DCIT, CENTRAL CIRCLE 2(2), CHENNAI vs. MIDAS GOLDEN DISTILLERIES PRIVATE LIMITED, KANCHEEPURAM

आदेश /O R D E R Per BENCH: These five appeals filed by the Revenue are directed against separate, but identical orders of learned Commissioner of Income Tax (Appeals)-18, Chennai, all dated 27.08.2018 &

ITA No.3368/Chny/2018 2. The brief facts of the case are that a search and seizure operation u/s.132 of the Income Tax Act, 1961 (hereinafter the ‘Act’) was conducted in the case of M/s. Midas Golden Distilleries Pvt. Ltd., on 18.01.2006. Consequent to search, assessment has been completed u/s.143(3) r.w.s. 153A of the Act on 27.12.2007 determining total income of Rs.71,08,78,468/-. The assessee carried the matter in appeal before the first appellate authority but could not succeed. The ld.CIT(A) vide his order dated 31.12.2010 dismissed the appeal filed by the assessee. The assessee carried the matter in further appeal before the Tribunal. The ITAT, Chennai Benches in & 162/CHNY/2011 for assessment years 2005- 06 & 2006-07 has set aside the appeals to the file of the AO and directed him to reconsider the issue involved in appeals de-novo, commensurate with the decision taken in the 3 to 3372/Chny/2018 assessment year 2004-05. Pursuant to the directions of the Tribunal, the AO has completed assessment u/s.143(3) r.w.s. 153A r.w.s. 254 of the Act on 22.03.2013 and determined total income at Rs.71,72,12,693/- by making addition towards suppression of production for Rs.55,32,10,232/-, disallowance of advertisement expenditure of Rs.11,02,000/- and disallowance of marketing expenditure of Rs.39,41,100/-. On appeal, the ld.CIT(A) vide his order dated 27.08.2018 deleted additions made by the AO towards addition on account of suppression of production and disallowance of marketing expenditure, however, confirmed addition made towards disallowance of advertisement expenditure. Aggrieved by the CIT(A) order, the Revenue is in appeal before us.

3.1 The facts with regard to the impugned dispute are that the assessee is engaged in the business of manufacture of Indian Made Foreign Liquor (IMFL). The process of 4 to 3372/Chny/2018 manufacture involved purchases of rectified spirit, dilutes and converts it into neutral spirit. The neutral spirit is then blended with required flavors as prescribed in the bottling unit. The basic raw materials required for manufacture of IMFL are rectified spirit, neutral spirit and special flavors. The main packing materials used are bottles, caps, cartoon boxes, labels, etc. A search action u/s.132 of the Act was conducted in the case of the assessee on 18.01.2006 and during the course of investigation certain loose sheets were found which contains details of raw materials like empty bottles, caps issued for production of final products. The assessee was asked to furnish details of purchases and consumption of packing materials like bottles, caps and labels. From the details furnished by the assessee, it was noticed that there was a huge difference in total number of caps issued for production of bottles and the total number of bottles produced, as per which for the period 01.04.2005 to 28.02.2006 difference between issue of caps and actual consumption of caps was at 4,87,67,099 caps. The assessee was asked to explain the difference, for which it was stated that there was return of caps to stores and wastage in the process of manufacturing which 5 to 3372/Chny/2018 was not considered. If wastage and return of caps to stores is considered then there is no difference in actual caps issued to production and number of bottles produced for the relevant period. Accordingly, the assessee has explained the difference of 4,87,67,099 caps with total caps returned to stores at 3,62,53,764 nos. and wastage of caps at 1,25,13,335 nos. and thus claimed that percentage of wastage on account of handling, pressure and breakage would be around 6%, which is in accordance with industry average.

3.2 The AO, however was not convinced with explanation furnished by the assessee and according to him, there is a difference between the number of caps issued for production and number of bottles produced for the period and thus, opined that the assessee has suppressed production of final product. The AO has discussed the issue at length in light of various documents seized during the course of search in the form of loose sheets which contains details of purchase and consumption of empty bottles, caps and labels and arrived at an unaccounted production of Rs.55,32,10,232/-. According to 6 to 3372/Chny/2018 the AO, the assessee has not satisfactorily explained the difference in quantity of caps issued for production and production of number of bottles with the help of necessary records. The AO further was of the opinion that although the assessee claims that investigation team has not considered return of unused caps to stores and wastage of caps in the process of manufacture, but the claim of the assessee that it had returned unused caps to stores is not supported with any evidence. He, further observed that on verification of stock register produced by the assessee for maintaining purchase and consumption of caps, there is no column in the stock register to account for return of caps from production department. He has taken support from various documents found during the course of search coupled with statement recorded from certain parties including Shri K. Ganapathy Subramaniam, Senior Manager (Operations) to come to the conclusion that there is mismatch between purchase and consumption of raw materials like empty bottles, caps, labels, etc.

7 to 3372/Chny/2018 3.3 The AO further noted that the discrepancies in purchase and consumption of packing materials like caps and empty bottles is further strengthened by the fact of difference in inventory of closing stock of finished goods taken at the time of search, as per which there is a difference of 1759 cases of finished product when compared to physical stock found during the course of search and closing stock as per books of accounts. Therefore, the AO opined that there is no merit in the explanation furnished by the assessee that there is no difference in purchase and consumption of packing materials like caps and bottles and further the estimation of unaccounted production is not supported by major raw materials like rectified spirit, neutral spirit, etc. Thus, he has arrived at unaccounted production of Rs.55,32,10,232/- by taking into account number of caps issued by the stores for production of bottles and actual number of bottles produced during the year to arrive at a difference of caps consumed during the period and computed unaccounted production by adopting selling price of the bottles. The relevant findings of the AO are as under:-

8 to 3372/Chny/2018 “6.5 The submissions of the assessee representative are carefully considered. The thrust of the argument is that in view of tight control under which the assessee-company has to operate, there cannot be any suppression of production or sale. It is argued that the assessee company had to sell the products only to TASMAC as per Government Regulation and as such, there cannot be any unaccounted sale. But this argument of the assessee is too general to accept. The argument that merely because the production and dispatch of the goods are under the supervision of Excise authorities, there cannot be any discrepancy cannot be accepted. In fact, on the date of search, that is on 18.01.2006, the inventory of finished goods was taken by the inventory of finished goods was taken by the search party and as per Ann/MLP/Stock/NS I&II, the physical inventory of stock of finished goods was under: 1. Godown No.1 - 31,225 cases 2. Godown No.2 - 8,214 cases Total - 39,439 cases As per the records, the position of finished goods is as under :

6.6 One more crucial point to be noted is that the assessee does not maintain any Stock Register for Old Bottles. In fact, old bottles account for nearly 80% of bottle consumption. The assessee claimed that with regard to old bottles, the supplier M/s. Sri Ranga Enterprises is having its godown near the factory and that the stock is accounted for only by the supplier. It is stated that payment is made on the basis of supply and that the breakage, wastage, etc, is booked against the supplier. In the absence of control over the number of old bottles it is not known as to how the assessee makes payment for the bottles used for the manufacture. The absence of control in the form of stock registers also clearly lead to the conclusion that more bottles are used resulting in excess production that is totally unaccounted. Such a view has to be necessarily drawn when one takes into account the fact that there is huge difference in the number of caps (which is the other major packing material) issued and the number of bottles ultimately produced.

6.7 The assessee claims that stock register is maintained only in respect of new bottles. As on the date of search, an inventory of the empty bottles found was taken and as per Annexure Ann./Stock/Bottles/NS, it is noticed that the total number of bottles was 12,66,801. The detailed breakup is as under:

No.of cases No.of bottles S.No. Description Capacity 180 ml 9,888 543,840 1 Standard Bottle 2 Ramana Vodka 750 ml 786 14,148 3 BPG 180 ml 875 43,750 4 Vintage Bottle 180 ml 1,550 77,500 5 Old Cask Rum 750 ml 2,912 46,592 10 to 3372/Chny/2018 6 Old Cask Rum 180 ml 1,740 95,700 7 Day Night 750 ml 150 3,600 8 Vintage Bottle 375 ml 2,140 59,920 Day Night 9 180 ml 1,748 87,400 10 RRW Bottle 750 ml 5,856 134,688 11 PMW Bottle 750 ml 600 9,000 12 DNR Bottle 750 ml 210 19,740 13 OCB Bottle 750 ml 987 15,157 14 OAB Bottle 750 ml 659 29,040 15 MCD Bottle 750 ml 1,210 12,650 16 CXR Bottle 750 ml 550 2,856 17 Vintage 1000 ml 238 5,500 18 8PM 750 ml 275 2,000 19 RRG 750 ml 100 720 20 BDG 750 ml 40 38,400 21 OCR 375 ml 1,200 9,600 22 JDI 375 ml 400 9,600 23 MRW 750 ml 600 5,400 12,66,801 Accordingly to the assessee, on an average 17000 to 19000 cases are only produced. This is as per the statement given by Shri Ganapathy Subramaniam, Sr.Manager (Operations) vide answer to question NO.10. Even if we take that all the cases that are produced consist of 48 bottles, being the maximum number of bottles, a case can contain, the total number of bottles that would be required on an average per day would be only 9,12,000 bottles. As already stated, 80% of the bottles used are only old bottles for which the assessee does not maintain stock. Therefore, on an average the number of new bottles that would be required will be 1,82,400. Whereas, as detailed above, on the date of search more than 12,66,801 new bottles were found. It is not known as to why such huge number of bottles should be kept. The availability of the new bottles with reference to the stock register was also not furnished by the assessee. This clearly leads to the conclusion that huge number of new bottles are kept ready, for being utilized in production and this is not accounted for.

6.8 The assessee contended that with regard to the purchase and utilization of rectified and neutral spirit, there is total control by Excise authorities and that there cannot be any difference. This statement of the assessee found to be not correct. As per the inventory of the spirit, taken during the course of search, it is seen that there is shortage of both rectified spirit and neutral spirit vis-â-vis the records of the Central Excise authorities. This is tabulated as under :

S.NO. Description Tank No. Physical Stock As per books of Excise Authorities 1 RS Spirit 2 67,882.6 Bulk Litre 68000 Bulk Litre 35,895 Bulk Litre 36000 Bulk Litre 2 RS Spirit 5 40901 Bulk Litre 40933 Bulk Litre 3 Neutral Spirit 8 4 Neutral Spirit 12 35813.2 Bulk Litre 36000 Bulk Litre Such a discrepancy was noticed with regard to the storage in blending units wherein, after the process of blending the neutral spirit, with the flavor is completed, the finished product is stored. The details of discrepancy noticed are as under : S.NO Description Tank No. Physical Stock As per books of . Excise Authorities 44472 Bulk Litre 1 Cap Rum 22 44290 Bulk Litre 44586 Bulk Litre 2 Cap Brandy 23 44370 Bulk Litre 3 DN Whisky 29 7446 Bulk Litre 7472 Bulk Litre When questioned as to whether any day to day stock register is maintained for the raw material, rectified spirit and neutral spirit, Shri Ganapathy Subramaniam, Sr.Manager (Operations) stated that no day to day tanker stock register is maintained. (vide his answer to question no.22 of the Statement). In the absence of any stock register, the claim of the assessee that basic raw materials are under the total control of Excise authorities and that therefore there cannot be any discrepancy, is not a valid explanation.

12 to 3372/Chny/2018 From the aforesaid discussion, it is clear that there is shortage in the basic raw materials, viz rectified spirit and neutral spirit as on the date of search. In packing materials viz., caps, bottles, excess is noticed. The assessee could not furnish any satisfactory explanation for the discrepancy noticed. This clearly proves that there is excess production than what is recorded in the books. The huge difference between the number of caps issued and the bottles produced which is tabulated as under, clearly prove the above point that there is suppression of production.

The monitory value of excess production, on the basis of this table has been adopted as per the value determined by the TASMAC. In this context, as per the seized material in Annexure in Ann/DV/B&D dated 18.01.2006, it is noticed that the price structure with effect from 11.12.2004 has been determined by the TASMAC. The price determined includes the cost of production as well as the manufacturer’s margin of profit. As per the price structure, the price for different quantity of each product has been fixed and the price is determined per case. Therefore, this price is converted into price per bottle by adopting the number of bottles for each case as per the quantity. As the assessee company has not accounted for the entire production and also of the following amount, the entire amount is treated as undisclosed income in the hands of the assessee company.

(Caps- Sale price Value Brand Description Bottles Caps Name bottles) per bottle Difference AAN Q280 x 12 3360 8,914 5,554 40.67 225881 P2098 x 24 50352 88,000 37,648 20.54 773290 N94400 x 48 45,31,200 55,20,765 9,89,565 10.48 10370641 CAB N492151 x 48 2,36,23,248 } N353392 x 48 1,69,62,816 } 4,68,83,347 62,97,283 10.06 63350667 DNB P39985 x 24 9,59,640 } CAB DNB P7388 x 24 1,77,312 }13,89,158 2,52,206 17.00 42,87,502 13 to 3372/Chny/2018 CAR N578242 x 48 2,77,55,616 } 2386800 DNR N80198 x 48 38,49,504 }3,18,70,320 2,65,200 9 251341 ORV Q435 x 12 5,220 11,400 6,180 40.67 N38026 x 48 18,25,248 } N16915 x 48 8,11,920 )33,05,064 6„67,896 10.33 6899366 STV KMW N77611 x 48 37,25,328 42,99,623 5,74,295 8.08 4640304 MAB Q1611 x 12 19,332 20,166 834 29.83 24878 P75712 x 24 18,17,088 23,12,066 4,94,978 15.54 7691958 N455077 x 48 21843626 25435236 3591540 8.08 29019643 MAR Q2052 x 12 24,624 25,175 551 29.8 16436 P112673 x 24 27,04,152 35,98,009 8,93,857 15.54 13890538 N741715 x 48 3,56,02,320 4,62,27,238 60,24,918 8.08 48681338 BRG Q2830 x 12 33,960 53,835 19,875 44.25 879469 P1442 x 24 34,608 78,726 44,118 22.54 994420 N27492 x 48 13,19,616 16,98,381 3,78,765 23.17 8775985 OCR Q25642 x 12 3,07,704 4,84,749 1,77,045 43.58 7715621 P94152 x 24 22,59,648 30,17,716 7,58,068 22.42 16995885 N247138 x 48 1,18,62,624 1,38,80,248 2,01,17,624 23.17 46748348 MVW Q5762 x 9 51,858 72,128 20,270 98.17 1989906 P5073 x 24 45,657 49.29 N32844 x 48 15,76,512 19,82,585 3,60,416 24.65 8884254 CRV Q10054 x 12 1,20,648 1,40,746 20,098 40.5 813969 P4930 x 24 1,18,320 2,03,659 85,339 20.83 1777611 N24259 x 48 11,64,432 15,19,175 3,54,743 10.83 3841867 JFB Q1406 x 12 16,872 20,471 3,599 77.7 279642 P1251 x 24 30,024 36,292 6,268 39.73 249028 N7705 x 48 3,69,840 5,80,355 2,10,515 19.94 4197669 MRW Q495 x 12 5,940 8,442 2,502 77.70 194405 P1023 x 24 24,552 42,357 17,805 39.73 707393 N4338 x 48 2,08,224 2,76,717 68,493 19.94 1365750 OCW Q377 x 12 4,524 7,040 2,516 37.14 93444 P2249 x 24 53,976 1,16,579 62,603 19.79 1238913 N35100 x 48 16,84,800 19,02,380 2,17,580 10.09 2195382 OCB Q1911 x 12 22,932 49,338 26,406 34.4 908366 P64883 x 24 15,57,192 21,23,436 5,66,244 18.14 10271666 N2687744x48 1,28,99,712 1,54,66,207 25,66,495 9.57 24561357 OAB Q2920 x 12 35,040 1,08,221 73,181 34.42 2518890 P40439 x 24 9,70,536 25,37,086 15,66,550 18.13 28401551 Note : 1. The details furnished by the assessee consisted of number of cases and this has been converted into number of bottles wherein the following values have been adopted:

For Q (Quartz = 12 Bottles) For P (Pints = 24 Bottles) For N (Nimps = 48 Bottles) The above table shows the difference between the number of caps issued and the number of bottles produced for each item.

The total value of suppression of production and sale of bottles works out to Rs.54,89,22,730/- and this is added as undisclosed income in the hands of the assessee”

4.1 The ld.CIT(A) after considering relevant submissions of the assessee and also taken various facts including the fact 16 to 3372/Chny/2018 that the product manufactured by the assessee is under strict control of State Excise Authorities, deleted additions made by the AO by holding that the AO has gone on the basis of purchase and consumption of caps and empty bottles to arrive at a conclusion that there is unaccounted production, while doing so, he has forgotten to verify the fact that corresponding utilization of rectified spirit is also needed for alleged unaccounted production. The ld.CIT(A) further noted that the estimation made by the AO towards unaccounted production is purely on suspicion and surmises basis without there being any evidence like discrepancy in basic raw material consumption like rectified spirit and neutral spirit. The CIT(A) has also discussed the issue in light of the fact that procurement of rectified spirit is against the issuance of permit by the Prohibition and Excise Authorities in as much as, the AO has not found any omission in purchase of rectified spirit nor has there been any allegation that the assessee has contravened the regulations and purchase of rectified spirit. The CIT(A) has also taken support from the fact that the final product manufactured by the assessee are sold to TASMAC, a Government of Tamil Nadu undertaking and there was no 17 I.TA. Nos. 3368 to 3372/Chny/2018 allegation by any authority that the assessee had sold any product outside TASMAC. Therefore, he opined that addition made by the AO towards suppression of production is without any basis and accordingly deleted. The relevant findings of the CIT(A) are as under:- “After going through the observation of the AO and the submission of the AR, the issue is decided as under:

The utmost reason for making the addition on this count was due to the fact that there existed huge difference between the utilization of (bottle) caps in the production and the quantity of caps acquired. As per the AO, for each cap used, one bottle of liquor should have been produced. Thus going by the number of caps used equivalent number of bottles should have been used for filling up the liquor. But on going through the various details furnished there was no correlation between the caps and the bottles used. This discrepancy has led the AO to come to the conclusion that there was unaccounted production of liquor and accordingly he made an addition on this count amount to Rs. 55,32,10,232/- On the contrary, the AR submitted that the AO, while estimating the portion of production as unaccounted took into account only the number of caps purchased and he came to the conclusion that so much of the quantity purchased had been utilized in the production process. He has failed to take into account the damages caused to the caps, the return of the caps to the Stores which were not utlised etc. The AO was misled by the so called shortage in physical stock of raw materials. Even though, as per AR, these realities have been duly explained he did not consider the same while framing the assessment. In addition when the AO concluded that there was shortage in physical stock of spirit etc., the stock in pipelines has not been considered in arriving at the exact stock position. The AR pointed out that the AO depended on the stock position which was taken during 18 to 3372/Chny/2018 the course of s arch by a crude method. In that, a rod was dipped into the storage tank and the stock was estimated accordingly. This is rather a rough method and this cannot be a guiding factor for arriving at the stock position.

It is seen that the fact of huge difference between the quantity of (bottle) caps purchased and the quantity used in production has made the AO to come to the conclusion that there was unaccounted production. While doing so, he has forgotten to verify the fact that corresponding utilization of rectified spirit is also needed for the alleged unaccounted production.

Further the explanations and submissions offered by the AR with regard to the fact that rectified spirit which is one of the major ingredients in the production of liquor, can be purchased only against the issuance of permit by the Prohibition & Excise Authorities. Inasmuch as the AO has not found any omission in purchases nor has there been any allegation that the appellant had contravened the regulations and purchased rectified spirit, the conclusion that there was unaccounted production, has been, so to say, built on wrong premises.

That apart, the AR’s submission that in the State of Tamil Nadu, sales of IMFL are routed only through TASMAC and there was no allegation or complaint by any authority / anybody else that the appellant had sold any product outside TASMAC, is also a salient point to ponder over.

Taking all these facts into account, I am of the considered view that the addition made towards unaccounted production, is not called for and hence the AO is directed to delete the same. This ground of appeal is allowed.”

7.2 We have gone through the reasons given by the AO in light of seized documents found during the course of search and found that the assessee has made a plan for procurement of bottles and caps based on indent received from TASMAC, the buyer of the products. On receipt of packing materials, the stores department issues material requisitioned by the production department on the 28 to 3372/Chny/2018 basis of estimated production plan. The production department after capping the bottles and the wastage in the process returns back the unused caps to the stores. Therefore, it was claimed that the basis on which the AO had arrived a difference is completely irrational and without any basis. On the other hand, the assessee produced stock registers maintained for packing materials, as per which there is no difference in purchase and consumption of packing materials. However, the AO while making a comparison of the number of bottles used for production vis-à-vis the bottles issued, has omitted to take into account unused bottles returned to stores and this numbers is considered then, the difference computed by the AO becomes almost nil.

7.3 The AO has taken another aspect of shortage in primary raw materials like rectified spirit and neutral spirit. During the course of search, physical stock of primary raw materials was taken, as per which there is a difference in stock of rectified spirit and neutral spirit when compared to stock as per books of accounts of the assessee. The assessee has reconciled the physical stock found during the course of search to stock as per its books of 29 to 3372/Chny/2018 accounts, as on the date of search, as per which, the difference is hardly even less than 1%. For example, the physical stock of rectified spirit as on the date of search is 1,03,778 bulk litres, whereas the stock as per books of accounts of the assessee was at 1,04,000 bulk litres. The difference in stock of rectified spirit is only 222 bulk litres, which is 0.29% of total stock found during the course of search. Similarly, the physical stock of neutral spirit as on the date of search was 76,796 bulk litres, whereas stock as per books of accounts of the assessee is 76,933 bulk litres and once again the difference is 222 litres, which is 0.23% of total stock. Likewise, the difference in blended stock when compared to book stock was at 424 bulk litres, which is once again 0.41% of total stock. From the above, it is very clear that when you compare the nature of materials stored by the assessee to the percentage of difference in physical stock and book stock, the difference is negligible because, the raw materials like rectified spirit and neutral spirit are highly evaporable and further these raw materials are stored in wooden racks and measured in dips, which is not accurate. Therefore, the difference arrived at by the AO on the basis of physical stock taken during the course of search cannot support the case of the AO that there is 30 I.TA. Nos. 3368 to 3372/Chny/2018 discrepancy in stock of primary raw materials corresponding with difference in percentage of consumption of secondary raw materials like empty bottles, caps, as computed by the AO. Further, it was the explanation of the assessee that while taking physical stock the Department has not considered stock in the pipeline and if such stock is considered then there is no difference in stock computed by the AO. Therefore, on this count also, the reasons given by the AO to arrive at a suppression of production is not sustainable.

7.4 Another important point needs to be considered while negating the observations of the AO to arrive at suppression of production is the nature of products manufactured by the assessee and its trade. As we have already stated in our earlier paragraph, the assessee is into the business of manufacturing of IMFL. The basic raw material required for production of IMFL is rectified spirit and neutral spirit. The other raw materials required for manufacturing of IMFL is empty bottles, caps, labels, etc. The production of IMFL and other liquor products are fully controlled by the State Government Department. The production and sale of goods is controlled and monitored by State Excise 31 to 3372/Chny/2018 Authorities right from procuring of rectified spirit to selling of final products. The rectified spirit is purchased by the assessee with a license issued by Commissioner of Prohibition and Excise. The production of final product is controlled by once again State Excise Authorities in a bonded warehouse. The production process is monitored by the authority’s right from mixing rectified spirit with water to testing the final product from Forensic lab. The final product in the State of Tamil Nadu is sold only to TASMAC, a Government of Tamil Nadu undertaking. The AO has not pointed out any lapse in the process of procurement of primary raw materials like rectified spirit and in the process of manufacture and also in selling of final products to TASMAC. There is no iota of any evidence brought on record by the AO to support his estimation of unaccounted production either in the form of any evidences like action taken by the authorities who are responsible for monitoring the production process. The AO has also not pointed out any instance of violation of State Excise laws. The AO has also failed to bring on record any evidence to prove that other than TASMAC, the assessee has old goods to outsiders. Once the goods manufactured by the assessee are fully controlled and monitored by State Government Authorities 32 I.TA. Nos. 3368 to 3372/Chny/2018 and there is no evidence of any wrong doing by the assessee, the AO cannot estimate suppression of production only on the basis of his own mathematical calculations by extrapolating certain figures that to without understanding the process of manufacture involved in production of IMFL products. Therefore, we are of the considered view that the AO was completely erred in estimation of suppression of production on the basis of suspicion and surmises without any cogent reasons to support his findings. The CIT(A) after considering relevant facts, has rightly deleted addition made by the AO. Hence, we are inclined to uphold the findings of ld.CIT(A) and dismiss the appeal filed by the Revenue for assessment year 2006-07.

33 to 3372/Chny/2018 8.1 The AO has made addition of Rs.1,23,73,800/- towards excess production on the basis of conversion of rectified spirit into IMFL by allowing permissible deduction towards process loss at 3% as per Rule 15A 3(a) read with 3(c) of TamilNadu Distillery Rules, 1981. The AO has worked out probable production of IMFL in bulk litres and then compared with reported production as per books of accounts of the assessee. According to the AO, the probable production on conversion of rectified spirit into IMFL would be 2,15,34,454 litres, whereas the assessee has reported total production of 2,12,86,938 litres. Therefore, he opined that there is excess production of 2,47,516 litres, which the assessee has suppressed and accordingly, adopted average selling price of Rs.50/- per litre and made addition of Rs.1,23,73,800/-. It was the explanation of the assessee before the AO that as per records submitted to State Excise Authorities, production loss for the whole year is within the permissible limit of 3% and the authorities have not initiated any action for discrepancy in production loss. Therefore, computation of probable production by adopting arithmetical calculation without understanding the process of manufacture of IMFL from conversion of rectified spirit is incorrect. The assessee further claimed that as per the 34 I.TA. Nos. 3368 to 3372/Chny/2018 monthly production detail submitted to the authorities, the reported production loss percentage is less than 3% for all the months and hence, the AO is incorrect in determination of excess production by applying his own arithmetical calculation.

8.2 We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. We have also carefully gone through the reasons given by the AO to determine excess production of 2,47,516 litres of IMFL and we do not ourselves subscribe to the reasons given by the AO for the simple reason that the AO has done arithmetical calculation without understanding the process of manufacturing of IMFL by conversion of rectified spirit by adopting permissible production loss as per State Excise Rules. On the other hand, the assessee has demonstrated with evidences that production loss reported to State Excise Authorities is within the permissible limit of 3% for all months. We, further noted that the assessee has submitted monthly statement recording re-distillation of rectified spirit to State Excise Department in as much as, there is no action by the Excise Department for excess production loss reported over and above permissible production loss as per said 35 to 3372/Chny/2018 Excise Rules. Therefore, we are of the considered view that the AO was completely erred in determining excess production by applying his own arithmetic calculation without understanding the facts that there is no discrepancy in stock details submitted by the assessee to the State Excise Authorities and further there is no action from the authorities for violation of any of the conditions prescribed under State Excise Rules, 1981. The CIT(A) after considering relevant facts has rightly deleted additions made by the AO and hence, we are inclined to uphold the findings of ld.CIT(A) and reject ground taken by the Revenue.

9.1 The AO has made addition of Rs.14,83,950/- towards landscaping charges on the ground that amount incurred towards landscaping charges is in the nature of capital expenditure, which gives enduring benefit to the assessee and hence, cannot be allowed as deduction. It was the explanation of the assessee before the AO that landscaping charges incurred towards repair of 36 to 3372/Chny/2018 compound wall, removing and re-fixing of electrical gadgets and landscaping factory land are is in the nature of current repairs and cannot be considered as capital expenditure.

9.2 Having heard both the sides and considered materials available on record, we find that the ld.CIT(A) has recorded categorical finding that landscaping activity mainly consist of growing a particular variety of grass which can by no stretch of imagination be termed as capital in nature or of enduring benefit. Therefore, we are of the considered view that there is no error in the reasons given by the ld.CIT(A) to delete addition made towards disallowance of landscaping charges as capital in nature and hence, we are inclined to uphold the findings of ld.CIT(A) and reject the ground taken by the Revenue.

ITA Nos.3370 & 3371/CHNY/2018 11. The first issue that came up for our consideration from Ground No.2 of Revenue appeals for assessment years 2008-09 & 11.1 The fact with regard to the impugned dispute are that the assessee company is in the business of manufacturing and bottling of IMFL, has purchased old bottles and new bottles from two different suppliers. During the course of assessment proceedings, the AO noticed that the assessee has purchased 55,000 bottles from M/s. Basheer Ahmed & Co., at the rate of Rs.2.32 per bottle of 180ml size. The AO further noted that the assessee has purchased similar 180ml size bottles from M/s. Sri Renga Enterprises at a cost of Rs.2.95 per bottle. The AO further noted that the assessee had also purchased old bottles from M/s. Sri Renga Enterprises at Rs.2.86 per bottle. Therefore, he opined that when new bottles are available at the rate of Rs.2.32 per bottle, the assessee has not justified paying higher price of Rs.2.86 per bottle to M/s. Sri Renga Enterprises and accordingly, opined that the assessee has inflated purchase of bottles by paying more prices to M/s. Sri Renga Enterprises and thus opined that the assessee has paid 18.6% higher rate to old bottles and accordingly made addition of Rs.5,87,64,038/- towards purchase 38 to 3372/Chny/2018 of old bottles. Similarly, the AO has compared price paid for purchase of bottles from M/s.Sri Renga Enterprises to price paid by the assessee for purchase of bottles from M/s. Basheer Ahmed & Co., and opined that there is a difference of 21.35% in price paid to M/s. Sri Renga Enterprises and hence, made addition of Rs.1,03,19,742/- towards purchase of new bottles.

11.2 It was the claim of the assessee before the ld.CIT(A) that the AO has made additions on suspicion and surmises grounds without bringing on record any evidence to prove that the assessee has paid excessive price for purchase of old bottles as well as new bottles, without appreciating the fact that although the size of the bottles remains same, but type and pattern of bottles differs from once supplier to another supplier. The assessee further claimed that it is difficult to compare the price of bottle only on the basis of size because quality of bottles may be different from one manufacturer to other manufacturer as well as cost of bottle is purely dependent upon the pattern and type of bottle. As regards, addition made towards difference in price paid for old bottles, it was submitted that the assessee has purchased 90% of its bottle requirement from M/s. Sri Renga Enterprises 39 to 3372/Chny/2018 and the supplier has undertaken to deliver old bottles at the factory gate and would charge only for bottles that are actually used in the bottling of IMFL without charging for broken bottles. Further, the entire freight is borne by the supplier. Therefore, there is a slight difference in price paid for old bottles but when it compares to landing cost of new bottles, then the price paid for purchasing of old bottles is less and hence, the AO is incorrect in making addition towards inflation of purchases of old bottles as well as new bottles.

11.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. Admittedly, the AO has made addition towards inflation of cost of purchase of bottles by comparing price paid by the assessee to two different suppliers without bringing on record any evidence to prove that the bottles purchased by the assessee from two different suppliers are unique and are of same quality, type and pattern. It is quite possible in the business that the product supplied by two different suppliers may be of two different quality, type and pattern. Unless, the AO brings on record comparability of specification of bottles supplied by two 40 to 3372/Chny/2018 different suppliers, no addition can be made based on price difference alone because each supplier will have his own pricing policy depending upon quality of materials manufactured and supplied by them. In this case, the assessee has purchased old bottles as well as new bottles. Further, 95% of its requirement was purchased from Sri Renga Enterprises. It was the claim of the assessee before the AO that Sri Renga Enterprises has agreed to supply bottles at the factory gate without charging any amount for broken bottles. Further, the entire cost of freight is borne by the supplier. Due to these reasons, the assessee had paid little more prices, when it compares to new bottles purchased from other suppliers. We find that the explanation given by the assessee appears to be bonafide and reasonable. Further, it is the prerogative of the businessman to purchase a particular type of raw material from its own suppliers which suits to its business requirements. Moreover, the price paid for purchase of bottles cannot be compared with price paid to another supplier unless the AO brings on record some evidences to prove that specification of bottle supplied by two different suppliers are unique in type, quality and pattern. In this case, the assessee has proved with necessary evidences that it has paid to suppliers 41 I.TA. Nos. 3368 to 3372/Chny/2018 against purchases through account payee cheques. The AO has not brought on record any evidences to prove that the assessee has paid amount by cheques and get back money in cash. Therefore, we are of the considered view that the AO was erred in making addition towards inflation of cost of purchase of old bottles and new bottles only on the basis of price paid by the assessee to two different suppliers without bringing on record any cogent reasons to justify his action. The CIT(A) after considering relevant facts has rightly deleted additions made by the AO towards inflation of cost of purchase for old and new bottles. Hence, we are inclined to uphold the findings of the ld.CIT(A) and reject ground taken by the Revenue for both assessment years.

ITA No.3372/Chny/2018 13. The first issue that came up for our consideration from Ground No.2 of Revenue appeal is deletion of addition made towards disallowance of finance charges of Rs.18,00,000/- 42 to 3372/Chny/2018 13.1 The fact with regard to the impugned dispute are that the assessee has received back a sum of Rs.1.5 crores from M/s. Sri Harichandana Estates Pvt. Ltd., which was advanced against purchase of property. The AO has disallowed proportionate interest cost @ 12% per annum on amount of Rs.1.5 crores, on the ground that the assessee has diverted interest bearing funds for non-business purpose as well as advance was given for the purpose of purchase of property which is capital in nature for which the authorized representative of the assessee has agreed for the proposed addition.

13.2 Having heard both sides and considered material on record, we find that the assessee has advanced a sum of Rs.5.5 crores in the financial year 2008-09 and has received back a sum of Rs.1.5 crores during the current financial year. We, further noted that the assessee has paid huge interest on borrowed funds. The assessee has not furnished satisfactory explanation for diverting interest bearing funds to related parties for non-business purpose. Therefore, we are of the considered view that the AO was right in disallowance of proportionate interest @ 12% on sum of Rs.1.5 crores and made addition of Rs.18,00,000/-. The 43 to 3372/Chny/2018 CIT(A) without appreciating the facts, has simply deleted addition made by the AO. Hence, we reverse the findings of the ld.CIT(A) and sustain the addition made by the AO towards disallowance of proportionate interest of Rs.18,00,000/-.

14.1 During the course of assessment proceedings, the AO noticed that the assessee has claimed a sum of Rs.4,31,86,368/- as discount allowed and debited under the head selling expenses. The AO has called upon the assessee to explain the nature of expenditure debited under the head selling expenses. The assessee submitted that the TASMAC to whom the products of the assessee company are sold has taken cash discount of Rs.4,31,86,368/-. The AO however was not convinced with explanation furnished by the assessee and according to him, the assessee has failed to justify cash discount allowed to TASMAC with necessary evidences. The AO further noted that such discount has not been reflected in the invoice raised by the 44 to 3372/Chny/2018 assessee. Had an agreement existed as claimed by the assessee, the assessee could have furnished the same before the AO but the assessee could not do so. Therefore, he opined that discount allowed on sales and debited to selling expenses cannot be allowed as deduction.

14.2 We have heard both the parties, perused materials available on record and gone through orders of the authorities below. Admittedly, the Tamil Nadu State Marketing Corporation Ltd., a Government of Tamil Nadu undertaking, is sole distributor of IMFL and liquor products in the State of Tamil Nadu. In terms of State Excise Policy, the assessee should sell its products only to TASMAC. As per the terms and conditions for supply of IMFL, the TASMAC has charged cash discount of 2.18% on the basic price after trade discount and also additional cash discount of Rs.3.28 per case supplied. This cash discount is in addition to the trade discount of 0.55% allowed on basic price. This fact has been confirmed by TASMAC vide its letter dated 12.03.2014, where it has been stated that cash discount has been charged on all the suppliers including the assessee company. From the above, it is very clear that the assessee does not have any say in allowing 45 to 3372/Chny/2018 cash discount on sales but it is solely on the discretion of the purchaser of goods i.e., TASMAC. Therefore, we are of the considered view that expenditure debited under the head discount allowed on sales is a genuine expenditure, which was allowed as per the terms of agreement between the seller and buyer. The AO without appreciating the facts has simply made addition only on the ground that such discount has not been allowed / mentioned in the invoice. The CIT(A) after considering relevant facts has rightly deleted addition made by the AO. Hence, we are inclined to uphold the findings of the ld.CIT(A) and reject ground taken by the Revenue.

Order pronounced in the court on 6th September, 2021 at Chennai.