Income Tax Appellate Tribunal - Amritsar
Shakti Rice & General Mills vs Income Tax Officer on 16 February, 1998
ORDER
G.L. Garoo, A.M.
1. The appellant has filed appeal against the order passed by the CIT(A) vide A. No. CIT(A)/IT/BTI/1981/1990-91 dt. 18th April, 1991, and taken various grounds in appeal which are reproduced below :
"1. That the learned CIT(A) has erred on facts and law in upholding the applicability of proviso to s. 145(1).
2. That the learned CIT(A) has erred on facts and law in applying the yield of rice P.R. No. 106 at 65.66 per cent.
3. That the learned CIT(A) has erred on facts and law in applying the yield of rice bran @ 5 per cent.
4. That the learned CIT(A) has erred on facts and law in upholding the addition of Rs. 14,100 on account of alleged unexplained cash credit.
Or any other ground which may be taken at the time of hearing of appeal."
2. The first ground deals with application of s. 145(1) of the IT Act. The learned counsel of the appellant has pleaded that the appellant is maintaining books of accounts and no defect whatsoever has been pointed out either by the AO or by the CIT(A) which will justify the application of s. 145(1) of the IT Act. The learned counsel has also submitted that the appellant is maintaining proper records of sale and purchase and stock register is maintained as prescribed by the District Food & Supplies Department of Punjab Government.
3. The learned Departmental Representative relied on the order passed by the authorities below.
4. The AO has listed all defects at p. 3 of his order and these defects are as follows :
"(i) On 24th December, 1988, 800 quintals of IR. 8 paddy has been milled and 536 Qtls. of rice is obtained. It is not possible for a shelter of 1-1/2 tone capacity per hour to do so much milling in one day.
(ii) Again on 1st February, 1989, it is seen that 864 quintals of paddy is milled and 617.75 quintals rice is obtained giving yield of 71.49 per cent. The yield is abnormally high. Also the production shown is much higher looking to the capacity of the machine.
(iii) In PR. 106 paddy milling it is seen that in the milling register that on all the dates in October, November, December, 1988 and March, 1989 and April, 1989 daily yield of rice obtained is precisely shown at 65 per cent without variation which is not possible as the yield cannot be precisely the same on the dates and the same varies with the moisture content of paddy and is different for different types of paddy purchased on different dates and from different stations. So the figures adopted on the above dates in the milling registers are not actual figures but apparently by table computations.
(iv) No record of actual weighment of paddy and rice is stated to be maintained."
5. The CIT(A) has further observed that the appellant has not kept record for weighment of paddy or rice obtained and the yield has been reflected in the stock register on estimating basis.
6. It is quite clear from the arguments of the learned counsel as well as facts mentioned below that day-to-day stock register and consumption register is not maintained by the appellant in proper manner as no record of actual weighment of paddy and rice in maintained with respect of the yield. The proper maintenance of stock register is relevant factor regarding acceptability of the book results. The principle has been settled by the Hon'ble Supreme Court in the case of Chhabildas Tribhuvandas Shah & Ors. vs. CIT (1966) 59 ITR 733 (SC). Not only stock register is to be maintained but qualitatively as well as quantitatively stock tally of the manufacturing account has to be maintained otherwise non-maintenance will become a valid ground for rejection of book results. The issue has been settled by the Hon'ble Supreme Court in the case of S.N. Namasivayam Chettiar vs. CIT (1960) 38 ITR 579 (SC). The jurisdictional High Court has followed the same principle in Punjab Trading Co. Ltd. vs. CIT (1964) 53 ITR 335 (Punj). It is not the maintenance of register but the net result of the maintenance of the stock register which is relevant feature for making proper analysis regarding the proper maintenance of stock register.
7. One of the main purpose for maintenance of stock register is to analyse the yield from raw material to finished goods as well as accountability of bye-products, accountability of yield and reasonableness of wastage, shortage and the disposal of bye-products and finished goods both in terms of quantity as well as in terms of quality. The Hon'ble Calcutta High Court in the case of Howrah Trading Co. (P) Ltd. vs. CIT (1968) 67 ITR 582 (Cal) has held that the appellant should not only maintain day-to-day manufacturing or production account but should also be in a position to furnish a tally of raw material and stores issued with that of matching entries regarding production of finished goods as well as other bye-products. In Punjab Trading Co. (supra) low yield shown as compared to other cases, is one of the relevant situation for invoking proviso to s. 145(1) of the IT Act. The Hon'ble Orissa High Court in the case of Orissa Fisheries Development Corpn. Ltd. vs. CIT (1978) 111 ITR 923 (Ori) has held that where there is no record or faulty and defective maintenance of stock record regarding details of wastage, shortage, shrinkage and other defects, the AO will be justified in invoking s. 145(1) of the IT Act.
8. The yield becomes also relevant for arriving at correct profit because one has to accept whether there is possibility of creating the sale outside the books of accounts by tampering with the yield of finished goods out of manufacturing process from raw material. One may maintain stock register in most perfect manner but at the same time it is easy to tamper with the yield from raw material used in the manufacturing process. Of course, there has to be a scientific base for arriving at more rationale and scientific yield. Often, it has been observed that this rationale is not being followed by the authorities below. We are of the opinion that it is the duty of the Department to be equipped with a data and information regarding yield of finished goods from the raw material and the data should be analysed by an expert in the line which is under process of manufacturing. It should not be left to the persons who are neither expert nor have any knowledge in that field. The AO is within his right to make an investigation as well as inquiry if the end result of finished goods and bye-products are not in accordance with the normal conditions prevailing in a particular trade. It is for the appellant to produce valid, authentic and documented evidence to justify the reasons for deviation of end results in the manufacturing process. In case the explanation submitted by the appellant is not satisfactory or is devoid of documentary and other evidence, the AO should support his finding by an opinion or the report of an expert. Under these circumstances, the AO can make a specific addition evaluating the unexplained portion of low yield and excess wastage and shortage. In case, he is also rejecting trading accounts results by application of G.P. rate such additions should be taken part of the trading addition on account of application of G.P. rate or net profit rate. Keeping in view the above discussion, we are of the opinion that the authorities below were justified in invoking s. 145(1) of the IT Act.
8.1. In the second ground taken by the learned counsel of the appellant he has objected the application of yield percentage on PR.106 paddy at 65.66 per cent. The AO has observed that the appellant has shown yield at 65 per cent whereas in similar other cases the yield is shown at 67 per cent, regarding milling of PR 106 paddy. The AO has observed that FCI is recovering 68 per cent from paddy PR 106 but for the Districts of Amritsar, Bhatinda, Faridkot, Jalandhar, Kapurthala, Ludhiana and Sangrur, recovery of rice from PR 106 is fixed at 67 per cent. He has mentioned that in case of M/s Milkhi Ram Yash Pal Mukatsar, yield of rice from paddy PR.106 is shown at 67.72 per cent and in case of Rukmani Rice Mills, Malout, yield of rice is shown at 69.25 per cent. Accordingly he worked the yield from paddy and observed that the appellant has shown 614.23 quintals less than the normal rate of yield in this line. Valuing the rate of rice Rs. 350 per quintal he made an addition of Rs. 2,14,980 reflecting the sale from unexplained yield. Aggrieved against the order of the AO the appellant filed appeal before the CIT(A). The CIT(A) has given finding which is as follows :
"I have given due consideration to the arguments of the learned counsel and I find that AO while applying the yield rate had not taken into consideration the driage at 2 per cent, the net yield of PR-106 works out to 65.66 per cent and that of IR-8 to 67.62 per cent. These yield rates have been applied in the case of other millers of Bhatinda Range. The plea of the learned counsel that driage may be allowed at 3 per cent is not acceptable since no record of moisture and shortage due to driage has been kept in the stock register. In respect of IR-8 the assessee milled 3,864 Qtls. of paddy and since he has himself shown the yield of 68 per cent no addition is called for. Regarding PR-106, the AO has mentioned that assessee has milled 28,821 Qtls. of paddy whereas it was argued at the appeal stage that actual paddy milled was only 27,621 Qtls. as against purchase of 28,821 Qtls. The details of account were examined and the plea of the learned counsel being correct is accepted. The difference has arisen due to closing stock which was not reduced from the paddy purchased. The assessee has shown the yield at 65 per cent which is low as discussed above and by applying yield at 65 per cent the yield shown pass on the milling of 27,621 Qtls. of paddy would work out to 182 Qtls. Its value at Rs. 350 per Qtl. comes to Rs. 63,700. The addition is, accordingly, confirmed to the tune of Rs. 63,700 and the appellant would get relief of Rs. 1,51,230."
9. The learned counsel of the appellant has submitted that they are maintaining proper stock register which is signed and authenticated by the District Food and Supplies Department. The learned counsel has submitted that the appellant is purchasing paddy from open market and levy is fixed by District Food & Supplies Deptt. at 64.45 per cent. The appellant has to supply 40 per cent of the levy to the District Food & Supplies Department. The learned counsel pleaded that FCI is purchasing paddy from the market and they are purchasing best of the paddy where yield is more as compared to the yield made by the private parties from open market. The learned counsel has also submitted that the paddy purchased by the general commission agents and businessmen is having more moisture containment than the paddy purchased by the FCI. He has pleaded that allowance of 3 per cent driage should have been allowed for working out the yield. The learned counsel of the appellant has drawn our attention to the decision of the Tribunal in the case of Ashoka Rice Mills whereby yield of 65.45 per cent has been held as reasonable regarding PR-106. The learned counsel of the appellant has also drawn our attention to the decision of M/s R.K. Vishal Rice & General Mills, decided by the Tribunal, Amritsar Bench, in ITA No. 889/ASR/1989. The Tribunal has held yield of 64.45 per cent as reasonable in PR-106 relying on the decision of M/s Ashok Rice Mills, decided by the Tribunal, Amritsar Bench in ITA No. 105/ASR/1990, for the asst. yr. 1988-89.
10. We have perused the order of the learned Tribunal and the finding of the Tribunal is reproduced as follows :
"His reasoning, inter alia, being that for Faridkot, District yield of rice PR 106 has been fixed at 67 per cent by FCI. He upheld application of s. 145(1) or the order-proviso. In para 2.3 of the impugned order, he observes that yield of rice in respect of PR 106 varies between 60 per cent to 66.66 per cent. In nut-shell both the learned lower authorities have applied estimates. In view of the estimate of the learned lower authorities and additionally in the absence of serious infirmity in the books of accounts of the assessee, we will hold that yield in respect of PR 106 shall be adopted at 65.5 per cent. The additional shall be worked out on the above basis. The net result in that assessee's appeal stand allowed partly in the above terms while the Revenue fails in its appeal."
11. It is quite clear that factual position was not before the Tribunal and therefore, present case is quite distinguishable as compared to the case cited by the learned counsel. The learned counsel has also relied on the decision of the Tribunal for the asst. yr. 1986-87 in the case of ITO vs. M/s Mahavir Rice & General Mills, Phagwara. In the said appeal, in para 2 of the order, Tribunal has observed that in respect of paddy belonging to Market Federation yield of PR-106 is shown at 67 per cent. However, the Tribunal has relied on the Department's action in accepting the yield of 64.45 per cent in subsequent years. The learned counsel has also relied on the decision of the Tribunal in the case of M/s Saraswati Rice Mills, Bhawanigarh vs. ITO in ITA No. 1489/Chd/1989 for the asst. yr. 1988-89. In this order, the learned Tribunal has not discussed the variety of paddy for which percentage of yield is under discussion.
12. In the present case not only the AO has mentioned comparable cases but also the CIT(A) has based his finding on the report of an expert. The FCI is a Government body and under prevailing conditions, it is difficult to accept that the Government undertaking is purchasing better quality of paddy as compared to the private parties. The arguments of the learned counsel will not become an opinion of an expert that the District Food & Supplies Department is fixing levy of 64.45 per cent on the purchase of paddy. Out of paddy purchase the district authorities make procurement of 40 per cent of purchases of rice and for that they have fixed 64.45 per cent as yield percentage. The position of FCI is on more sound basis and there is more logical business propriety involved in the yield fixed by the FCI. The FCI gets paddy milled from the rice miller. Against the supply of the paddy, FCI has fixed supply of rice at 67.67 per cent. The FCI allows driage at 2 per cent of the net yield. The miller has to supply to the FCI finished rice which works out at 65.66 per cent. The learned counsel has not explained any evidence with the documentation to justify as to why the yield is lower than the yield fixed by the FCI. The FCI has fixed procurement rate 65.66 per cent after detailed investigation and reports from agricultural and engineering experts. This yield percentage is also discussed with various trade bodies and association and approved by the governing body of FCI. The FCI has to be very careful regarding the fixation of yield because they supply paddy to the miller who has to return the milled rice. Therefore, the yield rate fixed by the FCI is more scientific and near perfect. The CIT(A) has applied the rate fixed by the FCI and the learned counsel has failed to produce cogent evidence to support his rate of yield. The case of Ashoka Rice Mills (supra) has not discussed the opinion of expert and neutral case.
13. We are in agreement with the finding of the CIT(A) who has given a deduction of 2 per cent driage as is being done by the FCI. There is no evidence whatsoever is on the record to support the argument that the appellant that they purchased either inferior paddy or there was more moistured paddy as compared to the moisture available in the paddy purchased by the FCI. We, therefore, decline to interfere in the order of the CIT(A).
14. The third ground of appeal relates to low yield in rice-bran. The learned counsel of the appellant has not pressed ground No. 3. The same is accordingly dismissed.
15. The fourth ground of appeal relates to upholding the addition of Rs. 14,100 on account of alleged unexplained cash credit by the CIT(A). The AO has observed that the appellant introduced cash credit in the name of Shri Vijay Kumar, Accountant, amounting to Rs. 14,100. He has observed that Shri Vijay Kumar was engaged at a salary of Rs. 1,500 p.m. thus drawing salary of Rs. 18,000 per annum. He has observed that the creditor has not withdrawn any amount from his salary account for the period 1st April, 1988 to 4th January, 1989 as stated in the recorded statement of Shri Vijay Kumar. He disbelieved the creditworthiness of Shri Vijay Kumar and made an addition accordingly, as income from undisclosed sources. Aggrieved against the order of the AO the appellant filed appeal before the CIT(A).
16. The CIT(A) has observed that the alleged savings of Shri Vijay Kumar which have been shown as balance cannot be explained because in the immediate preceding year he withdrew Rs. 15,100 for his domestic expenditure and it is not believable that he did not withdraw any amount from 1st April, 1988, to 4th January, 1989. The learned counsel has submitted that Shri Vijay Kumar is an employee of the appellant. During the year under consideration, he has drawn the salary which is being credited in his copy of account. He has submitted that the AO has no objection regarding the fact that he is an employee and drawing salary of Rs. 1,500. The learned counsel has pleaded that out of salary he deposited Rs. 14,100 in his deposit account. The learned counsel has submitted that not only the identification of the creditor is established but the very source of creditor is accepted by the AO. We are, therefore, of the opinion that there was no justification in conforming the addition. It is a matter of record that Shri Vijay Kumar is an employee, and his salary has been accepted. The statement of Shri Vijay Kumar was recorded and he has pleaded that he was living with his brother who is also running a Karyana Shop and as such he did not withdraw salary from 1st April, 1988, to 4th January, 1989. The appellant not only identified Shri Vijay Kumar, his source of salary is admitted and accepted and the money has come from the ledger account of Shri Vijay Kumar. We do not find any justification in making addition, regarding cash credit in the name of Shri Vijay Kumar. The addition stands deleted.
17. In the result the appeal is partly allowed.