SRINIVASAN, J. - Two questions have been referred to us under section 66(2) of the Indian Income-tax Act :
'1. Whether on the facts and in the circumstances on the case that was any material before the Tribunal of justify an addition on the ground that the assessees books did not show the correct consumption of chlorate in the manufacture or matche ?
2. If the answer to question No. 1 is in favour of the assessee, whether on the facts and in the circumstances of the case, there are materials to justify the rejection of books results and to invoke the proviso to section 13 of the Income-tax Ac ?'
The assessment years in question are 1947-48, the accounting year for which is the calendar year 1946, and 1949-50, the relevant calendar year being 1948. In respect of the assessment year 1947-48, an assessment was originally made on August 2, 1948, and the net income of Rs. 32,433, returned in respect of the match manufacturing business of the assessee was accepted. Subsequently in 1953, proceedings were initiated under section 34 of the Act. The Income-tax Officer concluded as a result of these proceedings that there was an escape of the assessees income form assessment, principally on the basis that the consumption of chlorate for the manufacture of matches was excessive. In coming to the conclusion, be relied upon the decision of the Appellate Tribunal in the appellate proceedings relating to the assessment for the year 1948-49 wherein the Appellate Tribunal had held that a consumption of 15 pound per 100 gross match boxes was reasonable. The Income-tax Officer though that the accounts were defective in that the issues of chlorate could not be correlated to the production of matches and that the average consumption varied from month to month. It may be mentioned here that what set afoot the proceedings under section 34 was the suspicion that a certain quantity of potassium chlorate had been consigned by the assessee to Pattukottai. It was apparently suspected that this chemical was being diverted for other uses. It is not necessary to go further into this matter except to point out that in appeal the Assistant Commissioner decided that the charge that the appellant was diverting the chlorate to other uses was not established. The Income-tax Officer, however, added a sum of Rs. 12,000 to the income for this assessment year. In a similar manner, for the assessment year 1949-50, on the ground that there was excess consumption of chlorate sum of Rs. 15,000 was added to the returned income. The Appellate Assistant Commissioner in the appeals before him reduced the addition to Rs. 8,000 for the first year. For the second year, he directed the Income-tax Officer to recalculate the addition on the basis of the average purchase price of the chlorate as against the price of Rs. 1-4-0 per pound, which had been adopted by the Income-tax Officer.
Appeals were taken to the Income-tax Appellate Tribunal. The Tribunal, while conceding that a uniform standard for chlorate consumption could not be adopted by reason of the very nature of the trade, was still of the view that there was a case for the estimation of the chlorate consumption. It purported to adopt such consumption as 17 pounds per 100 gross of matches and directed the recomputation of the additions to be effected on this head.
On the directions of this court the Appellate Tribunal has referred the two questions set out above for the decision of this court.
In the statement of the case, the Appellate Tribunal pointed out that for the calendar years 1946, 1947 and 1948, respectively, the average consumption worked out to 24.50 pounds 18.70 pounds and 22.80 pounds per 100 gross matches. The calendar year 1947 is not the subject matter of this reference and has been included for the purpose of facilitating comparison of the average consumption in the different years. The learned counsel for the assessee has pointed out that the average worked out for the calendar year 1946, which is given as 25.50 in the statement is incorrect and that the correct figure is only 19.40 pounds per 100 gross, matches for that year. The mistake arose for the year, due credit was not given to the closing balance on hand. This defect is pointed out in the appellate order of the Assistant Commissioner. On so reworking the rate of consumption, it is seen that the learned counsel for the Department. It is clear, therefore, that the average consumption for these three years which are 19.40, 18.70 and 20.80 are not very much at variance with each other and that solely from these figures no inference of excessive consumption could be drawn.
The reason, however, for holding that addition to the returned income was called for appears from the statement of the case to be that the assessee was maintaining a daily mixture account in the absence of which the correlation of the issues of the chemical with the production could not be established. It was 'in the absence of such important record' that the Tribunal proceeded to hold that the proviso to section 13 was attracted. This reasoning is strangely at variance with the observations of the Tribunal in its appellate order. There the Tribunal observed :
'The difficulties in fixing a percentage for all manufacturers are numerous. The consumption of chlorate is acknowledged on all hands to vary from manufacturer to manufacturer, no doubt, within reasonable margin, depending upon the territory for which the matches are made to be sold in; damp places require a larger proportion than relatively drier areas.... In cottage industries where machinery are not much in use, dipping has to be necessarily manual only, with the concomitant absence of uniformity in the quantity of mixture consumed in each dip; if the dip is deeper more chemical and therefore, more chlorate will be consumed. Again the type of glue used either throughout the year by the same manufacturer or by different manufacturers in the same year determines through its viscosity the quantity of chemicals that go into the dip. In the face of these numerous difficulties, it is indeed unsatisfactory to fix any hard and fast formula for the chlorate consumption....'
It seems to us that these very observations answer the apparent defect noticed by the Tribunal that is the absence of a daily mixture account. If these difficulties exist in the manual manufacture of matches then the maintenance of a daily mixture account cannot possibly held in the correlation of the issues of chlorate with the manufacture of the matches. One lot of matches which are carelessly handled may involve a much heavier proportion of chlorate than another lot handled by a more experienced worker. A daily mixture account of the type envisaged by the Tribunal in its statement of the case (and not in its appellate order) would hardly serve the purpose which the Appellate Tribunal thought it would serve. The absence of this particular account the maintenance of which does not appear to have been insisted upon by the Department on any earlier point of time, does not therefore, lead to the conclusion that the conclusion that the entire book results of the manufacturing concern became unreliable.
A point of some considerable importance has really been lost sight of by the Tribunal. It appears that a test lot of matches produced by the assessees factory was sent for chemical analysis both to the Analytical Laboratory Madras, and to the Alipore Test House at Calcutta. The Madras Laboratory found that the big medium and small matches produced by the factory accounted for the consumption of 21.74 pounds of chlorate, 19.63 pounds and 20.64 pounds per 100 gross matches; the Alipore test house found that big size matches accounted for the consumption of 20.70 pounds the medium size 18.20 pounds and small size 17.30 pounds of chlorate per 100 gross of matches. It was particularly noted by the Alipore Test House that in all these cases the match heads containing the chemical composition were not uniform and appeared to be somewhat bigger in size than those of the usual machine made match stick. It was further stated that the tests were conducted by choosing match boxes arbitrarily from the lot. Unfortunately these special features attendant upon the manual manufacture of matches in the assessees factory were brushed aside by the Tribunal with the observation :
'Analysts certificates are also futile and serve no purpose as they hold good only for the particular lots sent to the analysts.'
It is not the case of the Department that the lots of matches sent for chemical analysis were specially chosen for getting a higher chlorate consumption rate. In order to satisfy ourselves of the features noticed by the analysts we called upon the assessee to produce before us matches of the various types manufactured. We found that the production was far from uniform. Even the match sticks in the same box of a particular kind 40s, 60s or smalls were of different sizes and even in the same box the match heads which account for the consumption of the chemical were far from uniform in size. It is clear, therefore, that the manual manufacture of these matches leads to apparently excessive consumption of chlorate and the adoption of 17 pounds per 100 gross of matches by the Department and the Tribunal is certainly not justified by the real state of things.
It appears further that in the case of this manufacturer different sizes of matches are produced. The assessee contended that the Tribunal had failed to consider certain detailed statements of the production of matches of various categories, and in the directions under section 66(2) of the Act this court called upon the Tribunal to report how far this material was considered. While the statement of the case does not appear to deny that detailed statements of this kind appearing as annexure 'C' were before the Department it is suggested by the Tribunal that the contents of these statements were not pressed in the course of the arguments. We are not however, satisfied that the approach of the Tribunal to this question is correct. The Tribunal appears to have relied upon the rate of chlorate consumption of the assessees factory itself for the calendar years 1951 and 1952. That fact was before the Tribunal and reference to the consumption for the calendar years 1951 and 1952 are found in paragraph 9 of the statement of the case. That detailed statements relating to the production for calendar years 1950 and 1951 were before the Department is not also denied. If the Tribunal based its conclusion that 17 pounds per 100 gross matches was reasonable in the light of the assessees own production in the subsequent calendar years 1950, 1951 and 1952, it was obviously its duty to examine whether the nature of the product during those years was the same as that in the assessment years in the appeals before it. Merely to say that apparently the point was not specifically argued in the appeals before it is to evade the question. Now it is seen from annexure 'C' that in the calendar years 1950 and 1951, the production was more or less confined to one or two varieties only. In the calendar year 1946, however there was a production of a very large number of varieties of matches. In 1948, the production was of two varieties only but the total was hardly 50 per cent. of the total production of the year 1950 and even less than 50 per cent. of the production for the calendar year 1951. Now it is obvious where the production is confined to a single product a greater degree of uniformity and economy in the production can be secured. Equally where the production reaches what may be called the optimum figure economy in the use of the materials may reasonably be expected. But the production of a much less quantity than what the factory is capable of producing leads necessarily to loss of efficiency that is to say excessive consumption of materials is likely to result therefrom. In relying upon the average consumption of chlorate as revealed by the figures for the calendar years 1950 and 1951, and applying those very figures to the calendar years 1946 and 1948, the Tribunal appears to have overlooked these salient features. We are satisfied that on the materials made available by annexure 'C', the Tribunal was not justified in concluding that the same rate of chlorate consumption as for the calendar year 1950 or 1951 could reasonably be adopted for the assessment years now in question.
It does not also appear to have been denied that the stock and the consumption of chlorate in the assessees factory were being periodically checked by the officer of other departments such as police and the revenue. There seem to have been no complaints with regard to the quantity of consumption from those departments though that is not conclusive. That is a factor which the assessee is entitled to rely upon to show that in so far as the chlorate consumption is concerned it is really accounted for by the match production.
The result accordingly is that it is impossible to hold that in the circumstances of the present case, it could be said that the accounts maintained by the assessee are incapable of reflecting his true income, profits or gains from the match manufacture business. There is no scope for invoking the proviso to section 13 of the Act.
Both the questions are answered in favour of the assessee. The assessee will be entitled to his costs. Counsels fee Rs. 250.
Reference answered accordingly.