-2, pgs.131-132). Per contra, no excavation, i.e., with reference to the approved mining plan, apart from that corresponding to 10 mtrs. depth, was found on physical inspection carried out only a few months prior to the date of the search. Needless to add, the said extra excavation was filled-up by the assessee, conveying the same to IBM vide its’ letter dated 12/2/2014. The assessee, in support of its’ various claims qua user of sub-grade material/waste, filed a certificate from a technical expert (Geologist) (at PB-2, pg. 139), justifying the absorption of the entire excess of 36,400 MT. The ld. CIT(A), however, did not – and without citing any definite reason/s, accept the same. Inasmuch as, however, the user of the overburden/waste/low-grade material for back-filling, etc. was an admitted fact (refer para 7.1.6 of the assessment order), he accepted the short-fall (in the physical stock), as explained, to the extent of 35%. This was clearly arbitrary. For the balance 65% (23,660 MT), he applied the gross profit rate disclosed by the assessee for the current year, estimating its’ sale value by lowering that adopted by the AO, to Rs. 2800 pmt, on being shown price variability. His action in doing so is wholly untenable. No case for an addition, to any extent, is made out. He would, on a query by the Bench, confirm that the returns agree with the books of account, based as they were on the records being maintained by the

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 10 assessee-firm. He could, however, offer no satisfactory explanation/answer to the basis of the sale rate of Rs. 2800 pmt adopted by the ld. CIT(A), whose order does not state any. 3.2 The ld. CIT-DR, Sh. Meena, would, on the other hand, submit, equally vehemently, that the assessee had no case and, in fact, had been allowed unwarranted relief by the first appellate authority. The reports by the Government Agencies, which are technical experts in the field, specifically requisitioned by the Revenue, are not disputed, even as clarified by Sh. Bardia in his pleadings. Where, then, is the scope for taking any different view in the matter; the physical stock (as determined by IBM) and book-stock (as per the assessee’s returns) of iron-ore, and thus the wide difference between them, being admitted? It is a clear case for application of sections 69A/69B, with the Revenue in fact not extrapolating the difference over the preceding years, which in fact it ought to have done, particularly given the assessee’s history of the searches/surveys in the past resulting in discovery of undisclosed income/assets. Further, there has been extra/unauthorized excavation, in contravention of the Mining Plan, detected on physical verification by IBM in January, 2014, again admitted, leading to the suspension of the assessees’ mining license by the Regional Controller of Mines (IBM). The Revenue had also not taken into account the difference/s in the stock of laterite and manganese ores, perhaps on account of nominal value/s thereof, which nevertheless it ought to have also included. The ld. CIT(A) should have corrected these errors in assessment; his powers being coterminous with the assessing authority, rather than accepting the assessee’s case. The subgrade dump, whatever may be it’s value, has also not been taken into account by the Revenue. Where, then, is the question of reckoning the iron (Fe) content therein, and then adding the same to the stock of the finished

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 11 goods? The additional book-stock of subgrade material, i.e., 1,49,128.57 MT (1,92,400 MT - 43,271.43 MT), could be either used for laying roads; ramps; pit filling; retaining wall, which is the admitted position, or sold out-of-books. The latter, however, is the only inference arising qua the additional finished stock inasmuch as the same is admittedly not used for any other purpose. It is accordingly this latter course (also detected during search in the form of TP dated 15.10.2014 on which weight had not been recorded, admitted by Shri Ghanshyam Patel, the firm’s Mining Manager), which the ld. CIT(A) has estimated at 65% of the admitted shortfall of 36,400 MT, i.e., 23660 MT, qua finished stock. Further on, the various production costs having been already fully absorbed in the books, it is the entire sale value that would stand to be added, rather than only the gross profit thereon. 3.3 The ld. counsel, Sh. Bardia, would, in rejoinder, submit that the consideration of iron ore component at 85% in the sub-grade material is as per the approved Mining Plan and, in fact, endorsed by IBM in its’ reports. In its’ report dated 04.12.2014, reproduced (in the scanned form) at pages 9-11 of the assessment order, the iron (Fe) recovery in the sub-grade dumps (4 in number), quantified at 43,271.43 MT, has accordingly been taken by it at 36,780.71 MT (at pg. 11). The assessee is therefore justified in including the iron ore component of the sub-grade dump in comparing the book-stock with the physical stock. Two, Sh. Ghanshyam Patel, the Mining Manager, retracted his statement/s dated 16.10.2014 and 17.10.2014 vide a sworn affidavit dated 04.10.2016 (PB-2, pg. 182), which was furnished before the AO in the course of the assessment proceedings. It was explained that the TP dated 15.10.2014 was for transportation of construction material, purchased by SSI, thereto, which was necessitated due to the said material having been dumped (by the supplier) near Keolri mine site, as there was no approach road to the site of

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 12 SSI. On query, he confirmed the valuation of the sub-grade dump stock (as at the year-end) to be nil, as the entire excavation/production cost had been already absorbed in the respective years, i.e., toward production of finished goods and, further, that it’s sale value was at ₹. 400 pmt. He would though add that both the AO and the ld. CIT(A) had not considered the assessee’s alternate plea, made without prejudice, i.e., that inasmuch as the entire excavation cost, as incurred, had already been absorbed (in valuing the book- stock of finished goods), the excess physical stock thereof, irrespective of its’ quantum, would stand to be valued at nil. This is as the value of the excess stock is to be at cost, representing the money expended/invested by the assessee on its’ acquisition/production. 3.4 The hearing, which was spread over two days, with the Bench making several queries, was closed at this stage, requiring the parties to furnish a synopsis of their arguments, which were submitted by the Revenue and the assessee on 16/12/2019 and 30/12/2019 respectively (copy on record). The assessee, enclosed along with, a copy of the India Gazette Notification dated 16/10/2009, copy of which stands furnished by it before the ld. CIT(A) as Annexure 1 to its’ reply dated 23/11/2017 (reproduced at para 6.2.2 of the impugned order). The assessee also furnished the monthly return (iron ore) for June, 2014, missing in the paper-book (PB). The same were taken on record. The Mining Plans, referred to by the assessee during hearing, being voluminous, were also retained for any reference thereto that may be required while adjudicating the appeals.

Discusssion & Analysis 4. We have heard the parties, and perused the material on record.

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 13 Formulation of the issues 4.1 As would be apparent from the foregoing, the issues arising for adjudication are as under: [ a). whether any addition under section 69A or, as the case may be, s. 69B, i.e., toward excess stock of finished goods of iron ore (manganese ore) is maintainable in the facts and circumstances of the case, i.e., in principle? b). whether, in addition to the addition toward unexplained physical stock, or even otherwise, any addition toward excess book-stock of any saleable material is called for in the facts and circumstances of the case? c). the value at which the addition/s, if any, referred to at (a) and/or (b) above, is to be made. These are also the three issues arising out of the several grounds assumed by the parties before us. 4.2 At the outset we note that the moot question arising is as to what constitutes finished (saleable) iron ore, i.e., its defining attribute, distinguishing it from the subgrade material; the latter being not readily saleable, and being now (since January, 2015) sold to the beneficiation plants at a fraction of the price fetched for the finished stock. We say so as while ‘finished-good’ is on physical stock-taking found to be in excess, the ‘sub- grade’ found short (i.e., at 43,271.43 MT, as against a book-stock of 1,92,400 MT), so that correct categorization becomes crucial. However, we observe no dispute either as regards the quantity of the iron ore found in various dumps or as to its classification (as finished-good or subgrade). The processed iron ore in dumps, quantified at 1,35,681.6 MT (by IBM), which quantity is not in dispute, would stand to be categorized as finished iron ore, as done by IBM (& adopted by the Revenue), considering that the grade thereof varies between 50.12% to 54.32% (refer para 2), which agrees with the consideration by the assessee of that with grade below 50% as subgrade, coupled with the fact of

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 14 the assessee paying royalty on the sale of finished goods under the grade class ‘below 55%’ (refer paras 2, 3.1). The quantity of laterite and manganese ores has neither been physically taken nor, consequently, compared. How can, then, even as ld. CIT-DR argues, the AO be faulted with?

4.3 Before we may examine the assessee’s case, it would be relevant to, and we accordingly begin by, delineating the mining process as explained by the assessee per its’ various submissions before the Revenue, as well as during hearing, and also consider the manner of its’ reporting. The excavation, after removal of the topsoil (overburden/OB), is firstly placed at the pit-head. This is also called ROM (run on mill), and is reported in the monthly returns under the section ‘Open cast working’. The material, after being dumped at a separate place at the site, is screened and crushed with a mobile crusher/screener, and again screened, and then sorted manually. The output is in the form of ‘fines’ (powder form, i.e., particle size: 0-10 mm), arising on first screening; and ‘lumps’ (granules/pebbles of different sizes: 10-40 mm), and reported accordingly, grade-wise, and kept in separate dumps. This is the saleable iron ore, the iron grade of which in the case of Keolari mines, as explained, varies between 50%-55% and, accordingly, reported under the grade class ‘below 55%’ in the monthly (annual) returns. This saleable production, which is almost equally divided between lumps and fines, however, extends to about 20% of the total production. What remains, i.e., the balance 80%, is the low-grade (or sub-grade) material, i.e., with iron grade <50%, which is stocked separately in/as what are called ‘sub-grade dumps’, categorized as ‘Dumped workings’ in the monthly reports. Further, as afore- noted, the iron ore ratio, as per the Mining Plan 2 (for 2013–14 to 2017–18) is 85%, the balance 15% being laterite and manganese ores. The monthly report

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 15 for October, 2014 for iron ore (at PB-2, pgs. 55-57), to which our attention was also drawn during hearing, is as under: Table 3 PART- II (PRODUCTION, DESPATCHES AND STOCKS (Unit of Quantity in Tonnes) 1. Types of ore produced: (Tick mark, whichever is applicable) a) Hematite √ Hematite b) Magnetite 2. Production and Stock of ROM ore at Mine-head Category Opening stock Production Closing Stock a) Open Cast 44800.00 1500.00 44800.00 Working b) Dump 192400.00 NIL 192400.00 workings 3. Grade-wise Production, Despatches, Stock and Ex-Mine of Processed ore: Grades (% of Fe content) Opening Production Dispatches Closing Ex-mine stock at from mine stock at price mine head head mine-head (Rs./MT) i.) Lumps:- a) Below 55% 17724.885 NIL 960.725 16764.16 950 b) 55% to below 58% NIL NIL NIL NIL NIL c) 58% to below 60% NIL NIL NIL NIL NIL d) 60% to below 62% NIL NIL NIL NIL NIL e) 62% to below 65% NIL NIL NIL NIL NIL f) 65% and above NIL NIL NIL NIL NIL ii) Fines:- g) Below 55% 30821.255 1500.00 3762.760 28558.495 950 h) 55% to below 58% NIL NIL NIL NIL NIL i) 58% to below 60% NIL NIL NIL NIL NIL j) 60% to below 62% NIL NIL NIL NIL NIL k) 62% to below 65% NIL NIL NIL NIL NIL l) 65% and above NIL NIL NIL NIL NIL NIL NIL NIL NIL iii) Concentrates …….. 4. Details of deductions used for computation of Sale price (Ex-Mine)(Rs./Tonnes) Deduction claimed Unit (Rs. Tonne) Remarks a) Cost of transportation 200 NONE (indicate loading station and Distance from in

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 16 Remarks) b) Loading and Unloading 300 NONE charges c) Railway freight if NIL NONE applicable (indicate destination and distance) d) Port Handling NIL NONE charges/export date (indicate name of port) e) Charge for Sampling and 50 NONE Analysis f) Rent for the plot at NIL Own stocking yard g) Other charges (specify 400 Separating materials & clearly dewatering expenditure Total (a) to (g) 950 NONE 5. Sales/despatches effected for domestic consumption and for Exports: Grade Name of For domestic Consumption For Export despatch (indicate whether for sale or captive consumption or Export) Consignee name Quantity Sale Country Quantity F.O.B. and Registration value Value number as (Rs.) allotted by Indian Bureau of Mines to the Buyer # # Below Domestic sale Sagar Stone 3762.76 Rs. 1100 NONE NIL NIL per tonn 55% Inds. FINES Ashtvinayak Trd. Below IBM/12676/2012 960.725 Rs. 3050 per tonn 55% Sun flag LUMPS IBM/560/2011 ## consignee name and Registration number as allotted by the Indian Bureau of Mines to the buyer (to indicate separately if more than one buyer) for the top five despatches in terms of Quantity for the remaining consolidated figure shall be reported with details of despatches as Annexure. Note: Place: JABALPUR Signature: Sd/- DATE: 24/12/2014 Name in full: G. Patel Designation: Owner/Agent/ Mining/Engineer/Manager

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 17 (*) Part-I of the return contains the assessee’s (and its’ mines’) particulars, and is therefore not reproduced. The graphic depiction of the process, as explained, would be as under: Table 4A Excavation (100) (ROM)

Hematite (85) Laterite (10) Manganese (5)

(sold as such) (sold as such)

Fines (8.5) semi-processed (76.5) (saleable) (*)

Lumps (8.5) Low-Grade (68)(sold as sub-grade material to beneficiation plants) (saleable) (*) (*) sold to pelletaization plants. Thus, while the material travels from the pit-head to stacks to finished good and sub-grade dumps, in the report the production is taken directly from the ‘raw material’ stage (open cast working) to ‘finished goods’, leaving the quantity in the sub-grade dump, being reported under the head ‘Dump workings’, undisturbed, except where there is an accretion thereto. This also explains why the raw material is constant, except where production for the month comes out of the existing ROM and not from fresh excavation. Monthly reports for June to October, 2014, placed on record (PB-2, pgs. 22- 66), did not contain the report for June, 2014 (for iron ore), but for November, 2014 instead, and was therefore placed on record. The production data for the period June to November, 2014, as reported, is as under:

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 18 Table 4B Production/Month June July August September October November Total (of 2014) (MT) Lumps 5000 8000 8000 - (3050) - (3050) 1000 (2000) 22,000 (2775) Fines 15000 12000 (1750) 12000 (1750) 2000 (1100) 1500 (1100) 1500 (400) 44,000 (975) Total 20000 20000 20000 2000 1500 2500 66000

NB: Qty. in MT. Figures in brackets represent the reported sale rate in Rs./MT; sale quantity is not stated in the Table. The entire production for the months of June to November, 2014 is of iron ore, save of laterite ore, at 500 MT for June, 2014 and, further, in the form of ‘lumps’ and ‘fines’. The iron ore produced during October & November, 2014 is entirely ‘Fines’, at 1500 MT each, sold at 3762.760 MT (to SSI) at Rs.1100 pmt. The sale under the ‘Lumps’ category is to the pellet plants, at rates varying from Rs. 2000 pmt to Rs. 3050 pmt. The accretion to the stock of sub- grade, again in no particular ratio, is only for July & August, 2014, at 10,000 MT each, for which period the iron ore production is at 40,000 MT. It is thus clear that: a) the production may be of iron ore only, i.e., without any waste generation, or of the sub-grade material, as for the months of June, Sept. to Nov., 2014; b) the iron ore production from Keolari Mines is of less than 55% grade, though falls under two categories, ‘Lumps’ and ‘Fines’, varying largely in their sale values, which also vary drastically within the same category. This could not be without some basis; c) the production of manganese and laterite ores is not a concomitant of the iron ore production; is of nominal quantity (and value), with no sales for the months of June to October, 2014. Why, it is not clear, or understood, should the ROM continue to be not processed; in fact, to any extent, to yield finished goods (FG)? This is any

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 19 firm would ordinarily consume its’ existing raw stock for production, rather than setting it aside & acquiring fresh stock for the purpose. Why, again, should not the sub-grade material, which arises on physically processing (crushing, screening and sorting) the raw stock, being, as stated, at about 80% of the iron ore processed, get generated – and in that ratio, along with the regular finished stock production (which is at 66,000 MT during the period for which the reports are available)? The non-generation of waste is understandable in the absence of any mention thereof in the current Mining Plan (for 2013-14 to 2017-18)(MP-2). The laterite and manganese ore production should, again, be about 90% of the total finished iron ore production, and in the ratio of 2:1, i.e., in terms of the Mining Plan itself, while it is only at 500 MT (i.e., as against an iron ore production of 66,000 MT). The production (of iron ore) is saleable, and which position, besides being borne out by the record, agrees with the assessee’s case of iron ore being saleable in the grade class 50%-55%, with that below 50% being liable to be regarded as sub-grade; the assessee paying royalty on sale of finished goods under the grade class ‘below 55%’ (also see para 4.2, Table 3).

4.4 At this stage we may digress to address the question as to if the saleable iron ore, as physically found, is to be valued at cost, as being alternatively contended by the assessee, or at its sale (net realizable) value (refer para 1.3; Q.(c) at para 4.1 above). This assumes significance as where the physical stock of iron ore is found to be in excess of the book-stock thereof, as the Revenue contends, the same may be of little or no consequence, given that the only cost suffered toward the same, being a resource extracted from earth, is its’ excavation cost, and which may be nominal in comparison to its’ sale value. In fact, even toward the same, the assessee contends to have already incurred and claimed the cost against its’ disclosed production, so that no

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 20 unexplained cost stands incurred, so as to result in any addition in assessment qua the undisclosed production. In our view, the sale (or net realizable) value of such stock is liable to be added, i.e., qua the physical stock, to the extent it is in excess of the book-stock. Its cost of excavation is, firstly, at 50% (approx.) of the sale value, given the disclosed gross profit rate of 50.69%, which profit is in fact higher than that for the preceding years. However, the assessee does not admit of any excess stock at any stage, which thus continues to remain out-of-books (accounts). Thus, while the assessee has this stock as on 31.10.2014, i.e., where so, the same is neither taken into account during the year, nor at the year-end, so that its value escapes being taken into account and, thus, in computing income. The cost (of excavation & processing) thereof, even as argued by the assesse itself, stands already absorbed as part of the regular cost of production. This aspect is in fact irrelevant. Even if regarded as incurred separately, i.e., out-of-books, inasmuch as there is nothing to show that the regular per unit cost of production is inflated to absorb the cost of the undisclosed production, such cost, which stands to be incurred prior to any realization in respect of the excess physical stock, would stand to be disallowed under section 69C, per proviso thereto. As such, either way, the entire sale (net realizable) value of the stock, to the extent in excess of book stock, is liable to be added to the assessee’s income for the relevant year. The second aspect that needs to be clarified in this regard is if, on the other hand, it is, upon examination, found that the book-stock (of finished iron ore) is in excess (vis-a-vis the physical stock), as inferred by the ld. CIT(A), whether any addition toward undisclosed profit is called for and, rather, also if it is the entire sale value, as contended by the ld. CIT-DR, which is to be added. No argument toward this stands raised by the assessee’s counsel, Sh. Bardia, during hearing; the assessee’s case contesting the impugned order

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 21 before us being of the arbitrariness in the ld. CIT(A)’s action in part- acceptance of it’s plea of there being in fact no excess stock of finished iron ore and, rather, the shortfall therein as only apparent, being fully explainable – which is the principal issue on the merits of the case. In our view, an excess book-stock of iron ore as on a particular date would lead to the imminent inference of the unaccounted removal (sale) thereof up to that date. True, it could be argued that the same stands disposed of in books subsequent to 31.10.2014 (i.e., with reference to which date the comparison between the physical and book-stock is being made), so that the profit on its disposal stands duly accounted through such subsequent sales, precluding any separate addition, as made by the ld. CIT(A). There can, however, be no presumption that the said subsequent sale, on which in fact royalty stands duly suffered (& paid), does not represent actual sale, which it purports to, and particularly considering that there is no cessation of production, with the assessee rather claiming that the said period marks the beginning of the season; the period June to October being an off-season due to rains. Why, one may ask, would the assessee act inimical to itself by continuing to perpetuate and, resultantly, further compound an error. Besides, the said sales can only be presumed to be duly receipted by the purchaser (buyer), producing goods on that basis, i.e., represent actual sales. There is neither any contention toward nor any basis for us to presume otherwise. Here it needs to be appreciated that while in case of a trading/manufacturing concern the out-of-books sale could, save where and to the extent there is an understatement of yield, arise only on account of, similarly, out-of-books purchase, in case of a mining concern, the raw stock is to be excavated from earth and does not require acquisition, at a cost, from any outside agency. The excess book-stock, implying the stock being sold out- of-books and, further, prior to the date of search, would thus have income implication despite the sale of finished goods in that (or higher) quantity

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 22 subsequent thereto, which (sale), in the case of a running concern, is a continuous affair. The next question is the quantification of the income that has escaped assessment. The same would be at the gross profit (or trading margin) obtaining. The reason is simple. Being part of the book-stock, i.e., production, duly accounted, which remains undisposed in accounts (though not found physically), cost thereof would stand already borne and duly reflected in accounts. There can be no presumption otherwise. Why, the same would stand to be valued (at cost) as at the year-end, so that reckoning it at its’ sale value for income adjustment, as the ld. CIT-DR submits, would imply a double accounting for cost and, thus, an excess addition to that extent. The income to be added would therefore be the gross profit on the sale value of the excess book-stock, and precisely for the same reason which the ld. CIT-DR states for reckoning the same at its sale value, i.e., a full absorption of cost of such stock in accounts. Yes, one could argue that there is nothing to show that the actual sale of the stock found in ‘excess’, which therefore is prior to the relevant date (31/10/2014), has materialized during the current year. True, but then there is equally nothing to suggest of the said stock having been disposed/sold during an earlier year. Sanctity has to be accorded to the closed accounts, i.e., in the absence of any impugning material for those years, and the stock of finished goods as at the end of the immediately preceding year regarded as a true and fair representation of the actual state of affairs, so that the difference in reporting the actual sales occurred only during the current year. The addition, at the gross profit rate as obtaining for the year of detection of ‘excess’ stock, i.e., the current year, for that year, as done by the ld. CIT(A), is thus valid, and meets our approval, i.e., in principle. He has, however, in our view, committed two errors. One, the gross profit rate, inasmuch as no royalty is paid on the out-of-books (or undisclosed) sales, is to be considered after adjustment (add-

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 23 back) of royalty cost incurred, where the gross profit rate is reckoned upon deducting that cost, as is the case (PB-2, pgs. 135-138). Two, there is no stated basis, and neither could Sh. Bardia inform us of any, for the adopted sale rate of ₹. 2800 pmt. The goods having been regarded as sold during the year, and prior to 31/10/2014, it is the average sale rate for this period (i.e., April to October, 2014), and as reflected in accounts, that shall have to be taken for the purpose. We are acutely aware of the vast difference in the sale rates of lumps and fines. However, there is no classification of the physical stock found into lumps and fines. It is thus not possible to state precisely the excess book-stock, product-wise. The presumption would therefore be of the same obtaining in the same ratio as appearing in accounts, i.e., as on 31/10/2014, being at 16,764.16 MT (lumps) and 28,558.495 MT (fines) (refer Table 3 at para 4.3), i.e., in the ratio of 1: 1.704. The average sale rate during the year (up to October, 2014), for either category, would accordingly be applied to the excess book-stock of both lumps and fines, as arrived at on the basis of their respective productions and the book sales thereof during this period. Further, another observation would be in order. Sure, each year Each year is a separate and independent unit of assessment and, further, sanctity is to be accorded to the closed accounts. So, however, in the assessee’s case, as stated both the assessment order (para 7.1.9) and the impugned order (para 6.2.11), a search the case of some of Samdariya Group (in May, 2013), has led to the discovery and seizure of material indicating undisclosed cash sales by the assessee, since admitted, and toward which it has since offered income. That is, there is material on record toward undisclosed cash sales in the earlier years. It is accordingly open for the assessee to contend that the said sales be off-set against the out-of-book sales imputed qua the excess book-stock, and that no further addition qua the said sales be made for the current year. The only difference would be that the sale

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 24 rate for the said sale as well as the gross profit (albeit adjusted for royalty) thereon would, in that case, be with reference to that obtaining for the relevant year/s. This completely answers Q.(c) at para 4.1 above.

4.5 We may next proceed to adjudicate the two issues delineated at (a) & (b) at para 4.1 supra. The same in the main concerns determining the extent of the differences between the physical and book-stock of finished (saleable) and subgrade stock, and the purport thereof. Toward this, we need to, at first, consider the relative merits of the respective cases. The primary difference between the Revenues’ and the assessee’s approach to the admitted differences found on physical verification pursuant to the search in October, 2014, is that while the Revenue regards the stock of finished and sub-grade material separately, i.e., as per the IBM report, which is not disputed, the assessee claims that the same be considered together, taking into account the iron ore component of the sub-grade material (refer letter dated 15/12/2016/PB-2, pgs. 1-21). In fact per its’ reply dated 09/12/2016 (with reference to which letter the AO sought the report from IBM vide his letter dated 10/12/2016/PB-1, pgs.98-99), the assessee contends for inclusion of the stock of ROM (i.e., 44,800 MT) as well (after excluding waste at the rate of 5%). The reason for this approach is stated to be in view of the Mining Plan (for: 2013–14 to 2017–18)(MP-2), as approved, assessing that to be the ratio of the iron ore in the excavated material, the balance 15% being laterite and manganese ores, at 10% and 5% respectively; the waste material being nil. The IBM, vide its’ report dated 04/12/2014, clarifies the iron recovery in the subgrade dump (43,271.43 MT) to be at 85%, i.e., 36,780.71 MT. It is perhaps this that led the assessee to consider 85% as the iron ore component in the

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 25 sub-grade material, and draw comparison on that basis. We may here also refer to the average grade in the various dumps as reported by MECL: Table 5 NAME OF THE AREA: KEOLARI MINES M/s. SHOBHA MINERAL, DIST. JABALPUR Sr. LOCATION VOLUME BULK TONNAGE AVERAGE REMARKS No. OF DUMP DENSITY GRADE (Fe %) 1. MECL 1 313.40 3 940.200 52.92 DUMP NO. A 2. MECL 3 1,757.30 3 5,271.900 51.52 DUMP NO. C 3. MECL 19,695.00 3 59,083.500 50.12 DUMP NO. B 2,4,7,12 & 15 4. MECL 16,322.00 3 48,966.300 51.73 DUMP NO. D 8,9A,10,1&11 5. MECL 14 557.10 3 1,671.300 54.32 DUMP NO. F 6. MECL 13 6,487.40 3 19,462.200 50.4 DUMP NO. E1 7. MECL 13 141.80 3 425.400 50.4 DUMP NO. E2 8. MECL 13 3.60 3 10.800 50.4 DUMP NO. E3 TOTAL 45227 135681.6 CU Mtr Te/Cu Mtr

The grade, it may be clarified, only refers to the content percentage therein, so that a 55% grade implies an iron content to that extent, and does not signify any qualitative attribute. This in fact appears incomprehensible to a logical mind, as the only difference between a 50% (say) and 55% (say) grade would imply a 5% (55% - 50%) difference in iron content, so that both should be saleable with a price differential corresponding to that difference. Rather, in

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 26 that case the prices would be quoted on a hundred percent grade (hypothetical though) basis, and the price for any particular grade – to be determined on chemical analysis, arrived at accordingly. In fact this is done in many a trade, viz. chemical industry; the prices being quoted on 100% basis. Further, the obtaining pricing model may not be in total agreement therewith, but a variant thereof, as it may well be that a lower iron (Fe) ratio implies a higher (to that extent) component of another chemical/mineral, which is also valuable, so that the pricing may factor this aspect as well. No such mineral, etc. has however been stated. On the contrary, as explained, in view of the recovery issues, the prices are not linearly related to the proportion of the principal mineral content.

4.6 With this background, we proceed to examine the assessee’s case explaining the excess stock of finished goods (as on 31/10/2014) with it, only to find it as wholly infirm, a non-starter, which only needs to be stated to be rejected. The reason is simple. The premise of the Revenues’ case is the variation in the quantity of different stocks as found on physical verification vis-a-vis their reported quantity (as per the assessee’s accounts). While the finished stock was found to be in excess on physical stock-taking, that of the subgrade material found less. The two findings/results, one positive and one negative, corroborate each other. It is this that led the AO to infer that the assessee was masquerading its’ finished goods stock as sub-grade material, i.e., representing the former, being saleable, in the guise of the latter, un- saleable material. It is nobody’s case that the assessee had excavated more material (from earth) than that disclosed. And, this, despite the admitted illegal extraction, stated by the assessee to be to the tune of 39,000 MT, which led to the suspension of its’ license for a time during the current year, as the said extra excavation does not necessarily imply undisclosed production, but

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 27 only of it being not in terms of the mining plan. Sure, the positive and negative differences do not match, the excess physical stock (of finished goods) being 90,359 MT, as against the short physical stock (of sub-grade material) at 1,49,129 MT (1,92,400 – 43,271), or at a difference of 58,770 MT (i.e., 1,49,129 – 90,359). But, then, it is not required to be, nor it is anybody’s case that the same should match. It is patent that the waste and sub-grade material had been used extensively toward laying roads and ramps; building retaining wall; repairs; pit-filling, etc., and toward which no adjustment has been made by the assessee in its’ accounts at any time. This, rather, forms the cornerstone of the assessee’s case and, in fact, represents an admitted position (refer para 7.1.6 of the assessment order), and which resulted in the IBM abandoning the assessment of the total excavation by the assessee, even as argued by Sh. Bardia, the assessee’s counsel, himself (refer para 3.1). Of what value, then, the certificate (dated 06/12/2016) from the Geologist (PB-2, pg. 139), justifying user of subgrade material for such purposes at 1,14,250 MT? The draft mining plan (2013-14 to 2017-18), which stands subsequently approved by IBM, submitted in February, 2013, reports the sub-grade dump quantity at 1,66,600 MT. The quantity as per books as on 31/01/2013, i.e., immediately before the submission of the draft Mining Plan in February, 2013, is 2,05,000 MT, exhibiting thus a difference of 38,400 MT, i.e., before the beginning of the current plan period. There is accordingly no reason to, as the assessee does, club the two types of materials, or the iron ore component therein, in seeking to justify the difference/s as found. In doing so, it in fact removes the very basis of the Revenues’ case. That is, to begin with, there is a complete mis-appreciation of the Revenue’s case. Two, it violates the basic principle of comparison, i.e., like with like. They iron grade has not been considered by the Revenue either in the finished or processed stock, which rather is to the assessee’s advantage in view of the

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 28 wide variability in the prices of the finished goods, as a perusal of Table 4 shall show. What all has been done is to compare the quantity, physically found, in the processed iron ore and sub-grade dumps, with that reported in its respect. The assessee has neither doubted nor contested the findings of the physical verification; rather, it itself states that the iron ore with iron (Fe) grade below 50% only is sub-grade, while none of the various dumps (8) has an iron grade below 50% (Tables 1A, 5). Rather, even if, for arguments sake, the iron grade of any of any of these dumps was below 50%, nothing prevents the assessee to mix the same with higher-grade material – which even otherwise flows in constantly, to upgrade to a mix of 50% and above, i.e., to make it saleable material. The price thereof, stated to be sensitive to the Fe ratio, is another, though as we shall presently see, related aspect of the matter. In fact, per its Ground 5, the assessee states of the price of ₹. 2800 pmt being applicable to the iron grade 57%-60%, which contradicts its’ claim of the iron grade, in view of the limitation of the physical processes being carried out by it, does not exceed 55%, for which grade class, i.e., ‘below 55%’, royalty is accordingly paid by it on its’ entire sales. Further, its’ case is completely inconsistent with the mining process, as explained and borne out from the record. The 85% iron ore is in the raw stock, freshly excavated material, and not in the sub-grade material, which is the outcome of processing, stated to be at 80% (70%) (of the processed ore), with the balance 20% (30%) being the finished stock (refer para 4.3), divided, as explained, equally between ‘lumps’ and ‘fines’. Reference, here, may also be drawn to para 4 of the IBM report dated 12/1/2017 (PB-1, pgs. 96-97), wherein it clarifies that the sub-grade material is generated from ROM. The reference to the iron recovery in the sub-grade material, stated to be at 85% by IBM (refer Table 1B), is incomprehensible. Why, the iron content in the finished goods (Table 1A) is itself at a maximum of 54.32% (Table 5), with the

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 29 assessee paying royalty on all its sales in the grade class ‘below 55%’. The IBM has, while stating of the iron recovery at 85%, clearly referred to the Mining Plan 2 (pg. 58), and which is the iron ore ratio in the raw stock (ROM) – and not of the iron content, much less in the sub-grade, the balance 15% (of ROM) being laterite and manganese ores. Why, the assessee itself admits of a substantial part of the sub-grade being unusable wast (refer para 9 of its’ letter dated 15/12/2016 /PB-2 (pgs. 1-21), and para 26 of it’s letter dated 23/11/2017, reproduced in the impugned order, appearing at pg. 37 thereof). Couple this with the information as to a large part (80%) of the processed iron ore bearing low-grade iron. Where, then, one may ask, is the scope of iron recovery at 85% therefrom? Pg. 36 of MP-2 is the chemical analysis of ROM stock of iron ore, stated to be at 85% of the total mineral. The average iron (Fe) content stated is 55.36% – the balance being other compounds, viz. Fe2O3; SiO2; Al2O3, etc., even as explained by NS during hearing. This is also borne out by the sample analysis reports in MP-1 (for 2008-09 to 2012-13). The assesse in fact itself, vide its’ Gd. 5, states of iron content in the subgrade to be at 50%, i.e., as stated during hearing. The sub-grade material is by definition low grade material, with an iron (manganese) grade at 45% (10%) or below being liable to be regarded as waste (also see 4.7). The assessee was unable to explain this anomaly during hearing. The IBM report dated 12/1/2017, to which the assessee refers in support (para 3 thereof), states of considering all the materials, including OB/waste, for the purpose of computing the total excavation, and not for any other purpose., so that reliance thereon is misconceived, even otherwise apparent from the foregoing. Further still, the assessee, after drawing comparison of the different category-wise quantities as physically found – which are not disputed, either as to quantity or category, on the common denominator of iron ore, making a rubbish of the different classifications and category-wise comparison, besides

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 30 representing, as explained by us hereinbefore, an unfeasibility, the excess iron ore is again notionally reconverted into and regarded as sub-grade material, explaining the now short-fall thereof (i.e., physically), to be wasted or deployed toward development works, though not accounted in books. Drawing a parallel with the more common manufacturing process, it amounts to reconciling the difference in the stock of finished goods, found physically in excess, by applying the yield of finished goods to the raw material stock, found short. The finished goods, to the extent now in excess, i.e., on being so reckoned, in books, is notionally reconverted into raw material, stating it to be wasted. Could, one wonders, there be anything more bizarre and de hors logic and facts than this! It is all this that led us to state of the assessee’s approach in the matter, since accepted, i.e., in principle, by the ld. CIT(A), to be completely mis- founded. The complete disharmony between the figures makes a travesty of the assessee’s methodology in explaining the difference. While the total difference per the same, and which it therefore seeks to explain, is 36,400 MT, it justifies a difference for a much higher figure of 1,14,250 MT through the certificate of the consulting Geologist. That is, the same has no relation to the obtaining difference between the physical and book figures per its’ own calculation, which it seeks to justify. The said certificate is, in fact, again a misrepresentation by the assessee, and has rightly been not accepted by any authority. If the quantity recycled, i.e., toward road/ramps, retaining wall, back-filling, etc. could be reasonably worked out, the same would have been by the technical agencies commissioned by the Revenue, the IBM and MECL, computing the total excavation by the assessee since inception, as per the mandate given thereto by the Revenue, and which could then be compared with the reported excavation. There is no whisper, much less authenticated data, on the surface area of the roads/ramps laid down over the years, which

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 31 has to be done, by own admission, time and again, for providing access to the pits/mine heads. Similarly qua the other jobs carried out, viz. the dimensions of the benches, retaining wall, etc., explained to be built for security reasons, or the pit sizes filled-up. Washing off of roads; loss of material, etc. on account of rains, also emphasized by Sh. Bardia, is another factor for which no reasonable estimate is possible. Why, as afore-noted, a considerable portion of the mining area was, as the photographs seek to show, gets submerged in water during and after the rainy season, as indeed is stated to be the position. In fact a significant proportion of the material, being accumulated since inception, would pertain to the period relating to Mining Plan 1, during which five year period (2008-09 to 2012-13) iron ore ratio was much lower, i.e., at 40%. Further still, any mining firm would first use the overburden (top soil), and then the waste, estimated at 20% of the total excavation of 1.636 lakh MT toward the same, which stands estimated at 20% of the total excavation (2.58 lakh MT), and only thereafter the subgrade material. (refer MP-2/pg. 15, para 4.6). This, i.e., the non-consideration of OB/waste toward the development works by the assessee, perhaps also explains, even if to an extent, the observed difference between the quantity of sub-grade material required to the explained and the quantity as per the certificate by the consulting Geologist, ascribed by the assessee wholly to sub- grade material. Coming to the difference worked per the assessee’s earlier letter (dated 09/12/2016), as apparent from the AO’s letter dated 10/12/2016 to IBM, the same is at 1,13,582.6 MT, and which perhaps also explains the said certificate, found as without any definite basis. In this letter the assessee, in seeking to explain the difference in finished (processed) iron ore, also includes raw stock (ROM), as well as laterite and manganese ores, as well as their component in the sub-grade material, making the reference by us to the example of ‘raw

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 32 material’ (qua a manufacturing process) equally applicable. ROM is raw stock, not physically taken, nor compared, and at a constant in the assessee’s returns for the past several months (also refer para 4.3). There is no question of the iron content therein, stated to be in the range of 48%-50%, being taken into account in comparing the inventory of finished goods. It is perhaps on realizing its’ folly in doing so, that the assessee revises it’s calculation to 36,400 MT, i.e., less than 1/3 of the original. Clearly, the ld. CIT(A) did not apply his mind to the assessee’s explanation, even as, as it appears, it is due to his being not fully satisfied therewith that he accepts it in part.

4.7 Finding no merit in the assessee’s case, with that of the Revenue, being based on undisputed, nay, admitted facts, on a firm basis, we are now – at least broadly speaking, in a position to conclude the matter in light of the discussion and analysis in the forgoing paragraphs (paras 4.1 to 4.6). So, however, there are certain aspects of the matter that needs to be considered. Also, the disagreement between the reported production figures and that which ought to arise, i.e., given the various submissions and explanations (summarized in Tables 3, 4A and 4B), is far from settled/explained. Why should, as afore-noted (para 4.3), there be a vast price difference between lumps and fines – both containing, as explained, same iron grade (50%-55%), on one hand, as well as, on the other, internally, i.e., between different lots of the same product type; the obtaining price differential in the ‘lump’ and ‘fine’ categories being at over 50% and 400% respectively (Table 4B). Answer/s to these questions, or addressing the same – which must be with reference to an authentic source or the conduct of its’ business by the assessee, or both, is extremely relevant, and an order dehors the same, would be inchoate.

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 33 One could regard the price variation between the two product categories, i.e., lumps and fines, as on account of mineral recovery due to the products’ physical properties, primarily, the particle size. While the lumps could be easily crushed into fines, making the two equivalent, it may be difficult to, or at least involve cost and technology, to coalesce fines into lumps, resulting in a lower price for the latter. In fact, as explained during hearing, the transportation cost itself, where the technology is not available locally, exceeds the selling price. The vast price differential – so that the same cannot be ascribed to fluctuation in the market price, is clearly indicative of the different qualities of the finished goods; the ld. counsel, Sh. Bardia, also explaining the price to be very sensitive to the iron grade, i.e., the iron (Fe) ratio (para 3.1). Even as this may appear to be an independent or a separate issue, it is not so, but integral to the issue at hand. A product may be saleable at Rs. 3000 (say), while the other lot may not fetch more than Rs. 1000 (say) or even Rs. 500 (say). Surely, the latter is subgrade relative to the former; the price differential across lumps and fines, inasmuch as there is no segregation between the two in the physical stock-taking, being more than 750% ((3050/400) x 100) (Table 4B). As afore-noted (para 4.4), there is no segregation of processed iron ore stock into lumps and fines (see Table 1A). This concept (of varying qualities) gets reflected in the very idea or notion of the ‘Threshold Value’. The IBM regularly, after consultation with different stakeholders, declares the threshold value for different ores in the country. The threshold value (TV) of a mineral is defined as: ‘The threshold value of minerals means limit prescribed by the Indian Bureau of Mines from time to time based on the beneficiability and/or marketability of a mineral for a given region and a given time, below which a mineral obtained from mining can be discarded as waste.’ (source: India Gazette Notification dated 16/10/2009/emphasis, in italics, ours)

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 34 As per the said Notification (copy on record), the threshold value of iron ore (Hematite) is 45%. Accordingly, an iron ratio below 45% is to be regarded as waste, though as per the mining rules the same is not to be removed (from the mining site), but stacked separately thereat on the premise that today’s waste is tomorrow’s wealth. A future technology may enable commercially viable extraction of iron from the iron content below that ratio. The waste though could be and, rather, is to be used for various collateral purposes, viz. laying roads and ramps, repairs, building retaining wall, preparing benches, filling-up pits and dumps, etc. And it is this, i.e., the varying qualities of finished goods, that led us to talk (at para 4.6) about the mixing of the different batches bearing different grades of iron, both with a view to upgrade it, making it either saleable or otherwise enhancing its marketability and/or price quotient. That is, there is a distinct possibility of the said material, even if not saleable, as where the iron grade is below 50%, being recycled, which may also be resorted to upgrade the same. As such, the narration along side the low-grade material in Table 4A (at pg. 17) must read as: ‘(recycled/sold as sub-grade to beneficiation plants)’. Continuing further, it cannot but be otherwise. The subgrade material is practically valueless, i.e., vis-a-vis the finished good, which itself gets sold, depending upon its iron grade, with a wide price variability, being as low as Rs. 400 pmt (Table 4B), so that any businessman would not dump material unless there is no scope for up-gradation. It is this, as well as the lack of a consistent, clear response, enunciating its’ case, by the assessee, that has led to a confusion as to what distinguishes a finished-good from a subgrade, which is the core issue – the correct categorization referred to para 4.2. There are clear pointers toward this. While the assessee consistently maintains of iron ore being saleable in the iron grade class 50%-55%, with that below 50% being sub-grade, per Gd. 5 of its’ Appeal it claims to be selling iron ore in the

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 35 grade class 57%-60%, belying its’ stand of the limitation of the physical processes being carried out by it to improve the iron grade beyond 55%. It thus tacitly admits to projecting incorrect facts, as well as evading royalty, paid on its’ entire sales in the grade category ‘below 55%’. Mention here be also made to the statement of NS, reproduced at page 26 of the impugned order, stating iron ore being saleable in the grade category 54%-55%. If that is indeed so, which fact could be easily proved, or called upon to, the entire material below 54% would stand to be classified as subgrade. There is however no such answer/s, and for which we have perused the entire statement of NS (PB-2, pgs 211 – 319), which in fact is in hindi language. The relevant questions & answers, are as under: M/s. “kksHkk feujy dsoykjh dh Mines dk eq[; :Ik ls mudh Chemical iz”u 5- Compositon ds ckjs esa crk;sa ? Fe Composition, Laterite esa Fe2O3 - 47 % to 48 % mRrj & Iron Ore - 50 % to 51 % Magnese - 15 % to 20 % (After Process) M/s. “kksHkk feujy& /kedh dh Mines dk eq[; :Ik ls mudh Chemical iz”u 6- Compositon ds ckjs esa crk;sa ? Laterite - 46 % to 48 % mRrj & Iron Ore - 47 % to 48 % Magnese - 18 % to 20 % (After Process) M/s. “kksHkk feujy] dsoykjh }kjk fudyus ckyh Iron Ore dh DokyhVh ds ckjs esa foLrkj iz”u 7- iwoZd crk;sa dh ;g fdl Grade dk gksrk gS ? M/s. “kksHkk feujy] dsoykjh }kjk [kuht mR[kUu djus ds mijkar dzs”kj ls o Screaning mRrj & e”khu ls o ysoj }kjk Sorting djus ds mijkar tks [kuht dk % Iron Ore dk ik;k tkrk gS A og 48% ls 50% ds yxHkx dk gS A orZeku esa IBM }kjk fdrus Grade rd ds Iron Ore dks fcdz; djus ;ksX; ekuk tkrk iz”u 28- gS] ftlij Royalty ns; gksrh gS ?

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 36 IBM }kjk Grade Wise jsV dk izdk”ku gj ekg fd;k tkrk gS A ijarq lcls de mRrj & Grade dk Iron fd D;k Royalty gS eq>s ugha irk A gekjs }kjk ,d ,ojst Grade 55% ds uhps dh Royalty dk Hkqxrku e/; izns”k [kuht foHkkx dks fn;k tkrk gS A NB: the reference to Qs. 8 & 29 (in the impugned order) is incorrect, perhaps due to typographical errors; the same being 7 & 28 Respectively. From assessee’s stand point, however, this may not be of much significance. There is no hard and fast categorization as to what constitutes subgrade, which would stand to fall in a range based on technology, besides the market dynamics. Thus when the assessee says of iron ore being a finished good in the grade 50%-55%, it does not imply, as the Revenue, and we must concede, for no particular fault of its’, considers the same as being a single class, saleable at the same rate. Further, how could a material liable to be recycled/reprocessed, with a view to being upgraded, lead to any addition for difference in quantity based on such categorization? Why, if, as stated, the ROM itself contains iron grade at 50%- 51% (or even 48%-50%, as stated by NS in answer to other questions, viz. Q. 7 of the statement dated 07/1/2015), a grade class of 50% or even 51% is hardly saleable. The claim, per Gd. 5 of Rs. 2800 (or Rs. 3050) as representing the rate of iron grade 57%-60%, has to be understood in this context, i.e., as applicable to higher grade categories, even as understating grade class to save on royalty, which increases with the grade class, cannot be ruled out. No dump falling in that category (57%-60%) was however found (Table 5), even as MECL took as many as 15 samples (from the eight dumps), i.e., more than one sample for larger dumps. In any case, from the tax point of view, it would matter only if there is an understatement of consideration. The purchase orders (POs) from its’ buyers, specifying the iron grade, inasmuch as price would only be with reference thereto, or the chemical analysis reports accompanying the sale consignments, in substantiation thereof, could establish the same. Again, the non-correlation

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 37 of the production of finished and subgrade does not, in view of the foregoing, carry any particular significance. We have, in arriving at the aforesaid finding/s, also considered and given regard to the approved Mining Plans, i.e., MP-1and MP-2. As afore- noted (para 4.6), page 36 of MP-2 states of the average iron grade of ROM at 55.36%. In Chapter I thereof, under section ‘Development’, the following is noted under the heading ‘Achievement’ (pg. 14): ‘ACHIEVMENT Considering the low grade Fe value demand from beneficiation plant the earlier called low grade material earlier which has been counted in stacks now become saleable and as on date OB generation is negligible.’ This gets further clarified per Chapter-III titled ‘Reserves’, under the section ‘Economic Axis’ (at page 29), reproduced as under: ‘ECONOMIC AXIS On the basis of feasibility study economic viability of the deposit, i.e., Laterite/Iron ore/Mn Ore has been established presently to work out G1=3.0388 HA and as per geological section. Sub-grade: No sub-grade likely to be generated. Further the lease area has ROM mineral stacks which become saleable due to change in threshold values and demand from beneficiation plant. The minerals in stacks are saleable after screening to the end users. The sub-grade dumps are considered as stack of minerals and not considered under reserve and are called as in situe with mineral recovery for Mn ore, Iron ore and Laterite as mentioned in next paras. Mineral Reject: No mineral rejects likely to be generated.’ , as well as per Chapter VI, titled ‘Handling of Waste/Subgrade material’ (at page 58). Paras 6.2 & 6.3 thereof are relevant, and read as under: ‘6.2 RATE OF YEAR-WISE GENERATION OF SUB GRADE MINERAL WITH REFERENCE TO THRESHOLD VALUES AND PROPOSAL FOR STACKING FOR NEXT FIVE YEARS

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 38 No generation of sub grade is proposed during proposal period. 6.3 QUANTITY AND GRADE OF SUB-GRADE MATERIAL AVAILABLE AT THE MINE AS ON DATE DULY SUPORTED BY PLANS AND SECTION As no sub grade material hence not applicable.’ (emphasis, by italics, ours) Page 35 of MP-2 contains category-wise updated reserves with grade (indicated end use grade with analysis) as well as marginal grade. The Fe content the iron ore is stated at 52.22% to 57.20%. The average grade for the iron ore lumps and iron ore fines is stated beneath at 52.9% and 55.55% respectively. It is thus clear that the material falling between 45% to 55% has been, considering the demand from the industry, being iron & steel and cement industries in the main, which is in the range of 55%, has been regarded by IBM (in MP-2) as subgrade. As the average Fe content in ROM is, as per it, at 55% plus (pg. 36), therefore no sub-grade is stated to be generated during the plan period, i.e., at pages 14,29 & 58 (of MP-2). This is also borne out by the average grade, considered as falling between 52.22% to 57.2%, on the basis of the sample analysis made, which can therefore be sold directly to the industry or to the Pelletaization plants. Any grade not directly saleable would get sold for up-gradation to the beneficiation plants, as stated in Chapter I. It is this that led the IBM to not regard any excavation during the plan period (2013-14 to 2017-18) as subgrade. This also explains, and is in fact broadly in agreement with the assessee’s claim, considered so, of the iron ore being not saleable when the iron grade falls below 54%, so that 1,34,010.3 MT (out of the total finished stock of 1,35,681.6 MT) would stand to be regarded as subgrade. On the other hand, as seen, the actual generation, stated to be in the grade class 48%-50%, is below 55%, as considered in MP-2. It is this that led the assessee to regard it, where not directly saleable to pelletaization plants, as subgrade. In fact, there is reference to, in Chapter-VII (page 59), of

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 39 iron grade 45%-55% being sold to beneficiation plants (10mm – 100mm) and fines (> 10mm) being sold to brokers (Fe: 44%-48%); Washeries (Fe:52%- 57%) and Pelletaization plants (Fe:58%-60%). That is, the situation is neither static nor rigid and, besides, a function of technology and market dynamics. 4.8 The statement of Sh. Ghanshyam Patel, Mining Manager, has also been carefully perused (PB-2, pgs. 182-210). Its retraction, made two years later, is without substance; he fully understanding the questions asked, answering them definitely. The same is, thus, not a valid retraction. So, however, his statement stands misconstrued by the Revenue. The admission by him of no weight being recorded on the TPs is limited to those for transporting goods to SSI, an associate concern, and not in general. SSI was during the relevant period, being in fact prior to the commencement of its’ operations in January, 2015, being transported, besides construction material purchased by it, sub- grade material, presumably for, as stated, trial production. If so, the same would be borne out of its’ records. It could also be that the said material, including OB/waste, was, or to any extent, for user of such material for the same purposes to which assessee puts it, i.e., laying roads, ramps, for using for construction, etc. His statement, thus, apart from being apiece with the other evidence as to the assessee’s accounts not representing true and fair state of affairs, does not, to our mind, have any direct income implication.

In Conclusion 5.1 The matter, thus, on a review thereof in its entirety (refer paras 4.1 to 4.8), in our considered opinion, comes to much ado about nothing. The different quantities/figure are not liable to be reconciled and, accordingly, no case for any reconciliation of different figures, or for any addition on the basis of the said categorizations, is accordingly made out, either toward excess

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 40 physical or book stock. The ‘excess’ stock is, under the circumstances, only apparently so/notional. This, thus, answers Q.(a) & (b) at para 4.1 supra. The assessee, despite that it’s books of account cannot be regarded as properly maintained, succeeds. The assessee, though, is advised to maintain proper records; much of the present mess, as we are constrained to describe the present imbroglio, arising for lack of the same, i.e., apart from the lack of proper presentation of facts and non-appreciation of the Revenue’s case by the assessee. It needs to be appreciated that only proper records could form the basis of a proper assessment, and which may require restatement of various figures. This is also paramount as without such a restatement, the difference between the actual and the book figures would continue to obtain, imperiling the assessee for all times. Any future search or survey at its’ business premises, etc., would lead to a fresh charge of understatement of income being imputed on the basis of the obtaining difference/s, and which also has penalty and prosecution implications. It may also be relevant here to mention (and which would at the same time also address the reference to the assessee’s past, whereat searches on it (or another) yielded undisclosed wealth, which was admitted and duly returned by it (for AYs. 2011-12 & 2012-13), paying tax thereon), that there is a qualitative difference, even otherwise apparent, between an excess physical stock and excess book-stock, representing opposite situations, even as, as explained hereinbefore, results in an inference of escapement of income from tax and, accordingly, liable to be brought to tax, albeit at different amounts, representing valuation/s thereof. While a positive difference (excess physical stock) would translate into an addition irrespective of any addition made on that count (or for undisclosed assets), it may not necessarily be so in the case of a negative difference (excess book- stock), which indicates, among others, unaccounted disposal of the relevant stock (i.e., as of the date of the physical verification), so that income

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 41 concomitant to that disposal had escaped assessment (as on that date). It is, accordingly, open to the assessee to make out a case that the past unaccounted income, since admitted and returned, arose on account of such undisclosed disposal. That is, the said escaped income, being sought to be brought to tax for the current year, had already suffered tax in an earlier year. Again, a further clarification may be in order. That is, in a case as the present one, where the escapement of income is on account of unaccounted disposal, the assessee realizes it’s value (Rs. 100, say), which gets disclosed/returned on the corresponding asset/money being discovered (by the Revenue). The income on this sale, however, would only be after deducting its cost, incurred and reflected in accounts (Rs. 40, say), i.e., Rs. 60. This is as the balance Rs. 40, though realized through sale, continues to be reflected in accounts, albeit does not represent an actual capital (of the reporting entity). This needs to be borne in mind, and once again emphasizes the need for bringing the accounts to actuals. The orders of the Revenue authorities are accordingly set aside, and additions deleted. 5.2 The case of Shobha Minerals (Dhamki), as was a common contention of the parties before us, is also the same. No separate arguments in it’s respect were made. Rather, as we observe, while the average bulk density of finished good is 3.5, that with a lower density (2.5) (at 95, 613.45 MT), qualifying as waste, has also been included while computing the total finished good stock of 1,22,744.75 MT, in the MECL’s report (PB-1, pg. 93). No separate adjudication for its’ appeals is accordingly called for, and our adjudication for Shobha Minerals (Kevlari), shall equally apply to the appeals in relation to this assessee. 6. In the result, appeals of the assessees are allowed and the Revenue’s appeals are dismissed.

I.T.A. Nos.51,52,77& 78/JAB/2018 Assessment year:2015-16 42 Order pronounced in the open court on February 24, 2020 Sd/- Sd/- (Bhavnesh Saini) (Sanjay Arora) Judicial Member Accountant Member Dated:24/02/2020 Copy of the order forwarded to : 1. The Appellants: (i) Shobha Minerals (Kevlari), 765, Near Anand Talkies, Napier Town, Jabalpur (ii) Shobha Minerals (Dhamki), 765, Near Anand Talkies, Napier Town, Jabalpur 2. The Respondent: Asst. CIT (Central Circle), Jabalpur, Dy. CIT (Central), 2nd Floor, 291, Ramnath Building, Napier Town, Jabalpur. 3. Concerned CIT 4. The CIT(A) 5. CIT-D.R., I.T.A.T.