Income Tax Appellate Tribunal - Ahmedabad
Babul Products vs Assistant Commissioner Of Income Tax. ... on 7 April, 1997
Equivalent citations: [1997]62ITD179(AHD)
ORDER
B.L. Chhibber, A.M. July, 1995
1. These cross-appeals arise out of the consolidated order dt. 28th December, 1989, passed by the learned CIT(A)-I, Ahmedabad, relating to asst. yrs. 1985-86 and 1986-87.
2. The assessee is a partnership and is engaged in the business of manufacture of chewing tobacco, with basic raw materials - raw tobacco, perfumes, menthol silver foils, glycerial, saffron and other spices.
3. The first accounting year is S.Y. 2040 commencing from 5th November, 1983, and ending on 24th October, 1984, relevant to the asst. yr. 1985-86. The second accounting year is S.Y. 2041, commencing from 25th October, 1984, and ending on 12th November, 1985, relevant to the asst. yr. 1986-87.
4. The AO has made the following additions in the first year :
Rs.
1. Inflation of consumption of silver foils : 34,71,505
2. Inflation of consumption of other raw materials 8,74,391
3. Suppression of production 20,00,000
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63,45,896
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5. The learned CIT(A) deleted the first two additions aggregating to Rs. 43,45,896 against which the Revenue is in appeal while against the confirmation of addition at item No. 3, i.e., Rs. 20,00,000 the assessee is in appeal.
6. For the second asst. yr. 1986-87 the AO has made the following additions :
Rs.
1. Inflation of consumption of silver foils 36,33,684
2. Inflation of consumption of other raw materials 11,69,949
3. Suppression of production 24,00,000
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72,03,633
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7. The learned CIT(A) deleted the first two additions aggregating to Rs. 48,03,633 and confirmed the addition of Rs. 24,00,000 at item No. 3. The Revenue is in appeal against the deletion of additions of Rs. 48,03,633 and the assessee is in appeal against the confirmation of addition of Rs. 24,00,000. The assessee has also for both the years raised certain other grounds which are of minor character.
8. The AO noted that there was a search at the business premises of the assessee and residential premises of the partners from 13th November, 1987 to 15th November, 1987, during the course of which certain discrepancies were found in the stock, and the assessee made a disclosure of Rs. 40 lakhs. Further, the AO, at the request of the assessee, visited the factory premises of the assessee along with his Inspector on 20th February, 1989, when the entire process of manufacture of chewing tobacco was demonstrated before him and explained. The AO noted that the assessee was not declaring the correct position about the consumption of various raw materials like silver foils and other materials. He has summarised his observations as under :
"(1) Raw tobacco bags were not weighed, when issued from RG-12 excise record, but standard weight of 40 kgs per bag was adopted.
(2) After seiving the raw tobacco, neither the powder tobacco nor tobacco-patti is weighed.
(3) Fixed quantity of masala and menthol per bag of raw tobacco are added to a bowl, but no record is maintained for the masala or menthol used during the day.
(4) Fixed quantity of perfume compound measured by standard container is added to the bowl for each bag of raw tobacco. No record is maintained for the perfume compound used during the day.
(5) Fixed quantity of glycerine measured by standard container is added to the bowl for each bag of raw tobacco. No record is maintained for the glycerine used during the day.
(6) Two bowls containing items (iii) to (v) are powdered into the tobacco-patti put in mixture machine, and the mixture emptied into 4 aluminium containers-this mixture is not weighed.
(7) The mixture, i.e., tobacco patti treated with the above ingredients is emptied into the seive machine and impurities, if any, sifted. No weight is taken either of the impurity or of the mixture.
(8) Fixed quantity of silver foils cut into small pieces is added to the tobacco mixture, but neither the silver foil added are weighed not the final mixture.
(9) 50 grams or 10 grams tins are manually filled with the final mixture and the tins are sealed. Neither the tins are weighed nor the tobacco split at the time of sealing the tins."
The AO also relied upon the statements of the employees, viz., Sarva Shri Baldev Budhalal Prajapati and Pravinbhai Naranbhai Shrimali, recorded ex parte behind the back of the assessee in the course of proceedings under s. 132(5) of the Act.
9. The AO has mentioned excess stock of silver foils at different stages as below :
Rs.
(a) Value of silver foil determined in s. 132(5) proceedings 49,73,544
(b) Value of silver foil admitted by the assessee in s. 132(5) proceedings 41,98,752
(c) Stock of silver foils on the date of search 34,17,899 The AO worked out the excess quantity of silver foil with reference to the facts of various constituents elements of the mixture in S.Y. 2042, i.e., asst. yr. 1987-88. He observed from the consumption figures of that year as under :
"Thus during S.Y. 2042, the total tobacco mixture prepared by the assessee was 4,44,617 kgs. This mixture contained 3,77,340 kgs. of tobacco which is 84.86854 per cent. This percentage is applied to the 15 kgs. mixture which is being packed and the tobacco contained comes to 12.73 kgs. This means that according to our analysis detailed above 120 grams silver varakh is added to 12.73 kgs. of tobacco contained in 15 kgs. of tobacco contained in 15 kgs. of mixture giving a silver consumption percentage of 0.94265 with respect to tobacco. This is in contrast to the percentage at 1.13 claimed by the assessee."
He did not find any change in the quantity of silver foil normally added to the mixture. The consumption of ratio of raw materials was taken at 0.94 per cent during the asst. yr. 1985-86 and worked out excess consumption of silver foil to the tune of 749.785 kgs. and made an addition of Rs. 34,71,505 as per the following computation :
Rs.
"1. Raw tobacco consumption shown by the assessee 3,25,991 kg.
2. Silver foils consumption as percentage of the above 0.94 per cent
3. Silver foil consumption as per the above 3,064.315 kgs.
4. Silver foil consumption as per records 3,814.100 kgs.
5. Inflation of silver foils consumption 749.785 kgs.
6. Value of (5) at the average cost price @Rs. 4,630 per kg. 34,71,505
10. On the same analogy, an addition of Rs. 36,33,684 was made for excess consumption of silver foils during the asst. yr. 1986-87.
11. The AO made additions for inflation of consumption of other raw materials as per observations in para 7.6 of the assessment order for asst. yr. 1985-86. According to the AO it was found at the time of search proceedings under s. 132 that the stock of every raw material was in excess except raw tobacco. He made an addition of Rs. 8,74,391 for asst. yr. 1985-86 observing as follows :
"In absence of any information, I estimate the inflation of consumption for items other than raw tobacco and silver foil at 5 per cent of their value as under :
Rs.
1. Total consumption of all raw materials 3,90,30,725
2. Consumption of raw tobacco and silver foil included in above (38,90,040 + 1,76,52,869) 2,15,42,909
3. Consumption of other raw materials 1,74,87,816
4. Estimated inflation of consumption of above @5 per cent 8,74,391 Further, addition of Rs. 8,74,391 on account of inflation of other raw materials is accordingly made."
12. On the same analogy, he made an addition of Rs. 11,69,949 during the asst. yr. 1986-87.
13. The third major addition made by the AO relates to suppression of production. He has discussed this issue in para 8.1 of his order. The AO noted two types of shortages during asst. yr. 1985-86 as follows :
1. Wastage of raw tobacco 10,809 kgs.
2. Difference in production 14,416.300 kgs.
The AO accepted the wastage of raw tobacco of 10,809 kgs. in the nature of wasted tobacco which could not be used. However, according to him, the wastage during the manufacturing process was on the higher side. He restricted the same to 4,416.300 kgs. and made an addition of Rs. 20 lakhs (10 x 200) for excess shortage observing as under :
"At the time of my visit to the factory on 20th February, 1989, it was observed that the shortage due to the above processes was very limited and cannot exceed 4,416.300 kgs. even by the most liberal estimate. The suppressed production, therefore, works out to 10,000 kgs."
14. On the same analogy, he made an addition of Rs. 24 lakhs in asst. yr. 1986-87.
15. On appeal, the learned CIT(A) deleted the addition made on account of alleged inflation of silver foil observing as under :
"However, the Asstt. CIT has not made out a case that there was inflation of consumption in relation to the production and to the extent of inflated value there was fictitious debit to reduce the profit. It has rather been found out that such excess stocks were found on physical check-up which too reflect that they must have been accounted for. It is not the case of the officer that there was extra investment in the extra silver foils. The inflation of extra consumption of silver foils if duly accounted for would only result in extra production for which the addition has been separately made. There is also force in the contention of the appellant that the variation may be because of the variation in the weight in terms of quantity as per tin and due to uniform application of consumption of silver foil to all brands of tobacco, which need different ratio and mixing of silver foil as already evidenced by the statement of brandwise mixing reproduced in para 6. In view of the aforesaid inference which can reasonably be drawn from the facts given above, there is no case of addition on account of inflation of silver foils. There would be relief of Rs. 34,71,505."
16. The additions on account of inflation of other raw materials were also deleted by the CIT(A) observing as under :
"As already held in the case of inflation of consumption of silver foils that the Asstt. CIT was not able to elucidate the extra purchase of such materials with investments outside the books of accounts, no disallowance because of inflated consumption can be made. They would at best result in extra production which has been separately treated by him. This addition too is deleted for the aforesaid reasons. There would be relief of Rs. 8,74,391."
17. The CIT(A) however, confirmed the additions of Rs. 20 lakhs and Rs. 40 lakhs for asst. yrs. 1985-86 and 1986-87, respectively on account of excess shortages during the process of manufacturing observing as under :
"Such a modus operandi can be inferred in the year in question as well. The legalities and points noted at the time of on-the-spot visit as mentioned by the officer in para. 4.3 do show a lapse of regular check-up; by the excise authorities. I, therefore, uphold the addition of Rs. 20,00,000 in relation to the extra production not declared."
18. Shri M. S. Rai, the learned Departmental Representative, drew our attention to para 3.1 of the ITO's order and submitted that the AO has gone step by step and has rightly held that there was inflation in respect of use of silver foil and other raw materials and the shortages claimed by the assessee were excessive. He submitted that during the course of search at the business premises of the assessee and residential premises of the partners from 13th November, 1987 to 15th November, 1987, showed the existence of excess stock and the results of the raid cannot be ignored/brushed aside. He submitted that the assessee was indulging in inflation of various ingredients used in the process of manufacturing of chewing tobacco and the manufacturing process being the same the results of the search-year are very important as guide for the additions made by the AO during the years under appeal. He further relied upon the fact that the AO visited the factory premises of the assessee on 20th February, 1989, and saw/verified for himself various stages of the manufacturing process and in each stage he observed discrepancies and accordingly made out a case for the impugned additions. He, therefore, submitted that the CIT(A) is not justified in deleting the additions of Rs. 34,71,505 and Rs. 36,33,684 on account of inflation of silver foil and Rs. 8,74,391 and Rs. 11,69,949 on account of inflation of other raw materials. Alternatively, he argued that part of the additions should be confirmed, if not in toto. He supported the action of the CIT(A) in respect of additions of Rs. 20,00,000 and Rs. 24,00,000 in respect of excess shortages claimed by the assessee.
19. Shri K. C. Patel, the learned counsel for the assessee, strongly supported the order of the CIT(A) in respect of deletion of additions of Rs. 34,71,505 and Rs. 36,33,684 in respect of inflation of silver foil and Rs. 8,74,391 and Rs. 11,69,949 in respect of inflation of other raw materials. In respect of confirmation of additions of Rs. 20,00,000 and Rs. 24,00,000 on account of excess shortages, the learned counsel for the assessee submitted that there was no justification on the part of the CIT(A) for doing so. The learned counsel for the assessee submitted that no evidence whatsoever against the assessee was found during the course of search proceedings or assessment proceedings leading to the three additions made by the AO. No paper, documents, etc., were found during the search having nexus, direct or remote, in support of the additions made. Disclosure of Rs. 40 lakhs was properly explained and ultimate disclosure of Rs. 20 lakhs was made for good reasons and was accepted by the CIT(A) in the relevant years. He further submitted that the statements of the employees though repeatedly asked for by the assessee, the same were recorded ex parte and no opportunity for cross-examination was granted. He drew our attention to the fact that the show-cause notice was only for Rs. 22,40,000 while additions were made to the tune of Rs. 63,45,000 and Rs. 72,33,633 respectively in the two years under appeal. The learned counsel for the assessee further submitted that no process was made of the return filed as back as on 30th September, 1985, and it was only after the search on 13th to 15th November, 1987, and after the visit on 20th February, 1989, paid at the instance of the assessee that the first notice dt. 21st February, 1989 was issued. The learned counsel submitted that the assessee has been engaged in the manufacture of chewing tobacco since 1964 and all through it has maintained an accepted history. The learned counsel further submitted that consistently both as to raw materials and finished products, the excise laws are applicable and the assessee is regularly maintaining different prescribed registers showing full particulars of purchase, consumption stock, output, etc., of the said raw materials as well as the finished products. Complete excise records were produced before the AO by way of xerox copies and in this connection he drew our attention to the following submissions made before the CIT(A) as contained in the statement of the case :
"The only ground for these proposed additions were non-production of excise registers and non-maintenance of quantity records at different stages of mixing and also on the ground that raw tobacco was found in less quantity at the time of search in 1987. Reply to the show-cause notice was given and excise records were also produced along with the books at the time of hearing from time to time. Xerox copies of the excise records were also given before the assessment order is passed. In the show-cause notice it was mentioned that 221 bags of tobacco were less at the time of taking inventory in November, 1987. It was replied that this is a irrelevant fact so far asst. yr. 1986-87 is concerned and secondly an inventory was incorrect is as much as no counting was done separately for each bag by employing labourer and rough estimates were taken. However, after issue of notice dt. 7th March, 1989, our advocate has attended his office on 10th March, 1989, at 5.30 p.m. where he has informed that addition in respect of inflation in consumption of silver foil is intended to be made on the basis of the order under s. 132(5) of the Act. No explanation or submission was demanded or given for this additional proposals. The original proposals were of Rs. 28,40,543 where the additions made in the assessments are of Rs. 63,45,896 on the basis of the order under s. 132(5) of the Act which was simply a summary order where no opportunity was given and where the additions are made on some estimated figures of consumption of silver foils."
20. The learned counsel for the assessee submitted that it was nowhere mentioned by the AO in the assessment order that any defects whatsoever was found by the excise department during their periodical visits from time to time and the stock position of different items, raw materials and finished products maintained accordingly were never rejected by the said excise department right from inception. The learned counsel further submitted that regular books of accounts as maintained by the assessee were produced before the learned AO consistently from several years since 1964, the year of inception of the business of the assessee, and all the records were consistently maintained in the proper manner. The learned counsel further submitted that the accounts for the years under appeal were duly audited by the auditors as required and the accounts were filed before the learned AO. The learned counsel further submitted that the details of raw materials, etc., given in the form of file A-10 (seized materials) could not have been ignored by the AO, which does include the consumption ratio of the preceding years, i.e., S.Y. 2039-40 and S.Y. 2040-41, of different raw materials, tobacco, etc., copies thereof given at Annexure B on pp. 75 and 76 of the paper-book dt. 12th April, 1994. According to him, the same being clinching evidence in favour of the assessee could not have been ignored. The learned counsel further submitted that all purchases and sales were duly vouched and shortages at different level prove to be normal, mode of measurement, weighment, etc., at different steps is the same as in the past. The learned counsel further submitted that the evidence in the form of statement of employees is not relevant as they were recorded after several years and they were not cross-examined either in the course of proceedings under s. 132(5) or were presented for chief-examination, etc., in the course of proceedings under s. 143(3). Similarly, the panchas, though requested, were not examined in s. 132(5) proceedings or thereafter.
21. As regards the additions on account of excess shortages during the two years under appeal, the learned counsel for the assessee submitted that the shortages are proved to be normal taking into account the shortage of the preceding year for which full details were given before the AO and the CIT(A). He submitted that in the immediate preceding year, i.e., asst. yr. 1984-85 the overall shortage was claimed by the assessee at 6.83 per cent which was accepted. As against this the assessee has claimed the overall shortage at 6.63 per cent in asst. yr. 1985-86 and 5.48 per cent in asst. yr. 1986-87. The learned counsel submitted that the additions on account of excess shortages claimed by the assessee were, therefore, made by the ITO on pure estimate and the CIT(A) was not justified in confirming the same.
22. Apart from relying on heavily on the above factual position in support of his contentions, the learned counsel relied upon the decision of the Supreme Court in the case of State of Kerala vs. C. Velukutty (1966) 60 ITR 239 (SC). The sum and substance of the said decision is :
(a) That existence of secret account in a given year in the head office did not establish probabilities of existence of such account in its branch office and such reliance can only lead to presumption which can be called arbitrary and based on capricious surmise unsupported by any relevant material.
(b) That power of making best judgment assessment is to be exercised only to decide the matter with wisdom truly and legally and it shall not be a wild one, but shall have a reasonable nexus to available material and the circumstances of each case.
(c) That the test to the facts of the case should be whether it could lay any nexus with available record and can have reasonable nexus.
According to the learned counsel, applying the above principle, there has been no nexus between search conducted by the Department and the additions made by the AO for the two assessment years under appeal.
23. We have considered the rival submissions and perused the facts on record. We find that the main base of the assessment orders under appeal is search proceedings and the alleged goods found in the stock of finished products. But it is to be noted that the search was conducted on 13th to 15th November, 1987, i.e., about three years from the close of the assessment for asst. yr. 1985-86 and two years after the close of the assessment for asst. yr. 1986-87. It is also an admitted fact that no incriminating documents or evidence relatable to the two years under appeal were found in the course of search proceedings. No doubt, the assessee made a disclosure of Rs. 40 lakhs but the same was later on reduced to Rs. 20 lakhs after the discrepancies were reconciled and the same was accepted by the CIT(A) in the fifth year and the same could not have nexus with the present two assessment years under appeal. The mere stigma of search and seizure carried on after a long lapse of time from the close of the two assessment years under appeal cannot be the basis for the impugned additions when the assessee placed all facts/evidence with regard to the business carried on by it during the two years under appeal.
24. The second base for making the impugned addition is the observations and the impressions gathered by the AO when accompanied by his inspector he visited the factory premises of the assessee on 20th February, 1989. Obviously, the visit was paid after a long lapse of time from the close of the accounts of the two years under appeal and search operations carried on from 13th to 15th November, 1987. The AO spent a few hours at the business premises of the assessee and observed manufacturing process and thereafter he has invented certain tailor-made formulas like the one i.e., that there should be uniform consumption of 0.94 per cent of silver foils and that the assessee had inflated raw materials (other than tobacco and silver foils) by 5 per cent. In our view, there is no justification for such tailor-made formula for the reasons discussed hereinafter.
25. The assessee-firm was established in the year 1964. It has maintained regular books of accounts. The books were found to be duly audited. It is an admitted fact that the assessee has an accepted history. During the years under appeal both the turnover and the GP rates declared are progressive. The assessee has declared the GP rate of 7.69 per cent in the asst. yr. 1985-86 as against 7.66 per cent in the asst. yr. 1984-85 which was accepted in that year. The GP rate declared for asst. yr. 1986-87 is 9.22 per cent. It is also to be noted that in the asst. yr. 1983-84 the assessee had declared a GP rate of 7.4 per cent which was also accepted. Purchases and sales are duly vouched. The assessee has maintained quantitative details of major items like tobacco and silver foils and the number of ingredients are so many that it is not practicable to keep quantitative details of each and every small item. It is an admitted fact that raw materials and finished products of the assessee firm are governed by the excise laws and the assessee has regularly maintained different registers showing full particulars of purchases; consumption, stock, output, etc. of the said raw materials as well as the finished products. Full excise records were produced before the AO as mentioned supra in para 19 and the AO has not pointed out any defects therein. Under the circumstances the AO was not justified in making the impugned additions. In this connection reference is invited to the judgment of the Hon'ble Punjab High Court in the case of Pandit Bros. vs. CIT (1954) 26 ITR 159 (Punj) wherein it has been held as under :
"Held, that there was no definite finding by the ITO that the case falls within the proviso to s. 13. Even if such finding were to be implied from his order it could not be said that there was material before him which would enable him to come to such a finding. The fact that the profits appeared to him to be insufficient and the fact that no stock register was maintained by the assessee were not materials upon which such a finding could be given, but they were circumstances which might provoke an enquiry. The ITO must discover evidence or material alunde before he could give such a finding. Increasing the taxable income the ITO did not adopt any method or basis and he was not acting according to the provisions of the statute."
Further, in the case of Jhandu Mal Tara Chand Rice Mills vs. CIT (1969) 73 ITR 192 (P&H), the Hon'ble Punjab & Haryana High Court has held as under :
"The accounts of the assessee were accepted in all years upto and inclusive of 1957-58 but in 1958-59 the ITO rejected the accounts and applied the proviso to s. 13 on the grounds that no day-to-day dryage register had been maintained and that in another case the yield proposed to be adopted by him was held to be reasonably by Tribunal, and added Rs. 32,053 to the income disclosed by the assessee. The AAC on appeal, confirmed the applicability of the proviso to s. 13 but reduced the addition to Rs. 15,000. The appeal to the Tribunal was dismissed. On a reference -
Held (1) that the method of accounting adopted by the assessee having been accepted by the Department in the previous years and the income computed on that basis, there were not sufficient grounds for applying the proviso to s. 13 to the facts of the case.
(2) that even assuming that the proviso was attracted, the IT authorities not having determined any basis of manner of computation of the true income, profits and gains of the assessee firm, were not justified in arbitrarily adding Rs. 15,000 in round figure to the income of the assessee-firm."
A similar ratio has been laid down in the case of International Forest Co. vs. CIT (1975) 101 ITR 721 (J&K).
26. Coming to the specific additions on account of excess consumption of silver foils, we find that the AO has taken the stand that there should be uniform consumption of 0.94 per cent. For arriving at this conclusion he has relied upon the statements of the two employees recorded during the course of search operations. The statements were recorded ex parte behind the assessee's back in the course of proceedings under s. 132(5) of the Act, and admittedly not examined by the assessee in the course of assessment proceedings under s. 143(3) of the Act.
27. In the assessment order for asst. yr. 1985-86 on p. 11 it is mentioned by the AO that Shri Nanubhai Veljibhai Thakkar had stated in his statement under s. 132(4) on 15th November, 1987, and admitted as under :
Q. 66. I am showing the statement of your employee Pravinbhai Naranbhai Shrimali recorded today which you can go through. Can it be said on the basis of this statement that there is no change in the quantity of silverfoil added to the tobacco mixture in the last 5 years ? What have you to say about this ?
A. The statement given by our helper Pravinbhai Naranbhai is correct and acceptable to me.
From the above, the AO has inferred that Shri Nanubhai has admitted the statement obtained from Shri Pravinbhai Shrimali. This fact is wrong because Shri Nanubhai was asked about last line of the statement which was taken after the original statement was over. The one question asked to him which is question No. 18 is "Since you have joined the service whether the proportion of mixing varakh in tobacco has remained same ?" To this Shri Pravinbhai answered "Yes, we are mixing in the same proportion". Shri Nanubhai was asked to clarify that question which in reply to question No. 66. He said that the statement given by their helper Shri Pravinbhai was true and acceptable to him. So Nanubhai was asked to clarify the limited part of the statement of Shri Pravinbhai and in the confused statement of mind he must have said that the proportion is the same for all the years. The Revenue wanted to have further clarification from him and question No. 68 was put to him which is as follows :
Q. 68. I am again showing to you the statement of Pravinbhai Naranbhai Shrimali. You peacefully read this statement. In question No. 3 of this statement, Shri Pravinbhai has stated that you are mixing in tobacco the masalas, perfumes, glycerin and other mixable item and on 15 kg. of tobacco in No. 135 product, 16 folds i.e., 120 gms. silver foil using. Is it true ?
A. 68. The statement which is shown to me, they are doing work of opening the foil and they are not doing this work. I do not agree with it."
From the above answer given by Shri Nanubhai it can be seen that he has categorically mentioned about his disagreement with the statement of Pravinbhai and so the conclusion drawn by the AO from the statement of Nanubhai is factually not correct. It is further noted that Pravinbhai and Baldevbhai both have admitted in their statements that they were merely opening varakh (question No. 2 in the statement of Baldevbhai and question No. 5 in the statement of Shri Pravinbhai). Further, both were getting Rs. 20 per day and this shows that they were doing only the work of opening varakh and they actually did not know the formula of manufacturing, mixing up of raw materials, etc. This is also clear from the statement of Pravinbhai who in reply to question No. 3 said that in this factory, "Whatever the product is manufactured before my eyes that I know but which formula is used that I do not know". It is also admitted that the assessee manufactures a number of brands of chewing tobacco and mixing up of silver foil is different in different brands. The two workers in their identical statements gave wrong quantity of silver foil mixed in different brands as they did not know about the exact formula. Both the workers have given proportion of mixing up of silver foil as under :
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No. Tobacco No. Guddies Weight of Varakh
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1. 135 16 120 gms.
2. 99 10 75 gms.
3. 65 10 75 gms.
4. 390 11 90 gms.
5. 460 11 90 gms.
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The selling rate of each brand is as under :
Quality No. 16th January, 1984 26th September, 1984
Rs. Rs.
135 100.65 108.70
460 177.20 191.40
180 124.82 134.80
99 80.40 86.85
65 66.21 71.50
390 133.30 122.35
145 87.10 87.50
52 57.50 62.50
From the above two tables, it can be seen that the brand which is costly the worker has given the less proportion of silver foil used therein. Most costly brand is No. 460 which is superior and is of export quality. Here the worker has given use of silver foil as 11 Guddies whereas in brand No. 135 which is of inferior quality the worker has given use of 16 Guddies. According to the assessee in brand No. 360, 30 Guddies are used (P. 23 of the paper-book). The above facts show that the two Gumastas of the assessee were only workers and did not know anything about the mixing up of silver foil and placing reliance on their statements which remain unsubstantiated, is unwarranted. It is further noted that the above statements of the workers are also not correct so far as the consumption of silver foil in relation to 15 kgs. container. The container which the assessee was using is not of 15 kgs. but is of 12.6 kgs. and this was pointed out to the Asstt. CIT at the time of his visit to the factory of the assessee and he was also asked to take note of the same but he did not deliberately mention the same in the assessment order. This is clear from the reply to show-cause notice submitted to the AO (PP. 14 to 20 of the paper book dt. 12th April, 1994). Further, the AO ignored the consumption of silver foil which were actually found from the register found from the cupboard of the assessee's residence and which tallies with the books of account.
This register which is seized material is a vital piece of evidence and cannot be ignored. It is noted that consumption of silver foil in asst. yr. 1984-85 as mentioned in the seized paper is 1.22 per cent which has been accepted as correct by the Revenue. When the Department accepts the consumption of silver foil at the rate of 1.22 per cent in asst. yr. 1984-85 i.e., in the immediate preceding year the Revenue cannot blow hot and cold and fix an uniform rate of consumption of silver foil at 0.94 per cent. We also find that the assessee has maintained quantitative details of silver foil and all sales and purchases were duly vouched. Under the circumstances we agree with the findings of the CIT(A) that there was no justification for additions of Rs. 34,71,505 and Rs. 36,33,684 on account of consumption of silver foil.
28. As regards the additions on account of inflation of raw material other than tobacco and silver foils, we find that the ITO has worked out the inflation by applying formula of 5 per cent. The only basis is presumption and estimate for which there is no justification because as stated above, the assessee has maintained complete details of such raw materials, purchases and consumption. In the absence of any cogent evidence there is no justification for presuming that the assessee had inflated the consumption of such materials by 5 per cent. The only basis given by the AO is his visit to the factory premises of the assessee-firm and during the process he noted (as summarised above in para 8) that all such raw materials were not weighed before putting into machine and some of the raw materials were poured not by weighing/weighment but by containers/bowls. In the type of process in which the assessee is involved and that too on a large scale, it is not practicable to weigh each and every small ingredient before putting the same into the mixing machine. In our view, the details of raw materials, etc. given in the form of file A-10 (seized materials) could not have been ignored by the AO which does include the consumption ratio of the preceding years i.e. S.Y. 2039-40 and S.Y. 2040-41, of different raw materials and tobacco, etc. We have perused the copies thereof given in Annexure 'C' at pp. 75 and 76 of the paper-book dt. 12th April, 1994. The same being clinching evidence in favour of the assessee should not have been ignored in preference to the tailor-made formula like 0.94 per cent of silver foils consumption and 5 per cent inflation of raw materials. We accordingly uphold the findings of the CIT(A) in deleting the additions for alleged inflation of raw materials. The view that income cannot be estimated by applying a tailor-made formula, stands supported by the decision of the Tribunal, Ahmedabad Bench "B" (V.P. as a Third Member) in ITA No. 1136/Ahd/1993 in the case of Rakeshkumar J. Gupta, vs. IAC decided on 28th April, 1995, to which both of us were parties.
29. Coming to the additions on account of excess shortage claimed by the assessee we find some merit in the case of the AO. But in our view, the additions of Rs. 20 lakhs and Rs. 24 lakhs made by the AO for two asst. yrs. 1985-86 and 1986-87, respectively and confirmed by the CIT(A) are on the higher side. As stated above, the assessee claimed two types of shortages viz., a shortage of 10,809 kgs. of raw tobacco. This shortage has been allowed by the AO. The other shortage claimed was during the process of manufacturing which was claimed at 14,416.300 kgs. This gives a percentage of 3.6 per cent. This shortage was during the course of manufacturing process by way of evaporation of different ingredients and raw materials wasted at the stage of packing, etc., and handling etc. The AO considered this type of shortage as excessive and allowed only 4416.300 kgs. as reasonable shortage which comes to 1.1 per cent only and worked out 10,000 kgs. as suppressed production and by applying rate of 200 kgs. made the addition of Rs. 20 lakhs during asst. yr. 1985-86. This was done on pure estimate and this fact is evident from the use of words "even by the most liberal estimate". The CIT(A) has confirmed the impugned additions with bald and cryptic remarks reproduced in para 17 supra without going into the relevant factors, evidence and details and without giving any reasons, far less cogent reasons. Accordingly, we hold that the estimates made by the AO and confirmed by the CIT(A) are highly excessive. The AO has not quoted any parallel case and in such a situation the past history of the assessee can be the best guide. It is noted that overall shortage claimed during the asst. yr. 1985-86 stands at 6.63 per cent as against 6.83 per cent declared and accepted in the asst. yr. 1984-85. In the asst. yr. 1986-87 the shortage claimed is still at a lower figure i.e., 5.48 per cent. Taking into consideration the facts and circumstances of the case, the submissions made by the learned counsel and the submissions made by the learned Departmental Representative who submitted that at least part of the additions must be retained, we restrict the additions to Rs. 4 lakhs in the asst. yr. 1985-86 and to Rs. 3 lakhs in the asst. yr. 1986-87 as the shortage claimed in the later year is lower. Accordingly, the grounds raised by the Revenue succeed in part.
30. The assessee has raised a number of other grounds of minor nature which were not pressed before us except the one relating to the charge of interest under s. 215. This ground reads as under :
"That the learned CIT has grievously erred in not passing any speaking order as to charging of interest under s. 139(8) and under s. 215 of the Act. On fact, it ought to have been held that no interest was chargeable under any provisions of the Act."
31. A perusal of the order of the CIT(A) reveals that he has not adjudicated upon the ground which was raised as "The learned AO erred in charging interest under s. 139(8) and 215 of the IT Act". The same is accordingly restored to his file for fresh adjudication after giving an opportunity of being heard to the assessee.
32. In the result, the Revenue's appeals are dismissed and the assessee's appeals are allowed in part.
Phool Singh J.M. 28th July, 1995
33. I had the privilege to go through the draft order prepared by my learned brother, Shri B. L. Chhibber, Accountant Member, in these cross-appeals of Revenue and the assessee relating to asst. yrs. 1985-86 and 1986-87 and had discussed the matter in detail relating to certain additions made by the AO in both the assessment years and deleted/confirmed by the learned CIT(A) and after two-three sittings with learned brother, I was not able to convince myself with the findings arrived at by him on these additions and thus I am writing this dissenting order.
34. As mentioned in the draft order the AO has made the following additions in asst. yr. 1985-86 :
Rs.
1. Inflation of consumption of silver foils 34,71,505
2. Inflation of consumption of other raw materials 8,74,391
3. Suppression of production 20,00,000
-----------
63,45,896
-----------
35. The learned CIT(A) deleted the first two additions aggregating to Rs. 43,45,896 against which the Revenue has come in appeal while against the confirmation of addition of Rs. 20 lakhs by learned CIT(A) the assessee is in appeal.
36. In the same manner in asst. yr. 1986-87 the AO made the following additions :
Rs.
1. Inflation of consumption of silver foils 36,33,684
2. Inflation of consumption of other raw materials 11,69,949
3. Suppression of production 24,00,000
-----------
72,03,633
-----------
37. As earlier, the learned CIT(A) deleted the first two additions and confirmed the addition of Rs. 24,00,000 at item No. 3. The Revenue is in appeal against the deletion, while the assessee has come in appeal against confirmation of Rs. 24 lakhs. The assessee has also raised some minor grounds in its appeals for both the assessment years but those are not relevant.
38. To begin with, I am taking up the addition of Rs. 34,71,505 made by AO in asst. yr. 1985-86 on account of inflation of consumption of silver foils and the same type of addition of Rs. 36,33,684 in asst. yr. 1986-87 which were deleted by the learned CIT(A) and that order is subject-matter of appeals of Revenue before the Tribunal.
39. To appreciate the arguments of learned Departmental Representative Shri M. S. Rai and learned counsel, Shri K. C. Patel appearing on behalf of the assessee, it will be in the fitness of things to give out some relevant facts for disposal of this common ground. The assessee is a registered firm which carries on business of manufacturing of chewing tobacco since 1964 under the brand name "Babul Jafrani Patti". The assessee-firm was manufacturing different qualities of said chewing tobacco under the brand Nos. 60,390, 99,65 etc. The basic raw material used for manufacturing of chewing tobacco consists of raw tobacco, perfumes, menthol, silver foils, glycerine, masala, keshar' etc. The issue involved before us are of S.Y. 2040 ending on 24th October, 1984 relevant to asst. yr. 1985-86 and S.Y. 2041 ending on 12th November, 1985 relevant to asst. yr. 1986-87. The assessee filed return of income for asst. yr. 1985-86 at Rs. 33,31,230 which was revised to Rs. 33,31,730 and income shown in the return for asst. yr. 1986-87 was at Rs. 51,81,270. There was a search operation under s. 132 of the IT Act, 1961 (herein after referred to as the Act) at the business premises of the assessee-firm as well as residential premises of its partners and other connected persons between 13th to 15th November, 1987 in which unaccounted cash, valuables, excess stock, books of accounts, etc., were found and seized. Statements of some of the partners of assessee-firm as well as some of the employees engaged in the manufacturing of Jafrani Patti, were recorded under s. 132(4)/131 of the Act and order under s. 132(5) of the Act was framed and served on the assessee in which different types of additions were proposed including an addition of Rs. 35,01,750 as value of inflated consumption of silver foils in asst. yr. 1985-86 and Rs. 36,35,400 on the same account for asst. yr. 1986-87 were estimated along with other additions with which I am not concerned at this stage. The assessee requested the AO to pay personal visit to its factory to have a personal inspection of the process of manufacturing of different types of Jafrani Patti, but the assessee was not obliged by the AO till the end of proceedings under s. 132(5) of the Act. However, the AO visited the factory of assessee on 20th February, 1989, at the instance of assessee and was witness to the existing demonstration of entire process of manufacturing of chewing tobacco which was also explained to him. After that the AO served two letters dt. 21st February, 1989 and 1st March, 1989 on the assessee calling it upon to produce excise records showing opening stock of raw tobacco, receipt of raw tobacco and issue in asst. yr. 1985-86 and further excise record showing production of various products in that year along with producewise consumption of various raw materials in that year. The AO observed, that assessee failed to produce the said record and a show-cause notice dt. 7th March, 1989 was issued to the assessee proposing the following additions.
1. Inflation of consumption of raw material Rs.
@ 5 per cent of the value of total consumption of all raw materials of Rs. 3,68,10,673 13,40,534 2. Suppression of production 10,000 kgs. at average sale price of Rs. 100 per kg. 10,00,000
The AO got the figures from a file A-10 of Annexure-A to the panchnama prepared at the time of search operation under s. 132 in which purchases and consumption of different components of raw materials, their value, production of finished goods etc., for asst. yr. 1985-86 were mentioned, and on the basis of that he observed that assessee had shown a wastage of raw tobacco to the extent of 10,809 kg. He further gave out the details of different items along with their consumption with value in asst. yr. 1985-86 which reads as under :
----------------------------------------------------------------------
Items Consumption Value
Rs.
----------------------------------------------------------------------
1. Tobacco 3,25,991.000 38,90,040
2. Perfume 24,775,350 67.60 per cent 21,64,696
3. Silver foils 3,814.100 1.17 per cent 1,76,52,869
4. Menthol 7,171.800 2.20 per cent 33,34,387
5. Masala 8,149.800 2.50 per cent 7,41,632
6. Glycerine 25,427.300 7.80 per cent 8,29,101
7. Kesar 40,750 0.0125 per cent 4,07,500
------------ -----------
Total consumption : 3,95,370.100 3,90,30,725
------------ -----------
----------------------------------------------------------------------
40. After going through the figures from File A-10 and on the basis of his observations at the visit of factory premises of assessee, the AO was of the opinion that assessee had been showing the consumption of different raw materials on estimate basis and closing stock of different raw materials reflected in the books of accounts was not real. He gave out the details of raw materials including tobacco, silver foils which was inventerised at the time of search operation and after checking an excess record and admission of assessee in proceedings of s. 132(5) of the Act, it was concluded that there was a deficiency of raw tobacco at the time of search and assessee's partner admitted excess stock of raw materials of Rs. 40,00,000 in statement recorded under s. 132(4) of the Act which was reduced to Rs. 20,00,000 and there was further excess stock of silver foils and other raw materials as well as of finished goods. These facts compelled the AO to reject the book results and he proceeded to make two separate additions on account of inflation of consumption of raw materials and secondly, suppression of production. The AO after examining the details of consumption of silver foils as shown by the assessee in asst. yr. 1985-86 observed that assessee has shown silver foils consumption 01.17 per cent but this was not believed by him on the basis of statement of Baldevbhai B. Prajapati and Pravinbhai Naranbhai Shrimali, the employees of the assessee involved in opening of silver foils and mixing it on the mixture and on the statements of Nanubhai V. Thakkar, one of the partners of assessee which were recorded under s. 132(4) of the Act. He also took into consideration the observation of actual mixing of silver foils at the time of statement of Pravinbhai Naranbhai Shrimali and at the time of visit to the factory on 20th February, 1989. After pressing into the service of modus operandi of mixing the silver foils into the mixture of tobacco, menthol, masala and perfume as stated by the employees and demonstrated by them on the spot at the time of search as well as at the time of visit of AO to the factory of assessee, into the figures of tobacco consumption for asst. yr. 1987-88 (S.Y. 2042) as well as the mixture thereof, the AO observed that rate of consumption of silver foils comes to 0.9426 per cent instead of 1.13 claimed by the assessee and 1.17 per cent shown in the year 1985-86. Following that ratio of silver foils (net) to the mixture figures of asst. yr. 1985-86, the AO concluded that assessee has inflated consumption of silver foils to the extent of 749.785 kgs. and valued at Rs. 34,31,505 which was added to the income of the assessee for asst. yr. 1985-86.
41. On the same circumstances, the AO made an addition of Rs. 36,33,684 value of 730.242 kgs. of silver foil in asst. yr. 1986-87.
42. Both these additions were assailed through two appeals and the CIT(A) heard both the appeals together. The assessee took several legal as well as factual pleas. It was contended by the assessee-firm that in view of the reasonings of Hon'ble Supreme Court in the case of State of Kerala vs. C. Velukutty (1966) 60 ITR 239 (SC), the AO was not justified to base his conclusion on the result of search and seizure which took place in November, 1987, which was much after the previous year under assessment was over. In the same way inspection of the factory was made by AO in February, 1989, just after 4 years of said search and that was also not to be relied upon by the AO. The other legal point was that the AO wrongly placed reliance on the statements of employees of assessee who were not concerned with the actual mixing of silver foils or mixture of tobacco nor they were examined in the presence of any partner of the assessee. The AO has also not given any opportunity to assessee to cross-examine those employees. The request of the assessee-firm to examine the Panchnama was turned down. Further, the show-cause notice issued by AO was relating to addition of Rs. 28,40,534 out of which Rs. 18,40,534 was for inflating consumption of different raw materials but ultimately final addition was made to the tune of Rs. 63,45,986 in which alleged inflated consumption of silver foils was more than Rs. 35 lakhs.
43. The assessee's contention about its past history was that the said firm was in existence since 1964 and it was following the same type of accounts which were being accepted prior to the year under consideration. It was also the case of the assessee that the AO placed reliance upon the statements of two employees whose statements were recorded under s. 132(4) but their statements were far beyond truth as they were simple laymen. Detailed arguments on this point running from p. 15 to p. 21 of the written submissions submitted to CIT(A) and are appearing on p. 16 to 22 of paper-book dt. 12th April, 1994 (henceforth it will be referred as first paper-book). Therein the contention was that the AO was not justified for arriving at the consumption rate of silver foils @ 0.94 per cent and to disbelieve the ratio shown by assessee which was on the same pattern as to earlier years and that ratio was accepted by the Department.
44. The learned CIT(A) after going through the submissions of the learned counsel for the assessee as well as that of AO concerned rejected the submissions of the assessee that discrepancies about the stock on physical check-up in view of the maintenance of the record and process of mixing would not be of any help to work out the addition in the year under question. He pointed out that AO witnessed the modus operandi of the assessee in relation to the maintenance of record and it was at the instance of assessee. Further, the assessee itself has admitted suppression of stock of raw materials and finished products. According to him this type of suppression of raw materials, etc., as admitted at the time of search was not only in the year of search but must have been followed by assessee-firm in so many years. However, the learned CIT(A) deleted this addition with the observation as under :
"However, the Asstt. CIT has not made out a case that there was inflation of consumption in relation to the production and to the extent of inflated value there was fictitious debate to reduce the profit. It has rather been found out that such excess stocks were found on physical check-up which too reflect that they must have been accounted for. It is not the case of the officer that there was extra investment in the extra silver foils. The inflation of extra consumption of silver foils if duly accounted for would only result in extra production for which the addition has been separately made. There is also force in the contention of the appellant that the variation may be because of the variation in the weight in terms of quantity as per tin and due to uniform application of consumption of silver foil to all brands of tobacco, which need different ratio and mixing of silver foil as already evidenced by the statement of brand-wise mixing reproduced in para 6. In view of the aforesaid inference which can reasonably be drawn from the facts given above, there is no case of addition on account of inflation of silver foils. There would be relief of Rs. 34,71,505."
The above order shall show that CIT(A) deleted this amount in just 20-22 lines only without going into the necessary details. This order is challenged by the Revenue.
45. The arguments of the learned Departmental Representative as well as that of the learned counsel have come in detail in the order of learned brother. However, in brief, the contention of the learned Departmental Representative is that AO has taken much pain in examining each and every fact in critical manner to arrive at the fair and most reasonable conclusion. He has rightly processed the materials available on record. The AO was justified in rejecting the book results shown by the assessee as in search of excess stock of different raw materials used in tobacco included in the stock of silver foils was admitted and assessee-firm agreed to disclose Rs. 40,00,000 as valuation of said excess stock and it was subsequently reduced to Rs. 20,00,000. He further contended that the AO was having statements of the employees supporting the contention that ratio of consumption of silver foils shown by assessee in the years under consideration was not correct and those employees were correct concerned persons and their statements were put up to one of the partners of the firm and correctness of those statements was admitted by him. The AO himself visited the factory and witnessed the process of manufacturing of tobacco and mixing of silver foils in the mixture of raw tobacco and other components and these facts were sufficient first hand evidence available to AO to conclude that rate of consumption of silver foils should have been 0.94 per cent instead of 1.17 per cent in both the years.
46. The learned counsel for assessee Shri K. C. Patel, contrary to it, placed heavy reliance on the order of CIT(A) in relation to deletion of addition of Rs. 34,71,505 and Rs. 36,33,684 in respect of inflation of consumption of silver foils. He has reiterated the same arguments which were adduced by assessee-firm before the CIT(A). The first plea was that AO was impressed by the search operation even though no paper, documents, etc., having any nexus direct or remote in support of any addition were found. Disclosure of Rs. 40,00,000 was also one of the grounds which visited the mind of AO but that was explained by assessee. He further submitted the past history of the assessee-firm and acceptance of its book results since asst. yrs. 1964-65 onwards. He attacked the order of AO on the ground that all purchases and sales of different raw materials, including silver foils were duly vouched and no justification for adverse inference against such correct accounting was called for. He pointed out that AO was not justified in placing reliance on the statements of employees without affording an opportunity to assessee for their cross-examination. In the end it was the substance of the learned counsel for assessee that the order of CIT(A) is based on sound footings and deserves no interference.
47. After going through the rival submissions of the learned representatives of both the parties and on the basis of materials to which my attention was drawn during the course of arguments, it is significant to point out that the first point requiring scrutiny is whether the AO was justified in rejecting the book results of the assessee-firm and in case the answer is in affirmative then the reasonableness of the addition is to be examined.
48. To begin with, the first plea from the side of learned counsel for assessee before CIT(A) against the action of AO in rejecting the book results was that the assessee was a well-established firm subject to IT assessment since 1964 and maintaining the accounts on the same pattern as in the years under consideration. It was also the case of the assessee-firm that books results shown by the assessee-firm in the earlier years i.e., prior to asst. yr. 1985-86 were accepted by the Department without any addition. On the basis of all these facts it had been contended that once book results of assessee-firm were being accepted, the AO was not justified in rejecting the book results of the years under consideration without any substantial material which could have gone against the assessee. Particular reference to the search and seizure operation was made and it was pointed out that no doubt search and seizure operation took place but that was in November, 1987, much after the relevant accounting years of assessment years under consideration. Even otherwise no other direct evidence which may be termed incriminating, was detected by the authorities which could have been used against the assessee for the years under consideration for rejecting the book results.
As pointed out earlier, the decision of Hon'ble Supreme Court in the case of C. Velukutty (supra) was pressed into service.
49. On this point, it is material to point out the well settled principle of IT Act that each assessment year is separate year and results of earlier years will not affect the result of a particular year unless the facts are similar. It is also needless to point out that principle of res judicata is not applicable to IT proceedings. The fact that the assessee is being assessed since 1964 and its book results were being accepted by the Department will not be taken for granted to preclude the Department from rejecting the book results for particular assessment year in case material on record and facts so warrant. So, I have to examine, whether material pointed out by the AO to reject the book results was sufficient to discard the book results submitted by the assessee or not.
50. The first relevant circumstance for rejecting the book results of the assessee-firm relates to repeated disclosure of undisclosed income by partners of assessee and family members of the assessee's partners. It is an admitted fact that the statement of Nanubhai B. Thakkar was recorded under s. 132(4) and under s. 131 of the Act on the date of search and in the statement dt. 13th November, 1987, the partner of assessee-firm, Mr. Thakkar admitted that he and his family members had been concealing the income from income-tax. Mr. Thakkar mentioned that this concealed income to be treated as number two income and in reply to question No. 59 he had mentioned that Babul Products had made Rs. 21 lakhs number two income since 1981. The Asstt. Director of Investigation tried to enquire from him about the modus operandi to earn number two income but this witness did not yield though admitted further that their family members had purchased bearer bonds worth Rs. 1.93 crores prior to asst. yr. 1985-86 from number two income. See answer No. 42 dt. 14th April, 1987. He further admitted that different family members and partners of assessee-firm had declared number two income under Amnesty Scheme in asst. yr. 1985-86. Further, this partner of assessee-firm admitted excess stock of Rs. 50 lakhs which was ultimately rest at Rs. 40 lakhs in reply to question No. 77 recorded on 14th November, 1987, itself. These three sets of answers, if read together, go to show that partners of the assessee-firm were generating number two (black money) out of income of assessee-firm since 1981 onwards as is evident from the abovereferred to disclosures. The Asstt. Director of Investigation put up specific question to Mr. Thakkar whether books of accounts were cooked up to generate number two income and Mr. Thakkar tried to express his ignorance but the fact remains that if number two income of such magnitude was being earned by partners of assessee-firm from the activities of the assessee then naturally the book results cannot be treated as true and correct.
51. The second important aspect of the matter is that at the time of search excess stock of different raw materials consumable by assessee-firm was found and it was admitted that there was difference in the actual stock with the stocks of different raw materials as per books of accounts/record. This fact again goes to show that once there is difference in actual stock available and the stock as per books of accounts then inference shall be that book results are not believable. No doubt search was made in 1987 but the fact remains that assessee's partners admitted that number two income was being generated since 1981 onwards.
52. In this case the AO visited the factory premises on 22nd February, 1989 and that too at the instance of the assessee-firm who had been requesting the AO from the time of proceedings under s. 132(5) of the Act. The AO has given out his observations in para 4.3 of his order, which is as under :
1. Raw tobacco bags were not weighed, when issued from R-G-12 excise record, but standard weight of 40 kgs. per bag was adopted.
2. After seiving the raw tobacco, neither the powder tobacco nor tobacco patti is weighed,
3. Fixed quantity of masala and menthol per bag of raw tobacco are added to a bowl, but no record is maintained for the masala or menthol used during the day,
4. Fixed quantity of perfume compound measured by standard container is added to the bowl for each bag of raw tobacco. No record is maintained for the perfume compound used during the day,
5. Fixed quantity of glycerine measured by standard container is added to the bowl for each bag of raw tobacco. No record is maintained for the glycerine used during the day,
6. Two bowls containing items (iii) to (v) are powdered into the tobacco patti put in mixture machine, and the mixture emptied into 4 aluminium containers-this mixture is not weighed,
7. The mixture i.e., tobacco patti treated with the above ingredients is emptied into the seive machine and impurities, if any, sifted. No weight is taken either of the impurity or of the mixture.
8. Fixed quantity of silver foils cut into small pieces is added to the tobacco mixture, but neither the silver foil added are weighed nor the final mixture,
9. 50 gms. or 10 gms. tins are manually filled with the final mixture and the tins are sealed. Neither the tins are weighed nor the tobacco spilt at the time of sealing the tins.
53. These observations have not been alleged to be against facts by assessee and thus the AO was justified in observing that quantity of consumption of different raw materials prepared by the assessee was only theoretical or estimate and closing stock of different raw materials reflected in the books cannot be treated as real or correct.
54. Apart from the above, excessive consumption of raw materials particularly use of silver foils proved by AO in his order for the following reasons is another factor which goes to show that book results of the assessee-firm was rightly rejected by AO.
55. In this case statements of two employees of the assessee-firm Baldevbhai V. Prajapati and Pravinbhai N. Shrimali were recorded under s. 132(4)/131 on 13th November, 1987, and 14th November, 1987 and the AO had placed reliance on the evidence of these two witnesses so far as mixing of silver foils in mixture of semi-processed tobacco and other raw materials, is concerned. To appreciate the arguments of the learned counsel for assessee, I am giving out the relevant questions and answers from the statements of these two employees viz. : Baldevbhai B. Prajapati and Pravinbhai N. Shrimali recorded on 13th November, 1987 :
Baldev Budhalal M. Prajapati Q. 2. Since what time are you working in Babul Products and what type of work are you doing ?
A. 2 I am working in this factory from about 6 years and I am doing work opening Varakh and I am getting Rs. 20 per day.
Q. 4. Whatever is manufactured in Babul Products is of what nature and what do you know about that ?
A. 4 In this factory Jafrani patti No. 135, 65, 99, 390 460, 180 is manufactured. For the above products tobacco is given by the persons of boss which we are putting in a tobacco mixing machine and masala given by our boss is mixed therein. After shifting that, varakh is mixed therein and filling up the tins and thereafter filling in required packs of goods.
Q. 5. State how do you come to know the above process ?
A. 5. We observe day-to-day work. Therefore, we learn some work and whenever the need arises, boss assigns us some other work also. Therefore, we know the process of work done here. Sometimes boss assigns work of mixing silver foil which I am doing and I am doing work of filling tins also.
Q. 6. According to above question-answer, you are doing work of mixing silver foils in tobacco. So can you show us in which type of tobacco, in what proportion silver varakh is mixed ? State the same.
A. 6. Whatever the mixture is made after mixing chemicals and masala in tobacco, in that mixture of 15 kgs., silver varakh is mixed as mentioned under :
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No. Tobacco No. Gaddies Weight of varakh
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1. 135 16 120 gms.
2. 99 10 75 gms.
3. 65 10 75 gms.
4. 390 11 90 gms.
5. 460 11 90 gms.
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Q. 7. Is the proportion of silver varakh shown in above tobacco perfectly right ?
A. 7 According to my knowledge, it is a right proportion.
Pravinbhai Naranbhai Shrimali Q. 2. Since how many years are you working in factory of Babul Products ?
A. 2 From 1st December, 1983, I am working in this factory. I have got identity card of factory and this date is written in that.
In reply to question No. 4 he gave out the process of mixing as follows :
A. 4 First of all tobacco is put in mixture machine thereafter Maganbhai sheth or Nanubhai sheth is giving some masala that is mixed with that and, therefore (sic - thereafter), mixture machine is operated. After mixing products we are shifting that product and thereafter big drum is filled. From the drum product is put in Aluminium big dhaki (Tasak). This product is spread up (sic-in) this drum and three tagaries at a time filed in Dhaki (Tasak) the weight of which is estimated about 15 kgs. Thereafter in this mixture which is about 15 kgs. varakh is added in that, the proportion of which is as under :
Tobacco No. Gaddies Wet grams (varakh) 1. 135 16 120 gms. 2. 99 10 75 gms. 3. 65 10 75 gms. 4. 390 11 90 gms. 5. 460 11 90 gms.
As stated above after putting in varakh; varakh and tobacco is mixed properly. From this ready mixture 50 grms. tins are filled up and sealed on machine sometimes 10 gms. tins and sometimes 250 gms. tins also we are packing. Except this I do not know anything.
Q. 5. From the above system of preparing product shown by you, in that what particular work are you doing ?
A. 5 I am mainly doing work of opening varakh gaddies and after taking out varakh I am mixing that in finished product, over and above that I am also doing work assigned by my boss.
In between his statement, Asstt. Director of Investigation suspended his statement for verification of the statement given by Shri Pravinbhai N. Shrimali regarding the correctness of the weight in which particular quantities of silver foils were added, practical aspect was examined and after verification, the following results were noted by Asstt. Director of Investigation in question No. 17 :
Q. 17 As mentioned above, you, yourself have shown us the weight procedure three times which is as under :
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Aluminium drum Weight of drum filled Wt. of Net wt.
filled with finished up with finished tobacco empty of
tobacco along with including the three drums tobacco
its dhakkan tagaries of finished
tobacco and covering
the weight of dhakkan
----------------------------------------------------------------------
Kgs. Kgs. Kgs. Kgs.
----------------------------------------------------------------------
1. 18.500 20.700 5 15.700
2. 18.000 20.200 4.700 15.500
3. 18.100 20.100 5.000 15.100
----------------------------------------------------------------------
Above three weights are done by myself as sample which are true and correct.
Ultimately Asstt. Director of Investigation further asked question No. 18.
Q. 18. Since you have joined the service whether the proportion of mixing varakh in tobacco has remained same ?
A. 18. Yes, we are mixing in the same proportion.
The plea of the learned counsel for assessee before CIT(A) and before us was that both the employees were not at all concerned with mixing silver foils is the mixture and were simple labourers earning Rs. 20 per day and were not in service even in the relevant period to assessment years under consideration. These arguments of the learned counsel are apparently forceless. Statements of the two witnesses were recorded on 13th November, 1987, and 14th November, 1987, and one of them stated to be working in the firm for last six years and the other joined on 1st March, 1983. It means both were working for good length of time and as per their admissions they were doing the work of mixing of silver foils as apparent from underlined sentences of their answers. The way these two witnesses have given the number of gaddies being used in different brands of tobacco along with specific weight of those gaddies had shown that those two employees of the assessee were fully aware of the mixture process and the quantity of silver foils being used otherwise the details given by these two employees was not expected from any layman. Not only this, the Asstt. Director of Investigation had adopted a cautious approach as to verify the veracity of the statements of the employees, he had suspended the examination of Pravinbhai N. Shrimali after question No. 5 and got done the practical experiments and mixing of silver foils in other raw materials himself and noted the results thereof in question No. 17 which were admitted to be true by that employee and particularly in reply to answer No. 18. The observations of Asstt. Director of Investigation are based on the spot inspection and at that time percentage of consumption of silver foil was not in question and whatever has been recorded should be treated as true account of the affairs particularly in the absence of anything going to prove these facts as false. So, the statements of two employees coupled with the observations of Asstt. Director of Investigation on the results of practical experiments are best piece of evidence and should not be treated as unreliable.
56. The next plea of the learned counsel was that the assessee-firm was not given an opportunity to cross-examine those two employees whose statements were recorded in the back of assessee. At the very beginning it is relevant to point out that statements given by Pravinbhai N. Shrimali were put up to Nanubhai B. Thakkar who admitted the correctness of the statements of question No. 66 and its reply is reproduced :
Q. 66. I am showing to you the statement recorded today of your Gumasta, Shri Pravinbhai N. Shrimali. On the basis of this statement, it is certainly decided that since last 5 years, no change in usage of silver foil is being done. What you have to say about this ?
A. 66 The statement given by our helper, Pravinbhai, Naranbhai is true and is acceptable to me.
Not only this, questi0on No. 67 is again specific.
Q. 67. You have mentioned about change in usage of silver foil, is it wrong ? And do you accept it ?
A. 67. Yes, it is alright.
Once statement of employees had been put up to partner of assessee-firm who admitted the correctness of the answer then there was no necessity for cross-examination. Further, as a word of caution Asstt. Director of Investigation put up to said Nanubhai B. Thakkar, the rate of consumption given by Pravinbhai and that Mr. Thakkar gave the answer which are as follows :
Q. 68. I am again showing to you the statement of Pravinbhai Naranbhai Shrimali. You peacefully read this statement. In question No. 3 of this statement, Shri Pravinbhai has stated that you are mixing in tobacco the masala, perfumes, glycerine and other mixable item and on 15 kgs. of tobacco in No. 135 products, 16 folds i.e., 120 gms. silver foil using. Is it true ?
A. 68. The statement which is shown to me, they are doing work of opening the foil and they are not doing this work. I do not agree with it.
No doubt Mr. Thakkar denied the correct use of particular weight of silver foils given by Mr. Pravinbhai, it is nothing but retraction as he must have realised the havoc to be caused by his replies to question Nos. 66 and 67. The earlier answer given by this partner of assessee admitted the correctness of statement given by Pravinbhai has to be treated as correct first hand version while the other denial is nothing but an afterthought self-serving device. Even otherwise also, if Mr. Thakkar was not in agreement that 16 folds of 120 gms. of silver foils were being used in 15 kgs. of tobacco in brand No. 135 he should have given out the actual weight of consumption of silver foils but it has also not been done.
57. It is again important to point out that the employees whose statements were relied by the AO were in the service of assessee-firm. If assessee was of the opinion that they had given out certain wrong facts in their statements, affidavits rebutting the same should have come from them or they should have been produced by assessee which has not been done. Principle of burden of proof is again on assessee who is claiming the rate of consumption of silver foil at particular rate and it is its duty to prove that fact before the authorities are incorrect and thus these arguments do not inspire any confidence.
58. Another relevant point came from the admission of Nanubhai B. Thakkar to the fact that he gave out the ratio of mixing silver foils at 1.13 per cent in answers to the question Nos. 56 and 57. Further, he admitted in reply to question No. 61 that whenever the price of silver went up, the consumption of silver foils was curtailed by them. These two facts are again reflecting a true affairs in the bungling of consumption of silver foils and rate of silver foils shown in the accounts books. These two answers were again significant for rejection of the books results and further giving credence to the statements of the two employees of the assessee.
59. In the last the learned counsel for assessee pointed out that statements of these two employees should have not been relied upon by AO as per their statements the lesser gaddies of silver foils were being used in two of best brands bearing No. 460 and 390 and more gaddies in brand No. 135.
In this connection he pointed out that the price of brand No. 460 was just double to the price of brand No. 135. The price of different brands of tobacco were shown as prevalent in the year under consideration at p. 18 of paper-book. I have also examined this contention of the learned counsel but nowhere it has come that assessee was mixing more silver foils/gaddies in brand No. 460 or in No. 390 or less gaddies in brand No. 135. I have perused the answer No. 17 of Nanubhai B. Thakkar recorded on 13th November, 1987 in which he mentioned that difference in brand No. 460 and 390 is on account of costlier perfume. Thus difference in use of silver foils in these types of brands of tobacco has not come from the side of assessee. Even if the contention of the learned counsel is accepted for the sake of arguments, still that will be having no impact as AO has worked out the ratio of consumption of silver foils taking the use of 16 gaddies even in inferior quality of tobacco brand Nos. 90 and 65 even though the employees stated that 10 gaddies were being used in those brands of tobacco. If the best quality of brand Nos. 460 and 390 were using more silver foils then 16 gaddies as worked out by AO, the same shall be compensated by the working out of 16 gaddies rate applied to inferior quality of brand No. 99 and No. 65. The result will be the same, AO has observed that most of the production is of brand 135 i.e., why rate of gaddies used in that brand of tobacco is applied for working out the ratio of consumption of silver foils and thus statements of those two employees were not going to be rejected on the pleas raised by the learned counsel.
60. On the basis of above discussions in which I have considered the statements of the employees and the same duly coupled with the admission made by Nanubhai B. Thakkar and duly corroborated by physical verification of consumption of silver foils by searching authority at the time of search and further as observed by AO, the AO was justified in rejecting the book results and coming to the conclusion that rate of consumption of silver foils as shown by the assessee was not correct and should have not been relied upon.
61. About reasonableness of the addition, the AO has rightly quoted the results from the physical verification/experiment of actual consumption of silver foils which was carried out by Pravinbhai Naranbhai Shrimali in between recording of his statement under s. 132(4) of the Act and the result of that are given in para 7.4 of his order. The result shows that 16 gaddies were added approximately to 15 kgs. of mixture consisting of semi-processed tobacco, chemicals, perfumes, menthol, glycerine and masala. After that the AO took the figures of consumption of different raw materials from the file No. 1 seized from factory of assessee for S.Y. 2042. Out of total tobacco mixture of 444,617 kgs. prepared by the assessee, the tobacco was 377.340 kgs. which comes to 84.87 per cent. This percentage was applied to the 15 kgs. of mixture and out of that ratio of tobacco comes to 12.73 kgs. According to the AO 120 gms, silver varakh of 16 gaddies was being used in 12.73 kgs. of tobacco contained in 15 kgs. of mixture and percentage of silver foil consumption comes to 0.94265 per cent with respect to tobacco as against 1.17 claimed by assessee-firm in the year under consideration. The AO further observed that there was no change in the quantity of silver foils added to the mixture of tobacco and other raw materials for the last 5 years as per admission of Pravinbhai Naranbhai Shrimali, employee of assessee and its endorsement by Nanubhai B. Thakkar, partner of the assessee, then the AO applied the same ratio of 0.94 per cent for S.Y. 2040 and S.Y. 2041 and worked out the addition of Rs. 34,71,505 for asst. yr. 1985-86 and Rs. 36,33,684 for asst. yr. 1986-87.
62. The learned counsel for assessee argued that no tailor-made formula can be laid down to arrive at the rate of consumption of silver foils as the same depends upon different factors and what has been shown by the assessee was the correct result of the actual consumptions. I have already discussed that book results shown by assessee are not reliable and further the way the AO has worked out the ratio of consumption of silver foils in the years under consideration is based on the facts and figures and on the basis of statements of concerned employees duly corroborated by admission of one of the partners and as a result of actual experiments and thus it is not to be treated as tailor-made formula.
63. An attempt was also made by the assessee to mention that statement of employees about consumption of silver foils in relation to 15 kgs. container has wrongly been noted while contentions were of 12.6 kgs. This does not appear to be correct as search party noted that result after practical experiments during the statement of Pravinbhai N. Shrimali.
64. The ultimate conclusion on the basis of above is that I am in full agreement with the conclusion arrived at by the AO on the correct rate of consumption of silver foils @ 0.94 per cent and about the working of the additions for both the years which are hereby confirmed and this ground of Revenue in each appeal stands allowed.
65. The next addition relates on account of inflation of consumption of other raw materials to the extent of Rs. 8,74,391 for asst. yr. 1985-86 and Rs. 11,69,949 for asst. yr. 1986-87.
66. I do agree with the conclusion arrived at by my learned brother, Shri B. L. Chhibber in para 28 of his order by which deletion of these additions by CIT(A) was confirmed.
67. Now comes the last addition on account of suppression of product for Rs. 20 lakhs and Rs. 24 lakhs in asst. yr. 1985-86 and asst. yr. 1986-87 respectively.
68. The AO observed that the assessee had shown wastage of 10,809 kgs. Of raw tobacco and further wastage during the process of production to the extent of 14,416. 300 kgs. in asst. yr. 1985-86. He accepted the case of the assessee so far as wastage of raw tobacco of 10,809 kgs. is concerned. However, he disallowed 10,000 kgs., out of 10,416.300 kgs. of wastage of tobacco during process of manufacturing on the ground that he himself had visited the factory and as per the observations, the shortage during the process was very limited and cannot be more than 4,416.300 kgs. He worked out the prices of 10,000 kgs. at Rs. 20 lakhs and in next year this addition was of Rs. 24 lakhs. Both the additions were confirmed by CIT(A).
69. My learned brother has restricted these additions to Rs. 3 lakhs and Rs. 4 lakhs for asst. yr. 1985-86 and asst. yr. 1986-87 respectively. I do agree to that addition but these additions are justified in view of the important fact that in asst. yr. 1986-87 as the AO has observed that assessee in return of income for asst. yr. 1988-89 filed on 27th August, 1987, reported production shortage of 4,847.080 kgs. It indicates that after search the assessee had started showing the correct wastage during the process of production. Secondly, I have already upheld the additions on account of inflation of consumption of silver foils and on account of that these additions should have not been for Rs. 20 lakhs and Rs. 24 lakhs but to a nominal amount and requires restriction as done by my learned brother.
70. I also do agree with the other findings of my learned brother, Shri B. L. Chhibber.
71. In the result, the appeals of Revenue are partly allowed.
REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961 31st July, 1995 As there is a difference of opinion between the Judicial Member and the Accountant Member, the matter is being referred to the President of the Tribunal with a request that the following question may be referred to a Third Member or to pass such orders as the President may desire :
"Whether on the facts and circumstances of the case, the AO was justified in making additions of Rs. 34,71,505 and Rs. 36,33,684 for the asst. yrs. 1985-86 and 1986-87 respectively to the income declared on account of alleged inflation of consumption of silver foils ?"
S.L. Banerjee, J.M.
1. In the referred question it is explicit that the learned Members differed on the issue of quantity of silver foil (varakh) used in producing the 'zarda' by the assessee in the two assessment years under appeal. After comparing the decision of learned Accountant Member and learned Judicial Member, I have no hesitation to say that the order of the learned Accountant Member is sound, logical and it is preferred to the decision of learned Judicial Member for the following reasons.
2. It emerges from the facts of the case that the addition was made in respect of consumption of silver foil. The following grounds have been taken as a bastion for making such addition :
(i) Statements of several persons actually carrying on such job including that of Nanubhai Valjibhai Thakker, the partner-in-charge of production, and
(ii) Physical verification of actual consumption of silver foils.
2.1. The above evidence were obtained by the Department at the time of search operation under s. 132 at the business premises of the assessee on 13th/15th November, 1987.
3. To appreciate these two grounds for making the addition, the depositions and the physical verification are depicted as follows :
"7.3 In this connection, statement of one of the employees, Baldevbhai B. Prajapati, who is actually entrusted with the work of separating silver foil from paper was recorded by the Asstt. Director of Investigation, the authorised officer. In reply to Q. 6, Baldevbhai has affirmed as under :
Q. No. 6 As per your answers to the above questions, you are doing the work of mixing silver-foil with the tobacco mixture. Will you state the quantity of silver foil mixed with different brands of chewing tobacco ?
A. After mixing chemicals, masala and other items in raw tobacco, silver foil quantity given below is mixed with 15 kgs. of the mixture.
S. No. Brand No. Silver foil gaddies Weight of silver foil 1. 135 16 120 gms 2. 99 10 75 gms 3. 65 10 75 gms 4. 380 12 90 gms 5. 460 12 90 gms
Shri Pravinchandra, another employee working with the firm for the last 5 years also confirmed in reply to Q. No. 3 the above quantities of consumption of silver foil in 15 kgs. of tobacco mixture.
Shri Nanubhai Valjibhai Thakker in his statement under s. 132(4) on 15th November, 1987 has admitted as under :
Q. No. 66. I am showing the statement of your employees Pravinbhai Naranbhai Shrimali recorded today which you can go through. Can it be said on the basis of this statement that there is no change in the quantity of silver foil added to the tobacco mixture in the last 5 years. What have you to say about this ?
A. The statement given by our helper Pravinbhai Naranbhai is correct and acceptable to me.
7.4. In the second stage, physical verification of the actual consumption of silver foil was carried out. For this purpose, the assessee's employee Pravinbhai was asked to carry out the process of adding 16 gaddies of silver foil to 15 kgs. of tobacco mixture. The result of sample checks carried out is reproduced below :
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Weight of ready made Weight of ready- Weight of Net weight
tobacco filled in made tobacco empty drums of tobacco
Aluminium drums filled in drum
together with its together with 3
lids tagaries with
ready-made
tobacco and
lids of drums
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kgs. kgs. kgs. kgs.
----------------------------------------------------------------------
1. 18,500 20.700 5.000 15.700
2. 18,000 20.200 4.700 15.500
3. 18,100 20.100 5.000 15.100
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3.1 Anomalies are clearly noticeable in the deposition of the employees. For that reason it is worthwhile to quote the demonstration carried out by the AO in the factory on 20th February, 1989, which runs as follows :
"4.3 At the time of my visit to the factory on 20th February, 1989, as stated earlier, the entire process of manufacturing chewing tobacco was demonstrated and explained. It was admitted that :
(i) Raw tobacco bags were not weighed, when issued from R-G-21 excise record, but standard weight of 40 kgs. per bag was adopted.
(ii) After seiving the raw tobacco, neither the powder tobacco nor tobacco-patti is weighed.
(iii) Fixed quantity of Masala and Menthol per bag of raw tobacco are added to a bowl, but no record is maintained for the masala or menthol used during the way.
(iv) Fixed quantity of perfume compound measured by standard container is added to the bowl for each bag of raw tobacco. No record is maintained for the perfume compound used during the day.
(v) Fixed quantity of glycerine measured by standard container is added to the bowl for each bag of raw tobacco. No record is maintained for the glycerine used during the day.
(vi) Two bowls containing items (iii) to (v) are poured into the tobacco-patti put in mixture machine, and the mixture emptied into 4 aluminium containers. This mixture is not weighed.
(vii) The mixture, i.e., tobacco-patti treated with the above ingredients is emptied into the sieve machine and impurities, if any, sifted. No weight is taken either of the impurity or of the mixture.
(viii) Fixed quantity of silver foils cut into small pieces is added to the tobacco mixture, but neither the silver foil added are weighed not the final mixture.
(ix) 50 grams or 10 grams tins are manually filled with the final mixture and the tins are sealed. Neither the tins are weighed nor the tobacco split at the time of sealing the tins."
3.2 In point (viii) the AO mentioned that it was found that "Fixed quantity of silver foils cut into small pieces is added to the tobacco mixture, but neither the silver foil added are weighed nor the final mixture."
3.3 It is evident, therefore, that at the time of demonstration it is established that weighing of silver foil was not made either before or after the final mixture. Therefore, adoption of the statement or deposition of the employees for making addition for only difference of 0.2 per cent is quite illogical and unjust.
3.4 Further, it may be noted that in the deposition following weights of silver foils had been given for mixture :
S. No. Brand No. Silver foil Gaddies Weight of silver foil 1. 135 16 120 gms 2. 99 10 75 gms 3. 65 10 75 gms 4. 380 12 90 gms 5. 460 12 90 gms
3.5. If a plain mathematical calculation is made it would be seen that the weights of the silver foil given by the employees are erroneous. One gaddi is equal to 7.5 grams (120/16). If this rate is adopted 11 gaddies cannot be 90 grams because 7.5 x 11 would be 82.5 grams and not 90 grams as stated by the employees. Again, if the panchnama is verified it would be seen that at Annexure-P, p. 1, the aluminium tin had capacity of keeping 12.600 grams per tin. At this stage if we again look into the demonstration by the AO it will be noticed that before the silver foil is mixed tobacco are kept in aluminium container (para 1). It will also be pertinent to note that in reply to question No. 3 one of the employees, from whom the deposition was taken, replied :
"Whatever the product is manufactured before my eyes that I know but which formula is used that I do not know."
Again in reply to question No. 5 the reply was as under :
"We observe day-to-day work. Therefore, we learnt some work and whenever the need arises, boss assigns us some other work also. Therefore, we know the process of work done here. Sometimes boss assigns of mixing silver foil which I am doing and I am doing work of filling tins also."
3.6 It would be noted that he had only admitted that he is doing mixing of silver foil but no specific reply as to the weight of the silver foil had been given at this stage. At one stage again it was deposed that mixing work was done by the partner.
"Q. 66. I am showing to you the statement recorded today of your gumasta, Shri Pravinbhai N. Shrimali. On the basis of this statement, it is certainly decided that since last 5 years, no change in usage of silver foil is being done. What you have to say about this ?
A. The statement given by our helper, Pravinbhai Naranbhai is true and is acceptable to me.
Q. 67. You have mentioned about change in usage of silver foil, is it wrong ? And do you accept it ?
A. Yes, it is alright.
Q. 68. I am again showing to you the statement of Pravinbhai Naranbhai Shrimali. You peacefully read this statement. In question No. 3 of this statement, Shri Pravinbhai has stated that you are mixing in tobacco the masala, perfume, glycerine and other mixable item and on 15 kgs. of tobacco in No. 135 products, 16 folds i.e., 120 gms, silver foil using. Is it true ?
A. 68. The statement which is shown to me, they are doing work of opening the foil and they are not doing this work. I do not agree with it."
It will be pertinent to note that neither in question No. 66 nor in question No. 67 the weight of silver foil for mixing was enquired. The questions related only to the changes in last 5 years. It is definitely when the investigating officer realised that the questions were not properly asked in the context of the weight that he asked question No. 68 where the exact weight of silver foil for mixing had been enquired into. Had the first two questions been sufficient there was no need to ask another question starting at question No. 68.
4. In these circumstances, the addition made for only variation of 0.2 per cent is uncalled for and unjustified. Moreover, the consumption claimed by the assessee is supported by the seized document captioned as "A9". It is pertinent to note that the consumption of silver foil had been noted in the seized document captioned as "A9". The AO had demolished this evidence by saying that they are merely estimate and not supported by any primary record maintained for this purpose. Surprisingly, he had not mentioned what is the primary record noted in this case. There is no dispute about the purchase of raw materials including the silver foils and there is no evidence of sale of silver foils by the assessee, found at the time of search.
5. Again, there exists a fallacy in the order of the AO in the context of consumption of silver foils. There is no dispute about the evidence of purchase of silver foil, nor there is any evidence of sale of silver foil, and there is no allegation that silver foil had been purchased from undisclosed sources not recorded in the books of accounts, then there cannot be addition for excess consumption of silver foil as well as excess of stock of silver foils. At p. 5 the AO mentioned that at the time of search excess silver foil had been found in the factory of the assessee. In this respect, decision of the learned CIT(A) is quoted which is a befitting one in the circumstances of the case :
".. However, the Asstt. CIT has not made out a case that there was inflation of consumption in relation to the production and to the extent of inflated value there was fictitious debit to reduce the profit. It has rather been found out that such excess stocks were found on physical check-up which too reflect that they must have been accounted for ......"
In short, the excess consumption and excess stock cannot coexist. It may further be noted that the assessee had made disclosures in the asst. yr. 1988-89 in respect of excess closing stock found at the time of search. Determination of closing stock is a continuing process. If there is an excess closing stock in one year it would be carried forward to the next year and so on. If the excess stock is added in subsequent year it has to be presumed that it has taken into account the excess stock if any in the year under appeal and no further addition should be made in respect of such excess stock of the silver foils in the years under appeal.
6. Coming to the legal aspect of the matter, it is seen that decision of Hon'ble Supreme Court in the case of State of Kerala vs. V. C. Velukutty (1966) 60 ITR 237 (SC) applies in this case mutatis mutandis. In that case the Hon'ble Supreme Court held that on the basis of materials of another year turnover of the subsequent year cannot be made as there is no nexus between materials obtained at the time of search of one year with the facts of another year.
7. It is further surprising that though a partner was shown the depositions of two employees on the basis of which additions had been made in these two assessment years, after the replies from the partner objecting to the correctness of the deposition, opportunity of cross-examination was not given to the assessee. The AO mentioned that employees were directed to carry out the actual consumption of silver foil at 16 gaddies of silver foil to 15 kgs. of tobacco mixture. It clearly shows that mixtures were made at the direction of the investigating officer. No evidence has been brought into record to show that the said mixture was similar to the products of the assessee sold in the market. The analysis made on the basis of the direction of the investigating officer cannot construe the real mixture of silver foils. No attempts have been made by the Revenue to make a chemical analysis through specialist in respect of the finished products of the assessee to verify the correctness of the statement made by the assessee.
8. Looking to the totality of the circumstances, it cannot be said that any addition should have been made to the extent of 0.23 per cent when everything is on estimate and no exact analysis of the final product is brought into record.
9. Now the opinion of the learned Judicial Member is examined in seriatim. At para 50 of his order the learned J.M. pointed out that one of the partners of the assessee-firm had admitted that he and his family members had been concealing the income from income-tax. In reply to question No. 59 he had mentioned that Babul Products had made Rs. 21 lakhs number two income since 1981. The Asstt. Director of Investigation tried to enquire from him about the modus operandi to earn number two income but the witnesses did not yield though admitting further that their family members had purchased bearer bonds worth Rs. 1.93 crores prior to 1985-86 from number two income. The partner further admitted that the partners of the assessee-firm and their family members had declared number two income under Amnesty Scheme in the year 1985-86. Further, this partner of the assessee-firm admitted excess stock of Rs. 15 lakhs which were ultimately raised at Rs. 40 lakhs. According to the learned J.M., the above facts established that since 1981 the assessee-firm was generating black money.
9.1 The opinion of the learned J.M. does not establish that the assessee-firm had earned income from sale of silver foil in the asst. yrs. 1985-86 and 1986-87. The disclosures had been made in bearer bonds which were purchased prior to asst. yr. 1985-86, which is the year under appeal. Not an iota of evidence representing the sale of silver foil was available from search. If the assessee had such huge income from sale of silver foil, for which the impugned addition has been made, it is highly improbable that not a single paper evidencing the sale of silver foil could not be available. Therefore, extra income disclosed cannot be attracted for alleged excess consumption of silver foil account. It is a trite law that however strong the presumption may, it cannot take the place of the evidence. If the assessee's partner and his family members had made declaration in the Amnesty Scheme, without bringing any materials on the record that they are attributable to the excess stock sale of silver foils, addition should not have been sustained on that ground. The reason given by the learned J.M. cannot therefore, be accepted.
10. At para 51 the learned JM pointed out that at the time of search the excess stock was found and on that basis the books of accounts cannot be relied.
10.1 But the rejection of books of accounts does not give unfettered power to estimate the income. There must be something to support the estimate and that should be more than the suspicion as laid down by the Supreme Court in the case of Dhakeshwari Cotton Mills vs. CIT (1954) 26 ITR 775 (SC) at p. 782. The above decision applies mutatis mutandis in this case. Here also no materials had been brought into record that the assessee had sold silver foils for generating black money by claiming higher consumption rate on that account. No materials had also been brought into record that the stocks shown in the relevant assessment year were untrue. If there is no dispute about the purchase of silver foil and there is no material on record to illustrate that the assessee did not show the stock correctly in the relevant assessment year, the additions made by the AO supported by the learned J.M. cannot be accepted.
11. At para 52 the learned J.M. depicted the observation of the AO when he (AO) visited the factory premises of the assessee. The learned J.M. at para 53 observed that the observation from the demonstration had not been alleged to be against the facts by the assessee and thus the AO was justified in observing that quantity of consumption of different raw materials prepared by the assessee was only theoretical or estimate and closing stock of different raw materials reflected in the books of account cannot be treated as real and correct.
11.1 As already pointed out earlier the demonstration of AO only indicates that the mixture of tobacco as well as other ingredients including silver foils was made on estimate basis, therefore, it does not establish that the exact quantity declared by the employees is erroneous, therefore, cannot be accepted. The observation relied on by the learned J.M. to reject the book results is, therefore, erroneous and cannot be accepted.
12. At paras 54 and 55 the learned J.M. appears to have accepted the action of the AO in rejecting the book results following the statements given by the two employees, already referred to above. This issue had already been considered in earlier part of this order. To repeat, it is apparent from the facts of the case that their statements cannot be accepted in toto because of various discrepancies. There was no aluminium tin of 15 kgs. holding capacity found at the time of search whereas, they made the statement that the silver foils are mixed with 15 kgs. tobacco. Secondly, even at the time of demonstration it was observed by the AO that no measurement of weight was done in respect of the silver foil used before mixing. The mixture made on the direction of the Asstt. Director of Investigation cannot be accepted also in absence of any evidence that similar mixtures are put to use by the assessee in the market or such products were similar to the assessee's products. It may further be noted that in reply to question No. 18 employees said that they are mixing same proportion since they had joined the service. The additions had been made to the tune of lakhs but strangely enough no assessment prior to asst. yr. 1985-86 had been reopened for the concealment of the income in the context of over-consumption of silver foils. If the Revenue was so sure that the result which was obtained in 1987 is same for all other earlier assessment years since the employees joined the service of the firm then why only in the asst. yrs. 1985-86 and 1986-87 the additions have been made and earlier assessments had not been reopened. It goes to prove that the Department had no sufficient materials and they are also not very sure in the matter of consumption of silver foils in earlier assessment years. It may further be pointed out that the suppression detected in a subsequent year cannot be made the basis of the addition in earlier years on presumed similar suppression [please see Delhi Iron Syndicate (P) Ltd. vs. CST 1979 ILR 70 (All)].
13. At para 56 the learned J.M. had examined the question Nos. 66 and 67 put to the partner Nanubhai and his answer to them. He observed that no doubt in reply to question No. 68 the partner denied the correctness of use of particular weight of silver foils given by the employees, it is nothing but retraction as he must have realised the havoc to be caused by replies to question Nos. 66 and 67.
13.1 It has already been stated earlier that the replies of Nanubhai did not go against the assessee's claim. It has already been pointed out that in reply to question No. 66 Nanubhai admitted only that there is no change of usage of silver foil for last 5 years. Again in reply to question No. 67 he almost reiterated the same thing and there also he did not mention about the quantity of silver foils used to be the same as there was no specific question in this respect. Most probably, apprehending that the questions put to Nanubhai in question Nos. 66 and 67 were not complete ones the Investigating Officer put question No. 68 again in the context of the specific quantity. There, Nanubhai clarified the position about the quantity of consumption. Therefore, the observation of learned J.M. that Nanubhai apprehending the answers to the question Nos. 66 and 67 were against the assessee had changed his version is not correct. Nanubhai had replied only the question asked for and the answer should be examined in the angles of the question asked for.
14. In para 57 the learned J.M. pointed out that if the statement given by the employees are not correct the partner should have filed an affidavit.
14.1 It has been already pointed out that his answers to question Nos. 66, 67 and 68 were not against the assessee and, hence, filing of affidavit does not arise. In any case, had the affidavit been filed this would only be a self-serving document and would have no value.
15. In para 58 the learned J.M. pointed out that Nanubhai had admitted in answers to question Nos. 56 and 57 that though the silver foil mixtures were at the rate of 1.13 per cent it was cut down as silver price went up.
15.1 In fact, this reply supports the contention of the assessee and not that of the Department as the learned J.M. feels. The silver foil price was definitely lower in 1985 and 1986 than 1987. If the Department found the consumption rate in 1987 was 0.94 grams then the consumption of silver foils in 1985 and 1986 should be higher as the prices were lower than that of 1987. It is not understood why the learned J.M. felt this deposition of the partner was against the assessee.
16. At para 50 the assessee's submission that statement of two employees should not have been relied upon by AO as per their statement that lesser gaddies of silver foils were being used in two of best brands bearing No. 460 and 390 and more gaddies in brand No. 135 was negatived by the learned JM. Higher consumption is compensated by the lower consumption of other brands. This opinion of the learned J.M. could have been accepted if the quantity produced by the assessee for all brands are same. The method of averaging cannot be adopted if the quantity of every brand is not equal to each other. The observation of the learned J.M. therefore, cannot be accepted.
17. At para 60 the learned J.M. observed that the admission of the employees duly coupled with admission made by Nanubhai and duly corroborated by the physical verification of consumption of silver by the searching authorities, at the time of search, is proper basis in rejecting the book results and to come to the conclusion that the rate of consumption of silver foil, as shown by the assessee, was not correct and should not have been relied on.
17.1 As already discussed the admission of Nanubhai does not pertain to the quantity of silver foil consumed and the physical verification of consumption of silver foil should not be made as the basis because the analysis had been made on the direction of the Asstt. Director of Investigation and there is no evidence brought into record to show that the assessee is selling the product containing similar mixtures.
18. As to the reasonableness of the addition at para 61 the learned J.M. again adopted the physical verification/experiment of actual consumption of silver foils carried out by the employees between the recording of the statement under s. 132(4).
18.1 This issue had already been discussed where it has been pointed out that the mixtures had been made at the direction of the searching party and no materials had been made at the direction of the searching party and no materials had been brought into record that the assessee is selling the products similar to the products produced at the time of verification. It has also been pointed out that the actual product produced and sold by the assessee had not been put into examination by any qualified analyst or chemist. The AO had adopted the products on the basis of demonstration made by the searching party.
19. At para 62 the learned J.M. repeated that the ratio of consumption of silver foil in the years under consideration is based on facts and figures and on the basis of statements of concerned employees duly corroborated by the admission of one of the partners and as a result of actual experiment and thus it is not to be made for tailor-made formula.
19.1 The above grounds had already been considered earlier and they are not further repeated. The reasons had already been given why these statements of the employees allegedly corroborated by the partner and actual experiment cannot be relied on in the circumstances of the present case.
20. The learned J.M. then pointed out the assessee's claim that silver foils were consumed relating to 15 kgs. are not proper because the containers are of only 12.6 kgs. According to the learned J.M. this does not appear to be correct as search party noted the result after practical experiment giving the statement of an employee.
20.1 It is pertinent to note that when the Panchnama was prepared there was no container to absorb 15 kgs. of tobacco. The aluminium containers of 12.6 kgs. were found. It would be seen that when the AO on 20th February, 1989, visited the factory he found that before silver foils are mixed tobacco is kept in aluminium containers. In the Panchnama it is found that the aluminium container weighs about 12.6 kgs. Therefore, mixing the tobacco in 15 kgs. containers appears to be erroneous basis and that too when the addition is made only for the variation of 0.23 kgs.
21. In view of the above, disagreeing with the conclusion reached by the learned J.M. the order of the learned A.M. is accepted. This case will now be placed before the Division Bench for passing the majority order.