Prahlad Industries vs Income Tax Officer.
1995 Latest Caselaw 189 Del

ORDER

SMT MOKSH MAHAJAN A.M. :

The orders of the learned CIT(A) for asst. yrs. 1982-83 and 1983-84 were challenged by the assessee raising various grounds. As common issues are involved in these appeals, they are disposed of by a common order.

2. The first ground of appeal pressed relating to asst. yr. 1982-83 is in respect of addition of Rs. 60,000 made to the trading account. Explaining the circumstances in which the addition came to be made, it is submitted by Shri Sapra, the learned authorised representative that the assessee derives income from manufacture and sale of woollen yarn from rags. For asst. yr. 1982-83, it declared gross profit rate of 25.8% on total sales of Rs. 53,95,132. After finding that the addition was made in the earlier assessment year, the addition of Rs. 60,000 was made in the trading account. This was for the various reasons as summarised by the learned CIT(A) in his order. To put it briefly the manufacturing register and raw material register showed that the assessee worked out the production on the basis of 2/3rd of raw material used. This was maintained throughout the year. There was no day-to-day consumption account of the batching oil which increased from Rs. 2,10,667 in the earlier assessment year to Rs. 2,59,859 in the year under consideration. There was increase in dyeing charges, striping charges and wages which led to the fall in gross profit rate by 1%. The explanation rendered by the assessee both before the Assessing Officer as well before the CIT(A) was not found convincing and the addition made by the Assessing Officer came to be sustained. In fact as submitted before the Revenue authorities that the assessee maintained complete books of accounts including cash book, ledger, raw material stock register, yarn stock register, bill book, salary register, packing register and other registers in respect of batching oil, colour, etc. These accounts were maintained in a similar manner as done in the earlier assessment years. The fall in the gross profit rate was explained on account of binding charges being debited to the trading account as against P&L account in the earlier assessment years. Further, the expenses on account to packing labour were fully verifiable. There was an increase in labour charges which was fully supported by the evidence produced before the authorities. The comparative figure of wastage clearly showed that the same was in accordance with the certificate issued by the Regional Office of Textile Commissioner, Department of Textile, Ministry of Commerce. The other expenses in respect of batching oil colour and Chemicals were completely verifiable. As mentioned by the learned CIT(A) there was an increase in these expenses when compared to the same in the earlier assessment year. The increase in the expenses on machinery maintenance was explained to be on account of machinery becoming old and requiring more repairs. In similar circumstances, the Tribunal deleted the addition of Rs. 5,000 sustained by the CIT(A) for asst. yr. 1981-82. After going through all these material, the learned CIT(A) should have deleted the addition instead of sustaining the same, after holding that provision of s. 145(1) of the Act was applicable in its case. There was only a fall in the gross profit rate which could not be consistent as would be clear from the past history. The learned CIT(A) wrongly observed that as against earlier assessment year, the assessee utilised rags imported from western countries instead of purchases made from 'Kabaries' as was the case in the earlier assessment year. There were no basis for making an observation that the consumption record was not maintained from day-to-day and that the wastage worked out at 33.3% was on the basis of empirical formula adopted by the assessee. In fact in the asst. yr. 1981-82, the assessee purchased rags of the value of Rs. 1,48,200 only from 'Kabaries'. The remaining were imported from abroad. As the consumption of each and every item of raw material vis-a-vis the production was explained in which no discrepancy was found by the Revenue authorities, the proviso to s. 145(1) of the Act was not attracted, as held by the learned CIT(A) and also the addition was not maintainable. The learned Departmental Representative relying on the order of the Revenue authorities, argued that in case the books of accounts are not maintained on day-to-day basis, the same can be challenged and the provision of s. 145(2) are clearly attracted. The very fact that the assessee arrives at production on the basis of empirical formula of 2/3 : 1/3 shows that the books were not written in the regular course of business. The formula applied was clearly admitted by the assesses in his submissions made before the learned CIT(A). In para 7 of the submissions at page 4, it was clearly mentioned that the wastage was taken by approximation @ about 33%. It is only at the end of the year that the actual wastage is determined which is almost the same as recorded from day-to-day in the production register. In support reliance was placed on the decision of Hon'ble Allahabad High Court in the case of Allahabad Glass Works vs. CIT (1961) 42 ITR 439 (All). Similarly in the case of Bharat Mill Products vs. CIT (1981) 20 CTR (All) 164 : (1981) 128 ITR 682 (All), it was held by their Lordships of Allahabad High Court that in the absence of day-to-day production or manufacturing record, the proviso to s. 145(1) of the Act was rightly applied. Furthermore in the cases of Ganeshi Lal Chhappan Lal vs. CIT (1941) 9 ITR 81 (All) and Seth Gurmukh Singh & Anr. vs. CIT (1944) 12 ITR 393 (Lah), it was held that in case of maintenance of non-genuine records, the provisions of s. 145 are attracted. In fact the provisions of s. 13 of Indian IT Act, 1922, which correspond to s. 145 of the 1961 Act were examined in detail by their Lordships of Madras High Court in the case of Sree Shanmugar Mills Ltd. vs. CIT (1974) 96 ITR 411 (Mad). Taking into consideration that addition made only covered the fall in the gross profit rate by 1% the same was rightly sustained by the learned CIT(A). Responding to the arguments of the learned Departmental Representative it was emphasised by the learned authorised representative that since it was difficult to arrive at the exact quantity of wastage each day, the formula was adopted which was the same as the shortage arrived at the end of the year. This by itself would not mean that the books of accounts were not written on day-to-day basis. The judgments relied upon by the learned Departmental Representative have been rendered on the facts of the case as available there. So, the same could not be applied to the case of the assessee when there are distinguishing features.

3. We have carefully considered the rival contentions and have also gone through the material placed before us. As per provisions of s. 145 of the Act, the assessor's income under the head "profits and gains of business or profession" or "income from other sources" is to be computed in accordance with the method of accounting regularly employed by the assessee. The proviso to s. 145 of the IT Act, 1961, can be invoked in case a finding is recorded as to the unacceptability of the method and irregularity of the accounts kept. Sec. 145(2) of the Act on the other hand, deals with the situation where the accounts are not correct and complete or where no method of accounting has been regularly employed by the assessee. In case of assessee, it is not disputed that the profits and gains from business are shown as per method of accounting regularly followed by the assessee and accepted by the Department. Coming to the correctness and completeness of the account expect for production register in which the wastage is recorded on the basis of alleged formula adopted by the assessee, no specific defects have been found to doubt the reliability of the accounts as maintained by the assessee. There is no material to show that the aforesaid record was not maintained on day-to-day basis. It is only the basis for arriving at a production of a particular day which is doubted. The question which arises is whether the assessee suppressed the production on the basis of percentage of wastage followed on each day or not. The assessor's stand has to be appreciated in the light of difficulty expressed in arriving at day-to-day wastage which could not be measured. This factor has to be seen in the light of the other records maintained by the assessee. It is not disputed that the assessee maintains separate register in respect of batching oil, colour, packing, salary, yarn, etc. It was also admitted that the percentage of wastage in the year under consideration corresponds to the wastage declared and accepted in the earlier assessment years. Furthermore, as in the assessment year under consideration, in the earlier year too, the assessee utilised imported rags in manufacture of yarn. The quantitative accounts maintained by the assessee have not been challenged. The rate of gross profit at 25.8% is more than 24.8% as declared in the asst. yr. 1981-82. It is also a fact that the additions made in similar circumstances stand deleted by the Tribunal in their order dt. 26th June, 1986. On the similar facts it was clearly held by the Tribunal, that there was no case for rejection of the trading results of the assessee. As to the reliance placed on the decision of Allahabad High Court in the case of Allahabad Glass Works (supra), there was material on the basis of which it appeared that the cash book was not written from day-to-day but subsequently on certain dates. Similarly was the position in respect of stock register which appeared to have been written in a few sittings. In case of the assessee it is not so. The only objection being that the daily production has been arrived at on the basis of a particular formula followed in respect of wastage. In the case of Bharat Mill Products (supra) it was found by the Assessing Officer that the purchase and cash sales were not verifiable and that no day-to-day production and manufacturing record had been maintained. In case of the assessee, the day-to-day record of production has been maintained though not on the basis of actual production which according to the assessee could not be done. Then in case of Ganeshi Lal Chhappan Lal (supra) the issue before their Lordships of Allahabad High Court was whether the ITO exercised his judgment in arriving at the conclusion that the income, profits and gains were not properly deducible from the assessor's regularly kept books of accounts or not. According to their Lordships if the discretion which vests with the ITO has been exercised judiciously, the same cannot be interfered with. In the case of the assessee there was no finding that the profits could not be correctly deduced from the method of accounting followed by the assessee. Similarly in case of Seth Gurmukh Singh (supra), it was held by their Lordships of Lahore High Court that the ITO can have recourse to the proviso to s. 13 even in those cases where the accounts are rejected on the ground that they are not genuine and thus fail to represent truly his income and profits. In the case of the assessee it was not shown that the production register was not genuine or the entries made were false. The only dispute was in regard to the formula adopted for arriving at the entries. The Madras High Court on the other hand, in the case of Sree Shanmugar Mills Ltd. (supra), examined the provisions of proviso to s. 13 and laid down the ratio that the impropriety of the method of accounting is to be distinguished from the falsity and unreliability of the books of accounts. In case of the assessee the production register has been considered to be unreliable without attacking the percentage of wastage which ultimately is arrived at a particular figure accepted by the Department. It was not shown that the wastage was excessive or not in consonance with the one declared in the assessment year as accepted. Thus, on the above facts, we are of the considered view that the addition made at Rs. 60,000 was not justified and, hence, we delete the same.

4. The next ground of appeal pertaining to disallowance of Rs. 1,000 made out of the miscellaneous and traveling expenses relating to asst. yr. 1982-83 is dismissed being not pressed.

5. The next ground of appeal pertains to addition made on account of cost of construction of godown in asst. yrs. 1982-83 and 1983-94. As the facts are slightly different, both the additions would be discussed separately. As regards the addition made in the asst. yr. 1982-83, the facts in brief are that the assessee showed cost of construction of a factory building at Rs. 4,16,456. In support the valuation report from the Shri D.K. Jain, Valuer, estimating the cost at Rs. 4,25,514 was filed. The matter was referred to the Departmental Valuer who estimated a cost of construction at Rs. 5,50,100. The difference of Rs. 1,33,644 was added on account of unexplained investment by the Assessing Officer. Before the learned CIT(A) the assessee raised certain objections which were forwarded to the Valuation Cell requiring the fresh inspection of the building and submission of the report. The Valuer modified his earlier report and arrived at the valuation of the building at Rs. 4,93,900. Thus, the difference was reduced to Rs. 77,444. This addition was sustained by the learned CIT(A) for the reasons given in his order.

6. The first objection taken by the learned authorised representative was that since complete details were furnished in respect of cost of construction, there was no valid reference made under S. 55A of the IT Act by the Assessing Officer to the Valuation Cell. The Assessing Officer should have first rejected the accounts maintained in respect of the cost of construction after recording his dissatisfaction with the information furnished, then he could have referred the matter to the Valuation Officer giving reasons for the same. In support reliance was placed on the decisions of the Tribunal in the case of ITO vs. Anupam Talkies in ITA No. 101/Del/84; ITO vs. Meghji Yadav & Co. (1986) 57 CTR (Trib) 63 (Ahd) : (1986) 18 ITD 170 (Ahd)(TM); and Harswaroop Cold Storage v. ITO (1988) 27 ITD 1 (Del) (TM). Without prejudice to the aforesaid objection even on the basis of the Valuer's report, no addition was warranted. There were apparent discrepancies in the report of the Government Valuer. While in para 3.1 of his first report, the valuer clearly mentioned that the assessee has submitted the drawing plans, vouchers of material, expenditure account and the valuation report of the registered valuer, in his comments (appearing at page 61 of the paper book), it was maintained that the assessee had not submitted all details required for checking the books of accounts. Despite the assessor's request, the rates at which the cost of construction was arrived at were not disclosed to the assessee. In fact they were adopted at the one given by the CBDT which were not in order. The Valuation Officer made an addition of Rs. 13,571 for internal electrical installation which was excessive. Similar was the case in respect of the supervision charges allowed at 7.5% against 10% claimed. The Departmental Valuation Officer made an addition of Rs. 4,890 on account of architect's fee which was only given at Rs. 3,000. As the factory is situated in village Mangupura which is 10 kms. away from the city, the labour was available at cheap rates and so were the material. In the circumstances, even on merit, the addition was not warranted. As regards asst. yr. 1983-84, it was submitted that the total cost of construction was shown at Rs. 4,04,204 in respect of construction of godowns in Unit Nos. 1 and 2. This was supported by the valuer's report whereby the investment was worked out at Rs. 4,02,500. The matter was still referred to the Valuation Officer, Lucknow, and he arrived at the value of the property at Rs. 5,06,000. This was vide report dt. 11th March, 1986. The assessee raised objections against the aforesaid report. The Assessing Officer, however, mentioned that as the case is getting time barred, it was not possible to refer the same to the Valuation Officer. In the aforesaid circumstances, the Assessing Officer should have first rejected the accounts furnished in respect of the details pertaining to cost of construction and then made reference to the Valuation Officer. This could not be made under S. 55A of the Act which only pertain to the value of the asset for the purposes of working out capital gain. Even for the aforesaid year, the estimate made was adopting the higher rate than what was required taking into consideration the entirety of the objections as raised before the Assessing Officer and then before the learned CIT(A).

7. Meeting the objections of Shri O.P. Sapra, Shri S.C. Gupta, the learned Departmental Representative submitted that in view of the decisions of their Lordships of Punjab & Haryana High Court in the case of Jindal Strips Ltd. vs. ITO (1979) 10 CTR (P&H) 103 (FB) : (1979) 116 ITR 825 (P&H) (FB) and and Andhra Pradesh High Court in the case of Daulat Ram & Ors. vs. ITO (1990) 90 CTR (AP) 152 : (1990) 181 ITR 119 (AP), the reference made to the Valuation Cell was valid. The Assessing Officer was well within his rights to refer the matter to the Valuation Cell as held by their Lordships in both the cases. The objections raised by the assessee were squarely met by him and it was submitted that the assessee had understated the expenses in respect of electric installation and other services. The valuation was arrived at on the basis of the rates as given by the CPWD which are revised from time to time keeping in view increase in the cost of material, labour, etc. As the valuer's report was made available to the assessee, the rates were specified and as such the assessor's objection that the plinth area rates were not given is devoid of force. In his reply, the assessee did not deny that the expenditure as estimated by the valuer on electric installation was in any way wrong. The only explanation was that the same could have been debited to the repair account which would make difference to the computation of income. Similar was the case in respect of supervision charges and other expenses. In case of cost of construction for asst. yr. 1983-84 before the CIT(A) the assessee never raised the plea that because of the case getting time barred, adequate opportunity was not allowed. As the objections raised are the same as in case of asst. yr. 1982-83, there being no strength in the same, the addition was rightly made under S. 69B of the Act.

8. We have carefully considered the rival contentions have also gone through the material placed before us. Dealing with the objection that reference to the Departmental Valuation Officer was not proper, we find that in case of Sri Harsarup Cold Storage & General Mills vs. ITO (supra), the assessee-firm constructed a cold storage, cost of construction of which was supported by the Government approved valuer. The ITO instead obtained the valuation report from Departmental Valuation Officer which showed variation between the cost of construction given by the assessee and the cost of construction estimated by it. The assessee asserted that the rates adopted by the Departmental Valuation Officer were far in excess of the rates adopted by the Government approved valuer and that the books of account maintained by him depicted the true picture. The ITO without going into the credibility of account books relied on the valuation report of the Departmental Valuation Officer and made addition on account of understated and unexplained investment. It was held that on reading ss. 69 and 143(3) together, it is imperative that the ITO has a statutory duty to examine the evidence produced by the assessee in support of his cost of construction namely, the books of account, record a finding about the falsity or unreliability and point out flaws in the evidence, if any. It was only after the evidence is rejected that the ITO would acquire the power to estimate the cost of construction and can rely upon the report of the Valuation Officer. Similar proposition was laid down in the case of Anupam Talkies (supra). In the case of Sri Harsarup Cold Storage & General Mills (supra), the assessor's assertion was that the rates adopted by the Departmental Valuation Officer were in excess of the rates adopted by the Government approved valuer and that the books of account maintained by him depicted true picture. In the case of the assessee no such contention of rates being excessive was ever raised either before the Revenue authorities or before us. The argument was confined to the fact that the plinth area rates were not made available to the assessee in absence of which the proper defense could not be taken. Furthermore, the record kept in respect of the cost of construction as is made available to us (age 63 to 80 of the paper book) show that the assessee has made daily record of purchase of goods, invoice number and the amount. Nowhere the complete details of expenditure in relation to quantity and area constructed was made available as was in the case of Sri Harsarup Cold Storage & General Mills (supra). Furthermore, the assessee did admit that under certain heads like 'Electric Installation' the expenditure incurred was less, part of which was claimed under some other head. In any case all along the assessor's plea being that the plinth area is not made available to compare the valuation report of Departmental Valuation Officer with that of the approved valuer. In the circumstances, it could not be said that there was complete record maintained in respect of cost of construction for which the reference to Departmental Valuation Officer was unnecessary. As to the invoking of provisions of s. 55A of the Act, it was held by their Lordships of Punjab & Haryana High Court Court in the case of Jindal Strips Ltd. (supra) that under the provisions of s. 133(6) of the Act, the ITO may require any person to furnish information in relation to such points or matters or to furnish statements of accounts and affairs as will be useful for, or relevant to, any proceedings under the Act. The ITO can exercise power to refer the matter to the Valuation Officer under s. 133(6) of the Act. The mentioning of s. 55A of the Act in the letter by the ITO to the Valuation Officer was of no consequence when the proceedings are otherwise valid. While observing so, their Lordships of Punjab & Haryana High Court made no reference to rejection of books of accounts as held in the case of Sri Harsarup Cold Storage & General Mills (supra). In the case of Daulat Ram & Ors. (supra), their Lordships of Andhra Pradesh High Court have even gone farther. It was held that though s. 55A falls under the sub-chapter titled "capital gains", the intention of the Legislature is obvious as the words that have been employed are "for the purpose of this chapter" denoting thereby that while computing the income, various factors might fall for determination and, therefore, whenever such contingency does arise, the ITO can ascertain it through the agency of the Valuation Officer. The reference to the Valuation Officer for determining the cost of construction was held to be valid. Thus on facts as well as law, we hold that the reference to the Departmental Valuation Officer was proper. Coming to the addition made, we find that it was not shown that the assessee actually spent more than what was arrived at by the Valuation Cell. The cost of construction was determined on estimate basis. It is a question of accepting one estimate against the other. There was no material brought on record to show that the assessee made more investment than the one recorded in the books of accounts because of which its case could be covered under s. 69B of the Act. As to the discrepancies pointed out, we find that the assessee explained that instead of debiting the expenses to 'Electric installation', the same were claimed under the head 'Repair' for which adjustment could be made. As regards supervision charges there are number of judgments holding that the same could be estimated at 10% as against 7.5% taken by the Departmental Valuation Officer. For asst. yr. 1983-84, the objections raised by the assessee were summarily rejected on the ground that there was no time to meet them. In absence of any material to show that the assessee did invest more than what was recorded, we are of the considered view that the addition made in both the assessment years cannot be upheld on the facts, which we delete.

9. The other ground of appeal raised for asst. yr. 1983-84 pertaining to disallowance of Rs. 2,000 out of miscellaneous and traveling expenses is dismissed being not pressed.

10. In the result, both the appeals are partly allowed.