ORDER
R. M. MEHTA, A. M. :
The following ground is raised in Revenues appeal directed against the order passed by the CIT(A) :
“On the facts and in the circumstances of the case, the CIT(A) has erred in facts in deleting the addition of Rs. 1,92,43,626 without proper appreciation of the facts brought by the Assessing Officer in his assessment order.”
2. The respondent in this case is a registered firm deriving income from manufacture and trading in Zarda, Betel Paste and Pan ka Masala. For the assessment year under appeal, viz., 1985-86 is filed a return declaring an income of Rs. 67,69,500 on 30th Aug., 1985 which was later on revised on 30th Sept., 1985 to a figure of Rs. 66,82,500. As observed in the assessment order the accounts of the assessed are audited by qualified chartered accountants.
3. During the year under consideration the turnover of the assessed increased by 22% over the preceding assessment year while the gross profit (in terms of rupees) increased by 25% over the same period.
4. The Assessing Officer in the course of the assessment proceedings took note of the fact that the manufacture of Zarda accounted for the lions share of the firms manufacturing and trading activities. It was also noted that the main ingredients of Zarda were tobacco flakes, two varieties of which, namely, Gujarati and Nepali were being used. The “other ingredients” which were purported to have been used in the manufacture of Zarda were 29 in number including menthol, musk, saffron, spices, kiwam, silver and various types of perfumes (attar). As noted by the Assessing Officer the assessed was required to maintain three registers under the Excise laws giving quantitative details of the inputs and outputs. It is not disputed that these were statutory registers subject to check by the Excise authorities as and when they desired. The Assessing Officer has recorded as a fact that during the year under consideration none of the three registers maintained bore any marks of inspection. The CIT(A) has, however, stated otherwise. By reference to the RG-12 register the Assessing Officer noted that this contained details of inputs issued and consumed in terms of weight, outputs in term of weight in loose form as well as in packed form and wastages, if any, recorded on daily basis. It was also found that the weight of tobacco flakes was separately shown under the inputs column whereas the weight of “other ingredients” was clubbed under one column. The Assessing Officer after noting the aforesaid details observed “that RG-12 register is a contemporaneous record of the inputs and outputs”.
5. The Assessing Officer on a further examination of the said register found that for the assessment year under consideration, viz., 1985-86 the assessed had consumed 53,337.700 kgs. of “other ingredients” and whose break up he asked the assessed to furnish vis-a-vis the different items and in terms of weight. The assessed, in other words, was asked to clarify whether the consumption claimed was correct as per the formulae especially when the articles manufactured by the assessed had remained the same for the last many years and it was only the partner one Shri Sri Gopal Gupta, who knew the formulae. It appears that the assessed firm declined to divulge the formulae on the ground that it was a trade secret and its leakage would benefit other persons in the same line of business at the cost of the assessed. The Assessing Officer thereafter asked the assessed to give relevant parts of the formulae to enable a verification to be made in respect of the consumption of high value items. Even this was not furnished.
6. The assessed, however, filed details of the monthly consumption of the “other ingredients” with the Assessing Officer and on a perusal of which he found that the weight of such “other ingredients” available for consumption during the year was 49,267.600 kgs. From this he excluded the weight of certain items which had gone in the manufacture of Betel Paste and these being menthol, sandal wood oil and silver leaves, etc., arriving at a net figure of 45,891.600 kgs. of the “other ingredients” used in the manufacture of Zarda.
7. On an appreciation of the aforesaid facts the Assessing Officer came to the conclusion that the weight of “other ingredients” actually consumed during the year as recorded in the RG-12 register was 53,337.700 kgs. whereas the weight available for consumption in the books of accounts was 45,891.600 kgs. The Assessing Officer took note of the fact that no stock register had been maintained for these ingredients and the figure of consumption had been worked out as a balancing figure, i.e., the opening stock plus purchases minus closing stock.
8. On 16th Nov., 1987 the assessed firm filed a quantitative summary of raw materials consumed wherein it had been mentioned that the plain water to the tune of 7,900 kgs. had also been used in the manufacturing process and this was included in the weight of “other ingredients” as stated in the RG-12 register. The submission, in other words, was that the difference in the material consumed as per the RG-12 register and that stated in the books of accounts was solely due to the use of plain water whose weight was 7,900 kgs. The Assessing Officer, however, noted that the difference as per the two figures of 53,337.700 kgs. and 45,891.600 kgs. was to the tune of 7,446.100 kgs. which was less than the weight of water purported to have been used, viz., 7,900 kgs.
9. In order to verify the veracity of the assesseds submissions the Assessing Officer recorded the statement of Shri Gupta under S. 131 on 20th Oct., 1987 and wherein he sought to provide certain clarifications about the two sets of figures of consumption. A specific question was asked regarding the consumption of certain high valued items used in the manufacture of Zarda. This information was not furnished by Shri Gupta on the ground that the formulae was a secret although the Assessing Officer was of the view that the disclosure of the high valued items could not have led to the leakage of the said secret formulae. The Assessing Officer, in the ultimate analysis, concluded that the “clarification” given by Shri Gupta was not correct and since no effort had been made to reconcile the figures it had become incumbent on the part of the Department to make further enquiries from outside agencies vis-a-vis use of plain water in the process of manufacturing Zarda.
10. The Assessing Officer made the aforesaid enquiries from the Asstt. Collector of Excise, New Delhi, who it appears stated that plain water was not used in the manufacture of Zarda and that no record of water was required to be entered in the RG-12 register. The Assessing Officer also referred to a publication of the CSIR, namely, “The Wealth of India – Raw Materials -Dictionary on Indian Raw Materials & Industrial Products.” vis-a-vis the moisture content in a freshly harvested tobacco leaf. A reference was also made to another publication of the ISI, New Delhi, once again for the purpose of determining the moisture content of a tobacco leaf as also the finished product, i.e., Zarda. The Assessing Officer also obtained samples from the assessed vis-a-vis the item in question and got them tested in the Shri Ram Institute for Industrial Research, Delhi, once again with a view to determine the moisture content. Vide their report the Institute stated that the moisture content varied from 9.5% to 14%. On the basis of the aforesaid enquiries and tests the Assessing Officer concluded that the “moisture content of Zarda manufactured by the assessed firm lies within the range of 10 to 15% which is due to the moisture content of dried processed tobacco leaf”. According to him in case plain water had been added as claimed by the assessed the moisture content of Zarda would have been more than 15%. The inference drawn in other words was that no plain water had been used in the manufacture process.
11. The Assessing Officer also chose to make enquiries from another Zarda manufacturer which disclosed that plain water was not used in the manufacturing process and the tobacco flakes constituted the bulk of the raw material used and its source being the same in case of most of the manufacturers.
12. After making the aforesaid enquiries the Assessing Officer sent a letter to the assessed on 9th March, 1988 allowing it an opportunity to explain its position regarding the use of plain water. The assessed furnished a reply in response to the aforesaid letter, but as per the Assessing Officer, the assessed only made a statement that plain water was used without giving any evidence in support. The Assessing Officer also made a reference to the same letter wherein the assessed had stated that plain water was never treated as an ingredient although purporting to record its consumption in the RG-12 register under the head “other ingredients”. In the ultimate analysis, the Assessing Officer treated the difference between the figure for consumption as stated in the RG-12 register, viz., 53,337.700 kgs. and the consumption as shown in the books of accounts, i.e., 45,891.600 kgs., namely, 7,446.100 kgs. as the purchases made outside the books of accounts and representing the undisclosed/concealed income of the assessed firm for the financial year 1984-85, the assessment year being 1985-86. At an average rate of 2,584.39 per kg. the Assessing Officer arrived at an addition of Rs. 1,92,43,626.
13. Being aggrieved with the action on the part of the Assessing Officer the assessed came up in appeal before CIT(A). During the course of these proceedings details arguments were advanced with reference to the material on record and written submissions were also filed, a copy of which was handed over to the Dy. IT (Asst.) who also attended the proceedings on behalf of the Department. It would suffice if the arguments advanced by the learned counsel on behalf of the assessed are summarised as follows :
(i) That the assessed was maintaining complete and proper books of accounts in the normal course of its business including the prescribed excise records and not a single defect had been pointed out by the Assessing Officer;
(ii) That the assessed had an accepted history and the results declared during various preceding assessment years had been accepted;
(iii) That the Assessing Officer had not considered the matter in proper perspective and had in fact taken into account irrelevant material in making the impugned addition;
(iv) That although the Assessing Officer had brought to the notice of the assessed the fact of making enquiries by means of a letter dt. 9th March, 1988, he had failed to appreciate the detailed reply furnished, by the assessed and wherein each and every aspect of the matter had been explained;
(v) That in spite of the assesseds request the Assessing Officer had not furnished the information in his possession and nor had he disclosed the names of the parties from whom the enquiries had been made and the contents of such enquiries;
(vi) That the reliance of the Assessing Officer on the publication “Wealth of India” was totally misplaced since he had failed to take into account the quality and type of tobacco actually used by the appellant; It was submitted that the Assessing Officer had taken into consideration the moisture content of tobacco as varying between 10% to 15% whereas the assessed was using altogether different varieties produced in Gujarat whose moisture content varied between 5.68% to 6.3% as stated in the same publication. Attention was invited to the fact that as against the aforesaid percentage the assesseds finished product contained moisture between 10% to 15% and the difference was apparently on account of the water added;
(vii) That the use of plain water was necessary for the manufacture of the assesseds products and the Excise authorities were not justified in stating otherwise, since they were not concerned with the manufacturing process and the assesseds secret formulae was not in their possession;
(viii) That plain water had been used in the earlier years as also in the succeeding assessment years;
(ix) That not only had the Assessing Officer not intimated to the assessed the details of the enquiries conducted by him, but there was no mention at all about the book “Wealth of India” relied upon by him and the said fact being disclosed to the assessed only on 18th March, 1988 by which time the proceedings had already been concluded;
(x) That the contents of the formulae for purposes of undertaking manufacturing activities was a closely guarded secret and its disclosure would have immensely harmed business interest of the assessed. Attention was invited to the fact that in asst. yr. 1983-84 the assessed had made an offer to reveal the contents of the formulae provided the same were not brought on record by the Assessing Officer. That although the exact composition of the various items used in the manufacture of Zarda were not disclosed the consumption figures of important items like saffron, attar, etc., were duly made available to the Assessing Officer during the course of the assessment proceedings relevant to the asst. yr. 1983-84;
(xi) That there was no basis with the Assessing Officer to make the impugned addition especially when the “other ingredients” were not the total ingredients, the main item being tobacco and whose figure of consumption had not been disturbed by the Assessing Officer;
(xii) That books of accounts had been thoroughly checked by the Assessing Officer and no defects, deficiencies or omissions had been pointed out and there not being a single item of purchase or sale which could be termed as unexplained, unrecorded or unvouched;
(xiii) The assesseds results were better as compared to many of the preceding assessment years and even on this account no addition was called for.
14. In reply to the aforesaid submissions, the Dy. CIT(Asst.) who attended the proceedings advanced the following arguments :
(1) That the excise records had not been checked during the previous year under consideration by the Excise authorities;
(2) That plain water was not used in manufacturing process and nor was it recorded in the RG-12 register;
(3) That the contention of the assessed about the furnishing of relevant formulae to the Department in asst. yr. 1983-84 was not relevant since at no point of time in the past the consumption of water had been indicated to the Department;
(4) That the quantity of water alleged to have been used had not been properly reconciled and only the balancing figure had been indicated;
(5) That the main partner of the assessed firm, namely, Shri Sri Gopal had admitted during the search operations under S. 132 and also in his statement under S. 131 recorded on 3rd Feb., 1988 that he purchased raw tobacco and manufactured Zarda at his residence and sold the same from the same premises;
(6) That he had also surrendered a sum of Rs. 28,88,250 during the search operations and this suggested that the assessed made cash purchases and sales whose actual quantification was not without difficulty. That the entire purchases made outside the books of accounts had been used in the manufacturing process;
(7) That the report of the Excise authorities could not be brushed aside having come from another Govt. Department;
(8) That the contention of the assessed that it was purchasing “Biri type tobacco” and not the quality of tobacco which had been made the basis for working out the moisture content was not proved and that the assessed was also purchasing various other types of tobacco.
15. The CIT(A) after considering the submissions made by the assesseds counsel as also by the Dy. CIT (Asst.) with reference to the material on record proceeded to delete the addition. In doing so he recorded detailed findings in paras 2.12 and 2.13 of his order. We, however, feel inclined to refer to the main findings which led to the deletion as follows :
(i) The manufacturing formulae of the assessed was admittedly a closely guarded secret and the same could not be divulged lest the assesseds business interest be endangered;
(ii) The formulae of the appellant had been gone into by the Assessing Officer while framing the assessment for asst. yr. 1983-84 and a finding to this effect given in the body of the assessment order itself;
(iii) That the Assessing Officer appeared to have taken into consideration a variety of tobacco which was apparently not being used by the assessed and which was purported to have a moisture content ranging between 10 to 15% whereas the correct fact was that the assessed was using those varieties of tobacco which had a maximum moisture content of 6.4% and it was only as a result of use of plain water that the moisture content of the assesseds finished products reflected percentage varying between 9.5 to 14%;
(iv) That if the assessed was using tobacco with 10 to 15% moisture content as contended by the Assessing Officer then its end product would definitely contain moisture more than 9.5% to 14% taking into account the fact that “other ingredients” also contained various items which had moisture in them;
(v) That the stand taken on behalf of the Department that the discrepancy in the consumption of water was not reconciled was not correct since the assessed was not recording water consumption in its books of accounts. That the use of water had also been accepted by the partner Shri Sri Gopal in his statement recorded by the Assessing Officer;
(vi) That the contention on behalf of the Assessing Officer to the effect that it was not a matter of record that the assessed had been consuming water in the past was not correct since it was borne from the record that there were similar differences with regard to the quantum of “other ingredients” available for consumption and those actually consumed shown in the books of accounts in the preceding assessment years. That the Assessing Officer himself had brought to the notice of the CIT(A) that such variations did exist in the subsequent assessment years as well;
(vii) That it was not possible to agree with the contention of the Assessing Officer that the percentage of consumption of water should be accurate looking to the fact that the method of production adopted by the assessed was not a scientific one and the consumption depended upon the quality of the tobacco and the variety of Zarda produced;
(viii) That the Excise Department was not concerned with the consumption of water and they were admittedly not in possession of the assesseds manufacturing formulae. The inference, in other words, was that they being concerned merely with the recovery of the excise duty on the end product, no reliance could be placed on the information supplied by them to the Assessing Officer;
(ix) That the contention of the Assessing Officer to the effect that the Excise register had not been checked stood belied by the fact that the same had been checked in October, 1984 and April, 1985. That the checking of the Excise register was not a relevant point and all that which had to be taken into consideration was that the said register had been maintained as prescribed by law;
(x) That the statement of Shri Sri Gopal during the course of the search operations on 26th Nov., 1987 as also in the course of the recording of his statement under S. 131 on 3rd Feb., 1988 was not important at all since these pertained to the manufacture of Zarda by him at his residence in his individual capacity and such activities having no nexus with the business of the assessed firm. That Shri Sri Gopal had at no point of time attributed his “clandestine” activities to the partnership firm.
16. After recording the aforesaid views, the CIT(A) proceeded to delete the addition on the following main grounds :
“On a consideration of all relevant facts and circumstances of the case, it is apparent that the Assessing Officer misread the facts as recorded in appellants books of accounts including variety of tobacco allegedly used by the appellant when the appellant was admittedly using biri type Gujarati and H tobacco where moisture contents are to a maximum of 6.3%. That the water is being used in the manufacturing process of the appellant firm, stands accepted by the partner Shri Sri Gopal in his statement. This apart, the appellant is not charging the cost of the differences in its books of accounts. There is also no unaccounted for purchase of tobacco required for manufacture of Zarda with the help of “other ingredients”. The Assessing Officer should have appreciated that the quantity of unaccounted for “other ingredients” had not meant any debit to appellants trading account. The trading results shown by the appellant as detailed below also show comparably better results :
Asst. Year
Sales
G.P. Rate percentage
Rs. (in crs.)
1981-82
3.61
19.25
1982-83
4.05
19.60
1983-84
5.27
17.00
1984-85
7.01
17.54
1985-86
8.57
17.98
The appellant has an accepted history. No defects/deficiencies/omissions have been found in the books of the appellant. Rejection of results was, therefore, not justified. Addition in thus deleted.”
17. Being aggrieved with the decision of the CIT(A) the Revenue is presently in appeal before the Tribunal. The learned Departmental Representative reiterated at length the stand taken by the Assessing Officer in making the impugned addition. It would suffice if we highlight his main arguments in the direction of supporting the order passed by the Assessing Officer as follows :
(i) That water was already included in the 9 ingredients which had gone into the manufacturing process and no further water as alleged by the assessed was required to be added;
(ii) The assessed had not produced complete details of the 29 items which fell under the category of “other ingredients”;
(iii) The use of water was not proved by any evidence;
(iv) That a shifting stand was taken at various stages of the proceedings since at one point of time the figure of water purported to have been used was stated to be 7,900 kgs. and which was later on changed to a figure of 7,446.100 kgs. and the difference not being explained;
(v) That the books of accounts maintained by the assessed did not reflect the true state of affairs;
(vi) That the partner of the firm, namely, Shri Sri Gopal had surrendered at the time of search a sum of Rs. 28 lakhs and odd and this reflected on his bona fides and to some extent of the assessed;
(vii) That the assessed had not discharged the onus which lay on it and sought to keep back relevant details and explanations under the shadow of secrecy.
18. On the basis of the aforesaid main arguments and raising them with reference to the material on record to which our attention was invited during the course of the hearing the learned Departmental Representative made an impassioned plea for the confirmation of the order passed by the Assessing Officer.
19. The learned counsel for the respondent, on the other hand, vehemently supported the order passed by the CIT(A). His detailed arguments advanced before us being a reiteration of those tendered before the tax authorities are not required to be restated, but the following are being highlighted :
(i) No additions were made in any of the past assessments on the same set of facts;
(ii) The details of “other ingredients” were not required to be given in the Excise register, viz., RG-12.
(iii) The ITO had not rejected the books of accounts since there was no observation to that effect in the assessment order;
(iv) That in all the past assessment years there was a difference between the figure stated in the RG-12 register and the figure which had actually been claimed as a deduction in the books of accounts and this position had been accepted by the Department all along;
(v) That the assesseds business had been improving from year to year and in the assessment year under appeal the best results had been disclosed;
(vi) That in the manufacture of Zarda there was a lot of competition and none of the manufacturers parted with their formulae which was kept as a closely guarded secret;
(vii) That the use of water in another item manufactured by the assessed, viz., Betel Paste had been accepted by the ITO in the preceding assessment year as also the assessment year under appeal and the only dispute pertained to the use of water in the manufacture of Zarda;
(viii) That the use of water percentage-wise compared quite favorably to the figure disclosed in the preceding assessment years;
(ix) That the disclosure pursuant to the search in November, 1987 which was much after the assessment year under consideration related mainly to the partner, who was engaged in manufacturing activities with which the firm or the other partners had no concern. This in any case could not form the basis of an adverse inference being drawn in the assessment year under appeal;
(x) That in spite of persistent requests made during the course of the assessment proceedings the Assessing Officer had failed to supply relevant details pertaining to the enquiries made by him from the Excise authorities as also other manufacturers and that being the situation such enquiries could not be used against the assessed;
(xi) That since the assessed had not claimed as a deduction the higher figure mentioned in the Excise register and the claim had been restricted to the lower amount which appeared in the books of accounts there was no basis to make the addition in respect of the “difference”.
(xii) On the assumption that the assessed had made purchases outside the books of accounts from its undisclosed income and which was in fact the allegation of the Department then, inasmuch as, there was no dispute between the parties that the said purchases had been used in the manufacturing process the addition even otherwise could not be made since the two sides of the same transaction would be off set against each other.
20. On the basis of the aforesaid arguments and with reference to the material on record which appeared on the paper book filed by the learned counsel it was urged that the order passed by the CIT(A) be confirmed.
21. Before we proceed to express our views on the arguments advanced by both the parties, it may be mentioned that the learned Departmental Representative while arguing the appeal of the Department referred over and over again to the fact that the addition made by the Assessing Officer pertained to the manufacture of Betel Paste and not to the manufacture of Zarda as stated by the CIT(A) and as argued by the learned counsel for the assessed. This line of argument, however, stands belied from the categorical observations recorded by the tax authorities and these making a clear reference to the manufacturing activities pertaining to “Zarda” and not Betel Paste. We may also refer to a statement made by the learned counsel for the respondent to the effect that Betel Paste is not an excisable item and is not required to be entered in the Excise register. The learned Departmental Representative, on the other hand, stated that the same was an excisable item. This controversy, however, need not detain us any further, since it is not at all relevant to decide the issue which is presently before us for our consideration.
22. We have examined the rival submissions and have also perused the material on record to which our attention was invited during the course of the hearing. At the outset, we would like to observe that the Assessing Officer was influenced to a large extent by the enquiries made from the Excise authorities as also from “other manufacturers”. However, the particulars of these enquiries were not intimated to the assessed although it made requests from time to time with a view to enable it to advance its view point. Inasmuch as the contents of these enquiries were not confronted to the assessed, these could not have been used to draw an adverse inference. The matter would accordingly have to be decided on the facts found by the tax authorities and reference being made to the material on record as also the past history of the case.
23. The CIT(A) in his detailed order has referred at length to the material examined by him during the course of the appellate proceedings and has thereafter given detailed and valid reasons for deleting the addition in question. We in fact adopt the views expressed by him as our own and these would be read as a part of the present order of the Tribunal. We would, however, like to highlight the following further facts :
(i) The extract from the RG-12 register appended at page 46 of the assesseds paper-book shows that details of “other ingredients” are not required to be shown and only the quantity is to be stated;
(ii) That even in two of the preceding assessment years, viz., 1983-84 and 1984-85 the difference on account of consumption of water existed as would be apparent from a perusal of the comparative chart appended at page 44 of the paper book. In asst. yr. 1983-84 the use of water was to the extent of 6,234 kgs. and the figure for asst. yr. 1984-85 was 4,897 kgs. The figure for the assessment year under appeal is 7,410 kgs. It is not disputed between the parties that the figure for the preceding assessment years stood accepted by the Assessing Officer;
(iii) The assessed was maintaining statutory registers under the Excise Laws and these were subjected to check by the authorities. Under these circumstances it would be quite improbable to accept the fact that the assessed would be entering wrong figures in these statutory registers;
(iv) It is also an accepted fact that the claim made by the assessed for deduction is the lower amount as reflected in its books of accounts and it is not the higher figure which is entered in the Excise register which is being claimed as a deduction;
(v) It is also an accepted fact that percentage-wise the use of plain water compares favorably with the trading results vis-a-vis production, sales and the gross profit;
(vi) That even if it was to be assumed that the assessed had made purchases of “other ingredients” outside the books of accounts the addition otherwise would not be sustainable since there is no dispute between the parties that whatever is entered in the Excise register is actually consumed and the corresponding addition would be set off by allowing a deduction in respect of such consumption. That use of water in Betel Paste has been duly accepted by the Assessing Officer not only in the preceding two assessment years but in the assessment year under appeal as well and it is only the use of water in the manufacture of Zarda which is being disputed in the assessment year under appeal although having been accepted in the earlier assessment years;
(vii) It is not disputed before us that the search operations related to the partner of the firm, namely, Shri Sri Gopal and it was he who surrendered substantial income in his individual capacity accepting, however, from time to time that the said income was in no way related to the business activities of the assessed firm. Even otherwise the search took place in November, 1987 and that being a period which is relevant to asst. yr. 1988-89 and having no relationship with the assessment year under appeal;
(viii) There is no observation in the order of the Assessing Officer as to the rejection of the books of accounts vis-a-vis the addition in question;
(ix) The Department has alleged that purchases in respect of “other ingredients” have been made outside the books of accounts, but there is no material on record and for that matter there is no allegation to the effect that purchases of raw tobacco had also been made vis-a-vis use of such unaccounted purchases on account of “other ingredients”;
(x) That in the assessment year under appeal, viz., 1985-86 the assesseds sales were the highest at Rs. 8.57 crores as compared to the four preceding assessment years and the G. P. rate at 17.98% was also higher as compared to the immediately two preceding assessment years; and
(xi) There is no challenge before us vis-a-vis the findings recorded by the CIT(A) after perusing the material on record in respect of the type of tobacco used by the assessed in its manufacturing process as also the moisture content thereof.
24. In the final analysis, we confirm the order of the CIT(A) since the view taken by him to delete the addition is wholly justified on the facts and circumstances of the case as brought out during the course of the hearing.
25. In the result, the appeal is dismissed.