SHANMUGAR MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is a public limited company now under liquidation. It carried on business in the manufacture and sale of cotton yarn mostly 20's and 26's. It had 6, 000 spindles. For the assessment years 1957-58, 1958-59 and 1959-60, the assessee submitted returns of its income, THE income, the turnover, the gross profit returned, percentage of waste in cotton, the out-turn of yarn for the three years as disclosed in these returns and the assessee's books of account are as follows 31-7-1956 31-7-1957 31-7-1958Income or loss Rs. 54, 691 (loss) Rs. 4, 054 (income) Rs. 1, 31, 673 (loss)Turnover Rs. 14, 65, 318 Rs. 16, 66, 038 Rs. 3, 63, 475Gross profitrate 7.6% 9.3% lossWaste oncotton 23.8% 25.1% 28.2%Production of 20's 5.7oz. 4.72oz. 3.57ozyarn per lb. 26.s 3.18, , 3.12, , 3.17In the course of assessment proceedings the Income-tax Officer felt that the waste claimed was excessive and that the standard of production was below normalAs the assessee had not maintained any record to show that the weight of cotton issued, quantity consumed, the processed stock, etc., which would enable proper verification of the waste at every stage of the manufacture, it was called upon to explain the excessive wastage and the extent of wastage at various stages of manufacture land at fornightly intervals. Explanation was also called for as regards the shortage in production.

(2.) THE assessee stated that it had only 6, 000 spindles which were very old, that there was no sufficient working capital, that the cotton purchased and used was of inferior qualify, that the labour was very much discontented and efficiency was at a low ebb, and that all these factors contributed to a higher wastage. THE Income-tax Officer, however, was not convinced with this explanation. He held that there was no evidence to show that the cotton purchased by the assessee was of an inferior quality and that though the machinery was old, that alone would not account for the higher wastage. He, therefore, declined to accept the wastage disclosed in the books and took the normal wastage at 20%. On that basis he worked out the excess wastage and its value as followsAssessment year. Lbs. Rs1957-58 41, 833 35, 2971958-59 59, 119 56, 7541959-60 22, 707 23, 388THE Income-tax Officer then compared the production of yarn in these years with the standard of production of yarn fixed by the Appellate Tribunal in the assessee's own case for the assessment year 1949-50, which was 4.5 oz. for 20's and 3.75 oz. for 26.s and felt that the production figures disclosed in the books of account cannot be accepted. Taking the out-turn fixed for 1949-50, as the basis, he worked out the overall under-production and their value as under, after allowing a margin of 5% for possible shortage in production on account of inefficiency of machinery, etcAssessment year Year ending Lbs. ValueRs1957-58 31-7-1956 49, 230 83, 1981958-59 31-7-1957 99, 993 1, 93, 9861959-60 31-7-1958 24, 555 46, 163THE Income-tax Officer, therefore, added the said sums towards overall under-production of yarn. He, however, felt separate addition on account of excess wastage, was not called forTHE assessee went on appeal before the Appellate Assistant Commissioner who reduced the additions to Rs. 17, 318, Rs. 1, 13, 826 and Rs. 35, 835 for the assessment years 1957-58, 1958-59 and 1959-60, respectively.

(3.) THE Supreme Court expressed the view that the keeping of a stock register was of great importance because that was the means of verifying the assessee's accounts by having a "quantitative tally", that if after taking into account all the materials including the want of a stock register, it was found that from the method of accounting the correct profits of the business were not deducible, the operation of the proviso to section 13 would be attracted, that the Income-tax Officer, even if he accepted the assessee's method of accounting, was not bound by the figure of profits shown in the accounts and that if he was of the opinion that the correct profits cannot be deduced in the absence of a stock register coupled with other books of account he would be justified in applying the proviso to section 13In our view it is not possible to accept the contention of the learned counsel for the assessee that unless the Income-tax Officer invokes the power under the proviso to section 13 and rejects the assessee's books of account, it is not open to him to ignore the book results while passing an order under section 23(3) and that an estimate of the income could be made only under the proviso to section 13 and not under section 23(3). Section 13 deals with the method of accounting and states that normally the income, profits and gains shall be computed in accordance with the method of accounting regularly employed by the assessee and the proviso says that if no method of accounting has been regularly employed or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, he may compute the income upon such basis and in such manner as he thinks fit. Section 13 does not deal with the books of account of the assessee. It may be that even in cases where the assessee employs a regular method of accounting from which the income could properly be deduced, the Income-tax Officer may not accept the books of accounts as truly representing the assessee's affairs and in such cases he has to make an estimate after rejecting the accounts of the assessee. Similarly, there may be cases in which the assessee had not regularly employed a method of accounting, or the method of accounting adopted by him did not enable the Income-tax Officer to compute the income, but the Income-tax Officer accepts the book results and makes an assessment on that basis without making an estimate. THE method of accounting, therefore, does not seem to be relevant on the question as to whether the book results are to be accepted or whether they are to be ignored and an estimate is to be made in a particular case. Whatever be the method of accounting employed by an assessee, if the Income-tax Officer finds that his accounts are incorrect and incomplete, he may reject such accounts and make an assess. ment under section 23(3) or make a best judgment assessment under section 23(4).