ORDER
T.J. Joice, A.M.
This appeal by the assessee is directed against the order of Commissioner (Appeals) dated 13-4-1992, for assessment year 1988-89.
2. The assessee filed a return of income showing total income of Rs. 2,24,110 for assessment year 1988-89. As per the assessment order under section 143(3), dated 27-11-1989, the assessing officer computed the total income of Rs. 15,51,540. The amount disputed in this appeal relates to an addition of Rs. 15,81,553 which was disputed before the first appellate authority who gave some partial relief to the assessee. This addition has been made on the basis of some seized materials in the form of Akar Note Book which is listed as Annexure A-1, pages 1, 2, 11 and 13 and seized loose/papers listed as Annexure A-3 pages 30 & 44. In this note book and loose sheets sales to various parties are shown in the month of June, 1987. On page 11 the details of purchases & sales in quantity along with stock as on 31-5-1987 and 30-6-1987, were mentioned as follows :
Inwards (kg)
Outwards (kg)
Stock (kg)
31st May, 1987
–
–
9,344.000
30th June, 1987
39,804.650
34,625,250
5,179.400
Net stock as on 30th June, 1987
14,523.400
The assessing officer found that these sales, purchase and stock were not reflected in the regular books of accounts maintained by the assessee. The assessing officer issued summons under section 131 of the Income Tax Act to Shri Madanlal M. Hundia on 25-10-1989, partner of the assessee-firm and examined him on oath regarding the discrepancy with regard to the sales, purchase and stock. The extracts from the examination of the partner are reproduced at pages 3 to 6 of the assessment order. The assessment order indicates that the assessee filed revised return on 20-10-1989, disclosing additional income of Rs. 5,69,403. This figure has been arrived at on the basis of the following details:
Rs.
Rs.
(1) The value of total sales now found recorded in some pages of the rough note-book amounting to
6,10,459
(2) Stock as found 14,523 kg. in the note book and valued at
2,75,944
(3) Amount of loose papers Nos. 30 & 44
33,000
9,19,403
Less : Already disclosed in the hands of the firms
M/s. Arihant Metal
1,20,000
M/s. Arihant Rolling
80,000
M/s. Mahavir Metals
1,50,000
3,50,000
5,69,403
3. However, in the assessment order the assessing officer did not accept the above figures shown by the assessee in the revised return. According to the assessee sale of scrap was taken at Rs. 15 per kg and Rs. 19 per kg for S.S. Patta. The assessing officer on the other hand, took the rate of Rs. 30 per kg of scrap on the basis of sales made during the year and for the value of stock he took the average purchase price during the year. On this basis, he worked out the estimated addition as follows.
Amount. (Rs.)
Unaccounted sales of 34625.250 kg. on page No.11 of Annex. A-1 (Akar Note Book) for the month of June 1987 at the rate of Rs. 30 per kg.
(34,625.250 x 30)=
10,38,758
Unaccounted stock of 14523.400 kg. as on 30-6-1987, including opening stock of 9,314 kg. as on 31-5-1987 on page No. 11 of Annex. A-1 (Akar Note Book) at the rate of Rs. 22 per kg.
14,523.400 x 22 =
3,19,515
Amount of loan payments page Nos. 30 & 44 of Annex. A-3 (estimated loans)
33,000
Total concealed income which should be disclosed in the revised return instead of Rs. 9,19,403
13,91,273
4. Further the assessing officer found on Akar Note Book (Annex. A-1) that some sales to various parties as below are mentioned but not reflected in the regular books of accounts :
Date
Quantity (Kg)
Name of party
3-6-1987
22JP 2,188.050
Hundia Metals
9-6-1987
22JP1,596.000
-do-
10-9-1987
22JP2,000.600
Santi Circles
18-6-1987
22JP558.000
Uma Metal Industries.
6,342.650
After examining the assessee on this point, the assessing officer came to the conclusion that the profit from the abovesaid sales were not reflected in the income returned and hence he proceeded to estimate the concealed income from these sales at Rs. 1,90,280 (6,342.650 kg x 30). Thus the total addition considered by the assessing officer in respect of unaccounted sales, purchase and closing stock comes to Rs. 15,81,553 (13,91,273 + 1,90,280).
5. The above addition was challenged by the assessee before the Commissioner (Appeals). The first appellate authority in the impugned order, substituted the rate of Rs. 19 per kg for Rs. 30 adopted by the assessing officer and as regards the other rate of Rs. 22 he found it reasonable and unheld the addition. With regard to the two specific sales to M/s. Hundia Metals, one to Shanti Circles and the last sale to Uma Metal Industries, the Commissioner (Appeals) upheld the addition in respect of the sales to the first mentioned two parties whereas in the case of last mentioned party the addition was deleted. The relevant portion of the Commissioner (Appeals)’s order reads as under :
“3. I have considered the facts and have gone through the loose papers on which the addition has been made. From the notings made and also by the total and by the nature of items, it is clear that these are scrap items and cannot be taken as the value of finished goods. The assessee has bifurcated that there are two qualities of poor scrap and S.S. Patta which is of better quality. Regarding the rate, I find that in the earlier year, the assessee had made proper entries for this year also, some sales are made at the rate of Rs. 16 per kg. by the assessee itself. In view of the earlier records and the absence of any specific proof of the rate, the value of unaccounted sales of 34,625.250 kg, should be taken at the rate of Rs. 19 per kg. instead of Rs. 30 taken by the Income Tax Officer. Regarding the value of S.S. Patta which is of a better quality, the rate adopted by the Income Tax Officer at Rs. 22 appears to be reasonable and upheld.
4. I have considered the facts and I do not agree with Shri Shah that the sales made are the same which are recorded in pages 1 & 2. On pages 1 and 2, it is scrap sales but on page 13, these are not scrap sales but regular sales are entered. The dates are also different and apart from this even the total of the dates mentioned by the assessee are not the same. I, therefore, hold that the sales to M/s. Hundia Metals and Shanti Circles remain unexplained and have been correctly added in the income of the year. Regarding M/s. Uma Metal Industries, I find that it is regularly entered in the firm which is assessed by the same Income Tax Officer. These goods were purchased on 18-6-1987 by Bill No. S-63 and the payment was also received through cheque on 13-7-1987. These entries are also verifiable from the bank accounts and took place before the search proceedings. It is, therefore, clear that the sales made to M/s. Uma Metal Industries are fully explained and no addition on this account is called for. In the case of M/s. Uma Metal Industries, the rate shown is about Rs. 30 per kg and all other items being of the same nature, the rate adopted by the Income Tax Officer at Rs. 30 per kg is also maintained.”
6. In the present appeal before us, the assessee has raised the following grounds of appeal with regard to the addition in respect of unaccounted sales, purchase and closing stock :
Ground No. 3 : In law and in the facts and circumstances of the appellant’s case, the learned Commissioner (Appeals) has grossly erred in retaining the addition of Rs. 11,50,934 instead of Rs. 5,69,403 offered by the appellant for taxation in respect of unaccounted income out of the sales and the stocks of the material. In doing so he has failed to appreciate the following amongst others.
(a) While working out the addition referable to the value of the unaccounted sales in respect of 34,625.250 kgs of scrap he has erroneously held, without any evidence having been brought, that the value of such scrap should be adopted at Rs. 19 per kg. in the place of that already disclosed by the appellant in the revised return filed by the appellant.
(b) The addition of Rs. 3,19,515 in respect of the value of the closing stock of 14,523.400 kg of scrap valued at Rs. 22 per kg. when the value of such stock ought to have been accepted as claimed by the appellant.
(c) The addition of Rs. 1,75,535 in respect of the alleged unaccounted sales referable to Hundia Metals and Santi Circles without considering the fact that such sales are already accounted for by the said concerns and that the appellant had nothing to do therewith.
(d) In not appreciating the fact that the amount of Rs. 2,30,000 represents income of Arihant Rolling Mills and Mahavir Metals and ought not to have been included while determining the total income of the appellant.
The appellant, therefore, prays that this Hon’ble Tribunal may be pleased to delete the entire addition of Rs. 2,64,531 retained by the Commissioner (Appeals).
7. The learned counsel for the assessee reiterated the submissions made before the assessing officer and the Commissioner (Appeals). He pointed out that the details mentioned in Akar Note Book contained sales of scrap of different qualities, some of the items were of superior quality, but most of the scrap was of poor quality. The assessing officer has taken the rate of Rs. 30 per kg which is for finished goods. This cannot be relied on in respect of scrap which is of poor quality. According to the assessee’s books of accounts scrap is sold @ Rs. 11, Rs. 14, 15 per kg. specific instances of such sales were brought to the notice of the Commissioner (Appeals) who has discussed such items in para 2 of his order. The learned counsel further pointed out that in the case of closing stock which consists of scrap of poor quality the purchase cost cannot be taken as the basis for valuation. Instead inventory of non-reusable waste or inventory of reusable waste for which facilities for reprocessing do not exist should be valued at net realisable value. It is further pointed that scrap is ordinarily accounted for on cash basis and does not form part of the stock. According to the learned representative, the average sale-price of scrap should be taken at Rs. 15 per kg and the learned Commissioner (Appeals) has not given any reason for taking this at Rs. 19 per kg. Similarly,s it is argued that in the case of Rs. 22 per kg adopted for closing stock, the value should be taken at Rs. 19 per kg as it was not S.S. Patta but only scrap. As regards unaccounted sales appearing at page 13 of Akar Note Book the assessing officer has taken the value of Rs. 30 per kg. for 6,430.650 kgs whereas the Commissioner (Appeals) has adopted the figure of Rs. 30 per kg for 5,784.650. It is pleaded by the learned counsel that this item of unaccounted sale is already included in the total sales of 34,625.250 kg as pagess 1 to 4 of the Akar Note Book.
8. The learned counsel further goes to argue that only the gross profit on the unaccounted sales should be brought to tax and not the entire unaccounted sales. It is further pleaded that when the cash generated from such sales is available stock is to be presumed out of such cash so that no further addition for such stock need be made. Reliance in this connection is placed on the decision in the case of CIT v. S.M. Omer (1993) 201 ITR 608 (Cal).
9. We have considered the rival submissions and the evidence on record. The question to be considered is whether the additional income disclosed by the assessee in the revised return is to be accepted as correct. The revised return filed by the assessee itself indicates that the assessee has admitted additional income on the basis of seized materials. In other words position regarding the seized materials as indicating the sales outside regular books of account and closing stock unrecorded in the regular books of account is not disputed by the assessee itself. The present dispute boils down to the rate to be applied in respect of unaccounted sales and in respect of unaccounted stock. The assessing officer has taken the value of Rs. 30 per kg for sale of scrap and average of Rs. 22 purchase price per kg for the unrecorded closing stock. On the other hand, the assessee pleaded that the sales shown in the seized materials are of scrap of low quality which would not fetch the same price as for good quality material. According to the assessee such sale of scrap should be valued @ 15 per kg and the closing stock should be taken @ Rs. 19 per kg The Commissioner (Appeals) reduced the rate to be applied in the case of sale of scrap from Rs. 30 to Rs. 19 per kg and in respect of closing stock he upheld the rate of Rs. 22 per kg as computed by the assessing officer. We have reproduced already the reasoning given by the Commissioner (Appeals) in para 5 above. The Commissioner (Appeals) has noted that in the earlier year the assessee had made proper entries where the rate of Rs. 16 per kg is shown. The assessee had quoted instances of sales below Rs. 16 also but the Commissioner (Appeals) jumped to an estimate @ Rs. 19 per kg without quoting any specific instance. Since no specific reasoning is given for this estimation and considering the arguments of the assessee in this behalf, we are of the view that the unaccounted sale ot scrap should be estimated at Rs. 16 per kg as against Rs. 15 admitted by the assessee and Rs. 19 fixed by the Commissioner (Appeals). As regards the closing stock also the rate adopted by the Commissioner (Appeals) at Rs. 22 per kg. is not supported by any cogent reasoning and in the absence of any evidence to controvert the assessee’s stand in this regard, we hold that the closing stock should be valued at Rs. 19 per kg. as claimed by the assessee.
10. Regarding the alternative argument of the assessee to the effect that unaccounted sales should be brought to tax at gross profit rate only, we do not find any merit in this contention because the assessee itself had disclosed additional income in the revised return admitting the fact of unaccounted sales and the primary dispute in the present case arose only regarding the rate to be adopted. When the assessee makes sales outside the books of account, the presumption is that the corresponding investment in purchases should also be outside the books of accounts and in that case the assessee becomes liable to disclose the source of investment in sales. Hence considering the special nature of this case, we are of the view that the addition should not be merely confined to gross profit alone.
11. With regard to the addition in respect of closing stock the assessee has raised an alternative argument that when the cash generated from such sales is available closing stock should also be presumed out of such cash so that no further addition for such stock need be made. This argument is also devoid of any merit because in the revised return the assessee itself has disclosed unaccounted stock valued at Rs. 19 per kg. Therefore, the assessee cannot now take the stand and say that such unaccounted sales were generated out of unaccounted sales. The case relied by the learned counsel for the assessee in the case of CIT v. S.M. Omer (supra) does not come to the rescue of the assessee as the facts in that case are not on all fours with the facts in the present case because in the present case there is an admission with regard to the existence of unaccounted stock.
12. While sustaining the above said addition on unaccount sales and unaccounted stock @ Rs. 16 per kg and Rs. 19 per kg respectively, we have taken into consideration the Accounting Standard 2(AS-2) issued by the Council of the Institute of Chartered Accountants of India on “Valuation of Inventories”. According to clause 29.4 of the Accounting Standard inventory of non-reusable waste or inventory of reusable waste for which facilities for reprocessing do not exist should be valued at net realisable value. One of the arguments raised before us, on behalf of the assessee was that scrap when sold is accounted for on cash basis as and when sold and the closing stock of scrap as such is not accounted for in the regular books of account. It is true, the assessee may do so for reasons best known to itself, but in the context of the Income Tax Act when the profit of the business has to be computed on the basis of certain accounting principles consistently followed it is clear that closing stock valuation cannot be kept outside the regular books of account. The guiding principle will be cost of market price which is lower and clause 29.4 of AS-2 gives proper guidelines in this regard.
13. Coming to clause (c) of ground No. 2 (reproduced in para 6 above) in respect of alleged unaccounted sales to M/s. Hundia Metals, Santi Circles and Uma Industries the assessee’s plea is that it has already been reflected in the unaccounted sales considered for addition as mentioned earlier. However, this point has been properly dealt with by the Commissioner (Appeals) in para 4 of his order which we have already reproduced in para 5 above. The Commissioner (Appeals)’s finding is based on security of the relevant year’s papers and the account books of the various parties. No convincing Explanation has been given by the learned counsel of the assessee to show that the Commissioner (Appeals)’s finding is erroneous. We are in total agreement with the finding recorded by the Commissioner (Appeals) in respect of the unaccounted sales to the above said three parties.
14. Coming to clause (d) of ground No. 3 of assessee’s appeal, the plea of the assessee is that the money originally disclosed in the case of M/s. Mahavir Metals Rs. 1,50,000 and in case of M/s. Arihant Rolling Rs. 80,000 totalling to Rs. 2,30,000 should not have been included while determining the total income of the appellant. In para 10 of the impugned order, the Commissioner (Appeals) has directed that the assessing officer will allow benefit of income disclosed and admitted under section 132(4) as additional income due to stock difference and out of unaccounted sales. The assessee is aggrieved by this direction of the Commissioner (Appeals) as being too vague. On going through the assessment order we find that the assessing officer proceeded to compute the total income starting from net profit as per P&L a/c subject to additions and deductions under the law. While arriving at the assessed income, the assessing officer has given a deduction for additional income as declared at the time of search statement under section 132(4) by Shri Madanlal M. Hundia the partner of the appellant firm, namely, M/s Arihant Metals amounting to Rs. 1,20,000. This means that the assessing officer has given proper deduction in respect of additional income disclosed by the assessee-firm under section 132(4), as regards the assessee only. There is nothing wrong -in the procedure adopted by the assessing officer because his estimate of unaccounted sales and unaccounted stock is made independently of the additional income declared by the assessee. Therefore the final total income to be assessed in the hands of the assessee does not call for any revision with reference to the income declared under section 132(4). The computation of income is subject to. revision only to the extent with regard to the specific ground of appeal as decided by us in this order. With regard to the income disclosed in the case of M/s Mahavir Metals and M/s Arihant Rolling it is clear that no deduction can be made in respect of such disclosure in the hands of the assessee as those concerns are separately assessable to tax. Moreover, the declaration under section 132(4) is relevant only in the context of penalty for concealment under section 271(1)(c) and not for computing taxable income when the computation is made on a different basis. Accordingly we modify the direction of the Commissioner (Appeals) in para 10 of his order. Our decision in this para covers ground No. 5 in which the assessee has challenged the direction of the Commissioner (Appeals) in para 10 of the impugned order,
15. While doing the assess merit the assessing officer has disallowed 1/5th of the telephone expenses debited in the profit and loss account as attributable to the personal use of the partners. The total expenses relating to telephone comes to Rs. 38,041. The Commissioner (Appeals) has upheld the disallowance stating that the personal use of telephone cannot be ruled out by the partners or the family members. Before us it is pleaded that the phones having been installed at business premises and not at residential premises the entire expenses should be allowed. In the absence of any specific detail of the calls made, we hold that the disallowance attributable to personal use by partners or their family members may be restricted to 10 per cent in-stead of 20 per cent done by the assessing officer and the Commissioner (Appeals).
16. One more specific ground remains to be considered in this appeal. This ground is numbered as 2 in the appeal before us and reads as under :
“2. In law and in the facts and circumstances of the appellant’s case, the learned Commissioner (Appeals) has grossly erred in not considering the following grounds of appeal :
(8) The assessing officer erred in disallowing Rs. 6,000 from the interest paid account of Rs. 39,866 on the ground that loan given to M/s Mangaldip was without interest being charged. The assessing officer failed to see that there were other cases where interest was not being charged by the appellant according to commercial expediency and that in any event the advance to M/s Mangaldip were not for the whole year but were given from time to time and even if any interest is to be disallowed, the calculation of Rs. 6,000 is excessive.
(13) The assessing officer erred in charging interest under sections 215 and 216 and under section 201(1A).
The appellant prays that this Hon’ble Tribunal may be pleased to direct the Commissioner (Appeals), to specifically consider and decide the above grounds of appeal.”
17. The assessee’s counsel pleads that ground Nos. 8 & 13 raised before the Commissioner (Appeals) were not considered by him while passing the impugned order and, therefore, the matter may be set aside for consideration by the Commissioner (Appeals). On perusal of the grounds. of appeal before the Commissioner (Appeals), we find that these points are not covered by the impugned order and, therefore, the assessee’s argument merits consideration.
We direct the first appellate authority to consider these grounds and dispose of them in accordance with law after giving the assessee an opportunity of being heard in this connection.
18. In the result, the appeal is partly allowed.