IT: Where estimation made by Assessing Officer was based on mathematical formula, an ad hoc addition would be justified
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[2013] 37 taxmann.com 82 (Agra - Trib.)
IN THE ITAT AGRA BENCH
Laxmi Narayan Shivhare
v.
Joint Commissioner of Income-tax-III, Gwalior*
BHAVNESH SAINI, JUDICIAL MEMBER
AND A.L. GEHLOT, ACCOUNTANT MEMBER
AND A.L. GEHLOT, ACCOUNTANT MEMBER
IT APPEAL NOS. 419 & 442 (AGRA) OF 2012
[ASSESSMENT YEAR 2009-10]
[ASSESSMENT YEAR 2009-10]
MAY 24, 2013
I. Section 145, read with section 144, of the Income-tax Act, 1961 - Method of accounting - Estimation of income [Best judgment assessment] - Assessment year 2009-10 - Whether limits of power is an element of guess work in a best judgment, it shall not be a wild one but shall have reasonable nexus to available material and circumstances of each case - Held, yes - Assessee, a liquor contractor, filed its return but did not produce books of account - Assessing Officer noticed that sales of country liquor and IMFL beer were not bifurcated and quantity of purchase of country liquor were not disclosed correctly - Assessing Officer computed sales by applying 20 per cent on total cost of IMFL Beer and treated differential between sales disclosed by assessee and as estimated by him as suppressed income and made addition - Whether estimation of profit by Assessing Officer being based on mathematical formula, i.e., estimation of profit by estimating purchases, converting them into sales and then by applying gross profit rate estimating profit, was not justified - Held, yes - Whether considering totality of facts, an ad hoc addition would be just - Held, yes [Para 20] [Partly in favour of assessee]
II. Section 145, read with section 2(1A), of the Income-tax Act, 1961 - Method of accounting - Estimation of income [Agricultural income] - Assessment year 2009-10 - Assessee declared agricultural income but did not furnish any evidence in respect of said income - Assessing Officer treated 40 per cent of said amount as income from other sources and balance was accepted as agricultural income - In earlier assessment year, on similar facts, Assessing Officer himself had allowed 90 per cent of said income as agricultural income - Whether, to maintain consistency, Assessing Officer should follow same formula in year under consideration - Held, yes [Para 23] [In favour of assessee]
III. Section 68 of the Income-tax Act, 1961 - Cash credit [Loan] - Assessing Officer made addition to income of assessee on account of non-production of requisite details in respect of loan taken by it from two companies - Assessee submitted that assessee filed confirmation and copies of accounts of both parties and was having sufficient material to establish that loans were taken for business purposes - Whether since complete facts had not been brought on record, matter was to be remitted back for re-adjudication - Held, yes [Para 25] [Matter remanded]
FACTS-I
| ■ | The assessee, a liquor contractor, filed its return declaring G.P. rate of 7.37 per cent. But it did not produce its books of account to verify the expenditure before the Assessing Officer. | |
| ■ | The Assessing Officer noticed that sales of country liquor and IMFL Beer were not bifurcated. In absence of concerned books the Assessing Officer had made the addition of Rs. 7,14,40,512 on account of difference of suppressed income from liquor business taking the highest difference of suppressed sales which had been determined by applying 20 per cent G.P. rate over cost. He also calculated suppressed income after allowing relevant deduction. | |
| ■ | The Commissioner (Appeals) held that the policy approved by the Government mentioned G.P. rate of 10 per cent and, therefore, he deleted addition computed on basis of GP rate of 20 per cent and he confirmed lowest amount of suppressed sales and profit on which no further deduction was allowable. | |
| ■ | On second appeal: |
HELD-I
| ■ | Under section 145(1), the income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' has to be computed in accordance with the method of accounting regularly employed by the assessee, unless in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom or the Income-tax Officer is not satisfied about the correctness or completeness of the accounts of the assessee. Under sub-section (3) of section 145 in any case where the accounts are correct and complete to the satisfaction of the Income-tax Officer but the method employed is such that, in the opinion of the Income-tax Officer, the income cannot properly be deduced therefrom, then the computation has to be made upon such basis and in such manner as the Income-tax Officer may determine. However, if the Income-tax Officer is not satisfied about the correctness or completeness of the accounts of the assessee or where no method of accounting has been regularly employed by the assessee, the Income-tax Officer may make the assessment in the manner provided in section 144. Section 145 is mandatory and the revenue is bound by the assessee's choice of a method regularly employed unless by that method the true income, profits and gains cannot be arrived at. In other words, section 145 enacts that for the purpose of section 28 (profits and gains of business, profession or vocation) and section 56 (income from other sources), income, profit and gains must be computed in accordance with the method of accounting regularly employed by the assessee. Therefore, if the assessee regularly employs a particular method of accounting and if no defects are found in the method or maintenance of accounts, the taxing authority is bound to compute the profits and gains of business or profession or vocation in accordance with the method employed by the assessee. Therefore, in case where the Income-tax Officer or the taxing authority finds that in maintaining accounts, the assessee has regularly employed a particular method and does not make any investigation to find or does not find any defect in the accounts and accept the accounts as they are, he is bound to compute the income in accordance with the accounts maintained by the assessee. Therefore, when the assessee represents to the taxing authority that its accounts are maintained by a method of accounting regularly employed, he expects the Income-tax Officer to act upon such method and compute the income accordingly. [Para 20.1] | |
| ■ | Section 145 provides that if assessee does not satisfy the condition of section 145 the Assessing Officer may make assessment in the manner provided under section 144. In the case under consideration, it is no doubt true that the assessee did not produce the books of accounts, and, therefore, the Assessing Officer is to make assessment under section 144. [Para 20.3] | |
| ■ | While making a best judgment assessment the Assessing Officer does not possess absolute arbitrary authority to assess any figure he likes and although he is not bound by strict judicial principle, but he should be guided by rules of justice, equity and good conscience. The limits of power is an element of guess work in a best judgment, it shall not be wild one but shall have reasonable nexus to available material and circumstances of each case. It is settled law that there is certain degree of guess work in best judgment assessment. [Para 20.4] | |
| ■ | The Assessing Officer and Commissioner (Appeals) both have estimated business profit on the basis of their own assumption and presumption. Estimation of profit by estimating purchases, then applying certain percentage of GP, then convert purchases into sale and then estimated profit by applying certain percentage of G.P. in both types of goods, IMFL and country liquor, such procedure is not accepted procedure. Therefore same is not acceptable. | |
| ■ | The assessee did not accept the purchases estimated by the Assessing Officer. [Para 20.5] | |
| ■ | The Commissioner (Appeals) also did not agree with the Assessing Officer. [Para 20.6] | |
| ■ | Thus, it is found that estimation made by Assessing Officer was based on mathematical formula and simply on mathematical formula income cannot be estimated. The Assessing Officer made the addition of entire/gross sale but entire sale proceeds of the assessee cannot be added to the income, only net profit is to be added. Thus, the Assessing Officer's finding is contrary. The Commissioner (Appeals), on one hand, rejected the working of estimation of the Assessing Officer and, on the other hand, he relied upon rejected working of the Assessing Officer and addition was sustained. Under the circumstances, both the orders of the Assessing Officer and Commissioner (Appeals) cannot be sustained. [Para 20.7] | |
| ■ | In the case under consideration, both Assessing Officer and Commissioner (Appeals) have ignored the past history of the assessee. [Para 20.8] | |
| ■ | On perusal of comparative chart, it was noticed that in the year under consideration the assessee has shown comparatively better result, as G.P. is 7.34 per cent and net profit 2.13 per cent. However, after considering totality of the facts and circumstances of the case, it will be fair and just if addition to the extent of Rs. 20,00,000 is sustained which will cover all deficiencies and lapses noticed by the Assessing Officer. Accordingly, the addition to the extent of Rs. 20,00,000 was confirmed and balance addition of Rs. 6,94,40,512 (7,14,40,512-20,00,000) made by the Assessing officer is deleted. [Para 20.9] |
CASES REFERRED TO
Tolaram Daga v. CIT [1966] 59 ITR 632 (Assam) (para 20.2), State of Kerala v. C. Velukutty [1966] 60 ITR 239 (SC) (para 20.3), Ganga Prasad Sharma v. CIT [1981] 127 ITR 27/[1980] 4 Taxman 26 (M.P.) (para 20.4), CIT v. Badradas Ramrai Shop AIR 1937 PC 133 (para 20.4),Brij Bhushan Lal Parduman Kumar v. CIT AIR 1979 SC 209 (para 20.4), Man Mohan Sadani v. CIT [2008] 304 ITR 52 (M.P.) (para 20.7) andCIT v. Balchand Ajit Kumar [2003] 263 ITR 610/[2004] 135 Taxman 180 (M.P.) (para 20.7).
Rajendra Sharma for the Appellant. Waseem Arshad for the Respondent.
ORDER
A.L. Gehlot, Accountant Member - These are cross appeals filed by the assessee and Revenue against the order dated 29.06.2012 passed by the ld. CIT(A), Gwalior for the Assessment Year 2009-10.
2. The assessee has raised the following grounds of appeal :—
| "1. | That the Commissioner of Income-tax (Appeals) Gwalior has been arbitrary and unjust while sustaining the addition for Rs. 18654659/- towards the income of the appellant from liquor business, no addition is liable to be sustained, addition sustained by the CIT (Appeals) is liable to be deleted. | |
| 2. | That while sustaining the addition at Rs. 18654659/- the CIT(Appeals) has completely ignored the facts and submissions made by the appellant and also the past record and margin of profit shown by other assessee of same very trade, after taking into consideration the above, trading results shown by the assessee is liable to be accepted, addition made by the A.O. and sustained by the CIT (Appeals) is liable to be deleted. | |
| 3. | That learned CIT (Appeals) has been arbitrary and unjust while sustaining the addition at Rs. 484124/- made bay the AO while estimating the income from agriculture at Rs. 726186/- as against shown by the assessee at Rs. 1210310/-, income shown by the appellant is liable to be accepted, addition made on this score is liable to be deleted. | |
| 4. | That the learned CIT(Appeals) has been erred on facts and in law, while sustaining the addition for Rs. 3621887/- made by the AO u/s 68 of the Income-tax Act, no addition is liable to be sustained, same is liable to be deleted. | |
| 5. | That the appellate order of CIT(Appeals) dated 29.06.2012 is bad in law." |
3. The Revenue has raised the following grounds of appeal :—
"Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 5,27,85,853/- out of addition of Rs. 7,14,40,512/- made on account of disallowance for difference of suppressed income.
The appellant reserves his right to add, amend or alter the grounds of appeal on or before the date; the appeal is finally heard for disposal."
ITA No. 419/Agra/2012 by the assessee
4. The brief facts of the case are that the assessee is a liquor contractor and is deriving income from selling of liquor. The assessee did not produce books of account to verify the expenditure before the A.O. During the assessment proceedings, the A.O. noticed that the assessee declared gross receipt of Rs. 32,65,29,808/- showing G.P. @ 7.37% as against the last year's gross receipt of Rs. 33,75,06,175/- at G.P. rate of 5.61%. The A.O. further noticed that in A.Y. 2008-09 the assessee has declared additional income of Rs. 33,00,000/-.
5. In the absence of books of account, the A.O. on the basis of information available on record furnished by the assessee noticed that the assessee did not bifurcate the sale of Country Liquor - Masala & Plain and IMFL/Beer. The A.O. noticed that in order to work out the correct/suppressed income, it is essential to arrive at the profit from IMFL/Beer and country liquor separately. The A.O calculated the purchases of IMFL as under :— (Page No.5)
| Particulars | Basis of allocation | FL (amount) |
| Duty | As per licenses | 9,96,65,450 |
| Basic duty | In the duty ratio | 87,79,021.78 |
| Purchases | Actual | 6,75,54,240 |
| Freight | Equal (prorate basis) | 12,23,654.50 |
| Issue fee | Actual | 4800 |
| TOTAL | 17,72,27,166 |
6. The A.O. on the basis of Madhya Pradesh Gazette dated 15.01.2008 noticed that minimum selling rates of IMFL were not less than 10% of profit over the cost of liquor + excise duty + fee + transportation charges. By application of minimum selling rate of 10% profit over and above the cost of IMFL, the minimum sale amount and resultant Gross Profit has been calculated by the A.O. as under :- (Page No.6)
| "(i) | Total sale :- | ||
| 17,72,27,166 x 110/100 | = Rs. 19,49,49,882.60 | ||
| (ii) | Gross Profit at minimum selling price | = 1,77,22,716/- | |
| (Rs. 19,49,49,882.60 - Rs. 17,72,27,166)" |
7. Similarly, in respect of country liquor, the A.O. has separately calculated the sale and profit on the basis of detailed submission made by the assessee and on the basis of Country Liquor business in Madhya Pradesh State. The A.O. calculated the licence fee in respect of country liquor as under :- (Page no.6)
"It is pertinent to ascertain whether the above quantity is correct. In the case of Country Liquor business in MP State, the licence fee (Excise duty) is determined shop-wise and charged @ Rs. 105 per bulk litre in the case of Masala and Rs. 70/- per bulk litre in the case of plain. Applying this issue price, the total corresponding license fee chargeable with respect to above quantity in bulk litre will be as under :-
| Particulars | Bulk litre X Issue rate | License fee | |
| CL-Masala | 3,75,361.39 × 105 | 3,94,12,945.95 | |
| Plain | 7,34,547 × 70 | 5,14,18,290 | |
| TOTAL | 9,08,31,235.95" |
8. On perusal of the details, the A.O. noticed that in addition to the cost of fright Rs. 12,23,654/- (proportionate), sealing and bardana charges of Rs. 2,18,03,013/- and purchase cost of Rs. 25,04,809/- in respect of Dholpur licence shop, the assessee himself claimed total licence fee (Excise duty) on account of country liquor purchase in respect of DEOs in M.P. State amounting to Rs. 9,96,84,189/- (licence fee Rs. 9,16,14,348/- plus basic duty of Rs. 80,69,841/-). On the basis of Dholpur licence shop, the A.O. noticed that the assessee disclosed quantity of country liquor to the extent of licence fee of Rs. 9,08,31,235/- and the quantity of purchase with respect to the remaining difference of claim of Rs. 88,52,953/- which has not been disclosed by the assessee. The A.O. further noticed that the quantity relating to purchase cost of Rs. 25,04,809/- in respect of Dholpur shop has also not been included in the declared quantity. The A.O. accordingly calculated the total amount of Rs. 1,13,57,762/- (Rs. 88,52,953 + Rs. 25,04,809). On the basis of above calculation, the A.O. noticed that the assessee has not correctly disclosed the quantity of purchase of country liquor. The A.O. on the basis of his own calculation finally calculated suppressed income of Rs. 7,14,40,512/- as under :- (Page No.14)
'6(b). Sale of IMFL liquor: - The assessee was specifically asked vide para-9 of order sheet entry dated 14.12.2011 as under :-
"Please calculate the rates of IMFL/Beer by applying the actual selling rates worked out the difference by deducing disclosed sale and show cause as to why the difference should not be added as suppressed income".
The assessee has not furnished any quantitative details of brand-wise and IMFL, Beer despite repetitive requests made. As per the prevalent market practice, the rate of IMFL are charged at much higher rate than the prescribed minimum rate being 10% over and above the cost price. In certain cases, the market profit goes very high. Considering the entire facts of the case, it will be most logical, reasonable and justified to compute the sale by applying gross profit rate of 20% on the total cost of IMFL liquor as under :—
| = | Cost × 120 | ||
| 100 | |||
| = | Rs. 17,72,27,166 x 120 | ||
| 100 | |||
| = | Rs. 21,26,72,600/- |
The total sales of CL and IMFL are as under :-
Rs. 18,52,97,720 + Rs. 21,26,72,600 = Rs. 39,79,70,320/-
The assessee has disclosed total sales of Rs. 32,65,29,808/-. Based on the above, the difference of Rs. 7,14,40,512/- is treated as suppressed income and is added back to the total income of the assessee.
It is to reiterate here that the expenses claimed by the assessee are mostly to the Govt. department. In order to effect the total sales the assessee is not required to incur any additional expenses to effect the suppressed sales. Accordingly, the net difference of sales as referred to the above represents the total suppressed income which is being added to the total income'
9. During the assessment proceedings, the A.O. has also noticed that the assessee declared agricultural income of Rs. 12,10,310/-. In absence of details, the A.O. treated the agricultural income @ 40% of which calculation comes to Rs. 4,84,124/- and the same was treated as income from other sources and rest of the amount Rs. 7,26,186/- was accepted from the agricultural income.
10. The A.O. has also made addition of Rs. 36,21,887/- as the assessee has failed to produce evidence and confirmation in respect of following charges:- (Page No.15)
| "(i) M/s. Pooja Greh Nirman | Rs. 5,00,000/- | |
| (ii) Shri Harvinder Singh Bhatia | Rs. 31,21,887/-" |
11. The A.O. has made the addition under section 68 of the Act.
12. The CIT(A) restricted the addition to Rs. 1,86,54,659/- out of liquor business and allowed relief of Rs. 5,27,85,853/- as under :- (Paragraph No.3.5)
"3.5 From the perusal of assessment order, it is seen that AO has made the addition of Rs. 7,14,40,512/- on account of difference of suppressed income from liquor business taking the highest difference of suppressed sales which has been determined by applying 20% G.P. rate over cost whereas the policy approved by the State Government mentions it to be 10%. A.O. has determined suppressed sales & gross profit with various alternatives based on the rates adapted as per Govt. policy. AO has determined all these amounts very scientifically based on the prescribed rates except for the amount of Rs. 7,14,40,512/- which is found based on hypothetical and assumed profit rate of 20% of cost. Therefore, total addition of Rs. 7,14,40,512/- is not found sustainable as per facts on record. Determination of suppressed sales at Rs. 2,28,49,257/- is based on minimum rates and Rs. 5,37,17,794/- is based on rates given by DEO Shivpuri considering the sales determined based on 100% duty, including 8% basic duty, which has been objected to by the appellant but not found expressly excluded as per the Gazette. A.O. has also calculated suppressed income of Rs. 1,86,54,659/- after allowing deduction of freight of Rs. 12,53,654/- and after taking into account appellant's submissions. A.O. has arrived at various alternatives based on specific information. Appellant's submissions made during the course of appeal proceedings regarding declaration of highest gross profit rate as compared to preceding years and principle of consistency have also been considered. From perusal of preceding year's orders, it is seen that for A.Y. 2006-07 an ad hoc addition has been made by applying net profit rate of 5% on total sales determined as per rates given by DEO without invoking provisions of Sec. 145(3). Whereas during the year under appeal, no books of account have been produced, sale/gross profit have been determined scientifically based on specific information. Therefore, there is no consistency of the facts for both the years. Accordingly, principle of res judicata as well as rule of consistency don't apply to the issue under appeal.
Keeping in view facts and material on record, I am of the considered opinion that the lowest amount of suppressed sales and profit on which no further deduction is allowable, which comes to Rs. 1,86,54,659/- is found sustainable and hereby confirmed. Accordingly, the appellant gets relief of Rs. 5,27,85,853/- (Rs. 7,14,40,512 - 1,96,54,659) on this ground."
13. Since the CIT(A) has partly allowed the appeal, therefore, the assessee is in appeal through ground Nos. 1 & 2 where addition of Rs. 1,86,54,659/- has been confirmed by the CIT(A) and the Revenue is in appeal against the addition of Rs. 5,27,85,853/- deleted by the CIT(A).
14. The CIT(A) confirmed the order of A.O. in respect of agricultural income and in respect of addition under section 68 of the Act.
15. The ld. Authorised Representative submitted that the A.O. and CIT(A) both have estimated the income by applying the mathematical formula without considering all the relevant facts of the case. Ld. Authorised Representative submitted that the assessee is selling country liquor and IMFL/Beer at 40 shops of different places of Madhya Pradesh and Dholpur and more than 7 Districts in Rajasthan. Ld. Authorised Representative submitted that A.O. has wrongly relied upon the figures of one of the shop at Dholpur and estimated for the whole year which is unreasonable. Ld. Authorised Representative submitted that the A.O. has applied rates as informed by DEO of one shop at Shivpur but the A.O. did not mention whether the rates as informed by the DEO is for which period and whether same are relevant to the year under consideration. Ld. Authorised Representative submitted that looking to the nature of business of the assessee the rates are fluctuating considering various facts including climate and season. The ld. Authorised Representative submitted that the A.O. and CIT(A) both have estimated the income without considering the earlier years result wherein the department has accepted the final outcome of the assessment. Ld. Authorised Representative submitted that the A.O. has ignored the fact that against the basic licence fee at Rs. 80,69,841/- no purchases could be made, basic licence fee is not adjusted against the purchase made and moreover the contractor some time is not lifted the liquor against licence fee paid being there are no sales, thus the assessee can be entitled only for adjustment of liquor cost with licence fee and not with basic licence fee. Thus, licence fee paid at Rs. 9,96,84,189/- is correctly paid. The ld. Authorised Representative submitted that the assessee has only lifted the quantity as mentioned by the A.O. at page No.6 of the Assessment Order which is supported by the certificate from DEO. Ld. Authorised Representative further submitted that profit worked out on country liquor is incorrect because they have not added basic licence fee, freight in purchase while calculating all the amount of purchase for calculating of G.P. Ld. Authorised Representative submitted that the A.O. has wrongly calculated profit on IMFL on the cost which included basic licence fee and the same was not taken into consideration while calculating of the percentage of profit on purchase i.e. 10% which is even not applicable on these purchases as clarified in the gazette.
16. The ld. Authorised Representative drew our attention to page No.1 of Paper Book wherein comparative position of Gross Profit & Net Profit of different years have been placed.
17. The ld. Authorised Representative submitted that in A.Y. 2005-06 in assessee's own case the I.T.A.T. has accepted 1.2% profit rate, a copy of the order of I.T.A.T. has been placed at page No.38 of assessee's Paper Book. Ld. Authorised Representative further submitted that in A.Y. 2006-07 the I.T.A.T. has accepted 1.3% N.P. rate. He further submitted that in A.Y. 2007-08 the A.O. himself accepted 2.43% N.P. rate and in A.Y. 2008-09 the N.P. rate initially accepted is 3.3%.
18. The ld. Authorised Representative submitted that the estimation made by the A.O and sustained by the CIT(A) is excessive and on higher side. He accordingly held that necessary relief may be granted by accepting the income declared by the assessee.
19. The ld. Departmental Representative, on the other hand, relied upon the order of the A.O.
20. We have heard the Ld. Representatives of the parties and records perused. The admitted facts of the case are that the assessee did not produce books of account. To examine the issue, we would like to refer relevant provisions of section 145 of the Act which reads as under:-
'145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
(2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.
(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.'
20.1 It is to note that under section 145(1), the income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" has to be computed in accordance with the method of accounting regularly employed by the assessee, unless in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom or the Income-tax Officer is not satisfied about the correctness or completeness of the accounts of the assessee. Under the sub-section (3) of section 145 in any case where the accounts are correct and complete to the satisfaction of the Income-tax Officer but the method employed is such that, in the opinion of the Income-tax Officer, the income cannot properly be deduced therefrom, then the computation has to be made upon such basis and in such manner as the Income-tax Officer may determine. However, if the Income-tax Officer is not satisfied about the correctness or completeness of the accounts of the assessee or where no method of accounting has been regularly employed by the assessee, the Income-tax Officer may make the assessment in the manner provided in section 144. Section 145 is mandatory and the Revenue is bound by the assessee's choice of a method regularly employed unless by that method the true income, profits and gains cannot be arrived at. In other words, section 145 enacts that for the purpose of section 28 (profits and gains of business, profession or vocation) and section 56 (income from other sources), income, profit and gains must be computed in accordance with the method of accounting regularly employed by the assessee. Therefore, if the assessee regularly employs a particular method of accounting and if no defects are found in the method or maintenance of accounts, the taxing authority is bound to compute the profits and gains of business or profession or vocation in accordance with the method employed by the assessee. Therefore, in case where the Income-tax Officer or the taxing authority finds that in maintaining accounts, the assessee has regularly employed a particular method and does not make any investigation to find or does not find any defect in the accounts and accept the accounts as they are, he is bound to compute the income in accordance with the accounts maintained by the assessee. Therefore, when the assessee represents to the taxing authority that its accounts are maintained by a method of accounting regularly employed, he expects the Income-tax Officer to act upon such method and compute the income accordingly.
20.2 In the case of Tolaram Daga v. CIT [1966] 59 ITR 632 (Assam), the Court held as under:-
"It would appear that the accounts of the firm which had been produced in the case had been accepted and acted upon by the department and no serious challenge had been made to their genuineness or that they were kept regularly in the course of business. That being the case, the accounts are relevant and afford prima facie proof of the entries and the correctness thereof under section 34 of the Evidence Act"
20.3 Section 145 of the Act provides that if assessee does not satisfy the condition of section 145 of the Act, the A.O. may make assessment in the manner provided under section 144 of the Act. In the case under consideration, it is no doubt that the assessee did not produce the books of account; therefore, the A.O. is to make assessment under section 144 of the Act. The scope of best judgment has been examined by the Apex Court in the case of State of Kerala v. C. Velukutty [1966] 60 ITR 239 as under :-
'What is the scope of section 12(2)(b) of the Act ? The expression "to the best of his judgment" in the said clause is presumably borrowed from section 23(4) of the Income-tax Act. The said expression in the Income-tax Act was the subject of judicial scrutiny. The Privy Council inCommissioner of Income-tax v. Laxminarayan Badridas has considered those words. Therein it observed:
"He (the assessing authority) must not act dishonestly, or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guess-work in the matter, it must be honest guess-work. In that sense, too, the assessment must be to some extent arbitrary."
The Privy Council, while recognizing that an assessment made by an officer to the best of his judgment involved some guess-work, emphasized that he must exercise his judgment after taking into consideration the relevant material. The view expressed by the Privy Council in the context of the Income-tax Act was followed when a similar question arose under the Sales Tax Act. A Division Bench of the Calcutta High Court in Jagadish Prosad Pannalal v. Member, Board of Revenue, West Bengal, confirmed the assessment made by the sales tax authorities, as in making the best judgment assessment the said authorities considered all the available materials and applied their mind and tried their best to come to a correct conclusion. So too, a Division Bench of the Patna High Court in Doma Sahu Kishun Lal Sao v. State of Bihar refused to interfere with the best judgment assessment of a Sales Tax Officer as he took every relevant material into consideration, namely, the situation of the shop, the rush of the customers and the stock in the shop and also the estimate made by the Assistant Commissioners in the previous quarters.
Under section 12(2)(b) of the Act, power is conferred on the assessing authority in the circumstances mentioned thereunder to assess the dealer to the best of his judgment. The limits of the power are implicit in the expression "best of his judgment". Judgment is a faculty to decide matters with wisdom truly and legally. Judgment does not depend upon the arbitrary caprice of a judge, but on settled and invariable principles of justice. Though there is an element of guess-work in a "best judgment assessment", it shall not be a wild one, but shall have a reasonable nexus to the available material and the circumstances of each case. Though sub-section (2) of section 12 of the Act provides for a summary method because of the default of the assessee, it does not enable the assessing authority to function capriciously without regard for the available material.
Can it be said that in the instant case the impugned assessment satisfied the said tests ? From the discovery of secret accounts in the head office, it does not necessarily follow that a corresponding set of secret accounts were maintained in the branch office, though it is probable that such accounts were maintained. But, as the accounts were secret, it is also not improbable that the branch office might not have kept parallel accounts, as duplication of false accounts would facilitate discovery of fraud and it would have been thought advisable to maintain only one set of false accounts in the head office. Be that as it may, the maintenance of secret accounts in the branch office cannot be assumed in the circumstances of the case. That apart, the maintenance of secret accounts in the branch office might lead to an inference that the accounts disclosed did not comprehend all the transactions of the branch office. But that does not establish or even probabilize the finding that 135% or 200% or 500% of the disclosed turnover was suppressed. That could have been ascertained from other materials. The branch office had dealings with other customers.
Their names were disclosed in the accounts. The accounts of those customers or their statements could have afforded a basis for the best judgment assessment. There must also have been other surrounding circumstances, such as those mentioned in the Privy Council's decision cited supra. But in this case there was no material before the assessing authority relevant to the assessment and the impugned assessments were arbitrarily made by applying a ratio between disclosed and concealed turnover in one shop to another shop of the assessee. It was only a capricious surmise unsupported by any relevant material. The High Court, therefore, rightly set aside the orders of the Tribunal.'
20.4 From above discussions, it is relevant to note that while making a best judgment assessment the A.O. does not possesses absolute arbitrary authority to assess any figure he likes and although he is not found by strict judicial principle he should be guided by rules of justice, equity and good conscience. The limits of power is an element of guess-work in a best judgment, it shall not be a wild one but shall have reasonable nexus to the available material and the circumstances of each case. It is settled law that there is certain degree of guess-work in best judgment assessment vide Ganga Prasad Sharma v. CIT [1981] 127 ITR 27/[1980] 4 Taxman 26 (M.P.), CIT v. Badradas Ramrai Shop AIR 1937 PC 133 and Brij Bhushan Lal Parduman Kumar v. CIT AIR 1979 SC 209. The A.O. and CIT(A) both have estimated business profit on the basis of their own assumption and presumption. Estimation of profit by estimating purchases, then applying certain percentage of G.P, then converted purchases into sale and then estimated profit by applying certain percentage of G.P. in both types of goods IMFL and country liquor, such procedure is not accepted procedure. Therefore same is not acceptable. A comparative position of purchases declared by the assessee and estimated by the A.O. are a under:—
| Purchases | ||
| As per assessee | As per A.O. | |
| 30,24,42,832 | 39,79,70,320 | |
20.5 The assessee did not accept the purchases estimated by the A.O. on following grounds:- (Page No.22 of CIT(A)
| "(i) | AO is not justified in mentioning that the appellant has not submitted the relevant details during the assessment proceedings when the AO himself has determined sales and profit on the basis of details submitted form time to time and as asked for by the A.O. | |
| (ii) | AO has considered the total duty, including basic duty of 8%, for the purpose of determination of sales. | |
| (iii) | AO has collected the information from DEO, Shivpuri, Ashok Nagar & Sheopur and has relied heavily on information of DEO, Ashok Nagar when the appellant has not carried out business in Ashok Nagar. | |
| (iv) | The appellant has carried on the same business since long. There is no change in the nature, line, modus opernadi of his business in the year under appeal as compared to earlier years. He has declared better gross profit during the year and his trading results should be accepted." |
20.6 The CIT(A) also did not agree with the A.O. The relevant observation of the CIT(A) are as under:- (Page Nos.22 & 23 CIT(A))
"3.4 It is an admitted fact that the appellant has not produced his books of account and relevant records for verification of sales with reference to quantity as well as rate at any stage of assessment or even appeal. Quantitative details, as given, are too not verifiable for total sales effected vis-à-vis sale rate. Both AO and the appellant have relied upon the excise policy of the State Govt. and referred to para 9.3 (reproduced supra) a of MP Gazette dated 15.01.2008 for charging of minimum rate of IMFL. As per State policy, minimum selling price of IMFL could not be less than 10% of profit over the cost of liquor plus excise duty plus transportation charges. The only dispute in this regard is consideration of 8% of basic duty. The relevant clause of the Gazette only mentions about duty without excluding the basic duty paid immediately after the draw. As per the published policy, IMFL could not be sold at less than the value determined applying 10% profit upon excise duty plus fee plus transportation charges and income tax. It nowhere excludes the basic duty. Therefore, the determination of sales by the AO considering the amount of duty paid is justified as the appellant has never produced his books of account and supporting documents/evidences, at any stage, for verification of declared sales of IMFL. The next question is of quantification of sales with reference to quantity and amount. So far quantity is concerned, there is no dispute. The only dispute is quantification with reference to amount. A.O. has quantified IMFL sales at Rs. 19,49,49,882/- by applying 10% profit over cost price of IMFL as per State Govt. policy and then has again assessed total sales at Rs. 21,26,72,600/- by applying 20% profit rate on total cost of IMFL presuming that as per prevailing market price, rate of IMFL is charged at much higher rate than the prescribed minimum rate. However, AO has not brought on record any material in his support either in form of comparable case(s) or any other evidence."
20.7 Thus, it is found that estimation made by the A.O. is based on mathematical formula and simply on mathematical formula income cannot be estimated. The A.O. made the addition of entire/gross sale whereas Hon'ble M.P. High Court in the case Man Mohan Sadani v. CIT [2008] 304 ITR 52 following CIT v. Balchand Ajit Kumar [2003] 263 ITR 610/[2004] 135 Taxman 180 held that entire sale proceeds of the assessee cannot be added to the income, only net profit is to be added. Thus, the A.O.'s finding is contrary to finding of judgment of Hon'ble M.P. High Court. The CIT(A) on one hand rejected the working of estimation of the A.O. and, on the other hand, he relied upon rejected working of the A.O. and addition was sustained. Under the circumstances, both the orders of the A.O. and CIT(A) connot be sustained.
20.8 As stated above that while making best judgment one should have reasonable nexus to the available material and circumstances. In the case under consideration, both A.O. and CIT(A) have ignored the past history of the assessee. A comparative trading result furnished by the assessee has been placed at page No. 1 of Paper Book, which is reproduced as under :-
Comparative Position of Trading results
| A.Y. | Sales | Gross Profit | G.P. Rate | After deduction of intt. & expenses related to the Liquor Business Net Profit | % N.P. | Finally assessed by AO or Hon'ble ITAT Agra Bench Agra |
| 05-06 | 293123139/- | 12220302/- | 4.16% | 3841464 1262894 2578570 | 0.87% | 1.2% by Hon'ble ITAT Agra Bench, Agra |
| 06-07 | 132265429/- | 4029612/- | 3.04% | 1475687 | 1.11% | Sales estimated and applied 1.3% N.P. income finally assessed at 2016917/- as against 1475687/- disclosed. |
| 07-08 | 253548344/- | 15142186/- | 5.97% | 3381657 | 1.49% | 6161656/- 2.43% accepted/assessed No appeal |
| 08-09 | 283394956/- | 18942906/- | 5.6% | 6138059 | 2.16% | 6138059+3300000=9438059 3.3% No appeal |
| 09-10* | 326529801/- | 24086975/- | 7.34% | 6955730 | 2.13% | (Under consideration) |
| *Note: That assessee has deducted the expenses under the Head Intt. at Rs. 8463304/- and also shown the intt. & other income at Rs. 4413591/- after adjustment of the income at Rs. 4413591/- with expenses of intt., net intt. claimed at Rs. 4049713/- being related to the Liquor Business. | ||||||
20.9 On perusal of above comparative chart, we notice that in the year under consideration the assessee has shown comparatively better result, as G.P. is 7.34% and not profit 2.13%. However, after considering totality of the facts and circumstances of the case, it will be fair and just if addition to the extent of Rs. 20,00,000/- is sustained which will cover all deficiencies and lapses noticed by the A.O. We accordingly confirm the addition to the extent of Rs. 20,00,000/- and balance addition of Rs. 6,94,40,512/- (7,14,40,512 - 20,00,000) made by the A.O. is deleted. Thus, ground Nos. 1 & 2 of the assessee's appeal are partly allowed.
21. Ground No.3 is in respect of estimation of agricultural income. The assessee declared agricultural income of Rs. 12,10,310/-. The assessee did not furnish any evidence. In absence of evidence, the A.O. taken 40% of the said amount of which calculation comes to Rs. 4,84,124/- and the same was treated as income from other sources. The balance amount of Rs. 7,26,186/- was accepted as agricultural income by the A.O. The CIT(A) confirmed the action of the A.O.
22. The ld. Authorised Representative submitted that in A.Y.2008-09 the A.O. himself accepted agricultural income as under:-
"3. Last year the assessee had declared agricultural income at Rs. 12,02,510/- out of which Rs. 1,35,416/- were treated as income from other sources. By application of same ratio this year Rs. 1,70,000/- is added back to the income of the assessee out of agricultural income, treating it as income from other than agricultural income."
23. We have heard the ld. Representatives of the parties and records perused. Since the A.O. himself has accepted the agricultural income in A.Y. 2008-09 and to maintain consistency the A.O. should follow the same formula in the year under consideration as followed in A.Y. 2008-09 since the land holding and other facts are similar. Therefore, the A.O. is directed to calculate the agricultural income in accordance with the income determined in A.Y. 2008-09.
24. The fourth ground is in respect of addition of Rs. 36,21,887/- under section 68 of the Act. The A.O. made addition of Rs. 36,21,887/- on account of loan taken from M/s. Pooja Greh Nirman Rs. 5,00,000/- and from Shri Harvinder Singh Bhatia Rs. 31,21,887/-. The A.O. made the addition as the assessee failed to furnish details including PAN etc. The CIT(A) confirmed the order of A.O. observing that the assessee has failed to file the requisite details.
25. We have heard the ld. Representatives of the parties and records perused. The ld. Authorised Representative submitted that the assessee filed confirmation and copies of accounts of both the parties. The assessee was having sufficient material to establish that the loans were taken during the course of business for the purpose of business. He further submitted that copy of PAN and other details were furnished. It was also submission of the ld. Authorised Representative that considering the nature of business of the assessee, some time such loans are necessary and assessee has sufficient material to prove the same. The alternate submission of the ld. Authorised Representative was that if any addition is to sustained, benefit of telescoping of addition sustained in trading result may also be allowed. After hearing the ld. Departmental Representative, we find it appropriate to send back this issue to the file of A.O. with the direction to decide the issue afresh as complete facts of the issue has not been brought on record considering the business expediency and nature of business of the assessee. The A.O. is directed to decide the issue in accordance with law. The A.O. may also consider the alternate contention of the ld. Authorised Representative for set off of addition, if any, against the addition sustained on account of profit as in the case under consideration which has been sustained by us at Rs. 20,00,000/-. The A.O. may decide the issue after providing reasonable opportunity of hearing to the assessee.
ITA No. 442/Agra/2012 by the Revenue
26. The sole ground raised in Revenue's appeal is in respect of deletion of addition of Rs. 5,27,85,853/- by the CIT(A). This is a common ground as raised in ground Nos.1 & 2 of assessee's appeal. These grounds i.e. ground Nos.1 & 2 of assessee's appeal have been decided after a detailed discussion and those grounds were partly allowed by us. In the light of the fact, this ground of Revenue's appeal is dismissed.
27. In the result, appeal of the assessee is partly allowed and partly allowed for statistical purposes and appeal of the Revenue is dismissed.
POOJARegards
Prarthana Jalan
__._,_.___
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