1. The appeal by the revenue raises two points, one with regard to an addition made for invisible loss in the production of yarn and the other relating to the claim for development rebate under Section 33 of the Income-tax Act, 1961 ('the Act').
2. The assessee is a registered firm engaged in the manufacture and sale of cotton yarn. In computing the total income for the assessment year 1975-76 corresponding to the previous year ended 31-12-1975, the ITO scrutinised the quantitative tally statements and found that there was an invisible loss of 2.18 per cent, which was excessive when compared to the similar loss of 1.18 per cent shown in the preceding year. He also noticed that the gross profit had declined from 17.1 per cent to 9.02 per cent and asked the assessee to explain the increased claim in the invisible loss with reference to the monthly figures of production. The assessee explained that the monthly figures were rough and ready estimates and that several factors, such as, the mixing of usables waste called sweepings, the variation in the use of the foreign and Indian cotton, the suspension of work due to strike and consequential accumulation of dust which were unusual features, may have contributed to the excessive loss. The assessee also contended that all the production figures have been checked and cross-checked by the excise authorities, etc. and, therefore, the figures of loss shown should be accepted as correct. The ITO, however, compared the visible loss of the assessee with those shown by the other assessees and taking the 1.70 per cent as the standard, added back a sum of Rs. 26,900 as the undisclosed income of the assessee from waste produced and sold outside the books.
3. On appeal, the Commissioner was of the opinion that on a comparison with the figures shown by the sister concerns of the assessee, the higher percentage of invisible loss shown could not be considered unreasonable. He also noted that in the case of sister concerns, no such additions have been made even though the invisible loss shown was much more than what was shown by the assessee.
4. In the appeals before us, the contention of the revenue is that the position of the sister concerns of the assessee could not be taken as comparable merely because of common ownership when in fact the size of the operations of the assessee was much different from that of the sister concerns. It was submitted that since the other assessees of comparable size had shown less invisible loss, the addition was justified and should be restored. On the other hand, it was pointed out on behalf of the assessee that the assessee was maintaining audited accounts which had been checked by the authorities concerned and, therefore, there was no justification for assuming that any yarn had been produced or sold outside the books and for making an addition in that regard.
5. On consideration of the rival submissions, we are of the opinion, that the order of the Commissioner should be confirmed on this point.
The fact that the gross profit was lower than that in the earlier year may provoke the ITO to enquire into it. But in this case, we find that even after the enquiry he had not made any addition on account of any suppression in the gross profit. That being the position, there cannot be an addition for any invisible loss in the process of production, unless there is further material to show that in fact certain amount of yarn had been purchased and sold outside the books. The ITO has sought to draw such inference merely on the ground that the rate of invisible loss shown by the assessee was comparatively higher than last year.
But, a reference to the invisible loss shown by other assessees as well as the sister concerns of the assessee is enough to indicate that it is a variable factor depending upon various conditions of production and there is no particular standard by which it can be definitely stated that the loss shown by the assessee was unreasonable or excessive.
Moreover, the ITO has not demonstrated that the figures of consumption, production, etc., which have been audited and also checked by the excise department are in any way incorrect or inaccurate. In the circumstances, it is difficult to assume that the invisible loss shown by the assessee is false and that a part of it represents unaccounted production sold outside the books. We find no material on record to justify such an inference and we, therefore, uphold the deletion of the addition made in that regard.
6. The next point in dispute relates to the claim for development rebate. During the previous year, the assessee had acquired spinning machinery for Rs. 16,203, electrical plant and machinery for Rs. 70,743 and a diesal generator set for Rs. 78,809. The assessee claimed development rebate as 25 per cent on the total sum of Rs. 1,65,757. The ITO granted a rebate of Rs. 33,647, the computation of which showed that the development rebate was granted at 25 per cent in respect of the spinning machinery, motor and ring frame starters of the electrical machinery and at 15 per cent only on the generator set and low tension panel board. The assessee appealed and the ITO explained that in the view of the internal audit wing, only textile machinery was entitled to the higher rate of development rebate and even the motor and ring frame starters were only ancillary to the textile machinery. The Commissioner found that there was no scope for such an invidious distinction and that the machinery installed for the purpose of the business were entitled to the higher rate of development rebate when the business was that of the production of article in the Fifth Schedule.
7. The revenue is in appeal against this decision, with the contention that the higher rate of development rebate should be restricted to the particular machines actually engaged in the production of article listed in the schedule and not the entire machinery of the factory engaged in the production of the article. But a reading of Section 33 does not give room for this distinction. As pointed out by the Commissioner, the opening words of Section 33 refers to the machinery used for the purpose of the business carried on by the assessee.
Sub-clause (B)(i) of Section 33(1)(b) grants higher rate of development rebate for the machinery installed for the purposes of the business of construction, manufacture or production of any of the things specified in the Fifth Schedule. Item 32 of the Fifth Schedule is textiles, including cotton yarn. Therefore, the machinery installed for the purpose of business of production of cotton yarn would be entitled to the higher rate of development rebate. The revenue wants to omit the word 'business' by reading the section as if it refers to machinery installed for the purpose of production of cotton yarn and limit the higher rate of development rebate to only such machinery as are directly instrumental in producing the yarn. We are unable to agree with such a construction as it means that a main part of the section is omitted and we cannot assume that the Parliament had used any redundant words in framing the Sub-section. The only way to read the Sub-section is that machineries installed for the purpose of business of construction, or the business of manufacture or the business of production of an article listed in the Fifth Schedule would be entitled to the higher rate of development rebate allowance. It would follow that since the business of the assessee is the production of cotton yarn which is an item listed in the Fifth Schedule all the machinery used for the purpose of such business as categorised in the opening of the section would be entitled to the higher rate of development rebate.
The revenue advanced another argument that a generator should be left out of the scope of the textile machinery for the purpose of this section, as it can be utilised for producing electricity for the purpose of running any kind of machinery. This argument emanates from the fallacy of abstracting the provisions of the section. There is nothing in the section which says that the higher development rebate is confined to textile machinery for there is no such classification, because higher development rebate is given for the business of production of textiles, the revenue for the purpose of convenience calls it a concession given to textile machinery, thereby loosening the real scope of the section. As we have stated earlier, the scope of the section is to give higher rate of development rebate allowance to machinery employed in the business of production of textiles. The generator is also employed in the business of production of textiles because without the electricity thus generated there can be no production of textiles. A generator is only used for the purpose of business carried on by the assessee as required by the opening words of Section 33 and that business is the production of textiles as required by item (i) of Clause (b) of Sub-clause (B). Since these two essential conditions of the section are satisfied, it is not possible to deny the claim of the assessee by referring to a convenient nomenclature, such as, textile machinery which is nowhere to be found in the provisions of the Act, We are, therefore, in entire agreement with the order of the Commissioner on this point also. We have. therefore, no hesitation in confirming his order.