INSPECTING ASSISTANT COMMISSIONER OF INCOME TAX (ASST.) v. DIGVIJAY TEXTILES
[Citation -1986-LL-0507-2]

Citation 1986-LL-0507-2
Appellant Name INSPECTING ASSISTANT COMMISSIONER OF INCOME TAX (ASST.)
Respondent Name DIGVIJAY TEXTILES
Court ITAT
Relevant Act Income-tax
Date of Order 07/05/1986
Assessment Year 1978-79
Judgment View Judgment
Keyword Tags cost of production • excess consumption • closing stock • raw material • book result • mineral oil • grey cloth
Bot Summary: The assessee's reply was that this year there was non-availability of Kerosene oil and the assessee had to use more expensive item i.e. mineral oil. A t the time of hearing, a preliminary objection was raised on behalf of the assessee that the departmental ground of appeal raised before us does not make out any case justifying interference with the book results of the assessee. In the present case there has been a lengthy exercise of estimating the raw material that should have been consumed by the assessee and computing the price of the excess consumption it has not been specifically mentioned that the provisions of s. 145(1) proviso or sub-s. are applicable but it appears that the intention of the assessing authority was to reject the book results of the assessee. We have already briefly pointed out the reason which led the IAC to reject the assessee's results. The CIT(A) has referred to with them without specifically rejecting any of the reasons given by the IAC. He has, however referred to certain arguments raised on the basis of which he has accepted the assessee's contention. Very lengthy comments have been given by the IAC in that reply and the authorities referred to by the assessee were also commented upon and sought to be distinguished. On behalf of the Department again the authorities relied upon by the assessee were sought to be distinguished and reliance was placed upon two cases, namely, Ram Chandra Singh Ramniklal vs. CIT, Bihar Orissa 42 ITR 780 and Punjab Trading Co. Ltd. vs. CIT 53 ITR 335 to justify the rejection of book results shown by the assessee.


H.S. AHLUWALIA, J.M. dispute in this appeal relates to correctness of book result shown by assessee. business of assessee is processing of grey cloth as per requirement of customers. After issue of cloth till its finishing stage activities are carried on by separate concern, namely, M/s. Adarsh Enterprises. assessee only supplies cloth and raw material which is put to use under its supervision. IAC (Assessment) noticed that raw material consumed in processing, namely, bleaching agents and colouring agents were excessive. He called for assessee's explanation which in first instance was that issue did not represent daily consumption but reflected quantity of shortfall issued so as to meet daily requirement. IAC was, however, not satisfied about this reply and wanted further information as to whether next issue was made before first issue was consumed. He asked assessee to finish monthly consumption, production chart, of grey cloth and chemicals/raw materials used and noticed that there was tremendous variations in ratio of grey cloth processed. assessee's reply was that there had been some mistake in earlier year's statement occurring incidentally because figure was worked out on estimate basis. second chart was furnished but this also contained huge variation. To clarify matter third chart was furnished in which effort was made to connect conclusion of raw materials with monthly average of cloth issued and finished cloth received. In this chart average result of two months were taken because issue of cloth and raw materials on last day of month could spill over to next month. IAC again found that there were disproportionate consumption. Then assessee's contention was that Department should appreciate annual results only. IAC was, however n o t satisfied and was of opinion that if books had been regularly and correctly maintained then monthly results would compare favourably with annual averages. raw material consumed in books of assessee on higher side. It was not comparable with results of last year also. only possibility was that either materials were so consumed or expenses h d been inflated. first inference was not possible because if more chemicals were consumed they would damage cloth or it means that assessee had manufactured larger items of cloth. second possibility was there and, therefore, IAC (Assessment) continued to make further query in relation to shortfall. He also noticed that there had been huge consumption on account of oil amounting to Rs. 60,168 which came to 0.26 per cent of cost of production as against Rs. 4,971 i.e. 0.03 per cent in last year. assessee's reply was that this year there was non-availability of Kerosene oil and, therefore, assessee had to use more expensive item i.e. mineral oil. This again was rejected by IAC on ground that assessee had shown closing stock of 7,100 litres of kerosene and there had been no reduction in consumption of total quantity of kerosene. If mineral oil was better raw material, consumption should have come down. He also found that there was abnormally high consumption about which again explanation of assessee was not satisfactory. He, therefore, concluded that issue entry for consumption in Register did not reflect correct position. Accordingly he estimated consumption of these raw materials on basis of production and was of opinion that expenditure of Rs. 2,58,027 had been inflated in respect of caustic liquid alone. On this basis he made addition of Rs. 3.25 lacs to assessee's declared results. This addition has been knocked off by CIT(A) on appeal filed by assessee. Revenue has come up in second appeal before us. We have heard representatives of parties at length in this appeal. t time of hearing, preliminary objection was raised on behalf of assessee that departmental ground of appeal raised before us does not make out any case justifying interference with book results of assessee. ground of appeal is only one which reads as under: "On facts and in circumstances of case CIT(A) has erred in deleting addition of Rs. 3,25,000 without appreciating facts on record and also written submissions made during course of appellate proceedings by IAC (Asst. yr..)." According to him this ground does not say that proviso to s. 145(1) of 145(2) is applicable and since books of assessee as such has not been rejected, no addition can at all be justified. To our mind, there is little force in his preliminary objection. It is correct that addition has not been made in normal manner of making addition which was urgently done by applying proviso to s. 145(1) or sub-s. (2) of s. 145 and rejecting book results of then estimate is made in respect of gross profits that may have been earned by assessee. In present case there has been lengthy exercise of estimating raw material that should have been consumed by assessee and computing price of excess consumption it has not been specifically mentioned that provisions of s. 145(1) proviso or sub-s. (2) are applicable but it appears that intention of assessing authority was to reject book results of assessee. In Para 6 page 5 of certified copy there is clear observation if books were kept regularly and correctly then monthly average should compare favourably with annual average. In beginning of Para 11 it has again been stated that assessee's books do not give complete and correct picture of business activities of year and expenses in these items had been inflated to reduce taxable profits. Obviously book results were rejected by assessing authority and although ground taken before us seeks only to restore addition because of certain submissions made by IAC during course of appellate proceedings, it is really against conclusion of CIT(A) accepting book results. We, therefore, overrule preliminary objection. Coming to merits, we have already briefly pointed out reason which led IAC to reject assessee's results. CIT(A) has referred to with them without specifically rejecting any of reasons given by IAC. He has, however referred to certain arguments raised on basis of which he has accepted assessee's contention. For example, he has referred to assessee s argument that assessee firm had been maintaining books of accounts for purchase of cloth and other printing materials which had been accepted in past. He also gave figures of past four years to show that gross profit rates earned by assessee varying between 10.8 per cent to 13 per cent only addition of Rs. 53,000 was made in one year when gross profit was only 10.8 per cent which was not set aside by appellate authority and ultimately addition stated to be deleted by IAC himself. Next he has referred to certain explanations given by assessee to IAC in respect of this deficiency. Then he has referred to certain authorities which were quoted before him, namely, Oudh Sugar Mills vs. Union of India (1978) ELT published in April, 1978 page J-172. Thereafter he had referred to certain presumptions on basis of which IAC had made additions which according to submission made before him were not justified because books of accounts had not been rejected and no specific defects in books were pointed out by lAC. Thereafter he has deleted addition. As we have pointed out above, this last reasoning is not acceptable to us. CIT(A) order does not appear to deal with real issue, namely, as to whether he was satisfied with quantities of consumption of raw materials shown by assessee. He has not even touched this issue although IAC had dealt with same at considerable length. Not only has this issue been highlighted at length in order of assessment, assessee raised certain objections to conclusion arrived at by IAC in reply to which IAC gave detailed reply purporting to have been sent on 14th June, 1983. Very lengthy comments have been given by IAC in that reply and authorities referred to by assessee were also commented upon and sought to be distinguished. These contentions of IAC do not appear to have been noticed by CIT(A) inasmuch as his order does not show that he has even considered them. On behalf of Department again authorities relied upon by assessee were sought to be distinguished and reliance was placed upon two cases, namely, Ram Chandra Singh Ramniklal vs. CIT, Bihar & Orissa (9161) 42 ITR 780 (Pat) and Punjab Trading Co. Ltd. vs. CIT (1964) 53 ITR 335 (P & H) to justify rejection of book results shown by assessee. After carefully considering all facts and circumstances of case, we are of opinion that matter requires further examination. As pointed out above, decision of CIT(A) cannot be supported on sole ground that book results of assessee have not been rejected. As regards question of gross profit, gross profit shown in this year i.e. 11.9 per cent though it compare favourably with some of earlier years it was definitely lower than atleast two years when it was 13 per cent and 12.8 per cent respectively. If addition of 1 per cent is made this would result itself in addition of Rs.2,22,000. At any rate, we do not know what where reasons which ultimately resulted in deletion of Rs. 53,000 made to declared results in year 1975-76 and Mr. Ajmera was not in position to enlighten us in matter further. real issue which IAC had raised was that assessee had inflated its expenses on cost of certain raw materials which consumption whereof was wholly disproportionate with consumption in earlier years and in this year itself. While we agree with assessee's contention that all over results should be considered because consumption of raw material from day to day may not be true representative, we find that CIT(A) has not examined matter even from this angle. After all entire consumption during year would certainly be proportionate to finished product and if there is any difference there should be certain reason for same. CIT(A) has relied upon generalities to delete additions which were made on certain specific discrepancies. We do not propose to express any opinion on correctness of conclusions of IAC but would certainly like to say that these conclusions should have been scrutinised and either accepted or rejected or CIT(A) should have formed his own opinion, but before deleting addition he should have come to positive finding that consumption was not wholly disproportionate to finished products. Since his order is slightly more presumptions rather than analytical, we are of opinion that matter should be examined afresh in light of objections of IAC and clear cut conclusion be arrived at in matter. It was specifically pointed out by assessee's representatively that assessing authority has wholly misconstrued position. proportionate coast of chemical this year could not to be said to be excessive. In this behalf he referred to comparative chart filed before CIT (A) in which cost is shown at Rs. 34,54,728 in year 1977-78 which comes to 19.80 per cent of total expenditure as against 19.68 per cent incurred in this year. decrease in gross profit is due to higher amount of wages paid in this year. This certainly appears to have very important bearing on point of dispute. But unfortunately nobody appear to have looked into this aspect of matter. Accordingly we accept appeal, set aside order of CIT (A) and restore matter back to him for fresh decision in light of our aforesaid observations and new argument noted above. In result, appeal shall be deemed to have been allowed for statistical purposes. *** INSPECTING ASSISTANT COMMISSIONER OF INCOME TAX (ASST.) v. DIGVIJAY TEXTILES
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