Commissioner Of Income-Tax v. J.K Synthetics Limited.

N.D Ojha, J.:— The Commissioner of Income-tax, Central (Delhi-II), New Delhi, has made this application under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), with a prayer that the Income-tax Appellate Tribunal, Delhi Bench “A”, Delhi, may be required to refer 24 questions of law to this court for its opinion. The assessee-opposite party in the instant case is M/s. J.K Synthetics Ltd., Kamla Tower, Kanpur, and the assessment year involved is 1971-72.

2. Having heard counsel for the parties, we are of the opinion that questions Nos. 14 to 20, 23 and 24 are not questions of law arising out of the order of the Tribunal and are concluded by the findings of fact recorded by the Tribunal. Questions Nos. 21 and 22 arise out of a claim made by the assessee in regard to the legal expenses and interest in respect of two loans obtained by the assessee from the Government of Rajasthan. These loans were raised by the assessee for setting up acrylic and cement plants. The claim of the assessee was disallowed by the Income-tax Officer and his order was affirmed in appeal by the Appellate Assistant Commissioner. However, the Tribunal allowed the claim of the assessee relying on a decision of a Division Bench of this court in Prem Spinning and Weaving Mills Company Ltd. v. CIT, [1975] 98 ITR 20. A perusal of the judgment in the said case indicates that this judgment was rendered on the basis of the law laid down by the Supreme Court in India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52. The question which arose for consideration in the aforesaid two decisions was similar to what has been raised in the instant case as to whether the expenses incurred in respect of obtaining loans were to be treated as capital expenditure or revenue expenditure allowable as a deduction. In the case of Prem Spinning and Weaving Mills Co. Ltd., [1975] 98 ITR 20 (All), it was held that the said amount of expenditure was allowable as a deduction. The same view was taken by the Supreme Court in the case of India Cements Ltd., [1966] 60 ITR 52 also. In this case, the Supreme Court further pointed out that the act of borrowing money Was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period and it was irrelevant to consider the object with which the loan was obtained. The Tribunal not only allowed the claim of the assessee in regard to the expenses aforesaid on the basis of the two decisions referred to above but also dismissed the application of the Commissioner of Income-tax for referring these two questions to this court under section 256(1) of the Act holding that in view of the two decisions aforesaid, these questions were only of academic value. We do not find any cogent reason to take a different view. At this place, we may point out that counsel for the Commissioner of Income-tax placed reliance on the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT, [1975] 98 ITR 167. That is, however, clearly distinguishable inasmuch as that was not a case where amounts may have been borrowed by a running concern in connection with its business but was a case of loan being taken for acquisition and installation of plant and machinery. Reliance was placed by counsel for the Commissioner of Income-tax on certain other decisions also. We, however, do not consider it necessary to refer to them in detail because those were not cases of expenditure for obtaining loans by a running concern in connection with its business.

3. Questions Nos. 4, 6 and 10 raise in one form or the other the same disputes which are already covered by questions Nos. 1, 2, 3, 5, 7, 8, 9, 11, 12 and 13. As such, we do not consider it necessary to require the Tribunal to refer to this court questions Nos. 4, 6 and 10 also.

4. As regards questions Nos. 1, 2, 3, 5, 7, 8, 9, 11, 12 and 13, it may be pointed out that these questions relate to the addition of a sum of Rs. 64,92,710 made by the Income-tax Officer in respect of the alleged excessive wastage claimed by the assessee in the process of manufacture of nylon yarn which was confirmed by the Appellate Assistant Commissioner. After considering the respective submissions made by counsel for the parties in regard to these questions, we are of the opinion that these are questions of law arising out of the order of the Tribunal and a case has been made out for requiring the Tribunal to refer these questions to this court for its opinion.

5. Counsel for the assessee strenuously urged that the findings recorded by the Tribunal while reversing the order of the Income-tax Officer and the Appellate Assistant Commissioner and deleting the addition referred to above were essentially findings of fact and no case was made out for requiring the Tribunal to refer these questions to this court. In this connection, it was urged that pleas about sufficiency of evidence, appraisal of evidence or soundness of reasons recorded in support of a finding of fact do not raise questions of law which may be gone into by this court under section 256(2) of the Act. In support of this submission, counsel for the assessee also placed reliance on certain decisions but since the law on the point is well settled and as it has been urged by counsel for the assessee, we do not consider it necessary to refer to those decisions in detail. In our opinion, however, it is not a case where this court is being called upon to go into the question of either sufficiency of evidence or of appraisal of evidence or of soundness of reasons. On the other hand, it is a case where detailed orders passed by the Income-tax Officer and the Appellate Assistant Commissioner on the basis of material placed by the parties, particularly on the material supplied by the assessee itself, have been reversed by the Tribunal without meeting the reasons recorded by the said authorities in support of their findings. While considering the submission made by counsel for the assessee, it has to be kept in view that the Tribunal was not passing an order of affirmance but one of reversal. In T.D Gopalan v. Commissioner of Hindu Religious and Charitable Endowments, (1972) 2 SCC 329 : AIR 1972 SC 1716, it was held by the Supreme Court (para 9 at p. 1719):

“We apprehend that the uniform practice in the matter of appreciation of evidence has been that if the trial court has given cogent and detailed reasons for not accepting the testimony of a witness, the appellate court in all fairness to it ought to deal with those reasons before proceeding to form a contrary opinion about accepting the testimony which has been rejected by the trial court.”

6. What has been held in the aforesaid case in regard to acceptance of the testimony of a witness will, in our opinion, also apply to a case of accepting other material produced by the parties and if an order of reversal is to be passed, the minimum requirement for the appellate court is to at least consider that material as also the reasons which weighed with the subordinate authorities in accepting that material and to record reasons why it chose to differ from the view taken by the subordinate authorities. It cannot be doubted that while allowing the appeal filed by the assessee, the Tribunal was acting in a quasi-judicial manner. In Siemens Engineering and Manufacturing Co. of India Ltd. v. Union of India, (1976) 2 SCC 981 : AIR 1976 SC 1785, it was held (para 6 at page 1789):

“It is now settled law that where an authority makes an order in exercise of a quasi-judicial function, it must record its reasons in support of the order it makes. Every quasi-judicial order must be supported by reasons…. The rule requiring reasons to be given in support of an order is, like the principle of audi alteram partem, a basic principle of natural justice which must inform every quasi-judicial process and this rule must be observed in its proper spirit and mere pretence of compliance with it would not satisfy the requirement of law.”

7. In Union of India v. M.L Capoor, (1973) 2 SCC 836 : AIR 1974 SC 87, it was held by the Supreme Court (para 28 at p. 98):

“Reasons are the links between the materials on which certain conclusions are based and the actual conclusions. They disclose how the mind is applied to the subject-matter for a decision whether it is purely administrative or quasi-judicial. They should reveal a rational nexus between the facts considered and the conclusions reached. Only in this way can opinions or decisions recorded be shown to be manifestly just and reasonable.”

8. We find the order of the Tribunal lacking in this behalf. To illustrate, it may be pointed out that apart from the reasons recorded by the Income-tax Officer and the Appellate Assistant Commissioner, reliance was placed by counsel for the Department on certain discrepancies which are referred to in paragraph 23 of the order of the Tribunal. In this connection, certain statements were filed by the assessee before the Tribunal and the Tribunal apparently brushed aside the reasons recorded by the authorities below as also the discrepancies pointed out by counsel for the Department by observing that the discrepancies pointed out by the Revenue had been fully and satisfactorily reconciled by the assessee with reference to various statements. No reasons have been recorded as to how those discrepancies were reconciled and as to why the Tribunal disagreed with the detailed reasons recorded in this behalf by the authorities below. The Tribunal has, while dealing with the statements filed before it, observed that these statements had been prepared from the regular books of account by the assessee. We are not sure as to how this observation was made inasmuch as at another place, the Tribunal has categorically held that “we are not inclined to do so for the simple reason that we have not examined the accounts of the assessee in all their aspects. Nor have we examined their accounts in detail. We have confined ourselves only to an examination of the points in dispute before us”. Similarly, in regard to the percentage of wastage, the authorities below had placed reliance, inter alia, on a certificate of BASF dated December 21, 1971, produced by the assessee itself. Before the Tribunal, another certificate contained in its letter dated March 21, 1975, was produced and the Tribunal has, simply relying on this letter which admittedly had not been produced either before the Income-tax Officer or before the Appellate Assistant Commissioner and had, according to the Department, been produced before the Tribunal as an afterthought, reversed the findings of the authorities below on this point. Apart from relying on this letter, the Tribunal has not given any reasons as to why it was not inclined to agree with the reasons recorded by the authorities below on this point when their findings were based, inter alia, on the certificate of BASF filed by the assessee itself. We do not consider it expedient to give further details in this behalf inasmuch as at this stage we are not answering the questions referred to us but are only considering the plea as to whether these are questions of law arising out of the order of the Tribunal. In the result, this application is dismissed in so far as it relates to questions Nos. 4, 6, 10 and 14 to 24. It is, however, allowed in regard to questions Nos. 1, 2, 3, 5, 7, 8, 9, 11, 12 and 13. We accordingly direct the Tribunal aforesaid to draw up a statement of case and refer the following questions of law which are questions Nos. 1, 2, 3, 5, 7, 8, 9, 11, 12 and 13 of this application to this court for its opinion:

“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that no defects in accounts have been pointed out by the Revenue which could warrant an addition to the trading results when the Tribunal specifically declined to hold that the accounts of the assessee have been maintained impeachably and there are absolutely no defects which warrant their rejection?

2. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the discrepancies and variations pointed out by the Revenue in stocks, wastage, etc. (some of which have been noted by the Tribunal in para. 23 of its order), are in reality no discrepancies and that the accounts are not defective or unreliable on that account, is justified?

3. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the assessee has clarified and reconciled the variations and discrepancies pointed out by the Revenue in the different figures of stock, wastage, etc., furnished by the assessee at different stages of the case, is based on relevant evidence?

4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that no material has been placed before it by the Revenue to show that the accounts of the assessee were liable to be rejected on account of defects therein?

5. Whether, on the facts and in the circumstances of the case, the Tribual was justified in basing its conclusions vis-a-vis the reasonableness of wastage on the testimony of the letter dated March 21, 1975, from BASF obtained by the assessee from the said company (who have business relationship with the assessee) specifically for the purpose of supporting its case before the income-tax authorities particularly in the light of the earlier certificate dated February 21, 1971, issued by the said company which materially differed with the subsequent letter dated March 21, 1975, in the matter of reasonable percentage of waste in the production of nylon yarn?

6. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in basing its conclusion with regard to the reasonableness of the question of wastage on the said letter dated March 21, 1975, which was not placed by the assessee before the lower authorities without giving an opportunity to the Income-tax Officer to test the conclusions and statements made in the said letter by leading any evidence in rebuttal?

7. Whether the finding of the Tribunal that the wastage in the year under consideration was not excessive is based on relevant evidence and is not vitiated in any manner being based on surmises, conjectures, presumptions or on consideration of material partly relevant and partly irrelevant?

8. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in permitting the assessee to make out an entirely new case before it based on ‘invisible wastage’ which contention was never raised by the assessee either before the Income-tax Officer or the Appellate Assistant Commissioner or even in the grounds of appeal before the Tribunal, without the Income-tax Officer being given an opportunity to examine the various aspects arising out of this new case made out by the assessee before the Tribunal?

9. Whether, on the facts and in the circumstances of the case, there was evidence before the Tribunal to hold that the assessee's factory was subjected to close central excise scrutiny as its products are excisable particularly when the excise registers produced before it by the assessee only showed that after the close of the month (normally in the first week of succeeding month) the excise officials made a routine check of the figures furnished by the assessee in the excise statements filed with the totals in the excise registers from which these statements were admittedly compiled by the assessee?

10. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that no case was made out by the Revenue for rejecting the accounts and making an addition of Rs. 64,92,710 in the trading account on account of excessive wastage?”

9. In view of the divided success, the parties shall bear their own costs.