The DCIT, Circle-1, Bhavnagar V. M/s. Shree Electromelts Ltd., Bhavnagar

ITA 827/AHD/2018

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 4124 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 10 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-02-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 13-02-2020
• Assessment Year: 2014-2015
• Appeal Filed On: 04-04-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: L P JAIN
• Assessee Lawyers: SARJU MEHTA
• Section: 72; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH (BEFORE SHRI MAHAVIR PRASAD, JUDICIAL MEMBER & SHRI AMARJIT SINGH, ACCOUNTANT MEMBER) ITA. NO: 827/AHD/2018 (ASSESSMENT YEAR: 2014-15) DCIT, CIRCLE-1, BHAVNAGAR V/S M/S. SHREE ELECTROMELTS LTD., , KARTIKEY COMPLEX, 2 ND FLOOR, KALANALA. BHAVNAGAR (APPELLANT) (RESPONDENT) PAN: AADCS 0001K APPELLANT BY : SHRI L.P. JAIN, SR. D.R. RESPONDENT BY : SHRI SARJU MEHTA, C.A. ( )/ ORDER DATE OF HEARING : 13 -02-202 0 DATE OF PRONOUNCEMENT : 18 -02-2020 PER MAHAVIR PRASAD, JUDICIAL MEMBER 1. THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER OF THE LD. CIT(A)-6, AHMEDABAD DATED 30.01.2018 PERTAINING TO A.Y. 2014-15 AND FOLLOWING GROUNDS HAVE BEEN TAKEN: ITA NO. 827/ AHD/2018 . A.Y. 2014-1 5 2 I. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN D ELETING THE ADDITION OF ADDITIONAL GROSS PROFIT OF RS. 2,04,84,813/-.- II. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN D ELETING THE ADDITION OF CLOSING STOCK OF WIP OF RS. 49,26,560/-. III. THE APPELLANT CRAVES LEAVE TO ADD, ALTER AND /OR TO AMEND ALL OR ANY OF THE GROUND BEFORE THE FINAL HEARING OF THE APPEAL. 2. FACTS OF THE CASE ARE THAT THE ASSESSEE IS IN THE B USINESS OF MANUFACTURING OF COKE AND STEEL INGOTS. 3. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE CO MPANY WAS INVOLVED IN THE MANUFACTURING OF MS STEEL INGOTS AND COKE THROUGH I TS TWO DIFFERENT MANUFACTURING UNITS. THE ASSESSEE COMPANY WAS EARNI NG HUGE PROFIT FROM COKE UNIT WHILE HAVING HUGE LOSSES FROM THE STEEL UNIT. THE ASSESSEE COMPANY IS HAVING SAME SITUATION SINCE LAST FOUR ASSESSMENT YE AR. BY THIS WAY, THE ASSESSEE COMPANY WAS CONTINUOUSLY SETTING-OFF THE TAXABLE IN COME OF ONE UNIT FROM THE LOSSES OF THE OTHER UNIT ( I.E STEEL UNIT). THIS IS SURPRISING AND. RAISED SUSPICION, THAT THE ASSESSEE COMPANY HAS CONTINUOUSLY INCURRED HEAVY LOSSES IN A PARTICULAR UNIT AND THAT TOO SINCE LAST FOUR ASSESS MENT YEARS. 4. THEREFORE, IN ORDER TO INVESTIGATE THE ACTUAL REASO NS BEHIND THE CONTINUOUS LOSSES FROM A PARTICULAR UNIT, THE BOOKS OF ACCOUNT S WAS THOROUGHLY ANALYZED. DURING THE COURSE OF THE ANALYSIS OF THE BOOKS OF A CCOUNTS IT IS FOUND THAT IN THE MS STEEL INGOTS MANUFACTURING DIVISION, THE PAT TERN OF POWER CONSUMPTION VIZ-A-VIS PER MT PRODUCTION VARIES BEYOND REASONABL E LIMITS. FOR SAKE OF CONVENIENCE THE SAME IS BEING RE- PRODUCED AS HEREU NDER: MONTH PRODUCTION POWER CONSUMPTION % VARIATION CONSUMPTION UNIT PER MT FROM MINIMUM. ITA NO. 827/ AHD/2018 . A.Y. 2014-1 5 3 CONSUMPTION PER UNIT APRIL 1564.332 1007550 644.0768 19.27349 MAY 1399.575 89400 639.4084 18.40896 JUNE 1517.9 6 968950 638.3238 18.20811 JULY 1478.305 915000 618.9521 14.62076 AUGUST 1276.175 847550 664.1331 22.9876 SEPTEMBER 991.83 547400 551.9091 2.205388 OCTOBER 1065.38 574700 539.4319 - 0.1052 NOVEMBER 895.925 599700 669.3641 23 .95631 DECEMBER 1061.76 585900 551.8196 2.188819 JANUARY 1102.56 645600 585.5464 8.434512 FEBRUARY 991.625 643600 649.0357 20.19179 MARCH 974.985 575600 590.3681 9.327418 5. FROM THE ABOVE TABLE IT CAN BE OBSERVED THAT THE PO WER CONSUMPTION FOR PER ML' MS STEEL PRODUCTION VARIES FROM MINIMUM 539.43 UNIT/MT TO 669.36UNIT/MT/ THUS IN THIS UNIT THERE WAS AN ENORM OUS FLUCTUATION IN THE POWER CONSUMPTION VIZ-A-VIS PRODUCTION. AGAIN, IF W E OBSERVE IN TERMS OF THE %AGE VARIATION THEN THE RANGE OF VARIATION GOES TIL L 0-24%. THERE MAY BE SOME FLUCTUATION IN THE CONSUMPTION OF THE POWER ON THE DAY TO BASIS WITHIN A REASONABLE LIMIT BUT HEREIN THE INSTANT CASE THE FL UCTUATION IN THE STEEL DIVISION VARIES UPTO 24%, WHICH IS BEYOND THE ACCEPTABLE LIM ITS AND LOOKS IRRATIONAL. 6. HERE IT IS ALSO NECESSARY TO MENTION THAT THE PROCE SS OF THE MS INGOTS MANUFACTURING WAS REMAIN UNCHANGED AND THE PRODUCT RANGE WAS ALSO SAME AND DOES NOT CHANGED ON MONTHLY BASIS. AGAIN, THE MACHI NERIES USED ARE ALSO SAME. ITA NO. 827/ AHD/2018 . A.Y. 2014-1 5 4 IN ALL, THE CIRCUMSTANCES ARE SAME. FURTHER, THERE MAY BE SOME VARIATION, IN THE POWER CONSUMPTION DUE TO QUALITY OF THE RAW MATERIA L BUT HEREIN THE INSTANT CASE THE MS INGOT MANUFACTURING HAPPENS AT THE TEMP ERATURE OF 1700 DEGREE C THEREFORE, AT THIS RANGE OF TEMPERATURE THE QUALITY OF THE RAW MATERIAL HARDLY MAKES ANY DIFFERENCE AND POWER CONSUMPTION CANNOT F LUCTUATE BEYOND 5% AND ONCE THE AVERAGE FOR THE WHOLE MONTH IS CONSIDER, T HE DAY TO DAY VARIATION HAS BEEN AUTOMATICALLY TAKEN CARE OF. 7. FURTHER, WHEN THE ASSESSEE WAS ASKED TO JUSTIFY THE FLUCTUATION THEN NO SATISFACTORY EXPLANATION FOR SUCH WIDE FLUCTUATIONS WAS OFFERED BY THE ASSESSEE. HERE IT IS ALSO NECESSARY TO MENTION THAT THE PROCE SS OF MANUFACTURING MS INGOTS IS SIMPLE AND INVOLVED ONLY ONE STAGE. IN TH IS PROCESS MS SCRAP OF PREDETERMINED COMPOSITION IS MELTED IN INDUCTION FU RNACE AND LIQUID HOT METAL IS TRANSFERRED IN POURING LADLE. FROM POURING LADLE THE LIQUID METAL IS TRANSFERRED INTO INGOT MOULDS, HENCE, FINAL PRODUCT I.E MS INGOT IS READY. FROM THE ABOVE MENTIONED, PROCESS IT CAN BE OBSERVED THA T THE POWER CONSUMPTION IS DIRECTLY PROPORTIONAL TO THE PRODUCTION, AND IF , THERE IS VARIATION IN POWER CONSUMPTION THEN DEFINITELY IT SHOULD ALSO BE REFLE CTED IN THE PRODUCTION. IF NOT SO, THEN THERE IS SOMETHING WRONG, THIS HAS WHAT HA PPENED IN THE INSTANT CASE. 8. THUS, FROM THE ABOVE, IT BECAME CRYSTAL CLEAR THAT THE PRODUCTION RECORDED BY THE ASSESSEE COMPANY IN ITS BOOKS OF ACCOUNTS IS CO MPLETELY INCONSISTENT VIZ-A- VIS POWER CONSUMPTION. IT MEANS THE BOOKS OF ACCOUN TS OF THE ASSESSEE COMPANY ARE NOT CORRECT AND COMPLETE. THEREFORE, ON THE BASIS OF DEFECTIVE ACCOUNTS, IT IS NOT POSSIBLE TO ASSESS CORRECT INCO ME OF THE ASSESSEE COMPANY. ITA NO. 827/ AHD/2018 . A.Y. 2014-1 5 5 9. THE ASSESSEE HAS CARBONIZED 42666.950 MT OF THE COA L DURING THE YEAR UNDER CONSIDERATION. TAKING INTO CONSIDERATION 26 DAYS AS WORKING DAYS PER MONTH, THE TOTAL WORKING DAYS OF THE YEAR WORKS OUT TO 312 DAYS, THE AVERAGE OF CARBONIZING PER DAY WORKS OUT LO BE OL 136.75MT. AS IT HAS ALREADY BEEN ITERATED THAT TO COMPLETE A CIRCLE OF CARBONIZATION , IN COKE UNIT, IL TAKES ALMOST 72 HRS. I.E. THREE DAYS. THEREFORE, A LOT OF THE CO AL WILL BE CARBONIZED AND CONVERTED INTO COKE ON 4UL DAY. THEREFORE, THE ASSE SSEE MUST HAVE THREE DAYS WORK-IN-PROCESS AS ON 31,03.2014. THIS WORKS OUT TO 410 MT (136.75 MT X 3 DAYS). THE AVERAGE RATE OF THE CARBONIZATION CHARGE S PER MT WORKS OUT AT RS.1783 (GROSS RECEIPTS -COST OF THE MATERIAL CONSU MED- GROSS PROFIT = COST - MT PROCESSED.) I.E (576720925-474685751-25936507- 7 60986670/42666.95). CONSIDERING THE VARIOUS STAGES OF CARBONIZATION, IT WOULD BE, REASONABLE TO ADOPT 50% I.E. RS.891 PER MT CARBONIZATION CHARGES, FOR ARRIVING AT VALUE OF WORK-IN-PROCESS. 10. HENCE, THE WIP WILL BE OF RS. 49,26,560/- [(410*AVE RAGE RATE OF THE PER MT RAW MATERIAL)+(410* AVERAGE RATE OF THE CARBONIZATI ON CHARGES PER MT)] I.E [(410*11125)+ (410*891)]. SINCE THE ASSESSEE HAS NO T SHOWN THE CLOSING STOCK OF WIP AND PROFIT TO THAT EXTENT IS SUPPRESSED, IT IS NECESSARY TO ADD THE WORK- IN-PROGRESS TO ARRIVE AT THE CORRECT PROFIT OF THE BUSINESS OF THE ASSESSEE. THEREFORE, THE CLOSING STOCK OF WORK-IN-PROGRESS OF RS. 49,26,560/~ AS WORKED OUT ABOVE IS ADDED TO THE TOTAL INCOME OF THE ASSES SEE. 11. AND LD. A.O. AFTER REJECTING THE BOOKS OF ACCOUNTS MADE THE ADDITION OF RS. 2, 04,84,813/- ON ACCOUNT OF GROSS PROFIT AT THE DIFFE RENTIAL RATE AND ALSO MADE AN ADDITION OF RS. 49,26,560/- ON ACCOUNT OF IRREGULAR ITY IN THE STOCK WORK IN PROGRESS. ITA NO. 827/ AHD/2018 . A.Y. 2014-1 5 6 12. THEREAFTER ASSESSEE PREFERRED FIRST STATUTORY APPEA L BEFORE THE LD. CIT(A) WHO GRANTED RELIEF TO THE ASSESSEE. 13. NOW REVENUE HAS COME BEFORE US. 14. WE HAVE GONE THROUGH THE RELEVANT RECORD AND IMPUGN ED ORDER. THE ASSESSING OFFICER HAS CARRIED ON GROSS PROFIT RATES DECLARED BY ENTITIES WHICH ARE IN THE SAME LINE OF BUSINESS AS FOLLOWS: SN NAM E OF COMPANY GROSS PROFIT MARGIN % TURNOVER (IN CRORES) 1 K B ISPAT PVT LTD. 6.90% 43.89 2 3 R ISPAT 3.27% 39.08 3 MADHAV METACAST PVT LTD. 1.34% 39.32 4 APPOLO CONCAST 2.19% 46.76 OVERALL AVERAGE 3.425 GP OF SHREE ELECTROM ELTS LIMITED ( - )0.87Q 47.69 15. THE A.O. HAS COMPUTED AVERAGE GP OF ALL THE ABOVE C ONCERNS AND ARRIVED AT FIGURE OF 3.425%. FURTHER, FOR COMPUTING GROSS PROF IT OF THE ASSESSEE, THE A.O. HAS APPLIED GP RATE OF 4.295% WHICH IS THE DIFFEREN CE IN GP AS PER BOOKS. 16. IT IS SEEN FROM THE ABOVE TABLE THAT TURNOVER OF AP POLO CONCAST AT 46.76 CRORES IS COMPARABLE TO THE TURNOVER OF ASSESSEE AT 47.69 CRORES . APPOLO CONCAST HAS DECLARED IN GP AT 2.19% AND SAME IS IN THE CASE OF REMAINING ABOVE SAID COMPANIES. ITA NO. 827/ AHD/2018 . A.Y. 2014-1 5 7 17. LD. A.R. CONTENTION IS THAT ABOVE SAID INSTALLATION S STARTED THEIR PRODUCTIONS IN THE YEAR OF 2008 TO 2010 AND HAVE INSTALLED MODERNI ZED AND LATEST EQUIPMENT AND TECHNOLOGY WHEREAS ASSESSEE STARTED ITS BUSINES S IN 1994 WITH OLD MACHINE AND TECHNOLOGY. THEREFORE POWER CONSUMPTION IS HIGH AND PRODUCTION IS LESS AS COMPARE TO OTHERS. ASSESSEE IS ALSO SUBJECT TO EXCI SE DEPARTMENT SCRUTINY AND ASSESSEES BOOKS OF ACCOUNT ARE DULY AUDITED AND AU DITOR AND EXCISE DEPARTMENT HAS NOT NOTICED ANY IRREGULARITY APART FROM THAT WH ILE MAKING ADDITION. LD. A.O. HAS NOT SOUGHT HELP FROM ANY TECHNICAL PERSON WHO I S EXPERT IN THE FIELD IN THIS REGARD AND MADE ADDITION ACCORDING TO HIS ONUS WHIM S AND FANCIES. 18. IT IS SEEN THAT A.O. HAS WORKED OUT THE CLOSING WOR K IN PROGRESS AT THE END OF THE YEAR AND ADDED RS. 49,26,560/- ON THIS ACCOUNT. HOWEVER, ASSESSING OFFICER HAS NOT GIVEN ANY CREDIT FOR OPENING WORK IN PROGRE SS WHICH WOULD COME FROM CLOSING WORK IN PROGRESS AS ON 31.03.2013 I.E. IMME DIATELY PRECEDING YEAR. IT IS WELL SETTLED LAW THAT VALUE OF CLOSING STOCK CANNOT BE DISTURBED WITHOUT DISTURBING THE VALUE OF OPENING STOCK. 19. IN OUR CONSIDERED OPINION, LD. CIT(A) HAS PASSED DE TAILED AND REASONED ORDER AND SAME DOES NOT REQUIRED ANY KIND OF INTERFERENCE AT OUR END. 20. IN THE RESULT, APPEAL FILED BY THE REVENUE IS DISMI SSED. ORDER PRONOUNCED IN OPEN COURT ON 18 - 02- 2020 SD/- SD/- (AMARJIT SINGH) (MAHAVIR PRASAD) ACCOUNTANT MEMBER TRUE COPY JUDICIAL MEMBER AHMEDABAD: DATED 18/02/2020