Income Tax Appellate Tribunal - Allahabad
Kesarwani Zarda Bhandar,, Allahabad vs Assessee on 15 July, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL,
ALLAHABAD BENCH, ALLAHABAD
BEFORE : SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND
SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER
ITA Nos. 358 & 374 to 378/Alld./2013
Asstt. Year : 2004-05 to 2009-10
Kesarwani Zarda Bhandar, vs. J.C.I.T., Central Circle,
Sahson, Allahabad. Allahabad.
(PAN: AADFK 6279 N)
ITA Nos. 06 to 11/Alld./2014
Asstt. Year : 2004-05 to 2009-10
J.C.I.T., Central Circle, vs. Kesarwani Zarda Bhandar,
Allahabad. Sahson, Allahabad.
(Appellant) (Respondent)
Assessee by : Shri R.R. Agarwal, Sr. Advocate
Shri Anand Godbole, Advocate
Shri S.P. Agarwal, Advocate
Revenue by : Shri R.K. Lachhiramaka, CIT/DR
Date of hearing : 29.05.2014
Date of pronouncement : 15.07.2014
ORDER
Per Bhavnesh Saini, J.M.:
This order shall dispose of all the cross appeals filed in the case of M/s.
Kesarwani Zarda Bhandar against the orders of ld. CIT(A), Allahabad dated 30.09.2013 for all the above assessment years.
2 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014
2. We have heard the ld. representatives of both the parties, perused the findings of authorities below and considered the material available on record. Most of the issues are common in all the appeals, therefore, for the purpose of disposal of appeals, respective grounds are decided issue-wise.
3. Briefly, the facts of the case are that the assessee is a firm reportedly came into existence in 1967. It manufactures branded chewing tobacco known as 'Zarda', excisable goods. In pursuance of warrant of authorization u/s 132(1) of the I.T. Act, search and seizure operation was carried out on 27.08.2009 in the business premises of M/s Kesarwani Zarda Bhandar, including Head Office situated at Sahson, Allahabad, Branch Offices situated at Mumbai and Ahmedabad and the residential premises of the partners of the firm. Notices u/s 153A were issued and the assessee in compliance to same, filed return of income along with audited balance sheet, trading and profit & loss account. Statutory notices were issued and assessments were completed making many additions in all the appeals under consideration. In the background of these facts, now we take up all the additions and points raised in the present appeals issue-wise as under :
3 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014 Issue No. 1 : (Regarding validity of assessments u/s. 153A of the IT Act):
4. This legal issue is involved in appeals of the assessee in respect of assessment year 2004-05 to assessment year 2007-08. The assessee contended before the ld. CIT(A) that the assessment orders passed u/s. 153A(b) are without jurisdiction, illegal, bad in law and framed in arbitrary manner. The undisclosed income was not determined on the basis of any search material and the Assessing Officer simply proceeded as if it is a normal assessment and not on the basis of any search material. Therefore, section 153A(b) of the IT Act has no application to the facts of the case.
Hence, the assessment is liable to be declared illegal.
5. The assessee's written submissions in respect of above ground before the ld. CIT(A) are reproduced as under :
"That Section 153A of the Income Tax Act 1961 comes into operation where a search or requisition is initiated after 31.05.2003 on satisfaction of certain condition that the assessing officer is under the obligation to issue the notice to the person requiring him to furnish the return of income of six years immediately preceding the year of search. The word used in the said section is "Shall" and thus there is no option but to assess or reassess the real income of those six years on the basic of the material found in search. No doubt only pending assessment shall abate. Thus the question is - what is the scope of assessment or reassessment of the real income under Section 153A(1)(b) of the Income Tax Act and the first 4 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 proviso that only one assessment will be made under the aforesaid provisions. If the assessment is made under sub- section (1) is annulled in appeal or in other legal proceedings then the abated assessment or reassessment shall revive, but with regard to proviso (2) of the section 153A of the act the assessment will be made on the basis of the books of account or other documents not produced in the course of original assessment proceedings and found during course of the search and any undisclosed income/property discovered in the course of the search. In the present case it is an admitted fact on record that the books of accounts were produced in the original assessment proceedings on various dates which will appear from the order sheet entries enclosed in the paper book at page no. _____. Likewise in the assessment order dated 19.12.2006 passed under Section 143(3) of the Income Tax Act for Assessment Year 2004-05 by the rank of Deputy Commissioner of Income Tax it has been mentioned that the books of accounts were produced and examined and another important facts is that no incriminating materials was found in the course of the search which relate to the assessment year under question. In these background abatement take place only in respect of pending assessment and not for regular assessment which was framed on the basis of the same books of account and become final. Therefore sanctity of such assessment framed under Section 143(3) dated 19.12.2006 of the Income Tax Act on the basis of same books of account duly audited and report already filed and considered u/s 143(3) assessment should be maintained since no incriminating material was found in the course of search. Sir from the assessment order dated 22.12.2011 passed under Section 153A(1)(b) of the Act it will be clear that in the entire assessment order there is no whisper of any incriminating material indicating any undisclosed income on which the additions or disallowances are made but the addition made are only based on regular book/same books which were already examined in original assessment as well as during assessment of the block period and found correct in all respect therefore, 5 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 thus, as per provisions of Second proviso of the Section 153A(1)(b) of the Income Tax Act the present assessment made vide order dated 22.12.2011 is nullify and liable to be cancelled. In this regard your honour's kind attention is invited to the decision of jurisdictional High Court in the case of Commissioner of Income Tax (Central), Kanpur Vs. Smt. Shaila Agarwal reported in 65 DTR of 2012 page
41. In this case there lordship held that the assessment which had become final on the date of search shall not be liable to abate.
18. That in support of the above submission the assessee also invites your honour's kind attention to the decision of ITAT special bench of Mumbai in the case of All Cargo Global Logistics Ltd & Others Vs Deputy Commissioner of Income Tax, Mumbai reported in 147 TTJ 513 in this case it has been observed as under :
In assessments that are abated, the Assessing Officer retains the Original jurisdiction as well as jurisdiction conferred on him under S. 153A for which assessments shall be made for each of the six assessment years separately; in other cases, in addition to the income that has already been assessed, the assessment under S. 153A will be made on the basis of incriminating material, which in the context of relevant provisions means-(i) books of account, other documents, found in the course of search but not produced in the course of original assessment, and (ii) undisclosed income or property discovered in the course of search. That from the aforesaid decision (copy of the above order is at page ......... )given by the Hon'ble Special Bench of Income Tax Appellate Tribunal it is clear that since the books of accounts were produced in the course of original assessment for the year under consideration and an order dated 19.12.2006 of which was also framed under Section 143(3) of the Income Tax Act concluded and no incriminating material was found in the course of search operation, therefore the above referred decision of Hon'ble Income Tax Appellate Tribunal Special Bench (Mumbai) fully applies in this case and accordingly sanctity of the original assessment 6 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 dated 19.12.2006 passed under Section 143(3) of the Income Tax Act, 1961 for the year under consideration cannot be disturbed merely based on presumptions and guess work.
Even the facts and issues of the assessment year of the cited case and assessment year of the appellant under consideration at present are also the same. The other decisions are as reported in 137 TTJ of 2011 page 627 Pune Bench (copy at page ...........) In addition the appellant rely upon the following decisions also in which it was held and observed that the decision of higher authorities is binding:-
1. (2008) 216 CTR 153 (M.P)
2. (2005) 274 ITR 6 (ITAT Panjai Bench)
3. (2002) 256 ITR 385 (Bombay)
4. (1987)168 ITR 387 (M.P) Since the facts of the present case and facts of the cited cases are similar and identical, therefore in view of such legal body sanctity of the original assessment dated 19.12.2006 passed under Section 143(3) of the Income Tax Act is liable to be maintained in all fairness and also in the interest of the justice and assessment made u/s 153A(1)(b) of the Act. may kindly be quashed."
5.1 The AO in the remand report relied on section 153A and stated when assessment is pending, the assessment proceedings of those years will be abated. The assessee in rejoinder reiterated submissions already made and relied on CBDT circular No. 7 of 2003 dated 05.09.13 (263 ITR (St.) 62) which provides that completed assessment u/s. 143(3) on the date of search shall not abate.7 ITA Nos.358 & 374 to 378/Alld./2014
ITA Nos. 06 to 11/Alld./2014
6. The ld. CIT(A) after considering the submissions of the assessee dismissed this ground of appeal of the assessee. The findings of ld. CIT(A) in para 4.4 of the impugned order is reproduced as under :
"4.4 Decision:
In the grounds of appeal the appellant has alleged that the assessment order passed u/s 153A(b) of the Act is without jurisdiction, illegal, bad in law and framed in arbitrary manner. It is alleged that the A.O. did not have jurisdiction to pass the assessment order for the block period in the absence of valid action u/s 132(1). The appellant has further submitted that the undisclosed income was not determined on the basis of any search material. The assessment order has been passed like any regular assessment order. The appellant agrees that there is no option with the A.O. but to asses the total income of the assessee for six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made. The appellant has raised the question on the scope of assessment u/s 153A stating that in view of proviso to Section 153A, only that income can be assessed which is based on the search material found during the course of search. During the course of search and seizure action no incriminating materials were found. As per the interpretation of the appellant the completed assessments will not abate if no evidences are found leading to unearthing of undisclosed income. In the assessment order dated 22.12.2011 passed u/s 153A(1)(b), there is no whisper of any incriminating material indicating any undisclosed income. The additions made are only based on regular books which were already examined in the original assessment. The appellant has invited my attention to the decision of jurisdictional High Court in the case of Commissioner of Income Tax (Central Circle), Kanpur Vs. Smt. Shaila Agrawal reported in 65 DTR of 2012 page 41. The appellant has also relied on the decision of ITAT Special Bench of Mumbai in the case of All Cargo Global Logistics Ltd. & Ors. Vs. DCIT, Mumbai reported in 147 TTJ 513. The appellant has also relied on the following decisions, complete references to which are not given. (1) 216 CTR 153 (MP) (2) 274 ITR 6 (ITAT, Panji Bench) (3) 256 ITR 385 (Bom.) 8 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 (4) 168 ITR 387 (MP).
In the remand report, the A.O. has relied on the 1st proviso to Section 153A which requires the A.O. to assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made. It is submitted by the A.O. that 2nd proviso to Section 153A(1) applies only where assessment is pending. If the assessment is pending, the same shall abate else all the total income of each of six assessment years will be liable to be assessed or reassessed.
In the Rejoinder, i.e. comments on the remand report of the A.O., the appellant states that in the present case the assessment was made u/s 143(3) vide order dated 19.12.2004 by the then Deputy Commissioner of Income Tax, Allahabad which was a speaking and well reasoned order. The appellant has referred to the CBDT circular No.7 of 2003 dated 05.09.2003 reported in 263 ITR page 62. According to the appellant, the Board has directed that the completed assessments u/s 143(3)/143(1) shall not abate. The Board Circular is binding on the income tax authorities, as such, the assessment made by the A.O. is liable to be declared illegal.
In the submission, the appellant has made a wild allegation that order u/s 153A(1)(b) is not valid as there was no valid action u/s 132(1) of the I.T. Act. But in this regard, the appellant has not elaborated as to how and why the search and seizure action was invalid. Therefore, ground No.1 deserves to be dismissed. The appellant has heavily relied on the 2nd proviso to Section 153A of the I.T. Act and in accordance with the appellant the scope of assessment u/s 153A is limited to only undisclosed income unearthed in the course of search and seizure action. First of all, I would like to deal with the Board Circular No.7 of 2003 dated 05.09.2003. The appellant states that the Circular prohibits to make the assessment for six assessment years in question, which is not based on the incriminating materials found during the course of search and seizure action or the requisition made. I have gone through the Circular to check if there are any such directions. As a matter of fact, the circular mandates the assessment where search is initiated u/s 132 or books of account, other documents or any assets are requisitioned u/s 132A after May 31, 2003. In such cases, the A.O. shall issue notice to such 9 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 person requiring him to furnish within such period, as may be specified in the notice, the return of income in respect of the assessment years immediately preceding the assessment year relevant to the previous year in which search was conducted u/s 132 or requisition was made u/s 132A. The A.O. shall assess or reassess the total income relevant to each assessment year falling within the period of six assessment years. Assessment or reassessment pending on the date of initiation of search u/s 132 or requisition u/s 132A, as the case may be, shall abate. The circular also clarifies that the appeal, revision or rectification proceedings pending on the date of initiation of search or requisition shall not abate. Save as otherwise provided in the proposed Section 153A, 153B and 153C, all other provisions of this Act shall apply to the assessment or reassessment made u/s 153A. As may be seen, the Board has only laid down the procedure to pass assessment or reassessment order in the light of new provisions introduced. There is no such direction in the above Circular to prohibit the A.O. to make assessment or reassessment confined to evidence found in the course of the search.
The appellant has heavily relied on the decision of jurisdictional High Court in the case of CIT Vs. Smt. Shaila Agrawal (2012) 346 ITR 130. It is necessary to understand that the contention of the appellant is distinguishable on the facts. The cited order pronounced by the jurisdictional High Court is in favour of the department, against the assessee. The question before the Hon'ble High Court was - whether as a consequence of issue of notice u/s 153A, the proceedings before the Tribunal relating to one of six assessment years shall also abate. In this context, the Tribunal had held that once a notice u/s 153A has been issued after search and seizure operations, all the assessments of six preceding years prior to the date of search have to abate and that even completed and concluded assessments should stand merged in the fresh assessment to be made by the A.O. u/s 153A in pursuance of a search. On Appeal the Hon'ble Court has held that in the case before them there was a pendency of a appeal in the Tribunal against the order of assessment against which an appeal had been decided by the Commissioner of Income Tax (Appeals). The court has held that the proceeding before the Tribunal is not continuation of the proceedings of assessment. The provisions of second proviso to Section 153A do not indicate the abatement of proceedings before the Tribunal. In the said case the 10 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 Hon'ble High Court disagreed with the submission of the Counsel of the assessee. To my understanding the Hon'ble High Court has answered a question as to whether or not a proceeding before the Tribunal shall get abated in respect of any one of six assessment years after the issue of notice u/s 153A. The facts in the case under consideration are absolutely different. There are no proceedings pending either before the CIT(A) or before the Tribunal. The second proviso to Section 153A states that only assessment or reassessment pending on the date of initiation of the search shall abate. The proceeding before the Tribunal cannot be treated as extension to the assessment or reassessment. The intention of the judgment of the Hon'ble High Court is to underline the importance and validity of completed assessments which give rise to certain penal actions against the assessee. The assessment u/s 153A does not take away all the consequences of a completed assessment. The corollary to this judgment is that the appellate proceedings, if any, shall continue and if there are any consequences based on such appellate proceedings, those shall not lose their implications. But the Hon'ble Court does not put any bar on fresh investigations on any of the issues found during the course of assessment proceedings u/s 153A. This only can be considered right interpretation of the decision quoted by the appellant.
In the case of Shivnath Rai Harnarain (India) Vs. DCIT decided on 15th February, 2008, the Income Tax Appellate Tribunal, Delhi (reported in 117 TTJ page 480) held that the appeal, revision or rectification proceedings pending on the date of initiation of search u/s 132 or requisition shall not abate. Save as otherwise provided in the section 153A, section 153B and section 153C, all other provisions of this Act shall apply to the assessment or reassessment made u/s 153A. After May 31, 2003, the earlier provisions of block assessment in the case of search initiated against the assessee shall not apply, as the special procedure for assessment in search cases contained in Chapter XIV B stands abolished and a new provision of Section 153A has been introduced which provides procedure for single assessment of period comprising of previous years relating to six assessment years preceding the year in which the search was conducted. Further, the second proviso to Section 153A makes it clear that assessment or reassessment relating to any assessment year falling within the period of six assessment years pending on the date of initiation of the search 11 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 shall abate. In other words, if on the date of initiation of search or requisition, any assessment or reassessment proceeding is initiated relating to any assessment year falling within the period of six assessment years, it shall stand abated but assessment or reassessment can be done u/s 153A in cases of completed assessments or in cases where assessments have not been framed due to non filing of returns etc. for the abovementioned assessment years even if such assessment made u/s 153A is not based on material found during the course of search. The Tribunal has summarized as under:-
"17; In view of our above analysis of the provisions of sections, the contention of the learned counsel for the assessee have no force because there is no requirement for an assessment made Under Section 153A of the Act being based on any material seized in the course of search. Further, under the second proviso to Section 153A pending assessment or reassessment proceedings in relation to any assessment year falling within the period of six assessment years referred to in Section 153A(b) of the Act shall come to an end (abate), which means that the Assessing Officer gets jurisdiction for six assessment years referred to in Section 153A(b) of the Act for making an assessment or reassessment."
The requirements prior to changed system, that the assessment should be confined to the undisclosed income found during the search are no longer necessary under the new system - Shyam Lata Kaushik Vs. ACIT (2008) 306 ITR (AT) 117 (Del).
It is only the proceedings, which get abated, and not the original return filed, so that it can be taken into consideration in computation of income after giving assessee an opportunity - DCIT Vs. Natrajan (K) (2010) Bangalore ITAT.
The procedure for an assessment u/s 153A not being different from regular assessment should be made on all available materials and not as supplementary assessment or as piecemeal one - ACIT Vs. Hotel Harbour View (2010) 2 ITR (Trib) 178 (Coch).
Where an assessee doing business of carrying out job work of buffing and polishing gas stoves was subjected to search and addition was made on account of estimate of sale of scrap and unproved credits, the assessee raised an argument, that additions were not 12 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 based upon any materials seized. Such an argument was found unacceptable to the Tribunal - Shyam Lata kaushik Vs. ACIT (2008) 306 ITR (AT) 117 (Del).
I respectfully differ from the decision of Special Bench Mumbai ITAT in the case of M/s All Cargo Global Logistics Ltd. Vs. DCIT relied upon by the appellant. The Hon'ble Supreme Court in the case of Prakash Nath Khanna Vs. CIT (2004) 266 ITR 1 has held that the first and foremost rule of construction is that the intention has to be found from the words used by the legislature itself. The courts interpret the law and do not legislate the law. If a provision has been misused or is absurd, it is for the legislature to amend, modify, repeal, if deemed necessary. Thus, the provisions should be read as a whole and as they exist, and there is no necessity of reading them down or providing Casus Omissus. Where the search is conducted, there is no option with the A.O. but to issue notice calling for return of all six assessment years. Thereafter, the first proviso casts a duty on him to assess or reassess the total income in respect of each assessment year. In this respect he has no choice but to make six assessments. In order to obviate a necessity of making two assessments in respect of the year for which proceedings are pending, the second proviso provides that pending assessments shall abate, which means that only one assessment u/s 153A shall be made in respect of assessments which have abated because of this provision. Both the first and second proviso directed the A.O. to assess total income, which has to be computed in accordance with Section 5 of the Act, therefore, in respect of all six assessments, A.O. has to make assessment or reassessment of total income and in doing so there is no fetter on his powers i.e. the A.O. is not restricted to the consideration of only incriminating materials or undisclosed valuables. The provisions of Chapter XIV B of the Act caused excessive litigation and therefore the scheme of search assessments has been modified. In the case of Shanker Narain Construction Co. & Ors. Vs. State of Karnataka & Anr (2004) 276 ITR 56, the Hon'ble Karnataka High Court held that nothing is to be added and nothing is to be taken away from the statute unless there are adequate grounds for doing so. The introduction of provisions of Section 153A was to avoid litigation which proliferated on the issue of 'undisclosed income'. If the same controversy is raised under the new provision, by arguing that no reassessment can be made in respect of completed assessment where 13 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 no incriminating material is found, the avowed purpose of bringing new provisions will be forfeited and the litigation will proliferate on the question as to what constitutes incriminating materials in respect of such assessments. The A.O. can look into all matters as what he has to do to compute the total income for six assessment years. Coming to the apprehension, one may assume that some additions which were made in the original assessment and deleted by the higher forum may be made in reassessment u/s 153A, it may be stated that such an apprehension is unfounded and the A.O. will have to follow the decision of the higher forum as a matter of judicial discipline.
On the above facts and in the light of discussion made above, the objections of the appellant are dismissed. The assessment order of the A.O. is held to be valid. Grounds 1, 2 & 3 are decided accordingly."
7. We have considered the rival submissions and perused the material on record. The submissions of the ld. counsel for the assessee had been that sanctity of the original assessment orders passed u/s. 143(3) and 143(1) have to be maintained because as per the provisions of second proviso to section 153A(1)(b) of the IT Act, only pending assessments shall abate and not the completed assessments framed u/s. 143(3) or u/s. 143(1) of the IT Act. It is not in dispute that for the assessment years 2004-05 to 2007-08, the assessee has already filed returns of income within time before the search. In the assessment year 2004-05, the AO passed the assessment order u/s. 143(3) dated 19.12.2006 after the case was selected for scrutiny. The assessee produced books of account and relevant details before the AO, which is evident from the copies of the order sheet placed on record and the AO after examining the books of account and the details furnished by the 14 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 assessee accepted the returned income. Remaining assessments for assessment years 2005-06 to 2007-08 were completed u/s. 143(1). The assessee along with the return of income filed complete audited accounts and the relevant details. The assessee has filed a chart showing the dates of assessments, income declared along with copies of the audited reports and acknowledgement of filing of returns for these years. It is admitted fact that during the course of search operation on 27.08.2009, no incriminating material was found indicating any undisclosed income for the assessment years under appeals, on the basis of which any addition or disallowance were made, but the additions were made on the basis of regular books of account, which were already examined in original assessment proceedings as well as during the block assessment proceedings. Section 153A of IT Act provides as under :
"Assessment in case of search or requisition.
153A. [(1)] Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, in the case of a person where a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A after the 31st day of May, 2003, the Assessing Officer shall--
(a) issue notice to such person requiring him to furnish within such period, as may be specified in the notice, the return of income in respect of each assessment year falling within six assessment years referred to in clause (b), in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and the provisions of this Act shall, so far as may be, apply 15 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 accordingly as if such return were a return required to be furnished under section 139;
(b) assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made :
Provided that the Assessing Officer shall assess or reassess the total income in respect of each assessment year falling within such six assessment years:
Provided further that assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years referred to in this sub-section pending on the date of initiation of the search under section 132 or making of requisition under section 132A, as the case may be, shall abate :
Provided also that the Central Government may by rules52a made by it and published in the Official Gazette (except in cases where any assessment or reassessment has abated under the second proviso), specify the class or classes of cases in which the Assessing Officer shall not be required to issue notice for assessing or reassessing the total income for six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made.
(2) If any proceeding initiated or any order of assessment or reassessment made under sub-section (1) has been annulled in appeal or any other legal proceeding, then, notwithstanding anything contained in sub-section (1) or section 153, the assessment or reassessment relating to any assessment year which has abated under the second proviso to sub-section (1), shall stand revived with effect from the date of receipt of the order of such annulment by the Commissioner:
Provided that such revival shall cease to have effect, if such order of annulment is set aside.] Explanation.--For the removal of doubts, it is hereby declared that,--16 ITA Nos.358 & 374 to 378/Alld./2014
ITA Nos. 06 to 11/Alld./2014
(i) save as otherwise provided in this section, section 153B and section 153C, all other provisions of this Act shall apply to the assessment made under this section;
(ii) in an assessment or reassessment made in respect of an assessment year under this section, the tax shall be chargeable at the rate or rates as applicable to such assessment year."
In view of the above provisions contained in second proviso to section 153A(1)(b) of the IT Act, no assessment would be deemed to be pending in the year under appeal on the date of initiation of search and as such, the same could not be said to have abated. Hon'ble Allahabad High Court in the case of CIT vs. Smt. Shaila Agarwal, 65 DTR 41 (346 ITR 130) held as under :
"Held : A plain reading of s. 153A would show that where notice under this section is issued as a result of any search under s. 132, assessment or reassessment if any relating to any assessment year falling within the period of six assessment years referred to under s. 153A, pending on the date of initiation of search under s. 132 or requisition under s. 132A shall abate. The words, pending on the date of initiation of search under s. 132, or making of requisition under s. 132A, as the case may be, have to be assigned simple and plain meaning. Where the assessment or reassessment is finalised, there are no pending proceedings to be abated and restored to the file of the AO. To abate means to diminish or to take away. The word 'abatement' is referable to something, which is pending alive, or is subject to deduction. The abatement refers to suspension or termination of the proceedings either of the main action, or the proceedings ancillary or collateral to it. The word is commonly used in the legislations, which provide for abatement of action/suit; abatement of legacies; abatement of nuisance; and all actions of such nature, which have the pendency or continuance. The proceedings which have already terminated are not liable for abatement unless 17 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 statute expressly provides for such consequence thereof. The word 'pending' occurring in the second proviso to s. 153A is also significant. It is qualified by the words 'on the date of initiation of the search', and makes it abundantly clear that only such assessment or reassessment proceedings are liable to abate. The pendency of an appeal in the Tribunal against the order of assessment against which an appeal has been decided by CIT(A) is not a continuation of the proceedings of assessment. An appeal under the IT Act lies to the Tribunal on a question of law. Even if it is pending on the date of search, no such intention as indicated by the Tribunal arises out of the provisions of second proviso to s. 153A, to abate the proceedings, which have been completed, or concluded, and to restore assessment to the file of the AO. There is no force in the submission that where a notice under s. 153A has been given after the search operations under s. 132, for filing assessment for the block period of six years, and if such period includes any of the assessment years, the abatement of assessment and reassessment proceedings, to give way to reassessment considering the additions in the assessment under s. 153A, will also include the assessment or reassessment, which has been completed. If as a result of search, some undisclosed income is found to have escaped assessment, the AO may initiate steps for reassessment after sanction of competent authority, within the prescribed period of limitation. Circular No. 7 of 2003 dt. 5th Sept., 2003 [(2003) 184 CTR (St) 33] issued by the CBDT has clarified the position".
7.1 ITAT, Mumbai Special Bench in the case of All Cargo Global Logistics Ltd.
vs. DCIT, 147 TTJ 513 (Mum)(Special Bench) held as under :
"In assessments that are abated, the AO retains the original jurisdiction as well as jurisdiction conferred on him u/s 153A for which assessments shall be made for each of the six assessment years separately; In other cases, in addition to the income that has already been assessed, the assessment u/s 153A will be made on the basis of incriminating material, which in the context of relevant provisions means - (i) books of account, other documents, found in the course of search but not produced in the course of original assessment, and (ii) undisclosed income or property discovered in the course of search."18 ITA Nos.358 & 374 to 378/Alld./2014
ITA Nos. 06 to 11/Alld./2014 7.2 ITAT Pune ' B' Bench in the case of ACIT s. SRJ Peety Steels Pvt. Ltd., 137 TTJ 627 held as under :
"In the present case, the search was initiated on 17th March, 2006 in the residential and business premises of SRJ Group, covering the premises of the assessee company as well. Prior to the search, the returns of income for the asst. yrs. 2000-01 to 2005-06 had already been filed under s. 139(1) accompanied by all requisite documents and proceeding under s. 143(1) stood completed. During the course of search no incriminating materials were found relating to aforesaid years which could have been added back in the proceedings under s. 153A. The details regarding the consumption of electricity for the production for each of the year under consideration was very well placed before the authorities below in the director's report of each year. The same has not been disputed by the Revenue. The tax audit report also contained the unit production of each year which were accepted year after year along with the returns and no query was ever raised by the Department. The matter of fluctuating consumption of electricity can by no means be said to be a finding of search since all details regarding electricity vis-a-vis production were before the Department. If the Department had any doubts regarding the same, it could have been raised during the regular assessments and not in the assessment proceedings under s. 153A. When nothing incriminating was found in the course of search relating to any of these assessment years, the assessments for such years could not be disturbed on this ground. In view of above factual and legal position the additions in question in asst. yrs. 2000-01 to 2005-06 are not corresponding to the seized material found during the course of search. The relevant IT returns for said years were filed prior to the search in normal course disclosing the particulars of subject-matters were already on record. The returns have already been accepted and no assessment as such could be said to be pending on the date of initiation of search and abated in light of the provisions of s. 153A."19 ITA Nos.358 & 374 to 378/Alld./2014
ITA Nos. 06 to 11/Alld./2014 7.3 According to the decision in case of Smt. Shaila Aggarwal (supra) of jurisdictional Allahabad High Court, only assessment or re-assessment pending as on the date of initiation of search u/s. 132 of the IT Act, shall abate as per second proviso to section 153A of the IT Act. According to Special Bench decision, in case of All Cargo Global Logistics Ltd. (supra) the abatement takes place only in respect of pending assessments. ITAT, Pune Bench in the case of SRJ Peety Steels (P) Ltd. (supra) held that when the returns have already been accepted and no assessment as such could be said to be pending or abated on the date of initiation of search. The ld. DR referred to the statement of Shri Kailash Chand Kesarwani, partner of the assessee firm, copy of which is filed at page 263 of the paper book and in answer to question No. 13 (PB-272), the partner has surrendered Rs.50,00,000/- as undisclosed income for the assessment year 2010-11. The ld.
DR, therefore, submitted that the statement is relevant u/s. 132(4), which has legal sanctity and is incriminating in nature. However, the ld. counsel for the assessee argued that surrender of Rs. 50 lacs was not on account of any search material. In para 6 of the said statement, a query was made about the ratio mixed in 1 kg of tobacco and the partner replied that he will not disclose the trade secretes or formula otherwise it would open the business secretes of the assessee. The amount of Rs.50 lacs was surrendered to buy peace only or to avoid litigation only. On going through the statement of Shri Kailash Chand Kesarwani, we find that the ld.
20 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014 counsel for the assessee rightly contended that the partner during the course of recording of the statement did not reveal the trade secretes, which is just and proper and in answer to question No. 13, the partner stated that the books of account of the assessee firm are complete in all respect, but for anticipated short coming he has surrendered Rs.50 lacs in the assessment year 2010-11. Therefore, it would indicate that no incriminating material was found against the assessee during the course of search in respect of assessment years under appeal so as to make the assessment u/s. 153A of the IT Act. Such statement could not be said to be incriminating in nature against the assessee. The statement was recorded u/s.
131(1A) on 04.09.09 and 27.08.09 after search could not be regarded as recorded u/s. 132(4) of IT Act as argued by Ld. DR.
7.4 The ld. DR also contended that during the course of search operation, the profit and loss account from CPU was found, which is search material and indicates difference in the sales account as was submitted in the audited accounts with the return of income. The ld. DR, therefore, submitted that such P & L account obtained from CPU are incriminating material against the assessee. The ld.
counsel for the assessee, however, submitted that the P & L account referred to by the ld. DR are simply rough and dumb documents, which was properly replied before the AO and the AO was satisfied and convinced with the explanation of the 21 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 assessee offered and, therefore, there is no discussion in any of the assessment years about this printout taken from the CPU. The ld. DR placed on record copies of the same and on going through the same, we find that the ld. DR has furnished profit and loss account for four years under consideration. In the assessment year 2005-06 we find that the same P & L Account was filed with the return of income.
Therefore, no adverse inference could be taken against the assessee. In assessment years 2004-05, 2006-07 and 2007-08, CPU printout of profit and loss account are of half page only and mainly containing the sale account without having any monetary reference to opening stock, purchase account, direct expenses or closing stock. These items are of trading account only and as such could not be considered part of profit and loss account. These facts would clearly disclose that the alleged paper taken from the CPU are only rough and dumb document and has no relevance to the matter in issue. Without having any details of opening stock, direct expenses and closing stock, it is difficult to prepare even trading account or complete accounts as per law. In these papers, the gross profit of assessee is shown and we do not find from where such figures have been arrived at. We may also note here that these papers now produced on record by the ld. DR have not been referred to or relied on by the authorities below in the impugned orders and no additions, whatsoever, have been made on the basis of the same. These are not considered relevant material by the authorities below, what to say of incriminating 22 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 material. Therefore, these rough and dumb documents would not lead to anywhere or to say that these were incriminating documents in nature. Hon'ble Delhi High Court in the case of Girish Chaudhary, 163 Taxman 608 held that there is no basis as to how, the AO came to the conclusion that 48 was Rs. 48 lacs. - Dumb document - Addition deleted. No other material is brought on record to say if any incriminating material was recovered during the course of search against the assessee. No case is made out that the assessee at the regular assessment stage u/s.
143(3) for the assessment year 2004-05 did not produce any books of accounts, evidence or material, which was alleged to be found during the course of search. In other years also, the return of income completed u/s. 143(1) were accompanied by all the requisite documents and assessments were completed. Therefore, the returns for all the assessment years under appeals have already been accepted completed prior to search and no assessment as such could be said to be pending on the date of initiation of search so as to abate in the light of the provisions of section 153A.
No excess stock was found during the course of search. No sales or purchases were found outside the books of account. The decisions, cited above, clearly support the case of the assessee that no assessment proceedings were pending for above assessment years on date of search under appeals. The ld. DR submitted that even without recovery of incriminating material, the assessment proceedings u/s. 153A are valid and relied upon the following decisions :
23 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014
(i). ACIT vs. Pratibha Industries Ltd, 28 taxmann.com 246 (Mum. Trib.), in which in para 44, it was held -
"To answer the question, as to what shall be the assessment of total income, where there is / are no pending proceedings and no incriminating material, we have to trace out the logical conclusion, by harmonising the legislative intendments and the judicial decisions, as held by the Hon'ble Supreme Court of India in the case of K.P. Varghese (supra), wherein it was observed, so as to achieve the obvious intention of the legislature and produce a rational construction. When we look into the decision of the Hon'ble Delhi High Court in Anil Kumar Bhatia's case (supra), we find that the Hon'ble Court has pointed out that in case where there is no abatement, total income has to be determined by clubbing together the income already determined in the original assessment order and the income that escaped assessment (situation 2A in the graphic). In the circumstances, what we are dealing in instantly, there are finalized assessment proceedings and no incriminating material indicating any escaped income (situation 2B in the graphic). Taking a cue from the decision of Hon'ble Delhi High Court in the case of Anil Kumar Bhatia (supra) we can tread on the same premise and hold that on clubbing, what remains is the income originally determined or assessed (i.e. income originally determined + Zero = income originally determined - as there was no incriminating material)."
(ii). Scope (P) Ltd. vs. DCIT, 33 Taxmann.com 167 (Mum. Trib.), in which in para 13, it was held -
"Before parting with the issue, we make it clear that having held that initiation of proceedings u/s. 153A is valid, the Assessing Officer, cannot resort to a roving and fishing enquiry to find out whether any income has escaped assessment during the reassessment proceedings when there is no incriminating material found or seized during the course of search action u/s. 132."24 ITA Nos.358 & 374 to 378/Alld./2014
ITA Nos. 06 to 11/Alld./2014
(iii). CIT vs. Anil Kumar Bhatia, 24 Taxmann.com 98 (Delhi), in which in para 23, it was held -
"We are not concerned with a case where no incriminating material was found during the search conducted under section 132 of the Act. We, therefore, express no opinion as to whether section 153A can be invoked even in such a situation. That question is therefore left open."
(iv). CIT vs. Chetan Das Lachmaan Das, 25 taxmann.com 227 (Delhi), in which pursuant to a search conducted at assessee's premises certain loose papers were found, which suggested gross under-invoicing of sales and suppression of production/yield of Hing. On the basis of said papers AO rejected books of accounts and made the addition of suppressed sale value.
7.5 None of the above decisions would support the case of the Revenue, rather, would support the contention of the assessee that when there is no incriminating material found or seized during the course of search u/s. 132, AO could not resort to roving and fishing enquiry and no addition could be made against the assessee as have been made in the assessment orders. The AO and the ld. CIT(A) have not relied upon any profit and loss account referred to by the ld. DR. It therefore, appears, ld. DR has produced copies of these profit and loss account for the first time on record without having any relevance to the matter. Their admissibility at this stage is doubtful in law. ITAT, Allahabad Bench is subordinate to Hon'ble 25 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 jurisdictional Allahabad High Court in judicial hierarchy and as such bound to follow the decision of Hon'ble Allhabad High Court in the case of Smt. Saila Agarwal (supra). The ld. CIT(A) was also bound to follow the decision of the Special Bench of the Tribunal in the case of All Cargo Global Logistics Ltd.
(supra) and should not have differed with the same.
7.6 Considering the facts of the case, it is clear that no assessment proceedings were pending against the assessee for the assessment years under appeals on date of search so as to abate any assessment or re-assessment. Therefore, second proviso to section 153A would clearly apply in the case of the assessee and in the absence of any incriminating material found against the assessee, the above cases would not support the case of the Revenue particularly in view of the decision of jurisdictional High Court in the case of Smt. Shaila Agarwal (supra) and the order of ITAT Special Bench in the case of All Cargo Global Logistics Ltd. (supra).
7.7 Considering the above discussion, when nothing incriminating material was found in the course of search relating to assessment years 2004-05 to 2007-08, completed / finalized assessments for such years could not be disturbed and as such invoking of the provisions of section 153A against the assessee in these years would not be valid and no addition could be made against the assessee as are made 26 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 in the assessment orders. Recently, ITAT, Delhi Bench 'G' vide order dated 16.06.2014 in 3184/Del/2013 in the case of Sanjay Aggarwal vs. DCIT, after following the decision of Hon'ble Delhi High Court in the case of Anil Kumar Bhatia, 352 ITR 493 and ITAT Spcl. Bench in case of All Cargo (supra), has held as under :-
"We, therefore, hold in principle that no addition can be made for any assessment year u/s. 153A, the assessment for which is not pending on the date of search, unless any incriminating material is found in the course of search."
We accordingly set aside the orders of authorities below and delete all the additions made in the assessment orders under reference. In the result, the appeals of the assessee for the assessment years 2004-05 to 2007-08 on this ground are allowed.
7.8 In view of the above findings, there may not be need to consider the grounds on merits, however, we find that the additions on merits in these years are also connected with the remaining appeals. The assessment year 2004-05 is a lead case and the identical facts and reasons are followed in the remaining assessment years.
Therefore, it would be necessary to decide the respective grounds of appeals on merits also and the facts would be taken for the purpose of adjudication of remaining appeals from assessment year 2004-05. The parties have also stated that all the issues are common in remaining appeals as would be considered in 27 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 assessment year 2004-05. Ultimately, the findings given on merits shall not affect the findings given on the issue of legality of assessments and the additions on merits shall be deemed to have been deleted. This issue is decided in favour of the assessee in A.Y. 2004-05 to 2007-08.
8. Issue No.2 : (Addition on account of suppressed production:) This issue arises in all the assessment years under appeals. The parties have referred to the facts from the impugned order for the assessment year 2004-05.
Therefore, for the purpose of disposal of all the appeals on this issue facts are taken from the impugned order for the assessment year 2004-05. In the Assessment Order the A.O. examined the manufacturing process of Zarda from raw materials consumed. In the first step raw tobacco (whole leaf) is boiled in water to take out its 'ark' known as "Raw Kimam". The residual waste i.e. tobacco (whole leaf) is rendered useless and is thrown. In the second step, various spices are baked, grinded and sieved to convert them into powder form. The recovery of powder depends upon the moisture contents, quality of spices and losses in the process.
Spices used in this process are vegetable products hygroscopic by nature. In the third step, aromatic spices are boiled and distilled in perfumery substance. The residual waste of such aromatic spices becomes useless and thrown. The recovery of the perfume varies from time to time and its quality depends on the quality of 28 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 the spices, its moisture contents and number of times of distillation repeated. The raw tobacco (tobacco leaf) is sieved to remove its dust contents, then it is coloured with the mixture of raw Kimam, powder of spices and compound of glycerin water. The moist tobacco is then dried in sunlight on the open roof to remove its water contents and then packed in gunny bags. The tobacco at this stage is called coloured tobacco. In such process there is some gain in weight of tobacco which depends on several factors. The coloured tobacco is mixed with compound of chemicals, perfumery substances and menthol and then is stored in drums for 2-3 days for absorption of odour, flavor and taste. Thereafter it is spread on plastic sheet for drying. After this process, 'silver vark' in addition to the above mixture is mixed in the final product 'Zarda'. The Zarda is manually filled in unit containers and pouches which are then packed and sealed.
8.1 The A.O. has produced Annexure D & E of form 3CD i.e. audit report for the financial year ending as on 31.03.2004. The same is reproduced as under:-
TOBACCO Particulars Opening Purchase Total (Kgs) Closing Stock Storage Consumpti Stock (Kgs) (Kgs) (Kgs) Loss on (Kgs) (Kgs) TOBACCO 431627.500 920852.000 1352479.500 433285.500 0.000 919194.000 LEAF WHOLE LEAF 34474.000 32441.000 66915.000 6288.000 0.000 60627.000 29 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 TOBACCO 0.000 0.000 0.000 0.000 0.000 0.000 DUST Total 466101.500 953293.000 1419394.500 439573.500 0.000 979821.000 OTHER RAW MATERIALS Particulars Opening Purchase Total (Kgs) Closing Storage Consumption Stock (Kgs) (Kgs) Stock (Kgs) Loss (Kgs) (Kgs) CHEMICALS 35469.000 86441.450 121910.450 36999.000 0.000 84911.450 & PERFUMES SILVER & 532.000 3994.758 4526.758 1173.512 0.000 3353.246 SILVR VARK MASALA 64612.300 122986.800 187599.100 80370.800 0.000 107228.300 QUANTITATIVE DETAILS OF FINISHED GOODS Particulars Quantity Manufactured Quantity Sold (Kgs) Closing Stock (Kgs) (Kgs.) Bhola Chhap Zaf Patti 590705.800 590695.100 0.000 Bhola Yellow Zaf Patti 242858.800 242858.800 0.000 Bhola Red Zaf Patti 9563.000 9558.000 5.000 Chandani Patti 44126.000 44126.000 0.000 SPL Pan Chhap Zaf 1290.000 1290.000 0.000 Patti Pan Zarda 1100.000 1100.000 0.000 Shahi Zarda 550.000 550.000 0.000 Total 890193.600 890177.900 5,000 8.2 The A.O. has observed that quantitative details of work-in-progress have not been shown in the audit report but only estimated cost is given. No books of account were shown for the year under consideration during the course of search and seizure proceedings. Those were produced during the course of assessment 30 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 proceedings. Thereafter, the A.O. has given comparative chart of ratio of production for the financial years relevant for Assessment Years.2004-05 to 2010-
11 as per para 32 of form 3CD, as under:-
A.Y.04-05 A.Y.05-06 A.Y.06-07 A.Y.07-08 A.Y.08-09 A.Y.09-10 A.Y.10-11 G.P./Turnover 21.47% 21.31% 19.28% 17.17% 14.77% 14.25% 14.39% N.P./Turnover 02.75% 06.94% 08.99% 04.92% 3.23% 2.72% 3.16% Stock/Turnover 37.91% 43.63% 45.22% 43.59% 0.86% 0.01% NA Material 77.34% 77.53% 79.52% 81.43% 98.93% 98.75% 99.05% consumed/finis-
hed goods 8.3 The A.O has remarked that the assessee has not maintained the details of consumption of raw material at various stages. The ratio of consumption of whole leaf with Kimam has not been explained. It was, further, stated that approximately 200 gm of Kimam is produced in one Kg of whole leaf consumed. It was told to the A.O. that the product of raw Kimam is taken out after gap of 15 to 20 days. The A.O. has examined the difference of production (based on production register of Kimam) for F.Y. 2007-08 and found that there is no certain ratio of production of Kimam vis-à-vis the consumption. The assessee has not shown opening and closing stock of Kimam in all the assessment years under consideration. In another observation the A.O. remarked that in addition to its own production the assessee purchased Kimam from other parties namely Gupta Traders, Sultanpur, Prop. Smt. Shakun Devi, the sister concern of assessee. The husband of the proprietor is also partner of the assessee firm. The assessee has not maintained stock details of 31 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 consumption of purchased Kimam. The assessee has also not maintained the details in respect of goods handed over to Karigars for mixture of tobacco and Kimam. During the course of discussion, the A.O. came to know that masala consists of several items, viz. Gond, Kateela, Kulanjan, Peepar, Kapoor, Kuchari, Hauber, Musali (Satawar), Muskdana, Dal Chini, Pipramool, Mulethi, Soth, Tulsi Beej, Brahami Patti, Kusum Phool, Tomar Beej, Lohban, Dhoop Ral, Mansalo Phool, Laung, Brass, Taj Moti, Nakhala, Chadila Phool, Pachauli Patti, Bal Char (Jatamasi), Keshar, Javitri, Sugandh Bala, Balum Powder, Mongra Safron, Kethiya, Nakh, Talish Pat, Nagar Motha, Ekangi, Elayachi, Bakchi, Sugandh Chemical, Narak Choor etc. The assessee firm also manufactured the perfumes from masala over and above perfumes purchased from other parties. The A.O. has remarked that quantitative details of consumption have not been maintained. To this, the assessee replied to the A.O. that the same is not practically feasible. The production of perfumes, from masala, highly depends on the ingredients of masala.
The A.O. is of the view that in spite of the use of costly ingredients like Kesar, the details of daily consumption are not available. The assessee has also not maintained stage wise details of consumption of spices to mix with the raw tobacco and compounding of the same with the glycerin water. As stated, there is gain in weight in the process of mixing glycerin water with raw tobacco leaf. As regards, the removing of dust content from the raw tobacco before colouring, the A.O. 32 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 observed that the audit report does not have any percentage of dust. No details are available regarding evaporation of aroma from ingredients and perfumery items.
The A.O. has also observed that the Kimam is semi liquid item and would not evaporate. The A.O. also remarks that the consumption, purchase and stock of sandal wood oil are not verifiable and also that the purchases of sandal wood oil were found to be bogus. The assessee did not explain the ratio of mixture of perfumes and silver in the final product. To the submission of the appellant that modvetable items are recorded in excise record, the A.O. remarked that there are incoming entries of various modvetable items but those are issued as one in whole and the quantity of each item cannot be ascertained separately. The Silver Vitran Register was also not produced stated to be missing. In the Silver Vitran Register for subsequent assessment years, the difference was found in the closing stock and opening stock. There are no details of quantity of 'silver vark' received back from Karigars. There are no details of issue of 'Silver vark' for manufacturing. The assessee submitted before the A.O. that the silver items are kept in the custody of partners / managements and the same were released as and when required. There was no need to maintain stock register for the 'silver vark'. With regard to the consumption of 'silver vark' the A.O. asked the assessee to produce some Kamgars for examination but as stated by the A.O. Kamgars were not produced nor were their addresses furnished. There are no details of percentage of evaporation of 33 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 aroma from ingredients and perfume items. To the issue that details of packing materials were also not maintained, the assessee submitted before the A.O. that it is not practically possible to maintain the consumption of containers, boxes, pouches, cotton, gunny bags etc. on day to day basis. In the assessment order the A.O. has mentioned that the details of all the ingredients in terms of quantity have not been maintained. All the items other than tobacco have been clubbed together under the name 'other materials'. Percentage of material consumed and finished goods varied substantively year after year.
8.4 The A.O. further proceeded to discuss the facts and findings related to subsequent years as according to her the issues are common for all the assessment years involved. In this context she made reference to inquiry related to purchase invoice No.172 dated 23.11.2006 for Rs.27,21,888/- for the purchase of 150 Kg of sandal oil issued by M/s Sarita Industries, Prop. Sri Rakesh Narayan Gupta, 105/682, Chandrika Devi Chauraha, Deputy Ka Padao, Kanpur. On inquiry conducted by the Deputy Director of Income Tax (inv.)-1, Thane from Regional Transport Officer, Thane Range it was found that the vehicle which was allegedly used for the transportation, No. MH 04 - 8300 is Bajaj Chetak Scooter 1990. The said letter of RTO was confronted to the assessee and the A.O. also asked the assessee to produce Sri Rakesh Narayan Gupta for examination. Subsequently the 34 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 A.O. issued a summons u/s 131 to the above person. Sri Rakesh Narayan Gupta sent a letter for the adjournment on medical grounds and requested for time after 15.12.2011. Subsequently the statement of Sri Rakesh Narayan Gupta was recorded during the course of assessment proceedings who submitted that the vehicle number was wrongly mentioned in the invoice and the correct vehicle number was MH 04 AW - 8300 and he also gave the address of the vehicle owner.
The A.O. again conducted the inquiry through DDI (Inv.), Thane who reported that a summons could not be served on the person named Kashi Nath B. Bhoir, 97, Kherivali, Khsrivali, Wada, Post Office Gorhe, VI A Wada, Thane. It was stated by the investigation authority, based on the report of an inspector, that above named person did not exist at the address. The local inquiry also revealed that no such person exists there.
8.5 In a statement on oath during the course of survey u/s 133A in the business premises of Sarita Industries on 08.09.2009, Prop. Sri Rakesh Narayan Gupta categorically stated that, office go-down and residence are all situated at 105/682, Chandrika Devi Chauraha, Deputy Ka Padao, Kanpur. The A.O. also states that no staff was found during the survey. The A.O. also conducted inquiry through her Inspector, who submitted the report that there was no go-down and signboards displayed the firm's name and the name of a furniture shop. In a further inquiry, 35 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 the A.O. found that Sri Rakesh Narayan Gupta, in his bank account with State Bank of India, withdrew the cash immediately after the deposit of the drafts. The A.O. also noticed discrepancy in the cheque numbers in the ledger account of assessee in the books of Sarita Industries for the F.Y.2006-07 on the comparison of the entries in the bank statements of the assessee firm. In a post search inquiry conducted by investigation unit, it was discovered that the goods as per invoice no.173 and 176 dated 23.11.2006 and 22.12.2006 were sent through Car No. UP 78B - 6780 which is 1992 model. The weight of the goods was 350 Kg and 100 Kg respectively. The A.O. noticed that the vehicle is LMV tracker through which goods were allegedly sent from Kanpur to Sahson, Allahabad. In a further inquiry the A.O. found that perfumes from M/s Cosmo Elemek, Varanasi, M/s S.P. Upadhyaya Fragrance Pvt. Ltd., Varanasi, M/s Deepak & Co., Varanasi, M/s Sanjay & Co., Varanasi were transported by LMVs. The A.O. collected the details of the vehicles allegedly used for transportation from the RTO office, Varanasi. As per the details obtained from RTO office, Varanasi, the vehicles were Maruti WagonR, Tata Sumo and Maruti Swift. The ADIT (Inv.) recorded the statement of the owner of the vehicle No. UP 65Y - 3901 u/s 131(1A). The owner Sri Chandra Shekhar Tripathi categorically denied the use of the said vehicle for the transportation of alleged goods. On the basis of the above statement, the A.O. inferred that no goods were transported by the aforesaid vehicles. The A.O. also 36 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 examined the weight transported by these vehicles in respect of given invoices.
The A.O. has quoted the statement of Sri Chandreshwar Tiwari to support her finding. Further, the A.O. remarked that voluminous liquid perfume was allegedly transported by Maruti Swift and Maruti Wagon-R from Varanasi to Sahson, Allahabad. Transportation of huge quantity, for example 960 Kg, 707 Kg, 565 Kg, 725 Kg in small cars is not possible. The A.O. remarked that by no stretch of imagination, the perfume weighing above quantity could be transported to a distant place. Secondly, these are not commercial vehicles used for commercial purposes.
In another remark, the A.O. found that the explanation that parties supplying the goods charged on FOR basis was not correct as transport charges have been mentioned in the invoices of Sarita Industries. The assessee did not furnish any reply to the statement of Chandra Shekher Tripathi on having been confronted by the A.O. On the strength of above investigation, the A.O. stated that the purchases are bogus. The A.O. found her inference fortified on the finding that details of consumption are not maintained and assessee did not furnish the details of consumption of perfumes and sandal wood oil. The cash generated out of bogus purchases is utilized in the construction of building, purchase of land, foreign travel, purchase of gold bar and jwellery. Accordingly, the A.O. held that the accounts of the assessee are fabricated by bogus purchases, consumption and stock.
37 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014 8.6 The A.O. further proceeded to work out the percentage of yield of consumption of 'other materials' on the basis of audit report furnished during the course of assessment proceedings. The A.O. remarked that the quantitative details of opening and closing stock of work-in-progress have not been given in the audit report and those are available in terms of value only. During the course of assessment proceedings assessee submitted the quantitative details of opening and closing stock of WIP, details of production and issue of coloured tobacco. The details as produced in the assessment order are reproduced herein under:-
Details of consumption of raw tobacco and production of finished goods as per assessee Consumption of Raw tobacco in Kg. Adjusted consumption in Kg. Production of finished goods in Kg.
Raw tobacco 919194.000 838742.500 890193.600
Opening balance of WIP +
88819.550
1008013.550
Closing balance of WIP - 169271.050
838742.500
Details of production and issue of coloured tobacco Opening stock Coloured tobacco Total in Kg. Production of Closing stock of WIP in Kg. produced in Kg. Zarda in Kg. in Kg.
88819.550 970645.100 1059464.650 890193.600 169271.050 8.7 The A.O. further observed that Kimam is not included in the consumption figures, which is manufactured from whole leaf as stated by the assessee and 200 38 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 gms of kimam is extracted out of 1 kg of whole leaf. The whole leaf is used only in manufacturing of kimam. After manufacturing of Kimam the waste of whole leaf is not used further. During the year under consideration, the consumption of whole leaf was 60, 627 kg. for manufacturing of Kiman. The production of kimam as per books was 13,643 kg. The assessee also purchased kimam from Gupta Traders, Sultanpur. As per the submission, the total consumption of kimam during the year under consideration was stated to be 36,091 kg. On the basis of WIP, kimam and consumption, the A.O. worked out the percentage of consumption as under:-
Items Quantity of consumption Quantity of finished %age of in Kg. goods in Kg. consumption Raw tobacco leaf after 749922.950 890193.600 84.24 considering CB of WIP Chemicals and 84911.450 9.54 perfumes Silver and silver-vark 3353.246 0.38 Masala 107228.300 12.05 Kimam 36091.000 4.05 WIP 88819.550 9.97 Total %age of consumption 120.23 8.8 By making arithmetic calculations, the A.O. has shown that the coloured tobacco produced during the year should be 8,01,374.050 kg. The tobacco leaf has been consumed at 7,49,922.950 kg (8,01,374.050 - 51,451.100 - the balance after consumption) during the year under consideration. The A.O. recast the consumption of raw materials as under:-
Tobacco Leaf 7,49,922.950 kg
Other materials 2,31,583.996 kg
39 ITA Nos.358 & 374 to 378/Alld./2014
ITA Nos. 06 to 11/Alld./2014
Opening WIP 88,819.550 kg
Total consumption 10,70,326.496 kg
Total percentage of consumption 120.33%
8.9 From the details, the A.O. worked out the output of other materials which remains 51,451.100 kg from 2,31,583.996 kg. Accordingly, the yield is worked out as under:-
Tobacco leaf consumed - 749922.950
Add: Opening WIP - 88819.550
838742.500
Add: Other materials remained after
Consumption as per assessee 51451.100
Final product as shown by 890193.600
assessee
Total %age of yield = 83.17
8.10. The A.O. has proceeded to analyze the consumption of 'other materials'.
The total consumption of other materials was 2,31,583.996 kg. The production was stated to be 51,451.100 kg. Thus, as per this working the yield is only 22% and remaining 78% is stated to have evaporated. The A.O. commented that this yield is not acceptable in the absence of day to day records of consumption of other raw materials. The percentage of consumption of raw tobacco leaf was worked out to 84.24%. The consumption of other materials at 26%. WIP was 88,819.550 kg.
Thus, total percentage of consumption was worked out to 120.23% as against 77.34% shown in the audit report. The A.O. referred to the statement of the assessee that at the stage of colouring, the tobacco gains the weight. Then in 40 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 another observation, the A.O. has remarked that as per the assessee, percentage of yield was about 106%. The A.O. referred to the audit report, as per which the percentage of material consumed with reference to finished goods was ranging from 77.34% for A.Y.2004-05 to 99.05% for A.Y.2010-11. Then the A.O. has extracted the submission of the appellant in which the assessee stated that column 32 of the audit report speaks of amount whereas percentage of yield should be given in terms of quantity. The A.O. has produced the statement of Sri Krishna Chandra Kesarwani mentioned above and remarked that no specific reply was given on the ratio of consumption and percentage of yield. The results of the assessee vary from year to year as regards percentage of consumption vis-à-vis yield. On the strength of the discussion, the A.O. held that the actual yield was only 83.17% as against the claim of 106%. In this respect, the A.O. has also referred to the statement of Sri Kailash Chandra Kesarwani, partner of the firm, recorded on oath on 04.09.2009 in which he had stated that he would not disclose the issue of consumption and yield on account of trade secrecy and surrendered Rs.50,00,000/- for this reason.
8.11 Finally after extracting the statement of Sri Kailash Chandra Kesarwani, the A.O. concluded as under:-
"From the statement, it is very clear that assessee is suppressing its production and for which it has been surrendered at the time of search 41 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 and seizure proceedings. The average percentage of yield comes to 105.66% as per above submission of assessee. Clearly, if 100 Kg. of items is consumed then 105.66 Kg. of finished goods would receive. Total production has been shown 890193.600 Kg. as against total consumption of raw materials at 1070326.496 kg. (838742.500 + 231583.996). Thus, total production worked out as 1130906.975 Kg. (1070326.496 x 105.66%). As the assessee has shown finished products at 890193.600 Kg., there will be suppression in production by 240713.375 Kg. not shown by the assessee. Cost of goods produced comes to Rs.289/- per Kg. as per detail shown in the audit report. The value of above suppressed production comes to Rs.6,95,66,165/- which is added to the income of the assessee firm on account of suppression of production in manufacturing of ZARDA for the year under consideration."
9. Addition of Rs.6,95,66,165/- was challenged before the ld. CIT(A) and the assessee's written arguments before him are reproduced as under :
"19. Regarding addition of Rs. 6,95,66,165/- by alleging Suppression of production (Ground No.4 to 20):
That in this regard the assessing officer has discussed the matter in para 2 to the para-8 of the assessment order. For making such a huge addition in arbitrary manner the assessing officer has narrated the facts in 27 pages of the assessment order but such a lengthy and clumsy discussions in the assessment order are not based on any search material or any other positive material brought on record nor any defect was pointed out in the books of account. The major portion of the assessment order (27 pages) contains simply reproduction of statement of Kailash Chandra in eight (8) pages, issue of purchase of sandal wood from M/s Sarita Industries on 26.11.2006 which relates to Assessment Year 2007-08 in 5 pages, charts from our audit reports in 4 pages. Thus likewise in other pages the assessing officer has reproduced details of production process furnished by the appellant and also various charts as appearing in the audit reports. The other discussion is that no details of percentage 42 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 of evaporation of aroma, no ingredients and perfumery items have been maintained, no detail of silver leaves consumption has been produced, no percentage of dust has been shown in the audit report, no opening and closing stock of Kimam has been shown. In this manner the assessing officer proceeded by making all her efforts to give a different colour away from the truth to mislead the higher authorities to make a show as how much hard labour was put to make the said high pitched addition under reference by mentioning hypothetical and misunderstanding the facts and figures.
20. That in the present case main arbitrary and illegal addition of Rs. 6,95,66,165/- was made by the assessing officer on account of alleged suppressed production. The similar type of addition has been made uniformly in all the subsequent assessment years. In this way it is necessary to bring the facts about the business results of the assessee firm to your kind knowledge which are as follows :
A.Y Profit before Salary Net Profit
to Partners and
Depreciation
2004-2005 1,34,40,749.47 90,01,169.47
2005-2006 2,72,25,321.32 2,22,65,272.32
2006-2007 3,35,12,098.96 2,83,73,514.96
2007-2008 2,09,53,302.73 1,53,71,921.73
2008-2009 1,67,76,395.23 1,08,84,426.23
2009-2010 1,53,12,230.72 95,35,365.72
43 ITA Nos.358 & 374 to 378/Alld./2014
ITA Nos. 06 to 11/Alld./2014
2010-2011 1,73,13,670.63 1,14,86,998.63
That from the above chart it will appear that the appellant disclosed progressive income year after year but net effect has been ignored from consideration by the learned authorities.
21. That during the entire assessment proceeding only a single notice dated 11.07.2011 was issued connected with the production activities and such notice is a common notice by mentioning the assessment year 2004-05 to assessment year 2010-11 and in compliance to the said notice a voluminous reply in 109 pages (copy enclosed) explaining there in each and every points was filed justifying the books results and thereafter the assessing officer framed the assessment orders in her own designed calculations purely based upon surmises and conjectures and it is also very important to consider before making such a huge addition that neither any mind was applied nor before making such huge addition proper opportunity was given to the appellant by the assessing officer. Hence on this ground also the addition made is arbitrary and uncalled for
22. That notice dated 11.07.2011 is a common notice issued in syncline manner which fact itself proves the seriousness taken by the assessing officer because according to assessing officer alleged suppression of production was only there in all the seven years of assessment which she completed because search was conducted though no incriminating material was found in the search although in the last 45 years similar type of accounting was there in the assessee's same nature of business which was accepted and there was no allegation of suppression of production even in the assessments which were made under Section 143(3) of the IT Act, 1961 by various higher authorities of the Department.
23. That since the allegation of alleged suppression of production is a common issue in all the subsequent years, therefore it is necessary to deal the same separately in all respective years by considering the facts and figures of those years which has 44 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 been ignored by the assessing officer as she developed a concocted and common theory for all the years which is wrong and against facts & law. Therefore it is necessary to briefly touch upon the background of captioned dispute that the appellant is a registered firm and came into existence in the year 1967 and is engaged in business of manufacture and sale of chewing tobacco known as 'Tobacco'. The appellant firm is assessed to income tax from the very beginning and in respect of such business activities the appellant maintained voluminous books of accounts, which are audited and the audit report is filed alongwith the return year after year. In the present case in the past number of assessments were framed U/s 143(3) of the Income Tax Act'1961 either by the rank of JCIT or DCIT. Copies of the orders are enclosed in the paper book at pages no. ______. In this regard in para no.4 on page no. 7 of the written submission, observations of the assessing officer regarding our books of account have been mentioned. Thus our book results, trading results, production activities and norms, consumptions and yields of various raw materials and production, sales, and profit etc. every thing was accepted by the department in past in Toto by passing a well reasoned and speaking assessment order Under Section 143(3) of the Income Tax Act and not Under Section 143(1) of the Income Tax Act but unfortunately no cognizance was given to those earlier assessment records although apprised in the written submissions filed before the assessing officer though during the assessment year under consideration also similar method and manner of books of accounts and production/consumption norms as in the past years have been adopted and maintained by the appellant.
24. That in this regard there is an another very important point/ facts to be considered by your good self is that this issue was already raised and considered during Assessment Year 1999-2000 where vide assessment order dated 22.03.2002 passed under Section143(3) of the Income Tax Act while an identical addition of Rs. 3,40,69,013/- was made under the head manufacturing account/ suppression of production on 45 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 the similar ground as has been done in the present assessment under Section 153A(1)(b) of the Act. A photo copy of the assessment order dated 22.03.2002 is placed in the paper book at page no. _________. The then assessing officer has discussed the facts and his observations are appearing at page 6 to 10 of the order for making the said arbitrary addition, which are reproduced as under:-
"That a survey under Section 133A of the Income Tax Act was conducted at the business premises of the assessee on 05.11.98 where various stock was found. It was found that except tobacco no stock register of any other material is being kept. No day to day consumption of other items are maintained. Then vide order-sheet entry dated 18.02.2002 it was asked from the assessee that in absence of consumption of other materials why the production and consumption should not be taken on the basis of production and consumption shown by him during the Financial Year 1998-99."
"Then vide reply dated 04.03.2002 the assessee stated that the assessee has manufactured Tobacco, which is subjected to excise duty on production and for which all details have been maintained under the Central excise rules and regulations and according to which figures have been submitted for this year also which is quite true and correct."
25 That thereafter the assessing officer examined the books of account and noted number of defects to invoke provisions of Section 145(3) of the Income Tax Act and by applying his own designed ratio/format he estimated the value and worked out the addition ignoring the factual position and explanation of the assessee then the appellant had no other option but to file First Appeal against the said assessment order before the first appellate authority. The then learned CIT (Appeal) heard the appeal and by considering the entire facts of the case deleted the addition vide his order dated 10.12.2002. A photo copy of the Order of the Commissioner of Income Tax (Appeals) is enclosed in the paper book at page no. ________. The observations of the 46 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 then learned Commissioner of Income Tax (Appeal) as per para 7 (at page _________) of his order are reproduced hereunder:-
"I have considered the facts of the case and find merit in the arguments of the appellant. I agree that the addition is not based on any hard fact but on certain presumptions. From the Assessing Officer's Order it is clear that during survey proceeding under Section 133A of the Income Tax Act no incriminating document or material was found to give reason to conclude excess production or out of books sales or yield or out of books purchase of raw materials. There is less expenditure on account of consumption of raw material to produce more end- product. Instead of appreciating better result in comparison to earlier years the assessing officer has assumed that the assessee might have consumed out of books purchased to show better yield. Why the answer will do this is not explained. Provisions of Section 69 of the Income Tax Act does not apply to fictitious excess stock based on estimate of possible consumption determined by mathematical Calculations. The finding of the Assessing Officer is without any tangible evidence and it is based on inferences involving unwarranted assumption. Accordingly the addition of Rs. 3,40,69,013/- made by the Assessing Officer Under Section 69 of the Income Tax Act is deleted."
26. That the department went into Second Appeal against the aforesaid order of the learned Commissioner of Income Tax (Appeal). The Hon'ble Income Tax Appellate Tribunal, Allahabad Bench heard the appeal and vide their order dated June 2006 as per ITA No.126/A/09 dismissed the departmental appeal. A copy of the Income Tax Appellate Tribunal's Order is enclosed in the paper book at page no. ______ and in this regard observations/findings of the Hon'ble Tribunal as mentioned at page 8 in last para no. 9 of the order are reproduced hereunder:-
47 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014 "However, again as discussed above, we have held that there is no warrant for invoking the provisions of Section 145(3). It automatically follows that the imaginary exercise undertaken by the assessing officer is futile and hence the additions cannot be sustained. Moreover during the survey, no incriminating was found. No irregularity with regard to books of account is found and therefore the Commissioner of Income Tax (Appeal) deleted both the additions. We agree with his conclusion."
27 That now in the year under consideration at present second time such an huge addition has been again made by observing that there was suppression of production but before saying so the assessing officer failed to invoke provision of section 145 (3) of the I.T. Act. though sales and gross profit as shown were accepted. In this way the approach of assessing officer in the A.Y. in question is not judicious approach rather arbitrary approach as compared to A.Y 1999-2000. Sir In the entire order there is no whisper of Section 145 (3) of the I.T. Act or rejection of account, sales or gross profit meaning thereby that the addition was made on own whims and calculation and not on any concrete material and alleged suppressed production was created by the assessing officer only on her own whims and illogical surmises, wrong calculations and mis-understanding of the nature of incomes with set mind and to justify the search and also to please the higher authorities and to debar the assessee from getting proper justice from her end. Thus the huge addition was made by Assessing Officer. without any adverse or incriminating material brought on record nor found in search. Likewise before making such addition provision of section 145 (3) of the I.T. Act was not invoked, purchase, sale and closing stock have been accepted hence entire addition is illegal and baseless. This shows also that even principles of consistency is missing in the order.
28 28. That, Sir, similar and identical formula/ basis have been adopted for making addition for alleged suppressed production in all the assessment years 2004-05 to 2010-11 whereas appellant has adopted and followed the same 48 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 method/manner/pattern for maintaining books of accounts and production process for manufacturing Tobacco on commercial principles since inception of the firm and there is no change in any way therefore the arbitrary addition made by the assessing officer by alleging suppressed production is unjustified and illegal. It is also submitted that the production of tobacco is an excisable items and the production has been accepted by the Central Excise Authorities and excise duty has also been paid on the clearance of the manufactured goods from the godown under control of Central Excise Department and our declared sales was accepted year after year and in view of this fact no such addition could be made. Kindly consider Allahabad High Court decision as reported in 320 ITR 116 in the case of CIT Vs. Mascot (India) Tools & Forges Pvt. Ltd. (Copy of the order at page .... Of the paper books)
29. 29. That Sir, the most important fact that even for the year under consideration i.e. Assessment Year 2004-05, originally the assessment was made Under Section 143(3) of the act vide order dated 19.12.2006 by the Deputy Commissioner of Income Tax, who examined the books and other details on various dates of hearing by calling various details which will appear from the order-sheet entries written by the then assessing officer, copies of the order sheet are in the paper book at page no. ________. Similarly the copies of order sheet in respect of present assessment under Section 153A(b) of the act is enclosed at Page -.... of the paper book. Kindly compare the same with the order sheet of block proceeding which shows the manner of the examination of records/facts adopted by the assessing officer which is absolutely casual. The order sheet entry is an important document of the assessment records so please consider the manner and give weightage to original order sheet entries and the approach of the then assessing officer.
30 That in this case a search action under Section 132(i) of the Income Tax Act was conducted by the department at the business and residential premises of the partners of the appellant firm. As a consequence of the search, the assessing 49 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 officer framed the impugned assessment order under Section 153A (b) of the act. But Sir, in the entire assessment order there is no whisper of any search material or any new evidence found in the search rather the entire additions/disallowances have been made only on the basis of the same books of accounts which were produced in the original assessment proceedings under Section 143(3) of the Income Tax Act and accordingly a well reasoned and speaking assessment order was framed Under Section 143(3) of the Income Tax Act.
31. That in this regard copy of order sheet entries for the assessment year 2004-2005 written by the assessing officer in original assessment proceeding is enclosed at page ... of the paper book and from the order sheet entry it will appear that on number of dates hearing was fixed and relevant queries were made with regard to trading result, expenses etc and in compliance to those queries various replies details/ informations / documents were furnished before the assessing officer and after thorough scrutiny of the same though the assessing officer was satisfied but she framed the assessment order by discarding all such facts/ details furnished and made the arbitrary addition which is unjustified and illegal. Sir, in the original assessment books result was accepted whereas in the proceeding u/s 153 A(1)(b) of the I.T. Act again on the same book of accounts addition was made by alleging suppression of production which is not correct and out of purview of section 153A(1)(b) of the I.T. Act. The provision of section 153A(1)(b) of the I.T. Act is not meant for repetition of proceedings and to draw different view as above in present case.
32 That sir the trading result position for the assessment year under consideration and for earlier two assessment years are as under:-
Assessment Year Declared Sales Gross Profit Gross Profit Result in Rate Assessment 50 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 2002-03 26,17,95,483 5,90,90,630 22.57% Accepted U/s 143(3) 2003-04 33,09,13,848 7,06,23,739 21.34% Accepted U/s 143(3) 2004-05 (Under 32,76,14,467 7,03,55,084 21.47% Accepted U/s Consideration) 143(3) and now in dispute u/s 153A(b) That from the above chart it will appear that overall position is progressive which was accepted by the assessing officer and more so regarding trading result there is no adverse view in the assessment order under consideration. Sir, there is no dispute with regard to Opening Stock, purchases, Sales & Closing Stock as well as gross profit and when everything was found in order and nothing adverse has been recorded in the order then there is no justification to proceed to make incorrect/ uncalled for addition by brushing-aside the entire facts, explanations, past-records, Submissions, and earlier assessments and results etc. The most important fact is that in the whole assessment order there is no whisper of Section 145(3) of the Income Tax Act which proves that the assessing officer was fully satisfied with our books of accounts/ method of account. The only provision in the Income Tax Act is Section 145 which empowers the Assessing Officer to reject the books for making addition, if any. But in this present case on this issue the Assessing Officer is silent though she devised a colourful statistical formula prepared according to her own whims and wishes to justify the arbitrary addition made in absence of any search material brought on record and without any adverse finding made for invoking section 145 of the I.T Act. That in this regard the Hon'ble supreme court in 319 ITR page 3 in the matter of CIT Vs Flexi Pack in SLP Civil No 18112 of 2009 held as under - Copy enclosed page ...... of paper books.51 ITA Nos.358 & 374 to 378/Alld./2014
ITA Nos. 06 to 11/Alld./2014 " That no substantial question of law arose from the order of the Tribunal, that there was no question of going into estimation without rejection of the books which has been properly maintained in the regular course. The Tribunal held that the assessing officer had not invoked the provisions of section 145 of the Act and therefore, there was no justification for not accepting the book results."
That sir the above view is the view of the highest authorities and their view is to be considered as the law of land and therefore the same must be given absolute weightage accordingly.
33 That Sir during the course of the search operation in the appellant's factory (manufacturing place) the search party did not find any suppressed production lying in the premises due to which there is no adverse finding about closing stock in the assessment order nor any adverse findings about trading results. The search party prepared the inventory of raw materials and finished products but since no suppressed production was found in the premises nor any hidden place was unearthed by the search party, where any such alleged suppressed production was lying then Sir a question arises for consideration and adjudication before your goodself is that after all where such alleged suppressed production has gone specially when there is no allegation about EXIT of suppressed production by the Excise authorities (Central Excise) because the excise-duty is leviable at the point of EXIT (clearance) from the godown of the goods under the strict supervision of Central Excise Authorities nor in this regard any query was put to the appellant before framing the assessment order. In fact no discrepancies in the production was found but the discrepancy of alleged suppressed production was created by the Assessing Officer on her own estimation though the accuracy of the account maintained by the appellant had not been doubted or challenged during the year or also during last 45 years by the authorities of Income Tax, Sales Tax or Excise departments.
52 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014
34. That, Sir the books of account are supported by purchase vouchers, vouchers for expenses, Stock records registers and Excise records etc. therefore hypothetical and imaginary calculations for deriving of alleged suppressed production as has been made in the present assessment order, cannot be treated as authentic and no specific mistake in the book of account has been pointed out and mentioned in the order by the Assessing Officer in the Assessment Order. During the year under consideration when turnover is on higher side and G.P. Rate is also more or less same then there is no justification to corner the appellant's books of accounts for making an arbitrary addition based on assumption and estimation for alleged suppressed production. Thus inspite of all these facts the Assessing Officer made huge addition which is total disregard of complete records, and specific and precise details submitted by the appellant which is indeed an arbitrary and unjustified addition. The procedure of framing assessment is of judicial nature and in making the assessment, the Assessing Officer must proceed on judicial and accountancy principles which is completely lacking in this case. Moreover the appellant explained entire stage wise manufacturing process of Tobacco to the Assessing Officer in writing and also produced details of various materials and ingredients used in the manufacturing process and also requested the Assessing Officer to visit the appellant's place of manufacturing to see and understand the entire manual process but neither the Assessing Officer visited nor considered the real facts nor mentioned anything about this in the assessment order.
35. That in support of above contention, the appellant invites your's kind attention to the decision of Hon'ble jurisdictional High Court of Allahabad reported in 320 ITR 116, (Alld) in the case of CIT Vs MOSCOT (India) Tools & Forgings in which the Hon'ble Court held as under:-
(i) Income from undisclosed sources-Addition-Alleged suppressed sale-Tribunal found that sales declared by the assessee are of excisable goods and the correctness of declared sales is supported by regular books of account which have duly been audited by the auditors-53 ITA Nos.358 & 374 to 378/Alld./2014
ITA Nos. 06 to 11/Alld./2014 Sales recorded in the books of account are supported by various excise registers, which are periodically checked and verified by the excise authorities - It is beyond comprehension that any addition on account of alleged suppressed sales can be made without any valid basis whatsoever on record-Findings recorded by the Tribunal are based on appreciation of fact and material available on record and there is no illegality or infirmity in the order passed by the Tribunal- No interference is called for.
(i i) Accounts - Rejection - Estimation of income - Books of account are supported by the purchase vouchers, vouchers for expenses, stock records, excise records and therefore, hypothetical and imaginary calculation of GP Rate cannot be made unless some specific mistakes in the accounts are pointed out - It is not disputed that the turnover and GP rate declared by the assessee in the year under consideration is better as compared to preceding year - In the absence of any specific instances of mistakes in the books of account and other records, the book results cannot be rejected on the basis of any such hypothetical calculations based on erroneous presumptions- Findings of Tribunal based on appreciation of material did not call for interference.
That Sir in the light of the aforesaid decision since appellant's books of account are true and correct as the same have duly been audited by the auditors and declared sales recorded in the books of accounts are also supported by various excise registers which are periodically checked and verified by the excise authorities and accepted therefore the addition on count of alleged suppressed production as made by the Assessing Officer is highly unjustified and illegal in view of the decision reported in 337 ITR page 541 (Bombay) search addition should be confined to the material discovered in search.
54 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014 36 That regarding addition made by alleging suppressed production, it is submitted that observations and findings of the assessing officer in the order are incorrect and contrary to the actual facts and figures of the case. The assessing officer made the addition based on presumptions ignoring the norms, true facts and explanations furnished by the appellant. In reality tables reproduced in the assessment order at page 16 of the assessment order are based on the information, already available in the audit report of relevant assessment years and a biased attempt has been initiated to draw adverse inference by the assessing officer which is totally incorrect as the same does not match with our actual nature of manufacturing process inserted in production chart as already explained above. Moreover from the entire order it is clear that the assessing officer made all her efforts only to find out the consumption of raw materials in one Kg. of finished goods by twisting the audit figures in a designed fashion to make the addition ignoring the true facts and real production norms.
That the assessing officer has reproduced certain chart at page 14- 16 of assessment order which require your kind consideration to solve the issue:
CHART - A (As per Page 14 of Assessment Order) Details of consumption of raw tobacco and production of finished goods as per assessee:
Consumption of raw tobacco in kgs. Adjusted Production of consumption finished goods in in kg kg.
Raw Tobacco 919194.000 838742.500 890193.600
Op Bal
of WIP + 88819.550
1008013.550
Cl. Bal
of WIP - 169271.050
55 ITA Nos.358 & 374 to 378/Alld./2014
ITA Nos. 06 to 11/Alld./2014
838742.500
% of consumption 94.22 %
(838742.500/ 890193.600)
% of yield 106 % (890193.600/
838742.500)
Details of Production and Issue of Coloured Tobacco Opening Coloured Total in Kgs Production Closing Stock of tobacco of Tobacco Stock in WIP in Kgs produced in Kgs Kgs in Kgs 88819.950 970645.100 1059464.650 890193.600 169271.050 That from the above chart marked as Annexure "A" it is submitted that chart "A" shows consumption at 94.22 % from adjusted consumption to production which is true and correct. The figure is supported by day to day stock register.
CHART - B (As per Page 15 of Assessment Order)
Items Quantity of Quantity of % age of
consumption in finished goods in consumption
kgs kg.
Raw tobacco leaf after 749922.950 890193.600 84.24
considering OB & CB
of WIP
Chemical and perfumes 84911.450 (a) 9.54
Silver and silver-work 3353.246 (b) 0.38
56 ITA Nos.358 & 374 to 378/Alld./2014
ITA Nos. 06 to 11/Alld./2014
Masala 107228.300 (c) 12.05
Kimam 36091.000 (d) 4.05
WIP 88819.550 9.97
TOTAL 1070326.496 120.23
That with regard to chart marked as Annexure "B" it is submitted that while considering the quantity of consumption assessing officer has included figures of chemical and perfume, silver and silver vark, masala and kimam marked as "a", "b" "c" and "d" and worked out total consumption at 1070326.496 kgs and also worked out yield at 120.23 % as against 94.22 % as declared by the assessee .
CHART - C (As per Page 16 of Assessment Order)
Tobacco leaf 749922.950 Kgs
Other materials 231583.996 Kgs Total of a to d as per
chart "B"
Opening WIP 88819.550 Kgs
Total consumption 1070326.496 Kgs
That chart "C" is based on chart "B" for working out % of consumption CHART - D (As per Page 16 of Assessment Order) Tobacco leaf consumed 749922.950 Add : Opening WIP 88819.550 TOTAL 838742.500 Add : Other materials remained after 51451.100 consumption as per assessee Final products as shown by assessee 890193.600 That in chart "D" the assessing officer has calculated final production at 890193.600 kgs which is correct. In this way % of yield has been worked out at 83.17 % [ (890193.600/ 1070326.496) X 100]. The said yield as worked out at 83.17 % is incorrect in so far as the total consumption was taken at 1070326.496 kgs because while considering other materials shown at 231583.996 kgs the evaporation/wastage percentage was not considered and excluded rather ignored. Thus if percentage of evaporation/wastage is taken into account and excluded 57 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 then the actual consumption comes to 838742.500 kgs and not 1070326.496 kgs as shown as per chart "A" above. In this way the correct percentage of yield is as under:
By Assessee By Assessing officer
Final products as 890193.600 890193.600
shown (No dispute)
Total consumption 838742.500 1070326.490
percentage of yield 106.24 % 83.17 %
37 That thus the assessing officer in fact totally ignored and discarded the actual evaporation/wastage of other materials used in production appearing in chart "B" where as such evaporation/wastage has been allowed year after year being normal feature in this nature of business. Therefore the whole confusion arises only because the quantam of evaporation and normal process loss was ignored which is the cause of deriving alleged suppressed production. In this connection it is further submitted that in the year 1990-1991 a survey was conducted by the excise department for verification of stock and they alleged that there was excess stock of tobacco as a result pilot experiment was also conducted by the excise authorities and thereafter they, arrived at a conclusion that the increase in weight on account of the addition of chemicals, perfumes, menthol etc was purely temporary and the weight by and large come to the level of the weight of coloured leaves. Therefore the excess in weight found at the time of verification of the stock by the officers was on account of the addition of chemicals perfumers and other volatile substances and this increase in weight was purely temporary and the actual weight nearly settled down to the level of the weight of the coloured leaves after completion of the process of the manufacturing and was accounted for. In this way the higher authorities of the Central Excise department also held that in such type of nature of manufacturing of tobacco there is wastage process loss and evaporation loss of ingredients used/ mixed and the same are temporary due to which the ultimate result is that there was no increase in weight accepted by Central Excise Appellate Tribunal in assessee's own case.
38 That the assessing officer considered the item of other material such as perfume, chemicals, silver and silver vark, kimam, masala at 231583.96 kgs whereas after evaporation it comes to 51451 Kgs. Thus the 58 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 difference of 180132.996 kgs is shortage in weight (kgs) due to evaporation in normal process and processing loss and not weight of suppressed production as claimed by the assessing officer.
39 That like wise another mistake committed by the Assessing Officer is that precentage of yield as admitted by assessee at 106 % as per chart marked as annexure "A' above was applied again on total alleged consumption at 1070326.496 kgs. In this way the alleged production was worked out to 1130906.975 Kgs (1070326.496 X 105.66 %) as per working of the Assessing Officer at page 27 para 8 of the assessment order. The difference comes to 60581.00 kgs (113096- 1070326 ) In this way the alleged total production was worked out at 1130906.975 kgs as against 890193.600 kg as shown by the assessee. Due to such haphazard working alleged suppression of production was worked out at 240713.375 kgs and in this way by applying cost of production at 289.00 per kg a huge addition of Rs. 6,95,66,165/- has been made. Since the so called suppressed production as worked out by the assessing officer at 240713.375 kgs is nothing but reduction in weight of material due to evaporation normal processing loss of 180182.996 kgs and 60581 kgs on account of difference in alleged production as worked out by applying percentage of yield on alleged consumption. The total of alleged shortage and difference in alleged production was worked out to 240713 (180132+ 60581).Thus the assessing officer has made addition all together on different logic without considering nature of manufacturing process, nature of ingredients used and explanation given by the appellant which is highly unjustified.
40 That at page 25 of the assessment order the assessing officer has alleged that no specific reply was given on ratio of consumption and percentage of yield which is absolutely incorrect in so far as at page 18 of the same assessment order a chart is reproduced from which it will appear that there is different in yield percentage figures in the A.Y. 2004-2005 to A.Y. 2007-2008 and yield percentage figures of A.Y. 2008-2009 to A.Y. 2010-
2011. Such difference is there only due to method of yield percentage working as adopted by the auditors and not due to any manipulation as alleged by the assessing officer. Sir, If a uniform method is adopted in all the assessment years then there will be no difference at all in the yield percentage figures in any of the years but the Learned assessing officer never tried to understand this fact and made such a irrelevant allegation based on her own wishes to justify the addition and search. Actually these 59 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 two ratio - (i) the accounting ratio of material consumed/finished goods produced (as per class 32 of Form 3CD) (ii) the percentage of yield of the principal raw material (as per class 28 of Form 3CD) are altogether different in nature and purpose and the same can not be compared with each other as compared by the Ld. Assessing officer without understanding this true fact.
41 That at page 25 of the assessment order the assessing officer stated that in the course of search operation in the statement no specific reply was given on ratio of consumption and percentage of yield whereas the assessee explained all the items used in production of Tobacco, their consumption and opening and closing stock. But the assessing officer failed to examine the past records which proves that such temporary shortage is caused due to evaporation and normal processing loss at stages of the manufacturing processes as a regular features which was accepted by the department. Thus to support and to give strength to the assessment order the assessing officer in the order stated that the assessee failed to state the ratio of different constituents mixed to get one kg of product of tobacco when the assessee stated only this that because it is a trade secret and nobody can compel to state the trade secret. The amount of Rs. 50,00,000.00 was also surrendered only with the intention to purchase peace of mind and to avoid litigation. Sir, there could be thousand and one reason for offering some amount for taxation which is quiet usual in the search and survey. The department is no stranger to the same fact but it is not correct on the part of assessing officer to take shelter for such surrender to misuse it whereas such surrender was made to buy peace of mind from the department and settle the matter and also to stop the assessing officer from repeated persuasion of telling the ratio of consumption.
42. That in the course of search no incriminating material was found relating to present year which could have been added back in the proceeding under section 153A(1)(b) of the I.T. Act. Prior to date of search the return of income for the assessment year 2004-05 to assessment year 2008-09 had already been filed under section 139(1) of the act accompanied by all the requisite documents and proceeding under section 143(1) of the act stood completed except the year 2004-05 which was made under section 143(3) of the income tax act. The details regarding opening stock, purchase, sales, closing stock and consumption of materials for the production of Tobacco for each year under consideration were also placed before the authorities below. This fact has not been disputed by the 60 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 revenue. The audit report also contains the facts of production of each year which were accepted from year after year and no dispute was ever raised by the department. The matter of consumption / alleged suppressed production can by no means be created as a fresh or new issue and finding created by the assessing officer in the present order passed is based on assessing officer's own imagination ornamentaly during the search assessment since all details regarding consumption / production were before the department prior to the search. Sir, if department had any doubt regarding the same, it could have been raised during the regular assessment proceedings upto assessment year 2004-05 and not in the proceeding under section 132(1)/ 153 A(b) of the Act. When no incriminating material was found in the course of the search relating to any of the assessment year of the block period then the original assessment for such year could not be disturbed on the ground of alleged suppressed production through wrong working and own colourfull calculations of the assessing officer. In view of above factual and legal position the addition in question on account of so called suppressed production in a uniform manner for assessment year 2004-05 to 2010-11 are not corresponding to such material found during the course of search therefore the addition made in the pre-search assessment year is unjustified and illegal.
43 That without prejudice to above, it is found that having not rejected the books of account of the assessee for all the years under consideration, the assessing officer derived a colourful statistical formula prepared in general and vague manner which is not based on any real facts or figure found in the course of search but were applied uniformly in order to work out certain production in hypothetical manner. The assessing officer simply discussed various facts in general way as discussed in different para of the assessee's submissions and worked out unrealistic figures for suppressed production for the purpose of making addition. Infact and in real sense the method of computing so called suppressed production is not justified in absence of any sound basis for the same. Sir, it is an admitted fact that each year of the assessment is independent and since no adverse evidence or any new evidence was found in the course of search reflecting any adverse impact then why such addition. Sir, from the nature of addition it appears that simply because the assessing officer, while framing the assessment order under section 153A (1)(b) of the act, had no other way out but to make the addition in haphazard manner with a view to justify the search because no material was found in the course of 61 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 search. Thus the appellant prays that when nothing was found in the course of search which facts also appear from the assessment order therefore the original assessments for the assessment years 2004-05 to 2010-11 could not be disturbed in all fairness and justice. 44 That Sir, all these details were furnished before the assessing officer also for consideration during the assessment proceeding but the same were totally ignored without assigning any reasons or justification. The Assessing officer failed to understand and consider the real facts such as:-
a) That the appellant manufacture and sale 'Tobacco' and the product is subjected to the excise act/rules and regulations.
b) That complete statutory records were maintained as required under the control of the excise Act/Rules made there under. Those records from the stage of raw tobacco to the sale of branded Tobacco were periodically checked and verified by the officials of the Central Excise Department. This is an important fact that in the assessment order neither the Assessing Officer has mentioned it nor pointed out any defect regarding maintenance of excise records. Moreover broad steps of the manufacturing process have already been explained.
c) That with a view to survive in the business market it is not possible for the appellant to disclose its trade-
secrete.
d) From the aforesaid brief account/ details the yield during the various stages of manufacturing process can not be uniform on account of the fact that the raw materials are purchased largely from agricultural produce or vegetable products, some of which are hygroscopic in nature and some are volatile. The consumption of silver leaves and other perfumery items varies on account of the various manual process and nature of the business as explained above.
62 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014
45. That on the basis of charts as reproduced at para 36 above the assessing officer has tried her level best to make the issue clumsy and has narrated her concocted theory by attacking on the consumption of raw materials in a wrong way and with ill motive only. True facts were submitted before the Assessing Officer again and again that there is no fixed rate of ratio or parameter for the consumption of various raw materials in the manufacturing process of the Tobacco as the same always varies at the stages of production processes /depending upon quality of raw materials used and quality of Tobacco manufactured by taking into account need in the market and level of like business competition as well as also loses in the process but since the assessing officer was adamant to make the addition at any cost therefore these true facts were ignored. The nature of manufacturing process / stages from inception of the firm are also same and similar and already accepted by the department in past, therefore the consumption and product cannot be derived at one to one ratio but the assessing officer failed to understand this simple and established fact and by ignoring the same a wrong working was manipulated and inserted to justify the addition which is incorrect.
46. That in this regard the assessing officer at the end at page number 27 of the assessment order has concluded her justification to make the addition by alleging suppressed production in a cyclostyle manner in all the respective assessment years of the block period. Even language word by word is same which is now reproduced here under :
"From the statement, it is very clear that assessee is suppressing its production and for which it has been surrendered at the time of search and seizure proceedings. The average percentage of yield comes to 105. 66% as per above submission of assessee. Clearly, if 100 kgs. Of items is consumed then 105.66 kg of finished goods would receive. Total production has been shown 890193.600 kgs as against total consumption of raw material at 1070326.496 63 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 kgs (838742.500+231583.996). Thus total production worked out as 1130906.975 kgs (1070326.496 X 105.66%) As the assessee has shown finished products at 890193.600 kgs, there will be suppression in production by 240713.375 kgs not shown by the assessee. Cost of goods produced comes to Rs. 289/- per kgs as per details shown in the audit report. The value of above suppressed production comes to Rs.
6,95,66,105/- which is added to the income of the assessee firm on account of suppression of production in manufacturing of ZARDA for the year under consideration."
That from the above, it will appear that the cause of the addition according to the assessing officer is only this that the assessee surrendered Rs. 50 lac at the time of search with an intention to save the trade - secret but while framing the assessment order the assessing officer failed to consider the statement of surrender correctly in its true spirit and tried to take disadvantage of the said surrender when such surrender was in good faith and only on persuasive query on the point of ratio of raw tobacco consumption and production and as a matter of fact it was a heavy surrender in volume as such adverse inference of the same has been wrongly taken for making a stand for the addition which is unjustified.
That likewise the contention of the assessing officer that if 100 kg of items is consumed then 105.66 kgs finished goods would receive is totally incorrect because the assessing officer failed to understand this fact that it does not happen so in the production of tobacco and result of final product never comes in 1 to 1 ratio in comparison to the materials and ingredients used in the production, because it involves dust, wastage, evaporation and other processing losses, so, sir kindly consider this aspect in its practical background. For example, while preparing a cup of tea, its various ingredients such as water, milk, sugar, tea-leaf are mixed in a cup and heated and after getting essence and colour of the 64 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 tea leaf and other ingredients used, the wasted-tea leaf bags are thrown out, thus here also we do not get similar weight of tea and sugar etc as of weight of all the used ingredients nor the quantity increases. So sir similar position is here also in our production and in its true perspective only assessments in all the earlier years have been done by accepting our norms of production since the inception of the firm.
That the assessing officer miserably failed to mention the fact in the assessment order that where such suppressed production have gone ? and thus now it is an important issue for your kind adjudication.
47. That Sir the most important fact for consideration at your end is that the assessing officer worked out the alleged production of 1130906.975 Kgs. whereas in reality our production is 890193.600 Kgs only. In this way an artificial differences of 40713.375 Kgs of alleged excess production was created by the Assessing Officer but the assessing officer miserably failed to state that for such alleged excess production from which source the raw tobacco (Base Raw Material) had come and where the sales effected or stock/ kept and left from the eyes of central excise department because the assessing officer has accepted our opening stock, purchases, sales and also closing stock of raw tobacco and other materials including finished goods. And when these four major heads have been accepted then a natural question arises there for consideration of your goodself that from which source the raw tobacco (Base Raw Material) used in the so called excess production had come specially when the raw tobacco shown by us is based on day to day stock excise register with quantity wise. Meaning thereby that consumption of the raw tobacco, as per books, used for declared production is true and accepted by the Department and left quantity is in closing stock which was also accepted by the Assessing 65 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 Officer. Moreover no loose paper or any incriminating document indicating any such suppressed production, purchase of raw tobacco was found during the course of the search. Although it is a known fact that our entire production/sale is subject to the excise duty and till date no case was ever made by the excise department or Income Tax Department or Sales Tax Department that any suppress purchase of raw tobacco, production and sales were made nor in this regard there is any whisper in the assessment order. For your convenience a chart is enclosed at page no. ______ of the paper book showing the consumption of raw tobacco and quantity of the production compared with the working of alleged suppressed production done by the assessing officer. In this connection it is also necessary to mention here that our earlier assessments were made after thorough scrutiny and passed under Section 143(3) of the Income Tax Act. Copies of the orders are at page no. ____ to ______ of the paper book. So kindly consider observations of various senior officers of the department in their orders and please compare the same with the present assessment order passed under Section 153A(b) of the Income Tax Act. In the referred chart earlier years position of consumption of the raw tobacco in the production has also been given based on which it is clear that on declared consumption the department has accepted our declared production. Therefore there is no sense to create artificial excess production without giving the source of raw tobacco used for such alleged suppressed production and proving its sales or stock and excise duty paid on such excess production and thus it puts a serious question on judicious approach of the concerned assessing officer.
48. That in this regard a 2nd chart is enclosed at page no. _________ of the paper book for your kind convenience which is based on our books of accounts and audit report. From this chart it will appear that there is no dispute in respect of consumption of raw tobacco whereas for the first time in the history of the case doubts in respect of other materials used in the production have been raised and details of which is appearing in col. no. 4 of the said chart. From the chart it will also appear that in other materials (such as 66 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 chemicals, perfumers, silver & silver verk, various types of other ingredients, kimam and masala etc) there is loss/shortage on account of processing wastage, evaporation and dust etc and as a result weight of some other materials/ ingredients gets reduced and ultimately by mixing the same in the raw tobacco such nominal weight increases and it contains taste/essence of those other items and this system/processing of manufacturing of our product has already been accepted by the department since the date of inception of the firm including the assessment year under consideration of which assessment was framed under Section 143(3) of the Income Tax Act but simply because a search was conducted though no incriminating materials was found in the course of the search and also the present assessing officer was not ready to understand the process as a result a theory of suppressed production was created by the assessing officer according to her own wishes to make huge addition without considering the true facts and factors as elaborated above. In this regard a decision of the jurisdiction High Court reported in 320 ITR Page 116 is fully applicable in the appellant's case as the facts of the case are identical and copy of the order is at page no._____ of the paper book.
49. That from the said relevant chart at page no. ________kindly consider the working of assessing officer. Sir, the assessing officer considered the quantity of other materials in same ratio (1:1) which is absolutely incorrect. Meaning thereby that various ingredients, masala & spices etc. were mixed in the raw tobacco as it is without processing and no benefit of process loss in to weight/quantity was allowed. In this way the quantity of production by considering the weight of other materials as it is (1:1) and over and above yield percentage of 105.66% was again applied by the Assessing officer in each year due to which figure of artificial suppressed production was increased and worked out by the assessing officer which is absolutely baseless. Sir, the process of manufacturing of tobacco is a technical matter and Zarda is not manufactured in the manner as suggested/calculated by the Assessing Officer. Sir fact is that since the assessing officer could not understand the entire manufacturing process as a whole due to which such 67 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 type of confusion was designed/created by the assessing officer and Sir, if tobacco is manufactured in the manner as calculated/ decided by the assessing officer then the said Zarda shall be hardly purchased by any consumer/user because in Zarda, its taste & flavour is most important aspects & which only attracts the consumers.
50. That Sir already we have put and example for preparation of cup of tea in para 46 above similar position is there also in our production of Zarda and therefore in its true perspective only assessments in all the earlier years have been made by accepting our norms of production since the date of inception of the firm. Thus in nut-shell the theory of alleged suppressed production as launched by the assessing officer is there due to following reasons:-
(i) In using other ingredients/materials apart from the raw tobacco, processing wastage/shortage/ evaporation was not allowed when in earlier years including the year under consideration the same were allowed.
(ii) The assessing officer considered quantity of other ingredients/materials in comparison to the production in 1:1 ratio which is at all not possible nor actual manufacturing way of Zarda.
(iii) The yield of percentage as applied twice by the assessing officer, first from raw tobacco to finished production at flat rate and again applying yield percentage on production which is wrong and impractical.
Thus the entire working of the alleged suppressed production done by the assessing officer in haphazard way is baseless and far away from the real working based on commercial principles.
51. That the 3rd important issue is that the department is taxing us on the value of production as worked out by the assessing officer treating the entire value as income and not on real income when the law is settled that the income tax is leviable on real income only based on a working done 68 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 on commercial principles. Sir the production is final outcome of the various materials used for the production. In para 27 of the order the assessing officer has stated that the total production is worked out to 240713.375 Kgs @ Rs. 289/- kgs value of which comes to Rs. 6,95,66,165/-. The assessing officer has clearly stated that it is the value (Cost) of such suppressed production and the same has been added to the income of the assessee firm on account of alleged suppressed production. Likewise at page 35 of the assessment order where the income has been computed, the assessing officer has stated that the income of the assessee is computed as under and there also the assessing officer has added the amount of the suppressed production, Sir it is not a judicious way to tax sale, production, and purchases etc. but in the appellant's case the department travelled beyond the procedures of the Income tax law and principles of accountancy and judicial parameter of observing the real income and not to tax the artificial income in the garb and suppressed production by ignoring the real income and commercial principles. Thus it is a patent and glaring mistake on the part of the assessing officer to tax the amount of alleged artificial production worked out by the assessing officer because in the production costs various other elements are also involved. The assessing officer no where has stated in the order that there was suppression of sale and purchases nor she mentioned any thing about payment of excise of duty on the finished goods derived out of such alleged suppressed production or whether the excise duty was charged and paid on each and every exhit item of finished goods. Moreover there was no finding of excise department that any excise duty was suppressed then question of taxing the alleged suppressed production as worked out by the assessing officer does not arise. The records go to show that there is no finding nor any material referred in the assessment order about the suppression of investment in acquiring the alleged suppressed production. Sir total sales or total production cannot be regarded as profit/ income of the assessee. In support of this the assessee rely on following decisions.............
1- (2003) 263 ITR 610 (MP) 2- (2002) 258 ITR 654 (Guj) 3- (2008) 304 ITR 52 (MP) 4- (2008) 302 ITR 63 (Guj) 69 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 5- (2011) 12 ITR 748 (ITAT Delhi Bench) To sum up the whole submissions on the point of the addition of the amount of alleged suppression of production of tobacco and addition of Rs 6,95,66,165/- treating such amount as income of the assessee. The questions to be considered for adjudication by the Learned appellate court are broadly as under : -
1- Whether when the assessee maintained regular and proper books of accounts duly audited by chartered accountant year after year and the nature of business of the assessee is that of excisable goods and past history of the assessee is neat and clean and whether without invoking the provisions of 145 (3) of the I.T. Act and rejecting the books of accounts maintained by assessee merely on whims and wrong understanding of the material facts of the case any trading results addition on the ground of alleged suppressed production could be made.?
2- Whether considering the nature of business of assessee i.e chewing tobacco manufacturing and its sales in the absence of any material on record that the assessee made purchases/ obtained base raw material i.e tobacco was obtained from any other sources which was used in the manufacturing of chewing tobacco and thus suppressed production?
3- Whether in search made on 27.08.2009 any such material was found and seized which could have been given a cleu that the assessee was indulged in suppressing the production of finished production i.e. chewing tobacco?
4- Whether on the ground that the assessee could not justify the consumption of other raw materials which was quite in large number in the production of one kg of manufactured tobacco would justify the presumption of suppressed production?
5- Whether keeping in view the practical difficulties of a trader/manufacturer in the case of tobacco, Where large number of other raw materials are required to be used and also through various process mixed in obtaining finished products, Is it practicable to tell the ratio of the same in spite of the fact that it was trade secrete of the assessee which was asserted in statement 70 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 by the appellant u/s 132(4) of the Act at the time of search?.
6- Whether where the business is of excisable goods and excise duty is levied and paid on the clearance of the finished goods from the factory godowns under the supervision and control of the Central Excise Department, the production and sale could be disbelieved on just whims and surmises of the assessing officer and also without any incriminating material found during the search. 7- Whether in any view of the matter and keeping in view the nature of production of chewing tobacco and manufacturing process as already explained earlier and various ingredients used in obtaining the finished product the evaporation/ driage/ shortage and process loss disclosed could be disbelieved on hypothetical grounds and surmises and excess production be created and considered on the basis of baseless calculations without considering the above mentioned driage, evaporation and process loss etc?. 8- Whether in any view of the mater the alleged suppressed production worked out by the Assessing Officer. and its value as worked out at Rs 6,95,66,165/- could be wholly treated as the income of the assessee in determining the total income as against the judicial views and fiscal statutes as to assessment of real income?. Sir in order to decide the appeal of the assessee on the point of addition of the amount of Rs. 6,95,66,165/- made for alleged suppressed production, the finding on above issues/ point raised are necessary to do proper justice to the case as the question of survival of old established business having clean past history is at stake and unfortunately such nature of addition to the income has been made by the assessing officer in subsequent year also.
Sir, according to the assessee's arguments and pleading the answer to the above questions raised are "NO". Hence requested (i) assessment be quashed and (2) that the addition of Rs. 6,95,66,165/- made in total income for alleged suppressed production may kindly be deleted and justice be done.
52 That it may further be submitted that instead of taxing the assessee on real income as worked out and declared in the return on the basis of closed books of accounts duly audited, the department is taxing on the artificial 71 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 alleged production which action is against the fundamental principles./ practice of the income tax law. The real income has been defined in the decision by the Hon'ble Supreme Court reported in 322 ITR of 10 Page 678 wherein it has been observed by the Hon'ble court as under :-----
"Income tax is a tax on real income i.e. the profits arrived at on commercial principles subject to the provision of the income tax act"
53 That sir, there are well settled laws that sales tax is levied on sale of goods, excise duty is levied on production/ sale of finished goods, service tax is levied on the services provided and likewise the income tax is levied on real income of an assessee but in assessee's case the learned Assessing Officer has violated the settled principles of law by ignoring commercial principles and has taxed on production which is absolutely unjust and arbitrary. Moreover till date the excise authorities never alleged that in any year there is any suppression of excise duty on the part of the assessee. The excise department and income tax department both are departments of the central government of India. Sir till date taxes have been levied by the income tax department on real income of the assessee only but in the year under consideration for the first time department is taxing on the "production" which is a clear mockery of the law and harassment to an old and one of the heavy tax payer assessee of the District, which is not permissible according to the spirit of in the I.T. Act or even against the guidance of Ministry of Finance of CBDT i.e. no uncalled for harassment should cause to the tax payer."
10. The submission of the assessee was forwarded to the A.O. for examination and comments. Vide his letter dated 19.08.2013, the A.O. has submitted as under:-
"Addition of Rs. 6,95,66,165/- on the ground of suppression of production - A. O. in her assessment order has made addition on the ground of suppression of production and main basis of the addition was that the assessee did not provide any evidence which could show 72 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 what was the itemwise percentage of wastage/evaporation in perfumery items such as chemicals, masala, silver and silver-vark and kimam During the remand proceedings, A.R. of the assessee was asked to provide the percentage of wastage of the items i.e. chemicals, masala, silver and silver-vark and kimam. On 26.07.2013, Shri Sanjay Gupta, A.R. of the assessee replied that it is not possible to quantify the itemwise percentage of the waste item or percentage of evaporation for each item separately. He further submitted that the assessee only weigh the finished goods and gain in the finished goods is 6% approximately which is also recorded in Audit report. Assessee also submitted that he can not disclose the percentage of the perfumery items used in manufacturing of Zarda because it is business secret whose disclosure can harm our business. The assessee was asked specifically to explain the variance in the ratio of material consumed/finished goods mentioned at Page No. 9 of the Assessment Order. A.R. of the assessee submitted that it is because of the different method applied for last three years. The assessee also made written submission in which he had explained the different method. Regarding the variance in the ratio of material consumed, assessee's submission is reliable. Assessee's main submission was that ' there is nothing outside the books of account and the conclusion has been drawn, on which ground addition was made, on the basis of the Audit Report submitted by the assessee itself. Assessee further contended that the addition had been made on the basis of different interpretation of the facts and figures disclosed in the Audit Report. But the assessee could not substantiate his claim by providing item wise chart of weight loss. During the remand proceedings for the A.Y. 2009-10 on 06.08.2013, the assessee explained about the process of manufacturing of Zarda by showing raw material. It was observed that the elements of the raw materials were not being reflected exactly in raw form in finished products, but it was also not clear whether the raw materials, particularly masala is used in grinded form or not because the colour of finished product was different from the colour of raw tobacco. It was also clear that some weight loss is there in the form of useless part of whole leaf tobacco and masala during the process of manufacturing, but what is the percentage of weight loss was not clear.
Finding: As the assessee failed to produce any item wise chart of loss in the process of finishing Zarda, it is difficult to fully rely upon 73 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 the submission of the assessee. Hence, addition made on this ground is correct."
11. The copy of remand report received from the A.O. was forwarded to the assessee. Vide their submission dated Nil, the counter comments have been given as under:-
"B. Regarding addition of Rs. 6,95,66,165.00 on the allegation of suppression production of Zarda:
That in this regard the detailed/ explanation was offered in the statement of fact in Para 19 to 53 at page 29 to 84 of the first paper book which comprises various charts etc. During the remand proceeding again the entire books of accounts including the excise records, stock and production register duly checked by central excise authorities books and records were examined and contentions of the assessee checked and found correct also. The books and records were thoroughly scrutinized by the assessing officer who was fully satisfied with method and maintenance of books of account as a result there is no adverse comment in respect of books of account or method of accounting in the remand report. In the present case a uniform /addition right from the assessment year 2004-05 to 2010-11 as alleged suppressed production which is not based on any seized materials, suppressed production or stock found on search that has been worked out as a uniform percentage of production i.e 105.66 % and thus worked out alleged suppressed production and after deducting the actual production as per regular books of accounts and records duly accepted by the central excise authorities ignoring the truth. In the remand report the only allegation of the assessing officer appears to be that the assessee did not provide any evidence which could show what was the percentage of wastage/evaporation in the perfumery item such as chemical, Masala, Silver and silver vark without considering the nature of business and practical difficulties of the assessee and with these background in remand report a finding was recorded in following manner:
"As the assessee failed to produce any itemwise chart or loss in the processing of finished Zarda. It is difficult to fully rely 74 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 upon the submission of the assessee hence addition made on this count is correct."
That in this connection it is necessary to mention here that in the remand proceeding on 06.08.2013 the assessee produced various raw products/materials which are used in manufacturing of Zarda and demonstrated the entire production process and right from tobacco whole leaf for boiling and taking out of liquid kimam only and other raw materials purchased and coloured and mixed with various other ingredients and after understanding the whole system of manufacturing process and production the assessing officer arrived on a conclusion that element of loss/element of evaporation are involved and by considering the various items of raw products and their nature the assessing officer recorded the facts in the order sheet which is enclosed at page .... The relevant contents of the order sheet and in the remand proceedings and facts narrated in following manner.
"During the remand proceeding for the assessment year 2009-10 on 06.08.2013, the assessee explained about the process of manufacturing the Zarda by showing raw material. It was observed that the elements of the raw materials were not being reflected exactly in raw form in finished products, but it was also not clear whether the raw materials, particularly masala is used in grinded form or not because the colour of finished product was different from the colour of raw tobacco. It was also clear that some weight loss is there in the form of useless part of whole leaf tobacco and masala during the process of manufacturing, but what is the percentage of weight loss was not clear."
That from the above observations of the assessing officer it will appear that the assessee fully explained the whole process of manufacturing of zarda by showing raw materials. The assessing officer also observed that it was clear that some weight loss is there in form of whole leaf tobacco and masala during the process of manufacturing. In this way a claim of loss/wastage/evaporation has been duly accepted by the department so the issue of loss/evaporation/wastage has finally concluded. But unfortunately the assessing officer worked out the production on own whims considering that the production of finished product is the excess which resulted in working out alleged suppressed production.
That the assessing officer slightly doubted that masala is used in grinded form or not and to this affect it is submitted that for grinding work 75 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 two big machines are installed in the factory premises long ago and through those machines grinding work goes on regularly. So the question of doubt in this regard does not arise. Photo of grinding machines which are installed in factory premises are enclosed herewith. The assessee also made a request to assessing officer to visit of factory premises but not considered the assessee's request as a result in reality the manufacturing process was not examined properly by the department to do proper justice. In these background we are enclosing herewith photograph of manufacturing process in respect of manufacture of raw kimam, process of converting spices into powder form, process of manufacturing of coloured tobacco, process of manufacturing of perfume and process of manufacturing of branded chewing tobacco. The entire photographs clarify that the entire manufacturing process is handmade and wastage/ evaporation as admitted by your goodself is true and correct.
That in this way now no dispute is left about the fact of wastage/evaporation/element of loss in the production activity do arise and in this background finding recorded by the assessing officer that the addition is correct is nothing but miserable to support illegal addition already made by the then assessing officer in wrong way. Sir, once the assessing officer was satisfied that element of wastage/evaporation is involved in materials used in production of Zarda then allegation of suppress production does not arise. There is no dispute with the department about the consumption of raw tobacco which is the main item of production of Zarda i.e. 95% of total production which is supported by day to day stock excise register as maintained in regular way as per the norms of Central excise law and duly checked by them and on the basis of production register excise duty has been paid and thus in such situation to support the addition in remand proceeding is nothing but miscarriage of justice.
That in the remand report there is no reference or any adverse remark on the following issue:-
(a) That the assessee is maintaining the books of accounts in the systematic manners which are supported by day to day stock register and method of accounting has been accepted by the department in earlier year from the year of inception of business.
(b) That in earlier year trading result was never disturbed though number of assessment were framed u/s 143(3) of the Income Tax 76 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 Act by the various higher authorities of the department so as per the principles of consistency addition made is unwarranted as the assessing officer is bound to give cognizance to the past records.
(c) That in the assessment year 1999-2000 for the first time in the history of the case an identical and similar addition of Rs.
3,40,69,013.00 was made under the head suppress production which was deleted in appeals and no reference filed even before the High Court. Thus the assessee's case is well covered by decision passed by the appellate court.
(d) That in the entire block period of assessment there is no whispers about the invoking of provision of section 145(3) of the act and once the said provision for rejection of account was not invoked then the addition made is unwarranted because for rejection of account invoking of provision of section 145(3) is a mandatory requirement. In this regard there are various decisions in support of the assessee including the decision of apex court and various High Courts etc and list of case law is at page 100 enclosed onward.
(e) That the most important facts has been ignored that manufactured tobacco (Product) Zarda is subject to excise duty and for this purpose necessary details as per central excise rules and regulation are maintained which are periodically checked by the central excise authority and also audited/periodically and till date nothing adverse found in any year and in this way clean chit was given to the assessee by the central excise authority in the light of books maintained. Sir, during the year excise duty paid is amounting to Rs. 19,52,49,186/- The assessee's case is well covered by the decision of Allahabad High Court which is reported in 320 ITR Page 110, CIT Vs. Mascot (India) Tools Limited. Copy of the decision at page 267 to 275 of second paper book and a copy of the same is also attached herewith for ready reference.
(f) That the assessing officer measurably failed to state and locate the source for manufacture of suppress production in the entire block assessment specially when purchase, sales, opening and closing stock has been accepted. In this regard a chart is enclosed in 77 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 paper book and photo copy of same is enclosed herewith for your kind consideration.
(g) That it is also a fact that in the course of survey proceeding u/s 133A in assessment year 1999-2000 as well as in search proceeding u/s 132 of the income tax act conducted on 27.08.2009 no incriminating material, no suppression of stock, no loose paper was found hence there is no whisper in the order about adverse material. In this way the entire discussion/addition in the order are based on regular books of account therefore liable to be deleted.
(h) That during the assessment in question gross profit rate was progressive and in all the block assessment order in subsequent year trading result is accepted and not disturbed nor any adverse finding in this regard recorded in any order.
(i) That from the assessment order it will appear that sales, purchases, closing stock are not in dispute and when all the heads of trading accounts are not in dispute. Hence the theory of suppressed production launched by the assessing officer is liable to be spunged.
(j) That the assessing officer failed to state where such alleged suppressed production as worked out has gone and how disposed off closing the eyes of the central excise department. During the search or survey even no excess stock unaccounted cash or investment was found by the department and specially when till date there was no dispute by the side of excise authority about suppression of excise duty.
(k) That it is an admitted fact that there is no fixed rate/ratio/parameter for consumption of various raw material used in manufacturing process as the same always varies at the stage of production depending on quality of raw material, atmosphere and moisture etc hence the percentage of consumption and production basis year after year .
(l) The assessing officer has worked out artificial production at 11,30,906.975 kgs. as compared to real production 8,90,193.600 78 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 kgs. In this way artificial difference i.e. alleged suppressed production as created/worked out in production is 2,40,713.375 kgs but the assessing officer failed to state the fate of such extra production and likewise failed to state where such extra production has gone and also failed to state position of excise duty because the assessing officer has accepted the payment of excise duty as per production and as per regular books of accounts.
(m) That the assessing officer applied yield percentage twice first from the stage of raw tobacco to finished product and flat rate again applied yield percentage on production which is not correct.
(n) That alternatively without admitting, the whole of the alleged suppressed production cannot be legally treated as the income of the assessee for the purposes levy of tax thereon because other outgoing are also to be considered for making such production hence only the element of net profit on such alleged amount could be considered and as such from all angels the addition of Rs. 6,95,66,165/- as income unjustified and uncalled for. The assessee relies on following decisions :
263 ITR Page 610 (Copy enclosed) 258 ITR Page 654 (Copy enclosed) 11 ITR Page 476 (I.T. at Report) (Copy enclosed)
(o) That the sales tax authorities also examined our books year after year and the said authorities accepted declared result and there is no dispute till date i.e. the sale tax authorities accepted the turnover as per the books.
(p) The Central Excise authorities issued several times for performance in payment of excise duty by issuing "SAMMAN PATRA AND COMMENDATION CERTIFICATE" under the signature of Commissioner, Customs, Central Excise and Service Tax Allahabad. This certificate itself proved that sanctity of books. The Copy of the certificate are enclosed herewith for your ready reference.
(q) That the above facts were placed before the concerned assessing officer in the written submission in details but while preparing the remand report the assessing officer nowhere disagrees with the 79 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 facts as stated above as there is no adverse remark in the remand report.
(r) That in the second paper book various decisions have been cited by the assessee and photocopy of those decisions also enclosed but due cognizance was not given by the assessing officer while preparing remand report.
That in these backgrounds the remand report prepared without giving due weight to whole facts and legal position is no judicially correct facts narrated above."
12. The ld. CIT(A) considering the explanation of the assessee and the material on record did not justify the calculation made by the AO for the purpose of making addition, however, considering the comparable cases, reduced part of the addition.
The assessee as well as the Revenue are in appeal on this ground. The findings of the ld. CIT(A) in para 5.15 are reproduced as under :
"5.15 Decision:
With reference to issue of suppression of production the A.O. started the discussion from page 2 of the assessment order in which first of all, she has thrown light on the process of manufacturing of Zarda. Thereafter, she has summarily remarked that the appellant has not shown the quantitative details of work in progress in the audit report. Then the basic commentary on the maintenance of books of account by the A.O. is that the details of consumption at various stages have not been furnished, therefore, the process is not open to verification. Another objection of the A.O. is that the ratio of consumption of different items of raw material has not been explained on the pretext of secrecy. The A.O. has also examined the genuineness of purchases of sandal wood oil and on the facts given in the foregoing paras, she proved that the purchases were bogus. The A.O. also found discrepancy in the consumption of packing materials as there are no records for issuance and consumption.80 ITA Nos.358 & 374 to 378/Alld./2014
ITA Nos. 06 to 11/Alld./2014 The appellant states that the addition is not based on any search material nor was any discrepancy pointed out in the books of account. The appellant's argument is that in the past its book results were accepted in Toto. The A.O. was faulty in deviating from past practice when the method and manner of books of account and production / consumption norms, followed from year to year, have not changed. The appellant has also given reference to addition of Rs.3,40,69,013/- made on identical issues for A.Y. 1999-2000 which was in pursuance of survey proceedings u/s 133A and the same was deleted by the first appellate authority. The appeal of the department against the order of Commissioner of Income Tax (Appeals) was dismissed. It is also alleged that the A.O. has made the addition without invoking the provisions of section 145(3) of the I.T. Act. It is also submitted that the production of tobacco is an excisable item under the supervision of Central Excise Department. The appellant has relied on the decision of Hon'ble Allahabad High Court in 320 ITR 116 in the case of C.I.T. Vs. Mascot (India) Tools & Forges Pvt. Ltd. The provisions of Section 153A are not meant for repetition of proceedings and to have different view on the concluded matters. To support the arguments, the appellant has relied on the decision of the Hon'ble Supreme Court in the matter of C.I.T. Vs. Flexi Pack in SLP (C) No.18112 of 2009 reported in 319 ITR Page 3. The Hon'ble Court held that there was no question of going into estimation without rejection of books of account, properly maintained in the regular course. Another argument put forward by the appellant is that the search and seizure action did not result in the discovery of any suppressed production lying in the premises, so no adverse finding could be given on the production of the finished products. The department could not find any hidden place to store the suppressed production. There is no allegation about exit of suppressed production by the Central Excise, the duty is leviable at the point of exit. The process of manufacturing was explained to the A.O. but the A.O. did not visit the manufacturing process. Relying on the decision of Allahabad High Court in the case of Mascot (India) Tools & Forges, the appellant has argued that no addition on account of suppression of sale can be made without any valid basis when the goods were excisable and correctness of the declared sales is supported by regular books of account, duly audited by the auditors. No G.P. rate addition can be made unless some specific mistakes in the accounts are pointed out. The A.O. has not considered the evaporation / 81 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 wastage of percentage in arriving at her working of suppressed production. The appellant has also referred to one survey conducted by the excise department in the year 1991 for verification of stock in which they alleged that there was excess stock of tobacco found as a result of pilot experiment. They reached the conclusion that the increase in the weight on account of addition of chemicals, perfumes, menthol etc. was purely temporary and the weight of the coloured leaves come almost to the same level after evaporation. Loss of weight on the use of other materials for example perfumes, chemicals, silver and silver vark, kimam and masala etc. is on account of evaporation and processing. The surrender of Rs.50 lakh was only with the intention to purchase peace of mind and to avoid litigation. But the surrender did not represent the acceptance of suppression of production. The yield during the various stages, manufacturing process cannot be uniform as the raw materials are largely agricultural produce or vegetable products, some of which are hygroscopic in nature and some are volatile. There is no fixed rate of ratio or parameter for the consumption of various raw materials in the manufacturing process of the tobacco. The yield always varies on account of quality of raw materials used. The consumption and product cannot be matched at 1 to 1 ratio but the A.O. failed to understand this simple fact. The appellant has given the example of preparation of a cup of tea wherein various ingredients such as water, milk, sugar, tea leaf are mixed and heated, after getting the essence and colour of the tea, leaf and other ingredients used are thrown out.
It is argued that the A.O. has not held that there was any suppression of sale or purchases.
On going through the discussion of the facts, specially on the maintenance of stock register, one thing is clear that the appellant has not maintained the production account reflecting stage wise consumption and yield. When the entire process of manufacturing is opaque, it is very difficult, rather impossible, for an Assessing Officer to accept the disclosed results. The maintenance of production register is very vital aspect when the assessment is related to yield in the manufacturing process. As per the provisions of section 44AA of the I.T. Act, the persons refer to in the said provisions, shall keep and maintain such books of account and other documents as may enable the A.O. to compute his total income in accordance with the 82 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 provisions of this Act. The purpose of maintaining books of account and accounting standards related to the maintenance are that the account should be transparent, understandable, relevant for the purpose for which they are made and be reliable. In certain types of businesses, the absence of stock register or a quantitatively or qualitatively tallied manufacturing account can be a material ground for rejection of books [Namasivayan Chettiar (SN) Vs. C.I.T. (1960) 38 ITR 579 (SC), C.I.T. Vs. British Paints (India) Ltd. (1991) 188 ITR 44 (SC), Bimal Kumar Anant Kumar Vs. C.I.T. (2007) 288 ITR 278 (All.)].
In timber business, timber is sold with reference to length, girth and weight of timber, a stock account merely with reference to number of logs cannot be accepted as stock account capable of verification [C.I.T. Vs. Saatal Kattha & Chemical Pvt. Ltd. (2008) 296 ITR 197 (MP), Kachwala Gems Vs. JCIT (2007) 288 ITR 10 (SC)]. It is clear that when the business processes are complex, it is imperative that its relevant details could be ascertained at any stage. Where there is no record of details regarding wastage, shortage, shrinkage and like, the rejection of books has been upheld [Orissa Fisheries Development Corpn. Ltd. Vs. CIT (1978) 111 ITR 923 (Ori.)]. The valuation of work in progress at the end of the year is of great importance in certain cases. In the audit report, the assessee has not shown quantitative details of work in progress; the same was produced only during the assessment proceedings. The production account is a necessary account for manufacturing business, so much so that in the case of a shoe manufacturer, where production register and information as to consumption of raw materials in the form of an issue register are not maintained, besides other imperfection in wages account, rejection of accounts and estimate of income, which was held, cannot be avoided. The said decision was given by the Hon'ble Allahabad High Court in the case of Omax Shoe Factory Vs. The Commissioner of Income Tax reported in 281 ITR 288 (All). In the instant case the A.O. found that the assessee did not maintain any production register, day to day consumption of raw material was also found not properly maintained, the A.O. rejected the books of account. The Hon'ble High Court held that:
"7. Admittedly, assessee is the manufacturer and exporter of leather shoes, therefore, it was necessary to maintain production register and 83 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 day to day record of production and consumption register of raw material. Unless the consumption register for raw material and the production register relating to the manufactured goods are maintained, the production can not be verified.
8. Apart from non-maintenance of production register and the raw- material consumption register, Assessing-Authority also found that proper accounts relating to the payment of wages have also not been maintained. In our view, the aforesaid reasons are sufficient to invoke the proviso to Section 145(1) of the Act.
9. In the case of Raza Textiles Ltd. v. Commissioner of Income Tax reported in 86 ITR page 673, the Division Bench of this Court up-held the rejection of account in the absence of production register. The Division Bench held as follows:-
"In the absence of a register indicating the supply of yarn issued from the spinning department to the weaving department it is plain that there is no possibility of co-relating the supply of yarn and the production of cloth. Therefore, there was no way of checking whether the production of cloth shown in the books represents the true figure of production. The system of records adopted by the assessee is inadequate and does not afford an effective method of determining the true income, profits and gains so far as the production of cloth is concerned."
10. In the case of Bharat Milk Products v. Commissioner of Income Tax reported in 128 ITR page 682, the Division Bench of this Court in the absence of day to day manufacturing or production account, justified the applicability of the proviso to Section 145(1) of the Act. The Division Bench of this Court observed as follows:-
"The proviso further says that even if the accounts are correct and complete but the method employed is such that the income cannot properly be deduced therefrom, the ITO can compute the income upon such basis and in such manner as he may determine. In the instant case it has been found as a fact and it was not disputed before us that the assessee did not maintain any day-to-day manufacturing and production account and the question is whether on account of this defect the accounts of the assessee could be rejected. In our opinion, the answer to this question has to be in the affirmative."84 ITA Nos.358 & 374 to 378/Alld./2014
ITA Nos. 06 to 11/Alld./2014
11. In the case of Arya Confectionary Works v. Commissioner of Income Tax reported in 143 ITR page 184, the Madhya Pradesh High Court also held applicability of the proviso to Section 145(1) of the Act in the absence of non-maintenance of day-to-day record of consumption of the raw-materials and production of finished goods. It has been further held that mere maintenance of quantitative details did not establish the fact that the assessee had maintained a day-to- day stock account of raw-material and finished goods. The Court up held the view of Tribunal that the income could not be properly deduced from the accounts maintained by the assessee, therefore, application of proviso to Section 145(1) of the Act has been held justified.
12. In the case of Awadhesh Pratap Singh Abdul Rehman and brothers v. Commissioner of Income Tax reported in 210 ITR page 406, the Division Bench of this Court has up-held the rejection of books of account on the ground that neither the stock register was maintained nor sales were found verifiable in the absence of cash memo.
13. In the case of Bastiram Narayan das Maheshwari v.
Commissioner of Income Tax reported in 210 ITR page 438, the Division Bench of Bombay High Court has up held the rejection of books of account and the application of the proviso to Section 145 in the absence of day-to-day manufacturing account of Bidi including quantity of Bidi manufactured daily, figures of Bidi leaves consumed per day in the factory.
14. In the case of Commissioner of Sales Tax, U.P. Lucknow v. Girja Shanker Awanish Kumar reported in Supreme Court (1996) 11 SCC page 648, books of account of the dealer was rejected for non maintenance of manufacturing account as required under Section 12(2) of the U.P. Sales Tax Act. Section 12(2) requires to maintain stock register in respect of raw-materials as well as products obtained at every stage of production. Apex Court held that if a stock book as contemplated under Section 12(2) of U.P. Sales Tax Act, is not maintained, it leads to the conclusion that the account books are not reliable or that particulars are not properly verifiable. Though, the 85 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 judgment is under the U.P. Sales Tax Act but is relevant in the context of the present case.
15. The decision cited by the learned counsel for the assessee reported in 26 ITR page 159, 38 ITR 152 and 83 ITR 484 are not applicable to the present case. They were the cases of traders and not the manufacturer. It may be mentioned that there is nothing on record to show that in the previous year, assessee has maintained books of account in the similar fashion and its books of account have been accepted.
16. In view of foregoing discussions, question referred above, is answered in affirmative in favour of revenue and against the assessee. There shall be no order as to cost."
Admittedly, the appellant whose case is before me, is the manufacturer of Zarda and it has not maintained production register on day to day basis to reflect the consumption and yield at any given stage. In accordance with the decision of Hon'ble Allahabad High Court in the case of Bharat Milk Products vs. Commissioner of Income Tax reported in 128 ITR page 682, the absence of day to day manufacturing or production account, justified the applicability of proviso to Section 145(1) of the Act. Even if the accounts are correct and complete but the method employed is such that the income cannot properly deduced, the ITO can compute the income upon such basis and in such manner as he may determine. The decision of Hon'ble Supreme Court in the case of Commissioner of Sales Tax, U.P. Lucknow vs. Girja Shanker Awanish Kumar (1996) 11 SCC page 648, referred to in the above cited decision is very important to the issue at hand. In the cited case, the books of account of the dealer were rejected for non maintenance of manufacturing account as required u/s 12(2) of the U.P. Sales Tax Act. The said section of Sales Tax Act requires to maintain stock register in respect of raw materials as well as products obtained at every stage of production. Apex Court held that if the stock book as contemplated u/s 12(2) of U.P. Sales Tax Act, is not maintained, it leads to the conclusion that the account books are not reliable. Though the judgment is under the U.P. Sales Tax Act, it is relevant in the context of the present case.
The A.O. has gone at length dealing with the issue of purchase of sandal wood oil and has established that certain purchases were 86 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 not genuine. On the facts that the appellant has not maintained production register to ascertain stage wise consumption and yield on day to day basis coupled with the fact that certain purchases of sandal wood oil are not found to be genuine, it can be held that the books of account of the assessee are not reliable which can give complete and true picture to deduce the profits therefrom. Though the A.O. has not expressely mentioned invoking the provisions of Section 145(3) of the I.T. Act, the whole discussion is focused on rejecting the books of account u/s 145(3) of the I.T. Act. To remove any doubt, I reject the books of account of the assessee u/s 145(3) of the I.T. Act by virtue of the powers of C.I.T.(A) u/s 251 of the I.T. Act.
Before proceeding further, it is important to discuss the decision of the Hon'ble Supreme Court in the case of C.I.T. vs. British Paints (India) Ltd. (1991) 188 ITR 44, the Hon'ble Court held that it is not only the right but the duty of the A.O. to consider whether or not the books disclose true state of account and the correct income can be deduced therefrom. It is incorrect to say that the officer is bound to accept the system of accounting regularly employed by the assessee, the correctness of which had not been questioned in the past. There is no estopel in these matters and the officer is not bound by the method followed in the earlier years. So the arguments of the assessee that when its books of account have been accepted in the past cannot be disturbed in future when the same system of accounting is maintained, deserves to be rejected. The appellate authority can also reject the books of account as per the decision of Hon'ble Supreme Court in the case of C.I.T. vs. McMillan & Co. (1958) 33 ITR 182.
Now, let us examine the fallout and consequences of rejection of books of account. The rejection of the book results is a step-in-aid to the officer to compute the correct income on some reasonable and proper basis. As pointed out in C.I.T. Vs. Pilliah & Sons (Ky.), the estimation of turnover or profit rate or disallowance of claims of expenditure, shortage, wastage should be based on some material and cannot be arbitrary. As held in Shamsher Ali Abdul Hussain vs. C.I.T. (1945) 13 ITR 240 (Nag.), surrounding circumstances may be taken into account in estimating the income where the books are unreliable. The A.O. has computed the production of Zarda not only by taking the weight of all the raw materials including Kimam, Spices, Menthol, Perfumes, Glycerin, Silver and Silver Vark etc., the same 87 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 weight in the finished products, she had also increased the production by 6% on a wrong interpretation referring to the submission of the appellant. There is no dispute as regards the weight of raw tobacco in the finished product. There may rather be some weight gain or weight loss depending upon the moisture content. But as regards the ratio of weight of other materials mentioned above in the finished product, the same deserves better understanding and consideration. In this respect even the A.O. has considered the manufacturing process of Zarda. In the submission before the A.O. during remand proceedings, the appellant has explained the manufacturing process by enclosing photographs of each stage from page 76 to 104. Here I will consider those processes which may result in wastage and residuals. In the process of manufacturing of Kimam, it is explained that, whole leaf tobacco is put in big containers for boiling along with the water. The Ark i.e. raw kimam is taken out from the containers. The residuals / waste become useless and are thrown away. The photographs of residuals / waste are given on page 79 of the paper book 3. The spices are dried under the sun, those are baked and grinded. This process also results in certain weight loss as the skin of the spices is removed before grinding. The tobacco, mixed with the spices and raw kimam and glycerin is spread on the roof for drying, obviously to remove the water content. Then the appellant has explained the process of making aroma. In this process, the spices are put in boiling water, the same is distilled in base oil i.e. perfumery substances. The process obviously creates the residuals of spices because at this stage the spices are used to make the perfume only. The appellant has enclosed a photograph given on page 98 of the paper book depicting the residuals of used spices to make the perfume. The coloured tobacco mixed with chemicals, perfumes and menthol is spread for drying. There is again loss of weight in the form of water content. The description of the above process clearly indicates that the ratio of production vis-à-vis the consumption of raw materials cannot be one to one. There has to be generation of residuals and the process of evaporation.
Now I would analyze the method of computation of the suppression of production as dealt with by the A.O. The A.O. has analyzed the quantitative details of raw materials and finished goods given in the audit report in column 28 of 3CD report. Though the A.O. has attempted to analyze the consumption of raw material and semi 88 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 finished products for getting the finished products, in the process, the A.O. has also carried out some infructuous exercises.
Apart from taking the quantitative details from audit report, the A.O. has also obtained the quantitative details of work in progress which is not part of details in the 3CD report. To this the appellant invited my attention to column 28 which requires the quantitative details of the principal items and byproducts. Therefore, the appellant has not shown the figures of work in progress in the said audit report. The work in progress has been shown only in the profit & loss account in terms of value. During the course of assessment proceedings the A.O. asked the assessee to produce the details of work in progress in terms of quantity also. Accordingly, the assessee furnished the quantitative details of work in progress and the same was used by the A.O. for computing the percentage of yield. The A.O. has given the details of raw material used on page 16 of the Assessment Order as under:
Tobacco leaf : 749922.950 Kg.
Other materials : 231583.996 Kg.
Opening WIP : 88819.550 Kg.
Total consumption 1070326.496 Kg.
Total %age of consumption = 120.23.
The yield with reference to above use of raw material is as under:-
Tobacco leaf consumed - 749922.950
Add: Opening WIP - 88819.550
838742.500
Add: Other materials remaining after
Consumption as per assessee 51451.100
Final products as shown by 890193.600
assessee
Total %age of yield = 83.17.
Here too the arithmetic calculations as made by the A.O. are important to understand. First, the consumption has been shown 120.23%. This is actually the figure of total consumption with reference to yield of finished product i.e. as under:-
89 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014 Total Consumption : 10,70,326.496 Kg.
Weight of finished product : 8,90,193.600 Kg. 10,70,326.496 x 100 8,90,193.600 = 120.23%
The yield has been calculated at 83.17% by the A.O. The same can be understood as under:-
8,90,193.600 x 100 10,70,326.496 = 83.17% The figures what they represent, are explained.
As regards the percentage of consumption with reference to yield, the A.O. has remarked that the percentage of consumption with reference to raw tobacco leaf used during the year under consideration is 120.23% whereas in column 32 of the audit report the same has been shown at 77.34%. During the appellate proceeding before me the appellant pointed out that the A.O. misunderstood the figures of material consumed vis-à-vis finished goods produced which is in terms of value in column 32 of the audit report. The A.O. misunderstood it for in terms of quantity. The appellant also explained before me that earlier auditor had given the figures of sales in place of the value of finished goods produced, in the audit reports for Assessment Years 2004-05, 2005-06, 2006-07 and 2007-08. Later these figures have been corrected and the present auditor has correctly taken the figures of finished goods produced only. So the appellant has tried to emphasize that the percentage of consumption of material with reference to finished goods given in the audit reports for above financial years is incorrect. The A.O. has quoted the reply of the assessee in this regard on Page 20 of the assessment order. Sri Krishna Chandra Kesarwani, the partner of the firm stated that the ratio is not that of quantity, but that of value of consumption of material to sales in terms of rupee. Secondly, the percentage has been shown against the consumption of raw tobacco only.
Now it is important to understand the percentage of yield as shown by the assessee and understood by the A.O. On page 17 of the assessment order the A.O. has shown percentage of yield for financial 90 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 years 2003-04 to 2009-10. As far as F.Y. 2003-04 is concerned, the same has been shown at 106.13%. In a reply to a question on the ratio of ingredients to produce 1 Kg of finished product, the partner of the firm Sri Kailash Chandra Kesarwani had stated that the ratio is 'trade secret' and he would not reveal the same. The A.O. also relied on the surrender of Rs.50 Lakh for not disclosing the ratio of consumption of raw material. During the course of proceedings before me, the appellant emphasized that the A.O. misunderstood the average percentage of yield computed at 105.66%. The A.O. was of the view that if 100 Kg of items are consumed, the yield would be 105.66 Kg., whereas the appellant argued before me that if 100 Kg raw tobacco (only) is consumed the yield would be 105.66 Kg. But raw tobacco is not the only raw material for the end product Zarda.
For manufacturing Zarda, other materials like chemicals and perfumes, masala, kimam, silver and silver vark are also consumed. So if 100Kg of raw tobacco and 20.23 Kg other materials are consumed, the weight of the finished product would be 105.66 Kg. In other words, on the consumption of 120.23 Kg raw material the yield would be 105.66 Kg. But it is pleaded that the A.O. misunderstood the ratio of yield taking that if the weight of all the consumables is 100 Kg the yield would be 105.66 Kg. I notice that this finding of the A.O. is incorrect and invalid with reference to the facts analyzed by her. Therefore, it is clear that the yield of 105.66% is with reference to consumption of 120.23% of raw materials. This fact is discussed by the A.O. on page 16 of the assessment order. The ratio of production shown by the appellant is with reference to the consumption of raw tobacco only. Here the appellant has not included the consumption of other materials. In a submission before the A.O., i.e. part of the paper book before me, the assessee had produced before the A.O. the chart of adjusted consumption and production. In respect of F.Y. 2003-04 the adjusted consumption is shown as 8,38,742.500 Kg. The weight of finished goods produced has been shown as 8,90,193.600 Kg. The appellant has pleaded before me that the percentage of production as shown by it should be understood with reference to these figures only wherein the consumption of raw tobacco was 9,19,194 kg less work in progress at 80,451,500 Kg. This chart is on page 359 of the paper book submitted before me. Clearly the consumption of raw materials shown in this table does not include the consumption of other materials mentioned above.
91 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014 The most important issue to be decided is the yield in the form of end product i.e. Zarda. As regards the manufacturing process and the use of raw materials, the assessee explained the same before the A.O. as well as before me. On page 16 of the assessment order, the A.O. has worked out total consumption during the year under consideration which was 10,70,326.496 Kg. This gives the yield of 8,90,193.600 Kg. There is no dispute on the weight of tobacco leaf and opening work in progress in the end product, as shown in the chart prepared by the A.O. and also accepted by the assessee. The only difference and bone of contention is with regard to other materials which remained 51,451.100 Kg in the finished goods while it was used 2,31,583.996 Kg as raw material. The A.O. analyzed the proportion of other materials in the finished product and held that on the use of other materials, the weight in the finished product remains only at 22%, meaning thereby approximately 78% gets evaporated. To explain the loss of weight, the appellant has submitted before me that:-
"The major loss is in the use of Whole leaf, Masala and perfumery and chemicals items as detailed on page 222 of the paper book and also explained in Para (i) and (ii) of page 225, Para (v) of page 226 and Para (vii) of Page 227 of paper book in A.Y.2004-2005, the explanation may please be considered.
That raw tobacco (Whole Leaf) is boiled in water to take out its ark known as "Raw Kimam". The residual water i.e. tobacco becomes useless and thrown away. Various spices / Masala are baked, grinded and sieved to convert them into a powder form as well as aromatic spices/Masala are boiled in water and the aroma is distilled in base oil i.e. perfumery substance which is repeated till the period to get the required strength of the perfume. These spices / Masala are also mostly vegetable products and hygroscopic in nature and residual waste of such aromatic spices / Masala becomes useless and thrown away. Likewise the coloured tobacco from the second stage is mixed with compound of chemicals, perfumery substances and menthol and is stored in drums for 2-3 days for absorption of adour flavor and taste and then it is spread on plastic sheets for drying. Further likewise the compound of chemicals perfumery items and menthol are 92 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 volative in nature and evaporate in the atmosphere. All this facts in details brought on record by the assessee."
The Income Tax Act and the Courts attach with the A.O. a heavy and onerous responsibility to compute correct income of the assessee when the books of a/c are rejected u/s 145(3) or proviso to Section 145 of the Act. This also requires the A.O. to evaluate not only the facts available on the records of the assessee but also the surrounding facts to arrive at a decision. As discussed in the foregoing paras, the assessee has not maintained stage wise production account to verify the wastage and yield. One has only the volume of raw materials and end product. The intermediary processes are not transparent, viz., how much kimam or perfume is produced on consumption of required raw materials. This means, the production of zarda shown by the assessee cannot be verified. This situation calls for judicious approach by the tax authorities. As discussed above, the A.O. failed to consider two facts important to evaluate the percentage of yield, one, that use of spices and other ingredients, mainly to prepare the flavor & perfume, cannot give yield of equal weight, meaning thereby the residuals & waste are bound to be there, secondly, the yield of 106% was not with reference to the weight of all the materials, it was only with reference to raw tobacco only. Therefore, the working of suppression of production by the A.O. cannot be held to be justified. Under these circumstances, the best practice, to a certain extent universally acceptable is comparability, i.e. to judge the yield in the comparable cases of manufacturing of flavoured tobacco. The assessee has not come forward with any such comparable cases in this line of business. Therefore, I undertook this exercise and collected the audited reports of the two concerns. It may be noted that such figures are not available in the public domain or public data bases. It may also be added that these concerns are also engaged in the manufacturing of the same product. Though, the details of their manufacturing process are not available, it is presumed that they also follow a process more or less same as the appellant uses for the manufacturing. Therefore vide this office letter F.No. CIT(A)/Alld./KZB/2013-14 dated 05.09.2013, the appellant was required to furnish its comments on the contents of my letter and on the production data taken from the respective audit reports i.e. 3CD, column no. 32 :-
93 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014 "To, Kesarwani Zarda Bhandar, Sahson, Allahabad Sub: Ratio between production of finished goods with material consumed.
Ref: Assessment Years 2004-05 to 2010-11 - reg. -
Please refer to the above.
2.During the course of hearings, you have challenged the orders of respective assessment years of the A.O. computing the suppressed production. But it has also been noticed that you have not maintained day to day production statements to verify consumption of raw material and yield at every stage. Therefore, I have obtained the copies of some audit reports in the following cases which are also engaged in the business of manufacturing and sale of Zarda. Though, the volume of their business may not be comparable, the manufacturing process may certainly be comparable to a certain extent. These audit reports are for F.Y. 2007-08 in respect of Kishore Zarda Factory, D.51/199, Surajkund, Varanasi (U.P.) and for F.Y. 2011-12 in respect of Sugandhi Snuff King, A-15 Block B-1 Extn., Mohan Co-op. Ind. Area, Delhi Mathura Road, New Delhi - 110044. The reference to the audit reports of different financial years in the above cases is also not material as the manufacturing process remains almost same. The ratio of material consumed to finished goods produced in the above cases as per Column 32(d) of 3CD reports is as under:-
i ) Kishore Zarda Factory 92.29%
ii) Sugandhi Snuff King 90.37%
You may furnish your comments on the comparability of the yield keeping in view of the above cases. The copy of the audit reports is enclosed herewith. Your comments, if any, may be furnished within a week of receipt of this letter."
On the above, the appellant has submitted as under:
"With reference to above it is submitted that alongwith the notice dated 05-09-2013 photo copy of two audit reports in the case of M/s Kishor 94 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 Zarda Factory of Varanasi and M/s Sugandhi Snuff King of Delhi were provided to the assessee and required assessee's comment on the basis of these two comparable cases. In this connection it is submitted that simply on the basis of audit report comparison is too difficult because the audit report do not speak about their manufacturing process where as the assessee elaborately explained/demonstrated the manufacturing process in details in the course of remand proceeding as well as before your goodself. In the remand proceeding the raw materials which are used in manufacturing of zarda were brought to the knowledge of assessing officer as well as raw material also produced before your goodself and photo of manufacturing process of different stages were also brought on records. Thus for comparison one will have to bound to consider the ingredients used for manufacturing of zarda as well as processing of manufacturing of zarda but such thing are absent in the audit report considered as comparable cases. In the course of hearing a voluminous paper books was filed in respect of assessment years 2004-05 to 2010-11 and in the paper book entire stage wise manufacturing process were discussed in detail, various charts were filed therefore the undersigned person requesting your goodself to give weightage to the past record of the assessee past history where different authorities of the department examined our manufacturing process, considered our method of accounting, considered the method and maintenance of books of account, examined our central excise record and then accepted our production as well as trading result year after year including the assessment year 2004-05, 2005-06 and 2006-07. In this case a search operation was conducted on 27-08-2009 and in the course of search operation no incriminating material, no loose paper, no excess stock was found by the search party but simply because a search was conducted therefore as per regular practice of the department book result was disturbed in respect of block period for assessment year 2004-05 (first year of Block) to 2010-11 when in the assessment year 2004-05 after thorough scrutiny book result was accepted by passing an order u/s 143(3) of the income tax act and in A.Y. 2005-2006 and 2006-2007 u/s 143(1) thus these assessment were concluded on the date of search i.e. 27.08.2009.
That in this connection it is very necessary to mention here that in assessment year 1999-2000 a huge addition was made on account of suppressed production but considering the nature of business and method of maintaining books of accounts addition were deleted in first appeal and then department filed an appeal before Hon'ble ITAT where 95 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 the departmental appeal was dismissed as a result book results were accepted in toto. Sir, the assessee firm came into existence in the year 1967 and the founder of the company was Late Sri Bhola Nath Kesarwani who prepared a formula to make zarda and on the same line year after year production work is going on and the same was accepted by the department. The assessee is also registered with the central excise authorities and paying huge excise duty year after year on sale of zarda at the point of exit of goods from the manufacturing premises. The excise authorities also satisfied with our method of accounting. In this way our product/production is under the strict supervision of excise authority as a result excise authority issued recognition certificate from time to time which are also placed on record. These facts required consideration at your end.
That, Sir the assessee's industry is not a organized industry in the eyes of law and the entire manufacturing work is handmade work as there is no involvement of machinery in the manufacturing process of zarda. Therefore on different stages losses are liable to be incurred whereas certain losses are visible and as well as certain losses are invisible. Such losses occurred in the course of manufacturing process of zarda. Invisible losses arises because of drying and evaporation wgere as visible losses occurred on account of waste material obtained while processing of kimam, grinding of spices and manufacturing of perfumes. The parties in question (Comparable case) are small and local manufacturer. Their process are different where as we did all various manufacturing work in house such as colouring of tobacco, manufacturing of kimam with whole leaf, grinding of spices, manufacturing of perfume. We manufacture different varities of zarda. The important facts for consideration is that even the taste of finished zarda of assessee's firm and comparable two cases are different which shows that ingredients and formula are not common, so the question of comparison does not arises. We used various types of ingredients for manufacturing of zarda but in the two comparable cases what types of ingredients they used are absent therefore question of comparison with two cases does not arise. Thus in nut shell the entire approach of the assessing officer is nothing but mislead and to ignore the norms of judicial proceeding and commercial principle with the view to determine abnormal income simply to justify search and proceeded hence the undersigned person pray that the books result may please be accepted.96 ITA Nos.358 & 374 to 378/Alld./2014
ITA Nos. 06 to 11/Alld./2014 Under these circumstances the assessee pray that the two audit report which was enclosed alongwith the letter dated 05-09-2013 liable to be ignored/discarded in all fairness and justice and basis of the same kindly be not adopted for deciding our appeals."
I have examined the submission of the appellant refuting the proposition of comparability and find that it lacks necessary substance and reasonable contents. The appellant states that the audit reports of the comparable cases do not speak of the manufacturing process. It is true that the audit reports do not speak of the manufacturing process but here we are concerned about the percentage of yield in the similar manufacturing activity. The appellant has not given any comparable cases to claim them having similar manufacturing process. The appellant has not satisfied me with any cogent reasoning that the cited cases cannot be comparable, as they are also engaged in the manufacturing of flavoured tobacco. In the light of the decision of Hon'ble Supreme Court in the case of British Paints (India) Ltd., the assessing authority is not bound to accept the system of accounting, regularly employed by the assessee, the correctness of which had not been questioned in the past. When the manufacturing process of the assessee not found fully transparent and when the production account does not give determinable picture of production, the book results must be rejected. Another argument by the appellant is that no incriminating material or excess stock was found during the course of search also deserves to be rejected as the A.O. has adversely commented on the stock found during the search, in the respective assessment orders. It is not necessary that direct incriminating evidences only will prove the suppression of production. Indirect and surrounding factors like investments in valuable items, real estate, bogus cash credits, huge expenses on households also prove generation of unaccounted income. The comparison between assessment based on survey relating to A.Y. 1999-2000 (before search & seizure action ) and present assessments is also not fair as the rejection of books of a/c owing to opaque production process and absence of true and correct accounts of yield at each stage is a dominant factor in the cases under consideration. The arguments like past history of assessment, reputation of the firm are also weak in the face of hard facts discussed. As regards the inspection of accounts & audit for/by excise authorities, that carries weight to a limited extent 97 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 only as it is not clear as to what view the excise authorities have taken with respect to the waste when entire facts and figures of stage wise production are not available even before them. I do admit that there is loss of weight in form of evaporation & residuals in the process of manufacturing. I also admit that the cited cases of comparison may or may not have same or similar process of manufacturing. They may not be manufacturing the perfume (major source of loss of weight), they may be purchasing the perfumery items from the market. But the yield shown by the cited cases does give certain indication of percentage of production in this line of business. Therefore, I hold that the cited cases may be considered as comparable cases as far as the percentage of yield in the manufacturing of zarda is concerned. The average of yield in the cited cases is 91.33% (92.29 + 90.37)/2. Considering the facts (i) There may be slight variation in the percentage of yield depending on the factors of time i.e. from year to year (ii) The use of perfume by direct purchase or by manufacturing in own factory may affect the waste (iii) The processes adopted may vary resulting in variation in production (iv) The quality of raw materials used may also affect the yield and (v) The process of manufacturing of Kimam or its purchase from the market may be a distinguishable feature, especially when the quantity is substantial, I take the percentage of yield @ 90% in the case of the appellant, in all the assessment years under consideration, to take in to account and factor in numerous factors responsible for variation in the production and to average out them, of the total quantity of raw materials consumed. The working of production on the above lines, the production in accordance with this working (in terms of quantity), the suppressed production and the sale value of suppressed production (on the average sale price per kg.) are given in the table form for A.Ys. 2004-05 to 2010-11 as under:
Table - A A.Y. Consumption of 90 % of Quantity Suppressed Average Total sale value Raw Material Coloumn No Manufactured Production Sale Price of Suppressed (Raw Tobacco 2 as per books (3-4) per Kgs Production (In and Other (in Kgs) Rs) Materials) (in (Col No 5*6) Kgs) 1 2 3 4 5 6 7 2004-2005 1070326.496 963293.846 890193.600 73100.246 368.030 26903083.68 2005-2006 996506.132 896855.519 843932.800 52922.719 380.290 20125980.73 2006-2007 951155.518 856039.966 799339.000 56700.966 394.730 22381572.39 98 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 2007-2008 959679.193 863711.274 816464.000 47247.274 382.930 18092398.52 2008-2009 1109204.482 998284.034 929478.000 68806.034 365.850 25172687.47 2009-2010 1007166.032 906449.429 843983.000 62466.429 411.640 25713680.75 2010-2011 945101.031 850590.928 799434.600 51156.328 454.950 23273571.38 TOTAL 161662974.92 It may be noted that the A.O. had worked out the value of suppressed production on the average cost price. But that was not correct as concealed production would result in sale to fetch unaccounted income. So while correcting the approach of the A.O., assessment year wise income sustained and relief are also worked out as under:
Table - B Assessment Year The value of cost of The sale value of suppressed Relief Allowed suppressed production production as per column worked out by the A.O. no. 7 of Table - A 2004-05 6,95,66,165 2,69,03,083.68 4,26,63,081.32 2005-06 6,24,83,585 2,01,25,980.73 4,23,57,604.27 2006-07 6,56,02,962 2,23,81,572.39 4,32,21,389.61 2007-08 6,26,17,961 1,80,92,398.52 4,45,25,562.48 2008-09 7,56,62,496 2,51,72,687.47 5,04,89,808.53 2009-10 7,77,26,717 2,57,13,680.75 5,20,13,036.25 2010-11 7,76,72,166 2,32,73,571.38 5,43,98,594.62 In accordance with the above, the addition of Rs. 2,69,03,083.68/- on this issue is confirmed. The appellant would get the relief of Rs. 4,26,63,081.32/- for the F.Y. 2003-04, relevant for A.Y. 2004-05."99 ITA Nos.358 & 374 to 378/Alld./2014
ITA Nos. 06 to 11/Alld./2014
13. We have considered the rival submissions and the material on record. The assessee challenged addition of Rs.2,69,03,083/- whereas department challenged deletion of addition of Rs.4,26,63,081/-.
14. The ld. counsel for the assessee reiterated the submissions made before the authorities below. He has submitted that in earlier year, lesser yield of the production has been accepted by the Revenue Authorities. In comparable cases cited by the ld. CIT(A), there are distinguishable features, which are noted at PB 235A of the paper book and even the ld. CIT(A) considered that these cases may not be comparable on facts because the declared turnover of the assessee is more than the turnover declared in the comparable cases. In assessment year 1999-2000 similar addition was made by the AO which has been deleted by the ld. CIT(A) and confirmed by the Tribunal. Copies of the orders are filed in paper book at pages 345, 356 and 375. In assessment years 2002-03 and 2003-04, the AO in assessment orders u/s. 143(3) accepted the percentage of yield at 81.69% and 83.62%. The copies of the orders are filed at pages 396 & 392 of the paper book.
The AO did not reject the books of account and no specific defects have been pointed out in maintenance of books of account. The accounts are maintained on the same pattern. The Excise and Sales Tax Authorities accepted the manufactured goods and sales, which are binding on the Income-tax Authorities. Tobacco leaves 100 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 and raw material are agricultural produce and it depends upon the quality of the leaves. The AO made the addition on account of sales, but the entire sales could not be profit of the assessee. The details of each material consumption were explained in the audit report. Copies of the same are filed at pages 206 to 235 of the paper book. On the other hand, the ld. DR relied upon the order of the AO and submitted that the ld. CIT(A) correctly rejected the books of account u/s. 145(3).
Even if books are not rejected by the AO, the assessee did not maintain day-to-day record of the production at each stage and even in the appraisal report, the cost of other material etc. have been mentioned. The orders of the Sales Tax Authorities and Excise Authorities are not relevant. The assessee suppressed the sales and rule of consistency should not be applied when facts have been brought on record against the assessee.
15. We have bestowed our careful consideration. In assessment year 2004-05, the AO made addition of Rs.6,95,66,165/- by alleging suppression of production.
The assessee declared percentage of yield of total raw material to finished goods produced at 83.17%. The AO took it at 105.66% and the ld. CIT(A) restricted the same to 90%. In this way, the ld. CIT(A) reduced the addition and granted relief to the assessee in a sum of Rs.4,26,63,081/- on which the Revenue is in appeal.
However, the ld. CIT(A) confirmed the addition to Rs.2,69,03,083/- on which the 101 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 assessee is in appeal. The basic reason for making the addition was that the details of consumption at various stages have not been furnished. Therefore, the process is not open to verification and further the ratio of consumption of different items of raw material has not been explained on the pretext of secrecy. The assessee, however, explained that there is no material recovered against the assessee during the course of search and no specific defects have been pointed out in maintenance of books of account and in past also on the similar pattern the books of account have been maintained and lesser yield of production has been accepted by the Revenue Department. Even in assessment year 1999-2000 on identical facts, similar addition was made and it was a case of survey u/s. 133A and addition have been deleted. The ld. CIT(A) was of the view that production account is necessary for manufacturing business and the ld. CIT(A) rejected the books of account u/s.
145(3) by using the powers u/s. 251 of the IT Act even if the books were not rejected by the AO. The ld. CIT(A) found that the AO has analysed quantitative details of raw materials and finished goods as were given in the audit report. The ld. CIT(A) also found that though the AO has attempted to analyze the consumption of raw material and semi-finished products for getting the finished products, in the process, the AO has also carried out some infructuous exercise.
The AO called for the details of work-in-progress in terms of quantity also which were furnished and same was used by AO for computing the percentage of yield.
102 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014 Thus, the assessee pleaded before the ld. CIT(A) that the AO misunderstood the figures of raw material consumed, vis a vis, finished goods produced, which is in terms of value in the audit report. The AO misunderstood it in terms of quantity.
The assessee explained before the ld. CIT(A) that earlier, the auditor has given the figures of sales in place of value of the finished goods produced in the audit report.
Later, these figures have been corrected and present auditor has correctly taken the figures of finished good produced only. So the assessee emphasized that the percentage of consumption of material with reference to finished goods given in the audit reports for these financial years is incorrect. The AO also relied upon the surrender of Rs.50,00,000/- made by the partner for the purpose of addition. The assessee pleaded that the AO misunderstood the ratio of yield taking that if the weight of all the consumables is 100 kg, the yield would be 105.66 kg. The ld.
CIT(A) on examination of the record found that the findings of the AO are incorrect and invalid with reference to the facts analysed by her. The ld. CIT(A) on examination of the record found that the yield of 105.66% is with reference to the consumption of 120.23 of raw materials. The ratio of production shown by the assessee is with reference to the consumption of raw tobacco only. The assessee has not included the consumption of other raw materials. Thus, the finding of fact recorded by the AO against the assessee was found to be incorrect. The ld. CIT(A) thereafter proceeded to decide the yield in the form of end product, i.e. Zarda. The 103 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 submissions of the assessee was called for on the same and after considering the explanation of the assessee, the ld. CIT(A) noted that the A.O. has to evaluate not only the facts available on the records of the assessee but also the surrounding facts to arrive at a decision in the matter. The ld. CIT(A) noted that the A.O. failed to consider two facts important to evaluate the percentage of yield, one, that use of spices and other ingredients, mainly to prepare the flavor & perfume, cannot give yield of equal weight, meaning thereby the residuals & wastes are bound to be there, secondly, the yield of 106% was not with reference to the weight of all the materials, it was only with reference to raw tobacco only. Therefore, the working of suppression of production by the AO was not found to be justified. It would mean that the ld. CIT(A) did not accept the theory of findings propounded by the AO for the purpose of making the addition. The finding of fact recorded by the ld.
CIT(A) rejecting the findings of the AO have not been disputed before us during the course of arguments and have also not been rebutted by the ld. DR through any evidences or material on record. The ld. CIT(A) thereafter proceeded to decide the issue on the basis of comparable cases in the line of the business. The ld. CIT(A) collected the audit reports of two concerns, namely M/s. Kishore Zarda Factory and Sugandhi Snuff King showing ratio of material consumption to finished goods produced in 92.29% and 90.37%. The assessee submitted its objections before the ld. CIT(A) and distinguished the same to say that these are not comparable cases.
104 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014 The ld. CIT(A) accepted that audit reports of these two concerns do not speak of the manufacturing process, but the department is concerned with the percentage of yield. The ld. CIT(A) heavily relied upon the decision of the Hon'ble Supreme Court in the case of CIT vs. British Paints ( India ) Ltd., 188 ITR 44 on the proposition that it is incorrect to say that the AO is bound to accept the system of accounting regularly employed by the assessee, the correctness of which has not been questioned in the past. The ld. CIT(A) noted that with regard to inspection by Excise Authorities, the same carries some weight to the limited extent, however, admitted that there is loss of weight in the form of evaporation and residuals in the process of manufacturing. The ld. CIT(A) also admitted that the cited cases of comparison may or may not have same process of manufacturing. They may not be manufacturing the perfumes. The ld. CIT(A), however, considered the same as comparable case with regard to the percentage of yield in the manufacturing of Zarda and took the percentage at 90% in the case of assessee for making the addition as against yield taken by the AO. The ld. CIT(A) also noted that AO had worked out the value of suppressed production on the average cost price but it was not correct as the concealed production would result in sale to fetch unaccounted income. The appeal of the assessee was accordingly partly allowed and both the parties are in appeals before us. These findings of facts given by the ld. CIT(A) clearly prove that the finding of fact given by the AO against the assessee 105 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 calculating the percentage of yield was not correct and the AO on mere assumption and presumptions and on distorted figures made huge addition against the assessee by enhancing the percentage of yield. Since the case set up by the AO was not accepted by the ld. CIT(A), therefore, the ld. CIT(A) proceeded to decide the case/issue on the basis of comparable cases only. These facts clearly show that the department has no case for interference in departmental appeal and now we have to consider the merits of the additions sustained by the ld. CIT(A). It is admitted fact that no specific defects have been pointed out by the authorities below in maintaining all the books of account by the assessee. It is also not in dispute that the assessee maintained books of account on the same pattern as have been maintained in preceding assessment years. It is also clear that the AO has ignored actual evaporation and wastage of the material used in the production as are appearing in Chart (B) (supra) in submission of the assessee. The ld. CIT(A), however, admitted that there is loss of weight in the form of evaporation and residuals in the process of manufacturing. Therefore, the submissions of the assessee shall have to be accepted for the purpose of believing the books of accounts properly maintained by the assessee. Hon'ble Supreme Court in the case of M/s. Flexi Pack, 319 ITR (Statute)(SC) 3, held that there is no question of going on estimate of income without rejecting the books of account of the assessee. In the case of assessee, it is admitted fact that the books of account of the assessee have 106 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 not been rejected by the AO u/s. 145(3) of the IT Act. The ld. CIT(A) heavily relied upon the decision of Hon'ble Supreme Court in the case of CIT vs. British Paints (India) Ltd., 188 ITR 44, in which the facts are clearly distinguishable from the facts of the case of the assessee. In this case, the assessee company was engaged in the manufacture and sale of paints, had, as a consistent practice, valued its goods in process and finished products exclusively at cost of raw materials totally excluding overhead expenditure. The ITO held that there was no justification to recognize a practice of valuing stock otherwise than in accordance with well recognized principle of accounting which require the stock to be valued at cost (raw material + expenditure) or market price whichever was lower. The AAC and the Tribunal confirmed the view of the AO. However, the High Court reversed the order of the Tribunal. In the background of these facts it was held that any system of accounting which were likely to result in distorted picture of true state of business for computing chargeable income. The AO is not bound to accept the system of accounting regularly employed by the assessee. However, in the case of present assessee despite it is a case of search, no recovery of any incriminating material was made in search to prove any suppression of sales or stock. The ld.
CIT(A) accepted that the concealed production would result in sales to fetch unaccounted income, but no such concealed production or sales outside the books of account were found against the assessee. It is admitted fact that in assessment 107 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 year 1999-2000, similar addition was made by the AO against the assessee which have been deleted by the ld. /CIT(A) and the order of the ld. CIT(A) has been confirmed by the ITAT, Allahabad Bench vide order dated 07.06.2006. Copy of the order is placed on record at page 345 of the paper book. In assessment year 2002-03 and 2003-04, the AO accepted the percentage of yield at 81.69% and 83.62% under regular assessment orders u/s. 143(3) of the Act. In assessment year 2004-05 under appeal, the AO also accepted the yield of 83.17% u/s. 143(3) dated 19.12.2006 prior to search. PB-387 is the copy of assessment order which is supported by order sheet to show that the AO examined the books of account and all materials before accepting the book results of the assessee with regard to manufacturing / production and the sales. Since the system of accounting regularly employed by the assessee, the correctness of which had been questioned by the Revenue in past and after examination of the records and material produced by the assessee, book results have been accepted on the identical facts by the Revenue Department, therefore, the decision in the case of British Paints India Ltd. (supra) would not apply against the assessee. No case is also made out before us that the percentage of yield shown by the assessee in past was against any Rule or the law.
The G.P. rate declared by assessee is almost same as declared in preceding years.
We may note here that it is well settled principle of law that even if the principle of res judicata does not apply to the Income-tax proceedings, but the income-tax 108 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 authorities shall have to follow the principle of consistency. We rely upon the decision of Hon'ble Supreme Court in the case of Radhasoami Satsang vs. CIT, 193 ITR 321, the decision of M.P. High Court in the case of Godavari Corporation, 156 ITR 835, decision of Supreme Court in the case of Union of India vs. Satish Panalal Shah, 249 ITR 221 and the decision of Delhi High Court in the case of Escorts Ltd., 338 ITR 435. Therefore, identical issue considered and decided in earlier years in favour of the assessee by the AO as well as by the Tribunal in various years should have been followed by the authorities below on the identical issue. It is also not in dispute that the end product, i.e., Zarda is excisable item/goods and subjected to inspection and control by the Excise Authorities and it is admitted fact that the Excise Department accepted the manufactured goods and cleared the goods manufactured on duty paid. Such a circumstance also supports the explanation of the assessee that there is no suppression of the yield. The case of the assessee is squarely covered by the decision of Allahabad High Court in the case of CIT vs. Mascot (India) Tools and Forgings Pvt. Ltd., 320 ITR 110. It is also not in dispute that the sales have been accepted by the Sales Tax Authorities.
Therefore, there is no question of any suppression of sales in the case of assessee and as noted above, no material was found during the course of search of any sales made by the assessee outside the books of account. Hon'ble Madras High Court in the case of CIT vs. Anandha Metal Corporation, 273 ITR 262 held that when the 109 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 valuation of stock accepted by the Sales Tax Authorities is binding on the income-
tax Authorities. We may also note here that though ld. CIT(A) has invoked his powers u/s. 251 of the IT Act for the purpose of rejection of books of account u/s.
145(3), which have not been rejected by the AO, but there is no observation in the appellate order if the ld. CIT(A) while using such powers, issued any show cause notice to the assessee for taking any adverse inference which has not been taken by the AO in the assessment order. Therefore, such powers should not have been used against the assessee without affording opportunity of being heard to the assessee.
The authorities below have also considered the statement of partner Shri Kailash Chand adverse in nature who has made surrender of Rs.50 lacs in the assessment year 2010-11, but it is not considered that in his statement, the partner has stated that the books of account are complete in all respect and in anticipation of some discrepancies, surrender of Rs.50,00,000/- is made for the assessment year 2010-
11. It was also on account of that the assessee did not reveal the trade secretes.
Therefore, the same may not be relevant for assessment years under appeals and could not be said to be adverse in nature to take different percentage of yield. The ld. CIT(A) also noted at page 90 of the impugned order that the AO had worked out the value of suppressed production on the average cost price, but the same is not correct as concealed production would result in sale to fetch unaccounted income. These findings of the ld. CIT(A) also suggest that even part addition 110 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 sustained by the ld. CIT(A) and the addition made by the AO was wholly unjustified. Hon'ble Gujrat High Court in the case of President Industries, 258 ITR 654 held that there is no finding that goods sold outside the books of account were acquired from unexplained sources. The value of entire sale outside the books cannot be added. Only profit margin may be added. This view was re-confirmed in its later decision in the case of Samir Synthetics Mill, 326 ITR 410 (Guj.).
Therefore, the addition maintained by the authorities below was highly unjustified.
The ld.CIT(A) though cited the alleged comparable cases of M/s. Kishore Zarda Factory and Sugandhi Snuff King, but admitted in the impugned order that the cited cases of comparison may or may not have the same or similar process of manufacturing. They may not be manufacturing the perfumes, which is major source of loss of weight. They may be purchasing the perfumery items from the market. It would suggest that these were not the comparable cases to be cited against the assessee. The assessee has filed the complete details of sales declared by the assessee and these two concerns at page 235A of the paper book to show that in the case of Kishore Zarda Factory in assessment year 2008-09, the declared sales were Rs.1.19 crores and in the case of Sugandhi Snuff King for assessment year 2012-13 the declared sales of Rs.3.99 crores were shown. However, in the case of assessee for assessment year 2004-05, the declared sales were 32.76 crores and in the remaining assessment years under appeals, the declared sales were more 111 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 so at Rs.32.09 crores, 31.55 crores, 31.26 crores, 33.73 crores and 35.04 crores.
The findings above and the findings given by the ld. CIT(A) that they may not have similar process of manufacturing would suggest that these are not the comparable cases to be considered for the purpose of making part addition against the assessee. Once Ld. CIT(A) did not accept findings of AO to calculate yield of production, Ld. CIT(A) should not resort to adopt comparable cases because the foundation of making addition by AO has completely been demolished. Hon'ble Rajasthan High Court in the case of Gotan Lime Khanij Udyog, 250 ITR 243 held that on mere rejection of books of account, does not mean the addition shall have to be necessarily made against the assessee. Hon'ble Privy Council in the case of Laxmi Narain Badri Das, 5 ITR 170 held that estimate of income should be fair.
The AO should not act dishonestly or vindictively or capriciously. His knowledge of previous returns, local knowledge, circumstance of assessee are to be considered to arrive at fair and proper estimate of income. Hon'ble Delhi High Court in the case of Aero Club 336 ITR 400 held that the assessment should be on rational basis. Profit margin declared by the assessee cannot be rejected arbitrarily. It is well settled law that taxes should be collected on real income and not on imaginary income. In case of assessee, admittedly, the book results on almost same percentage of yield were accepted in earlier years in scrutiny proceedings by the AO as well as by the Tribunal. Nothing was found against the assessee during the 112 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 course of search i.e., any excess stock or sales made outside the books of account.
Therefore, going by some illogical calculations based on figures provided in the audit report, the AO should not have made huge additions against the assessee, which is also not approved by the ld. CIT(A).Therefore, on mere comparison of cases without bringing adequate material on record, the ld. CIT(A) should not have sustained part addition without considering the principle of law that the entire sales would not be profit of the assessee. Considering the above discussion and examining the case of the assessee from every possible angle, we are of the view that the authorities below were not justified in making or confirming any addition against the assessee. We accordingly, set side the orders of the authorities below and delete the entire addition in assessment year 2004-05. In the result, the appeal of the assessee is allowed and the departmental appeal is dismissed on this issue.
15.1 This issue is arising in the remaining appeals for the assessment year 2005- 06 to 2009-10 under appeals before us in which the assessee has declared percentage of yield at 84.69%, 84.04%, 85.08%, 83.80% and 83.80%. The AO took the percentage of yield at 105.66% and the ld. CIT(A) restricted the addition by taking the percentage of yield at 90% as has been taken in assessment year 2004-05. The assessee as well as the revenue are in cross appeals on the identical issue. By following the order for the assessment year 2004-05 above, we set aside 113 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 the orders of the authorities below and delete the entire additions. In the result, all the remaining appeals of the assessee are allowed and the departmental appeals are dismissed on this issue.
16. Issue No. 3 (Bogus Liabilities):
This issue arises in all the appeals under reference. Both the parties stated that the issue is same in all the appeals and for the sake of convenience, the facts from assessment year 2004-05 have been taken. In the assessment year 2004-05, the AO discussed this issue in assessment order and observed that liability for expenses amounting to Rs.56,83,162/- has been shown under the current liabilities and the provisions of balance sheet. The assessee submitted before the AO that those are related to various heads, viz., advertisement, audit fee, legal expenses, printing charges, wages / salary and bonus. The AO analyzed the list of sundry creditors for expenses and noticed that 38 heads are specified, but 39th is mentioned as "others" amounting to Rs.30,04,511/-. The assessee had not furnished the break-up of others. So the AO asked the assessee to furnish the break-up and produce the vouchers for expenses claimed under the head 'others'.
The AO added the amount of Rs.30,04,511/- as bogus liability and added to the income of the assessee. It was submitted before the ld. CIT(A) that the list of current liabilities was given to the AO at assessment stage. During the block 114 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 assessment proceedings also, the details of the same were provided. This issue was examined at original assessment stage u/s. 143(3) and no addition has been made.
Moreover, such nature of liabilities for expenses are brought forward from past years. The assessee submitted the details of liabilities for assessment years 2002-03 and 2003-04 to prove that it is carried forward from the earlier years. It was submitted that most of the liabilities are existing in earlier years and had been carried forward only. Therefore, the addition be deleted. The ld. CIT(A), however, did not accept the contention of the assessee because the composition of 'other' has been changing every year and new parties are mentioned. These are unsettled accounts of the parties for which no evidences have been filed and accordingly in the absence of this claim substantiated by the assessee, the addition of Rs.30,04,511/- was confirmed.
17. We have considered the rival submissions and the material on record. The ld. counsel for the assessee reiterated the submissions made before the authorities below and referred to PB 327 which is the details of sundry creditors for expenses of Rs.56,83,162/-, which contained the list of "others" in a sum of Rs.30,04,511/-.
The break-up of the same is given at page 328 of the paper book. At page 329 & 330 of the paper book, the list of sundry creditors for expenses from preceding assessment year 2003-04 have been mentioned in a sum of Rs.57,34,725/-. On 115 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 going through the same, we find that most of the sundry creditors for expenses are coming up from preceding assessment year 2003-04 except one item of Tarun Bharat Associates, Nagpur was new item. The other item in the name of Vartman Kamal Jyoti Lucknow has reduced in assessment year under appeal as compared to preceding assessment year 2003-04. The ld. counsel for the assessee also filed the chart showing sundry creditors for expenses in submissions for all the assessment years under appeals and is reproduced as under :
"Chart showing Sundry Creditors for Expenses.
That the assessee claimed sundry creditor in the balance sheet and the amount of sundry creditor appearing in the balance sheet are as under :-
A.Y. Total Liability under the Disputed Amount under head sundry creditors for the head "OTHERS"
expenses.
2003-04 57,34,725.81 -----------NIL-------- 2004-05 56,83,162.01 30,04,511.40 2005-06 38,73,526.92 19,22,490.90 2006-07 44,81,003.10 6,41,177.68 2007-08 40,70,617.07 18,46,952.79 2008-09 41,49,623.31 25,50,707.04 2009-10 41,93,959.70 21,62,415.98 2010-11 50,44,353.02 17,90,328.34
These details would clearly reveal that these sundry creditors are coming up from earlier years except in one case which was a new party. Therefore, there is no 116 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 question of making any addition against the assessee in assessment year under appeal in respect of old balances. Similarly, we find from the above list that total liabilities most of the times have reduced, therefore, in assessment year 2004-05, the matter requires reconsideration at the level of ld. CIT(A) to verify the old balances, which if coming from earlier years should have been deleted and for the new parties, the assessee would be required to furnish evidences to prove the genuineness of the same. It appears that the AO has not done any exercise in this matter and old liabilities coming up from earlier years have been added without any just cause. We accordingly set aside the order of the authority below and restore this issue to the file of ld. CIT(A) with direction to re-decide this issue after verifying the old balances coming up from earlier years and in case the balances are coming up from earlier years, no addition should be made against the assessee and for new items appearing for the first time under sundry creditors, the assessee shall have to furnish the evidences before the ld. CIT(A) for verification of the same. The ld. CIT(A) shall give reasonable sufficient opportunity of being heard to the assessee and shall also allow to furnish material before him for clarification of the issue. This issue is same in remaining assessment years, therefore, in these years also the issue is restored to the file of ld. CIT(A) for reconsideration as is directed in assessment year 2004-05 above. In the result, this ground of appeals of the assessee in all the years are allowed for statistical purposes.
117 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014
18. Issue No. 4 (Addition on account of construction of building on the basis of DVO's report) :
This issue arises in assessment years 2004-05, 2005-06, 2006-07 & 2008-09.
In assessment year 2004-05, the AO made addition of Rs.1,29,617/-. The AO observed that during the year under consideration, the addition to the building has been shown at Rs.63,58,268/-. The assessee was asked to furnish the bills and vouchers in respect of the addition made to the building, but the assessee failed to produce the same. Reference to the DVO was made on 19.10.2011. The assessee could not produce bills and vouchers before the DVO as well. The assessee has only furnished break-up of addition in building at Sahson and Purna Bhiwandi, which was Rs.7,06,980/- and Rs.57,51,288/- respectively. The valuation officer valued the cost of construction for head office, Sahson building and not for building at Purna Bhiwandi. The valuation Officer submitted the report on 09.12.2011 and valued the cost of addition to the building at Sahson at Rs.8,36,597/- as against Rs.7,06,980/- declared by the assessee. So, there was difference of Rs.1,29,617/-. The assessee explained before the AO that the DVO's report is only opinion based on estimate and the property is inspected on 18.11.2011 whereas the construction falls in different assessment years from 2004- 05 to 2010-11. It was submitted that instead of CPWD rate, the DVO should have applied the PWD rate and in the rural area, the labour and building material is 118 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 available at cheaper rate and builder's efforts should be allowed deduction of 2% and personal supervision should be allowed by the DVO at 10%. The AO, however, did not accept the contention of the assessee and made the addition. The assessee similarly made submissions before the ld. CIT(A) and it was submitted that no books of account have been rejected, therefore, the addition is unjustified.
Complete details have been maintained. The ld. CIT(A), however, finding the issue to be identical as have been decided in the case of M/s. Kesarwani Sheetalaya, i.e., sister concern of the assessee for the assessment year 2005-06 dismissed this ground of appeal of the assessee. Similar additions have been made in other assessment years as above on the identical facts.
19. On consideration of the rival submissions, we are of the view, the matter requires reconsideration at the level of the ld. CIT(A). The ld. CIT(A) did not give any finding on the submission of the assessee and followed his order in the case of M/s. Kesarwani Sheetalaya for the assessment year 2005-06. ITAT, Allahabad Bench in the case of M/s. Kesarwani Sheetalaya vs. DCIT, Central Circle, Allahabad in ITA No. 440/2012 for the assessment year 2008-09 decided the issue vide order dated 30.11.2012. In this order reference to AY 2005-06 is made. The findings in para 20 are reproduced as under :
"20. We have considered the rival submissions and the material on record. Hon'ble Supreme Court in the case of Sargam 119 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 Cinena vs. CIT, 328 ITR 513 held that when books of account of the assessee are not rejected, the Assessing Officer cannot refer the matter to the Departmental Valuation Officer. Hon'ble Rajasthan High court in the case of CIT vs. Pratapsingh Amrosingh Rajendra Singh & Deepak Kumar, 200 ITR 788 held that "there was no dispute that the assessee maintained proper books of account and same had been accepted in past and no defects were pointed out in the books. The expenses were fully supported by vouchers. Full details were also mentioned in respect of each items in the books. Simply because valuation report was of a higher amount, books could not be said to be unreliable. The Tribunal was, therefore, justified in deleting the addition of Rs.55,780/-." The assessee filed details of investment made in earlier years in the property at pages 116 of the paper book, which support the submissions of the assessee that investment has been made from the assessment year 2004-05 to 2010-11. The assessee maintained proper books of account in past and it was only when no regular books of account were found during the course of survey, the AO inferred that the assessee did not maintain regular books of account, but with regard to shortage of cash on which addition of Rs.37,30,710/- was made, the AO on perusal of the audit report relevant to assessment year under appeal took the figure of cash available with the assessee firm at Rs.64,70,642/-. Thus, the AO acted on the audit report, which is prepared on the basis of the books of account maintained by the assessee. Thus, there were no reasons to discard the books of account merely because the same were not found during the course of survey. The AO should have verified each and every entry from the books of account of the assessee on this issue before making reference to the DVO. However, no such findings have been given and the AO merely because the assessee did not produce bills and vouchers referred the matter to the DVO for estimating cost of construction. The findings of the AO are, therefore, not justified in view of the judgments of Hon'ble Supreme Court and Rajasthan High Court referred to above. It, therefore, appears that the matter requires reconsideration at the level of the AO. We accordingly, set aside the orders of the authorities below on this issue and restore the matter to the file of the AO with direction to re-decide the issue by considering the books of account produced by the assessee. In the result, ground No. 20 & 21 of the appeal of the assessee, are allowed for statistical purposes."
120 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014 19.1 In this case, the ld. CIT(A) followed his order in the case of M/s. Kesarwani Sheetalaya for the assessment year 2005-06 and confirmed the addition. Since in this case the issue is restored for re-consideration, therefore, the ld. CIT(A) is bound to pass reasoned order. We may also note here that the ld. counsel for the assessee contended that the books of account have not been rejected and the issue is covered in his favour by the decision of Hon'ble Supreme Court in the case of Sargam Cinema, 328 ITR 513 and the decision of Hon'ble Allahabad High Court in the case of CIT vs. Lucknow Public Educational Society, 339 ITR 588, in which it was held that when books of account of the assessee are not rejected, the AO cannot refer the matter to the DVO. We also find that difference may be around 10% or so as per valuation shown by the assessee and the report given by the DVO, which should have been ignored for the purpose of making addition. In view of the above discussion and following the order in the case of M/s. Keserwani Sheetalaya (supra) and other decisions above, we set aside the order of ld. CIT(A) and restore this issue to his file with the direction to re-decide this issue in the light of the above judgments. The ld. CIT(A) shall give reasonable sufficient opportunity of being heard to the assessee. In the result, all the appeals of the assessee on this issue are allowed for statistical purposes.
20. Issue No. 5 (Disallowance of various expenses, i.e., entertainment expenses, 121 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 shop expenses, telephone expenses, generator expenses, motor vehicle expenses, petrol expenses):
This issue is same in all the appeals except that in some assessment years, the heads of disallowances of expenses are lesser. But the issue is identical.
Therefore, for the purpose of disposal of appeals facts are taken from assessment year 2004-05. In the assessment year 2004-05, the AO observed that a sum of Rs.5,94,173/- has been debited on account of shop expenses out of which vouchers for expenses incurred on entertainment account of Rs.78,780/- and expenses incurred on milk and Gur for workers are amounting to Rs.33,556/-. The AO mentioned that vouchers of these expenses were not produced for verification, therefore, she disallowed 50% of both the expenses and made addition of Rs.39,390/- and Rs.16,780/- respectively. The AO also disallowed 10% of the expenses towards telephone to cover up personal use by the partners and made disallowance of Rs.31,313/-. The disallowance of Rs.12,635/- has been made out of generator expenses on the ground that some of the vouchers are not verifiable in nature. The AO also disallowed 10% out of motor vehicle expenses and petrol expenses on the ground that personal user of the petrol etc. by the partners cannot be ruled out and made additions of Rs.37,915/- and Rs.32,803/-.
21. The assessee submitted before the ld. CIT(A) that the assessee's principal place of business is at Sahson, which is about 22 kms. away from Allahabad city.
122 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014 The dealers and customers came from different places of long distance for the purpose of business so for showing good gestures towards the customers and also to maintain good relations between the employer and the employees for the purpose of business, entertainment expenses were incurred. These expenses are allowed in earlier years u/s. 143(3) by the AO. It was further submitted that nature of business of assessee is manufacturing tobacco, which is manually hand made and the process is having some dust and hazardous to the workers and labourers, therefore, for safeguard to the health of labourers and on humanitarian grounds, Gur and milk are provided to them during working hours. In past, no disallowances have been made. It was submitted that telephone expenses have been disallowed without any reason. Generator is used for running of the factory because of the break-down of electricity for which complete details have been maintained and accepted the same deduction in past. Motor vehicle expenses and petrol are used for the purpose of business like any other years. Therefore, no addition was made in earlier years. Therefore, the addition was wholly unjustified. The ld. CIT(A), however, confirmed the additions.
22. We have considered the rival submissions and the material on record. It is not in dispute that the nature of business of assessee is manufacturing of tobacco and must have the dust and other ingredients while working of labourers.
123 ITA Nos.358 & 374 to 378/Alld./2014ITA Nos. 06 to 11/Alld./2014 Therefore, it may be hazardous to the working of labourers. The business premises of the assessee is said to be far away from the city. Therefore, vehicles must have been used for the purpose of business and if milk and Gur are provided to the labourers during working hours, we do not find any wrong in the same. It is a fact that in the city of Allahabad, there is electricity failure for several hours and as such generators must have been used for the purpose of business. The authorities below either on the personal user of telephone, vehicles etc. or that some vouchers were not produced made disallowances of 50% under some heads and 10% under other heads of the expenses. The assessee has filed chart showing history of expenditure incurred on these heads. It would show that in preceding assessment years 2002-03 and 2003-04, no such disallowances have been made on entertainment/shop (milk and Gur expenses). Small additions have been made on account of telephone expenses. Generator expenses are also accepted in earlier years and on motor vehicle and petrol expenses about 5% have been disallowed in earlier years. It is, therefore, claimed that the same issue has been examined u/s.
143(3) in earlier years and no huge additions have been made or in fact no additions have been made. Even in original assessment proceedings for the assessment year 2004-05, the AO accepted these expenses. It would, therefore, show that volume of addition made by the authorities below is wholly excessive in nature. Therefore, considering the findings of the authorities that some vouchers 124 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 have not been produced or that personal user are not ruled out, it would not be proper to delete the entire additions. However, same are excessive in nature and needs reduction to a reasonable extent because most of the expenses are incurred for business purposes. We set aside the orders of the authorities below and reduce the disallowance of expenses on all these heads to 5% of the total claim on different heads of expenses. The AO is directed to restrict the disallowance of expenses under all these heads to 5% in all. In the result, the appeal of the assessee for the assessment year 2004-05 on this issue is partly allowed. The orders of authorities below on this issue in remaining assessment years 2005-06 to 2009-10 are similarly set aside and modified and the AO is directed to restrict the additions by making disallowances under these heads of 5% only. In the result, remaining appeals of the assessee on this issue are also partly allowed.
23. Issue No. 6 (Bogus Purchases):
In assessment year 2006-07, the Revenue has raised ground No. 5, challenging the deletion of disallowance of Rs.16,11,270/- on account of bogus purchases. The assessee claimed before the ld. CIT(A) that the purchase was made from M/s. Cosmo Elmek, Varanasi which was wrongly treated as bogus purchase by the AO. Copy of the account was filed before the AO from the books of account on the invoice, Tin Number, name of the banker, telephone number and payment 125 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 made through drafts have been mentioned. The AO discussed this issue in the assessment order with regard to enquiry made for purchases made from M/s. Sarita Industries and the vehicle number was found different. On further enquiry, the AO found that perfumes have been purchased from M/s. Cosmo Elmek, Varanasi and other parties. The AO collected the details of use of vehicle for supply of the material. The owner of the vehicle denied use of vehicle for transportation of goods. Therefore, the AO inferred that no goods were transported and ultimately purchases were found to be bogus. The ld. CIT(A) asked for the break-up of the purchase of the amount in question and the vehicle used for supply of the material.
The assessee submitted before the ld. CIT(A) that the purchases have been made genuinely from this party. The AO started enquiry in the case of Sarita Industries, but made addition of different party in assessment year under appeal. M/s. Cosmo Elmek is genuine party. Its PAN and telephone numbers were furnished. It was explained that payments were made through demand draft and all entries are recorded in the books of account. Part payments were made in the assessment year under appeal and for balance amount, sundry creditor account is shown. The purchases of perfumes were made from this party. The AO has not made out any case that the expenses incurred have not been entered into the book of account. In earlier year, the AO examined the same party and did not make any addition.
Remand report from the AO was also called for.126 ITA Nos.358 & 374 to 378/Alld./2014
ITA Nos. 06 to 11/Alld./2014
24. The ld. CIT(A) found the contention of the assessee to be correct that the AO discussed this issue with regard to the purchase made from M/s. Sarita Industries, Kanpur and thereafter observed that the purchases were made from Cosmos Elmek, Varanasi. The ld. CIT(A) found this party to be genuine and assessed to Sales Tax also and sale in their case have been accepted by the Sales Tax Authorities. Their books of account are audited. No material was found during the course of search to hold that the bogus purchases from this party have been made. Payments were found to have been made of these purchases through different demand drafts. The ld. CIT(A), therefore, found that purchases should be genuine and accordingly deleted the addition.
25. On consideration of the rival submissions we do not find any justification to interfere with the order of the ld. CIT(A) in deleting the addition. The assessee has made out a case that genuine purchases have been made from M/s. Cosmos Elmek and the purchases are entered into the books of accounts. The payments are made through bank drafts, which are also entered into the books of account. No material was found during the course of search to prove that it was bogus purchase. The sales made by M/s. Cosmo Elmek have been accepted by the Sales Tax Authorities and was genuine party. The AO merely on the basis of test check and statement of 127 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 the driver of the vehicle, who was not subjected to cross examination, held the purchases to be suspicious, as the transportation by other vehicle was found doubtful. This itself is no ground to consider the purchases to be bogus. No enquiry has been made in respect to the vehicle used for transportation of goods in this case, i.e., vehicle No. UP 65-P-8308. Therefore, the ld. CIT(A) was justified in deleting the addition. Ground No. 5 of the departmental appeal is accordingly dismissed.
26. Issue No. 7 (Bogus purchases from M/s. Sarita Industries):
This issue arises in assessment year 2007-08 in assessee's appeal. The assessee on ground No. 4, challenged the addition of Rs.27,21,888/- in respect of purchase of perfumery items from M/s. Sarita Industries, Kanpur. The AO conducted enquiry in respect of purchase invoice No. 172 dated 23.11.2006 for Rs.27,21,888/- for the purchase of 150 kg of Sandal Oil issued by M/s. Sarita Industries, Kanpur, proprietor Rakesh Narin Gupta. The goods were sent by vehicle No. MH04 - 8300. On enquiry, it was found that it is a Bajaaj Chetak Scooter, 1990 Model. Letter of RTO was confronted to the assessee and the AO also asked the assessee to produce Shri Rakesh Narain Gupta, proprietor of M/s.
Sarita Industries for examination. The statement of Shri Rakesh Narain Gupta was recorded during the course of assessment proceedings in which he has explained 128 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 that vehicle Number was wrongly mentioned because the correct number is MH 04-AW-8300.The address of the owner of the vehicle was also given as Shri Kashi Nath, but the report of the department shows that such person was not residing at the given address. No stock at the premises of Shri Rakesh Narain Gupta was found. There was no godown and signboard displayed. The amount was withdrawn immediately in cash after deposits of the drafts. In further investigation, it was found that for invoices Nos. 173 and 176, the material was sent through Car though the weight of the goods was 350 kg and 100 kg. The Tata Sumo which was used for transportation was not a commercial vehicle and owner denied transportation of the goods. The AO, therefore, found that no genuine purchases have been made and these were accommodation entries only. The addition of Rs.27,21,888/-
against invoice No. 172 dated 23.11.2006 was accordingly made.
27. It was submitted before the ld. CT(A) that the purchases are debited in the books of account and no purchases outside the books of account found. Therefore, there is no question of bogus purchases. M/s. Sarita Industries, Kanpur is a genuine and reputed firm. In preceding assessment year 2006-07 and subsequent assessment years 2008-09, 2009-10 and 2010-11, the purchases from the same party have been accepted by the department. Copies of all the bills of purchases were submitted. It was submitted that in the year under consideration, the assessee 129 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 made purchases of Rs.1,23,64,142/- and the AO has doubted only the purchases of Rs.27,21,888/- in respect of one bill No. 172 only and rest of the purchases have been accepted. It was submitted that this party has PAN and registered with the Central Excise Authorities. The proprietor has filed affidavit confirming the transaction with the assessee. The payments are made through banking channel, i.e., account payee demand drafts. In the statement of Shri Rakesh Narain Gupta, he has confirmed the transaction with the assessee. Merely no commercial vehicle was used or owner of the vehicle was not found at the given address is no ground to make the addition. The ld. CIT(A), however, did not accept the contention of the assessee and on the basis of different use of vehicle for transportation of goods confirmed the addition.
28. On consideration of the rival submissions and the material on record, we do not find any justification to sustain the addition. PB-45 and 46 are the details of the purchases made and payments made through demand drafts and entered into the books of account of the assessee. PB-48 is confirmation made by M/s. Sarita Industries, Kanpur to DCIT for selling their product to the assessee. PB-54 is the statement of Proprietor of M/s. Sarita Industries, Shri Rakesh Narain Gupta in which he has confirmed to have made sales to the assessee during whole of the year in a sum of Rs.1,23,64,142/-. It would, therefore, show that the assessee made 130 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 genuine purchase from M/s. Sarita Industries. In preceding and subsequent assessment years, the assessee has similarly made purchases from same party which have not been doubted by the Revenue department. It is also interesting to note that in the assessment year under appeal, the assessee made total purchases from M/s. Sarita Industries for a sum of Rs.1.23 crores approximately through six invoices. The AO accepted five purchases and did not make any addition. The AO doubted only purchase through one bill No. 172 without assigning any cogent and specific reason. It appears that the purchase of one bill was not found to be genuine because of particular use of vehicle for transportation or that owner of the vehicle did not confirm the fact of transportation of goods in favour of the assessee.
However, the facts and circumstances and the material on record clearly show that the assessee made genuine purchases from M/s. Sarita Industries and payments are made through account payee drafts. Therefore, other considerations noted by the AO for making addition appear to be irrelevant. M/s. Sarita Industries was not found doubtful party because assessed to Income-tax as well as registered with Central Excise Authorities and transactions with this party in preceding and subsequent assessment years have not been doubted. Therefore, merely on the basis of use of vehicle, the book results should not have been rejected by the ld.
CIT(A) and no addition should be made against the assessee. The assessee has debited all the purchases in the books of account ad no purchases outside the books 131 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 of account have been found during the course of search. Merely because the party withdrew the amount from bank is not sufficient to discard the explanation of the assessee. Proprietor of M/s. Sarita Industries also filed affidavit before the authorities below confirming the transaction with the assessee. Therefore, such should not have been the reason for treating the purchase to be bogus. In view of the above discussion, we set aside the orders of the authorities below and delete the addition of Rs.27,21,888/-. In the result, ground No. 4 of appeal of the assessee is allowed in assessment year 2007-08.
29. Issue No. 8 (Bogus purchases from M/s. Cosmo Elmek):
This issue arises in assessment year 2008-09. On ground No. 3, the assessee challenged the addition of Rs.4,54,240/- in respect of purchase of perfumery items from M/s. Cosmo Elmek, Varanasi. The Revenue on ground No. 5 challenged the order of the ld. CIT(A) in reducing the disallowance of Rs.27,59,714/- on the same issue. The assessee challenged the addition of Rs.27,59,714/- before the ld. CIT(A) in respect of purchase from Cosmo Elmek, Varanasi treated as bogus by the AO.
The AO conducted the enquiries with regard to M/s. Sarita Industries regarding use of the vehicle in transportation of the goods. In further enquiry, the AO found perfumes purchased from M/s. Cosmo Elmek Varanasi. The AO obtained the details of use of vehicle for transportation of the goods and found that the vehicle 132 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 was not commercial. The AO mainly with regard to use of vehicle held the purchases to be bogus. The assessee submitted break-up of the purchase of Rs.27,59,714/- before the ld. CIT(A), which is noted at page 18 of the impugned order to show that on various dates, the purchases were made through vehicle No. UP 65 AB 8414. This party was assessed to tax and Sales Tax Authorities accepted their sales. Payments are made through demand drafts and confirmation of the party was also fled. The ld. CIT(A) found this party to be genuine and registered with the Sales Tax Authorities and assessed with Income tax Authorities also.
Purchases have been accepted by the Sales Tax department. No material was found during the course of search to prove bogus purchases. The payments are made through demand drafts. It was also found that no inquiry was made in the case of vehicle No. UP-65-AB 8414 used in transportation of goods. No other enquiry was made. The ld. CIT(A) despite these findings confirmed the addition of Rs.4,54,240/- and balance addition of Rs.23,05,474/- was deleted. Both the parties are in cross appeals on this issue.
30. On consideration of the rival submissions, we are of the view, this issue is same as is considered in assessment year 2006-07 on issue No. 6 above. Copies of the bills are filed in the paper book along with confirmation of the party. The totality of findings of the ld. CIT(A) proved that M/s. Cosmo Elmek Varanasi is a 133 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 genuine party and sales in their case have been accepted by the Sales Tax Authorities and party also confirmed the transaction with the assessee. We have dismissed the departmental appeal on this issue in assessment year 2006-07 on identical facts. It appears that addition is merely made on account of carrying of the weighted item in the vehicles. However, once it is held by the ld. CIT(A) that no enquiry has been conducted in respect of vehicle used for transportation of the goods, the part addition should not have been maintained. We following the order for the assessment year 2006-07 and considering the above discussion set aside the orders of authorities below and delete the addition of Rs.4,54,240/-. In the result, the appeal of the assessee is allowed ad departmental appeal stands dismissed.
31. Issue No. 9 (Bogus purchase from M/s. Cosmo Elmek) :
This issue arises in assessment year 2009-10. The assessee challenged the addition of Rs.33,49,264/- on account of purchases made from M/s. Cosmo Elmek Varanasi. The Revenue on ground No. 5, challenged the reducing of disallowance of Rs.1,64,38,134/-. The assessee challenged the addition of Rs.1,64,38,134/- in respect of purchase made from Cosmo Elmek, Varanasi before the ld. CIT(A). The facts are same as are considered in the assessment years 2006-07 and 2008-09 above. The AO on the bass of use of vehicle inferred that the assessee has made bogus purchase. Bifurcation of purchase was submitted before the ld. CIT(A) to 134 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 show that vehicle used for transportation was UP 65 AB 8414 and UP 65 Y-3901.
The assessee made similar submissions as were made in earlier years. The ld.
CIT(A) almost gave the same findings. The ld. CIT(A) found some additions should be duplicate in nature and no enquiry was made in respect of concerned vehicle. However, the ld. CIT(A) maintained the addition of Rs.33,49,264/- and deleted the remaining addition of Rs.1,30,88,870/-. Both the parties are in cross appeals.
32. The ld. representatives of both the parties submitted that the issue is same as is considered in the assessment year 2008-09. Copies of the bills etc. and confirmation are filed in the paper book. We, therefore, following the order on this identical issue for the assessment year 2006-07 and 2008-09, delete the part addition maintained by the ld. CIT(A). In the result, the appeal of the assessee is allowed and the departmental appeal is dismissed.
No other issue is argued or pressed.
33. In the result, the appeals of the assessee in assessment years 2004-05, 2005- 06, 2006-07 ad 2007-08 are allowed. However, remaining appeals of the assessee for the assessment years 2008-09 and 2009-10 are allowed partly and partly 135 ITA Nos.358 & 374 to 378/Alld./2014 ITA Nos. 06 to 11/Alld./2014 allowed for statistical purposes as indicated above. All the departmental appeals are dismissed.
Order pronounced in the open court.
Sd/- Sd/-
(J. SUDHAKAR REDDY) (BHAVNESH SAINI)
Accountant Member Judicial Member
Dated: 15th July, 2014
*aks/-
Copy of the order forwarded to :
1. Appellant
2. Respondent
3. CIT(A), concerned By order
4. CIT, concerned
5. DR, ITAT, Allahabad
6. Guard file Asstt. Registrar
True copy