C.K. Banerji, J.
1. This reference under Section 256(2) of the I.T. Act, 1961, at the instance of the assessee, Siddheswari Cotton Mills P. Ltd., Calcutta, relates to the assessment year 1961-62. The relevant accounting year is the year ending 31st December, 1960.
2. The assesseee is a private limited company and runs a weaving mill, It purchases yarn from market and weaves that yarn into cloths (dhoties and sarees). During the course of examination of the books of the assessee for the relevant accounting year, the ITO noticed that the production account disclosed a wastage of 9.4% while in the immediately preceding year the wastage claimed by the assessee and accepted by the AAC was 8.3%. When required to explain the higher wastgage for this year, the assessee's explanation was similar to that given in the immediately preceding year, that the yarn consumed was coarse and resulted in a higher wastage. The ITO did not accept the explanation of the assessee as there was lesser consumption of coarser counts of yarn in the relevant year and an increase in the consumption of fine and superfine counts of yarn. The ITO, accordingly, made an addition of Rs. 34,000 valuing the excess wastage at the average rate of sale price of cloth.
3. The assessee preferred an appeal before the AAC and contended that the ITO did not give any valid reasons for not accepting the higher wastage. The AAC was of the view that several factors, such as, moisture, dust contents of the cotton, the efficiency of the blowing, carding and spinning of yarn resulted in wastage. He did not consider the extra wastage of 1.1% as excessive and deleted the addition.
4. The revenue preferred an appeal before the Tribunal against the said order of the AAC. On behalf of the revenue, it was urged that the AAC in holding the wastage as not excessive proceeded on a wrong basis, as in the relevant year the assessee had only purchased the yarn and woven the cloth. It did not undertake any spinning and, therefore, could not be given the benefit of wastage that would occur in the production of yarn. It was further urged that in the preceding year the higher wastage was considered reasonable only on the ground that a larger quantity of medium count of yarn was consumed. In the present year, greater quantity of fine and superfine yarn had been consumed which should have reduced and not enhanced the wastage.
5. The assessee urged that the wastage was more in this year for the following reasons:
(a) The yarn was sold in sized beams for the first time ;
(b) Sizing materials consumed during the year was 16% of the total quantity as against 12.4% in the preceding year; and
(c) The machinery were old and could not maintain any standard wastage.
6. It was also pointed out that production book and daily stock book for the consumption of yarn, etc., were maintained on a regular basis and on the authority of the decision of the Bombay High Court in R. B. Bansilal Abirchand Spinning and Weaving Mills v. CIT : 75ITR260(Bom) , it was contended that high wastage alone was no ground for rejecting the claim for wastage. The increase in the gross profits in the relevant year was also relied on to show that the wastage should be accepted as reasonable.
7. The Tribunal was of the view that the AAC erred in assuming some wastage in the process of production of yarn as the assessee had purchased the yarn and that the AAC should have scrutinized the assessee's claim for wastage on the basis of quantity of yarn used as has been done in the preceding year. The Tribunal noted that during the year under consideration, on the basis of the assessee's own figures, a large quantity of superior yarn have been consumed, being 90,040 lbs. (as against 35,523 lbs.) in the earlier year and there was no good reason for the higher wastage in this year. The fact of higher gross profit, according to the Tribunal, was due to larger production of superfine cloth and had no connection with higher wastage. The user of sized beams was also immaterial. The Tribunal held that the assessee duly maintained its production and consumption registers and the same were open to the scrutiny of the ITO and might have been found by him not to be a faithful record of consumption. The age of the machinery being a ground raised for the first time and not having been pressed in the preceding year, was also not accepted by the Tribunal. The Tribunal accordingly held that the assessee's claim for a higher wastage was neither reasonable nor justified and restored the assessment of the ITO. Thereafter, on reference proceedings initiated by the assessee, this court directed the Tribunal under Section 256(2) of the Act to refer the following question :
'Whether, there was any materials) on record on which a sum of Rs. 34.000 was included in the total income of the company on account of alleged understated production of cloths ?'
8. Dr. Debi Pal, learned counsel on behalf of the assessee, urged that the consumption register and production register have been found to be duly kept and maintained. The ITO found them to be correct. Therefore, the observation of the Tribunal that 'it is open to the Income-tax Officer to subject such records to scrutiny and if he found that the quantity alleged to be consumed cannot be explained satisfactorily, there was no reason why he could not consider the same as not a faithful record of consumption' is based on mere assumption.
9. Dr. Pal submitted that once the registers are accepted as correct, the increase in the percentage of wastage as recorded in these books should have been accepted as correct and proper. According to Dr. Pal, use of sized beams and the age of the machinery purchased in 1943 were all relevant factors to explain the wastage and the Tribunal did not apply its mind to the above aspects but brushed them aside on flimsy grounds.
10. Dr. Pal submitted that the Tribunal has given no reasons and no materials have been found or relied on by the Tribunal so that its order can be justified.
11. In support of his above contentions Dr. Pal relied on the said decision of the Bombay High Court in R. B. Bansilal Abirchand Spinning and Weaving Mills v. CIT : 75ITR260(Bom) . In that case, the assessee was producing yarn from cotton by spinning and had claimed wastage at a higher percentage than that of the preceding year. The ITO did not accept the explanation for higher percentage of wastage as given by the assessee and added an amount of Rs. 1,00,000 to cover for unaccounted production of yarn and soft waste. The AAC on appeal estimated the value of unaccounted stock at Rs. 50,000. The Tribunal confirmed the order of the AAC.
12. The Bombay High Court observed as follows (p. 282):
'We are also unable to accept the contention that the- principles of Section 13 of the Income-tax Act are not attracted in this case. The assessee has followed a regular method of keeping account of the cotton consumed in the whole of ihe spinning process. It is not shown that there is any other or better method of keeping account of such consumption. In fact, it does not appear to be disputed that the quantity of cotton shown to be consumed is not more than what has been found from the figures in the assessee's books. The ultimate conclusion is reached only on the basis of the alleged exaggeration in the percentage of dead losses If there is no material on which it could be established that the increase in the percentage was attributable to any suppression of weight or any suppression of production, then we fail to see how the right under the proviso could be availed of by the Income-tax Officer in making an estimate. The very condition for making use of the right under the proviso arises after the finding is recorded as to the non-acceptability of the method and irregularity of the accounts kept. It does not appear that there is such a finding recorded by the authorities in this case ; in the absence of such a finding the book result could not be ignored or brushed aside. The mere fact that the percentage of loss is very low in a particular year cannot possibly lead to an inference that thereby there has been a suppression in the weight of yarn that is produced. We are not satisfied that on the material on record the sum of Rs. 50,000 could be included in the total income of the assessee on account of the alleged under-stated production of yarn and soft waste. We, therefore, answer the second question referred to us in the negative and in favour of the assessee.'
13. Dr. Pal next cited C. Arumugaswami Nadar v. CIT : 42ITR237(Mad) . In that case, the assessee manufactured safety matches. Its books showing the consumption of chlorate were not accepted and certain sums were not accepted and certain sums were accordingly added as income. On this consumption there were certain discrepancies between the Report of the Madras Analytical Laboratory and that of the Ah'pore Test House. The question referred to the Madras High Court was, firstly, whether there was any material to justify the addition by the Tribunal on the ground that the assessee's books did not show correct consumption and, secondly, that whether there were any materials to justify the rejection of the book results and to invoke the proviso to Section 13 to the Act. The Madras High Court noted that there was periodical checking by officers of police and revenue department as to the stock and consumption of chlorate and they had no complaints. The Madras High Court on the facts before it held 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'. The last case cited by Dr. Pal was R. M. P. Perianna Pillai & Co. v. CIT : 42ITR370(Mad) . Here, the Madras High Court held that a system of accounts adopted by the assessee cannot be rejected under the proviso to Section 13 the I.T. Act on the only ground that the gross profits disclosed by the books were low and compared unfavourably with those of others in the same line of business without further investigation.
14. Mr. Ajit Sengupta, learned counsel for the revenue, firstly, submittedthat the books of the assessee must have been disbelieved by the ITO as he made the addition. He next submitted that the question referred does notarise out of the order of the Tribunal which has not stated anything aboutthe inclusion of Rs. 34,000 in the total income of the assessee on account of understated production of cloths. The Tribunal proceeded on the basis as to whether the wastage of 9.4% claimed by the assessee throughout has been proved and found that it was not proved. The assessee did not raise any objection to the addition of the said sum of Rs. 34,000 as such and the Tribunal merely dittoed the order of the ITO.
15. Mr. Sengupta supported the order of the Tribunal on its finding that no explanation had been given by the assessee as to why the wastage was higher in the year under consideration.
16. In support of his contention, Mr. Sengupta cited several decisions as follows :
'(a) CIT v. Scindia Steam Navigation Co. Ltd. : 42ITR589(SC) . This was cited to show the nature of the question of law which could be said to arise out of the order of the Tribunal as also the jurisdiction of the High Court in a reference. The Supreme Court summed up the position in law as follows:
(1) When a question is raised before the Tribunal and is dealt with by it, it is clearly one arising out of its order.
(2) When a question of law is raised before the Tribunal but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it, and is, therefore, one arising out of its order.
(3) When a question was not raised before the Tribunal but the Tribunal deals with it, that will also be a question arising out of its order.
(4) When a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order notwithstanding that it may arise on the findings given by it.'
(b) Gobald Motor Service (P.) Ltd. v. CIT : 60ITR417(SC) .
The Supreme Court in this case, while agreeing with the contentions of the assessee, that none of the relevant principles as laid down by the Supreme Court in an earlier case (viz., Gangadhar Banerjee's case : 57ITR176(SC) were considered by the ITO, did not allow the assessee to raise those points before the Supreme Court as the same had not been canvassed before the authorities earlier.
(c) CIT v. Devi Prasad Vishwanath Prasad : 72ITR194(SC) . Here the Supreme Court laid down that it is not open to the High Court to direct the Tribunal to state a case on a question which was never raised before or decided by the Tribunal at the hearing before it.
17. We do not accept the contentions of Mr. Sengupta that the ITO must have disbelieved the books of the assessee. In the assessment order the ITO has not adverted to the books of the assessee at all and to assume that he had considered and rejected the books would be a speculative assumption.
18. We also do not accept his further contentions that the question referred does not arise from the order of the Tribunal inasmuch as the Tribunal has only decided that the wastage claimed by the assessee has not been proved. The Tribunal has restored the order of the ITO and, therefore, must be held to have sustained the addition of Rs. 34,000. The matter having been dealt with by the Tribunal the question clearly arises out of the order. The question of the said addition, whether specifically raised or not, was in fact before the Tribunal and the Tribunal dealt with it.
19. It appears to us that the Tribunal having concluded that the assessee has failed to prove the wastage claimed, the Tribunal fell into error in assuming that-
(a) the entirety of the extra wastage was utilised by the assessee and manufactured into 4,526 pieces of dhoties (and not sarees).
(b) the said dhoties were sold at the average sale price of Rs. 7.52 per piece.
20. Mr. Sengupta was unable to bring to our attention any material from the records from which the aforesaid conclusions could be based or drawn. We also do not accept the contention that the assessee did not challenge the said addition. The assessee challenged the order of the ITO and succeeded before the AAC. Having been unsuccessful before the Tribunal the assessee has again raised the question in this reference challenging the addition.
21. For the reasons given above, the question referred must be answered in the negative and in favour of the assessee.
22. In the facts and circumstances, there will be no order as to costs.
Dipak Kumar Sen, J.
23. I agree.