BOON INDUSTRIES,MUMBAI vs. CIT XVII, MUMBAI

ORDER

PER N.K. PRADHAN, AM

1. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in confirming the reopening of assessment on issuing the notice u/s 148 without having a believe that income had escaped assessment;

2. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in confirming the addition of Rs. 15,21,435/- (A.Y. 2000-01); Rs. 6,02,514/- (A.Y. 2001-02); Rs. 6,77,213/- (A.Y. 2002-03); Rs. 8,04,875/- (A.Y. 2003-04) and Rs. 10,95,369/- (A.Y. 2004-05) on assuming the suppression of production, sales and income on ignoring the vital fact that electric consumption is not a sole determining factor to estimate the production of goods when there is no unaccounted purchase, sales, labour detected in assessment;

3. On facts and circumstances of the case and in law, Ld. CIT(A) erred in estimating the production yield of 1.75 kg per power unit as against 1.00 kg per power unit reported by the appellant; 3.1 The Ld. CIT(A) while estimating the production yield of 1.75 kg per electric unit, incorrectly compared the production result of other machine manufacturer on ignoring the fact that there is substantial variation to both machines; 3.2 The Ld. CIT(A) erred in not accepting the report of a Government approved Chartered Engineer certifying the appellant’s production yield at 1.00 kg per electric unit; 4. On facts and circumstances of the case and in law, Ld. CIT(A) erred in estimating a Gross Profit rate of 27.70% on sales (A.Y. 2000-01); 29.50% A.Y. (2001-02); 32.94% (A.Y. 2002-03); 30.11% (A.Y. 2003-04) and 29.65% (A.Y. 2004-05) as against 10% net-profit estimated appellant’s associate concern’s case. 3. We begin with the background of the present appeal. The revenue had filed miscellaneous applications no. 337 to 341/Mum/2014 seeking recall of the common order dated 15.07.2010 passed by the ‘’B’’ Bench, Mumbai in the case of the assessee in to 4063/Mum/2009 relating to the assessment years 2000-01 to 2004-05 against the appeals filed by the assessee. The assessee had filed appeals challenging the orders passed by the learned CIT(A) for the said years, wherein he had confirmed the validity of reopening of assessments and granted partial relief in respect of additions of gross profit made by the Assessing Officer (AO) towards suppressed sales. The Tribunal confirmed the order of the learned CIT(A) in upholding the validity of reopening of the assessments. However, the Tribunal deleted the addition of gross profit made towards suppression of sales in all the years referred above. The assessee submits before the Tribunal that the revenue has already preferred appeal before the Hon'ble High Court of Bombay challenging the orders passed by the Tribunal. It is submitted by him that the present miscellaneous applications are invalid, since the appeals filed by the revenue against the order of the Tribunal have since been admitted by the Hon'ble High Court. The Tribunal followed the order dated 08.04.2015 of the Hon'ble Bombay High Court in the case of M/s. R.W. Promotions (P) Ltd. in W.P. No. 2238 of 2014 wherein it has been held that the power given to the Tribunal u/s 254(2) can be exercised by it, even if the order passed by it u/s 254(1) has been challenged u/s 260A of the Act before the High Court. The Tribunal thus held as under:

“Hence, we find merit in the miscellaneous applications filed by the revenue. Accordingly, we recall all the grounds relating to the addition of Gross profit made on account of suppression of production/sales. In the miscellaneous petitions, the revenue has not pointed out any mistake on the decision rendered on the issues relating to validity of reopening of assessments. Hence the grounds relating to validity of reopening of assessments need not be recalled. The registry is directed to post these appeals for hearing in the normal course.’’ 4. The relevant facts are not in dispute and can be shortly stated. We begin with the A.Y. 2000-01. The assessee filed its return of income for the said year on 17.10.2000 declaring total income of Rs. nil, claiming deduction u/s 80IA of Rs. 1,48,062/-. The assessee was having a Steel Wool Manufacturing Unit. It was investigated by the MSEB authorities for power thefts. The said authorities requested the Income Tax Department to conduct investigation from the income tax angle.

4.1 The AO mentions in his assessment order dated 28.12.2006 that the following information was received from the MSEB authorities by the Income Tax Department: i. Letter No. DVS/ENF/3449 dated 21/08/2004 from Director, Vigilance MSEB [Annex 2 hereto], along with monthly billing statement from 01/04/1997 to 31/03/2004 Annexure ‘2A’hereto. ii. Letter No. Vs./ENF/04216 dated 10/11/2005 [Annex 3 hereto] from the Executive Engineer, MSEDCL along with rectified billing statement. This letter stated that the earlier billing statement sent with letter dated 21/08/2004 was incorrect and hence the rectified billing statement was sent, Annexure ‘3A’hereto. Iii Copy of electricity theft inspection report sheet No. C for theft of 115999 units of energy amounting to Rs. 2,78,398/-. Annexure ‘4’hereto. iv. Letter No. V&S/ENF/0355 dated 31/01/2006 received from the Executive Engineer, MSEDCL. Annexure ‘5’hereto. v. Copy of Assessment Sheet dated 09.02.2004. Annexure ‘6’ hereto. vi. Letter No Vs./ENF/0875 dated 18/03/2006 from the Executive Engineer Enforcement, MSEDCL. Annexure ‘7’hereto. 4.2 The AO had sent a copy of the above documents to the assessee on 28.11.2006 asking for comments/objections. As per the information received by the AO, the electricity bills for the relevant period of the assessee was Rs. 4,99,363/-. In the profit & loss account for the relevant period, the assessee has shown electricity charges at Rs. 50,000/-.

4.3 The AO then sent letters to the manufacturers of the machinery used by the assessee requesting them to furnish details of the capacity of the machines. In reply, the AO received catalogues/pamphlets from Machinotherm Engineers and S.S. Machine Mfg. Co. As per the details furnished by the MSEB authorities, the machine of Machinotherm Engineers would produce 140-160 Kg/29.84 units = 3.75 to 4.2 Kg per unit of energy and the machine of S.S. Machine MFg. Co. would produce 75 to 80 kg/29.84 units = 2.51 to 2.68 kg of steel wool per unit of electricity. The minimum production thus works out to 2.5 kg of steel wool per unit of energy consumption.

4.4 For the relevant period, the assessee’s consumption is 127631 units of energy. Out of this 80% is attributable to the manufacturing process. The AO calculated 80% of 127631 at 102104 units. At 2.5 kg output per unit, the same comes to 255262 kg of steel wool in the year. The assessee did not furnish before the AO the unit selling price. The AO found from enquiries that for A.Y. 1998-99 and 1999-2000, the sister concern of the assessee i.e. M/s. Ashish Industries had stated their selling price to be Rs. 40 per kg. Since the selling price for A.Y. 2000-01 could not be less than that of A.Y. 1998-99 and 1999- 2000, the A.O. adopted the selling price at Rs. 40 per kg and estimated the sales at 2,55,262 kg X Rs. 40 = Rs. 1,02,10,480/-.

4.5 It is mentioned by the AO that the assessee did not appear before him to reply fully to the queries in the questionnaire issued by him.

4.6 As mentioned here-in-above, the AO estimated the sales of the assessee at Rs. 1,02,10,480/-. The assessee has shown sales of Rs. 21,31,500/- only. The assessee has shown GP ratio at 30.58%. Accordingly the AO determined the GP at Rs. 31,22,364/-. The AO then observes that “the expenses charged to profit and loss account are of such a nature viz; bank charges, bank interest, conveyance, insurance and miscellaneous expenses that they will not vary with the increase in sales excepting electricity charges. They are to the tune of Rs. 4,53,965/-. Deducting this amount from the GP i.e. (Rs. 31,22,364 – Rs. 4,53,965) = Rs. 26,68,399/-. The assessee has claimed electricity expenditure of Rs. 50,000/-. This leaves a balance of Rs. 26,18,399/- . Its actual electricity expenses as established by MSEB authorities were Rs. 4,49,363/- not shown by it in its profit and loss account is allowed to it. Hence, the net profit is established at Rs. 26,18,399 – Rs. 4,49,363 = Rs. 21,69,036/-.”

4.7 To sum up, the A.O. has computed the income of the assessee for the different assessment years in the following manner:

A.Y. Estimated sales (Rs.) GP (%) Estimated income (Rs.) 2000-01 1,02,10,480/- 30.58 21,69,036/- 2001-02 73,79,200/- 35.58 18,29,223/- 2002-03 1,01,51,880/- 35.58 29,04,341/- 2003-04 1,01,51,880/- 35.58 28,78,820/- 2004-05 99,13,600/- 29.87 22,57,310/-

of indirect expenses in that case and CIT(A) has confirmed net profit of 10% of the total unaccounted sale. Without getting into that mechanism I am of the view that production can be estimated at 1.75 kg per unit instead of 2.5 kg as done by AO for reasons of lower horse power capacity and the depreciation of the machinery. Every other estimation done by the AO will remain unchanged and is confirmed in view of the reasoning given by the AO in the assessment order and the remand report. No further deduction of any other indirect expenses will be given except the allowed indirect expenses, as per the original assessment order. They are to be reduced. Accordingly out of the addition made by the Assessing Officer addition at rate of 1.75 kg per unit of power is confirmed and the balance addition is deleted. The A.O. is directed to modify the production estimated accordingly.

The appellant has claimed that the Assessing Officer has taken GP rate of 30.58%. The Appellant has argued that the Assessing Officer should have taken the normal GP of 8-10% prevalent in the industry instead of the high percentage adopted. I am not in agreement with the arguments of the Authorised Representative. I find that as per the books of the appellant for the year under consideration the disclosed GP was 27.70%. It is fair to adopt the same GP rate for the purpose of the unaccounted sales also. The AO is therefore directed to adopt the GP rate of 27.70% for arriving at the taxable income from these operations. From the profit so derived the AO is directed to allow only the expenses allowed as per the original assessment. This is Rs. 9,53,328 for the year. On this basis the Assessing Officer is directed to recompute the net income and tax accordingly. This ground of appeal is allowed partly.”

5.1 The learned CIT(A) after going through the disclosed GP of the assessee has directed the AO to adopt 29.50% (A.Y. 2001-02); 32.94% (A.Y. 2002-03); 30.11% (A.Y. 2003-04) and 29.65% (A.Y. 2004-05).

6.1 The learned counsel further submits that the AO estimated the production yield of 2.50 kgs per unit which has been reduced at 1.75 kgs per unit by CIT(A) and the same is incorrect because (i) the Chartered Engineer’s report certifying the production yield of 0.90 to 1.00 kg per unit should be given preference, (ii) the assessee’s machine is assembled whereas the compared machine is branded one and (iii) the assessee’s machine is of 40HP whereas compared machine is of 50HP.

6.2 It is submitted by him that the Additional Session Court Judge, Palghar had acquitted the assessee on giving the finding that there is no pilferage of electricity.

6.3 The learned counsel further submits that the mere disparity in consumption of electricity cannot be a reason for estimating the turnover since production depends upon various factors and addition made on estimating the suppressed sales on the basis of consumption of electricity deserves to be deleted since it has no scientific basis. As per him, the MSEB vide letter dated 10.11.2005 estimated the power electricity consumption which comprises of understated defects :-

Paramater As per MSEB As per Appellant Load 50 HP 40 HP No of shifts 3 shifts 1 shifts

It is clarified by him that the MSEB stated that its earlier letter dated 21.08.2004 was misleading. The MSEB vide letter dated 31.01.2006 informed the basis of consumption of electricity also which comprised of understated defects :-

Paramater As per MSEB As per Appellant Connectedload 45 HP 40 HP Hours 21 Hours (3 8 Hours (1 shifts) shifts)

It is stated by him that MSEB allowed 60% discount factor, however did not provide the revised statement of electricity consumed due to which learned CIT(A) erroneously considered the incorrect statement provided by MSEB vide earlier letter dated 10.11.2005. The MSEB vide letter dated 18.03.2006 intimated the AO of its earlier error and admitted that the assessee’s machine is of 40 HP, thus provided the basis of re-working of the power consumption. However, MSEB did not provide the revised statement of electricity consumed due to which learned CIT(A) erroneously considered the incorrect statement provided by MSEB vide earlier letter dated 10.11.2005.

6.4 The learned counsel thus submits that the production unit determined by the AO at 2.50 kgs per unit and re-estimated by learned CIT(A) at 1.75 kgs per unit is erroneous since the machine compared by AO is different from the assessee’s machine in understated manner:-

Paramater Appellant’s S.S. Mfg. Co. Machine Machine Motor capacity 40 HP 50 HP Make Locally Branded machine assembled Length of machine 12 meters 198 meters Cost of machine Rs. 9-10 Lakhs Rs. 44 Lakhs Year of manufacturing 1998 2006 6.5 It is further submitted by him that the learned CIT(A) estimated the average sale price of Rs. 40/- per kg on considering the facts of associate concern M/s. Ashish Industries in which case, the total income was estimated @ 10% on sales. However, in impugned case, learned CIT(A) sustained the addition on re-working the gross profit @ 27.70% on sales.

A.Y. Units consumed & Expenses of amounts paid as per electricity as per MSEB’s letter & P&L Account statement enclosed therewith 2000-01 127631 units / Rs. Rs. 50,000/- 4,99,363/- 2001-02 84674 units / Rs. Rs. 1,05,760/- 3,13,259/- 2002-03 75076 units / Rs. Rs. 75,125/- 2,78,162/- 2003-04 91220 units / Rs. Rs. 99,610/- 3,17,632/- 2004-05 108363 units / Rs. Rs. 1,44,380/- 3,75,225/-

The bank statements reflect these payments and the electricity authorities have certified that the assessee had paid all its bills without dispute. It is stated that in the P&L account for the A.Y. 2000- 01, only Rs. 50,000/- has been debited towards electricity expenses and no outstanding electricity expenses were shown in the balance sheet, clearly indicating payment outside the books.

It is stated that the assessee did not produce the wage register despite opportunity provided to it. Therefore, this is not a case where no unaccounted labour has been detected in the assessment contrary to the ground raised by the assessee.

7.1 In respect of ground no 3 of the appeal, it is submitted that the learned CIT(A) has taken the yield at 1.75 kg taking into consideration the lower HP and the depreciation of the machinery. It is further submitted that information had been called u/s 133(6) of the Act from M/s. Machinotherm Engineers and M/s. S.S. Machine Mfg. Co. (both Calcutta based manufacturers of steel wool making machinery). Both had sent pamphlets detailing the dimensions, parameters and production capacity of their machines. Before the learned CIT(A), the assessee had produced report of a Chartered Engineer, Mr. S.P. Marulkar. This report also mentions the dimensions and parameters of the assessee’s machines. These are summarised as under:

Sl. Name of Type of Type of Type of No of Output / No Machinery Machine Motor raw Blade hour Manufacturer material used 1 Machinotherm Double- 75 HP (rpm Steel wire 72 140-160 Engineers Bed no 3.1 mm kgs mentioned) diameter 2 S.S. Machine Double- 50 HP Steel wire 48 75-80 kgs Mfg. Co. Bed (1450 rpm) 3.1 mm diameter

3 Assessee’s Double- 40 HP Steel wire 58 20kgs machine as per Bed (1450 rpm) 3.1 mm the Chartered diameter Engineer’s report

It is thus submitted by him that there is a direct correlation between HP / speed of the machine and the number of blades used to the output. The more the HP / speed and the number of blades – the higher is the output.

7.2 It is stated by him that the Chartered Engineer’s report ought to be rejected as he himself has admitted in his report that when he went for inspection, the machine was no longer there and it had been sold. It is the admitted position that he inspected the machine of M/s. Ashish Industries while certifying the production capacity of the present assessee. Further the Chartered Engineer has himself mentioned in his report that the test was carried out using re-run i.e. used wire (raw material) whose thickness had been reduced instead of brand new wire. During his examination on oath, the Chartered Engineer had admitted that he had not given any technical explanation in support of his conclusion that the assessee’s machine could produce only 20 kg per hour. The assessee’s sister concern M/s. Ashish Industries had a brand new steel wool machine, specifically manufactured for them by M/s. MTR Pvt. Ltd., a manufacturer of steel wool making machinery. The pro-forma invoice clearly indicates this. Hence it was not “locally assembled’’ as claimed by the assessee / Chartered Engineer. The Chartered Engineer has stated in his report that he had inspected the machine of the assessee’s sister concern – viz M/s. Ashish Industries, whose machine was identical to that of the present assessee. The Chartered Engineer has certified that the machine of the assessee and M/s. Ashish Industries are identical. It follows that the machine of the assessee and that of M./s. S.S. Machine Mfg. Co. will have virtually the same parameters. Hence, the output will also be similar. An examination of question no 4 & 28 put to the Chartered Engineer during his statement on oath and his answers thereto clearly shows that the machine was not self-fabricated or locally assembled but was specially manufactured for the purchaser (M/s. Ashish Industries). Hence, the assessee’s contention that its machine being “locally assembled’’, can never have the capacity of a “branded’’ machine has no substance.

7.3 In respect of ground no 4 of the appeal, it is submitted that before the learned CIT(A) the assessee worked out the GP ratio. The same was accepted by the learned CIT(A) and he directed the AO to adopt the said ratio. Hence, the assessee should not have any grievance on this ground.

8.1 In respect of the remaining grounds of appeal

, we begin with the assessment order for the A.Y. 2000-01 dated 28.12.2006 passed by the AO u/s 144 r.w.s. 143(3) of the Act. The AO had issued notices u/s 142(1) to the assessee on the following dates: Notice u/s 142(1) dated 27/06/2005 Hearing fixed on 11/07/2005 1

2. Notice u/s 143(2) dated 27/06/2005 Hearing fixed on 11/07/2005 3. Notice u/s 142(1) dated 17/08/2005 Hearing fixed on 24/08/2005 4. Notice u/s 142(1) dated 29/08/2005 Hearing fixed on 05/09/2005

5. Notice u/s 142(1) dated 20/09/2005 Hearing fixed on 26/09/2005 Questionnaire issued dated Hearing fixed on 03/08/2006 6 11/07/2006

7. Show cause letter dated 17/10/2006 Hearing fixed on 26/10/2006

8. Letter dated 28/11/2006 enclosing information received from MSEB and machinery manufacturers and asking for comments Letter dated 01/12/2006 giving final 9 chance to assessee 8.2 The AO has mentioned in the assessment order (page 10) that till 28.12.2006 the assessee did not appear before him to conclusively reply to the queries in the questionnaires. We find that this is evident from the assessment order (page 6 & 7). Similar is the situation for remaining assessment years. The contentious issues delineated at para 6 to 6.5 by the learned counsel of the assessee and at para 7 to 7.3 by the learned DR here-in-above which fall in the province of facts can be resolved only on proper appreciation of the documents, analysis of facts and conclusion thereon. The claim should be based on credible evidence. The AO could not do it as the assessee failed to file the complete details of the transactions before him. A perusal of the details filed by the assessee in response to the questionnaire issued by the AO along with notice u/s 142(1) of the Act amply indicates it. The issues still remain unresolved by the order of the learned CIT(A). Filing of complete details by the assessee before the AO would resolve the contentious issues delineated here-in-above. In view of the above, we set aside the order of the learned CIT(A) on issues relating to ground no 2, 3 & 4 of the appeal filed by the assessee and restore it back to the file of the AO to make a fresh assessment as per the provisions of the Act keeping in mind the issues raised by the learned counsel of the assessee at para 6 to 6.5 and the learned DR at para 7 to 7.3 here-in-above. Needless to say, the AO is directed to give reasonable opportunity of being heard to the assessee before finalising the assessment order. The assessee is directed to file before the AO the complete details on the above.

Order pronounced in the open court on 07/02/2017