Case: Bell ceramics (Orient Bell Limited) – Part 1, ITAT Surat

Issue: Validity of addition to income on account of higher consumption of raw material

This case has multiple issues, and this case summary relates to one of them. Other issues will be covered in parts.

Listen to case summary of Bell ceramics (Orient Bell Limited) – Part 1 here.

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Facts of the case

  • The Assessee is a manufacturer of wall tiles and floor tiles having its manufacturing units in Dora, Gujarat and Bangalore, Karnataka.
  • The filed returns for the assessment years 1998-99, 1999-2000, 2001-02, 2003-04, 2005-06, 2006-07, and 2007-08. The same was selected for scrutiny by the Assessing Authority and various adjustments/additions were made to the returned income. 
  • The major addition running through most of the years was on account rejection of books of accounts on account of variation in consumption of raw material, disallowance of interest on account of advances given to subsidiary companies and associated enterprises. 
  • The assessee had challenged the adjustments/additions made by the Assessing Officer on various grounds before the CIT (A). Later, aggrieved by the decision of the CIT (A), revenue and assessee had filed their respective appeals before the Tribunal on various issues.  Some interesting issues decided by the ITAT, Surat are as under.

Revenue’s Argument
 

The consumption of raw material for the production of tiles varied from year to year.  The addition to the income was made on the basis of the increase in the consumption of raw materials in comparison to the previous year.

Assessee’s Argument

The consumption was increased due to the wastage of raw materials in view of the starting problem in the new plant in Karnataka and Dora Gujarat. Further, the Assessee had entered into a collaboration agreement with a Foreign Collaborator for providing technology for the production of tiles.  Proper technical support was not received by the Assessee from the collaborator which resulted in wastage.  It was also stated that the purchases, sales, expenses etc have been duly recorded in books and no defects have been found in the same.  The excise department had accepted the quantity records. 

Ruling

The contentions raised by the Assessee that wastages were more because of starting problems was accepted.  The AO has not pointed out any defects in the books of accounts whereas purchases, sales and expenses have been accepted and no fault has been found in the same. Relief allowed by the CIT(A) was upheld. Thus, the addition of excess consumption was rightly deleted.


Dear reader, we wanted to let you know that this case summary was provided by one of our readers, CA Bhavin Marfatia, who is also a litigator at the ITAT level and one of the lawyers in this case. This case is not yet available on the court site yet. We thank Mr Marfatia for sharing this with us.

Bhavin Marfatia tax lawyer

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Written by CA Bhavin Marfatia, Partner | Direct Tax, KC Mehta & Co.

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