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TMI Blog1971 (3) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and what was the basis of the estimate of shortage made by the Income-tax Tribunal?" The case relates to the assessment year 1950-51, for which the relevant previous year is the year ending December 31, 1949. The assessee is a public limited company incorporated in 1948, under the Rampur Companies Act and having its registered office at Rampur. It operates a textile unit at Rampur in which both spinning and weaving are carried on. The State of Rampur merged into the Dominion of India in 1949. For the assessment year 1950-51, which was the first assessment year under the Indian Income-tax Act, 1922, in respect of the assessee, the assessee filed a return showing a net loss of about Rs. 4,93,191. The Income-tax Officer, however, applied the proviso to section 13 of the Act and estimated the total income of the assessee at Rs. 82,437. By his assessment order dated December 13, 1945, he added back a sum of Rs. 2,58,541 on account of unexplained shortage in the production of yarn and cloth. On appeal by the assessee, the Appellate Assistant Commissioner reduced the addition to Rs. 36,711. Both the assessee and the Income-tax Officer then appealed to the Income-tax Appellate Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and free from defect, and there was no justification for making any addition either for shortage of yarn or for shortage of cloth. It was pointed out that the records maintained by the assessee showed the amount of the ginned cotton purchased, the amount of cotton sent to the blow room, the weight of soft waste found in the blow room after the moisture was blown off, the weight of cotton actually processed into yarn and the weight of yarn produced. The Tribunal, however, did not accept the contention. The Tribunal, on the other hand, upheld the submission of the revenue that the proviso to section 13 was attracted because although the assessee could be said to have a complete record of the ginned cotton that was purchased and the cotton that was processed into yarn there was no record of the intangible waste and the dust that was stated to have fallen out in the blow room. It was conceded on behalf of the revenue that although intangible additions could not be made and the dust as a matter of rule was never weighed but, it was said, that did not exonerate the assessee from maintaining the proper records in that regard. It was urged on behalf of the assessee that the percentage of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k note of the percentage of increase in subsequent years, it being 5.8% for 1952-53, 5.3% for 1953-54 and as much as 15% for 1954-55. In the circumstances, it observed that the net increase in weight at 3.5% for the relevant year was low. On behalf of the assessee an explanation was put forward that the percentage increase in the weight of cloth depended on the quality of the sizing material used, and that the sizing material used during the relevant accounting period included a large proportion of bajra starch and paraffin wax which fell off from the yarn and reduced the increase in weight. It was said that in 1951-52 and other years the sizing material had included a larger proportion of maize starch and gum by reason of which the weight of yarn showed a comparative increase, the retentive quality of the sizing material being greater. The Tribunal, however, did not accept the explanation, and sustained the increase in weight at 4% taken by the Appellate Assistant Commissioner. In regard to the production of yarn, the Tribunal has applied the proviso to section 13 for the reason that the assessee did not maintain a record of the intangible waste and dust which had fallen out in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. Those cases are Arumugaswami Nadar v. Commissioner of Income-tax, Harakchand Radhakisan v. Commissioner of Income-tax, K. M. Adam v. Commissioner of Income-tax, Chhabildas Tribhuvandas Shah v. Commissioner of Income-tax, B. F. Varghese (No. 2) v. State of Kerala and St. Teresa's Oil Mills v. State of Kerala. With the exception of Chhabildas Tribhuvandas Shah v. Commissioner of Income-tax, the remaining cases are those where the court held that the Tribunal erred in accepting the account books of the assessee. Having perused the judgment in each case, we are of opinion that they are clearly distinguishable. In Arumugaswami Nadar's case, the court expressed the view that in the case of match manufacturing, in view of the difficulties obtaining in manual manufacture, the maintenance of a daily mixture account could not possibly help in the co-relation of the issues of chlorate with the manufacture of matches, and consequently not much weight could be attached to an absence of a daily mixture account. This is a consideration which can hardly be said to arise in the case before us. In Harakchand Radhakisan v. Commissioner of Income-tax, the only consideration upon which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of production. The system of records adopted by the assessee is inadequate and does not afford an effective method of determining the true income, profits and gains so far as the production of cloth is concerned. There is also the circumstance that the net increase in weight for the relevant years is far below than in other years and the explanation attempted by the assessee in this behalf has not been accepted by the Tribunal. In Chhabildas Tribhuvandas Shah v. Commissioner of Income-tax, the Supreme Court laid down that where there was material to support the finding of the Tribunal underlying the rejection of the accounts of the assessee, no question of law arose. In cases involving the applicability of the proviso to section 13, it observed, the question to be determined by the revenue authorities was a question of fact, namely, whether the income, profits and gains could or could not be properly deduced from the method of accounting regularly adopted by the assessee. Accordingly, we 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 ..... 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