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Rajasthan High Court · body

2017 DIGILAW 1339 (RAJ)

CIT v. Ceramic Industries

2017-05-25

K.S.JHAVERI, VIRENDRA KUMAR MATHUR

body2017
ORDER : In all these appeals common question of law and facts arises and they relates to same assessee, therefore, these appeals were heard together and decided by this common judgment. 1.1 By way of these appeals, the appellant has challenged the judgment and order of the Tribunal whereby Tribunal has dismissed the appeals preferred by the Department. 2. While admitting the appeals, this Court framed the following substantial question of law: "(1) D.B. Income Tax Appeal No.117/2008 (1) Whether in the facts and circumstances of the case, the ITAT has not acted illegally and perversely and has not grossly erred in deleting the additions on account of excessive wastage which was rightly and on the basis of record restricted to 25% by the AO? (2) Whether in the facts and circumstances of the case ITAT has not acted illegally and perversely and has not grossly erred in overruling the decision of CIT(A) and AO regarding rejection of books of accounts invoking provisions of Section 145(3) of the Act? (2) D.B. Income Tax Appeal No.65/209 (1) Whether in the facts and circumstances of the case, the ITAT has acted illegally and perversely in deleting the additions u/s 69c on account of difference in the closing stock of finished goods and work in progress as well as deleting the additions on account of non-genuine expenditure. (2) Whether in the facts and circumstances of the case, the ITAT has acted illegally and perversely and has grossly erred in deleting the additions on account of excessive wastage in computation of income under chapter IV of Income Tax Act which was on the basis of record restricted to 25% by the Assessing Officer. (3) Whether, in the facts and circumstances of the case, the ITAT has acted illegally and perversely and has not grossly erred in overruling the decision of CIT(A) and AO regarding rejection of books of accounts invoking provisions of Section 145(3) of the Act. (3) Whether, in the facts and circumstances of the case, the ITAT has acted illegally and perversely and has not grossly erred in overruling the decision of CIT(A) and AO regarding rejection of books of accounts invoking provisions of Section 145(3) of the Act. (3) D.B. Income Tax Appeal No.44/2010 "(1) Whether in the facts and circumstances of the case, the ITAT has acted illegally and perversely and has not grossly erred in overruling the decision of AO regarding rejection of books of accounts invoking provisions of Section 145(3) of the Act." (4) D.B. Income Tax Appeal No.56/2010 "(1) Whether in the facts and circumstances of the case, the ITAT has acted illegally and perversely and has not grossly erred in overruling the decision of Assessing Officer regarding rejection of books of accounts invoking provisions of Section 145(3) of the Act? (5) D.B. Income Tax Appeal No.83/2011 "(1) Whether in the facts and circumstances of the case, the ITAT has acted illegally and perversely in deleting the additions U/s.69C on account of difference in the closing stock of finished goods and work in progress as well as deleting the additions on account of non-genuine expenditure. (2) Whether in the facts and circumstances of the case, the ITAT has acted illegally and perversely and has grossly erred in deleting the additions on account of excessive wastage in computation of income under Chapter IV of Income Tax Act which was on the basis of record restricted to 25% by the Assessing Officer. (3) Whether, in the facts and circumstances of the case, the ITAT has acted illegally and perversely and has not grossly erred in overruling the decision of CIT(A) and AO regarding rejection of books of accounts invoking provisions of Section 145(3) of the Act." (6) D.B. Income Tax Appeal No.63/2014 "(1) Whether in the facts and in the circumstances of the case, the ITAT has acted illegally and perversely and has grossly erred in deleting the additions on account of excessive wastage which was on the basis of record restricted to 25% by the Assessing Officer? (2) Whether in the facts and circumstances of the case, the ITAT has acted illegally and perversely and has not grossly erred in overruling the decision of Assessing Officer and CIT(A) regarding rejection of books of accounts invoking provisions of Section 145(3) of the Act?" (7) D.B. Income Tax Appeal No.65/2014 "(1) Whether in the facts and in the circumstances of the case, the ITAT has acted illegally and perversely and has grossly erred in deleting the additions on account of excessive wastage which was on the basis of record restricted to 25% by the Assessing Officer? (2) Whether in the facts and circumstances of the case, the ITAT has acted illegally and perversely and has not grossly erred in overruling the decision of Assessing Officer and CIT(A) regarding rejection of books of accounts invoking provisions of Section 145(3) of the Act.?" (8) D.B. Income Tax Appeal No.124/2016 "(1) Whether in the facts and circumstances of the case, the ITAT has acted illegally and perversely and the grossly erred in deleting the additions of Rs.22013105/- and also not confirming the rejection of books of results done after pointing out specific defects in its books. (2) Whether the ITAT was justified in confirming the decision of the CIT(A) deleting the trading addition despite of the fact that during the survey proceeding and assessment proceedings many inconsistencies were noticed. (3) Whether in the facts and circumstances of the case, the ITAT and CIT(A) have not acted illegally and perversely in deleting the additions made by AO on account of restriction of wastage which was done after examining the complete process of production. (4) Whether in the facts and circumstances of the case, the ITAT and CIT(A) have not acted illegally and perversely in not considering that the estimation of wastage made by the AO was on the basis of report of CGRI which is an independent agency having expertise in the related filed. (5) Whether in the facts and circumstances of the case, the ITAT has erred in deleting addition of Rs. 2472851/- made for depositing the employee's contribution to PF A& ESI beyond the prescribed time limit provided in the respective Acts, when the employee's contribution is governed by the provisions of section 36(1) (va) r.w.s. 2(24)(x) and not section 43B of the IT Act. 2472851/- made for depositing the employee's contribution to PF A& ESI beyond the prescribed time limit provided in the respective Acts, when the employee's contribution is governed by the provisions of section 36(1) (va) r.w.s. 2(24)(x) and not section 43B of the IT Act. (9) D.B. Income Tax Application No.135/2016 "(1) Whether in the facts and circumstances of the case, the ITAT has acted illegally and perversely and has grossly erred in deleting the trading additions of Rs.33015176/- may be the Assessing Officer without appreciating the fact that the estimation of wastage made by the Assessing Officer was on the basis of CGCRI Report which is in independent agency having expertise in the related filed. (2) Whether in the facts and circumstances of the case, the ITAT has acted illegally and perversely and has not grossly erred in overruling the decision of Assessing Officer regarding rejection of books of accounts invoking provisions of Section 145(3) of the Act. (10) D.B. Income Tax Appeal No.198/2016 "(1) Whether in the facts and circumstances of the case, the ITAT has acted illegally and perversely and has grossly erred in deleting the entire additions of Rs.16643028/- on account of unaccounted production made by the Assessing Officer without appreciating that the estimation of wastage made by the Assessing Officer on the basis of report of CGCRI which is an independent agency having expertise in the related field. (2) Whether the ITAT was justified in confirming the decision of the CIT(A) deleting the trading addition despite of the fact that during the survey proceeding and assessment proceeding many inconsistencies were noticed. (3) Whether in the facts and circumstances of the case, the ITAT has acted illegally and perversely and has not grossly erred in overruling the decision of Assessing Officer regarding rejection of books of accounts invoking provisions of Section 145(3) of the Act. 3. Mr. R.B. Mathur has taken us to the order of AO which reads as under:- "In response to this query the assessee vide its' A/R's letter dated 26.03.2004 submitted as under:- 'In para no.1, you have pointed out in-consistency in output/input ratio. In this respect we will like to submit. (a) You have included plaster of paris consumed 346.365 M.T. in the inputs. Plaster of paris is not ingredient of our product. In this respect we will like to submit. (a) You have included plaster of paris consumed 346.365 M.T. in the inputs. Plaster of paris is not ingredient of our product. This is being used as consumable for mould purposes and as such it should not be included for calculating input output ratio. (b) The output/input ratio for the year under assessment comes to 67.31% whereas this was 68.34% in the financial year 1998-99 and 66.19% in the financial year 1999-2000. We are enclosing a comparative chart for this purpose. There is no major difference in these ratios. (c) The output is the actual and most reasonable. Here we would like to mention that the output ratio will depend on number of factors depending on the quality of the goods produced, quality of furnaces and machines used, temperature required, tolerable fluctuations. As well as the quality of raw material used and the ingredient used and in the ingredients used. (d) We agree that in our sister concern M/s Bharat Potteries Ltd., their yield comes to 73.14% and in our case it is only 67.31%. The basic reason of difference are as under: (i) We are manufacturing Bone China Crockery at large and the manufacturing of Stone Ware Crockery is less. The Stone Ware Crockery manufactured by us is lower as compared M/s. Bharat Potteries Ltd. (ii) Bharat Potteries Ltd. is manufacturing maximum stoneware crockery & we are manufacturing maximum Bone China Crockery. (iii) Stoneware Crockery is heavy in weight in comparison to the Bone China Crockery. (iv) Green Strength of Bone China Crockery is less in comparison to Stoneware Crockery. Therefore Green Wastage & Wastage in Biscuitting is more in Bone China Crockery. (v) The temperature in Bone China Biscuitting is 12300 & Stoneware temperature is 9500. Therefore due to high temperature the percentage of breakage is more in Bone China Crockery in comparison to Stoneware Crockery. (vi) Temperature range in Stoneware Crockery is 500 centigrade & Bone China Crockery is 100 centigrade. (vii) In view of the above the production & breakage of Bone China & Stoneware can never be same. Therefore, the yield of output will differ as compare to our sister concern M/s. Bharat Potteries Ltd. The comparison of our yield with M/s. Bharat Potteries Ltd. is not justified. (vii) In view of the above the production & breakage of Bone China & Stoneware can never be same. Therefore, the yield of output will differ as compare to our sister concern M/s. Bharat Potteries Ltd. The comparison of our yield with M/s. Bharat Potteries Ltd. is not justified. The difference in yield is only of 6.19% and no 21.44 as pointed out by you in your show cause notice. Therefore there is no question of unrecorded production." 3.1 He has also taken us to the order of CIT appeal, para 3.4 of which reads as under: 3.2 Taking into consideration he contended that the view taken by the AO is correct even at the most even assuming but not admitting, if it is taken to be correct, it cannot travel beyond reasoning adopted by the tribunal. 4. Counsel for the respondent has reproduce on report taken from Ceramic Research Labotary which is at Khurja Centre, Jaipur Road No.6, V.K.I. Area, Jaipur (Rajasthan). ESTIMATION OF WASTAGE IN PRODUCTION OF BONE CHINA WARES On the basis of a request from M/s Ceramic Industries, Road No.6, VKI Area, Jaipur for making loss/rejection percentage analysis in their unit manufacturing bone china ware crockery/table wares from raw material handling to glost/sorting/decoration/packaging etc. Shri C.S. Prasad, Dy. Officer-in-Charge, CGCRI, Khurja Centre visited the unit on 12.04.2004 and estimated the loss/rejection in the different section of the unit during production. Although the % loss/rejection varies due to change in the climate as well as involvement of new worker. The details of waste generation areas, stage and cause of waste and range of waste is furnished below:- Name of Unit: Ceramic Industries Address of Unit: Road No.-6, VKI Area, Jaipur (Rajasthan) Phone No.2330889, 5404709, Fax No. 2331306 Rejection loss Analysis: Sl. Although the % loss/rejection varies due to change in the climate as well as involvement of new worker. The details of waste generation areas, stage and cause of waste and range of waste is furnished below:- Name of Unit: Ceramic Industries Address of Unit: Road No.-6, VKI Area, Jaipur (Rajasthan) Phone No.2330889, 5404709, Fax No. 2331306 Rejection loss Analysis: Sl. No. Waste/Loss/ rejection Generation Area Stage & Cause of Loss/Wastage Range of Loss/Waste (%) Total loss/ rejection (%) 1 Raw Materials/Chemicals Storage Spillage and scattering of material during transportation 1-2 1-2 China Clay Intermixing of raw material in the storage 1-2 Bone Ash Feldspar Quartz Frit Colours Liquid Gold Others 2 Preparation of Body Spillage/Scattering/Flowing Pussing Loss during transportation and weighing 1-2 Casting slip preparation and sieving During loading of ball mill 1-2 Defective process parameters During unloading of ball mill 1-2 During sieving of slip 3-4 1.9-2.9 During Filter pressing 3-4 During Pugging 1-2 During preparation of casting slip 3-4 Defective process 2-3 3 Preparation of Glaze Loss during transportation and weighing of raw materials and chemicals 1-2 1.7-2.7 Loading in ball mill 1-2 Unloading of ball mill 1-2 Sieving of glaze slip 2-3 Transportation storage of glaze slip 1-2 Washing of utensil used for glaze slip 4-5 4 Fabrication of wares Cutting scrap from jiggering and rolling machine 10-11 4-5.3 Casting of handling, cutting and finishing 6-8 Handle joining in the mug 4-5 Drying 1-2 Water finishing 2-3 Transportation during different process of fabrication 2-3 5 Biscuit firing Loading of the ware of kiln car 1-2 2-3 Unloading of the ware from kiln car 1-2 Cracks due to defects 3-4 Breakage due to miss handling during transportation. 3-4 6 Reaction loss Firing loss due to molecular water, carbon, carbonates, phosphorous, un-burnt fat material etc. 9-10 9-10 7 Glaze Application Spillage during slip density adjustment. 05-1 07-1.3 Wastage during glaze application 1-2 Breakage during glazing process 02.03 Breakage during handling 1-2 8 Glost Firing During loading of glazed ware 1-2 2-3.5 During unloading of glazed ware 1-2 Defective glazed piece 5-7 Transportation for decoration 1-3 9 Transfer Decoration and firing Breakage during decoration 2-3 2-3 Loading of ware for decoration firing 2-40 Unloading of decorative ware 2-3 10 Storing & Packing Defective piece 6-7 4-5 Sorting of the ware 4-5 Packaging 2-3 Total amount of rejection/loss in the production of bone china ware crockery=28.3-38.7%" 5. We have heard counsel for the parties. 6. In the case of same assessee itself, where conclusion is as under:- "Total amount of rejection/loss in the production of bone china ware crockery = 28.3-38.7%". The average will come down to 33.5. 7. Taking into consideration the tribunal has observed as under:- We have perused the facts of the case. The ld. AR Mr. H.M. Singhvi argued that assessee has produced all the books of account, vouchers and the assessee's accounts are audited and all the production is subject to Excise Duty and not even a single unit of production can go out of the factory without recording the same in the Excise Registers which are regularly and continuously verified by the excise Department and are under their control. The AO has not pointed out any defect in the purchases, sales, opening stock and closing stock and as explained before the AO and the ld. CIT(A) that M/s. Bharat Potteries Ltd. i.e. a sister concern is manufacturing more of maximum stoneware crockery and the assessee is manufacturing more of bone china crockery and the difference in yield and the wastage and the gross profit had been explained vide our letter dated 26.03.2004 before the AO and similarly the output/input ratio has also been explained before the AO through the same letter and the AO has not commented upon the same and has not found out any defect in our explanation. The assessee has also filed before the AO following documents/publications to support the wastage declared by the assessee is reasonable and according to the standard practise adopted in the country as under:- 1. C.G.C.R.I., Khurja (PB No.13 to 1) 2. Publication of Articles in while wares (P.B. No.18) 3. Photocopy of Hand book of Ceramics-Volume 2 (Editor S. Kumar) showing typical composition of Bone china. 4. Photocopy of the Chapter 5 of stoneware in the books published by the Institute of Materials (P.B. No.21 to 22). In the report of CGCRI, Khurja, (refer P.B. No.17), the waste worked out to 28.31% to 38.7% interest he bone china crockery and in the case of stoneware crockery it worked out to 24% to 34.8% We agree with the arguments of the ld. In the report of CGCRI, Khurja, (refer P.B. No.17), the waste worked out to 28.31% to 38.7% interest he bone china crockery and in the case of stoneware crockery it worked out to 24% to 34.8% We agree with the arguments of the ld. AR that the main objection raised by the AO was that input/output ratio in various months has the inconsistency which has been duly explained by the assessee vide letter dated 26.03.2004 and the second objection by the AO was that the sister concern M/s. Bharat Potteries Ltd. has declared more yield and more gross profit, has also been explained by the assessee vide the same letter dated 26.03.2004. Therefore, the inconsistency in the input/out ratio in various months the reasons for which has been explained by the assessee, cannot be the basis for rejection of books of account. The yield and gross profit rate declared by the assessee can also not be the basis for rejection of books of account since M/s. Bharat Potteries Ltd. is manufacturing maximum of stoneware crockery and for many other reasons which were explained by the assessee vide its letter dated 26.03.04 which was ignored by the AO and the AO has not pointed out any specific defects in the purchases, sales, opening stock and closing stock of the assessee and the AO has not brought on record any cogent material to prove that the assessee has sold the under-production out of the books of account. Therefore, in such circumstances and facts of the case, the AO is not justified in rejecting the books of account by invoking Provisions of Section 145(3) of the Act and the additions made by the AO are liable to the deleted. The objection of the ld. DR that the ld. CIT(A) has not relied upon the CGCRI Report, Calcutta, the ld. AR has pointed out that the in the same report it has been mentioned that the said organization is not involved production practise and the are not sure to what extent their opinion will be useful for the purpose of the assessee and in such circumstances and facts of the case, the report of CGCRI, Calcutta alone cannot be the basis for rejection of books of account and making an estimation of wastage and the ld. CIT(A) was not justified in ignoring other material which was placed before him as mentioned hereinbefore. CIT(A) was not justified in ignoring other material which was placed before him as mentioned hereinbefore. Therefore, the ld. CIT(A) was not justified in sustaining the applicability of Section 145(3) of the Act and addition of Rs.11,15,087/-. Thus Ground No.1 of the assessee is allowed and the solitary ground of the Revenue is dismissed. 8. In our considered opinion the argument which has been canvassed by Mr. Mathur that the stone average loss as 29.4 should not be 30.1 as per Khurja is also 23.1. 9. Taking into consideration that the bones china crockery of the delicate nature, the report of Khurja for the specific industry has been accepted by the tribunal, no error is committed in doing so. 10. Both the issues are answered in favour of assessee and against the Department. 10.1 It is made clear that we have only decided the matter which is pending before this court but for the next year, it will be open for AO or the Department to look into improvement of industries, machinery and assesses the same every year loss. 11. All the appeals are dismissed. 12. A copy of this judgment be placed in each file.