M/S. HINDUSTAN MINERAL PRODUCTS,,GODHRA vs. THE INCOME TAX OFFICER, WARD-1,, GODHRA

This appeal by the assessee pertaining to A.Y. 2007-08 is directed against the order of Ld. Commissioner of Income Tax (Appeals)-II, Baroda dated 05.08.2014 which is arising out of the order under section 143(3) of the Income Tax Act, 1961; in short “the Act” in 30.12.2009 framed by Income Tax Officer Ward-1 Godhra.

The assessee has raised following grounds of appeal:-

Briefly stated facts as called out from the records are that the assessee is a partnership firm engaged in manufacturing of quarts silica. Income of Rs. 71,980/- declared in the Income Tax Return filed on 01.12.2007. Audit Report under section 44AB of the Income Tax Act furnished. Case selected for scrutiny through CASS followed by serving of notices under section 143(2) and 142(1) of the Act.

During the course of assessment proceeding Ld. AO observed that the assessee had shown a deposit of Rs. 15,52,725/- to MGVCL. On inquiry it was revealed that this amount was paid to Deputy Engineer MGVCL towards supplementary electricity bill raised for the alleged electricity theft detected by MGVCL. On the basis of this information Ld. AO was of the view that as the assessee has been charged for un-metered electricity consumption of 181498 units used for manufacturing unaccounted goods which the assessee has not reflected anywhere in the books of account. Based on this observation and further adopting the average sale price at Rs. 905/- MT on the 17074 MT of goods (arrived on the basis of un-metered unit of 181498 multiplied by 10.630 unit per MT), Ld. AO computed the unaccounted Gross Profit at Rs. 15,85,372/- and assessed the income at Rs. 16,57,354/-.

Aggrieved assessee filed appeal before the Ld. CIT(A) who after considering the submission of the assessee dismissed the assessee’s appeal observing as follows:- “4.3.1. I have considered the submissions of the learned Authorized Representative and the order of the Assessing Officer. In this case, there is sharp (M/s. Hindustan Mineral Products vs. ITO) A.Y. 2007-08 3 decline in the G.P. as well as N.P. rate. This phenomenon is coupled with the proceedings by MGVCL who levied penalty of Rs. 15,52,725/- for theft electricity. The instance of this levy of penalty in itself is not conclusive proof of unaccounted production. However, the assessee could not justify the reasons for sharp decline in the G.P. as well as N.P. rate. This has led to the application of net profit rate on the basis of average profit rate shown by the appellant himself in the past several years. These facts have not been disputed by the appellant. In respect of allegation of theft of electricity, the assessee has filed one copy of court order delivered by Special Judge (Elec.) & 3rd Addl. Session Judge, Godhra dated 20.02.2010. From the copy of judgment, it has been found that after surprise checking by MGVCL & on detecting the unauthorized use of electricity by theft, one court case was filed by the Government against the partner of the assessee firm. During the course of hearing, the Hon’ble Judge has observed that there were so many discrepancies at the time of conducting the surprise checking at the business premises of the assessee firm. 4.3.2. In the Remand Report, the Assessing Officer has clearly mentioned that the assessee has not filed any details of the present status of the said case. In addition to the above, in the submission dated 17.12.2009 filed before the Assessing Officer during the course of assessment proceedings, the assessee has nowhere tried to prove that there was no unauthorized use of electricity. It has also been submitted by the Assessing Officer that on page 4 & 6 of the submission dated 17.12.2009, the assessee itself has worked out the excess consumption at 22590 or 22598 units and after applying average sale price at Rs.905/-, the unaccounted sales i.e. production at Rs.19,23,231/- has been calculated by the firm, These facts clearly proved that there was unaccounted production of Quartz Silica. Thus, there has been clear acceptance of unaccounted production by the appellant during the course of assessment proceedings which was probably done only to preempt rigours of penalty proceedings as the assessee was not sure of any relief in the pending case of electricity theft. In respect of this unaccounted production, in rejoinder, the assessee firm has explained that the said working was done only in relation to the additions purported to be made by the Ld. Assessing Officer in his show cause notice dated 09.12.2010. In this connection, Assessing Officer has pointed to page 6 on which the assessee firm has explained that considering the calculation error made by MGVCL, the unaccounted production works out to only 2125 MT in excess on excess consumption of electricity (alleged theft) of 22598 units in the preceding para. It is also submitted that on page 4 of the assessment order, the Assessing Officer has discussed that "further it has admitted in his reply at point no. vi) at page 6 that firm has consumed the electricity the addition can be made the average of gross profit and not of the entire sales at point no. vii) at page 6 it has accepted the average sale price at Rs.905/- per MY instead of as proposed at Rs1,323/- per MY. The assessee has also admitted alleged unaccounted turnover of Rs.1,54,51,970/-." After considering the facts of the case, gross profit on accounted sales was worked out at Rs.15,85,372/- by the Assessing Officer. With rejoinder to remand report, the assessee has provided one chart of GP/NP for the relevant year and for subsequent four years. On verification of the chart, it can be seen that during the relevant year the assessee has disclosed GP at 8.87 % and the GP in subsequent four years was between 13.3% to 18.72%. Thus, the GP for the relevant year was much less. As regards NP, NP for the current year was 0.22% where as in four preceding years, it was between 0.56% to 1.29%. Thus, the NP for the current year was also low. I am inclined to accept the contention of the Assessing Officer that in the rejoinder to remand report, the assessee has not (M/s. Hindustan Mineral Products vs. ITO) A.Y. 2007-08 4 bothered to offer any explanation for lower GP/NP for the year under consideration. From the assessment order, it can be seen that to work out the gross profit for the current year, the Assessing Officer has applied average rate of GP for the relevant year @ 10.26% considering the GP rate of relevant year and preceding year. Thus, it is very clear that during the relevant year, the firm has disclosed lower Gross profit in comparison to preceding years as well subsequent year. Considering all the aspects, the addition made by the Assessing Officer is confirmed and the ground of appeal is disallowed.”

Per contra Ld. DR vehemently argued supporting the orders of both the lower authorities.

We have heard the rival contention and perused the record placed before us. Sole grievance of the assessee is against the finding of Ld. CIT(Appeals) confirming the addition for Gross Profit of Rs. 15,83,372/-.

We observe that Ld. AO made the addition on the basis of alleged un- metered electricity consumed at 181498 units and it was inferred that the production arrived by using such un-metered electricity would have been at Rs. 1,54,51,970/- and thereafter, after applying the Gross Profit rate of 10.26% addition for 15,85,372/- has been made.

The assessee itself worked out that considering the calculation error made by the MGVCL the unaccounted production works out to only 2125 MT and if it is taken as the basis the unaccounted sales would arriving at 22598 units and applying the average sale price at Rs. 905/- the unaccounted sales would work out 19,23,231/-.

Perusal of records also shows that the basis of the addition by the AO was un-metered electricity whereas Ld. CIT(Appeals) has taken the basis of lower Gross Profit/Net Profit rate. Except for the electricity units issue no other mistake has been pointed out in the books of account regularly maintained that audited. Except the submission of the assessee accepting the excess units of 22598 units and working out the unaccounted sales of Rs. 19,23,231/- all the charges levelled against the assessee by both the lower authorities have no sound basis and they are (M/s. Hindustan Mineral Products vs. ITO) A.Y. 2007-08 6 moving here and there. Sometimes the un-metered units are taken as a basis and sometimes lower Gross Profit/Net Profit rate is taken as a basis to complete the addition even when books of account stands not rejected.

We, therefore, in the given facts and circumstances of the case are of the considered view that at the most addition for undisclosed Gross Profit at the average Gross Profit rate of 11.28% on the unaccounted sales accepted by the assessee at Rs. 19,23,231/- can be sustained. We accordingly, confirm the addition at Rs. 2,16,940/- for undisclosed Gross Profit, delete the addition for 13,08,432/- and partly allow the assessee’s appeal.

In the result, the appeal of the assessee is partly allowed.