Income Tax Appellate Tribunal - Pune
Mayur Trading Co. vs Income-Tax Officer on 16 January, 1991
Equivalent citations: [1991]39ITD49(PUNE)
ORDER
--Claim for shortage Ratio:
Assessment order accepting excessive claim for shortage as compared to preceding year without making specific enquiry in this regard but merely relied on assessee's own statement, was erroneous and prejudicial.
Held:
The shortage claimed is remarkably higher in the year and there is no way of ascertaining the correct shortage apart from assessee's own statement. The assessee has emphasised that books have been regularly maintained and they should be accepted but that amounts to nothing more than stating that what he says must be accepted without any independent proof. The books are the assessee's own books and they are no more and no less than the assessee's own statement. The Income Tax Officer's order and the question which he has put to the assessee under section 143(2) do not show that a specific enquiry regarding steep rise in the shortage claimed had been made by the Income Tax Officer. Therefore, a direction under section 263 to make enquiries would be justified.
Application:
Also to current assessment years.
Income Tax Act 1961 s.263 ORDER K.R. Dixit, Judicial Member
1. These appeals arise out of an order under Section 263 raising two issues viz. (1) in what circumstances can the assessee's books be rejected by an order passed under Section 145(2), and (2) if such an order is passed on what basis can an addition be made.
2. Briefly, the assessee's business consists in buying inter alia raw turmeric, getting it processed and then selling it. In getting it processed the assessee sends it to a mill. No record is maintained regarding weight of the turmeric which is sent but processing charges are paid according to the net weight of the turmeric after the processing. Between the weight of the turmeric sent for processing and the weight received after the processing there is a shortfall by way of wastage. The entire dispute centres around this wastage. The assessee has claimed wastage of 9% and 7.3% respectively for the two years which the ITO allowed. However, according to the Commissioner since the shortage claimed for assessment year 1984-85 and immediately preceding year is 1984-85 was only 5% and considering the shortage in other cases, the assessee's claim was excessive this year. He therefore calculated the value of the difference for these two years at Rs. 3,68,000 and Rs. 2,86,230 respectively. Thus the ITO's order therefore was erroneous and prejudicial to the interests of revenue. He invited the assessee's objection, considered it and ultimately passed the following order:
In the present case, I find that the assessee does not maintain the books of accounts properly inasmuch as there is no corroborating evidence of the turmeric sent for powdering and polishing to the mills. There is no check on the closing stock of the assessee in the form of physical verification by the Auditors and due to these two defects the books of accounts of the assessee are defective and as stated in the Sub-section (2) of Section 145 of the IT Act, 1961, the correctness or the completeness of the assessee is in doubt. Accordingly, the impugned assessment orders passed by the ITO are considered to be erroneous in so far as they are prejudicial to the interest of the revenue and in terms of Section 263(1) of the Income Tax Act, 1961, these two impugned assessment orders are set aside and the ITO is directed to complete the assessments as per the provisions of Section 145(2) after giving proper opportunity to the assessee.
3. At the time of hearing Shri Sathe, learned counsel for the assessee, submitted that the higher shortage this year was mainly because most of the purchases by the assessee were from Nizamabad where the raw turmeric available was of inferior quality. He pointed out that the Commissioner had not questioned gross profit shown by the assessee and therefore the shortage shown by the assessee could not be rejected. He submitted that there was nothing sacrosanct about the 5% shortage on which the Commissioner had based his order since the turmeric was an agricultural product and shortage depended upon the quality and factors like moisture in the air, extraneous material like dust or mud stuck to it at the time of purchase. He showed as samples of turmeric in its raw form at two stages. He pointed out that the ITO had not failed to make necessary enquiries and so there was no justification for an order under Section 263, relying upon the decision of the Madhya Pradesh High Court in the case of CIT v. Ratlam Coal Ash Co. [1988] 171 ITR 141 : [1987] 34 Taxman 443. For this he pointed out the following paragraph from the ITO's order:
All the trading accounts are fully supported by qualitative stock details and both the sales as well as purchases are fully supported. On going through the books of accounts, as well as other details filed, total income of the firm is computed as under:
Business income: Net profit as per Rs.
P&LA/c 1,27,662
Add (i) 1/3rd scooter expenses including depreciation Rs. 695
(ii) Depreciation on scooter debited to P&L A/c Rs. 273
(iii) Balance Sheet difference Rs. 98
(iv) Out of telephone misc. and other expenses
of personal and unverifiable nature Rs. 1,786 2,852
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1,30,514
Less : Depreciation as per statement 514
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Total income : 1,30,000
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According to him since the ITO was according to the facts and law, order under Section 263 was not justified relying upon the decision of the Madhya Pradesh High Court in the case of CTT v. Shri Govindram Seksariya Charity Trust [1987] 166 ITR 580. According to him this showed that the ITO had taken into account the amount of shortage claimed by the assessee. He submitted that accounts up to 1984-85 had been accepted and there was no action by the Commissioner under Section 263. Lower yield this year was no ground for action under Section 263 relying upon the decisions in B.F. Verghese (No. 2) v. State of Kerala [1969] 72 ITR 726 (Ker.) and International Forest Co. v. CTT [1975] 101 ITR 721 (JK). He particularly criticised the expression of doubt by the Commissioner in the above quotation from his order and submitted that for exercise of powers under Section 263 the Commissioner had to give definite finding regarding the defect and mere expression of doubt was not sufficient for drawing a conclusion which the Commissioner had done. He also filed Commissioner's appellate order in the case of one Kabra Co., where the deficit of 6% had been accepted. He emphasised that the burden of showing that the accounts were defective was on the department relying upon the decision of the Kerala High Court in the case of St. Teresa's Oil Mills v. State of Kerala [1970] 76 ITR 365. He relied upon ITO v. Arun Oil Industries [1985] 13 ITD 769 (Jp.) and submitted that without evidence of manipulation of yield, there was no justification for rejection of books. He further submitted that the Commissioner's order was so broadly worded that it effected the assessee's book results regarding other commodities in which the assessee was dealing. He submitted that the Commissioner's observation regarding the auditor's note showing that they had not physically verified the closing stock so as to lead him to the conclusion that the accounts were not satisfactory because they were of a routine nature and also that the auditors were appointed after the last date of the accounting period i.e. 31st March.
4. The learned Departmental Representative made two submissions. First on the ground whether the Commissioner of Income-tax was justified in passing his order and second whether the deduction given by him left no option to the ITO to make addition as mentioned by him. He took up the second part of the submission, first stating that Commissioner had specifically mentioned in his direction that the assessee should be given an opportunity of being heard which meant that the assessee could lead independent evidence and make his submission thereon so that the ITO would arrive at independent decision regarding the additions. He submitted that the very expression of doubt by the Commissioner had to be read in this context and showed that the Commissioner wanted the ITO to make proper enquiries which gave ITO an option regarding the additions to be made, if any. He also stated that the contents of the order clearly show that there was no wholesale rejection of the books so as to cover the other commodities apart from turmeric.
5. On merits he first of all submitted that since the shortage was large this year compared to shortage in earlier years the Commissioner was justified in passing the order. He referred to the evidence of shortage in other cases produced by the assessee's advocate and submitted that evidence was of no value when the evidence in the case of this very assessee was available for the earlier years relying on Omaro Industrial Corporation (P.) Ltd. v. ITO [1990] 35 ITD 42 (All.). He staled that the revisional order was justified if the ITO' s order was passed without making proper enquiries relying upon the following decisions :
Seth Satya Paul Virmani v. CIT [1955] 27 ITR 109 (Punj.);
Addl. CIT v. Mukur Corporation [1978] 111 ITR 312 (Guj.);
Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi); and Smt. Tar a Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC).
He referred to the ITO's order and the enquiries which had been made under Section 143(2) which according to him showed that there was no specific question regarding the higher shortage this year. According to him over the past several years the shortage did not exceed 5%. It was standardised and so the sudden steep rise in these two years justified the Commissioner's order. He pointed out that the assessee had done nothing to show before the Commissioner that the purchases for these two years were from Nizamabad and so were of inferior quality. According to him the fact that gross profit had not been disturbed by the Commissioner made no difference to the question of shortage. He pointed out that in this case since the goods were not weighed before processing. The assessee's method of accounting was such that the shortage and consequently the income could not be ascertained and so action under Section 145(2) was justified relying upon the following decisions :
CIT v. McMillan & Co. [1958] 33 ITR 182 (SC);
S.N. Namasivayam Chettiar v. CIT [1960] 38 ITR 579 (SC) ;
Kishinchand Chellaram v. CIT [1978] 114 ITR 671 (Bom.)(App.); and Punjab Trading Co. Ltd v. CIT [1964] 53 ITR 335 (Punj.).
He submitted that the auditors had pointed out that they were not present for physical verification of closing stock which according to him suggested that if they would have been present they would not have accepted the stock position as certified by one of the partners.
6. The assessee's counsel began his rejoinder by stating that the arguments of the learned Departmental Representative regarding steep rise in the shortage in these two years were like expressing surprise at abnormal rainfall in a particular year. Just as rainfall was a natural phenomenon so were the factors such as moisture, dust, lower quality in the turmeric which were natural factors. He reiterated his earlier arguments and emphasised that the CIT's order was so clear that the ITO was bound to make the additions mentioned in the Commissioner's order which in fact had been made in the consequential order by the ITO. At one stage the learned Departmental Representative had attempted to make a general submission that in this kind of trade the shortage of 7% to 9% was abnormal relying on general information but Shri Sathe submitted that the Commissioner's order could not be supported by any reason other than those stated by him relying on CIT v. Jagadhri Electric Supply & Industrial Co. [1983] 140 ITR 490 (Punj. & Har.).
7. We began this order by stating the above issues in these appeals. On the first issue our decision is that the rejection of books in this case is justified. The proposition put forward by the assessee's counsel regarding this issue are correct but they relate to isolated factors and not a combination of factors. Thus, while it is true that the accounts cannot be rejected just because there is a lower yield or out-turn this year as compared to earlier years or when there is no evidence of their manipulation and when the accounts have been regularly maintained rejection cannot be done light heartedly. But that is not the situation here. Here there is a combination of factors. One is that the shortage claimed is remarkably higher in the years before us and the other is that there is no way of ascertaining the correct shortage apart from assessee's own statement. The assessee has emphasised that books have been regularly maintained and they should be accepted but that amounts to nothing more than stating that what he says must be accepted without any independent proof. The books cannot state anything more than what the assessee says and the assessee cannot say anything more than what the books show. The books are the assessee's own books and they are no more and no less than the assessee's own statement. It is a fact in this case that the goods were given to the mill for processing without any weight and the only thing that is known is weight of the goods after processing. The only way in which the shortage can be ascertained is to deduct the weight of the processed goods from the weight of the goods sent for processing when the latter quantity is not available the only method of knowing the shortage is denied to an independent enquiry. What then is to be done? This particular glaring defect coupled with the remarkable rise in the shortage claimed in one year at 2% and in other at 4% does put a person on enquiry as to how and why this has occurred and whether such a claim of shortage is justified. The learned counsel has criticised the Commissioner's order stating that the Commissioner has proceeded on the basis as if 5% shortage was fixed but that is not correct. The assessee's counsel has given a chart showing turnover and shortage percentage. It shows small percentage of 2.27 and 2.7% for 1976-77 and a 5.53% for the immediately preceding assessment year 1984-85. Therefore in taking 5% shortage as reasonable the CIT has already allowed a large amount of variation. Not only that he has not interfered when the shortage was 5.53% as rightly pointed out by the learned Departmental Representative. The learned counsel has tried to co-relate the turnover with the shortage by submitting that if the turnover is large the shortage will also be larger. But that cannot be accepted because shortage is expressed in terms of percentage. Therefore it cannot be said that the rejection of the books has been done light heartedly. The emphasis on the presumption as to the correctness of the books by the assessee's advocate and the burden on the TO to show the defect, is carried too far because the above combination of factors is in our view, sufficient to reject the books and make an enquiry. Further, the ITO's order and the question which he has put to the assessee under Section 143(2) do not show that a specific enquiry regarding steep rise in the shortage claimed had been made by the ITO. Therefore a direction under Section 263 to make enquiries would be justified. The ITO may be aware of the law and the fact but he could still make mistake and in this case his order and his enquiries show that the relevant queries have not been made by him. The learned counsel has merely emphasised that the gross profit has not been disturbed by the Commissioner. But many factors go into the making of gross profit and shortages is not the only factor. Therefore the fact that gross profit has not been disturbed docs not lead to a necessary conclusion that shortage must be accepted as it was claimed. Further, if the shortage claimed by the assessee is not accepted ultimately the gross profit also may change. But the fact that the ultimate result has not been altered does not mean that the revenue is bound to accept the shortage. The fact that the ultimate conclusion has not been drawn or step has not been taken in the form of alteration of the gross profit does not mean that the intermediate step of questioning and altering the shortage percentage cannot be taken. The learned counsel's criticism of the Commissioner's observation regarding the auditor's note is justified but even accepting that or above conclusion regarding justification for a direction for enquiry under Section 263 would still remain for the above reasons.
8. However, we do find that the Commissioner's order goes too far and is too specific regarding the additions to be made. As stated above there is justification for an enquiry but that justification goes so far only as enquiry. The assessee's counsel has expressed the apprehension that it leaves no option to the ITO regarding the additions to be made and we find that there is some justification for this apprehension. The learned counsel has stated that since the Commissioner has expressed a doubt the order under Section 263 could not be passed but that very expression of doubt can mean, as rightly contended by the learned Departmental Representative, that the direction regarding the amount of additions to be made was not definite. But with all that doubt the other parts of the above Commissioner's order show certain imperative directions to the ITO which, in our view, is incorrect. The assessee should have an opportunity to show to the ITO that the shortage claimed was justified and the ITO may then allow such reasonable shortage after considering the evidence and the submissions of the assessee. The fact that the earlier shortage was lower does not mean that the considerably higher shortage in any circumstances should be accepted this year. Exceptional circumstances can lead to exceptional reasons. Everything depends upon the facts and the available evidence put forward before the ITO. The Commissioner's order should be read subject to the above modification. The Commissioner has not given any direction regarding the shortage in other commodities and his order does not affect the accounts regarding those commodities.
9. In the result, the appeals are partly allowed.