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TMI Blog2011 (8) TMI 1176X X X X Extracts X X X X X X X X Extracts X X X X ..... g the addition made by the AO for alleged excess consumption of raw material of ₹ 1,32,51,851. 2.2 The learned CIT(A) erred in confirming the action of the AO in applying the Input/Output formulae of 108.19 : 100 for computing alleged excess/short consumption of raw materials at the appellants Contract Manufacturing Units ("CMU's") as against the formulae of 110.607 : 100 as contended by the appellant. He erred in not appreciating the submissions made by the appellant in this connection. 2.3 Without prejudice to the above, the learned CIT(A), while confirming the action of the AO in applying the Input/Output formulae of 108.19 : 100 for the appellants CMU's, erred in not directing the AO to make the adjustments to the amount of production of the CMU's in computation of excess/short consumption of the CMU's. 3. The learned CIT(A) erred in confirming the action of the AO in disallowing long term capital loss of ₹ 35,58,718 on redemption of preference shares." Revenue's appeal " 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the A.O. to allow adjustment for empty bags of maida ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed as a bad debt as the conditions under section 36(2) were not satisfied. Regarding the claim under section 28/37 as the assessee transferred the business in connection with which the deposits were claimed the amount cannot be allowed as a loss incidental to the business. 6. After considering the rival submissions and examining the issue we are of the opinion that the amount cannot be allowed as a deduction. It is admitted that the amount cannot be allowed as bad debt as assessee has not fulfilled the conditions under section 36(2). With reference to the claim under section 28/37(1) it can be considered as a loss arising in the course of business but this loss has not arising during the year. As the units was transferred in F.Y. 1996-97 relevant to A.Y. 1997-98 the deposits made with reference to the said unit could have been claimed in the year in which the same was sold off. Since the unit was already sold in an earlier year and since the assessee has not made any adjustment with reference to the deposits in that year, the same cannot be allowed during year under consideration. For this reason, we uphold the order of the lower authorities in not allowing the amount. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the actual weight of the biscuits in the packets were generally more than the printed weight and as such the actual production was more than the production recorded in the books of account. The CIT(A) accepted the submission of the AR and set aside the order with a direction to the Assessing Officer to recompute the amount of excess consumption after taking into account the submission made by the assessee in this regard. Effect to this order was given by the Assessing Officer vide order dated 10.05.1996 in which the Assessing Officer has considered in detail the submission made by the assessee and has allowed relief on account of wastages as contended by the assessee. 11. In the original order in the A.Y. 1989-90 an addition of ₹ 49,20,000/- was made by the Assessing Officer. This addition was reduced to ₹ 22,72,270/- after giving effect to the order of the CIT(A). In giving effect to the order of the CIT(A), addition of ₹ 22,72,270/- was made on account of excess consumption of sugar without setting off of short consumption of maida and vanaspati. On further appeal, the CIT(A) held that set off for short consumption should be allowed and only net ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of the direction of the CIT(A), the Assessing Officer weighed the sample packets of Parle-G to verify the claim and found that the weight of biscuits was actually more than the printed weight and accordingly had allowed the adjustment for excess consumption. However, during the year under consideration the Assessing Officer has not given similar relief in case of other brands in the same proportion in which it was allowed in Parle-G. 15. As far as adjustment in respect of biscuits produced by contract manufacturers, it was submitted that the assessee besides manufacturing biscuits in his own factory also gets the biscuits manufactured through contractor. According to the Assessing Officer while the input-output ratio for production in respect of the assessee's own factory is 108.19:100, the same in respect of CMUs it is 110.607:100. It was submitted before the Assessing Officer that CMUs were in the nature of sub-contractor who were given raw material against which fixed amount of biscuits were received as finished product. The CMUs are paid only the processing charges and any wastage, etc., in the process of manufacturing is on account of CMUs. Therefore, the input- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeds the declared weight. He accordingly directed the Assessing Officer to allow adjustment for the excess weight of biscuits on the basis of these results. He further directed the Assessing Officer to get the packets weighed again in case he requires the same and allow adjustment accordingly. 19. As far as the biscuits produced by the contract manufacturers, he agreed with the contention of the learned counsel for the assessee that if the input-output ratio of the own factory is applied to the CMUs also then adjustments which have been allowed in respect of own factory should also be allowed in respect of CMUs. Since the figures of exact wastage are not available, he directed the Assessing Officer to allow the wastage in the same proportion in which it has been allowed in respect of Parle-G production in own factory. He noted that the assessee has worked out the figure of excess/short consumption after taking into account the adjustments allowed in this order. As per this calculation there is short consumption instead of excess consumption for which no addition is to be made. The calculation as given by the assessee before the CIT(A) is as under: Manufactured by Bahadurgarh Fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lls vs. CIT reported 75 ITR 260, he submitted that the Assessing Officer's right under the proviso to section 13 (Income-tax Act, 1922) arises only if a finding is recorded as to the unacceptability of the method and irregularity of the accounts kept. In the absence of such a finding recorded by the authority the results cannot be ignored or brushed aside. The mere fact that the percentage of dead loss of cotton is high in a particular year cannot lead to an inference that there has been suppression of the production in the spinning mill. Accordingly it was held that the addition of ₹ 50,000/- to the total income of the assessee on account of alleged understated production of the yarn and soft waste was not justified. 23. Referring to the decision of the J & K High Court in the case of International Forest Co. vs. CIT 101 ITR 721, he submitted that the Hon'ble High Court in the said decision has held that mere low yield of out-turn sawn timber or the manifestation of meagre gross profit, which were the sheet anchors of the orders of the income-tax authorities and Tribunal could not be taken as indication of suppression of sales on the part of the assessee. 23.1 Refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not produced any evidence as to whether it is the gross weight or net weight. The wastage as submitted by the assessee has already been taken care of by the standard formula. He submitted that the Assessing Officer and the CIT(A) have not discussed the issue of 108.19:100 in a scientific manner. The various decisions relied on by the learned counsel for the assessee are distinguishable and not applicable to the facts of the present case. Therefore, he submitted that the matter may be set aside to the Assessing Officer. 26. The learned counsel for the assessee, in his rejoinder, submitted that not a single word about the order of the ITAT for the earlier year has been mentioned. He submitted that it is not known who devised the formula of input-output ratio of 108.19:100 in the A.Y. 1989-90. In any case the same has already been deleted by the Tribunal. He submitted that in case of good quality of raw material like maida and sugar there will be less consumption. There is no dispute regarding the weight of the maida bag being 100 kg. However, the dispute is only regarding the maida that remains in the bag. He submitted that there is bound to be some loss in the process. He according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he view that the appeal by the assessee on this ground is to be allowed. It is allowed." 28. The CIT(A) vide para 8.7 has stated that the issue for the current year was identical to the issue decided by the CIT(A) for A.Y. 2002-03. Therefore, he did not find any reason to depart from the order of the CIT(A) from A.Y. 2002-03. In A.Y. 2002-03 this issue was considered by the ITAT "C' Bench in ITA No. 1412/Mum/2006 and in ITA No. 1411/Mum/2006 dated 31.08.2010 wherein on similar facts it was held as under: - "24 Since the facts of the present case on account of manufacturing of biscuits through own factory are identical to the facts in the preceding assessment years, therefore, respectfully following the decision of the Tribunal in assessee's own case and in absence of any contrary material brought to our notice, we are of the view that the book results of the assessee, so far as manufacturing of biscuits through own factory is concerned has to be allowed and no adjustment is called for." Respectfully following the same, as the facts are identical, we direct the A.O. to accept the book results of the assessee as far as manufacturing of biscuits through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned, in view of our finding in the preceding paragraph accepting the book results of the assessee for production through own factory, we do not find any infirmity in the order of the CIT(A) in directing the Assessing Officer to allow adjustment for empty bags of maida while working out the ratio of consumption of raw material and production. The ground No. 1 and 2 of Revenue are accordingly dismissed. 32. Ground No. 3 in assessee appeal pertain to the disallowance of long term capital loss of ₹ 35,58,718/- on account of redemption of preference shares. 33. The facts in brief are that assessee claimed capital loss of ₹ 35,58,718/- on account of redemption of preference shares. The total consideration received by assessee on redemption of preference shares has two categories. The preference shares are of SFR Ltd. and Himachal Futuristics Communications Ltd. Both these preference shares were allotted to the assessee company in the month of July 1995 at a face value of ₹ 1,000/- and were redeemed in July 1997 at a value of ₹ 1,000/-, i.e. same value. In the notes attached to the statement of Income assessee stated that redemption of preference shares amounts t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) to section 2(22) since preference shares are non participating. This exception states that a distribution made under clause (d) of section 2(22) in respect of share issued for full cash consideration where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets, will not be included as dividend. The Preference shares are not entitled to participate in surplus income / assets unless they are "Participating preference shares". The shares issued by these companies are not Participating Preference shares. Reference in this connection may be made to schedule 5 page 14 of annual accounts (page 16 of compilation) where the shares are described as "12.5% Redeemable Cumulative Preference shares". If the shares were participating preference shares are word "Participating" would have been specifically mentioned and the shares would have been described as such in the schedule just as the shares have been specifically described as "Cumulative" and "Redeemable" in the present case. Hence as the shares are not participating preference shares the exception (i) to section 2(22)(d) will apply and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l the hare to the company. The company redeems its preference shares only by paying the preference shareholders the value of the shares and taking back the preference shares. In effect, the company buys back the preference shares from the shareholders. If redemption of preference shares did not amount to sale, it would not have been necessary, in section 77 of the Companies Act, 1956, to specifically provide that the restriction imposed upon a company in respect of buying its own shares will not apply to redemption of shares issued under section 80 of that Act. The redemption of preference shares by a company, therefore, is a sale and squarely comes within the phrase "sale, exchange or relinquishment" of an asset in section 2(47)(i) of the Income-tax Act, 1961. The definition of "transfer" in section 2(47) of the Income-tax Act, 1961, is not an exhaustive definition. Sub-clause (i) of clause (47) of section 2 speaks of "sale, exchange or relinquishment of the asset" and implies parting with any capital asset for gain which will be taxable under section 45 of the Act. When preference shares are redeemed by the company, the shareholder has to abandon or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to share I the distribution of the net assets upon liquidation is extinguished proportionately to the extent of reduction in the capital. Such reduction of the right in the capital asset would clearly amount to a transfer within the meaning of that expression in section 2(47) of the Income-tax Act, 1961." 39. Consequently, the redeeming of preference shares has to be considered as a transfer under the meaning of section 2(47). Therefore computation of capital loss has to be considered on this transaction. Assessee has worked the cost of acquisition as per the provisions of section 48 and since shares was held for more than one year and being a long term capital asset, indexed cost of acquisition has been claimed as against the sale consideration received. On the facts of the case, assessee purchased preference shares at a cost of ₹ 2 crores and the same was redeemed at face value and assessee received only ₹ 2 crores. However, by virtue of mode of computation prescribed under section 48 of the I.T. Act assessee's sale consideration being ₹ 2 crores and indexed cost of acquisition being ₹ 2,35,58,718/- being the deduction allowable under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e procedure prescribed under the Companies Act was undergone. After obtaining the orders from the Court reduction was given effect and on 26.05.1962. Subsequently the face value of shares in the company was reduced from ₹ 1,000/- to ₹ 210/-. There was a pro-rata distribution of some properties of the company and payment of money to the shareholders including the assessee. In the Income Tax proceedings connected with the property/amounts so received by the assessee on reduction of share capital in the said company, the Tribunal was required to consider whether any capital gains accrued to the assessee. The Tribunal held that no capital gain accrued to the assessee. The Hon'ble High Court held that a sum of ₹ 64,517/- must be taken to have come out of the accumulated profits and treated as dividend for all purpose and on appeal the Hon'ble Supreme Court confirmed the decision of the Hon'ble Madras High Court and held that: - "(ii) that the assessee in the present case had been paid not merely cash but had also been given a property for the reduction in the value of his shares from ₹ 1,000 to ₹ 210. Out of the total amounts so received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redemption as deemed dividend it gets exempted, as accepted by the A.O., under section 10(34). Similar issue was considered by the Hon'ble Bombay High Court in the case of CIT vs. Surat Cotton Spinning and Weaving Mills Pvt. Ltd. 202 ITR 932 where the A.O. treated the sum received on redemption of preference shares as dividend under section 2(22) and also treated the same as consideration received while working out the capital gains. The Hon'ble Bombay High Court examined the issue and held as under: - "Section 2(22) deals with various types of cases and creates a fiction by which certain receipts or parts thereof are treated as dividend for the purpose of levy of income-tax. A deeming provision is intended to enlarge the meaning of a particular word which includes matters which otherwise may or may not fall within the provision. It should be, therefore, be extended to the consequences and incidents which shall invariably follow. In other words, the consequences and incidents flowing from a legal fiction should also be deemed to be real. The very same income or the very same receipt cannot be assessed twice under two different heads of income. "Dividend", w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount assessed as dividend under section 2(22)(c). This provision makes the position abundantly clear that in a case where a part of the consideration has been assessed as dividend it is only the balance amount left with the assessee which can be said to be a consideration for the transfer and capital gain has to be computed under section 48 of the Act taking such balance amount only as the consideration for transfer." 45. In view of the above principle laid down, assessee would become eligible for capital loss of ₹ 2,35,58,718/-, if the issue of deemed dividend as was done by the A.O., were to be accepted. 46. We are of the opinion that the redemption of preference shares at face value without any premium or discount does not result in any amount to be considered as deemed dividend and assessee's claim of loss by way of computation prescribed by the Act is correct. The loss of ₹ 35,58,718/- is consequently allowable as long term capital loss. Therefore the A.O. is directed to allow the same as claimed. Assessee's ground on this is allowed. 47. Assessee appeal is partly allowed whereas Revenue appeal is dismissed. ITA No. 5319/Mum/2006 & ITA No. 5541/Mum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot arise." 49. Ground No. 1.1 to 1.3 in assessee's appeal and ground Nos. 1 & 2 in Revenue's appeal relate to addition of ₹ 74,12,408/- made by the A.O. on account of excess consumption of raw material. The facts are similar to A.Y. 1998-99. The A.O. made an addition of ₹ 74,12,408/- on account of excess consumption of raw material. Since the facts are similar to A.Y. 1998-99, for the detailed reasons given therein, vide paras 27 to 31 above, the grounds of assessee are allowed and the grounds of the Revenue are rejected. 50. Ground No. 2 in assessee's appeal is with reference disallowance of long term capital loss of ₹ 15,08,196/- on redemption of preferential shares. 51. The facts are that in the statement of capital gains assessee has shown loss of ₹ 15,08,196/- on account of redemption of 13.5% L&T Finance Ltd. preference shares at face value. In the notes attached with the statement of income, assessee had stated that the redemption of preference shares amounts to transfer within the meaning of section 2(47) and it has relied upon the decision of the Hon'ble Supreme Court in the case of Anarkali Sarabhai vs. CIT 224 ITR 422. 52. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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