TMI Blog2014 (8) TMI 827X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be disturbed and as such invoking of the provisions of section 153A against the assessee in these years would not be valid and no addition could be made against the assessee - Decided in favour of Assessee. Addition on account of suppressed production – Low yield ratio - Held that:- Zarda is excisable item/goods and subjected to inspection and control by the Excise Authorities and it is admitted fact that the Excise Department accepted the manufactured goods and cleared the goods manufactured on duty paid. Such a circumstance also supports the explanation of the assessee that there is no suppression of the yield – following the decision in CIT vs. Mascot (India) Tools and Forgings Pvt. Ltd. [2009 (7) TMI 675 - ALLAHABAD HIGH COURT] - there is no question of any suppression of sales in the case of assessee as no material was found during the course of search of any sales made by the assessee outside the books of account - CIT(A) has invoked his powers u/s. 251 of the IT Act for the purpose of rejection of books of account u/s 145(3), which have not been rejected by the AO, but there is no observation in the appellate order if the CIT(A) while using such powers, issued an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition - Since the issue is restored for re-consideration, CIT(A) is bound to pass reasoned order - assessee contended that the books of account have not been rejected and following the decision in Sargam Cinema Versus. Commissioner of Income-tax [2009 (10) TMI 569 - Supreme Court of India] - when books of account of the assessee are not rejected, the AO cannot refer the matter to the DVO - difference may be around 10% or so as per valuation shown by the assessee and the report given by the DVO, which should have been ignored for the purpose of making addition – the matter is to be remitted back for reconsideration – Decided in favour of Assessee. Various expenses disallowed – Held that:- The nature of business of assessee is manufacturing of tobacco and must have the dust and other ingredients while working of labourers - assessee has filed chart showing history of expenditure incurred on these heads - some vouchers have not been produced or that personal user are not ruled out, it would not be proper to delete the entire additions - it is excessive in nature and needs reduction to a reasonable extent because most of the expenses are incurred for business purposes - the disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in compliance to same, filed return of income along with audited balance sheet, trading and profit loss account. Statutory notices were issued and assessments were completed making many additions in all the appeals under consideration. In the background of these facts, now we take up all the additions and points raised in the present appeals issue-wise as under : Issue No. 1 : (Regarding validity of assessments u/s. 153A of the IT Act): 4. This legal issue is involved in appeals of the assessee in respect of assessment year 2004-05 to assessment year 2007-08. The assessee contended before the ld. CIT(A) that the assessment orders passed u/s. 153A(b) are without jurisdiction, illegal, bad in law and framed in arbitrary manner. The undisclosed income was not determined on the basis of any search material and the Assessing Officer simply proceeded as if it is a normal assessment and not on the basis of any search material. Therefore, section 153A(b) of the IT Act has no application to the facts of the case. Hence, the assessment is liable to be declared illegal. 5. The assessee s written submissions in respect of above ground before the ld. CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since no incriminating material was found in the course of search. Sir from the assessment order dated 22.12.2011 passed under Section 153A(1)(b) of the Act it will be clear that in the entire assessment order there is no whisper of any incriminating material indicating any undisclosed income on which the additions or disallowances are made but the addition made are only based on regular book/same books which were already examined in original assessment as well as during assessment of the block period and found correct in all respect therefore, thus, as per provisions of Second proviso of the Section 153A(1)(b) of the Income Tax Act the present assessment made vide order dated 22.12.2011 is nullify and liable to be cancelled. In this regard your honour's kind attention is invited to the decision of jurisdictional High Court in the case of Commissioner of Income Tax (Central), Kanpur Vs. Smt. Shaila Agarwal reported in 65 DTR of 2012 page 41. In this case there lordship held that the assessment which had become final on the date of search shall not be liable to abate. 18. That in support of the above submission the assessee also invites your honour s kind attention to the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riginal assessment dated 19.12.2006 passed under Section 143(3) of the Income Tax Act is liable to be maintained in all fairness and also in the interest of the justice and assessment made u/s 153A(1)(b) of the Act. May kindly be quashed. 5.1 The AO in the remand report relied on section 153A and stated when assessment is pending, the assessment proceedings of those years will be abated. The assessee in rejoinder reiterated submissions already made and relied on CBDT circular No. 7 of 2003 dated 05.09.13 (263 ITR (St.) 62) which provides that completed assessment u/s. 143(3) on the date of search shall not abate. 6. The ld. CIT(A) after considering the submissions of the assessee dismissed this ground of appeal of the assessee. The findings of ld. CIT(A) in para 4.4 of the impugned order is reproduced as under : 4.4 Decision: In the grounds of appeal the appellant has alleged that the assessment order passed u/s 153A(b) of the Act is without jurisdiction, illegal, bad in law and framed in arbitrary manner. It is alleged that the A.O. did not have jurisdiction to pass the assessment order for the block period in the absence of valid action u/s 132(1). The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omments on the remand report of the A.O., the appellant states that in the present case the assessment was made u/s 143(3) vide order dated 19.12.2004 by the then Deputy Commissioner of Income Tax, Allahabad which was a speaking and well reasoned order. The appellant has referred to the CBDT circular No.7 of 2003 dated 05.09.2003 reported in 263 ITR page 62. According to the appellant, the Board has directed that the completed assessments u/s 143(3)/143(1) shall not abate. The Board Circular is binding on the income tax authorities, as such, the assessment made by the A.O. is liable to be declared illegal. In the submission, the appellant has made a wild allegation that order u/s 153A(1)(b) is not valid as there was no valid action u/s 132(1) of the I.T. Act. But in this regard, the appellant has not elaborated as to how and why the search and seizure action was invalid. Therefore, ground No.1 deserves to be dismissed. The appellant has heavily relied on the 2nd proviso to Section 153A of the I.T. Act and in accordance with the appellant the scope of assessment u/s 153A is limited to only undisclosed income unearthed in the course of search and seizure action. First of all, I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al had held that once a notice u/s 153A has been issued after search and seizure operations, all the assessments of six preceding years prior to the date of search have to abate and that even completed and concluded assessments should stand merged in the fresh assessment to be made by the A.O. u/s 153A in pursuance of a search. On Appeal the Hon ble Court has held that in the case before them there was a pendency of a appeal in the Tribunal against the order of assessment against which an appeal had been decided by the Commissioner of Income Tax (Appeals). The court has held that the proceeding before the Tribunal is not continuation of the proceedings of assessment. The provisions of second proviso to Section 153A do not indicate the abatement of proceedings before the Tribunal. In the said case the Hon ble High Court disagreed with the submission of the Counsel of the assessee. To my understanding the Hon ble High Court has answered a question as to whether or not a proceeding before the Tribunal shall get abated in respect of any one of six assessment years after the issue of notice u/s 153A. The facts in the case under consideration are absolutely different. There are no procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears, it shall stand abated but assessment or reassessment can be done u/s 153A in cases of completed assessments or in cases where assessments have not been framed due to non filing of returns etc. for the abovementioned assessment years even if such assessment made u/s 153A is not based on material found during the course of search. The Tribunal has summarized as under:- 17; In view of our above analysis of the provisions of sections, the contention of the learned counsel for the assessee have no force because there is no requirement for an assessment made Under Section 153A of the Act being based on any material seized in the course of search. Further, under the second proviso to Section 153A pending assessment or reassessment proceedings in relation to any assessment year falling within the period of six assessment years referred to in Section 153A(b) of the Act shall come to an end (abate), which means that the Assessing Officer gets jurisdiction for six assessment years referred to in Section 153A(b) of the Act for making an assessment or reassessment. The requirements prior to changed system, that the assessment should be confined to the undisclosed inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proviso directed the A.O. to assess total income, which has to be computed in accordance with Section 5 of the Act, therefore, in respect of all six assessments, A.O. has to make assessment or reassessment of total income and in doing so there is no fetter on his powers i.e. the A.O. is not restricted to the consideration of only incriminating materials or undisclosed valuables. The provisions of Chapter XIV B of the Act caused excessive litigation and therefore the scheme of search assessments has been modified. In the case of Shanker Narain Construction Co. Ors. Vs. State of Karnataka Anr (2004) 276 ITR 56, the Hon ble Karnataka High Court held that nothing is to be added and nothing is to be taken away from the statute unless there are adequate grounds for doing so. The introduction of provisions of Section 153A was to avoid litigation which proliferated on the issue of undisclosed income . If the same controversy is raised under the new provision, by arguing that no reassessment can be made in respect of completed assessment where no incriminating material is found, the avowed purpose of bringing new provisions will be forfeited and the litigation will proliferate on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of regular books of account, which were already examined in original assessment proceedings as well as during the block assessment proceedings. Section 153A of IT Act provides as under : Assessment in case of search or requisition. 153A. [(1)] Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, in the case of a person where a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A after the 31st day of May, 2003, the Assessing Officer shall (a) issue notice to such person requiring him to furnish within such period, as may be specified in the notice, the return of income in respect of each assessment year falling within six assessment years referred to in clause (b), in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139; (b) assess or reassess the total income of six assessment years immediately prec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the case of CIT vs. Smt. Shaila Agarwal, 65 DTR 41 (346 ITR 130) held as under : Held : A plain reading of s. 153A would show that where notice under this section is issued as a result of any search under s. 132, assessment or reassessment if any relating to any assessment year falling within the period of six assessment years referred to under s. 153A, pending on the date of initiation of search under s. 132 or requisition under s. 132A shall abate. The words, pending on the date of initiation of search under s. 132, or making of requisition under s. 132A, as the case may be, have to be assigned simple and plain meaning. Where the assessment or reassessment is finalised, there are no pending proceedings to be abated and restored to the file of the AO. To abate means to diminish or to take away. The word 'abatement' is referable to something, which is pending alive, or is subject to deduction. The abatement refers to suspension or termination of the proceedings either of the main action, or the proceedings ancillary or collateral to it. The word is commonly used in the legislations, which provide for abatement of action/suit; abatement of leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other documents, found in the course of search but not produced in the course of original assessment, and (ii) undisclosed income or property discovered in the course of search. 7.2 ITAT Pune B Bench in the case of ACIT s. SRJ Peety Steels Pvt. Ltd., 137 TTJ 627 held as under : In the present case, the search was initiated on 17th March, 2006 in the residential and business premises of SRJ Group, covering the premises of the assessee company as well. Prior to the search, the returns of income for the asst. yrs. 2000-01 to 2005-06 had already been filed under s. 139(1) accompanied by all requisite documents and proceeding under s. 143(1) stood completed. During the course of search no incriminating materials were found relating to aforesaid years which could have been added back in the proceedings under s. 153A. The details regarding the consumption of electricity for the production for each of the year under consideration was very well placed before the authorities below in the director s report of each year. The same has not been disputed by the Revenue. The tax audit report also contained the unit production of each year which were accepted year after year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ratio mixed in 1 kg of tobacco and the partner replied that he will not disclose the trade secretes or formula otherwise it would open the business secretes of the assessee. The amount of ₹ 50 lacs was surrendered to buy peace only or to avoid litigation only. On going through the statement of Shri Kailash Chand Kesarwani, we find that the ld. counsel for the assessee rightly contended that the partner during the course of recording of the statement did not reveal the trade secretes, which is just and proper and in answer to question No. 13, the partner stated that the books of account of the assessee firm are complete in all respect, but for anticipated short coming he has surrendered ₹ 50 lacs in the assessment year 2010-11. Therefore, it would indicate that no incriminating material was found against the assessee during the course of search in respect of assessment years under appeal so as to make the assessment u/s. 153A of the IT Act. Such statement could not be said to be incriminating in nature against the assessee. The statement was recorded u/s. 131(1A) on 04.09.09 and 27.08.09 after search could not be regarded as recorded u/s. 132(4) of IT Act as argued by Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Delhi High Court in the case of Girish Chaudhary, 163 Taxman 608 held that there is no basis as to how, the AO came to the conclusion that 48 was ₹ 48 lacs. Dumb document Addition deleted. No other material is brought on record to say if any incriminating material was recovered during the course of search against the assessee. No case is made out that the assessee at the regular assessment stage u/s. 143(3) for the assessment year 2004-05 did not produce any books of accounts, evidence or material, which was alleged to be found during the course of search. In other years also, the return of income completed u/s. 143(1) were accompanied by all the requisite documents and assessments were completed. Therefore, the returns for all the assessment years under appeals have already been accepted completed prior to search and no assessment as such could be said to be pending on the date of initiation of search so as to abate in the light of the provisions of section 153A. No excess stock was found during the course of search. No sales or purchases were found outside the books of account. The decisions, cited above, clearly support the case of the assessee that no assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incriminating material was found during the search conducted under section 132 of the Act. We, therefore, express no opinion as to whether section 153A can be invoked even in such a situation. That question is therefore left open. (iv). CIT vs. Chetan Das Lachmaan Das, 25 taxmann.com 227 (Delhi), in which pursuant to a search conducted at assessee s premises certain loose papers were found, which suggested gross under-invoicing of sales and suppression of production/yield of Hing. On the basis of said papers AO rejected books of accounts and made the addition of suppressed sale value. 7.5 None of the above decisions would support the case of the Revenue, rather, would support the contention of the assessee that when there is no incriminating material found or seized during the course of search u/s. 132, AO could not resort to roving and fishing enquiry and no addition could be made against the assessee as have been made in the assessment orders. The AO and the ld. CIT(A) have not relied upon any profit and loss account referred to by the ld. DR. It therefore, appears, ld. DR has produced copies of these profit and loss account for the first time on record without ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings, there may not be need to consider the grounds on merits, however, we find that the additions on merits in these years are also connected with the remaining appeals. The assessment year 2004-05 is a lead case and the identical facts and reasons are followed in the remaining assessment years. Therefore, it would be necessary to decide the respective grounds of appeals on merits also and the facts would be taken for the purpose of adjudication of remaining appeals from assessment year 2004-05. The parties have also stated that all the issues are common in remaining appeals as would be considered in assessment year 2004-05. Ultimately, the findings given on merits shall not affect the findings given on the issue of legality of assessments and the additions on merits shall be deemed to have been deleted. This issue is decided in favour of the assessee in A.Y. 2004-05 to 2007-08. 8. Issue No.2 : (Addition on account of suppressed production:) This issue arises in all the assessment years under appeals. The parties have referred to the facts from the impugned order for the assessment year 2004-05. Therefore, for the purpose of disposal of all the appeals on this issue fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.000 919194.000 WHOLE LEAF 34474.000 32441.000 66915.000 6288.000 0.000 60627.000 TOBACCO DUST 0.000 0.000 0.000 0.000 0.000 0.000 Total 466101.500 953293.000 1419394.500 439573.500 0.000 979821.000 OTHER RAW MATERIALS Particulars Opening Stock (Kgs) Purchase (Kgs) Total (Kgs) Closing Stock (Kgs) Storage Loss (Kgs) Consumption (Kgs) CHEMICALS PERFUMES 35469.000 86441.450 121910.450 36999.000 0.000 84911.450 SILVER SILVR VARK 532.000 3994.758 4526.758 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.23% 2.72% 3.16% Stock/Turnover 37.91% 43.63% 45.22% 43.59% 0.86% 0.01% NA Material consumed/finished goods 77.34% 77.53% 79.52% 81.43% 98.93% 98.75% 99.05% 8.3 The A.O has remarked that the assessee has not maintained the details of consumption of raw material at various stages. The ratio of consumption of whole leaf with Kimam has not been explained. It was, further, stated that approximately 200 gm of Kimam is produced in one Kg of whole leaf consumed. It was told to the A.O. that the product of raw Kimam is taken out after gap of 15 to 20 days. The A.O. has examined the difference of production (based on production register of Kimam) for F.Y. 2007-08 and found that there is no certain ratio of production of Kimam vis- -vis the consumption. The assessee has not shown opening and closing stock of Kimam in all the assessment years under consideration. In another o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inal product. To the submission of the appellant that modvetable items are recorded in excise record, the A.O. remarked that there are incoming entries of various modvetable items but those are issued as one in whole and the quantity of each item cannot be ascertained separately. The Silver Vitran Register was also not produced stated to be missing. In the Silver Vitran Register for subsequent assessment years, the difference was found in the closing stock and opening stock. There are no details of quantity of silver vark received back from Karigars. There are no details of issue of Silver vark for manufacturing. The assessee submitted before the A.O. that the silver items are kept in the custody of partners / managements and the same were released as and when required. There was no need to maintain stock register for the silver vark . With regard to the consumption of silver vark the A.O. asked the assessee to produce some Kamgars for examination but as stated by the A.O. Kamgars were not produced nor were their addresses furnished. There are no details of percentage of evaporation of aroma from ingredients and perfume items. To the issue that details of packing materials w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 009, Prop. Sri Rakesh Narayan Gupta categorically stated that, office go-down and residence are all situated at 105/682, Chandrika Devi Chauraha, Deputy Ka Padao, Kanpur. The A.O. also states that no staff was found during the survey. The A.O. also conducted inquiry through her Inspector, who submitted the report that there was no go-down and signboards displayed the firm s name and the name of a furniture shop. In a further inquiry, the A.O. found that Sri Rakesh Narayan Gupta, in his bank account with State Bank of India, withdrew the cash immediately after the deposit of the drafts. The A.O. also noticed discrepancy in the cheque numbers in the ledger account of assessee in the books of Sarita Industries for the F.Y.2006-07 on the comparison of the entries in the bank statements of the assessee firm. In a post search inquiry conducted by investigation unit, it was discovered that the goods as per invoice no.173 and 176 dated 23.11.2006 and 22.12.2006 were sent through Car No. UP 78B 6780 which is 1992 model. The weight of the goods was 350 Kg and 100 Kg respectively. The A.O. noticed that the vehicle is LMV tracker through which goods were allegedly sent from Kanpur to Sahson, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of other materials on the basis of audit report furnished during the course of assessment proceedings. The A.O. remarked that the quantitative details of opening and closing stock of work-in-progress have not been given in the audit report and those are available in terms of value only. During the course of assessment proceedings assessee submitted the quantitative details of opening and closing stock of WIP, details of production and issue of coloured tobacco. The details as produced in the assessment order are reproduced herein under:- Details of consumption of raw tobacco and production of finished goods as per assessee Consumption of Raw tobacco in Kg. Adjusted consumption in Kg. Production of finished goods in Kg. Raw tobacco 919194.000 Opening balance of WIP + 88819.550 1008013.550 Closing balance of WIP - 169271.050 838742.500 838742.500 890193.600 Details of production and issue of coloured tobacco Opening stock of WIP in Kg. Coloure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r materials 2,31,583.996 kg Opening WIP 88,819.550 kg Total consumption 10,70,326.496 kg Total percentage of consumption 120.33% 8.9 From the details, the A.O. worked out the output of other materials which remains 51,451.100 kg from 2,31,583.996 kg. Accordingly, the yield is worked out as under:- Tobacco leaf consumed 749922.950 Add: Opening WIP 88819.550 838742.500 Add: Other materials remained after Consumption as per assessee 51451.100 Final product as shown by assessee 890193.600 Total %age of yield = 83.17 8.10. The A.O. has proceeded to analyze the consumption of other materials . The total consumption of other materials was 2,31,583.996 kg. The production was stated to be 51,451.100 kg. Thus, as per this working the yield is only 22% and remaining 78% is stated to have evaporated. The A.O. commented that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as shown finished products at 890193.600 Kg., there will be suppression in production by 240713.375 Kg. not shown by the assessee. Cost of goods produced comes to ₹ 289/- per Kg. as per detail shown in the audit report. The value of above suppressed production comes to ₹ 6,95,66,165/- which is added to the income of the assessee firm on account of suppression of production in manufacturing of ZARDA for the year under consideration. 9. Addition of ₹ 6,95,66,165/- was challenged before the ld. CIT(A) and the assessee s written arguments before him are reproduced as under : 19. Regarding addition of ₹ 6,95,66,165/- by alleging Suppression of production (Ground No.4 to 20): That in this regard the assessing officer has discussed the matter in para 2 to the para-8 of the assessment order. For making such a huge addition in arbitrary manner the assessing officer has narrated the facts in 27 pages of the assessment order but such a lengthy and clumsy discussions in the assessment order are not based on any search material or any other positive material brought on record nor any defect was pointed out in the books of account. The major portion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter year but net effect has been ignored from consideration by the learned authorities. 21. That during the entire assessment proceeding only a single notice dated 11.07.2011 was issued connected with the production activities and such notice is a common notice by mentioning the assessment year 2004-05 to assessment year 2010-11 and in compliance to the said notice a voluminous reply in 109 pages (copy enclosed) explaining there in each and every points was filed justifying the books results and thereafter the assessing officer framed the assessment orders in her own designed calculations purely based upon surmises and conjectures and it is also very important to consider before making such a huge addition that neither any mind was applied nor before making such huge addition proper opportunity was given to the appellant by the assessing officer. Hence on this ground also the addition made is arbitrary and uncalled for 22. That notice dated 11.07.2011 is a common notice issued in syncline manner which fact itself proves the seriousness taken by the assessing officer because according to assessing officer alleged suppression of production was only there in all the seven years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the past years have been adopted and maintained by the appellant. 24. That in this regard there is an another very important point/ facts to be considered by your good self is that this issue was already raised and considered during Assessment Year 1999-2000 where vide assessment order dated 22.03.2002 passed under Section143(3) of the Income Tax Act while an identical addition of ₹ 3,40,69,013/- was made under the head manufacturing account/ suppression of production on the similar ground as has been done in the present assessment under Section 153A(1)(b) of the Act. A photo copy of the assessment order dated 22.03.2002 is placed in the paper book at page no. _________. The then assessing officer has discussed the facts and his observations are appearing at page 6 to 10 of the order for making the said arbitrary addition, which are reproduced as under:- That a survey under Section 133A of the Income Tax Act was conducted at the business premises of the assessee on 05.11.98 where various stock was found. It was found that except tobacco no stock register of any other material is being kept. No day to day consumption of other items are maintained. Then vide o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on estimate of possible consumption determined by mathematical Calculations. The finding of the Assessing Officer is without any tangible evidence and it is based on inferences involving unwarranted assumption. Accordingly the addition of ₹ 3,40,69,013/- made by the Assessing Officer Under Section 69 of the Income Tax Act is deleted. 26. That the department went into Second Appeal against the aforesaid order of the learned Commissioner of Income Tax (Appeal). The Hon'ble Income Tax Appellate Tribunal, Allahabad Bench heard the appeal and vide their order dated June 2006 as per ITA No.126/A/09 dismissed the departmental appeal. A copy of the Income Tax Appellate Tribunal's Order is enclosed in the paper book at page no. ______ and in this regard observations/findings of the Hon'ble Tribunal as mentioned at page 8 in last para no. 9 of the order are reproduced hereunder:- However, again as discussed above, we have held that there is no warrant for invoking the provisions of Section 145(3). It automatically follows that the imaginary exercise undertaken by the assessing officer is futile and hence the additions cannot be sustained. Moreover du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clearance of the manufactured goods from the godown under control of Central Excise Department and our declared sales was accepted year after year and in view of this fact no such addition could be made. Kindly consider Allahabad High Court decision as reported in 320 ITR 116 in the case of CIT Vs. Mascot (India) Tools Forges Pvt. Ltd. (Copy of the order at page . Of the paper books) 29. That Sir, the most important fact that even for the year under consideration i.e. Assessment Year 2004-05, originally the assessment was made Under Section 143(3) of the act vide order dated 19.12.2006 by the Deputy Commissioner of Income Tax, who examined the books and other details on various dates of hearing by calling various details which will appear from the order-sheet entries written by the then assessing officer, copies of the order sheet are in the paper book at page no. ________. Similarly the copies of order sheet in respect of present assessment under Section 153A(b) of the act is enclosed at Page - . of the paper book. Kindly compare the same with the order sheet of block proceeding which shows the manner of the examination of records/facts adopted by the assessing officer w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gross Profit Rate Result in Assessment 2002-03 26,17,95,483 5,90,90,630 22.57% Accepted U/s 143(3) 2003-04 33,09,13,848 7,06,23,739 21.34% Accepted U/s 143(3) 2004-05 (Under Consideration) 32,76,14,467 7,03,55,084 21.47% Accepted U/s 143(3) and now in dispute u/s 153A(b) That from the above chart it will appear that overall position is progressive which was accepted by the assessing officer and more so regarding trading result there is no adverse view in the assessment order under consideration. Sir, there is no dispute with regard to Opening Stock, purchases, Sales Closing Stock as well as gross profit and when everything was found in order and nothing adverse has been recorded in the order then there is no justification to proceed to make incorrect/ uncalled for addition by brushing-aside the entire facts, explanations, past-records, Submissions, and earlier assessments and results etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce) from the godown of the goods under the strict supervision of Central Excise Authorities nor in this regard any query was put to the appellant before framing the assessment order. In fact no discrepancies in the production was found but the discrepancy of alleged suppressed production was created by the Assessing Officer on her own estimation though the accuracy of the account maintained by the appellant had not been doubted or challenged during the year or also during last 45 years by the authorities of Income Tax, Sales Tax or Excise departments. 34. That, Sir the books of account are supported by purchase vouchers, vouchers for expenses, Stock records registers and Excise records etc. therefore hypothetical and imaginary calculations for deriving of alleged suppressed production as has been made in the present assessment order, cannot be treated as authentic and no specific mistake in the book of account has been pointed out and mentioned in the order by the Assessing Officer in the Assessment Order. During the year under consideration when turnover is on higher side and G.P. Rate is also more or less same then there is no justification to corner the appellant's books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mistakes in the accounts are pointed out - It is not disputed that the turnover and GP rate declared by the assessee in the year under consideration is better as compared to preceding year - In the absence of any specific instances of mistakes in the books of account and other records, the book results cannot be rejected on the basis of any such hypothetical calculations based on erroneous presumptions- Findings of Tribunal based on appreciation of material did not call for interference. That Sir in the light of the aforesaid decision since appellant's books of account are true and correct as the same have duly been audited by the auditors and declared sales recorded in the books of accounts are also supported by various excise registers which are periodically checked and verified by the excise authorities and accepted therefore the addition on count of alleged suppressed production as made by the Assessing Officer is highly unjustified and illegal in view of the decision reported in 337 ITR page 541 (Bombay) search addition should be confined to the material discovered in search. 36 That regarding addition made by alleging suppressed production, it is submitted that obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is submitted that chart A shows consumption at 94.22 % from adjusted consumption to production which is true and correct. The figure is supported by day to day stock register. CHART B (As per Page 15 of Assessment Order) Items Quantity of consumption in kgs Quantity of finished goods in kg. % age of consumption Raw tobacco leaf after considering OB CB of WIP 749922.950 890193.600 84.24 Chemical and perfumes 84911.450 (a) 9.54 Silver and silver-work 3353.246 (b) 0.38 Masala 107228.300 (c) 12.05 Kimam 36091.000 (d) 4.05 WIP 88819.550 9.97 TOTAL 1070326.496 120.23 That with regard to chart ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 106.24 % 83.17 % 37 That thus the assessing officer in fact totally ignored and discarded the actual evaporation/wastage of other materials used in production appearing in chart B where as such evaporation/wastage has been allowed year after year being normal feature in this nature of business. Therefore the whole confusion arises only because the quantam of evaporation and normal process loss was ignored which is the cause of deriving alleged suppressed production. In this connection it is further submitted that in the year 1990-1991 a survey was conducted by the excise department for verification of stock and they alleged that there was excess stock of tobacco as a result pilot experiment was also conducted by the excise authorities and thereafter they, arrived at a conclusion that the increase in weight on account of the addition of chemicals, perfumes, menthol etc. was purely temporary and the weight by and large come to the level of the weight of coloured leaves. Therefore the excess in weight found at the time of verification of the stock by the officers was on account of the addition of chemicals perfumers and other volatile subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , nature of ingredients used and explanation given by the appellant which is highly unjustified. 40 That at page 25 of the assessment order the assessing officer has alleged that no specific reply was given on ratio of consumption and percentage of yield which is absolutely incorrect in so far as at page 18 of the same assessment order a chart is reproduced from which it will appear that there is different in yield percentage figures in the A.Y. 2004-2005 to A.Y. 2007-2008 and yield percentage figures of A.Y. 2008-2009 to A.Y. 2010- 2011. Such difference is there only due to method of yield percentage working as adopted by the auditors and not due to any manipulation as alleged by the assessing officer. Sir, If a uniform method is adopted in all the assessment years then there will be no difference at all in the yield percentage figures in any of the years but the Learned assessing officer never tried to understand this fact and made such a irrelevant allegation based on her own wishes to justify the addition and search. Actually these two ratio (i) the accounting ratio of material consumed/finished goods produced (as per class 32 of Form 3CD) (ii) the percentage of yield of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the production of Tobacco for each year under consideration were also placed before the authorities below. This fact has not been disputed by the revenue. The audit report also contains the facts of production of each year which were accepted from year after year and no dispute was ever raised by the department. The matter of consumption / alleged suppressed production can by no means be created as a fresh or new issue and finding created by the assessing officer in the present order passed is based on assessing officer s own imagination ornamentaly during the search assessment since all details regarding consumption / production were before the department prior to the search. Sir, if department had any doubt regarding the same, it could have been raised during the regular assessment proceedings upto assessment year 2004-05 and not in the proceeding under section 132(1)/ 153 A(b) of the Act. When no incriminating material was found in the course of the search relating to any of the assessment year of the block period then the original assessment for such year could not be disturbed on the ground of alleged suppressed production through wrong working and own colourfull calculati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y records were maintained as required under the control of the excise Act/Rules made there under. Those records from the stage of raw tobacco to the sale of branded Tobacco were periodically checked and verified by the officials of the Central Excise Department. This is an important fact that in the assessment order neither the Assessing Officer has mentioned it nor pointed out any defect regarding maintenance of excise records. Moreover broad steps of the manufacturing process have already been explained. c) That with a view to survive in the business market it is not possible for the appellant to disclose its tradesecrete. d) From the aforesaid brief account/ details the yield during the various stages of manufacturing process can not be uniform on account of the fact that the raw materials are purchased largely from agricultural produce or vegetable products, some of which are hygroscopic in nature and some are volatile. The consumption of silver leaves and other perfumery items varies on account of the various manual process and nature of the business as explained above. 45. That on the basis of charts as reproduced at para 36 above the assessing officer has tried her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05/- which is added to the income of the assessee firm on account of suppression of production in manufacturing of ZARDA for the year under consideration. That from the above, it will appear that the cause of the addition according to the assessing officer is only this that the assessee surrendered ₹ 50 lac at the time of search with an intention to save the trade secret but while framing the assessment order the assessing officer failed to consider the statement of surrender correctly in its true spirit and tried to take disadvantage of the said surrender when such surrender was in good faith and only on persuasive query on the point of ratio of raw tobacco consumption and production and as a matter of fact it was a heavy surrender in volume as such adverse inference of the same has been wrongly taken for making a stand for the addition which is unjustified. That likewise the contention of the assessing officer that if 100 kg of items is consumed then 105.66 kgs finished goods would receive is totally incorrect because the assessing officer failed to understand this fact that it does not happen so in the production of tobacco and result of final product never comes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indicating any such suppressed production, purchase of raw tobacco was found during the course of the search. Although it is a known fact that our entire production/sale is subject to the excise duty and till date no case was ever made by the excise department or Income Tax Department or Sales Tax Department that any suppress purchase of raw tobacco, production and sales were made nor in this regard there is any whisper in the assessment order. For your convenience a chart is enclosed at page no. ______ of the paper book showing the consumption of raw tobacco and quantity of the production compared with the working of alleged suppressed production done by the assessing officer. In this connection it is also necessary to mention here that our earlier assessments were made after thorough scrutiny and passed under Section 143(3) of the Income Tax Act. Copies of the orders are at page no. ____ to ______ of the paper book. So kindly consider observations of various senior officers of the department in their orders and please compare the same with the present assessment order passed under Section 153A(b) of the Income Tax Act. In the referred chart earlier years position of consum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... working of assessing officer. Sir, the assessing officer considered the quantity of other materials in same ratio (1:1) which is absolutely incorrect. Meaning thereby that various ingredients, masala spices etc. were mixed in the raw tobacco as it is without processing and no benefit of process loss in to weight/quantity was allowed. In this way the quantity of production by considering the weight of other materials as it is (1:1) and over and above yield percentage of 105.66% was again applied by the Assessing officer in each year due to which figure of artificial suppressed production was increased and worked out by the assessing officer which is absolutely baseless. Sir, the process of manufacturing of tobacco is a technical matter and Zarda is not manufactured in the manner as suggested/calculated by the Assessing Officer. Sir fact is that since the assessing officer could not understand the entire manufacturing process as a whole due to which such type of confusion was designed/created by the assessing officer and Sir, if tobacco is manufactured in the manner as calculated/ decided by the assessing officer then the said Zarda shall be hardly purchased by any consumer/user be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he suppressed production, Sir it is not a judicious way to tax sale, production, and purchases etc. but in the appellant s case the department travelled beyond the procedures of the Income tax law and principles of accountancy and judicial parameter of observing the real income and not to tax the artificial income in the garb and suppressed production by ignoring the real income and commercial principles. Thus it is a patent and glaring mistake on the part of the assessing officer to tax the amount of alleged artificial production worked out by the assessing officer because in the production costs various other elements are also involved. The assessing officer nowhere has stated in the order that there was suppression of sale and purchases nor she mentioned anything about payment of excise of duty on the finished goods derived out of such alleged suppressed production or whether the excise duty was charged and paid on each and every exhit item of finished goods. Moreover there was no finding of excise department that any excise duty was suppressed then question of taxing the alleged suppressed production as worked out by the assessing officer does not arise. The records go to sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are required to be used and also through various process mixed in obtaining finished products, Is it practicable to tell the ratio of the same in spite of the fact that it was trade secrete of the assessee which was asserted in statement by the appellant u/s 132(4) of the Act at the time of search?. 6- Whether where the business is of excisable goods and excise duty is levied and paid on the clearance of the finished goods from the factory godowns under the supervision and control of the Central Excise Department, the production and sale could be disbelieved on just whims and surmises of the assessing officer and also without any incriminating material found during the search. 7- Whether in any view of the matter and keeping in view the nature of production of chewing tobacco and manufacturing process as already explained earlier and various ingredients used in obtaining the finished product the evaporation/ driage/ shortage and process loss disclosed could be disbelieved on hypothetical grounds and surmises and excess production be created and considered on the basis of baseless calculations without considering the above mentioned driage, evaporation and proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtment and income tax department both are departments of the central government of India. Sir till date taxes have been levied by the income tax department on real income of the assessee only but in the year under consideration for the first time department is taxing on the production which is a clear mockery of the law and harassment to an old and one of the heavy tax payer assessee of the District, which is not permissible according to the spirit of in the I.T. Act or even against the guidance of Ministry of Finance of CBDT i.e. no uncalled for harassment should cause to the tax payer. 10. The submission of the assessee was forwarded to the A.O. for examination and comments. Vide his letter dated 19.08.2013, the A.O. has submitted as under:- Addition of ₹ 6,95,66,165/- on the ground of suppression of production A. O. in her assessment order has made addition on the ground of suppression of production and main basis of the addition was that the assessee did not provide any evidence which could show what was the itemwise percentage of wastage/evaporation in perfumery items such as chemicals, masala, silver and silver-vark and kimam During the remand pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficult to fully rely upon the submission of the assessee. Hence, addition made on this ground is correct. 11. The copy of remand report received from the A.O. was forwarded to the assessee. Vide their submission dated Nil, the counter comments have been given as under:- B. Regarding addition of ₹ 6,95,66,165.00 on the allegation of suppression production of Zarda: That in this regard the detailed/ explanation was offered in the statement of fact in Para 19 to 53 at page 29 to 84 of the first paper book which comprises various charts etc. During the remand proceeding again the entire books of accounts including the excise records, stock and production register duly checked by central excise authorities books and records were examined and contentions of the assessee checked and found correct also. The books and records were thoroughly scrutinized by the assessing officer who was fully satisfied with method and maintenance of books of account as a result there is no adverse comment in respect of books of account or method of accounting in the remand report. In the present case a uniform /addition right from the assessment year 2004-05 to 2010-11 as alleged s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olour of raw tobacco. It was also clear that some weight loss is there in the form of useless part of whole leaf tobacco and masala during the process of manufacturing, but what is the percentage of weight loss was not clear. That from the above observations of the assessing officer it will appear that the assessee fully explained the whole process of manufacturing of zarda by showing raw materials. The assessing officer also observed that it was clear that some weight loss is there in form of whole leaf tobacco and masala during the process of manufacturing. In this way a claim of loss/wastage/evaporation has been duly accepted by the department so the issue of loss/evaporation/wastage has finally concluded. But unfortunately the assessing officer worked out the production on own whims considering that the production of finished product is the excess which resulted in working out alleged suppressed production. That the assessing officer slightly doubted that masala is used in grinded form or not and to this affect it is submitted that for grinding work two big machines are installed in the factory premises long ago and through those machines grinding work goes on regularly. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... department so as per the principles of consistency addition made is unwarranted as the assessing officer is bound to give cognizance to the past records. (c) That in the assessment year 1999-2000 for the first time in the history of the case an identical and similar addition of ₹ 3,40,69,013.00 was made under the head suppress production which was deleted in appeals and no reference filed even before the High Court. Thus the assessee s case is well covered by decision passed by the appellate court. (d) That in the entire block period of assessment there is no whispers about the invoking of provision of section 145(3) of the act and once the said provision for rejection of account was not invoked then the addition made is unwarranted because for rejection of account invoking of provision of section 145(3) is a mandatory requirement. In this regard there are various decisions in support of the assessee including the decision of apex court and various High Courts etc. and list of case law is at page 100 enclosed onward. (e) That the most important facts has been ignored that manufactured tobacco (Product) Zarda is subject to excise duty and for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re was no dispute by the side of excise authority about suppression of excise duty. (k) That it is an admitted fact that there is no fixed rate/ratio/parameter for consumption of various raw material used in manufacturing process as the same always varies at the stage of production depending on quality of raw material, atmosphere and moisture etc hence the percentage of consumption and production basis year after year . (l) The assessing officer has worked out artificial production at 11,30,906.975 kgs. as compared to real production 8,90,193.600 kgs. In this way artificial difference i.e. alleged suppressed production as created/worked out in production is 2,40,713.375 kgs but the assessing officer failed to state the fate of such extra production and likewise failed to state where such extra production has gone and also failed to state position of excise duty because the assessing officer has accepted the payment of excise duty as per production and as per regular books of accounts. (m) That the assessing officer applied yield percentage twice first from the stage of raw tobacco to finished product and flat rate again applied yield percentage on pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of production the A.O. started the discussion from page 2 of the assessment order in which first of all, she has thrown light on the process of manufacturing of Zarda. Thereafter, she has summarily remarked that the appellant has not shown the quantitative details of work in progress in the audit report. Then the basic commentary on the maintenance of books of account by the A.O. is that the details of consumption at various stages have not been furnished, therefore, the process is not open to verification. Another objection of the A.O. is that the ratio of consumption of different items of raw material has not been explained on the pretext of secrecy. The A.O. has also examined the genuineness of purchases of sandal wood oil and on the facts given in the foregoing paras, she proved that the purchases were bogus. The A.O. also found discrepancy in the consumption of packing materials as there are no records for issuance and consumption. The appellant states that the addition is not based on any search material nor was any discrepancy pointed out in the books of account. The appellant s argument is that in the past its book results were accepted in Toto. The A.O. was faulty in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered the evaporation / wastage of percentage in arriving at her working of suppressed production. The appellant has also referred to one survey conducted by the excise department in the year 1991 for verification of stock in which they alleged that there was excess stock of tobacco found as a result of pilot experiment. They reached the conclusion that the increase in the weight on account of addition of chemicals, perfumes, menthol etc. was purely temporary and the weight of the coloured leaves come almost to the same level after evaporation. Loss of weight on the use of other materials for example perfumes, chemicals, silver and silver vark, kimam and masala etc. is on account of evaporation and processing. The surrender of ₹ 50 lakh was only with the intention to purchase peace of mind and to avoid litigation. But the surrender did not represent the acceptance of suppression of production. The yield during the various stages, manufacturing process cannot be uniform as the raw materials are largely agricultural produce or vegetable products, some of which are hygroscopic in nature and some are volatile. There is no fixed rate of ratio or parameter for the consumption of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at any stage. Where there is no record of details regarding wastage, shortage, shrinkage and like, the rejection of books has been upheld [Orissa Fisheries Development Corpn. Ltd. Vs. CIT (1978) 111 ITR 923 (Ori.)]. The valuation of work in progress at the end of the year is of great importance in certain cases. In the audit report, the assessee has not shown quantitative details of work in progress; the same was produced only during the assessment proceedings. The production account is a necessary account for manufacturing business, so much so that in the case of a shoe manufacturer, where production register and information as to consumption of raw materials in the form of an issue register are not maintained, besides other imperfection in wages account, rejection of accounts and estimate of income, which was held, cannot be avoided. The said decision was given by the Hon ble Allahabad High Court in the case of Omax Shoe Factory Vs. The Commissioner of Income Tax reported in 281 ITR 288 (All). In the instant case the A.O. found that the assessee did not maintain any production register, day to day consumption of raw material was also found not properly maintained, the A.O. rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion is whether on account of this defect the accounts of the assessee could be rejected. In our opinion, the answer to this question has to be in the affirmative. 11. In the case of Arya Confectionary Works v. Commissioner of Income Tax reported in 143 ITR page 184, the Madhya Pradesh High Court also held applicability of the proviso to Section 145(1) of the Act in the absence of non-maintenance of day-to-day record of consumption of the raw-materials and production of finished goods. It has been further held that mere maintenance of quantitative details did not establish the fact that the assessee had maintained a day-today stock account of raw-material and finished goods. The Court up held the view of Tribunal that the income could not be properly deduced from the accounts maintained by the assessee, therefore, application of proviso to Section 145(1) of the Act has been held justified. 12. In the case of Awadhesh Pratap Singh Abdul Rehman and brothers v. Commissioner of Income Tax reported in 210 ITR page 406, the Division Bench of this Court has up-held the rejection of books of account on the ground that neither the stock register was maintained nor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te but the method employed is such that the income cannot properly deduced, the ITO can compute the income upon such basis and in such manner as he may determine. The decision of Hon ble Supreme Court in the case of Commissioner of Sales Tax, U.P. Lucknow vs. Girja Shanker Awanish Kumar (1996) 11 SCC page 648, referred to in the above cited decision is very important to the issue at hand. In the cited case, the books of account of the dealer were rejected for non maintenance of manufacturing account as required u/s 12(2) of the U.P. Sales Tax Act. The said section of Sales Tax Act requires to maintain stock register in respect of raw materials as well as products obtained at every stage of production. Apex Court held that if the stock book as contemplated u/s 12(2) of U.P. Sales Tax Act, is not maintained, it leads to the conclusion that the account books are not reliable. Though the judgment is under the U.P. Sales Tax Act, it is relevant in the context of the present case. The A.O. has gone at length dealing with the issue of purchase of sandal wood oil and has established that certain purchases were not genuine. On the facts that the appellant has not maintained production re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterials including Kimam, Spices, Menthol, Perfumes, Glycerin, Silver and Silver Vark etc., the same weight in the finished products, she had also increased the production by 6% on a wrong interpretation referring to the submission of the appellant. There is no dispute as regards the weight of raw tobacco in the finished product. There may rather be some weight gain or weight loss depending upon the moisture content. But as regards the ratio of weight of other materials mentioned above in the finished product, the same deserves better understanding and consideration. In this respect even the A.O. has considered the manufacturing process of Zarda. In the submission before the A.O. during remand proceedings, the appellant has explained the manufacturing process by enclosing photographs of each stage from page 76 to 104. Here I will consider those processes which may result in wastage and residuals. In the process of manufacturing of Kimam, it is explained that, whole leaf tobacco is put in big containers for boiling along with the water. The Ark i.e. raw kimam is taken out from the containers. The residuals / waste become useless and are thrown away. The photographs of residuals / wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f yield. The A.O. has given the details of raw material used on page 16 of the Assessment Order as under: Tobacco leaf 749922.950 Kg. Other materials 231583.996 Kg. Opening WIP 88819.550 Kg. Total consumption 1070326.496 Kg. Total %age of consumption = 120.23. The yield with reference to above use of raw material is as under:- Tobacco leaf consumed 749922.950 Add: Opening WIP 88819.550 838742.500 Add: Other materials remaining after Consumption as per assessee 51451.100 Final products as shown by assessee 890193.600 Total %age of yield = 83.17 Here too the arithmetic calculations as made by the A.O. are important to understand. First, the consumption has been shown 120.23%. This is actually the figure of total consumption with reference to yield of finished product i.e. as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ret and he would not reveal the same. The A.O. also relied on the surrender of ₹ 50 Lakh for not disclosing the ratio of consumption of raw material. During the course of proceedings before me, the appellant emphasized that the A.O. misunderstood the average percentage of yield computed at 105.66%. The A.O. was of the view that if 100 Kg of items are consumed, the yield would be 105.66 Kg., whereas the appellant argued before me that if 100 Kg raw tobacco (only) is consumed the yield would be 105.66 Kg. But raw tobacco is not the only raw material for the end product Zarda. For manufacturing Zarda, other materials like chemicals and perfumes, masala, kimam, silver and silver vark are also consumed. So if 100Kg of raw tobacco and 20.23 Kg other materials are consumed, the weight of the finished product would be 105.66 Kg. In other words, on the consumption of 120.23 Kg raw material the yield would be 105.66 Kg. But it is pleaded that the A.O. misunderstood the ratio of yield taking that if the weight of all the consumables is 100 Kg the yield would be 105.66 Kg. I notice that this finding of the A.O. is incorrect and invalid with reference to the facts analyzed by her. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Para (vii) of Page 227 of paper book in A.Y.2004-2005, the explanation may please be considered. That raw tobacco (Whole Leaf) is boiled in water to take out its ark known as Raw Kimam . The residual water i.e. tobacco becomes useless and thrown away. Various spices / Masala are baked, grinded and sieved to convert them into a powder form as well as aromatic spices/Masala are boiled in water and the aroma is distilled in base oil i.e. perfumery substance which is repeated till the period to get the required strength of the perfume. These spices / Masala are also mostly vegetable products and hygroscopic in nature and residual waste of such aromatic spices / Masala becomes useless and thrown away. Likewise the coloured tobacco from the second stage is mixed with compound of chemicals, perfumery substances and menthol and is stored in drums for 2-3 days for absorption of adour flavor and taste and then it is spread on plastic sheets for drying. Further likewise the compound of chemicals perfumery items and menthol are volative in nature and evaporate in the atmosphere. All this facts in details brought on record by the assessee. The Income Tax Act and the Courts attach with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between production of finished goods with material consumed. Ref: Assessment Years 2004-05 to 2010-11 reg. - Please refer to the above. 2.During the course of hearings, you have challenged the orders of respective assessment years of the A.O. computing the suppressed production. But it has also been noticed that you have not maintained day to day production statements to verify consumption of raw material and yield at every stage. Therefore, I have obtained the copies of some audit reports in the following cases which are also engaged in the business of manufacturing and sale of Zarda. Though, the volume of their business may not be comparable, the manufacturing process may certainly be comparable to a certain extent. These audit reports are for F.Y. 2007-08 in respect of Kishore Zarda Factory, D.51/199, Surajkund, Varanasi (U.P.) and for F.Y. 2011-12 in respect of Sugandhi Snuff King, A-15 Block B-1 Extn., Mohan Co-op. Ind. Area, Delhi Mathura Road, New Delhi 110044. The reference to the audit reports of different financial years in the above cases is also not material as the manufacturing process remains almost same. The ratio of material consumed to finished goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion no incriminating material, no loose paper, no excess stock was found by the search party but simply because a search was conducted therefore as per regular practice of the department book result was disturbed in respect of block period for assessment year 2004-05 (first year of Block) to 2010-11 when in the assessment year 2004-05 after thorough scrutiny book result was accepted by passing an order u/s 143(3) of the income tax act and in A.Y. 2005-2006 and 2006-2007 u/s 143(1) thus these assessment were concluded on the date of search i.e. 27.08.2009. That in this connection it is very necessary to mention here that in assessment year 1999-2000 a huge addition was made on account of suppressed production but considering the nature of business and method of maintaining books of accounts addition were deleted in first appeal and then department filed an appeal before Hon ble ITAT where the departmental appeal was dismissed as a result book results were accepted in toto. Sir, the assessee firm came into existence in the year 1967 and the founder of the company was Late Sri Bhola Nath Kesarwani who prepared a formula to make zarda and on the same line year after year production ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er dated 05-09-2013 liable to be ignored/discarded in all fairness and justice and basis of the same kindly be not adopted for deciding our appeals. I have examined the submission of the appellant refuting the proposition of comparability and find that it lacks necessary substance and reasonable contents. The appellant states that the audit reports of the comparable cases do not speak of the manufacturing process. It is true that the audit reports do not speak of the manufacturing process but here we are concerned about the percentage of yield in the similar manufacturing activity. The appellant has not given any comparable cases to claim them having similar manufacturing process. The appellant has not satisfied me with any cogent reasoning that the cited cases cannot be comparable, as they are also engaged in the manufacturing of flavoured tobacco. In the light of the decision of Hon ble Supreme Court in the case of British Paints (India) Ltd., the assessing authority is not bound to accept the system of accounting, regularly employed by the assessee, the correctness of which had not been questioned in the past. When the manufacturing process of the assessee not found fully ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may vary resulting in variation in production (iv) The quality of raw materials used may also affect the yield and (v) The process of manufacturing of Kimam or its purchase from the market may be a distinguishable feature, especially when the quantity is substantial, I take the percentage of yield @ 90% in the case of the appellant, in all the assessment years under consideration, to take in to account and factor in numerous factors responsible for variation in the production and to average out them, of the total quantity of raw materials consumed. The working of production on the above lines, the production in accordance with this working (in terms of quantity), the suppressed production and the sale value of suppressed production (on the average sale price per kg.) are given in the table form for A.Ys. 2004-05 to 2010-11 as under: Table - A A.Y. Consumption of Raw Material (Raw Tobacco and Other Materials) (in Kgs) 90 % of Coloumn No 2 Quantity Manufactured as per books (in Kgs) Suppressed Production (3-4) Average Sale Price per Kgs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2005-06 6,24,83,585 2,01,25,980.73 4,23,57,604.27 2006-07 6,56,02,962 2,23,81,572.39 4,32,21,389.61 2007-08 6,26,17,961 1,80,92,398.52 4,45,25,562.48 2008-09 7,56,62,496 2,51,72,687.47 5,04,89,808.53 2009-10 7,77,26,717 2,57,13,680.75 5,20,13,036.25 2010-11 7,76,72,166 2,32,73,571.38 5,43,98,594.62 In accordance with the above, the addition of ₹ 2,69,03,083.68/- on this issue is confirmed. The appellant would get the relief of ₹ 4,26,63,081.32/- for the F.Y. 2003-04, relevant for A.Y. 2004-05. 13. We have considered the rival submissions and the material on record. The assessee challenged addition of ₹ 2,69,03,083/- whereas department challenged deletion of addition of ₹ 4,26,63,081/-. 14. The ld. counsel for the assessee reiter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d at 83.17%. The AO took it at 105.66% and the ld. CIT(A) restricted the same to 90%. In this way, the ld. CIT(A) reduced the addition and granted relief to the assessee in a sum of ₹ 4,26,63,081/- on which the Revenue is in appeal. However, the ld. CIT(A) confirmed the addition to ₹ 2,69,03,083/- on which the assessee is in appeal. The basic reason for making the addition was that the details of consumption at various stages have not been furnished. Therefore, the process is not open to verification and further the ratio of consumption of different items of raw material has not been explained on the pretext of secrecy. The assessee, however, explained that there is no material recovered against the assessee during the course of search and no specific defects have been pointed out in maintenance of books of account and in past also on the similar pattern the books of account have been maintained and lesser yield of production has been accepted by the Revenue Department. Even in assessment year 1999-2000 on identical facts, similar addition was made and it was a case of survey u/s. 133A and addition have been deleted. The ld. CIT(A) was of the view that production acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee was called for on the same and after considering the explanation of the assessee, the ld. CIT(A) noted that the A.O. has to evaluate not only the facts available on the records of the assessee but also the surrounding facts to arrive at a decision in the matter. The ld. CIT(A) noted that the A.O. failed to consider two facts important to evaluate the percentage of yield, one, that use of spices and other ingredients, mainly to prepare the flavor perfume, cannot give yield of equal weight, meaning thereby the residuals wastes are bound to be there, secondly, the yield of 106% was not with reference to the weight of all the materials, it was only with reference to raw tobacco only. Therefore, the working of suppression of production by the AO was not found to be justified. It would mean that the ld. CIT(A) did not accept the theory of findings propounded by the AO for the purpose of making the addition. The finding of fact recorded by the ld. CIT(A) rejecting the findings of the AO have not been disputed before us during the course of arguments and have also not been rebutted by the ld. DR through any evidences or material on record. The ld. CIT(A) thereafter proceeded to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts clearly show that the department has no case for interference in departmental appeal and now we have to consider the merits of the additions sustained by the ld. CIT(A). It is admitted fact that no specific defects have been pointed out by the authorities below in maintaining all the books of account by the assessee. It is also not in dispute that the assessee maintained books of account on the same pattern as have been maintained in preceding assessment years. It is also clear that the AO has ignored actual evaporation and wastage of the material used in the production as are appearing in Chart (B) (supra) in submission of the assessee. The ld. CIT(A), however, admitted that there is loss of weight in the form of evaporation and residuals in the process of manufacturing. Therefore, the submissions of the assessee shall have to be accepted for the purpose of believing the books of accounts properly maintained by the assessee. Hon ble Supreme Court in the case of M/s. Flexi Pack, 319 ITR (Statute)(SC) 3, held that there is no question of going on estimate of income without rejecting the books of account of the assessee. In the case of assessee, it is admitted fact that the book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee with regard to manufacturing / production and the sales. Since the system of accounting regularly employed by the assessee, the correctness of which had been questioned by the Revenue in past and after examination of the records and material produced by the assessee, book results have been accepted on the identical facts by the Revenue Department, therefore, the decision in the case of British Paints India Ltd. (supra) would not apply against the assessee. No case is also made out before us that the percentage of yield shown by the assessee in past was against any Rule or the law. The G.P. rate declared by assessee is almost same as declared in preceding years. We may note here that it is well settled principle of law that even if the principle of res judicata does not apply to the Income-tax proceedings, but the income-tax authorities shall have to follow the principle of consistency. We rely upon the decision of Hon ble Supreme Court in the case of Radhasoami Satsang vs. CIT, 193 ITR 321, the decision of M.P. High Court in the case of Godavari Corporation, 156 ITR 835, decision of Supreme Court in the case of Union of India vs. Satish Panalal Shah, 249 ITR 221 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not reveal the trade secretes. Therefore, the same may not be relevant for assessment years under appeals and could not be said to be adverse in nature to take different percentage of yield. The ld. CIT(A) also noted at page 90 of the impugned order that the AO had worked out the value of suppressed production on the average cost price, but the same is not correct as concealed production would result in sale to fetch unaccounted income. These findings of the ld. CIT(A) also suggest that even part addition sustained by the ld. CIT(A) and the addition made by the AO was wholly unjustified. Hon ble Gujrat High Court in the case of President Industries, 258 ITR 654 held that there is no finding that goods sold outside the books of account were acquired from unexplained sources. The value of entire sale outside the books cannot be added. Only profit margin may be added. This view was re-confirmed in its later decision in the case of Samir Synthetics Mill, 326 ITR 410 (Guj.). Therefore, the addition maintained by the authorities below was highly unjustified. The ld.CIT(A) though cited the alleged comparable cases of M/s. Kishore Zarda Factory and Sugandhi Snuff King, but ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cepted in earlier years in scrutiny proceedings by the AO as well as by the Tribunal. Nothing was found against the assessee during the course of search i.e., any excess stock or sales made outside the books of account. Therefore, going by some illogical calculations based on figures provided in the audit report, the AO should not have made huge additions against the assessee, which is also not approved by the ld. CIT(A).Therefore, on mere comparison of cases without bringing adequate material on record, the ld. CIT(A) should not have sustained part addition without considering the principle of law that the entire sales would not be profit of the assessee. Considering the above discussion and examining the case of the assessee from every possible angle, we are of the view that the authorities below were not justified in making or confirming any addition against the assessee. We accordingly, set side the orders of the authorities below and delete the entire addition in assessment year 2004-05. In the result, the appeal of the assessee is allowed and the departmental appeal is dismissed on this issue. 15.1 This issue is arising in the remaining appeals for the assessment year 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd had been carried forward only. Therefore, the addition be deleted. The ld. CIT(A), however, did not accept the contention of the assessee because the composition of other has been changing every year and new parties are mentioned. These are unsettled accounts of the parties for which no evidences have been filed and accordingly in the absence of this claim substantiated by the assessee, the addition of ₹ 30,04,511/- was confirmed. 17. We have considered the rival submissions and the material on record. The ld. counsel for the assessee reiterated the submissions made before the authorities below and referred to PB 327 which is the details of sundry creditors for expenses of ₹ 56,83,162/-, which contained the list of others in a sum of ₹ 30,04,511/-. The break-up of the same is given at page 328 of the paper book. At page 329 330 of the paper book, the list of sundry creditors for expenses from preceding assessment year 2003-04 have been mentioned in a sum of ₹ 57,34,725/-. Ongoing through the same, we find that most of the sundry creditors for expenses are coming up from preceding assessment year 2003-04 except one item of Tarun Bharat Associates, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of ld. CIT(A) with direction to re-decide this issue after verifying the old balances coming up from earlier years and in case the balances are coming up from earlier years, no addition should be made against the assessee and for new items appearing for the first time under sundry creditors, the assessee shall have to furnish the evidences before the ld. CIT(A) for verification of the same. The ld. CIT(A) shall give reasonable sufficient opportunity of being heard to the assessee and shall also allow to furnish material before him for clarification of the issue. This issue is same in remaining assessment years, therefore, in these years also the issue is restored to the file of ld. CIT(A) for reconsideration as is directed in assessment year 2004-05 above. In the result, this ground of appeals of the assessee in all the years are allowed for statistical purposes. 18. Issue No. 4 (Addition on account of construction of building on the basis of DVO s report) : This issue arises in assessment years 2004-05, 2005-06, 2006-07 2008-09. In assessment year 2004-05, the AO made addition of ₹ 1,29,617/-. The AO observed that during the year under consideration, the additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad in ITA No. 440/2012 for the assessment year 2008-09 decided the issue vide order dated 30.11.2012. In this order reference to AY 2005-06 is made. The findings in para 20 are reproduced as under : 20. We have considered the rival submissions and the material on record. Hon ble Supreme Court in the case of Sargam Cinena vs. CIT, 328 ITR 513 held that when books of account of the assessee are not rejected, the Assessing Officer cannot refer the matter to the Departmental Valuation Officer. Hon ble Rajasthan High court in the case of CIT vs. Pratapsingh Amrosingh Rajendra Singh Deepak Kumar, 200 ITR 788 held that there was no dispute that the assessee maintained proper books of account and same had been accepted in past and no defects were pointed out in the books. The expenses were fully supported by vouchers. Full details were also mentioned in respect of each items in the books. Simply because valuation report was of a higher amount, books could not be said to be unreliable. The Tribunal was, therefore, justified in deleting the addition of ₹ 55,780/-. The assessee filed details of investment made in earlier years in the property at pages 116 of the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at when books of account of the assessee are not rejected, the AO cannot refer the matter to the DVO. We also find that difference may be around 10% or so as per valuation shown by the assessee and the report given by the DVO, which should have been ignored for the purpose of making addition. In view of the above discussion and following the order in the case of M/s. Keserwani Sheetalaya (supra) and other decisions above, we set aside the order of ld. CIT(A) and restore this issue to his file with the direction to re-decide this issue in the light of the above judgments. The ld. CIT(A) shall give reasonable sufficient opportunity of being heard to the assessee. In the result, all the appeals of the assessee on this issue are allowed for statistical purposes. 20. Issue No. 5 (Disallowance of various expenses, i.e., entertainment expenses, shop expenses, telephone expenses, generator expenses, motor vehicle expenses, petrol expenses): This issue is same in all the appeals except that in some assessment years, the heads of disallowances of expenses are lesser. But the issue is identical. Therefore, for the purpose of disposal of appeals facts are taken from assessment year 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, confirmed the additions. 22. We have considered the rival submissions and the material on record. It is not in dispute that the nature of business of assessee is manufacturing of tobacco and must have the dust and other ingredients while working of labourers. Therefore, it may be hazardous to the working of labourers. The business premises of the assessee is said to be far away from the city. Therefore, vehicles must have been used for the purpose of business and if milk and Gur are provided to the labourers during working hours, we do not find any wrong in the same. It is a fact that in the city of Allahabad, there is electricity failure for several hours and as such generators must have been used for the purpose of business. The authorities below either on the personal user of telephone, vehicles etc. or that some vouchers were not produced made disallowances of 50% under some heads and 10% under other heads of the expenses. The assessee has filed chart showing history of expenditure incurred on these heads. It would show that in preceding assessment years 2002-03 and 2003-04, no such disallowances have been made on entertainment/shop (milk and Gur expenses). Small add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom M/s. Cosmo Elmek, Varanasi and other parties. The AO collected the details of use of vehicle for supply of the material. The owner of the vehicle denied use of vehicle for transportation of goods. Therefore, the AO inferred that no goods were transported and ultimately purchases were found to be bogus. The ld. CIT(A) asked for the break-up of the purchase of the amount in question and the vehicle used for supply of the material. The assessee submitted before the ld. CIT(A) that the purchases have been made genuinely from this party. The AO started enquiry in the case of Sarita Industries, but made addition of different party in assessment year under appeal. M/s. Cosmo Elmek is genuine party. Its PAN and telephone numbers were furnished. It was explained that payments were made through demand draft and all entries are recorded in the books of account. Part payments were made in the assessment year under appeal and for balance amount, sundry creditor account is shown. The purchases of perfumes were made from this party. The AO has not made out any case that the expenses incurred have not been entered into the book of account. In earlier year, the AO examined the same party and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andal Oil issued by M/s. Sarita Industries, Kanpur, proprietor Rakesh Narin Gupta. The goods were sent by vehicle No. MH04 8300. On enquiry, it was found that it is a Bajaaj Chetak Scooter, 1990 Model. Letter of RTO was confronted to the assessee and the AO also asked the assessee to produce Shri Rakesh Narain Gupta, proprietor of M/s. Sarita Industries for examination. The statement of Shri Rakesh Narain Gupta was recorded during the course of assessment proceedings in which he has explained that vehicle Number was wrongly mentioned because the correct number is MH 04-AW-8300.The address of the owner of the vehicle was also given as Shri Kashi Nath, but the report of the department shows that such person was not residing at the given address. No stock at the premises of Shri Rakesh Narain Gupta was found. There was no godown and signboard displayed. The amount was withdrawn immediately in cash after deposits of the drafts. In further investigation, it was found that for invoices Nos. 173 and 176, the material was sent through Car though the weight of the goods was 350 kg and 100 kg. The Tata Sumo which was used for transportation was not a commercial vehicle and owner denied tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arly made purchases from same party which have not been doubted by the Revenue department. It is also interesting to note that in the assessment year under appeal, the assessee made total purchases from M/s. Sarita Industries for a sum of ₹ 1.23 crores approximately through six invoices. The AO accepted five purchases and did not make any addition. The AO doubted only purchase through one bill No. 172 without assigning any cogent and specific reason. It appears that the purchase of one bill was not found to be genuine because of particular use of vehicle for transportation or that owner of the vehicle did not confirm the fact of transportation of goods in favour of the assessee. However, the facts and circumstances and the material on record clearly show that the assessee made genuine purchases from M/s. Sarita Industries and payments are made through account payee drafts. Therefore, other considerations noted by the AO for making addition appear to be irrelevant. M/s. Sarita Industries was not found doubtful party because assessed to Income-tax as well as registered with Central Excise Authorities and transactions with this party in preceding and subsequent assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Income tax Authorities also. Purchases have been accepted by the Sales Tax department. No material was found during the course of search to prove bogus purchases. The payments are made through demand drafts. It was also found that no inquiry was made in the case of vehicle No. UP-65-AB 8414 used in transportation of goods. No other enquiry was made. The ld. CIT(A) despite these findings confirmed the addition of ₹ 4,54,240/- and balance addition of ₹ 23,05,474/- was deleted. Both the parties are in cross appeals on this issue. 30. On consideration of the rival submissions, we are of the view, this issue is same as is considered in assessment year 2006-07 on issue No. 6 above. Copies of the bills are filed in the paper book along with confirmation of the party. The totality of findings of the ld. CIT(A) proved that M/s. Cosmo Elmek Varanasi is a genuine party and sales in their case have been accepted by the Sales Tax Authorities and party also confirmed the transaction with the assessee. We have dismissed the departmental appeal on this issue in assessment year 2006-07 on identical facts. It appears that addition is merely made on account of carrying of the weig ..... X X X X Extracts X X X X X X X X Extracts X X X X
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