TaxTMI 
TaxTMI 
2015 (1) TMI 863
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....A) ought to have upheld the action of the Assessing Officer in making the addition on account of low yield of finished product of Rs. 32,57,060/-. 3. The Assessing Officer made the addition by observing as under:- "4. Addition Rs. 32,57,500/-on account of low yield : During the course of assessment proceedings various details were sought along with the details in respect of the raw material purchases / consumption, finished goods and wastage vide notice u/s 142(1) dated 08.10.2009. The assessee has filed the reply in response to the notice, however not the furnished the following details: 1)Details of Raw material, finished product and wastage : Chemical name R a w material F inished product wastage 2) Details of consumption of raw material: Month Consumption of Raw Material Quantity in Kg. Quantity of wastage in Kg. Once again a notice u/s 142(1) of the IT Act dated 18.11.2009 was issued to the assessee requiring him to furnish the details as stated above. However no such details were filed. In view of non production of details and Basic Records such a bill, voucher etc. a notice u/s 142(1) dated 24.11.2009 was served and requiring him to produce the books and....
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....duced the excise register. On verification of the Excise register and other details filed by the assessee, a final show cause notice was issued on 23.12.2009 which is reproduced as under : "The reply filed in respect of low yield is not tenable as neither any factual details nor any supporting document is furnished to support the claim. In the chemical reaction the law material is in proportion with the final product as also the percentage of yield is also ascertainable, however, it is noticed that the yield is considerably low and it is also noticed that sodium chloride is produced as by product, however, the quantification of the same is neither appearing in the stock details nor in excise. The quantitative details must be incorporated in the Stock Register, Excise Register etc. whether the value is significant or not. It means that the assessee is not showing true yield and thereby the book result is not reliable and same is required to be rejected u/s 145 (3) of the I T Act and income is to be estimated. Please offer your explanation. In response to this notice the assessee has filed the reply on 24.12.2009 which is reproduced as under : In your above letter you have s....
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.... has not offered any comment on this issue. The issue of yield is very important as far as this case is concern as the percentage of yield is very low and varies between 34.56% to 38.86% in comparison to the last year. As regard the quantification of wastage produced during the manufacturing process i.e Sodium Chloride (common Salt) is claimed to be 10% of the total input. If the same is added to the above stated yield, it would be 44.56 to 48.86, then where the rest of weight i.e nearly 50% has gone . The assessee has not offered any explanation on this issue which was specifically asked in the show cause notice. The assessee has also not quantify the production of Sodium Chloride (common Salt) in the excise Register in the pretext that there is no commercial value of the same and also not maintaining any kind of proof in respect of the quantification of the Sodium Chloride . Therefore the quantity of the Sodium Chloride produced during the year and its commercial value is highly suspicious. In view of the above, the quantitative ratio of raw material vis-avis final product is analyzed from the records of the assessee. It noticed that there are two processes to obtain Potassium....
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....t Potassium Nitrate as derived from the above table is 0.54 % and the material which is left is only having ratio of 0.17% and this ratio could not yield the finished goods as shown in the books of the assessee. Therefore, the yield shown by the assessee is not true. If it is presumed that the all of the Potassium Chloride i.e 570MT is consumed in the same ratio as arrived in above stated chart then it would requires 1054 MT ratio is 0.54) Sodium Nitrate and after reaction of the both chemicals, Potassium Nitrate of 812MT ( 50% yield* of the weight of both the material) would be produced. If this quantity is merged with the quantity of Potassium Nitrate which was already been produced through procedure A the total weight of the Potassium Nitrate (final product) arrived at 2321MT (1509MT+812MT) which is much higher than 2175MT as shown in the books i.e This indicates that the purchases are not genuine. This also confirms that the books of accounts are not showing true result of the production. More importantly these conclusion is arrived under two constraints firstly the ratio of concentration is taken as per the assessee submission which is highly suspicious as discussed above and ....
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....mpany Law and as per Income-tax Act by the qualified Chartered Accountants. The auditors in both of the audits had not quantified any defect or deficiency in maintenance of books of account and other records. The assessee's records are also subject to audit by the Central Excise authorities and the Assessing Officer had not brought on record any irregularity or deficiency noticed in such audit by the Central Excise authorities. 2.3 The Ld. Counsel has brought on record that in the chemical process industry, various processes and compositions are always tried with an intent to improve the profitability. In the process, the change in mix of composition of input materials is effected at times. It happens that the change in input composition may result in lower yield with lower cost of production and improved profitability/gross profit, the achievement of which is the intention of every business entity. He further submitted that there are two methods of procuring Sodium Nitrate, which is again mixed with Potassium Chloride to give the final product i.e. Potassium Nitrate. Either one can opt for combining Weak Nitric Acid and Soda Ash to get Sodium Nitrate or alternatively one ca....
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....e produced. The total production thus in his view was to be 2321 MT (1509 MT by first process + 812 MT by second process) which was much higher than the production of 2175 MT shown in the books of account. If, it is admitted for the sake of convenience, it goes to say that the appellant had purchased the excess Sodium Nitrate and not recorded in the books of account. First of all, there is no evidence on record of such unaccounted purchase of Sodium Nitrate and secondly, why the appellant will like to purchase the raw material out of books where it is the expenditure for it. It is also against the stand of the Assessing Officer wherein at other place at page-8.of the assessment order, he had observed that the purchases are not genuine. I agree with the contention of the Ld. Counsel that the decline in the weight is partly attributable to burning loss and partly due to the fact that when the final product viz., Potassium Nitrate is produced, Sodium Chloride is simultaneously produced that is in watery form. This explains the weight loss. It is to be seen that the Chemistry is not mathematics where it can be calculated in a simple method. The Assessing Officer had taken Soda ash + Ni....
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....s were stated to be made and if there were any, the same were not brought on record by the Assessing Officer. It is surprising that the books of accounts were accepted for seven continuous years on the basis of same accounting system by the Assessing Officer whereas the accounting system for the eighth year is being found faulty. The addition was made only on possibilities and probabilities which cannot be approved in absence of evidence and without any material on record. 2.7 Considering the above discussion, it is held that the Assessing Officer was not justified in rejecting the books of account without bringing on record even a single instance of inflation or suppressing of purchases or sales outside the books of account. He had not brought any evidence on record to justify the suppression of purchases of Sodium Nitrate not so recorded in the books of account. The books of account cannot be rejected only on the ground that the appellant had not maintained the stock register of consumable raw materials. It is pertinent to mention here that by changing the process of production, the appellant had substantially reduced the cost of production from Rs. 17,788 per MT in the preced....
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....f additional depreciation of Rs. 90,908/-. On verification of the ledger it is noticed that the assessee has claimed additional depreciation on addition to plant and machinery account during the year. A show cause notice dated 10.12.2009 was issued and required to furnish explanation as to why the said depreciation should not be disallowed as no new machinery is purchased during the year. The assessee in his reply has stated that: "Assessee has undertaken some extension and for which new machinery were installed which is part of the present machinery and has helped to have better production. Thus the parts used have been capitalized and for which additional depreciation is claimed." As per the provisions of the IT Act the essential criteria for claiming additional depreciation is to acquired and installed new machinery and plant, however in this case majority of expense is made towards up keeping and running of old plant and machinery. The intention of the legislature behind allowing additional depreciation is to give incentive for purchasing of new plant and machinery for more production. However, the assessee is fail to produce any documentary evidences in respect of purcha....
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.... particulars allowed the normal depreciation and disallowed the additional, depreciation on the reason that the addition to plant & machinery is for upkeep of existing machinery and it does not add to any further production. Copy of ledger account of Plant & Machinery is attached vide page no.45 & 46 of the paper book. It is with respect submitted that the provisions relating to allowance of additional depreciation are governed by sec. 32(1)(iia) and when same is perused, it is evident that a further sum equal to 20% of the actual cost of plant & machinery is to be allowed as deduction under clause (ii) which deals with allowance of normal depreciation. There is no reference to creation of any additional capacity etc. as it existed up to the assessment year 2005-06. In the case of the appellant, where the ld. A.O. himself considers the addition to the plant & machinery during the year as new for the purposes of allowance of normal depreciation, there is no justification in his taking a different stand in the allowance of additional depreciation which is prescribed at 20% of the cost of new plant & machinery. In the case of the appellant, the ld. A.O. has allowed in the assess....