ACIT, CIRCLE- 5(2), NEW DELHI vs. CENTURY METAL RECYCLING PVT. LTD., NEW DELHI

It is therefore, prayed that initiation of proceedings under section 147 of the Act and assessment framed under section 147/143(3) of the Act be held to be without jurisdiction and be quashed as such and the cross objection filed by the assessee may kindly be allowed. 4 The brief facts of the case are that the assessee is engaged in the business of manufacturing of aluminum alloy ingots and zinc alloy ingots. The original return of income for the AY 2009-10 was filed on 23.9.2009 at a loss of Rs. 4,58,27,554/- which was later on revised on 6.4.2010 at a loss of Rs. 3,96,91,598/-. The original assessment was made vide order dated 02.5.2011 u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as the Act) wherein, declared loss was substantially accepted. On 25.6.2008 a search operation was conducted at the factory premises of the assessee company in Faridabad by the Central Excise Department subsequent to which a survey was conducted by the Income Tax Department on 26.3.2015. The ADIT(Inv.) Faridabad forwarded his survey report to the AO, based on which the AO formed his reasons to believe that income of the assessee had escaped assessment. Accordingly, the case of the assessee was reopened under section 147 and statutory notice under section 148 in this regard was issued. The assessee vide its reply dated 6.4.2016 submitted that its return filed u/s 139(1) on 6.4.2010 may be treated as a return in response to the notice under section 148 and requested the AO to provide the copy of reasons recorded and copy of approval taken from Pr. CIT. Thereafter, the assessee filed its objections which were duly disposed of by the AO. After disposing of the objections, the AO continued with the assessment proceedings. The reassessment was completed on 20.12.2016 u/s 147/143(3) of the Act by the AO, determining total income at Rs. 9,55,41,820/- making addition of Rs. 13,19,00,275/- in the hands of the assessee on account of alleged suppression and non-reporting of sales of aluminum dross. The addition of the AO is based on the findings of the Central Excise Department in the show cause notice issued wherein it was observed that the assessee had sold aluminum dross in the guise of “ash & residue”. The Ld. CIT(A) upheld the action under section 148 of the Act but deleted the addition on merits vide his order dated 30.6.2017 and partly allowed the appeal of the assessee. Against the impugned order, the Revenue is in appeal before the Tribunal. 5 However, in Cross objection the assessee has challenged the validity of notice issued under section 148 and re-assessment proceedings completed under section 147 vide order dated 20.12.2016. According to the assessee, reasons recorded are contained in the 7 pages, and from the same, it can be noted that, on six pages of the reasons recorded, the AO has reproduced the contents of Investigation Report received from the ADIT. It was contended that the said Investigation report is verbatim copy of show cause notice issued by excise department to the assessee. The AO has reopened the case of the assessee only on the basis of the show cause notice issued by the excise department and since adjudication order passed by Commissioner of Central Excise in respect of the said notice has been already set aside by the Hon’ble CESTAT, notice issued u/s 148 must be held to be invalid. It was submitted that CESTAT order is dated 7.12.2015 and, is prior to the date of reasons recorded on 31.3.2016 and in a case where original assessment was framed u/s 143(3) of the Act. The submission is that once the edifice of the proceedings had ceased to exist and, therefore reopening was not valid.

6 On the other hand, the ld. CIT(DR) had relied upon the orders of the authorities below and requested that contention of the assessee be rejected. The ld. CIT(DR) submitted that it is a case of valid reopening where fresh information was received which justified the action u/s 147. It was contended that an issue of notice only a prima facie opinion needs to be formed and, not a conclusive view of the matter. Once reasons were recorded and, approved obtained u/s 151 of the Act, action was in accordance with law. Reliance was placed on the following judgments: i) Yogendrakumar Gupta v. ITO 227 Taxman 374 (SC) ii) Raymond Woolen Mills Ltd. v. ITO 236 ITR 34 iii) R.K. Malhotra ITO v. Kasutrbhai Lalbhai 109 ITR 537 (SC) iv) ACIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. 210 CTR 30 (SC) v) Yuvraj v. UOI 315 ITR 84 (SC) vi) Paramount Communication (P) Ltd. v. PCIT 2017 TIOL 253 SC-IT 7 Apart from the above, the ld. AR contended that even the approval granted was mechanical and therefore not valid. Reliance was placed on the following judgments: i) dated 11.1.2017 (Del) Pr. CIT v. N.C. Cables Ltd. ii) 79 ITR 603 (SC) Chugamal Rajpal v. S.P. Chalihan and others 8 We have heard both the parties and perused the records, especially the orders of the authorities below and the case laws referred by both the parties. We find that in the instant case original assessment was framed on 02.05.2011 u/s 143(3) of the Act. Subsequently reasons were recorded on 31.3.2016 on the basis of show cause notice issued by the Excise Department of Faridabad, whereby it was alleged that assessee had sold processed aluminium dross valued at Rs. 13,19,00,275/- during financial year 2008-09 relevant to AY 2009-10 either fraudulently by issuing sale invoices of Ash & Residue” to suppress the actual value thereof or clandestinely without issue of proper Central Excise invoice. The assessee in the objection dated 16.4.2016 contended that pursuant to the show cause notice and adjudication order was passed by the learned Commissioner of Central Excise which had been completely set aside by Central Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi by its order dated 29.10.2015. The AO however in the order disposing off objection held since the matter is open until the department accepts the order of an appellate authority and therefore action u/s 147 is valid. Infact in the order of assessment the AO has observed as under: “The contention of the assessee was considered but not acceptable. CESTAT is not the final appellate authority to adjudication any matter. The matter is yet to achieve finality till the revenue accepts an order or it sis settled by the Hon’ble Apex Court. The order of the CESTAT has not been accepted by the Excise Department. From the information received in this office, the Excise Department has already started the process of filing the appeal against the CESTAT order. This information was also shared with the assessee on 15.12.2016. Thus the contention of the assessee that the CESTAT order has achieved finality and therefore the proceedings u/s 148 stands deleted is not correct. Rather, it points out that the information won the basis of which enquiry was done by AO, before reopening this case u/s 148, was correct. The AO reopened this case u/s 148 after satisfying himself of the correctness of the information and after coming to a credible belief that income has escaped from assessment.” 9 Having considered the rival submissions, we find that in the instant case it is undisputed fact that action u/s 148 of the Act was proceeded on the basis of show cause notice issued by the Excise Authorities which formed the basis of adjudication order by the Commissioner of Central Excise which had been set aside by an order dated 4.12.2015 of the Customs, Excise Service Tax Appellate Tribunal. Thus once the very foundation on which the action u/s 147 had been initiated had cease to exist; both logically and legally what emerges is that notice u/s 148 of the Act was invalid and the assessment framed u/s 147/143(3) was also vitiated. Apart from the above we also note that the approval was recorded u/s 151 of the Act in the following manner:

“Dated 31.03.2016 yes Whether the Pr. CIT is satisfied on the reasons recorded by AO that it is a fit case for the issue of notice u/s 148.

(P.K. Gupta) Pr. CIT, Range-5, New Delhi”

10 The Hon’ble Apex Court in the case of Chhugamal Rajpal vs. S. P. Chaliha and Others 79 ITR 603 has held as under: Further, the report submitted by him under section 151(2) does not mention any reason for coming to the conclusion that it is a fit case for the issue of a notice under section 148. We are also of the opinion that the Commissioner has mechanically accorded permission. He did not himself record that he was satisfied that this was a fit case for the issue of a notice under section 148. To question No. 8 in the report which reads "Whether the Commissioner is satisfied that it is a fit case for the issue of notice under section 148", he just noted the word "Yes" and affixed his signature thereunder. We are of the opinion that if only he had read the report carefully, he could never have come to the conclusion on the material before him that this is a fit case to issue notice under section 148. The important safeguards provided in sections 147 and 151 were lightly treated by the Income-tax Officer as well as by the Commissioner. Both of them appear to have taken the duty imposed on them under these provisions as of little importance. They have substituted the form for the substance. 11 Also the jurisdictional High Court in the case of Pr. CIT vs M/s N.C. Cables Ltd. has held as under: 11. Section 151 of the Act clearly stipulates that the CIT (A), who is the competent authority to authorize the reassessment notice, has to apply his mind and form an opinion. The mere appending of the expression 'approved' says nothing. It is not as if the CIT (A) has to record elaborate reasons for agreeing with the noting put up. At the same time, satisfaction has to be recorded of the given case which can be reflected in the briefest possible manner. In the present case, the exercise appears to have been ritualistic and formal rather than meaningful, which is the rationale for the safeguard of an approval by a higher ranking officer. For these reasons, the Court is satisfied that the findings by the ITAT cannot be disturbed.”

12 The Ld. CIT(DR) has relied on various judicial pronouncements to submit that since action was based on fresh information from the Excise authorities a prima facie opinion was formed that income of the assessee had escaped assessment. It was contended that neither the sufficiency nor the correctness or material is to be considered at the stage of reopening. However no judicial decision has been highlighted before us to suggest that once the very foundation on which action has been based has ceased to survive, the notice is valid. Thus judgments relied upon are distinguishable on the facts of the assessee. The order of CESTAT had neither been stayed nor reversed and therefore had to be given effect to without any restriction and therefore we are of the opinion that the reasons recorded dated 31.3.2016 subsequent to the order of CESTAT dated 7.12.2015 were not valid reasons to assumption of jurisdiction to invoke u/s 147 of the Act.

13 Hence, respectfully following the above precedent, we hold that the notice issued by the AO u/s. 148 was not a valid notice and quash the reassessment proceedings being bad in law and illegal. As a result grounds raised by the appellant in cross objection stands allowed.

14 Now taking up the revenue appeal, the solitary issue in this appeal by relates to deletion of addition of Rs.13,19,00,275/- on account of suppression of value of sale of alumninium dross.

15 We have heard both the parties and perused the records, especially the orders of the authorities below and the case laws referred by both the parties. We find that the Ld. CIT(A) has deleted the addition by holding as under:

5.2.2 The background of the case of the appellant is that on 24.06.2008 a search operation under Central Excise Act was conducted at the premises of the appellant. The Excise Department later on forwarded their observations to the Income Tax Department based on which a survey operation was conducted by ADIT (Investigation), Faridabad on 26.03.2015.

The ADIT (Investigation), Faridabad forwarded his report to the AO on the basis of which the AO reopened the case of the appellant u/s 148/147 of the Income Tax Act. 5.2.3 In the reasons recorded, the AO has quoted the findings of the Excise Department in the show cause issued by them under Excise provisions. Based on the said findings in the show cause, the AO formed his reasons to believe that income to the tune of Rs. 13,19,00,275/- had escaped assessment in the assessment year 2009-10 and completed assessment under Section 147 read with section 143(3) of the Act making addition of Rs. 13,19,00,275/- in the hands of the appellant. In the re-assessment order, the AO has reiterated his reasons recorded. 5.2.4 The AO in the impugned order has alleged that the appellant has suppressed the value of its sales of aluminum dross (high value by-product) by reporting the same as sale of ash and residue (low cost by product) generated during the course of its manufacturing process of its final product ‘Aluminum Ingot’. 5.2.5 All the allegations of the AO are based on two grounds: (a) Statement of some of the job workers recorded by the Excise Department during the course of investigation against the appellant, wherein they have admitted to have purchased aluminum dross from the appellant for which invoices of ash and residue were issued by the appellant. (b) Excel Sheets recovered from the pen drive seized from the premises of the appellant by the Excise Department, wherein the reported quantity of the aluminum dross was stated to be matching with the quantity of sale of ash and residue reported in the Excise return (ER 1). 5.2.6 Based on the above two grounds, the AO has recorded his finding that the appellant has sold processed aluminum dross valued at Rs. 13,19,00,275/- during the financial year 2008-09 fraudulently by issuing sale invoices of ash and residue to suppress the actual value of sales.

5.2.7 Before dealing with the above allegations of the AO, it is important to refer to the manufacturing process of the appellant company through which aluminum dross and ash & residue are generated. The appellant company is engaged in the manufacturing of aluminum ingots and zing alloy ingots. Aluminum ingots are manufactured by melting aluminum scrap at a very high temperature and during the said melting process a thick layer of dross comes on the surface of the molten metal. The said thick layer is termed as aluminum dross which is then removed from the surface and spread on the ground for cooling. After cooling, the aluminum dross takes the shape of big lumps and these lumps are subjected to re-melting to extract the aluminum metal out of the same. The said re-melting is either done in- house or through job workers. After extracting the aluminum from the dross, remaining impurities in the form of ash and residue are disposed of/sold. 5.2.8 The appellant in its books has shown sale of aluminum ingot and ash/residue. However, the AO in the assessment order has alleged that the appellant has sold aluminum dross in the guise of ash/residue and accordingly the sale of ash/residue shown in the books of accounts is the unreported sale of aluminum dross, as per the A.O. The allegation of the AO is primarily based on the data contained in the pen drive seized by the Excise Department from the premises of the appellant during search under Excise Act, which contained data for the months of Aug, 2006 to May, 2008. The AO in the assessment order has stated that as per the data of excel sheet ‘RECON MONTHLY DROSS’ in the pen drive, the quantity of aluminum dross for the month of April, 2007 exactly matches with the quantity of sale of ash and residue reported in the ER-1 return and that for the other months it was by and large in excess of the quantity of ash and residue shown in ER-1 return. Accordingly, it has been presumed by the AO that the appellant has sold aluminum dross and issued invoices in the name of ash and residue, reducing the value of sales in terms of rupees in respect of the quantity reported in ER-1 return and for the excess quantity, no sale invoice whatsoever has been issued. 5.2.9 On the basis of the said observation, the AO extrapolated his presumption also to the months of June 2008 to March 2009 (for which there was no data in the pen drive) and treated the thereby sale of ash & residue reported in the ER-1 return as sale of aluminum dross and calculated the value of under reported sales. 5.2.10 The appellant in this regard has submitted that it has not sold any aluminum dross in the year under consideration. The aluminum dross generated during the process of melting of aluminum scrap has been subject to re-melting to extract aluminum metal out of the same. As regards the quantity of aluminum dross mentioned in the excel sheet extracted from the seized pen drive, the directors of the appellant company have stated that the same does not represent the sale of aluminum dross. Rather the same is being used for the purpose of costing of the final product. 5.2.11 In this regard, the appellant has drawn attention to the fact that out of total raw material charged in the furnace in the production of aluminum alloy ingots, 15.6 per cent of aluminum dross is generated. This dross is further processed and about 40 to 45 per cent of aluminum is further extracted from the same. The balance quantity that remains is termed as ash and residue which is saleable in the market. In other words, ash and residue forms 8 to 10 per cent of the total raw material charged to the furnace. The said manufacturing process had been closely observed by the Excise department during the search. In the year under consideration, ash and residue generated and sold is 2502.482 MT which forms 8.61% of the total raw material of 29081.51 MT consumed during the year under consideration. 5.2.12 The appellant further submitted that the processing of aluminum dross is either done in house or through job workers.

The aluminum dross when processed through job workers, they return the metal extracted out of the said processing of aluminum dross and keep the ash and residue generated during the said processing with them. For the ash and residue kept by the job workers, the appellant issues sale invoices to them. And accordingly, sale of ash and residue have been duly reported in the Excise return filed by the appellant. 5.2.13 After going through the observations of the AO and arguments of the appellant in its written submissions, it is noticed that the AO in the assessment order has mainly relied upon the month wise data of aluminum dross extracted from the pen drive in which quantity generated in the month of April, 2007 matches with the quantity of sale of ash and residue reported in ER-1 return and based on the same, he presumed that all the quantity of aluminum dross mentioned in the sheet was being sold by the appellant, out of which some was reported as sale of ash and residue in the books of accounts by issuing invoices in this regard and remaining quantity has been sold outside the books. 5.2.14 As regards the data contained in the pen drive, my attention was drawn to the relevant extract of the show cause notice issued by the Central Excise department placed on paper book page no. 155 wherein the invoiced sale quantity of ash and residue reported in the ER-1 has been compared with the quantity of dross mentioned in the excel sheet in the pen drive. On perusal of the same, it is observed that the quantities for April, 2007, July, 2007, November, 2007 and March, 2008 only match with the reported quantities of ash and residue sale for these months. For the year under consideration, the quantity of dross for the months of April, 2008 and May, 2008 (period before the Excise search in June, 2008) only is available in the excel sheet. That too does not match with the reported quantities of sale of ash and residue for the corresponding months. Observing all these facts, it is noticed that the AO has made a chain of presumptions while making addition in the hands of the appellant. 5.2.15 Firstly, it was presumed that the quantity of dross mentioned in the excel sheet for the month of April, 2007 has been sold by the appellant in the guise of ash and residue as the same was matching with the invoiced quantity of ash and residue for that month. Secondly, it was presumed that even if the data for the other months was not matching, then took the appellant must have sold dross in the guise of ash and residue in all months. And thirdly, in the period after the date of search i.e. June, 2008 to March, 2009, for which there was no data on the excel sheet, the appellant must have also sold dross in the guise of ash and residue. There is no evidence whatsoever brought on record to support these presumptions. Even, for the period after the date of search, when the investigation was already initiated against the appellant, the AO has filed to bring out any evidence to show as to how the appellant was able to all the aluminum dross without issuing any invoice or by issuing invoice of ash and residue. Therefore, I am of the view that the AO was not justified in making the presumption that the appellant has sold aluminium doss in the guise of ash and residue. 5.2.16. Even otherwise, if the allegations and observations of the AO are summarized, then his point is that the appellant has only generated aluminium dross as a byproduct in the process of manufacturing of aluiminium ingots and no ash and residue has been generated. However, going but the scientific process explained by the appellant, it s not possible to believe that the appellant has not generated and ash and residue whatsoever during the said manufacturing process. In every manufacturing process, there are by products and scraps which are generated in the due course of manufacturing. A manufacturing process, however efficient it may be cannot bring out hundred percent input output ratio. Meaning thereby, there is always a left out material in the form of scrap during a manufacturing process which cannot be avoided. The AO in the assessment order has not pointed out any discrepancy in the inputs.raw material consumed by the appellant and the output that is aluminium ingots generated out the same. In other words, the input-out, that is, aluminium ingots generated out of the same, In other words, input-output ratio has not been doubted by the AO. The operating results reported by the appellant in the profit and loss a/c are also not in doubt. Neither is there any rejection of books of accounts. In view of the same, it cannot be concluded that the appellant has underreported its sales by selling aluminium dross either through invoices of ash and residue or without invoice. The view of the AO cannot be upheld because if the appellant has sold aluninium dross in the guise of ash/residue, as alleged by AO., then there is no evidence of sale/disposal of ash and residue outside the books brought on record, which could take the observations/findings of the AO to the logical end. 5.2.17 The AO in the assessment order has also referred to some of the statements of the parties to whom the invoices of ash and residue were issued wherein they admitted having purchase dross in the guise of ahs and residue from the apple ant. However, the AO in the last para of the assessment order has mentioned that the cross examination of these persons demanded by the appellant has not been granted as he is mainly relying on the data received and not on the statements, meaning thereby, that these statements have not been treated by the AO as evidence against the appellant. 5.2.18 However, since the statement s find mentioned in the assessment order, it is relevant to deal with the same. The AO in the assessment order has mentioned about the statements of five persons recorded at the time of search at their premises by the Excise Department. The appellant has rebutted the statements one by one in its reply dated 01/12/2016 before the AO. As regards, the statements of Ratan Lal and Babu Lal of M/s. B.S.Metal, the appellant pointed out that it has supplied aluminium dross on job work out of which some of the quantity was processed and aluminium ingots were supplied back to the appellant and the remaining quantity of dross was found lying at its premises by the Excise Department at the time of search. 5.2.19. As regards the statement of Shri Dharambir, Prop D.B.Enterprise, he has retracted from his original statement the very next day vide his letter dated 12/12/2009 wherein he has mentioned to have given statement under duress. Further the appellant has not sold even a single kilo of ash and residue to him in the year under consideration. 5.2.10. The next is the statement of Sh. Ram Kumar of Uma Metal with respect to which it has been mentioned in the assessment order that an invoice was seized from his premises wherein the description of good was of ash residue; however in the weighment slip it was mentioned as dross. In this regard, the appellant has submitted that the alleged invoice is dared 11/06/2017 which is not relevant for the year under consideration. In the year under consideration, the appellant has sold ash as residue only through one invoice no. 1961 dated 24/07/2008 for which no query/question was put before Ram Kumar. 5.2.21 The last statement is of Sh.Ajay Kant Thakur, AR of Apoorav Metal, in whose case unprocessed metal, aluminium ingots and other sorted metal was seized by the Excise Departmnet and a confiscation SCN was issued in this regard which was set aside by the Commissioner Excise (Appeals) holding the seizure to be unlawful and it was further held that the system of maintaining books for receipt of raw material and production of resultant goods on challan has to be accepted. 5.2.22 The above rebuttal of the appellant has nowhere been doubted by the AO in the assessment order. Moreover, it is important to note here that a search operation was also carried out at the premises of these persons by the Excise Department. No incriminating material with respect to any cash transaction being done by the appellant with these parties has been brought on record by the A.O. In view of these facts and the specific rebuttal made by the appellant, no adverse inference can be drawn against the appellant on the basis of these statements.

5.2.23. The appellant has been regularly assessed to tax in the earlier years and subsequent years also. In the said assessments, the trading and the manufacturing results alongwith the input- output ration of raw-material and finished goods were never in doubt. Neither was any discrepancy ever pointed out in the same. In this regard the appellant has also drawn attention to the findings of the CESTAT in their order darted 7.12.20156 against the adjudication order passed by the Commissioner of Excise, Faridabad. In the said order CESTAT has completely set aside the findings in the adjudication order. The CESTT in its order has specifically dealt with issue of sale of aluminium dross in the guise of ash and residue. In this regard, CESTAT has recorded the finding that the Revenue has failed to bring out any corroborative evidences in the form of any cash transaction or other evidences to support its finding. The CESTAT further held that if sale of ash and residue is assumed to be sale of aluminium dross then the department has failed to explain as to how aluminium dross was removed from the factory premises and sold in the market and further how the assessee has disposed of the ash and residue generated during the manufacturing process.

5.2.24 In view of the above, I am of the considered view that the appellant has not sold dross in the year under consideration as there is no concrete evidence available on record to show that the appellate has underreported its sale. Further, the AO has not doubted the books of accounts and the operating results shown by the appellant.

Accordingly, the addition made by the AO of Rs.13,19,00,275/- is liable to deleted.

Grounds nos.9 to 11 of the appeal are allowed.

16 The ld. DR has relied upon the judgment of Apex Court in the case of ITO v. Pirai Choori 334 ITR 262 wherein it has held that absence of cross examination cannot be made the basis of deletion of an addition.

17 In the case of G.R. Kalra HUF v. ITO in for Assessment year 1999-00 dated 12.4.2017 it has been held as under “……21. We find the Hon’ble Supreme Court in the case of Andaman Timber Industries vs. Commissioner of Central Excise (supra) while decing an issue regarding not allowing the cross examination has held that not allowing the assessee to cross examine the witness by the adjudicating authority though statement of those witnesses were made as basic of the Impugned order amounted to a serious flaw makes the order a nullity as it amounted to violation of principles of natural justice.

by the Revenue.

19. In the result, the Appeal filed by the Revenue is dismissed and Cross Objection filed by the Assessee stands allowed.

Order pronounced on 19-07-2018.