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FOR DEPARTMENTAL USE ONLY

Techniques of Investigation for Assessment

TECHNIQUES OF
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FOR ASSESSMENT

Vol 5
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TECHNIQUES OF
INVESTIGATI N
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FOR ASSESSMENT
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TECHNIQUESOF
OF
INVESTIGATI
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First Impression: June 2020

Techniques of Investigation for Assessment

Vol. 5

© Income-tax Department, New Delhi

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 Government of India

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Central Board of Direct Taxes

P.C. MODY
Chairman, CBDT & North Block, New Delhi – 110001
Special Secretary to the Government of India E-mail: [email protected]
Tel: 23092648 & Telefax: 23092544

Foreword
As the financial ecosystem is evolving and changing rapidly, the tax authorities are required to keep
themselves abreast with the latest developments in the field of tax investigations. There has been
a seminal change in the way in which financial transactions are carried out. Owing to that, the
methodology to track and analyse such transactions from the perspective of a tax investigator has
also undergone a drastic change. In this backdrop, a need was felt to revise the existing ‘Manual on
Techniques of Investigation’, which was last released in the year 2002.
The scope of the updated and revised Manual is to give the officers of the Income-tax Department an
overview of the modern techniques of investigations. Two volumes of the revised Manual have been
finalized. The chapters highlight the issues, legal position and techniques which the departmental
officers can use to investigate the case and to tackle tax evasion.
Volume–V of the Manual contains, in all, 20 chapters covering industries such as Tyre Industry,
Paper Industry, Gutkha Industry, Rubber Industry etc. and focuses on the industry specific data,
manufacturing processes, types of books of accounts/ other documents maintained, latest modus
operandi of tax evasion, applicability of other laws.
I would like to place on record my special appreciation for the efforts of all the members of the
Committee and other officers associated with the mammoth task of rewriting this Manual. I hope,
this Manual will act as a useful reference point for the officers of the department while conducting
inquiries and investigations.

(Pramod Chandra Mody)

New Delhi Chairman and Member (Investigation)(A/C)
Date: 26/06/2020 Central Board of Direct Taxes

[v]
Scanned by CamScanner
 Preface
The Board had constituted a Committee on 27/11/2017 to review and update the departmental
publication of “Techniques of Investigation Manual” (Vol. I to Vol. V) 2002. The need for the same
had arisen from the fact that the earlier publication was more than 16 years old. The new series
of ‘Techniques of Investigation’ is an effort to sensitize and educate the officers to effectively equip
them with the requisite skill set. The Committee decided to bring the manual in seven volumes. The
Committee has great pleasure in bringing out the present Volume V of the Manual which contains
various topics covering industries/ sectors such as Co-operative Sector, Dairy Industry, Coffee
Industry, Leather Industry etc. as mentioned in the table of “CONTENTS”. The work involved re-
writing the existing chapters by incorporating the refinements undergone in old methods of tax
evasion and by incorporating the changes in the statute and the procedures.
The basic principles of taxation are as old as organised human society. Several ancient civilisations,
including the Greeks and Romans, levied taxes on their citizens to pay for military expenses and
other public services. Taxation in India is rooted from quiet early period. The celebrated poet Kalidas
in his epic poem Raghuvansa has said:
“It was only for the good of his subjects that he collected taxes from them, just as the sun
draws moisture from the Earth to give it back a thousand fold.”
However, the human tendency to avoid paying taxes was also known to exist from earlier
times, people had started using certain avenues to avoid payment of taxes. Thus the role of the
tax administrators became crucial in ensuring that every eligible person must pay tax correctly.
The provision of investigation in the existing Income-tax law is an important aspect. These
investigative powers coupled with information gathering tools form the backbone of any judicious
assessment order.
Nowadays businesses have witnessed significant technological advancements. They have adopted
technology, resulting in change in the methods and manner of doing business. As a result, the scope
and meaning of investigation has also changed. The internet, perhaps the most important achievement
of mankind, has made practically all information available to us in no time. Investigation today has
to match with the fast pace of technological developments and the technological infrastructure of the
Income-tax department is playing a significant role. The Tax Authorities have to scale themselves up
to meet the newer challenges posed to them in the form of digital transactions of business affairs.
The Government has recently taken various initiatives to unearth the black money viz.
Demonetization, Revamping the Benami Transactions Act, bringing in various amendments in
respect of reporting cash transaction and transactions over a particular threshold, mandatory quoting
of PAN, etc. It is now the responsibility of the Tax Officers to use the information and authority under
the law to enforce payment of correct taxes else the key steps undertaken by the Government to
enhance the tax compliance would be rendered futile.

[ vii ]
It can be seen that this volume covers various industries such as Cashew Industry, Seafood and
Aquaculture, Liquor Trade, Forest Exploitation, Timber & Plywood Industry etc. and each such
industry has different gamut of its operations with varied types of processes involved from the stage
of input of raw materials to the end product. The ‘team’ has undertaken untiring efforts to collect
latest data, details of processes, latest modus operandi of tax evasion employed in each such industry/
sector and has incorporated all these things in the respective chapters of this volume.
The chapters are not an exhaustive list of techniques of investigation as the tax avoidance and
evasion practices are quite diverse and dynamic in nature. However, it intends to highlight and guide
the officers and make them aware about the existing provisions of law and techniques that they can
apply independently to tackle the tax evasion issue in the facts and circumstances of the particular
case. We attempted to utilize the earlier and newer investigation techniques to address the issue of
tax avoidance and evasion in the complex digital business space. It is hoped that officers in the field
find this book useful and make best use of the intended knowledge sharing while solving cases of tax
evasion effectively.
The Committee acknowledges the effort of all the officers who have contributed material and made
value addition for compilation of this Volume. We are also grateful to the Editorial Board for going
painstakingly through the write-ups and for their valuable inputs.

Ajai Das Mehrotra

Chairman of the Committee

[ viii ]
 Acknowledgments
CONTRIBUTORS TO VOLUME 5

Shri B.K. Jha CCIT, Ludhiana

Shri Devashish Roy Choudhury CCIT(TDS), Ahmedabad
Shri Raj Tandon PCIT, Vadodara
Ms. Bhanumati M.V. PCIT-4, Pune
Shri Hemant J. Lal PCIT-14, Kolkata
Shri Arvind Kumar PCIT-4, Kolkata
Shri R. Ravichandran PDIT(Inv.), Bengaluru
Shri Parneet S. Sachdev PDIT(Inv.), Punjab and J&K
Shri Sanjay Bahadur PDIT(Inv.), NER, Guwahati
Shri Alok Johri DIT(Inv.), Raipur
Shri Tushar Dhawal Singh CIT(A)-11, Kolkata
Shri Amlan Tripathy CIT(A)-10, Kolkata
Shri Prafulla Mishra CIT(A), Raipur
Dr. Banwarilal CIT(A), Vadodara
Shri Mahesh Shah CIT(IT & TP), Ahmedabad
Shri Ramkrishnan S. ADG(DTRTI), Chennai
Shri Anil Dhaka Addl. CIT, Surat
Shri Sudipta Guha Addl. CIT, Range-1, Kolkata
Shri Sanjay Mukherjee Addl. CIT, Range-34, Kolkata
Shri Pravin Kumar Addl. CIT, Vadodara
Shri S.R. Meena Addl. CIT, Surat
Shri C. Deepak Singh Addl. DIT(Inv.), Unit-I, Guwahati
Shri Sanjeev Kumar Addl. DIT(Inv.), Faridabad
Shri Rajkumar Singh Mehra DCIT, Vadodara
Shri Daljit Singh DDIT(Inv.), Ludhiana
Shri Prabhat Jha DIT(I & CI), NER, Guwahati
Shri Sarvanan B. Addl. DIT(Inv.), Unit-I, Bengaluru
Shri B. Balakrishna Addl. DIT(Inv.), Unit-II, Bengaluru

[ ix ]
Shri Anup Bhattacharjee JDIT(I&CI), Guwahati
Shri Shahnawaz-ul-Rahman JDIT(Inv.), Panaji
Shri Parth P. Basak JCIT(OSD), Judicial, Kolkata
Shri Nilay B. Som JCIT(Intl. Taxn.), Kolkata
Ms. Richa Rastogi JCIT, Vadodara
Shri Krishna Kumar DCIT(Intl. Taxn.)-I, Ahmedabad
Shri S. Mookambikeyan DCIT, Bengaluru
Shri Rakesh Rana DCIT, Vadodara
Shri Daljeet Singh DDIT(Inv.), Ludhiana
Ms. A.K. Walia DDIT(Inv.), Ludhiana
Shri Manek S. Kapoor DDIT(Inv.), Ludhiana
Shri Mithun Shete DCIT, Pune
Shri Jibanta K. Das DDIT(Inv.)(Tech.)-1, Kolkata
Ms. Kalai Selvi A. ACIT, Bengaluru
Shri H.D. Simte ADIT(I&CI), Guwahati
Shri A.K. Subramanian ITO, Chennai

[x]
 Committee for Review and Updating of Manual
of
Techniques of Investigation
for Assessment
Sl. No. Name Designation Station Position
1 Shri Vinodanand Jha Chief CIT (Since Retired) Mumbai Chairman
2 Shri N.P. Sinha Chief CIT (Since Retired) Mumbai Chairman
3 Shri A.D. Mehrotra Pr. Chief CIT Ahmedabad Chairman
4 Shri K.K. Vyawahare DGIT(Inv.) (Since Retired) Mumbai Member
5 Shri Harish Kumar DGIT(Inv.) New Delhi Member
6 Shri Nilimesh Baruah Chief CIT (Since Retired) New Delhi Member
7 Shri Pravin Kumar Pr. DIT(Inv.) Hyderabad Member
8 Shri Alok Johri Pr. DIT(Inv.) Raipur Member
9 Shri Yogendra Choudhary PCIT Mumbai Member
Secretary
10 Shri Sunil Kumar Singh CIT(Inv.) CBDT Member

[ xi ]
Editorial Board for Volume 5
Shri N.P. Sinha
CCIT(C)-2, Mumbai (Since Retired)
Shri K.K. Vyawahare
DGIT(Inv.), Mumbai (Since Retired)
Shri Devashish Roy Choudhury
CCIT(TDS), Ahmedabad
Shri Mahesh Shah
CIT(IT&TP), Ahmedabad
Shri C.S. Gulati
CIT(A)-1, Mumbai
Shri Rajeshwar Yadav
CIT(A)-47, Mumbai
Shri L.K.S. Dehiya
CIT(DRP)-1, Mumbai
Shri Ajit K. Srivastava
CIT(A)-17, Mumbai
Shri Sunil K. Jha
CIT(DRP)-2, Mumbai
Shri Vivek Anand Perampurna
Addl CIT, CR-7, Mumbai
Shri Nilabhra Dasgupta
JCIT(TPO), Ahmedabad
Shri Umesh Phade
JCIT, ReAC Range-1, Ahmedabad
Shri Krishna Kumar
DCIT(IT)-1, Ahmedabad
Shri Kalpesh K. Rupavatiya
DCIT(TPO)-1, Ahmedabad
Shri S.K. Singhal
DCIT(TPO)-2, Ahmedabad
Shri Adeeshwar Meena
ACIT(IT)-2, Ahmedabad
Shri Roy Abraham
ACIT(IT), Rajkot

[ xii ]
 C O N T E N T S

 Foreword v

 Preface vii

 Acknowledgments ix

 Committee xi

 Editorial Board xii

1. Cashew Industry 1

2. Coffee Industry 7

3. Cooperative Sector 17

4. Dairy Industry 35

5. Flour Mills 57

6. Food Processing and Canning Industry 65

7. Forest Exploitation, Timber and Plywood Industry 83

8. Gutka Industry 113

9. Leather & Footwear Industry 123

10. Liquor Trade 151

11. Paper Industry 175

12. Rice Shellers 197

13. Rubber Industry 217

14. Seafood, Aquaculture & Hatcheries 225

[ xiii ]
15. Soft Drink Industry 243

16. Sugar Mills 257

17. Tea Industry 273

18. Tobacco Industry 301

19. Tyre Industry 331

20. Vanaspati & Edible Oil Industry 339

Index 355

[ xiv ]
 Chapter

1
Cashew Industry

1. INTRODUCTION
1.1 India is the largest producer of raw cashew
nuts in the world. The total area under cashew
cultivation in the country during the financial
year 2017–18 was 10.41 Lakh hectares and the
production of raw cashew nuts was 8.17 Lakh
MT. Also, India is the biggest exporter of cashew
kernels in the world. Other major exporting
countries are Brazil, Vietnam, Indonesia,
Mozambique and Kenya.
1.2 Cashew industry is a traditional industry of
Kerala. It is a major foreign exchange earner for rains. A good chunk of raw cashew nuts (RCNs)
the state. As foreign exchange earner, cashew required for our factories is being imported. The
stood fifth amongst the agricultural products imports in the year 2017–18 were 6,49,050 MTs
exported from India during 1998–99. There is valued at Rs. 8850.03 crore. Tanzania is the
a concentration of cashew factories in Kollam major exporter of nuts to India. Till the season
(Quilon) district of the state. The town is the biggest starts in India, the industry is sustained by
cashew centre in the country. Almost all major imports from Tanzania where the season starts
cashew manufacturers are headquartered here. by October end.
There are a few factories in Thrissur (Trichur), 1.4 The system of marketing of raw nuts
Kozhikode (Calicut) and Kannur (Cannanore) differs from state to state. In Kerala, generally,
districts of the state, though. Certain others the government imposes restrictions, and the
are in the neighbouring states-near Mangalore procurement is made by the state agency
(Karnataka), Rajahmundry (Andhra Pradesh) namely, the Kerala State Marketing Federation.
and Kanniakumari (Tamilnadu). The industry is The cultivators are required to sell only to the
highly labour-intensive. federation. Due to this restriction, a part of the
1.3 Cashew is a seasonal industry. Raw cashew production is smuggled to the neighbouring
nut season in India starts by mid-January. It is states like Tamilnadu and Karnataka. In those
over by June. Even if some small quantities are states there is no procurement and the nuts fetch
received in July, they are of poor quality due to much higher prices.

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Techniques of Investigation for Assessment Vol. 5

1.5 Export of cashew kernels totalled 84.343 2.3 The processing is essentially manual.
Lakh MTs in 2017–18. It brought foreign The different stages of processing are roasting,
exchange equivalent of Rs. 5870.97 crore per shelling, peeling, grading and packing. Roasting
annum. The USA continued to be the biggest is made in drum-type roasting machines. The
importer of cashew kernels from India and roasted raw nuts are transferred for shelling, 3 to
45% of Indian exports is to the USA. Other 4 hours after roasting. Shelling is the removal of
major importers of Indian cashew kernels are the hard outer shell with the help of a specially
the Netherlands, Japan, the UK and the UAE. made wooden piece. The shell is used as fuel in
Foreign exchange is also earned through export domestic kitchens, tile factories etc. By peeling,
of cashew shell oil (also known as cashew shell the brown coloured thin inner layer is removed
liquid) which is a by-product. and the kernel is obtained. Different grades of
kernels are sorted out by grading. Packing is the
**Statistics Sourced from CEPCI and DGCI&S, last stage of processing. The graded kernels are
Kolkatta packed in tins and filled with carbon dioxide.
Generally the kernels are packed in 25 lb (11.34
2. PROCESSING OF RAW NUTS kgs) tin. For local sales the packing is either 1
kg or 500 grams tin or polythene bag. A case
2.1 Raw nuts are generally processed in
(also known as carton) contains two 25 lb tins.
factories licensed by the State government.
Exports are made in cases.
The raw nuts procured from local and interstate
markets and those imported are transported to 2.4 The quality of cashew in the international
the processing centres by Lorries-either own market is determined by the size, shape and
or hired. Before processing, the raw nuts are colour of the kernels. The different grades of
dried in the drying yard. Generally the yard is cashew kernels are the following:
maintained at the head office. As the work is W-180- White Whole
managed by employees only, proper records
are maintained at the head office wherein both W-210- White Whole
shortage and driage are recorded. But these W-240- White Whole
registers are not produced before the income-tax W-320- White Whole
authorities on the pretext that such registers were
not maintained. Such registers are found during W-450- White Whole
surveys and search operations. SW - Scorched Wholes
2.2 The unit for processing is the 80 kg bag of SSW - Scorched Whole Seconds
raw nuts. The raw nut imported is on the basis DW - Deserted Wholes
of tonnage. It is received generally in bags of
B - Butts
uneven weight. The nuts purchased from Indian
markets are generally in 80 kg bags. The nuts S - Splits
brought in gunny bags are unloaded in the LWP - Large White Pieces
drying yard for drying and after drying they
SWP - Small White Pieces
are repacked into 80 kg bags and sent to the
factories for processing. The shortage and the BB - Baby Bits
driage are ascertained at this stage and they are SP - Scorched Pieces
recorded in the stock register at the head office, SS - Scorched Splits
or at the drying yard if drying is made at a place
other than the head office. Claim of shortage SSP - Scorched Small Pieces
and driage upto 5% is reasonable. DP - Deserted Pieces

2
 Cashew Industry

The abbreviation W-180 stands for Wholes 180 5. SUPPRESSION OF CLOSING STOCK
which means that 180 kernels will weigh one 5.1 For the sake of convenience, raw nut
pound. Similarly W-210 means that 210 kernels purchases are converted to 80 kg bags before
will weigh one pound and so on. The output processing. The manufacturers file quantitative
(production) of W-180 and W-210 varieties- details and output statement with reference to 80
which are big and valuable-is relatively low. The kg bags. Output (production) of kernels between
yield of big kernels depends on the size of the 45 to 47 pounds per bag of raw nuts is treated
raw nut. They are generally obtained from the as good (2.204 lb = 1 kg). There were instances
raw nuts from Kerala. of output of even 48 lb. Though the processor
gets weekly statements from factories in which
3. MARKETING OF KERNELS the number of bags of raw nuts processed and
the actual production of kernels there from are
3.1 Cashew kernels are sold through exports, noted, these statements are not produced before
local sales, interstate sales and consignment the AO. Output per bag is generally worked out
sales. Exports are effected through ships. Kernels by the assessees as under:
are transported to the ports through lorries.
Table 1
With the introduction of the container system,
the kernels for shipments are now transported Sales of Kernels 1,25,000 lb
Closing stock 40,000 lb
through containers to the port and shipment
Total 1,65,000 lb
is made along with the containers. For sales in
Less: Opening stock of kernels 17000 lb
India kernels are transported through lorries. Purchases 33000 lb
3.2 By virtue of Section 80HHC the export 50,000 lb
profits are deductible while computing the Production during the year 1,15,000 lb
taxable income. The issues connected with the Output per bag (supposing that 1,15,000/
2500 bags have been processed) 2500 = 46 lb
deduction are the same in this industry as in
other export cases. As respects the other kinds As the output is derived as above, verification
of sales, apart from the issues peculiar to the of actual production is difficult. By making a
cashew industry, there are issues which are slight reduction in the output per bag (say 43 lb
common to all businesses. per bag) in the output statement, suppression of
closing stock of raw nut is possible. In this way
4. TAX INVESTIGATIONS production can also be suppressed. Suppression
of closing stock of raw nuts is made by treating a
4.1 Investigation of Accounts: The accounts
part of the last period purchases also as processed
of a cashew business should be checked for the
by the end of the accounting year. Factually
following:
it may not be so. A part of such purchases is
a. Suppression of closing stock of raw nuts shown as closing stock. There are instances
and kernels. where stock of raw nuts in transit was found to
b. Rolling of unaccounted cash for purchases. be more than what was shown in closing stock.
The production of kernels from such suppressed
c. Excess claim towards driage and shortage raw nuts is adjusted by reducing the output per
of raw nuts. bag which is only a hypothetical figure. While
d. Suppression of production and examining the issue relating to the correctness
unaccounted sales. or otherwise of the closing stock, it is worthwhile

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Techniques of Investigation for Assessment Vol. 5

to take note of that in the case of imported raw raw nuts processed, closing stock of raw nuts
nuts, the consignment may take relatively more available at the factory and at the head office,
time to reach the factory from the date of the the number of filled tins of cashew kernels
Bill of Entry. With the introduction of container available etc. The records in the custody of these
system, the imported raw nuts reach the factory authorities should be scrutinised.
early. Another point to be noted is that it takes a 5.3 Suppression of closing stock of kernels is
minimum of 8 days for the roasted raw nuts to sometimes attempted. Here also the statements
be ready for sale. given by the assessee before the Sales Tax/
commercial-tax authorities in the course of their
5.2 Suppression of Closing Stock of assessment proceedings and the books and papers
Raw Nuts Can be Unravelled taken by them during the course of their inspection
in the Following Ways is helpful. Reference to such documents is helpful.
Verification of stock statements furnished to the
As rawest are transported in lorries, delivery
banks is also strongly advised.
notes and vouchers for unloading contain
relevant information. These documents at least 5.4 Another area for investigation is suppression
in respect of the last period purchases should be of closing stock of kernels ready for export. The
verified. The date on which the lorry crossed the shipping documents for export are:
Sales Tax/ commercial-tax checkpost is available a. Export bills raised by the exporter.
in the purchase bill and the delivery note.
b. Bill of lading signed by the captain of the
In respect of imported raw nuts, the bill steamer, or by the shipping agent.
of entry and the clearance issued by the
Customs Department should be verified. The c. Export inspection certificates issued by the
correspondence issued by the clearing agent for Export Inspection Agency (now replaced
the transportation of such goods gives a clear by the independent surveyor’s certificate).
indication regarding the actual date of lifting of The export bill contains the shipping marks (the
the raw nuts from the port, lorry number, weight marks put on the carton containing the kernels),
of raw nut loaded in each lorry etc. number of cases of kernels (a case = 2 tins @
Scrutiny of the key-loan register of the bank will be 11.34 kg.), grade of kernels, name of the buyer,
fruitful. As the stock under key-loan is physically name of vessel etc. The same details appear on
verified by the bank officials and periodical the inspection certificate and the bill of lading.
releases are made only in their presence, the 5.5 Part stock of kernels which has already
correctness of the key-loan statement can be been inspected by 31st March or the last day
relied on. In respect of other loans like open loan, of the accounting year will be there in the form
cash credit loan etc. the correctness of the stock of closing stock, and the same will be exported
statement given by the exporter is not verified during the next April. Verification of the export
by the bank and even the stock position as on bills for the next April with the respective
the last day of the accounting year may not be inspection certificates issued by the Export
available with the bank. Inspection Agency (now replaced by independent
During their inspections the Sales Tax/ surveyor’s certificate) will give an indication as
commercial-tax officials take possession of the to how much kernels already inspected before
stock registers for raw nuts in the factory and 31st March have been used for export after 1st
the head office, the registers maintained at the April. In certain cases, it has been found that the
packing Section, the factory day books etc., if quantity of closing stock of kernels disclosed as
they find discrepancies. These registers give at 31st March was less than the quantity already
information regarding the number of bags of inspected before 31st March but used for export

4
 Cashew Industry

after the said date. The bill of lading shows the the excess quantity sold has been obtained
date on which the cargo was shipped on board. either from unaccounted purchases of kernels
or from the processing of unaccounted purchases
5.6 A manufacturer - K and Co - had disclosed
of rawest.
in its tax return closing stock of kernels at 4500 lb.
for A.Y. 1985–86 (Y.E. 31/12/1984). A scrutiny of 6.2 Scrutiny of factory books is useful for
the export bills and the respective bills of lading verification of unaccounted purchases of rawest.
for A.Y. 1986–87 revealed that two lots of cashew In certain cases the number of bags of raw nuts
kernels weighing to 47500 lb valued at Rs. 11.11 that have passed through different stages of
lakhs which had already been shipped on board processing are noted down. If the number of
on 31/10/84 and on 10/12/84 were not accounted bags so processed is more than the accounted
raw nuts, the inescapable conclusion is that the
for as sales or as closing stock for the assessment
excess has come from unaccounted purchases
year 1985–86. They were not included in the
by rolling unaccounted cash.
closing stock as on 31/12/1984. The closing
stock disclosed was only 4500 lb. When this was 6.3 Scrutiny of the factory day book and
pointed out with irrefutable proof, the assessee ledger of a cashew exporter from Kollam, for
accepted the fact of suppression of closing stock the financial year 1980–81 revealed that he had
and revised the statements enhancing the closing processed 2711 bags of raw nuts in excess of the
stock by 47500 lb. accounted quantity. The factory books disclosed
that the following bags of raw nuts have passed
5.7 Local purchase of raw nuts and kernels using through different stages of processing between
own bought-notes is prevalent in this industry. It 1.4.80 and 21/03/1981 as against the recorded
is likely that suppressed stock of raw nuts and availability of 10,219 bags out of opening stock
kernels would be accounted as purchases in the and accounted purchases upto 21/03/1981.
next year either of raw nuts or of kernels, thereby
Roasting - 12,930 bags
creating a bogus debit.
Shelling - 12,930 bags
6. ROLLING OF UNACCOUNTED Peeling - 12,204 bags
CASH FOR PURCHASES Grading - 12,114 bags
6.1 As stated above, the season for rawest in The entries in the factory cash book and ledger
India is January-June. The manufacturers try showed that the assessee had processed more
to effect maximum possible purchases during raw nuts than the quantity reflected in the books
this time. Sometimes accounted cash may not of accounts (slight difference in the number of
be available for the purchases actually effected. bags peeled and graded is due to overlapping in
Therefore, they record these purchases as made stages of processing). An addition of Rs. 19.79
in the subsequent period of the same accounting lakhs under the head other sources towards the
year when sufficient cash balance is available. money invested in the excess stock of raw nuts
A peculiarity of such purchases is that they are was made. It was substantially upheld in appeal.
mostly on cash basis on the strength of self-
prepared bought-notes. His manipulation can be
detected by computing the monthly availability 7. EXCESS CLAIM TOWARDS
of kernels from the opening stock, the purchases SHORTAGE AND DRIAGE
and the production from the accounted 7.1 Shortage and driage upto 5% are considered
purchases of raw nuts. If the quantity of kernels normal. If the assessee’s claim is more than
sold is more than the availability, it is clear that that, the AO should get alerted. He should call

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Techniques of Investigation for Assessment Vol. 5

for the stock records especially from the drying good the deficiency in the output. Corresponding
yard. Almost all cashew manufacturers maintain addition for unaccounted sales should also be
pucca stock registers. Contemporaneous entries considered.
for driage and shortage of raw nuts are made 8.2 A manufacturer at Kollam had disclosed
in these registers as and when they are noticed. the total output (including rejection quality) at
These registers are never produced before the 44.12 lb for AY 1993–94 as against 47.18 lb
AO. Some pretext or the other is given. They can disclosed for AY 1992–93. He contended that the
be obtained only through coercive means like a low output was due to poor quality of raw nuts.
survey or search under Sections 133A or 132 or However, he did not produce the stock register
an inspection by sales tax authorities. claiming that no day-to-today stock register was
7.2 A cashew manufacturer from Kollam maintained. The AO adopted the output at a
claimed excess driage by a simple trick in the higher rate, and taxed the difference in quantity
conversion of raw nuts from tonnes to 80 kg as suppressed sales. The CIT (Appeals), relying
standard bags. If correctly converted, the driage on the decision of Supreme Court in Chhabildas
(224.301 MT) would work out to 2,804 bags only Tribhuvandas vs. CIT (59 ITR 703), rejected the
as against 9,817 bags claimed in the quantitative assessee’s explanation for the lower output. But
particulars. The driage claimed (9817 bags) he restricted the enhancement in the output to
worked out to 11.59% of the current year’s 0.86 lb. The difference in quantity was treated as
purchases. For the current year there were certain sold outside the books. In this process, addition to
short weight claims on shipping and transit sales to the tune of Rs. 10,38,000/- was sustained.
losses. In respect of short weight, claims were
8.3 In another cashew case, the CIT (Appeals)
made against the seller and for transit loss, claim
sustained a similar addition (AY 1993–94).
had been filed before the insurance company.
In this case, the purchase rate of the assessee
The Settlement Commission has allowed the
was higher than that of other exporters whereas
claim for shortage and driage at 4% of the total
quantity as reduced by the quantity for which the output (yield) percentage was lower. After
claims have been filed. The excess quantity considering these comparable cases, the AO
claimed as shortage and driage has been treated fixed the yield at 24.95% on the consumption
as unaccounted sales. In effect, the Commission reported by the assessee. The difference in
sustained the addition to the tune of Rs. 45 lakhs. production was treated as unaccounted sales,
and an addition of Rs. 17,26,530/- was made.
8. SUPPRESSION OF PRODUCTION The CIT (Appeals) fixed the yield at 23.41% and
AND UNACCOUNTED SALES reduced the addition to Rs. 5,88,880/-.

8.1 As stated earlier, output of kernels ranging

9. CONCLUSION
between 45 and 47 lb per bag of raw nuts is
normal. Poor quality of rawest may affect The cashew industry has many features which
the output to a certain extent. If the output is are common to all industries. It has several
abnormally low, say 43 lb, the case should be peculiar features also. The AO should be familiar
scrutinised in depth. The low output can be due with both to conduct meaningful investigations.
to suppression of production. The assessee then Now that Section 80HHC is on its way out, the
should be required to substantiate the low output tendency to manipulate accounts may go up.
with the help of stock register. If the claim is not Alertness on the part of the AO is needed to
substantiated, addition can be made to make tackle such misadventure.

6
 Chapter

2
Coffee Industry

1. INTRODUCTION
1.1 Coffee is grown in various parts of the
world with the areas being distributed within a
narrow belt, roughly 25˚ north and south of the
equator known as the “Bean Belt”. Cultivation
of coffee has special climatic requirements.
Suitable rain fall, temperature, altitude and soil
are its four natural needs. The average rainfall
required is about 45 inches, and the mean
annual temperature about 70˚F. The coffee plant
flourishes best on highlands at altitudes ranging
between feet 4500 and 6500 feet. 1.4 There are different varieties of coffee. The
most commonly grown are Coffee Arabica and
1.2 The major coffee producers in the world
Coffee Canephora (Robusta) coffees. The latter
are Brazil, Vietnam, Columbia and Indonesia. In
is grown at lower altitudes. It is harder and has a
India, coffee is mainly cultivated in the southern
better yield per plant than the Arabica. In terms
states of Karnataka, Kerala, Tamilnadu and
of exports, Robusta garners 70% of total exports
Andhra Pradesh and in some parts of Assam
whereas the balance is contributed by Arabica.
and Odisha. According to the 2017 statistics
A graphic representation of both varieties is
published by the Coffee Board of India, the area
as under:
of green coffee harvested in India was 3,52,644
hectares forming a total production estimate of ARABICA
1250m
3,12,000 metric tonnes.
1.3 As per a recent estimate, there are 600m+ 70%
1000m

approximately 250,000 coffee growers in India, Altitude World Production Susceptible Need Attention

90% of who are small growers. Over 90 per 750m

ROBUSTA
cent of them are small farms consisting of 10
acres (4.0 ha) or fewer. The most important 500m

areas of production are in the southern states Sea

Level
30%

of Karnataka, Kerala, and Tamil Nadu which Altitude World Production Hardy
250m
High in Caffeine
accounted for over 96% of India’s coffee
production in the 2018–19 growing season. Fig. 1

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Techniques of Investigation for Assessment Vol. 5

1.5 All coffee grown in India are grown in shade 2.5 It’s used either on its own or mixed with
and commonly with two tiers of shade. Often coffee to complement its flavour.
inter-cropped with spices such as cardamom, 2.6 Although the history of chicory coffee is
cinnamon, clove, and nutmeg, coffee gains not entirely clear, it’s believed to have originated
aromatics from the inter-cropping, storage, and in the 1800s in France during a massive coffee
handling functions. Growing altitudes range shortage.
between 1,000 m (3,300 ft) to 1,500 m (4,900 ft)
2.7 Desperate for a similar substitute, people
above sea level for Arabica (premier coffee),
began mixing chicory roots into their coffee to
and 500 m (1,600 ft) to 1,000 m (3,300 ft) for
get their coffee fix.
Robusta (though of lower quality, it is robust to
environment conditions). Ideally, both Arabica 2.8 Years later during the Civil War, it also
and Robusta are planted in well-drained soil became popular in New Orleans, when the city
conditions that favour rich organic matter that experienced a coffee shortage after Union naval
is slightly acidic (pH 6.0–6.5). However, India’s blockades cut off one of their ports.
coffees tend to be moderately acidic, which can 2.9 Today, chicory coffee can still be found in
lead to either a balanced and sweet taste, or a many parts of the world and is often used as a
tasteless and inert one. Slopes of Arabica tend to caffeine-free alternative to regular coffee.
be gentle to moderate, while Robusta slopes are
gentle to fairly level. 3. GOVERNMENT CONTROL AND
1.6 The coffee harvest calendar is confined to a REGULATION
few months each year, being from November to The industry was under Government controls
January for the Arabica variety, and December till 1996. Way back in 1942, the Government
to about April for Robusta, these being the decided to regulate the export of coffee and
commercial varieties of coffee that are cultivated. protect the small and marginal farmers by
When the coffee seed is planted in different soils, passing the Coffee VII Act of 1942, under which
altitudes and climates, it acquires different tastes the Coffee Board of India got established,
and characteristics including aroma & taste. under the Ministry of Commerce and Industry.
As such, coffees grown in various parts of the The government significantly increased their
world vary from one another in both appearance control on coffee exports in India and resorted
and flavour. to pooling of coffee produce of its growers. The
industry flourished significantly in India after
1991 economic liberalization and the industry
2. A VARIANT IN COFFEE took full advantage of this. In 1993, the Internal
2.1 Chicory Coffee: It is a beverage made using Sales Quota (ISQ) was introduced by which
the roots of the chicory plant, which are roasted, coffee farmers were allowed to sell 30% of
ground and brewed into a coffee-like drink. their production within India. This was further
amended in 1994 when the Free Sale Quota
2.2 Chicory is a flowering plant in the dandelion (FSQ) permitted large and small-scale growers
family that is characterized by a tough, hairy to sell between 70% and 100% of their coffee
stem, light purple flowers and leaves that are either domestically or internationally. A final
commonly used in salads. amendment in September 1996 unshackled
2.4 Chicory coffee tastes similar to coffee but the industry by providing the freedom to the
has a flavour that is often described as slightly producers and traders to sell their produce
woody and nutty. wherever they wished. Now, the industry is

8
 Coffee Industry

entirely outside the controls of the Government. During this period the area under cultivation for
With liberalization, the farmer is incentivized to Arabica coffee as percentage of total area has
produce high-quality coffee depending on the decreased from 73% in 1951 to 50% in 2018,
demand in the world market. whereas the area under cultivation for Robusta
coffee has gone up from 27% in 1951 to 50%
4. COFFEE PLANTATION in 2018.
4.1 Broadly speaking, coffee making operations 4.4 Today (2018) we observe that Arabica
can be divided into two parts—agricultural coffee, despite covering 50% of the soil in India
operations and manufacturing operations. for production produces only 30% of the volume
(tonnage) and in value terms it is 39% ($256
4.2 Coffee can be propagated by seed as well
as by means of cloning. Coffee in India is mainly million worth of Arabica coffee at 135 cents per
propagated through seeds. This method is simple pound) and the rest is Robusta coffee which is
and easy to adopt by growers. Use of quality 61% ($388 million worth of Robusta coffee at
seeds plays an important role in establishing 88 cents per pound).
a productive plantation. The seeds are usually 4.5 It is no surprise that growing Arabica coffee
picked from the research department. The is dragging Indian coffee sector behind when it
agricultural operations are similar to those carried comes to optimally utilizing its resources (land
on for other plantation crops. Coffee bushes take and labour).
3–4 years for maiden crop (blossoming) and
6–7 years for producing economic yields. The 4.6 If we observe closely the productivity of
crops at initial years are stripped off in order to a Arabica coffee farm land is decreasing (from
have optimum yield at a later stage. The coffee 1971 to 2018). India witnessed increased
harvest calendar is confined to a few months productivity of Arabica soil from 229 kg per
each year, being from November to January hectare in 1951 to 725 kg per hectare in 1971
for the Arabica variety, and December to about and since then it has decreased gradually and
April for Robusta; these being the commercial today (2018), despite mechanization and the
varieties of coffee that are cultivated. The fully best in class technology available, Arabica soil
ripe fruits are only hand-picked. These are in India produces 478 kg of coffee per hectare.
sorted out according to the quality of the fruit.
Fruits which are not fully ripe before the end 4.7 At the same time Robusta soil’s productivity
of the harvesting season are of inferior quality. has gone up gradually from 136 kg per hectare
These are stripped off, completely dried and sent in 1951 to 1031 kg per hectare in 2018.
to curing works separately.
5. AN OVERVIEW OF PRODUCTION,
4.3 In India, over a period of 68 years from 1951
LABOUR AND EXPORTS, IN INDIA
till 2018, one can observe that the area under
cultivation for coffee has gone up from 92,523 The broad overview of productions, labour and
hectares in 1951 to 454,722 hectares in 2018. exports are as under:
Table 1: Statewise Productivity 2017–18
State Area, Production, Labour Labour Productivity, Labour/ Productivity,
Hectares Ton Tons/ Labour Hectare kg/Hectare
Karnataka 226,244 222,300 514,695 0.4 2.3 983
Kerala 84,976 65,735 44,194 1.5 0.5 774
Tamil Nadu 33,613 17,440 31,274 0.6 0.9 519

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Techniques of Investigation for Assessment Vol. 5

Arabica Coffee, Productivity (Kg/Hectare)

Fig. 1

Robusta Coffee, Productivity (Kg/Hectare)

Fig. 2

Table 2: Indian Coffee Sector-Area, Production & Productivity

Planted Area, Hectares
Year 1951 1961 1971 1981 1991 2001 2011 2018 Growth%
Arabica 67,613 70,650 80,433 109,454 127,934 167,679 197,930 228,910 2%
Arabica% 73% 59% 59% 53% 47% 48% 49% 50%
Robusta 24,910 49,670 55,030 98,815 142,887 179,037 206,715 225,812 3%
Robusta% 27% 41% 41% 47% 53% 52% 51% 50%
Total 92,523 120,320 135,463 208,269 270,821 346,716 404,645 454,722 2%

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 Coffee Industry

Table 3
Coffee Production, by Type
Year 1951 1961 1971 1981 1991 2001 2011 2018 Growth%
Arabica 15,511 39,526 58,348 61,262 78,311 104,400 94,140 95,000 3%
Arabica% 82% 58% 53% 52% 46% 35% 31% 30%
Productivity
229 559 725 625 722 713 575 478
(Kg/Ha)
Robusta 3,382 28,643 51,883 57,384 91,415 196,800 207,860 221,000 6%
Robusta% 18% 42% 47% 48% 54% 65% 69% 70%
Productivity
136 577 943 623 795 1175 1056 1031
(Kg/Ha)
Total 18,893 68,169 110,231 118,646 169,726 301,200 302,000 316,000 4%

Table 4: Labour Wages Prevailing in Different States 2018–19

Tamil Nadu
Karnataka

Arunachal

Mizoram
Pradesh

Pradesh
Andhra

Odisha

Assam
Kerala

Tipura
State

Wages
314 326 299 222 213 267 244 270 201
(INR per Day

Major Indian Coffee Exporters

Exporterwise Export of Coffee, 1st January 2018 to 25th October 2018
Arabica @ 135 cents per pound & Robusta @ 88 cents per pound 1 ton = 2000 pounds
Table 5
Name of Exporter Arabica Arabica Robusta Robusta Instant Roasted Total
(Tons) (USD) (Tons) (USD) Coffee Coffee (Tons)
(Tons) (Tons)
CCL - - - - 39,000 0 39,000

ALLANASONS Private Limited 10,719 28,941,300 12,622‬ 22,214,720‬ - 12 23,353‬

Olam Agro India Private Limited 3,105 8,383,500 17,640‬ 31,045,400‬ - - 20,745‬
MKG India Coffee Private 3,114 8,407,800 16,307‬ 28,702,032‬ - - 19,421‬
Limited
Coffee Day Global Limited 4,771 12,881,700‬ 14,494‬ 25,509,440‬ 12 5 19,282‬
TATA Coffee Ltd 1,805 4,873,500‬ 3,472‬ 6,110,720‬ 12,477‬ - 17,754‬
NED Commodities India Pvt Ltd 2,523 6,812,100‬ 13,001‬ 22,881,760‬ - - 15,524‬
EMIL Traders Pvt Ltd - 13,796‬ 24,280,960‬ - - 13,796‬
SLN Coffee and Spices Exports 1,287 3,474,900‬ 10,013‬ 17,622,880‬ - - 11,300‬
Ecom Gill Coffee Trading 2,712 7,322,400‬ 8,251‬ 14,521,760‬ - - 10,963‬
Others 18,073 48,797,100‬ 50,906‬ 89,594,560‬ 46,370‬ 256 1,15,605‬
Total 48,109 1,60,502 97,859 273 3,06,743

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 Techniques of Investigation for Assessment Vol. 5

Major Export Destinations for Indian Coffee Producers

Coffee Exports by Country-During 1st January 2018 to 25th October 2018

Table 6
Country Arabica Robusta Instant Roasted Total Percentage
(Tons) (Tons) Coffee (Tons) Coffee (Tons) (Tons) Exports
Italy 6,999‬ 63,127‬ 312 0 70,438‬ 23
Germany 657 18,393‬ 642 1,428‬ 25,616‬ 8
Russian 859 3,452‬ 13,948‬ 1.5 18,261‬ 6
Belgium 7,770‬ 8,469‬ 669 0 16,910‬ 6
Indonesia 31 198 12,716‬ 0 12,945‬ 4
Poland 49 2,275‬ 10,588‬ 0 12,913‬ 4
Turkey 136 794 11,567‬ - 12,498‬ 4
Malaysia 9 110 8,729‬ 2 8,851‬ 3
Jordan 5,775‬ 2,602‬ 162 0 8,541‬ 3
Spain 426 5,966‬ 952 0 7,345‬ 2
Others 19,476‬ 55,116‬ 37,569‬ 268 112,431‬ 37
Total 48,109‬ 160,502‬ 97,854‬ 273 306,749‬ 1

Table 7: Coffee Consumption in India

Year 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Growth%
Quantity 60,000‬ 68,000‬ 75,000‬ 85,000‬ 94,400‬ 108,000‬ 115,000‬ 120,000‬ 125,000‬ 130,000‬ 4%
Consumped
(Tons)

**The data is sourced from alphainvesco.com.

6. PROCESSING OF COFFEE 6.1.2 Natural (or Dry) Process: Where

6.1 Coffee processing removes the fruit from water is not as readily available, freshly-picked
the seed. Skin, pulp, parchment, and silverskin cherries are spread out on tarps, patios, and even
slough off to reveal a beautiful bean. Ranging sometimes along the road for the fruit to dry in
from pale yellow to pale green, if bitten, the the sun. Reaching optimal moisture content can
bean gives slightly bitter taste. take weeks. Throughout this drying process, the
6.1.1 Washed (Or Wet) Process: Where coffees are regularly turned with rakes to ensure
water is plentiful, the cherries are usually passed even drying.
through a pulping machine, sorted by weight, and 6.2 Drying: If the coffees received from the
deposited in a fermentation tank. Here, naturally planters are found to be under dried, they will
occurring enzymes dissolve the pulp until it can be dried at the curing works to bring down
be washed from the bean, a process that takes 12 the moisture content. The accepted moisture
to 72 hours depending on many factors such as level is 11%.
temperature and humidity. Once fermented, the
washed coffee, still in its parchment (filmy, paper- 6.3 Hulling, Grading and Garbling: The
like covering) is spread out to dry until it reaches raw coffee is first passed through a stone/ stick
around 11% moisture content. At this point, the eliminator, where foreign materials like stone,
seed is stabilized and won’t germinate. twigs, sticks, etc., are removed. Then the coffee

12
 Coffee Industry

is passed into the huller/ peeler-cum-polisher bulked based on the cup test groupings decided
and from there on to the horizontal or vertical by the tasters. The bulking operation is carried
winnower. The coffee is next allowed into the out manually or using bulking machines. Double
pregrader, where the bits are separated. It then gunny bags are used for packing cured coffee.
passes through the graders, where the different The cured coffee is stored according to the
grades of coffees such as PB, A, B and C are storage norms fixed by the Board.
separated. Thereafter, the coffee is subjected to
garbling/ sorting, out turning, bulking, etc. The 6.6 Roasting and Powdering: The cured
cherry coffees are hulled using hullers and the coffee is roasted at a particular temperature to
parchment coffees are peeled using peelers. give a rich taste and aroma. It is then powdered.
Primary grading is carried out based on the Now it is ready for consumption. The accepted
size of the beans. This is carried out by a rotary processing loss under this stage is 18–20%. The
grader. Secondary grading is done based on curing loss of Arabica Plantation and Robusta
densimetric classification of the individual grades Parchment is 18–20% and for unwashed cherry
using catadors and gravity separators. it is 47–49%. The accepted output percentage of
Arabica Plantation after curing is as follows:
6.4 Garbling and Sorting: The sorting of
defective and discoloured beans is carried out Plantation “A” 55–60%
manually and also by using electronic colour Plantation “B” 15–20%
sorting machine. After the garbling process, the
coffee lot is out turned and the quantity of each Plantation “A” 12–18%
of the grades weighed and recorded. Peabury 8–12%
6.5 Bulking, Packing and Storage: The
Bits & Black 2–5%
different types of coffee cured and out turned
separately are bulked based on the region of 6.7 The stages in dry & wet processing is shown
growth. The plantation coffee out turns are as under:

Fig. 3

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Techniques of Investigation for Assessment Vol. 5

7. EXPENSES IN A CURING CONCERN engaged in curing business. The main registers

7.1 The expenses in a coffee curing concern are the raw coffee stock inward register and the
can be broadly classified as under: output register. In the former, the purchase of
raw coffee is entered item wise. The quantity
a. Purchase of uncured coffee issued for curing is also noted in this register.
b. Transport cost In the latter, the quantity of coffee cured after
passing through various stages of processing
c. Brokerage-procurement commission such as drying, hulling, grading, garbling and
d. Labour cost sorting, is entered.
e. Power 8.2 The AO should take all routine steps in the
f. Repairs and maintenance case of a coffee concern as he would take in the
case of any manufacturing concern. He should
g. Packing materials do all usual checks in regard to profit and loss
h. Tax on Interstate purchases account and Balance Sheet items.
i. GST
9. TAX INVESTIGATIONS:
j. General expenses POINTS TO REMEMBER
7.2 Transport Cost: Transport cost varies 9.1 Application of Rule 7B
directly with the distance between the coffee
estate and the curing/ roasting factory. It 9.1.1 Coffee industry has been accorded special
also varies if the estates are situated at higher status in the Income-tax Act, 1961; perhaps due
altitudes like Valparai and Shervaroys. Costs are to its importance for the Indian economy. Rule
bound to be less for relatively lower altitudes 7B of the Income-tax Rules, 1962, outlines a
like Chikmagulur. Hence there is no uniform special method by which income from sale of
transport cost. The AO should keep this factor coffee should be computed. It has got two limbs:
in view while deciding the reasonableness 9.1.1.1 The Sub-rule (1) to Rule 7B provides
of the cost. that income derived from the sale of coffee
7.3 Cost of Machinery: Machines are normally grown and cured by the seller shall be computed
fabricated according to the requirements. as if it were income derived from business but
Depending on the method and stages, the cost only 25% of such income shall be deemed to be
of machinery may vary. Major manufacturers of the income liable to tax.
such machines are in Germany, England and 9.1.1.2 The Sub-rule (1A) to Rule 7B provides
Russia. that income derived from the sale of coffee
7.4 Invisible Loss: The visible waste arising grown, cured, roasted and ground by the
from the curing process is ‘husk’ which is used as seller, with or without mixing chicory or other
fuel by some other industries. The invisible loss flavouring ingredients, shall be computed as if
during curing process is between 5–10% due to it were income derived from business but only
moisture and weighment difference. Invisible 40% of such income shall be deemed to be the
loss, occurring at the time of roasting, ranges income liable to tax.
between 18–20%.
9.1.2 The Rule also states that for computing
the income due allowance shall be given to the
8. BOOKS AND REGISTERS cost incurred for planting the coffee plants, either
8.1 It is imperative to know the important books as a replacement or for planting in areas which
and registers maintained by the companies had become useless.

14
 Coffee Industry

9.1.3 This Rule is for only those sellers who 9.1.6 Other Incomes: Rule 7B does not
have grown and/ or manufactured coffee, as the apply to an income that is not related to coffee
case may. The AO should not lose sight of the business, e.g. income by way of interest on loans
fact that in order to claim profit ratio as per this advanced by coffee growing concerns.
Rule, the primary requirement is that the assessee
should be a grower of coffee. A ratio of 25%/ 10. PURCHASES
40% would be applied to the net profit arrived
after allowing all costs, to compute the taxable 10.1 Coffee trading was under the control of
income from coffee business. As a corollary, it Coffee Board till 1994. Once it became free trade,
can be deduced that the provisions of Rule 7B is the small estate owners resorted to tax evasion
not applicable to traders of coffee. by selling their produce outside the books, thus
avoiding agricultural income-tax. As mentioned
9.1.4 In the cases of assessees who have incomes earlier, in India, the coffee harvest calendar is
from both from growing and trading in coffee, confined to a few months each year, being from
the assessees may not maintain separate P&L November to January for the Arabica variety,
accounts for both activities and show the total and December to about April for Robusta, these
income accruing from coffee growing business. being the commercial varieties of coffee that are
The AO should inspect sales register, purchase cultivated and therefore logically, the purchase of
register, sale bills, and purchase bills (In case of raw coffee would fall within the above months.
trading) before arriving at any conclusion. Form The AO may look for purchasing pattern i.e.
3CD may also give a clue whether the assessee large purchases booked in August of fresh raw
is involved in trading activity or not. The AO coffee beans, then such purchases should be
also call for a list of all finished products and a taken up for detailed examination.
process chart (Flow Chart) to ascertain whether
the assessee falls in 25% (sub-rule 1) or not. 10.2 It is a normal practice for small estate
owners to sell the raw coffee beans to the big
9.1.5 In some cases, it is possible that the coffee companies and from the purchase ledgers
assessees, a coffee grower, may let out its of such companies, the sales made by small
manufacturing plant & machineries to third estate owners can be verified, as such estate
parties in spare time in lieu of which the assessees owners may not disclose all such sales in their
may receive rent. Such rent received on account books of account.
of letting out of plant & machinery may be
claimed as part of composite income by the
11. SALES
assessees thereby claiming 75%/ 60% income of
the rent under Rule 7B as exempt agricultural Coffee being a volatile commodity with day to
income. In such cases, the coffee grown is not day fluctuations, the AO should compare the
on land owned by the assessee nor the same prevalent market rate of a particular variety with
belongs to the assessee and hence, there cannot the admitted sale price. It has to be understood
be any component of agricultural income in the that different varieties have a different price at
hands of the assessee so as to qualify the rental different times. For instance, high altitude coffee
income on letting out plant and machinery to be grown in Babubudanagiri hills has a different
eligible for treating as part of composite income. aroma & taste and comes with a premium, as
Such rental income is directly related with the compared to other varieties. It may be borne in
use of plant and machinery and has no direct mind that the export market is highly regulated
connection with agricultural activity or income of by international spot prices which are available
the assessee and needs to be treated separately online, which can be used to compare the prices
out of the composite income under Rule 7B. disclosed by the tax payer. Secondly, it is important

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Techniques of Investigation for Assessment Vol. 5

to understand that the prices mentioned in the should check these aspects. The discussion on
Coffee Board website correspond to average stock manipulations appearing elsewhere in
prices and therefore, may not reveal the exact this manual may be perused.
prices which the tax payer might have realised
in the market. Hence, care should be taken to 14. CONCLUSION
understand the taxpayer’s portfolio of different
grades of coffee and arrive at prices grade wise India is one of the major producers of coffee in the
and day wise, for verification. world. It exports nearly 70% of the output. With
an estimated US$ 454.59 million in exports for
FY 2017–18, coffee industry in India is growing
12. EXPORTS
significantly and it is important to understand
Around 70% of coffee cultivated is exported the various stages of coffee processing and the
out of India. These export rates are determined international markets, which drive & decide
by London & New York market rates, which in the rates for different grades of coffee. The AO
turn depend on different grades of coffee. Earlier should also be familiar with blending of coffee
some of the exporters used to indulge in under- with chicory flavour and make an attempt to
invoicing their exports. A common practice was ascertain the actual cost incurred by the assessee
to setup dummy exporters to divert the export for such process including procuring of raw
profits. Concealment through under-invoicing of material, process cost, wastages, if any etc.. In
exports can be detected if the: the GST era, the coffee, whether roasted or
a. contract between the exporter and the unroasted, coffee husk and skin attract GST rate
buyer is studied. of 5% and coffee beans do not attract any GST.
Considering that the invisible loss, in the form
b. rates as per contracts are tallied with the
of husk and skin is around 18–20%, the AO can
prevailing market rates.
fairly compute coffee production with GST data.
c. rates in the aforesaid documents are tallied As can be seen from the foregoing paras, as per
with sales invoices. Rule 7B of IT Rules, the business income from
d. quantity mentioned in GR Forms as sent is growing coffee is taken at 25% or 40% as the
tallied with sales invoices. case may be. The remaining income is treated as
income from agricultural activity. In the case of P
Chidambaram, his income from coffee growing
13. CLOSING STOCK
activity was initially treated as income from
The AO may examine quantitative details of agricultural activity and the entire income was
opening stock, production/ purchases, issues, exempted from tax. However, at a later date, his
sales and closing stock of raw materials, case was reopened and part income from such
finished products and stores. The basis of activity was brought to tax in terms of Rule 7B. A
valuation of closing stock, in respect of each good understanding of these points would arm
item separately should be in accordance with the AO to identify and verify the factual issues
Section 145A of the Act and the relevant associated with the industry and further, help in
Accounting Standard. The valuation of closing unearthing the various modes of tax evasion,
stock now is as per FIFO method. The AO adopted by the assessees.

16
 Chapter

3
Co-operative Sector

1. INTRODUCTION
1.1 The International Co-operative Alliance,
whose membership includes co-operatives
from all parts of the world, has defined a
co-operative as:
“A co-operative is an autonomous association
of persons united voluntarily to meet their
common economic, social, and cultural needs
and aspirations through a jointly-owned and
democratically-controlled enterprise”.
As per Income-tax Act, 1961 ‘Co-operative
Societies’ are defined under Section 2(19) as under: e. Hybrids such as worker co-operatives that
are also consumer co-operatives or credit
“Co-operative Society” means a co-
unions.
operative society registered under the
co-operative Societies Act, 1912 (2 of 1912), f. Multi-stakeholder co-operatives such as
or under any other law for the time being those that bring together civil society and
in force in any State for the registration of local actors to deliver community needs.
co-operative societies:
g. Second-and third-tier co-operatives whose
1.2 Co-operatives May Include members are other co-operatives.
a. Non-profit community organisations. 1.3 The Co-operative Sector is not at par
b. Businesses owned and managed by the with the corporate sector in relation to the
people who use their services (a consumer management, staff personnel, accounting
co-operative). systems of internal control, internal audit or
c. Organisations managed by the people the statutory audit. It also differs in profitability.
who work there (worker co-operatives). The Co-operative organisations normally
embrace various fields of activities like banking,
d. Organisations managed by the people
manufacturing, marketing, housing etc. The co-
to whom they provide accommodation
(housing co-operatives). operative institutions in various fields include:

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Techniques of Investigation for Assessment Vol. 5

a. Banking and Credit Co-operative Societies a. Voluntary and open membership.

b. Sugar Co-operative Societies. b. Democratic control of members.
c. Economic participation of members.
c. Spinning and Weaving Co-operative
Societies. d. Autonomy and independence.
e. Education, training and information.
d. Primary Industrial Societies.
f. Co-operation among Co-operatives.
e. Consumer Co-operative Stores.
g. Concern for community.
f. Dairy Co-operatives.
g. Agricultural Produce Marketing 2. MANAGEMENT
Co-operatives. The management of the Co-operative Societies
h. Salary Earners’ Co-operative Societies. empowers active participation and control by
the Members. In view of its concept, there is
1.4 The co-operative idea took a concrete
democratic management in which the General
shape in India for the first time in 1904, when the
Body of the Members is supreme. It is the
Co-operative Credit Societies Act was passed.
General Body that elects the Board of Directors
Later, in 1912, the Co-operative Societies
or the Members of the Management Committee.
Act, provided for the registration of non-credit
Each member has one vote regardless of his
societies as well as federations of co-operatives.
share holdings. The pattern of management of
It was a Central Act. It gave a comprehensive law Co-operative Societies is generally as under:
as to the formation, working and management
of the societies apart from the provisions relating Table 1
to accounts, audit and investment of funds. Members General Body
1.5 By the Government of India Act, 1915 Top Board of Directors Elected by
the subject of Co-operation was conferred to Management General Body
Middle management
the States and they were to enact their own
Departmental
law to regulate the activities of Co-operative
committees
Societies with reference to the basic principles Manager-Secretary
and structure of the Central Act with regard to Chief Accountant
the Co-operative Organisations. The States Accountants
have passed their own laws and rules regulating Other employees
the activities of the Co-operative movement
which are, by and large, in consonance with the 2.1 The Managing Committee generally elects
recommendations of Raja Committee of 1956 the Chairman, who is in-charge of the general
that drafted a model bill, rules and by-laws. The administration. In a manufacturing concern
Gujarat Co-operative Act, 1961 is similar to the there may be a post of Managing Director and
Maharashtra State Co-operative Act. in the Urban Bank and other Societies, there
To cater to the societies functioning in more than may be a post of Secretary. The functions of the
one state, the Multi-State Co-operative Societies Management Committee are:
Act, 1984, came into operation from Sept. 16, a. Proper custody and maintenance of
1985, which was later on replaced by “The movable and immovable properties
Multi-State Co-operative Societies Act, 2002”. belonging to a society.
1.6 All the enactment, by and large, are based b. Proper maintenance of accounts relating
on the following principles of co-operative to receipts and payments of a society,
movement and the laws regulating them: through its accounting staff.

18
 Co-operative Sector

c. To summon and attend all the meetings k. Provision for making approved donation
including Annual General Meeting. To under the Act.
record the proceedings of the meetings in l. Provision for contribution to education
proper minute book. fund.
d. To keep all the necessary registers and m. Development rebate.
records required by the Co-operative
Societies Act and Rules and bye-laws of n. Provision for development fund.
the society. o. Bad debt fund, price fluctuation fund.
2.2 System of Audit and Accounting: p. Provisions for retirement benefits to
The role of an Auditor in the Co-operative employees and in case of co-operative
Societies has to be more positive and cautious consumers stores, provision for rebate on
as the Auditor has to oversee the pattern purchases.
of management, fixation of responsibilities,
q. Bad debts and losses not adjusted against
examining the Minute Books with reference to
any fund.
the important policy decisions, functions of the
various sub-committees with reference to the r. Dividend equalization fund, Share capital
work allotted to them etc. The Auditor has also to redemption fund and Investment fund.
oversee the provisions of by-laws, etc. in relation
to the accounts and audit matters and also to 2.4 Method of Accounting
confirm whether or not the activities of the society
There is no specific provision in the Co-
conform to the rules and by-laws of the Society
operative Societies Act with regard to the
which in turn have to conform to the provisions
method of accounting. The societies are thus
of Central and State Co-operative enactment.
free to adopt either mercantile or cash system of
2.3 Section 65 of the Maharashtra State accounting. However, the method adopted by
Co-operative Societies Act contains provisions the society must be consistently followed every
relating to maintenance of accounts which are year. Appropriation of profits is generally subject
(in) conformity with the normal accounting to the provisions enshrined in the relevant Co-
standards. The net profit has to be ascertained operative Societies Act. Similar provisions exist
after taking into account following charges: in Chapter-VI of Gujarat Co-operative Societies
a. Interest accrued on overdue loans. Act, 1961 and Maharashtra Co-operative
b. Establishment charges. Societies Act. Section 6 of the Gujarat Act
provides for the appropriation of funds in the
c. Interest payable on loans and deposits.
following manner:
d. Audit Fees.
i. A Society earning profit, shall calculate its
e. Working expenses of the Society. annual net profits by deducting from the
f. Repairs, rent and taxes. gross profits for the year, all accrued interest
g. Depreciation on fixed assets. which is overdue for more than six months,
establishment charges, contributions,
h. Bonus payable to employees under
if any, towards the provident fund and
Payment of Bonus Act, 1965.
gratuity fund of its employees, interest
i. Equalization fund for such bonus. payable on loan and deposits, audit fees,
j. Provision for payment of Income-tax if any working expenses including repairs, rents,
payable after claiming appropriate relief, taxes and depreciation, and after providing
under Section 80P of the Income-tax Act. for or writing off bad debts and losses not

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Techniques of Investigation for Assessment Vol. 5

adjusted against any fund created out of e. in shares, or security bonds, or debentures,
profits. A Society may, however, add to issued by any other Society with limited
the net profits for the year, interest accrued liability, or
in the preceding year (not accounted for f. in any co-operative bank or in any banking
in that year) but actually recovered during company approved by the Registrar, and
the year. The net profits thus arrived at, on such conditions as the Registrar may
together with the amount of profits brought from time to time impose, or
forward from the previous year shall be
available for appropriation. g. in any other mode permitted by the rules,
or by general or special order of the State
ii. A Society may appropriate its profits
Government.
to its reserve fund or any other fund
created by it for payment of dividends to In addition to the aforesaid appropriation of
members on their shares, to contribution profit, Section 69 provides for the contribution
to the educational fund of such federal Co- to Education fund of the Gujarat Co-operative
operative society as the State Government Union and also contribution for a public purpose.
may by notification in the Official Gazette
2.6 According to Section 65 of the Act, which
specify as ‘‘ the Gujarat State Co-operative
deals with the ascertainment of profits, amounts
Union’’, to the payment of rebate on the
transferred to Dividend Equalization Reserve,
basis of support received from members
Share Capital Redemption Fund are stated as
and person who are not members to its
charges against profits. According to generally
business and subject to the prescribed
conditions to payment of honoraria, and to accepted principles of accountancy, though,
any other purpose which may be specified these items are not the charges but appropriations
in the rules or bye-laws. However, no of profits.
part of the profits can be appropriated 2.7 Bonus Equalisation Fund has to be created
except with the approval of annual general out of net profits and it is to be utilised only
meeting and in conformity with the Act, for payment of bonus to members and non-
rules and bye-laws. members. According to the standard bye-laws
2.5 Section 68 restricts the distribution of the of a Society, a Sinking Fund is required to be
dividend to the Members at a rate not exceeding created from the collections made from members
15% of the profit. Section 67 provides for the for the purpose of providing the depreciation on
creation of statutory fund as permanent reserve completed building. The rate of sinking fund to
fund in which 25% of the net profit has to be be collected is 0.5% of cost of flat of each member
added every year subject to a minimum of 10% every year. It has to be specifically invested
with the permission of the Registrar having and should not be utilised in the working of
regard to the financial condition of the society. the society. Interest on sinking fund should be
The Reserve Fund has to be invested as per credited to the fund and has to be reinvested.
provisions of Section 71 as follows:
a. in a Central Bank, or the State 3. BOOKS OF ACCOUNT
Co-operative Bank, or 3.1 There are no specific provisions relating to
b. in the State Bank of India, or maintenance of books of accounts and records
by a Co-operative society either under Multi
c. in the Postal Savings Bank, or
State Co-operative Societies Act, 2002 (MSCS
d. in any of the securities specified in Section Act) which has replaced Central Co-operative
20 of the Indian Trust Act, 1882, or Societies Act of 1984 and applicable, at present,

20
 Co-operative Sector

to all the co-operative societies having operations Moreover, as per Section 108 of MSCS Act,
in more than one state or different co-operative 2002, the books of accounts and other books
societies Acts enacted by State Governments. and papers of every multi State Co-operative
However, the books of accounts are required to Society shall be open to inspection by the Central
be audited by an auditor every year. For instance, Registrar or by such officer of the Government as
Section 70 of MSCS Act provides that every multi may be authorised by the Central Government
state Co-operative society shall get its account in this regard. As per Section 109 of this Act,
audited by an auditor as defined under Section at every AGM the Board is required to present
70(2) of the Act at least once in each year. Likewise, before Multi State Co-operative Society
Section 84 of Gujarat Co-operative Societies Act, members a Balance Sheet and a Profit & Loss
1962 also prescribes such provisions. It has further Account for the financial year. This makes it
clear that although no method of accounting
been provided in Section 70 of the MSCS Act
has been prescribed by the co-operative Act,
that the auditor shall have a right of access, at all
nonetheless, they are required to maintain the
times, to the books, accounts and vouchers of the
books of accounts as well as Balance Sheet and
co-operative society and shall be entitled to seek
profit & loss account.
from the officers or other employees of such co-
operative society any information or explanation 3.2 Books of Accounts for Co-operative
as he may require in the course of discharge Credit Societies
of his duties as an auditor. In this regard, the Under Section 82 of the Gujarat Co-operative
Assessing Officer should examine the auditor’s Societies Act(Corresponding Section 79 of the
report to verify whether any qualifications have Maharashtra Co-operative Society Act), the
been made by the Auditor in the course of his Registrar has been given the powers to direct
audit with reference to the provisions listed under the co-operative society to maintain the books
Section 70(2) of MSCS Act. Further, as per the of accounts with respect to money received, and
provisions of Sub-section s (3), (4) & (5) of expenses expanded by the Society, the record
Section 70 of the MSCS Act. The Auditors shall of all the sales and purchases of goods by the
furnish report as to whether the Balance Sheet society, assets and liabilities of the society etc.
and the Profit & Loss Account as well as every The same can be summarized as under:
other document required to be part or annexed i. All sums of money received and expended
to such documents provide a true and fair view by the society and the matters in respect of
for the Financial Year under consideration. Such which receipts and expenditure take place.
audit includes an examination of overdue debts, if ii. All sale and purchase of goods by the
any, and a valuation of assets and liabilities of the society also on account of stock-in-hand.
society. The Registrar will authorise any person to
iii. Assets and liabilities of the society.
conduct the audit of the Society on his behalf by
an order and the person so appointed shall have Thus, the Co-operative Societies are required to
right at all times to have access to the books of broadly maintain following books of accounts:
accounts, papers and securities of the Society. He 1. Day books.
shall have access to the books of accounts, papers
2. Payment book for loan advances.
and securities of the Society. He shall have a right
to ask information and conduct an inspection in 3. Sundry payment book (other than loans).
relation to audit. Similar provisions are also found 4. Receipts & payments book for Fixed
in the respective State Co-operative Acts as well. Deposit Receipts.

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Techniques of Investigation for Assessment Vol. 5

5. Sundry receipt book. 5. Stock register.

6. Dividend payment book. 6. Bin-cards for item-wise upto date quantity
7. Members register. records.
8. Share ledger Form (Rule 32 & 65). 7. Register of excess and shortages.
9. Fixed deposits personal ledger. 8. General ledger.
10. Balance book for F.D.R. 9. Debtors ledger, Creditors ledger.
11. Due register for F.D.R. 10. Journal proper.
12. Unpaid dividend register.
11. Register of tenders.
13. Recoveries register for advances.
12. List of approved suppliers.
14. Summary book for recoveries.
13. Register of Market Rates.
15. F.D.R. due Interest register.
16. Suspense register. 3.4 Books of Accounts for Credit
Co-Operatives
17. Sundry creditors register.
1. Main Day book.
18. Surety deposit account book.
19. Surety liability register. 2. General ledger.
20. Journal. 3. Trial balance.
21. Bank reconciliation book. 4. Cash reserve & liquid assets register.
22. Trial balance book. 5. Cashiers scroll.
23. Demand and time liability register for 3% 6. Transfer scroll.
& 28%.
7. Cheque books issue register.
24. Yearly balance book for loans, shares and
M.R.B.F. account for personal balance. 8. Monthly balancing register.
25. Particulars for loan bond, after payment. 9. Current O/ D register.
26. Register for loan applications (Head office). 10. Total loan liability register.
27. Register for loan applications (Branches).
11. Godown inspection register.
28. Sanctions register for loan, for membership,
for share refund. 12. Loan application register.
29. Minutes books. 13. Mortgage register.
30. General body meetings. 14. Membership application register.
31. Managing committee meetings. 15. Share call in arrears register.
32. Index books of branches.
16. Share register & share ledger.
3.3 Books of Accounts for Consumers
Co-Operative Societies 17. Token register, cash in safe/ vault register.

1. Cash book.
4. TAX INVESTIGATIONS
2. Cash sales subsidiary book.
4.1 Assessment of Co-operative Societies
3. Credit sales register. It may be stated here that though for taxation
4. Purchase book. purposes, the status of a society is to be taken

22
 Co-operative Sector

as an AOP, Sections 67A and 86 of the Act have 4.4 Deduction under Section 80P
been specifically excluded from application to the 4.4.1 While handling an issue relating to
case of its members. Besides, as provided in Part deduction under Section 80P(2) of the Income-
I of the First Schedule to an annual Finance Act, tax Act in a case of a Co-operative society, it
a co-operative society is taxed at rates, which would be useful to keep in mind the following
are different from those applicable to an AOP. general observation of the Supreme Court
It may be seen from Part I of the First Schedule made in the case of Kerala State Co-operative
to an annual Finance Act, wherein though Marketing Federation Ltd. vs. CIT (231 ITR 814,
individuals, Hindu Undivided Family, AOPs or 819):
Body of Individual, whether incorporated or not,
or every artificial juridical person referred to in “The provision is introduced with a view
Section 2(31) (vii) of the Act, are chargeable at to encouraging and promoting the growth
the rates prescribed under paragraph B thereof. of the Co-operative sector in the economic
life of the country and in pursuance of the
4.2 Wealth-Tax Liability on a Co-operative declared policy of the Government, the
Society correct way of reading the different heads
As per Section 3(1) of the Wealth-tax Act, 1957, of exemption enumerated in the Section
only individuals, HUF and companies are liable would be to treat each as a separate and
to wealth-tax. It clearly implies that no wealth- distinct head of exemption. Whenever a
tax is chargeable in the case of co-operative question arises as to whether any particular
society. However, at present, the Wealth Tax Act category of an income of a Co-operative
has been repealed by the Finance Act 2015 with society is exempt from tax what has to be
effect from F. Y. 2015–16. Therefore, the same is seen is whether the income fell within any
not applicable to any class of assessees. of the several heads of exemption. If it fell
within any one head of exemption, it would
4.3 Concept of Mutuality not Applicable
be free from tax notwithstanding that the
to Co-operative Societies: (Judicial View)
conditions of another head of exemption
a. There is no aspect of mutuality in the are not satisfied and such income is not free
case of the assessee registered under the from tax under that head of exemption.”
Co-operative Societies Act, as one of the
4.4.2 The provisions have categorised various
objectives of a co-operative society was to
activities of the Co-operative societies with
make profits and declare dividends to its
reference to the eligibility and extent of deduction
members. In the case of a mutual concern,
“from the profits and gains of business attributable
there is no room for such intention of
to any one or more of such activities” where
making profit and distribute the same
100% deduction is eligible. Legal controversies
among the members. (Totgar’s Co-
normally had arisen on account of the fact that
operative Sale Society Ltd. vs. ITO (2010)
the Co-operative society may carry on business
322 ITR 283 (SC); 229 CTR 209).
to earn income part of which is exempted and
b. The Hon. Andhra Pradesh High Court in part of which is not exempted. If separate books
the case of CIT vs. Secunderabad Cricket of accounts are not maintained and the expenses
Club (2012) 21 Taxmann.com 54 (A.P. are incurred jointly, the AO has to allocate the
HC.) vide Para 34 has held that, “… with related expenses to the income of exempt and
respect to any transaction of business non-exempt activities in order to ascertain the
nature, having a motive of profit, the correct income chargeable to tax. It is to be
concept of mutuality will not apply and allocated on pro-rata basis. It is settled by the
transaction would be liable to Income-tax”. Supreme Court in 203 ITR 1027:

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Techniques of Investigation for Assessment Vol. 5

‘‘when the assessee co-operative society’s 80P. However, primary agricultural credit society
income is included in its total income, it (whose principal business is to provide financial
becomes entitled to a deduction from the accommodation to its members for agricultural
amount of income-tax chargeable on its purpose or for purpose connected with
total income. That means, the Co-operative agricultural activities including the marketing of
society concerned becomes entitled to crops) or a primary co-operative agricultural and
deduction or exemption from income-tax rural development bank can claim deduction
payable by it only on its net amount of profits under Section 80P. Likewise, a credit co-operative
and gains, i.e. on income of its business society (which is not credit co-operative bank)
otherwise computable in accordance with can claim deduction under Section 80P–CIT vs.
the provisions of the Income-tax Act for the Surat Vankar Sahkari Sangh Ltd. (2014) 225
purpose of charging income-tax thereon and Taxmann 156 (Guj).
which is included in its total income, and not 4.6 Income from Banking Business
on the amount of its gross profits and gains [Section 80P(2)(a)(i)]
of business’’.
A co-operative society (which is engaged in
4.4.3 The effect of the above judgment is that carrying on the business of banking or providing
deduction under Section 80P is admissible credit facilities to its members is eligible to claim
with reference to net income and not the gross the following income as deduction under Section
income. This decision was followed by the 80P(2)(a)(i).
Gujarat High Court in Gandevi Taluka Khedut
1. Income from carrying on banking business
Sahkari Mandali Ltd. vs. CIT 207 ITR 175. While
for its members.
dealing with the provisions of Section 80P (2)
(d), it was held by the Gujarat High Court that 2. Income from providing credit facilities to
the deduction is admissible in respect of the net its members.
income by way of interest or dividends derived 4.6.1 Providing Credit Facilities to Members
by the Co-operative society from its investment, Deduction under Section 80 P (1)(a)(i) is
if any, in other Co-operative society. A reference available to those co-operative societies that
was also made to the case of CIT vs. Surat are engaged in providing credit facilities strictly
District Co-operative Milk Producers Union Ltd. to their members only.
211 ITR 726.
Members – meaning of—In Section 80P(2)(a)
4.5 Effect of Insertion of Sub-section (4) (i), when Parliament has used the expression
to Section 80P in the Act ‘members” it has used it in the normal sense of a
A Co-operative society can claim deduction member of a co-operative society. The intention
under Section 80P. However, with effect from was to extend the exemption to co-operative
AY 2007–08 onwards, no such deductions societies directly extending credit facilities to its
are available to any co-operative bank (other members. There is nothing in the said provisions
than a primary agricultural credit society or to show that intention was to grant exemption
a primary co-operative agricultural and rural to co-operative societies which were extending
development bank) by virtue of Sub-section credit facilities to the person who though not
(4) to Section 80P. Even, Regional Rural Banks the members of the said society, were members
cannot claim any deduction under Section of another co-operative society which was a
80P-Circular No.6/2010, dated September 20, member of the co-operative society seeking
2014. Also, State co-operative bank, Central exemption. The meaning of the expression
co-operative bank and a primary co-operative ‘members’ cannot, therefore, be extended to
bank cannot claim any deduction under Section include the members not a primary co-operative

24
 Co-operative Sector

society, which is a member of the federated co- Auto Rickshaw Drivers’ Co-operative
operative society seeking exemption–U.P. Co- Society vs. Commissioner of Income-tax.
operative Cane Union Federation Ltd. vs. CIT
iv. Service charges for loan agreement—
(1999) 237 ITR 574/103 Taxmann 376(SC).
Where the assessee-society had been
4.6.2 When Section 80P(1)(a)(i) refers to a carrying on business of providing facilities
co-operative society engaged in providing credit to its members for obtaining fertilizers
facilities to the members, it really refers to a credit etc. as also arranging loans from bank
society whose primary object is to provide loans by giving certificates about cultivated
or other credit facilities to its members, it does land. etc., for which certain amount was
not include any society whose primary object charged as service charges such service
is something other than the provision of loans charges received by the assessee would
or other credit facilities, such as a consumer not be eligible for deduction under
co-operative Society—Rodier Mill Employees Section 80P(2)(a)(i)—CIT, vs. Anakapalli
Co-op Stores Ltd. vs. CIT(Mad) 135 ITR 355. Co-op Marketing Society Ltd. (2000) 111
4.7 A few instances of income held/ not held as Taxmann 702/245 ITR 616 (AP).
deductible under Section 80P(2)(a)(i) are given v. Interest on funds not immediately required
below: for business purpose: If a society regularly
i. Selling goods on credit – The facility of earns interest on funds (not required
settling goods on credit to members is an immediately for business purposes). Such
activity of business of selling of goods, of interest income is taxable under Section
which the credit facility is only an incidence it 56 under the head “Income from other
will not amount to providing credit facilities sources’ and not eligible for deduction
in the nature of the business of banking so under Section 80P—Totgars Co-operative
as to amount to carrying on the business Sale Society Ltd. vs. ITO (2010) 188
of banking or providing credit facility to Taxmann 282 (SC).
its members–CIT vs. Co-operative Supply
vi. Categorization of Society as per
& Communication Shop Ltd. (1993)
Co-operative Societies Act is relevant
204 ITR 713 (Raj), CIT vs. Kerala State
– Assessee is not a credit society as per
Co-operative Marketing Federation Ltd.
Co-operative Societies Act – Interest
(1998) 234 ITR 301 (Ker).
received from providing credit facilities
ii. Chit Fund – Conducting chit fund amounts to its members not eligible for deduction
to providing credit facilities–CIT vs. under Section 80P(2)(a)(i) ITO vs. Modern
Kottayam Co operative Bank Ltd. (1974) Engineers Construction Co-operative
96 ITR 181 (Ker.). Society (ITAT, Chennai) 11 ITR (Trib.) 393.
iii. Hire-purchase  –  Co-operative society, found vii. Interest received on PF deposits and rental
to be engaged in business of purchasing income from house property not eligible
auto-rickshaws and re-selling them to its for deduction under Section 80P(2)(a)
members on hire-purchase terms. In this
(i) as in the case of Bihar Rajya Sahkari
case, Apex Court has held that assessee
Bhoomi Vikas Co-operative Bank Ltd. vs.
cannot be considered to be engaged in
CIT (Patna) 313 ITR 247.
carrying on business of providing credit
facilities to its members, so as to be entitled viii. Service charges received from members
to exemption under Section 80P(2)(a)(i) for arranging loans in banks – Not eligible
(2001) 117 Taxmann 370 (SC) Madras for deduction under Section 80P(2)(a)

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Techniques of Investigation for Assessment Vol. 5

(i). CIT vs. Anakapalli Co-op Marketing court has held that the meaning of expression
Society Limited (AP) 245 ITR 616. ‘members’ for a federated co-operative society
ix. Hon’ble Supreme Court in its latest could not be extended to include members of a
judgement (2017) 88 taxmann.com 279 primary co-operative society which was itself a
(SC) Citizen Co-operative Society Ltd. vs. member of such federated co-operative society
seeking exemption. It was further held that since
Assistant Commissioner of Income-tax,
exemption was extended to co-operative societies
Circle 9(1), Hyderabad, has held that:
which were directly extending credit facilities to
“Where assessee society was engaged its members only, federated co-operative societies
in activity of finance business and was could not be allowed same exemptions under
also engaged in activity of granting loans Section 80P(2)(a)(i). (1999) 103 Taxmann 376
to general public as well, it could not be (SC) U.P. Co-op. Cane Union Federation Ltd. vs.
termed as co-operative society meant Commissioner of Income-tax.
only for providing credit facilities to its 4.9.2 In the cases of Co-operative sugar mills
members, hence not entitled to deduction purchasing sugar cane from its members, who
under Section 80P.” grow and supply sugar cane, an issue which has
4.8 Another issue involved with regard to the faced much litigation especially in the states of
deduction of profits attributable to the activities Gujarat and Maharashtra, is whether payment
of the society specified under Section 80P(2) of extra price for procuring sugar cane by the
is whether the business loss or depreciation of co-operative to its members over and above
earlier years are required to be set off against the the Minimum Support Price (MSP) fixed by
current year’s profits. The Supreme Court has the Government, is an allowable deduction in
settled the issue in the case of CIT vs. Kotagiri computing its profits. The additional price paid
Industrial Co-operative Tea Factory Ltd. 204 for procuring sugar cane is actually based on
ITR 604. It is held that the gross total income co-operatives own operational profits which
has to be determined first by setting off against vary from year to year. The question that arises
the income, the business loss and unabsorbed is whether such extra payment amounts to
depreciation of the earlier years, and the application of income by way of distribution of
deduction under Section 80P will be allowable profit to the members or is the purchase price
in respect of the balance income. or expenditure. A few appellate authorities in
Maharashtra have taken the view that this does
4.9 Co-operative Sugar Mills not amount to an expenditure allowable under
Section 37(1) of the Act. This issue is now settled
4.9.1 Assessee was a federated co-operative
with an amendment in the Act, w.e.f. 01/04/2016,
society consisting of cane-unions as its members
wherein a new Clause (xvii) has been inserted in
– In turn cane-unions were separate primary
Section 36 of the Act, given as under:
co-operative societies having individual cane
growers as their members-Assessee provided “(xvii) the amount of expenditure incurred by a
credit facilities to individual cane growers for co-operative society engaged in the business of
purchase of pumping sets-Assessee received manufacture of sugar for purchase of sugarcane
service charges of 5 per cent of price of pumps at a price which is equal to or less than the price
from suppliers of pumps In this case Apex fixed or approved by the Government.”

26
 Co-operative Sector

Thus, now sugar cane co-operative societies are capital and a small number of workers and has a
not allowed deduction on account of price paid turnover which is correspondingly limited.
in excess of MSP fixed by the Government. a. It should not be required to be registered
4.9.3 Similarly, it was observed that some under the Factories Act.
sugar cane co-operatives use to deduct certain b. It should be owned and managed by a Co-
amounts from purchase price of the sugar cane operative Society.
payable to its members. In the accounts, such
deductions were shown as ‘deposit’ with the c. The activities should be carried on by the
stipulation that such deposits are to be adjusted members of the society and their families.
against loss or repayment of loan or redemption For this purpose, a family would include
of shares etc. The Supreme Court in the case of self, spouse, parents, children, spouses
of children and any other relative who
CIT vs. Bazpur Co-operative Sugar Factory Ltd.
customarily lives with such a member.
172 ITR 321 has held that amounts deducted by
Outsiders (persons other than members
the Society from the price payable to its members
and their families) should not work for the
on account of sugarcane were deducted in
society. In other words, the Co-operative
the course of its trading activity primarily for
society should not engage outside hired
discharging the liabilities of the Society and
labour: District Co-op Development
were held to be revenue receipts. It was further
Federation Ltd. vs. CIT (1973)88 ITR 330
observed in the judgment that the essence of a
(Allahabad).
deposit is that there must be a liability to return
it to the party by whom or on whose behalf it d. A member of a Co-operative society means
is made on the Fulfilment of certain conditions a shareholder of the society.
otherwise it is a trading receipt irrespective of e. The place of work could be an artisan
the nomenclature given to such deductions in shareholder’s residence or it could be
the accounts of the Society. The retrospective a common place provided by the Co-
amendment of bye laws of the society in that operative society: CIT vs. Chichli Brass
case was held to be invalid or of no effect. Metal Workers Co-op. Society Ltd. (1978)
4.10 Societies engaged in cottage industry- 114 ITR 720 (MP).
Under Section 80P (2)(a)(ii) deduction is f. The cottage industry must carry on activity
allowable in the cases of the Co-operative of manufacture, production or processing;
Societies engaged in cottage industry. The it should not be engaged merely in
main issue for determination in these cases trade, i.e., purchase and sale of the same
is whether a particular society is engaged in commodity: CIT vs. Indian Co-operative
cottage industry. Board’s Circular No. 722 dated Union Ltd. (1982) 134 ITR 108 (Delhi).
19.9.95 has clarified various criteria which
The aforesaid criteria are also in conformity
should be satisfied before a society can be said
with the judicial pronouncements available so
to be engaged cottage industry. The criteria
far with regard to the nature of cottage industry
according to the circular are:
eligible for deduction under this Section. The
4.10.1 A cottage industry is one which is Assessing Officer should, therefore, ensure that
carried on a small scale with a small amount of each of the criteria mentioned above is satisfied

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Techniques of Investigation for Assessment Vol. 5

before allowing deduction under Section 80P 4.11.1 Societies engaged in marketing of
(2) (a) (ii). agricultural produce of their members – Prior
4.10.2 Some issues relating to Cottage Industry to its amendment brought about by Income-tax
as upheld by various judicial authorities, are Second Amendment Act, 1998, from 01/04/1968,
given as below: the expression used in Section 80P (2) (a) (iii) was
‘marketing agriculture produce of its members’.
i. Coir marketing – An apex society for coir In a number of cases decided by the courts it
marketing cannot be said to be engaged in
was held that for the purpose of allowance of
regard to any affairs cottage industry so as
deduction under the said Section the produce
to be entitled to deduction under Section
need not be grown by the members of the
80P(2)(a)(ii)—CIT vs. Quilon Central
society. In order to bring in the real intent behind
Coir Marketing Co-operative Society Ltd.
the provisions an amendment, as aforesaid,
(1998) ITR 348 (Ker.).
was brought about whereby the expression was
ii. Manufacture through primary societies substituted by ‘agriculture produce grown by
– The assessee-society had the power its members’. This amendment has neutralised
to direct, supervise and control over the effect of judgment of the Supreme Court in
the manufacturing of cloth through the the case of Kerala State Co-operative Marketing
primary societies which were the members Federation Ltd. vs. CIT 231 ITR 814. According
of the assessee-society. Members of the to the amended provisions this Section
primary societies ran cottage industries
applies to the societies engaged in marketing
in their houses. In these circumstances, it
the agricultural produce only and not to the
could not be said that the assessee-society
income derived from anything manufactured
was not engaged in the manufacturing
or processed out of it. For instance, if a Co-
activities carried out by the weavers.
operative society is engaged in milling the paddy
The weavers got the way materials, i.e.
or if it undertakes the sales of rice processed out
yarn through their primary societies, but
of such paddy it will not be entitled to deduction
thereafter weaving charges were paid by
the assessee and it purchased the cloths under Section 80P (2) (a) (iii). Here it requires
through primary societies CIT vs. Rajasthan to be taken note of that the ratio of judgments
Rajya Bunker Sahakari Sangh Ltd. (2002) delivered with reference to the law as it existed
124 Taxmann 135 (Raj.). prior to the amendment would not support the
cases of the societies.
iii. Profit attributable to cottage industry are
deductible in entirety – Expression whole 4.11.2 Some Case Laws in Favour of the
of the amount profits and gains of business Department
attributable to any one or more of such i. Assessee a federation of co-operative
activities’ industries that deduction under societies derived income from marketing
Section 80P(2)(a) is to be given to the of agricultural produce received from
extent of whole of profit attributable to member societies. Deduction not eligible
cottage industry without deducting there under Section 80P(2)(a)(iii) as well
from any loss arising in any other activity– as 80P(2)(e) CIT vs. Haryana State
CIT vs. Agency Marketing Co-operatives Co-op. Supply & Marketing Federation
Society Ltd.(1993) 201 ITR 881 (Ori.). Ltd. (P&H) 201 Taxmann 169.

28
 Co-operative Sector

ii. As per Section 80P(2)(a)(iii), income from Co-op. Marketing Society Ltd. vs. CIT
marketing of agricultural produce grown by (1985) 156 ITR 422 (Bom.).
its members is only eligible for deduction – ii. Supply need not necessarily be to
Since item marketed by the assessee being members – Section 80P(2)(a)(iv) does not
lint which was obtained in the process of require that the supplies shall be made by
manufacture and not grown by its members, the co-operative society only to members
assessee not entitled for deduction. CIT and to no one else—CIT vs. Guntur Distt.
vs. Virudhunagar Co-operative Marketing Co-op Marketing Society Ltd. (1985) 154
Society Limited (Mad) 255 ITR 558. ITR 799 (AP). However, deduction is not
iii. Income of Co-operative society from available under Section 80P(2)(a)(iv) in
selling rice – No deduction under Section respect of profit on sale of commodities
80P(2)(a)(iii) since what is sold i.e. rice is to non-members—CIT vs. Vidarbha Co-
not an agricultural produce and deduction operative Marketing Society Ltd. (1995)
is allowable only if the end product which 212 ITR 327 (Bom.).
reaches the consumer is an agricultural iii. Apex society can also be a member – The
produce–Rice does not retain the same expression ‘members’ in Section 80P(2)(a)
character as paddy after hulling and hulling (iv) cannot be restricted to either a member
is not a necessary process for marketability of a primary society or to an agriculturist
of the produce. South Arcot District Co- alone—CIT vs Tamil Nadu Co-operative
op. Supply & Marketing Society Ltd. vs. Federation Ltd. (1983)144 ITR 317(All.).
CIT (Mad) 97 ITR 500.
iv. Cattle-feed – It cannot be said that cattle-
4.12 Societies engaged in purchase of feed meant for livestock has no connection
agricultural implements, seeds, livestock etc. with agricultural operations and as such is
Section 80P (2) (a) (iv) provides for deduction in outside the exemption contemplated under
the cases of the societies engaged in the purchase Section 80P(2)(a)(iv)—CIT vs. Thudialur
of agricultural implements, seeds, livestock or Co-operative Agricultural Services Ltd.
other articles intended for agriculture for the (1997) 143 CTR (Mad.) 362.
purpose of supplying them to its members. The
v. Sale of fertilizers to members – Where the
deduction under this Clause is admissible with
assessee was a co-operative marketing
reference to the net profit and not to the gross
federation registered under the Co-
profit as held by the Supreme Court in the case
operative Societies Act, and it mainly dealt,
of Sabarkantha Zilla Chara Vechan Sangh Ltd.
inter-alia, in general fertilizers, products
vs. CIT 203 ITR 1027,1037.
from mixing units, etc., it would be entitled
4.12.1 Some Salient Points to deduction in respect of profit from sale
i. Assessee must prove factum of purchase – of fertilizers to its members—CIT vs. Tamil
It is necessary that the assessee must prove Nadu Co-operative Marketing Federation
that it has purchased the certain articles, Ltd (1999) 151 CTR (Mad.) 232.
which means that it has acquired property vi. Mixing pesticides – By purchasing different
in certain articles, and those articles have kinds of manures and pesticides and
been sold to the members—Vidarbha mixing them up for the purpose of selling

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Techniques of Investigation for Assessment Vol. 5

the same to the small farmers in retail, Ganesh Co-op. (L&C) Society Ltd. (1998) 67
it cannot be said that the assessee is ITD 436 (Asr.).
indulging in any manufacturing activity or 4.14.1 Persons not falling in specified categories
processing of goods, so as to disentitle it to can be members but they should have no right
exemption under Section 80P(2)(a)(iv)— to vote–If the co-operative society as specified in
CIT vs. Thudialur Co-operative Agricultural sub-Clause (vi) wants to claim full deduction of
Services Ltd. (1997) 143 CTR (Mad.) 362. the profits made by it, persons other than those
4.13 Societies engaged in processing of falling under the three specified categories can
agricultural produce (Section 80P(2)(a)(v)) – This be members of the society, but they should not
Section provides for deduction in the cases of the be given the right to vote and that fact should
societies engaged in the processing, without the be clearly borne out from the rules and bye-
aid of power, of the agricultural produce of its laws restricting the right to vote only to members
members. There is no amendment in this Clause specified in the proviso—Gora Vibhag Jungle
on the lines of amendment to Clause (iii) and, Kamdar Mandali, 161 ITR 658 (Guj). Societies
therefore, the judgment of the Supreme Court engaged in disposal of labour.
(231 ITR 814) may be applicable to societies 4.15 Fishing and allied activities (Section
engaged in the processing the agriculture 80P(2) (a)(vii)) – The whole of the profits of co-
produce of its members even if the produce is operative society engaged in fishing and allied
not grown by them. activities are deductible under Section 80P(2)
4.14 Collective disposal of labour (Section (a)(vii). Fishing and allied activities include the
80P(2)(a)(vi)) – Income from the activity of catching curing, processing, preserving, storing
collective disposal of the labour of its members or marketing of fish or the purchase of materials
is deductible under Section 80P(2)(a)(vi). and equipment in connection therewith for the
purpose supplying them to its members.
This deduction is available only when the
4.16 Interest/ dividend (Section 80P(2)(d))
earning of the society is through the utilization of
– The whole of interest and dividend income
the actual labour of its members. Thus, a society
derived by a co-operative society from it
of engineers engaged in collective disposal of
investments in any other co-operative society is
labour of members where actual supervision
deductible under Section 80P(2)(d).
of work in field is done by paid employees will
not be entitled to exemption, since there is no i. Net income from interest received from
direct connection between the work executed co-operative societies/ co-operative banks
and the specialty of members of the society as computed after deducting expenses
engineers – Nilagir Eng Co-op Society Ltd, vs. debited to income and expenditure account
CIT (1994) 208 ITR 326(Ori.). Likewise, where relatable to earning of such income is
not only members but also a large number of deductible under Section 80P(2)(d)—CIT
non-members were contributing collective vs. U.P. Co-operatives Sugar Factories
disposal of labour and condition laid down in (2013) 2019 Taxmann 33(All).
proviso to Section 80P(2)(a)(vi) was not fulfilled, ii. Interest derived by the assessee
the assessee society would not be entitled to co-operative sugar mill from its investment
exemption of its income-Assessing Officers vs. in co-operative bank would qualify for

30
 Co-operative Sector

deduction in its entirety under Section society, make actual verification of the activities
80P(2)(d), without adjustment of interest of the society and thereafter determine the issues
paid by the assessee to the co-operative that arise there-from.
bank-CIT vs. Doaba Co-operative Sugar 4.18.1 It sometimes happens that the treatment
Mills Ltd. (1998)96 Taxmann 509/230 ITR given to some of the items of reserves, provisions,
774 (Punj. & Har.). investments etc. in the accounts filed with the
4.17 Societies deriving income from letting return of income is different from that given in
out of godowns (Section 80P(2)(e)) provides the accounts meant for the public consumption
for deduction in respect of ‘any income derived and filed with the Registrar of Societies. It is
by the society from letting of godown or obvious that the determination of real nature
warehouses for storage, processing or facilitating of these items of account is crucial to the issues
the marketing of commodities’. The issue involved in computing the deduction under
relating to the interpretation of the expression Section 80P(2). While looking into the return
‘any income derived by’ came for consideration of income and the accompanying accounts it is,
of the Supreme Court in the case of Orissa State therefore, advisable for the Assessing Officer to
Warehousing Corporation vs. CIT 237 ITR 589, call for and examine the audited accounts and
when it was dealing with the interpretation of Balance Sheet submitted to the Registrar of
Section 10(29) of the Income-tax Act. It was Societies and meant for the public consumption.
held that when the expression ‘any income’ is 4.18.2 How important a physical verification
qualified by the word ‘derived’ it gives it a very of the activities of a society may prove in a case
restrictive meaning. The exemption in that case will be evident from the discussion in the para
was held to be available only to that part of the that follows.
income which arises or is derived from letting of
4.19 Co-operative Society vs. Bank: In the
godown or warehouse for the specified purpose,
namely, storage, processing or facilitating the case of Assistant Commissioner of Income-
marketing of commodities and not for any other tax, Circle-I vs. Quepem Urban Co-operative
purpose. The deduction may, therefore, not be Credit Society Ltd. (2015) 63 taxmann.com 300
available in respect of income of a society from (SC). The Hon’ble Supreme Court of India has
integrated activities which are not directly linked granted SLP and for Assessment years 2008–
with the activities referred in the provisions. In 09, 2009–10 and 2011–12 reversed the order
this connection a reference may also be made of High Court where it was held that assessee-
to the case of CIT vs. Ahmedabad Maskati Cloth co-operative society could not be regarded
Dealers Co-operative Warehousing Society Ltd. as ‘Co-operative Bank’ on, mere fact that an
162 ITR 142 (Guj). insignificant proportion of revenue was coming
from non-members, and thus, was entitled for
4.18 Needless to say that the ratio of the
deduction under Section 80P(2)(a)(i)-Whether
judgments discussed above is applicable to
the facts of a given case and unless full facts Special Leave Petition filed against impugned
relating to the activities or to the nature of the order was to be granted-Held, yes (In favour
concerned transactions are brought on record, of revenue).
the judgments by themselves may not be of any 4.20 Punjab State Co-operative Federation of
help. The Assessing Officer should normally House Building Societies Ltd. vs. Commissioner
analyse the contents of the bye-laws of the of Income-tax (2016) 76 taxmann.com 98

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Techniques of Investigation for Assessment Vol. 5

(Punjab & Haryana) – Assessee was a co-operative business and could not be termed as co-operative
society-In banks other than co-operative bank, it society-Moreover, it was also found that assessee
made short term investment of surplus which was was engaged in granting loans to general public
not immediately required for business purpose- without any approval from Registrar of Societies
Assessee also advanced loans to employees – Whether thus assessee could not be treated as a
for housing and conveyance-Tribunal found co-operative society meant only for its members
that deduction under Section 80P(2)(a)(i) was and providing credit facilities to its members
available only in respect of core activities of and accordingly it would not be entitled to claim
societies; that interest received by assessee was benefit of Section 80P. Held, yes (Paras 25 and
not from core activities and, therefore, same had 27) (In favour of revenue).
to be taxed as ‘Income from other sources’ and,
Circulars and Notifications: CBDT Circular No.
thus, assessee would not be entitled to deduction
133 of 2007, dated 09/05/2007.
under Section 80P. Whether there was no error
or perversity in approach of Tribunal-Held, yes
5. BOGUS OR PAPER SOCIETIES
(Para 10)(In favour of revenue).
5.1 On physical verification of the activities of
4.21 In the case of Citizen Co-operative Society
societies in few cases it was found that there were
Ltd. vs. Assistant Commissioner of Income-tax,
no genuine Co-operative societies in existence.
Circle-9(1), Hyderabad: Where assessee society
The societies were merely paper entities created
was engaged in activity of finance business and
for the purpose of taking advantage of the sales
was also engaged in activity of granting loans to
tax, excise duty, concessional loans offered by
general public as well, it could not be termed as
the Government and other benefits available
co-operative society meant only for its members
to the co-operative societies. The advantage
and providing credit facilities to its members,
relating to availing of deduction under Section
hence not entitled to deduction under Section
80P and availing of cheap credit from banks
80P-Section 80P of the Income-tax Act,-1961
etc. was only incidental. In the cases popularly
Deductions-Income of Co-operative Societies
known as ‘Shoe scam cases’ it was found that
(Co-operative Bank)-Assessment Year 2009–
a group of assessees (Dawood Shoes, Metro
10. Assessee, a co-operative society claimed
Shoes and Milano Shoes) created a large number
deduction under Section 80P(2)(a). Same was
of fictitious Co-operative societies named as
denied on ground that assessee was carrying
‘cobbler’s societies’ ostensibly engaged in the
on banking business for public at large. It was
manufacture of parts of shoes. On behalf of
found that activities of assessee were in violation
these non existing Co-operative societies they
of Mutually Aided Co-operative Societies Act,
availed loans of crores of rupees from different
1995 under which it was formed. Assessee
banks. The accused created a fictitious Co-
was catering to two distinct categories, viz.
operative society of cobblers to take advantage
(1) ordinary members and (2) nominal members
of government loans through various schemes.
who made deposits with assessee for obtaining
loans, who were not members in real sense. 5.1.1 In fact no such societies existed in as
Further, most of assessee›s business was with this much as no actual activities were carried on
second category of persons and depositors and by these societies. They did not even have any
borrowers were quite distinct. Thus, in reality, premises, raw materials or implements. The
such activity of assessee was that of finance promoters of these bogus societies were trusted

32
 Co-operative Sector

men of the group and most of the members were made in respect of inflation in purchases
were found to be bogus. The societies obtained shown from the societies.
credit for purchase of raw material etc. from the 5.3 The modus operandi discussed above leads
banks on the guarantee of the members of the to the conclusion that if on verification in a given
beneficiary group. This fact further established case the activities of a society are not found to
the connection of the bogus societies with be genuine, apart from denying deduction under
the group. Section 80P, it would be essential for the AO to
investigate the matters further and establish on
5.1.2 In-fact the banks involved in giving loans
facts as to who are the real beneficiaries of the
were also charge sheeted by the investigating
transactions shown in the accounts of the bogus
agencies. The Banks whose officials were
societies. The evidence gathered in this behalf
involved in this scam are: Maharashtra State along with the facts of the case and the findings
Finance Corporation, Citibank, Bank of Oman, recorded in the assessment order of the society
Dena Bank, Development Credit Bank, Saraswat require to be sent to the AOs having jurisdiction
Co-operative Bank, and Bank of Bahrain over the cases of the respective beneficiaries.
and Kuwait.
5.1.3 The group showed purchases of shoe 6. DEDUCTION OF TAX AT SOURCE
parts, such as shoe uppers, from the cobbler 6.1 As per Section 194 A (3) (i) of the Income-
societies though in fact no such purchases were tax Act, 1961, interest exceeding Rs. 10,000/-on
made from the societies. The shoe parts were time deposits with a Co-operative society engaged
directly manufactured by the group from the raw in carrying on banking business is subject to
material shown as purchased in the accounts of deduction of tax at source. As per Section 194A
the societies. By creating these paper entities not (3)(v) of the Act, interest income credited or paid
only the group benefited by evading payment by a Co-operative society to its members or to
of excise duty, sales tax etc. which it would have any other Co-operative society, is not subject to
otherwise paid, the societies also used to inflate deduction of tax at source though it is not exempt
from charge of Income-tax. The definition of the
the purchase price of the semi finished produce
member is given in Section 2(13) of the Gujarat
shown to have been purchased from these
Co-operative Societies Act, 1961 which reads
societies. The extent of inflation in purchase as under:
price was found to be as high as 40% of the
purchase price debited to the accounts. This “Member means a person joining in an
application for the registration of a co-
scam was exposed in 1995.
operative Society which is subsequently
5.2 Further enquiries from the so-called registered, or a person, duly admitted to
promoters of the societies revealed that they membership of a society after registration, and
merely received commission @ 3% of the includes a nominal, associate or sympathiser
amount of bogus sales shown to the business member”.
entities of the beneficiary group. The societies 6.2 Instances have come to light which show
were accordingly assessed on such commission that many Co-operative banks take undue
income and no deduction under Section 80P was advantage of this Clause by making many of
obviously allowed in their cases. In the cases of their large depositors, nominal members of the
the business entities of the group, disallowances Co-operative banks by charging a small fee of

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Techniques of Investigation for Assessment Vol. 5

say Rs. 5/-and thereby do not deduct tax at 6.4 In the case of Girijan Co-op. Corporation
source on interest payments to such depositors. Ltd. vs. Assistant Commissioner of Income-
However, no case law is available on this issue tax, Range-2(TDS), Visakhapatnam (2011) 13
so far. This issue is also under consideration of taxmann.com 42 (Visakhapatnam)—Assessing
the Board. Officer noticed that product sold by assessee
6.3 A Co-operative society like any other fell under category of forest produce and
assessee may make an application to the assessee was required to collect tax at source-He
assessing officer under Section 197 of the Act, raised demand under Section 206C – Assessee
for deduction of tax at lower rate, in case the contended that sales were made to buyers who
income likely to be received so warrants. The had already been assessed to tax and who
relevant rules are 28, 28AA and 29. Similarly, had filed their Income-tax returns disclosing
a Co-operative society may furnish declaration impugned transaction and, therefore, assessee
in duplicate under Section 197A (IA) of the Act, was not liable under Section 206C since buyers
to the person responsible for paying any income
had already paid tax thereon – Whether as per
of the nature referred to Section 193 (interest
Section 206C(6), person being seller of specific
on security), Section 194 A (interest other than
goods, is not deemed to be an assessee-in-default;
interest on securities) for no deduction of tax at
source. The relevant form is 15H, which has to however, is made liable to pay TCS amount –
be verified in the prescribed manner to the effect Held, yes – Whether, therefore, assessee was
that the tax on the estimated total income of the liable to pay demand raised under Section
previous year will be “nil”. 206C(6) – Held, yes (In favour of revenue).

34
 Chapter

4
Dairy Industry

1. GENERAL
1.1 Apart from its popularity and acceptability
in India, milk is recognised as a nutritive food
par excellence. Proteins constitute 3.4% and
3.9% of cow and buffalo milk, respectively.
1.2 With the increased availability of liquid
milk and Western dairy products, refinement
in the marketing network and improvement
in per capita income, there is an increased
pressure for the restructuring of the indigenous
milk products industry. Now the organised
sector has an increased presence in processes kind of milk products. Chemical composition of
and equipment for manufacturing traditional milk of different species is as under:
products, standardization of products, as well Table 1: Chemical Composition of Milk
as refinement in packaging and improvement in
safety and shelf life. Percentage of
Species
Water Fat Protein Lactose Ash
1.3 Milk production during 2015–16 and
Buffalo 82–84 7.0–11.5 3.3–3.6 4.5–5.0 0.8–0.9
2016–17 was 155.5 million tones and 165.4
Camel 86–88 2.9–5.4 3.0–3.9 3.3 0.6–0.9
million tonnes respectively in India, showing an
Cow 85–87 3.7–4.4 3.2–3.8 4.8–4.9 0.7–0.8
annual growth of 6.37 per cent. The per capita (foreign)
availability of milk was around 355 grams per Goat 87–88 4.0–4.5 2.9–3.7 3.6–4.2 0.8–0.9
day in 2016–17.
Human 88–89 3.3–4.7 1.1–1.3 6.8–7.0 0.2–0.3
Source: (Kanhal and Hamad, 2010)
2. CHEMISTRY OF MILK
2.2 Factors Affecting Composition of Milk:
2.1 The major constituents of milk are water, fat, The factors affecting composition of milk
protein, lactose, ash or mineral matter. The minor are-species, breed, individuality, interval of
constituents are phospholipids, sterols, vitamins, milking, completeness of milking, frequency
enzymes, pigments etc. With the development of milking, irregularity of milking, day-to-day
of dairy technology, each & every constituent of milking, disease and abnormal conditions,
milk can be extracted so as to produce different feeding, season and age.

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 Techniques of Investigation for Assessment Vol. 5

Table 2: Approximate Composition of Cow Milk (Western)

Component Average Content Range (% w/w) Average (% On Dry
(% w/w) Matter Basis)
Water 87.3 85.5–88.7
Solids not fat 8.8 7.9–10.0 69
Fat in dry matter 31.0 21.0–38.0
Lactose 4.6 3.8–5.3 36
Fat 3.9 2.4–5.5 31
Protein 3.25 2.3–4.4 26
Casein 2.6 1.7–3.5 20
Mineral substances 0.65 0.53–0.80 5.1
Organic acids 0.18 - 1.4
Miscellaneous 0.14 - 1.1

Source: Dairy Chemistry and Physics, Walstra and Nenness, 1984

Table 3: Average Composition (% w/v) of Milk from Different Breeds of Buffalo

Breed % Fat % SNF
Murrah 6.8 10.1
Jaffarabadi 7.3 10.1
Surti 8.4 10.3

Source: Rangappa and Achaya, Indian Dairy Products, 1974

3. DAIRY FARM VIS-A-VIS DAIRY 4.1.1 Direct System: In this system, organized
INDUSTRY processor (Public, Co-operative or Private)
Dairy Farm is a farm devoted chiefly to the collects milk directly from the producers by
production of milk and the manufacture of establishing village procurement centres.
butter and cheese, whereas in dairy Industry,
4.1.2 Contractor System: The processors
milk is procured from village, farm etc. and after
purchases milk from the contractor according to
due process, market milk and also variety of milk
products are made. The rural areas are normally the terms of contract such as quality, quantity,
identified for milk production, the urban centres price, etc.
are selected for the location of milk processing 4.1.3 Agent System: The processor appoints
plants and product manufacturing factories. agents to procure milk in particular area.
These plants and factories rapidly expanded
Payment for the milk is made directly to the
and modernised with improved machinery and
equipment to secure various advantages of producers while the agent gets the commission.
large-scale production. 4.1.4 Co-operative System: At the village
level, the farmers form a co-operative society,
4. DAIRY BUSINESS which establishes the milk collection centres.
4.1 Purchase of Milk: The organized dairies The society collects milk twice a day and delivers
collect milk through one or combination of the it to the milk collection centres where the milk is
following systems. weighed, tested and the price paid to farmers.

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 Dairy Industry

The payment is based on fat content or fat + Premium is decided as it encourages

SNF content in the milk. The village society production of high grade milk.
supplies/ sells milk to its own District co-operative
iv. Payment according to the cost of
dairy plant. It transports milk in cans by trucks or
production is usually followed by dairies in
through insulated road milk tankers, preferably
the organised sector.
via a chilling centre. Besides milk collection, the
society also provides the technical input services At present each milk plant or dairy product
such as the A.I, veterinary aid; concentrated factory has evolved an arbitrary system of milk
cattle feed and fodder seeds. The society also pricing, which seems to have no relation to
provides counselling to the society members to the actual cost of milk production. Liquid milk
enhance milk production. plants have a differential pricing system for flush
4.1.5 Chilling Centres/ Bulk Milk Cooling and lean months based on the fat and SNF
Centres: If the dairy plant is far away from the contents of milk with provision for the payment
collection centre, then the collected milk is first of a premium for a higher fat and SNF contents
brought to a centralized chilling centre/ bulk milk than any specified standard. Dairy product
cooling unit. Here, milk is cooled to 4°C and factories purchase milk merely on a per kilo
stored in insulated storage tanks of 5000–20,000 fat basis at different prices for different season.
litres capacity. Subsequently, the chilled milk is The fat portion being visible (giving thickness),
transported in insulated road milk tanker to the separable (yielding cream) and measurable (in
dairy plant. The transportation of milk from the percentage) made it easier to decide milk price.
chilling centre to the dairy plant usually takes
place once a day. 4.2.2 Kilo Fat System: A system based on
‘kilo fat’ became a practice for purchase of
4.2 Purchase Pricing: Fat and SNF are two buffalo milk. Under this system, an amount in
major constituents of milk which are considered rupees per kg of fat means an amount payable
for price fixation. The ‘2-axis pricing policy’ on that quantum of milk which would yield one
gives importance to both fat and SNF; the per kg of fat. For example, when the rate per kg fat
kg (rate) price of fat and SNF are fixed in that
is Rs. 425, it means that the said amount will
ratio at which these occur naturally i.e. around
be paid for 16.66 L of buffalo milk with 6% fat
2/3 of fat per kg price for each kilogram of SNF.
(minimum standard): 1 kilo (1000gm) fat ÷ 60
This type of pricing discourages adulteration.
gm/L (6%) = 16.66 L On this basis, the price per
Basic price is fixed for basic composition and for
each 0.1 additional value, bonus is added and L works out to: Rs 425 ÷ 16.66 = Rs 25.51/ L
for shortfall deductions are made. If cow milk with 3.5% fat (min standard) were to
be purchased under kg fat system, it would fetch
4.2.1 Buying: Different methods are employed Rs 14.87 per L as shown below: 1000 gm ÷ 35
for buying milk, singly or in combination, as gm/L (3.5%) = 28.57 L Rs 425 ÷ 28.57 = Rs.
given below: 14.87/L.
i. Payment according to weight or volume
4.2.3 Double Axis Pricing: With a view
(also known as a flat rate) is prevalent in
to pay for buffalo milk and cow milk on the
the unorganised sector.
rationale of their two components, viz. fat and
ii. Payment according to the fat content of SNF, a system was devised called as Double–axis
milk. milk pricing. The purchase rate for fat and SNF
iii. Payment of premiums based on quality are determined based on previous experience or
of milk is usually confined to market milk. ruling market prices.

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Techniques of Investigation for Assessment Vol. 5

Table 4: Example
Type of Milk Fat SNF Rs./L
Buffalo milk (%) 6.0 9.0
Rate (Rs./kg) 190 158 25.62
Amount (Rs./L)* 11.40 (= 60x 19.0) 14.22 (= 90x 15.8)
Cow Milk (%) 3.5 8.5
Rate (Rs./kg) 190 158 20.08
Amount (Rs./L)* 6.65 (= 35x19.0) 13.43 (= 85x 15.8)

4.3 Manufacture, Packing & Storage of Pasteurized Milk

Flow Diagram

Receiving milk, grading, sampling, weighing, testing

Preheating (35–40 degree C)

Filtration/ clarification

Cooling and storage (5 degree C or below)

Standardization

Pasteurization (63 degree C/ 30 mts or 72 degree C/15 mts)

Pasteurization (63 degree C/ 30 mts or 72 degree C/15 mts)

Homogenization (2500 psi)------------------------------------Bottling/packaging

Storage (5 degree C or below)

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 Dairy Industry

4.3.1 Receiving Milk multiplying the volume with an agreed

density. In case of road milk tankers,
i. Grading: Milk may be delivered to the
milk plant/ dairy in cans or tankers (road or another common alternative is to use a
rail). The milk in these containers has to be weigh-bridge, the tanker being weighed
once when it is full, and again after it has
graded, emptied, measured by weight or
been emptied. However, any mud or snow
volume, sampled, and bulked to provide
on the tanker should be washed off before
continuity of supply to the pasteurizing
equipment. In the absence of mechanical weighing, adjustments to fuel or water
should not be made between weightings,
aids, the cans are offloaded manually to
and the driver and his accompaniment
the tipping point, where the lids/ covers are
should be either on or off the vehicle on
removed and the milk inspected. Where a
both occasions.
higher output is required, the procedure
is mechanized and the cans are unloaded iv. Testing: Apart from initially accepted/
directly from the truck onto the conveyor rejected lots of milk, there are always some
(power driven or by gravity-roller) and the of doubtful quality. All the accepted lots
tipping, sampling and weight-recording have already been properly sampled; these,
may be completely automatic. If milk is together with samples of the remaining two
measured by weight, as is usual, it is tipped categories, have to be tested in the quality
into the weight tank/ pan; this is suspended control laboratory for the final verdict of
from a weighing machine, the indicating acceptance/ rejection.
dial of which is calibrated in weight and
4.3.2  Preheating: This term refers to heating
so placed that it can be easily seen by
before the operation which follows immediately.
the checker. If milk is being received from
The milk is preheated for efficient filtration/
Milk-Chilling Centres it has already been
clarification. Preheating becomes essential if
graded, weighed, sampled and cooled. It
the incoming milk is cold, as otherwise the flow
may be weighed and sampled again, or
of milk is hampered. As the temperature of the
the Centre’s report may be used
milk increases, the viscosity decreases and more
ii. Sampling: Sampling is done for subsequent efficient filtration/ clarification results.
chemical and bacteriological analysis.
4.3.3 Filtration/ Clarification: This is done to
iii. Weighing: This is an essential step in improve the aesthetic quality of milk by removing
accounting for milk receipts and disposal, visible foreign matter which is unseemly and may
making payments for milk, etc. The milk therefore cause consumers complaints.
in-cans is dumped into the weight tank,
4.3.4 Cooling and Storage of Raw Milk-1
either manually or mechanically. The tank
is mounted on scales and the scale dial set i. Cooling: As soon as the milk is received
at zero when the empty tank is on the scale, in the Plant, it is chilled to 5 degree C or
thus enabling the operator to make a direct below and stored cool till used, to prevent
reading of the weight of the milk (Weighing deterioration in its bacteriological quality
is facilitated by the use of a dial reading during the interim period: Various methods
or some other indicating scale, rather than are employed for cooling known as surface
a beam scale). The milk in tankers (road cooler, plate cooler, internal tubular cooler,
jacketed vat/ tank
or rail) may be measured by volume by
passing it through a flow-meter; and its ii. Storage: Modern milk plants hold both
measurement converted into weight by raw and pasteurized milks for a much

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longer period than before. Normally the 4.7 Bottling/ Packaging: The pasteurized
milk storage capacity is equal to one day’s and cooled milk is promptly bottled/ packaged
intake. This allows a more nearly uniform so as to serve the dual purpose of:
work-day for processing and bottling i. Protecting the milk against contamination,
operations with less dependence on the loss, damage or degradation (due to
time for receiving raw milk. Storage tanks micro-organisms or insects; exposure to
are used in milk plants for the storage of heat, light, moisture or oxygen; spillage,
raw, pasteurized, or processed products, evaporation or pilferage).
often in very large volumes. Due to the
ii. Helping in sale and distribution of milk (by
longer periods of holding, storage tanks
packaging it in an easy-to-carry-and-open,
are among the most important items of sufficiently strong and leak-proof, non-
equipment. tainting container).
4.4 Standardization: Standardization of milk Earlier milk was used to be distributed in bottles.
refers to the adjustment, i.e. raising or lowering Now the concept has changed and milk is
of the fat and/ or solids-not-fat percentages of distributed in polythene packs.
milk to a desired value, so as to conform to the
4.8 Storage: In any milk plant, it is necessary
legal or other requirements prescribed. Milk is
to provide refrigerated rooms where milk can be
standardized by the addition of milk or cream stored until delivery. The temperature of milk
with a higher or lower fat percentage than that storage rooms should be 5 degree C or below so
of the material to be standardized. Sometimes as to check bacterial growth.
the addition of skim milk will do. To solve the
problem, it is necessary to find the relative 4.9 Distribution: Distribution of milk is the
amounts of original material and standardizing last or final stage of the market milk industry.
This varies with the size and the type of business.
material to be mixed together to give a product
In a small plant, the same drivers and trucks
with desired fat content.
may deliver both wholesale and retail goods.
4.5 Pasteurization: The term Pasteurization, In larger organisations, wholesale & retail
as applied to market milk today, refers to the distribution are usually handled by separate
process of heating every particle of milk to at personnel and equipment. Due to the highly
least 63 degree C (145 degree F) for 30 minutes, changeable temperatures during most seasons
or 72 degree C (161 degree F) for atleast15 and the lack of refrigeration facilities at the
seconds (and not more than 25 seconds). After average customer’s home in India milk has to be
Pasteurization, the milk is immediately cooled to distributed twice daily, viz. morning and evening.
5 degree C (41 degree F) or below to render milk In cold countries, one time delivery is usual.
safe for human consumption by destruction of 4.10 Systems of Collection for Payment of
100% pathogenic microorganisms; to improve Milk-Credit, cash or advance payment (coupon
the keeping quality of milk by destruction of monthly card) are in vogue.
almost all spoilage organisms (85–99%).
4.6 Homogenization: A considerable proportion 5. OTHER TYPES OF MILK & MILK
of market milk pasteurized in developed dairying PRODUCTS
countries is now homogenized as well. In this 5.1 Toned Milk: Toned milk (also called
process, milk fat globules are reduced in size & Single Toned Milk) refers to milk obtained by
dispersed uniformly through the rest of the milk. the addition of water and skim milk powder to

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 Dairy Industry

whole milk. Under the PFA Rules (1976), toned together with sugar and flavour, with or without
milk should contain a minimum of 3% fat and stabilizer or colour, and with the incorporation of
8.5% solids-not-fat throughout the country. By air during the freezing process.
merely adding water to whole buffalo milk, both 5.8 Cheese: Cheese like butter, also functions
the fat and solids-not-fat content is reduced. But as the balance wheel of the dairy industry in
by adding skimmed milk powder to the mixture, developed dairying countries. The manufacture
solids-not-fat is ‘toned up’ or increased to the of cheese did not develop in India during the
original level. past mainly because animal rennet could
5.2 Double Toned Milk: This is the same not be used by Indians, who considered cow
as toned milk, except that under the PFA Rules slaughter sinful. However, they discovered a
(1976), double toned milk should contain plant known as Withaniacoagulans, the seeds of
a minimum of 1.5% fat, 9% solids-not-fat which coagulated milk, and this helped in the
throughout India. preparation of Indian cheese or paneer on a
5.3 Cream: Cream is known as the fatty very limited scale.
layer that rises to the top of the milk when it 5.9 Condensed Milk: Condensed milk is
stands undisturbed for some time. Cream may obtained by evaporating part of the water of
be defined as (i) that portion of milk which is whole milk, or fully or partly skimmed milk,
rich in milk fat, or (ii) that portion of milk into with or without the addition of sugar. The
which has been gathered and which contains a term ‘condensed milk is commonly used when
large portion of milk fat, or (iii) when milk fat is referring to full-cream sweetened condensed
concentrated into a fraction of the original milk, milk’, while the term ‘evaporated milk’ is
that portion is known as cream. commonly used when referring to ‘full cream
5.4 Curd/ Dahi: It is usually made from unsweetened condensed milk’.
Pasteurized Toned Milk. The process takes about 5.10 Dried Milks: Dried milk or milk powder
8 to 12 hours through bacterial fermentation. is the product obtained by the removal of water
5.5 Yogurt: Yogurt, also spelled yoghurt, from milk by heat or other suitable means, to
yogourt or yoghourt, is a food produced by produce a solid containing 5% or less moisture.
bacterial fermentation of milk. The bacteria used Whole milk, defatted milk or skim milk may be
to make yogurt are known as yogurt cultures. used for drying. The dried product obtained
Yogurt comes in different fruit flavours too. from whole milk is called Dried Whole Milk or
5.6 Butter: Butter serves as the balance wheel Whole Milk Powder (WMP); and that from skim
of the diary industry; surplus milk is converted milk is known as Dried Skim Milk or Skim Milk
into butter, while during times of scarcity the Powder (SMP), or Non-fat Dry Milk (NFDM).
milk intended for butter-making is used for more The various dried milk products are given
essential products. Butter may be defined as a specific names.
fat concentrate which is obtained by churning 5.10.1 Standards
cream, gathering the fat into a compact mass
and then working it. According to the PFA Rules i. Whole Milk Powder: According to the
(1976), table (creamery) butter should contain PFA Rules, 1976, whole milk powder is
not less than 80% fat, not more than 1.5% curd the product obtained from cow or buffalo
and not more than 3% common salt. milk, or a combination thereof, or from
standardized milk, by the removal of water.
5.7 Ice Cream: Ice cream may be defined as a
frozen dairy product made by suitable blending ii. Skim Milk Powder: According to the
and processing of cream and other milk products, PFA Rules (1976), skim milk powder is

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Techniques of Investigation for Assessment Vol. 5

the product obtained from (the skim milk allowed to graze, be fed an organically certified
of) cow or buffalo milk, or a combination fodder or compound feed, not be treated with
thereof, by the removal of water. most drugs (including growth hormone), and in
general must be treated humanely.
5.10.2 Dried Milk Products: Dried milk
products are manufactured for the same purposes There are multiple obstacles to forming firm
as dried milks, viz. to reduce bulk so as to effect a conclusions regarding possible safety or health
saving in storage space, to reduce packaging and benefits from consuming organic milk or
transportation costs, to improve the storage life conventional milk, including the lack of long term
of the product etc. Dried buttermilk or buttermilk clinical studies. The studies that are available
powder may be prepared from sweet, sour and have come to conflicting conclusions with
high-acid buttermilks. regard to absolute differences in nutrient content
between organic and conventionally produced
5.11 Makkhan: The yield of makkhan is
milk, such as protein or fatty acid content. The
influenced by the fat content of the initial milk,
weight of available evidence does not support
the moisture content of makkhan and the fat
the position that there are any clinically relevant
loss in lassi (buttermilk). The fat content of
milk depends primarily on its type; buffalo milk differences between organic and conventionally
has a higher fat content than cow milk, while produced milk, in terms of nutrition or safety.
mixed with indicates an intermediate value.
The moisture content of makkhan usually 6. BY-PRODUCTS OF DAIRY
varies from 25 to 35% and samples have been INDUSTRY
reported to contain as much as 60%. However,
During the manufacture of dairy products by
the improved method should normally yield a
products having commercial value is produced.
product containing 18–20% moisture. The fat
The by-products of the Indian dairy industry are
losses in butter milk can be kept at a minimum
given as under:
by strictly adhering to the various steps for the
improved method as outlined above. Table 5
5.12 Organic Milk: Organic milk refers to a Main Products By-Products
number of milk products from livestock raised
Cream Skim milk
according to organic farming methods. In
most jurisdictions, use of the term "organic" or Butter Buttermilk
equivalents like "bio" or "eco", on any product Ghee Ghee residue
is regulated by food authorities. In general these
Chhana/ Paneer Cheese/ Casein Whey
regulations stipulate that livestock must be:

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6.1 A chart showing the process flow is as under:

Ghee Butter Cream

Fig. 1

7. PERSONS ENGAGED IN DAIRY dilute it even further, and sell low-fat to low
BUSINESS income consumers, tea stalls, and restaurants
for use in whitening tea or for making curds.
7.1 Private Sector: Traditionally, dairy trade
Small private creameries support a large class of
is a large employment provider. It includes
vendors who cool the cans filled with skim milk
several hundred thousands of dudhias, gwalas,
in canals or tanks, and transport it over fairly
local halwais and bhattawalas, curd and chaach
long distances. The fourth category of vendors,
(buttermilk) shops. Vendors are of several
who basically work as agents to milk contractors,
types; similarly, milk contractors also vary in
purchase milk from producers on behalf of
their business across regions. Four categories
their principals.
of vendors have been identified in Punjab. The
first includes those who keep their own cattle 7.2 Cooperative Sector: The dairy
shed in urban peripheries to supply milk to the cooperative structure is a two-tier one. The village
city. The second category includes vendors who society, the first tier, is mainly concerned with
procure milk from village milk producers, get it milk production and collection of milk besides
standardized in local creameries by adding skim acting as a channel to market the production
milk to it, and market it to their city customers. enhancement package. Depending upon the
The third category vendors, less significant than volume of business, a village cooperative
the first two purchase skim milk from creameries, employs paid staff like secretary, milk collector,

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Techniques of Investigation for Assessment Vol. 5

fat tester, accountant, and inseminator etc. to commerce and distribution of milk and milk
run its day-to-day business. Each village has products. Units handling between 10,000 and
a milk collection centre. The milk producer or 75,000 litres of milk per day are required to
his family members bring milk to the centre obtain registration from the State Governments,
every morning and evening. At the centre, the while units handling more than 75,000 litres per
quantity of milk is ascertained. A small sample day milk are required to obtain registration from
is taken from each member for testing its quality. the Government of India.
The Union provides each cooperative with an 8.3 Standards on Weights and Measures
electronic fat-testing machine. With quality and (Packaged Commodities) Act, 1976
quantity determined, the amount to be paid to (Ministry of Food & Civil Supplies)
each member is worked out. When he comes to
The Legal Metrology Act, 2009 came into effect
the centre in the evening, his morning delivery
from the 1st of April, 2011, replacing the Weights
is paid for. For milk delivered in the evening,
and Measures Act. The Act was passed with the
the money is paid the next morning. As similar purpose of establishing and enforcing standards
institutions grew in the State, marketing became of weights and measures or aspects incidental to
inter-competitive and difficult. As a result, the same. Under the Act, there are various rules,
an apex cooperative institution-the Gujarat but a crucial arm of the Act is the Packaged
Cooperative Milk Marketing Federation-was Commodities Rules, i.e. Legal Metrology
formed with the prime responsibility of marketing (Packaged Commodities) Rules, 2011. These
the products manufactured by its member rules lay down certain obligatory conditions for
dairies under a common brand name ‘Amul”. all commodities that are in packed form, with
In Gujarat, successful and dynamic dairies are respect to declaration on quantities contained,
in the cooperative sector namely Amul Dairy at including labelling.
Anand and Sagar Dairy at Mehsana.
8.4 Export (Quality Control and Inspection)
Act, 1963 (Ministry of Commerce)
8. SPECIAL LEGISLATION
GOVERNING DAIRY INDUSTRY The Export (Quality Control And Inspection) Act,
1963 (No. 22 of 1963) as amended upto Export
8.1 Prevention of Food Adulteration Act (Quality Control and Inspection) Amendment
(PFA), 1954 (Ministry of Health) Act, 1984 (No. 40 of 1984) and The Export
This basic statute specifies different standards (Quality Control And Inspection) Rules, 1964
of various food articles, including milk and (corrected upto 30th September 1986).
milk products. The standards are in terms of 8.4.1 The Export Inspection Council is
minimum quality levels for ensuring safety in responsible for the operation of this Act. Under the
the consumption of these food items and for Act, a large number of exportable commodities
safeguarding against harmful impurities and have been notified for compulsory pre-shipment
adulteration. The violation of the Act can lead to inspection. Recently, the Government has
both fine and imprisonment. exempted agriculture and food products, fruit
products and fish and fishery products from
8.2 Milk and Milk Products Order
compulsory pre-shipment inspections, provided
(MMPO), 1992 (Ministry of Agriculture)
that the exporter has a firm letter from the
Vide Milk & Milk Product Amendment overseas buyer stating that the overseas buyer
Regulations-2009 (MMPR-09), MMPO, 1992 does not require pre-shipment inspection from
has been renamed as MMPR, 2009. Indian government agencies.
The Government of India has notified the sixth 8.5 Pollution Control (Ministry of Environment
amendment in the official Gazette on 26/3/02-Its & Forests)-No objection certificate from the
main objectives are to regulate the manufacture, respective State Pollution Control Board is must.

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9. DESIGNATIONS AND STANDARDS sterilized milk containing minimum milk fat

FOR VARIOUS MARKET MILK of 3.5% and minimum milk SNF of 9% in the
states of Chandigarh, Haryana, Kerala, Madhya
According to the FSS Rules, 2011 (formerly PFA
Pradesh, Maharashtra, Punjab and Uttar
Rules), the standards for different classes and
Pradesh, whereas in Andaman and Nicobar,
designations of milk in India are as follows:
Andhra Pradesh, Assam, Bihar, Dadra and
9.1 Buffalo Milk: The legal standards for Nagar-Haveli, Delhi, Gujarat, Goa, Daman
buffalo milk stipulate that it may be either and Diu, Himachal Pradesh, Lakshadweep,
raw, pasteurized, boiled, flavoured or sterilized Tamilnadu, Manipur, Karnataka, Nagaland,
milk containing minimum milk fat of 6% and Orissa, Pondicherry, Rajasthan, West Bengal
minimum milk SNF of 9% in the states of Assam, and Tripura, the minimum milk fat is 3.5% and
Bihar, Chandigarh, Delhi, Gujarat, Maharashtra, minimum milk SNF is 8.5%.
Haryana, Punjab, Uttar Pradesh and West
9.5 Standardized Milk: The legal standards
Bengal, whereas in states/ Union Territories
for standardized milk stipulate that it is used for
like Andaman and Nicobar, Andhra Pradesh,
liquid milk consumption and should contain
Dadra and Nagar-Haveli, Goa, Daman and
minimum milk fat of 4.5% and minimum milk
Diu, Kerala, Himachal Pradesh, Lakshadweep,
SNF of 8.5% throughout India.
Tamilnadu, Madhya Pradesh, Manipur,
Karnataka, Nagaland, Orissa, Pondicherry, 9.6 Recombined Milk: It should contain
Rajasthan and Tripura, the minimum milk fat is minimum milk fat of 3% and minimum milk
5% and minimum milk SNF is 9%. SNF of 8.5%.
9.2 Camel Milk: The legal standards for 9.7 Toned Milk: It should contain minimum
camel milk prescribe that it may be either raw, milk fat of 3% and minimum milk SNF of 8.5%.
pasteurized, boiled, flavoured or sterilized 9.8 Double Toned Milk: It should contain
milk containing minimum milk fat of 2% and minimum milk fat of 1.5% and minimum milk
minimum milk SNF of 6% in all the states of SNF of 9%.
India.
9.9 Skim Milk: It should contain maximum
9.3 Cow Milk: The legal standards for cow milk milk fat of 0.5% and minimum milk SNF of 8.7%.
prescribe that it may be either raw, pasteurized,
boiled, flavoured or sterilized milk containing 9.10 Full Cream Milk: To cater to the need of
minimum milk fat of 4% and minimum milk SNF growing children and high income group people
of 8.5% in the states of Chandigarh, Haryana who wish to purchase the whole buffalo milk, a
and Punjab whereas in Andaman and Nicobar. variant of milk called ‘Full Cream Milk’ (FCM)
Andhra Pradesh, Assam, Bihar, Dadra and with minimum 6.0% fat and 9.0% SNF came
Nagar-Haveli, Delhi, Gujarat, Goa, Daman and into the market.
Diu, Kerala, Himachal Pradesh, Lakshadweep, 9.11 Toned Milk: Toned milk refers to milk
Tamilnadu, Madhya Pradesh, Maharashtra, obtained by the addition of water and skim milk
Manipur, Karnataka, Nagaland, Pondicherry, powder to whole milk. In practice, whole buffalo
Rajasthan, Uttar Pradesh, West Bengal and milk is admixed with reconstituted skim milk.
Tripura the minimum milk fat is 3.5% and
minimum milk SNF is 8.5%. However, in Orissa 9.12 Legal Definition: Under the FSS Rules
the minimum milk fat is 3% and minimum milk (2011), toned milk should contain a minimum of
SNF is 9%. 3.0% fat and 8.5% SNF throughout the country.
9.4 Goat or Sheep Milk: The legal standards (Note: When milk is offered for sale without any
for Goat or sheep milk specify that it may be indication of the class, the standards prescribed
either raw, pasteurized, boiled, flavoured or for buffalo milk shall apply.)

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 Techniques of Investigation for Assessment Vol. 5

10. VOLUNTARY STANDARDS 10.2.2 Tax Laws: Market milk is exempt from
the levy of any tax and duty. The rates of central
10.1 There are two organisations that deal
excise duty on various milk products are specified
with voluntary standardization and certification
in Chapter-IV of the Central Excise Tariff. The
systems in the food sector. The Bureau of
rates of Sales tax vary from State to State as
Indian Standards looks after standardization
it is a state subject. However with effect from
of processed foods and related products. 01/06/2000 sales tax will be levied uniformly by
Standardization of raw agricultural produce all the States as per the Uniform Sales Tax Policy
comes under the purview of the Directorate of announced by the Union Government. Now
Marketing and Inspection. with the implementation of GST, milk and milk
10.1.1 Bureau of Indian Standards (BIS): products fall under 5%, 12% and 18% tax slabs.
BIS has standards for most of the processed 10.3 Regulatory Bodies in India: The Indian
foods. In general these standards cover raw food processing sector maintains its quality
materials permitted and their quality parameters, parameters through compulsory legislation which
hygienic conditions under which products are specifies minimum standards and certification
manufactured and packaging and labelling systems. Legal standards are formulated to
requirements. Manufacturers complying with exercise control over the quality of foods offered
BIS standards can obtain an “ISI” mark that for sale and to safeguard the consumer from
can be exhibited on product packages. BIS health hazards posed by possible adulteration.
has identified certain items like food colours/ The three major Indian standards prevalent in
additives, vanaspati, containers for packing, milk the dairy industry are the FSSR, 2011 (formerly
powder and condensed milk for compulsory PFA), Bureau of Indian Standards (BIS) and
certification. Agriculture Produce Grading and Marketing Act
(AGMARK).
10.1.2 Directorate of Marketing and
Inspection (DMI): The DMI enforces the 10.4 Food Safety and Standards Authority
Agricultural Produce (Grading and Marketing) of India: The Food Safety and Standards
Act, 1937. Under the Act, grade standards Rules of India replaces the Prevention of Food
are prescribed for agricultural and allied Adulteration Act which has been in use since
commodities. These are known as “Agmark” the year 1954 for the protection of consumers
standards. Grading under the provisions of this against supply of inferior quality or adulterated
food. Food Safety and Standards Rules came
Act is voluntary. Manufacturers who comply with
into effect from August, 2011. The standards
standards laid down by DMI are allowed to use
have been formulated by the Department Of
“Agmark” labels on their products.
Health and Family Welfare (Ministry of Health
and Family Welfare). The Act, as was under
10.2 Other Regulations PFA, spells out standards of various food articles
10.2.1 Industrial License: No license is in terms of minimum quality for safeguarding
required for setting up a dairy project in India. against harmful impurities and to ensure safety.
Only a memorandum has to be submitted to the These are compulsory standards that are
Secretariat for Industrial Approvals (SIA) and an obligatory for any food product going into the
acknowledgment is to be obtained. However, a market. Any violation of the rule can lead to
certificate of registration is required under the Milk fines and imprisonment.
and Milk Products Order (MMPO), 1992. Vide Milk 10.5 Bureau of Indian Standards: Bureau
& Milk Product Amendment Regulations-2009 of Indian Standards, formerly the Indian
(MMPR-09), DIVISION (MMPO, 1992 has been Standards Institution (ISI), was established as a
renamed as MMPR, 2009. statutory body under the Ministry of Consumers

46
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Affairs in 1986. BIS specifies standards for goods 1992, by the Government of India for guidance
manufactured in the country in consultation with on production, sale, purchase and distribution of
the experts drawn from manufacturing units, milk and milk products. Dairy plants processing
research and technical institutions, purchase up to 75,000 L per day or equivalent quantity
organisations and other concerned parties. In the of milk solids per annum need to be registered
processed food sector, the formulated standards compulsorily with the Directorate of Animal
are implemented through voluntary and third Husbandry in respective states, while those
party certification systems. These standards are handling more than 75,000 L per day have to
amended suitably from time to time and cover register with Department of Animal Husbandry
the permitted raw materials and their quality of Central Government. This order has also
parameters, hygiene rules for manufacturing, defined milk-shed areas, so as to restrict uneven
packaging and labelling requirements. procurement and marketing of milk and set rules
Manufacturers complying with these standards for production, hygienic conditions, packaging,
can obtain ‘ISI’ or ‘BIS’ certification and exhibit labelling, marketing and penalty.
the same on their product package. The various 10.8 Export (Quality Control and
certification schemes operated by BIS are 1) Inspection) Act: Enacted in 1963 and
BIS Product Certification Scheme, 2) Quality operated by the Export Inspection Council of
Scheme Certification as per IS/ ISO 9000 series, India, this act works under the Department of
3) Environmental Management System as per Commerce. It stresses on compulsory inspection
IS/ ISO 14000 series and 4) Hazard Analysis of the manufacturers’ premises, human hygiene,
and Critical Control Point (HACCP) as per ISO- quality of raw material purchased, hygienic
15000. manufacturing practices followed, quality
10.6 AGMARK: The Agriculture Produce assurance programmes followed, packaging and
Grading and Marketing Act was first enacted in labelling at the production centre for the exportable
1937 to prescribe grade standards for agricultural product. A certificate has to be obtained from the
and allied commodities. The standards came Council before the consignment is cleared for
to be known as Agmark standards and are export for each batch. The act covers compulsory
formulated by the Directorate of Marketing and pre-shipment examination of a large number
Inspection (DMI), under Ministry of Agriculture of exportable commodities. The quality control
(Government of India). Agmark categorizes the and inspection of export product is administered
through a network of officials located at the main
commodities into various grades (for example,
production centres and port of shipment.
Special and Standard). Grading under this act
is voluntary. Manufacturers who comply with 10.9 International Standards in the Indian
these standards are allowed to use ‘Agmark’ Context: The Codex Committee on Milk and
logo on their products to give the consumers Milk products (CCMMP) was established in
an assurance of quality in accordance with 1993 to cater to new scientific and technological
the standards laid down. Three dairy products developments and accordingly revise the existing
(ghee, butter and dairy spreads) are currently standards. Eleven standards of Codex have been
graded under this scheme. revised and adopted by the CAC over the years.
A few of the altered ones as a consequence of
10.7 Milk and Milk Product Order Indian intervention deal with the definition of
(MMPO): All dairy plants processing more than milk, inclusion of ghee in the standard Milk Fat
10,000 litres of milk per day or handling more Product, incorporation of BHA as an antioxidant
than 500 tonnes of milk solids per annum are and removing the restriction of permitting only
now required to obtain registration certificates cow milk as a raw material particularly for
from the competent authority. This was the cheeses. Concerted efforts by India at the IDF as
result of setting up of an Advisory Board in well as CCMMP led to accepting the suitability

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Techniques of Investigation for Assessment Vol. 5

of buffalo milk for cheese making. This was a 11.1.2 During summer season when the
boon to the subcontinent as India and Pakistan supply is less, skimmed powder is dissolved in
account for 92 per cent of the world’s buffalo water and added with milk having more fats.
milk. Despite these efforts, several anomalies still Skimmed powder is fat less powder having SNF
exist in the two standards. 95%. Thus fats in the milk is varied either by
taking away cream or by adding solution made
10.10 Harmonization of the Indian
from skimmed powder.
Standards with International Standards:
The WTO accepts the international food 11.1.3 The minimum standards prescribed
standards/ guidelines/ codes related to food by the PFA (1976) rules for cow milk are 3–4%
hygiene and sanitation formulated by the fat and 8.5–9% solids-not-fat, while those for
codex as the reference points for the global buffalo milk are 5–6% fat and 9% solids-not-fat
food trade. Most of the national food standards throughout the country.
would have to be harmonized with those of 11.1.4 Purchase Rate: In dairy, milk is the
codex and the dairy industry would be required raw material. In Gujarat, the purchase rate of
to comply with them. In India, the food safety milk depends upon the fat content, i.e. higher
regulations, whether mandatory or voluntary, are the fat higher the price. The buffalo milk fetches
implemented by different agencies/ ministries/ more price than cow milk as buffalo milk is rich
departments. The presence of multiple agencies in fat. In states like Maharashtra, the purchase
to implement multiple laws poses a problem of price depends on the Fat and SNF (Solids-not
fixing responsibility. It is, therefore, necessary to fat) content in the milk and payment is made
have uniform and logical approach for regulating on the basis of fat unit. The fat plus 2/3 rd of
the quality of food and for harmonizing with the SNF is equivalent to one Fat unit. For example,
international regulations. if milk of 6% fat & 9% SNF cost Rs. 36/-per litre,
the price per fat unit is Rs. 3/-(6 fat + 2/3 rd of
11. TAX INVESTIGATIONS 9 (SNF) = 12 fat units.) In Gujarat, though the
price is paid on the basis of fats, yet the SNF
11.1 General content is important & its content should not be
11.1.1 The ingredients of milk which are less than 8.5. SNF below 8.5 means that supplier
important for investigation are fats and SNFs has mixed water.
(Solids-Not-Fat). In market milk fats vary 11.2 Unaccounted Purchases & Sales
whereas SNF remains constant. Buffalo milk
contains 6–7% fats whereas cow milk 4–4.5%. 11.2.1 In order to find out unrecorded purchases
Milk is marketed under different names; toned, & sales, it is necessary to prepare the trading
standardised, whole milk which have 3%, 4.5% account in terms of fats quantity. How much fats
and 6% fats, respectively. In order to make have been purchased, can be found out from
marketable milk under different categories an the purchase register and how much used by
adjustment/ variation in fats are necessary. Fats multiplying Sales & closing stock of various items
content in the milk is reduced by not adding with fat conversion ratio given in Annexures 1,2,
water but by taking away cream i.e. fats. Cream &3 at the end of the chapter. If the consumption
contains 40% fat. 100 kg of cream contains 40 is less than the purchases, it means all sales are
kg fats and 60 kg serum, mainly consisting of not being accounted for. There is possibility
SNF, vitamins, mineral, proteins etc. From 100 of excess stock of unaccounted items at the
litres (6% fat) milk & 8.5% SNF, if 3% fats are business premises. Survey action in such cases
taken out, it would give 92.5 litres of milk of 3% would be very useful. Similar exercise can be
fat & 3 kg of fat (in volume terms 7.5 litres of carried out for total SNF purchased, consumed
cream). Refer Case 1 discussed later. and reflected in sales and closing stock. In short,

48
 Dairy Industry

quantitative tally should be prepared in terms of days for which it worked during the year will give
fats and SNF instead of milk as raw material and an idea as to how much milk can be processed.
finished goods as various milk products. The total sales made in term of litres normally
11.2.2 Ice Cream is one of the most produced should tally with the capacity of the milk plant.
milk product. It broadly has the following If the milk processed on the basis of capacity is
composition: more than sold, there can be understatement
of sales. If purchases are more than the sales
i. Greater than 10% milkfat by legal (in litres) there may be either bogus purchases
definition, and usually between %10 and or unrecorded sale. During lean season i.e.
as high as %16 fat in some premium ice when the milk supply is less, the assessee
creams.
prepares solution by adding skimmed powder
ii. 9 to 12% milk solids-not-fat (MSNF): this in water. How much skimmed powder has been
component, also known as the serum purchased by the assessee during the year would
solids, contains the proteins (caseins and determine how much additional milk in litres can
whey proteins) and carbohydrates (lactose) be made by the assessee. Fats are also added
found in milk. to obtain the standard milk. Thus while making
iii. 12 to 16% sweeteners: usually a the trading account in terms of litres, it is also
combination of sucrose and glucose-based necessary to account the milk produced from
corn syrup sweeteners. the skimmed powder and fats. Normally lean
season starts from 15th March and continues up
iv. 0.2 to 0.5% stabilizers and emulsifiers.
to 15th September in Gujarat.
v. 55% to 64% water which comes from the
11.3 Water: Where the consumers are not very
milk or other ingredients.
quality conscious but cost is only consideration
vi. Dry fruits and other solids such as caramel, particularly in the localities of poor people, milk
chocolate etc. suppliers do add water and reduce the price
11.2.2.1 These percentages are by weight, to some extent. Normally these people use the
either in the mix or in the frozen ice cream. milk only for the preparation of tea, therefore,
Please remember, however, that when frozen they are not very much bothered about the
after processing, about 40% of the volume of quality of the milk. Thus more profit is earned
ice cream is air (i.e overrun) so by volume in than the normal profit. Therefore, it is necessary
ice cream, these numbers can be reduced by for the AO to find out who are the customers
approximately 40%, depending on the actual air of the assessee and thereafter methodology for
content. However, since air does not contribute investigation can be decided.
weight, we usually talk about the composition
of ice cream on a weight basis, bearing in mind 11.4 Mixing Vegetable Oil: Private dairy
this important distinction. Since ice creams are operators sometimes adopt unscrupulous
sold in volume, weight per litre is necessary for means. Among other means, one is of mixing of
working out of consumption of raw material vegetable oil. Vegetable oil in the market costs
and yield which may be obtained by Assessing Rs. 150/- to Rs. 200/- whereas the milk fat costs
Officers by actual weighing the samples. Similar Rs. 450/- to Rs. 500/- per kg depending upon
exercise may be done for other products. the season. Thus, if there is excess supply of milk
11.2.3 Trading account of market milk in than purchased, the chances are that the assessee
terms of litres may also be prepared. Quantity might have used vegetable oil for mixing. With
must tally after allowing weightage on account the homogenizer, the vegetable oil can be mixed
of burning, handling losses. The capacity of the in the water and after adding some flavors, it
Pasteurisation plant multiplied by the number of gives smell and odour of the natural milk.

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Techniques of Investigation for Assessment Vol. 5

11.5 Investment in Advances: The dairies actual electricity bills and production from the
engaged in the private sector have to complete production register. In the month where there is
with their counter parts in Government and large variation, purchases as well as sales may
Cooperative Sectors. Milk is the basic raw be verified by making cross verification from the
material and therefore, constant and regular accounts of suppliers and distributors of milk.
supply of the milk is very essential. One day’s
interruption in the supply may cost heavily. To 11.8 Overstatement of Facts: Prevention of
ensure the regular supply particularly during the Food Adulteration (PFA) Act requires to display
lean season, huge advances are given to the fat & SNF content on each and every packet. In
milk producers/ milk transporters depending many cases, it is found that the fats, displayed
upon the mode of procurement of milk. Big on the packet, is more than the milk actually
suppliers may be identified from the assessee’s contains. Thus, the assessee shows more fat
books and thereafter payment receipt register/ consumption. The Foods and Adulteration
Bank statement of big supplier may be called Department which checks the various
for and then cross checking could be done with irregularities committed under PFA works in
the assessee’s payment register/ bank statement the office of Municipal Corporation (Health).
so as to locate unexplained deposit in the bank Information gathered from the department may
account of the suppliers. Quantum of advances be useful for establishing that the assessee has
are very huge. If the capacity of the plant is to over displayed the fat content on the packet.
process 1 lakh litre per day (big dairies process 3
11.9 Under Filing: Standard of Weights and
to 5 lakh litres per day) and the average price of
milk is Rs. 32/- to Rs. 40/- per litre, then to have Measures Act (Packaged Commodities Rules)
the regular supply for a month, assessee may grants a maximum permissible error of 10 ml in
have to advance about Rs. 9.6 crores (30 lakh 500 ml pack but in reality, it is found that often
litres of milk x Rs. 32/- (rate). Therefore, source there is a under packing of the milk which is
of investment in advances must be examined by more than permissible limit. Thus, less quantity
the Assessing Officer. of milk is supplied. The above modus operandi
is witnessed particularly in the case of private
11.6 Project Report: In big dairy where dairies. Metrology Department (Ministry of
investment is substantial, for taking the financial
Civil Supplies) is concerned with the accuracy
help from the banks/ financial institutions, project
in measurement. Information about the persons
report is submitted. Information disclosed in
involved in under measurement may be collected
the project report is immensely helpful for
understanding the assessee’s business, sources from the district supply office.
of finance, capacity of the plant, financial worth 11.10 Half Yearly Return: Milk and Milk
of the directors/ partners and their activities etc. Products Order (MMPO) 1992 requires Dairy
More important is that the project report also units to obtain Registration from the State
forecasts the mode of payment, gives the details Government if their milk handling is between
of the projected sales and other sources of 10,000 to 75,000 litres per day, while Units
income. It may also provide information about handling more than 75,000 litres per day
the recovery of the fat, which will be helpful in are required to obtain registration from the
evaluation of the assessee’s claim with reference Central Government. Each such unit is also
to the fat loss. statutorily required to submit half yearly return
11.7 Electricity: The monthly production (Annexure 4). The return contains detailed
vis-à-vis units of electricity consumed may give information of fats, SNF (Solids-not-fat), milk
an idea in which month there is a variation, procurement prices in terms of per kg. Milk, per
i.e. whether the electricity consumed is in kg. fat and per kg. SNF, how much whole milk
conformity with the milk produced. Units of powder, skimmed powder, butter oil and white
electricity consumed may be taken from the butter are used for producing milk and vice-versa

50
 Dairy Industry

i.e. from, how much milk how much whole milk Income Rs.
powder, skimmed powder, butter oil and butter By the sale of 92.5 litres of toned milk 2,312.50
are produced, detailed sales of milk and milk (3% fat) @ Rs. 25/ litre
items. Joint Director of Animal Husbandry and By sale of 2.88 kg ghee @ Rs. 450/ Kg. 1,296.00
Dairy (Ministry of Agriculture) is the controlling Total 4,508.50
authority in the State Government and Joint
Gross margin per 100 litres after 1,308.50
Secretary, Dairy, (Ministry of Agriculture) in the deduction of purchase cost
Central Government. Units handling milk more of milk @ Rs. 3, 200/-
than 10,000 and up to 75,000 litres per day (Rs. 4,508. 50–3, 200)
have to submit the half yearly return to the State Gross margin/ litre of milk 13.09
Government and those handling more than
75,000 litres per day to the Central Government. Case 2: Buffalo milk-100 litres (6% fat, 8.5%
This half yearly return may be helpful in detecting SNF) – Converted to butter and skimmed milk
the discrepancies and thereafter in deciding the powder. Calculate yield per 100 litres of milk.
mode of inquiry/ investigation.
Products Kg
11.11 Certification: For ISI and Agmark,
dairy units have to comply with the standards Butter 7.2
laid down by the Bureau of Indian Standards. Ghee, after conversion of 5.76
These standards have been formulated by 7.2 kg of butter
specialized Sectional committee of the BIS
Skimmed milk powder (SMP) 7.8
Food & Agricultural division council (FADC),
which have representatives of manufactures,
consumers, Government agencies, scientists Option-1(SMP and Butter) Rs.
and technologists. These standards require the By sale of 7.8 kg SMP @ Rs. 120/kg 900.00
producers to disclose the ingredients of the
By sale of 7.2 kg butter @ Rs. 500/kg 3,600.00
products in alphabetical order and also batch
wise sampling. The information gathered from Total 4,500.00
this department may be useful in knowing as Gross Margin per 100 litres of milk after 1,300.00
to whether the assessee has been found guilty
deduction of purchase price of milk at
of any violation of any standards which has the
Rs. 3, 200/- (Rs. 4,500–3,200)
effect on determination of income.
Gross margin/ litre of milk 13.00
11.12 Gross Profit: Following examples
illustrate working of the gross profit margin and
Option-2(SMP and Ghee) Rs.
applying of conversion ratio:
By sale of 7.8 kg SMP @ Rs. 120/kg 900.00
Case 1: Buffalo milk–litres (6% fat, 8.5% SNF) –
By sale of 5.76 kg ghee @ Rs. 550/kg 3,168.00
Sold as liquid milk of 3% fat and balance 3%
fat converted to butter/ ghee. Calculate yield per Total 4,068.00
100 litres of milk. Gross Margin per 100 litres of milk after 868.00
deduction of purchase price of milk at
Toned milk–3.0% fat 92.5 litres (Volume reduction by
7.5 litres i.e. 2.5 times of 3 kg.) Rs. 3,200/- (Rs.4,068–3,200)
Cream (40%) contains 3 kg. fat (in terms of Gross margin/ litre of milk 8.68
volume=7.5 litres)
Ghee conversion
2.88 kg.
@ 96% of cream

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 Techniques of Investigation for Assessment Vol. 5

ANNEXURE–1

Approximate Milk Equivalent of Milk Products

Product kg Product Per 100 kg Milk kg Milk Required for 1 kg Product
Buffalo Milk 6% Cow Milk 4% fat Buffalo Milk Cow Milk
fat +9% SNF +8.5%SNF
Skim milk 85.2 90.2 1.2 1.1
Butter milk 7.6 5.1 13.2 19.6
Cream, 40% fat 14.8 9.8 10.2
Butter 7.2 4.7 13.9 21
Ghee 5.7 3.8 17.5 26.3
Dahi 91 77 1.1 1.3
Chhana 24.3 20 4.1 5
Khoa 21.7 18 4.6 5.6
Conc.milk(50% solids) 30 25 3.3 4
Skim milk powder 9.5* 9.0* 10.5** 11.0**
Whey milk powder 15.5 12.9 6.5 7.8
Cheese Cheddar 13.6 10.4 7.4 9.6
Cottage Cheese 6.9* 6.2* 14.8** 16.1**
Raw Casein (wet) 7.5* 6.8* 13.6** 14.8**
Whey 86.4 89.6 1.2 1.1

*kg per 100 kg of skim milk

**kg skim milk required
Source: Dairy India 1997 (Fifth Edition, Page 364)

ANNEXURE–2

Average Weights of Different Types of Milk and Creams

One Litre of Average Weight

Cow milk (3.5% fat) 1,030 gm
Buffalo milk (6% fat 1,028 gm
Full Cream milk (6% fat) 1,028 gm
Standardized milk (4.5% fat) 1,029 gm
Toned milk (3.0% fat) 1,032 gm
Skim milk (0.01%) 1,036 gm
Cream with 20% fat 1,013 gm
Cream with 30% fat 1,002 gm
Cream with 40% fat 993 gm

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 Dairy Industry

Approximate Yields of Selected Dairy Products from Milk

100 kg Each of Whole Milk Yields
With 4.0% fat 4.75 kg butter
With 4.0% fat 13 kg whole milk powder
With 3.5% fat 9.45 kg cheddar cheese with 37% moisture
100 kg skim milk with 9.5% solids 9.8 kg skim milk powder
16.1 kg cottage cheese
7.5 kg wet casein
3.5 kg dried casein

Source: Dairy India 1997 (Fifth edition) page 370

ANNEXURE–3

Requirement of Milk to Make 1 kg of Selected Dairy Products

To Make One kg of Milk Required
Burfi 3 litres of milk with 6% fat
Butter 13 litres of milk with 6% fat
Cheese (cheddar ripened) 10 litres of milk with 3% fat
Channa 8 litres of milk with 3% fat
Condensed milk 2.44 litres of milk with 3.7% fat,9% SNF
Cream (40% fat) 11.11 litres of milk with 6% fat
Curd/ Dahi/ Yogurt 1 litre of milk
Evaporated milk 2 litres of milk with 4.5% fat 9%SNF
Ghee 18 litres of milk with 6% fat
Gulab jamuns 1 litre of milk with 6% fat
Ice cream mix 1.6 litre of milk with 6%
Khoa 5 litres of milk with 6%
Kurchan 8 litres of milk with 6% fat,9% SNF
Mishti Doi 1.2 litres of milk with 6% fat
Paneer 5 litres of milk with 5% fat
Peda 3 litres of milk with 6% fat
Rabri 8 litres of milk with 6% fat, 9% SNF
Rasagolla 1.5 litres of milk with 3% fat
Srikhand 2.2 litres of milk with 3% fat
Skim milk muska 5 litres of skim milk
Skim milk powder 10.5 litres of skim milk
Whole milk powder 7.5 litres of milk with 4% fat
Source: Dairy India 1997 (Fifth edition) Page 370

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 Techniques of Investigation for Assessment Vol. 5

ANNEXURE–4
FOURTH SCHEDULE
(Milk and Milk Products Order, 1992)
Half Yearly Return
(See of Paragraph 14)
For the period ending……………..
Name of dairy Plant/ Unit/ other:
Establishment/ Premises (with address):

Name of holder of Town/ District State

Registration Certificate ________________________ ____________

Registration Number Date of issue_____________

Stock Position
Fat (MT) Solids-not-fat (MT)
Opening Stock
Receipts
Dispatches
Closing stock

Milk Procurement
Source of Type of Total Total Fat Total **Prices **Prices *Prices Remarks
Procurement milk Qty(MT) (MT) SNF(MT) Rs/kg of Rs./kg of Rs./kg of
milk fat SNF
Village milk Cow
Prod.Coop. Buffalo
Societies Mixed
Milk Producers Cow
Coop. Unions/ Buffalo
Federations Mixed
Other agencies Cow
Buffalo
Mixed

** Annexe details regarding names, location etc. Indicate landed price of milk.
MT – Metric Tonnes
Rs./ kg – Rupees per kilogram

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 Dairy Industry

Reasons for Conservation of Commodities

Total Half Yearly (MT)
Commodities used for________________________
Commodities Whole Milk Skimmed Milk Butter Oil White Butter
Powder Powder
Combined milk for sale
Other milk products

Product Manufactured
Product Qty Average Product Qty Average
Produced (MT) Fat/ SNF (MT) Fat/ SNF
1. White Butter

2. Table butter

3. Ghee

4. Skimmed milk powder

5. Whole milk powder

6. Infant food

7. Malted food

8. Chocolate products

9. Cheese

10. Any other article containing

milk or milk product
11. Ice cream

12. Yogurt

Qty. – Quantity
MT – Metric Tonnes
SNF – Solid-not-fat

Milk Sold Packing (Specify) Total Quantity Average Consumer Price

Directly in Towns During the Period Fat/SNF (Rupees per Litre)
(Name) (.000L)

Milk Supplied to other Total Qty. during the Average Price (Rupees Per Litre)
Dairies (Name of Dairy) Period (.000L) Fat/ SNF

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Techniques of Investigation for Assessment Vol. 5

Product Marketing

Product Opening Stock Quantity Sold Closing Stock Average Selling

During the Period (Metric Tonnes) Ex-Dairy (Rs/ Lit.)
(MT)

1. White butter

2. Table butter

3. Ghee

4. Skimmed milk
powder

5. Whole milk
powder

6. Infant food

7. Malted food

8. Chocolate
products

9. Cheese

10. Any other article

containing milk
or milk product

11. Ice cream

12. Yogurt

Place:
Signature
Date:

56
 Chapter

5
Flour Mills

1. INTRODUCTION
1.1 Wheat and rice provide staple food to
world’s entire population. Wheat is the most
widely used cereal food grain of the world
directly by human species. The following table
shows production of five major cereal crops in
the world:
Table 1: Food Grain (MMT)
2018 2017 2016 2015 2011 1961
Maize 1074 1047 1087 978 888 205
Rice 517 509 504 495 484 285
products for the family. Large machines are used
Wheat 731 760 761 736 699 222
by food companies to produce mass quantities
Barley 141 142 146 149 133 72 for sale as a commercial good.
Sorghum 59 58 67 66 58 41
1.4 In a commercial mill, the grain is cleaned
1.2 Though maize is a major crop but as far as then “tempered”, which means the grain is soaked
direct human consumption is concerned wheat in water to enlarge its moisture content to make
and rice are preferred cereal grains. Maize is it easier to roll. After it’s tempered, the grain is
mainly used in manufacturing of cattle/ poultry moved through a series of rollers, which break up
feed and for brewing purposes. Wheat grows in the grain into its separate parts: endosperm, bran
every climate. In terms of area and production, and germ. Each Section creates a different type
it is on third place after maize and rice. of four, with separate properties and textures. The
endosperm can be grounded down into a finer
1.3 Flour mills, which are sometimes referred to
texture, so it is used for the white variety. For the
as grain mills, break down the grain into smaller
whole wheat variety, the equipment adds the
parts and separate them. These machines can
bran and germ back in.
range in size from a small version that will fit in
the kitchen, to a large commercial version made 1.5 Different varieties of wheat, grown under
for manufacturing space. Both do essentially diverse conditions of soil, climate and pedigree,
the same thing, with the difference being in the vary greatly in appearance and characteristics.
volume. Small machines are made for personal In appearance wheat may be red or white
use and can usually grind enough grain to make according to the colour of the bran or outer skin

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Techniques of Investigation for Assessment Vol. 5

of the grain; in characteristics it may be hard This white powder is known as Maida or fine
or soft, strong or weak. To the miller the most flour. This fetches the third highest price.
important qualities are strength, colour, flavour
2.2.5 Dalia: As a result of first grinding
and flour yielding properties. In general, red
the bigger pieces of outer layer of wheat are
wheat are stronger than white, but white wheat separated by straining and are known as Dalia.
produces flour of better colour. Its pieces are bigger than that of Rawa. It is
normally consumed with Milk.
2. FLOUR MILLS GRIND
2.2.6 Bran: It is normally known as ‘choker’.
2.1 Flour Mills grind wheat to get various It mainly consists of bran and some poor quality
products used as staple food in a large area of of flour. It is normally used as fodder for cattles.
our country. The main stages of operation are: 2.3 The quality of these products depends on
i. Purchase and storage of wheat. the quality of wheat and the process of grinding.
Different varieties of wheat are grown in India but
ii. Cleaning and preparing the wheat for
wheat flour is normally sold in fewer varieties.
milling.
Various varieties of wheat are ground together
iii. Milling the wheat into maida, suji, atta, and therefore, one quality of wheat flour is sold
bran etc. from a particular flour mill.
iv. Packing, storage and dispatch of finished 2.4 There are two types of flour mills, namely,
goods. Atta chakki and Roller flour mill.
2.2 The different products resulting from 2.5 Atta Chakki
grinding of wheat are: 2.5.1 These are small flour mills, normally
2.2.1 Wheat Flour: This is generally known situated in rural areas and smaller towns. The
as whole meal flour from which Suji and Rawa income of each chakki is generally below
are not separated, and includes bran. The sale taxable limit. Therefore, these are not of much
price is lower than that of Maida. If Suji and importance from the point of Income-tax.
However, following points require to be looked
Rawa has been removed, then the flour sells at
into during investigation of such cases.
cheaper rates.
2.5.2 Normally Atta chakki owners do not
2.2.2 Suji: After first and second grinding the maintain books of accounts. Instead, they
bigger pieces of the outer layer of wheat are maintain a “Pisai register” giving details of
separated by straining and is known as Suji. It weight of grain ground, the amount charged etc.
fetches the highest sale price. in a chronological order. The grinding charges,
2.2.3 Rawa: As a result of the third and now-a-days, vary from Rs. 2.50 to 3.50 per kg
or even higher in bigger towns. It may be noted
subsequent grinding the smaller particles of the
that no standardization of this type of charge
outer layer of wheat are separated by straining. exists. The AO can call for Pisai register to verify
This product known as Rawa, fetches the second gross receipts. The quantity of fuel, i.e. diesel or
highest price. electricity can be correlated with the quantity
2.2.4 Maida: The very finely ground flour is of wheat ground. Normally fuel charges are
strained to remove bran, and the fine flour is 25–30% of Pisai charges.
again ground into a homogenous powder which 2.5.3 Often the owners of chakkies retain ¼ to
is then made to pass through an electric spark ½ kg of flour per 10 kg of the grain ground in
chamber which bleaches the power snow white. addition of the grinding charges. This is known

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 Flour Mills

as “Karda”. It is a regular source of income. The field. Before milling, this debris must be
weight of flour so received can be worked out by removed, and this is accomplished in
finding out the total weight of the grain ground the wheat cleaning Section of the mill.
either from the Pisai register or with the help of Although numerous machines exist to
fuel consumption figures. clean wheat, they are all classified based
2.5.4 It should also be seen whether the person on separation by size, shape, density, and
is running other chakkis at different places either magnetism. Different mills vary greatly
in his own name or in the name other persons with respect to the order of the operations
from local enquiries. There may be indications in in a cleaning process. Usually, one of the
accounts by way of cash credits, other deposits first separations removes any ferrous metal
etc. Sometime Atta Chakki owners have other in the wheat using magnetic separators.
manufacturing units e.g. oil extraction plants, Removing metal early in the process
cotton carding and ginning, masala chakki, helps avoid damage to equipment farther
dhankutti machine (small rice mill) and saw mill. downstream. A milling separator may be
next, to remove sticks, stones, stems, and
2.6 Roller Flour Mill
other plant debris.
In a commercial mill, the grain is cleaned then
Lighter, less-dense components in the
“tempered”, which means the grain is soaked
wheat are removed here via aspiration.
in water to enlarge its moisture content to make
Air circulates upward through the grain
it easier to roll. After it’s tempered, the grain is
moved through a series of rollers, which break up as it is fed into the separator, and lighter
the grain into its separate parts: endosperm, bran material is drawn away from the wheat
and germ. Each Section creates a different type kernels. The wheat then falls onto a sieve,
of four, with separate properties and textures. which allows the wheat to pass through
The endosperm can be grounded down into a but retains stones and larger seeds.
finer texture, so it is used for the white variety. Another sieve follows which retains the
For the whole wheat variety, the equipment adds wheat and allows smaller seeds to pass
the bran and germ back in. through. A disk separator, which separates
2.7 Process Description for Wheat Flour wheat from other grains of equal density,
is also likely to be included in the cleaning
A modern milling operation involves much more process. This machine separates grains
than grinding wheat to a powder. Three general based on shape. Pockets in rotating disks
operations are usually involved: cleaning, accept seeds of certain lengths and reject
tempering, and milling. Cleaning removes those of other sizes. Generally there is
unwanted material; tempering softens the grain, more than one disk separator. One will
making it easier to separate and grind; and accept wheat and another will reject wheat
milling involves grinding the wheat and isolating
to remove both larger and smaller grains.
wheat components of a specific size.
Dirt or mold adhering to wheat kernels
i. Cleaning: Wheat unloaded from is largely removed using a scourer. This
a truck, into a mill elevator contains machine uses a screen or an abrasive
a sizable percentage of non-wheat surface to remove any material adhering
kernel components, termed “dockage.” to the kernel. Materials such as small
Dockage consists of other types of seeds, stones similar in size to a wheat kernel are
underdeveloped or unsound wheat separated based on density in a gravity
kernels, insects, stems, stones, and other table or dry stoner. The gravity table is an
debris commonly found in a wheat oscillating inclined plane. Denser material

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Techniques of Investigation for Assessment Vol. 5

such as stones moves down the table in this process have spiral grooves called
faster than lighter material. The dry stoner “corrugations” cut parallel to the long axis
removes the dense material with aspiration of each roll. Generally there are about five
sufficient to raise the grain and allow the roller mills or five “breaks” in the system.
stones to drop out. The germ is removed in the first two breaks,
as is much of the bran. The germ is pliable
ii. Tempering: Is the addition of
and tends to flatten when it goes through the
predetermined amounts of water to wheat
rollers. Bran particles are usually in the form
during specific holding periods. It toughens
of low-density small flakes. These properties
the bran, making it easier to separate from
allow millers to separate the germ and bran
the endosperm and germ. It also softens the
fractions from the endosperm fraction. After
endosperm, allowing it to break apart with
each break, a set of sieves and/ or purifiers
less force. Tempering involves adjusting (aspirators) separates the ground material
the moisture level of the wheat. For soft by size and density.
wheat, optimal tempering brings the grain
to 13.5–15.0% moisture and takes 6–10 iv. Sieving: Small particles are channeled
hr. For hard wheat, the final moisture is into the flour, and large particles are either
15.5–16.5%, and tempering times are removed (as is the case with the germ and
12–18 hr. Incoming wheat is generally lower bran) or sent to the next break (as occurs
in moisture content than this; hence, water for large endosperm pieces). Once the
is usually added and the grain is allowed to endosperm is isolated, the large particles
equilibrate for a period of time. This time that result (called middlings) are reduced
varies considerably based on the hardness in the reduction system to a particle size
of the wheat. Conditioning of wheat refers distribution consistent with flour. This
to the application of heat in the tempering means they must be able to pass through
process to increase the rate of penetration a 136-μm opening. The rollers in the
of moisture into the kernels. Temperatures reduction system are smooth and are
lower than 50°C are employed during operated at low differentials, providing a
conditioning to ensure that the functionality crushing action that yields the fine particles
of the flour components, especially the of flour (although a small amount of shear
gluten, is maintained. is still important). A large percentage of the
particles composing the final flour come
iii. Milling: At this point, the wheat is ready off the reduction rolls. Flour from the break
for milling and starts through the various and reduction rolls may be combined in
systems in the mill. The first machine in many ways to create different types of
almost every mill is the roller mill. Two flour, but it is usually sifted again in the
rolls, one rotating clockwise and the other flour dressing system and passes through
counter-clockwise, are separated by a sieves meets the particle size standard
small distance called the “gap.” One of the for flour. Larger particles are recirculated
rolls usually rotates faster than the other back to the appropriate point in the
one. Consequently, at the nip, due to the grinding process. The flour may be further
rotation of the rolls the wheat experiences treated with chlorine or a bleaching agent
a shearing action as well as a crushing depending on the requirements of the
action. The first roller mills are employed customer. In the mill feed system, the germ
in the break system. This is the part of the and bran are separated from each other,
milling operation designed to remove the and adhering endosperm is removed.
endosperm from the bran and germ. Rolls The coarse bran from the early breaks is

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 Flour Mills

termed “bran” and composes about 11% 3.2 The mills also keep subsidiary and
of the total products from the mill. The miscellaneous records, such as, Order book,
finer branny material from the later steps purchase invoices, sale bills, empty gunny bag
is called shorts; it represents about 15% of register, store register, gate pass record, delivery
the total. Germ is generally recovered at records, vouchers etc. In States like Uttar Pradesh
the rate of about 2–3.0% of the total wheat and Uttaranchal where the wheat is subject
depending on the type of equipment used. to Mandi tax, the flour mills are authorized to
These special products or ingredients for purchase the wheat from the farmers directly. It
human consumption are usually sold as is mandatory to maintain the ‘Satti Bahi’ where
animal feed in our country. all incoming and out-goings of wheat and wheat
products are recorded, along with the day-to-
3. ACCOUNTS MAINTAINED day stock register. The wheat is purchased from
the farmers on Receipts (Form 6R) and from the
3.1 Apart from the usual books of accounts Commission Agents on Receipts (Form 9R).
like Cash book, Journal, Ledger etc, Roller mills
maintain certain distinctive books of accounts
4. TAX INVESTIGATIONS
which are as under:
4.1 Unaccounted Milling of Wheat
3.1.1 Wheat Receipt Register: This is an
important register as it indicates order-wise 4.1.1 Unaccounted milling of wheat and
details of delivery order, number and weight of manipulation in quantities of products are not
bags received, origin of the stock etc. directly reflected in the books but they can be
checked by referring to power consumption. The
3.1.2 Wheat Stock Register: This provides main power for production is electricity or diesel.
details regarding daily opening stock, grain Normally for grinding of one quintal of wheat
received, grain issued for grinding, and closing 5.5–7.5 units of electricity or 1.75–2.25 litres of
stock in gunny bags and weight. diesel is consumed. Verification of consumption
3.1.3 Production Register: This records the of electricity/ diesel against quantity of wheat
output of the mill showing date-wise details of milled for the peak period with that of the other
wheat crushed and production of all items like periods during the year or for earlier years can
flour, suji, maida, bran, broken wheat dust, bring out the manipulations.
and husk. 4.1.2 In one case the AO while scrutinizing
3.1.4 Sales Ledger: This shows the opening a large payment for electricity charges came
stock, production, issues and closing stock of across the fact that wheat milled for a particular
each day in respect of the various products month was more than what the Wheat stock
detailed above. register was indicating. On being confronted
with this anomaly, the mill came up with the
3.1.5 Wheat Godown Register
plea that through some stock of wheat had been
3.1.6 Grinding Register (i.e. total grain in purchased the same remained to be entered in
godown and in process). the Stock register through oversight. The reason
3.1.7 Hourly Production Register offered was not found in order and consequently
resulted in addition to its income.
a. Daily production report for goods received.
4.2 Manipulation in Quantities of
b. Gate keepers report for goods received.
Production: The product yield from a given
c. Wheat receipt notes. weight of wheat will vary with the quality of wheat,

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state of the machinery etc. However a rough 4.3.3 The sale proceeds of such suppressed
indication of proportionate yields is given below: production of maida, suji etc. is difficult to
detect from books of account, unless the same
Product Yield   %
is introduced by way of cash credits or it finds
Maida 45–50 its way in the form of investments outside the
Rawa or Suji 10–15 books. Proper scrutiny of Gate pass register may
reveal such suppressed production.
Resultant Aata about 20
4.4 Milling Gain
Bran about 20
4.4.1 One of the most important aspect of
The AO should analyse the Production register as milling is the milling gain. This is nothing but
this is the base for all the subsequent production a moisture gain. Normally wheat has 9–13%
charts. While analysing the production figures the moisture while its products are sold with moisture
AO should note the variations in proportionate of 12–15%. As such in the process of milling,
yield. While slight variation is bound to occur moisture to the extent of 3–5% gets added to the
in any given mill, it is the significant variation
wheat. This gives the additional product weight,
which should attract attention. These figures
called milling gain.
should then be cross-checked with the Stock
register for each product. Sale bills or vouchers 4.4.2 Gross milling gain, though essentially,
relating to the relevant product should also be attributable to the addition of water, is a function
scrutinized very closely. Similarly, the entries in of other factors too. These are, the structural
the Gate pass register should be verified with the characteristics of the wheat milled, the efficiency
entries in Stock register. of the milling machinery, and the outside
4.3 Inflated Percentage of Refraction temperature. The last two factors remaining
constant, gross milling gain depends on the
4.3.1 A common method of suppression of variety of wheat. Water is added to wheat to
profit by the flour mills is inflating the percentage
facilitate efficient milling. The optimum amount
of refraction. Refraction means impurities in
of water that has to be added depends on the
wheat, mainly small gram, shriveled wheat, grain
quality of the wheat milled. Any excess of water
husks etc., which are removed from wheat during
over the optimum amount will, besides reducing
the cleaning process. Normally, it is collected in
gunny bags through the outlets in the machines, the efficiency of milling, lead to the formation
such as receiving separators. These gunny bags of lumps in the finished products viz. maida,
are weighed and daily record is kept of the same. suji, and flour—a factor that tells upon the
It is generally sold to the poor or as bird feed at quality of the product. Another limiting factor is
low rates. the Prevention of Food Adulteration Act which
prescribes certain tolerance limits in respect of
4.3.2 The sale proceeds of refraction form a
the moisture content of the finished products.
part of the income of the mill. Depending on
the quality of the wheat, refraction ranges from 4.4.3 To arrive at the net milling gain/ loss,
2.5–5% of the total weight of the wheat milled. it is necessary to ascertain the loss of weight
Some mills suppress the output of maida, suji etc. occurring on the following counts:
by showing a high percentage of refraction. This
a. Pilferage and spillage that occur from the
method is highly attractive to the mill, because
time wheat is purchased to the time it is
while maida and suji would sell at about say
brought into the mill.
Rs. 600/-per quintal the corresponding rate for
refraction may be about Rs. 200/-per quintal. b. Evaporation during the above interval.

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 Flour Mills

c. Evaporation that takes place when wheat verify them with the books of account. Copies of
is kept stored. account of major customers must be obtained
d. Cleaning of wheat. and cross-verified with the assessee’s books.
4.6 Manipulation in Purchase and
e. Evaporation during milling.
Utilization of Gunny Bags: The millers at
f. Spillage during milling and packing times record inflated figures of issues in the Gunny
g. Evaporation that takes place during the bags register, thereby understating the closing
time when the finished products are kept stock. The millers resort to this manipulation
stored. in conjunction with bogus purchases of gunny
bags. Proper verification of purchase would take
Normally, milling operations result in a net care of such bogus claims. As for the issues, it
milling gain, often as high as 3%. In Northern will be necessary to judge their reasonableness
region, flour mills disclose milling gains ranging with reference to the total quantity of products
between 0.5–2.0% only. milled and packed. Here correlation with the
4.5 In short the quantitative analysis of Gate pass book will also be necessary.
production can be summed up as under: 4.7 Verification of Sales
Particulars Weight-kg.
4.7.1 The verification of sales in these cases
Gross weight of wheat purchased 101. is no different from that in other cases. Thus
Net weight of wheat recorded in books of verification will cover not only the quantity sold
accounts after deducting weight of bags 100 but the rate at which the products have been
Less-shortage on accounts refraction in milling sold. It will be a good idea to obtain copies of
process, and impurities 2.5. account of the assessee from its major customers.
Net weight of wheat actually milled (no loss of 4.7.2 For selling atta, maida, suji, the dealers
visible shortage is normally allowed, because have to obtain the license of food grain from
purchases are made on gross weight basis but the Regional Food Controller Department.
recorded on net weight basis 97.5. Since they are basically registered dealers there
Weight gain on account of milling gain 03 Net identity can be verified. While verifying sales,
weight of end products like flour, suji, maida, the quantity of stocks physically lifted by the
rawa, dalia, bran 100.5. customers during a period may be verified with
It is difficult to verify the reasonableness of the the stocks available with the miller during the
disclosed net milling gain which may vary from said period. Such detailed verification will help
say 1.0–2.5%. If the AO, having regard to the in detecting unaccounted stocks.
totality of the circumstances of a case, feels that
4.7.3 Under-invoicing of sales is a common
the assessee has not fully disclosed the net milling
gain, he should examine closely the internal method of concealment of income. The
evidence available in the various records, and understatement of price may be resorted in
registers maintained by the assessee. Particularly conjunction with the misstatement of grade or
the details recorded in the Gate pass register must quality of product sold. For example, the mill
be correlated to the details in Railway receipts/ might have actually sold fine quality maida, but
Lorry receipts (in terms of weight and number of the invoice shows sale of medium grade. The
bags). It may also become necessary to collect price difference is either collected separately by
details of the goods transported by the assessee miller and not brought into the books at all or
from Railway station(s) and Lorry operators and introduced as fictitious cash credits.

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Techniques of Investigation for Assessment Vol. 5

4.7.4 Periodically the food products are in iii. Purchases.

short supply and during these periods they iv. Yield of final product and by product.
usually command on money. The AOs should
be aware of such periods of short supply and v. Sales of final product.
subject the sales affected during such periods to vi. Sales of bye products.
close scrutiny.
vii. Sales of gunny bags (Bardana).
Important Issues to be Investigated:
viii. Evidence regarding transportation of raw
i. Stocks. material, final product and bye products.
ii. Power/ Electricity Consumption.

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 Chapter

6
Food Processing and
Canning Industry
1. INTRODUCTION
1.1. Food processing is basically the
transformation of agricultural produce or animal
products from its basic raw form into food or
from one form to another. Food processing
enables this conversion by subjecting the
agricultural produce to one or several processes
right from the simple process of grinding grains
for making flour to complex industrial processes
for producing ready to eat foods. In the field of
food processing, these processes are classified
into three stages, as follows: attractive and palatable. Canning is also a part
of food processing industry aimed at preserving
a. Primary food processing, by which food for long duration. Canning process involves
agricultural produce is subjected to simple placing foods in jars or similar containers and
processes like drying, threshing, milling, heating them to a temperature that destroys
grinding, removing shells/ kernels, cutting, micro-organisms that would have otherwise
smoking, freezing, pasteurizing, etc. This
caused food to spoil. During this heating process
process produces food ready to use or
air is driven out of the jar and as it cools a vacuum
ready to eat.
seal is formed. This vacuum seal prevents air
b. Secondary food processing, by which food from getting back into the product bringing with
is made out of ingredients ready to use it contaminating micro-organisms.
through processes like baking, fermenting,
1.3 Techniques for processing and preservation
frying, roasting and several other cooking
of food have been in vogue throughout the world
methods.
from early days. Scientific methods of processing
c. Tertiary food processing is the commercial and preservation, however, came to be
production to make ready to eat food or developed only around middle of the nineteenth
heat-and-serve food, which has a long century. The industry gained momentum after
shelf life and which can be preserved. the outbreak of first world war, when supply of
1.2 Processing of food serves twin purposes large quantities of vegetables, fruits, meat etc.
of making food stay longer and make it more had to be arranged for the fighting forces of

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allied countries. Further impetus to this industry present era of globalization and open market, there
was provided by the second world war. is a vast scope for both investors and exporters
1.4 Food processing industry is of enormous in food processing industries. The industry
significance for India’s development as it has has the highest number of plants approved by
linked economy, industry and agriculture in the US Food and Drug Administration (FDA)
India, efficiently and effectively. The three pillars outside the USA. India’s food processing sector
being together have synergized the development covers fruit and vegetables; meat and poultry;
process and promoted the growth of the nation to milk and milk products, alcoholic beverages,
a great extent. This also helped to minimize the fisheries, plantation, grain processing and other
huge wastage of perishable agricultural produce. consumer product groups like confectionery,
In terms of investment in fixed capital, registered chocolates and cocoa products, Soya-based
food processing sector is growing annually at an products, mineral water, high protein foods
average of 15.60 per cent during six years ending etc. The most promising sub-sectors includes–
2014–15. As per the ASI 2014–15, the fixed Softdrink bottling, Confectionery manufacture,
capital in FP industry stood at Rs. 1.92 Lakh Fishing, aquaculture, Grain-milling and grain-
Crore. Cent per cent FDI is permitted under the based products, Meat and poultry processing,
automatic route in food processing industries– Alcoholic beverages, Milk processing, Tomato
manufacturing sector. FDI is also allowed paste, Fast-food, Ready-to-eat breakfast cereals,
through approval route for trading, including Food additives, flavors etc. Food Processing
through e-commerce in respect of food products Industry is the most important segment in the
manufactured and/ or produced in India. world because it has major contribution in the
1.5 India is the world’s second largest producer survival of the people in the societies and Gross
of food next to China, and has the potential of Domestic Product in India.
being the biggest with the food and agricultural
1.7 Food processing has been identified as
sector. The total food production in India is likely to
one of the priority under “Make in India” with
double in near future and there is an opportunity
a view to attract investment to this sector,
for large investments in food and food processing
Ministry of Food and Processing Industries has
technologies, skills and equipment, especially in
been implementing schemes for development
areas of Canning, Dairy and Food Processing,
of infrastructure for promoting food processing
Specialty Processing, Packaging, Frozen Food/
industries. Mega food parks with common
Refrigeration and Thermo Processing. Fruits
utilities like road, electricity, water supply,
& Vegetables, Fisheries, Milk & Milk Products,
sewage facility and common processing facility
Meat & Poultry, Packaged/ Convenience Foods,
Alcoholic Beverages & Soft Drinks and Grains like pulping, cold storage, dry storage and
are important sub-sectors of the food processing logistics are being promoted in areas with strong
industry. A health food and health food agriculture resource base.
supplement is another rapidly rising segment
of this industry which is gaining vast popularity 2. STAGES OF CANNING OF FRUITS
amongst the health-conscious. Apart from this, AND VEGETABLES
organically grown food and food products are 2.1 Sorting and Grading: After preliminary
also gaining popularity day by day. sorting, fruits and vegetables are graded. This is
1.6 India is one of the world’s major food necessary to obtain a pack of uniform quality as
producers but accounts for less than 1.5 per cent regards size, colour etc. which can either be done
of international food trade. This means that in the by hand or with the help of grading machines.

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2.2 Washing: Graded fruits and vegetables 2.7 Labeling, Storing and Packing: The
are washed with water in different ways, such cans are then labeled by hand or by machine,
as soaking or agitating in water, washing with and packed in strong wooden cases.
cold or hot water, sprays, etc. Agitation of the
washing water is effected generally by means of 3. CANNING OF DIFFERENT FRUITS
compressed air or a force pump or a propeller
type pump. 3.1 Apples: Apples are not canned to any
great extent. Canned apples, which are usually
2.3 Peeling, Coring and Pitting: The available in large packing, are generally used
washed fruits and vegetables are then prepared in pies. Apples are also used to prepare apple
for canning by peeling, coring, blanching etc. juices, ‘murabba’, shakes and a host of other
They can be peeled in a variety of ways, i.e. (i) products.
by hand or with knife; (ii) by machine; (iii) by
heat treatment; and (iv) by lye solution. 3.2 Bananas: Banana is one of the most
important fruit crops of India. Recently, an
2.4 Can-Filling, Syruping, Exhausting and excellent method for canning banana has been
Sealing: The cans are washed with water or developed in combination with a number of
subjected to a steam-jet to remove any adhering other fruits in the form of salad.
dust or foreign matter. Automatic can-filling
machines are in use in large canneries in many 3.3 Cherries: Cherries are grown in Kashmir
countries, but choice grade of fruits are generally Valley. There are three kinds of cherries-Sweet
filled by hand to prevent bruising. Hand filling varieties, sub-acid varieties, and acid varieties.
ensures a properly graded pack. In India, hand They are packed in barrels of brine containing
filling is the most common practice. calcium hydroxide, sulphur dioxide, and
(occasionally) alum. They are also canned in
2.5 Processing: The term ‘Processing’ as used sugar syrup solutions. Cherries are used in
in canning technology, means heating or cooking preparing various combinations besides, ice-
of canned foods to kill bacteria. Since fruits and creams and salads.
vegetables vary considerably in their composition
and texture, it is difficult to lay down any hard 3.4 Grapes: Among grapes, Muscat and
and fast rule about the temperature as well as Thomson seedless are good canning varieties.
time required for processing; However, generally Quality grapes have recently been developed
three types of cookers are used for canning fruits in Maharashtra. Syrups of 20–40 Brix are
i.e. (i) open type cookers, (ii) continuous non- used. Loss in canning is estimated to be of
agitating cookers and (iii) continuous agitating the order of nearly 16%. This factor needs to
cookers. be critically examined while assessing cases of
grade-processors which have diverse use. Grape
2.6 Cooling and Testing for Defects: After juices are also used for preparation of various
processing, cans are cooled rapidly to stop the beverages and concentrates and have medicinal
cooking process and to prevent stack-burning, use also.
especially in the cans at the centre of large stacks,
3.5 Lichies: Lichies are found in Uttar Pradesh,
where they remain for several hours. Cooling is
Bihar and Orissa. For canning, the fruit should
done by (i) immersing or passing the hot-cans
be tree-ripened. Plain cans and syrup of 40 Brix
in tanks containing cold water; (ii) by spraying
with 0.5% citric acid are used for this purpose.
with jets of cold water; (iii) by turning cold water
into the pressure cooker in the case of canned 3.6 Mangoes: A number of varieties of
vegetables; or (iv) by exposing the cans to air in mangoes are found in the country. This is grown
small lots, when water supply is scarce. in almost all parts of India. Since mango is an

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extremely important commercial fruit of India, green jack-fruit etc. Canned vegetables mainly
its canning and preservation is done on a very cater to the requirements of armed forces, BSF,
large scale. About 1.5 lb of unprepared fruits are CRPF, hotels & big restaurants etc. as demand
required for a one lb. butter size can. Percentage from the general public is not large for canned
of loss may vary. It is also used in preparation vegetables.
of pickles, chutney, concentrated juices, pies,
jams squash and some health products & has 5. DEHYDRATION OF FRUITS AND
tremendous export market. VEGETABLES
3.7 Oranges: Oranges are canned to a limited 5.1 A number of other processes are employed
extent only. Malta, ‘Sathgudi’ and the loose in the food processing industry, other than
jacket oranges of Nagpur and Coorg have been canning for preserving food. Understanding of
found suitable for canning. Oranges are most these processes will help the AO to look for the
commonly used for preparation of health tonics, areas which provide scope for manipulation of
different grades of squashes and juice etc. accounts.
3.8 Papaya: Papaya slices or cubes can be used
5.2 Sun-drying is one of the oldest methods of
for canning. About 0.5% citric acid is added to
preservation known to the mankind. With the
the syrup. Pears are grown in abundance in the
advance in scientific knowledge, drying is now
Kulu and Kashmir valleys, and to some extent in
done in closed chambers by mechanical means
the hilly areas of South India. The peeled and
under controlled conditions and this process is
cored fruits are usually placed in 1–2% common
known as dehydration.
salt solution to prevent browning.
5.3 The quality of fruits and vegetables is
3.9 Pineapples: Pineapples are grown mostly
influenced by their water content. In dehydration
in Assam, Bengal, Godavari district, and the
west coast of South India. Giant Kew and Queen process, the water content of the material is
are two important varieties. Pineapples are cut reduced to a level where microorganisms may
into rings, cubes or tit-bits and then canned. The not be able to grow and spoil the food material.
trimmings and cores can be used for preparing Dehydration reduces the weight of the material
pineapple juices or squash or slices. and, therefore, packing and transportation costs
of dehydrated material are far less than that of
the fresh material. Dehydrated material can also
4. CANNING OF VEGETABLES
be compressed, thereby affecting further savings
4.1 Vegetables such as peas, carrots, beet roots, in cost of packing and transport.
tomatoes, asparagus, etc. are canned in large
quantities in different parts of the world. 5.4 Both fruits and vegetables can be
dehydrated. Fruits which are usually dehydrated
4.2 Peas in India can be canned out of season are mangoes, bananas, apples, apricots, grapes,
also. For processed peas, the covering liquid peaches, pears, figs, dates, berries etc., whereas
should contain about 1.5 lb, of common salt, vegetables which are subjected to dehydration
5 lb of sugar, and about 4–5 oz. of a 2% solution in this country are spinach, potatoes, peas,
of a good green colour per 10 gallons of water. cauliflower, cabbage, beans, lady fingers,
4.3 Carrots, cabbages, potatoes, cauliflower, onions, tomatoes, carrot, beet, brinjal, bitter
tomatoes, etc. are canned in brine either in their gourd, pumpkin, etc.; though ‘peas’ occupies
natural form or in curried style using spices, pride of place among the dehydrated vegetables
fat etc. Attempt is also being made to pack in India. Nowadays dehydrated onions are also
indigenous vegetables like brinjal, lady fingers, being exported from India.

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5.5 Frozen Food: This is very big segment and these trays are so stacked that the fumes
in Food Processing industry and includes both may react readily. The sulphur needs to be free
raw/ ready to cook/ fry/ microwave. These foods of oil. Vegetables are often given a sulphitation
comprise of vegetarian and non-vegetarian treatment i.e. treated with sodium or potassium
food items. The big players in this segment are sulphite or bi-sulphite solutions. A 50:50 mixture
“MacCain”, “Kenventer”, “Magson” etc. of 0.6% sulphite and 0.6% bisulphite solutions
5.6 Fruit and Vegetable Seeds: There gives very good results.
are various edible seeds extracted from fruits 6.1.4 Drying or Dehydration: The fruits and
and vegetables alike. These seeds are dried/ vegetables are then loaded into trays. Trays are
dehydrated and then sold in the market. Seeds available in various sizes (2’ × 3’, 3’ × 3’, 3’ × 6’,
are rich in nutrients and have many health 3’ × 8’) and may have slotted or solid bottoms.
benefits. These small but mighty kernels are Trays may be made of wood or galvanized iron.
high in vitamins and minerals the body needs However, aluminum trays are preferred because
to function at peak performance. Seeds are of their non-corrosive property. The trays may
extremely versatile and can be incorporated be lubricated with mineral oil to prevent sticking.
easily into a variety of different recipes. Need Drying may be done in various types of drier such
more energy? Want a slimmer waist? There’s as tray or chamber drier, kiln drier, tower or stack
a seed for that. Some examples are pumpkin drier, cabinet drier, tunnel drier etc. Drying may
seeds, wild rice, quinoa, flax seeds, hemp seeds, be done by natural circulation or by forced draft.
sunflower seeds, pine nuts etc.
6.2 Changes in Weight and Dehydration
Ratios: Weight of fruits and vegetables is
6. PROCESSES OF DEHYDRATION
normally reduced due to the removal of
6.1.1 Sorting, Grading and Washing: The moisture in the process of dehydration. There
first operation in the dehydration of fruits and is loss at different stages of processing such as
vegetables is sorting, grading and washing. washing, peeling, cutting, blanching of fruits and
6.1.2 Peeling and Blanching: Fruits and vegetables. Reduction in weight is expressed as
vegetables are then peeled. Peeling is done by dehydration ratio.
hand with knives or by abrasive peelers. Some 6.3 Packaging: Dried vegetables are
fruits are peeled by dipping them for a short compressed into blocks and packed. They are
period (about 3 minutes) in a boiling solution of heated to 60–70  ºC in the current of warm air
1.5 to 2.5% caustic soda or lye. In some cases, and pressed in steel moulds of 130–200 kg/sq.
fruit or vegetable is scaled for 0.5–1 minute in cm. for a short period of 10–45 seconds. This
boiling water to loosen the peel. After peeling the treatment is suitable for vegetables containing
material, same is thoroughly washed for removal high percentage of soluble solids e.g. carrots
of peel. Fruits are then cut into pieces and their etc. However, in the case of leafy vegetables
inner unwanted material such as stones, seed like cabbage which are rendered brittle by
and core removed. dehydration, conditioning in hot and humid
6.1.3 Treatment with Sulphur Dioxide air, to make them flaccid is necessary before
Fumes: Fruits are often treated with sulphur applying pressure. The compressed material is
dioxide fumes before drying. Sulphur dioxide packed in the containers after they have been
fumes are obtained by burning sulphur (about treated in phosphate or chrome bath to prevent
2–4 kg. per ton of fruit). Fruits are placed in trays corrosion.

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7. JAMS, JELLIES, AND jelly. It is generally agreed that pectin form jellies
MARMALADES when mixed with proper amounts of sugar, acid
7.1 Among preserved fruits, jams, jellies and and water. All these constituents must be present
marmalades form an important class or products. in a particular ratio for making a good jelly. With
Basically, all these products are alike, i.e. all fruits more sugar, the jelly becomes stiffer. Acid causes
are preserved by adding sugar. Jams, jellies, jelly to be firmer but if the acidity is too high,
and marmalades are normally prepared from jelly may become syrupy.
cut fruits. 7.3.2 For preparation of jellies washed, peeled
(if required) and trimmed fruits are cut into thin
7.2. Jams
slices and then cooked in water for obtaining an
7.2.1 The fruits are washed thoroughly, then extract. Grapes are cooked in their own juice and
sorted. They may be peeled if peeling is required no water is required to be added. Other high juice
and then trimmed to remove undesirable containing fruits like berries are merely crushed
ingredients. The washed fruits are pulped by and boiled. In case of fruit like guavas, sometimes
cooking with water and then pulp is screened. a second or even a third extraction is obtained
Normally in a factory, boiled or stemmed fruits are and these extracts are mixed with the first extract.
pulped in a pulpier and then required quantities In commercial practice, the juice is extracted from
of sugar, pectin and other additives are added. the cooked fruits in a pulpier or screw press.
Jam is prepared by boiling the whole pulp with
sugar to a moderately thick consistency without 7.3.3 The strained and clear juice is mixed
retaining the shape of the fruit. with pectin, acid, sugar and other ingredients
according to requirements. The mix is
7.2.2 The proportion of sugar to fruit depends
concentrated by boiling at 104–105  ºC in open
on the variety and ripeness of the fruit though the
steam jacketed kettles, skimmed if necessary,
quantity addition is to be so adjusted as to ensure
and boiling is to be continued until a jelly of
maximum strength to the pectin-sugar-acid gel.
desired consistency is obtained.
There has to be 30–50% invert sugar or glucose
in the finished product to avoid crystallization of 7.4. Marmalades
the cane sugar (sucrose) during storage.
7.4.1 Marmalade is a jelly in which fruit peels
7.2.3 The mixture of fruit, sugar and pectin is and pieces of fruits are also mixed. Preparation
then concentrated by heating at about 104  ºC of marmalade is similar to jelly making except
under pressure in a steam jacketed kettle. In that pectin and acid contents of marmalades
some cases, concentration in vacuum pan at should be kept slightly higher.
low temperature (65–75   ºC) is preferred, as
this prevents loss of vitamin C. The product 7.4.2 Marmalades are usually made from citrus
is then poured hot in sterilized wide mouth fruits like orange, lime, lemon and grapes. They
glass containers or cans, and pasteurized at are prepared from single or mixed fruits. Peels
82  ºC for 30 minutes. Jams containing higher are cut into shreds ¾“-1” in size and about
concentration of sugar (70% or above) is kept 1/32“-1/20” thick. When peels become tough
well in most climates and pasteurization may not they are boiled as such with sugar solution and
be necessary. then softened before use by boiling with water for
10–15 minutes or by boiling in 0.25% solution
7.3 Jellies of soda ash or 0.1% ammonia solution. Peels
7.3.1 Jellies are clear, transparent and viscous. could be heated in an autoclave at 115–120  ºC.
Pectin, acid and sugar are the three essential After softening, they are to be kept covered with
substances required in the manufacture of fruit water for use later on. Prepared peels are cooked

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with fruit juices, sugar and other ingredients to 9. FRUIT JUICES, SQUASHES, AND
the jellying point. Material is cooled to 65–800 CORDIALS
C. After cooling, marmalade is filled into jelly 9.1 Fruit juices are preserved in different
glasses or jars and can be sealed airtight, or forms such as pure juices, squashes, cordials,
packed in cases. When it is filled in jelly glasses, fermented juices etc. Pure fruits juice or
it is allowed to set overnight and sealed next unfermented fruit juice is natural-juice pressed
morning with hot paraffin wax. out of a fruit, and remains practically unaltered
in its composition during its preparation and
8. CHUTNEYS, SAUCES AND PICKLES preservation. As against this, fruit juice beverage
is a fruit juice which is considerably altered in
8.1 Chutneys, sauces and pickles of various
its composition before consumption. It is to be
kinds are prepared in almost all Indian homes. diluted before being served. Fruit juice squash
They are also made on a commercial scale from consists essentially of strained juice containing
fruits such as apples, peaches, plums, apricots moderate quantities of fruit pulp to which cane
and mangoes and vegetables like turnips, sugar is added for sweetening. Fresh juice cordial
cauliflower, carrots, etc. Onion, garlic, spices, is a sparkling and clear sweetened fruit juice
herbs etc. are added for flavour whereas vinegar, from which all the pulp and other suspended
common salt and sugar are used to make them material stand completely eliminated, e.g. lime
more palatable. juice cordial.
8.2 Chutneys: A good chutney is palatable 9.2 Selection and Preparation of Fruit:
and appetizing. Raw fruits or vegetables are The variety of fruit, its maturity, and the locality
generally cut into pieces or made into slices of in which is grown have a marked effect on its
the desired size and cooked till they are soft. flavour and quality. Best juices are therefore
Slow cooking at temperatures below the boiling extracted from freshly picked, sound and suitable
point, yields better results than brisk treatment at varieties. Fully ripe, mid-season fruits particularly
a comparatively higher temperature. Onion and citrus fruits yield juice superior to that of early
garlic are added in the beginning for mellowing or late picked fruits. Decayed or damaged fruits
their strong flavours. Spices are coarsely do not yield good juices. Some cull fruits, i.e.
powdered before they are added. Sometimes a undersized, oversized, malformed or blemished,
vinegar extract of spices is used instead. which are not readily salable as fresh fruits, can
also be used for production of juices.
8.3 Cooking Process: Sweet chutneys are
9.3 Extraction of Juices: The method of
usually cooked to the consistency of jam to avoid
juice extraction will differ with the structure and
fermentation during storage. Where vinegar is
composition of the fruit. Generally, juice from
used in large quantities, the amount of sugar fresh fruits is extracted by crushing and pressing
may be kept low in view of the fact that vinegar them. The juice during extraction should not be
itself partly serves as preservative. unduly exposed to air as it will spoil its colour,
8.4 Bottling: Only clean dry bottles, sterilized taste and aroma and also reduce the vitamin
in boiling water ought to be used when they are content. For products like tomato juice, special
still warm. If containers are not properly cleaned, extraction has been recently designed for
fermentation caused by some fermentative minimizing absorption of air.
organisms adhering to their walls is likely to spoil 9.4 Straining, Filtration and Clarifications:
the chutney. It is safer to pasteurize the filled Fruit juices after extraction always contain
bottle (1 lb. size) for about 30 minutes at 180  ºF. varying amounts of suspended matter which

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consists of broken fruit tissue and proteins in to can exterior, vacuum in the can, volume
colloidal suspension. Coarse particulars of and nature of filling medium, drained weight
suspension in juices are either removed by of contents as percentage of water capacity of
straining through non-corrodible metallic screens the can, disintegration of the material, colour,
or by sedimentation. texture and flavour of the product and freedom
9.5 Preservation of Fruit Juices: Freshly from extraneous material. Sodium Chloride and
extracted juices are very attractive and have Citric Acid in filling brine (in the case of brine
good taste and aroma but deteriorate rapidly if packs), proportion of water in filling medium (in
kept for some time. To retain the natural taste oil packs), commercial sterility and maximum
and aroma of a juice it is necessary to preserve limits of toxic elements in all such commodities
it immediately after extraction. Various methods are prescribed by the appropriate authorities.
of preservation employed are-(i) pasteurization; 10.4 Dehydration of fish and accelerated freeze-
(ii) addition of chemicals, (iii) addition of sugar; drying process is in vogue in advanced countries
(iv) freezing; (v) drying, and (vi) filtration. Other as a means of preserving perishable foods of
methods such as preservation by pressure or all kinds. One advantage of this process is that
by gases or by electric current are not generally refrigerated conditions of storage or transport
used at present. are not required and the dehydrated fish
can be stored and transported at normal
10. FISH PROCESSING temperatures only.
10.1 Fishes are perishable and spoilage sets in
soon after their landing. In the tropical climatic- 11. MEAT PRODUCTS
conditions obtaining in major parts of India, 11.1 Meat is largely consumed fresh in India.
deterioration is rapid. Before preservation, they Meat animals include cattle, buffaloes, sheep,
are washed with clean water to remove the goats and pigs. Besides, poultry contributes to
slime, blood stains, faeces and foreign matter; poultry meat productions, bulk of which comes
long fishes are gutted and thin body cavity is from country hens (desi).
washed. The methods used for preservation of
11.2 Cured, Comminuted and Canned
fish include refrigeration and freezing, drying,
Meat Products: Basically, the curing process
salting, soaking, dehydration, canning etc. The
involves addition of salt to retard bacterial
product obtained by drying, salting and smoking
growth and to promote preservation. Cured ham
is known as cured fish.
and bacon are the major processed products
10.2 Freezing of fish is comparatively a recent produced by meat industry in India. Both
innovation; and this has been so far confined to private and public factories are manufacturing
shrimp and that too for foreign markets. Frozen these products. Technology for preparation of
fish in the internal market is gaining ground. these cured products is well documented and
Canning as a means of preservation of food, consists of salting by stitch pumping followed
particularly fish, is ideally suited for a tropical by dip in pickle or dry rubbing of curing salts.
country like India, because it does not need Most of the regional bacon factories follow
special storage conditions as required in the case the method of stitch pumping-cum-dipping
of frozen fish. in pickle. In general, the cured products are
10.3 Canned products covered by Indian smoked by exposing them to smoke using non-
Standards are prawns in oil, brine and its own resinous hard weeds. Smoking gives the product
juice, lactarius and tuna in oil and crab meat a characteristic flavour and colour, which can be
in brine and solid pack. Specifications relate varied slightly with cure and types of smoke.

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11.3 Commercial canned meat products yield required. The hot meat is then put into a
manufactured in this country are of various types hot pickle, in which it remains for a maximum
such as Indian curries and other westernized period of 24 hours.
products like ham, bacon, luncheon meat, 11.7 Can Filling: There are two ways of filling
corned beef etc. Several canned meats are tin containers one is filling by hand and other
especially produced for infant feeding. A wide is filling through a stuffing machine. Tongues,
variety of meat in combination with vegetables brains, sliced bacon and Vienna sausages, etc.
and gravy are also produced. The time and are placed in the can by hand-filling method;
temperature required for the destruction of and solid and bulky products, such as coned
bacteria depends on the nature of products, its beef, are filled into the cans by means of stuffing
Ph value, presence of curing salts, shape and machine.
size of can, etc. Some products are packed hot
into the can and others sold. Sometimes, the 11.8 Closing the Container: In the hold-and-
meat is cooked or processed before canning cap cans, the cap has a small vent hole in the
to pre shrink the material and give a well-filled centre. The can is placed in a capping machine,
appearance to the contents. where it is soldered. The cans are then placed
in a vacuum machine, where the vent hole is
11.4 Process Involved in Canning of soldered. This type of can is becoming obsolete
Meat: The methods employed in the canning of and is being replaced by open top cans.
different meat products are based on the same
principle. 11.9 Sterilisation and Cooling: In this
industry there is increasing use of the automatic
11.5 Trimming and Cutting: First operation regulation of pressure and that of sterilization
consists of trimming and cutting of the carcasses. method. After sterilization, cans are cooled
In the large factories, cutting portions of boneless under pressure, and then washed thoroughly
meat is done by the use of two sets of disc cutters, using different equipment.
each composed of anything upto 32 circular knives.
11.10 Dehydration of Meat: Preservation
11.6 The Curing Process: Three methods of
of meat is also done through dehydration.
curing in use are as below:
A number of factories have been setup for
Long Curing and Long Continued Reuse dehydrating meat, particularly goat meat. Meat
of the Pickle: The long cure is extensively used slices are brined in 10% saline solution for three
in Britain for curing brishets and tongues. After minutes, spread out on trays and dried for 8–10
varying number of days, according to the idea of hours in dehydration tunnels maintained at
individual canner, meat is taken out and cooked. 63–68  ºC. The slices appearing as flakes are
The used pickle is reinforced with salt, saltpetre salted, packed in tins, and sealed.
and/ or nitrite, so that the percentage of different
ingredients is brought up to its original level after 12. NAMKEEN, EXTRUDED SNACKS
the removal of meat. AND RELATED PRODUCTS
Short Curing with Sterilization of Pickle: 12.1 Namkeen is the Hindi word used to
The short cure consists in immersing the raw-meat describe a savory flavor. Namkeen is also used
for a maximum of 24 hours at the temperature as a generic term to describe savory snack foods.
of Cool Cellar. The pickle is then drawn off and Presently, the market for namkeen and snacks
sterilised and requisite amount of salt is added. in India is about one lakh crore rupees. It is
Hot Cure: The raw meat is boiled in plain presently the most vibrant sector of food industry.
water for a specified time depending upon the This sector has been witnessing unprecedented

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growth in the recent past and still continues to like. Repeated frying in edible oil changes the
expand rapidly. In the past four years, Indian physiochemical and nutrition properties of the
namkeen market is growing at faster pace @ oil and leads to the formation of TPC (Total
22–25% as compared to Western snacks growing Polar Compounds), which makes it unfit for
@12–15%. In 2016–17 year, India exported human consumption. FSSAI has now framed
nearly $ 2.8 million worth of savoury snacks, laws and setup standards in respect of usage of
including extruded or expanded products, cooking oil as also in respect of storage of used
registering a year over year growth of almost cooking oil fit for further use and disposal of
22–23 per cent from the previous year. The top unfit cooking oil.
five importing countries if Indian namkeen were
USA, followed by Australia, Thailand, Israel and 12.4 The basic manufacturing process for
UAE due to the huge Indian expat population in Namkeen involves the following steps:
these countries. This segment of food industry a. Dough kneading.
ensures maximum value addition which is not
b. Extrusion of dough in different sizes and
just in monetary terms but also in giving added
shapes.
shelf life to the product or ensuring that there
is reach from Farm to Fork. As foods category c. Frying/ Roasting.
is growing in India, several food companies d. Mixing of savories/ flakes/ nuts/ dals, etc.
are in the process capturing maximum of the
salty snacks market. More than 1000 items of e. Weighing and packing.
snack and more than 300, including ‘khakhra’, 12.5 Haldiram’s Group is a major industry in
‘mumra’ (Gujarati Specialties), types of savories
this field. The industry strategy of this major is
are sold in India with varying tastes, forms,
graphically shown as under:
textures, aromas, bases, sizes, shapes and fillings.
The average annual per capita consumption of
commercial snacks is more than 500 grams.
12.2 In the recent times, Namkeen industries
have started switching on to computer controlled
automated manufacturing process with no
human touch involved anywhere in the processes.
High end series of machineries with advanced
technology imported from countries like Germany
and China are being used for the same. These
machineries perform all functions starting from
transferring Dal/ grains from Silo to the grinding
mill and from grinding mill to dough kneader,
extrusion, frying, mixing proper proportion of
masala and flavours, mixing various savories, Fig. 1
weighing and packing. Touching by human hands
do not happen anywhere in the entire process. 13. LAWS APPLICABLE TO FOOD
PROCESSING INDUSTRY
12.3 The main ingredients of ‘Namkeen’ are
various types of grain flour and dal flour, various 13.1 Food Safety and Standards Authority
types of dal, peanuts and dry fruits, roasted of India (FSSAI) is an autonomous body
grains, spices and condiments, edible flavours, established under the Ministry of Health & Family
citric acid, salt, butter, ghee, vegetable oil and Welfare, Government of India. The FSSAI has been

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established under the Food Safety and Standards 13.2 Under the FSS Act, 2006 following
Act, 2006 which is a consolidating statute related Regulations have been notified to be followed
to food safety and regulation in India. The Food by food processing industry which covers the
Safety and Standards Act, 2006 (FSS Act, various regulatory & compliance aspects of the
2006) is the primary law for the regulation of food industry like licensing, labelling, use of
food products and formulation and enforcement additives, food standards etc.
of food safety standards in the country. The Act i. Food Safety and Standards (Licensing
is intended as an “umbrella law” for food safety and Registration of Food Businesses)
by consolidating older laws, rules and regulations Regulations, 2011
like Prevention of Food Adulteration Act, 1954 ii. Food Safety and Standards (Packaging
Fruit Products Order, 1955, Meat Food Products and Labelling) Regulations, 2011
Order, 1973, Vegetable Oil Products (Control)
iii. Food Safety and Standards (Food
Order, 1947, Edible Oils Packaging (Regulation)
Products Standards and Food Additives)
Order 1988, Solvent Extracted Oil, De-Oiled
Regulations, 2011
Meal and Edible Flour (Control) Order, 1967,
Milk and Milk Products Order, 1992. iv. Food Safety and Standards (Prohibition
and Restrictions on Sales) Regulations,
The Preamble to the Act states that it seeks
2011
to “consolidate the laws relating to food and
to establish the Food Safety and Standards v. Food Safety and Standards (Contaminants,
Authority of India for laying down science based Toxins and Residues) Regulations, 2011
standards for articles of food and to regulate vi. Food Safety and Standards (Laboratory
their manufacture, storage, distribution, sale and Sample Analysis) Regulations, 2011
and import, to ensure availability of safe and 13.3 All Food Business Operators (FBO) in
wholesome food for human consumption”. The the country will be registered or licensed in
Act gives statutory powers to the Food Safety accordance with the procedures laid down in FSS
and Standards Authority of India. Some of the (Licensing and Registration of Food Businesses)
key functions of the FSSAI include: Regulations, 2011. As per various rules every
i. Framing of regulations to lay down food FBO has to be licensed/ registered with either
safety standards. central authorities or state authorities. These
regulations have also defined Petty FBO (with
ii. Laying down guidelines for accreditation
turnover of less than Rs. 12 lakh) which needs to
of laboratories for food testing.
be registered with competent authorities.
iii. Providing scientific advice and technical
13.4 The FSS Regulations lay down certain
support to the Central Government.
conditions for grant of license:
iv. Contributing to the development of i. Maintain daily records of production, Raw
international technical standards in food. materials utilization and sales in separate
v. Collecting and collating data regarding register.
food consumption, contamination, ii. Maintain Records of raw materials, food
emerging risks etc.
additives and ingredients as well as their
vi. Disseminating information and promoting source of procurement shall be maintained
awareness about food safety in India. in a register for inspection.

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Techniques of Investigation for Assessment Vol. 5

iii. Furnish periodic annual return 1st April to 31st March, within 31st May of each year. For
manufacture of Milk and Milk Products monthly returns also to be furnished in form D.

iv. Ensure procurement from Licensed/ Registered source.

v. Furnish form of guarantee, i.e. Form E to certify the nature and quality of the product as under;

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 Food Processing and Canning Industry

14. TAX INVESTIGATIONS Abnormal increase in purchases during a

14.1 When any case of food processing unit is particular period may give clues regarding the
picked up for scrutiny, information submitted to bogus purchases. The ledgers of parties from
the competent authority under FSS Regulations whom purchases are made in such period may
enumerated above in Form D should be be examined. Further in cases where there are
collected which would help the assessing officer large outstanding balances may be inquired
in checking out production details. AO is advised into thoroughly. Necessary inquiries with such
to study the entire manufacturing process for suppliers may be conducted by issuing summons
each product to get an idea about issues/ areas under Section 131, calling for documents in
which may lead to tax evasion. It is also advised support of transactions made. The statement of
to study what are the various records maintained suppliers may also be recorded, especially in the
by the manufacturer internally to have control case of purchase of agricultural commodities.
over the whole process. The examination of They may be asked questions to verify claim
the same will give vital clues regarding line of of supply by questioning them about their land
investigation. holdings, crops taken, credit facilities used, bank
accounts etc. At the same time enquiries through
14.2 Investigation of Purchases
banking channel also may be conducted to
14.2.1 In the case of small-scale manufacturers, ascertain if any cash is withdrawn immediately
purchases of basic raw material should be after payment or there are debit entries of similar
subjected to verification. It has been observed amount immediately after credit of cheques. The
that in cases where purchases are effected bank trail will help to ascertain the flow of funds,
through commission agents, detailed accounts which may again be introduced into the books
are not maintained. This is especially true in of assessee as unsecured loans/ advances etc.
case of small commission agents. In case of
14.2.2 Wherever purchase of basic raw material
manufacturers operating on a large scale, supply
is effected from subsidiaries, firms or companies
of basic raw material is through middlemen,
where proprietors, partners or directors are
who supply material after obtaining the same
interested, details of all such supplies should
from primary producers or some commission
be obtained and rates compared keeping in
agents. Alternatively, they enter into rate
view the available price-trends from APMC
contracts for major items of purchases. In the
(Agricultural Produce Market Committees)
case of seasonal items like vegetables and fruits
to judge the reasonableness of rates and the
these entities make spot purchases, which is an
quantum of payments made to related parties.
area of inquiry. AOs are expected to obtain a
Supplier-wise comparison of rates and rates
list of all significant suppliers along with their
with APMC may help ascertain whether there
addresses from whom purchases are made.
was any manipulation in the rates and excessive
This list may also be compared with the register
payment has made to the associates.
maintained in compliance of FSS Regulations.
Most small manufacturers maintain accounts on 14.2.3 Since there can be wide variations in
Tally software. The same can be obtained during the ratio of the quantity of processed food to the
the inquiry which gives, both macro level and quantity of raw material consumed depending
micro level view of the business of the assessee. upon the quality of raw material, it is quite easy

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Techniques of Investigation for Assessment Vol. 5

for the assessees engaged in this line of business same may be obtained to study the consumption
to inflate the purchase of basic raw material and and production patterns.
justify lower yield of finished product attributing
14.2.5 Another very important development
it to the poor quality of raw material. If in a
recently is introduction of Goods and Services
case yield shown is low compared to industry
Tax (GST). It mandates issue of e-way bill for
average, the inflation of purchases can be
movement of goods. Every registered person
suspected. Bogus purchases are usually shown
who causes movement of goods of:
at a time when prevailing prices are high. It is,
therefore, desirable for the assessing officer to i. Consignment value exceeding 50,000
first identify the parties from whom purchases rupees.
of raw material are shown during the period ii. In relation to supply.
when the prevailing market rate is high. Another
iii. For reasons out of state supply.
clue for identification of bogus purchases could
be that in a case where the assessees merely iv. Sales returns; stock transfer; movement for
obtain bills for purchases from some parties and job work etc. Or.
no material is in fact purchased, the payments v. Due to inward supply from unregistered
for purchases are often not shown as made in person.
time since such parties would obviously not
insist on timely payments against the bogus Shall, before commencement of movement,
sales bills issued. It is, therefore, also desirable furnish information relating to the said goods in
to identify the suppliers to whom the purchase Part A of FORM GST EWB-01, electronically, on
consideration is not paid within a reasonable the common portal, a unique e-way bill number
period of time. Detailed investigation by way (EBN) shall be made available to the supplier/
of direct enquiries need to be made from such transporter/ recipient.
suspected suppliers, preferably by maintaining In order to verify actual movement of goods
an element of surprise. claimed, E-way bills can be called for. This bill
contains the details of the supplier, recipient
14.2.4 Most large manufactures use ERP
and the transporter which can be utilised for
(Enterprise Resource Planning) software like
purchase verification.
SAP, Oracle to maintain books of account.
ERP is used to generate periodic MIS reports 14.2.6 In addition to the basic raw material,
pertaining to all the aspects of the production a number of other ingredients such as sugar,
process. These reports are shared with the top chemicals, syrups, brines, preservatives etc. are
management regularly so that they have control required for the manufacture of various processed
over the whole process. These reports regarding foods products. Assessing Officers are expected
consumption and production may be examined to familiarize themselves with the manufacturing
which may give clues for detecting bogus processes and quality control standards to judge
purchases. Any abnormal production variance whether claim relating to incurring of expenditure
i.e low yield may be inquired from point of view for purchase of sugar, chemicals, preservatives
of suppression of sales or inflation of purchases. etc. are within permissible limits or not. If they
ERP software has BOM (Bill of Material) for each appear to be disproportionately high, same
product being manufactured at the unit. The need to be subjected to closer scrutiny. If on

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 Food Processing and Canning Industry

verification, expenses are found to be excessive in cold storages. Enquiries may be made with
or unverifiable, suitable disallowance should be nearby ware-houses and cold storages to
made after proper opportunity to the assessee. ascertain the quantity of such raw materials
stocked by such manufacturers and compare the
14.2.7 Another major item of purchase relates
same with the books of account. If an assessee
to purchase of packing material. It is also one
indulges in unaccounted production, it may
of the costliest inputs of food industry. Packing
prefer to use unaccounted stock for the same to
in food industry is governed by Food Safety
avoid detection. In cases where stock is pledged
and Standards (Packaging and Labelling)
to bank for credit facilities, monthly stock
Regulations, 2011. Bulk of expenditure is
statements furnished by such manufacturers
incurred on purchase of bottles, laminated rolls
under a verification to the banks can also be
or cans required for packing processed food
examined.
items. Though big manufacturers normally have
their own factories for producing cans or bottles,
14.3 Other Direct Expenses: Other
cost of tin cans is found to constitute a substantial
significant direct expenses in this line of business
portion of the cost of production. Besides cans
include expenditure on utilities like electricity,
of various sizes, bottles and closures may also
steam, and water. The extent of expenditure may
be needed where the processed food is bottled.
depend upon the conversion charges, which may
Both tins and glass containers are used in the
vary from item to item. Reasonableness of these
canning industry. However, such expenses
expenses need to be examined with reference
may vary depending on whether the sale was
to the past records of the assessee and industry
made locally or to the outside parties. When
averages. Consumption reports generated from
supplies are made to Defence Services, BSF,
ERP includes cost of material, labour, power,
or CRPF or goods are exported, high quality of
consumables etc which may be examined for
packing standards have to be ensured due to
any abnormal increase.
tough standards prescribed by the concerned
authorities or importers. The reasonableness of
14.4 Loss/ Spoilage of Raw Material and
the expenses on purchase of packing material
Finished Products
is required to be first ascertained keeping these
factors in mind and if they are suspected to be 14.4.1 The requirements in respect of freshness,
on higher side further investigation into the ripeness or quality of raw material are clearly laid
genuineness thereof would be necessary. down in the relevant FSS Regulations, 2011.
The basic raw material of fruits, vegetables, fish
14.2.8 Any food industry would be engaged or meat are liable to spoilage if not consumed
in its production activity throughout the year, immediately. Fruit products may also lose their
whereas, generally its main inputs/ raw materials freshness or attractive appearance and become
from agriculture sector are seasonal. Hence, such unsaleable after a period of time. Two primary
manufacturers have a tendency to procure a big reasons of spoilage are as under:
lot of such agricultural produce in season, when
their prices are at rock bottom and store them in i. Spoilage by microorganism.
ware houses or cold storages. The agricultural ii. Spoilage due to physical or chemical
produce which is perishable is generally stores changes.

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Techniques of Investigation for Assessment Vol. 5

Due to the action of microorganisms, gases are products are generally sold to outsiders. Some
generated inside, which may affect the quality of such by products are as follows;
of product. In other cases, tins may be swelled
i. Candied peals of citrus fruit or apple and
or bulged due to formation of gases inside
grape.
the can. It is caused by decomposition due to
microorganisms. Cans may also burst due to ii. Core of guava and pear.
excess pressure caused by the gases inside. In iii. Stones of mango.
such exceptional cases a manufacturer/ dealer is
iv. Trimmings and other waster material of
left with no alternative but to destroy such tins.
pineapple.
14.4.2 Though in some cases, claim of spoilage/
v. Kernels of apricot and peach.
losses may at times be genuinely excessive, some
manufacturers may try to use it as a facade for vi. Seeds of tomato.
suppressing their profits. The AO is well advised vii. Stems of grape etc.
to verify minutely; claims regarding any such
spoilage of raw material or that of the finished viii. Edible oil used for frying which is unfit for
products. The claim should also be checked human consumption.
with reference to the manufacturing processes 14.5.2 The wastes left over in the drying of
involved and type of food processed besides vegetables like potatoes, cabbage, cauliflower,
adverse climatic conditions if any. Unusual price sweet potatoes, beans, etc. can be used for
rise in the rates of particular food items may making cattle-food and may also be sold. The
also have to be taken into consideration. The AO while examining the accounts, should
AO should identify the suspected cases with make specific enquiries about the utilization of
reference to the industry averages, past history of by-products and waste. Details of sale of by-
the cases and the claims made by other assessees products should be properly looked into to find
in comparable cases and insist on production of out whether sales of by-products have been fully
necessary evidence in such suspected cases. accounted for.

14.5 Byproducts and Generated Waste 14.6 Suppression of Sales/ Turnover

14.5.1 During canning of fruits and vegetables 14.6.1 If the yield of the finished product
and preparation of juices, squashes, jams, shown by an assessee is low, the assessee may
jellies, dehydrated products etc, large quantities either have inflated his purchases of inputs or
of waste material are left over. A producer has may have suppressed sales of finished product.
to dispose of the peal, rags and seeds of citrus The issue relating to inflation of purchases has
fruits, the peels and stones of mangoes, the seed been discussed above. In a given case, it is
of jack-fruit, core and peal of guavas and seed, possible that there is no inflation of purchases
skin and trimmings from tomatoes and the like. but there is suppression of sales. It is advised
Similarly, in ‘Namkeen’ industry, burnt edible that sale data for each product may be called for
oil is a by-product, which is procured by soap from the assessee. The same may be compared
manufacturers. Thus, in some cases, such by- with the production data made available to the

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competent authorities under FSS Act, 2006 employees is shown to have been paid high
by filing of annual return in form D as per amounts on the ground that they had expertise in
FSS Regulations, 2011. Please refer to para food technology and their services were needed
13.4 above. to update the technology and modernize the
plants, genuineness of such claim be examined
14.6.2 During the course of examination
with details of their qualifications and experience.
of a case one may sometime find excessive
Any abnormal salary/ consultancy payment
consumption of only some of the inputs. On
needs to be properly looked into.
examination, the purchases may be found to
be genuine. In a case like this it is possible that
the excess consumption of particular inputs 16. CONCLUSION
relates to the unrecorded production and for 16.1 Some of the important issues which an
such production certain other inputs are also Assessing Officer should bear in mind while
purchased without recording them in the books examining a case of food industry are as under:
of account. It is also possible that there are
i. The Assessing Officer must familiarize
allegations of unaccounted production and sale
himself with the entire production process
of the products.
employed by an assessee, machineries
14.6.3 The evidence of unaccounted used, specification of machineries and also
production and sale in the cases like these get in touch with the regulatory authorities
can only be obtained by way action under under FSS Act, 2006 to ascertain the
Section 133A or 132 of the Act. It is, therefore, standard ratios of consumption of inputs
desirable that if there are serious discrepancies to the final product. He should also
in the ratios of consumption and production study facts of a few comparable cases, if
and the purchases are found to be genuine, available.
the case may be processed from the angle
ii. He may thereafter compare month to month
of action under Section 133A or 132
consumption of raw fruits, vegetables,
of the Act.
fish, meat and raw materials for producing
final product. If there is any unusual
15. PROFIT & LOSS ACCOUNT consumption without corresponding
15.1 The extent of staff and labour charges increase in final product either in the same
depend upon the nature and type of processes month or ensuing month, reasons thereof
involved in the manufacture of a particular need to be analyzed.
item of processed food and on the degree of iii. Significantly high consumption of any one
mechanization. Reasonableness of the claim or two raw material without ‘on the board’
needs to be examined with reference to these higher consumption of entire spectrum
two factors. Wherever claim appears to be of raw elements could be indicative of
unreasonable; details of salary and wages should bogus purchases of such raw material. In
be called for and scrutinized. Similarly, whenever a case like this, direct enquiries from the
there is a sharp swing in salary payments concerned suppliers and transporters are
to employees or an employee or a group of likely to provide evidence necessary for

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Techniques of Investigation for Assessment Vol. 5

making disallowance of bogus purchases. v. It should also be checked whether power

The enquiries from the banks about the consumption is in various months are
final destination of the payments made proportionate to the expenses of wages to
against suspected purchases may further labour and to the production taken in that
help the investigation. period.
iv. Abnormal transportation charges in vi. Selective surveys under Section 133A could
a particular month or fortnight with be an effective method for ascertaining
correspondingly higher sale figure may whether production is suppressed and the
also call for deeper examination. accounts have been manipulated.

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 Chapter

7
Forest Exploitation, Timber
and Plywood Industry
1. INTRODUCTION
1.1 Forests are the repositories of cultures and
civilizations. Great civilizations of the world
originated in the forests and then came down to
the plains. In material terms, forests are the store
houses of timber, grass, bamboo and canes;
essential oils from plants and trees like sandal
and eucalyptus, waxes, tans and dyes, gums and
resins, drugs, spices, poisons and insecticides,
lakh, turpentine, fuel and charcoal. The National
Forest Policy 1988 acknowledges the primacy
1.2 Forests are evidently national wealth and a
of the requirements of local communities, and
nation’s richness or otherwise may be measured
advocates a sustainable management approach
in terms of per capita area of forests it is endowed
with maintenance of environmental stability,
with. India has a forest area of only 77.47 million
restoration of ecological balance, and soil and
hectares and its per capita land forest is amongst
water conservation as the prime objectives of
forest management. The conservation of natural the lowest in the world.
heritage and genetic resources is highlighted 1.3 The process of urbanization and movement
with indicator targets of maintaining forest/ of people from rural to urban areas has put the
tree cover (33% of the landmass and 66% development of forest area in the back gear. On
in hills). The social concerns are addressed one hand it has increased the requirement of
through increasing productivity of forests to timber for building purposes and on the other
meet local needs first, and creating a massive hand large forest areas have been wiped out
people’s movement for afforestation to reduce for building towns to accommodate both man
pressure on existing forests. Industries have been and material. The indiscriminate denudation of
specifically advised to network with farmers forest areas causes erosion of land, floods and
for the production of industrial raw material other calamities.
instead of depending on subsidized supply from 1.4 In America and other European countries,
government forests. The economic benefits of the fact that forests are great purifiers of air and
forests have been subordinated to the principal prevent air pollution has brought about awareness
aim of environmental stability. of the need of keeping up the ecological balance

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Techniques of Investigation for Assessment Vol. 5

by not allowing indiscriminate felling of forests. reserve and protected forests. Other categories
In India, there has been indiscriminate-both include community, local common and private
authorized and unauthorized-felling of trees by forests, aggregating into unclassed forests. The
the forest contractors and awareness to protect the legal categories of lands indicate the intensity
forest has dawned too late. Now, Vanmahotsava, of regulation on the use of these lands as
intensive afforestation by cultivation of forests forests. Within the ambit of the national policy
on an organized basis, has now been taken and legislation, states can promulgate legal
up as a priority project by the Government as instruments and undertake suitable measures
well as non-government agencies. A reference to facilitate smooth functioning of the sector.
may be made to the movement for saving the A number of state laws have been passed to
Himalayan forests and Silent Valley in Kerala. An regulate forest resource use, including timber
emotional angle to this social problem was given and NWFPs. Forestland in India is a tract of
by the Chipko Andolan that was a movement land that is legally proclaimed to be forest under
resorted to by villagers including women in a the forest laws (mainly Indian Forest Acts 1865,
village called Advani in Tehri Garhwal hills in 1927). India has a notified forest area of 77.47
Uttarakhand (erstwhile in Uttar Pradesh) in the million hectares (m ha), comprising 39.99 m ha
year 1978 when they saved some trees marked of Reserved, 23.84 m ha of Protected and 13.64
for felling by clinging to them in the face of m ha of Unclassed (unclassified) Forests. The
armed police. Reserved Forest is an area notified under the
Indian Forest Act or a State Forest Act enjoying
1.5 The subject ‘Forest’ has been in the
a higher degree of protection (human activities
concurrent list of the Indian Constitution since
are prohibited unless expressly permitted);
1976. The Indian Forest Act 1927 is the basic
Protected Forests are also notified under the
legal framework governing the forests in India.
Forest Acts but the restrictions are less stringent
The Forest (Conservation) Act 1980 (amended in
(human activities are permitted unless expressly
1988, 2003) empowers the Central Government
prohibited). Unclassed Forests are forests that
(Ministry of Environment and Forests) to guide
have not been included in reserved or protected
states in matters related to the diversion of
forest categories. The tenurial status of such
forestland for non-forestry purposes, conversion
forests varies widely. The forests of the country
of natural forests into plantations and even
have been grouped into 5 major categories
priorities of forest management in line with
and 16 types according to biophysical criteria.
the National Forest Policy. The forest laws in
The forest area estimate based on types is given
India provide for declaration of forests under
in Table 1.
government management in categories like
Table 1
Forest Type Area (Sq. km) % of Total Occurrence in States/ UTs
Arunachal Pradesh, Assam, Karnataka, Kerala,
Tropical wet
45000 5.8 Mizoram, Manipur, Nagaland, Tamil Nadu, Sikkim,
evergreen forest
Andaman & Nicobar Islands, Goa
Assam, Karnataka, Kerala, Maharashtra, Nagaland,
Tropical semi-
19000 2.5 Orissa, Tamil Nadu, Sikkim, Andaman & Nicobar
evergreen forest
Islands, Goa
Andhra Pradesh, Bihar, Gujarat, Assam, Karnataka,
Tropical moist Kerala, Maharashtra, Nagaland, Mizoram, Tripura,
23300 30.3
deciduous forest Meghalaya, Uttar Pradesh, West Bengal, Orissa, Tamil
Nadu, Sikkim, Andaman & Nicobar Islands, Goa
Table 1: (Contd.)...

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 Forest Exploitation, Timber and Plywood Industry

...Table 1: (Contd.)
Littoral and swamp Andhra Pradesh, Gujarat, Maharashtra, Orissa, Tamil
7000 0.9
forest Nadu, West Bengal, Andaman & Nicobar Islands
Andhra Pradesh, Bihar, Gujarat, Haryana, Himachal
Tropical dry Pradesh, Karnataka, Kerala, Madhya Pradesh,
29400 38.2
deciduous forest Jammu & Kashmir, Maharashtra, Orissa, Punjab,
Rajasthan, Tamil Nadu, Uttar Pradesh
Andhra Pradesh, Bihar, Gujarat, Haryana, Himachal
Tropical thorn
52000 6.7 Pradesh, Karnataka, Madhya Pradesh, Maharashtra,
forest
Punjab, Rajasthan, Uttar Pradesh
Tropical dry Himachal Pradesh, Jammu & Kashmir, Andhra
3000 0.3
evergreen forest Pradesh, Tamil Nadu
Subtropical broad
3000 0.4 Assam, Meghalaya
leaved hill forest
Subtropical pine Arunachal Pradesh, Himachal Pradesh, Jammu &
37000 5.0
forest Kashmir, Sikkim, Uttar Pradesh, Haryana, Punjab
Subtropical dry
2000 0.2 Himachal Pradesh, Jammu & Kashmir
evergreen forests
Montane wet Arunachal Pradesh, Karnataka, Manipur, Nagaland,
16000 2.0
temperate forests Sikkim, Tamil Nadu
Himalayan moist
26000 3.4 Himachal Pradesh, Jammu & Kashmir, Uttarakhand
temperate forests
Himalayan dry
2000 0.2 Himachal Pradesh, Jammu & Kashmir
temperate forests
Sub-alpine, moist
Jammu & Kashmir, Himachal Pradesh and
alpine scrub forests 33000 4.3
Uttarakhand
and alpine forests

Source: Asia Pacific Forestry Sector Outlook Study II/ Working Paper No. APFSOS II/WP/2009/06/India Forestry Outlook
Study, Published by the FAO.

1.6 Largest areas bear tropical dry deciduous Anogeissus dominated vegetation, interspersed
and tropical moist deciduous types. These have with grassy rangelands. The northeastern region
been most important in terms of yield of forest is rich in tropical and subtropical moist forests
products. Accordingly these habitats have been with much diversity of hardwood and softwood
converted into commercial plantations also for species. Similar composition of forests in the
industrial raw material. From the point of view Western Ghats and in the Andaman and Nicobar
of forest utilization value, the important forest Islands has been an important source of wood
regions include the central southern region with
and wood products. Other specific ecologically
predominantly teak forests, the eastern region
important regions include sandalwood habitats
with Shorearobusta (sal) dominated forests and
in the southern dry belt, red sanders in Andhra
the western Himalayan region with coniferous
species like pine, cedar, spruce and fir. The Pradesh, shola forests in Nilgiris, mangroves in
northern plains and foothills of the Indian the Sundarbans in West Bengal, rain forests in the
Himalayan region support Shorea, Dalbergia, Andaman and Nicobar Islands and Himalayan
Terminalias Gmelina, Albizzias, etc while the alpines. The figures below show classification
northwestern arid areas bear Prosopis and and other related data of forests in India.

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Techniques of Investigation for Assessment Vol. 5

2. FOREST COVER OF INDIA

Table 2: Forest Cover Classified in terms of Canopy Density Classes

Class Description
Very Dense Forest All land with treee canopy density of 70 per cent and abouve
Moderately Dense Forest than 70 Per cent All lands with tree canopy density of 40 per cent and more but less
Open Forest than 40 Per cent All lands with tree canopy density of 10 per cent and more but less
Scrub Degraded forest lands with canopy density less than 10 per cent
Non-Forest Lands not included in any of the above classes. (Includes water)

Table 3: Forest Cover of India

Class Area (Sq Km) Per cent of Geographic Area
Very Dense Forest 98,158 2.99
Moderately Dense Forest 3,08,318 9.38
Open Forest 3,01,797 9.18
Total Forest Cover * 7,08,273 21.54
Scrub 45,979 1.40
Non-Forest 25,33,217 77.06
Total Geographic Area 32,87,469 100.00
*Includes 4,921 sq km under Mangrove Cover Percentage rounded off

1.40%

9.18%

9.38%

2.99%
77.06%

Non Forest 77.06%

Scrub 1.40%
Open Forest 9.18%
Moderately Dense Forest 9.38%
Very Dense Forest 2.99%

Fig. 1

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 Forest Exploitation, Timber and Plywood Industry

Map

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䤀渀琀攀爀渀愀琀椀渀愀氀 䈀漀甀渀搀愀爀礀
匀琀愀琀攀 䈀漀甀渀搀愀爀礀
䐀椀猀琀爀椀挀琀 䈀漀甀渀搀愀爀礀
䌀愀瀀椀琀愀氀

Fig. 2
Source: Forest Survey of India (Assessment done in 2017)

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3. INDIAN TIMBER Tamilnadu; and Yerravegisa in Andhra. It is

the principal tree of Andamans. Very large
3.1 In India, the ratio of production of round
wood to firewood is almost 1:1 whereas in the semi-deciduous or practically evergreen
world as a whole, the production of round wood tree, it reaches upto 45 m in height and
is almost double of firewood. In developed 5.5 m in girth. It is slightly heavier and also
countries as a whole the production of round stronger than teak. It is high class cabinet
wood is more than five times of firewood. In all wood and a fine, strong constructional
underdeveloped countries taken together the timber. It is especially suitable for heavy
position as in India prevails. This clearly indicates carpentry such as billiard tables, bank
that on account of poor technology and other counters, piano cases, railway carriages,
factors including understatement by contractors, ship cabins and saloons and high class
excessive production of firewood is shown and furniture. It is also used for making gun-
the round wood production is suppressed. carriages and wheels, ammunition boxes,
boats and timber bridges.
3.2 While dealing with cases concerning forests
ii. Hopea: Its local names are Bogimara,
and allied industries, it is necessary and helpful
Tirupi in Kannada; Kambagonu, Ureppu
to have some knowledge of forests in general
in Malayalam; Kolhoni in Marathi; and
and trees of certain species in particular, found
Kongu, Pongu, Agil, Nirkongu in Tamil. A
in different parts of the country. Technical details
very large, handsome, straight evergreen
such as type of timber provided by a particular
tree, duration of its expected life and the uses tree 30–37 m high and upto 5.5 m in girth
to which it is capable of being put to as also with a cylindrical clear pole of 18–24 m. It
its girth, the length of its bole, susceptibility is available in the tropical wet evergreen
to various diseases like rotting and hollowing forests of Western Ghats in Karnataka,
are relevant details that can help the assessing Tamilnadu and Kerala, upto 1100 m
authorities in estimating the expected yield from altitude. It grows in moisture and alluvial
a particular forest, in knowing the processes soil. The timber is heavier and stronger than
involved in its extraction and verifying the Burma teak, very hard, difficult to saw and
various claims put forward by the assessee and work. Extremely durable, even in contact
also the market conditions of that timber. For with ground and water and is immune to
example, consumption of sawing blades will white ants. It takes a fine finish and good
be more while exploiting teak trees than say for polish. Besides constructional timber, it is
pines or semuls and wastage by rotting etc. will used in ship and boat building. The bark
be more in semul trees whereas deodar trees are of the tree contains a high percentage of
free from such diseases. tannin (used for tanning); next to wattles,
myraholans and divi-divi, it is the richest
3.3 Although coniferous trees like deodar source of tanning material containing
and pines constitute the major portion of the 26–28% tanning.
trade from exploitation of forests, yet some
deciduous trees like Padauk, Teaks, Gurjan etc. iii. Gurjan: Its local names are Charrata,
are commercially of no less importance and Angili in Malayalam; Karungil in Tamil &
information about the same is also necessary. Telugu; Guya in Marathi; Hollong Gurjan,
Some of the important species are discussed Tillia Gurjan in Assamese; and Kali Gurjan
below: or Swet Gurjan in Bangla. About ten species
of gurjan are found in the country, mostly
i. Padauk: This is known as Red wood, in eastern zone and Andamans. Large
Chalangloda in Andaman; Vengai in trees with straight cylindrical stems, they

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are dominant trees in the forests they occur. generally scarce in hills. It is very common
They are lofty evergreen trees reaching to in the Bhabar tracts of UP and Bihar.
a height of 40–45m and girth upto 4.5 m Assam and West Bengal have the largest
with a long clear bole of about 21–30 m. supplies of semul in India. Semul timber is
It is a widely used and the most important widely used in the match industry and in
plywood timber and is also suitable for tea- the manufacture of plywood and packing
chest plywood. Gurjan logs are supplied cases. It is commonly used in ceilings and
to plywood industry mainly concentrated also for planking. In Tamilnadu it is used
in upper Assam, Arunachal Pradesh, for kerosene cases and in Kolar gold mines
Nagaland, Meghalaya, Andamans and the as cushion to mine-props. The floss from
Malabar coast and in West Bengal. It is also semul seeds is the silk cotton or Indian
a standard constructional timber and can Kapok Commerce. It is light buoyant,
be used as a fine choice for beams. It can elastic, resilient and water repellent. The
be used for railway sleepers after treatment. demand for kapoks is increasing for the
The Railway Board has sleeper treatment manufacture of life-belts and other life
plants at Naharkatia in upper Assam and saving devices and also for its more recent
Olavakkot in Kerala. The timber is also uses like the manufacture of felted kapok
commonly used in ship building. The and Kapok yarn. Floss is used for stuffing
Gurjan oil is chiefly on coleorasin that is pillows, upholstery. Semul gum and seed
used as an adulterant of capaiba balsam, oil have medicinal uses.
which is an ingredient of lithographic inks
and of corrosive coating compositions for v. Benteak: Its local names in different
iron. The oil has several other industrial languages are Nonu, Nao Chadhoro in
applications such as preservation of Gujarati; Billinandi, Benteak in Kannada;
timber and bamboo, caulking of boats and Ventheru in Malayalam; Nana in Marathi;
preparation of baking varnishes. It has Vevala Venteak in Tamil; and Ventaku in
also various medicinal uses. It is applied to Telugu. It is one of the most important trees
ulcer, ring worm and cutaneous infection of the west coast. It is a moderate to large
and is used in the treatment of diarrhoea size deciduous tree. In the mixed moist
and gonorrhea. It also acts as stimulant. deciduous forests of Kanara and Malabar,
the trees attain large sizes upto 30 m in
iv. Semul: Its local names are Simal, Tula,
height and 2.4–3 m in girth, with a 9–10 m
Pagun in Bangla; Semul, Pagun, Somir in
clean cylindrical bole. It is common along
Hindi; Burla, Sauri in Kannada; Pulai, Ilavu,
and below Western Ghats from the Dangi
Pulanarnam, Mullivala in Malayalam; Saur,
southwards to Kerala, ascending the hill
Sayor, Savar, Samar in Marathi; Buroh
ranges of Karnataka, the Nilgiris and parts
in Oriya; Illavam, Pula, Burajal in Tamil;
of Tamilnadu. It is very popular wood for
and Buruga in Telugu. It is also known
commonly as silk cotton tree, cotton wood, house building, furniture, bridges etc. It is
red cotton tree etc. It is a lofty deciduous tree also suitable for plywood.
with a straight cylindrical bole. It reaches vi. Brijasal: Its local names are Bija in Bangla;
upto 40 m in height and 6 m in girth with Biya in Gujarati; Bija, Biji, Bijasar in Hindi;
a clear pole of 24 m. A tree of 59 m in Binga, Begai bond in Kannada; Venga in
height has been reported from Coorg. It is Malayalam; Dharbehla, Asan in Marathi;
widely distributed almost throughout India Bjasa, Piasal in Oriya; Vengai, Pirasaran
excepting the arid regions and the lower in Tamil; and Peddagi yegi in Telugu. It is
valleys, and even in sal forests, though also known by the common name of Kino

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tree. A tall deciduous tree with spreading to a long age. In natural forests trees with
branches and a stout somewhat cylindrical 2.4 m to 3.6 m girth predominate, though
stem it is one of the most important trees of far larger trees upto 76 m height and 13.7
the Indian peninsula attaining height upto m in girth are found. In Manali and Kulu,
30.5 m and girth of 2.4 m at breast height. trees having girth of 16.5 m have been
In north India, the Deccan plateau and MP
reported. It occurs in the North-Western
it reaches 1.8 m. The tree attains its largest
Himalayas, from Kashmir to Chamoli
size in the most deciduous forests of the
East Coast in Karnataka, Tamilnadu and Garhwal, at elevations ranging from 1200
Kerala. The timber is strong, very heavy m to 3050 m. Total area of deodar forests
and very hard. It is harder in transverse in India is estimated at 2,03,263 hectares.
strength than Burma teak. It is valuable The trees have a long life and 400–700
structural timber and is popular in South years old trees have been reported.
India for furniture and construction Introduction of railways in India created a
purposes e.g. beams, rafters and window heavy demand for wooden sleepers and
frames. deodar along with teak and sal were initially
vii. Rose Wood: It is locally known as Sitsal, the most wanted trees. It is recommended
Swetasal in Bangla; Shisam in Gujarati, first choice structural wood for spans of 3
Hindi and Marathi; Bite, Todagathi, bidi m to 6 m after seasoning. It is a second
in Kannada; Itri, Kar-Itri in Malayalam; grade timber for furniture. It is also used
Sucia, Sitsal in Oriya; Itti Eruvadi in Tamil; for constructing carriage wagons and
and Irugudu, Cittegi in Telugu. It is a large bridges etc. Saw dust or steam distillation
deciduous or nearly evergreen tree with a yields an average of 2.5% of a pale yellow
cylindrical fairly straight bole and can grow oil with a pleasant odour and is known as
upto 45 m in height and 5 m in girth. It has Himalayan cedar wood oil.
a large range of distribution. Commercial
supplies are available in Kerala, Tamilnadu, ix. Chir: This is known as Dhup in Nepali.
Karnataka, Maharashtra and to a lesser It is a large evergreen tree-trees of 54.9 m
extent from South Gujarat and Madhya height and breast height girth upto 3.4 m
Pradesh. It ranks amongst the finest woods have been recorded in localities of Tons
for furniture and cabinet work. It is well valley of Jaunsar and Tehri Garhwal. It is
known in America and Europe where its found in outer ranges and principal valleys
chief use is in the piano forte trade. It is of Himalayas and on the ridges of the
also a decorative wood suitable for carving Shivalik Hills flanking the Himalayas from
and ornamental ply boards and veneers. It about 450 m to 230 m. In India it is confined
is too expensive for general constructional to Jammu and Kashmir, Himachal Pradesh
work. Carefully selected and manufactured and Uttar Pradesh. It is only second to
ply boards satisfy aircraft specifications. deodar in utility. It is a popular all-round
It is grown in coffee plantations as a timber used expansively for house building
shade-tree. and also by the railways as sleepers. The
viii. Deodar: It is a very large coniferous, wood is long fibred and gives satisfactory
evergreen tree with dark green (rarely yields of bleached pulp. Printing paper/
silvery blue) foliage and typically conical wrapping paper of satisfactory form and
crown. It attains huge dimensions and lives strength can be made out of chir pulp.

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4. FOREST RESOURCE more emphasis on conservation than timber

EXPLOITATION production. Production from natural forests
has shown a declining trend due to continuing
4.1 Most of India’s needs for forest products
forest degradation. Sampling in some of the
consist of industrial wood products, non-timber
reserved forests (RF) revealed that 82% had
forest products and fuel wood. Other major
dense forests while the forests were degraded
forest products sectors are: sawn wood products,
in the remaining 18% and had open crops
wood-based panels, wood-pulp, paper and
where production was minimal (SFR, 2003). In
paperboard products. Estimated consumption
protected forests (PF) the percentage of open
of industrial roundwood products in the year
forest was more than 60% which meant that
2014 (latest data not available) amounted to
harvesting in these areas was not feasible. Some
50.1 million cubic meters. Approximately 98.8%
good forest areas were also included in wildlife
of supply for both India’s domestic demand
areas further affecting their productivity. The
and exports of this commodity came from local
conditions of plantations after 1980 have also
production, and the rest from imports. There is
not brought the best of results mainly due to
no exact estimation of the country’s consumption
lack of proper protection, cleaning and thinning
of fuelwood, but according to FAAAO’s
at the desired stage. Thus, production from
assessment, India consumed approximately
plantations was not commensurate with the area
307.2 million cubic meters in 2014 as well.
under plantation. In order to arrest deforestation
India’s import of forest products amounted to
and environmental deterioration most of the
$7.7 billion in 2014 which represented 1.7% of
state forest departments have completely or
imports of all commodities. The imports of forest
partially banned logging in natural forests over
products have experienced a total growth of
the past 20 to 25 years. Madhya Pradesh is a
more than 515% between 2000 and 2014 as a
case in point where 16 districts/ forest divisions
result of shortage of domestic timber resources,
completely banned logging with the view that
governmental restrictions etc.
these areas would ultimately recoup. At present,
4.2 The exploitation of forest resources logging operations in natural forests have been
needs to be optimized for Sustainable Forest minimized and the resulting wood scarcity has
Management. This optimization would mean provided an impetus for the development of farm
equilibrium between use and production of forestry, homestead forestry and agroforestry
forest resources. The demand and supply of particularly in north and south India. Currently,
various timber and non-timber forest products about 50% of the wood supply in the country
largely depends upon the local requirements of comes from non-forest sources, that is, outside
people and local market conditions. There exists government forests. The rest of the industrial
a huge gap between the demand and supply of wood consumption is accounted for partly by
forest products in India. The demand far exceeds imports and supply from public forests, mainly
the domestic supply. India, an ITTO producer plantations. India’s round wood production in
member country, is one of the major consumers 2006 was estimated to be about 240 million
of wood in the Asia Pacific region although the m3, of which 75% is the estimated share of
country domestically produces several tropical fuelwood and 15–20 million m3 industrial round
hardwood species. The indigenous production wood, including poles and small lumber for
was sufficient to meet most of the domestic rural households (NFC Report 2006, p 261).
timber demand till the 1980s. However, with Supply from natural forests (including temperate
the enactment of the Forest Conservation Act hardwood and softwood species) is about 12
1980 and subsequently the formulation of the million m3 (about half coming from tropical forest
National Forest Policy 1988 there has been areas). The estimated share of industrial round

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wood for industry coming from farm forestry economic and policy initiatives recently taken
and other trees outside forests is 31 million m3. in India. All panels other than plywood barely
Official imports of timber accounted for just over account for 10% of the total production and the
3 million m3 in 2006, mostly in the form of logs. remaining 90% comprises plywood and block
Hence, there is a gap between consumption board. There are about 62 large and medium
and supply of timber of about 25 million m3 size plywood mills and over 2,500 SSI units that
(conservatively estimated). It is assumed that a mostly operate based on plantation wood like
considerable part of this gap is being filled from poplar and eucalyptus grown by farmers under
unregistered sources, such as from home gardens agroforestry systems. Technological advances
and small timber logs and poles. Recycling and allow more efficient use of raw material for better
use of modern technologies for structural use of quality of products. Development of panels of
small wood and waste wood are also important bamboo composites from the mats of woven
contributors. There are varying estimates of bamboo slivers is a significant development.
production as well as consumption of forest Medium density fibreboard (MDF) has a
products, particularly timber and processed variety of end uses and can replace tropical
wood. In wood production, the concept of hardwood timbers for most of the uses. Despite
annual allowable cut (AAC) has often been given the technological advances relating to efficient
low consideration. India’s AAC, based on the use of wood, reduction of wastage, diversity of
net annual increment of growing stock from all raw materials and recycling, the gap between
sources (public and private) was only 127 million demand and supply is widening.
m3 in 1994, but actual production was estimated
to be 294 million m3. According to FAO (1997), 5. PROCEDURE FOR EXPLOITATION
estimated removals were about 50% above
net increment. Over-cutting is, however, more 5.1 Procedure for exploitation of forests
serious than these figures imply, considering including disposal of allotment, subsequent
that nearly 40% of the net annual increment controls and permits issued at various stages and
in the region is in young forest plantations and checkpoints etc. is governed by the provisions
that the proportion of total production from of Indian Forests Act 1927. The forests are
plantations is comparatively low. The failure surveyed for exploitation purposes and marked
to use less commercially desirable species and into ‘lots’ (H.P.) ‘compartments’ (J&K) ‘coupes’
sizes, led to damage to residual trees, inadequate (Assam). As to how many trees, of what size and
protection and maintenance. The state forest from which forests are to be felled in each year
departments (SFDs) admit seizure of 10–20% is determined by the working plan of the forest
of the illegally harvested timber. However, even department. This is formulated in advance for
the routine seizure of illegal logs in the country a period of 10–25 years in each Forest division.
is guesstimated to be about 200,000 m3. This
5.2 The trees selected for exploitation are
figure needs to be multiplied by a factor of
10 to get a reasonable account of unrecorded hammered and lot/ compartment are engraved
removal. Most of the production estimates of thereon. Total volume of standing trees in each
timber products (round wood logs, sawn wood, lot chosen for exploitation in a particular period
veneer and plywood) are generally based on is worked out in terms of cubic feet/ meters on
FAO Year Book of Forest Products 2003 and those trees. These are further graded according
ITTO Annual Review and Assessment of World to their quality, exploitability and commercial
Timber Situation, 2004/05. The requirement for importance. Thus the royalty for a particular
wood and wood products is bound to witness lot is fixed by the department on the basis of
an unprecedented upward trend due to various these data viz. total quantity of timber in terms

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of cubic meters and its quality, number of years vi. Mahan.

of the lease and total yield percentage. vii. Rafting.
5.3 The forests are disposed of generally by viii. Stacking.
auction for which a notification is published in
the official gazette setting out details of the forest ix. Marking.
offered for sale and date, time and place of 5.5 Lopping consists of cutting the branches
auction. To be qualified for bid in auction, a person of the trees as to have a clear bole in sight and
has to be registered with the State Government also to minimize the damage to the surrounding
or the Forest Corporation of the State as the growth on its fall on the ground. Sometimes,
case may be. Open auction is conducted by
this may be done after felling the trees. Felling is
keeping a reserve price which is based on the
usually done manually. The branches lopped are
estimates made by the forest department before
generally used as fire wood by the labour, but in
hand. The highest bidder is allotted the lot and
certain varieties like Khair, Rosewood or Padauk
is required to deposit certain amount as security.
The amount of security is fixed keeping in view the lopped branches can also be disposed of as
the confidential estimate. Higher the percentage timber. The next process of sawing the logs in
of security to auction price, lower the rate of sleepers may be done manually or mechanically.
profit. After the allotment, a lease agreement is Here the logs are converted in scants or sleepers
entered into which stipulates the details about and are ready for sale as timber in the market.
the trees marked for felling, the time period, This may be done by the contractor himself or
royalty paid or to be paid. In Assam disposal is by through the subcontractors. The next process of
coupes. There is guaranteed allotment of certain carrying timber from the site of sawing to the
percentage of forests to plywood manufacturers banks of the river or the stream as the case may
in the state. be is called launching. In the first instance the
5.4 Since the period of contract in most cases timber is brought to the river bank manually as
is more than one year (generally 4–5 years), the head load and thereafter it can be transported
contractor organises his work accordingly. The by one or combination of the three modes-rope
labour, tools and food supplies may be for each way, dry slide or wet slide. The timber which
stage, but the whole project right from the felling is taken out from the forest and slid down the
of the trees to the arrival of timber to the sale slope is collected at the base of the hill at the
depot is a continued process and arrangement river side for launching which is also known as
may be carried out at all stages simultaneously. ‘Ghal’ i.e. putting out the timber on to the river
If the forest is not approachable and there is for its further journey down.
no river/ rivulet flowing nearby, an approach 5.6 Ghal also includes the stocking of the timber
road may have to be constructed. Thereafter,
flowing down the river at a time. This is usually
the contractor will be ready to start exploitation
done through subcontractors and there is also
proper. The exploitation includes following
scope for pilferage. The labour is organized into
stages:
sweeping parties and advance parties to clear
i. Lopping. the timber that gets stuck up either in the banks
ii. Felling. or in the mid stream due to stones or boulders
on to the sides. The whole process of launching
iii. Sawing.
and reaching the Ghal upto the catching point
iv. Carriage. is known as ‘Mahan’ and expenses incurred are
v. Launching. called mahan expenses.

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5.7 From the catching point, the next point of forest depending upon the situation and other
transporting the timber through river in plains factors and therefore, it would be advisable
is known as rafting. Here 200–300 pieces are to ascertain from the contractor himself, the
tied into rafts and floated down the river. They processes employed by him in the exploitation
are collected at the sale depot, which is usually of a particular lot and then proceed to examine
established at the bank of the water channel close the accounts.
to a rail/ road head. Here the raft is untied and
the timber is stacked in sizes, species and quality 7. TAX INVESTIGATIONS
grading. This is called landing and stacking. 7.1 The first step in dealing with such cases
5.8 At this stage the forest lessee makes is to identify the exact geographical location
a payment called boom fee, to the forest of the forests. The AO should for this purpose
department. Payment will also be made to the prepare a map marking the situation of the
sub-contractor for labour, felling, sawing and forest, approach routes, roads, rail and rivers
mahan who tender their final bills and their and means of transport and communications
accounts are settled here. The transporter is also available, position of the godowns, saw mills, if
paid for the carriage and after the timber has any, utilised by the contractor, collection points,
launching site, location of sub-depots and sale
reached the sale depot, the exploitation process
depots and headquarters of the contractor,
is complete. In case of the forests situated in
towns and banking facilities available. Similarly
plains, all these processes are valid except for the
position of forest barriers, octroi posts and other
river transportation.
check posts should also be shown. Thus the
whole vista of the operations will be graphically
6. ORGANISATIONAL SETUP present before the officer and it would be
At each successive stage in his operations, possible for him to relate movement of man,
from the felling stage downward upto the sale machinery, material and money to time, distance
depot, the forest contractor establishes sub- and motion. The well-known golden rule for
depots at certain points. These sub-depots act picking up clues is to look for the abnormal and
as advance operational command-posts where unusual and to raise an enquiry and suspicious
the employees of the contractor are stationed for eye at the deviation. The map prepared on the
controlling and supervising various processes lines mentioned above should help the officer in
of exploitation of forests. These sub-depots act spotting such deviations and incongruities.
as accounting points for production, labour as 7.2 Another step preparatory to the examination
well as for expenses. Money and other supplies of accounts is to obtain the original lease
which cannot be obtained at the sub-depots or deed drawn between the lessee and the forest
at the forest sites are sent from the Head Office department. The study of this lease deed should
to the depot from where they are distributed to be made with respect to the Clauses dealing with
different sub-depots. Thus the organisational the location of the lot, basis of fixation of royalty,
setup in this business would consist of sub- total number of trees allotted, the timber involved
depots at forest sites and launching site etc. in terms of cubic meters and total number of
supervised by a main depot called the sale trees marked for felling. This agreement would
depot-all activities finally being controlled and also show how to determine the various phases
recorded in the head office of the contractor. of the operations and as to how those operations
However, the contractor may modify or adopt are to be carried out in a particular lot, and also
a variation of the processes detailed above to the dates by which the timber is required to
suit the needs and the requirements of the be exported etc. This would also lay down the

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security deposit required to be made, mode of p. Medical aid.

payment of royalty and the dates on which the q. Boom fee.
instalments of royalty are required to be paid
to the forest department. Royalty is sometimes 7.5 Payment of the royalty is the first and most
paid in instalments and sometimes in lump- important item for investigation. Contractors
sum. These Clauses should be related to actual are required to deposit large sums of money
adjustment of royalty after the compartment has as security money on the fall of the hammer
been exploited, stock position from time to time i.e. immediately at the end of the auction. All
in terms of scants, logs and standing trees. These subsequent payments towards royalty are also
details form the basis of valuation of stock at the of substantial amounts. Very often contractors
end of the year. do not have sufficient cash balance in their cash
7.3 Since most of the work of exploitation upto book on the relevant date. The point to remember
the stage of collection at the sale depot is done is that the actual date on which the money was
by manual labour and more than 50% of the handed over to the forest department and not
work is done in forests, it is the forest books the date on which such payment has been
which are the basic books of account and these recorded in the books of account, is the material
books, along with the vouchers relating thereto, point of time at which the availability of cash
need thorough examination. with forest lessee and sources thereof should be
verified. Since the branch offices, sub-depots
7.4 Besides the licensing fee and royalty payable and the subcontractors have running accounts
to the forest department, forest contractor would, with the head office, it is easy for the assessee to
in the process of exploitation incur expenses manipulate such cash balances. Therefore, it is
under the following heads. necessary not only to go into the source of such
a. Felling commission. payments but also the source of the sources has
to be traced till the ultimate source and its relation
b. Sawing commission. is established. For detection of concealment, two
c. Log cutting commission. lines of investigation can be followed, firstly, to
go by accretions to their wealth from year to
d. Log carriage commission.
year; and secondly, to enquire into sources of
e. Machine sawing commission. major payments.
f. Pathru (dry slide) expenses. 7.6 The term commission is used for some
expenses because mostly the work is done
g. Pakki nali (wet slide) expenses.
through subcontractors to whom payments
h. Rope way carriage expenses. are made. The labours engaged are generally
i. Carriage to godam expenses. poor, illiterate persons, coming from hill areas
or away from contract site, and are easily
j. Mahan expenses for launching and rafting. exploited. Hence, it is necessary that lease deeds
k. Godown loss. in respect of the subcontractors are obtained
and verified. Besides the terms of the contract,
l. Khudan-engraving of property mark and their genuineness itself should be cross checked
hammering expenses. with the actual muster rolls and other vouchers.
m. Inami labour expenses. One of the methods usually adopted is that
rates of commission are inflated to cover up the
n. Salaries.
commission paid on undisclosed stock. Hence,
o. Travelling expenses. as suggested earlier total expenses must be

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related to the total timber that should have been reference to which entries can be made in
extracted by the contractor from the forest. regular books.
e. Statement of money received in cash or
8. BOOKS MAINTAINED BY FOREST other forms and its disposal.
CONTRACTORS
8.3 Books maintained at head office:
8.1 Apart from the usual cash books, ledgers,
a. Statement of account received from depots
journals etc., forest contractors maintain
and sub depots.
following records, which should be thoroughly
examined: b. Periodical intimations from sub depots or
the forest site regarding the progress of
a. At forest site or sub depots. exploitation.
b. Muster rolls/ acquaintance rolls or pay
book. 9. EXAMINATION OF ACCOUNTS
9.1 Three basic items on which the profits of
c. Felling register.
the forest contractors depend are-the quality of
d. Sawing register. timber extracted, the value of the sales effected
and the expenses of exploitation. Sales of timber
e. Tally book. are usually effected at the depot itself, though
f. Launching register. sometimes the timber may be sent to Head Office
for sales. The main points requiring scrutiny are:
g. Carriage register showing the logs or
a. Whether all the timber extracted has
scantlings transported by trucks.
been accounted for by the contractor in
h. Register of passes. his books-either as sales or as part of the
closing stock.
i. Copies of statement of account received
b. Whether the sales shown are subject to
from sub-contact ors in respect of output.
verification and have not been understated.
j. Copies of statement of account submitted c. Whether the expenses on exploitation
to the depot or head office showing cash can be verified and/ or there is a reason
receipts from head office and distribution to suspect inflation by fictitious and bogus
thereof. claims.
k. Sub contractors ledger. 9.2 Verification of Quantitative Details:
Verification of the quantitative details is absolutely
l. Register of timber passed at the forest necessary at different stages of exploitation. The
check post. expenses should also be classified according
8.2 Books maintained at depots: to the different species of timber, after which
the quantitative details should be reconciled.
a. Bill books. Following process will be helpful for this purpose:
b. Stock register. i. Lease agreement between the contractor
and the forest department should be
c. Railway receipt book.
scrutinized. The agreement will show the
d. Copies of statement of stock received number of trees and quantity of timber
through trucks by road or by rafts with in terms of cubic meters. Depending

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upon the size of logs, scants or sleepers and verified at the check post established
produced their total number which should by the forest department and permits
have been obtained from a particular lot issued by them allowing the timber to pass
can be determined. Any variations can be through the barrier. Apart from bringing on
checked back with reference to the age of record the details of timber taken out, the
the forest, species of the trees, their height information is also valuable for ascertaining
and girth and any claims on account of the genuineness of the claims for work
excessive wastage due to rotting must be done by the subcontractors at various
verified from this data. The certificates stages of the exploitation. Muharirs of the
issued by the forest authorities can also be forest department issue these permits that
cross checked with the help of this data. are documents of primary entry and much
Total stock shown in the trading account would depend upon their correctness. On
should then be tallied with the estimated scrutiny in one case it was found that the
production and explanations obtained muharir has prepared permits on the days
from the assessee for any variations. There when he was not on duty at all.
is also widespread practice of felling of
v. The assessing authority may also call
unauthorized trees. This can be checked for information directly from the forest
by proper verification of exploitation department. On request, the forest
expenses because the assessee will charge department would certify the quantity of
these expenses to his accounts and such timber exported from a particular forest
collusive sales must have been entered at
lot by the forest contractor as also the
any of the sub depots or depot. These are
penalties, if any, imposed for felling down
also sometimes shown as distress sales at
of the trees in excess of allotment and
unit price much below the normal rate.
damage caused to the other standing trees,
ii. Daily register maintained at forest sites for as also concessions, if any, allowed in
recording the quantitative details of the respect of the royalties payable. The forest
felling, sawing and launching. department can also certify the royalty
paid by the contractor.
iii. Scrutiny of personal accounts of the
subcontractors engaged for the exploitation vi. Where timber extracted from the forest is
processes at various stages, would furnish transported to the sale depot by river, the
the same information. Their personal contractor prepares launching lists that are
accounts would be credited with the value to be verified against the record prepared
of work done by the labour employed by at the time when the same timber in the
them and since it is done on the basis of shape of scants was taken out of the forest,
piecework, the total quantity of timber the number of scants and volume thereof
felled, sawn, carried and launched etc. in cubic meters declared to the forest
could be known. department. A check is carried out at the
launching site also by the forest department
iv. Various permits issued by the forest before a launching permit is issued by
department like ‘ravannas’ or launching them. The permit records the number of
permits, would also contain the details of logs, scants or sleepers and their volume in
total timber taken out by the contractor from cubic meters that the contractor is allowed
the jungle from time to time. According to to put out in the river, as also the launching
rules no timber can be taken out from forest date and details regarding payment and
site unless its quantity has been checked adjustment of royalty.

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vii. Muster rolls and acquaintance rolls record disallow the expenses, especially when they are
the number of labourers on a particular job considered excessive, unless they are proved in
which may further be cross verified with regard to their genuineness by the contractor.
the total consumption of rations under the The AO should call for the agreements entered
head ‘godown loss.’ This figure related to into by the contractor with the sub-contractors
the number of man days put in would give before examining the genuineness and
an indication of the trees felled and logs correctness of expenses. However, nonexistence
produced. of the agreement by itself does not justify the
rejection of accounts. The evidence should be
viii. Timber, if carried by the truck at any stage,
called for to verify:
the number of trips made by these trucks
and loading and unloading expenses paid a. Whether a particular sub-contractor was
thereon can help in cross verification of actually engaged.
the total stock of timber exported by the b. The rate at which the work has been credited
contractor. to the account of the sub-contractor, has
ix. Engraving and hammering charges are been correctly shown and that payments
recorded in Khudan and stacking register have been made according to it.
and are paid on the basis of per unit of c. A comparison of the rates in the agreement
timber and total number of units thus with similar cases might reveal inflated
declared have to be accounted for. contract rates. Since the labour is illiterate,
9.3 Claims of Loss and Wastage: It is usual it is possible to get receipt for any amount.
for the contractor to claim shortages in transit 9.5 The normal practice of the subcontractors
and produce the stacking register in support of is to tender periodic statement of account to
the claim. Generally, after removal from site, their principals, the forest contractor, and it is
shortages can occur only in case of timber that is only on the basis of these statements that entries
floated down the river when some of it may be in their accounts are made in the ledger by the
carried away by the current out of reach or get latter. The contractors preserve these statements
stolen on the way. Such loss should be normally in their own interest. The AO should check these
within 5%. The figure may be higher if there are on random basis.
floods in the river and timber is washed away 9.6 Purchase of Timber at Depot: Often
irretrievably. However, there should be no loss the contractors have to purchase timber at depot
when timber is brought by land routes to the locally to meet their commitments of making
depot. Mere certificate of the taxpayer is not supplies. Some of the unverifiable purchases
enough to verify the shortage. A careful study may be shown at inflated rates. To verify the
of the launching or the registers maintained genuineness of such purchases the AO may:
at launching office and the collection point
a. Compare rates with the purchases made
will be helpful in this regard. Spot enquiry by
by the forest contractors of similar timber
the Inspector can bring to light discrepancies in
from known parties near about the date of
this regard.
the transaction under investigation;
9.4 Inflation of Expenses: The contractor
b. Compare the rate with the cost of
may make claims for expenses not incurred at
all or may inflate the expenses under various conversion to the contractor himself of
heads in which they are incurred. The expenses similar timber;
incurred by the contractors have to be proved c. Look into the rate at which sales have been
by them completely. The AO will be justified to made of this particular timber;

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d. Ensure that the purchased timber is not expenditure under this head requires detailed
the contractor’s own timber surreptitiously scrutiny. Many a times roads are constructed by
kept back from his stock account at the the forest department but bogus expenditure on
forest site or depot. this account is claimed by the contractor. It is
9.7 Benami Contracts: One of the usual therefore necessary that enquiry on this account
devices adopted by forest contractors is either to should be addressed to the forest department.
sell off a contract obtained by them on commission 9.8.3 Sawing Charges: The trees are usually
or to take on auction a forest coupe or forest lot logged for being sawn into Broad Gauge
in the name of a benamidar who are usually the sleepers, 10 inch wide and 5 inch thick and
contractor’s own employees or near relatives. in lengths of 9, 10 or 11 feet. Other sizes are
The case of a new contractor should therefore be made out of the remnants of smaller pieces
particularly scrutinised to see whether the alleged from which whole sizes cannot be converted.
contractor has used his own funds from known Sawing output and loss in conversion of trees by
sources or is a benamidar of another contractor. sawing is again dependent upon various factors.
In this process what is to be looked into is the
9.8 Scrutiny of Special Expenses disposal of rejection and its proper accounting.
Accounts Claim for other expenses like total consumption
9.8.1 Godown Loss: Since the forests are of sawing blades or rope ways and expenses on
generally situated in difficult areas and the wet/ dry slides should be verified from actual
labour are required to be kept satisfied, they are vouchers and in terms of the agreements with
supplied ration on subsidized rates. Rations and the contractors.
other requirements are purchased in towns or at
9.8.4 Carriage Charges: In many cases the
one of the depots belonging to the contractor and
contractors have their vehicles and other modes
carried into the forest site. Contracts are given for
making these supplies to make available to the of transport which are used for carriage of timber
forest labour. The difference between the cost of and for other purposes. Their running, repair
procurement of these rations at forest site and the and maintenance charges must be checked
price charged from the labour is called ‘beshi’ or thoroughly. The log books maintained in respect
godown loss and is charged to the profit and loss of each vehicle and details of trips made as
account by the contractor. Proper verification of recorded therein must be cross-verified with
chits and indents issued by the labour contractor the records available at various check points,
to ‘munim’ in this respect should be made and octroi posts and location of the sub depots of
total expenses cross checked in relation to the the assessee. Particular attention will have to be
number of labour employed as per muster roll or given to the maintenance charges e.g. expenses
acquaintance rolls. These expenses are usually on tyres etc. The vehicles may belong to the
inflated by showing either bogus names or by relative of the contractor or a benamidar himself
showing inflated supplies per head. As a rough or a sister concern and the expenses may be
and ready check it may be mentioned that a man inflated.
working in difficult conditions consumes about 9.8.5 Bad debts in respect of advances to
600 grams of ration on an average per day. subcontractors for supply of labour, rations
9.8.2 Cost of Roads and Huts: The and for performing other jobs require detailed
expenditure on this account is now considered scrutiny. The labourers are migratory and
allowable as revenue expenditure. However, the seasonal and many times they disappear without

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notice and their contact address may not be agencies came into action and involvement of
available. Though this may be a fact in itself but officers of level of divisional commissioner was
the claims made in this regard require thorough found. Then the IT department initiated action
check before being accepted. and large demand was raised. The officers
posted in such areas should be aware of local
9.9 Fictitious Claims and Bogus
activities and incidents reported in media.
Payments: Normally the forest contractors
finish the extraction work by the date stipulated
in the agreement entered into with the forest 11. VALUATION OF STOCK
department because any delay would make Valuation of the timber and the valuation of
the contractor liable for the penalty. The closing stock are the next points to be looked
subcontractors require constant and immediate into by the assessing officer. It should be ensured
payments for the work done so as to enable that all the expenses incurred by the assessee in
disbursement of wages to the labour working the forest for extraction of timber from the forest
under them. The subcontractors insist the early site upto the launching site should be included
settlement of their accounts as soon as the work in the Manufacturing and Trading Account and
is finished so that they may make final payment therefore these expenses should be taken into
to the labour and get their own share of the consideration to ascertain whether the closing
earnings and move to the other work. Therefore stock has been valued correctly. Besides, it
where a contractor claims that payments have should also be seen that the same method of
been settled much after the contract period valuation is used consistently. Difficulty can also
was over, should be looked with suspicion. arise while considering the question whether the
Unless there are verifiable and extraordinary standing trees should be included in the closing
circumstances, the cases of delayed payments
stock and, if so, method of their valuation. The
may not be accepted without thorough scrutiny.
manner of treatment may depend upon the
process of exploitation adopted by the assessee,
10. FOREST EXPLOITATION BY the contractor may work a lot by stage or in
FOREST OWNER parts and method of accounting may vary, but it
10.1 Where the forest is exploited by the owner should have been consistently followed.
himself without engaging sub-contractor, the
chances of inflation of expenses are higher and 12. CASH BOOK
therefore, the expenses should be examined
12.1 The contractor’s requirement of cash from
more thoroughly and critically.
time to time and the manner in which he has
10.2 Often the laws are bypassed by ingenious met these requirements also need a thorough
methods. For example in many states, major scrutiny. While examining the cash book, it
parts of forests are declared tribal areas and should be kept in mind that it is at the launching
cutting of trees require permission of State and at the collection site that the contractor
authorities. The owner of land before cutting would need large amounts of cash because it is
trees should obtain permission of authorities. here that he has to make final payments towards
In a case, tribal land was unofficially bought by royalty and to the subcontractors. Therefore, he
non-tribal businessmen whereas on paper, the would naturally start his efforts to raise cash and
land was still in the name of original owner. All try to introduce receipts of large amounts of cash
permissions were obtained by these businessmen in his cash book. Each and every entry therefore
in the name of owner and trees were cut on a should be properly scrutinized. The assessee
large scale. The scam was unearthed and central may show encashment of savings certificate

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or fixed deposit receipts or even produce pass 13. HEAD OFFICE ACCOUNT
book of a bank account in support of the cash 13.1 While examining the accounts of the head
introduced. This should not be accepted on the office of the forest contractor, particular attention
face value. In some cases it was found that no should be paid to the following points:
such account existed with the particular post
office. For verifying the cash credits, the AO Bank Account: The withdrawals of cash from
should not be satisfied merely by affidavits of bank and cash deposits representing remittance
alleged depositors, but he should go into the of sale proceeds from the depots have to be
form, time and place of such a receipt, mode of verified with reference to the inter-branch
its carriage to the point at which it was disposed accounts.
of and also the creditor’s capacity to advance Personal Withdrawals: Money released
such an amount. outside being the amount of inflated and bogus
12.2 The claim of bogus, fictitious and inflated expenses is utilised for the purpose of meeting
expenses leads to the release of cash outside the personal expenses of the proprietors and the
books. The cash equivalent to the bogus and partners. The adequacy of the withdrawals has
inflated expenses would not be kept idle and the to be thoroughly investigated.
assessee would utilize them in making payments Balance Sheet: As has been already discussed,
for expenses particularly on a day on which normally the accounts of the subcontractors are
these expenses have been incurred but there is settled well before the completion of the contract
not enough cash in the books. Hence the cash period. Therefore the Balance Sheet should
books, especially those kept at the depot and not contain creditors for the payments due to
sub-depots at forest sites should be minutely subcontractors. There may be some debtors for
scrutinized with reference to the actual dates the money advanced for the next season or the
on which such verifiable expenses as royalty, advances not adjusted against the payments for
launching fees, etc. are paid. Remittance of cash the work done. Therefore, where such accounts
between the head office, depot and sub-depots appear in the Balance Sheet, they should be
should also be scrutinized with the same end thoroughly investigated.
in view keeping in mind the distance between
them and the time that would elapse while 14. MARKETING OF TIMBER
money sent from head office would reach the 14.1 Sale of timber may be done in any of the
depot and then to the sub-depots at forest sites. following three ways:
It may happen that the receipt of the cash may
be shown on the books when even by the fastest a. Direct by the contractor.
mode of transport it could not reach there on the b. Timber merchants who purchase timber
specified date. from the contractor in the forest itself.
12.3 Such money may be introduced as cash c. Through commission agents.
deposits without being recorded in ledgers, and 14.2 Where sales are made to the government
withdrawn later in the same manner. It may also
departments like railways or electricity boards,
be used in making advance payments to the
the timber is dispatched from the sale depot by
subcontractors engaged for working in the next
the contractor himself. However, major portion
season, the advance payment being made to
them at the forest site on a date earlier than on is sold through commission agents, who, in turn
which this payment is recorded subsequently in indulge in forward trading. The commission
the cash book. agents enter into contracts with the contractors

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as regards rate and quantum in advance and d. Claim may be made for shortage in storage
also pay advance against future payments. and the timber to that extent may be sold
outside the books. Therefore, excessive
14.3 Where sales are made either at the depot
claims of shortage should not be accepted
or at the head office to the established traders
unless fully substantiated.
either on whole sale or on commission basis,
such transactions are supported by bills which e. When logs are carried down to the Head
give details of the quantity as well as quality of Office in the town, the output of scantlings,
timber sold. To ensure that all the bills have been obtained after sawing may be understated.
entered into the books, it will be necessary to In such cases it is necessary to tally the
test check the sales and verify them in the usual quantity of logs sawn and the output of
manner. Many times the sales are manipulated scantlings. Very often such output may
and the contractor may adopt any one or more have to be calculated with reference to total
of the following ways for doing so: sales plus closing stock less opening stock.
Such an output tally in respect of different
a. By showing large amount of cash sales.
species of timber logs such as teak, deodar
Sales may be made to the unidentifiable
etc. can prove very effective in detecting
parties to manipulate the quantity as well suppression of stock.
as the quality of timber sold. Usually sales
of the quality timber is sold in advance f. Where forests of spontaneous growth are
to the government departments or to the auctioned for clearing, there is likelihood
established traders. Local sales should of under-statement of timber output since
therefore be confined only in regard to the forest check is not as rigorous as in
the sales of inferior quality. Where sales the case of forests auctioned with marked
trees. In such cases the output-expense
are shown to the local parties, they should
ratio should be especially examined and
be compared with other sales to find out
a cross check of customer’s accounts for
understatement therein.
selected cash sales also made.
b. Sales to ‘benamidars’-Sales made to
g. Obligation of the seller of tax collection at
‘benamidars’ of the contractor are also
source: According to Section 206C of the
understated so as to reduce the profits of Income-tax Act 1961, every seller of forest
the assessee. To detect such sales is not produce is under legal obligation to collect
easy, but can be traced by checking how the tax from the buyer of such products at the
contract of sale was entered into between time of such sale. The rates of TCS are as
the parties and how and where the goods under:
were delivered, how the payment was
received, whether any interest is charged Table 4
on the outstanding balance. S. No. Nature of Goods Percentage

c. Understatement of quality of timber sold- 1 Tendu leaves Five per cent

This can be detected by verifying the 2 Timber obtained under a Two and one-
forest lease half per cent
quantitative details of the timber kept by
3 Timber obtained by any Two and one-
the contractor. Usually separate accounts mode other than under a half per cent
are kept for different quality of timber. An forest lease
examination of these records with reference 4 Any other forest produce not Two and one-
to the sales account would help in bringing being timber or Tendu leaves half per cent
to light transactions of this type.

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h. No collection of tax at source is to be 15.2 Interest paid on delayed payment of

made in case of a buyer, who is resident in royalty-Royalty is required to be paid generally
India if such buyer furnishes to the person in instalments on specified dates. When the
responsible for collecting tax, a declaration contractor is not in a position to make the
in writing in duplicate in the prescribed payments in time he is required to pay interest
Form 27C of Income-tax rules(under rule in addition to the amount of the royalty itself.
37C) and verified in prescribed manner It was earlier held that this interest payment is
to the effect that the goods referred to in in the nature of penalty and therefore not an
the above table are to be utilised for the allowable expenditure under Section 37 of the
purposes of manufacturing, processing Act. However, it has now been accepted by
or producing articles or things or for the the Department that the nature of interest paid
purposes of generation of power and not for on delayed payment of royalty is incidental to
trading purposes. The person responsible for business and is not for infraction of law and
collecting tax at source under Section 206C therefore, the admissibility of claim will have to
has to compulsorily deliver or caused to be be decided in each individual case keeping in
delivered to the Principal CCIT or Principal view the terms of the lease agreement and other
relevant facts of the case.
CIT one copy of the Form 27C on or before
the seventh day of month next following the 15.3 Deductions available to a manufacturing
month in which the declaration is furnished unit-Income-tax Act allows deduction to eligible
to him. Thus a manufacturer, producer or industries and units engaged in manufacture.
a processor of articles or things or power is The contractors engaged in the exploitation of
exempt from the TCS obligation if he has forest have been claiming that their business is
furnished the declaration in Form 27C. manufacturing of logs and sleepers. Therefore
This exemption is however not available they are entitled to deduction under Section 80
for a trader of forest produces. It is seen HH. This is also on the basis because most of the
that the declarations received by the seller forest business is in backward areas. The Courts
are not delivered to the department and are not unanimous. Allahabad High Court
therefore the verification of the nature of accepted the claim of the taxpayers but the view
activity or utilization of forest produces by of the Punjab and Haryana High Court is to the
the buyer remain unverified. It is seen that contrary. (Pyare Lal Khushwant Rai vs. State of
many a times the unscrupulous traders also Punjab).
furnish Form 27C to the sellers and thereby 15.4 The assessee, an authorised contractor
violating the requirement of TCS. This engaged in the purchase of forest lots removed
malpractice results in non collection of TCS from the forest, chopped and sold the same as
and also non verification of end utilization firewood. The Sales Tax department treated the
of the forest produce by the buyer. The taxpayer as a manufacturer and charged sales tax
Assessing Officer should bear this practice in accordingly. The taxpayer claimed that he was
mind while doing the assessment of persons assessable only as a dealer. The Court decided
dealing in forest produce. the case in favour of the taxpayer and relied on
the decision of the Supreme Court in Union of
15. IMPORTANT CASE LAWS India vs. Delhi Cloth and General Mills Co. Ltd
15.1 Certain court decisions, relevant to timber (1963) S.C. 791, (1963) and Commissioner of
and wood trade, are given below with the ratio Sales Tax UP vs. Harbilas Rai and Sons (1968)
of the cases. 21 S.T.C. 17 (S.C.).

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15.5 “Manufacture” implied a change, but upheld the order of the High Court in regard
every change is not manufacture and yet every to the exemption under Section 10(20), and
change of an article is the result of treatment, remanded the case to the lower authorities for
labour and manipulation. But a new and examining the claim of exemption under Section
different article must emerge having a distinct 11(1) because the said claim was not made by
name, character or use. The Court also the taxpayer before the lower authorities at all.
observed that cutting the logs in small and big
15.7 Hillwood Furniture (P.) Ltd. vs. Income-
pieces would not make any difference in the
tax Officer: (2015)59 taxmann.com 265
nature of business. A customer may purchase
logs and may himself get them cut in the (Kerala) or (2015) 275 CTR 429 (Kerala)
pieces of shapes and sizes of his requirement This judgement has given the ruling that
or he may purchase the pieces cut by the Section 206C does not draw any distinction
contractor. In both the cases the nature of between ‘timber grown in India’ and ‘timber
business remains the same. It does not make imported’, from abroad.
a difference if the trees are sold as timber or
fuel without any work of art. A Division Bench 15.8 Divisional Forest Officer vs. Income-
of Madhya Pradesh High Court in Mohan tax Officer (TDS), Haldwani (2015) 57
Lal Vishram vs. Commissioner of Sales Tax, taxmann.com 238 (Delhi-Trib.)
Madhya Pradesh (1969) 24 STC 101 observed According to this judgement, furnishing of Form
that by felling standing timber trees, cutting them
No. 27C by buyer at time when collection of tax
and converting some of them into ballies, the
at source is contemplated under Section 206C,
assessee did not alter their character as timber.
has to be construed as mandatory.
15.6 Tax exemption to State Forest
Corporations-In almost all the states, the 15.9 Maharashtra State Co-operative
work relating to exploitation of the forests Tribal Development Corporation Ltd. vs.
has been given to State Forest Development Commissioner of Income-tax, Nagpur
Corporations. These corporations are different (2017) 78 taxmann.com 197 (Bombay)
from the forest department and are therefore According to this ruling where Tribal Development
taxable as Government Undertakings. Some
Corporation engaged Tribals to collect forest
of these corporations have claimed that their
produce, which were sold in auction by
income is exempt from tax under Section
10(20) as well as Section 11(1) of the Act. Uttar corporation, Tribals could not be said to be first
Pradesh Forest Development Corporation took seller; corporation would be first seller and be
the matter to the High Court. The High Court liable to deduct TCS from buyers in auction sale.
negated the assessee’s claim for exemption 15.10 Natwarlal vs. Union of India (1999):
under Section 10(20) but accepted the claim 102 TAXMAN 49 (MP).
under Section 11(1) on the ground that the
work of the Corporation was covered under the According to this ruling, the process of collection
definition of charitable purpose in Section 2 of and pruning of tendu leaves does not amount to
the Act. The Department agitated the matter ‘processing’ within meaning of Section 206C as
before the Supreme Court. The Supreme Court nothing new emerges from the process.

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PLYWOOD involving changes in temperature, humidity and

alternate wetting and drying. In addition they
16. INTRODUCTION need to withstand attack by marine organisms.
The plywood made to the specifications prepared
16.1 Plywood is a processed structural material by the Wood Products Sectional Committee
composed essentially of wood element veneer. at the instance of Ministry of Defence is called
The veneers may be of different species or marine plywood.
different thickness. The structure involves layers
of veneers disposed with the grain at right 17.3 The manufacturing of general plywood
angles in adjacent layers-the layers bonded with should be as per the IS:303:1989 and the
synthetic resin glues. marine plywood must be manufactured as per
the IS:710:1976.
16.2 The properties of plywood are dependent
upon its composition, structure and processing 18. MATERIALS
steps. The outstanding properties of plywood
compared to solid wood are its high shear 18.1 Timber: Until about 1964 only logs of
resistance, its high strength to weight ratio, 12–15 species of logs over 60 cm diameters
dimensional stability and its good working were accepted by the mills. In recent years due
to the work done by FRI (Forestry Research
properties. The plywood and panel industry
Institution) and IPIRI (Indian Plywood Industries
in India has made significant progress in last
Research Institute) the range of peel able species
25 years. The timber resources in the country
has increased to more than 60 species and more
are inadequate to meet the panel industry species are being tested both at FRI, Dehradun
requirements. However, plywood and panel and IPIRI Bangalore. Logs of 30 cm diameters
industries will help the country to achieve a onwards are accepted now.
better utilization of forest resources, widen the
18.2 Tables 1 & 2 of IS: 710–1976 list the species
available raw materials base and to a large extent
of timbers suitable for face veneers and core &
upgrade hitherto wasted or idle forest resources.
cross band veneers respectively in the case of
marine plywood. Annexure B of IS:303:1989
17. TYPES & GRADES lists species of timbers used for general plywood.
17.1 Plywood is generally of two grades viz. Some of the commonly used timbers suitable
Boiling Water Resistant (BWR) and Moisture for plywood are Gurjan, Hollong, Keruing etc.
Resistant (MR), depending upon the bond However, mills also use Mango, Eucalyptus,
strength developed by the adhesive used for Semul, Safeda, Poplar and several other species
bonding the veneers. Plywood for general for manufactures of plywood-Arjun (Terminalia
purposes is classified into three types, namely, arjuna), Birch (Betula) Chaplash (artocarpus
AA, AB and BB based on the quality of the chaplasha), Gamari (Gmelina arborea), Gurjan
two surfaces. A & B are the terms of general (Dipterocarpus), Indian Oak, Jaman (Syzjgium),
permissible defects. The better quality surface Katha (Artocarpus heterophyllus), Mango
is called ‘face’ and the opposite side is called (Mangifera indica), Neem (Azadirachta indica),
‘back’. The type of plywood denotes first the Semul (Salmoba malabrica), sisssoo (Dulbergia
quality of face followed by the quality of back. sissoo) etc. In fact, theoretically any wood can
17.2 The plywood used in the construction, be used for the purpose.
repair and maintenance of marine and river 18.3 Adhesives: The adhesive used for
craft is required to withstand rigorous conditions bonding the veneers in different grades

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of plywood are the corresponding types of glue), Storage tanks (for chemicals), Pond for
adhesives as specified in IS:848:1974. Extenders storage of logs, cranes & other material handling
conforming to IS:1508:1972 may be used with the equipment.
synthetic resin adhesive (amino resins). However,
synthetic resin adhesives when extended by more 19. MEASUREMENT OF LOGS
than 25% should contain suitable preservative
chemicals in sufficient concentration to satisfy the The measurement system of timber allows
mycological test. Fillers, if used, do not exceed for wastage. The actual quantity of timber is
10% mass of solid content of the glue. Normally normally 1.273 times that of measured quantity
used adhesives are Urea formaldehyde (UF) and and in addition measurement allowance of 4 to
Phenol formaldehyde (PF). Plywood produced 5% is acceptable. The logs are measured either
from PF is water-resistant and can be used in in cubic metric (CBM) or cubic feet (CFT).
exposed conditions. Theoretically, 1 CBM = 35.3147 CFT, but in
India in practice 1 CBM = 27.74 CFT.
18.4 Machines: Machinery normally required
for a plywood manufacturing unit are-Chain saw,
20. MANUFACTURING
Peeling lathe, Veneer clipper, Dryer, Boiler, Glue
spreader, Aluminium cauls or plates, Hot press, The diagrammatic presentation of the
D.D. saw, Sanding machine, Slicer machine (for manufacturing process of plywood is given
decorative veneer), Resin kettles (for preparing below:

Fig. 3

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 Forest Exploitation, Timber and Plywood Industry

20.1 Logs: Timber is procured in the form are placed in the cross direction to the panel and
of logs from forests or imported from other face veneers. The stacking of panel veneer is
countries. Logs are kept in ponds under water done alternately i.e. face then core then panel
to preserve them from becoming dry. Logs in then face. The number of panel and core veneers
green condition yield better results & yield. At to be used depends on the thickness of plywood
present the rate of duty on imported logs is 15%. required.
The logs are cut (sawing-electric or manual) into
20.7 Gluing: The core veneers are passed
blocks of different sizes depending upon the
through a glue spreader which spreads & applies
size of plywood to make. The bark of blocks is
the adhesive on both the surface of the core
removed manually by axe. Log to block yield
veneers. The glue should be evenly spread and
should be 90–95%.
core veneers placed securely cemented together
20.2 Peeling: The blocks are loaded into without overlap. No unglued areas or scarf joints
peeling machines for being pilled into veneers should be found on separation of veneers.
of varying thickness ranging from 0.4 mm to 3.0
20.8 Pressing: The assembled veneers are
mm. All plywood plants use rotary peeling system.
then placed inside a hot press which presses the
The peeling lathes are specified by knife length &
assembled veneers under high temperature and
diameter of logs that can be rotated. The yield of
pressure resulting in a permanent bond between
veneer from logs depends on the quality of logs
the veneers. The compression is about 5–8% in
used and varies 50–105% is possible because UF bonding and 8–12% in PF bonding. Normal
of measurement system of timber that allows specific pressure is in the range of 8–12 kg/sq.
wastage in the measurement itself. cm in PF bonding. Normal specific pressure is
20.3 Clipping: The veneers peeled in the in the range of 8–12 kg/sq. cm for UF adhesives
peeling machine are reeled into rolls and then and 14–18 kg/sq. cm for PF adhesives. The
cut into desired width in clipping machines. The temperature required for curing of adhesive
normal width varies from 2.5–4 ft. varies from room temperature to 150  ºC. Hot
setting phenolics generally come in the range of
20.4 Drying: The veneers produced contain
140–150  ºC.
very high degree of moisture and are passed
through dryers to reduce the moisture content 20.9 Treatment: Boards taken out
to 6–12%. immediately from the press and while still hot
they are immersed in a 2% solution of either
20.5 Checking: The dry veneers are sorted
sodium penta-chlorophenate or boric acid or
out and split ends, cracks, knots, joints, insect
1.9% solution of borax or a combination of
holes, dotes, blisters etc. are chopped out. Both
these for a period of 10–40 minutes at room
the edges of the veneers are clipped to make
temperature of 85–90°C and allowed to dry. All
them straight to enable them to be placed side depend on size & thickness of plywood. In case
by side and to avoid gaps. of marine plywood, the board is given treatment
20.6 Assembly: Face veneer is used for the by pressure impregnation with fixed type either
surface of the plywood and it is placed in such a water soluble or oil based preservatives and
manner that its grains are along with the length having retention of a minimum of 12 kg/sq. m
of the plywood. Core veneers and panel veneers in case of copper-chrome-arsenic composition
form the interior of the plywood. Core veneers or 100 kg/sq. m in case of creosote or creosote-

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fuel oil composition. The treatment is required to 21.3 Cutting Losses: Considerable amount
make the ply termite & borer proof. of wood is wasted at present due to non-vertical
20.10 Finishing: The treated sheets are then axe cutting of the log at forest site. Log division
cut into exact size by trimming the edges in a if done by axe and drag holes made in case of
D.D. Saw and cut then sanded to make the logging by elephants further add to wood losses.
surface smooth. The edges are finished and gaps Some factories give less importance to obtain
are sealed by using putty. The sheets are then even cuts and peel logs with suitable adjustment
checked, graded and quality is marked. of spur knives in the lathe to trim off the
defective portion from the veneers. In the study
conducted the cross cutting wastage varied from
21. YIELDS & WASTAGE
1.7–10.6% giving an average of 8.95% of the
21.1 There are likely to be many defects in the initial log volume.
logs and the veneers and the permissible limits
21.4 Veneer Manufacturing Losses: In many
are prescribed in the specifications of the Indian
factories, at the time of cross cutting, an extra
Standards (IS). Their discussion is avoided
margin is provided in the length of the bolt
here as they may not be of any use to the AO
which is removed by the spur knives at the time
during the investigation. There are various tests
of peeling. This is unnecessary as provision is
conducted on the plywood manufacturers which
made in the veneer length for shrinkage and
determine the quality of the plywood and hence
mis-assembly. The quantity of wood wasted due
the price. But these again will not be of any help
to this excess length is known as “spur trim”. The
to the AO. However, after having understood the
wastage of wood in peeling from logs/ bolts to
materials, the machines and the manufacturing
the stage when the log becomes perfect cylinder
process, it is necessary to have fair idea of yields
(then only full length can be peeled) is called
and wastage at the various stages of production
“rounding wastage”. Though the rounding waste
so that any quantitative manipulation by the
is associated with irregular shapes of logs/ bolts, a
manufacturer can be uncovered.
significant share can be attributed to the incorrect
21.2 In the conversion of logs to veneer and centering in absence of guide circles, compass
then to plywood, wastage is inevitable. The or four points centering device etc. Loss due to
extent of wastage depends upon many factors final core or roller removed from the lathe after
such as log quality, species of timber, method of peeling is called “core loss”. Core is the central
manufacturing etc. Yield figures worked out on portion of log which cannot be peeled further
a uniform basis are not available for the Indian because of constraints of knives. A common
Plywood Industry. Wood wastage is generally factor which goes unnoticed in many factories is
assessed at two points of production viz: the excess thickness in veneer. Actual thickness
a. Wastage at green end i.e. from log yard to of the veneer as peeled being greater than the
clipping of wet veneers. specified thickness of the veneer required leads
to this wastage. The “clipping loss” from reeled
b. Wastage at dry end i.e. from drying of veneers is usually dependent on the quality of
veneers up to finishing of plywood panels. veneers and facilities available in factories for
In this discussion, the yields & wastage are as reeling of veneers. This wastage can be reduced if
per studies made by IPIRI (IPIRI Journal Vol. 4, veneers otherwise wasted at the time of rounding
No. 4 IPIRI Research Report No. 33). etc. are salvaged by resorting to clipping across

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 Forest Exploitation, Timber and Plywood Industry

the grain. The total of all these losses are added compression loss can be reduced by 2–3% i.e.
up to determine the net green veneer recovery the compression loss will be in the range of
(the quantity of usable untrimmed veneers ready 3–4% only instead of 5–12% in case of single
for drying). The study gave the following ranges cycle compression.
of wastage at each stage and net green veneer
21.6 Quality of Veneers: Apart from the type
recovery.
class & quality of the timber used for obtaining
21.4.1 The percentage is based on initial veneers, in rotary cutting the quality of veneer
peeler bolt volume and taking into account 13 peeled depends to a large extent on lathe settings
species of timber. These percentages vary from such as:
one species of timber to another.
a. Pressure bar compression or the associated
21.5 Compression Loss: There is compression horizontal and vertical gaps between the
loss in plywood during pressing of the veneers tops of knife edge and pressure bar.
(face, cross and panel after gluing operation. b. Knife angle.
The compression of the plywood depends on
temperature, pressure applied, duration of the c. Knife level.
pressure, timber species, moisture content of d. Knife edge with respect to spindle centre.
wood and surface quality of the peeled veneers.
21.6.1 Both the optimum horizontal gap and
The compression is about 5–8% in UF (Urea
formaldehyde) bounding and 8–12% in PF optimum knife angle depend on wood species,
(Phenol formaldehyde) bounding. Normally log temperature, moisture content etc. Most lathe
specific pressure required (surface pressure on are so designed that the knife angle decreases
the plywood area in the press) for UF adhesive is automatically as the bolt diameter decreases.
in the range of 8–12 kg/cm and for PF adhesive Factors that affect drying of veneer include
14–18 kg/cm. Recognizing that excess pressure both properties of wood and drying conditions.
results in excess compression and thereby Thickness of veneer, variation in veneer
significant loss in plywood yield, dual cycle or thickness, grain direction on the surface of veneer
two step hot pressing technique is in vogue determine the drying time. The important drier
nowadays. In single cycle the pressure applied conditions that can affect rate of drying are drier
is as mentioned earlier and the temperature temperature and air velocity across the surface
can vary from room temperature to 140–150°C of veneer. One of the experiments conducted by
(higher temperature for hot setting phenolic/ IPIRI, Bangalore revealed that drying schedule
urea resin adhesives). In dual cycle a relatively
determined for each of the species should be
high pressure of 14 kg/cm is applied to the glued
taken as guideline to arrive at the best schedule
assembly for 1–2 minutes and then reduced
of the veneer dryer.
to 7–8 kg/cm for the complete curing cycle of
the glue line. This low pressure leads to low
compression and hence low compression loss. In 22. ALLIED INDUSTRIES
a study (IPIRI research report No. 33) reduction 22.1 The discussion on plywood industry
in compression loss was found to be 2.34%, cannot be complete without brief mention
2.3%, 2.35% and 2.35% in case of 4 mm, 8 of other wood substitutes. Dwindling forest
mm, 12 mm & 18 mm plywood respectively. resources and general bar on exploitation of
Loss in phenolic resin adhesive bonded plywood timbers has led to search for alternative materials

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for the building and construction industry. Now 20% wood particle and 20% water and other
there is wide array of substitutes available in the chemicals. Wood species which are not suitable
market. Some of the items are discussed here. for other purposes like fast growing species
Eucalyptus and Casurina can be used with
22.2 Reconstructed Panel Products (RPP)
advantage. Ordinarily wood & cement are not
made from agricultural and wood residues. This
compatible and hence the wood is stored for
is a polymer fibre composite came to be known
3 months to ensure that moisture content is
as Particle Board (PB) and Medium Density Fibre
equalised and the cement poisons like sugar
Board (MDF). PB and MDF are now available in
and tannin are destroyed. Wood is flaked in
many varieties-low density, medium density and small size with thickness of 0.2 to 0.4 mm. All
high density-veneered, pre-laminated etc. components like cement, wood and liquid are
22.3 Conversion of trees into sawn timber or mixed in exacting proportions chemically and
plywood involves high wastage 50–60%. The physically and mixture is spread on conveyer
waste wood is sold in the open market as fire cauls forming a continuous mat that is pressed
wood. However, PB industry utilises 100% of in 1000 ton hydraulic press and subjected to
the volume of the trees. PBs are not prone to heat for 6 to 8 hours in a ring chamber. Boards
insect attack and have dimensional stability. are removed from the cauls and are cured for
PBs are made using teak wood particles from 10 days. It is then trimmed and cut in various
teak branches. Graded particles where different sizes. These boards are available as Bison panel
varieties basic wood and the bonding material in India and are good construction materials.
are Urea formaldehyde or Phenol formaldehyde, 22.6 The methods of tax investigation are
all exposed edges of the board are sealed by similar for these allied materials as those for
applying a thick coat of sealants like synthetic plywood delineated below.
wood primer, varnish, laquer. It is followed by
beading with hard timber. Particle boards are 23. TAX INVESTIGATIONS
best used as panel inserts.
23.1 Theoretically, the manipulation of
22.4 A rice husk board can be fibre reinforced, manufacturing of plywood is possible by
over laid or tailor made. Rice husk is mixed suppressing the yield through:
with small proportion of a suitable fibre and a. Inherent flaw in measuring technique and
this mixture is bonded with a phenolic resin practices-actual volume of a timber is
adhesive. This board can be overlaid on both 1.273 times the measured volume.
sides with phenolic resin treated bamboo mats
b. Showing lesser moisture in timber i.e. dry
or jute fabric. The strength of rice husk board
timber as logs in green condition yield
can be improved with use of suitable disposition
better results and yield.
of reinforcements in and on the surface and
may be made to approach plywood and even c. Incorrect thickness of the veneers and
solid wood in strength properties. The board is incorrect size of the plywood.
resistant to termite, borer & rodent and water d. Higher consumption of the adhesives
and fire proof. They are good for panel doors (most of the plywood factories make their
and flush doors. own adhesives).
22.5 Other variety Cement Bonded wood e. Showing high wastage in peeling and non-
particle Boards are made with 60% cement, utilisation of broken/ smaller veneers.

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 Forest Exploitation, Timber and Plywood Industry

23.1.1 The technique & losses at various stages into the books of account. The balance payment
discussed earlier should be kept in mind and the (at the full rate) is made in cash. The moment
records and books examined accordingly. particular goods is purchased, its pre-determined
23.2 Main evasion of tax through suppression sale price is fed into the system using a particular
of sales or making sales outside the books formula (3.5% margin over and above billed
takes place at the trading level. The wholesaler purchase cost + freight). Thus, when that
or the retailer remits the amount to the particular goods are sold, the sale invoice is
manufacturer through bank drafts and these generated which automatically factors in this
drafts are in majority issued through benami/ pre-determined sale price, leading to an under-
fictitious accounts. Thus it becomes difficult in billing. The actual amount charged, however,
investigating the accounts/ trade volume at the is determined as per a detailed “dealer’s price
trading level. There are purchasers available list” prepared and maintained by the assessee.
who want to purchase by payment of cash. This dealer’s price list is used for marketing and
23.3 Except for the stage of exploitation of quotation purposes. While the billed amount
forest where day to day reporting on felling is paid through banking channels, the balance
of trees & production of timber is made to amount is received in cash, which is collected
the Forest Department, there is no statutory by the various collection agents employed by
reporting at any level except at manufacturing the company. The assessee maintains parallel
level at trading level to GST authorities. invoices, one set for recording in the books of
account and the other for internal record and
24. CASE STUDY: SEARCH collection. The second or other set of invoices is
AND SEIZURE OPERATIONS not revealed to tax authorities.
CONDUCTED ON A MAJOR 24.4 In order for the collection to be made, the
PLYWOOD TRADER OF INDORE collection agents carry a separate printed invoice,
24.1 During the month of January, 2019, the generated on a parallel system of maintaining
Investigation Wing, Indore of the IT Department ledger accounts, which quotes the sale price at
was involved in search and seizure operations at exactly 1/10th of the actual sale price, i.e. with one
a major plywood trader of Indore, along with its ‘0’ less. For example, if the sale price mentioned
associate concerns. The search operations led to in this parallel invoice for good ‘X’ is Rs. 3.5
unearthing of a unique modus operandi, which per sq. ft., its actual sale price mentioned in the
holds true for the entire industry, and stems from dealer’s price list/ quotation is exactly 10 times,
collusion among all stakeholders concerned. i.e. Rs. 35/- per sq. ft. Such parallel invoices are
used for collection by the agents because if at
24.2 Generally, quantitative suppression of any point of time authorities like IT find these
purchases, sales and income is done by doing invoices, they will never get a true picture of the
out of books trading of goods. The purchase and real quantum of turnover. What is finally entered
sale of plywood are invoiced at a much lower into the books of accounts is not Rs. 35/-, but
per unit rate. only the pre-determined sale price as per the
24.3 Initially, the goods are purchased at their formula mentioned earlier, around Rs. 14/- in
full market price, but a much lower per unit cost this case, which normally leads to a suppression
is shown in the purchase invoice that is entered of 60% of turnover (on an average). While Rs.

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Techniques of Investigation for Assessment Vol. 5

14/- is paid by accounted banking channels, the safeguards the kaccha chits which mention the
balance Rs. 21/- is received in cash. true purchase rate, and the collection agent who
collects the balance amount after sale in cash
24.5 In this manner, it is estimated that around
using the parallel 1/0th invoice. The unaccounted
Rs. 150/- crores of turnover has been suppressed
income earned through this modus was invested
over the last 7 years by the assessee (with
by the assessee in his real estate business,
corresponding suppression of purchase). The
expensive cars, frequent foreign tours and
above modus operandi has been discovered
maintaining a flashy lifestyle.
with supporting evidences of parallel invoice/
ledger, kaccha chits of purchase amount, actual
collection in cash upon sale, dealer’s price list, 25. CONCLUSION
and sale bill entered in Tally. This is backed up The investigation tips given in this write-up are
by corroborative statements on oath describing indicative in nature and the AO may use this
the modus operandi in detail by 3 key players write-up as a tool to initiate probe. The assessees
involved in the entire chain–the accountant always evolve new modes of tax evasion and the
who prepares the sale invoice, the person who AO should remain alert.

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 Chapter

8
Gutka Industry

1. PAN MASALA INDUSTRY AND

POTENTIAL MARKET
1.1 The custom of chewing breath fresheners
after meals has a very long history, particularly
in India. Pan masala is a balanced mixture of
areca nuts (also known as supari), catechu,
cardamom, lime, flavouring agents and some
natural perfuming materials. It is widely used
to remove the bad odour of the mouth by
providing a fresh breath and comes in attractive
user-friendly packets and containers. Despite segmented the pan masala market on the basis
its growing demand in rural areas, pan masala of state, type and price. Among the various types
is gaining prominence in urban areas of India.
of pan masala available in the Indian market,
Factors like its immense popularity, constantly
pan masala containing tobacco represents the
increasing disposable incomes, convenient
dominating type accounting for more than 50%
packaging, aggressive advertising campaigns
by manufacturers and the large-scale switching of the entire market. (which is banned in India)
of consumers from tobacco products to pan Pan masala containing tobacco is followed by
masala are currently encouraging the growth plain pan masala and flavoured pan masala.
of pan masala market. According to IMARC Exports also represent a major driver of the Indian
group (International Market Analysis Research pan masala market. The Indian exports of pan
and Consulting group), the Indian pan masala masala are dominated by UAE, accounting for
market has reached values worth around INR around one-third of the total export values. UAE
38,886 Crores in 2018 growing at a CAGR of is followed by USA, Singapore, Afghanistan,
12.62% during 2011–2018. South Africa, Saudi Arabia and Malaysia. The
1.2 IMARC’s latest study “Pan Masala Market report has also analysed some of the key players
in India: Industry Trends, Share, Size, Growth, operating in the market and provides their
Opportunity and Forecast 2018–2023” has business overview and market shares.

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 Techniques of Investigation for Assessment Vol. 5

Fig. 1: India: Pan Masala Market Forecast: Value Fig. 2: India: Pand Masala Market Forecast:
Trends (in INR Crores), 2023 Breakup by Type (In INR Crores), 2018–2023

2. INDIAN PAN MASALA MARKET depends upon the quality of raw material and
TRENDS source of raw material. Usually the industry uses
2.1 The increased awareness regarding the low quality raw material with inflated cost of
harmful effects of tobacco products has led high quality raw material. Further majority of the
to a shift in consumers’ interests toward the suppliers of these raw materials are in informal
consumption of flavoured or plain pan masala. economy, therefore it is easy to purchase raw
Besides this, manufacturers have started offering material in cash from these suppliers to produce
their products in innovative packaging that is out of books finished product.
sealed from all corners. This ensures longer
shelf life and retains the aromatic fragrance
3. MAJOR PLAYERS IN INDIA
of the product. They have also introduced
products in flexible, convenient and cost-efficient In India the major players in Pan Masala industry
packaging, such as pouches or sachets, which are given as under:
can be consumed on-the-go. Apart from this, i. Rajnigandha
a large number of market players are focusing
ii. Pan Bahar
on aggressive advertising strategies, including
celebrity endorsements, to promote the product iii. Dilbagh
and entice consumers to a specific brand or iv. Pan Parag
product. Looking forward, the market value is
projected to reach INR 66,470 Crore by 2024, v. Raj Shri
growing at a CAGR of   9.33% during 2019–2024. vi. Manikchand
2.2 Since Pan masala industry is one of the vii. Chutki
most cash rich industries in India, the industry is
viii. Shikhar
involved in large scale tax evasion by way of out of
books transactions and unaccounted investment
in premium properties. The tax evasion in Pan 4. DIFFERENCE BETWEEN PAN
masala industry is rampant due to distribution of MASALA AND GUTKHA AND THEIR
incidence of tax at various levels and complex REGULATORY BODY
structure of this industry. The industry uses raw 4.1 The pan masala and gutkha are
material like lime, areca nut, katha, and some synonymous for majority of people, but there
fragrances. The costing of majority of raw material is difference between pan masala and gutkha.

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 Gutka Industry

Gutkha is common name to all pan masala above basis the industry may be classified in
where the ingredient is areca nut, lime katha following two categories.
tobacco and nicotine. While pan masala does a. The industry controlled by Brand and
not have nicotine and tobacco as ingredient. operated by employee.
In India all the Pan masala having tobacco
and nicotine as ingredient (commonly known b. Industry controlled and operated by
as Gutkha) are banned by Food safety and promoter.
Standards Authority of India(FSSAI) on 9th
October 2017 by a notification. The Food Safety 6. THE INDUSTRY CONTROLLED
and Standards (Prohibition and Restrictions on BY BRAND AND OPERATED BY
sales) Regulation, 2.3 & 4 prohibits the use of EMPLOYEE
tobacco and nicotine as ingredients in any food Since the pan masala is excisable item, some
items and bans sale of all food products where of the industry in this sector created a structure
tobacco is present as ingredient. where brand is controlled by promoter company
4.2 The commissioners/ offices in state govt./ firm and manufacturing activity is controlled
UTs are entrusted with implementation of The by small firms/ companies having its trusted
Food Safety and Standards (Prohibition and employees and partner/ director/ share holder of
Restrictions on sales) Regulation. manufacturing concerns. This way the promoter
group shifted its legal liability of manufacturing
4.3 Therefore Gutkha is banned in India from
activity on its employees, who are of no means. If
9th October 2017. The pan masala is allowed to
one goes through the agreement between brand
be manufactured and to be sold in India, which is
holding Promoter Company and manufacturing
not having tobacco and nicotine as ingredients.
concerns, will find majority of the receipts of
manufacturing company will go to the brand
5. STRUCTURE OF INDUSTRY
owning company/ firm leaving meager amount
The structure of pan masala industry has of receipt of manufacturing concerns. This way
changed a lot with passage of time. Earlier it was the brand owning concern is earning income
family business with production located at the from pan masala production and sale without
residential premises of the manufacturers or at any legal liability of manufacturing activity. This
small factory premise. With the passage of time design was created by some pan masala industry
the industry has became huge, and the structure group to evade penal action on violation of law
of industry has changed to some extent. Some by manufacturing concerns. On the close recce it
industries are controlled by brand owner and will be found that actually the group is controlled
operated by close employees; some industries by brand owning concerns. The structure may
are owned and operated by brand owners. On be depicted as below.

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 Techniques of Investigation for Assessment Vol. 5

Industry controlled and operated by promoter

Industry controlled and operated by promoter

A-Brand owning company/firm

A-Brand Directors/partners
owning company/firmof this concern are
Directors/partners of this
de-facto ownerconcern are concerns
of below
de-facto owner of below concerns

Xx-The manufacturing concern having

employeesconcern
x-The manufacturing of above company A as
having
shareholder/director/partner
employees of above company A as
shareholder/director/partner
Z-The manufacturing concern having
employeesconcern
Z-The manufacturing of above company A as
having
Y-The manufacturing concern having employees of
shareholder/director/partner
employees of above company A as
above company
Y-The manufacturing A as
concern shareholder/director/partner
having employees of
shareholder/director/partner
above company A as shareholder/director/partner

Chart 1

In some cases the manufacturing of product is is the number of boxes and pouches used for
carried outIn by some brand
casesowning company/ offirm.
the manufacturing productpacking
is carried are important
out by brand as the masala
owning is excisable
company/firm. Here
In some cases
Here the structure the
the structure manufacturing
of concern
of concern is isof
simpleproduct
simpleasasany is carried
any otheritem.out by brand owning
The profit declared
manufacturing company/firm.
concern.by pan masala industry Here
the structure of concern
other manufacturing concern. is simple as any other manufacturing concern.
ranges from 5–7% on turnover, which is much
7 Production Process - lower than actual profit.
7 Production Process -
7. PRODUCTION 7.1 PROCESS
The pan masala manufacturing require following raw material for manufacturing of
7.1 The pan masala 8. DISTRIBUTION AND MARKETING
7.1 The pan masala
finished product.manufacturing require
manufacturing requirefollowing raw material for manufacturing of
finishedraw
product. OF PAN MASALA
following material for manufacturing of
finished product. i) Areca nut. 8.1 The finished product i.e. pan masala after
i) Areca nut.
ii) Kathha packing needs to be transported till retailer
i. Areca
ii) nut. Kathha
iii) Lime through its marketing network. The marketing
ii. Kathha.
iii) Lime
iv) Fragrance /essence network includes transporter, distributor,
iv)
iii. Lime. v) Fragrance /essence
Pouch /box whole seller and retailer. The finished product
v) Pouch /box is transported to distributor through trucks
iv. Fragrance/ essence. and
7.2 There are two streams of business of anythere are various
pan masala unit onemobile units of
is accounted andGST other is
7.2 There
v. Pouch/ box. are two streams of business of any enforcement agencies. The modus operandi
pan masala unit one is accounted and other is of
unaccounted. The unaccounted stream is altogether transport outisofthat
books.the The
truckinvestigation
driver of unaccounted
carries the bill
unaccounted. The unaccounted
7.2 There are two streams of business of any stream is altogether out of books. The investigation of unaccounted
out of books production and sale can only beand invoice for
investigated the good
through of actual
intrusive weight tillThe
investigation. the raw
panout masala
of booksunit one is accounted
production and sale canand only other godown
be investigated of distributor.
through intrusiveIfinvestigation.
the vehicle is Theintercepted
raw
is unaccounted.materialsThe afterunaccounted
received in factory stream is got
premises entered
in the wayintheyfollowing
will showbooksthe of accounts
bill RG-1,
and stock
invoice.stock
materials after
altogether register, received
out of books. in factory
The register.premises
investigation gotof entered in following books of accounts RG-1,
Daily stock After receipt But
of theif raw
theymaterials
did not same get intercepted
is processed by and GST
finished
unaccounted outstock
register, Daily of books
register.production
After receiptand of the enforcement
raw materialsagency same isthen the bill and invoice will
processed and finished
sale can only be investigated
materials are prepared through intrusive
after grinding of raw material in prescribed ratio. The finished product is
be inreturned backratio.
and The whole material whichiswas
materials are prepared after grinding of raw material prescribed finished product
investigation. The raw materials after received
packed in Pouches or boxes depending on the in transported
requirement to distributor
of sale. It isremains
the numberunaccounted
of boxes and
factory premises
packed got entered
in Pouches or boxesindepending
following on books
the requirement
and out of of sale.
books. It isThis
the number
way theofwhole boxesmaterial
and
of accounts pouches
RG-1, used for packing
stock register, are important
Daily as stock as the masala is excisable item. The profit declared by
pouches used for packing are important the masalais transported
is excisable item. to distributor
The profitremains
declaredout by of
register. Afterpanreceipt
masala of the raw
industry materials
ranges sameon turnover,
from 5-7% books. The which distributor
is much lower transports the material
than actual profit.
is processed and finished materials are prepared
pan masala industry ranges from 5-7% on turnover, which is much lower than actual
to wholesaler then retailer. The sale proceeds ofprofit.
after grinding 8 of raw material in prescribed ratio.
Distribution and marketing of Panunaccounted Masala materials remains out of books in
The finished product is packed in Pouches or
8 Distribution and marketing of Pan Masala the industry. The distribution network may be
boxes depending on the requirement of sale. It understood as below flow chart.

116
 Gutka Industry

There is huge tax evasion in pan masala industry and huge cash generated in this process

Factory of pan masala–

the product is loaded in
the truck and the quantity
amount is not entered in
the outward register but in
kachcha paper. If the truck
intercepted in between,
then same is entered in
outward register otherwise
not.

Distributor Godown-Normally at
hidden premise

Wholesaler A
Wholesaler C
Wholesaler B

Retailers
Retailers
Retailers

Chart 2 and huge cash generated in this process.

There is huge tax evasion in pan masala industry
8.2 Inflation of Prices of Raw Material: that without disturbing the books the pan masala
8.2 suppliers
The Inflationof of prices
areca nut, of raw
lime andmaterial-
katha are Themanufacturing
suppliers of areca
concern nut,purchases
lime andmorekatharaw
are from
from informal
informal sector
sector ofofthe
theeconomy.
economy. These
These rawraw materials
materialshave different
by paying ratesprices
fewer for different quality of
but booking
materials have different
raw material. Industry rates for different
shows the ratequality higher inhigher
of raw material the books. In this regard
but actually the modus
they purchase at lower
ofrate
rawwith
material.
moreIndustry
quantity.shows
Sincethetherate
itemof is
raw operandi
excisable is thatitthe
therefore rawnumber
is the materialsofprocured are
pouch production
material higher but for
which important actually
levy ofthey purchase
GST. at entered
The purchase in theisstock
inflation registerinand
important thesame
way isthat
also
without
lower rate with more quantity. Since the item entered in the RG-1 and inward register. These
disturbing the books the pan masala manufacturing concern purchases more raw materials by
is excisable therefore it is the number of pouch registers are statutory registers which have to
paying fewer prices but booking higher in the books. In this regard the modus operandi is that the
production which important for levy of GST. be maintained by all pan masala company.
rawpurchase
The materialsinflation
procured are entered
is important in in
thethe
waystockTherefore
register and same is also entered in the RG-1 and
to avoid any penal action from GST
inward register. These registers are statutory registers which have to be maintained by all pan
masala company. Therefore to avoid any penal action from GST and Excise they normally
                                                          117
maintain all books of accounts but they also maintain parallel set of books to carry out the out of
books transactions.
Techniques of Investigation for Assessment Vol. 5

and Excise they normally maintain all books of 8.4 Investigation of out of Books sale,
accounts but they also maintain parallel set of Generation of Cash and Mode of Tax Evasion
books to carry out the out of books transactions. 8.4.1 Out of Books Sale: The main modus of
8.2.1 Books of accounts and registers tax evasion in pan masala industry is out of books
maintained by pan masala company. The books sale. The company manufactures the finished
of accounts which has to be maintained by Pan product out of books, purchases pouches out of
masala Company are as below. books and sale out of books to generate cash.
Tackling this menace needs concerted effort in
i. RG-1 and RG-2 investigation.
ii. Stock register 8.4.2 Investigation of Suppliers of Raw
iii. Daily stock register Material: The raw material suppliers are either
in informal economy or part of formal economy.
iv. Daily production sheets
The pan masala manufacturer creates an agent
v. Inward register who in turn opens the various proprietorship
concerns in the name of either the employees
vi. Out ward register
or daily wage laborers. These accounts are used
vii. Gate pass register for cash deposit and subsequent transfer to the
viii. Purchase register suppliers of the raw material. The raw material
suppliers issue the bill of goods in the name
ix. Sale register of concern which transferred the fund to the
x. Cashbook etc account of suppliers. This way the unaccounted
cash got deposited in the accounts of employees
8.3 Role of Pouch Manufacturing Concern: and same have been used for purchase of raw
For law enforcement agency the number of material which in turn used for out of books
pouch used for production of finished product production of finished product.
is most important. There are certain pan masala
8.4.2.1 The finished product is transported
group who have their own packaging industry
through transport vehicles to different distributors
on the other hand other group purchase pouches
having genuine bill/ builty having exact detail of
from different packaging industry. The number
the product. Here the mobile unit of state VAT/
of pouch used is an important criterion for levy
GST if intercepts the vehicle the driver shows the
of excise duty, therefore the investigation on this sale bill and builty and then the sale is booked
front is most important for any law enforcement in the books of assessee company otherwise if
agency. The pan masala manufacturing industry not intercepted by any enforcement agency the
purchase pouch out of books and same used genuine bill returned back to company and same
for out of books production and sale of the pan is not entered in the books of accounts. This way
masala. Therefore packaging industry, which the distribution of unaccounted material is totally
is supplier for pan masala industry, is most dependent upon the vigil of mobile unit of law
important for investigation of tax evasion of this enforcement agencies. The whole mode can be
industry. depicted as bellow.

118
 the genuine bill returned back to company and same is not entered in the books of accounts. This
way the distribution of unaccounted material is totally dependent upon the vigil of mobile unit of
law enforcement agencies. The whole mode can be depicted as bellow. Gutka Industry

Unaccounted Cash of Company Given to Agent

Pan masala
manufacturing Agent having hidden
company premise

X firm deposits cash

Z firm- deposits cash in
in its account
its account
Y firm - deposits cash
in its account

Material supplied at
manufacturing site of pan
masala manufacturing company.

Transfer of fund either

Through RTGS or DD

Supplier of raw material and pouch etc

Chart 3
8.4.2.2 The above flow chart shows that the are the links of the chain which needs thorough
agent who is either close
8.4.2.2 employee
The above of shows
flow chart the panthat theinvestigation to find
agent who is either out
close the exact
employee amount
of the pan of tax
masala company
masala company or or
any any other
other commission
commission evasion
agent. The and incidence
agent registers number of offirms
tax liability.
in the state
agent. TheVAT department
agent registersand collectsofcash
number from
firms in the
the key persons
i. Theof the pan masala manufacturer and
agent.
deposits the same in their various
state VAT department and collects cash from the bank accounts. After depositing the same, he transfers the fund
to the bank account of suppliers of the raw material. The supplier transfersof
ii. The supplier theareca nut. to the
raw material
key persons of the pan masala manufacturer and
factory premise of the pan masala manufacturer. Thisiii.way the supplier
The whole unaccounted
of lime andout kattha.
of books
deposits the same in their various bank accounts.
production of pan masala takes place. Further the finished product is sold through various
After depositing the across
distributors same,thehecountry.
transfers the fund to iv. The supplier of packaging material.
the bank account of suppliers of the raw material. v. Pan masala manufacturer.
8.5 transfers
The supplier How to crack
the rawthe case-
material to the
8.5.2 The investigation requires thorough
factory premise of the pan masala manufacturer.
analysis of important suppliers and agents of
This way the whole unaccounted out of books the group. The books of accounts discussed
production of pan masala takes place. Further above needs thorough analysis and also the
the finished product is sold through various field investigation of vendors are also need to be
distributors across the country. done to quantify the amount of purchase of raw
8.5 How to Crack the Case material. Sometimes same truck number is used
for transportation of raw material in different
8.5.1 From above discussion on modus invoices on the same date; the close analysis of
operandi of the out of books transactions of the invoices gives leads to the manipulation of
pan masala industry it is clear that the following accounts. Further the inward register daily stock

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Techniques of Investigation for Assessment Vol. 5

register and daily production sheets and out the delivery of goods to any shell entity of
ward register need to be analyzed, to quantify Mr. X, rather goods were delivered to the premise
the out of books sale. of ABC Ltd. Further ABC Ltd. has not shown
8.5.3 There are various models of out of books corresponding goods in its receipt register/ stock
transaction but one of them is very rampant in register. During the investigation the agent also
North India is creation of an agent in the purchase accepted that he has made purchases from
chain to make cash purchases. An independent XYZ Ltd. on behalf of ABC Ltd. on the basis
agent or any employee of company is created of commission. Though the cash movement
as agent, who in turn creates number of firms was not traced but non-filing of ITRs by firms of
after getting registration from GST offices and Mr. X, delivery of goods to the premise of ABC
opens dozen of accounts in the name of these Ltd without corresponding payments established
shell firms. The agent collects the cash from that the purchases of raw material have been
Pan Masala Company and deposits the same made out of books and the same have been
in various accounts of the shell firms created used for out of books manufacturing of finished
by him. Later on this cash fund is transferred product.
to suppliers account through RTGS or demand
draft. The supplier of raw material supplies the 9.1.1 The AO needs to carry out the
material such as areca nut, lime, pouches, katha investigation about out of books transaction.
etc. to the factory premises of the pan masala The one which needs thorough investigation is
company, but invoices raised in the name of of all major suppliers, agents and transporters to
shell firms created by the agents. This way the nail the issue. The stock register and production
pan masala company affected unaccounted sheets of the factory need to be examined to
cash purchase by just creating an agent in the quantify the exact amount of out of books sale.
chain of purchase. These agents are like entry The cash generated through the out of books sale
operators who work on the commission. Usually
is generally applied for acquisition of premium
these agents operates for one year with help of
assets and luxury expenditure.
these shell firms later on they close the same
and create other set of shell firms. This can be 9.1.2 In case the DDIT wants intrusive action,
explained by a case study on which search and he must cover the supplier of packaging
seizure action was executed. material, major distributors and their go downs
to quantify the scale of tax evasion by the Pan
9. CASE STUDY I Masala Company. The distributor and supplier
9.1 The search and seizure action was executed of packaging material are important link in the
on ABC ltd (Pan Masala Manufacturer), its agent chain. The incidence of excise duty depends on
Mr. X the packaging material supplier XYZ Ltd. the number of pouches manufactured. Therefore
During the search action dozens of accounts the correct purchase of packaging material
were found maintained and operated by the Mr. is important for assessing the production of
X in the name of various shell entities. The cash finished product. Likewise the number of
was being deposited in the bank accounts of shell machines operated at the factory premise is
entities maintained by Mr. X and the same cash another important criterion for the incidence of
was being transferred to bank account of XYZ excise duty. It is found in various cases that Pan
Ltd. through RTGS and demand draft. During Masala Companies either use hidden premise to
the search the XYZ Ltd. could not substantiate store packaging materials and Machines or they

120
 Gutka Industry

create their employee as machine owner and cash component for acquisition of property.
put the machine in some hidden premise. These In this regard the market rate of the property
things have to be kept in mind while carrying can be taken from any real estate agent of the
out the pre search investigation of Pan Masala area. Further the seller of property and his bank
Company. The DDIT must cover all the hidden accounts may be examined thoroughly; if seller
premise of the group. Further another link is the is individual the cash component might reflect in
distributor. If material produced out of books his bank accounts. In some cases the seller may
then the same needs to be marketed through be real estate developer/ builder, in these cases
distributor. If proper recce carried out and all it will not be easy to trace cash component,
the godowns of distributors located, it is most here the assistance of DVO may be taken to
probable that the entire finished product which find out the correct value of the property under
are produced for marketing will be found. The consideration.
physical stock and stock register of distributor
shall be examined to quantify the exact amount 9.3.2 In some cases pan masala group
of Pan Masala traded unaccounted. purchases land and constructs the hotel by
contractor. In this type of case the investigation
9.2 Application of Unaccounted Cash: It
of contractor, assistance of DVO and analysis
is invariably found that the pan masala industry
of bank account of company in which hotel is
usually have another limb of business either
constructed gives lot of leads of unaccounted
creation of house property income, or real
investment.
estate or hospitality sector. These are the sectors
where cash can be applied to large extent.
10. CASE STUDY II
Starting the investigation of pan masala group
will be incomplete without the investigation of One group purchased land in an area where
acquisition of various assets by the group and its circle rate/ collector rate of land was very
promoters. low, though the market rate was high. The
investigation started and sellers of the land
9.3 Acquisition/ Creation of Premium Assets were examined and it was found that the sellers
by Pan Masala Group and its Investigation: who were generally farmer deposited the cash
The promoters of pan masala group usually invest received from the pan masala group in their bank
for acquisition of following property. accounts. When examined they all accepted that
i. Hotel in area where circle rate is lower. they have received cash in lieu of land sold to
pan masala group. Further the farmers have no
ii. Purchase of commercial property where other alternative income. To substantiate the
circle rate is lower. same other transaction details were called from
iii. Purchase of agricultural land in the region the sub registrar and it was found that within a
where circle rate is lower. month there were 11 transactions, out of which
two transactions were at the rate much higher
9.3.1 It is seen that almost all the pan masala than the rate which was disclosed by pan masala
group and its promoters declare huge income group. Further it is found that if cash deposited
under House Property, Long Term Capital in the bank account of farmers are taken in to
Gain etc. the house property acquired in the account the transactions of all 11 cases comes
area where circle rates are lower and property similar. On the basis of these circumstantial
is purchased on premium by applying huge evidences and market rate and statement of

                                                          121
Techniques of Investigation for Assessment Vol. 5

farmers it was established beyond doubt that the is investigating the pan masala company should
pan masala group has made huge cash in the collect the show cause notices issued by Excise
acquisition of land. Department to understand the tax evasion by
particular company. The show cause notices
10.1 Further the hotel constructed on the land
of Excise Department is very helpful as usually
was of 60 rooms sprawling campus with five star
these pan masala companies are constantly
facilities. On investigation of bank account of
watched by excise department due to rampant
the company in which hotel was constructed it
tax evasion in this Industry.
was found that there was no major transactions
in the accounts. The contractor of the hotel was
examined and it is found that major fund have 11. CONCLUSION
been given to contractor in cash. By thoroughly
The Investigating Officer/ AO should be aware
examining contractor’s accounts and assistance
of the modus operandi of tax evasion in the
of DVO huge application of cash was found and
industry which is mainly cash based. The
concealment was detected.
recent introduction of GST Law will be of great
10.2 The investigation of pan masala industry help to track the movement of goods and the
needs intrusive investigation as the modus consequent transactions. The AO should be able
operandi is very complex and it is very easy to match the sales data from GST returns filed
to carry out unaccounted transaction in this by the trader/ manufacturer and can also get
industry. The Assessing Officer or the DDIT who some clue from e-way bills.

122
 Chapter

9
Leather & Footwear
Industry
A. LEATHER INDUSTRY

1. INTRODUCTION
1.1 Chronologically the birth of Leather in
India dates back to 3,000 years B.C. The innate
strengths, innovative technology and marketing
strategies have converted the comparative
advantage of India into a commercial success
making the country a cynosure of Leather and
Tanning in the Global Leather Map. The leather
industry occupies a place of prominence in the
Indian economy in view of its massive potential manifold over the past decades and touched
for employment, growth and exports. There has US$ 5.69 billion during 2018–19, recording
been an increasing emphasis on its planned a Cumulative Annual Growth Rate of about
development, aimed at optimum utilization 3.09% (5 years).
of available raw materials for maximizing 1.3 An Overview of Indian Leather Industry
the returns, particularly from exports. Indian (Source-Council for Leather Exports):
Leather Development Programme (ILDP)
aims at augmenting raw material base through i. The Leather Industry holds a prominent
modernization and technology upgradation place in the Indian economy. This sector
of leather units, addressing environmental is known for its consistency in high export
concerns, human resource developments, earnings and it is among the top ten foreign
supporting traditional leather artisans, addressing exchange earners for the Country.
infrastructure and establishing institutional ii. The export of footwear, leather and leather
facilities. products from India reached a value of
1.2 This sector is known for its consistency in US$ 5.69 billion during 2018–19.
high export earnings and it is among the top ten iii. The leather industry is bestowed with
foreign exchange earners for the country. With an affluence of raw materials as India
an annual turnover of over US$ 12 billion, the is endowed with 20% of world cattle
export of leather and leather products increased & buffalo and 11% of world goat &

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Techniques of Investigation for Assessment Vol. 5

sheep population. Added to this are the 1.5 Emerging Strengths

strengths of skilled manpower, innovative i. Design development initiatives by
technology, increasing industry compliance institutions and individuals.
to international environmental standards,
ii. Continuous modernization and technology
and the dedicated support of the allied up-gradation.
industries.
iii. Economic size of manufacturing units.
iv. The leather industry is an employment
iv. Constant human resource development
intensive sector, providing job to about programme to enhance productivity.
4.42 million people, mostly from the
v. Increasing use of quality components.
weaker Sections of the society. Women
employment is predominant in leather vi. Shorter prototype development time.
products sector with about 30% share. vii. Delivery compliance.
v. India is the second largest producer of viii. Growing domestic market for footwear
footwear in the world, producing about and leather articles.
2.41 billion pairs (2017), second only to 1.6 Highlights of Product Segments of
China. Indian Leather and Footwear Industry
vi. India is the second largest exporter of i. Tanning Sector – Annual availability of
leather garments and third largest exporter leathers in India is about 3 billion sq.ft.
of Saddlery & Harness in the world. India accounts for 13% of world leather
production of leathers. Indian leather
vii. The major production Centres for trends/ colors are continuously being
footwear, leather and leather products selected at the MODEUROPE Congress.
in India are located in the States of ii. Footwear Sector – India is Second largest
Tamil Nadu–Chennai, Ambur, Ranipet, footwear producer after China, with
Vaniyambadi, Vellore, Pernambut, Trichy, Annual Production of 2.41 billion pairs
Dindigul and Erode; West Bengal– (2017). India is also the second largest
Kolkata; Uttar Pradesh–Kanpur, Agra, consumer of footwear after China, with a
Noida, Saharanpur; Maharashtra– consumption of 2.49 billion pairs.
Mumbai; Punjab–Jalandhar; Karnataka– iii. Footwear (leather and non-leather) export
Bengaluru; Telengana–Hyderabad; accounts for about 45.48% share in Indian
Haryana–Ambala, Gurgaon, Panchkula, leather and footwear industry’s export
Karnal and Faridabad; Delhi; Madhya (2018–19). The Footwear products export
Pradesh–Dewas; Kerala–Kozhikode and mix is: Gents 58%, Ladies 30%, Children
Ernakulum/ Cochin; Rajasthan; Jaipur; 9% and others 3%.
Jammu & Kashmir; Srinagar. iv. Leather Garments Sector – India is the
1.4 Strengths of Indian Leather Sector second largest global exporter, next only to
Italy, with a global market share of about
i. Own raw material source–About 3 billion 17%. Accounts for 8.23% share of India’s
sq ft of leather produced annually. total export from leather sector (2018–19).
ii. Some varieties of goat/ calf/ sheep skins v. Leather Goods & Accessories Sector
command premium position. including Saddlery & Harness – India is
the fifth largest global exporter. Accounts
iii. Strong and eco-sustainable tanning base.
for about 28% share of Indian leather and
iv. Modernized manufacturing units. footwear industry’s total export.

124
 Leather & Footwear Industry

1.7 India’s Export of Leather & Leather Products for 5 Years

Table 1
—Value in US$ Mn
Product 2014–15 2015–16 2016–17 2017–18 2018–19
Finished Leather 1329.05 1046.45 888.39 874.24 721.73
Leather Footwear 2278.18 2147.98 2128.87 2193.86 2195.47
Footwear Components 361.29 284.34 298.69 335.24 319.10
Leather Garments 604.35 553.11 518.96 518.96 468.48
Leather Goods 1452.83 1370.04 1365.22 1365.79 1434.24
Saddlery & Harness 162.7 146.38 155.88 155.97 159.35
Non-Leather Footwear 306.44 306.74 296.68 296.91 392.63
Total 6494.84 5855.06 5646.79 5740.97 5691.00
% Growth 9.37% -9.85% -3.56% 1.67% -0.87%
Source: DGCI&S

1.8 % Share of Leather & Leather Products FY 2018–19

Footwear Components Sadolery and

Non-Leather Harness 2.80%
5.51%
Footwear 6.90%

Leather
Garments 8.23% Leather Footwear
38.58%
Finished Leather
12.68%

Leather Goods
25.20%

Fig. 1

1.9 Major Markets ii. These 12 countries together accounts for

nearly 71.84% of India’s total leather,
i. The major markets for Indian Leather & leather products and footwear export.
Leather Products are USA with a share of
15.70%, Germany 11.58%, UK 10.50%, iii. European Union accounts for 54% of
India’s total export of leather and leather
Italy 6.48%, France 5.68%, Spain 4.54%,
products.
UAE 3.97%, Netherlands 3.42%, Hong
Kong 3.34%, China 2.60%, Poland 2.02%,
and Belgium 2.00%.

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Techniques of Investigation for Assessment Vol. 5

1.10 % Share of India’s Exports of Leather & Leather Products in Top 12 Countries in
US $ MN FY 2018–19
USA
2.02%
2.00% Germany
2.60%
3.34% UK
3.42% Italy
15.70% France
3.97% Spain
4.54% 11.58%
U.A.E.
5.68%
Netherlands
6.48% 10.50%
Hong Kong
China
Poland
Belgium

Fig. 2

1.11 India’s Export of Leather & Leather Products to Various Countries for Last 5 Years.
Table 2
(Value in Million USD)
Country 2014–15 2015–16 2016–17 2017–18 2018–19 %Share of
2018–19
USA 768.06 834.10 867.19 847.30 893.68 15.70%
Germany 800.20 674.19 657.37 684.41 659.18 11.58%
UK 751.33 716.49 606.18 616.41 597.30 10.50%
Italy 504.26 407.91 374.09 389.06 368.71 6.48%
France 371.75 308.45 287.74 326.38 323.02 5.68%
Spain 351.27 327.86 293.43 281.30 258.26 4.54%
U.A.E. 281.07 263.15 226.72 161.27 226.18 3.97%
Netherlands 224.92 182.97 169.00 196.98 194.43 3.42%
Hong Kong 422.11 315.26 265.60 248.07 190.31 3.34%
China 194.26 162.21 173.72 170.34 148.21 2.60%
Poland 81.74 65.20 101.06 144.47 115.02 2.02%
Belgium 108.88 84.84 104.90 114.80 114.09 2.00%
Somalia — 100.12 94.12 58.82 102.24 1.80%
Vietnam 115.57 105.54 92.38 104.81 98.44 1.73%
Australia 84.66 84.71 82.66 91.16 95.36 1.68%
Portugal 68.39 62.13 67.61 68.62 68.77 1.21%
Denmark 83.90 76.17 77.22 69.35 67.39 1.18%
Korea Rep. 68.47 82.38 68.65 67.22 66.12 1.16%
Japan 56.21 59.24 63.87 71.42 65.53 1.15%
Russia 49.96 49.01 51.15 56.08 52.59 0.92%
South Africa 55.04 52.87 44.13 43.80 52.28 0.92%
Table 2: Contd...

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...Table 2: Contd.
Country 2014–15 2015–16 2016–17 2017–18 2018–19 %Share of
2018–19
Chile 53.12 52.18 41.85 44.90 48.87 0.86%
Malaysia 62.99 54.58 48.60 48.77 46.32 0.81%
Austria 35.48 26.20 27.86 46.26 43.82 0.77%
Canada 59.24 47.25 46.94 50.50 43.27 0.76%
Sweden 46.48 38.14 40.83 43.20 40.02 0.70%
Nigeria 12.30 17.02 20.29 24.75 37.53 0.66%
Indonesia 28.95 25.62 26.97 33.82 37.23 0.65%
Mexico 8.57 12.49 12.14 19.36 36.07 0.63%
Saudi Arabia 47.42 36.77 40.86 37.87 33.65 0.59%
Kenya 8.26 12.73 30.25 22.04 32.29 0.57%
Switzerland 37.05 29.74 24.83 30.37 31.41 0.55%
Slovak rep 0.00 30.71 31.48 36.44 26.61 0.47%
Hungary 30.96 23.46 28.23 24.65 24.31 0.43%
Thailand 28.79 18.22 19.82 19.82 20.20 0.35%
Bangladesh 18.08 17.66 34.98 27.59 19.84 0.35%
Finland 23.55 16.80 17.25 19.76 18.64 0.33%
Turkey 39.63 27.60 19.96 22.63 16.31 0.29%
Israel 13.92 13.35 13.24 15.87 15.86 0.28%
Cambodia 10.81 12.62 10.37 7.27 10.84 0.19%
Czech Republic 22.52 10.45 9.34 11.91 10.52 0.18%
Greece 14.22 10.95 10.16 10.28 10.46 0.18%
New Zealand 12.11 11.23 9.81 9.88 10.16 0.18%
Oman 11.21 12.76 12.29 9.32 9.46 0.17%
Sri Lanka Des 10.13 13.85 14.42 12.34 9.39 0.16%
Singapore 22.12 23.49 33.04 14.42 9.22 0.16%
Sudan 31.40 20.17 14.63 8.86 9.10 0.16%
Taiwan 12.08 9.87 8.97 8.07 8.44 0.15%
Norway 15.00 12.31 7.54 8.76 6.32 0.11%
Djibouti 0.00 14.79 11.19 8.56 6.28 0.11%
Others 336.40 187.24 209.98 249.40 261.02 4.59%
Total 6494.84 5855.06 5646.79 5740.97 5691.00 100.00%
Source: DGCI&S

1.12 Future Outlook of leather sector. With the implementation of

The Government of India had identified the various industrial developmental programmes
Leather Sector as a Focus Sector under ‘Make as well as export promotional activities; and
in India’ programme keeping in view of its keeping in view the past performance, and
immense potential for growth and employment industry’s inherent strengths of skilled manpower,
generation. Accordingly, the Government is also innovative technology, increasing industry
implementing various Special Focus Initiatives compliance to international environmental
under the Foreign Trade Policy for the growth standards, and dedicated support of the allied

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Techniques of Investigation for Assessment Vol. 5

industries, the Indian leather industry aims period during the first year but continues to
to augment the production, thereby enhance remain employed for the minimum period in
export, and resultantly create additional subsequent year. These facts have to be certified
employment opportunities. by a chartered accountant in his accountant’s
report in Form 10DA (Rule 19AB).
1.13 The leather industry employs 3 million
people of which 30 per cent are women. A large 1.15 India is the second largest exporter of
part of the production is in the Micro, Small and leather garments and third largest exporter of
Medium Enterprises. The industry is bestowed Saddlery & Harness in the world. The Indian
with an affluence of raw materials as India is leather industry accounts for around 12.93 per
endowed with 20% of world cattle & buffalo and cent of the world’s leather production of hides/
11% of world goat & sheep population. Added skins. The country ranks second in terms of
to this are the strengths of skilled manpower, footwear and leather garments production in the
world and accounts for 9 per cent of the world’s
innovative technology, increasing industry
footwear production. India’s leather industry
compliance to international environmental
has grown drastically, transforming from a mere
standards, and the dedicated support of the allied
raw material supplier to a value-added product
industries. Besides, the industry is supported
exporter.
by renowned R & D and training institutes like
Central Leather Research Institute. There have 1.16 In 2018–19, total exports from Leather
been many reforms introduced to boost exports- & Leather Manufactures recorded export value
the footwear industry has been de-licensed and worth US$ 5691.00 million comprising of Raw
de-reserved allowing bigger firms to produce Hides and Skins, Finished Leather, Leather
shoes with state of the art machinery. They also Goods, Leather Garments, Footwear of Leather,
Leather Footwear Component and Saddlery
have been allowed to expand their production
and Harness.
capacity. Most leather exports ($ 5.69 billion in
2018–19) have gone to US and EU in the past. 1.17 Top 10 Leather/ Footwear Manufacturing
Companies in India.
1.14 The Union Finance Ministry has extended
the liberalised benefits under Section 80-JJAA Bata India Ltd: The company was founded in
of the Income-tax Act to footwear and leather the year 1894 by Tomas Bata. It is headquartered
industry in the Budget 2018–19. Earlier, a in Lausanne, Switzerland. Bata India product
weighted deduction of 30% was allowed in range includes Footwear, Accessories and
addition to normal deduction of 100% in respect Clothing. Besides India, it is serving Africa,
of emoluments (additional employee cost) paid Asia, Europe and Latin America. The company
to eligible new employees who have been is Swiss multinational shoe maker based in
Lausanne, Switzerland.
employed for a minimum period of 240 days
during the year under Section 80-JJAA of the Bhartiya International Ltd: Bhartiya is one of
Income-tax Act. However, now the minimum the top exporters of leather apparel. It is serving
period of employment is relaxed to 150 days in global clients since 1990. Its production facilities
the case of leather and footwear industry as in the are in Bangalore-Chennai region of South India.
case of apparel industry. This would encourage Farida Group: It is one of the top 10 leather
creation of new employment in this sector. The manufacturing companies in India. The company
provisions further rationalized deduction of is leading manufacturer of good quality men
30% by allowing benefit for a new employee and women footwear and finished leather. It
who is employed for less than the minimum operates into three business segments including

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leather, uppers and shoe manufacturing units. company is known for its skilled craftsmanship,
The group has various companies which are as unmatched quality and high fashion product in
follows: the footwear industry. It has network of Metro
a. Farida Shoes Pvt Ltd showrooms in the entire country. It offers huge
collection of footwear and accessories.
b. Arcot Soles Pvt Ltd
Mirza International Ltd (Red Tape):
c. Farida Classic Shoes Pvt Ltd The company was started in the year 1979.
d. Delta Shoes Pvt Ltd It is preferred supplier of leather to leading
international brands. It is one of the top 10
e. Farida Leather Ware Private Limited leather manufacturing companies in India.
f. Farida Prime Tannery Relaxo Footwears Ltd: The company was
g. India Shoes Exports Private Limited started in the year 1976 and it is headquartered
in New Delhi. It is offering a huge range of
h. Kenmore Shoes Private Limited
fashionable, comfortable, durable and colorful
i. Farida Tannery PLC-Ethiopia footwear collection for children, women and men.
Lakhani Armaan Group: The group came In 1976, two brothers Mukund Lal Dua &
into existence in the year 1966 with Lakhani Ramesh Kumar Dua dreamed to take their
Rubber Works, an automotive components father’s footwear business to what Relaxo is
manufacturing company established by Mr K.C. today–one of the leading and most popular
Lakhani. footwear companies in India. It has various
Now company is involved in the business of sub-brands such as Sparx, Bahamas, Flite,
manufacturing beach slippers, canvas shoes and Schoolmate and Relaxo Hawaii.
sports shoes. The group companies are Lakhani Superhouse Ltd: Superhouse Ltd is multi-unit
Footwear, Lakhani Rubber Products Pvt Ltd, and multi-product conglomerate. It is leader into
Lakhani Shoes & Apparels Pvt Ltd, Mascot the field of footwear manufacturing and exports.
Footcare etc. It is involved into manufacturing of The company produces all types of leather
footwear for men, children and ladies. goods, quality leather and textile garments.
Liberty Shoes Ltd: Liberty Shoes was 1.18 Some Facts about Foreign Direct
founded in the year 1954 by Dharam Pal Gupta, Investment (FDI) in Leather Industry:
Purshotam Das Gupta and Rajkumar Bansal by
i. $193.7 mn FDI in leather sectors, leather
the name of Pal Boot House. It is headquartered
goods and pickers during April 2000–
in Karnal Haryana. It is one of the top 10 Leather
March 2019
Manufacturing Companies in India.
ii. $54 mn FDI in leather industry in India was
Mayur Uniquoters Ltd: The company is top
received during April 2014-March 2017
manufacturer of artificial leather/ PVC vinyl.
Mayur Uniquoters has made its place in ‘Forbes iii. 100% FDI inflows to leather and leather
Asia Top 200 under $1Bn enterprises’ in the goods is allowed under automatic route
Asia Pacific region. Mayur Uniquoters is offering
iv. Sep 2017: $100 mn Brazilian firm Grupo
artificial leather for automotive, footwear,
Priority brings premium shoe brand to
furnishing, leather goods & garments.
India. Grupo Priority has launched its
Metro Shoes Ltd: Metro Shoes Ltd was flagship men’s shoe brand West Coast in
founded in the year 1947 by Malik Tejani. It has India in a tie-up with the distribution arm
multi-brand footwear retail chain in India. The of footwear retailer Metro Shoes.

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v. Feb 2017: Founder kids footwear brand A large proportion of slaughtered stock is
Teddy Toes aims to make luxurious consumed in the country. Even tanneries situated
international designs easily available in at a distance have arrangements for buying stock
India, and at affordable prices. from slaughter houses.

2. STRUCTURE & PRESENCE OF THE 4. FLAYING AND CURING

INDUSTRY IN INDIA 4.1 Whether slaughtered or naturally dead, the
The leather industry in India is geographically well hides and skins are removed from the carcasses.
diversified, though Tamil Nadu, Uttar Pradesh This process is known as flaying. In their raw
and West Bengal account for bulk of the output. state, the hides and skins are highly perishable
The major production centres for leather and as these are easily liable to putrefaction. As a
leather products are located at Chennai, Ambur, protection against putrefaction, the raw hides
Ranipet, Vaniyambadi, Trichy and Dindigul in and skins are subjected to the process of curing
Tamil Nadu, Kolkatta in West Bengal, Kanpur, and tanning to obtain in putrescible leather.
Agra and Noida in Uttar Pradesh, Jalandhar Curing in India is mainly done by wet-salting,
in Punjab, Bahadurgarh and Manesar in dry-salting or plaster-curing or by drying.
Haryana, Bengaluru in Karnataka, Delhi,
4.2 Wet: salting of raw hides and skins is
Hyderabad in Andhra Pradesh. The sector is
adopted for short term preservation of raw hides.
dominated by micro and small units with bigger
It is convenient when the goods are meant for
units accounting for smaller share of the total
tanning in the country. It consists of the rubbing
manufacturing units. Leather industry being
of salt-common salt and/ or khari salt-on the
predominantly dominated by MSMEs and
fleshy side of the hide or skin twice or thrice.
huge unorganized sector had been impacted
by demonetization. Considering the resilience 4.3 Dry: salting or plaster-curing is normally
shown by the sector in the wake of judgment employed for goods meant for export. It consists
of Supreme Court relating to environmental of rubbing the fleshy side with a solution of khari
front, the sector is expected to bounce back salt and drying. The process is repeated twice or
once again. thrice. The final coat of salt is usually mixed with
chalk in order to make the flesh appear white
and attractive in appearance. Consequently,
3. COLLECTION OF HIDES AND
thick plaster is formed on the flesh of the hide
SKINS
and hence its name “plaster curing”.
3.1 The villagers who are traditionally engaged
4.4 Curing by Drying: In this method, curing
in this kind of work collect the ‘fallen’ hides and
carry them to the local market for sale. Here, is ensured by stretching the hides lengthwise
the agents of the commercial firms dealing in on bamboo frames and drying them on those
hides and skins come regularly. They purchase frames. The hides cured in this way are known
the hides and supply to the manufacturer. These as framed hides. The dried hides are also known
agents play a crucial role in this trade. in the trade circles as ‘flints’.

3.2 The other source of hides is the slaughtered

5. SOAKING
stocks. These are managed by professional
butchers and hence they are superior in quality. 5.1 Its object is to cleanse by removing the
They are produced in towns generally. The adhering dung, dirt, blood and also to soften the
number of intermediaries in this case is less. dry-salted and dried hides and skins. In cases of
Production is more regular and better organized. green and wet-salted stock, the soaking usually

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consists of washing in two or three changes hides and skins, also to dissolve some protein
of water. matter of the grain surface and the yellow elastic
5.2 For Dry: salted and dried hides and skins, fibres to make the final leather smooth on the
soaking must be of a fairly long duration. In surface and stretchy, to loosen the lime soap
winter it requires at least 48 hours and in summer formed during liming and the dirt and to bring
from 24 to 36 hours to get the stock properly down the swelling of hides and skins. For stiffer
soaked. Water alone does not make dry hides varieties of leather such as sole, harness and
and skins sufficiently soft, hence chemicals like belting, a partial removal of the lime is all that
caustic soda or sodium sulphide are added. is necessary.
7.2 For leathers which have to be soft, pliable,
6. LIMING and more or less stretchy all the four objects
of deliming must be fulfilled and this cannot
6.1 Well soaked hides are now limed. The be achieved by any chemical deliming agent.
object of liming is four fold-removal of hair, Bacterial action is necessary and from times
swelling and plumbing of the pelt, saponification immemorial fermented infusions of hen and
of the natural grease and solution of some inter- pigeon dung or of dog dung have been used for
fibrillary matter or cementing substance. this purpose.
6.2 All these are essential for satisfactory
tannage. 8. PICKLING
6.3 The process consists mainly of the When intended for chrome tanning, the delimed
immersion of hides and skins in a milk of lime, pelt is usually pickled. Pickling means treating
called lime liquor. This process takes six to the pelt for a short time in a bath of sulphuric
twelve days in once-used, twice-used or fresh acid and salt to which some alum is added. The
lime liquor depending on the nature of the end object is to impart a sort of preliminary tannage
product. and to bring the pelt into an acid condition.
Hides and skins meant for vegetable tannage are
6.4 The usual procedure is to put hides for the
not usually pickled.
first few days in old lime for loosening the hair
and dissolving the cementing substance and
then shift them to newer limes for plumping up 9. TANNING
and swelling. A good practical system is to use 9.1 There are two main processes of tanning-
a set of three pits containing-old (twice used) vegetable and chrome. Broadly, most of the
lime; medium (once used) lime; and fresh lime. thicker and coarser varieties of leather, such
Hides are kept in each of these for a number as sole, harness and belting are made by the
of days, usually two to four, so that the liming former while the finer varieties like leathers for
is generally complete in 6 to 12 days. But both boot and shoe uppers are made by the latter
the total duration of liming and the treatment in process. Alum, formaldehyde and oil process of
different limes are varied according to the class tanning are of comparatively limited application.
or leather under manufacture and the qualities The first two are used for making white, and the
desired in the final product. third for making chamois leather. A combined
formaldehyde and oil tannage is also used
7. DELIMING nowadays for making chamois leather.
7.1 After liming, the hides have to be delimed. 9.2 In vegetable or bark tanning delimed hides
The object of deliming is not only to remove the and skins, technically called the ‘prepared pelt’
lime from the pelt but, with certain classes of are treated in an infusion of tannin, containing

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Techniques of Investigation for Assessment Vol. 5

vegetable matter. Chrome-tanning is a leathers (made from goat and sheep skins) are
comparatively modern invention. In this method lightly shaved and dyed into various shades of
tanning is done by a basic chrome salt. There colour, oiled up, dried out, glazed and either
are two processes of chrome tanning-the single embossed or boared to produce characteristic
bath, and the double bath. gains.
9.3 The main advantage of chrome-tanning 10.4 Finishing of Chrome Leather: This
over the vegetable process is the speed of the is more elaborate than that of the vegetable-
former. Chrome does in hours what vegetable- tanned leather. It chiefly involves the following
tanning takes months to do. The final product operations:
too, In case of shoe upper-leather at any rate,
is very satisfactory when tanned with chrome. i. Shaving to make the leather thin and
Hence, cow hides, calf skins and goat and uniform in substance, usually done by
sheep skins are nowadays chrome-tanned for machine.
manufacture of this class of leather. ii. Neutralising and washing to free the leather
from acid and soluble matters.
10. FINISHING OF LEATHER iii. Dyeing.
10.1 After tanning, all classes of leather,
iv. Fat-liquoring, corresponding to make the
whether vegetable or chrome-tanned have to be
leather soft.
finished to make them suitable for the purpose
for which they will be ultimately used. With the v. Drying.
exception of sole leather, finishing consists of
vi. Staking to soften the leather mechanically
i. Dyeing or colouring, treating leather with (done by machine).
grease (for softening and
vii. Glazing, to make the leather glossy and
ii. Waterproofing-technically called carrying) bright (done by machine.)
polishing or glazing.
10.2 But the finish imparted to a leather is 11. TAX INVESTIGATION
peculiar to it, that no two varieties are finished in 11.1 Accounting
the same way.
11.1.1 Like in any other business, in this trade
10.3 Finishing of vegetable-tanned leather- also books of account like cash book, ledger and
Sole leather, which is usually vegetable-tanned journal are maintained. Apart from the usual
is neither dyed, nor glazed, its finishing consists
vouchers and invoices, job card for each process,
of setting it out well to make it flat and smooth
whether it is tanning or making of finished goods
on the surface and pressing heavily to make it
is maintained showing the weight/ area of the
stiff, tough and water resistant. Belting, harness
leather. These job cards are at the maximum kept
and saddlery leathers are shaved to required
for six months and thereafter destroyed. These
substance and treated with grease to increase
their tensile strength and water resistance and to job cards are important pieces of information for
make them pliable and well set-out. Harness and valuing the stock.
saddlery leather is occasionally dyed into brown 11.1.2 Accountancy packages like Tally or
and black shades. Vegetable-tanned shoe upper Profit, SAP and ERP on cloud are prevalent in
leather is shaved to substance and often dyed this trade. There is no common software in the
and well curried and some also glazed, while market for the technical functions in this business.
vegetable-tanned morocco and bookbinding However, in some places for better control of the

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products indigenously developed software are of the preceding three licensing years as
used as product management programs. given in serial no 3 of sub Section XII,
11.2 Costing and Yield Rate Analysis: duly certified by the Chartered accountant/
The Commerce Ministry makes a study of the Cost & Works Accountant/ Jurisdictional
industry and from time to time, and fixes up the Excise/ GST Authority.
STANDARD INPUT AND OUTPUT NORMS 11.3 The commission agents are the king-pin
(SIONs) in consultation with Central Leather of the system of collection of raw skins and hides
Research Institute, Chennai (CLRI), and Council and their role should be thoroughly scrutinised.
of Leather Exports (CLE). The latest norms The probability of commission agents carrying
for cow and buffalo hides and other relevant on their own business in the guise of the
statistics are in Annexure-I, and II. commission agency and thus keeping their
11.2.1 SION—Standard Input Output profits out of tax net cannot be entirely ruled out.
Norms or SION: In short is standard norms The AO must be fully aware of this aspect. Cash
which define the amount of input/ inputs credits specially, on the occasion of festival sales
required to manufacture unit of output for export should be very carefully scrutinised.
purpose. Input output norms are applicable for 11.4 Inflation of purchases is very common in
the products such as electronics, engineering, this trade and it is difficult to pin down the assessee
chemical, food products including fish and on this. Purchases are made through bought
marine products, handicraft, plastic and leather notes prepared by the assessee themselves, that
products etc. SION is notified by DGFT in the too in cash. Since cash transaction is permitted
Handbook (Vol. 2), 2002–07 and is approved by law (Rule 6DD) for this line of business,
by its Boards of Directors. An application for verification becomes difficult. Bought notes
modification of existing Standard Input-Output should contain the signature and the address
norms may be filed by manufacturer exporter of the seller. In most of the cases only thumb
and merchant-exporter. The Directorate General
impression are available with no addresses.
of Foreign Trade (DGFT) from time to time issue
In such situations though the conclusion will
notifications for fixation or addition of SION for
be obvious, inference should be drawn only
different export products. Fixation of Standard
after insisting on the identity of the seller.
Input Output Norms facilitates issues of Advance
Intra-firm and inter-firm comparisons and spot
License to the exporters of the items without any
enquiries will help.
need for referring the same to the Headquarter
office of DGFT on repeat basis. 11.5 Most of the purchases are cash purchases.
Hence, it is easy to inflate them. The assessees
11.2.2 Basics Requirements of Standard Input usually take shelter from the operation of Section
Output Norms For fixation/ modification of 40A(3) by claiming that their case is covered by
Standard Input Output Norms (SION) following the exception in Rule 6DD(e). The benefit of this
details are required: exception is available only where the purchases
i. Technical Details of the export product as are made from butchers directly. If the purchases
per the details given in Appendix 33. are from middlemen, which is normally the case,
the benefit is not available. The disallowance
ii. Chartered Engineer certificate certifying
under Section 40A(3) should survive the test
the import requirements of raw materials
of appeal. However, the AO should not stop
in the format given in Appendix 32B.
with proving cash payment but examine the
iii. Production and Consumption data of the genuineness of the purchase itself. Low GP rates
manufacturer/ supporting manufacturer are generally indicative of bogus purchases.

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11.6 As this industry is dominated by MSMEs, x. Spent chrome liquors are regenerated and
sales suppression is rampant. Quantity tally used back in tanning.
and data analytics like percentage of yield can xi. Utilisation of leather shavings in preparation
be of some help in finding out suppression. of chrome liquors.
When local sales are suppressed, turnover for
sales tax is also suppressed. In suspected cases 11.7.1 The AO should check whether the by-
products are duly accounted for and the income
of suppression of sales, reference to sales tax
arising from their disposal is offered for tax
assessment orders may help. If the quantitative
tally is not provided or the percentage of yield is 11.8 The industry is labour-intensive. To
abnormal, sales suppression can be inferred. avoid payment of PF, ESI and other payments,
the manufacturers go for labour contracts. As
11.7 Suppression of sales of by-products is contract labour is not permanent, payment of the
common. A variety of wastes and by-products above benefits to it does not usually arise. This
are derived in this business. Their sale is not apart, tanneries pose serious health hazards.
reported. With progressive improvements in Working conditions are unhygienic. Employees
leather technology, the leather ‘wastes’ have do not stick to an establishment for long.
found new uses with considerable revenue Unscrupulous manufacturers take advantage
implications. It is imperative that the AO keeps of this and inflate their claims of expenditure.
himself abreast of technological changes and They even fabricate registers for payment of
ensures that additional revenue is brought to tax. wages and bonus with some names and thumb
Marketable by-products of leather industry are: impressions not capable of verification. Here,
i. Waste lime sludge from tanneries-used as spot inspections and surveys may help. Further,
construction material. payments made to labour contractors attract the
provisions of Section 194C and TDS is liable to
ii. Goat hair and sheep wool in belt and be deducted on such payments. Non-deduction
spinning industry-used in manufacture of of TDS is prevalent in this sector, since the small
carpets, rugs etc. time labour contractors are generally reluctant
iii. Pig-hair-used in brush making industry. to provide their PAN, which is mandatory for
deduction of tax at source. In that case, Section
iv. Leather Shavings and cutting and leather 206AA may be invoked by the deductor(s). Non-
splits used for manufacture of leather deduction of tax on such expenditure is liable
boards. to disallowed as per the provisions of Section
v. Nitrogen-produced from vegetable tanned 40(a)(ia) of the Income-tax Act. In this line of
leather waste. business, commission is generally paid to acquire
orders from purchasers abroad. The commission
vi. Insoles and middle soles, fancy leather
paid to such brokers/ agents are guised in the
goods manufactured from chrome
form of business promotion expenses, which
shavings. also attracts deduction of TDS. Once TDS is
vii. Chrome shavings are also used as a deducted on such payments, the income of the
substitute for cork and cardboard box broker/ agent has to be necessarily disclosed to
manufacture. the department and is also brought to tax.
viii. Use of vegetable tanned leather waste for 11.9 Inflation of inputs is not unusual in this
the manufacture of heel stiffener materials. line of trade. Standard input norms are given
in Annexure to help in the assessment. Some
ix. Spent bark as fuel. inputs like wattle extracts which are mostly

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imported are sold outside books but are shown fabricated indicating much higher prices than
as consumption. This point can be easily verified what was actually paid. Inflation of expenditure
by applying the standard norms. was admitted by the assessee in that year.
11.10 The most common kind of suppression 12.2 In the case of a firm, purchases of hides
prevalent in this trade is the under-valuation of were shown as Rs. 28.80 lakh. The GP rate
closing stock. There are many varieties of raw worked out to 5.69% as against 12.6% of the
skin. There are many varieties of tanned goods earlier year. The AO noticed that considerable
at different stages. Even in finished goods there amount of purchases were recorded from two
are goods of different quality and goods of parties-‘A’ and ‘B’. The payments to them were
different weight and with different measurement. made by bearer cheques. These cheques were
Since valuation of these items is highly technical found to have been encashed, not by ‘A’ or ‘B’,
and does not yield to any particular standard, but by certain other persons. On enquiry it was
assessees take advantage of this and cook up found out that ‘A’ was a scooter mechanic and
figures of closing stock to suit them. Primary ‘B’, a tea shop owner. It turned out that the
records based on which the valuation is done alleged purchases from them were never made.
are generally destroyed within six months The addition of inflation in purchases was upheld
from the end of the accounting year, therefore in appeals.
verification of the valuation of closing stock will
12.3 An assessee owning several tanneries
be a problem unless scrutiny of the return is taken
engaged in manufacture of leather goods like
up immediately after its filing. It is advisable to
wallets, belts and garments. During scrutiny
collect inventory of closing stock every year in
when the case came up for hearing the AO asked
the first week of April which at least will pre-empt
for details of valuation of the closing stock. In
any manipulation of the stock.
these, 5082 sq. ft. of tanned leather was shown
11.11 The industry is highly polluting. Supreme as “stock in transfer given for processing”.
Court decision has obliged the tanneries to This aroused the AO’s suspicion. The assessee
setup their own pollution control mechanisms. claimed that the leather was given to another
The expenditure on setting up such mechanisms processing unit for further tanning as the required
may be overstated or sometimes claimed as process was not available with the assessee. It
revenue expenditure. Modernisation of the gave the name and address of the processor. In
industry is on with active support of the State. the meantime the assessee filed a revised return
Capital expenditure incurred on these scores for the subsequent assessment year reducing
may sometimes be claimed as revenue. the income and claiming more opening stock of
tanned leather to the extent of 5082 sq. ft. The
12. CASE STUDIES processor confirmed having received the leather
and returned it in the next year. However,
12.1 The case of an assessee owning a except for the confirmation letter, there was no
tannery, and supplying wet blue leather to other corroboration in the form of any entry in the
manufacturers of leather goods was taken up stock register or debiting of processing charges,
for scrutiny. The AO routinely called for the loading and unloading charges, etc. The person
books and the vouchers and asked the Inspector in charge of the processing unit was summoned
to test-check one or two bills by making spot and questioned in depth. During enquiry it
enquiries. The Inspector selected four vouchers came to light that sale proceeds of 5082 sq. ft.
of purchase of raw hides for local enquiries. It leather were sought to be covered up by the plea
turned out that they were bogus. On detailed of transfer of stock. Prosecution was launched
enquiry, it turned out that the bought-notes were against the assessee for this suppression.

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12.4 In yet another assessee’s case, during dominated by unorganised players who account
the assessment proceedings, the AO visited the for approx. 70% of the total industry. Thus on
assessee’s tannery. He noticed that the assessee an annual basis, out of approx. 2.1 bn pairs
organised its work economically and its labour of footwear manufactured, approx. 1.5 bn
and chemicals costs were minimal. It had a system pairs are manufactured by small unorganised
of maintaining job cards for each lot of leather manufacturers and the rest approx. 0.6 bn pairs
getting processed at different stages. It also had a are made by organised players such as Bata,
system for valuing the stock. After studying these Relaxo Footwear, Metro Shoes, Liberty, Action,
systems, the AO called for the details of labour Khadims, Paragon, Nike, Puma etc. There are
charges, chemicals consumption and valuation overall approx. 15000 units involved in the
of closing stock. It was found out that the labour manufacturing of shoes in India with approx.
charges had been inflated to the extent of almost 55% of volume coming from small players and
double. Besides, there were no basic records rest by large manufacturer where overall sales is
to substantiate the valuation of closing stock. above Rs. 15 mn annually. Thus, total footwear
Immediately after the close of the accounting industry is currently pegged at Rs.336 bn
year the AO visited the assesse’s premises and translating into realisation of Rs.160/ pair. Out
collected the details of actual stock as on 31 of total pair consumed in India about 840 mn is
March. Though this pre-empted the assessee consumed by top 20 cities, thus accounting for
from suppressing the closing stock for that year, it urban region average realisation of Rs.240/ pair
could not help the AO in ascertaining the correct and in rural areas at Rs.100/ pair.
closing stock for preceding assessment year.
13.2 India along with China is expected to be
The inflation in labour charges was, however, the fore bearers of growth in the next few decades
brought to tax.
and would thus be one of the largest consumers.
This has prompted many international players to
setup base in these countries and tap the latent
B. FOOTWEAR INDUSTRY
demand. Pavers England has already made its
presence felt, having setup shop. Many others are
13. INTRODUCTION expected to arrive within a short span of time.
13.1 Indian footwear market, like its India produces close to 2.06 bn pairs of footwear
international counterpart, can broadly be including leather shoes (909 mn pairs), leather
classified into men, women and kids. Indian shoe uppers (100 mn pairs) and non-leather
footwear segment is dominated by men footwear, footwear (1,056 mn pairs).The major production
which accounts for 60% of the industry while Centres in India are Tamil Nadu, Uttar Pradesh,
Punjab and Delhi. Apart from these hubs there
women and kids footwear contribute 30% and
are hordes of small centres that act as suppliers for
10%, respectively. India is the second-largest
the fast growing footwear industry.
producer of footwear globally after China, where
India currently accounts for approx. 9% of 13.3 Footwear manufacture is a labour intensive
total global shoe production. Global volume of industry. The industry has undergone structural
footwear stands at 22 bn pairs per year of which changes in last two decades. These have been
approx. 2.1 bn are produced in India. 90% of occasioned by migration of artisans from rural
the footwear produced in India is consumed areas to urban centres in search of employment.
within the country while the rest 10% is exported Numerous household units have come up
primarily to European markets such as the UK, in urban centres like Agra, Kanpur, Kolkata,
Germany, Italy and France and some shipped Mumbai, Jaipur, Jalandhar, Ahmedabad, Delhi
to North America. Indian footwear industry is and Chennai.

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13.4 The industry employs 1.1 mn people, both machine’ (mechanical or computer-aided design),
directly and indirectly. Majority of these people for different sizes and fittings of the shoe.
are from the weaker Sections of the society of 14.3 The upper leather is sorted and dispatched
them, only 20% are in the organized sector, of to the clicking Section. In upper clicking Section,
which 40% are female workers. The remaining the various components of uppers are cut both
80% of the workforce comprises of rural artisans, manually (hand operation) and mechanically.
cottage and household units. With improvement The clicking skill and the speed of the operator,
in the manufacturing facilities more and more maximum utilisation and minimum wastage
people will be part of the organised sector of material contribute to the efficiency of the
resulting in better working environment for operation.
the workers.
14.4 Upper Closing: The components are
13.5 The footwear produced can be classified skived for reducing the thickness at the ends
into three kinds, viz. full leather, mixed leather of the upper using the upper skiving machine.
and non-leather. Leather footwear for this
Thermoplastic toe puffs and stiffeners are skived
purpose is one where all its components (barring on heavy duty machines. Edges of upper are
the sole) are made from leather. There is another cemented and folded. The upper components
classification of footwear-Gents’, ladies’, and are joined and stitched on sewing machines that
children’s footwear. Footwear sales depend on
vary according to the need. A flat bed machine
seasons. January and February are usually lean is used on a flat surface. A post bed machine
months. The peak seasons are the spring and
with a small working area, allows easier fitting
the summer. and stitching on partially closed uppers. On a
cylinder machine closed upper could be moved
14. STAGES OF MANUFACTURE freely around the working area. The eyelets are
14.1 Shoe manufacturing involves following attached on punching and eyeletting machine.
stages: 14.5 Assembly Section: Toe puff is attached
i. Design development. onto the toe portion on toe puff attaching
machine. Thermoplastic stiffener is attached on
ii. Upper cutting/ clicking. the counter moulding machine.
iii. Upper preparation. 14.6 Lasting Section: Insoles are attached
iv. Upper closing. on the last bottom on insole attaching machine.
The fore part or the upper is steam-conditioned
v. Assembly.
to make it soft and pliable for lasting on fore part
vi. Lasting. conditioning machine. The upper is kept over
vii. Sole attaching, finishing. the last. The fore portion is pulled and attached
to the insole. In both fore lasting and side lasting,
viii. Packing. neoprene-based adhesive is used. The heel/ seat
14.2 Design Development: Designing of portion of the shoe is also lasted. The lasted
a shoe requires a sketch. A proper shoe last is margin of the upper is completely attached to
selected or designed and fabricated. This sketch the insole on the last.
is transferred on to a paper pasted to the contours 14.7 Marking: The shoe is pounded using
of the last. Patterns of different components of vibrating hammers. The lasted margin of the
the shoe are cut, tolerances are given wherever upper is roughed until the fibres are exposed
required and final patterns are cut. These patterns on lasted upper roughing machine. The shoe
are graded on a machine called ‘pattern grading is passed through the ‘humid and heat setting’

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chamber. Here, the shoe is set to the shape of 15.2.1 The issues from the store are made
the last and when the last is removed the upper against the requirement received for leather on
should retain its shape. clicking cards and for other items requisition slips.
14.8 Bottom Filler: A mixture of rubberised 15.3 Clicking cards are prepared for each and
cork and felt is filled in between the lasted every clicker with details of style order, quantity
margin of shoe. Neoprene based cement is of finished goods the requirement of various
applied to the roughed surface of the upper. finished leather to be issued to clicker. The stores
The leather soles are roughened and neoprene department makes the issue to the individual
adhesive applied. Thermo plastic soles (TPR) are clicker on receipt of the clicking card. After
halogenated, polyurethane cement applied and completion of the job, the clicker submits the
dried. The bottoms of the upper and the outsole clicked components along with the card to the
are exposed to an infrared lamp on adhesive in-charge of clicking department. The gain/ loss
reactivating chamber. The sole is kept in position of leather in clicking is calculated on the card-
of the lasted upper and is pressed under pressure itself to note the efficiency of the clicking person
on sole attached press. Sole stitching to the and control the consumption of finished leather.
upper depends on the design and style of the In cases of piece-raters the wages are paid on
construction. the basis of clicking cards.
14.9 Finishing: The shoes are cleaned using 15.4 A similar method is adopted in skiving
cleaner, repaired for any minor damages by for controlling the production and clearing the
repairer/ filler and sprayed by a finish. The payment of wages to piece workers. In closing
shoe is polished by a suitable wax finish. Section also a production register with the
Then it is attached, cleaned, inspected and put control number of job orders (closing cards) is
in the carton. maintained on the same lines.
15.5 In the packing Section an order style
15. PRODUCTION RECORDS wise record for finished uppers is maintained.
15.1 In the uppers division and the leather goods In dispatch Section the material is dispatched
division, production records are maintained at to the customer according to the order delivery
various stages of production according to the schedule. Challan and packing list invoice are
flow of materials. prepared immediately on dispatch of materials.

15.2 Stores-The following records are kept in

16. COSTING RECORDS
the store:
In a typical footwear division the following
i. Gate pass-Gate pass is prepared for all
costing records are usually maintained:
materials received in stores.
i. Cost sheets.
ii. Stock register-Individual stock registers are
maintained for each of these items. ii. Profitability statement.

iii. Leather. iii. Statement showing cost of production.

iv. consumable stores (lining, hooks, eyelets, iv. Statement showing the cost of sales.
threads, button etc.) v. Statement showing cost of sales, sales
realisation, and margin.
v. general stores-machine parts and other
items not directly consumed in stores. vi. Statement showing cost of rubber sole.

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vii. Statement showing conversion cost for purchases. Whether all purchased items have
various cost centres been accounted for in terms of sales and stock,
viii. Statement showing apportionment of a quantitative tally will help. Indian sales can
conversion cost to various product be cross-checked by reference to the account
copies of the major buyers. Export rejections
ix. Statement showing cost of power are disposed of locally. The AO should look into
generated, purchase and consumed.
this aspect and satisfy himself about a correct
recording of the rejection sales.
17. TAX INVESTIGATIONS
17.4 When the raw hide is spliced, the thinner
17.1 The leather industry in India is portions are used for the uppers and for
concentrated in a few specific areas. It is carried manufacture of shoes etc. Thicker portions which
on by a closely knit group of individuals. are generally not accounted for are used in the
Consequently, the business methods adopted manufacture of sole, leather-bags etc. It is for this
by them are shrouded in a certain measure of reason that most of the footwear industries show
secrecy which has made tax evasion possible on export of shoe uppers but do not disclose the
a significant scale. The nature of the business sale or use of thicker leather coming out of the
being such, very little investigation had been splitting.
done in the past into the manufacturing process
and other operations. 17.5 In any case, the entire transaction from
the stage of purchase of unprocessed hide till
17.2 Mostly, tanning and manufacture of the sale of footwear to local industries is shown
footwear and other leather goods produced in cash. A tanner, for example, buys all his raw
are intertwined. The tanners of leather are also hides through agents in one of the mandis (e.g.
into the business of leather goods manufacture, industries at Kanpur make purchases mainly
maybe in separate units, but nevertheless in
from Kanpur, Agra and Khurja). The raw hides
closely connected operations. Consequently,
thus purchased are sent for processing and the
evasion or posting of expenses commence from
manufacturer has total flexibility in showing the
the time when the raw hides are purchased.
end products of processed hides and keep the
Without going into the process of tanning it may
be mentioned that the manufacturers make it rest outside books for manufacture and sale
difficult for linking raw hide consumption and of footwear and leather goods outside books.
manufacture of footwear/ leather goods by Therefore, an enquiry has to commence from
weighing different measures at different stages. the Mandi stage where wholesalers have to be
For example, at the time of purchase of raw examined to see what they are accounting for in
and unprocessed hides, these are bought in their books.
kilos/ tonnes. Once the hide undergoes tanning 17.6 Similarly, the processing has to be
process, the mode of measurement changes to observed for some time to understand the output
decimetre, thus making it difficult to establish that comes out of the processed hides since
any linkage between the raw hide processed these are measured in decimetre. Unless the
and the end product in the form of footwear/ processing is observed, it will not be possible for
leather goods. the AO to determine how much shoe uppers or
17.3 The AO should examine the purchases shoes can be manufactured out of one hide and
for their genuineness. Considering the small further he will not be in a position to determine
units with which the manufacturer deals, the economic benefit of the thicker leather which
there is considerable scope for inflation of is also used for production purposes.

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18. ENQUIRIES IN CASES OF orders. Examination of the correspondence and

EXPORTERS reaching proper conclusion is necessary while
dealing with this aspect.
18.1 Against exports the exporters get various
incentives like duty drawbacks and import 18.2 Inflating export invoices is “a tempting
licenses. Accounting of these incentives assume mode of avoiding GST, according to Neelkanth
importance. The AO should ensure that the Mishra, the India equity strategist at Credit
incentives are properly accounted for and have Suisse Group AG. By showing more of their
entered the income computation. Realisation/ sales as exports, manufacturers can claim bigger
repatriation of export sale proceeds is also an area tax credits.
to be checked. The reasons for non-repatriation 18.3 There are prescribed Standard Input
should be closely scrutinised. Yet another area Output Norms (SION) for this industry and the
in export cases is quality claims/ cancellation same is enlisted here in under:

Table 3
G01 All type Leather garments including coats/ jackets having consumption of finished
leather above 25 Sq.ft.
G02 All type Leather garments including coats/ jackets having consumption of finished
leather of 25 sq.ft. and below
G03 Children Leather Shoes
G04 Children Rubber and Canvas footwear with rolled soles
G05 Children Rubber and Canvas shoe with moulded sole
G06 Fine/ Fancy Leather Gloves
G07 Finished Leather from Hide of Cow/ Buffalo
G08 Gents Leather Half Boot Uppers
G09 Gents Leather Half Boots
G10 Gents Leather Long Boots/ Gents Leather Long Boot Lasted Uppers
G11 Gents Leather Sandal Upper
G12 Gents Leather sandals with P.U Sole/ Rubber Sole/ PVC Sole
G13 Gents Leather Shoe Uppers(Stitched/ unstitched)
G14 Gents Leather Shoes
G15 Gents Long Boot Uppers (upto Knee)
G16 Gents Rubber and Canvas footwear with rolled soles
G17 Gents Rubber and Canvas shoes with moulded sole
G18 Leather-Cum-Synthetic Golf Gloves/ Synthetic Golf Gloves with Leather
G19 Industrial Hand Gloves (Large size) (Based on consumption of Gloving leather hide/
splits 42cm in length, 4.70 sq.ft)
G20 Industrial Hand Gloves (Medium size) (Based on consumption of Gloving leather
hide/ splits 36cm in length, 3.60 sq.ft)

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G21 Industrial Hand Gloves (Small size) (Based on consumption of Gloving leather hide/
splits 26cm in length, 3.00 sq.ft)
G22 Ladies Closed Leather shoe uppers
G23 Ladies Leather Half Boot
G24 Ladies Leather Half Boot Uppers
G25 Ladies Leather Long Boot
G26 Ladies Leather sandals with PU Sole/ Rubber Sole/ PVC sole
G27 Ladies Leather Sandals Upper
G28 Ladies Leather Shoes
G29 Ladies Long Boot Uppers (Upto knee)
G30 Ladies Rubber and Canvas footwear with rolled soles
G31 Ladies Rubber and Canvas shoes with moulded sole
G32 Laminated leather Split/ Crust laminated with polyurethene Foil
G33 Leather Bags, All Sorts(like Handbags, Shoulder Bags, Shopping Bags, Portfolio,
Travel Bags, School Bags, Ladies Bags, Men’s Bags, Briefcases, Attache Cases,
Pouch Bags, Clutch Bags, Evening Bags Rucksacs, Ladle folios, Belts, Bags etc.)
G34 Leather Board Counter for Shoes
G35 Leather Golf Gloves
G36 Leather Portfolio based on consumption of Leather hide/ skin 012.0 sq ft., Size 17
G37 Leather Sanddlery Goods Harness: Saddle Sets-14
G38 Leather Waist belt (Based on consumption of Leather hide/ skin 01.0 sq ft Size 30
G39 Leather Wallets, Purses, Key cases, Card holders, coil purses, Billfolds, Spects
cases, Toilet cases, Passport Covers, Cigarette cases, Lipstick cases, Cosmetic
cases, Manicure cases, Pen cases, Memo cases, Cheque Book Covers, Ring Binder
Bookcovers, Tie cases, vanity cases, Desk Top sets, camera ca
G40 Leather welt work shoes
G41 Sports shoes with leather upper & PVC sole
G42 Sports shoes with leather upper and moulded sole
G43 Gents & Boys Leather Chappals, Slippers with Leather Sole or Synthetic Sole
G44 Ladies & Girls Leather Chappals, Slippers & Sandals with Leather Sole and
Synthetic Sole
G45 Gents Leather Half Boot Lasted Upper with insole
G46 Finished Leather from Skin of Goat/ Sheep/ Calf
G47 Finished Leather Sofa Cover (Stitched)
G48 Leather Carpet

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18.3.1 The DGFT has notified revised Standard misreporting practices or inflation of expenses.
Input Output Norms (SIONs) No. G7 and G46 Sharing data on input materials may help the
in its public notice dated 23rd October, 2013. Assessing Officers in their verification. In this
The same is annexed at the end of this chapter. regard, the AOs should take note that GST rate
for footwear upto Rs. 1,000/- has been reduced
19. CONCLUSION to 5%, while those above this value shall attract
the GST Rate of 18%. This variation in rate may
This industry is large, growing and has all the
potential to impact Indian Economy. Due to lure the assessee to reclassify its goods/ finished
nature of its products, cash purchases of hide and products so as to bring them to the lower slab of
skin, the AO is advised to follow the SIONs notified GST rate. This should be verified by the AO by
by the DGFT. GST, rolled out in the year 2017, calling for assessee’s production register, stock
has positive impact to curb underreporting and register, GST invoices etc.

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PUBLIC NOTICE NO. 32(RE:2013)/2009–2014

NEW DELHI, DATED THE 23rd OCTOBER, 2013

In exercise of the powers conferred under Paragraph 2.4 of the Foreign Trade Policy, 2009–2014 and
Paragraph 1.1 of Handbook of Procedures (Vol. 1), the Director General of Foreign Trade hereby
makes the following amendment/ modifications in the Handbook of Procedures, Vol. II (SION Book):
2. The entries No. G-7 and G-46 of Leather and Leather Product in the Standard Input Output
Norms (SION) are revised as per Annex-I and Annex-II respectively.
3. Effect of Public Notice
In SIONs at entry G-7 and G-46 certain input items have been amended/ changed. These are in
the nature of (a) deletion, (b) change in the description, and (c) technical specification detailed. No
changes have been made either in description of concerned export product or in the permissible
quantity of relevant inputs (in some cases, input has been deleted).

Sd/-
(Anup K. Pujari)
Director General of Foreign Trade
E-mail: [email protected]
(F.No.01/84/162/037/AM-14/DES-V)

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ANNEXURE-I
Revised Standard Input Output Norms (SION) G-7.
G7 Finished Leather 1000 1 Preservative (as per Sl. No. 3 of General 2 Kg
from Hide of Cow/ Sq. Ft. Note for Leather & Leather Products)
Buffalo
2 Wetting Agent 10 Kg
3 Soaking Enzyme (other than used in 5 Kg
Food Processing Industry)
4 Unhairing Agent:
a) Sodium Sulphide 5 Kg
b) Sulfohydrate 5 Kg
5 Leather Liming Auxiliaries 2.5 Kg
6 Deliming Agent 10 Kg
7 Bating Agent (other than Potassium 5 Kg
Carbonate)
8 Leather Degreasing Agent (Fatty Alcohol/ 5 Kg
Esters Fatty Acid Derivatives)
9 Bleaching Agents (Sodium Bisulfite/ 2.50 Kg
Hydrogen Peroxide/ Sodium Chlorite/
Potassium Per-Manganate)
10 Formic Acid 10 Kg
11 Acetic Acid 5 Kg
12 Chrome Tanning Agent: Deleted
a) For Full Chrome Tanned Leather
(i) Chrome Tanning Agent/ Relevant 50 Kg
Reducing Agent/ Masking Agent
(ii) Vegetable Tanning agent such as
Wattle or Mimosa/ Quebracho and 20 Kg
Supplementary Vegetable Tanning agents
such as Chestnut/ Tara/ Sumac/
Re-tanning agent such as Cutch.
b) For Vegetable Tanned Leather Main 150 Kg
vegetable tanning agents such as Wattle
or Mimosa/ Quebracho, Re-tanning
agents such as Cutch and supplementary
Vegetable Tanning agents such Chestnut/
Tara/ Sumac subject to the condition that
Supplementary Tanning Agents shall be
allowed a maximum of 30 Kg (Betal nut/
Areca nut is not allowed)
c) For Vegetable-Chrome Combination
Tanned Leather (Semi-Chrome tanned
Leather)
(i) Vegetable Tanning Agent such as 150 Kg
Wattle or Mimosa/ Quebracho, Re-
tanning agents such as Cutch and
supplementary Vegetable Tanning agents
such Chestnut/ Tara/ Sumac subject to the
condition that Supplementary Tanning
Agents shall be allowed a maximum of
30 Kg.

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(ii) Chrome Tanning Agent/ Relevant 22 Kg

Reducing Agent/ Masking Agent
13 Zirconium Tanning Salt 10 Kg
14 Sodium Formate/ Acetate 8 Kg
15 Sodium Bicarbonate 8 Kg
16 Soda Ash 4 Kg
17 Magnesium Oxide 5 Kg
18 Syatan (only synthesized chemical 54 Kg
products but not pure chemicals)
19 Oxalic Acid 2.50 Kg
20 Deleted Deleted
21 Fatliquors 24 Kg
22 Dye Levelling Agent 2 Kg
23 Dyes (Acid dyes/ Direct dyes/ 12 Kg (Out of the
Premetallised dyes/ Basic Dyes/ Reactive total quantity of 12
dyes/ Sulphur dyes) other than those of Kg, the quantity of
exclusively used in textile processing Reactive dyes shall
not exceed 0.6 Kg
and subject to the
General Note 6 of
Leather & Leather
Product)
24 Dispersing Agent (formulated products) 5 Kg
excluding Nonylphenol
25 Cationic Dye Fixative 5 Kg
26 Polyurathane Resin 20 Kg
27 Penetrating Agent (As per Sl. No.3 of 4 Kg
General Note for Leather & Leather
Product)
28 Pigments other than those used 10 Kg
exclusively in ceramic colours, cuprous
oxide and aluminium oxide
29 a) Binders other than those indicated below 10 Kg
b) Casein based Binders 5 Kg
OR
Resin/ Polyurathane based binders 10 Kg
30 Liquid Dyes (Based on Acid dyes/ 10 ltrs
Basic dyes/ Metal complex dyes/ Liquid
Colouring Agents)
31 Feel Modifiers 1 Kg
32 Lacquer Emulsion 10 Kg
33 Slipagents (Silicon based Oil) 1 Kg
34 Fixing Agents/ Cross Linkers 1 Kg
(Formaldehyde free)
35 Wax Emulsion (only ready to use 2 Kg
formulated products; raw materials for
wax emulsion is not permitted)
36 Oil/ Wax for pull up Finish (edible oils are 25 Kg
not permitted)

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Techniques of Investigation for Assessment Vol. 5

37 Fillers for Leather Industry (Hydrophilic 3 Kg

fumed silica not allowed)
38 Spl. Auxiliaries for Stain/ Fire/ Grease/ 5 Kg
Water/ Alkali/ Acid/ Oil Resistance
39 Pearlised Pigment and Powder (Bronze 1 Kg
powder is not allowed)
40 Fluorescent Pigment 4 Kg
41 Special Lacquer for Brush off/ Two tone 10 Kg
42 *Transfer foil (Polyester/ Polyurethane 120 sq. Mtrs.
Metalised film-Silver/ Gold/ Bronze/ Mat/
Plain/ Two Tone effect/ Glazy/ Nubuck
effect/ Pull up effect/ Suede effect/ Floral
and other design effects)
Note: *This item will be allowed only
for laminated finished leather using the
above Transfer Foil/ Film.
43 Miscellaneous Items:
a) Knife Blades/ Band Knives:
Splitting Band Knife/ Fleshing Knife/
Shaving Knife used only in leather
industry
b) Grinding wheels for Splitting Machine/ upto 5% of FOB
Fleshing Machine/ Shaving Machine used value of export, out
only in leather industry of which value of
each of the items at
(e), (g) & (h) shall
not exceed 5% of the
overall CIF value of
miscellaneous items
permitted for import.

c) Felt/ Felt Sleeves Samming Machine/

Setting cum Samming/ Polishing Felt
Roller
d) Stones:
Polishing Stone Roller/ wet Buffing Stone
Roller
e) Emery Paper:
Roll of 50 Metre Length
f) Glazing Glass in cylindrical shape only
g) Padding Mohair cloth
h) Embossing plate
Note: In case of export of Suede and Nubuck leather, the quantity of the import item 24 i.e. Dyes shall be enhanced to “20 Kg (Out
of the total quantity of 20 Kg, the quantity of Reactive Dyes shall not exceed 0.6 Kg).
Note: 2. Item No. (ii) for 12 (a) shall not be allowed for the grain garment leather and gloving leather.
Note: 3. Supplementary Vegetable Tanning Agents Gambier/ Chestnut/ Tara/ Sumac shall be allowed for import on Actual User
condition. In case of DFRC, these items shall be used by the licensee only and shall not be allowed for transfer/ sale.
j. Lactic Acid which is appearing as Deliming Agent against inputs shall not be allowed.
k. Synthetic Resins and Hydroxy Ethyl Cellulose in any broad heading of Chemicals may not be allowed.
l. Any product in the name of fillers may not be allowed because formulated products manufactured by Leather Chemical
Companies (as supported by their technical data sheets) are used in Leather Industry.

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 Leather & Footwear Industry

ANNEXURE-II
Revised Standard Input Output Norms G-46.
46 Finished Leather from 1000 1 Preservative (as per Sl. No.3 of 1.5 Kg
Skin of Goat/ Sheep/ Sq.ft. General Notes for Leather and
Calf Leather products)
2 Wetting Agent 5 Kg
3 Soaking Enzyme (other than used 2.5 Kg
in Food Processing Industry)
4 Unhairing Agent:
a) Sodium Sulphide 2. Kg
b) Sulfohydrate 2.5 Kg
5 Leather Liming Auxilliaries 1.5 Kg
6 Deliming Agent 2.5 Kg
7 Bating Agent (other than 5 Kg
Potassium Carbonate)
8 Leather Degreasing Agent (Fatty 5 Kg
Alcohol/ Esters/ Fatty Acid
Derivatives)
9 Bleaching Agent (Sodium 1.5 Kg
Bisulfite/ Hydrogen Peroxide/
Sodium Chlorite/ Potassium
Permanganate)
10 Formic Acid 10 Kg
11 Acetic Acid 2.5 Kg
12 Chrome Tanning Agent: Deleted
a) For Full Chrome Tanned Leather
(i) Chrome Tanning Agent/ 30 Kg
Relevant Reducing Agent/
Masking Agent 12 Kg
(ii) Vegetable Tanning Agent such
As Wattle or Mimosa/ Quebracho
and supplementary Vegetable
Tanning agents such as Chestnut/
Tara/ Sumac/ Re-tanning agent
such as cutch
b) For Vegetable Tanned Leather 55 Kg
Main vegetable tanning agents
such as Wattle or Mimosa/
Quebracho Re-tanning agents
such as cutch and Supplementary
vegetable Tanning agents such as
Chestnut/ Tara/ Sumac subject to
the condition That Supplementary
Tanning agents such as Gambier,
Chestnut, Tara and Sumac shall
be allowed a maximum of 30
Kg. (Betal nut/ Areca nut is not
allowed)

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c) For Vegetable-Chrome
Combination Tanned Leather
(Semi-Chrome tanned Leather)
(i) Vegetable Tanning Agent such 55 Kg
as Wattle or Mimosa/ Quebracho
Re-tanning agents such as cutch
and Supplementary Vegetable
tanning agents such as Chestnut/
Tara/ Sumac subject to the
condition that Supplementary
Tanning Agents such as Chestnut,
Tara and Sumac shall be allowed
a Maximum of 30 Kg.
(ii) Chrome Tanning Agent 13 Kg
13 Zirconium Tanning Salt 5 Kg
14 Sodium Formate/ Acetate 5 Kg
15 Sodium Bicarbonate 4 Kg
16 Soda Ash 2 Kg
17 Magnesium Oxide 2.5 Kg
18 Syntan (only synthesized chemical 20 Kg
products but not pure chemicals)
19 Borax 5 Kg
20 Oxalic Acid 2.50 Kg
21 Sodium thio-sulphate 5 Kg
22 Deleted Deleted
23 Fatliquors 20 Kg
24 Dye Levelling Agent 1 Kg
25 Dyes (Acid dyes/ Direct Dyes/ 10 Kg (Out of the
Premetallised dyes/ Basic Dyes/ total quantity of 10
Reactive dyes/ sulphur dyes) other Kg, the quantity of
than those of exclusively used in Reactive dyes shall
textile processing not exceed 0.5 Kg
and subject to the
General Note 6 of
Leather & Leather
Product))
26 Dispersing Agent (formulated 2.5 Kg
products) excluding Nonylphenol
27 Cationic dyes Fixative 5 Kg
28 Pigments other than those used in 10 Kg
ceramic colours, cuprous oxide ad
aluminum oxide
29 a) Binders other than those 10 Kg
indicated below
b) Casein based binders 15 Kg
OR
Resin/ Polyurathane based binders 10 Kg

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 Leather & Footwear Industry

30 Liquid Dyes (based on Acid dyes/ 10 ltrs

Basic dyes/ Metal complex dyes)
31 Feel Modifiers 1 Kg
32 Lacquer Emulsion 10 Kg
33 Slipagents (Silicon based Oil) 1 Kg
34 Fixing Agents/ Cross Linkers 1 Kg
(Formaldehyde free)
35 Wax Emulsion (only ready to use 2 Kg
formulated products)
36 Oil/ Wax for pull up finish (other 15 Kg
than edible oils)
37 Fillers for Leather Industry 3 Kg
(Hydrophilic fumed silica not
allowed)
38 Spl. Auxiliaries for Stain/ Fire/ 5 Kg
Grease/ Water/ Alkali/ Acid/ Oil
resistance
39 Pearlised Pigment and Powder 1 Kg
(Bronze powered is not allowed)
40 Fluorescent Pigment 4 Kg
41 Special Lacquer for Brush off/ 10 Kg
Two tone
42 *Transfer foil (Polyester/ 120 sq.mtrs
Polyurethane Metalised film-Silver/
Gold/ Bronze/ Mat/ Plain/ two
Tone effect/ Glazy/ Nubuck effect/
Pull up effect/ Suede effect/ Floral
and other design effects)
Note: *This item will be allowed
only for laminated finished leather
using the above Transfer Foil/ Film.
43 Miscellaneous Items:
a) Knife Blades/ Band Knives:
Splitting Band Knife/ Fleshing
Knife/ Shaving Knife used in
leather industry
b) Grinding Wheels for Splitting Upto 5% of FOB
Machine/ Fleshing Machine/ value of export, out
Shaving Machine used in leather of which value of
industry each of the items at
(e), (g) & (h) shall
not exceed 5% of the
overall CIF value of
Miscellaneous items
permitted for import
c) Felt/ Felt Sleeves Samming
Machine/ Setting cum Samming/
Polishing Felt Roller

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Techniques of Investigation for Assessment Vol. 5

d) Stones:
Polishing Stone Roller/ wet Buffing
stone Roller
e) Emery Paper:
Roll of 50 Metre Length
f) Glazing Glass in cylindrical
shape
g) Padding Mohair cloth
h) Embossing plate

Note: 1. Item No. (ii) for 12 (a) shall not be allowed for the grain garment leather and gloving leather.
Note: 2. Supplementary Vegetable Tanning Agents Gambier/ Chestnut/ Tara/ Sumac shall be allowed for import on
Actual User condition. In case of DFRC, these items shall be used by the licensee only and shall not be allowed for
transfer/ sale.
a. Lactic Acid which is appearing as Deliming Agent against inputs shall not be allowed.
b. Synthetic Resins and Hydroxy Ethyl Cellulose in any broad heading of Chemicals may not be allowed.
c. Any product in the name of fillers may not be allowed because formulated products manufactured by Leather
Chemical Companies (as supported by their technical data sheets) are used in Leather Industry.

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 Chapter

10
Liquor Trade

1. INTRODUCTION
1.1 The word ‘liquor’ refers to an alcoholic
drink, especially one made by distillation, such
as whisky or rum, as distinguished from such
beverages as wine or beer which are made by
fermentation. Similarly and significantly, the
word ‘spirit’ also, apart from its other meanings
like holy spirit, public spirit, vigour or enthusiasm,
refers to strong alcoholic liquor like whisky
and rum which are produced by distillation.
Wine, which also is an alcoholic beverage, is
the fermented juice of grapes (or other fruits). complicated network of laws and regulations on
Wines vary as to colour (red or white) and both the federal and state levels.
sugar content (sweet or dry). These may be 1.2.1 Indian Made Foreign Liquor (IMFL):
effervescent (sparkling) or non-effervescent (still)
Hard liquor that has incorporated imported raw
and sometimes strengthened with additional
material or borrowed the concept from foreign
alcohol. Hence, various types of wines and beer
branded liquor are often termed as Indian Made
fall in one distinct category distinct from cooked
Foreign Liquor (IMFL). Among all IMFL, whiskey
spirits like whisky and rum.
accounts for approximately 46 per cent of total
1.2 Background of Liquor Market in India: sales. Despite its origins, freedom to buy IMFL
India has the world‘s third largest and fastest growing is restricted in some federal states. The southern
market for alcoholic beverages. The whiskey
states are often more heavily regulated in liquor
market—estimated at 300 million cases—is the
manufacturing and distribution than the north.
largest in the world. The World Health Organisation
They are often available at retail outlets and
(WHO) reports that liquor consumption in India
has been growing steadily since 2005. In the privately owned bars. A licensing system is used
meantime, per capita consumption of alcohol by the federal states to control the number of
beverages has increased from 3.6 litres to 4.3 private bars. Nevertheless, purchase of IMFL
litres between 2003 and 2010, 93 per cent of this in southern Indian states including Kerala,
growth comes from liquor (spirits). While tariffs Tamil Nadu, Karnataka and Andhra Pradesh
on imported liquor remain high, domestic liquor still accounts for more than 60 per cent of total
manufacturing and sales are also enmeshed in a annual sale in the country.

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1.2.2 Imported Foreign Liquor (IFL): IFL 1.2.4 Emerging Black Market: Restrictions
includes foreign produced liquor imported to on foreign liquor have led to a growing number
India. IFL constitutes only a marginal share of the of illegal liquor businesses in India. For instance,
total alcohol consumption in India. Consumers a state-wide ban on liquor sale in Gujarat, a
of IFL are often rich and upper middle class state in Western India and Bihar in Eastern
people or international travellers. Duties on IFL India, in particular, has given rise to wide-scale
are as high as 150 per cent, a reason why its sales of spurious and cheap liquor followed by
share of India‘s total liquor market is less than an increase in organized crimes in areas where
3 per cent. Despite the high custom duties on demand is high.
IFL and strict quotas on the amount of liquor 1.3 India’s alcohol industry is the third largest in
travellers can carry into the country, whiskey the world with a value of $35 billion and adds to
imported has grown steadily over the years 65% of manufacturing and about 7% of imports
primarily driven by purchases from government, into the territory. The industry is divided into
licensed retailers and manufacturers using IFL as
three categories: Indian Manufactured Foreign
raw materials for their own products. Liquor (IMFL), beer, and homemade liquor. The
exact gauge of unrecorded liquor production is
not clearly known.
i. The mass liquor manufactured in India is
predominantly from sugarcane molasses.
Around 52% of liquor produced in India is
for the consumable reason.
ii. Among the prevalent liquor products,
country liquor and Indian-made foreign
alcohol represent about 60 to 70% of the
Fig. 1: India Gross Whiskey Imports 2009–2013
aggregate beverage liquor consumed. The
1.2.3 Country Liquor: Country Liquor, also conventional home-prepared beverages
called Indian Made Indian Liquor or (IMIL), is represent an expansive degree of
brewed and mostly sold domestically. Most of the unrecorded consumption.
country liquor is sold in northern states. Ethanol
from molasses and grains are used in the north iii. Liquor sale and production and
while palm and coconut are used in the south distribution are basically a state subject in
for producing the country liquor. The price of India. Because of a few impediments in
country liquor is much cheaper compared to the current excise policies, a considerable
IMFL and IFL; the reason it constitutes 48 per lot of the Indian states produce liquor far in
cent of the domestic liquor market. (Table 1) abundance of the stipulated quantity.

Table 1: Affordability, Market Share and Geographical Accessibility of Liquor and Beer in India
Type Pricing Market Share (Per cent) Geographical Availability
IMFL Affordable 36 Southern States
IFL Luxury 3 Metropolitan Cities
Country Liquor Cheap 48 Across India
Beer Expensive 13 Urban Areas
Illicit Liquor and Other Very Cheap Not Available Across India

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iv. The production, sale, and distribution as the United States, heavy drinkers among young
pursue a complicated duty structure Indians were more prevalent. Men were more
differing from state to state. The tax likely to drink than women by a large margin
assessment on imported liquor additionally and were also more prone to episodic drinking.
varies between 100% and 500%. According to a study, over 88 per cent of Indians,
aged under 25, purchase or consume alcoholic
v. The consumption level of liquor is not
beverages even though it is illegal. This was
directly connected with the taxation policies
despite bans on alcohol in some states across the
because the government only increases
country and limitations on sales in some others.
the tax to generate more revenue.
1.5.3 Consumption of alcoholic beverages in
vi. The policies which are promoted till
India from 2016 to 2020 (in billion litres):
date have been basically with a view to
expanding taxes to generate more revenue
and not from a public health perspective. 6.53
6.23
Actually, the importance of public’s’ health 5.66
5.94
has been totally ignored while making the 5.38

policies and programs. Consumption in billion litres

1.4 The report says that about 30 per cent of

India’s population, just less than a third of the
country’s populace–consumed alcohol regularly
(as of 2010). Some 11 per cent are moderate to
heavy drinkers. The average Indian consumes
2016 2017 2018 2019 2020
about 4.3 litres of alcohol per annum, says the
report. The rural average is much higher at about © Statista 2019

11.4 litres a year.

Fig. 2
1.5 Alcohol consumption in India amounted to
about 5.4 billion litres in 2016 and was estimated 1.6 It may be noted that the liquor industry has
been kept out of GST, which was rolled out on
to reach about 6.5 billion litres by 2020. The
1st July, 2017. State governments are becoming
steady increase in consuming these beverages
more and more dependent on alcohol revenue
can be attributed to multiple factors including the
to pay their bills. With the exception of Bihar,
rising levels of disposable income and a growing Gujarat, Nagaland, Mizoram and Manipur,
urban population among others. The following where liquor is officially prohibited, alcohol
bar chart shows the trend in consumption: revenue takes the second, third or fourth place
1.5.1 Alcohol Market in India: India’s in terms of contributions to a State’s coffers.
alcohol market consisted of two main kinds of Governments often project excise revenue alone,
liquor–Indian made Indian liquor or IMIL, and but sales tax is much more than Excise. In States
Indian made foreign liquor or IMFL. This was such as Tamil Nadu, Kerala and Delhi, where
the wholesale and retail liquor business is under
in addition to beer, wine and other imported
government control, alcohol revenue is relatively
alcohol. Country liquor accounted for the
easy to reckon. In Andhra Pradesh, Orissa,
highest market share, while spirits took up the Chhattisgarh, Rajasthan, Uttarakhand, Uttar
majority of the consumption market. Pradesh, Karnataka and Bihar, governments
1.5.2 Young Consumers: Although the average run the wholesale business, leaving retail to
per adult intake of alcohol was considerably low private players. Maharashtra’s liquor business is
in India when compared to other countries such in private hands.

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1.7 More than a fifth of alcohol produced in can threaten the solvency of State governments,
the world is consumed by Indians. The Lancet the clamping of the dry order can threaten the
magazine points out that two-thirds of alcohol regime’s existence itself.
consumed in India is unrecorded, mainly illicit. 2.3 The Indian alcohol market is growing at a
Tribal, backward and working-class communities CAGR of 8.8% and it is expected to reach 16.8
in most parts of the country consume arrack and Billion litres of consumption by the year 2022.
palm toddy. The popularity of wine and vodka is increasing
at a remarkable CAGR of 21.8% and 22.8%
1.8 India is the largest whisky market in respectively. India is the largest consumer of
the world. There is increasing demand for whiskey in the world and it constitutes about
imported whisky and wine. Economic affluence, 60% of the IMFL market.
urbanisation, changing lifestyles and social
2.3.1 Though India is one of the largest
mores are all persuading young people to take consumers of alcohol in the world owing to
to drinking. its huge population, the per capita alcohol
2. No reliable statistics exist for worldwide consumption of India is very low as compared
production and consumption of liquor. The to the Western countries. The per capita
consumption of alcohol per week for the year
great variations in alcohol concentrations of
2016 was estimated at 147.3 ml and it is
various liquors make it difficult to determine the expected to grow at a CAGR of 7.5% to 227.1
real amount of alcohol consumption. According ml according to estimates.
to the Industry of Distilled Drinks, a survey
2.3.2 The fact is that for most of the state
of 45 nations shows that despite its higher
governments, up to one-fifth of their budget are
concentration of alcohol, only about one-fourth funded by alcohol. Apart from Bihar (after the
of the alcohol consumed is in the form of liquor Supreme Court stayed Patna High Court order),
i.e whisky, brandy or rum. Beer and wine are the Gujarat, Nagaland, Mizoram and Manipur,
first and the second greatest sources of alcohol. where liquor is prohibited, revenue from alcohol
is a major contributor to state exchequer.
2.1 Over the past few years IMFL market has
grown at a rate of 10% and is heavily skewed in 2.3.3 Here are the top earners:
favour of whisky, rum and brandy, accounting
Table 2
for 60%, 25% and 20% respectively. Around
States Revenue from Alcohol
5% is accounted for by white spirits such as gin
Tamil Nadu Rs. 29,672 crore
and vodka. The all important whisky market
Haryana Rs. 19,703 crore
is further segmented into the regular, prestige,
Maharashtra Rs. 18,000 crore
premium and deluxe subparts. The beer industry
Karnataka Rs. 15,332 crore
has been expanding at a pace similar to IMFL.
Uttar Pradesh Rs. 14,083 crore
2.2 The fortunes of the industry are linked to Andhra Pradesh Rs. 12,739 crore
the ideologies of the political parties ruling the Telengana Rs. 12,144 crore
States. Being a major vote-catching weapon, Madhya Pradesh Rs. 7,926 crore
especially of the women, prohibition has Rajasthan Rs. 5,585 crore
affected the profitability of many breweries and Punjab Rs. 5,000 crore
distilleries. For the political parties it is a choice
Source: India Today https://www.indiatoday.in/india/
between the devil and the deep sea. If on the one story/booze-revenue-alcohol-economy-prohibition-tamil-
hand, the revenues lost because of prohibition nadu-bihar-supreme-court-345588-2016-10-08

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2.5 According to a study conducted by the manufacturing liquor do incur GST. This used
Organisation for Economic Cooperation to be taxed at around 12–15% under various
and Development (OECD), per capita liquor VAT regimes previously, but under GST the tax
consumption in India grew at 55 per cent incurred on most of the raw material stands at
between 1992 and 2012. Another study by the 18%. Also, the GST applicable on freight and
World Health Organisation found an increase of transportation charges is higher than under
38 per cent in the per capita alcohol consumption the previous tax regime. Due to these factors,
in India. Naturally, increased consumption has alcohol prices went up after the introduction of
led to better income for the states. GST, and continue to rise year-on-year.
2.6 Raising liquor taxes-which bring in nearly
25% of revenue-is the most likely option as state 3. MANUFACTURE OF BEER
governments are unlikely to borrow and worsen 3.1 The origins of beer go almost as far back as
their debt-to-GDP ratios. But any increase in those of wine. Beer has been made by virtually all
taxes will have an adverse effect on alcohol people in all stages of civilization. African tribes
demand as liquor companies are sure to pass on produce it from millet, the Japanese from rice,
the buck to customers. In the past, there have Europeans, Americans, Australians and others
been multiple instances where volumes have make it mainly from barley. In India, generally
taken a beating owing to price hikes emanating barley or maize is used. Beer is the general
from an increase in the tax rate. term for all classes of beers-draft, bottled or
2.7 Maharashtra has already taken a step in canned, ales, lagers and stout. It is brewed from
this direction. The Maharashtra government malt, sugar, hops and water and is fermented
increased the excise duty on Indian-made with yeast. Quality is largely dependent on the
foreign liquor by 20%, and the buzz is that it will suitability of the main raw materials for the type
help fetch additional revenue of Rs. 2,000-2,500 of beer being produced.
crore. In the recent past too several states had 3.2 The following are the ingredients of beer:
hiked up taxes on alcohol. For instance, Gujarat
had tripled the excise duty on alcohol while i. Malt begins its life as barley. First, barley
Kerala had announced a hike of up to 210% on is dampened with water and allowed to
liquor. Karnataka, meanwhile, announced an germinate under controlled conditions in
excise duty hike by 8% on liquor, after upping order to convert the insoluble starch to
the additional excise duty on it to 21% in the soluble sugar. It is then dried and cured, to
previous budget. According to India Filings, it is a pale colour for pale beers and to a richer
estimated that the taxes on beer and liquor fetch colour for dark beers.
state governments around Rs. 90,000 crore in ii. Sugars used in brewing are manufactured
taxes each year. from cane sugar, which is treated in
2.8 That is the main reason why alcohol is out different ways to give different flavours
of the GST net, despite being a “sin goods”. For and sweetness.
the record, a sin tax is levied on items that are iii. Hops are specially grown for brewing and
harmful or costly to society, like tobacco. The idea give beer its bitter flavour. Only the flower,
behind this tax is to provide a revenue source cone of golden petals carrying resin and
to governments while deterring consumption of oils, is used.
such items by keeping prices high. iv. The water used in brewing is specially
2.9 While alcohol has been kept out of the treated with mineral salts for the particular
new tax regime, the input raw materials used in type of beer being processed. In earlier

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days before the days of water analysis, stream of carbon dioxide is bubbled through it to
famous brewing centres emerged because wash out the undesirable new flavors and smells
the local water was particularly suitable which are common to all beers in their early
for the brewing of certain types of beer. stages. After washing, the beer is run into storage
For example, Pilsner, the famous beer of tanks (Stage-VI) where further carbon dioxide
Polsen in Czechoslovakia, is brewed with is added to bring about the desired mount of
natural water and is recognised as one of carbonation. After a few days, the beer, which
the finest beers in the world. is now ready for bottling, is filtered (Stage-VII)
v. Yeast, a living organism, is the agent which through the fine asbestos filter sheets, thereby
ferments the beer. removing any yeast or other deposits which may
have formed in the beer during storage, and
3.3 The process of production of beer is not very which would cause trouble at a later stage after
complicated. Beer is produced chemically by the the beer has been bottled.
action of yeast on appropriate carbohydrates-in
3.6 The filtered beer is collected in a bottling
this case, malt. For making Beer, grist-which is a
tank (Stage-VIII) and from the latter it is passed
blend of malt, is crushed in a mill, and depending
to the filing machine (Stage-IX) where it is filled
on the recipe, is mashed into a porridge-like
at high speed into bottles which have been
consistency with hot demineralised water. This
carefully washed and made more sterile. The
mash is collected in lautertun (Stage-I), and then
crown cork is then fixed by a special machine
left for about two hours to allow the breakdown
and filled bottle is subjected to Pasteurisation
of the small starch molecules into various sugars.
(Stage-X). The latter process consists of heating
The sweet wort or malt sugar extract is filtered
the bottle gradually in water to a temperature
off and collected in the brewing copper or wort
of approximately 63ºC, holding this temperature
kettle (Stage-II). During filtration, hot water is
for half an hour and then cooling it slowly before
splurged over the mash to ensure complete
putting on a cap and finally labeling it and
extraction of the malt sugars. In the wort kettle,
making it ready for dispatch to the markets.
hops and sugar are added and the whole thing
Pasteurisation is carried out to ensure that the
is boiled for about 1½ hours.
beer when it reaches the consumer is perfectly
3.4 The characteristic sweet, foul smell of sterile and will remain for a number of months
the brewery comes from the boiling and it is in a starbright condition.
carried out to bring about among other things,
3.7 Certain terms peculiar to this process may
sterilization and the extraction of the bitterness
now be defined:
from the hops. After boiling, the spent hops and
grains are removed and collected in the spent 3.7.1 Steeping: Steeping means putting barley
grain tank. The contents in wort kettle are then in water. It is steeped for about 62 hours, with
transferred to hop-back (Stage-III) when it is two air rest periods of 12 hours and 10 hours.
centrifuged and the bitter extract is cooled to Steeping schedule is 20 hours in water, air rest of
about 10 degree C, and run into the fermentation 12 hours in water and air rest for 10 hours.
tanks (Stage-IV). 3.7.2 Couching: The steeped barley is
3.5 Suitable yeast, usually from a previous couched. It is couched till the chitting (sprouting)
brew, is added in the fermentation tanks (Stage- has started. The period generally varies from
IV). The fermentation commences and the 8 to 20 hours. Couching is part of first day of
wort changes into beer as alcohol and Carbon germination (Flooring).
dioxide gas is formed. The beer is then pumped 3.7.3 Germination: The couched barley is
into washing tanks (Stage-V) where a very fine then spread on the floors. It is germinated for

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6–7 days till the required level of germination distillery. On the other hand, a blended whisky
is attained. The temperature is controlled by is actually a combination of a barrel-aged malt
turnings, aerating at regular intervals. whisky (as in all barley) and some quantity of
3.7.4 Kilning: To arrest the germination, the grain whisky (a whisky made with barley as well
germinated barley is put into the kiln. Then it as other grains). Under the United Kingdom’s
is dried by heating at the required temperature. Scotch Whisky Regulations, a “Single Malt
After that malt is packed, weighed and sent to Scotch Whisky” must be made exclusively from
store. The process till flooring depends on the malted barley (although the addition of E150A
atmospheric condition and quality of barley. caramel colouring is allowed), must be distilled
These processes are subject to change in the using pot stills at a single distillery, and must be
above two factors. Normally it takes about aged for at least three years in oak casks of a
11 days for one steep to pass through four capacity not exceeding 700 litres (150 imperial
stages. During the four stage process there is no gallons; 180 US gallons). American whiskey
possibility for fumigation. advertised as “single malt whisky” is produced
from malted rye rather than malted barley.
All single malt goes through a similar batch
4. MANUFACTURE OF RUM production process. There are several types of
Rum, a product of cane and water, is essentially single malts available from distilleries including
West Indian in origin. Sugarcane perhaps single barrel single malts which are the product
brought from the Azores by Columbus on his of a single batch that was stored for three or
second voyage and the pure West Indian water more years in a single oak barrel. These single
which tumbles down from the mountains were barrel variants afford the opportunity for the
the main ingredients. Rum is made principally consumer to see the influence of different types
from molasses, which is the uncrystallised mass of storage on the same whisky (e.g., first use
remaining after the formation of sugar; either bourbon whiskey barrels, port pipes, etc.). The
more common form of Single Malt is a marrying
directly from the sugarcane juice, or from second
at bottling time of various batches that are mixed
grade molasses and other residues. The last type
or vatted to achieve consistent flavours from one
is usually called tafia, not rum, and it is seldom
bottling run to the next. Taste depends upon–
worth bottling. The majority of fine rums come
where the scotch is made, how long it was aged
from molasses. However, the best and famous and in what it is aged.
Marinique of Haiti, is made directly from cane
juice syrup concentrate.
6. MANUFACTURE OF COUNTRY
LIQUOR
5. MANUFACTURE OF WHISKY
6.1 In India, besides the above different forms
5.1 In India whisky is not made in the complex of wines and spirits, a sharp distinction is made
way it is done in Scotland. Comparatively small between India-made foreign liquor (IMFL), and
quantity of whisky made from malt is blended country liquor. IMFL includes all liquors made
with huge quantities of rectified spirit (made in the country in imitation of imported liquors
from molasses), colouring materials and caramel whereas country liquors include fermented
or other essences for taste. Now scotch whisky is liquors prepared according to indigenous
imported in bulk and blended with locally made processes using local recipes, plain spirits made
whisky or extra neutral alcohol.
from approved bases and special liquors which
5.2 Single Malt Whisky: In whisky, single do not imitate any imported liquors or cordials.
malt is more prized. It is malt whisky from a single ‘Toddy’ or tari is the most important of the

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country beers. It consists of the fermented or varieties of grapes and strains of yeasts produce
unfermented sap drawn from any kind of palm different styles of wine.
tree, from the spadix in the case of coconut and
6.4 Red Wine: The red-wine production
palmyra and from the stem. This sap ferments
naturally and rapidly into malts. Other country process involves extraction of color and flavor
beers are made from rice, barley or millet and components from the grape skin. Red wine is
sometimes from gur or mahua. Such beers are made from dark-colored grape varieties. The
known in Bengal as pachwai, handia, jaur, actual color of the wine can range from violet,
marua, kusha and sugda; in Assam as boza, typical of young wines, through red for mature
madh, zu and laopani; in UP as boza, darbahra, wines, to brown for older red wines. The juice
soma and rabra, in the HP as su, lugri, chang from most purple grapes is actually greenish-
and angoori, in Kashmir as chang or arak, in white; the red color comes from anthocyan
Karnataka as akki-bhoja and in Tamil Nadu as pigments (also called anthocyanins) present in
londa, henda and sontisaru, and in Andhra as the skin of the grape; exceptions are the relatively
sendhi and ‘arak’. uncommon teinturier varieties, which actually
6.2 Country spirit is plain spirit made from have red flesh and produce red juice.
materials recognised as a country spirit base. It
6.5 White Wine: Fermentation of the non-
is issued and sold at fixed strengths at country
liquor shops and is subject to the local rate of colored grape pulp produces white wine. The
excise duty. The bases recognised are unrefined grapes from which white wine is produced are
sugar, cane or date gur, jaggery, molasses or typically green or yellow. Some varieties are well-
shira, mahua or in special cases toddy, resins known, such as the Chardonnay, Sauvignon,
and date etc. and Riesling. Other white wines are blended
6.3 Wine: Wine is a type of alcoholic beverage from multiple varieties; Tokay, Sherry, and
with lower alcohol content. Wine entails a longer Sauternes are examples of these. Dark-skinned
fermentation and aging process as compared to grapes may be used to produce white wine if
other types of alcohol. It can take years only to the wine-maker is careful not to let the skin stain
produce an alcohol content of 9–16%. As the the wort during the separation of the pulp-juice.
word’s Latin origin, ‘vine’ (meaning grape) Pinot noir, for example, is commonly used to
suggests, is an alcoholic beverage mainly produce champagne.
produced from fermented grapes. There are
also other types made from fruit juices obtained 6.5.1 Dry (Non-Sweet) White Wine is the
from apples, cherries, and plums, consequently most common, derived from the complete
generating several varieties of the said beverage, fermentation of the wort. Sweet wines are
such as apple or elderberry wine, fruit or country produced when the fermentation is interrupted
wine, barley wine, sake, etc. However, grape juice before all the grape sugars are converted into
is the preferred raw ingredient in the winemaking alcohol. Sparkling wines, which are mostly white
process due to its natural chemical balance that wines, are produced by not allowing carbon
allows it to ferment without the aid of enzymes, dioxide from the fermentation to escape during
acids, sugars, and other agents. The role of yeast fermentation, which takes place in the bottle
in winemaking is the most important element
rather than in the barrel.
that distinguishes wine from grape juice. In the
absence of oxygen, yeast converts the sugars 7. The 29 states along with seven union
of wine grapes into alcohol and carbon dioxide territories in India have adopted different
through the process of fermentation. Different approaches when it comes to taxing and

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regulating liquor. For instance, the state of Gujarat in taxes rather than for the liquor. Hence there is
has entirely banned trade and consumption of substantial evasion of duty and consequently of
liquor since 1961. By contrast, Puducherry, the Income-tax.
territory on the Coromandel Coast, earns most 9.2 The crucial point of reference for both the
of its revenue from alcohol trade. State Excise and Income-tax is the same-the
7.1 Some of the states auction retail and quantity produced. Suppression of production of
wholesale licenses, while others have their own goods, as a natural corollary, leads to suppression
monopolies. Tamil Nadu is one state that has of sales and profits. In the case of excise duty,
a monopoly on the alcohol trade and employs the taxable base is the quantum of production of
more than 30,000 people with over 6,000 excisable goods. The duty liability is charged-in
outlets. terms relatable to factors such as weight, length,
area or volume, or on ad-valorem rates dependent
8. TAXATION OF LIQUOR on the value of goods. Besides, there are certain
exemptions for various categories. Therefore, the
8.1 Even though liquor hasn’t been brought evasion of duty is resorted to by-suppression of
under the purview of Goods and Services Tax, production in case of production based rates,
it still falls under other taxes that contribute to its under valuation of goods in case of ad valorem
rising prices. These taxes are: duty, misclassification of goods to minimise duty
i. Excise Duty liability in case of exempted goods.
ii. VAT (Value Added Tax) 9.3 Suppression of production of goods is
a device resorted to frequently by the duty
8.2 Alcohol was not brought under the purview evaders. The task of identifying the quantum of
of GST regime primarily due to two reasons: evasion is impossible, while making a guess can
i. To ensure that the State Governments be hazardous. All that can be done is to plug the
continue to have a strong inflow of revenue loopholes. Besides the production based control
(other than what they get from GST). It is other checks like ‘clearance-based control’ or
estimated that taxes on liquor and beer ‘record-based control’ have also been prescribed.
fetch the state governments nearly INR 9.4 The State Excise authorities keep a tight
90,000 crores annually. supervision and control on the production of
ii. To keep the prices of liquor and beer high all intoxicating materials including wines and
to limit consumption. spirits and beers by exercising production based
control. Whereas, on the one hand, they can be
a great help to the AO by providing a readily
9. EXCISE LEVY
available information system on the facts and
9.1 As already stated breweries and distilleries figures of a particular fact, on the other hand,
have traditionally been money spinners for these records can act as a handicap if not
governments. Taxes on distilled spirits are properly maintained or if the control exercised
among the highest taxes imposed on any is not effective and management is allowed an
product. Liquor being a state subject, there is a opportunity to hoodwink the Excise staff present
levy of state Excise duty which in some states on the premises. Because, on the strength of
is as high as 200%. The duty structure for each these records and checks, the assessee will have
state is so different that for a company operating a readymade and foolproof evidence in support
at the national level it is like dealing with several of his figures of quantity of liquor produced,
countries. On average 60% of what one pays for stocks available and sales to contractors that
a bottle of distilled spirit goes to the government would be difficult to controvert.

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9.5 Board’s instruction on the subject issued and evade taxes, particularly, in the figures of-
vide their letter in F. No. 414/1/80-IT (Inv) (i) production, (ii) purchases, (iii) wastage, (iv)
dated 25/04/1980, reproduced below for ready utilisation of outflows and husks, (v) transit
reference, is still relevant: depots, and (vi) allotment of agencies/ depots.
Hence, the AO should be familiar with the
“1. During the course of assessment
processes of production and the trade practices.
proceedings, Assessing Officers normally
It will help the AO to carry out cross-checks
examine the records maintained by assessees and verification of the figures of production,
relating to payment of Central Excise duties. purchases and sales, etc.
Since such records would have already been
checked by the officers of the Central Excise 10.2 It is in the manufacturing account that the
Department, there seems to be an impression assessee can and generally does manipulate the
that the quantum of the production of goods, figures to conceal the extent of his production
etc. noted in such records or registers must be which lead to suppression of sales. Some
invariably accepted by the Assessing Officers suggestions regarding the method of examining
as unimpeachable. these items occurring in Manufacturing account
are given below.
2. These registers which have been prescribed
by the Central Excise regulations are 11. PRODUCTION
contemporaneous records and would prima
facie be considered by any court of law as good 11.1 The chemistry of the process is summarised
evidence regarding production, etc. However, below for clear understanding of the subject.
cases have come to light where detailed Cane molasses of the sugar industry contains
examination has led to the establishment of tax fermentable carbohydrates (sugar) mainly a crude
evasion due to understatement of production, form of sucrose with the approximate composition
etc., not reflected in such registers, e.g., where of water (16%), sucrose (33%), invert sugars
the factory has been run on an extra shift and (20–21%), organic non-sugars (19–20%), ash
the entire production from this shift has not (9–10%), potash phosphates, organic nitrogen
been noted in the registers. and vitamins are present in small quantities.
3. It may, therefore, be impressed upon 11.1.1 The quality of molasses vary from year
the Assessing Officers that they should not to year and from factory to factory depending on
take for granted the accounts authenticated the process adopted in a particular sugar factory.
by the Central Excise Officers and such It is subjected to fermentation with the help of a
authentication does not necessarily mean special living microorganism called yeast.
that all the entries in the accounts have been
checked by the Central Excise Authorities. 11.1.2 The state Excise authorities keep an hour
The Assessing Officers should scrutinise the to hour and shift to shift record of production.
accounts from the Income-tax point of view. Further, every day’s production is transferred
The Board desires that in all cases where to what is known as the ‘bonded warehouse’
substantial tax evasion is suspected, the kept by the Excise authorities within the factory
Assessing Officers must apply their mind to premises and released on the production of a
this aspect of the matter independently.” certificate known as ‘duty paid permit’ or ‘export
pass’ confirming the fact of excise duty having
10. AREAS OF MANIPULATION been paid.
10.1 Most of the distillers/ brewers indulge in 11.2 The date of payment of Excise duty as
manipulation with a view to conceal income recorded in the books of account must be cross-

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verified with the actual date of depositing the market. The quantities purchased are very large
money in the government account. The record and avenues of manipulations and adjustments
of quantity of production is kept in terms of in this account are many, like inflation in terms
number of crates/ bags and bottles. But this of quantity, wastage in movements or stocking,
strictness of control by state Excise authorities is and in terms of price rate per tonne. Another
only in theory. In practice, only the bags/ crates area that presents difficulties is the verification
are counted and they are not opened to check of the figures of consumption shown during the
the number of bottles contained therein. But to year as also the closing stock of grains and its
reject the figures of the assessee on this ground is valuation. Since the purchasing operations are
a very difficult task for which a foolproof case will carried out over a vast area and generally made
have to be made, on the basis of independent directly from the growers, detailed cross checking
investigation and substantial evidence. In is very difficult and would be a long drawn affair.
some cases, a simple method of producing and The quantity to be purchased and the rate have
smuggling out unaccounted quantity of liquor to be contracted in advance. A sample check
has been to pack 2 or 3 bottles more than to verify the facts of such agreements may
the stated capacity of the box/ crate, which is be made. A major device resorted to by the
24 or 12. assessees in this context is to indulge in forward
11.3 Another Cross Check on Production: trading and speculation. Therefore, the fact
is provided by the number of bottles procured of physical transfer and movements of these
by the assessee during the year. Most of the grains needs to be verified with reference to
distillers have their own ceramic factories or the trucks/ wagons employed, cartage paid and
have captive ceramic factories. While the liquor octroi receipts. Commissions are also paid to the
production is under the supervision of the State purchasing agents/ arhatias for such purchases
Excise authorities, the manufacture of ceramics/ made from the mandis or the growers and a
glass bottles falls under the jurisdiction of Central reference to their books of account in certain
Excise authorities who can give the figures of cases will be worthwhile. Mere dispatch/ receipt
total bottles of various types manufactured by the of communication slips in this regard will not be
ceramics factory. Further, the distiller/ brewer has of any use.
to keep a record of functioning of boilers-giving 11.5 Consumption: The usual stores issues
duration for which these were used, number registers are maintained. Since the Excise controls
of shifts worked, their capacity, and the fuel are on the basis of production-the consumption
consumed. In his own interest the assessee would and production at each successive stage are
ensure that these records are correct. By relating checked and verified by the excise authorities.
this information to other factors and processes However, a rough and ready method for check
mentioned above, it should be possible for the by the AO may be given here. Depending
AO to estimate total production and verify the upon the type of beer produced and its gravity,
correctness of the production disclosed by the normally out of a 100 kg of barley/ maize 550–
assessee. The AO should also call for details of 600 litres of beer may be produced. Similarly,
licensed capacity, installed capacity and actual depending upon the method, still, climate, and
production for the relevant year. the quality of grains and other raw material,
11.4 Purchases: While in other countries, 16–17 alcoholic litres of whisky spirit may be
the distillers/ brewers produce their own grains obtained from one quintal of barley malt. These
particularly barley or they have captive farms to scales of consumption depend on the quality
produce the right type of grains for them, in India of raw materials like barley, etc, and they are
the barley is generally purchased from open only approximate guides. Therefore, only gross

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variations may be pointed out to the assessee for by the assessee. Generally assessees have their
explanation. This may be cross-tallied with the own trucks whose logbooks should be checked
installed capacity and type of the still or brewery, in terms of distance, time, number of trips made,
number of casks/ vats in use with their capacity, diesel, consumption and load carrying capacity.
excise records and data sent by the distillery/ 11.8 Allotment of Depots/ Agencies: As in
brewery to the Association of distillers/ brewers, the case of transit depots, the Excise authorities
Indian Standards Institute and such other also keep a control and maintain records of
authorities. The figures in the manufacturing stocks handled by the depots. The choice of
account should further be compared with the persons to whom the depots are to be allotted
corresponding figures of earlier years, and any remains with the producer concerned. Since
wide variations in ratios and proportions be depots handle the sale and supply of allotted
questioned. quotas to the liquor contractors and therefore
11.6 Wastage: This depends upon the quality exercise a great influence in the liquor market
of raw materials. As mentioned above the they are the crucial barrage through which
yield of malt from barley may vary between sales and supply of liquor outside the books of
40–55% depending upon the quality of barley. account of the distillers as well as the Liquor
The remaining husks are sold as fodder and it contractor is generally made. Actually this is the
should be seen that the total of quantities of malt area which provides scope for large scale money
produced and husks sold plus general wastage transactions outside the books of account of the
of 5% adds upto the purchases of raw materials assessees. Charging of on-money for allotments
of barley, etc. shown by the assessee. It should of these depots is generally practiced by most
also be looked into that the sale price obtained distilleries/breweries. The quantum is directly
from such outflows and wastage material or their proportional to the total production of the factory
alternative utilisation is properly accounted for. and the quota allotted to a particular area fed
11.7 Transit Depots: Transit depots are by that depot. Hence, detailed inquiries about
generally established by factories near the inter- the depot holders must be made at least in areas
State boundaries or centrally in a distribution where demand for a particular brand is known to
zone comprising a number of depots. The be especially high and other alternatives are not
transit depots are also under the State Excise easily available. These depots do not enter into
departments who keep a record of all receipts retail sales and issue liquor only to authorised
and issues of liquor/ beer giving number of licensed contractors on wholesale basis.
wagons/ trucks that reported in during a day and
11.9 Accounting of Closing Stock: At any
number of crates/ sacks carried by them. Account
is kept of the quantity of the stock available at point of time, the distillery/ brewery will have
the transit depots and also the incoming and stock of goods and raw materials in various
outgoing during a day. A surprise survey for stages of production/ completion which may be
taking stock inventory may be carried out by categorised as under:
the AO, and the stock position tallied with the i. Raw materials.
records of the excise authorities. Actually figures
of opening stock available at the beginning of ii. Stock in process.
the accounting year, stock received/ issued iii. Finished goods.
during the year and the closing stock in terms of
iv. Stock in Trade.
quantity as well as value should be obtained from
the depots as well as the transit camp, totalled v. Standing crops, if any (of barley, molasses,
and compared with the production figures given hops, etc.).

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11.9.1 Thus accounting of these stocks at the of the concerns do resort to misclassification of
end of the year in terms of quantity as well as value expenses. For example, personal expenses of
is a difficult task and verification of the same for the Managing Director or other Director, or top
correctness is still more so. As far as quantitative executives, benefits and facilities made available
tally is concerned, the brewery/ distillery take which may be actually for their private exclusive
out the balance from their stores issue registers use e.g. a guest house may only be maintained
which are required to be presented by them to as a summer resort of the higher executives,
the Excise authorities for their examination. But cars or furniture/ refrigerator/ air conditioners
the AO should also obtain a qualitative analysis etc. may be actually provided at their residence
of closing stock if an inventory of the same is at company expenses and charged to the
not already given in the annual statement of profit and loss account, or traveling and hotel
accounts. The closing stock of the raw material expenses incurred by them on their private visits
of a brewery/ distillery will include beer, spirits may be claimed as business expenses. Certain
(qualitative break up), maize, rice, barley, yeast illegal payments although made in the course of
(of different types), malts, molasses, hops, liquid business would not ordinarily be allowable and
and dry carbon dioxide, sundry chemicals, tools therefore would be camouflaged under various
and equipment, etc. It should be ensured that heads of accounts like purchases, commission
finished stock lying at different places viz. in etc. Thus disallowance of such personal
bonded warehouses, in transit, in the depots, expenses, benefits and perquisites or illegal
in the pipeline are accounted for. The general expenses will have to be made.
principles of valuation of closing stock are equally
11.10.2 Similarly, attention should be paid to
applicable to the liquor industry. First in first out claims like ‘stores and spares consumed’ ‘Excise
is the normal principle for accounting of stocks
duty paid’ ‘repairs’ ‘breakage and leakage’
and the same may be valued at cost or market
‘commission to agents’ ‘octroi’ ‘packing and
price or the lower of the two. But the method forwarding’ and ‘depot expenses’. The extent of
adopted should be consistently and uniformly
these expenses should be related in proportion
the same from year to year. The closing stocks
to the purchases made and the goods produced.
should also be verified against total purchases,
consumption and wastage. 11.10.3 In the case of major payments like
‘Excise duty’ a reference should be made to
11.10 Manufacturing and Profit and Loss the actual date of payment which should be
Account compared with the date on which the payment
11.10.1 Manufacturing and profit and loss has been recorded in the assessees’ cash
account of a distillery/ brewery generally include book. A reference to the relevant vouchers of
all heads of account as in any other industry. carriage or octroi charges paid on that particular
Whatever heads of account a distillery/ brewery consignment may bring out interesting facts to
may have, information on items of expenditure light.
should always be obtained if not available from 11.10.4 In quite a few cases, investigations into
the statements rendered by it. Detailed checking purchases of old bottles have shown inflation
of vouchers etc. to verify the genuineness of each under this head. Hence, any outstanding towards
item of expenditure is an impossible task except purchases should be probed.
in the case of some of the important heads or on
a random sample check of major amounts. In 11.11 Sale
general, only statutory admissibility of expenses 11.11.1 Because of variations in Excise laws
claimed can be questioned which forms the in different States, the distilleries/ breweries
bulk of case law relating to this industry. Most establish and follow different channels of sales

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and supplies of their produce. In some States the purpose. This applies equally to hotels, bars, and
system is that out of the wholesale (L-I) licensees, restaurants for sale or stocking of liquor. There
the producers choose some to be appointed are different categories of licensees meant for
as their agents. They do not allocate all their different purposes or different types of stockists:
brands to one agent only, but distribute the same a. L-1 wholesale dealers.
amongst various whole-sellers appointed as their
agents. The agent wholesale dealer then makes b. L-2 retail dealers.
purchases directly from the distillery. In most of c. L-3 hotels.
the States the system is that goods are allowed to
be lifted by wholesale vendors from the distillery 12.2 Liquor contractors, known also as abkari
without payment of Excise duty. These are then contractors, are the persons who, on payment
stocked in a bonded warehouse, maintained by of certain fees are licensed by the respective
the Excise authorities. An Excise Inspector is State Excise Department to engage themselves
attached with each wholesale vendor or each in the purchase, stocking and sale of liquor and
bonded warehouse. Excise duty is charged at are almost exclusive channels through whom
the time of sale by the wholesale vendor. liquor trade is run. Each State has its own
excise laws governing the collection of excise
11.11.2 In other States, the producers establish duty, controls on producers and traders, issue
their own depots which also stock the liquor under of licensees/ excise contracts and the same vary
license and are, therefore, subject to control of from one state to another. Changes are made in
the Excise authorities. Their operations, method the procedure from year to year. For that reason
of accounting and examination thereof have before taking up the case of a liquor contractor
already been discussed above. Some of the a reference must be made to the latest Excise
distilleries do not give agencies to the wholesale Manual of the State.
licensees but carry out the wholesale transactions
by themselves. Method of their operations is 12.3 Contracts/ Licensees are Issued
the same as that of regional depots established Generally: on annual basis, through an open
by other distilleries. The system of issuing auction as in Karnataka. In some of the states
licenses to these parties is discussed in detail in like Tamil Nadu, the licensees are issued on
subsequent paragraphs. The agents appointed perpetual basis to be renewed every year on
by the producers are paid commission on total payment of certain fee. There are two types
sales transacted by them. Hence quantity of of liquor contract, one for India-made foreign
goods lifted by them from the distilleries and liquor and the other for country liquor. There is
sale transactions carried out by them can be another class of liquor contractors who are given
conveniently understated by collusion between license/ permit to import customs duty-free liquor
the principles and the agent which would serve for supply to foreign embassies and consulates.
both the parties, to understate their profits. The
12.4 Procedure for Allotment of Contracts/
agents further have their sales promotion agents.
Licenses: In most States, licenses for stocking
Cross examination of such agents or enquiries
and sale of liquor are allocated by open auction
with disgruntled element in the channel may
give helpful clues. on an annual basis. However, in some of
the states they are issued on perpetual basis,
renewable from year to year. Financial year (April
12. IMFL CONTRACTORS to March) is generally adopted as the licensing
12.1 Anyone stocking liquor above a particular year but there are variations. For example, in
quantity or selling liquor has to obtain a license Karnataka the period runs from July to June, in
from the state Excise departments for the Andhra Pradesh the contracts are given for the

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period October to September. A reserve price the mentioned quantity with permit for that
for each contract is generally fixed and notified. liquor to be carried through the state and to
The license is allotted to the highest bidder. The the particular premises. The wholesale dealer/
auctions are made generally at district level. agent collects his stocks the same way from
Separate licenses are allocated for sales on the the distillery or its depot itself and keeps these
wholesale basis (L-1) and retail basis (L-2). In stocks in a bonded warehouse under the control
some of the states like Delhi, only wholesale of Excise authorities. The permit issued by the
licenses are auctioned to the private parties and Excise authorities, is recorded in a register which
the retail is controlled by state agencies like the gives following information:
state Small Scale Development Corporation and i. Name of the contractor to whom issued.
the State Tourism Development Corporation.
The license corporations in Delhi do not have to ii. Permit number.
pay any Excise duty but a contract for sharing of iii. Date of issue.
profits is made amongst the Excise authorities,
the licensee corporation and the private party iv. Quantity authorised.
whose premises have been hired for the retail v. Name of distiller etc.
shop. These retail licensees get their stock from
vi. Challan number of the distillery from
the wholesale licensees. Before a person can be
whom the goods were later received.
awarded the license, he has to present before the
Excise authorities: vii. Date of sale by the distillery/ bonded
house, wholesale dealer etc.
i. Solvency certificate issued by the district
magistrate. 12.6.1 The rent on the bonded warehouse is
payable by the contractor whom it serves. It is
ii. Income-tax clearance certificate issued by
at this stage that the Excise duty is paid by the
the AO having jurisdiction.
contractor and only on payment of this duty he
12.4.1 Both the authorities are supposed to can lift the goods and is thereafter authorised
have made due enquiries before issuing these to sell them. The licensee has to maintain a
certificates and a reference to these certificates stock register as prescribed and take out day
at the time of assessment may prove to be very to day balances which have to be certified by
useful. the Excise Inspector. License fee is apart from
12.5 Mode of Payment of License Fee: The the Excise duty. The Excise duty is chargeable
total amount payable for the contract is called the with reference to the quantity of liquor actually
license fee. Of this, 20–30% (varies from State to purchased by the contractor.
State) has to be paid by the person on the spot 12.7 Mode of Purchase from Distillery:
and the rest in equal monthly instalments. One of the contractors, who has larger number of
12.6 There is no restriction on the quantity of vends is given the wholesale contract. Different
liquor that a contractor is allowed to purchase vends are attached with the wholesale vendor.
on the strength of these licenses. For each The wholesale vendor, then purchases from
consignment required by the contractor he has the distillery, the quantity of liquor for its own
to obtain a permit from the Excise authorities vends as well as for the vends attached with it.
who issue the same in the name of distillery/ The permits for the purchase of liquor are issued
depot thereof or the bonded warehouse of in the name of that wholesale contractor, on
the Excise authorities as the case may be, and distillery of the state. All such permits are issued
such distillery, depot or wholesale agent or the on the various distilleries established in the state
bonded warehouse as the case may be issues only and not on the distilleries of any other state.

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This is with a view to ensure that revenue of the or October to September. The highest bidders
state from Excise should remain within the State. are granted the contracts. In certain States, the
The distillery then sells the liquor and charges highest bidder ensures that a minimum quota
the distillery-charge plus the State Excise duty. will be lifted for sale from the government depot,
The goods are then carried/ transported by the called ‘minimum guarantee’. The bidding of
wholesale contractor to his district. The wholesale contracts is done in each district by the Excise
contractor makes necessary entries in the stock department regarding each vend. The name
registers maintained and then he sells the same and number of vends in each district are already
to the various retail vends attached with him. known to bidders. The quota of country liquor is
The wholesale contractor is allowed a nominal also fixed for each vend. The contractor of that
commission, as he simply passes on the goods to vend is required to lift that quota only, not less
retail vends. Each contractor has to lift the quota not more.
sanctioned in the contract during the financial
13.2 Mode of Payment of License Fee:
year so that the Excise revenue may not be lost
Generally an amount equal to two months’
by not lifting of quota and instead they may sell
contract money (License fee) is required to be
spurious liquor. Each contractor has to maintain
paid at the fall of hammer. The balance amount
a statutory stock register, which is periodically
checked by the State Excise authorities. is paid in 10 monthly instalments. In States like
Tamil Nadu, the amount to be paid on the spot
12.8 Sale of Liquor: The retail contractors get is 30% of the total bid.
their supplies of liquor from the agent appointed
by the distillery, the wholesale dealer, the sale 13.3 The procedure described by the
depot or the distiller/ brewery itself, as allowed Commissioner of Income-tax, Bhopal, in his
by the Excise laws of the State. General practice Circular letter issued on 24/11/1979 brings out
followed by the distilleries/ breweries is to appoint the extent of money involved and the variations
one of the wholesale licensees as a stockist or that exist from state to state. It is reproduced
sale agent for their brand(s) who in turn supply below:
the same in the market. Or else, the producers
“According to the rules, the person who
may establish their own depots as per Excise laws
deposits certain amount prescribed with
of a particular State. Sale prices are generally
reference to the last year’s license fee, is only
determined by the Wine Merchants’ Association
eligible to participate in the auction. Where
of the region. The prices so determined are
the license fee last year was upto Rs. 10 lakhs,
subject to review by the Excise authorities. The
the earnest money to be deposited, to make
agents are paid fixed commission on the basis of
oneself eligible to participate in the auction, is
sales contracted by them.
6–12% and where the license fee was more
than Rs. 10 lakhs, the EMD is 2%. Apparently
13. COUNTRY LIQUOR CONTRACTORS there are many bidders and everybody has to
13.1 Auction of Licenses: In the case deposit the prescribed amount with reference
of arrack or country liquor also rules and to the last year’s license fee. It is an open secret
procedures of allotment and auction of licenses that in big cities, the license fee is enormous.
vary from State to State. But the system basically License fee for certain shops in 1979–80 was
is the same, i.e. the country liquor contracts are fixed at Rs. 90,50,000/-. In the earlier years
auctioned every year in February or March of also the license fee must be in the vicinity of
each financial year, for the contracts starting this amount and as such, each competitor was
in next financial year. In some States contracts required to pay an earnest money of about
are given from June to May, or July to June, Rs. 9 lakhs to make himself eligible for the

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bid. The amount of earnest money may differ DEO has to maintain P-5 register normally known
from year to year and is verifiable from the as ‘Profit and Loss Register’. On inspection, the
records of excise authorities. Of course, the Excise Inspector notes the prevailing selling rates
earnest money in the case of unsuccessful shown on the notice board. This register also
bidders is refundable immediately. The shows receipt and sale of liquor. A record of the
successful bidder has to deposit immediately quantity of liquor issued and the supply rates, is
1/6 of the license fee (and he gets a setoff of also maintained by the warehouse authorities.
the earnest money deposited by him earlier
to make himself eligible to bid). After 10 days 14. TAX INVESTIGATIONS
of the auction, the successful bidder will have
to pay a further sum equal to 1/12th of the 14.1 Status of Assessee: In the case of liquor
license fee. In this way for a contract of Rs. contractors dealing in India-made foreign liquor,
90 lakhs, the successful bidder will have to one important aspect is the status of the assessee
deposit in all Rs. 22,50,000/-before starting under the Income-tax Act. Bidding in auctions
the business. The contractor has to pay the is done by individuals generally as independent
cost of the empty bottles to the Distillery persons and it is after allotment of a license that
contractor in addition to the sealing charges. they take in other persons to form firms and
Thus he must have sufficient liquid funds to seek registration thereof. The Punjab & Haryana
carry out the day to day business in addition High court in CIT vs. Hardit Singh Pal Chand
to the deposit made.” and others reported in CTR (February 1979)
page 365, considered the question of granting
13.4 For running the contract a minimum registration to a firm engaged in liquor business
quantity of liquor is to be lifted, though the where the names of all persons subsequently
contractor is free to lift more than the minimum taken as partners are not mentioned in the
prescribed. Country liquor is measured in litres license. The High Court held that since the
and is available in sealed full bottles, half bottles names of eight strangers to the liquor license,
(adha) and nips to be sold to the public without had not been endorsed on the license in terms of
opening the seal. If a contractor is found selling Rule 37 (26) of the Punjab Liquor License Rules
the liquor loose, the DEO is empowered to book 1956, the firm was not entitled for registration
him and compound the offence by imposing under Income-tax Act, as it carried on business
a fine. In case of repetition of the offence, of selling liquor in violation of the Punjab Excise
the Collector is empowered to re-auction the Act, and the conditions of the license. This view
contract, but such cases have never come to was upheld by Supreme Court in Biharilal
notice. The contractor is free to fix the rates of Jaiswal vs. CIT 217 ITR 746. Supreme Court
each brand, but the same are to be indicated on held that a partnership formed in contravention
the notice board. These rates are to be intimated of State Excise enactment is unlawful and void
to the DEO as these rates form the basis for under Section 23 of the Contract Act. A licensee
inspection by the district Excise authorities. under the Excise Act of a State, transferring the
13.5 The contractor has to maintain a record of license to a firm in which he is a partner without
daily transactions, especially of receipts and sales. informing the Excise authorities, would disentitle
A register of empty bottles and an inspection the firm to registration under Income-tax Act.
register are also maintained by the contractor 14.2 Source of Payment of License Fee
for producing before the Excise authorities on and Excise Duty: The actual date of payment
demand. Any deviation found during inspection of license fee, particularly the initial deposit, and
is recorded in the inspection register. Besides the not the date on which it is entered in the books is
above registers maintained by the contractor, the the crucial date. The availability of cash on that

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date and its ultimate source must be thoroughly the old history of each case. The estimate is never
enquired into. The cash might be shown as passed based on any reliable material and even major
through four or five channels before it reached changes in facts and circumstances are often not
the assessee. Therefore, the source of source at utilised in favour of Revenue. The contractors
each stage and the manner of transfer must be generally plead non-maintenance of accounts.
explained by the assessee. Recent investigations Even where they are maintained these do not
in Karnataka have revealed undisclosed/ benami reflect the correct position. Since correct income
deposits as the source of the earnest money cannot be deduced from incomplete past history
deposits. The AO may get the details of payments without taking into account the material relevant
by the successful bidders from the state Excise to the given year, such estimates, are generally
department and examine the source. reduced in appeals citing lower profit rates in
14.3 Suppression of Sales-IMFL Contractors: other cases. The subsequent assessments are
Although IMFL have to maintain stock register framed on the basis of that appellate decision,
which are subject to periodical checks by Excise without collecting additional material from Excise
officials, it is through suppression of sales that authorities. Cases exist where assessments were
profits are concealed. Although the rates may completed mechanically with sales at 2–1/2 times
be fixed by the Wine Merchants Association, (in some case 2 times and even 1–1/2 times) of the
the actual price charged depends on the general license fee and net profit at 8% (even 6%) resulting
laws of economics-charge as tariff can bear. in apparent underassessment. Some important
However, the contractors show sales at uniform ITAT decisions relevant for country liquor cases:
rates throughout the year. Although cash memos
are required to be issued and sales are expected 14.4.2 Rejection of Books of Account: In
to be vouched, in practice they are never issued. ITO vs. Omprakash Premchand & Co (Indore)
Instead cash memos are generally prepared at 26 TTJ 286 and Chamanlal & Co vs. ITO
the end of the day showing sales in bunches. (Chandigarh) 53 TTJ 241, books were rejected by
One liquor contractor confided that generally the AO since sale vouchers were not maintained.
one cash memo is prepared after every four or But the ITAT cancelled the rejection of books
five customers whose names in any cases are since the AO had not disputed the quantity of
not mentioned. In case of a liquor contractor, the purchases and the assessee had maintained a
accounts were found foolproof and purchases as stock register the authenticity of which was not
well as sales were fully vouched. On close scrutiny challenged by the AO. In ITO vs. Iqbal Singh
of sale vouchers these were found to have a Taranjit Singh 26 TTJ 4(Delhi) a country liquor
dealer committed offences like adulteration of
peculiar pattern. The first four vouchers were all
liquor by mixing water, overcharging of sales,
of full bottles, and next four vouchers of pints,
sales on dry days etc. for which penalties were
and so on. Similar was the case with the brands.
levied by the Excise Department. The ITO
The system had been followed by the contractor rejected the books and estimated the profit. The
consistently throughout the year. When this ITAT confirmed this.
was pointed out he had no explanation. The
accounts were rejected and income assessed at 14.4.3 Estimation of Profits: In Rooplal
a higher figure was sustained in appeals. Danchand vs. ITO 10 TTJ 244 (Jaipur), gross
profit from country liquor was estimated at
14.4 Suppression of Sales 9% for AY 1974–75. In Muvattupuzha Liquors
14.4.1 Country Liquor Contractors: vs. ITO 54 TTJ 489 (Cochin), net income was
Country liquor contractors are generally assessed estimated at Rs. 2.25 per litre of arrack for A.Y.
from year to year on estimate basis following 1985–86.

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14.5 Investigation in Cases of Unsuccessful of the real owner would not be available by
Bidders: Most aspects of the trade are common then. Therefore, it is useful to carry out survey
to both IMFL and country liquor contractors. under Section 133A and record statements of
Every bidder has to deposit prescribed amount the concerned persons on oath under Section
through demand draft. In big cities where the 131, covering benami contract, investment, cash
license fee is quite high, each bidder is required credits, source of investments, etc.
to deposit a large sum as earnest money. Two 14.7 Utilisation of Excise Records: The
types of bidders participate in these auctions i.e. Excise authorities maintain full record of the
genuine and bogus. The bogus bidders though quantity of liquor supplied separately for each
not interested in having the contract, come brand and the rates charged. The contractor also
forward to blackmail the genuine bidders. As shows the selling rates as required by law. This
soon as they receive the expected hush money, information is available from the warehouse,
euphemistically called goodwill, they withdraw P-5 registers, and is normally available with the
from the auction. It is reasonable to suspect that assessee also as he has to maintain a receipt and
these bogus bidders would not come forward sale register. The assessee has to bear selling
with their real names or the names of their
charges of 40 paise for a bottle and 30 paise for
business concerns, but would operate in benami a half bottle/ nip. Each bottle, half bottle and nip
names. A proper enquiry immediately after the (quarter bottle) contains 750 ml, 500 ml and
bid, will bring to surface the real parties behind 250 ml of liquor respectively. This information is
the unsuccessful bidders. The investment of the useful in working out the correct amount liquor
initial deposits and their source can thereafter issued in sealed bottles. The contractor may not
be investigated in the hands of real parties. It is mislead by saying that full bottle contains 750
quite likely, especially in the case of benamidars ml and half and nip contain 375 and 188 ml
that a substantial part of the initial deposits will respectively, as the names suggest. The total
be unexplained. Thus it is useful to obtain lists of sales can be worked out when the quantity
unsuccessful bidders for enquiring into the real of liquor issued and purchase/ sale rates are
bidders and source of investment of huge sums available. Other reasonable expenses like
deposited initially. Incidentally, payment made freight and overheads can easily be estimated
to rival bidders to withdraw from the auction after examining the expenditure claimed by the
for right to vend arrack is not a deductible contractor under each head. It is also observed
expenditure in the accounts of the successful that the same parties go on obtaining contract
bidder. CIT vs. Bangalore Arrack Co. 201 ITR of a particular group of liquor shops at higher
25 (Kar). and higher bids year after year. This indicates
that the contractors had earned higher profits
14.6 Investigation in the Case of Successful
than the income returned/ assessed on the basis
Bidders: A successful bidder has to deposit the
of estimate. The assessments can therefore be
further sum as soon as the auction is concluded
framed on a more scientific and rational basis
in his favour and subsequently on the 10th day
by using the material available in Excise records.
of the auction. Besides, he needs substantial
amount to run the contract. He has also to file 14.8 Packing Material: Manufacturers of
solvency certificate (which may reveal assets not beer spend huge money on packing. Purchase
disclosed). To build up capital, bogus creditors are of bottles in which beer is marketed is shown
introduced in the knowledge that, the Income-tax as purchase of either packing material or
department would if at all, enquire about these plant, and either the entire cost of purchase or
things only after the end of the accounting year. hundred per cent depreciation is claimed as
If the contract is in benami names whereabouts deduction. However, such beer is sold by these

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companies without bottles since bottles are liable fee in the absence of books of account and net
to payment of excise duty and sales tax, and such profit rate of 8% applied. This was upheld by
levies increase the cost of manufacture of beer the appellate authorities. Generally, accounts
for purposes of excise levy. The manufacturers maintained by liquor contractors are not reliable
therefore take some deposit on the bottles and and have to be rejected. Provisions of Sections
account for only sale of beer. The bottles are 145/ 145A are applicable in such cases and
shown as stock-in-trade lying with the customers. income should be assessed by estimating sales
The deposit received on the bottles is shown as and applying a reasonable profit rate. The
liability payable to the customers on return of rate so applied must be maintainable on the
bottles. However, more than 60% of the bottles basis of past history of liquor cases in the area
are never returned by the customers. The bottles comparable with the market conditions in that
continue to be in stock-in-trade and the deposits particular year. In certain cases in Delhi gross
continue to be in the liabilities. In the case of one profit rates of 24 to 28% have been declared
of the major manufacturers of beer it was found by the assessee. The AO should not be taken in
that the deposits were continuing for over 40 by the assessee’s plea of higher license fees to
years and it kept increasing every year. In fact the justify lower results because the price is always
deposit received should have been taken as sale adjusted keeping in view the license fee paid by
of bottles and added to the turnover. The assessee the contractor.
accepted the addition made on account of bottle 15.2 Manufacturers of IMFL incur huge
deposits which were lying with it for a number of expenditure on bottles, caps, cartons etc.
years as customers had not returned the bottles.
There have been instances that expenditure on
14.9 Sales Promotion: Likewise, beer these packing materials is inflated. For this the
manufacturers spend huge sums of money on number of dozens of bottles purchased has to be
sale promotion. In many cases, the manufacturers compared with that of IMFL sold and in stock.
authorise the dealers to spend towards sales This analysis will give a fair idea whether the
promotion. The dealers in turn book bogus expenditure is inflated or genuine.
expenditure by debiting fake bills for which the 15.3 Liquor manufacturers are often found
manufacturers send credit notes to the dealers. indulging in unaccounted production and sales
In one of the dealer’s cases it was found that he outside the books of account. No Excise duty
was getting credit notes from the manufacturer is paid on such unaccounted sales. The goods
towards sales promotion and was showing in his sold in such a manner are popularly known in
books that the amounts were spent by debiting Karnataka as ‘seconds’. Though all stages of
bills from Mumbai. Investigations in Mumbai production and removal of goods from the factory
revealed that the concerns who were claimed are carried out under the direct supervision and
to be the suppliers of sales promotion materials
control of state Excise authorities, unaccounted
never existed at the addresses given. Although
production and sales are resorted to either
the dealer had made the payments by drafts, with the connivance of such authorities or by
these were encashed immediately after the circumventing such controls, by taking advantage
proceeds were credited to their accounts. The
of various loopholes. One common method is
additions were accepted by the dealers.
the use of duplicate excise labels. By law the
labels for the finished products are required to
15. TAX EVASION IN COUNTRY be approved by Excise authorities and they
LIQUOR CASES contain running serial numbers as allotted by
15.1 In some cases of liquor contractors the Excise authorities. Records are maintained
sales were estimated at 2–1/2 times of license by Excise authorities regarding the range of

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serial numbers allotted to a manufacturer, and manufacturers whose unaccounted goods were
also the range of serial numbers used for each transported by this transporter and whose details
consignment removed from the factory after were found in the diary, accepted the noting
payment of the Excise duty. However, this is found in the diary.
circumvented by liquor manufacturers in respect
15.5 The excise contractors in Karnataka
of unaccounted production by affixing duplicate
Excise labels. Sometime the same number is follow a particular pattern of conducting the
used three/ four times indicating the extent of business put into practice for a number of years.
unexcised production. During a search operation All business transactions including obtaining
in the case of a leading IMFL manufacturer in tax clearance certificate are done in the name
Bangalore, duplicate Excise labels were found of a benami, who might be a close relative or
in the assessee’s premises. The labels contained employee. This is primarily to cover themselves
two series of label serial numbers and on cross from any untoward Excise/ police actions.
verification with excise records, it was found that The contractors use benami names to evade
only the first series of Excise label numbers were excise rentals. They pay Excise rentals for 8 to
allotted to the manufacturer, but this series had 9 months and keep the balance outstanding.
already been utilised for a consignment cleared Since business is in the name of a benami who
by the Excise authorities earlier. It was also found does not have proportionate assets it is difficult
that the second series of label serial numbers had to recover the outstanding rentals. The Excise
not been allotted to this manufacturer by Excise department now insists on bank guarantee of 3
authorities. Thus it was possible to estimate the to 4 months rental to counter this. Another use
unaccounted/ unexcised production. of benami is to outsmart competitors in Excise
15.4 Another area for verification is the transport bidding.
of finished goods. Whenever any consignment 15.6 Another area is the nature of the Excise levy
of finished goods is required to be dispatched which involves parallel ‘seconds’ transactions for
from the factory, the manufacturer has to obtain which illegal gratification is paid to the concerned
Excise gate pass from the Excise authorities agencies, called ‘monthly mamool’ or M.M. The
after making necessary payment of Excise duty
Excise contractor would not like to soil his hands
in respect of goods to be removed. However,
in such illegal payments and hence a benami is
the manufacturers remove the unaccounted
used.
goods from the factory by utilizing the same
gate pass for more than one consignment. Such 15.7 The benami method is also being used to
unaccounted goods are normally transported earn of goodwill. Goodwill is an amount paid
without valid transport documents with the by the successful bidder to the other participants
help of unorganized transporters, who are close in the bidding as a consideration for tacit
confidants of the manufacturer. During the search understanding that the other participants will not
operation of a leading IMFL manufacturer in make a call, over and above the amount quoted by
Bangalore, the transporter concerned was also the successful bidder. Thus, the successful bidder
simultaneously searched and a diary containing can manipulate monthly rentals to maximize his
details of unaccounted goods transported by profit. The other participants are benamis of the
him was seized. The diary contained details other contractors. Therefore, more the number
such as date, factory from where goods were of benamis, higher the goodwill. It can be seen
lifted, the party to whom goods were delivered, from the Excise bidders from a particular taluk,
number of cases of liquor transported and the the same Excise contractor will be filing EMD in
freight charges received. Most of the liquor the names of 3–4 benamis.

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15.8 ‘Seconds’ play a major role in liquor trade. situation arose that though the assessees were
In a search case, the income from ‘seconds’ paying higher bid amounts they were incurring
business was found to be very high, sometimes losses. This was because the sendhi collected
5 to 6 times of the accounted profit. As per from trees was never sold as it is. Instead, a
the prevailing Excise rules, arrack has to be very large volume of sendhi was prepared in
sold only in sachets sourced from government the depots by mixing the daily collection of
agencies. The accounted source for arrack are sendhi with water, sugar and chloral hydrate.
the government agencies (Mysugar and MSIL The sendhi finally sold in retail contained only
in Karnataka). As per market information, these a small quantity of the juice and contained large
agencies give unaccounted arrack generally quantity of water, sugar and chloral hydrate. It
called leakage, which are additional arrack is an open secret that a small amount of chloral
sachets, over and above accounted sachets. The hydrate is mixed to prepare a large volume of
Excise contractors get rectified or neutral spirit sendhi out of a small quantity of juice. But this
from sugar industries, which is then supplied to is never admitted by the contractors and Excise
vendors as bulk arrack. The AO should keep officials for obvious reasons. In the process, the
himself informed of these tricks of trade. contractor accounts only part sales while the
15.9 The Investigation wing in Kerala came major part goes unaccounted. Local reports show
across instances of under-filling of arrack in 100 that unaccounted sales are much more than the
ml bottles. In surveys under Section 133A at disclosed sales. It was widely alleged that Excise
retail vends, it was found that the bottles were officials are not bothered about adulteration.
filled with 60 ml arrack only, thus saving 40 ml Now there seems to be a strict vigil by the Excise
arrack per bottle. The corresponding sales are Department to book Excise contractors found
not accounted. Empty IMFL bottles and labels adulterating sendhi with chloral hydrate. In the
were found in the vends during surveys. The trading and accounts filed the expenses on sugar
bottles were admittedly meant to be filled with are debited while the cost of chloral hydrate is
arrack, which tinged with an essence for IMFL omitted.
flavour, is passed off as IMFL. 16.3 The contractors employ tappers who tap
and collect sendhi from allotted trees normally
16. COUNTRY LIQUOR spread over more than 100 sq. kms. The
sendhi collected is brought to a depot where it
16.1 Country liquor is always adulterated is adulterated and bottled before dispatching
with water, sugar and chloral hydrate. Chloral in boxes containing 24 bottles each, to 40–50
hydrate mixed with country liquor is highly nearby villages for retail sales. The expenditure
intoxicating. It is injurious to health. Adulteration incurred is towards salaries of tappers, lorry
of country liquor with the chemical is forbidden charges, purchase of bottles, making of wooden
though sugar is permitted. The books produced boxes, labour charges etc. The quantity of water
never accounted for sugar, chloral hydrate etc. mixed, the number of bottles dispatched to
As other expenses such as wages, purchases of various centres, the sales at various retail centres
bottles and boxes, salaries, etc. are not properly is not recorded anywhere.
vouched and verifiable, the books were rejected
16.4 It was not possible for the department
and net income is worked out accordingly.
to lay hands on the unaccounted quantity and
16.2 As the Excise contractors were making its sales. The contractor keeps selling agents at
huge profits by adulteration, the baitak/ bid different places notified as retail centres by the
amount was raised each year, though the number Excise department. Selling commission is paid to
of trees remained same. For several years a the agents at fixed rates on each box of bottles.

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No stock account is maintained for the yield of successful bidder was a benamidar who drew a
toddy from trees. Since assessments on the basis monthly pension of Rs. 75/- only and that he
of yield as in past, did not result in any profit the was never an Income-tax assessee who could
basis was changed and estimate of net income invest Rs. 40 to 50 lakhs. The Supreme Court in
is made in respect of each tree. As the real sales civil appeal No 2095 of 1978 dated 5/12/1978
could not be detected, the estimate of net income held that it was not possible to record a finding
was found to be acceptable to the assessees and that the successful bidder was a benamidar and
the department. Since this generally resulted that some other person was the real purchaser,
in underassessment, the contractors were also even though the Court did not doubt that the
satisfied. bidder was backed by powerful financiers. In the
16.5 The names of successful contractors assessments a few persons form a partnership
are available in Excise records. Normally, the and bid for the contracts in the annual auctions.
contractors produce a certificate from Excise They pool up not only their resources but also
department showing names of contractors and the borrowals made by each partner from
the bid amount paid during the year. Apart from friends and relatives. Affidavits are produced at
this, each contractor is supposed to pay tree tax the time of assessments from the creditors. It is
at Rs. 10/- per tree. Sometimes, the toddy/ sendhi learnt that in some years the sendhi contractors
trees are located on private lands. The private incurred losses but cooked up the accounts
land owners are forbidden to remove the trees and showed profits so that the capital in the
and the government has right over these trees business is not diminished to create problem
for collection of sendhi. The tree tax is collected for explaining the sources of funds invested in
by the Excise Department from the contractors the following year. The unaccounted profits of
in respect of trees standing on government lands. earlier years continue to flow in the business in
spite of disclosed losses. The credits introduced
16.6 The contractors are known to be giving always bear interest. From the partnership deeds
huge amounts to political parties and bigwigs it is seen that sometimes the main partners or
connected with their business. The books the real partners have nominal share along with
maintained in the depots are normally produced persons who did not have anything to do with
before the AOs for assessment purposes. The the business. The main partners sometime do
books showing the real profits are not kept at not even remain as partners but control the day
the depots. The main persons entrusted with to day business.
the business are in the depots day and night by 16.8 The sale of sendhi is mainly to lower
turns to take stock of the unaccounted sendhi economic strata of society and as such the
sent out and the collection therefrom, apart business is managed by the hard-core in the
from supervising the day to day business and society. The depots adulterating the toddy are
accounts for Income-tax purposes. The books always located on the outskirts of the town. A
for unaccounted sales are maintained secretly detailed investigation is necessary to detect the
by these persons. unaccounted sales. Information can be obtained
16.7 In a case for A.Y. 1971–72 the exclusive from the state Excise office in respect of:
privilege of retail sale of toddy was given at i. Names of the successful contractors to
monthly rentals of Rs. 9,99,999/-. The total whom the contract was given.
rental for the year came to over a crore of
rupees. There were some disputes between the ii. Baitak or monthly rental paid.
successful bidder on the one hand and the State iii. Number of trees allotted and number of
of Mysore & Others. The contention was that the trees tapped.

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iv. Tax paid for the trees tapped. contractors give security of their properties for
financing the Excise business. Such persons are
v. Cases booked against the contractors for
normally found to be the main contractors doing
Excise offenses.
the business from behind the scene. This needs
vi. Selling rate of sendhi. to be probed to find the real owners.
This information should be checked at the time
of examination of accounts with a view to find 17. CONCLUSION
out the real partners, number of trees auctioned, Liquor industry is highly growing industry and
number of trees tapped, payments made by has a shadow market. Revenue from the Indian
the contractors. The contractors or the partners
Alcohol industry is large yet, for the most part,
may have to be watched for investment of
non-transparent and hard to be tracked from a
unaccounted money derived from the contracts,
Balance Sheet. On liquor product State Excise
as invariably all the partners in the business are is applicable, which is very high. Therefore,
not real partners and some of them are benamis.
there are more chances of leakage of revenue.
16.9 A major part of the capital is usually The Assessing Officer has to understand
financed by banks on securities given by the manufacturing process of product and after
contractors. The properties given as securities collecting the relevant fact of the case and region
to banks have to be verified with Income-tax of assessee decide the line of investigation with
records. Sometimes persons other than the help of basic understanding given in the topic.

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11
Paper Industry

1. INTRODUCTION
1.1 Paper is essentially a mat of cellulose
fibres bound together with additives. The word
owes its origin to ‘papyrus’, a plant which grew
abundantly in the Egyptian delta. History has it
that the barks and leaves of this plant were woven
and pressed into a sheet to form a crude type
of paper by the ancient Egyptians. It is believed
that the art of paper making was invented by the
Chinese around the second Century B.C. and
it reached the Indian subcontinent through the
Arabs, who initially learnt it from the Chinese. structure, consisting of small, medium and large
paper mills having capacity ranging from 05 to
1.2 Today paper is, so to say, more than an
1500 tonnes per day. There are around 850 units
industrial product. It is the cultural barometer of
which manufacture pulp, paper, paper board
a nation. The per capita paper consumption in
and newsprint with an installed capacity of 25
India today is estimated at around 13 kg while
million tonnes out of which 3.5 million tonnes
the global average is over 57 kg. In advanced
are lying idle.
countries, the consumption is over 100 kg. The
demand is further expected to rise in India as the 1.3 As per The Indian Paper Manufacturers
economic progress would give rise to significant Association (IPMA), the paper industry today
rise in per capita disposable income. Considering accounts for an estimated direct employment to
the present literacy rate, it can fairly be expected 5 lakh persons, and indirectly to around 15 lakh,
that we would see higher paper consumption and has an annual turnover of about INR 60,000
in days to come. In the age of e-commerce, Crore. The domestic market/ consumption of
packaged delivery of commodities is going to paper is over 17 million “tonnes per annum”
enhance paper consumption to a great extent. (TPA), with over 3 million TPA being imported.
As per the present policy, FDI upto 100 per By 2024–25, under the baseline scenario,
cent is allowed on the automatic route for the domestic consumption is projected to rise to
pulp and paper sector. However, the per capita 23.50 million TPA (in the optimistic scenario,
consumption of paper in India is about 13 kg. consumption is expected to rise to 36.90 million
which is much lower than the world average of 58 TPA by 2024–25).The association has estimated
kg. The Indian paper industry is in a fragmented that 1 million TPA of integrated pulp, paper and

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paper board capacity has to be created in India 2.2 After introduction of GST tax regime, GST
on an annual basis over the current capacity rate for Paper, Paper Board & Paper Products
to meet the growing demand. They have also fall under five rates: NIL, 5%, 12%,18% and
estimated that such investments would create a 28%. GST rates are also based on HSN Code
multiplier effect on the economy through gross (Harmonised System of Nomenclature), the
capital formation of INR 8,500 crore every year, globally adopted system for classifying goods in
direct employment to 15,000 people every year international trade practices.
and further giving additional livelihoods of 72
million man days per year (for people involved 3. PAPER INDUSTRY IN INDIA: A BRIEF
in farm forestry). This projected growth trajectory SWOT (STRENGTH, WEAKNESS,
brings out the revenue potential of the industry. OPPORTUNITY AND THREAT)
ANALYSIS
2. TYPES OF PAPER
3.1 Strength: Paper industry is one of the oldest
2.1 The most widely used classification of paper industries in India. The industry’s fundamentals
is cultural paper and industrial paper. Paper are strong. The installed capacity over the years
used for writing and printing is called cultural shows a rising trend.
paper. Industrial paper is used for industrial
3.2 Weakness
purposes as against paper used for writing and
printing, or that used for facial or sanitary tissue i. Wood prices in India are higher.
papers. Prime examples of industrial paper are
ii. Infrastructure continues to be a major
liner board; corrugating medium and bag paper.
Paper can also be broadly divided into two bottleneck in the movement of raw
categories: Paper and Board. This classification materials and finished product.
is based on weight in terms of grams per square iii. Interest rates are quite high.
metre(GSM) and the manufacturing process of
either is classified depending on the end use. iv. Stringent environment norms and scarcity
The classification is as follows: of basic raw material (wood/ bamboo).

i. Newsprint. v. Comparatively lower return against huge

initial investment.
ii. Printing Paper-White printing; Colour
printing; Litho/ Offset; Duplicating etc. 3.3 Opportunity: Expected rise in consumption
iii. Writing Paper-Cream Wove; Drawing and as the per capita consumption is very low today.
Cardige board; Bank bond etc. Paper is a biodegradable product. It has no real
iv. Wrapping Paper-Kraft; brown etc. competitor. Plastic, once perceived as a substitute
for paper no longer poses the challenge because
v. Tissue-White; coloured etc. of its environmental hazards.
vi. Special Paper-Cigarette tissue; Art paper;
Blotting paper etc. 3.4 Threat

vii. Rag Papers-Account Book; Manifold paper 3.4.1 Since the initiation of the policy of
etc. economic liberalization, the government has
viii. Boards-Duplex/ Triplex/ Ticket board etc. been reducing import duties. This has led to
rising imports of both paper and newsprint.
ix. Special Board-Chrome board; Art board The fall in international newsprint prices has
etc.
also contributed to growth in the import figures.
x. Straw Board-Mill board. Rising Import again resulted in:

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i. Low capacity utilization of domestic iv. The industry is energy-intensive and

manufacturing units. efficiency is yet far below than that in
developed countries.
ii. Huge losses even for large manufacturers.
3.4.3 Another issue of concern for the industry
iii. Deferment of modernization of expansion
world over, is that with the revolution of
due to resource crunch.
information technology, the work environment
3.4.2 As already mentioned, the issue ringing is turning ‘digital’. It will have an impact on the
the alarm bell is the environmental issue. The future demand. However, keeping in view the
industry is yet to tackle the environment issue fact that the average consumption of paper in
successfully and tune itself to the concept of India is far below the international standard and
sustainable development. Here the points literacy is on the rise, there is a scope for future
involved are: growth of the industry, which again has revenue
implications for the taxing authorities.
i. Paper industry is held responsible for
depletion of forests. 3.4.4 Presently India is heavily dependent on
import supply of pulp and wastepaper as raw
ii. Consumption of water to great extent.
material. The comparative figure (in value Rs:
iii. Pollution issue. Crore) for the past four years is as below:
Table 1: Import Figure in India
(Fig. in Crores)
Commodity 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18 2018–19
Pulp of Wood or of Other 6991 8379 10323 10699 11088 13592 18321
Fibrous Cellulosic Material;
Waste and Scrap of Paper
or Paperboard.
Comparative (Increase 7.14% 19.86% 23.21% 3.64% 3.63% 22.59% 34.79%
Decrease in% over the
previous year)

(Reference: Website of Ministry of Commerce-link-http://commerce-app.gov.in/eidb/Icomq.asp?hs=48)

3.4.5 Proper focus on systematic retrieval main inputs in the production process. These are
mechanism of recycled paper can address the described below:
huge revenue outgo on this count. 4.2.1 Basic Raw Materials: The raw
materials used by Indian manufacturers can be
4. MANUFACTURING PROCESS divided into following categories:
i. Forest-based: Wood (from eucalyptus
4.1 Manufacturing process in paper industry
trees), bamboo.
can be broadly divided into two stages:
ii. Agro-based: Bagasse (waste from sugar
i. Pulp making from basic raw materials or mills), wheat/ rice straw, jute.
pulp making from recycled paper. iii. Secondary fibre-based: Waste/ recycled
ii. Conversion of Pulp into paper of desired rags, gunny bags, old rags, cotton waste.
quality. iv. Delinked pulp-based: Recycled papers.
4.2 Main Inputs: Basic raw materials, other In addition, some mills manufacture paper from
fibres, chemical & additives and fuel are the imported virgin pulp.

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4.2.2 Other fibres used are grass string, babul 4.2.7 Fuel: Coal, pitch, wood dust, lignite,
grass, paper and tailor cuttings, rags, and wood oil, bio-fuel, bio-gas, leco are used as fuel. In
pulp. addition large quantity of water is required.
4.2.3 Fillers: China clay, talc powder, and
soap stone powder are used as fillers. 5. DESCRIPTION OF THE
MANUFACTURING PROCESS
4.2.4 Coating and surface sizing materials:
5.1 The manufacturing process of a typical
i. Starch plant engaged in production of writing and
ii. Glue printing paper converts the basic raw materials
into pulp and finally to paper reels or sheets.
iii. Rosin
5.2 A typical paper factory includes the
iv. Soda ash following:
v. Cream caustic i. Bamboo Chipping Plant
vi. Dispsonil ii. Pulp Mill
vii. Alum iii. Paper Machine
viii. Coating clay & SF clay iv. Chemical Recovery Plant
ix. Salt cake v. Power Plant
x. Carbide sludge 5.3.1 Bamboo Chipping Plant: Chipper
xi. Liquid chlorine House: Bamboo or wood is fed into the chipper.
This machine is basically a drum or a rotor
xii. Caustic soda filled with knives called fly-knives and also one
xiii. Caustic liquor knife fixed to the body of the chipper called
4.2.5 Dyes: These are used for colouring ‘dead knife’. Raw materials to be chipped are
passed through the fly-knives and dead-knife for
4.2.6 Additives cutting into small pieces. The output of chipping
i. Silicate of soda is subject to screening through Decker Screens
and washed Bamboo dust is a bye-product in
ii. Sodium sulphate
this process if the raw material used is other than
iii. Guarton bamboo or wood, then also it is divided into
iv. Cellpro small pieces in the chipper.

v. Manganese sulphate 5.3.2 Pulp Mill: Bamboo chips are first de-
aerated by process steam and impregnated by
vi. Ferro cyanide treating with “white liquor”. Following are the
vii. Sulphuric acid processes:
viii. Acetic acid i. Digester Cooking and Washing: The
raw material so converted into small size
ix. Titanium dioxide is cooked in the pressure vessel known as
x. Higum digester. For the purpose of cooking, liquor
containing sodium hydroxide, sodium
The above chemicals and additives are used in
sulphate and sodium carbonate is used.
the Paper manufacturing process.
This is commonly known as white liquor.

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The white liquor once used is recovered undergoes bleaching. The screened pulp is
back from the spent liquor known as black then passed through sand-traps, rifflers,
liquor. The digestion is carried out for three and centri-cleaners for removing sand and
to six hours under pressure range 3.5 to 7.5 other impurities.
kg/sq. cm. White liquor at a temperature of iii. Bleaching: For manufacturing bleached
160–175 degrees centigrade is circulated paper, the pulp is required to be bleached
through the chips for cooking. The with different chemicals. Normally, these
purpose of cooking is to eliminate lignin are chlorine gas; chlorine-dioxide, hypo-
and other wood components leaving chlorate, oxygen alkali, bleaching liquor
cellulose fibre behind. The whole cycle of etc. Generally, the pulp is bleached in three
heating, cooking and blowing the pulp to stages consisting of chlorination, caustic
the pulp-storage tank, called blow-tank is extraction and hypo stages of chlorination.
completed here. However, the use of chlorine and its
ii. Washing and Screening: The mixture impact on the environment have been
of unbleached pulp and black liquor is the subject of contemporary debate. The
ECF (Elemental Chlorine Free) and TCF
passed on to ‘screens.’ The purpose of
(Totally Chlorine-Free) bleach sequences
screening is to catch undigested bamboo/
are yet to be in used in India.
wood chip and their knots. The screened
pulp and black liquor are then fed into a 5.3.3 Paper Machine: The unbleached and
battery of washers known as Brown Stock bleached pulp thus obtained cannot be used
washers. The black liquor is completely as such for making of paper; it requires further
washed out and freed from pulp in these physical and chemical treatment. In the paper
washers and collected in storage tanks. machine, the pulp is first sent to a Section
The liquor is taken from here to the soda called the Stock Preparation Section. After the
recovery process for conversion into white physical treatment of refining and brushing,
liquor. The uncooked knots are sent for re- sizing chemicals like resin, talcum, broke etc.
cycling to the digester. The washed pulp and other additives are mixed with the pulp
known as unbleached or brown pulp is to render strength to the paper. The types of
used in unbleached varieties of paper. For additives, typical chemicals and their functions
making white paper, the unbleached paper are described in the following table:

Different Wet-End Chemical Additives: Functional Additives

Table 2
Type of Additives Typical Chemicals Application
Sizing agents Rosin size/ alum, ketene dimers, alkyl Imparts water penetration resistance to paper
succinic anhydride
Dry strength agents Starches, gums, poly-crylamides Increases paper dry strength (tensile, stiffness, etc.)
Wet strength resins Urea formaldehyde, melamine Imparts increased strength to paper saturated
formaldehyde, polyamine resins with water
Fillers Clay, talc titanium dioxide, calcium Improves optical and printing properties
carbonate.
Colouring agents. Dyes, coloured pigments, optical whiteners Imparts colours and tints to paper

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Different Wet-End Chemical Additives: Chemical Processing Aids

Table 3
Type of Additives Typical Chemicals Application
Retention aids Cationic and anionic poly-crylamides, alum Improves retention of fines and fillers
Defoamers Proprietary chemicals Improves drainage, sheet formation,
cleanliness, prevents foam formation and
deposit problems
Slime control agents -do- Controls micro biological growth and
associated deposit problems
Pitch control agents Talc, alum, dispersants Prevents deposition and accumulation of pitch
Drainage aids - Increases water removal rates
Formation aids High molecular weight anionic polymers, Improves distribution of fibres by decreasing
gums, poly acrylamides fibre-fibre flocculation
Acids and base - Controls Ph
Specialty chemicals - Corrosion inhibition, flame proofing, anti
tarnishing

The resultant output coming out is known as quantity of paper has been converted into a roll,
‘furnished stock’. The furnished stock is then a fresh roll is started. Each roll is weighed and
passed through the “Flow System” where we get test-checked at this stage and the weight noted
rejects in the form of sand, fibre etc. The stock in the machine log-book. The small reels are
travels through this Section in a highly diluted next packed and stored in product warehouse.
form. Much water is removed at this stage and But the bulk consumption of writing and printing
what remains is technically known as ‘Paper Web’. paper is in sheets of various sizes. For this, the
5.3.4 Pressing and Drying: The paper reels are cut into sheets by passing them through
web is then subject to pressing and drying by cutters, the cutters trim the papers (Trims and
mechanical means. A pair of rollers known as broke are obtained as ‘by-products’ in this
wet press is used to extract as much water as process). This apparent wastage is sent back for
possible. When the paper sheet comes out, it still re-pulping.
contains 62–67% of water. The wet sheet is then
passed on to the heated surface of rotary dryers 5.3.7 Finishing Room: Trained personnel
which give air dry paper. inspect the sheets here thoroughly, sort out the
good ones and discard the defective ones. The
5.3.5 Calendaring: The sheet is then carried
defective ones are either rejected or made into
in between highly polished rolls stacked one
seconds. The good ones are generally grouped
over the other known as calender. The process
of calendering imparts a smooth finish and gloss together and wrapped into reams so that in
to the paper. During drying and ‘Calendering’ each ream there are five hundred sheets. Next
the web is treated with process steam, which the reams are sent to the product warehouse for
reach the condensate stage and is re-used. onward dispatch to customers.
5.3.6 Reeling and Built: The paper sheet is 5.4 Chemical Recovery Plant: Economy
then wound around a rotating shaft and a reel dictates that for larger paper plants of capacity
is build up. These reels are quite heavy and 100 tonnes of production per day and above,
too wide to be used. By employing rewinding chemicals used for cooking should be recovered
machine and using slicing tape, these reels are for reuse in the product-cycle. For this a chemical
converted into smaller ones. As soon as sufficient recovery plant is essential. In this plant, black

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liquor comprising sodium carbonate converted in practice, due to distances involved, pilferage
from sodium hydroxide, sodium sulphide, etc., transit losses of 5 to 20% occur.
thiosulphate and lignin inorganic compound 5.6 Finishing Losses: Finishing losses vary
are produced. Heat generated in the recovery from mill to mill and it depends upon the quality
furnace is used for raising steam which can either of managerial control, condition of machine etc.
be used directly in the process or can be used for These vary between 6–12%.
power generation, or for both the purposes. The
main equipments in the ‘Soda Recovery Plant’ 5.7 Ware Housing
are evaporator, soda recovery boiler, causticiser 5.7.1 Receipt of Reams from Finishing
etc. Evaporators are heat-exchangers where House: After paper is finished and wrapped
steam is supplied to one, to affect the heating in reams and check-weighted, Finishing House
and boiling the black-liquor for evaporation prepares a Finishing report stating Lot No, quality,
whereas in the other, evaporation takes place by substance, size, ream weight and Net weight
application of vapours from the previous effects
along with total number of reams. Distribution
and vacuum. Chemical recovery boiler is a
Section arranges to remove and transport the
normal combustion boiler with furnace capacity
reams from Finishing lines to Product warehouse
specially designed as to allow the burning of
on daily basis. After all the reams have been
the black liquor without smelt deposits and by
allowing the smelt to escape through the bottom received, the total number of reams received
of the furnace. In the Caustising Section, lime is tallied with the Daily finishing report and a
and filter is installed in the final stage to extract “Production Receipt Sheet” is prepared. These
any residual chemicals left in the sludge so production figures are used for maintenance of
that there is minimum loss of chemicals. The statutory GST Records.
recovery of Alkali by the Recovery plant is not 5.7.2 Receipt of Reels from Finishing
100%. There are losses at various points both House: Subsequently slitting and rewinding of
in the pulp mill and the recovery process. And reels are done at reminder, the reels are packed
the loss is 8–12%. These losses are made up with wrapper in the reel packing machine. Each
by adding Salt Cakes to the thick black liquor reel is weighed and marked with Reel serial
before burning it. Sodium sulphate is the make- number, gross weight, and net weight and rolled
up material. This is why the process of cooking to stitching area. The net weight of the reel is
with white liquor is known as sulphate process. determined by deducting the tare weight from
5.5 Transit Losses of Raw Materials: Ideal the gross weight. Tare weights of different widths
situation suggests that there would be no transit for paper in reels have been standardized by the
losses except reduction in moisture content, but authorities are tabulated below:
Table 4
Size Core Weight Wooden Pulp Wrapper Total

Upto 40 cm 0.8 kg 0.3 kg 1.1 kg 2.2 kg

40.1–60 cm 1.0 kg 0.3 kg 1.4 kg 2.7 kg

60.1–80 cm 1.5 kg 0.3 kg 1.6 kg 3.4 kg

80.1–100 cm 1.9 kg 0.3 kg 1.7 kg 3.9 kg

100.1–120 cm 2.3 kg 0.3 kg 1.8 kg 4.4 kg

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Further all the reels are delivered, Finishing 6. Apart from the paper manufacturing process
House issues a “Finished paper delivery report” from virgin raw material detailed above, the
based on which a “Production receipt sheet” is process in case of two other important types
prepared for recording in Register maintained of papers, namely newsprint and paperboard,
for GST purposes.
employed by a standard Indian company is
5.7.3 Conversion of Reams Into Bundles: detailed below.
The number of reams received are converted into
bundles as per the chart in “Balling Register”. 6.1.1 Newsprint Machine Configuration
Generally a bundle weighs 65–70 kg. and Manufacturing Process
5.7.4 Packing: Hessian cloth and jute twines 6.1.2 Machine Configuration
were the traditional packing materials for packing
A typical newsprint machine has the basic
of reams and reels. The average consumption of
hessian cloth and jute twine per reel and bundle configuration of:
used to be as follows: i. A deinking plant comprising two loop
Table 5
systems with both oxidative and reductive
bleaching to achieve +58% brightness.
Reel Width Hessian Consumption
40 cm-69 cm 0.8 kg ii. Stock Preparation System Comprising,
70 cm-80 cm 1.0 kg Chest Agitators, Pumps, Motors, Piping,
81 cm-91 cm 1.2 kg Instrumentation and Controls.
102 cm 1.3 kg iii. Approach Flow System Comprising Centri
cleaners, Pressure Screens, Centri cleaner
The consumption of hessian and jute twine per
Feed Pump, Piping, Instrumentation and
bundle is 500 gm on an average. Nowadays,
other synthetic material is used for packing. Controls.
5.7.5 Marking: After stitching, product iv. Head box.
specification and other details are marked v. Forming Section.
with ink on hessian packings. The quality, lot
no, GSM, size, ream weight, number of reams vi. Press Section.
packed, Total weight of the contents are marked vii. Dryer Section with unirun in first few
on each bundle. The reel serial no., quality, lot group.
no., GSM, size, gross weight and net weight
are given on each reel. After the passage of the viii. Calendar stack with CC rolls.
Packaging Act in the seventies, it is mandatory ix. Pope Reel.
to specify date of manufacture and ex-factory
price also. x. Rewinder.
5.7.6 Stacking: After stitching and marking 6.1.3 Detailed Process Description and
paper bundles and reels, these are stacked Machinery Details
in the product ware house according to
established guidelines and organisational 6.1.3.1 Deinking Plant
practices. Stack Card is used on each i. The furnish for the newsprint is mainly the
stack indicating the product-specifications. secondary fibre and hence, waste paper
Similar cards are also used on stacks of reels.
pulping with deinking is suitable.
The goods are then ready for dispatch and are
removed from the factory premises on execution ii. Waste paper has a considerable amount
of supply order. of contaminants such as sand, inks,

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adhesives, hot melts, strings, and various iii. Due to rolling motion, sufficient force is
kinds of bigger particles of metal, wood generated between the impacts. Ink, dirt,
or plastic or other contraries, that must be lamination adhesive etc., are efficiently
removed before a quality recycled fibre loosened and detached from fibre. With
can be produced. gentle shearing forces, the contaminants
are retained as large particles without much
iii. This removal process utilises various
disintegration making further cleaning
techniques such as pressure screening,
operation easier.
flotation and combines them with other
fibre enhancing operations, which are iv. At the feed end a continuous water shower
assumed to be performed by other parts is provided to wet the waste paper and
of the system. due to the gentle lifting and falling of waste
paper, the waste paper is disintegrated
6.1.4 Raw Material Feeding and the slushed fibre passes through the
The required quantity of waste paper is stocked screen at the discharge end and falls to the
in the wastepaper feeding shed. Retrieval and collection tank below. The water spray at
feeding of waste paper to conveyor is mechanised the discharge end washes the plastics and
using forklift trucks. While the local ONPs are in other contaminants to reduce the fibre
carry over in the reject. The chemicals,
small bundles tied with ropes, the imported ONP
dilution water additions are controlled
and OMG are in bales tied with wires. To process
automatically through DCS.
the design raw material mix, the respective
raw material will be handled separately and v. During the pulping cycle, the required
simultaneously. The bales are fed to the bale chemicals such as sodium hydroxide,
feed conveyor and the bale wires are cut and sodium silicate, hydrogen peroxide,
Diethylene Triamine Penta Acetic Acid
removed at the bale wire cutting station and the
(DTPA) and surfactants are added to the
loosened bales fall on to the elevating conveyor.
waste paper mix. The chemicals added
Local ONP bundles which are almost in loose during the pulping cycle have the following
form are pushed to the bale feed conveyor. The objectives:
pulper feed conveyor will be equipped with load
cells for tracking the weight of waste paper fed a. Aid in the wetting of the fibre for
efficient defibering.
to the pulper. The conveyor will be adequately
sized to feed the required quantity of both waste b. Effectively detach the ink from the fibre
papers continuously. surface.
6.1.5 Slushing c. Provide pre-bleaching action on the
fibre.
i. Repulping of the waste paper is carried out
as a continuous process in a continuous d. Disperse the ink particles and hold
pulper operating at a consistency of around them in a dispersed state for subsequent
15%. The pulping cycle starts with the removal in the flotation stage.
loading of baled waste paper from storage. 6.1.5.1 The stock is diluted to get consistency
ii. The continuous pulper is a rotating of around 4% by addition of a measured quantity
horizontal cylindrical vessel with internal of dilution water.
baffles with spout at feed and discharge 6.1.6 Coarse Cleaning
ends and perforated screen at the
i. The discharged stock from the pulper is
discharge end. collected in a dump chest. Agitation in

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the chest blends all the incoming stocks, 6.1.8 Fine Cleaning
levelling out any consistency variations The accepted stock from the coarse cleaning
from the pulper. is collected in a cleaner feed chest. Stock from
ii. Stock from the dump chest is then fed the cleaner feed chest is cleaned in a four-
on level control to the coarse screening/ stage fine cleaning system arranged in cascade
cleaning feed chest. The stock is diluted to arrangement. The fine cleaners remove very
around 3 to 3.5% consistency in the coarse fine heavy impurities. Accepts from the screens
screening/ cleaning feed chest and then fed are fed to the suction of the floatation cell feed
to the high density cleaners on consistency pump. Rejects from the final stage cleaner are
control, operating at a consistency of 3 collected in the screen/ cleaner reject chest. The
to 3.5% and a pressure drop of 1.5 to 2 final stage cleaners are provided with elutriation
bar. The cleaners remove contraries of water for minimising the loss of good fibre along
high specific gravity such as wires, staples, with the cleaner rejects.
glass, sand etc. These rejectable materials 6.1.9 Flotation
are discharged intermittently from the
bottom of the cleaner with the use of i. Flotation is a physio-chemical process of
timer actuated back-to-back valves. A separating materials. It is based on the
recirculation line in the accepts is provided phenomenon that separation is achieved
to ensure a constant pressure drop across by influencing the wettability of the particles
the cleaners. The cleaners are provided to be separated, whether the surface of
with elutriation water injection into the the particle is hydrophilic or hydrophobic.
reject chamber, which washes any fibre The water-repellency of the surface of
entrained with rejects and returns the fibre the particles to be separated is achieved
to the accepts stream. The rejects are fed to by the addition of special heteropolar
a cleaner/ screen reject chest. chemicals, called collectors, which deposit
on the surface of the particles. At the same
6.1.7 Coarse Screening time, the treated particles can deposit on
i. Accepts or the approved materials from the air bubbles that are introduced into the
high density cleaners are fed directly to the suspension. As a result of the buoyancy
inlet of the primary coarse screen equipped of the air bubbles, the adhering particles
with a 1.6 mm perforated screen basket. The are conveyed to the surface of the slurry
coarse screen removes relatively large light or suspension to concentrate as froth,
and heavy weight contaminants. Accepts in which form they can be removed. All
from the primary coarse screen are fed to hydrophilic particles (i.e. fibres) remain in
the cleaner feed chest. The rejects from the the slurry or suspension.
coarse screen are fed directly to the feed of ii. Flotation deinking stages are effective in
the reject screen. removal of particle sizes ranging from 10
ii. The reject screen works in cycles controlled microns to 100 microns.
by the plant DCS. Over the screening iii. The fine cleaning ‘accepts’ are fed to
phase, the stock is first introduced into the the flotation cell at a feed consistency
inlet chamber in which a specially made of around 1 to 1.5%. The flotation cell
rotor revolves, ensuring the passage of considered in the proposal is a multistage
fibres through a vertical screen plate with flotation cell. Accepts from each stage
perforations (1.6 mm) which are thus are re-circulated to the subsequent stage
cleaned. and the last stage accepts are fed to the

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subsequent fine cleaning system. Rejects 6.1.11 Washing and Thickening

discharge is achieved through slight The accepted stock from the screens is washed
overpressure, which is adjustable and can and thickened in a disc filter. The stock is thickened
be controlled without fibre being carried to around 8% consistency and discharged via
away in the form of foam. Flotation air is a repulper to the screw feed conveyor feeding
added through special injectors. The rejects the screw press. The screw press thickens the
line is connected to a cyclone, where air stock to a consistency of around 30 to 35%
and ink particles are separated. The air is and feeds to the screw feed conveyor feeding
vented to atmosphere and the liquid flows the kneader/ disperser. The filtrate from the disc
to a sludge tank. filter flows to the white water chest through two
drop legs, one for cloudy and another for clear
6.1.10 Fine Screening filtrate. Cloudy filtrate is produced during the
i. The fine screening system comprises time when fibre mat is forming on the surface of
pressure screens with slotted baskets the disc sector. Once the mat is thick enough, it
arranged in a three-stage cascading functions like a fine filter collecting fines and thus
arrangement. Accepts from the floatation producing a clear filtrate. The filtrate chest is
cell are fed via a constant level feed box partitioned into cloudy and clear compartments.
to the feed of the primary fine screen with The screw press filtrate is also collected in the
a 0.20 mm slotted basket. The rejected cloudy compartment. The cloudy filtrate is sent
material from the primary fine screen is for clarification in a Direct Air Flotation (DAF)
fed to the primary fine screen reject stand clarifier. The clear filtrate is used for the disk filter
cleaning showers and sheet knock off showers.
pipe. The accepted material is fed to the
Excess clear filtrate is fed to the backwater
disc filter for washing and thickening.
chest, which also receives the clarified water
ii. Rejects from the primary fine screen from the DAF clarifier. The disk filter washing
reject stand pipe are diluted and fed to and thickening stage is effective in removing ink
the secondary fine screen equipped with particles ranging from 0.1 to 10 microns.
a 0.20 mm slotted basket. Accepts from 6.1.12 Dispersion System
the second stage are cascaded back to
the primary stage constant level feed box. The thickened stock from the screw press is
Rejects are fed to the secondary fine screen fed to the kneader/ disperser via a screw feed
reject stand pipe. conveyor with steam injection. The kneader/
disperser has two counter-rotating discs. The
iii. Rejects from the secondary fine screen resulting rubbing action caused by the speed
reject stand pipe are diluted and fed to of the rotors separates the ink into fine particles
the tertiary fine screen equipped with with minimum injury to the fibre. Intense fibre to
a 0.20 mm slotted basket. Rejects from fibre rubbing action increases the temperature of
the tertiary stage are led to the screen/ the pulp by about 20oC and no additional steam
cleaner reject chest. Accepts are cascaded is required for softening the ink and stickies.
back to the primary fine screen reject Dispersion size of most left out ink particles to
stand pipe. the 20–100 micron range.
iv. The slotted fine screens remove smaller 6.1.13 Bleaching System/ Storage
size contaminants, primarily lightweight Stock from the kneading/ dispersion system
contaminants such as stickies, hot melts, is discharged to a screw feed conveyor which
plastic etc. feeds the down flow high consistency peroxide

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bleaching tower. Bleaching chemicals are added The dewatered and compacted rejects are
to the stock at the inlet of the kneader, which burnt in the boiler.
also acts as a mixer for uniform mixing of the 6.2 Stock Preparation
bleaching chemicals with the pulp.
6.2.1 Stock Preparation and Chemical
6.1.14 Water System Additive Preparation
The deinking plant will have two water loops. i. The stock preparation plant is an area in
Dilution requirements downstream of the the mill between the wastepaper processing
flotation-2 are met from the poly disc filter plant and the paper machine.
filtrate and excess paper machine clarified water. ii. The proposed newsprint machine will have
Dilution requirements at the pulper, coarse a separate continuous stock preparation
cleaning and screening, fine screening, flotation system to prepare the stock suitable for
and fine cleaning are met from the filtrate of loop making the newsprint paper. The stock
one thickener (disc filter). will be received in the receiving chest
at about 3.5% consistency. From the
6.1.15 Clarified White Water from Paper
receiving chest, the stock is pumped to the
Machine
blend chest. The chemical additives like
i. Disc saveall is fed to a DAF clarifier. alum, dyes etc will be dosed in the blend
Polyelectrolyte flocculating agents are chest. From the blend chest, the stock is
used for effective clarification of the white pumped to machine chest. The stock from
water. The clarified white water from the machine chest is pumped to fan pump
the DAF clarifier is collected in a back with basis weight control system.
water chest and used for dilution. Sludge iii. The white water and fibre recovery system
from the DAF clarifier is collected in the basically consists of a poly disc saveall. All
sludge chest. the excess, rich water after internal use is
ii. A constant volume of clarified water from pumped to polydisc saveall.
the back water chest is purged to the drain iv. For better mat build-up, a portion of
to have a control on the ionic trash build- incoming pulp is used as sweetener. The
up in the system. Fresh water is added for recovered fibre is blended along with the
make-up in the back water chest. pulp in the blend chest.
6.1.16 Rejects Handling v. The filtrate which is extracted in three split
i. Sludge from the flotation cell and DAF is used back in showers, dilution etc.
clarifier is collected in a sludge chest and vi. The broke handling system is provided to
then pumped to a sludge dewatering and process the wet broke formed at couch pit,
thickening system. The filtrate from the press pit and also the dry broke generated
system is sewered and to join the main under the machine pulper and finishing
effluent. The dewatered sludge is burnt in house pulper.
the boiler.
vii. The wet broke generated at couch pit and
ii. Coarse screening and cleaning rejects, press pit is pumped to a thickener and the
fine screening rejects and fine cleaning thickened pulp is stored in the broke chest.
rejects are collected in a rejects tank and All the dry broke and the thickened wet
then fed to a rejects compactor. The filtrate broke is stored in a broke tower. The broke
from the rejects compactor is sewered. pulp is then passed through a HD cleaner,

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deflaker and then blend with the incoming vi. Note books/ records/ DIP Pulp
pulp.
vii. Mixed waste
6.3 Paperboard Machine Configuration,
Manufacturing Process and Input Costs viii. Mixed waste/ DIP Pulp

6.3.1 Machine Configuration Considering the raw material usage, processing

sequence, the following raw material processing
A typical multilayer board machine has the
streets are considered.
following Sections:
i. Hydraulic head box with dilution control Street 1: for virgin pulp/ DIP Pulp
for the top and filler layers. Street 2: for Note books/ records/ DIP Pulp
ii. Fourdrinier, forming Sections with a top Street 3: for Mixed waste
wire for the filler layer.
6.3.2.2 Street 1: Virgin Pulp/ White
iii. Shoe Press Section.
Shaving Street
iv. Dryer Section with a combination of unirun
and two tier configuration with hood and This Street mainly used for producing bleached
ventilation system. pulp from white shavings and DIP pulp and also
used for slushing virgin pulp. The street contains
v. An inclined size press.
pulper with feeding conveyor, LC cleaner and
vi. A hard nip precalendar. deflaker/ refiner.
vii. On line coating Section. 6.3.2.3 Street 2: Note books/ Records
viii. IR/ Air dryers with steam dryers for curl
This street is for processing note books, office
correction.
records and ONP. The street contains pulper
ix. A soft nip calender. with feeding conveyor. LC cleaner, two stage
x. Pope Reel. screening.
xi. Rewinder & reel handling system. 6.3.2.4 Street 3: Mixed Waste
xii. Sheet Cutter. i. This street is for processing Mixed Waste.
xiii. Ream and Bundling Packing. The street contains pulper with feeding
arrangement, LC cleaner, coarse screens,
xiv. Storage Rack system. cleaners and screens for fine screening.
6.3.2 Process Description and Machinery ii. A belt thickener and disperser for further
Details processing for use in the bottom layer for
6.3.2.1 Fibre Preparation grey back is included.
For recycled grade, the layer wise raw materials iii. Different grades of pulps are stored in
used are as below: separate HD tower for onward pumping to
i. Top Layer approach flow system.

ii. Top Under Layer iv. However, the furnish mix and the raw
material will be adjusted with reference to
iii. Middle layer
the quality of end product.
iv. Bottom Layer
v. For virgin grade all the layers will be of
v. Virgin pulp/ DIP Pulp virgin pulp.

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6.4 Board Machine recovered fibre is blended along with the

6.4.1 Stock Preparation cum Approach pulp in the blend chest.
Flow System iii. The filtrate which is extracted in three split
i. The stock preparation plant is an area in is used back in showers, dilution etc.
the mill between the wastepaper processing
plant and the paper machine. 6.6 Broke Handling System
ii. From the storage chest, in the fibre i. The broke handling system is provided to
preparation plant, the stock is pumped process the wet broke formed at couch pit,
to the blend chest at about 3.5% press pit and also the dry broke generated
consistency. The chemical additives under the machine pulper and coater
like alum, dyes etc will be dosed in the Section.
blend chest.
ii. The wet broke generated at couch pit and
iii. The pulp received at 3.5% consistency
press pit is pumped to a thickener and the
is diluted with machine back water to a
thickened pulp is stored in the broke chest.
consistency of 0.6 to 0.8% depending on
All the dry broke is processed separately
the substance required. For this purpose,
the incoming pulp at 3.5% consistency is and the thickened broke is stored in a
taken to the constant level box from where, broke tower. The broke pulp is then passed
through a basis weight control valve, it through a HD cleaner, deflaker and then
enters the suction of fan pump. blend with the incoming pulp.
iv. The approach flow system is simple single 6.7 Chemical Additive Preparation (CAP)/
dilution type consisting a low pulse primary Coating Colour Kitchen (CCK)
fan pump followed by two stage pressure
screening. i. CAP Section shall consist of preparation,
storage and dosing system comprising
v. From the fan pump, the pulp at 0.6 to 0.8%
dissolvers, dispersers, cookers, and
consistency passes through pressure screen
volumetric dosing pumps for chemicals
to remove any residual sand particles and
speck and to open the bundles of fibres. such as retention aid, coagulants, cationic
and anionic starch, slimicide and defoamer.
6.5 Fibre Recovery System
ii. CCK Section shall consist of dispersers for
i. The white water and fibre recovery system
calcium carbonate, coating clay, dissolvers
basically consists of a poly disc saveall. All
for coating chemicals such as water
the excess, rich water after internal use is
retaining agents, plasticizers, synthetic
pumped to polydisc saveall. There will be
binders, dispersers used in the surface
two disc saveall to process white water.
sizing and coating application.
One for top layer and bottom layer in case
of bleached pulp furnish and the other for iii. The pulp now enters the head box of the
top under and middle layer. forming Section of the board machine.
ii. For better mat build-up, a portion of iv. Each layer is having a dedicated approach
incoming pulp is used as sweetener. The flow system.

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6.8 Board Machine

Table 6
No. of Layers Three(3)/ Four (4) Layers
Head box Pressurised/ air cushion head box for top under and bottom layer. Hydraulic head box
with slice adjuster and CD basis weight dilution control for top and filler layers.
Forming Section Fourdrinier with necessary dewatering system, cantilever type forming Section for each
layer with top dewatering wire for filler layer.
Press Section Independent three nip press Section followed by a smooth press. The first nip is with
plain roll and suction roll and second nip is between blind drilled rolls and the third nip is
a shoe press
Dryer Section First group dryer Section is arranged in single tier and conventional two (2) tier
arrangement for the rest of the groups.
Size press An inclined pond size press to apply 1–2 gsm/ side of starch
Pre-calender Section Single nip hard calender
Coating station Two coaters for top layer, one coater for back layer
Dryers IR/ air dryers
Curl correction Steam dryers
Final Calender Single nip soft calender
Pope reel Section Horizontal centre wind assist pope reel with primary & secondary arm.

The board machine auxiliaries include the following:

Table 7
Pulpers Couch/ Press Pit Pulpers, UTM Pulper
Mechanical drive Necessary mechanical drive components for the machine drive system viz. cardon
components shafts, gearboxes, couplings, guards etc.
PM vacuum system PM vacuum system comprises water ring vacuum pumps, blowers to meet the vacuum
requirement of fourdrinier and press Section vacuum pump seal water recovery system etc.
Steam and condensate Cascade type steam and condensate system, comprising separators, condensate pumps,
system vacuum pump, surface condenser with complete instrumentation and control system.
Hood and PV system A complete closed type hood and pocket ventilation system basement enclosures with
hood fans, PV system supply air fans, ducts etc.
Tail threading system Tail threading system from press to reel covering for the complete board machine and
coater Section.
Lubrication system Central closed circulation type oil system for dryer Section of the board machine
complete and coater Section with oil tanks, pumps, pressure filters, oil heaters, oil flow
meters, flow switches, control panels etc. with complete instrumentation.
Instrumentation & Necessary instrumentation and control system for the safe and trouble free operation of
Controls machine and its auxiliaries. A distributed control system (DCS) is provided.
The machine is also provided with quality control system to control CD, MD basis
weight, CD caliper and moisture.
Control panels, hydraulic Necessary control desks/ panels for operating various Sections of the paper machine
system and hydraulic system for press and calender.

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6.9 Head Box & Forming Section a plain press and the third press will be a
shoe press. The dryness after the press will
i. The formation of paper depends to a
be about 46%.
large extent on the design and operation
of the head box. The head box, as the iii. A smoothing press in the fourth nip is
name implies, is at the head of the paper provided.
machine and is actually the heart of the
6.11 Dryer Section
machine. The pressure is maintained in
the head box to control the flow through The dryers in a board machine are used to dry
the slice. The pulp slurry passes through the wet web using steam as the heat energy. The
the slice on to the forming board of the steam entering the dryer heats their surface. Wet
forming Section. sheet after the presses goes around the dryers. In
the process, the heat is transferred to the paper
ii. The forming Section consists of all the
and dries the paper. The steam inside the dryer
drainage elements like forming table,
condenses and the condensate is taken out. The
hydrofoils, vacuum foils and suction couch
steam pressure is controlled in the dryer Sections
roll. The drainage elements of the forming
Section operate with a synthetic endless through a cascading steam and condensate
wire, which is looped between the breast system. The dryer Section consists of first dryer
roll and the forward drive roll. In these Section with single tier, followed by conventional
drainage elements, the water is removed double tier arrangement with suitable sheet
from the pulp. supporting arrangement between press Section
and first dryer Section. The sheet after the dryers
iii. Each layer is having its own dedicated head
is dry and the dryness is about 93%-94%.
box, fourdrinier type forming Section. As
the substance range is high, the wire length 6.12 Size Press
is limited, a top wire is provided to drain An inclined pond type size press is considered
more water at both sides for the filler layer. to apply starch upto 2 ‘grams per square metre’
iv. All the wet web layers formed in each (GSM) on each side.
fourdrinier will join the bottom ply 6.13 Calendaring
fourdrinier at different locations with
matching dryness. The sheet of board so produced after the dryers
is not smooth and has uneven surfaces. To
6.10 Press Part
increase its smoothness, and to bring uniform
i. The web formed in forming Section is profile, a single nip hard calender will be installed.
transferred to the press Section by pick up The pressure in the calender is controlled by the
roll. The web dryness leaving the forming
hydraulic system.
Section will be about 18% and the wet web
is then passed into press Section. The press 6.14 Coater Section
Section will be a straight through three nip i. An on-line coating Section is considered.
Section followed by a smoothing press.
ii. There will be three coating stations, 2 for
ii. While the first press will be double felted top layer as pre-coat and top coat and one
suction press and the second press will be station for back coat. A coat weight upto

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a maximum of 13 GSM is anticipated. 6.19 Sheeter

The pre-coat will be a rod coater, and the
As the finished product is marketed in sheets,
topcoat will be a blade coater. The back
sheeting and packing line is required.
coat is a rod coater.
The salient features of the sheeters are:
iii. Each coater station is provided with drying
i. Backstand to hold minimum, four rolls.
Section IR dryer and air dryers. However,
steam dryers are also provided for the curl ii. Cutting station.
correction. iii. Sheet transfer and overlap conveyors.
6.15 Soft Nip Calendar iv. Layboy.

A single nip soft calender is provided as a final v. Automatic sheet conveyor.

calender. vi. Reject gate.
6.16 Reeling vii. Electrical drive and control system.
To handle the board produced after 6.20 Reel Handling & Wrapping Systems
calendering, it is reeled in the form of jumbo Mechanisation is considered for transportation
rolls on the board machine pope reel. The and storage of finished goods in the warehouse
jumbo reels produced are removed from the and further loading on to the trucks.
board machine on achieving a diameter of
around 2800 mm. The board is now ready to be 6.21 Reel Handling System
cut into reels as required by the market for sale. In general, the reel handling system will be
6.17 Finishing Equipment required to collect reels from the machine winder,
and convey reels to a lowerator that will lower
i. Rewinder. them from paper machine operating floor to
ii. Sheeter. 0.0 m ground floor, and deliver reels to sheeter
Section or wrapping machine as required. From
iii. Reel Handling and Wrapping system.
the reel wrapping machine, the packed reels
6.17.1 The board produced in the paper shall be delivered to the warehouse by a suitable
machine is in the form of jumbo reels and cannot
conveyor and upender arrangement.
be marketed as such. It has to be cut into reels as
per the requirement. 6.21.1 The following main equipment are
proposed in the reel handling system:
6.18 Rewinder
i. Reel stopper in front of the winder.
Table 8
ii. Reel sorting deck.
Rewinder is ●● Reel ejector-reel lowering cradle
provided with ●● Rewind braking unit iii. Bar code and roll identification station.
●● Drive couplings with gear boxes
●● Electrical drives and control system iv. Reversible transporting conveyor to accept
●● Control desk reel sets from winder.
●● Necessary hydraulic power pack etc.
v. Transporting conveyor to lowerator.

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vi. Lowerator with reversing conveyor and of resources. However information gathered
necessary guards and safety devices. from a particular mid-sized production house is
as follows:
vii. Transporting conveyor from lowerator to
reel wrapping unit or sheeter. a. Waste Paper and Pulp: For manufacturing
of recycled grade board, the raw material
viii. Transporting conveyor from reel wrapping
is BHKP pulp/ DIP pulp for top layer and
unit to reel upender.
waste paper (old newspaper, Box Board
ix. Reel upender. Cuttings, old corrugated cartoons) for filler
x. Upended reel receiving conveyor. and bottom layer. For virgin grade board
100% raw materials is virgin pulp.
xi. Storage conveyor.
b. Chemicals: Chemicals used for deinking
6.22 Reel Wrapping System
of the waste paper in the Deinking Plant
6.22.1 The following are main equipment in and paper making chemicals used in the
reel wrapping system: paper machine. In case of coated board
i. Reel width and diameter measuring and coating chemicals are used. The standard
centering station. chemicals used are given below:

ii. Wrapping station with wrapper dispenser. i. Deinking Plant – Hydrogen Paroxide,
Caustic Lye, Sodium Silicate, Sod.
iii. Crimping station. Hyd. Sulphite
iv. Automatic head sealing station or header ii. Paper Machine – PAC, Polymin SK etc
press suitable for both wrapper and
laminated head caps. iii. Coating – WGCC, Binders
The cost of chemicals based on the present
v. Weighing station.
market price comes to Rs. 4,000/- per ton to
vi. Reel conveyors. Rs. 5,000/- per ton of board.
vii. Automatic end cap inserter. c. Power & Fuel: For manufacture of paper
viii. Ink jet markers. the basic requirement of availability of
process steam and electricity. The process
ix. Reel wrapper back stand.
steam requirement is around 1.80 tons
x. Mono rail crane for wrapper back stand. per ton of paper and power requirement
xi. Wrapping paper head cutter. is around 500–600 units per ton of paper
with captive generation.
xii. Reel stoppers.
The captive power plant normally requires
800 kgs of coal for manufacturing of
7. INPUT COSTS
requisite power and steam for manufacture
The input cost cannot be standardised of 1 ton of paperboard. The 800 kgs of coal
considering the fact that there is wide variance is based on 3500 to 4000 GCV coal with
in process, equipment, raw material used, 15% moisture and 45% ash. However, the
locational parameters and overall management coal quantity may increase or decrease

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depending on coal quality and power plant raw materials, chemicals, production account,
efficiency. purchase and cost record, sales etc.
d. Packing Materials: Maximum paperboard 8.2.1 Application of Ratios: There is not
is sold in sheet form and packed with much updated documented data on profitability
shrink flim. Normally shrink flim and other and other financial indicators in the public
items of packing material cost around Rs. domain. A few studies made by the Indian Paper
900/- to Rs. 1,000/- per ton of paperboard. Manufacturers Association though available, are
quite outdated. Still, Assessing Officers may
e. Quality of Paperboard: For manufacturing
go through the Annual Reports of the leading
of paperboard, quality is basic requirement
manufacturers and a gather a rough idea of
for better printability and for smooth
various parameters like gross profit ratio, net
printing at press. Critical to quality
profit ratio, Return on Capital Employed etc.
parameters are brightness, bulk, stiffness,
Assessing Officers may also use time series data
strength properties, moisture content, etc.
for the entity they are investigating wherefrom
for better printability of board. Paperboard
any abnormality in any of the indicators may be
is manufactured mainly in the range of
identified for further probe.
170–450 gsm.
8.2.2 Input Costs: Reference may be made
8. TAX INVESTIGATIONS to paragraph 7 above. The Assessing Officers
may use the information given there to get an
8.1 General: Little information is available
idea about any abnormality in the figures which
in the departmental and extra-departmental
may require further investigation.
juridical reference systems about the outcome
of any investigation based assessment in respect 8.2.3 Raw Materials: In wood based industry,
of paper industry except for a few judgments bamboo/ wood transported by trucks or railways
available in the public domain on income are recorded at the Bamboo Yard. Similarly,
based incentives under Section 80I/80IB etc. the issues/ consumptions are also recorded at
and interpretation of the term ‘manufacture’ in the bamboo yard. After receipt of the material
respect of several kinds of industries producing is certified, payments are made through the
paper based outputs. However, in general, study accounts/ finance department. The suppliers
of the method of accounting, valuation of stock, accounts are maintained in the raw materials
examination of depreciation, claim for wages, supplies ledger of the main bamboo and wood
sundry debtors/ creditors, loan transactions and purchase account.
allowability of different claims of expenditure 8.2.4 Forest Accounts: Historically, many
are as much important in case of paper industry paper mills in India used to take lease of bamboo
as applicable for other industries. Sometimes forest blocks from the forest department of the
assesses may claim certain expenditures as State Governments or State Trading Corporations.
revenue expenditure, which on factual and legal These blocks used to be operated through
scrutiny, may turn out to be capital in nature. departmentally or though contractors. Most of
8.2 Industry-Specific Analysis: This the transport is done through the railways where
particular angle Centres around analysis of there is little scope for manipulation in railway

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Techniques of Investigation for Assessment Vol. 5

freight. The bamboo/ block to the forest blocks of quantitative consumption may be detected.
to the railway heads and therefrom to bamboo/ Sometimes, forest areas are taken on lease from
wood yards may be brought through trucks. If the Government/ Autonomous District Councils
the operation is done through contractors, the and the manufacturer has to pay royalty for these.
compliance to TDS provisions has to be looked The relevant agreement has to be looked into to
into. As usual, compliance to the TDS provisions check the exact amount of royalty so payable.
does not necessarily mean genuineness of the In the case of purchase of agro based materials,
transactions where the assessees take resort there is a possibility of inflation of expenses on
to inflation of expenses. Even without the the plea of non availability of proper documents.
involvement of contractors, there is possibility
8.4 New Developments and Tax Implications
of inflation of expenditure on these points. The
adherence to the provisions of Section 40A(3) in 8.4.1 Share of bamboo as a raw material has
respect of unorganised transporters also may be been decreasing over the years. Due to this, a
looked into. An important point of investigation number of companies have made arrangements
is in the quantity of timber/ wood collected from for afforestation of lands. It has dedicated farm
the forest. While giving the lease, the areas to lands for bamboo/ wood through the mechanism
be extracted are clearly demarcated by the forest of contract farming and has increased the
department and they make an estimate of the quantum of wood in the production process.
quaintly of bamboo/ wood to be extracted. Companies like ITC Limited, through e-choupal,
Detailed quantitative accounts are required to be have ensured purchase of bamboo/ wood directly
maintained by the forest department regarding from the primary manufactures by assuring the
the quantity extracted and dispatched from farmers attractive return. However, expenditure
the forest blocks. The particulars furnished by incurred by any assessee separately shown as
the assessee may be cross checked against the Corporate Social Responsibility (CSR) will not
figures available with the forest authorities. The be entitled to deduction in determination of
periodical accounts and returns of felling and its income in view of Explanation 2 to Section
removal of bamboos submitted to the D.F.Os 37(1).
concerned are helpful in checking the quantity 8.4.2 Recycled paper industry and units
and expenses incurred in cutting the bamboos, manufacturing high quality tissues may import
however, while comparing the two figures, certain pulp and similar raw materials. The issue of
margin is to be kept for drainage of the moisture imports has been discussed separately.
content. When the bamboo/ wood is received
8.4.3 The draft National Forest Policy provides
in the bamboo ward of the mill, again detailed
for utilisation of degraded forest land for industry.
weight is taken and these measurements are kept
If accepted, this policy revamp may influence
in the bamboo yard. At each stage of production,
the performance of this industry.
there is an in-built system of weighing. These
documents may be called for to check the 8.5 Chemicals: The purchase of chemicals
quantities shown as consumed at various stages. can be verified from the suppliers and from
Unless the assessee manipulates the figures at supporting documents. The prices of chemicals
every stage, there is every likelihood that any as available in economic journals/ authentic
manipulation done by the assessee in respect internet sites may be compared with cost data

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submitted by the assessee. Large difference may and therefore, such purchases/ imports are free
provide certain lead regarding manipulation from direct taxation. The possibility of inflation
of accounts. Mills which use and produce their of expenses through over invoicing may be
own chemical and soda may sell their excess carefully scanned through. In such cases, the
production outside. Assessing Officer should invariably, check
invoices and tally them with bills of lading/ bills
8.6 Production Account: The manufacturing
of entry, as the case may be.
account deserves special scrutiny. Data with the
GST department may be shared and examined 8.8 Depreciation
if required.
8.8.1 There are several factors worth
8.7 Import of Raw Material and Plant and investigating in this capital intensive industry.
Machinery Apart from checking actual import and
installation of plant and machinery, user of the
8.7.1 Share of imported pulp and imported
machine during the financial year may be looked
newsprint is on the rise. Paper and paperboard
into in the particular facts of a case.
imports have also increased. Basis customs duty
(BCD) on paper and paperboard stands at nil 8.8.2 The paper industry units extensively use
under India-ASEAN FTA and India–Korea CEPA. water and it is likely that they may install water
Further under the Asia Pacific Trade Agreement treatment system. Due to strict environment
(APTA), India extended import tariff concessions norms, industries also need to install modern
to the world’s largest paper producer China and Air pollution control equipment, water
reduced BCD to 7 per cent from 10 per cent pollution control equipment, solid waste control
on most grades of paper. In the last eight years, equipments, solid waste recycling and resource
imports have grown at a compound annual rate recovery system. For equipment’s acquired after
of 14 per cent to 1.48 million tonnes last fiscal 01/09/2002, the rate of depreciation was 100%.
from 0.54 million tonnes in 2010–11 and in value However, with effect from 01/04/2017, the rate has
terms, it was up 13 per cent to Rs. 9,134 crores in been reduced downward to 40%. It may be also
2017–18 from Rs. 3,411 crores in 2010–11. be checked whether the machinery acquired is
8.7.2 The increase in import figures are due to new or used machinery from some other unit.
downward revision of import duties on paper 8.9 Goods and Services Tax (GST):
pulp and newsprint and scarcity of availability GST will have a positive impact to curb
of raw material back home.The major import underreporting and misreporting practices or
partners are ASEAN countries. The capital inflation of expenses. Sharing of GST data on
intensive industry also requires installation of input materials may help the Assessing Officers
sophisticated Plant and Machinery which in in their investigations in addition to verification
many cases are not produced indigenously. from the angle of Section 43B of the Income-tax
Thus purchase of and import of machinery Act, 1961. On the other hand, paper, articles of
often involves outright purchase from foreign paper pulp, paper board falls under HSN code
companies/ entities. The foreign companies do chapter 48 of GST commodity tariff schedule.
not have any Permanent Establishment in India The tax rate has been notified and it is seen to

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vary from 5% to 12% and 18% for various types increasing literacy rate. In this scenario, there
of paper products. are more chances of leakage of revenue in the
industry. Therefore, the Assessing Officer has to
9. CONCLUSION understand procedure to produce the paper and
The paper industry in India is witnessing related product by the assessee and then, after
significant growth and capacity expansion to collecting all relevant facts of the case on hand,
meet the growth demand for paper consumption he has to decide the line of investigation with
as a result of growth in education sector and help of basic understanding given in this article.

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12
Rice Shellers

1. INTRODUCTION
1.1 After maize, paddy is second largest crop
in volume followed by wheat in the world.
Maize is considered as indirect source of food
as the same is mostly used in poultry/ cattle
feed. Rice is the foremost grain used in direct
human consumption followed by wheat. Wheat
is preferred over rice in developed countries of
Europe, North America, South America, Africa
and Australia continents whereas rice is used
as food grain in third world countries, mostly
following in Asia. Rice, wheat, and maize are the
population and economic growth, especially in
world’s three leading food crops; together they
many Asian and African countries.
directly supply more than 42% of all calories
consumed by the entire human population. 1.1.1 After China, India is the second biggest
Human consumption accounts for 78% of total consumer of rice and rice is mainly consumed
production for rice, compared with 64% for as a staple food by more than 70% of the
wheat and 14% for maize. Of these three major population, but the per capita rice consumption
crops, rice is by far the most important food has been declining due to growth in Indian
crop for people in low-and lower-middle-income economy which accounted for an increase in the
countries. Although rice consumption is spread purchasing power that led to a diversification
across income classes, relatively equally in low- of diet. During the FY 2017–18, comparative
income countries, the poorest people consume production of rice, wheat and maize in India is
relatively little wheat. Rice is the staple food of 112.91 MT, 99.70 MT and 28.72 MT respectively.
more than half of the world’s population. Asia Paddy is extensively grown food crop occupying
accounts for 90% of global rice consumption, and
43.79 million hectares of area. Thus, rice is the
total rice demand continues to rise. But outside
main crop in India.
Asia, where rice is not a staple yet, per capita
consumption of rice continues to grow. Rice is 1.1.2 Rice is drawn from paddy after removal
the fastest growing food staple in Africa, and of husk by a milling process. Therefore, rice is
also one of the fastest in Latin America. Global part of paddy. In other words, paddy is the rice
rice consumption remains strong, driven by both grain with husk. Generally, rice plant is also

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called paddy. This is a crop which belongs to the rivers and the non-deltaic rain fed areas of
family Gramineae. Its botanical name is Oryza Tamilnadu and Andhra Pradesh. In the deltaic
Sativa. It is a wetland crop which extensively tracts rice is grown under irrigated conditions.
grows all over the world. Paddy is the main crop
in the majority of the Asian countries including 1.2.3 The Central region of Madhya Pradesh,
India, China, Pakistan, Thailand, Indonesia, Telengana in Andhra Pradesh and parts of
Philippines. Geographically rice is distributed Karnataka. Except in Andhra Pradesh, rice is
over a wide range of conditions embracing sown as a rain fed crop in this region. One crop
Central America, Southern half of USA, West of rice per year is the normal practice in this tract.
Indies, South America, Africa, Australia, India,
China, Japan, and South-East Asia. The paddy 1.2.4 The Western coastal region comprising
cultivation started with the beginning of human Kerala and coastal districts of Maharashtra and
civilization. The wetland cultivation originated Karnataka. Here rice is grown largely under rain
in China but field cultivation of paddy was first fed conditions during the period May–June to
started in Korea. November–December.
1.2 The areas under paddy in the country can 1.2.5 The Northern Region comprising
be broadly classified in the following five regions Jammu & Kashmir, Punjab, Haryana, Himachal
according to the rice cropping season and other
Pradesh, Uttar Pradesh, and North Bihar, has
agricultural conditions:
low winter temperatures and only a single crop
1.2.1 The North-Eastern region i.e. Assam, of rice is raised from May–June to September–
West Bengal, South Bihar and Orissa. Here October.
rice is grown in the basins of the Brahmaputra,
Ganga and Mahanadi rivers. The region has the 1.3 From the above para 1.2 it is seen that
highest intensity of rice cultivation in the country. paddy is grown to varying extents in all the
1.2.2 The Southern region i.e. delta tracts of the States, yet top 10 rice producing states for F.Y.
Godavari, Krishna, Cauveri and Tambrabarni 2017–18, are as under:

Table 1
S. State Production of Area Under Paddy Average Yield (kg per
No. Rice (in MMT) (Million Hectares) Hectare)
1 West Bengal 14.97 5.12 2926
2 Punjab 13.38 3.07 4366
3 Uttar Pradesh 13.27 5.81 2283
4 Andhra Pradesh 8.18 2.16 3792
5 Bihar 7.91 3.28 2409
6 Tamilnadu 7.28 1.86 3923
7 Odisha 6.53 3.70 1765
8 Telangana 6.25 1.97 3176
9 Assam 5.16 2.45 2107
10 Chattisgarh 4.73 3.76 1256
11 Haryana 4.52 1.42 3181
12 Madhya Pradesh 4.12 2.04 2026

Source: Agriculture statistics at a glance 2018 Directorate of Economics and Statistics

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1.4 Some special characteristics of paddy sets definite limits to the type of development of
production in India: which the plant/ crop variety is capable.
i. After China, India is the second largest 1.5.2 Environmental factors can be defined as
producer of paddy. the “aggregate of all the external conditions and
influences affecting the growth and development
ii. India is the largest exporter of rice with a
total volume of USD 7.4 billion involving of plants”. The environmental factors affecting
12.5 million metric tons as of 2018/2019. plant growth are-climate, soil, water supply, and
supply of plant nutrients.
Thailand was the second largest rice
exporter, with about 10.3 million metric 1.5.3 Paddy as a crop shows very wide
tons of rice worldwide in that year. adaptability to different soil and climatic
conditions and can, therefore, be cultivated
iii. Since 1950, though area under paddy
over a vast area in the tropical and subtropical
cultivation is slightly shrinking yet paddy
regions. Yet, it has its own soil and climatic
production in India is rising due to increase
requirements under which it performs best. It
in per hectare yield of paddy.
is grown under varying conditions of rainfall,
iv. Though Punjab is not a home to paddy yet altitude and climate. In parts of eastern regions
per hectare production is highest amongst and peninsular India, the mean temperatures
Indian states. throughout the year are favourable for paddy
v. Similarly, in Punjab rice is not preferred cultivation and two or even three crops of rice
as staple diet yet due to high volume of are taken in a year. In the northern and western
production it has become largest supplier parts of the country, where winter temperatures
of rice to other Indian states. are fairly low and the rainfall is not high, only
one crop of paddy is taken during the months of
vi. Basmati Rice known for its aromatic May to November.
qualities is produced in Punjab and
1.5.4 There are three main seasons for growing
Haryana.
paddy and these are named according to
vii. Though Bihar was having largest area the seasons of harvest of the crop. The most
under paddy but after carving of Jharkhand important is the Kharif crop (winter paddy)
out of Bihar now West Bengal has taken sown in June-July and harvested in November-
first place. December. A little over 51% of India’s paddy crop
is grown in this season and it usually consists of
viii. Andhra Pradesh used to be stated Rice
medium or long duration varieties. The autumn
Bowl of India but in recent years it had
paddy is grown in May-June and harvested in
drifted to a lower berth. After separation of
September-October. About 44% of paddy crop
Telangana, it has now actually drifted far
is grown in this season. The summer paddy is
lower to sixth position.
sown in November, December and harvested in
1.5 Characteristics of Paddy Crop March-April.
1.5.1 The growth of paddy crop depends upon 1.5.5 Paddy is adaptable to all kinds of soil. The
internal or genetic factors, and the environmental suitability of a soil for paddy cultivation depends
conditions. The genetic characters, such as more on the conditions under which the plants
dwarfness, disease resistance, flavour, fine grain are grown than upon the nature of the soil itself.
characteristics, cooking qualities, etc. are related The semi-aquatic nature of the crop necessitates
to the genetic make-up of the plants. The genetic a heavy soil through which the irrigation or rain
constitution of a given plant or a crop variety water will not be easily drained away, because for

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paddy the requirement of water is more crucial were done manually whereas, these days use
than soil conditions. Paddy, being a semi-aquatic of power-driven trans-planters, reapers and
crop, grows best under submerged or water combine harvesters has been increasing day
logged conditions. A major part of paddy crop in by day.
India is grown under “low land” conditions, i.e. 1.6 Difference between Paddy and Rice
under “flooded” or “submerged” conditions. On
level areas without bunds or dikes or areas that Paddy is the rice grain with husk. The term paddy
are not terraced, paddy may be grown during was derived from Malay word with the meaning
the rainy season without impounding the water of rice in the straw or husk. Therefore, rice plant
in field. Paddy grown under such conditions is is also called paddy. On the other hand, rice is
known as “up land” paddy. the seed of paddy. The process of removal of
rice from paddy is generally called Rice Shelling
1.5.6 In India the principal systems of paddy or Rice Milling.
cultivation adopted are ‘dry’, ‘semi-dry,’ and
‘wet’. The dry and semi-dry systems of cultivation The processes of sowing, transplantation,
are mainly confined to tracts which depend harvesting, marketing of paddy by the farmer
on rains and do not have adequate irrigation are agricultural processes and purchase of
facilities. The wet system is practiced in areas paddy for processing thereafter, shelling of rice
with assured and adequate supply of water either from paddy, extraction of oil from rice bran are
by way of rainfall or through irrigation. In some commercial processes from Income-tax point of
areas like Assam, Bihar, UP and West Bengal, view. Therefore, in the forthcoming paras we will
flooded conditions occur in the monsoon. Deep discuss these processes i.e.
water paddy is cultivated in these areas. i. Purchase of paddy from farmer.
1.5.7 The paddy crop is reaped mainly by ii. Shelling of rice from paddy.
manual labour. The harvesting is usually done
when the paddy kernels in the lower part of iii. Extraction of oil from rice bran.
the head have not hardened completely or the It is worth noting here that major difference
upper parts of the leaf-blades have not turned between wheat and paddy grain is that wheat
completely dry. In some regions, the crop is husk is removed in the process of threshing in
threshed as soon as it is cut, while in others, a the field itself whereas in case of paddy grain is
certain amount of time, varying from a week to harvested from the fields and removal of husk
two months, is allowed to elapse after reaping. from the grain is done in rice mills/ shellers. The
Threshing is done either by beating the sheaves shelling of rice is the tedious process since paddy
against a block of wood until the paddy grains husk is tightly wrapped around the rice grain
are separated from the straw, or by bullocks and it is harder than the husk of wheat grain. It
treading the sheaves laid on the threshing floor. is the sole reason that rice shelling has become a
When threshing is done by beating the sheaves, voluminous commercial activity involving much
a little dressing may be required to remove more cost than the flour mills.
whatever chaff as may have found its way into
the produce. If the paddy has been trodden by 2. MARKETING OF PADDY
bullocks, the grain is usually separated from
2.1 Introduction
the chaff and impurities by winnowing. With
technological advancements, the mechanization 2.1.1 The marketable surplus of paddy is
in paddy growing is increasing day by day. assembled, by a host of agencies, viz. the
Earlier, transplantation, cutting and threshing farmers, the landlords, village merchants,

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commission agents, wholesale merchants, or gunj in urban and township areas; and
agents of millers, and cooperative organisations. terminal markets in towns and cities where the
In states such as Haryana and Punjab the food produce is finally pooled for consumption and
agencies owned by Union or State Governments distribution in the intra-or inter-State trade or for
such as Food Corporation of India, PUNSUP, export abroad.
Markfed, Hafed etc. do play a major role in 2.2 Market Functionaries
procurement of paddy in paddy surplus states
such as Punjab and Haryana. However, in 2.2.1 Arhatiyas or arhatdars (commission
other parts marketing is not regulated. Though, agents), dalals (brokers), tolas (weigh men) and
the paddy is purchased at cheapest rates much palledars or hamals (labourers) are the four
below the minimum support price being fixed important market functionaries.
by the Union Government every year on the 2.2.2 There are two kinds of Arhatiyas, namely,
basis of recommendations of Commission for kutcha and pukka. The former is a person of
Agricultural Costs and Prices (CACP) directly small means acting mainly as an intermediary
from the fields by Dalals/ Mill owners but for the between the primary producer and the buyer in
purpose of books of accounts purchase prices the wholesale assembling market, and receiving
are jacked up through a series of bogus bill trails. commission for his services from the seller or
2.1.2 Well-organized assembling markets the buyer, or sometimes from both. The pukka
or mandis are now coming up in India. A Arhatiyas who often function as wholesale
considerable part of the marketable surplus merchants also buy produce in the assembling
of paddy is normally acquired directly from markets or sell produce at consuming centres
the field by the rice-millers or their agents, by on behalf of their clients in other centres. The
traders of various categories and professional functions of a kutcha or a pukka arhatiya may
de-huskers. Thus, a large portion of the paddy both be carried out by the same person, who is
produced never enters the market. Wholesale then known as kutcha-pukka Arhatiya.
merchants and commission agents figure largely 2.2.3 Tola may be employees of the arhatiya
in the assembling of paddy and rice by collecting
working on salary or commission basis, or may
produce from the cultivators, village merchants
work independently for a fee known as tolai,
and itinerant merchants.
charged on the quantity of the produce weighed.
2.1.3 The mill agents play a fairly active part In regulated markets, as also usually in markets
in the assembling of paddy by paying periodical managed by the market committees, tolas are
visits to villages, haats, etc. in order to buy their licensed, and the scale of charges fixed.
requirements direct from the farmers, village
2.2.4 Palledars or hamals are labourers, who
merchants or itinerant dealers. Advances or
carry on operations like loading and unloading
money may be made to producers even before
in the carts, wagons, lorries, etc. stacking bags,
the crop has matured, thus binding them to bring
assisting in weighing, cleaning and dressing the
their harvest to the mill.
produce.
2.1.4 The three types of markets that are in
2.3 Market Practices
vogue for buying and selling paddy are the
primary markets known as haats at the village 2.3.1 Paddy is usually brought to the assembling
level; the secondary markets known as mandis markets in bulk, and rice packed in gunny bags.

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The Arhatiyas negotiate sales on behalf of the are generally borne by the seller, but the cost of
seller. The transactions generally take place in removing the produce after weighment to his
morning, the latter part of the day being taken godown is, in most cased, met by the buyer.
up in weighing and settling accounts. Prices may
2.4.4 Apart from the payments to market
be settled by giving offers-under cover or by
functionaries, deductions in kind are also made
auction or by open offer or a private treaty. In
from the seller in order to compensate the buyer
the ‘cover’ system, the buyer indicates the prices
for loss in weight on account of impurities,
he is prepared to pay by clasping the hands of
driage, etc. Dhalta (quantity allowance), karda
the arhatiya under cover of a cloth and pressing
(deduction on account of refraction) and dan
or manipulating the fingers. The seller is usually
are some of the deductions of this nature.
consulted by the arhatiya before he accepts the
offer. In the auction system, the arhatiya auctions 2.5 Price of Paddy
the produce at a particular part of the day, when 2.5.1 The prices of different qualities of paddy
all the buyers assemble near the produce. For are determined by the size of grain, milling quality,
sales by open offer or private treaty, the buyers and its physical characteristics e.g. impurity
may give their offers by going to the sellers’ contents, proportion of damaged or defective
agent at any time or to the dalal when he comes
grains, rd grains, admixture of other varieties
around with his samples.
and moisture contents. Paddy from which fine
2.4 Market Charges rice can be manufactured is normally dearer,
2.4.1 When paddy or rice is brought to the while that from which bold rice is produced is
markets for sale, a number of deductions, either the cheapest.
in kind from the produce or in cash from the sale 2.5.2 The milling quality is generally judged
proceeds are made. In some cases, the buyers by the rough and ready test of rubbing a few
have also to bear some charges in addition to grains of paddy between the palms, or between
the price of the produce. two small wooden boards to remove the husk
2.4.2 The first charge is the toll or tax. In and disclose the rice kernel. The sample which
private-owned markets, the owner or the lessee husks readily without an unduly large breakage
generally levies a toll on all produce handled of kernels is considered to be of good milling
in the market. The municipalities, in many quality, while the one having a thick husk, or
cases also levy an octroi or terminal tax on the is hard to husk, or showing a tendency for the
agricultural produce entering municipal limits. kernels to disintegrate, is considered of poor
The next charge is the commission or arhat or milling quality. Paddy of poor-quality sells at a
dalali paid to the arhatiya and dalal, respectively, discount which varies with the fine, medium and
in return for their services. They are payable by bold types.
the seller or the buyer, or sometimes by both. 2.5.3 The value of paddy also takes into account
2.4.3 Besides the arhat and dalali payment in the presence of foreign matter, undeveloped
cash or in kind has to be made to the labour grains, admixture of other varieties, and moisture
employed for loading, unloading, cleaning, content. In many areas, customary allowance is
weighing or measuring the produce and conceded by the seller to the buyer in the shape
stitching of bags, etc. These charges, which vary of extra weight to compensate the latter for the
in different markets depending on the local rates presence of foreign matter, impurities, etc. as
of labour and the extent of services rendered, well as moisture in the grain.

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2.6 Procurement of Paddy by Government milling is a seasonal industry. The de-hulling

Agencies starts in the month of August/ September, and
As stated above as far as production of food lasts up to February/ March. A lot of paddy is
grains specially wheat and paddy are concerned sold in the country in unregulated markets. The
price of paddy of different qualities is determined
their production is not uniformed. There are
by grain size, milling quality and physical
some surplus states which may be called
characteristics such as impurity contents,
supplier states and on the other hand deficient
proportion of damaged or defective grains, red
states which may be called consumer states.
grains, admixture of other varieties and moisture
The Union Government has been regulating
contents.
minimum support prices of major food grains on
the basis of recommendations of Commission for 3.1.2 The methods used for converting
Agricultural Costs and Prices (CACP). Many state paddy into rice may be broadly classified into-
governments have enacted Agricultural Produce hand processing, and machine drilling. Hand
Marketing Acts, by which the sale of paddy is processing, is extensively in vogue in rural
regulated through Mandi/ Market Committees. In areas. It employs the pestle and mortar method
these of the surplus states government agencies to remove the husk from paddy. Machine
milling employs power driven machines to
have been assigned the task of procurement of
de-hull paddy.
wheat and paddy on minimum support price
and supply the same to deficient states through 3.1.3 The modern rice mill is a semi-automated/
Public Distribution System commonly known as automated factory consisting of mechanical
PDS. In case of paddy these agencies procure handling and conveying equipment, oil fired
paddy from mandis and store the same with dryers, bulk silo storage, mechanized parboiling
private rice mills for the purpose of shelling. After equipment, by-product separators, and polishers.
shelling the rice is supplied to the deficient on Here, paddy is first discharged by means of an
their requirement basis. Therefore, in the surplus elevator on to a set of cleaning sieves where it
states such as Punjab and Haryana marketing gets freed of stone, straw, dust, grit etc. It is then
of wheat and paddy stands regulated and the husked in the Sheller and the shelled paddy is
farmers are assured of minimum support price freed of husk in a husk separator. The paddy
subject to threshold quality parameters such as from the mixture of rice and paddy (remaining
commodity, colour and length of the grain. unhusked) is removed in paddy separators and
the shelled rice is carried by elevators into a
3. RICE MILLING storage chamber from which the rice can be fed
to a series of polishing cones for the polishing
3.1 An Introduction to Rice Milling
of the rice. The polished rice is delivered by
3.1.1 The process of de-husking or sometimes an elevator to a sorting sieve where the head
known as de-hulling and separation of other rice and broken grains are separated and latter
ingredients such as rice bran, other impurities collected separately. The process in modern rice
is known as rice shelling or rice milling. Rice mill is depicted in the following diagram.

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Fig. 1

3.1.4 Brown vs. White Rice Table 2

Rice grain consists almost entirely of Brown (RDI) White (RDI)

carbohydrates and with small amounts of Thiamine 6% 1%
proteins and practically no fat. Whereas, the Niacin 8% 2%
wheat grain contains large amount of proteins Vitamin B6 7% 5%
other minor and micro nutrients such as Manganese 45% 24%
glutton with lesser amount of carbohydrates
Magnesium 11% 3%
as compared to rice. This is the main reason
Phosphorus 8% 4%
that wheat is preferred over rice. Brown rice
is obtained by way of simple process of de- Iron 2% 1%
husking. No polishing is made to remove bran Zinc 4% 3%
from the grain whereas in case of white rice, rice Source: www.healthline.com
grain is polished by a series of rubber polishers
to remove bran from the grain. Therefore, 3.1.5 Black Rice: The texture of black rice
brown rice contains more fibers, anti-oxidants, is a bit heavier as compared to other varieties
vitamins and minerals. On the other hand, of rice but its natural flavour is rich and sweet.
white rice is mostly a source of empty calories Black in colour when harvested, once cooked
with lot of carbohydrates but very few nutrients. it turns deep purple. It is harvested only in
Health conscious people prefer brown rice. On India and China. In India, it is mainly grown
the other hand, white rice is preferred where and consumed in Manipur where it is known
presentation does matter such as in hospitality as “Chackhao”. It has cultural and traditional
industry. Following table depicts presence of significance to the people of Manipur and other
vitamins and minerals in brown vs. white rice. parts of Northeast India where no celebration

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is complete without a delicious serving of black It is generated during the first stage of
rice. It contains high amount of antioxidants paddy milling. Till recent past it used to
namely Anthocyanins, dietary fiber, minerals and be considered a total waste having no
other anti-inflammatory nutrients. Anthocyanins commercial value however in recent past it
is known as cancer fighting, beneficial for heart has been being used in energy production.
health and inflammatory conditions. Due to its Common uses of rice husk are depicted in
health benefits, black rice has a good market the following chart:
potential, especially in the overseas markets, as b. Rice Bran: Rice bran is a mixture of
the demand for the same is growing in the USA, substances including protein, fat, ash and
Australia and Europe. crude fiber. It is generated when brown
3.1.6 Rice may be of two types viz. raw and rice moves through the whiteners and
parboiled. The former is not subjected to any polishers. In modern rice mills several
form of treatment prior to milling, while in the different kinds of bran are produced that
case of the latter, the usual practice is to first keep are Coarse Bran, Fine Bran, Polish. The
the paddy in water and subsequently supply heat rice bran is used for extraction of oil,
by steam or other means. Parboiling toughens poultry feed and cattle feed.
the rice kernel and enables it to withstand c. Rice Germ: Often known as Nakku.
milling better without excessive breakage. A
large proportion of rice consumed in country is d. Brewer’s Rice: Brewer’s rice is separated
parboiled. when milled rice is shifted. In north part of
India it is commonly known as ‘totta’ i.e.
3.1.7 In the rice processing following bye broken rice. It is often used as ingredient
products are produced: for beer brewing hence the name. It has a
a. Rice Husk: Rice husk or rice hull is variety of other uses including ingredient
the coating on a seed or grain of rice. for rice flour and rice noodles.

Fig. 2

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The following table depicts approximate yield of broken rice, quantity of rice and broken rice sold
rice and its bye products: and balance of paddy and rice in stock.
Table 3 3.3 Tax Investigations
Rice & Rice Rice Bran Rice 3.3.1 Organisational Structure: The profile
Brewer’s Rice Husk Germ of the Indian rice milling industry reveals that
70% 20% 8% 2% partnership firms dominate the business; the
corporatization is gaining momentum. The mills
3.2 Books of Accounts generally fall under following types viz.
3.2.1 Rice milling is a fairly complex operation, a. Those that own the rice mills and carry on
and success of the venture depend on the setting the business of rice milling on their own.
up of various control points. Even in the best of
circumstances, personal supervision and control b. Those that own the rice mills and do the rice
of its multifarious aspects is difficult to achieve. milling on contract basis for Government
The regulatory intervention of Government in Agencies or other private entities.
the rice trade has made it obligatory for the rice c. Those that own the rice mills and lease
millers to maintain certain registers and submit them out to others.
certain statements at prescribed intervals.
d. Those that take rice mills on lease and
Gate Pass Book: This book contains a record
of all goods coming into the factory and going carry on the business of rice milling.
out of the factory. 3.3.2 In cases where the rice mill is owned by
Paddy Gate Book: This is a record of the stock one firm and operated by another on lease,
of paddy delivered in the mill premises. The there may or may not be common partners.
quantity of the stock of paddy delivered, the The presence of common partners may well
weight of each bag, name and address of the point to the necessity of ascertaining how far the
vendor, etc. are recorded in this book. ostensible dichotomy between the owners’ and
the contractors’ firm is real. It may be conceded
Weighing Register: After paddy is received that a host of factors e.g. dearth of finance
and entries made in the Paddy gate book, the
and managerial ability, disinclination to take
bags weighed and the actual weights of paddy
risks, preference for more profitable avenues of
are entered in this register.
investment, do compel the owners of a rice-mill
Purchase Voucher Register: After the paddy to lease it out rather than work it themselves.
is weighed a bill is made out and recorded in this Even so, it should not be forgotten that by setting
register. up two firms-one owning rice and the other
Railway Pass Register: Particulars of rice operating it on lease-one could considerably
consigned by rail are entered in this register. reduce the incidence of taxation. In appropriate
cases therefore, investigation should be directed
Muster Register: In this register, particulars of
towards ascertaining the true state of affairs.
coolies employed in the factory and payments
made to them daily are entered. 3.3.3 Cost of Construction of Rice Mill
Other Registers: In some states, sales tax In the case of a newly constructed rice mill, it is
authorities prescribe maintenance of a register essential to investigate the cost of its construction,
containing particulars of the opening stock of and the source of the investment. It is well known,
paddy, receipt of paddy, quantity of paddy sold, that business entities make maximum use of
quantity issued for milling, yield of rice and institutional finance. The nationalized banks and

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the financial institutions finance the setting up of see as to whether the creditor has taken loans
rice-mills. Profitability of the venture is one of for agricultural operation or otherwise. These
the criteria applied by them while processing the enquiries will help determine as to whether the
loan applications. Profitability is an index of a creditor had a reasonable paying capacity. The
firm’s financial capacity to pay back the money payments to the creditors are generally shown
borrowed. However, it has been generally seen by the rice millers in the first few months of the
that cost of construction is suppressed where the subsequent year and that too by cheques. In
rice mill is constructed out of own funds of the one case, when enquiries were made from the
partners/ share-holders. On the other hand, cost bank, it was found that the cheques were in fact
of construction is generally declared on higher bearer cheques and had been en-cashed either
side in case the same is done with borrowed by the assessee or his Munim. When these facts
funds. Larger the borrowed funds, larger the were confronted to the assessee, no satisfactory
risk of enhancement of cost of construction. explanation was offered resulting in addition on
The trend shows that in view of the high risks, account of unexplained cash credit.
availability of cheap borrowed funds pushes 3.3.5 Advance to Farmers
the entrepreneur to establish a mill entirely by
borrowed funds under corporate structure. Very often the millers advance moneys and
other inputs such as fertilizers to farmers. The
The profitability of a rice mill depends on the cost advances are then adjusted against the value of
of its construction, the working capital required, the produce purchased from them. The manner
the capacity of the mill, the cost of raw material in which the accounts are settled needs to be
(paddy), the price of the finished product (rice), examined closely. In the case of cash advances,
the liability towards taxes, interest on other it must be seen whether, on the relevant dates,
borrowing and other related factors. The project the miller had sufficient funds in his books. In
report prepared by the banker as an essential the case of advance of inputs, it must be seen
study of the profitability of the project, contains whether on the dates on which the inputs are
a wealth of data which the AOs will find useful purchased, the millers had sufficient funds in his
when investigating the cost of construction of a books of account. Again, the total quantity of
rice mill. inputs advanced to the farmers must be verified
3.3.4 Examination of Trade Creditors with reference to the total quantity purchased
to ensure that the miller had not financed the
The Indian farmer is perennially in need of money. purchases from out of the unaccounted money
Therefore, the trade creditors often include such in its possession. The price difference, if any,
farmers to whom money has already been paid. charged by the miller must be treated as profits.
In almost all the cases of rice mills huge trade The stock of inputs left with the assessee should
creditors appear in the Balance Sheet. These be reflected in the closing stock disclosed in the
trade creditors are generally farmers from whom books of accounts.
paddy is shown to have been purchased during
the financial year. Therefore, it is very important 3.3.6 Verification of Purchases
to examine these trade creditors by making field In the case of an agricultural produce like paddy,
enquiries or through recording statements on verification of purchases is ordinarily difficult
oath. The creditors should be asked to furnish for more reasons than one. Firstly, farmers do
proof of their land holdings and area under paddy not maintain books of accounts. Secondly, the
cultivation. The creditors should also be asked to purchases are usually verified after lapse of
furnish details of his house hold expenditure and several months, and consequently, what passes
his savings. Enquiries should also be made to for verification is nothing more than a test of

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the farmers’ memory. Thirdly, the absence of a addresses of such transporters and to produce
precise, uniform grading system compounds the them for examination. If necessary, field enquiries
situation for verifying the cost of production. should be made in this regard. Since rice shelling
Case Study: In NWR charge, a suspicious requires transportation of paddy rice, husk and
transaction report was received with other products in bulk documentary evidence
information that business entity X has been in respect of transportation of goods is crucial
receiving payments by way of bank transfers evidence. At times GRs (goods receipts) are
from A and D. The amount used to be made in the name of fictitious registered number
withdrawn in cash by X. During the course of vehicles which may be checked from the RTA.
of investigation, it was found that both the 3.3.9 The vouchers evidencing the purchase of
concerns viz. A and D were proprietary paddy from farmers are invariably prepared by the
concerns of father son duo engaged in the millers themselves. In the best of circumstances,
business of rice milling/ shelling. On the basis the farmers are interested in getting the agreed
of discrete enquiries, a search and seizure price as quickly as possible. It is not uncommon
operation was conducted on proprietor of for the purchasers to obtain the signature of
X. A large number of diaries were seized the farmers on blank voucher forms and to fill
from his possession and during the course them in later. Here, the price of paddy may be
of investigation in his statement proprietor inflated. To match the inflated price, the quality
confessed that he has been engaged in of the paddy may also be suitably manipulated.
providing bogus bills in which he returns cash Such malpractices may be resorted to not only in
against cheque/ transfer payments. respect of the paddy purchased by the assessee
in its own name, but also in respect of the
3.3.7 Paddy is purchased by the rice millers
paddy purchased benami. Timely surveys and
either through registered traders or directly from
search operations, particularly during the peak
the farmers. In case, the purchases are made
purchase season, have in the past brought to
through a registered trader, Form No. 9R in
light blank vouchers with farmers signatures. A
respect of the ‘Mandi Shulk’ paid is issued by the
critical examination of the internal evidence can
trader to the rice miller. On the contrary when
lead to detection of inflation of purchase prices.
purchases are made directly from the farmer,
Form No. 6R is issued by the rice miller to the 3.3.10 As already stated, paddy is classified
farmer. Form No. 9R bears the signature of the into fine, medium, and coarse varieties. There
registered trader as well as the purchaser. Form is always a varietal price difference. Medium
No. 6R bears the signature of the rice miller as variety fetches a higher price than coarse variety,
well as the farmer. and fine variety is costlier than medium variety.
3.3.8 At the time of scrutiny of case, full details If the vouchers indicate the variety of the paddy
of the purchases of paddy on day to day basis purchased, a comparison of the price paid by
should be obtained along with the copies of the miller for the variety in question, with the
Forms 9R and 6R. These should be cross tallied. price paid by him for the next higher variety, and
Many a time the assessee includes certain the price paid by other millers of the locality for
expenses in the purchase cost of the paddy on different varieties will bring inflation of purchase
account of transportation expenses incurred price into bold relief. This must then be followed
for transporting the paddy from the field of the by an inquiry into the rate at which the rice
farmer to the mill premises. However, generally obtained on conversion of the batch(es) of
these expenses are un-vouched. The assessee paddy in question was sold. Conducted on right
should therefore be asked to furnish names and lines, such an inquiry will bear fruit.

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3.3.11 In one case it was found that the price purpose, the gate book and the purchase register
allegedly paid by a miller was substantially may be examined.
higher than the prevailing rate for coarse paddy. 3.3.13 Not infrequently, the assessees purchase
The purchase vouchers did not indicate the paddy from their partners themselves. This fact,
variety of the paddy purchased. The contention per se, should occasion no surprise, because the
of the miller was that he had purchased paddy big landlords of the locality are partners of the
of medium variety, and that the price paid by milling firms, and there is nothing outlandish
him compared well with the rates prevailing about their selling their produce to the firms in
in the relevant season. Prima facie, the reason which they are partners. A point or two, however,
given appeared to be sound. However, on deserve notice here. Firstly, it must be ensured
examination it was found that the miller had sold that the firm does not clearly and clandestinely
the rice obtained from these batches of paddy to pass on part of its taxable profits to the partners in
Food Corporation of India, which had paid him the guise of higher price for the paddy purchased
the rate fixed for coarse rice. A case of inflation from them. It is therefore essential to verify
of purchase price was thus proved. whether the price paid to the partners compares
3.3.12 The farmers generally sell their paddy favorably with the price paid to the farmers. In
immediately after threshing. This is the reason cases where higher than normal prices are fund
why the millers make bulk purchases during to have been paid to the partners, the reasons
the season. Fresh or new paddy has higher therefore must be ascertained and critically
moisture content. In many parts of the country, examined. If, for example, it is contended that
the purchasers customarily get an allowance a higher price was paid because the paddy was
on this score. For example, in Andhra Pradesh, old, the capacity of the partner to sell old paddy
the standard weight of a bag of paddy is 75 kg. must be judged with reference to:
In respect of the purchases made early in the i. The extent of land possessed by him.
season, the purchasers get 2 kg of paddy extra to
compensate them for the weight loss on account ii. The yield obtained therefrom.
of drying. Purchases made late in the season iii. The sales made by him during the previous
carry an allowance of 1 kg. Besides the allowance years.
on this count, the purchasers may also get a
refraction allowance (variously called tharam These factors will indicate whether the partner
etc.) to compensate them for loss on account could have had old paddy in stock. If, on the
of presence of foreign matters/ shrunken, or other hand, it is contended that the paddy was
sprouted paddy. The miller usually claims some of superior variety, then the price for which the
loss on account of drying, cleaning etc. The loss resultant rice was sold must be checked.
on these counts cannot be disputed. But while
3.3.14 It is not unusual for rice millers to mill
examining the reasonableness of the claim, it is
paddy belonging to others for a fee. The extent
essential to check whether extra paddy, if any,
collected by the miller has been fully accounted to which such milling on hire is undertaken will
for. If the loss claimed is allowed without taking naturally depend on whether, after milling the
into account the extra paddy collected by the assessee’s own paddy, sufficient milling time/
miller, clearly a case of double allowance will capacity is available. In cases where significantly
arise. Hence, it will be necessary to see whether large quantities are shown to have been milled
the miller had accounted for the gross weight on hire, it will be worthwhile to investigate into
(75 kg + 2 kg) or the net weight (75 kg). For this the matter deeply.

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3.3.15 It is not uncommon for millers to 5%. Suppose, a miller shows, say, 10% output
purchase paddy on credit, and hence the presence of ‘brokens’. One possibility is that the yield of
of such credit purchases per se need not cause whole rice has been understated by 5%. The
any suspicion or surprise. Care should, however, other possibility is that the miller had milled
be taken to verify at random, some credit unaccounted paddy, and had brought into the
purchases to make sure that they are really credit books only the ‘brokens’ obtained from the
purchases; for it is quite easy to camouflage cash milling of the unaccounted paddy. Moreover, it is
purchases financed by black money as credit possible he had understated, to a corresponding
purchases. The modus operandi adopted is that, extent, the yield obtained from the milling of the
in the first instant, the black money available unaccounted paddy. In this way the miller reaps
with the assessee is used to finance purchases a double benefit i.e. he not only mills paddy
which are recorded in the books of accounts outside the books, but also converts a portion of
as credit purchases. The fictitious trade credit ‘white’ stocks of rice into ‘black’.
is cleared as and when the books of accounts
3.3.18 Nowadays, the millers, while seeking
show sufficient cash balance. Needless to add,
to substantiate a higher than normal yield
the money thus, siphoned off the books will go
of ‘brokens’ rely on the fact that, in respect
to augment the stock of black money available
of rice, the Food Corporation of India and
with the assessee. It is, therefore, essential to
other government agencies have prescribed a
contact the alleged trade creditors and ascertain
tolerance limit as high as 17% for ‘brokens’. It
the true facts of the purchases.
is essential to remember that the tolerance limit
3.3.16 Verification of Output: Paddy when prescribed signifies the upper limit upto which
milled, yields rice, broken rice, bran, rough the presence of ‘brokens’ will be tolerated in
bran and husk. In the course of investigation, it the rice supplied to FCI/ government agencies.
is essential to see whether the yield, especially It is designed to safeguard the interests of these
of rice and brokens disclosed by the assessee is agencies by curbing the proclivities of the millers
reasonable. Other things being equal, the yield to make quick profits by mixing large quantity of
of raw rice with ‘brokens’ will be around 69.5%, ‘brokens’ with the rice supplied. It has nothing
and that of boiled rice with brokens around to do with the yield of ‘brokens’ obtained on
70.5%. The yield of ‘brokens’ is around 5% for milling paddy. Hence the tolerance limit fixed by
raw rice. In the case of boiled rice, ‘brokens’ are the aforesaid agencies should not be regarded as
negligible. Any significant shortfall in the yield evidence to the effect that the yield of ‘brokens’
of rice, coupled with an abnormally high yield will be as high as 17%.
of ‘brokens’, should alert the AO. The reason Case Study: During the course of search
is that it is easy for the miller to pass of rice as proceedings at the business premises of M/s
‘brokens’. XYZ, the statement of Sh. ABC was recorded.
3.3.17 The phenomenon of abnormal yield He was asked to intimate the yield of paddy. The
of ‘brokens’ may be looked at from another specific question and answer as per statement
angle. The normal yield of ‘brokens’ is about are reproduced as under:

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Table 4
S. No. Ques. No. Question Answer
1 6 What is your job profile I am working as lab in-charge in M/s XYZ and I am doing, here,
and job timing? LAB inspection, quality checking and complete checking of
processing of yield of paddy, my job timing 9:00 AM to 7:00 PM
2 7 How do you determine/ Determination/ calculation of yield of paddy per quintal details
calculate the yield of are as under:
paddy? Name of Paddy Quantum Quantum of Rice
of Yield of White/ Milled Product
Brown Rice Rice/ Silky
1121 (Steam) 76 kg 65 kg 63 kg
1121 (Seila) 77 kg 66 kg 64 kg
1121 (Raw) 74.6 kg 64.5 kg
1509 (Steam) 74 kg 64 kg
1509 (Sella_aw) 45 kg 64 kg
1509 (Raw) 73.2 kg 63.2 kg

3 8 Please once again Yes, I confirm that oath has been administered on me and was
confirm that oath has made aware of consequences of giving false statement.
been administered on
you and you have made
aware of consequences of
giving false statement.
4 9 Does yield depend upon Yes, the yield depends upon the quality of paddy.
the quality of paddy?
5 10 Please demonstrate the The demonstration of yield of paddy was done on 12/02/2016
yield of paddy (quality and details are as under:
wise) available at this Demonstration of yield of paddy 1121 stream
time.
S. No. Quantity of Brown White Rice Rice
Paddy Yield Product
1 100 Gms. 76.8 Gms. 67.75 Gms. 64.85 Gms.
(Sella)
S. No. Quantity of Brown White Rice Rice
Paddy Yield Product
1 100 Gms. 77 Gms. 70.375 Gms. 69.89 Gms.

6 11 There is difference in The difference in% of yield between as demonstrated on

yield as demonstrated 12/02/2016 and I stated above in answer of question no. 7 is
and as is there, in due to quality of paddy i.e. old/ New paddy.
company’s data or told
by you in answer of
Q.No. 7. Please explain
you why?

The percentage of yield intimated by Sh. ABC is hereby compared with the percentage of yield
shown by the assessee concern in his books of accounts. The details are as under:

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Table 5
A.Y. As Shown in Audit Report

2016–17 -

2015–16 63

2014–15 63

2013–14 63

2012–13 64

2011–12 -

2010–11 63

Table 6: As Intimated by ABC

Name of Paddy Quantum of Yield of Quantum of White/ Rice Product
Brown Rice Milled Rice/ Silky
1121 (Steam) 76 kg 65 kg 63 kg
1121 (Seila) 77 kg 66 kg 64 kg
1121 (Raw) 74.6 kg 64.5 kg -
1509 (Steam) 74 kg 64 kg -
1509 (Sella_aw) 45 kg 64 kg -
1509 (Raw) 73.2 kg 63.2 kg -

Table 7: As Per Demonstration

Demonstration of Yield of Paddy 1121 Steam
S.No. Quantity of Paddy Brown Yield White Rice Milled Rice Product
1 100 gm. 76.8 gm. 67.75 gm. 64.85 gm.
(Sella)
S.No. Quantity of Paddy Brown Yield White Rice Milled Rice Product
1 100 gm. 77 gm. 70.375 gm. 69.89 gm.

3.3.19 The books of accounts of the miller 3.3.20 In one case, it was found that the miller
contain useful information from which it is had stolen 17,845 units of electricity. From the
possible to verify whether the miller had milled details obtained from the Electricity Department
unaccounted paddy. The purchase tax paid by it was possible to say that the assessee had
the miller, lorry hire charged/ incurred and the stolen 11,130 units in the year and 6,715 units
fuel/ electricity consumed are useful indices of
the next year. The quantum of paddy milled was
the total volume of paddy milled. In appropriate
cases a correlation must be attempted between calculated on the basis that, on an average, 1½
the money laid out on these items and the units are required to mill a bag of paddy (75 kg)
volume of paddy milled. and suitable additions were made.

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3.3.21 Where the output of rice/ broken rice loan facility. The facility is allowed generally on
is suppressed, the sale proceeds thereof will the personal security of the partners of the miller.
naturally be kept outside the books of accounts. Cases have come to light where the undisclosed
However, the miller quite often requires cash to assets of the partners such as fixed deposit
defray expenses which are easily cross-checked. receipts standing in their names or in the names
Again, the miller requires cash to repay the loans of their ‘benamidars’ have been clandestinely
taken from banks and other financial institutions. offered as security for large open loans.
To meet such cash requirements, the suppressed 3.3.22.2 Not infrequently, in the stock
sale proceeds may be introduced as cash credits, statements submitted periodically by it to the
a phenomenon which in its varied manifestations bank, the millers report inflated figures of stocks,
is too ubiquitous and well known. Alternatively, with a view to secure a bigger open loan. The
the suppressed output itself may be introduced in bank does not mind, because the loan has
the books of accounts in the guise of purchases. been advanced more on the personal security
In such cases the genuineness of the purchases of the partners (or against collateral security
must be examined in depth. If the alleged seller is clandestinely furnished by the constituent),
a farmer, the inquiry should be directed towards and in any event, the stocks have been merely
ascertaining (i) whether he had the capacity to hypothecated and not pledged.
sell the quantity of rice/ broken rice in question,
(ii) where he got the paddy milled, (iii) how he 3.3.22.3 Key Loan Cash Credit facility, is
got the rice/ broken rice transported etc. If, on granted against stocks pledged with the bank.
the other hand, the alleged seller is a dealer in The stocks are kept under the lock and key of the
rice/ broken rice, the inquiry must be geared bank. Once KLCC is granted, the miller cannot
to rule out the possibility of his having merely get the stocks released, unless he liquidates an
‘accommodated’ the miller, without the goods appropriate part of the loan. Since the stocks are
having changed hands. pledged, the bank keeps records of the goods
initially pledged, the releases made from time to
3.3.22 Verification of the Stocks Pledged
time and of the balance stock. Such details are
with Banks
kept separately for each key loan sanctioned. In
3.3.22.1 It is common knowledge that the cases where the miller had taken KLCC, the AO
miller obtains loan facilities from banks. The loan should invariably obtain from the bank certified
facilities extended by banks are of two kinds viz. details of the stocks pledged, stock released etc.
Open Loan Cash Credit (OLCC), and Key Loan and cross-verify them with the stock register of
Cash Credit. Usually, the stocks of paddy/ rice the assessee; and make suitable additions to
available with the miller are hypothecated to, or cover the excess stocks; if any, detected. In the
as the case may be pledged with the bank. In the case of key loan the question of over-stating the
case of OLCC, the stocks remain in custody of the stocks for getting a higher loan cannot arise, for
miller, and the stock position is reported to the the stocks are pledged in the custody of the bank.
bank through periodical statements. The stocks, If an assessee contends that the figures of stocks
be it noted, are merely hypothecated to the bank were inflated to obtain a bigger key loan the AO
and not pledged with it. That is to say, they are should make enquiries from the bank about the
not treated as direct, collateral security for the quantity and value of stock pledged.

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3.3.23 Verification of Sales 3.3.23.4 Rice bran is one of the products of

3.3.23.1 The verification of sales in the case paddy milling. Paddy contains approximately
of rice mill is no different from the verification 72% rice, 5% bran and 22% husk. The
of sales in any other case. Thus, a copy of bran obtained on milling raw paddy contains
the assessee’s accounts in the books of the 15–18% oil; while bran obtained on milling
merchants/ commission agents to whom the sales parboiled paddy contains 22–25% oil. Rice
have been made must be obtained and verified bran oil is costly, can be put to a variety
with the books of accounts of the assessee. While of industrial uses. Hence bran commands
an attractive price. Bran as such is used as
doing so, both the movement of the goods and
poultry feed.
the flow of cash must be scrutinized critically.
Antedating/ postdating of cash transaction is 3.3.23.5 Some States like Punjab regulate the
the convenient method adopted to disguise the sale of Rice bran. 50% of rice bran is required to
payments made from out of moneys kept outside be sold to poultry feed manufacturers and the
the books of accounts. Cross verification of the rest in the open market. The millers are required
books of accounts of the assessee with those of to make the sales to poultry-feed manufacturers
the merchants/ commission agents may help in at controlled rates, while solvent-extraction units
detecting bogus or havala entries made in the which manufacture rice bran oil are prepared
books of accounts of the assessee. to pay much higher price. Naturally, then, the
millers prefer to sell bran to solvent extraction
3.3.23.2 The supplies may also be made to units rather than to poultry-feed manufacturers.
the FCI/ other government agencies under the To get over the regulations of government, the
levy system account. The sales made to these millers either understate the yield of bran; or mix
agencies must be cross verified with the details crushed husk with rice bran and sell the mixture
obtained from the agencies. Once the miller to poultry-feed manufacturers. Therefore,
discharges the obligation under the levy system, particular attention must be paid to the yield of
he is entitled to make free market sales. The bran, and the price at which it has been sold.
respective State Government usually regulates
3.3.24 Recovery of Rice: The recovery of rice
the quantum of sales that can be made outside
ranges between 67 to 68%. However, the recovery
the State. Even within the State, sales to retailers
of Basmati rice ranges between 66 to 67%. The
may have to be made in accordance with the
hulling of paddy starts in the month of October/
allotments made by the State Government.
November near about Diwali and ends by March.
3.3.23.3 In cases where the sales are covered A small quantity of the left-over paddy which is
by permits, the mode of concealment adopted by shown as closing stock is hulled in the first few
millers is to fraudulently use the same permit to months of the subsequent year. The rice millers
transport rice/ broken rice more than once. This have necessarily to maintain a production register
is particularly prevalent in areas where, thanks to prescribed by the marketing department which
the proximity of the border, the goods need to be is known as the Levy register. This is maintained
hauled over short distances. Such malpractices from October of the year to September of the
can be detected only with the active cooperation subsequent year, i.e. from the start of the paddy
of the Sales Tax and Civil Supplies Departments. season to the start of next season.

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3.3.25 Rice Bran and 7–8% recovery of rice bran, the balance
3.3.25.1 The normal accepted recovery of 25% is paddy husk which also includes a certain
rice bran varies 7 to 8%. A lower recovery rate amount of dust and extraneous material. This
calls for deep investigation. While examining paddy husk is normally piled up outside the mill
the production and sale of rice bran it has been premises. As such, pilferage of a small quantity
noticed in many a cases that though the closing out of the husk cannot be denied. Moreover, a
stock of rice bran was nil and no hulling of paddy small quantity out of this husk produced is also
had been undertaken from first of April of the used by labourers as a fuel. Keeping in view
year up to the starting of the next paddy season, these factors, the production of paddy husk is
yet substantial quantity of rice bran is claimed usually determined at 20% of the paddy hulled.
to have been sold and sale proceeds credited This recovery @ 20% is also being assessed to
in the books. Rice bran being a by-product of by the Sales Tax authorities of the Tarai belt of
hulling of paddy, can be obtained only if paddy UP. This has been accepted by the assessees.
is hulled. It was therefore found that extra paddy The paddy husk produced is utilised by sugar
had been hulled, and not accounted for in the mills and distilleries as a fuel. The procurement
books of accounts. This resulted in addition on price fixed by these sugar mills and the distilleries
account of unexplained investment in purchase varies from Rs. 20–35 per quintal exclusive of
of paddy at average rate of disclosed purchases, the transportation charges. However, the sale
and further addition of profit on the sale of rice. price declared by the rice millers is much lower.
3.4 Examination of Profit & Loss A/c
3.3.25.2 The State Governments procures
paddy through many of its purchase Centres 3.4.1 By the very nature of things lot of
spread over the entire state. This paddy is payments are made to labour and unorganized
compulsorily to be hulled by the rice millers as sector. However, keeping in view the nature of
per the directions of the State Government. The business, type of machinery used and large-
rice produced is taken by the State Government scale dealings with the farmers, the amount of
by paying milling charges at fixed rates. However, depreciation, ‘bardana’ expenses and labour
the rice bran produced is not taken by the State payments require special attention.
Government and is left with the assessee for sale
3.4.2 While examining P&L account, special
in the open market. The sale of this rice bran is
attention should be given to depreciation claim.
not declared.
It should also be verified as to whether the asset
3.3.26 Paddy Husk on which the depreciation is claimed was in
Normally, no record is maintained in respect of the existence and ready for use during the year. In
paddy husk produced and sold. Generally, sale one case the IAP pointed out that depreciation
of paddy husk is shown as lump sum by issuing on boiler had wrongly been claimed at 100% by
a cash memo on the last day of the accounting claiming it to be a high efficiency boiler though
year in which even the name of the purchaser it was a normal boiler. It was then found that the
does not figure. However, it is necessary to boiler was not even ready for use during the year
examine the production and sale of paddy husk. under consideration, as the installation expenses
After accounting for 67–68% recovery of rice, had been debited in the subsequent year.

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3.4.3 In many cases, such units get substantial 3.4.4 Vouchers in respect of all major expenses
subsidy on machineries from State Government debited to the P&L a/c should be verified. The
and Central Government. In such cases, it copies of account of all the major expenses
should be ensured that depreciation on plant should also be obtained. While examining
expenses on account of salary, it should be seen
and machineries is allowed only on the balance
as to whether any abnormal expenditure on
value of plant & machineries remaining after
such an account has been made on the last few
deducting the subsidy amount.
days of the accounting year.

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 Chapter

13
Rubber Industry

1. INTRODUCTION
The rubber plant, called Hevea Brasiliensis is a
native of the Amazon basin. It was introduced
by British to Asia and Africa during late 19th
century. It can be termed as the most far
reaching and successful of introductions in
plant history. Commercial cultivation of rubber
in India started in 1902. Rubber is one of the
most important raw materials for a variety of
industries such as aviation, defence, railways,
agriculture, medical, sports, transport and many
other manufacturing industries. India is the sixth 2.1 Natural Rubber
largest producer and second largest consumer of
2.1.1 The rubber growing regions in India can
natural rubber in the world and also the fourth
be classified under two major zones, traditional
largest consumer of natural rubber & synthetic
and non-traditional on the basis of agro-climatic
rubber put together. The rubber goods industry
conditions. Rubber cultivation in India has been
excluding tyre and tubes consists of 4550 small
traditionally confined to the hinterlands of the
and tiny units generating about 5.50 Lakhs
southwest coast, mainly in Kanyakumari District
direct jobs. The rubber industry manufactured
of Tamil Nadu and Kerala. The non traditional
a wide range of products like rubber coats and areas are the hinterlands of coastal Karnataka,
aprons, contraceptives, footwear, rubber hoses, Goa, Konkan Region of Maharashtra, hinterlands
cables, camelback, battery boxes, latex products, of coastal Andhra Pradesh and Orissa, the
conveyor belts, surgical gloves, balloons, rubber northeastern states, Andaman and Nicobar
moulded goods, tyre and tubes etc. Islands etc.
2.1.2 The main crop from a rubber plantation
2. TYPES OF RUBBER
is latex harvested by the tapping process. About
The rubber industry uses three types of rubber, 70–80 per cent of the crop from a rubber
namely, Natural Rubber(NR), Synthetic plantation is in the form of latex. The rest of the
Rubber(SR) and Reclaimed Rubber. The ratio crop is constituted by field coagulum comprising
of consumption of NR: SR worldwide is 47:53 of tree lace, cup lump and earth scrap. The
while in India, it is 64:36. latex which gets solidified in the tapping panel is

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called the tree lace and in the collection cups is by centrifugation involves the separation
called cup lump. These are collected at the time of preserved field latex into two fractions,
of tapping. The latex spilt and/ or overflowed to one containing the concentrated latex
the ground (earth scrap) when gets dried up is of more than 60% dry rubber and the
also collected as scrap once in a month. other containing 4–8% dry rubber (skim
latex). Centifuged latex with 60% DRC is
Table 1: General Composition of Latex called CENEX. Centrifuged latex is today
Rubber 30–40% Resins 1–2.0% available commercially in two different
Proteins 2–2.5% Sugars 1–1.5% verities with high ammonia (min. 0.7% of
Ash 0.7–0.9% Water 55–65% ammonia) and low ammonia (max. 0.3% of
ammonia). The former is preserved solely
2.1.3 Latex can be processed into any of the with ammonia and later contains one or
following forms: more preservatives besides ammonia. LA
i. Preserved field latex and latex concentrate. latex has several advantages which include
better quality, lower cost of production by
ii. Sheet rubber.
way of savings in preservatives, acid and
iii. Block rubber. low cost of effluent treatment.
iv. Crepe rubber. 2.1.3.3 Ribbed Smoked Sheet: Around
Field coagulum can be processed only into crepe 74.7% of NR produced in India is marketed as
rubber or block rubber. Ribbed Smoked Sheet. Latex is coagulated and
rolled through a set of smooth rollers followed
2.1.3.1 Preserved Field Latex: Field latex
by a grooved set and dried to obtain sheet
is preserved using suitable preservative for
rubber. Depending upon the drying method,
long term storage. The processing of preserved
field latex consists essentially of adding the sheet rubbers are classified into two: Ribbed
preservative (usually ammonia, minimum 1%) Smoked Sheets and Air Dried Sheets (Pale
to the sieved latex, bulking, settling, blending Amber Unsmoked Sheets).
and packing. 2.1.3.4 Block Rubber/ Technically
2.1.3.2 Latex Concentrate: This can be Specified Rubber (TSR): Technically specified
Prepared by One of These Two Methods: rubber (TSR) is a modern marketable form of
natural rubber produced from latex and field
i. Concentration by Creaming: The coagulum. The production of TSR started only
processing of latex into creamed concentrate during the 1960’s, prior to which raw natural
involves the mixing of a creaming agent rubber was marketed in conventional forms like
such as ammonium alginate or tamarind sheet and crepe for which only visual grading
seed powder with properly preserved field was done. From 1950’s onwards well packed
latex and allowing the latex to separate into and scientifically characterized synthetic rubbers
two layers; an upper layer of concentrated became commercially available in bulk quantities.
latex and a lower layer of serum containing To compete with synthetic alternatives, TSR was
very little rubber. The lower layer of serum developed. TSR is produced in almost all NR
is removed, leaving the latex concentrate producing countries. In India, TSR production
having about 50–55% DRC (dry rubber started in the year 1973. It is marketed with
content), which is often tested, packed and quality certification from the Bureau of Indian
marketed. Standards, under the name Indian Standard
ii. Concentration by Centrifugation: The Natural Rubber (ISNR). At present, 6 grades of
processing of latex into latex concentrate TSR are recognised.

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 Rubber Industry

Different Grades of TSR and its applications are 2.3 Reclaimed Rubber: The waste rubber
as under: products are converted into products for reuse
i. ISNR 3CV: Produced from good quality in rubber industry. The reclaiming process
field latex. It is used for the manufacture of aims at conversion of vulcanized rubber
tyres, engineering components, extruded product into a material of sufficient plasticity
and calendared products. to enable it to be compounded and handled
ii. ISNR 3L: Produced from good quality with rubber machinery or to re-vulcanize it
field latex and used for making light by adding curatives. Some of the major uses
coloured products, feeding bottle teats, are in Passenger Tire Carcass, in extruded
large industrial rollers, paper and printing and calendared products, animal mats used in
industry. stables, insulation tiles used in metro railways for
iii. ISNR 5: Produced from field latex or high reducing the noise level, tubeless tire liners etc.
quality field coagulum. It is widely used in 2.4 Good & Services Tax (GST): After
the manufacture of conveyor belts, cycle introduction of GST in India, rubber products
tubes, engine mountings, footwear etc. industry tyre & tubes now fall into the category
iv. ISNR 10, ISNR 20 and ISNR 50: of GST Goods and have been included under
Produced from quality field coagulum. the Chapter 40 of HSN Code for GST purpose.
ISNR 10 and ISNR 20 grades are used
by tyre manufactures. ISNR 50 is used 3. ISSUES IN TAXATION
for the production of less costlier non-
critical applications like handmade hose, 3.1 Income from Rubber Plantations as
footwear, mats and moulded goods. Agricultural Income: Claims of agricultural
2.1.3.5 Crepe Rubber: Crepe rubbers are income from rubber plantations made in ITR
processed from fresh latex coagulum, field may need verification so as to ensure that the
coagulum or cuttings of RSS. When any of agricultural receipts are genuine and are not
these materials, after necessary preliminary a shield for unaccounted income. For such an
treatments, is passed through a set of crepe exercise, a basic understanding of the cultivation
making machines, crinkly, lace-like rubber is of rubber, the yield per acre, number of trees
obtained. Crepe rubbers are classified into latex per acre, the average cost of cultivation and
crepe and field coagulum crepe, depending market price is essential. It assumes significance
on the starting material used. Pale latex crepe in computing the income from the manufacture
(PLC) and sole crepe are the two latex grade
of rubber under Rule 7A.
crepe rubbers. The crepe prepared from field
coagulum materials fall into five types, namely 3.1.1 Some of the unique features of rubber
Estate Brown Crepe (EBC), Thin Brown Crepe plantations in India are as under:
(Remills), Thick Blanket Crepe, Flat Bark Crepe
i. Rubber plantations in India are usually
and Smoked Blanket Crepe.
on sloping and undulating lands. Contour
2.2 Synthetic Rubber: Synthetic rubber is a terraces are made for water retention and
low cost alternative to natural rubber. Around
soil conservation.
65% and 70% of all rubber goes into the
production of tyres. Other main applications ii. Unlike tea plantations, majority of the
include binders for paper coating, carpet rubber plantations are of small holding
backing, moulded articles such as thin gloves sizes. Currently, nearly 76 per cent of
and sealing strips. rubber estates are less than 200 hectares in

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area and nearly 34 per cent are less than 3.1.3 Average Yield: In order to calculate
40 hectares. the yield per acre, the statistics published by the
Rubber Board can be used reliably.
iii. Being a perennial crop, there is a gestation
period of 7–8 years followed by 15–30 3.1.4 Average Cost of Cultivation: The cost
years of yielding phase of production varies with the size of holdings
and the location. The Centre for Development
iv. The Rubber Board provides subsidy to
Studies Trivandrum publishes research papers
the growers to compensate for the cost
on the average cost of cultivation. Such data can
incurred during the pre-bearing period.
also be requisitioned from the Rubber Board.
All rubber holdings are registered with the
Rubber Board. 3.1.5 Market Prices of Rubber: Collection,
compilation and dissemination of natural rubber
v. Inter cropping can be done only during
prices are done by the Market Promotion
the gestation period.
Division of Rubber Board. This includes daily,
vi. Some amount of processing is necessary weekly, bi-weekly, monthly and yearly prices of
at the farm gate, as fresh latex cannot various grades of natural rubber in the domestic
be kept for long without preservative as well as international markets. The price data
treatment. Some farmers also convert the is disseminated through print and visual media.
latex into sheets. In addition, it is made available to the public
vii. After the useful life of rubber, the plantations by Rubber Board websites: www.rubberboard.
are subjected to slaughter tapping. This org.in and www.indainnaturalrubber.com and
technique is used for extracting maximum through IVRS(0481-2571232). Association of
latex during a specified short period from Natural Rubber Producing Countries, Malayasia;
estates which are earmarked for replanting. www.anrpc.org: The website gives the daily
prices of latex, TSR and RSS in major markets
3.1.2 To determine the number of trees per
like Bangkok, Kuala Lumpur and Kottayam.
hectares
Table 2: Spacing

Metres Feet No. of Plants/ Ha No. of Plants/ Acre

Rectangular System
5.5 × 3.7 18 × 12 499 202
5.8 × 3.0 19 × 10 566 229
5.8 × 3.4 19 × 11 514 208
6.1 × 3.0 20 × 10 539 218
6.1 × 3.4 20 × 11 489 198
6.4 × 3.0 21 × 10 511 207
6.4 × 3.4 21 × 11 467 189
6.7 × 3.0 22 × 10 489 198
6.7 × 3.4 22 × 11 445 180
7.0 × 3.0 23 × 10 467 189
Square system
4.3 × 4.3 1 4 × 14 549 222
4.6 × 4.6 15 × 15 511 194
4.9 × 4.9 16 × 16 479 170
Source: Rubber Board

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Table 3: Annual Trends in Area, Production, Consumption, Import, Export and

Average Prices of Natural Rubber in India
Updated on 30/07/2019
Year (April Rubber Tappable Production Average Consumption Import Export Average
to March) Area (ha) Rubber (Tonne) Yield (Tonne) (Tonne) (Tonne) Price of
Area (ha) (kg/ha) RSS-4 at
Kottayam
(Rs./100kg
2005–06 ‭597,610‬ ‭447,015‬ ‭802,625‬ ‭1,796‬ ‭801,110‬ ‭45,285‬ ‭73,830‬ ‭6,699‬
2006–07 ‭615,200‬ ‭454,020‬ ‭852,895‬ ‭1,879‬ 820,305‬ ‭89,799‬ ‭56,545‬ ‭9,204‬
2007–08 ‭635,400‬ ‭458,830‬ ‭825,345‬ ‭1,799‬ ‭861,455‬ ‭86,394‬ ‭60,353‬ ‭9,085‬
2008–09 ‭661,980‬ ‭463,130‬ ‭864,500‬ ‭1,867‬ ‭871,720‬ ‭77,762‬ ‭46,926‬ ‭10,112‬
2009–10 ‭686,515‬ ‭468,480‬ ‭831,400‬ ‭1,775‬ ‭930,565‬ ‭177,130‬ ‭25,090‬ ‭11,498‬
2010–11 ‭711,560‬ ‭477,230‬ ‭861,950‬ ‭1,806‬ ‭947,715‬ ‭190,692‬ ‭29,851‬ ‭19,003‬
2011–12 ‭734,780‬ ‭490,970‬ ‭903,700‬ ‭1,841‬ ‭964,415‬ ‭214,433‬ ‭27,145‬ ‭20,805‬
2012–13 ‭757,520‬ ‭504,040‬ ‭913,700‬ ‭1,813‬ ‭972,705‬ ‭262,753‬ ‭30,594‬ ‭17,682‬
2013–14 ‭778,400‬ ‭518,100‬ ‭774,000‬ ‭1,629‬ ‭981,520‬ ‭360,263‬ ‭5,398‬ ‭16,602‬
2014–15 ‭795,135‬ ‭533,675‬ ‭645,000‬ ‭1,443‬ ‭1,020,910‬ ‭442,130‬ ‭1,002‬ ‭13,257‬
2015–16 ‭810,800‬ ‭558,900‬ ‭562,000‬ ‭1,437‬ ‭994,415‬ ‭458,374‬ 865 ‭11,306‬
2016–17 ‭818,000‬ ‭584,600‬ ‭691,000‬ ‭1,553‬ ‭1,044,075‬ ‭426,188‬ ‭20,920‬ ‭13,549‬
2017–18 ‭820,900‬ ‭612,000‬ ‭694,000‬ ‭1,458‬ ‭1,112,210‬ ‭469,760‬ ‭5,072‬ ‭12,980‬
2018–19p ‭822,000‬ ‭640,000‬ ‭651,000‬ ‭1,453‬ ‭1,211,940‬ ‭582,351‬ ‭4,551‬ ‭12,595‬
* Provisional

3.1.6 Nature of Income: Income from rubber grown in a nursery is agricultural income
can assume the character of agricultural income w.e.f. 01/04/2009.
only in the hands of the farmer who has grown iv. Income from manufacture of certain types
the rubber trees in India. The following points of rubber is to be computed under Rule 7A.
needs to be taken into consideration while
making assessment: v. It was held in CIT vs State Farming
Corporation of Kerala Ltd (2011) 199
i. Receipt of sale of rubber trees is an Taxmann 371 (Ker) that income from
agricultural income in the hands of the
scrap generated in industrial activity of
farmer if the conditions for land being
processing latex into products referred
agricultural in nature are satisfied.
However, it is taxable to Income-tax in the to in Rule 7A(1) has to be brought to
hands of a trader. Central Income-tax, while income from
sale of scrap rubber which is generated
ii. Income from sale of latex, field coagulum in the course of extraction of rubber latex
or rubber trees earned by middlemen and from trees cannot be brought to Central
traders who obtain contracts for slaughter Income-tax by applying Rule 7A because
tapping are to be taxed under Income-tax. such scrap is generated in the course of
iii. As per Explanation 3 to Section 2(1A), any taking yield which is a purely agricultural
income derived from saplings or seedlings operation.

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vi. In case of imports and exports, it may with the Rubber Board. The Rubber Board
be necessary to examine the transfer can provide authentic data of the number of
pricing angle. plants and their age. The quality of rubber is
3.1.7 Rule 7A Inserted w.e.f. 01/04/2002: of prime importance in determining the prices.
This rule is applied in cases where the rubber A statement of daily production and consumption
grower not only sells the produce as such but of rubber can be obtained. The reasonableness
also manufactures various types of rubber as of the quantity and the quality of the input
specified in the Rule from his own produce. of rubber for manufacturing purposes may
be judged with reference to the type and the
7A (1) Income derived from the sale of
specifications of the finished products.
centrifuged latex or cenex or latex based
crepes (such as pale latex crepe) or brown 3.1.8 Items of manufacturing expenses need
crepes (such as estate brown crepe, remilled close scrutiny. The AO should have a fair idea
crepe, smoked blanket crepe or flat bark of the cultivation costs in that locality. The
crepe) or technically specified block rubbers manufacturing process should be gone through
in detail and job works that are outsourced may
manufactured or processed from field
require cross verification.
latex or coagulum obtained from rubber
plants grown by the seller in India shall be 3.1.9 Explanation 7 to Section 43(6) of the IT
computed as if it were income derived Act deals with the computation of depreciation
from business, and thirty-five per cent of claimed under this Rule. WDV is required to be
such income shall be deemed to be income computed by deducting the full depreciation
liable to tax. attributable to composite income.

(2) In computing such income, an allowance 3.2 Rubber Based Industries and Taxation
shall be made in respect of the cost of planting Issues
rubber plants in replacement of plants that
3.2.1 The rubber manufacturing industry
have died or become permanently useless
is fragmented in structure with around 6000
in an area already planted, if such area has manufacturing units, comprising of 30 large-
not previously been abandoned, and for scale, 300 medium-scale and around 5600 small
the purpose of determining such cost, no and tiny units. With an estimated turnover of
deduction shall be made in respect of the US$ 12.7 billion, the industry employs 500,000
amount of any subsidy which, under the people. Based on consumption patterns, rubber
provisions of Clause (31) of Section 10, is not industry in India can be categorised into two
includible in the total income. sectors-the tyre sector and non-tyre sector. The
3.1.7.1 While applying this rule in the tyre sector, comprises all types of automobile
computation of income from manufacture tyres, conventional as well as radial tyres-and tyre
of rubber, the AO may ensure that the value exports. Globally, automobile tyres constitute
of rubber is not inflated. The AO may rely on the single-largest consumer segment, for natural
the return of Agricultural Income submitted rubber. The non-tyre sector comprises the
by the assessee. The AO can also do an medium-scale, small-scale and tiny units, which
estimate of the yield based on data available produce high technology and sophisticated

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industrial products. The small-scale units account industrial purposes and is marketed in seed and
for over 50 per cent of rubber goods production kernel forms. The seed from Kerala is entirely
in the non-tyre sector. used for processing while that from Tamil Nadu
is used for nursery purposes. Rubber seed
3.2.2 Various manufacturing processes
reaches the processing industry with and without
are employed in rubber based industries.
the help of brokers at village and town level on
Manufacturing processes vary with the type of
commission basis. Processing industry is mostly
products. Knowing the manufacturing processes
concentrated at Virudhunagar in Tamil Nadu
can help the AO understand the costs involved.
due to historical and natural factors. Rubber
For instance, some rubber based industries may
seed is processed as oil and cake. Rotary system
require little manual labour whereas others like
is mainly employed for processing.
footwear may engage more manual labour. The
AO should have a clear idea about the input- 3.3.2 Rubber Wood Industry: Processed
output ratios. Production register and log book rubber wood is used extensively in house hold
are useful records to check the correctness of furniture panelling and flooring. Rubber wood
wages paid to labourers. is a raw material used in the plywood industry.
3.2.3 The main fact to be verified is the The cost of rubber wood being lower than other
quantitative and the amount-wise tally of the raw traditional hard wood used for furniture, this
materials consumed and the finished products. industry is a high profit industry and requires
While there may be a stock tally in respect of detailed investigation into inflation of prices and
the finished products in large factories, there suppression of production.
may not be such a tally in factories producing
rubber toys, mats etc. Abnormal consumption 4. CONCLUSION
of raw materials, increase in labour charges etc. 4.1 The outlook for the Indian rubber industry
may indicate suppression of production in those on the whole is positive. Around 70% of the
cases. It is therefore advisable to take extracts of domestic demand comes from the automobile
purchases from the dealer’s accounts and trace it sector. The export of rubber & articles thereof
back to the factory producing those articles. This was worth Rs. 20,915 Crores in FY 2017–18.
sort of verification is likely to prove successful Rubber futures contracts are traded on three
in detecting the suppression of sales in the case National Multi Commodity Exchanges, viz
of a factory producing rubber toys and similar NMCE, NCDEX and MCX. The challenges
products. It may also be noted that the quantity facing the rubber industry are chiefly operational
of costly chemicals used in manufacturing is challenges, innovation needs, technology
relatively low and the main cost incurred will be adoption, marketing challenges, material costs-
the cost of rubber as the raw material. mastering the volatility, price reduction pressure,
3.3 Ancilliary Industries rising labour costs and inventory management.

3.3.1 Rubber Seed Oil Industry: Rubber 4.2 Studies show that the carbon sequestration
seed is one of the by-products of natural rubber potential of natural rubber trees is much
plantations. It is procured for nursery as well as greater than most tree species commonly used

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in afforestation/ reforestation programmes. for sale in the Kyoto market every year which
Studies at the Rubber Research Institute of is 11 to 14 per cent of the combined demand
India (RRII) and elsewhere have established for carbon credit by Japan and the European
the excellent carbon sequestration capacity of Union (50 mt C per year). But this market can
natural rubber plantations, which is roughly in be tapped only if natural rubber plantation is
the range of 7–9 t C per ha per year or more. explicitly included for carbon crediting under
From a total area of about 0.8 m ha of natural the Kyoto Protocol.
rubber in India, we have about 5.6 to 7.2 mt C

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 Chapter

14
Seafood, Aquaculture
& Hatcheries
SEAFOOD INDUSTRY
1. INTRODUCTION
1.1 Indian fisheries and aquaculture is an
important sector of food production providing
nutritional security, besides livelihood support
and gainful employment to more than 14 million
people, and contributing to agricultural exports.
With diverse resources ranging from deep seas to
lakes in the mountains and more than 10% of the aquaculture, and coldwater fisheries are
global biodiversity in terms of fish and shellfish contributing to the food basket, health, economy,
species, the country has shown continuous and exports, employment and tourism of the country.
sustained increments in fish production since
1.3 More than 50 different types of fish and
independence. The total fish production during
shellfish products are being exported to 75
2017–18 is estimated to be 12.60 million metric
countries around the world. Fish and fish
tonnes, of which nearly 65% is from inland
products have presently emerged as the largest
sector and about 50% of the total production
group in agricultural exports from India, with
is from culture fisheries, and constitutes about
13.77 lakh tonnes in terms of quantity and Rs.
6.3% of the global fish production.
45,106.89 crore in value. This accounts for
1.2 Paradigm shifts in terms of increasing around 10% of the total exports and nearly
contributions from inland sector have been 20% of the agricultural exports, and contribute
significant over the years. With high growth to about 0.91% of the GDP and 5.23% to the
rates, the different facets, viz., marine fisheries, Ag-GVA of the country. The commercial fishes
coastal aquaculture, inland fisheries, freshwater are majorly classified as under:
Commercial Fishes
Crustaceans Molluscs Elasmobranchs
Teleosts Scombroids Perches
Sciaenids Carangids Ribbon Fish
Cat Fish Clupeids Flat Fish
Other Fishes

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1.4 With over 2.4 lakh fishing crafts operating Agencies (BFDAs) were established in the country.
along the coast, 7 major fishing harbours, 75 The annual carp seed production is to the tune
minor fishing harbours and 1,537 landing centres of 40 billion fry and that of shrimp is about 54
billion PLs, with increasing species diversification
are functioning to cater to the needs of over 4.0 in the recent past. Besides large-scale freshwater
million fisher folk. For promoting aquaculture, food fish culture, ornamental fish culture and high
429 Fish Farmers Development Agencies (FFDAs) value marine fish farming are gaining importance
and 39 Brackish water Fish Farms Development in the recent past.
1.5 Some Statistics on Fisheries and Aquaculture in India are as under (2017–18):
Indian Fisheries
Global position 3rd in Fisheries 2nd in Aquaculture
Contribution of Fisheries to GDP (%) 0.91
Contribution to Agril. GDP (%) 5.23
Per capita fish availability (Kg.) 9.0
Annual Export earnings (Rs. In Crore) 45,106.89
Employment in sector (million) 14.0

Resources
Coastline 8118 kms
Exclusive Economic Zone 2.02 million sq. km
Continental Shelf 0.530 million sq. km
Rivers and Canals 1,95,210 km
Reservoirs 3.150 million ha
Ponds and Tanks 2.414 million ha
Flood Plains lakes and derelict waters 0.796 million ha
Brackishwaters 1.240 million ha
Estuaries 0.290 million ha

Some Facts
Present fish Production (Capture) 7,0 mmt
Inland 3.2 mmt
Marine 3.8 mmt
Potential fish production 8.4 mmt
Fish seed production 40,000 million fry
Hatcheries 1,604 units
FFDA http://nfdb.gov.in/about-indian-fisheries.htm
Source: 429
BFDA 39

2. FISHERIES accounts for 5.23 per cent share of agricultural

2.1 India is the second largest fish producer in GDP. It is also a major producer of fish through
the world with a total production of 13.7 million aquaculture and ranks second globally after
metric tonnes in 2018–19 of which 65 per cent China. The fish availability pattern in India is
was from inland sector. Almost 50 per cent of typical of tropical waters. Indian fishery resource
inland fish production is from culture fisheries, consist of a large variety of species of fish and
which constitutes 6.5 per cent of global fish shell fish, e.g. sardines, mackerel, Bombay
production. The sector has been showing a ducks, sharks and ray perches, pomfrets, seer
steady growth in the total gross value added and fishes, flying fish, tunas and tuna-like fishes.

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Indian marine prawns contribute substantially to 2.5 In order to stimulate indigenous construction,
the export earnings from marine products. It is the ship building yards are permitted to import
a major producer of fish and shellfish through designs and drawings of fishing vessels from
aquaculture globally, apart from possessing a abroad. They can also avail services of foreign
number of other flourishing sectors with vast experts to acquire the requisite technology.
resources and potential. Presently, the country’s Loans to the extent of 95% of the cost of vessels
annual fish production is at a high of 10.07 are available from the Shipping Development
million metric tonnes. As the second largest Fund. In the case of imported vessels, loans are
country in aquaculture production, the share of available to the extent of 90% of the cost.
inland fisheries and aquaculture has gone up
2.6 The change in export pattern from
from 46 per cent in 1980s to over 85 per cent in
traditional items to export of processed fishery
recent years in total fish production.
products is a significant feature. The recent trends
2.2 The best fishing season for the country as are towards increased exports of processed and
a whole is during October to December, when frozen fishery products to newer export markets
all the maritime states of the West coast of India e.g. Japan, Taiwan and South Eastern Asia.
record high landings. For Maharashtra and 2.7 Quality Control: For ensuring high quality
Gujarat the period July to September, and for of marine exports a scheme of quality control and
Kerala and Karnataka the period April to June, pre-shipment inspection was introduced, under
are relatively poor. On the east coast conditions the Export (Quality and Inspection) Act, 1963.
vary from state to state. In West Bengal and An Export Inspection Council was also setup to
Orissa, the peak fishing period is during October advise the Government of India on quality control
to December, while in Andhra Pradesh and of various products exported from Indian ports.
Tamil Nadu, it is from January to March. Fishing The Act empowers the Government of India
is relatively poor in these two states during the to notify the products for compulsory quality
period April to June. control and pre shipment inspection. Various
marine products e.g. frozen and canned shrimp,
2.3 Small-scale fishing plays a significant role
dried fish, dried prawns, dried shark fish etc.
in the Indian fisheries. A large number of active
were brought under this Act. The standards laid
fishermen employing indigenous crafts and
down for each item are internationally accepted,
gears, and following traditional methods are
and can be classified into 4 categories-physical,
engaged in small scale fisheries. They contribute organoleptic, analytical and bacteriological.
about 65% of the total marine fish production of Marine Products Export Development Authority
the country. has laid down hygiene standards for fishing
2.4 Coastal mechanization programme has vessels, processing plants, storage premises etc.
been one of the main thrusts in the development 2.8 The Marine Products Export Promotion
of marine fisheries in India. In order to popularize Council was setup to promote export of marine
use of mechanized boats, scheme of subsidizing products from India. This body was renamed
a part of the cost of construction of boats was as “Marine Products Export Development
introduced. Over the years, the subsidy was Authority”, and was vested with more powers
progressively tapered off, and the beneficiaries including development of production for export.
were encouraged to avail of institutional finance. Its functions include registration of fishing vessels,
Refinance facilities at lower rates of interest are processing plants and infrastructure facilities,
offered by the Agricultural Refinancing and laying down standards and specifications for
Development Corporation. marine products, improving the marketing of

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marine products overseas by providing market the can, disintegration period of the material,
intelligence, market promotion activities, supply colour, texture and flavour of the product, and
of information on the types of products in demand extent of extraneous materials. Sodium chloride
in different countries, rendering financial or other and citric acid in filling brine (in case of brine
assistance to exporters, regulation of export of packs), proportion of water in filling medium (in
marine products, and training in different aspects oil packs), commercial sterility and maximum
of export of marine products. limits of toxic elements in all such commodities,
have also been prescribed.
3. PRODUCTION 3.2.3 Commercially, the terms, “shrimp” and
“prawn” represent the same product, in most
3.1 In the context of marine products,
of the markets. But a clear distinction is made
production simply means harvesting at sea.
between them in the UK and continental markets,
Fishermen using traditional crafts, and to a
where “shrimp” represents the small size ones.
limited extent motorized versions of traditional In India the exportable varieties of shrimps are
crafts, harvest the bulk of the quantity exported. identified under five broad classification
A few corporates using more sophisticated fishing
vessels harvest the balance. Since the export i. Karikadi (Parapenaeopsis Styliffera).
trade is in the hands of the organized sector, the ii. Poovalan (including “Thelly Chemmeen
fish landed by the fishermen are purchased by and Chingiri” Metapenaeus Dobsone).
the units in the organized sector. From the point iii. Kazhandan (“Jinga” Metapenaeus Affinis).
of view of the exporters in organized sector, the
iv. Naran (Penaeus Indicus).
term ‘production’ by and large means ‘purchase’.
v. Karachemmeen (Penaeus Monodon).
3.2 Processing for Export
Normally, ‘Naran’ refers to very big size shrimps,
3.2.1 Marine products are exported after they
‘Kazhandan’ to medium size, while ‘Poovalan’
are block-frozen. Therefore, quick freezing of corresponds to small size shrimps. However,
marine products is essential for the needs of the ‘Karachemmeen’ is the biggest among all and
export markets. Quick-freezing was introduced is generally referred to as king prawn or tiger
in the early fifties, and since then a large number prawn.
of freezing plants have been setup in different
parts of the country close to the coastal areas. 3.2.4 After the procurement of the fish, shrimps
Canning as a means of preservation of fish, is from the fishermen directly or through suppliers
ideally suited for a tropical country like India, at the landing Centres, the raw fish/ shrimps are
taken to the peeling sheds, where the heads and
because it does not need special storage
tails are cut off or heads and shells are removed
conditions as required in the case of frozen
and then deveined according to requirement.
fish. Further, mackerel and sardines, which are
The processed fish/ shrimps are thereafter taken
abundant during a short period of the year, are
to processing units and are kept in adequate
ideal fishes for canning purposes. However, quantity of ice to prevent decay.
canning of fish has not made much advance.
3.3 Processing of Shrimps: The methods
3.2.2 Canned products covered by Indian of processing of shrimps vary according to the
Standards are prawns in brine, pomfret in oil, requirement of the type of shrimps for export
brine and its own juice, tuna in oil, and crab market.
meat in brine and solid pack. Specifications
relate to can exterior, vacuum in the can, volume i. Headless-shell-on Shrimps: Fresh raw
and nature of filling medium, drained weight shrimp is washed in chlorinated water. The
of contents as percentage of water, capacity of head is then removed and the shrimp is

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washed thoroughly before it is taken for blocks) are packed in a master carton made of
grading and freezing. corrugated paper board. Thus, a packed master
ii. Peeled and Deveined Shrimps: carton would weigh 50 lb net or 65 lb to 70 lb.
Shrimps are de-headed first, shells peeled Gross. The packed master carton is tightened
off, and the veins completely removed. with plastic hoops. The packed material is always
The meat is then washed. kept in cold storage at a temperature of around
minus 23  ºC.
iii. Peeled, Deveined and Cooked Shrimps:
Peeled and deveined shrimps of small size 4. TAX INVESTIGATIONS
are cooked in 3–5% boiling brine for about
5 minutes and then, allowed to cool. 4.1 Export of sea food is in the hands of a few
corporate and non-corporate entities. These
iv. Cooked and Peeled Shrimp: Raw entities own fishing vessels and harvest marine
shrimps are washed well and then cooked products. However, large part of the export is
in 7 to 10% boiling brine for 2–3 minutes. from out of the purchases made by them from
Cooked shrimps are then cooled in ice-cold artisanal fishermen. The purchases are made to
water containing 3–5% salt. Thereafter, some extent directly from the fishermen, and to
head and shell are removed. These are a large extent from the middlemen who in turn
washed in chlorinated water. purchase fish from the fishermen. Some of the
v. Peeled and Undeveined Shrimp: This is middlemen have their own arrangements for
a special preparation meant for the Japanese getting products processed and block frozen.
and European markets. In this case the veins The smaller entrepreneurs, get their products
are not removed though the shrimps are de- processed and frozen on hire at other factories.
headed and shells peeled off. 4.2 Verification of Purchases
3.4 Grading: Processed shrimps are graded 4.2.1 The landing Centres of catch of fish
before they are sent for freezing. Grading is are also the purchasing Centres. The inherent
based on the number of shrimps of the same characteristics of the industry i.e. illiteracy and
size per pound of weight. Thus the grade 16/20 poverty of the fishermen, who are the chief
indicates that a pound of shrimps of this grade source of supply, and the highly perishable
contain 16–20 shrimps of the same size. nature of marine products are two factors which
3.5 Freezing: Graded product is block-frozen offer big merchants/ exporters abundant scope
next. Graded material is arranged mostly in 5 lb. for suppressing their real income, by fabricating
or 2 kgs (plus about 10% more to compensate false evidence in support of the purchases. The
the drip loss), directly in freezing traps or in purchases of prawns, fish etc. made by the
waxed cartons lined with polythene placed in exporter are generally evidenced by his own
freezing trays. Adequate quantity of ice water ‘bought notes’. Even though the ‘bought notes’
is added and the trays are kept in the freezer. are signed by the fishermen (i.e. the seller), it is
Freezing takes place between minus 30  ºC to very difficult to verify the genuineness of these
minus 40  ºC, in about 3–4 hours, in a contact notes. Often, the seller’s signature is taken on
type plate freezer. When freezing is over the blank ‘bought notes’. Again, there is no foolproof
trays are removed from the freezer. The frozen evidence of the identity of the seller. The
material is in the form of slabs hard as stone. system thus affords ample scope for, inflation
3.6 Packing: The slabs are wrapped first with of purchases, both in terms of quantity & value
polythene paper and then packed in waxed and introduction of totally bogus purchases.
carton. Ten such slabs (either 5 lb. blocks or 2 kgs Besides, the highly perishable nature of prawns

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and other fish, militates against there being any to examine more closely the purchases shown
uniformity in the purchase price paid for the on those dates. Statistical data on the quantum
same variety in the same area and on the same of fish landed, collected by the Central Marine
day. The availability of both ice and conveyance Fisheries Research Institute is useful. The Institute
is another operative factor. For example, if ice or has divided entire Indian Coast into Zones, of
conveyance is not available, the fishermen are about 20–30 landing Centres. From each Zone,
only too anxious to part with their catches for a trained field staff collects information on
any price. Again, there are various counts and the fish landings, gears employed, effort
varieties of prawns, whose value differ from one expended, and data on size, weight and maturity
another. conditions of the major commercial species,
price structure etc.
4.2.2 Often bogus purchases are shown on
credit. However, in fishery industry, purchase 4.2.4 In the case of exporters who harvest fish
of fish on credit never takes place, because with the help of their own fleet of vessels, the
the fishermen, being poor, demand the sale question of verifying the correctness of the total
proceeds immediately on effecting the sale. quantity of fish landed assumes significance. As
In fact exporters give the suppliers monies in such details of the quantum of landed fish are
advance against future purchases, to ensure furnished by the assessee himself, there is no
continuous supply. The receipt of advance scope whatsoever to cross-verify these details
money by the supplier binds him to the exporter, from an independent source. Every person who
as a result of which the supplier is compelled to sets out to sea in vessels has to intimate to the
sell his catches to that exporter. Port authority the total number of trips done by
4.2.3 The price of fish fluctuates widely, him each day. But the details of the catch is not
depending upon the volume of landed fish. furnished. The details regarding the number of
When exceptionally large volume of fish is trips made by each vessel could be correlated
landed, the price dips, and on these occasions to the total catch to obtain a general idea of
the fishermen are at the mercy of the buyers. On whether the assessee has properly disclosed
such occasion the fishermen, stop fishing for a the details of the total catch. For example, if the
couple of days. Given adequate supply of ice, details furnished by the assessee show frequent
it is possible for them to stagger the sales over fruitless trips that by itself will indicate the need
a couple of days. Again, if adequate supply of for more detailed and closer scrutiny of the case.
ice is not available, the fishermen are forced to There is internal evidence which enables one to
sell-off the catch at very low prices. From the cross-verify the details of catch. As pointed out
point of view of investigation of accounts such
earlier, the Export Inspection Agency conducts
occasions assume significance. The exporters
pre-shipment inspection. The Agency issues a
stock up large quantities of fish at very low prices
certificate of inspection in respect of the goods
on such occasion, and doctor the ‘bought notes’
inspected by it, without which the product
to make it appear as though the purchases
were made on days when the prices, were high. cannot be exported. In this certificate the nature
The AO must, therefore, collect information of the product, the date of processing and the
regarding the dates on which the prices were total number of packs permitted to be exported
ruling high, and the dates on which fishing was are all given. The packs inspected are identified
abandoned for one reason or the other. During by code numbers. The code numbers enable
monsoon season, as also on stormy days, no the AO:
fishing is generally done. If the details of no- i. To ascertain the age of the stock of frozen
fishing days are available, the AO will be able products on any day;

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ii. To cross-verify the details of the catch as also out of sale of such fish has been properly
purchases by working backwards. accounted for.
4.2.6 In another case, the assessee had in a 4.3 Verification of Processing Results
particular month claimed to have made certain
4.3.1 Prawns/ shrimps are converted into one of
credit purchases. With the help of the data the following forms:
contained in the certificates issued by the Export
i. Headless-shell-on shrimps.
Inspection Agency, it was conclusively proved that
the assessee not having processed any stock in the ii. Peeled and deveined shrimps.
month in question, the alleged credit purchases iii. Peeled, Deveined and Cooked shrimps.
were fictitious. iv. Cooked and Peeled shrimps.
4.2.7 Since marine products are highly perishable v. Peeled and un-deveined shrimps.
they are processed the very day. In exceptional The yield on conversion of whole prawns/ shrimps
circumstances, when the catch is landed late in differs widely. The exporter takes advantage of
the night, the processing may be done early next the variant nature of yield, and generally avoids
morning. Therefore, the quantum of the product furnishing to the Assessing officer item-wise
processed is an important internal evidence breakup of the input and output. The AO should
having a close and direct relation to the quantum call for the qualitative and quantitative details in
of catch and/ or purchases. One of the important such cases, and see whether the processing results
are reasonable.
techniques adopted by the Assessing Officers to
detect suppression or inflation of purchases or 4.3.2 The Central Institute of Fisheries
suppression of sales, is to call for fortnightly or Technology, Cochin had published a paper on the
monthly details of purchases and sales, and to average yield in Volume XII (1975) of “Fisheries
examine whether any adverse stock position comes Technology” (Pages 125 to 130). For this they
to light, by correlating the quantum processed and have collected data on the total quantity of whole
the quantum landed and or purchased over a very prawns of different species handled daily by the
short interval, of say two to three days. factories and the quantity of PD (Peeled and
Deveined), HL (Headless), etc. produced after
4.2.8 Another important aspect of assessees conversion, for a period of one year (excluding
harvesting shrimps with the help of their own fleet the monsoon months of June, July, August and
of vessels, is that while harvesting shrimps in an September). The following Tables 1(a) to 1(d)
area which abounds in shrimps, a large variety indicate the mean yield, standard deviation, and
of other fish also gets caught. In fact, the quantity 95% confidence interval regarding the four species
of fish caught is much more than that of shrimps of prawns/shrimps for the months of January,
caught. For example, if a trawler catches say, 10 February and March. The study indicated further
tonnes of shrimps in an area, it gets at least 30 to that the yield of PUD (Peeled and Un-deveined) is
40 tonnes of mixed fish. The AO would do well to more by 3 to 5% than PD (Peeled and Deveined).
inquire into the mode and manner of disposal of This aspect is significant from the point of view of
such fish so as to ensure that the moneys realised investigation of accounts.
Table 1(a): Mean Yield, Standard Deviation, and 95% Confidence
Interval Metapenaeus Dobsoni (Poovalan)
Month No. of Observations Mean Yield% SD 95% (CI)
January 23 46.89 2.27 45.91–47.87
February 18 46.58 2.23 45.47–47.69
March 21 45.76 1.49 45.08–46.44

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Table 1(b): Metapenaeus Affinis (Kazhandan) Whole to PD

Month No. of Days Mean Yield% Standard 95% Confidence
Observed Deviation (SD) Interval (CI)
January 19 42.28 1.85 41.25–42.75
February 18 43.72 1.93 42.66–44.68
March 16 41.46 2.23 40.27–42.65

Table 1(c): Parapenaeopsis Styliffera (Karikadi) Whole to PD

Month No. of Observations Mean Yield% SD 95% (CI)
January 19 37.14 1.97 36.18–38.08
February 15 36.37 0.71 35.98–36.76
March 15 33.57 1.97 22.48–34.65

Table 1(d): Penaeus Indicus (Naran) Whole to Headless

Month No. of Observations Mean Yield% SD 95% (CI)
January 13 64.83 4.95 61.84–67427
February 16 65.91 2.17 64.75–67.07
March 19 64.85 1.79 63.99–65.71

4.3.3 Drip loss is another important point that verification may be made in respect of fairly
needs consideration. On freezing, fish meat loses short intervals. Though no fixed percentage can
a little weight. To compensate this loss in weight, be provided regarding the extent of drip loss
which is called ‘drip loss’, some extra quantity incurred in freezing, yet as a general guideline it
of prawns/ fish is put in the freezing trays. For may be stated, that the normal drip loss in frozen
example, to obtain a 2 kg (net weight) pack of prawns is 5% in the case of HL variety, 10%
frozen shrimps/ prawns about 2.2 kg of prawns/ in the case of PD type, and 3% in the case of
shrimps are used, the extra 200 gm, being added cooked prawns.
to compensate for drip loss. The significance of
drip loss lies in the fact that the exporters generally 4.3.4 In one case an exporter had claimed
tend to inflate loss on this account. Suppression abnormally high percentage of wastage in
of sales is the natural corollary of such a processing of shrimps. An analysis of sales and
manipulation. The AO should examine closely stock position furnished by the assessee during
the extra fish/ prawns added to compensate drip the three month period commencing from 1st
loss, correlate the quantity added to the quantity January revealed that he had produced 1,98,744
purchased and the quantity in stock. Such kg. during this period as below (Table 2)

Table 2
Particulars Weight (kg)
Sale 242,166
Add: Stock as at the end of the period
Less: Stock as at the beginning of the period 44,280
Production during the period 198,744

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There was no dispute about the total exports Thereafter the AO computed the total production
made during the period. The books of account of of block-frozen shrimps at 2,33,321.70 kgs as
the assessee revealed that during the said period detailed below (Table 6)
the assessee had purchased/ landed the following
quantities which were processed (Table 3) Table 6

Wt. in kg
Table 3
Prawn meat purchased 170,979
Particulars Weight (kg) Prawn meat produced out of purchases
Prawn meat purchased 170,979 and own catches
Whole prawn purchased 7,900 Estimated production 87,358.70 less 62,342.7
Own catches 202,643 Drip loss 25,016.00
Total 233,321.7
The prawn meat purchased by the assessee did
not require any processing before it was Block Since the production accounted for in the books
frozen therefore the AO proceeded to work out of account was only 1,98,744 kgs, the AO
the total yield on processing of the own catches concluded that the excess production of 34,577
and whole prawns purchased as follows (Table 4) kgs (2,33,321 kgs (-) 1,98,744 kg) needed to
be explained. As he was satisfied that there
Table 4
was no leakage at the sales end, he came to
the final conclusion that the excess production
Form to Which

Quantity Yield

was relatable to bogus purchase debited in the

Percentage
Converted

accounts. Working backwards and adopting

Quantity
Variety

the drip loss of 10%, he quantified the bogus

Yield

purchases at 38,419 on payment of vessel hiring

kg % kg kgs and made suitable addition on this count.
Naran HL 6,347 65.2 4,138.24
Kazhandan PUD 866.5 49.41 428.13
4.4 Verification of Expenses
Poovalan PUD 51,402 45.5 23,387.91 4.4.1 The verification of expenses in the cases
Choodan HL 6,160.5 67.41 4,152.79 of assessees exporting marine products is no
Villan & Kara HL 42.5 67.41 28.65
different from verification of expenses in any
Karikadi CP 33,173.3 35.2 11,677
other case. Again, seafood cases afford ample
Karikadi PUD 104,651 38.69 40,489.47
Karikadi(own PUD 7,900 38.69 3,056.51 scope for inflation of expenses. The typical
purchases) expenses in such cases are:
Total 87,358.7
i. Expenses on peeling and grading.
The AO then proceeded to estimate the drip loss ii. Expenses on purchasing ice and renting
as detailed below (Table 5) cold storage space.
Table 5 4.4.2 Expenses on Peeling and Grading:
The reasonableness of the expenses incurred
% of Drip Loss Drip under this head must be verified with reference
Estimated Loss (kg)
to the quantum of fish processed. In one of the
On 11,677 kgs (cooked 3 350
prawns) cases it was found that the assessee had claimed
On 75,681.70 kgs 10 7,568 expenses amounting to Rs. 3.72 lakhs on peeling
On 1,70,979 kgs (Meat 10 17,098 of 14,15,771 kgs of prawns. But on a scrutiny
purchased) of the books of accounts, the purchase invoices,
Total 25,016
the landing receipts and other documents it

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could be established that only 8,58,519 kg. The fact of the case is that M/s Kanchanganga
required peeling. On this basis, corresponding Sea Foods Ltd, an Indian Company entered into
disallowance was made. an agreement with a Hongkong based company
4.4.3 Expenses on Ice and Cold Storage: chartering two fishing vessels for fishing business.
A major portion of the expenses is accounted The hiring charge was fixed at maximum US $
for by the purchase of ice and renting of cold 600,000 per vessel per annum payable by way of
storage space. The expenses incurred on this 85% of gross earnings from fish sales. Minimum
count must be cross-verified with the books of of 15% of earnings by way of sales value of catch
account of the ice factory/ owner of the cold of fish was required to accrue to the assessee. No
storage. Assessees not having ice producing TDS was deducted by the assessee on the hiring
units/ cold storage of their own often try to inflate charge paid to the NRI company under Section
the expenses by setting up benami units and by 195 of the Act. The ITO, in the instant case, held
doctoring the documents to make it appear as that the income earned by the NRI company
though they purchased ice/ rented cold storage was chargeable to tax under Section 5(2) of the I
space from the benami units. What happens in T Act, 1961. Therefore, the assessee was treated
such cases is that ice is purchased or cold storage as assessee in default under Section 201(1) of
space rented directly from the real owner at a the I T Act, 1961, even though the payment was
cheaper rate and the benami unit is used as an not made in cash.
instrument for inflating purchases. In relevant
The NRI Company went into appeal. However,
cases, therefore, the inquiry must be directed
the DCIT(Appeals) and the ITAT confirmed the
towards proving that the ostensible is not the
order of the ITO. The judgment of the ITAT was
real. Particularly, the reasonableness of the rent
paid for cold storage space hired by the assessee also upheld by the Apex Court.
must be carefully scrutinized to detect inflation.
5. AQUA CULTURE AND HATCHERIES
4.5 Verification of Sales: Since seafood
industry is an export industry, the exports can The shrimp aqua culture has witnessed
easily be verified with reference to the data phenomenal growth over the last 20 years with
collected from the Customs and Port authorities. annual production growth rate of around 25%.
As already pointed out, while harvesting shrimps The total world supply of shrimp has increased
and prawns large quantities of mixed fish are also owing to the increased efforts, both by way of
harvested. The mixed fish may be sold locally or capture and also by culture. As the growth in
may be converted into fish meal. Similarly, the supply through capture has stagnated, aqua
wastage occurring in shrimps, fish etc. may also culture of shrimp has become the major means
be converted into fish meal. It must be verified for augmenting production. India having a
whether the assessee has accounted for the sale coastal area of 6500 km. and about 1.2 million
proceeds of such byproducts. hectares brackish water area has a lot of potential
in the area of shrimp aqua culture. Prawns can
4.6 Applicability of TDS on Payment of
be cultured both in fresh water, and sea water. In
Vessel Hiring Charges to NRI.
the intensive culture system, about 2500 million
The applicability of TDS under Section 195 of the seeds are needed for a 5000 hectare area, at the
Income-tax Act, 1961 on payment of vessel hiring rate of 2.5 lakhs per hectare per crop for two
charges to NRI has to be looked into. Reliance is crops in a year. For semi-intensive farming for
placed on the judgment of the Supreme Court the same area the requirement is about 1000
in the case of M/s Kanchanganga Sea Foods Ltd million seeds @ 1 lakh per hectare per crop for
vs. CIT, Civil Appeal Nos. 3844–3847 of 2003. two crops in a year.

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6. SEA WATER SHRIMP HATCHERIES The brood stock is first acclimatized in the
hatchery. Therefore, the difference in salinity
6.1 History of shrimp hatchery technology
dates back to 1930s when Fujinaga of Japan and temperature between natural sea water and
hatchery water should not be more than 5 ppt or
succeeded in rearing early larval stages of
50 cg. In order to achieve best production results
Karuma Prawn (Penacuc Japonicus). The first
major breakthrough was realised in 1942. Major the following parameters are maintained:
developments took place in 1960s on key aspects Table 7
such as food, growth and mass production
Salinity -- 26–32 ppt
of shrimp larvae. In the system developed by
Temperature -- 28–32ºC
Fujinaga, the larvae are reared along with their
food organisms, but in the Galveston system pH -- 7.8–8.5
developed by Cook and Murphy in 1966, larvae 6.3.2 In the maturation tanks, filtered and
are reared separately from live food organisms. disinfected sea water is filled up. For the spawning
Most of the hatcheries, these days combine these tanks and hatching tanks, water is filtered to 1
two technologies. Major breakthrough on captive micron level. Water is changed everyday, and a
maturation, algal culture etc., during 1970s and minimum aeration is also provided. Fresh feed
80s have contributed to the commercial operation like squid, fish liver, clams, polychaetes shrimps,
of shrimp hatcheries. Today though hatchery etc. are used. To avoid bacterial and fungal
technology is available for 31 species of shrimp, infection, water is mixed with chemicals and
11 species are propagated commercially. Among antibiotics. Subdued lighting with the help of
these 11 species P. Monodon is considered the fluorescent lights covered with blue acrylic sheets
most suitable species for culture. is provided to create the natural habitation for
6.2 P. Monodon or the Tiger shrimp has black adult shrimps.
and yellow bands on its abdominal segments. 6.3.3 Gravid females caught during brood stock
The males with a length of around 200 mm collection can spawn naturally. To have greater
weigh about 65 gms, while the females of success rates these gravid females are induced
around 240 mm weigh about 90 gms. The for maturation by unilateral eyestalk ablation.
adults mature, mate, and release eggs in deep
oceanic waters. The hatched out larvae dwell in 6.3.4 About 12–13 hours after spawning the
the surface waters of the ocean till they reach fertilized eggs (embryo) hatch out as nauplii
post larvae stage. The post-larval drift towards (temperature 28–32  ºC and salinity 29–34 ppt).
brackish water areas/ estuaries which are the The nauplii are harvested and transferred to
nursery grounds for them. The grown up shrimps larval Section within 2 days when they reach the
migrate back to offshore waters thus completing sixth sub-stage i.e. end 6.
the migratory cycle.
6.3.5 The shrimp nauplii received from
6.3 Hatchery operations involve brood stock maturation Section pass through three Zoeal
rearing, maturation (spawning and hatching), and three Mysis stages before they reach Post-
larval rearing, post-larval rearing, algal culture, larval stage. Nauplii subsist on yolk. Zoeal feeds
artemia hatching (live brood culture) and sea on phytoplankton (Unicellular Algae) and Mysis
water management. larvae feed on phytoplankton and zooplankton
6.3.1 Brood stock is collected from wild (microscopic animals). Post-larvae feed on
waters. Minimum size for male and female are zooplankton. Any deficiency in nutrients is
65 to 70 gms and 90 gms respectively having met by inducing the live feed cultures and by
a length of 200 mm and 240 mm respectively. continuous aeration.

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6.3.6 Only aquatic grade drugs which are brachium are distributed throughout the tropical
soluble in water are used. All the drugs are and subtropical regions of the world. There are
dissolved in distilled water or in potable fresh 150 species of macro brachium in the world, of
water and administered near aeration points for which 49 are commercial. 25 of the commercial
thorough mixing. Photo degradable drugs are species are found in Indian waters. Most of them
given at night time. Usually all drugs are given live in fresh water. A few species live in brackish
immediately after water exchange and feeding. water at the mouth of rivers. Among different
6.3.7 From the post-larval stage, the larvae species available macro brachium rosembergii is
are designated by the age in terms of number the best species of aqua culture, since it can be
of days. The post larval rearing includes rearing grown in both fresh and low saline water. It has
from three day old, till 20 day post-larva. (The mixed growth potential among culture prawns.
viability of a hatchery depends much on the cost It has no serious problems of disease and has
of production of post-larval). The post-larval a good consumer preference and demand in
are stocked @ 25–250/ litres and reared till local sales/ export markets. In the early 50s Thai
harvest. Post-larval are fed with mainly artemia farmers started rearing fresh water prawns by
and prepared egg feed @ 2 to 5 ml, two to three collecting the seeds from natural waters. In 1961,
times a day. Algae need not be fed for post a Taiwanese Scientist Dr. S.W. Ling, discovered
larvae. Antibiotics and chemicals are used for that Mrosenbergii, though actually an inhabitant
therapeutic/ prophylactic treatment. Post larvae of fresh water, completed its larvae phase in
are harvested at PL-20 stage or 13 mm in size brackish water. Following this discovery, Dr.
which is ready to be stocked in grown up ponds. Ling reared the larvae in brackish water and
50% survival can be normally accepted from achieved success in 1962. Following Ling’s
post-larvae rearing. success attempts at artificial seed production
were made in India during 1963–65 by Rao
6.3.8 Pathogens i.e. disease-causing organisms at CIFRI and also the Department of Fisheries
affecting production, generally come from two of Kerala. The experiments conducted at the
sources, viz. water and mother prawns. Pathogens Fisheries College, Cochin since 1987 resulted
coming through water are generally kept under in a cost effective technology using suspended
control by maintaining good water quality; particles of shrimp/ clam meat with egg as the
and those coming through mother prawns are major feed.
generally avoided. Hence water management
7.2 There are four stages in the life of a
and quality brooder selection plays a major
freshwater prawn viz., egg, larva juvenile and
role in production of shrimp seeds. Normally
adult. In the natural environment, mating of
to ensure quality, seed production hatcheries
Macro brachium takes place all year round,
observe 15 days of shutdown operation once
although, due to environmental reasons, peak
in 45 days of production. Usually marketing of
mating takes place only during certain periods
shrimp seed is dull during the months October
to December. During this period hatcheries of the year. A fully mature female of 50–100g
observe annual shutdown and undertake can carry 50,000–100,000 eggs. But at first
maturity, due to the female’s small size, it lays
maintenance works.
only 5000–20,000 eggs. In the laboratory, it has
been observed that hatching takes place 20 days
7. FRESH WATER HATCHERIES after copulation; it may even take 25–30 days if
7.1 According to FAO nomenclature fresh the temperature has remained below 28 degrees
water paleomonids are referred to as ‘prawn”. C. In some case, a female can lay eggs twice a
Fresh water prawns of the genus, Macro month. Larvae hatch during the night. Larvae in

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a hatchery take 26 days to metamorphose into 8. EXAMINATION OF ACCOUNTS

post-larvae (PL). 8.1 Capital Cost of Shrimp Hatchery
7.3 Macro brachium larvae cannot collect 8.1.1 The capital cost involved in starting a
food directly by themselves. Live Artemia
hatchery is one of the major factors that decide
salina nauplii (Brine Shrimp Nauplii, BSN), a
small crustacean rich in protein and essential the cost of the end product. If the capital cost
fatty acids, is given as feed to prawn larvae. increases abnormally, then because of allowance
No commercially effective substitute has yet of proportionate depreciation the taxable
been found for Artemia nauplii. This is the income also comes down. Hence the AO should
major operating expense of a freshwater prawn be vigilant regarding the cost of various fixed
hatchery. assets also. An illustration of “per hectare cost”,
7.4 The known diseases of Macrobrachium on estimate basis” is as under:
rosenbergii larvae are, caused by bacteria, 8.1.2 An Overview: How Much Does it
protozoa and nutritional deficiencies, Mid-cycle
Cost to Start Prawn Farming in a Hectare?
larvae Disease (MCD). Bacterial Necrosis (RN).
Exuvia Entrapment Disease (EED). Microscopic In prawn farming, feeding, digging, and
Epibiont Disease (MED). Usually, 90% of equipment are the main sources of investment.
postlarvae are obtained before day 42. However, The capital investment amount also depends on
usually harvesting is done between day 30 to 35 the amount of seed you are going to farm. On
(60–80% of post-larvae) for economic reasons.
an average, the investment can be anywhere
When post-larvae density on the bottom of tank
is above 2/sq.cm. (100,000/2-m’ tank), some from 7 to 12 lakh that include seed, feed,
cannibalism may occur. Therefore, post-larvae equipment, and medicines. The farmer should
must be cropped before this stage. have equipment such as water aerator sets,
pumps, and generator that is mandatory in this
7.5 The main differences between sea water culture. To reduce the capital investment, some
prawns and fresh water prawns are as under:
farmers get this equipment for lease/ rent. It takes
Table 8 about 4 to 5 lakhs to dig and prepare a hectare
pond. An already built prawn pond may help
Sea Water Prawns Fresh Water Prawns
you in capital investment. The main risk factor
The land near sea can Land nearby river can be
be used by using sea used by using fresh water for in prawn farming is a virus and WSD, proper
water as ponds for prawn cultivation. pond maintenance and medicine availability is
prawn cultivation very important. On a successful crop, at the time
Availability of land and Even though the availability of harvest, a farmer can make profits twice or
water plenty of land and water is plenty it
costs more. thrice on the investment. The sale price of the
Diseases found to be Diseases found to be less and harvest is based on the number of prawns per
more and survival rate the survival rate is more than kilogram, the lesser the count, more is the selling
is less than 50%. 50%.
price. Depending on the current market rate, on
Commercially very Not so economical/
an average with a count of 40 per kg, a farmer
good and profit margin commercial and the profit
is more. margin is not high. can make about 13 to 15 lakh per crop.
Already established This line of business is
business recently started and, is still
developing

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Techniques of Investigation for Assessment Vol. 5

A. Fixed Capital Investment Cost on Hatchery A3. Income on Hatchery

Table 9 Table 12
Sl. No. Particulars Cost Rs.
Sl. No Particulars Cost. Rs.
1. Sale of Seed @ 10,00,000/-
1. Broodstock Pond 2. Nos 1,08,000/
Rs. 500/1000**
2. Larva Rearing Tank 12. Nos 1,15,000/
Net Income (Sale–Total 1,90,000/-
3. Hatchery Shed 10x6 m 2,35,000/ Cost) (Net of A2)
4. Water Storage Tank 46,000/
**Sale price is per thousand seeds (PLs)
5. PVC Drainage Piping 21,000/
6. Aerator Set 5hp, 2. Nos 1.50,000/
B. Operational Cost of Freshwater Prawn
Farming in Semi-Intensive Culture
7. Water Pump sets 2 hp, 2. Nos 30,000/
8. Generator 5 kva 65,000/ Table 13
9. Electrical Installation 25,000/ S. No Particulars Cost. Rs
10. Borewell 45,000/ 1. Chemical and Organic 7,500/-
Fertilizer
Total Fixed Capital Investment 8,40,000/-
2. Prawn Seed 30,000/ ha @ 18,000/-
Rs. 600 per 1000
A1. Total Operational Investment
3. Formulated Pellet Feed 40,000/-
Table 10 4. Laborer wages per annum 57,600/-
S. No Particulars Cost. Rs 5. Laborer wages at 6,000/-
Harvesting
1. Chemical and Organic 7,500/-
6. Fuel and Electricity 3,500/-
Fertilizer
7. Miscellaneous 5,000/-
2. Broodstock Development 50,000/-
Total Operational Investment 1,37,600/-
3. Pumping and Aeration 15,000/-
Charges
B1. Total Cost on Freshwater Prawn Farming
4. Pelleted Feed and Artemia @ 2,20,000/-
Rs.4000/kg Table 14
5. Seawater Transportation 27,500/- S. No Particulars Cost. Rs
6. Fuel and Electricity 35,000/- 1. Operational Cost 1,37,600/-
7. Refrigerator 25,000/- 2. Depreciation on Fixed Cost @ 13,760/-
10%/ year-(B)
8. Salaries and Wages 1,90,000/-
3. interest on Fixed Investment @ 20,640/-
9. Miscellaneous 30,000/- 15%/ year (B)
Total Operational Investment 6,00,000/- Total Cost 1,72,000/-

A2. Total Cost of Hatchery B2. Income on Freshwater Prawn Farming

Table 15
Table 11
S. No Particulars Cost. Rs
S. No Particulars Cost.Rs
1. Sale of Big Size Prawn 450 kg 2,47,500/-
1. Operational Cost (A) 6,00,000/- (5) Rs. 550/kg
2. Depreciation on Fixed Cost 84,000/- 2. Sale of Small Size Prawn 90 kg 18,000/-
@ 10%/ year (A1) (5) Rs. 200/kg
3. Interest on Fixed Investment 1,26,000/- Net Income (Total Sale-Total Cost) (Net of B1) 93,500/-
@ 15%/ year (A1) Source: https://www.agrifarming.in/prawn-farming-
Total Cost 8,10,000/- project-report-cost-profits-guide

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8.2 Cost of Brooder Mother Prawns: N.B.: Usually, the “size” of post-larvae (PL)
The availability of gravids (brooders/ mother in the market is considered their chronological
prawns) during peak season is a limiting factor age after completing the metamorphosis period.
for the availability of nauplii for larval stocking. A P.L.10, for example, is an animal that went
The cost of brooder (mother prawn) has to be through complete metamorphosis (involving
gathered from local market, depending upon the nauplii, zoea and mysis stages) and has been
availability of catch and the climatic conditions. a post-larva for 10 days. At this point, the
The hatchery owner has to take several animal has completed its morphological and
precautions right from the time of purchase/ physiological development, and the standard
brooder stock upto the hatching point. These larval-rearing process would be finished.
include maintenance of temperature during As feed forms one of the major inputs, the cost of
transit, from coastal belt to the hatchery. If these inputs can be verified on the basis of the above
precautions are not taken, the brooder (mother calculations. While accepting the expenditure
prawn) will lay eggs in a limited place, which towards feed, the AO should invariably verify
may not be helpful in using these for hatching the consumption of feed with reference to
purpose. If the brooder lays eggs before reaching the number of survivals. The availability of
the hatchery, the cost of brooder will be almost good hatchout artemia becomes a constraint
zero, and it can be used only for consumption during peak seasons of hatcheries production.
purposes. Some times the cost of brooder goes As of today the artemia available for shrimp
upto Rs. 40,000 to Rs. 70,000 per gravid, but hatcheries, is imported mostly from Great Salt
they are often available from Rs. 1,000 per Lake, Utah, USA. For an optimal hatchery cycle,
gravid onwards. The AO should be vigilant in the consumption of 15 kg per million tiger shrimp
this regard, and should gather information from seed of artemia, is considered to be economical.
the local market regarding the rates of brooder. 8.4 Cost of Medicines and Chemicals:
8.3 Cost of Feed: As regards the expenditure The expenditure booked towards chemicals and
on feed, chemicals and medicine, the AO has to medicines should be linked with the production
investigate the genuineness of the purchases from and sale of PL 20. The GST on these items is
the distributors/ suppliers. The reasonableness of @ 5–12% at present. If necessary, the Assessing
consumption can be checked from the guidelines Officer, can obtain information from GST
provided in the brochures of MPEDA i.e. Marine Department with regard to the monthly GST
Products Export Development Authority, Ministry returns filed by the hatcheries, and also from the
distributors/ suppliers of medicine/ chemicals.
of Commerce, which are as under:
Because of checks by GST department, the
Table 16 tendency to suppress the cost of production
ARTEMIA FEEDING SCHEDULE for P.L. stage
with regard to chemicals and medicine arises.
To offset suppression of cost of production, the
PL 3 to PL 6 2 ml x 3 feeds a day
hatcheries are likely to suppress the sales both
PL 7 to PL 12 3 ml x 3 feeds a day
quantitatively and rate-wise. As the clientele of
PL 13 to PL 20 3 ml x 1 feed a day
the hatcheries are mostly shrimp farmers, it is
Table 17 difficult to detect the suppression of sale at a later
date. In turn the shrimp farmers sell their end
EGGS FEEDING SCHEDULE for P.L. period
products to the Export Houses or route the same
PL 8 to PL 10 15 gms x 2 times a day
through Exporters, who would like to show their
PL 11 to PL 15 25 gms x 2 times a day cost of production at a lesser rate, so as to show
PL 16 to PL 20 40 gms x 5 times a day larger profits from exports, which are exempt

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Techniques of Investigation for Assessment Vol. 5

from taxes. To check this tendency proper man at various fishing markets in Port area to
and intermittent checks are needed during the purchase the raw material. Purchase man takes
course of production of PL 20, as regard the cost the telephonic confirmation from Managing
of various inputs and the sale price of the end Director or Production Manager with regard to
products. rate/ variety/ quality at the time of purchasing of
8.5 Comparative Sale Price: The sale price catches of fisherman and afterwards, purchased
varies on weekly basis depending on the month material is loaded to trolley and weight of the
of the year, type of prawn, quality, size etc. The quantity is measured at the weighbridge located
AO needs to be vigilant regarding the market at fishing market. The purchase man and
ups and downs. The rates of one hatchery can trolley-man prepare the delivery challan and
be compared with the rates of other hatcheries. duly sign it specifying the rate, quantity, quality
Further, the hatcheries usually shut down 15 and port details etc. Thereafter, raw material
days once every 45 days of production. Besides, is dispatched to cutting centre for head cutting
hatcheries also shut down between October and weighing of headless fish. In order to verify
and December. The AO can check whether any the authenticity of raw material delivered vis-a-
expenditure on the feed, medicine, cost of PL vis details specified in the delivery challans i.e.
20 etc. has been debited during the shutdown rate./ quantity/ quality, number of check points
periods. are installed at the premises of manufacturing
8.6 Survival Rate of PL 20: Estimation of unit. Firstly, the gatekeeper checks the weight
population at different larval stage is done by as specified in delivery challan at the time of
random sampling. These estimates are not entry of loaded trolley/ truck and makes the
accurate. However, for all practical purposes necessary entries in the goods receipt register or
the survival in sea water is less than 50% and in inward register and subsequently, specifications
fresh water the survival is more than 50% from mentioned in the delivery chalian are verified
the initial to the final stages of the larva. and duly certified by the production manager
or managing director of the assessee company.
Further, delivery challan is forwarded to the
9. CORPORATE SCENARIO
account Section for preparation of purchase
9.1 Export of seafood is in the hands of a few invoice and after verification of delivery challan
corporate and non-corporate entities. These and purchase invoice by the Managing Director,
entities, own fishing vessels and harvest marine the account Section is informed to release of
products. However, large part of the export is payment to the part as per pre-decided terms
from out of the purchases made by them from and conditions.
artisanal fisherman. The purchases are made to
9.3 Generally, above described standard
some extent directly from the fishermen. Some
operating procedure is not followed while
of the middlemen have their own arrangements
debiting fictitious invoices without physical
for getting product processed and block frozen.
delivery of material from paper concerns.
The smaller entrepreneurs get their product
Delivery challans of raw material shown to be
processed and frozen on hire at other factories.
purchased from bogus entities to inflate the
9.2 The big corporate entities in seafood expenses prepared at factory premises mostly
industry follows the standard operating in account Section unlike to delivery challans of
procedure (SOP) to purchase of raw material to genuine entities. These delivery challans will be
ensure proper check and balance while affecting either unsigned cr signed by the unauthorized
the purchases. The exporter appoints purchase persons. It is very essential to take the month-

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wise list of purchase man appointed by assessee taking place in these bank accounts through
at various fishing markets to ascertain the sanctity RTGS/ NEFT/ CHEQUE from assessee’s bank
and genuineness of delivery challans. From the account and immediately followed by cash
point of view of investigation, it is very significant withdrawals. The bank account holders were
to ascertain as to whether specifications like rate/ not aware about the nature of transactions in the
quantity/ quality are mentioned in that bogus bank accounts and in fact, these bank accounts
delivery challans and if mentioned, then whether were operated by key persons of assessee. The
these are showing correct and realistic picture of conventional payment pattern was not followed
that day prevailing market conditions like rate, while making payment to these concerns. The
availability of particular quality etc. Statistical payment was transferred to the bogus concern in
data on the quantum of fish landed, collected by advance or immediately after affecting purchases
the Central Marine Fisheries Research Institute in round figure, however, in the case of genuine
is useful. The institute has divided entire Indian parties (middlemen), payment was transferred
Coast into Zones, of about 20–30 landing within 45–60 days after delivery of raw material.
centres. From each Zone, a trained staff collects With the help of stepwise verification of SOP,
information of the fish landings, gears employed, it was conclusively proved that, the assessee
effort expended and data on size, weight and has not received actual physical delivery of
maturity conditions of the major commercial raw material from certain parties and fictitious
species, price structure etc. These suspicious purchase were debited to inflate the expenses
delivery challans may be correlated with goods and consequently, to suppress the profit. As
receipt register or inward register to ascertain as stated above and alternatively the same are also
to whether raw material shown to be delivered reflected as Trade Advances in the Balance Sheet
as per these delivery challans, is genuinely of the company and in many cases subsequently
entered into the inward register on same date written off as bad debts after a gap of even
and duly signed by authorized person or not nineteen years on the plea that no purchases
The verification of bank account statements of were effected from such fishermen not only due
these suspicious parties may lead to ascertain to the vagaries of nature or rough sea resulting
the genuineness of business operation of these in non traceability/ death of fishermen but also
parties. Immediate credit and debit transactions fishermen landing into enemy territory and being
(cash withdrawal or RTGS/ NEFT to other bank caught and jailed. Even the contact person are
accounts) with zero balance indicate suspicious also not available for pursuing the matter due
nature of activities. to various reasons such as death and hence
9.4 Case Study: In one case the assessee they have no option but to write-off the trade
had formed paper concerns in the name of his advances as irrecoverable or as a loss arising out
employees and had shown bogus purchases from of business. The courts of the country also take a
these fictitious concerns. These non-genuine liberal view in the matter considering interaction,
purchases were without proper documentation the very nature of uncertainties associated with
and SOP of purchases was not followed. The sea food and marine industries. However, no
delivery challans were prepared at the factory concrete evidence could be put forth by the
premises in the account Section. These delivery assessee company before the Investigating/
challans were either unsigned or signed by Assessing Officer regarding details of such trade
unidentified persons. Thereafter, bank account advances except for writing off the same in the
statements of these bogus concerns were verified books of account subsequently and claiming the
and it was observed that huge credit transactions same as a loss/ bad debt deduction.

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Techniques of Investigation for Assessment Vol. 5

10. CASE LAWS 10.2 Commissioner of Income-tax vs. Premier

10.1 Torry Harris Sea Foods (P.) Ltd. vs. Export International; (2004) 134 Taxmann
Assistant Commissioner of Income-tax, Circle-1, 339 (Kerala) in IT Reference No. 163 of 1999
Alappuzha; (2018) 97 taxmann.com 443 dated November 7, 2003-Section 32A of the
(Cochin-Trib.) Section 92C of the Income-tax Act, Income-tax Act, 1961 Investment allowance
1961 – Transfer pricing – Computation of arm’s – Assessment Year 1985-86 – Assessee was
length price (Comparables and adjustment/ exporting prawns and shrimps after subjecting
Comparables – Illustrations) – Assessment Year them to various treatments-Whether when raw
2012–13 – Assessee in its Transfer Pricing study prawns are subjected to process of deveining
had concluded that CUP was most appropriate and peeling, they do not cease to be prawns and
method for benchmarking international become other distinguished commodity Held,
transactions in seafood industry and had used Yes-Whether, therefore, assessee was not
export rates published by MPEDA i.e. Marine entitled to investment allowance under Section
Products Export Development Authority, as a
32A – Held, yes.
comparable in its CUP analysis and claimed 3
per cent adjustment for difference in glaze in
each sale made to its AE so as to bring it under 11. CONCLUSION
Arm’s Length Price – TPO rejected adjustment The AO may note that the purchases in this
as claimed by assessee and made adjustment industry is mostly through auctions and are
after examining invoice produced by assessee usually made from the boats arriving from sea.
showing that it had exported products having The lot may include unwanted sea weed and other
glazes ranging from 15 per cent to 25 per cent-It sea creatures, shells etc. The assessee may claim
was found that assessee’s products as such could
wastage at proportionately higher rate which is
be compared with price list published by MPEDA
one of the modus operandi for tax evasion i.e.
which was for 20 per cent glaze after making
showing low yield. Secondly, the large players
suitable adjustment which TPO had done-
Further, assessee had not brought on record any stock their processed seafood in cold storages
evidence to show that assessee’s product was temperature in which is maintained at 18–20ºC.
having 25 per cent glazes so that it could not be Taking physical stock inventory during search or
compared with price list published by MPEDA – survey operations is not a viable option. The AO
Whether therefore, claim of assessee was to be should device a different strategy to ascertain
dismissed – Held, yes. the actual stock.

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 Chapter

15
Soft Drink Industry

1. THE SCENARIO
1.1 In India, the youth, especially those from
the well to do Sections, patronise the soft drinks
segment. Revenue in the Soft Drinks segment
amounts to US$ 4324m in 2019. The market
is expected to grow annually by 8.1% (CAGR
2019–2023). There is stiff competition in the
industry. The cola war is on. No programme in
the electronic media can be seen without the
advertisement of one soft drink or the other
being splashed across in the commercial breaks.
(non-carbonated) soft drinks. Understandably
If one particular drink says it is ‘being liked by
the aerated (carbonated) drinks segment is
the hearts asking for more’, another proclaims
dominated by two MNCs, namely Pepsi & Coca
‘if you enjoy it, whatever you want, can happen-
Cola. The market share of these two companies,
‘One advises you not to go by the looks, but
put together, is estimated at 95%. In 2019, the
to go by the taste. The other claims that ‘you
segment-wise revenue of carbonated and non-
have to grow up, to like it’. Thus, there are
carbonated soft drinks is US$ 279m and US$
advertisements galore for one soft drink or the
4,045m respectively. There are few others in
other. The market is huge and each competitor
organized sector but at regional levels. Apart from
wants to reach out to as many customers
the foregoing, there are local manufacturers with
as it can.
lesser known varieties in the unorganized sector.
1.2 The soft drinks industry in India can be A few graphical representations of data relating
broadly bifurcated into two segments, (a) aerated to soft drinks in World/ India are as under. The
(carbonated) soft drinks & (b) non-aerated source is STATISTA (Website).

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Fig. 1: Global

Fig. 2: India

Fig. 3: India

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The projections of soft drink industry in India, in graphical form, are as under:

Fig. 4

Fig. 5

Fig. 6

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Fig. 7

1.3 From the foregoing paras, it can be seen that non-carbonated soft drinks are more popular in
India as compared to carbonated drinks. A few statistical data in respect of non-carbonated industry
in India are as under, in the form of graphical representation:

Fig. 8

Fig. 9

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 Soft Drink Industry

Fig. 10

Fig. 11

Fig. 12

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Techniques of Investigation for Assessment Vol. 5

Fig. 13

1.4 A comparative study of data of carbonated soft drinks and non-carbonated soft drinks in India
is as under:

Fig. 14

Fig. 15

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Fig. 16

Fig. 17

Fig. 18

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1.5 The non-aerated drinks segment is an important parameter to gauge the turnover of
another flourishing industry which is giving the company. However because of the reusable
stiff competition to the aerated drinks segment nature of the bottles, it is essential to ascertain
and is currently capturing significant market the number of “bottle turns” or “velocity” to
share. This segment includes fruit base/ milk make the best estimate of the turnover.
base drinks such as Maaza, Patanjali, Amul 1.10 The number of times a bottle comes
Kool, Nimbooz, Tetra Packed fruit juices namely back to the bottler for being filled during a year
Frooti, Real, Tropicana, Activ, Sofit etc. Although is known as ‘bottle turns’ or velocity. This is
this segment has major players operating in
measured by the equation:
organized sector namely Parle Agro Pvt. Ltd.,
Manpasand Beverages Ltd. etc., but there are Bottle turns (Velocity) = {Total volume turnover}/
a large number of regional, local manufacturers Gross stock of cases
selling lesser known brands. 1.11 For National level bottlers, having a huge
1.6 If one considers the overall market share quantity of bottles, the bottle turns 5 to 7 times
in the soft drink segment, it shall be noted that per annum. For the regional bottlers, the bottle
both the aerated as well as non-aerated drinks turns 11 to 20 times per annum, whereas in the
have significant market share and a loyal unorganised sector the bottle turns as much as
customer base. With the increasing population, 25 to 50 times per annum. The reason for this
urbanization, better infrastructure and higher per is that normally the bottle turns depend on the
capita income, the soft drinks industry in India is range of the supply chain. In respect of national
now worth more than USD 4324 million. bottlers they normally have a range of 300 km
radius. The regional bottlers have a range of
1.7 The soft drinks (aerated, energy and 100 kms radius, whereas the local unorganized
caffeinated) segment is subject to levy of GST sector mostly operates in the nearby areas in a
at the rate of 28% and further cess of 12%. The radius of 10 kms.
effective indirect tax rate in some instances goes
up to 40%. The GST rate for fruit juice/ pulp 1.12 In the GST era, the “bottle turns” can
based drinks has been kept at 12% whereas all henceforth be identified with much ease. Under
other non-alcoholic beverages attract GST rate the GST laws, the movement of goods is now
of 18%. Such high incidence of tax acts as an required to be undertaken through E-Way Bills.
incentive to the assessees to evade taxes. The In the circumstances where the bottles move
assessees avoid paying GST and other taxes from the factory to the distributors or the depots,
with a view to subsidise its products and as a the trail can be easily identified on real-time basis
consequence evade Income-tax as well. Tackling through E-Way Bill Database. Consequently even
this menace proves difficult for the revenue when the bottles are returned, the distributors/
officers. depots have to issue E-way bills, which makes
tracking of “bottle turns” manageable.
1.8 However with the advent of the new age
information technology and the financial profiling 1.13 It may however be pertinent to mention
which is now possible with the integrated data that E-Way bills are not mandatory for intra-
mining being undertaken by the Government, State movements and hence ascertaining the
number of bottle turns of local & unorganized
the Assessing Officers can identify the possible
players, who have a radius of 10–100 kms, may
loopholes and areas of evasion of taxes and
be difficult. Nevertheless the industry data may
address the same.
well be taken as a comparable, with suitable
1.9 In the soft drink segment, the number of adjustments, to identify and estimate the bottle
bottles purchased & used by the assessee acts as turnover of the local players.

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2. The unorganized sector, though not now being used in India, belong to the MNCs
organised, is still having considerable presence. and the secret of these concentrates is available
It exists in small towns and does good business. only to very few and that too in their overseas
In the sector, most manufacturers do not headquarters. However, Coca Cola concentrate
maintain proper books of account. This renders is assembled or manufactured at Pirangut near
examination of the accounts difficult. However, Pune, Maharashtra. Similarly, Pepsi concentrate
under the GST laws, all manufacturers are now is being assembled or manufactured at a place
required to file monthly/ quarterly returns which called Charno near Patiala in Punjab. The
makes tracking of the turnover easy. With the erstwhile Campa Cola, which is now in circulation,
concept of registered and unregistered dealers, sparsely has its concentrate manufacturing plant
the extent of unorganized business is also in Delhi.
unascertainable. The sales made to unregistered 3.2 The concentrate is different for different
dealers can be identified through the GST returns types of soft carbonated drinks and a specific
and the same may be targeted for enquiry quantity of this concentrate is mixed in a bottle.
and investigation to identify under-invoicing and For a 300 ml bottle, the quantity of concentrate
tax evasion.
that would be mixed is different compared
2.1 Similarly even the purchases made by the to the quantity of concentrate that would be
soft drinks segment can now be tracked through mixed in a 500 ml bottle. It also depends on
the GST returns. In the aerated segment, the the variant of cola drink such as Diet Coke/
purchases, especially of carbon dioxide, is Pepsi Diet or Coca Cola Zero Sugar/ Pepsi
an important barometer to judge the overall Zero Calorie. As per unverified information,
business of the company. Percentage of carbon 23 gms of concentrate is normally mixed in a
dioxide in the liquid is constant. Accordingly 300 ml bottle. The actual formulas are highly
if enquiries could be made as to how many guarded secrets for ages. The MNCs keep a
cylinders of carbon dioxide have been purchased strict watch on the concentrates being mixed
by the manufacturer, some idea can be had in a bottle. Even a 2% variation in the dilution
of the turnover effected. The purchases made can be found out by these multinationals
from registered and unregistered dealers can be through regular checks carried out by them at
identified from the GST returns. The enquiry various bottling plants and as a matter of fact
& investigation may be concentrated more on such plants, where variation in the mixing of
the unregistered purchases where there is more the concentrate is observed, are immediately
scope for bogus billing, false invoicing leading to directed to be closed by them. Every crown of
tax evasion. a bottle has a FPO number of the plant, where
the bottle has been filled. With the help of this
2.2 Armed with the above data, the Assessing FPO number, on the inside of the crown, their
Officers can very well correlate the purchases checking squads find out the location of the
with the sale, undertake quantitative and cost plant where the erring bottle (a bottle with
analysis and identify the correct turnover, either lesser quantity or lower concentrate
profitability etc. drink) has been filled and raids are carried out
by the checking squads of these multinationals
3. THE MULTINATIONALS at such bottling plants.
3.1 In respect of the two main players (Coca 3.3 Filling of bottles is done either in the
Cola and Pepsi) the most elaborately guarded Company-owned Bottling Outlets (COBO) or
secret is the composition of the concentrates. at the franchisee bottlers’ facility. The COBOs
In fact, most of the formulae of concentrates are under strict supervision of the company-

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appointed executives in hygienically operated an automatic system before being taken to the
bottling plants. Franchisee bottlers are mostly the filling position.
erstwhile manufacturers of soft drinks like Thums 4.2 At the filling position, a concentrated
Up, Limca, Fanta and Sprite. With the onset of mixture of the respective soft drink is prepared
globalisation, the entire marketing scenario has in huge cans. This concentrated mixture consists
undergone a sea change. An MNC in the field of a fixed quantity of the concentrate, sugar
used to have several Indian companies (each and water. The water being used is highly
catering to a region) with a foreign holding purified water carrying no bacteria or virus. The
company. Coca Cola has a holding company- concentrated mixture is filled into a filler bowl
Hindustan Coca Cola Holdings (P) Ltd. There along with more water and mixed with Carbon
were several subsidiaries to this company. These dioxide. From the other side, the cans to be
subsidiaries had earlier taken over the operations filled in approach on a conveyor belt and this
of most of the Indian bottlers and their plants. concentrated mixture along with further water
These subsidiaries have been merged and and carbon dioxide, which is available in the
amalgamated into a single subsidiary called filler bowl, is filled into the cans at a very high
Hindustan Coca Cola Beverages (P) Ltd. Most of speed and pressure. The temperature is kept
the financial transactions and money circulation very low during this operation and thereafter the
is through the holding company. The Coca Cola cans are sealed. The 330 ml cans are then passed
Company (TCCC), USA, is the parent holding through a warmer to bring them to normal room
company for the Indian companies. Thus a temperature, i.e. 25–26ºC. The conveyer belt
pyramid structure has been formed at the then takes these filled cans to a coder where the
pinnacle of which is the Coca Cola Company, batch number, date of manufacturing, FPO No
USA. The two cola giants have smoothly taken and maximum retail price is printed on to the
over the operations through a series of chains cans.
and mergers and demergers. The ultimate
control of their operations remains with the 4.3 The conveyer belt then passes through
overseas parent. afiltec which is a machine that automatically
rejects under-filled cans. Such under-filled
4. OPERATIONS IN A BOTTLING cans are considered as a waste and they are
PLANT not supplied to the market. The thoroughly
checked cans are then conveyed to a packing
4.1 Most of the bottling plants run by the MNCs machine which fills 24 cans into one corrugated
are hygienic, automatic and state of the art. The box. Thereafter, these boxes are conveyed to
water and concentrate are not touched by hand a box coder which puts the seal for the week
at all. The whole system runs on a conveyor of manufacturing alongwith the batch number.
belt, which moves and takes empty cans (330 These boxes are then passed through a palletizer
ml) or bottles (300 ml) to a rinser, where these
which carries out proper alignment and packing
are inverted and cleansed and taken to the
of these corrugated boxes. From there these
filling spot through the conveyor belt. Most of
are off loaded into trolleys. These trolleys are
these 330 ml cans are imported and stocked
then manually taken to a warehouse where the
in the warehouse of the plant. Similarly, the
used bottles which are received back from the boxes are stocked for being despatched to the
market, from the distributors, are also stocked distributors.
in the warehouse. To repeat, these cans are 4.4 A similar procedure is followed with regard
loaded on the conveyor belt and they are taken to 300 ml bottles. These are cleaned and rinsed
to the rinser, inverter, and then again cleaned by by the conveyer belt and then they are taken

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to the filling area where concentrated syrup whereas as far as 300 ml bottles are concerned,
(concentrate + sugar + water) is available in the same 56 units would give 107280 litres of
huge bowls. This concentrated syrup is mixed finished product, i.e. 234 litres less. The reason
with more water and carbon dioxide and then is that in the filling Section when the bottles are
it is taken to the filler bowl. From the other filled, as the diameter of the opening is small,
side, bottles are conveyed where these bottles in spite of greatest precision, there is some
of 300 ml are filled at very high speed and spillage of the final product. However, when
pressure and low temperature. These bottles the same liquid is filled in cans, as the opening
are then automatically crowned at a very high of the can is of larger diameter compared to
speed and are taken to a coder where the batch the bottles, the wastage is much less. It may
number, FPO Number, date of manufacture be pointed out that in the organized sector the
and maximum retail price is automatically percentage of concentrate efficiency is very
printed. For the bottle there is-no lifted system. high and in fact it is as high as 98.5% to 99%.
Bottles are manually inspected and if any
of the bottles has not been filled to the full 5. ACCOUNTING IN BOTTLING
capacity, then the same is removed manually. PLANTS
Thereafter, these bottles are conveyed to a
packer where 24 bottles are filled in a plastic 5.1 At the end of the day or after the third shift,
crate. These crates are then taken manually exact details of all the raw materials consumed,
by trolley to the warehouse where they are finished product obtained and wastage is
stocked for despatch to the distributors. There normally available to the last digit. The Finance
is no particular concentrate used for filling of Manager gets all the reports from the warehouse
soda water bottles. They are directly filled with in-charge, regarding the finished products
water and carbon dioxide under pressure and stocked, and from the Production Manager
speed at low temperatures and then manually regarding the production effected during the
inspected for the quantity and then 24 bottles day. The Finance Manager then matches the two
are packed into a plastic crate. figures find out any spillage or loss. Normally, an
4.5 On a rough estimate, 56 units of Thums inventory is prepared once a month. In a quarter
Up (now taken over by Coca Cola) concentrate (three months), the inventory is prepared in the
will give around 15,700 litres of concentrated cycle of 4 weeks + 4 weeks + 5 weeks, i.e. in the
syrup which, when mixed with water and last month of the quarter the cycle of 5 week is
carbon dioxide, would fill approximately 3 lakh applied and in the first two months, the cycle of
bottles of 300 ml each i.e. around 90,000 litres 4 weeks is applied. At the end of every quarter,
of the final product. Similarly, 56 units of Coca the exact details of receipts and issue, production
Cola concentrate when mixed with water and in pipeline and stock of finished products are
carbon dioxide, will give around 14,900 cases worked out.
(24 bottles in each case) of 300 ml bottles
i.e. 357,600 bottles of Coca Cola. Thus, 56 5.2 The books of account maintained are the
units of concentrate would give approximately following:
107280 litres of finished product. The same i. Inventory module for all the inventory
56 units of Coca Cola concentrate would fill items.
around 13575 cases of 330 ml cans i.e. in all
325800 cans. It means, 56 units of Coca Cola ii. Subsidiary inventory module for receipts,
concentrate when filled in cans would give issue, production in progress and finished
around 107514 litres of the finished product products.

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iii. With regard to trade creditors, where process and marketing. The MNCs are not
certain amounts are payable, a separate prepared to cut down on their quality or their
register is kept. It gives details of fixed profit margin. They seek to increase their
suppliers, approved by the company as sales by aggressive promotion rather than by
per the quality control and local laws. lowering price. All those interesting ads and the
iv. Day book or cash book. fabulous amounts paid to the brand icons are
v. Petty cash book. at the cost of the consumer. The so-called fierce
vi. Bank book. competition between the colas is confined only
to the promotional front and does not extend to
vii. Suppliers ledger. the price front. There are no price wars indeed!
viii. Sales Ledger: This would include
despatch of the finished product to the 6. TAX INVESTIGATIONS
depots. From depots, finished products
are transferred to distributors. From the 6.1 One of the items which is to be enquired
distributors the finished products are sold into is the invoice rate of the bottle when supplied
to the retailers. to the distributor. There is a general perception
that there is a chance of under-invoicing by the
ix. Imported Cans Register: 330 ml cans
companies while supplying the bottles to the
are imported and such imports are carried
distributor. This aspect can be examined by
out at one point and from there these
making enquiries or conducting surveys at the
empty cans are transferred to various
depots and the distributors. By determining the
bottling plants of the same company.
bottle velocity, a fair idea regarding the total
x. Bottles Module: account of 300 ml amount of the finished product can be obtained
bottles is kept and, as per practice, these by finding out the availability of total glass
bottles are valued at the deposit price. bottles. This can be compared with the sales
5.3 From the above, it would be seen that declared by the company.
most of the details, as prepared by these bottling 6.2 The entire purchase of 330 ml empty
companies, are the same as in any other business. cans is through imports. Thus, the total cans
The only difference is that, in the business imported during the year can be obtained.
of soft drinks, the cost of the material itself is From that, by obtaining the details of the
very low compared to the cost of the finished
opening stock of empty cans and by finding out
product charged to the customer. Apart from the
the total cans available at the end of the year,
concentrate what is required is only sugar, carbon
the consumption of the cans for filling during the
dioxide and water. The maximum amount of
year by the company can be ascertained. The
expenditure is actually on the overheads. These
overheads include the costs of running and sale vis a vis the cans filled in by the manufacture
maintaining the plant, cost of maintaining the can thereafter be determined.
warehouse and the costs of advertisement and 6.3.1 The stock of 300 ml bottles is huge. It
distribution. Very high salaries are paid by the is replenished by the company through local
MNCs, not only to their executives, but also to purchases. The main manufacturers of glass
the lower functionaries and the workers. For a bottles are:
bottle of soft drink which may cost Rs. 8 to the
customer, the actual cost of the liquid inside the i. Larsen and Toubro Ltd (Glass), L&T
bottle to the manufacturer may not be more than House, Malad, Mumbai.
Rs. 1.50. The rest is the profit margin and the ii. Owens Bilt Ltd, 135, Brigade Towers, 6th
extraordinary expenditure in the manufacturing Floor, 609/610, Brigade Road, Bangalore.

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iii. Owens Brockway (India) Ltd, Glass Unit, v. Prince Metal Plast, 33 Marol Cooperative
197–198, Bombay Pune Road, Pune. Industrial Estate, MV Road, Andheri (E),
Mumbai.
iv. Owens Bilt Ltd, Plot.No.15, A Block, D 1,
Micchinhwad, Pune. 6.3.4 The main suppliers of the wooden crates
are:
6.3.2 The main suppliers of crowns for bottles
are: i. Dhanjal Timber, Khajuri Road, Yamuna
Nagar, Haryana.
i. Larsen and Toubro, Division No.15,
Opp: Gandhigram Railway Station, ii. Rishabh Wood Works, 1/5, Begawan
Ahmedabad. Bhuvan, Hanuman Road, Ville Parle,
Mumbai.
ii. Larsen and Toubro, Ganges Ink Building,
110, lb Market, Vikroli, Mumbai. 6.3.5 Another item of importance used in
this industry is carbon dioxide gas. The main
iii. Manaksia Closures Ltd, 24, DamjiShamji suppliers of this gas are:
Industrial Complex, Andheri, Mumbai.
i. Sicgil India Ltd, Dhun Building, 827, Anna
iv. Manaksia Crowns Ltd, Survey No. 161/2,
Salai, Chennai.
Village Khutlivia, Khanvel, Silvassa.
ii. Pure Liquid Gas P ltd, Ramoli Industrial
v. Vora Industries, 5, Vardaman Industrial
Estate, Baroda.
Estate, Village Road, Bhandup, Mumbai.
vi. Asoka Metal Decor P Ltd, 145, Anand iii. The Bombay Carbon dioxide Gas
Industrial Estate, Mohan Nagar, Gaziabad, UP. Corporation, 107 Wodehouse Road,
Mumbai.
vii. Adit Metal Decor, 53/73, Ramjas Road,
Karol Bagh, New Delhi. iv. Shivshakthi Gases P Ltd. 1, Tyagi Market,
Prahlad Garhi, Sahibabad, Gaziabad
viii. Cans and Closures Pvt. Ltd, P 6, CIT Road,
4th Floor, Calcutta. 6.3.6 In non-carbonated soft drinks segment,
one packaging item has got its widespread use.
ix. Vora Enterprises, 75, Village Road, It is tetra packs. It is mainly used for packaging
Bhandup, Mumbai. juices and comes in mainly in two different sizes
x. Miniksh Crowns Ltd, 38, Sunder Nagar, i.e. 200 ml and 1 L. The following concerns are
Hyderabad. main suppliers of tetra packs to this industry:
6.3.3 The other major item of use in this industry i. M/s Tetra Pak India Pvt. Ltd., Gurgaon;
is the plastic crate used to transport the bottles.
ii. M/s S.G. Star Drinks Pvt. Ltd., Sonipat;
The major suppliers of plastic crates are:
i. Nilkamal Plastic Ltd, 77/78, Nilkamal iii. M/s Topworth Group of Companies,
Mumbai
House, Road No.13/14, MIDC, Andheri
East, Mumbai. iv. M/s Zuberi Fibres Pvt. Ltd., New Delhi.
ii. National Plastic Ltd, Western Express 6.3.7 As all these concerns are well established
Highway, Andheri East, Mumbai. with proper accounting systems, cross-
verification of purchases from them, both price-
iii. The Supreme Industry Ltd, RS 112/4, wise and quantity-wise, is possible and should
Sudurpeta Industrial Area, Sudurpeta, be done in case of suspicion.
Pondicherry.
6.4 One element which provides the scope for
iv. Supreme Industries Ltd, C 30 and 31, manipulation is the recently introduced plastic
Phase II, Noida, Gautam Budha Nagar UP. bottle. These bottles come in sizes of 500 ml,

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1 1/2 litre, 2 litre and so on. As this is a recently 6.5.1 The Indian subsidiary of an MNC imports
introduced concept, there is not much information the concentrate from its holding company
available about the manufacturers and suppliers abroad. There can be over invoicing of the price
of the bottles to the national players. Glass bottles by the foreign parent. The AO should be alert
are returnable and there is some inventory of to this possibility. The AO should also insist on
stock. This enables investigation of the turnover. a proper explanation for any variation in the
Plastic bottles, on the other hand, are use and
quantity of the concentrate actually imported
throw items. As such, there is no inventory of
stock. This makes it difficult to determine the and the amount shown in the books of account.
turnover. Unless the AO can find out how many 6.6 In the past an MNC Took over a Local Brand
plastic bottles were purchased, how many used like Thums Up, Limca or Maaza. It purchased
and how many remained in stock, he will be the concentrate from the erstwhile manufacturer.
hard put to determine the turnover. He should It marketed the local product through its own
make enquiries from the bottle suppliers, and
outlets. While enquiring into the turnover of a
cross-verify the assessee’s claim. For example,
national player, this aspect should be kept in
the cold drink major Coca-cola has revealed that
it had used three million tonnes of plastics in the mind. The enquiry should cover the turnovers
year 2017. Hence, with the average weight of 10 referable to both types of concentrates-their own
grams a bottle, it employed 300 million plastic (whether manufactured in India or imported)
bottles in that year. This should give a fair clue and the ones acquired from local brands. The
to the Assessing Officer about the turnover of the AO should ascertain the yield from indigenous
company. concentrate and reckon it against the production.
6.5 With the likes of Google, Starbucks, Apple, 6.7 Sometimes MNCs buy the finished product
Coca Cola, Pepsi undertaking rampant white- itself in liquid form, filled in bottles or cans, from
collar tax evasion at Global level, the assessing a local manufacturer of an unbranded Indian
officers should also be alert and identify tax soft drink. They market the drink under their
structures which are illegitimate and meant to own brand. For example, Mewar Bottling Co.
evade tax. The provisions of GAAR have recently Ltd, Badgaon, Udaipur supplies the finished
been introduced in the Income-tax Act, 1961 to products to the national players.
combat such illegal tax planning by MNCs. In the
soft drink industry as well, the high indirect tax
incidence and comparative higher Income-tax 7. CONCLUSION
rates in India, in comparison to other developed The Investigating Officer/ Assessing Officer
countries, there is a tendency of MNCs to build has a gargantuan task cut out for him/ her in
complex corporate structures to siphon off profits investigating the tax evasion modes of soft drink
outside India and/ or overall reduce the tax majors such as Coca cola, Pepsi, Parle Agro
liability in India. MNCs infuse equity in the Indian
etc. as their volume and scattered geographical
subsidiary in the form of debt to gain a tax shield
presence poses a challenge. The aspects of tax
by getting tax benefit on interest payments from
evasion methods are indicative in nature and
India and lower tax rate on interest income outside
India. Several other tax avoidance methods are the IO/ AO is advised to employ his/ her own
deployed to evade tax. The Assessing Officers wisdom in approaching the tax evasion methods
should examine the Multilateral Convention & resorted to by the assessee. Although, in the age
BEPS, to which now India is also a party, and of internet and post GST era, it will not be such
ensure that the MNCs pay appropriate taxes on a difficult task where plethora of information is
the income derived in India. available in public domain.

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16
Sugar Mills

1. INTRODUCTION
1.1 Sweeteners have been used by living
beings since hundreds of years. Honey, one of
the oldest sweeteners has been used by human
beings, animals and birds alike. The synthetic
sweeteners are the latest arrivals on the scene.
Sugar, however, occupies the most prominent
position among all the sweeteners and it will
probably continue to do so.
1.2 Sugarcane, the basic raw material for sugar
was found growing in the wild. Human beings,
later on started cultivation of sugarcane in South 1.4 India is a second largest producer of Sugar
East Asia about 50,000 years back. Gradually in the world after Brazil. There are 735 sugar
but steadily the cultivation of sugar cane grew factories in the country as on 31/01/2018 with
and at present it is grown in a large number crushing capacity to produce around 340 lakh
of countries namely India, Brazil, Indonesia, MT of Sugar. In F.Y. 2017–18, India’s sugar
Cuba, Mauritius etc. Sugarcane is the basic raw
production is pegged at 323 lakh MT. Today,
material for gur, sugar and alcohol. Although
Indian Sugar industry’s annual output is worth
these items have been manufactured using
approximately Rs. 80,000 Crores. Sugar industry
other raw materials also but sugarcane has over
is the second largest agro based Industry, next
a period of time, emerged as one of the cheapest
only to the Cotton based industry. It plays a very
and reliable sources of raw material.
important role in the economy of the country. It
1.3 Present economic trends show a great future influences the economy of the country in several
for the sugar industry. The by-products of sugar ways. Some of these are enumerated as under:
industry are likely to play a more important role
than sugar itself. The production activity depends 1.4.1 It encourages sugarcane cultivation
on power, fossil fuels i.e. coal and oil which are and thus provides jobs to a large number of
classified as limited resources and may not last the rural population. Although, agricultural
for more than a few 100 years. In the coming activities provide job opportunities to rural folk
years, therefore, ethanol, a by-product from the in general, sugarcane cultivation provides better
Sugar Industry, is poised to play a major role as opportunity as cash realisation from sugarcane
an alternative fuel for vehicles and power plants. cultivation is much better than any other crop.

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1.4.2 The sugar mills, sugarcane crushers and also depends on maturity of the sugarcane. Fully
kolhoos which are engaged in the manufacture ripe sugarcane harvested at the proper time
of sugar, khandsari & gur provide substantial may give yield upto 14%. The yield however,
employment to the people around sugarcane generally remains at about 11%.
growing areas. This employment is again very 2.1.2 Proper and Timely Transportation:
substantial and plays an important role in the After harvesting, sugarcane starts loosing
rural economy. Sugar cane crushers and kolhoos, moisture. The loss of moisture in turn results
however, sooner or later will be discarded as the in reduced yield of sugar. It is therefore very
percentage of recovery through this process is
important that sugarcane should be transported
very low. to factories and crushed as early as possible after
1.4.3 A large number of jobs are created in the harvesting.
transporting, storing & marketing of sugar, 2.1.3 The Machinery: In order to get
khandsari & gur. These jobs cover rural and optimum yield of sugar from the sugarcane,
urban areas both. Sugar industry impacts rural the mill machinery should be able to extract the
livelihood of about 5 crores sugar cane farmers maximum amount of juice from the sugarcane.
and around 5 lakhs of workers directly employed Continuous repair and updating of the mill
in sugar mills. Employment is also generated in machinery is important in this regard. Old
various ancillary activities relating to transport, machines based on out dated technology can
trade, servicing of machinery and supply of reduce the yield substantially.
agriculture inputs.
2.2 Sugar cane is transported to sugar mills in
1.5 Looking to the importance of the sugar bullock-carts, trucks, tractors or railway wagons.
Industry and its contribution to the national
Sometimes, it is purchased by purchasing agents
exchequer, it is extremely important to appointed by sugar mills for the centres in
understand the working of the industry closely. the region, who in turn send the sugarcane to
the factory. On arrival at the factory, the cane
2. MANUFACTURE OF WHITE SUGAR is weighed on the weighing bridge near the
2.1 In India sugar is manufactured from entrance of the factory. Thereafter, the cane is
sugarcane. In Europe and certain other countries fed into the revolving cane carrier and is broken
beetroot is also used for manufacture of sugar. up with the help of revolving knives.
There are certain well defined areas of sugarcane 2.3 The cut cane is fed into crusher where
cultivation in India. These are Maharashtra, Uttar primary juice is extracted from the cane. The
Pradesh and Bihar. Besides, small quantities are extraction of primary juice constitutes the first
also cultivated in other areas including Punjab process in the manufacture of sugar. Mill House
and Haryana. The sugar mills consequently are is the crushing unit, which consists of cane
also clustered in these areas. The sugar mills carrier, cane cutters and cutting knives, million
purchase sugarcane from surrounding areas and tendom (4 to 6 mills of 3 rollers each), Bagasse
manufacture the sugar from the same. The yield carrier and conveyer.
of sugar depends on several factors. Some of
them are: 2.4 Cane feeding to the cane carrier is done
either manually or by mechanical unloading
2.1.1 Quality of Sugarcane: The yield cranes. As the cane carrier moves, the cane
of sugar depends besides other things, on the kicker evens out the load in the cane carrier and
quality of sugarcane. Different varieties have then two sets of cane knives cut them into small
been developed by various institutes engaged in pieces. This process of cane cutting is called
the development of the sugar industry. The yield cane preparation. On passing the cut cane into

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heavily grooved rollers in the mills, the juice is dried under reduced pressure to the consistency
extracted and the woody fibre known as bagasse of syrup. The syrup is then sulphitated in the
is taken to the boilers and used as fuel. There are syrup Sulphitation tank and filtered, if necessary.
usually 2 or 3 boilers in a sugar factory which 2.7 The next process is the boiling and curing
generate steam by burning bagasse. This unit is process, which results in the formation of white
known as a Boiler House. The steam generated crystal. The unit dealing with this process is
from the boiler is utilised for driving mills using known as the Boiling house. In this process, the
impulse turbines and power generation in turbo- syrup is passed to the vacuum tanks where it is
alternators. The power generated is sufficient boiled until a mist of fine white crystal appears.
for running different electrical units of a sugar More syrup is gradually introduced and the
factory. Depending on the moisture content, boiling is continued to allow the original crystals
fibre content and the condition and type of to grow. When the crystallisation reaches the
boiler, one pound of bagasse produces about 2 desired stage, the whole mass, technically known
to 2.2 lbs. of live steam. as ‘Massecuite’, is dropped into a tank called the
2.5 The primary juice or the liquid pressed out ‘Crystaliser’ where it cools down, thus completing
of the cane is a foaming, turbid and somewhat the crystallisation. Cooled massecuite, containing
muddy grey to brownish green liquid. One kg of crystal and the surrounding liquid known as
this juice comprises of 75–140 gms of sucrose, ‘molasses’ is fed into rapidly rotating copper
840–900 gms of water and 20–25 gms of solids. baskets called ‘centrifugal tank’, where molasses
The juice is sieved to remove particles of bagasse are thrown out and sugar crystals are retained.
and other foreign matter. It is then passed on to The crystals in the baskets are washed, to remove
particles of molasses. The washing, called ‘light
measuring tanks.
molasses’, is collected separately. These crystals
2.6 The next process is that of purification of are then dried with steam and are removed from
juice, called clarification process. The juice is the baskets to a drying cylinder heated by a close
passed on to the juice heater where it is heated. steam pipe or hot air and then passed on to a
Thereafter it enters the clarification tanks where storage hopper. By letting in hot air, the sugar is
it is mixed with milk lime. The lime combines dried and taken to a grader where different grains
with sucrose present in the juice. The unit dealing are separated and bagged. After packing in bags,
with the process is known as clarification unit. it is transferred to stores.
The clarification tanks are either Carbonation 2.8 The final molasses thrown off is of the lowest
tanks or Sulphitation tanks. In the carbonation grade from which it is not profitable to extract
tanks, carbon dioxide gas is passed through the further sugar. Sometimes this waste is stored
solution. It combines with lime already present for re-processing during the following crushing
in sugarcane juice to form calcium carbonate, season, either in the form of ‘massecuite’ as such
which settles down as a precipitate, carrying or in the form of brown sugar after separating
with it many impurities. The sugar remains the crystalline mass from molasses. Molasses is
dissolved in the juice. The juice is then filtered to pumped into a tank for storage.
remove the sediments called ‘press-cake’. In the
Sulphitation tank, sulphur dioxide is pumped in
the lime juice. The sulphide mixture is then boiled 3. YIELDS
and allowed to settle. The clear juice is decanted 3.1 The variations in percentage yield of
while the muddy juice at the bottom of the Baggase and molasses are mainly due to varying
settling tank is filtered to remove the ‘press cake’ characteristics of the cane, soil condition,
as in the carbonation process. The purified juice climatic changes, etc. In case of press cake,
is then sent to vacuum evaporators, where it is due to high moisture percentage at the time of

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production, there is possibility of loss in weight blended with gasoline or in its original state. It
during storage to the extent of 50%. In general, can also be used as a raw material in various
a large proportion of bagasse is utilised as fuel industrial processes. Ethanol can be made by
for generation of steam. Surplus bagasse, after fermenting almost any material that contains
meeting the fuel requirements of the factory, starch or sugar. Ethanol, when used as a gasoline
is sold to paper mills for being utilised in the component, improves combustion-helping the
manufacture of board. fuel burn more completely. Ethanol blends also
3.2.1 Molasses are also used in production of reduce carbon monoxide emissions. India’s
power alcohol, industrial alcohol and potable interest in improving its energy security stems
spirit. Almost 60% of molasses produced are from its rapidly growing dependence on foreign
utilised for these purposes and the balance 40% oil. The Ethanol blended Petrol Programme
are utilised for preparing smoking tobacco and (EBP) seeks to achieve blending of Ethanol with
some other purposes. Small quantities are often motor spirit with a view to reducing pollution,
used in making lower grades of confectionery conserve foreign exchange and increase value
and golden syrup. Press cake of sulphitation unit addition in the sugar industry.
is used as manure while that of carbonation unit 3.3.2 Earlier, ethanol was allowed to be made
is usually burnt. Ethanol is one such by-product. from C–heavy molasses, a cane by product
that has no sugar content left in it. Whereas the
3.2.2 To make molasses, sugar cane is harvested
B-heavy molasses and sugar cane juice have
and stripped of leaves. Its juice is extracted,
some sucrose content left in them for sugar
usually by cutting, crushing, or mashing. The
production and thus, they were not allowed
juice is boiled to concentrate it, promoting sugar
to use for ethanol production. Recently, the
crystallization. The result of this first boiling is
government has notified a decision to allow
called first syrup (‘A’ Molasses), and it has the
sugar mills to manufacture ethanol directly from
highest sugar content. First syrup is usually
sugarcane juice or an intermediate product i.e.
referred to in the Southern states of the United
B-heavy molasses. Manufacturing process of
States as cane syrup, as opposed to molasses.
ethanol depends upon type of sugar production
Second molasses (‘B’ Molasses) is created from
plant and feed stock i.e. sugarcane juice or
a second boiling and sugar extraction, and has a
B-heavy molasses or C-heavy molasses or
slightly bitter taste.
bagasses.
3.2.3 The third boiling of the sugar syrup yields
dark, viscous blackstrap molasses (‘C’ Molasses), 3.3.3 The new Bio-Fuel Policy, 2018 has
known for its robust flavor. The majority of fixed a target of achieving 20 per cent ethanol
sucrose from the original juice has crystallized blending with petrol by 2030. The current
and been removed. The caloric content of consumption of fuel sets 3300 million litres of
blackstrap molasses is mostly due to the small ethanol requirement to achieve 10 per cent of
remaining sugar content. blending target by 2022 for the entire country
excluding J&K, North Eastern states and Island
3.3.1 Ethanol: Ethanol is an agro-based
territories. In the current season (December
product, mainly produced from a by-product
2018 to November 2019), India is set to close
of sugar industry, namely molasses. Ethanol is
an alternative energy source. When mixed with in on the highest ever of 7.2 per cent of ethanol
unleaded gasoline, ethanol increases octane blending with petrol.
levels, decreases exhaust emissions, and extends 3.4 Proper records are required to be maintained
the supply of gasoline. Ethanol in its liquid form, showing the quantity and value of by-products
called ethyl alcohol, can be used as a fuel when produced, their disposal and the closing balance.

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The basis adopted for the valuation of the by- containing inter-alia the particulars mentioned
products should be reasonable and consistent. therein, relating to the utilisation of material
Molasses should be valued at the controlled rate labour and other items of cost, have to be kept.
fixed by the respective State governments. The The records required to be maintained are in
actual realisation obtained from the sales of by- respect of materials i.e. sugarcane, process
products should be shown in the records. material, consumable stores and wastage,
spoilage, rejections, losses etc. of materials.
4. MAINTENANCE OF RECORDS Further, proper records are to be maintained
4.1 The Cost Accounting Records (Sugar about salaries and wages, steam and power
Industries) Rules, 2011 notified by the utilised and various items of expenses comprising
Government of India, Ministry of Corporate the overheads. Even in respect of by-products,
Affairs, vide G.S.R. No. 872(E) of 7th December, the Rules require that proper records shall be
2011. These are applicable to every company, maintained for each by-product showing its
including a foreign company as defined under receipts/ issues and balance, in quantity and
Section 591 of the Companies Act, 1956 which value.
is engaged in the production, processing or 4.3 Records to be Maintained under
manufacturing of sugar activities and wherein, the CGST Act, 2017: Sugar is a taxable
aggregate value of net worth as on the last date of commodity and as such its manufacture and sale
the immediately preceding financial year exceeds is subject to control of GST provisions. Some of
five crores of rupees;or wherein the aggregate the important registers prescribed by the CGST
value of the turnover made by the company Act are as under:
from sale or supply of all products or activities a. Section 35(1) Read with Rule 56(12):
during the immediately preceding financial year Mandates that every registered person
exceeds twenty crores of rupees; or wherein the engaged in manufacturing of goods has to
company’s equity or debt securities are listed or maintain on monthly basis the quantitative
are in the process of listing on any stock exchange, records of raw materials or services used in
whether in India or outside India. It is obligatory manufacturing and also records of goods
for all such companies to maintain the books of so manufactured including the waste and
accounts containing the particulars specified in scrap thereof. These records are not limited
Proformae A to I annexed to the above Rules, only to quantitative but extends to value
which relate to utilisation of material, labour base also.
and other items of cost in respect of white or
b. Inward and Outward Supply of
raw sugar or both. The books of accounts so
Goods or Services or Both: Registered
maintained should facilitate calculation of cost
person shall maintain the records of all
of production or the cost of sale of sugar during
inward supply of goods and services.
a particular period. Therefore, these books can
Inwards supply includes the supplies on
be of great help for investigation. Wherever a which registered person is liable to pay
sugar factory is registered as a company under tax on reverse charge. In addition to
the Companies Act, it has to maintain the books inward supply the registered person shall
of accounts specified under the Cost Accounting maintain outward supply details of goods
Records (Sugar Industries) Rules, 2011. or services. Rule 56(1) also mandated
4.2 Performa A to I annexed to these Rules, that every person shall maintain true
prescribe that proper books of accounts and correct account of supplies attracting

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payment of tax on reverse charge along 6. SUGAR POLICY AND SYSTEM OF

with the relevant documents including PARTIAL DECONTROL
vouchers, bills of supply, delivery, challan, While at present the government is following
credit notes, debit notes, receipt vouchers, a policy of partial control, it was not always
payment vouchers and refund vouchers. so. It has varied from little or no control to full
c. Stock of Goods: As per Section 35(1) control on distribution and sale of sugar. Under
every registered person shall maintain Section 18G of Industries (Development &
stock of goods. It is also prescribed in rule Regulation) Act, 1951, Central Government has
56(2) that every registered person, other power to control supply, distribution, price, etc.
than a person paying tax under Section of certain articles and under these powers, the
10, shall maintain the accounts of stock Government has been announcing its policy
in respect of goods received and supplied from season to season. The AO should make
by him, and such accounts shall contain himself familiar with the orders that are issued by
particulars of the opening balance, receipt, the Central Government and also by the State
supply, goods lost, stolen, destroyed, Governments regarding such controls. The AOs
written off or disposed of by way of gift should also get acquainted with the sugar policy
or free sample and the balance of stock of the Government in respect of percentage and
including raw materials, finished goods, rates for free sale sugar as well as for levy sugar
scrap and wastage thereof. Here the and correctness of figures of sales disclosed by
phrase “goods received and supplied” is the sugar mills.
used. Rule 56(12) has mandated for every
taxable person engaged in manufacturing 7. TAX INVESTIGATIONS
of goods shall maintain the stock of goods.
7.1 Sugar Recovery
5. EXAMINATION OF PRODUCTION 7.1.1 The first issue to be examined is the
REGISTERS recovery percentage of sugar. The sugar content
in cane (called ‘pol’), as well as the yield of sugar
5.1 It is useful to examine these registers
and compare the figures with the production, i.e. percentage of weight of sugar produced to
purchases, and sales account. weight of sugarcane crushed varies in different
parts of India owing to climatic and soil
5.2 The GST provisions do not exercise day-to- conditions, etc. The percentage recovery of ‘pol’
day check over maintenance of the prescribed ranges from about 8–16%.
registers which are prepared by the employees
of the factory. There is thus no system of keeping 7.1.2 The sugar recovery depends on various
constant watch over the day-to-day postings factors e.g.:
made in the various registers. The entries and i. Sometimes sugar factories start operations
postings in the registers may sometimes be earlier than the normal start of the season,
tampered by the employees at the instance of the or close late, in order to claim Excise
factory owners with a view to suppress the actual Rebate. Early crushing results in crushing
output of sugar. Therefore, the authenticity of the of immature cane and late crushing in
GST records also needs proper scrutiny by the crushing of dry cane.
AOs during assessment. These records should
be tallied with the records maintained under ii. Even distribution of rainfall during the
the Income-tax Rules and the Cost Accounting main growth period of cane viz. July to
Records (Sugar Industry) Rules, 2011. September.

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iii. Variety of cane. commission basis. Hence information

can be gathered from such societies and
iv. Soil, climate, etc.
the quantity purchased shown in their
7.1.3 The disclosed yield should be compared records can be tallied with the quantity
with the corresponding figure of the preceding shown in the books of sugar mills. In
season and also with the yield shown by some States, mills have also to pay a cess
comparable factories in the neighbourhood to the Cane Development Societies on
for the season. Even slight variation in yield the basis of purchases. Arithmetic tally of
makes a large difference in the total production. the commission and cess paid to the Co-
Therefore, the question of reasonableness of operative society and Cane development
the yield shown, should be scrutinised closely. society provide a check on the quantity of
Wherever the disclosed yield is found to be cane purchased.
low, assessee’s explanation should be called
iv. Supply of sugarcane from the farms of
and examined. In case the explanation is not
the directors/ partners/ proprietors of the
satisfactory, it must be examined whether the
factory, requires special scrutiny. The total
production has been understated.
supply of cane and the yield of cane per
7.1.4 Low yield can also be the result of acre in their farm should be found out. If
inflation in the quantity of sugarcane purchased. the yield of sugarcane is obviously high,
In this connection, the following points need this may indicate inflation in the weight of
special attention: sugarcane supplied by them. In one case,
i. The weighment records of sugarcane at the it was found that fictitious purchases were
factory contain details of the lorries & other recorded in the books of the company,
transport by which the cane was brought. showing purchases of sugarcane from the
The entries are in chronological order of directors of the company. Since the AO
receipt. It is possible to inflate the quantity noted that alleged purchases from the
of sugarcane purchased by manipulating directors were rather high, he pursued the
these records. It is, therefore, advisable to matter, and found that gate passes for the
go through and test check purchases with alleged purchases were not issued from
the original weighment sheets or registers the regular serially numbered book, which
maintained. Bulk of the cane purchased is was in use during the period. He also
usually through co-operative societies. In found that the stocks of sugarcane claimed
such cases manipulation of the quantity of to have been received from the directors
cane is less likely. More critical examination in the factory premises were weighed on
may be necessary in respect of direct a different weigh bridge and so did not
purchases. bear the regular weighment slip number,
which appear on the purchases made in
ii. The supply of cane is regulated through the normal course. The AO established
tickets or supply slips issued by the Cane that purchases allegedly made from
Marketing Union, to suppliers in the area. these directors were fictitious recorded in
The tickets or supply slips are retained in the books of the company to inflate the
the records. If there are suppliers without quantity of sugarcane purchased.
such tickets or supply slips, the genuineness
of such supplies should be investigated. 7.2 Understatement of Production
iii. In most places, sugarcane is purchased 7.2.1 The understatement in production is more
through Co-operative societies on difficult to detect in view of the detailed records

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which are kept in terms of the requirements of Mills. Similarly, the yield declines after March
GST Authorities. Only a detailed checking of and April on account of warming of the climate
the daily stock register may give some indication and hardening of sugarcane. However, if there
or clue where the production figures have been are variations within the same month, fortnight
manipulated. The entries contained in the or week i.e., suppose the yield in the first week
relevant GST registers should be test-checked, of December is 11% and the same is only 9% in
with reference to the records maintained by the second week of December, it requires deep
the sugar mills. If the production figures are analysis and enquiry, as in the normal course
manipulated over a period of time, such a test- there should not be any variations in such a short
check may lead to points on which detailed period. The Sugar Mills normally have analysis
investigation may be called for. laboratories, where the sugarcane is analysed for
its sugar content on daily basis. The Laboratory
7.2.2 One of the agencies to which a reference
records may be called for and examined in order
can be made is the Directorate of Sugar,
to establish the understatement of the yield.
Department of Food, Ministry of Agriculture,
Delhi. Various Sugar mills are required to forward
the details of production to this Directorate. 7.3 Under-Statement of Sale
In case, the AO finds any discrepancy in the 7.3.1 The market rates of sugar are quoted on
production figures as per account books and a daily basis in various newspapers including
as per GST Registers, he can call the details of Economic Times, Financial Express etc. The
production from this Directorate for comparison reported rates of sugar during the period
with those available in the account books and relevant to the assessment year should be found
the Excise registers. Any additions on account out to ascertain the reasonableness of the sale
of marginally low yield without finding out any price shown. Most of the mills sell sugar through
discrepancy in the purchase of cane or production commission agents at a fixed percentage of the
of sugar, is unlikely to survive in appeal. sale proceeds. Sometimes this percentage is
7.2.3 The yield of sugar depends on various abnormally high. In such cases the commission
factors as raw material i.e. sugarcane is a ground agent/ broker may be summoned as well as the
produce. As such the variety of sugarcane, the commission/ brokerage paid to them by other Mill
condition of land, the motivation and training owners should be compared in order to establish
of the farmers and climatic conditions play a that an abnormal brokerage is paid to these
major role not only in the yield of sugarcane per commission agents/ brokers. The management
Hectare, but also in the yield of sugar. Sugarcane receives substantial part of the brokerage shown
which is properly crushed at the appropriate in the books. In one of the cases at Muzaffar
time after harvesting gives better yield. However, Nagar, it was clearly established by the AO that
delay of few hours in harvesting and crushing excessive commission has been paid by one
results in decrease of yield. The yield of sugar of the leading sugar mills. An important item,
varies between 9–14%. This variation of upto which figures in cases of sugar factories, is the
5% provides a vast opportunity to manipulate sole selling agency commission. Even in times of
records for suppressing the actual yield. While complete or partial control, the sugar mills have
examining the accounts, monthly freight and been continuing with the system of sole selling
daily production details should be obtained and agents. In times of shortage of sugar, no services
analysed critically. It should however, be borne at all are expected to be rendered by them and
in mind that in the beginning of the season, during the period of full or partial control, their
which starts from November or so, the yield is role is limited. Most of the sole selling agents are
less due to immature sugarcane coming to the closely related to the owners of the sugar factory.

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It is, therefore, necessary to investigate whether Section 263 but the Appellate Tribunal set aside
the sole-selling agent have rendered services the order of the Commissioner. Thereafter, the
& remuneration or commission paid to them AO reopened the assessments and completed
is disproportionate to the services rendered by the same after adding the additional sale price.
them. If a proper investigation is made, it may The company, has challenged this reopening
be found that the remuneration or commission before the appellate authorities. In another case,
paid to them is not fully justified. The Company the assessee excluded the excess realisations
Law Board has decided against the appointment resulting from higher price charged for levy sugar,
of sole selling agents for sugar industries and this from the sale credited in the trading account and
decision has taken effect from 5th September, claimed during assessment proceedings that this
1980. This should show that in times of shortage sum has been credited to levy sugar equalisation
of sugar as is found in the present period, the fund, and it should not be treated as its income
appointment of sole selling agents can not be till disposal of the appeal by Supreme Court.
said to be justified on business consideration. The assessee’s plea was not accepted by the
AO on the footing that in mercantile system of
7.3.2 Differential Sale Prices Realised: In
accounting followed by the assessee, income
recent years many sugar mills have realised some
accrues when the assessee acquires the right
additional sale price in respect of levy sugar which
to receive it, and in the accounting year under
is in excess of the price fixed by the government.
consideration, the enforceable price was the one
Such excess realisations have not been credited
fixed by the High Court. The assessee did not
in the trading receipt and are often shown as
file appeal. Action under Section 147(b) was
liability in the Balance Sheet. This is on account
also taken by the AO for earlier years to bring
of the fact that disputes have arisen between
to tax such excess realisation, since, at the time
the sugar factories and the parties, who claim
of original assessment, the assessee had failed
the extra price as refundable to them. In some
to disclose the fact that the sales credited to the
cases, the High Courts and Supreme Court have
trading account did not include the sums realised
passed decisions adverse to the sugar factories.
as a result of higher price fixed for levy sugar by
As a result of adverse decisions, the extra price
High Court.
on the sale of levy sugar alongwith the interest
thereon, has become refundable. In some other 7.3.3 Sales and Profiteering
cases disputes are still pending in the courts.
i. Even after the introduction of controls in a
Though the issue regarding the taxability of such rising market, first in July, 1959 (removed
additional sale price is not finally settled, the AO
on 27th Sept. 1961) and then on 17th April,
should properly investigate the matter relating to
1963 and 12th Sept., 1979, there was black
this additional sale price. If the additional sale
marketing of sugar on account of a large
price or part thereof has not become refundable at
demand and short supply. Even under
the close of the accounting year, the same should the scheme of partial control, which was
be treated as forming part of the sale proceeds, in operation since 1967 except for a brief
even if it is not credited in the sales account. In period in 1978 and 1979, there has been
one case, the AO treated the additional sale price a lot of profiteering in respect of free sale
realised by the company on sale of levy sugar, sugar, depending on the demand and
as a mere deposit on behalf of the consumers shortage in supply. The mills as well as the
liable to be refunded and as such it represented whole-sellers very often resort to various
the company’s liability and he did not tax it as ways for concealing their extra income from
part of the sale proceeds. The Commissioner of the high price charged in respect of free sale
Income-tax cancelled the order of the AO under sugar. Sometimes, sugar mills earn extra

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profits by charging ‘on money’ on sugar issues and balances both in quantity and value
sales direct from the purchasers. At other have been kept as a pre requirement of Cost
times, they introduce their employees or Accounting Records (Sugar) Rules, 2011. In
some other relations as benamidars, who factories employing sulphitation process, press
act as bogus intermediaries between the cake is used as manure and so similar records
mills and the real purchasers. In times of should be kept in respect of press cake in such
control, the sales are shown to have been factories. In respect of molasses, the AO should
made to such bogus intermediaries at verify whether proper record has been kept
controlled rates and when there is partial tank wise and whether draining out of molasses
control or decontrol, the sales are shown at is authenticated. The Controller of molasses
a price, which is below the actual price in allocates the molasses produced to distilleries
the market. It is very difficult to establish the and some other industrial units. If molasses
receipt of ‘on money’ because at the time remain unlifted in open tanks, the brie and
the transaction is entered the manufacturers total sugar contents deterioriate, and molasses
and the wholesalers take all the necessary become unfit for distillation and other purposes.
precautions. However, the ‘on money’ In rare cases, the Excise authorities allow the
sugar mills to drain out such stock to make space
charged on sales, is likely to be introduced
for storage of new stock. Sometimes it may
in the accounts of mills in the form of cash
happen that some stock of molasses is shown
deposits. Such deposits, therefore, need
by the sugar mills as drained out, but it is not
thorough investigation. The bulk of the
actually drained out and such molasses is sold
‘on money’ charged by the mill normally
to dealers outside the books of accounts. In one
goes to the managing agents, managing case, the assessee claimed that about 40% of the
directors or other persons in charge of the closing stock of molasses was drained out and
management of the company. The AOs hence the same was claimed as wastage. The
should therefore be vigilant. They should assessee filed a copy of Inspector’s note from
make a thorough probe into their affairs at the Excise Officer (Molasses), which showed
the time of making their assessments. that two out of five tanks were drained out at
ii. One of the co-operative sugar mills certain points of time in terms of the order of
in North India earned huge profits on the Excise Officer (Molasses). The AO checked
account of better yield in a particular year. the entries in the Molasses register, pertaining to
The management, however, decided to these two storage tanks. He noted that the date
suppress the profits. The Management on which the stock in the two tanks was certified
suo-moto increased the purchase price of by the excise authorities as unfit on the ground
sugarcane after the close of the accounting of brie and sugar content being below certain
period. This enhanced purchase price was figures, the entries were found to be wrong, with
shown in the Balance Sheet as outstanding reference to the registers kept by the assessee.
On these facts, the AO held that the assessee
to farmers. A fraction of this amount was
has been manipulating the records in collusion
paid to farmers. This was detected by the
with local excise officials and rejected the claim
AO who added the amount being not due
regarding the stock of molasses having been
to the farmers. The Appellate authorities
drained out, in entirety. In this case, some of the
upheld the addition.
material found at the time of a search and the
7.4 By-products: Bagasse is mainly consumed statement of employee recorded at that time,
in the mills as a substitute for firewood. However, corroborated that the stock of molasses shown
wherever the bagasse is sold, it should be as drained out, was in fact sold to dealers outside
seen whether proper records of receipts and the books of accounts.

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7.5 Ethanol is allowed to be produced from mills is that Excise duty is payable on sugar when
sugarcane juice and intermediate molasses. As it is despatched from the factory. If the basis of
per National Sugar Institute, Kanpur, ethanol valuation is the market rate, then the correct
yield arrives at 296.8 litres per ton and 235.5 method will be the market value of stock less the
litres per ton for B Heavy molasses and Final Excise duty payable on the quantity of stock. It
molasses respectively. In trial done at Dhampur may be that some concerns might value part of
Distillery, the yield arrives at 281.8 litre per ton closing stock at lesser rate on the ground that it is
and 225 litre per ton for B Heavy molasses damaged. In that case the AO has to see the sale
and Final molasses respectively. Therefore, the in the subsequent years to verify the explanation
AO is required to check quantative details of from the registers maintained for GST as specific
consumption of molasses for ethanol production. entries in regard to the damaged sugar is to be
The Oil Marketing Companies (OMC) are made therein. Sometimes the sugar mills value
to procure ethanol from domestic sources. the work-in-progress and finished goods on
Government has notified administered price of cost basis. In such cases the cost records may
ethanol since the year 2014. For the previous be looked into to find out the cost elements of
ethanol supply year 2018–19, the ethanol the sugar that have been taken into account. In
procurement by OMCs is estimated to be 200 one case the cost basis was followed by reducing
Crore litres. For ethanol supply year 2019–20 certain percentage from the market price, which
(i.e. 1st December 2019 to 30th November 2020), was worked on the basis of sales. This sort of
the government has fixed remunerative price valuation can not be resorted to while valuing
for ethanol procurement based on raw material the stock on cost basis. The Cost Accounting
utilised for ethanol production as follows: Records(Sugar) Rules, 2011 stipulate that the
i. From C–heavy molasses at Rs. 43.75 per method followed for the cost of work-in-progress
litre. and finished goods stock should be indicated
in the cost records, clearly mentioning the cost
ii. From B–heavy molasses/ partial sugarcane elements that have been taken into account
juice/ sugar/ sugar syrup route be fixed at in such computation. The Rules do not state
Rs. 59.48 per litre. that these items should be cost accounted in a
iii. Additionally, GST and transportation definite manner. On the other hand, there may
charges will also be payable. OMCs be certain flexibility but this flexibility can not be
have been also advised to fix realistic extended to allow the working of cost, which is
transportation charges so that long arrived at by making some percentage deduction
distance transportation of ethanol is not from the market price. Whatever is the method
dis-incentivised. of valuation of closing stock, the same should be
consistently followed. In one case, the assessee
Government has reduced the GST rate on was valuing the free sale sugar on the market
ethanol meant for Ethanol Blending Programme price, but in one particular year, it was valued
(EBP) from 18% to 5%. on cost basis. The stock was revalued on market
The AO is also required to look into consumption price and the resultant difference was added to
of molasses, production of ethanol as well as the income.
supply of ethanol to OMCs quatity-wise.
7.7 Interest Payable Pertaining to
7.6 Closing Stock: The valuation of closing Additional Sale Price Realised: Another
stock should be examined in the same manner item, which has featured in recent years, is the
in which it is examined in other manufacturing interest payable on bank guarantees given to
concerns. The special feature in respect of sugar the courts for refund of the extra price realised

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on sale of levy sugar. Most sugar factories have by the Sugar Mills. Similarly the relationship
been realising, some additional sale price, between management and suppliers should also
in respect of levy sugar, over and above the be looked into. In cases where the gunny bags
price fixed by the Government. Disputes arise have been purchased through an agent, there is
between the factories and the parties, which are higher possibility of over statement of the price.
taken to the courts. Where the disputes have In fact, the overstated or excess purchase price
been settled in the court, the sugar mills are paid to the suppliers is received back by the
required not only to refund the additional sale management as their unaccounted income.
price realised, but also to pay interest in terms of 7.8.2 Lubricants and Diesel etc. are used
the orders of the courts. It is to be ensured that in a large quantity and are required by the sugar
the liability for interest is allowed as deduction mills for various operations. The quantities and
in the year in which it becomes an ascertained account of these purchases should be compared
liability in the terms of court’s order. In some with the preceding year’s consumption. Also
cases, interest is debited to the Profit and loss the quantities purchased during the various
account, including the interest charged by the period should be compared with the seasonal
assessee in its books in respect of additional sale
requirements of these items. Quite often huge
price realised which is credited to the account of quantities of these items are purchased at the
levy sugar equalisation fund. In one case, while fag end of the financial year and also shown
allowing fixation of additional interim price for as consumed. The average consumption per
levy sugar, the High Court directed that in case month/ fortnight etc. should be worked out and
the assessee failed in its plea for a higher price it should be seen whether the quantity purchased
for levy sugar, the difference should be refunded during the fag end has been really consumed. In
along with interest at the rate of 12.5%. Since at case they could not have consumed it naturally
the time of finalisation of relevant assessment, the conclusion will be that only bills have been
the issue was pending before Supreme Court produced and payments have been siphoned
on a reference made by the Government, the off by the management. It may be quite possible
AO took the view that the case having not been that suppliers may not have any ready stock of
disposed of, no liability towards interest could be those lubricants and oils etc., when the purchases
said to have accrued or arisen during the year have been shown.
and accordingly the claim for deduction of such
interest was disallowed. However, in the event of 7.8.3 Repairs & Maintenance: Sugar
the assessee finally losing the case for additional production is a seasonal industry. During
price of levy sugar and becoming liable to refund the season the industry runs 24 hours as the
the excess amount alongwith interest, the claim production is a continuous process. The season
for deduction of interest may have to be accepted may last from November to May and therefore
in the year of final decision by Supreme Court. after the season all the sugar mills go for large-
scale repairs and maintenance schedule. The
7.8 Overstatement of Expenses details of various items/ parts purchased for
7.8.1 Gunny Bags and other Packing repair and maintenance should be analysed
Material are required in packing and selling critically. Wear and tear normally occurs in
the sugar. The packing material by an Agent is respect of bearings, taps, valves, etc. Other major
purchased at higher rates than the prevailing repairs on account of motors, gears, pipes and
market rate. In this regard the rates of various containers are occasionally repaired, but quite
packing material including gunny bags as often the management obtains bills from the
quoted in the various Economic Journals should suppliers whereas no replacement of a particular
be compared with the purchase price shown item is done. For instance, replacement of gears

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and rollers are shown on a large scale. These showed an artificially inflated non-taxable
are very heavy items and if they have been income on agricultural operations and thereby
replaced, the scrap value obtained should also reduced the taxable income.
be scrutinised. However, neither the scrap value 7.8.5 Loading and Unloading Expenses:
is shown nor these items are shown in the closing Inflation of loading and unloading expenses is
stock. Physical verification even after one or two another method of reducing the trading profits.
years may give results in this regard. It needs When the cane is purchased at the outstation
to be emphasised that where bogus purchases centres, the same is to be transported to the
have been shown in these items, there may not factory site. The factories usually deal with
be proper transport documents, installation bills, two sets of contractors–one for loading and
trial details etc. unloading and the other for transport from the
7.8.4 Inflation of Purchase Price of purchasing centres to the factory site-and written
Cane: In addition to inflation of the quantity agreements are entered into with the contractors.
of sugarcane consumed there is a possibility of For, unloading cane from farmer’s carts and then
inflating the purchase price of sugarcane. The loading them into trucks, written agreements are
possibility of inflating the purchase price of entered with the contractors. No hard and fast
sugarcane exists in respect of direct supply of rules can be laid down for loading, unloading
crushed cane purchased from sugarcane growers and stocking. This will depend upon the local
as well purchases made through Co-operative labour conditions and availability of adequate
Societies. Even though the minimum price for work at the purchasing centre to keep the labour
the purchase of cane is fixed for a particular fully employed. These things have to be kept in
year, the factory owner may claim that the price mind by the AO to judge the reasonableness of
paid for the cane crushed is higher than the the charges. Further, the rates paid in the past
minimum rate fixed by the Government which as well as the rates paid by other mills in the
is generally justified on grounds of a higher neighbouring areas should also be considered in
recovery percentage of sugarcane. The AO this regard. In one case the factory submitted an
should verify the actual recovery percentage of excess claim for loading and unloading charges.
sugar in the factory and if it is low, there may be The factory did not produce written contracts
reason to suspect that sugarcane of low quality with some of the loading contractors, although
has been purchased. In one case, enquiries were these were specially called for. The AO noticed
made directly from the farmers who were said that the charges paid were much higher than the
to have supplied the cane at a price higher than rates at which other mills of the area were making
the minimum but the statement of the farmers payments for similar work. Some parties in
did not corroborate the purchase price shown. respect of whom original agreements were filed,
Where a sugar factory owns a sugarcane farm, were called and examined. One of the contractors
an attempt might be made to inflate the purchase admitted before the AO that out of payments
price of sugarcane produced at the farm. Rule 7 received by him from the Mill for loading and
of the I.T. Rules, 1962 provides that the price of unloading, he used to part with certain amounts
the sugarcane debited in the books should be which were given back to the assessee. Another
at the market rate. In one case, the company contractor who was examined, gave valuable
having a large sugar factory, owned a sugarcane information regarding the fact that the assessee
farm. It debited the purchase price of its own had been regularly inflating the loading and
cane at a much higher rate as compared to the unloading expenses. When some vouchers were
rate for the best variety of sugarcane available shown, he denied that they bore his signature.
in the locality. The result was that the company He admitted that the actual amount paid to him

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was only 50% of the contract rate. On these facts, out as a percentage of cane crushed and then
a part of the loading and unloading expenses compared with similar figures of the preceding
were disallowed. Sometimes the transport years. The normal requirement of firewood for
contractor is made responsible for shortages on firing boilers in the beginning of the season
the weighment at the factory site. In such cases varies from three thousand to five thousand
the contract rates are to be slightly higher. Care maunds. It may so happen that sometimes there
should be taken to see that no transport charges may not be any increase in the consumption of
are claimed in respect of cane supplied directly one item compared to the last year and there is
at the factory gate. lesser consumption of some other items. In order
7.8.6 Consumption of Power, Fuel and to have an idea of overall consumption it may
Process Store: The expenses under these be kept in mind that the ratio of consumption of
heads are debited to the trading account. These coal to bagasse is 1:3 and firewood to bagasse
should be compared with earlier year’s expenses is 1:2. In certain cases coal and firewood are
and wherever these appear to be excessive, it supplied free to the staff and also used in the
should be checked whether proper records have guest house. In view of this, the issue of these
been maintained to show the receipts both in items should be scrutinised thoroughly.
quantity and cost.
7.8.6.2 Bagasse: After the juice has been
7.8.6.1 Coal and Firewood: For running the fully extracted, the bagasse automatically
boiler, bagasse is used as firewood. Normally the moves into a furnace on a revolving conveyor
bagasse is sufficient to meet the fuel requirements belt. However, it is possible to lift bagasse from
in the case of the mill but in certain cases coal the belt and sell it to the parties concerned for
and firewood have to be utilised in addition manufacture of cardboard, glass etc. In view of
to bagasse as they are substitutes for bagasse. this, the assessee’s plea that the whole of the
It is necessary for the Assessing Officer to look bagasse stood consumed for manufacture of
into the comparative figures of consumption sugar should be critically examined.
of bagasse, coal and firewood in production of
sugar for the previous years as well as the years 7.8.6.3 Lime and Lime Stone: This is used
under consideration. He can also look into the for purification of sugar. In the carbonation
comparative figures of various sugar mills located plant, this requirement is more as compared
in the same region. If consumption claimed is to the Sulphitation plant. Sometimes the
excessive, then the claim has to be examined in company straight away buys lime from outside
detail. Although the bagasse is normally sufficient and sometimes buys limestone and converts it
to meet the fuel requirements in the case of mills into lime. For conversion of limestone into lime
with large capacity and constant supply of cane, the small pieces of limestone and coal are put
Coal/ fire wood may be required during off- together into the furnace and with the heat and
season (when the boiler may be required to run water, it converts into lime. During the process
for some maintenance operations) or for a few of conversion, certain pieces of big limestone
days at the start of the season or when there may do not melt and they have to be reprocessed for
be temporary stoppage in the crushing of cane. conversion. At the same time certain very small
The claim of coal and firewood should therefore pieces of lime stone also remain undissolved
be examined keeping this aspect in view. The but these cannot be put into the furnace again
position however, will be different if the entire or and they are kept apart and sold to various
substantial quantity of bagasse is sold to some contractors for construction of buildings, etc.
other sister concern or to some outside agency Generally such sales are not shown in the books.
for the manufacture of strawboard, etc. The Therefore, during investigation this point has to
quantity of coal and firewood is generally worked be kept in mind.

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7.8.6.4 Sulphur: Consumption of sulphur In season, they are used for running various
should also be compared with the previous machines, turbines and engines. In off-season,
years and its ratio to production should also be they are used for running the workshop machine.
compared. Comparison should be made with The use of lubricants is more at the start of the
other factories, but it should be ensured that factory operations and lesser during running of
the comparison is with a factory using the same the factory, as at the beginning of the season,
process. the oil has to be filled in chambers of various
7.8.6.5 Diesel Oil or Crude Oil: Under this machines.
head consumption of two items is claimed i.e. 7.8.6.8 Electricity Expenses: The units of
diesel oil and crude oil. High-speed diesel oil and electricity consumed can be verified from the
crude oil are used for running the engines which records of the factory and from the electricity
are used to generate electricity. The assessee department of that area. The expenses of
sometimes claims that due to power shortage electricity are more during the season and they
they had to run generators for the production are less during off-season. During off-season, the
of electricity. This claim has to be critically electricity may sometimes be consumed in the
examined. Sometimes the electricity is supplied workshop for manufacturing of machines and
to the staff residing in the locality and also for the excessive expenses may relate to an item of new
repairs to the machinery etc. The staff of the mill machinery, which may be claimed as revenue
normally stays in the compound of the mills and expenditure. The excess on account of electricity
it is not unlikely that in some cases the electricity charges will however correspondingly reduce
may be supplied from the mill. In case, any the expenses on diesel oil. As such, the expenses
amount is charged from the staff for providing on diesel oil may be kept in mind while critically
electricity, it is to be seen whether this payment examining the electricity expenses.
is accounted for or not. If there is no decrease in 7.9 In brief, no hard and fast guidelines for
electricity expenses during the month in which
investigation of the cases of sugar mills can
such consumption of diesel oil is claimed, it
be devised. Every sugar mill is located in a
should be ascertained for which purpose the oil
specific area having its own advantages and
has been consumed. It could be that, there has
been some manufacture of machinery in the mill disadvantages. Therefore, each case has to be
in such a period and in that case the expenditure tackled in its own way. Still some broad principles
has to be capitalised. can be summarised below-

7.8.6.6 Filter Cloth: Like other items 7.9.1 The yield of sugar and other by-products
consumption of this item has to be compared i.e. molasses, Bagasse, etc. may be compared
with the previous years. In addition to the filter with the assessees own results declared in the
clothes, the mills also use a rough cloth known preceding years. The yields may further be
as ‘hessien cloth’ to support the filter cloth. It has compared for different months as the yield varies
to be kept in mind that the consumption of filter from month to month during a season. The
cloth may vary a little according to the purity of sugar yield is less in the beginning of a season,
juice but not much. it goes up gradually and then it decreases at the
end of the season.
7.8.6.7 Lubricants: The month-wise
consumption of lubricants and its ratio with 7.9.2 The sale price of different products should
production can throw light on the genuineness be ascertained from the market during different
of the expenses. However, it may be mentioned months of the accounting period and compared
that the lubricants are used in off-season also. with the assessee’s results carefully.

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7.9.3 Commission paid to selling agents above items or the same is deducted at a very
and other persons may be compared with the concessional/ nominal rate. The AOs are advised
preceding years and also with the commission to obtain the details of perquisites provided
paid by other sugar mills located in the nearby to the employees and work out the value in
areas. accordance with the Income-tax Rules and pass
on this information to the AO dealing with TDS
7.9.4 The purchase price of various consumable
matters of that sugar mill.
including gunny bags, grease, lubricants, diesel,
oil, coal, fuel etc. should be compared with the 7.9.8 The APMC market wise, commodity
prevailing market rates and appropriate enquiries wise price of Agricultural commodities including
and investigations should be carried out when Sugar cane is readily available at http:/agmarket.
the variations are more than the acceptable limit. gov.in. This data is available on daily basis. From
The quantities purchased, used and remaining the above mentioned website, the AO can easily
in the closing stock may be verified. get the market rate of Sugar Cane at APMC of
the area where the sugar factory is situated and
7.9.5 The expenses incurred on repairs and
replacement of the plant & machinery during can then compare the rate with the rate stated
or claimed by assessee. Generally, the price
the off season should be examined critically.
Purchase of important items should invariably provided by broker or factory owner is slightly
lower from the rate offered by APMC as farmers
be cross checked from the suppliers. There are
have to prove that it has actually paid the higher
market information about large scale inflation
rates as claimed by it. Further, the AO can also
of expenses in this area, therefore, not only the
disallow the difference of higher prices claimed
cost of the items should be verified from the
by the assessee by comparing the rates shown in
suppliers but also the cost may be verified from
the books with the highest rate as prevailing in
the manufacturers of similar items.
the APMC.
7.9.6 The closing stock of various materials
should invariably be checked and verified from 8. CONCLUSION
the Banks and Excise Authorities.
This article unravels various aspect of
7.9.7 Many perquisites specially free/ manufacturing processes involved in Sugar and
concessional residential accommodation Molasses. The manufacturing process also results
free/ concessional electricity, telephone, into various by-products too. The AO should
transportation, chowkidar, mali etc. are provided examine the yield of such by-products which in
by various sugar mills to their employees. It has turn will give him/ her a clue as to the actual
been observed that either no tax is deducted production of main products such as Sugar and
at source in respect of these perquisites on the Molasses.

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17
Tea Industry

1. INTRODUCTION
1.1 The word “tea” comes from the Chinese
dialect word “te” pronounced “tay”. In
Cantonese, the character becomes “cha”
pronounced “chah”. In this form, it travelled
to India, Iran and Russia as well as to Japan.
The English adopted the word and changed the
pronunciation to “tea”.
1.2 The history of tea in India dates back to
1774 when the first consignment arrived from
China. However, commercial plantation began 1.4 The world production of tea is concentrated
only in 1830s. The tea estates in the earlier days in a few countries like China, India, Kenya,
were predominantly owned by the British who Sri Lanka, Vietnam and Indonesia. In 2016,
raised funds from the London markets. After these six countries accounted for about 85%
independence, the ownership gradually passed of the total world production of tea. They also
into the hands of Indian business houses. Since accounted for nearly 85% of the total tea exports.
1947, the total area under tea plantation has The import markets are mainly in developed
increased by around 40% while production has countries, though with increasing consumption
galloped by more than 250%. in developing countries, there is a gradual shift
1.3 Tea is a popular drink whose demand is of import markets to developing countries.
relatively insensitive to price. However, being 1.5 The average per head consumption of tea
an agricultural commodity, its supply is sensitive varies widely from country to country. In 2016,
to weather conditions. Tea plantation and the consumption was highest in Turkey (3.02
production are highly labour intensive. Labour kg), Afghanistan (2.20 kg) and was around 2
cost accounts for around 60% of the total cost kgs in United Kingdom, Libya, Morocco, Qatar,
of production. Tea bushes begin to yield leaves Taiwan and Ireland. The consumption was
after 5–7 years and have a life span of about 150 around 1 kg in Hong Kong, Sri Lanka, Egypt,
years. This implies that return on new investment Chile, Iraq, China, New Zealand and Iran while
is low and is spread over a long period. in India, it was around 800 grams.

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2. PLANTATION AND PROCESSING 4. INDUSTRY CHARACTERISTICS

Botanically, tea is a tree. For commercial farming, 4.1 Productivity and Quality: The art of
tea is grown as a bonsai, by repeated pruning and plucking, fine-tuned over the last 200 years,
clipping. Tea bushes get ready for commercial requires two fresh leaves and a bud to be plucked
plucking in 5 years and take about 7 years to manually. Tea productivity can be measured
reach maturity. Their life span is over 100 years. in terms of per unit of labour (man-year) and
Productivity is high in the first 30–50 years. The per unit of land (hectare). Mechanized plucking
processing of tea leaves involves crushing of
enhances productivity, but with compromise on
leaves, which leads to controlled fermentation of
quality, coarse leaves also get plucked. When
the present liquor. The processed tea (referred to
tea is in short supply, some producers increase
as “made tea” in the industry) is sold either in
loose form or in packets. productivity by allowing plucking of coarse leaves
with fresh ones. The productivity also depends
on the age of tea bushes, genetic material,
3. TYPES & QUALITY
irrigation, fertilizer, cultivation techniques, etc.
3.1 Tea is distinguished as Black or Green Replantation is also done to replace old bushes
based on apparent colour. While black tea is to improve productivity.
manufactured by deliberate fermentation of leaf
juice, green tea is manufactured by preventing 4.2 Labour-Intensive: Tea industry is very
fermentation. Black tea has a stronger taste labour intensive. The proportion of variable
and liquor. Green tea is light and is perceived elements in labour cost depends on labour
to have pharmaceutical properties. Black tea legislation and extent of casual and temporary
can be of two varieties – Leaf or Dust. Leaf workers employed.
tea can also be processed as orthodox or
4.3 Long Gestation: Tea bushes mature
CTC (Crush, Tear and Curl). CTC production
for commercial exploitation in 5–7 years and
entails accelerated fermentation. CTC gives
remain productive for over 100 years. Major
higher cuppage (almost twice) for the same
part of capital expenditure is to be incurred in
quantity of tea and has a stronger liquor, while
orthodox tea is light and retains an aroma. first five years, which then yields return over the
Tea quality is measured on the basis of liquor, next 100 years.
aroma/ flavour and leaf appearance. Consumers 4.4 Commodity Nature: Tea prices fluctuate
perceive quality differences on the attributes widely with demand supply imbalances. The
of taste, pungency, strength, freshness, colour commodity is perishable and its demand is
and packaging. relatively inelastic to price. While demand has a
3.2 Value Addition: The most popular form secular growth rate, supply can vary depending
of value addition is selling branded tea. This on climatic conditions in the major tea growing
involves not only the packing of tea but also countries. Unlike other commodities, tea price
blending of other varieties to maintain consistency cycles have no linkage with the general economic
of taste. To arrive at a blend, expert tea tasters cycles, but depend on agro-climatic conditions.
sample hundreds of liquors. Convenient drinks
like instant tea (soluble tea powder), tea bags 4.5 Organized Industry: Tea industry is an
(bags are dipped in hot water), ready to drink organized agro-industry. This implies that labour
(served in cans) and flavored tea (with vanilla, law exists and since the dominant mode of tea
strawberry flavor) are becoming popular in trade is through auctions, a large number of
developed countries like the USA and Japan. small producers get fair prices.

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5. GLOBAL SCENARIO for 90% of the total global production and the
top 10 growing 94% of the world’s tea. The
5.1 More than 36 countries spread over all the
major tea producing and exporting countries
continents (except North America) with wide
are China, India, Kenya and Sri Lanka and they
range of agro-climatic conditions between 41’N account for about 80% and 73% of the world
(Georgia) and 35’S latitude (Argentina) grow tea. production and exports respectively. China and
The global production of tea has been increasing India ranked as the largest and second largest,
steadily, doubling in the 20 years’ period from respectively, in tea production. Together, they
2,525 million metric tons (MT) in 1995 to 5,305 account for more than 65% of the world’s tea
million metric tons (5.3 billion kilos) in 2015. production. Other countries like Kenya, Sri
While tea is grown commercially in more than Lanka, Vietnam and Indonesia produce only
35 countries, production remains concentrated about 20% of world tea but control more than
in a few with the top seven producers accounting 50% of the global trade.

Table 1: Share of Major Tea Producing Countries in Production

Country China India Kenya Sri Lanka Vietnam Indonesia Others

2013 38.5% 24.0% 8.7% 6.8% 3.6% 2.7% 15.7%
2014 40.3% 23.2% 8.6% 6.5% 3.4% 2.6% 15.4%
2015 42.7% 22.9% 7.5% 6.2% 3.2% 2.4% 15.1
2016 43.0% 22.7% 8.7% 5.4% 3.0% 2.3% 14.9%

Fig. 1: Global Production Growth 1995–2015 (In M.kgs.)

Source: ITC Annual Bulletin of Statistics 2017

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Table 2: Share of Major Tea Exporting Nations in World Trade

Year Kenya China Sri Lanka India Vietnam Indonesia Others

2013 26.6% 17.9% 16.6% 11.8% 7.5% 3.8% 15.8%
2014 27.4% 16.5% 17.4% 11.4% 7.2% 3.6% 16.5%
2015 24.7% 18.0% 16.8% 12.7% 7.4% 3.4% 17.0%
2016 27.0% 18.5% 15.8% 12.2% 7.1% 2.8% 16.6%

Fig. 2: World Production of Tea 2015 Million kg

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5.2 The total global tea export was 1805 China, Hong Kong and Taiwan are the world’s
million kilos as against total production of 5305 biggest consumers of Green Tea.
million kilos. Kenya, China, Sri Lanka and
India accounted for 25%, 18%, 17% and 13% 7. INDIAN SCENARIO
respectively of the global tea exports in 2015.
7.1 In India tea plantations were started
With a billion plus population, India consumes
in the middle of 19th century under British
about 75% of its total produce. Thus, it has very
management. Commercial tea cultivation in
little amount of surplus tea left for export.
India was driven by the British who consumed
tea in enormous quantities, which they bought
from China. By 1750, they were purchasing
millions of pounds worth of tea every year
from China. Even though the British managed
to counterbalance it with opium trade to some
extent, they found that their tea consumption
was exorbitantly expensive and unsustainable.
This realisation led to a sustained effort by the
British to understand tea production–and start
tea cultivation in India.
7.2 As in end of 2017, India is the second
largest producer and consumer of tea in the
world after China. It is also a leading player in
Fig. 3: World Exports of Tea (Total-1,801 M kg global R&D and is a leading manufacturer and
exporter of tea machinery. Major tea producers
Source: ITC Annual Bulletin of Statistics 2017
source equipment and technology from India.
7.3 The annual per capita consumption in India
6. TEA CONSUMING NATIONS
is low at 800 gm (in 2016) as compared to other
6.1 Tea is the second most consumed drink in countries like in Turkey(3.02 kg), Afghanistan,
the world, after water. Data from the U.N. Food United Kingdom, Libya, Morocco, Qatar,
and Agriculture Organisation suggests that the Taiwan and Ireland. Even though per capita
world drinks about six billion cups of tea a day. consumption of tea is lower in India as compared
The world consumed 2.9 million tonnes of tea to other countries due to its population, the tea
in 2016, up from 1.6 million tonnes in 2002. consumption in India accounts for 19% of the
Global consumption of tea is forecast to reach global consumption. Almost 76% of the total
3.3 million tonnes in 2021. production is consumed within the country. This
distinct position is in sharp contrast with other
6.2 The top three markets for tea by per
producing countries, particularly Kenya and Sri
capita consumption are Turkey, Ireland and
Lanka, which hardly have any strong domestic
United Kingdom. The top three markets for tea
demand and hence are able to export most of
consumption by volume are China, India and
their production
Pakistan. Historically, tea consumption has been
very high in the UK and Ireland. Tea popularity 7.4 Tea production in India has risen to 1267
has been growing rapidly in developing countries million kg in 2016 from around 780 million kg
like India, China, Pakistan and the Middle in 1996. The total area under tea production in
Eastern countries. Major instant tea consumers 2016–17 is approx. 577,480 hectares of which
are USA and West Europe. The largest importers 476,660 hectares are in North India and 100,820
of tea in the world are Russia, Pakistan and USA. hectares in South India.

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 Techniques of Investigation for Assessment Vol. 5

Table 3: India-Tea Statistics

Year Area Production Yield Exports Price
000 Hectares Million kg kg/Hectare Million kg Million Rs Rs/ kg
2012–13 563.98 1135.07 2012.61 216.23 40059.3 127.91
2013–14 563.98 1208.78 2143.30 225.76 45090.9 126.12
2014–15 566.66 1197.18 2112.70 199.08 38236.4 125.59
2015–16 566.66 1233.14 2176.15 232.92 44931.0 127.62
2016–17 577.48 1250.49 2165.43 227.63 46325.0 133.51
Source: Tea Board India

7.5 Regional Variations Table 4

7.5.1 In India, tea is cultivated in 15 states State/ Region Area (000 Salient Features
of which Assam, West Bengal, Tamil Nadu Hectares)
and Kerala are the major tea growing states.
Assam 282.05 Assam tea is grown
These four states account for 97% of the total
here. More than 50%
production of tea in India. Other traditional of Indian tea crop is
states where tea is grown are Tripura, Himachal produced here.
Pradesh, Uttarakhand, Bihar and Karnataka.
West Bengal 142.09 The high-quality
The non-traditional states that have entered the Darjeeling tea is
tea map of India include Arunachal Pradesh, grown in this State.
Manipur, Meghalaya, Mizoram, Nagaland and
Sikkim. Other NI states 52.53

7.5.2 World’s finest teas like Darjeeling, Total North India 476.67
Assam, Nilgiris and Kangra which are famous Tamil Nadu 69.62 The Nilgiris, famous
for their delicate flavor, strength and brightness for high-quality tea,
are produced in India. With diverse agro climatic are located in Tamil
conditions, India produces a medley of tea suited Nadu. Annamalais tea
is also grown here.
to different tastes and preferences of consumers.
The characteristics of each region are distinct, Kerala 36.18 Wayanad tea, Munnar
which sets them apart from one another in tea and Travancore
many ways. tea are grown here.

7.5.3 The main tea-growing regions are in Karnataka 2.22 Tea plantations are
North East India (mainly Assam) and in north mostly located around
Chikmagalur, which
Bengal (Darjeeling district and the Dooars is located in the Baba
region). These two regions account for more Budan Hills of the
than 80% of the total tea production in India. Sahyadris range.
Tea is also grown on a large scale in the Nilgiris
Total South India 108.02
in South India. The tea growing areas in India
during 2016–17 are as follows: Total India 584.69

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 Tea Industry

The state-wise production of Indian tea during

The state-wise production of Indian tea during 2016-17 is given below:
Orthodox tea refers to loose leaf tea produced
2016–17 is givenofbelow:
Production Tea in India during 2016-17 using traditional (orthodox) methods, which
Total Production: 1250.49 million kg involves plucking, withering, rolling, oxidation/
fermentation and drying. CTC (Crush, Tear
and Curl or Cut, Tear and Curl) is a method
Assam: 52.5% of processing black tea where tea leaves are
West Bengal: 28.6% passed through a series of cylindrical rollers with
Tamil Nadu: 11.5%
serrated blades that crush, tear, and curl the tea
Kerala: 4.7%

Karnataka: 0.4%
into small, even-shaped pellets.
Others: 2.3% 8.4 Post-Processing Activities: Bulk tea is
packed in tea chests of standard sizes or gunny
Fig. 4: Productgion of Tea in India During 2016–17 bags with poly liners or paper sacks (which is
very sparingly used in India but is commonly
Source: Tea Board India

Source: Tea Board India

used in Africa). After packing it is grade-named,
8 Tea Processing

invoiced and stenciled, and transported from

8.1 The art of quality tea plucking requires plucking two fresh leaves and a bud. In coarse plucking, 5 or
more leaves apart from the bud are plucked. Plucking being a labour intensive operation, accounts for about
8. TEA PROCESSING
one-fourth of the total cost of sales. Besides this, a tea garden requires continual weeding and pruning. The
plucked leaves are weighed and transported to the factory, where the leaves are withered, rolled, fermented tea gardens to registered warehouses. The
and dried.
8.1 The art of quality tea plucking requires producers, buyers, and brokers have to be
plucking two fresh leaves and a bud. In coarse registered with the auction centre(s). In addition,
plucking, 5 or more leaves apart from the bud a broker needs a license from the Tea Board
are plucked. Plucking being a labour intensive India-the apex tea body in India.
operation, accounts for about one-fourth of the
total cost of sales. Besides this, a tea garden 9. TYPES OF TEA
requires continual weeding and pruning. The
plucked leaves are weighed and transported to 9.1 Different types of tea and their processing
the factory, where the leaves are withered, rolled, methods are briefly discussed below.
fermented and dried.
8.2 Black Tea is the most widely consumed of
all the teas. In the global tea market, the major
production is of black tea, which comprises
about two-thirds of the global production. In
black tea making, oxidation and condensation
of tea catechins or tannins is affected to attain
optimum fermentation.
8.3 Orthodox and CTC are basically the two
major styles of tea production. The tea leaves
produced by these methods are being given their Fig. 5: All-India Category-wise Production
respective names after their production styles. of Tea in India
Table 5
Type of Tea Black Tea Green Tea
Orthodox CTC (crush, tear & curl)
light and aromatic less strong and dark liquor light coloured liquor
cuppage than CTC Darjeeling appearance of dry leaf acts as a preventive against cancer,
tea is also an orthodox tea is granulated twice coronary heart disease, bacterial/ viral
Characteristics but is sold separately due to the cuppage as that of infection
its unique “muscatel” flavour Orthodox (500 cups per kg)

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Techniques of Investigation for Assessment Vol. 5

In the traditional method, Process similar to orthodox Leaves are pan-roasted or steam
freshly plucked leaves are except in the sphere treated to kill the green cells, thereby
withered to induce loss of of rolling to achieve preventing fermentation
Processing moisture. These are then accelerated and intensive
rolled to rupture leaf cells fermentation. This is
and release enzymes. This followed by cleaning to
is followed by fermentation remove excess fibres
and firing.
Sri Lanka, Indonesia, China, India, Kenya, Bangladesh China is the largest producer of green
Growing areas India and Turkey are main and Malawi are the major tea. In India, it is grown in some parts
growing areas. producers of CTC tea. of Dooars, Kangra and South India.
Grades Whole-leaf (size ³ ¾”), Brokens, fannings, dusts Whole-leaf, brokens, fannings, dusts
brokens, fannings, dusts

Table 6: Category-wise Production of Tea in India during 2016–17

Category North India South India All India
Production Production Production
(Million kg) (Million kg) (Million kg)
CTC 969.71 162.09 1131.80
Orthodox 73.40 45.29 118.69
(Darjeeling + Green)
Total 1043.11 207.38 1250.49

Oolong tea, which is not made in India, is an case of instant/ iced tea where caffeine-tannin
intermediate between black and green with precipitate has to be removed.
regard to fermentation.
9.2 Organic Tea: Organic tea is grown without 10. MARKET STRUCTURE
the use of synthetic chemicals or pesticides, 10.1 Auctions: About 45% of the total tea
using only sustainable interdependent produced in India is sold by auction. Tea Auction
farming methods. It commands a premium is a means of disposing the teas produced to a
over conventionally grown tea in the quality- wide range of buyers in a competitive manner
conscious export market. Organic tea growing for fair discovery of price. It always ensures better
is highly knowledge-intensive, labour-oriented realization of tea prices due to competitive bidding
and complex system integrating several organic environment. Auction is especially suited to tea
recycling processes. owing to nature of the commodity with infinite
9.3 Popular Tea Variants: Tea variants, like varieties (based on flavour, age, appearance,
tea bags, instant tea, tea mix, iced tea, frozen pedigree etc.), scattered location of gardens and
concentrates, flavoured tea (in strawberry, wide range of buyers. The auction mechanism
vanilla, ‘masala’, herbal flavours etc.) have been ensures fair price to the producer, continual sale
introduced to popularise consumption. Instant without fear of unsold stocks (as tea is perishable
tea and soluble tea, in the form of dry solid within 1–3 years) and automatic payment
concentrate, liquid tea concentrate and semi collection. This system introduces greater deal
solid frozen products (“slushes”), canned tea of transparency compared to private sale, which
or cold packed tea, are fast gaining popularity. at times goes unreported and is referred to as
The quality parameters are separate in the ‘laddoo’ or black sale in tea trade jargon.

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 Tea Industry
10.2 There are seven registered auction centers in the country - Kolkata, Guwahati, Siliguri, Jalpaiguri in
10.2 There the east and Conoor, Cochin and Coimbatore in the south. Prior to 2009, tea auction was carried out
are seven registered auction Centres for Darjeeling Tea). Such e-Auctions are being
manually across the tea auction centres of the country. Electronic auction for tea was introduced in 2009
in the country-Kolkata, Guwahati,
(except for Darjeeling Tea). Siliguri,
Such e-Auctions are beingconducted
conducted on on electronic
electronic platform platform
provided by provided
Tea by
Jalpaiguri Board
in the east
of India. and Conoor,
Pan-India e-auctionCochin
of tea wasand
implemented from June 2016 across all the auction centres.
The total volume of tea sold at major auction centers inTea Board
2016-17 of India. Pan-India e-Auction of tea
is as below:
Coimbatore in the south. Prior to 2009, tea
was implemented from June 2016 across all the
auction was carried out manually across the
tea auction centres of the country. Electronic auction centres. The total volume of tea sold at
auction for tea was introduced major auction Centres in 2016–17 is as below:
AuctioninQuantities
2009 (except
in Major Centres (2016-17)
Total Quantity auctioned: 541.57 mn kgs

8.4% 2.9%

9.2% 29.5%
Kolkata
Guwahati
Siliguri
Conoor
22.0% Cochin
Coimbatore

28.0%

Fig. 6: Auction Quantities in Major Centres (2016–17)

10.3 Tea Futures: Tea prices show both to be mixed and sold at an affordable price.
random and cyclical variability. Theoretically, Blending may be manual or mechanized and
futures trading
10.3 Teain futures
tea would- Tea be a useful
prices show both hedging
random andgreat cyclicalaccuracy is requiredfutures
variability. Theoretically, to match
trading inthe actual
instrumentteafor producers
would be a usefulto insure
hedging themselves
instrument for producers to insure themselves against price risk. Futures
trading in tea will not only curb volatility but also help‘standard’ in the process asofin miniature
price discovery, blends.
benefiting Theboth blended
against price
buyersrisk.
andFutures trading
sellers. Besides, thisinis tea will tonot
expected tea is then packed to retain the aroma and keep
facilitate greater liquidity and firmer prices over time. Initial
only curb attempts
volatility but also
to launch help
futures ininthe
trading process
tea in India have been made by the Multi Commodity Exchange (MCX)
out viz.,
moisture.At times it has The been
which has initiated talks with all stakeholders in the tea trade brokers, buyers and producers. moveseen that
of price discovery, benefiting both buyers
comes after the Central Government which notified that and the weight
futures tradingofcould
thebeblended
initiated in tea
tea. is slightly higher
sellers. Besides, this is expected to facilitate than that of the combined weight of the various
greater liquidity and - firmer
10.4 Blending prices
Tea blending overcommences
operation time. with qualities of the
the receipt of theteas used from
tea chests for the blending. This
the auction
Initial attempts
centres.toNormally,
launchtea futures trading
has seasonal in teaininquality,is appearance
variations and density. Hence blending is done
obtain consistent quality. Also, it enables differently priced teas to be mixed and sold at an affordableblending.
due to absorbtion of moisture while
India haveto been made by the Multi Commodity
price. Blending may be manual or mechanized and great accuracy is required to match the actual ‘standard’
Exchange as (MCX) which
in miniature hasTheinitiated
blends. blended tea talks
is then packed 10.5
with to retainLoose
the aromaTea andout
and keep Packet
moisture.AtTeatimesMarket: In
all stakeholders
it has in the tea trade viz., brokers,
been seen that the weight of the blended tea is the retail
slightly market,
higher than tea
that of is
the sold in
combined loose
weightor ofpackaged
the various qualities of the teas used for the blending . This is due to absorbtion of moisture while blending.
buyers and producers. The move comes after form. At the start of 2015, about 45% of overall
the Central Government which notified that tea consumption in India was accounted for by
futures trading could be initiated in tea. unpackaged tea. This share dropped well below
10.4 Blending: Tea blending operation 40% by the end of 2016. In 2017, India consumed
commences with the receipt of the tea chests from a total retail volume of 678.20 million tonnes of
the auction centres. Normally, tea has seasonal packaged tea. Packet tea accounts for roughly 50
variations in quality, appearance and density. per cent of the country’s total tea consumption.
Hence blending is done to obtain consistent The segment is currently dominated by brands
quality. Also, it enables differently priced teas such as Tata Tea (a product of Tata Global

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Beverages Ltd), Lipton, Brooke Bond (Hindustan 11.3 Age of Bushes: The tea bush begins
Unilever Ltd) and Wagh Bakri Tea. to give lower yield after reaching the age of
50 years. Out of the total tea acreage in the
11. CHARACTERISTICS OF INDIAN TEA country of about 5.77 lakh hectares (in 2016–
INDUSTRY 17), the bushes with over 50 years of age are
about 1.48 lakh hectares (about 25%). The
11.1 Cost of Labour: Tea is one of the yield increases periodically as newer bushes
most labour intensive agricultural activities. come into production. Increasing replantations,
The main components of expenses in the tea infilling at the tea estates, extension planting in
garden are labour cost, fertilizers, chemicals non-traditional areas and improved drainage
and pesticides. Labour cost involves wages and and irrigation facilities are required to replenish
heavily subsidized food ration to the families of shortages in the long run, although in the short
plantation workers. Plucking is the most labour run the industry may have to tradeoff with
intensive among the operations involved in decreased level of production in line with a loss in
production. Nearly 70% of the labour involved crop through pruning. Apart from low yield, old
in tea production is used for the plucking bush profile also implies increased expenditure
operation and approximately 40% of the cost of on uprooting and replantation. The annual rate
production of tea goes into payments for labour of replantation has not been adequate. Against
involved in plucking operation. Temporary the target of 40,000 hectares for replantation of
workers are employed during the peak period ageing bushes for the 12th Plan ending 2016–17,
of June-October. When production declines, the the actual achievement of replantation is 19,760
labour cost, being fixed, has an adverse effect- hectares only.
leading to higher unit cost of production. 11.4 Soil Conditions and Planting
Material: The yield of tea garden is dependent on
11.2 Productivity: While the tea industry
the condition of the soil. For instance, Darjeeling
has come a long way from production of 570
bushes are low-yielding due to lack of sufficiently
million kg in 1980 to 1250 million kg in 2016,
deep subsoil layer, besides unfavourable climatic
yield per hectare continues to remain low. The
conditions for a major part of the year. Another
average yield per hectare in Assam is around reason for the low productivity of Darjeeling
2330 kg, in Darjeeling around 2510 kg and in tea is that large number bushes are of Chinese
South India around 2050 kg. The average yield variety which are generally low-yielding.
per hectare of North Indian tea gardens vis-à-vis Constant research is being conducted in India
South Indian tea gardens is represented in the to clone bushes. There are different types of
figure below: clones available-ones which give extremely high
yields, others which give excellent quality and in
varying degrees a mixture of the two.
11.5 Labour Productivity: The land man
ratio in the tea crop sector is about 2.5 labour
units per hectare. The productivity per labour is
910 kg in Assam, 957 kg in West Bengal, 1473 kg
in Kerala, 1780 kg in Karnataka and 3584 kg in
Tamil Nadu. The low-yield in Assam is primarily
due to factors such as long plucking rounds
Fig. 7 owing to holidays, employment of large number

282
 Tea Industry

of temporary workers during the plucking 12.3 Borrowings: The source of financing
season, lack of workforce continuity and social of tea industry is made up of equity from
factors such as chronic absenteeism, alcoholism the promoters in the form of land and cash,
etc. Labour productivity is low in Darjeeling loans from commercial banks, assistance
primarily due to hilly terrain, fine plucking and from Tea Board of India and National Bank
shorter plucking season. Mechanization in tea for Agriculture and Rural Development
industry is hampered by hilly terrain, unplanned (NABARD). Loans from NABARD are generally
plantation and unionized labour. It is catching available only for projects which involve an
up in South India where coarse plucking is a extension of planted tea areas and carry a
norm and labour is expensive. Apart from the minimum promoter contribution of 25%. For
above factors, productivity is also a function of manufacturing facilities and machinery, finance
the quality of tea produced (depending on fine is usually arranged under the Tea Board Hire
Purchase Scheme or Bill Discounting Schemes
or coarse plucking method) and the practices of
of financial institutions. Term loans from
individual estates.
commercial banks were available mainly to
large borrowers in terms of cash credit, packing
12. FINANCE IN TEA INDUSTRY credit and bills discounting facilities. After tea
12.1 The fortunes of tea industry, being an agro- was placed as a priority sector lending item
based industry, are susceptible to the vagaries of with reduced interest rates, public sector banks
nature, world crop and stock levels. Long-term are also providing finance to small tea growers.
finance is required for acquisitions, extension/ Financing of tea industry is also being made
maintenance of planted areas, manufacturing through the Special Purpose Tea Fund (SPTF)
facilities, power generation, transport fleet and setup by the Government in 2007.
housing and welfare measures for the employees. 12.4 Future Projections: The global tea
Short-term finance is required for carrying on market is expected to exhibit a 2.80% CAGR
the day-to-day operations. between 2014 and 2020. The world consumed
12.2 Working Capital Management: A 2.9 million tonnes of tea in 2016, up from 1.6
closer look at the working capital management million tonnes in 2002. Global consumption
of tea industry reveals surplus cash during the of tea is forecast to reach 3.3 million tonnes in
months from September to March, when the 2021. In 2016–2021, the global consumption
realizations from the sales (both export and of tea is expected to grow at 15%. More than
domestic) start accruing. The period between half of global tea consumption comes from Asia.
April to August demands high wage outgo for The share of India’s exports tea has consistently
seasonal labour, increased manufacturing costs declined over the years from about 20% in 1986
etc. resulting in deficit. Typically, 6 to 8 weeks to only about 12% of the global trade in 2016.
elapse between plucking to realization through Hence, appropriate strategies and incentives
auction. Payment is immediate from the export need to be in place for encouraging the farmers
market, which is usually realized through a for growing tea and for bringing additional land
forward contract with the producer. Blenders under new plantations of tea in order to catch up
and importers, being bulk buyers, have exactly with the challenges of global demand for tea in
opposite working capital cycles. the coming years.

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Table 7: India: Tea Trends

Year Area under Yield Per Production Exports Retention Sold in
Tea (‘000 Hectare (kg) (Million kgs) (Million kgs) (Million kgs) Auctions
Hectares) (Million kgs)
2012–13 563.98 2012.61 1135.07 216.23 918.84 512.36
2013–14 563.98 2143.30 1208.78 225.76 983.02 531.08
2014–15 566.66 2112.70 1197.18 199.08 998.10 553.02
2015–16 566.66 2176.15 1233.14 232.92 1000.22 536.08
2016–17 577.48 2165.43 1250.49 227.63 1022.86 557.03
Source: Tea Board India

Table 8: Indian Exports

Name of the 2016–17 2015–16
Country Qty. (M. kg.) Value (Rs. Crs.) Qty. (M. kg.) Value (Rs. Crs.)
Russian Federation 45.21 683.38 48.23 670.57
United Kingdom 16.06 316.14 20.02 140.9
Germany 10.79 262.01 10.53 262.76
USA 14.61 405.63 14.03 364.61
UAE 18.84 390.61 16.15 333.65
Iran 24.24 632.82 22.13 571.81
Pakistan 11.13 113.69 19.37 192.61
Others 86.75 1828.22 82.46 1956.19
Total 227.63 4632.5 232.92 4493.1
Source: Tea Board India

13. ACCOUNT BOOKS AND REGISTERS 13.2.2 Registers and Sales Account are
maintained estate-wise because each estate
13.1 Important accounts books kept in a tea
is taken as a separate unit. Therefore, if an
estate are as under:
assessee has more than one estate, there would
i. Green Leaf Account/ Register: This be separate registers for each estate. The tea can
shows weighment of green leaf before it is be moved from one state to another state on
taken for manufacture. issue of waybills only.
ii. Manufactured Tea Weighment
13.2.3 In one case, the assessee was disclosing
Register: This shows output of
its affairs with regard to one estate though it had
manufactured tea from the drier machine.
also taken on lease another estate having no
iii. Tea Book Register: This contains details factory. The green leaves of the estate taken on
of green leaf processed, output of made lease were being manufactured in the factory of
tea and tea waste. the original estate and were being sold. Though
iv. Registers as prescribed in GST Act some of the expenses including Central Excise
Duty in respect of the estate taken on lease were
13.2 Registers
passed through the disclosed accounts of the
13.2.1 The AOs can obtain very useful original estate, the entire production and sales
information from the records maintained under for the estate taken on lease were altogether kept
CGST Act/ IGST Act. concealed.

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14. TAX INVESTIGATIONS costs (plucking, labour, pesticides, weedicides

etc.) also need to be disallowed in that ratio. It
14.1 Application of Rule 8
is observed that generally, the assessees do not
14.1.1 Tea industry has been accorded special disallow these costs suo-motu and hence, the
status in the Income-tax Act, 1961; perhaps due disallowance is necessarily to be done in such
to its importance for the Indian economy. Rule 8 cases.
of the Income-tax Rules, 1962, outlines a special 14.1.4 In some cases, it is found that the
method by which income from sale of tea grown assessees had let out their tea manufacturing
and manufactured should be computed. The plant & machineries to third parties in spare
Rule provides that income derived from the sale time in lieu of which the assessees receive rent.
of tea grown and manufactured by the seller Such rent received on account of letting out of
shall be computed as if it were income derived plant & machinery had been claimed as part
from business but only 40% of such income of composite income by the assessees thereby
shall be deemed to be the income liable to tax. claiming 60% income of the rent under Rule 8
The Rule also states that for computing the as exempt agricultural income. In such cases, the
income due allowance shall be given to the cost tea grown is not on land owned by the assessee
incurred for planting the tea bushes, either as a nor the tea grown belongs to the assessee and
replacement or for planting in areas which had hence, there cannot be any component of
become useless. agricultural income in the hands of the assessee
14.1.2 This Rule is for only those sellers who so as to qualify the rental income on letting out
have grown and manufactured tea. The Rule plant and machinery to be eligible for treating as
lays down the method of computation of income part of composite income. Such rental income
by first computing the composite income from is directly related with the use of plant and
the business of tea garden by way of plantation, machinery and has no direct connection with
agricultural activity or income of the assessee
manufacturing and sale of tea, and then making
and needs to be treated separately out of the
allowances for the deductions permissible under
composite income under Rule 8.
the Act. A ratio of 40% would be applied to the
net profit thus arrived, to compute the taxable 14.1.5 Other Incomes: Rule 8 does not apply
income from tea business. to an income that is not related to tea business,
e.g. income by way of interest on loans advanced
14.1.3 In the cases of assessees who have by tea concerns. However, if the tea business were
incomes from both Bought Leaves and Own leased out to another party for management, only
Leaves, the assessees generally do not maintain 40% of the lease income would be assessable to
separate P&L accounts for Own Leaves and income-tax. In Sookerating Tea Co. (P) Ltd. vs.
Bought Leaves and show the total income CIT (1977 LTR 1255, Gauhati), the facts of the
accruing from Bought Leaves and Own Leaves. case were that, this tea company took loans from
While the income from Bought Leaves is bank on hypothecation of tea crops and out of
completely business income, only the income these loans the company advanced loans to sister
from Own Leaves is subject to Rule 8. Hence, concerns and earned interest thereon. It was held
in computing the total income of such assessees, by the High Court that advancing of loans to
the ratio of green leaves bought to own leaves sister concerns was not in any way related to the
produced should be used to find out how tea business of the assessee and, therefore, Rule
much income is attributable to Bought Leaves 8 did not apply to the interest income received
separately (which is fully taxed) and how much by the company. Such income was liable to be
income is from Own Leaves separately (which included in its total income in full and not to the
is subject to Rule 8). However, the cultivations extent of 40% only.

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14.1.6 The words “derived from” was a subject iv. To bring under plantation new virgin area
matter of consideration by the Supreme Court in so that there is attendant increase in the
Bombay Electric Supply Industrial Co. Ltd. vs. CIT total area under useful plantation. This is
(1976) 113 ITR 84. In the above case, the Apex known as “planting”.
Court held that the expression “attributable to” is Under Rule 8(2), the cost of planting bushes
wider than the expression “derived from”. It was falling by “infilling” or “supplying”, is deductible
held in the above case that whenever Parliament as a revenue expenditure in computing the
wanted to give a restricted meaning, they used the Income of a tea garden. Expenses on the other
word ‘derived from’. Further, the Supreme Court, in three activities mentioned above are capital
the case of Pandian Chemicals Ltd. vs. CIT (2003) expenditure and do not fall within the ambit of
262 ITR 278 (SC), has also upheld the order of Rule 8(2). Therefore, plantation expenses shown
the Madras High Court wherein the High Court by tea companies should be analysed critically
had ruled that the word “derived from” could be to detect whether expenses incurred on capital
construed to include situations where the income items have been claimed as revenue expenditure.
arose from something having a close connection In Karimtharuvi Tea Estates vs. State of Kerala
with the industrial undertaking itself. Therefore,
(1963), 48 ITR 83 (SC), Supreme Court held
interest incomes and other such incomes should that the expenditure incurred for maintenance
not be considered as incomes for the application of immature tea plants till they become
of Rule 8. mature, even though no income was derived
14.1.7 Attempt to ‘Transfer’ Expenditure: from them during the accounting year, is not
Assessees who have income from activities other capital expenditure and is allowable as revenue
than growing and manufacturing of tea attempt expenditure. In MSMM Meyyappa Chettiar
to inflate the income from tea business, while vs. CIT Madras (1962) 44 ITR 775 (Mad), the
reducing the income from other activities by Madras High Court held that once the land is
transferring part of the expenditure pertaining to acquired and made fit for plantation, plantation
the tea business to the other activities or Head is actually laid, and the trees are actually planted,
Office account. the state of capital expenditure ceases. Whatever
is spent thereafter upon maintenance, such
14.2 Tea Bushes: Tea bushes are generally
as weeding, superintendence etc., would be
planted:
revenue expenditure, notwithstanding that trees
i. To replace tea bushes that have died or have not started to yield.
become otherwise unproductive in an area
14.3 No Depreciation on Tea Bushes: The
which is, as a whole, under plantation. This
issue whether depreciation is allowable on tea
is known as “infilling” or “supplying”.
bushes has seen protracted litigation. It has been
ii. To replace useless bushes, en masse, in settled by an amendment to the Act in 1995
an area which had been under plantation which categorically states that although tea bush
in the past but had been subsequently is a capital asset, no depreciation is allowable
abandoned, and had stayed as such. This on the same.
is referred to as “replanting”. 14.4 Agricultural Income: In some tea
iii. To bring under plantation a new area as estates, part of the area is reserved for growing
a substitute for an old and abandoned grass, bamboo and bushes. The income derived
planted area, so that there is no net from the sale of such produce is fully assessable to
increase in the total area under useful tax. There are cases where a portion of the estate
plantation. This goes by nomenclature of area is also utilised for growing vegetables, fruits,
“replacement planting”. paddy etc. In such demarcated areas tea bushes

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are grown for obtaining seeds which the estate the entire tea leaves plucked from the gardens
may be selling outside. In such cases the income is required to be entered in the Register but the
derived from these produce, is agricultural possibility of ex-garden sale of tea leaves outside
income not assessable to Income-tax. The the Register cannot be ruled out. Generally a
expenses on raising such produce should also plucker’s average output per day ranges between
not be allowed as business expenditure. 24 to 28 kg in the gardens in Upper Assam area,
14.5 Sale of Green Leaves: Income derived and 18 to 23 kg in other places. On this basis,
from sale of green tea leaves is treated as a general estimate of output of green tea leaves
agricultural income and therefore, exempt from can be made by the AOs. Further, the normal
Income-tax. Often in arriving at the income net recovery of tea out of the leaves collected
from sale of green tea leaves, tea companies from a tea garden is about 22–23%. If there is a
overstate the agricultural income by claiming less wide discrepancy between the general estimate
expenses for the cultivation of tea, particularly in of output of tea leaves, or tea made on these
those states where the Agricultural Income-tax norms and the corresponding quantity shown
is less than the Central Income-tax. Therefore, in the Register, the matter should be examined
computation of agricultural income requires close critically.
scrutiny. The cost of green tea leaves at times is 15.2 The period of production of green leaves
inflated by inflating the quantity purchased. To is from late March till middle of December,
check the twin inflation of quantity and value, the with periodic ups and downs. In the months of
AOs should call the Central Excise records. The January and February, there is practically no
information available in these indicate whether production of green leaves. In many instances,
the so-called seller had grown tea at all and in it has been seen that assessees, who are mostly
what quantity. These may also give information into production from bought green leaves, are
about prevailing rates of green tea. claiming purchases in the months of January and
February. Such purchases are most likely to be
14.6 Cess on Green Leaves: The Cess on
bogus purchases booked to inflate expenditures.
green leaf is paid for the growing and plucking
of green leafs of tea plants. Growing of tea leaf 15.3 The manufactured tea is graded depending
is purely an agricultural activity and it is quite on its quality and salability, into primary tea,
distinguishable from the total operation of secondary tea and tea waste. Normally 80% of
tea growing and manufacturing. The Hon’ble the manufactured tea comprises primary tea,
15–18% is secondary tea, and remaining 2%
Guwahati High Court in the case of Jorehaut
comprises labour tea, staff tea and sample tea
Group Ltd., has held that Cess on green leaf is to
etc. Companies try to understate the production
be deducted from the 60% of the income which is of primary tea in their books as far as possible
treated as Agricultural Income as per Rule 8 of the while overstating the production of secondary
Income-tax Rules 1962. In view of these, cess on tea, which sells at lower prices. This practice
green leaf is not to be allowed as deduction from of inflating production of secondary tea at the
the composite Income. cost of primary tea does not affect the GST
since the rate of Duty for both is same. It does,
15. MANIPULATION IN PRODUCTION however, matter for Income-tax since this leads
to understatement of sales.
15.1 Manipulation of production starts from the
garden itself. The tea manufacturing companies/ 15.4 Green tea leaves plucked from bushes are
concerns very often conceal a portion of the brought to the factory by labourers and weighed
manufactured tea from their registers with a at different weighment Centres in the estate and
view to avoid GST and Income-tax. Although entered in a Register. The Weighment registers

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are books of primary entry. The labourers are 16. SALE OF TEA
paid wages according to the quantity of green 16.1 Consignment Sales: Tea is mostly
leaf weighed for each of them. Apart from the sold through auctions. Auction Houses are
regular wages, extra incentives are also given to the barometers for the actual sale price of a
the labourers if the quantity plucked is in excess particular brand of tea. Auction fetches the
of the minimum prescribed. In some estates,
maximum sale price for a particular brand of tea
a deduction from weight is made towards
on the day. Despite this, often tea manufacturers
excessive moisture content. Where such practice
sell their stock in open market at a lower price.
is followed, the output of manufactured tea
Of late, ex-factory or ex-garden sales or sales
should be higher.
on consignment basis are being increasingly
15.5 Production of tea is greatly dependent made. The real intention could be to suppress
upon the monsoon conditions. In the event of turnover. Open market sales need verification.
drought, the yield of tea is very low. Similarly In consignment sale, tea is sent to big dealers
hailstorm damages the leaves, buds and plants
on consignment basis to be sold by the latter at
resulting in low production. Therefore, where
a negotiated price agreed before the dispatch.
lower productions are shown it would be
necessary to investigate into the exact causes for Under-invoicing in these sales cannot be ruled
the same. If the assessee claims that the lower out. Consignment sale is also used for avoiding
production was due to drought or hailstorm, he or saving Central sales tax, as in this there is no
should produce supporting evidence. Tea estates transfer of property from principal to agent. An
maintain record of fluctuations of temperature, obvious way to tackle such sales is to compare
rainfall etc. Reports regarding drought, hailstorm the prices fetched on such sales with the prices
etc. also appear in the contemporary journals on prevailing at the auction Centres. Wide variation
Tea showing area wise details. Often the crops in the prices would indicate possibility of
are insured against damages. In these cases suppression of sales.
the assessees receive payments from insurance
companies. 16.2 During searches on a reputed tea group, it
was found that the assessees were making huge
15.6 Consumable: Apart from tea leaves coal, sale of tea through consignment agents outside
light diesel oil, high-speed diesel oil and other
the auction house. Scrutiny of books revealed that
lubricating oils etc. are required for manufacturing
in the sales registers against each consignment
tea. Their actual consumption depends on state
of machinery, quality of inputs etc. In many cases sale, an alphabet such as “E”, “P” or “T” had
AOs apply quantitative consumption ratios for been written in pencil. On an interrogation of
verifying consumption of these items vis-a-vis the the concerned officials, it was found that these
quantity of tea manufactured. If disproportionate alphabets represented their respective number in
consumption of these items is claimed, reason for a scale of 1 to 26 i.e. “E” represented Rs. 5, “P”
the same should be ascertained and scrutinized. represented Rs. 10, and “T” represented Rs. 20
Diversion to connected concerns is another way indicating the cash amount of Rs. 5 or Rs. 10 or
of inflating the cost of these items. Rs. 20 per kg. for the relevant consignment sale.
15.7 Fuel Expenses: While examining Sale price quoted in the sale bills was thus on an
the manufacturing expenses the AO should average less by Rs. 10–20 per kg from the rates
scrutinize fuel and power consumption claimed quoted at the auction houses. The group had
by the assessee. Generally, for production of collected the difference of Rs. 10–20 per kg from
one kg of tea, 0.92–1.25 kg coal, 0.25 litre high the consignment agents in cash, out of which a
speed diesel, or 0.60 unit power is consumed. part was given to the agents as kickbacks.

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16.3 Manipulation through Auction Houses malpractices possible in ex-garden or private

16.3.1 The sale by regular auction should sales are not possible in auction sales, since the
be supported by sale notes from the brokers. price quoted is on record. The price of tea sold
These sale notes contain information as to the through auction is invariably higher than that on
quality and quantity of tea sold. This should private sale. A common defense for private sales
be checked with reference to the dispatch is that, in auction the proceeds are received after
register which indicates the serial number, date, considerable delay and since capital invested in
marking, weight, gate pass number, consignee, the business is borrowed, private sales are made
lorry number, RR or steamer or postal receipt to cut interest cost. The practice in auction sales
and way bill nos. The tea in transit is normally is that the buyer must pay the price (less deposit if
insured. Therefore, no claim of loss in transit paid) of the lot purchased on or before the prompt
of tea should be accepted without considering date, i.e. Monday for leaf tea and Wednesday for
the compensation amount received from the dust tea in the week next but one following the
Insurance Company. sale. Thus, the payment has to be made within
two weeks, which is not an inordinately long
16.3.2 Many times tea companies sell their tea time. There is scope for manipulation in sales
in open market outside the auction house with through private parties. Cash sales from gardens
the help of auction houses themselves who make are sometimes suppressed, which is known as
entries in their records as though the tea was ‘Uchanti’ sales. This can only be checked with
sold through auction. The selling prices in these active cooperation of GST authorities as well as
cases would be lower than the auction price of on the spot survey.
the day. Such transactions are more common
16.3.4 In cases where the difference in auction
between sister concerns of the group owning price and the price shown on private sale of tea
the auction house. In these trading, the buyers of same grade and quality, is disproportionate a
generally do not adhere to the payment schedule thorough scrutiny is called for. In one case the
of 15 days prescribed by Tea Board. The AOs, Company Law Board, during its inspection,
while scrutinizing sales through auction, should noticed that for three years no tea was sold by
therefore, verify any discrepancy between the the company in auction. Instead, during this
price quoted in auction house rate on the date period entire tea was sold through private sales
of sale & the actual sale price shown in the bills; at various places. The average sale price of
and whether the duration of settlement of bills Cachar tea shown by the company in its books
by the buyers was more than that stipulated by for three years were lower than the average of
Tea Board. If the payment came to the assessee Calcutta auction rates for Cachar tea during the
after 15–20 days, it could be possible that the same years. This provided ground for further
sale was made in open market & the difference inquiry by the department.
between quoted price and sale price collected out
16.3.5 Sometimes in order to evade sales tax
of books, after sharing a portion as commission
in their home state, where the rate of sales tax is
with the buyer. higher compared to the rate in the neighbouring
16.3.3 Almost every tea estate sells tea locally states, the tea companies show in their books as
apart from selling in wholesale. There is ample if the tea sales were effected outside the state,
scope for suppression or concealment by by arranging bills and cheque remittances from
manipulation of invoices/ bills of local sales. the outside state, whereas the tea is actually
Some garden owners also smuggle tea out of sold locally at higher prices. In such cases, the
the gardens by duping the excise personnel and genuineness of the sources located in outside
net the entire proceeds in black money. The states from where the assessee received or

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was receiving sale proceeds may be verified. between the actual price of the exported
Sometimes these sources/ bank accounts could commodity and the invoice price is paid
turn out to be owned by the assessee itself. With to the exporter’s nominees under the
the introduction of GST w.e.f. 01/07/2017, this assumed head of “sundry expenses”.
malpractice should be over. ix. It may be useful to examine the applicability
16.4 Export Sales: Under-invoicing exports, of Section 92 of the Act. Normally such
particularly when there is no export duty and so sales are made to a “closely connected”
no check by the Customs is a common practice. Nonresident company such as the holding
Often dummy exporters are setup to divert company of the Indian exporter or a sister
profits. A usual explanation is that contract with concern under the same holding company
the foreign importer was entered earlier at a with a common management.
time when the prevailing market rates were low.
Whereas, the actual situation may be that the 16.5 Sample Tea: Tea export houses
contract of sale was entered into a time when customarily receive sample tea in large quantities
higher rates were prevailing. Investigation into from various auctioneers and tea-brokers. These
under-invoicing of exports can be done on the samples are sometimes sold in the market. In
following lines: one case, Department collected information
about the receipt of such tea by referring to the
i. The contract between the foreign buyer
auctioneers and tea-brokers. As a result it was
and the Indian exporter is usually made
found that large quantities of sample tea were
through cables. Confirmation cables are
followed up by contract memos. The AOs received by the concern, but not disclosed to the
should verify whether. Department. The AOs can call details of sample
tea received by the assessee and crosscheck
ii. The rates are as per contract cable. this with the auctioneer’s brokers. In case
iii. the rates mentioned in the contract memo discrepancies are detected, the assessee may be
tally with those in the contract cable. asked as to how such tea was disposed off.
iv. the rates compare favorably with the 16.6 Consumption of Tea Chests and
prevalent market rate on the date of Gunny Bags vis-à-vis Sales: Tea chest and
contract. gunny bags are used by tea companies for
v. the rates tally with the rates in the invoice. dispatching finished tea to the selling point.
Often the tea chests and gunny bags used are
vi. The description and qualities of goods not in proportion to the quantity of finished
as per confirmation cable and contract
tea dispatched. Tea chests are of various sizes,
memos tally with the description in the
ranging from 48 cm x 48 cm x 60 cm to 40 cm
invoice and the GR forms sent to Reserve
x 50 cm x 60 cm. The last one is the standard
Bank.
pallet size in the ocean going ships. The weight
vii. An examination of the “accounts sales” of a chest depends on the grade of tea packed.
received from the foreign broker at times For example, orthodox type of tea takes more
gives valuable clues to the real sale volume than the CTC type. The Orthodox type
proceeds of the consigned goods. leaf tea is lighter than the broken one, whereas
viii. Scrutiny of ‘sundry payments’ made by the dust tea is heavier than the brokens. Similar
the Indian agent of the foreign buyer in is the position with CTC, the broken are lighter
connection with export of the commodity than the fannings or Pekoe fannings whereas
may be useful, as sometimes the difference the dust is heavier than the other grades etc.

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Often complete tea chests are made in the tea 17. STOCK VERIFICATION
gardens themselves using battens, stocks and 17.1 Secured loans are normally obtained
tops. In these cases a stock book of the tea from banks by the tea companies by pledging
chests manufactured is maintained. A thorough or hypothecating tea stocks. These stocks are
check of the tea chests stock register along with also insured. To counter suppression of stocks,
invoices through which packets of tea were the stock position as per the stock statement
dispatched and countercheck of these invoices submitted to the department should be verified
with the Excise Register where the number with the statement of stock submitted to banks.
of tea chests and gunny bags taken out of the It would be also worthwhile to check stock
garden is quoted, can provide clue to the modus statements given to the insurance companies.
of tax evasion adopted. In fact, in one case it But before coming to conclusion on the variation
was detected that the tea chests were lent by one in the stock, further enquiries should be made.
garden to another garden, a sister concern, but
17.2 While examining the stock of tea in one
the expenses on account of these tea chests were
case, the AO found that the stock of tea at the
claimed in the P&L account of the receiving
end of the accounting year shown in the stock
company. This is a common practice for gardens
register was much less than in the stock statement
under the same management control. Purchase
furnished to the bank. The assessee explained
of excess consumable materials such as tea
that the stock figures submitted to the bank were
chests, coal, fertilisers etc., are debited to the given before final adjustment of stock account
accounts of the more profitable concern to reduce was made. The explanation was found to be
tax incidence. Therefore, while scrutinizing the incorrect. Investigation showed that a substantial
tea-chest account or other such consumable quantity of tea, stored in company’s warehouse,
accounts, the AO must check corresponding was disclosed to the bank in its stock statement
expenses in cases of sister concerns so as to but not in the stock register. Consequently, the
get a feel of the expenses under these heads. difference was considered while framing the
In appropriate cases, cross verification can be assessment.
made from suppliers of the tea chests or parts.
17.3 Undervaluation of Stock: The tea
16.7 Waste Tea: Production and sale of waste stocks are valued at cost or at market price
tea is another item for investigation. Normally, whichever is lower. Sometimes to reduce profits
the percentage of waste tea in both Orthodox of a particular accounting year, especially where
and CTC manufacture is about 3%. The advance tax paid is less, large quantity of tea lying
decision for declaration of waste generally rests with Agents is shown as unsold tea. It should be
with Garden management. Waste tea can be checked from Agents, by obtaining certificates,
disposed off either by destruction, or for making if such stocks were in fact lying unsold as on the
compost, or for manufacture of caffeine, or by stock valuation date. The AOs should closely
sale/ export. Further, the waste tea can be sold examine the method of valuation of made tea.
only to a licensee. In one case of an excessive Normally, closing stock of made tea is valued at
realized/ realizable prices. The AOs should check
claim of waste tea, the assessee was asked to
whether this practice is uniformly followed from
produce the required certificate of the Excise,
year to year.
because destruction of waste tea can only be
made on the permission and in presence of the
Central Excise Inspector. Enquiry with Central 18. EXPENSES
Excise confirmed the suspicion that part of the 18.1 The expenses in a tea estate can be
claim for waste tea was bogus, resulting in a agricultural expenses or manufacturing expenses.
substantial addition to the profits. Following are normally agricultural expenses:

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i. New clearance for planting. it will be immediately known. No tea garden

ii. Upkeep of immature tea. can bring additional area under tea plantation
without the prior approval of the Tea Board.
iii. Weeding. Therefore, obtaining information from the Tea
iv. Terracing. Board in suspected cases is one of the first steps
of investigations. Tea Board also has particulars
v. Pruning.
regarding extensions to tea areas for each estate.
vi. Manuring. Information regarding new extensions facilitates
vii. Control of pests and diseases. verification as to whether certain expenses
claimed to have been incurred for in-filling
viii. Supplying. were really incurred for such purpose or for
ix. Upkeep of roads and drains. plantations in new areas. It is also necessary to
examine the break-up of the acreage as planted
x. Wages.
areas, planted areas abandoned, and newly
xi. Upkeep of buildings. extended area under plantation so as to have
xii. Shade of trees. an idea whether some capital expenses have
been incurred. These details are available in the
xiii. Plucking.
Annual Returns submitted by tea estates to Tea
18.2 Before scrutinizing the expenses, the AO Board.
should seek information about total area of the
18.3 Capital Expenditure vs. Revenue
garden owned and brought under tea plantation. Expenditure: Tea companies often claim
This can be ascertained by examining Balance various capital expenses incurred towards new
Sheet of the company or by calling following cultivation/ extension as revenue expenditure in
information under Section 142(1): their accounts. The Tea Board gives loans as well
i. Tea in bearing or land under plantation as subsides for new cultivation under different
and nurseries. heads of extension. It gives loan for extension
of cultivation and subsidy for operating and
ii. Land under factory and other housing
repair of rejuvenating the plants. Wherever the
including hospitals, schools and clubs etc.
companies avails subsidies or loan from Tea
iii. Land under other plantations viz. coffee, Board they show the expenditure as capital
rubber etc. if any. in their Balance Sheet. Some tea companies,
iv. Land under agriculture other than tea, instead of availing the loan/ subsidy write-off
coffee, rubber plantation etc. showing the the entire expenditure in their books by debiting
item of crop grown their Profit & loss account. The AOs should be
vigilant while scrutinizing the expenditure in the
v. Land under orchards, parks, playgrounds cases of extension plantation shown as nursery
etc. expenses, land development expenses or repair
vi. Land under roads, drains, rocks and waste, expenses. Some tea companies manipulate
including all other unusable land. their accounts in such a way as to show capital
expenses on preparation of virgin soil, clearing
vii. Vacant land including uprooted areas. of jungle by uprooting standing trees, spading,
A comparison of the above details with those furrowing, watering of virgin soil, plantation of
for the previous years will reveal the changes in new tea bushes, and cost of young plants etc.
acreage in respect of the different heads. If any as if they were expenses on hoeing, weeding,
new clearing has been done for tea plantation, pruning etc., which are revenue expenses.

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Similarly, under the head ‘estate expenditure’ In cases where expenses on deep pruning are
items like upkeep of buildings, roads and drains claimed, the records of the plants subject to
are included. Any disproportionate increase pruning should be examined. The dictum, that
in expenditure as compared to the preceding bushes need deep pruning once in five years
year can be indicative of capital expenditure should be applied to ensure that expenses on
being camouflaged as revenue expenditure. this have actually been incurred. The total area
This may require detailed scrutiny of accounts. subjected to deep pruning should be compared
A visit to a tea estate would show that there year to year to ensure that the expenses claimed
are several coolie lines consisting of both under this head are reasonable.
temporary huts and permanent constructions. 18.6 Manuring Expenses: Tea estates
Replacement of temporary huts is allowed as usually maintain charts showing areas subject to
revenue expenditure but if the replacement is manure in a particular year. The same area is
by permanent construction, the expenditure usually not manured every year. The only way
is capital. Expenses on construction of roads, to check that inflated expenses have not been
permanent fencing etc. has to be treated as shown is to compare the manuring charts. It
capital. The AO can refer to the Monthly reports is not unusual to find that manure is shown as
of Estates, furnished to the Head Offices, where purchased towards the end of the accounting
details of such expenses are recorded. year and could not have been utilised during the
18.4 Direct and Indirect Expenses: In year. The AO should keep in mind the period
South India many concerns own tea, coffee and of tea season in the area in which the garden is
rubber estates. Consequently, there are several situated.
items of common expenses e.g. Head Office
18.7 Labour Expenses: Two types of
and management expenses, interest payments labourers are employed in Tea estates viz.
and depreciation pertaining to the concern as
Permanent labour and Temporary labour.
a whole. These are indirect expenses as against
The temporary labour or ‘contract’ or ‘theka’
the direct expenses, which are incurred on tea,
labour are employed only in plucking season.
rubber or coffee cultivation and manufacture
About 60% of the labour force is employed
separately. Each estate follows its own method in plucking operations. There is often large
for the allocation of indirect expenses when inflation in Wages account of temporary labour.
computing the income under each crop. CBDT
The AOs should critically scrutinize the Wages
vide Circular No. 26-D of 10/10/1966 had
register to determine any sham wages shown
clarified that in cases of estates having mixed
as paid to these labour. Temporary labourers
plantations indirect expenses i.e. expenses
are also entitled to subsidized rationing in the
like depreciation, repairs, etc., that cannot be garden. Therefore, in doubtful cases Register for
directly related to a particular business (e.g. tea), distribution of ration to labourers can also be
the apportionment should be made on “labour examined. A through check may reveal names
day” basis, i.e. on the ratio between the number
of labourers not figuring in the register for ration
of labour days spent on different kinds of crop
distribution. Another useful method of detecting
(e.g. tea, coffee, rubber).
inflated wages on temporary labour is to check
18.5 Pruning Expenses: Two major up monthly plucking yield from the Weighment
expenses incurred by a tea garden before the register (Green leaf account), and compare the
bushes are ready for plucking, are on pruning plucking yield during off-season months when
and manuring. Pruning is of two types viz. the labour employed is less, with the figures
deep pruning and light pruning. Deep pruning of plucking yield in a seasonal month, where
is generally necessary once in every five year. labour employed is more. If the ratio of yield to

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number of labour employed in plucking season and cash is siphoned out by directors/ promoters
month is not very much higher than the yield of the company. Therefore, the AOs should
in the less active month, there may be reason examine the details of contracts given by the
to doubt the payment of wages shown. It will tea companies. In case of doubt a physical
also be worthwhile to obtain the number of verification of the office of the company/ firm
workers employed at each stage of cultivation performing the contract may be made. Generally
and manufacture of tea. these paper companies have no offices and
Directors are mere name lenders. If necessary
18.8 Bogus Job Work: The tea companies
Directors of these companies can be examined
give large contracts for weeding, manuring,
under Section 131 of the Act as regards their
neem oil spraying etc. on the tea gardens.
technical expertise in performing the contract.
In a search at Kolkata in 1999 an Income-
Their Balance Sheet and Bank Statements would
tax practitioner was found to have floated
also provide telltale evidence distinguishing a
numerous paper companies engaged in giving
genuine contract from a bogus one.
‘job work entries’ to established tea companies.
These job works/ contracts were in reality never 18.9 General Expenses: Personal expenses
performed, and merely the bills were issued. The of management are often debited under General
tea companies approach these entry operators expenses or welfare expenses. The AOs may
through a middleman/ broker. The entry examine some items of expenditures under these
operators issue invoices of the paper companies heads which are disproportionately high and
to the tea companies. The paper work relating make appropriate disallowance of items having
to the contract is supplied by the beneficiary tea no nexus with the business activities.
company. The beneficiary tea companies make
18.10 Expenses not Accrued During
the payment through account payee cheques.
Accounting Period: Often expenses in the
These cheques are deposited in the account of nature of Excise duty in respect of tea not
the paper companies, and once the proceeds are
cleared from factory during the accounting year
credited, the amount is routed through the bank
are charged as revenue expenditure. Similarly,
accounts of these dummy concerns and cash is
freight, transportation, selling expenses etc. on
withdrawn and handed over to the middlemen/
beneficiary tea company. The beneficiary such tea lying in the factory are also debited
company even deducts TDS on the job work to the Profit and Loss account and is shown
contract and deposits the same in government the same as a liability in Balance Sheet. Such
account. The amount so deducted is also shown expenses are not allowable.
in the annual TDS Return of the beneficiary 18.11 Complimentary Tea: Generally, tea
tea company (Form 26C). The tax deduction companies distribute complimentary tea packets
is resorted to not merely as a legal requirement amongst shareholders at the time of the Annual
but to give a colour of genuineness to the General Meeting. But it should be noted that any
entire transaction, the entry operator receives expenses on the shareholders, being the owners
commission in cash for the services performed. of the company, either in kind or in cash are
A part of the commission is also paid in the form not allowable as revenue expenditure. Further,
of the TDS certificates to the paper company. complimentary tea packets given to visitors are
The paper company fabricates its P&L A/c exempt from excise duty. The companies should
and brings down its profit to insignificant levels be asked to furnish list of persons to whom
and claims refund of the TDS amount. The job complimentary tea was given. Investigation in
work amount is debited in the account of the one case revealed that the complimentary tea,
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on which were allowed as revenue expense, was iv. The amount standing to the credit of
sold in the market but the sale proceeds were not such special account can be withdrawn
disclosed in books. and utilised only for specific purposes
18.12 Depreciation: While claiming expenses i.e. for the growth & expansion of the tea
against agricultural income, tea companies do industry. Deduction under this provision
not take into account depreciation on common cannot be claimed for amounts utilised
assets, such as administrative buildings, hospitals, for any machinery or plant to be installed
labour lines etc. Used for both agricultural in any office premises or residential
and manufacturing operations. Proportionate accommodation including guest house; any
depreciation on such assets should be disallowed. office appliance (other than computers) or
an item of plant or machinery eligible for
18.13 Tea Development Account: depreciation @100% in any year.
Deduction under Section 33AB is allowable on
Fulfilment of following conditions:
19. CAPITAL GAINS ON TRANSFER OF
i. The assessee must be engaged in the TEA GARDEN
business of growing & manufacturing tea
in India. 19.1 Tea estates are classified as ‘agricultural
land’ and therefore do not constitute ‘capital
ii. It must deposit an amount in an account
asset’ within the meaning of Section 2 (14) of
maintained with NABARD as specified
the Act. Calcutta High court in CIT, W.B.-II vs.
under the scheme in the Tea Deposit
Chota Nagpur General Trading Co. Ltd., (1969)
Account (TDA).
79 ITR 161 held that sale of tea garden is transfer
iii. The amount should be deposited within six of land from which income derived is agricultural
months from the end of the previous year income and so, there is no transfer of any capital
or before furnishing the return of income, asset as defined in Section 2(4A) of the I.T. Act,
whichever is earlier. 1922. This view has been accepted by CBDT in
iv. The accounts of the taxpayer are audited F.No. 75/128/69-ITJ dated 01/09/1969. But, this
by a Chartered Accountant and an audit decision is applicable only to agricultural land
report in Form 3 AC duly signed and and not to building and machinery.
verified is filed along with the return of the
relevant year. 19.2 When an estate, comprising gardens,
factory and other assets, is sold as a going
18.14 While examining claims under Section
concern, the agreement for sale does not show
33 AB, the AO is advised to keep the following
the breakup of the total consideration between
in mind:
various assets. The AO should, therefore, call for
i. Where any deduction is claimed under this the breakup and the basis for the apportionment.
Section, no deduction should have been Opinion of Tea Board can be taken before
allowed in respect of such amount in any accepting the allocation of sale consideration
other previous year.
between various assets.
ii. Where a deduction is claimed and allowed
19.3 The trees standing on agricultural land
under this Section to AOP or BOI, no
would not constitute to be part of the land.
deduction should be allowed to any
Kerala High Court in Travancore Tea Estates
member in respect of the same deposit.
Co. Ltd. (1974) 93 ITR 314 held that trees
iii. Any excess deposit made in the previous standing on agricultural land do not form part
year is not treated as deposit made in the of the “agricultural land” within the meaning of
next year or any other year. Section 2(14) (iii) of the Act, on the principle of

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it being attached to or situated on such land. of forest and bushes, sungrasss and bamboo etc.
The Court held that the same principle would A part of the land would be used for factory
apply to houses for agricultural workers. The premises, godowns, offices, and labour quarters.
CBDT has accepted this vide Instruction No. There may also be marshy land or fishery lands.
1014, F.No. 207/11/76-ITA-(II) dated 30.9.76. Such land cannot be treated as agricultural land
Therefore, sale proceeds of trees, as distinct from either because it was never put to or intended
the agricultural land, would be chargeable to tax for cultivation or because of its very nature. Sale
as capital gains. proceeds relatable to such lands will be liable to
be tax as capital gains.
19.4 Though the land under tea plantation
may be agricultural land, but the entire land of
a tea estate is not agricultural land. Cultivable 20. CONCLUSION
land is only a part of the total area of tea estate. On the basis of the above discussions, a draft
Most tea estates have considerable fallow land checklist/ questionnaire is given in the Annexure
and other nonagricultural land. Such land is below which the AOs may find useful for calling
generally known as tilla land and jungle land, information in cases of tea manufacturing
which would generally have spontaneous growth companies.

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ANNEXURE dates of purchase, installation and date

Checklist/ Questionnaire on which each item of machinery was
first put to use, stating whether the
(A) Balance Sheet machinery was new or second hand.
1. Details of Secured Loans duly certified c. Electric Installation: In respect of
by the bank or the financial institution electric installation added during the
giving full particulars of the securities year, to furnish description of electric
offered particularly as on the opening and installation-whether fittings, meters,
closing dates. generators, conditioners, compressors
2. Details of Unsecured Loans giving or other appliances etc., and names/
the names and addresses and also the addresses of suppliers, contractors,
Permanent Account Numbers of the loan dates of purchase and installation.
creditors together with confirmation letters.
d. Furniture and Fixtures: In respect
3. Complete details of Current Liabilities of additions during the year, to furnish
for expenses giving full particulars of names and addresses of suppliers,
names and address of the creditors, and description of furniture and fixture,
the nature of the expenditure. dates of purchase etc.
4. Complete details of Current Liabilities e. Vehicles: In respect of additions
for supplies (Capital assets, raw materials, during the year, to furnish the
stores, manure etc.,) giving names and description of vehicles i.e. whether
addresses of the creditors and nature of the car, truck, tractor, etc. and also furnish
expenditure.
the names and addresses of suppliers,
5. Complete details and nature of Remaining date of purchase and cost paid for each
Liabilities other than those above, giving vehicle, separately.
names and addresses of the persons and/
or authorities to whom such liabilities are f. Fixed Assets Sold, Demolished
payable. or Discarded: If any item of the
fixed assets was sold, demolished or
6. Complete details and nature of each item discarded during the accounting year,
of Provision. The written off amount of to furnish details of such item showing
provision during the year may also be the cost, the depreciation actually
shown. allowed and the value realized on such
7. Fixed Assets item by way of sale or otherwise.
a. Buildings: To furnish details of g. Land and Plantation—To furnish:
addition during the year if any, giving i. Total land area of the tea estate on
type of construction, purpose for
the beginning of accounting year.
which used, total built-up area, cost of
construction etc., together with details ii. Total land area of the tea estate on
of Loans or subsidies received, if any. the last day of accounting year.
b. Plant and Machinery: To furnish iii. Breakup of area of land, on last
details of addition during the year day of accounting year under
if any, the names and address of the following heads-under plantation
suppliers, description of machinery, and nurseries.

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iv. Land under factory and other loans advanced to shareholders, directors,
housing areas. and other concerns in which a directors or
v. Land under agriculture other than shareholders are interested as a proprietor,
tea plantation. partner, director etc., are to be furnished
separately. The particulars of interest
vi. Land under forest or natural charged on loans also to be supplied.
vegetation To furnish name, designation, address
vii. Land under drains, roads or other of the concern/ person/ authorities with
unusable lands whom deposits are lying as at the close
of accounting year, giving the purpose
viii. Vacant land, including uprooted for which such deposits have been made.
areas (fallow land) To state whether the deposits are bearing
ix. Mode and the year of acquisition of interest or not.
land (B) Profit and Loss Account
x. The annual land revenue payable a. Analysis of salary, wages, bonus and
xi. Area under tea plantation at the gratuity to be furnished.
beginning of year, new plantation b. With regard to gratuity, to inform whether
made and uprooting done during the concern maintains a gratuity fund which
the year. has been approved by the Commissioner
xii. Certificate from Tea Board showing of Income-tax. If so, to furnish a copy of
the area under the tea plantation at the approval granted by him.
the end of accounting year. c. In case the concern does not maintain a
8. Investments: To state whether the gratuity fund, then to submit in writing
investments are held as trading or capital the precise basis on which the debit for
assets. In respect of fresh investment and gratuity has been made in the concern’s
sales during the year furnish names and accounts explaining in particular whether
addresses of sellers and purchasers as the the debit made is an actuarial liability or a
case may be. mere provision.
9. Closing Stock: In respect of raw d. Details of remuneration paid to the Directors
materials, finished products, stores, including perquisites paid or allowed and
chemical and manure to furnish the benefits/ amenities enjoyed. To also state
quantitative details of opening stock, the functions and responsibilities of each
production and/ or purchases, sales, of the Directors.
consumption and closing stock. The basis e. Full analysis of the perquisites paid
of valuation of the closing stock, in respect or allowed to, and benefits/ amenities
of each item should also be furnished. enjoyed by the employees drawing salary
10. Sundry Debtors: To furnish names and exceeding Rs. 7,500/- per annum.
addresses of sundry debtors and amount f. Details of donation and subscriptions.
due from each of them.
g. Breakup of expenditure and repairs.
11. Loans Advanced: To furnish names and Details of any expenditure under the head”
addresses of persons to whom loans have Repair” which is of capital nature.
been advanced during the accounting
year, including squared-up accounts. The h. Details of miscellaneous expenses

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i. Details of legal charges, indicating the sold and if so, in which assessment year
purpose for which each one of the items and to what extent.
under this head was included. q. To give a detailed computation for the
j. With regard to traveling expenses, to development rebate/ investment allowance
furnish the necessary details as required claimed stating categorically whether the
under Rule 6D of Income-tax Rules, 1962. appropriate reserve has been created or
not. In the computation of Development
k. Details of entertainment expenses within
the meaning of Section 37(2) of the Act. rebate/ Investment allowance, dates
when the assets are put to use should be
l. Details of commission and brokerage mentioned.
paid during the year of account, giving
the names and addresses of the parties r. To furnish the analysis of total quantity of
concerned. green leaf plucked from own plantations,
green leaf sold or purchased, total tea
m. Details of interest payment with the names
manufacture giving grade wise breakup,
and addresses of the payees and the dates
and disposal of tea. The gross sale prices
of payments.
giving quantity and value, in respect of sales
n. Details of bad debts, if any, explaining through auction markets or through other
clearly the circumstances under which the modes of sales to be shown separately.
debts arose, the steps for their realization In regard to the sales through agents, the
and the reasons why they were written off names and addresses of such agent also be
during the year of account. furnished.
o. If loss, of assets used in business, has been s. To produce the following documents:
claimed then to furnish the necessary details
in terms of Section 32 (i) (iii), after taking i. Monthly statements of garden produce.
into account the initial depreciation, if any. ii. Latest blue print showing the tea garden
Whether development rebate/ Investment lands.
allowance had been allowed on the assets
sold and if so, in which assessment year iii. Copy of the annual return as filed
and to what extent. before the Tea Board.
p. Analysis of the profit on assets sold for iv. Registers of green leaf.
purposes of Section 41(2), after taking into v. All registers accounting for waste
account initial depreciation if any, allowed and distribution/ consumption of tea
on the assets in question. To state whether otherwise than by sales.
any Development rebate/ Investment
allowance had been allowed on the assets vi. Annual stock registers.

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21. One typical computation of tea industry: Computation of Total Income

Net Loss as per Profit & Loss A/c 18250238

Add: For Separate Consideration
Depreciation 3787042
Cess on Green Leaves 988042
Infilling and replanting expenditure 1662176
Subscription to TRA 76248 6513508
24763745
Less: For Separate Consideration 100% Central Income
Profit on sale of Fixed Assets 10842
Interest 185625
Miscellaneous Receipts 26723
Subsidy From Tea Board 1138629 1361819
23401926
Less: Depreciation as per I.T.Act 4814402
18587523
Less: Deduction under Section 35(2AA) for contribution to TRA 95310
@125% of Pro rata gain on green leaf purchased & consumed
in Mfg of Tea
Total Green leaves consumed 3710049
Purchased Leaf Consumed 622418
Percentage thereof 16.78%
Total Central Income @16.78% on above 3102354
15389859
Less: Deduction under Section 33AB 2500000
Mixed Income 12889859
Central Income
Profit from Business & Profession
Under Rule 8 40% of Mixed Loss 5155944
Add: Pro rata Loss as determined above 3102354
Interest 185625
Miscellaneous Receipts 26723
3314703
Business Profit 8470646
Brought Forward Business Loss SRT OFF 398113
Taxable Income 8072533
Less: Deduction under Section 80IE 8072533
Total Income Nil

Computation of Book Profit under Section 115JB:

Net Profit as Profit & Loss Account 18250238

Less: Income Exempt under Section 10
Subsidy from Tea Board 1138629
Agricultural Profit 7733915 8872544
Net Book Profit 9377693

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 Chapter

18
Tobacco Industry

1. INTRODUCTION
1.1 Tobacco is related to garden vegetables,
flowers, weeds and poisonous herbs such as
potatoes, tomatoes, eggplant, petunias, Jimson
wood, ground cherries and nightshades. The
family or plants is Solanaceae; the genus
Nicotiana contains about 100 species, only
two of which have been extensively cultivated.
Nicotiana tabacam is used in cigarettes and
tobacco and is the predominant type of crop
tobacco. 2. TOBACCO—ITS BOTANY AND
VARIETIES
1.2 Originally, native Americans in the Eastern
United States grew Nicotiana rustica, which was 2.1 Tobacco is a member of Solanaceae family.
the first form of tobacco introduced in England Solanaceae is a large family, encompassing a
and Portugal. N. Tabacam, first introduced to the wide variety of herbs, shrubs and trees. About
Spanish, was obtained from Mexico and South 1800 species grouped under about 85 genera
America. It has been the preferred tobacco since belong to this family. The family is so large
that, interestingly, potato and petunias are the
settlers in Jamestown, Virginia, began growing it.
relatives of tobacco.
1.3 Because planters believed that tobacco had
2.2 Tobacco is a leaf crop. It produces enormous
to be grown on virgin soil, tobacco gradually leaf area. Under favourable conditions, the fully
made its way to the eastern part of what is nature leaf measures, on an average 1.0-1.5
now North Carolina. Consumer preferences sq. ft. in area. Certain varieties of cigar tobacco
for tobacco products changed decidedly from produce more than 25 sq. ft. leaf area per
the early 1700’s. No other product in the world plant with 18 leaves. The commercially grown
has ever succeeded in catching the fancy of the varieties of tobacco are annuals, though some
people and in remaining entrenched as their hot species are potentially perennial. The specie N.
favourite. Nor has any other product evoked so tabacum is rarely seen growing in wild state. It
much controversy. requires careful and skillful nurturing.

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2.3 The total number of varieties of tobacco 3.2 Ordinary tobacco does not grow in wild
now in use is quite large. However, these can be state as the seeds are very small and the young
classified under broad group having commercial seedlings are too delicate to survive without
significance. These groups are-Virginia; White manual help. Consequently, direct planting in
Burley; Maryland Broadleaf; Cigar-tobacco the field is not practicable and seedlings must
varieties comprising the wrapper, the binder first be reared in seedbeds and transplanted only
and the filler classes; Turkish tobacco etc. There after they have grown to proper size. Successful
exist besides a large number of non-descript local production of healthy seedlings is one of the
varieties grown in different parts of the world. most vital tasks in commercial cultivation of
The natu, desi and lanka tobsaccos are Indian tobacco. Often, it is also one of the most difficult.
Therefore, much care and attention is bestowed
examples of such varieties. They are consumed
on the preparation of seedbeds.
locally.
3.3 First, the site of seedbeds is carefully
2.4 The aforesaid classification should not lead
selected having regard to several factors. The
one to believe that a particular variety of tobacco
location must ensure ample seedbed area, and
is exclusively or almost invariably used for a free exposure to sunlight, avoiding shading from
particular purpose. True, the nondescript local any source. It must provide sufficient surface
varieties are used to make bidis, snuff, chewing drainage and under-drainage to prevent flooding
tobacco and even low class cigarettes. But in the or water logging of the soil. At the same time, the
world of international brands of cigarettes and location should not be high or excessively dry. It
cigars, blending has come to stay. For a fact, if should facilitate day to day observation and care
an (American) Indian, the original consumer of which the delicate seedlings cannot do without.
tobacco offered you a smoke, it would be hard to
3.4 Next the seedbeds are prepared. The soil
take. Back then, the taste was bitter; and so hot,
is thoroughly loosened, fertilizer and manure
it was said to burn the mouth like pepper. Before
worked in, and the soil raked till the surface is
tobacco became the rage of the world, it had to
smooth. The seeds are then sown. Since the
become milder and sweeter, through blending.
seeds are tiny and the seedbed are relatively
Blending improves the aroma, the flavour and
large, it is the usual practice to mix the seeds
the smoking quality of tobacco. Superior varieties
with fertilizer, cotton seed meal or other inert
of tobacco like Virginia command higher price,
material to obtain a larger volume so that
because of qualities which manufacturers of
sowing is rendered easy. The soil is then tamped
tobacco products value most.
or compacted. Tobacco is grown the world over,
under a variety of climatic conditions. Seeding
3. CULTIVATION OF TOBACCO time, therefore, varies from country to country
3.1 The cultivation of tobacco is a highly and, in a country, from place to place. In India,
specialized task, requiring much care and skill. for example, the export varieties are sown late
Different varieties of tobacco requires different July/ early August. In USA the normal seeding
environmental conditions. The methods of time ranges from late December/ early January
cultivating tobacco also vary from country to in Florida & Southern Georgia to late April/
country. These differences in methods and early May in Wisconsin. The transplanting and
conditions have a direct impact on the type and harvesting seasons too vary accordingly.
quality of the leaf produced. There are, however, 3.5 Six to ten weeks after seeding, the seedlings
certain broader aspects of tobacco culture that are ready for transplantation. If they had been
have general application. tended with care and skill, the healthy seedlings

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would be 5 or 6 inches in height, with four to topping facilitates better leaf development, and
six leaves each. Meanwhile, the land is prepared gives body to the leaves. In superior varieties of
carefully. Pre-transplantation preparation of the tobacco, the number of leaves left on the plant
land is of utmost importance. Deep ploughing, ranges between 14 and 20. As for the timing of
broadcasting of fertilizer, and smoothening the topping, the practice varies. Generally, early and
surface soil are the chief features of the operation. low topping produces maximum results, though
Depending on the variety of tobacco grown, the later and high topping, supplemented by heavy
nature of the soil, and such factors, the land use of fertilisers, produces excellent results in
may be ridged or left level. In the case of ridge certain varieties of plants.
culture, again, the variety of the crop determines 3.8 ‘Suckering’ is the operation that is carried
whether the ridges are to be moderate or high. out next. It is common experience that, when
Varieties yielding large, drooping leaves are the top portion of a growing plant is lopped off,
grown on high ridges. the plant fights back, as it were, by sprouting
3.6 After the land is thus prepared, the seedlings fresh shoots on the stem and the leaf axils. Such
are transplanted. In India, they are set by hand. fresh shoots are called suckers. Suckers are the
In the USA, transplanting is done also with the outward manifestation of the plant’s struggle for
help of a device called hand transplanter, or by survival. In the case of tobacco, however, the
use of horse-drawn/ tractor drawn machine. development of suckers affects the growth of
While transplanting the seedlings, care is taken the leaves already existing on the plant. In order
to ensure that there is adequate distance or gap that the leaves may develop fully, it is essential to
not only between two rows but also between remove the suckers i.e. pluck them off regularly.
two plants. Normally, a week or 10 days after Otherwise, the advantages of topping will be lost.
they are transplanted, the young plants become Normally tobacco plants are suckered in weekly
established. Thereafter, the soil between the intervals. As in the case of topping, so in the case
rows is plowed out, and the soil between the of suckering, the aim is to channelise energies
plants broken with a hard hoe. These operations of the plant towards the full-bodied growth and
are repeated 3 or 4 times, at weekly intervals-the development of a limited number of leaves.
last operation ceasing about 10 days before the
3.9 When the leaves are ripe and mature, they
normal topping time.
are ready for harvesting. If this sounds as a
3.7 Tobacco is a leaf crop and the aim is to truism, it is because there are no hard and fast
obtain the maximum possible yield of the rules for determining the right time for harvesting.
desired grades of leaves per acre of planted area. Intuitive perception of the right harvesting time,
In marked contrast to the cultivation of fruits and acquired after long experience, comes into play.
vegetables where the aim is to obtain vigorous No wonder, because the right time of harvesting
plant growth leading to a profusion of buds, is a function of various factors such as the variety
the main focus of tobacco culture is to develop of tobacco grown, its end-use, the texture, colour,
high grade, healthy leaves. This is achieved by graininess and the degree of thickness desired
an operation called ’topping’. Topping consists in the leaf and so on. Harvesting is done either
in the pinching or lopping off of the terminal by cutting the stalk (the stalk-cutting method) or
bud. The purpose is to direct, or redirect if you by priming or plucking the leaves from the stalk
like, energies of the plant towards increased and (the priming method). In the former method, the
better leaf development-energies which would stalks are cut only when all the leaves are mature,
have otherwise gone to formation of seed heads. and generally, all the plants in the field are cut
By preventing development of seed heads, and at the same time, except, of course, when it is
reducing the number of leaves on the plant, necessary to pass over small patches where the

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plants are not fully mature. The priming method different varieties of tobacco demand different
is a rather drawn out process. Priming starts with amounts of relative humidity. Low temperatures
the bottom leaves of the plant which naturally (below 60–65 degrees F) slow down the rate of
are the first to mature. Thereafter, the middle and curing without necessarily slowing down the rate
top leaves are primed as they mature, priming of drying. Similarly, a very low relative humidity,
being done usually in weekly intervals. After the while hastening the drying process, may hinder
crop is harvested the stalks/ leaves are strung on or even halt the desired chemical changes and
sticks/ strings, and removed to barns for curing. colour development. The optimum situation is,
therefore, one where the temperature lies in the
4. CURING OF TOBACCO range 90–95 degrees F, and the relative humidity
in the range 65–80%, depending on the variety
4.1 Curing is central to the manufacture of of the leaf.
tobacco and its products. It holds the key to
the quality of manufactured tobacco. The time, 4.3 There are four different ways of curing the
energy, and money spent on cultivating high leaf viz. air-curing, fire-curing, flue-curing, and
grade leaves will be lost irretrievably, if curing sun-curing. The aforesaid names are derived
is done indifferently. The process has a twofold from the principal means by which the leaf is
purpose, namely, to dry the fresh leaf (so as to cured. In all the methods, hot air is the drying
reduce its water content from 88 to 20%), and agent used, and the methods differ only in the
to aid those chemical transformations in the leaf manner in which hot air is obtained.
that are needed for development of the desired 4.3.1 Air-curing is the natural way of curing
qualities in the leaf. The chemical composition tobacco. Here the leaf is dried under natural
of the cured leaf depends on its variety, the weather conditions, and no artificial heating
soil, and the environmental conditions in arrangement is made. Initially, this method was
which it has been grown. But curing under used to cure all types of tobaccos. But with the
controlled conditions helps to fix in the cured advent of flue and fire-curing techniques, the
leaf the chemical properties which the tobacco application of air-curing is limited to certain
manufacturers value most. The significance varieties of tobacco. Cigar binder and filler
of the simultaneous achievement of the twin tobaccos are air-cured generally. In its simplest
objectives will be clear from the fact that well version, the barn for air-curing is nothing but
dried but uncured tobacco is as worthless as ill an open structure (a shed) with only a roof to
dried but well cured tobacco. protect the leaf from rain. Such structures are
4.2 Temperature and relative humidity are the quite effective in areas where the temperature
two factors that aid and assist proper curing. These and relative humidity are adequate for curing.
two factors are interrelated. The moisture content Generally, however, the barns for air-curing
of a given space at the saturation point increases are reasonably tight structures with adequate
with an increase in temperature. Nevertheless, provision for ventilation on all their sides.
their effect on the rate of curing. In other words, Normally, the temperature and relative humidity
the rate of drying and the rate of curing do not inside the barn is regulated by opening and
progress pari passu. Experiments have shown closing the ventilators. At times, when the
that tobacco can be cured satisfactorily at any weather becomes unfavourable, it may become
temperature in the rage of 60–95 degrees F, necessary to use small open fires or stoves inside
provided the relative humidity is favourable; the barn. On such occasions, smokeless fuel
that the rate of curing increases with the increase such as coke or powdered charcoal is used. Air-
of temperature; that warm temperatures in the curing barns vary in size and interior details.
range of 90–95 degrees F are preferable; and that The interior, however, consists essentially of a

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series of horizontal poles tier poles, each usually 4.3.4 Flue-curing is an improved or
about 16 ft. long. The sticks/ strings bearing sophisticated version of fire-curing. In this
the leaves are hung on the poles. Bigger barns process, heat is distributed inside the barn with
contain arrangements for supporting tier poles. the help of flues or pipes and hence the names.
The tier poles are placed about 4 feet apart The typical flue-curing barn is a smaller structure
horizontally. Vertically the gap or space between than a fire-curing barn for two reasons. Firstly,
the poles ranges from 20” to 5 feet. The bottom flues are used to distribute heat inside the
most row of tier poles, however, is fixed at a barn, and hence it is easier to secure a more
height of 6’ to 9’ above the floor of the barn. uniform curing if the barn is small. Secondly,
The entire arrangement is designed to facilitate small structure facilitates easier manipulation
free circulation of air between the lines of leaves of temperature and humidity. The furnace is
hung for curing. By the same token, the volume the distinctive adjunct to a flue-curing barn. It
of a barn determines the optimum amount of is placed at one end of the barn, at the ground
leaves that can be cured at a time. level. It has an arched opening through which
fuel is fed into it from outside the barn. The
4.3.2 Sun-curing is one of the oldest methods metal flues and fluepipes are attached to the
of curing tobacco. It differs from air-curing in that inner end of the furnace (the end opening in the
the leaves are cured in direct sunlight. Even here, barn). The fluepipes are so fitted that they run
as the leaves are hung vertically to dry, they are a few inches above the barn floor, and a feet or
not for the most part exposed to sunlight. In this two away from the walls. The flue pipes can be
method, the leaf dries fast but, in the process gets arranged in more ways than one. Two types of
bleached. Temperature and humidity control is arrangements usually adopted may however he
difficult to achieve. Consequently, this method indicated. In cases where the furnace is placed
is not applied to Virginia, White Burley and the not at the centre but at the extremity of one of
like which are generally flue-cured. Turkish and the walls of the barn, the fluepipes, on leaving
other Oriental tobaccos are still cured this way. the inner side of the furnace, run across the barn
4.3.3 Fire-curing process employs artificial to the opposite side, take a right angled turn and
heat to cure tobacco. A fire curing barn is run parallel to the opposite wall, take another
right angled turn and run parallel this time to
comparatively tighter in construction than an
the side wall, return to the furnace side of the
air-curing barn. After being loaded into the
barn, and exit through the wall, and discharge
barn, the leaf is first allowed to yellow under
the smoke and fuel gases into the chimney
natural conditions. Thereafter, depending on the
attached. The chimney also provides adequate
barn construction, moderate or heavy firing is
draught of air. If the furnace is placed at the
employed. At times, slow firing is employed to
centre of a wall, the fluepipes leaving the furnace
start with and, as curing advances, stronger, heat run across the barn to the opposite side, branch
is applied. There may also be firing and no firing off at right angles near the opposite wall, one
intervals. Fires are started on the floor of the branch turning toward the side wall to the right
barn. Temperature and humidity is controlled by and the other toward the one to the left. Both
controlling firing and/ or by opening and closing the branches then take a right-angled turn, run
the ventilators. With a view to imparting to the parallel to the side walls and return to the wall
fire-cured leaf a distinctive odour, hardwood at which the furnace is located, exit through
is used as fuel. In recent times, more attention the wall, and discharge smoke and fuel gases
is being paid to smoking the leaf rather than into the chimney. The objective in all cases is
heating it and consequently, smaller timbers to achieve optimum possible distribution of heat
supplemented by hardwood saw dust are used. inside the barn. The barn is heated up gradually,

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by starting, in the first instance, small fires in the needed for aging is added and the tobacco is
furnace. As curing progresses, more fuel is fed securely packed in cases or hogsheads. Exported
into the furnace, and the temperature stepped tobacco is shipped in this form. The trend is for the
up. The relative humidity inside the barn is packing factories to stem the leaf-that is, remove
regulated by partially opening and closing the most of the stem leaving the lamina-usually by
ventilators. Under favourable conditions, the threshing machines but sometimes by hand,
entire process takes 4 days. When curing is before redrying it. The aging process, particularly
complete, the barn is allowed to cool. Thereafter with cigar tobaccos, is sometimes hastened by
the doors and ventilators are opened, and the forced fermentation procedures. After purchase,
leaf is allowed ‘to come to order’, that is to say, aromatic tobaccos are manipulated; that is, they
to absorb some moisture, so that is not too brittle are graded, baled, and subjected to an elaborate,
to handle. Tobacco is hygroscopic and absorbs in-the-bale, fermentation process before going
moisture and becomes supple. The curved to the ultimate manufacturer.
leaves are then taken down from the tier poles in
convenient lots for grading.
6. TYPES OF TOBACCO
5. FARM GRADING OF TOBACCO There are seven major categories of tobacco,
viz.L
5.1 After curing, the leaf may be piled in bulk
to condition for a time before it is prepared for i. Flue cured Virginia tobacco (FCV).
sale. The preparation consists usually of grading ii. Oriental.
the leaf and putting it in a bale or package of
iii. Bark flue cured.
convenient size and weight for inspection and
removal by the buyer. Except during humid iv. Sun cured.
periods, the leaf must be conditioned in v. Light flue cured cigar.
moistening cellars or humidified rooms before
it can be handled without breakage. Type of vi. Dark flue cured.
leaf and local custom determine the fineness of vii. Burley.
grading. As its most elaborate, grading may be
by position of the leaf on the plant, colour, size, Flue cured virginia tobacco is mainly used
maturity, soundness, and other recognizable for manufacture of cigarettes. Light air cured
qualities; flue-cured tobacco in the United tobacco is used in the manufacture of bidis.
States and Zimbabwe is graded this way and
each grade bulked or baled separately. Much 7. PROFILE OF INDIAN TOBACCO
simpler grading is usual in developing countries, 7.1 A wide range of tobacco products-cigarettes,
where the buyer is as much concerned with the cigars, cheroots, bidis, hookah tobacco, chewing
proportions of each grade as with the quality of tobacco and snuff-are also produced in our
the entire lot; aromatic tobaccos are an example country. The quantum of total production of
of this. Most tobaccos entering world trade, tobacco (all varieties) has earned for India the
except the aromatic, are assembled before sale third place among the world growers of tobacco,
into bundles, or hands, of 15 to 30 leaves and yet only 20% of the production is exported, the
tied with one leaf wrapped securely around the rest being locally consumed. The chief reason
butts. is that varieties like Virginia that are preferred
5.2 Most tobaccos, except aromatic and cigar, by international buyers account for only about
are regarded if necessary and usually redried 25% of the total production. The rest of the
after purchase; then the exact amount of moisture production is, in the eyes of international buyers,

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nondescript. A related reason is the low yield per i. Whether the leaf, when shredded, gives
hectare of the preferred varieties. reasonably long rags (small rags tend to fall
out from the ends of the cigarette);
7.2 Following are the main varieties of tobacco
grown in India: ii. Whether the leaf yields minimum quantity
of dust and smalls, and maximum quantity
7.2.1 Flue cured virginia (FCV) is easily the
of useable rag;
most important variety of tobacco grown in India.
Largely used in the manufacture of cigarettes, this iii. Whether a given weight of cut-rags fills the
variety accounts for about 90% of the quantity cigarette as firmly as possible; and
exported by India annually. The pioneering iv. Whether the tobacco gives the maximum
efforts of the Imperial Tobacco Company were number of cigarettes of the required
responsible for introducing in 1921 Virginia firmness per unit weight of tobacco.
tobacco in Guntur district in Andhra Pradesh.
Until 1929 when FCV was introduced, Sun- Here, equilibrium, moisture content, porosity,
cured Virginia was the main produce. Today, elasticity, shatter-ability etc. are relevant.
the cultivation of FCV is mainly concentrated 7.2.4 Traditionally, FCV has been grown in
in the coastal districts of Andhra Pradesh. The black soils of the coastal districts of Andhra
transitional belt in Karnataka is also witnessing Pradesh. In fact, the image of the Indian FCV
rapid development of this variety. in the foreign markets had been built purely
7.2.2 Quality of FCV is a highly complex on the produce of black soil. In the recent past,
concept, nebulous to the point of defying however, international preference has shifted
definition. In the ultimate analysis, the smokers in favour of the produce of light soils, which, in
are the best assessors of quality. The taste, the turn, has caused a shift in cultivation from black
aroma, and the strength are what the smokers soils to light soils. A distinction will therefore
seek in tobacco. Smoking pleasure, however, is have to made between black soil and light soil
highly subjective, and by the same token difficult tobaccos.
to measure. But the manufacturers cannot throw 7.3 Bidi tobacco is the next important variety
in the towel for that reason alone. They do require that is grown in our country. It shares about
objective indices for assessing quality. It is here 25% of the total tobacco production in the
that the physical and chemical characteristics country. Among the states growing this tobacco,
of the leaf assume significance. True, a nature’s Gujarat stands first. In Gujarat, the cultivation
product like tobacco exhibits a wide variety of is concentrated mainly in Kaira and Baroda
physical and chemical characteristics. Even so, districts and to some extent in Mehasana district.
research has made it possible to prescribe certain The other important Bidi tobacco growing areas
standard parameters of quality. are Nipani in Belgaum district of Karnataka
7.2.3 Broadly speaking, quality of FCV is a and parts of Kolhapur and Sangli districts of
function of smoking quality and manufacturing Maharashtra. The tobacco produced in Nipani
quality. Smoking quality depends mainly on the area is considered to be stronger than that
chemistry of the leaf. The nicotine content, flavour produced in Gujarat, Kurnool area of Andhra
and aroma, and burning characteristics are its Pradesh is a newly developing bidi tobacco
area. To a small extent, it is grown in the States
main ingredients. The physical characteristics of
of Rajasthan and Madhya Pradesh.
the leaf such as the colour, maturity, body and
texture are also relevant. Manufacturing quality 7.4 Cigar, cheroot & chewing tobacco—
is determined mainly with reference to the The South Tamilnadu districts of Madurai,
following considerations: Tiruchirapalli, Coimbatore and Salem districts

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grow cigar filler, binder, cheroot and chewing marketing of flue-cured varieties have had a
tobaccos. The tanka tobacco produced on the salutary effect on the marketing of those varieties.
islands of Godavari and Krishna rivers and the The bidi tobacco trade, on the contrary, is a free-
natu tobacco grown in Andhra Pradesh are for-all. Dalals and middlemen dominate. There
utilised for manufacture of indigenous chuttas is no grading system for bidi tobacco. Price is
(Cheroots). almost invariably dictated by middlemen
7.5 Cigar wrapper tobacco is currently grown 8.2 Marketing of the flue-cured tobacco involves
on a very small acreage in Cooch Bihar district of the following main players:
West Bengal. The production in India is sufficient
i. The farmers who grow, cure, and rough-
to meet the requirement of the domestic cigar
grade their crop on their own account.
industry.
ii. small dealers, with or without packing
7.6 Hookah tobacco—Desi, Vilayati, Motihari
and Jati types of tobacco are cultivated in facility, who buy, process, pack & sell
Muzaffarpur, Dharbhanga and Purnea districts tobacco to exporters and to the domestic
of Bihar, and Cooch Bihar and Jalapaiguri cigarette manufacturers.
districts of West Bengal. These types are also iii. Domestic manufacturers of cigarettes.
used for chewing and in the manufacture of
snuff. Farukhabad in Uttar Pradesh is also an iv. Exporters who buy, grade, redry, pack and
important area growing tobacco mainly for sell tobacco to overseas buyers.
hookah and chewing purposes. At times, the STC enters the market and buys
7.7 Traditionally the premier overseas buyer tobacco and, on such occasions, the associates
of Indian tobacco, the UK still maintains the of the STC also join the ranks of the buyers.
lead, despite the recent downward trend in the 8.3 Small dealers are for the most part growers
quantum of leaf lifted by it. The UK is a selective themselves. They maintain warehouses, and a
buyer, and so is Japan, though it lifts a much few of them have redrying and packing facilities
smaller quantity. The strained political relations also. Out of business considerations or at least
with China during the 60’s and a greater part of for reasons for economy, they buy tobacco
the 70’s brought tobacco exports to that country from fellow growers in their locality. The local
to a complete halt. After the lapse of about 20 growers, on their part, prefer to sell their produce
years, China has started buying Indian tobacco to the small dealers in their locality, because,
though in small quantities. Imports by Eastern in the process, they are able to avoid the risk
European countries have shown a steady and expenses involved in the direct selling of
upward trend, Russia taking the lion’s share. tobacco to manufacturers/ exporters. The small
dealers number about 200. They make own
8. MARKET MECHANISM arrangements for finance, institutional as well
as individual. They, in turn, often help the local
8.1 The marketing of tobacco in India comprises growers with some assistance in cash or kind
of, marketing of higher varieties meant for (e.g. fertilizers).
exports and manufacture of cigarettes in India,
and, marketing of the remaining varieties locally 8.4 The three biggest Indian manufacturers
consumed in the manufacture of bidis, cheroots who take roughly a quarter of the flue-cured
etc. The market for the higher varieties is better crop each year for their own factories are the
organized, attracts foreign buyers, and is based Indian Tobacco Co., National Tobacco Co. (now
on a grading system. Further, the regulatory a subsidiary of the Duncan Group), and the
functions of the Tobacco Board in the field of Golden Tobacco Co.

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8.5 There are about 35 exporters of substantial realising the proceeds. Secondly, purchasers
size and stability, mainly in and around normally provide farmers with cash advances
Guntur. Family and owner-managed business and/ or inputs like fertilisers, and consequently a
predominate; few are corporate enterprises. farmer is more or less obliged to sell his produce
They have large scale redrying and packing to a particular purchaser. Thirdly, many farmers
facilities, and long-established contacts with grow the crop with a particular purchaser in
foreign buyers. Late in January each year view, and the purchaser encourages such stable
markets open, and well before that time the relationship with farmers who regularly produce
larger buyers setup in the tobacco districts of good tobacco grown by selected farmers,
A.P. Some 150 of their own buying depots, ensuring for themselves an assured source of
locally called purchase platforms. These buying supply, and for the farmers an equally assured
courts each usually consists of a thatched, open- avenue of sale.
sided, temporary shed, a makeshift office, and a 8.7.1 As each bale is bought, it is weighed, the
small storage shed. Traditionally, ILTD has been amount due to the farmer (less advance if any)
providing the lead in buying. That is to say, ILTD calculated, and purchase voucher prepared.
inaugurates the buying and the rest follow suit.
Generally, only a part of the money due is paid
The pioneering role that ILTD had played in the on the spot, the rest being deferred to later dates.
past in the field of tobacco, its organised bigness, This is particularly true of smaller purchasers.
and more importantly, its insight into the local
production trends, quantity wise as well as quality 8.7.2 Purchasers, as suppliers, no doubt plan
wise, coupled with its intimate knowledge of the their buying keeping in view the order they
current preference of international buyers-all have in hand. But farm grading, as pointed out
these factors have been instrumental in placing above, is not in line with manufacturers grade.
the mantle of leadership on ILTD. With the result the purchaser gets a clear picture
of what he has purchased only after he gets the
8.6 When the farmers come to know that leaf graded in his factory. Often, he finds that
buying is about to start, they bring their bales of he has not purchased sufficient quantities of
produce to the buying courts and display them the required grade of leaf. There is therefore a
on purchasing platforms. There the purchaser’s good deal of inter-purchaser buying and selling,
representative, known as “buyer”, opens each designed to make up shortfalls in certain grades,
bale, assesses its over all quality composition and dispose of surpluses in others.
by sight and smell and keeping in view the
proportions of each required grade contained in 8.7.3 The Indian farmer has traditionally been
the bale, offers a price which is usually accepted. grading the leaf on the basis mainly of its colour.
Some buyers never bargain; others haggle with Historically also, for reasons which have lost
farmers in search of an agreed figure. some of their relevance, Indian Leaf was valued
for its colour. Colour is fleeting; it must be fixed
8.7 As a general rule, the price offered by the quickly by re-drying. This is one reason why the
buyers is accepted by the farmer. For more marketing season lasts barely two months.
reasons than one. Firstly, the farmer who is
dissatisfied with the price offered is technically
free to take his produce to the purchasing 9. PROCESSING OF TOBACCO BY
platform of another purchaser, but there is no PACKERS
certainty that he will get a better price. There 9.1 On the conclusion of sale, tobacco is
is, again, the expenses to be incurred in shifting transported to factories for further processing. In
the produce from one platform to the other, as much as farm-graded tobacco is a mixed bag,
and the incidental delay in making the sale and it will have to be graded again so as to confirm

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to the requirements of overseas buyers or, as comparatively safe keeping condition. At the time
the case may be, domestic manufacturers. For of purchase, FCV normally contains about 15%
this purpose, the Agmark grade specifications moisture some of which is lost during grading
prescribed by the government of India are and stripping operations. Still, the strips will
followed. Factory grading is done manually have to be redried. Selective buyers like the UK
by women labourers in halls fitted with and Japan clearly specify the desired moisture
humidifiers. There women sit in lines and grade level which varies from 10.25 to 11%. Redrying
tobacco. Ungraded tobacco is brought to them entails the drying of the strips in successively
in line and graded tobacco collected from higher temperatures ranging from 130–170
them by a separate set of labourers. Mistries degrees F, and cooling them to temperatures
supervise work. varying between 95 and 110 degrees F, holding
9.2 The next operation is stripping which all the while the moisture at predetermined level.
consists in the removing the midrib of graded The modern redrying machine consists, in the
leaf. If the buyer so desires, graded leaf can be main, of a series of compartments, usually 3 or 5,
straight away be redried and packed. However, through which the strips are passed by means of
the bulk of the orders, especially those emanating an apron type of conveyor. As tobacco passes
from the UK buyers, are for strips. The leaf is through the compartments it is gradually heated
stripped manually by women workers. Stripping up, and then cooled down to predetermined
operations are also conducted in halls fitted with temperatures, depending, of course, on its
humidifiers. The aim is to prevent the leaf from type and grade. Right through the process, the
becoming brittle owing to excessive drying. A moisture level is carefully controlled. At the end
veritable army of labourers, scrap collectors, of the process, the strips come out in a warm
sweepers, table checkers, line boys, line maistries condition and with the desired moisture content.
and head maistry take part in the operations. 9.4 The redried strips are straight away packed
Stripping does not mean total removal of the in bales or cases as required by buyers. It will be
midrib, leaving a split leaf. In normal stripping interesting to note that over all cost considerations
60–65% of the mid rib is removed. At times, weigh heavily with overseas buyers then they
buyers may direct that special stripping be done prefer one type of packing to the other. The
in which case more than 90% of the midrib is cost of packing materials apart, factors such
removed. Special stripping is an expensive as the reuse potential of the packing material
operation; needless to add, loss on stripping will (after the package is opened) are also taken into
be more in special stripping. Ordinary stripping account by them. For instance, certain overseas
yields, on an average, 73–75% of strips, while buyers specify that tobacco should be packed in
the out turn in special stripping is 67–69%. plywood cases. Now, plywood cases are more
The strips are sand-screened next so as to free costly than ordinary wooden cases, and much
them of sand and fine scrap. For this purpose more costly than gunny or burlap packing.
specially designed drums are filled with the Enquiries revealed that the overseas buyers had
strips, and rotated with the help of power. High certain plans for reusing the plywood cases, and
speed rotation separates sand and fine scrap that it was more economical for them to obtain
from the strips. plywood this way. This small highlights how cost
conscious overseas buyers are.
9.3 Redrying plays a vital role in the processing
of tobacco for packing and storing, its 9.5 Packed tobacco is then sold to local
significance lying in the fact that it regulates the manufacturers of tobacco products or, as the case
moisture content of tobacco. It is by controlling may be, exported. Tobacco meant for export
its moisture content that tobacco is put into should invariably be inspected and graded under

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Government of India’s Agmark scheme. After valuable slice of the Indian flue-cured crop
inspection and grading, Agmark slips indicating each year, do not make direct purchases in
the grade of tobacco that is exported are pasted India. Apart form what they buy from ILTD
on the packages. No package can be exported they place orders with more than a dozen leaf
without Agmark specifications. merchant companies incorporated in UK, who
9.6 Export: The mode and mechanics of in turn obtain their requirements from Indian
exporting tobacco and realising the proceeds, suppliers with whom they have close and often
in its essentials, is no different from that of long-standing relations. Senior men from these
exporting any other commodity. The mechanics merchant houses go out to Guntur each year
of export and import business has been dealt to watch the sales, give their suppliers help and
with elsewhere in this volume, and hence it is guidance in all aspects of handling, packing
not proposed here to repeat it. and exporting, sometimes helping with capital
and modernisation, and generally acting as a
9.7 The system of inspection and grading two-way link between the original buyer and
under Government of India’s Agmark scheme the ultimate manufacturer. The larger of these
of tobacco meant for exports has already merchants also sell Indian tobacco in many other
been touched upon. This system has created markets and, in effect, have become an export
confidence in international market for Indian development arm of the Indian industry.
tobacco. Government’s regulatory intervention
in the field of export prices for each Agmark 10. EXAMINATION OF ACCOUNTS
grade is a related and, indeed, complementary
matter. With a view to ensuring that Indian 10.1 Growers, small dealers, domestic
tobacco does not get a short shrift in international manufacturers of cigarettes, and exporters
markets, Government of India each year fixes, constitute the organised sector of the Indian
in consultation with the Tobacco Board, the tobacco market. Domestic manufacturers of
Minimum Export Prices (MEP) for each grade. cigarettes buy mainly from growers and to a small
No export can be invoiced at prices less than extent from dealers. Small dealers buy tobacco
the MEP fixed for each grade. Each year a from growers, and either process it in their own
public notice is issued by Government of India factory or get it processed on commission basis at
indicating the MEP fixed for each group. other factories. They sell the processed tobacco
either to domestic manufacturers or to exporters.
9.8 Certain incentives are also given by Exporters buy tobacco, process and export it to
government to promote exports of Indian foreign countries. They may at times make small
tobacco. These take the form of licenses to import sales to domestic manufacturers.
specified goods from abroad, goods that are
inputs in the tobacco export trade. Gerrad wire 10.2 Verification of purchases-In the case
needed for packing, spares for machines used in of agricultural produce like tobacco, or rice,
verification of purchases is more than ordinarily
processing tobacco and the like, are covered by
difficult. Firstly, farmers do not maintain books
the licenses. The value of import licenses is 3% of
of account, and hence there is no scope for
the value of Indian tobacco exported. Generally,
cross verification. Secondly, the purchases are
the exporters sell the licenses at a premium of
investigated usually after the lapse of 2–3 years,
25–30%. and consequently, what passes for verification is
9.9 At the non-governmental level, the role nothing more than a test of the farmers’ memory.
played by the so called ‘London Merchants’ Thirdly, in the case of tobacco particularly, the
in the export trade of Indian tobacco deserves absence of a precise grading system confounds
mention. The UK manufacturers, who lift a the situation. Farm grading is inexact, and each

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bale bought for sale by farmers is almost unique the members of the syndicate were seized from
in respect of proportion of the various grades the assessee’s premises. It was revealed that
of leaves it contains. The result is that not only tobacco was purchased and sold to STC by the
the price offered for each bale varies but, more assessee but in benami name of the syndicate.
importantly, a comparison of the prices does Blank vouchers obtained from the farmers were
not take us any farther than the truism that meant for overstating the purchase price, so that
the difference in the price is attributable to the the syndicate itself could understate its profits.
difference in the quality of the leaves purchased. Blank cheques signed by the members of the
What is worse, there is no means of verifying syndicate were meant to enable the assessee-the
whether the truism is true in a given case, real owner-to draw the moneys deposited into
because at the time of sale the exact proportion the bank accounts ostensibly standing in the
of the various grades of leaves contained in a name of the syndicate and its members.
bale is nowhere recorded, as it is not known. 10.4 Usually dealers and packers advance
Fourthly, the TLPV system is no doubt designed moneys and other inputs such as fertilisers to
to combat malpractices at the time of purchasing farmers, the advance being adjusted at the time
tobacco from farmers. It is, nevertheless, well
of paying the value of the tobacco purchased
worthwhile to remember that a system is only from the farmers. The manner in which the
as good as those who operate it. Even the most farmers accounts are settled need to be examined
meticulously designed system is no insurance closely. In case of cash advances, it must be
against manipulations which may subvert and
seen whether, on the relevant dates, the dealer
ultimately destroy the system.
had sufficient funds in his possession. In case of
10.3 The vouchers evidencing the sale of advance of inputs, it must be seen whether, on
tobacco are invariably prepared by the purchasers the dates on which the inputs were purchased,
themselves. In the best of circumstances, farmers the dealer had sufficient fund in his books of
are only interested in getting the agreed price as account, and whether he had accounted for the
quickly as possible. It is not uncommon for the entire purchases.
purchasers to obtain the signatures of the farmers 10.5 It was observed in a case that some
on blank voucher forms and to fill them in later. close relatives of the assessee had ostensibly
Here, the price of tobacco may be inflated. advanced moneys to farmers and had obtained
To match the inflated price, the quality of the promissory notes from them. It was explained
leaf may also suitably be manipulated. Such that the advances had been made from out
manipulations may be done in respect of not of the agricultural income of the relatives.
only tobacco purchased by the assessee firm in Investigations revealed that the:
its own name, but also of tobacco purchased and
sold benami. In a case where search and seizure i. Relatives did not earn sufficient agricultural
operations were conducted, it was seen that the income, and whatever agricultural income
assessee firm had transacted large volume of they earned had already been credited to
business with the STC in benami names. Tobacco their accounts in the books of the assessee;
was purchased ostensibly by a syndicate of small ii. Advances had not been made in cash as
brokers, and sold to the STC. The value of the alleged, but in kind, i.e. fertilisers;
tobacco was also ostensibly received by the
syndicate directly from the STC, and deposited iii. Fertilisers supplied to the farmers had been
into bank accounts operated by the syndicate. In purchased with the assessee’s funds; and
the course of the search, blank vouchers signed iv. Purchase of the said fertilisers had not
by agriculturists, and blank cheques signed by been accounted for by the assessee.

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10.6 At times, the dealer may claim that the grade, it may be possible to establish inflation in
advance given by him to farmers has become purchase price. In the case of tobacco, however,
bad and irrecoverable. While investigating a direct correlation between the price paid and
this claim, it will be useful to find out from the the produce purchased is not possible. The
Tobacco Board whether the farmers in question reason is that farm grades do not conform to
continue to grow tobacco under licenses issued manufacturers’ grades. It is nevertheless possible
by it. The bank accounts opened by the farmers to attempt a rough correlation between the two
under the TLPV system will also reveal whether
sets of grades. It must at once be added that
the advances could be recovered or not.
the correlation is so broad that, in the best of
10.7 An important question is whether the circumstances. It is nothing more than a pointer
price paid for the produce is reasonable, having to the need for further investigation.
regard to its quality. It is not difficult to answer the
question in cases where the produce is classified 10.8 The farm grades are labeled-IV, 2V, 3V,
into precise grades of quality. Superior quality is 5V, 6V and 8V. Agmark grades as standardised
costlier than inferior quality. If, in a given case, a by government are-1, 2, 3, 4, 5 or LBY, LBY2,
higher than normal price is alleged to have been Brown DB & LG etc. Farm grade tobaccos, when
paid, that fact by itself will indicate the need for graded again in factories, are expected to yield
further investigation. By comparing the price paid certain percentage of export grade tobaccos.
by other dealers for the grade in question, and The following table indicate percentages of
by correlating the purchases and sales of each expected yield:

Table 1
Farm Grade Corresponding Agmark Grades Approximate of Percentage Agmark Grades
1-V Grade 1 to 4 65–70% (North & Central)
Grade 1 to 4 50–60% (South)
Grade LBY 10–15%
2-V Grade 4 25–35%
Grade LBY 35–40%
Grade LBY2 20–25%
Grade B 10%
3-V Grade LG 65–70%
Grade LMG 20–25%
Grade MG/ DG 10%
5-V Grade B 30–40%
Grad DB 30–40%
Grade PL 30%
6-V Grade LMG 20–25%
Grade MG 40%
Grade DG 35–40%
8-V Grade PL 50–75%
Grade DB 20–25%
Grade DG 5–25%

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Techniques of Investigation for Assessment Vol. 5

It may be possible to see generally whether the Scrap and chura are sold to bidi manufacturers.
price paid is reasonable with reference to the Previously stems were discarded. Nowadays
yield of export grade tobaccos actually obtained. the stems are flattened, shredded, and used
as cigarette filter. It must be seen whether the
11. LOSS OF STOCK moneys realised on the sale of these items have
11.1 Certain losses, visible and invisible, been accounted for.
occur in the course of handling and processing 11.5 Loss on redrying is an invisible loss, being
of tobacco. Invisible loss arises because of the result of the loss of moisture that occurs during
driage and loss of moisture. Visible loss occurs the process. The extent of loss on redrying will
on account of the by-products obtained while naturally depend on the specifications given by
processing tobacco. The usual by-products viz. overseas purchasers or domestic manufacturers.
scrap, bits and stems are not losses in the real
The redrying loss claimed must be checked
sense, because they are salable.
with reference to the redrying operation reports
11.2 Normally, the losses are of 3 types viz., prepared by factories. Following table gives
(i) grading, stripping and sand-screening losses; approximate average loss occurring at the
(ii) redrying loss; and (iii) tobacco that is unfit various stages of processing tobacco:
for human consumption. As long as tobacco
leaf was subject to excise duty, Central Excise Table 2
Department used to verify and certify the losses Stage Visible Invisible
reported by the dealers. Today, the leaf is not Losses% Losses%
subject to excise. Hence the reasonableness of Grading–scrap and 2.9 1.5
handling and processing losses must be verified. bits
Here, the records maintained by the dealers Stripping–stems 20.0 0.5
and packers for internal control may be usefully
Scrap & bits 1.0 0.5
examined.
Sand screening–for 0.5 0.5
11.3 The loss or shortage that occurs while sand & dust (for
grading the leaf in factories can be ascertained export to UK)
from grading operation reports prepared by the Redrying–scrap 2.5 3.5
factories. These reports indicate the number of
Total 26.9 6.5
bundles and the weight of tobacco issued for
grading, and the weight of leaf obtained under
various export grades. In format and content the 12. The percentages vary from packer to
reports may vary from dealer to dealer, but they packer, depending upon the quality and grade
invariably contain enough basic data to enable of tobacco processed, the efficiency of handling
one to work out the loss in grading. The weight and processing the leaf and so on.
of tobacco issued for grading, and the weight of
Charges for grading, stripping etc.
leaf obtained on grading may be, if necessary,
checked with the details in the weighment report The verification of the expenses claimed under
register. these heads is no different from the verification
11.4 Similarly, the loss on stripping and sand- of other expenses. In tobacco cases, however,
screening may be worked out from the factory it is possible to verify the claim from another
reports on these operations. The quantity of angle. Small dealers not owning factories get
stems, scrap and chura (tobacco dust) obtained their tobacco processed and packed in other
in the operations are recorded in the reports. factories on a commission. When a factory

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owner undertakes to process and pack tobacco 14. SALES

for others he naturally expects to earn a profit
14.1 Three types of sales can be visualized,
for himself, and consequently the profit element
viz, sale to domestic manufacturers of cigarettes,
is built into the rates quoted by him. Therefore,
inter-dealer sales, and exports. The first two
the cost of processing and packing a unit of his
types of sales can be verified by cross checking
own tobacco must be less than the rate charged
the purchasers accounts in the books of account
by him to process and pack a unit of tobacco
belonging to others. If the unit cost of processing of the suppliers and the suppliers account in the
and packing assessee’s own tobacco is higher books of account of the purchasers.
than the rates charged by him for others, that 14.2 Most of the processed FCV is exported,
fact will per-se indicate the need for further and hence export sales must be critically
probe. It will therefore be worthwhile to compare examined. Here, two modes of exports, viz.,
the assessee’s unit cost with the rates charged outright sale, and sale on consignment basis,
by him for handling the tobacco belonging to deserve notice. In both the types of sales, it must
others. Variations, mostly marginal, are bound first be examined whether, having regard to the
to be there between packer and packer, as also grade of FCV exported, the invoiced prices are
from year to year. The major determinant of cost in accord with the minimum export prices fixed
is the wages paid to labour. by the government. As regards consignment
sales, the transactions should be scrutinized with
13. FOB EXPENSES reference to both the initial pro forma invoice
The export price of tobacco is normally quoted (prepared at the time of sending the goods for
on FOB basis, the exporter being responsible to sale on consignment basis) and the final invoice
meet the connected expenses. It often happens prepared on conclusion of the sale.
that dealers having stocks of particular grades of 14.3 Tobacco cannot be exported without first
tobacco do not have on hand any export orders being inspected and graded under the Agmark
and vice versa. The problem may be solved scheme. Hence, the Agmark grade awarded
by means of inter-dealer sales. Alternatively, to each bale exported, and the MEP fixed for
dealer ‘A’ having stocks of the required tobacco each grade are useful indices in the matter of
may execute orders secured by dealer ‘B’ who verification of sales. This is however not to
is unable to execute the orders as he does not say that overseas buyers invariably accept the
possess stocks. In such a case, the exports will Agmark grades, or that they do not pay more
be made in the name of ‘B’ who has secured than the MEP fixed for each grade. Overseas
the export order. ‘B’ will usually incur the FOB buyers, at times, down grade tobacco and at
expenses and recover them from ‘A’. In ‘B’s
other times, pay a higher price than the MEP.
case, therefore, there can be no question of
In such cases, the circumstances surrounding the
allowing FOB expenses in respect of the orders
transactions must be examined closely.
executed by ‘A’. As a general rule, therefore,
the first step should be to collect the details 14.4 Particularly in cases in which a higher
of the export orders secured by the assessee, price than the MEP is paid, the matter needs
categorize these into those relating to the export to be investigated from the point of view of
orders executed by him on his account, and possible under invoicing. For example, MEP
those relating to the export orders which he had fixed for redried strips of Agmark grade 4 is
permitted others to utilise. The details will help Rs. 2062 per 100 kg, FOB, packed in bales.
not only in examining the expenses claimed Suppose an overseas buyer paid Rs. 2162
by him but also in handling the cases of the for that grade of tobacco. One possibility is
other dealers. of course that the grading was strict and that

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the overseas buyer was prepared to pay a fair that is the major factor. Here, cigarettes lead the
price for the goods. Another possibility is that rest. The advent of efficient cigarette making
the tobacco was really of Agmark grade 3 (the machines and improved blending techniques
MEP for which is Rs. 2238) but was deliberately have made the phenomenal growth of cigarette
downgraded and under-invoiced by Rs. 76 per trade possible the world over.
100 kg. It is extremely difficult to decide whether, 16.2 India occupies 10th position among
in a particular case, such manipulations have world cigarette manufacturers, with an annual
been done. production of 68.5 billion pieces. Indian cigarette
manufacturers consume about 20% of the
15. CLOSING STOCK tobacco produced in the country. Nevertheless,
15.1 Tobacco is exported mainly on India’s share in world cigarette production is
consignment basis. The stock at the end of the less than 2%. In Asia, it stands second to Japan
year of account, therefore, comprises the stocks whose production is nearly three times more
lying in the country and those lying with the than ours. It’s share in world export market is
overseas consignees. The basis of valuation of negligible.
each grade of tobacco lying in stock in India and
outside must be scrutinized. 17. MANUFACTURE OF CIGARETTES
15.2 Merchants buy farm grade tobaccos, grade 17.1 The processed leaf is first allowed to age or
them again in their factories and export them. to mellow so as to render it fit for consumption.
Since farm grades do not match manufacturers’ When the leaf is ready for manufacture, certain
grades and since overseas buyers lift superior hygroscopic agents such as glycerin are added to
grades only the traders are normally left with it in small quantity so as to maintain its moisture
unexportable grades of tobacco. Such grades are content at the proper level. It is absolutely
essential to regulate the moisture content
valued at lower rates. However, it is essential to
throughout the several stages of manufacture. If
guard against the superior grades lying in stock
the leaf is too dry, the flake or filler will drop out
at the end of the year being passed off as inferior
of the open ends of the cigarette; if too moist, the
grades and valued at lower rates.
cigarettes will deteriorate rapidly and its smoking
15.3 MEP fixed by government may usefully quality will suffer.
be adopted as a basis for valuing stocks lying 17.2 Thereafter, certain sweetening, flavouring
with overseas consignees. As for local stocks, and casing agents are added to the leaf. The
the last sale price or the market price obtaining variety and quantity of the materials employed
immediately after the close of the year of account vary and are trade secrets.
are useful indices.
17.3 Blending of leaves is easily the most
important factor in cigarette manufacture. There
16. INDIAN CIGARETTE INDUSTRY are many reasons why blending has come to stay.
16.1 The popularity of tobacco smoking as a First, tobacco leaves come in all types and grades,
daily pleasure has, over the years owed much to each type or grade exhibiting particular quality
the conversion of the cured leaf into convenient or qualities. No type or grade of leaf however
form for use by the consumer. True, the blending possesses all the qualities which contribute to the
of various grades of leaves, the addition of ideal finished product. For a fact, various types
aromatic substances and the like do enhance or grades of leaves possess opposing qualities. It
product appeal. But it is the convenience of the is through blending that the desired qualities are
customers and ease of dispensing by merchants harnessed and heightened. Secondly, smokers’

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preferences are varied. Some prefer aromatic Equipment in the primary area includes tobacco
tobaccos, some light tobaccos, and some others bale loosening machines, preconditioning
strong tobaccos. The varied tastes can be catered and casing equipment, automatic blending
to only through blending. Blending is very much and shredding machines etc. Then there are
a balancing act, designed to obtain in the finished the cigarette makers, soft packers, cellophane
product a favourable combination of the desired wrappers and cartoners, duplex packers and
qualities. Thirdly, consumer preference manifests wrappers for shell-and-slide packers.
itself in the form of preference for a particular
brand or brands of tobacco products. And the 17.6 Cigarettes are subject to excise duty. The
consumer naturally expects his brand to remain, excise authorities exercise close control over
quality wise, substantially the same year after the entire process of cigarette manufacture
year. But the weather conditions change from through the registers and statements prescribed
year to year, producing marked variations in the under the Excise Act. The details contained in
characteristics of the tobacco crop produced in a these registers and statements is of great help.
locality. The yearly variations in the quality of the The fines, compounding fees etc. levied by
leaf pose a big hurdle in maintaining, the quality the Excise authorities for violation of Excise
of the product. Manufacturers overcome this by regulations give useful clues in the matter of
carrying sufficient stock of leaves of particular detection of suppression of output and income.
varieties, and by blending them in desired The circumstances leading to the levy of fine/
quantities. The fourth reason, is that blending
fees, therefore, merit close and critical study.
enables manufacturers to mix inferior grades
of tobacco with top grade leaves, and to sell
the product on the strength of the latter. It must 18. CASE STUDY—MANUFACTURE OF
however be added that as long as the inferior CIGARETTES
grades of leaf have some qualities to contribute to 18.1 Some companies engaged in manufacture
the blend, no objection could possibly be taken of cigarettes in India also manufacture popular
to such a practice. foreign brands of cigarettes under license
17.4 The leaf blend is then fed into the cutting agreements. In some of the cases royalty is
machine which shreds the leaf into strands to be paid and in some cases no royalties are
somewhat less than 1 mm wide. The shredded provided. In one case, an Indian company,
leaf is then dried to the desired moisture level, engaged in manufacture and sale of cigarettes,
varying from 12–13%. Special flavours are entered into license agreement with a foreign
added if necessary. After about 24 hours the company for their popular brand “Rothmans”
material is fed into the cigarette making machine cigarettes vide agreement dated 09/8/1987.
which turn out upto 4,000 cigarettes a minute. Under this agreement, the assessee was allowed
to manufacture and sell Rothmans cigarettes
Normally a battery of such machines are
in India for five years. As per Para 6 of the
operated simultaneously. The cigarettes are then
agreement, the licensee had the sole agency
packed mechanically. Packing machines can
in India for the manufacture and sale of the
pack upto 5000 cigarettes per minute.
said brand in Indian market. As per Para 11
17.5 The demand for cigarettes today is no royalty or fees was payable by anyone.
enormous. It can be met only with the help of Further, there were no stipulation regarding the
sophisticated machines designed to operate on selling price of cigarettes. The agreement
a large scale, and high speed. The entire process provided for maintaining quality of production
of cigarette manufacture is highly mechanised. and inspection etc.

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18.2 During the assessment, it was noted from bidi tobacco is primarily used for domestic
the computation of income filed with the return consumption. Bidi tobacco forms about 35%
of income, the assessee had reduced an amount of the total tobacco production in the country.
of Rs. 26,20,500/- from total income, as capital Gujarat, Maharashtra and Karnataka produce
receipt because of non-renewal of license from most of the bidi tobacco grown in India.
the foreign company. It was submitted that as 19.2 The Indian bidi tobacco market,
there was loss of source of income the amount unorganised as it is, is dominated by private
of Rs. 26,20,500/- was not taxable even though trade. Bidi tobacco is mostly sold in the villages.
it was shown as revenue receipt in the Profit and The traders purchase processed tobacco or even
Loss Account. the standing crop, through their ‘dalals’. In a
18.3 The AO, after examining the facts of the normal year, when there is no glut in bidi tobacco,
case and terms and conditions of the agreement, buyers from towns approach farmers through
local dalals, and the farmers indicate the price
held that the amount cannot be treated as a
which is ultimately settled through negotiations.
capital receipt for the following reasons:
But in years of glut, the farmers have to move
i. The assessee is a full fledged and exclusive from dalal to dalal beseeching them to purchase
agent of M/s Rothmans. the produce. The growers are then at the mercy
ii. The compensation received by the of the dalal or trader who fixes the terms and
assessee is deemed income liable to tax conditions of purchase.
under Section 28 (ii) (b) & (c) r.w.s. 2 (24) 19.3 Though bidi tobacco falls under the pale of
(v) of the Act. the Agricultural Produce Marketing Act, in actual
iii. The compensation is liable to tax under practice, thanks to the tardy enforcement of the
Section. 40 (i) r.w.s. 2 (24) (v) of the Act, Act, bidi tobacco marketing is plagued by certain
as deemed income being recoupment of practices and conventions which are loaded
an allowed loss for expenditure. heavily against the grower. Weight discounts at
the rate of half to one kg per 20 kg of produce,
iv. The compensation can be treated as and cash discounts ranging from 30% to 15%,
business income under Section 28 (ii), and though illegal, are common. The growers’
v. As per Section 2 (13) business includes accounts are never settled immediately after the
any trade, commerce or manufacture delivery of the produce, delays ranging between
or any adventure in the nature of trade, three months to three years being very common.
commerce or manufacture. No interest is paid to the growers on the delayed
payments. Again, at the time of settlement of
19. MANUFACTURE OF BIDIS account, the amounts due to the farmers are
rounded off invariably to the next lower hundred
19.1 India accounts for over 85% of the world’s of thousand, the sums thus withheld being
bidi tobacco production, the balance being treated as “bakshish”. (For example, if he owes
produced by Nepal, Bangladesh, Pakistan and the farmer a sum of Rs. 871.25 the trader will
Sri Lanka. The Indian bidi industry is a major pay Rs. 800; and if he owes Rs. 1109.60 he will
cottage industry. It employs more than 3.5 pay the farmer only Rs. 1000). The net result
million unskilled and mainly rural workers. The of these unhealthy practices and conventions is
annual wage bill of this industry is around Rs. that growers get only 70 to 75% of the value of
250 crores. Unlike FCV which is export-oriented, the tobacco sold by them.

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19.4 The two major inputs of bidi manufacture Authorities naturally exercise important checks
are bidi tobacco and tendu (kendu or timru) on bidi manufacture. An AO should be aware
leaves. The manufacturing process is very simple. of the nature and extent of the checks exercised
Tendu leaves are first soaked in water, and then and the information that bidi manufacturers are
cut into rectangular bits. Bidi tobacco (normally statutorily obliged to furnish to Central GST
a blend of two or three varieties of tobacco) in department. A brief resume of the role of Central
the form of strips or flakes is placed on the leaf GST Department in the bidi trade provides a
which is then rolled by hand, and tied with a convenient entry point to further discussions.
slender string. Both ends of the roll are tucked in 20.2 Every registered person shall keep and
to prevent the filler tobacco from dropping out of maintain, at his principal place of business, as
the bidi. The raw bidis are then carefully baked mentioned in the certificate of registration, a
in ‘bhattis’ (ovens) to make them dry and stiff. true and correct account of—(a) production or
The heat treatment also helps in preventing the manufacture of goods; (b) inward and outward
deterioration and decay of the tendu leaf in the supply of goods or services or both; (c) stock of
bidi. Thereafter, the bidis are packed in bundles goods; (d) input tax credit availed; (e) output tax
of 10 or 20 pieces each, labeled, packed, and payable and paid; and (f) such other particulars
marketed. as may be prescribed: Provided that where more
19.5 Bidi manufacturers purchase tobacco than one place of business is specified in the
from merchants/ commission agents. Tendu certificate of registration, the accounts relating
leaves are either purchased from merchants/ to each place of business shall be kept at such
commission agents, or collected from the forests places of business: Provided further that the
taken on lease by the bidi manufacturers. One registered person may keep and maintain such
or more of the following methods are generally accounts and other particulars in electronic form
adopted to manufacture bidis: in such manner as may be prescribed. (2) Every
i. The workers employed by the manufacturer owner or operator of warehouse or godown or
roll bidis in the factory owned by the latter; any other place used for storage of goods and
every transporter, irrespective of whether he is a
ii. The workers employed by the manufacturer registered person or not, shall maintain records
roll bidis in their own homes; of the consigner, consignee and other relevant
iii. Commission agents/ contractors receive details of the goods in such manner as may be
the inputs from the manufacturers, employ prescribed. (3) The Commissioner may notify a
the workers, and get bidis made by them. class of taxable persons to maintain additional
It is not unusual for manufacturers to buy bidis accounts or documents for such purpose as may
from smaller producers also. be specified therein. (4) Where the Commissioner
considers that any class of taxable person is not
in a position to keep and maintain accounts in
20. EXAMINATION OF ACCOUNTS OF
accordance with the provisions of this Section,
BIDI MANUFACTURERS
he may, for reasons to be recorded in writing,
20.1 Bidis, whether marketed under a permit such class of taxable persons to maintain
trademark/ label or not, are subject to excise accounts in such manner as may be prescribed.
levy. Unlabelled bidis attract lower rate of (5) Every registered person whose turnover
duty than labeled bidis. The Central Excise during a financial year exceeds the prescribed

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limit shall get his accounts audited by a chartered 21. PURCHASE OF TOBACCO
accountant or a cost accountant and shall 21.1 The manufacturers generally purchase
submit a copy of the audited annual accounts, tobacco from merchants or through commission
the reconciliation statement under Sub-section agents. Some manufacturers purchase the
(2) of Section 44 and such other documents in tobacco crop itself, and get is processed. In the
such form and manner as may be prescribed. (6) former case, a copy of the assessee’s account in
Subject to the provisions of Clause (h) of Sub- the books of the merchants/ commission agents
section (5) of Section 17, where the registered must be obtained and verified with the books of
person fails to account for the goods or services accounts of the assessee. While doing so, both
or both in accordance with the provisions of Sub- the movement of the goods and the flow of
section (1), the proper officer shall determine the cash must be scrutinized critically. Antedating/
amount of tax payable on the goods or services postdating of cash payments is the convenient
or both that are not accounted for, as if such method adopted to disguise the payments made
goods or services or both had been supplied by from out of moneys kept outside the books. The
such person and the provisions of Section 73 or cross-verification must be geared to detecting
Section 74, as the case may be, shall, mutatis such disguised payments. Similarly, by tracing
mutandis, apply for determination of such tax. the movement of goods (i.e. the date of receipt
20.3 The above records contain important of tobacco by the assessee), the AO will be able
information which could be utilised for to detect whether the assessee had been keeping
investigating the cases of bidi manufacturers. stocks outside the books. To elucidate-the
The AO should not make the facile assumption assessee might claim that a certain consignment
that an assessee will ensure that the books of tobacco weighing, say, 200 kg was received by
of accounts he produces before Income-tax him on, say, 15/09/1980, and might, on this basis,
authorities are in consonance with the Central seek to show that he had sufficient stocks to issue
Excise records. He should invariably examine to the workers during the period 15/09/1980,
the books of accounts of a bidi manufacturer 20/09/1980. A close verification of movement of
in the light of the information contained in the the goods might reveal that the consignment in
Excise records. question was in fact received on, say, 21/09/1980,
20.4 In one case, it was found that the stocks and that but for the said 200 kg which the assessee
of tendu leaves pledged by the assessee with had accounted for on 15/09/1980, he would not
the bank were substantially higher than those have had sufficient stocks to issue to the workers.
accounted for in the books. The assessee’s In such circumstances, it will be reasonable
explanation was that the excess stocks pledged to conclude that the assessee had utilised his
with bank belonged to the contractors who undisclosed stocks during the period 15/09/1980
were regularly supplying bidis to him. Upto to 20/09/1980.
this point, the case proceeded on conventional 21.2 Cross verification of the books of accounts
lines. The break came, when a close analysis of the assessee with those of the merchants/
of the information contained in the Central commission agents may help in detecting bogus
Excise records, relating to receipts and issues of or hawala entries made in purchase a/c, with a
tendu leaves, belied the assessee’s explanation. view to inflating the purchase price of tobacco.
The concealed income detected was confirmed In cases where the assessees purchase tobacco
by I.T.A.T. from the growers, verification of purchase is very

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difficult. Yet it is these cases that afford a lage acquaint himself with the procedure followed in
scope for manipulation. the concerned State.
21.3 A search conducted in a case revealed 22.3 The Forest Department exercises certain
that the assessee had made huge purchase of checks on the lessees, the nature and extent of
tobacco but accounted for only a part of it. It which vary from State to State. For example,
was found that the assessee had misused the Andhra Pradesh Forest Produce Rules, 1970
permits issued by the Central Excise Authorities. enjoin on the lessees to maintain, in respect of
Normally, each permit authorises the holder to each godown where the leaves are stored, a
transport once, and only once, the quantity of stock account in Form H, showing the details of
tobacco specified therein from point A to point the opening stock, the stock added and the stock
B indicated in the permit. In the instant case, disposed of, and the closing stock. The lessees
however, the assessee had utilised the permit to are also required to submit to the Divisional
transport tobacco by lorries twice. He did not Forest Officer a monthly statement showing-
disclose the quantity of tobacco thus illegally
transported. It was also noticed that the assessee i. The godown where stock is stored
had inflated the purchase price of tobacco ii. The balance of stock on hand at the time
(accounted for in his books) to the extent of Rs. of submission of last return
150–250 per baram (a local unit of 265 kg) iii. The stocks added
iv. The total quantity consumed or disposed
22. PURCHASE OF TENDU LEAVES
of and
22.1 Cost of Tendu leaves is one of the main
v. The balance of stock on hand on the date
components of cost of production of bidis. The
of submission of the return.
main problems in the assessment are:
22.4 Further, the leaves cannot be moved from
i. Whether the rates of purchase are out of the Division, unless a transport permit (TP)
reasonable. is obtained from the DFO. Again, movements
ii. Whether all the purchases have been within the Division require similar permits issued
accounted for. by the lessee or registered contractor as he is
called. When a contractor wishes to make a
iii. Whether the consumption of the leaves is
sale, he should obtain the written orders of the
reasonable.
DFO. The relevant proceedings of the DFO will
22.2 Tendu leaves are a forest produce. The indicate the name of the person to whom the
Forest department of the concerned States registered contractor is permitted to make the
each year lease out to contractors the right to sale, and the quantity of the leaves to be sold. At
pluck the leaves from clearly demarcated areas the time of actually transporting the leaves TPs
of the forest. In Andhra Pradesh such rights go must be obtained in respect of each lot. Valuable
under the name of ‘coupe’. The name of the information is thus available with the Forest
area over which the right is exercisable is added department which could profitably be used while
as an adjectival prefix to the word ‘coupe’ e.g. investigating the case of a bidi manufacturer.
Begumpet Coupe, Bhainsa Coupe etc. The lease The information will enable an assessing officer
rights are generally auctioned. The procedural to verify whether all the stocks have been duly
details vary from State to State. The AO should accounted for, and more importantly, to trace

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chronologically the movements of the stocks, iii. Incidental expenses like messing, salary
and thereby: etc.
i. To detect the existence of unaccounted iv. Transport expenses.
stocks, and 22.7.1 The plucking rates should be compared
ii. To check, particularly in respect of the with the rates shown by other manufacturers
purchases made at the fag end of the year in the same or near-by forests. The expenses
of procuring 1000 gaddis directly should also
iii. To ascertain whether the stocks have been
be compared with the rates given in respect of
reflected in the closing stock.
purchases made through contractors.
22.5 The manner in which bidi manufacturers
22.8 Sometimes, manufacturers take lease
obtain their supplies of leaves depends on their
of tendu forests in benami names, mostly in
location. For example, the bidi manufacturers of
the names of their employees or associates. If,
Madhya Pradesh and Andhra Pradesh may take therefore, purchases from another lessee are
forests on lease. They may also purchase the shown, such details as who stood surety for such
leaves from other registered contractors. The bidi lessee, who supplied the necessary finance, and
manufacturers of Tamilnadu and Maharashtra who actually supervised the plucking of leaves
(where tendu is not grown), on the contrary, and his relationship with the manufacturer etc.
have to purchase leaves from other States. should be ascertained and examined.
22.6 Where forests are taken on lease, the 22.9 Where the bidi manufacturer purchases
leaves are plucked by the local tribes. Bidi tendu leaves from dealers, the purchases will
leaves are generally sold in the form of gaddis have to be verified on the lines indicated under
(puda). A ‘gaddi’ contains 70 to 100 leaves. the heading ‘Verification of purchase of tobacco’.
In some districts like Bhandara, bidi leaves are
also sold in the form of smaller gaddis known 23. PRODUCTION
as ‘phals’ containing 30 to 50 leaves. Apart
23.1 The elementary method of verifying the
from the variations in the number of leaves in a output of bidis is to see whether, judged in the
particular gaddi, the quality of leaves also varies light of standard norms, the quantum of tobacco
from place to place. The gaddis are sold to the and bidi leaves consumed bears a reasonable
manufacturers at different collecting centres in relationship to the number of bidis produced.
the forest called ‘phals’. Normally, one kilogram of tobacco and 5 kg
22.7 The rates of plucking for 100 leaves are of tendu leaves will yield 4000 bidis. Needless
fixed by the bidi manufacturers and depend to add, local variations are bound to be there,
on competition as well as the size of the gaddi. and the quantum of inputs vary according to
the size of the bidis. In Maharashtra (Nashik
From the ‘phals,’ leaves are transported to head
area), for example, the manufacturers issue 650
office. If direct purchases are made, it would be
gms to 700 gms of bidi leaves for 1000 small
advantageous to analyse the purchase expenses
(lavangi) bidis, and 800 gms to 950 gms for
under the following head:
1000 big (chalu) bidis. The input of bidi leaves
i. Lease money paid. thus ranges from 2.6 kg to 3.8 kg for 4000 bidis,
ii. Expenses of plucking with quantities. thus exhibiting a marked variation from the

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mean. The explanation lies in the fact that, as followed in Nasik area will help highlight the
justly complained by the workers of that area, point. The bidis rolled by each worker are
the leaves issued are insufficient to produce checked twice a day, the supervisor usually
1000 bidis, and that, lest they should totally picking up the so-called substandard (chatt)
lose their livelihood, the workers buy leaves bidis, numbering on an average 15 per day
from the market to make good the deficiency. per worker. Again, at the end of the day, each
In Andhra Pradesh, about 5.28 kg of leaves are worker leaves on his tray 10 extra bidis, locally
consumed for making 4000 big bidis. Similar called “mapari” bidis. The worker of course
variations are noticeable in respect of tobacco receives no wages for the 25 bidis. Incidentally,
consumption also. The AO should compare the a male worker rolls about 700 bidis and a female
average consumption of tobacco and tendu worker about 500 bidis per day. ‘Thread bidis’ is
leaves disclosed by an assessee with (i) the another impost. The manufacturer issues thread
average consumption in his own case in the to the workers once in 5–6 days. This occasion
previous years, and (ii) the average consumption is a signal for the manufacturer to extract from
disclosed in other comparable cases. This rule- the worker a bundle of 25 bidis for each bundle
of-thumb approach enables the officer to see of thread issued. ‘Transport bidis’ is yet another
whether the matter needs further probe. novel impost. A number of factories are situated
23.2 The relationship between the input of 1 in interior villages. The manufacturers collect
kg. of tobacco, and output of number of bidis, from the workers employed in these factories
can be ascertained by adopting what are called 25 extra free bidis each day, on the ground that
the “constructive” and “destructive” methods, the manufacturers have to incur expenditure
and averaging the results obtained. The on transporting the raw materials to and the
“constructive” method consists in ascertaining bidis from the far off factories. The extra bidis
the number of bidis that can be produced from collected under various pretexts go unaccounted
a kilogram of tobacco, the entire process being in the books of accounts of the manufacturers. In
done in the presence of the officer. Under the appropriate cases, the AO should examine the
“destructive” method, a reasonably adequate workers on this aspect.
number of bidis (usually 1000) are broken open 23.4 Where the workers employed by the
and the weight of tobacco contained in them assessee roll bidis in the factory belonging to
is found out. By applying the rule of three, the him close supervision of the workers is rendered
number of bidis that can be made from a kg. of easy. Usually a number of supervisors keep
tobacco is worked out. The average of the results watch on the process of making bidis. Even
obtained by the two methods can be adopted as here, some simple or skeleton records indicating
a reasonable norm for verification purposes. If the quantum of tobacco, tendu leaves etc. issued
in a given case the actual overall output falls far to each worker and his output are maintained.
short of the norm, the case will certainly merit It is essential to call for these records and verify
detailed examination. them.
23.3 Wages for rolling bidis are paid on piece 23.5 Where the workers employed by the
rate basis. The manufacturers, nevertheless, assessee roll bidis at their homes, more elaborate
collect extra bidis on one count or the other, records need necessarily be maintained, because
which are invariably suppressed. The practice such records serve as surrogate for direct

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supervision. These will indicate the quantity purchasers may be entered in their names. Here,
issued, the number of bidis produced, and the a cross verification of the assessee’s purchases
quantity of tobacco and leaves left with the with the books of account of the petty producers
workers, the wages due/ paid etc. In appropriate will be useful. Thirdly, the petty producers may
case, these records must be called for and be benamis of the assessee. In such situations,
scrutinised. the investigation must be geared to proving that
23.6 Most bidi manufacturers employ workers the ostensible is not the real.
for making bidis. However, lack of adequate 23.8 The records under the Central Excise
factory space, limited availability of supervisory Act and the Forest Department Rules, and
manpower, unwillingness to engage workers those maintained by the assessee for internal
beyond a manageable level are some of the control contain a wealth of data which, if
considerations which weigh heavily with them used intelligently, can enable the AO to detect
when they examine the question of expanding existence of undisclosed stocks. For this purpose,
their production. It is here that the method the profile of manufacture for relatively short
of getting the bidis manufactured through periods, say fortnights, must be prepared. The
contractors or commission agents is found details of the stocks of raw materials at the
attractive by the manufacturers. They supply beginning of the period, receipts and issues
the inputs to the contractors who engage the during the period, and the stocks at the end of
workers and get bidis made. The contractors are the period will enable one to see whether any
remunerated for the services rendered by them. adverse stock position indicative of the existence
Naturally they will have to account for the raw of unaccounted raw material stocks exists.
materials received, the bidis manufactured etc. Similar details for bidis manufactured and sold
Generally the remuneration is related, directly or will enable one to detect sales outside the books.
indirectly, to the output. In such cases, besides A co-relation between the details of raw materials
verifying the inputs supplied and the output
and bidis will help in ascertaining whether the
received from the contractors, it will also be
assessee has suppressed the output.
necessary to examine closely the basis on which
their remuneration is calculated. At times, the 23.9 In one case, monthly statements of bidis
remuneration attributable to the undisclosed manufactured and sold were prepared, and it
production may be disguised as loans. Survey was noticed that in a particular month, the sum
operations under Section 133A of the Act can be total of the opening stock of bidis and the bidis
useful in such cases. manufactured/ purchased during the month
23.7 Large manufacturers usually make was far less than the sales made during that
purchases from smaller producers. The price month. The assessee was not able to explain the
paid in such cases must be compared with discrepancy. It was also found that the assessee
the assessee’s own unit cost. Further, the had covered up the deficiency by introducing
Investigating Officer should be on guard to detect bogus purchases towards the close of the year of
a manipulation or two that may be resorted to. account. This highlights the fact that while overall
One is that the assessee may pass off his own figures of input and output for the year taken as
undisclosed out turn as purchases from petty a whole may seem to be unexceptionable, such
producers. Hence, the production details of the figures for reasonably short periods may tell a
latter must be scrutinized closely. Secondly, bogus different story.

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23.10 The average cost of production of, say, before the Labour department may enable the
1000 bidis is another useful index of the fact AO to see whether the assessee had inflated the
whether all is well with the accounts. A little wage bill.
elementary costing will give the average cost 24.2 A problem arises in cases where in respect
of production. Thus the cost of the inputs e.g. of appropriate provisions made in earlier years
bidi leaves, tobacco, thread, wages etc. go to the assessee claims in subsequent assessment
make up the cost to the assessee. The average year(s) to have actually paid the sums in question
cost of production of 1000 bidis during the year to the home workers. The home workers are large
must be compared with (i) the assessee’s own in number, and are dispersed over a wide area.
cost of production in previous years, and (ii) the They do not carry any marks of identification.
cost of production in comparable cases. It must They are unorganised and illiterate. Yet the AO
also be compared with the rates charged by the will have to make sure that, without having paid
contractors who supplied bidis to the assessee. the sums to the workers, the assessees have
Normally, manufacturer’s cost of production not doctored the accounts to make it appear as
must be less than that the rate at which the though they had paid the sums to the workers.
contractors supply bidis to the manufacturer, In other words, he will have to verify whether
because the latter will include the contractor’s the ostensible is the real. The task is not easy.
profit. If the manufacturer’s cost of production The sums payable to workers under such
is higher, it is a pointer to the fact that the Government orders are substantial requiring the
manufacturer had either suppressed the output assessee will to introduce large sums of money
or inflated the consumption of raw materials, in books of accounts. The first step is therefore
or the expenses. In either case, the AO should to examine critically the source of the funds. The
examine the matter critically. moneys may be introduced in the form of cash
23.11 In one case, it was found that the credits/ hundi loans, or merely as realisation of
assessee’s unit cost of production was higher sale proceeds of bidi. Whatever be the mode in
than that of the contractor who was regularly which the money is introduced into the books,
supplying bidis to him, and that this was mainly the genuineness of the money introduced must
be examined more critically than usual. Secondly,
due to the higher unit consumption of tobacco
as large a number of home workers as possible
in the assessee’s case. The assessee had no
must be contacted and their deposition taken on
explanation to offer. Hence, taking into account
the specific question whether they were aware
the excess consumption of tobacco suitable
of the additional financial advantage coming
additions were made.
to them, and whether they had received either
from the bidi manufacturer or the contractor or
24. WAGES the commission agent any extra money over
24.1 Wages are paid to bidi workers on piece and above the wages normally paid to them.
rate basis. The payment of wages is regulated by The assessee must be made to commit on
statutes and regulations. Important information each and every significant detail relating to the
regarding the number of workers employed, the precise mode and mechanics of the payments
wages paid, and the quantum of goods produced in question, and the AO should cross verify the
can be obtained from the Labour department. details. If, for example, the assessee says that the
Details of labour disputes for adjudication payments were made through the contractor/

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commission agent, all the details of how and vary. In some cases, it was found that the sales
when the moneys were handed over to the alleged to have been made through commission
contractor/ commission agent, must be obtained agents, had in fact been made directly to
from the assessee. Thereafter, the deposition dealers, at higher rates. It is, therefore, useful to
of the contractor/ commission agent on the examine some of the purchases of other parties
significant details of the payments must be cross to verify whether they have purchased from the
verified with the assessee’s version. It would be manufacturers directly or through Agents. While
a good idea to examine the assessee and the examining sales, following points are worth
contractor/ commission agent simultaneously considering:
on all the circumstances surrounding the i. What is the system of sale i.e. whether
disbursement of the sum. the sales are through selling branches, or
through commission agents or direct to the
25. LOSSES bidi dealers. In case selling branches exist,
25.1 Loss in handling of tobacco, and loss whether the sales to branches are at the
on account the destruction of tobacco unfit same rate as to other dealers or at a lesser
for human consumption are generally claimed rate. In case sales are through commission
by the manufacturers. Both types of losses agents, whether commission is deducted
are certified by the Central Excise Authorities. from the bills or paid at the close of the
Recently, however, enquiries made by the CBI year.
brought to light the fraudulent manipulation ii. Whether the sales are F.O.R. dispatching
of Central Excise registers with a view to claim centre, or F.O.R. receiving centre. This point
bogus loss on destruction of tobacco unfit for is relevant where sale rates are compared
human consumption. It was noticed that large for different cases.
quantities of what was in fact good tobacco was
shown as having been destroyed. Actually no 27. CLOSING STOCK
tobacco was destroyed, and the good tobacco
was sold surreptitiously. The Central Excise The valuation of stocks of tobacco, bidi leaves,
registers were tampered to support the story of puddas, and packing materials etc. is also an
loss on account of destruction. important point to be considered. The stock of
tobacco generally consists of:
25.2 The assessee frequently claimed loss of
tobacco due to flood or any natural calamity i. Duty paid tobacco.
case. Accordingly claimed whole loss in the P&L ii. on-duty paid tobacco.
Account without considering the claim allowed
by the insurance authority. iii. Rawa and garda (dust).
These quantities can be verified with the help of
26. SALES excise registers.
Manufacturers whose brands have become
popular over a particular area, make sales not 28. BALANCE SHEET
only through commission agents, but also to 28.1 The Balance Sheets of the bidi
dealers directly from the factory. The rates manufacturing concerns disclose large credit
charged for the two types of sales generally balances in favour of tobacco commission

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agents. It is necessary to get detailed copies of rule 37C) and verified in prescribed manner
such accounts for verification. The manufacturer to the effect that the goods referred to in the
requires a large amount of ready cash to pay above table are to be utilised for the purposes of
for the tendu leaves, since he has to build up manufacturing, processing or producing articles
a whole year’s stock between April and June, or things or for the purposes of generation of
the period during which the tendu leaves are power and not for trading purposes. The person
plucked from forests. The cash book entries responsible for collecting tax at source under
relating to this period have to be thoroughly Section 206C has to compulsorily deliver or
scrutinised, because it is during this period that caused to be delivered to the Principal CCIT or
large amounts of cash are brought in. Again, Principal CIT one copy of the Form 27C on or
the cash book entries of those days when huge before the seventh day of month next following
excise duty is paid to get non-duty paid tobacco the month in which the declaration is furnished
released, require scrutiny. In the cases of bidi to him. Thus a manufacturer, producer or a
manufacturers bogus hundi havala entries are processor of articles or things or power is exempt
also common. from the TCS obligation if he has furnished
28.2 TCS on Tendu Leaves: As per the the declaration in Form 27C. This exemption
provisions contained in Chapter XVII-BB of the is however not available for a trader of forest
IT Act, sale of Tendu Leave is subject to Tax produces. It is seen that the declarations received
Collection at Source. According to Section 206C by the seller are not delivered to the department
of the Income-tax Act 1961, every seller of forest and therefore the verification of the nature of
produce is under legal obligation to collect tax activity or utilization of forest produces by the
from the buyer of such products at the time of buyer remain unverified. It is seen that many
such sale. The rates of TCS are as under: a times the unscrupulous traders also furnish
Form 27C to the sellers and thereby violating the
Table 3 requirement of TCS. This malpractice results in
S. No. Nature of Goods Percentage non collection of TCS and also non verification
1 Tendu leaves Five per cent of end utilization of the forest produce by the
2 Timber obtained Two and one-half buyer. The Assessing Officer should bear this
under a forest lease per cent practice in mind while doing the assessment of
3 Timber obtained Two and one-half persons dealing in forest produce.
by any mode other per cent
than under a forest
lease 29. CASE LAWS
4 Any other forest Two and one-half 29.1 The TCS on Tendu Leaves was inserted
produce not being per cent
in Taxation Laws (amendment) Act, 2003
timber or Tendu
leaves amending earlier statute on the matter of TCS.
The Ministry of Finance, Government of India
No collection of tax at source is to be made in case had, in its Circular F. No. 149/160/95-TPL dated
of a buyer, who is resident in India if such buyer 10/01/1996, clarified that mere drying, sprinkling
furnishes to the person responsible for collecting water and bundling of tendu Leaves, a raw
tax, a declaration in writing in duplicate in the material for manufacturing bidies etc. cannot be
prescribed Form 27C of Income-tax rules (under equated with processing.

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29.1.2 The said circular was challenged by of tax-Profits and gains from business of trading
Gondia Beedi Leaves Contractors Association, in alcoholic liquor, forest produce, etc.-Whether
Gondia by filing a writ of mandamus before repeated operations of sorting of tendu leaves,
the High Court, Mumbai (Nagpur Bench) in sprinkling of water thereon, drying and then
WP No. 956 of 2019. The contention raised by bundling them would amount to ‘processing’ in
this association was that they are their activity real sense as contemplated under first proviso to
tantamount to manufacturing and hence Section 206C-Held, no.
provisions of Sub-section (1A) of Section 206C 29.4 Natwarlal vs. Union of India (1999) 102
are applicable them. Resultantly, they claimed TAXMAN 49 (MP)-Collection of tax at source-
that the members of the Association are exempted Whether process of collection and pruning of
from TCS provisions which collected by the tendu leaves does not amount to ‘processing’
Forest Department of the State of Maharashtra. within meaning of Section 206C as nothing new
29.1.3 The Hon’ble High Court, Bombay, in emerges from the process-Held, yes
its decision dated 19/09/2019, dismissing the
writ petition, has held that “once the availability 30. ELECTRONIC CIGARETTE
of exemption, where the goods are processed
30.1 An electronic cigarette or e-cigarette is
for the purposes of trading or selling to the
a handheld battery-powered vaporizer that
manufacturer or producer of different articles or
simulates smoking and provides some of the
things there from, is ruled out under Sub-section
(1A), the intention of the Legislature becomes behavioural aspects of smoking, including the
clear to understand the word ‘processing’, as hand-to-mouth action of smoking, but without
an intermediary process to qualify the produce, burning tobacco. Using an e-cigarette is known as
namely, Tendu leaves, for being utilised for the "vaping” and the user is referred to as a “vaper.”
purpose of manufacture or production of article Instead of cigarette smoke, the user inhales an
or things therefrom. It is an integrated process of aerosol, commonly called vapor. E-cigarettes
manufacture or producing bidi in this case, from typically have a heating element that atomizes
the processed Tendu Leaves, which qualifies a liquid solution called e-liquid. E-cigarettes are
for exemption. The placement of the word automatically activated by taking a puff; others
‘processing’ in between ‘manufacturing’ and turn on manually by pressing a button. Some
producing article or things’ under Sub-section e-cigarettes look like traditional cigarettes, but
(1A) is also significantly indicate such intention they come in many variations. Most versions
of the Legislature. The processing of Tendu are reusable, though some are disposable. There
leaves in this case may qualify for the purposes are first-generation, second-generation, third-
of trading or sale, but not for the utilization for generation, and fourth-generation devices.
E-liquids usually contain propylene glycol,
the purposes of manufacture of bidis.”
glycerine, nicotine, flavorings, additives, and
29.2 Sagarmal Agarwal vs. Union of India differing amounts of contaminants. E-liquids
(2000) 158 CTR 44(Ori.) – Held that conversion are also sold without propylene glycol, nicotine,
does not amount to processing; or flavors.
29.3 Abdul Sattar vs. Union of India, (1998) 96 30.2 The benefits and the health risks of
TAXMAN 229 (MP) – Collection and recovery e-cigarettes are uncertain. There is tentative

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evidence they may help people quit smoking, E-cigarette vapor contains fewer toxic chemicals,
although they have not been proven to be more and lower concentrations of potential toxic
effective than smoking cessation medicine. chemicals than cigarette smoke. The vapor
There is concern with the possibility that non- is probably much less harmful to users and
smokers and children may start nicotine use bystanders than cigarette smoke, although
with e-cigarettes at a rate higher than anticipated concern exists that the exhaled vapor may be
than if they were never created. Following the inhaled by non-users, particularly indoors.
possibility of nicotine addiction from e-cigarette 30.4 Since their entrance to the market in 2003,
use, there is concern children may start smoking global use has risen exponentially. In a 2014
cigarettes. Youth who use e-cigarettes are more survey, about 13% of American high school
likely to go on to smoke cigarettes. Their part in students reported using them at least once in the
tobacco harm reduction is unclear, while another previous month, and in 2015 around 10% of
review found they appear to have the potential American adults were users. In the UK, users have
to lower tobacco-related death and disease. increased from 700,000 in 2012 to 2.6 million in
Regulated US Food and Drug Administration 2015. About 60% of UK users are smokers and
(US FDA) nicotine replacement products may about 40% are ex-smokers, while use among
be safer than e-cigarettes, but e-cigarettes are never-smokers in the UK is negligible. Most still
generally seen as safer than combusted tobacco use traditional cigarettes, raising concern that
products. It is estimated their safety risk to users dual use may “delay or deter quitting”. Most
is similar to that of smokeless tobacco. The long- peoples’ reason for using e-cigarettes involve
term effects of e-cigarette use are unknown. The trying to quit smoking, though a large proportion
risk from serious adverse events was reported use them recreationally. It is commonly stated
in 2016 to be low. Less serious adverse effects that the modern e-cigarette was invented in 2003
include abdominal pain, headache, blurry vision, by Chinese pharmacist Hon Lik, but tobacco
throat and mouth irritation, vomiting, nausea, companies have been developing nicotine
and coughing. Nicotine itself is associated with aerosol generation devices since as early as
some health harms. In 2019, an outbreak of
1963. As of 2018, 95% of e-cigarettes were
severe lung illness across multiple states in the
made in China. Because of overlap with tobacco
US was linked to vaping.
laws and medical drug policies, e-cigarette
30.3 E-cigarettes create vapor made of fine legislation is being debated in many countries.
and ultrafine particles of particulate matter, The revised EU Tobacco Products Directive
which have been found to contain propylene came into effect in May 2016, providing striker
glycol, glycerin, nicotine, flavors, tiny amounts regulations for e-cigarettes. As of August 2016,
of toxicants, carcinogens, heavy metals, and the US FDA extended its regulatory power to
metal nano-particles, and other substances. include e-cigarettes. Large tobacco companies
Its exact composition varies across and within have greatly increased their marketing efforts. As
manufacturers, and depends on the contents of of 2014, there were 466 brands of e-cigarettes,
the liquid, the physical and electrical design of with global sales of around $7 billion.
the device, and user behaviour, among other
factors. E-cigarette vapor potentially contains Source: Wikipedia, the free encyclopedia https://
harmful chemicals not found in tobacco smoke. en.wikipedia.org/wiki/Electronic_cigarette

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30.5 As on date, the Central Government has 31. CONCLUSION

banned electronic cigarettes amid growing fears Tobacco industry is highly growing industry.
over the health risks posed by vaping, sending It has high tax rate therefore, there are
shares of conventional cigarette makers soaring. more chances of leakage of revenue. The
Assessing Officer has to under stand process
30.5.1 The Union cabinet has made the of cultivation, procurement and process of
manufacture, import, sale, distribution and tobacco and after collecting the relevant fact
of the case and region of assessee decide
advertisements of e-cigarettes a cognizable
the line of investigation with help of basic
offence. understanding given in the topic.

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 Chapter

19
Tyre Industry

1. INTRODUCTION
1.1 The automobile tyre and tube industry
occupies an important position in the economy
of the country. Tyres and tubes constitute a major
segment of the rubber goods manufacturing
industry and consume about 60% of the total
rubber used in the industry. At present there are
40tyre manufacturers in the organised sector in
India. The domestic tyre industry is growing at
the rate of 8% and the production has reached
1800 lakh tyres during the FY 2018–19.
2. INDUSTRIAL AND TRADE POLICY
1.2 Tyre is a demand driven product. Its demand
depends on demand for automobiles. Within the 2.1 The industry is totally delicensed. No
tyre industry, the trucks and bus tyre segment industrial license is needed for starting a tyre
accounts for more than 70% of the sales. industry any more. The requirement for starting
a new unit or doing a substantial expansion,
1.3 Indian tyre industry has proved itself to be
is only filing an industrial entrepreneurship
versatile. The industry has been successful and
memorandum with the Ministry of Industries
quick in absorption of International technology. furnishing details of the proposed investment,
It has introduced several innovations to apply number of employees and probable date of
international technologies/ processes to create commencement.
tyres suitable for Indian road conditions. The
industry has developed a wide product range 2.2 Under the present trade policy, all categories
for diverse uses ranging from a moped/ light of tyre can be exported freely. All categories of
motorcycle tyre weighing 1.5 kg to an earth new tyres can be imported freely. Free import
mover tyre weighing over 1.5 tonnes. Except of secondhand/ used tyres is also going to be
aero and some other specialised categories, possible if per tyre CIF value is above certain
domestic production fully meets the indigenous levels. All raw materials required for the
requirements. Ready availability of tyres even in manufacture of tyres, except natural rubber can
the remotest corners of the country bears witness be imported freely under the OGL. However,
to the vibrant and large marketing setup. natural rubber is under special import license. It

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can be imported but only on payment of duty. ‘radial’. Radialisation led to higher tread life
Under the Goods & Services Tax laws (‘GST’), (mileage) and comfortable ride. It is said that the
the tyres are subject to a tax at the rate of 28%. rate of radialisation is an index of the status of
road development, vehicle engineering and the
3. RAW MATERIALS economy in general. By and large the Indian tyre
companies have kept pace with the technical
3.1 Raw materials constitute 60–70% of
production cost of tyres. Natural rubber is the improvements that radialisation signifies. They
most critical raw material. It accounts for about offer state-of-art products comparable to the best
40% of the total raw material cost. The primary in the world. The future of radialisation depends
raw material i.e. natural rubber is however on several factors like cost-benefit ratio, road
subject to levy of GST of only 5%. Apart from development, overload control, user education
rubber, Carbon black (10%), nylon tyre cord and retreading infrastructure.
(24%) and chemicals (12%) are other important
4.2 The domestic industry is dominated by cross
raw materials.
ply tyres due to the poor conditions of roads and
3.2 The input component of industry includes overloading of commercial vehicles. Penetration
natural rubber and synthetic rubber. The natural of radial tyres in the commercial segment is only
rubber component is also sourced from north upto 40% and they command a presence in
eastern part of the country and because of passenger car segment where radialisation has
prevalent tax exemption in these States, this is
reached the 95% mark.
one area which could give genesis to possible
revenue leakages and may warrant closer
scrutiny of such purchases and also payment 5. DEMAND AND SUPPLY
of commission, if any, in connection with such 5.1 There used to be a time when tyres were in
purchases. short supply. But it is no longer so. The supply has
3.3 From the above it shall be noted that the grown faster than the demand. The demand is
effective indirect tax levy on tyre(after input credit) linked to auto demand from original equipment
is substantially high. Such high incidence of tax market (OEM) and replacement market. Except
acts as an incentive to the assessees to evade in aero and some other specialised categories,
tax. Hence in order to avoid paying GST and domestic production/ capabilities fully meet the
with a view to subsidize its products, the tyre is indigenous requirements. Ready availability
manufactured out of books and as a consequence of tyres at retail level even in remote parts of
results in evasion of income-tax as well. country has been achieved through responsive
3.4 However with the advent of the new marketing channels.
age information technology and the financial
5.2 The industry claims that it is almost a
profiling which is now possible with the
buyer’s market now and that the bargaining
integrated data mining being seriously pursued
power of the supplier is low due to intense
and undertaken by the Central Government, the
competition from other manufacturers and
Officers can identify the possible loopholes and
imports. This led to price wars between the major
areas of evasion of taxes and address the same.
manufacturers. Large scale retreading also affects
the bargaining power of the suppliers. There is
4. RADIALISATION fierce competition with competitors adopting
4.1 Tyres can be divided into two categories— a strategy of differentiation. An extensive
cross ply, and radial. In early 1950s a new distribution network and strong brand recall are
concept of tyre design was developed called factors critical to tyre sales.

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6. EXPORTS of passenger and freight traffic. This adds to the

The demand for tyre is increasing due to exports importance of the road transport.
to neighbouring and other developing countries 7.3 The growth in tyre exports from India is
of Asia. The industry has performed well in the depending on several plus factors. Indian cross
export front with sustained exports for over a ply tyres are rated as the best in the world.
decade to more than 50 countries with long- However, the Indian exports have to compete
term commitment. All large tyre companies are with cheaper exports from China. Besides, cross
exporting. ply truck tyres are not taken by the developed
countries at the same levels as in the past. The
7. DEMAND INFLUENCING FACTORS Indian tyre industry has the capability to produce
and export radial truck tyres and make good the
7.1 The tyre demand and production are fall in the export of cross ply tyres. Increased
directly influenced by the following factors: level of tyre imports has an adverse impact on
i. Overall economic growth. domestic tyre industry. The progressive reduction
in import tariff has resulted in sizable imports.
ii. Growth in automobile sector (vehicle Import of used tyres is being permitted but it is
demand/ sales). not likely to have much impact in view of the
iii. Performance of Railways vis-a-vis road floor price mechanism.
transportation. 7.4 Increased level of radialisation has a
iv. Performance of public transportation negative impact on demand for new tyres
(State Transport Undertakings). in view of long life of such tyres. Similarly,
v. Growth in export of Indian tyres. increase in the level of retreading has an inverse
relationship with demand for new tyre. The bad
vi. Import level of tyres into India.
condition of Indian roads benefits Tyre Industry
vii. Level of radialisation. greatly. If road infrastructure is improved, it
viii. Level of retreading. would result in greater acceptance of retreaded
tyres. Overloading also affects the life of tyres.
ix. Condition of roads and road related
Hence the demand for new tyres increases.
infrastructure.
7.5.1 Retreading of Tyres: Retreading tyres is
x. Overloading.
the process of restoring old tyres so that they can
7.2 Overall economic growth, particularly be used in automobiles. In this method, a worn
performance of agricultural and industrial sectors casing of a tyre that has a good structural quality
has a major bearing on the demand for tyres. is taken off and put through a process in which
Road transportation accounts for over 75% of it gets a completely renewed tread and sidewall
goods transportation. Growth in agricultural rubber. After that, the revamped tyre is taken
input and industrial production has a direct and forward for a curing process in which the new
positive impact on demand for tyres, particularly rubber is vulcanized to the original casing and
in the replacement market. Growth in tyre hence, the tyres gets newly made tread pattern.
production can be significantly attributed to an Tyre retreading business is a major consumer
impressive growth off take by OEM in various of natural rubber. It has a direct bearing on the
segments. The addition in the number of vehicle fortunes of the tyre industry. In India a truck tyre
augments the demand for replacement of tyres is more likely to be a retreaded than replaced
in subsequent years. A degree of competition with a new one. Indian retreading industry
and substitutability exists in movement of goods is estimated to be worth more than Rs. 5000
and passenger traffic between the railways and Crores with roughly 20000 retreaders scattered
road transport. Railways have a declining share in the organized and unorganized sector. Its

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importance can be gauged from the fact that 8.2 Presently rising rubber prices have
reputed fresh tyre Manufacturer JK Tyres opened somewhat reduced the operating margins of
its 34th retreading Centre recently. In order to help the tyre companies. The situation is expected to
the industry to grow, GST has been reduced to stabilise soon. Government’s policy regarding
18% from 28%. There are comparatively higher natural rubber imports has immediate relevance
margin in this retreading tyre business. to the industry.
7.5.2 There are several advantages of 8.3 The industry is facing a challenge in the
retreading such as: form of cheap import of radial tyres especially
i. Retreading are quite safe and are being from Korea. While the manufacturers are
used in all kind of vehicles nowadays. understandably upset, the tyre dealers are not.
According to the latter, domestic prices of tyres
ii. Retreading is highly environment friendly.
continue to be very high despite a steep decline
iii. There are many economical benefits of in raw material cost over the last few years. They
retreading as the retreading tyres are less want the industry to rationalize, what they call
pricey in comparision with new ones. ‘indiscriminate and arbitrary’ price structure, and
7.5.3 There are also several disadvantages of sell tyres at much lower rates. The Automotive
retreading tyres such as: Tyre Manufacturers Association representing the
tyre manufacturers stoutly denies this.
i. Retreading tyres are generally a lot less
expensive than the new ones, however,
after the budget tyres have come into play, 9. INVESTIGATION OF ACCOUNTS—
the scenario has changed to a large extent. MANUFACTURERS’ CASES
Budget tyres are less expensive. 9.1 In the cases of tyre manufacturers,
ii. In retreading, a new lease of rubber is put examination of accounts may be made under
on the casing of a worn out tyre without the following heads.
changing the cord infrastructure. Hence, 9.1.1 Purchases: The chief input in this
the quality of the retreaded tyres always industry is natural rubber. This is purchased
stays a lot down than that of the new tyres. directly from the big estates and also from traders
who purchase it from the small growers. Earlier
8. PROSPECTS the purchase of rubber was not subject to indirect
8.1 The growth in passenger car sales is expected tax levies and only some States would levy VAT
to increase the demand for tyres. With a string of etc. In such a scenario it was not possibleto
launches planned in the car segment, demand track, verify and examine the purchase of rubber
from OEM is expected to increase considerably. by tyre companies. However under the current
It is expected that this will go to augment the GST laws, natural rubber is now subject to a
tyre industry volumes. It will also ensure tax levy of 5%. By bringing the natural rubber
steady demand from the replacement market. within the indirect tax fold, the officers can now
Replacement demand constitutes nearly 60% correlate and examine the purchases made by
of tyre sales, OEM accounting only for the rest tyre companies. All rubber suppliers are now
40%. Since margins are lower in OEM segment, required to file monthly/ quarterly returns, which
the manufacturers depend on higher volumes to makes tracking of the purchases easy. With the
increase the sales growth. Replacement demand easy bifurcation of purchases from registered
from the car segment is expected to pick up and unregistered dealers, the extent of organized
further as the second hand car market is buoyant business being conducted by the tyre company
following the easy availability of finance to this is now ascertainable. Correspondingly even
segment. the sales made to unregistered dealers can be

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identified through the GST returns and the same 9.2 The input material includes numerous
may be targeted for enquiry and investigation to chemicals some of which are sourced from
identify under-invoicing and tax evasion. relatively small suppliers which at times involve
9.1.2.1 It is further relevant to note that payment of commission which may call for
henceforth the movement of taxable goods closer scrutiny. Moreover, these chemicals, 10–
is required to be undertaken through E-Way 12 in number may also be examined from the
Bills generated through the GST system. In the point of view of consumption. It may be relevant
circumstances where the natural rubber moves to obtain estimated consumption ratio of these
from the factories/ depots to the tyre factories, chemicals to compare the actual consumption
the trail of transactions can easily be identified and look for oddity if any on this count.
on real-time basis through E-Way Bill Database. 9.3 The process loss in the industry is said to be
Consequently the quantity of goods purchased around 1.5%. This is another area which may
each month etc. can now be easily identified. be relevant for scrutinizing the revenue leakage.
9.1.2.2 It may however be pertinent to 9.4 The industry in its books shows substantial
mention that E-Way bills are not mandatory amount under the head claim loss/ rejection on
intra-State and in some North Eastern States. account of warranty policy as well as in-house
In the circumstances tracking of purchases from rejection. This area is tax evasion sensitive and,
persons who are within the radius of 10–100 therefore, calls for closer scrutiny to prevent
kms may be difficult. Nevertheless the industry revenue leakage.
data may well be taken as a comparable with
suitable adjustments to identify and estimate the 9.5 Another tax evasion sensitive area is
turnover of the tyre players. Scrap Sale. The industry generates scrap both
on account of in house rejections as well as on
9.1.3 Natural rubber is the primary
account of rejection relatable to warranty policy
indispensable ingredient in manufacture of
of the assessee company. Here, it is pertinent to
tyre. The quantity of rubber used in production
add that scrap sale is liable for TCS at the rate
of each size of tyre is constant. Therefore,
of 1% under Section 206C of the IT Act. This
the assessing officers can track the quantity
is an area where there is prime-facie substantial
and amount of natural rubber purchased and
scope for tax evasion. Thus, it may be an area
accordingly ascertain the expected production
of interest to the Assessing Officer to put scrutiny
by the company. This data can be correlated with
scanner on such scrap sale.
the actual production reported by the company
and the discrepancies may be enquired into.
10. FOREIGN COLLABORATION
9.1.4 Thus, if enquiries could be made into
the purchases by tyre manufacturers, one can 10.1 No collaboration agreement with the
arrive at a reasonable estimate of the turnover foreign party is operative without the prior
affected. The purchases made from registered approval of the Ministry of Commerce. Care is
and unregistered dealers can be identified from needed in reading this agreement. Certain old
the GST returns. The enquiry & investigation provisions refer to technical services obtained
may be concentrated more on the unregistered in exchange for equity shares. Very often the
purchases where they may be scope of bogus tax angle, on account of valuation of these
billing, false invoicing and/ or tax evasion. shares was missed and they escaped taxation.
9.1.5 Armed with the above data, the assessing No amounts under collaboration agreements
officers can very well correlate the purchases are payable till Government has approved the
with the sale, undertake quantitative and cost terms of agreement. Pending final approval of
analysis and identify the correct turnover, these terms, manufacturing work is continued
profitability etc. and provision is made in respect of amounts for

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which approval is sought for. These provisions are methods being commonly deployed have been
not allowable because nothing is payable till the set out in the Multilateral Convention & BEPS
Government approves the agreement. to which now India is also a party. The Officers
10.2 The collaboration agreements normally should therefore examine the tax structures of
contain the Clause whereby the collaborator the MNCs and ensure that they pay appropriate
has a direct say in the matter of buying capital taxes on the income derived in India.
goods. This is one such area where manipulation
is possible which benefits both the Indian party 11. PRODUCTION
as well as the overseas party. Secret agreements 11.1 Verification of production has a twofold
are known to have existed whereby the cost of purpose, namely:
goods (including plant and machinery etc.) was
increased by a stipulated amount. By minor ●● To ensure that the quantity of finished
variations in these bills, the Indian buyer also was products produced are fully accounted.
able to accumulate funds abroad which he could ●● To see whether the input-output ratio is
use at will. Normally, there is a long negotiation reasonable.
between the Indian party and the collaborator
before the final quotation for purchase of goods 11.2 It is not possible to check each stage of
is accepted. This correspondences made, in this production. The AO would do well to apply the
regard, may help in unravelling the hidden facts. checks exercised by GST authorities which are
relevant from Income-tax angle.
10.3 The tax liability on the foreign collaborator
is to be kept in mind. It is to be checked whether 11.3 In any investigation into the total quantity
TDS has been made for remittance of royalty. produced by a manufacturer, the manufacturer’s
The provisions of Section 40(a) should be kept own system of internal accounting is highly
in mind. The deduction for fees for technical relevant and the AO should have an intimate
services is governed by Section 115A. Here also knowledge of such accounting and use the
it should be ensured that TDS has been made knowledge to cross-verify the details contained in
during the previous year itself. However, on the the statements before him with those maintained
basis of verification of ‘PE’ of the foreign entity, by the manufacturer.
the same should be subjected to withholding tax. 11.4 Tyre manufacture has many features
10.4 In addition to the above, the assessing common with other industries. Similar problems
officers should examine the collaboration arise and similar tax issues crop up. All the usual
agreements and its fallouts on a macro basis. checks made in other cases of manufacture
The officers should understand and identify the should also be made in these cases.
tax structures which are illegitimate and meant
solely to evade tax. With the GAAR provisions 12. SALES
now in full force to combat such illegal tax 12.1 Large manufacturers have their own
planning by MNCs, it is necessary for the officers network for the distribution and sale of their
to look through the agreements and identify the products. Tyre industry is no exception. The AO
white collar tax evasion being undertaken by
should have clear idea of the distribution channels
the organized tyre players. It may well be noted
setup by the assessee. The general principles
that due to high indirect tax incidence and
governing the sales may be borne in mind while
comparative higher income-tax rates in India in
comparison to other developed countries, there dealing with bogus/ unaccounted sales.
is tendency of MNCs to build structures to siphon 12.2 A good chunk of the production is
off profits outside India and/ or overall reduce the exported to foreign countries. However with
tax liability in India. Many of such tax avoidance grandfathering of Section 80HHC and the

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Legislature’s intention to phase out other profit 15. ADVERTISEMENTS

linked deductions, there is sufficient incentive
15.1 Brand-building has assumed a lot of
for the exporters to suppress the proceeds and
importance in tyre business. The manufacturers
avoid tax. The Assessing Officers may therefore
allot as much as 3% of sales to advertising.
ascertain the custom valuation of the goods
Huge expenses are incurred on advertisement
exported and correlate them with the actual sale
price to identify discrepancies and address them. on TV, newspapers and magazines, hoarding,
endorsements and sponsorships. Specific
12.3 In view of the stiff competition in the reference is given to advertisement deal enterd
industry, the manufacturers are particular by Appollo Tyres with Manchester United
about quality. Hence, tyres which are having
Football Club of EPL. Expenses are also
manufacturing defects are generally rejected and
incurred on rally vehicles and payments to race
sold as scrap. There can be appreciable quantities
drivers. There is need for cross-verification of
of tyres which do not come up to the standards
these expenses and communication with the
but which are not technically defective. These
are sold as ‘seconds’. It must be ensured that AOs assessing the advertising agencies and the
the manufacturer does not pass off good tyres beneficiaries. Compliance with TDS provisions
as ‘seconds’ in his books of account and in the on these contracts and payments also should be
process pocket the price difference. examined.
15.2 In the organized sector, the payments to
13. MIDDLEMEN advertising agencies, stars, players, international
13.1 Purchases made from middlemen are race associations etc. are nowadays often
required to be verified carefully. Bogus purchases structured in ways to avoid income-tax.
introduced by middlemen also need to be verified Foreign payments to international advertising
with the statement showing daily purchases, companies, satellite channels, actors etc. are
sales and balance, both in terms of quantity and routed through colourable devices with a view
quality. While verifying sales, the price charged to avoid taxes in India. With the GST on import
by middlemen for supplies made by them must payments at 18%, there is all the more reason to
be verified with the Kottayam market quotations employ fancy agreements & structures with a sole
to ensure that there is no manipulation of the intention to evade tax. There are also instances
quality of the rubber sold. where the foreign parent company tends to shift
13.2 The middlemen in some cases may just its advertisement costs to the Indian entity with
be dummies setup by the manufacturer. If there a view to siphoning off profits. The Assessing
is room for suspicion, sustained enquiries and Officers should therefore carefully examine the
examination of accounts should be made to branding & advertisement expenses and identify
show the nexus between the two and the lack of the tax avoidance schemes, if any, put in place
creditworthiness of the middleman. by the tyre players.
15.3 Often, capital assets are created for
14. SISTER CONCERNS
advertisement. In one case, an entire block was
Transactions with sister concerns need to added to a stadium. If the asset is going to be
be looked into with care. Such concerns are under the ownership of the assessee itself, the
interpolated for purchase of raw materials and expenditure may be capital in character. Full
disposal of waste and byproducts. The rates of
details regarding such expenditure such as
purchases and sales made from/ to them should
ownership of the asset should be obtained and
be compared to the market rates. Loans and
advances made to these concerns should also scrutinised to determine the allowability of the
be verified. expenditure.

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16. RESEARCH AND DEVELOPMENT 18. In most situations the date and amount of
16.1 R & D is essential for the survival and unaccounted sales may not be available unless
prosperity of any industry. The Act provides for such accounts maintained by the dealer are
an incentive under Section 35. Section 35 (1) recovered during a search or survey. Therefore,
(iv)/ (2) provides for 100% deduction for capital one has to make an estimate of the unaccounted
expenditure incurred for scientific research. Only circulating capital/ investment by taking into
capital additions made during the year exclusively consideration the stock turnover, the period
for R & D activities are allowable and not those of credit allowed by the manufacturer and the
used in routine activities during the course of the general demand and supply position.
business. This incentive is sometimes misused
by the manufacturers. An activity which is not R 19. DISCOUNTS, REBATES, AND
& D activity is disguised and projected as such INCENTIVES
activity and 100% deduction is claimed with
regard to the capital expenditure including the Quite often, in their urge to push the sales,
cost of the buildings and plant. In a major tyre the manufacturer gives discounts, rebates and/
manufacturer’s case, the capital expenditure on or incentives. The discounts are allowed if
setting up a facility for manufacture of a special payments are made within the stipulated period
type of tyre was claimed as deduction under of credit. Rebates and incentives are given if the
Section 35 (1) (iv). dealer exceeds the target fixed for him. They
are not properly accounted for by some dealers.
16.2 In certain other cases, capital expenditure
A comparison/ reconciliation of the dealer’s
on setting up quality control mechanism is
account in the books of the manufacturer and
claimed as R & D expenditure. The AO should
the manufacturer’s account in the dealer’s books
be vigilant about such claims. In cases of doubt
would reveal such credits.
he should make a reference to the prescribed
authority.
20. VERIFICATION OF STOCK
17. INCENTIVES If on scrutiny, the AO finds that there are
17.1 Tyre manufacturers get certain benefits discrepancies in the accounts as mentioned
in the form of cash subsidy, duty drawback and above, it is advisable to conduct a survey at
the like from the Ministry of Commerce. The AO the business premises of the dealer and take
must verify whether the assessee has properly a physical inventory of the stock. Excess stock
accounted for these benefits and incentives. In would indicate unaccounted investment. On
suspect cases, reference may be made to that the other hand, if there is deficit stock, it would
Ministry to find out the fact of receipt and the indicate unaccounted sales.
quantum of the benefits allowed.
17.2 Under the Act, there are several tax 21. CONCLUSION
benefits available to the tyre manufacturers. The role of road transportation cannot be
These concessions are conditional on the undermined. It is bound to increase further with
manufacturer fulfilling specific conditions. The the country’s economic uptake. The importance
AO should ensure that the conditions have been of the tyre industry will certainly remain
fulfilled. The burden is on the assessee to show undiminished. The AOs, therefore, should
that it comes within the exemption provisions ensure that the industry contributes its fair share
and is entitled to the tax concession. to the exchequer.

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 Chapter

20
Vanaspati & Edible Oil
Industry
1. INTRODUCTION
1.1 The edible oil, aka Cooking Oil, is a fatty
liquid that is physically extracted from several
vegetables and also from some animal tissues.
This industry can be classified into:
i. Vanaspati manufacturers.
ii. Edible Oil manufacturers (Other than
coconut oil).
iii. Coconut oil manufacturers.
1.2 Oilseed crops are the second most important
determinant of agricultural economy, next only enhanced per capita consumption (18 kg oil per
to cereals within the segment of field crops. annum) driven by increase in population and
The self-sufficiency in oilseeds attained through enhanced per capita income.
“Yellow Revolution” during early 1990’s, could 1.3.1 There are about 100 Vanaspati Units
not be sustained beyond a short period. Despite
and 651 Solvent extraction plants/ refineries in
being the fifth largest oilseed crop producing
the country with an annual capacity to process
country in the world, India is also one of the
around 6800 lakh MT of raw material. Due to
largest importers of vegetable oils today. There
various reasons, mainly the seasonal availability
is a spurt in the vegetable oil consumption in
recent years in respect of both edible as well as of raw material the total capacity utilization of
industrial usages. the edible oil industry is around 35 per cent as
per estimates given by the Solvent Extractors
1.3 The demand-supply gap in the edible oils Association of India (Source–India 2019 of
has necessitated huge imports accounting for 60 Publication Division, Ministry of Information
per cent of the country’s requirement (2016–17: and Broadcasting, Govt. of India).
import 14.01 million tonnes; cost Rs. 73,048
crore). Despite commendable performance of 1.4 Sources of Vegetable Oils
domestic oilseeds production of the nine annual 1.4.1 Primary Sources of Vegetable Oil:
crops (Compound Annual Growth Rate of Nine oilseeds are the primary source of vegetable
3.89%), it could not match with the galloping oils in the country, which are largely grown under
rate of per capita demand (approx. 6%) due to rainfed condition over an area of about 26 million

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ha. Among these, soybean (34%), groundnut of edible oils during the last decades is about
(27%), rapeseed & mustard (27%) contributes 174%. The import figure of edible oils during
to more than 88% of total oilseeds production 2015–16 reveals that India imported a total of
and >80% of vegetable oil with major share of 15.88 million tonnes of oilseed and vegetable
mustard (35%), soybean (23%) and groundnut oil products worth Rs. 69331.96 Crore.
(25%). 1.6.2 Export: As per foreign trade policy,
1.4.2 Andhra Pradesh (groundnut) & Gujarat export of edible oils was prohibited over the years.
(groundnut), Haryana (Mustard), Karnataka Currently the following exemptions are in place:
(G.nut), M.P (Soybean), Maharashtra (Soybean), i. Edible oils permitted for export in bulk as
Rajasthan (Mustard & Soybean), Tamil Nadu well consumer packs of upto 5 kgs with
(G. nut), U.P (Mustard), West Bengal (Mustard) MEP.
contributing more than 95% of total oilseed
production in the country. India is producing a. Groundnut oil, sesame oil, soybean oil,
about 7–8 million tonnes of vegetable oils from rice bran oil, coconut oil.
primary sources. b. Minor forest product oils.
1.4.3 Secondary sources of vegetable oil: In ii. Edible oils permitted for export in only
addition to nine oilseeds, 03 million tonnes of consumer packs upto 5 kgs with MEP of
vegetable oil is being harnessed from secondary USD 900 per MT:
sources like cottonseed, rice bran, coconut, Tree
Borne Oilseeds (TBOs) and Oil Palm. Oil palm a. Olive oil, palm oil, sunflower oil,
which is categorized as secondary sources of oils safflower oil, cotton seed oil, linseed
should be included as primary source as it gives oil, mustard oil.
the highest per ha oil yield (4–5t/ ha). 1.6.2.1 India was never a big exporter of edible
1.5 Area, Production and Yield of Oilseed oils. India’s export basket comprised of premium
Crops in India: In India, annual oilseeds oils with higher value realization (refined coconut,
are cultivated over 26.67 million hectares of groundnut and sesame oils) and recently DOC
area producing 30.06 million tonnes annually (de-oiled cake) oil meals, castor oil, groundnut
(quinquennium ending 2016–17). Majority oil and sesame oil contributes largest share.
of the oilseeds are cultivated under rainfed The export figure of edible oils during 2015–16
ecosystem (70%). The area under oilseeds has reveals that India exported a total of 8.20 million
experienced a deceleration in general, and this tonnes of oilseed and vegetable oil products
is due to their relative lower profitability against worth Rs. 29527.97 crore.
competing crops like maize, cotton, chickpea 1.7.1 Olive Oil—An Emerging Segment:
etc., under the prevailing crop growing and India largely imports olive oil from Spain, Italy
marketing situations. and Turkey. While India consumes 17 million
1.6 Import and Export of Oilseeds & tonnes of edible oils but the share of olive oil
Vegetable Oil is only 0.1 per cent. More than 90 brands are
competing for such a small share of market.
1.6.1 Import: India is heavily dependent on
imports to meet its edible oil requirements and 1.7.2 The top three brands in the domestic
largest importer of vegetable oils in the world market, which together control more than 70
(15% share) followed by China & USA. Of per cent of retail sales, are Leonardo, Figaro and
imported edible oils, share of palm oil is about Borges (including Cesar). Some other prominent
60% followed by soybean oil with a share of 25% brands include RS, Bertolli, Del Monte, Fragata,
and sunflower (12%). Import growth in respect Colavita and Athena.

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1.7.3 The Indian olive oil market size was and animal body fats. The quality of Vanaspati
valued at $58.6 million in 2017, and is projected has improved in recent years. Hydrogenation
to reach $127.5 million by 2025, growing at a permits the use of the cheapest edible oil
CAGR of 9.9% from 2018 to 2025. Olive oil is available. Selective hydrogenation can suppress
a viscous liquid that is extracted from the fruit those constituents of oil which adversely affect
of the olive tree by pressing whole olives. Olive stability or quality of the finished product.
oil has a low smoke point of 240ºC and hence Hydrogenation, combined with other processes,
can be consumed raw. Olive oil consumption is permits the production of margarine in developed
often considered healthy as it is associated with countries which is superior to butter in flavour,
a lower risk of heart disease and certain cancers texture, color, spread ability and nutritive value.
including colorectal and breast cancer. Olive Similarly tailor-made fats are being produced
oil is also a good source of monounsaturated to meet the specific needs of baking and frying
fatty acid and antioxidants such as polyphenols, different foods.
vitamins E & K, chlorophyll, and carotenoids. 2.1.2 A few bigwigs of the edible oil
The olive oil industry in India has witnessed industry are:
considerable growth in the recent years due to
rise in health-conscious consumers. The olive oil i. Marico: One of the oldest and most
market has become more competitive and price famous edible oil brands in India, Marico,
sensitive due to the high potential and steady was founded in 1987. Saffola holds the
growth of the olive oil market. brand name for all Marico’s edible oil
ventures. Marico has an international
1.8 Future: Considering the growing domestic presence in over 20 countries including
demand for edible oils, the staggering deficiency
Egypt, Vietnam, Malaysia and South
and the cost to the exchequer on account of Africa. Brands: Saffola, Parachute etc.
imports, the urgency of scaling up the oilseeds
production does not need over-emphasis. It ii. Adani Wilmar Ltd.: It is an another
has now been planned to achieve a production edible oil company which came into
of 45.64 million tonnes (mts) from nine (9) existence after Adani Group collaborated
annual oilseed crops by 2022–23, expecting with Wilmer International. The edible oil
an additional production of about 15.58 mt manufactured by this company is extracted
over and above the 30.06 mt production from sunflower, groundnut, mustard and
(QE 2016–17). Thus, the availability of total rice bran. Brands: Fortune
vegetable oil from domestic production of nine iii. Agrotech Foods Ltd.: This company
annual oilseed crops would be about 13.69 mts was established in 1986. Brands: Sundrop,
by 2022 (at 30 per cent recovery) as against the Poshan etc.
current annual output of 7.0 mts.
iv. Mother Dairy: This is one of the most
(Source: DFI Committee Estimates based on popular dairy firms in India and sells edible
data compiled from DACNET(Except Para 1.7)) oil under the brand name ‘Dhara’. Some
of the Dhara’s oil variant includes mustard
2. VANASPATI MANUFACTURERS oil, soyabean oil and groundnut oil.
2.1 The Vanaspati or hydrogenated oil v. Vimal Oil & Foods Limited: This
industry in India has a history of over 60 years. company was established in 1993 and has
The process of hydrogenating liquid oils is to since been selling different kinds of edible
make available more saturated or solid fats, oil under the sub-brand ‘Vimal’. The
the demand for which cannot be met by milk company has built a strong distribution

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network, which includes more than 1500 2.2.3 Due to very diverse culinary traditions
distributers in India. Some of Vimal’s oil and tastes, there are different types of cooking
variants are filtered groundnut oil, refined oils available in India.
soyabean oil and refined sunflower oil.
i. Palm Oil.
vi. Bunge Ltd.: Bunge is the sixth most
sold edible oil in the country. It is one the ii. Sunflower Oil.
oldest brands, founded in the year 1818. iii. Groundnut Oil.
The company had acquired the brand
name “Dalda” in 2003 from Hindustan iv. Soybean Oil.
Unilever Limited and uses ‘Dalda’ as its v. Mustard Oil.
brand name to sell its products. Dalda is
vi. Sesame Oil.
popular for selling multiple oils including
soyabean oil, vanaspati, sunflower oil, vii. Rice Bran Oil.
mustard oil etc. Dalda is one of the most viii. Olive Oil.
trusted products of the country.
vii. Cargill: It is a US based food ix. Corn Oil.
manufacturing company which was x. Canola Oil.
incorporated in 1865, in America. It set
xi. Cottonseed.
its foot in Indian market in 1987 and
since been selling some of its popular xii. Blended.
brands like Gemini, Sweekar, Sunflower 2.2.4 Depending on one’s budget, cooking
Vanaspati, Leonardo, Rath and Nature
style, and dietary concerns, one can buy any of
fresh.
these edible oils from excellent brands in India.
viii. Ruchi Soya Industries Ltd.: Ruchi
Soya Industries Ltd was established in the 2.2.5 Top 10 brands names in Edible Oils in
year 1986. The company’s popular edible India are:
oil brands include names like Mahakosh, i. Fortune.
Nutrela, Sunrich & Ruchi Gold.
ii. Saffola.
ix. Rasoya Protiens Ltd.: The Company
was established in the state of Maharashtra iii. Sundrop.
in the year 1992. The company sells its iv. Patanjali.
edible oil variants in brand names ‘Rasoya’
and ‘Sunsafe’. The company is extremely v. Emami.
popular in rural India, which is plus point, vi. Gemini.
as more than 40% of India’s population
resides in rural area. It produces edible oil vii. Dhara.
from soyabean as well as from sunflower. viii. Dalda.
2.2.1 India is a huge market for edible oils. ix. Sweekar.
During the financial year 2017–2018, Indians
consumed whopping Rs. 1.3 trillion worth of x. Recon.
edible oil of different types. 2.3 Vanaspati in India is wholesome and
2.2.2 Further, edible oil constitutes the single nutritive. In the modern Indian markets
largest share of packaged foodstuff: It accounts vanaspati is being used to refer to vegetable
for over 30 per cent of all packed foodstuff sold oil that has been hydrogenated and hardened.
in India. Vanaspati ghee is a cheaper substitute for the

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clarified butter that is made from milk. Vanaspati Hence the process of obtaining hydrogen
means any refined edible vegetable oil or oils from water is eliminated.
subjected to a process of hydrogenation in any v. This stage involves de-odorisation of the
form. It conforms to strict specifications laid Vanaspati as different oils give different
down by the Government of India to ensure odours. This stage also includes blending
a high nutritive value. Currently, nearly one and vitaminisation.
quarter of the total edible fat consumption in
this country is in the form of Vanaspati. This vi. In the final stage, the Vanaspati is
however varies from region to region depending refrigerated and packed in tins & pouches
upon dietary habits. For example, in the North as required in the market.
where traditionally hard fats have been in use, 2.4.3 Conventionally, the above process is done
Vanaspati consumption is very high but it tends in batch process, i.e. vanaspati is manufactured
to decrease as one goes south, where the people on a batch by batch basis. Hence a fixed quantity
are more accustomed to liquid oils. of batch would be passed through different
2.4.1 Raw Material: The basic raw material stages. Under the latest technology which is the
in vanaspati industry is oil. The oils commonly continuous process technology, the edible oil
employed are groundnut oil, cottonseed oil, ends up into tins & pouches after processing
sesame oil and kardi oil. Imported oils like from the first to last stage. Some of the plants
palm oil, soyabean oil and rapeseed oil are use intermediate technology whereby a couple
also used when available. Indigenous edible of processes are done on a continuous process
grade Rice bran oil is also used. The other raw technology, and others on batch processing.
materials for the Vanaspati industry are Vitamins 2.5 Process Losses: In the process of
and chemicals, for example vitamin ‘A’ & ‘D’, manufacturing Vanaspati, losses are incurred
Phosphoric acid, Caustic Soda, Nickel, Catalyst at various stages. In order to ascertain the
fullers and Activated carbon. These chemicals
reasonable process loss, it is important for the
constitute only 1% of the total cost of production.
AO to understand the process employed by
2.4.2 Manufacturing Process: The production the manufacturer. Normally, losses depend on
of vanaspati oil involves following stages: the quality of the oil used, the efficiency of the
i. Edible oils of various types, and qualities, technology employed, and the quality of caustic
are collected. lye employed during the neutralization process.
For ascertaining the correct amount of losses, the
ii. Various impurities such as sludge, fatty
past record of the unit and the losses incurred by
acid etc. are removed from the oil.
other units in the industry employing the same
iii. The oil is then bleached, and colours are process, should act as an indicator. Reports
removed as different types of edible oils of laboratory tests, carried out by Vanaspati
contain different colours. manufacturer at the time of purchase of edible
iv. Hydrogen gas is applied on the bleached oil, could be a good evidence of the quality of
oil. This is a critical stage of converting oil the oil and hence an indicator of the extent of
into Vanaspati. Hydrogen gas is now readily process loss. A format of ‘laboratory analysis
available from caustic soda manufacturers. report’ normally used is as under:

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2.5.1 Laboratory Analysis Report of 2.5.2 Laboratory test report of Vanaspati

Edible Oil Purchased Date:________________
Name of Party Report No. Dated._________ Table 2
Sample No.____________________________ Particulars of Analysis Batch No.
Table 1
M.P C
Oil
F FA%
F.F.A
R T Red units
Moisture
Total M.I.V. Colour 1 cell

Hold Test Unsap. Matter

Flash Point C Moisture%
B.T. Test Vitamin Test
Hexabromide Test Acid Value%
Argemone (Fecl 3 Test) R.I.at 60 C.
Castor Oil Test
N.E.O Test
R.I. at 40 C
Nickel PPM
M.P.C
Animal Fat
Unsap Matter
Colour (Y+R) Description
Colour after bleaching Clarity Test
Bleaching ability
present in raw oils. Soap stock generally contains
Barrels__________Truck No.________________ about 30–50% of fatty matter, the rest being
Remarks_________________________________ water and impurities, originally present in the
Checked by: Chemist______________________ oil. Soap stock derived from the pre-neutralised
stage is called “soft soap stock”, and that derived
2.6 The oil industry has prescribed following from post-neutralised stage is called “hard soap
methods to analyse oil obtained for sampling: stock”. Hard soap stock is more valuable to soap
manufacturers as it tends to make the saponified
i. Bottom sample.
product in the physical or chemical sense harder.
ii. Top sample. The disposal of soap stock has a significant
influence on the economics of Vanaspati
iii. Average sample.
manufacturing. Hard soap stock fetches a higher
2.6.1 The samples of oil are then sent for price than soft soap stock if it is collected and
analysis to laboratory in a locked box. Therefore marketed separately. Therefore, if the proportion
the above factors also will be useful to process of hard soap stock sold is larger than that of soft
the case. soap stock and the assessee has not maintained
a separate account, some suppression of income
2.7 By-Products is likely to result. It may, therefore, be advisable
2.7.1 Soap Stock: The main by product is to obtain separate details of two varieties of soap
stock obtained during the manufacturing process.
soap stock obtained while refining food oils.
Soap stock is produced in the reaction of caustic 2.7.2 Acid Oil: Many Vanaspati manufacturers
soda in the form of lye with the free fatty acid convert their soap stock into acid oil by treating
it with sulfuric acid. As this acid oil is not

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susceptible to deterioration in storage, it fetches 3.1.1 In addition, the rules also provide that
a relatively higher price. Other byproducts are the registered person shall keep and maintain
oxygen, spent bleaching earth, spent nickel records of:
catalyst and wash waters. a. Goods or Services imported or exported.
2.7.3 Oil Cake: Also known as press cake, is b. Supplies attracting payment of tax
the solids remaining after pressing something to on reverse charge along with relevant
extract the liquids, in this oil industry. Their most documents, including invoices, bills of
common use is in animal feed. supply, delivery challans, credit notes,
debit notes, receipt vouchers, payment
3. BOOKS OF ACCOUNTS vouchers, refund vouchers and e-way bills.
3.1 In view of the large volumes involved in In the cases under investigation it could
this business and the Government controls, be useful to examine and compare the
the Vanaspati manufacturers are required to figure of production and sales shown by
maintain detailed accounts with the advent of the assesses with the corresponding figures
shown in the GST and other records.
computerization, most of these manufacturers
have computerized accounting systems where 3.2 Purchases: In the case of purchases,
the purchases, stock of raw materials, transfer there are possibilities of inflation of purchases,
of raw materials to manufacturing process and particularly if the purchases are made through
transfer of semi-finished products from one a concern in which directors/ partners of the
process to another, maintenance of finished purchasing units are interested. The purchase
stock record and invoicing are governed by of raw materials requires to be verified with
integrated softwares specially designed for this reference to the contracts entered into by the
line of business. Here it is imperative for the AO assessee, for finding out whether the purchases
to fully understand the system of accounting have been made at prevalent market rates or
there was collusion with the suppliers in inflating
and the escape routes, if any, in the software
the purchase rates. It may also be worthwhile
accounting package. Moreover, statutory records
to verify the genuineness of purchases from the
are required to be maintained under the local
books of suppliers. The weekly prices of major
laws and Central laws, for instance, Section
edible oils of important markets in the country are
35 of the CGST Act, 2017 provides that every published in the annual reports of the Vanaspati
registered person shall keep and maintain, at Manufacturers Association of India. Therefore,
his principal place of business, as mentioned in by referring to these reports it should be possible
the certificate of registration, a true and correct to verify whether edible oils had been purchased
account of: at inflated rates.
a. Production or manufacture of goods. 3.3 Sales: As the Vanaspati has its root in
b. Inward and outward supply of goods or the edible oil industry, the prices of vanaspati
services or both. fluctuate with the fluctuations in the prices of
edible oils. There are different market prices for
c. Stock of goods. Vanaspati made from different kind of edible
d. Input tax credit availed. oils. The sale prices needs to be correlated with
the market prices of such Vanaspati. Branded
e. Output tax payable and paid. vanaspati fetches better price than the normal
f. Such other particulars as may be market price. The premium over the market
prescribed. price depends upon the strength of such brand.

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Manufacturers in the industry often appoint firms various parties in his region. Interestingly,
constituted of themselves or their relatives as he also supplied the lorry receipts (L.R.)
selling agents for sale of their products. At times, along with his bills of sale. On inquiry, it
these agents are ‘benami’ of manufacturers. The was found that the vehicle number given
agreement between the manufacturers and the in the L.R s were of two wheelers and not
selling agents should be critically examined to of trucks. Thus, an organized racket of
find out the real identity of the agent and whether bogus billing was unearthed.
any extraordinary commission, disproportionate
to the services rendered by the agent has been iv. Copy of bank accounts of the assessee
passed onto him. should be thoroughly examined as these
give an idea of the nature of various
3.4 GST: Oilseeds attract 5% tax under goods transaction of sales, purchases, loans,
and services tax, unlike most other agricultural
deposits etc.
produce such as grains and pulses that have
been exempted under the new regime that is v. These days all major businesses enjoy
rolled out from July, 2017. The primary list of bank facilities. Copies of stock statement
GST includes oilseeds under 5% tax bracket. But certified by the owners to the bank are
of the two products manufactured after crushing good evidence regarding the stock, sale
oilseeds, only edible oils will attract 5% GST and and purchase.
DOC (De-oiled cake), the second product, has
4.1.1 The GST input credit shown in the
been put in the nil tax category. Oilseeds used
accounts should be confirmed with the returns
for seed purpose have been exempted from
taxation. submitted to the GST authority.
i. The genuineness of the credit notes and
4. TAX INVESTIGATIONS debit notes, given/ received by the assessee
should be examined.
4.1 General Issues: The books of accounts
need scrutiny on the following points: ii. The payment of commission and brokerage
in sales and purchase should be inquired
i. Fictitious cash credits and deposits may
have been introduced in the accounts. with reference to the services provided by
such parties.
ii. Credit balances appearing in the Balance
Sheet of suppliers etc. need to be confirmed iii. Abnormal fluctuations in the manufacturing,
as they may have already been paid out of administrative and sale expenses should
unaccounted money. be intensively scrutinized.

iii. In recent past, numerous cases of “billing 4.2 Production: Following types of enquiries
agents” have come to light, who in reality, can reveal suppression of production of vanaspati
do not do any business but only provide by manufacturers:
bills of purchase/ sale etc. of different dates, i. The assessees furnish periodical returns
to facilitate the suppression of income. A in respect of total production and sales
vigilant eye needs to be kept on the bills to the GST authority. These details may
produced before the AO for detecting such be compared with those furnished to the
bogus transactions. An on-site inquiry of Income-tax department to find out any
suspected parties or inquiry in the market discrepancy. Wherever any action has been
can lead to discovery of true state of affairs. taken by these departments, the relevant
In a case, a “billing agent” supplied bills to orders should be studied to find whether

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any manipulation has been attempted by be useful to obtain information in respect

the assessee. of the cost and quantity of chemicals used
ii. It may also be useful to obtain invoices by the manufacturer. This can give an
prepared while sending the vegetable indication of the total production, if the
products from the filling room to the input-output ratios are known.
cooling room, and compare these with the ix. The extent of consumption of electricity
registers maintained for GST purposes. by the manufacturing unit has a direct
Similarly, an examination of gate passes relationship with the total production.
issued at the time of delivery of goods Production of vanaspati can be co-related
from factory, may show sales which have with consumption of electricity. It may be
not been accounted for. mentioned that for units getting hydrogen
iii. The AO may also detect concealment from caustic soda plants or steam iron
of production by ascertaining from the process, the average consumption of
suppliers the quantity of packing materials electricity could be different.
like tins and plastic containers purchased 4.3 Sources of Information: It would be
by the manufacturing units. useful for the AO to refer to following reports/
iv. The invoices made for the transporters publications-
indicate the correct quantity of Vanaspati i. Annual reports of the Vanaspati
being dispatched. These may be utilised
Manufacturer’s Association of India.
for cross verification. The manufacturers
also insure goods against loss or damage ii. Supplement to the Manual of departmental
while in transit, and the quantity of goods instructions on excisable manufactured
insured can be obtained for verification. products (vegetable products).
v. Where the assessee seeks to justify a low iii. Reports of the Food and Civil Supplies
gross profit on the ground that expenditure department.
had to be incurred under certain additional
heads or where there is abnormal increase 5. EDIBLE OIL MANUFACTURERS
in certain items of expenditure, the (OTHER THAN COCONUT OIL
relevance of the same should be examined. MANUFACTURERS)
vi. The closing stock of the finished goods 5.1 General: Edible oils are not only raw
should be reconciled with the opening material for vanaspati, but also a major cooking
stock, production and the sales made
medium. A variety of oils are produced in the
during the year. A proper scrutiny may
country. Traditionally different regions and parts
reveal manipulations made by the assessee
of the country had pockets of different types
to maintain a desired G.P. rate.
of oil-making industries. For instance, Madhya
vii. The prices shown in the invoices should be Pradesh has major soyabean oil manufacturing
compared with those in the market reports industries, while Andhra Pradesh and Gujarat
published in local newspaper. This may has Groundnut oil manufacturing industries. In
reveal under-invoicing of goods. recent times with the development of transport
viii. Certain chemicals are used in the and communications facilities, edible oil industry
production of Vanaspati. These are mainly has developed not only in oil seed growing
vitamin A, caustic soda, nickel, catalyst, regions but also at far flung places where oil
fuller’s earth, and activated carbon. It may seeds are transported for crushing.

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5.2 Manufacturing Process: The manufacturing are directly processed in the solvent extraction
process involves three stages, which is by and large plants.
similar for different kinds of oilseeds. 5.3 Blending of Edible Oil: Oils and fats have
5.2.1 Shelling: For some of the oil seeds such many functions in food product preparation.
as groundnut, the pods are shelled so that the Quality, stability and nutritional features of oils
kernel (oilseed) inside the pods is separated from are the most important factors in food technology.
the outer shell. Some oilseeds do not require There is no pure oil with good functional and
shelling as they are available directly in the form nutritional properties and appropriate oxidative
of seeds. stability. Therefore, vegetable oils are modified
using different methods to enhance their
5.2.2 Crushing: In the second stage of process,
commercial applications and to improve their
oil seeds are crushed with the help of an expeller
nutritional quality. Modification methods are
to obtain oil. In this process large stock of oil
hydrogenation, interesterification, fractionation
seeds together with oil seed cake are put in the
and blending. Blending of oil combines the
machinery into which steam is passed to make
potency of two edible oils and offers a balance
the seeds hot. The temperature is maintained at
of fatty acids. Various cooking preparations
30 to 35ºC. The hot oil seeds are passed through existing across different ethnicities and regions
a roller where they are crushed and the oil subject to different cooking temperatures thereby
obtained is separated from the cake. Steam is let causing deterioration of the oil due to oxidative
in to smoothen the process and extract as much stress. By blending different types of oils, the
of oil as possible. The oil thus obtained contains consumer can be offered a better quality product
dust particles and the outer skin layer of the oil with respect to flavor and nutritive value. In the
seeds. The oil is therefore passed through filters, last century, there has been more emphasis on
so that it becomes free from dust, sediment etc. edible oils based on regional production due
The oil thus obtained is put into barrels if the to traditional taste and flavor preferences in
miller has a ready sale contract, otherwise it is the different regions. Some unconventional
pumped into tanks. The miller is able to know oils such as soyabean and palmolein came
how much of oil has been obtained from the into production since the last 20 years, which
processing of oil seeds each day. As and when were being accepted by the general public
he has to fulfill his selling contracts, oil is drawn only in their refined form. Blending would also
from these tanks to fill the drums. reduce the pressure for regional preferences of
specific individual oil, thereby indirectly helping
5.2.3 Solvent Extraction: During the
in stabilizing the edible oil price in a country.
crushing of oil seeds, a byproduct i.e. oil cake
There are basically three parameters to adjudge
is obtained. In spite of the best efforts to recover
any oil as the healthiest cooking oil i.e., ratio of
as much of oil as possible during crushing 6–8%
of oil still remains left over in the oil cake. For saturated/ mono unsaturated/ polyunsaturated
extracting this left over oil from oil cake, a fatty acid, ratio of essential fatty acids (Omega 6/
process known as “Solvent Extraction Process” Omega 3) and presence of natural antioxidants.
has been developed. There are some mills which The oils can be blended even to derive the
purchase oil cake from various millers, and protective advantage due to the presence of
extract oil from the oil cake by this process after specific ingredients that offer protection against
reprocessing, only 1% or less of oil is left over oxidation to improve frying recyclability.
in the cake, which is then called de-oiled cake. 5.3.1 The blending of edible oil is done in
In the last decade, there has been technological appropriate ratios keeping in mind to enhance
advancement whereby rapeseed and soyabean its nutritive value and other factors as mentioned

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above. For example: Saffola Gold, Pro Healthy oilseeds purchased and the rate at which
Lifestyle, edible oil, is a blend of 80% refined rice the purchase was made.
bran oil and 20% imported refined safflower oil.
ii. Purchase Invoices: These contain full
5.4 Yields: Different kinds of oil seeds have details of purchases.
different rates of yield. Following are the average
iii. Register of Seeds: The register shows
yields of different oil seeds. These yields are after
day to day details of the opening stock of
the oil seeds have been processed ultimately by
oil seeds available with the miller, kernel
the solvent extraction plant.
obtained from decortication during the
Table 3 course of the day (or kernel purchased
if the assessee is also purchasing kernel),
Sl. No. Oil Seed Average Yield (%)
oil seeds issued for crushing of oil and the
1 Soyabean 19–20
balance of oil seeds available at the close
2 Castor 45–50
of the day.
3 Groundnut 45–50
4 Rape 39–40
iv. Register of Oil: As in the case of the
register of seeds, this register contains
5 Cotton 18–22
details of the opening stock of oil on the
NB: After the above yields have been obtained day, oil obtained from crushing during the
from the oil seeds, oil contents of only 1% and day, oil sold, and the balance available
below remains in the de-oiled cake. The other with the miller at the close of the day.
de-oiled cake is useful as cattle feed and chicken v. Register of Cake: For oil cake, which
feed. Different edible oil manufacturers claim is a byproduct of oil milling, a register is
different variations in yields on the grounds that
maintained which shows details of stock at
the oilseeds used by them were of a particular
the beginning of the day, quantity of stock
quality. Hence, in order to arrive at a reasonable
obtained during the course of day, quantity
yield in a particular case the above table could
sold out, and the balance available at the
be an indicator. However, other facts such as the
close of the day.
quality of seeds available generally in the region,
track record of the assessee on the yields and vi. Registers under GST Act: These
the available yields to other manufacturer in the registers are maintained in the forms
area should also be taken into account. prescribed by the GST authority.
5.5 Books of Accounts: The edible oil is vii. Sales Bills: giving full details of sales made.
a business with large volumes and a number viii. Closing Stock Inventory Register: Some
of government controls. Hence, it requires a of the millers do not maintain the registers
detailed accounting system. With the advent of seed, oil and oil cake, mentioned above.
of the computerised accounting all major Instead, ledger accounts are maintained for
manufacturers use software to maintain records. oil seeds, oil and cake which contain the
It is important for the AO to not only know the weight and other particulars. As mentioned
software but also to verify the books of account earlier, the first weighment of oil or cake is
mandated to be maintained under GST Act.: made only when they are sold. The entries
i. Gate Book: In this book, day-to-day in the above registers are however made
purchases of oilseeds are recorded showing on the basis of approximate figures.
the name of the person from whom the ix. Yield Registers: An output register or
oil seeds were purchased, the quantity of yield register showing the weight of oil

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seeds issued for decortication and the vi. At times, bad debts are claimed by the
weight of kernel obtained from such oil assessee as per their convenience in the
seeds, is to be maintained by a miller books of accounts. The AO should verify
so that his yield rates can be accepted. whether the bad debts claimed are correctly
Similarly, an output register showing the classified as bad debts and whether they
weight of oil seed issued for crushing, and should be allowed as a deduction.
the yield of oil and cake obtained from vii. In recent times, a class of ‘Billing Agents’
such oil seed is to be maintained. As the have come into existence who do not
registers maintained by the oil miller do carry out actual business but only provide
not contain the particulars expected to be accommodation bills for purchase/ sale
recorded in an output register normally, etc. A vigilant eye needs to be kept on
the yield rates of oil seeds, oil and cake are the bills produced before the AO to
being estimated in the case of oil millers. detect such bogus transactions. An on-site
inquiry of suspected parties or inquiry in
6. TAX INVESTIGATIONS the market can lead to the discovery of the
6.1 The books of account in this industry need true state of affairs. In one case, a billing
scrutiny on the following points: agent supplied bills to various parties in
his region. Interesting, he also supplied the
i. In case of edible oil business, forward Lorry Receipts along with his bills of sale.
transactions of purchase/ sale are common. On inquiry it was found that the vehicle
These should be verified with the market
numbers in the LRs were of two-wheelers
rates prevailing at the time of transaction
and not of trucks. Hence an organized
and should whether these forward deals
racket of bogus billing was unearthed.
are genuine transactions or afterthought/
adjustments. viii. In GST era, the bogus e-way bill/ fake
ii. Where the assessee seeks to justify a low bills racket have been busted though not
gross profit on the ground that expenditure particular to this sector. The AO should
had to be incurred under certain additional remain alert and check, on sample basis,
heads or where there is abnormal the authenticity of invoices, issued by
increase in certain items of expenditure, lesser known players in the market, to
the justification of the same should be detect bogus purchase. The help of GST
examined. authorities may also be taken to sift their
iii. The closing stock of the finished goods database for identifying such fraudsters.
should be reconciled with the opening ix. Assessee’s bank accounts should be
stock, production, and the sales made thoroughly examined to get an idea of the
during the year. A proper scrutiny may nature of the various transactions of sale,
reveal manipulations made by the assessee
purchase, loans, deposits etc.
to maintain a GP rate.
x. Copies of stock statement certified by the
iv. Fictitious cash credits and deposits may be
introduced in the accounts of the assessee owner given to the bank can be good
which should be properly scrutinized. evidence regarding the quantum of stock,
sale and purchase.
v. Credit balances appearing in the Balance
Sheet in supplier’s name etc. need to be xi. The GST input credit shown in the accounts
confirmed as it is possible that they would should be confirmed with the returns
have been paid out of unaccounted money. submitted to GST authority Department.

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xii. The genuineness of the credit notes and 6.2.4 Under normal practice, the purchases
debit notes given/ received by the assessees are subjected to laboratory analysis as per the
should be examined. format of report given in this chapter earlier. If
xiii. The payments of commission/ brokerage the AO verifies such laboratory reports, it shall
on sales and purchases should be give conclusive evidence regarding the yields
examined to determine the justification for claimed by the assessee.
the services provided by the commission 6.2.5 The rates of purchases should be verified
agent or the broker. with those prevailing in the market. The market
rates are available in local news papers or in the
xiv. Abnormal fluctuations in manufacturing,
publications of trade associations.
administrative, and sales expenses should
be intensively scrutinized. 6.2.6 The AO should examine whether any
purchases have been made from associate
6.2 Purchases concerns of the assessee and if so, whether these
6.2.1 At times purchases are shown from out of were at prevailing market prices?
state or outstation suppliers. The amounts and 6.3 Sales
quantity of such purchases should be verified
from the suppliers. The mode of transportation 6.3.1 The assessees are required to furnish
of the purchases made should be confirmed periodical returns in respect of total production
with the transporters. In cases of suspicion RTO and sale to the GST Authority. These details may
be obtained and compared with those furnished
authorities can be consulted regarding existence
to the Income-tax department to find out any
of the vehicles by which the transport took place,
discrepancy.
to ascertain whether such vehicle had really
transported the goods. 6.3.2 When the production is transferred
from one division to another within the factory
6.2.2 Freight charges on purchases, paid
premises, a register is maintained for such
through vouchers or by modes otherwise transfer. This can give an idea of the actual
than by an account payee cheque should be production and sales. The gate passes also
closely scrutinized as it can throw light on the should be tallied with the total sales.
genuineness of the goods transported by the
said transporters. In one case, the transportation 6.3.3 The AO may also detect concealment of
charges were paid by the assessee by crossed production by ascertaining from the suppliers
cheque which was deposited in the account of the quantity of packing material like tins and
beneficiary of the assessee. This in turn led to containers purchased by manufacturing units.
unearthing of the fact that the purchases relating 6.3.4 The invoices made for the transporters
to the said freight were bogus. indicate the correct quantity of edible oil
6.2.3 Purchases made by the assessee directly dispatched. These may be utilised for cross
from oilseed growers (farmers), need close verification. The manufacturers also insure
scrutiny regarding the identity of the seller, mode goods against loss or damage while in transit.
of payment, actual possibility of such sale by and the details of quantity of goods insured can
the seller in keeping with his land holding and be obtained for verification.
the yield of that crop. The proof regarding the 6.3.5 The prices shown in the invoices should
physical transfer of such goods purchased from be compared with those in the market reports
farmers could also play a vital role in ascertaining published in local newspapers. This may reveal
the true facts. under invoicing of goods.

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Techniques of Investigation for Assessment Vol. 5

6.3.6 Some oilseeds like groundnut are iii. Similarly, huge amounts were paid to fake
available in the form of pods. Hence during persons in respect of freight and transport
the manufacturing process husk is a byproduct. expenses, which on inquiry was found
The sale of husk needs to be accounted for in to be inflated. The modus operandi was
the books of accounts and its quantity needs to same as mentioned above.
be correlated with the total production of oil. iv. In depth inquiry was conducted in respect
Normally, out of 100 kg of groundnut pods 25 of truck owners/ transporters through
to 27 kg. of husk is recovered. whom the goods were claimed to have
6.3.7 The use of hexene in the solvent extraction been received. On inquiry, it was detected
plants is also a guiding factor in arriving at the that no such goods were delivered through
sales/ production of oil. these transporters. The truck owners in
6.3.8 These days the Government has allowed their statements denied to have delivered
blending of various types of oil. The sales of each oil seeds.
type of oil as a percentage of the blend should v. Some of the alleged suppliers had closed
be very closely scrutinized with the purchases, their business 15 years back, yet the
production and yield of each oil. purchases of oil seeds from them were
being shown in the books of accounts.
6.4 Sources of Information: It would be
The cheques drawn in the names of such
useful for the AO to refer to following reports/
persons were found deposited in the
publications:
account of the benami persons who in turn
i. Annual reports of the Edible Oil withdrew the amount in cash.
Manufacturers’ Associations at local/ state/
central levels. 8. CASE LAWS
ii. Reports of the Food & Civil Supplies Dept, 8.1 In the case of N.K. Proteins Ltd. vs.
and Food Administration Dept. Deputy, Commissioner of Income-tax (2017)
iii. Local news papers. 84 taxmann.com 195 (SC), the Hon’able Court
has held that where entire purchases shown on
7. CASE STUDY the basis of fictitious invoices were debited in
trading account – Tribunal came to a categorical
In one case, it was seen that the yield shown finding that there were purchases from bogus
by the miller was apparently low. On detailed
suppliers and, thus, Tribunal made addition
inquiry and investigation following facts were
of 25 per cent of total purchases – High Court
noticed:
by impugned order upheld Tribunal’s finding-
i. The creditors who claimed to have supplied Whether SLP against said impugned order was
oil seeds were either not in existence or if to be dismissed? Held, yes.
found they denied to have supplied oil
seeds to the assessee company. 8.2 In Vijay Proteins Ltd. vs. Assistant
Commissioner of Income-tax; (2004) 2 SOT
ii. The payments were made to such suppliers 116 (RAJKOT), February 27, 2002 the Hon’ble
by cross cheques. On investigation, it was ITAT decided as under:
revealed that the cheques were collected by
a particular person who was a benami of “Section 271(1)(c) of the Income-tax Act,
the assessee company who deposited these 1961 – Penalty – For concealment of income-
cheques in his account and immediately Assessment Year 1991–92 – During assessment
withdrew the amount in cash. proceedings, additions were made on account

352
 Vanaspati & Edible Oil Industry

of suppressed oil production and bogus – Held, yes-Whether in instant case, there
purchases – Tribunal confirmed additions on was ample evidence on record to prove that
account of low yield and bogus purchases- assessee had claimed deduction of expenses
assessee was not maintaining proper books of pertaining to purchases of raw material from
account which had been rejected on account bogus parties or suppliers and that fact had
of their non-reliability – Whether duty is been duly proved on record and brought
enjoined upon a person to make a complete assessee within ambit of phrase ‘furnishing
disclosure of his income as well as correct wrong particulars of income’-Held, yes-
disclosure and if disclosure made of particulars Whether assessee had concealed particulars
of income is incorrect, then also he commits of its income and was liable to be visited with
breach of his duty – Held, yes – Whether onus penalty under Section 271(1)(c) – Held, yes”
lies on assessee to prove genuineness of any
expenditure which is claimed as deduction 9. CONCLUSION
in computing its taxable income – Held, As can be seen, the future of this industry is bright
yes – Whether benefit of principle that mere and the demand is increasing in leaps and bounds
non – satisfactory nature of explanation with the increase in population and purchasing
furnished cannot amount to proof of falsity of power. To meet the domestic requirement, the
explanation furnished applies in case fact – industry will strategize to increase its production
finding authority reaches a stage where it can and thus the profits are bound to zoom too. The
only conclude that fact alleged is not proved, AO is advised to take cue from the finer points
which would result that except rejection of mentioned in the sub-topic “Tax Investigation”
explanation furnished by assessee, there is and with the help of GST data can certainly
no material to sustain plea of concealment frame a good assessment.

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INDEX

Account,
Bank, of Shell Entities, 120
Books of, 95
Books and Registers, 284
Contractor’s, 122
of Stock, 262
of Sub-contractor, 98, 101
Accounting Standards, 19
Adjustments to Fuel, 39
Advertisement, 243, 337
Branding and, 337 — Appointment of, 265
Costs, 337 — for Sugar Industries, 265
Advertising Agencies, 337 to Milk Contractors, 43
Affidavits, 173 AGMARK, 47
of Alleged Depositors, 101 Agreement, 94, 346
Agent, with Contractors, 99
Casing, 316 with Foreign Party, 335
Collection, 111–12 Lease, 93, 96, 103
Colouring, 179 Non-existence of, 98
of Commercial Firms, 130 Relevant, 194
Commission, 77, 101, 119, 133, 201, for Sale, 295
214, 264, 319–20, 325–26, 351 Written, 269
Dry Strength, 179 Agricultural Produce Marketing Acts, 203, 318
Flavouring, 113 Agricultural Income, 15, 221, 287, 295, 312
Hygroscopic, 316 Agriculture Produce Grading and Marketing Act
Managing, 266 (AGMARK), 46
Mill, 201 Arrangement, Supporting, 190
of Millers, 201 Asia Pacific Trade Agreement, 195
Purchasing, 258 Assets,
Retaining, 188 Fixed, 297
Sales Promotion, 164 and Liabilities, 21
Premium, Acquisition of, 120
Selling, 346
Proportionate, 171
Sizing, 179
Undisclosed, 213
Sole Selling, 264
Auctioneers and Tea-brokers, 290

                                                          355
Balance Sheet, 14, 21, 101, 174, 266, 297, 350 Techniques, 316
of Company, 292 and Vitaminisation, 343
Liability in, 294 Board Machine, 188–89, 191
of Suppliers, 346 Auxiliaries, 189
Bank Pope Reel, 191
Book, 254 Section of, 188
Commercial, 283 Board of Directors, 18
Bar Code, 191 Board,
Bearer Cheques, 135, 207 Corrugated Paper, 229
Benamidars, 169, 213, 266 Exposed Edges of, 110
of Contractor, 102 Forming, 190
Group, 33 Leather, 134, 141
Sales to, 102 Notice, 167
Tea Company, 294 Particle, 110
Benefits, Rice Husk, 110
Available to the Co-operative Societies, 32 — Strength, of, 110
Economic, of Forests, 83 Sheet of, 190
and Facilities, 163 Ticket, 176
Health, 42, 69, 205 Virgin Grade, 192
Retirement, 19 Bogus Job Work, 294
of Retreading, 334 Bonded Warehouse, 165
under Section 80-JJAA, 128 Book,
Bidders, Bogus, 169 of Account, 5, 15, 20–21, 58, 61–63,
Bill, 78–79, 81, 95, 111, 132, 160–62, 170,
Bogus, 208 201, 206–07, 210–13, 233, 241, 253,
— Sales, 78 256, 261, 264, 266, 311–12, 315, 320,
— Trails, 201 325, 337, 345–46, 349–50, 352–53
Books, 96 — of a Bidi Manufacture, 320
Discounting Schemes, 283 — Cross-Verification of, 320
of Entry, 4 — of Ice Factory, 234
Billing, — of Manufacturers, 323
Bogus, 335, 346, 350 — Rejection of, 168
— Scope for, 251 Bank, Reconciliation, 22
Black Marketing of Sugar, 265 Cash, 96
Black Money, 289 — Entries, 327
Blenders and Importers, 283 — and Ledger, 5
Blending, 218, 274, 281, 302, 348 Cheque, 22
of Coffee with Chicory Flavour, 16 of Company, 263
of Edible Oil, 348 Day, 21, 254
of Ethanol, 260 — Factory, 4
of Leaves, 316 — Main, 22
of Oil, 348 Dealer’s, 338
— of Various Types, 352 Log, 99, 162
with Petrol, 260 Maintained,
Suitable, and Processing, 41 — at Depots, 96
Tea, 281 — by Forest Contractors, 96

356
 of Manufacturer, 338 Load Carrying, 162
of Merchants, 320 Low Utilization, 177
Minute, 19 of Milk Plant, 49
Note, 187 of Mill, 207
and Papers, 4 of Plant, 50
Petty Cash, 254 — Pasteurisation, 49
of Primary Entry, 288 Paying, 207
and Registers, 14 Capital, 27
Regular, 96 Asset, 286, 295, 298, 337
Sale, 118 Expenditure, 135
Showing the Real Profits, 173 — Deduction for, 338
of Sugar Mills, 263 Expenses, 292
of Suppliers, 345 Fixed, 66
Trading of Goods, 111 Formation, 176
for Unaccounted Sales, 173 Gains, 296
and the Vouchers, 135 Gains on Transfer of Tea Garden, 295
Borrowers, 32 Goods, 336
Large, 283 Investment, 237
Bought Notes, 133, 229–30 Receipt, 318
Box Board Cuttings, 192 Working, 207, 283
Broker, 294 — Management, 283
Foreign, 290 Cardboard Box Manufacture, 134
Brokerage, 264 Case,
Abnormal, 264 Comparable, 80–81
Commission and, 299 Study, 111, 120–21, 208, 210
Brokers, 134, 201, 281, 289 Cash,
Auctioneer’s, 290 Book, 22, 95, 100, 132, 163
Brood Stock, 235 in the Books, 101
Brown Stock Washers, 179 Contractor’s Requirement of, 100
Bureau of Indian Standards (BIS), 46 Deposit, 101, 118, 266
Business, Discounts, 318
Income, 285 Purchases, 210
— from Growing Coffee, 16 — of Hide, 142
— under Section, 28 (ii), 318 Unaccounted, 5, 118
Assessee’s, 50 — Purchase, 120
— Rolling of, 3
Cane Marketing Union, 263 CBDT, 293, 295
Capacity, 253 Central Bank, 20
Carbon Sequestration, 224 Certificate, Chartered Engineer, 133
Creditor’s, to Advance, 101 Certification Systems, Third Party, 47
Crushing, 257 Characteristics,
Current, 176 Appearance, 57
Expansion, 196 Burning, 307
Financial, to Pay Back, 207 of Cane, 259
Furnace, 181 Chemical, of Leaf, 307
Installed, 162, 175, 176 Fine Grain, 199

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 of Indian Tea Industry, 282 Selling, 172
Industry, 229, 274 Sole Selling Agency, 264
of Paddy, Commodities, 27, 72, 91, 203, 228
— Crop, 199 Agricultural, 77, 272–73
— Production, 199 — and Allied, 46, 47
Physical, 202, 307 Conservation of, 55
— and Chemical, 307 Exportable, 44
Tastes and, 8 Nature of, 274, 280
of Tobacco Crop, 317 Packaged, 44
of Wheat, 62 Taxable, 261
Charges, Weaving, 28 Volatile, 15
Claim, Company Law Board, 265, 289
Assessee’s, Evaluation of, 50 Company,
Bogus, 63 Footwear Manufacturing, 128
Classification, 85, 228 Foreign Parent, 337
of Footwear, 137 Non-resident, 290
of Individual Grades, 13 Computation of Depreciation, 222
of Paper, 176 Concern, Bogus, 241
Coal for Manufacturing, 192 Consignment,
Coated Board Coating Chemicals, 192 Agents, 288
Coffee Board, 15, 16 Sales, 3, 288, 315
Coffee Board of India, 7, 8 Construction, 206
Coffee Trading, 15 Barn, 305
Commission for Agricultural Costs and Prices Building and Industry, 110
(CACP), 201, 203 Contractors for, of Buildings, 270
Commission, 36, 95, 102, 120, 161, 163, 202, Indigenous, 227
263, 265, 289, 311, 314 Material, 110, 134
through Agents, 101 Permanent, 293
to Agents, 163 of Rice Mill, 206
Arithmetic Tally of, 263 of Roads, 293
Brokerage, 264 Plywood Used in the, 105
Extraordinary, 346 Purposes, 90
Felling, 95 Type of, 297
Fixed, 166 Constructional Timber, 88
Log, Constructional Work, 90
— Carriage, 95 Consumption,
— Cutting, 95 and Distribution, 201
Machine Sawing, 95 of Paper, 175
on Total Sales, 164 Contaminants, Plastics and other, 183
Paid, Contract Act, 167
— by other Sugar Mills, 272 Contract, 165
— to Selling Agents, 272 Allotment of, 164
Payment of, 335 Milling on, 206
— and Brokerage, 346 Benami, 99
Rates of, 95 — Investment, 169
Sawing, 95 Bid for, 173

358
 Cable, 290 Small Time Labour, 134
Date of, 290 Successful, 173
Details of, 294 Transport, 270
Excise, 164 Understatement by, 88
Farming, 194 Wholesale, 165–66
with Foreign Importer, 290 Control, 266, 275
Forward, 283 Clearance-based, 159
Genuine, 294 on Coffee Exports, 8
Job Work, 294 Consistency, 184
Liquor, 164 on Distribution, 262
Memos, 290 Excise, 161
Period of, 93, 100 Government, 153, 349
Rate, 270 — and Regulation, 8
— Inflated, 98 Instrumentation and, 182
Ready Sale, 348 Internal, 17, 314, 324
Rubber, Futures, 223 Introduction of, 265
of Sale, 102, 290 Managerial, 181
Selling, 348 Number of Job Orders, 138
for Sharing of Profits, 165 Overload, 332
for Slaughter Tapping, 221 Partial, 262, 264–66
Terms of, 36 Points, 206
Wholesale, 165 Pollution, 44
Written, 269 — Air, 195
Contractor, 36, 93–94, 99–100, 102, 121, 167, — Mechanisms, 135
168, 172–73, 193 on Producers and Traders, 164
Abkari, 164 Quality, 44, 227, 254
Authorised, 103 — Compulsory, 227
— Licensed, 162 Over Quality of Foods, 46
Cases Booked Against the, 174 Record-based, 159
Country Liquor, 166, 168–69 Strictness of, 161
Depots Belonging to the, 99 System, 186, 191
Distillery, 167 Temperature and Humidity, 305
Excise, 171–72 Ultimate, 252
Expenditure Claimed by the, 169 Controlled Fermentation, 274
Forest, 84, 94–01 Cost Accounting, 261
Head Office of, 94 Cost Accounting Records, 261
IMFL, 164, 168 Cost Accounting Records (Sugar Industry)
Involvement of, 194 Rules 2011, 262, 266–67
Liquor, 162, 164, 167–68, 170 Cost,
Loading, 269 Actual, 16
New, 99 of Advertisement, 254
Registered, 321–22 Analysis, 335
Relative of, 99 to the Assessee, 325
Retail, 166 Average, of Production, 325
Sales to, 159 of Brooder, 239
Sendhi, 173 — Mother Prawns, 239

                                                          359
 Capital, of Shrimp Hatchery, 237 of Roads and Huts, 99
Centres, 139 of Rubber, 223
of Chemicals, 192 — Sole, 138
Considerations, 310 of Running and Maintaining the Plant, 254
of Construction, 207, 297 of Sales, 138, 279
— of a Rice Mill, 207 Sheets, 138
of Conversion, 98 of Tendu Leaves, 321
Cultivation, 222 of Tin Cans, 79
Effective Technology, 236 Transport, 14
Employee, 128 Unit, 111
to the Exchequer, 341 of Vessels, 227
of Feed, 239 Working of, 267
of Goods, 336 of Young Plants, 292
of Hatchery, 238 Cost-benefit Ratio, 332
Inflated, of High Quality Raw Material, 114 Cotton Carding, 59
Input, 187, 192–93, 239, 325 Credit,
Interest, 289 Cash, 59, 62, 101, 133, 213
of Labour, 282 — and Deposits, 350
of Liquid Inside the Bottle, 254 — Fictitious, 63, 346
of Machinery, 14 — Loan, 4
of Maintaining the Warehouse, 254 Notes, 170, 262, 345
of Manufacture of Beer, 170 Purchases, 210, 231
of Material, 79, 254 Creditors,
of Medicines and Chemicals, 239 Bogus, 169
of Milk Production, 37 Trade, 207, 210
Operational, 238 Cultivation, Average Cost of, 219–20
— of Freshwater Prawn, 238 Curing under Controlled Conditions, 304
of Packing,
— and Transport, 68 Data
— Materials, 193, 310 Analytics, 134
of Planting, on Profitability, 193
— Bushes, 286 Debit, Bogus, 5
— Rubber Plants, 222 Debts,
of Power, 139 Bad, 19, 350
of Primary Tea, 287 — and Losses, 19
of Processing and Packing, 315 — Details of, 299
of Production, 37, 79, 138, 208, 218, Decontrol, Partial, 262
236, 239, 282, 325 Delivery, 40
— of Bidis, 321 Challan, 240–41, 345
— of Tea, 282 —Bogus, 241
— Total, 343 of Commodities, 175
of Purchase, 111, 169 Compliance, 124
and Quantity of Chemicals, 347 of Goods, 120, 347
Raw Material, 332, 334 Morning, 44
Records, 267 Note, 4
of Removing the Produce, 202 One-time, 40

360
 Order, Details of, 61 E-commerce, 66
of Produce, 318 Electronic Media, 243
of Raw Material, 241 Energy,
Report, 182 Alternative, 260
Demonetization, 130 Production, 205
Depreciation, 26, 169, 195, 215, 222, 293, Security, 260
295, 297 Enforcement,
on Common Assets, 295 Agency, 118
on Fixed Assets, 19 of Food Safety Standards, 75
Initial, 299 Entities, Bogus, 240
on Plant and Machineries, 216 Entries,
Proportionate, 237
Bogus Hundi Havala, 214, 320, 327
Purpose of Providing the, 20
Operators, 294
Unabsorbed, 26
in the Stock Register, 135
Directorate General of Foreign Trade (DGFT), 133
Directorate of Marketing and Inspection (DMI) Environmental Management System, 47
46, 47 ERP, 78–79, 132
Directors, 263, 294, 298, 345 Ethanol Blending Programme (EBP), 267
of Company, 263 Evidence, Documentary, 208
in the Factory Premises, 263 e-Way Bill, 78
Managing, 266 — Database, 250, 335
Discount, 202, 338 — Number, 78
Weight, 318 Exemption, 23
Distribution, 96, 153, 162, 341 to Co-operative Societies, 24
and Advertisements of e-Cigarettes, 330 From Income-tax, 24
Channels Setup, 336 to State Forest Corporations, 104
Consistent with Flour, 60 Under Section 10(20), 104
of Dividend, 20 Under Section 11(1), 104
of Heat, 305 Expenditure,
of Incidence of Tax, 114 Bogus, 99, 170
Liquor Manufacturing and, 151 Capital, 286, 293, 338
of Milk, 40, 44, 47 Expenses,
Network, 116
Against Agricultural Income, 295
— Extensive, 332
Bogus and Inflated, 101
of Rainfall, 262
Business Promotion, 134
of Ration to Labourers, 293
Section, 181 Direct, 79
of Unaccounted Material, 118 — and Indirect, 293
Wholesale & Retail, 40 Illegal, 163
Documents, Indirect, 293
Doctoring the, 234 Misclassification of, 163
Supporting, 194 Personal, 101, 163
Transport, 171, 269 — of Management, 294
Double Tier Arrangement, 190 Export,
Drawings of Fishing Vessels, 227 of Commodity, 290
Dryers in a Board Machine, 190 Profits, 3
Dyeing, 132 Exporters, Dummy, 16

                                                          361
Foreign Exchange, 2 Income-tax,
Earner, 1, 123 Agricultural, 15, 287
Forest, Returns, 34
under Government Management, 84 Industry,
Management, 83–84 Capital-intensive, 195
Fundamentals, Industry’s, 176 Spinning, 134
Inflation,
Genuineness, 263, 289 of Expenses, 98, 135, 142, 194, 195,
of Business Operation, 241 233, 272
of Claims, 97 Extent of, 33
of Credit Notes, 346, 351 by Fictitious and Bogus Claims, 96
of Delivery Challans, 241 of Inputs, 134
of Expenditure, 353 in Labour Charges, 136
of Expenses, 271 of Loading and Unloading Expenses, 269
of Goods, 351 of Prices, 223
of Money Introduced, 325 — of Raw Material, 117
of Purchase, 133, 213, 239, 345 in Purchase, 33, 78, 80, 117, 133, 135,
of Transactions, 194 139, 208, 229, 231, 345
Global Clients, 128 — Price, 209, 313
Global Market Share, 124 — of Cane, 269
Gondia Beedi Leaves Contractors Association, of Quantity, 269
328 — of Sugarcane, 263
GST, — and Value, 287
Commodity Tariff Schedule, 195 in the Weight of Sugarcane, 263
Enforcement Agencies, 116 Information, 21, 132, 174, 192–93, 230, 263, 347
Provisions, 261 About Total Area of Garden Owned,
Returns, 122, 251, 335 292
Gujarat Cooperative Milk Marketing Federation, Age Technology, 332
44 Available about the Manufacturers, 256
Contained in the Central Excise Records,
Hazard Analysis and Critical Control Point 320
(HACCP), 47 of Fish Landings, 230, 241
From GST Department, 239
Identity, 63 on Items of Expenditure, 163
of Agent, 346 under Section 142(1), 292
of Seller, 133, 229 from the Tea Board, 292
Imports, Paper and Paperboard, 195 Technology, 177, 250
Income, on the Types of Products in Demand, 228
Agricultural, 222 Useful, 212
— Computation of, 287 Valuable, 269
— Exempt, 285 Insurance against Manipulations, 312
— from Rubber Plantations, 219 Intermediaries, 130
Application of, 26 Bogus, 266
Non-taxable, Artificially Inflated, 269 Inventory,
Taxable, 15, 237, 285 Management, 223
Unaccounted, 112 Subsidiary Module, 253

362
Investment, 50, 66 Temporary, 293
in Advances, 50 Unionized, 283
Allowance, 242, 299 Utilisation of Material, 261
Fixed, 238 Wages, 11
— Capital, 66 Women, 310
Fresh, 298 Law
Fund, 18–19 Enforcement Agency, 118
of Initial Deposits, 169 and Setup Standards, 74
in Purchase of Paddy, 215 Ledger
Short Term, of Surplus, 32 Accounts, 111, 349
Source of, 169 Sub-Contractor, 96
of Unaccounted Money, 174 Liabilities,
Investors and Exporters, 66 Current, 297
Wealth-Tax, 23
Kerala State Marketing Federation, 1 License,
Agreement, 317
Labour, 9, 93, 200–02 Fee, 165–70
Livestock, 42
and Chemicals Costs, 136
Loan,
Charges, 172
Advances, 21
— Details of, 136
Agreement, 25
— Increase in, 223
Applications, 22, 207
— Staff and, 81
Creditors, 297
Conditions, 269 and Deposits, 19
Contract, 134, 293 for Extension of Cultivation, 292
Contractor, 99 Facilities, 213
Cost, 14, 274, 282 Key, 213
— Accounts, 273 — Cash Credit, 213
Disbursement of Wages to the, 100 — Sanctioned, 213
Disposal of, 30 Liability, 22
Disputes, 325 From Tea Board, 292
Employed in Plucking Season, 294 Transactions, 193
Expenses, 293 Unsecured, 77, 297
Intensive
— Agricultural Activities, 282 Management, 18, 266, 268
— Operation, 279 Committee, 18
Legislation, 274 Common, 290
Local, 223 of Co-operative Societies, 18
Manual, 95, 223 Control, 291
Outside Hired, 27 Democratic, 18
Payments, 215
Expenses, 293
Permanent and Temporary, 293
Garden, 291
Productivity, 282–83
Overall, 192
Quarters, 296
Pattern of, 19
Rates of, 202
Seasonal, 283 Relationship between and Suppliers, 268
Sub-contractor for, 94 Sea Water, 235

                                                          363
 Sustainable, Paper, Process, 182
— Approach, 83 of Paperboard, 193
— Forest, 91 Plant & Machineries, 15
Top, 18, 78 Practices, Hygienic, 47
Manipulations, 312, 316 Process, 77, 80, 108, 139, 174, 176–78,
and Adjustments, 161 222–23, 272, 319, 344–45, 348, 352
by the Assessee, 347, 350 — of Ethanol, 260
of Manufacturing of Plywood, 110 — of Plywood, 106
Manufacture, — and Quality Control Standards, 78
Dummies Setup by the, 337 Process, Basic, 74
of Cardboard, 270 and Profit and Loss Account, 163
of Strawboard, 270 Product, 116
Manufacturing, 57, 72, 152, 240, 252, 261, — Factories, 36
272, 328 Quality, 307
Account, 160, 162, 195 Raw Material for, 116
Activities, 28, 30, 115 of Recycled Grade Board, 192
— Legal Liability of, 115 Rubber, 222, 331
Bidis, 327 and Sale of Tea, 285
Chemicals Used in, 223 Sector, 66
of Cloth, 28 Shoe, 136–37
Company, 342 of Sugar, 261
— Automotive Components, 129 Soyabean Oil, Industries, 347
— Leather, 128–29 Tea, in India, 295
Computer Controlled Automated, 74 Unit, 47, 59, 103
Concentrate, Plant, 251
— Modernized, 124
Concern, 14, 18, 115, 267
— Shoe, 129
— Receipt of, 115
Size of, 124
— Role of Pouch, 118
Work, 335
Costs, 283
Workshop for, of Machines, 271
Defects, 337
Domestic Liquor, 151 Margins, Operating, of Tyre Companies, 334
Equipment for, 35 Market
Expenses, 222, 288, 291 Conditions, 241
Extraordinary Expenditure in, 254 Costs, 49
Facilities, 283 Open, 110, 289
— and Machinery, 283 — Sales, 288
of Footwear, 129 Share, 152, 243
— and Exports, 129 — Significant, 250
of General Plywood, 105 Marketing, 252
of Goods, 261–62 Agriculture Produce, 28–29
Growing and, of Tea, 286 Bidi Tobacco, 318
Industries, 217 Challenges, 223
— Groundnut Oil, 347 Channels, Responsive, 332
of Logs and Sleepers, 103 Coir, 28
Operations, 9, 295 of Commodities, 31
out of Books, 120 Co-operative, 29
Pan Masala, 116–18 of Crops, 24

364
 Department, 214 Paper Board, 192–93, 195
Efforts, 329 Capacity, 176
of Flue-cured Tobacco, 308 Machine, 187
of Higher Varieties, 308 Newsprint and, 182
of Kernels, 3 Products, 91
Network, 35, 116 Paper, Average Consumption of, 177
of Paddy, 200 Particle Board (PB), 110
of Raw Nuts, 1 Payment,
of Remaining Varieties, 308 Bogus, 100
Responsibility of, 44 of Commission, 351
Season, 309 Due to Subcontractors, 101
for Labour, 282
Setup, 331
of License Fee, 167
of Shrimp Seed, 236
Made by the Contractors, 174
Strategies, 123
of Royalty, 95, 100
of Sugar, 258
of Tax, 262
of Timber, 101 — on Reverse Charge, 345
of Tobacco in India, 308 Penalty,
Medium Density Fibreboard (MDF), 92, 110 Nature of, 103
Members of Management Committee, 18 Under Section 271(1)(c), 353
Middle Management, 18 Ply Boards, 90
Middleman, Creditworthiness of, 337 Ornamental, 90
Milk, Plywood,
Contractors, 43 and Block Board, 92
Fat, 49 Manufacturing Unit, 106
Procurement and Marketing of, 47 Premium, 37, 280, 345
Products from Livestock, 42 Assets, 121
Storage Capacity, 40 Oils, 340
Mixing, 74, 168, 172, 251 Payment of a, 37
of Bleaching Chemicals, 186 Properties, 114
of a Creaming Agent, 218 Price Discovery, 281
Quick Profits by, 210 Producers, Hedging Instrument for, 281
Money, Unaccounted, 207 Product Management Programs, 133
Multi Commodity Exchange (MCX), 281 Production,
Based Control, 159
National Multi Commodity Exchanges, 223 Capacity, 128
Notification in the Official Gazette, 20 Cost of Tyres, 332
and Distribution, 152
Oil Marketing Companies (OMC), 267 Out of Books, 116, 118
On-the-board, 81 — Unaccounted, 119
Open Loan Cash Credit (OLCC), 213 Records, 138
Organisation for Economic Cooperation and Supervision and Control on the, 159
Profit, 336, 353
Development (OECD), 155
on Account of Better Yield, 266
Organisational Setup, 94
by Adulteration, 172
Packaging, Cost-efficient, 114 Amount of, 20, 24

                                                          365
 Annual Net, 19 from the Dealer’s Accounts, 223
Appropriation of, 19 Direct, 311, 322
of Assessee, 102 — from the Distillery, 164
on Assets Sold, 299 of Hides, 135
from Exports, 239 of Inputs, 80
and Gains of Business, 23, 28 Large Booked, 15
Gross, 19, 24 Last Period, 3–4
— Margin, 51 Made,
and Loss Account, 14, 21, 81, 99, 215, — by the Assessee, 351
292, 294 — by the Soft Drinks Companies, 251
Submitted by Tea Estates to Tea Board, — by Tyre Companies, 334
292 — from Middlemen, 337
Taxable, 209 — from Registered and Unregistered
Unaccounted, 173 Dealers, 251, 335
Profitability, 154, 251, 335 — through Contractors, 322
Lower, Against Competing Crops, 340 — through Co-operative Societies, 269
of a Rice Mill, 207 Maximum Possible, 5
Statement, 138 Non-genuine, 241
of Venture, 207 of Oil Seeds, 352, 349
of Old Bottles, 163
Promoters,
Outstanding towards, 163
Equity from the, 283
of Paddy, 208
of Pan Masala Group, 121
from Producers,
of Societies, 33
— Petty, 324
Properties Given as Securities, 174
— Smaller, 324
Prosecution, 135 Rates of, 351
Public Distribution System, 203 of Raw Material, 78, 120, 162
Purchasers, Bogus, 324 — from Bogus Parties, 353
Purchase, 33, 63, 77, 133, 207–08, 231, 233, of Raw Nuts, 5
240, 242, 268, 322, 350 and Sales, 160, 313, 337
Accounted, 5 of Shoe Parts, 33
Alleged, 263 of Sugarcane, 263
— from the Directors, 263 Suspected, 82
from Another Lessee, 322 Tracking of, 334, 335
of Basic Raw Material, 77 by Tyre Manufacturers, 335
Bogus, 49, 63, 77–78, 81, 133, 230, 241, Unaccounted, 5, 48
269, 287, 324, 353, 337 — of Kernels, 5
— Disallowance of, 82 Unrecorded, 48
— From Suppliers, 352 Unregistered, 251
— Totally, 229 Unverifiable, 98
of Bottles and Boxes, 172 Verification of, 207, 311
Bulk, 209
Cost, Quality
— Deduction of, 51 and Cost, 270
— of Paddy, 208 Control
Cross-Verification of, 255 — Laboratory, 39
— of Assessee’s, 324 — Mechanism, 338

366
 of Paperboard, 193 Monthly, 76
of Stock, 349 Quarterly, 251
— Available, 162 Submitted by Tea Estates to Tea Board,
292
Railway Board, 89 Rights, Lease, 321
Rates, Controlled, 214, 266 Risks,
Records, 170 of e-Cigarettes, 328
and Books, 111 Health, Posed by Vaping, 330
Costing, 138 Royalty, 103, 317
of Raw Materials, 75 Adjustment of, 95
Reeling and Built, 180 Amount of, 103, 194
Regional Food Controller Department, 63 Delayed Payment of, 103
Regional Rural Banks, 24 Instalments of, 95
Register, Licensing Fee and, 95
Rubber Board, 220, 222
Closing Stock Inventory, 349
Excise, 291
Sale,
Liquid Assets, 22
Bogus, 33
Purchase, 48, 209
of Commodities, 29
Stock,
and Distribution of Milk, 40
— Annual, 299 Outside the Books, 111, 118, 120
— Daily, 264, 118 Promotion, 170
— Daily Inward, 119 SAP, 132
— Day-to-Today, 6 Sap, Unfermented, 158
— Individual, 138 Scrutiny, 135, 208, 346
— Statutory, 166 of Accounts,
— Wheat, 61 — Detailed, 293
Registration, — Personal, 97
Certificate, 46–47, 54 by the AOs, 262
of Co-operative Societies, 17, 33 of Books, 288
from Central Government, 50 — of Accounts, 233
of Fishing Vessels, 227 Closer, 230, 335
of Food Businesses, 75 of Export Bills, 5
from Government of India, 44 of Factory Day Book, 5
under Income-tax Act, 167 of Key-loan Register of Bank, 4
of Non-credit Societies, 18 of Sale Vouchers, 168
Number, 54 of ‘Sundry Payments’, 290
from the State Governments, 44 Regarding the Identity of Seller, 351
Repayment of Loan, 27 Section 194C, Provisions of, 134
Report, Secured Loans, 291, 297
Annual, 345 Security,
Auditor’s, 21 of Society, 21
Return, Debt, 261
on Capital, 193 Particulars of, 297
of Felling, 194 Service Charges, 25–26

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Settlement Commission, 6 from Coarse Cleaning, 184
Setup, 136 from Dump Chest, 184
for Dehydrating Meat, 73 Excess, 48, 338
Share Capital Redemption Fund, 20 — of Raw Nuts, 5
Share, Exchange, 261
Capital, 19 of Finished Products, 163, 253
Equity, 335 of Frozen Products, 230
Ledger, 22 Furnished, 180
Overall Market, 250 of Goods, 162, 262, 319, 345
Shipping Documents for Export, 4 on Hand, 321
Show Cause, at the Inlet of Kneader, 186
Notices, 122 of Inputs, 207
— of Excise Department, 122 Inventory, 162
Sinking Fund, 20 of Kernels, 4
Societies, under Key-loan, 4
Bogus, 32–33 from the Kneading/ Dispersion System,
Paper, 32 185
Sourcesof Raw Material, 257 of Leaves, 317
Special Purpose Tea Fund (SPTF), 283 Maintenance of Finished Record, 345
Sprouting, 303 Manipulations, 16
State Pollution Control Board, 44 Market Value of, 267
Statement, Correctness of Key-loan, 4 of Molasses, 266
Statistics, of Oil Seeds, 348
on Fisheries and Aquaculture, 226 Opening, 54
Reliable, 154 — Available, 162
Stock, — of Bidis, 324
Account, 173 — of Empty Cans, 254
— Adjustment of, 291 — of Oil, 349
Adverse Position, 231 — of Oil Seeds, 349
Balance of, 262, 321 of Paddy Delivered, 206
of Black Money, 210 Physical Inventory, 242
Book of Tea Chests, 291 Pledged, Value of, 213
Brooder, 239 Position, 4, 54, 95, 162, 213, 232, 324
from the Cleaner Feed Chest, 184 Preparation, 182, 186, 188
Closing, 48, 56, 61, 100, 102, 135–36, — Plant, 186
162, 207, 214, 267, 272 — Section, 179
— of Finished Goods, 347, 350 — Continuous, 186
— of Grains, 161 in Process, 162
— of Kernels, 4–5 from Pulper, 183
— of Made Tea, 291 Pumped to Machine Chest, 186
— of Raw Materials, 16 Received, 162
— of Raw Nuts, 3 of Raw,
— of Raw Material, 163 — Materials, 345
— Qualitative Analysis of, 163 — Nuts, 4
— Suppression of, 5 — Nuts in Transit, 3
— under-Valuation of, 135 Records, 6

368
 Register, 2, 4, 6, 22, 62, 96, 116–17, on Distilled Spirits, 159
120–21, 142, 165, 168, 213, 291 Exemption, Prevalent, 332
— Chests, 291 Evasion of, 250, 332
— Inward, 14 Implications, 194
Released, 213 on Income Derived in India, 336
of Rice Bran, 215 Increase in, 155
from Screens, 185 Liability, 256
Shown in Trading Account, 97 — in India, 336
Soap, 344 — on the Foreign Collaborator, 336
Statement, 96, 213, 291 on Liquor, 159
— Copies of, 346, 350 Claim of, 103
— Correctness of, 4 TDS, 134, 294, 336
— Monthly, 79 Amount, 294
Tally, 223 Applicability of, under Section, 195, 234
of Tea, 291 Certificates, 294
Thickened, 185 Provisions, Compliance to, 194, 337
of Timber, l98 Return of Beneficiary, 294
in Trade, 162 Tea Board, 289, 292, 295, 299
Transfer, 78, 135 Tea Board Hire Purchase Scheme, 283
Turnover, 338 Tea Board of India, 281, 283
Unaccounted, 79 Certificate from, 298
Undervaluation of, 291 Tea,
Valuation Date, 291 Manufacturing
Verification, 291 — Companies, 287, 296
Sub-contractors, 93, 95, 97–98, 100 — Plant & Machineries, 285
Advance, Tea-brokers, 290
— Payments to the, 101 Tobacco Board, 313
— for Supply of Labour, 99 Tobacco Lying in Stock, 316
Normal Practice of, 98 Trading, 327–28
Subsidiary, Indian, of an MNC, 256 Account, 48–49, 265, 270
Suitable Adjustment, 242, 250 — of Market Milk, 49
Supply, Power to Control, 262
Activity, 15, 27
Survey,
in Alcoholic Liquor, 328
Action, 48
in Coffee, 15
under Section 133A, 82, 169, 172, 324
Corporations, 193
Tally, 132 Forward, 161
Target, 260 Futures in Tea, 281
Tax, Profits, 269
on Alcohol, 155 Purposes, 103
Avoidance, 336 Receipt, 27
— Methods, 256 Transaction,
— Schemes, 337 Bogus, 346, 350
on Beer and Liquor, 155 Out of Books, 118, 120
Benefits, 338 — of Pan Masala Industry, 119
and Depreciation, 19 — and Unaccounted Investment, 114

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Transfer Pricing, of Timber, 100
Angle, 222 Vanaspati Manufacturers Association of India,
Study, 242 345
Transportation, Veneer Manufacturing Losses, 108
Costs, 42 Verification,
of Purchases, 351 of Stock Statements, 4
of Unaccounted Purchases, 5
Understanding,
Basic, 174, 196 Wages,
— of Cultivation of Rubber, 219 to Labour, 82
Tacit, 171 Paid to Labour, 315
Utilization, Total Capacity, 339 Warehouse, 252–53
Authorities, 167
Valuation, 135 Operator of, 319
of Assets, 21 Product, 180–81
Basis of, 267 Reports from the, 253
of by-Products, 261 Wastage, Percentage of, 232
of Closing Stock, 16, 100, 135–36, 163, Water,
267, 298 Exchange, 236
of Goods, 159 Management, 236
— Custom, 337 Offshore, 235
of Made Tea, 291 Pollution Control Equipment, 195
Method of, 100
of Stock, 95, 100, 193 Yield Shown by Comparable Factories, 263
— of Tobacco, 326

370
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