1982 (9) TMI 82 - AT - Income Tax

Summary

Issues Involved:
1. Defects in stock registers and production records.
2. Estimation of turnover and net profit by the ITO.
3. Application of proviso to Section 145(1) by CIT(A).
4. Sustaining of addition by CIT(A) based on three factors.
5. Assessee's appeal against the addition of Rs. 75,000.
6. Revenue's appeal against the reduction of addition from Rs. 9 lakhs to Rs. 75,000.

Detailed Analysis:

1. Defects in Stock Registers and Production Records:
The ITO identified several discrepancies in the stock and production registers of the assessee, including mismatched production quantities, unexplained consumption of raw materials, and inconsistencies in the use of coal and hexane. The ITO concluded that these defects indicated production outside the books of account.

2. Estimation of Turnover and Net Profit by the ITO:
Due to the identified defects, the ITO estimated that the assessee had an unrecorded turnover of Rs. 60 lakhs and added Rs. 9 lakhs to the trading results as net profit at a rate of 15%.

3. Application of Proviso to Section 145(1) by CIT(A):
The CIT(A) upheld the application of the proviso to Section 145(1), agreeing that the accounts were not maintained in a verifiable manner. However, the CIT(A) disagreed with the ITO's conclusion of extensive unrecorded business and reduced the addition to Rs. 75,000 based on three specific factors: high hexane consumption, unrecorded deoiled cake in the closing stock, and oil left in the miscella tank or pipes.

4. Sustaining of Addition by CIT(A) Based on Three Factors:
The CIT(A) sustained the addition of Rs. 75,000 due to:
- High consumption rate of hexane (3%) and a loss of 30 liters, which was considered excessive.
- Unrecorded deoiled cake in the closing stock.
- Oil left in the miscella tank or pipes not included in the closing stock.

5. Assessee's Appeal Against the Addition of Rs. 75,000:
The assessee argued that the CIT(A) was not justified in upholding the addition since there was no evidence of production outside the books. The assessee also contended that the defects pointed out were either rectified or inherent to the production process and did not justify any addition. The assessee provided explanations and supporting evidence, including a certificate from a professor and head of the Oil and Paint Department, to counter the CIT(A)'s findings.

6. Revenue's Appeal Against the Reduction of Addition from Rs. 9 Lakhs to Rs. 75,000:
The revenue argued that the ITO's original addition of Rs. 9 lakhs should be restored, relying on the defects identified in the stock and production registers.

Tribunal's Findings:
The Tribunal carefully reviewed the manufacturing process, the records maintained by the assessee, and the explanations provided for each defect. It found that:
- The defects identified by the ITO were either rectified or explained satisfactorily.
- The peculiarities of the batch-type solvent extraction process justified the discrepancies noted.
- The consumption rate of hexane and the loss were within acceptable norms as certified by an expert.
- The non-recording of deoiled cake and oil in the closing stock was inherent to the continuous production process and did not indicate concealment or understatement.

The Tribunal concluded that the ITO's addition was not sustainable, and the CIT(A) was not justified in sustaining the addition of Rs. 75,000. The trading results declared by the assessee were found to be adequate and reasonable.

Conclusion:
The assessee's appeal (ITA No. 952/Alld/1981) was allowed, and the addition of Rs. 75,000 was deleted. The revenue's appeal (ITA No. 1084/Alld/1981) was dismissed.