ORDER
Joginder Pall, A.M.
1. This is an appeal filed by the Revenue against the order of the CIT(A), Jalandhar, for the asst. yr. 1998-99.
2. In this appeal, the Revenue has raised following three effective grounds:
1. That on the facts and circumstances of the case, the learned CIT(A) has erred in law in deleting the addition of Rs. 70,97,989 made by the AO in the trading account.
2. While allowing relief at sl. No. (1) above, the learned CIT(A) failed to appreciate that books of account maintained by the assessee were defective inasmuch as no day-to-day record for consumption of raw material, production of finished goods, bye products obtained and shortage/wastage generated in the manufacturing process, were maintained by the assessee. The provisions of Section 145(3) were thus clearly applicable and rightly invoked by the AO.
3. That the learned CIT(A) has further erred in law in allowing depreciation on newly purchased industrial agro-waste fired boiler @ 100 per cent as against 50 per cent allowed by the AO. The learned CIT(A) failed to appreciate that the installation of boiler continued even after 30th Sept., 1997, and as such could not be put to use in the first half of the year, especially when the expenditure on fuel remained the same as per last year and the rice husk which is used as fuel in agro-based boiler started purchasing in November, 1997.
3. The facts of the case relating to first two grounds are that during the course of assessment proceedings, the AO observed that there was steep fall in GP from 31.93 per cent to 25.6 per cent for asst. yrs. 1996-97 and 1997-98, respectively to 20.79 per cent for assessment year under reference on turnover of Rs. 10.50 crores. The AO also called for the details of comparative increase in the cost of production and comparative increase in the sale price and observed that while the cost of inputs marginally increased, there was substantial increase in the sale price and, therefore, there was no justification of substantial fall in GP rate. He also noticed that in the statutory audit report, auditors had referred to the books of account, examined the cash book, ledger, bank book, journal, sale book, purchase book, etc. However, he observed that the auditors had not referred to the stock register. The AO, therefore, drew an inference that the assessee had not maintained stock register. He further observed that the assessee claimed to have purchased a new industrial high efficiency boiler for a cost of Rs. 26.5 lakhs, which was stated to be an energy saving device. However, the cost of expenditure on fuel and power was shown at 10.22 per cent of the total cost of production as against 10.02 per cent of the immediately last year. The AO further observed that in the audit report, process loss was shown at 1853.675 MT. When asked to explain as to how the said loss was accounted for, the assessee explained that it had shown semi-finished goods weighing 440 MT valued at Rs. 45,04,254 in the closing stock. Such item of semi-finished goods was not reflected in the quantitative details. The AO also observed that the assessee had installed new boiler on which depreciation @ 100 per cent had been claimed. However; fabrication charges of the furnace (Bhathi) were debited on 18th Nov., 1997 and the boiler was run on paddy husk, purchases of which were shown only in November, 1997, which showed that the boiler had not been installed prior to November, 1997, and the claim of the assessee for depreciation @ 100 per cent was not correct. Thus, the AO concluded that the book results of the assessee were not supported by day-today records of consumption of raw materials, the production of finished goods, process loss and manufacturing wastage. He, therefore, rejected the book results and applied the provisions of Sub-section (3) of Section 145 of the IT Act, 1961. Applying GP rate of 25.60 per cent of the immediately preceding assessment year the AO made trading addition of Rs. 70,97,989.
4. Aggrieved, the assessee challenged the addition in appeal before the CIT(A) and also challenged the finding of the AO for rejection of book results. It was submitted before the CIT(A) that the action of the AO in rejecting book results and for making addition was arbitrary, unwarranted and unreasonable. It was submitted before the CIT(A) that the finding of the AO that the assessee had not maintained the stock register was factually wrong because the assessee had maintained such register in the regular course of business as the summary of the said register as duly verified by the auditors was furnished and was already existing when the return of income was filed. It was also stated that the assessee had maintained day-to-day purchase and sale registers and monthly figures were prepared from these registers and were incorporated in the production and stock registers. It was submitted that the nature of business of the assessee was such that the processing of raw materials was a continuous process and the figures are worked out by physical verification at the end of every month. It was submitted that on the basis of same facts and books of account maintained, the AO had accepted the book results for the asst. yrs. 1995-96, 1996-97, 1997-98 and 1999-2000 where GP rate of 25.29 per cent, 31.93 per cent, 25.60 per cent and 12.13 per cent was accepted. It was also argued that the process loss is a normal feature of assessee’s business and it was not only in the assessment year under reference that such loss had been shown. It was submitted that process loss for the assessment year under reference worked out to 40 per cent as compared to such loss at 38 per cent of the asst. yr. 1997-98, 43 per cent for the asst. yr. 1995-96 and 42 per cent of the succeeding asst. yr. 1999-2000. He submitted that all the assessments for these assessment years were completed under Section 143(3) and no addition was made on this account though the process loss varied from 38 per cent to 43 per cent during the relevant assessment years. It was submitted that process loss depended on the quality of raw materials which was beyond the control of the assessee. It was also argued that the AO had wrongly calculated sale rate ignoring the substantial expenses of Rs. 15.99 lakhs debited to trading and manufacturing account under the head cartage and packing charges. It was also explained that there was no major variation in the GP rate in the main products, i.e., ossien/tech. gelatine. However, there was fall in GP rate i.e. DCP which is one of the bye-products. The learned CIT(A) considered these submissions and held that the AO was not justified in rejecting the book results because the assessee had maintained complete records and no defects in the books were pointed out. Consequently, the CIT(A) also deleted the trading addition made by the AO. The relevant findings in para 2.8 of the impugned order are as under:
2.8 I have considered the submissions from both the sides and have gone through the record. The book results have been rejected by the AO on the basis of non-maintenance of day-to-day consumption of raw material, the production of finished goods and the manufacturing wastage, the deficiency in stock of 1853.675 MT stated as process loss and reason for fall in GP rate not explained to the satisfaction of the AO. No other defects have been pointed out in the books of account. A look at the records reveal that it is a case where stock registers have been maintained and quantitative details of consumption of the raw material along with generation of finished goods were made part of the audited report filed with the return of income. The manufacturing process of the appellant is a continuous process and at end of the month the figures of production and stocks are worked out by physical verification. It is precisely from these statements, quality-wise that the figure of process loss in the case of appellant was determined at 1853.675 MT after considering the net production to consumption of raw materials. No discrepancy has been pointed out regarding quantitative records and its reflection thereof. The objection regarding non-reflection of stock records in the relevant column of audit report is meaningless when the complete quantitative tally was made part of the audited financial statements. Therefore, I find merits in the submissions of learned Authorised Representative that results of the year were supported with stock tally based on production details. AO has further mentioned that the process loss of 1853.675 MT which in percentage terms stands at 40 per cent of the consumption of raw material, was detected and when the total wastage was shown at 100.260 MT there was no reason as to why process loss as high as 1853.675 MT was not reflected in the stock details. AO did not accept that 1853.675 MT of raw material was lost in the manufacturing process. The process loss was not the unique phenomenon of the year, rather it was a result of manufacturing activities carried out by the appellant and it occurred not only in the relevant assessment year but also in other years. It was seen that the process loss varied from 38 to 43 per cent and except in the year under consideration the process loss was accepted in other years. The process loss of 43 per cent was accepted in asst. yr. 1995-96 and 42 per cent in asst. yr. 1999-2000. The AO failed to appreciate that the process loss being total loss was not an item to be reflected in stock details, as it had no value to the appellant while wastage having some value weighing 100.260 MT was reflected. Further, while working cost of production of the different items vis-a-vis their sale price under the issue of fall in GP rate of the year, AO did not consider the direct expenditure on account of packing material and consideration of same has revealed that increase in cost of production was not neutralized by enhancement in sale price. I also find merits in submissions of learned Authorised Representative that observation of AO regarding non-reflection of semi-finished goods worth Rs. 45,04,254 in the quantitative details was baseless as the same were reflected in the stock as per the return. Regarding variation in GP rate, the records reveal that results of the appellant were not consistent as it oscillated between 12.13 per cent to 31.93 per cent and the results declared at 12.13 per cent for asst. yr. 1999-2000 were accepted based on the similar books of account as maintained during the year and in asst. yr. 1997-98, the same AO accepted fall in GP rate of 5 per cent. No defects were found in the books of account to reject the declared results and in view of discussion above; there was no basis to resort to provision ofSection145(3) of IT Act. Therefore, trading addition of Rs. 70,97,989 made by the AO is deleted.
The Revenue is aggrieved by the order of the CIT(A). Hence, this appeal before us.
5. The learned Departmental Representative heavily relied on the assessment order. He referred to the specific defects pointed out by the AO in the assessment order for rejecting the book results. He submitted that the GP rate of the assessee was considerably lower than last year. The audit report did not refer to maintenance of stock registers and there was marginal increase in the cost of production which was duly matched by corresponding increase in the sale rate. Therefore, there was no justification for fall in the GP rate. The basis of process loss was not known. Thus, he submitted that the AO was justified in rejecting the book results and estimating the income by applying the provisions of Sub-section (3) of Section 145. He submitted that since the AO had applied the GP rate as shown in the earlier assessment year, the learned CIT(A) ought to have upheld the addition.
6. The learned Authorised Representative, on the other hand, heavily relied on the order of the CIT(A) and reiterated the submissions, which were made before the authorities below. He also drew our attention to written submissions filed before the Tribunal. He submitted that during the asst. yrs. 1995-96 to 1997-98, the GP rate varied from 25.29 per cent to 31.93 per cent and in the asst. yr. 1999-2000 GP rate was 12.13 per cent, which was accepted by the AO while completing the assessment under Section 143(3). He submitted that even for the assessment year under reference, the assessee had given valid reasons for fall in GP rate which was mainly on account of substantial increase in the cost of production. He submitted that the AO was not justified in excluding the cost of packing and cartage expenses aggregating to Rs. 15.99 lakhs while working out the sale rate. He drew our attention to pp. 20A to 20F, which are the quantitative details of the working of the cost of production of various items and the value of closing stock shown by the assessee. He submitted that the AO has not pointed out any defects in the working of the cost. He further drew our attention to para 28 of the impugned order where the CIT(A) has observed that stock register had been maintained and quantitative details of consumption of raw material along with production of finished goods were made part of the audit report filed with the return of income. He further submitted that the process loss was a part of assessee’s manufacturing activity. He submitted that for the assessment year under consideration, the process loss was only 40 per cent whereas such process loss was at 43 per cent for the asst, yr. 1995-96 and 42 per cent for the asst. yr. 1999-2000. The assessments for these assessment years were completed under Section 143(3) and no addition was made. Thus, he submitted that the CIT(A) has rightly held that book results could not be rejected and has rightly deleted the addition. He also relied on the judgment of Hon’ble Punjab & Haryana High Court in the case of CIT v. K.S. Bhatia , where it was held that the AO could not reject the book results and make the addition to GP in the absence of definite finding that the case of the assessee fell within the ken of proviso to Section 145(1) and that merely low rate of profit as compared to earlier years was not a circumstance which could justify estimate.
7. We have heard both the parties at some length and given our thoughtful consideration to the rival contentions, examined the facts, evidence and material placed on record. We have also gone through the orders of the authorities below. From the facts discussed above, it is obvious that the AO rejected the book results mainly on the ground that the assessee had not maintained day-to-day details of consumption of raw material, items manufactured and the quantity of closing stock, GP rate for the assessment years was low as compared to earlier assessment years, the increase in the comparative cost of production was marginal vis-a-vis increase in sale rate and there was no basis for showing process loss These findings of the AO have not been found correct by the CIT(A). The CIT(A) has clearly mentioned in the impugned order that the assessee had maintained stock register and quantitative details of consumption of raw material along with production of finished goods which were made part of the audit report filed with the return of income. Nowhere, the AO has mentioned that the assessee was asked to produce stock register and the assessee failed to produce the same. On the contrary, statements placed at pp. 20A to 20F clearly show that quantitative details, the working of the cost, valuation of closing stock were furnished before the AO and were part of the return itself. However, no defects therein have been pointed out by the Revenue. Besides, the method of valuation of closing stock has not been doubted by the Revenue. As regards the fall in the GP rate, the assessee has given proper explanation. Besides, the facts placed on record do show that GP rate were 25.29 per cent, 31.93 per cent and 25.60 per cent for the preceding asst. yrs. 1995-96, 1996-97 and 1997-98, respectively. This again shows variation in the GP rate. For the immediately succeeding asst. yr. 1999-2000, the GP rate shown was 12.13 per cent which was lower than the GP rate of the assessment year under reference at 20.79 per cent and the assessments for all the assessment years were completed under Section 143(3). Neither book results were rejected nor any trading addition was made. This fact is very important because in the subsequent assessment year i.e. 1999-2000, the fall in the GP rate was more than 8 per cent and even the process loss was higher at 42 per cent than 40 per cent in the assessment year under reference. Still, no trading addition was made by rejecting book results. As regards process loss, it is a fact that the process loss is part of assessee’s business In fact, for the assessment year under reference, such loss has been shown at 40 per cent. Such process loss was shown at 42 per cent in the asst. yr. 1999-2000 and 43 per cent in the asst. yr. 1995-96. The assessee has submitted that such loss varied from 38 per cent to 43 per cent in spite of the fact that process loss for the other years was higher than the process loss of the assessment year under reference. Still, neither book results were rejected nor any trading addition was made. It is pertinent to mention that the AO very well knew that the substantial trading addition was made for the asst. yr. 1998-99 by rejecting the book results and by applying the GP rate of 25.60 per cent. In the subsequent assessment year, not only the GP rate was lower at 12.13 per cent, even the process loss was much higher at 43 per cent. Neither the book results were rejected nor any trading addition was made. In fact, apart from the assessment year under reference, the book results have always been accepted by the Revenue. Thus, even on merits, we find that book results were not liable to be rejected.
7.1 Even otherwise, we are of the view that principle of consistency demands that similar treatment should be accorded for all the assessment years. Reliance is placed on the judgment of Hon’ble apex Court in the case of Berger Paints India Ltd. v. CIT , Hon’ble Delhi High Court in the case of Director of IT v. Lovely Bal Shiksha Parishad , the decision of Tribunal, Chandigarh Bench, in the case of Dy. CIT v. United Vanaspati Ltd. (2004) 83 TTJ (Chd)(TM) 201 : (2004) 275 ITR 124 (Chd)(TM)(AT), In the case of CIT v. Vikas Chemi Gum India , the Hon’ble Punjab & Haryana High Court has held that if the Department did not contest the decision of CIT(A) for deleting the addition for the earlier asst. yr. 1986-87, it could not challenge similar order passed in relation to asst. yr. 1988-89. No doubt, in this case, the order was passed by the CIT(A), but the fact remains that the Department has not made any addition for any of the assessment years; even though GP rate was low and process loss was higher in respect of many other assessment years as compared to the assessment year under reference. Therefore, there is no justification for taking a different view for the assessment year under reference. Taking into account these facts and circumstances of the case and the legal position discussed above, we are of the considered opinion that the CIT(A) was justified in holding that provisions of Section 145(3) were not applicable and consequently the trading addition has been rightly deleted. We confirm his order and reject both the grounds of appeal of the Revenue.
8. The next ground of appeal relates to allowing depreciation on boiler @ 100 per cent as against 50 per cent allowed by the AO. The facts of the case are that the assessee had claimed depreciation @ 100 per cent on a new industrial hybrid agro-waste fired boiler installed in the assessment year under consideration. The AO observed that the said boiler was run on rice husk. The assessee purchased the rice husk in November, 1997, which showed that the said boiler was not used prior to November, 1997. Further, the AO also examined the details of the expenses incurred for installation of the boiler and observed that expenses were incurred right upto 19th March, 1998 and the same included fabrication charges of boiler (Bhathi) amounting to Rs. 30,000 on 18th Nov., 1997. Taking into account these facts, the AO was of the view that the boiler was not put to use prior to November, 1997, and, therefore, the assessee was entitled to depreciation @ 50 per cent. When this matter was brought to the knowledge of the assessee, it produced a copy of letter from the Director of Boiler, Punjab, who inspected on 26th Sept., 1997, and found the working as satisfactory upto March, 1998. However, the AO did not accept such certificate and restricted the claim of depreciation to 50 Der cent.
8.1 Aggrieved, the assessee carried the matter in appeal before the CIT(A). He referred to the certificate issued by the Director of Boilers, Punjab, on 26th Sept., 1997, which indicated that the boiler was functioning in September, 1997. He also observed that the AO was not correct in ignoring this certificate on the ground that the same related to old boiler. He observed that the said certificate was indeed related to the new boiler to whom new registration number was allotted. He also found no merits in the finding of the AO that pre-fabrication charges were incurred after September on the ground that these were paid in the month of August and September, 1997, and entry in November, 1997, was made under the head advance account through the boiler account. He also observed that boiler could operate both on coal as well as on rice husk and since the assessee had sufficient stock of coal available, the boiler was run on the same prior to November, 1997. Thus, he observed that the finding of the AO that the boiler was not put to use prior to November, 1997, was without any basis. Accordingly, the learned CIT(A) allowed the claim of the assesses for depreciation @ 100 per cent. The Revenue is aggrieved by the order of the CIT(A). Hence, this appeal before us.
8.2 The learned Departmental Representative heavily relied on the order of the AO.
8.3 The learned Authorised Representative, on the other hand, relied on the order of the CIT(A) and reiterated the submissions, which were made before the authorities below. He drew our attention to p. 23 of the paper book, which is a certificate of the Director of Boilers, Punjab, who inspected the boiler on 26th Sept., 1997, and found the same functioning satisfactory. He submitted that prior to November, 1997, the boiler was run on coal for which the assessee had sufficient stock.
8.4 We have heard both the parties and carefully considered the rival contentions with reference to facts, evidence and material on record. From the facts discussed above, it is obvious that the claim of the assessee that boiler started functioning in September, 1997, is supported by certificate of the Director of Boilers, Punjab, who inspected the same on 26th Sept., 1997 and found the working as satisfactory. No material has been placed by the Department to controvert the findings of the CIT(A). As regards the details of rice husk purchased in November, 1997, the learned CIT(A) observed that the boiler could be run both on coal and rice husk and prior to November, 1997, the same was run on coal for which adequate quantity of stock was available. These findings had not been challenged by the Department. No evidence/material has been placed before us to show that the boiler could run only on rice husk. As regards the other observations that part of the expenses were incurred in November, 1997 and thereafter, the same is also without any basis. It is not denied that the Revenue itself has accepted that the boiler started functioning from November, 1997, though some of the expenses were incurred on 19th March, 1998 i.e. on purchase of water softner for Rs. 49,358. Thus, in the light of these facts and circumstances of the case, we are of the view that the learned CIT(A) was justified in allowing depreciation @ 100 per cent. We confirm the order of the CIT(A) and reject this ground of appeal of the Revenue.
9. In the result, the appeal filed by the Revenue is dismissed.