TMI Blog2011 (8) TMI 1176X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 while working out the ratio of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditions 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. Accordingly the ground is rejected. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual 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 excess consumption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 81 81.5 84 2 80.6 83 82.1 3 83.4 82.1 82.8 4 83.3 83.5 83.2 5 82.6 84.7 83 6 82.8 82.8 83.2 7 83.2 83.8 82 8 83.2 84.8 85.4 9 84.3 85 83.5 10 83.2 81.8 82.4 18. On the basis of the above, he noted that after reducing the weight of empty packets, actual weight of biscuits exceeds 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 requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he total income of the assessee. He submitted that while making the addition on account of excess consumption of raw material the Assessing Officer has neither rejected the books of account nor made an allegation of suppressed production. He submitted that full details of purchases were filed and it has not been proved by the Assessing Officer that such purchases are not genuine. There is also no case of the Assessing Officer that the assessee sold its goods outside the books of account. He submitted that the assessee has maintained all the books statutorily required which are duly audited as per the Companies Act and Income-tax Act. The assessee's accounts cost-wise also were audited. The books of account were audited and verified by the Excise Department. In absence of any primary material to reject assessee's books of account the Assessing Officer cannot make the addition. Referring to the consolidated order of the Tribunal for the A.Ys. 1989-90, 1991-92 and 1994-95 to 1996-97, a copy of which is placed at Paper Book pages 166 to 174, the learned counsel for the assessee referred to para 11 of the order and submitted that the Tribunal while accepting the grounds of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that in the instant case, the Department has established nothing except excess consumption. Referring to Paper Book, he submitted that a detailed reply was given to the Assessing Officer. However, the Assessing Officer has not carried out any enquiry with any of the suppliers to prove that the purchases are bogus. Referring to Paper Book he submitted that a note on computation of quantity and value of raw material, unit-wise production figures, note on yield of biscuits, handing loss and operational loss, etc., was given to the Assessing Officer. He submitted that a note on why a standard or theoretical formula cannot be applied to work out the consumption of raw material was given to the Assessing Officer. Therefore, without considering all these factual aspects, the Assessing Officer cannot make an addition on account of excess consumption of raw material. He submitted that since the Tribunal has already deleted such excess consumption to the extent sustained by the CIT(A) for the A.Ys. 1989-90, 1991-92 and 1994-95 to 1996-97, no addition is called for on this issue. 25. The learned DR, on the other hand, while supporting the order of the CIT(A) drew the attention of the Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther find the Tribunal in assessee's own case in the consolidated order for the A.Ys. 1989-90, 1990-91 and 1994-95 to 1996-97 vide order dated 21st December, 2006 at para 11 of the order has discussed the issue and deleted the addition sustained by the CIT(A) on account of excess consumption by holding as under: We heard the rival submissions and gone through the orders of the revenue authorities. We are of the view that the appeal by the assessee on this issue is to be accepted. It is true that the assessee could not explain why the sister concern's consumption of raw material is comparatively less. But at the same time it is to be noted that the assessee's accounts are audited, book results are not rejected and there is no case for the revenue that there is sale outside the books. Revenue itself is indirectly accepting assessee's contention that there cannot be standard formula for usage of raw materials. In some items there is excess use and in some items there is less. The raw materials which are shown as used less, the revenue itself allowed set off against excess use shown in some other items, which indirectly accepts assessee's contention that there c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit should also be allowed to the CMUs. Further the matter was set aside to the file of the A.O. to make necessary verification and give proper relief to the assessee. However, as seen from the facts of this year, there was no excess consumption as far as CMUs are concerned. The A.O. arrived at the excess consumption in own units at ₹ 1,91,79,273/- and short consumption to the extent of ₹ 15,10,138/- from the CMUs. The net excess consumption was worked out at ₹ 1,76,69,135/-. Further allowing a deduction of 25% as per the directions of the CIT(A) in earlier years, the net addition was arrived at a sum of ₹ 1,32,51,851/-. As can be seen from the above facts (the working of the A.O. in page 12 of the order) there is no excess consumption as far as CMUs are concerned. We are of the opinion that there is no need to set aside the issue back to the A.O. as the A.O. has not quantified any excess consumption as far as the Contract manufacturing units are concerned. As the excess consumption in the case of own units was deleted, we are of the opinion that the issue in case of CMU's need not be set aside as in last year, as on the facts no addition can be made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at ₹ 35,58,718/- was disallowed. Assessee contested the same before the CIT(A). The CIT(A) vide para 9.2 considered that similar issue had come up in A.Y. 1998-99 before the CIT(A) in the case of assessee's holding company Parle Products Pvt. Ltd. in which the issue was decided against the assessee. Following the same, on identical facts the ground was rejected. There is no discussion about the issues contested by assessee in the order of CIT(A).. 34. The learned counsel for the assessee placed on record the order of the CIT(A) in the case of Parle Products Pvt. Ltd. for A.Y. 1998-99 wherein the loss in that year was only ₹ 41,200/- but most of the discussion of the CIT(A) pertain to sale of 12% preferential shares which are sold through a broker in the market for which loss of ₹ 25,54,923/- was claimed but disallowed. He referred to the finding of the CIT(A) in para 10.5 and submitted that this issue was not discussed by the CIT(A) on contentions but rejected only on the reason that the nature of preference shares are not on record. It was further submitted that the appeal of A.Y. 1998-99 in Parle Product Pvt. Ltd. on this issue was still pending but the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as deemed dividend, therefore, the question of allowing the loss does not arise. 36. In reply the learned counsel submitted that if the entire amount is treated as deemed dividend then the whole of consideration received consequent to redemption would got exempted as dividend and was not taxable and since assessee has redeemed the shares the loss would go up by same amount, if the contentions of Revenue that it is deemed dividend are to be accepted. He relied on the decision of the Hon'ble Bombay High Court in the case of CIT vs. Surat Cotton Spinning and Weaving Mills Pvt. Ltd. 202 ITR 932. It was submitted that assessee was claiming only capital loss consequent to redemption which should be allowed. 37. We have considered the issue. As far as redeeming preference shares are concerned, the Hon'ble Supreme Court in the case of Anarkali Sarabhai vs. CIT 224 ITR 422 has examined the provisions of section 77 of the Companies Act, section 80 of that Act and also definition of transfer under section 2(47) of IT ACT and has held that the difference between the sum received by the assessee on redemption of shares and the sum earlier paid by for purchasing them was taxable a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer of a capital asset. It is not necessary for a capital gain to arise, that there must be a sale of a capital asset. Sale is only one of the modes of transfer envisaged by section 2(47) of the Act. Relinquishment of the asset or extinguishment of any right in it, which may not amount to a sale, can also be considered as a transfer and any profit or gain which arises from the transfer of a capital assist is liable to be taxed under section 45. A company, under section 100(1)(c) of the Companies Act, 1956, has a right to reduce the share capital and one of the modes which can be adopted is to reduce the face value of the preference shares. Section 87(2)(c) of the Companies Act, inter alia, provides that where the holder of any preference share has a right to vote on any resolution in accordance with the provisions of this sub-section, his voting right on a poll, as the holder of such shares, shall, subject to the provisions of section 89 and sub-section (2) of section 92, be in the same proportion as the capital paid up in respect of the preference share bears to the total paid-up equity capital of the company . Hence, when as a result of the reducing of the face value of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed dividend does not arise, as the provisions of section 2(22)(d) can only be invoked only when there is distribution of accumulated profits by way of reduction of share capital. On the facts of the case, assessee has purchased the preferential shares at a cost of ₹ 2 crores and they were redeemed at the same price of ₹ 2 crores. Therefore the question of invoking deemed dividend provision on this transaction does not arise, eventhough the redemption of shares are to be made out of the profits of the company by virtue of section 80(1) of the Companies Act. However, since it cannot be treated as reduction of authorised share capital by virtue of section 80(3) of the Companies Act, the amount received by assessee on redemption of preference shares cannot be treated as deemed dividend. The A.O. relied on the principles established by the Hon'ble Supreme Court in the case of CIT vs. G. Narasimham Others 236 ITR 327. In fact this case supports the above opinion also eventhough it was given in a different context. The facts of that case were that assessee was a shareholder in a private company. Assessee held 70 shares in the company with face value of ₹ 1,000/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istribution attributable to accumulated profits and distribution attributable to capital (except capitalised profits). To the extent of accumulated profits whether such accumulated profits are capitalised or not, the return to the shareholder on reduction of share capital is a return of such accumulated profits. This part of it is taxable as dividend. The balance may be subject to tax as capital gain, if they accrue. 43. Adopting the same principles here, since there is no reduction of share capital in the given case, consequent to section 80(3) of the Companies Act which states that redemption of preference shares under this section shall not be taken as reducing the amount of its authorised share capital, that part of the amount received by assessee as face value, eventhough paid out of accumulated profit, does not fall within the definition of deemed dividend, therefore, cannot be treated as deemed dividend. So the amount received on redemption of preference share has to be considered as consideration received on transfer in working out the capital gain, which assessee did. 44. Even for the purpose of argument, it is considered as deemed dividend, assessee would be eligibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of finding out the profits or gains arising from the transfer of a capital asset, it is necessary to know the cost of acquisition of the asset and the full value of the consideration for which the transfer is made. It is the difference between the two which is termed as profits and gains arising from the transfer subject, however, to specific provisions, if any, contained in any other section of the Act. Section 48 deals with the mode of computation of capital gains. It says that capital gain has to be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital assets, the cost of acquisition and the cost of improvement thereof and other expenses mentioned therein. In view of the provisions of section 46(1), the Legislature was required to make a specific provision in sub-section (2) to make the shareholder who receives any asset on liquidation of a company liable to capital gains. As in such a case, under section 2(22)(c) of the Act, a part of the receipt may be held to be dividend, with a view to avoid any ambiguity. The Legislature thought it fit to make it clear that the consideration for the purpose of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO in disallowing long term capital loss of ₹ 15,08,196 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 while working out the ratio of consumption of raw material and production without appreciating that: a) The maida bags come in net weight and not as gross weight as made out to be by the assessee before CIT(A). The A.O. has already allowed adjustment of 25% on account of pre-production and postproduction wastages. 2. 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 all adjustments that have been allowed in respect of own factory to CMUs also without appreciating the fact that the excess consumption of raw material is worked out on the total production on the different brands of biscuits irrespective of production in own factory or by CMUs, and deduction was allowed in the same proposition in all the brands of biscuits ignoring the fact that pre-production and pot production wastages are not included in the production of biscuit ..... 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