2023 (2) TMI 1230 - HC - Income Tax

Undisclosed stock - CIT(A) considered the case of the assessee along with the assessment records and held that no details have been produced by the assessee with regard to the quantity of the leather consumed - tribunal called for the assessment records as well as the records of the CIT(A) but, however, concurred with the CIT(A) on the ground that the assessee has not produced any evidence from which the yielded figure as well as the figure of wastage could be worked out - HELD THAT - A fundamental error has crept in during the course of the assessment proceedings as pointed out earlier in response to the show cause notice dated 28th November, 2008 with regard to the quantitative details of stock. The assessee s specific case was that from the materials already produced before the assessing officer it is clear that the consumption of raw materials would depend on the quality of leather and items produced and that during the year under review they had used old stock and most of the items are small things of various shapes in which case there was heavy wastage. If such stand of the assessee is not disputed by the assessing officer that the assessee had produced details including quantitative details of stock of finished leather and raw materials consumption of the same and details of production, the assessing officer was duty bound to examine those details and documents and come to a conclusion. However, those details have been brushed aside and what derived in the mind of the assessing officer were the figures for the three earlier assessment years. This, in our opinion, could not have been done by the assessing officer ignoring the materials and documents produced by the assessee about assessment year under consideration. CIT(A) also committed a similar error in not adverting to the records which are germane to the assessment year under consideration and largely swayed by the opinion of the assessing officer who committed an error by determining the quantity of wastage based on the production figures for the previous year. There is nothing on record to indicate that there was suppression of materials by the assessee nor there is anything to indicate that the wastage as mentioned by the assessee for the year under consideration could not have been shown and those figures were neither examined nor rejected. One more important factor which needs to be taken note is that before the CIT(A) the assessee placed bunch of documents which were comparative chart of gross profits for the assessment years 2004-05 to 2007-08. As produced the consumption report style-wise showing particulars of consumption of different types of products. The list of different types of articles producing during the assessment years 2005-06 to 2007-08 was also furnished along with the summary of export sales. Thus, if according to the assessee, different types of articles are produced for each assessment year which largely depends upon the orders which were placed by the assessee by overseas customers, the assessing officer was bound to consider those details as it is elementary principle that each assessment year is an independent unit. Tribunal also ignored this fact and was persuaded by the opinion drawn by the CIT(A) which had approved the estimation done by the assessing officer purely based upon the figures for the earlier assessment years and not in respect of the assessment year under consideration. It might have been a different case had the details and documents furnished by the assessee been examined and found to be incorrect or otherwise and thereafter the assessing officer embarked upon a fact finding exercise by referring to the facts and figures for the earlier assessment year, it would have been another matter. Specific case of the assessee is that in none of the two years identical products have been manufactured and exported and, therefore, an independent examination of the goods ought to have been done by the AO which the assessee was not noticed by CIT(A) or by the learned tribunal. Thus, the first issue which has been raised in substantial question of law (a) has to be necessarily answered in favour of the assessee. Estimating the production/sale of finished goods AND disallowance of expenditure on repairs and maintenance made upon comparison of expenditure under the head for the preceding year and the turnover figures for the two years - The other two substantial questions of law (b) and (c) are also relatable to the same approach of the assessing officer as well as the CIT(A) and the learned tribunal. Once again, the two authorities and the tribunal state that there was nothing on record. Documents clearly show the details of repairs and maintenance have been clearly listed before the CIT(A) and, thus, if the facts relevant for the assessment year under consideration had been considered, such an error would not have occurred. In fact, the learned tribunal in its order records that the assessment records as well as the records of the CIT(A) were called for. Having done so, the tribunal does not record any finding on such records and details and documents produced by the assessee at the very inception during the course of scrutiny assessment. It proceeds to say that there is no evidence before the authorities below. This finding is factually incorrect and should be termed to be a perverse finding. For all the above reasons, we are of the considered view that the Tribunal committed an error in affirming the order passed by the CIT(A). In the result, the appeal filed by the assessee is allowed and the substantial questions of law are answered in favour of the assessee.

Summary

Issues:
1. Discrepancy in leather consumption and production of finished goods.
2. Estimation of production/sale of finished goods based on previous year's order.
3. Disallowance of expenditure on repairs and maintenance without proper examination.

Analysis:

Issue 1: Discrepancy in leather consumption and production of finished goods
The appellant, engaged in the manufacture and export of leather goods, filed a return of income disclosing a total income for the assessment year. The assessing officer alleged a discrepancy in leather consumption and production of finished goods, issuing a show cause notice. The appellant explained that raw material consumption depended on the quality of leather items produced and the heavy wastage due to various shapes of items. However, the assessing officer, without examining the details and documents provided by the appellant, based the conclusion on figures from previous years. The Court held that the assessing officer erred by not considering the materials and documents produced for the assessment year under consideration, leading to the addition of an amount to the total income of the appellant.

Issue 2: Estimation of production/sale of finished goods based on previous year's order
The CIT(A) and the Tribunal concurred with the assessing officer without proper examination of the records and documents provided by the appellant. The assessing officer's estimation of wastage based on the production figures of the previous year was deemed incorrect. The appellant had presented comparative charts and consumption reports for different assessment years, emphasizing the independent nature of each year's production. The Court noted that the authorities failed to consider the details and documents furnished by the appellant for the assessment year under review, leading to an erroneous estimation.

Issue 3: Disallowance of expenditure on repairs and maintenance without proper examination
The Court found that the CIT(A) and the Tribunal did not consider the relevant records and documents provided by the appellant, leading to a flawed decision on the disallowance of expenditure on repairs and maintenance. The Tribunal's assertion of no evidence before the authorities was deemed factually incorrect and a perverse finding. The Court held that if the facts relevant to the assessment year had been properly considered, such errors would not have occurred. Consequently, the Court allowed the appeal filed by the appellant, answering the substantial questions of law in favor of the appellant.

Additionally, the Court referenced a previous judgment in an appeal filed by the appellant for the assessment year 2004-05, which was allowed by the Court in a separate judgment.