Income Tax Appellate Tribunal - Rajkot
Income Tax Officer vs Girish M. Mehta on 7 February, 2005
Equivalent citations: [2007]105ITD585(RAJKOT), [2008]296ITR125(RAJKOT), (2006)99TTJ(RAJKOT)394
ORDER
R.C. Sharma, A.M.
1. This is an appeal filed by the Revenue against the order of the CIT(A), dt. 31st May, 1999 for the asst. yr. 1998-99.
2. The grievance of the Revenue relates to the deletion of addition made on account of low GP amounting to Rs. 18,08,310. The Revenue has also grievance that the CIT(A) has erred in law and on facts in holding that the books of account could not have been rejected.
3. The brief facts of the case are that during course of assessment proceedings under Section 143(3), the AO observed that along with return of income, the assessee has filed trading account, P&L a/c and balance sheet and capital account duly audited by the chartered accountants. The audit report in the prescribed Form 3CD was also filed. The assessee is engaged in trading of gold, silver and diamond. He also derived income from job work in setting of synthetic stones. The AO further observed that upto the asst. yr. 1997-98, the assessee was doing business in synthetic stone only and the present business of trading in gold, silver and diamond has been started from this year only. The AO also observed that the turnover of the assessee in the asst. yr. 1997-98 when he was doing business in synthetic stone was Rs. 2,46,534 on which the GP shown was at Rs. 83,886 which comes to 34 per cent. During the year, the assessee has started business of bullion and diamond in wholesale basis and his turnover is Rs. 79,39,22,675. The assessee has shown GP at Rs. 14,46,772 which in terms of percentage comes to 0.18 per cent. Since the GP shown by the assessee is very low as compared to other dealer, dealing in same commodity, the AO issued show-cause notice to the assessee as to why its results should not be rejected. It was submitted by the assessee that there was competition in the market in this line of business and the GP margin is very low. The assessee also submitted the statement of day-to-day purchases, sales and profit/loss arise and the margin of GP and submitted that the book results may be accepted. The assessee also submitted that through oversight the sales-tax has been debited in the trading account, instead of debiting it to the P&L a/c and after closing the P&L a/c and considering the sales-tax liability in P&L a/c, the GP would work out to 0.23 per cent. The AO did not accept the assessee's contention to be convincing on the following two grounds :
(i) The assessee's sales are mainly effected in cash and the full address of the purchasers are not mentioned in the cash memo as such sales are not open to verification.
(ii) The assessee's contention regarding recasting of account with regard to sales-tax is also not acceptable as it is against the principle of accountancy.
4. The AO, therefore, held that the book results are not acceptable and the. GP was estimated keeping in view the GP shown by the comparable dealer, M/s Gayatri Bullion at. 0.41 per cent. Thus, the AO rejected the assessee's GP rate of 0.18 per cent and estimated GP at 0.41 per cent and trading addition of Rs. 18,08,310 was made.
5. By the impugned order, the CIT(A) deleted the addition by observing that the assessee has filed, day-to-day purchases and sales records which, clearly show that on various occasions, there were losses also. From the assessment records produced before the CIT(A) in the presence of the AO, the CIT(A) recorded a finding to the effect that the AO has not able to pinpoint any instance of sales where sales rate has been shown below the market rate. As per the CIT(A), the AO has also not found any fault with the quantitative details of purchase and sales maintained by the assessee on day-to-day basis. The CIT(A) has also found that in this line of business many of the purchasers do not want to disclose their correct identity, therefore, it may not be possible for the assessee to record the correct names and addresses of its purchasers. In view of this and also in view of the fact that day-to-day quantitative details of purchase and sales have been maintained by the assessee, book results cannot be rejected. The CIT(A) has also observed that it has not been proved by the AO that on a particular date, the appellant had shown less sales rate of gold and silver as compared to market rate. The AO was also present at the time of hearing and he was also shown both cash and debit sales which were comparable, the CIT(A), therefore, held that it cannot be said that in case of cash sales, sale rate was less. He, therefore, deleted the additions made on account of GP.
6. Aggrieved by the order of the CIT(A), the Department is in appeal before the Tribunal. It was contended by the learned Departmental Representative that in spite of giving opportunity, the assessee failed to furnish full names and addresses of the cash purchasers, and, therefore, sales was not open to verification. He, therefore, submitted that the matter should be restored back to the AO for examining afresh and assessee may be directed to furnish names and addresses of the purchasers so as to enable the AO to verify the correctness of the sales/purchases in the books of account.
7. On the other hand, the learned Authorised Representative, Mr. D.M. Rindani, chartered accountant, vehemently argued that during the course of scrutiny assessment, the assessee had filed audited books of account in which there was no adverse comment by the auditor along with quantitative details of daily purchase and sales. In the line of business, the assessee was dealing, it was not practicable for the assessee to insist the purchasers, making cash purchases from the assessee, to disclose their full names and addresses, and therefore, on some cash bills names and addresses were not fully recorded. He further contended that in case of cash sales even if the buyer had stated wrong names and addresses, the assessee was bound to record whatever names and addresses has been given to the assessee, as the assessee has no reason to doubt the version of the buyer. As per the learned Authorised Representative, in this line of business, normally, the buyers are reluctant to disclose their identity and when the assessee has shown entire sales amount in cash, none disclosure of names and addresses of the purchasers is not going to adversely affect the interest of the assessee or Revenue. As per the learned Authorised Representative, the assessee for the first time started business of bullion and diamond on wholesale basis, whereas earlier he was doing the business in synthetic stone only. Against profit of Rs. 83,886 earned by the assessee in the business of synthetic stone in the immediately preceding asst. yr. 1997-98, the assessee had earned GP of Rs. 14,46,772 during the asst. yr. 1998-99 under consideration. As per the learned Authorised Representative, the AO was not correct in comparing GP rate of assessee with that of M/s Gayatri Bullion which was doing business since long back and having vast experience in this line of business for purchase and sales. As per the learned Authorised Representative, there was competition in the market, which resulted into low GP. The learned Authorised Representative drew our attention to the quantitative details of purchases and sales furnished to the AO in respect of all of its purchase and sale transactions of bullion, which are placed at page Nos. 7 to 15 of the paper book. He also invited our attention to the quantitative statement of stock of gold bar maintained on day-to-day basis, which were furnished before the AO and the AO was not able to pinpoint any mistake in such quantitative details of purchases, sales and stock. As per the learned Authorised Representative, the assessee had maintained day-to-day purchases, sales and stock register and, GP on each and every transaction could be ascertained from the statement maintained by the assessee and furnished before the AO. As per the learned Authorised Representative, expenditure on sales-tax was in profit and loss nature which was earlier inadvertently debited to the trading account, which could not be a reason for rejecting the book results. The learned Authorised Representative also invited our attention to the comparable cases furnished by the assessee before the AO, dealing in the same items in which GP at much lower rate was declared. As per the learned Authorised Representative, the assessee was not having his own capital, therefore, purchase was on credit basis for only two days and because of paucity of funds, the assessee could not hold the stock for a long period, and started selling immediately on receipt of goods. He, therefore, submitted that the AO has not given any valid reason for rejection of book results and estimation of profit at 0.41 pr cent of the sales. The learned Authorised Representative also relied on the judgment of Kerala High Court in the case of M. Durai Raj v. CIT (1972) 83 ITR 484 (Kei) in support of proposition that the Department was not justified in rejecting the book results on the plea of low GP rate and absence of particulars of address of the customers, without which verification of sales was not possible. It was observed by the Hon'ble High Court that there was no need to have complete particulars of names and addresses of the customers in the case of cash transactions and in the absence of such particulars in the sale of bullion could not be a ground for not accepting the book results of the assessee. The assessee had admittedly maintained its accounts according to the method regularly employed by him, and the profits and gains of the business should be properly computed from his account. The learned Authorised Representative also relied on the judgment of Patna High Court in the case of Md. Umer v. CIT , in support of proposition that before rejecting the book results, the Department has to establish that correct income cannot be deduced from the accounts maintained by the assessee. Learned Authorised Representative thus justified the order of CIT(A) and submitted that no interference is called for.
8. We have considered the rival contentions, carefully gone through the. orders of the authorities below and also deliberated on the case laws cited by the learned Authorised Representative, Mr. D.M. Rindani. From the record, we found that the assessee for the first time entered into the business of bullion and diamond on wholesale basis. We also found that during the course of hearing, the assessee has furnished day-to-day purchases, sales and stock register according to which, the GP of each and every transaction could be ascertained. No defect has been pointed by the AO either in the books of account or with respect to quantitative details furnished by the assessee, nor in the method of accounting followed by the assessee for computing its business income. We also found that the assessee has furnished day-to-day rate prevailing in Ahmedabad Bullion Merchant Association, day-to-day gold and silver bullion purchases and sales details and also details of profit and GP on day-to-day basis. The AO was unable to find anything wrong in the impugned statement furnished before him. The case of M/s Gayatri Bullion indicates GP at 0.41 per cent was not comparable to the case of the assessee, insofar as M/s Gayatri Bullion was long standing in the business and because of its past track record and antecedents it was capable to get the goods on better terms from the market, whereas the assessee was a new entrant in the line of business and because of shortage of funds could not hold the stock and because being a new entrant, was not able to get long credits on the purchases.
9. As per our considered view before rejecting the books of account, the Department has to prove that accounts are unreliable, incorrect or incomplete. The accounts regularly maintained in the course of business, duly audited under the provisions of IT Act and free from any qualification by the auditors, should be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. Even though, it is not possible to lay down the exact circumstances in which accounts should be rejected as unreliable or incorrect, yet the accounts may be rejected as unreliable if important entries and transactions are omitted therefrom or if proper particulars and vouchers, bills, etc. are not forthcoming or if they did not include entries relating to particular class of business transaction. The assessee should invariably be given opportunity for offering explanation regarding defects in accounts and on his failure to satisfactorily explain the defects, the Department would be justified in rejecting the books of account. Thus, books of account should not be rejected light-heartedly. The duty of the AO is to administer the provisions of the Act in the interest of public revenue and to prevent evasion or escapement of tax legitimately due to the State. At the very same time, the duty of the appellate authority is to ensure not only that the provisions of the Act are administered in the interest of public revenue so as to prevent evasion/escapement of tax, but at the very same time to ensure that only the tax legitimately due to the State is collected.
10. An assessment under Section 144 r/w s. 145 is an assessment in which the AO can estimate the assessee's income after rejecting the books of account and for rejecting the books of account, it is the Revenue's onus to prove that either the books of account maintained by the assessee are not correct and complete or the method of accounting adopted is such that true profit cannot be deduced therefrom. From these legal provisions, what flows is that if the Revenue doubts the correctness of GP declared by the assessee, it first of all should reject the assessee's books of account after satisfying the mandatory requirements of s. 145 which can be done only after pointing out a specific defect in the books of account. As the onus to make out a case for rejection of books of account is on the Revenue, so the assessee cannot be burdened with the responsibility of proving a negative aspect of the matter meaning thereby, the assessee cannot be held responsible for not having earned the profit at a particular rate. As per the income-tax laws, the assessee has to substantiate his return and if he furnishes or produces necessary evidence, which in the normal course of things is known as books of account, bills, vouchers, etc. in support of his return, then in order to rebut the assessee's reliance/submissions when the return is substantiated, by such books of account, it is the Revenue's duty to carry on proper investigation and verification from such books of account and must call for any other explanation or evidence, if so required. After production of books of account and submission of explanation by the assessee, if any asked for, with respect to the contents of the return and books of account, the Revenue may accept the same or after pointing out the specific defect may reject the books of account and proceed to determine the assessee's income as per the provisions of s. 145. Income-tax provisions nowhere either authorize the AO or cast ah obligation on the assessee to prove a negative result, i.e., to prove as to why he failed to make a profit at a particular rate. In disposing of an appeal from against any order under Section 143(3)/144, the first appellate authority need not confine itself only to the materials on record at the time of assessment. It may make such enquiries as it thinks fit. The first appellate authority has all the powers which the original authority may have. In the absence of any statutory provisions to the contrary, the appellate authority is vested with the plenary powers, which the subordinate authority has in the matter. In this case, the CIT(A) himself has looked into audited accounts as well as quantitative statement of daily sales and purchases and compared it with the rate prevailing in Ahmedabad Bullion Merchant Association and found that the profit arrived at in each and every transaction was correct. All this exercise was done by the CIT(A) in the presence of the AO. No ground has been taken by the Revenue with regard to any additional materials relied on by the CIT(A) in contravention of Rule 46A, while reaching to such conclusion.
11. Where the AO makes estimations, he has to provide evidence and proof as to the falsity of the books of account, etc. where he failed to do so, he should not reject the books of account.
12. The Hon'ble Supreme Court in Brij Bhushan Lal Praduman Kumar v. CIT , categorically observed that while making "best judgment assessment" the AO should keep in mind what honestly he believes to be fairly estimated or the proper figure of assessment. Furthermore, Hon'ble Calcutta High Court in the case of CIT v. Popular Electric Co. (P) Ltd. observed that while making "best judgment", the AO should make independent and well grounded estimate and such estimate may be based on adequate and relevant materials.
13. As per our considered view, "best judgment assessment" is not a provision to penalize the assessee, but is a machinery provision to enable the Revenue to assess a person when situation warrants an assessment. The order under Section 144 is to be made to the best of the judgment of the AO which means, the order has to be rational and is to be best on an honest guesswork for which some valid basis is available to the AO. The order involves exercise of 'judgment' by the officer. A fair estimation of income has to be made, the AO should take into consideration the totality of the facts and circumstances of the case in addition to proper evaluation of the material furnished by the assessee and collected by him by his own efforts. Where "best judgment assessment" power has been conferred, the limits of the power are implicit in the expression "best of his judgment assessment". The judgment is vital to decide the matter with wisdom, truly and legally. Judgment does not depend upon the arbitrary capricious of the AO, but on settled and invariable principle of justice. Though there is an element of guesswork in "best judgment assessment", it shall not be a wild one, but shall have reasonable nexus to the available material and circumstances of each case. While estimating the GP, the AO should be fair and reasonable and should keep into account the turnover and the GP of earlier years along with all the facts and circumstances of the case. By rejecting book result, the AO does not get absolute and unbridled powers to estimate whatever profit he wants, as per his sweet-will.
14. Sales-tax was paid by the assessee on sales which is liable to be debited in P&L a/c and which has been correctly dealt with by the assessee by rectifying its inadvertent mistake. Non-supply of full name and address in case of cash sales cannot be a reason for rejecting books of account, as held in the judgment of M. Durai Raj (supra) by the Kerala High Court, relied on by the learned Authorised Representative.
15. The fact that some of the cash vouchers, the names and addresses of buyers were not fully written, may give rise to reason to doubt regarding genuineness of the sale price, but mere suspicion is not enough for making addition by estimating higher GP rate. For rejecting sale price of cash transactions, the AO has to bring corroborative material on record to reach to the conclusion that sale price of these cash bills were lower than the sale price of credit sale bills in respect of which full names and addresses of the buyers were written. However, the AO has not pointed out any cash bills in respect of such sales in which lower price have been collected. On the other hand, during the appellate proceedings, on verification of each and every transaction of cash sales by the CIT(A) in the presence of the AO, it was found and categorically noted by the CIT(A) that there was no difference in price collected by the assessee in respect of such cash sale transactions. The Department is also not aggrieved by any additional document being relied on by the CIT(A) in contravention of Rule 46A. The rate of gold and silver charged by the assessee in respect of cash sales were according to the rate prevailing in the market on that particular date. The finding recorded by the CIT(A) to the effect that rates charged in cash and credit sale bills were comparable, was not controverted by the Department by bringing any cogent material on record. We, therefore, do not find any merit in the action of the AO for rejecting book results merely on the ground that in respect of some of the cash sale transactions, the names and addresses of the buyers were not recorded fully.
16. In the instant case, no mistake has been pointed out by the AO either in the books of account or in the statement of purchases, sales and stock which was maintained quantitatively on day-to-day basis. The findings recorded by the CIT(A) at page Nos. 3 and 4 have not been controverted by the Department by bringing any positive material on record. We are, therefore, inclined to agree with the learned Authorised Representative, Mr. Rindani, that the assessee has maintained proper books of account and full details regarding the purchases, sales and stock registers were furnished to the AO in which no defect whatsoever was pointed out, thus there was no reason before the AO for rejecting the book results and thereby estimating the profit merely by comparing the assessee's GP rate with M/s Gayatri Bullion, which was standing entirely on different footings than the assessee.
17. In the result, the appeal of the Revenue is dismissed.