Delhi High Court
Chandra Timber Traders vs Deputy Commissioner Of Income Tax. ... on 9 August, 1995
Equivalent citations: (1996)54TTJ(DEL)544
ORDER
A. SATYANARAYANA, VICE-PRESIDENT :
These cross appeals arise out of the order of the CIT(A) dt. 13th Aug., 1990 for the asst. yr. 1987-88 for which the previous year was Diwali year 1986.
2. The assessee is a partnership of two persons engaged in the business of purchase and sale of timber.
Assessees appeal - ITA No. 6063/Del/90
3. According to the Assessing Officer (AO), who passed the assessment order under s. 143(3) on 23rd March, 1990, there was a search on the business as well as the residential premises of the partners in the month of January, 1989. As a result of the search, a number of documents, loose papers and other books of account were found and seized.
4. The AO noticed that for the assessment year under consideration the assessee had disclosed sales of Rs. 45,34,536 and a gross profit rate of 9.8% as against the sales of Rs. 21,74,076 and gross profit rate of 12.95% in the preceding asst. yr. 1986-87. The assessee was required to explain the reasons for the fall in the gross profit rate. The counsel for the assessee submitted that the turnover of the assessee had increased considerably as compared to the last year, that in the previous year relevant to the assessment year under consideration, bulk of the sales were made on wholesale basis and that it was a normal practice to get lesser margin of profit in respect of the sales effected on wholesale basis. The assessee was required to submit the details of various items of goods dealt in by the assessee. The assessee has not given complete details of opening and closing stock of various items of goods. After considering the reply of the assessee and the defects in the maintenance of the books of account, the AO applied the provisions of s. 145(2) and estimated the sales and gross profit rate at Rs. 70 lakhs and 15% respectively. He observed that "proviso to s. 145(2) is being applied because the assessee had not been able to explain properly the fall in the gross profit, sales and purchases are not satisfactorily verifiable. It was found from the scrutiny of the documents seized that some of the entries recorded in such documents are not reflected in the regular books of the assessee and as such the books of account of the assessee are not reliable". In the process, an addition of Rs. 6,05,492 was made on account of extra profit.
5. The AO found that the sums of Rs. 48,680 on account of U. P. Sales-tax and Rs. 15,285 on account of the Central Sales-tax (CST) remained unpaid at the close of the accounting period. The assessee was required to explain as to why the above sums may not be disallowed and added to the income of the assessee under s. 43B because the sales-tax realised by the assessee was not paid to the Government department and the liability was not discharged by the assessee during the accounting period. It was submitted by the assessees counsel that no amount of sales-tax had been debited to the P&L account and that the liability was discharged within one month after the close of the accounting period. The AO held that the contention of the assessee was not acceptable and that these amounts have to be treated as the income of the assessee. However, addition of Rs. 63,965 (Rs. 48,680 + Rs. 15,285) was not made in the total income of the assessee as the AO arrived at the taxable income of Rs. 19,85,625 starting with net profit as per P&L account of Rs. 1,07,123.
6. The AO noticed that the assessee maintained a car which was used by the partners and their families for their private purposes and, accordingly, 1/4th of the car expenses was disallowed for the personal use of the car. This resulted in a disallowance of Rs. 3,500. Depreciation was also disallowed to the extent of 1/4th.
7. Before the CIT(A), the assessees counsel submitted that the decline in the gross profit was due to the fact that the sales had increased substantially and that the sales to the dealers amounted to Rs. 33,79,662 as against Rs. 9,93,246 in the preceding assessment year. He further submitted that the margin of profit on wholesale sales was never more than 5%.
8. The CIT(A) directed the AO to estimate the sales at Rs. 46,50,000 and adopt a gross profit rate of 11.5% by observing as under :
"I have considered the facts. It appears that the learned counsel had not given such figures to the AO because he has not made any mention of these figures in his assessment order. Therefore, at this level it is not verifiable whether the claim made by the appellant in respect of the sales to the dealers is correct or incorrect. In any case, since the details of opening stock and closing stock were not available, the G. P. rate was applicable. In other sister concern, looking to the fact that the sales had increased substantially, in this year I maintained the G. P. rate at 11.5%. More or less facts are similar of this case as well and, therefore, I direct the AO to apply a G. P. rate of 11.5% in this case also. I further find that the estimation of the sales at Rs. 70 lakhs from the declared sales of Rs. 45,34,536 is without any basis. At least, there is nothing on record which suggests that the AO has applied any logic while estimating the sales. I am surprised to note that there is a mention of many loose papers found and seized at the time of search, but the AO has not brought on record the details of any such paper and, therefore, in the absence of any such record how the sales have been estimated at Rs. 70 lacs, it is beyond my apprehension. In this context it is relevant to mention here that it is a search case. No record was available in this office. This office had even at the time of hearing required the records from the AO but the assessment records were not made available. More surprising is also that even ITNS 151 has not come back from the AO which reflects the attention paid or being paid by the AO towards the additions made. Any way, this is just by the way, but the fact remains that the estimation of the sales under any circumstances on the basis of assessment order cannot be justified. I, therefore, direct the AO to estimate the sales at Rs. 46 lacs 50 thousand rupees."
9. Regarding the addition of Rs. 63,965 made under s. 43B, the CIT(A) confirmed the "addition" by observing as under :
"..... Since the law has been amended and in view of the amended provisions of the Act, the addition made is fully justified. Therefore, the addition made by the AO is confirmed.
10. He also confirmed the disallowance of 1/4th of car expenses and depreciation for personal purposes by observing that the use of the car by the partners for their private purposes cannot be ruled out.
11. The assessees counsel filed a paper book of 28 pages and urged to the following effect. There is no justification for the AO to reject the book results. Details of opening stock and closing stock were furnished to the AO. The last years closing stock has become this years opening stock. This years closing stock has become the opening stock of the next year. These were accepted by the AO. No defects were pointed out in the maintenance of the books of account by the assessee. The AO made a cryptic remark that it was found from the scrutiny of the documents seized that some of the entries recorded in such documents were not reflected in the regular books of the assessee and as such the books of account of the assessee were not reliable. The search has taken place in January, 1989. The assessment year involved now is 1987-88 for which the relevant accounting year ended on Diwali 1986. The books of account for the relevant asst. yr. 1987-88 were not at all seized. The AO has not given the details of the entries allegedly not found in the regular books of account when compared to the seized documents. In the absence of any clear finding as to how the AO was not satisfied about the correctness or the completeness of the accounts of the assessee, s. 145(2) cannot be invoked. In the cause title portion of the assessment order, the AO has stated "mercantile" opposite the column "Method of Accounting". Hence, he cannot say that no method of accounting has been regularly employed by the assessee. Thus, even on this count also, the AO could not invoke s. 145(2). Even assuming that the details of opening stock and closing stock were not furnished, s. 145(2) cannot be made applicable.
Reliance is placed on the order of the Third Member in para 6 in the case of ITO vs. Oswal Emporium (1989) 35 TTJ (Del) (TM) 225 : (1989) 30 ITD 241 (Del) (TM) (at page 253). At page 1 of the paper book filed by the assessee, copy of the letter dt. 14th Oct., 1988, addressed to the AO is placed. In that letter, it is clearly stated that three consignments had been sold on wholesale basis that the details were enclosed and that a profit of 5% had been charged. Hence, the CIT(A) is not correct in saying that the counsel has given such figures before the AO. Another letter was furnished before the AO and the same is given at pages 2 to 9 of the assessees paper book. Here also, under the head "Trading Results", it has been reiterated that the assessee had already submitted a break up of sales in wholesale as well as retail. As laid down by the Honble Supreme Court in the case of State of Orissa vs. Maharaja Shri B. P. Singh Deo (1970) 76 ITR 690 (SC), "The mere fact that the material placed by the assessee before the assessing authorities is unreliable does not empower those authorities to make an arbitrary order. The power to levy assessment on the basis of best judgment is not an arbitrary power; it is an assessment on the basis of best judgment. In other words, that assessment must be based on some relevant material. It is not a power that can be exercised under the sweet will and pleasure of the concerned authorities". The amounts of Rs. 48,680 and Rs. 15,285 have been deposited on 1st Dec., 1986, with the Sales-tax department, much before the due date for filing the return of income under s. 139(1). In the present case, the return of income was filed on 30th July, 1987, hence, the impugned addition of Rs. 63,965 has to be deleted following the judgment of the Patna High Court in the case of Jamshedpur Motor Accessories Stores vs. Union of India & Ors. (1991) 189 ITR 70 (Pat). The disallowance under the car expense and depreciation may be reduced reasonably.
12. The Departmental Representative contended that the Honble Calcutta High Court in the case of Amiya Kumar Roy & Bros. vs. CIT (1994) 206 ITR 306 (Cal) has upheld the addition made on a reasonable estimate when the wholesale dealer in spices failed to maintain stock accounts and when there was no explanation for low gross profit rate.
13. We have considered the rival submissions, case law cited and perused the papers filed before us. The assessment year before us is 1987-88 for which the previous year was Diwali year 1986. The books of account maintained by the assessee for the Diwali year 1986 were not seized by the Department. The AO has not given any specific instance to substantiate his allegation that some of the entries recorded in the seized documents at the time of the search in January, 1989 were not reflected in the regular books of the assessee. Hence, he cannot say that the books of account maintained by the assessee for the relevant accounting year ending on Diwali 1986 are not reliable. The AO stated that the assessee has not given complete details of the opening stock and the closing stock of various items of goods. But the opening stock and the closing stock of various items of goods as reflected in the trading account for the year ending Diwali 1986 have been accepted by him while completing the assessments for the asst. yrs. 1986-87 and 1988-89. Hence, he cannot find fault with the same. Even assuming that he found fault with them, he could meddle with the opening and closing stock figures and the revised figures of opening and closing stocks have to be carried to the earlier assessment year and the subsequent assessment year. But this has not been done. Before applying s. 145(2) a specific finding has to be given based on relevant material brought on record that the books of account maintained by the assessee are incorrect and incomplete or that the assessee did not regularly employ any method of accounting. In the present case, such findings are not given based on any material brought on record. The AO simply says "defects in the maintenance of books of account". He did not elaborate as to what were those defects in the maintenance of books of account. The system of accounting adopted by an assessee cannot be rejected merely on the ground that the gross profit disclosed by his books was low. [RMP Perianna Pillar & Co. vs. CIT (1961) 42 ITR 370 (Mad)]. Low profit without any other defect being found in the account books is not a sufficient ground for rejection of accounts [Laxmi Stores vs. CST (1979) 43 STC 167 (All)]. The assessee has given the details of the wholesale sales aggregating to Rs. 33,79,662, both before the AO as well as before the CIT(A), they are not in any way found incorrect by the AO or the CIT(A). On these facts, the AO is not at all justified in making the addition of Rs. 6,05,492 on account of extra profit and the CIT(A) is equally unjustified in directing the AO to estimate the sales at Rs. 46,50,000 and adopt a gross profit rate of 11.5%.
14. Respectfully following the judgment of the Patna High Court in the case of Jamshedpur Motor Accessories Stores (supra), we hold that the addition of Rs. 63,965 cannot be made since it was paid on 1st Dec., 1986, i.e., long before the due date for furnishing the return of income under s. 139(1).
15. Regarding the disallowance under the heads "car expenses" and "Depreciation", the disallowances appear to be on the high side. We reduce the same to 1/6th.
16. Ground No. 3 in the grounds of appeal in respect of the addition of Rs. 5,55,000 made by the AO towards unexplained deposits in the accounts of various persons, was not pressed at the time of hearing. To the said effect, the assessees counsel has signed in the grounds of appeal also. Accordingly, this ground is dismissed.
Revenues appeal ITA No. 657/Del/1990
17. Ground Nos. 1 and 2 are to the effect that the CIT(A) erred in law and on facts in deleting the addition of Rs. 5,15,250 out of the total addition of Rs. 6,05,492 made in the trading account by applying the provisions of s. 145(2) of the IT Act, 1961, without properly appreciating the facts of the case and that he erred in law and on facts in applying the G. P. rate of 11.5% on total sales of Rs. 46,50,000 to recast the trading account as against the application of G. P. rate by the AO at 15% on total sales at Rs. 70 lacs ignoring the fact that the correctness or the completeness of the accounts of the assessee-firm was not established by the assessee.
18. In the assessees appeal, we have already dealt with this issue and held that the AO was not at all justified in making the addition of Rs. 6,05,492 on account of extra profit. Accordingly, these two grounds stand disposed of.
19. Ground Nos. 3 and 4 are to the effect that the CIT(A) erred in law and on facts in deleting the addition of Rs. 5,85,000 being unexplained cash credits in the names of Shri Anil Chandra and Shri Surendra Chandra, partners of the assessee-firm without properly appreciating the facts of the case and that he erred in law and on facts by accepting the paying capacity of the partners to deposit such heavy amounts with the firm ignoring the facts that the assessee did not produce any concrete evidence in respect of having the silver in the possession of S/Shri Anil Chandra and Surendra Chandra thus leaving the amounts unexplained to the satisfaction of the AO within the meaning of s. 68 of the IT Act, 1961.
20. The AO noticed certain credits in the accounts of the two partners of the assessee-firm. The assessee was required to explain the credit entries appearing in the books of account of the assessee in the accounts of the two partners. It was submitted by the counsel for the assessee that there were deposits of Rs. 3 lakhs in the account of partner, Shri Surinder Chandra and that the said deposit was made by him out of the sale proceeds of silver. Similarly, another partner, Shri Anil Chandra also deposited a sum of Rs. 2,85,000 with the firm and the same was also out of the sale proceeds of silver. The silver sold by these partners was their personal property, declared under the Amnesty scheme and the capital gain arising on the sale of such silver had been properly returned in the personal returns of the partners. The assessee was required to give some positive evidence with regard to the ownership of silver allegedly sold by these partners. The partners were also required to explain the source of the acquisition of silver, which was sold by them out of which deposits were made with the assessee-firm. By merely saying that the silver sold was declared by them under the Amnesty Scheme, cannot be accepted as satisfactory evidence in support of the ownership of silver. It is a search case and "the assessee" has to give proper explanation for the source of acquisition of silver, keeping in view the weight of silver. The assessees counsel did not give any satisfactory explanation in respect of the source of acquisition of the silver which was sold by the partners and the deposits had been made in the firm. In the absence of any such explanation, the AO made addition of Rs. 5,85,000 on account of unexplained deposit in the books of the firm.
21. The CIT(A) deleted the addition of Rs. 5,85,000 by observing as under :
"9. The learned counsel, who appeared, submitted that in the account of Shri Anil Chandra the credit was of Rs. 2,80,000 while in the assessment order it has been taken at Rs. 2,85,000. In the case of Shri Surendra Chandra the credit was of Rs. 3 lacs. It is argued that S/Shri Surindra Chandra and Anil Chandra had sold the silver. Shri Surendra in his IT return for the asst. yr. 1987-88 filed on 30th Oct., 1987 disclosed capital gain on the sale of silver of Rs. 71,411. The total sale proceeds amounted to Rs. 3,07,821. The cost for purchase of this silver was shown from the asst. yr. 1978-79 to the asst. yr. 1982-83 at Rs. 1,55,000. The silver was duly disclosed by him in the WT returns for the asst. yrs. 1984-85, 1985-86 and 1986-87 at Rs. 2,64,500, 29,000 and Rs. 2,97,000 respectively. The assessments have already been completed under s. 143(1). The cash credits were made out of the sale proceeds of this silver.
9.1. Similarly, in the case of Shri Anil Chandra it is argued that the capital gain for the asst. yr. 1987-88 have been shown at Rs. 70,535. The silver was claimed to have been acquired in the asst. yr. 1978-79 to 1981-82 at the cost of Rs. 1,30,000. In the WT returns for the asst. yrs. 1984-85 to 1987-88, the assessee had shown the existence of this silver. Assessments in this case have also been completed under s. 143(1). Thus, it is argued that the source is explained in the hands of the partners. The appellant has also filed the copies of the purchase vouchers wherefrom the silver was claimed to have been purchased.
10. I have considered the facts. On the basis of evidence brought on record by the appellant before the AO, if it was a search case, as mentioned by the AO, at least the AO should have looked into the partners personal cases and if he was not satisfied, some action should have been taken in the partners cases. Since, in the hands of the partners the appellant had declared this income by way of capital gains which stood accepted till today as per record and, therefore, hardly there was any reason not to accept in firms case. The appellant had shown existence of the silver in the WT return for the asst. yr. 1984-85 then at least the onus which was required on the part of the appellant, stands discharged. To my mind, it appears that the AO has rejected the contention but has also not taken any pains to go beyond any such situation which is not justifiable to maintain the addition-once these amounts stood accepted by the Department in the individual cases, therefore, the addition made is deleted."
22. The Departmental Representative relied upon the order of the AO.
23. The assessees counsel supported the order of the CIT(A) and relied upon the judgments in the case of CIT vs. Jaiswal Motor Finance (1983) 141 ITR 706 (All) and Addl. CIT vs. Precision Metal Works (1985) 156 ITR 693 (Del).
24. We have considered the rival submissions and the case law cited. The silver belonged to the partners. The existence of the silver was accepted in the WT assessments of the partners for the asst. yrs. 1984-85, 1985-86 and 1986-87. Further, the sale of silver and the capital gains on the sale of silver was accepted in the assessments of the partners. As rightly pointed out by the CIT(A), the assessments of the partners stood accepted till 13th Aug., 1990, when the CIT(A) passed the order. No material was brought on record by the AO to indicate that the alleged credits in the accounts of the two partners were the profits of the firm. The receipt of the cash by the assessee-firm from its partners was accepted by the Department. The Honble Allahabad High Court held in the case of Jaiswal Motor Finance (supra) that if there were cash credits in the accounts of the partners and when it was found that the cash was received by the firm from the partners, then in the absence of any material to indicate that they were the profits of the firm, the credits cannot be assessed in the hands of the firm under s. 68 of the IT Act, 1961. Respectfully following the same and considering the facts of the case, we uphold the order of the CIT(A) in deleting the addition of Rs. 5,85,000.
25. In the result, the appeal of the Revenue is dismissed while the appeal of the assessee is partly allowed.