1. This is a reference under Section 256(2) of the I.T. Act, 1961, and the Income-tax Appellate Tribunal, Delhi Bench 'C', Delhi, has referred the following two questions for the opinion of this court:
'(1) Whether, on the facts and circumstances of the case, the Tribunal was legally justified in rejecting the account books of the assessee ?
(2) Whether, on the facts and circumstances of the case, the Tribunal was justified in upholding addition to the extent of Rs. 25,000 to the returned income ?'
2. M/s. Bharat Milk Products, Gulaothi, District Bulandshahr (hereinafter referred to as ' the assessee') is a proprietary concern of Shri H. C. Gupta. The assessee is engaged in the manufacture of condensed milk, cream, khova and skimmed milk. The assessment year involved is 1966-67, the previous year ended March 31, 1966. On an examination of the accounts, the ITO found that the purchases and cash sales were not verifiable and that no day-to-day production and manufacturing record had been maintained. Accordingly, he invoked the proviso to Section 145(1) of the Act and on the basis of the milk purchases and sugar consumed as also the past record, he worked out the shortage in production at 76,376 kgs. and thus made an addition in the sale price of loose condensed milk at Rs. 2.65 per kg.
3. On appeal, the AAC took the yield of condensed milk at 25 per cent. as against 35 per cent, of raw milk taken by the ITO, He further allowed two per cent. as wastage on sugar. The shortage thus came to 19,077 kgs., the value of which was taken at Rs. 50,000 in found figure at the average selling rate of Rs. 2.65 per kg. The assessee was thus given a relief of Rs. 1,51,000.
4. Both the assessee and the department preferred appeals against the decision of the AAC. In the department's appeal the Appellate Tribunal took into consideration the fact that for the first three assessment years, that is, 1962-63 to 1964-65, the assessee did not maintain any accounts and the assessments were made on estimate. As for 1965-66, the matter was still pending. The ITO had not pointed out any parallel case while the assessee had cited the case of Healthways. The yield of condensed milk shown by M/s. Healthways was 25 per cent. and thus, in the opinion of the Appellate Tribunal, the AAC was justified in calculating the yield on that basis. As for the shortage of sugar allowed by the AAC as well, the Appellate Tribunal agreed with him. Further, the Tribunal accepted the assessee's contention that since no cash sales had been made, there was no question of such sales not being verifiable. However, in the absence of a day-to-day production or manufacturing record, the application of the proviso to Section 145(1) was upheld and the relief allowed by the AAC was confirmed.
5. Coming to the assessee's appeal, in which the addition sustained at Rs. 50,000 was challenged, the Appellate Tribunal found that in the yield shown by the assessee and that shown by the comparable case, there was a difference of 2.5 per cent, and the assessee had not been able to explain that difference. However, on a consideration of all the facts it was found that the price of the short yield of 10,000 kgs. should not be taken at the average selling price of Rs. 2.65 per kg. of loose condensed milk. In its opinion, it is just as likely that what seems to be short yield might have been occasioned by inflation of purchase. If that be so, the correct course should be to add back an amount based on purchase rate. In the nature of things, we are of the view that it is difficult to hold one way or the other. Taking all in all, we are of the opinion that an addition of Rs. 25,000 can be maintained and we order accordingly. Hence, now, at the instance of the assessee, this reference has been made to this court.
6. It was submitted before us on behalf of the assessee by Dr. K.B. Bhatnagar, advocate, that the accounts of the assessee could not be rejected merely on the ground that the assessee did not maintain any day-to-day manufacturing or production account or that the yield disclosed by him was less by 2.5 per cent, when compared with the yield shown by the comparable case. It was emphasised that there was no material before the Appellate Tribunal for sustaining the addition to the trading account at Rs. 25,000 and it has done so only on the basis of conjectures and surmises. Another submission made was that in the absence of any finding that the method of accounting adopted by the assessee was incomplete or defective, his accounts could not be rejected.
7. After hearing counsel for the parties at some length we find ourselves unable to agree with the submissions made before us by Dr. Bhatnagar. Section 145(1) reads as under :
(1) Income chargeable under the head 'Profits and gains of business or profession' or ' Income from other sources' shall be computed in accordance with the method of accounting regularly employed by the assessee : Provided that in any case where the accounts are correct and complete to the satisfaction of the Income-tax Officer but the method employed is such that, in the opinion of the Income-tax Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine.'
8. This sub-section lays down that in computing the profit under the head 'Profits and gains of business or profession' or 'income from other sources', the method of accounting regularly employed by the assessee should form the basis. In the present case it cannot be said that the method of accounting employed by the assessee in the year under consideration had been regularly employed by him. We have already seen that in the first three assessment years of its existence, that is, 1962-63 to 1964-65, the assessee had not maintained any accounts whatsoever and for the assessment year 1965-66 the proceedings had not become final. As stated by the Appellate Tribunal for the year 1965-66, though the assessee maintained the accounts, the assessment had been made under Section 144 of the Act. An application under Section 146 had been given but the matter had not become final till the appeal for the year under consideration was disposed of by the Tribunal. What we intend to show is that it could not be said that it was a case where a particular method of accounting had been regularly employed by the assessee. The proviso further says that even if the accounts are correct and complete but the method employed is such that the income cannot properly be deduced therefrom, the ITO can compute the income upon such basis and in such manner as he may determine. In the instant case it has been found as a fact and it was not disputed before us that the assessee did not maintain any day-to-day manufacturing and production account and the question is whether on account of this defect the accounts of the assessee could be rejected. In our opinion, the answer to this question has to be in the affirmative. We do not think that any exhaustive list of defects can be laid down which might justify the rejection of the books. There may be some defects which even individually may be sufficient for rejection of the books while there may be some minor or technical defects which even though several in number may not be sufficient for rejecting the accounts. It would be useful in this behalf to refer to the decisions of the Supreme Court in CIT v. McMillan & Co. : 33ITR182(SC) . The corresponding provision in theAct of 1922 was contained in Section 13 and the proviso to it and in McMillan's case it was observed that the words 'in the opinion of the Income-tax Officer' in the proviso to Section 13 do not confer a mere discretionary power, but in their context impose a statutory duty on the ITO to examine in every case the method of accounting employed by the assessee and to see, (1) whether or not it is regularly employed, and (2) to determine whether the income, profits and gains of the assessee can properly be deduced therefrom. It was further laid down that the ITO, even when he accepts the method of accounting, is not bound by the figure of profits shown in the accounts. The same view was taken by the Supreme Court in S. N. Namasivayam Chettiar v. CIT : 38ITR579(SC) and it was laid down (p. 588):
' ......the Income-tax Officer, even if he accepts the assessee's methodof accounting, is not bound by the figure of profits shown in the accounts. It is for the income-tax authorities to consider the material which is placed before them and, if, after taking into account in any case the absence of a stock register coupled with other materials, they are of the opinion that the correct profits and gains cannot be deduced, then they would be justified in applying the proviso to Section 13.'
9. In CIT v. K. Y. Pilliah and Sons : 63ITR411(SC) upon making detailed enquiries the ITO discovered that the assessee had carried out transactions outside the books. He, therefore, rejected the figures disclosed in the accounts as unreasonable because they did not include sales kept out of the accounts and, secondly, the gross profit disclosed was wholly inadequate in the light of profits disclosed by other dealers in the same business. The Supreme Court confirmed the findings of the I.T. authorities and held that, on the facts found, it was open to the ITO to estimate gross profits at a rate at which profit was earned in similar business by other merchants. In our opinion, this decision would apply squarely to the facts of the present case because here it has been found that in the absense of the day-to-day manufacturing or production account it cannot be said that the accounts are complete and accurate and further the yield shown by the assessee is less by 2.5 per cent. when compared with the yield shown by another dealer in the same business, which was relied upon by the assessee himself. No satisfactory explanation at all was given by the assessee to justify the lower rate disclosed by him.
10. Dr. Bhatnagar as well has placed reliance on certain decisions, but in our opinion they are all distinguishable. Harakchand Radhakishan v. CIT is a case of the Assam High Court. In that case, the assessee-firm which carried on business in oil and oil cake submitted a return showing the quantity of seeds crushed and quantity of oil and oil cake obtained. The ITO did not reject the books of account but on the basis of the previous year's assessment presumed that the rate of yield must be much higher, and estimated the yield of oil and oil cake and refraction at figures higher than shown. It was held by the High Court on a reference that the action of the ITO was based purely on conjecture and his assessment could not be upheld. In the present case, the ITO did not accept the account books of the assessee for various reasons and some of those reasons were upheld by the appellate authorities. Further, the yield shown by the assessee was found to be lower when compared with the yield shown by another dealer carrying on the same business and reference to which had been made by the assessee himself. This decision, therefore, does not help the assessee.
11. In Jhandu Mal Tara Chand Rice Mills v. C1T the accounts of the assessee had been accepted in all the years up to and inclusive of the assessment year 1957-58 but in 1958-59, the ITO rejected them solely on the ground that no day-to-day dryage register had been maintained and that, in another case, the yield proposed to be adopted by him was held to be reasonable by the Appellate Tribunal. On a reference the High Court did not agree with that view since the method of accounting adopted by the assessee had been accepted by the department in the previous years and no sufficient grounds had been made out for applying the proviso to Section 13 to the facts of the case. This case also is clearly distinguishable on facts.
12. The next case to which our attention was invited is a decision of the Bombay High Court in R. B. Bansilal Abirchand Spinning and Weaving Mills v. CIT : 75ITR260(Bom) , wherein it was laid down that the proviso to Section 13 can be applied only after a finding is recorded as to the unexplainability of the method and irregularity of the accounts kept. In that case, the main reason for rejecting the accounts was that the percentage of dead loss of cotton was high in a particular year. We do not think that that decision can help the assessee's case because here a finding has been recorded that the accounts are not complete and correct inasmuch as there is no day-to-day manufacturing or production account maintained and secondly that the percentage of yield of condensed milk is also low.
13. In St. Teresa's Oil Mitts v. State of Kerala : 76ITR365(Ker) the disparity in the consumption of electricity was held as not sufficient for the rejection of accounts without any other supporting circumstance.
14. The last case on which reliance has been placed on behalf of the assessee is of Raza Textiles Ltd. v. CIT : 86ITR673(All) . That case is also distinguishable because the mere circumstance on account of which the accounts were rejected was that the assessee had not maintained a record of the intangible waste and dust which had fallen out in the blow room. The addition was made by the revenue authorities in spite of the admission on behalf of the revenue that an intangible addition could not be made and that the dust was as a matter of rule never weighed. It would be seen that both these cases are clearly distinguishable on facts. In our opinion, therefore the action of the I.T. authorities in rejecting the assessee's accounts for the two defects, which we have noted above, was perfectly justified. Apart from this we find that the Appellate Tribunal recorded its findings on a consideration of the material on record. It cannot be said that the findings of the Appellate Tribunal are not based on any material and that is also not' the subject-matter of the questions referred to us. These are pure findings of fact which cannot be challenged in a reference. As regards the quantum of the addition sustained by the Appellate Tribunal, it would be too much for the assessee to say that it is based on mere conjecture, for, if there can be any grievance about the relief allowed by the Appellate Tribunal, it could be only to the department. The average sale price of loose condensed milk was certainly a proper guide for estimating the value of the short yield. There was certainly no basis for adopting the purchase rate for this purpose. Therefore, we do. not think that the assessee can, with any justification, dispute the quantum of the addition sustained by the Appellate Tribunal.
15. We, therefore, answer both the questions in the affirmative, in favour of the department and against the assessee. The department is entitled to its costs which we assess at Rs. 200 and counsel's fee in like figure.