COMMISSIONER OF INCOME TAX vs. M/S RAM STEEL INDUSTRIES G.T. ROAD, KHANNA

This appeal has been filed by the revenue under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 20.8.2013 (Annexure A-3) passed by the Income Tax Appellate Tribunal, Chandigarh Bench 'B', Chandigarh (hereinafter referred to as “the Tribunal”) in ITA No. 707/Chd/2012 for the assessment year 2005- 06, claiming the following substantial questions of law:- (i) Whether in the facts and circumstances of the case, the ITAT was right in law in confirming the order of the CIT(A) in not sustaining the addition made by the AO on account of suppressed production, without appreciating the fact that consumption of electricity is a good measure of suppressed produced, as held by GURBACHAN SINGH 2014.10.10 15:00 authenticity of this document High Court Chandigarh -2- the Hon'ble Supreme Court in the case of 31.01.2007? (ii) Whether in the facts and circumstances of the case, the ITAT was right in law in confirming the order of the CIT(A) in not sustaining the addition made by the AO on account of suppressed

Put short, the facts necessary for adjudication of the instant appeal as narrated therein may be noticed. The original assessment was completed by the Assessing Officer under Section 143(3) of the Act vide order dated 26.10.2007 at an income of ` 13,46,201/- by making an addition of ` 12,95,975/- on account of suppressed sale of finished goods. Later on, the Commissioner of Income Tax (CIT) vide order dated 10.8.2009 cancelled the assessment under Section 263 of the Act and directed the Assessing Officer to pass a fresh assessment order. Against the order of the CIT dated 10.8.2009, the assessee filed an appeal before the Tribunal who vide order dated 28.2.2011 dismissed the appeal. In pursuance to the order dated 10.8.2009 passed by the CIT, the Assessing Officer vide order dated 28.12.2010 (Annexure A-1) framed assessment under Section 143(3) of the Act at an income of ` 68,28,690/- by making further addition of ` 54,82,489/- on account of suppressed production on the basis of consumption of electricity. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [for brevity “the CIT(A)”] who vide order dated 27.4.2012 (Annexure A-2) directed the Assessing Officer to apply gross profit @ 23% on the total turnover of ` 93,26,096/- for the purpose of determining income from manufacturing against the gross profit shown by the assessee @ 8.78% and confirmed the addition of ` 13,25,728/-. Against the order dated 27.4.2012 (Annexure A-2), the GURBACHAN SINGH 2014.10.10 15:00 authenticity of this document High Court Chandigarh -4- assessee as well as the revenue filed appeals before the Tribunal. The Tribunal vide order dated 20.8.2013 (Annexure A-3) upheld the order of the CIT(A) and dismissed both the appeals. Hence, the present appeal by the revenue.

Learned counsel for the revenue submitted that the Assessing Officer on the basis of consumption of electricity relying upon the decision of the Apex Court in Melton India v. The Commissioner Trade Tax, UP, Appeal (Civil) 373 of 2007 decided on 31.1.2007 had rightly made the addition. The CIT(A) as well as the Tribunal have erred in reversing the order of the Assessing Officer and wrongly applied gross profit rate of 23% on total turnover of ` 93,26,096/-.

After hearing learned counsel for the appellant, we do not find any merit in the aforesaid contention.

No doubt, the power consumption is one of the factors of production where there can be large variance and in the given facts and circumstances, the basis of power consumption can be taken to be a factor for determining the income of the assessee. However, in the absence of any corroborative evidence to support that, it cannot conclusively be taken to form the basis for assessing the income as the consumption of power necessarily may not be in respect of production process only. In the present case, the sample of electricity consumption which was taken was for one hour and was of very small dimension. It was not carried out during the period relating to the assessment year in question whereas it was in respect of subsequent period for assessment year 2007-08. The CIT(A) after considering the facts and circumstances and rejecting the books of account and taking into consideration the production results of comparable business turnover and specific GURBACHAN SINGH 2014.10.10 15:00 authenticity of this document High Court Chandigarh -5- circumstances of the assessee, adopted gross profit rate of 23% and sustained the addition to that extent.

The CIT(A) while partly accepting the plea of the assessee had noticed as under:- “4.3 Considering the totality of facts and circumstances of the case, it emerges that the material/evidence in the form of sample meter reading of one hour is irrelevant and inconclusive evidence for the purpose of determining the income from the business operations of the appellant during the year. It is because: a) sample is very small. b) It is not relating to the assessment year in consideration. c) Power consumption is only one factor of production which is subject to large variance also and it is not a certainly that the power so consumed relates to production process only. d) Even if accepting this evidence itself, it remains inconclusive so as to arrive at a figure of actual production and sales. It is for this reason that there is enumeration of many facts required to be collected by Revenue for the purpose of reaching a conclusion in respect of this evidence which has been discussed in the submission in the foregoing paragraphs. e) At the same time it is admitted position that the GURBACHAN SINGH 2014.10.10 15:00 authenticity of this document High Court Chandigarh -6- appellant has himself accepted that there could be variation of some percentage which itself is a proof that Books of Account are not reflecting the correct picture. There is suspicion and doubt on the figure of electricity consumption etc. As a result it is inescapable conclusion that the Books of Account of appellant could not be relied upon for the purpose of determination of correct production result. Therefore, to that extent, Books are treated as rejected. f) In view of above facts, I am inclined to apply the GP rate of 23% on the total turnover of the appellant for the purpose of determining income from manufacturing. The percentage is taken on the basis of production results of comparable business, turnover and the specific circumstances in the case of the appellant. As submitted by the A.O. and the appellant the turnover is Rs.93,26,096/- and GP declared is Rs.8,19,274/- @ 8.78%. Accordingly, on turnover of Rs.93,26,096/- the GP @ 23% will be Rs.21,45,002/-, the GP disclosed is Rs.8,19,274/-. Therefore the addition will be Rs.13,25,728/-. g) The addition made by the A.O. based on irrelevant and inconclusive evidence of meter reading as discussed above for bringing into tax GURBACHAN SINGH 2014.10.10 15:00 authenticity of this document High Court Chandigarh -7- the suppressed sales is faulty and inappropriate amounting to taxation of notional income. Because in all the income tax proceedings until now there is not a single element/suggestion that the appellant has made any sales out of the Books. Taking note of this fact, that it is not a case of sales outside the Books together with the fact that the method applied by the A.O. is leading to notional taxation, the method adopted by the A.O. is rejected. In the circumstances, the addition of Rs.13,25,728/- is confirmed based on the full and complete appreciation of arguments, facts and circumstances and records.”

The Tribunal affirmed the order of the CIT(A) with the following observations:- “In ITA No. 692/Chd/2012 and ITA No. 707/Chd/2012 i.e. appeals filed in the case of M/s Ram Steel Industries, the issue arising is identical to the issue arising in the earlier appeals and the same reasoning is to be applied in order to determine the income in the hands of the assessee for the captioned assessment year. The assessee is engaged in the production only. In the original round of assessment, the suppressed production in the hands of the assessee was agreed upon at Rs.12,95,975/-. The CIT (Appeals) had applied GP rate to the total GURBACHAN SINGH 2014.10.10 15:00 authenticity of this document High Court Chandigarh -8- turnover resulting in addition of Rs.13,25,728/- as against the original addition on Rs.12,95,975/-. In view of the above facts and circumstances, we are in conformity with the order of the CIT (Appeals) in applying GP rate to the total turnover in order to determine the income from manufacturing in the hands of the assessee. The grounds of appeal raised by both the assessee and the revenue are, thus, dismissed.”

The findings recorded by the CIT(A) and the Tribunal were not shown to be erroneous or perverse in any manner by the learned counsel for the revenue. Further, in the judgment of the Apex Court in Melton India's case (supra), it was held that consumption of electricity can be one of the factors for drawing an inference that the assessee's intention to avoid tax was there. However, in the light of the findings noticed hereinabove, the addition on the basis of gross profit rate of 23% on total turnover of ` 93,26,096/- in the facts and circumstances of the present case could not be faulted.

Accordingly, no question of law muchless a substantial question of law arises in this appeal. Finding no merit, the instant appeal is dismissed. (AJAY KUMAR MITTAL) JUDGE August 11, 2014 (FATEH DEEP SINGH) gbs JUDGE GURBACHAN SINGH 2014.10.10 15:00 authenticity of this document High Court Chandigarh