Judgment:
Mrs. Sujata Manohar J.
1. This income-tax reference relates to the assessment year 1964-65 for which the corresponding previous year is Samvat year 2019.
2. The assessee-company herein is one of the leading manufacturers of bidis in the State of Maharashtra. Its head office is at Sinnar in Nasik district. The assessee has got a number of factories at Sangamner, Sinnar, Ahmednagar, Nizamabad, and other places and the villages surrounding each of these places. In all, the assessee claims to have 130 such factories. The assessee has several branches with the head office at Sinnar.
3. During the relevant year the assessee manufactured two brands of bidis known as 'cock' and 'camel'. For each of these brands it manufactured two sizes of bidis 'chalu' (ordinary bidi of the usual size) and 'lavangi' (short bidis). The assessee also sold in the market certain bidis known as chhat bidis.
4. Separate books of account for each of these branches were kept by the assessee. The bidis manufactured in the village factories were sent to each of the respective branches which had supplied them with raw material for the manufacture of bidis. All the profits of the assessee were accounted for in the account books of the assessee at its head office at Sinnar.
5. During the year, the assessee had employed thousands of workmen in its different factories. This industry does not require any machinery but depends entirely on human labour for the manufacture of bidis. The workmen were paid on the basis of the work done at the rate of 1,000 bidis prepared. The raw material required by the workers for rolling the bidis are bidi leaves, tobacco and thread.
6. For checking the bidis rolled by the workers, the assessee employs checkers who are known as taraiwallas. The taraiwallas distribute raw materials to the workers and make rounds for checking the bidis being rolled. The taraiwallas take out bidis in the process of rolling which, in their opinion, are not of the standard quality. These sub-standard bidis are called chhat bidis. Even after the bidis are rolled the taraiwallas again check the bidis and take out sub-standard or chhat bidis. Thereafter the bidis are roasted in the oven of the factories.
7. For rolling bidis, the taraiwallas issue bidi leaves to the workers in the evening. These leaves are issued by weight for the purpose of rolling 1,000 bidis out of these leaves. The workers are required to soak the bidi leaves in water overnight. On the next morning, the leaves are cut into required triangular pieces for rolling the bidis.
8. At the close of the day all the workers come to give account of the bidis prepared by them. These bidis are kept in bundles of 25 bidis in a tray. Each worker has to give ten extra bidis known as mapari bidis for which the workers do not get any wages.
9. For the relevant accounting year, the gross profit in the assessee's trade as worked out by the Income-tax Officer was 13.6 per cent. on sales of Rs. 1,79,63,421 including havala for bidis used for advertisement and for free distribution. If the bonus paid to the workers was taken into account the net profit disclosed was 12.6 per cent. The Income-tax Officer did not accept the book results of the assessee. The Income-tax Officer held that the book results could not be relied upon because the assessee had not produced day-to-day registers showing the quantity of bidis manufactured and the bidi leaves consumed in each factory. He further observed that the purchase of bidi leaves by the assessee was in bags which varied in weight from 20 kgs. to 60 kgs. or more, and the issuance of bidi leaves to the workers was by weight. It was, therefore, not possible to co-relate the weight of the bidi leaves purchased by the assessee with the weight of the bidi leaves issued to the workers. He also commented on the absence of record for day-to-day collection as also total collection of chhat bidis. He further noted the fact that the gross profit in the bidi industry at the relevant time which was returned by other leading bidi manufacturers was between 23.8 per cent. to 25.5 per cent. The Income-tax Officer, therefore, rejected the book results and proceeded to estimate the income of the assessee on the basis of various items which went into the books of account of the assessee.
10. The Income-tax Officer estimated the total consumption of bidi leaves at 21,64,099 kgs. He estimated the cost of these leaves at Rs. 28,20,147 as against Rs. 32,74,982 claimed by the assessee. The Income-tax Officer, therefore, concluded that the assessee had inflated the cost of consumption of bidi leaves by Rs. 4,55,000 approximately, which the Income-tax Officer added to the assessee's total income.
11. The Income-tax Officer further held that the assessee had suppressed the production of bidis, inter alia, by not adding to the production figures of mapari bidis which he estimated as ten bidis from each worker per day. He estimated the average production of a workman per day as 700 bidis and, therefore, arrived at the figure of 13 mapari bidis for every thousand bidis. He also added gundichi bidis (with which we are not now concerned) and arrived at the total mapari and gundichi bidis collectively which according to him were not accounted for; and he added Rs. 3,20,000 under this head, i.e., suppressed production. He also added Rs. 1,64,000 as suppressed production of chhat bidis. He calculated chhat bidis at the rate of 20 chhat bidis per 1,000 bidis for this purpose. He also added certain other types of bidis and estimated the total figure of suppressed production at Rs. 8,74,000. As a result, he raised the gross profit to about 19.3 per cent. as against comparable cases where a gross profit rate of 25.3 per cent. to 26.7 per cent. was estimated.
12. Being aggrieved by the order of the Income-tax Officer, the assessee appealed to the Appellate Assistant Commissioner. The assessee had also appealed from a similar order of assessment for the assessment year 1963-64. In respect of the assessment year 1963-64, the Appellate Assistant Commissioner passed a remand order on April 26, 1969. Pursuant to this remand order, the Income-tax Officer gave his report dated July 7, 1971. here, the Appellate Assistant Commissioner in his common order for the assessment years 1963-64 and 1964-65 which is dated September 27, 1971.
13. For the year 1963-64, both the assessee as well as the Revenue filed appeals before the Tribunal which were disposed of by a common order dated March 3, 1973.
14. In respect of the assessment year 1964-65 with which we are concerned here, the Appellate Assistant Commissioner in his common order dated September 27, 1971, held that no addition on account of excess consumption of bidi leaves was required. Hence he deleted the addition of Rs. 4,55,000 made by the Income-tax Officer under this head. In doing so, the Appellate Assistant Commissioner, inter alia, observed in his order that leaves weighing one seer 3 chataks (1,090 grams) should be taken as required for 1,000 bidis. The Appellate Assistant Commissioner, however, worked out the gross profit at 15.5 per cent. on the estimated sales of Rs. 1,84,00,000 and under this head he sustained an addition of Rs. 1,29,750.
15. From the order of the Appellate Assistant Commissioner both the assessee as well as the Department filed appeals before the Tribunal for the assessment year 1964-65 which were disposed of by the Tribunal by its order dated May 29, 1974. On the question of excess consumption of bidi leaves, the Tribunal held on the basis of the observations made by the Appellate Assistant Commissioner, that the average quantity of bidi leaves issued by the assessee for rolling thousand bidis was 1 seer 3 chataks; that the estimated consumption of bidi leaves for the production of 27,30,00,7000 bidis by the assessee during the year therefore came to 30,30,974 kgs. as against the consumption of 32,55,547 kgs. shown by the assessee. The excess was 2,24,573 kgs. whose cost at Rs. 1.03 per kg. came to Rs. 2,31,310. The Tribunal, however, said that taking all the circumstances into account and after giving all possible benefits to the assessee, it will be reasonable to add only Rs. 1,00,000 to the income of the assessee in respect of the excess consumption of bidi leaves shown by the assessee. In other words, as against the addition under this head made by the Income-tax Officer of Rs. 4,55,000 which was deleted by the Appellate Assistant Commissioner, the Tribunal maintained the addition of Rs. 1,00,000.
16. The Tribunal next considered the question of suppressed production of various types of wage-free bidis collected by the assessee. In the present case, we are concerned only with chhat and mapari bidis. The Tribunal came to the conclusion that the assessee collected an estimated 15 chhat bidis per day per worker. But since only 800 bidis were rolled per day per worker, the chhat bidis per thousand bidis would come to 18 in number. The Tribunal also took into consideration evidence relating to free chhat bidis given to workers or being used for free advertisement and deducted from this figure of 18 chhat bidis per thousand, 3 bidis. It held that 15 chhat bidis were produced per thousand bidis and all these bidis were not accounted for. The Tribunal directed the Income-tax Officer to work out the figures relating to addition on this basis. The amount so worked out is Rs. 1,23,210.
17. The Tribunal also considered the number of mapari bidis which, according to the Tribunal, were not accounted for. After considering the evidence relating to the number of mapari bidis collected by the assessee from each of the workers every day, the Tribunal found that the number of mapari bidis per worker per day would be 10 bidis, which in terms of thousand bidis worked out to 12 1/2 bidis per worker per every thousand bidis. The Tribunal ultimately concluded that the figure of suppressed production of mapari bidis should be worked out as 10 mapari bidis per thousand per worker. After considering the entire record in the case including the reopened assessment of the assessee for the assessment years 1952-53 to 1962-63, the figure of suppressed production which was added under the head of mapari bidis was worked out at 1,72,494.
18. As a result, under the three heads (1) excess consumption of bidi leaves, (2) chhat bidis, and (3) mapari bidis, the Tribunal made a total addition of Rs. 3,95,704 as against the total addition of Rs. 9,39,000 made by the Income-tax Officer and Rs. 1,29,750 made by the Appellate Assistant Commissioner. These are additions to the estimated income of the assessee.
19. At the instance of the assessee, the following questions have been referred to us by the Tribunal for opinion :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income-tax Officer was correct in applying section 145(2) of the Income-tax Act, 1961, for the assessee's assessment for the assessment year 1964-65, and in further holding that the scope of the provisions of section 145(2) was different from the scope of the provisions of section 13 of the Indian Income-tax Act, 1922
(2) Whether, on the facts and in the circumstances of the case, the Tribunal's conclusion directing the addition of Rs. 1 lakh on account of excess consumption of bidi leaves, and the further addition on account of the estimated value of the suppressed production of chhat and mapari (wage-free) bidis was bad on the ground that there was no material therefor, and its conclusion was based on irrelevant material, suspicion and conjectures and was contrary to the material on record ?'
20. On the first question there is no serious dispute that the Tribunal was right in holding that the Income-tax Officer had correctly applied section 145(2) of the Income-tax Act, 1961, for the assessee's assessment for the assessment year 1964-65. In view of reasons which have been given by the Income-tax Officer which we have set out earlier, there is no doubt that the assessee had not produced the relevant record as pointed out by the Income-tax Officer relating to its day-to-day manufacture of bidis including the quantity of bidis manufactured daily, the figures of bidi leaves consumed per day in each factory and the record relating to the daily collection of chhat and mapari bidis. The Tribunal has correctly held that in this situation, the Income-tax Officer was not satisfied about the fairness or correctness of the accounts of the assessee and that the Income-tax Officer was entitled to make an assessment in the manner provided in section 144. Question No. 1 must, therefore, be answered in the affirmative and in favour of the Revenue.
21. The second question relates to the addition of amounts set out earlier on account of an estimated excess consumption of bidi leaves and for the suppressed consumption of chhat and mapari bidis. It is the assessee's contention that there was no material before the Tribunal for arriving at these conclusions, while according to the Revenue, the Tribunal's conclusions in this regard are based on evidence which was before the Tribunal. In this connection, it is necessary to note that when the Appellate Assistant Commissioner passed a common order for the assessment years 1963-64 and 1964-65, the Appellate Assistant Commissioner had before him the evidence of five workers who were examined on behalf of the Department. These five workers were from one of the factories of the assessee, where the workers were on strike. These workers were examined for the assessment year 1963-64. Their evidence was recorded in 1968. The Appellate Assistant Commissioner also had before him three affidavits of three workers filed by the assessee. The affidavits were filed in 1969 in the assessment proceedings for the assessment year 1964-65. These workers were allowed to be cross-examined by the Income-tax Officer in the appeal proceedings before the Appellate Assistant Commissioner. In addition, the assessee had also filed a statement on oath of three other persons. These persons were also cross-examined in the appeal proceedings before the Appellate Assistant Commissioner. Hence, the Appellate Assistant Commissioner, examined the evidence given by all these persons. The Appellate Assistant Commissioner also had before him a report of an Institute of Agriculture, viz., Anand Bidi Tobacco Research Station. This report deals with the study of different varieties of bidi leaves. It states that the quality of leaves from various parts of India set out therein differs considerably, The maximum number of bidis which can be produced from one kg. of leaf samples obtained from Nagpur forests would be 925. This is the highest recovery figure of bidis. The recovery of bidis is also good in the case of bidi leaves obtained from Sambalpure, Indore and Jabalpur, as compared to leaves from other places. The minimum recovery of bidis is from leaf samples obtained from Vanswada. These leaves yield 405 bidis from one kg. of leaves.
22. The Appellate Assistant Commissioner considered the evidence of the workers relating to the quality of bidi leaves issued to each worker daily. The figures fluctuate considerably. The witnesses on behalf of the assessee have given higher figures of consumption of bidi leaves per thousand bidis than the workers examined by the Income-tax Officer. The Appellate Assistant Commissioner seems to have estimated the consumption of bidi leaves at 1 seer 3 chataks of bidi leaves for a thousand bidis. For this, he seems to have relied on one register which was produced by the assessee relating to daily production in one of the factories. According to the assessee, all the other registers from its various factories were not available because they were either destroyed or eaten by rats or burnt. The explanation of the assessee has rightly not found favour with the Appellate Assistant Commissioner. However, the only material in support of taking the figure of 1 seer and 3 chataks for 1,000 bidis is this single register produced by the assessee. The Appellate Assistant Commissioner has, however, observed that when out of thousands of workers employed only a few striking workers are examined, their evidence does not inspire confidence. Similarly, when out of thousands of daily registers only one is produced, that register also does not inspire confidence. However, this figure of 1 seer 3 chataks has been accepted by the Tribunal without further discussion. There does not, therefore, appear to be any satisfactory material in support of the conclusion arrived at by the Tribunal that 1 seer 3 chataks of bidi leaves were required in the assessment year 1964-65 for the production of 1,000 bidis.
23. What is important to be noticed in this connection is that the Tribunal failed to take into consideration the production of chhat bidis as well as mapari bidis for the purpose of determining the total consumption of bidi leaves by the assessee during the assessment year 1964-65. The Tribunal has held that the total production of the bidis as disclosed by the assessee does not include chhat bidis and mapari bidis. The production of both these bidis would also require consumption of bidi leaves.
24. The Tribunal has estimated that 15 chhat bidis were taken per worker per day. When the assessee had employed around 10,000 workers in its 130 factories, and a very large number of workers were employed from surrounding villages, it is quite clear that a very substantial number of chhat bidis were collected by the assessee during the year in question. Similarly, the Tribunal has estimated that the assessee has taken 10 mapari bidis from each worker per day. On the same basis, there would also be a large production of such mapari bidis for which also bidi leaves supplied by the assessee would be consumed. If all these figures are estimated and taken into account, in our view, there would not be any justification for adding any amount under this head. The difference between the consumption of bidi leaves as estimated by the Tribunal and as disclosed by the assessee comes to about 2,21,836 kgs. valued by the Tribunal at Rs. 2,31,310. The Tribunal has already made certain allowances and estimated the excess consumption at Rs. 1 lakh. The Tribunal has, in our view, erred in not taking into account the bidi leaves consumed in the production of chhat and mapari bidis. Had this been done there would not have been any need to add any amount under this head. The addition, therefore, of Rs. 1,00,000 by the Tribunal cannot be justified as it is not supported by the material on record.
25. On the question of suppression of production of chhat bidis, the Tribunal has arrived at a figure of 15 chhat bidis per day per worker on the basis of the evidence of workers examined by the Income-tax Officer as well as by the assessee which was before it. It is true that the Tribunal has observed in its order that the evidence of these witnesses was recorded for the assessment year 1963-64 and, therefore, it could not be considered for the assessment year 1964-65. Nevertheless, the Tribunal has in fact, looked at this evidence and recorded its alternate finding after considering this evidence also. Therefore, on the basis of the material before the Tribunal, it has held that on an average 15 chhat bidis per day per worker were being taken by the assessee. Since this is an order under section 145(2) read with section 144 of the Income-tax Act, 1961, we do not see any reason to interfere with the reasoning of the Tribunal since it cannot be said that the Tribunal had no material before it for arriving at its conclusion.
26. The assessee has contended before us that we should take the average of various figures given by the various witnesses. We do not see why this should be done or why this alone can be considered as giving the correct estimate.
27. Similarly, the Tribunal has estimated that each worker rolled, on an average, 800 bidis per day. This estimate also cannot be disturbed in reference jurisdiction because this again is based on an appreciation of evidence by the Tribunal after looking at the testimony of various witnesses relating to the amount of bidis rolled by each of them per day. The Tribunal has also taken into account the fact that when new workers are employed the average production of such new workers is much below the average production of workers who are experienced in rolling bidis. Taking all these factors into account, the Tribunal has estimated that an average of 800 bidis per day were rolled by each workman. It is not possible to say that this finding is not based on any material. It is because of this estimate of average production per worker per day that the Tribunal has calculated chhat bidis per thousand bidis at 18. The Tribunal has also taken into account the argument of the assessee that some of these chhat bidis were given to the workers every day free of charge and that some of the chhat bidis were used for free advertisement. According to the assessee, half of the chhat bidis were so used. The Tribunal has not accepted this contention of the assessee and has estimated the number of such chhat bidis given away free of charge at 3 per thousand. It has thus held that out of 18 chhat bidis per thousand, 15 chhat bidis remained with the assessee and these were sold in the market. We do not see any reason for disturbing this finding. The assessee, however has disclosed certain sales of chhat bidis in their books of account. The assessee should be given credit for the sales so shown by them in their books of account and only the balance quantity should be added under the head of suppressed production of chhat bidis.
28. The same position prevails relating to suppressed production of mapari bidis which the Tribunal has estimated at 10 bidis per thousand per workman. It is strongly contended by the assessee that mapari bidis were in substitution of chhat bidis and hence mapari bidis were included in the production figures of bidis as disclosed by the assessee. The Tribunal, however, has not accepted this contention of the assessee on the ground that adequate material is not there to show that mapari bidis were in substitution of chhat bidis.
29. The assessee has relied upon the statement on oath given by its partner, Deokisan Bastiram Sarda, in which he has stated :
'Mapari and chhat bidis are never supposed to be part of production because chhat is rejected bidi as sub-standard product while mapari bidi is meant for replacement of chhat.'
30. It is not at all clear from this statement whether mapari bidis were in fact included in the production figures of bidis. The statement that mapari bidis were taken in substitution of chhat is somewhat ambiguous. It is nobody's case that there was any co-relation between chhat bidis taken from each worker and mapari bidis taken from him. What is more important is that, the Tribunal has found as a fact that mapari bidis were not included in the production figures of the assessee. Therefore, the amount added under the head of suppressed production of mapari bidis cannot be reconsidered in this reference application.
31. In the premises, in our view, it cannot be said that there was no material before the Tribunal for making the additions as alleged or that the Tribunal's conclusions were based on mere suppositions or conjectures as far as mapari and chhat bidis are concerned.
32. Accordingly, we answer question No. 2 as follows :
The Tribunal's conclusion directing the addition of Rs. 1 lakh for the excess consumption of bidi leaves is not based on any material on record and hence is erroneous in law.
The additions on account of estimated value of the suppressed production of chhat and mapari bidis are in accordance with law save and except that the assessee is entitled to get credit for the sale proceeds of chhat bidis disclosed by the assessee in its books of account. Question No. 2 is answered accordingly.
33. In the circumstances of the case, there will be no order as to costs.