1 IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 165 of 1993 For Approval and Signature: THE HON'BLE MR.JUSTICE D.A.MEHTA Sd/- HON'BLE MS.JUSTICE H.N.DEVANI Sd/- =========================================================== === 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? =========================================================== COMMISSIONER OF INCOME TAX - Petitioner(s) Versus SANJAY OIL CAKE INDUST. - Respondent(s) =========================================================== Appearance : MR B.B.NAYAK for Petitioner No(s).: 1. MRS.SWATI SOPARKAR FOR MR SN SOPARKAR for Respondent No(s).: 1. ======================================================= CORAM :THE HON'BLE MR.JUSTICE D.A.MEHTA HON'BLE MS.JUSTICE H.N.DEVANI Date : 22/06/2005 ORAL JUDGMENT 2 (Per : THE HON'BLE MR.JUSTICE D.A.MEHTA) 1. The Income Tax Appellate Tribunal , Ahmedabad Bench 'B' has drawn up a consolidated statement of case in relation to questions referred at the instance of the Commissioner of Income Tax and the assessee under section 256(2) of the Income Tax Act, 1961 (the Act). At the instance of Revenue. “Whether the Appellate Tribunal is right in law and on facts in deleting the addition of Rs.54,23,457 made on account of suppressed production of 28284 tins of oil and also Rs.12,44,130/- on account of suppression of sale price of 678 tons of oil cakes outside the books of accounts ?” At the instance of assessee. “1. Whether in the facts and in the circumstances of the case the Tribunal was justified in rejecting the evidence in the form of certificates and statements filed during the course of assessment proceedings. 2. Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the purchases of tin plate for manufacture of tins were not made on the basis of weight but were made on the basis of number of component 3 parts ? 3. Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the value of 28,284 tins was to be added in the income of the assessee ? 4. Whether on the facts and in the circumstances of the case there was evidence to justify the finding of the Tribunal that there was suppression of production of 28284 tins by the assessee? 5. Whether on the facts and in the circumstances of the case the Tribunal was justified in rejecting the evidence led by the appellant in support of its contention that the purchases were made on the basis of weight and not on the basis of numbers? 6. Whether on the facts and in the circumstances of the case the conclusions drawn by the Tribunal against the appellant are perverse, in that no reasonable person could have reached these conclusion on the basis of the evidence on the record of the case ?” 2. The Assessment Year is 1982-83 and the relevant accounting period is S.Y.2037. The assessee, a registered firm, carries on business as oil mill and solvent extraction plant with Factory and Head Office at Jamnagar and Branch Office at 4 Bombay. 3. The facts relatable to the question at the instance of the revenue are that : 3.1Asssessing Officer on the footing that the assessee had manufactured 28284 tins in excess of the number reflected by the Books of Account came to the conclusion that as each tin contains 16 kgs. of oil the total quantity of oil would work out to about 452.5 tons. Applying the multiplier of Rs.205/-, which was the average selling price of one tin, total selling price of 28284 tins of oil was worked out at Rs.57,08,220/-. The Assessing Officer held that this amount was to be added to the profits of the assessee as concealed income. However, as separate addition on account of undisclosed income from suppressed production of tins was worked out at Rs.3,74,763/- he made an addition of Rs.54,23,457/- being the sale price of suppressed production of oil. 3.2 Further addition to the tune of Rs.12,44,130/- was made on account of suppressed sales of oil cakes. 5 The basis for arriving at this figure was that normal yield of oil would be about 30% and that of oil cake about 45%. Accordingly, in the process of production of unaccounted quantity of oil 678 tonnes of oil cake would have been produced according to the Assessing Officer. Applying the average price of Rs.1,835/- per ton of oil cake to 678 tonnes the aforesaid figure of Rs.12,44,130/- has been arrived at and added as unaccounted sales of oil cakes. 4. The assessee carried the matter in appeal before CIT (Appeals) who deleted both the additions vide his order dated 4.8.1986. 5. Revenue challenged the aforesaid deletions by way of appeal before the Tribunal. The Tribunal has confirmed the order of CIT (Appeals) deleting the additions on account of suppressed production of oil and oil cakes. 6. Mr.B.B.Naik, learned Standing Counsel appearing on behalf of the revenue submitted that during the year under consideration the yield of oil had gone 6 down to 28.13% as against 28.83% in the preceding year, whereas the quality allowance received by the assessee during the year towards inferior quality of groundnut was comparatively less than the preceding year. Similarly there was exceptional increase in the oil cakes production : this year the production was 51.75% as against 43.80% in the immediately preceding year. That considering direct nexus between the production of oil and oil cakes, higher percentage of oil cakes production during the year under consideration supported the conclusion of the Assessing Authority that the assessee had suppressed production of oil and oil cakes. He, therefore, urged that the addition made by the Assessing Officer was required to be restored answering the question raised at the instance of the Commissioner in favour of the revenue. 7. Mrs.Soparkar, learned Advocate appearing on behalf of the assessee submitted that the assessee had maintained regular Books of Accounts showing complete quantitative details in relation to production of oil and oil cakes and no specific 7 discrepancy had been found by the Assessing Officer in the record maintained by the assessee. That Books of Accounts duly supported by vouchers and records of production and stock had been produced before the Assessing Officer. It was submitted that the entire addition was based on presumption that as there was excess production of tins there must be suppressed production of oil and oil cakes. Attention was invited to the surprise checks made by Civil Supplies Department as well as examination of record by the Excise Department and acceptance of declared turnover by Sales Tax Department to contend that there was no case for any addition on account of undisclosed production of oil and oil cakes. 8. The Tribunal has upheld the findings recorded by CIT (Appeals) for deleting the additions on account of undisclosed income on account of suppressed sales of oil and oil cakes. It has been found by the Tribunal that it is an undisputed fact that regular Books of Accounts have been maintained by the assessee along with records of stock as 8 required under the provisions of the excise law. That correctness of book results relating to production of oil and oil cakes has been accepted by the Income Tax Authorities in past. The production of oil and oil cakes as well as stock records have been examined by the Excise Department and the Sales Tax Department and neither of those authorities, who are also revenue authorities, have found any discrepancy in the records maintained by the assessee. Similarly, the Tribunal has taken cognizance of the fact that the surprise visits by the officials of Civil Supplies Department have revealed that there were no irregularities in the maintenance of stock and the physical stock and the stock records tallied and were found in order. The Tribunal has also found that percentage of yield of oil and oil cakes would depend on the quality of groundnut and the quality of groundnut was likely to fluctuate/vary on the basis of various factors like the season during which purchases were made, the area from where the purchases were made, the extent of moisture content in the groundnut which in turn would 9 depend upon the extent of rain, and also technical efficiency of the crushing process in each case. The Tribunal has further found that the Assessing Officer has not pointed out any specific omission or suppression in the Books of Accounts maintained by the assessee. Nor has the revenue disputed the fact that in case of various other oil mills, the percentage of production of oil and oil cakes during the year under consideration is less when compared to the percentage of production in case of the assessee. On the basis of these factors the Tribunal has came to the conclusion that the CIT (Appeals) was justified in deleting the additions on account of alleged suppression of unaccounted sales of oil and oil cakes of Rs.54,23,457/-, and Rs.12,44,130/- respectively. 9. The aforesaid findings recorded by the Tribunal are supported by the evidence which is available in the Paper Book and no material has been pointed out so as to take a different view of the matter. The Tribunal has taken into consideration all relevant 10 facts for the purpose of adjudicating the issue as to whether there was any suppressed production of oil and oil cakes resulting in sales outside books and consequently undisclosed income. In the result, it is not necessary to reiterate the reasons and the factors which have weighed with the Tribunal while deleting the additions on this count and there being no infirmity in the order of the Tribunal in relation to this issue no interference is called for. 10. The question referred at the instance of the revenue is therefore answered in the affirmative i.e., in favour of the assessee and against the revenue holding that the Tribunal was right in law in deleting the addition of Rs.54,23,457/- made on account of suppressed production of 28,284 tins of oil and also Rs.12,44,130/- on account of suppressed production of 678 tons of oil cakes. 11 Coming to the reference at the instance of the assessee, though as many as six questions have been referred the issue is whether the assessee had 11 manufactured 28,284 tins and failed to show the said production in the accounts maintained by the assessee. 12 The Assessing Officer records that the assessee has maintained a stock register showing day to day consumption and production of tins. The register reflects the daily receipts, consumption, production and balance and is certified and signed by the managing partner of the assessee firm. However, according to the Assessing Officer scrutiny of purchase bills reflects that the purchases were of unsoldered tin sets known as component sets comprising of four pieces, one each for the top and bottom and two pieces for body panels. That on the basis of examination of the purchase bills, according to the Assessing Officer, such component sets have been purchased on the basis of number of sets and not on the basis of weight in kilograms. Thus, according to the Assessing Officer, the stock register is false when considered in light of the purchase bills because the stock register mentions the receipts, consumption, production and 12 balance stock in weight. The Assessing Officer, therefore, after examining few bills held that the purchases of the component sets were shown on the basis of rate or price per set and the purchases of component sets were not reflected by the rate of per kilogram. That for making a complete tin from a component set four pieces of the set were required to be soldered and a clip, kadi and round lid was required to be affixed. The Assessing Officer therefore came to the conclusion that during the year under consideration the assessee had purchased 2,73,047 component sets, after considering the opening balance of component sets and deducting therefrom closing stock, 2,76,272 tins ought to have been produced against which the assessee had shown production of 2,47,988 tins. He therefore worked out that 28,284 tins were produced but the production was suppressed. The detailed working is as under : 13 Opening balance of component sets. 9,120 Add : Total number of component sets purchases from twenty different manufacturers as shown above 2,73,047 2,82,167 Less : Closing stock as discussed above. 5,895 Balance that should have been accounted as production. 2,76,272 Less : Production and consumption of tins actually accounted for 2,47,988 Balance of production of tins suppressed 28,284 13 The Assessing Officer while doing so has not accepted the explanation tendered by the assessee that though the purchase bills reflected purchase of component sets at the rate per set, in fact the bills were so prepared considering the legal impediment that tin plates could be sold only to small scale manufacturers as per government order and hence the sets and the rates were mentioned in numbers though purchases were in fact on basis of weight. The assessee in support of such contention had placed on record various evidences from its own possession, 14 from manufacturer of the tins, certificates from suppliers etc. The Assessing Officer had also examined two of the suppliers but thereafter recorded that there was nothing to suggest in the statements that the purchase bills which were very specific and clear as to the nature of goods supplied to the assessee were in any manner incorrect. It is further stated that from the chart supplied by the assessee in almost all cases each component set was weighing about 1000 grams or slightly more, after process of soldering and affixing of clip, kadi and round lid weight would go upto 1040 grams or slightly more. He therefore rejected the assessee's explanation that the weight of a complete tin would workout to 1080 to 1100 grams and it was not necessary that from each component set one tin would be produced. He therefore worked out the value of 28,284 tins alleged to be suppressed production by applying average rate of Rs.13.25 ps. per tin totalling to Rs.3,74,763/- and added the same as undisclosed income in hands of the assessee. 14.The assessee carried the matter in appeal before CIT 15 (Appeals). The CIT (Appeals) after considering the explanation tendered by the assessee caused inquiry to be made through the Inspector to ascertain the facts. It is recorded that as per result of the inquiry the net weight of oil per tin would be 15.9 kgs., and weight of new tin would be from 965 grams to 1000 grams but the weight of old tins used to vary between 1 kg. to 1.18. kg. The CIT (Appeals) has further found that some of the bills of M/s. Raj Tin Factory, M/s.Taheri Tin Factory and M/s.Nilam Tin Factory as well as all the four bills of M/s.Girishchandra & Co. also mentioned weight of the components in kilograms. It was further found by CIT (Appeals) that the statement, including cross examination of the suppliers along with certificates clearly revealed that number of component sets was mentioned not by counting but on an estimated basis because what the party had sold to the assessee was tin plates as claimed by the assessee and not the number of component sets. He has further found that “ the number of component sets has been mentioned on estimate to circumvent the difficulties in 16 selling the tin plate”. The CIT (Appeals) has further recorded that the weight per component set varied between 1000 to 1100 grams which was well within the vicinity of weight per set as reported by the Inspector vide his report dated 1.8.1986. However, he found that the weight per component set in the case of goods supplied by M/s.Girishchandra & Co. came to 908 grams which was absurdly low and hence he estimated that M/s.Girishchandra & Co. would have supplied 46,455 sets @ 1000 grams per component set and accordingly granted reduction towards cost of 4716 tins on this count while confirming the balance number of tins as being undisclosed production. 15. Both the assessee and the revenue carried the matter in appeal before the Tribunal. The assessee against retention of addition to the extent of 23,568 tins as being suppressed production and the revenue against relief to the extent of 4716 tins granted by CIT (Appeals). The Tribunal for the reasons stated in its order dismissed the assessee's 17 appeal on this count and allowed revenue's appeal restoring addition as made by the Assessing Officer holding that there was suppressed production of 28,284 tins. So far as valuation was concerned the Tribunal directed the Assessing Officer to adopt the rate which was applicable for production of the other tins as per Books of Accounts instead of applying average rate and restored the matter to Assessing Officer for this limited exercise. 16. Mrs. Soparkar, learned Advocate appearing on behalf of the assessee invited attention to the explanation tendered by the assessee vide letters dated 14.11.1984, 26.2.1985 and 11.3.1986 which were accompanied by various enclosures to submit that there was adequate material on record to show that the purchases were on the basis of weight in kilograms and not on the basis of number of component sets. She invited attention to various certificates issued by the suppliers as well as other similarly situated purchasers to emphasise this fact that though the bills reflected purchases 18 to be by number in fact the purchases were on the basis of weight. Referring to various tables and charts coupled with the statements of the suppliers she contended that the entire basis of addition viz., one tin for every component set was erroneous considering the possibility of variance as to weight, thickness of tin plate etc., and that it was not always possible to match the number of component sets with the number of tins produced. That the Tribunal had erred in proceeding on the footing that the material supplied by each of the suppliers, who were 20 in number, would be of identical quality and hence, the end result in working out so called suppressed production was not supported by actual facts and figures. That the addition was based on various hypotheses and conjectures. She therefore urged that the Tribunal's order on this issue was perverse in as much as it had ignored relevant material which was available on record and proceeded on surmises and conjectures. It was therefore submitted that no addition on this count was called for. 19 17. Mr.Naik appearing on behalf of revenue supported the order of the Tribunal and submitted that both the Assessing Officer and the Tribunal had taken into consideration purchase invoices which were primary documents; the said material was produced by the assessee itself and the assessee could not be permitted to turnround and state that the said invoices were not correct. That even if the assessee wanted to dislodge the said evidence the onus was on the assessee to prove that the invoices did not reflect correct position, and on appreciation of evidence the Tribunal had came to the conclusion that the assessee had failed to discharge the said onus. He therefore urged that no interference was called for in the order of the Tribunal. 18. As can be seen from the impugned order of the Tribunal after recording the fact that the assessee has submitted certificates from various suppliers during the course of assessment proceeding and certificates of brokers to corroborate its 20 contention that the component sets of tin plates were purchased on the basis of weight and number of component sets were mentioned in the respective invoices to comply with the relevant regulation relating to sale of tin plates, the Tribunal brushes aside the said evidence by observing : “All such certificates or statements of subsequent dates cannot over ride the clear and unambiguous description given in the respective purchases invoices”. The Tribunal thereafter observes that the correctness of the various purchase invoices in respect of component sets has not been questioned or disputed by the assessee or by the suppliers. It further reiterates that in view of clear description given in most of the purchase bills it was not inclined to accept the assessee's contention that such tin plates were in fact purchased on the basis of weight and the number of component sets were mentioned in the purchase invoices merely to comply with the relevant regulation in force relating to sale and supply of tin plates. Thereafter, the entire order of the Tribunal 21 proceeds on the footing that normally each component set should result in manufacture of one complete tin container for holding excess tin production to the tune of 28,284 tins worked out by the Assessing Officer. The Tribunal enters into an elaborate exercise on the presumption that weight of each set would be 1000 grams. Applying the same reasoning the Tribunal also reverses the partial reduction granted by CIT (Appeals). The only relief that the Tribunal has granted is to work out the actual quantum of addition by applying the manufacturing cost per tin by adopting the average cost price at which the other manufactured tins were available to the assessee in place of the cost price adopted by the Assessing Authority. 19. The least that was expected from the Tribunal was to discuss the inherent strength of the certificates issued by the suppliers and other persons, consider the statements and the cross- examination of the suppliers which have come on record and discuss other evidence. The Tribunal has 22 singularly failed to discuss the merits of the said evidence. Except for stating that the said evidence like certificates, statements etc., have come on record subsequently no reason is assigned as to why the said evidence is not acceptable. The entire premise is fallacious. The Tribunal has failed to appreciate that in fact the Assessing Officer had called upon the assessee to make submissions with regard to tin plates account, modality of manufacture of tins and furnish information in this regard. It is in this context that the assessee has made detailed submission vide communication dated 14.11.1984 addressed to the Assessing Authority. The basic explanation, and the same has remained consistent all throughout, tendered by the assessee is reflected by paragraph No.1 of communication dated 14.11.1984 which reads as under : “1. Present Govt. policy is to issue tinplate quota only to the backwards area, in small scale sector, that is why we being a D.G.T.D.unit cannot get tin plates directly from tin plate manufacturers and have to buy it from local market, either in form of component or tin plate.” 23 20. In the said communication it is explained that the assessee is required to obtain purchase bills showing purchase of component sets in number but in fact the purchases are in weight and even the delivery is in terms of weight. This becomes clear from paragraph No.5 of the said communication which reads as under : “5. The components or tinplates are always taken delivery in terms of weight even if the purchase vouchers are in terms of component sets. This fact is justified looking to the following points. 1. It is difficult to count because they are numbering in more than millon. 2. The edge of tinplates as well as that of components sets are as sharp that while handling them in piece to piece counting there are possibilities of injuring the persons involved. This way it is rather impossible to count and to take delivery. So the practice is to get them weighed and we maintain the record on every stage in terms of weight only.” 20.1It is an admitted position that in support of the aforesaid submission the assessee was 24 called