S. C. Mital, J. - M/s. Haryana Iron and Steel Rolling Mills, Hissar (for short the assessee) has filed this petition u/s 256 (2) of the IT Act, 1961, praying for the issuance of a direction to the Tribunal to state the case and refer inter alia the question set out hereinafter.
2. The assessee deriving income from the running of an Iron and Steel Rolling Mills in Hissar, filed its return declaring therein Rs. 29,560.00 its income for the accounting period commencing from 1-10-1960 ending on 30-9-1966, relevant to the asst. yr. 1967-68. The assessee had been obtaining overdrafts from the Central Bank of India, Hissar, by pledging its stocks. According to the ITO the assessee had pledged the following stocks of the value of Rs. 3,66,695 with the said bank on 26-9-1966 :
Raw material : 484,711 M.T.
Finished material 112,371 M.T.
Giving the credit of the stock, the value of Rs. 3,26,389 being the value of the stock which had been similarly found pledged with the bank outside the account books during the preceding asst. yr. 1966-67, the excess stock was determined to be of the value of Rs. 40,306. This unexplained amount was treated to be the assessees income for the year 1967-68, hence added back to be income declared by it. In this respect the decision of the ITO which was upheld by the higher authorities, is not directly the subject matter of this petition.
3. The other aspect of this case is that the assessee processed raw material and by rolling it, obtained the following quantities of finished material :
Raw material :
Private/free raw material :
Thus, the assessee showed a shortage of 177.880 M.T. of raw material in its account books. This shortage which came to about 9 per cent was considered by the ITO to be excessive. Taking the shortage at 7 per cent to be reasonable, the ITO allowed the shortage of about 138.00 M.T. valuing it at the rate of Rs. 750 per metric tonne, the ITO made an addition of Rs. 30,000 to the declared income of the assessee.
4. On the above said question of addition, on account of excessive shortage the assessees case before the ITO was (1) keeping in view the diverse kind of raw material with varying compositions and of variety of quality purchased and processed by it, the shortage of 177.880 M.T. (of about 9 per cent) was not excessive, and (2) taking into account 112.371 M.T. of finished products, which had not been reflected in the account books, and had been found pledged with the Bank outside the books, the quantity of the finished products comes to 1914.633 M.T. (1802.262) M.T. as shown in the account books and 112.371 M.T. kept outside the books) and thus the resultant shortage of 65.509 M.T. coming to about 3.30 per cent was not excessive. The assessee further reinforced its case by showing that the stock of the value of Rs. 25,135 found pledged in excess accounted for the excess shortage shown by it. Rejecting the assessees view point the ITO declined to delete the addition of Rs. 30,000.
5. Feeling aggrieved the assessee challenged the order of the ITO by filing an appeal before the AAC, Rohtak, who by his order dt. 26-8-1972, deleted the addition of Rs. 30,000. Thereafter the revenue felt dissatisfied and filed appeal before the Tribunal which by its order dt. 25-9-1975 restored the addition of Rs. 30,000. On the crucial point for determination whether, 112.371 M.T. of the finished product found pledged with the above said Bank, but kept outside the books was manufactured out of 1980.142 M.T. of the raw material rolled during the year in question, the Tribunal decided the case against the assessee. The Tribunal was influenced by the comparison made by the representative of the department between the valuation of the stock consisting of the raw material and the finished products which had been found pledged by the assessee on 26-9-1966 with the valuation of such stock found pledged with the bank during the preceding year. The Tribunal, thus, while sustaining the addition of Rs. 40,306 held that the addition of Rs. 30,000 could not be adjusted against Rs. 40,306 and that there was no connection between the two accounts.
6. Dissatisfied from the order of the Tribunal the assessee filed an application u/s 256(1) of the IT Act, 1961, requiring the Tribunal to refer to this court certain questions of law which arise out of the order of the Tribunal dt. 25-9-1975. The questions sought to be referred read as under :
'(i) Whether, on the facts and circumstances of the case, the Tribunal was justified in law in concluding that there was no connection between the addition of Rs. 40,306 made on account of over-pledging of stocks with the Bank on 26-9-1966 and the addition of Rs. 30,000 made on account of excessive shortage as ascertained on 30-9-1966 ?
(ii) Whether, on the facts and circumstances of the case, the Tribunal was justified in law in holding that the shortage in a manufacturing concern could only be ascertained at the end of the accounting period and as such whether the Tribunal was further satisfied in law in holding that addition on account of shortage could not be adjusted against other additions made ?
(iii) Whether, on the facts and circumstances on the case, the Tribunal was justified in law in restoring the addition of Rs. 30,000 deleted by the appellate authority and further erred in law in holding that the said addition could not be adjusted against the addition of Rs. 40,306 ?'
7. The Tribunal considered the matter a fresh and by its order dt. 21-1-1976 declined to refer the aforesaid questions, as in the opinion of the Tribunal the case had been decided on facts and no question of law arose which required decision by this Court.
8. As earlier observed, the present petition has been filed u/s 256(2) of the IT Act, for the issuance of a direction to the Tribunal to state the case and refer the questions for our decision.
9. It may be observed at the outset that Mr. Gupta, ld. counsel for the petitioner, pressed only Question No. (iii). What was sought to be argued by him was that the addition of Rs. 40,306 for over-pledging of stock with the bank on 26-9-1966, should have covered the addition of Rs. 30,000 on account of the alleged excessive shortage and that the separate addition of Rs. 30,000 was not justified.
10. We have heard the ld. counsel for the parties and after giving our thoughtful consideration to the entire matter, we find that on the aforesaid contention of the ld. counsel for the petitioner, the following question of law does arise for our decision, out of the order of the Tribunal :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the addition of Rs. 30,000 could not be adjusted against the addition of Rs. 40,306 ?'
11. Consequently, we allow this petition and direct the Tribunal to draw up a statement of the case and refer the question of law formulated.
Prem Chand Jain. J. - I agree.