AI Insights
The case involves Mahalaxmi Sweet House, a manufacturer and seller of Namkeen, which appealed against the order of the CIT(A), Panchkula, confirming additions made by the AO for unaccounted sales and excess diesel consumption. The AO had rejected the books of accounts under section 145(3) and made additions based on the alleged unrecorded sales and excess diesel usage. The Tribunal examined the methods used by the AO to estimate unrecorded sales and found them to be based on yield ratios without considering other factors like pilferage, wastage, and the nature of the products which have a limited shelf life. The Tribunal also noted that the AO did not provide a specific opportunity for the assessee to contradict the materials used for estimation, which is a requirement under section 144 of the Act.
Appeal Details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 127729 (ITAT-CHANDIGARH)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
3 year(s) 5 month(s) 21 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
18-05-2023
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
Not Allotted
Next Hearing Date
10-05-2023
Assessment Year
2014-2015
Appeal Filed On
27-11-2019
Judgement Text
आयकर अपील य अ धकरण,च डीगढ़ यायपीठ “बी” , च डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “B”, CHANDIGARH ी आकाश द प जैन, उपा य एवं ी $व%म 'संह यादव, लेखा सद,य BEFORE: SHRI. AAKASH DEEP JAIN, VP & SHRI. VIKRAM SINGH YADAV, AM ITA NO. 1508/Chd/ 2019 Assessment Year : 2014-15 Mahalaxmi Sweet House Ph-II, Chitta Mandir Road, Azad Nagar, Yamuna Nagar The ITO, Ward-2 Yamuna Nagar PAN NO: AAEFM6110F Appellant Respondent ! " Assessee by : Shri Ajay Jain, C.A. # ! " Revenue by : Smt. Moatenla, JCIT, Sr. DR $ % ! & Date of Hearing : 11/05/2023 '()* ! & Date of Pronouncement : 19/05/2023 आदेश/Order PER VIKRAM SINGH YADAV, A.M. : This is an appeal filed by the Assessee against the order of the Ld. CIT(A), Panchkula dt. 30/09/2019 wherein the assessee has taken the following revised grounds of appeal: i) That the Ld. CIT(A), Panchkula has wrongly confirmed the addition of Rs. 2,62,906/- & Rs. 7,95,750/- on account of unaccounted sale of Gajjak, Makhane and Namkeen without any single evidence on record to prove that the assessee has made any sale out of books. ii) That the Ld. CIT(A) wrongly confirmed the addition of Rs. 5,57,350/- on account of excess consumption of Diesel. 2. Briefly the facts of the case are that the assessee is in the business of manufacturing and selling Namkeen and filed its return of income declaring total income of Rs. 4,96,280/-. The case of the assessee was selected for scrutiny and after issuance of notice and calling for information/documentation from time to time and taking into consideration the submissions filed by the assessee, 2 the books of account maintained by the assessee were rejected by the AO by invoking the provisions of section 145(3) of the Act and thereafter, has made an addition of Rs. 2,62,906/- in respect of unaccounted income on production and sale of Gazak, Revari, Makhana and Rs 7,95,750/- in respect of unaccounted income on production and sale of Namkeen. Further, an addition of Rs. 5,57,350/- was made on account of excess consumption of diesel and assessment proceedings were completed vide order passed under section 143(3) dt. 28/12/2016. 3. Being aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A) who has since sustained the said additions and against the said findings and directions of the Ld. CIT(A), the assessee is in appeal before us. 4. During the course of hearing, the Ld. AR submitted that the AO has grossly erred in rejecting the books of accounts under section 145(3) of the Act. It was submitted that the system of accounting has been consistently followed by the assessee for the current year as well as preceding and subsequent financial year and the same has been accepted by the AO. It was submitted that in the assessment order, the AO has held that the entire sale has not been recorded in the books of accounts and partial sale amounting to Rs. 10,58,656/- out of total sales of Rs. 16,81,55,562/- has not been recorded in the books of accounts. It was submitted that the unrecorded sales as alleged by the Ld. AO is only 0.63% of the total sales which implies that 99.37% books are accurate. 4.1 It was further submitted that findings of the Ld. AO are based on his own assumption and presumptions and are not based on any documentary evidence. It was submitted that the reasons for rejecting the books of accounts are highly unjustified and devoid of merits. The powers of the Ld. AO under section 145(3) are not arbitrary and there must be used judicially and the assessment must be completed based on judicial considerations in light of relevant material on record. 3 4.2 It was further submitted that by estimating standard wastage / shortage across all the items, the Ld. AO has taken the output ratio as 95% out of total raw material consumed for making different varieties of finished goods. It was submitted that the process of making halwai products is manual and not automated and the workmen also keep changing from time to time. It was submitted that the assessee during the relevant period manufacturing about 30 types of namkeen with different product mix in different years. The consumption of raw material is different for different products and therefore the input-output ratio also varies. It was further submitted that even for the same product, it may vary due to various factors such as quality of raw material used, skill of labour, weather conditions, types of products etc. It was submitted that the AO while framing the assessment has illogically assumed the input output ratio is uniform at 95% across all the products which is unjustified and imaginary. There is no fixed ratio in the law for manual preparation of finished goods of this kind not is it practical. It was accordingly submitted that consumption of raw material cannot be directly proportionate of the production of finished goods. The output ratio of each product shall differ as the shortage / wastage in percentage may go from 5% to 15%. It was accordingly submitted that the AO has failed to take into consideration these important facts and have gone ahead and made the impugned addition and which have been sustained by the Ld. CIT(A). 4.3 It was further submitted that the learned AO has held that the production of Gajak should have been 697646 kg i.e. 95% of inputs of 734365 kg whereas the assessee has sold 693260 kgs which is 99.4% of 734365 kg and thus has not recorded the sale of 4406 Kg ( In fact it is 4386 kg, there is a calculation mistake in the order) valued at Rs 262906/-. Even if the production is 95%, the billing cannot be of full production. There is bound to be gap between the production and billing because Gazak is a ready to eat food item, it is sweet and is produced and consumed only in winters. It gives instant energy and warmth to 4 body to bear the harshness of winters. The entire manufacturing, packing and handling process is manual and not mechanised. Therefore, every person be it worker, packer, transporter, whosoever handles it, has a tendency to consume some portion of Gazak. Moreover, it is regulated under Food Safety and Standard Act( FSSAI). It carries expiry date of three months. Sometimes incentives like free issues are given to clear the inventory likely to expire shortly. Pilferage and wastage in packing and handling is also there. As we have billed 99.40%, the difference in quantitative terms is only 0.60% which is negligible for item like Gazak. 4.4 Similarly, the AO has applied the yard stick of input output ratio of 95% on the manufacturing of Namkeens and as per the AO, the sale of namkeen should have been 1874592 kgs being 95%of the inputs, after adjustment of opening and closing stocks whereas it is 1862900 kgs as per books of accounts of the assessee, which is 99.38%. Thus, a difference of 0.62% in quantitative terms which is negligible considering that it is food item. Even if the production is 95%, the billing cannot be 100% of production because of consumption of namkeen by handlers, pilfrege , wastages and expiry date of three months under FSSAI Act. The learned AO has added Rs 795750/- as unrecorded sale in the income. It was submitted that the learned AO has simply tried to jackup the GP rate to 5% and have added the income without any justification. 4.5 The learned AO has rejected the books of accounts u/s 145(3) citing the above grounds which are imaginary and ill-founded. The actual reason for rejection of books is fall in GP Ratio, but it is not the sufficient cause for invocation of sec 145(3). The AO is required to analysis various other parameters which have the effect on GP Rate before drawing any conclusion on the merit of such claim. The AO has to pin point the malice & bring out in the Assessment order by stating the facts on which rejection of accounts books is based. The AO is required to bring on record the specific defects in the books of accounts of 5 the assessee before invoking provisions of sec 145(3). The rejection of books simply on lower GP rate in comparison to earlier year would not suffice. It is a mechanical approach & application of mind is missing & against the natural justice & encroachment on fundamental rights of business enshrined in the Constitution of India. 4.6 It was submitted that the Tribunal in ITO vs Girish Mehta (2008) 296 ITR (AT) 125 Rajkot has held that the precondition for estimating business income of the assessee, where an assessee keeps accounts is that the books should have been found unreliable or otherwise not capable of proving the assessee's income . Without this first step, the fact that the gross profit is low cannot by itself be a ground for taking a view that it is open to Assessing officer to make good the alleged deficiency in gross profit. There should be sufficient reason to hold that books of accounts maintained by the assessee are unreliable, incorrect or incomplete but no such reason has been recorded by the Assessing officer in our case. 4.7 It was submitted that the reason to believe that the case demands a best judgement assessment u/s 144 have to be in writing and based on facts. Sec 144 also requires an opportunity of being heard to the assessee before proceeding with the assessment to the best of his own judgement. No such opportunity was provided to the assessee. Moreover, the learned AO has acted arbitrarily and capriciously. The Hon'ble Allahabad HC has held in the case of CIT vs Surjeet Singh Mahesh Kumar (1994) 210 ITR 83 that best judgement assessment must proceed judiciously in the light of relevant material on record and discretion in that behalf has not been exercised arbitrarily and capriciously. Further, the Assessing officer has to give an opportunity to the assessee to contradict the materials upon which the AO wants to basis his estimates. Reliance is also placed on Hon'ble Karnataka High Court decision in the case of Karnataka State Forest Industries Corporation Ltd vs CST (1983) 201 ITR 674. 6 4.8 It was submitted that the Hon'ble Supreme Court and various High Courts in number of cases have held that before invoking the provision of sec 145(3), the AO has to bring an record material on the basis of which he has arrived at the conclusion with regard to correctness or completeness of the accounts of assessee or the method of accounting employed by it. The rejection of books of accounts cannot be sustained merely on the facts that the GP Rate of the assessee is low during the relevant period as compared to book results of earlier years. 4.9 It was submitted that the rate of GP in a particular year depends on many factors like rise or fall in prices of raw materials, finished product, Input output ratios of various products like namkeens, gajak etc. The AO cannot proceed to make an arbitrary addition and base his conclusion on guess work. The Courts have held that if the profit shown by the assessee in his return is not accepted, it is for the taxing authorities to prove that the assessee made more profit. Reliance is placed on International Forest Company vs CIT(1975) 101 ITR 721(J&K). 4.10. Regarding diesel consumption, it was submitted that the assessee manually manufactures halwai goods like namkeens, gajjak etc by using diesel bhatties with traditional tools. In the previous year, there was no production of gajjak which involves more consumption of diesel in comparison to simple deep frying. It was submitted that during the current financial year, gajjak weighing 693240 Kgs were sold which clearly justifies the increase in consumption of diesel. It was submitted that the consumption of diesel depends upon many variable factors and there cannot be any abstract formula for calculation of production which is directly proportionate to consumption of diesel. It was further submitted that the AO has not considered the consumption of diesel for running of generating set. It was submitted that the running of generating set cannot be uniform, and again cannot be linked to the turnover. It was submitted that it 7 depends upon the power cuts and breakdowns and during the year, the area where the shop of the assessee was situated, there were quite large numbers of power cuts and breakdowns as compare to the previous year which has resulted in increase usage of generating set and consequent consumption of diesel. It was further submitted that the invoices towards purchase of diesel have been duly submitted before the AO which he has not rejected and all the payments have been made through banking channel and therefore the disallowance of Rs. 557,350/- deserves to be deleted. 5. Per contra, the Ld. Sr. DR relied on the order and the findings of the AO as well as the Ld. CIT(A) and taken up through findings of the Ld. CIT(A) which are contained at para 4.5 of the impugned order which read as under: “4.5 I have gone through the facts of the case and the written submissions filed by the appellant. It is noted that the AO considered that during the relevant year, the appellant disclosed lower profits compared to last year by 1% even though the quantity of sale has increased and appellant took up production and sale of items like Gajjak and Revari too besides Namkeen Dals in earlier year. Accordingly, the AO adopting the output ratio for Namkeens and Gajjak, as furnished by the appellant itself in assessment proceedings, worked out the excess wastage declared by appellant which amounts to undisclosed production of goods and their undisclosed sale which was added to the income of appellant after rejecting its books of account u/s 143(3) of the Act. The AO gave consideration to other factors like additional loss in quantity or raw material due to leakage of oil and moisture loss in pulses and adopted the output ratio of 95% as against 95.6% for Namkeens as provided by appellant itself in its submissions. Further the AO has, by detailed workings, computed excess expenditure claimed by appellant on diesel expenditure and after considering various factors explained by appellant for increase in diesel consumption during the year e.g. introduction of Rewari and Gajjak in production, seasonal variation, labour skills etc. he further gave an allowance of half of the excess consumption worked out and only considered the balance half of Rs. 10,965/- litres as excessive consumption shown and made addition to income of appellant on this account. Thus, I find that the AO has taken into account the various factors affecting production cost which were submitted by the appellant and adopted a logical and reasonable method in computing the excess shortage/undisclosed sales of appellant and excess consumption or diesel expenditure against that claimed by appellant in its books of account which are also found to be rightly rejected by the AO by a speaking order. Therefore on the facts and circumstances, as discussed above, I do not find any reason to interfere in the additions made by the AO on these accounts. As a result, these grounds of appeal are not allowed.” 8 6. We have heard the rival contentions and purused the material available on record. One of the contentions which has been raised by the AR is that even considering the percentage of production as a percentage of raw material that is the yield ratio as so computed by the Assessing officer, the difference in quantitative terms is only 0.60% for Gazak and a difference of 0.62% in quantitative terms in respect of Namkeen which is negligible from materiality perspective and being food items, it is inherent that there would be pilferage, wastage and more importantly, there is a expiry date of three months under FSSAI Act beyond which these foods items are not worthy of human consumption and have to be taken off the shelves. In other words, it has been submitted that even where the production is determined at 95% of raw material and other input cost, it cannot be expected that whole of the production has been sold and the assessee has derived income outside of the books of accounts. We find that in the instant case, the AO basis the yield working of raw material and other input cost has determined the expected level of production of finished goods and comparing the said figure and figures of sales shown by the assessee has held that the differential is nothing but sales which has been effected by the assessee outside the books of accounts. Besides the said yield working, there is no other direct or corroborative evidence on record that the assessee has carried out sales outside the books of accounts. Even the ld CIT(A) has returned a finding in para 4.2 of the impugned order that the AO has inferred that difference in quantity of Gajjak which is undisclosed production was sold by the assessee but the sale proceeds based on average sale price were not entered in the books of accounts and similar finding has been recorded in respect of Namkeen. There is thus an inference which has been drawn by the AO based solely on yield ratio. Further, in para 4.5 of the impugned order where our reference was drawn by the ld Sr DR, we find that the ld CIT(A) has confirmed the findings of the AO stating that “the AO has taken into account the various factors affecting production cost which were 9 submitted by the appellant and adopted a logical and reasonable method in computing the excess shortage/undisclosed sales of appellant” and we thus find that the excess shortage and undisclosed sales have been used inter- changeably. We therefore find that the shortage has been equated with undisclosed sales basely solely on yield ratio. In our view, no doubt yield ratio is one of the guiding factors which needs to be considered for determining appropriate level of production but at the same time, to equate production with sales, there has to be something more in terms of positive evidence in form of unrecorded sales realization which has not been entered in the regular books of accounts which is apparently absent and not available on record. Alternatively, the explanation of the assessee that being food items, it is inherent that there would be pilferage, wastages and more importantly, there is a expiry date of three months under FSSAI Act beyond which these foods items are not worthy of human consumption and have to be taken off the shelves needs to be rebutted which has again not happened in the instant case. In view of the same, we are of the view that there is no justifiable basis for making the addition of Rs 262,906/- and Rs 795,750/- and the same is hereby directed to be deleted. 7. Regarding diesel consumption, it is an undisputed fact that the assessee started production of Gajjak during the year and for the purposes, has used diesel bhatties and therefore, comparison of diesel consumption via-a-vis last year is not correct in absence of suitable adjustments which has not happened in the instant case. Further, the assessee has produced the invoices for diesel purchase in respect of which the payments have been made through the banking channel. There is thus complete documentation in support of diesel consumption which is placed on record and no defect has been pointed out by the AO. In any case, where the overall books of accounts have been rejected, there is no basis for making the individual addition relying on the same books of accounts and all the AO is required to do is estimate appropriate level of profit based on some rational basis and which has not happened in the instant case. 10 In view of the same, the addition of Rs 557,350/- is hereby directed to be deleted. 8. In view of the above, the other contentions raised by the assessee relating to rejection of books of accounts have become infructious and in any case, no specific ground of appeal has been taken by the assessee and hence, the same are dismissed. 9. In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on 19/05/2023. Sd/- Sd/- आकाश द प जैन $व%म 'संह यादव (AAKASH DEEP JAIN) ( VIKRAM SINGH YADAV) उपा य / VICE PRESIDENT लेखा सद,य/ ACCOUNTANT MEMBER AG Date: 19/05/2023 ( + ! , - . - Copy of the order forwarded to : 1. The Appellant 2. The Respondent 3. $ / CIT 4. $ / 0 1 The CIT(A) 5. - 2 ग 4 5 & 4 5 678 ग9 DR, ITAT, CHANDIGARH 6. ग 8 : % Guard File ( + $ By order, ; # Assistant Registrar
Other Referred Cases
ITO vs Girish Mehta (2008) 296 ITR (AT) 125 Rajkot, CIT vs Surjeet Singh Mahesh Kumar (1994) 210 ITR 83, Karnataka State Forest Industries Corporation Ltd vs CST (1983) 201 ITR 674, International Forest Company vs CIT(1975) 101 ITR 721(J&K)
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