B.N. Mahapatra, J.
1. This Income-tax appeal has been preferred against the Order Dated 14.03.2002 passed by the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack (hereinafter referred to as 'ITAT') in IT(SS)A No. 1/CTK/1996 for the block year 1986-87 to 1996-97. This Court has admitted the appeal on the following two substantial questions of law:
(i) Whether, on the facts and in the circumstances of the case, the Learned Third Member of the Income Tax Appellate Tribunal is correct in law in relying on the case of Haribhagat Agarwalla v. State of Orissa 51 STC 355 with distinguishable facts and circumstances and holding that no addition can be made in the case of UAL?
(ii) Whether on the facts and in the circumstances of the case, the Learned Third Member of the Income Tax Appellate Tribunal has erred in law in ignoring the findings of the Learned Judicial Member that from the rough calculation sheets presented at the time of hearing, some of the items were actually weighed and others were estimated with the assistance of UAL's, representative at the factory premises?
2. Bereft of unnecessary details, the facts and circumstances giving rise to the present appeal are that a search under Section 132 of the Income Tax Act, 1961 (hereinafter referred to as 'the IT Act') was made in the factory and office premises of M/s Utkal Alloys Limited, Rourkela, Sundargarh (hereinafter referred to as 'UAL') on 2nd & 3rd November 1995. During the course of search, the search party did not find any incriminating material against the assessee-Respondent. However, discrepancy was alleged to have been found in stock of raw-materials and finished products during search. The assessing officer valued the excess stock at Rs. 30,880 and treated the same as undisclosed income of the assessee-Respondent for the assessment year 1996-97. The UAL filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the ITAT'). In appeal, two Learned members differed in their opinions about the correctness of the method of valuation adopted by the search party. According to Learned Accounts Member, no addition can be made to the income of the assessee on the basis of discrepancy worked out on estimation of stock. According to the Learned Judicial Member addition can be made to the total income of the assessee even if the discrepancy worked out on estimation of the stock. On difference of opinion between the two members, the matter was referred to the Learned President, ITAT for opinion of a Third Member under Section 255(4) of the IT Act. The Learned Third Member concurred with the view of the Learned Accounts Member and held that no addition can be made on the basis of discrepancy worked out on estimation. Hence, this appeal has been preferred at the instance of the Revenue.
3. Mr. A. Mohapatra, Learned Standing Counsel appearing for the Income tax strenuously argues that considering the voluminous stock it was not possible on the part of the search party to make weighment of the materials. On the consent of one Nathumal Agrawal, an employee of the assessee-Respondent the weight and value of the stock were estimated. Hence, the discrepancy worked out on the basis of such estimated value of stock has rightly been held to be the undisclosed income of the assessee-Respondent and added to its total income by the assessing officer. It is further argued that the decision of this Court in Haribhagat Agarwalla v. State of Orissa (1982) 51 STC 355 has wrongly been applied by the Learned Third Member to the case of the assessee-Respondent.
4. Mr. S. Ray, Learned Counsel for the Respondent submits that law is well settled that no addition can be made to the total income of the assessee on the basis of any discrepancy worked out on estimation as the accuracy of the accounts maintained by the assessee had not been doubted. Learned Accounts Member as well as the Learned Third Member is fully justified holding that no addition can be made to the total income of the assessee on the basis of discrepancy worked out on estimation. Mr. Ray relied upon the Judgment of Vijaya Traders v. Commissioner of Income Tax Mysore (1969) 73 ITR 15 and submitted that the appeal filed by the Appellant is liable to be dismissed.
5. Since both the questions involved in this appeal are linked with each other, instead of dealing with them independently it would be appropriate to deal with them combinely.
6. At this juncture, it is necessary to quote here some of the relevant portions of the findings/observations of the Learned Accounts Member, Learned Judicial Member and the Learned Third Member, which are quoted below:
Learned Accounts Member observed as follows:
We have considered the submissions of the parties, gone through the assessment orders, paper books filed and find that the actions of the authorities is not legally tenable and factually not correct.
It is a fact that the assessing officer has not disputed that the assessee maintains regular books of account including stock book. The Central Excise authorities periodically and regularly check those registers and put their initials in support of having inspected the materials. They have not found any omission or commission as there is no comment by those authorities in those registers. They have also not commented anything adversely regarding maintenance of stock registers etc. Therefore, the Revenue authorities are not justified in resorting to estimation of stock without rejecting the books of account. There is hot even a whisper whether the account books as regards the stock disclosed which is written on day-to-day basis and why the same is not acceptable to them. The assessing officer has observed in page-2 of his order that in the course of the search substantial discrepancy was noted in the stocks of raw materials as well as finished products. From the order it appears that the above statement has been made only after the searching party valued the same according to their own method which the assessee styled as 'eye estimation'.
In this connection, we may also observe that the 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 authorities have to prove satisfactorily that the account books are unreliable, incorrect or incomplete before it can reject the accounts which may be done by showing that important purchases were omitted there from or proper particulars or vouchers are not forthcoming for the accounts do not include entries relating to particular class of business. The rejection of the accounts should not be done light-heartedly as has been held by Kerala High Court in the case of St. Teresa's Oil Mills v. State of Kerala : [1970]76ITR365(Ker) . Similarly, in the case of Tolaram Daga v. CIT the Assam High Court held same view. The basic principle is the same in law relating to income-tax as well as in civil law, namely, that if there is no challenge to the transaction represented by the entries or to the genuineness of the entries, then it is not open to the other side to contend that what is shown by the entries is not the same state of affairs in Commissioner of Income Tax, Gujarat v. Amitbhai Gunvantbhai : [1981]129ITR573(Guj) .The ratio of the decision reported in 200/788 is directly on the issue before us.
When a return is furnished and the accounts are put in support of that return, the accounts should be taken as the basis for the assessment. They should not be rejected because they are complicated. The procedure of the assessing officer is of judicial nature and in making the assessment; the assessing officer should proceed on judicial principles. If the evidence is produced by the assessee in support of his return it should be accepted unless it is rebutted by other admissible evidence and not by mere hearsay or arbitrarily George Commn. v. Commissioner of Agricultural Income-tax : [1964]52ITR977(Ker) From the assessment order, it is clear that the assessing officer has not mentioned any reason why the stock books or other books were not acceptable to him. Therefore, the action of the officers in straightway proceeding to inventories the stock on estimate basis, that too which is not accurate and correct, is not in order. The above discussion and the case laws clearly go to show that the stocks shown by the assessee which has been mentioned in page-2 of the assessment order should be accepted in the absence of any defects in the accounts or omission or commission by the assessee.
Learned Judicial Member observed as follows:
There is no dispute that for valuation of about 3000 Mts. iron scraps of small to very large, sizes the best and proper method is the exact weighment using weigh-bridges, cranes and high tonnage dumpers. This could not be weighed due to time constraints and the apprehension of disruption of normal factory work even closure for a long time. It is evident from the argument and papers filed in course of the hearing that the Department had adopted the next best method available to them during search which was wholly not scientific but the best possible approximation. As the Works Manager and other senior factory workers were present at the factory premises there was hardly any necessity of summoning any technical expert for doing such exercises. It is not out of place to mention here that the Income Tax authorities were getting all types of assistance from the above mentioned officials of the factory to arrive at the best possible approximation. It has further been observed from the rough calculation sheets presented at the time of hearing that some of the items were actually weighed and others were estimated with the assistance of the assessee's representative at the factory premises. What the Income Tax officials have done may not be wholly scientific, but the calculation which have been made cannot be ruled as without any logic or statistical sampling. In view of the complexity of the issue there is nothing wrong on the part of the Income Tax Officials in adopting the next best possible valuation method. It was also reported by the Learned Counsel for the assessee that there were huge quantity of materials scattered in different places inside the factory and all the cranes were not in working condition to assist the Income Tax Officials to arrive at the actual or nearer accurate weighment.
Learned Third Member observed as follows:
The Learned Counsel of the assessee Shri A.K. Roy and the Learned Counsel of the Department the Commissioner of Income-tax, Sri E.M. Mohanty were heard and their rival submissions were considered. It is an admitted fact that the stock was not weighed physically. It was partly physical and partly adopting sampling method. When a sampling method is adopted, some difference has to be there and cannot be 100% true account of the weighment. It may represent a discrepancy as observed by the A.M. at various places and as discussed in various paragraphs of his order or it may be a difference over or below what is recorded by the assessee. In view of stamping by the Steel Authority/RSP for the size and weight, there might not be much difference in valuation if it goes by weight inscribed therein but it has been taken as a sample in a cubit feet storage where scraps of different sizes were stored. That the difference is bound to be there, because sample always does not represent actual. It may be less or it may be more. Difference may be large if there is a large scale difference in various scraps and rejects and small or nil if the items are of lesser difference of size and weight. Both the Accountant Member and Judicial Member agree on the point that the correct method of valuation is physical weighment and the assumption by sampling does not result in actual valuation in the opinion of the Accountant Member and is the next best method as per the Judicial Member can, therefore, be in such a situation any addition be made in assessment? I find a decision of Orissa High Court in the case of Haribhagat Agarwalla v. State of Orissa 51 STC 355, a case under the Sales-tax Act, stating that no addition can be made on the basis of difference of the stock arrived at by sampling method. It observed as under:
In 1969-70 the assessee, a rice miller, was the purchasing agent of the Food Corporation of India for paddy. Two revenue officials on two different dates verified the stock held by the assessee by a sampling method and not physically and found a huge shortage though their findings were different regarding quantity. The assessing officer taking notice of the practice of the assessee to pay purchase tax on paddy by calculating backwards on the basis of the sale of rice raised a demand by treating the deficit as the turnover of purchase of paddy without payment of tax. But the principal of the assessee, namely, the Food Corporation of India, through its officer made a physical verification and found the shortfall in the stock of the assessee as 61 quintals only. On reference: Held, that a sampling method of verification might be useful for certain purposes but could not be utilized as the basis for imposition of tax. In the facts and circumstances of the case, the principal's physical measurement on the basis of which payment should have been made should be given greater importance, and therefore, the assessee was liable to pay purchase tax on 61 quintals of paddy only.
7. Admittedly, both the Accounts Member and the Judicial Member have agreed on the point that correct method of valuation is physical weighment and assumption by sampling does not result any actual valuation. Learned Accounts Member relying upon various case laws and analyzing the method of valuation of stock adopted by the Department came to the conclusion that the stocks shown by the assessee should be accepted in absence of any defect in the accounts or omission and commission.
8. The Learned Judicial Member does not dispute that the valuation of the stock was made on estimation. In his order, he has held that there is no dispute that for valuation of about 3,000 MTs. iron scraps of small to very large sizes the best and proper method is the exact weighment using weighbridge, cranes and high tonnage dumpers. The same could not be weighed due to time constraint and the apprehension of disruption of normal factory work even closure for a long time.. It was further held that some of the items were actually weighed and others were estimated with the assistance of the assessee's representatives at the factory premises. What the Income Tax officials have done may not be wholly scientific, but the calculation cannot be ruled out as without any logic or statistical sampling.
9. The Learned 3rd Member taking into consideration the reasonings given by both members in their orders and applying the principle decided by this Court rendered in Haribhagat Agarwalla's case (supra), held that no addition can be made on the basis of difference of stocks arrived at by applying sampling method.
10. Admittedly, in course of search, the search party did not find any incriminating document or duplicate books of account involving the Respondent-assessee in any clandestine business activity like effecting any sale or purchase outside the regular books of accounts on the basis of which returns were filed. The Department could not find out any omission of important purchase/sale from the assessee's books of account or any entry in the books of account not supported by voucher. The addition has been made on the basis of discrepancy worked out on estimation of the stock.
In Vijaya Traders case (supra), the question before the Mysore High Court was whether the Income-tax Appellate Tribunal was right in law in holding that the Income-tax Officer could act on the proviso to Section 13 of the Income-tax Act, 1922, for completing the assessment for the assessment year 1961-62 and on the proviso to Sub-section (1) of Section 145 of the Income-tax Act, 1961, for completing the assessment for the assessment year 1962-63. The High Court held that the Appellate Tribunal was not right in law in holding that the Income-tax Officer could act on the proviso to Section 13 of the Act of 1922 or the proviso to Section 145(1) of the Act of 1961, for completing the assessments, as the accuracy of the accounts had not been doubted and the Appellate Tribunal did not also find that the manner in which the assessee maintained his accounts did not enable a proper determination of his income. So long as it is not impossible to deduce the true income from the accounts, its computation could not be made in any other way.
The Delhi High Court in Commissioner of Income Tax in Balaji Wire Private Ltd. : [2008]304ITR393(Delhi) held that of course the best method of determining the number of bundles and their average weight would be to actually count the bundles and use machines/cranes for weighing each bundle. This is no doubt a tedious exercise but where a liability is sought to be foisted upon an assessee, the Revenue has to be a little more serious while exercising powers conferred upon it under the Act. Mere guesswork or an estimate cannot be an adequate substitute for a scientific investigation or carrying out some empirical study. The officers who conducted the search did not want to take the necessary trouble which of course, would have been time consuming, but the impact of making a guess time can be quite damaging insofar as the assessee is concerned. The assessee cannot be made to suffer the consequences of lethargy on the part of the officers of the Revenue.
11. The procedure of assessment is quasi judicial in nature and in making the assessment the assessing officer must observe the judicial principles. Accounts regularly maintained in course of business have to be relied upon unless there are strong and sufficient reasons to disbelieve them. Needless to say that discrepancy worked out on the basis of estimation of quantity and value of stock is not accurate, correct and scientific. Therefore, in absence of any defect found out in the books of account, maintained in regular course of business, no addition can be made to the income disclosed by the assessee in its return of income on the basis of discrepancy worked out on estimation of stock.
12. In view of the above, question No. 1 is answered in affirmative and question No. 2 is answered in negative.
Hence, both the questions are answered in favour of the assessee and against the Revenue.
13. The appeal is disposed of accordingly.
B.S. Chauhan, C.J.
I agree.