2021 (10) TMI 449 - AT - Income Tax

Estimation of suppressed turnover - suppressed production of IMFL - certain loose sheets found during the course of search in the business premises of the assessee, as per which there is discrepancy in purchase and consumption of secondary raw materials like caps, bottles and labels - AO has determined suppression of production by taking into account difference in purchase and consumption of caps on the basis of production reports submitted by the assessee for the month of April, 2005 - explanation of the assessee that the AO has determined suppression of production purely on estimation without there being any basis or supporting evidences that the assessee has not accounted production for the relevant period - HELD THAT - The production department after capping the bottles and the wastage in the process returns back the unused caps to the stores. Therefore, it was claimed that the basis on which the AO had arrived a difference is completely irrational and without any basis. On the other hand, the assessee produced stock registers maintained for packing materials, as per which there is no difference in purchase and consumption of packing materials. However, the AO while making a comparison of the number of bottles used for production vis- -vis the bottles issued, has omitted to take into account unused bottles returned to stores and this numbers is considered then, the difference computed by the AO becomes almost nil. Shortage in primary raw materials like rectified spirit and neutral spirit - When you compare the nature of materials stored by the assessee to the percentage of difference in physical stock and book stock, the difference is negligible because, the raw materials like rectified spirit and neutral spirit are highly evaporable and further these raw materials are stored in wooden racks and measured in dips, which is not accurate. Therefore, the difference arrived at by the AO on the basis of physical stock taken during the course of search cannot support the case of the AO that there is discrepancy in stock of primary raw materials corresponding with difference in percentage of consumption of secondary raw materials like empty bottles, caps, as computed by the AO. Further, it was the explanation of the assessee that while taking physical stock the Department has not considered stock in the pipeline and if such stock is considered then there is no difference in stock computed by the AO. Therefore, on this count also, the reasons given by the AO to arrive at a suppression of production is not sustainable. The production of IMFL and other liquor products are fully controlled by the State Government Department. The production and sale of goods is controlled and monitored by State Excise Authorities right from procuring of rectified spirit to selling of final products. The rectified spirit is purchased by the assessee with a license issued by Commissioner of Prohibition and Excise - AO has also not pointed out any instance of violation of State Excise laws. AO has also failed to bring on record any evidence to prove that other than TASMAC, the assessee has old goods to outsiders. Once the goods manufactured by the assessee are fully controlled and monitored by State Government Authorities and there is no evidence of any wrong doing by the assessee, the AO cannot estimate suppression of production only on the basis of his own mathematical calculations by extrapolating certain figures that to without understanding the process of manufacture involved in production of IMFL products. Therefore, we are of the considered view that the AO was completely erred in estimation of suppression of production on the basis of suspicion and surmises without any cogent reasons to support his findings. The CIT(A) after considering relevant facts, has rightly deleted addition made by the AO - Decided in favour of assessee. Addition towards excess production - Addition on the basis of conversion of rectified spirit into IMFL by allowing permissible deduction towards process loss at 3% as per Rule 15A 3(a) read with 3(c) of TamilNadu Distillery Rules, 1981 - AO has worked out probable production of IMFL in bulk litres and then compared with reported production as per books of accounts of the assessee - HELD THAT - We do not ourselves subscribe to the reasons given by the AO for the simple reason that the AO has done arithmetical calculation without understanding the process of manufacturing of IMFL by conversion of rectified spirit by adopting permissible production loss as per State Excise Rules As assessee has demonstrated with evidences that production loss reported to State Excise Authorities is within the permissible limit of 3% for all months - assessee has submitted monthly statement recording re-distillation of rectified spirit to State Excise Department in as much as, there is no action by the Excise Department for excess production loss reported over and above permissible production loss as per said Excise Rules - we are of the considered view that the AO was completely erred in determining excess production by applying his own arithmetic calculation without understanding the facts that there is no discrepancy in stock details submitted by the assessee to the State Excise Authorities and further there is no action from the authorities for violation of any of the conditions prescribed under State Excise Rules, 1981. CIT(A) after considering relevant facts has rightly deleted additions made by the AO and hence, we are inclined to uphold the findings of ld.CIT(A) and reject ground taken by the Revenue. Nature of expenses - Disallowance of landscaping charges - amount incurred towards landscaping charges is in the nature of capital expenditure, which gives enduring benefit to the assessee and hence, cannot be allowed as deduction - explanation of the assessee before the AO that landscaping charges incurred towards repair of compound wall, removing and re-fixing of electrical gadgets and landscaping factory land are is in the nature of current repairs and cannot be considered as capital expenditure - HELD THAT - We find that the ld.CIT(A) has recorded categorical finding that landscaping activity mainly consist of growing a particular variety of grass which can by no stretch of imagination be termed as capital in nature or of enduring benefit. Therefore, we are of the considered view that there is no error in the reasons given by the ld.CIT(A) to delete addition made towards disallowance of landscaping charges as capital in nature and hence, we are inclined to uphold the findings of ld.CIT(A) and reject the ground taken by the Revenue. Addition made towards inflation in cost of old bottles - HELD THAT - It was the claim of the assessee before the AO that Sri Renga Enterprises has agreed to supply bottles at the factory gate without charging any amount for broken bottles. Further, the entire cost of freight is borne by the supplier. Due to these reasons, the assessee had paid little more prices, when it compares to new bottles purchased from other suppliers. We find that the explanation given by the assessee appears to be bonafide and reasonable. It is the prerogative of the businessman to purchase a particular type of raw material from its own suppliers which suits to its business requirements. Moreover, the price paid for purchase of bottles cannot be compared with price paid to another supplier unless the AO brings on record some evidences to prove that specification of bottle supplied by two different suppliers are unique in type, quality and pattern. In this case, the assessee has proved with necessary evidences that it has paid to suppliers against purchases through account payee cheques. The AO has not brought on record any evidences to prove that the assessee has paid amount by cheques and get back money in cash. Therefore, we are of the considered view that the AO was erred in making addition towards inflation of cost of purchase of old bottles and new bottles only on the basis of price paid by the assessee to two different suppliers without bringing on record any cogent reasons to justify his action - Decided in favour of assessee. Addition made towards disallowance of finance charges - AO has disallowed proportionate interest cost @ 12% per annum on the ground that the assessee has diverted interest bearing funds for non-business purpose as well as advance was given for the purpose of purchase of property which is capital in nature for which the authorized representative of the assessee has agreed for the proposed addition - HELD THAT - As assessee has paid huge interest on borrowed funds. The assessee has not furnished satisfactory explanation for diverting interest bearing funds to related parties for non-business purpose. Therefore, we are of the considered view that the AO was right in disallowance of proportionate interest @ 12% - Hence, we reverse the findings of the ld.CIT(A) and sustain the addition made by the AO towards disallowance of proportionate interest. Addition made towards disallowance of discount allowed on sales - HELD THAT - Assessee does not have any say in allowing cash discount on sales but it is solely on the discretion of the purchaser of goods i.e., TASMAC. Therefore, we are of the considered view that expenditure debited under the head discount allowed on sales is a genuine expenditure, which was allowed as per the terms of agreement between the seller and buyer. AO without appreciating the facts has simply made addition only on the ground that such discount has not been allowed / mentioned in the invoice. The CIT(A) after considering relevant facts has rightly deleted addition made by the AO. Hence, we are inclined to uphold the findings of the ld.CIT(A) and reject ground taken by the Revenue.

Summary

Issues Involved:
1. Suppression of production.
2. Excess production.
3. Disallowance of landscaping charges.
4. Inflation in cost of old bottles.
5. Disallowance of finance charges.
6. Disallowance of discount allowed on sales.

Detailed Analysis:

1. Suppression of Production:
The primary issue was the deletion of addition made towards suppression of production. The AO alleged that the assessee suppressed production based on discrepancies in the number of caps issued versus the number of bottles produced. The AO determined unaccounted production of ?55,32,10,232/- based on the difference in caps issued and actual consumption. However, the CIT(A) deleted the addition, noting that the AO's estimation was based on secondary raw materials without considering primary raw materials like rectified spirit and neutral spirit, which are under strict control of State Excise Authorities. The CIT(A) emphasized that the AO's conclusion was built on wrong premises and lacked supporting evidence of any discrepancy in primary raw materials. The Tribunal upheld CIT(A)'s decision, agreeing that the AO's estimation was speculative and unsupported by concrete evidence.

2. Excess Production:
For the assessment year 2007-08, the AO made an addition of ?1,23,73,800/- towards excess production by comparing probable production of IMFL with reported production. The AO calculated excess production of 2,47,516 litres. The assessee argued that the production loss reported to State Excise Authorities was within permissible limits. The CIT(A) deleted the addition, and the Tribunal upheld this decision, noting that the AO's calculation was arithmetical and did not account for the actual production process and permissible production loss.

3. Disallowance of Landscaping Charges:
For the assessment year 2007-08, the AO disallowed ?14,83,950/- towards landscaping charges, treating them as capital expenditure. The CIT(A) found that landscaping activities, such as growing grass, did not provide enduring benefits and were current repairs. The Tribunal upheld CIT(A)'s decision, agreeing that the landscaping charges were not capital in nature.

4. Inflation in Cost of Old Bottles:
For assessment years 2008-09 and 2009-10, the AO made additions towards inflation in the cost of old bottles by comparing prices paid to different suppliers. The AO alleged that the assessee paid higher prices without justification. The CIT(A) deleted the additions, noting that the AO did not provide evidence to prove that bottles from different suppliers were of the same quality and type. The Tribunal upheld CIT(A)'s decision, agreeing that the AO's comparison was speculative and unsupported by evidence.

5. Disallowance of Finance Charges:
For the assessment year 2010-11, the AO disallowed ?18,00,000/- towards finance charges, alleging that the assessee diverted interest-bearing funds for non-business purposes. The CIT(A) deleted the addition, but the Tribunal reversed this decision, sustaining the AO's addition, noting that the assessee did not provide a satisfactory explanation for the diversion of funds.

6. Disallowance of Discount Allowed on Sales:
For the assessment year 2010-11, the AO disallowed ?4,31,86,368/- towards discount allowed on sales, claiming the assessee failed to justify the discount with evidence. The CIT(A) deleted the addition, noting that the discount was charged by TASMAC as per the terms of supply. The Tribunal upheld CIT(A)'s decision, agreeing that the discount was genuine and allowed as per the agreement.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on most issues, except for the disallowance of finance charges for the assessment year 2010-11, which was sustained. The appeals filed by the Revenue for assessment years 2006-07 to 2009-10 were dismissed, and the appeal for assessment year 2010-11 was partly allowed.