SRI. KUMARASWAMY MINERAL EXPORTS PRIVATE LIMITED., ,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(1), BENGALURU

5. The learned Commissioner of Income-tax [Appeals] failed to appreciate that the learned assessing officer has failed to record the satisfaction regarding an inference of liability before the issuance of notice under section 153A of the Act and consequently the assessment framed on an invalid procedure is bad in law and liable to be cancelled, on the facts and circumstances of the case.

6. The learned Commissioner of Income-tax [Appeals] failed to appreciate that, the notice issued under section 153A of the Act suffers from material irregularity thus the notice issued is bad in law, and consequently order of assessment passed on an invalid notice does not have legs to stand and requires to be cancelled, on the facts and circumstances of the case.

7. Without prejudice to the above, the Commissioner of Income Tax [Appeals] failed to appreciate that the additions made by the learned assessing officer were not based on incriminating material found during course of search and the additions made in the impugned order of assessment is not emanating out of the seized materials, thus the impugned additions made in the impugned order of assessment passed are not sustainable and requires to be deleted, on the facts and circumstances of the case.

8. The learned Commissioner of Income-tax [Appeals] failed to appreciate that mere admission in the statement recorded under section 132 [4] of the Act by the Director of the Appellant Company during the search which was later retracted, cannot form the basis of addition, more so when the director of the appellant company had admitted the additional income at the time of search on a mistaken notion of facts and law and thus, the income assessed on that basis is unjustified and requires to be deleted, on the facts and circumstances of the case.

9. Without prejudice, the Appellant denies itself liable to be assessed on a total income of Rs.100,99,35,420/- determined by the learned assessing officer and confirmed by the learned Commissioner of Income-tax [Appeals], as against the NIL income returned by the appellant, on the facts and circumstances of the case.

10. The learned Commissioner of Income Tax [Appeals] is not justified in confirming the addition made by the learned assessing officer amounting to Rs. 68,66,77,426/- on account of alleged valuation of closing stock of sub-grade Iron Ore as undisclosed stock, on the facts and circumstances of the case.

11. The learned Commissioner of Income-tax [Appeals] is not justified in denying the benefit of a favorable judgement, owing to the fact that the appellant has not disclosed quantitative details in its tax audit, on the facts and circumstances of the case.

12. The learned Commissioner of Income-tax [Appeals] and the learned assessing officer were not justified in making additions on account of alleged valuation of closing stock of sub-grade Iron Ore as undisclosed stock, without understanding the accounting principles required to be followed in accordance with law, on the facts and circumstances of the case.

13. The learned Commissioner of Income-tax [Appeals] and the learned assessing officer were not justified in revaluing the closing stock, without appreciating the fact that the addition relating to valuation of sub grade iron ore was considered and assessed in earlier scrutiny assessment proceedings for the Assessment Year 2009- 10 and valuing the very same stock for the impugned assessment year would amount to double taxation, on the facts and circumstances of the case.

14. Without prejudice, the learned authorities were not justified in valuing the sub-grade iron ore at Rs. 622/- per tonne which is far excessive and the same requires to be reduced substantially on the facts and circumstances of the case.

16. The Appellant craves leave of this Hon'ble Tribunal to add, alter, substitute and delete any or all of the grounds of appeal

urged above.

17. For the above and other grounds to be urged during the hearing of the appeal the Appellant prays that the appeal be allowed in the interest of equity and justice.”

4. Subsequently, Search & seizure action were carried out on 19.11.2018, pursuant to that, case of assessee was centralized and notice u/s. 153A of the Act was issued on 23.4.2020.

Assessee reiterated the return at Rs. Nil on 7.9.2020 and consequent to that, notice u/s. 142(1) was issued on 19.2.2021 and notice u/s. 143(2) was issued on 29.9.2020.

i. the stock was not mined in the current year but was part of the waste product from 1994 and not saleable. ii. The stock of 496375 metric tons (MT) of iron ore found in seized document Annx. 01 page 277-280 based on Mahazar report dated 5.1.2018 represents mineral rejects and waste not saleable. As the net realisable value is Rs.Nil as per Accounting Standard 2, same is valued lower of cost or net realisable value, hence valuation is Nil. iii. Sub grade material did not have much market of the buyer and therefore not put up for e-auction. iv. As per order of Hon’ble Supreme Court dated 29.7.2011 all the mining activities in Karnataka had stopped. Therefore, this stock were quantified from all the mines in Karnataka. Subsequently permission of the Hon’ble Supreme Court was taken to sell all these stocks. At that time, the assessee has disclosed the stock. Inspection was also conducted. Based on this, assessee has disclosed Rs.39740979 towards stock of sub grade iron ore, which is valued at the cost of loading, unloading and transportation from dumpyard to stock yard. v. Assessee also explained that according to Accounting Standard inventory has to be valued at lower of cost or net realizable value and not at the market value. vi. Assessee has already valued the inventory as stated above and therefore addition cannot be made.

15. The ld. AO considered the mining ban in Karnataka and subsequent decision of the Hon’ble Supreme Court and held that information was received from the Dy. Director, DMG and if not for the mining ban and subsequent sale through the Monitoring Committee, the sale of sub grade iron ore would not be disclosed by the miner and thereby generating undisclosed income. He further held that quantity of 496375 MT of sub grade iron ore was determined as per Mahazar drawn by Dy. Director and same was accounted for stock in FY 2019-20 and sold at e-auction

subsequently. He held that assessee has accounted for closing stock of such iron ore as Mahazar found and seized during the search proceedings. This proves that the assessee has not accounted for sub grade iron ore lying at its stock yard after the ban of mining. Hence the stock of sub grade iron ore is undisclosed. The ld. AO based on IBM reports, computed the quantitative details from AY 2013-14 to 2018-19 in para 12 of the assessment order. He found that assessee had sub grade iron ore of 1692672 MT as on 31.3.2012 and in FY 2012-13 the assessee has sold 588689 MT, resulting in closing stock as on 31st of March 2013 of 11,03,983 metric ton. As the assessee has sold 588 689 metric tons, the assessee cannot claim that net realizable value of above material is NIL. He held that the assessee has not disclosed the opening stock of sub grade iron ore of 1692672 MT as at 31/3/2012 and closing stock of 1103983 MT as at 31/3/2013 in the return of income filed by the assessee. Therefore, as the assessee has not disclosed the closing stock of 1103983 MT and iron ore is sold at Rs.1280/- per MT, having cost of production of Rs.622/- per MT, he made an addition of Rs.68,66,77,426/- to the total income of assessee being 1103983 MT of sub grade iron ore which is valued at cost of production of Rs.622/- per MT.

17. The assessee aggrieved with the same, preferred appeal before the ld. CIT (A). The assessee challenged the validity of search,

validity of the addition and also the merits of the addition. Assessee also raised several other grounds on technical issues. i. In ground No.4, assessee challenged that addition has been made in the hands of assessee in absence of any incriminating material found during the course of search for the relevant assessment year i.e. for Ay 2013-14. Amongst other grounds, the assessee challenged the same relying on the decision of the Hon’ble Delhi High Court in the case of CIT v Kabul Chawla and the decision of the Hon’ble Supreme Court in the case of PCIT v. Abhisar Buildwell P. Ltd., 149 taxmann.com 399. The ld. CIT(A) held that this ground related to issuance of notice u/s. 153A in absence of incriminating material resulting from the search is not tenable. He held that once the search is conducted u/s. 132 of the Act, issuance of notice u/s. 153A is mandatory, which will result into an assessment, hence he dismissed this ground. ii. On merits of the addition, he held that as per financial statement submitted by the assessee for all the years prior to PY 2012-13 there is no entry in the annual report regarding quantity of iron ore and sub grade iron ore. Even in the tax audit report, the detail of stock is not mentioned. He further noted that there is no mention in the notes to the accounts that sub grade iron ore was excavated in earlier years, it is not saleable, He therefore referred to the annual report para 16.1 wherein it is mentioned that the assessee has not maintained stock register and during the appellate proceedings it was also not produced, the information was gathered during the course of search. Now assessee cannot claim that the stock of sub grade iron ore in the financial statement is not shown because its value is Rs. Nil. He further stated that the MD of the assessee in a statement in search has arrived at a value of Rs. 622/- per MT and considering the same, the AO has made an addition of Rs.68.62 crores. Therefore, addition made on the basis of statement made u/s. 132(4) of the Act is justified. Accordingly, he dismissed ground nos. 6 to 8 of the appeal. iii. He also rejected the retraction of the statement relying upon Accounting Standard 2. iv. Assessee also raised an issue that if the addition is to be made, the opening stock for the year is 16,92,672 MT , out of which 588689 MT is sold during the year and thereby resultant closing stock is 11,03,983 MT. Assessee has already recorded the sale value of 588,689 MT in the Profit & Loss account. Therefore, if the ld. AO is making addition of the value of the closing stock, assessee must also get benefit of the opening stock of 16,92,672 MT. Therefore, addition of closing stock alone without giving credit for opening stock is not proper. The assessee relied on the decision of the coordinate Bench in & 1539/2018 dated 22.2.2022. v. The ld. CIT(A) distinguished the above judicial precedent holding that in that case, the quantitative details shown in the financial as well as tax audit report and stock of dump working was not at all valued. In the case of assessee, quantitative details are not available as assessee did not maintain stock register and quantitative details are also not available in the tax audit report. He called for a remand report from the AO on this issue which was submitted on 26.3.2024 and based on the above that as assessee has not disclosed quantitative stock in the annual accounts as well as in the tax audit report, he dismissed this argument. Thus, appeal filed by the assessee was dismissed.

19. Ground nos. 1 & 2 are general in nature. He submits that grounds 3 to 5 are inter-connected, challenging the assumption of jurisdiction, validity of search. Ground No.6 relates to the issue of notice u/s. 153C of the Act.

20. Contesting ground no.7 challenging the assessment u/s. 153A of the Act and additions made by the ld. AO which was not based on incriminating material found during search relevant to the impugned assessment year, He submitted that search took place on 19.11.2018 and during the search material found was stock statement of FY 2017-18. He specifically referred to paragraph number 5 of the assessment order where the learned assessing officer has issued a notice under section 133 (6) to the office of the deputy director in order to ascertain the unsold stock of iron ore lying at the mines after mining ban period to till to date. He categorically submits that material for AY 2013-14 was not at all found during search but was collected by the ld AO during assessment proceedings by invoking powers of section 133 (6) of the Act. He referred to the statement u/s. 132(4) of the Act of Shri Santesh Gureddi dated 21.11.2018 and referred to Q.No.17 wherein page 277-280 of Annx. 1 is referred to. He also submitted that based on that paper in answer to Q.No.18, the MD has disclosed the quantity of 496375 MT for AY 2017-18 as verified and found by the Dept. of Mines at the value of Rs.622/- per MT, the disclosure was made of Rs.30,87,45,250/-. This is evident from the Q.Nos.19 & 20. Therefore, according to him, material was found for AY 2018-19 and not for AY 2013-14.

21. He submitted that Assessee has retracted the statement on 1.4.2019 by making submission to the Dy. Director of Income Tax, Bengaluru (Bengaluru). He referred to the notice u/s. 142(1) dated 19.2.2021 placed at page 87 onwards of the PB. He referred to para 2 and stated that based on Mahazar at pg. 277-280 for FY 2017-18, AO obtained further information during the course of assessment proceedings from DMG of the total quantity of sub grade iron ore as on the date of mining ban and at the end of each financial year. Based on such information received, the ld. AO found that as on 31.3.2012, the closing stock of SGROM was 1692672 MT and stock as on 31.3.2013 was 11,03,983 MT. For the year ended on 31.3.2013 there was sales of 568000 MT. Therefore, this was the material obtained during assessment proceedings by the ld. AO as per notice u/s. 142(1) of the Act and not based on any material found during the course of search. He further relied upon decision of Hon’ble Supreme Court in the case of Abhisar Buildwell P. Ltd. 454 ITR 212 (SC) and submitted that the addition in the concluded assessment can be made on the basis of incriminating material found during the course of search relevant to that assessment year. If during search no incriminating material is found, then the assessment u/s. 153A of the Act to be made at already assessed income or returned income accepted as it is. Therefore, in the absence of incriminating material, the AO could not have disturbed the assessed income of the assessee.

22. According to ground No.10 on the merits of the addition, he submitted that closing stock is an inventory out of production made in earlier years and is not produced during this year. He also submitted that even the material collected by the assessing officer clearly shows that there was an opening stock during the year, part of which is sold during the year and resultant quantity of stock is in balance. He referred to the assessment order para 12 wherein the AO himself has stated that the opening balance of sub grade iron ore for AY 2013-14 was 1692672 MT. Therefore, it was the closing stock for FY 2011-12. This is an accepted fact by the ld. AO based on inventory obtained from DGM. He further submitted that in answer to Q. 17 & 18 of the statement dated 21.11.2018 and consequent retraction of the MD, the value of the stock should have been at Rs. NIL only as per Accounting Standard 2. He submits that the cost of producing the material or net is realizable value, least of the two is the rate at which closing stock is to be valued. In this case realizable value was Rs.NIL and therefore no valuation of closing stock was made in the books of account, it was further submitted that for the impugned AY, opening stock of 1692672 MT and closing stock of 1103983 MT was determined after recording sale of 588689 MT which is credited to the Profit & Loss account. If the AO finds that there is a closing stock at the end of the year, then set off also be given to the assessee of the opening stock. In absence of any production during the year, the opening stock is higher than the closing stock and therefore no addition could have been made during the year.

25. With respect to additions on the merits, he submits that he ld. CIT(A) failed to consider that there is no production during the year, opening stock is pertaining to the earlier years and if addition is to be made to the closing stock, the credit of the opening stock for the year should have been granted to the assessee.

26. According to him, the addition cannot survive without any incriminating material or even otherwise on merits.

i. Assessee has disclosed income for AY 2018-19 arising from undisclosed closing stock in the statement of the MD of the company made u/s. 132(4) of the Act and therefore it is having evidentiary value. The retraction made by the assessee is merely an afterthought and has rightly been rejected by the ld. CIT(A). ii. It was further stated that even if retraction is valid, lack of merit in the retraction makes it irrelevant. She referred to the order of the ld. CIT(A) and relied upon the decision of Hon’ble Delhi High Court in the case of CIT v. Chetan Das Lachman Das, 25 taxmann.com 227 (Del).

With respect to self-serving retraction without evidence not admissible, she relied upon the decision of Hon’ble Kerala High Court in CIT v. O. Abdul Razak, 20 taxmann.com 48. She further referred to IBM Circular referred to by the ld. CIT(A) at para 6.4.2 to 6.4.4 submitting that it is very relevant and the above rate of closing stock @ Rs.622/MT has valid justification. iii. On the issue of incriminating material, she specifically submitted that the material was found for AY 2018-19 which is the statement of stock and based on that the AO obtained stock statement of earlier years from the mining authorities and therefore incriminating material was the stock statement for AY 2018-19 which led to unaccounted stock for the impugned assessment year i.e. AY 2013-14. Therefore, the addition is made based on incriminating material found during the course of search. iv. On the issue of opening stock and closing stock and why credit for opening stock is not given, she referred to para 6.7 of the appellate order where the ld. CIT(A) has given a categorical finding that the assessee does not maintain stock register and further the quantitative details are also not mentioned in the tax audit report. She referred to para 6.7 of the appellate order and stated that the CIT(A) is perfectly justified in not granting credit to opening stock but confirming the addition of closing stock.

i. There is no incriminating material found during search for AY 2013-14 but only for AY 2018-19 and material was gathered by the ld. AO during the course of assessment proceedings by making an enquiry of material found for AY 2018-19 and made the addition in AY 2013-14 on the basis of opening and closing stock related to the business of assessee from AY 2009-10. ii. He further stated that the assessment order for AY 2009- 10 shows the quantity and there is no factual inaccuracy on the quantity of stock as well as the rate. Therefore, during the year, the addition is unwarranted. iii. He referred to the yearly reports of the quantitative details of the material to show that there is an excess opening stock than the quantity of closing stock. Therefore, no addition could have been made. iv. On the issue of not granting credit to opening stock while making addition of the closing stock, he submits that when the AO has himself stated that there is opening stock of 16.92 lakhs MT and closing stock of only 11.03 lakhs MT, the quantitative details are extracted by the ld. AO himself, therefore even if quantitative details are not maintained by the assessee or not reported in Form 3CD, the addition of closing stock without granting set off of the opening stock could not have been made. v. Accordingly, he submitted that addition is required to be deleted and is not based on any incriminating material found during search and further the addition on merit is also wrongly confirmed.