Income Tax Appellate Tribunal - Ahmedabad
Gopal Glass Works Ltd.,, Ahmedabad vs Assessee on 6 May, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL,
AHMEDABAD, BENCH : "A"
BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER
AND
SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER
आयकर अपील सं./ ITA.No.274, 275 and 276/AHD/2010
[Asstt.Year 2001-02, 2002-03 and 2004-05]
M/s.Gopal Glass Works Ltd. ITO, Ward-4(1)
182, Gagan Vihar, Khanpur Vs Ahmedabad.
Ahmedabad.
PAN : AAACG 5599 H
आयकर अपील सं./ ITA.No.667 and 668/AHD/2010
[Asstt.Year 2001-02, 2002-03 and 2004-05]
ITO, Ward-4(1) M/s.Gopal Glass Works Ltd.
Ahmedabad. Vs 182, Gagan Vihar, Khanpur
Ahmedabad.
PAN : AAACG 5599 H
अपीलाथ#/ (Appellant) $%यथ#/ (Respondent)
Assessee by : Shri Tushar A. Hemani
Revenue by : Shri A.R. Rewar, Sr.DR
ु वाई क तार ख/ Date
सन of Hearing : 28/04/2016
घोषणा क तार ख / Date of Pronouncement: 06/05/2016
आदे श/O RDER
PER RAJPAL YADAV, JUDICIAL MEMBER:
The assessee and the Revenue are in cross-appeals against separate orders of even dated 30.10.2009 passed by the ld.CIT(A) in the Asstt.Years 2001-02 and 2002-03. In the Asstt.Year 2004-05, the Gopal Glass Works Ltd. Vs. ITO, Ahmedabad (5 appeals) 2 assessee alone is in appeal against the order of the ld.CIT(A) dated 30.10.2009. Since common issues are involved in all the appeals, therefore, we heard them together, and deem it appropriate to dispose of these appeals by this common order.
2. The grounds of appeal taken by both the appellants in their cross- appeals are not in consonance with the Rule 8 of the Income Tax (Appellate Tribunal) Rules, 1963 - they are descriptive and argumentative in nature. In brief the common issue involved in all these appeals relates to determination of income on an estimate basis. We would revert to the specific grievance pleaded by the Revenue in subsequent part of this order. Let us first take adumbrated facts.
3. The assessee-company is engaged in the manufacture of glass. It was carrying out job work for M/s.Haryana Sheet Glass Ltd. The Excise Department had carried a search operation at the office premises of M/s.Haryana Sheet Glass Ltd (HSGL) on 23.9.2003. The Excise Department had seized a document inventorised as Annexure-A/7. This document contained both recorded and unrecorded transactions. According to the assessee, an employee of Sagar Glass Enterprises, who was also working as job worker for HSGL has prepared this Annexure-A/7. The stand of the assessee before the Revenue authorities was that it does not disclose true picture of the assessee, because, it was not found at the premises of the assessee. It was not recorded by any authorized employee of the assessee. It was a document recorded by third person. Thereafter, survey was carried out at the premises of the assessee under section 133A of the Act on 18.12.006. The assessments in the Asstt.Years 2001-02 and 2002-03, have been reopened by issuance of notice under section 148 of the Income Tax Act. The assessee in the Asstt.Year 2001-02 has filed its original return on 30.10.2001 declaring Gopal Glass Works Ltd. Vs. ITO, Ahmedabad (5 appeals) 3 total income at Rs.12,37,084/-. In response to the notice under section 148, it has filed its return on 8.2.2008 declaring total income at Rs.1,19,59,550/-. Similarly, in the Asstt.Year 2002-03, the original return was filed on 31.10.2002 declaring total income at Rs.75,840/-. In response to the notice under section 148, return was filed on 8.2.2008 declaring total income at Rs.(-)29,20,234/-. The AO has framed the assessment in both these years on 28.12.2008 under section 143(3) r.w.s. 147. The income determined by the AO reads as under:
Asstt.Year 2001-02:
7. On the basis of details available with the return of income and the details filed in response to the notice u/s.142(1) of the IT.Act income of the assessee is computed as under:
Total income as per revised return of income u/s.148 11959550 Income as discussed above in para 5.a 14714587 Add:
Expense not allowable Rs.2489779
(para 6b)
Expenditure disallowed (as Rs.37815844
per para 6.c3)
Disallowances u/s.40AE (as Rs.1610273 41915896
per para 6.d)
Revised total income 56630483
Asstt.Year 2003-04:
7. On the basis of details available with the return of income and the details filed in response to the notice u/s.142(1) of the IT.Act income of the assessee is computed as under:
Total income as per revised return of income u/s.148 2650787 Income as discussed above in para 5.a 2627629 17342216 Add:
20% excess epense in cash 775705
u/s.40A(3) (Para.6(c1)
Excess expenses (Para 35322889
6.(c2))
Maximum of the above 35322889
Gopal Glass Works Ltd. Vs. ITO, Ahmedabad (5 appeals) 4 (para 6.c3) Add: cash expenses of 402026 freights u/s.40A(3) para
6.(d) Revised total income 52665105
4. Dissatisfied with the computation of income, the assessee carried the matter in appeal in both the years.
5. The stand of the assessee before the ld.CIT(A) was that in Annexure-
A/7 found during the course search operation carried out by the Excise authority, entries which are not recorded in the books as well as which are recorded in the books are available. The assessee has analysed this Annexure-A/7 along with its books of accounts. It has prepared a list of items and worked out total sales which include the accounted as well as unaccounted entries. The assessee has taken peak amount of sales at a particular time during the year. It further contended that for the purpose of levy of excise, dispute went to Settlement Commission. In the Settlement Commission the sales worked out by the assessee, on the basis of peak theory has been accepted. The levy of excise has been determined on this sale. Thus, the AO is not justified in taking cognizance of the entries in Annexure- A/7 as well as in the books of accounts. The assessee has filed the working which has been reproduced by the CIT(A) at page no.13 and 14 of the impugned order. The basis explained by the assessee has been noticed by the CIT(A) at page nos.14 and 15 which reads as under:
Asstt.Year 2001-02 "On the basis of the peak value of sales it filed revised Excise Duty Returns before the Excise Authorities It may be seen that the appellant went before the Hon'ble Settlement Commission of Custom and Excise for settlement of its cases for the period May 1999 to August 2003. The Hon'ble Settlement Commission of Central Excise passed the final order u/s 32F(7) of Central Excise Act, 1944 on 6.6.2007 determining total undervaluation of sales at Rs. 22,49,09,770/- for the period May Gopal Glass Works Ltd. Vs. ITO, Ahmedabad (5 appeals) 5 1999 to August 2003. This comprised of undervaluation of Rs. 7,00,25,375/- for the period December 2001 to August 2003 and Rs. 15,48,84,395/- for the period May 1999 to November 2001. The amount of under valuation of sales for the relevant period as per the working filed before the Hon'ble Settlement Commission of Excise & Custom , has been arrived at Rs. 6,39,04,493/-. In other words the appellant has recorded sales to the tune of Rs. 17,33,56,167/- in its regular books of accounts and over and above Rs. 6,39,04,493/- has been collected by it in cash during the relevant period from the purchasing parties outside the books of accounts. As such the total turnover of the appellant during the relevant period after taking into consideration Annexure A-7 and the regular books of accounts was to the tune of Rs. 23,72,60,660/-.
7.12 There is no doubt about the fact that the books of accounts maintained by the appellant, for the relevant, period are defective in the sense that they do no, reflect correct and complete picture of the appellants transactions. The aforesaid would reflect that the appellant tried to offset all the cash receipts over an amount recorded in books of accounts to the extent of Rs. 6,39,04,493/- by debiting various expenses in cash namely Director's Salary etc. which can be seen a Sr.Nos 16, 19, 20, 21, 22, 23 , 26, 27 and 30 to 37. Most of these expenses reflected in regular books of accounts. Admittedly the appellant has not maintained any supporting documents for such expenses, in absence of such documents cannot be ascertained as to whether these expenses have been debited to exhaust the extra cash on sales collected by the appellant or for the purposes of basin There ore, on the basis of these figures the peak theory applied by the appellant cannot be accepted as it considers those expenses which are not supported by necessary documents."
Asstt.Year 2002-03 On the basis of these peak values it filed revised Excise Duty Returns before the Excise Authorities It may be seen that the appellant went before the Hon'ble Settlement Commission of Custom and Excise for settlement of its cases for the period May 1999 to August 2003. The Hon'ble Settlement Commission of Central Excise passed the final order u/s 32F(7) of Central Excise Act, 1944 on 6.6.2007 determining total undervaluation of sales at Rs. 22,49,09,770/- for the period May 1999 to August 2003. This comprised of undervaluation of Rs. 7,00,25,375/- for the period December 2001 to August 2003 and Rs. 15,48,84,395/- for the period May 1999 to November 2001. The amount of under valuation of sales for the relevant period as per the working Gopal Glass Works Ltd. Vs. ITO, Ahmedabad (5 appeals) 6 filed before the Hon'ble Settlement Commission of Excise & Custom , has been arrived at Rs. 4,77,00,314/-. In other words the appellant has recorded sales to the tune of Rs.16,15,21,809/- in its regular books of accounts and over and above Rs.4,77,00,314/- has been collected by it in cash during the relevant period from the outside the books of accounts. As such the total turnover of the relevant period after taking into consideration Annexure books of accounts was to the tune of Rs. 20,92,22,123/-.
7.12 There is no doubt about the fact that the books of accounts maintained by the appellant for the relevant period are defective in the sense that they do not reflect correct and complete picture of the appellants transactions. The aforesaid table would reflect that the appellant tried to offset all the cash receipts over and above the amount recorded in books of accounts to the extent of Rs.4,77,00,314/- by debiting various expenses in cash namely Director's Salary etc. which can be seen at Sr. Nos. 16, 19, 20, 21, 22, 23, 26, 27 and 32 to 36. Most of these expenses are not reflected in regular books of accounts. Admittedly the appellant has not maintained any supporting documents for such expenses. In absence of such documents it cannot be ascertained as to whether these expenses have been debited to exhaust the extra cash on sales collected by the appellant or for the purposes of business. Therefore, on the basis of these figures the peak theory applied by the appellant cannot be accepted as it considers those expenses which are not supported by necessary documents."
6. The ld.CIT(A) has accepted the stand of the assessee, as far as the quantification of unaccounted sales are concerned. The ld.CIT(A), thereafter, adopted a net profit rate of 8% of the alleged turnover/sales to estimate the profit earned by the assessee on recorded as well as unrecorded sales. As far as other disallowance made by the AO in the computation of income extracted (supra), the ld.CIT(A) has observed that once the books of accounts are rejected, the income of the assessee is to be estimated, then no separate disallowance is required to be made on the basis of books of accounts or on the basis of any specific entry, because, the estimate in itself will take care of the expenses. Accordingly ld.CIT(A) has deleted various disallowance made Gopal Glass Works Ltd. Vs. ITO, Ahmedabad (5 appeals) 7 by the AO under section 40A(3) of the Act relying upon the following judgments:
i) CIT Vs Banwarilal Bansidhar, 229 ITR 229 (All)
ii) CIT Vs. Smt. Santosh Jain, 296 ITR 324 (P&H)
iii) CIT Vs. Mohammed Durabuddin, 4 BTR 218 (Mad)
7. Thus, the grievances of the assessee in its appeal relate to (a) reopening of the assessment, (b) rejection of the books of accounts, and (c) estimation of profit at 8% of the alleged unaccounted sales.
8. On the other hand, the grievance of the Revenue is that the ld.CIT(A) ought to have not disturbed the profit worked out by the AO on the basis of Annexure-A/7. It has also pleaded that the ld.CIT(A) ought to have not deleted the various additions made by the AO by making a disallowance of the expenses, because, the assessee failed to produce evidence in support of the expenditure.
9. The ld.counsel for the assessee, while impugning the orders of the Revenue authorities has contended that as far as reopening of the assessment and rejection of the books of accounts in these years are concerned, he does not press these grounds of appeal. According to the ld.counsel for the assessee, the only issue required to be adjudicated in the appeals of the assessee is, what rate of profit required to be applied on the alleged unaccounted sales. On the strength of Hon'ble Gujarat High Court's decision in the case of Black Diamond Trading Co. Tax Appeal No.235 2015 and others, he contended that even after the rejection of the books of accounts, the AO has to compute the profit on reasonable basis. He further contended that in this decision, the Hon'ble High Court has observed that once net profit rate is being applied, then, there is no question of further making any addition of Rs.40A(3) of the Income Tax Act. He placed on record copy of the decision.
Gopal Glass Works Ltd. Vs. ITO, Ahmedabad (5 appeals) 8 He further contended that in the Asstt.Years 2000-01 and 2003-04, the assessee has approached Settlement Commission. The Settlement Commission has accepted the working of unaccounted sales and accepted the application of net profit rate at 5%. The ld.counsel for the assessee further placed on record the details of net profit as per the books of accounts shown by the assessee in the assessment years 2001-02, 2002-03 and 2004-05. As per the books of accounts, the average profit comes out for these three years is 0.25%. Similarly, in Annexure-A/7 the working of the profit has been provided. The average profit rate in this annexure is also 3.44%. Thus, there is no justification to estimate the profit at 8%.
10. The ld.DR, on the other hand, relied upon the orders of the AO. He contended that the AO has worked out the profit on the basis of Annexure- A/7, that ought not to have been disturbed by the CIT(A).
11. We have considered rival submissions and gone through the record. Section 145 of the Income Tax Act is the relevant provision for this issue, therefore, it is pertinent to take note of this section. It 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.]"
Gopal Glass Works Ltd. Vs. ITO, Ahmedabad (5 appeals) 9
12. A bare reading of Section 145 would reveal that it provide the mechanism how to compute the income of the Assessee. According to sub- section 1, the income chargeable under the head profit and gains of business or profession or income from other source shall be computed in accordance with the method of accountancy employed by an Assessee regularly, subject to sub-section 2 of Section 145 of the Act. Sub-section 2 provides that the Central Government may notify in the official gazette from time to time, the Accounting Standard required to be followed by any class of Assessee in respect of any class of income. Thus, it indicates that income has to be computed in accordance with the method of accountancy followed by an Assessee i.e. cash or mercantile, such method has to be followed keeping in view the Accounting Standard notified by the Central Government from time to time. Sub clause 3 provides a situation, that is, if the Assessing Officer is unable to deduce the true income. On the basis of method of accountancy followed by an Assessee than he can reject the book result and the assessee's income according to his estimation or according to his best judgment. The Assessing Officer in that case is required to point out the defects in the accounts of Assessee and required to seek explanation of the Assessee qua those defects. If the assessee failed to explain the defects than on the basis of the book result, income cannot be determined and Assessing Officer would compute the income according to his estimation keeping in view the guiding factor for estimating such income.
13. For exercising the best judgment, section 144 of the Income Tax Act provide the guidance to the ld.AO. This section reads as under:
"144. [(1)] If any person--
(a) fails to make the return required [under sub-section (1) of section 139] and has not made a return or a revised return under sub-
section (4) or sub-section (5) of that section, or Gopal Glass Works Ltd. Vs. ITO, Ahmedabad (5 appeals) 10
(b) fails to comply with all the terms of a notice issued under sub- section (1) of section 142 [or fails to comply with a direction issued under sub-section (2A) of that section], or
(c) having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143, the [Assessing] Officer, after taking into account all relevant material which the [Assessing] Officer has gathered, [shall, after giving the assessee an opportunity of being heard, make the assessment] of the total income or loss to the best of his judgment and determine the sum payable by the assessee [* * *] on the basis of such assessment :
[Provided that such opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment :
Provided further that it shall not be necessary to give such opportunity in a case where a notice under sub-section (1) of section 142 has been issued prior to the making of an assessment under this section.] [(2) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), shall apply to and in relation to any assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year and references in this section to the other provisions of this Act shall be construed as references to those provisions as for the time being in force and applicable to the relevant assessment year.]"
It is pertinent to note that that section 144 would suggest that in order to estimate income, learned Assessing Officer has to exercise his discretion which should be in consonance with best of his judgment. We are conscious of the fact that in various authoritative pronouncements, it has been propounded that in making a best judgment assessment, the Assessing Officer must not act dishonestly or vindictively or capriciously. He must make, what he honestly believe to be a fair estimate of the proper figure of assessment and for this purpose he must be able to take into consideration, local knowledge, Gopal Glass Works Ltd. Vs. ITO, Ahmedabad (5 appeals) 11 reputation of the assessee about his business, the previous history of the assessee or the similarly situated assessee. It is also pertinent to mention that judgment is a faculty to decide matter with wisdom, truly and legally. Judgment does not depend upon the arbitrary, caprice of an adjudicator, but on settled and invariably principles of justice. Thus, in a best judgment, even if, there is an element of guess work, it should not be a wild one, but shall have reasonable nexus to the available material and circumstances of each assessee.
14. Admittedly, the assessee did not press its ground challenging reopening of the assessment. Similarly, the assessee did not challenge the rejection of books of accounts. Thus, its profit has to be worked out on estimate basis. The area of dispute between the assessee and the Revenue is that the assessee has worked out total unaccounted sales on the basis of peak theory applied to the entries available in Annexure-A/7 books of account. As far as taking cognizance of Annexure-A/7, is also not disputed. In order to buttress its stand, the assessee has contended that this working has been accepted by the Settlement Commission for the purpose of levy of excise as well as for the purpose of income-tax in the Asstt.Years 2000-01 and 2003-04. The logic for giving this working is that Annexure-A/7 contained duplicate entries i.e. certain entries were recorded in the books as well as in Annexure-A/7. This document was prepared by an employee of Sagar Glass just to have estimated figure of profit on job work. The ld.CIT(A) found justification in this working. On the other hand, there is no reasoning given by the ld.Additional Commissioner, while giving instructions under section 144A. This instruction has been reproduced by the AO in para-5 of the assessment order. The ld.Additional Commissioner has nowhere mentioned as to why the working given by the assessee cannot be accepted. More so, he has not given any reasoning as to how the duplicate entries taken in Annexure-A/7 as well Gopal Glass Works Ltd. Vs. ITO, Ahmedabad (5 appeals) 12 as in the books, would be taken care. He simply treated Annexure-A/7 as gospel truth. On the other hand, the ld.CIT(A) has ironed out the anomalies or the error in the entries in an Annexure-A/7. We do not find any error in the finding of the ld.CIT(A) to this extent. The next aspect is application of net profit rate. On one hand, the assessee is armed with two sets of circumstances, viz. (i) net profit rate accepted by the Settlement Commission, after a discussion with both the parties, and secondly, average net profit rate as worked out on the basis of entries recorded in the books as well as as worked out in Annexure-A/7. The average in Annexure-A/7 is 3.44% of the entries mentioned therein. In our opinion, ends of justice would meet, if we apply net profit rate at 5% of the unaccounted sales accepted by the ld.CIT(A). The ld.AO is directed to re-work out the income of the assessee on the basis of 5% net profit rate on the sales worked out by the assessee and accepted by the CIT(A) in both these years.
15. As far as the appeal for the Asstt.Year 2004-05 is concerned, facts are identical. The ld.CIT(A) has worked out the total turnover of Rs.23,00,10,774/-. In this year also, we direct the AO to compute the net profit at 5% on this turnover.
16. As far as other grounds of appeal raised by the Revenue are concerned, we are of the view that in the decision of Black Diamond Trading Co. (supra), the Hon'ble Gujarat High Court has specifically observed that once the books of accounts are rejected, income of the assessee has been estimated by applying a net profit rate, then, there is no question to make the disallowance of expenses separately. Reason being that, once the books of accounts are unreliable, then, the expenses on the basis of those books cannot be claimed or disallowed. The determination of income by application of a net profit rate on an estimate basis would take care of this aspect. In view of the above Gopal Glass Works Ltd. Vs. ITO, Ahmedabad (5 appeals) 13 discussion, all the appeals of assessee in these three assessment years are partly allowed, whereas, the appeal of the Revenue for two assessment years are dismissed.
17. In the result, all the appeals of the assessee are partly allowed, and all the appeals of the Revenue are dismissed.
Order pronounced in the Court on 6th May, 2016 at Ahmedabad.
Sd/- Sd/- (N.K. BILLAIYA) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER