TMI Blog1998 (2) TMI 141X X X X Extracts X X X X X X X X Extracts X X X X ..... g with the flavour and literature is packed inside the printed Ceka Cartons which is also patented and distinctly known by the customers. Two sets of books of account are maintained i.e. one by the proprietor i.e. Khambhata Family Trust for its income from M/s. Pioma Industries and interest etc. and another for the business in the name of M/s. Pioma Industries. M/s. Pioma Industries are maintaining cash book, sales journal, purchase journal, ledger, Bank pass books, vouchers of purchases, bills of purchases, copies of the bills of sales, vouchers of expenses, various registers for the receipt of packing materials, registers for issue of packing material, production register and supply register. However, no register is maintained to record day to day consumption of raw materials or issue of raw materials or production. Closing stock is valued as per physical verification at the end of the year. The books of account are audited by Chartered Accountants for general accounting purposes and they are also audited by the Tax Auditors under section 44AB of the I.T. Act, 1961. 3. During the year under appeal, which is the second year of business, the assessce had declared sales to the tun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case contains 200 Ceka Cartons) as against the production shown at 82,214 cases resulting in the alleged suppression of production of 6345 cases valued at Rs. 36,42,030 at the rate of Rs. 574 per case calculated at average selling price exclusive of excise duty and sale tax. Accordingly he made an addition of Rs. 36,42,030 to the income of the assessee. 5. The assessee appealed to the CIT(A). Detailed submissions were made before the CIT(A) who has discussed the same thread bear in his detailed order and gave a finding in favour of the assssee as follows: "A. The Assessing Officer has wrongly taken into consideration the so called variations in electricity consumption and that consumption of electricity, by itself, cannot form a reliable test to determine the production. The good conduct of the Assessee in showing better production in succeeding year cannot be allowed to land the assessee in difficulty in his own case for prior assessment year. B. Wastage of 11.27% of consumption of glass vials cannot be treated as high or excessive as they are purchased from scrap dealers who in turn had purchased the same from the rejected stocks of pharmaceutical Co. Even otherwise if an o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He submitted that the parameters like the consumption of electricity, consumption of packing materials, and the rated capacity of packing machineries of Rasna packs per hour of working had rightly been applied by the learned Assessing Officer to reject the trading version of the assessee. He submitted that it created doubt that though the consumption of electricity was more and the consumption of packing material was more the production was less which clearly showed that the assessee was suppressing production. He further submitted that during the course of the search, though the search period pertains to the subsequent assessment year Shri Khambhata had accepted some defects in his books of account and had made a disclosure. According to him the statement of Shri Khambhata has very much relevance and in support of his contention he relied upon the judgment of Kerala High Court in the case of V. Kunhambu Sons v. CIT [1996] 219 ITR 235/86 Taxman 477. The learned DR further submitted that it was admitted by the trustee Shri Khambhata that no day to day record of production and consumption was maintained and accordingly it is a fit case for rejection of the books of account. Accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee's claim for wastage of Ceka Cartons. The learned counsel submitted that a similar wastage was shown in the subsequent Assessment Year i.e. Assessment Year 1987-88 and it was accepted by the Assessing Officer. As regards the comments of the learned Assessing Officer on pouch paper, the learned counsel submitted that the assessee explained that from one kilogram pouch paper 1290 pouches could be made. The Assessing Officer after working out the consumption of pouch paper during the year under appeal viz., 11353 Kgs. observed that the total pouch which could be made worked out to 1,46,45,370 as against which actual pouch paper of 11353 Kgs. The assessee has shown 1,63,41,800 pouches. According to the learned counsel the discrepancy pointed out by the learned Assessing Officer can be reconciled by relying on the fact that the assessee had not only made the pouches from pouch paper but had purchased ready made pouches from market, totalling to 29 lakhs while the discrepancy worked out by the learned Assessing Officer to about 17 lakhs only. On the rated capacity of the packing material the learned counsel submitted that the entire basis adopted by the learned Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see were accepted in all years upto and inclusive of 1957-58 but in 1958-59 the ITO rejected the accounts and applied the proviso to section 13 on the grounds that no day to day dryage register had been maintained and that in another case the yield proposed to be adopted by him was held to be reasonable by Tribunal, and added Rs. 32,053 to the income disclosed by the assessee. The Appellate Assistant Commissioner on appeal, confirmed the applicability of the proviso to section 13 but reduced the addition to Rs. 15,000. The appeal to the Tribunal was dismissed. On a reference- Held (1) that the method of accounting adopted by the assessee having been accepted by the department in the previous years and the income computed on that basis, there were not sufficient grounds for applying the proviso to section 13 to the facts of the case. (2) that even assuming that the proviso was attracted, the income-tax authorities not having determined in any basis of manner of computation of the true income, profits and gains of the assessee firm, were not justified in arbitrarily additing Rs. 15,000 in round figure to the income of the assessee firm." A similar ratio has been laid down in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 284 and the same was taken into business profit on which deduction was claimed under section 80HH and 80-I. The assessee submitted before the Assessing Officer that the interest was earned in the ordinary course of business and was a direct result of the business activities carried on by the assessee and, therefore, it was rightly treated as business income for the purpose of relief under section. 80HH and 80-I of the Act. The Assessing Officer was of the opinion that this income did not form part of the profits and gains of the industrial undertaking so as to be entitled for the aforesaid deductions and, therefore, he did not allow the said deductions. 11. The assessee appealed to the CIT(A). It was submitted before him that since the assessee was running an industrial undertaking in the backward area, it was obliged to keep substantial part of its circulating capital by short term fixed deposit for one year only because there was a dispute about the liability of excise duty with the Central Excise Department for which a provision had been made in the accounts to the extent of Rs. 60 lakhs which had been disallowed in the assessment. Though the assessee was of the view that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee had invested surplus funds in fixed deposits and the interest accrued thereon should be treated as income from other sources. He drew our attention to the provisions of section 80HH and 80-I and submitted that the benefits under these sections were available only in respect of profits and gains derived from an industrial undertaking. According to him income earned on fixed deposits by way of interest could not partake the character of profits and gains derived from business. He therefore submitted that the CIT(A) was not justified in directing the learned Assessing Officer to allow relief under section 80HH and 80-I. 12. In support of his contention the learned D.R. relied upon 12 ITR 95 (Bom.) (sic), Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd v. CIT [1983] 143 ITR 590/14 Taxman 43 (MP), Sterling Foods v. CIT [1984] 150 ITR 292/20 Taxman 55 (Kar.) and Cochin Co. v. CIT [1978] 114 ITR 822 (Ker.). 13. Shri S.N. Soparkar, the learned counsel for the assessee strongly supported the order of the learned CIT(A). He submitted that the assessee used to import raw materials and also used raw materials from domestic-market in bulk for which it was required to issue Letters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sman made a provision to keep apart certain funds so as to be able to make payment of excise duty if required at any time without any liquidity crunch. Therefore, in our opinion, the purpose of placing money in deposit was not to earn interest on investment of surplus funds, but the investment was necessitated by compelling business requirements. In our view the issue stands covered in favour of the assessee by the decision of Gujarat High Court in the case of Gujarat Mineral Development Corpn. In the said case it was observed as under- "Now, in our opinion, the main question that has to be considered is whether this amount which was deposited in short-term deposits represented any money not required for the purpose of the business, and secondly, whether this amount could be said to be capital employed in the business and r. 19(4) is part of the rules for the computations of the capital employed in the industrial undertaking. If the amounts were lying idle or in the coffers of the assessee-company they would undoubtedly be considered to be part of the assets of the company being cash in hand. Similarly, if the amounts were allowed to lye in the current account of the assessee wit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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