2018 (5) TMI 436 - HC - Income Tax

Addition u/s 69C - Cost of production of per quintal of rice - difference in cost of production as unaccounted in terms of Section 69 (C) - Held that - The finding of the Tribunal in this case appears to be primarily based on human probabilities, inferences from surrounding circumstances what are the human probabilities or surrounding circumstances has not been spelt out. Further, the Tribunal accepts that there is no direct evidence, hence it has to go by inferences. We cannot accept such reasoning. Taxing statute does not proceed on vagueness, ambiguity or on human probabilities. Inference from surrounding circumstances will lead to arbitrariness in the assessment. This is nothing but conjectures and surmises. Such a reasoning is untenable in law. The very same A.O. has accepted the per quintal rate of expenditure for the assessee for the assessment year 2002-2003, 2004-2005 and 2005-2006. There cannot be any departure from this method, unless there is a new and substantial material to the contrary. Radhasoami Satsang s case to be followed 1991 (11) TMI 2 - SUPREME Court There is no relevant material to justify the findings of the A.O. only for the present assessment year. The authority has accepted the per quintal rate of cost of production in respect of other assessment years as indicated above. Therefore, the demand and the assessment order in terms of Section 69(C) is not justified. It is an arbitrary determination based on irrelevant parameter and, therefore, on this issue we find that the Tribunal has proceeded on a wrong premise - Decided in favour of assessee. Packing material addition - cost of packing material with regard to the assessee Unit as well as two other Units i.e., M/S New Kashmir Rice Mills and M/s Kashmir Rice and Oil Mills differs - Held that - Appellant s claim is not supported by inventory details of the assessee-Unit to substantiate the plea that some of the bags were left out from paddy purchases and, therefore, the cost of packing material has come down - In the absence of material and a clear explanation from the assessee there cannot be two opinions that the cost of packing material should differ from one Unit and the other Unit, more so when it is dealing with the same kind of packing material for the same good i.e., rice. Assessing Officer was justified in his demand under Section 69 (C) in respect of packing material which has been rightly confirmed by the appellate authority and by the Tribunal. - Decided against assessee.

Summary

Issues Involved:
1. Whether the Appellate Tribunal could in law confirm the additions made on mere presumptions, surmises, and conjectures rather than on some evidence?
2. Whether the Tribunal being a fact-finding authority could in law uphold the additions by relying upon perverse findings of lower authority without correlating the same material on record?
3. Whether the Tribunal was correct in confirming the order of the Assessing Authority insofar as packing material is concerned?

Issue-wise Detailed Analysis:

1. Confirmation of Additions Based on Presumptions:
The appellant challenged the order of the Income Tax Appellate Tribunal, Amritsar Bench, confirming the additions made by the Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) [CIT (A)]. The A.O. had issued a show cause notice stating that the cost of labour and wages per quintal in the appellant's unit was significantly lower compared to older units, leading to the presumption that expenses were understated to claim higher deductions under Section 80IB. The A.O. invoked Section 145(3) and framed the assessment under Section 144, treating the understated expenses as unexplained income under Section 69(C).

The High Court found that the A.O.'s comparison was flawed as it did not consider the age and efficiency of the machinery in the appellant's new unit. The assessment was based on mere presumptions without relevant supporting material. The Court emphasized that tax assessments should be based on concrete evidence and not on arbitrary comparisons or conjectures.

2. Reliance on Perversive Findings:
The Tribunal upheld the A.O.'s findings based on "surrounding circumstances" and "human probabilities," suggesting that the appellant had incurred unaccounted expenditures. The High Court criticized this approach, stating that tax assessments should not rely on vague inferences or probabilities. The Court cited the Supreme Court's decision in "State of Orissa Vs. Maharaja Shri B. P. Singh Deo," highlighting that assessments must be based on relevant material and not arbitrary judgments.

The High Court noted that the A.O. had accepted similar cost structures in previous assessment years without dispute, and there was no new material to justify a different approach for the current year. The Court concluded that the Tribunal's order was based on conjectures and surmises, making it untenable in law.

3. Confirmation of Order Regarding Packing Material:
The A.O. had also added an amount for packing material expenses, stating that the appellant's explanation was unsupported by inventory details. The appellant claimed that old bags from paddy purchases were reused, reducing the cost of packing material. However, the A.O. found no inventory records to substantiate this claim.

The High Court upheld the A.O.'s addition regarding packing material, agreeing that the appellant failed to provide a clear explanation or supporting documents. The Court found no error in the A.O.'s demand under Section 69(C) for packing material expenses, as it was based on the absence of inventory records.

Conclusion:
The High Court allowed the appeal partly. The first issue regarding the cost of production was decided in favor of the appellant, as the assessment was based on arbitrary comparisons without relevant material. The second issue regarding the packing material was decided in favor of the respondent-department, as the appellant failed to provide adequate supporting evidence. The Tribunal's order was partly overturned, emphasizing the need for concrete evidence in tax assessments.