KKR AGRO Mills P. Ltd, Ernakulam V. The ACIT, Cochin

ITA 328/COCH/2016

AI Insights

The case involves KKR Agro Mills Pvt. Ltd., which appealed against the order of the CIT(A) - 1, Kochi, for the Assessment Year 2010-11. The primary issues in the appeal were the additions made under section 40A(2) concerning the purchase costs of paddy and rice from related parties, and an addition for underreporting of production based on discrepancies between electricity consumption and rice production. The Tribunal examined whether the purchase costs were excessive or unreasonable and whether the rejection of book results based on electricity consumption was justified. The Tribunal's decision emphasized the need for a clear connection between the alleged discrepancies and tax evasion, which was not established in this case.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 115263 (ITAT-COCHIN)
• Duration Of Justice: 6 year(s) 4 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 06-01-2021
• Assessment Year: misc
• Appeal Filed On: 24-07-2016
• Other Referred Cases: CIT Vs Dempo, CIT vs Siya Ram Garg HUF, CIT Vs. Indo Saudi Services (Travel) (P) Ltd, CIT Vs Shatrunjay Diamonds, V.S. Dempo & Co. (P) Ltd, HIVE COMMUNICTION PVT. LTD. V/s CIT, St Teresa's Oil Mills v. State of Kerala, CIT v. Sulabh Marbles (P.) Ltd., N. Raja Pullaiah v. Deputy CTO, ACIT Vs. SRJ Peety Steels Pvt.Ltd., Mahabir Prasad Jagdish Prasad v. Commissioner of Sales Tax, Ponni Sago Factory v DCTO, Kalyani Oil Mills v State of Madras, Rutvi Steel & Alloys Pvt.Ltd. vs Department Of Income Tax
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Maximum Marginal Rate; Cost of acquisition; Fair market value; Corroborative evidences
• Section: 205; 73; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH : COCHIN BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND MS. PADMAVATHY S, ACCOUNTANT MEMBER ITA No.328/Coch/2016 Assessment Year : 2010-11 KKR Agro Mills Pvt. Ltd., III/678, KKR Building, Okkal Kalady, Ernakulam – 683 550. PAN : AABCK 6542 K Vs. ACIT, Circle – 1(2), Kochi. ASSESSEERESPONDENT Assessee by :Smt. Parvathy Ammal,CA Revenue by:Smt.J M Jamuna Devi, Sr. AR Date of hearing:05.12.2022 Date of Pronouncement:19.12.2022 O R D E R Per Padmavathy S, Accountant Member This is an appeal against the order of the CIT(A) - 1, Kochi, dated 11.05.2016, for Assessment Year 2010-11 raising the following grounds – The Orders of the learned authorities below are against the law and facts and hence unsustainable . 1.The Orders of the learned authorities below are against the law and facts and hence unsustainable . ITA No.328/Coch/2016 Page 2 of 19 ISSUES IN THE APPEAL 2.Addition [ Purchase cost estimated and excess disallowed u/s 40A(2) ] - in respect of 5 Transactions of paddy Purchases from SN Rice Mills and KKR Mills i)It is submitted that the appellant had brought to the attention of the authorities the fact that sister Concerns are paying tax at maximum marginal rates . a)At the time of hearing appellant had brought to the attention of the assessing Officer the decision of the Mumbai High Court in CIT Vs Dempo 196 Taxmann 193=336 ITR 20( Bom) and Punjab Haryana High Court in CIT vs Siya Ram garg HUF , 49 DTR 126= (2011)(237 CTR 321). b)Even though the assessing officer has Referred to this decision in para 4.2.2- page 11 of the Order dated 28.3.2013, this decision has not been considered in a proper manner . The assessing officer has relied on Bombay high Court’s earlier decision in CIT Vs Shatrunjay Diamonds [ para 4.2.4 of the Order ] and has stated that even in Dempo case (2011) the Bombay high Court has not moved away from its earlier verdict[ [para 4.2.5] c)It is submitted that Bombay High Court in the case of CIT Vs. Indo Saudi Services (Travel) (P) Ltd (2009)(310 ITR 306), has referred to the Circular issued by CBDT with regard to sec. 40A(2)(a) as under:- "Under the CBDT Circular No. 6-P, dated 6th July, 1968 it is stated that no disallowance is to be made under section 40A(2) in respect of payments made to relatives and sister concerns where there is no attempt to evade tax." In the case before the Bombay High Court, the revenue was not in a position to show as to how the assessee therein evaded payment of tax by alleged payment made to its sister concern, since the sister concern was also paying tax at higher rate and hence the disallowance made u/s 40A(2)(a) was deleted. The Hon'ble Punjab & Haryana High Court has also expressed similar view in the case of CIT Vs. Siya Ram ITA No.328/Coch/2016 Page 3 of 19 Garg (HUF) (2011)(237 CTR 321). In para 15 of the Judgment it is observed- "15. On this issue, we find that indeed, the details filed by the assessee showed that its sister concerns were being taxed at the same rate at which the assessee was being taxed, proving that there was no reason for the assessee to show higher rate purchases made by the assessee from its sister concerns. The assessee's sister concern had offered their income from such sales, which fact has not been disputed. Therefore, the AO erred in invoking the provisions of S.40A(2) of the Act and the ld. CIT(A) has correctly deleted the disallowance." d)It is submitted that the Central Board of Direct Taxes circular dated July 6, 1968 is binding on the Department. The Hon'ble Bombay High Court has Considered the above Circular in the case of V.S. Dempo & Co. (P) Ltd (336 ITR 209) although in that decision appeal was allowed on the ground that section 40A(2) is not applicable . The Circular has been considered by the Delhi High Court in case of HIVE COMMUNICTION PVT. LTD. V/s CIT [ ITA 306/2011 ( DELHI H.C.)] ii)Without prejudice to the above appellant had furnished statement showing Outside paddy purchase summary –with Details of party , date wise purchase, bill date , quantity , bill amount and Transportation Cost . The rate per Kg adding Transportation cost ranges from Rs.11.03, 13.18, 10.99 to 13.30 etc [Reproduced in Para 7.3 to 7.5 of appellate order] . It is submitted the purchases of paddy in question are at the rates of Rs.11.82,Rs. 11.90, Rs.12.07, Rs.12.50 and Rs.11.94 respectively and there is no finding that the purchase cost of the appellant is not within the above range. It is also to be noted that unless it is established that the Cost is unreasonable or excessive, the addition u/s 40A(2) cannot be sustained. iii)It is also to be noted that even though the CIT (Appeals) has accepted that by purchasing from sister concern quality can be ITA No.328/Coch/2016 Page 4 of 19 assured , the effect thereof on the price fixed has not been given any Consideration. iv)The CIT ( appeals) also ought to have accepted that minor variation in rate is die to various factors like Moisture content, extent of presence of husk, dust, outturn, black rice etc . 3.Addition [ Purchase cost estimated and excess disallowed u/s 40A(2) ] - in respect of 3 Transactions of Rice Purchases from M/s KKR Products and marketing private Limited i)It is submitted that the disallowance is not made on the basis of fair market value of the goods purchased or on the basis of purchases from unrelated parties but on the ground that rice is sold at price below the purchase price. Appellant had pointed out that rice was sold by KKR Products and marketing private limited at a higher rate to outside parties . However the assessing officer did not accept the same for the sole reason that rice sales to Outside parties is a particular grade of VADI RICE ( costlier than Unda rice) viz Silky Sortex , grade name suggesting top quality rice . But the rice sold to sister concern is not qualified as whether it is UNDA, VADI , WHITE etc . The assessing officer has observed- “the open market purchase rates may be much lower . But for lack of independent third party information especially on the sales side , the adjustment exercise is curtailed refrained and limited to that extent. The assessing officer has observed has also observed that sister concern is taxed at maximum marginal rate is not a relevant factor. ii)Before the CIT (Appeals) appellant produced details of purchases of rice from outside parties to confirm that appellant has purchased rice from other parties at higher rates.{ reproduced in para 8.2 of appellate order] ITA No.328/Coch/2016 Page 5 of 19 The CIT (Appeals) has admitted that Cost of purchase from outside parties varies from Rs.18.2 to 21.9 per Kg whereas without the transport charges the price is much lesser than cost of purchase from sister concern. However the CIT(Appeals) has sustained the addition on the sole ground that appellant could not furnish any satisfactory explanation for the higher purchase cost than sale price. iii)It is submitted that in view of the CBDT circular dated July 6, 1968 and decisions referred in the grounds above , the disallowance of purchase cost is incorrect . iv)Without Prejudice to the above it is submitted that addition u/s 40A(2) can be sustained only if there is a finding that Purchase cost is excessive ie more than fair market value . That the rice has been sold at a lower value subsequently to the sister concern cannot be a ground for invoking section 40A(2) 4.Addition for under reporting of production on account of Mismatch between electricity consumption & Rice Production (Production and unaccounted sales Estimated) a)The Assessing Officer as well as the CIT (Appeals) was not justified in rejecting the book results only on the ground of irregular pattern of consumption of electricity. b)It is submitted that there is no evidence of any unaccounted Production or unaccounted sales. The estimate of both Production and sale has been made solely on the basis of electricity consumption . CIT (Appeals) has only directed to rework the estimates after considering revenue from sale of by- products and quantum of rice processed for sister concern .. c)In para 9.5 of the appellate order- the learned CIT ( Appeals) has observed – in the assessment order, though the assessing officer could not establish any unaccounted purchase and also accepted the books of accounts produced by the appellant, the assessing officer has brought out the fact that appellant has not reported the actual production of rice corresponding to the Consumption of electricity. ITA No.328/Coch/2016 Page 6 of 19 d)In this Connection Kind attention is invited to The Following decisions (1) St Teresa's Oil Mills v. State of Kerala reported in [1970] 76 ITR 365 (Ker.); (2) CIT v. Sulabh Marbles (P.) Ltd. reported in : [2006] 205 CTR 464 (Raj.); (3) N. Raja Pu. e)llaiah v. Deputy CTO reported in : [1969] 73 ITR 224 (AP) f)In para 5 of the judgment in St Teresa's Oil Mills v. State of Kerala reported in : [1970] 76 ITR 365 (Ker.)the Kerala High Court has observed 5. In the case on hand, the only circumstance relied on by the authorities below for the rejection of the accounts is that there was wide disparity in the consumption of electricity. In our opinion, this factor by itself without any other supporting circumstance does not justify the rejection of the accounts. Such variation in the consumption of electricity can be due the various factors outside the control of the assessee. It is unsafe to categorically say that because there is variation in the consumption of electricity the accounts are incorrect or unreliable. It sometimes happens that current supply falls far below the usual voltage and on such occasions the output will necessarily be much lower than the normal rate. The efficiency of the crushing machine as also the moisture content in the copra would also be relevant factors to be taken into account in arriving at the output. It is, therefore, unsafe to uphold the rejection of the accounts purely on the ground that there has been divergence in the consumption of electricity. g)In ACIT Vs. SRJ Peety Steels Pvt.Ltd. (2011) 137 TTJ 627 (Pune) it has been held that no addition could be made merely on the basis of technical electricity consumption formula. h)In Mahabir Prasad Jagdish Prasad v. Commissioner of Sales Tax [1971] 27 S.T.C. 337 also, a similar question was considered. There also, the assessing authority did not find any material to show that the account books maintained by the assessee were not reliable. But the account books were rejected ITA No.328/Coch/2016 Page 7 of 19 only on the ground that the consumption of electricity showed that the assessee would have suppressed his production. In dealing with the question of estimate based on the electricity consumption without any reason for rejecting the assessee's accounts, the court stated that the fact that there was sizable disparity between the electricity consumption shown by the assessee and the report by the expert merely led to a suspicion that the entire production could not have been brought into the books. But suspicion, however strong it may be, cannot take the place of positive material and, therefore, unless the assessing authority was able to detect at least one instance where the assessee might have understated its sales, he would not be justified in rejecting the accounts and making an estimate of the escaped turnover, only on the basis of the consumption of electricity. This decision was followed by the same High Court in Mahashakti Oil Mill v. Commissioner of Sales Tax [1972] 30 S.T.C 390. i)It is submitted the assessing officer has not Conducted any tests or relied on any consumption patterns of other under takings . Appellant had brought to the attention of the authorities below, the decision in N. Raja Pullaiah v DCTO, Kurnool & Another (24 STC 90)= (1969) 73 ITR 224 (AP), it was even held that “The basis furnished by tests conducted in other undertakings cannot be of much relevance for the purpose of these mills about which it cannot be said that they are similarly circumstanced in all respects.” Appellant had brought to the attention of the authorities below the fact that in the various decisions, where the electricity consumption has been adopted as the basis for completing the best judgment assessment, the assessing authorities have conducted test production in the said factory and has used that result to ascertain whether there is any un-accounted production or not. Appellant had brought to the attention of the authorities below decisions in Kalyani Oil Mills v State of Madras (32 STC 542); Madurai Soft Drinks (P) Ltd v State of Tamilnadu (60 STC 94). , Ponni Sago Factory v DCTO (5 VST 223) (Mad). ITA No.328/Coch/2016 Page 8 of 19 j)In Kalyanai Oil Mills case (32 STC 542) madras High court after referring to the decision in St Teresa's Oil Mills v. State of Kerala case Observed: If the assessing authority had material to doubt the correctness or genuineness of the entries in the account books, he can proceed to make the "best judgment" assessment, taking the electricity consumption as the basis for making an estimate. But in this case the assessing authority has not proceeded to reject the account books on any ground whatever. We are, therefore, of the view that so far as the assessment year 1963-64 is concerned, the assessing officer had no sufficient material to reject the accounts and proceed to make the assessment on a "best judgment" basis, having regard only to the electricity consumption. Further, it is seen that though the assessing authority conducted a test check so far as crushing of oil is concerned and found that the electricity consumption was 4 units per bag, no such test check was conducted in relation to decorticating of kernel and grinding of the oil-cake. But without any actual test check, the assessing authority has assumed that the electricity consumption will be 2 units per bag, both for decortication and for grinding. For this assumption we find no basis at all. The assessing authority has not referred to any comparable data from other similar oil mills. Therefore, the adoption of 2 units of electricity per bag so far as decortication and grinding appears to be somewhat arbitrary. k)In Rutvi Steel & Alloys Pvt.Ltd.,, ... vs Department Of Income Tax ITAT ahemedabad bench in its order dated 10.6.2010 (ITA No.3870/AHD/2007) has considered decisions in (1969) 73 ITR 224 (AP) , Pondy Metal & Rolling Mills (P) Ltd. v/s DY.C.I.T 107 TTJ 336, 27 STC 337 (All) etc and observed – “The Learned Departmental Representative could not bring any material on record to show that the assessee has purchased raw materials outside the books of account for making unaccounted production. Further, the assessee has maintained books of account, purchase and sale register and no defects could be pointed out in the same by the Learned Assessing Officer. Further, no error could be pointed out in the submission of the ITA No.328/Coch/2016 Page 9 of 19 assessee that it has maintained RG-1 register which is subject to verification by Excise Authorities and no defect has been pointed out by them on their inspection and that the accounts of the assessee are audited under the Companies Act and the Income Tax Act, 1961 and no adverse comments were made by the auditors on the accounts of the assessee. Further, the Hon'ble Delhi Bench of the Tribunal in the case of Pondy Metal and Rolling Mills P. Ltd. (Supra) has held that where assessee is maintaining regular books of accounts and all the purchase and sales are duly vouched and supported by raw material register, production register and finished good register which ware subject to check by excise authorities no addition can be made on account of alleged suppression of production simply on the basis of consumption of electricity. We also find that the contention of the assessee that the variation in consumption of electricity may be caused due to various reasons such as break down of machinery, quality of raw materials, thickness of finished goods and frequency of power failure, etc. could not be controverted by the Learned Assessing Officer. Rather it is observed that the above argument of the assessee was accepted by the Learned Assessing Officer to the extent of 30% for which no basis could be cited. No material was brought on record to show that it was scientific to arrive at the quantity of production merely on the basis of consumption of units of electricity. Therefore, in our considered opinion merely on the basis of units of electricity consumption, it cannot be concluded that the assessee's books of account were not reliable or the assessee is engaged in producing finished goods outside the goods of account. 5.Without prejudice to the above it is submitted that Taking into Consideration the fact that appellant has processed 3246550 kg of paddy belonging to sister concern and revenue from sale of by-products CIT ( Appeals) had directed to give credit for quantum of rice processed for sister concern and re-compute the suppressed production of rice . [ para 9.6 of the Appellate order dt 11.5.2016] ITA No.328/Coch/2016 Page 10 of 19 However Vide Order dated 7.6.2016 giving effect to the CIT(A) Credit for the quantity Processed for sister concern -3246550 kg is not given. The learned assessing officer Ought to have recomputed the suppressed Production at 1715209 kg (4961759 Kg as per assessment order Less credit For quantity processed 3246550 kg) and reworked the quantity of paddy and Profit estimated accordingly. 2. The assessee is a private limited company engaged in the manufacture of rice and rice products. For the Assessment year 2010-11 assessee filed return of income on 4.10.2010 declaring a total income of Rs21,59,480/-. The case was selected for scrutiny and a notice u/s.143(2) was duly served on the assessee. The AO while completing the assessment made the following additions – (i) Addition u/s.40A(3) towards cash purchase of paddy – Rs.10,87,72,870 (ii) Addition u/s.40A(2) on account of rate difference in respect of paddy purchased from related parties – Rs.2,44,96,050 (iii) Addition u/s.40A(2) on account of rate difference in respect of rice purchases from related parties – Rs.21,86,279 (iv) Addition for under reporting of production on account of mismatch between electricity consumption & rice production – Rs.2,19,95,180 3. Aggrieved the assessee filed an appeal before the CIT(A). The CIT(A) deleted the addition made in respect of (i) above and gave partial relief in respect of the rest of the additions. Accordingly, the additions were reduced to Rs.2,64,68,420. The assessee is in appeal before the Tribunal against the order of the CIT(A). ITA No.328/Coch/2016 Page 11 of 19 Addition u/s 40A(2) on account of rate difference in respect of paddy purchases from related parties 4. While completing the assessment the purchase cost in respect of 5 transactions of purchases of paddy effected from related Concerns – M/s SN Rice Mills and M/s KKR Mills was alleged to be inflated/excessive by the assessing officer. The assessing officer held that the assessee is purchasing the paddy at a higher cost and therefore adopted the purchase cost at Rs.10 based on cash purchases of paddy made on the same day and made addition u/s 40A(2). The details are as given in the below table - Purchased from Date Item Rate as Per Books Rate adopted by AO SN Rice Mills 31.07.2009Paddy11.82 10 KKR MILLS31.10.2009Paddy11.90 10 KKR MILLS30.11.2009Paddy12.07 10 KKR MILLS31.12.2009Paddy12.50 10 KKR MILLS25.01.2010Paddy11.94 10 5. On further appeal CIT(A) sustained the disallowance in respect of addition u/s 40A(2) in respect of paddy but after considering the fact that assessing Officer while adopting cost at Rs.10 did not consider transportation cost . The CIT(A) considered the details of purchases with transportation costs and also accepted the contention that reliability in quality will be better when it is purchased from sister concern, quality can be assured. CIT (A) held that the rate of Rs.10 adopted by the assessing officer is very low as it would be reasonable to adopt Rs. 11.15 as the average cost of purchases which includes the transport charges. The ITA No.328/Coch/2016 Page 12 of 19 CIT(A) directed the assessing officer to recompute the purchase cost of paddy by adopting Rs.11.15 as market price and arrive at purchase inflation if any. Vide Order dated 7.6.2016 giving effect to the CIT(A) order, the disallowance is recomputed as Rs.1,12,08,375 (relief of Rs.1,32,87,675). The assessee is contending the addition before the Tribunal. 6. The learned AR submitted that the assessee is purchasing paddy from third parties at a price which is range of Rs.11.03 to 13.30 and this fact is acknowledged by the AO himself in the assessment order. The learned AR also submitted that the purchases from the sister concerns are also in the same range and therefore cannot be said to be unreasonable or excessive to attract additions u/s.40A(2). The ld AR further submitted that the sister concerns are also taxed at the highest rate of tax and therefore the transaction cannot be said to done with an intention to evade tax. In this regard the learned AR relied on the decision of the Mumbai High Court in the case of VS Dempo & Co P Ltd (336 ITR 209) 7. The learned DR relied on the order of the CIT(A). 8. We heard the rival submissions and perused the material on record. The provisions of section 40A(2) reads as follows – Expenses or payments not deductible in certain circumstances. 40A. (1) ** (2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee ITA No.328/Coch/2016 Page 13 of 19 or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction : Provided that for an assessment year commencing on or before the 1st day of April, 2016 no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm's length price as defined in clause (ii) of section 92F. (b) The persons referred to in clause (a) are the following, namely :— (i) where the assessee is an individual any relative of the assessee; (ii)where the assessee is a company, firm, association of persons or Hindu un-divided family any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member; (iii)any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual; (iv)a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member or any other company carrying on business or profession in which the first mentioned company has substantial interest; (v)a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member; (vi)any person who carries on a business or profession,— (A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or ITA No.328/Coch/2016 Page 14 of 19 (B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person. (emphasis supplied) 9. In assessee’s case the difference between the price at which paddy is purchased from the related parties and the price at which it is available in the market is very nominal, as submitted by the learned AR. It is submitted by the learned AR that these minor variations are due factors like moisture content, extent of presence of husk, dust, black rice etc., and this unique feature relating to assessee’s business has not been appreciated by the lower authorities. We also see merit in the argument that the related parties are also taxed at the maximum rate and that there is no tax evaded by purchasing the paddy at this rate from the related parties. From the plain reading of the provisions of section 40A(2) it is clear that to attract the disallowance, the expenditure incurred should be excessive and unreasonable. In the given it is factually established that the price paid is not unreasonably excessive and the transaction is not done with an intention to evade tax. Therefore in our considered view no disallowance is warranted in respect of the price paid by the assessee towards purchase of paddy from the related parties. Accordingly the disallowance made in this regard is deleted. Addition u/s 40A(2) on account of rate difference in respect of rice purchases from related parties ITA No.328/Coch/2016 Page 15 of 19 10. Purchase cost in respect of 3 Transactions of purchases of rice effected from related Concern –M/s KKR Products and Marketing private Limited is alleged excessive by the assessing officer . The assessing officer adopted the purchase cost as Follows Purchased from Date Item Rate as Per Books Rate allowed by A.O. KKR- PMPL 9.2.2010 RICE 2019.47 KKR- PMPL 18.2.2010 RICE 2019.22 KKR- PMPL 22.2.2010 RICE 2019.28 11. On further appeal the disallowance in respect of rice Rs.21,86,279 is sustained by the CIT(A). Aggrieved the assessee is in appeal before the Tribunal. 12. The learned AR submitted that the disallowance is not made on the basis of fair market value of the goods purchased or on the basis of purchases from unrelated parties but on the ground that rice is sold at price below the purchase price. The learned AR also submitted that the seller KKR products sells the rice at a higher rate to outsider which is not accepted by the AO on the ground that the quality of the rice is different which is not factually correct. The learned AR therefore submitted that no disallowance is warranted u/s.40A(2) of the Act. 13. We heard the learned DR. The contention on the basis of which the disallowance is made is that KKR products is selling the rice at a price a ITA No.328/Coch/2016 Page 16 of 19 lower than the purchase price. The contention of the assessee that price charged by KKR products to third party is higher is also rejected on the ground that the quality of rice sold to third parties of higher quality. However, we notice that the quality of rice purchased by the assessee is not brought out clearly by the AO while making the disallowance. Further the contention that both the assessee and KKR Products are chargeable to tax at the same rate and no loss is suffered by the revenue has merits. Considering the facts of the issue in our view the price at which rice is purchased is not excessive or unreasonable and accordingly we delete the disallowance made in this regard. Addition for under reporting of production on account of mismatch between electricity consumption & rice production 14. The AO during the course of hearing observed that there production of rice is not proportionate to the electricity consumption and accordingly estimated production to be 1,49,98,259 kg as against the production shown by the assessee at 1,00,36,800 kgs. For the difference considered as suppressed production the AO calculated the sale price at Rs.19.58 kgs. For purchases the AO estimated 68% productivity out of the paddy to work out the paddy consumption to be 72,96,705 kgs and considered purchase cost to be Rs.10.30 per kg the AO made an addition of Rs.2,19,95,180. 15. The assessee preferred an appeal before the CIT(A). The CIT(A) gave partial relief to the assessee by holding that: ITA No.328/Coch/2016 Page 17 of 19 (i)Directed to adopt Rs. 11.15 per Kg as average purchase cost(of paddy) instead of Rs.10.30, (ii)Taking into Consideration the fact that assessee has processed 3246550 kg of paddy belonging to sister concern and revenue from sale of by-products Rs.27,19,210 directed to give credit for quantum of rice processed for sister concern and re-compute the suppressed production of rice. 16. The learned AR submitted that the book results of the production of rice is rejected only on the ground of irregular pattern of consumption of electricity. The learned AR drew our attention to para 9.5 of CIT(A)’s order where the CIT(A) has stated that the AO could not establish any unaccounted purchases and also has accepted the books of accounts of the assessee. The learned AR submitted that the AO did not conduct any test to check the variation in production and has considered only the electricity consumption to conclude that the production is suppressed. The learned AR relied on the following decisions in this regard: (i) St Teresa’s oil mills vs State of Kerala (1970) 76 ITR 365 (Ker) (ii) CIT vs Sulabh Marbles (p) ltd (2006) 205 CTR 464 (Raj) (iii) N Raja Pullaiah vs Deputy CTO (1969) 73 ITR 224 (AP) 17. We heard the rival submissions and perused the material on record. The only basis on which the addition towards suppressed production is done is that the same is not proportionate to the electricity consumption. The AO did not consider the submission that the during those months the assessee was doing job work of rice production for the sister concern ITA No.328/Coch/2016 Page 18 of 19 though the CIT(A) gave direction to consider the same. On perusal of records, it is noticed that the revenue did not bring anything contrary on record to establish that the assessee has suppressed production. It is also noticed that the books of accounts of the assessee was not rejected. Given this in our view using the electricity consumption alone as a reason for concluding that the assessee has suppressed production without any other supporting evidence to corroborate the is not tenable. Many factors such as voltage, efficiency of the machines used in production etc., may contribute to the variations in electricity consumption and therefore making an addition only on the basis of electricity consumption is not correct. Accordingly, we hold that the addition made by the AO towards suppressed production be deleted. 18. During the course of hearing the learned AR presented an alternate plea that in the order giving effect the AO has not correctly followed the directions of the CIT(A). In the light of our decision with regard to the issue of suppressed production this contention has become academic. In any case the issue is not arising out of the order under appeal and the assessee has to prefer a separate cause of action. It is ordered accordingly ITA No.328/Coch/2016 Page 19 of 19 19. In the result, appeal is allowed in favour of the assessee. Pronounced in the open court on the date mentioned on the caption page. Sd/- (N. V. VASUDEVAN) Sd/- (PADMAVATHY S) Vice President Accountant Member Bangalore, Dated: 19.12.2022. /NS/* Copy to: 1.Assessees2.Respondent 3.CIT4.CIT(A) 5.DR 6.Guard file By order Assistant Registrar, ITAT, Cochin.