D.b. Income Tax Appeal v. Commissioner Of Income Tax, Alwar

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHANAT JAIPUR BENCH, JAIPUR D.B. Income Tax Appeal No.125/2004Vijay Solvex Ltd. vs. Commissioner of Income Tax, Alwar Date of Judgment : 24.02.2015 REPORTABLE HON'BLE THE ACTING CHIEF JUSTICE MR.SUNIL AMBWANIHON'BLE MR. JUSTICE PRAKASH GUPTA Mr. Sanjay Jhanwar, counsel for appellant.Ms. Parinitoo Jain, counsel for respondent-department. 1.This Income Tax Appeal, under Section 260A of the Income Tax Act, 1961, was admitted on the questions of law as follows: “(i)Whether the Income Tax Appellate Tribunal wasjustified in reversing the categorical finding of the firstappellate authority that the books have not beenrejected under section 145 of the Act in the presentcase and in absence of such rejection, the book resultcannot be substituted?(ii)Whether the term 'Profit and Gains' used insection 80HH & 80I of the Income Tax Act, 1961 withreference to an eligible industrial undertaking have thesame meaning as the term 'income' whereas thestatute uses both the terms independently in differentprovisions of the Act?” 2.On the question No.1, it is submitted that the books of accounts of the assessee were not rejected, nor they werefound to be inaccurate, incorrect or incomplete, and thus theAssessing Officer was not justified in adding Rs.5 lacs, only onthe ground that the profit rate shown by the assessee wasmuch lower than the previous year. It is submitted that theappellate authority found, after it was held by AssessingOfficer, that the regular books of accounts have been maintained, and purchase and sales are fully vouched, andquality details were also maintained and produced before theAssessing Officer, and on such findings the books of accountscould not be disbelieved. The observation of the AssessingOfficer that the appellant was trying to suppress his real profit,was not supported by any material, the appellate authority heldthat in the instant case, the books of accounts are properlymaintained and unless the books are rejected, the estimationcould not be made. He found that the Assessing Officer hasnowhere found any defect in the books of accounts of theappellant, therefore, lump sum addition of Rs.5 lacs cannot besustained. 3.The Income Tax Appellate Tribunal allowed the secondappeal with the findings that assessee-company derives incomefrom crushing of oil seeds through oil mill, and solvent plantand also by trading of its products. The Assessing Officerobserved that in view of the crushing of different kind of oilseeds and oil cakes proper comparison cannot be visualised inthe business of the assessee company. The assessee companydeals in purchase of various oil seeds, out of which certain oilseeds give more and better yield rate, whereas the lowerquality of the oil seeds and oil cakes give lower yield rate,which cannot be compared with others. Tracing the history ofthe profits, the Assessing Officer found that despite continuousprofits, the profit rate started decreasing from 19.84% in assessment year 1990-91 to 11.18% in assessment year 1993-94. In view of these factors, and specially the fact that theassessee had maintained the books of accounts properly, thebooks of accounts of the assessee were rightly not rejected bythe Assessing Officer, but the addition of Rs.5 lacs, on theunexplained reduction of profit rate was justified. assessment year 1990-91 to 11.18% in assessment year 1993-94. In view of these factors, and specially the fact that theassessee had maintained the books of accounts properly, thebooks of accounts of the assessee were rightly not rejected bythe Assessing Officer, but the addition of Rs.5 lacs, on theunexplained reduction of profit rate was justified. 4.Learned counsel appearing for the appellant-assesseesubmits that the books of accounts were not rejected by theAssessing Officer. He had simply raised doubt over it, withoutany material or findings with regard to proper maintenance ofbooks of accounts. He submits that no error was detected inthe books of accounts, and they were accepted by theAssessing Officer, and thus, there could be no reason foraddition of Rs.5 lacs. The reduction in the profit rate in theabsence of any defect in accounts, cannot be a ground to madeaddition in income. He has relied on judgment of this Court inCommissioner of Income Tax vs. Maharaja Shree UmedMills Ltd. [(1991) 192 ITR 565 (Raj.)], in which it was held in para 3 as follows: “3......... The assessee was asked to give reasonsfor the abrupt fall in the gross profit rate to which areply was given that it was due to increase inexpenditure on salaries and wages, fuel consumptionand stores consumption. The assessee was directedto furnish the details of the percentage ofconsumption of the different items but, in spite ofrepeated reminders, he failed to furnish the same. Itwas held by the IAC that the assessee-company hadfailed to discharge the onus of proof regarding the fallin the gross profit rate to the extent of 6.4 per centand the conclusion was that the expenses under various heads had been inflated. On appeal, thelearned CIT took into consideration the change in thegross prifit rate for 11 years and various other factorsincluding the maintenance of accounts, which havenot been rejected and that the IAC had not pointedout any single instance of inflation in expenditure.The appeals of the assessee were allowed in part. Inappeal, the Tribunal did not discuss the matter, butsimply stated that the opinion of the CIT was correctand that the IAC had been unduly influenced by theaction of his predecessor and had not applied hisjudicial mind in the proper perspective. The reasoningof the CIT was adopted.” 5.Reliance has also been upon the judgment of Gauhati High Court inAluminium Industries (P) Ltd. vs.Commissioner of Income Tax [(1995) 80 TAXMAN 184 (Gau.)], in which it was held in para 5 as follows: “5.......Similarly, the mere fact that the profits werelow is not a circumstance or material to justifyaddition of profits. It would be seen from both theorders Annexures-A and C as passed by the ITO andthe Tribunal that the sheet anchor of this order is thefall in profit. Even in cases of best judgment it mustbe based on adequate and relevant material. It isnow well-settled that the ITO while making a bestjudgment assessment should make an intelligible wellgrounded estimate and such estimate must be basedon adequate and relevant material, inasmuch as, suchestimate, is to be made in case of default committedby the assessee either in not making the return or notcomplying with all the terms of a notice under s. 143(2) of the Act of a direction made under s. 142(2A).It is on any one or more of this default that ITO has tomake a best judgment assessment after taking intoaccount all relevant materials which may be derivedfrom the records or which may have come into hispossession into course of assessment proceeding andwhich the assessee does not explain or contradict inrespect of particulars given to him. The conditionsenumerated in cls. (a), (b) and (c) under s. 144 of theAct relating to best judgment assessment must befulfilled before taking recourse to the best judgmentassessment. The order Annexure-A and C do notreflect such considerations although the Tribunal at one stage has observed: 'In our opinion, the ITO wasjustified in making the addition of Rs.50,000 whichmarginally increased the rate of gross profit of theassessee. There is no justification for deleting thisamount of Rs.50,000. Now going through the ITO'sorder, it would be evident that the essentialrequirement of s.144 have not at all been compliedwith.” 6.Learned counsel appearing for the appellant-assessee has also referred to the judgment of Delhi High Court in Commissioner of Income Tax vs. Smt. Poonam Rani[(2010) 41 DTR (Del) 194], in which the Delhi High Courthas held in para 9 as follows: “9.The fall in GP ratio could be for various reasonssuch as increase in the cost of raw material, decreasein the market price of finished product, increase in thecost of processing by the assessee etc. There is nofinding that the actual cost of the raw materialpurchased by the assessee was less than what wasdeclared in the account books. There is no finding thatthe actual cost of processing carried out by theassessee was less than what had been declared in heraccount books. No particular expenditure shown in theaccount books has been disallowed by the AssessingOfficer. There is no finding by the Assessing Officerthat the actual quantity of finished product producedby the assessee was more than what it was shown inthe accounts books. There is no finding that theassessee had made any such sale of thefinished product which was not reflected in theaccounts books. There is no finding by the AO that thefinished product was sold by the assessee at a pricehigher than what was declared in the accounts books.In these circumstances, the CIT(A) and the Tribunal,in our view, were justified in holding that theAssessing Officer could not have increased the GPprofit ratio merely because it was low as compared tothe GP ratio of the preceding year.” 7.Learned counsel appearing for the respondent-department submits that the increasing turn over and gross profits from1990-91 to 1993-94, did not justify the reduction in the profit rate. The assessee-company had declared profit rate of11.18% as against the last years gross profit rate of 13.78%. 8.The Assessing Officer had given the figures of the grossprofit rates of the assessee-company for last three years as follows: “A.Y.Sales Turnover Gross ProfitGross Profit rate1990-91Rs.4,58,31,787/-Rs.90,95,300/-19.84%1991-92Rs.19,78,12,367/-Rs.3,43,80,517/- 17.38%1992-93Rs.39,76,59,696/-Rs.5,48,20,047/- 13.78%1993-94Rs.33,63,27,190/-Rs.3,76,25,958/- 11.18%” 9.The Assessing Officer, on analysis of the above table, recorded the trend of the assessee-company for adoptingdecreasing low profit rates. The reasons given for low profitrate, despite increase of the turnover and gross profits, was notaccepted. The Assessing Officer, therefore, did not reject thebooks of accounts wholly, and even after accepting the methodof accounting, made an addition of Rs.5 lacs on the ground thatthe profit rate shown by the assessee was much lower than theprevious year. 10.Learned counsel appearing for the respondent-departmenthas relied on Commissioner of Income Tax vs. BritishPaints India Ltd. [(1991) 188 ITR 0044], in which theSupreme Court has observed as follows: “Section 145 of the Income-tax Act, 1961,confers sufficient power upon the officer-nay itimposes a duty upon him-to make such computationin such manner as he determines for deducing thecorrect profits and gains. This means that where,accounts are prepared without disclosing the real costof the stock-in-trade, albeit on sound expert advice inthe interest of efficient administration of the company,it is the duty of the Income-tax Officer to determine the taxable income by making such computation as hethinks fit. 10.Learned counsel appearing for the respondent-departmenthas relied on Commissioner of Income Tax vs. BritishPaints India Ltd. [(1991) 188 ITR 0044], in which theSupreme Court has observed as follows: “Section 145 of the Income-tax Act, 1961,confers sufficient power upon the officer-nay itimposes a duty upon him-to make such computationin such manner as he determines for deducing thecorrect profits and gains. This means that where,accounts are prepared without disclosing the real costof the stock-in-trade, albeit on sound expert advice inthe interest of efficient administration of the company,it is the duty of the Income-tax Officer to determine the taxable income by making such computation as hethinks fit. Any system of accounting which excludes, forthe valuation of the stock-in-trade, all costs otherthan the cost of raw materials for the goods-in-process and finished products, is likely to result in adistorted picture of the true state of the business forthe purpose of computing the chargeable income.Such a system may produce a comparatively lowervaluation of the opening stock and the closing stock,thus showing a comparatively low difference betweenthe two. In a period of rising turnover and risingprices, the system adopted by the assessee, as foundby the Tribunal, is apt to diminish the assessment ofthe taxable profit of a year. The profit of one year islikely to be shifted to another year which is anincorrect method of computing profits and gains forthe purpose of assessments Each year being self-contained unit, and the taxes of a particular yearbeing payable with reference to the income of thatyear, as computed in terms of the Act, the methodadopted by the assessee has been found to be suchthat income cannot properly be deduced therefrom. Itis therefore, not only the right but the duty of theAssessing Officer to act in exercise of his statutorypower, as he has done in the instant case, fordetermining what, in his opinion, is the correct taxableincome. The Tribunal's order, affirming that of theAssessing Officer, was based on findings of fact madeon cogent evidence and in accordance with correctprinciples. The High Court was clearly wrong ininterfering with those findings. Accordingly, we set aside the judgment of theHigh Court and allow the appeals of the Revenue withcosts throughout. Appeals allowed”. 11. Section 145 of the Income Tax Act provides for method of accounting at the time of making assessment. The incomechargeable under the head “Profits and gains of business orprofess” or “Income from other sources” is provided to becomputed in accordance with the method of accounting, subjectto provisions of sub-section (2) in accordance with either cash The Tribunal's order, affirming that of theAssessing Officer, was based on findings of fact madeon cogent evidence and in accordance with correctprinciples. The High Court was clearly wrong ininterfering with those findings. Accordingly, we set aside the judgment of theHigh Court and allow the appeals of the Revenue withcosts throughout. Appeals allowed”. 11. Section 145 of the Income Tax Act provides for method of accounting at the time of making assessment. The incomechargeable under the head “Profits and gains of business orprofess” or “Income from other sources” is provided to becomputed in accordance with the method of accounting, subjectto provisions of sub-section (2) in accordance with either cash or mercantile system of accounting regularly employed by theassessee. Sub-section (3) of Section 145 provides that wherethe Assessing Officer is not satisfied about the correctness orcompleteness of the accounts of the assessee, or where themethod of accounting provided in sub-section (1) or accountingstandards as notified under sub-section (2), have not beenregularly followed by the assessee, the Assessing Officer maymake an assessment in the manner provide in Section 144.12.In our view, following an accepted method of accountingand the consistency in maintaining such accounts, does notensure the correctness or completeness of the accounts. Evenif, the method of accounting is correct, the accounts may bemaintained in a manner, in which without creating any doubtover the method of maintaining of the accounts, the AssessingOfficer, for good and sufficient reasons recorded by him, findthat the computation is in such a manner, which does notaccurately records the profits and gains. In the present case,the substantial increase in turnover from 4.58 to 33.63 crores,and the gross profits from Rs.90 lacs to 3.76 crores, did notjustify the gradual fall in the gross profit rates. The reasons,given by the assessee-company explaining the reduction ofgross profit rates, were not accepted by the Assessing Officer,and thus he made lump sum addition of Rs.5 lacs, which hasbeen upheld by the Tribunal. We do not find any error of law inthe computation of the income in a manner in the absence of a valid justification of reduction of gross profit rate, a marginaladdition of Rs.5 lacs was made. 13.The question No.1 is thus, decided in favour of thedepartment and against the assessee-company. 14.The question No.2 is covered by the judgment of aDivision Bench of this Court in Vijay Solvex Ltd. vs.Commissioner of Income Tax, Alwar [D.B.Income TaxAppeal No.185/2004, decided on 06.01.2014 alongwithtwo connected appeals], following the judgment of the ApexCourt in Motilal Pesticides (I) Pvt. Ltd. vs. Commissionerof Income Tax [(2000) 9 SCC 63], in which it was observed as follows: valid justification of reduction of gross profit rate, a marginaladdition of Rs.5 lacs was made. 13.The question No.1 is thus, decided in favour of thedepartment and against the assessee-company. 14.The question No.2 is covered by the judgment of aDivision Bench of this Court in Vijay Solvex Ltd. vs.Commissioner of Income Tax, Alwar [D.B.Income TaxAppeal No.185/2004, decided on 06.01.2014 alongwithtwo connected appeals], following the judgment of the ApexCourt in Motilal Pesticides (I) Pvt. Ltd. vs. Commissionerof Income Tax [(2000) 9 SCC 63], in which it was observed as follows: “Both sections 80HH and 80M fall in Chapter VI-Arelating to deductions to be made in computing totalincome. It will be seen that the language of sections80HH and 80M is the same. It was held in ClothTraders (P.) Ltd.'s case : [1979] 118 ITR 243 (SC)that deduction is to be allowed on the gross totalincome and not on the net income. But then thedecision in Cloth Traders (P.) Ltd.'s case: [1979] 118ITR 243 (SC) was overruled in Distributors (Baroda) P.Ltd. v. Union of India: [1985] 155 ITR 120 (SC) . Afterthe decision in Cloth Traders (P.) Ltd.'s case [1979]118 ITR 243 (SC) , two sections 80AA and 80AB wereintroduced by the Finance (No. 2) Act, 1980. WhileSection 80AA was to have retrospective effect witheffect from April 1, 1968, Section 80AB was to haveoperation with effect from April 1, 1981. Section 80AAhad the effect of effacing the decision of this court inCloth Traders (P.) Ltd.'s case : [1979] 118 ITR 243(SC) , which had interpreted Section 80M. Section80AB was made applicable to all the sections inChapter VI-A except Section 80M. In Distributors(Baroda) P. Ltd.'s case: [1985] 155 ITR 120 (SC) ,however, this court specifically overturned its earlierdecision in Cloth Traders (P.) Ltd.'s case: [1979] 118ITR 243 (SC) and held that deduction is to be allowedonly on the net income and not on the gross income. With reference to Section 80AB, this court said it wasmerely of a clarificatory nature and the decision of thiscourt in Distributors (Baroda) P. Ltd.'s case: [1985]155 ITR 120 (SC) is thus irrespective of Section 80ABof the Act. The High Court, therefore, relying on thedecision of this court in Distributors (Baroda) P. Ltd.'scase : [1985] 155 ITR 120 (SC) answered thequestion in favour of the Revenue and against theassessee.” The Division Bench also found that the Apex Court in M/s. Himatsingka Seide Ltd. vs. CIT [Civil AppealNos.1501/2008, decided on 19.09.2013] also took similarview. 15.Thus, the question No.2, in the present case, in respectof the same assessee, has been decided by the Division Benchof this Court, with which we do not find any reason to disagree.The question No.2 is also decided in favour of the departmentand against the assessee-company. 16.We are informed that the Apex Court in M/s. VijayIndustries vs. Commissioner of Income Tax [Civil Appeal Nos.1581-1582 of 2005, decided on 05.11.2014] hasexpressed doubt on the opinion expressed in Motilal Pesticides(I) Pvt. Ltd. vs. Commissioner of Income Tax (supra), and hasreferred the question to Hon'ble the Chief Justice of India toconstitute a Larger Bench to consider the correctness of theopinion. 17.Any doubt, expressed by Hon'ble Supreme Court on thecorrectness of the opinion in a case which has been followed inthe case of the assessee for previous year, may not persuade us to take a different view in the matter, unless the SupremeCourt decides otherwise. 18.Learned counsel appearing for the appellant-assesseeprays for a liberty to file appeal in the Supreme Court. In ouropinion, this case does not raise any question of law, which inour opinion, may be considered and decided by Hon'bleSupreme Court. The prayer is rejected. 19.The Income Tax Appeal is dismissed. (PRAKASH GUPTA),J. (SUNIL AMBWANI),ACTING C.J. Mohit 17.Any doubt, expressed by Hon'ble Supreme Court on thecorrectness of the opinion in a case which has been followed inthe case of the assessee for previous year, may not persuade us to take a different view in the matter, unless the SupremeCourt decides otherwise. 18.Learned counsel appearing for the appellant-assesseeprays for a liberty to file appeal in the Supreme Court. In ouropinion, this case does not raise any question of law, which inour opinion, may be considered and decided by Hon'bleSupreme Court. The prayer is rejected. 19.The Income Tax Appeal is dismissed. (PRAKASH GUPTA),J. (SUNIL AMBWANI),ACTING C.J. Mohit M/7All corrections made in the judgment/order have been incorporated in the judgment/order being emailed.Mohit Tak, P.A.