ITAT, AHMEDABAD BENCH `D’ AHMEDABAD,
Jai Pulse Mills VS. ITO,
APPEAL NO: ITA Nos. 1317-1319/Ahd/2004,
DECIDED ON May 7, 2010
O R D E R
PER Mahavir Singh Judicial Member:-
These seven appeals – 4 appeals by the assessee and 3 appeals by Revenue are arising out of the order of Commissioner of Income-tax (Appeals)-II, Ahmedabad in appeal Nos.CIT(A)VII/Wd.3(4)/104-107/03-04 dated 05-03-2004; appeal Nos. CIT(A) VII/Wd.3(4)/108, 103/03-04 i.e. dated 13-02-2004 and 11-02- 2004 and appeal No. CIT(A)VII/Wd.3(4)12/05-06 dated 03-01-2006. The assessments were framed by the ITO Ward-3(4), Ahmedabad u/s.143(3) r.w.s. 147 of the Income-tax Act, 1961 (hereinafter referred to as `the Act’) vide his orders dated 28-03-2003.
2. The first common issue in four appeals of the assessee in regarding assumption of jurisdiction u/s.147 of the Act by the Assessing Officer and the validity of the assessment. Ld. Counsel for the assessee, Shri A.C. Shah fairly stated that he has instructions from the assessee not to press first common issue and accordingly he has not argued anything on this issue. As the assessee has clearly admitted that he is not interested in prosecuting this issue, accordingly, the same is dismissed as not pressed.
3. As regards the issue of merits, in these 4 appeals of the assessee and three appeals of the Revenue, is as regards to only addition made by the Assessing Officer on account of wastage on the basis of 5% disallowed by the Assessing Officer. In first 4 appeals of the assessee, the assessee has also challenged the enhancement made by the CIT(A) on ad hoc basis and by taking the deficit in the yield at 9.1% to 9.5% in these assessment years. The facts are being exactly identical in all the years, hence, we will take the facts from the assessment year in which survey was conducted i.e. assessment year 2002-03 and decided the issue raised on merits by the assessee as well as Revenue, which is common in all the 7 appeals. The assessee is engaged in the business of crushing of mug and creating bi-product called “mug dal”. A survey u/s.133A of the Act was carried on the business premises of the assessee on 04-02-2002 and during the survey certain discrepancies were noted by the Survey Party in respect of stock of “mung”, stock of “mung dal” and cash. The Survey Party, in order to ascertain the correct yield of “mung dal” and its bi-product, a sample milling was done by taking 200 kg. of “mung” and “mung dal” and its bi-product resulted out of the said processing was noted. The Assessing Officer in his assessment order noted that the analysis of sample processing of “mung dal” carried out by the Survey Party, clearly demonstrate that the percentage of the bi-products i.e. chuni waste, dust, etc. constitutes about 8.46% of the total consumption, whereas the assessee has declared the wastage at 10% as per the stock register maintained for production of “mung dal” and percentage of biproduct. According to the Assessing Officer, the percentage of kuma waste comes to 10% and the assessee is showing higher percentage of wastage and bi-product.
According to the Assessing Officer, the assessee in this way suppressed the production of principal product of “mung dal” to the extent of 1.5% and the AO carried out an exercise of sample milling as under:-
“Working as per survey:
Input kept (mung)
No of bags x Net weight in one bag in kg.
20 x 100 = 2000 kg.
Production of mung dal:
Wastage found : Dust 39,340 kg
Kuma (mung chuni) 1,34,000 kg
Less: Weight of 5 bags (bandan) in which
Dust and Kuma filed in 1 kg per bag 5,000 kg.
Net Weight 1,69,340 kg
Input (mung dal) 2000.00 kg. Reply to Q. No.33
Cheni waste, dust 169.34 kg
Therefore, yield = 91.54% & sastage = 8.46%
Working as per assessee:
Mung fed into machine (after cleaning the machine) 2000.00 kg.
Less: Mung left out in the machine 138.66 kg
Net mung processed 1861.34 kg
Mung dal produced
(as per Q.No.33 of the statement) 1692.00 kg 90.90%
Kuma chuni, waste, dust, stone etc:
Kuma 135.00 7.00%
Dust, waste, stone etc. 39.34 2.10%
Less: Weight of 5 Bardans 5.00 169.34 kg.
Mung dal left in machine = 138.66 kg
Fotri (kumar or chuni) = 135.00 kg
Dust, wastage, stone etc. = 34.34 kg
Mung dal = 1692.00 kg
= 2000.00 kg
Therefore, yield = 90.90% & bi-product/wastage = 9.1%”
And he made addition by observing in para-6 of his appellate order as under:-
“6. As per the production register maintained by the assessee, the mung consumption for the whole yea is shown at 73207.68 quintals. The production of mung dal is shown at 66141.37 quintals, kuma & chuni at 5411.10 quintals and wastage on account of stone/dust at 1655.21 quintals. Therefore, the yield ratio in respect of main products and bi-product is 90.35%: 3.39%. The loss on account of stone/dust comes to 2.26% as per the assessee. This can be clearly explained from the following chart:- ` Raw material consumed 73207.68 quintals (i.e. whole mung)
Mung dal produced 66141.37 qts. – (90.35%)
Bi-products (saleable) 5411.10 qts. – (7.39%)
Stone/dust (wastage) 1655.21 qts. – (2.26%)
73207.68 qts. – (100%) 73207.68 quintals
7. In view of para-5 above, the correct working of yield ratio is as under:-
Consumption of Mung as per stock record 73207.68 quintals
Less: Weight of Bardon
(i.e. 1 Kg. bag per 100 kg) 73.21 Qts.
Less: Shortage in weight 957.65 qts. 1030.86 quintals
(The assessee has deducted Rs.20,55,474 from the purchase bills and declared it in the P & L a/c. The total purchase for the year is 73,334.68 qts. For Rs.15,74,03,520.50. The average purchase price is therefore Rs.2146.37 per quintal. The shortage in weight therefore be Rs.20,55,472/2146.37= 957.65 quintals.
Net Consumption for production 72176.82 Production of mung dal shown 66141.37
Yield (in%) 91.64% (6141.37 x 100)
Therefore, yield = 91.64 & bi-products = 8.36%
8. From the above comparison of submission made by the assessee dated 7.3.2005 para-6 and the correct working of yield ratio given above, it can be seen that there is a difference of 1.29% which is shown by the assessee as ITA No.1317-19 & 1370/Ahd/04 A.Ys.95-96 to 98-99 excess bi-products. For the sake of clarity, the facts and figures are
I. As per assessee 90.35%
Kuma / fotri shown by the assessee 7.39%
As per para-6
II. As per working given in para para-7 above
Mung Dal 91.64%
Bi-products (including dust/Stone)
Therefore, (I-II) = 91.64 – 90.35 = 1.29%
9. Accordingly, the assessee has shown excess bi-products wastage of 1.29%. In quantity / monetary terms, the suppressed production of mung dal is worked out as under:-
1.29% on total consumption as worked out in this order i.e. 72176.82 quintals
x 1.29% = 931.08
Average price of mung dal
(Sales / quantity (160807010 / 65974.37) Rs.2437.42
Total value of 1.29% difference
(Rs.2437.42 x 931.08) Rs.22,69,433/-
Production on account of proportionate
Sale price of kurma/fotri
Average price of kurma/fotri
(sales/quantity (31,39,962 / 5615.10 Rs.559.20)
Total value of suppressed production of mung dal Replaced as kurma (i.e.
931.08 qts. X Rs.550.20) Rs.5,20,660/-
Therefore suppressed production of mung dal
(Rs.2269.433 – 5,20,660) Rs.17,48,773/-
9.1 It is, therefore apparent from the records and investigations that the assessee has suppressed that the assessee has suppressed production of mung dal to the extent of Rs.17,48,773/-. Accordingly, this amount is added to the total income. This suppression is further supported by the fact that the actual weight of the raw material pu9rchased and pu9t to processing has not been recorded in the relevant books, the shortages in weight are not recorded in the registers of the time of entering the purchases, but only a claim made at the time of making the payment to the concerned parties. No truck-wise/lotwise record is maintained and the weight of the wastage produced is not recorded for every transaction but a lump sum entry is after a period of time.”
4. The CIT(A) deleted the addition by observing in para-4.3 of his appellate order as under:-
“4.3 I have carefully considered the submissions made by the ld. A.R and I have also gone through the assessment order. It is to be noticed that at the time of survey the basic operation itself was carried out by the survey partly which reflected an yield of 91.54% in respect of `dal’ and the bi-products were at the rate of 8.46%. It is difficult to understand the method only adopted by the AO because while working the actual yield he has worked out consumption of `mung’ after deducting shortage in weight and thus net amount used for consumption was taken. However, while working out the excess shortage, he has taken the gross amount shown as consumption. He has not cared to deduct the shortage in weight and weight of `bardan’ while working out the actual addition. Thus the entire basis adopted by the AO is incorrect. In the order, the AO has himself pointed out that weight loss and weight of bardan is to be reduced for the actual working of yield. If that be the position, then for working out the actual yield as well as the yield as per audit report, these weights were to be reduced. I also find that in the case assessee’s own case my predecessor vide order dated 5.3.2004 for A.Ys 195-96 to 1998-99 has held that proper wastage allowable to the appellant firm was 9.5% meaning thereby that the yield would be 90.5%. If the yield is correctly worked out as discussed above, the yield for the year actually works out to 91.36% as under:-
Consumption of mug as per stock record 73207.68 Qtl.
Less: Weight of Bardan 732.00 Qtl.
Shortage in weight 79.26 Qtl
Net consumption of mug 72396.42 Qtl
Production of mug dal 66141.37 91.36%
Kurma 5411.10 7.4%
Deficit 843.96 1.17%”
Therefore, on this basis there is no case for any addition in the appellant’s case. I also find that in earlier years, the ld. CIT(A) has held that yield of dal would be around 90.5% and other items would be around 9.5% in appellant’s own case. In view of the above facts, addition made by the AO is directed to be deleted.”
5. As regards to the 4 appeals by the assessee, the CIT(A) also enhanced the addition vide para-3.5 and 3.6 of his appellate order as under:-
“3.5 The contentions raised as mentioned in para 3.4 above, have been considered. The fact that the appellant firm had purchased new machinery during the assessment year 99-2000 may have improved the manufacturing process as claimed by the ld. counsel. The appellant firm had also employed a technical person to supervise over the manufacturing process. I agree with the ld. counsel that these steps would have improved the production process and as a result the wastage would have been lower as compared to the proceeding assessment years. The assessment years under consideration in this appeal did not involve the new machinery and the technical person and therefore, the process wastage which has been fixed for A.Y. 99-2000 and 2000-01 may not be appropriated for the assessment years under appeal Some adjustment is therefore, called for on account of these two factors which are not available for the assessment years under appeal and which may have lead to improvement in the manufacturing process in the subsequent assessment years. However, I do not agree with the ld. Counsel that the quality difference credited in the various assessment years would have any impact on the standard wastage to be fixed for the appellant firm. The quality difference amount cannot be quantified in terms of weight and therefore, no estimate can be made on this basis. I also find that such quality difference additions do not lead to a conclusion that the quality of mug purchased by the appellant firm was poorer in the assessment years under consideration as compared to the other assessment years. Similarly, I find that the wastage on account of stone/dust does not show any uniform pattern but various from 2.68% to 3.40% for the four assessment years. Therefore, no inference can be drawn on the basis of the above facts that the wastage in the manufacturing process would definitely be higher in the assessment years under consideration.
3.6 In view of the above discussion and keeping in view the facts of the appellant company had purchased new machinery and employed technical person from A.Y. 99-2000, I hold that process wastage allowable to the appellant firm is 9.5% for all the four assessment years under consideration. In view of the above decision, the addition / enhancement of income is worked out as under:
AY. 95-96 A.Y.96-97 A.Y.97-98 A.Y.98-99
Consumption of mug as per Stock record (quintals) 90,060 78,460.08 70,967.29 77,828.23
Less: Weight of bardan (jute bag of 1 kg. each for 100 kgs of mug((quintals)
900.6 784.6 709.67 778.28
Less: Shortage in weight (in quintals)
626.17 546.82 453.14 584.3
Net consumption (quintals) 88,533.23 77,128.66 69,804.48 76,465.65 Production of mug (quintals)
79,011.5 69,514.75 62,942 68,889.8
Excess wastage claimed by the appellant with reference to 9.5%
1.25% 0.37% 0.34$ 0.41%
Excess wastage in quintals 1,106.67 285.38 237.34 313.51
Average sale price
1,555.15 1,731.99 1,923.46 1,854.69
Addition required to be made (in Rs)
1,721.059 494.275 456.514 581,464
Addition made by A.O (in 224,960 182,628 216,711 203,965
ITA No.1317-19 & 1370/Ahd/04 A.Ys.95-96 to 98-99
ITA No.1419-20/Ahd/04 A.Ys.99-00 to 00-01
ITA No.818/Ahd/06 A.Y. 02-03 Page 8
Balance addition/Enhancement required to be made (in Rs)
1,496,099 311,647 239,803 377,499
6. At the outset, the Ld. counsel for the assessee, Shri A.C. Shah stated that the assessee’s issue is squarely covered in favour of the assessee and against the Revenue by the decision of this Tribunal in the case ITO v. M/s. Jay Industries ITA No.528/Ahd/2006 for assessment year 2002-03 vide order dated 25-09-2009, wherein the assessee was engaged in the same line of business and facts also identical and issues arising out of same survey operation carried out on 04-02-2002 by the Department u/s.133A of the Act. He stated that the facts being exactly identical, the issue is squarely covered.
7. After hearing the rival contentions and going through the case records, we find that at the time of survey the sample processing was carried out and according to the sample processing, the bi-products consists of chuni, dust, waste, etc. which comes to 8.46% and the books of account reflected the waste and bi-products at 10%. We find from the facts that out of 100 kg. of mug the production of mugdal is 90 kg. and bi-product is 10 kg, which is called `kurma or chuni’. Kurma is bi-product and not a waste or process loss. Kurma is sold in open market and sale proceed has already been credited by the assessee in the books of account. According to the assessee, the actual waste in the form of dust & stone comes to 2.10% and not 8.46% as pointed out by the Assessing Officer on the basis of sample processing done by the Survey Party. We from the arguments of the Ld. counsel that the sale proceeds of kurma is at 5615 qtl. and the assessee has credited the sale proceed at Rs.31,39,954/- in its books of account , therefore the kurma cannot be taken as waste or process loss. The waste is only stone and dust found from `mung’. The kuma can be considered for the purposes of taking yield and in that case the entire process has to be considered and including kurma, the process loss will be considered at 10%. The assessee has produced the complete books of account before the Assessing Officer including bills and vouchers audited by the Chartered Accountant. The assessee has also maintained the stock register and after going the assessment orders in these seven assessment years, we find that there is no whisper about the defects in the books of accounts. Even the AO has not invoked the provisions of Sec.145A of the Act and has not rejected the book results. Once the book results are not rejected, the AO has no alternative except to accept the book results. In the present case, the Assessing Officer has not rejected the book results and found no defects in the books of accounts of the assessee for all the seven assessment years. In such a situation, the question arises is whether, the AO in exercise of his powers u/s.145(1) of the Act, is whether can make estimates without rejecting the book results and without finding fault in the books of account. We are of the view that the AO has to give a finding of fact i.e. whether or not income can properly be deduced from the accounts maintained by the assessee, even if the accounts are correct and complete to the satisfaction of the Assessing Officer and the income has been computed in accordance with the method of accounting regularly employed by the assessee. What is to be determined by the Assessing Officer in exercise of his power is a question of fact. i.e. whether or not income chargeable under the Act can properly be deduced from the books of account, and he must decide the question with reference to the relevant material and in accordance with the correct principles. We are of the view that the Assessing Officer has to examine the accounts of assessee and has to consider the following questions:-
(i) Whether the assessee has regularly employed a method of accounting?
(ii) Even if regular adoption of a method of accounting is there, whether the annual profits can properly be deduced from the method employed?
(iii) Whether the accounts are correctly maintained?
(iv) Whether the accounts maintained are complete in the sense that there is no significant omission therein?
In that event, if the Assessing Officer’s finding on all four counts is in the affirmative, the assessee’s profit are to be computed on the basis of these accounts. We find that the first proviso to Sec. 145(1), or section 145(2), can be invoked only if and where the elements attracting either of those provisions are found to exist. A clear finding to that effect, along with the materials on which such finding is based, has to be made out and given by the Assessing Officer. No assessment under the first proviso to section 145(1) or under section 145(2) can be sustained if the Assessing Officer has not considered and recorded a finding against the assessee as to whether he has been regularly employing a method of accounting or whether his income, profits or gains can properly be deduced from his method of accounting if he has been regularly employing a method of accounting or whether the accounts are correct and complete. In the absence of these findings, the Assessing Officer cannot make assessment by invoking the provisions of Sec. 145(1) or 145(2) of the Act .
8. Another facet of arguments made by the Ld. counsel for the assessee is that this issue is covered by the decision of Co-ordinate Bench on similar facts, wherein the assessee was carrying on same line of business and the facts coming out of the same survey, wherein the Tribunal in the case of M/s. Jay Industries (supra) has deleted the addition confirming the results declared by the assessee on wastage as well as on percentage of yield, by giving following findings in para-8:-
“8. We have heard the learned representatives of both the parties at length. Shri M.C. Pandit, learned DR relied on the order of the AO. On the other hand Shri A. C. Shah, learned Counsel for the assessee vehemently argued that the CIT(A) has passed a well reasoned order after appreciating the facts of the case and evidence available on record. He, therefore, submitted that the order of the CIT(A) may be upheld. It is seen that during the course of survey, basic operation itself was carried out by the survey party which reflected in yield of 90.50% in respect of dal and bye-product @9.5%. In our view, the CIT(A) has correctly rejected the methodology adopted by the AO. While working the actual yield , the AO has worked out consumption of mung after deducting shortage in weight and thus net amount used for consumption was 55880.34 kgs. However, while working out excess shortage the AO has taken the gross amount shown as consumption at 55505.77 quintals. The AO has not considered the weight of bardan while working out actual addition. We are in agreement with the observations of the CIT(A) that the entire basis adopted by the AO was incorrect. The CIT(A) has also observed that in the group cases of M/s. Jai Pulse Mills in which simultaneously survey was carried out, his predecessor has held that proper wastage allowable to the assessee firm was 9.5% meaning thereby that the yield would be 90.5%. The CIT (A) has correctly stated in the instant case that the yield in the year under consideration worked out to 90.88%. It is also seen that in the AY 1999-2000 and 2000-01 the CIT (A) has deleted such addition vide his order dated 05-12-2003 in assessee’s case. It seems that the Revenue has not challenged the orders of the CIT (A) in appeal before the Tribunal relating to AY 1999-2000 and 2000-01. Thus, considering the entire facts and circumstances of the present case, we do not see any valid ground for interfering with the order of the CIT(A). We find that the CIT (A) has passed a well reasoned order after appreciating the facts of the case as well as materials available on record. We do not see any reason for disagreeing with the CIT(A). In that view of the matter, we uphold the order of the CIT(A) and dismiss the appeal of the Revenue. “
9. In view of the facts of the present case that the Assessing Officer has not rejected the book results of the assessee in all the seven assessment years and there was no defects pointed out by the Assessing Officer, the estimation made by the AO and consequently enhancement made by the CIT(A) in four assessment years, is arbitrary and without any basis. Even otherwise, the Tribunal in the similar placed facts in another case, emanating out the same survey, confirmed the book results declared on account of wastage and percentage of yield, we are of the view that the additions made by the Assessing Officer in these seven assessment years, including the four assessment years where the CIT(A) has enhancement the assessment deserves to be deleted. We order accordingly.
10. In the result, assessee’s appeals are partly allowed and that of the Revenue are dismissed.