M/s. Jeevaka Industries Ltd., Hyd, Secunderabad V. ACIT, Cir-2(1), Hyderabad

ITA 684/HYD/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5554 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 11 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 18-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 684/HYD/2011 ASSESSMENT YEAR : 2006-07 M/S. JEEVAKA INDUSTRIES LTD., HYDERABAD PAN: AAACJ5113G VS. THE ASST. CIT CIRCLE-2(1) HYDERABAD [APPELLANT] [RESPONDENT] ITA NO. 983/HYD/2011 ASSESSMENT YEAR : 2006-07 THE ASST. CIT CIRCLE-2(1) HYDERABAD VS. M/S. JEEVAKA INDUSTRIES LTD., HYDERABAD PAN: AAACJ5113G [APPELLANT] [RESPONDENT] ASSESSEE BY: SRI K.C. DEVDAS REVENUE BY: SRI SOLGY JOSE T. KOTTARAM DATE OF HEARING: 24.02.2014 DATE OF PRONOUNCEMENT: 28.03.2014 ORDER PER CHANDRA POOJARI, AM : THE ABOVE APPEALS ARE CROSS APPEALS DIRECTED AGAIN ST THE ORDER OF THE CIT(A)-III, HYDERABAD DATED 15.3.2 011 FOR ASSESSMENT YEAR 2006-07. 2. THE ASSESSEE RAISED THE FOLLOWING GROUNDS: 1. THE ORDER OF THE CIT(A) IN DIRECTING THE AO TO QUAN TIFY THE EXCESS CONSUMPTION OF IRON ORE AT SUCH RATE AND TO MAKE THE ADDITION AT THE PRICE/VALUE OF SUCH QUANTITIES OF I RON ORE WHILE GIVING EFFECT TO THE IMPUGNED ORDER IS TOTALL Y UNSUSTAINABLE IN LAW AND ON FACTS. ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 2 2. THE LEARNED CIT(A) FAILED TO NOTE THAT THE APPELLAN T IN VARIOUS PROCEEDINGS BEFORE THE AO AND IN THE STATEM ENTOF FACTS, GROUNDS OF APPEAL AND WRITTEN SUBMISSIONS FI LED BEFORE THE CIT(A) HAD CATEGORICALLY SUBMITTED THAT THERE WAS NO EXCESSIVE CONSUMPTION OF IRON ORE AND THAT T HE APPELLANT HAD DEMONSTRATED WITH STATISTICAL DATA CO MPILED FROM THE RECORDS TO SHOW THAT THERE WAS NO EXCESS CONSUMPTION OF RAW MATERIAL AND THEREFORE THE CIT(A ) ERRED IN GIVING A DIRECTION ASSESS THE VALUE OF EXC ESS CONSUMPTION OF IRON ORE ARTIFICIALLY DETERMINED AT 22% BY THE CIT(A). 3. THE REVENUE RAISED THE FOLLOWING GROUNDS: 1. THE LEARNED CIT(A) ERRED BOTH ON FACTS AND LAW. 2. THE LEARNED CIT(A) ERRED ON FACTS AND IN LAW IN HOL DING THAT IRON ORE IS THE MAIN RAW MATERIAL FOR PRODUCTI ON OF SPONGE IRON WHICH IS CONTRARY TO THE RECORDS AND RE LEVANT FACTS AS SUBMITTED BY THE ASSESSEE WHICH EVIDENCE T HE MAIN RAW MATERIALS TO BE MELTING SCRAP AND SPONGE IRON I N TERMS OF BOTH QUANTITY AND VALUE AS PER ANNEXURES I, II & III ENCLOSED. 3. THE LEARNED CIT(A) ERRED IN CONFINING THE EXCESSIVE CONSUMPTION DETERMINED B Y HIM AT 22% TO ONLY IRON ORE TAKING IT AS THE MAIN RAW MATERIAL WHILE THE EXCESS CONSUMPTION OUGHT TO HAVE BEEN TAKEN WITH REFERENCE TO THE ENTIRE RAW MATERIAL AND NOT IRON ORE ALONE. 4. FACTS OF THE CASE, IN BRIEF, ARE THAT T HE ASSESSEE IS A COMPANY WHICH IS ENGAGED IN MANUFACTURE OF MILD STE EL INGOTS, SPONGE IRON, RUNNER AND RAISER. FOR THE ASS T. YEAR 2006-07, IT HAS FILED ITS RETURN OF INCOME ON 24.10 .2006 SHOWING LOSS OF RS. 1,48,09,068/-. DURING THE SCRU TINY OF THE RETURN, THE AO NOTICED THE SPONGE IRON PLANT IN CASE OF THE ASSESSEE COMMENCED PRODUCTION IN JANUAR Y, 2006 DURING THE PREVIOUS YEAR. FROM THE DETAILS OF CONSUMPTION OF IRON ORE AND PRODUCTION OF SPONGE IR ON ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 3 FILED BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT PRODUCTIVITY OF SPONGE IRON IN JANUARY, 2006 WAS 758 MT AND THE YIELD WHEN COMPARE D WITH CONSUMPTION OF IRON ORE SHOWN, WAS 66%. COMPAR ING THE PRODUCTION OF SPONGE IRON IN THE MONTHS OF FEBR UARY AND MARCH, 2006 SHOWN AT 1880 MT, WITH THE CONSUMPTION OF IRON ORE CLAIMED FOR THOSE TWO MONTH S AT 6750 MT, HE NOTICED THAT THE YIELD WAS 27.8%, WHICH WAS VERY LOW. FURTHER, COMPARING SUCH PRODUCTION WITH T HE CONSUMPTION OF LIME STONE, ANOTHER RAW MATERIAL USE D FOR PRODUCTION OF SPONGE IRON, HE NOTED THAT, BASED ON CONSUMPTION OF LIME STONE SHOWN AT 50.89 MT IN THE MONTH OF JANUARY 2006, THE YIELD OF SPONGE IRON DUR ING THAT MONTH COMES TO 14.9% AND BASED ON SUCH CONSUMPTION OF LIME STONE FOR FEBRUARY AND MARCH 20 06 SHOWN AT 331.11 MT, THE YIELD OF SPONGE IRON DURING THOSE MONTHS WAS 5.54%. HE NOTED THAT SUCH YIELD AT 5.54% WAS VERY LOW, WHEN COMPARED TO THE YIELD OF 14.9% SHOWN FOR JANUARY, 2006. 5. THE AO FURTHER NOTED THAT SILICOMANGANESE IS AN IMPORTANT RAW MATERIAL FOR PRODUCTION OF INGOTS, RU NNERS AND RAISERS IN THE CASE OF THE ASSESSEE. HE FOUND T HAT DURING THE PREVIOUS YEAR, THERE WAS CONSUMPTION OF 251 ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 4 MT OF SILICOMANGANESE AND PRODUCTION OF 22,814.8 MT OF FINISHED GOODS / FINAL PRODUCTS, COMPRISING OF STEE L INGOTS, RAISERS AND RUNNERS ETC. HE NOTED THAT CONSUMPTION OF SILICOMANGANESE, WHEN COMPARED WITH THE QUANTUM OF TOTAL OUTPUT I.E., FINISHED PRODUCTS , IT WORKS OUT TO 0.01%. AS NOTED BY HIM, BASED ON SUCH CONSUMPTION OF SILICOMANGANESE VIS-A-VIS PRODUCTION OF FINAL PRODUCTS MONTH-WISE, HE ARRIVED AT THE FIGURE OF CLOSING STOCK OF SILICOMANGANESE AT THE END OF EACH MONTH, AS PER THE TABLE GIVEN AT PAGE-4 OF THE ASSE SSMENT ORDER. AS PER SUCH WORKING, THE CLOSING STOCK OF SILICOMANGANESE AT THE END OF MARCH, 2006 SHOULD BE AT 47.43 MT, WHEREAS THE ASSESSEE HAS SHOWN THE SAME I N ITS BOOKS OF ACCOUNTS AT 26.3 MT. THUS, ACCORDING TO HI M, THE ASSESSEE HAS SUPPRESSED CLOSING STOCK OF THE ABOVE ITEM TO THE EXTENT OF 21.13 MT. 6. THE AO FURTHER NOTED THAT MELTING SCRAP IS ANOTHER RAW MATERIAL USED FOR PRODUCTION OF FINAL PRODUCT. TAKING INTO ACCOUNT THE OPENING STOCK, PURCHASES MADE DURI NG THE PREVIOUS YEAR AND CLOSING STOCK OF THE SAME AS SHOWN BY THE ASSESSEE, HE NOTED THAT THE TOTAL CONSUMPTIO N OF SUCH ITEM DURING THE PREVIOUS YEAR WAS 10,117 MT FO R PRODUCTION OF 22,814.8 MT OF FINAL PRODUCTS AND THE YIELD ON ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 5 THAT BASIS COMES TO 2.255 MT OF FINAL PRODUCT PER M T CONSUMPTION OF MELTING SCRAP. BUT, HE NOTED THAT, I F SUCH RATE OF YIELD IS ADOPTED FOR EACH MONTH, THEN SAME GIVES NEGATIVE FIGURE PERTAINING TO STOCK AVAILABILITY/CL OSING STOCK FOR DIFFERENT MONTHS. ACCORDING TO HIM, THE Y IELD PERCENTAGE DURING THE FIRST SIX MONTHS OF THE PREVI OUS YEAR, WHEN APPLIED TO THE REMAINING SIX MONTHS, IT WOULD GIVE CORRECT PICTURE OF STOCK POSITION OF MELTING S CRAP. HE NOTED THAT BASED ON THE YIELD OF FINAL PRODUCTS WHEN TAKEN ON THE BASIS OF CONSUMPTION OF MELTING SCRAP DURING THE FIRST SIX MONTHS, IT COMES TO 3.43 MT AN D APPLYING SUCH RATE FOR THE LATTER SIX MONTHS DURING THE PREVIOUS YEAR, THE CLOSING STOCK OF MELTING SCRAP A T THE END OF MARCH, 06 WORKS OUT TO 6531.92 MT. SUCH WORK ING MADE BY HIM, IS GIVEN IN THE TABLE AT PAGE-6 OF THE ASSESSMENT ORDER. SINCE THE ASSESSEE IN ITS BOOKS, HAS SHOWN THE CLOSING STOCK OF MELTING SCRAP AT 1434 MT , THE AO WAS OF THE VIEW THAT, IT HAS SUPPRESSED CLOSING STOCK OF THAT ITEM TO THE EXTENT OF 5,080 MT. FURTHER COMPARING THE PROFIT OF RS. 34,99,635/- SHOWN ON TURNOVER OF RS. 45,93,63,272/- DURING THE CURRENT PREVIOUS YEAR, WITH THE CORRESPONDING FIGURES SHOWN IN THE PRECEDING PREVIOUS YEAR, THE AO NOTED THAT THE ASSESSEE HAS CLAIMED HIGHER EXPENDITURE IN THE CURR ENT ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 6 YEAR. HE FURTHER NOTED THAT DURING PREVIOUS YEAR U NDER CONSIDERATION, THERE WAS UTILIZATION OF INGOTS AND RUNNERS AT 404.20 MT AND 220.21 MT. HOWEVER, SINCE THE ASSESSEE HAS NOT TREATED THE SAME AS PART OF SALES, HE WAS OF THE VIEW THAT SELLING PRICE OF THE SAME SHOU LD BE ADDED TO THE TOTAL INCOME OF THE ASSESSEE. REFERRI NG TO ABOVE ISSUES, THE AO HAS ISSUED A SHOW CAUSE LETTER DATED 19.12.2008 DURING THE ASSESSMENT PROCEEDINGS, IN RESPONSE TO WHICH, THE ASSESSEE HAS FURNISHED EXPLANATION VIDE LETTER DATED 26.12.2008. 7. IN THAT LETTER THE ASSESSEE HAS SUBMITTED THAT RAW MATERIALS ARE RECEIVED FIRST, AT THEIR FACTORY PREM ISES ALONG WITH DELIVERY CHALLANS FROM THEIR SUPPLIERS A ND AFTER SOME TIME GAP, THE BILLS FOR THE SAME ARE REC EIVED AT THEIR CORPORATE OFFICE LOCATED ELSEWHERE. IT WAS CLAIMED THAT THE GOODS ARE RECEIVED IN THE FACTORY PREMISES EARLIER AND AFTER SOME TIME, CORRESPONDING BILLS ARE RECEIVED AT THEIR CORPORATE OFFICE. HOWEVER, AT THE END OF THE YEAR, FOR THE YEAR AS A WHOLE, THE SAME WILL BE RECONCILED AND THE QUANTITY OF GOODS RECEIVED WILL FULLY TALLY. FURNISHING A STATEMENT OF CONSUMPTION OF IRON ORE AND THE PRODUCTION OF FINISHED GOODS FOR THE THREE MONTHS, FROM THE JANUARY 2006 TO MARCH 2006, THE ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 7 ASSESSEE SUBMITTED THAT YIELD RATIO WAS CONSTANT AT 33.33% FOR EACH MONTH. HOWEVER, THE AO DID NOT AGREE WITH SUBMISSION OF THE ASSESSEE. MAKING VARIOUS OBSERVATIONS MADE AT PAGE-10 OF THE ASSESSMENT ORDE R, HE NOTED THAT SUCH STATEMENT FURNISHED BY THE ASSES SEE IS NOT CORRECT. REFERRING TO THE CONTENTION OF THE ASS ESSEE THAT THE MONTHLY YIELD RATE WAS 33%, HE NOTED THAT SUCH AN UNIFORM RATE FOR EACH MONTH IS NOT POSSIBLE. 8. WITH REFERENCE TO CONSUMPTION OF LIME STONE, THE ASSESSEE HAS SUBMITTED THAT IT IS OF MINOR VALUE. I T WAS STATED THAT LIME STONE ACTS AS A CHEMICAL TO CONTRO L SULPHUR ETC., IN PRODUCTION AND IT'S CONSUMPTION DE PENDS ON THE PROCESS, PARAMETERS AS PER REQUIREMENT. AFTE R CONSIDERING SUCH SUBMISSIONS, THE AO NOTED THAT THE ASSESSEE HAS NOT FURNISHED MONTH WISE CONSUMPTION DETAILS OF LIME STONE. HE FURTHER NOTED THAT THERE IS ABNORMAL VARIATION IN CONSUMPTION OF THIS ITEM SINC E FOR PRODUCTION OF 758 MT OF SPONGE IRON THE ASSESSEE HA S SHOWN UTILISATION OF 50 MT OF LIME STONE, WHEREAS F OR PRODUCTION OF 1880 MT OF SPONGE IRON, IT HAS SHOWN CONSUMPTION OF LIME STONE AT 340 MT. HE FURTHER NOT ED THAT NON DISCLOSURE OF ANY CLOSING STOCK OF ABOVE I TEM IS UNUSUAL. WITH REFERENCE TO CONSUMPTION OF SILICO- ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 8 MANGANESE, THE ASSESSEE HAS SUBMITTED THAT THERE IS NO VARIATION IN THE AVAILABILITY OF STOCK DURING EACH MONTH. IT WAS STATED THAT SILICO-MANGANES ACTS AS PURIFYING A GENT AND THERE IS NO PARAMETER FOR CONSUMPTION OF THE SA ME. 9. REFERRING TO CONSUMPTION OF MELTING SCRAP, THE ASSESSEE HAS SUBMITTED THAT IN THE PROCESS OF PRODU CTION OF INGOTS, RUNNERS AND RAISERS ETC. IT HAS NOT EXCL USIVELY USED MELTING SCRAP, BUT BY COMBINATION OF THE SAME WITH ETHER MATERIALS INCLUDING SPONGE IRON. IT WAS STATE D THAT RATIO OF INPUTS OF MELTING SCRAP, SPONGE IRON AND S ILICO- MANGANES ARE DONE BY THEIR PRODUCTION DEPARTMENT, CONSIDERING THE AVAILABILITY, MARKETABILITY AND OTH ER FACTORS. IT WAS FURTHER STATED THAT INPUT OUTPUT RA TIO IS TO BE WORKED OUT BY CONSOLIDATING DIFFERENT QUANTITIES OF THE ABOVE ITEMS IN THE MANUFACTURING UNIT. IT WAS FURTH ER SUBMITTED THAT WHENEVER MELTING SCRAP IS NOT AVAILA BLE THE ASSESSEE USES SPONGE IRON, WHICH IS A SUBSTITUT E OF METING SCRAP. IN THIS REGARD THE ASSESSEE FURNISHED MONTH WISE CONSUMPTION OF MELTING SCRAP, CI MOULDS, SPONGE IRON AND SILICO-MANGANES AND PRODUCTION OF F INAL PRODUCTS DURING DIFFERENT MONTHS FROM APRIL 2005 TO MARCH 2006, IN A SEPARATE STATEMENT, WHICH IS REFER RED TO BY THE AO AT PAGE-12 OF THE ASSESSMENT ORDER. ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 9 10. WITH REFERENCE TO OBSERVATION OF THE AO REGARDING HIGHER CLAIM OF EXPENDITURE DURING THE PREVIOUS YEA R, THE ASSESSEE HAS SUBMITTED THAT THE SAME IS NOT CORRECT . IT WAS STATED THAT ALL THE PURCHASES AND EXPENSES ARE FULLY VOUCHED. IT HAS FURNISHED A COMPARATIVE CHART OF VA RIOUS EXPENDITURE UNDER DIFFERENT HEADS DURING BOTH THE Y EARS. CLARIFYING THE REASONS FOR THE VARIATION IN THE NET PROFIT RATE DURING THE PREVIOUS YEAR, THE ASSESSEE HAS SUBMITTED THAT THERE WAS INCREASE IN SALARIES AND W AGES, RATES AND TAXES, ADMINISTRATION AND SELLING EXPENSE S AND INTEREST ON FINANCE CHARGES ETC. DURING THE CURRENT YEAR. SUCH STATEMENT FURNISHED BY THE ASSESSEE, IS REFERR ED TO BY THE AO AT PAGE-14 OF THE ASSESSMENT ORDER. 11. HOWEVER, THE AO WAS NOT CONVINCED WITH SUCH EXPLANATION FURNISHED BY THE ASSESSEE. BASED ON YIE LD OF SPONGE IRON, TAKING INTO ACCOUNT THE CONSUMPTION FI GURE OF IRON ORE IN JANUARY, 2006 AS NOTED BY HIM, HE OBSERVED THAT THE PRODUCTION OF SPONGE IRON, CONSID ERING THE CONSUMPTION OF 6750 MT OF IRON ORE SHOWN DURING FEBRUARY AND MARCH, 2006, WOULD BE 4,460 MT. SINCE THE ASSESSEE HAS SHOWN PRODUCTION OF SPONGE IRON DURING THESE TWO MONTHS AT 1880 MT, HE HELD THAT THE ASSES SEE HAS SUPPRESSED PRODUCTION OF 2580 OF SPONGE IRON ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 10 DURING THOSE TWO MONTHS. HE COMPUTED THE VALUE OF S UCH SUPPRESSED PRODUCTION OF SPONGE IRON AT RS. 2,61,49,518/-. HE FURTHER HELD THAT CONSEQUENTLY, T HE ASSESSEE HAS SUPPRESSED THE PRODUCTION OF FINAL PRODUCTS I.E., INGOTS AND RUNNERS AND RAISERS. HE FURTHER COMPUTED THE VALUE OF EXCESS CONSUMPTION OF MELTING SCRAP AT RS. 6,56,92,806/-. ADDING THE ABOVE TWO AMOUNTS, HE ARRIVED AT FIGURE OF RS. 9,18,42,324/-. FURTHER COMPUTING THE INCURRED EXCESS EXPENDITURE B Y THE ASSESSEE AT RS. 3,74,75,860/-, HE ADDED THE AVE RAGE OF BOTH THE ABOVE FIGURES I.E., AT RS. 4,16,98,511/ -, TO THE INCOME OF THE ASSESSEE. 12. FURTHER, SINCE THE ASSESSEE HAS NOT CONSIDERED THE VALUE OF REJECTED CI MOULD, WHICH HAVE BEEN UTILIZE D IN PRODUCTION PROCESS, THE AO AFTER CONSIDERING THE VALUE OF THE SAME AT RS. 20,10,975/-, ADDED THE SAID AMOUNT TO THE INCOME OF THE ASSESSEE. FURTHER, DURING THE PREVIOU S YEAR THE ASSESSEE HAS PAID AN AMOUNT OF RS. 5,500/- TOWA RDS FEES TO REGISTRAR OF COMPANIES. THE SAME BEING IN N ATURE OF CAPITAL EXPENDITURE, THE AO DISALLOWED THE SAME AND ALLOWED DEDUCTION THEREON U/S. 35D OF THE ACT. WITH THE ABOVE ADDITIONS THE AO COMPLETED THE ASSESSMENT ON A ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 11 TOTAL INCOME OF RS. 2,89,04,818/- VIDE HIS ORDER DA TED 29.12.2008 PASSED U/S 143(3) OF THE ACT. 13. THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). AFT ER HEARING THE ASSESSEE AND CALLING FOR A REMAND REPOR T FROM THE AO, THE CIT(A) OBSERVED THAT IN THE ASSESSMENT ORDER, ADDITIONS HAVE BEEN MADE UNDER TWO HEADS. THE FIRST ADDITION OF RS. 4,16,98,511/- WAS MADE TOWARDS SUPPRESSED PRODUCTION OF SPONGE IRON AND EXCESS CONSUMPTION OF MELTING SCRAP. THE SECOND ADDITION W AS FOR THE REASON, THAT THE ASSESSEE HAS NOT ACCOUNTED FOR THE VALUE OF 402.20 MT OF CI INGOTS MOULDS, INTERNALLY CONSUMED BY IT, UNDER SALES ACCOUNT. ACCORDING TO T HE CIT(A) THE AO HAS MADE SUCH ADDITIONS, WITHOUT CONFRONTING THE ASSESSEE WITH ISSUES IN THAT REGARD . HOWEVER AS STATED ABOVE, OBJECTING TO SUCH ADDITION S MADE IN THE ASSESSMENT, THE ASSESSEE HAS FILED DETA ILS RELATING TO CONSUMPTION OF VARIOUS RAW MATERIALS AN D PRODUCTION OF FINISHED GOODS DURING DIFFERENT MONTH S OF THE PREVIOUS YEAR AND ALSO CLOSING STOCK OF GOODS A T THE END OF THE YEAR. IT WAS STATED THAT THE DETAILS FUR NISHED ARE AS PER THEIR RECORDS/REGISTERS MAINTAINED AT TH E FACTORY. ON FORWARDING SUCH DETAILS FILED BY THE AS SESSEE, THE AO HAS FURNISHED A REMAND REPORT. WITH REGARD TO THE ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 12 ADDITION MADE IN THE ASSESSMENT, TOWARDS NON ACCOUNTING OF INTERNAL CONSUMPTION OF THE SAID 402. 20 MT OF CI INGOTS MOULDS, THE ASSESSEE HAS SUBMITTED THAT CREDITS AT AN AMOUNT OF RS. 20,10,975/- HAS ALREADY BEEN EFFECTED FOR THE SAME IN THE REJECTED MOULDS, UNDER STORES CONSUMPTION. IT WAS STATED THAT SINCE CREDIT ENTRY FOR THE SAME HAS ALREADY BEEN MADE IN THEIR BOOKS, NO FURTHER ADDITION ON SAME ACCOUNT IS CALLED FOR. IT IS STATED THAT THE SAME WOULD AMOUNT TO DOUBLE ADDITION IN TH IS CASE. AFTER CONSIDERING SUCH SUBMISSIONS OF THE ASS ESSEE AND THE FINDINGS GIVEN BY THE PRESENT AO IN PARA-7 TO 7.1 OF HIS REMAND REPORT, THE SAID ADDITION OF RS. 20,10,975/- MADE IN THE ASSESSMENT IS DELETED BY TH E CIT(A). 14. FURTHER, THE CIT(A) OBSERVED WITH REGARDS TO THE SECOND ADDITION OF RS. 4,16,98,511/- TOWARDS SUPPRE SSED PRODUCTION OF SPONGE IRON ETC., THAT THE AO HAS NOT SPECIFICALLY COMMENTED WITH REFERENCE TO THE SAME, ON THE BASIS OF THE WRITTEN SUBMISSIONS FILED BY THE A SSESSEE IN THIS CASE. FURTHER, WHILE ACCEPTING IN PRINCIPLE THE STOCK STATEMENT DETAILS FURNISHED BY THE ASSESSEE A T PARA 5.7 OF HIS REMAND REPORT, HE HAS FURTHER STATED THA T ON BASIS OF EXCESSIVE CONSUMPTION OF RAW MATERIAL POIN TED ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 13 OUT IN THE ASSESSMENT ORDER, THERE WAS EXCESS PRODU CTION OF FINISHED GOODS TO THE EXTENT OF 2321.97 MT AND V ALUE OF THE SAME AMOUNTING TO RS. 3,92,32,167/- MAY BE TREATED AS UNACCOUNTED SALES MADE BY THE ASSESSEE I N THIS CASE. SUCH FINDINGS RELATING TO UNACCOUNTED SALE IS GIVEN IN PARA 5.8 OF THE REMAND REPORT. HOWEVER, WITH REF ERENCE TO THIS SUGGESTION OF THE AO, WHILE POINTING OUT HI S ACCEPTANCE OF THE STOCK DETAILS IN THE CASE OF THE ASSESSEE AT PARA 5.7 OF HIS REMAND REPORT, THE ASSESSEE HAS FURTHER STATED THAT, SUCH WORKING MADE BY HIM IS TOTALLY INCORRECT. IT IS STATED THAT ONCE THE AO HAS ACCEPT ED THE STOCKS AND FINISHED GOODS DETAILS AS PER THEIR RECO RDS, HE CANNOT SUGGEST FOR SUCH ADDITION ON GROUND OF EXCES SIVE CONSUMPTION OF RAW MATERIAL. 15. THE CIT(A) AFTER CAREFULLY GOING THROUGH THE ABOVE REMAND REPORT OF THE PRESENT AO, HE OBSERVED THAT IN PARA 5.7 OF HIS REMAND REPORT, THE AO HAS ACCEPTED IN PRINCI PLE THE SAID STOCK DETAILS RELATING TO CONSUMPTION OF VARIO US RAW MATERIALS FOR PRODUCTION OF FINISHED GOODS AND ALSO DIFFERENT QUANTITIES OF SUCH FINISHED GOODS PRODUCE D DURING THE CURRENT YEAR, AS PER THAT STATEMENT AT P AGE 185 OF PAPER BOOK, THE SAME STATED TO BE AS PER THEIR RECORDS/REGISTERS. HOWEVER, IN THE NEXT PARA I.E., 5.8, HE ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 14 HAS POINTED OUT THAT AS THERE WAS EXCESSIVE CONSUMP TION OF RAW MATERIALS, POINTED OUT IN THE ASSESSMENT ORD ER, THERE WAS EXCESSIVE PRODUCTION OF FINISHED GOODS DU RING THE YEAR. HE HAS SUBMITTED SO, REFERRING TO VARIOUS DISCREPANCIES POINTED OUT BY HIS PREDECESSOR, IN TH E ASSESSMENT ORDER. ACCORDING TO HIM, SUCH DISCREPANC IES NARRATED IN THE ASSESSMENT ORDER CANNOT BE IGNORED. HOWEVER, IT MAY BE SEEN, HE HAS NOT STATED WHETHER SUCH DIS CREPANCY AS POINTED OUT BY HIS PREDECESSOR IS CORRECT? SECONDLY, WHEN HE HAS ACCEPTED IN PRINCIPLE, THE ST OCK STATEMENT OF THE ASSESSEE AS GIVEN AT PAGE 185 OF THE PAPER BOOK, THEREBY ACCEPTING THE TOTAL QUANTITY OF PRODUCTION IN THE CASE OF THE ASSESSEE AS SHOWN IN THAT STATEMENT, WHICH IS AS PER THEIR BOOKS, HOW CAN HE SAY SO I.E., THERE WAS EXCESS PRODUCTION IN THE CASE OF TH E ASSESSEE. FURTHER, WHEN HE HAS ACCEPTED SUCH SUBMI SSION OF THE ASSESSEE REGARDING SUCH STOCK DETAILS AS PER THEIR EXCISE RECORDS AND ALSO THEIR CONTENTION REGARDING ACCEPTANCE OF SUCH EXCISE RECORDS BY THE CONCERNED AUTHORITIES, HOW CAN HE SAY THAT THERE WAS UNACCOUNTED PRODUCTION AND CONSEQUENTLY SALE OF THE SAME, OUTSI DE BOOKS IN THIS CASE. HE OBSERVED THAT NO ADDITION C AN BE MADE ON BASIS OF SUCH SUGGESTION MADE BY THE AO IN PARA 5.8 OF HIS REMAND REPORT. FURTHER, AS THE PRESENT AO HAS ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 15 ACCEPTED THE STOCK STATEMENT GIVEN BY THE ASSESSEE AT PAGE 185 OF PAPER BOOK, WHICH IS AS PER THEIR BOOKS MAINTAINED FOR THIS ASSESSMENT YEAR, THE SAID ADDIT ION OF RS. 4,16,98,511/- MADE IN THE ASSESSMENT IN THIS CA SE IS NOT SUSTAINABLE. HENCE, HE DELETED THE SAME. 16. THE CIT(A) OBSERVED THAT IN PARA 3.6 OF HIS REMAND REPORT, THE AO HAS POINTED OUT ABOUT LOW YIELD OF 33% UNDER PRODUCTION OF SPONGE IRON SHOWN BY THE ASSESS EE IN THIS CASE. DURING THE REMAND PROCEEDINGS, HE HAS CA RRIED OUT NECESSARY VERIFICATION THROUGH HIS INSPECTOR FR OM TILE FACTORY OF THE ASSESSEE. DURING SUCH ENQUIRY, IT RE VEALED THAT IN THE PROCESS OF PRODUCTION OF SPONGE IRON, T HE WASTAGE WAS FROM 40 TO 50 PERCENT. UNDER THIS CIRCUMSTANCE, AS POINTED OUT BY HIM IN PARA 3.3 OF HIS SAID REPORT, IN PARA 3.6, HE NOTED THAT THE YIELD S HOWN BY THE ASSESSEE AT 33% IS NOT ACCEPTABLE. AFTER CONFRO NTING THE ASSESSEE WITH THE ABOVE REMAND REPORT OF THE AO , THOUGH IT HAS FILED SUBMISSIONS ON OTHER ISSUES, IT HAS NOT MADE ANY SUBMISSION WITH REFERENCE TO SUCH OBSERVAT ION OF THE AO. FROM THIS, IT SHOWS THE ASSESSEE INDIREC TLY ADMITS REGARDING LOW YIELD OF SPONGE IRON SHOWN IN THIS CASE. HE OBSERVED THAT, UNDER SUCH CIRCUMSTANCES, ADDITION SHOULD BE MADE ON ACCOUNT OF EXCESSIVE ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 16 CONSUMPTION OF RAW MATERIAL CLAIMED BY THE ASSESSEE UNDER PRODUCTION OF SPONGE IRON. THE MAIN RAW MATER IAL FOR PRODUCTION OF SPONGE IRON IS IRON ORE. VARIOUS QUANTITIES CLAIMED BY THE ASSESSEE DURING DIFFERENT MONTHS ARE REFERRED TO BY THE AO IN THE TABLES A, B & C OF HIS ORDER. ON BASIS OF SUCH REMAND REPORT OF THE AO , TAKING THE AVERAGE WASTAGE AT 45%, THE YIELD OF SPO NGE IRON SHOULD BE AT 55% OF SUCH RAW MATERIAL CONSUMED . SINCE THE ASSESSEE HAS SHOWN YIELD AT 33%, IT SHOWS THE ASSESSEE HAS CLAIMED EXCESSIVE CONSUMPTION OF SUCH RAW MATERIAL I.E., IRON ORE AT 22%. IN THIS VIEW OF THE MATTER, THE CIT(A) DIRECTED THE AO TO COMPUTE THE QUANTITY OF EXCESSIVE CONSUMPTION OF IRON ORE AT SUCH RATE AND TO MAKE ADDITION AT THE PRICE/VALUE OF THE SUCH QUANTI TY OF IRON ORE, WHILE GIVING EFFECT TO THIS ORDER. AGGRIEVED, BOTH THE ASSESSEE AND THE REVENUE ARE IN APPEAL BEFORE U S. 17. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE THE MAIN ADDITION MADE BY THE AO IS TOWARDS SUPPRESSED PRODUCTION OF SPONGE I RON AT RS. 4,16,98,511 WHICH WAS DELETED BY THE CIT(A) BY OBSERVING THAT STOCK DETAILS RELATING TO CONSUMPTION OF VARIO US RAW MATERIALS FOR PRODUCTION OF FINISHED GOODS AND ALSO QUANTITIES OF SUCH FINISHED GOODS PRODUCED DURING THE ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 17 ASSESSMENT YEAR IS TALLIED WITH THE RECORDS/REGISTER ED MAINTAINED BY THE ASSESSEE. BEING SO, THERE IS NO REASON TO AO TO OBSERVE THAT THERE WAS EXCESSIVE CONSUMPTION OF RAW MATERIAL AND THEREBY THERE WAS EXCESSIVE PRODUCTION OF FINISHED GOODS DURING THE YEAR. FURTHER, STOCK DET AILS FURNISHED BY THE ASSESSEE ARE TALLIED WITH EXCISE R ECORDS MAINTAINED BY THE ASSESSEE AND ALSO THESE EXCISE RE CORDS WERE ACCEPTED BY THE CONCERNED AUTHORITIES SINCE TH ERE CANNOT BE ANY UNACCOUNTED PRODUCTION OR SALES. AFT ER HOLDING SO, THE CIT(A) DELETED THE ADDITION OF RS. 4,16,98,511 MADE TOWARDS SUPPRESSION OF PRODUCTION OF SPONGE IR ON. HOWEVER, WITHOUT STOPPING HERE, THE CIT(A) CONTINUE D TO GIVE FINDING THAT THE MAIN RAW MATERIAL FOR PRODUCTION O F SPONGE IRON IS IRON ORE. AVERAGE WASTAGE IS TO BE WORKED OUT AT 45% AND THE NET YIELD OF SPONGE IRON SHOULD BE 55% OF R AW MATERIAL CONSUMED. SINCE THE ASSESSEE HAS SHOWN YI ELD AT 33% THEREBY THE ASSESSEE HAS CLAIMED EXCESSIVE CONS UMPTION OF RAW MATERIAL AT 22% OF IRON ORE, HE DIRECTED THE AO TO COMPUTE THE QUANTITY OF EXCESSIVE CONSUMPTION OF IR ON ORE. THIS FINDING OF THE CIT(A) IS UNWARRANTED. AS ARGU ED BY THE LEARNED AR, THE ASSESSEE HAS MAINTAINED QUANTITATIV E RECORDS AND REGISTERS FOR GOODS MANUFACTURED BY IT AND ALSO AS REQUIRED BY THE CENTRAL EXCISE ACT. THERE IS NO AL LEGATION BY THE CIT(A) THAT THE ASSESSEE HAS NOT MAINTAINED REC ORDS FOR ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 18 ALL GOODS MANUFACTURED AND ALSO FOR ALL STOCK AND CONSUMPTION OF MATERIALS. 18. IT IS ALSO BROUGHT ON RECORD BY THE ASSESSEE THAT M ONTH TO MONTH BASIS QUANTITATIVE DETAILS ARE TALLIED WIT H THE BOOKS OF ACCOUNT. IT IS ALSO BROUGHT ON RECORD BY THE AS SESSEE THAT CONSUMPTION IRON ORE ON DAY TO DAY BASIS IS ENTERED IN THE CENTRAL EXCISE RECORDS. THE ASSESSEE HAS DECLARED YIELD AT 33% ON AVERAGE BASIS. THIS IS SUPPORTED BY THE SUR VEY REPORT OF JOINT PLANT COMMITTEE. AS PER THEIR REPORT 2.5 MT OF IRON ORE LUMP IS REQUIRED FOR PRODUCTION OF 1 MTA OF CAL IBRATED LUMP ORE AND PRODUCING 1 MT OF SPONGE IRON, 1.4 MT OF CALIBRATED LUMP ORE IS REQUIRED. AS OBSERVED BY TH E CIT(A) IN PARA 6.1 OF HIS ORDER, ONCE THE AUTHORITIES ACCEPTE D THE QUANTITATIVE DETAILS FURNISHED BY THE ASSESSEE WHIC H TALLIED WITH THE BOOKS OF ACCOUNT THE SAME CANNOT BE REJECT ED UNLESS THERE IS CONCLUSIVE EVIDENCE TO SUGGEST THAT THE AS SESSEE MADE ANY UNACCOUNTED SALES. 19. IN THE PRESENT CASE, THE LOWER AUTHORITIES ACCEPTED THAT PURCHASES ARE SUPPORTED BY BILLS AND ALSO IT IS IN CONFORMITY WITH THE EXCISE RECORDS. SALES ALSO TALLIED WITH T HE BOOKS OF ACCOUNT AND PURCHASES AND SALES ARE FULLY VOUCHED A ND FURNISHED FOR VERIFICATION. THE ASSESSEE HAS BEEN FOLLOWING THE SAME METHOD OF ACCOUNTING CONSISTENTLY. THERE IS NO ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 19 VARIATION OF IN ACCOUNTING OF ANY EXPENSES OR RECEI PTS. UNLESS AND UNTIL THE BOOKS OF ACCOUNT OF THE ASSESS EE ARE IMPEACHED BY ANY AUTHORITY, IT IS INCUMBENT UPON TH E AUTHORITIES TO ACCEPT THE BOOKS OF ACCOUNT AS IT RE FLECTS TRUE AND CORRECT PROFIT OF THE ASSESSEE. THERE MAY BE D EFICIENCY IN CLOSING STOCK. THE REASON FOR DEFICIENCY IN CLO SING STOCK IS THAT SPONGE IRON USED FOR MANUFACTURING MS INGOTS A ND AO ASSUMED THAT ONLY MS SCRAP IS USED FOR MANUFACTURIN G SPONGE IRON AND TOOK THIS PERCENTAGE BASED ON PREVI OUS SIX MONTHS CONSUMPTION. IF BOTH MS SCRAP AND SPONGE I RON CONSUMPTION ARE TAKEN TOGETHER NO VARIATION WILL BE THERE IN DETERMINING PRODUCTION OF SPONGE IRON. THUS, THERE WILL BE NO VARIATION IN THE CLOSING STOCK. FURTHER, IT IS ALSO NOTED BY THE AO IN HIS REMAND REPORT AT PARA 5.7 AS FOLLOWS: ' THE UTILISATION OF EITHER SPONGE IRON OR MELTING SC RAP FOR PRODUCTION OF FINAL PRODUCTS VIZ., INGOTS OR BOTH, PUT TOGETHER WAS VERIFIED THROUGH THIS OFFICE INSPECTOR AND ACCE PTED.' 20. AS SEEN FROM THE ABOVE, THE AO HAVING GOT VERIFIED FROM THE INSPECTOR REGARDING CONSUMPTION OF SPONGE IRON/ MELTING SCRAP, HE CANNOT REJECT THE SAME AS THE INS PECTOR'S REPORT IS IN FAVOUR OF THE ASSESSEE. 21. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE , IN OUR OPINION, THE ADDITION MADE BY THE AO TOWARDS SUPPRESSED PRODUCTION OF SPONGE IRON CANNOT BE SUST AINED. ITA NOS. 684 & 983/HYD/2011 M/S. JEEVAKA INDUSTRIES LTD. ============================ 20 ACCORDINGLY, WE ALLOW THE GROUND TAKEN BY THE ASSES SEE AND REJECT THE GROUNDS TAKEN BY THE REVENUE. 22. IN THE RESULT, ITA NO. 684/HYD/2011 BY THE ASSESSEE I S ALLOWED AND ITA NO. 983/HYD/2011 BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH MARCH, 2014. SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED THE 28 TH MARCH, 2014 TPRAO COPY FORWARDED TO: 1. M/S. JEEVAKA INDUSTRIES LTD., C/O. M/S. SEKHAR & CO ., CHARTERED ACCOUNTANTS, 133/4, R.P. ROAD, SECUNDERABA D 2. THE ASST. CIT, CIRCLE-2(1), HYDERABAD. 3. THE CIT(A)-III, HYDERABAD. 4. THE CIT-II, HYDERABAD. 5. THE DR BENCH 'B', ITAT, HYDERABAD