MARIE PRODUCTS PRIVATE LIMITED,JAIPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 7, JAIPUR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर
IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES,”B” JAIPUR

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BEFORE: DR. S. SEETHALAKSHMI, JM & SHRI RATHOD KAMLESH JAYANTBHAI, vk;dj vihy la-@ITA No. 771/JP/2023
fu/kZkj.k o"kZ@Assessment Year : 2018-19

Marie Products Private Limited
H-20A, RIICO Industrial Area,
Circle-07, Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAGCM4747F vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Sh. P. C. Parwal, CA jktLo dh vksj ls@ Revenue by : Sh. Ajay Malik, CIT lquokbZ dh rkjh[k@ Dates of Hearing
: Various, final on 18/02/2025
mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 21/04/2025

vkns'k@ ORDER

PER: RATHOD KAMLESH JAYANTBHAI, AM

By way of present appeal, the assessee challenges the order of the learned National Faceless Appeal Centre, Delhi dated 31/10/2023 [ for short CIT(A)] relates to the assessment year 2018-19. The said order of the ld. CIT(A) arises because the assessee has challenged the assessment order dated 07.04.2021 passed under section 143(3) of the Income Tax
Act, 1961 [ for short “Act”] by National e-Assessment Centre, Delhi [ for short AO].

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(DGGSTI, JZU) conducted a search on 10.11.2017 at various premises of M/s. Marie Products Pvt. Ltd. (M/s. MPPL), RIICO Industrial Area, Kukas,
Jaipur and during the search proceedings incriminating documents were found. The officers also conducted physical verification of stock of raw materials and finished goods at the premises of the assessee company and detected a shortage of raw material and excess of finished goods. A statement of the director of M/s. MPPL was recorded on 11.11.2017 u/s. 14
of the Central Excise Act, 1944 r.w.s. 174 of CGST Act, 2017 wherein he admitted the fact of clearance of goods without payment of duty/tax and shortage of raw material as well as excess of their finished goods. In anticipation of the same, the director of M/s MPPL has paid Rs. 1.50 Cr against their Central Excise Duty/CGST liability.
2.1
Based on that information the case of the assessee was selected for "compulsory Scrutiny" assessment under the E-assessment Scheme, 2019
on the issue of "Specific information pointing tax evasion has been received from other agency". Statutory notices as required u/s. 142(1) of 3
The assessee company, vide e-communication dated 11.02.2021, has submitted that during the search operation on 10.11.2017 by the officers of DGGI, physical stock verification of various types of raw material and finished goods was done and the officers found certain differences.
The company has deposited an amount of Rs. 1.5 Cr against the Central
Excise Duty/CGST liability under protest only. It was further submitted by the assessee company that the DGGI issued the SCN 03.01.2020 on the basis of electricity consumption demanding Central Excise duty of Rs.1.22
Cr and interest of Rs.0.35 Cr and proposing appropriation of Rs.1.5Cr. In its reply the assessee has stated that statement recorded were retracted within time. The same has also been mentioned in the SCN. Further, the assessee company has provided the calculation of the demand raised by Directorate General of Goods & Services Intelligence of Rs.1.5 Cr. The relevant portion of the calculation pertains to the assessment of year under consideration.
2.3
The assessee also submitted a copy of the Show Cause Notice dated
03.10.2020 issued by the Addl. Director, Directorate General of Goods &

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Notice ld. AO noted the following points :-
(i)
As per the Show Cause Notice, during the course of search proceedings on 10/11.11.2017 at factory premises of the assessee company at Plot No. H-
20A, RICO, Industrial Area, Kukas, Tehsil Amer, Jaipur-28, physical stock verification was carried out and excess of stock of raw material, packaging material, semi-finished goods and finished goods valued at Rs.68,04,678/- was found against the quantity recorded in the stock register.
(ii)
The officers found excess stock of perfume/compounded valued at Rs.
15,79,200/- belonging to the assessee company from the residence of the director.
(iii) The officers found excess stock of sweet supari valued at Rs. 4,78,640/- belonging to the assessee company from the premises of M/s. Shubham
Agency clearing and forwarding agent of the assessee company.
(iv) The officers found excess stock of raw betel-nut valued at Rs. 13,20,800/- belonging to the assessee company from the premises of M/s. Agarwal &
Company.
(v)
The officers found excess stock of raw material, WIP and Finished Goods from the premises of M/s. Singhal Flexi-Pack for an amount of Rs.
43,89,371/- belonging to the assessee company.

The above stock so found in excess was tabulated at page 4 & 5 of the assessment order which amounted to Rs. 1,45,72,690/-. On this issue statement of Shri Ashok Agarwal was recorded on 10.11.2017 u/s 14 of the Central Excise Act, 1944. In that statement he admitted that the discrepancies found in their stock verification on 10.11.2017 was due to purchase & sale of their goods without any bill. The assessee was asked to reconcile the excess goods found from the above-mentioned premises. The assessee company submitted various reasons like the excise officer has considered WIP as finished goods, material issued for R&D work, material not considered during the search proceedings, the officers considered

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Marie Products Pvt. Ltd. vs. ACIT weight on improper sample basis, assessee company has stored goods at other premises, material under process goods not considered etc. The submission of the assessee company was considered as afterthoughts and not tenable. Therefore, a sum of Rs. 1,45,81,700/- being the amount of excess stock considered as unexplained expenditure as per provision of section 69C of the Act.
2.4
During that proceeding statements of various persons were recorded u/s. 14 of the Central Excise Act, 1944. Based on the statement of Shri
Sushil Shah, labour of M/s. MPPL, recorded u/s. 14 of the Central Excise
Act, 1944 on 10.11.2019 and the statement of Shri Ashok Agarwal, director of M/s. MPPL recorded on 11.11.2017, they hold a view that 36 Bori of raw betel-nut purchased by M/s. MPPI on daily basis, which results in manufacturing of 2180 Kg. of scented supari per day. Based on the statement of the various person, average weight per pouch was calculated at page 7 of the assessment order at 3.6875 gms. Based on the excise ER-
1 return actual production and based on the electric consumption unaccounted production for an amount of Rs. 8,15,28,076/- was considered and accordingly same was also added as per provision of section 69C of the Act.

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Center, 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:
“Ground No. 1 and 4

"5. The assessment order dated 7 April 2021 passed under section 143(3) read with sections 143(3A) and 143(3B) of the Act is bad in law, illegal and void-ab-inito as sections 143(3A) and 143(3B) of the Act had ceased to exists from 1 April 2021
in terms of section 143(3D) of the Act. Relevant extracts are as under.
"143 (3D) Nothing contained in sub-section (3A) and sub-section (3B) shall apply to the assessment made under sub-section (3) or under section 144, as the case may be, on or after the 1st day of April, 2021."

"(xvi) the National Faceless Assessment Centre shall examine the draft assessment order in accordance with the risk management strategy specified by the Board, including by way of an automated examination tool, whereupon it may decide to-

"The AO in the instant case has failed to issue draft assessment order cum show cause notice and, thus not followed the mandatory provisions of the Act..."

In this connection, kind attention is invited to the provisions of sec 2928 of the IT ACT, relevant provision is as follows:-

Return of income, etc., not to be invalid on certain grounds.

292B. No retum of income, assessment, notice, summons or other proceeding, furnished or made or issued or taken or purported to have been furnished or made or issued or faken in pursuance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason/of any mistake, defect or omission in such return of income, assessment, notice summons or other proceeding if such return of income, assessment, notice, summons or other proceeding is in substance and effect in conformity with or according to the intent and purpose of this Act.

In view of the above, it is submitted that the assessment made u/s 143(3) r.w.s.
143(3A) and 143(38) of the Act dated 07/04/2021 is not illegal.

Further, the contention of the assessee that FAO has failed to issue draft assessment order cum show cause notice in this case does not hold any ground as after examination of the ITBA note sheets it is gathered that the FAO has issued the draft assessment order on 31/03/2021 to the assessee (copy enclosed). "

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Marie Products Pvt. Ltd. vs. ACIT till 31 March 2021. With effect from 1 April 2021, all the assessment orders have to be passed under section 1448 of the Act and therefore passing of the assessment order in an incorrect section which was not having enforcement under the law as on the date of passing of the assessment order is a substantive illegality/
juri ictional defect and not a procedural violation of the nature adverted to in section 2928 of the Act. Reliance in this regard is placed on the decision of Hon'ble
Delhi High Court in the case of Ranu Promoter Private Limited vs Add CIT wherein the Hon'ble Delhi High Court held that the assessment order could have been passed in consonance with section 144B of the Act alone on or after 1 April 2021. For relevant extracts of the decision, kindly refer to the detailed CIT (A) submission.

Thus, the defect in the assessment order cannot be cured by relying on section 2928 of the Act as it is not a procedural defect rather a substantive/juri ictional defect.

Ground 2

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7.3 A statement of the Director of the appellant company was recorded u/s 14 of the Central Excise Act 1944 r.w.s. 174 of CGST Act, 2017 and admitted the fact of clearance of goods without payment of duty/tax and shortage of raw material as well as excess of their finished goods, and paid Rs. 1.50 Cr against their Central
Excise Duty/CGST liability.

"In this connection, it is submitted that the addition of Rs. 1,45,81,700/- has been made by the FAQ on the basis of the information gathered through Show Cause notice issued by the GST Deptt in the assessment order the FAO has discussed all the facts in detail while making this addition of Rs 1,45,81,700/-. It is further mentioned that Sh. Ashok Agarwal in his statement dated 11/11/2017 recorded u/s 14 of the Central Excise Act, 1944 has himself admitted that M/s MPPL is indulged in clandestine clearance of their finished goods without issuance of tax invoice. He also admitted that the perfume found at their residence situated at Plot No. 41,
Gupta Garden, Behind Amor Hotel Tilak Marg Govind Nagar (West), Jorawar
Singh Gate, Amer Road, Jaipur belongs to Mis MPPL and ownership of the said premises belongs to him only, and he could not produce any invoices against the illicit purchase of compound/perfume found at the residence during the course of search operation conducted by the CGST Deptt.

During the course of assessment proceedings the assessee was asked to reconcile the excess goods found from the above mentioned premises, however, the submissions made by the assessee company were not found tenable by the FAO."

"2.1 In the remand report, the FAO has only reiterated which has already been mentioned in the assessment order and has not provided any arguments against the submission made by the Appellant. The Appellant had provided detailed reconciliation of the stock quantity recorded during physical verification and as per books during the assessment proceedings vide submission dated 4 February 2021
and 2 March 2021 (PB 1-2 and 265-269). The FAO has mentioned that the submission provided by the Appellant was not found tenable but the reasons for not accepting the submission/reconciliation of the Appellant by the FAO has not been explained.

Ground No. 3

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(iv) Shri Ashok Agarwal in his statement dated 10.11.2017 recorded u/s. 14 of the Central Excise Act, 1944 admitted that the discrepancies found in their stock verification on 10.11.2017 was due to purchase & sale of their goods without any bill. Shri Ashok Agarwal in his statement dated 11.11.2017 recorded u/s. 14 of the Central Excise Act, 1944 admitted that M/s MPPL is indulged in clandestine clearance of their finished goods without issuance tax invoice. It is also admitted that the perfume found at their residence situated at Pot No. 41, Gupta Garden,
Behind Amer Hotel, Tilak Marg, Govind Nagar (West), Jorawar Singh Gate, Amer
Road, Jaipur belongs to M/s. MPPL and ownership of the said residence premises belongs to him only and he could not produce any invoices against the illicit purchase of compound/perfume found at the residence during the course of Search operation.

In the statement recorded u/s. 14 of the Central Excise Act, 1944 of Shri Ashok
Agarwal on 14.11.2019, it is stated by him that average price of the scented supari is Rs.275-285 (approx- average 280) therefore considering the daily production
2180 kg per day the production for the period from 01.04.2017 to 09.11.2017 (222
days) the total value of total production comes to Rs.2180 X 222 X 280 =Rs.
13,15,08,800/-

(v)Shri Rajesh Agarwal, Proprietor of M/s. Shubham Agency, Jaipur in his statements recorded on 17.04.2018 & 27.04.2018 could not submit any plausible reason for discrepanciesfound in the stock of Marie Brand Supari found at the premises of M/s. Shubham Agency.

(vi)Shri Vindo Agarwal, Director of M/s. MPPL in his statements dated 20.11.2017
and 22.11.2017 also agreed with the content of statements of Shri Shushil Shah,
Labour of M/s. MPPL, Shri Lalit Kumar, Labour Supervisor of M/s. MPPL and Shri
Ashok Agarwal.

(vii)A statement u/s. 14 of the Central Excise Act, 1944 of Shri Gurjinder Singh Gill,
Partner of M/s. G. G. Carriers, 11/14, Automobile Nagar, Jaipur was also recorded on 17.06.2019 wherein he admitted that not all goods transported by them to M/s.
MPPL were accompanied by invoice and on some occasions, they transported supari in excess of the quantity shown in the invoices.
(viii) Considering the physical verification of goods at various premises related to the assessee to the assessee company, data extracted devices seized, statements recorded u/s. 14 of the Central Excise Act, 1944 of various persons, electric consumption, Kacchi Parchhi, the DGGI department made quantification of Central
`
Total

"In this connection, it is submitted that the addition of Rs. 8,15,28,076/- has been made by the FAO on the basis of the information gathered through Show Cause notice issued by the GST Deptt. In the assessment order the FAO has discussed all the facts in detail while making this addition of Rs. 8,15,28,076/-It is further mentioned that the unaccounted production has been calculated for the period from 01/04/2017 to 09/11/2017 and this addition has been made after detailed study / examination and analysis of the data of ER-1 returns submitted for the period from 01/04/2017 to 09/11/2017 and electricity bills seized from the factory premises of M/s MPPL. Kukas, Amer, Jaipur."

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3.2 Further, the addition has been made under section 69C of the Act which is not applicable as the FAO has no where in the assessment order proved that the Appellant had incurred expenditure and plainly relied on the show cause notice/
order passed by the indirect tax authenties for making addition under section 69C of the Act The hypothetical numbers of alleged alleged suppressed is based on a theory which is not proved by any production is by any corroborative Appellant without bill."
8.6 Taking in account all the above details and counter arguments of the AO and the appellant as well as the report of the DGGI Department after a physical inspection of the production facility of the appellant; it is quite clear that the appellant has indulged in production of goods which have not been properly reported in its regular books of accounts. In view of the same, the addition of such unaccounted production by the AO u/s 69C of the IT Act is upheld and the ground no. 3 of the appeal is accordingly dismissed.

Ground No. 5

In the result the appeal is dismissed.”

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Based on facts and circumstances of the case and in law, the CIT(A) has erred in not appreciating that the assessment order dated 7 April 2021 passed under section 143(3) r.w.s 143(3A) & 143(3B) of the Act is illegal and bad in law as the assessment order has been passed in an inoperative section which is substantive/
juri ictional defect and not merely a procedural defect

Facts:-
1. The Appellant is engaged in the business of manufacturing and processing of scented betel nut (supari). Return was filed declaring total income of Rs 18,86,090/-. The Assessing Officer (“AO”) issued notice under section 142(1) dated 21 January 2021 seeking certain information. Reply was filed by the Appellant vide submissions dated 4 February 2021 (PB 1-12) and 2 March 2021
(PB 264).

Submission:-

“143 (3D) Nothing contained in sub-section (3A) and sub-section (3B) shall apply to the assessment made under sub-section (3) or under section 144, as the case may be, on or after the 1st day of April, 2021.”
4. As evident from page number 1 of the assessment order, the order has been passed under section 143(3) read with sections 143(3A) & 143(3B) of the Act. Passing of an order under a non-operative section vitiates the applicability of the order itself and therefore the order is bad in law and be quashed. The order ought to have been passed by the AO under section 144B of the Act which was applicable from 1 April 2021. The date of assessment order is 7 April 2021 and, thus non-passing of order under the applicable section makes the assessment order void-ab-initio.

“Return of income, etc., not to be invalid on certain grounds.

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292B. No return of income, assessment, notice, summons or other proceeding, furnished or made or issued or taken or purported to have been furnished or made or issued or taken in pursuance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such return of income, assessment, notice, summons or other proceeding if such return of income, assessment, notice, summons or other proceeding is in substance and effect in conformity with or according to the intent and purpose of this Act.”
6. It is submitted that passing of the assessment order in an incorrect section which was not having enforcement under the law as on the date of passing of the assessment order is a substantive illegality/ juri ictional defect and not a procedural violation of the nature adverted to in section 292B of the Act.

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Marie Products Pvt. Ltd. vs. ACIT provisions of this Act, the assessment under sub- section (3) of section 143
or under section 144, in the cases referred to in sub-section (2), shall be made in a faceless manner as per the following procedure, namely: --.........
(xvi) the National Faceless Assessment Centre shall examine the draft assessment order in accordance with the risk management strategy specified by the Board, including by way of an automated examination tool, whereupon it may decide to--
(a) finalise the assessment, in case no variation prejudicial to the interest of assessee is proposed, as per the draft assessment order and serve a copy of such order and notice for initiating penalty proceedings, if any, to the assessee, along with the demand notice, specifying the sum payable by, or refund of any amount due to, the assessee on the basis of such assessment; or (b) provide an opportunity to the assessee, in case any variation prejudicial to the interest of assessee is proposed, by serving a notice calling upon him to show cause as to why the proposed variation should not be made; or.........
xxx xxx xxx
(9) Notwithstanding anything contained in any other provision of this Act, assessment made under sub-section (3) of section 143 or under section 144
in the cases referred to in sub-section (2) [other than the cases transferred under sub-section (8)], on or after the 1st day of April, 2021, shall be non est if such assessment is not made in accordance with the procedure laid down under this section."
(emphasis supplied)
14. Keeping in view the aforesaid, this Court is of the opinion that learned counsel for the petitioner is correct in submitting that Section 144B of the Act had been violated and the assessment proceeding had been completed in the present case in violation of the principles of natural justice.
15. Consequently, this Court sets aside the impugned assessment order dated 6th April, 2021 as also the notice of demand issued under Section 156
of the Act and the notice for initiating the penalty proceedings under Section 274 read with Section 270A of the Act.”
16. However, the respondent/revenue will be at liberty to proceed with the assessment process, albeit, under the provisions of Section 144B of the Act.
Needless to add, if a show cause notice-cum-draft assessment order is served on the petitioner, an opportunity would be given to the petitioner to file its response/objections to the same. Furthermore, if there is a variation proposed in the income of the petitioner, an opportunity of personal hearing will also be accorded. In sum, the procedure prescribed under Section 144B of the Act will have to be followed by the respondent/revenue.”

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• Margita Infra vs. National W-assessment Centre, Delhi (2023) 458 ITR
0101 (Guj): Relevant extracts of the decision are as under:

“8. One of the grounds of challenge is that assessment order is also contrary to the scheme of I.T Act because the additions are made beyond the scope and issues in the show cause notice resulting in actual income assessed at 50 times then proposed to be assessed in the show cause notice. Thus, on both the counts non- grant of virtual hearing, though asked for repeatedly by the petitioner, and because the additions are made beyond the scope and issue of the show cause notice, the final assessment order passed deserves to be interfered with.
9. Resultantly assessment order dated 23.9.2021 and the demand notice issued under Section 144 of the self same date are hereby quashed and set aside giving the permission to the respondent to issue a fresh show cause notice. All contentions available under the law would be open for the petitioner to be raised in the fresh proceedings.”
• Trendsutra Client Services Pvt. Ltd. Vs. ACIT and Ors. (2021) 112 CCH 0242
MumHC: Relevant extracts of the decision are as under:

“16. We find from the impugned assessment order that there are variations from the return filed by Petitioner by containing additions/disallowances. The final assessment order is not made in accordance with the procedure laid down under Section 144B (xvi)(b) of the Act as inspite of the variation being prejudicial to the interest of assessee, no opportunity has been provided to the assessee by having him served with a show cause notice as well as draft assessment order calling upon him to show cause as to why the proposed variation should not be made.
Thus, the impugned assessment order dated 18th April, 2021 is non est as the assessment is not made in accordance with procedure laid down under Section 144B of the Act. Hence, we pass following order:-
(a) The assessment order issued by Respondent No.2 dated 18th April, 2021
along with consequential demand notice is quashed and set aside.
(b) The Respondents may take such denovo proceedings as required in accordance with law.
(c) Writ Petition is accordingly disposed in the above terms. There shall be no order as to costs.”
• Pr CIT vs Maruti Suzuki India Limited (2019) 416 ITR 0613 (SC): The Hon’ble
Supreme Court of India held that passing of the assessment order on a non- existing company is a substantive illegality and not a procedural violation of the nature adverted to in Section 292B of the Act and further clarified that participation in the proceedings by the appellant in the circumstances cannot operate as an 20
• CIT vs Norton Motors 275 ITR 595: The Hon’ble Punjab & Haryana High Court stated the effect of section 292B in in the following manner:-

"A reading of the above reproduced provision makes it clear that a mistake, defect or omission in the return of income, assessment, notice, summons or other proceeding is not sufficient to invalidate an action taken by the competent authority, provided that such return of income, assessment, notice, summons or other proceeding is in substance and effect in conformity with or according to the provisions of the Act. To put it differently, Section 292B can be relied upon for resisting a challenge to the notice, etc., only if there is a technical defect or omission in it. However, there is nothing in the plain language of that section from which it can be inferred that the same can be relied upon for curing a juri ictional defect in the assessment notice, summons or other proceeding. In other words, if the notice, summons or other proceeding taken by an authority suffers from an inherent lacuna affecting his/its juri iction, the same cannot be cured by having resort to Section 292B.
• CIT Vs. Harjinder Kaur (2009) 222 CTR 254 (P&H): In the said case, return in question filed by the assessee was neither signed by the assessee nor verified in terms of the mandate of Section 140 of the Act. The Court was of the opinion that such a return cannot be treated as return even a return filed by the assessee and this inherent defect could not be cured inspite of the deeming effect of Section 292B of the Act. Therefore, the return was absolutely invalid and assessment could not be made on a invalid return. In the process, the Court observed as under:-

"Having given our thoughtful consideration to the submission advanced by the learned Counsel for the appellant, we are of the view that the provisions of Section 292B of the 1961 Act do not authorize the AO to ignore a defect of a substantive nature and it is, therefore, that the aforesaid provision categorically records that a return would not be treated as invalid, if the same "in substance and effect is in conformity with or according to the intent and purpose of this Act". Insofar as the return under reference is concerned, in terms of Section 140 of the 1961 Act, the same cannot be treated to be even a return filed by the respondent assessee, as the same does not even bear her signatures and had not even been verified by her. In the aforesaid view of the matter, it is not possible for us to accept that the return allegedly filed by the assessee was in substance and effect in conformity with or according to the intent and purpose of this Act. Thus viewed, it is not possible for us to accept the contention advanced by the learned Counsel for the appellant on the basis of Section 292B of the 1961 Act. The return under reference, which had been taken into consideration by the Revenue, was an absolutely invalid return as it had a glaring inherent defect which could not be 21
Marie Products Pvt. Ltd. vs. ACIT cured in spite of the deeming effect of Section 292B of the 1961 Act."
• Sri Nath Suresh Chand Ram Naresh Vs. CIT (2006) 280 ITR 396: The Allahabad
High Court held that the issue of notice under Section 148 of the Income Tax Act is a condition precedent to the validity of any assessment order to be passed under section 147 of the Act and when such a notice is not issued and assessment made, such a defect cannot be treated as cured under Section 292B of the Act.
The Court observed that this provision condones the invalidity which arises merely by mistake, defect or omission in a notice, if in substance and effect it is in conformity with or according to the intent and purpose of this Act. Since, no valid notice was served on the assessee to reassess the income, all the consequent proceedings were null and void and it was not a case of irregularity. Therefore,
Section 292B of the Act had no application.

Thus, it is submitted that the defect in the assessment order cannot be cured by relying on section 292B of the Act as it is not a procedural defect rather a substantive/ juri ictional defect.
Ground No 2:

Based on facts and circumstances of the case and in law, the CIT(A) has erred in stating that the show cause notice/ draft assessment order was issued on ITBA prior to issuing of the final assessment order dated 7 April 2021 without providing a copy of the same/ evidence in support of the same and therefore in absence of framing a draft assessment order as per Paragraph 5(2)(xvi) of Faceless
Assessment (Ist Amendment), Scheme 2021 and in absence of providing an opportunity to the Appellant, the final assessment order is illegal, bad in law and against the principles of natural justice.

Facts and submission:-

“Further, the contention of the assessee that FAO has failed to issue draft assessment order cum show cause notice in this case does not hold any ground as after examination of the ITBA note sheets it is gathered that the FAO has issued the draft assessment order on 31/03/2021 to the assessee (copy enclosed).”
9. It is submitted that the CIT(A)/ AO has not provided copy of the draft assessment order dated 31 March 2021. The Appellant has placed on record screenshot of the e-filing portal evidencing that a draft assessment order cum

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Marie Products Pvt. Ltd. vs. ACIT show cause notice was not issued to the Appellant (PB 292). Thus, the assessment order has been passed without following the mandatory procedure laid out in the Act and therefore is against the principles of natural justice. As per paragraph 5(2)(xvi) of the Faceless Assessment Scheme 2021 (PB 288)/ section 144B(1)(xvi) of the Act, the AO is required to provide an opportunity to the assessee in case any variation proposed is prejudicial to the interest of the assessee. Relevant extracts are as under:

“(xvi) the National Faceless Assessment Centre shall examine the draft assessment order in accordance with the risk management strategy specified by the Board, including by way of an automated examination tool, whereupon it may decide to—
(a) finalise the assessment, in case no variation prejudicial to the interest of assessee is proposed, as per the draft assessment order and serve a copy of such order and notice for initiating penalty proceedings, if any, to the assessee, along with the demand notice, specifying the sum payable by, or refund of any amount due to, the assessee on the basis of such assessment; or (b) provide an opportunity to the assessee, in case any variation prejudicial to the interest of assessee is proposed, by serving a notice calling upon him to show cause as to why the proposed variation should not be made; or (c) assign the draft assessment order to a review unit in any one Regional
Faceless Assessment Centre, through an automated allocation system, for conducting review of such order”
10. Reliance in also placed in the case of Shreeji Investment & Advisory
Services vs. National Faceless Assessment Centre & ors (2021) 112 CCH 88
(Mum HC). Relevant extracts of the order are as under:
“3 Moreover, as regards draft assessment order, the impugned order does not state that any draft assessment order was given but in the affidavit in reply filed by one Sreekala S. Nair affirmed on 21st September 2021, it is stated that the show cause notice dated 18th February 2021 had a heading "show cause notice as to why assessment should not be completed as per draft assessment order and "the notice further states that if no reply is received, the assessment will be completed as per the draft assessment order". In our view, this is one of the most preposterous stand take in as much as in the notice dated 18th February 2021
cannot, by any stretch of imagination, be called the draft assessment order. In paragraph 3 of the notice it is stated "please explain the tax impact if it should be 8,41,03,800/- instead of 6,54,05,508/-". Then it is stated in paragraph 4 "in this regard please produce the ITR/P&L / and balance sheet of the partners". In paragraph 5 it is stated "please explain the method of accounting adopted by you"
and in paragraph 6 it is stated "please produce copy DEMAT account with a chart showing the entry date of purchase of share on which short term capital losses occurred and chart showing sale date of these shares supported with the bank details". In our view, this is nothing but a notice seeking further details, information,

23
4. The final nail in the coffin is addition of Rs.3,24,98,451/- and Rs.3,79,58,450/-, both under Section 68 of the Act. In the petition, in one of the grounds there is a specific allegation that there is not even a whisper of these additions either in the alleged draft assessment order or in any of the notices issued in the course of assessment proceedings and no opportunity whatsoever was given to petitioner to file its objections against these additions. In the affidavit in reply of respondent, there is no denial of this fact. In the affidavit in reply, the affiant has gone on the merits of the two additions but does not deny the fact that neither the alleged draft assessment order or any of the notices have not even referred to this proposed additions under Section 68 of the Act. Issuance of show cause notice is the preliminary step which is required to be undertaken. The purpose of show cause notice is to enable a party to effectively deal with the case made out by respondent
(Om Shri Jigar Association Vs. Union of India), 1994 SCC Online Guj.77
Therefore, on this ground also the impugned order is required to be set aside.
5. In our view, having heard Mr. Syal and Mr. Pinto and having considered the petition and the affidavit in reply, the prayer as prayed for in prayer clauses (a) and (c) of the petition has to be granted and is hereby granted. The same read as under:
"(a) that this Hon'ble Court be pleased to issue a Writ of Certiorari or any other writ, order or direction under Article 226 of the Constitution of India calling for the records of the case leading to the passing of the impugned order dated 24th
May2021 under Section 143(3) r.w.s. 144B of the Act for the assessment year
2018-19 and after going through the same and examining the question of legality there of quash, cancel and set aside such impugned order.
(c) that this Hon'ble Court be pleased to issue a Writ of Prohibition or any other writ, order or direction under Article 226 of the Constitution of India ordering and directing respondent no.1 not to take any action in furtherance to the impugned order."
In view of the above, considering that the order has not been passed under correct section of the Act and the mandatory provisions as provided in the Act have not been followed, the assessment order be quashed.

Ground No 3:

Based on facts and circumstances of the case and in law, the CIT(A) has erred in confirming addition of Rs 1,45,81,700 on account of alleged excess stock determined by Directorate General of Goods and Service Tax Intelligence
(“DGGSTI”) in the search dated 10 November 2017 carried out at the various premises without pointing out any discrepancy in the reconciliation statement submitted by the Appellant and by not appreciating that a part of the alleged excess stock was not even found on the premises of the Appellant.

24
Facts:-

S No Particulars
Amount (INR)
A For alleged excess stock at factory premises of the Assessee at Plot No 20A, RIICO Industrial Area, Kukas
68,04,689
B
For alleged excess stock at residence of the director of the Appellant Mr
Ashok Agarwal
15,79,200
C
For alleged excess stock at Shubham Agency, proprietorship concern of Rajesh Agarwal
4,78,640
D
For alleged excess stock at M/s Agarwal & Company, proprietorship concern of Mr Akash Agarwal, s/o Mr Ashok Agarwal
13,20,800
E
For alleged excess stock at M/s Singhal Flexi-Pack. Mr Ashok Agarwal is partner in the firm along with Mr Jitendra Kumar Agarwal
43,89,371
Total
1,45,72,690

Submission:-

25
14. The reasons for alleged excess stock of INR 1,45,72,690 for which addition has been made by the AO is explained hereunder:

A.
For alleged excess stock at factory premises of the Assessee at Plot No H-20A,
RIICO Industrial Area, Kukas amounting to INR 68,04,689. B.
For alleged excess stock at residence of the director Mr Ashok Agarwal amounting to INR 15,79,200. 14.1
The AO referring to the search proceedings conducted by DGGI at the factory premises of the Appellant and its director made addition alleging that excess stock was found during search conducted by the officials of DGGI. At the outset, it is submitted that the observation of the DGGI is incorrect as the DGGI has not considered the stock recorded in the books of accounts as on the date of search and has assumed that the entire physical stock as excess stock. It may be noted that Mr Ashok Agarwal, director of the Appellant company in his statement dated 11 November 2017 (PB 293-299) recorded at the factory premises has specifically stated that stock register in maintained in computer, but the indirect tax authorities ignored the same and considered the entire physical stock to be excess. The Assessee again explained this fact before the indirect tax authorities in reply to the show cause notice but the same was again ignored and thus only on the basis of incorrect finding recorded by the indirect tax authorities, the presumption of excess stock drawn by the AO is incorrect (letter filed with indirect tax authorities is enclosed at PB 300-304).

S
No Item/
product
Actual stock as per physical verification – A Amount of stock as per physical verification
(INR)
Stock as per books as 10
November
2017 (date of search) – B
Excess/
(shortage) [A-
B]
Remarks
1
Cherry papaya
160 kg
7,840
300 kg
(140 kg)
Stock issued for R&D work was not entered in the ledger account. Thus, there is no deviation in this stock
2
3878.5 kg semi-finished goods.
Thus, there is no deviation in this stock

Plastic
Outer
(Laminated outer)
834.56 kg
1,25,189
1014.60 kg
180.01 kg
Stock issued for material under process. However, during search, material under process was not considered at all. Thus, there is no deviation in this stock
4
Plastic roll
(Polyster
Roll)
3821.41 kg
3314.58 kg
(506.83 kg)
Weight considered by excise department is on improper sample basis and therefore the difference. If correctly done, there is no deviation in this stock
5
Palm oil/
Refined corn oil
806.40 kg
77,056
1,224.78 kg
(144.59) kg
1080.19 kg
273.79 kg
Difference of 273.79 kg is on account of stock issued to R&D to check oil quality. Thus, there is no deviation in this stock.
144.59 kg represents oil issued for production and therefore has been reduced
6
of supplier S.H. Kelkar &
Co.
Ltd.
which was received later
7
Plastic bags
&
bori
2300 pcs
39,100
4018 pcs
(715 pcs)
3303 pcs
1003 pcs
Plastic bags and boris occupied in raw material, semi-finished goods, finished goods and wastage not considered.
Also, plastic bags and boris not found proper were removed from stock. Thus, there is no deviation in this stock
715
pcs represents packing material issued for production
8
Plastic tich strip
163.12 kg
17,780
275.04 kg
(30.73) kg
244.31 kg
81.19 kg
Plastic tich strip already used in finished goods and lying in stock not considered.

If considered, there is no deviation in this stock
30.73
kg represents packing material issued for production
9
Saunf
42.43 kg
6,110
60.50 kg
18.07 kg
Stock issued for R&D work was not entered in the ledger account. Thus, there is no deviation in this stock
10
Sodium
Sacreen
40.80 kg
-
84.42 kg
43.62 kg
-
-
40 kg
40 kg
Stock issued for R&D work was not entered in the ledger account. Thus, there is no deviation in this stock
13
Raw material sabut
Supari

Supari
Cutting

19,014.84 kg

35,80,785
11,819.00 kg
(2,535.00 kg)
(7,139.00 kg)
2,145.00 kg

15,913.42 kg

-

-3,101.39 kg
2535
kg represents invoice number 95 of Jain
Enterprises dated
7
November 2017 which was received later. 7139
kg represents conversion of raw material supari into supari cutting

Products very speedily absorbs moisture and therefore the stock found in excess is cumulative result of this property of the stock. For detailed reconciliation, refer page
269 of PB
14
Zintan
(Sugar
Ball)
3.4 kg
170
20 kg
16.60 kg
Stock issued for R&D work was not entered in the ledger account. Thus, there is no deviation in this stock
Add: Product in work in progress considered as finished goods by excise officer
22,32,096
Total
83,83,879
Aggregate of Rs 68,04,689 and 15,79,200

From the above table, it can be noted that stock was properly recorded in the books of accounts and any excess/ shortage of stock in comparison to physical verification is duly verifiable and explainable. The indirect tax authorities failed to 29
Even at para 4.1 of the order (PB 306), the indirect tax authorities have incorrectly mentioned that “excess stock was found as against the quantity recorded in the stock register” and have mentioned in the table below as “excess stock”. On perusal of the table (PB 307-310), your goodself will appreciate that the indirect tax authorities have not provided any details/ comparison of “stock found at physical verification” and “stock as per stock register”. They have only mentioned “stock details” which is actually the “physical stock”. Copy of stock register as per books of accounts evidencing the above quantity which is recorded in books is enclosed as PB 378. Therefore, without considering the stock as per the stock register, the excess stock determined is incorrect and cannot be the basis for making addition on account of alleged excess stock.

C.
For alleged excess stock at Shubham Agency, proprietorship concern of Mr Rajesh Agarwal amounting to INR 4,78,640

31
Singhal Flexi-Pack. As the alleged excess physical stock is not the stock of the Assessee, the same cannot be treated as unexplained stock of the Assessee.
14.12
In the assessment order, the AO has incorrectly mentioned that the alleged excess physical stock is of the Assessee company. Even at paragraph 7.1
of the show cause notice F No DGGSTI/JZU/INT/CE/02/2017/9802 dated 3
October 2020 (PB 24) and order passed by the indirect tax authorities (PB 313-
314) pursuant to the show cause notice, it has not been mentioned that the alleged excess physical stock is the stock of the Assessee company. Further, Mr Jitendra
Kumar Agarwal, partner in M/s Singhal Flexi-Pack in the statement recorded on 10
November 2017 has not mentioned that the alleged excess physical stock is the stock of the Assessee company and thus no addition can be made on stock which does not belongs to the Assessee.

In light of above, it is submitted that the addition made by the AO by incorrectly relying on the show cause notice/ order passed by the indirect tax authorities be directed to be deleted due to the following reasons:

• The indirect tax authorities failed to consider the stock register maintained by the Assessee as on the date of search and concluded that the entire physical stock found was excess.

• The indirect tax authorities purposefully did not consider the response filed by the Assessee explaining the position of stock as per stock register and as found during physical verification and therefore the order passed by the indirect tax authorities cannot be relied as it contains material mistakes and improper facts.

• The Assessee has not accepted the order passed by the indirect tax authorities and has challenged it before the indirect tax appellate authority which is pending as of the date.

32
• The AO has failed to consider the detailed explanation and reconciliation provided for stock found on physical verification and as per books of the Appellant and plainly relied upon the incorrect facts recorded in show cause notice/ order passed by the indirect tax authorities without independently verifying the same.

• In relation to stock of perfume compound, day to day stock register has been maintained. Copy of daily stock register of perfume compound from 1 April 2017
to 10 November 2017 is enclosed at PB 379-397. On perusal of the stock register, your honour will appreciate that the quantity purchased is duly entered into stock register and the quantity issued for production is also duly recorded in stock register. Thus, the indirect tax authorities have incorrectly considered 314 kgs as actual stock whereas out of 314 kgs, 200 kgs was water and remaining 114 kgs was perfume compound. Reconciliation of actual stock with books has already been provided above.

• Alleged excess physical stock found at M/s Shubham Agency, M/s Agarwal &
Company and M/s Singhal’s Flexi-Pack is not of the Assessee company and therefore cannot be added to the total income of the Assessee company. In the show cause notice, order passed by the indirect tax authorities, statement recorded by respective owner of these entities, it has not been stated that the stock is of the Assessee company and the AO has incorrectly assumed it to be of the Assessee company.

In view of above, the addition for alleged unexplained stock be directed to be deleted.

Ground No 4:

Based on facts and circumstances of the case and in law, the CIT(A) has erred in confirming addition of Rs 8,15,28,076 on account of alleged suppressed production under section 69C of the Act worked out by DGGSTI basis electricity consumption method by not controverting the detailed explanation of the Appellant and by not appreciating that the electricity method used by DGGSTI is faulty, incorrect and only on surmises and conjectures. He has further erred in taxing such amount under section 115BBE of the Act instead of taxing the income earned from sale of alleged suppressed production under the normal provisions of the Act.

Facts:

33
Submission:
Order passed by indirect tax authorities has been challenged before the appellate authority and therefore cannot be relied
17. At the outset, it is submitted that that order passed by the indirect tax authorities has not been accepted by the Appellant and an appeal has been filed before the appellate authority challenging the order. Thus, addition on the basis of an order which is under litigation is unwarranted. Also, the order passed by the indirect tax authorities is full of factual errors (elaborated in subsequent paragraphs) and therefore cannot be relied upon.
Faulty method used by indirect tax authority for computing alleged suppressed production and therefore cannot be relied
18. The AO on the basis of the observations of indirect tax authorities has considered the average weight of pouch at 3.6875 grams per pouch. The computation of weight of 3.6875 grams per pouch is as under:

Particulars
Weight in grams
Pouch of 50 paisa
1.25
Pouch of Re. 1
2.00
Pouch of Rs 2
3.50
Pouch of Rs 5
8
Total
14.75
Average weight per pouch = 14.75/4 = 3.6875 Gm

34
3.6875 Gm computed by the DGGSTI officials, detailed as under:

Particulars
Weight in grams
(I)
Average weight computed by DGGSTI officials
As per Appellant
Actual production in pouches
%
of Producti on (II)
Average
Weight in Grams
(III=I*II)
Pouch of 50 paisa
1.25
3.6875
Gm basis 14.75/4
(1.25 + 2 + 3.5
+ 8 = 14.75)
59055840
34%
0.4249
Pouch of Re. 1
2.00
110336780
64%
1.2701
Pouch of Rs 2
3.50
999540
1%
0.0201
Pouch of Rs 5
8
3340032
2%
0.1538
Total

173732192
100%
1.8690

Particulars
Product (A)
No of Pouches (B)
Grams per
Pouch (C)
Weight In Kg
D=B*C/1000
Electricity consumption
Ratio –
Production per unit/electrici

35
F = D/E
22. On perusal of the above table, your honour will notice that the highest ratio of production per unit of electricity is 4.15 as against ratio of 8.45 considered by the indirect tax authorities and relied upon by the AO. Thus, the method used by indirect tax authority is arbitrary and only on an ad-hoc basis and therefore cannot be relied upon. Further, it is submitted that the ratio is different for different months, mainly due to the following reasons:
(a) Number of machines: During the year, the Appellant purchased 5 new mixer machines during 18 July 2017 to 30 October 2017 (bills enclosed at PB 398-402).
Since, these were new and efficient machines, the electricity consumption reduced and therefore the production per unit of electricity increased in the month of July
2017 to 9 November 2017. (b) Capacity of machines & skilled/ unskilled labours: The capacity of machine varies from 0 to 300 pouches per minute. The speed of the machine has to be varied according to the person operating the machine. Where an unskilled person operates the machine, it produces lesser pouches per unit whereas when skilled person operate the machine, it produce more pouches per unit of electricity consumption.
(c) Use of DG set for generation of electricity and manufacturing: The Appellant used DG set for generation of electricity and manufacturing which was completely overlooked by the indirect tax authorities. The diesel expenditure increased during the impugned period due to which the ratio of production per unit of electricity increased. Ledger account of diesel expenditure for the entire year is enclosed at PB 403. The indirect tax authority only looked at the electricity units consumed as per the electricity bill without considering the diesel expenditure and ratio of electricity produced by DG set in 1 liter of diesel.

Thus, by not considering the above important factors of production, the production estimated by the indirect tax authorities and blindly relied upon by the AO is misplaced and arbitrary.
23. As mentioned above, the Appellant is not in agreement with the addition made by the AO to its total income as explained above. Without prejudice to above and assuming (only for the sake of discussion), if suppressed production is computed using the highest ratio of 4.15 kg per unit of electricity, the suppressed production will come as under:
-5
-1,428
Total
141857
3,97,19,932

Thus, the amount of suppressed production using the above method of calculation comes to Rs 3,97,19,932 as against Rs 8,15,28,076 computed by the AO.
24. Further, the basis of using the highest ratio has not been explained/
provided by the AO. As explained above, the ratio has been increasing due to a number of factors which were totally ignored by the indirect tax authority and therefore the working of alleged suppressed production cannot be relied to make any addition.

Particulars
Product (A)
No of Pouches (B)
Grams per
Pouch
(C)
Weight In Kg
D=B*C/1000
Electricity consumption
(E)
Ratio
–
Production per unit/electricity
F = D/E
15
26. The only basis for making alleged addition to the total income of the Appellant is ratio of production with electricity. It is submitted that addition cannot be made using electricity consumption as a basis. Reliance in this regard is placed on following decision:
• CIT Vs. Sulabh Marbles (P) Ltd 165 Taxman 258 (Raj.) (PB 404-406): The fact of this case that by taking the amount paid by assessee for electricity consumption as base, AO assumed actual production to be more then what is disclosed and made the addition. It was held that where AO has not pointed out any defect in the books of accounts of the assessee or method of accounting followed by the assessee and there was no material placed on the record to show any instance of suppression of sale or inflation of purchase by the assessee, AO was wrong in drawing adverse inference against assessee by only referring to the electricity expenses.

• St. Teresa's Oil Mills Vs. State of Kerala 76 ITR 365 (Ker) (PB 407-410): The mere fact that there was wide disparity in the consumption of electricity would not justify the rejection of the accounts without any other supporting circumstances, because such variation could be due to various factors outside the control of the assessee.
• Prem Cables (P) Ltd. Vs. Asstt. CIT 56 ITD 0382 (JP) (PB 411-418): Though consumption of energy was a relevant factor for knowing quantity of goods produced, yet since quality of raw material, constant or irregular supply of energy, manufacturing process involving consumption of energy without giving any production and similar other factors might affect ratio of consumption of energy to production of goods, it would be wrong to make a trading addition on ground that where there was more consumption of energy, there should be more production.
• ACIT Vs. Khambhata Family Trust 67 ITD 0411 (Ahd.): Merely because the consumption of electricity was more and the production was less was no ground for rejection of the trading version.
• Rakesh Kumar Jayantilal Vs. ACIT 55 ITD 0097 (Ahd.) (TM): In the light of the judgments in the case of N Raja Pullaiah Vs. DCTO 73 ITR 224 (AP) and in the case of St. Teresa’s Oil Mills Vs. State of Kerala 76 ITR 365 (Ker.), the DCIT’s view regarding estimating the income of the assessee to determine the net income from the business of plying of trucks on the basis of consumption of diesel was not justified.
• G. K. Auto Vs. ACIT, ITA No. 616/JP/05 dated 23.3.2007: Hon’ble Bench in para
5 of the order held that on the basis of variation in electricity consumption, section 145(3) is not justified. It further held that when decline in GP rate is explained,

41
29. Section 69C of the Act (under which the addition has been made) is reproduced as under:
30. “Unexplained expenditure, etc.
69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year :
Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.”
31. As evident from above, in order to attract addition under section 69C of the Act, a taxpayer is required to incur an expenditure. The AO has no-where in 42
Marie Products Pvt. Ltd. vs. ACIT the assessment order proved that the Appellant had incurred expenditure and plainly relied on the show cause notice/ order passed by the indirect tax authorities for making addition under section 69C of the Act. The hypothetical numbers of alleged suppressed production is based on a theory which is not proved by any corroborative evidence of clearance of goods from the factory of the Appellant without bill. Thus, the addition made by the AO under section 69C is incorrect and be deleted.

Addition basis borrowed satisfaction without independent examination cannot be made
32. The AO should have independently examined the alleged suppressed production and the information from the show cause notice could have relevance only for formation of opinion. As the AO has not independently verified the allegation and simply replied upon other of other authority, addition cannot be sustained. Reliance in this regard is placed on the following decision:

• ITO vs Arora Alloys Ltd (2011) 12 ITR 0263 ChdTrib. Relevant extracts of the decision are as under:
17. Perusal of the assessment order passed by the AO shows that the AO worked out unaccounted sales on the basis of unaccounted production calculated by the Central excise authorities solely on the basis of statement of Shri Harmesh Arora as recorded by them on 25th March, 2004. As regards the evidentiary value of a statement containing admission, it has been held in Thiru John vs. Returning Officer AIR 1977 SC 1724, 1726-
7 that an admission, if clearly and equivocally made, is the best evidence against the party making it and, though not conclusive, shifts the onus on to the maker on the principle that "what a party himself admits to be true may reasonably be presumed to be so and until the presumption was rebutted the fact admitted must be taken to be established". It has been held in Narayana Bhagwantrao Gosavi Balajiwale vs. Gopal
Vinayak Gosavi AIR 1960 SC 100, 105 that an admission is the best evidence that an opposing party can rely upon and though not conclusive, is decisive of the matter unless successfully withdrawn or proved erroneous. The legal position that emerges from catena of authorities on the subject is that the proposition that an admission is decisive of the matter is subject to four qualifications, namely, (1) The admission must have been voluntarily made; an admission cannot be acted upon unless the facts available on record show that it was voluntarily made; (2) The admission must be clear and unequivocal; (3) An admission cannot be acted upon if it is proved by the person making it that it is incorrect or erroneous; and (4) An admission cannot be acted upon if it is inconsistent with the materials available on record. Unless an admission falls under any of the aforesaid four situations, an admission is decisive of the matter. The question as to whether an admission, which is not corroborated by independent materials, can form the sole basis for decision can better be answered with reference to the facts of the case. There is no universal rule that an admission or confession is never decisive unless it is corroborated. Similarly there is no universal rule that an admission/confession is always decisive in all cases. The answer to the question as to whether a statement containing admission/confession is decisive in a given case depends upon the nature of admission, contents of admission, and several other relevant factors.

43
18. Applying the aforesaid principles, we shall now examine as to whether the statement made by Shri Harmesh Arora before the Central excise authorities in the context of levy of excise duty on unaccounted production can form the sole basis for making the impugned additions by the AO. First and most important aspect is that the said statement was not recorded by the IT authorities but by the Central excise authorities. As held by the Hon’ble High Court (reproduced supra), proceedings under the Central
Excise Act have relevance only for formation of opinion of escapement of income and thereafter the IT authorities have to independently finalise the reassessment irrespective of the final view in excise proceedings. We find that the AO has reassessed the income and made the impugned additions solely on the basis of the information received by him from the Central Excise Department without bringing any material on record to justify or support the additions. The impugned additions are liable to be cancelled on this ground alone and are accordingly cancelled.
…..
22. In view of the foregoing, the statement of Shri Harmesh Arora cannot by itself form the basis for making the impugned additions. The AO has given no other basis to support the additions made by him. In this view of the matter, the order passed by the CIT(A) in this behalf is confirmed. Ground No. 2 is dismissed.
A copy of the decision is enclosed at PB 419-441. • ACIT vs Cremica Frozen Food Pvt Ltd (2012) 32 CCH 0056 Chd Trib. Relevant extracts of the decision are as under:
“8. We have heard the rival submissions and have also perused the materials available on record. As per the Assessing Officer, the Special Auditors had prepared the weight wise consumption of materials consumed in Annexure A-3. In para 11.1 of the assessment order, the Assessing Officer has mentioned that "it is observed from the special audit report that during the year there was manufacturing of 240519 Lts. As per the information obtained, one liter of ice cream weight is 555 gms. So in Kgs the production of ice cream is 1,33,488.600 Kgs. However, the weight of all the ingredients comes to 1,48,186.568 Kg thereby giving a difference of 14,697.968 Kg in production. The weight wise details of raw material consumption are given in A-15 of the Special Audit Report. You are hereby given the final opportunity to explain this discrepancy."
In para 11.3, the Assessing Officer has calculated the value of extra consumption of raw material of 14697.968 by taking average rate of the material @ 80.84 and made an addition of Rs. 11,88,224/- on account of excess consumption of raw material in the manufacturing of ice cream relying on the report of the Special Auditor's. The Assessing
Officer has taken the weight of one liter of ice cream equal to 555 gms. The Assessing
Officer assumed that since the net weight of one liter of ice cream is 555 gms, the consumption of raw material to produce one liter ice cream should also be 555 gms. In our view, this assumption of the Assessing Officer is not based on any supporting material. In our considered view there is a merit in the submission of Shri Subhash Aggarwal, Ld.
Counsel for the assessee that there is no process or equipment whereby one liter of ice cream can be calculated to be equal to 555 gms. He further submitted that even otherwise the weight of ice cream varies from flavour to flavour and the variation is from 540 gms to 580 gms per liter and there is always a variation of + /—in the weight to liter ratio due to air content variation at the time of production of ice cream. It is true that in any manufacturing process, the production losses cannot be ruled out. In this case, the 44
• Evaporation loss of milk, cream and other raw materials during the pasteurization
(heating & boiling) process.
• Process Line losses during Homogenization (processed raw material which is left in the pipe line and cannot be taken out.)
• Loss of processed raw material in ageing vats where the raw materials are store prior to freezing.
• Losses during the freezing of processed raw material to ice cream occur when the freezer is cleaned for batch change over.
9. In our view, the Assessing Officer has not correctly appreciated the process of manufacturing of ice cream. In this regard, the CIT(A) has observed that the manufacturing of ice cream involves heating and boiling of milk etc. and, therefore, there have to be evaporation losses. He further observed that the production of food products involves dealing in perishable items where again wastage cannot be avoided. In our view, there was no ground for making the addition particularly when the assessee has maintained complete details of the purchases / sales duly supported by bills and vouchers which were produced before the Assessing Officer. The books of account of the assessee are subject to audit and the Assessing Officer has not found any discrepancy / defect in the books of account regularly maintained by the assessee. We have already observed herein above that the Assessing Officer has made the impugned addition merely on the basis of opinion of Special Auditor which is not based on any scientific formula.
We have also observed hereinabove that the Special Auditor has also not taken into consideration certain important point relating to manufacturing of ice cream, therefore, the Assessing Officer was not justified in relying upon the Special Report of Auditors. In view of the above, we hold that Ld. CIT(A) has erred in sustaining the addition of Rs. 1,78,234/-
. In fact no addition is called for. Accordingly, we allow ground No.2 of the assessee's cross objection and dismiss ground No.1 of the Revenue's appeal.
In light of above, it is submitted that the addition made by the AO by incorrectly relying on the show cause notice/ order passed by the indirect tax authorities be directed to be deleted due to the following reasons:
• Order passed by indirect tax authorities has been challenged before the appellate authority and therefore cannot be relied. The appeal is pending disposal.
• As explained in detailed, method used by indirect tax authority for computing alleged suppressed production is faulty and comprises of various errors and therefore cannot be relied.
• Electricity consumption cannot be a basis for computing suppressed production as held by juri ictional High Court and Income Tax Appellate Tribunal.
• Statements of director and labour recorded by indirect tax authority cannot be relied as the same were under duress and were retracted well within time.
• No cash recovered during search conducted by the indirect tax authority. Had the 45
• The AO has made addition under section 69C of the Act, which is not applicable at all.
• As held by various jurisprudence, addition basis borrowed satisfaction, and without independent examination by the AO cannot be made.

Ground No 5:

Based on facts and circumstances of the case and in law, the CIT(A) has erred in not adjudicating the ground of the Appellant as to the confirmation of addition for the sale value of alleged suppressed production instead of applying a gross profit rate for working out the alleged income and therefore, the addition so made is illegal and bad in law.

Facts and submission:

46
Facts and submission:
36. At the outset, it is submitted that the Ld. CIT(A) has not adjudicated this ground of appeal and after adjudicating ground number 3 has directly concluded the order as dismissed. Thus, the order of the CIT(A) is bad in law.

In view of the above, it is submitted that the addition made by the AO and confirmed by the CIT(A) be directed to be deleted.”

Addition of Rs.1,45,81,700/- on account of alleged excess stock :-

Name of Person / Parties
Amount of alleged excess stock
Assessee (68,04,689 + 15,79,200)
Rs.83,83,889/-
M/s Subham Agencies
Rs.4,78,640/-
M/s Agarwal & Co.
Rs.13,20,800/-
M/s Singhal Flexi Pack
Rs.43,89,371/-
Total
Rs.1,45,72,690/-

47
Intelligence on 10.11.2017. 2. The alleged excess stock of Rs.4,78,640/- was found from the business premises of M/s Subham Agencies at Geeta Palace, Amer Road, Jaipur. Sh.
Rajesh Kumar Agarwal is the proprietor of this concern. The Assistant
Commissioner of Central Goods & Service Tax Division vide order dt.06.04.2020
(PB 1-21 filed on 23.04.2024) has confiscated the above goods in the hands of M/s Subham Agencies. The assessee has sold goods to this concern in the year under consideration of Rs.8,46,70,365/- (PB 223-256) out of which sales made till
10.11.2017 is Rs.3,91,76,532/-. Thus, when the alleged excess stock is of M/s
Subham Agencies, the same cannot be added in the hands of the assessee.

48
Marie Products Pvt. Ltd. vs. ACIT the actual stock of the factory. The statement of Sh. Ashok Agarwal, director of the assessee company was recorded on 11.11.2017 (PB 293-299) where in reply to question no. 15 & 16 he admitted sale of goods without invoice and offered to pay excise duty of Rs.1,50,00,000/-.

Addition of Rs.8,15,28,076/- on account of alleged suppressed production :-

Particulars
Weight in grams
Pouch of 50 paisa
1.25
Pouch of Re. 1
2.00
Pouch of Rs 2
3.50
Pouch of Rs 5
8
Total
14.75
Average weight per pouch = 14.75/4 = 3.6875 Gm

Particulars
Weight in grams (I)
Average weight computed by DGGSTI officials
As per Appellant
Actual production in pouches
% of Producti on (II)
Average
Weight in Grams
(III=I*II)
Pouch of 50 paisa
1.25
3.6875 Gm basis 14.75/4
(1.25 + 2 + 3.5
+ 8 = 14.75)
59055840
34%
0.4249
Pouch of Re. 1
2.00
110336780
64%
1.2701
Pouch of Rs 2
3.50
999540
1%
0.0201
Pouch of Rs 5
8
3340032
2%
0.1538
Total

173732192
100%
1.8690

In view of above and in the absence of any evidence of suppressed production found in search by the indirect tax authorities, the addition made only on the basis

50
Marie Products Pvt. Ltd. vs. ACIT of electricity consumption without controverting the explanation filed by the assessee is unjustified and unlawful.”

In view of above, since the stock found in search is duly reconciled with the stock as per books, the addition made on account of excess stock is unjustified and the same be deleted.

d. Submission dated 11 July 2024 – Comparative chart of defects in calculation of alleged suppressed production and note on the incriminating materials referred in excise order

53
Marie Products Pvt. Ltd. vs. ACIT e. Submission dated 23 July 2024 – Consolidated stock summary and reconciliation of stock as per show cause notice and books of accounts

In view of above, the addition made on account of excess stock and alleged suppressed production is unjustified and the same be deleted.

13-16
17-59
60

65-74
75-101
102-146
147-166
167-199
200-231
232-263
•
Reconciliation of value and quantity of goods as per books of account and per physical verification on the date of search
•
Comparison of figures between books, GSTR and SCN
265-272

273-276
4. Assessment order dated 7 April 2021
277-285
Both
5. Faceless Assessment Scheme 2021
286-290
Both
6. Screenshot of e-filing portal
291-292
Both
7. Statement of director Shri Ashok Agarwal recorded by DGGSTI officials
293-299
Both
8. Explanation filed by the Appellant with indirect tax authority on difference in stock as per books and on physical verification
300-304
Both
9. Order passed by the indirect tax authority
305-377
Both
10. Copy of stock register as per books of accounts evidencing quantity recorded in books as on 10 November 2017
378
Both
11. Copy of daily stock register of perfume compound from 1 April
2017 to 10 November 2017
379-397
Both
12. Invoices for purchase of 5 new mixer machines
398-402
404-406
Both
15. Decision of Kerala High Court in the case of St. Teresa's Oil
407-410
411-418
419-441
Both
18. Copy of the hearing notice issued by the National Faceless
Appeal Centre enclosing remand report obtained from the Assessing Officer
442-449
Both
19. Rejoinder submission filed by the Appellant on 30 October 2023
450-455
456-483
Both

Paper book Index filed supplementary paper book
S No Particulars
Page no 1
In case of M/s Shubham Agency
Order dated 4 June 2020 passed by the Asst Commissioner CGST
Show cause notice dated 8 May 2018
Stock tally/ panchnama dated 10 November 2017

1-21
22-27
28-29
2
In case of M/s Agarwal & Company
Order dated 18 May 2020 passed by the Asst Commissioner CGST
Show cause notice dated 7 May 2018
Stock tally in the books of accounts of M/s Agarwal & Company

30-48
49-54
55
3
In case of M/s Singhal Flexi-pack
Order passed by the Asst Commissioner CGST
Show cause notice dated 7 May 2018

56-72
73-78
4
In case of the Appellant
Stock tally/ panchnama dated 10 November 2017
Panchnama dated 15 November 2017

79-94
95-97

11
12. The ld DR is heard who relied on the findings of the lower authorities and more particularly advanced the similar contentions as stated in the order of the ld. CIT(A). The ld. DR also filed a detailed report of the ld. AO and the status of the appeal filed by the assessee with the relevant authority in the indirect taxes. The contention of those reports reads as under :

57
300-304 a detailed retraction statement placed on record. There is no tangible material regarding suppressed sales. No cash in excess was found and therefore, the addition of suppressed production is based on the surmises and conjectures and thus required to be deleted.

The Ld CIT(A) at para 7.10 of its order held that the assessee was unable to reconcile the difference in the closing stock despite various opportunities were granted and thereby he confirmed the addition. Record reveals that stock found for Rs. 4,78,640/- at Shubham Agency, is the proprietorship concern of Mr Rajesh Agarwal. Stock found for Rs. 13,20,800/- belonging to M/s Agarwal & Company, proprietorship concern of Mr Akash Agarwal.
Stock found with M/s Singhal Flexi-Pack, wherein Mr Ashok Agarwal is partner in the firm along with Mr Jitendra Kumar Agarwal and that firm
S No Particulars
Amount
(INR)
A For alleged excess stock at factory premises of the Assessee at Plot No H-20A, RIICO Industrial Area, Kukas
68,04,689
B
For alleged excess stock at residence of the director of the Appellant Mr Ashok Agarwal
15,79,200
C
For alleged excess stock at Shubham
Agency, proprietorship concern of Mr Rajesh Agarwal
4,78,640
D
For alleged excess stock at M/s Agarwal & Company, proprietorship concern of Mr Akash Agarwal, s/o Mr Ashok
Agarwal
13,20,800
E
For alleged excess stock at M/s Singhal Flexi-Pack. Mr
Ashok Agarwal is partner in the firm along with Mr Jitendra
Kumar Agarwal
43,89,371
Total
1,45,72,690

64
Marie Products Pvt. Ltd. vs. ACIT stock worth Rs. 43,89,371 found. This shows all the entity are separate legal. As regards the difference in the stock of the assessee’s record, assessee submitted a copy of stock tally as per books of account of these parties. As regards the stock of various entities show cause notices were issued by the GST authority and order passed by the GST authority in the name of Shubham Agency, M/s Agarwal & Company and M/s Singhal
Flexi-Pack. It was argued that from these documents, it is evident that this stock is not belong and relates to the assessee and it is the stock of these three concerns only.
Since the stock is not of the assessee, it cannot be added to the total income of the assessee and therefore, the same cannot added in the hands of the assessee because as is evident from the record that the alleged excess stock of Rs.4,78,640/- was found from the business premises of M/s Subham Agencies at Geeta Palace, Amer Road, Jaipur.
Sh. Rajesh Kumar Agarwal is the proprietor of this concern. The Assistant
Commissioner of Central Goods & Service Tax Division vide order dt.06.04.2020 (PB 1-21 filed on 23.04.2024) has confiscated the above goods in the hands of M/s Subham Agencies. The assessee has sold goods to this concern in the year under consideration of Rs.8,46,70,365/-
(PB 223-256) out of which sales made till 10.11.2017 is Rs.3,91,76,532/-.

65
Thus, when the alleged excess stock is of M/s Subham Agencies, the same cannot be added in the hands of the assessee.
As regards the stock worth Rs.13,20,800/- found from the business premises of M/s Agarwal & Co. at Plot No.212, Manga Marg, Near Samrat
Gate, Brahampuri, Jaipur. Sh. Aakash Agarwal is proprietor of this concern.
The Assistant Commissioner of Central Goods & Service Tax Division vide order dt.18.05.2020 (PB 30-48 filed on 23.04.2024) has confiscated the above goods in the hands of M/s Agarwal & Co. The assessee purchases raw betel nut from this concern. The assessee has purchased goods from this concern in the year under consideration of Rs.32,33,600/- (PB 203-
204) till 10.11.2017. Thus, when the alleged excess stock is of M/s Agarwal
& Co., the same cannot be added in the hands of the assessee.
As regards the alleged excess stock of Rs.43,89,731/- found from the business premises of M/s Singhal Flexi Pack at Plot No.E-39A, RIICO
Indusrtrial Area, Bassi, Jaipur, wherein Shri Jitendra Kumar Agarwal is one of the partner. The Assistant Commissioner of Central Goods & Service
Tax Division vide order dt.28.12.2023 (PB 56-72 filed on 23.04.2024) has confiscated the above goods in the hands of M/s Singhal Flexi Pack. The assessee purchases polyester roll from this concern. The assessee has purchased goods from this concern in the year under consideration of Rs.

66
1,06,55,659/- (PB 225-228) out of which purchases made till 10.11.2017 is Rs.51,74,143. Thus, when the alleged excess stock is of M/s Singhal Flexi
Pack., the same cannot be added in the hands of the assessee.
Now coming to the stock of the assessee found excess for Rs.
68,04,689 at factory premises of the Assessee at Plot No H-20A, RIICO
Industrial Area, Kukas and of Rs 15,79,200 found at residence of the director of the Appellant Mr Ashok Agarwal, the Assessee has contended that the GST authority had not considered the stock recorded in the books of accounts of the assessee and has considered the entire physical stock as excess stock. To verify this fact, the Assessee was asked to file the panchanama recorded by the GST authority at the time of search. In the case of the assessee, the panchnama of goods found is placed at PB 79-
94 filed on 23.04.2024. It comprises of three annexures. Annexure B-1 is of Raw Material (PB 88-90 filed on 23.04.2024), Annexure B-2 is of Semi-
Finished goods (PB 91-92 filed on 23.04.2024) & annexure B-3 is of Finished Goods (PB 93-94 filed on 23.04.2024). Thereafter as per PB
Page 82 shortage in stock of raw material was determined in respect of sugar, perfume & supari and excess stock of Marie Supari. Sh. Ashok
General, GST Intelligence retracting the statement of the director recorded by the GST authority and the reconciliation statement of stock as per books of the assessee vis-à-vis the physical stock to contend that no excess stock was found in search. This reconciliation statement was also filed with the Ld AO during the assessment proceedings vide submission dated 2.3.2021 but the AO without pointing out any discrepancy in such reconciliation added the entire physical stock found in search of Rs
68,04,689 and Rs 15,79,200 which cannot be made without dealing with the submission of the assessee. The ld DR referring to the order of the GST authority dated 31.12.2020 and statements recorded of Shri Ashok
4,78,640, at M/s Agarwal & Company of Rs 13,20,800, M/s Singhal Flexi-
Pack of Rs 43,89,371 is that of those concerns only. Even the GST authority has passed orders confiscating the goods in the name of these concerns only and not in the name of the Assessee. The AR of the Assessee has furnished the stock tally of these three concerns wherein the 69
Marie Products Pvt. Ltd. vs. ACIT physical stock found during search is compared with the stock recorded in the books of accounts of these three concerns only. Further, appeals before the GST appellate authority have been filed by these three concerns only in relation to the alleged excess stock. Thus, the alleged excess stock of Shubham Agency of Rs 4,78,640, M/s Agarwal & Company of Rs
13,20,800, M/s Singhal Flexi-Pack of Rs 43,89,371 cannot be added to the total income of the Assessee and therefore, we direct the ld. AO to delete the same.
Now coming to the excess stock of the Assessee of Rs 68,04,689
and Rs 15,79,200, it is noted that the assessee has provided detailed reconciliation of the physical stock with the books and reasons for short/
16. Now coming to the ground no. 4 wherein the assessee challenges the addition of Rs 8,15,28,076/- made by the ld. AO on account of alleged suppressed production of finished goods based on the calculation made by the GST authority in the excise search held on 11.11.2017 considering the Electricity consumption of the assessee. Apropos to this ground the relevant submission made by the ld. AR of the assessee reads as under :
“9. The indirect tax authorities made an arbitrary calculation of the estimated production taking electricity consumption as a base and arrived at a ratio of 8.45
The AO on the basis of the observations of indirect tax authorities has considered the average weight of pouch at 3.6875 grams per pouch. The computation of weight of 3.6875 grams per pouch is as under:

Particulars
Weight in grams
Pouch of 50 paisa
1.25
Pouch of Re. 1
2.00
Pouch of Rs 2
3.50
Pouch of Rs 5
8
Total
14.75
Average weight per pouch = 14.75/4 = 3.6875 Gm
Re 0.50, Rs 1, Rs 2 and Rs 5 as the weight per pouch (in grams) is increased basis the MRP (as mentioned in the above table). The average weight per pouch as computed by the Appellant is 1.7382 Gm as against 3.6875 Gm computed by the DGGSTI officials, detailed as under:

Particulars
Weig ht in gram s (I)
Average weight computed by DGGSTI officials
As per Appellant
Actual productio n in pouches
%
of Produc tion (II)
Average
Weight in Grams
(III=I*II)
Pouch of 50
paisa
1.25
3.6875
Gm basis
14.75/4
(1.25 + 2 +
3.5 + 8 =
14.75)
59055840
34%
0.4249
Pouch of Re. 1
2.00
110336780
64%
1.2701
Pouch of Rs 2
3.50
999540
1%
0.0201
Pouch of Rs 5
8
3340032
2%
0.1538
Total

173732192
100%
1.8690

Thus, after considering the correct weight and pouches manufactured, the actual production and production per unit of electricity works out as under:

Particulars
Product (A)
No of Pouches (B)
Grams per
Pouch (C)
Weight In Kg
D=B*C/1000
Electricity consumption
(E)
Ratio –
Producti on per unit/ele ctricity
F = D/E
On perusal of the above table, your honour will notice that the highest ratio of production per unit of electricity is 4.15 as against ratio of 8.45 considered by the indirect tax authorities and relied upon by the AO. Thus, the method used by indirect tax authority is arbitrary and only on an ad-hoc basis and therefore cannot be relied upon. Further, it is submitted that the ratio is different for different months, mainly due to the following reasons:
(a)
Number of machines: During the year, the Appellant purchased 5 new mixer machines during 18 July 2017 to 30 October 2017 (bills enclosed at PB 398-
402). Since, these were new and efficient machines, the electricity consumption reduced and therefore the production per unit of electricity increased in the month of July 2017 to 9 November 2017. (b)
Capacity of machines & skilled/ unskilled labours: The capacity of machine varies from 0 to 300 pouches per minute. The speed of the machine has to be varied according to the person operating the machine. Where an unskilled person operates the machine, it produces lesser pouches per unit whereas

74
Use of DG set for generation of electricity and manufacturing: The Appellant used DG set for generation of electricity and manufacturing which was completely overlooked by the indirect tax authorities. The diesel expenditure increased during the impugned period due to which the ratio of production per unit of electricity increased. Ledger account of diesel expenditure for the entire year is enclosed at PB 403. The indirect tax authority only looked at the electricity units consumed as per the electricity bill without considering the diesel expenditure and ratio of electricity produced by DG set in 1 liter of diesel.

Thus, by not considering the above important factors of production, the production estimated by the indirect tax authorities and blindly relied upon by the AO is misplaced and arbitrary.

As mentioned above, the Appellant is not in agreement with the addition made by the AO to its total income as explained above. Without prejudice to above and assuming (only for the sake of discussion), if suppressed production is computed using the highest ratio of 4.15 kg per unit of electricity, the suppressed production will come as under:

Month
Electricity consumption
(units)
Production using ratio of 4.15 (in kgs)
Actual production
(refer assessment order)
Suppressed production
(kg)
Suppressed production in Rs, applying rate of Rs
280 per kg
April 2017
9960
41334
30440
26986
75,56,080
May 2017
10180
42247
27740
28643
80,20,040
June 2017
9400
39010
27205
25949
72,65,720
July 2017
9500
39425
43338
20449
57,25,720
August
2017
11500
47725
49241
23187
64,92,360
September
2017
9560
39674
54837
9450
26,46,000
October
2017
9380
38927
63137
7198
20,15,440
1
to 9
November
2017
2466
10234
20834
-5
-1,428
Further, the basis of using the highest ratio has not been explained/ provided by the AO. As explained above, the ratio has been increasing due to a number of factors which were totally ignored by the indirect tax authority and therefore the working of alleged suppressed production cannot be relied to make any addition.

If the above methodology is extended for the remaining period of FY 2017-18, ie from 15 November 2017 to 31 March 2018, the ratio of production per unit of electricity will be as under:

Particulars
Product (A)
No of Pouches (B)
Grams per
Pouch (C)
Weight In Kg
D=B*C/1000
Electricity consumption
(E)
Ratio
–
Production per unit/electri city
F = D/E
15
38. The only basis for making alleged addition to the total income of the Appellant is ratio of production with electricity. It is submitted that addition cannot be made using electricity consumption as a basis. Reliance in this regard is placed on following decision:

• CIT Vs. Sulabh Marbles (P) Ltd 165 Taxman 258 (Raj.) (PB 404-406): The fact of this case that by taking the amount paid by assessee for electricity consumption as base, AO assumed actual production to be more then what is disclosed and made the addition. It was held that where AO has not pointed out any defect in the books of accounts of the assessee or method of accounting followed by the assessee and there was no material placed on the record to show any instance of suppression of sale or inflation of purchase by the assessee, AO was wrong in drawing adverse inference against assessee by only referring to the electricity expenses.

• St. Teresa's Oil Mills Vs. State of Kerala 76 ITR 365 (Ker) (PB 407-410): The mere fact that there was wide disparity in the consumption of electricity would not justify the rejection of the accounts without any other supporting circumstances, because such variation could be due to various factors outside the control of the assessee.

• Prem Cables (P) Ltd. Vs. Asstt. CIT 56 ITD 0382 (JP) (PB 411-418): Though consumption of energy was a relevant factor for knowing quantity of goods

77
• ACIT Vs. Khambhata Family Trust 67 ITD 0411 (Ahd.): Merely because the consumption of electricity was more and the production was less was no ground for rejection of the trading version.

• Rakesh Kumar Jayantilal Vs. ACIT 55 ITD 0097 (Ahd.) (TM): In the light of the judgments in the case of N Raja Pullaiah Vs. DCTO 73 ITR 224 (AP) and in the case of St. Teresa’s Oil Mills Vs. State of Kerala 76 ITR 365 (Ker.), the DCIT’s view regarding estimating the income of the assessee to determine the net income from the business of plying of trucks on the basis of consumption of diesel was not justified.

• G. K. Auto Vs. ACIT, ITA No. 616/JP/05 dated 23.3.2007: Hon’ble Bench in para 5 of the order held that on the basis of variation in electricity consumption, section 145(3) is not justified. It further held that when decline in GP rate is explained, books of accounts are maintained and supported by vouchers, sales and purchases are fully vouched, no specific defect is pointed out except making general observation. Addition by applying higher profit rate is unjustified.
41. Section 69C of the Act (under which the addition has been made) is reproduced as under:

“Unexplained expenditure, etc.

69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing
Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year :

Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.”

Addition basis borrowed satisfaction without independent examination cannot be made

79
Marie Products Pvt. Ltd. vs. ACIT only for formation of opinion. As the AO has not independently verified the allegation and simply replied upon other of other authority, addition cannot be sustained. Reliance in this regard is placed on the following decision:

• ITO vs Arora Alloys Ltd (2011) 12 ITR 0263 ChdTrib. Relevant extracts of the decision are as under:

80
Marie Products Pvt. Ltd. vs. ACIT authorities in the context of levy of excise duty on unaccounted production can form the sole basis for making the impugned additions by the AO. First and most important aspect is that the said statement was not recorded by the IT authorities but by the Central excise authorities. As held by the Hon’ble High Court (reproduced supra), proceedings under the Central
Excise Act have relevance only for formation of opinion of escapement of income and thereafter the IT authorities have to independently finalise the reassessment irrespective of the final view in excise proceedings. We find that the AO has reassessed the income and made the impugned additions solely on the basis of the information received by him from the Central
Excise Department without bringing any material on record to justify or support the additions. The impugned additions are liable to be cancelled on this ground alone and are accordingly cancelled.
…..

A copy of the decision is enclosed at PB 419-441. • ACIT vs Cremica Frozen Food Pvt Ltd (2012) 32 CCH 0056 Chd Trib.
Relevant extracts of the decision are as under:

“8. We have heard the rival submissions and have also perused the materials available on record. As per the Assessing Officer, the Special Auditors had prepared the weight wise consumption of materials consumed in Annexure A-3. In para 11.1 of the assessment order, the Assessing Officer has mentioned that "it is observed from the special audit report that during the year there was manufacturing of 240519 Lts. As per the information obtained, one liter of ice cream weight is 555 gms. So in Kgs the production of ice cream is 1,33,488.600
Kgs. However, the weight of all the ingredients comes to 1,48,186.568 Kg thereby giving a difference of 14,697.968 Kg in production. The weight wise details of raw material consumption are given in A-15 of the Special Audit Report. You are hereby given the final opportunity to explain this discrepancy."

In para 11.3, the Assessing Officer has calculated the value of extra consumption of raw material of 14697.968 by taking average rate of the material @ 80.84 and made an addition of Rs. 11,88,224/- on account of excess consumption of raw material in the manufacturing of ice cream relying on the report of the Special Auditor's. The Assessing Officer has taken the weight of one liter of ice cream equal to 555 gms.

81
The Assessing Officer assumed that since the net weight of one liter of ice cream is 555 gms, the consumption of raw material to produce one liter ice cream should also be 555 gms. In our view, this assumption of the Assessing Officer is not based on any supporting material. In our considered view there is a merit in the submission of Shri Subhash Aggarwal, Ld. Counsel for the assessee that there is no process or equipment whereby one liter of ice cream can be calculated to be equal to 555 gms. He further submitted that even otherwise the weight of ice cream varies from flavour to flavour and the variation is from 540 gms to 580 gms per liter and there is always a variation of + /—in the weight to liter ratio due to air content variation at the time of production of ice cream. It is true that in any manufacturing process, the production losses cannot be ruled out. In this case, the Assessing
Officer has made addition relying on the opinion of Special Auditors and he has not applied his mind independently. Shri Subhash Aggarwal, Ld. Counsel for the assessee pointed out that the Special Auditor have not taken into consideration the following important point relating to manufacturing of ice cream.

• Evaporation loss of milk, cream and other raw materials during the pasteurization
(heating & boiling) process.
• Process Line losses during Homogenization (processed raw material which is left in the pipe line and cannot be taken out.)
• Loss of processed raw material in ageing vats where the raw materials are store prior to freezing.
• Losses during the freezing of processed raw material to ice cream occur when the freezer is cleaned for batch change over.

We have also observed hereinabove that the Special Auditor has also not 82
Marie Products Pvt. Ltd. vs. ACIT taken into consideration certain important point relating to manufacturing of ice cream, therefore, the Assessing Officer was not justified in relying upon the Special Report of Auditors. In view of the above, we hold that Ld. CIT(A) has erred in sustaining the addition of Rs. 1,78,234/-. In fact no addition is called for. Accordingly, we allow ground No.2 of the assessee's cross objection and dismiss ground No.1 of the Revenue's appeal.

In light of above, it is submitted that the addition made by the AO by incorrectly relying on the show cause notice/ order passed by the indirect tax authorities be directed to be deleted due to the following reasons:

• Order passed by indirect tax authorities has been challenged before the appellate authority and therefore cannot be relied. The appeal is pending disposal.

• As explained in detailed, method used by indirect tax authority for computing alleged suppressed production is faulty and comprises of various errors and therefore cannot be relied.

• Electricity consumption cannot be a basis for computing suppressed production as held by juri ictional High Court and Income Tax Appellate Tribunal.

• Statements of director and labour recorded by indirect tax authority cannot be relied as the same were under duress and were retracted well within time.

• No cash recovered during search conducted by the indirect tax authority.
Had the Appellant been engaged into suppressed production of such a huge amount computed by the indirect tax authority, the indirect tax authorities would have found cash during search proceedings. Since, no cash was recovered, computation of suppressed production by indirect tax authority cannot be relied.

• The AO has made addition under section 69C of the Act, which is not applicable at all.

• As held by various jurisprudence, addition basis borrowed satisfaction, and without independent examination by the AO cannot be made.”

85
Marie Products Pvt. Ltd. vs. ACIT carried on 10-11 November 2017 are enclosed at PB 5-10 and at PB 11-
15. On these statements, Shri Ashok Agarwal, director of the assessee was confronted on 14.11.2019 wherein in reply to question number 3, he stated that he do not agree with the statement of Shri Gurjinder Singh Gill at all. Again in question number 5, with reference to the statement of Gaurav Sharma, he stated that he has no information about sale of supari of 106 bags at Jhunjhunu and 34 bags at Jodhpur without invoice. He further stated that print out of other papers taken from the laptop of Gaurav
Sharma is either related to the free sample sent in the market or relate to tea business of the group. Copy of the statement of Shri Ashok Agarwal is enclosed at PB 16-18. Further, it was submitted that these papers relate to the period of March 2017 falling in AY 2017-18 and not in the AY under consideration and therefore it has no relevance for the year under consideration. Thus, even as per the excise order, no incriminating material for the year under consideration has been referred to and therefore no addition can be made.
18. We have considered the rival contentions and perused the material available on record. The AO has simply relied upon GST order and has not made any independent evaluation of the alleged suppressed production.
The CIT(A) also relied upon the GST order without analyzing the 86
Marie Products Pvt. Ltd. vs. ACIT submission filed by the assessee so as to deal the contention of the assessee that 98 % sales present of minor denomination sale and therefore, the working of the average on simple average method is incorrect as it does not take into consideration the actual production and sale of pouches. It is an undisputed fact that as per excise returns filed by the assessee and accepted by the excise department, the sale of pouches of 50 paisa and Re 1 is the highest ie 98% of the total sales. The weight of these pouches is 1.25 grams and 2 grams respectively which is very low as compared to the simple average weight of 3.6875 gram computed by the GST authority. Thus, the method is apparently faulty and cannot be relied upon fast the allegation of alleged suppressed production. The Assessee during the assessment proceedings have filed complete books of accounts, purchase register, sale register, etc which have been accepted by the Ld
AO without commenting any mistake on it. The ld AO has not rejected the books of account which are audited before making such an allegation. The co-ordinate bench of Chandigarh in the case of ITO vs Arora Alloys Ltd
(supra) held that proceedings under the Central Excise Act have relevance only for formation of opinion of escapement of income and thereafter the IT authorities have to independently finalise the reassessment irrespective of the final view in excise proceedings. Further, Rajasthan High court in the 87
AO assumed actual production to be more then what is disclosed and made the addition which is incorrect. It was held that where AO has not pointed out any defect in the books of accounts of the assessee or method of accounting followed by the assessee and there was no material placed on the record to show any instance of suppression of sale or inflation of purchase by the assessee, ld. AO was wrong in drawing adverse inference against assessee by only referring to the electricity expenses. Also, the co- ordinate bench of Jaipur ITAT in the case of Prem Cables (P) Ltd. Vs.
Asstt. CIT 56 ITD 0382 (JP) held that though consumption of energy was a relevant factor for knowing quantity of goods produced, yet since quality of raw material, constant or irregular supply of energy, manufacturing process involving consumption of energy without giving any production and similar other factors might affect ratio of consumption of energy to production of goods, it would be wrong to make a trading addition on ground that where there was more consumption of energy, there should be more production.
The bench also noted from the record made available there is no allegation of having found the alleged unaccounted cash of such huge amount or that of the unaccounted investment in the hands of the assessee. The ld. AO

88
Marie Products Pvt. Ltd. vs. ACIT while making the addition applied the provisions of section 69C of the Act that provision of the Act reads as follows:
Unexplained expenditure, etc.
69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing
Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year :
Order pronounced in the open court on 21/04/2025. ¼ Mk0 ,l- lhrky{eh ½
¼ jkBksM deys'k t;UrHkkbZ ½
(Dr. S. Seethalakshmi)
(Rathod Kamlesh Jayantbhai)
U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member
Tk;iqj@Jaipur fnukad@Dated:- 21/04/2025
*Ganesh Kumar, Sr. PS
आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू
1. The Appellant- Marie Products Private Limited, Jaipur
2. izR;FkhZ@ The Respondent- ACIT, Circle-07, Jaipur
3. vk;dj vk;qDr@ The ld CIT
4. vk;dj vk;qDr¼vihy½@The ld CIT(A)
5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत
6. xkMZ QkbZy@ Guard File (ITA No. 771/JP/2023) vkns'kkuqlkj@ By order,

सहायक पंजीकार@Aेेज. त्महपेजतंत