ACIT, Ludhiana V. M/s Sodagar Woollen Mills P. Ltd., Ludhiana

ITA 561/CHANDI/2009

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8519 (ITAT-CHANDIGARH)
• Duration Of Justice: 6 year(s) 8 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-01-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 07-10-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 25-05-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K MITTAL
• Keywords: Income from undisclosed sources

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI H.L.KARWA, VICE PRESIDENT AND MS. RANO JAIN, ACCOUNTANT MEMBER ITA NO.542/CHD/2009 (ASSESSMENT YEAR : 2005-06) M/S SODAGAR WOOLLEN MILLS (P) LTD., VS. THE A.C.I.T., 592/1, WAIT GANJ, CIRCLE III, LUDHIANA. LUDHIANA. PAN: AACCS4598J AND ITA NO.561/CHD/2009 (ASSESSMENT YEAR : 2005-06) THE A.C.I.T., VS. M/S SODAGAR WOOLLEN MILLS (P) LTD., CIRCLE III, 592/1, WAIT GANJ, LUDHIANA. LUDHIANA. PAN: AACCS4598J (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI VINEET KRISHAN & VIJAY GUPTA DEPARTMENT BY : SHRI S.K. MITTAL, DR DATE OF HEARING : 02.11.2015 DATE OF PRONOUNCEMENT : 29.01.2016 O R D E R PER RANO JAIN, A.M . : BOTH THE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEAL S), JALANDHAR DATED 26.2.2009 ASSESSMENT YEAR 2005-06. 2 2. BRIEFLY, THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURIN G, EXPORT AND TRADING OF HOSIERY GOODS. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER EXAMI NED THE MONTH-WISE DETAILS OF DIFFERENT GOODS AND SERVI CES USED FOR PRODUCTION. FROM THE DETAILS HE OBSERVED SOME GLARING DISCREPANCIES. FIRST DISCREPANCY NOTICED B Y HIM WAS WITH REGARD TO PERCENTAGE OF WASTAGE WITH RESPE CT TO QUANTITY ISSUED FOR MANUFACTURING/PRODUCTION. THES E DETAILS WERE MADE IN THE FORM OF TABLE PRODUCED BY HIM AT PAGE 2 OF HIS ORDER. FROM THE ANALYSIS OF THIS TAB LE, THE ASSESSING OFFICER OBSERVED THAT THE PERCENTAGE WITH RESPECT TO QUANTITY ISSUED FOR MANUFACTURING OR PRODUCTION VARIED FROM 0% TO INFINITY AND ALSO THE WASTAGE IN THE MONTHS OF NOVEMBER AND DECEMBER, 2004 CAME T O 636% AND 876.7%. IN THE MONTH OF JANUARY, 2005, NO MATERIAL IS SHOWN TO HAVE BEEN ISSUED FOR PRODUCTIO N. NO PRODUCTION HAS BEEN CARRIED OUT STILL WASTAGE IS SH OWN TO BE 432 KGS. THE NEXT DISCREPANCY NOTICED BY THE ASSESSING OFFICER WAS WITH REGARD TO WAGES VIS--VI S QUANTITY ISSUED FOR MANUFACTURING. THE ASSESSING O FFICER NOTED THAT FOR THE PERIOD FROM APRIL, 2004 TO OCTOB ER, 2004, THE WAGES OF RS.9,37,694/- HAVE BEEN INCURRED FOR MANUFACTURING 240461.542 KGS OF RAW MATERIAL. ON T HE OTHER HAND, FOR THE MONTHS OF NOVEMBER, 2004 TO MAR CH, 2005, ONLY 6128 KGS OF RAW MATERIAL WAS USED FOR 3 PRODUCTION BUT WAGES OF RS.21,11,687/- HAS BEEN PAI D. THE ASSESSING OFFICER ALSO NOTED THAT THE CONSUMPTI ON OF NEEDLES SHOWN BY THE ASSESSEE DURING THE PERIOD APR IL, 2004 TO SEPTEMBER, 2004 WAS RS.1,57,898/- FOR THE PRODUCTION OF RAW MATERIAL OF 227505.832 KGS., WHIL E FOR THE MONTHS OCTOBER, 2004 TO MARCH, 2005, THE RAW MATERIAL CONSUMED WAS ONLY 38079.614 KGS., WHEREAS THE CONSUMPTION OF NEEDLES WAS RS.5,47,128/-. THE ASSE SSING OFFICER FURTHER EXAMINED THE DYEING ACCOUNT OF THE ASSESSEE. FROM THE ANALYSIS OF MONTH-WISE DETAILS OF QUANTITY AND DYEING CHARGES, THE ASSESSING OFFICER NOTED THAT THE DYEING RATE PER KG. FOR THE MONTH OF NOVEM BER, 2004 COMES TO RS.322.82 PER KG., WHILE FOR THE MONT HS APRIL 2004 AND JANUARY, 2004 THE RATE COMES TO RS.1 1.13 PER KG AND RS.11.66 PER KG. RESPECTIVELY. THE VAR IATION OF DYEING RATE FROM RS.4.04 OF THE COST PRICE OF TH E YARN TO RS.291.3% OF THE COST OF YARN PER KG. IS NOT NORMAL . AFTER ANALYZING THE REPLY OF THE ASSESSEE THE ASSES SING OFFICER OBSERVED THAT WHEREAS FOR THE PERIOD 1.4.20 04 TO 31.10.2004, 71.70% OF THE TOTAL PRODUCTION WAS CARR IED OUT, PERCENTAGE OF TOTAL WAGES CAME TO 30.75%, WHIL E ON THE OTHER HAND, FOR THE PERIOD 1.11.2004 TO 31.3.20 05 AGAINST PERCENTAGE OF TOTAL PRODUCTION OF 28.3%, PERCENTAGE OF TOTAL WAGES COMES TO 69.25%. FROM T HIS, THE ASSESSING OFFICER CONCLUDED THAT THE PROPORTION ATE PRODUCTION OF GOODS HAD NOT BEEN DECLARED WITH RESP ECT OF QUANTUM OF WAGES INCURRED FOR THE PERIOD FROM NOVEM BER, 2004 TO MARCH, 2005. IN VIEW OF THESE DISCREPANCIE S, THE 4 ASSESSING OFFICER REJECTED THE BOOKS OF THE ASSESSE E AS PER SECTION 145(3) OF THE ACT AND RECALCULATED THE GROS S PROFIT. FOR THIS, HE CALCULATED THE GROSS PROFIT FOR THE YE AR UNDER CONSIDERATION AFTER EXCLUDING RENT, INTEREST RECEIV ED, PREMIUM ON DEPB AND CENTRAL EXCISE REFUND. AFTER THESE ADJUSTMENTS, THE GP WAS CALCULATED ON THE COST OF G OODS SOLD, WHICH CAME TO 5.069% FOR THE YEAR UNDER CONSIDERATION. SIMILAR EXERCISE WAS CARRIED OUT FO R COMPUTING THE GROSS PROFIT WITH RESPECT TO THE CASE OF THE GOODS SOLD FOR ASSESSMENT YEAR 2004-05 WHICH CAME T O 24.897%. FROM THIS, THE ASSESSING OFFICER OBSERVED THAT THERE IS DECLINE IN GP RATE OF 19.828%. THE ASSESS EE FILED DETAILED SUBMISSIONS WITH REGARD TO FALL IN GP. TH E ASSESSING OFFICER, HOWEVER, REJECTED ALL THE CONTEN TIONS OF THE ASSESSEE. THE GP FOR ASSESSMENT YEAR 2004-05 I .E. 24.897% WAS ADOPTED FOR ESTIMATING THE GP FOR THE Y EAR UNDER CONSIDERATION AT RS.1,24,11,876/-. AFTER GIV ING CREDIT OF GP AS WORKED OUT BY THE ASSESSING OFFICER FOR THE YEAR UNDER CONSIDERATION, THE BALANCE ADDITION OF RS.98,84,430/- WAS MADE BY THE ASSESSING OFFICER. 3. FURTHER THE ASSESSING OFFICER NOTED THAT THE WAGES FOR THE SECOND PERIOD WERE 2.25 TIMES AS COMP ARED TO THE FIRST PERIOD. TAKING A LIBERAL VIEW, THE AS SESSING OFFICER CAME TO THE CONCLUSION THAT THE PRODUCTION FOR THE SECOND PERIOD WAS ATLEAST TWICE AS COMPARED TO THE FIRST PERIOD. THEREFORE, THE PRODUCTION OF 50,524 DOZENS OF ACCESSORIES, 88,704 DOZENS TOPAS AND 3,10,368 PIECE S OF 5 KNITTED GARMENTS WERE NOT TO BE RECORDED IN THE BOO KS OF ACCOUNT. HE COMPUTED RAW MATERIAL REQUIRED FOR SUC H PRODUCTION ON PROPORTIONATE BASIS BASED ON THE WHOL E YEAR DATA. HE FURTHER ASSUMED A PRODUCTION CYCLE OF ONE MONTH FOR MAKING THE FINISHED GOODS READY FOR SALE. HE WORKED OUT THE PEAK OF THE RAW MATERIAL INVESTMENTS ON MONTHLY BASIS AT 85,598 KGS., THE COST OF WHICH WAS WORKED OUT TO 94,85,114. HE MADE ADDITION OF THIS AMOUNT AS UNDISCLOSED INVESTMENT IN THE PURCHASE OF RAW MATERIAL BY THE ASSESSEE. 4. THE ASSESSING OFFICER ALSO WORKED OUT THE GROSS PROFIT ON THE SALE OF ABOVE SAID PRODUCTION @ 24.89 %, WHICH WORKED OUT TO RS.3,60,844/- FOR EVERY CYCLE A ND FOR THE TOTAL FOR FIVE CYCLES ANOTHER ADDITION OF RS.1,18,04,224/- WAS MADE. 5. AS REGARDS THE EXTRA WAGES PAID BY THE ASSESSEE AND ADDITIONAL PRODUCTION ON ACCOUNT OF EXCESS CONSUMPTION OF NEEDLES AS WELL AS ON EXCESS DYEING CHARGES, THE ASSESSING OFFICER DID NOT MAKE ANY SEP ARATE ADDITION AND TELESCOPED THE SAME WITH THE ADDITION MADE ON ACCOUNT OF WAGES. 6. AGGRIEVED BY THIS, THE ASSESSEE WENT IN APPEAL BEFORE THE LEARNED CIT (APPEALS) AND MADE ELABORATE SUBMISSIONS, WHICH ARE REPRODUCED BY THE LEARNED CI T (APPEALS) IN HIS ORDER AT PAGES 8 TO 19. THE LEARN ED CIT (APPEALS) FORWARDED THE SUBMISSIONS TO THE ASSESSIN G 6 OFFICER, WHO OFFERED HER COMMENTS VIDE REMAND REPOR T DATED 27.6.2008. A SUMMARY OF THIS REPORT IS ALSO STATED AT PAGES 19 TO 22 OF THE CIT (APPEALS)S ORDER. TH E ASSESSEE FILED REJOINDER TO THE REMAND REPORT, THE CONTENTS OF WHICH ARE REPRODUCED BY THE LEARNED CIT (APPEALS) IN HIS ORDER AT PAGES 22 TO 26. THE ASS ESSEE MADE FURTHER SUBMISSIONS BEFORE THE LEARNED CIT (APPEALS), WHICH WERE SENT TO THE ASSESSING OFFICER FOR FURTHER COMMENTS. THE ASSESSING OFFICER OFFERED HE R COMMENTS VIDE LETTER DATED 7.1.2009. IN THIS REPOR T, THE ASSESSING OFFICER SUBMITTED THAT THE ASSESSEE WAS A SKED TO FILE DETAILS OF PRODUCTION DURING THE ASSESSMENT PROCEEDINGS, WHICH WERE PROVIDED BY THE ASSESSEE IN ITS REPLY DATED 10.9.2007. AN ITEM-WISE DETAIL WHICH W AS FILED BEFORE THE LEARNED CIT (APPEALS) WAS DIFFEREN T FROM THE SUBMISSIONS MADE BEFORE THE ASSESSING OFFICER. SHE POINTED OUT THAT NUMBER OF MUFFLERS, SCARFS, KANPAT TIS AND GLOVES MANUFACTURED DURING THE ASSESSMENT YEAR WAS 43,905 DOZENS AS SUBMITTED BEFORE THE ASSESSING OFF ICER AND FIGURE BEFORE THE LEARNED CIT (APPEALS) WAS 44, 337 DOZENS. SHE ALSO NOTED THAT THERE WAS SUBSTANTIAL INCREASE ONLY IN THE PRODUCTION OF GLOVES FROM THE PRECEDING YEAR TO THE CURRENT YEAR. THE ASSESSING OFFICER REITERATED THAT TOPAS WERE MANUFACTURED IN THE PREC EDING YEAR ALSO. THE ASSESSING OFFICER PREPARED A CHART SHOWING MONTH-WISE MANUFACTURE OF GLOVES AND TOPAS IN FINAN CIAL YEAR 2004-05 AND HAS POINTED OUT THAT THE MONTH-WIS E WASTAGE DID NOT CORRESPOND TO THE PRODUCTION. SHE NOTED 7 WITH SURPRISE THAT NOT A SINGLE KILOGRAM OF WASTAGE WAS PRODUCED DURING THE FIRST THREE MONTHS OF THE YEAR WHEN THERE WAS PRODUCTION OF GLOVES AS WELL AS OTHER ITE MS IN THESE MONTHS. THE ASSESSEE FILED REJOINDER TO THE SAID REMAND REPORT, WHICH IS REPRODUCED IN CIT (APPEALS) S ORDER AT PAGES 32 TO 40. 7. AFTER CONSIDERING THE VARIOUS SUBMISSIONS OF TH E ASSESSEE AS WELL AS REMAND REPORT FILED BY THE ASSE SSING OFFICER, THE LEARNED CIT (APPEALS) CONFIRMED THE AC TION OF THE ASSESSING OFFICER IN REJECTING THE BOOKS OF ACC OUNT. HOWEVER,, HE DIRECTED THE ASSESSING OFFICER TO ESTI MATE THE GP @ 21.5% INSTEAD OF 24.89% TAKEN BY THE ASSES SING OFFICER. THE ADDITION MADE BY THE ASSESSING OFFICE R ON ACCOUNT OF PEAK INVESTMENT IN PURCHASE OF RAW MATER IAL AT RS.94,85,932/- WAS DELETED BY THE LEARNED CIT (APPE ALS). FURTHER HE DIRECTED THE ASSESSING OFFICER TO RECOMP UTE THE UNACCOUNTED GROSS PROFIT FOR THE SECOND PERIOD ON T HE FACTS OF THE FIRST PERIOD THEREBY ALLOWING RELIEF O F RS.72,24,692/- TO THE ASSESSEE. FURTHER HE ESTIMAT ED THE WASTAGE @ 18% INSTEAD OF 22.56% CLAIMED BY THE ASSE SSEE. HE DIRECTED THE ASSESSING OFFICER TO RE-WORK THE AD DITION TO BE MADE ON ACCOUNT OF GP AND WASTAGE AND TO TELE SCOPE ONE ADDITION AGAINST OTHER AND TAKE THE HIGHER OF T HE TWO FOR THE FINAL ADDITION. 8. AGGRIEVED BY THIS ORDER, BOTH THE DEPARTMENT AS WELL AS THE ASSESSEE HAS COME UP IN APPEAL. THE DEPARTMENT IS AGAINST THE RELIEF GIVEN TO THE ASSES SEE 8 WHILE THE ASSESSEE IS AGGRIEVED BY THE ADDITION SUS TAINED BY THE LEARNED CIT (APPEALS). THE FIRST ISSUE TO B E DECIDED BY US IS WHETHER THE REJECTION OF BOOKS OF ACCOUNT AND ESTIMATION OF GP IS CORRECT OR NOT. THIS ISSUE HAS BEEN CONSIDERED BY THE LEARNED CIT (APPEALS) IN HIS ORDE R AT PAGE 40 TO 48. WE ARE IN TOTAL AGREEMENT WITH THE FINDINGS GIVEN BY THE LEARNED CIT (APPEALS). THERE ARE MANY REASONS ON THE BASIS OF WHICH THE ASSESSING OF FICER HAS REJECTED THE BOOKS MAINTAINED BY THE ASSESSEE. THE MAIN REASON WAS THE LEARNED CIT (APPEALS) TO CONFIR M THE ACTION OF THE ASSESSING OFFICER IN REJECTING THE BO OKS OF ACCOUNT THAT THE ASSESSEE HAS NOT MAINTAINED WASTAG E REGISTER WHICH IS CRUCIAL RECORD TO BE MAINTAINED I N THIS KIND OF ACTIVITIES. THE LEARNED CIT (APPEALS) HAS RIGHTLY REJECTED THE CONTENTION OF THE ASSESSEE THAT NO OTH ER DISCREPANCY IN THE BOOKS OF ACCOUNT AND OTHER RECOR DS HAVE BEEN FOUND BY THE ASSESSING OFFICER AND NO EVI DENCE OF ANY PURCHASE OR SALE OUTSIDE THE BOOKS OF ACCOUN T WAS THERE. EVEN IF IT WAS IMPRACTICAL TO MAINTAIN A DA Y-TO-DAY RECORD OF WASTAGE, THERE HAS TO BE CERTAIN KIND OF DOCUMENTATION OF WASTAGE. IN THE ABSENCE OF STOCK RECORD OF WASTAGE PRODUCTION, THE OTHER RECORDS OF THE ASS ESSEE CANNOT BE RELIED ON SINCE THERE ARE MANY GLARING IN STANCES BROUGHT OUT BY THE ASSESSING OFFICER IN ANALYZING T HE WASTAGE AS SHOWN BY THE ASSESSEE. THERE ARE INSTAN CES WHERE EVEN WITHOUT ANY PRODUCTION THERE IS SUBSTANT IAL AMOUNT OF WASTAGE AS COMPARED TO THE INSTANCES IN W HICH A VERY HIGH AMOUNT OF PRODUCTION DOES NOT YIELD ANY 9 WASTAGE. NONE OF HIS REPLIES TO THE ASSESSING OFFI CER AS WELL AS VARIOUS SUBMISSIONS FILED BEFORE THE LEARNE D CIT (APPEALS), THE ASSESSEE HAD BEEN ABLE TO BRING ON R ECORD THE REASON OF SUCH GLARING MISTAKES. THE ASSESSEE S CONTENTION THAT MONTH-WISE WASTAGE CAN VARY DEPENDI NG ON THE ITEMS PRODUCED DURING THE MONTH IS QUITE REASONABLE, STILL IN THE ABSENCE OF ANY SUCH RECORD BEING MAINTAINED, SUCH CONTENTION CANNOT BE VERIFIED. TH E OTHER CONTENTION RAISED BY THE ASSESSEE THAT IT HAD SOLD AND EXPORTED THE ARTICLES. REGARDING THIS, THE ASSESSING OFFICER HAS POINTED OUT IN HER REMAND REPORT THAT T HE HIGHER SALES IN THE LOCAL MARKET HAD BEEN MADE IN T HE PRECEDING YEAR. IN THIS BACKGROUND, WE ARE OF THE VIEW THAT THE BOOKS OF ACCOUNT HAD BEEN RIGHTLY REJECTED BY THE ASSESSING OFFICER. 9. AS REGARDS THE ESTIMATION OF GP, THE FIRST ISSU E WAS THAT THE MAIN REASON FOR DIFFERENCE BETWEEN THE GP WORKED OUT BY THE ASSESSING OFFICER AND THAT BY THE ASSESSEE IS THAT THE ASSESSEE HAS TAKEN INTO ACCOUN T CENTRAL EXCISE REFUND AND DEPB ON THE CREDIT SIDE O F THE ACCOUNT FOR WORKING OUT THE GP, WHILE THE ASSESSING OFFICER WORKED OUT THE GP BY EXCLUDING THE SAID ITE MS. HE OBSERVED THAT THESE INCOMES PERTAINED TO PROFIT & L OSS ACCOUNT SINCE THE DEPB AND EXCISE REFUND ARE POLICY VARIABLES AND ARE EXTERNALLY DETERMINED AND DO NOT REFLECT THE PROFITABILITY OF THE ASSESSEES BUSINESS. AS R EGARDS 10 DEPB, WE WOULD LIKE TO REFER PARA 11.1 AT PAGE 41 O F CIT (APPEALS)S ORDER, WHICH READS AS UNDER : 11.1 COMING TO THE ISSUE OF DEPB AGAIN THOUGH THE AO HAS OBJECTED FOR CONSIDERING THE SAME FOR THE PU RPOSE OF GP, 1 AM MORE INCLINED TO GO WITH THE CONTENTION OF TH E ID. COUNSELS THAT THE DEPB IS GIVEN ONLY TO NEUTRALIZE L OSS TO THE EXPORTERS AGAINST INTERNATIONAL PRICE COMPETITION AND THEREFORE, TO BE TAKEN INTO ACCOUNT FOR KNOWING THE GP IN A CASE. EVEN OTHERWISE, AN EXPORTERS FIXES/QUOTES HIS SALE PRICE ON THE GOODS TO BE EXPORTED TAKING INTO ACCOUN T THE EXPORT INCENTIVES TO BE RECEIVED ON SUCH EXPORTS. THE DEPB BEING SUCH ONE OF THE EXPORT INCENTIVES ONLY . I AM ALSO OF THE OPINION THAT THE SAME SHOULD BE TAKEN INTO ACCOUNT FOR FINDING OUT OF GROSS PROFIT RATE IN THE CASE OF AN EXPORTER AS THE APPELLANT. THEREFORE, DEPB IS AL SO TO BE TAKEN IN TO ACCOUNT FOR WORKING OUT GP IN THIS CA SE. 10. WE FIND NO INFIRMITY IN THE SAID FINDINGS GIVE N BY THE LEARNED CIT (APPEALS) SINCE THE DEPB IS GIVE N ONLY TO MAKE-GOOD THE LOSS TO THE EXPORTERS AGAINST INTERNATIONAL PRICE FLUCTUATION. THIS IS DIRECTLY R ELATED TO THE PROFITABILITY OF THE ASSESSEE, HENCE TO BE TAKE N INTO ACCOUNT FOR WORKING OUT THE GP. AS REGARDS THE EX CISE DUTY REFUND TO BE TAKEN FOR WORKING THE GP, THE LEA RNED CIT (APPEALS) HAS VERY CORRECTLY HELD THAT THOUGH C ENTRAL EXCISE REFUND AMOUNT IS NOT TAKEN INTO ACCOUNT ON T HE CREDIT SIDE, IT WOULD GIVE MISLEADING RESULTS. NOT CONSIDERING THE EXCISE DUTY REFUND ON THE CREDIT SI DE OF THE PROFIT & LOSS ACCOUNT FOR WORKING THE GP CANNOT BE JUSTIFIED. THEREFORE, WE UPHOLD THE ACTION OF THE LEARNED 11 CIT (APPEALS) IN DIRECTING THE ASSESSING OFFICER TO TAKE EXCISE DUTY REFUND AND DEPB FOR WORKING OUT GP. 11. THE OTHER CONTENTION OF THE ASSESSEE THAT RAW MATERIAL COST INCREASED MORE THAN THE PER UNIT UTIL IZATION OF THE SALE RATE. THE LEARNED CIT (APPEALS) HAS RI GHTLY POINTED OUT THAT THE SAID CONTENTION IS NOT VERIFIA BLE. THE GP HAS BEEN ESTIMATED AT 21.5% BY THE LEARNED CIT (APPEALS). 12. WE DO NOT FIND ANY INFIRMITY IN THE SAID FINDI NGS OF THE LEARNED CIT (APPEALS) SINCE WE OBSERVE THAT ON A VERY CAREFUL AND SCIENTIFIC APPLICATION OF MIND GIV ING DUE REGARD TO EVERY FACT AND FIGURE, THE LEARNED CIT (A PPEALS) HAS ESTIMATED THE GP ON THE BASIS OF COST OF PRODUC TION TO BE 21.5%. IN VIEW OF THE ABOVE, WE CONFIRM THE ACT ION OF THE LEARNED CIT (APPEALS) IN CONFIRMING THE REJECTI ON OF BOOKS AND ESTIMATING THE GP AT 21.5%. THIS TAKES C ARE OF GROUND NO.1 OF THE ASSESSEES APPEAL AND GROUND NO. (I) OF DEPARTMENTAL APPEAL. 13. THE GROUND NOS.2 AND 3 OF ASSESSEES APPEAL READ AS UNDER : 2. THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E LD. CIT(APPEALS) GRAVELLY ERRED IN ESTIMATING THE WASTAG E AT 18% INSTEAD OF 22.56% CLAIMED BY THE APPELLANT. 3. THAT IN THE FACTS AND CIRCUMSTANCE OF THE CASE THE LD CIT(A) GRAVELY ERRED IN DIRECTING THE ID. ASSESSING OFFICER TO REWORK THE ADDITION TO BE MADE ON ACCOUNT OF GP AND WASTAGE BA SED ON THE ESTIMATES AND TO TELESCOPE ONE ADDITION AGAINS T-THE 12 OTHER AND TAKE THE HIGHER OF THE TWO FOR THE FINAL ADDITION. 14. THE ISSUE OF WASTAGE BASED ON ESTIMATE AND TELESCOPE OF THE SAME HAS BEEN DISCUSSED BY THE LEA RNED CIT (APPEALS) AT PAGE 49, PARA 12.2 OF HIS ORDER, W HICH READS AS UNDER : 12.2 I AM, HOWEVER, FOR THE REASONS DISCUSSED ABOVE , NOT CONVINCED ABOVE THE METHOD OF COMPUTING THE ADDITIO NAL INCOME EARNED BY THE APPELLANT. THE AO HAS ESTIMATED T HE ADDITION ON ACCOUNT OF GP BY TAKING THE ACTUAL GP @ 24.897% AS AGAINST HIS CALCULATION OF THE DECLARED GP AT 5.069% . I HAVE ALREADY HELD THAT THE NET FALL IN GP RATE IS ONLY 8.35 %. THIS IS PARTLY EXPLAINED BY THE INCREASE IN COST OF RAW MATER IAL AND THE STRENGTHENING AGAINST THE RUPEE AGAINST THE DOL LAR. THE SALES OF THE APPELLANT HAVE ALSO INCREASED BY ABOUT 1.75 TIM ES. AS REGARDS WASTAGE, CONSIDERING THE VARIOUS SUBMISS IONS DISCUSSED ABOVE, 1 WOULD ESTIMATE THAT THE WASTAGE RATE WOULD HAVE INCREASED TO AROUND 18% AS AGAINST 13.34% IN THE PREVIOUS YEAR. THIS ESTIMATE IS BASED ON THE HIGHER PRODUCTION OF GLOVES AND PAJAMIS TO SOME EXTENT AND BY THE NEW PRODUCTION OF TOPAS AS HAS BEEN DISCUSSED EARLIE R, AS WELL AS LOWER PRODUCTION OF MUFFLERS ETC. WHICH HAVE LOW ER WASTAGE. THE EXCESS WASTAGE OF 4.56% (22.56% MINUS 18%) IS ESTIMATED TO HAVE BEEN SOLD AT THE AVERAGE RATE OF SA LE OF RS. 254.53 PER KG OF FINISHED PRODUCTS (TOTAL SALES DIVIDED BY WEIGHT OF GOODS SOLD). NO DEDUCTION AGAINST THIS SALE O N ACCOUNT OF MANUFACTURING EXPENDITURE OR RAW MATERIAL E TC. IS ALLOWED, SINCE THE SAME IS ALREADY DEBITED IN THE ACCOU NTS OF THE ASSESSEE AND THE ENTIRE EXCESS SALE CONSIDERATIO N IS TREATED AS UNDISCLOSED INCOME. THE ADDITIONAL SALES A ND INCOME ON ACCOUNT OF SALE OF GOODS SHOWN AS WASTE WO RKS OUT TO APPROX. RS. 30,82,413/-. CONSIDERING THESE CIRCU MSTANCES, I WOULD ALSO ESTIMATE THE ACTUAL GP OF THE YEAR ON THE BA SIS OF COST OF PRODUCTION TO BE AROUND 21.5% AS AGAINST 15 .73% IN 13 THE PREVIOUS YEAR. THE AO IS DIRECTED TO REWORK THE ADDITION TO BE MADE ON ACCOUNT OF GP AND WASTAGE BASED ON THESE ESTIMATES AND TO TELESCOPE ONE ADDITION AGAINST THE O THER AND TAKE THE HIGHER OF THE TWO FOR THE FINAL ADDITION. 15. WE DO NOT FIND INFIRMITY IN THIS REGARD IN THE FINDINGS GIVEN BY THE LEARNED CIT (APPEALS) AS IT I S A FACT ON RECORD THAT EVEN THE LEARNED CIT (APPEALS) AGREE WITH THE SUBMISSIONS OF THE ASSESSEE PARTLY WITH REGARD TO THE HIGHER WASTAGE BEING ON ACCOUNT OF NEW PRODUCTS INTRODUCED DURING THE YEAR. HOWEVER, IT IS ALSO A FACT ON RECORD THAT THE ASSESSEE HAS NOT BEEN ABLE TO FULLY EXPLAIN THE INCREASE IN WAGES IN SECOND HALF OF THE YEAR AS ALSO THE INCREASED CONSUMPTION OF NEEDLES. EVEN DYING R ATE CHARGES HAS NOT BEEN PROPERLY EXPLAINED BY THE ASSE SSEE. IN SUCH A SCENARIO, THE LEARNED CIT (APPEALS) IS LE FT WITH NO OPTION BUT TO ESTIMATE THE RATE OF WASTAGE. EV EN THE ESTIMATE OF 18% MADE BY THE LEARNED CIT (APPEALS) D OES NOT APPEAR TO US TO BE UNREASONABLE. THE LEAR NED CIT (APPEALS) HAS CLARIFIED HIS STAND THAT THE ESTIMATE IS BASED ON THE HIGHER PRODUCTION OF GLOVES AND PAJAMA S TO SOME EXTENT AND BY THE NEW PRODUCTION OF TOPAS AS W ELL AS LOWER PRODUCTION OF MUFFLERS ETC. WHICH HAVE LOWER WASTAGE. THE ASSESSEE HAS SHOWN WASTAGE @ 22.56%. ONCE THE LEARNED CIT (APPEALS) HAS FOUND THE WASTAG E TO BE 18%, HE IS ALSO RIGHT IN CONSIDERING THE EXCESS OF THE WASTAGE I.E. 4.56% TO HAVE BEEN SOLD AT THE AVERAGE RATE OF SALE OF RS.254.53 PER KG. OF FINISHED PRODUCTS. WE ALSO DO NOT FIND ANY INFIRMITY IN THE ACTION OF THE LEARNED CIT 14 (APPEALS) IN NOT ALLOWING ANY MANUFACTURING EXPENDI TURE ON THIS ACCOUNT AS THE EXPENSES HAVE ALREADY BEEN D EBITED IN THE ACCOUNTS AND THE ENTIRE EXCESS SALE CONSIDER ATION IS TREATED AS UNDISCLOSED INCOME. THE GROUND NOS.2 AN D 3 RAISED BY THE ASSESSEE ARE DISMISSED. 16. THE GROUND NO.4 RAISED BY THE ASSESSEE READS A S UNDER : 4. (A) THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) GRAVELLY ERR ED IN DIRECTING THE LD. ASSESSING OFFICER TO WORK OUT THE ALLEGED UNACCOUNTED INCOME EARNED BY THE APPELLANT ON THE BAS IS OF ALLEGED PRODUCTION FOR THE SECOND PART OF THE YEAR TO BE SAME AS IN THE FIRST PART OF YEAR RESULTING IN ADDITION O F RS. 45,79,5327- WHICH IS PURELY ON THE BASIS OF ASSUMPTION , SURMISES, WHIM AND FANCIES AND WITHOUT ANY BASIS AND NE EDS TO BE DELETED (B) WITHOUT PREJUDICE TO THE ABOVE GROUND THE ADDI TION SUSTAINED BY LD CIT(A) IS HIGHLY EXCESSIVE AND THE PER IOD OF PRODUCTION SPLITTED IS NOT IN HALF BUT SEVEN AND FIV E MONTHS. 17. THE GROUND NOS.(II) AND(III) OF THE APPEAL OF THE DEPARTMENT, WHICH ARE CONNECTED TO THE ABOVE GROUND OF ASSESSEE READ AS UNDER : II) THAT THE LD.CIT(A) HAS ERRED IN LAW AND FACTS OF THE CASE BY DELETING ADDITION MADE BY THE A.O. ON ACCOUNT OF PEAK INVESTMENT IN PURCHASE OF RAW MATERIAL AT RS.94,85,932/-. III) THAT THE LD.CIT(A), ON FACTS AS WELL AS IN LA W, HAS ERRED IN DIRECTING TO COMPUTE THE UNACCOUNTED GROSS PROFIT FOR THE SECOND PERIOD ON THE BASIS OF FACTS O F THE FIRST PERIOD, THEREBY ALLOWING RELIEF OF RS. 72,24,692/ - TO THE ASSESEE. 15 18. THE LEARNED CIT (APPEALS) HAS DEALT WITH THE SAME IN HIS ORDER AT PAGE 49, PARA 12.3, WHICH READ S AS UNDER : 12.3 THE AO HAS ESTIMATED, FOR MAKING HIS SECOND ADDITION, THAT THE APPELLANT 'S PRODUCTION IN THE SE COND HALF OF THE YEAR WAS TWICE ITS PRODUCTION IN THE FIRST HALF OF THE YEAR, BASED ON THE WAGES OF THE SECOND HALF OF THE YEAR. I DO NOT AGREE WITH THE AO'S ESTIMATE. PART OF THE HIGHE R WAGES HAS BEEN EXPLAINED BY THE NEED OF LABOUR FOR MAINTEN ANCE OF MACHINES AND PARTLY BY THE NEED TO PRODUCE SAMPLE S. THE APPELLANT HAS ALSO POINTED OUT THAT THE WAGES ARE P AID IN THE SUBSEQUENT MONTHS. ON A BROAD CONSIDERATION OF TH ESE FACTORS, I WOULD ESTIMATE THAT THE EXCESS WAGES IN TH E SECOND HALF OF THE YEAR REPRESENT PRODUCTION IN THE S ECOND HALF OF THE YEAR TO BE THE SAME AS IN THE FIRST HALF OF THE YEAR. THE PRODUCTION IN THE SECOND HALF OF THE YEAR IS ALSO CONSEQUENTLY ESTIMATED AT THE SAME FIGURE AS IN THE FIRST HALF OF THE YEAR. THE AO HAS ESTIMATED INVESTMENT B Y THE APPELLANT IN THE PRODUCTION OF RAW MATERIAL AND A ONE MONTH CYCLE OF PRODUCTION. THERE IS NO EVIDENCE OF ANY INVE STMENT MADE BY THE APPELLANT IN UNACCOUNTED PURCHASES. THE BALANCE SHEET OF THE APPELLANT SHOWED SUNDRY CREDIT ORS AND OTHER LIABILITIES, WHICH INDICATE THAT RAW MATERIAL AND RELATED GOODS ARE AVAILABLE ON CREDIT. SECTION 69B O F THE ACT COMES INTO PLAY WHEN THE ASSESSEE IS FOUND TO HAVE MADE INVESTMENTS. THERE IS NO EVIDENCE WITH THE AO THAT AN Y INVESTMENT WAS ACTUALLY MADE BY THE APPELLANT FOR P URCHASE OF RAW MATERIAL, AND SINCE GOODS ARE AVAILABLE ON C REDIT, AS EVIDENCED BY THE BALANCE SHEET, I DO NOT THINK THAT ANY ADDITION ON ACCOUNT OF INVESTMENT IS CALLED FOR. FURTHE R, EVEN IF SOME INVESTMENT IS REQUIRED TO BE MADE, THE SAME W ILL BE TELESCOPED INTO THE UNACCOUNTED INCOME GENERATED ON ACCOUNT OF SALE OF WASTE AND LOWER GP RATE. I, THER EFORE, DELETE THE ADDITION ON ACCOUNT OF UNACCOUNTED INVES TMENT IN PURCHASE OF RAW MATERIAL. THE AO IS DIRECTED TO W ORK OUT THE UNACCOUNTED INCOME EARNED BY THE APPELLANT ON T HE BASIS 16 OF THE PRODUCTION FOR THE SECOND PART OF THE YEAR TO BE SAME AS IN THE FIRST PART OF THE YEAR. THE UNACCOUNTED PRO DUCTION CAN SAFELY BE PRESUMED TO HAVE BEEN SOLD OUTSIDE THE BOOKS TO YIELD PROFIT @ 21% AND THE PROFIT ON THE SAME IS TO BE ADDED TO THE TOTAL INCOME OF THE ASSESSEE. NO ADDIT ION ON ACCOUNT OF DYEING CHARGES IS CALLED FOR, AS ALREADY D ISCUSSED EARLIER. ANY ADDITION ON ACCOUNT OF NEEDLES IS TELES COPED INTO THE ADDITION ON ACCOUNT OF WAGES. IT IS ORDERED ACCORD INGLY. 19. WE DO NOT FIND ANY INFIRMITY IN THESE FINDINGS OF THE LEARNED CIT (APPEALS). APART FROM THE FACT THA T HE HAS MADE COMPARISON OF THE FIRST PERIOD WITH THE SECOND PERIOD CONSIDERING THE SAME AS EQUAL. HOWEVER, WE FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE THAT THE ASSESSING OFFICER HAD MADE COMPARISON OF THE FIRST PERIOD COMPRISING OF SEVEN MONTHS I.E. FROM APRIL TO OCTOB ER, 2004 WITH THAT OF THE SECOND PERIOD COMPRISING OF F IVE MONTHS ONLY FROM NOVEMBER, 2004 TO MARCH, 2005. THOUGH IN PRINCIPLE, WE AGREE WITH THE FINDINGS OF HE LEARNED CIT (APPEALS) THAT THE PRODUCTION IN THE SE COND PERIOD CAN BE ESTIMATED ON THE BASIS OF INCREASE OF THE FIRST PERIOD. HOWEVER, WE DIRECT THE ASSESSING OFF ICER TO PROPORTIONATELY ESTIMATE THE SAME BY CONSIDERING TH E FIRST PERIOD TO BE OF SEVEN MONTHS AND SECOND TO BE OF FI VE MONTHS. WE ALSO AGREE WITH THE FINDINGS OF THE LEA RNED CIT (APPEALS) THAT THERE IS NO EVIDENCE WITH THE AS SESSING OFFICER THAT ANY INVESTMENT WAS ACTUALLY MADE BY TH E ASSESSEE FOR PURCHASE OF RAW MATERIAL AND SINCE THE GOODS ARE AVAILABLE ON CREDIT AS EVIDENCED BY THE BALANCE SHEET, THERE IS NO NEED TO MAKE ANY FURTHER ADDITION ON AC COUNT 17 OF INVESTMENT. THE GROUND NO.4 RAISED BY THE ASSES SEE IS PARTLY ALLOWED AND GROUND NOS.(II) AND (III) RAISE D BY DEPARTMENT ARE DISMISSED. 20. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND THE APPEAL OF THE DEPARTMENT IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 29 TH DAY OF JANUARY, 2016. SD/- SD/- (H.L. KARWA) (RANO JAIN) VICE PRESIDENT ACCOUNTANT MEMBER DATED : 29 TH JANUARY, 2016 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/THE CIT/THE DR. ASSISTANT REGISTRAR, ITAT, CHANDIGARH 18