TMI Blog2015 (7) TMI 608X X X X Extracts X X X X X X X X Extracts X X X X ..... e addition on account of increase in closing stock is ₹ 51,12,814/- and if this addition is deleted then the assessed income will stand at ₹ 11,78,696/- and the returned income of assessee was at ₹ 20,28,108/-. Ld. counsel for the assessee strongly raised that the formula adopted by the AO is unscientific and CIT(A) did not accept the said formula but for argument sake if the formula accepted then the net profit as per the above formula will be much lesser then the returned income of assessee and in that case there will be a revenue loss to the government. Total expenditure incurred for manufacture of tea out of green leaf purchased by assessee as per calculation of the AO is erroneous, hence profit on tea manufacture out of our own leaf is also erroneous. And the formula adopted by the AO gives distorted figures for profit made out of the assessee’s own leaf and bought leaf. In the field of agriculture particularly in produce of green tea leaf there is no mechanism to divide the profit as agriculture and nonagriculture i.e. while after giving deep thought to the point and after taking expert opinion on this subject the government introduce Rule 8 of IT Rules f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 1,99,62,814/-. Thus there was an increase of ₹ 51,12,814/- in the value of the stock during the year as shown by the assessee itself in its return of income. In the scrutiny proceedings, the AO has taken the same amount only in his revised adoption of special method by which income from sale of tea grown and manufactured could be computed in terms of Rule 8 of Income Tax Rules 1962. The Ld. CIT(A) could not point out any defect in the said computation of the AO but simply stated that the AO was wrong invading ₹ 51,12,814/- towards increase in stock without appreciating that the AO had simply adopted the figure (closing stock ₹ 1,99,62,814/-, opening stock ₹ 1,48,50,000/-) by the assessee itself. Thus the Ld. CIT(A) was wrongly assumed that the AO had made further addition of ₹ 51,12,814/- which is factually incorrect. 2. Whether the facts and circumstances of the case, Ld. CIT(A) was justified in treating the method adopted by the AO as not reasonable and logical. During the course of assessment proceedings, for the sake of clarity, the AO analyzed all the expenses and income claimed in the audit report and recomputed the income on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and manufactured by the seller shall be computed as if it were income derived from business but only 40% of such income shall be deemed to be the income liable to tax. Taking into consideration of the above ratio, the mixed expenditure has been divided in 60:40 ratio as agriculture expenditure and manufacturing expenditure. (1) Agriculture expenditure ₹ 2,22,85,842.84 (2) Manufacturing expenditure ₹ 1,48,57,228.57 [C] 100% Manufacturing expenditure: Excise Duty : ₹ 3,75,606.00 Selling Expenses : Rs.27,06,240.37 ₹ 30,81,846.37 [D] Total Agriculture expenditure : [A]+[B](1) = ₹ 4,60,84,361.17 [E] Total manufacturing expenditure : [B](2)+[C] = ₹ 1,79,39,074.94 [F] Total green leaf consumed during the year 54,51,373 kg. [G Manufacturing expenditure for per kg green leaf : [E] / [F] ₹ 3.29/Kg [H] Manufacturing expenditure incurred for 21,19,731 kgs of green leaf purchased 21,19,731 x 3.29 = Rs.69,73,914.99 [I] Green leaf purchased Rs.2,85,95,141.25 [J] Total tea sold during the year 11,27,940.8 Kg [K] Total sale value Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce assessment year 1996-97 and the Department has been accepting such computation. The Ld AO in this assessment year adopted new method of computation of income by considering expenditure in three different categories 10% agriculture expenditure, mixed expenditure and 100% manufacturing expenditure and determining profit arising out of manufacturing of tea from tea leaves grown in own tea gardens and tea leaves bought from outside separately. By apportioning expenditure to tea manufactured out of tea leaves grown in own gardens and out of bought leaves from outside the Ld AO computed revised total income to the tune of ₹ 60,40,588.232 and forwarded this computation to the assessee vide letter dated 14.10.2011. In response to this letter the assessee company submitted a revised computation of income showing net loss of ₹ 25,44,920- without deduction u/s.33AB claiming that it has followed the same method of computation as applied by the Ld. AO. The Ld. AO after considering the contention of the assessee and revised computation of income of the assessee rejected it by stating reasons as mentioned in the assessment order. The d AO thereafter computed revised total i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formula adopted by him for calculation of agriculture income i.e. composite income and mixed income under Rule 8(1) of the IT Rule, which is the guiding factor in deciding and computing the income from manufacture of tea Rule 8(1) stated as under:- Income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it was income derived from business and 40% of such income shall be deemed to be income liable to tax. We have perused the above rule, which does not given any formula for arriving mixed income or composite income but rules stated categorically that the income from tea grown, manufactured and sold has to be ascertain first and then the income @ 60% shall be the agriculture income and 40% of income shall be income liable to be taxed under income tax act. The formula adopted by the AO is non-scientific and irrational. We find from the facts of the case that while completing the assessment the AO has made an addition of ₹ 51,12,814/- on account of increase in closing stock. The above addition on account of increase in stock is neither permitted under the principle of accountancy nor under the law. Closing stock is alwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch more than own crop of green leaf then applying the ration of 60:40 in that case will be a dangerous proposition and the formula has given absurd finding as under:- 1. Manufacturing expenditure was not arrived as right figure 2. Manufacturing expenditure arrived @ ₹ 3.20 per kg of green leaf is wrong. 3. Again the concept of average sale price per kg of tea is a thumb rule. My quality of green leaf may be good and the quality of bought leaf may be worst and average sale price of our own leaf and purchased leaf cannot be same. 4. The average sale price theory as adopted by the AO is not tenable Further we find that assessee is not maintaining separate account for manufacture of tea from purchase leaf and its own produced leaf and there is no system which can divide the expenditure in terms of purchase and assessee s own leaf and as such the formula as adopted by the AO is totally absurd. In the field of agriculture particularly in produce of green tea leaf there is no mechanism to divide the profit as agriculture and nonagriculture i.e. while after giving deep thought to the point and after taking expert opinion on this subject the government introduce Rule 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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