TANVIR TEXTILE MILLS LTD. vs COMMISSIONER OF INCOME-TAX

1. SAEEDUZZAMAN SIDDIQUI, J.-The above noted four direct References under section 66(2) of the Income-tax Act 1922 have been filed by the applicant for determination of the following questions:- "(1) Whether in the facts and circumstances of the case the Tribunal was justified in confirming the rejection of declared result merely on the ground of alleged short production.

(2) Whether in the facts and circumstances of the case, the Tribunal was justified in fixing a uniform rate of production at 85% for the assessee when the Tribunal itself has been allowing much more wastage than 15%.

(3) Whether in the facts and circumstances of the case, the Tribunal was justified in ignoring the evidence produced by the assessee regarding the old age of machinery, frequency of power break down, lack of humidification plant and disadvantageous location of the mill.

(4) Whether in the facts and circumstances of the case, when there were no defects in the purchases found by the Income-tax Officer and when the Tribunal its; if held that there was no evidence of suppression of sales and consequently deleted the addition made by the Income-tax Officer to the sales at Rs. 1,25,000 the Tribunal was justified in rejecting the book result declared by the assessee?"

2. At the hearing of these References Mr. Sirajul Haque, learned counsel for the applicant stated before us that it is not necessary to decide all the four questions referred in the References and that he will be satisfied if only question No. 1 is answered by this Court. The references relate to assessm ent years 1973--74, 1974-75, 1975-76 and 1976-77. The petitioner is a Spinning Mill which consumes cotton to produce cotton yarn. It is situated in Tando Adam. In the assessment years mentioned above the petitioner claimed before the Income-tax Officer wastage of cotton at the rate of 16.6, 18.7, 16.2 and 18.1% respectively. The Income-tax Officer, however, did not accept the above declared wastage and applying a uniform formula of 15% wastage in each assessment year added a sum of Rs.2,97,588, Rs.6,24,202, Rs.1,59,600 and Rs.2,87,640 respectively as the amount for short production of cotton yarn. The Income-tax Officer also rejected the sale figures disclosed by the petitioner in its return for the aforesaid assessment years and accordingly added a sum of Rs. 1 lac, Rs. 1,25,()00, Rs. 1 lac and Rs. 1 lac respectively on account of unverifiable sales. The applicant challenged the above order of Income-tax Officer before the Appellate Assistant Commissioner who not only deleted the amount added in the sale figure in each year as unverifiable sales but also knocked out the amounts added on account of alleged short production of cotton yarn by the petitioner. Against the order of Appellate Assistant Commissioner the Department filed 4 separate appeals before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal while maintaining the order of Appellate Assistant Commissioner regarding deletion of the amount of unverifiable sales, reversed the order of Appellate Assistant Commissioner in so far it related to deletion of the amount which was added by the I.T.O. On account of alleged short production of cotton yarn. The applicant applied to the Appellate Tribunal for making a reference to this Court under section 66(1) of the Act for decision on the above noted questions but the Tribunal refused the same. The applicant thereafter, filed the above references directly, under section 66(2) of the Income-tax Act in this Court.

3. Mr. Sirajul Haque, learned counsel for the petitioner firstly, contended that the Income-tax Tribunal having failed to point out any defect, fault or incorrectness in the account maintained by the petitioner, could not reject the figures of wastage disclosed by petitioner on the ground that the petitioner had failed to maintain stage-wise production record. It is urged by the learned counsel that in the process of manufacture of cotton yarn it is not possible to maintain stage-wise production record. The second contention of the learned counsel is that application of a uniform formula of 15% wastage in each assessment year was arbitrary as wastage is dependent on several factors which may vary in each year but the learned Income-tax Tribunal failed to consider the same. The last submission of learned counsel is that both Income-tax Officer and Income-tax Appellate Tribunal failed to notice that the effect of additions in the quantity of cotton yarn produced by the applicant in the above assessment years was that the total production of applicant for these years exceeded the admitted quantity of cotton consumed by the applicant in each year, which could not possibly happen.

4. Learned counsel for the Department though could not controvert the submission of the applicant that the effect of additions made by the Income-tax officer, in the production figures of cotton yarn in the above mentioned assessm ent years was that the total quantity of yarn and visible and invisible wastage if added together exceeded the quantity of cotton consumed in each year but maintained, that keeping in view the past practice of fixing the production of applicant's mill at 85% which was accepted by the Assessee the Income-tax Officer rightly rejected the excessive wastage claimed by applicant and legitimately added the proportionate amount in each assessment year so as to maintain the production level at 85%o in the assessment years under dispute.

5. After hearing the learned counsel for the Assessee and the Department we are of the view that there was no justification for rejecting the wastage claimed by the assessee in the above assessm ent years. It is quite clear from the order of Income-tax Appellate Tribunal that the genuineness of the account books maintained by the petitioner was not doubted. In fact, the additions made by the Income-tax Officer on account of unverifiable sales in the sale figure disclosed by the assessee/applicant in its returns for the above years, were not only rejected by the Appellate Assistant Commissioner in appeal, but it was maintained by the Income-tax Appellate Tribunal in the appeal riled by the Department against the order of the Appellate Assistant Commissioner. This goes to show that there was nothing wrong in the manner of accounting maintained by the assessee. In the case of Indus Textile Mill Ltd. v. C.I.T. (1989 PTD 567) a Division Bench of the Court held that the accounts maintained by the assessee, can be rejected if then are substantial mistakes and discrepancies due to which it is not possible for the assessing authority to correctly and clearly determine the income of the assessee.

6. It is also observed in the above case that where it is not possible to maintain record of stage wise production and stage wise wastage and no such record w maintained in the past, the department could not reject the accounts of assess, for that reason. We are in respectful agreement with above observations which are fully attracted in the present case. Apart from that it is quite obvious on simple mathematical calculation that the quantity of cotton yarn added in ea, assessment year by the I.T.O. To the production figures disclosed by the applicant if taken, together with visible and invisible wastages disclosed by the applicant, which was duly accounted for in the assessment, the total production of assessee/applicant in each of the above mentioned assessment year exceeded the total quantity of cotton consumed in that year. This is obviously an absurd, which could not take place. We, accordingly, accept the above, References ate answer question No.1 mentioned above in the negative. There Will be no order, as to costs.