Income Tax Appellate Tribunal - Mumbai
Parle Biscuits Pvt. Ltd, Mumbai vs Department Of Income Tax on 30 June, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH, MUMBAI
BEFORE SHRI D.K. AGARWAL, JM & SHRI R.K. PANDA, AM
I.T.A. No. 5320/Mum/2006 : (Assessment year 2000-01)
I.T.A. No. 5321/Mum/2006 : (Assessment year 2001-02)
I.T.A. No. 1412/Mum/2006 : (Assessment year 2002-03)
I.T.A. No. 2802/Mum/2007* : (Assessment year 2003-04)
M/s. Parle Biscuits Pvt. Ltd. Vs. *Addl. CIT. Cent. Cir. 25/
V.S. Khandekar Marg, ACIT, Cent. Cir. 25
North Level Crossing, Aayakar Bhavan,
Vile Parle (E), Mumbai-400 057 Mumbai
PAN:AAACP0485D
Appellant Respondent
I.T.A. No. 5542/Mum/2006 : (Assessment year 2000-01)
I.T.A. No. 5543/Mum/2006 : (Assessment year 2001-02)
I.T.A. No. 1411/Mum/2006 : (Assessment year 2002-03)
I.T.A. No. 3870/Mum/2007 : (Assessment year 2000-01)
ACIT, Cent. Cir. 25 Vs. M/s. Parle Biscuits Pvt. Ltd.
Aayakar Bhavan, V.S. Khandekar Marg,
Mumbai North Level Crossing,
Vile Parle (E), Mumbai-400 057
PAN:AAACP0485D
Appellant Respondent
Assessee by: Mr. P.J. Pardiwala and
Mr. Mitesh Joshi
Revenue by: Mr. Ajit Kumar Singh and
Mr. Devdasan
ORDER
Date of hearing: 30.06.2010 Date of order: 31.08.2010 PER BENCH:
These are cross appeals and are directed against the orders of the CIT(A) for the respective assessment years mentioned above. For the sake of convenience these were heard together and are being disposed of by this common order.
2 M/s. Parle Biscuits Pvt. Ltd.
=================== I.T.A. No. 1411/Mum/2006 (By Revenue) (A.Y. 2002-03):
I.T.A. No. 1412/Mum/2006 (By Assessee) (A.Y. 2002-03):
2. The grounds of appeal by the Revenue and the grounds of appeal by the assessee relate to the partial relief given by the CIT(A) on account of addition of Rs.1,57,84,868 made by the Assessing Officer on account of excess consumption of raw materials.
3. Facts of the case, in brief, are that the assessee company is in the business of manufacturing of biscuits. The same are manufactured under the brand names of Parle-G, Krackjack, Monaco, Nimkin, etc. Besides having its own manufacturing unit at Bahadurgarh (Haryana) and at Neemrana (Rajasthan), it also gets the manufacturing done through its various Contract Manufacturing Units (CMUs) which manufacture Parle-G and cream biscuits.
4. The Assessing Officer during the course of assessment proceedings noted that in the earlier year an addition for the difference between the actual consumption of raw materials and the manufacture of the products and the standard consumption as per the standard input-output formula has been made wherever there has been excess consumption.
5. He noted the first addition was made in A.Y. 1988-89. In that year, the assessee was asked to give the input-output ratio of the raw material consumed and the finished product manufactured.
Assessee submitted the input-output ratio as 108.19 : 100 which means 108.19 kg of raw material to be consumed for producing 100 kg of biscuits. This input-output ratio was based on scientific calculations for ideal condition. The Assessing Officer found that the actual consumption of raw material was more than what should have been consumed as per the formula. He therefore, added the value of excess raw material consumed as income. Similar addition was made in A.Y. 1989-90 also. The matter went in appeal before the CIT(A) and it was contended before the CIT(A) that the input- output ratio of 108.19:100 did not take into consideration the 3 M/s. Parle Biscuits Pvt. Ltd.
=================== various wastages in the consumption of raw material as well as excess weight in the finished product. It was submitted that the consumption of maida was accounted for in the books along with the weight of bags which was roughly 1 kg. Therefore, the actual consumption of maida would be less than what has been shown in the accounts. Similarly, there were wastages on account of unfinished/burnt biscuits which were also not taken into account for making the disallowance on the basis of input-output ratio . Inrespect of the finished product it was submitted that the actual weight of the biscuits in the packets were generally more than the printed weight and as such the actual production was more than the production recorded in the books of account. The CIT(A) accepted the submission of the AR and set aside the order with a direction to the Assessing Officer to recompute the amount of excess consumption after taking into account the submission made by the assessee in this regard. Effect to this order was given by the Assessing Officer vide order dated 10.05.1996 in which the Assessing Officer has considered in detail the submission made by the assessee and has allowed relief on account of wastages as contended by the assessee.
6. In the original order in the A.Y. 1989-90 an addition of Rs.49,20,000 was made by the Assessing Officer. This addition was reduced to Rs.22,72,270 after giving effect to the order of the CIT(A). In giving effect to the order of the CIT(A), addition of Rs.22,72,270 was made on account of excess consumption of sugar without setting off of short consumption of maida and vanaspati. On further appeal, the CIT(A) held that set off for short consumption should be allowed and only net excess consumption after allowing relief of 25% on it for other factors should be added to income. Accordingly, the addition of Rs.22,72,270 was reduced to Rs.5,22,385.
7. In all subsequent years additions were being made on the basis of the decision given by the CIT(A) in A.Y. 1989-90. However, 4 M/s. Parle Biscuits Pvt. Ltd.
=================== in the year under consideration following the same principle there was a short consumption of raw material to the tune of Rs.1,11,21,729 instead of excess consumption as was being worked out in all earlier years and as such it was submitted that no addition was to be made. The Assessing Officer has, however, departed from the method of working out the excess consumption in earlier year and did not allow following adjustment.
i) In respect of production from own factory of the assessee, the Assessing Officer did not accept the contention of the assessee for allowing wastage of 1 kg maida in each bag of maida consumed.
ii) The difference between the declared weight of biscuits and the actual weight of biscuit packets in respect of Crackjack, Monaco and Nimkin biscuits were taken on the same proportion as in the case of Parle-G ignoring the laboratory reports of excess weight in biscuit packets submitted by the assessee.
iii) No adjustment made by the Assessing Officer in respect of biscuits produced by contract manufacturer.
The Assessing Officer accordingly made an addition of Rs.1,57,84,868 to the total income of the assessee on account of excess consumption of raw materials.
8. In appeal, it was submitted by the assessee that when maida bags are emptied some maida is left over in the bag and do not go through the production process. It was submitted that nearly 1 kg of maida is left over in each bag which should be deducted from the amount of consumption of raw material for working out the excess consumption. It was submitted that such adjustment has been allowed in A.Y. 1989-90 and in all subsequent years.
9. As regards the adjustment for excess weight of biscuits for other brands i.e., other than Parle-G it was submitted that usually the actual weight of biscuits in packets is more than the printed 5 M/s. Parle Biscuits Pvt. Ltd.
=================== weight. Therefore, the actual production is more to this extent and this should be taken into account for working out the amount of excess consumption. The order of the CIT(A) for A.Y. 1989-90 was brought to his notice where on the basis of the direction of the CIT(A), the Assessing Officer weighed the sample packets of Parle-G to verify the claim and found that the weight of biscuits was actually more than the printed weight and accordingly had allowed the adjustment for excess consumption. However, during the year under consideration the Assessing Officer has not given similar relief in case of other brands in the same proportion in which it was allowed in Parle-G.
10. As far as adjustment in respect of biscuits produced by contract manufacturers, it was submitted that the assessee besides manufacturing biscuits in his own factory also gets the biscuits manufactured through contractor. According to the Assessing Officer while the input-output ratio for production in respect of the assessee's own factory is 108.19:100, the same in respect of CMUs it is 110.607:100. It was submitted before the Assessing Officer that CMUs were in the nature of sub-contractor who were given raw material against which fixed amount of biscuits were received as finished product. The CMUs are paid only the processing charges and any wastage, etc., in the process of manufacturing is on account of CMUs. Therefore, the input-output ratio for the CMUs has to be higher than the input-output ratio in respect of own factory. Since no wastage has been allowed in respect of CMUs, the Assessing Officer should have accepted the ratio of 110.607:100. It was further submitted that the Assessing Officer has no evidence on record to doubt the genuineness of the input-output ratio in respect of CMUs in the books of account. Further if the input-output ratio of 108.190:100 is applied to the CMUs, the wastage as allowed in respect of own factory should also be allowed in respect of production from CMUs. However, as the CMUs were on contract basis, the detailed figures of wastage are not available with the 6 M/s. Parle Biscuits Pvt. Ltd.
=================== assessee and therefore, exact amount of adjustment for different kinds of wastage as has been done in respect of the own factory input-output ratio shall not be possible in the case of CMUs.
11. Based on the various arguments advanced by the learned counsel for the assessee, the CIT(A) rejected the contention of the assessee for allowing wastage of 1 kg of maida in each bag of maida consumed. He noted that during the A.Y. 1989-90 the Assessing Officer while giving effect to the order of the CIT(A) had only made adjustment in respect of weight of empty bag and not on account of left over maida. In all subsequent years also adjustment for the weight of empty bag which was found to be nearly 1 kg has been allowed. He accordingly directed the Assessing Officer to allow adjustment for empty bags of maida as has been done in A.Y. 1989- 90 and all subsequent years, if it has not already been adjusted in the order passed.
12. As far as the adjustment for excess weight of biscuits in packets for the brands namely, Crackjack, Nimkin and Monaco, the CIT(A) in the presence of the Assessing Officer had verified the sample packets, the results of the weights of which are as under:
(Weight in gms) Monaco Krackjack Nimkin Declared weight on packet (net wt. of 75 75 75 biscuits) Wt of empty packet (i.e., wrapper wt.) 1.4 1.5 1.2 Wt of sample (packed) packets (i.e., wt with wrapper) 1 81 81.5 84 2 80.6 83 82.1 3 83.4 82.1 82.8 4 83.3 83.5 83.2 5 82.6 84.7 83 6 82.8 82.8 83.2 7 83.2 83.8 82 8 83.2 84.8 85.4 9 84.3 85 83.5 10 83.2 81.8 82.4
13. On the basis of the above, he noted that after reducing the weight of empty packets, actual weight of biscuits exceed the declared weight. He accordingly directed the Assessing Officer to 7 M/s. Parle Biscuits Pvt. Ltd.
=================== allow adjustment for the excess weight of biscuits on the basis of these results. He further directed the Assessing Officer to get the packets weighed again in case he requires the same and allow adjustment accordingly.
14. As far as the biscuits produced by the contract manufacturers, he agreed with the contention of the learned counsel for the assessee that if the input-output ratio of the own factory is applied to the CMUs also then adjustments which have been allowed in respect of own factory should also be allowed in respect of CMUs. Since the figures of exact wastage are not available, he directed the Assessing Officer to allow the wastage in the same proportion in which it has been allowed in respect of Parle-G production in own factory. He noted that the assessee has worked out the figure of excess/short consumption after taking into account the adjustments allowed in this order. As per this calculation there is short consumption instead of excess consumption for which no addition is to be made. The calculation as given by the assessee before the CIT(A) is as under:
Manufactured by Bahadurgarh Factory Parle G 43,63,970 Monaco (1,03,57,370) Krackjack (42,67,895) Nimkin (4,76,371)
-----------------
(1,07,37,666) Manufactured by Neemrana Factory 93,78,226 Manufactured by Neemrana Factory CMUS (Parle G) Annakut Biscuits Co. Pvt. Ltd. (48,31,646) Rishi Bakers Pvt. Ltd. (56,41,403) Swati Biscuits Mfg. Co. Ltd. (55,87,902) Balaji Bakers Pvt. Ltd. (43,05,481)
---------------
(2,03,66,433)
------------------
Total excess/(short) consumption (2,17,25,873)
15. He accordingly directed the Assessing Officer to verify these figures subject to the condition that no adjustment in respect of left over maida in the bags is to be made and allow relief.
8 M/s. Parle Biscuits Pvt. Ltd.
===================
16. Aggrieved with such order of the CIT(A), the as well assessee the Revenue are in appeal before us with the following grounds of appeal:
Assessee's grounds of appeal:
The appellant objects to the order dated 15.12.2005 passed by the Commissioner of Income-tax (Appeals), Central V, Mumbai, ("CIT(A)") for the aforesaid assessment year on the following among other grounds.
1. The learned CIT(A) erred in not deleting the addition made by the Assessing Officer (AO) for alleged excess consumption of raw materials of Rs.1,57,84,868.
2. The learned CIT(A) erred in confirming the action of the AO in applying the Input/Output formulae of 108.19:100 for computing alleged excess/short consumption of raw materials at the appellant's Contract Manufacturing Units (CMUs) as against the formulae of 110.607:100 as contended by the appellant.
He erred in not appreciating the submissions made by the appellant in this connection.
3. Without prejudice to the above contention, the learned CIT(A), while confirming the action of the AO in applying the Input/Output formulae of 108.19 for the appellants CMUs, erred in not directing the AO to make the adjustments to the amount of production of the CMUs in computation of excess/short consumption at the CMUs.
4. Each one of the above grounds of appeal is without prejudice to the other.
Revenue's Grounds of Appeal:
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to allow adjustment for empty bags of maida while working out the ratio of consumption of raw material and production without appreciating that
a) The maida bags come in net weight and not as gross weight as made out to be by the assessee before CIT(A).
9 M/s. Parle Biscuits Pvt. Ltd.
=================== The AO has already allowed adjustment of 25% on account of pre-production and post-production wastages.
2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to allow all adjustments that have been allowed in respect of own factory to CMUs also without appreciating the fact that the excess consumption of raw material is worked out on the total production on the different brands of biscuits irrespective of production in own factory or by CMUs, and deduction was allowed in the same proposition in all the brands of biscuits ignoring the fact that pre- production and post production wastages are not included in the production of biscuits by CMUs. Therefore, question of taking input output ratio at 110.607:100 does not arise.
17. The learned counsel for the assessee submitted that the assessee which is in the business of manufacturing of biscuits, manufactures the same at its own factory and also through various CMUs. The Assessing Officer while completing the assessment adopted the standard formula of input-output ratio of 108.19:100 and accordingly calculated the excess consumption of raw material to the tune of Rs.1,57,84,868 and added to the total income of the assessee. He submitted that while making the addition on account of excess consumption of raw material the Assessing Officer has neither rejected the books of account nor made an allegation of suppressed production. He submitted that full details of purchases were filed and it has not been proved by the Assessing Officer that such purchases are not genuine. There is also no case of the Assessing Officer that the assessee sold its goods outside the books of account. He submitted that the assessee has maintained all the books statutorily required which are duly audited as per the Companies Act and Income-tax Act. The assessee's accounts cost- wise also were audited. The books of account were audited and verified by the Excise Department. In absence of any primary material to reject assessee's books of account the Assessing Officer cannot make the addition. Referring to the consolidated order of the 10 M/s. Parle Biscuits Pvt. Ltd.
=================== Tribunal for the A.Ys. 1989-90, 1991-92 and 1994-95 to 1996-97, a copy of which is placed at Paper Book pages 166 to 174, the learned counsel for the assessee referred to para 11 of the order and submitted that the Tribunal while accepting the grounds of the assessee has held that no addition can be made on account of excess consumption.
18. Referring to the decision of the Hon'ble Bombay High Court in the case of R.B. Bansilal Abirchand Spinning & Weaving Mills vs. CIT reported in 75 ITR 260, he submitted that the Assessing Officer's right under the proviso to section 13(Income-tax Act, 1922) arises only if a finding is recorded as to the unacceptability of the method and irregularity of the accounts kept. In the absence of such a finding recorded by the authority the results cannot be ignored or brushed aside. The mere fact that the percentage of dead loss of cotton is high in a particular year cannot lead to an inference that there has been suppression of the production in the spinning mill. Accordingly it was held that the addition of Rs.50,000 to the total income of the assessee on account of alleged understated production of the yarn and soft waste was not justified.
19. Referring to the decision of the J & K High Court in the case of International Forest Co. vs. CIT reported in 101 ITR 721, he submitted that the Hon'ble High Court in the said decision has held that mere low yield of out-turn sawn timber or the manifestation of meagre gross profit, which were the sheet anchors of the orders of the income-tax authorities and Tribunal could not be taken as indication of suppression of sales on the part of the assessee.
19.1 Referring to the decision of the Hon'ble Patna High Court in the case of Motipur Sugar Factory vs. CIT reported in 95 ITR 401, he submitted that the Hon'ble High Court in the said decision has held that when the entire manufacturing process of sugar was subjected to the supervision and checking of the Central Excise Officers posted at the factory and the accounts of the assessee are audited by a 11 M/s. Parle Biscuits Pvt. Ltd.
=================== reputed firm of chartered accountants, the Tribunal was wrong in drawing an adverse inference and in rejecting the assessee's accounts and sustaining the addition.
19.2 Referring to the decision of the Hon'ble Kerala High Court in the case of St. Teresa's Oil Mills vs. State of Kerala reported in 76 ITR 365, he submitted that disparity in consumption of electricity would not justify the rejection of accounts in absence of any other supporting circumstances because such variation could be due to various factors outside the control of the assessee.
20. He submitted that in the instant case, the Department has established nothing except excess consumption. Referring to page 37 of the Paper Book, he submitted that a detailed reply was given to the Assessing Officer. However, the Assessing Officer has not carried out any enquiry with any of the suppliers to prove that the purchases are bogus. Referring to page 39 of the Paper Book he submitted that a note on computation of quantity and value of raw material was given to the Assessing Officer. Referring to page 41 of the Paper Book, he submitted that unit-wise production figures were submitted to the Assessing Officer. Referring to pages 49 to 51 of the Paper Book, he submitted that a note on yield of biscuits, handing loss and operational loss, etc., was given to the Assessing Officer. Referring to page 91 of the Paper Book, he submitted that why a standard or theoretical formula cannot be applied to work out the consumption of raw material was given to the Assessing Officer. Therefore, without considering all these factual documents, the Assessing Officer cannot make an addition on account of excess consumption of raw material. He submitted that since the Tribunal has already deleted such excess consumption to the extent sustained by the CIT(A) for the A.Ys. 1989-90, 1991-92 and 1994-95 to 1996-97, therefore, no addition is called for.
21. The learned DR, on the other hand, while supporting the order of the CIT(A) drew the attention of the Bench to page 4 of the 12 M/s. Parle Biscuits Pvt. Ltd.
=================== CIT(A)'s order and submitted that the assessee has nowhere explained as to why there was short production. He submitted that if the accounts are correct there cannot be any short consumption. The assessee had not produced any evidence as to whether it is the gross weight or net weight. The wastage as submitted by the assessee has already been taken care of by the standard formula. He submitted that the Assessing Officer and the CIT(A) have not discussed the issue of 108.19:100 in a scientific manner. The various decisions relied on by the learned counsel for the assessee are distinguishable and not applicable to the facts of the present case. Therefore, he submitted that the matter may be set aside to the Assessing Officer.
22. The learned counsel for the assessee, in his rejoinder, submitted that not a single word about the order of the ITAT for the earlier year has been mentioned. He submitted that it is not known who devised the formula of input-output ratio of 108.19:100 in the A.Y. 19899-90. In any case the same has already been deleted by the Tribunal. He submitted that in case of good quality of raw material like maida and sugar there will be less consumption. There is no dispute regarding the weight of the maida bag being 100 kg. However, the dispute is only regarding the maida that remains in the bag. He submitted that there is bound to be some loss in the process. He accordingly submitted that no addition is called for.
23. We have considered the rival submissions made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. There is no dispute to the fact that the assessee is manufacturing biscuits through its own factory as well as through CMUs. As far as the manufacturing of biscuits through own factory is concerned, the books of account of the assessee are not rejected by the Assessing Officer. The accounts of the assessee are audited and no material has been brought on record by the Assessing Officer that there is 13 M/s. Parle Biscuits Pvt. Ltd.
=================== sale of goods outside the books of account. Further we also find merit in the submission of the learned counsel for the assessee that when the details of the purchases are submitted before the Assessing Officer nothing has been done to prove that any of the purchases are bogus. We further find the Tribunal in assessee's own case in the consolidated order for the A.Ys. 1989-90, 1990-91 and 1994-95 to 1996-97 vide order dated 21st December, 2006 at para 11 of the order has discussed the issue and deleted the addition sustained by the CIT(A) on account of excess consumption by holding as under:
"We heard the rival submissions and gone through the orders of the revenue authorities. We are of the view that the appeal by the assessee on this issue is to be accepted. It is true that the assessee could not explain why the sister concern's consumption of raw material is comparatively less. But at the same time it is to be noted that the assessee's accounts are audited, book results are not rejected and there is no case for the revenue that there is sale outside the books. Revenue itself is indirectly accepting assessee's contention that there cannot be standard formula for usage of raw materials. In some items there is excess use and in some items there is less. The raw materials which are shown as used less, the revenue itself allowed set off against excess use shown in some other items, which indirectly accepts assessee's contention that there cannot be any standard formula. Secondly it is difficult to reject assessee's contention that the output depends on the quality of raw material. It may depend on various factors. Under these circumstances, we are of the view that the appeal by the assessee on this ground is to be allowed. It is allowed."
24. Since the facts of the present case on account of manufacturing of biscuits through own factory are identical to the facts in the preceding assessment years, therefore, respectfully following the decision of the Tribunal in assessee's own case and in absence of any contrary material brought to our notice, we are of the view that the book results of the assessee, so far as manufacturing of biscuits through own factory is concerned has to be allowed and no adjustment is called for.
14 M/s. Parle Biscuits Pvt. Ltd.
===================
25. As regards the issue relating to the manufacturing of biscuits through CMUs is concerned, we find the Assessing Officer noted that the input-output ratio in the CMUs are shown by the assessee at 110.60:100 as against 108.19:100 in case of own factory. We find the Assessing Officer rejected the various submissions given by the assessee and applied the ratio of 108.19:100 for the CMUs also. We find the CIT(A) directed the Assessing Officer to make the same adjustments to the CMUs which are applicable to own factory. Based on the figures given by the assessee, he directed the Assessing Officer to verify these figures subject to the condition that no adjustment in the case of left over maida is to be made. Admittedly, the assessee has no full control over the CMUs. At the same time it cannot be blindly accepted as to whatever figures given by the assessee on account of manufacturing of biscuits through the CMUs has to be accepted. Some sort of control, in our opinion, is required as there is every possibility of leakage of revenue through excess consumption of raw material in absence of any control mechanism. Under the peculiar facts and circumstances of the case, we find merit in the submission of the learned counsel for the assessee that if the input-output formula of 108.19:100 for the CMUs is applied then necessary adjustment which are allowed to the own manufacturing units should also be allowed to the CMUs. We, therefore, set aside the order of the CIT(A) on this issue and restore the matter to the file of the Assessing Officer directing him to make necessary verification and give appropriate relief to the assessee. We hold and direct accordingly. The grounds raised by the assessee are accordingly allowed for statistical purposes and the grounds of appeal No. 2 by the Revenue is dismissed.
26. As far as grounds of appeal No. 1 by the Revenue is concerned, in view of our finding in the preceding paragraph accepting the book results of the assessee for production through own factory, we do not find any infirmity in the order of the CIT(A) in directing the Assessing Officer to allow adjustment for empty 15 M/s. Parle Biscuits Pvt. Ltd.
=================== bags of maida while working out the ratio of consumption of raw material and production. The grounds of appeal No. 1 by the Revenue is accordingly dismissed.
27. In the result, the appeal filed by the assessee is allowed for statistical purposes and the grounds raised by the Revenue are dismissed.
I.T.A. No. 5542/Mum/2006 (A.Y. 2000-01) (By Revenue):
I.T.A. No. 5320/Mum/2006 (A.Y. 2000-01) (By Assessee):
I.T.A. No. 5543/Mum/2006 (A.Y. 2001-02) (By Revenue): I.T.A. No. 5321/Mum/2006 (A.Y. 2001-02) (By Assessee):
28. The grounds raised by the assessee and the Revenue are as under:
I.T.A. No. 5542/Mum/2006 (A.Y. 2000-01)(By Revenue):
1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to allow adjustment for empty bags of maida while working out the ratio of consumption of raw material and production without appreciating that:
a) The maida bags come in net weight and not as gross weight as made out to be by the assessee before CIT(A).
The AO has already allowed adjustment of 25% on account of pre-production and post-production wastages.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to allow all adjustments that have been allowed in respect of own factory to CMUs also without appreciating the fact that the excess consumption of raw material is worked out on the total production on the different brands of biscuits irrespective of production in own factory or by CMUs, and deduction was allowed in the same proposition in all the brands of biscuits ignoring the fact that pre- production and post production wastages are not included in the production of biscuits by CMUs. Therefore, question of taking input output ratio at 110.607:100 does not arise.
I.T.A. No. 5320/Mum/2006 (A.Y. 2000-01)(By Assessee):
The appellant objects to the order dated 08.08.2006 passed by the Commission of Income-tax (Appeals), 16 M/s. Parle Biscuits Pvt. Ltd.
=================== Central IV, Mumbai (CIT(A)) for the aforesaid assessment year on the following among other grounds:
1.1 The learned CIT(A) erred in not deleting the addition made by the Assessing Officer for alleged excess consumption of raw materials of Rs.1,51,32,688.
1.2 The learned CIT(A) erred in confirming the action of the AO in applying the input/output formulae of 108.19:100 for computing alleged excess/short consumption of raw materials at the appellants Contract Manufacturing Units as against the formulae of 110.607:100 as contended by the appellant.
He erred in not appreciating the submission made by the appellant in this connection.
1.3 Without prejudice to the above, the learned CIT(A), while confirming the action of the AO in applying the Input/Output formulae of 108.19:100 for the appellant's CMUs erred in not directing the AO to make the adjustments to the amount of production of the CMUs in computation of excess/short consumption at the CMUs.
I.T.A. No. 5543/Mum/2006 (A.Y. 2001-02)(By Revenue):
1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to allow adjustment for empty bags of maida while working out the ratio of consumption of raw material and production without appreciating that:
a) The maida bags come in net weight and not as gross weight as made out to be by the assessee before CIT(A).
The AO has already allowed adjustment of 25% on account of pre-production and post-production wastages.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to allow all adjustments that have been allowed in respect of own factory to CMUs also without appreciating the fact that the excess consumption of raw material is worked out on the total production on the different brands of biscuits irrespective of production in own factory or by CMUs, and deduction was allowed in the same proposition in all the brands of biscuits ignoring the fact that pre- production and post production wastages are not included in the production of biscuits by CMUs.
17 M/s. Parle Biscuits Pvt. Ltd.
=================== Therefore, question of taking input output ratio at 110.607:100 does not arise.
I.T.A. No. 5321/Mum/2006 (A.Y. 2001-02)(By Assessee):
The appellant objects to the order dated 08.08.2006 passed by the Commission of Income-tax (Appeals), Central IV, Mumbai (CIT(A)) for the aforesaid assessment year on the following among other grounds:
1.1 The learned CIT(A) erred in not deleting the addition made by the Assessing Officer for alleged excess consumption of raw materials of Rs.1,37,16,820.
1.2 The learned CIT(A) erred in confirming the action of the AO in applying the input/output formulae of 108.19:100 for computing alleged excess/short consumption of raw materials at the appellants Contract Manufacturing Units as against the formulae of 110.607:100 as contended by the appellant.
He erred in not appreciating the submission made by the appellant in this connection.
1.3 Without prejudice to the above, the learned CIT(A), while confirming the action of the AO in applying the Input/Output formulae of 108.19:100 for the appellant's CMUs erred in not directing the AO to make the adjustments to the amount of production of the CMUs in computation of excess/short consumption at the CMUs.
29. After hearing both the sides, we find the grounds taken by the assessee as well as the Revenue are identical to the grounds in I.T.A. No. 1411/Mum/2006 and I.T.A. No.1412/Mum/2006. We have already decided the issue and the grounds raised by the Revenue have been dismissed and the grounds raised by the assessee have been allowed for statistical purposes. Following the same ratio, the grounds raised by the Revenue are dismissed and the grounds raised by the assessee are allowed for statistical purposes.
I.T.A. No. 3890/Mum/2007 (A.Y. 2003-04) (By Revenue):
I.T.A. No. 2802/Mum/2007 (A.Y. 2003-04) (By Assessee):
30. The grounds of appeal raised by the Revenue as well as the assessee are as under:
18 M/s. Parle Biscuits Pvt. Ltd.
=================== Revenue's grounds of appeal:
1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to allow adjustment for empty bags of maida while working out the ratio of consumption of raw material and production without appreciating that:
a) The maida bags come in net weight and not as gross weight as made out to be by the assessee before CIT(A).
The AO has already allowed adjustment of 25% on account of pre-production and post-production wastages.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to allow all adjustments that have been allowed in respect of own factory to CMUs also without appreciating the fact that the excess consumption of raw material is worked out on the total production on the different brands of biscuits irrespective of production in own factory or by CMUs, and deduction was allowed in the same proposition in all the brands of biscuits ignoring the fact that pre- production and post production wastages are not included in the production of biscuits by CMUs. Therefore, question of taking input output ratio at 110.607:100 does not arise.
Assessee's grounds of appeal:
The appellant objects to the order dated 15.02.2007 passed by the Commission of Income-tax (Appeals), Central V, Mumbai (CIT(A)) for the aforesaid assessment year on the following among other grounds:
1. The learned CIT(A) erred in not deleting the addition made by the Assessing Officer for alleged excess consumption of raw materials of Rs.51,63,729
2. The learned CIT(A) erred in not directing the AO follow the order of the Income-tax Appellate Tribunal in the appellant's own case for the assessment years 1989-90, 1991-92, 1994-95, 1995- 96 and 1996-97 in respect of the addition for alleged excess consumption of raw materials made in the case of the Contract Manufacturing Units of the appellant.
He further erred in confirming the action of the AO in applying the Input/Output formulae of 108.19:100 for computing alleged excess/short consumption of raw materials at the appellant's 19 M/s. Parle Biscuits Pvt. Ltd.
=================== CMU's as against the formulae of 110.607:100 as contended by the appellant.
Without prejudice to the above contention, the learned CIT(A), while confirming the action of the AO in applying the input/output formulae of 108.19:100 for the appellant's CMUs, erred in not directing the AO to make the adjustments to the amount of production of the CMUs in computation of excess/short consumption at the CMUs.
He erred in not appreciating the submissions made by the appellant in this connection.
31. After hearing both the sides, we find the grounds taken by the assessee as well as the Revenue are identical to the grounds in I.T.A. No. 1411/Mum/2006 and I.T.A. No.1412/Mum/2006. We have already decided the issue and the grounds raised by the Revenue have been dismissed and the grounds raised by the assessee have been allowed for statistical purposes. Following the same ratio, the grounds raised by the Revenue are dismissed and the grounds raised by the assessee are allowed for statistical purposes.
32. Grounds of appeal No. 3 by the Revenue reads as under:
"On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the claim of entire expenditure on advertisement amounting to Rs.16,88,82,896/- in spite of the fact that assessee has debited only 50% (i.e., 8,44,41,448/-) of such expenses in the books of account."
33. The brief facts of the above issue are that it was inter alia observed by the AO that the assessee has incurred an expenditure of Rs. 16.88 crores on publicity and brand advertising. Fifty percent of this expenditure amounting to Rs. 8.44 crores has been debited in the books of accounts and the balance 50% was claimed in the computation of income. The assessee was asked to explain as to why the same should not be disallowed more so when the assessee itself not considered it as expenditure accrued for the purpose of accounting. In response it was inter alia submitted by the assessee as under:-
20 M/s. Parle Biscuits Pvt. Ltd.
=================== "........Under section 37(1) of the Income-tax Act, a deduction of any expenditure incurred by the assessee, not being capital or personal expenditure, incurred wholly and exclusively for the purpose of its business is allowable as a deduction in computing the profits and gains of business. Hence once expenditure is incurred the entire amount is allowable as a deduction irrespective of the fact that only a part of the amount is debited in its Profit & Loss account. There is no concept of deferred revenue expenditure/ amortization under the Act except where specifically provided viz. section 35DDA (VRS amounts); 35DD (amalgamation expenditure) etc. The assessee has incurred expenditure of Rs. 16,88,82,896/- on advertisement during the year though it might have been deferred in the accounts for a period of two years. Hence the entire amount of Rs. 16,88,82,896/- has been claimed as a deduction in computation of income......"
34. The reliance was also placed in the case of Amar Raja Batteries V. ACIT (272 ITR 17, ITAT Supplement), Core Health Care Ltd. (78 ITD 1(TM), CIT vs. Bhor Industries Ltdd. (264 ITR 180) and Silcon Interfaces Pvt. Ltd. V. ITO (ITA No.7434/Mum/03). However, the A.O was of the view that matching concept is a necessary prerequisite for computing true and correct income of the assessee. Admittedly the benefit is derived by the assessee over a number of years and on this basis only, the accounts have been prepared and, therefore, he disallowed the deduction of Rs. 8,44,41,448/- and added to the income of the assessee.
35. On appeal, ld. CIT(A) while distinguishing the decisions relied on by the AO, relied on the decision cited by the assessee wherein it has been held that the advertisement expenditure in one year is allowable even though written off in the books over a period of time, held that the entire advertisement expenditure is allowable in the year under consideration and accordingly deleted the addition made by the AO.
36. At the time of hearing ld. D.R submits that for the reasons as discussed in the assessment order the ld. CIT(A) was not justified in 21 M/s. Parle Biscuits Pvt. Ltd.
=================== allowing the claim of entire expenditure on advertisement amounting to Rs. 16,88,82,896/- in spite of the fact that the assessee has debited only 50% i.e.8,44,41,448/- on such expenses in the books of account. He, therefore, submits that the addition made by the AO be restored. He further submits that since the AO has not considered the nature of expenditure having enduring benefit, or capital in nature, therefore, the issue may be set aside to the file of the AO.
37. On the other hand, ld. Sr. Counsel for the assessee while reiterating the same submissions as submitted before AO and ld. CIT(A) relied on the following decisions.
1. CIT vs. Jai Parabolic Springs Ltd. (2008) 306 ITR 42 (Del)
2. CIT vs. Sakthi Soyas Ltd. (2006) 283 ITR 194(Mad)
3. CIT v. Berger Paints (India) Ltd. (No.2) (2002) 254 ITR 503(Cal)
4. Silicon Interfaces Private Limited, ITA No.7434/Mum/ 03,A.Y. 2001-02, order dated 30.6.2005 He, therefore, submits that the order passed by the ld. CIT(A) be upheld.
38. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute in as much as the assessee has incurred expenditure of Rs.16.88 crores on publicity and brand advertising and out of it the assessee has debited 50% of total expenditure i.e. 8.44 crores in its books of accounts and balance expenditure of Rs. 8,44,41,448/- has been claimed in the computation of income filed alongwith return of income. The A.O in view of the entries recorded in the books of accounts treated the balance expenditure of Rs.8,44,41,448/- as deferred revenue expenditure and allowed only Rs. 8.44 cores as debited in the books of accounts. On appeal ld. CIT(A) observed that there is no dispute that the impugned advertisement expenditure is revenue in nature and the expenditure is laid out wholly and exclusively for the purpose of business and that the only dispute is where the entire expenditure is 22 M/s. Parle Biscuits Pvt. Ltd.
=================== to be allowed as deduction during the year or it is to be allowed in two years as per treatment given in the books of accounts, relied on certain decisions held that the entire advertisement expenditure is allowable in this year and hence deleted the disallowance made by the AO.
39. Here it is necessary to take note of the following cases on this issue.
40. In CIT vs. Berger Paints(India) Ltd.(No.2)(Cal.)(supra), it has been held(page 504 head note):
"Held,(i) that if according to the revenue laws the assessee is entitled to treat a sum as a revenue expenditure, then that legal right of the assessee is not estopped by the treatment given by the assessee to it in its own books of account. Advertisement expenses are normally to be treated as revenue expenditure. The Tribunal was justified in law in allowing a sum of Rs.8,29,723/- as revenue expenditure.........."
41. In CIT vs. Sakthi Soyas Ltd. (supra), it has been held(page 195 head note):
".....(ii) That in respect of the project launching expenses amounting to Rs.16,41,125/- also the assessee had spent the money mainly for advertisement through visual and print media and also for designing and printing leaflets, brochures, etc. and hence these expenses were also in the nature of business expenditure entitled for deduction in computing the assessee's income."
42. In CIT vs. Bhor Industries Ltd.(supra), it has been observed and held (page 185):
".....Applying the ratio of judgment of the Supreme Court to the facts of this case, in the present matter, the VRS expenses were incurred by the company to save on the expense. The expense was not referable to any income-yielding asset. It is well settled that, ordinarily revenue expenditure, which is incurred wholly and exclusively for the purpose of business, must be allowed in its entirety in the year in which it is incurred and it cannot be spread over a number of years even though the assessee has written it off in its books over a period of years even though the assessee has written it off in its books over a period of years....."
23 M/s. Parle Biscuits Pvt. Ltd.
===================
43. In ACIT vs. Ashima Syntex Ltd.(2009) 310 ITR(AT) 1(Ahmedabad) (SB) the Special Bench of the Tribunal while considering the decision of Hon'ble Supreme Court in Madras Industrial Corp Ltd. vs. CIT (1997) 225 ITR 802 observed and held as under (page-15):
".....This judgment relied upon by the ld. Departmental Representative itself clarifies that though the taxpayer may have written off the expenditure in its books of account over a period say of five years, it must be allowed in its entirety in the year in which it was incurred, if it is revenue expenditure, and if it is wholly and exclusively incurred for the purposes of business. In the case under consideration, there is nothing to suggest that with this expenditure, any asset, tangible or intangible, has been created. There is no evidence on record regarding accrual of any specific revenue in the years under consideration or subsequently over a defined period with the incurring of the said expenditure. The Assessing Officer himself admitted the portion of expenditure debited in the profit and loss account as revenue expenditure. In these circumstances, we do not find any justification to interfere with the findings of the ld. Commissioner of Income tax (Appeals)."
44. In CIT vs. Jai Parabolic Springs Ltd., (2008) 306 ITR 42 (Del) it has been observed and held as under:-
"The assessee filed a return of income declaring a net loss at Rs. 4,40,36,000/- for the assessment year 1990-
91. The loss was computed at Rs. 4,27,63,353, inter alia, by making several additions and disallowances. The assessee incurred an expenditure of Rs. 19,48,125/- as expenditure on account of customer introduction charges which were debited as "deferred revenue expenses" in the balance-sheet. The expenditure was written off over a period of five years starting from the assessment year 1990-91 and accordingly the assessee claimed reduction of Rs. 3,89,625 in the return. The claim was allowed by the Assessing Officer. In appeal before the Commissioner (Appeals), the assessee claimed an additional ground that the entire deferred revenue expenses were deductible in the assessment year in appeal. The appeal was allowed. The Tribunal restored the matter to the Assessing Officer. The Assessing Officer allowed only a reduction of Rs. 3,89,625 and disallowed the claim of Rs. 15,58,500 on the ground that this was not claimed by the assessee in 24 M/s. Parle Biscuits Pvt. Ltd.
=================== its return of income in the assessment year 1990-91. The Commissioner (Appeals) held that the Assessing Officer erred in disallowing the expenditure on the sole ground that no claim for deduction of the amount was made in the return of income. This order was confirmed by the Tribunal.
On appeal:
Held, dismissing the appeal, that there was no prohibition on the powers of the Tribunal to entertain an additional ground which according to the Tribunal arose in the matter and for the just decision of the case. There was no infirmity in the order of the Tribunal."
45. In Silicon Interfaces Private Limited, ITA No.7434/M/03, A.Y. 2001-02 dated 30.6.2005, the Tribunal while relying on the decision of the Tribunal in Amar Raja Batteries Ltd. vs. ACIT, 272 ITR 1 (AT); 91 ITD 280 and the ratio of decision of Kedarnath Jute Manufacturing Co. Ltd. vs. CIT 82 ITR 363 (SC) holding that the books of accounts do not determine the allowability or otherwise expenditure, agreeing with the view taken by the Co-ordinate Bench of the Tribunal and deleted the disallowance made by the AO.
46. Applying the ratio of aforesaid legal position to the facts of the present case we are of the view that making of an entry or absence of an entry does not determine the allowability or otherwise of the item of expenditure and the same can not be considered to be a factor adverse, if the expenditure is otherwise of allowable nature. It is not the case of the revenue that the expenditure incurred by the assessee on publicity and brand advertising are not revenue in nature or have not been incurred wholly and exclusively for the purpose of business. There is nothing to suggest that with this expenditure, any asset tangible or intangible, has been created. There is no law under the Act to say that the revenue expenditure is deferred revenue expenditure. The A.O himself admitted the portion of expenditure debited in the P&L Account as revenue expenditure. This being so, we are of the view that the expenditure incurred by the assessee on publicity and brand advertising are allowable as revenue expenditure.
25 M/s. Parle Biscuits Pvt. Ltd.
=================== Accordingly, we are inclined to uphold the finding of the ld. CIT(A) in deleting the disallowance made by the AO. The ground taken by the revenue is, therefore, rejected.
47. In the result, the appeals filed by the Revenue are dismissed and the appeals filed by the assessee are allowed for statistical purposes.
Order pronounced in the open court 31st August, 2010.
Sd/- Sd/-
(D.K. AGARWAL) (R.K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
MUMBAI, dated 31st August, 2010
Copy to:
(1) The Appellant,
(2) The Respondent,
(3) The CIT(A)-IV
(4) CIT(A)-V, Mumbai,
(5) The CIT, Central-II, Mumbai,
(6) The DR, 'C' Bench, ITAT, Mumbai.
//True Copy//
BY ORDER
ASSISTANT REGISTRAR
ITAT, Mumbai Benches, Mumbai
Tprao