ASSTT. COMMISSIONER OF INCOME TAX CENTRAL CIRCLE, ALLAHABAD vs. M/S KESARWANI ZARDA BHANDAR, ALLAHABAD

Assessee by: Sh. Praveen Godbole, C.A. Revenue by: Sh. Dr. Neel Jain, CIT DR Date of hearing: 29.08.2024 Date of pronouncement: 22.11.2024 O R D E R PER NIKHIL CHOUDHARY, A.M.: These two appeals have been filed by the Revenue against the decision of the ld. CIT(A), Lucknow-3, deleting the additions made on account of suppression of sales by the ld. AO under section 143(3) of the Income Tax Act ,vide his separate orders for the A.Ys. 2011-12 and 2012-13. Cross Objections have been filed by the assessee supporting the orders of the ld. CIT(A). The issues being common, these appeals and Cross Objections are taken up for disposal by way of a common order. The grounds of appeal of appeal in these various cases are as under:-

“1. That on the facts and in the circumstances of the case, Ld.CIT(A) has erred in deleting the addition of Rs. 2,75,42,070/- made by the AO on account of suppressed production.

2. That the order of Ld. CIT (A) deserves to be set aside and the assessment order passed by the A.O. be restored.

3. That the appellant craves to add, modify, revise or amend any one or more of the grounds of the appeal as stated above as and when need for doing so may arise.” C.O. No.17/Alld/2016 1- That in any view of the matter it is not correct to say that the ld. CIT(A) has erred in deleting the addition of Rs.2,75,42,070/- made by the Assessing Officer on account of Suppressed Production. The Id. CIT(A) perfectly justified in deleting the addition made arbitrarily by appreciating the correct facts and past records. 2- That in any view of the matter the ld. CIT(A) was perfectly justified in deleting the addition so made on count of Suppressed Production by honouring the order and decision of the Higher Authority. 3- That in any view of the matter since the issue of Suppressed Production has been finally settled and concluded hence there is no justification to make repetitive additions on account of Suppressed Production by ignoring the orders of the Higher Authorities.”

“1. That on the facts and in the circumstances of the case, Ld. CIT(A) has erred in deleting the addition of Rs. 5,77,89,675/- made by the AO on account of suppressed production.

2. That while deleting the above addition of Rs. 5,77,89,675/-, Ld. CIT(A) has not appreciated the fact that with regard to A.Υ. 2005-06 to A.Y. 2 2009-10, Ld. CIT(A) had only reduced the amount of similar additions made by the AO. Thus Ld. CIT(A) has erred by taking different view on the issue of suppressed production in this year on similar facts.

3. That the order of Ld. CIT(A) deserves to be set aside and the assessment order passed by the A.O. be restored.

2. That in any view of the matter in the light of principle of consistency the Ld. Commissioner of Income Tax (Appeals), Allahabad was perfectly justified in deleting the addition in the facts and circumstances of the case.

before hearing of the appeal.

4. That in any view of the matter in the facts and circumstances of the case the departmental appeal is liable to be dismissed.”

3. Aggrieved with these additions, the assessee filed appeals before the ld. CIT(A)-3, Lucknow. In both years, it was submitted before the ld. CIT(A) that the assessee firm had submitted a detailed explanation of its manufacturing process stage wise along with photographs for the understanding of the ld. AO, but the ld. AO had failed to appreciate the same. It was further submitted that the final product of the assessee i.e. Zarda, was subjected to the Excise Act / Rules and Regulations. The assessee submitted that it had maintained all statutory records, as required under 4 the Excise Act / Rules made thereunder. These records had been periodically checked and verified by officials of the Central Excise Department. No defect had ever been pointed out regarding maintenance of excise records. It was further submitted, that details of yield during the manufacturing process could not be uniform, on account of the fact that raw materials which are purchased from agricultural or vegetable produce, were sometimes hygroscopic and sometimes volatile. Further consumption of silver leaves and other perfumery items varied on account of various manual processes and the nature of business, which had been explained to the ld. AO. It had been submitted to the ld. AO, that the ratio for consumption of raw materials depended upon the quality used, the quality of tobacco manufactured, levels of business competition and also losses in the process. But all these facts had been ignored, because the ld. AO was determined to make an addition. It was submitted, that right from the inception of the firm, the nature of the manufacturing process were the same and the fact of wastage had been accepted by the Department in the past. It was submitted, that the ld. AO had estimated the yield at 95% instead of yield shown at 85.57%. He had failed to appreciate that in manufacturing of chewing tobacco, there were production losses because it involved dust, wastage, evaporation and other processing losses. It was submitted that the ld. AO had come to a conclusion regarding suppressed production, without any finding of where the suppressed production had gone. There was no finding that the assessee had made sales outside its books of accounts and artificial difference of alleged excess production had been created, without explaining from which source this excess production had come, where this excess stock was kept and how the sales of this excess stock was effected away from the prying eyes of the Central Excise Department. It was also submitted that the ld. AO had accepted the assessee’s opening stock, purchases, sales and closing stock of raw tobacco and other materials including finished goods. It was again reiterated that the entire production/sale was subject to Excise Duty and till date, no case had ever been made out by the Excise Department or Sales Tax Department, that any suppression had been done in the purchase of raw tobacco, or in the production and sale of finished tobacco. It was submitted that the ld. AO had not considered the past records of the assessee. Without prejudice to the above, it was submitted that the ld. AO was taxing the assessee on the value of the production, when the law was settled that income tax was leviable on real income worked out on commercial basis, since production was the final outcome of various materials. Taxing the production value, amounted to also bringing to tax alleged expenditure made by the assessee, in purchase of raw materials. Thus, it was not the profit out of the same which was being subjected to tax but the gross figure, which was not as correct per the principle of accounting and taxation. Furthermore, in a situation where the Excise Department had never alleged that any Excise Duty had been suppressed, the Income Tax Department could not take a view that there had been suppression of production in its books and consequent sale of this excess production , outside of its books. It was submitted that therefore ,there was, no basis for making an addition of Rs.2,75,42,070/- (in the A.Y. 2011-12) or Rs.5,75,89,675/- (in the A.Y. 2012-13). Finally, the assessee posed a few questions by way of argument, in which it asked i. whether such a step could be taken without invoking the provisions of section 145(3) of the Act. ii. Whether the production and sales could be disbelieved on the whims of the surmises of the ld. AO when the assessee was in the business of excisable goods and clearance of finished goods from the factory, godowns took place under the supervision and control of Central Excise Department.

iii. Whether the wastage in the production process could be disbelieved on the basis of hypothetical grounds, surmises and excess production be created on the basis of calculations that did not consider the driage, evaporation and process loss? iv. Whether the entire value of the alleged surplus production could be considered as the income of the assessee. In view of these questions raised, the assessee prayed that there was no basis for the addition made on account of suppressed production. It accordingly prayed that the same may be deleted.

4. The ld. CIT(A), on consideration of the issue, held that the production and sales of the assessee were under the strict supervision of the Excise department; the appellant was bound to maintain statutory records, as required under the Excise Act and Rules. It was also required to maintain sales tax records and file regular returns in respect of U.P. Sales Tax (VAT). He faulted the process adopted by the ld. AO pointing out, that he had taken the consumption of whole leaf in calculating the yield, whereas the whole leaf is boiled to take out its ark, known as raw kimam and residual waste of the whole leaf was rendered useless and thrown away. The ld. AO had taken into accounts raw materials used in production such as chemicals, perfumes, Silver and Silver varks, masala, but had not taken into consideration the consumption of raw kimam. He had also ignored the actual evaporation / wastage of other materials used in production, whereas the same had been allowed year after year, being a normal feature in this nature of business. He observed that the assessee had maintained regular books of accounts, as per the Excise Act, which had been subjected to routine checks. No discrepancy had been reported by the ld. AO thereon and nothing adverse had been found by the Sales Tax Department. He quoted from the production figures of earlier year viz a viz., the year under consideration, to show that the production figures of the present year were better than previous years which had been accepted by the Department. He further observed, that there was no finding of any sales outside the books of accounts or any finding of suppressed stock, by either the ld. AO or the Trade Tax Authorities or any finding of suppression of production by the Excise authorities. He observed that the ld. AO had not rejected the books of accounts, which meant that the books of accounts are correct and complete. He, therefore, held that the case of the assessee was squarely covered by the decision of the Hon’ble Allahabad High Court in the case of CIT vs. Mascot (India) Tools and Forgings (P) Ltd., 320 ITR 110 wherein the Hon’ble Court had observed as under:- “While deleting the addition made by the AO the Tribunal, inter alia, has observed as follows: "It is beyond comprehension that the charge of alleged suppression of sales has been confirmed by the CIT(A) without applying his mind on such elaborate written submission and comprehensive details submitted before him by the assessee. The AO has brought no material or evidence on records to prove the existence of any unaccounted local sales having been made by the assessee. The sales declared by the assessee are of excisable goods. The correctness of declared sales is supported by regular books of account which have duly been audited by the auditors as required by various provisions of the Companies Act and the IT Act. The auditors have given unqualified report. The Excise authorities have not doubted the correctness of the declared sales. The sales recorded in the books of account are supported by various Excise registers, which are periodically checked and verified by the Excise authorities. It is beyond comprehension that any addition on account of alleged suppressed sales can be made without any valid basis whatsoever on record. We are, therefore, of the considered opinion that the addition of Rs. 15,99,158 made by the AO and confirmed by the learned CIT(A) on account of alleged suppression of domestic sales is patently wrong. The same is, therefore, deleted."

8. On the other hand, Shri. Praveen Godbole, C.A. (hereinafter referred to as the ‘ld. AR’) arguing the case on behalf of the assessee, submitted that the order of the Hon’ble Allahabad High Court had been misinterpreted and, in fact, the Hon’ble Allahabad High Court had declined to admit the issue of suppressed production, that had been raised by the Department in its application, as a question of law for adjudication. Accordingly, no relief had been granted to the Department on this account by the Hon’ble Allahabad High Court and the orders of the Hon’ble Allahabad High Court in & 374 to 378/Alld/2013 and ITA Nos. 6 to 11/Alld/2014 relating to A.Y. 2004-05 to 2009-10, still held the field. Hence, the ld. 10 CIT(A) was fully justified in following the legal precedent and it was incorrect to say that there was any mistake in his order on this account. It was further submitted that the entire process had been explained to the ld. AO and it had been pointed out that there would be divergences on account of variations in the quality of the raw material purchased and the quality of the tobacco produced. Therefore, a strait jacket formula could not be applied to estimate the wastage during production. It was further argued, that the assessee was dealing in an excisable commodity and its entire production process was subject to examination of the excise authorities to the extent that finished goods only left the factory godowns after clearance by excise authorities. It was submitted that the Excise had never pointed out any suppression of sales (and thereby evasion of Excise Duty) and therefore, the ld. AO could not assume suppression on the basis of surmises and conjectures. The ld. AR submitted that the ld. AO had not found any excess stock, had not found any evidence of sales outside the books of accounts and had not even been able to point out from which raw material this excess production was generated. He, therefore, submitted that his case was squarely covered by the decision of the Hon’ble Allahabad High Court in the case of CIT vs. Mascot (India) Tools and Forgings (P) Ltd. (supra) and considering the above, the ITAT had granted relief to the assessee in the assessment years 2004-05 to 2009-10, after considering the entire process and the submissions of the assessee. Therefore, the ld. AR argued that the ld. CIT(A) was correct in his decision and the deletions made by him, deserved to be upheld.