Kanwal Rice Mills Kotkapura V. The Commissioner of Income Tax, Patiala

ITR/165/1999

AI Insights

The case revolves around M/s Kanwal Rice Mills, which faced scrutiny from the Income Tax Department over the yield of rice from paddy, which was significantly lower than expected. The Assessing Officer rejected the books of account provided by the assessee, suspecting that the low yield figures were manipulated to underreport income. The matter escalated to the Income Tax Appellate Tribunal, which upheld the Assessing Officer's decision, and subsequently, the High Court of Punjab and Haryana also affirmed this decision. The core legal issue was whether the low yield of finished goods or unexplained high shortage/wastage justified the invocation of Section 145 of the Income Tax Act, allowing for an estimated assessment of income.

• Counselvise Citation: [2009] 140 COUNSELVISE.COM (IT) 679673 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 27-10-2009
• Assessment Year: misc
• Other Referred Cases: Chhabildas Tribhuvandas Shah and others Versus C.I.T. 59-ITR-733, S.N.Namasiyayam Chettiar Versus C.I.T. 38-ITR 579
• Laws Referred To: Income Tax Act
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: SAVITA SAXENA
• Keywords: Estimate of income; Rejection of Books of Account; Low yield; Unexplained high shortage/wastage; Scientific base for yield
• Section: 145

Judgement Text

"ITR No. 165 of 1999 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITR No. 165 of 1999 (O&M) Date of decision: October 27, 2009 M/s Kanwal Rice Mills Kotkapura ...Appellant Versus The Commissioner of Income Tax, Patiala ...Respondent CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL HON'BLE MR. JUSTICE GURDEV SINGH Present: None for the assessee. Ms. Savita Saxena, Advocate, for the revenue. ORDER 1. The Income Tax Appellate Tribunal, Amritsar, has referred the following question of law for opinion of this Court, at the instance of the assessee, arising out of its order dated 29.7.1998 in ITA No. 163 (ASR)/ 1992 for the assessment year 1990-91:- “Whether, on the facts and circumstances of the case, low yield of finished goods or unexplained high shortage/wastage is a valid ground for invoking Section 145 and making suitable estimate of income on account of low yield and unexplained shortage ?” 2. The assessee derived income from rice mill. The assessee produced the books of account, wherein abnormal low yield of rice from ITR No. 165 of 1999 2 paddy was depicted. The Assessing Officer rejected the books of account and made assessment on the basis of the estimate of yield of rice at 65.66% of paddy milled. The CIT (A) as well as the Tribunal upheld the assessment. It was observed that mere maintenance of books of account was not enough if the income derived has not been correctly reflected. Reliance was placed on the judgment of Hon'ble Supreme Court in the case of Chhabildas Tribhuvandas Shah and others Versus C.I.T. 59-ITR-733 and S.N.Namasiyayam Chettiar Versus C.I.T. 38-ITR 579. The relevant observations of the Tribunal are as under:- “The yield becomes also relevant for arriving at correct profit because one has to accept whether there is possibility of creating the sale outside the books of accounts by tampering with the yield of finished goods out of manufacturing process from raw-material. One may maintain stock register in most perfect manner at the same time it is easy to tamper with the yield from raw-material used in the manufacturing process. Of course, there has to be a scientific base for arriving at more rational and scientific yield. Often, it has been observed that this rationale is not being followed by the authorities below. We are of the opinion that it is the duty of the department to be equipped with a data is information regarding yield of finished goods from the raw-material and the data should be analyzed by an expert in the line which is under process of manufacturing. It should not be left to the persons who are neither expert nor have any knowledge in that field. The A.O. is within his right to make an investigation as well as inquiry if the end result of finished goods and bye-products are not in accordance with the normal conditions prevailing in a particular trade. It is for the appellant to produce valid, authentic and documented evidence to justify the reasons for deviation of the end results in the manufacturing process. In case the explanation submitted by the appellant is not satisfactory or is devoid of documentary ITR No. 165 of 1999 3 and other evidence, the AO should support his finding by an opinion or the report of an expert. Under these circumstances, the A.O. can make a specific addition evaluating the unexplained portion of low yield and excess wastage and shortage. In case, he is also rejecting trading accounts results by application of G.P. rate such additions should be taken part of the trading addition on account of application of G.P. rate or net profit rate. Keeping in view the above discussion, we are of the opinion that the authorities below were justified in invoking section 145 (1) of the I.T. Act.” 3. It cannot be disputed that where entries in the books of account are absurd and totally unacceptable, mere fact that books of accounts have been maintained is not enough to accept their correctness. In the present case, there is valid reason given by all the authorities for not accepting the books of account. Thus, in the facts and circumstances of the case, rejection of books of account was justified. The question referred has to be answered against the assessee and in favour of the revenue. 4. Reference is disposed of accordingly. (ADARSH KUMAR GOEL) JUDGE October 27, 2009 (GURDEV SINGH ) prem JUDGE Note:- Whether this case is to be referred to the Reporter .....Yes/No "