R.C. Sharma, A.M.
The present appeal is filed against the order of the Commissioner (Appeals) dated 7-7-1994, for the assessment year 1993-94, deleting addition of Rs. 95,299 on account of suppression of own milling and addition of Rs. 70,000 being estimated capital for earning such milling.
2. The facts of the case are that the assessee is a rice miller. During the course of assessment under section 143(3) the assessing officer observed that there is no consistency between monthly consumption of electrical energy and milling done in terms of quintals and it resulted in suppression in the milling shown by the assessee. The assessing officer formed an opinion that there was wide variation in the units consumed per quintal of paddy milled from month to month indicate that quantity of milling shown in the books of accounts month-wise, does not reflect the true state of affairs of the assessees business. The assessing officer, therefore, invoked the provision of section 145 of the Income Tax Act, 1961, and rejected the assessees books of accounts and made addition on account of suppressed income from milling and the capital employed to earn the income of suppressed milling.
3. Before the Commissioner (Appeals) it was contended by the learned authorised representative for the assessee that the assessee has maintained full stock register for purchase, milling and selling which were all produced and examined by the assessing officer and not a single discrepancy was noted therein. It was further contended that these registers were regularly checked by different authorities namely Superintendent of Taxes, Assam State Agricultural Marketing Board and the Director of Food and Civil Supplies. Further these registers were duly checked and signed by various officials of these organisations and no adverse remark has been noted therein. It was also submitted that the production and milling of paddy is strictly supervised by those authorities and there is no scope of any manipulation. The authorised representative also submitted the copies of assessment order and the return filed under Assam Purchase Tax Act before the Superintendent of Taxes which tallies with the books of accounts of the assessee fully,
4. In the first appeal the Commissioner (Appeals) observed that the assessee maintained various prescribed registers for the milling and no discrepancy has been found there. The Commissioner (Appeals), therefore, held that there cannot be any question of suppression of production or milling.
5. We have heard the submissions of the learned authorised representative of the assessee and the learned Departmental Representative both and gone through the orders of the lower authorities. We are of the considered opinion that the assessing officer was not justified in rejecting the books of account merely because there was no consistency between monthly consumption of electrical energy and milling done in terms of quintals, without bringing on record any other supporting circumstances corroborating the assertion of the assessing officer that lead to suppression in the milling shown by the assessee. Such inconsistency in electric consumption vis-a-vis milling, could be due to various other reasons beyond the assessees control. Nowhere the assessing officer has observed that any sales were found which were not recorded in the books of accounts which admittedly was maintained by the assessee. There was also no whisper that the assessee was indulging in unaccounted sales. No defect in stock register was pointed out by the assessing officer. Therefore estimating the suppressed milling only on the basis of variations in electric consumption was not legally tenable. The comparative position of any other mill owner regarding consumption of electric power, vis-a-vis, production was not brought on record by the assessing officer. Moreover, the electric consumption depends on so many other factors like erratic power supply, low voltage, high moisture contents of the paddy, etc. Further, nowhere it was indicated by the assessing officer that entries of purchase or sales were not tallying with the purchase bills/voucher or sales bills. It means purchase and sales were regularly entered in the books of accounts. This was also not the case of the department that any sales/millings were made which were not recorded in the sales account. Therefore, there was no reason or justification for making estimate of suppressed milling/sales. While invoking the provisions of section 145 of the Act, no defect either in the system of accounting or in the method of accountancy principles, was brought on record by the assessing officer. Moreover, accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. The department has to prove satisfactorily that the account books are unreliable, incorrect or incomplete before it can reject the accounts.
The rejection of accounts should not be done light-heartedly. Even though it may not be possible to lay down the exact circumstances in which accounts should be rejected as unreliable or incorrect, yet the accounts may be rejected as unreliable if important entries and transactions are omitted therefrom or if proper particulars and vouchers/bills, etc. are not forthcoming or if they do not include entries relating to particular class of business. The assessee should invariably be given reasonable opportunity for offering satisfactory explanations regarding defects in the accounts and on his failure to satisfactorily explain the defects, the department would be justified in rejecting the accounts. In the instant case no such defect was brought on record by the assessing officer except the disparity in consumption of electric power. The Honble Kerala High Court in the case of St. Teresas Oil Mills v. State of Kerala : [1970]76ITR365(Ker) , held that the mere fact that there was disparity in the consumption of electricity would not justify the rejection of accounts without any other supporting circumstances, because such variation could be due to various factors outside the control of the assessee. It was further held that it is unsafe to categorically say that because there is variation in the consumption of electricity the accounts are incorrect or unreliable. It was observed that, it sometimes happen that correct supply falls far below the usual voltage and on such occasions the output will necessarily be much lower than the normal rate. It was further held that it is, therefore, unsafe to uphold the rejection of the accounts purely on the ground that there has been divergence in the consumption of electricity.
6. Similarly it was held by the Honble Andhra Pradesh High Court in the case of N. Raju Pullaiah v. Dy. CTO & Ors. : [1969]73ITR224(AP) that the assessing authority rejected the accounts of the assessee, a groundnut oil miller and estimating the turnover on the basis of consumption of electricity and the result of tests conducted in other mills, was not justified. It was observed in this case that consumption of electricity by itself cannot form a reliable test for determining the yield of oil, the yield depends upon various factors viz., the quality of the seeds, the condition of the machine, the skill of the driver, the surroundness of electric equipment, etc. There may be several other disturbing factors which affect the net yield. Moreover, the consumption of electricity itself is affected by various factors.
7. In the instant case the data relied upon by the assessing authority, which is made the basis of rejection of books of accounts and thereby estimating the suppression of own milling, smacks of arbitrariness, therefore, deserves to be quashed. The observation of the assessing officer that suppressed quantity of 2,046 quintals was purchased by the assessee outside his books of accounts, milled and sold during the year, was without bringing any instance on record to the effect that a particular purchase and/or sale vouchers/bill, found by him but not recorded in books of accounts.
8. The Privy Council had occasion to consider the exact import of the expression "to the best of his judgment" occurring in section 23(4) of the Indian Income Tax Act, 1922 in the case of CIT v. Laxminarain Badridas (1937) 5 ITR 170 . The Privy Council made the following observation in that judgment :
"He (the assessing authority must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessees circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate., and though there must necessarily be guesswork in the matter, it must be honest guesswork."
9. On the basis of above observation we are of the considered view that only on the circumstances relied on by the authorities below (AO), for rejection of the accounts is lack of consistency in the monthly consumption of electrical energy and milling done in terms of quintals. In our opinion, this factor by itself without any other supporting circumstances does not justify the rejection of the accounts. Such variation in the consumption of electricity vis-a-vis output can be due to various factors beyond the control of the assessee. These factors are condition of machine, skill of machine operator/driver, the soundness of electric equipments, uninterrupted/continuity of electric supply, etc. Our opinion also get support from the order of the Tribunal, Ahmedabad Bench, in the case of Asstt CIT v. Khambhatta Family Trust . It was held in this case that merely because the consumption of electricity was more and the production was less it would be no ground for rejection of the trading version. As the estimation of suppression in the milling by the assessing officer is deleted, the consequential addition on account of estimated capital employed in the suppressed milling, is also deleted.
10. We accordingly uphold the order of the Commissioner (Appeals) and dismiss the revenues appeal.