1994-VIL-61-ITAT-DEL

Equivalent Citation: TTJ 050, 398,

Income Tax Appellate Tribunal DELHI

Date: 04.07.1994

HIMACHAL SHODDY MILLS (P) LTD.

Vs

DEPUTY COMMISSIONER OF INCOME TAX.

BENCH

Member(s)  : Ch. G. KRISHNAMURTHY., R. K. GUPTA.

JUDGMENT

In all these appeals, more or less common issues are involved and, therefore, for the sake of convenience, these are being consolidated and disposed of by a common order.

Asst. yr. 1969-70:

2. The first contention in the appeal before us is that the learned CIT(A) erred in deciding the appeal ex parte in spite of the fact that compliance was duly made. In fact, this ground is common to all the assessment years and, therefore, it is being discussed for the assessment year under consideration and our finding on this issue will be applicable to all the other assessment years.

3. In his order dt.29th May, 1992, the learned CIT(A) has observed as under:

"This being a priority appeal, it was fixed for hearing on31st March, 1992, thereafter, adjourned to23rd April, 1992,30th April, 1992and8th May, 1992on the appellant's request. On 8th May, 1992, Shri D.B. Sen,C.A.attended on behalf of the appellant. Written reply was filed and the case was partially discussed. Some queries were raised and the final hearing was fixed for29th May, 1992. On29th May, 1992, the authorised representative was not present, but sent by post further written submissions. The appeal is being decided by taking into consideration these written submissions and discussions with the appellant's representative."

It would thus be clear from the above extract that the appellant was given adequate opportunity of being heard by the learned CIT(A). The case was discussed with the authorised representative of the appellant on various dates. On the final date of hearing, the authorised representative did not choose to appear for personal hearing and instead chose to file written submissions to the queries raised by the learned CIT(A). In these circumstances, there does not appear to be any force in the contention of the appellant that the impugned order was wrongly passed ex parte. In fact, more than adequate opportunity was afforded to the appellant and not only the oral submissions made on various dates, but also the written submissions sent on the final date of hearing were duly considered by the learned CIT(A) while deciding the appeal. This contention of the appellant is, therefore, rejected as being without any substance.

4. The second contention raised before us is that the learned CIT(A) erred in confirming the addition of Rs. 3,81,684 made by the Assessing Officer to the trading account. It was contended by the learned authorised representative that the addition made was partly due to the typographical mistake in the carry forward of the closing stock of the previous year and partly due to the mistake in taking the two figures of 20,558 lbs. and 4,474.68 lbs. (in pounds) instead of kgs. A stock reconciliation statement was filed before the learned CIT(A), a copy of which is available at page 31 of the paper book. According to this statement, the opening stock was shown at 2,74,796.452 kgs. instead of 2,24,796.452 kgs. thereby resulting in the excess carry forward of the opening stock by 50,000 kgs. The figure of 20,558 lbs. on conversion came to 9,324 kgs., thereby resulting in the excess closing stock by 11,324 kgs. (20,558-9,324). The figure of 4,474.685 lbs. has been shown equivalent to 2,034 kgs. and the difference of these two figures has resulted in the excess carry forward of the opening stock by 2,379.685 kgs. Actually, the difference comes out to be 2,440.685 kgs. and not 2,379.685 kgs. as explained by the assessee. This discrepancy in the carried forward of the opening stock was noticed by the Assessing Officer and ample opportunities were allowed to the appellant to explain the same as is evident from para 5 of his order. The appellant having failed to furnish any reply, the Assessing Officer had no option but to value the difference in the stock of raw material to the extent of 63,613.687 kgs. at the rate of Rs. 6 per kg. amounting to Rs. 3,81,684 which he added to the trading account.

5. On appeal, this discrepancy was sought to be explained by filing a reconciliation statement, a copy of which is available at pages 28 to 31 of the paper book. The learned CIT(A) forwarded the same to the Assessing Officer for verification and report. The Assessing Officer sent his report as below:

"It was not possible to verify the statement from the details available. Therefore, letters were sent to him time and again and last on9th Nov., 1972asking him to attend the office along with the copies of the accounts and documentary evidence in support of the same. The assessee never attended the office. I, therefore, cannot add anything to what has already been mentioned by my predecessor in the assessment order, nor can I offer any comments thereon."

6. On receipt of the report of the Assessing Officer, as above, the learned appellate authority felt unable to decide the appeal unless the various submissions made before him were properly scrutinized by the Assessing Officer. He also observed that the appellant was given proper opportunity and the matter was referred to the Assessing Officer, but the appellant did not co-operate with him, despite the fact that the learned counsel had agreed to produce all the necessary material on which he relied upon before him. In spite of the non-cooperation by the appellant before the Assessing Officer, the learned appellate authority took a very lenient view and set aside the assessment to enable the Assessing Officer to examine the reconciliation statement. The impugned assessment was again finalised ex parte on29th Oct., 1990on failure of the appellant to appear before the Assessing Officer with the result that the stock reconciliation could not be verified in the absence of documentary evidence in support of the same. The Assessing Officer, therefore, maintained the addition of Rs. 3,81,684 on account of unexplained difference in stock of 63,613.685 kgs. and after valuing it @ Rs. 6 per kg. added the addition as the income of the assessee.

7. On further appeal, the assessee also could not satisfy the appellate authority as no attempt was made to get the reconciliation verified or the discrepancies removed. In view of this unhelpful attitude of the appellant-assessee, the first appellate authority maintained the addition of Rs. 3,81,684 vide his order dt.29th May, 1992.

8. It was contended before us by the learned counsel for the assessee that the authorities below failed to appreciate the typographical mistake, which led to inflation of stocks by 50,000 kgs. This mistake could have been easily detected if the cost of the stock originally filed with the Assessing Officer was properly checked up. It was also contended that the mistake in treating lbs. as kgs. of the two quantities mentioned at item Nos. 1 and 9 of the purchase statement, filed with the Assessing Officer was also verifiable. He submitted that even if the assessee failed to appear on the dates of hearing because of his health problems, the Assessing Officer was bound to make the assessment in accordance with law, which he failed. The stock reconciliation statement, purchase statement and the books of account of the assessee being in the possession of the Assessing Officer he was duty bound to consider the said material. He also submitted that the money value of the opening stock remaining the same, i.e., Rs. 8,58,395 as per the figures of the last year, this also showed that there was a genuine mistake in the carry forward of the quantity of the opening stock. He drew our attention to s. 144 of the IT Act, 1961 to contend that the assessment of the assessee's income or loss to the best of judgment, could only be made by the Assessing Officer after taking into consideration all the relevant material gathered by him. He submitted that since the ex parte assessment is not based upon the material in the possession of the Assessing Officer, the assessment is bad in law. In the alternative, it was also contended that the addition due to difference in the closing stock and opening stock and the mistake of taking lbs. as kgs. was uncalled for, when an addition of Rs. 2,23,000 offered by the appellant in the settlement proceedings as undisclosed income from business has already been made by the learned Assessing Officer. According to the appellant, this amounted to subjecting him to the double jeopardy, inasmuch as, besides the addition on account of difference between the closing and opening stock, etc., a further addition of Rs. 2,23,000 offered by the appellant for addition as his undisclosed income from business has also been made. He also contended that he had done his best in cooperating with the authorities below and it was not possible to satisfy any further without the help of the account books which were in the possession of the IT authorities since Feb., 1978. He submitted that the reconciliation statement ought to have been verified by the IT Department from the account books in their possession. He has also submitted that the IT authorities have failed to point out any defect in the books of account despite being in the possession of the said books of account right from Feb., 1978.

9. On the other hand, it has been contended before us by the learned Departmental Representative that the onus was on the appellant and it was open to him to apply for inspection of the books of account and take the necessary extracts therefrom to substantiate his version as put up in the reconciliation statement.

10. We have carefully considered the rival contentions. It has not been disputed before us by the learned Departmental Representative that the books of account are not in possession of the tax authorities since 1978. The case record also shows that the assessee had filed the stock reconciliation statement and stock purchase statement. This entire material was available with the Assessing Officer at the time of making de novo assessment after remand. He seems to have taken no pains in verifying the discrepancy in the stock with the help of the available material. Instead he took the easy course of rejecting the explanation on considerations other than merits. The figure of the opening stock carried forward from the previous year is a verified fact from the assessment records of that year. The mistake in taking two amounts in pounds as kilograms also appear to be verifiable from the purchase statement as contended by the assessee as well as the books of account in the custody of the Assessing Officer. At any rate, if the material available was not sufficient to verify the discrepancy in the stock, it was open to the Assessing Officer to reject the explanation offered on merits after recording the reasons. To our mind it would not be just, fair and reasonable to penalise the assessee for the lack of exercise required to be undertaken by the Assessing Officer with the help of the material available even if there was a deliberate attempt on the part of the assessee not to respond to the various notices of the dates of hearing sent to him. Taking of the extracts from the seized records, as contended by the learned Departmental Representative, to enable verification of the stock, would have been an ideal thing to do. But the question is, whether, where cooperation is not forthcoming from the assessee, is the Assessing Officer right in making the best judgment assessment, without following the requirements of law, as laid down in s. 144 of the Act. In our opinion, the answer would appear to be in the negative. The duty of the Assessing Officer is to consider the material and not to set a Nelson's eye to it. Because of these legal infirmities, we are unable to persuade ourselves to uphold the addition made. We, therefore, set aside the addition made.

11. The next contention of the appellant is that the authorities below erred in treating the amount of Rs. 2,23,000 offered for addition in the settlement proceedings as undisclosed income from business, as the income from other sources.

12. Having failed to evoke any response to the various notices issued by the Assessing Officer for finalisation of the assessments de novo as per the orders of the first appellate authority or to complete the other pending assessments in Feb., 1978, the Assessing Officer visited the premises of the appellant at Delhi and impounded the books of account. Thereafter, on16th March, 1978, the appellant moved the Settlement Commission atNew Delhifor settlement of the case for the asst. yrs. 1969-70 and 1971-72 to 1977-78. The petition was allowed to be proceeded with, but for want of non-prosecution the Settlement Commission sent back the case to the Assessing Officer for disposal according to law after utilising all the material and information produced before the Commission, as if no application under s. 245C had been made before the Settlement Commission. Before the Settlement Commission, it was stated by the appellant that, in the interest of justice and speedy settlement of the appellant's pending application, it became necessary for the appellant to explain the following credits and unsecured loans which actually represented the amounts flowed back into the company's account by Shri S.K. Gupta, Director Incharge of the company, from time to time. The details of the undisclosed credits are as under:

13. Shri S.K. Gupta explained before the Commission that the above investments in the company made by him actually came out of and/or represented entirely the income derived by the company in the previous years 1968-69, 1970-71 to 1976-77, corresponding to asst. yrs. 1969-70 and 1971-72 to 1977-78 and brought into the books of the company by him by way of contribution to share capital in his own name and as unsecured loan to the company from him. Accordingly he offered the addition of an amount of Rs. 15.98 lakhs to the income of the company as under:

The above year-wise additional incomes, though have been given from memory with reference to the volume of business, are by and large, correct and they have been offered for settlement."

14. It has been contended before us by the learned counsel that the above additions were offered by the assessee who is an old and ailing person to buy peace and to put an end to the whole matter. These additions, it was contended, represented undisclosed income of the company from the business and were flowed back into the business as share capital or unsecured loan. The authorities below, it was submitted, were not justified in making an addition of an amount of Rs. 2.23 lakhs offered before the Commission for inclusion as undisclosed income from other sources. It was also contended that if the authorities below were not satisfied that the income offered was not undisclosed income from business, but income from any other source, then they ought to have ignored the offer and proceeded to establish that the income offered for the year under consideration was, in fact an income from any other source. It was submitted that there is nothing on record to prove the stand taken by the authorities below.

15. The Assessing Officer did not accept the contention of the appellant and treated the amount offered for addition as the income of the assessee under s. 69 of the IT Act, i.e., unexplained investments. On appeal, the learned CIT(A) has observed as under:

"It is, therefore, crystal clear that the appellant-company has only surrendered accretions to the share capital and unsecured loans of its director-incharge to the tune of Rs. 15,98,000 which took place in asst. yrs. 1975-76 and 1976-77. No attempt has been made to show how these accretions in the directors personal account could be linked with the undisclosed profits of the appellant-company. Further, these accretions emerged in asst. yrs. 1975-76 and 1976-77 only. Apart from the blank statement, there is not an iota of evidence to establish that the secreted profits of asst. yr. 1969-70 were in fact ploughed back in the books as accretion in the director's personal account in asst. yr. 1975-76. The appellant himself admits that the additional income surrendered in each year has been arrived at 'entirely from memory with reference to the volume of business' of such year. It, therefore, goes without saying that the surrendered income on estimate basis, has nothing to do with the books of account of that particular year. The surrender was made only to bale out the director-in-charge who apparently had no explanation in respect of investment to the tune of Rs. 15.98 lakhs made by him in asst. yrs. 1975-76 and 1976-77. Therefore, this surrender cannot fetter the Assessing Officer from finalising the assessments in accordance with law after examination of appellant's accounts. Moreover, the settlement fell through for reasons best known to the appellant. As there is no co-relation between the income as disclosed in the Settlement Petition and the income as per books, the Assessing Officer was fully justified in not accepting the additional income as disclosed by the appellant for settlement as the only income. The first ground of appeal, therefore, has no substance and is accordingly rejected."

16. We have heard the appellant as well as the learned Departmental Representative, who has supported the orders of the authorities below. In our view, the submission made by the appellant has force. It is amply clear from the terms of settlement offered by the appellant that the amount of Rs. 15.98 lakhs was offered for inclusion in the company's income on two conditions, namely, (a) that this amount represented the undisclosed income of the company derived from business and (b) that this amount was to be spread over various assessment years as per the details given. The Assessing Officer either ought to have accepted this version or proceeded to conduct an enquiry as to the nature and source of the income flowed back into the company by way of share capital or unsecured loans. After conducting the enquiry, he could have sought corroboration from the petition filed before the Settlement Commission. The Assessing officer did not adopt such a course and in the absence of any material on record to show that what was offered was in fact unexplained investment, we find it difficult to uphold the version of the authorities below on this point. However, we maintain the addition of Rs. 2.23 lakhs offered by the assessee as undisclosed income from business and not from any other source.

17. The next contention is that the learned CIT(A) erred in not directing the ITO to properly compute the quantum of deduction allowable under s. 80-J of the IT Act, 1961. It was contended that the learned Assessing officer was not justified in restricting the assessee's claim under s. 80J to Rs. 48,088 only when the claim for the entire amount had been found correct and accepted by the Assessing Officer in the original assessment. The assessment order out of which the present appeal has arisen, reveals that the Assessing Officer did not find the said deduction in accordance with r. 19A of the IT Act, 1961. He, therefore, disallowed a sum of Rs. 66,588 as an eligible deduction under s. 80-J. On appeal the action of the Assessing Officer has been upheld.

18. It has been observed by the learned CIT(A) that the appellant made no attempt to substantiate this contention. He observed that it was never clarified to him that what was the actual amount of deduction allowable under s. 80-J as per the provisions of the IT Rules and that in the computation of the assessable income filed before him, the assessee himself had deducted only a sum of Rs. 48,088 as the qualifying amount for deduction under s. 80-J. The CIT(A) did not, therefore, find any fault in the order of the Assessing Officer on this point.

19. During the course of hearing, the appellant filed a statement before us of computation of deduction under s. 80-J. A perusal of the said statement shows that the Assessing Officer had accepted all the figures except the amount of Rs. 7,72,523 which is stated to be a long term loan from H.P. Finance Corpn. Since this loan is stated to have been obtained from a statutory body, its authenticity or otherwise is easily verifiable from the said finance corporation. The Assessing officer has not given any finding about it in his order. He has simply made a bald observation that the claim for deduction under s. 80-J is not in accordance with the r. 19-A. In our view, the claim of the appellant for deduction under s. 80-J has not been properly dealt with by the Assessing Officer. Neither the learned CIT(A) has dealt with this point on merits. He has also not assigned any reasons as to why he differed from the original assessment order on this point. We, therefore, set aside the findings of the authorities below on this point and restore the case to the file of the Assessing Officer to examine the claim on merits after affording sufficient opportunity of being heard to the appellant.

20. On27th Jan., 1994, the appellant moved an application for taking additional grounds of appeal. During the course of hearing, it was submitted by the learned counsel for the assessee that the additional grounds did not require any further evidence to be taken on record and that the proposed grounds can be substantiated from the assessment records. The learned Departmental Representative opposed the prayer on the ground that these grounds were not taken before the first appellate authority, though a right was reserved to urge additional grounds at the time of hearing. He drew our attention to para 7 of the learned CIT(A) order, wherein it has been stated that no other specific ground had been raised during the course of hearing.

21. The first additional ground taken by the appellant relates to the setting off of the brought forward losses of the earlier year. The second additional ground relates to the appellant's claim for full deduction under s. 80-J. The third additional ground relates to Triple Shift allowance.

22. After hearing both the sides and having regard to the nature of the claim, we feel that it would be in the interest of justice that the prayer should be allowed. Accordingly, we allow the appeal to proceed on additional grounds.

23. From the perusal of the assessment order, it is seen that the Assessing Officer has allowed full set off of the depreciation claim of Rs. 2,76,983. But out of the Development Rebate of Rs. 3,71,170 only set off of Rs. 2,95,980 could be allowed and the balance amount of Rs. 75,190 was carried forward. The claim on account of Development Rebate under s. 80-J amounting to Rs. 1,25,902 was also carried forward to the next year because of absence of income in the assessment year under consideration to absorb the entire carried forward loss. In the statement of the unabsorbed loss carried forward, the appellant has claimed that an amount of Rs. 40,858 towards depreciation for the asst. yr. 1967-68 has not been allowed to be carried forward by the Assessing officer. He further claimed an amount of Rs. 1,35,803 on account of other losses for the asst. yr. 1967-68 which had not been taken into consideration by the Assessing officer. The assessment order does not reveal, whether the above mentioned losses in the earlier years were required to be carried forward or not and if this required carried forward, then why the same has been denied. The order of the learned CIT(A) is also silent on this point probably because this issue was not agitated before him. It may not be possible for us to express any opinion with regard to the right of the appellant to have these two amounts carried forward for the purpose of set off in the assessment year under consideration. However, we leave this question open with a direction to the Assessing Officer to examine the claim regarding these two figures and give necessary relief if it is found by him that these two amounts were unabsorbed losses in the earlier year and required to be carried forward to the next assessment year.

24. As regards the claim of the appellant for triple shift depreciation, the learned counsel did not press the same at the time of hearing. The same is thus rejected.

25. In the result, the appeal for the asst. yr. 1969-70 is partly allowed.

Asst. yr. 1971-72:

26. The first ground relates to ex parte decision in appeal. This ground has been decided against the appellant while disposing of the appeal for the asst. yr. 1969-70.

27. The second ground relates to addition of Rs. 2,00,750 by the Assessing Officer on estimate basis for low rate of gross profit. For the year under consideration, the appellant had shown a gross profit at Rs. 6,49,250 on the total sale of Rs. 23,45,895 giving a G.P. rate of 27.63%. The Assessing Officer observed that having regard to the past history of the case and in particular the G.P. rate of 34% for the year 1968-69 and 1969-70, the G.P. rate of 27.63 declared by the appellant was on lower side. He also observed that the appellant was not maintaining day-to-day stock tally of raw material. He, therefore, applied the gross profit rate of 34% on the estimated sales of Rs. 25,00,000 as against the sales of Rs. 23,45,895. On appeal, the CIT(A) maintained the addition. He observed that there were allegations that the appellant was selling the imported raw material in the open market, as it was commanding high premium ranging from 55% to 140%, that the movement of the imported material to factory premises could not be explained on the excuse that the matter was very old, that a finding has already been recorded by the Assessing Officer that the stock tally and quantitative details of raw material was not verifiable and that this being a manufacturing concern, this defect stuck at the very root of the reliability of its accounts. The contention of the appellant that the G.P. rate disclosed for the asst. yr. 1970-71 was accepted by the Tribunal in appeal was also rejected on the ground that the imported raw material was being sold in the open market at a premium which led to much higher earnings.

28. The learned counsel for the appellant has contended before us that the alleged sale of raw material in the open market is mere suspicion, that the books of account were in the custody of the Department and not a single defect was pointed out and unless the books of account are rejected, s. 145(1) cannot be invoked and that the G.P. rate disclosed for the year 1970-71 was upheld by the Tribunal and as such there was no justification in estimating the G.P. rate and making an addition to the gross profit. On the other hand, the learned Departmental Representative relied upon the orders of the authorities below and justified the addition.

29. We have considered the rival contentions. As regards the alleged sale of imported raw material in the open market, our attention was drawn toPara8 of the appellate order dt.8th Sept., 1977passed by the Additional Chief Controller of Imports and Exports. The issue under consideration was, whether the raw material imported, amongst others, under licence No. 2390294 dt.17th Sept., 1971and 2386055 dt.20th Feb., 1971were properly utilised or not. The allegation was that a large number of bales had been diverted toLudhianaand were not brought to the factory for utilisation as per the conditions of Import Licence. It was found by the appellate authority that 396 bales had been pledged with the Punjab National Bank,Ludhiana, since 1974. With regard to the remaining quantity, the explanation offered was that a major portion was still lying inBombayand that the rest had been consumed in the factory. After giving benefit of doubt, the appellate authority held "that the material available is inadequate to hold the firm liable for action for diversion of imported goods". In view of this finding by the appellate authority, we are left with no choice but to accept the appellant's version that there was no sale of imported raw material in the open market at premium. There is no material on record to suggest to the contrary. It is also worth noting that in the assessment order which was the subject-matter of appeal before the learned CIT(A), there is no whisper about diversion of sale of raw material at premium in the open market. The learned CIT(A) in our view, had erred in basing his order on this allegation. The original assessment order wherein such an allegation was made had been set aside in appeal and as such did not survive for any purpose. Any sustenance drawn by the learned CIT(A) from that non-existent order is wholly uncalled for.

30. There also appears to be force in the contention of the appellant that s. 145(1) could not be invoked in the facts and circumstances of the case. The Assessing Officer has not pointed out any defect in the books of account. The assessment order does not reveal that any exercise was undertaken by the Assessing Officer to verify the stocks from the books which were in his custody since 1978. He has based his estimated addition on "the past history of the case" and G.P. rate of 34% for the asst. yrs. 1968-69 and 1969-70. The learned counsel has drawn our attention to the order of the Tribunal dt. 22nd July, 1975 in ITA No. 968 of 1973-74 for the asst. yr. 1970-71 in the applicant's own case, a copy of which is available at page 77 of the Paper Book. In that year also, the Assessing Officer had estimated the G.P. rate at 34% by invoking s. 145(1), for failure to provide quantity stock details. The Tribunal rejected the estimated G.P. rate of 34% and upheld the G.P. rate of 24% disclosed by the assessee. The G.P. rate declared by the assessee for the year under consideration is 27.63, which is higher than the G.P. rate of 24% upheld by the Tribunal. On this ground also, the G.P. rate as estimated by the Assessing Officer cannot be sustained. Accordingly, we accept the G.P. rate of 27.63% declared by the appellant and the addition of Rs. 2,00,750 made is deleted.

31. The third ground relates to the addition of Rs. 3,03,000 on account of unexplained investments from other sources instead of undisclosed income from business. This issue has already been dealt with by us for the asst. yr. 1969-70. We, accordingly, uphold the addition as undisclosed income from business instead of from any other sources.

32. The fourth ground relates to allowances under s. 80-J. We direct the Assessing Officer to examine the claim in accordance with law as it existed before amendment to s. 80-J and r. 19-A.

33. With regard to the additional ground for carry forward of losses from earlier years, we direct the Assessing Officer to allow whatever be such losses.

34. With regard to the claim for triple shift depreciation, this ground was not pressed.

35. In the result, the appeal is partly allowed.

Asst. yr. 1972-73:

36. All the grounds of appeal, including the additional grounds of appeal, are the same as in the earlier years. The addition made to the trading account on estimate basis in this year is at Rs. 78,157. The basis for making the addition as stated in para 6 of the assessment order are as under:

"During the year, the assessee has declared the gross profit at Rs. 3,97,843 on the total sales of Rs. 13,27,701, which gives gross profit rate about 29.96%. It is observed that the G.P. rate declared by the assessee in the asst. yrs. 1968-69 and 1969-70 was more than 34%. In view of the assessee's past history, the gross profit declared by the assessee during the year under consideration is at lower side. There are allegations against the assessee that he was selling raw material and earning handsome premium thereon. Considering all the facts, the assessee failed to comply with the terms of notices and explain the correctness of statement filed along with the return of income. The trading addition is made after taking the G.P. rate @ 34% on the estimated sales of Rs. 14,00,000. This will result in addition of Rs. 78,157..."

37. For identical reasons, we have set aside the addition made in the asst. yr. 1971-72. We, accordingly, set aside the addition made in the year under consideration and sustain the G.P. rate of 29.96% declared by the appellant. With regard to the other grounds, our order for earlier years will apply.

38. In the result, the appeal is partly allowed.

Asst. yr. 1973-74:

39. Except ground Nos. 2, 3 & 4, all the other grounds of appeal, including the additional grounds, are identical to the grounds for the earlier assessment years and are covered by our orders for those years. As such, no separate order is called for with regard to these grounds.

40. Ground No. 2 relates to disallowance of Rs. 10,000 out of manufacturing expenses, ground No. 3 relates to disallowance of Rs. 37,650 being interest charged to Profit and Loss Account and ground No. 4 relates to disallowance of Rs. 13,813 being contribution to unrecognised provident fund.

41. As regards the disallowance of Rs. 10,000, the Assessing Officer had observed that manufacturing expenses had increased whereas the sales had decreased. He, therefore, disallowed expenses of Rs. 10,000 being excessive. On appeal, the addition was confirmed.

42. It has been contended by the appellant that except this general statement, no specific reasons have been stated by the Assessing Officer to justify the disallowance. On the contrary. the learned Departmental Representative contended that the assessment being ex parte, the addition is only on estimate basis and as such cannot be regarded excessive. We have considered the submissions of both the parties. In the absence of any specific reasons, the addition of Rs. 10,000 is not justified on the basis of general observations. We, accordingly, delete the addition.

43.As regards the disallowance of Rs. 37,650 being interest charged to P&L Account, we find that in the earlier asst. yr. 1972-73, interest of Rs. 36,000 was allowed. We see no justification in disallowing the interest in the year under consideration and as such the addition is delated. The ground relating to disallowance of Rs. 13,813 was not pressed.

44. In the result, the appeal is partly allowed.

Asst. yr. 1974-75:

45. Except Ground No. 2, all the other grounds including the additional grounds are covered by our earlier orders and as such no separate order is called for on these grounds. Our order for earlier years will apply.

46. Ground No. 2 relates to addition of Rs. 1,00,000 on account of excessive wastage. The appellant has shown wastage of 51% in the year under consideration. The highest percentage accepted by the tax authorities was 39% in the asst. yr. 1970-71. The Assessing Officer, therefore, made the impugned addition, which was upheld by the learned CIT(A) also.

47. The learned counsel drew our attention to the letter dt.28th Dec., 1975, addressed to the appellant by the Indian Shoddy Mills Association, wherein a wastage of 40 to 50% has been found reasonable by the office of the Textile Commissioner. According to this letter, the Tariff Commission has also accepted a wastage of 45% on shoddy rags. It was also contended by the learned counsel that from1st April, 1973to September 1974, the appellant was debarred from making imports. The bar was ultimately lifted by the Hon'ble High Court and that because of this reason, the appellant had to use locally available inferior quality of raw material which resulted in excess wastage. He further contended that since the addition of Rs. 2,10,000 has already been made on account of undisclosed income from business, a further addition is not justified. The learned Departmental Representative, on the contrary, contended that the addition of Rs. 2,10,000 has been made on account of unexplained investment from other sources, therefore, the addition on account of excessive wastage cannot be regarded as unjustified.

48. We have considered the rival contentions. Since the addition of the amounts offered for addition before the Settlement Commission have been treated by us as undisclosed income from business instead from any other sources, we are inclined to agree with the submission of the learned counsel for the appellant. We, accordingly, delete the addition of Rs. 1,60,000.

49. In the result, the appeal is partly allowed.

Asst. yr. 1975-76:

50. For the assessment year under consideration, the following grounds have been taken:

"1. That the learned CIT(A) erred in not setting aside the assessment with directions for determining loss returned by the appellant instead of confirming disallowance of entire loss.

2. That the learned CIT(A) erred in holding that the additional income offered by the appellant to the tune of Rs. 3,25,000 was rightly assessed under s. 69 of the IT Act instead of treating the said income under the head income from business."

51. For the assessment year, the assessee had returned an over-all loss of Rs. 13,98,740 consisting of loss of Rs. 14,11,590 from business and an income of Rs. 12,850 from house property. The return was accompanied by an audited Profit and Loss Account and balance-sheet. On failure of the assessee to respond to the notice under s. 143(2), the Assessing Officer proceeded to make an ex parte assessment to the best of his judgment under s. 144 of the IT Act, 1961. The Assessing Officer completed the assessment and disallowed the entire loss. From a perusal of the assessment order, it is seen that the Assessing Officer did not disclose any basis or reasons for determining the quantum of loss as nil. On appeal, the order of the Assessing officer was upheld.

52. In our view, the Assessing Officer should have given his reasons for arriving at a particular figure of income, so that the assessee could be enabled to appreciate the mental process leading to the assessment and the figure assessed. Such an order being subject to appeal, needs also to be a speaking order. The Assessing Officer did not at all look into the audited balance-sheet accompanying the return nor did he reject the accounts as unreliable. On similar facts, it has been held by the Hon'ble High Court of Calcutta in the case of CIT vs. Rani Cherra Tea Co. Ltd. (1994) 207 ITR 979 (Cal) as under:

"......in making a best judgment assessment, the Assessing officer cannot act dishonestly, vindictively or capriciously because he must exercise the judgment in the matter. In making a best judgment assessment, the Assessing Officer does not possess absolute arbitrary authority to assess any figure he likes and that, although he is not bound by strict judicial principles, he should be guided by the rules of justice, equity and good conscience. The limits of the power of the Assessing Officer are implicit in the expression 'best of his judgment'. Though there is an element of guess work in the best judgment assessment, it shall have not be a wild one but shall have a reasonable nexus to the available material and the circumstances of each case."

We also find from the order appealed against that the learned first appellate authority also took no pains in computing the income on the basis of the material available on record, even though, in the absence of any statutory provisions to the contrary, the appellate authority is vested with all the plenary powers which the subordinate authority has in the matter.

53. In view of the above, we set aside the impugned order and direct the Assessing officer to determine the loss for the year under consideration with reference to the account books seized and also to allow set off of the loss carried forward from the earlier years.

54. As regards the second ground, the issue has already been decided by us by a detailed order for the asst. yr. 1969-70. The additional grounds have also been covered in the earlier assessment years. Our order for these years will govern these grounds also.

Asst. yr. 1976-77:

55. For the asst. yr. 1976-77, the grounds taken are that the learned CIT(A) had erred in deciding the appeal ex parte; that the authorities below had erred in treating the amount of Rs. 2,20,000 offered for addition before the Settlement Commission as undisclosed income from business as income from other sources, that the authorities below erred in rejecting the appellant's claim for deduction allowable under s. 80-J and that the authorities below erred in not setting off the brought forward losses of earlier years against the income of the assessee.

56. All these grounds are covered in the main order relating to the asst. yr. 1969-70. In accordance with our finding for that year, the appeal is partly allowed.

Asst. yr. 1977-78:

57. The grounds taken for the assessment year under consideration are that the CIT(A) has erred in deciding the appeal ex parte, that the amount of Rs. 2,62,850 offered for addition as undisclosed income from business ought not to have been treated as income from other sources and that the losses for the earlier years ought to have been carried forward and set off against the income of the current year.

58. All these grounds have been covered in our order for the asst. yr. 1969-70. In accordance with our finding for that year, this appeal is also partly allowed.

 

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