The ITAT Ahmedabad bench, in ‘DCIT v. M/s Real Strips Ltd, held that any additions based on mere statements during the survey are invalid without tangible materials.
A survey was conducted at the factory premises of Real Strips Ltd (Assessee) engaged in the manufacturing business of S. S. Cold Rolled Coils/Strips and Generation of Power, located Sari village, Ahmedabad on 21-01-2015. During the survey proceedings, the statement of production manager Shri N. Anantha Padmanabhan was recorded. According to his statement, it was revealed that there was maximum loss of 5.6% in the manufacturing process of the material consumed on account of invisible loss as well as scrap loss. However, the Assessee has shown processing loss @ 6.9% of the material consumed in the year under consideration ie A.Y.2013-14. Thus, the AO was of the view that the Assessee has claimed excess loss by 1.3% of the total material consumed. The AO treated the excess loss shown by the Assessee as suppressed production which was worked out at 445355 kgs (1.3% of total consumption 3,42,58,111 kgs). Thus the excess loss/suppressed production was treated as undisclosed sale made by the Assessee outside the books of accounts. Accordingly the value of such undisclosed sale was worked out to Rs.4,57,82,539/- only. Thus, the said amount was treated as suppressed sale of the Assessee. In addition to the above, the AO also observed that the gross profit as well as net profit declared by the Assessee is reducing consistently. Accordingly, the AO was of the view that the Assessee has suppressed its production leading to suppressed sale. The AO further observed that the financial statements are not reflecting the true and correct income of the Assessee. Accordingly as per the AO the books of accounts of the Assessee are liable for rejection u/s 145(3) of the Act. Finally, the AO after rejecting the books of accounts held that the gross profit of the Assessee should have been enhanced by Rs.3,81,75,944. The AO further observed that the amount of addition on account of suppressed production/sales is greater than the amount of enhanced gross profit determined by 1.17% of the turnover. Accordingly, the higher amount of disallowance of Rs. 4,57,82,539/- was treated as suppressed sale/ income and added to the total income of the Assessee.
The aggrieved Assessee preferred an appeal to CIT(A). The Assessee contended that the statement recorded u/s 133-A do not have any evidentiary value in the assessment. The Assessee also pointed out that no evidence of unaccounted production or sale relating to the A.Y under consideration was found during the procedure u/s 133-A. The Assessee argued that the statement given by the Production Manager cannot be relied upon as it was based on the production sheet which was made for internal purposes and internal discussion and no other person have admitted any suppressed production or suppressed sale. They also stated that the books of accounts were subject to audit under Companies Act, Income Tax Act, VAT, and Excise and none of these authorities have pointed out any suppression of production or sale.
The CIT(A) deleted the additions made by the AO by observing that no defect whatsoever was pointed out by the AO in the books of accounts of the Assessee. As per the Ld. CIT(A), the addition was based merely on the statement obtained under section 133A of the Act during survey proceedings without any corroborative evidence and the addition is not sustainable. According to CIT(A), the addition was based merely on the statement obtained under section 133A of the Act during survey proceedings without any corroborative evidence and the addition cannot be held as sustainable. The DCIT challenged this order before the ITAT.
The ITAT observed that the AO did not highlight any defects in the books of accounts of the Assessee and therefore the addition made by AO was merely on the basis of the statement of Production Manager recorded u/s 133A of the Act. The excess production loss observed in the statement recorded on 21.12.2015 was applied to A.Y. 2012-13 to determine the suppressed sale and suppressed production. The ITAT held that a statement recorded during F.Y. 2014-15 on the basis of documentary evidence pertaining to F.Y.2014-15 cannot be ipso facto applied to A.Y.2012-13 without having any corroborative evidence. Besides, the lower authorities had not produced any evidence suggesting that the Assessee had suppressed the production leading to suppressed sale out of the books. The addition solely based on statement u/s 133A is invalid.
The ITAT upheld the decision of CIT(A) relying upon the judgment of the Tribunal in ‘ITO vs. Rutvi Steel & Alloys Pvt. Ltd. The ITAT also cited a circular of CBDT issued on 18 .12.2014 which had instructions discouraging its officers from making any additions based only on statements and without bringing any tangible material for addition /disallowance.
