Madras H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in declining to allow deduction of expenditure that would have been necessarily incurred for executing their orders for stitching garments such as wages for stitching, costs of lining cloth, buttons and other tailoring materials from out of the gross tailoring receipts omitted and determined for the asst. yrs. 1981-82 and 1982-83 ?

JUDGMENT

K. GNANAPRAKASAM, J. :

The assessee is the proprietor of a tailoring establishment run under the name and style of “G, Tex Tailors” at Madurai. The order books and collections chittai for the asst. yrs. 1981-82 and 1982-83 were compared and the ITO found that a portion of tailoring receipts to the extent of Rs. 1,53,000 and Rs. 3,35,377 were omitted by the assessee.

2. On appeal, the CIT reduced the tailoring receipts omitted by the assessee to Rs. 1,25,000 and Rs. 2,00,000 respectively. The assessee took up the matter to the Tribunal, where it was contended on behalf of the assessee that the actual omissions on the basis of the statements prepared by the assessee came to Rs. 1,29,664 and Rs. 1,81,806, respectively. The assessee further claimed that deduction should have been given from these amounts towards stitching charges that might not have been received by the assessee on account of non-delivery of stitched clothes. The assessee further claimed that the normal rate of gross profit in this business is 40 per cent and if the above omissions are added to the assessee’s trading receipts, the resultant gross profit would go up to 66 per cent to 71 per cent for these two years.

The assessee further contended before the Tribunal that the amount of expenditure incurred by him on lining cloth, buttons, thread, wages and other expenses in order to produce the extra garments should be deducted from and out of the assessee’s income. Deduction of the abovesaid amounts should also be allowed in and out of the omissions and tailoring receipts stated above.

The Tribunal, after having considered the submissions made by the assessee and the Revenue held that the actual omissions as obtained in tailoring charges for these two years may be taken at Rs. 1,25,000 and Rs. 1,82,000, respectively. However, the Tribunal rejected the assessee’s contention with regard to the deductions claimed by him on account of expenditure said to have been incurred by him in respect of the cloths stitched, the receipts of which were omitted.

The Tribunal also disallowed the claim of the assessee is respect of the expenditure incurred for executing the orders for stitching garments such as wages, cost of lining cloth, buttons, etc. Dissatisfied with the findings of the Tribunal, the assessee sought for reference and the same was ordered by the Court in T.C.P. Nos. 187 and 188 of 1988 dt. 7th March, 1989. Pursuant to the same, the following questions have been referred to this Court.

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in declining to allow deduction of expenditure that would have been necessarily incurred for executing their orders for stitching garments such as wages for stitching, costs of lining cloth, buttons and other tailoring materials from out of the gross tailoring receipts omitted and determined for the asst. yrs. 1981-82 and 1982-83 ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in declining to set off the addition made to the business income for the current assessment year against all the additions made for investments under s. 69B, cash deposits in banks, investments in machines, etc., and to sustain only the balance of such additions for the asst. yrs. 1981-82 and 1982-83 ?”

With regard to question No. 1, the learned senior advocate for the petitioner has submitted that the making of any dress requires wages for stitching, costs of lining cloth, buttons and other tailoring materials and the authorities have failed to take note of the fact and the Tribunal also had fallen into an error in not adverting to the said aspect. In fact, no separate finding has been given by the Tribunal except to the extent that it is not uncommon to find high rates of return in the case of such skilled professionals who charge their fees not as the basis of the materials consumed or wages paid but, on account of the reputation they command in the market.

The learned senior advocate appearing for the petitioner has further submitted that in the process of making the garments, the lining cloth, buttons and other tailoring materials are absolutely necessary and the amounts spent for the abovesaid purpose must be deducted in and the amounts spent for the abovesaid purpose must be deducted in and out of the gross profit, said to have been earned by the assessee. We feel that there is some force in the said submission of the learned senior advocate for the assessee. It is common knowledge that making of garments involves wages for stitching, costs of lining cloth, buttons and other tailoring materials, without which a garment cannot be completed.

The learned advocate for the Revenue is not in a position to dispute the said fact. But, however, the learned advocate for the Revenue has contended that the tailoring charges do not depend upon the abovesaid factors, but it depends upon the reputation that has been earned by the tailor and, therefore, the Tribunal was correct in having come to the conclusion that the charges said to have been spent for other purposes cannot be deducted. we have carefully considered the rival submissions and we feel that a tailor would normally incur expenditure towards wages for stitching the clothes, lining cloth, buttons and other tailoring materials and the claim of the assessee in respect of the same cannot be brushed aside. The skill and the reputation earned by the assessee may be an added factor for getting some more customers and in any event, the tailor has to necessarily incur certain expenditure referred to above and hence, necessary deductions have got to be given. In the absence of any rules and guidelines in this matter, we feel that deduction to the extent of 25 per cent may be given in this respect and we hold that the Tribunal is not correct in declining to allow the deduction of expenditure incurred by the assessee in respect of the abovesaid articles. Hence, we feel that the matter relating to question No. 1 has got to be remanded to the ITO to take into consideration all the observations made by us and to allow 25 per cent of deduction, towards expenses in computing the addition to the income and assess the tax accordingly.

7. With regard to question No. 2, the assessee was not able to offer a proper explanation for the deposits made in the name of his wife and bank accounts in the name of his brother, etc. But, however, he claimed total set off for the abovesaid amounts. The authorities below and the Tribunal have held that these amounts are suppressed business receipts and they treated the same as income from undisclosed sources of the assessee under s. 69B of the IT Act. Sec. 69B of the IT Act states : “Amount of investments, etc. not fully disclosed in books of account.— Where in any financial year the assessee has made investments or in found to be the owner of any bullion, jewellery or other valuable article, and the ITO finds that the amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account maintained by the assessee for any source of income, and the assessee offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the ITO, satisfactory, the excess amount may be deemed to be the income of the assessee for such financial year.”

8. It has been found by the authorities as well as the Tribunal that the explanation offered by the assessee is not satisfactory for the excess amount held by him. The Tribunal was right in declining to set off the above said amounts. We do not find any error in the findings, which warrants any interference by this Court.

In the result, the computation regarding question No. 1 is remanded to the ITO to assess the tax after giving credit to 25 per cent of deduction towards wages for stitching, lining cloth and other tailoring materials, and assess the tax accordingly.

Question No. 2 is answered in favour of the Revenue and against the assessee.

Decision in favour of Assessee Partly, Revenue Partly

[Citation : 250 ITR 780]