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Department represented by Shri H.P. Meena (CIT-DR) Assessee represented by Shri Bhavin Marfatia, CA Date of hearing 28/07/2022 Date of pronouncement 21/10/2022 Order under Section 254(1) of Income Tax Act PER: PAWAN SINGH, JUDICIAL MEMBER: 1. These two appeals by the revenue are directed against the separate orders of learned Commissioner of Income Tax (Appeals)-1, Vadodara (in short, the ld. CIT(A) dated 03/10/2019 and 29/11/2019 for the Assessment years (AY) 2009-10 ad 2011-12 respectively. In both these appeals, the revenue has raised certain common grounds of appeal, except variation of addition on account of unaccounted production and & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. stock. Facts in both these years are almost similar, therefore, with the consent of parties, both these appeals were clubbed, heard together and are being decided by this consolidated order to avoid the conflicting decision. For appreciation of facts, the appeal for the A.Y. 2009-10 is treated as a “lead case” wherein the revenue has raised following grounds of appeal:
1. On the facts and circumstances of the case and in law, the Ld. C.I.T. (A) erred in holding that 'the action of the A.O. of rejecting the books of account without taking into consideration all the facts and figures is not correct , without appreciating that the A.O.in the assessment order after through examination of the issues involved had recorded justifiable reasons for rejecting the assesee's books of account.
2. On the facts and circumstances of the case and in law, law, the Ld. CIT (A) erred in deleting the addition made by the A.O. by holding that "the A.O. has ignored the fact that the appellant is producing different sizes of tile both the units and hence the consumption of raw materials and gas and power per Sqr Mtr of tiles produced by the appellant will differ depending upon the size of the tiles manufactured and the consumption of power and gas will also varying on account of moisture and other impurities present in the raw material" without appreciating that the assessee during the course of assessment proceedings did not submit details of production of tiles at Dora Unit and the assessee did not furnish quantity details of power, gas, moisture and impurities resulting into of raw materials but had merely worked lower wastage of raw materials at 4.5% and A.O. after conducting thorough inquiry worked out wastage of raw materials at 3 & 2% respectively for Dora and Hoskote Unit of the assessee company.
3. On the facts and circumstances of the case and in law, the Ld. CIT (A) erred in deleting the addition made by the A.O without appreciating that the A.O. in para 4.2. ( C) to (E), para 4.3 & 4.5 of the assessment order has discussed the issue involved in detail and hence the A.O. after considering the factual aspects of the matter, had correctly made addition of Rs. 46,23,73,162/- on account of unaccounted production and stock.
4. On the facts and circumstances of the case and in law, the Ld. CIT (A) erred in deleting the addition made by the A.O without appreciating that the assessee 2 & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. had considered weight of the tiles far too in excess of the actual weight of the tiles worked out by the A.O. on the basis of technical specification for tiles and spot verification of dealers of tiles in the local market & hence the A.O. had correctly made addition of Rs.46,23,73,162/- on account of unaccounted production and stock.
5. The appellant craves to add to, amend or alter the above ground as may be deemed necessary. Relief claimed in appeal The order of the Ld. C.I.T. (A) on the above issue be set aside and that of the order u/s. 143(3) of the Act passed by the Assessing Officer be restored.”
Brief facts of the case are that the assessee is a company engaged in manufacturing of Ceramic Glazes Floor and Wall Tiles, filed its return of income for the year under consideration (AY 2009-10) on 29/09/2009 declaring NIL income. The case of assessee was selected for scrutiny. During the assessment, the Assessing Officer noted that there is abnormal fluctuation in consumption of raw material as well as production of tiles per square meter. The Assessing Officer recorded that in the month of January, 2009, only 10.64 Kgs. of raw material was consumed for production of one square meter tile in Dora unit of assessee company wherein in the month of April, 2008 the raw material consumption was 21.89 Kgs. for one square meter tile and in the month of February, 20099 only 17.03 Kgs. of raw material was consumed for production of one square meter tiles in Hoskote unit of assessee and in the month of September, 2008, the raw material consumption was 20/16 Kgs. for one square meter tiles. On the basis of such & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. discrepancies, the Assessing Officer issued show cause notice dated 20/12/2011 directing the assessee to explain the discrepancies with supporting documents on or before 16/12/2011. The contents of show cause notice is extracted in para 4 of assessment order wherein the Assessing officer has compiled month wise total consumption of raw material, per square meter production and per square meter consumption in Kilograms in Dora unit as well as Hoskote unit. In the show cause notice, the Assessing Officer also mentioned that as to why the books result should not be rejected by invoking provisions of Section 145(3) of the Income Tax Act, 1961 (in short, the Act).
The assessee filed its reply vide reply dated 16/12/2011. The contents of reply of assessee is extracted by the Assessing Officer in para 4.1 of assessment order. In the reply, the assessee stated that the reasons given for rejection of books of account is not valid. The consumption ratio of raw material per unit of production in Dora unit as recorded in show cause notice is 10.64 per KG of production whereas the ratio of such consumption for other months it varies from 14.61 to 21.89 Kgs in the case of Hoskote unit. Such ratio for the month of February 2009 is 17.03 Kgs. whereas for the balance months it varies from 17.16 to 20.16. On the issue of rejection of books of account as proposed by assessing officer, the assessee stated that provisions of Section 145(3) of the Act is applicable when the Assessing Officer is not satisfied about & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. the correctness or completeness of the accounts of assessee or where the assessee has not been regularly followed the method of accounting notified under Section 145(2) of the Act. In case of assessee, the Assessing Officer has himself accepted the result of books of account for one month whereas for other month, the Assessing Officer is not willing to accept the book result. The Assessing Officer proposing to take base of one month to arrive the revised production without giving any reason for rejection the production ratio of other months. The cherry picking exercise for rejecting books of account is not valid. To support their submission, the assessee relied on the decision of Hon’ble Madras High Court in CIT Vs SAS Hotels & Enterprises Pvt. Ltd. 246 ITR 729 (Mad) and DCIT Vs Associated Petroleum Corporation (2011) 24 SOT 45 (Ahm.) 4. The assessee further submitted that the books of assessee are duly audited as per the Companies Act as well as for tax audit purpose and also required as per Section 44AB of the Act. None of the auditors have reported any qualification for books of account maintained and auditors have found that financial statement is true and correct. To justify the production and consumption of raw material, the assessee furnished stock register of raw material, packing material, stores and spares giving details of opening, purchase record, closing stock, electricity and & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. gas bill, cash payment vouchers, bank payment vouchers and bank book, expense vouchers, journal vouchers and excise records.
The assessee further explained that audit under Central Excise Act was also carried out for the period under Consideration. Copy of records of central excise audit report was furnished. The assessee claimed that Central excise officers verified the quantitative and production details and accepted the result of assessee. The assessee filed returns under Value Added Tax (VAT) for the period under consideration. The said returns contain details of dispatch of finished goods and raw materials purchased. Copy of returns were furnished. Copy of monthly production furnished with Central Excise was also furnished. The assessee submitted that the raw material consumption and production arrived therefrom for month to month basis is actual and this fact also accepted by accepting the same for a particular month. Thus, there is no merit or base for rejection of books of account.
The assessee in its without prejudice submission submitted that consumption of raw material for production of tiles varies by considering the type and quality of tiles, quantity of tiles and technical factors affecting the production. In Dora unit, the consumption of RM per KG of production is varies from 14 to 21 Kg per KG of finished product. However, for the month of January 2009, it is lower on account of usages of waste generated from the preceding period of production.
ITA No.578/Srt/2019 & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. The assessee furnished details of electricity consumed vis a vis production and submitted that the consumption of electricity and fuel is commensurate with the production quantity. Such fact supports the stand of assessee that production data furnished by assessee is true and correct and no adverse view can be taken based on low consumption ration of only in one month.
In Hoskote unit, there is no such exceptional production trend and ratio of raw material to production varies from 17 to 20 Per KG. Such minor difference in consumption of raw material is mainly on account of production of various types of tiles by considering their size, quality and quantity. There is no huge fluctuation in the consumption of raw material vis a vis production which is supported by actual consumption, production, sale and stock produced by assessee. The electricity consumption generated and fuel used vis a vis production was furnished. The assessee submitted that consumption of electricity and fuel is commensurate with the production quantity. Such fact supports stand of assessee that the production data submitted by assessee is true and correct and no adverse view can be taken. The assessee furnished detailed note as Annexure-6 on relevant factors affecting the variation in the consumption of raw materials based on the manufacturing process and the technology used at two plants of the assessee company. On the basis of such explanation, the assessee & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. submitted that books of account are true and correct. The accounting record including quantitative details is correct in all respect.
The assessee in Annexure-6 of details affecting variation in consumption of raw material is reproduced by Assessing officer wherein the assessee furnished standard net weight of the fires tiles manufactured at both the units in the following manner:
On the basis of above details, the assessee contended that actual weight sometimes differs with the standard weight due to variation in size and thickness in the tiles within the permissible parameters. As everyday more than one lac piece of tiles at Gujarat in Dora Unit and about 2.00 lacs piece of tiles manufactured at Hoskote plant in Karnataka. Thus, the consumption ratio differs. For the purpose of verification, one tile of each size of category was furnished in the office of Assessing Officer. The Assessee also explained the process of & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. manufacturing and explained that the clays are received in loose form as the quantity is very high i.e. more than 200 tons per day for Gujarat plant and about 370 tons per day at Karnataka plant. Generally, stores maintain the stock of clay for minimum period of 30 days and the highest stock is kept in pre monsoon period as the availability of raw material is disturbed in monsoon and approach to mines get damaged. Some quantity is lost due to mixing of material and in the flow of material due to wind. Rain water in factory also damaged the material stored in the open area. Process wastage i.e. residue at ball mills and at spray dryer. The wastage is non-recoverable as they are not reused due to risk of changes of defects in the final products. The assessee also furnished the details of total handling of material in the plants. The details of electricity consumption at both the plants and justification of production quality is duly recorded by the Assessing Officer.
The Assessing Officer after considering the reply of assessee held that the explanation furnished by the assessee has no merit. On verification of details furnished by assessee, the Assessing Officer was of the view that there is huge discrepancy in the consumption of raw material as calculated by him with the comparison of data to the books of assessee. The assessee in its submission dated 28/12/2011 submitted that actual weight of fired tiles is 17.333 Kgs per sq. mtr for 300 x 300 ITA No.578/Srt/2019 & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. square meters’ tiles and 19.063 kgs per square meter for 400x400 square meter tiles. After allowing wastage month-wise was prepared by assesse in the following manner:
After going through the figure in the above table, the Assessing Officer assumed that there are huge discrepancies in the net consumption of raw material especially during the months of June, July, October and December, 2008 and January, 2009. The consumption figures for these months are above the consumption/production claimed by the assessee. The Assessing Officer further recorded that assessee was asked to submit the details for its Dora unit and as such no details were provided. Thus, there must be discrepancies in the details of Dora unit. The Assessing Officer further recorded that on the basis of tiles given by assessee for sample basis was compared with the dealers of assessee in & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. the local market. On verification, he found that average weight of 300 x 300 square meter tiles is 15.555 KG. However, as per assessee’s submission, it is 17.333 KG per square meter tile. On the basis of such difference, the Assessing Officer was of the view that there is difference in average weight of tiles of 1.777 KG per tiles. The Assessing Officer also noted that for 400 x 400 square meter tiles, the average weight of per square meter tiles is 17.187 KG per tiles, however, as per assessee, sample tiles, it is 19.063 KG per square meter tile and difference in average weight of tiles of 1.875 per square meter tiles. The Assessing Officer further recorded that no tile was found having weight of more than 15.60 per tiles of this size. The size in Bharuch market with the size of 300 x 300 having average weight of 14.00 KG.
On the basis of such discrepancies, the Assessing Officer rejected the books of account by invoking provisions of Section 145(3) r.w.s. 145A and held that assessee failed to show actual per square meter consumption of raw material and failed to disclose actual per square meter consumption of raw material in its account, therefore, correct profit cannot be deduced from the books of account. The assessee has never shown figure of wastage in its books of account, the data made available in respect of production/consumption is fabricated. Wastage of ratio of 4.5% of gross consumption of raw material is on higher side. The average industry wastage ratio in wet process unit is around 2.5 to & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. 3% of total raw material consumption and average wastage percentage in dry process unit is 1.5 to 2% of gross raw material consumption. Size wise details of production of Dora unit was not submitted. Actual weight of tile is lesser than the claims made in submission and if the books of account are accepted for any other year that does not mean the same cannot be rejected in any other year. The consumption ratio of gas and electricity is also fluctuating abnormally. 13. The Assessing Officer estimated wastage at 3% of gross consumption of raw material for Dora unit and 2% for Hoskote unit. The total consumption of raw material in Dora unit is 84968.55 MT and in Hoskote unit 135286 MT. After allowing wastage percentage of 3% and 2% in Dora and Hoskote units respectively, the net consumption for tile manufacturing in Dora unit worked out to 82419.49 MT and net consumption of raw material for Hoskote unit comes to 132580.28 MT. The Assessing Officer adopted the average consumption of raw material for the month of January, 2009 as basis for estimation of production of tiles for Dora unit and worked out the production of 7746098 square meter. For Hoskote unit, the Assessing Officer adopted average consumption of raw material for the month of February, 2009 as basis for estimation of production for whole of the year and worked out total production of 7785101 square meter. The Assessing Officer added production of both the units which is 1553119 square meter. The & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. installed capacity of units is 14450000 square meter. The assessee has shown higher production in various months to its installed capacity. Thus, the Assessing Officer justified its estimation. As the assessee has shown production of 12183095 square meter of tiles during the year. The Assessing officer worked out the difference of production of 3348105 square meter, as out of books of account. The average sale rate of per square meter was adopted at Rs. 173.25 per square meter and average closing of stock of finished goods at Rs. 138.10 per square meter. Thus, the unaccounted production of 3348104 square meter was treated as out of books of account and the value of such unaccounted production was worked out at Rs. 46,23,73,162/- and was added to the income of assessee as income from suppressed production. 14. Aggrieved by the additions in the assessment order, the assessee filed appeal before the ld. CIT(A). Before the ld. CIT(A), the assessee filed detailed written submissions. The written submission of the assessee is recorded in para 4 and 4.1 of order of ld. CIT(A). The assessee in sum and substance in its written submission submitted that the Assessing Officer has adopted maximum value of consumption during the year and compared with minimum value during the year and based on such values, he has concluded that there is abnormal fluctuation in consumption of raw material and thereby rejected books of account. This was the only basis for rejection of books of account. The Assessing & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. Officer has not provided any basis on which such months are selected for determining fluctuation in consumption of raw material. During the assessment, detailed submissions were made before the Assessing officer and entire manufacturing process was explained. It was explained that there are several factors which affects the consumption of material like quality of raw material, moisture content etc. The Assessing Officer without rejecting submission and/or finding out any fault in such submission, has picked the consumption data of the months which suited to him and worked out the addition. No material was provided to assessee to prove that there is abnormal fluctuation. Mere months to months’ comparison is not correct. The data taken by Assessing Officer for the purpose of comparison is based on the books of account only. Hence, the Assessing Officer is not justified in rejecting the books of account. The Assessing Officer invoked the provisions of Section 145(3) of the Act to reject the books of assessee. The provisions of Section 145(3) is applicable, when the Assessing Officer is not satisfied about the correctness of account of assessee or where the assessee has not been regularly following the method of accounting notified under Section 145(2). The Assessing Officer accepted the book result for one moth where he is not accepted the result of books for other months. The Assessing Officer proposed to take the base for one/ single month to arrive at the revised production without giving any ITA No.578/Srt/2019 & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. reasons for rejection of production ratio of other months. The cherry picking exercise adopted by Assessing Officer for rejecting the books of account is not valid.
The assessee further stated that the books of assessee are maintained as per the Companies Act as well as under Section 44AB of the Act. None of the auditors have reported any clarification for the books of account maintained. There is no allegation that sales and purchase are not properly recorded. The lower gross profit is not a defect in the books of account likewise variation in consumption figure is not a defect in the books of account. The Assessing Officer has accepted the claim of expenses, accounting policies followed by assessee are also accepted. The assessee also furnished month wise receipt and dispatches of finished goods of its Hoskote unit and the details of production of 300 X 300 and 400 X 400 consumption of raw material for both the size, total consumption and net consumption of raw material (which we have recorded in para-10 above) 16. On the basis of said details, the Assessing Officer made a random assumption that there existed a discrepancy in the net consumption of raw material without bringing any cogent material to prove it. The Assessing Officer also took his view that the consumption for the month of June, 2008, July, 2008, October, 2008, December, 2008 and January, 2009 is more than the consumption ratio claimed by assessee. The view & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. taken by the Assessing officer is a merely assumption. For each above months, the consumption ratio matches with that provided by assessee i.e. 1.733 KG per square meter, 300 X 300 tiles and 19.063 KG per square meter for 400 X 400 tiles, thus the Assessing Officer is not correct in rejecting the books of account on this ground. The Assessing officer estimated average wastage @ 3% and 2% of gross consumption of raw material for Dora unit and Hoskote unit respectively. The Assessing officer adopted average wastage on ad hoc basis without any justification. The Assessing Officer failed to provide any material supporting the working of average rate for both the units. The Assessing officer made addition by computing the revised production by adopting lowest value of consumption ratio as based so as to arrive at a greater production quantity. The assessee prepared following summary:
ITA No.578/Srt/2019 & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd.
The Assessing officer on the basis of aforesaid details worked out the suppressed production of 3348104 square meters from the books of account. The Assessing Officer thereafter applied average rate of closing stock of Rs.138.10 square meter and computed value of suppressed production of Rs.46,23,73,162/-. Such suppressed production computed by Assessing Officer is without any basis. Firstly, the Assessing officer adopted ad hoc wastage rate to compute net consumption as against the wastage rate of 4.54%and4.48% provided by the assessee. Secondly, in order to maximise the value of revised production, the AO has arbitrarily adopted the lowest consumption ratio of January, 2009 for Dora unit and February 2009 for Hoskote unit. The Assessing Officer has failed to furnish any material to support his claim that these ratios are appropriate for taking as base. The assessee also stated that working adopted by the Assessing Officer is not only erroneous but flawed. The Assessing Officer has taken lowest consumption ratio for the purpose of making addition. If slight changes in the consumption ratio is made, the entire addition made by Assessing officer would be nil. If the average consumption of all the months and substitute the said figure in the working of the Assessing Officer accepting the wastage ratio used by the Assessing Officer, the entire addition would be deleted. The assessee furnished & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. the following such average consumption of all the months and difference is shown in negative.
On the basis of aforesaid working, the assessee stressed that the working adopted by the Assessing officer is not only erroneous but flawed. The assessee stated that the method adopted by them is more scientific as it takes into consideration all the factors affecting the consumption in a year. By taking yearly average, the fact of fluctuation is diluted and it gives a more scientific picture of state of affairs. The Assessing officer adopted only one-month average, which does not represent a proper sample for working out of consumption. The assessee stated that the books of account were rejected in A.Y. 1997-98 and the addition was made. The addition was deleted by the ld. CIT(A) and the order of ld. CIT(A) was confirmed by the Tribunal. On similar grounds, books were rejected for A.Y. 2003-04 to 2007-08. 18 & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. The issue of average wastage was involved, the ld. CIT(A) for these years decided that there is no defect in the books and addition was deleted. The assessee also given detailed explanation with regard to usage of wastage in January, 2009 at Dora plant, daily production at Hoskote Unit, wastage, month wise consumption of raw material and production of tiles, weight of manufactured tiles, monthly production of Hoskote Unit and consumption of electricity and gas in the units.
The ld. CIT(A) after considering the submission of assessee and the contents of assessment order held that during the assessment, the Assessing Officer found certain defects regarding variation in daily production of tiles vis a vis raw material used, variation in consumption of Gas and power etc. The Assessing Officer has ignored the fact that the assessee is making different size of tiles at both the units and hence, the consumption of raw material and gas and power per square meter of tiles made by assessee will differ, depending upon size of tiles. Besides consumption of power, gas will also vary on account of moisture and other impurities in the raw material. On the low value of raw material per KG square meter prepared in month of January, 2009 at Dora unit, the assessee had submitted that on account of use of breakage for reproduction of tiles up to the stage of firing. Such claim of assessee was rejected by holding that no wastage was used. The Assessing Officer has not pointed out any defect in the books of & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. account in this regard. There is nothing on record to show that the broken tiles up to the stage of firing cannot be reused for preparing fresh tiles. Hence, for determining the production figure, quality of raw material used during the year is required to be compared with weight of tiles during the year. The ld. CIT(A) recorded that he directed to furnish certain details. On the direction of ld. CIT(A), the assessee furnished month-wise and size-wise details of tiles produced as per excise return for both the units. The same was submitted as per details in Annexure-A which is reproduced by ld. CIT(A) on page No. 26 and 27 of his order about both the units. The details of standard weight of tiles was also furnished for both the units which is reproduced on page No. 27 by the ld. CIT(A). On perusal of such details, the ld. CIT(A) held that these details tallied with the figures in the audited accounts as well as with excise returns filed by assessee before excise authorities. The manufacturing loss in respect of Dora unit is 17.04% and in Hoskote unit is 12.08%. the ld. CIT(A) recorded that the assessee also submitted copy of audit accounts of comparable industries who are manufacturing tiles. The percentage loss of Somani tiles is 17.938% and Orient tiles is 17.88%. The ld. CIT(A) further recorded that the assessee given the details of Kazaria tiles with regard to raw material consumed and production of tiles per square meter which is 18.575 KG against 18.09 KG of assessee. On the basis & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. of such comparable cases, the ld. CIT(A) held that the average weights are rightly available in the catalogue published by assessee, copy of which was provided during the appellate proceedings. The weights of tiles produced by assessee can be easily compared on the basis of standard specification as has been done by assessee. The figures are comparing wit excise record of assessee filed before the excise authority. On the basis of aforesaid observation, the ld. CIT(A) held that the action of Assessing Officer in rejecting books of account without taking into consideration of all these facts and figures, is not correct. The rejection of books of account was not approved by the ld. CIT(A) and held that the Assessing officer made a wrong presumption and accordingly deleted the entire addition. Aggrieved by the order of ld. CIT(A), the revenue has filed the present appeal before this Tribunal.
We have heard the submissions of learned Commissioner of Income Tax-Departmental Representative (ld. CIT-DR) and the learned Authorised Representative (ld. AR) of the assessee and have gone through the orders of lower authorities. The ld. CIT-DR for the revenue submits that during the assessment, the Assessing Officer find various discrepancies with regard to consumption of raw material used for production of tiles. The Assessing Officer noted that the assessee has not shown the correct figure in its books of account. The assessee has & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. not made available the correct data of production of tiles. The wastage of ratio at 4.5% of gross consumption of raw material was on higher side. The average industry wastage in wet process unit is around 2.523% of total raw material consumed and average waste percentage for dry process unit is 1.522%. The details of production of Dora unit was not furnished. The Assessing Officer after rejection of books of account estimated 3% wastage in Dora unit which is based on wet process and 2% for Hoskote unit which is based on dry process. The assessing officer considered the wastage of row material at reasonable basis against the figure provided by the assessee. The Assessing officer after considering the consumption of raw material in both the units have worked out the difference in suppressed/unaccounted production of 334810 square meter and on the basis of average rate of sale and average rate of closing stock of finished goods worked out the addition of unaccounted production. The ld. CIT-DR submits that he fully supports the order of Assessing Officer and prayed to set aside the order of ld. CIT(A) and to restore the order of Assessing Officer.
On the other hand, the ld. AR of the assesse supported the order of ld. CIT(A). The ld. AR of the assessee submits that the Assessing Officer wrongly rejected the books of account. The ld. AR submits that the Assessing Officer has adopted maximum value of consumption during the year and compared with minimum value during the year & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. and based on such values, he has concluded that there is abnormal fluctuation in consumption of raw material and thereby rejected books of account. The ld AR for the assessee submits that Assessing Officer has not provided any basis on which such months are selected for determining fluctuation in consumption of raw material. The ld. AR submits that before the Assessing Officer, it was explained that there are several factors which affects the consumption of material like quality of raw material, moisture content etc. The Assessing Officer without rejecting submission and/or finding out any fault in such submission, has picked the consumption data of the months his choice and worked out the addition. No material was provided to assessee to prove that there is abnormal fluctuation. Mere months to month’s comparison is not correct. The data taken by Assessing Officer for the purpose of comparison is based on the books of account only. Hence, the Assessing Officer is not justified in rejecting the books of account. The ld. AR submits that the provisions of Section 145(3) is applicable when the Assessing Officer is not satisfied about the correctness of account of assessee or where the assessee has not been regularly following the method of accounting notified under Section 145(2) of the Act. The Assessing Officer accepted the book result for one moth where he is not willing to accept the result of books for other months. The Assessing Officer proposed to take the & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. base for one month to arrive at the revised production without giving any reasons for rejection of production ratio of other months. The cherry picking exercise adopted by Assessing Officer for rejecting the books of account is not valid. The ld. AR further submits that books of assessee are maintained as per the Companies Act as well as under Section 44AB of the Act. None of the auditors have reported any clarification for the books of account maintained. There is no allegation that sales and purchase are not properly recorded. The lower gross profit is not a defect in the books of account likewise variation in consumption figure is not a defect in the books of account. The Assessing Officer has accepted the claim of expenses, accounting policies followed by assessee are also accepted. The assessee also furnished month-wise receipt and dispatches of finished goods of its Hoskote unit and the details of production of 300 X 300 and 400 X 400 consumption of raw material for both the sizes, total consumption and net consumption of raw material. The ld. AR submits that the Assessing Officer made a random assumption that there existed a discrepancy in the net consumption of raw material without bringing any cogent material to prove it. The Assessing Officer also took his view that the consumption for the month of June, 2008, July, 2008, October, 2008, December, 2008 and January, 2009 is more than the consumption ratio claimed by assessee. The view taken by the & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. Assessing officer is a merely assumption. For each above months, the consumption ratio matches with that provided by assessee i.e. 1.733 KG per square meter, 300 X 300 tiles and 19.063 KG per square meter for 400 X 400 tiles, thus the Assessing Officer is not correct in rejecting the books of account on this ground. The Assessing officer estimated average wastage @ 3% and 2% of gross consumption of raw material for Dora unit and Hoskote unit respectively. The Assessing officer adopted average wastage on ad hoc basis without any justification. The Assessing Officer failed to provide any material supporting the working of average rate for both the units. The Assessing officer made addition by computing the revised production by adopting lowest value of consumption ratio as based so as to arrive at a greater production quantity. The ld. AR also submits that the Assessing officer on the basis of aforesaid details worked out the suppressed production of 3348104 square meters from the books of account. The Assessing Officer thereafter applied average rate of closing stock of Rs. 138.10 square meter and computed value of suppressed production of Rs.46,23,73,162/-. Such suppressed production computed by Assessing Officer is without any basis. Firstly, the Assessing officer adopted ad hoc wastage rate to compute net consumption as against the wastage rate of 4.54 and 4.48 provided by the assessee. Secondly, in order to maximise the value of revised & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. production, the AO has arbitrarily adopted the lowest consumption ratio of January, 2009 for Dora unit and February 2009 for Hoskote unit. The Assessing Officer has failed to furnish any material to support his claim that these ratios are appropriate for taking as base. The ld. AR of the assessee also submits that working adopted by the Assessing Officer is not only erroneous but flawed. The Assessing Officer has taken lowest consumption ratio for the purpose of making addition. If slight changes in the consumption ratio is made, the entire addition made by Assessing officer would be nil. If the average consumption of all the months and substitute the said figure in the working of the Assessing Officer accepting the wastage ratio used by the Assessing Officer, the entire addition would be deleted. The ld. AR of the assessee submits that the method adopted by them is more scientific as it takes into consideration all the factors affecting the consumption in a year. By taking yearly average, the fact of fluctuation is diluted and it gives a more scientific picture of state of affairs. The Assessing officer adopted only one-month average, which does not represent a proper sample for working out of consumption. The ld. AR of the assessee submits that the books of account was rejected in A.Y. 1997-98 and the addition was made. The addition was deleted by the ld. CIT(A) and the order of ld. CIT(A) was confirmed by the Tribunal. On similar grounds, books were rejected for A.Y. 2003- & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. 04 to 2007-08. The issue of average wastage was involved, the ld. CIT(A) for these years decided that there is no defect in the books and addition was deleted. The assessee also given detailed explanation with regard to usage of wastage in January, 2009 at Dora plant, daily production at Hoskote Unit, wastage, month wise consumption of raw material and production of tiles, weight of manufactured tiles, monthly production of Hoskote Unit and consumption of electricity and gas in the units.
We have considered the rival submissions of both the parties and have perused the orders of the lower authorities carefully. We find that during the assessment the assessing officer rejected the books of accounts of the assessee and estimated the wastage in production in both the units of the assessee. The assessing officer rejected the books of accounts of assessee by taking view that assessee failed to show actual per square meter consumption of raw material and failed to disclose actual per square meter consumption of raw material in its account, therefore, correct profit cannot be deduced from the books of account. The assessee has never shown figure of wastage in its books of account, the data made available in respect of production/ consumption is fabricated. Wastage of ratio of 4.5% of gross consumption of raw material is on higher side. The average industry wastage ratio in wet process unit is around 2.5 to 3% of total raw & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. material consumption and average wastage percentage in dry process unit is 1.5 to 2% of gross raw material consumption. Size wise details of production of Dora unit was not submitted. Actual weight of tile is lesser than the claims made in submission and if the books of account are accepted for any other year that does not mean the same cannot be rejected in any other year. The consumption ratio of gas and electricity is also fluctuating abnormally. The Assessing Officer estimated wastage at 3% of gross consumption of raw material for Dora unit and 2% for Hoskote unit. The total consumption of raw material in Dora unit is 84968.55 MT and in Hoskote unit 135286 MT. After allowing wastage percentage of 3% and 2% in Dora and Hoskote units respectively, the net consumption for tile manufacturing in Dora unit worked out to 82419.49 MT and net consumption of raw material for Hoskote unit comes to 132580.28 MT. The Assessing Officer adopted the average consumption of raw material for the month of January, 2009 as basis for estimation of production of tiles for Dora unit and worked out the production of 7746098 square meter. For Hoskote unit, the Assessing Officer adopted average consumption of raw material for the month of February, 2009 as basis for estimation of production for whole of the year and worked out total production of 7785101 square meter. The Assessing Officer added production of both the units which is 1553119 square meter. & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. The installed capacity of both the units is 14450000 square meter. The assessee has shown higher production in various months to its installed capacity. Thus, the Assessing Officer justified its estimation. As the assessee has shown production of 12183095 square meter of tiles during the year. The Assessing officer worked out the difference of production of 3348105 square meter, as out of books of account. The average sale rate of per square meter was adopted at Rs. 173.25 per square meter and average closing of stock of finished goods at Rs. 138.10 per square meter. Thus, the unaccounted production of 3348104 square meter was treated as out of books of account and the value of such unaccounted production was worked out at Rs. 46,23,73,162/- and was added to the income of assessee.
As recorded above before ld CIT(A), the assessee filed detailed written submissions before ld CIT(A). The ld CIT(A) after considering the submissions of the assessee held that that during the assessment, the Assessing Officer found out certain defects regarding variation in daily production of tiles vis a vis raw material used, variation in consumption of Gas and power etc. it was held that the Assessing Officer has ignored the fact that the assessee is making different size of tiles at both the units and hence, the consumption of raw material and gas and power per square meter of tiles made by assessee will differ, depending upon size of tiles. Besides consumption of power, & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. gas will also vary on account of moisture and other impurities in the raw material. It was held that on the low value of raw material per KG square meter prepared in month of January, 2009 at Dora unit, the assessee had submitted that on account of use of breakage for reproduction of tiles up to the stage of firing the claim of assessee was rejected by holding that no wastage was used. The Assessing Officer has not pointed out any defect in the books of account in this regard. There is nothing on record to show that the broken tiles up to the stage of firing cannot be reused for preparing fresh tiles. For determining the production figure, quality of raw material used during the year is required to be compared with weight of tiles during the entire year. The ld. CIT(A) recorded that he directed to furnish certain details, on his direction, the assessee furnished month-wise and size- wise details of tiles produced as per excise return for both the units in details along with standard weight of tiles was furnished for both the units. On considering such details, the ld.CIT(A) held that these details tallied with the figures in the audited accounts as well as with excise returns filed by assessee before excise authorities.The manufacturing loss in respect of Dora unit is 17.04% and in Hoskote unit is 12.08%.
The ld. CIT(A) further held that that the assessee also submitted copy of audit accounts of comparable industries who are manufacturing similar tiles. The percentage loss of Somani tiles is 17.938% and & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. Orient tiles is 17.88%. The ld. CIT(A) further recorded that the assessee given the details of Kazaria tiles with regard to raw material consumed and production of tiles per square meter which is 18.575 KG against 18.09 KG of assessee. The ld CIT(A), on the basis of such comparable cases it was held that the average weights of tiles are rightly available in the catalogue published by assessee, copy of which was provided during the appellate proceedings. The weights of tiles produced by assessee can be easily compared on the basis of standard specification as has been done by assessee. The figures are matching with excise record of assessee filed before the excise authority. On the basis of aforesaid observation, the ld. CIT(A) held took his view that the action of Assessing Officer in rejecting books of account without taking into consideration of all these facts and figures, and as such rejection of books is not correct and consequently deleted the entire addition.
We have also examined the facts independently and find that sales and the purchases are not disputed by assessing officer nor there is any allegation that sales and purchase are not properly recorded. The Assessing Officer has accepted the claim of expenses, accounting policies followed by assessee are also not disputed. We find that the assessee furnished month-wise receipt and dispatches of finished goods of its Hoskote unit and the details of production of 300 X 300 ITA No.578/Srt/2019 & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. and 400 X 400 consumption of raw material for both the sizes, total consumption and net consumption of raw material and such figures are not disputed by assessing officer, as recorded in para-16 (supra). We find that the Assessing Officer made a random figures and assumed that there exists discrepancy in the net consumption of raw material without bringing any cogent material to prove it. We further find that the Assessing presumes that the consumption for the month of June, 2008, July, 2008, October, 2008, December, 2008 and January, 2009 is more than the consumption ratio claimed by assessee. In our view the view adopted by the Assessing officer is a merely on assumption and presumption. We also noted that as per details provided by the assessee for each above months, the consumption ratio matches i.e. 1.733 KG per square meter, 300 X 300 tiles and 19.063 KG per square meter for 400 X 400 tiles, thus the Assessing Officer is not correct in rejecting the books of account on this ground.
We find that Assessing officer estimated average wastage @ 3% and 2% of gross consumption of raw material for Dora unit and Hoskote unit respectively. The Assessing officer adopted average wastage on ad hoc basis without any justification nor any comparable stances was brought on record to adopt such wastage. The Assessing Officer failed to provide any material supporting the working of average rate for & 25/Srt/2020 ACIT Vs M/s Bell Ceramics Ltd. both the units. Further, we find that the Assessing officer made addition by computing the revised production by adopting lowest value of consumption ratio as based so as to arrive at a greater production quantity and on such basis worked out the suppressed production of 3348104 square meters from the books of account. The Assessing Officer applied average rate of closing stock of Rs. 138.10 square meter and computed value of suppressed production of Rs.46,23,73,162/-. We also noted that suppressed production computed by Assessing Officer is without any basis as he adopted ad hoc wastage rate to compute net consumption as against the wastage rate of 4.54% and 4.48% shown by the assessee. And further in order to maximise the value of revised production, the assessing officer arbitrarily adopted the lowest consumption ratio of January, 2009 for Dora unit and February 2009 for Hoskote unit. At the cost of repetition, we note that the Assessing Officer has failed to bring any material to support his working that ratio of waste material, adopted by him is appropriate for taking such base. Thus, working adopted by the Assessing Officer is not only erroneous being not based on scientific basis as he had adopted lowest consumption ratio for the purpose of making addition.
We find merit in the submissions of ld AR for the assessee that even if slight changes in the consumption ratio is made, the entire addition