Punjab-Haryana High Court
M/S Shree Digvijaya Woollen Mills Ltd. ... vs Commissioner Of Incomt-Tax, Amritsar on 22 March, 2024
Author: Sudeepti Sharma
Bench: Sanjeev Prakash Sharma
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207
IN THE HIGH COURT OF PUNJAB AND HARYANA
AT CHANDIGARH
-.-
ITR-3-2010 (O&M)
Reserved on :-14.02.2024
Pronounced on:-22.03.2024
M/s Shree Digvijaya Woollen Mills Ltd., Amristar ....Petitioner
VERSUS
Commissioner of Income-Tax, Amritsar ....Respondents
CORAM : HON'BLE MR. JUSTICE SANJEEV PRAKASH SHARMA
HON'BLE MRS. JUSTICE SUDEEPTI SHARMA
Present: Ms. Radhika Suri, Sr. Advocate with
Mr. Abhinav Narang, Advocate and
Mr. Sidhant Suri, Advocate for the petitioner.
Ms. Pridhi Jaswinder Sandhu, Jr. Standing Counsel
for the respondent-Income Tax Department.
SUDEEPTI SHARMA, J.
1. The Hon'ble Punjab and Haryana High Court vide its order dated
23.08.2007 under Section 256(2) of the Income-tax Act directed the Income-tax
Appellate Tribunal to refer the following question of law for their opinion:-
"Whether on the facts and circumstances of the case, was the Tribunal
wrong in law and acted perversely in sustaining the additions of Rs.34,28,414/- on
account of excessive shortage and Rs.2,15,150/- on account of scrap value of
discarded cables which had been made by the Assessing Officer on surmises and
conjectures without any evidence and material justifying such additions?"
2. The assessment year involved in the present case is 1983-84. The
facts of the case regarding addition of Rs.34,28,414/- as noted by the A.O. during
the course of framing of assessment order are that the A.O observed that assessee
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had shown wastage of 76,336 Kgs. on consumption of 5,85,295 Kgs. which
worked out to 13.04% as against wastage shown @ 8.66% of last year on spinning
of worsted yarn. When the assessee was confronted with such abnormal increase
in wastage, the assessee explained the variation due to product mix manufactured
by the assessee during this year as compared to last assessment year. It was
submitted that in the last assessment year, the assessee in its worsted Division spin
yarn for Angola and Serge Battle Dress for defence requirements weighing 95,540
Kgs representing 55.4% of production and it did not involve re-combing while
during the year under consideration, only 44,391 Kgs of yarn was spun for this
purpose which accounted for only 8.77% of total production. The assessee also
pointed out that besides, bulk production in single shade and larger lot was made,
that due to shortage and dearth of Govt. business the company had to switch its
production plans to manufacture material for the civil market. This necessitated
spinning of worsted yarn in small lots of different shades and involved recombing
process also. As a result of this overall wastage increased as compared to the last
year. However, the A.O found the explanation given by the assessee untenable for
the reasons reproduced below:-
"i. Spinning of Worsted yarn for Angola and Serge battle dress for
Defence requirement:-
It is a fact that last year, the assessee has spun yarn of 95,540 Kg for this purpose
whereas this year the company has spun 44,390 Kgs. In this regard it is pointed
out that the defence dress was prepared mainly of wool and less other material like
Polyester and Viscose etc. It is a common knowledge that wastage in the spinning
of woolen yarn is more than the spinning of synthetic yarn or blended yarn.
Therefore, this argument of the assessee is not at all appealing. On the other
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hand, on scrutiny of production of worsted yarn, it is seen that the assessee has
spun majority of the blended yarn using viscose and polyester yarn. As per
annexure 10 the following details have been given regarding production of
worsted yarns:-
All Wool 54,261
Viscose 73,244
Terry wool 55:45 49,955
Terry wool 70:30 1,37,769
Tweeds 41,233
Govt. material 44,391
Synthetic Fabrics 27,532
Millionore 64,260
Shawls, blankets and Lois 11,587
Carpet yarn 44,411
In view of the above details, it is observed that out of the total worsted yarn
manufactured at 585294 Kg., 288500 Kg. is of synthetic blended yarn in which the
wastage is nominal.
Secondly, it has been emphasized by the assessee that for manufacture of fine
quality of yarn re-combing process is also involved. It is admitted that re-combing
is required of manufacture of certain varieties of worsted yarn. But it is seen that
the assessee is not having any re-combing process. The top is received whether it
is single combed or double combed from the wool combers and net weight of the
receipt of the top of the wool is taken in the stock. Therefore, since the assessee
has taken the net figure of the top, it cannot be said that the assessee has got the
top re-combed and applied re-combing process. It has further been explained vide
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its letter dated 17.02.1986 that though there is a wastage of 13.04% shown in the
worsted yarn spinning as against 8.66% of last year, the assessee has recovered
more visible waste than the last year. It has also been submitted that last year out
of 8.06% of wastage, 7.49% was visible wastage and 1.17% was invisible wastage
and against this during the accounting period under consideration, the assessee
has recovered 12.19% visible waste and the invisible wastage is 0.86%. This
argument is entirely contradictory to the argument earlier given by the assessee
i.e. excess wastage is because of the manufacture of finer variety of yarn this year
as compared to the last year. It is pointed out here, the more the finer variety is,
the more will be the invisible wastage. Since the assessee has shown less invisible
wastage, it proves that the assessee's earlier claim of manufacture of finer quality
of worsted yarn is not correct. As has already been discussed above, since the
assessee has manufactured majority of synthetic blended yarn during the account
period under consideration, as compared to the last year, the shortage this year
should have been far less than the last year. Keeping in view the above discussion,
I reject the contention of the assessee that the higher wastage should be accepted."
Thus, keeping in view the above facts and the past history, the A.O
estimated the visible wastage at 8% and invisible wastage at 1.25%. Accordingly,
the A.O worked out the excess wastage at 22,199 Kgs being quantity of yarn as in
stock or sold out. Taking the value of closing stock of yarn shown by the assessee
at Rs.154.44 per Kg., the A.O worked out the addition at Rs.34,28,414/- (i.e
154.44 X 22,199 Kgs) and added the same to income of the assessee.
3. Regarding the other addition of Rs.2,15,150/- made by the Assessing
Officer, the facts are that in the year under consideration, the assessee discarded
copper wire cable wroth Rs.2,46,553/- and claimed under the head "Assets
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Discarded during the year." The A.O further noted that copper wire cable was
purchased by assessee from 1955 to 1965 and that was over-head and under-
ground wire and cables of copper covered with PVC or rubber. From the sales of
discarded goods, the A.O found that the assessee had not shown sale of copper
wire in the year under consideration. When the assessee was confronted with this
fact, the assessee submitted that under-ground wire lost its utility and the same is
not normally recovered as the cost of labour charges for recovering under-ground
wire was much higher than the value of scrap. Further such recovery of copper
wire caused damage to the building and flooring. It was also the case of the
assessee that scrap sold at Rs.4,29,754/- also included copper wire. However, the
A.O found on enquiry that assessee had shown sale of old stores at Rs.1,55,821/-
for which no details were given. The A.O personally visited the factory premises
of the assessee-company alongwith Shri S.K.Gupta, Inspector on 20.03.1986 and
found that there was no stock of copper wire in the godown of assessee. Shri
R.C.Mehta, Secretary of the company was requested to produce the sale bill of
copper wire and he managed to produce the sale bill for sale of copper wire worth
Rs.16,000/-. It was further pointed out by the store-keeper of the company that no
sale of copper wire was made during the relevant period except the above sale of
Rs.16,000/-. After considering the explanation of the assessee, the A.O noted that
copper wire worth Rs.2,46,552/- purchased in early 50s cannot be thrown away as
the value of the copper wire was high in the market. The A.O, therefore, held that
assessee had estimated the discarded value of the copper wire and accordingly
worked out the profit under Section 41(2) of the Act as under:-
Rate of copper wire in 50's was near
About Rs.7-8 per Kg. Therefore, the
Cost of PVC wire was about Rs.15-
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16 per Kg. i.e. 5-6 yards. On a liberal
Estimate the value is taken at Rs.20/-
Per Kg. Thus, the total quantity in
Terms of Kg. comes to 12,274 Kgs (245558-20) 12,274 Kgs.
Less 60% of its as copper wire scrap out of
7384 Kgs 2/3 is considered as reasonable 7,384 Kgs.
Balance recovernable 4,623 Kgs.
The scrap value is taken @ Rs.50/-
Per Kg. Thus, the value of 4623 Kgs
Comes to Rs.2,31,150/-
Less Value of scrap sold down Profit
U/s 41(2) Rs. 16,000/-
_____________
Rs.2,15,150/-
Accordingly, the A.O made the addition as the assessee failed to show
the value of copper wire.
4. In appeal, the CIT(A) taking into consideration all aspects deleted the
addition of Rs.34,28,414/- made by the A.O on account of excessive wastage and
confirmed the addition of Rs.2,15,150/- made by the A.O on a/c of scrap value of
discarded cost.
5. The Department and assessee filed cross appeals before the Tribunal
against the deletion and confirmation of above mentioned additions. The Tribunal
on the basis of discussion and looking into material on record, confirmed the
additions of Rs.34,28,414/- and Rs.2,15,150/- made by the Assessing Officer.
6. The assessee then filed reference application under Section 256(1) of
the Income-tax Act, 1961 against the above order, which was rejected by the
Tribunal vide order dated 17.07.1998.
7. The assessee then approached the Hon'ble High Court u/s 256(2) of
the Income-tax Act, for issuing appropriate directions to the Tribunal. The
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Hon'ble High Court vide order dated 23.08.2007 directed the Tribunal to refer the
matter to the High Court.
8. Accordingly, the matter is referred to the Hon'ble High Court as
directed.
Submissions of learned counsel for the petitioner :-
i) Learned Sr. counsel for the petitioner contends that during the year
under consideration i.e. 1983-84, the assessee had shown wastage of 76,336 Kgs
out of total consumption of 5,85,294/- Kgs, which comes out to 13.04%.
ii) Learned Sr. counsel further contends that in the assessment order the
Assessing Officer, under the Head Wastage, by holding that the assessee had
shown wastage of 8.66% in the Assessment Year 1982-83 and thus, the wastage of
13.04% shown by the assessee in the Assessment Year 1983-84 is erroneous and
in excess and on this presumption held that percentage of visible wastage should
have been 8% of 5,85,294 Kgs i.e.46,823 Kgs and percentage of invisible wastage
should have been 1.25% of 5,08,958 Kgs i.e 7,316 Kgs. Thus, the total wastage
was assessed at 54,139 Kgs (46,823 Kgs + 7,316 kgs). Consequently, out of total
wastage shown by the assessee of 76,336 kgs., the A.O worked out 22,199 kgs,
(76,336 kgs - 54,139 kgs) as excessive wastage. The A.O. then went further, and
held that this excess wastage of 22,199 kgs, should have been added to the total
income of the assessee at the rate at which the closing stock in the worsted yarn
store has been valued by the assessee which is Rs.154.44 per kgs. Consequently,
the addition of Rs.34,28,414/- (22,199 kgs x Rs.154.44) was made by the assessing
officer in the net profit of the assessee treating the wastage as addition to closing
stock or sales out of the books. That no defect was pointed out in the consumption
or production register of the assessee or in the method of accounting regularly
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appointed by the assessee and thus the addition was made without resorting to the
proviso to Section 145 of the Income Tax, 1961 and contrary to the assessment
orders passed for AY 1975-76 onwards, wherein higher wastage was accepted.
Apart from it, during the AY under consideration, the assessee has
also discarded copper wire worth Rs.2,46,553/- and this amount has been claimed
under the head 'Assets Discarded During the year'. It was submitted by the
assessee that the discarded copper wire has been taken to the old store account and
whenever there is any sale, it is shown in the profit and loss account. It was further
submitted by the assessee vide its letter dated 20.01.1986 that after the
underground wire loses its utility, it is not normally recovered as the cost of labour
charges for recovering underground wire is much higher than the value of scrap
besides causing damage to building and flooring. It was further submitted that
scraps sold include copper wire also. It was further submitted that the sale
includes all types of stores and copper wire also.
However, the AO without appreciating any of the explanations given
by the assessee, made the addition of Rs.2,15,150/- under the head profit u/s 41(2).
iii) It is further contended by the learned Sr. counsel that the assessee
thereafter filed an appeal before the Commissioner of Income Tax on the ground
that the assessee is carrying on the business of production of yarn for the last so
many years and the percentage of wastage in the preceding years has consistently
been more than 13% and it was only for the preceding two years that the
percentage of wastage had come down. The assessee also submitted year wise
chart showing the percentage of wastage which is being produced here under:-
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Sr. No. Assessment Production of Wastage Wastage
Year yarn in weight weight Percentage
in worsted
Division
Kgs. Kgs.
1. 1975-76 2,80,557 44,310 13.64%
2. 1976-77 4,30,619 73,532 14.58%
3. 1977-78 3,71,193 72,971 16.43%
4. 1978-79 3,99,809 72,280 15.31%
5. 1979-80 5,05,279 80,264 13.71%
6. 1980-81 4,33,375 65,663 13.16%
7. 1981-82 6,69,732 66,855 9.08%
8. 1982-83 (3 1,72,537 16,376 8.66%
months)
9. 1983-84 5,08,958 76,336 13.04%
Thus, it was submitted that the A.O went on an erroneous
presumption by assuming that the percentage of wastage of 13.04% is excessive
just by looking at the data of previous two years without appreciating the fact that
the wastage of percentage accepted by the department varied from year to year
because it depended not only on the quality of machinery installed but also the
quality of raw material used, quality of production and the quality of the labour
and other variables. It was further pointed out before the CIT(A) that in the
A.Y.1977-78, the wastage of 16.43% was accepted while in the A.Y.1982-83,
where production records for three months have been taken into consideration,
wastage of 8.66% was accepted. In fact it was pointed that if the years 1981-82
and 1982-83 are ignored, wastage accepted by the department was always more
than 13%. Consequently, the CIT(A) deleted the above said addition of
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Rs.34,28,414/- made by the A.O by observing that this addition was made merely
on conjectures and surmises and as such could not be justified.
Thus, CIT(A) rightly observed that without pointing out any error in
books of accounts or method of accounting and without resorting to proviso to
Section 145 of the IT Act, the said addition was completely unsustainable.
iv) It was further submitted by the learned Sr. counsel that the only
reason for addition of Rs.2,15,150/- made under Section 41(2) of the IT Act
appeared to be the desire of the Assessing Officer that the company ought to have
dug out undergrounds cables even at the cost of damaging building, converting
cables to copper and then selling copper. No defect in the books of account
maintained regularly had been found and yet it was alleged that the copper must
have been sold as the value of copper was very high in the market. However, the
CIT(A), without appreciating any of the arguments upheld the addition made by
the AO under the head of profit u/s 41(2).
v) Learned Sr. counsel further contends that aggrieved by the order of
CIT (A), the revenue filed an appeal before the ITAT, Amritsar on the ground that
the percentage of wastage was excessive as compared to earlier two immediately
preceding assessment years. It was submitted by the assessee before the ITAT,
that the assessee company has been claiming wastage since 1974-75 and the
highest wastage claimed by the assessee was 16.43% and the department had never
doubted the rate of wastage claimed and allowed the same. The other plea was that
the rate of wastage cannot be stated as variation but is natural. It was also
submitted that the account books of the assessee are being maintained by following
identical method of accounting from A.Y. 1975-76 onwords and the result of the
account books were being accepted by the department consistently. All the details
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of consumption of raw material, production of finished goods, purchases and sales
were fully vouched and all the bills were attached to the expenses and no defect
has been pointed out by the A.O in the method of accounting or in the books of
accounts and thus, there is no justification for disallowing the rate of wastage,
which is simply based on personal whims of the A.O. It was further submitted that
the G.P. rate for the year under consideration is 24.92% which is highest from
A.Y. 1975-76 onwards and once the assessee itself has come with the highest rate
of G.P., no justification can be given to pin point the minor claim of assessee.
However, the ITAT without controverting the findings recorded by CIT (A) and in
a completely erroneous manner upheld the order of the A.O by observing that
resorting to the proviso to Section 145 was not required.
Apart from this, the assessee also filed cross appeal before the ITAT
on the point of addition of Rs.2,15,150/- under the head profit u/s 41(2). The same
line of arguments was taken before the ITAT also that the cost of extracting copper
from the underground wires was more than the scrap value of copper. However
the ITAT failed to appreciate any line of this head.
vi) Learned Sr. counsel further contends that A.O in the present case has
on wrong presumption valued the wastage of 22.199 Kgs @ Rs.154.44 per Kgs,
which is the rate at which closing stock has been valued. Thus, the A.O accepted
the books of account of assessee including the rate at which closing stock has been
valued and without recomputing trading results of the assessee, made addition to
the net profit.
vii) Learned Senior Counsel has relied upon the judgment of Calcutta
High Court in Siddheshwari Cotton Mills (P) Limited vs Commissioner of
Income Tax 1979 (117) ITR 953, judgment of Bombay High Court in R.B.
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Bansilal Abrichand Spinning & Weaving Mills Limited vs Commissioner of
Income Tax (1970) 75 ITR (BOM) and judgment of Madras High Court in
Carumugaswami Nadar vs Commissioner of Income Tax (1961) 42 ITR 237, to
submit that once the Assessing Officer has accepted the books of accounts of the
assessee including the rate on which the clothing stock has been valued, a
presumption cannot be drawn of wastage of 22.199 Kgs @ ` 154.44 per kg.
Relevant para Siddheshwari Cotton Mills (P) Limited's case (supra) is extracted
below:-
"18. We do not accept the contentions of Mr. Sengupta that the
ITO must have disbelieved the books of the assessee. In the
assessment order the ITO has not adverted to the books of the
assessee at all and to assume that he had considered and
rejected the books would be a speculative assumption.
19. We also do not accept his further contentions that the
question referred does not arise from the order of the Tribunal
inasmuch as the Tribunal has only decided that the wastage
claimed by the assessee has not been proved. The Tribunal has
restored the order of the ITO and, therefore, must be held to
have sustained the addition of Rs. 34,000. The matter having
been dealt with by the Tribunal the question clearly arises out
of the order. The question of the said addition, whether
specifically raised or not, was in fact before the Tribunal and
the Tribunal dealt with it.
20. It appears to us that the Tribunal having concluded that the
assessee has failed to prove the wastage claimed, the Tribunal
fell into error in assuming that-
(a) the entirety of the extra wastage was utilised by the assessee
and manufactured into 4,526 pieces of dhoties (and not sarees).
(b) the said dhoties were sold at the average sale price of Rs.
7.52 per piece.
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21. Mr. Sengupta was unable to bring to our attention any
material from the records from which the aforesaid conclusions
could be based or drawn. We also do not accept the contention
that the assessee did not challenge the said addition. The
assessee challenged the order of the ITO and succeeded before
the AAC. Having been unsuccessful before the Tribunal the
assessee has again raised the question in this reference
challenging the addition.
22. For the reasons given above, the question referred must
be answered in the negative and in favour of the assessee."
The learned Sr. counsel, therefore, prays that question of law should
be answered in negative and in favour of the assessee.
Submissions of learned counsel for the revenue
Learned counsel for the revenue argued on the lines of the assessment
order passed by the Assessing Officer and, therefore, prays that the question of law
should be answered in favour of the revenue and against the assessee.
9. We have heard learned counsel for the parties and perused the whole
record with their able assistance.
10. The relevant portion of the decision by Commissioner Income -tax
(Appeals) - II, Amritsar, while deciding the appeal of the assessee, is as under:-
"From the perusal of the arguments of the learned counsel, which
have been produced in the earlier paragraphs, following position
emerges:-
(A) The Assessing Officer has not been able to
specifically point out whether while making
the addition he was applying the proviso to
section 145(1) or section 145(2).
(B) The appellant was maintaining complete
production records and all the purchases,
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sales, expenses etc. were properly vouched
and even after inspecting the factory the
Assessing Officer had failed to detect any
discrepancies or defects in the books of
accounts maintained and production records
maintained by the appellant.
(C) From 1924 till the assessment year in appeal,
the books of accounts were always accepted
and, therefore, while rejecting the books of
a/cs. for the assessment year in appeal it was
the duty of the Assessing Officer to prove to
the hilt that the quality of the accounts or
production records maintained by the
appellant had so deteriorated during the
assessment year in appeal that a trading
addition was called for by invoking the
provisions section 145(2).
(D) The wastage percentage accepted by the
department varied from year to year because it
depended not only on the quality of the
machinery installed but also the quality of
raw-material used, quality of production and
the quality of the labour and other variables.
In this connection it was specifically pointed
out in the assessment year 1977-78 that
wastage of 16.43% was accepted while in the
assessment year 1982-83, where production
records for 3 months have 8.66% was
accepted. In fact, if the years 1981-82 and
1982-83 are ignored, wastage accepted by the
department was always more than 13%.
(E) The Excise Authorities were having a tight
control over the production and production
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records were also maintained in accordance
with the instructions of the Excise Department
and without the permission of the Excise
Authorities not a single yard of cloth could be
taken out of the factory. The Assessing Officer
has not pointed out how inspite of tight control
of the Excise Department there could be extra
stock of Rs.34,28,414/- or that stock could be
sold outside the books without paying excise
duty. In this connection it is relevant to
observe that unless the Assessing officer could
bring on record evidence which could prove
that the appellant company hoodwinked the
Excise Department, the accounts and records
duly checked by that department could not be
considered incorrect.
Taking into consideration the above position, the
addition of Rs.34,28,414 made by the Assessing Officer merely on
surmises and conjectures could not be considered justified. It is
accordingly deleted.
2. ADDITION OF RS.2,15,150/- UNDER SECTION
41(2) OF THE INCOME TAX ACT, G.NO.1
The Assessing Officer made an addition of Rs.2,15,150/- under
Section 41(2) and after taking into consideration the following facts:-
i) During the accounting period relevant to assessment
year in appeal the appellant company had discarded copper wire
cable worth Rs.2,46,553/- and the said amount had been claimed
under the head 'Assets Discarded during the year'. It was submitted
that discarded copper wire had been taken to the old store account
and whenever there was any sale, it was shown in the profit and loss
account. From the details available with the return it was observed by
the Assessing officer, that the copper wire cable was purchased by the
appellant, from 1955-65. Most of the copper wire purchased in
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1950's and according to the Assessing Officer since the over-head,
underground wire and cables were of copper wire, they were covered
with PVC, or rubber. From the details of the sales of the discarded
goods, it was observed by the Assessing Officer that the sale of the
copper wire had nowhere been shown. During the assessment
proceedings it was submitted in letter dated 20.01.1986 that after
underground wire lost its utility it was normally not recovered as the
cost of labour charge for recovering the under-ground wires was
much higher than the value of the scrap, besides damage to building
and flooring was also caused. It was further submitted that the scrap
sold included copper wire also and for this purpose attention of the
Assessing Officer was drawn to Annexure 36 of letter dated
06.07.1985, which showed that stores had been sold for Rs.4,29,754/-.
It was further claimed that the sale included all type of stores
including copper wire also. Further scrutiny of the annexure revealed
to the Assessing officer that the old stores had been shown at
Rs.1,55,821/- but no details had been given. In order to verify the
sale of copper wire and the stocks discarded, the Assessing Officer
personally visited the factory premises of the appellant-company
along with Sh. S.K.Gupta, Inspector on 20.03.1986. The Assessing
Officer directed Sh. Gupta, to see the stores to find out if there was
any stock of copper wire. He reported that there was no stock of
copper wire at that time. Sh. R.C.Mehta, Secretary of the Appellant
Company was then requested to produce the sale bill of copper wire.
He produced a sale bill for the sale of copper wire worth Rs.16,000/-.
It was also pointed out by the store-keeper of the company that no
sale of copper wire was made during the period 1981-82 to date
except the above-mentioned sale.
While challenging the addition made by the Assessing Officer
under this head, the learned counsel has not denied the contention of
the Assessing Officer that the appellant company had actually
purchased copper wire worth Rs. 2,46,552/- in early 50s. However,
the learned counsel has tried to explain the sale of copper wire by
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submitting that conorally cables which are underground are not taken
out because that will be damaging the floors and the building.
However, if this contention of the learned counsel is considered
correct then considering the life of the company it is feared that most
of the floor will be having cables underground although they may not
be of any use to the company. The above contention of the learned
counsel could not be accepted because normal practice followed is
that whenever a cable becomes defective then it is taken out by
digging the ground and new cable is installed at the place of the old
cable. It is relevant to observe that if this procedure is not followed
and new cable is installed at different places then it will be difficult to
connect various points of the machinery with a cable because then
new terminal will have to be installed for that purpose. Therefore the
plea of the learned counsel that defective cable having copper wire
was not extracted from the ground could not be accepted because if
the position had been no then the Assessing Officer at the time of
inspection of the factory promise would not have been separate bills
showing sale of copper to extent of Rs.16000/-. The fact that the
assessing officer was able to locate some bills showing up sale of
copper shows that the appellant was actually selling the copper out of
defective cables extracted from the ground and the sale proceeds were
not being credited under the head 'Miscellaneous Incomes' showing
sale of scrap.
As the learned counsel has not been able to effectively
counter the argument of the Assessing Officer that the appellant had
actually sold copper out of defective cables, the action of the
Assessing Officer in computing u/s 41(2) at Rs.2,15,150/- is
considered fully justified. Accordingly, the addition by him is uphold.
11. We have considered the record and find that the assessee's books of
accounts, trading account and the stock has been found to be within the satisfaction
of the Income Tax authorities and the Assessing Officer had accepted the same.
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The wastage of 13.04% shown by the assessee has been held to be more higher
than the wastage shown for the previous year i.e. 8.66%. However, from the
perusal of the record, as maintained by the assessee, shown in the tabular form for
the various assessment years from 1975-76 upto 1983-84, we find that the wastage
percentage was varying from 13.64% and increased upto 16.43% and decreased to
8.66% only for a period of three months in the year 1982-83, while in the year
1983-84 remained consistent to 13.04%. Thus, it cannot be said that the wastage
has been shown on the higher side for the year 1983-84. Moreover, this Court find
that the Income Tax Authorities had accepted the earlier wastage percentage
without any demur.
12. This Court, however, is also satisfied and accept the contention of the
assessee that since the stock production and consumption records were maintained
under the supervision of the Excise Authorities and there is no objection raised
with regard to the said stock. The Assessing Officer has not objected to the total
stock maintained, it could not have proceeded on a presumption alleging higher
wastage shown by the assessee.
13. The relevant provision as applicable to the case of the assessee at the
time of assessment year 1983-84 is reproduced as under:-
"Section 145 of the Income Tax Act:-
Method of accounting :-
145. (1) Income chargeable under the head "Profits and gains of
business" or "Income from other sources" shall be computed in
accordance with the method of accounting regularly employed by the
assessee:
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Provided that in any case where the accounts are correct and
complete to the satisfaction of the Income-tax Officer but the method
employed is such that, in the opinion of the Income-tax Officer, the
income cannot properly be deducted therefrom, then the computation
shall be made upon such basis and in such manner as the Income-tax
Officer may determine.
(2) Where the Income-tax Officer is not satisfied about the
correctness or the completeness of the accounts of the assessee, or
where no method of accounting has been regularly employed by the
assessee, the Income-tax Officer may make an assessment in the
manner provided in Section 144."
14. A perusal of Section 145 of the Income Tax Act shows that income
chargeable under the head "Profits and gains of business or profession" or "Income
from other sources" shall be computed in accordance with the method of
accounting regularly employed by the assessee, and as per proviso, in any case,
where the accounts are correct and complete to the satisfaction of the Income Tax
Officer, but the method employed is such that, in the opinion of Income-tax
Officer, the income cannot properly be deducted therefrom, then computation shall
be made upon such basis and in such manner as the Income-tax Officer may
determine and in the present case the Assessing Officer has accepted the closing
stock and further accepted the trading account to be correct and complete and
without computing afresh, as per the proviso to Section 145(1) of the Act, the
Assessing Officer has made addition to the account of wastage.
15. The income-tax department throughout accepted the trading account
of the assessee and there is no dispute regarding the quantity of cotton shown to be
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consumed as per the books of account maintained by the assessee and no material
to show and to establish that the increase in percentage of wastage was attributable
to any suppression of weight or any suppression of production. The Assessing
Officer without mentioning any irregularity in the accounts and accepting it could
not make addition without giving any reasoning and fresh computation.
16. A perusal of the record further shows that the assessing officer has
resorted to provisions of Section 145(1) of the Income Tax Act without recording
any finding as to whether the case of the petitioner falls under proviso to Section
145(1) or sub-Section (2) of Section 145 of the Act. If the case of the petitioner
fall under the proviso to Section 145, then the Income Tax Officer had to first
reject the whole books of account of the assessee before adding any amount to the
income of the assessee. The closing stock is valued as per the computation by the
assessee regarding the profits and losses and if the books of account of the assessee
including rate at which closing stock had been valued are accepted by the
Assessing Officer, the addition to the net profit could not be made without re-
computing the trading result of the assessee and if as per Section 145(1) of the Act,
the trading account of the assessee are accepted to be correct and complete, the
Assessing Officer without re-computing cannot make additions to the net profit.
Thus, the addition of Rs.34,28,414/- on account of excessive shortage is held to be
not sustainable in the eyes of law.
17. So far as addition of profit under Section 41(2) on the sale of copper
wire to the tune of Rs.2,15,150/- is concerned, it is observed in the assessment
order that the assessee discarded copper wire cable worth Rs.2,46,553/- and this
amount was claimed under the head 'Assests Discarded during the year'. It was
stated by the assessee that discarded copper wire was taken to the old store account
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and all the sales were shown in the profit and loss account. From the details as
shown to the Assessing officer alongwith return, it was seen that the copper wire
cable was purchased by the assessee, from 1955-65. Most of the copper wire was
purchased in 50's. Since from the details of the sale of discarded goods sale of
copper wire was not shown, therefore, the assessee was required to show the sale
of scrap of copper wire and he by its letter dated 20.01.1986 stated that after
underground wire lose its utility, it is not normally recovered as the cost of labour
charges for recovering under-ground wires is much higher than the value of the
scrap, besides damage to building and flooring is also caused. Further, it was
submitted that scraps sold included copper wire and for this purpose attention was
drawn to Annexure 36 of letter dated 06.07.1985, which showed that stores were
sold for Rs.4,29,754/-. Further the assessee showed during the assessment
proceedings that sale included all types of stores and copper wire also. Further it
was submitted that the company does not recover the copper out of old copper wire
but the old wires are sold as scraps. On scrutiny of the annexure referred to above,
it was seen (as observed by the Assessing Officer in assessment order) that the old
stores sale had been shown at Rs.1,55,821/- but no details were given. In order to
verify the sale of copper wire and stocks discarded, the Assessing Officer
personally visited the factory premises of the assessee-company along with Sh.
S.K.Gupta, Inspector on 20.03.1986. Sh. Gupta, was directed to see the stores to
find out if there is any stock of copper wire. He reported that there was no stock of
copper wire at that time. Sh. R.C. Mehta, Secretary of the Company was requested
to produce the sale bill of copper wire. He produced the sale bill for the sale of
copper wire worth Rs.16,000/- only. It was pointed out by the store-keeper of the
company that no sale of copper wire was made during the period 1981-82 till the
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date of visit by the Assessing Officer except the above-mentioned sale of
Rs.16,000/. But the Assessing Officer did not accept the explanation of assessee
and amount to the tune of Rs.2,15,150/- was added as profit under Section 41(2) of
the Income Tax Act.
A perusal of the assessement order and the explanation given by the
assessee shows that the assessee explained each and every question put by the
Assessing Officer. Further inspite of the fact that the Assessing Officer himself
personally visited the factory premises alongwith the Inspector Sh. S.K.Gupta, and
nothing was found to show that the assessee has tried to evade tax, the Assessing
Officer on assumptions and presumptions made addition to the tune of
Rs.2,15,150/- as profit. The reasoning given by the Assessing Officer for such an
addition is found to be contrary to the facts.
18. Keeping in view the aforesaid findings and conclusion, we hold that
the Tribunal has erred in assessing the additions made by the Assessing Officer.
Accordingly, the reference is answered in favour of the assessee and against the
revenue.
19. Pending application(s), if any, also stand disposed off.
(SANJEEV PRAKASH SHARMA) (SUDEEPTI SHARMA)
JUDGE JUDGE
22.03.2024
tripti
Whether speaking/non-speaking: Speaking
Whether reportable : Yes/No
