By TIOL News Service

JAMMU, APRIL 16, 2018: THE ISSUE BEFORE THE DIVISION BENCH IS - Whether differences in age of production houses, justifies lower cost of manufacturing by the new production Unit, and hence does not disentitle the producer from claiming deduction u/s 80IB. YES IS THE VERDICT.

Facts of the case:

The Assessee, an individual, is engaged in the the proprietary business of running M/s Kashmir Super Rice Mills, M/s New Kashmir Rice Mills and M/s Kashmir Rice & Oil Mills. He filed his return declaring income of Rs. 4,77,480/- after claiming deduction u/s 80IB at Rs. 38,06,850/-. Though the AO confirmed that purchases, sale and expenses debited to profit and loss account were duly vouched and no apparent error was found in manufacturing & trading account, he however during the course of assessment proceedings, observed that M/S Kashmir Super Rice Mills was showing abnormally low expenses in respect of labour and wages and also in respect of packing material. This according to the AO was done by assesse to take the benefit of deduction u/s 80IB, so that the profits could be shown at a higher level and at the same time showing expenses at a lower level which would otherwise tantamount to unaccounted money in terms of Section 69(C). To compete the assessment on this premises of understated labour and wages, the AO issued show cause to Assessee, which remained unexplained in terms of Section 69(C). Consequently, invoking the provisions of Section 145(3), the AO framed an assessment in terms of Section 144. In response, it was submitted that the concerned mill being a new unit, was much efficient than the older ones and consequently the cost of labour and wages were lesser, resulting in lesser cost of production. Insofar as the expenditure relating to packing material was concerned, the assessee explaned that paddy was procured from farmers in bags and the old bags leftover were utilized for the Unit to pack the goods. Both these contentions were rejected by the AO by observing that the assessee had husked maximum paddy in the unit where deduction u/s 80-IB was available to him and in that process in order to build his capital, the assessee had suppressed the expenditure by actually meeting such expenditure out of the unaccounted money. Similarly as regards packing material, the explanation of assessee was not supported by any inventory and account in respect of the utilization of the old bags in M/S Kashmir Super Rice Mills. As a result, the AO passed an order determining additional sum of Rs. 8,18,551/- on account of the expenditure incurred on labour and wages and addition of Rs. 1,07,714/- made on account of the expenditure incurred outside the books of account on packing material, as unexplained expenditure treating it as income in terms of Section 69(C) and for consequential action.

On appeal, the FAA rejected the contentions of Assessee by simply extracting the order of AO without any discussion or any finding. On further appeal, the Tribunal opined that the assesse had been in the habit of recording of claim in respect of labour and wages and also packing material so that he could claim higher deduction u/s 80IB. The fact of incurring higher expenditure by M/s Kashmir Super Rice Mills could not be ruled out and direct evidence for incurring such expenditure would not be available and inference about such expenditure had to be drawn on the basis of circumstances available on record. Thus, the Tribunal confirmed that the assesse had incurred unaccounted expenditure in M/S Kashmir Super Rice Mills.

High Court held that,

++ as far as cost of production is concerned, it is seen that while discussing the production cost factor between the concerned mill and the other two Units, AO has not taken into consideration the age of the three Units which has been repeatedly pointed by the assessee. The concerned Unit is three years old new machinery while the other two are comparatively old, and hence the labour cost and wages of the older Units were higher. The derivative calculation based on which the AO had proceeded was a mere presumptions. There is no specific relevant material to substantiate the finding that the cost of per quintal in the case of concerned-Unit- M/S Kashmir Super Rice Mills is erroneous or wrong. If the AO's view is accepted then modernization and consequent reduction in cost of production will become a bane for such new enterprise. The logic of AO was counterproductive because better performance and lower cost of production is faulted. Hence, the hypothetical measure of assessment cannot be accepted. Therefore, the issue has to be considered on the basis of materials which are relevant to the determination of the cost of production of rice per quintal based on the type, age and quality of the machinery and its working capacity. A mere comparison with old machinery or Unit will not justify the assessment. When the relevant documents produced by assessee were found by the AO to be in order and duly vouched, then there is no serious error in the records produced. On the contrary, the Tribunal holds that there is a case of higher expenditure, which has been suppressed. The finding of the Tribunal, based on the surrounding circumstances and inference cannot be justified;

++ the finding of the Tribunal in this case appears to be primarily based on human probabilities, inferences from surrounding circumstances what are the human probabilities or surrounding circumstances has not been spelt out. Further, the Tribunal accepts that there is no direct evidence, hence it has to go by inferences. This reasoning cannot be accepted. Taxing statute does not proceed on vagueness, ambiguity or on human probabilities. Further, the very same AO has accepted the per quintal rate of expenditure for the assessee for the assessment year 2002-2003, 2004-2005 and 2005-2006. There cannot be any departure from this method, unless there is a new and substantial material to the contrary. There is no relevant material to justify the findings of the AO only for the present assessment year, when the authority has accepted the per quintal rate of cost of production in respect of other assessment years. Therefore, the demand and the assessment order in terms of Section 69(C) is not justified. It is an arbitrary determination based on irrelevant parameter and, therefore, on this issue, the Tribunal has proceeded on a wrong premise;

++ insofar as the issue relating to packing material is concerned, in the show cause notice it has been pointed out that the cost of packing material with regard to the assessee- Unit as well as two other Units i.e., M/S New Kashmir Rice Mills and M/s Kashmir Rice and Oil Mills differs and, therefore, there is an addition of Rs. 1,07,714/-. In the reply to the show cause notice, there is no proper explanation to this factual claim made by the Department. Assessee's claim is not supported by inventory details of the assessee-Unit to substantiate the plea that some of the bags were left out from paddy purchases and, therefore, the cost of packing material has come down. The AO was correct in this aspect as it is based on production inventory. In the absence of material and a clear explanation from the assessee, there cannot be two opinions that the cost of packing material should differ from one Unit and the other Unit, more so when it is dealing with the same kind of packing material for the same good i.e., rice. The AO was therefore justified in his demand u/s 69(C) in respect of packing material which has been rightly confirmed by the FAA and by the Tribunal.

(See 2018-TIOL-700-HC-J&K-IT)