TaxTMI 
TaxTMI 
2024 (11) TMI 1264
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....ing 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 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 wa....
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....ssessee has got the top re-combed and applied re-combing process. It has further been explained vide 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 compare....
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....ssee, 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- 2024:PHHC:041731-DB 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 addi....
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....essing 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 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 submitte....
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.... 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 exces....
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....igh Court in Siddheshwari Cotton Mills (P) Limited vs Commissioner of Income Tax 1979 (117) ITR 953, judgment of Bombay High Court in R.B. 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 @ Rs. 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....
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....tion records and all the purchases, 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 reco....
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....nderground 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 coppe....
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....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. 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 Authorit....
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....onsumed 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....