Itta/247/2003 Of The Commissioner Of Income Tax v. M/S.balaji Steel Profiles

HON’BLE SRI JUSTICE L. NARASIMHA REDDYANDHON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A No.247 OF 2003 29-10-2014 BETWEEN Commissioner of Income Tax (Central), Hyderabad …Appellant And Balaji Steel Profiles, D.O.No.43-18-26, Venkataraju Nagar, Visakhapatnam –530 016 …..Respondent HON’BLE SRI JUSTICE L. NARASIMHA REDDYANDHON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A No.247 OF 2003 JUDGMENT:(per the Hon'ble Sri Justice L. Narasimha Reddy) The respondent is a manufacturer of steel and is an assessee under theIncome Tax Act, 1961 (for short, ‘the Act’). A search was conducted in thepremises of the factory on 25-03-1999. On the basis of the discoveries said to have been made therein,the assessing officer initiated steps under Chapter XIV-B of the Act and issuednotice under Section 158BC of the Act. It was mentioned that a comparison ofthe figures mentioned in RG-1 register on the one hand and Daily RoughProduction Register (DRPR) on the other hand revealed discrepancy of about250 metric tonnes of steel and in that view of the matter, the income tax on thecorresponding amount is payable at the penal rate. Reference was also madeto the statement said to have been made by the managing partner of therespondent. A reply was submitted by the respondent to the effect that the purport ofthe DRPR is totally different from that of the RG-1 register. According to them,it is only after the steel that is produced on a particular day and recorded in the DRPR is cooled for three days, and weighed on approval of quality, that it canbe entered in the RG-1 register. Other grounds such as that though search wasmade on 25-03-1999, statement was recorded on 11-05-1999 through the process ofquestioning and prolonged interrogation were also pleaded. Ultimately, therespondent filed return for the block period on 17-04-2000 declaring nil income.The assessing officer passed an order on 27-03-2002 treating a sum ofRs.17,64,780/- representing the cost of 134 metric tonnes of steel as thetaxable income. Aggrieved by the order passed by the assessing officer, the respondentfiled an appeal before the Commissioner of Income Tax (Appeals)-I,Hyderabad. The same was dismissed on 27-08-2002. Thereafter, it filed IT (SS)No.120/VIZ/97 before the Visakhapatnam Bench of the Income Tax AppellateTribunal (for short, ‘the Tribunal’). The appeal was allowed through order dated11-03-2003. Hence, this further appeal under Section 260A of the Act, by theRevenue. Sri S.R. Ashok, learned Senior Counsel for the appellant submits thatduring the course of search, the RG-1 register and the DRPR were compared,apart from verifying the material on the ground; and when the particularsthereof were put to the managing partner, he agreed for addition of a sum ofRs.35,00,000/- towards undisclosed income. He contends that once theassessment was made on the basis of the material found during the course ofsearch and the statement recorded from the managing partner of therespondent under Section 132(4) of the Act, there was no basis for the Tribunalto interfere with the order of assessment. Sri Y. Ratnakar, learned counsel for the respondent, on the other hand,submits that except that the assessing officer made comparison of the factsand figures mentioned in RG-1 register and DRPR, no independent materialwas discovered and the assessment was made on the basis of assumptions.He contends that the entries in the DRPR are in relation to the activities thattake place on a particular day and the quantity of steel produced on that daywould be entered in the RG-1 register three days thereafter on completion ofcooling, quality verification and weighing, and that the same was mentioned in Sri Y. Ratnakar, learned counsel for the respondent, on the other hand,submits that except that the assessing officer made comparison of the factsand figures mentioned in RG-1 register and DRPR, no independent materialwas discovered and the assessment was made on the basis of assumptions.He contends that the entries in the DRPR are in relation to the activities thattake place on a particular day and the quantity of steel produced on that daywould be entered in the RG-1 register three days thereafter on completion ofcooling, quality verification and weighing, and that the same was mentioned in the course of search as well as subsequent enquiry. Learned counsel furthersubmits that the emphasis by the assessing officer all through, was only on thediscrepancy between the entries in the two registers which is genuinely in therealm of Central Excise Department and without even alleging that the quantityof steel representing the discrepancy was sold, attempt was made to levy penaltax. He submits that the Tribunal corrected the patent error committed by theassessing officer, and that no interference is warranted. The search in the premises of the respondent was conducted on 25-03-1999 and the only material on the basis of which the block assessment wassought to be made is that there is discrepancy in the facts and figuresmentioned in RG-1 register on the one hand and the DRPR on the other hand, to the extent ofabout 135 metric tonnes. An attempt is made to rest the order of assessmenton the sworn statement, said to have been made by the managing partner ofthe respondent. The first aspect that needs to be dealt with is as to whether thestatement said to have been recorded from the managing partner of therespondent would fit into the one referable to Section 132(4) of the Act. Theprovision reads: “The authorised officer may, during the course of the search or seizure,examine on oath any person who is found to be in possession or controlof any books of account, documents, money, bullion, jewellery or othervaluable article or thing and any statement made by such person duringsuch examination may thereafter be used in evidence i n any proceedingunder the Indian Income Tax Act, 1922 (11 of 1922), or under this Act.” On a perusal of this it becomes clear that firstly the statement must berecorded during the course of search and seizure. Secondly it can be recordedonly as a sequel to the discovery of books of account, cash, bullion or similaritems. In the instant case, the search has taken place on 25-03-1999, but the statement was recorded on 11-05-1999. It was not evenalleged that the search was carried out for the entire period, in between. Astatement recorded one and half months after the search, can by no means bebrought under the purview of Section 132(4) of the Act. Further, it becomes doubtful as to whether RG-1 register and DRPRwhich are referable to the Central Excise Act and the rules made thereunder,can be treated as ‘books of account’ mentioned in Section 132(4) of the Act.Assuming them to be so, the statement fails to qualify the test under theprovision on the first count itself. Added to that, the statement was almost inthe form of an answer to a question. The answer was not in the form of anyvoluntary disclosure. It was to the effect that since the facts suggested in thequestion cannot be explained instantly, the assessee had agreed to offer thevalue of the material at Rs.35,00,000/- as undisclosed income. It is relevant tomention that four days after the statement was recorded, the respondentsubmitted a letter/representation on 19-12-2000. At the end of it, it wasmentioned that “…..such admission was made only due to confusing state ofmind on account of the prolonged, hectic interrogation search proceedings”. Forall practical purposes, the statement was retracted. I n Commissioner ofIncome Tax vs. Naresh Kumar Agarwal, this Court dealt with the evidentiaryvalue of such statements and the facts of the present case fit into the saidjudgment. Coming to the merits of the matter, the block assessment in the instantcase is not on the basis of any discovery of wealth, bullion or books of account.The sole basis is the alleged discrepancy between the two registers. When themaintenance of registers was under the Central Excise Act and the rulesframed thereunder, the assessing officer could have formed opinion only afterascertaining the relevant facts or the method of arriving at conclusions, fromthe concerned officials of the Central Excise Department. The respondent madea specific plea that the entries in the DRPR are only tentative in nature and it isonly after the steel produced on a particular day is cooled for three days, testedfor quality and weighed, that the corresponding entry can be made in the RG-1register. This however did not weigh with the assessing officer. Straightawayconclusions were drawn as to the discrepancy. Even if necessary latitude is shown regarding the power of the assessingofficer to make the block assessment, what would have constituted the basis,is the suppression of sale proceeds of a product. The mere production of amaterial, even if not reflected in a register, does not constitute the basis to levy the central excise duty, leave alone income tax. While excise duty becomespayable when the manufactured material is removed from the factory, theincome tax becomes payable when the product is sold and sale proceedsaccrue to the assessee. When it was not even alleged that the steel,representing the differential quantity, was sold, there was no basis to infer orimagine the accrual of income or the corresponding obligation to pay theincome tax. It does not need any emphasis that the proceedings under ChapterXIV-B are penal in nature and they can be sustained if only they are foundedand grounded on undisputed or established facts. An assessee cannot besubjected to the proceedings under that chapter, just on the basis ofimaginations or surmises. Being the last authority on facts the Tribunal analysed every aspect andrecorded a finding to the effect that neither the assessing officer nor theappellate Commissioner have recorded any finding to the effect that therespondent has suppressed the sale of any steel, referable to the discrepancyin the registers. We do not find any basis to interfere with the order underappeal. The appeal is accordingly dismissed. There shall be no order as tocosts. ___________________________ L. NARASIMHA REDDY, J 29-10-2014ksNote:LR Copy to be marked.B/Oks ____________________________ CHALLA KODANDA RAM, J