Income Tax Appellate Tribunal - Cochin
Siva Parvathi Traders vs Income-Tax Officer on 31 January, 1994
Equivalent citations: [1994]50ITD151(COCH)
ORDER
G. Santhanam, Accountant Member
1. This Is an appeal by the assessee.
2. The assessee is an unregistered firm vending arrack. It had also toddy business. For arrack business it maintained books of accounts. For toddy business no books of accounts were maintained. The profit and loss account in the arrack business showed a net loss of Rs. 8,15,940. However, in the return of income the assessee applied the provisions of Section 44AC of the Income-tax Act, 1961, and admitted an income of Rs. 1,96,536, by estimating the profit at a presumptive rate of 40% on the purchase price of arrack totalling Rs. 4,91,341 as provided for under Section 44AC of the Act. This was accepted by the Income-tax Officer on which there is no dispute before us. On a scrutiny of the cash book and the ledger produced in respect of arrack business, the Income-tax Officer noticed credits in the names of 10 partners as detailed in Annexure A to the assessment order as follows :
(1) Sri V.N. Prabhakaran Rs. 1,55,650
(2) Sri M. Baburaj Rs. 85,550
(3) Sri P.V. Ramakrishna Panicker Rs. 45,000
(4) Sri C.K. Sreedharan Rs. 90,000
(5) Sri N. Janardhanan Rs. 45,000
(6) Sri B. Shajishah Rs. 60,000
(7) Sri B. Sreekumar Rs. 60,000
(8) Smt. P.K. Vasumathy Amma Rs. 60,000
(9) Sri Bhavani Rajappan Rs. 60,000
(10) Sri M.P. Sukumara' Panicker Rs. 60,000
_____________
Rs. 7,21,200
______________
In addition to the above, loans were shown against the following partners as follows :
(1) Sri B. Sreekumar Rs. 10,000 on 24-5-1989 (2) Sri B. Shajishah Rs. 10,000 (3) Sri V.N. Prabhakaran Rs. 50,000 on 28-11-1989 (4) S.K. Sreedharan Rs. 10,000 on 24-5-1989
There was also difference in cash book on various dates to the extent of Rs. 2,18,850 as noticed in Annexure B to the assessment order. The assessee was asked to explain the credits amounting in all to Rs. 10,20,050 consisting of credits in the partners' current accounts amounting to Rs. 7,21,200, loan accounts of the partners in a sum of Rs. 80,000 and difference in cash book balances of Rs. 2,18,850. The assessee was unable to explain. Hence the Income-tax Officer made an addition of Rs. 10,20,050 to the income of the assessee as computed by him under Section 44 AC of the IT Act and the amount thus added was assessed under "other sources". There is no dispute before us in respect of the toddy business for which no accounts were maintained. The dispute is only with regard to the addition of Rs. 10,20,050 under the head "other sources". The assessee carried the matter in appeal and contended that the sum of Rs. 10,20,050 should be adjusted against the loss of Rs. 8,15,941 and the net balance alone is assessable under arrack business. Even in such a case, in view of the provisions of Section 44AC only a sum of Rs. 1,96,536 could be assessed and thus there was no case for assessing the sum of Rs. 10,20,050 under the head "other sources". The assessee had no other source of income except the income from arrack business, for which accounts were maintained and in which the impugned amounts were reflected. For toddy business it had loss only, but that loss was reduced to 'nil' on agreed basis. Therefore, there was no scope for assessing the impugned amounts under "other sources". The CIT (Appeals) held that if the impugned amounts stood credited directly to the profit and loss account, the assessee would be right in all its contentions. However, the impugned amounts were found credited to the accounts of the partners and there was nothing to show that such credits have come out of the business of the assessee and, therefore, they are rightly assessed under the head "other sources". The assessee is on second appeal.
3. Sri C.K. Nair, the learned Counsel for the assessee contended that the assessee had only two known sources of income viz., arrack business and toddy business. In toddy business it had returned a loss of Rs. 1,56,264. As no books of accounts were maintained for that business the assessee had agreed for "no loss no gain" in toddy business. In arrack business the provisions of Section 44AC stood attracted and therefore whatever be the real profit earned in arrack business, the Legislature had mandated estimation of profit on a presumptive basis. Therefore, the Income-tax Officer is precluded from looking Into the accounts of the business, once he finds that the provisions of Section 44AC stand attracted and once it is seen that the accounts maintained by the assessee were in respect of that business only. In cases where the assessee maintained consolidated accounts for arrack business as well as for other business, then the Income-tax Officer is empowered to look into the accounts to apportion the income as between the two businesses in terms of Section 44AC(3). Such is not the case with the assessee. Hence, after applying the provisions of Section 44AC, to make further additions, that too, on the basis of the books maintained for the arrack business, would be to exceed the mandate of Section 44AC. Assuming that the Income-tax Officer had such powers to look into the accounts of arrack business, notwithstanding the provisions of Section 44AC, Sri Nair contended that the credits were recorded in the books of accounts maintained for arrack business. For toddy business no books were maintained. There was no other source of income for the assessee and the department has not pointed out any such source. Therefore, the credits found in the books relating to the arrack business must be deemed to be the business income, but because of the presumption created under Section 44AC, there cannot be any further addition to the income from arrack business. As the source had been identified in the business, it cannot be assessed under other sources. Alternatively he contended that if the credits are to be assessed at all, they are to be assessed in the hands of the partners and not in the hands of the firm as the credits are found in their respective accounts. Finally he relied on the following decisions:
(i) G.M. Chenna Basappa v. CJT [1958] 34 ITR 576 (AP),
(ii) Sundar Lal Jain v. CIT [1979] 117 ITR 316 (All.),
(iii) CIT v. Maduri Rajaiahgari Kistaiah [1979] 120 ITR 294 (AP) and also on the commentaries found in Chaturvedi & Pithisaria's Income-tax Law, Vol. 2, 7th Edition, p. 1908, Vol. 7 page 6297, Kanga & Palkhivala's Income-tax, Eighth Edition, Vol. I, p. 866 and V.S. Sundaram's Commentary in law of Income-tax in India (12th Edition), Vol. 3, page 235.
4. Sri C. Abraham, the learned senior departmental representative submitted that though credits were found in the account books of arrack business, the assessee was unable to explain the source and, therefore, the provisions of Section 68 of the IT Act stood attracted. Section 44AC is applicable only for computation of income from arrack business. Merely because the credits were found in the books maintained for arrack business, it cannot be presumed that the credits are referable to the business profits. It is for the assessee to show that they came out of the business or trading transactions. In this case that has not been established. Section 44AC, though has prescribed the mode of computation of profits from arrack business on a presumptive basis, does not preclude the Income-tax Officer from going into the accounts of the assessee to determine the income of the assessee. The expression 'income' is in an inclusive definition. Profits and gains of business is only one of the constituent units and not the only unit of income.
5. We have heard rival submissions and perused the records. Section 44AC came into force with effect from 1-4-1989 and reads as follows :
44AC. Special provision for computing profits and gains from the business of trading in certain goods. - (1) Notwithstanding anything to the contrary contained in Sections 28 to 43C, in the case of an assessee, being a person other than a public sector company (hereinafter in this section referred to as the buyer), obtaining in any sale by way of auction, tender or any other mode, conducted by any other person or his agent (hereinafter in this section referred to as the seller),-
(a) any goods in the nature of alcoholic liquor for human consumption (other than Indian-made foreign liquor), a sum equal to forty per cent of the amount paid or payable by the buyer as the purchase price in respect of such goods shall be deemed to be the profits and gains of the buyer from the business of trading in such goods chargeable to tax under the head 'Profits and gains of business or profession':
Provided that nothing contained in this clause shall apply to a buyer where the goods are not obtained by him by way of auction and where the sale price of such goods to be sold by the buyer is fixed by or under any State Act;
(2)** ** ** ** (3) In a case where the business carried on by the assessee does not consist exclusively of trading in goods to which this section applies and where separate accounts are not maintained or are not available, the amount of expenses attributable to such other business shall be an amount which bears to the total expenses of the business carried on by the assessee the same proportion as the turnover of such other business bears to the total turnover of the business carried on by the assessee.
Explanation: For the purposes of this section, 'seller' means the Central Government, a State Government or any local authority or corporation or authority established by or under a Central, State or Provincial Act, or any company or firm or co-operative society.
The scope and effect of Section 44AC has been elaborated in the departmental Circular No. 528, dated 16-12-1988. The object of the introduction of the new provisions is explained in para 24.2 of the said circular as follows :
24.2 The object of the introduction of the new provisions for working out the profits on a presumptive basis is to get over the problems being faced in assessing the income of and recovering the taxes in the cases of persons trading in country liquor, timber and forest produce. A large number of such persons either do not maintain any books of account or the books maintained are irregular and incomplete. Locating such persons after the contract or agreement became impossible in many cases. Further in such cases, even if the assessment was completed, the Income-tax Department found it extremely difficult to collect the tax from them. Thus, assessment of income and recovery of taxes from such businessmen posed serious problems.
From a reading of the above provisions of Section 44AC which provide for a presumptive rate of profit in arrack business and also the objects for which the special provision was enacted as amplified by the Board's Circular cited supra, we hold that in the case of arrack business, whether books are maintained or not, whether the books are complete or incomplete and whether the books are regular or irregular, the Income-tax Officer has to regulate the profits or gains from arrack business only under the provisions of Section 44AC. That would mean that he should not cull out or single out from the books of arrack business any item of expenditure of receipt either for purpose of disallowance or for the purpose of making any addition. The credits are admittedly found in the books of accounts of the assessee maintained for arrack business. The books of accounts are neither correct nor complete as on various dates the cash book showed difference in carry forward of cash balances. Besides it is admitted before us and not controverted that the assessee did not issue any sale bill in evidence of sale of arrack. Except for the purchase of arrack, payment of kist and P.F. and E.P.F. contributions and tax payments, no other expenditure is supported by external evidence. Majority of payments are recorded only in self-made vouchers with minimum details. No day-to-day stock register has been kept. These defects are common in this line of business and the assessment of arrack vendors usually proceed on the basis of estimation of profit and we take judicial notice of the same, as we have noticed the presence of such defects and practice in the assessment of arrack vendors which have come before us. Thus, in the absence of Section 44AC, the Income-tax Officer would be entitled to reject the books of accounts and resort to an estimate of income, but in view of the provisions of Section 44AC, the same result is achieved by resorting to a presumptive rate of profit. Therefore, we hold that once the provisions of Section 44AC are invoked, no fresh additions or disallowances can be made for arriving at the profit from arrack business. Sri Abraham points out that the Income-tax Officer has accepted the presumptive rate of profit as worked out by the assessee. The addition made by the Income-tax Officer was in a totally different field viz., in the field of unexplained cash credits found in the accounts of the partners and also the difference in balances, noticed in the cash book. These items represented the income for which proper explanation should have come from the assessee, but in the absence of any satisfactory explanation, the Income-tax Officer was entitled to make an addition under Section 68 or under Section 69 of the IT Act. Since the Legislature has mandated the computation of profit from arrack business in a particular manner under the provisions of Section 44AC, the only course open to the Income-tax Officer is to bring to tax such credits and the difference in the balances under the head "other sources". As against this contention, Sri Nair submits that, no doubt, under Section 68 or under Section 69, the unexplained credits or investments can be treated as income, but the nature and the source of such income must first be determined before it is assessed under "other sources". Obviously, these amounts are found in the books of arrack business and the Legislature knows that nobody keeps accounts in a complete and regular manner in so far as the arrack business is concerned. The character of such receipts under Section 68 should be taken to be the business income in view of the location of such receipts or deficiencies found in the books of accounts. Further, it has not been established that the assessee was having any other source of income. Therefore, the argument goes that the impugned credits and difference in the cash balances should be construed only as business income referable to arrack business and the profits and gains of such business having been computed under Section 44AC, there was no scope for malting a separate addition under the head "other sources".
6. From the records it is seen that the assessee-firm had only two known sources of income, viz., arrack business and toddy business. For toddy business it did not maintain any accounts and, therefore, these credits or difference in balances, as are found by the Income-tax Officer, cannot be attributed to the toddy business. In fact, the assessee had reported a loss in toddy business to the extent of Rs. 1,56,264, but that was agreed to be assessed at no profit or loss. The only other known source is arrack business, for which incomplete accounts were maintained and in which these credits and difference in cash balances were noticed. It is reasonable to presume that the impugned amounts related to the arrack business of the assessee. It is reasonable to hold thus because this is not the first year of the assessee's business, but it is the second year of its business. It is reasonable to hold thus because the credits are not in one lump sum, but are found credited in the accounts of the partners on different dates in varying amounts. It is reasonable to hold thus because the difference in cash balances was not found on any one date, but was spread over a number of dates. It is reasonable to hold thus on the premises that the earlier mentioned defects and deficiencies that are commonly noticed in account books of arrack business provide the conduit for siphoning off the income generated in the business. In other words, they could constitute the source of funds which are later ploughed back into the business in the guise of credits in partners' accounts and loan accounts and carry-forward of different cash balances. This we say because in the absence of sale bills, sale price per litre of arrack is anybody's guess. In the absence of day-today stock register and stock tally, quantity of arrack sold is another moot point. In the absence of corroborative evidence for expenses, the varacity of the claim for deduction for such expenses is open to challenge. Further it is seen from the ledger that on dates when the impugned amounts were introduced payment of kist or purchase of arrack had taken place. In view of the above, we hold in the preponderance of probabilities that the source for the sum of Rs. 10,20,050 can be said to be the arrack business carried on by the assessee-firm. Hence, as against the loss of Rs. 8,15,940, if the impugned amounts are adjusted, it would ultimately result in a profit of Rs. 2,04,109 from arrack business. Normally this should have been profit of the assessee, but under the provisions of Section 44AC, which provided for the presumptive rate of profit, the income was to be taken at Rs. 1,96,536. There is no provision to rope in the balance amount of Rs. 7,573 (Rs. 2,04,109 minus Rs. 1,96,536) in view of the clear mandate found in Section 44AC. Thus, we uphold the contention of Sri Nair and delete the addition of Rs. 10,20,050.
7. For another reason - quite different reason - we are unable to sustain the addition in respect of credits and loans. The credits and loans are obviously found in the accounts of the partners. Thus, the identity of the parties is established. If the credits and loans found in the partners' accounts are not viewed as business income of the assessee-firm and the assessee-firm not having any other source of income, it is for the partners to explain the source of such credits and in the absence of such explanation, additions can be made only in their respective hands. Such additions, if at all to be made, are to be made under Section 69 only in the hands of the partners as the credits and loans are found in the accounts of the firm - a totally different person - within the meaning of the Income-tax Act as has been held by the Allahabad High Court in Sunder Lai Jain's case (supra). For this reason also, the impugned sum, at least to the extent of the amounts standing to the credit of the partners' current accounts and loan accounts cannot be assessed in the hands of the assessee-firm.
8. Before parting with the order, we may add that the additions made under Section 68 or under Section 69 need not always be assessed under the head "other sources". In the scheme of the Income-tax Act, the head of income known as "other sources" is a residuary head of income. Only if a receipt cannot be placed under any other head of income or if the receipt cannot be traced to or referable to any source, the assessment under "other sources" would come into operation and not before. In the light of our discussions, the appeal of the assessee is allowed.