AI Drafter 
TaxTMI 
TaxTMI 
2022 (10) TMI 947
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....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 produ....
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.....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 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). 3. 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....
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....epted 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. 6. 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. The assessee furnished details of electricity consumed vis a vis production and submitted that the consumption of electricity ....
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....s 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. 10. 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 ....
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....abricated. 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 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,....
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....g 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 reasons for rejection of production ratio of other months. The cherry picking exercise adopted by Assessing Officer for re....
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....r 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 ad....
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....e 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. 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....
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....icer 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. 20. 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 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 a....
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....t 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 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....
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....sumption 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. 21. 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 material consumption and average wastage percentage in dry process unit is 1.5 t....
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....r 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, 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....
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....puted 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. 25. 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 f....
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....foresaid discussions, we do not find any merits in the grounds of appeal raised by the revenue, and thus, we affirm the order of ld CIT(A), with our additional findings. In the result, the grounds of appeals raised by the revenue is dismissed. 28. In the result, the appeal of the revenue is dismissed. 29. In ITA No. 25/Srt/2020 for the A.Y. 2011-12, the revenue has raised identical grounds of appeal as raised in appeal for AY 2009-10 (ITA No. 578/Srt/2020) except variation of addition on account of suppressed production. Considering the facts that we have dismissed the appeal of revenue on similar grounds of appeal thus, following the principal of consistency, the finding given by us in the former paras shall apply mutatis mutandis in this appeal also. 30. In the result, the appeal of the revenue for AY 2011-12 is also dismissed. 31. Finally, both the appeals of the revenue are dismissed. Order pronounced in the open court on 21st October, 2022 in open Court. ============= Document 1 Unit Size of tiles Weight No. of tiles per Actual weight in mm per tile M2 of the fired tiles in Kg. (Kg./M2) A. Dora Gujarat Unit Floor tiles: ....