Income Tax Appellate Tribunal - Chandigarh
Cremica Frozen Food Pvt. Ltd., Ludhiana vs Department Of Income Tax on 26 April, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCHES 'B' CHANDIGARH
BEFORE SHRI H.L.KARWA, HON'BLE, VICE PRESIDENT
AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER
ITA No. 713/Chd/2011
Assessment Year: 2005-06
The ACIT, Vs M/s Cremica Frozen Food Pvt Ltd.,
Circle-III, Ludhiana
Ludhiana
PAN No. AAACC6846K
&
C.O.No. 60/Chd/2011
(In ITA No. 713/Chd/2011)
Assessment Year: 2005-06
M/s Cremica Frozen Food Pvt Ltd., Vs The ACIT, Circle-III,
Ludhiana Ludhiana
PAN No. AAACC6846K
(Appellant) (Respondent)
Appellant By : Shri Subhash Aggarwal
Respondent By : Shri Manjeet Singh
Date of hearing : 26.04.2012
Date of Pronouncement : 17.05.2012
ORDER
PER H.L.KARWA, VP This appeal filed by the Revenue and Cross Objection filed by the assessee are directed against the order of CIT(A)-II, Ludhiana dated 27.4.2011 relating to assessment year 2005-06.
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2. Ground No. 1of the Revenue's appeals reads as under:-
1. That the Ld. CIT(A) has erred in law and on facts in reducing the addition u/s 69C of the Income Tax Act, 1961 on account of excess consumption of raw material to 15% of total addition i.e. from Rs . 11,88,224/- to Rs.
1,78,234/- thereby allowing relief or Rs. 10,09,990/- without giving any cogent reason.
2. Ground no.2 of the assessee's cross objection reads as under:-
2. That the Ld. CIT(A)-II, Ludhiana has erred in confirming the disallowance of Rs. 1,78,234/- on account of alleged excess consumption of raw material in the manufacture of ice cream ignoring the fact that no defect was pointed out in the account of the appellant.
3. In this case the Assessing Officer made addition of Rs. 11,88,224/- u/s 69C of the Income Tax Act, 1961 (in short 'the Act'). On appeal, the CIT(A) allowed a relief of Rs. 10,09,990/- to the assessee and sustained the addition of Rs. 1,78,234/-. The Revenue has filed the instant appeal against the relief allowed by the CIT(A) and assessee has filed the Cross Objection against the addition of Rs. 1,78,234/- sustained by CIT(A).
4. Briefly stated, the facts of the case are that the assessee is engaged in the busines s of manufacturing of ice creams. In the assessment year 2004-05, the assessee filed the return of income on 31.10.2005 declaring a loss of Rs.
64,712/- and book profit u/s 115JB at Rs. 11,02,368/-. The return was processed u/s 143(1) on 16.1.2006. Notices u/s 143(2) and 142(1) alongwith 3 questionnaire were issued to the assessee. The reply dated 18.12.2007 and 20.12.2007 s ubmitted by the assessee were found to be not satisfactory and lacked clarity and authenticity. The Assessing Officer observed that on going through the reply filed by the assessee, certain complexity arose and he, therefore, referred the matter to Special Audit u/s 142(2A) after giving due opportunity to the assessee as to why Special Audit should not be carried out as per provisions to section 142(2A) of the Act. After obtaining necessary permission from the CIT-I, Ludhiana, the case was assigned for Special Audit u/s 142(2A) of the Act to M/s Kumar AShwani & Associates, 85, Green Park, Cool Road, Jalandhar City, Chartered Accountants.
5. The Special Audit was carried out and as sessee submitted the reply on 30.6.2008 raising certain objections which are mentioned in para 4 of the assessment order. The Assessing Officer observed that the objections raised by the assessee are completely baseless and without any substance for which he has given reasons in para 6 of the assessment order. The Assessing Officer also observed that the assessee company withdrew their objections against the Special Audit Report vide letter dated 21.7.2008. According to Assessing Officer, in Special Audit Report, the following points were raised.
"As submitted in Annexure A-2 Cream, Sugar & Milk are the main raw materials for the manufacturing of Ice Cream. No Stock is kept for the cream & milk. However the stock for sugar is kept. Month wise Purchase / /consumption of Cream is as per Annexure-9. Month wise Purchase / Consumption of Milk is as per Annexure A-10. Month wise Purchase / Consumption of Sugar is as per Annexure A-11. Detail of 4 flavour wise Sale of ice Cream is as per Annexure A-12. Detail of Month wise Production & Sale of ice Cream all flavor is as per Annexure A-13.
Detail of Quantitative & Amount wise consumption of all ingredients raw material is as per Annexure A-14.
During the year there was manufacturing of 2,40,519 Lts of ice-cream. As per the information obtained one liter of Ice Cream weight is 555grams. So in Kgs the production of Ice Cream is 1,33,488.600 Kgs. However, the weight of all the ingredients comes to 1,48,186.568 kg thereby giving a difference of 14,697.968 kg in production. The weight wise details of raw material cons umption are given in Annexure A-
15."
6. Regarding the above discrepancies, the Assessing Officer required the assessee vide show cause notice dated 21.7.2008 to explain the same. The assessee vide reply dated 5.8.2008 submitted that there is a variation of + / - 5% in the weight to liter ratio due to air content variation and due to different flavours. On this basis, the assessee furnished its own calculation and claimed that the actual variant in consumption as against the standard consumption is only 4561 kg and not 14698 Kg as alleged in the Special Audit Report. The assessee claimed that these variances are only 3.07% which is negligible. The assessee has also claimed that the weight of ice cream in one liter is not always 555 gms and it can vary. The Assessing Officer did not accept the explanation of the assessee and made an addition of Rs. 11,88,224/-, observing as under:-
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11.3 The reply of the assessee has been considered. The observations made by the Special Auditor is fr om the records maintained by the assessee itself. If the assessee claims that there in no way of converting ice cream from litres to kgs., then it will never be possible to verify the assessee's production data because the raw materials are in kgs. and the output is in litre. Therefore, the standard adopted by the Special Auditor based on the information obtained by them from assessee has to be relied upon. In any case the claim of the assessee that the conversion ratio is variable does affect the calculation because the variation will always be equally spread on both sides of the standard of 555 gms. The assessee has not stated that if 1,33,488.600 kgs is not the weight of 2,40,519 litres of ice cream then alternatively what is the weight of this quantity of ice cream in any other unit of measurement and what is its basis of these calculation.
Therefore, the explanation of the assess ee is not credible and plausible. Thus, 1,33,488.60 kg of ice cream produced while 1,48,186.568 kgs raw material has been used. But from the account of the assessee it is not visible that what has happened to the difference of 14,697.968 kgs of material. In absence of any explanation or any documentary evidence to prove the contentions it is logically inferred that this material has als o been sold after conversion into ice cream thus making unaccounted sale of ice cream. The total declared sale is Rs. 1,07,91,582/- and in quantity it is 2,40,519 litres = 1,33,488.60 kgs. Thus the average sale rate of ice cream is Rs.80.84 per kg. This average sale price of raw material Rs . 80.84 per kg applied to 14697.968 kgs of represents unaccounted expenditure of Rs. 11,88,224/-, No expense is hereby allowed to the assesseed since this production is taken out of books of assessee as claimed by the assessee on which expenses are already claimed. On this basis, the value of unaccounted expenditure is Rs.11,88,224/ : . Accordingly, an 6 addition of Rs. l1,88,2247- is made to the returned income of the assessee u/s 69C of the I.T. Act. I am satisfied that the above act of the ass essee is willful attempt to conceal income, hence, penalty proceedings u/s 271(1)(c) are being initiated separately for concealment of income and furnishing of inaccurate particulars of income.
7. On appeal, the CIT(A) decided the issue observing as under:-
"5. Ground no. 9 is against an addition of Rs, 11,88,224/- on account of excess consumption of raw material in the manufacture of ice cream. The A.O. relied on the report of the special auditors for making the said addition on the assumption that since the net weight of one liter ice cream is 555gms , the consumption of raw material to produce one liter ice cream should also be 555 gms. This assumption of A.O cannot be accepted. In any manufactur ing process the production losses are inevitable. Manufacturing of ice cream involves heating and boiling of milk etc., therefore there have to be evaporation losses. I also agree with the contention of the appellant that the production of food products involves dealing with perishable items where again wastage cannot be avoided. The appellant has also maintained proper stock records which have been duly audited and has submitted the chart of quantitative consumption in the written submissions filed. It has further, been submitted that the addition cannot be made merely on the basis of conjectures and surmises and without pointing out any defect in the books and rejecting the books of account. The appellant has placed reliance on the following decisions in support of his contention:
i) Yog Raj Soni v ACIT (2008) 26 SOT 67 (Delhi) (URO)
ii) ACIT Vs. Maheshwari Ros in &Turpentine Works & ORS. (2008) 16 DTR (Asr)(Trib)313 7
iii) ACIT Vs. Mahesh T Patodia (2001) 79 ITD 40 (Pune)
iv) ITO Vs. Arun Kumar Gupta (2006) 103 TTJ (Jd) 134
v) Ashok Kumar & Co. Vs. ITO (2004) 90 TTJ (Asr) 666
vi) Vijay industries Vs. ITO (2007) 112 TTJ (Jp) 353
vii) CIT Vs. Gotan Lime Khanij Udhyog (2002) 256 ITR 243 (Raj)
viii) Kumar Aerosoles (P.) Ltd. Vs. ACIT (1996) 55 TTJ (Del)385
ix) CIT Vs. Central Provinces Manganese Ore Co. Ltd. (2008) 296 ITR 217 (Bom)
x) Nikka Mai Jewellers vs. ACIT Chandigarh Bench order dated 24.09.2008
xi) Nikka Mai Jewellers CIT (A) order for asses sment year 2005-06 dated 23.12.2008
xii) CIT Vs. Om Overseas (2008) 3 15 ITR 185 (P &H ) 5.1 Keeping in view the above factual position of the case and after considering the facts of the case, I am of the view that the addition made by the A.O is not based on any cogent reason but the excess consumption of raw material is also not fully negligible, therefore, it will be fair to restrict the disallowance to the extent of 15% of total disallowance. Thus, the dis allowance of Rs. 1,78,234/-
is. upheld and remaining of Rs. 10,09,990/- is directed to be deleted"
8. We have heard the rival submissions and have also perused the materials available on record. As per the Assessing Officer, the Special Auditors had prepared the weight wise consumption of materials consumed in 8 Annexure A-3. in para 11.1 of the assessment order, the Assessing Officer has mentioned that "it is observed from the special audit report that during the year there was manufacturing of 240519 Lts. As per the information obtained, one liter of ice cream weight is 555 gms. So in Kgs the production of ice cream is 1,33,488. 600 Kgs. However, the weight of all the ingredients comes to 1,48,186.568 Kg thereby giving a difference of 14,697.968 Kg in production. The weight wise details of raw material consumption are given in A-15 of the Special Audit Report. You are hereby given the final opportunity to explain this dis crepancy." In para 11.3, the Assessing Officer has calculated the value of extra consumption of raw material of 14697.968 by taking average rate of the material @ 80.84 and made an addition of Rs. 11,88,224/- on account of excess consumption of raw material in the manufacturing of ice cream relying on the report of the Special Auditor's . The Assessing Officer has taken the weight of one liter of ice cream equal to 555 gms . The Assessing Officer assumed that since the net weight of one liter of ice cream is 555 gms, the consumption of raw material to produce one liter ice cream should also be 555 gms. In our view, this assumption of the Assessing Officer is not based on any supporting material. In our considered view there is a merit in the submission of Shri Subhash Aggarwal, Ld. Counsel for the assessee that there is no process or equipment whereby one liter of ice cream can be calculated to be equal to 555 gms. He further submitted that even otherwise the weight of ice cream varies from flavour to flavour and the variation is from 540 gms to 580 gms per liter and there is always a variation of + / - in the weight to liter ratio due to air content variation at the time of production of ice cream. It is true that in any manufacturing process, the production losses cannot be ruled out. In this 9 case, the Assessing Officer has made addition relying on the opinion of Special Auditors and he has not applied his mind independently. Shri Subhash Aggarwal, Ld. Counsel for the assessee pointed out that the Special Auditor have not taken into consideration the following important point relating to manufacturing of ice cream.
• Evaporation loss of milk, cream and other raw materials during the pasteurization (heating & boiling) process. • Process Line losses during Homogeniz ation (processed raw material which is left in the pipe line and cannot be taken out.) • Loss of processed raw material in ageing vats where the raw materials are store prior to freezing.
• Losses during the freezing of processed raw material to ice cream occur when the freezer is cleaned for batch change over.
9. In our view, the Assessing Officer has not correctly appreciated the process of manufacturing of ice cream. In this regard, the CIT(A) has observed that the manufacturing of ice cream involves heating and boiling of milk etc. and, therefore, there have to be evaporation losses. He further observed that the production of food products involves dealing in perishable items where again wastage cannot be avoided. In our view, there was no ground for making the addition particularly when the assessee has maintained complete details of the purchases / sales duly supported by bills and vouchers which were produced before the Assessing Officer. The books of account of the assessee are subject to audit and the Assessing Officer has not found any discrepancy / defect in the books of account regularly maintained by the assessee. We have already observed herein above that the Assessing Officer 10 has made the impugned addition merely on the basis of opinion of Special Auditor which is not based on any scientific formula.
We have also observed hereinabove that the Special Auditor has also not taken into consideration certain important point relating to manufacturing of ice cream, therefore, the Assessing Officer was not justified in relying upon the Special Report of Auditors. In view of the above, we hold that Ld. CIT(A) has erred in sustaining the addition of Rs. 1,78,234/-. In fact no addition is called for. Accordingly, we allow ground No.2 of the assessee's cross objection and dismiss ground No.1 of the Revenue's appeal.
10. Ground No.2 of the Revenue appeal reads as under:-
2. That the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 5,850/- made on account of disallowance of club expenditure without giving any cogent reas on.
11. During the assessment year under consideration, the assessee made a payment of Rs. 5,850/- as club expenses. The assessee claimed that this amount was incurred for business purposes. The Assessing Officer disallowed the claim of the assessee holding that it is a personal expenditure of directors.
12. On appeal, the CIT(A) deleted the addition relying on the following decisions:-
1) CIT v Samtel Colour Ltd (2009) 180 Taxman 82 (Del)
2) Sterlite Industries (India) Ltd Vs ACIT (2006) 6 SOT 497(Mum)
13. We have heard the rival s ubmissions. The issue is squarely covered in favour of the assess ee and against the Revenue by the decision of Hon'ble 11 Delhi High Court in the case of CIT v Samtel Colour Ltd now reported in (2010) 326 ITR 425 (Del.), wherein it has been held that the admission fee paid towards corporate membership was an expenditure incurred wholly and exclusively for the purposes of business and not towards capital account as it only facilitated the smooth and efficient running of a busines s enterprise and did not add to the profit earning apparatus of a business enterprise. Respectfully following the decision of Hon'ble Delhi High Court (supra), we do not see any merit in this ground of appeal. Accordingly we dismiss ground No.2 of the Revenue's appeal.
14. Ground No.1 of assessee Cross Objection No. 60/Chd/2011 reads as under:-
1. That the Ld. CIT(A)-II , Ludhiana has erred in dismissing the grounds of appeal relating to section 142(2A) without giving any reasons for rejection.
15. At the time of hearing, Shri Subhas h Aggarwal, Ld. Couns el for the assessee did not press for this ground of C.O. and, therefore, we dismiss the same as not pressed.
16. In the result, the appeal of the Revenue is dismissed while Cross Objection field by the assessee is allowed partly as indicated above.
Order Pronounced in the Open Court on this 17 t h day of May, 2012 Sd/- Sd/-
(MEHAR SINGH) (H.L.KARWA)
ACCOUNTANT MEMBER VI CE PRESIDENT
Dated : 17 t h May, 2012
Rkk
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Copy to:
1. The Appellant
2. The Respondent
3. The CIT
4. The CIT(A)
5. The DR
True Copy
By Order
Assistant Registrar