Pathak, J. - (1.) THE Income-tax Appellate Tribunal has referred the following question under Section 66(2), Indian Income-tax. Act, 1922 : "Whether there was any material on the record for not accepting the shortage in the production of yarn and in the production of cloth as disclosed by the assessee and what was the basis of the estimate of shortage made by the Income-tax Tribunal ?"
(2.) THE case relates to the assessment year 1950-51, for which the relevant previous year is the year ending December 31, 1949. THE assessee is a public limited company incorporated in 1948, under the Rampur Companies Act and having its registered office at Rampur. It operates a textile unit at Rampur in which both spinning and weaving are carried on. THE State of Rampur merged into the Dominion of India in 1949. For the assessment year 1950-51, which was the first assessment year under the Indian Income-tax Act, 1922, in respect of the assessee, the assessee filed a return showing a net loss of about Rs. 4,93,191. The Income-tax Officer, however, applied the proviso to Section 13 of the Act and estimated the total income of the assessee at Rs. 82,437. By his assessment order dated December 13, 1945, he added back a sum of Rs. 2,58,541 on account of unexplained shortage in the production of yarn and cloth. On appeal by the assessee, the Appellate Assistant Commissioner reduced the addition to Rs. 36,711. Both the assessee and the Income-tax Officer then appealed to the Income-tax Appellate Tribunal, but the Tribunal confirmed the decision of the Appellate Assistant Commissioner. Learned counsel for the assessee contends that there is no justification for applying the proviso to Section 13, especially having regard to the detailed records maintained by the assessee. We shall now proceed to examine this contention.
(3.) THE account books maintained by the assessee disclose that 51,23,346 lbs. of cotton were issued to the mill. Out of this, 50,60,550 lbs. of cotton were put into the machinery for the manufacture of yarn, the balance of 72,796 lbs. being claimed as shortage on account of the drying up of moisture. THE total quantity of yarn manufactured was 40,42,517 lbs. THE manufacturing wastage was thus shown as 10,08,033 lbs. THE waste product obtained was 7,56,257 lbs. On this basis the overall refraction worked out at 19.96%, THE dust matter and fine cotton particles amounted to 2,51,776 lbs., which worked out to 5% over and above the shortage of 1.5% for moisture. THE return filed by the assessee proceeded on that basis. THE Income-tax Officer considered the shortage disclosed in the production of yarn as excessive. He took the normal refraction at 18% and valuing the yarn shortage at Rs. 1-8-0 per lb. he added Rs. 1,48,407. This was in respect of yarn. In regard to the production of cloth, the Income-tax Officer found that on the assessee's claim the percentage increase in the weight of yarn after treating with sizing material worked out to 3.5%. THE percentage of the sizing material applied worked out to 11%, and the Income-tax Officer holding that after making an allowance of 3% for the dropping of sizing material and a further 3% for hard waste considered that the increase should have been 5% and not 3.5% shown by the assessee. He valued the excess shortage of 1.5% at Rs. 1-4-0 per lb. and, therefore, added Rs. 1,10,134. The Appellate Assistant Commissioner allowed the shortage in yarn at 4.5% and thus reduced the addition in respect of yarn to Rs. 1,20,000, As regards cloth he held that the net increase after the addition of sizing material should have been 4% and not 5%, and on this account also reduced the addition to Rs. 36,711.;