1971 (3) TMI 39 - HC - Income Tax

Assessee urged that there was no ground for applying the proviso to section 13 inasmuch as the records maintained by the assessee were complete and free from defect, and there was no justification for making any addition either for shortage of yarn or for shortage of cloth - hold that there was no material on the record for concluding that there was an undisclosed shortage in the production of yarn, but in regard to the production of cloth there was material on the record for not accepting the shortage disclosed by the assessee, and we further hold that in estimating the shortage in the production of cloth the Tribunal adopted a reasonable basis

Issues Involved:
1. Application of the proviso to section 13 of the Indian Income-tax Act, 1922.
2. Justification for the shortage in the production of yarn.
3. Justification for the shortage in the production of cloth.
4. Adequacy of the records maintained by the assessee.

Detailed Analysis:

1. Application of the proviso to section 13 of the Indian Income-tax Act, 1922:
The Tribunal applied the proviso to section 13, which allows the Income-tax Officer to estimate income if the method of accounting is not sufficient to deduce true profits. The Tribunal upheld the application of the proviso because the assessee did not maintain a record of intangible waste and dust in the blow room, even though it was admitted that such intangible additions could not be made and the dust was never weighed. The Tribunal reasoned that the absence of such records justified the application of the proviso in a technical sense. However, the High Court found this reasoning difficult to appreciate, especially when the dust was not weighed and the amount of intangible waste could not be determined, making it hard to justify the application of the proviso to section 13.

2. Justification for the shortage in the production of yarn:
The Income-tax Officer considered the shortage disclosed in the production of yarn as excessive and took the normal refraction at 18%, adding Rs. 1,48,407 for yarn shortage. The Appellate Assistant Commissioner allowed a 4.5% shortage, reducing the addition to Rs. 1,20,000. The Tribunal confirmed this decision, stating that the shortage shown by the assessee was excessive compared to other years and industry standards. The High Court, however, found that the mere variation in shortage from other years did not justify rejecting the books concerning yarn production. The High Court concluded that there was no material on record to conclude an undisclosed shortage in yarn production.

3. Justification for the shortage in the production of cloth:
The Income-tax Officer found the percentage increase in weight of yarn after treating with sizing material to be low at 3.5%, compared to the expected 5%, adding Rs. 1,10,134 for cloth shortage. The Appellate Assistant Commissioner adjusted this to a 4% increase, reducing the addition to Rs. 36,711. The Tribunal upheld this, noting the lack of a register for yarn supply to the weaving department, making it impossible to correlate yarn supply and cloth production. The High Court agreed with the Tribunal, noting that the system of records was inadequate to determine true income, profits, and gains for cloth production. The High Court held that the Tribunal adopted a reasonable basis in estimating the shortage in cloth production.

4. Adequacy of the records maintained by the assessee:
The assessee maintained detailed records of ginned cotton purchased, processed into yarn, and the resultant production. However, the Tribunal found the records incomplete due to the lack of documentation for intangible waste and dust. For cloth production, the absence of a register for yarn supply to the weaving department was critical. The High Court found the records for yarn production adequate but agreed with the Tribunal regarding the inadequacy of records for cloth production. The High Court emphasized that the system of records did not afford an effective method of determining true income, profits, and gains for cloth production.

Conclusion:
The High Court concluded that there was no material on record for concluding an undisclosed shortage in yarn production. However, for cloth production, there was material on record for not accepting the shortage disclosed by the assessee, and the Tribunal adopted a reasonable basis in estimating the shortage. The question referred was answered accordingly, with no order as to costs and counsel's fee assessed at Rs. 200.

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