Patna High Court
Commissioner Of Income-Tax vs Kashiram Agrawalla on 22 March, 1983
Equivalent citations: [1984]147ITR797(PATNA)
JUDGMENT Ashwini Kumar Sinha, J.
1. In a reference under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as "the Act"), the Income-tax Appellate Tribunal, Patna Bench 'A', Patna, has referred the following questions of law for the opinion of this court:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of sales tax liability has not to be excluded from the gross turnover to arrive at the gross profit disclosed in the trading account ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the provisions of section 68 of Income-tax Act, 1961, were not applicable for considering the cash credits appearing in the accounting years relevant to the assessment year 1961-62 and earlier years and in deleting the additions of the cash credits amounting to Rs. 31,000 and Rs. 32,344 ?"
2. I may take the facts from the statement of the case. The assessment year involved is 1958-59. The method of accounting followed by the assessee is admittedly the mercantile system. The assessee is a dealer in foodgrains, sugar and other goods. The ITO found that in the original assessment in this case, the turnover had been disclosed at Rs. 3,67,560. Later on, certain books of accounts were seized by the sales tax authorities and on the basis of that, an assessment was made by the ITO by estimating the profits on the suppressed business. This assessment was set aside in appeal by the Tribunal, which had directed the books to be examined and a balance-sheet to be prepared. As the balace-sheet was not filed before the ITO and as no day-to-day stock register was produced before him and also as the applicability of the provisions of Section 145 was not disputed as stated before the AAC, the ITO proceeded to assess the income by adopting a rate of gross profit of 5 per cent. However, while making an addition, the ITO took the view that the gross profit shown by the assessee at Rs. 1,12,910 on a turnover of Rs. 29,22,074 was not correct gross profit. According to him, the gross profit should have been reduced by an amount of Rs. 51,607, which represented the sales tax liability. On this calculation, the ITO arrived at a gross profit of Rs. 61,303 as disclosed by the assessee's books. The 1TO, therefore, made an addition of Rs. 82,220 to bring the gross profit to the level of 5 per cent.
3. The ITO further found several cash credits for which he did not find satisfactory explanation. Some of these credits were in the capital account whereas certain others were in the account of Smt. Sarbati Devi and M/s. Ganga Sahay Ram Chandra as well as in the account named "Cash from Home". There were also credits in the account of Sri Satyanarain of Jharia and Rs. 11,000 as realisation from the debtors. The details of these credits are given in the order of the ITO and he made an addition of Rs. 85,149 as income from other sources. A copy of the order of the ITO has been marked as annex. A to the statement of this case.
4. The matter came up before the AAC and he upheld the action of the ITO in not accepting the book results and in estimating the profits. The AAC considered the estimate made to be reasonable. However, the AAC held that the sales tax liability was not to be deducted from the gross profit and he held that the amount of Rs. 51,607 should have been allowed as sales tax liability in determining the income of this year. The AAC, therefore, reduced the addition to Rs. 33,194 by adopting the gross profit as shown by the assessee at Rs. 1,12,910 and thus he allowed a relief of Rs. 49,026.
5. Regarding the income from other sources, the AAC found that the credit of Rs. 11,000 as claimed by the assessee as realised from the debtors of the cloth business appeared on January 10, 1957. The same deposit in the name of Sri Satyanarain of Jharia to the extent of Rs. 20,000 appeared in the books on January 9, 1957. The assessee was following Diwali accounting year and the accounting year of the assessee ended on October 22, 1957. The AAC accepted the argument advanced on behalf of the assessee that these credits were assessed as income from other sources and for income from other sources, no separate books were being maintained. It was, therefore, submitted that the assessment of these amounts could be made only under the provisions of the Indian I.T. Act, 1922, and, according to the legal position, under the old Act, these credits could be considered for assessment only in the assessment year 1957-58. The AAC held that in respect of the income from undisclosed sources, the accounting year should be taken as business year and on this basis, he deleted the addition of Rs. 20,000 and Rs. 11,000 from the assessment. The AAC, for the reasons given in his order, also deleted the addition of Rs. 32,344. Regarding the amount in the account of Smt. Sarbati Devi, the AAC agreed with the submission advanced on behalf of the assessee and deleted that addition also. With regard to the addition of Rs. 4,712 which was shown as "Cash from Home", the AAC held that this amount should be taken as having been received from trading income which had not been fully shown in the books. He, therefore, deleted this addition also. A copy of the order of the AAC has been marked annex. B to this statement of the case.
6. Thereafter, the Department as well as the assessee both appealed against the order of the AAC and both the matters were heard together by the Tribunal, The Tribunal considered the question regarding reducing the gross profits by the amount of sales tax and the Tribunal held that the gross profit shown by the assessee at Rs. 1,12,910 should not have been reduced by the ITO by deducting the sales tax from the turnover as well as the gross profits. According to the Tribunal, sales tax was a business liability to be allowed as a deduction in the profit and loss account and, on the facts of the case, it could not go to reduce the trading results in the foodgrains. Thus, the Tribunal upheld the order of the AAC regarding the adjustment of sales tax.
7. Regarding the cash credits, the Tribunal upheld the order of the AAC in deleting these amounts and held that while making an assessment for the assessment year 1958-59, the provisions of the old Act were applicable.
8. The attention of the Tribunal was drawn by the Departmental representative to the provision of Section 297(2)(d)(ii). This provision lays down that in the case of an escapement of income, notice under Section 148 should be issued in respect of proceedings for the assessment years prior to the assessment year 1962-63 and "All the provisions of this Act (1961) shall apply accordingly." According to the Department, this provision would make Section 68 applicable to any proceeding reopened under Section 148. The Tribunal did not accept this argument of the Departmental representative. The Tribunal has observed that the law does not provide that an income which could not have been brought to charge in the original proceedings as it fell out of the accounting year would become chargeable in that very assessment year only because the proceedings had been reopened under Section 148. According to the Tribunal, the provisions of Section 297(2)(d)(ii) refer only to the procedural law laid down in the Act. The Tribunal further held that the position of cases covered by Section 297(2)(d) and the cases covered by Section 297(2)(d)(ii) would be the same and any other interpretation would create anomalies. In this view of the matter, the Tribunal held that the credits in question did not fall in the financial year 1957-58 and they could not be reassessed as income from undisclosed sources in the assessment year 1958-59.
9. With regard to the addition of Rs. 32,344, the Tribunal referred to the fact that these credits appeared on dates prior to March 31, 1957, and, therefore, could not be assessed in the assessment year 1958-59. The Tribunal further considered the addition of Rs. 4,712 and found that these amounts were deposited in the capital account on various dates and the AAC had deleted the addition on the ground that various additions have been made to the trading results and a further profit of Rs. 5,352 had been added by the AAC out of the goods transferred by the old firms. The Tribunal agreed with the AAC that the profit from the old firms had not been credited in the books and, therefore, it could have been credited directly in the capital account. The Tribunal, therefore, confirmed the deletion of these additions. Thus, in the result, the Tribunal allowed in part the appeal of the assessee and the appeal ol the Department. A copy of the order of the Tribunal has been marked annex. C to the statement of case.
10. Learned counsel appearing for the Department has contended that a registered dealer under the Bihar Sales Tax Act is authorised to collect sales tax on the sales made by him from the customers and if the amount collected belongs to the Sales Tax Department, then that amount is neither an income nor an expenditure. It is only the excess amount which will be income or the shortfall will be the liability of the assessee. The learned counsel appearing for the Department has contended before us that, in the instant case, the sales tax amount was collected by the assessee and shown separately and, hence, it was neither an income nor expenditure. I may state here that this point was never raised at any stage and the learned senior standing counsel has urged this point for the first time before this court in the course of hearing of this case, which is not permissible. Learned counsel appearing for the Department has further submitted that sales tax had to be excluded to find out the actual margin of profit on the trading commodities and the inclusion of sales tax gave a wrong picture of the result shown. He further submitted that the rate of 5 per cent, was reasonable.
11. It is well settled that the moment a dealer made either purchases or sales which was subject to sales tax, the obligation to pay the tax arose. Although that liability could not be enforced till quantification was effected by an assessment proceeding, the liability for payment of tax was independent of the assessment. It is further well settled that the assessee, who had followed the mercantile system of accounting, was entitled to deduct from the profits and gains of its business, liability to sales tax which arose on sales made by it during the relevant previous year. It is further well settled that the amount of sales tax paid or payable by the assessee is a business expenditure. The profits of business which are to be assessed to tax must be real profits and they have to be ascertained on ordinary principle of commercial trading and commercial accounting. If reference to a case is needed, reference may be made to the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC). To the same effect is the decision in the case of Addl. CIT v. T. Nagireddy & Co. [1976] 105 ITR 669 (AP), in which the principle laid down in Kedarnath Jute Mfg. Co. Ltd. v. CIT [I971] 82 ITR 363 (SC), has been reiterated. The learned senior standing counsel for the Department has tried to persuade me to accept his submissions and, in support of his submission, has tried to press into service the case of Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542 (SC) and the case of Sinclair Murray and Co. P. Ltd. v. CIT [1974] 97 ITR 615 (SC), but, in my opinion, these decisions are irrelevant for the purpose at hand.
12. Thus in view of what has been held in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), the Tribunal was correct in holding that the amount of sales tax liability had not to be excluded from the gross turnover to arrive at the gross profit disclosed in the trading account.
13. Coming to the second point, the learned senior standing counsel for the Department submitted that this was a proceeding under Section 147 of the I.T. Act, and in view of this, all the provisions of the new Act would apply, The learned senior standing counsel submitted that all the provisions of the new Act would apply in a case where a proceeding was reopened under Section 148 and, therefore, submitted that the provisions of Section 68 would also apply and the credit appearing in the books of assessee in the previous year would be assessable to tax in the assessment year 1958-59.
14. In my opinion, there is no force in the submission advanced by the learned senior standing counsel appearing for the Department. It may be pertinent to note that there was no provision in the 1922 Act corresponding to Section 68 of the Act. None the less, this section gives statutory recognition to the principle that the cash credits which were not satisfactorily explained may be assessed as income. But, it has now been well settled that in two respects this section has changed the law which prevailed in the 1922 Act. One of the committed changes which is significant is that under the 1922 Act, it was held that where a large number of cash was credited on the very first day of the accounting year, and considering the extent of the business, it is not possible that the assessee could have earned such an amount in the course of one day, the amount cannot be assessed as the income of the assessee on the first day on which he had credited it in the books of account. But, in the present section, even in the case of unexplained cash credit for the accounting year for which the books of account are maintained, the matter of inconvenience has to give way to this statutory change. The question arises as to whether Section 297(2)(d)(ii) of the Act can be said to save the operation of Section 68 of the Act although introduced for the first time in the Act by holding that it was a matter of mere procedure or machinery for the purpose of assessment and not a substantive right or liability either conferred on or chargeable against the assessee. Cases in this regard are unanimous and no decision has struck any discordant note. Reference be made to the case of Bhogilal Virchand v. CIT [1981] 127 ITR 591 (Bom), wherein a Bench of the Bombay High Court held that the effect of Section 68 is that statutorily a sum which is found credited in the books of the assessee maintained for any previous year, in respect of which either the assessee offers no explanation or the explanation offered by him is not accepted by the ITO, is to be charged to income-tax as the income of the assessee of that previous year. Therefore, Section 68 is a charging provision in so far as the particular sum, which is a subject of legislation, is concerned. As a necessary corollary, it has further been held that the words "all the provisions of this Act shall apply accordingly", occurring in Section 297(2)(d)(ii) of the Act refer only to the machinery provided in that Act for the assessment of escaped income and that they do not apply to the substantive provisions of the new Act which creates rights or liabilities. It has further been held that Section 68 of the Act being a substantive charging section, it cannot be applied to a case of reassessment governed by the 1922 Act. To the same effect, numerous decisions have taken the view, as for CIT v. Dharamchand Anandkumar [1981] 128 ITR 219 (MP), CIT v. N. L. Satyanarayan Setty [1981] 129 ITR 226 (Kar), Govinddas v. ITO [1976] 103 ITR 123 (SC), Ganga Properties v. ITO [1979] 118 ITR 447 (Cal) and CIT v. Sahibganj Electric Cables Pvt. Ltd. [1978] 115 ITR 408 (Cal). In the Supreme Court case of Govinddas v. ITO [1976] 103 ITR 123 (SC), it was held that the words "all the provisions of this Act shall apply accordingly" in Clause (ii) of Section 297(2)(d) of the Act merely refer to the machiney provided in the new Act for the assessment of escaped income and that they do not import any substantive provisions of the new Act which create rights or liabilities. The Supreme Court has further held in this case that the word "accordingly" in the context means nothing more than "for the purpose of assessment" and it clearly suggests that the provisions of the new Act which are made applicable are those relating to the machinery of assessment.
15. The point is again squarely covered by a decision of this court in the case of CIT v. Hari Prasad Chaudhary (Taxation Case No. 24 of 1974, decided on 14th December, 1982) ([1984] 147 ITR 791 (Pat) (supra)), wherein the cases referred to above have been reviewed. Thus, the submission advanced on behalf of the Department by the learned senior standing counsel fails.
16. In the result, I answer both the questions in the affirmative, in favour of the assessee and against the Revenue and I hold that on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of sales tax liability has not to be excluded from the gross turnover to arrive at the gross profit disclosed in the trading account and I further hold that, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the provisions of Section 68 of the I.T. Act, 1961, were not applicable for considering the cash credits appearing in the accounting years relevant to the assessment year 1961-62 and earlier years and in deleting the additions of the cash credits amounting to Rs. 31,000 and Rs. 32,344. The assessee will be entitled for costs. Hearing fee Rs. 250.
S.K. Jha, J.
17. I agree.