Ita/194/1999 Of M/S S.v.auto Industries v. Commissioner Of Income Tax

ITA No.194 of 1999 IN THE HIGH COURT FOR THE STATES OF PUNJAB ANDHARYANA AT CHANDIGARH ITA No.194 of 1999Date of decision: February 21, 2014. M/s S.V. Auto Industries, Phagwara Appellant Vi Commissioner of Income Tax, Jalandhar and another Respondents CORAM:HON'BLE MR. JUSTICERAJIVE BHALLAHON'BLE MR. JUSTICE DR. BHARAT BHUSHAN PARSOON Argued by: Shri Akshay Bhan, Advocate, for the appellantShri Vivek Sethi, Advocate for therespondentsShri Vivek Sethi, Advocate for therespondents .J. Dr. Bharat Bhushan Parsoon The challenge in this appeal filed under Section 260-A ofthe Income Tax Act, 1961 by the assessee is to the order dated30.8.1999 (Annexure P-3) passed by the Income Tax AppellateTribunal, Amritsar Bench, Amritsar in ITA No.749(ASR)/93-94pertaining to the assessment year 1990-91 The appellant-assessee has sought consideration of thisCourt on the following substantial questions of law:- (i) Whether in the facts and circumstances of the case, theorders Annexures P-I and P-3 are legally sustainable?orders Annexures P-I and P-3 are legally sustainable? (ii) Whether in the facts and circumstances of the case, theconfirmation of the additions made on account of excesswastage even though, no discrepancy or defect was presentin the Books of Accounts of the assessee-appellant, islegally sustainable?confirmation of the additions made on account of excesswastage even though, no discrepancy or defect was presentin the Books of Accounts of the assessee-appellant, islegally sustainable? (iii) Whether in the facts and circumstances of the case, theconfirmation of the addition made on account of excessivewastage with there being no material and cogent evidenceon record and the same being based on presumptions andconfirmation of the addition made on account of excessivewastage with there being no material and cogent evidenceon record and the same being based on presumptions and conjectures, is legally sustainable? (iv) Whether in the facts and circumstances of the case, theconfirmation of the addition made on account of excesswastage by Appellate Tribunal is legally sustainablewithout taking recourse to proviso to Section 145(1) of theIncome Tax Act, 1961?confirmation of the addition made on account of excesswastage by Appellate Tribunal is legally sustainablewithout taking recourse to proviso to Section 145(1) of theIncome Tax Act, 1961? (v) Whether in the facts and circumstances of the case, therespondents were legallyjustified in making an addition onaccount of excess wastage on mere surmises without therebeing any evidence on record to support the same?respondents were legallyjustified in making an addition onaccount of excess wastage on mere surmises without therebeing any evidence on record to support the same? A perusal of these questions reveals that that these areneither happily worded nor are terse and telling. In fact, the realcontroversy 1s as to whether without rejection of books and accounts,the results arrived at by the assessee based on his books can beignored? It 1s in this light that the entire dispute 1s being discussed. Finalizing assessment for the assessment year 1990-91, asum of Rs.1,22,547/- was added in the income of the assessee, amanufacturer of pins and steel bars, interalia on account of excessivewastage shown by the assessee. It was vide order dated 9.10.1991(Annexure P-1) of the Assessing Officer. Additions made on manyother counts being not relevant, are not being discussed, In appeal preferred by the assessee, this addition madeby the Assessing Officer was deleted, though additions on some othercounts made by the Assessing Officer were upheld by Commissionerof Income Tax (Appeals), Jalandhar. It was vide order dated19.4.1993 (Annexure P-2). Finalizing assessment for the assessment year 1990-91, asum of Rs.1,22,547/- was added in the income of the assessee, amanufacturer of pins and steel bars, interalia on account of excessivewastage shown by the assessee. It was vide order dated 9.10.1991(Annexure P-1) of the Assessing Officer. Additions made on manyother counts being not relevant, are not being discussed, In appeal preferred by the assessee, this addition madeby the Assessing Officer was deleted, though additions on some othercounts made by the Assessing Officer were upheld by Commissionerof Income Tax (Appeals), Jalandhar. It was vide order dated19.4.1993 (Annexure P-2). Inter-alia against this order of deletion, the Departmentwent in appeal before the Income Tax Appellate Tribunal. However,no appeal was preferred by the assessee regarding upholding ofcertain other additions which had been ordered against it, by CIT(Appeals). Upholding the order of the Assessing Officer to someextent regarding addition to the income of the assessee qua excessivewastage, the Appellate Tribunal allowed wastage @ 2% instead ofwastage @ 2.7% claimed by the assessee. Claim of the assessee 1sthat when wastage had been arrived at in conformity with the entriesin the stock register and the books of accounts, there was noparameter with the Tribunal to quantify wastage @ 2% instead of2.7% claimed by the assessee on the fact based situation. We have heard counsel for the parties while perusing thepaper book, It is urged by the assessee that wastage depends on manyvariables and quantum of wastage cannot be the same every time. Itis claimed that the stock register kept in regular course of businessand in the due discharge of their duties by the officials maintainingthe same, shows production as also wastage, which 1s accordinglyquantified on day to day basis and is meticulously recorded in thestock register as well. In short, it 1s claimed that the wastage hasbeen quantified on the basis of actual production and actual wastagetaken into account on day to day basis. Plea of the revenue on the other hand 1s that the Tribunalhaving found large scale variation as compared to the previous yearsin output of wastage, had taken the average figure of 2%, rejectingthe claim of the assessee of wastage at 2.7%. It may be noticed that in the manufacture of pins andsteel bars, MS rounds are converted into bright bars by application ofthe prescribed manutacturing process. These bars thereafter are cutinto pieces according to the size required of the bars by the assessee. In this process, some wastage and scrap emerges as a natural processand this scrap is sold by the assessee at much lower a price. Prices ofthe steel bars and of the scrap considerably vary. Concededly, books of accounts including stock registermaintained by the assessee in the course of manutacturing processand business operations, have neither been doubted in theircorrectness nor have been questioned much less rejected underSection 145 of the Act. Once the books of accounts have not beendoubted in their correctness and much less are rejected, there 1sabsolutely no explanation coming forth from the revenue as to whythe Assessing Officer as also the appellate authorities including theTribunal went on to substitute their own judgment for the actualfigures of wastage emerging from stock register and from the booksof accounts of the assessee? Merely because last year, 1.e. assessment year 1989-90,such wastage was calculated by the assessee @ 1.5% whereas in theyear under consideration, 1.e., assessment year 1990-91, it is 2.7%,would not mean that the quantity of wastage has been inflated merelyto increase actual profits, as scrap 1s sold at much lower a price thanfinished steel bars manufactured by the assessee. Merely because last year, 1.e. assessment year 1989-90,such wastage was calculated by the assessee @ 1.5% whereas in theyear under consideration, 1.e., assessment year 1990-91, it is 2.7%,would not mean that the quantity of wastage has been inflated merelyto increase actual profits, as scrap 1s sold at much lower a price thanfinished steel bars manufactured by the assessee. In fact, when production of 5 years earlier to the presentassessment year are compared, it becomes clear that quantum ofwastage has never been the same in any two consequent years,though it was somewhere in the same vicinity in the years 1985-86,1986-87 and 1987-88. In the year 1988-89, quantum of wastage wasnearly double of the year under consideration. Figures of wastagedeclared by the assessee in terms of its stock register and other booksof accounts right from the assessment year 1985-86 till theassessment year 1n question, are reproduced as below:- - 5S ce The Assessing Officer has very conveniently bye-passedthe figure of wastage at 4.4% for the assessment year 1988-89 merelymentioning it as an exception in the entire scenario. It remains a factthat in all the earlier assessment years, quantum of wastage asdeclared by the assessee was based on entries 1n the stock registerincorporating opening stock, closing stock, monthly trading account,bank statements furnished to the bank from time to time etc. and onentries in other account books and had never been questioned in anyother assessment year. Rather, percentage of wastage was beingaccepted as used to be declared by the assessee including the highestpercentage of wastage @ 4.4% declared in the assessment year198 8-&9_ When the books of accounts including stock register etc.have neither been rejected nor are doubted, accounts could not be byepassed merely on the whims and fancies of the authorities. Almostthe same view was taken inMadnani Construction Corporation P.Ltd. v. Commissioner of Income Tax)(2008) 296 ITR 45 (Gauhati)andPyarelal Mittal v. Assistant Commissioner of Income Tax, (2007)291 ITR 214 (Gauhatt). Wheneven slightest doubt has not been expressed withregard to genuineness of the entries in the stock register as also inother books of accounts of the assessee, findings of the Tribunal intaking the percentage at 2% instead of 2.7% claimed by the assessee,the same being without any basis or on any sound formula, is not the ITA No.194 of 1999 correct approach of the Tribunal. Rather, it 1s dependent on over-generalization of quantum of wastage arrived at by the assessee 1n theearlier assessment years. Observations of the Tribunal in theimpugned order (Annexure P-3), in its relevant portion are as under:- ,On going through the order of the A.O., we find thatin the assessment years 1985-86 to 1990-91, the assessee hasbeen showing the percentage of wastage at 1.9%, 2.3%, 2%,4.4%, 1.5% and 2.7% respectively. Of course, the assessee ismaintaining stock register and production record and theA.O. has not been able to detect any defect in the register butthe fact remains that the assessee is manufacturing pins andsteel bars and in this very business,, he has shown thepercentage ofwastage at 1.5%in the preceding year but in theyear under consideration, he has shown the wastage at 2.7%. Thus all these facts clearly indicate that upto 1989-90,variation in wastage was shown by the assessee from .3% to .5% only with the exception t.e., in the assessment year 1986-59, when the assessee shown the wastage at 4.4% it variedfrom 2.4% to 2.9% but we are of the opinion that suchexceptions cannot be accepted as a rule for looking into thereasonableness of the variation in the percentage of wastagewhen the assessee suddenly shows the variation from 1989-90to 1990-91 at 1.2% and claiming the wastage at 2.7% whichto our mind, on account of our above discussion, is certainlyhigh because the assessee has not rendered any plausibleexplanation for the same. Thus all these facts clearly indicate that upto 1989-90,variation in wastage was shown by the assessee from .3% to .5% only with the exception t.e., in the assessment year 1986-59, when the assessee shown the wastage at 4.4% it variedfrom 2.4% to 2.9% but we are of the opinion that suchexceptions cannot be accepted as a rule for looking into thereasonableness of the variation in the percentage of wastagewhen the assessee suddenly shows the variation from 1989-90to 1990-91 at 1.2% and claiming the wastage at 2.7% whichto our mind, on account of our above discussion, is certainlyhigh because the assessee has not rendered any plausibleexplanation for the same. 15. Looking into the past history ofthe case, and also in viewof our detailed analysis, it would be fair and reasonable toadopt the reasonable percentage of the assessee at 2%against 2.7% claimed by the assessee. 16. The order of the CIT(A) is set aside and the order of theA.O. gets modified with the directions to the A.O. to work outthe addition after taking into consideration the reasonablepercentage of variation at 2% . With these observations, thisground ofappeal No.2 is partly allowed.7 In contrast, when we peruse order dated 19.4.1993(Annexure P-2) of Commissioner of Income Tax (Appeals), followingobservations are noteworthy:- “2.1 .... From this, it is apparent that wastage variedfrom year toyear and even to the extent of 4.4% it was not consideredexcessive. In such circumstances, claim of wastage of 2.7% was reasonable especially when it was supported by complete stockregisters and no defects of any type were pointed out in the booksof accounts or the stock registers. It was contended that even ifthe average ofprevious 3 years is adopted it would work out toalmost the same as claimed. Therefore, the addition made on thisaccount is warranted and needs to be deleted. 2.2 After careful consideration ofthe rival submissions and ofthepast history of the case, in my opinion, the claim of wastage of2.7% could not be termed excessive when wastage to the extent of4.4% had been allowed in the assessment year 1985-89. Moreoverthe trading results are being supported by complete stock registerand no defects have been pointed out in the said registerTherefore, the addition made on this account is deleted as claim ofwastage is in accordance with the past history ofthe case. ” Dhen the entire matter 1s tested on factual matrix and by application of law, order of the Commissioner of Income Tax(Appeals) takes precedence over the impugned order of the Tribunal.There 1s nothing in the order of CIT(A) which could be assailed onthe fact based situation or on any principle of law. Impugned order ofthe Tribunal rather is not based on any sound parameters and runscontrary to the entries in the stock register and other books ofaccounts, veracity of which entries 1s not questioned by the revenueevena little. | Consequently, there being merit in the appeal, all thesubstantial questions of law are answered in favour of the assessee tothe extent discussed above. The appeal 1s accordingly allowed. |Dr. Bharat Bhushan Parsoon|Judge February 21, 2014.kadyan |Rajive Bhalla|Judge