ACIT, Central Circle, Bikaner. V. M/s. Sunshine Food Products, Bikaner

ITA 434/JODH/2018

• Counselvise Citation: [2024] 101 COUNSELVISE.COM (IT) 8371 (ITAT-JODHPUR)
• Duration Of Justice: 5 year(s) 6 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-03-2024
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 28-01-2024
• Assessment Year: 2016-2017
• Appeal Filed On: 28-08-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Loose papers; Tax effect; Set aside
• Section: 131; 132; 143(3); 142(1); 44AB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL JODHPUR BENCH, JODHPUR. BEFORE: DR. S. SEETHALAKSHMI, JJUDICIAL MEMBER & SHRI RATHOD KAMLESH JAYANTBHAI, ACCOUNTANT MEMBER I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 Assistant Commissioner of Income Tax, Central Circle, Bikaner [PAN: AAOFS 7902 H] (Appellant) Vs. M/s Sunshine Food Products, F-88 & 89, Bichhwal Industrial Area, Bikaner (Respondent) Appellant by Sh. Rajendra Jain (Adv.) & Smt. Raksha Birla (CA) Respondent by Smt. Alka Rajvanshi Jain, CIT- DR Date of Hearing 29.01.2024 Date of Pronouncement 07.03.2024 ORDER PER: RATHOD KAMLESH JAYANTBHAI, AM This appeal filed by revenue is arising out of the order of the Commissioner of Income Tax (Appeal)- 4, Jaipur dated 27/06/2018 [here in after ‘CIT(A)’ ] for assessment year 2016-17 which in turn arise from the order dated 21.12.2017 passed under section 143(3) of the Income Tax Act, by ACIT, Central Circle-01, Bikaner . I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 2 2. In this appeal, the revenue has raised following grounds: - “A. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) was justified in deleting the addition of Rs. 1,35,21,297/- made by the AO on account of unaccounted sales. B. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in deleting the addition of Rs. 59,56,365/- made by the AO on account of estimated initial investment made by the assessee for making unaccounted sales. The Appellant crave, leave or reserving the right to amend modify, alter add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.” 3. Succinctly, the fact as culled out from the records is that Search and Seizure proceedings were carried out at the residential and business premises of Bhikahram Chandmal group on 24.02.2016 pursuant to the warrants of authorization issued u/s 132 of the Income Tax Act, 1961. The warrant of authorization was issued in the case of the assessee on 19.02.2016 and the same was executed on 24.02.2016. The assessee firm is engaged in the manufacturing of ‘Bhujia’ and ‘Namkeen’. The partners of the firm are Shri Hari Ram Agarwal, Shri Raji Prakash Agarwal and Smt. Lalita Devi Agarwal. The assessee filed the return of income for the year under consideration, disclosing a total income of Rs. 29,76,560/- on 15.09.2016. Notice u/s. 143(2) of the Act was issued on 14.02.2017, which was duly served upon the assessee by speed post. Notices u/s. 142(1) of the Act were issued on 14.02.2017, 03.04.2017 and 11.07.2017, which were duly I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 3 served upon the assessee. Notice u/s. 142(1) r.w.s 129 of the Act was issued on 10.07.2017, which too was served upon the assessee. 3.1 During the course of search in the case of the assessee company, stock of goods at the business premises including the stock in cold storage and other premises were physically taken. On verification, it was seen that the stock of goods as per books of the assessee company as on the date of search was Rs. 9,80,32,662/-. Thus, a shortage in stock of Rs. 5,47,30,097/- was detected. The assessee has not put forth any claim of damage, theft or loss in any manner during the course of search or during the post search period or during the instant assessment proceedings. There exists only one reason for shortage in stock of packing materials, which is unaccounted sales effected using the packing materials on the books of account of the assessee company. The main component of shortage was found to be in packing materials. During the course of search, the assessee company could not derive the item wise stock of packing materials as no records were maintained by the assessee for its day to consumption. As such, the stock of packing materials as on the date of search was worked out by the authorized officer taking into consideration the opening stock of packing materials, purchase of packing materials during that year till the date of search and I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 4 the consumption of packing materials vis- à-vis sales made in that year up to the date of search based on the percentage of consumption of packing materials vis-à-vis sales in the immediately preceding year, i.e. F.Y. 2014-15. The search team had no other option but to work out the same in this manner as the assessee company was not in a position to provide the stock of packing materials as per books. Despite being specifically called for vide notice u/s. 142(1) of the Act on 11.07.2017, the assessee company could not produce day to day stock register of its stock of goods for the year till the time of completion of assessment in the case. In the circumstances, during the course of proceedings made in the case on 09.11.2017, the learned authorized representative of the assessee firm was asked to explain as to why the unaccounted sales corresponding to the deficit stock of packing materials should not be added to the total income of the assessee firm. 3.2 On 29.11.2017, during the course of which, a written submission was filed, wherein, at point no. (2), an explanation was offered in respect the deficit stock but no explanation was offered in respect of the issue of initial investment. Thereafter, on 14.12.2017, a written submission was filed, wherein, at point no. (1), the assessee has offered explanation on the issue of initial capital. The ld. AO stated that he has carefully gone I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 5 through the facts of the case, finding of the search and the explanations given by the assessee in this respect. The arguments given by the assessee were not acceptable for the following reasons: (a) Neither the partner of the firm nor the learned authorized representative of the assessee company have, either during the course of search or post search proceedings or during the instant assessment proceedings explained as to why there was a deficit stock of packing materials. Leave aside evidences in this respect, the assessee could even offer a simple explanation about the fate of packing materials. The packing materials are made to order by the assessee firm with the name of the firm printed on it and hence it is of no use to others. It is not such a commodity which cannot be sold or lent by the assessee to the needy. Further, the search team has not found any damaged or rejected packing materials and the assessee has also not claimed so during the course of search. No argument has ever been put forth by the assessee about the same being stolen. As such, there exists no other logical reason for its deficit except that the same were used for unaccounted sales made by the assessee. (b) It has been alleged by the assessee that the stock taking was carried perfunctorily in a very superfluous manner. In this context, it is stated that the search team at the factory premises of the assessee had taken physical inventory of all stock of goods in the presence of responsible persons of the assessee as also two independent witnesses. The inventory contains item wise and quantity wise details of raw materials, finished goods and packing materials and the inventory reveals that stock of even the minor items were taken by the survey team. Thus, the allegation made by the assessee at this stage is incorrect and out of place. (c) The assessee has stated that it had huge stock of obsolete and damaged packing materials. In this respect, it is stated that the I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 6 inventory of stock of goods physically taken at the premises of the assessee do not reveal any such obsolete or damaged stock. The inventory contains details of all stock available at the premises of the assessee as also at other places like cold- storage and State woolen Mill compound at the time of stock taking. Even when assessee was confronted with the issue of deficit stock during the course of search, the partners of the firm had not made such a claim. No such claim was made by the assessee even during the post search proceedings. This claim is being made by the assessee after lapse of more than 21 months from the date of search. In the initial part of the submission, the assessee has stated that it values its inventory at cost in the books of account consistently and that the same are reported in the audit report. The audit report does not specify any damaged or obsolete stock. Further in the details of closing stock furnished by the assessee for the year as also for the earlier years, the assessee has not disclosed any obsolete stock therein. It is also a fact that this argument now being put forth by the assessee is not supported by any evidence to prove this claim of the assessee. Thus, this argument now being made by the assessee is an afterthought. The same is accordingly not accepted. (d) Thereafter, it is alleged by the assessee that there was no judicious basis to work out the break-up of short stock as the same has many sub heads and that the consumption of packing material was computed hypothetically. In this respect, it is stated that at the time of search, item wise and quantity wise stock of packing materials were taken in the presence of responsible persons of the assessee company and two independent witnesses. In fact, assessee itself did not have head wise stock of packing materials as per books. It was seen that the assessee had no records in respect of day to day consumption of packing materials. As far as the allegation of hypothetical computation of consumption of packing materials is concerned, it is stated that since the books of account were not ready in this respect and the assessee itself did not have any stock register, there was no option in this respect either with the search team or even with the assessee to work out I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 7 the stock as per books. The method adopted is not hypothetical or based on assumption, as alleged by the assessee. The figures of opening stock and total purchase of packing materials as also the sales effected by the assessee till the date of search are actual figures based on the closing stock reported in the return of income for A.Y. 2015-16 as also purchase and sales figures recorded by the assessee company for A.Y. 2016-17. The percentage of consumption is also the actual consumption percentage disclosed by the assessee company in its return of income for A.Y. 2015-16. Thus, the consumption of packing materials till the date of search has been worked out scientifically. Thus, this argument of the assessee is also incorrect and unfounded. Despite being specifically called for vide notice u/s. 142(1) of the Act on 11.07.2017, the assessee firm could not produce day to day stock register of its stock of goods for the year till the time of completion of assessment in the case (e) Thereafter, the assessee has stated that no evidence was found during the search which could prove that packing material was used for packaging of unaccounted sales. It is further stated therein that no evidence of any nature came to light as regards unaccounted sales. In this respect, it is stated that despite being given sufficient opportunities, the assessee could not explain the fate of packing materials found deficit during the course of search or during post search proceedings or during the assessment proceedings or even in instant reply to the show-cause notice. It is a matter of simple understanding that packing materials are made specially with food grade materials, which make them costly and further, the packing materials carry the name, logo and address of the assessee, which definitely cannot be used by other such manufacturers. Thus, it is not saleable as such. Further, the assessee itself cannot afford to sell its packing materials for the fear that it would be misused by others to pack inferior quality products in them and sell the same under the brand and logo of the assessee firm. As far as the issue of documents proving unaccounted sales are concerned, the same has been found I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 8 during the course of search in the assessee group and the same were also confronted to the assessee group during the search. At this juncture, reference is made to the statement given by Shri Anand Agarwal u/s. 131 of the Act on 30.05.2016, during the post search proceedings. In response to Q. nos. 4, 5 & 6, Shri Anand Agarwal has confirmed that the seized documents pertain to unrecorded sales. It is very clear from the above statement that evidences of unaccounted sales were confronted to the assessee and the same has already been accepted by the assessee. Thus, feigning ignorance of the above facts and putting forth such arguments improper and out of place. (f) Thereafter, it is further stated that the rationale of considering any short item of stock as basis of projecting out of books sale is untenable and that if there had been proportionate deficit in the stock of various items of finished goods and packing materials, then it would have created a pattern which may have propelled one to infer that these items have resulted in unaccounted sales. In this respect, it is stated that the in the case of the assessee, the total deficit was of Rs. 5,47,30,097/-, which also included deficit stock of raw materials and finished goods. Thus, deficit stock of finished goods was also found during the search. The items dealt with by the assessee are 'Namkeen' and 'Bhujia', which are fast moving items in Bikaner as also outside Bikaner and the brand of the assessee is the most sought after, in respect of these items. Thus the unaccounted production and sale of finished goods occurs continuously on a day to day basis. Accordingly, the corresponding raw materials are also purchased on a continuous basis and the stocks replenished to the maximum extent possible. Whereas, since specific printing is required on packing material, the same cannot be continuously replenished. The assessee, has in fact, no other way to reduce its stock of packing materials other than by way of unaccounted sale of traded items Further, documents and evidences seized from the premises of the I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 9 assessee group contains order slips for delivery of goods wherein, the value of goods is not mentioned. Many of the loose papers are in the form of bills/ estimates, which were not recorded in the books of account at the time of search. These loose papers also pertain to purchase of raw materials by the assessee group, which were not found to be recorded in the books of account at the time of search. Further, in order to make unaccounted sales, an assessee would also ensure that the corresponding purchases of raw materials/ traded goods would also be unaccounted, which are never recorded in its books of account and hence it is not necessary that there should also be proportionate deficit of traded goods, to conclude that there are unaccounted sales. Thus, this argument of the assessee is not accepted. (g) Thereafter, the assessee has attempted to bring forth the fact that if the ratio of deficit finished goods vis-à-vis turnover is applied instead of deficit packing material vis * hat a -vis turnover, the resultant unaccounted sales worked out would be much lower. In this respect, it is stated that packing material is also a component in respect of the sold items. The amount of deficit finished goods cannot be taken as a parameter for working out unaccounted sales because the finished goods marketed by the assessee are manufactured and sold continuously, where, the unaccounted raw materials used for unaccounted production are procured locally from Bikaner which can be easily replenished. Whereas, the packing materials are purchased by the assessee group from faraway places, which cannot be replenished easily. Thus, this argument of the assessee is also not acceptable. (h) Thereafter, the assessee has cited a plethora of judicial pronouncements to impress upon the fact that in such cases, the entire undisclosed sales cannot be taxed and that only the gross profit can be taxed. The judicial pronouncements cited by the assessee have been respectfully taken into consideration. (i) In respect of the initial investment, it is stated by the assessee that since there was no out of books purchase, there is no I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 10 requirement of initial investment to fund those purchases and that the stock recorded in the books are deemed to have been sold and hence there was no need for additional resources. It is further stated that initial investment theory comes into picture only when working capital is required to fund undisclosed sales. The argument of the assessee that there was no out of books purchase stands disposed off in view of the discussions made herein before in respect of the submission filed by the assessee. Since the assessee is engaged in manufacturing, it would require additional capital corresponding to at least a week's sale of unaccounted sale, which happens in cash and over the counters. The assessee has also confirmed this period as 7 days in the written submission. It does take a period of a week to complete the cycle from placmg the order for raw materials to realization of cash amount from unaccounted sale and the intermediate period gets consumed in manufacturing, packing, sale and transportation to the delivery point. Hence, at least seven days are required to complete this cycle. This argument of the assessee is, hence not accepted. However, in the arguments given in this respect in the written submission, it has been confirmed by the assessee that stock of at least 7 days would be necessary to carry on the business. 3.3 After considering the facts of the case and the arguments put forth by the assessee at all stages of its case, it is evident that the deficit stock of packing materials has arisen on account of unaccounted sales made by the assessee company. While search, on physical verification, the stock of packing material found from the premises of the company was of Rs. 1,70,08,273/-. As such, deficit of Rs 3,74,77,564/- was detected. Since the consumption of packing material vis-à-vis sales is 13.90%, this shortage of packing materials of Rs. 3,74,77,564/- I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 11 translates into unaccounted sales of Rs. 26,96,22,763/-. The gross profit disclosed by the assessee for the year under consideration is 11.32%. Applying this gross profit ratio, the gross profit earned by the assessee company from unaccounted cash sales of Rs. 26,96,22,763/- works out to Rs. 3,05,21,297/-. This amount of Rs. 3,05,21,297/- is liable to be added to the total income of the assessee for the year under consideration, the same being undisclosed profits earned from undisclosed sales. 3.4 The assessee is in the business of manufacturing and sale of various types of Namkeen' and 'Bhujia'. As discussed earlier, in order to carry out unaccounted sales, the assessee needs to invest an amount equivalent to average sales of at least seven days, which is the time required for the assessee to complete the cycle from the time of procurement of goods to realization of sales. The total undisclosed sales done by the assessee company during the year, as discussed above, is Rs. 26,96,22,763/- and the number of working days in the year till the date of search is 281 days. The gross profit of the assessee as worked out above is 11.32%. Thus, the per day sale made by the assessee is Rs. 9,59,512/- (269622763 281). The cost of the said sales to the assessee is Rs. 8,50,895/- (Rs. 959512 minus Rs. 108617 gross profit). I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 12 Thus, the initial capital deployed by the assessee company works out to Rs. 59,56,265/- (8,50,895 x 7). The above issues along with two other addition were proposed and the ultimately the assessment was finalised determining income of the assessee firm at Rs. 2,29,20,219/- as against the returned income of Rs. 29,76,560/-. 4. Aggrieved from the order of AO, the assessee preferred an appeal before the ld. CIT(A). Apropos to the grounds so raised the relevant finding of the ld. CIT(A) is reiterated here in below: Finding of the ld. CIT(A) on the profit addition 11. I have considered the relevant facts and the argument advanced. I have also considered the case law cited by the appellant. I find that the entire addition of 1.35 crores is arrived at by considering the shortage of packing material considered as used for making unaccounted sales on which the gross profit normally declared by the appellant is applied. I find from the impugned order that the appellant is not maintaining the records for packing material unlike that maintained for raw material and finished goods. Even the Ld. AO has held that the appellant does not maintain record of stock of packing material. If that be the case, it cannot be said that compared with the stock found on physical verification, the stock as per book records is excessive. Even if the stock of packing material is arrived at by taking the figure of opening stock of such packing material, adding thereto the purchases made during the year and reducing the consumption based on standard formula, the book records will never reduce the shortage or wastage. Wastage of packing material is a normal phenomenon in the type of business in which the appellant operates. As per the inventory prepared during the course of search, there are as many as 71 different items of packing material used by the appellant the main item of packing material is packing roles. The roles cannot be used till the last end and loose ends will always remain which are not used for packing the goods for sale. The same has to be discarded. Similarly while packing the goods in all likelihood, the pouch or the bag will tear off resulting into such wastage. As rightly contended by the appellant I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 13 there is no fixed formula of percentage of packing material being part of the cost of goods sold. The same varies between 13.9% and 16.25%. Therefore applying the formula of sales based on the consumption of packing material will never give the correct picture of the profitability or the income earned by the assessee. It is equally true that only packing material cannot be used for making sales. For sales not only the packing materials is required but also the raw material, the labour charges, the electricity etc. will go into production of the goods traded by the appellant. The only evidence found is shortage of packing material but even after conducting the search, there is no evidence found which results into unaccounted sales other than that declared by the appellant. To the extent the unaccounted sales are found, the appellant has declared additional income of 1.7 crores. As rightly contended by the appellant, even for making such unaccounted sales on which there is a profit of 1.7 crores is declared, it will require use of packing material which to a great extent will explain the shortage as worked out by the assessing officer. For earning profit of 1.70 crores, it can be out of sales of ₹ 15.01 crores. For sales of 15.01 crores, it will require consumption of packing material @ 13.90% of sales which will work out to be ₹2.09 crores. Thus if the same formula is applied as applied by the assessing officer, for earning the income of 1.7 crores, it will require use of packing material to the extent of ₹2.09 crores. In such circumstances the net shortage of stock will remain to the extent of 1.65 crores only. During the last five years of business, the appellant has not claimed wastage of packing material. If consumption of last five years is considered, the same is worked out to be 29.93 crores. Even if safest estimate is applied, the wastage will be app. 5% of consumption. Considering the wastage, it will explain the shortage of remaining amount. Thus after considering the wastage, there will be no shortage of packing material. It is also to be noted that no other evidence is found to suggest that such packing material was used for making sales outside books of accounts. Such sales will also require the use of raw materials and other components and only packing material cannot be considered as base for estimating unaccounted sales. 12. Counsel for the appellant has cited following judgments. I have considered the case laws cited by the appellant. Hon'ble Rajasthan High Court in the case of CIT V. Sulabh Marbles (P) Ltd. (165 Taxman 258) held thus: X X X X X 13. Hon’ble Income Tax Appellate Tribunal Ahmedabad in the case of ITO vs. Pragati Fashions (50 SOT 71) held thus: X X X X I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 14 14. Hon’ble Income Tax Appellate Tribunal Hyderabad in the case of DCIT vs. Balaji Steel Rolling Mills P. Ltd. in ITA No. 225/Hyd/2012 vide order dated 19.02.2016 (copy filed) held thus:- X X X X 15. The common thread running between all the three judgments is that merely on the basis of only electricity expenses, and without any evidence of use of other ingredients required for production, the production cannot be presumed so as to be considered as sales outside books of accounts and to make addition on such basis. In the present case, the only ingredient for manufacture and sale is presumed to be use of packing material and no other component required for production and sales. No evidence is also found for sale, other than that admitted by the appellant, as sales outside books of accounts. Thus applying the principle enunciated by Hon'ble Rajasthan High Court as also the ITAT, it can be held that mere shortage of packing material alone cannot be presumed to be for unaccounted production of Bhujia and Namkeen and also unaccounted sales so as to earn income out of same. I therefore delete the addition of ₹ 1, 35 ,21,297/- being considered as profit on alleged sales out of books of accounts due to shortage of packing materials found during search. Finding of the ld. CIT(A) for the initial investment addition “19. I have considered the relevant facts and argument advanced I notice that the entire addition is made on the presumption that when there is unaccounted sales which is worked out on the basis of shortage of packing material considered as used for sale of goods, should also have made initial investment for making such sales outside books of accounts. Accordingly the addition is made. Since the only basis for the addition is presumption of unaccounted sales due to shortage of packing material and since I have deleted the addition on account of unaccounted profit on such unaccounted sales arrived at due to shortage of packing materials, the presumption for having invested initial capital for making such unaccounted sales does not survive. Even otherwise there is no evidence found during search which suggests that the assessee has made certain initial investment. It is also settled law that the source as well as the application of income, both, cannot be taxed. Thus when the source of income being profit on unaccounted sales as admitted by the appellant is taxed, and since such profit is not found to have been applied or spent away, the same can be considered as available so as to explain the investment. I therefore delete the addition of 59,56,265/- 20. Grounds No. 3, 4, 5 and 6 are not pressed and hence these grounds are dismissed for want of prosecution. 21. At this juncture the appellant has raised additional ground raised by the appellant being ground No. 7. It is contended that Ld. assessing officer erred I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 15 in law and on the facts in not allowing benefit of extra surrender of the income of 1,10,54,000/- against the additions made in the return income and also in view of the facts that no other matching undisclosed assets were found during the course of search. 22. In this regard counsel for the appellant submitted that the telescoping of extra income declared during the course of search which is forming part of the disclosure of 6 crores is not identified as to against what type of defects such additional disclosure was made. Therefore if any addition on account of unaccounted sales and investment for earning such income is sustained, to that extent the same may be offset against the extra surrender of 1.10 crores offered by the appellant. It is further contended thus: "As mentioned hereinabove in the total surrender of Rs. 6,00,00,000 the appellant had allocated surrender to the extent of Rs. 4,89,46,000 towards the undisclosed assets/ expenses and no fault was found by the Id. AO in the same. However there was an additional surrender of Rs. 1,10,54,000 in this said offer for whichn no matching assets./ expenses were noticed and hence the appellant is eligible for the set off of the same towards additions made in the assessment. In the income determined for alleged unaccounted sales and alleged capital investment the Id. AO has allowed set off of Rs. 1.70 Crores only which was towards that particular head but has not allowed benefit for this above said extra surrender of Rs. 1,10,54,000. If not allowed, it will result into double taxation of the same income.” Admission of additional ground: 23. At the outset it is noted that the additional ground is purely legal in nature and on which no fresh finding of fact is required. Accordingly the said ground is admitted and is being adjudicated now. While dealing with the ground regarding addition of 1.35 crores, I have held that the same is not sustainable on facts as also in law. As regards addition of 59.56 lakhs, I find that the same is made on the basis that the appellant has made unaccounted sales of 26.96 crores which was derived by considering the shortage of packing material as sales outside books of accounts and for making such sales, it was presumed that the appellant must have invested certain initial capital for the same. I have deleted the said addition of a 59.56 lakhs also. Therefore the question of telescoping such income against the extra disclosure of Rs. 1.10 crores does not arise. However, the issue is decided independently for the reason that if any of the addition on account of profit on undisclosed sales or investment for unaccounted sales is sustained in further appeals, whether the same should be telescoped against the extra surrender of Rs. 1.10 crores declared by the appellant during the course of search. 24. I find that whereas all of the income declared during the course of search being item No. 1 to 5 narrated in para 7 of the impugned order, it has some basis like earning of income or applying such income. However the last item is unallocated surrender of 1.10 crores categorized as 'Miscellaneous Income I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 16 which is unconsumed' is neither against any income earned by the appellant nor against any application or investment/expenditure incurred by the appellant. Thus the surrender was purely voluntary without identifying any nature of income or nature of asset acquired out of such income. Neither during the course of search nor during the course of assessment proceedings was any other income found. Therefore if any income in the nature of profit on unaccounted sales because of shortage of packing material is sustained, the same can be considered as extra income surrendered by the appellant and to that extent no further addition needs to be made. Same reasoning will also apply against addition of 59.56 lakhs being unexplained investment for the purpose of earning extra income by way of unaccounted sales due to shortage of packing material. Thus if any addition is sustained on either of the above two counts, to the extent of extra surrender of Rs. 1.10 crores the same need not be made again as it will be telescoped against the extra surrender of Rs. 1.10 crores declared by the appellant during the course of search against which there is no evidence of earning such income and offered voluntary by the appellant. In the result, the appeal is partly allowed.” 5. Feeling dissatisfied with the order of the ld. CIT(A), the revenue preferred the present appeal on the grounds as reiterated herein above in para 2 challenging the finding of the ld. CIT(A) who has deleted the addition made by the ld. AO consequent to the search and seizure conducted at the premises of the assessee. The DR representing the revenue vehemently supported the arguments recorded in the assessment order. The ld. DR also relied upon the contention of the ld. AO raised when he recommended the present appeal. The contention of the ld. AO as relied upon by the ld. DR is reiterated herein below for the sake of convenience: “5.1 The decision of the Ld. CIT(A) on the issue of addition of Rs. 1,35,21,297/- on account of unaccounted sales is not acceptable for the following reasons:- I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 17 (a) The assessee has been disclosing closing stock of packing materials in its return of income from year to year and the audit reports u/s 44AB specifies that inventories have been physically taken at the end of financial year and valued at cost price and that the same has been certified by the management. It is further specified in the audit reports for all years that stock register has not been maintained for raw materials and finished goods. It does not specify anywhere that stock register is not maintained for packing materials. In the books of accounts prepared by the assessee for F.Y. 2014-15, it has disclosed closing stock of packing materials, which actually takes the form of stock as per books. Thus, working out deficit in stock of packing materials from the figures of opening stock of F.Y. 2015-16 in its books of account, purchases during that year till the date of search and consumption uptil date of search was a scientific way to arrive at stock of packing materials as per books and the same is not based on presumption. (b) As far as wastage of packing materials is concerned, the stock of the same as recorded in its books as on 31.03.2015 was physically verified by the management and thereafter certified (as per audit report u / s 44AB). Thus, wastage of packing materials for all earlier years upto 31.03.2015 is deemed to have been taken care of. Further, no stock of wastage of packing materials was found by the search party and no such claim was put forth by the assessee either during search or during post- search proceedings. It is also a fact that no stock of damaged/wastage packing materials is separately disclosed in the balance sheet as on 31.03.2015 or earlier years. (c) Apart from the formula applied in the assessment order, there is no other way to work out shortage of packing materials and this situation arose on account of deficiency on the part of the assessee to maintain stock records. However, as per audit report u/s 44AB, the assessee firm itself has certified stock of packing materials as on 31.03.2015 after making physical verification of the inventory. Thus, the formula applied is proper and it gives a correct picture of profitability/income. (d) It is true that in order to arrive at sales, not only packing materials but also raw materials and other inputs have to be considered. However, as discussed in the body of the assessment order, packing materials are purchased/stocked by the assessee in bulk as they are purchased by it from faraway places (with the name of the assessee, name of product, etc printed on it) which is consumed by the assessee over a long period of time. As far as raw materials are concerned, the same are bulky and are purchased locally as per requirement for a limited period and the same is replenished as per need. As far as finished goods, viz. Bhujia and Namkeen are concerned, the same are fast moving items and the same are manufactured and dispatched as per demand. Thus, in the case of the assessee firm, packing material deficit is a critical input suggesting unaccounted sales and the deficit in stock could not be replenished by it as the purchases are not made at short intervals. Further, the assessee has failed during the search as also during I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 18 the post search period and during assessment proceedings to explain as to what is the reason for deficit in stock of packing materials. (e) During the course of search, evidences were found in respect of unaccounted sales and the same has also been discussed in the body of the assessment order. The assessee has also admitted undisclosed income on that account. This means that the assessee is in the practice of indulging in unaccounted sales and it admitted undisclosed income on this account only to the extent of such documents and evidences found and seized. This fact cannot be ignored. The evidences found during search need not be consisting of all evidences of unaccounted sales. Any businessman would not keep such records of unaccounted sales after settlement of the dues receivable. As such, this ground of relief taken by the Ld. CIT(A) is not acceptable. (f) As far as the findings of the Ld. CIT(A) that even unaccounted sales corresponding to Rs. 1.70 crores declared by the assessee would require use of packing materials, is concerned, it is submitted that these unaccounted sales corresponding to disclosure of Rs. 1.70 crores was duly given credit while completing assessment in the case and only the differential amount of Rs. 1,35,21,297/- (Rs. 30521297 Rs.1700000) was added to its total income and brought to tax. (g) The findings of the Ld. CIT(A) that the assessee has not claimed wastage of packing materials in the last five years, is not acceptable, for the reasons that the assessee has been taking physical inventory of packing materials on 31st of March every year. This is a regular practice of the assessee. It has been so reported in the audit reports u/s 44AB for A. Υ. 2015-16 as also for all earlier years. The balance sheet or P&L account does not specify any stock of wastage and the assessee does not maintain any stock records. Hence, it is deemed that such wastage is not included in the stock of packing materials disclosed in the audit report and the return of income for A.Y. 2015-16. Thus, the opening stock of the year (as on 01.04.2015) in the books of the assessee firm does not include any wastage of packing materials. (h) The findings of the Ld. CIT(A) that no other evidence was found during search to suggest that such packing materials was used for making unaccounted sales, is not acceptable. The finding is of no substance because the assessee is not in the habit of maintaining any records of stock or consumption of packing materials. 5.2. The decision of the Ld. CIT(A) on the issue of initial capital investment is also not acceptable for the following reasons; (a) The assessee has not been able to explain at any stage as to how shortage/deficit arose in the stock of packing materials. There is no other use of packing materials except for packing its own products. This suggests that there is only one reason for the shortage/deficit of packing materials, which is its utilization for its own unaccounted sales. I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 19 (b) It is a fact that unaccounted funds needs to be deployed as initial investment for procurement of unaccounted raw materials and for other unaccounted expenses like labour, transportation, fuel, etc. Thus, the working of initial investment of Rs. 59,56,265/- made in the assessment order is proper and very much in place. (c) Such initial investment cannot be considered as an application of unaccounted income earned during the year because this investment is first made and income is earned thereafter. As such, it does not result in double taxation. 6. In view of the above facts, the decision of the Ld. CIT(A) is not acceptable on both the issues. Accordingly, appeal to the Hon'ble ITAT is recommended on both these issues. The tax effect of these issues is Rs. 60,18,566/-, which is above the monetary lims prescribed in Circular no. 3/2018 dated 11.07.2018 issued by the CBDT.” The ld. DR vehemently argued that the ld. AO has based on the above contention made the addition after considering the submission of the assessee. The ld. DR thus relied upon the detailed working made in para 6.5 page 29 of the assessment order and submitted that the addition made by the ld. AO be sustained and that of the order of the ld. CIT(A) be set aside. 6. Per contra, the ld. AR of the assessee supported the order of the ld. CIT(A) who has discussed all the aspect of the matter and after considering the detailed submission has directed to delete the addition. Since, the ld. AR of the assessee has relied upon the detailed finding based on the submission made by the assessee which is forming part of I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 20 the order of the ld. CIT(A) the same is not repeated to avoid the repetition. 7. We have heard the rival contentions and perused the material placed on record. The brief facts related to the issue on hand is that during the course of the search the stock of the assessee company was physically verified at the business premises including the stock lying in the cold storage and other premises. The total value of the stock physically found was determined for an amount of Rs. 4,33,02,565/-. Whereas the value of goods as per the books of accounts was determined at Rs. 9,80,32,662/-. Thus, the shortage of stock found during the search operation for an amount of Rs. 5,47,30,097/-, which also included deficit stock of raw material and finished goods. Thus, deficit stock of finished goods was also found during the search. The items dealt with the by the assessee are ‘Namkeen and Bhujia’, which are fast moving items and the brand of the assessee is demanding in the market. Thus, unaccounted production and sale of finished goods occurs continuously on a day to day basis. Accordingly, the corresponding raw materials are also purchased on a continuous basis and the stock replenished to the maximum extent is also possible for raw material. Whereas same is not in the case of printing material, since specific I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 21 printing is required on packing materials other than by way of unaccounted sale of traded items. Further, documents and evidences seized from the premises of the assessee contains order slip for delivery of goods wherein the value of goods is not mentioned. Many of the loose papers were in the form of bills / estimates which were not recorded in the books of accounts found at the time of search. These loose paper also pertains to purchases of raw materials by the assessee. Thus, in order to make unaccounted sales, an assessee would also ensure that the corresponding purchases of raw materials / traded goods would also be unaccounted and the same were never recorded in the books. Thus, based on this contention the ld. AO noted that since there is deficit in stock of packing material and the same is on account of unaccounted sales made by the assessee company. Thus, based on these finds the ld. AO found that stock of packing material as per books amounts to Rs. 5,44,85,837/- whereas the physical stock found for an amount of Rs. 1,70,08,273/- and thereby computed the deficit of Rs. 3,74,77,564/-. As the consumption of packing material vis a vis sales is 13.90 % the deficit of packing material converted to unaccounted sales for Rs. 29,96,22,763/-. The gross profit disclosed by the assessee for the year under consideration is 11.32 % and applying that profit the gross profit was worked at Rs. 3,05,21,297/- and treated as undisclosed profit I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 22 earned by the assessee. In the search the assessee the assessee has disclosed a sum of Rs. 1,70,00,000/- being the amount of profit earned and invested as advances to agriculturist balance amount of Rs. 1,35,21,297/- was considered as undisclosed profit and the same was added in addition to the disclosure already made by the assessee. The assessing officer has also worked out the initial capital by considering the total sales of Rs. 26,96,22,763/- divided into 281 working days per day sales comes to 9,59,512/- after reducing the profit margin @ 11.32 % the cost of per day goods computed at Rs. 8,50,895/- and the same was considered as 7 days unaccounted sales cycle and the same was considered for an amount of Rs. 59,56,265/- as initial investment. This two addition of Rs. 1,35,21,297 and Rs. 59,56,265/- was disputed by the assessee before the ld. CIT(A) who has after considering the submission of the assessee deleted that two addition and the revenue is aggrieved from the finding of the ld. CIT(A) filed the present appeal supporting the finding of the ld. AO. The bench noted that the assessee has already based on the working presented before him has surrendered income of Rs. 1,70,00,000/- and the balance addition is solely made on the basis of shortage of packing material considered as used for sale of goods and initial investment as worked out on the presumption and assumption. Though the disclosure of Rs. 1,70,00,000/- is made based I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 23 on the seized document corresponding to the income and investment found. The addition made at the time of the assessment is solely based on the presumption of unaccounted sales due to shortage of packing material. We note that the shortage of packing material was arrived at by taking the figure of opening stock adding to it purchases and reducing the consumption based on the standard formula without considering the damage or wastage of packing material and the same has not been considered while calculating the difference. As per the inventory prepared at the time of search 71 different items of packing material used by the assessee and the important item of the packing material is the roles used to pack the packed foods items. The roles cannot be used till the last end and loose ends will always remain which are not used for packing the finished goods for sale. The same is required to discarded similarly at the time of quality check of the goods the same is also rejected for having the inferior packing, damaged or not as per the quality of goods required as per the government standards. Thus, applying the simple ratio of consumption of packing material will never give the correct picture of the sales. Not only that for making the goods in addition to the raw material, labour, fuel, electricity, delivery expenses etc. will also attracted. At the time of search only shortage of packing material found and the other evidence of advance corresponding income I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 24 is already disclosed by the assessee. This additional income disclosed along with the shortage of packing material if counted with the wastage and discarded goods packing material which has not been claimed by the assessee. The ld. CIT(A) considered that the assessee has not considered the waste of packing material since last 5 years and therefore, he has considered the consumption of five year at Rs. 29.93 crore and 5 % if considered as wastage or rejection then the difference of packing material found is considered as explained and thus this shortage is considerable found in the range of 5 % the additional income cover the profit earned by the assessee and no separate addition whatsoever was required. In the light of the discussion so recorded the ground no. 1 raised by the revenue stands dismissed. 8. Since, we have decided in the ground no. 1 that no further addition of profit is required as the assessee has already disclosed a sum of Rs. 1,70,00,000/- which is also cover the initial amount and therefore, the ground no. 2 raised by the assessee has not merits based on the detailed finding recorded herein above and we note that the same finding is recorded in the order of the ld. CIT(A) and therefore, we hold that the ground no. 2 has not merits and the same is dismissed. I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 25 9. In the result, the appeal filed by the revenue stands dismissed. Order pronounced under Rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1963 by placing the details on the notice board. Sd/- Sd/- (Dr. S. Seethalakshmi) (Rathod Kamlesh Jayantbhai) Judicial Member Accountant Member Ganesh Kumar, PS Copy of the order forwarded to: (1)The Appellant (2) The Respondent (3) The CIT (4) The CIT (Appeals) (5) The DR, I.T.A.T. True Copy By order Date Initial 1. Draft dictated on Sr.PS/PS 2. Draft placed before author Sr.PS/PS 3. Draft proposed & placed before the Second Member JM/AM 4. Draft discussed/approved by Second Member JM/AM 5. Approved Draft comes to the Sr. P.S./P.S. Sr.PS/PS 6. Kept for pronouncement on Sr.PS/PS 7. File sent to the Bench Clerk Sr.PS/PS 8. Date on which file goes to the Head Clerk 9. Date on which file goes to the AR 10. Date of dispatch of Order I.T.A. No. 434/Jodh/2018 Assessment Year: 2016-17 26