Income Tax---

---- Addition---Assessee, a public limited company engaged in manufacturing of yarn---Rejection of wastage declared by the assessee-- No deficiency was pointed out in the books maintained by the assessee-- Loss shown by the assessee due- to dryage was a normal and unavoidable feature of the manufacturing process and the same could be verified from the quantitative details of the cotton purchased, consumed and the yarn manufactured given in the record maintained for the purpose of excise duty---Rejection of claimed dryage was not factually correct as their addition to the total production resulted in absurdity-- -Appellate Tribunal, in circumstances, was not justified to uphold the addition on account of alleged suppression of production, without finding any defect or discrepancy in the books of accounts of assessee---Principles.

Tanvir Textile Mills Ltd. v. Commissioner of Income-tax 1990 PTD 254 fol.

Mian Ashiq Hussain for Appellant.

Mian Yousaf Umar for Respondent/Revenue.

Date of hearing: 6th October, 2003.

JUDGMENT

NASIM SIKANDAR, J.---Through this single judgment we intend to dispose of I.T.As. Nos.512 and 513 of 2000.

2. In these further appeals under section 136 of the late Income Tax Ordinance, 1979 the appellant, a public limited company engaged in manufacturing of yarn claims that following common questions of law arise out of the impugned order of the Income Tax Appellate Tribunal Lahore, dated 31-3-2000 recorded on cross-appeals of the appellant as well as the respondent/Revenue:--

"(i)Whether under the facts and in the circumstances of the case, the learned Tribunal was justified to uphold the addition of Rs.34,01,402 (Rs. 21,25,517) on account of alleged suppression of production, without finding any defect or discrepancy in the books of accounts of the assessee?

(ii)Whether regularly maintained books of accounts and excise record (accepted by the Assessing Officer) could be ignored, for estimating assessee's income without any evidence?

(iii)Whether acceptance of trading results and addition in production account do not amount to contradiction in terms?"

3. The appellant in the two years involved namely 1994-95 and 1995-96 returned losses respectively at Rs.83,46,294 and Rs.2,87,54,062. The Assessing Officer in both the years rejected the yieldage declared at 84.78% and 83.58 % which was arrived at after claiming dryage and damaged cotton at 64,930, kgs in the assessment year 1994-95 and 33,697 kgs in the assessment year, 1995-96. For both the years the Assessing officer adopted the yieldage at 84.50% which at the average sale rate declared by the appellant at Rs.51.31 and Rs .63.58 p.kg resulted in the two impugned additions at Rs. 21,25,517 in the assessment year 1994-95 and at Rs. 34,01,402 in the assessment year 1995-96.

4. Learned First Appellate Authority CIT (Appeals) Zone Lahore on 18-2-1999 allowed partial relief on the basis of parallel cases placed before him. The dryage claim was allowed at 0.5 % while the yieldage adopted at 84.5 % was found reasonable and, therefore, confirmed.

5. Both the Department as well as the assessee agitated the partial relief so allowed before the Tribunal. By way of the impugned order the learned Members of the Tribunal disagreed with the learned CIT (Appeals) and, therefore, restored the additions in both years. The relevant part of their order reads as under:--

"After considering the arguments of both the sides we are of the considered view that the history of the case has precedence over parallel cases. In the immediately preceding year declared loss of due dryage in this case was not accepted and yield of yarn was adopted at 84.5 % and this treatment was accepted by the assessee. The loss claimed due to dryage in the years under consideration could not be substantiated by the assessee as pointed out in the assessment order. As regards the acceptance of declared loss in the subsequent assessment years, it may suffice to say that each year is an independent entity. Moreover, the loss shown under this head in the next following assessment years was much lesser for, example, loss shown in the assessment years 1996-97 and 1998-99 was 0.41 %."

6. After hearing the learned counsel for the parties we are persuaded to allow the contentions made at the bar for the appellant that the learned Tribunal was not justified in restoring the additions as no deficiency was pointed out in the books maintained by the assessee. The appellant is correct in pointing out that loss due to dryage was a normal and unavoidable feature of the manufacturing process and that the same could be verified from the quantitative details of the cotton purchased consumed and the yarn manufactured given in the record maintained fox the purpose of excise duty.

7. The reliance of the learned counsel for the, appellant on a judgment of the Karachi High Court in re. Tanvir Textile Mills Ltd. v. Commissioner of Income Tax (1990 PTD 254) is also pertinent and relevant. The facts in the case before their Lordships and the one in hand are strikingly similar. In both cases the genuineness of books of accounts maintained by the assessee was not questioned. Neither the Assessing Officer nor at the two appellate stages any substantial mistake or discrepancy in the accounts was pointed out. Their Lordships of the Karachi High Court on relying upon their earlier decision observed as under:--

"After hearing the learned counsel for the Assessee and the Department we are of the view that there was no justification for rejecting the wastage claimed by the assessee in the above assessment years. It is quite clear from the order of Income-tax Appellate tribunal that the genuineness of the account books maintained by the petitioner was not doubted. In fact, the additions made by the Income-tax Officer on account of unverifiable sales in the sale figure disclosed by the assessee/applicant in its returns for the above years, were not only rejected by the Appellate Assistant Commissioner in appeal, but it was maintained by the Income-tax Appellate Tribunal in the appeal filed by the Department against the order of the Appellate Assistant Commissioner. This goes to show that there was nothing wrong in the manner of accounting maintained by the assessee. In the case of Indus Textile Mill Ltd. v. CIT (1989 PTD 567) a Division Bench of this Court held that the accounts maintained by the assessee, can be rejected if there are substantial mistakes and discrepancies due to which it is not possible for the Assessing Authority to correctly and clearly determine the income of the assessee. It is also observed in the above case that where it is not possible to maintain record of stagewise production and stage wise wastage and no such record was maintained in the past, the department could not reject the accounts of assessee for that reason. We are in respectful agreement with above observations which are fully attracted in the present case. Apart from that it is quite obvious on a simple mathematical calculation that the quantity of cotton yarn added in each assessment year by the I.T.O. to the production figures disclosed by the applicant, if taken, together with visible and invisible wastages disclosed by the applicant, which was duly accounted for in the assessment, the total production of assessee/applicant in each of the above mentioned assessment year exceeded the total quantity of cotton consumed in that year. This is obviously an absurdity which could not take place."

8. In the present case the Assessing Officer accepted the account in both years to the extent of declared turn over as well as the gross profit rate shown at 16.65 % in the assessment year, 1994-95 and the gross loss in the assessment, 1995-96. The rejection of claimed dryage at 1.32% and 1.24% in the two years was not factually correct as their addition to total production resulted in the absurdity as pointed out by their Lordships of the Karachi High Court. In the case in hand as well if the quantity of cotton yarn is added to the production figure disclosed by the appellant when taken together with visible and invisible wastage the total production in both assessment years either exceeds or reduce the total quantity of cotton consumed in these years against the declared record.

9. Mian Ashiq Hussain, learned counsel for the appellant with the help of a chart has successfully demonstrated that if the total production, admitted wastage the estimate made by the Assessing Officer and confirmed by the Tribunal are taken together it will result in unnatural percentage ac 99.52 % in the assessment year 1994-95 and 100.7 % in the assessment year 1995-96. It needs to be noted again that the Assessing Officer accepted all other results except for the production account arid recast the same as noted earlier.

10. Since that could not possibly happen by simple mathematical calculations and since no defect or discrepancy was pointed out in the books maintained by the assessee, we will return a negative answer to question No.1. The other two questions being only another way to look' at the preposition are not needed to be answered.

11. Appeal accepted.

M.B.A./R-5/L.Appeal accepted.