Income Tax Appellate Tribunal - Ahmedabad
Assistant Commissioner Of Income Tax vs Hynoup Food & Oil Industries (P) Ltd. ... on 18 March, 1998
ORDER
R.K. Bali, A.M.
1. These two cross-appeals; one by the Revenue and the other by the assessee relating to asst. yr. 1987-88 are taken up together and disposed of by a common order for the sake of convenience.
2. ITA No. 3707/Ahd/1992 is the appeal filed by the Revenue wherein the following three grounds have been raised :
"(1) The learned CIT(A) has erred in law and on facts in deleting an amount of Rs. 36,12,666 being purchase disallowed under s. 40A(3).
(2) The learned CIT(A) has erred in law and on facts in deleting an amount of Rs. 8,73,621 disallowed for want of verification as well as under s. 40A(3) of the IT Act.
(3) The learned CIT(A) has erred in law and on facts in deleting an amount of Rs. 32,92,327 disallowed on account of excess process loss in production."
3. In ITA No. 3572/Ahd/1992, there are as many as 19 grounds but the dispute projected in ground of appeal Nos. 1 to 11 relates to the action of the CIT(A) in sustaining an addition of Rs. 11,92,392 out of the total addition of Rs. 44,84,719 made by the AO on account of excess claim of process loss by the assessee during the manufacturing process of refining of crude cottonseed oil. Ground of appeal Nos. 12 to 15 relate to certain disallowances under s. 40A(3) which were not pressed by the learned counsel for the assessee and as such are not dealt with. Ground of appeal Nos. 16 to 18 relate to the action of the CIT(A) in upholding the action of the AO in granting depreciation to the assessee on the cost of machinery after deducting the cost of subsidy received by the assessee from the Government. The issue has to be adjudicated in favour of the assessee and against the Revenue as per the decision of the Supreme Court in the case of CIT vs. P.J. Chemicals (1994) 210 ITR 830 (SC). We direct accordingly.
4. At the time of hearing, the learned Departmental Representative moved an additional ground of appeal in the following words :
"That the assessee is not entitled to deduction under ss. 32A, 80HH and 80-I of the Act because it is engaged in the business of refining of mainly cottonseed oil and the refining of oil does not amount to manufacture or production of an article or thing as per the provisions of relevant sections of the IT Act and accordingly the assessee is not entitled to any deduction under ss. 32A, 80HH and 80-I of the Act."
5. At the time of hearing, the learned Departmental Representative submitted that the above ground being purely a legal ground should be admitted as the same can not be taken up at the time of filing the appeal by the Revenue because certain decisions of the Supreme Court were not taken into consideration and in any case this being a purely legal ground can be taken up even for the first time before the Tribunal in view of the decision of the Supreme Court in the case National Thermal Power Co. Ltd. vs. CIT (1998) 229 ITR 383 (SC).
6. J. P. Shah, the learned counsel for the assessee, objected to the admission of the additional ground and submitted that for the last served years the assessee has been engaged in the business of manufacturing of refined a cottonseed oil from crude cottonseed oil which is known as wash oil and the assessee is held to be entitled to deduction under ss. 32A, 80HH and 80-I of the Act. It was submitted that earlier in some of the years the AO tried to deny the benefit of deduction under ss. 32A, 80HH and 80-I to the assessee but on appeal, the CIT(A) directed the AO to allow deduction under ss. 32A, 80HH and 80-I and although the appeals were filed by the Revenue on other grounds, the question of deduction under ss. 32A, 80HH and 80-I was not agitated before the Tribunal by filing an appeal and this was done consciously by an application of mind by the learned CIT(A) who authorised the AO to file the appeal. It was further submitted that in the assessment year under consideration also while filing the appeal the ground relating to deduction under ss. 32A, 80HH and 80-I was not at all taken and no satisfactory explanation is given as to why this ground is now being taken by way of additional ground of appeal.
As regards reliance of the Departmental Representative on the decision of the Supreme Court in National Thermal Power Co. Ltd. vs. CIT (supra), J. P. Shah, the learned counsel for the assessee admitted that a legal ground can be raised any time before the Tribunal if it does not involve investigation into facts He, however, submitted that in the present case it will be necessary to go into the factual aspects of the case and as such the additional ground should not be admitted.
7. We have considered the rival submissions with regard to the admission of the additional ground. The issue is in dispute is squarely covered by the decision of the Supreme Court in the case reported in (1998) 229 ITR 383 (SC) (supra) wherein the Supreme Court held that a legal ground can be taken even for the first time before the Tribunal. As regards the submissions of J. P. Shah, the learned counsel for the assessee, that it will involve investigation into facts, the same is not tenable because the only fact which is required to be ascertained is as to whether conversion of raw cottonseed oil known as wash oil into refined cottonseed oil tantamounts to manufacturing or not and it is undisputed that the business of the assessee is only refining of raw cottonseed oil into refined cotton seed oil under ISI mark. Accordingly we will admit the additional ground in view of the above the additional ground in view of the above decision of the Supreme Court in (1998) 229 ITR 383 (SC) (supra).
8. We will be taking up the Revenue's appeal first and like to adjudicate on the additional ground raised by the Revenue relating to deduction under ss. 32A, 80HH and 80-I. The learned CIT(A) has discussed this issue in paras 12 to 12.2 of the impugned order and after referring to the various stages involved in conversion of wash oil into refined oil it held that the assessee is entitled to deduction under ss. 32A, 80HH and 80-I on the basis of decisions referred to in para 12.1 of the impugned order viz. :
(1) CIT vs. Mansinghka Oil Mills (P) Ltd. (1988)169 ITR 158 (Bom);
(2) Burmashell Refineries Ltd. vs. G. B. Chand, ITO & Anr. (1966) 61 ITR 493 (Bom);
(3) CIT vs. Lakhtar Cotton Press Co. (P) Ltd. (1983) 142 ITR 503 (Guj);
(4) CIT vs. J. B. Kharwar & Sons (1987) 163 ITR 394 (Guj);
(5) Addl. CIT vs. A. Mukherjee & Co. (P) Ltd. (1978) 113 ITR 718 (Cal);
(6) G. A. Renderian Ltd. vs. CIT (1984) 145 ITR 387 (Cal);
(7) Cochin Co. vs. CIT (1978) 114 ITR 822 (Ker);
(8) CIT vs. Perfect Liners (1985) 142 ITR 654 (Mad); and (9) Nu-Look (P) Ltd. vs. CIT (1986) 157 ITR 253 (Del);
as also his own decision in the case of M.Ravji Oil Industries Ltd., Ahmedabad.
9. R. K. Chowdhury, the learned Departmental Representative, submitted that the action of the CIT(A) is not in accordance with law as interpreted by the various Courts and taking into consideration the dictionary meaning of the word "manufacture". It was submitted that the prevalent and generally accepted test to ascertain whether there is "manufacture" is to find whether the change or the series of changes brought about by the application of process take the commodity to the point where commercially it can no longer to regarded as the original but is, instead, recognised as a distinct and new article that has emerged as a result of the process. Reliance was placed on the decision of the Raghbir Chand Som Chand vs. Excise & Taxn. Commr. (1960) STC 149 (Punj). It was submitted that there is a distinction between 'manufacture' process and the process per se. Relying on the decision of the Supreme Court in the case of Jayant Oil Mills (P) Ltd. (1989) 3 SCC 343 (SC) it was submitted that hydrogenation of rice bran oil is a process. But all process need not be manufacture and further submitted that manufacture is the result of one or more processing but processing does not include manufacture always and everywhere. Reliance was placed on the decision of the Supreme Court in the case of CIT vs. N. C. Budhharaja & Co. (1993) 204 ITR 412 (SC), Delhi Cold Storage (P) Ltd. vs. CIT (1991) 191 ITR 656 (SC), Sterling Food vs. State of Karnataka 63 STC 239 (SC) and Dy. CST vs. Pio Food Products 36 STC 63 (SC).
The learned Senior Departmental Representative read through the decision of the Supreme Court in the case of Pio Food Packers (supra) at paras 26 and 27 as well as the decision in the case of Sterling Food (supra) at paras 28 and 29 and submitted that in the case of Pio Food Packers (supra) the apex Court observed that although a degree of processing is involved in preparing pineapple slices from the original fruits, the commodity continues to possess its original identity notwithstanding the removal of inedible portions. Similarly, in the case of Sterling Food it was held that after processing the frozen, shrimps, prawns and lobsters they can still go under the description of shrimps, prawns and lobsters even though their heads and tales are separated for the purpose of storage and preservations. In both the cases the items under process cannot be regarded as an item commercially distinct from the original items namely pineapples, shrimps, prawns and lobsters. Applying the same analogy it was submitted that in the process of refining of wash oil into edible oil the ultimate product remains the same i.e., oil only. Accordingly, it was pleaded that the assessee is not entitled to deduction under ss. 32A, 80HH and 80-I. Reliance was also placed on the decision of the Karnataka High Court in the case of V. M. Salgaocar & Brothers (P) Ltd. vs. CIT (1996) 217 ITR 849 (Kar) as well as the decision of the Supreme Court in the case of Tungabhadra Industries Ltd. vs. ITO 11 STC 827 (SC); and other decisions as under :
(i) Universal Chemical & Industries (P) Ltd. vs. CST 62 STC 197 (MP);
(ii) Kanyakumari Dist. Co. Milk Supplies Union vs. ITO (1996) 56 ITD 80 (Mad);
(iii) ITO vs. Sreekumar (1987) 27 TTJ (Asr) 331;
(iv) CIT vs. Fashion Prints Ltd. (1996) 217 ITR 456 (Bom);
(v) Asstt. CIT vs. Varma Mukharjee (P) Ltd. (1997) 61 ITD 462 (Bom);
(vi) ITO vs. Vidarbha Refineries (P) Ltd. (1986) 17 ITD 453 (Nag);
(vii) 227 ITR 598 (Sic) and 227 ITR 736 (Sic);
(viii) Crystal Oil (P) Ltd. vs. ITO (1992) 40 ITD 15 (Bom);
(ix) Kanti Bros vs. ITO (1994) 50 ITD 106 (Hyd);
(x) Ennar Refineries vs. Asstt. CIT 92 STC 404;
(xi) State of Gujarat vs. Dipak Lalbhai & Co. 92 STC 78; and
(xii) CIT vs. Hindustan Metal Refinery Works (1981) 128 ITR 472 (Cal).
It was further submitted that the decisions on which reliance was placed by the assessee's counsel before the CIT(A) are distinguishable on facts and the CIT(A) has been greatly influenced by the submissions of the assessee that in trading circle raw oil and refined oil are known as different commercial commodities. According to the learned Departmental Representative this fact would not alter the applicability of judicial decision as refined oil will always be known separately from raw oil but that in itself cannot turn processing into activity of manufacture.
10. J.P. Shah, the learned counsel for the assessee, strongly contested the submissions made by the learned Senior Departmental Representative and submitted that the authorities relied upon by the Departmental Representative mostly relate to the refining of groundnut oil and rice bran oil which is eatable in the unrefined state as well as in the refined state. Similarly, rice bran oil is not (sic) eatable in the unrefined state as well as in the refined state. Whereas in the case of cottonseed oil which the assessee is manufacturing, unrefined cottonseed oil is not at all eatable whereas cotton seed oil is eatable and, therefore, not only different commercial commodity come into existence, but its use is also different as compared to the unrefined cotton seed oil called "wash oil". Reliance was placed on the decision in the case of Edible Products (India) (P) Ltd. vs. CTO (1991) 83 STC 317 wherein the conversion of raw coconut oil into refined coconut oil was held to be manufacturing because the change brought about in the coconut oil purchased by the applicant by application of different processing such as neutralisation, decolouring and deodorisation takes the commodity to the point where commercially the refined coconut oil produced by the applicant can no longer be regarded as the original commodity due to difference in the free fatty acid value, colour odour, unsaponificable matter, moisture and impurities. Such coconut oil is a different commercial article and has a different class of consumers who purchases it for manufacturing biscuits.
In the above referred decision, the decision of the Supreme Court in the case of Tungbhadra Industries Ltd. vs. CTO (supra); Dy. CST vs. Pio Food Packers (supra) and Dy. CST vs. Coco Fibres (1991) 80 STC 249 (SC) were also referred to.
J. P. Shah, the learned counsel further relied upon the decision of the Punjab & Haryana High Court in the case of Phool Chand Arora vs. The State of Punjab (1986) 63 STC 464, Gujarat High Court decision in the case of State of Gujarat vs. Leena Traders (1991) 82 STC 313 (Guj), Kerala High Court decision in the case of Dy. CST vs. Sulaiman (1986) 61 STC 331, Ujagar Prints vs. Union of India (1989) 179 ITR 317 (SC), Delhi Cloth and General Mills Co. Ltd.'s case AIR 1963 SC 791, Bombay High Court in the case of CST vs. Radha Dyeing and Printing Mills (1981) 48 STC 61, Supreme Court decision in the case of Devi Dass Gopal Krishnana vs. State of Punjab 20 STC 430, State of Tamil Nadu vs. Pyare Lal Malhotra (1976) 37 STC 319, Madhya Pradesh Court decision in the case of Kumar Rolling Mills vs. CST (1992) 87 STC 222 and Punjab & Haryana High Court decision in the case of 14 STC 252, Gujarat High Court decisions in the case of CIT vs. Ajay Printery (P) Ltd. (1965) 58 ITR 811 (Guj) and CIT vs. J. B. Kharwar & Sons (supra), Tribunal decision in the case of Dy. CIT vs. Lalit Fabrics (P) Ltd. (1992) 198 ITR 190 (AT), Supreme Court decisions in the case of Sirpur Paper Mills Ltd. vs. Collector of Central Excise (1998) 1 SCC 400 and CST vs. Jagannath Cotton Co. (1995) 99 STC 83, etc. J.P. Shah, the learned counsel for the assessee, referred to the written submissions filed on behalf of the Department by R.K. Chowdhury, the learned Senior Departmental Representative and submitted that the reliance of the Departmental Representative on certain observations in the case of Pio Food Packers (supra) is misplaced because in that case the decision was "there is no essential difference between pineapple fruit and the canned pineapple slices". Similar in Tungbhadra case (supra), the Court observed that there was not any essential difference between hydrogenated or hardened groundnut oil and groundnut oil. Whereas in the case before us it is undisputed that a new marketable commodity viz., refined cottonseed oil has emerged as a result of the manufacturing activity of the assessee from the original raw cottonseed oil known as wash oil. It was submitted that the Department does not deny that not only raw cotton seed oil is called wash oil in the commercial market, whereas refined cottonseed oil is known as a different commercial commodity in trade circle, it also does not deny that the wash oil is not edible whereas the refined cottonseed oil is edible. Thus when the final product which is produced is commercially distinct from the raw material, the process involved necessarily has to be held as a manufacturing process. Reliance was placed on the decision of the Tribunal in the case of C.J. Kansara & Co. vs. ITO (ITA No. 2757/Ahd/ 1992) Order dt. 25th November, 1997.
11. We have considered the rival submissions. Refining of cottonseed oil consists of the following process :
1. Degumming (Phosphoric acid treatment);
2. Neutralising (Alkali refining);
3. Bleaching;
4. Filtration;
5. Deoderisation;
6. Winterisation;
7. Final Filtration; and
8. Tinning (filling in the containers).
Out of the above process, degumming involve treatment with phosphoric acid by which the gums are dissolved and precipitated. Thereafter with the process of neutralisation by treating degummed oil with alkali-free fatty acids are removed by using caustic Iye (NaOH).
All the above process results into formation or refined cottonseed oil with is a different commercial commodity known in trading circles and is fit for human consumption whereas raw cottonseed oil commercially known as wash oil is unfit for human consumption and can be used only in the manufacture of soaps, etc. None of the decisions relied upon by the learned Departmental Representative relates to the refining of cottonseed oil. Whereas in the case of the assessee itself the Department has accepted the decision of the CIT(A) granting deduction under ss. 32A, 80HH and 80-I for the last several years. In this connection it will be useful to refer to the observations of the Supreme Court in the case of Parshuram Pottery Works Co. Ltd. vs. ITO (1977) 106 ITR 1 (SC) :
"It has been said that the taxes are the price that we pay for civilization. If so, it is essential that those who are entrusted with the task of calculating and realising that price should familiarise themselves with the relevant provisions and become well-versed with the law on the subject. Any remissness on their part can only be at the cost of the national exchequer and must necessarily result in loss of revenue. At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that, lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity."
Radhasoami Satsang vs. CIT (1992) 193 ITR 321 (SC) :
"Parties are not permitted to begin fresh litigations because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the Court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted, and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of a setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken."
In view of the above, we are of the opinion that the CIT(A) was justified in holding that the activity carried on by the assessee is a manufacturing activity and the assessee is entitled to deduction under s. 32A, 80HH and 80-I. Even assuming though not admitting that there are diversions of opinion on the question as to whether activity carried on by the assessee is manufacturing or not, we will adjudicate the issue in favour of the assessee relying on the decision of the Supreme Court in the case of CIT vs. Vegetables Products Ltd. (1973) 88 ITR 192 (SC) that if there are two equally reasonable views possible on a issue in dispute, the one which is favourable to the assessee should be adopted. In that decision the Supreme Court held as under :
"If the Court finds that the language of a taxing provision is ambiguous or capable or more meaning than one, then the Court has to adopt that interpretation which favours the assessee more."
12. Coming to ground of appeal Nos. 1 and 2 in the Revenue's appeal the dispute is with regard to the action of the CIT(A) in deleting the amount of Rs. 36,12,666 and an amount of Rs. 8,73,621 by invoking the provisions of s. 40A(3). The CIT(A) has adjudicated this issue in para 5.3 of the impugned order as under :
"5.3. The addition of Rs. 36,12,666, and of Rs. 8,73,621 are directly covered by ITAT's order in the assessee's own case for the asst. yr. 1986-87. A copy of the ITAT's order dt. 10th February, 1992 in ITA No. 498/Ahd/1990 had been filed. As mentioned above, the purchases have been disallowed by the AO on the ground that payments are made in cash and, therefore, provisions of s. 40A(3) are attracted. Similarly the expenses debited to the Trading and P&L a/c has been disallowed under s. 40A(3) and also on the ground that these expenses are not verifiable. During the asst. yr. 1986-87 on identical grounds purchases of Rs. 43,35,715 and expenses of Rs. 1,76,017 were disallowed. The additions made during the asst. yr. 1986-87 have been entirely deleted by the ITAT and, therefore, judicial propriety requires that the view adopted by the ITAT in the assessee's own case should be followed. Therefore, following the ITAT's order the additions of Rs. 36,12,666 and Rs. 8,73,621 are deleted."
12.1. The learned Senior Departmental Representative fairly conceded that the issue has been adjudicated by the Tribunal in the asst. yr. 1986-87 against the Revenue and reference under s. 256(1) has also been granted by the Tribunal. Yet he submitted that this Bench may reconsider its earlier decision as certain aspects of the case were not considered by the earlier Bench. It has filed detailed written arguments in support of its contention running into about 14 pages on this issue and submitted that the provisions of s. 40A(3) should be held applicable to unaccounted business transactions as well as to those transactions which are accounted for in the regular books of accounts. It was pleaded that if the view of the earlier Bench is to be accepted then it will put a premium on dishonesty because an assessee who is conducting business legally after recording the same in its books of account will be subject to the rigours of s. 40A(3) whereas a dishonest assessee who is admittedly carrying on business outside the regular books of accounts will not be subjected to the provisions of s. 40A(3). In this connection reliance was placed on the decision of the Andhra Pradesh High Court in the case of Venkat Subba Rao vs. CIT (1988) 173 ITR 340 (AP). Reliance was also placed on the decision of the Supreme Court in the case of Avtarsingh Gurumukhsingh vs. ITO (1991) 191 ITR 667 (SC). Reliance was also placed on the decision in the case of Maddi Venkataraman & Co. vs. CIT wherein the Supreme Court has considered its earlier judgment in the case of CIT vs. S. C. Kothari (1971) 82 ITR 794 (SC) relied upon by the Tribunal in the case of the assessee for earlier assessment year. On the question of following the decision of an earlier Bench, Chowdhury relied on the decision of the Tribunal in the case of Virendra & Co. vs. Asstt. CIT (1997) 60 ITR 463 (Mumbai) wherein relying on the decision of the Supreme Court in the case of CIT vs. Brijlal Lohia & Mahabir Prashad Khemka (1972) 84 ITR 273 (SC) it was held that it is not only possible for the subsequent Bench but even obligatory on the subsequent Bench to take a decision which is different from an earlier decision of another Bench and which is in consonance with the decision of the Supreme Court and the jurisdictional High Court. Reliance was also placed on the decision of the Supreme Court in the case of Distributors Baroda (P) Ltd. vs. Union of India & Ors. (1985) 155 ITR 120 (SC).
While discussing the question of secret commission the learned Senior Departmental Representative further submitted that such type of expenses are in the nature of graft money paid to employees of various Govt. departments and are punishable under the IPC and as such clearly disallowable as per the decision of the Supreme Court in the case of Haji Aziz Abdul Shakur & Bros vs. CIT (1961) 41 ITR 350 (SC) being against public policies. Reliance was also placed on the decision of the High Court in the case of CIT vs. K. Subbaraju Venkateshwara Rao & Co. (1989) 175 ITR 307 (AP) and CIT vs. Bangalore Arrack & Co. (1993) 201 ITR 25 (Kar) as well as the decision in the case of CIT vs. Sauser Liquor Traders (1996) 222 ITR 33 (MP).
13. J.P. Shah, the learned counsel for the assessee relied on the order of the CIT(A) and submitted that the issue has been thoroughly discussed and analysed by the Tribunal in its earlier order for the asst. yr. 1986-87 which has since been reported in Hynoup Food & Oil Ind. (P) Ltd. vs. Asstt. CIT 48 ITD 202(Ahd) and the judicial propriety demand that this Bench should follow the earlier decision particular when the fact and circumstances are exactly identical. It was submitted that in the earlier decision also the question of purchases and other expenses including secret commission recorded in the seized books of account were subject-matter of dispute and the Tribunal held that the seized documents have to be taken, as a whole and it is only the income which is reflected in the seized documents which can be brought to tax. Accordingly, it was submitted that there is no reason for the Tribunal to depart from the findings of the earlier Bench in the assessee's own case for asst. yr. 1986-87.
14. We have considered the rival submissions and have also gone through the orders passed by the AO as well as the CIT(A) and the submissions made by the Departmental Representative which have been made and summarised by us in para 12.1 above. However, we feel that the earlier Bench of the Tribunal has taken a proper and reasonable decision taking into consideration the totality of the facts and circumstances of the case and we are not persuaded by the arguments of the learned Departmental Representative to take a view which is different from that of our predecessor in office because of consistency of approach. In this connection we will like to refer to the decision of the Supreme Court in the case of CIT vs. Smt. P.K. Kochammu Amma (1980) 125 ITR 624 (SC) wherein it is held that although the earlier decision in the case of V.D.M.RM.M.RM. Muthiah Chettiar vs. CIT (1969) 74 ITR 183 (SC) was not correctly decided, yet the Supreme Court followed that decision.
Accordingly, we will adjudicate these two grounds against the Revenue and in favour of the assessee.
15. Ground of appeal No. 3 in the Revenue's appeal and ground of appeal Nos. 1 to 11 in the assessee's appeal relate to the same issue i.e., the disallowance made by the AO on account of excess process loss in the manufacturing of refined cottonseed oil from raw cottonseed oil. The AO while examining the accounts of the assessee found that the assessee has claimed 3.04 per cent of process loss in the regular books of accounts whereas process loss claimed in the seized books was much less. On combining the manufacturing results recorded in the regular books as well as in the seized books it was found that the process loss claimed by the assessee in the assessment year under consideration was 2.48 per cent as against 2.60 per cent of last year. The AO discussed this issue at page 8 of the assessment order and after giving the reasons of not accepting the process loss of 2.48 per cent after referring to the statement of Ashwin P. Patel, director of the company, recorded under s. 132(4) on 20th August, 1987, wherein the said director admitted that the process loss ranges between 2 per cent to 2.5 per cent and by claiming the excess process loss in the regular books the assessee has been able to earn unaccounted income of about Rs. 55 lakhs, the AO held that the process loss can be allowed to the extent of 0.6% and he thereby made an addition of Rs. 44,84,719.
16. The assessee appealed and the CIT(A) considered this issue in para 6 to 6.6 of the impugned order and allowed process loss at 2 per cent and sustained the addition to the extent of Rs. 11,92,392 and allowed relief to the assessee amounting to Rs. 32,92,327.
17. The assessee is aggrieved with the retention of addition to the extent of Rs. 11,92,392 and the Revenue has challenged the relief of Rs. 32,92,327 allowed by CIT(A).
18. It was submitted by the learned counsel for the assessee that in the facts and circumstances of the case the CIT(A) ought to have deleted the entire addition as the claim of the assessee of process loss at 2.48 per cent was quite reasonable. It was submitted that as per manufacturing chart from the literature published by Vulcan Laval shortage in the manufacturing process should range from 2.65 per cent to 4.25 per cent. A copy of this manufacturing chart has been furnished by the learned counsel for the assessee before us also in which the probable shortage during the various stages of processing have been shown. It was further submitted that in the comparable case of M. Ravji Oil Industries Ltd. for the asst. yr. 1987-88 a shortage of 3.32 per cent was claimed. The AO allowed the shortage of 2.66 per cent and the CIT(A) allowed shortage of 3 per cent and the order of the CIT(A) was not challenged by the Department before the Tribunal on this point. It was submitted that the Departmental authorities have mainly relied on the statement of the director A. P. Patel for making this addition and they have not correctly understood the import of the statement of the of the director.
It was pleaded that what the director meant was that a total amount of unaccounted profit of Rs. 55 lakhs was earned on account of claim of excess process loss in the regular books of account and the same was reflected in the seized diaries. Accordingly, it was submitted that whatever undisclosed income has been earned by the assessee-company, the same is fully reflected in the seized diaries and when the assessee's income has already been computed on the basis of these seized diaries, there is no further justification to make any addition on the ground of excess-shortage. Reliance was placed on the submissions made by the assessee before the CIT(A) which have been extracted in para 6.3 of the impugned order wherein based upon the statement of the director excess production on account of claim or excess process loss in the regular books has been worked out as under :
Regular Books Asst. yr. Issue for % of Loss % of Excess Excess production shown loss over production M.T. 2.5% by showing excess loss 1986-87 9,284 3.50 1.00 92.84 1987-88 14,588 3.04 0.54 78.78 1988-89 8,599 2.24 - -
Excess production 171.62
i.e. 171.00
Unaccounted Business
Asst. yr. Raw oil Process Balance Refined Excess
purchase loss @ M.T. oil sales sales
M.T. 2.5% M.T. over
purchase
1986-87 329.815 8.245 321.570 398.901 77.331
(Rape (Rape
seed seed
22.642) 35.870)
1987-88 279.295 6.982 272.313 420.291 147.978
1988-89 84.488 2.112 82.376 18.501 (-) 63.875
-------- ------- -------- ----------- -------
693.598 17.339 676.259 837.693 161.434
-------- ------- -------- ----------- -------
M.T.
Excess production by showing excess loss as above 171
Less : Excess sales over purchases in diary as above 161
The excess production obtained in regular business
by showing excess loss is sold in diary
-----
10
Less : Oil tins gifted and recorded in diary as
per details enclosed 8
-----
2
Difference due to transit or weighment loss,
and because excess process loss is taken at 1%
instead of 0.50% to 1% "
On the basis of the above it was submitted that there was no justification for making any addition whatsoever on account of alleged claim of excess process loss in the regular books.
The learned counsel for the assessee submitted that the findings of the CIT(A) that the case of M. Ravji Oil Industries is distinguishable, is not correct because the assessee's plant is also traditional batch type process plant and not continuous processing plant as made out by the learned CIT(A).
19. The learned Departmental Representative opposed the submissions made by the learned counsel for the assessee and pleaded that the AO has noted the particulars regarding the process loss at p. 8 of the assessment order which are as under :
Stock + Direct Balance Sent for
Purchase Sales (M.T.) production
(M.T.) (M.T.) (M.T.)
Recorded 15,017 10 15,007 14,588
Unrecorded 279 - 279 279
-------- ------- ------- --------
Total 152% 10 15,286 14,867
Last Year (10,747) (1,095) (9,652) (2,614)
Closing Production Shortage Percentage
(M.T.) (M.T) (M.T.) (M.T.)
Recorded 419 14,143 445 3.04
Unrecorded - 421 (*) 76 -
-------- --------- ---------- ----------
Total 419 14,564 369 2.48
Last year (33) (9,319) (256) (2.60)
(*) Excluding 66M.T., i.e., unrecorded quantity for asst. yr. 1988-89
It was submitted by the learned Departmental Representative that the assessee has tried to reconcile the discrepancies noted by the AO by furnishing working of unaccounted business in the course of appeal hearing before the CIT(A) in support of its contention with regard to the claim of process loss at 2.48 per cent. However, on the basis of working given in the assessment order there was excess sale to the extent of 148 M.T. approximately. It was submitted that as per the recorded production the shortage has been worked out at 445 M.T. and if shortage is worked at 2 per cent then the results in the form of excess sales recorded by the assessee as per seized diaries broadly reconciles. Accordingly, it was pleaded that the assessee has absolutely no case for claim of process loss exceeding 2 per cent. The learned Departmental Representative however submitted that the CIT(A) was in fact in error in allowing relief to the assessee as there is bound to be some excess if additional inputs like quantity of chemicals, water, etc. added in the process of refining oil and are considered then the process loss claim becomes highly unrealistic and excessive. Accordingly, it was pleaded that the order of the CIT(A) be reversed and that of the AO restored in this regard.
20. We have considered the rival submissions and have also gone through the orders passed by the AO as well as the CIT(A). Vulcan Laval in their instructions which were given along with the plant for the running of the plant for refining of cottonseed oil clearly specifies that there are 8 different stages of refining as stated above in para 11 of the order. The refining loss in each of the above stages differ on the basis of quality of raw cottonseed oil which is used for refining purpose. The actual process loss in refining of crude cottonseed oil (wash oil) is highly depended upon on the quality of raw cottonseed oil (wash oil). Cottonseed are part of cotton and cotton is grown all over India in different climatic conditions. The quality of cottonseed depends on weather, soil and insecticides used for killing insects which may destroy the crop. Thus, the ultimate quality of crude cottonseed oil (wash oil) depends on so many factors which cannot be controlled by the manufacturer. Accordingly in the literature supplied by Vulcan Laval it was indicated that the process loss are bound to vary depending on the quality of wash oil (crude cotton seed oil) and the functioning of the plant and will range between 2.65 per cent to 4.25 per cent. The above clarifications were given by the plant supplier Alfa Laval India Ltd. originally known as Vulcan Laval which is the only one in India manufacturing this type of plant in collaboration with Sweden based company and the above process loss is over and above the filing and tinning loss.
For making the addition the AO has mostly relied on the statement of the director Ashwin P. Patel who in fact stated that the process loss varied between 2 per cent to 2.5 per cent and by claiming excess process loss in the regular books, the assessee has shown unaccounted production in the seized diaries and thus has earned extra income of Rs. 55 lakhs. The assessee, on the basis of above statement of the director, has tried to reconcile the excess production in the regular books with the sales shown in the seized diaries which we have extracted in para 18 and which has also been referred to by the CIT(A) in para 6.3 : Thus it is seen that the so-called excess production obtained by claiming excess process loss in regular books has been shown in the seized diaries which has also been taken into consideration while computing the total income by the AO and as such we are of the opinion that there is no justification for making any further addition on account of alleged excess claim of process loss in the regular books because total process loss of 2.48 per cent claimed in quite reasonable in view of the certificate given by Alfa Laval India Ltd. (originally known as Vulcan Laval). As regard the observations of the AO that the process loss should be lesser on account of addition of chemical, water, etc. is concerned, we are of the opinion that whatever excess chemicals are added, the same will in fact remove some of the impurities in the crude oil by combining with the impurities and forming solid/semi-solid compounds which will be removed from the oil by the process of filtration and there can never be any gain on account of addition of chemicals, water, etc. as it so happens in the case of roller flour mills where there is a gain in the process of milling by absorption of moisture in the wheat flour produced by the crushing of wheat in the roller flour mills. Thus, taking into consideration the totality of the facts and circumstances of the case we are of the opinion that the CIT(A) was not justified in even sustaining the addition of Rs. 11,92,392 which we will direct the AO to delete.
21. In the result, the appeal filed by the assessee is partly allowed and the appeal filed by the Revenue is dismissed.