Income Tax Appellate Tribunal - Jaipur
Prem Cables (P.) Ltd. vs Assistant Commissioner Of Income-Tax on 28 February, 1995
Equivalent citations: [1996]56ITD382(JP)
ORDER
M.A.A. Khan, Judicial Member
1. This is an appeal from CIT(A)'s order dated 8-1-1990 for assessment year 1986-87 challenging the following additions/disallowances :
2. (1) Trading addition of Rs. 5,00,000 The assessee is a private limited company engaged in manufacture and sales of Electric Conductors and Aluminium Re-draw Rods since 1973. Manufacturing activities are carried in two separate units called "Conductor Division" and "Rolling Division".
3. The licensed capacity of Conductor Division is 8492 MT against which the assessee-company has installed machines of 1000 MT capacity. The raw material required for manufacturing conductors are Aluminium Rod and Steel Wire. Though the Aluminium Wire is not a controlled item yet its supply is regulated by the Aluminium Controller, Govt. of India. The producers and suppliers of Aluminium Rods include Hindustan Aluminium Corporation Ltd., Renukoot (HACL), Bharat Aluminium Co. Ltd., Korba (BACL), Indian Aluminium Co. Ltd. (IACL), Madras Aluminium Co. Ltd. (MACL), which are Govt. or Semi Govt. Undertakings. The buyers are State Electricity Boards. The finished goods is subject to re-winding process before sales and is an Excisable item.
4. The raw material required for manufacture of cables in the Rolling Division are Aluminium & Steel/Iron. This Division has 300 Bobins on which wire is wrapped for strandering purposes. The wrapping process on all the 300 Bobins require 7 days time. Strandering is done in different sizes. It takes 3 to 4 hours for making 4-5 kilometre of wires. The manufacturing process involves drawing of the melted material into wire and strandering on the Bobbins. Drawing and Strandering process are done simultaneously. The manufacture of cables is also done on job basis. The manufacturing process in both the Divisions require electric energy which is supplied by the Electricity Board and is also produced by generators.
5. For both the Divisions the assessee has a common Metre. An Excise Inspector, stated to be stationed at assessee's factory, supervises the production. Officers of the Electricity Boards are stated to be visiting the factory for checking. All relevant registers, account books, etc., are stated to have been regularly maintained and relevant returns duly filed periodically. The accounts maintained are subject to audit.
6. For the year under consideration the assessee-company filed the return of income on 17-6-1986 declaring its income at Nil after adjusting the unabsorbed losses of earlier years to the extent of net income for the current year at Rs. 4,48,894 and carrying forward the losses at Rs. 6,95,052. Relevant accounts were also produced. The Assessing Officer, however, noted that day to day record of consumption of raw material and production of goods was not maintained and that there was a vast variation between the electricity units consumed and production obtained. In this behalf he noted that though the licensed capacity of the units was 8492 M.T. yet the assessee had installed machineries of 1000 M.T. capacity which could have enabled the assessee-company to produce more finished goods than reflected in books. He noted the following position of the units consumed and production obtained:
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Quarter Units Actual Production Difference
consumed production ought to
obtained have been
obtained
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1. 1,10,492 1,122 1,105 -2. 1,23,455 955 1,134 279
3. 86,519 954 864 -4. 71,957 303 720 416
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7. In this behalf the AO proceeded on the footing that the consumption of units in both the Divisions was in equal ratio in producing 1607 M.T. of finished goods in Rolling Division and 1727 M.T. in Conductor Division. On being asked to explain the vast variation in consumption of electric energy and production of finished goods in the IInd & IVth quarters vis-a-vis other quarters the assessee explained that frequent cuts in supply of electric energy, inferior quality of raw material, repeated process of re-heating and re-winding, etc., had contributed to the variation. The AO examined assessee's production Manager, Shri S.K. Jain, and formed the opinion that 10% of the variation may be attributed to electricity failure and other reasons. He, therefore, concluded that the assessee had made purchases of raw material worth Rs. 10 lacs and effected sales worth Rs. 6 lacs out of the books. He made additions accordingly.
8. In appeal the learned CIT(A) examined the month wise consumption of units vis-a-vis production obtained and agreed with the learned AO that there were vast variations in IInd & IVth quarters between consumption of units and production. He further agreed with him that the alleged supervision of production by the Officer of the Excise Department and inspection by the Officers of the Electricity Board were not reliable. Further, the 1d. CIT(A), took into consideration the subsequent conduct of the assessee in purchasing raw material from open market and, in such attempt, having been caught at the check post in September 1988 and visited with penalty. He further took note of the search conducted by the Sales-tax Department at the business premises of the assessee and levy of penalty of substantial amount on the assessee for making sales outside the books. He, thus, confirmed the findings of AO that there was a case for rejecting the book results and making a trading addition. He, however, reduced the trading addition of Rs. 6 lacs to Rs. 5 lacs, which is subject-matter of ground No. 1 in this appeal.
9. For the addition of Rs. 10 lacs the 1d. CIT (A) found no material to support the case of the AO for investment of that much of amount in making purchases outside the books. He, therefore, deleted the same. The Department is not in appeal or cross-objection against such deletion.
10. Mr. C.L. Jhanwar, CA, appearing for the assessee-company vehemently urged that all along the results as declared by the assessee in earlier as well as subsequent years were accepted and no such addition was ever made. The 1d. Counsel further submitted that the consumption of units and the production of finished goods was subject to supervision, checks and verification by the Officers of the Excise, Electricity and Sales-tax Departments and the assessee had maintained the relevant accounts and submitted the required statements/returns to their satisfaction. It was further submitted that the purchase of raw material from open market, though not prohibited, was a costly affair and could not have been adopted for the sole reason that the buyers of the conductors were quite limited. That apart, there is no evidence to raise a presumption or assumption in that behalf. Mr. Jhanwar explained the variance of unit consumption vis-a-vis production in the IInd & IVth quarters and submitted that such variance cannot afford a good basis for making a trading addition. In this behalf reliance was placed on Kerala High Court decision in the case of St. Teresa's Oil Mills v. Store of Kerala [1970] 76 ITR 365 and Andhra Pradesh High Court decision in the case of N. Raja Pullaiah v. Dy. CTO [1969] 73 ITR 224.
11. Mr. Jhanwar further submitted that the survey conducted by the Officers of Sales-tax Department does not adversely affect the book results of the assessee in Income-tax proceedings. Moreover, the penalty levied by the Sales-tax Department was later on cancelled in 1987-88. In support of such contentions the learned counsel relied upon Allahabad High Court decisions in the case of Baleshwar Flour & Oil Mills v. CST [1987] 67 STO 450 and in the case of Baijnath Prasad v. CST [1987] 67 STC 346.
12. Supporting the order of the learned CIT(A) the 1d. Departmental Representative submitted that acceptance of past or subsequent results creates no presumption of correctness of assessee's accounts in the current year. He further urged that the abnormal variance between consumption vis-a-vis production in IInd & IVth quarters as compared to other quarters was such as could not have been ignored and which afforded good basis for making the addition in question. The 1d. Departmental Representative further submitted that the issue of blank gate passes was indication of the callous performance of their duties by the Excise Department Officers and that the inspecting officers of the Electricity Boards did not make physical verification of the finished goods. It was also submitted that the subsequent conduct of the assessee in trying to make purchases outside the books and being penalised for effecting sales outside books were relevant factors. The 1d. D.R., thus, submitted that there were good reasons for making the addition in question which needs no interference.
13. After having heard the 1d. Counsels for the parties and on going through the material placed on our record and taking into account all the other facts and circumstances, relevant to the present proceedings, we are of the opinion that the addition in question is not sustainable.
14. It is not in dispute that the assessee-company is in this business for the last so many years and all along the results declared by it were accepted by the Department. In subsequent years too the results declared were accepted and no such addition was made. It is also not disputed that the assessee has been following the same system of accounting and no challenge to the system adopted by the assessee was ever given by the Department. It is also not in dispute that the assessee duly maintains the relevant accounts and submits the periodical statements, returns to the concerned authorities. It is established on record that the main item of raw material, i.e., Aluminium is supplied by Govt. agencies to the manufacturers of Conductors on allocation basis at rates below the market rates. It is not challenged that in Officer from the Excise Department is stationed at assessee's factory to keep a watch on production and the officers of the Electricity Board do visit assessee's factory quite occasionally to check the consumption of electric energy. We further find that, save the variance between consumption of units vis-a-vis production no other material defect in the maintenance of the books of account or the system of accounting, have been pointed out by the assessing authorities. With these established facts we have to consider whether the basis adopted by them for making the addition in question can be approved of as good basis and the addition of Rs. 5 lacs can be sustained.
15. Production of its finished goods by the assessee involves manufacturing process through consumption of electric energy. Electric energy is supplied to it either by the Electricity Board or the generators in the event of failure of the supply of energy by the Board. The consumption of electric energy, thus, has certain relevance and relation to the production. But the ratio between the consumption of energy consumed and production obtained would not always be uniform. The ratio is bound to differ from time to time, place to place and goods to goods. The process involved in the manufacture of the same kind of goods may also create variance between consumption of energy and production. The quality of the raw material, the constant or irregular supply of energy, the manufacturing process involving consumption of energy without giving any production, the skill and expertise of the person and similar other factors may affect the ratio between consumption of energy and production of goods. It is, therefore, difficult to maintain the same or uniform ratio between consumption of energy and production of goods. That being so, though consumption of energy is a relevant factor for knowing the quantity of the goods produced yet, for the reasons recorded above, this fact alone can hardly be a good basis for making a trading addition on the ground that where there is more consumption of energy there should be more production.
16. In the case before the Kerala High Court such a situation, as is before us, was considered and the Hon'ble High Court observed that:-
The mere fact that there was wide disparity in the consumption of electricity would not justify the rejection of the accounts without any other supporting circumstance, because such variation could be due to various factors outside the control of the assessee.
17. A similar question was addressed to themselves by Their Lordships of the Andhra Pradesh High Court. In the case of N. Raja Pullaiah (supra), the Andhra Pradesh High Court, while dealing with the case of an oil mill wherein the turnover was estimated on the basis of consumption of electricity and the results of test conducted in other mills. Their Lordships accepted the contention of the learned counsel for the petitioners to the effect that consumption of electricity by itself cannot form a reliable test for determining the yield of oil. The yield depends upon various factors, viz., the quality of the seeds, the condition of machines, the skill of the driver, the soundness of electric equipment, etc. There may be several other disturbing factors which affect the net yield of oil. The consumption of electricity itself is affected by various factors.
18. There is, therefore, sufficient support for the view that the variance between the consumption of electric energy and production of goods is not a good basis for making addition on account of suppression of production.
19. In the instant case, we find that there was undoubtedly vast variance between the consumption of energy and production of goods in different months and particularly in quarter IInd and IVth and such variance should not have gone and, in fact did not go, unnoticed. The variation noticed naturally necessitated explanation from the assessee. The explanation offered by the assessee was that in the Conductor Division the officer ask the assessee to rewind the Conductor with a view to measure the length of the wire. This process involves consumption of energy without giving proportionate production. Similarly, in the manufacture of cables and iron rods in the Rolling Division the sudden failure of energy supply necessitated the help of generator to produce energy and maintain the temperature at 700° for strandering purposes as the melted raw material, if got frozen or solidified, will require more energy for re-melting. What situation was faced by a manufacturer of Iron Wires or Rod due to cut or failure of energy supply can best be known to him. Periodical cuts in supply of energy or sudden failure in such supply are the normal features of this type of business. Therefore, unless there are cogent reasons for disbelieving the assessee, his explanation should ordinarily be believed. In the instant case it is an established fact that the production of goods was being supervised by Officers from Excise Deptt. and consumption of electric energy being checked, though occasionally, by the officers of the Electricity Boards. Unless the contrary is proved, official acts are to be presumed to have been done according to the relevant rules. There is no material on record to assume or presume that the officers of these departments had in any way colluded with the assessee. There is no evidence to indicate dereliction in the discharge of their duties. Such being the position of evidence, no adverse inference can be made against their conduct in the discharge of their official duties. The explanation offered by the assessee-company thus becomes reasonable as it fits in the nature of the manufacturing activities being carried on by it and is also not negatived by any positive evidence to the contrary.
20. The other reason adopted by the learned CIT(A) for rejecting the explanation of the assessee was that sometimes in September 1988 the assessee was caught at Police Check Post while attempting transportation of unaccounted purchases and was fined by the officers of the Commercial Taxes Department. Further, in April 1989 the assessee, in the course of search by the officers of the said department, was found in possession of incriminating documents evidencing sales out of the books.
21. Prior or subsequent conduct of a person is certainly relevant in a proceeding where the conduct of the person is a fact in issue. The evidence of exhibition of a particular type of conduct by a person in relation to the commission of an offence may afford a basis for appreciating his conduct in relation to the commission of same type of offence or default by such person at an earlier or subsequent point of time. That may show his criminal tendency, bent of mind and behavioural pattern. Prior or subsequent conduct though relevant, however, does not raise any sort of presumption against the conduct of the person concerned. Once the conduct of that person is relevant in the given proceedings, the similarity of his prior or subsequent conduct may afford a corroborative piece of evidence in such proceedings. For, it cannot be either assumed or presumed in law that if a person has committed a particular type of default or offence at particular point of time, prior or subsequent to the commission of the default or offence in question, he must or might have committed the default or offence in question also. Our law proceeds on the presumption, though rebuttable, that every one is innocent until and unless the contrary is proved. Therefore, unless some evidence to the contrary is adduced, the normal presumption should be given due weight.
22. In the instant case we find that evidence of the subsequent conduct of the assessee relied upon by the 1d. CIT(A) for sustaining the addition in question, cannot be accepted for more than one reason. Firstly, no such evidence was referred to by the AO in his order. Secondly, the 1d. CIT(A) does not appear to have given any opportunity to the assessee before using such evidence against him. Thirdly, save the variance in the consumption of electric energy and the production of goods in some months or in IInd and IVth quarter, there was no evidence adversely affecting the conduct of the assessee. Thus, the conduct of the assessee as such was not a relevant issue in the present proceedings. Fourthly, in the seized material nothing incriminating against the conduct of the assessee, relevant to present proceedings, was found. Lastly it is not disputed that action taken and penalties imposed for the alleged subsequent conduct of the assessee finally ended in favour of the assessee. The evidence of the subsequent conduct of the assessee, therefore, affords no good basis for making the addition in question.
23. To sum up, we conclude that there is no reliable material on record to hold that the assessee had made, out of books production, so as to make profit of Rs. 6,00,000. The very fact that the learned CIT(A) himself found no case of making any additional investment by the assessee in purchases which could have enabled the assessee to make excess production also and the ratio in the decisions of the cases relied upon by Mr. Jhanwar supports our conclusions to some extent. We, accordingly, delete the addition of Rs. 5 lacs.
24. (2) Disallowance Under Section 43B Deduction of a sum of Rs. 5,586 claimed on account of P. F. and F. P. F. liabilities has been refused under Section 43B on the ground that the liability remained outstanding at the end of the accounting period of the assessee.
25. The learned Departmental Representative undoubtedly supported the order of the 1d. CIT(A) on the point with the help of Delhi High Court decision in Sanghi Motors v. Union of India[1991] 187 ITR 703 and Escorts Ltd. v. Union of India [1991] 189 ITR 81, but he could not dispute that this Bench has been consistently following the decision of the Andhra Pradesh High Court in the case of Srikakollu Subba Rao v. Union of India [1988] 173 ITR 708, wherein it was held that outstanding liabilities of the nature in question should be allowed in the relevant accounting period provided such liability is found to have been discharged by actual payment as per provisions of the relevant law or, in any case, before the date of filing return under Section 139(1) (vide 14 ITD 595 (sic) and IBM. World Trade Corporation v. IAC [1986] 19 ITD 116 (Bom.)). The payment of the outstanding liabilities was made on 14-10-1985 as it is evident from the copies of challans produced.
It is not disputed that the said date fall much prior to the last date for filing return Under Section 139(1) by the assessee. Following the consistent view of this Bench, we direct that the addition be deleted.
26. (3) Addition of Rs. 5,000 in Staff Welfare A/c:
(4) Addition of Rs. 5,051 in Inspection & other Exp. A/c:
Grounds relating to both the above-mentioned points are dismissed as not pressed.
27. (5) Disallowance of Extra Shift Allowance of Rs. 37,500:
The Assessing Authorities have allowed depreciation at Rs. 5,37,529 as claimed by the assessee. No comments, for or against assessee's claim for Extra Shift allowance have been made either by the AO or the learned CIT(A) in their respective orders. Normally claim for Extra Shift allowance is to follow the allowance of depreciation. We, therefore, direct the AO to examine the claim of the assessee at the time of giving effect to this order and allow the same as per rules.
28. In the result, the appeal is partly allowed.