DARSHAN SINGH SAMYAL V. COMMISSIONER OF INCOME TAX AND ANR

ITA/7/2009

AI Insights

The case involves Darshan Singh Samyal, the appellant-assessee, challenging the orders of the Income Tax Appellate Tribunal, Amritsar, which confirmed the orders of the Commissioner of Income Tax (Appeals) and the Assessing Officer. The primary contention was regarding the additions made to the assessee's income under Section 69(C) of the Income Tax Act, 1961, related to unexplained expenditures on labor, wages, and packing materials in his rice milling business. The Tribunal and lower authorities had inferred that the assessee had incurred unaccounted expenditures to benefit from deductions under Section 80IB. The High Court found the Tribunal's reliance on surrounding circumstances and inferences without direct evidence to be problematic, particularly concerning the cost of production per quintal of rice. However, for the packing material issue, the court agreed with the lower authorities due to the lack of satisfactory explanations from the assessee.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 767011 (HC-JAMMU_AND_KASHMIR)
• Appeal Type: Others
• Pronouncement Date: 05-03-2018
• Assessment Year: misc
• Other Referred Cases: Radhasoami Satsang vs. Commissioner of Income Tax, State of Orissa Vs. Maharaja Shri B. P. Singh Deo, lal Chand Ambica Ram Vs. Commissioner of Ibncome Tax
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: ARUNA THAKUR
• Assessee Lawyers: SUBASH DUTT
• Keywords: Assessment; Deduction under section 80IB; Income Tax; Packing material; Unaccounted expenditure; Labour and wages
• Section: 143(2); 143(1); 80IB; 145(3); 145(1); 69(c)

Judgement Text

" ITA No. 07/2009 Page 1 of 21 HIGH COURT OF JAMMU AND KASHMIR AT JAMMU ITA No. 07/2009 Date of order :05.03.2018 Darshan Singh Samyal v Commissioner of Income Tax, J&K Pamama Chowk, Jammu and ors. Coram: Hon’ble Mr. Justice Ramalingam Sudhakar, Judge Hon’ble Mr. Justice Sanjeev Kumar, Judge Appearing counsel: For Appellant(s) : Mr. Subash Dutt, Advocate For respondent (s) : Mrs. Aruna Thakur, Advocate i) Whether to be reported in Digest/Journal : Yes/No. ii) Whether approved for reporting in Press/Media : Yes/No. Per Ramalingam Sudhakar-J, (ORAL) 1. The instant appeal has been filed by the appellant- Darshan Singh Samyal (hereinafter referred to as ‘assessee’) challenging the order of the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (hereinafter referred to as ‘Tribunal’) dated 17.07.2009 confirming the order of the Commissioner of Income Tax (Appeals) (for short ‘CIT (A)) as well as order of the Assessing Officer (for short ‘A.O’). ITA No. 07/2009 Page 2 of 21 2. The appeal came to be admitted on 04.02.2012, on the following substantial questions of law:- “1. Whether the Appellate Tribunal could in law confirm the additions made on mere presumptions, surmises and conjectures rather than on some evidence? 2. Whether the Tribunal being a fact finding authority could in law uphold the additions by relying upon perverse findings of lower authority without co- relating the same material on record?” 3. After hearing the learned counsel for appellant and the counsel for respondent-department the following additional question of law arises for consideration and it is follows:- “Whether the Tribunal was correct in confirming the order of the Assessing Authority insofar as, packing material is concerned.” 4. The appellant-assessee in this case filed return on 27.11.2003 declaring income of Rs. 4,77,480/- after claiming deduction under Section 80IB at Rs. 38,06,850/-. This was processed under Section 143(1) on 31.02.2004. As the case comes under compulsory scrutiny, notice under Section 143 ITA No. 07/2009 Page 3 of 21 (2) was issued and served on the assessee and thereafter detailed questionnaire was issued on 12.09.2005 and the assessee was asked to submit his reply and thereafter the case was taken up for passing the assessment order. 5. The assessee in this case is in the proprietary business of running M/s Kashmir Super Rice Mills (03 years old), M/s New Kashmir Rice Mills (08 years old) and M/s Kashmir Rice & Oil Mills (15 years old). The claim of the assessee under Section 80 IB of the Income Tax Act, 1961 is not in dispute and the A.O confirmed that the assessee fulfills the conditions for deduction under Section 80IB, subject to the other issues raised in the present case. The A.O. also states that purchases, sale and expenses debited to profit and loss account are duly vouched, meaning thereby records are in order. The books of accounts were also examined. There is no error apparent recorded. The manufacturing account and trading was also examined. 6. During the course of assessment proceedings, A.O. was of the view that the assessee-M/S Kashmir Super Rice Mills ITA No. 07/2009 Page 4 of 21 was showing abnormally low expenses in respect of labour and wages and also in respect of packing material. This according to the A.O was done by the assesse to take the benefit of deduction under Section 80IB, so that the profits can be shown at a higher level and at the same time showing expenses at a lower level which would otherwise tantamount to unaccounted money in terms of Section 69 (C) of the Income Tax Act, 1961. 7. To compete the assessment on this premises a show cause notice was issued to the assesse on 27.03.2006 inter alia stating that the cost of labour and wages per quintal in respect of the assesse M/S Kashmir Super Rice Mills was Rs. 9.65, whereas on a comparison with older Units M/S Kashmir Rice Mills and M/S Kashmir Rice and Oil Mills, the cost of labour and wages was @ 30.58 per quintal. Therefore, there is a phenomenal difference of Rs. 20.93 on labour and wages understated which remained unexplained and, therefore, an income in terms of Section 69(C). Consequently; the Assessing officer invoked the provisions of ITA No. 07/2009 Page 5 of 21 Section 145 (3) for framing an assessment in terms of Section 144 of the Act. 8. Section 145 (1) & (3) reads as under:- 145. Method of accounting (1) Income chargeable under the head\" Profits and gains of business or profession\" or\" Income from other sources\" shall be computed in accordance with the method of accounting regularly employed by the assessee: (3) Where the Assessing] Officer is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting, provided in sub-section (i) or accounting standards as notified under sub-section (2) have not been regularly followed by the assesse, the Assessing Officer may make an assessment in the manner provided in Section 144.” 9. Section 80IB of the Income Tax Act, 1961 where under the benefit is taken by the assessee reads as follows:- “80-IB. (1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to 11 (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section.” 10. The department does not dispute the eligibility criteria of the assesse in terms of Section 80 IB. ITA No. 07/2009 Page 6 of 21 11. Reply was submitted to the show cause notice by the assessee inter alia contending that the assessee -Unit is a new Unit and the efficiency of the assessee-Unit is much better than the old Units and consequently the cost of labour and wages is lesser. Therefore, the cost of production per quintal is lesser and it is the correct figure. This the assesse supported it by the documents submitted before the A.O. who has also stated that it is in order. 12. In addition to that it was pleaded by the assessee that the show cause notice of the A.O. is based on mere presumptions, surmises and conjectures and there is no material to support his doubt except referring to the cost of production of the other Units. Insofar as, the expenditure relating to packing material is concerned, the explanation of the assessee was that paddy is procured from farmers in bags and the old bags leftover are utilized for the Unit to pack the goods. The cost of packing material in M/S Kashmir Super Rice Mills is at Rs. 3,81,890/- on the sale of 28870 ITA No. 07/2009 Page 7 of 21 quintals of rice. The rate per quintal on packing material, therefore, was shown at Rs. 13.22 per quintal. Whereas, in M/S New Kashmir Rice Mills and M/s Kashmir Rice and Oil Mills the expenditure on packing material is at Rs. 2,26,371/- on the sale of 13551 quintals which works out to Rs. 16.95 per quintal in respect of packing material. 13. Both these contentions were considered by the A.O. and rejected in the following matter:- “The reply of the assessee has been examined. The arguments of the assesse that process of production in new unit is fast does not hold any ground. The fact is that the assessee has husked maximum paddy in the unit where deduction u/s 80-IB is available to him and in that process in order to build his capital the assessee has suppressed the above discussed expenditure by actually meeting such expenditure out of the unaccounted money. Similarly as regards packing material the explanation of the assessee is not supported by any inventory and account in respect of the utilization of the old bags in M/S Kashmir Super Rice Mills. Accordingly, an addition of Rs. 8,18,551/- on account of the expenditure incurred on labour and wages outside the books of accounts as discussed above is made to the income of the assessee. This income is treated as arising out of the unexplained expenditure as per the provisions of Section 69 C of the Income Tax Act. On such income the assessee is not entitled deduction u/s 80 IB as this is an expenditure incurred from out of the undisclosed sources and ITA No. 07/2009 Page 8 of 21 this is not an income derived from the industrial undertaking. Similarly, an addition of Rs. 1,07,714/- is made on account of the expenditure incurred outside the books of account of packing material. The amount also is the deemed income u/s 69C as being unexplained expenditure. On such income, the assesse is not entitled deduction u/s 80IB as this is an expenditure incurred from out of the undisclosed sources and this is not an income derived from the industrial undertaking. Both these additions are made in M/s Kashmir Super Rice Mills. Penalty proceedings u/s 271 (1) (C) in respect of the above discussed additions are also initiated for concealment of the said income. In the show cause dated 27th March, 2006, the assesse was also asked as to why provisions of Section 145 (3) may not be invoked in his case, as the accounts relating to the above items of expenditure were not correct and complete. The assesse has not offered any reply to this. Keeping in view that the accounts relating to the above referred items of expenditure have not been found complete and correct as discussed above, accordingly, the above additions are made after invoking the provisions of Section 145(3) in respect of such accounts only and assessment is framed in the manner provided in Section 144 by making above discussed additions.” 14. As a result, the A.O. passed an order determining additional sum of Rs. 8,18,551/- on account of the expenditure incurred on labour and wages and addition of Rs. 1,07,714/- made on account of the expenditure incurred outside the books of account on packing material, ITA No. 07/2009 Page 9 of 21 as unexplained expenditure treating it as income in terms of Section 69(C) of the Act and for consequential action. 15. Section 69(C) of the Income Tax, Act, 1961 reads as follows:- “69 C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the 3 Assessing] Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year.] Provided that notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assesse shall not be allowed as a deduction under any head of income.” 16. An appeal was filed by the aggrieved assessee before the CIT (A) who vide order dated 16.07.2008, confirmed the order of A.O, despite better returns and materials submitted by the assessee pointing out that the assessee-Unit is a new Unit and its comparison with the two old Units is not correct. It was further contended that in respect of assessment year 2002-2003, 2004-2005 and 2005-2006, the very same Assessing Officer has accepted the cost of ITA No. 07/2009 Page 10 of 21 production per quintal without any demur. Here also the labour and wages is almost the same. 17. Therefore, in light of para 9 of the decision in Radhasoami Satsang vs. Commissioner of Income Tax, (1992) 193 ITR 321, it is pleaded that the assessing officer ought not to have taken a different view for the present assessment year. There is no new fact on change of circumstances. The parameters are same, Unit is the same. 18. In Para 9 of the aforesaid decision (supra) it was held as follows:- “9. We are aware of the fact that, strictly speaking, res judicate does not apply to IT proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.” 19. This proposition was not accepted by the assessing Officer, the CIT (A) and also the Tribunal. ITA No. 07/2009 Page 11 of 21 20. The Commissioner of Income Tax (Appeals), rejected the appeal vide order dated 16.07.2008 by simply extracting the order of the Assessing Officer without any discussion or any finding. 21. Relevant portion of the order dated 16.07.2008 reads as under:- “Considering the facts and circumstances of the case, I am in agreement with the observations of the AO and hold that the AO is justified in making the said disallowances. The AO’s actions are upheld and the appeal of the appellant is dismissed on this ground.” 22. Aggrieved thereby, the assessees pursued the matter before the Tribunal. The Tribunal on this issue vide order dated 17th July,2009 in paras 5 and 6 held as follows:- “5.……….In the present case it is observed that the assesse is entitled for deduction under Section 80IB. The surrounding circumstances suggest that the assesse has been in the habit of recording of claim in respect of labour and wages and also packing material so that he can claim higher deduction u/s 80IB. In our opinion, the matter has to be considered in the light of human probabilities. We are to go by surrounding circumstances and it could be inferred from the surrounding circumstances. When we infer from the surrounding circumstances, we are to agree with the findings of the lower authorities. The fact of incurring ITA No. 07/2009 Page 12 of 21 higher expenditure by M/s Kashmir Super Rice Mills cannot be ruled out and direct evidence for incurring such expenditure would not be available and inference about such expenditure has to be drawn on the basis of circumstances available on record. Having regard to the circumstances and facts recorded by the A.O., te inference could reasonable be drawn that the assesse had incurred the unaccounted expenditure in M/S Kashmir Super Rice Mills. The explanation offered by the assesse cannot be accepted and the addition, is to be confirmed. Accordingly, the finding of the CIT (A) on these grounds is confirmed. 6. However, the assessee’s counsel submitted that in the assessment year 2004-05 and 2005- 06, the same facts have been accepted on the same reasons. In our opinion, each year is an independent assessment year and separately assessable and finding of one assessment year cannot be applied to other assessment year blindly. This argument of the assessee is rejected.” (emphasis supplied) 23. Challenging the above the present tax appeal is canvassed stating that all the authorities proceeded on a wrong premises and more particularly on conjectures and surmises. 24. Heard learned counsel for the parties. 25. In the instant appeal, two issues arises for consideration. The first one relates to cost of production per quintal of rice and the second issue relates to cost of packing material of the assesse-Unit. ITA No. 07/2009 Page 13 of 21 26. On the first issue i.e., cost of production of per quintal of rice, as has been rightly pointed by learned counsel for the appellant, the A.O. has proceeded on the basis of comparison of the cost of production of rice per quintal in respect of other two Units i.e., M/S New Kashmir Rice Mills and M/s Kashmir Rice and Oil Mills which are 08 years old and 15 years old stating that it is higher. That the cost of the assessed –Unit- M/S Kashmir Super Rice Mills is less and, therefore, the difference in cost of production will be unaccounted in terms of Section 69 ( C) of the Act. 27. It is the earnest plea of the appellant that the A.O has entertained a doubt on this issue, but to proceed on a mere doubt without relevant supporting material or proper reasons to support the doubt is of no avail. It will be arbitrary exercise of power. 28. We find that while discussing the production cost factor between the assessment and the other two Units, A.O has not taken into consideration the age of the three Units which has been repeatedly pointed by the assessee. The assesse Unit is three years old new machinery while the other two ITA No. 07/2009 Page 14 of 21 are comparatively old. The labour cost and wages of the older Units were higher. The new Unit (assesse unit) was new and worked on lesser labour. 29. The derivative calculation based on which the A.O. has proceeded is a mere presumptions. There is no specific relevant material to substantiate the finding that the cost of per quintal in the case of assessee-Unit- M/S Kashmir Super Rice Mills is erroneous or wrong. If the Assessing Officer’s view is accepted then modernization and consequent reduction in cost of production will become a bane for such new enterprise. The logic of the A.O is counterproductive because better performance and lower cost of production is faulted. If a contra view is taken then a question may also arise that the old Units are showing higher expenditure to avoid the payment of tax. Hence, the hypothetical measure of assessment cannot be accepted. 30. Therefore, the issue has to be considered on the basis of materials which are relevant to the determination of the cost of production of rice per quintal based on the type, age and quality of the machinery and its working capacity. This ITA No. 07/2009 Page 15 of 21 exercise has not been done. A mere comparison with old machinery or Unit will not justify the assessment. 31. The relevant documents which were produced by the assessee were found by the A.O to be in order and duly vouched. Meaning thereby, that there is no serious error in the records produced. The source of doubt appears to be on the basis of comparative of cost of production between new Unit with that of two older Units. This is deprecated. 32. The Commissioner of Income Tax (Appeals) has not dealt with the matter, except confirming the findings of the A.O. in a casual manner with no apparent discussion on merits. We do not see any reason to render a finding on the CIT (A) order. 33. On the contrary, the Tribunal in this case goes on a totally different premise. The order of the Tribunal is based on surrounding circumstances and inferences on the fact of the case to uphold the order of the A.O. The Tribunal holds that there is a case of higher expenditure, which has been suppressed. The finding of the Tribunal, based on the ITA No. 07/2009 Page 16 of 21 surrounding circumstances and inference cannot be justified. We are unable to uphold an order of the Tribunal based on conjectures and surmises. 34. Learned counsel for the appellant relies on Paragraph Nos. 04 and 05 of the decision of the Hon’ble Supreme Court in case titled “State of Orissa Vs. Maharaja Shri B. P. Singh Deo, reported in (1970) 76 ITR 690”, which are reproduced as under: “4. Apart from coming to the conclusion that the materials placed before him by the assessee were not reliable, the Assistant Collector has given no reason for enhancing the assessment. His order does not disclose the basis on which he has enhanced the assessment. The mere fact that the material placed by the assessee before the assessing authorities is unreliable does not empower those authorities to make an arbitrary order. The power to levy assessment on the basis of best judgment is not an arbitrary power; it is an assessment on the basis of best judgment. In other words that assessment must be based on some relevant material. It is not a power that can be exercised under the sweet will and pleasure of the concerned authorities. The scope of that power has been explained over and over again by this Court. 5. The Agricultural Income Tax Tribunal gave no reasons in its order for affirming the decision of the Assistant Collector. It appears to have been of the view that once the assessing authorities reject the material placed before them as being unreliable those authorities can proceed to levy whatever tax they may levy. It failed to bear in mind the scope of the power of the assessing authorities to levy assessment on the basis of best judgment. Therefore the ITA No. 07/2009 Page 17 of 21 tribunal was clearly in error in confirming the decision of the Assistant Collector. Hence the High Court was justified in interfering with the order or the tribunal.” 35. This decision affirms our view, as above. 36. Reliance is also placed on of the decision of the Hon’ble Supreme Court in case titled “lal Chand Ambica Ram Vs. Commissioner of Ibncome Tax, reported in (1959) 37 ITR 288” . The Hon’ble Supreme Court in the said case held as under: “……….If the entries in the books of account in regard to the balance in Rokar and the balance in Almirah were held to be genuine, logically enough there was no escape from the conclusion that the appellant had offered reasonable explanation to the source of the 291 high denomination notes of Rs. 1,000 each which it encashed on 19th Jan., 1946. It was not open to the Tribunal to accept the genuineness of these books of account and accept the explanation of the appellant in part as to Rs. 1,50,000/- and reject the same in regard to the sum of Rs. 1,41,000. Consistently enough, the Tribunal ought to have accepted the explanation of the appellant in regard to the whole of the sum of Rs. 2,91,000 and held that the appellant had satisfactorily explained the encashment of the 291 high denomination note of Rs. 1,000 each on 19th Jan., 1946.” 37. This decision is relied for emphasising that A.O has accepted the books of account. ITA No. 07/2009 Page 18 of 21 38. The finding of the Tribunal in this case appears to be primarily based on human probabilities, inferences from surrounding circumstances what are the human probabilities or surrounding circumstances has not been spelt out. Further, the Tribunal accepts that there is no direct evidence, hence it has to go by inferences. We cannot accept such reasoning. Taxing statute does not proceed on vagueness, ambiguity or on human probabilities. Inference from surrounding circumstances will lead to arbitrariness in the assessment. This is nothing but conjectures and surmises. Such a reasoning is untenable in law. 39. Further the very same A.O. has accepted the per quintal rate of expenditure for the assessee for the assessment year 2002-2003, 2004-2005 and 2005-2006. There cannot be any departure from this method, unless there is a new and substantial material to the contrary. The decision of the Hon’ble Apex Court in Radhasoami Satsang’s case (supra) will squarely apply. 40. We find that in this case there is no relevant material to justify the findings of the A.O. only for the present ITA No. 07/2009 Page 19 of 21 assessment year. The authority has accepted the per quintal rate of cost of production in respect of other assessment years as indicated above. Therefore, the demand and the assessment order in terms of Section 69(C) is not justified. It is an arbitrary determination based on irrelevant parameter and, therefore, on this issue we find that the Tribunal has proceeded on a wrong premise. The Tribunal’s order based on surmises and conjectures while confirming the demand of the Assessing Officer and that of the CIT (Appeals) is bad. On the first issue, the assesse appeal is justified. 41. Insofar as, 2nd issue relating to packing material is concerned, in the show cause notice it has been pointed out that the cost of packing material with regard to the assessee- Unit as well as two other Units i.e., M/S New Kashmir Rice Mills and M/s Kashmir Rice and Oil Mills differs and, therefore, there is an addition of Rs. 1,07,714/-. 42. In the reply to the show cause notice, there is no proper explanation to this factual claim made by the department. Appellant’s claim is not supported by inventory details of the assessee-Unit to substantiate the plea that some of the bags ITA No. 07/2009 Page 20 of 21 were left out from paddy purchases and, therefore, the cost of packing material has come down. The A. O. was correct in this aspect as it is based on record (i.e) production inventory. The learned counsel for the appellant fairly conceded to a query by the Bench on this issue in the absence of inventory of packing material. 43. In the absence of material and a clear explanation from the assessee there cannot be two opinions that the cost of packing material should differ from one Unit and the other Unit, more so when it is dealing with the same kind of packing material for the same good i.e., rice. 44. We find that the Assessing Officer was justified in his demand under Section 69 (C) in respect of packing material which has been rightly confirmed by the appellate authority and by the Tribunal. 45. We find no error in the findings. The second issue goes in favour of the respondent-department. 46. The demand in respect of packing material under Section 69 (C) of the Income Tax Act, 1961, is upheld. ITA No. 07/2009 Page 21 of 21 47. On the first issue the question of law is answered in favour of the appellant-assessee. On the second issue the third question of law is answered against the appellant- assessee and in favour of the Revenue. 48. The appeal is partly allowed. (Sanjeev Kumar) (Ramalingam Sudhakar) Judge Judge Jammu 05.03.2018 Bir "