Parle Biscuits Pvt. Ltd. Vs ACIT (ITAT Mumbai)- It is held that redemption of preference shares amounts to ‘transfer’ of a capital asset under the Income-tax Act and any loss on redemption thereon would thus be allowable as a capital loss. The Tribunal, relyied on the Supreme Court decisions in the case of Anarkali Sarabhai v. CIT [1996] 224 ITR 422 (SC) and Kartikeya Sarabhai v. CIT [1997] 228 ITR 163 (SC) , held that redemption of preference shares has to be considered as ‘transfer’ and loss on redemption thereof is an allowable long- term capital loss.
Further, the Tribunal observed that even if for the purpose of argument, the consideration is deemed as dividend, the same amount of consideration cannot be considered at the time of computing capital gains on redemption, and therefore, the assessee may be entitled to a higher loss on redemption.
On analysing the implications of section 2(22)(d) of the Act, the Tribunal held that since there is no reduction of capital in the given case, considering section 80(3) of the Companies Act, even though the amounts were distributed out of accumulated profits, the amounts received by the assessee cannot be construed as ‘deemed dividend’ and would therefore be considered as consideration received on ‘transfer’ in working out the capital gains.
M/s. Parle Biscuits Pvt. Ltd. Vs ACIT, Central Circle – 25
Decided By- ITAT Mumbai
ITA Nos. 5318 & 5319/Mum/2006 & 447/Mum/2009
(Assessment Years: 1998- 99, 1999-2000 & 2004-05)
ITA Nos. 5540 & 5541/Mum/2006 & 683/Mum/2009
(Assessment Years: 1998-99, 1999-2000 & 2004-05)
Date of Hearing: 27.07.2011
Date of Pronouncement: 19.08.2011
ORDER
Per Bench
These are appeals by assessee and Revenue against the orders of the CIT(A) in the respective assessment years. Since common issues are involved these appeals are taken together and considered.
2. We have heard Shri P.J. Pardiwalla, the learned counsel for the assessee and Shri D.S. Sunder Singh, the learned CIT D.R in detail.
ITA No. 5318/Mum/2006 & ITA No.5540/Mum/2006: A.Y. 1998-99
3. In these cross appeals the grounds stated by the assessee and Revenue are as under: –
Assessee’s appeal
1. The learned CIT(A) erred in confirming the addition made by the assessing officer (“A.O”)for deposits written off Rs.2,63,750.
2.1 The learned CIT(A) erred in not deleting the addition made by the AO for alleged excess consumption of raw material of Rs. 1,32,51,851.
2.2 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 (“CMU’s”) 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.
2.3 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 appellants CMU’s, erred in not directing the AO to make the adjustments to the amount of production of the CMU’s in computation of excess/short consumption of the CMU’s.
3. The learned CIT(A) erred in confirming the action of the AO in disallowing long term capital loss of Rs. 35,58,718 on redemption of preference shares.”
Revenue’s appeal
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the A.O. 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 A. O. has already allowed adjustment of 25% on account of pre-production and post production wastage.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the A.O. 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 pot production wastages are not included in the production of biscuits by CMU’s. Therefore, question of taking input output ratio at 110.607:100 does not arise.”
4. As can be seen from the grounds, ground No. 2 in assessee’s appeal is on the same issue as that of grounds in Revenue’s appeal. These are considered appropriately.
5. Ground No. 1 in assessee’s appeal is against dis allowance of deposit written off 2,63,75O/-. During the year assessee written off certain deposits lying with Maharashtra State Electricity Board aggregating to 2,63,75O/-. The amount written off was claimed as a deduction under Section 36(1)(vii) rws 36(2) or as alternative under section 28 or 37 of the I.T. Act. The deposits with MSEB, Lonavala relates to land, building and plant & machinery, which have been sold in financial year 1996-97 (A.Y. 1997-98) and since these assets were not with the assessee the deposits were not recoverable and were written off. The DCIT disallowed the claim on the reason that the deposit with the Government undertaking cannot be written off and assessee has not made any attempt to recover the amount. Before the CIT(A) it was submitted that the deposits relate to assets which had been disposed off in earlier year and as assessee was not in a position to obtain refund, the same was written off. It was the contention that the same is allowable under section 28/37(1) being a loss arising out of and incidental to business. The CIT(A) rejected the contentions stating that the amount could not be allowed as a bad debt as the conditions under section 36(2) were not satisfied. Regarding the claim under section 28/37 as the assessee transferred the business in connection with which the deposits were claimed the amount cannot be allowed as a loss incidental to the business.
6. After considering the rival submissions and examining the issue we are of the opinion that the amount cannot be allowed as a deduction. It is admitted that the amount cannot be allowed as bad debt as assessee has not fulfilled the conditions under section 36(2). With reference to the claim under section 28/37(1) it can be considered as a loss arising in the course of business but this loss has not arising during the year. As the units was transferred in F.Y. 1996-97 relevant to A.Y. 1997-98 the deposits made with reference to the said unit could have been claimed in the year in which the same was sold off. Since the unit was already sold in an earlier year and since the assessee has not made any adjustment with reference to the deposits in that year, the same cannot be allowed during year under consideration. For this reason, we uphold the order of the lower authorities in not allowing the amount. Accordingly the ground is rejected.
7. Ground No. 2 in assessee’s appeal and ground Nos. 1 & 2 in Revenue’s appeal relate to addition of 1,32,51,851/- made by the A.O. on account of excess consumption of raw material.
8. 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.
9. 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 in 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.
10. 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 various wastage 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 wastage on account of unfinished/burnt biscuits which were also not taken into account for making the dis allowance on the basis of input-output ratio. In respect 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.
11. In the original order in the A.Y. 1989-90 an addition of 49,20,000/- was made by the Assessing Officer. This addition was reduced to 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 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 22,72,270/- was further reduced to 5 ,22,385 / -.
12. 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, in the year under consideration following the same principle there was a short consumption of raw material to the tune of 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.
13. 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.
14. 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 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.
15. 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 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.
16. 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.
17. 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.)
