2024 (11) TMI 1264 - HC - Income Tax

Additions on account of excessive shortage and scrap value of discarded cables - abnormal increase in wastage - AO observed that assessee had shown wastage of 76,336 Kgs. on consumption of 5,85,295 Kgs. which worked out to 13.04% as against wastage shown @ 8.66% of last year on spinning of worsted yarn - HELD THAT - Trading account and the stock has been found to be within the satisfaction of the Income Tax authorities and the AO had accepted the same. The wastage of 13.04% shown by the assessee has been held to be more higher than the wastage shown for the previous year i.e. 8.66%. From the perusal of the record, as maintained by the assessee, shown in the tabular form for the various assessment years from 1975-76 upto 1983-84, we find that the wastage percentage was varying from 13.64% and increased upto 16.43% and decreased to 8.66% only for a period of three months in the year 1982-83, while in the year 1983-84 remained consistent to 13.04%. Thus, it cannot be said that the wastage has been shown on the higher side for the year 1983-84. Moreover, this Court find that the Income Tax Authorities had accepted the earlier wastage percentage without any demur. This Court, however, is also satisfied and accept the contention of the assessee that since the stock production and consumption records were maintained under the supervision of the Excise Authorities and there is no objection raised with regard to the said stock. The Assessing Officer has not objected to the total stock maintained, it could not have proceeded on a presumption alleging higher wastage shown by the assessee. The income-tax department throughout accepted the trading account of the assessee and there is no dispute regarding the quantity of cotton shown to be consumed as per the books of account maintained by the assessee and no material to show and to establish that the increase in percentage of wastage was attributable to any suppression of weight or any suppression of production. The Assessing Officer without mentioning any irregularity in the accounts and accepting it could not make addition without giving any reasoning and fresh computation. The closing stock is valued as per the computation by the assessee regarding the profits and losses and if the books of account of the assessee including rate at which closing stock had been valued are accepted by the Assessing Officer, the addition to the net profit could not be made without recomputing the trading result of the assessee and if as per Section 145(1) of the Act, the trading account of the assessee are accepted to be correct and complete, the Assessing Officer without re-computing cannot make additions to the net profit. Thus, the addition on account of excessive shortage is held to be not sustainable in the eyes of law. Addition of profit u/s 41(2) on the sale of copper wire - A perusal of the assessment order and the explanation given by the assessee shows that the assessee explained each and every question put by the Assessing Officer. Further inspite of the fact that the Assessing Officer himself personally visited the factory premises alongwith the Inspector Sh. S.K.Gupta, and nothing was found to show that the assessee has tried to evade tax, the Assessing Officer on assumptions and presumptions made addition as profit. The reasoning given by the Assessing Officer for such an addition is found to be contrary to the facts. We hold that the Tribunal has erred in assessing the additions made by the Assessing Officer. Accordingly, the reference is answered in favour of the assessee and against the revenue.

Summary

Issues Involved:

1. Whether the Tribunal erred in law by sustaining the addition of Rs. 34,28,414/- on account of excessive wastage.
2. Whether the Tribunal erred in law by sustaining the addition of Rs. 2,15,150/- on account of scrap value of discarded copper cables.

Detailed Analysis:

Issue 1: Addition of Rs. 34,28,414/- on Account of Excessive Wastage

The core issue was whether the addition of Rs. 34,28,414/- by the Assessing Officer (A.O.) for excessive wastage was justified. The A.O. observed that the assessee reported a wastage of 76,336 Kgs (13.04%) compared to 8.66% in the previous year. The assessee attributed this increase to changes in product mix and production processes. The A.O. rejected this explanation, arguing that the majority of the yarn produced was synthetic blended yarn, which should have resulted in lower wastage. The A.O. estimated visible wastage at 8% and invisible wastage at 1.25%, leading to an excess wastage calculation of 22,199 Kgs, valued at Rs. 154.44 per Kg, resulting in an addition of Rs. 34,28,414/- to the assessee's income.

The CIT(A) deleted this addition, noting that the A.O. failed to point out specific defects in the assessee's books or the method of accounting. The CIT(A) highlighted that the wastage percentage varied annually due to factors like machinery quality and raw material, and historically, wastage above 13% had been accepted. The Tribunal, however, upheld the A.O.'s addition.

The High Court found that the A.O. did not apply the proviso to Section 145 of the Income Tax Act, which requires rejecting the books of accounts before making such an addition. The court noted that the wastage percentage had been variable historically and that the Excise Authorities' control over production records further validated the assessee's records. Therefore, the addition of Rs. 34,28,414/- was deemed unsustainable.

Issue 2: Addition of Rs. 2,15,150/- on Account of Scrap Value of Discarded Copper Cables

The second issue concerned the addition of Rs. 2,15,150/- for the alleged sale of discarded copper cables. The assessee claimed that the copper cables, purchased between 1955 and 1965, had been discarded and their value claimed under "Assets Discarded." The A.O. contended that the copper wire was valuable and could not have been discarded without recovery. The A.O. estimated the scrap value and added Rs. 2,15,150/- as profit under Section 41(2) of the Income Tax Act.

The CIT(A) upheld this addition, accepting the A.O.'s reasoning that the copper must have been sold. However, the High Court found that the A.O.'s addition was based on assumptions rather than evidence. The court noted that the A.O. had personally inspected the factory and found no evidence of copper wire sales beyond a minor sale of Rs. 16,000/-. The court concluded that the A.O.'s assumptions were contrary to the facts presented by the assessee.

Conclusion:

The High Court ruled in favor of the assessee on both issues. It held that the Tribunal erred in sustaining the additions made by the A.O. The court emphasized that the A.O. had not provided sufficient evidence to justify the additions and had failed to follow the procedural requirements of Section 145 of the Income Tax Act. Consequently, the reference was answered in favor of the assessee and against the revenue.