TMI Blog2021 (10) TMI 449X X X X Extracts X X X X X X X X Extracts X X X X ..... acking materials, as per which there is no difference in purchase and consumption of packing materials. However, the AO while making a comparison of the number of bottles used for production vis- -vis the bottles issued, has omitted to take into account unused bottles returned to stores and this numbers is considered then, the difference computed by the AO becomes almost nil. Shortage in primary raw materials like rectified spirit and neutral spirit - When you compare the nature of materials stored by the assessee to the percentage of difference in physical stock and book stock, the difference is negligible because, the raw materials like rectified spirit and neutral spirit are highly evaporable and further these raw materials are stored in wooden racks and measured in dips, which is not accurate. Therefore, the difference arrived at by the AO on the basis of physical stock taken during the course of search cannot support the case of the AO that there is discrepancy in stock of primary raw materials corresponding with difference in percentage of consumption of secondary raw materials like empty bottles, caps, as computed by the AO. Further, it was the explanation of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Excise Authorities is within the permissible limit of 3% for all months - assessee has submitted monthly statement recording re-distillation of rectified spirit to State Excise Department in as much as, there is no action by the Excise Department for excess production loss reported over and above permissible production loss as per said Excise Rules - we are of the considered view that the AO was completely erred in determining excess production by applying his own arithmetic calculation without understanding the facts that there is no discrepancy in stock details submitted by the assessee to the State Excise Authorities and further there is no action from the authorities for violation of any of the conditions prescribed under State Excise Rules, 1981. CIT(A) after considering relevant facts has rightly deleted additions made by the AO and hence, we are inclined to uphold the findings of ld.CIT(A) and reject ground taken by the Revenue. Nature of expenses - Disallowance of landscaping charges - amount incurred towards landscaping charges is in the nature of capital expenditure, which gives enduring benefit to the assessee and hence, cannot be allowed as deduction - explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charges - AO has disallowed proportionate interest cost @ 12% per annum on the ground that the assessee has diverted interest bearing funds for non-business purpose as well as advance was given for the purpose of purchase of property which is capital in nature for which the authorized representative of the assessee has agreed for the proposed addition - HELD THAT:- As assessee has paid huge interest on borrowed funds. The assessee has not furnished satisfactory explanation for diverting interest bearing funds to related parties for non-business purpose. Therefore, we are of the considered view that the AO was right in disallowance of proportionate interest @ 12% - Hence, we reverse the findings of the ld.CIT(A) and sustain the addition made by the AO towards disallowance of proportionate interest. Addition made towards disallowance of discount allowed on sales - HELD THAT:- Assessee does not have any say in allowing cash discount on sales but it is solely on the discretion of the purchaser of goods i.e., TASMAC. Therefore, we are of the considered view that expenditure debited under the head discount allowed on sales is a genuine expenditure, which was allowed as per the ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture of ₹ 39,41,100/-. On appeal, the ld.CIT(A) vide his order dated 27.08.2018 deleted additions made by the AO towards addition on account of suppression of production and disallowance of marketing expenditure, however, confirmed addition made towards disallowance of advertisement expenditure. Aggrieved by the CIT(A) order, the Revenue is in appeal before us. 3. The first issue that came up for our consideration from Ground Nos.2 to 2.5 of Revenue appeal is deletion of addition made towards suppression of production. 3.1 The facts with regard to the impugned dispute are that the assessee is engaged in the business of manufacture of Indian Made Foreign Liquor (IMFL). The process of manufacture involved purchases of rectified spirit, dilutes and converts it into neutral spirit. The neutral spirit is then blended with required flavors as prescribed in the bottling unit. The basic raw materials required for manufacture of IMFL are rectified spirit, neutral spirit and special flavors. The main packing materials used are bottles, caps, cartoon boxes, labels, etc. A search action u/s.132 of the Act was conducted in the case of the assessee on 18.01.2006 and during the cours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved that on verification of stock register produced by the assessee for maintaining purchase and consumption of caps, there is no column in the stock register to account for return of caps from production department. He has taken support from various documents found during the course of search coupled with statement recorded from certain parties including Shri K. Ganapathy Subramaniam, Senior Manager (Operations) to come to the conclusion that there is mismatch between purchase and consumption of raw materials like empty bottles, caps, labels, etc. 3.3 The AO further noted that the discrepancies in purchase and consumption of packing materials like caps and empty bottles is further strengthened by the fact of difference in inventory of closing stock of finished goods taken at the time of search, as per which there is a difference of 1759 cases of finished product when compared to physical stock found during the course of search and closing stock as per books of accounts. Therefore, the AO opined that there is no merit in the explanation furnished by the assessee that there is no difference in purchase and consumption of packing materials like caps and bottles and further the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d.in response to the question NO.23 vide statement dated 18.01.2006, he replied that there were certain mistakes in inventorying the stock by the officials and that certain items were wrongly taken. As per his statement discrepancy noticed was 1,759 cases. He therefore, stated that the correct deficiency is only 77 cases and not 1,836 cases. However, no reconciliation as claimed by him was furnished to the search team. Even if we take into account the statement of the Manager to be correct, still there are 77 cases for which no explanation was furnished. The point to be noted here is that the above difference noticed, totally negates the assessee s argument that in view of the tight control, there cannot be any discrepancy. 6.6 One more crucial point to be noted is that the assessee does not maintain any Stock Register for Old Bottles. In fact, old bottles account for nearly 80% of bottle consumption. The assessee claimed that with regard to old bottles, the supplier M/s. Sri Ranga Enterprises is having its godown near the factory and that the stock is accounted for only by the supplier. It is stated that payment is made on the basis of supply and that the breakage, wastage, etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 210 19,740 13 OCB Bottle 750 ml 987 15,157 14 OAB Bottle 750 ml 659 29,040 15 MCD Bottle 750 ml 1,210 12,650 16 CXR Bottle 750 ml 550 2,856 17 Vintage 1000 ml 238 5,500 18 8PM 750 ml 275 2,000 19 RRG 750 ml 100 720 20 BDG 750 ml 40 38,400 21 OCR 375 ml 1,200 9,600 22 JDI 375 ml 400 9,600 23 MRW ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 813.2 Bulk Litre 36000 Bulk Litre Such a discrepancy was noticed with regard to the storage in blending units wherein, after the process of blending the neutral spirit, with the flavor is completed, the finished product is stored. The details of discrepancy noticed are as under : S.NO Description Tank No. Physical Stock As per books of Excise Authorities 1 Cap Rum 22 44290 Bulk Litre 44472 Bulk Litre 2 Cap Brandy 23 44370 Bulk Litre 44586 Bulk Litre 3 DN Whisky 29 7446 Bulk Litre 7472 Bulk Litre When questioned as to whether any day to day stock register is maintained for the raw material, rectified spirit and neutral spirit, Shri Ganapathy Subramaniam, Sr.Manager (Operations) stated that no day to day tanker stock register is maintained. (vide his answer to question no.22 of the Statement). In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CAB N492151 x 48 2,36,23,248 } DNB N353392 x 48 1,69,62,816 } 4,68,83,347 62,97,283 10.06 63350667 CAB P39985 x 24 9,59,640 } DNB P7388 x 24 1,77,312 }13,89,158 2,52,206 17.00 42,87,502 CAR N578242 x 48 2,77,55,616 } DNR N80198 x 48 38,49,504 }3,18,70,320 2,65,200 9 23868 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30,17,716 7,58,068 22.42 16995885 N247138 x 48 1,18,62,624 1,38,80,248 2,01,17,624 23.17 46748348 MVW Q5762 x 9 51,858 72,128 20,270 98.17 1989906 P5073 x 24 45,657 49.29 N32844 x 48 15,76,512 19,82,585 3,60,416 24.65 8884254 CRV Q10054 x 12 1,20,648 1,40,746 20,098 40.5 813969 P4930 x 24 1,18,320 2,03,659 85,339 20.83 1777611 N24259 x 48 11,64,432 15,19,175 3,54,743 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92,98,176 2,69,03,593 1,76,05,417 10.17 179047091 BDB N76257 x 48 36,60,336 42,65,338 6,05,002 8.35 5051767 553210232 Note : 1. The details furnished by the assessee consisted of number of cases and this has been converted into number of bottles wherein the following values have been adopted: For Q (Quartz = 12 Bottles) For P (Pints = 24 Bottles) For N (Nimps = 48 Bottles) The above table shows the difference between the number of caps issued and the number of bottles produced for each item. 2. In respect of CAB-N and DNB-N, as per the details filed by the assessee, the caps issued are the same. Similarly, for CAR-N and DNR-N and also for ORV-N and STV-N, the caps issued are the same. The total value of suppression of production and sale of bottles works out to ₹ 54,89,22,730/- and this is added as undisclosed incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the fact that procurement of rectified spirit is against the issuance of permit by the Prohibition and Excise Authorities in as much as, the AO has not found any omission in purchase of rectified spirit nor has there been any allegation that the assessee has contravened the regulations and purchase of rectified spirit. The CIT(A) has also taken support from the fact that the final product manufactured by the assessee are sold to TASMAC, a Government of Tamil Nadu undertaking and there was no allegation by any authority that the assessee had sold any product outside TASMAC. Therefore, he opined that addition made by the AO towards suppression of production is without any basis and accordingly deleted. The relevant findings of the CIT(A) are as under:- After going through the observation of the AO and the submission of the AR, the issue is decided as under: The utmost reason for making the addition on this count was due to the fact that there existed huge difference between the utilization of (bottle) caps in the production and the quantity of caps acquired. As per the AO, for each cap used, one bottle of liquor should have been produced. Thus going by the number of cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wrong premises. That apart, the AR s submission that in the State of Tamil Nadu, sales of IMFL are routed only through TASMAC and there was no allegation or complaint by any authority / anybody else that the appellant had sold any product outside TASMAC, is also a salient point to ponder over. Taking all these facts into account, I am of the considered view that the addition made towards unaccounted production, is not called for and hence the AO is directed to delete the same. This ground of appeal is allowed. 5. The ld.DR submitted that the ld.CIT(A) has erred in deleting addition made by the AO towards suppression of production without appreciating the fact that the AO had done elaborate analysis of the seized materials to quantify both shortage in rectified spirit, neutral spirit and blending stock as well as excess consumption of packing materials like caps and bottles leading to inevitable conclusion that there was suppression of stock. The ld.DR further submitted that during the course of search, when physical stock was taken there is a difference of 1836 cases of finished goods, for which the assessee has filed reconciliation. Even after reconciliation, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined for this purpose. The ld.AR further submitted that the AO has taken consumption figures of secondary raw materials like bottles and caps for few days and arrived at a difference by his own mathematical calculations without understanding the issue, and allowing production wastage / loss and thus, arrived at a suppressed production on the basis of excess consumption of caps without considering the explanation of the assessee that there is production loss of over about 6% and if you consider said production loss, there is no difference in purchase and consumption of caps. The ld.AR further submitted that while calculating wastage, the AO has taken difference between consumption as per stores and bottles produced in the production department without appreciating the fact that wastage has to be computed on the basis of total caps issued for production department. If you take total caps issued by the stores to the production department and compute wastage @ 6%, then the shortage computed by the AO on a particular day becomes zero. Similarly, the AO has computed excess production of bottles on the basis of total empty bottles issued by the stores without appreciating the fact that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bottles and caps and production of number of bottles. It was the explanation of the assessee that the AO has determined suppression of production purely on estimation without there being any basis or supporting evidences that the assessee has not accounted production for the relevant period. It was explained before the AO that there was no difference between purchase and consumption of caps and empty bottles as well as purchase of rectified spirit and neutral spirit. It was further explained that although the AO has determined difference in purchase and consumption of caps, but such calculation was without any basis because, the AO has not considered production loss and unused caps returned to stores. The assessee also justified its case in light of the fact that unless the AO points out that there is difference in primary raw material like rectified spirit and neutral spirit, only on the basis of secondary raw material production loss cannot be estimated. 7.1 We have given our thoughtful consideration to the facts of the case, reasons given by the AO and arguments of the assessee and we ourselves do not subscribe to the reasons given by the AO to determine suppressed productio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bottles and caps becomes waste due to damages and for other reasons. The assessee has filed a reconciliation explaining the difference computed by the AO towards issue and consumption of caps and purchase and consumption of stock as per its books of accounts, as per which there is no difference in purchase and consumption of caps and bottles as per the books of accounts of the assessee. Further, the AO while arriving at a difference has considered certain loose sheets found during the course of search, as per which the requirement of caps and bottles is estimated on higher number of bottles and caps. 7.2 We have gone through the reasons given by the AO in light of seized documents found during the course of search and found that the assessee has made a plan for procurement of bottles and caps based on indent received from TASMAC, the buyer of the products. On receipt of packing materials, the stores department issues material requisitioned by the production department on the basis of estimated production plan. The production department after capping the bottles and the wastage in the process returns back the unused caps to the stores. Therefore, it was claimed that the basis on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sponding with difference in percentage of consumption of secondary raw materials like empty bottles, caps, as computed by the AO. Further, it was the explanation of the assessee that while taking physical stock the Department has not considered stock in the pipeline and if such stock is considered then there is no difference in stock computed by the AO. Therefore, on this count also, the reasons given by the AO to arrive at a suppression of production is not sustainable. 7.4 Another important point needs to be considered while negating the observations of the AO to arrive at suppression of production is the nature of products manufactured by the assessee and its trade. As we have already stated in our earlier paragraph, the assessee is into the business of manufacturing of IMFL. The basic raw material required for production of IMFL is rectified spirit and neutral spirit. The other raw materials required for manufacturing of IMFL is empty bottles, caps, labels, etc. The production of IMFL and other liquor products are fully controlled by the State Government Department. The production and sale of goods is controlled and monitored by State Excise Authorities right from procuring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permissible deduction towards process loss at 3% as per Rule 15A 3(a) read with 3(c) of TamilNadu Distillery Rules, 1981. The AO has worked out probable production of IMFL in bulk litres and then compared with reported production as per books of accounts of the assessee. According to the AO, the probable production on conversion of rectified spirit into IMFL would be 2,15,34,454 litres, whereas the assessee has reported total production of 2,12,86,938 litres. Therefore, he opined that there is excess production of 2,47,516 litres, which the assessee has suppressed and accordingly, adopted average selling price of ₹ 50/- per litre and made addition of ₹ 1,23,73,800/-. It was the explanation of the assessee before the AO that as per records submitted to State Excise Authorities, production loss for the whole year is within the permissible limit of 3% and the authorities have not initiated any action for discrepancy in production loss. Therefore, computation of probable production by adopting arithmetical calculation without understanding the process of manufacture of IMFL from conversion of rectified spirit is incorrect. The assessee further claimed that as per the monthl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat landscaping charges incurred towards repair of compound wall, removing and re-fixing of electrical gadgets and landscaping factory land are is in the nature of current repairs and cannot be considered as capital expenditure. 9.2 Having heard both the sides and considered materials available on record, we find that the ld.CIT(A) has recorded categorical finding that landscaping activity mainly consist of growing a particular variety of grass which can by no stretch of imagination be termed as capital in nature or of enduring benefit. Therefore, we are of the considered view that there is no error in the reasons given by the ld.CIT(A) to delete addition made towards disallowance of landscaping charges as capital in nature and hence, we are inclined to uphold the findings of ld.CIT(A) and reject the ground taken by the Revenue. 10. In the result, the appeal filed by the Revenue is dismissed. ITA Nos.3370 3371/CHNY/2018 11. The first issue that came up for our consideration from Ground No.2 of Revenue appeals for assessment years 2008-09 2009-10 is deletion of addition made towards inflation in cost of old bottles. 11.1 The fact with regard to the impugned d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplier has undertaken to deliver old bottles at the factory gate and would charge only for bottles that are actually used in the bottling of IMFL without charging for broken bottles. Further, the entire freight is borne by the supplier. Therefore, there is a slight difference in price paid for old bottles but when it compares to landing cost of new bottles, then the price paid for purchasing of old bottles is less and hence, the AO is incorrect in making addition towards inflation of purchases of old bottles as well as new bottles. 11.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. Admittedly, the AO has made addition towards inflation of cost of purchase of bottles by comparing price paid by the assessee to two different suppliers without bringing on record any evidence to prove that the bottles purchased by the assessee from two different suppliers are unique and are of same quality, type and pattern. It is quite possible in the business that the product supplied by two different suppliers may be of two different quality, type and pattern. Unless, the AO brings on record comparability of specificatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charges of ₹ 18,00,000/- 13.1 The fact with regard to the impugned dispute are that the assessee has received back a sum of ₹ 1.5 crores from M/s. Sri Harichandana Estates Pvt. Ltd., which was advanced against purchase of property. The AO has disallowed proportionate interest cost @ 12% per annum on amount of ₹ 1.5 crores, on the ground that the assessee has diverted interest bearing funds for non-business purpose as well as advance was given for the purpose of purchase of property which is capital in nature for which the authorized representative of the assessee has agreed for the proposed addition. 13.2 Having heard both sides and considered material on record, we find that the assessee has advanced a sum of ₹ 5.5 crores in the financial year 2008-09 and has received back a sum of ₹ 1.5 crores during the current financial year. We, further noted that the assessee has paid huge interest on borrowed funds. The assessee has not furnished satisfactory explanation for diverting interest bearing funds to related parties for non-business purpose. Therefore, we are of the considered view that the AO was right in disallowance of proportionate interest @ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear that the assessee does not have any say in allowing cash discount on sales but it is solely on the discretion of the purchaser of goods i.e., TASMAC. Therefore, we are of the considered view that expenditure debited under the head discount allowed on sales is a genuine expenditure, which was allowed as per the terms of agreement between the seller and buyer. The AO without appreciating the facts has simply made addition only on the ground that such discount has not been allowed / mentioned in the invoice. The CIT(A) after considering relevant facts has rightly deleted addition made by the AO. Hence, we are inclined to uphold the findings of the ld.CIT(A) and reject ground taken by the Revenue. 15. The next issue that came up for our consideration from Ground No.4 of Revenue appeal is deletion of addition made towards disallowance of landscaping expenses of ₹ 18,13,132/-. We find that an identical issue has been considered by us in ITA No.3369/Chny/2018 for assessment year 2007-08 and the reasons given by us in preceding Para No.9.2 shall mutatis mutandis apply to this appeal as well. Therefore, for similar reasons, we are inclined to uphold the findings of ld.CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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