Shivalik Woollen Mills (P) Ltd. vs Assistant Commissioner of Income Tax

M.M. Kumar, J.—This order shall dispose of IT Appeal Nos. 31 and 32 of 2004 as both the appeals emerge from one composite order passed in respect of asst. yrs. 1990-91 and 1992-93.

These appeals by the assessee filed u/s 260A of the IT Act, 1961 (for brevity, ''the Act''), challenging order dt. 26th June, 2003 passed by the Income Tax Appellate Tribunal, Chandigarh Bench ''B'', Chandigarh (for brevity, ''the Tribunal''), in ITA No. 1424/Chd/199b, in respect of the asst. yrs. 1990-91 and ITA No. 142B/Chd/1995, in respect of the asst. yr. 1992-93 (A-3). The assessee has claimed that following three questions of law would arise for our determination:

(i) Whether in the facts and circumstances of the case the Tribunal is right by ignoring the fact that the assessee was dealing with the items on the whole sale basis and only a nominal profit of 4.5 per cent be applied by treating the sale as of raw material?

(ii) Whether in the facts and circumstances of the case, the Tribunal is right in upholding the addition of Rs. 21,39,950 when there is no evidence to show that the sale in stock outside the books of accounts.

(iii) Whether in the facts and circumstances of the case the Tribunal is right in ignoring that the gross rate of profit should be taken at 0;5 per cent and not at 29.1b per cent when it was not-clear whether the-said rate, of profit was in respect of the yarn trading account, or it included profit in. respect of job work receipt.

Briefly facts necessary for disposal of these appeals are that a notice u/s 148 of the Act was issued to the assessee on 11th Feb., 1993 and in response thereto a return was filed by it declaring nil income. It is appropriate to mention that Lhe assessee derived income from manufacturing and sale of shoddy yarn; and also from trading of M.S. Rounds. It is also involved in getting job work done on account of drawing and straightening of M.S. Round and bright steel bars. On 18th Dec., 1990, a search and seizure operation was carried out at its business premises and certain books of accounts including papers were seized. The AO noticed that sales and labour earned have increased suitably but the GP rate for the years under consideration has fallen by more than 6 per cent. On the asking of the AO, the assessee submitted that at the beginning of the manufacturing season there was theft at its factory premises on the night of 17th/18th Sept., 1989, which resulted into loss of woollen rags, etc. valued at Rs. 51,02,069, which in turn resulted into fall in the GP rate. The AO did not feel convinced with the explanation furnished and made addition of Rs. 12 lacs on account of low GP rate in comparison to the GP rate of the last year on estimate basis. The assessee had also shown a sum of Rs. 51,02,069-as "the claim receivable in an Annexure to the balance sheet under the head ''Current assets loans and advances'', which the assessee claimed that it was receivable on account of theft. No copy of the FIR or the claim filed with the. insurance company was furnished to the AO despite various opportunities, The AO also made direct inquiries from the insurance company by issuing summons u/s 131 of the Act. The United India Insurance Company, vide its letter dt. 3rd Jan., 1991, intimated the AO that the claim of Rs. 51,02,069 made by the assessee stood rejected as it was found to be fraudulent. The AO has made reference to various surveyor reports as well as the reports submitted by the: investigators of private companies. Accordingly, the AO disallowed the claim of the assessee in the P & L a/c, amounting to Rs. 51,02,069 and added towards the income of the assessee.

The assessee challenged the order of the AO before the CIT(A), Ludhiana, and raised those very contentions which were urged before the AO. In his order dt. 31st Aug., 1995, the CIT(A), Ludhiana, has observed that it was not clear from the order of the AO as to how and on what basis he concluded that the alleged fictitious entries as reflected in the balance sheet for the asst. yr. 1990-91 were representing the cash available with the assessee because the entry suggested the amount receivable and certainly not the cash available with the assessee. According to the CIT(A), the AO had misdirected himself. It. was-concluded that the assessee had not written off the loss caused by theft and that the claim thereof was receivable. It was emphasised that the transaction had become transaction of writing off a bad debt as per the provisions of Section 36(2) of the Act w.e.f. 1st April, 1989. Such a bad debt can be considered to be written off by the assessee. The CIT(A) also held that the order passed by the AO in this respect contravened the provisions of Section 36(2) of the Act.

On further appeal of the Revenue, the Tribunal concluded by referring to the voluminous evidence in the form of reports of surveyors and investigators that no theft had been committed on the premises of the assessee in respect of the alleged stock worth Rs. 51,02,069. It also further concluded that the assessee have manufactured goods out of raw material worth Rs. 51,02,069 and then sold the manufactured goods. It rejected the contention raised by the assessee that nominal profit of 0.5 per. cent was to be applied by treating the sales as wholesales and that of raw materials. Adverting to the quantum of addition to be made on the aforementioned basis, the Tribunal opined that the AO had reached the conclusion that the assessee must have manufactured goods worth Rs. 73,41,165 out of stock of Rs. 51,02,069, who had worked out the addition by applying the GP rate of 29.15 on the value of the manufactured goods, which were worth Rs, 73,41,165 and went on to observe as under:

...The AO has adopted the GP rate of 29.15 per cent which in our opinion, is not correct. In this case, the assessee had shown GP @ 6 per cent as mentioned at p. 2 of the assessment order. However, it is not known whether such GP rate was shown on the entire receipts including the labour charges amounting to Rs. 3,35,30,847 or only on goods manufactured and sold. Further, we find from p. 2 of the assessment order that the AO had made the trading addition of Rs. 12 lacs on account of low GP and such addition was agreed, to by the assessee. Since we do not know whether such addition was made only on account of goods manufactured and sold or in respect of the entire receipts of Rs. 3.35 crores, we. are unable to correctly work out the GP rate accepted by the AO by including the agreed addition of Rs. 12 lacs. Thus, we are of the opinion that the GP rate by including the addition of Rs. 12 lacs on account of goods manufactured and sold, required to be recomputed and addition on account of undisclosed sales of goods manufactured out of the stock of Rs. 51,02,069 also requires to be computed at the same GP rate as applied on the disclosed sales. In the light of these facts, we consider it fair and reasonable to set aside the order of the CIT(A) and direct the AO to recompute the addition in accordance with our observations made hereinabove in this order after allowing reasonable opportunity to the assessee.

On the question as to whether the assessee is entitled to claim loss of Rs. 51,02,069 debited as insurance claim in the P&L a/c for the asst. yr. 1992-93, the Tribunal concluded that once findings have been recorded that no theft was committed at the premises of the assessee, a presumption is liable to be raised against the assessee that it had manufactured goods out of such raw material and sold the same in open market. The addition of Rs. 21,39,950 made against the assessee had, thus, been sustained. Therefore, no claim of loss as debited towards insurance claim in the P&L a/c was acceptable. It was further observed that the insurance company had already rejected the insurance claim of the assessee on 3rd Jan., 1991. The Tribunal in the concluding paras 5.31 and 5.32 observed as under:

5.31 Hence, for the reasons stated above and relying upon the decision of the Tribunal in the case of the assessee passed in asst. yr. 1989-90, supra, we are of the considered opinion that once the assessee''s claim of Rs. 51,02,069 has been rejected by the insurance company on 3rd Jan., 1991 the same should have been claimed by the assessee in the asst. yr. 1991-92 but the same has not been done by the assessee. Hence, the assessee is not entitled to claim this loss and consequent deduction for the same in the asst. yr. 1992-93 and accordingly it is held that the assessee is not entitled to claim deduction/allowance in respect of Rs. 1,02,069 as loss debited in the P & L a/c as insurance claim rejected, Accordingly, issue No. iii is decided in favour of the Revenue and against the assessee.

5.32. As a result of our findings on issue No. iii given hereinabove in this order, the respective grounds of appeal taken by the Revenue for the asst. yr. 1992-93 in ITA No. 1425/Chd/1995 are allowed.

We have heard learned Counsel for the assessee at a considerable length and with his assistance have perused the orders passed by the AO, CIT(A) and the Tribunal. We further find that no question of law would emerge for our determination nor any such arguments have been advanced warranting admission of the appeals. When we examine question No. (i) as claimed by the assessee, it reveals that the same is a pure question of fact wherein it is claimed that the woollen rags worth Rs. 51,02,069 were deemed to have been sold by applying the nominal profit of 4.5 per cent. Obviously, these are questions of facts. Once it has been established that the story of theft on the night of 17th/18th Sept., 1989 is false then the raw material has to be treated the way the assessee has used the similar raw material in the preceding years. A reasonable inference has been drawn by the Tribunal confirming the view taken by the AO. Even the second question upholding the addition of Rs. 21,39,950 cannot be considered to be unrealistic. There is ample evidence on record to substantiate the aforementioned conclusion. This is again a pure question of fact, Similar is the position with regard to the third question which has been claimed by the assessee. Therefore, we are unable to find any substantial question of law warranting admission of the appeals.

In view of the above, these appeals are wholly misconceived and the same are dismissed.