Itta/230/2003 Of Commissioner Of Income Tax Hyd v. M/S.shri Girija Smelters (P) Ltd

* THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM + I.T.T.A.Nos.145 and 230 of 2003 %Date:29.10.2014 Commissioner of Income Tax and $M/s. Shri Girija Smelters (P) Ltd., Raipur. …appellant. …Respondent. ! Counsel for appellant: Sri S.R. Ashok^ Counsel for Respondent : Sri Y.Ratnakar < GIST: > HEAD NOTE: ? Cases referred THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.Nos.145 and 230 of 2003 COMMON JUDGMENT:(Per the Hon’ble Sri Justice L.Narasimha Reddy) These two appeals arise out of the order, dated 21.05.2002, passed bythe Visakhapatnam Bench of the Income Tax Appellate Tribunal (for short ‘theTribunal’) in I.T.(SS) A. No.8/Vizag/1998. While I.T.T.A.No.145 of 2003 is filed by the assessee, I.T.T.A.No.230 of 2003 is filed by the Department. For the sake of convenience, the parties are referred to as ‘Revenue’and ‘Assessee’. The assessee is a Company undertaking the activity of manufacture ofAlloy Metals. It has also a sister concern, by name, M/s. Srinivasa Ferro AlloysLimited (SFAL). Each company is an independent assessee. A search was conducted in the premises of SFAL, on 27.09.1996. TheManaging Director for both the companies is said to be the same individual. During the course of search, his statement was recorded. According to theRevenue, the discrepancy between the undisclosed income and unexplainedone, to the extent of Rs.1.03 crores, was noticed. Proceedings were initiatedunder Chapter XIVB of the Income Tax Act, 1961 (for short ‘the Act’), and noticeunder Section 158BD of the Act, was issued on 03.03.1997. A sum of aboutRs.16.00 lakhs was collected as income tax. M/s. SFAL submitted a return on22.09.1997, disclosing ‘NIL’ income. In addition to that, it has claimed refund ofRs.16.00 lakhs, collected from it during the course of search. An order of blockassessment was passed in relation to M/s. SFAL, for the assessment years1988-89 to 1997-98. On the basis of the material gathered during the course of the search, inthe premises of SFAL, a show cause notice was issued to the assessee herein,i.e. M/s. Girija Smelters (P) Limited, Raipur, on 20.08.1997, requiring it toexplain the discrepancies. Ultimately, an order of assessment was passed on30.03.1998 to the effect that the assessee has undisclosed income of Rs.1.78crores, in the form of suppression of production of the material. The assessee filed an appeal before the Tribunal. It was pleaded thatmost of the figures were arrived at by the Assessing Officer, on the basis ofsurmises and imaginations, and for all practical purposes, the Assessing Officeracted as though he is an authority under the Central Excise Act. The Revenueopposed the appeal and supported the order of assessment. The Tribunalpartly allowed the appeal, deleting a sum of Rs.89,45,465/-, being the cost ofthe alleged stock of finished products, noticed through discrepancies, and asum of Rs.23,80,000/- representing the alleged unexplained share capital. Theorder of assessment in respect of other items was upheld. While departmentfelt aggrieved by the said deletion, the assessee is of the view that the order of assessment ought to have been set aside, in its entirety. assessment ought to have been set aside, in its entirety. Sri S.R.Ashok, learned Senior Counsel for the Revenue, submits thatthe search of the premises of the said concern has yielded valuableinformation, and on the basis of the same, the block assessment order waspassed, duly giving opportunity to the assessee. He contends that the findingsarrived at by the Assessing Officer were based on the material that was seizedin the course of search and on comparison of the same with the RG-I registermaintained under the Central Excise Act and the Rules made thereunder. Hesubmits that the Managing Director of the assessee has accepted in hisstatement, that there existed discrepancies, but in the explanation, he has comeforward with a different version. Learned Senior Counsel contends that therewas no basis for the Tribunal to delete the substantial amounts from the order ofassessment. Sri Y.Ratnakar, learned counsel for the assessee, on the other hand,submits that the search did not result in any discovery of incriminating entries orundisclosed wealth, but the Assessing Officer has taken upon himself, the taskof undertaking comparison and verification, which cannot be expected evenfrom the authorities under the Central Excise Act. He contends that severalphenomena, such as, burning losses, or the marketability of the waste thatemerges in the course of manufacturing of the finished products, were not onlytaken note of, but also were treated as undisputed facts and huge financialliability was fastened upon the assessee. He submits that the Tribunal ought tohave set aside the order of assessment, in its entirety, since it is based upon atotally untenable exercise. For the most of it, the Revenue relies upon the facts and figuresfurnished in the returns, or those mentioned in the books of accounts. However, when serious suspicion arises as to the accuracy of the facts andfigures so furnished, a search is conducted under Section 132 of the Act. If, inthe course of search, any incriminating material or unexplained wealth orbullion, is discovered, the Act provides for passing of an order of blockassessment, covering a period of 10 years, preceding the date of search. Themanner in which the assessment must be made in such cases, is provided forin Chapter XIVB of the Act. The statement recorded under Section 132(4) of theAct also assumes significance in this behalf. In the instant case, the assessee is a manufacturer of ManganeseAlloys. Several registers are maintained and a typical procedure is followed formanufacture of the alloys of the relevant description. The finished product issubject to levy of excise duty. For all industries, that undertake the activity ofprocessing or manufacturing metals, the Central Excise Department, insists onmaintenance of registers, to monitor the activity of manufacture and the removalof finished products. This is obviously because, they cannot be expected toremain in the premises of the factory throughout. One such register is RG-I. In the instant case, the assessee is a manufacturer of ManganeseAlloys. Several registers are maintained and a typical procedure is followed formanufacture of the alloys of the relevant description. The finished product issubject to levy of excise duty. For all industries, that undertake the activity ofprocessing or manufacturing metals, the Central Excise Department, insists onmaintenance of registers, to monitor the activity of manufacture and the removalof finished products. This is obviously because, they cannot be expected toremain in the premises of the factory throughout. One such register is RG-I. Even where the authorities of the Central Excise Department doubt theaccuracy of figures mentioned in the registers, or if they find it difficult tounderstand the complexity of the manufacturing process, they seek the help ofthe experts. Sometimes experts are on the rolls of the department itself, and onthe other occasions, the service of experts outside the department are availed. The Assessing Officer under the Act can certainly look into various records ofthe assessee, to satisfy himself about the correctness of the facts and figures, orto come to his own conclusions about the income of the assessee. If it is acase of mere verification of books of account, or the registers that reflect thesale of any product, the Income Tax Officer can undertake the exercise byhimself. Where, however, he entertains a doubt about the correctness of thefacts and figures that are mentioned in the registers, which are required to bemaintained under the Central Excise Act or the Rules made thereunder, theproper course for him would be to take the assistance of the concernedauthority under the Central Excise Act. Howsoever anxious or willing he maybe to verify the registers, by himself, outcome of the exercise may not beaccurate. Just a Superintendent of Central Excise Department, cannot beexpected to verify the correctness of the income tax returns, submitted by amanufacturer, it is not at all safe for any Income Tax Officer to undertakeverification of the records referable to the department of Central Excise. Unfortunately, this is what exactly has happened in the instant case. A perusalof the order of assessment discloses that the Assessing Officer did not feel anyinhibition to express his views on a matter, which does not genuinely fall in hispurview. In a way, he has undertaken certain activity, which a Superintendentof Excise Department would have hesitated. For instance, in para 3.7 of theorder, the following discussion was undertaken: “3.7 During the course of search, evidence was seized inthe for of a register A3/24 in the case of M/s. Srinivasa Ferro Alloys Ltd., - sister company of the assessee Company which indicatedthat the assessee claimed higher burning loss in respect ofManganese ore. The burning loss as per the register A3/24, (thedetailed working of which has been elaborately discussed in theAsst. Order dt.30.09.97 in the case of M/s. SFAL) came to 56.33%. When the returns of income of the assessee company areverified, it is found that the assessee has claimed the burning loss at61.72% for IF.Y.94-95 and 60.03% for F.Y.95-96 which are quite onthe higher side as seen from the following table: 94-95 95-96 Burning loss as per return 61.72% 60.03%Burning loss accepted 56.33% 56.33%Excess burning loss claimed 5.39% 3.70% The assessee has been given an opportunity vide this officeletter dt.20.08.97 to furnish full details of the burning loss. During thecourse of hearing, the assessee was also given an opportunity toexplain why the production suppression should not be estimatedbecause a higher burning loss was claimed in the return of income. When the returns of income of the assessee company areverified, it is found that the assessee has claimed the burning loss at61.72% for IF.Y.94-95 and 60.03% for F.Y.95-96 which are quite onthe higher side as seen from the following table: 94-95 95-96 Burning loss as per return 61.72% 60.03%Burning loss accepted 56.33% 56.33%Excess burning loss claimed 5.39% 3.70% The assessee has been given an opportunity vide this officeletter dt.20.08.97 to furnish full details of the burning loss. During thecourse of hearing, the assessee was also given an opportunity toexplain why the production suppression should not be estimatedbecause a higher burning loss was claimed in the return of income. In its reply dt. 27.02.98, the assessee made similarsubmissions as in the case of M/s. Srinivasa Ferro Alloys Ltd. theassessee claimed that the burning losses was within reasonablelimits. It may be mentioned here that the burning loss of 56.33% theA3/24 register. The production processes for the production ofmanganese based alloys are same in the case of the assesseecompany and M/s.SFAL. therefore, there is no reason why theburning loss should be higher in the case of the assessee. Therefore, the objection of the assessee for the adoption of the samestandard of burning loss as in the case of its sister company doesnot hold good. The higher claim of burning loss is on account of thefact that the assessee has carried out unaccounted production whichis also evidenced by the existence of excess stocks of finishedproducts as discussed above. In the background of the above discussion, the unaccountedproduction owing to the higher claim of burning loss of manganeseore is arrived at in the same method as was adopted in the case ofM/s. Srinivasa Ferro Alloys Ltd. All said and done, the occasion to levy income tax would arise, only when the product in question was found or alleged to have been sold, and thesale proceeds, constituting income were not reflected in the returns. It was noteven alleged that the product shown in the form of discrepancies, was sold atall. We are sure that when faced with a situation of that nature, even aSuperintendent of a Central Excise would not have ventured to record his ownfindings about the maters like “burning losses” or other relevant issues andwould have chosen to avail the services of a Metallurgical Expert. What wehave extracted above is just a sample. The whole order is full of suchdiscussions and instances. It is on the basis of such an exercise, that theAssessing Officer arrived at the conclusions that the undisclosed income onaccount of the improper disclosure, or suppression of the production for variousassessment years is Rs.1,22,86,712/-. Even the expenditure incurred forpurchase of raw materials became the subject-matter of extensive discussion,without indicating as to how the purchase of raw material can have any impactupon the income of an assessee, that too, of a manufacturing company. In theorder of assessment, which runs into 31 closely typed pages, such instancesare galore. Obviously, to analyse and understand the approach of the AssessingOfficer, the Tribunal discussed the matter at length. The order passed by it runsinto 48 pages. At more places than one, it was pointed out that the stockavailable on ground, cannot be compared or verified with reference to the RG-Iregister. It was also pointed out that by-products or waste materials, such asslag, was treated by the Assessing Officer as the main product or an incomeyielding material and the conclusions were arrived at, only on the basis ofassumptions. We agree with the findings recorded and view expressed by theTribunal. Obviously, to analyse and understand the approach of the AssessingOfficer, the Tribunal discussed the matter at length. The order passed by it runsinto 48 pages. At more places than one, it was pointed out that the stockavailable on ground, cannot be compared or verified with reference to the RG-Iregister. It was also pointed out that by-products or waste materials, such asslag, was treated by the Assessing Officer as the main product or an incomeyielding material and the conclusions were arrived at, only on the basis ofassumptions. We agree with the findings recorded and view expressed by theTribunal. An Income Tax Officer cannot carry out the functions of an authorityunder the Central Excise Act and arrogate to himself the power to determine thequantity of production, or to utter a final word on the intricacies of themanufacturing process, that too, without referring to any reliable material. TheAssessing Officer, in the instant case, was totally unsuited for undertaking theactivity of determining the exact production of the material, which itself involvesvery complicated procedures. In the appeal of the assessee also, we do not find any substance. Theamounts that were untouched by the Tribunal represent the value of the landthat was purchased during the block period. The relevant facts and figureswere taken into account and a proper conclusion was arrived at. We do not findany basis to interfere with the same. Hence, both the appeals are dismissed. There shall be no order as tocosts. of. The miscellaneous petition filed in this appeal shall also stand disposed ____________________ L.NARASIMHA REDDY, J. Date:29.10.2014L.R. copy to be marked.GJ _____________________CHALLA KODANDA RAM, J.