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TMI Blog1999 (6) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... hat he is in a position to make satisfactory and intelligent understanding of the issue that may arise subsequently before the tax authority. 3. The learned counsel argued the cases and apprised us with the material available as well as legal position regarding invocation of proviso to s. 145(1) of the IT Act, 1961. The learned Departmental Representative also filed paper book after collecting the information from the AO regarding the question of yield and process of ginning of cotton. The learned counsel argued that the assessees are maintaining stock details in stock registers, which is showing daily position of stocks. It was argued that this stock register is showing the position of Narma ginned and the cotton obtained after the ginning process. It was argued before us that the AO has not pointed out any defect whatsoever in the books of accounts and, therefore, proviso to s. 145(1) of the Act does not apply under the facts and the circumstances of the cases mentioned above. It was argued that the proviso to s. 145(1) comes into play in case the accounts are. found not to be correct or complete to the satisfaction of the ITO and the method of accounting employed by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us manufacturing processes resulted into products and by-products, it is the duty of the assessee to account for both products and by-products and if the assessee fails to account for these products, the AO will be justified in invoking the s. 145(1) of the IT Act. 8. Before we decide the issue, we are of the opinion that we should discuss s. 143(3) of the IT Act, 1961. Sec. 143(3) deals with the assessment of an income. Sec. 143(3) reads as follows: "143(3) On the day specified in the notice issued under sub-s. (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the AO may require on specified points, and after taking into account all relevant material which he has gathered, the AO shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him (or refund of any amount due to him) on the basis of such assessment." The section in itself gives power to the AO to assess an income after taking into consideration evidence produced by the assessee and the evidence collected by the AO and/or relevant material, which is available on record. The AO wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he proviso to s. 145(1) will have to operate. This shows that the legislature has kept in mind the distinction between impropriety of the method of accounting and the falsity of the account books, and that proviso to s. 13 deals with only impropriety of the method of accounting leaving the falsity of account books to be dealt with under s. 23(3). The view taken in some of the decisions that the ITO has to act only under the proviso to s. 13 to reject the account books as being false or incomplete. In our view, ignores the above distinction. As already stated, s. 23(3) gives the power to the ITO to collect and act on such evidence as considered necessary, and this power naturally implies the power to reject the evidence including the books of account and, therefore, it is not necessary for the ITO to invoke the proviso to s. 13 for that purpose. The proviso to s. 13 relates to the method of accounting alone and not to the acceptance or rejection of the books of account. It is true that s. 13 cannot altogether be divorced from s. 23(3) for it is only in an enquiry under s. 23(3), s. 13 can operate. The proviso to s. 13 has to be resorted to by the ITO when the account books are rejec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes cost system or sometimes no system. It is now established legal system that the preparation of statement of the transaction should be gathered by the subsistence and not by the legal formation and should be framed by the accounting formation. The working of profit is a very sensitive situation in the complicated system of entries. The accounts may be perfectly maintained but casting of inventory may change the entire colour of gross profit in trading and manufacturing accounts. The stock may be maintained but non-reflection of by-products and proper and correct recording of the yield will positively lead suspicion in the mind of the AO and explanation that such stock is embedded in wastage will require an investigation from the AO. The moment the enquiry is made, the AO has to get material on record, which will satisfy him regarding accountability of the stock. In case such accountability and explanation is either missing or is not forceful enough, the AO is within his right to estimate an addition both under s. 145(1) as well as under s. 143(3) of the IT Act, 1961. 12. Sec. 145(1) deals with method of accounting and the method is definitely different than the books of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tisfactory answer. The other way to look at the controversy in issue before us is that in a given case the appellant maintains stock in a perfect manner but he has not maintained stock details of various by-products. Thus, under those circumstances, it is the duty of the AO to look into the unexplained areas. In case the appellant does not record the sale of manufactured products then the only way the AO can investigate the areas is to look into the yield percentage. The assessee may maintain the stock which he wants to record and may sell the stock which he does not want to record and easily take shelter in the yield percentage then perhaps a wrong signal and results will come from the accounts and this will be absolutely against the intention or purpose of the legislature and against the principles of accountancy as well as against the spirit of s. 143(3) r/w s. 145(1) of the Act. How can AO check the reliability of the stock. There are many test checks and one of the effective test is whether all stock available either by purchasers or by manufacturing activity in the finished or semi-finished state and all by-products are entered in the stock register. One of the test-check is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts by tampering with the yield of finished goods out of manufacturing process from raw-material. One may maintain stock register in most perfect manner but at the same time it is easy to tamper with the yield from raw-material used in the manufacturing process. Of course, there has to be a scientific base for arriving at more rationale and scientific yield. Often, it has been observed that this rationale is not being followed by the authorities below. We are of the opinion that it is the duty of the Department to be equipped with a data and information regarding yield of finished goods from the raw-material and the data should be analysed by an expert in the line who has expert and scientific knowledge in the process of manufacturing. It should not be left to the persons who are neither experts nor have any knowledge in that field. The AO is within his right to make an investigation as well as inquiry if the end result of finished goods and by-products are not in accordance with the normal conditions prevailing in a particular trade. It is for the appellant to produce valid, authentic and documented evidence to justify the reasons for deviation of end results in the manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on per maund of raw cotton in the assessee's ginning factories for the years in question could not possibly be correct, and even if it were open to us to question the findings of these officers which were upheld by the Appellate Tribunal, I do not think it would be possible to differ from their conclusions. I also consider that in a business of this kind, which merely consists of buying raw material and selling it after processing, the absence of a register showing the daily working of each factory is just as material as the absence of a stock register in the case of an ordinary merchant. I am, therefore, of the opinion that the question referred to us must be answered in the affirmative. The CIT will have his costs from the assessee. Counsel' fee Rs. 250." 19. To conclude, we would like to refer the decision of the Hon'ble Supreme Court in the case of CIT vs. British Paints India Ltd. (1991) 91 CTR (SC) 108 : (1991) 188 ITR 44 (SC). The Hon'ble Supreme Court has given the following findings: "Sec. 145 of the IT Act, 1961, confers sufficient power upon the officer nay it imposes a duty upon him-to make such computation in such manner as he determines for deducting the correct pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 145(1) of the IT Act, 1961 or 143(3) r/w 145(1). 21. The second issue to be decided is the parameter to be fixed for reviewing the yield percentage in cotton. Whether or not the assessee has shown low yield will depend upon fixation of reasonable yield or yield according to scientific principles or according to an opinion of an expert. Shri Aggarwal, the learned counsel, main argument is that in the cotton processing the possibility of uniform results cannot be scientifically visualised. The learned counsel submitted that the manufacturing process is done by sawgin ginning and roller ginning. He argued that both the processes may result into different yield of cotton and sawgin ginning will give more wastage and less yield of cotton as compared to the roller ginning and the difference can be as high as 9.4 per cent. It is argued by the learned counsel that always record is available in the books of accounts, whether processing is made by roller ginning or by sawgin ginning. However, it was agreed by the learned counsel that by and large the processing is made by roller ginning. The learned counsel, Shri A.K. Mangal pleaded that the cotton crops comes in the market in September ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ton Bulletin regarding statistics of cotton in the manufacturing process. The learned Departmental Representative has also filed information of yield percentage shown by the Cotton Corporation of India at pp. 60 and 65. 24. We have gone through the entire material available on record and which was filed before us. We are of the opinion that in a situation like this a reasonable yield can be arrived at by developing following processes of investigation. (1) The assessee's own history particularly yield shown in past years This cannot be applied in the case of the cotton yield because the cotton yield does not remain constant for each and every year and yield percentage is varied from year to year. We have examined yield chart of Bhatinda region prepared by the Cotton Corporation of India related to Muktsar region, which shows that in the asst. yr. 1986-87, yield was 32.738 per cent, whereas in the asst. yr. 1987-88 yield was 31.775 per cent. In the asst. yr. 1988-89, the yield was 31.143 per cent, for the asst. yr. 1989-90, the yield was 30.450 per cent. For the asst. yr. 1990-91, the yield was 29,950 per cent and same scenario is reflected in the case of cotton cell of Markfed, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Muktsar area shown by the Cotton Corporation of India is 30,500 per cent whereas in Malout area the yield is shown at 30.900 per cent. The yield percentage also varies from season to section. 26. There has to be a fiscal discipline and to develop this fiscal discipline, it is the duty of the judicial authority that the fiscal discipline should be equitable, judicious and positively transparent. It should be understandable both to the Revenue as well as to the assessee. The Revenue should not cross scientific line of investigation, which will result into uncalled for additions to the income and the assessee should be under discipline so that the advantage is not taken in the garb of wastage, shortage as well as yield to divert and convert the manufactured goods into unaccounted sales. We are, therefore, of the opinion that the yield percentage of Cotton Corporation of India or Cotton Cell of Markfed, which gives information complete in all respect vis-a-vis quality of cotton and vis-a-vis area from which cotton is grown and processed, should be the basis as reasonable yield percentage in a particular area. We are reproducing below the Annexure, which will clarify our discussion, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Corporation of India. (3) There are certain internal audit systems and the yardstick of yield processing and other areas are developed by the best experts in this line. This is required for internal audit system to check the pilferage and misuse of raw-materials as well as finished stock and for accountability of the managers. (4) The Cotton Corporation of India has a minimum standard of yield, which is fixed on the millers, who get the cotton for ginning and are paid ginning charges on rate contract. Such type of person are found to return a fixed quantity of cotton to the Cotton Corporation of India. This is arrived at after obtaining information from experts and field officers of the Corporation. 28. We are, therefore, of the opinion that most authentic comparable cases for looking into yield of cotton and by-product will be that of Cotton Corporation of India. Only in case where yield is lower as compared to the yield of cotton and other by-product shown by the Cotton Corporation of India then alone the AO can ask the assessee to explain the reasons for such lower yield and lower production of by-products like oil seeds or consequently higher shortage. In such cases, the on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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