Telangana High Court
Vijay Raj Sethai vs The Asst. Commissioner Of Income Tax , on 7 June, 2023
Author: N.Tukaramji
Bench: N.Tukaramji
THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN
AND
THE HON'BLE SRI JUSTICE N.TUKARAMJI
I.T.T.A.No.402 of 2006
JUDGMENT:(Per the Hon'ble the Chief Justice Ujjal Bhuyan) Heard Mr. Challa Gunaranjan, learned counsel for the appellant and Ms. K.Mamata Choudary, learned Senior Standing Counsel, Income Tax Department for the respondent.
2. This appeal has been preferred by the assessee as the appellant under Section 260A of the Income Tax Act, 1961 (briefly 'the Act' hereinafter) against the order dated 27.02.2006 passed by the Income Tax Appellate Tribunal, Hyderabad Bench 'B', Hyderabad (briefly 'the Tribunal' hereinafter) in I.T.(S.S.)A.No.108/Hyd/2003 for the block period 1991-1992 to 2001-2002.
3. Though this appeal was admitted on 13.10.2006, no substantial questions of law were framed. However, we find that in the memo of appeal, appellant has proposed the following questions as substantial questions of law:
1. Whether on the facts and in the circumstances of the case, the method adopted for arriving the profit and income is not perverse and whimsical ?
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2. Whether on the facts and in the circumstances of the case, the order of the Income Tax Appellate Tribunal is perverse, arbitrary, without any basis, illegal and a prejudicial one ?
3. Whether on the facts and in the circumstances of the case, when comparable cases disclosing a profit rate of 5% and even less are relied by the appellant before the assessing officer and more particularly the case of P.Koteshwar Rao in similar illegal trade, the Appellate Tribunal ignoring them could hold arbitrarily and without any basis that the profit rate adopted by the assessing officer at 15% is fair and right and whether such a finding, not based on any material or comparable cases, could be justified and not perverse ?
4. Whether on the facts and in the circumstances of the case, the finding of the Appellate Tribunal that the asssessing officer was not only considerate but also conservative in estimating the profit at 15% is based on any material evidence or comparable cases when assessing officer himself does not rely on any comparable cases to estimate profit at 15% and whether such finding is illegal, arbitrary, without any basis and unjust ?
5. Whether on the facts and in the circumstances of the case, the Appellate Tribunal ignored the fact that if the peak credit of Rs.1,93,603/-, which is considered as undisclosed income in the assessment, is taken into account, the profit margin disclosed by the appellant would be much lower at 7% and as such the order of the Appellate Tribunal is arbitrary, illegal and not based on the material on record ?
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4. Appellant is an assessee under the Act having the status of an individual. Search and seizure operations under Section 132 of the Act were carried out in the residential as well as the business premises of the petitioner and another person namely Sri Uttam Chand Sethia on 23.11.2000. In the course of the search and seizure operation, it came to light that appellant was indulging in clandestine business activity in purchase and sale of N-Hexane oil for the purpose of adulteration with petrol at petrol bunks. Further, unaccounted cash amounting to Rs.4,16,600.00 was seized.
5. Following the search and seizure operation, block assessment proceedings were initiated by the assessing officer for the block period 1991-1992 upto 2001-2002 (upto the date of search) under Section 143(3) r/w Section 158BC of the Act. Assessing Officer noted that on the date of search, appellant had, in the sworn deposition, admitted undisclosed income of Rs.10 lakhs from such clandestine activity. In a subsequent deposition recorded on the same day i.e., on 23.11.2000, he stated that he had undisclosed income of Rs.70 lakhs. Subsequently, by way of a letter dated 19.01.2001, appellant quantified his undisclosed income at ::4::
Rs.11,01,570.00. However, while filing return for the block period, appellant admitted undisclosed income at Rs.10,81,000.00.
6. In the course of the assessment proceedings, assessing officer opined that income admitted by the appellant was too low to be accepted. According to the assessing officer, appellant would not have undertaken or would not have been involved in such a clandestine business for a paltry profit knowing fully well the consequences in the event of detection. Assessing officer vide the assessment order dated 29.11.2002 reworked the turnover by taking into account a margin of 5% on the purchases. As a result, the turnover worked out to Rs.1,46,45,863.00. Assessing officer further opined that it would be prudent to adopt profit rate at 15% which worked out to Rs.21,96,879.00. Accordingly, the aforesaid amount was added to the income of the appellant.
7. In appeal before the Commissioner of Income Tax (Appeals)-I, Hyderabad (briefly 'CIT(A)' hereinafter), the first appellate authority vide the order dated 23.06.2003 took the view that rate of 15% adopted by the assessing officer was on the higher side.
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CIT(A) accepted the argument of the appellant that no purchaser would pay higher price for a commodity sold outside the regular books of account when he could get the same commodity at lower price in open market. According to CIT(A), the profit rate should be 8.25% on the turnover as was applied in the case of one Sri P.Koteswara Rao. Accordingly, the assessment order was modified by the first appellate authority by working out the undisclosed income at Rs.15,86,569.00 instead of Rs.25,80,483.00 by applying the profit rate at 8.25%.
8. Aggrieved by the aforesaid order of CIT(A), both appellant as well as revenue preferred appeals before the Tribunal. 8.1. Tribunal by the order dated 27.02.2006 set aside the order of CIT(A) and restored the order of the assessing officer thus allowing the appeal of the revenue and dismissing the appeal of the appellant. Relevant portion of the order of the Tribunal dated 27.02.2006 reads as under:
The assessee admittedly is indulging in the illegal trade of a product known as N-Hexane, which is used for adulterating petrol at petrol bunks. No books of account have been maintained. The ::6::
only recourse open to the AO was to estimate the undisclosed income. The assessee himself had admitted to this fact and filed block return disclosing undisclosed income from this trade. The question to be answered is whether the AO was right in estimating the profit at 15% of the turnover of the assessee in this trade. To our mind, the AO was fair and considerate in estimating the profit at 15% of the turnover. In fact, the assessee has benefited due to calculation mistake that has been done by the AO. The AO's estimation of sales was at cost plus 5% whereas his intention was that the assessee had earned a gross profit of 15% on such sales. In that case, the total turnover of the assessee should have been estimated at cost plus 15% or more. Nevertheless, the intention of the AO is that the profit from this illegal activity would have been 15%. The logic accepted by the first appellate authority is strange. As pointed out by the learned departmental representative, no person would take such great risk of illegal trade which would make him liable for imprisonment, for earning a percentage of profit much lower than if he had done the business in an open and legal manner. As the AD was not only considerate but also conservative in estimating the profit only at 15% of an underestimated figure of turnover, the assessee should not have had any grievance on the same.
Coming to the reliance placed on the case of Shri P.Kateswara Rao, we hold that fundamentally a profit rate adopted in the case of Shri Koteswara Rao cannot be a bench-mark, particularly in this illegal trade. Whatever might be the reason for accepting the percentage of profit in the case of Shri Koteswara Rao, to our ::7::
mind, his case does not come to the rescue of the assesse. Though the same Assessing Officer has passed the orders in both the cases, the basis for accepting gross profit of 8.25% in the case of Shri Koteswara Rao has not been explained or substantiated in that assessment order. Thus, we do not consider it fit, on the facts and circumstances of the case, to treat the assessment order in the case of Shri P.Koteswara Rao as a bench-mark or a comparable instance. It might have been a case of under-estimation of income of Shri Koteswara Rao, with which we are not concerned. Suffice it to say, the AO's order estimating the income at 15% of the turnover determined by him in this line of trade has to be sustained and the order of the CIT(A) to that extent, directing the AO to adopt a rate of 8.25% on the turnover in the case of both these assessees before us, be vacated.
Coming to the issue of telescoping, the assessee has not maintained any books of account. All the amounts received by the assessee have been deposited in the bank account and the assessee has not demonstrated as to how he claims telescoping in this case. No doubt, the Hon'ble Supreme Court in the case of Anantharam Veerasinghaiah & Co. (supra), held that an intangible addition made in the book profit during the assessment year forms part of assessee's real income. Nevertheless, in that very same case, it was observed as follows:-
"It is a matter for consideration by the taxing authority in each case whether the unexplained cash deficits and the cash credits can be reasonably attributed to a pre-existing fund of concealed profits or they are reasonably explained by reference to concealed income earned in that very year. In each case, the true nature of the cash deficit and the cash credit must be ascertained from an overall consideration of the particular facts and circumstances of the case.
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Evidence may exist to show that reliance cannot be placed completely on the availability of a previously earned undisclosed income. A number of circumstances of vital significance may point to the conclusion that the cash deficit or cash credit cannot reasonably be related to the amount covered by the intangible addition but must be regarded as pointing to the receipt of undisclosed income earned during the assessment year under consideration. It is open to the revenue to rely on all the circumstances pointing to that conclusion."
The ratio in all the judgments relied upon by the assessee is that secret profits or undisclosed income earned by the assessee can constitute a fund from which the assets were acquired, provided a reasonable nexus exists. Mere availability of such funds would not in all cases imply that the assessee had earned further secret profits during the relevant assessment year. It is a matter for consideration by the taxing authorities in each case to ascertain whether the unexplained cash deficits or cash credits can be reasonably attributed to a pre-existing fund of concealed profits during the relevant assessment year. In all these cases, the unexplained income was earned only during the previous year and was utilised for acquisition of assets in that year only, whereas in the case on hand it is spread over a number of years. In any event, the facts and circumstances do not point to a reasonable conclusion that telescoping could be allowed as claimed by the assessee. The very nature of the trade activities of the assessee and lack of evidence to support the contention of the assessee result in our dismissing this ground of the assessee. The order of the CIT (A), therefore, is set aside and the order of the AO is restored.
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9. Tribunal noticed that appellant was indulging in an illegal trade for adulterating petrol at petrol bunks. No books of account was maintained. Therefore, the only recourse open to the assessing officer was to estimate the undisclosed income. Appellant himself had disclosed the undisclosed income which was ofcourse found to be on the lower side by the assessing officer. According to the Tribunal, assessing officer was fair and considerate in estimating the profit at 15% of the turnover; logic adopted by the first appellate authority was found to be strange; nothing was mentioned by the first appellate authority as to why the profit rate should be treated as 8.25% as in the case of one Sri P.Koteswara Rao. Tribunal noted that the basis for accepting the gross profit of 8.25% in the case of Sri P.Koteswara Rao had not been explained or substantiated by the first appellate authority; assessment in the case of Sri P.Koteswara Rao could not be treated as a bench mark or as a comparable instance in the case of such assessment.
10. We do not find any error or infirmity in the view taken by the Tribunal. In a case of this nature, some play in the joint has to be given to the revenue authority. To our mind, estimating the profit ::10::
from such an illegal trade at the rate of 15% appears to be a reasonable one. We do not see any irrationality or unreasonableness in such quantification by the assessing authority. No case of any perversity is made out by the appellant. The decision of the Tribunal being based on facts, no question of law arises in this appeal, not to speak of any substantial question of law.
11. That being the position, all the questions are answered against the appellant.
12. Consequently, the appeal is dismissed. No costs.
As a sequel, miscellaneous petitions, pending if any, stand closed.
__________________ UJJAL BHUYAN, CJ _______________ N.TUKARAMJI, J Date: 07.06.2023 LUR