TMI Blog2021 (3) TMI 551X X X X Extracts X X X X X X X X Extracts X X X X ..... be disallowed on the reasoning that the assessee has incurred more expenses than the immediate preceding assessment year. It is because the test which has been provided under 37 of the Act is that any expense which is not capital in nature/ personal in nature incurred in course of the business has to be allowed while computing income under the head business profession. Indeed, the cost incurred by the assessee under the head power and fuel is not capital in nature and there was no allegation by the AO that such expenditure was not incurred in the course of the business. As such, the AO cannot decide to allow or disallow the expenses on noticing difference between the annual report and the details submitted by the assessee during the assessment proceedings until and unless there are supporting evidences. Accordingly we do not find any infirmity in the order of the learned CIT (A). Hence the ground of appeal of the revenue is dismissed. Addition made on account of excess consumption of raw material - differences as pointed by the AO was due to the fact that at time of survey under section 131(1) of the Act the income tax inspector collected data with respect to 11 major item ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee on account of such purchases will meet the end of justice. In view of the above, we direct the AO to make the addition to the extent of the amount of the gross profit embedded in such suppressed sale. Hence the ground of appeal of the revenue is partly allowed. - ITA No. 2332/AHD/2015 (Asstt. Year: 2011-2012) - - - Dated:- 8-1-2021 - SHRI RAJPAL YADAV, VICE PRESIDENT AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER Revenue by: Shri Karun Kant Ojha, CIT, D.R Assessee by: Shri K.P. Singh, A.R ORDER PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeal has been filed at the instance of the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)-1, Vadodara, dated 19/05/2015 (in short Ld. CIT(A) ) arising in the matter of assessment order dated 13/03/2014 passed under s.143(3) of the Income Tax Act, 1961 (here-in-after referred to as the Act ) relevant to the Assessment Year 2011-2012. 2. The Revenue has raised the following grounds of appeal: 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(Appeals) erred in by deleting the addition made by AO on expenses out of power and f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of the assessee were noticed by the AO which are elaborated in the following paragraph. 4.1 The AO observed that the assessee during the year has claimed power fuel expenses of ₹ 1721.22 lakh as compared to ₹ 1372.59 lakh claimed in immediate preceding assessment year on the similar amount of consumption of raw material i.e. 12200.01 MT in the year under consideration and 12898.6 MT in the immediate preceding assessment year. 4.2 The AO further found that the assessee has shown electricity expenses at the rate of 10.89/ unit in the annual reports against actual rate of ₹ 5.54/ unit. 4.3 In view of the above discrepancy, the AO sought clarification from the assessee vide letter dated 6-1-2014 and further requested to furnish the details of power fuel consumed in the year under consideration viz a viz in the immediate preceding AY in the specific format i.e. unit wise and product wise. 4.4 The assessee in response to such show cause notice submitted the requisite details vide letter dated 16 January 2014 in the format as desired by the AO vide annexure A . The assessee also submitted that the details of power in annexure A is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Furnance Oil 27.779 2. Wood 2.949 3. High Speed Oil 2.649 4. Electricity 5.539 4.6 On question by the AO about the above stated discrepancy, the assessee vide letter dated 28 February 2014 submitted as under: 1. Discrepancy in consumption of Furnace Oil of rs.617688/- The difference is due to the fact that you have considered total unit of Furnace Oil of 250761 Kgs. consumed for production of all units whereas in Annual Report total Furnace Oil consumed is 272980 Kgs. The difference of 22219 Kgs. is because of items shown in Annexure E which are produced during the year. However, consumption of Furnace Oil per unit cannot be identified separately for the listed products. The store ledger of Furnace Oil showing consumption of 272980 Kgs. as per Annual Report is filed. 2. Discrepancy in consumption of Wood of ₹ 2495213/- The difference is because of items shown in Annexure F which are produced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er consumed (in kwh) AstrolidePure 457 1797.07 821775 The difference is as under Name of Product Production (MT) Total Power consumed (in kwh) Astrolide (Pure/DEP/IPM/BB/DPG) 201 360697 This difference is due to variation in production quantity as taken by the Department and which is actually taken for charging the same to the product. Astrolide SEP/IPM/BB/DPG are formulations which are made from Astrolide Pure and so for calculating power consumption the total production of Astrolide Pure is considered i.e (105425 Kgs. Sold as such as and 351862 Kgs which is used for production of formulations which is shown in Intermediates). Attaching the process flow for your reference vide Annexure H 4.7 The assessee further contended that i. The power consumed in the utilities and other non-productive units should also be taken into consideration for making the comparison with the past records. ii. A qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 617688 100% of the difference 2 Wood 2495213 2495213 100% of the difference 3 High Speed Oil 323270 323270 100% of the difference 4 Electricity 51210591 43717410 80% of the difference Total 54646762 4,71,53,581 Total expenses of ₹ 4,71,53,581/- out of the Power and Fuel is disallowed on account of inflation of expenditure and added back to the total income of the assessee 5. Aggrieved assessee preferred an appeal to the learned CIT (A). 5.1 The assessee before learned CIT (A) besides reiterating its submission before the AO, contended that it has been maintaining proper books of account for past several years which are subject to various type of audit. Similarly, there has not been pointed out a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t pointed out any mistake in the facts and figures provided by the appellant in respect of consumption of power, furnace oil, wood and HSD vide his submission dated 28/02/2014 in relation to the books of accounts. Again, AO could have found out easily the electricity rate per unit by dividing the total value with total unit purchased to find out as to whether the rate of ₹ 10.89 per unit as shown by the appellant is correct or not. However, the AO while arriving at any conclusion for rejection of books of account of the appellant has not done this exercise also. Considering all these facts, it is held that the AO is not correct in working out differences of consummation of power and fuel merely as per his chart which was prepared by him on the basis of some of the submissions of the appellant as such submissions were made by the appellant to the AO in respect of production of the items and by ignoring consumption of other power and fuel in utilities, workshop, administration/ plant office, laboratory, effluent treatment plant, Research Development division, staff colonies, street lights and stores. Nowhere in the assessment order, the AO by pointing out any mistakes in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33471 kgms 121989 kgms 2.649 323270 4. Electricity 12125240 kwh 2881451 kwh 9243789 kwh 5.539 51210591 The appellant submitted its reply dated 28.02.2014 explaining the difference as noted by the AO. Here the column added by the AO in above table is unit consumed as per the chart prepared from the data submitted by the assessee on 16.01.2014 . The related submission provided by the assessee was only for the process plant which is clearly mentioned by the assessee in his submission dated 16/01/2014 and 28/02/2014. (Page 287 and 357 of Paper BookJBut the AO has considered it as the total power consumed by the company. He has worked out the difference of consumption in column no.5 and then multiplied the rate per unit consumption to derive the difference in value as mentioned in Column 6. Vide show cause notice dated 18/02/2014, the assessee was asked to explain why should the above difference in value not be added back to the total i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectricity. Production at Nandesari Unit is almost more by 22% which has required more consumption of electricity. In preceding year consumption of electricity was ₹ 547.59 Lakhs. But this year the AO wants the assessee to consume electricity of ₹ 204.08 Lakhs only i.e total cost 647.08 less disallowances of ₹ 437 Lakhs made by AO. This is not possible. It is very well clear that the AO has not considered the consumption of power in utilities, workshops, administration in plant office, laboratory and in effluent treatment plant etc. Further, it is also submitted that, from day one, the assessee is stating that the chemical processes at Bareilly plant are mostly the hot processes (+4o degree to +185 degree) where the heat requirement (Stream/hot oil) is high hence the wood consumption FO consumption is very high and refrigeration unit (where power consumption is high) requirement is low, hence the power consumption/Ton is very low as compared to Baroda. The products being manufactured at Baroda mostly having cold to very cold processes where high TR (Tonnes of refrigeration) low temperature (as low as - 40 degree C) refrigeration units are requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so consumed in Research Development division, staff colonies, street lights and stores. These facts were brought to the notice of the AO by the appellant. However, the AO could not pinpoint any mistake in the audited books of account. The AO while arriving at any conclusion for rejection of books of account of the appellant has not done this exercise also. AO is not correct in working out difference of consumption of power and fuel merely as per chart prepared by him. I also rely on the following case laws: 1. N Raja Pullaiah V. Deputy Commercial Tax Officer [1969] 73 ITR 224(AP) 2. Income Tax Officer V. Pragati Fashions [2012] 18 taxmann.com 269 (Ahmedabad) 3. St. Teresa's Oil Mills V. State of Kerala [1970] 76 ITR 365(Kerala) 4. Assistant Commissioner of Income Tax, Circle, Sangrur V. Maghan Paper Mills (P.) Ltd. [2018]97 taxmann.com 281 (Chandigarh-Trib.) 5. Commissioner of Income Tax V. Sulabh Marbles (P) Ltd. (2006) 205 CTR Raj 464 9. The learned AR before us vehemently supported the order of the learned CIT(A). 10. We have heard the rival contentions of both the parties and perused the materials available on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure was not incurred in the course of the business. As such, the AO cannot decide to allow or disallow the expenses on noticing difference between the annual report and the details submitted by the assessee during the assessment proceedings until and unless there are supporting evidences. Accordingly we do not find any infirmity in the order of the learned CIT (A). Hence the ground of appeal of the revenue is dismissed. 11. The 2nd issue raised by the revenue is that the learned CIT (A) erred in deleting the addition made by the AO for ₹ 2,28,41,828/- on account of excess consumption of raw material. 12. It was also observed by the AO that the assessee in its annual report has shown raw material consumption for its Nandesari Plant at ₹ 41,46,35,061/- only. However the document/ data collected by the AO in pursuance to summon issued under section 131 (tabulated at page 19 of the AO order) of the Act from the factory cum registered office of Nandesari Plant revealed that the value of actual raw material consumed by the assessee are of ₹ 39,17,93,233/- only. Thus such difference is leading to excess claim of ₹ 2,28,42,828/- only. On questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO in the assessment order, then it is not understandable as to how the addition of ₹ 2,28,41,828/- can be made. If at all there was discrepancy to the extent of ₹ 48,50,505/- only, then it means that there was no discrepancy in respect of remaining amount of ₹ 1,79,91,323/- (i.e. ₹ 2,28,41,828 - ₹ 48,50,505/-) and therefore if at all any addition was required to be made as per the stand of the AO that should have been made of ₹ 48,50,505/-. But the AO has made the addition of ₹ 2,28,41,828/- despite the fact that as per his own stand discrepancy of only ₹ 48,50,505/- was persisting. The AO in the assessment order has mentioned that the appellant after receiving the show-cause notice had manipulated the figures of raw material consumed to its convenience which was also without any supporting evidences. The AO has further mentioned that the above fact proved that the appellant had manipulated its books of account in such a manner so that profitability may be reduced. But the AO has not given any basis for arriving at such conclusion. It is not explained in the assessment order as to how the books of account of the appellant was manipu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of spot verification in respect of consumption of raw material and as per submission dated 28/02/2014 of the appellant) in respect of four raw* materials and in this regard the working is given by the AO on page no. 20 of the assessment order. But while working out the differences, the AO has relied on the information/evidences collected by the inspectors as a result of spot verification and the movements of all raw materials at Stores and Plant have not been considered. The AO has not established that the details provided by the appellant vide its letter dated 28/02/2014 in respect of four raw materials (i.e. Acetic Acid, Alpha Methyl Styrene, Toluene and Propylene Oxide) were incorrect by verifying the relevant books of account and bilte and vouchers and by pointing out any mistakes in the same. It may be mentioned that books of accounts of the appellant are audited by statutory auditors, tax auditors, cost auditors and none had reported any discrepancy and since the appellant is engaged in manufacturing activities and therefore every material produced is recorded in excise register i.e. RG-1 and dispatches made are also recorded in the said register RG-1* However, the auditors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that at the time of survey under section 131(1) dated 07.02.2014, the AO has gathered only major items of raw material figure issued from stores to plant. However, as per accounting practice, the movement of all raw materials at its stores and plants both should be considered and total consumption of raw material should be accordingly ascertained. The raw material of items present at plant was not considered by the A.O. Vide Annexure D (page no 367 of Paper book) of submission dated 28.02.2014, the assessee had furnished the details of all raw material consumed in the production process at Nandesari. The same proves that the total consumption as debited in the books of accounts is correct. As can be seen from the chart given by the AO (Page. 483 485 of Paper Book), he has taken the consumption of raw material of 11 items only but there are many more other items which are consumed in the process. In fact the inspectors of the department had collected details of consumption of 11 major raw materials only and that too from the stores only .The total of 11 major raw materials comes to ₹ 39,17,93,233/- where as total number of raw materials consumed were 68 in numbers a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incorrect value of ₹ 2,21,14,873/- as per the evidence u/s. 131(1) of the Act, in fact, the value of the material should be 2,23,41,254/-. The same should be compared with the consumption value of ₹ 2,23,66,961/-, as per submission dated 28.02.2014 and the difference would be only ₹ 25,707/-. Alpha Methyl Styrene For Alpha Methyl Styrene, the AO has taken the figure of ₹ 4,03,15,661/- from the assessee submission dated 28.02.2014. As per Annexure D of the said submission the assessee had consumed 3,98,216 Kgs of indigenous Alpha Methyl Styrene and 60,575 Kgs of imported Alpha Methyl Styrene (refer page 367 and 368 of the Paper book). The total consumption in value was aggregating to ₹ 4,03,15,661/- (₹ 3,47,26,716/-+₹ 55,88,945/-) However, for the value of ₹ 3,58,34,270/-, the AO has considered the purchased quantity of indigenous material (4,10,940 kgs) instead of consumed material (3,98,216 kgs.). Furthermore, the AO has not considered imported material (60,575 kgs) of Alpha Methyl Styrene which shows gross negligence of the inspectors while gathering the information. It also shows that the A.O. has incorrect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are 68 in numbers. Furthermore, the learned CIT (A) also found that the assessing officer himself has mentioned difference to the tune of ₹ 48,50,505/- but he has made the disallowance of 2,28,41,828/- without bringing any material on record. 18.1 Admittedly, the inspector of income tax Act, collected the details at the time of visit in the factory premises of the assessee with respect to the 11 items whereas the assessee has issued 68 items to its factory. Thus what is referred is that the entire basis of disallowance made by the AO is not sustainable for the simple reason that the AO should have made comparison of all the items which were issued to the factory. It is also pertinent to note that there was no doubt raised by the AO on the genuineness of the purchases claimed by the assessee as well as the stock statement maintained at the factory. In other words, there cannot be any addition merely on the basis of difference noticed by the AO in consumption of raw material between the details collected by the inspector and the information furnished by the assessee in its financial statement until and unless it is brought on record that the assessee has made bogus purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41.05 reduced as the same was stock in hand at Bhiwandi Godown. 20.2 However the AO rejected the submission of the assessee by observing as under: The argument of the assessee is not supported by any documentary evidences. The assessee failed reconcile this discrepancy. As per the assessee s submission, Camphor/isoborneol amounting to ₹ 36.77 lacs was transferred from Bareilly to Bhiwandi godown. However, the assessee in its Annual report/Audit report has not reported about any such Godown or transfer of any product from manufacturing unit to a godown. Further, the assessee in its Annual report Schedule 18(g) where details of inventories have described has also not reported any such transfer of finished goods from Bareilly to Bhiwandi. Therefore, reply of the assessee is found unacceptable and difference in amount of ₹ 36,77,078/-is added back to the total income of the assessee on account suppressed sales. 21. Aggrieved assessee preferred an appeal before the learned CIT (A) 21.1 The assessee before the learned CIT (A) claimed that the AO nowhere asked to submit any sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the discrepancy of sale of ₹ 36,77,078/- is hereby deleted. 23. Being aggrieved by the order of the learned CIT (A), the Revenue is in appeal before us. 24. The learned DR before us vehemently supported the order of the AO by reiterating the findings contained therein. 25. On the contrary, the learned AR before us submitted as under: It was explained that the stock of ₹ 36.77 Lacs were lying in stock at Bhiwandi. In fact, the appellant company transfers the goods from Factory to Bhiwandi Godown. However, while consolidating the books of all the units, stock transfers to godown are deducted and the actual sales made from godown are added and shown under the total sales. Explanation in tabular form: Particulars Amount (Rs. in Lakhs) Total dispatches made of Camphor/Isoborleon 9171.11 Less: Stock lying at Godown as on 31.03.2011 41.05 Add: Sales made from godown at Profit 4.28 Total Sales of Camphor/Isoborleaon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7422.4 MT As per Annual Report for AY 2011-12 page 30 4. Closing Stock (1+2+3) 10040.35 MT 5. Closing Stock as per Annual report 717.41MT As per Annual Report for AY 2011-12 page 40. 6. Difference [4-(5+6)] 9322.94 MT 27.2 The AO during the assessment proceedings deputed the inspector of income tax at the factory premises of the assessee located at NANDESARI- who has submitted the details of the sales made by the assessee of various products. 27.3 The AO subsequently compared the details collected under section 131 of the Act with the details of the sales submitted by the assessee. Accordingly the AO noticed certain differences in the quantity of the goods sold and shown by the assessee viz a viz the details collected under section 131 of the Act which was leading to the suppressed sale of ₹ 92,68,443/- only. 27.4 On question by the AO about such difference, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 69.25 1865571 537198.25 3. PITCH 222588 285130 10.63 3030931.9 2366110.44 664821.46 4. SAS 2238050 3168000 3.25 10296000 7273662.5 3022337.7 5. DT 205790 276740 40.95 11332503 8427100.5 2905402.5 6. SPENT PHOSPERIC ACID 32009 43940 9.51 417869.4 304405.59 113463.81 7 CROMATE SOLUTION 4105 198933 0.01 1989.33 41.05 1948 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale in some of the items which it has rectified while submitting data on 14/02/2014. The appellant gave the summary of total sales to the AO as per annual report for the year 2010-11 which is as under Net Sales ₹ 21663.63 lacs as per audited accounts shown on page no. 25. The breakup of the same is as under: Particulars Stock Transfer Adjustment Baroda FCP Bareilly Totals Sales - 36.77 6125.93 17275.75 23364.88 Less: Excise Duty 0.00 191.91 1509.32 1701.25 Net Sales - 36.77 5934.02 15766.39 21663.63 The details of sales summary of baroda division of ₹ 6125.93 lacs is submitted showing correct quantity of Nandesari division vide Annexure A tallying quantity as well as value. The quantity as per Sales Det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned CIT (A), the assessee is in appeal before us. 30. The ld. DR vehemently supported the order of the AO. 31. On the other hand the ld. AR submitted that the addition has been made by the AO without considering the submission filed by the assessee dated 14-2-2014. The ld. AR vehemently supported the order of the ld. CIT-A. 32. We have heard the rival contentions of both the parties and perused the materials available on record. In the case on hand, the discrepancies were found by the AO in the amount of sales and the quantity of the goods sold amounting to ₹ 92,68,443/- which was added to the total income of the assessee. However, the learned CIT (A) deleted the addition made by the AO by observing the AO has not pointed any mistakes in the books of accounts and in the bills vouchers and only relied upon the data collected by inspector in pursuance to section 131 of the Act. 32.1 The primary onus lies upon the assessee to reconcile the difference in the amount of sales shown in the books of accounts viz a viz the sales amount obtained during the survey under section 131 of the Act. In fact the assessee has made submissions to match the figures of s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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