Income Tax Appellate Tribunal - Delhi
D.D. Kochhar And Sons vs Income-Tax Officer on 30 March, 1988
Equivalent citations: [1988]25ITD317(DELHI)
ORDER
Anand Prakash, Accountant Member
1. These appeals pertain to assessment years 1976-77 and 1977-78. The facts giving rise to both the appeals are common. They were, therefore, heard together and are being disposed of by a combined order, for the sake of convenience.
2. The assessee is a firm manufacturing full range horizontal single screw, semi-automatic plastic injection and rotary fully automatic machines. The accounting year of the assessee-company ends on 81st of March every year. In respect of asst. years under consideration, the ITO made additions of Rs. 19,763 in respect of asstt. year 1976-77 and Rs. 1,23,391 in respect of asstt. year 1977-78 on account of admittedly bogus purchases to the above extent having been debited to the respective trading accounts. The purchases in question of the various items, as detailed by the ITO in paragraph 1 of his order for asst. year 1977-78 and in the asst. order for asst. year 1976-77, had been admitted by the assessee as having never been made by the firm and so, according to the assessee, the question of the said purchases being reflec ted in the closing stocks or in the stocks pledged with the banks in any of the aforesaid two years did not arise. The assessee's plea, however, has been that the addition to the above extent on account of purchases having been inflated should not be made to the assessee's trading results because that would yield a gross profit rate in respect of asst. year 1977-78 of 28.9 per cent, which according to him, would be entirely disproportionate to the admitted gross profit position of the assessee in earlier and subsequent years. In this connection, the assessee filed a chart before us, being SI. No. 5 of the assessee's paper book, which indicated that, beginning from asst. year 1966-67 right up to asst. year 1985-86, the assessees declared gross profit had never been more than 18.5 per cent. The addition in question of Rs. 1,23,391 in assessment year 1977-78 could not therefore, be justified. At the best the assessee's trading results could be estimated taking into account the past and the future history of the assessee's case in terms of sales and gross profit position figures. The submissions of the assessee as contained in paragraph 29 of the submissions made by the assessee under Section 144B before the IAC may be noted in this connection as follows :
It is very difficult to say at this point of time as to how the Accountant manipulated and purchase side of the account books. Relevant books are with the ITO. It is anybody's guess. After all if these purchases in all accounting to Rs. 1,23,391 are completely taken out the resultant gross profit stands increased from Rs. 1,54,372 as per trading a/c by Rs. 1,23,391 to Rs. 2,77,963 on sales and job receipts of Rs. 9,61,225. This gives a G.P. rate of 28.9 per cent against gross profit of Rs. 1,14,811 of the preceding year on sales and job receipts of Rs. 7,90,380 which gives a G.P. rate 14.5 per cent similar figures for asst. year 1975-76 are :
Sales Rs. 5,75,070 Gross profit Rs. 68,656 G.P. rate : 11.9 per cent
It is apparent that the GP rate could not have gone up from 11.9 per cent in 1975-76 to 14.5 per cent in 1976-77 and to 28.9 per cent in 1977-78. It is thus a case of estimate of sales and GP rate, keeping in view the hook history of the case.
Similar plea was reiterated by the assessee in its letter dated 16-1.-1981 when the following submission was made by it before the IAC :
If these purchases are taken out, the GP rate goes up to 28.9 per cent which Is on the high side. It is for this reason that the asses-see-firm suggested to you at the time of hearing that it may be allowed to work out the cost of production of the items, which the assessee-firm purchased and sold in the year under assessment. It is a case where sales can possibly be estimated and a responsible GP rate may be applied to work out the gross profit. It may, however, be stated that sales are fully vouched and are verifiable.
3. The case made out by the assessee was that the above bogus entries in the books of account of the assessee had been made by the assessee-firm's Accountant Sh. M.M. Tora, who had tried to cheat the assessee-firm and against whom ultimately the firm did file a FIR with the Police alleging cheating and embezzlement of certain funds in October 1979. The mis-appropriations [mentioned in the aforesaid FIR were of coarse, different from the aforementioned purchases but the said FIR did bring out that the said Sh. M.M. Tora was trying to defraud the assessee-firm. The submissions made by the assessee on this point were, inter alia, as below :
Taking advantage of the confidence and innocence of the partners of the firm, he manipulated accounts of the firm. He did not record purchases faithfully and instead inserted various items of purchases which have been found to be fictitious...If the firm had even the least idea about these vouchers being fictitious, it would not have produced the same before the ITO...It is the trade practice in this line of business that payment against purchase are made within a short time from the date of their respective purchases. In these circumstances, no such payment was made and the credit balance of these parties were allowed to stand and carried over from time to time. It may be pointed out that M.M. Tora made a number of attempts of making payments to these parties but the proprietors were always insisting on issue of only a/c payee's cheques and, there was no occasion for him to get such cheques signed by the partners. These amounts remained unpaid except to the extent indicated above.
Earlier, the assessee had, made out that Sh. M.M. Tora had encashed two cheques of Rs. 5,000 and Rs. 2,000 respectively as the said cheques were issued bearer. The amounts thus withdrawn were debited to the accounts of Bhatia Iron Store and Narang Iron Syndicate, after Sh. M.M. Tora had resigned. In regard to these two items also, the assessee wanted to file an FIR against Sh. Tora but had not done so because, according to him, the asses-see-firm was handicapped for want of preparing proper details based on entries appearing in the books of account of the assessee, which were in the custody of the department. In a subsequent letter, the assessee tried to set up a case contrary to the submissions made above and alleged that Sh. Tora had embezzled the amounts in question and so the assessee claimed in his letter dated 14-5-1981. that the amount in question namely Rs. 1,23,391 should be allowed to the assessee as loss on account of embezzlement incidental to the business and, in this connection, the assessee relied on several authorities as detailed at pages 3 to 5 of the letter mentioned above.
4. The said submissions were rejected by the ITO by pointing out that as long as the fact remained that purchases to the tune of Rs. 1,23,391 had been inflated by making bogus entries of the goods purchased, the addition of Rs. 1,23,391 had to be made. The ITO did not deal with the assessee's second plea that the loss be allowed to him as embezzlement loss.
5. The assessee's appeal before the OIT(A) on this point did not succeed. The observations of the CIT(A) on this point were as below :
After going through the facts on record as well as the papers filed by the appellant firm during these proceedings, there is no doubt that the firm itself accepted that the purchases vouchers were fictitious. If the appellant firm felt that this must also have been embezzled by Sh. M.M. Tora then the appellant himself should have produced him as a witness or filed a FIR against him. Neither of the plea was taken during the course of asstt. proceedings, the appellant had not even produced the evidence to show that the relevant entries are in the handwriting of Sh. M.M. Tora. Since the appellant firm had not produced any evidence in connection of these amounts with Sh. M.M. Tora as embezzled by him, the addition made is sustained.
6. The assessee is in appeal against the aforesaid findings of the authorities below. The learned counsel for the assessee very fairly gave up the plea of loss by embezzlement before us. We had asked the assessee to place on record its balance sheets for the years under consideration and, from a perusal thereof, it appears and it was conceded to by the assessee, that, in the books of the assessee, when purchases account was debited by the entries referred to above on account of alleged purchases, the corresponding credits were passed in the respective accounts of the alleged suppliers and these accounts of alleged suppliers continued to be in the balance sheets of the company as on 31-3-1976 and 31-3-1977. This position is in fact clear from the copies of accounts of Bhatia Iron Store, Khalsa Iron & Steel Works, Narang Iron Syndicate appearing at page 2 of the assesses's paper book in paragraph 6 of the submissions made by the assessee before the 1AC in proceedings under Section 144B of the IT Act, 1961. The assessee had in fact admitted this much at page 4 of the above submission when it had written that M.M. Tora made a number of attempts of making payments to these parties but the proprietors were always insisting on issue of only a/c payee's only cheques and, there was no occasion for him to get such cheques signed by the partners and these amounts remained unpaid.... In view of the aforesaid factual position, the averment that the amounts to the extent of debits to the purchase account had been taken out of the firm's coffers and had been embezzled by Sh. M.M. Tora could not stand the test of reasoning and, therefore, very fairly the learned counsel of the assessee did not press this point before us and admitted in so many words that the amounts in question remained with the firm though Sh. Tora all the time intended to take them out as and when the opportunity would present to do so but up to 31-3-1977 such an opportunity could not be availed by him.
7. He nonetheless pleaded that once it was shown that the purchases of the assessee were bogus, the books of account of the assessee had to be discarded and the income of the assessee had to be estimated in terms of Section 145(2) of the IT Act, 1981 and for estimating such an income, we should take into account the relevant facts on record, namely, the past assessment history of the assessee and the history of the subsequent asstt. years, the consumption of electricity during the different years and should estimate the income of the assessee in the light thereof. The addition of Rs. 1,23,391 and of Rs. 19,763 could not have been made, for doing so would amount to accepting the assessee's books of account in all other respects except the purchases and this was not the manner in which profits had to be estimated under Section 145(2) of the IT Act, 1961. In support of the above submission the assessee's learned counsel relied upon the order of the ITAT in the case of Metro Electric Co. v. ITO placed at SI. Nos. 1 to 4 of the assessee'a paper book and on the following decisions of the various High Courts :
1. Jot Ram Slier Singh v. CIT [1934] 2 ITR 129 (All.).
2. CIT v. Laxminarain Badridas [1937] 5 ITR 170 (PC).
3. CST v. H.M. Esufali H.M. Abdulali [1973] 90 ITR 271 (SO).
4. Sree Shanmugar Mills Ltd. v. CIT [1974] 96 ITR 411 (Mad.).
5. Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SO).
8. On behalf of the revenue, the above submissions are resisted and it is submitted by the learned D.R. that there was nothing to show that the entries with regard to the bogus purchases had been made by Sh. MM. Tora. This fact was vividly brought out by the CIT(A) in his order, when he observed that the assesses had not proved this assertion by leading cogent evidence including one of Sh. M.M. Tora. According to the learned D.R., the assessee all along knew the bogus nature of the entries and yet did not declare them when he filed his original returns of income. He was forced to accept the bogusness of the entries in question on account of various enquiries made by the ITO. The Inspector of Income-tax went to the Sales-tax Department also to enquire whether the sales-tax numbers allotted against the various alleged suppliers of the goods were genuine and he learnt from the Sales-tax Department that no sales-tax number had been allotted to the parties in question. The results of these enquiries made by the ITO were communicated to the assessee and when he was confronted with this that he came out with the admission that the purchases were bogus. At no stage had the assessee taken the stand that its sales and closing and opening stock figures were wrong. In the circumstances, the ITO was justified in not disturbing the figures of sales or opening stock and closing stock, but correct the mistake, which had been detected in the form of inflation of purchases and to debit the trading account with the figures of actual purchases. The above state of the accounts of the assessee was material, which was relevant for making the assessment of the assessee and the ITO had duly taken that into account, it could not be said that there was any error in this procedure. Then, there was the balance sheet of the assessee, which indicated that the assessee's liabilities included certain bogus credits and as against the said credits, it was not that the assessee's corresponding assets were not existent. The assessee had all the assets witnessed by the balance sheets of the assessee as on 31-3-76 and 31-3-77. These balance sheets clearly indicated that bogus liabilities were standing therein to match the real assets and when this be the position, there could be no other option for the ITO but to make the impugned additions equivalent to the bogus credits on the liabilities side of the balance sheet.
9. We have carefully examined the facts of the case and the rival submissions. In his submissions before the learned IAC in the proceedings under Section 144B of the IT Act, 1961 the assessee had asserted that "sales are fully vouched and are verifiable" (the last sentence of paragraph 8 of the assessee's letter to the IAC under Section 144B appearing at SI. No. 15 of the assessee's paper book). The assessee had also admitted in the above submissions that the purchases in question were never reflected in the stock account of the assessee-firm, because these purchases were never made (see para 28 of the asses-see's letter to the IAC in proceedings under Section 144B placed at SI. No. 12 of the assessee's paper book). The trading account of the assessee for the asstt. year 1977-78 is appearing at page 15 of the assessee's paper book. From a perusal thereof, it is clear that the entries on the credit side of the trading account are fully vouched so far as sales and job work receipts are concerned and so far as the closing stock is concerned, its list has been filed by the assessee before the ITO and it is not the case of either sides that the said closing stock is in any way wrong. The bogus purchases debited to the purchases of the account are admittedly not forming part of the said closing stock as per the assessee's own admission. The ITO cannot, therefore, be blamed if he accepted what is verifiable from the figures available on record. His acceptance of the credit side of the trading account was, in our opinion, justified. Coming to the debit side of the trading account, the ITO did not dispute the payment of cartage, wages, machinery repairs, electricity expenses, labour charges and the figure of opening stock. He, however, found that the purchases were inflated. This fact was admitted by the assessee-firm unequivocally. He, therefore, adjusted these purchases by eliminating the bogus purchases, which were admitted by the assessee. In doing so, again, the ITO cannot be said to have acted wrongly. If he is not able to find any fault with regard to the payments of wages, labour charges, etc. and when it is also not the allegation of the assessee, that they are erroneous or inflated or that they have been understated, the ITO would not be acting against the material on record in accepting the correctness of the figures in question and adopting them, while finding out the real profits derived by the assessee from its trading during the year in question.
10. Apart from the above, there is another reason on account of which the addition in question cannot, in our opinion, be deleted. It represents the real income which is lying in the pocket of the assessee and which cannot, therefore, be ignored for the purpose of determining the assessee's real income. The false liabilities appearing in the balance sheet in the names of the false sellers are matched by concrete assets available with the assessee. When the assessee has the concrete assets in his pocket, the real nature of which have been camouflaged by false entries having been raised in the books of the assessee, note thereof has but to be taken in any attempt at determining the assessee's real income for the year under consideration. It is irrelevant for this purpose to go into the controversy as to who was responsible for debiting fictitious purchases to the assessee's accounts and raising fictitious corresponding credits in the balance sheet to give them a cover. The result of this action, whosoever might have been responsible, is that the assets of the assessee have exceeded to the above extent over the liabilities declared by the assessee. When there is increase in assets during the accounting period directly relatable with the fictitious debits to purchases, it would be totally unrealistic to leave the said excess of assets, which have resulted during the previous year, from the computation of the income for the year under consideration.
11. There is no quarrel with the proposition that the book results of the assessee have to be rejected, when the books are found to have been concocted. What is to be done after discarding the book results of the assessee ? It is to make the best judgment assessment in terms of Sub-section (2) of Section 145 of the assessee's real income. For this purpose, the reality on ground has to be taken into account, namely, the existence of the assets of the assessee and the existence of the false liabilities against the said assets. At no stage has this been suggested that the assets in question do not exist. Discarding the books of account does not mean that the real facts, witnessed by them should also be ignored. The transac-tions entered in the books may be real or false. Real transactions cannot be ignored merely because they have been entered in the books along with the false transactions. False transactions, if identified, have to be ignored and the real transactions, which are independently verifiable, can be taken into account. The estimate of income has to be so made under Section 145(2) that the assessee's real income will be brought to tax, in whatever way it is reflected, whether in the accounts or outside them. It may be camouflaged in the accounts themselves (1) in the form of the increase in the partners' capital accounts as per their declaration, or (2) in the form of fictitious liabilities. Once the reality is discovered it has to be taken note of. The resort to the estimate of gross profit and the estimate of sales is not the only method of computing the income of the assessee in every given situation. Resort to it is had (sic.) when circumstances so warrant. But when other parameters be available to make a more reliable estimate of income, they have to be taken into account. What method would yield the best result will have to be determined with reference to the facts of that case. In the present appeals, we have seen that, after examination of the accounts produced by the assessee, the ITO found correct the asseasee's assertion that the sales are all vouched and verifiable and that the closing stock of the assessee is also correct. When this was the factual setting, it would be unrealistic to direct the ITO that he should nonetheless estimate the assessee's sales at a figure different from what he finds to be correct. Similar will be the position with regard to the various expenses debited by the assessee. They have not been found to be false. The only item which was false was the purchases. The extent of falsity therein was also pinpointed. There was, therefore, no error in the ITO adopting correct figures of purchases and recasting the trading account on that basis. In any. case, whatever be the mode of computation of income by the ITO, it would not be correct for him to ignore the excess of the assets over liabilities of the assessee. Such assets are real and they are with the assessee. He has to take such assets into account, particularly when he finds that such assets are directly relatable to the creation of the said fictitious liabilities by debiting the purchases account and such assets in fact, in the above situation, go to increase the capital of the firm.
12. The argument of the assessee that if the income of the assessee is worked out in the aforesaid manner, the gross profit reflected thereby will be highly disproportionate to the assessee's past and future record is, in our opinion, without merit in the peculiar setting of facts of the present case. Here, we have the wealth statement of the firm in the form of its acknowledged assets. Against the said assets acknowledged liabilities have to be set off. The excess of the assets over the liabilities is the wealth of the firm and the same will constitute its capital. Rs. 1,23,391 and Rs. 19,763, the corresponding liabilities for which are fictitious, get thus reflected in the firm's capital. If this were not the actuality on the ground, resort to gross profit estimation might have been valid. But when it is shown that all that was inflated in the purchases is available with the assessee and is camouflaged in the balance sheet, it will be entirely impermissible to ignore this reality, while framing the best judgment estimate of the assessee's income, merely because by doing so the assessee's gross profit margin becomes much higher than in the past. There is no sanctity in the parameter of gross profit rate, which may never be violated. It has a guiding potential, if all other conditions remain the same. In contrast, there is sanctity in the principle that assets in pocket of a businessman will be his income, if they are acquired by falsifying purchases and creating fictitious liabilities in the books to camouflage such acquisition of assets. The former course may be resorted to if the latter fact had not been there. But when the latter fact be available, as it is in the present case, it will have to be taken into account for estimating the assessee's income. Ignoring it will be ignoring the reality and the tangible evidence of existence of the assessee's undisclosed income. No case law has been brought to our attention by the assessee's learned counsel which might stipulate as an invariable principle the proposition that once the books of account of an assessee are shown to have been falsified even on one specific issue, the only way to estimate the assessee's income under Section 145(2) is to resort to g.p. rate application on estimated sales and all the rest of the evidence, howsoever tangible and relevant it may be, must be ignored merely because the same has come in contact with the tainted books. If the other evidence is available and is independently verifiable and provides a much more realistic estimate of the assessee's income, it can and must be resorted to. No case law says that it cannot be done. Then, the g.p. rate in earlier and later years has been accepted by the revenue because in those years events as in the present years, were not detected. Once these events are detected and they go to show positively that there is not only inflation of purchases, but there is creation of assets to the corresponding extent with no corresponding liability, the issue is, in our opinion, clinched, namely, that there has been understatement of income to the corresponding extent. The assessee's learned counsel has not been able to show that there was any other compensating error in the accounts anywhere else. Detailed submissions have been made on behalf of the assessee from time to time before the authorities below and, at no stage, has there been even the slightest suggestion that there was any compensatory error in the accounts. The learned counsel for the assessee cannot, therefore, be allowed at this stage merely to speculate on this probability. Balance sheet is prepared with reference to assets and not in vacuum and it has not been the assessee's case at any stage that any of the assets shown in the balance sheets in question did not exist. The speculative plea of the assessee's learned counsel on this account cannot, therefore, be entertained.
13. For the reasons given above, we confirm the additions made by the ITO.
14. In respect of asstt. year 1976-77, there was one additional ground of appeal regarding Rs. 5,600 having been added to the assessee's total income in terms of Section 41(1). The ITO found in the list of sundry creditors credit of Rs. 5,600 in the name of M/s Ambassador & Co. On enquiry it was revealed to the ITO that the purchase in question from the said party was made on 25-1-1972. That the said party did not collect the above amount from the assessee and so, according to the assessee, the amount in question remained outstanding with it during the aforesaid period, i.e., 25-1-1972 onwards up to corresponding to asstt. year 1976-77. The ITO, on the above facts, held that the amount was assessable in the hands of the assessee as such liability had not been claimed by M/s Ambassador & Co. On appeal, the learned CIT (Appeals) has sustained the above addition. Prima facie, the above addition is not sustainable for the reasons given by the authorities below, because the credit balance existing in the name of Ambassador & Co., not claimed by the said company for more than three years, which ended in January 1975, would not ipso facto cease to be the liability of the assessee. We, however, find that at page 7 of the assessee's paper book, a submission in writing was made by the assessee to the IAC (Asstt.) that Rs. 5,600 was the purchase made by the assessee from Ambassador & Co. during the previous year under consideration Copy of the account of Ambassador & Co. given in paragraph 6 of the said letter also shows that the said purchase was made in March 1976. It is further the assertion of the assessee that the said purchase was in fact never made and that the purchases were inflated to the above extent in respect of asstt. year 1976-77. Following submissions made by the assessee in the aforesaid context assume relevance :
There are purchases in the earlier year ending 31-3-1976 as well which are apparently not genuine-
Rs.
Bhatia Iron Stores 19,763 M/s Ambassador & Co. 5,600 Copies of accounts of the parties thus named are as under : ....
In the context of the above averment, the matter deserves to be given a second look. It is possible that the aforesaid amount is different from the amount considered by the ITO but from the copy of the account filed by the assessee, the above position does not appear to be so. In the absence of correct facts, we find it difficult to adjudicate on this controversy properly. We, therefore, consider it in the interest of justice to set aside the orders of the authorities below on this point and restore the matter back to the ITO for examining the facts. If the addition made by him is with regard to purchase made some time in 1972 and not claimed by Ambassador & Co. and yet outstanding as on 31-3-1976, there would be no justification to make the impugned addition. But if, however, the date in question has been wrongly given and the real date is March 1976 as comes out from the submissions of the assessee referred to above, the nature of the entry assumes a different colour and it will be for the ITO to adjudicate upon it in the light of the law and the submissions made before him by the assessee. We, accordingly, restore the matter back to the ITO on this point. The other grounds of appeal namely ground Nos. 6, 7 & 8 were not pressed before us.
15. In the result, the assessee's appeal for asstt. year 1976-77 is partly allowed, whereas the appeal for asstt. year 1977-78 is dismissed.
U.S. Dhusia, Judicial Member
1. I have gone through the order of the learned Accountant Member but even after great mental persuasion, I am not able to accept the approach of the revenue that the facts of the case warranted a mere add back of unvouched expenses without taking into account the one aspect arising from the unusual rise in rate of gross profit after disallowing the purchases given below :
Sl. No. Name of the party from which Bill Date Amount
the purchases are alleged to- No.
have been made
Rs.
1. M/s Bhatia Iron Store, 16720 25-9-76 36,059.60
12143-Kabar Mandi
2. M/s Navrang Iron Syndi
cate, 11628, Lohamandi,
Motia Khan, Rani Jhansi
Road, New Delhi 32318 15-10-76 33,911.80
3. -do- 36482 9-12-76 7,300.00
4. M/s Khalsa Iron & Steel
Works, Plot No. 42, Opp.
Gali No. 4, near Anand Par-
bat, New Rohtak
Road, New Delhi 23145 9-11-76 38,419.40
5. -do- 23733 7-12-76 7,618.00
___________
1,23,390.00
___________
2. No doubt, these purchases as recorded in accounts have been admitted by the principal partner Mr. H.R. Kochhar to be bogus. I may add further that in this connection to keep himself out from liability arising for the corresponding entries in the account, he made out that being an illiterate person, he allowed his accountant Sh. M.M. Tora to maintain accounts and that it was he who had caused these false entries to be made in the account books. It was further added by him that Mr. Tora had been accused of at least two instances of misappropriating funds of the firm by drawing two cheques dated 15-3-1979 and 29-10-1979 for Rs. 17,000 and Rs. 2,000 respectively aggregating to Rs. 20,000. He further had submitted that the first information report had been filed for drawing funds for the two fictitious payments and that the ITO in his submissions was quite correct in spotting out that the 5 afore said purchasers were not tick marked by the auditor who had audited the account. It was for this reason the learned counsel for the assessee-firm Mr. Harnam Shanker claimed that the account written by Mr. M.M. Tora being unreliable should be ignored and the provision contained in Sub-section (2) of Section 145 was to be applied to work out the reasonable profit of the trading operation carried on during the years. Judicial Member Mr, Vyas who was one of the Members of the earlier Bench constituted to dispose of the appeal by an order dictated by him was also of the view that the books being unreliable recourse to Section 145(2) was to be made to determine the profit of the trading operations.
3. This approach put forward by the assessee and on his behalf by the learned counsel representing him has been countered by the revenue, the ITO as well as the CIT(A) who found that except for the aforesaid 5 entries of purchases, the accounts were verifiable and correct. In para 6 of the order of the learned Accountant Member, it was observed as under :
The trading account of the assessee for the asstt. year 1977-78 is appearing at page 15 of the assessee's paper book. From a perusal thereof, it is clear that the entries on the credit side of the trading account are fully vouched so far as sales and job work receipts are concerned and so far as the closing stock is concerned, its list has been filed by the assessee before the ITO and it is not the case of either sides that the said closing stock is in any way wrong. The bogus purchases debited to the purchases of the account are admittedly not forming part of the said closing stock as per the assessee's own admission. The ITO cannot, therefore, be blamed if he accepted what is verifiable from the figures available on record. His acceptance of the credit side of the trading account was, in our opinion justified. Coming to the debit side of the trading account, the ITO did not dispute the payment of cartage, wages, machinery repairs, electricity expenses, labour charges and the figures of opening stock. He, however, found that the purchases were inflated. This fact was admitted by the assessee-firm unequivocally. He, therefore, adjusted these purchases by eliminating the bogus purchases, which were admitted by the assessee. In doing so, again, the ITO cannot be said to have acted wrongly. If he is not able to find any fault with regard to the payments of wages, labour charges, etc. and when it is also not the allegation of the assessee, that they are erroneous or inflated or that they have been understated, the ITO would not be acting against the material on record in accepting the correctness of the figures in question and adopting them, while finding out the real profits derived by the assessee from its trading during the year in question.
4. The learned D.R. also certified that except for the aforesaid 5 entries of purohases, other entries were verifiable and correct. The villains of the situation, according to him, were only the 5 purchase entries vouchers which could not be verified by the ITO who had caused his Inspector to be sent to enquire about the concerns from which the alleged purchases were claimed to have been made. The assessee-firm had also accepted that these entries were not correct and that the aforesaid purchases as entered in the account had not been made.
5. It is just here the crux of the question arises as to what treatment should be accorded to the 5 purchase entries, aggregating in value to Rs. 1,23,391 would it answer the needs of the situation squarely if a straight disallowance of the claim for deduction of purchase for Rs. 1,23,391 it made and a corresponding addition is caused to the profit shown or in the alternative as proposed by the learned counsel for the assessed to disregard the account altogether which on account of 5 unvouched purchase entries are unreliable and recourse to the provisions contained in Sub-section (2) of Section 145 of the IT Act is called for to make reasonable and fair estimate of profit.
6. We examine first the stand of revenue in the matter. The revenue undoubtedly seeks the disallowance of the unvouched purchases and the consequent add back of Rs. 1,23,391 to the profit disclosed in the account.
7. The assessee-firm is a manufacturer of horizontal single screw, semi-automatic plastic injection and rotary fully automatic machines, etc. He has, in this connection, furnished a table appearing on page 5 of the paper book containing trading results for 20 years comprising of both preceding and subsequent years right from assessment year 1965-66 to assessment year 1935-86. It will be noticed that the trading in assessment year 1965-66 comprised of a turnover to Rs. 77,000 and odd on which a gross profit rate of 7.70 per cent was worked out. It was accepted and no addition was made. The turnover rose gradually year after year to a turnover of Rs. 13,00,000 and odd in asstt. year 1983-84 when a gross profit rate of 16.89 per cent was registered. In the following assessment year 1984-85, the turnover shot up to Rs. 17,00,000 and odd on which a gross profit rate of 14.94 per cent or 15 per cent were shown. In the year in the issue, that is assessment year 1977-78, his turnover is Rs. 9,54,305 on which a gross profit rate of 16.20 per cent is shown. As far as turnover and gross profit rate are concerned, the trading results of the year marks out an year of improvement on both fronts both in turnover and gross profit rate. The ITO accepted the trading results to be fair and reasonable and did not adversely comment upon either as he had accepted the trading results in the preceding years which were not as good as in these years. Viewed in this background, can we detect any deficiency of any kind in the trading results to hold or entertain that the profits disclosed in accounts was not reflecting correct or rather reasonable profit and needs to be raised to 29 per cent by making an add back of unvouched purchases of Rs. 1,23,391. The addition would have the effect, we repeat, of raising the gross profit rate to 29 per cent against the highest gross profit rate shown in account of last 15 to 20 years. No material has been brought on record to show that the trading of the year in issue was in any way different from the trading of the last 20 years to warrant adoption of the gross profit rate of 29 per cent.
8. The primary aim of assessment is not to cause add back for infirmity in the accounts but make a reasonable and fair determination of profit only. It is from this consideration that an ITO has been given powers to undertake the enquiry and make the assessment of the profit. The main objective of examination of accounts and assessment is to bring out and determine a fair and reasonable estimate of profit. Proceeding from this angle it does not follow that one can justify the adoption of gross profit rate at 29 per cent on the facts and in the circumstances of the case by merely adding the value of the unvouched expenses of Rs. 1,23,391 and ignore the history of the business altogether in making the assessment of the fair and reasonable profit. In my view, there must be some material brought on record to justify the adoption of gross profit rate of 29 per cent for the trading of the year. Detection of unvouched expenses is not enough when the history of the business shows that its gross profit rate in the last 20 years comprising both of preceding and subsequent years have never gone over 16 per cent and revenue has never found that the gross profit rate shown by the assessee was not fair. It is not the case of the ITO either that the trading results shown by the assessee called for an adverse view.
9. Although, on the one hand, we have the five purchase entries of the year totalling at Rs. 1,23,391, on the other hand, we have the trading results of the twenty year in view to consider. In my consideration, we would not be justified in rejecting the trading results of 20 years in relying only on the 5 purchase entries of the year to determine the profit of the year and adopt a gross profit rate of 29 per cent. There can be several reasons for debiting the accounts with fictitious reasons. One reason which is, however, not the case here can be to bring down the rate of gross profit as the gross profit shown by the assessee during the year is found to be reasonable and fair. This could not be surely the objective which could have obliged the assessee to cause the aforesaid entries of purchases which could not be vouched or verified. It is a fact of life and of commerce which cannot be denied that there are two markets prevalent in this country from which consumers and producers make purchases-the open market and the closed market referred to as the black market. Normally, purchases are made from the open market but occasionally the purchases have to be made from the other market for which no vouching is possible. There is a consensus on both sides that none of the purchases as detailed in the beginning of the order amounting to Rs. 1,23,391 were ever made. Therefore, one is prompted to raise a second query, if the aforesaid purchases as are entered in the account books were not made is it open to doubt the reality of such purchases in fact which enabled the assessee to manufacture the various articles and ensure the turnover shown, on the facts and in the circumstances of the case. In other words, if the aforesaid purchases detailed in the accounts were not made how was it that the assessee could manufacture the articles which were sold and whose sale proceeds formed a part of the turnover. Various constituents were used for manufacturing the articles whose disposal constituted the turnover of the assessee-firm. Without using the constituents, it could not have been possible for the appellant firm to manufacture the various articles and dispose them of. I am fully conscious of the fact that consumption of such constituents does not find and support from the 5 unvouched purchase entries nor from the stock register maintained by the assessee-firm. Yet I am unable to entertain the view that the assessee-firm could manufacture the articles produced without the consumption of the constituents. As already pointed out, it is a fact of life in the world of commerce and business as indicated above that a businessman has to make purchases both from the open market and also from the closed ma.rket to obtain his supply. Without making such purchases from both markets, the assessee could not have maintained either his turnover or the rate of gross profit. It was from the closed market that purchases referred to appear to have been made. This derives support from the fact that although Mr. M.M. Tora on whose shoulders the assessee-firm shifted the responsibility for making the false entries caused those entries to be made in the accounts to enable the payment to these incognito suppliers by drawing fictitious bills. There is further support available from a careful consideration of these fictitious entries themselves. Both revenue authorities, the ITO and the CIT(A) testified that no cheque had been issued to make payments to the suppliers in the accounting period in issue. The omissions of the bills although indicate that payment of such amounts normally could be made only by cheques the failure to make payment of these bills in the year in appeal and afterwards by cheques does indicate that entries were most probably made to facilitate withdrawals of such amounts in future to make the payments for the constituents. For the view that purchases were from such supplier who wanted to be incognito, there is another circumstance also which supports the proposition. Both the lower authorities noticed that after the First Information Report, had been filed by the assessee-firm regarding earlier embezzlement of funds aggregating to Us. 17,000 on 29-10-1979, there is nowhere a finding that in respect of these embezzlements or about the 5 fictitious entries, any action under criminal procedure was initiated by the assessee-firm against Sliri M.M. Tora, who was the alleged author of these entries and who had embezzled the funds of the assessee-firm. Mr. Kochhar did not fail to attribute to Mr. M.M. Tora, the responsibility for making the fictitious entries as he did not fail to charge him with misappropriation of funds. Yet he did not cause any action at criminal law to be taken against him. In this respect, the ITO appears to be right that Mr. Kochhar was in the know of the entries and what they were to accomplish as the entries were to enable the assessee for making payment in future for purchases which although unvouched, were real and genuine purchases. He, therefore, in the circumstances, thought it wiser to keep quiet and take no further action than foisting blame on the shoulders of Shri M.M. Tora.
10. We have already indicated that the learned counsel for the assessee had contended that his account books being unreliable attracted the application of Sub-section (2) of Section 145 of the Act. In my opinion, the approach was not unreasonable. The aim of assessment as I have already brought out is to enable the ITO to make a reasonable and fair determination of profit and not merely cause an add back for the infirmity of the account. The revenue has testified that but for 5 purchase entries all entries in accounts are correct and verifiable. Shall we be justified in calling the accounts correct and complete and avoid the application of Sub-section (2) of Section 145. If we cannot call the accounts correct and complete recourse to Sub-section (2) of Section 145 cannot be avoided. A mere add back on account of 5 unvouched entries without understanding the true import will not answer the needs of the situation towards the objective of determining fair and reasonable profit as brought out above. But the application of Sub-section (2) of Section 145 needs the issue to be sent back to ITO for re-examining the matter and recording a fresh finding. Whatever has been brought up in the above analysis about the reality of consumption of constituents to achieve the turnover and maintain the rate of profit and the possibility of purchases having been made not from the open but from the closed market also calls for re-examination of the issue and recording of a fresh finding. Therefore, I would vacate the finding of the lower authorities made without understanding the true import of the five unvouched entries and, therefore, based on mis-appraisal of facts. It is fair also to both parties that they approach the subject-how to deal with the five unvouched entries-after making a proper appraisal of facts. The Tribunal should not jump to a conclusion at this stage and repeat the same error which lower authorities have already done by jumping to a finding without understanding the true purport of the entries. I, therefore, vacate the finding of both the authorities and direct the ITO to record a fresh finding after making a proper appraisal of facts in the light of the observation made by the Tribunal.
11. In the result, appeals shall be considered allowed only for statistical purpose.
As Per Bench
1. As it has not been possible for us to come to an agreed conclusion in the present appeals, we refer the following question for the valued opinion of the Hon'ble Third Member :
Whether, on the facts and in the circumstances of the case, the CIT(Appeals) was justified in sustaining the addition of Rs. 1,23,391 representing five entries of unvouched purchases ?
THIRD MEMBER ORDER G. Krishnamurthy, President
1. In this case the Members of Delhi Bench 'A' of the Income-tax Appellate Tribunal as then constituted could not agree upon the conclusion to be reached. Hence, the point of difference of opinion that arose between them was referred to the President to nominate a Third Member. As I nominated myself as a Third Member, the matter has come before me for my opinion. The point of difference of opinion is :
Whether, on the facts and in the circumstances of the case, the CIT (Appeals) was justified in sustaining the addition of Rs. 1,23,391 representing five entries of unvouched purchases ?
2. Actually there are two years involved, namely, assessment years 1977-78 and 1978-79 in ITA Nos. 804 and 3192 (Delhi) of 1984. In both these years the additions made by the Income-tax Officer though of different amounts, concern the same point. The addition involved in the assessment year 1977-78 was Rs. 1,23,391 and the addition involved in the assessment year 1976-77 was Rs. 19,763. Though both these appeals were heard together and a combined order was passed, the difference of opinion related to both these items, in the difference of opinion that was referred to the Third Member only the figure relating to the assessment year 1977-78 was mentioned and perhaps by mistake, the figure relating to the assessment year 1976-77 was not mentioned. This was brought to my notice during the course of hearing of this Third Member reference by the learned counsel for the assessee. As a Third Member I thought my powers are limited to expressing my opinion only on the point referred to me and not enlarge it even though the mistake is very apparent from the difference of opinion. However, since the points involved for both these years are identical, the opinion I express with regard to the assessment year 1977-78 can, if the Bench so considers, be regarded as covering the assessment year 1976-77 also and the Bench may like to dispose it of on that basis. With these preliminary observations, I now proceed to narrate the facts of the" present case, which gave rise to this Third Member reference.
3. As I mentioned earlier, these appeals relate to assessment years 1976-77 and 1977-78 and relate to a firm manufacturing horizontal single screw, semi-automatic plastic injection and rotary fully automatic machines. The accounting year of the assessee is the financial year ending with 31st of March every year. In the assessment year 1976-77 the Income-tax Officer noticed that the assessee made purchases during the year from one Bhatia Iron Store amounting to Rs. 19,763. No purchase vouchers were produced before him. The Income-tax Officer also noted that M/s Bhatia Iron Store was a bogus firm. The Income-tax Officer, therefore, concluded that the purchase recorded by the assessee was bogus and treated the same as income of the assessee from undisclosed sources and added as such. In the assessment year 1977-78 also the Income-tax Officer found that the assessee made purchases from the following parties, which were admittedly bogus in the sense that neither the parties did exist nor purchase vouchers were produced :
SI. No. Name of the party Bill No. Date Amount
1. M/s Bhatia Iron St- 16720 25-9-1976 36,059.60
ore, 12143, Kabar
Mandi
2. M/s Navrang Iron
Syndicate, 11628,
Lohamandi, Motia
Khan, Rani Jhansi
Road, New Delhi 32118 15-10-1976 33,911.80
3. -do- 36482 9-12-1976 7,381.00
4. M/s Khalsa Iron &
Steel Works, Plot
No. 42, Opp. Gali
No. 4, Near Anand
Parbat, New Rohtak
Road, New Delhi 23145 9-11-1976 38,419.40
5. -do- 23733 7-12-1976 7,618.00
___________
1,23,390.80
The Income-tax Officer examined on oath one of the partners of the assessee Shri H.R. Kochhar, who admitted that the goods relating to the above purchases were never received by the assessee-firm and that the sellers were bogus and non-existing. The Income-tax Officer also noted that in the purchase account, these purchases appeared at the end of each page. The partner also admitted before the Income-tax Officer that he came to know about the bogus nature of the purchases only when the books of account were impounded by the Income-tax Officer in March 1980. It was stated that the partners of the firm not knowing accounts relied entirely upon the accountant Shri M.M. Tora and that he made those entries with a view to misappropriate the funds at an appropriate and proper time and that the partners came to know that the said accountant encashed cheques for about Rs. 20,855 but accounted only for Rs. 18,855, thus misappropriated Rs. 2,000 which was debited to his account and embezzled funds in some other cases, that no FIR was lodged as it was thought useless. After stating that as a reason for the innocence of the partners, it was pointed out before the Income-tax Officer that the gross profit shown by the assessee was more than fair and compared to the gross profit shown in the earlier years and if these amounts were added to the trading account, the gross profit would shoot up to 28.9 per cent, which according to any standard is abnormal and therefore even though these purchases were bogus, no addition should be made to the income disclosed all because the gross profit rate disclosed was otherwise fair and reasonable. Rejecting these contentions as of no consequence and holding that the rate of gross profit was not an unalterable percentage and would vary from year to year depending upon the market conditions and that in any case a rate of 29 per cent should not be considered high in a manufacturing operation, the Income-tax Officer added the sum of Rs. 1,23,391.
4. Aggrieved by these additions, the assessee appealed to the Commissioner (Appeals) and repeated the same contentions. The Commissioner (Appeals) agreed with the Income-tax Officer and dismissed the appeal with the following observations :
After going through the facts on record as well as the papers filed by the appellant firm during these proceedings, there is no doubt that the firm itself had accepted that the purchase vouchers were fictitious. If the appellant firm felt that these amounts also had been embezzled by Shri M.M. Tora, then the appellant himself should have produced him as his witness or filed a FIR against him. Neither of the plea was taken during the course of assessment proceedings. The appellant has not even produced evidence to show that the relevant entries are in the handwriting of Sh. M.M. Tora. Since the appellant firm has not produced any evidence relating to these amounts with Shri M.M. Tora as embezzled by him, the addition made is sustained.
For the sake of completeness, I may mention that for the assessment year 1976-77 the addition made of Rs. 19,763 under similar circumstances was confirmed by the Appellate Asstt. Commissioner, following the order of the Commissioner (Appeals) passed for the assessment year 1977-78.
5. Thereafter a further appeal was filed before the Tribunal by the assessee urging that the confirmation of these additions by the Commissioner (Appeals) was wrong. One of the objections taken before the Tribunal was that the Commissioner (Appeals) should have summoned the prime witness Shri M.M. Tora even though a request to that effect was made before him was not acceded to inasmuch as, the examination of Shri M.M. Tora would reveal as to how these purchases came to be entered in the books of account and with what motive. The other pleas taken before the Tribunal were that these entries were made by Shri M.M. Tora with a view to embezzle the assessee's funds and that the assessee was innocent of these entries and that no addition should have been made on that account to the income of the assessee. It was further pointed out that as the rate of gross profit in any case being very fair and compared reasonably with the rate of gross profit shown and accepted in the earlier years, no addition should have been made on account of these purchases, which had pushed up the rate of gross profit to a very high percentage, which was abnormal and unattainable in a business of this kind. Another ground taken before the Tribunal was that even though the purchases were not supported by the purchase vouchers, the purchases were not fictitious and that the goods actually formed part of the manufactured goods and were therefore reflected either in sales or in closing stock and therefore no addition should be made separately for it.
6. The matter was heard by a Bench of the Tribunal and after hearing and reserving the orders, as one of the Members who heard the appeals happened to retire, the case was reposted for hearing and another Bench heard the matter. The learned Accountant Member was common to both the Benches. This Bench heard the matter for quite sometime but could not come to an agreed conclusion. After hearing the parties and considering the arguments addressed and the facts of the case the learned Accountant Member came to the view that there was nothing more for the assessee to argue in this case when it accepted unequivocally that these purchases were never made and that they were bogus and that the material was never received, the amount clearly resulted in the inflation of purchases and reduction in income and therefore the addition was rightly made. He did not find merit in the argument addressed based upon the resultant higher rate of gross profit. He held that the rate of gross profit was only a mean to arrive at the income and merely because the rate of gross profit happened to be higher, that by itself could not preclude adding back the inflation in purchases to the extent it was found and admitted by the parties.
7. The learned Judicial Member, on the other hand, proceeded on the basis that the resultant gross profit had a definite role to play in deciding" whether the amount found as inflation of purchases was to be added or not. The presence of unvouched purchases like in this case, might attract the provisions of Section 145 and if Section 145 was attracted, the course that was open to the Income-tax Officer then was to estimate the income and that has to be done with refereuce to the rate of gross profit shown and adopted in the earlier years and the estimate of the income should not be such as to shoot up the gross profit to an unattainable rate. He was also of the opinion that these goods were manufactured by the assessee and were accounted for in the sales and that would not have been possible, had the assessee not purchased these goods, which would then mean that these purchases were only unvouched but not fictitious. He then held that since the application of subSection (2) of Section 145 was resulting in a very high rate of profit, the matter needed to be sent back to the Income-tax Officer for ra-examination of the matter and recording a fresh finding. He held:
But the application of Sub-section (2) of Section 145 needs the issue to be sent back to ITO for re-examining the matter and recording a fresh finding. Whatever has been brought up in the above analysis about the reality of consumption of constituents to achieve the turnover and maintain the rate of profit and the possibility of purchases having been made not from the open but from the closed market also calls for re-examination of the issue and recording of fresh finding. Therefore, I would vacate the finding of the lower authorities made without understanding the true import of the five unvouched entries and, therefore, based on mis-appraisal of facts.
He therefore vacated the findings of the authorities below and directed the Income-tax Officer to record a fresh finding after making proper appraisal of the facts.
8. As I have already mentioned the learned Accountant Member was of a totally different opinion. After narrating the facts of the case and quoting from the orders passed by the Inspecting Asstt. Commissioner under Section 144B and after referring to the assessee's arguments, replies filed and the arguments addressed before the Bench, the learned Accountant Member took the view that the assessee admitted in unequivocal terms that these purchases were never made, the goods were never received by the assessee and in those circumstances, the addition to that extent had got to be made even if it results in enhancing the rate of gross profit to a much higher figure than shown and accepted in the earlier years, It was on account of this difference of opinion, the learned Members drew up the point of difference of opinion as stated above and submitted it to the President for the opinion of the Third Member.
9. Shri O.P. Dua, the learned counsel for the assessee submitted that this case was originally heard by a Bench consisting of Shri Anand Prakash and Shri D.D. Vyas, that Shri D.D. Vyas wrote the order and forwarded it to Shri Anand Prakash for his perusal and signature, that Shri Anand Prakash kept the order deliberately with him till Shri D.D. Vyas retired and that the delay committed by Shri Anand Prakash has resulted in the case being posted again for a fresh hearing. The order passed by Shri D.D. Vyas was on the file where he accepted the assessee's contention. If those views are counted, then it would mean that as against one Accountant Member, two Judicial Members have accepted the assessee's contentions and that being a majority view, the matter should be decided in favour of the assessee following that majority view or in any case the view expressed by Shri D.D. Vyas, must be directed to be considered by the Bench or at least must be considered by the Third Member. Secondly it was contended that neither the Income-tax Officer nor the Commissioner (Appeals) had found fault with the method of accounting adopted by the assessee except in regard to these five purchases even though those purchases were not supported by purchase vouchers nonetheless they were purchases made and should not be ignored merely on the ground that they were not supported by vouchers. The method of accounting employed not having been found fault with, should not have been discarded. Even if it is discarded, Section 145(2) of the Income-tax Act was attracted. When Section 145(2) was attracted, the only course open to the department was to estimate the income and in so doing, the Income-tax Officer must have regard to the rate of gross profit shown and accepted in the earlier years and could not make an addition in such a way as to push up the rate of gross profit to a very high figure, which was unattainable and unthinkable in this line of business. The argument was that the reasonable rate of gross profit disclosed should be considered that all the purchases including these unvouched purchases were those made in the ordinary course of business and no addition was called for more so when the rate of gross profit that would result by the addition of this unvouched purchases would push the rate of gross profit to such a figure, which was never comparable. He placed reliance upon an order of the Tribunal, where under similar ciroumstances the Tribunal held that in such circumstances only the rate of gross profit should be estimated and the addition should not be confined to the items found to have been inflated. He further submitted that when the assessee was stating that it was on account of the misbehaviour of the accountant that these purchases came to be debited in the accounts, the accountant should have been examined to find out the truth. Without examining the accountant, it cannot be said that the truth was established. This factor vitiated the assessment. Secondly the high gross profit syndrome, which according to him, proved that no addition was called for and thirdly the Income-tax Officer should have verified the consumption of materials along with the cost of consumption to ascertain whether they compared favourably with the figures in the earlier years and only in case such a comparison revealed any abnormality, an adverse view against the assessee could be drawn. Placing reliance upon the order of the learned Judicial Member, which according to him is identical to the views expressed by Shri D.D. Vyas, who retired, the course adopted by the department of adding back these purchases should be discarded and addition should be made only by estimating the rate of gross profit at a reasonable rate comparing favourably with the rate of gross profit shown and accepted in earlier and subsequent years.
10. The learned Departmental Kepresentative, on the other hand, contended that both the learned Accountant Member and the learned Judicial Member agree that the purchases were never made. They also agree that materials never came to the assessee's premises. In any case this was the admission made by the assessee before the authorities below. The authorities below proceeded on the basis of this admission. In such an event there is no possibility for the presumption or any supposition that the material was received by the assessee, underwent the process of manufacturing, produced saleable goods, which were sold and included in the turnover. The supposition made by the learned Judicial Member is against the record and should not be considered at all as a fact found. There is no such thing as a ceiling of rate of gross profit in order to compute the income. If the Income-tax Officer finds on examination of accounts that some purchases were inflated, then it must be held that the method of accounting employed by the assessee was such that true profits could not be deduced therefrom. It is then the duty of the Income-tax Officer to compute the income on such basis and in such manner as he determines. By Sub-section (2) of Section 145, he has been specifically empowered where he is not satisfied about the correctness or the completeness of the accounts to make the assessment in the manner provided in Section 144. Section 144 empowers the Income-tax Officer to make the assessment to the best of his judgment after taking into account all relevant material, which the Income-tax Officer has gathered. This means that on the basis of the materials gathered, namely, inflation of purchases, the Income-tax Officer had come to the conclusion that the method of accounting employed by the assessee was such that it is not correct and complete. Therefore he has to fall back upon Section 144, which permits him to make a best judgment assessment. In that process it is open to Mm to make the assessment to the best of his judgment, which includes either confining the addition to the extent of inflation found, keeping the inflation in view estimate the gross profit in such a way as to cover the inflation. Having found inflation, he cannot stop from making the addition of the inflation in purchases by looking to the reasonableness of the rate of gross profit. The assessment made by the Income-tax Officer on the facts of this case can be said to be an assessment made on the basis of admission because the partners admitted before the authorities below that these purchases were inflated and fictitious. In a case of this nature, no other argument can either be advanced or countenanced other than the addition to the book results the extent of the purchases found to be fictitious. She also placed reliance upon a judgment of the Karnataka High Court in the case of IAC v. Laxmichand [1986] 159 ITR 730 as against the reliance placed upon on behalf of the assessee on the cases in Laxrninarain Badridas (supra), State of Kerala v. C. Velukutty [1968] 60 ITR 239 (SC) and 8 STC 770.
11. I have considered the arguments very carefully, perused the records and I did not find any difficulty in agreeing with the view expressed by the learned Accountant Member. In a way this can be said to be a case where assessment was made on admission basis. It is no doubt true that the assessee after admitting before the authorities below that these purchases were fictitious, bogus and material was never received in the premises, made a submission that these entries were made by the accountant with a view to falsify the accounts and later withdrew the money and misappropriated or embezzled. These purchases were said to be credit purchases. Whenever the accountant made an attempt to make payments of these parties in cash, the partners objected to it and insisted upon payments being made by account payee cheques. All this might mean that the accountant might have entertained an evil and malacious motive to defraud the assessee for his gain. The assessee might also have succeeded in foiling his terms in withdrawing the money from the books in the guise of payments to those parties. But the fact remains that the trading accounts of the assessee was debited with fictitious purohases, which resulted in suppressing of profits. The Revenue's concern is with the profit shown but not with the motive and as to how the entries were made in the trading account, which resulted in deflating the profits. The assessee is trying to put forward the motive of the accountant to deflate the profits. That may be a reason, may be valid for the purpose of penalty or for the purpose of internal consumption but the effect of it has to be seen on the income so far as the purpose of Revenue is concerned. The assessee is putting forward that motive as a cover or a reason not to locate the effect of the implementation of that motive. The effect of that is suppression of profits. The assessed clearly admits, so also the advocate before me that this has resulted in the inflation of purchases and corresponding suppression of profits. Therefore the proviso to Section 145(2) is clearly attracted. The dispute now is only as to what should be done thereafter. Whether the addition to be made should be confined to the amount of the inflation in purchases found or no addition should be made on account of the inflation all because the rate of gross profit was reasonable. When the Income-tax Officer finds that the method of accounting of the assessee was incorrect and incomplete, he is empowered to make a best judgment assessment and to bring the income to the correct levels by making an addition as to off-set the effect of inflation in purchases.
12. To neutralize the effect of inflation in purchases, the only course open to the Income-tax Officer is to add back that amount to the income irrespective of the fact whether the rate of gross profit has gone up and whether the resultant gross profit was higher than the gross profit normally shown in the earlier years. This consideration at this stage and on these facts becomes, in my opinion, irrelevant; the relevant being to make the addition on account of inflation in purchases found or admitted. The learned Judicial Member is, therefore, in my opinion, wrong in stating that the gross profit should be seen even though the inflation in purchases was found to be existing and no addition should be made, if it results in a higher rate of gross profit. I am unable to commend this approach. The learned Judicial Member was also not correct, in my opinion, on facts to assume that the materials covered by these fictitious purchases was received by the assessee in his premises, used for manufacture and the finished goods sold were included in the turnover. This appears to be against the facts proved on record. Without going into the case law cited for and against, on facts I am of the opinion that in a case where the Inoome-tax Officer finds clear and unambiguous and unimpeachable proof of inflation of purchases, he has unfettered discretion to make the addition of the entire amount on inflation in purchases. He need not bother about the resultant rate of gross profit or worry about as to how the resultant gross profit would compare favourably with the rate of gross profit shown in the earlier years as we all know the rate of gross profit is only an indication about the trend in the trade and not a conclusive proof of the profit. In appropriate circumstances, the Income-tax Officer may reject the book results and may make an addition by estimating the gross profit in such a way as to cover up the inflation in purchases. That does not mean that merely because the rate of gross profit with the inclusion of the inflated purchases happened to be the same as in the earlier years, that should prevent the Income-tax Officer from making any addition notwithstanding the inflated purchases. I am therefore of the opinion that the view expressed by the learned Accountant Member is more commendable and acceptable to me than the view expressed by the learned Judical Member.
13. As regards the objection taken to the order passed by the learned Judicial Member Shri D.D. Vyas, I am of the opinion that once a Member proposes an order, signs it and sends it to the other Member, it is open to the other Member to agree with that view and append his signature in token of his acceptance or to differ from it and propose a separate order. But the convention is that in case the difference of opinion is likely to result, the Members should consult each other if that is possible. No doubt it is true that a Member should not delay the order but merely because of the delay if another Member happens in the meantime to retire, it cannot be said that this is another method of recalling an order passed by a Member. The operation of the inexonerable rule of superannuation cannot be halted. If Shri D.D. Vyas happened to retire, the only course open is to repost the case. The order operate as a view much less as an order. With these observations, I would say that the view expressed by Shri D.D. Vyas, cannot be taken into consideration for the purpose of counting, as was asked of me to find out the majority of opinion.
14. The matter will now go before the Bench for decision according to the majority opinion.