1. This is an appeal by the revenue for the assessment year 1977-78 against the order of the AAC deleting the addition of Rs. 60,125 and Rs. 2,700 made in the groundnut oil account and Tara Meera account, respectively. The assessee derives income from extraction of oil. The ITO rejected the book results of the assessee on the ground that the stock register was not properly maintained and the production was not correctly reflected. He observes that in several other cases the yield percentage of oil ranged between 29 per cent to 30 per cent. He, therefore, worked out the oil production of the assessee at 29.50 per cent. It resulted into a shortfall of 93 quintals of oil. The average sale price being of Rs. 6.50 per kg. the ITO made the addition of Rs. 60,125 in the groundnut oil account. In Tara Meera account, the assessee showed the yield of 29.2 per cent and the wastage of 5 per cent. The wastage was taken to be excessive by the ITO. He was of the view that the wastage was normally 2 per cent. He, therefore, took the view that the production of oil was suppressed by 3 per cent by the assessee. The assessee crushed 150 quintals of Tara Meera account and the shortfall was, thus, worked out at 4.50 quintals, i.e., 450 litres.
Applying the average sale price of Rs. 60 per litre, the ITO made the addition at Rs. 2,700 in the Tara Meera account. Both the additions were being challenged by the assessee in appeal before the AAC. He was of the view that there was no defect in the books of account of the assessee and that the yield shown by the assessee was well supported by several other cases. He also observes that no comparable case was cited by the ITO. He, therefore, deleted the addition.
2. We are in complete agreement with the AAC. The ITO makes a reference to the comparable cases but no case has been cited by him in his order nor was the assessee confronted with any case. The AAC clearly observed that the stock register has been properly maintained by the assessee.
No specific defect has been pointed out in the stock register by the ITO. He simply observes : The stock register is not the day to day production register but imaginary oil stock register.
There is nothing on record to substantiate this observation of the ITO.This is the first year of the assessee's business. Before the AAC the assessee cited several comparable cases in which the yield ranged from 27.5 per cent to 27.7 per cent. No defect having been established by the ITO in the books of the assessee, no addition can be made merely on the basis that yield as shown by the assessee appeared to be low. The addition in both the accounts--groundnut oil account and Tara Meera account--has, therefore, to be deleted for this reason and, in our opinion, the AAC was right in deleting the addition made in both the accounts. There is no need to consider the instances which were cited by the assessee before the AAC because no defect, as such, was established in the books of the assessee by the ITO. The instances given before the AAC by the assessee simply give a support to the conclusion of the AAC reached at by him independent of these instances.
For the reasons, we uphold the order of the AAC deleting the additions in both the accounts.
1. I had the benefit of going through the combined order passed by the Hon'ble Judicial Member. I am not inclined to agree with the conclusion arrived at by him. I am, therefore, recording my decision by a separate order : 1. Whether the stock register was properly maintained and production was properly reflected 2. If not, whether the yield shown in groundnut oil and Tara Meera accounts was reasonable and, consequently, no addition was called for? 3. According to the ITO, there was wide fluctuation in the yield of groundnut oil on different dates. On some dates yield of groundnut oil was high as 30 per cent, while on some date as low as 23 per cent. The ITO has further observed that no day to day details of chhilka and oil cake produced were available with the assessee. Apparently the production register was written by the assessee with reference to sales. The ITO also observed that there was no valid reason for vide fluctuation in the yield of oil, whereas the groundnut crushed was more or less of equal quality. According to the ITO, therefore, the production register was not day-to-day record of production, but the imaginary oil stock register. The ITO further observed that in cases of other comparable assessees the yield of groundnut oil ranged between 29 per cent to 30 per cent. He, therefore, worked out the reasonable yield at 29.5 per cent as against 27.3 per cent shown by the assessee as observed by the AAC and made addition of Rs. 60,125 on account of shortage shown in yield. While deleting the addition the AAC has merely stated that the stock register has properly been maintained without commenting on the wide fluctuation in yield on different dates or other observation made by the ITO. He also observed that the assessee had furnished comparable cases of low yield while the ITO has not mentioned any evidence in support of his estimates of yield at 29.5 per cent.
4. Before us the learned departmental representative has supported the order of the ITO and submitted that the stock register of yield was imaginary and did not reflect the real yield. He also submitted that the ITO had in support of the estimates of yield made by him at 29.5 per cent had relied upon the following comparable cases as is evident from the note recorded by him at the foot of the assessment order : (i) Govind Oil Mills showing yield of 29.5 per cent, and (ii) Kalyan Oil Mills showing yield of 29 per cent.
5. The learned departmental representative, therefore, submitted that the assessment records of the ITO were available with the learned AAC, still he did not take notice of the cases and proceeded to observe that no comparable cases were mentioned by the assessee. Shri Nanda, the learned departmental representative, further contended that the cases relied upon by the assessee before the AAC were never mentioned before the ITO and the AAC accepted the same without confronting the same to the ITO and without giving details of the quantity crushed and yields.
6. The learned authorised representative of the assessee, on the other hand, has supported the order of the AAC. He has pointed out that an explanation was duly submitted before the ITO vide assessee's letter dated 31-12-1979 and stated that variation in yield depended upon the quality of groundnut crushed and other facts prevailing at the time of crushing. He also pointed out that the Commercial Tax Officer, Circle 'C, Jaipur had also accepted the yield shown by the assessee. He has also furnished the rates of purchase of groundnut crushed on different dates as also the percentage of yield on different dates in support of his contention that the yield of oil on different dates depended on quality of groundnut crushed. These are included in the paper book. He has, however, not spelt out other adverse factors prevailing at the time of crushing contributing to low yield. He has also referred to comparable cases of low yield. He also stated that the comparable cases pointed out by the learned departmental representative do not indicate the location of the oil mills concerned and, therefore, the same cannot be relied upon.
7. I have carefully considered the rival submissions. The learned AAC has made a sweeping statement that production register is properly maintained by the assessee without commenting upon the defects pointed out by the ITO. He has not made any comments as to why there were wide variations in the yield of groundnut oil, particularly when the ITO had observed that there were no valid reason for fluctuation. I am, therefore, unable to uphold the finding of the AAC that stock register is properly maintained. I would also like to add that the order of the commercial taxes authority is not binding upon the ITO. The ITO is free to take his own enquiries and reach his own conclusions based on the facts available before him. I have already pointed out earlier that other adverse factors resulting in low yield have not been spelt out by the learned Counsel for the assessee nor such case appears to have been set up before the AAC. The only explanation of the assessee about variation in yield is the quality of groundnuts purchased and consumed for crushing. I shall now consider this aspect of the case. The first purchase of groundnut is shown on 11-3-1976 which was from Rs. 113 to Rs. 137 per unit. The yield out of these purchases crushed on 13-3-1976 and 14-3-1976 is 25 per cent and 25.73 per cent, respectively. Next purchase is on 26-3-1976 at the rate of Rs. 116 to Rs. 127.50 per unit.
Again on 1-4-1976 the purchases are at the rate of Rs. 133 to Rs. 160.
Next crushing is also on 1-4-1976. Opening stock on this date was 37-75-0 units (presumably quintals). Further purchases added on this date are 23-25-750 quintals. Thus, total stock available for crushing was 61-0-750 quintals. It is not clear how much quantity of groundnuts was crushed on this day, though the yield is shown at 26 per cent. Next purchase is on 6-4-1976 at the rate of Rs. 133 to Rs. 160 per quintal.
Next crushing is on 8-4-1976. The opening stock on 8-4-1976 is shown at 22-25-750 quintals. The opening stock on 8-4-1976 apparently consisted of purchases on 6-4-1976 and any uncrushed stock left on 1-4-1976. In other words, entirely or major portion of stock on 1-4-1976 was consumed. Even though crushing on 1-4-1976 included the material of superior quality having been purchased at the rate of Rs. 133 to Rs. 160 as against earlier purchases at the rate of Rs. 133 to Rs. 137 but the yield almost remained the same, i.e., at 26 per cent, against yield on 14-3-1976 at 25.73 per cent. On 12-4-1976 yield shown is at 22 per cent only while the material crushed was of purchases made at the rate of Rs. 133 to Rs. 160 per quintal, against 29 per cent shown earlier on 8-4-1976 out of the same or even inferior purchases of earlier period, if any. There is no explanation for this abnormal decrease in the yield. Again 23 per cent yield is shown on 18-8-1976, while the purchases made on the immediately preceding dates are at the rate of Rs. 210 to Rs. 220 per quintal. On 20-10-1976 also the yield is at 23 per cent, while the purchases made during October 1976 are from Rs. 160 to Rs. 215 per quintal. It would, thus, been seen that even better quality of groundnut has given widely fluctuating yield. The explanation for fluctuation, in my opinion is, therefore, not convincing. It is not the case of the assessee that the same quality of groundnut but the prices had gone up from time to time and quality remained inferior. The assessee has, therefore, failed to establish that low yield was because of poor quality of groundnut. Jn such circumstances, I am in agreement with the learned ITO that the stock register was not the day-to-day record of production, but imaginary and does not reflect the correct production of oil and the ITO was justified in not accepting the book results. Then the ITO has also pointed out non-maintenance of day-to-day records of chhilka and oil-cake produced to correlate the same with yield of oil. This is another strong point about incomplete nature of the records kept by the assessee. I, therefore, hold that the ITO was justified in rejecting the book records and, consequently, the AAC'S finding thereon is reversed. I shall now consider as to what addition is called for. I have observed earlier that the AAC has not considered the comparable cases relied upon by the ITO as mentioned by him at the foot of the assessment order. He has also not confronted the cases relied upon by the assessee to the ITO, as the same were not cited before him at the time of assessment. In such circumstances, there is no other alternative but to set aside the order of the AAC and to restore the same to his file. I, therefore, set aside the order of the AAC for fresh determination taking into consideration the following points : 2. he will consider whether there was any cases for admission of comparable cases cited by the assessee before him keeping the view the provisions contained in Rule 46A of the Income-tax Rules, 1962 ; and 3. if there is case under Rule 46A, he will confront the comparable cases to the ITO and give him an opportunity to rebut the same.
8. So far as addition in Tara Meera account are concerned, I agree with the conclusion arrived at by the Judicial Member, as the ITO himself has not pointed out any defects in the account books or the stock register with reference to this account. I, therefore, sustain the order of the AAC on this account.
9. In the result, the appeal is partly allowed, though for statistical purposes.
REFERENCE TO A THIRD MEMBER UNDER SECTION 255(4) OF THE Income-tax ACT, 1961 As the Members of the Bench differ in opinion on an addition of Rs. 60,125 made by the ITO in the groundnut oil account, the point of difference mentioned hereinafter is referred for the decision by a Third Member.
Whether, on the facts and in the circumstances of the case, can the addition of Rs. 60,125 made by the ITO in the groundnut oil account be deleted The assessee is a firm carrying on the business, of crushing groundn0uts into oil, The ITO found that the assessee maintained a stock register but there was a wide fluctuation in the yield of oil on different dates. No day-to-day details of chhilka and oil-cake produced for particular lots were available. Noting that the production register was written with reference to the sales and finding the fluctuation in the yield not valid, he came to the conclusion that the stock register is not the day-to-day production register but the 0imaginary oil stock register'. Rejecting the books, therefore, he worked out the yield at 29.5 per cent allegedly based on the results of comparable cases and made an addition of Rs. 60,125 to the groundnut oil account. On appeal, the AAC deleted the addition. Before the Tribunal, the department challenged the AAC's order. The two members who heard the appeal passed differing orders consequent upon which the following point of difference was referred to me as the Third Member for the resolution of the dispute : Whether, on the facts and in the circumstances of the case, the addition of Rs. 60,125 made by the ITO in the groundnut oil account could be deleted 1. The learned Counsel for the department has pointed out that the accounts of the assessee are not foolproof and cannot be accepted. The ITO has correctly found that the alleged stock register is only a made up affair. It does not represent the correct factual position of the business. Explaining his position further, the learned Counsel pointed out that if it were to be a stock register, the details of chhilka at least should have been present. This is not available. Even in the letter dated 31-12-1979, the assessee has not given out the details of the quality and quantity of the groundnut crushed so as to explain the discrepancies with regard to the yield pointed out to him. That the yield varies abnormally from day to day itself is an evidence of the fact that the register is a made-up affair. This is especially so if regard is had to high prices at which the groundnut has been purchased.
In fact, referring to some of the daily yields and some of the purchases the learned Counsel pointed out that the register is full of instances showing high yielding groundnut showing a low yield and vice versa. This itself shows that the stock register cannot be accepted as correct. The incorrectness of the accounts follows from the incorrectness of the closing stock. Since the stock register itself can be assailed as above, according to the learned Counsel, any sales of suppressed quantities of oil-cake, etc., will not come into the accounts. This firm no point of view can the accounts of the assessee be regarded as correctly maintained. The books had to be rejected.
Rejecting the book results, it is open to the ITO to apply the correct percentage of yield or profit to arrive at the total income of the assessee. The proper method for this being the adoption of the yield shown by other similar oil dealer, the ITO has correctly adopted this method and fixed the assessee's income by making suitable additions.
2. Dealing with the orders of the learned Judicial Member and Accountant Member, the learned Counsel stressed the point that the Accountant Member has given valid reasons supporting his case. The decisions of the Supreme Court as in Guduthur Bros. v. ITO  40 ITR 298 and in S.R. Jadav Desai v. Sixth WTO  121 ITR 531 (Kar.), show that a mere irregularity in the proceedings should not disable the ITO from making a correct assessment. What the learned Accountant Member has done, therefore, according to the learned Counsel, gets support from these decisions. The AAC discussed some of the comparable cases produced before him and this has been adverted to by the learned Judicial Member also. According to the learned Counsel, this was a clear error insofar as the implications of Rule 46A have not been kept in mind either by the AAC or by the learned Judicial Member. The latter has not referred to any comparable case himself. His finding that no cases were referred to by the ITO in the order and, consequently, the addition was based on no evidence is also, therefore, incorrect. Even if for the subsequent years, the yield of the assessee has been accepted as correct, that would not bind the ITO as far as the assessment for the year under appeal is concerned.
3. For the assessee, stress is laid on the detailed facts regarding the stock register of the business placed before the ITO and the AAC. The stock book is maintained as per day-to-day measurements made. In fact, this is a statutory register open to and actually examined by the Government officials. The fact of its regularly being checked is borne on the face of the register itself. Even though the quantities of groundnut purchases are taken out from the bills, there is an absolute tally. According to the learned Counsel, the ITO's finding that the stock register does not represent the reality is erroneous. The assessee had continued to maintain the same books for the subsequent years as well. Without any adverse comments on these books, the ITO has accepted the book results and the yield shown for these years. No omissions, manipulation of accounts, etc., have been pointed out. There was no justification, therefore, for rejecting the books. Even if for argument's sake the books were held to be not satisfactorily maintained, according to the learned Counsel, the book results were good. The comparable cases referred to were not pointed out to him in the first place. At any rate there was nothing to show that the nature of the business done by these comparable parties was the same as that done by the assessee. As against some cases pointed out, though at the appellate stage by the ITO, there were several other cases where a low yield has been accepted by the department.
4. The matter lies in a small compass. The assessee-firm carries on the business of manufacturing the groundnut oil. Some types of registers are maintained. The ITO has examined and adversely commented on a particular stock register treating it as an 'imaginary oil stock register', Relying on what he calls some comparable cases, he has adopted a higher percentage of yield and made the addition. Going through the register produced and having regard to the background of the register maintained, it would be incorrect to say that the register is not contemporaneously maintained or is a mere piece of imaginary work. Whether it technically satisfied the requirement of any authority or to what extent it so satisfies, is a different matter. The assessee has maintained the details of purchases in the purchase book. These are supported by vouchers. In fact the quantitative details are taken from the vouchers. It is true that a comprehensive and elaborate stock book showing the details of husking the groundnut, the quantity of goods sent up for crushing day-to-day and the actual yield every day, is not maintained. However, this cannot make the register already maintained a made-up affair. This register which I examined, indicates the actual purchases recorded, the issue for crushing, and the daily oil produced.
The production of the oil is measured by the stock method or by taking into account the tins filled in. I also find that under the special commodities control regulations, the assessee is to send every day a statement of production of oil. When, thus, the actual details of production of oil and the actual details of purchases are available from day-to-day, to brand the register containing such details as imaginary is certainly erroneous. It does represent the actual state of affairs. No other evidence has been produced by the department to show that there is any manipulation in the register in the quantities noted therein or in any other particulars found therein. The allegations made on this account by the ITO cannot be supported.
5. Even so, it cannot be denied that the register maintained does not give complete details to hold the account as foolproof. The yield calculated also, in my opinion, has no basic importance from the production point of view since it involves very many variables. The proposition stuck is of the daily production of oil culled out from the stick and filled-in-tins process and the purchase of unhusked groundnut as shown by the bills. While these may have a mathematical significance, it will have no production significance. The mere fact, therefore, that this register does represent the actual facts does not by itself help the assessee. There are no other quantitative details regarding the extent of loss at the husking stage, crushing stage, etc., which could be scientifically related to the process of production. In my view, therefore, the assessee cannot claim that merely because a particular type of production register is maintained, the accounts are foolproof. On the contrary, the ITO has not pointed out any defects, omissions, manipulation of accounts, not even an over-writing or incorrect correction. This is, therefore, only the usual type of a case where the assessee has maintained accounts, but the extent of perfection which the ITO wants for the accounts to be foolproof has not been fully realised. The ITO, therefore, would be correct in rejecting the accounts. The question whether the book results should be rejected as well is a different matter.
6. Even though the assessee's books could be rejected as not foolproof, there is no information to indicate that the yield shown by the assessee is low or manipulated. In the first place I find nothing in the order of any of the authorities below to indicate the scientific significance of the yield considered in question. If the yield is of oil in relation to de-husked groundnut, that would be one matter. If a proportion is computed in relation to the weight of groundnut raw itself, it would be a more complicated affair with more variables included. If added to this one considers the different qualities of groundnut, the nature of the groundnut itself, the different degree of wetness and various other factors inherent in the purchase of groundnut, the proportion called yield considered by the ITO as a concept, etc., they cannot be clearly understood at all. Be that as it may, to hold that the yield so calculated is low and so some addition should be made to bring up the yield to the normal figure, whatever that be, would be a limit of absurdity. What I want to say is that even if the accounts of the assessee could be rejected for not being capable of fully verified, no one can say without very much further information that the yield shown by him is low. The learned Counsel for the department has pointed out that other assessees have shown high yields.
The fallacy in the stand is that absolutely no information is available about the nature of the business done by the other manufacturers whose cases are compared with that of the present assessee. What was the nature of the groundnut they dealt in, where they made purchases, at what time they made the purchases, what was the extent of wetness, etc.
What was the technical efficiency of crushing in each case are all matters of great consideration while comparing two cases of manufacturers. The learned departmental representative is not in a position to furnish any of these details with regard to these other assessees. Even from the critical point of view, therefore, I cannot say that these cases could be considered as comparable. Merely because some other dealers show some proportion of yield, the present assessee could also show the same. In fact whether the proportion has been worked out in those cases, even in the same manner, namely, that all quantity of oil measured by the dip method to all quantity of groundnut purchased in the market. Whatever be the quantity sent in for crushing itself is not clear. I have, therefore, no doubt that the reliance on the yield shown by the comparable cases is not at all justified in the present case.
7. I thus find that the assessee has shown certain book results. There is absolutely no material with the department and none is given before me by the learned departmental representative to show that the results shown by the assessee are deficient in other respects. The learned Counsel is not in a position also to give the variables as regards purchase, quality, price, wetness, climate of the place, efficiency of crushing, etc., and show what they held should be in the background of these. No omissions, manipulations, etc., have been pointed out.
Purchases and sales are fully vouched. No defects have been found out even with regard to these. I see, therefore, no justification to reject the book results and make an addition on account of shortage of yield.The addition of Rs. 60,125 should be deleted, I agree with the learned Judicial Member that the order of the AAC should be upheld.8. The matter will now go back to the original Bench which heard the appeal for proper disposal.
1. This appeal was filed by the revenue against the order of the AAC dated 30-9-1980. The assessment year involved is 1977-78. The following issues were raised in the appeal by the revenue : (i) deleting the addition of Rs. 60,125 made by the ITO in groundnut oil account ; and (ii) deleting the addition of Rs. 2,700 made by the ITO in Tara Meera account.
2. After hearing the appeal by the Tribunal, there was a difference of opinion among the Members on deletion of addition of Rs. 60,125 made by the ITO. The learned Judicial Member has confirmed the view taken by the AAC. However, the learned Accountant Member did not agree with the Commissioner (Appeals) and he set aside the order of the AAC to that extent with the direction to decide the issue afresh. So far as the addition of Rs. 2,700, which was made by the ITO and deleted by the AAC, is concerned, both the Members have agreed with the view taken by the AAC. As there was a difference of opinion, on addition of Rs. 60,125 made by the ITO, it was referred to the Third Member. The learned Vice President, Dr. V. Balasubramanian, has decided the issue as Third Member. He agreed with the view taken by the learned Judicial Member. Since the view taken by the Judicial Member is the majority view on the issue, we confirm the order of the AAC, wherein he deleted the addition of Rs. 60,125 made by the ITO in groundnut oil account, and further deleted the addition of Rs. 2,700 made by the ITO in Tara Meera account.