Wednesday, 19 February 2014

Whether additions are warranted when there is substantial increase in consumption of electricity but without corresponding increase in production and also no mention of work-in-progress in books - YES: HC

THE issues before the Bench are - Whether additions are warranted when there is a substantial increase in consumption of electricity but without corresponding increase in production and also no mention of work-in-progress in books; Whether merely providing an explanation that Electricity Board would issue bills for minimum contracted units, whether they were consumed or not, can constitute sufficient evidence for showing the discrepancy between the power consumption and actual production and Whether the books of accounts can be rejected when in addition to the huge discrepancy between the productivity compared with the electricity consumption, the assessee has also not recorded the work in progress in its books of accounts. And the verdict goes against the assessee.
Facts of the case
The assessee is engaged in the production of groundnut oil, groundnut refined oil as well as small quantity of cotton seed oil. The assessee itself filed details giving month-wise production of oil and month-wise consumption of power. The consumption of power was directly linked with the production. Consumption of power was recorded and charged by the Electricity Board/power supplying company. The AO observed that consumption of power increased substantially with very marginal increase in the production of the oils. The AO recorded in his order that the details filed by the assessee gave a clear indication that the production recorded by the assessee in its books of account was completely inconsistent with the pattern of power consumed. The AO rejected the books of accounts and made various additions, in particular, on the premise of low output as compared to the electricity consumption and made matching additions. In the absence of any satisfactory explanation, the AO on the basis of average production observed that a reasonable basis for working out the suppressed production was on the basis of units of power consumed in remaining months of the year and therefore, calculated the same. On this amount so calculated the AO applied 2.46% as gross profit and made the necessary additions. On appeal, the CIT (A) allowed the assessee's appeal and deleted the additions.
On further appeal by the Revenue before the Tribunal, the Tribunal accepted the stand taken by the AO. However, the High Court remanded the matter before the Tribunal observing that the Tribunal had not given independent reasons why the CIT (A) was not justified in estimation of gross profit. In the second round of hearing, the Tribunal directed the AO to apply 2% of gross profits instead of 2.46% on the suppressed amount so calculated. The Tribunal also gave a detailed reasoning and calculation for arriving at such 2%. Further the Tribunal observed that assessee had not recorded work-in-progress in the books of account and it was not possible to have nil work-in-progress in oil producing mills. The Tribunal held that it was convinced that the assessee had not recorded procurement and processing of raw materials as also production and sale of oil truly and correctly in its books of account and therefore the books of account maintained by the assessee cannot be said to be correct and completed to that extent.
On appeal, the High Court held that,
+ the average production from using of power consumption widely fluctuated from month to month. The explanation rendered by the assessee was not accepted. It was, therefore, that the Tribunal agreed to reject the book results. Significantly, the Tribunal noted that in addition to such fluctuation in the output ratio, the assessee also did not record the work in progress in its books of accounts. It is because of this that the CIT (Appeals) who substantially allowed the assessee's appeal, was still persuaded to make addition of Rs. 5.72 lakh on this score. The Tribunal has, therefore, in our opinion, rightly recorded that the CIT (Appeals) thus effectively and essentially rejected the books of accounts of the assessee. From the above, it can be seen that not only Assessing Officer but CIT (Appeals) and Tribunal also found that the books of accounts of the assessee could not be accepted. In addition to wide fluctuation in the productivity compared to the electricity consumption, significant factor was that the assessee had not recorded the work-in-progress in the books of accounts;
+ this was, therefore, not a case where book results were rejected merely on unusual electricity consumption rate, but on additional factors, including the factor that for considerable fluctuation in the output ratio, the assessee's explanation was not found acceptable. We have perused the explanation rendered by the assessee which found favour with the CIT (Appeals). The principle explanations were that the assessee was engaged in oil extraction from different oil seeds and further that Gujarat Electricity Board would issue bills for minimum contracted units, whether they were consumed or not. Except for merely suggesting these factors, the assessee produced no further evidence. If the oil output was vastly different for different oil seeds, which was the reason for fluctuation in productivity, the assessee could have easily demonstrated from the books of accounts and other literature. Merely suggesting that the Gujarat Electricity Board would issue the bills for minimum contracted units without full consumption, is merely stating the obvious. The assessee could have pointed out from such bills that the amounts charged did not match full consumption. In fact, the Tribunal's findings are based on the consumption of units of electricity and not on the bills raised by the Gujarat Electricity Board on fixed/committed charge basis;

+ Coming to the question of estimation of gross profit, the Tribunal has given the following reasons for adopting the rate of 2%. Here also the entire issue is based on appreciation of material on record. The Tribunal having given its consideration and having adopted the GP rate of 2% by giving its own reasons, we do not find that any question of law, much less any substantial question of law arises.

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