Addition on estimated basis by rejecting books without any adverse material cannot stand

Parle Products Pvt. Ltd. vs. ACIT (ITAT Mumbai)

ITAT Mumbai held in the case of Parle Products Pvt. Ltd. vs. ACIT that Making addition on estimate basis by rejecting the books of account in the absence of any adverse material brought on record cannot stand.

In Parle Products Pvt. Ltd. vs. ACIT [ITA No.6821/Mum/2004 and other appeals, decided on 22.01.2018], one of the ground raised was the CIT(A) erred in confirming the action of Assessing Officer(AO) in rejecting the book results of the appellant. He erred in holding that the books of accounts cannot be said to be complete.

In brief, the assessee was engaged in the business of manufacturing biscuits and confectioneries of different varieties. It also got some of the items manufactured on contract basis from various Contract, Manufacturing, Units (CMUs) located all over the country. Ten of the CMUs were manufacturing biscuits and 5 of the CMUs were manufacturing confectioneries. The technical knowhow as well as the raw material for the CMUs is provided by the assessee and the manufacturing in the CMU is conducted under the direct supervision of employees of the assessee. From the details filed, the A.O. observed that the yield for this manufacture was 82.677% in assessee’s own unit whereas the average yield in the CMUs was 91.277%. After considering the explanations given by the assessee, the A.O. noted that while most of the CMUs were manufacturing biscuits identifiable by the trade name ‘Parle-G’, the assessee’s own manufacturing unit produced both Parle-G biscuits and other biscuits. No separate registers was being maintained in the assessee’s manufacturing unit which could lead to the determination of the yield in the manufacture of Parle-G biscuits and other biscuits separately. He also noted that some of the CMUs were also manufacturing biscuits other than Parle-G and their yield was almost the same as those of the other CMUs exclusively producing Parle-G.

Therefore, in the opinion of the A.O., the assessee’s books of accounts were not reliable. Similarly, there was a difference in yield in the confectionery manufactured by the assessee in its own unit and the manufacturing results of the CMUs. Accordingly, AO rejected the book results and made addition on account of suppression of production.
On first appeal, CIT(A) allowed part relief to the assessee after having the observation as under:-

“There are no changes in the basic facts and contentions of the case the year under consideration as compared to the earlier A.Y. 1996-97. The assessee has reiterated the same submissions as were made in the earlier A.Y.1996-97 to the A.O. and during appellate proceedings. The assessee has prepared a statement showing “Without prejudice” the computation of the amount to be disallowed on the same basis as determined by the CIT(A) for the A.Y. 1996-97. In this statement part A gives the disallowance made by the A.O. and part B gives the disallowance on the basis made by the CIT(A) for the A.Y. 1996-97. The yield of CMUs in the production of biscuits (primarily Parle-G brand) was 91.28% whereas the yield of Parle-G biscuits in assessee’s own manufacturing units has been determined at 87.61% i.e. a difference of 3.67%. It is clarified that for the purpose of working out the consumption of raw material the yield of Parle-G production in the assessee’s unit, the input/output on the basis of batch has been adopted by applying a standard input/output batch size, as had been done for A.Y. 1996-97 and formed the basis of the decision of my learned predecessor. Therefore, the consumption is an assumed figure and may not be the actual consumption. The suppressed production has been worked out by applying shortfall of 3.67% to the consumption of raw materials for Parle-G biscuits in assessee’s own unit. The value of suppressed production is worked out at 2,35,74,949/- On this basis the addition made by the A.O. of Rs 9,76,45,993/- is reduced to Rs 2,35,74,949/- and assessee is entitled to relief of Rs 7,40,71,044/-.”

Thereafter against above order, both assessee and revenue were in further appeal before ITAT, Mumbai.

The AR placed on record the order of the Tribunal in assessee’s own case for the A.Y.1996-97 wherein exactly similar issue was decided by the Tribunal in assessee’s favour. The precise observation of the Tribunal was as under:-

“45. Ground no.8 raised by the Revenue corresponding to ground no.5 raised by the assessee are on the issue of addition made with regard to suppressed production resulting in suppressed sales of biscuits.

46. Brief facts are, during the assessment proceedings, the Assessing Officer while examining tax audit report of the assessee found that as per quantitative details of consumption in production mentioned therein, percentage of yield works out to 92.55%. He, therefore, called upon the assessee to furnish quantitative details of raw material consumed in the manufacture of biscuit and confectionary separately; percentage of yield in respect of biscuits and confectionery; percentage of shortage / wastage in the process of manufacturing biscuits and confectionery separately; monthly statement of item-wise purchases of raw materials; monthly statements of item-wise consumption of raw materials and packing materials in the process of manufacturing biscuits and confectionery separately; monthly yield of final products item-wise; monthly statement of sales item wise and so on. After verifying the details submitted by the assessee, he found that overall percentage of yield both in respect of biscuit and confectionary comes to 84.50%. Whereas, as per the audit report, the yield works out to 92.55%. Further, the Assessing Officer observed, in the statement of quantitative details submitted before him, the assessee has shown 1059 MTs of coco vita oil as against 1860 MTs reported by the auditor. Further, though, the assessee in the statement furnished before the Assessing Officer has claimed consumption of “other materials” at 3335 MTs. It was not mentioned in the tax audit report.

Further, the assessee has revised the figures of consumption of Mumbai unit from 36690 MTs to 38490 MTs. To further verify the percentage of yield the Assessing Officer sought information from the contract manufacturing units. From the information obtained from contract manufacturing units, he found that consumption of other materials were shown at nil. He also found variation in the consumption of material as recorded in the books of the assessee for contract manufacturing units. He also observed, all the raw materials are provided by the assessee to the contract manufacturing units. He further observed, as per revised statement filed during the assessment proceedings, the yield for Mumbai Unit worked out to 82.67% for Biscuit and 85.99% for confectionary. Whereas, the corresponding figure for contract manufacturing unit were 91.65% and 100.24% respectively. When the Assessing Officer called upon the assessee to explain the difference in consumption, the assessee submitted that the difference in consumption of coco vita oil was on account of clerical mistake and the actual consumption was 1860 MTs. Thus, on the basis of difference found in the percentage of yield as per tax audit report and the statements filed by the assessee as well as the information obtained from the contract manufacturing units regarding percentage of yield, the Assessing Officer called upon the assessee to submit further details and also the standard formula applicable for consumption and production. In response, the assessee submitted, itemwise details of consumption and production cannot be filed as it was manufacturing various items and the details submitted before the Assessing Officer were as per books of account. The assessee also submitted, quantity of itemwise ingredients for various items of confectionary was taken as a whole and no separate records were available. To explain reason for difference in percentage of yield between its manufacturing unit at Mumbai and the contract manufacturing units assessee submitted, its unit at Mumbai was manufacturing various items of biscuits and confectionary for many years while the contract manufacturing unit have started recently and were mainly manufacturing Parle-G biscuit. The assessee, though, admitted that there is a standard formula but the theoretical form is not scientific and practical for working out consumption and production. Further, the assessee submitted, the standard formula cannot be applied due to various other factors as enumerated before the Assessing Officer. The assessee also advanced various other reasons for difference in percentage of yield between its Mumbai unit and contract manufacturing units. The Assessing Officer, however, did not accept the contention of the assessee on various grounds as summarized in Para-19.5 of the first appellate order. Further, the Assessing Officer comparing the production and sales at Mumbai unit with that of contract manufacturing units found that the sales at Mumbai unit was much less than the quantity available for sale, while for contract manufacturing units the quantity sold was more than the quantity available for sale. The Assessing Officer observed, as per standard formula, the yield should work out to 92.59%. He observed, the contract manufacturing units were showing average yield of 91.65% whereas, the Mumbai unit was showing yield of 82.69%. Thus, the Assessing Officer inferred that the assessee did not maintain records for consumption, production and sales of Mumbai Unit in a proper manner or the details were withheld purposely. Thus, on the aforesaid reasoning, the Assessing Officer taking into consideration the difference in percentage of yield shown by the contract manufacturing units and the assessee concluded that such difference of 8.96% was suppressed production resulting in suppressed sales. Taking into consideration consumption of raw material of Mumbai unit at 37498 MTs, he worked out the suppressed production at 3359.820 MTs and by adopting Rs.36,025, as average sale price, the Assessing Officer worked out the suppressed production of biscuits resulting in suppressed sales at Rs.12,10,44,000 and added it to the income of the assessee. Being aggrieved of such addition, assessee preferred appeal before the first appellate authority.

47. In the course of hearing of appeal before the learned Commissioner (Appeals), assessee contesting the addition made by the Assessing Officer submitted that the Assessing Officer did not appreciate the facts properly. It was submitted, the difference in coco vita oil was on account of typographical error. It was submitted, the quantity of other raw material though specifically not mentioned in the printed account but the value was shown. Reiterating the stand taken before the Assessing Officer, it was submitted that contract manufacturing units were manufacturing less number of brands as compared to Mumbai unit. It was submitted, the standard formula of manufacturing cannot be applied due to various factors including wastage in the manufacturing process. In this context, the assessee submitted the different variety of biscuits and confectionary manufactured by contract manufacturing units. The assessee furnishing a statement of reconciliation of sales submitted that the Assessing Officer did not consider the sales from depots and the outstandings available at different units and depots. In this context, the assessee specifically pointed out all discrepancies in figures taken by the Assessing Officer. The assessee also furnished copies of excise record to substantiate the production as recorded in the books of account. It was submitted, since, the assessment year 1992-93 the percentage of yield shown by the assessee was about 83% and in assessment year 1995-96, it was shown at 81.65%. In this context, the assessee submitted the working of yield for Mumbai unit for ParleG biscuit after considering wastage and operational loss of 350 MTs, heating loss of 1978 MTs, moisture of 405 MTs and excess weight of packaging in 642 MTs are worked out at 88.24%. It was submitted, in respect of contract manufacturing units also the percentage of yield varied between 87.85% to 100.35%. Thus, it was submitted, there is no suppression of production therefore, addition made should be deleted.

48. After considering the submissions of the assessee in the context of facts and materials on record, learned Commissioner (Appeals) upheld the rejection of books of account accepting the reasoning of the Assessing Officer, As far as the quantum of yield is concerned, after examining the material on record he observed that the yield of Mumbai unit is less than the yield of contract manufacturing units. However, he accepted assessee’s contention that in the manufacturing process, standard formula cannot be applied strongly though it may be a guiding factor for appreciating the result. From the material on record, he found that the yield of contract manufacturing units vary between 87.85% to 100.35%. Therefore, adopting average yield of 91.65% for all contract manufacturing unit will give a distorted picture. Referring to the percentage of yield of few contract manufacturing units, the learned Commissioner (Appeals) held that the percentage of yield of contract manufacturing unit can be taken at 91%. The learned Commissioner (Appeals) observed, as per the bifurcation of consumption of raw material for confectionary and biscuit, the assessee has worked out yield of 84%, whereas, after taking into account various aspects like heating, moistures and other factors, assessee has reconciled the yield for biscuits at 88.4%. The learned Commissioner (Appeals) also accepted assessee’s plea that mixtures if rejected results in heavy loss and the work force at Mumbai unit is not as disciplined as at contract manufacturing units. He also accepted assessee’s contention that while packing the biscuits extra weight of 5% to 10% is given. Thus, taking into consideration these aspects the learned Commissioner (Appeals) held that the percentage of yield of biscuit of the Mumbai unit can be fixed at 88% which leaves a gap of 2% which is unexplained. The learned Commissioner (Appeals) observed, taking into account consumption of raw materials at 37,498 MTs, the production @ 2% shall work out to 750 MTs which valued at Rs.36,205 per MT will work out to Rs.2,71,53,750. Therefore, he sustained the addition to the extent of Rs. 3 crore while deleting the balance addition of Rs.9,10,44,000.

49. Learned Departmental Representative extensively referring to the observations of the Assessing Officer in the assessment order submitted that the assessee was supplying all the raw materials to the contract manufacturing units. He submitted, as per the tax audit report yield of the Mumbai unit of the assessee worked out to 92.55%. Whereas, as per the statements filed before the Assessing Officer by the assessee, percentage of yield worked out to 84.50%. He submitted, in the reconciliation statement also, discrepancy was found which was again revised by the assessee. He submitted, as per the reconciliation statement, the discrepancy was found in consumption of vanaspati, sugar, maida, coco vita oil. He submitted, as per the information obtained from contract manufacturing units, percentage of average yield was found to be 91%. He submitted, before the Assessing Officer assessee could not prove that it was manufacturing a large variety of biscuits compared to contract manufacturing units. He submitted, the Assessing Officer has worked out the yield by applying a standard formula which was accepted by the Tribunal in assessee’s own case. Learned Departmental Representative submitted, in the course of assessment proceedings, the assessee was given full opportunity to reconcile the differences and prove the fact that percentage of yield is as per the standard formula. He submitted, the learned Commissioner (Appeals) without properly appreciating the reasoning of the Assessing Officer has deleted major part of the addition without proper reasoning and in a non-speaking manner. He submitted, even additional evidence produced before the learned Commissioner (Appeals) were not forwarded to the Assessing Officer for examination. Finally, the learned Departmental Representative submitted, once the Assessing Officer has rejected the books of account and made estimation on a scientific basis and to the best of his judgment, the learned Commissioner (Appeals) cannot interfere with the same. In support of such contention, he relied upon the decision of the Hon’ble Supreme Court in Commissioner of Sales Tax v/s H.M. Esufali H.M. Yusuf All Abdul AM, [1973] 90 ITR 271 (SC).

50. Learned Authorised Representative submitted, no defect was found in the books of account. He submitted, if there was any discrepancy, it was in the statement submitted before the Assessing Officer, that too, due to bonafide mistake. He submitted, in the tax audit report, there is no mention of percentage of yield. He submitted, as per Form no.3CD, prescribed under Income-tax Rules, 1962, in case of manufacturing concern, full quantitative details of principal items of raw material and finished products are to be given. He submitted, in Annexure to the tax audit report, the auditor has furnished the quantitative details of principal items of raw materials and finished products. In this context, he drew our attention to Annexure-V to the tax audit report at Page-211 of the paper book. He submitted, when the Assessing Officer called for details of “Others”, the assessee furnished statement of consumption of raw materials wherein coco vita oil was wrongly shown at 1056 MTs which was subsequently corrected in the revised statement. He submitted, the raw materials shown as “Others” since was not a principal item was not shown in the tax audit report. Learned Authorised Representative submitted, if at all there is any mistake / discrepancy it is in the statement furnished and not in the audit report or books of account. He submitted, books of account can be rejected if conditions of section 145(3) of the Act are fulfilled. Learned Authorised Representative submitted, only if the conditions of sub-section 3 of section 145 are satisfied, the Assessing Officer can make a best judgment assessment. He submitted, the Assessing Officer has not pointed out a single instance of sales outside the books. The purchases made by the assessee have not been doubted. The production of biscuit and confectionary are fully supported by and as per Central Excise records. He submitted, all excise registers were produced before the Assessing Officer and nothing adverse was found. Reiterating the stand taken before the Departmental Authorities, learned Authorised Representative submitted/ the reason for low yield is due to the factors explained before the Departmental Authorities. He submitted, because of labour problem ultimately assessee had to close down its factory at Mumbai. He submitted, it is not possible to maintain itemwise stocks considering the variety of products manufactured by the assessee qua the contract manufacturing units which primarily manufacture ParleG. He submitted, when the consumption of raw material and production of biscuit and confectionary are regulated by the Central Excise law and the assessee is maintaining Central Excise records which were verified by the Central Excise authorities and have not been found to be defective the Assessing Officer cannot question on the consumption and manufacture recorded in the books of account. In this context, he relied upon the decision of the Hon’ble Motipur Sugar Factory (P.) Ltd. v/s CIT [1974] 95 ITR 401. Strongly opposing the contention of the Learned Departmental Representative regarding applicability of standard formula, the learned Authorised Representative submitted, such formula cannot be applied as the Tribunal in assessee’s own case has held against applicability of such formula. Learned Authorised Representative submitted, compared to the yield for earlier years, the percentage of yield shown in the impugned assessment year is more. Therefore, the inference drawn by the Departmental Authorities regarding suppression of sales is baseless and unfounded. He submitted, even the contract manufacturing units have not shown any standard yield as their yield varies from 87% to 100%. That being the case, on the basis of yield shown by the contract manufacturing units, the books of account of the assessee should not have been rejected and no addition should be made.

51. We have heard rival contentions and perused the material available on record. On a perusal of the order of the Departmental Authorities as well as factual aspect of the issue, it is very much clear that the issue in dispute is purely a factual one and has to be decided after considering the facts brought on record. As could be seen, the Assessing Officer inferred suppression of sales by the assessee primarily taking into account the percentage of yield of biscuits of the assessee compared to the percentage of yield of the contract manufacturing units. The allegation of the Assessing Officer is, as per the tax audit report the percentage of yield works out to 92.55%, whereas, as per the statement and revised statement showing consumption of different raw material and manufacture furnished by the assessee, the yield works out to 84%. He has also referred to the information obtained from contract manufacturing units to conclude that the average yield of contract manufacturing units work out to 91.55%. In this context, the Assessing Officer has also referred to the standard formula applicable and the physical enquiry conducted by him at the factory premises/ wherein, it was found that the manufacturing of products at Mumbai unit is through sophisticated machinery. In the course of assessment proceedings, the assessee has explained comparative lesser yield qua contract manufacturing units due to the following reasons:-

i) Variety of biscuits manufactured at Mumbai unit compared to few variety of biscuits manufactured in contract manufacturing units;

ii) In case of contract manufacturing units, due to similar size of production and type of machinery used biscuit fall on the belt and tray which are manually picked up and sorted and identified for re- use or waste. Whereas, in case of Mumbai unit production being faster it is difficult to have such control and also costs for employing labour to pick and sort out biscuit fallen on the belt and tray is much higher;

iii) Due to different products lines at Mumbai unit, the average give away is much higher as compared to contract manufacturing units;

iv) Mumbai unit has a much higher production capacity as compared to contract manufacturing units and due to sheer volume wastages are higher in Mumbai unit;

v) Since, the contract manufacturing units are receiving processing charges which in turn is directly proportionate to production they exercise a better control over the labour, machine and the processing methods;

vi) Mumbai unit has a trade union and employees being of permanent nature there is always labour problem. Whereas, contract manufacturing units have small work force, hence, were able to supervise efficiently;

vii) The assessee being the mother unit effort is put on new formulas and research and development;

viii) Part of biscuit produced are consumed by the employees, therefore, cannot be reflected in the accounts; and

ix) Waste before production takes place on account of wheat flour remaining in jute bags, grinding loss sweepage, etc., compared to the loss suffered by contract manufacturing units.

52. Notably, the learned Commissioner (Appeals) has found some of the reasons shown for lesser yield at Mumbai unit acceptable. As far as the discrepancies pointed out by the Assessing Officer with reference to the audited accounts and the statements of consumption of raw material filed before him, it is noticed that in the audited accounts while furnishing the quantitative details of principal items of raw materials and finished products, there is no mention of the percentage of yield. Therefore, allegation of the Assessing Officer that as per the audit report, the assessee has shown yield of 92.55% is factually incorrect. This is evident from Annexure-5 of the audit report copy of which is at Page-211 of the paper book. As far as the discrepancies pointed out in the original statement of consumption of raw materials and the revised statement furnished during the assessment proceedings, it is a fact that the quantity of coco vita oil has been shown at 1059 MTs instead of 1860 MTs shown in the audit report. However, in the revised statement, the quantity of coco vita oil has been shown at the correct figure of 1859 MTs. Therefore, the assessee’s explanation that the figure of 1059 MTs shown in the original statement was due to a mistake is believable. As far as the allegation of the Assessing Officer that the raw material “others” were not shown in the audit report, we are of the view that non- mentioning of the said item in the Annexure to the audit report may be for the reason that as per Form no.3CD, only primary raw materials are required to be shown. Therefore, non-mentioning of raw material “others” in the Annexure to the audit report cannot be considered to be very serious lapse so as to infer suppression of sales and unreliability of books of account. It is a matter of record that the goods produced by the assessee are excisable goods and subject to scrutiny and regulatory measures of Central Excise authorities. It is also a fact on record that the assessee has maintained all Central Excise registers with regard to consumption of raw materials, production of biscuits and confectionary which have been verified by the Central Excise authorities periodically and the authenticity of the entries made in the said registers have not been questioned by them. It is also a fact on record that the Central Excise registers were produced before the Assessing Officer as well as the learned Commissioner (Appeals).

53. There is no allegation by the Departmental Authorities that the consumption of raw materials and production of finished products as recorded in the Excise registers were doubted by the Central Excise authorities. It is also a fact on record that the Assessing Officer has not doubted the purchases made by the assessee. It is also a fact that the assessee has maintained all books of account as required under the Income-tax Act, 1961, Companies Act, 1965 and Central Excise norms. Further, the accounts maintained by the assessee were subject to statutory audit. No specific defect or discrepancy in the books of account maintained by the assessee has been pointed out by the Assessing Officer. The alleged difference in yield was worked out on the basis of the statement and revised statement of quantitative details of consumption of raw materials and production filed by the assessee in the course of assessment proceedings as well as the information obtained from contract manufacturing units. Further, the Assessing Officer has worked out the yield by applying the standard formula as mentioned by him in the assessment order. It is relevant to observe, in the impugned assessment year, the dispute is with regard to the manufacture of finished products in assessee’s own unit at Mumbai. In the preceding assessment year, while dealing with similar addition made by the Assessing Officer, the Tribunal in assessee’s own case in ITA no.5320/Mum./2006 and other dated 31st August 2010, held that no addition by applying the standard formula can be made. Facts are no different in the impugned assessment year as well. The Assessing Officer has not found a single instance of sale made by the assessee outside the books. At least, no adverse material to indicate out of book sales has been brought on record by the Assessing Officer. In these circumstances, making addition on estimate basis by rejecting the books of account in the absence of any adverse material brought on record cannot stand legal scrutiny. It is also a fact on record that as per the information obtained from the contract manufacturing units, the yield varies between 87% to 100%. Therefore, average yield cannot be standardized to a particular percentage. Moreover, the yield of Mumbai unit for preceding assessment years has been shown by the assessee as under:-

54. Thus, compared to the yield of Mumbai unit in the preceding assessment years as noted above, the assessee has shown a higher yield for the Mumbai unit in the impugned assessment year. Therefore, on over all consideration of facts and circumstances of the case, we are of the considered opinion that rejection of books of account and addition made on estimate basis alleging suppression of sale is not in accordance with law. Therefore, even a part of addition made by the Assessing Officer cannot be sustained. Accordingly, we delete the addition made by the Assessing Officer fully. Ground no.8 of the Department is dismissed and grounds no. 4&5 raised by the assessee are allowed.”
The learned Members of the Mumbai, ITAT, following the order of the Tribunal in assessee’s own case, allowed grounds raised by the assessee.