Patna High Court
Motipur Sugar Factory (P.) Ltd. vs Commissioner Of Income-Tax on 18 March, 1974
Equivalent citations: [1974]95ITR401(PATNA)
JUDGMENT S.N.P. Singh, J.
1. At the instance of the assessee, the Income-tax Appellate Tribunal, Patna Bench, has stated a case and made this reference under Section 66(1) of the Indian Income-tax Act, 1922, for a decision on the following question of law:
" Whether, on the facts and in the circumstances of the case, the books of account were rightly rejected under Section 13 of the Indian Income-tax Act, 1922, and the addition of Rs. 2,25,000 was rightly sustained. "
2. M/s. Motipur Sugar Factory (P.) Ltd., the assessee, owns a sugar factory in the district of Muzaffarpur. For the assessment year 1958-59, the accounting period being from the 1st of October, 1956, to the 30th of September, 1957, the assessee filed a return showing an income of Rs. 5,78,891. In the return the assessee had shown production of sugar during the relevant year in question at 8.86 per cent. The Income-tax Officer by his order dated the 31st January, 1963, made an addition of Rs. 2,25,000 to the total income mainly on the ground that the production of sugar was not correctly disclosed. The Income-tax Officer was of the opinion that the norm of yield ought to have been higher and there was something wrong in the low production shown in the return. According to the Income-tax Officer, there were two possibilities for showing low recovery of sugar during the relevant period. One of the possibilities was the suppression of production of sugar and the other possibility was the inflation of the purchases of sugarcane. He ruled out the possibility of suppression of production of sugar because of the control by the excise authorities under the Central Excise Act and Rules. He, however, inferred that illusory purchases were shown as real purchases by the assessee. He drew that inference from the. fact that the assessee had failed to produce " purchas ", which, in his opinion, would have shown genuine purchases. The Income-tax Officer also took into consideration the fact that two of the mills situated in North Bihar had shown recovery of 9.3 per cent. and 9.5 per cent. of sugar respectively. In his opinion the assessee-company had no special reasons for showing a low recovery. Accordingly he adopted a norm of 9'2 per cent. and by a little back calculation computed the figure at Rs. 2,25,000 in terms of money being the value of illusory purchases. The Appellate Assistant Commissioner agreed with the views of the Income-tax Officer and confirmed his order. When the matter came up in appeal before the Income-tax Appellate Tribunal, the Tribunal took the view that some of the purchases of sugarcane might have been transferred for the manufacture of jaggery which had got very good market and whose production and sale were not controlled by Government. With regard to the documents filed by the assessee, the Tribunal made the following observation :
" A particular sugarcane grower is directed to effect his sales to a particular mill by way of purjas which is relevant for the issue. The weighmcnt record has not been produced before us. The records, after the entering of the sugarcane into the mill area, have been produced where-from it can be co-related with the intake of sugarcane. It is impossible in view of the fact that the Income-tax Officer has commented on the manufacture of jaggery for which the raw material is also sugarcane, to have a complete check on the intake of sugarcane which is only feasible by means of purjas and weighment records. This gives the weight before loading and unloading and other allied documents, such as gate passes issued at the mill gates on the departure of the vehicles carrying the sugarcane. Furthermore, no registers have been placed before us to show after the receipt of sugarcane at the stores or at a place where they are piled before going to the production and the different processes through which it passes. No requisition record has been shown either of the requisition sent for stores register or of the consumption of sugarcane. As a result of it, it is not possible to ascertain the correct amount of purchases of sugarcane. Presumably, Sri Banerjee was under the wrong impression that because the accounts have been audited by a very reputed firm of chartered accountants, M/s. S.R. Batliboi & Co., it is not necessary to maintain the purjas."
3. The Tribunal further observed as follows :
" We have looked into the books of account and other registers, and we have come to the conclusion that the said firm of chartered accountants have not made an effective check of the accounts but have relied on the internal checking of the staff of the mills. In the course of the arguments this fact was pointed out to Sri Banerjce and some of the entries were also referred to him. In the circumstances, it is implicit that no reliance can be placed on the audited accounts of M/s. S. R. Batliboi & Co. ...............
Even if we assume that the entire cultivation of surgarcane of the area allotted to the assessee by the Government has been purchased by the miller, in the absence of quantity and the rate of consumption which it bears to the sales we are unable to give a finding that the entire purchases of sugarcane have been utilised in the manufacture of sugar. "
4. The Tribunal also took into consideration the fact that two other sugar mills of the same area had shown recovery of 9.3 per cent. and 9.5 per cent. of sugar. It appears that on behalf of the assessee reliance was placed also on the certificate given by the Alipur Test House. The Tribunal, however, rejected that certificate on the ground that there was nothing to show that the samples of syrup had been drawn at random. The Tribunal ultimately held that the addition of Rs. 2,25,000 was justified after the application of the proviso to Section 13 of the Income-tax Act.
5. Dr. Pal, learned counsel appearing for the assessee, raised the following contentions:
(1) That there was no evidence before the Tribunal to show that the sugarcane purchased by the assessee was utilised for the production of jaggery and as such the finding of the Tribunal that some of the purchases of sugarcane could have been transferred for the manufacture of jaggery is based purely on surmises and conjecture.
(2) That the principle of natural justice was violated as the Income-tax Officer and the Income-tax Appellate Tribunal relied upon the recovery of sugar by sugar mills of North Bihar without disclosing the names of those sugar mills to the assessee.
(3) That the Income-tax Officer and the Income-tax Appellate Tribunal had illegally drawn an adverse inference against the assessee from the non-production of 'parchas' which were not at all relevant documents for the purpose of showing as to what quantity of sugarcane was actually purchased by the assessee.
(4) That the Income-tax Officer and the Income-tax Appellate Tribunal have rejected the documents including account books, registers, etc., filed by the assessee arbitrarily and without assigning any cogent and valid reason.
6. Before dealing with the points raised on behalf of the assessee, I would consider as to what are the limitations on the High Court from interfering with the findings of fact recorded by the Tribunal. In Mehta Parikh & Co. v. Commissioner of Income-tax, [1956] 30 I.T.R. 181; [1956] S.C.R. 626 (S.C.) it was held by the Supreme Court that the court would be entitled to intervene if it appears that the fact-finding authority acted without any evidence or upon a view of the facts which cannot reasonably be entertained or the facts found are such that no person acting judicially and properly instructed as to the relevent law would have come to the determination in question. In Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, [1957] 31 I.T.R. 28; [1956] S.C.R. 691 (S.C.) Venkatarama Ayyar J. summed up the legal position in these words:
" It appears to us that apart from the circumstances to which we have referred justifying an interference with the findings set out in the statement of the case, what has to be considered in all those cases is whether, on the materials on record, the true and the only reasonable conclusion is the one which is contrary to that found by the Tribunal. "
7. In Omar Salay Mohamed Sait v. Commissioner of Income-tax, [1959] 37 I.T.R. 151 (S.C.) it was observed as follows:
" We are aware that the Income-tax Appellate Tribunal is a fact-finding Tribunal and if it arrives at its own conclusions of fact after due consideration of the evidence before it, this court will not interfere. It is necessary, however, that every fact for and against the assessee must have been considered with due care and the Tribunal must have given its finding in a manner which would clearly indicate what were the questions which arose for determination, what was the evidence pro and contra in regard to each one of them and what were the findings reached on the evidence on record before it. The conclusions reached by the Tribunal should not be coloured by any irrelevant considerations or matters of prejudice and if there are any circumstances which required to be explained by the assessee, the assessee should be given an opportunity of doing so. On no account whatever should the Tribunal base its findings on suspicions, conjectures or surmises nor should it act on no evidence at all or on improper rejection of material and relevant evidence or partly on evidence arid partly on suspicions, conjectures or surmises and if it does anything of the sort, its findings, even though on questions of fact, will be liable to be set aside by this court. "
8. In Commissioner of Income-tax v. S. P. Jain, [1973] 87 I.T.R. 370 (S.C.) it was held and observed as follows:
" In our view, the High Court and this court have always the jurisdiction to intervene if it appears that either the Tribunal has misunderstood the statutory language, because the proper construction of the statutory language is a matter of law, or it had arrived at a finding based on no evidence or where the finding is inconsistent with the evidence or contradictory of it, or it has acted on material partly relevant and partly irrelevant or where the Tribunal draws upon its own imagination, imports facts and circumstances not apparent from the record, or bases its conclusions on mere conjectures or surmises, or where no person acting judicially and properly instructed as to the relevant law could have come to the determination reached. In all such cases the findings arrived at are vitiated. "
9. Keeping in view the legal position which has been explained in the decisions of the Supreme Court referred to above, I now proceed to consider the contentions which have been raised on behalf of the assessee. It is an admitted position that there was absolutely no material either before the Income-tax Officer or before the Income-tax Appellate Tribunal to show that the assessee had diverted any quantity of sugarcane purchased by it for the manufacture of jaggery. The Income-tax Officer has not recorded any finding about the diversion of sugarcane purchased by the assessee for the manufacture of jaggery. He has simply observed in his order as follows :
" It is needless to say that the best pricefor sugarcane is paid only by the sugar mills and using the sugarcane in any other manner, viz., by manufacture of jaggery, etc., would only produce a very poor return compared to sale to sugar mills. "
10. The above observation made by the Income-tax Officer shows that evidently he had no suspicion about the diversion of sugarcane by the assessee for the manufacture of jaggery. The Tribunal, however, without any material before it has reached a finding that some of the purchases of sugarcane could have been transferred for the manufacture of jaggery. It is significant to note that the Tribunal has not indicated as to how it was possible for the assessee to divert the sugarcane for the manufacture of jaggery in spite of checking by the officers of the Excise Department. It is manifest that the finding of the Tribunal that some of the purchases of sugarcane could have been transferred for the manufacture of jaggery is based purely on surmises and conjectures. That finding, therefore, must be held to be bad in law and it must be ignored.
11. As I have already stated, the Income-tax Officer and the Tribunal have placed reliance upon the recovery of sugar by two sugar mills of North Bihar during the relevant period for the purpose of arriving at the finding that the recovery shown by the assessee-company was low. The names of these two sugar mills are not to be found either in the order of the Income-tax Officer or in the order of the Tribunal. The fact that the names of these two sugar mills were not disclosed to the assessee at any stage is an admitted position. It has, therefore, been rightly contended on behalf of the assessee that the principle of natural justice has been violated in so far as reliance has been placed by the Income-tax Officer and the Tribunal on the recovery of sugar during the relevant period by the two sugar mills of North Bihar. Had the names of the two mills been disclosed to the assessee, it would have been able to show the reasons for the high recovery of sugar by those two mills. In this connection Dr. Pal produced before us a copy of the judgment of the Supreme Court in the case of Oudh Sugar Mills Ltd. v. Union of India, C.A. No. 596 of 1960 (Unreported) and relied on the following observation made in that case :
" It is well-known that the sugar content of sugarcane even grown in the same area is not constant but is variable according to the time of the year. Again it has to be borne in mind that the recovery of sugar must necessarily depend upon the milling performance. It cannot be assumed that even in an ordinarily well-run factory the performance would be uniformly good or uniformly the same. "
12. The above observation made by the Supreme Court supports the contention which has been raised on behalf of the assessee that even in the same area there is bound to be difference in the rate of recovery of sugar by different mills. In my opinion, the petitioner has been substantially prejudiced as the names of the two sugar mills, on whose recovery of sugar reliance was placed by the Income-tax Officer and the Tribunal, were not disclosed to it. I, therefore, hold that the inference drawn by the Tribunal about the low recovery of sugar by the petitioner on the basis of somewhat high recovery of sugar by the other two sugar mills of North Bihar was not a valid inference and as such it is not binding on this court.
13. Now I will consider the question whether the Income-tax Officer and the Tribunal were legally justified in drawing an adverse inference against the assessee-company from the non-production of parchas. The answer to this question will depend on the answer to the question whether the parchas were relevant papers for the purpose of verification of the quantity of sugarcane actually purchased by the assessee. Requisition slips issued according to the provisions of Rule 29B(1) and (2) of the Bihar Sugar Factories Control Rules, 1938, have been loosely termed as parchas by the Income-tax Officer and the Tribunal. As provided under Rule 29B(1), the occupier or manager of a factory for which the area is reserved is forbidden to purchase sugarcane grown in the reserved area without the previous issue of requisition slips and identification cards to the cane-growers except with the permission of the Cane Commissioner. Sub-rule (2) of Rule 29B provides that the requisition slips and identification cards to the members of a cane-growers' co-operative society shall be issued by such, society. Dr. Pal produced before us the specimen copies of the requisition slips which are required to be issued for the purchase of sugarcane in accordance with the provisions of Rule 293(1) and (2). In the requisition slips there is no column for mentioning the weight of the sugarcane purchased. It was, therefore, rightly contended on behalf of the assessee that the requisition slips, which have been loosely termed as parchas by the Income-tax Officer and the Tribunal, would not have shown the actual purchase of sugarcane by the petitioner. If in the parchas the actual weight of the sugarcane is not mentioned, it is difficult to comprehend as to how the parchas would have disclosed the genuine purchases made by the assessee-company. I, accordingly, hold that both the Income-tax Officer and the Tribunal have illegally drawn an adverse inference against the assessee from the non-production of parchas, which, if produced, would not have shown the actual quantity of sugarcane purchased by the assessee. I may state here that the Tribunal has taken a contrary view regarding the relevancy of the parchas for verification of the quantity of sugarcane purchased by the assessee in its order dated the 10th of January, 1972, which was passed by it in Income-tax Appeal No. 1341-Pat. of 1969-70 in relation to the assessment year 1963-64. In paragraph 6 of the order the Tribunal has observed as follows :
"The next question is, was there any material to justify that there was any inflation in the purchase of sugarcane ? Main reliance was placed by the department on the non-production of purjas. We do not find that the purja is, in any way, the primary evidence for verification of the quantity of sugarcane purchased by the assessee. The assessee purchased the sugarcane from the growers particularly from the co-operative societies of a particular zone reserved for it. It also got sugarcane from its own farm. It is required to maintain complete accounts of the growers who sell their products to the assessee. In any way, the purja is nothing else but a slip issued to the sellers whose goods would be weighed first on the basis of the purja or the slip issued by the assessee or ihe company. Thus, the purja will not contain either any identification of the person who is going to sell the goods or the quantity of the goods he brought for sale to the company. The identity of the person and the quantity of the goods could only be known when the goods are put for weighment and record is maintained for that. As such, on the basis of the purja, a person brings the goods for weighment where the goods are weighed and complete record of weighment is maintained in a register under the columns provided mainly, the serial No., purja No., the ledger folio for the growers, the growers' name and addresses, the quantity purchased, card No., weight, etc. The weighment register was produced before us and, on verification, it was found that it was not the purja which is important for the verification of the purchases of sugarcane but it is the weighment register which contains the full particulars about the purchases including the addresses of the sellers."
14. Having disposed of the three contentions which have been raised on behalf of the assessee, I now proceed to consider the last question whether the Income-tax Officer and the Tribunal had any justification for rejecting the books of account, the registers and other documents filed by the assessee. The assessee had filed a number of documents and registers which included rough cash books, fair cash books, ledgers and journals. Under Rule 38(1) of the Bihar Sugar Factories Control Rules, 1938, the manager or purchasing agent, as the case may be, is required to maintain clear and accurate records of all purchases made. As provided in the rule, such records shall show :
" (a) the name, parentage and full address of the person from whom cane is purchased,
(b) the name, parentage and full address of the person who actually delivers the cane,
(c) the gross weight of the cane including the weight of the cart.
(d) the weight of the cart (tare)
(e) the net weight of the cane purchased,
(f) the rate at which the cane is purchased,
(g) the date of purchase.
(h) the amount of loan advanced to the person from whom the cane is purchased,
(i) the date on which the loan was advanced,
(j) the calculated price that has to be paid for the cane purchased, (jj) the deductions made under Clause (3) of Rule 31 for payment in a deferred instalment, t
(k) the amount actually paid on account of the cane purchased,
(l) the date of payment, and
(m) the deductions made on account of advances, if any. " Sub-rule (2) provides that items (a) to (g) shall be recorded at the weighment centre in the order in which carts are weighed and so far as the entry under item (c) is concerned it shall be made in the presence of the person who actually delivers the cane while the cart is still standing on the weigh-bridge and entries under items (h) to (m) shall be made at the payment centre. The assessee had filed 119 ledgers containing the particulars as laid down in Rule 38. As provided under rule 83 of the Central Excise Rules, 1944, every owner of factory producing sugar other than kandsari and palmyra sugar is required to. maintain, (a) daily account of cane received and crushed, (b) register of daily manufacture, (c) periodical and monthly manufacturing reports, (d) final manufacturing report, (e) daily drier house account, (f) sugar store account, and (g) gunny bags account in the proper and prescribed Forms. The form prescribed is R. G.-4 at page 334 of the Excise Manual. The registers, which were maintained by the assessee in Form R.G.-4 and duly verified and initialled by the officers of the excise department were also produced by the assessee before the Income-tax Officer and the Tribunal. The registers showed the actual quantity of sugarcane which entered inside the factory gate. A number of other account books maintained in accordance with the provisions of the Central Excise Rules were also produced. The assessee also produced a letter from the Central Excise authority showing that the entire manufacturing process of sugar from the weighment of cane to the bagging of sugar was subject to the supervision and checking of the Central Excise Officer posted at the factory. The case cess register as prescribed by the State Government was also produced by the assessee. It is an admitted position that the accounts of the assessee had been audited by a reputed firm of chartered accountants, M/s. S. R. Batliboi and Company. It appears from the order of the Income-tax Officer that all the registers, account books, etc., which were produced by the assessee were rejected simply on the ground that the parchas were not produced. As I have already held, parchas were not relevant documents for the purpose of showing the real purchase of sugarcane by the assessee. The observation which has been made by the Tribunal in connection with the documents filed by the assessee has been quoted in extenso. From this observation it appears that the Tribunal also rejected the account books, registers, etc., because the parchas were not produced by the assessee. The Tribunal has treated the parchas as primary evidence and the other records as subsidiary evidence. It is difficult to comprehend the reasoning of the Tribunal when actually the parchas could not be primary evidence of the fact of actual purchase of sugarcane by the assessee-company. In Income-tax Appeal No. 1341-Pat. of 1969-70, which I have referred to above, the Tribunal has relied on those very documents and registers, which were produced by the assessee in the instant case, to show the actual purchase of sugarcane. The Tribunal in that case has made the following observation : " ......a separate ledger account for each of the growers is maintained and a ledger folio is given in the weighment register. Under the circumstances, if one wants to verify the purchases of sugarcane he should rely on the weighment register and not on a slip or purja which was just in the shape of an identity slip or a card that the goods of the holder would be weighed by the company or would be purchased by the company. On examining the weighment register, we were satisfied that unless any discrepancy is found in the weighment register, it could not be said that the purchases were inflated by the company."
15. Dr. Pal in support of his contention that it was the duty of the Tribunal to examine each of the registers and account books furnished by the assessee before rejecting them referred to a decision of the Supreme Court in the case of Indore Malwa United Mills Ltd. v. State of Madhya Pradesh, [1966] 60 I.T.R. 41 (S.C.).
That decision supports the contention of Dr. Pal.
16. For the foregoing reasons, I am of the opinion that, on the facts and in the circumstances of the case, the books of accounts were not rightly rejected under Section 13 of the Indian Income-tax Act, 1922, and the addition of Rs. 2,25,000 was not rightly sustained by the Tribunal. Accordingly, I answer the question in the negative.
17. The reference is accordingly answered in favour of the assessee and against the revenue. The assessee is entitled to the costs of this reference. Hearing fee is assessed at Rs. 200.
S.K. Jha, J.
18. I agree.