Ita/5028/2011 Of The Commissioner Of Income Tax v. M/S Bahubali Neminath Muttin

� R IN THE HIGH COURT OF KARNATAKA KALABURAGI BENCH DATED THIS THE 13 DAY OF JULY, 2016 PRESENT THE HON’BLE MR.JUSTICE ANAND BYRAREDDY AND THE HON’BLE MR.JUSTICE RAGHVENDRA S. CHAUHAN INCOME TAX APPEAL NO. 5027/2011 C/W INCOME TAX APPEAL NO. 5028/2011 INCOME TAX APPEAL NO.5027/2011: BETWEEN: 1.The Commissioner of Income TaxKhemjibai Complex,Khemjibai Complex, Dr. Ambedakar Road, Belgaum. 2.Deputy Commissioner of Income TaxCentral Circle –1, Belgaum.Central Circle –1, Belgaum. (Shri Ameet Kumar Deshpande, Advocate) … APPELLANTS AND: M/s. Bahubali Neminath MuttinMain Road at Post Chandachan Taluk Indi, District Bijapur – 586 205. … RESPONDENT (Shri Ashok Kulkarni & Shri K.R. Prasad, Advocates) This Income Tax Appeal is filed Under Section 260A of theIncome-Tax Act, 1961 against order passed in Income Tax AppealNo.161/PNJ/2010 dated 08-06-2011 on the file of the Income TaxAppellate Tribunal, Panaji Bench, Panaji, partly allowing theappeal filed by an assessee. INCOME TAX APPEAL NO.5028/2011: BETWEEN: 1. The Commissioner of Income TaxKhemjibai Complex,Dr. Ambedakar Road,Belgaum.Khemjibai Complex,Dr. Ambedakar Road,Belgaum. 2. Deputy Commissioner of Income TaxCentral Circle –1, Belgaum.Central Circle –1, Belgaum. (Shri Ameet Kumar Deshpande, Advocate) … APPELLANTS AND: M/s. Bahubali Neminath MuttinMain Road at Post Chandachan Taluk Indi, District Bijapur – 586 205. … RESPONDENT (Shri Ashok Kulkarni & Shri K.R. Prasad, Advocates) This Income Tax Appeal is filed Under Section 260A of theIncome-Tax Act, 1961 against order passed in Income Tax AppealNo.164/PNJ/2010 dated 08-06-2011 on the file of the Income TaxAppellate Tribunal, Panaji Bench, Panaji, partly allowing theappeal filed by the revenue. These appeals having been reserved on 14.6.2016 andcoming on for ‘Pronouncement of Judgement’ this day, AnandByrareddy J., delivered the following: JUDGMENT These appeals are disposed of by this common judgment inview of the fact that these appeals are filed by the Revenueaggrieved by the common order of the Income Tax AppellateTribunal (ITAT) passed on appeals filed by the assessee as well asthe Revenue in ITA No.160/2010 and ITA No.164/2010,respectively, the former filed by the assessee and the latter by theRevenue and in view of the questions arising for considerationbeing similar. 2.The facts are as follows: The respondent assessee is said to be a partnership firmcarrying on business as wholesale cloth merchants. Consequent upon a search conducted under Section 132 of the Income Tax Act,1961 (Hereinafter referred to as the ‘I.T. Act’, for brevity) theassessee is said to have filed a return of income declaring a totalincome of Rs.21,46,550/-. However, based on the material seizedby the assessing authority and on completion of the assessment, the following additions were said to have been made: (i)Undisclosed income on account of purchasesunder Section 69B being at Rs.62,94,317/-;under Section 69B being at Rs.62,94,317/-; (ii)Gross profit on suppressed sales being theundisclosed income at Rs.10,67,954/-;undisclosed income at Rs.10,67,954/-; (iii)Unrecorded purchases under Section 69B beingthe undisclosed income as per sales taxinformation Rs.21,60,929/-; andthe undisclosed income as per sales taxinformation Rs.21,60,929/-; and (iv)Gross profit @ 7.43% on Rs.6,01,187/- beingthe undisclosed income Rs.44,891/-.the undisclosed income Rs.44,891/-. 3.The assessee is said to have filed an appeal before theCommissioner of Income Tax (Appeals) against the above order.The addition under Section 69B of the I.T. Act was deleted, holdingthat on the date when the unaccounted purchases were made, the money from unaccounted sales was available for making suchpurchases. (ii)Gross profit on suppressed sales being theundisclosed income at Rs.10,67,954/-;undisclosed income at Rs.10,67,954/-; (iii)Unrecorded purchases under Section 69B beingthe undisclosed income as per sales taxinformation Rs.21,60,929/-; andthe undisclosed income as per sales taxinformation Rs.21,60,929/-; and (iv)Gross profit @ 7.43% on Rs.6,01,187/- beingthe undisclosed income Rs.44,891/-.the undisclosed income Rs.44,891/-. 3.The assessee is said to have filed an appeal before theCommissioner of Income Tax (Appeals) against the above order.The addition under Section 69B of the I.T. Act was deleted, holdingthat on the date when the unaccounted purchases were made, the money from unaccounted sales was available for making suchpurchases. 4.In dealing with the issue of the addition on account of grossprofit on suppressed sales made by the Assessing Officer, theAppellate authority had increased the addition to Rs.30,86,762/-. Itwas observed that the Assessing Officer had erred in adopting theclosing stock of Rs.1,89,25,248/- as against the amount disclosed inthe audited statement of accounts at Rs.2,80,21,787/-. 5.As against the said order of the Appellate authority, theassessee, as well as the Revenue, are said to have filed appealsbefore the ITAT. The Tribunal, had confirmed the deletions madeby the CIT (Appeals). 6.Further, the next addition made on account of unaccounted purchases at Rs.21,60,929/-, which was deleted by the CIT(Appeals), the Tribunal held that no interference was required asregards those findings. As regards the addition made as gross profit on account of suppressed sales at Rs.10,67,954/- which wasincreased to Rs.30,86,762/- by the CIT (Appeals), the Tribunal heldthat the sales declared by the assessee and the unaccounted salesworked out by the Assessing Officer had not been disputed by theCIT (Appeals). It was further observed that when the Gross ProfitRate is applied, there was a clear explanation and hence there wasno need for the scrutiny of the amount incurred on purchases by theassessee. 7.It was also observed by the Tribunal that there was nomaterial available to the CIT (Appeals) to draw an inference thatthe assessee had earned gross profit at a rate more than declared onthe turn over, or at the rate at which assessment had been made bythe assessing officer. It was further held that re-casting of tradingaccount itself was inappropriate and contrary to known principlesof accountancy. It was thus concluded that Assessing Officer hadestimated the income in a just and proper manner and hence confirmed the addition made by the Assessing Officer. It is against those findings, that the present appeals are filed by the revenue. 8.The common substantial questions of law as framed by theRevenue are as follows: “1. Whether the ITAT is justified in not upholding theaddition made on account of ‘unaccounted purchases’, byignoring the provisions of section 69B of the Income TaxAct, 1961? 2. Whether the ITAT is justified in deleting the additionmade by the CIT(A) on account of ‘unaccountedsales/suppressed sales’, when the ITAT has not disbelievedthe amount of closing stock arrived at by the CIT(A)?” 9.The learned Counsel Shri Ameet Kumar Deshpandeappearing on behalf of the Revenue would contend that theTribunal was in error in confirming the order of the CIT (Appeals)deleting the addition of Rs.21,60,929/- on account of unaccountedpurchases. It ought to have been noted by the Tribunal that fromthe records it was evident that the assessee had indulged in unaccounted purchases and sales, year after year, as evident duringthe course of the search. 2. Whether the ITAT is justified in deleting the additionmade by the CIT(A) on account of ‘unaccountedsales/suppressed sales’, when the ITAT has not disbelievedthe amount of closing stock arrived at by the CIT(A)?” 9.The learned Counsel Shri Ameet Kumar Deshpandeappearing on behalf of the Revenue would contend that theTribunal was in error in confirming the order of the CIT (Appeals)deleting the addition of Rs.21,60,929/- on account of unaccountedpurchases. It ought to have been noted by the Tribunal that fromthe records it was evident that the assessee had indulged in unaccounted purchases and sales, year after year, as evident duringthe course of the search. 10.It is further contended that the Tribunal’s observations thatthe assessee was found to have been carrying on business for overtwo decades and had indulged in carrying on sales out of purchaseswhich were recorded as well as purchases which were not recordedand that the unrecorded purchases as on 09.06.2004 wasRs.21,60,929/- as evident from Annexure-C to the assessment orderand therefore the Tribunal alternatively ought to have confirmed theaddition as unaccounted purchases under Section 69B of the I.T.Act at Rs.21,60,929/- representing the amount of peak purchase. 11.It is contended that the Tribunal has failed to consider thefact that the Assessing Officer had merely recast the day book andhad accurately added the unaccounted purchases and the grossprofit on suppressed sales. Therefore, the Tribunal ought to havenoted the addition made under Section 69B of the I.T. Act wouldhave no bearing on the estimation of profit on suppressed sales. It is contended that the Tribunal was also in error in holding that whengross profit rate is applied there is a clear explanation fordiscrepancies. In that, there was no need for the Assessing Officerto scrutinize the amounts incurred on purchases and therebyconcluded that there was no factual or legal justification in the CIT(Appeals) having enhanced the income at Rs.30,86,762/-. It is inthis vein that the learned Counsel would seek to urge grounds insupport of the substantial questions of law as framed by therevenue. 12.On the other hand Shri Ashok Kulkarni, the learned Counselappearing for the assessee – respondent, would submit that in theassessment proceedings that followed the search under Section 132of the I.T. Act, the Assessing Officer had found that the books ofaccounts of the assessee were not reliable. Therefore, afterconsidering the respondent’s explanation had rejected the booksand had invoked the provisions of Section 145 (3) of the I.T. Act.The Assessing Officer estimated the income by applying the Gross Profit Rate of 7.43% on the unaccounted sales over and above thedeclared sales and determined the income accordingly to the best ofhis judgment in the manner provided under the I.T. Act. It ispointed out that the rejection of the books of account under Section145 (3) of the I.T. Act the total sales determination and the grossprofit rate at 7.43% adopted by the Assessing Officer has not beendisputed by the respondents and therefore has attained finality.Pursuant to the appeals before the CIT (Appeals) and the furtherappeals before the ITAT and the present appeals having been filedby the Revenue, the substantial questions of law that have beenframed in the present appeals would have to be viewed in thebackground that the appellate Tribunal on a scrutiny of the entirefactual material on record has passed the impugned order and nowan attempt is being made by the Revenue to seek re-appreciation ofthe evidence on factual aspects and the conclusions drawn in theorder of the appellate tribunal, which according to the learnedCounsel is impermissible under Section 260A of the I.T. Act. 13.It is further contended that there are clear findings of fact bythe ITAT, on all the issues raised in the present appeals. It issignificant that no additional material is placed before this Court todemonstrate that the findings of fact arrived at by the Tribunal areperverse. It is emphasized that the cardinal principle is that theTribunal which is the final fact finding authority and if suchfindings of fact are to be assailed, it would require a substantialquestion, as to there being a perverse finding of fact by theTribunal, to have been raised. In the absence of any such questionhaving been raised, it cannot be said that any question of law arisesfor consideration, and much less a substantial question of law, ascontemplated under Section 260A of the I.T. Act. Reliance isplaced on the following authorities by the learned Counsel insupport of the above proposition: 1.330 ITR 1 (SC) @ 7-9 (Vijay Kumar Talwar vs.Commissioner of Income Tax)Commissioner of Income Tax) 2.378 ITR 640 (SC) @ 648 (Mangalore Ganesh BeediWorks vs. Commissioner of Income Tax and Another)Works vs. Commissioner of Income Tax and Another) 3.273 ITR 50 (SC) @ 55 (M. Janardhan Rao vs. JointCommissioner of Income Tax)Commissioner of Income Tax) 4.300 ITR 205 (SC) @ 211,212 (Sudarshan Silks andSarees vs. Commissioner of Income Tax)Sarees vs. Commissioner of Income Tax) 5.247 ITR 178 @ 180, 181, 182 (K. Ravindranathan Nairvs. Commissioner of Income Tax)vs. Commissioner of Income Tax) 14.Alternatively, and without prejudice to the preliminaryobjections raised above, he would submit that, on merits it shouldbe noted that admittedly the books of accounts of the respondenthave been rejected by the assessing authority. The profit of therespondent is estimated as provided under Section 145 (3) of theI.T. Act. When the gross profit rate is applied, it would cover anyinfirmity and there was no need for the Assessing Officer to make ascrutiny of the amounts incurred on the purchases by therespondent. In any event, the revenue would not be in a position torely on the rejected books of accounts for making the additions onaccount of trade creditors and also for the purpose of arriving at aclosing stock. This is the view taken by atleast four High Courts inthe following reported judgments: 1.232 ITR 776 (AP) @ 778, 779 (Indwell Constructionsvs. Commissioner of Income Tax)vs. Commissioner of Income Tax) 2.229 ITR 229 (All) @ 232 (Commissioner of IncomeTax vs. Banwari Lal Banshidhar)Tax vs. Banwari Lal Banshidhar) 3.302 ITR 246 (P & H) @ 249 (Commissioner of IncomeTax vs. Aggarwal Engineering Company)Tax vs. Aggarwal Engineering Company) 4.377 ITR 568 @ 580 (Commissioner of Income Tax vs.Amman Steel and Allied Industries)Amman Steel and Allied Industries) 15.In the light of the above contentions and on a perusal of theimpugned orders, we notice that the learned Counsel for theappellants has re-worded the substantial questions of law as framedin the memoranda of appeals and as framed by this Court at thestage of admission, as on 14.06.2016 at the final hearing as above. 16.It is evident from a reading of Section 260A of the I.T. Actthat an appeal would lie to this Court from an order of the ITAT,only if there is a substantial question of law that arises forconsideration. In Vijay Kumar Talwar’s case supra, the SupremeCourt has held that it is mandatory for the High Court to formulatethe substantial question of law on which the appeal would be considered. But that the expression “a substantial question of law,”is not defined in the I.T. Act. However, it has acquired a definiteconnotation through various judicial pronouncements. In ShriChunilal V. Mehta and Sons Ltd. vs. Century Spinning andManufacturing Company Limited, AIR 1962 SC 1314, aConstitution Bench of the Apex Court has held as follows: 16.It is evident from a reading of Section 260A of the I.T. Actthat an appeal would lie to this Court from an order of the ITAT,only if there is a substantial question of law that arises forconsideration. In Vijay Kumar Talwar’s case supra, the SupremeCourt has held that it is mandatory for the High Court to formulatethe substantial question of law on which the appeal would be considered. But that the expression “a substantial question of law,”is not defined in the I.T. Act. However, it has acquired a definiteconnotation through various judicial pronouncements. In ShriChunilal V. Mehta and Sons Ltd. vs. Century Spinning andManufacturing Company Limited, AIR 1962 SC 1314, aConstitution Bench of the Apex Court has held as follows: “18. The proper test for determining whether a question oflaw raised in the case is substantial would, in our opinion,be whether it is of general public importance or whether itdirectly and substantially affects the rights of the partiesand if so whether it is either an open question in the sensethat it is not finally settled by this court or by the PrivyCouncil or by the Federal Court or is not free fromdifficulty or calls for discussion of alternative views. If thequestion is settled by the highest court or the generalprinciples to be applied in determining the question arewell settled and there is a mere question of applying thoseprinciples or that the plea raised is palpably absurd thequestion would not be a substantial question of law.” 17.Similarly, in Santosh Hazari vs. Purushottam Tiwari [2001]3 SCC 179, a three-judge Bench of the Apex Court has observedthat: “A point of law which admits of no two opinionsmay be a proposition of law but cannot be a substantialquestion of law. To be ‘substantial’ a question of law mustbe debatable, not previously settled by law of the land or abinding precedent, and must have a material bearing onthe decision of the case, if answered either way, insofar asthe rights of the parties before it are concerned. To be aquestion of law ‘involving in the case’ there must be first afoundation for it laid in the pleadings and the questionshould emerge from the sustainable findings of fact arrivedat by court of facts and it must be necessary to decide thatquestion of law for a just and proper decision of the case.An entirely new point raised for the first time before theHigh Court is not a question involved in the case unless itgoes to the root of the matter. It will, therefore, depend onthe facts and circumstance of each case whether a questionof law is a substantial one and involved in the case, or not;the paramount overall consideration being the need forstriking a judicious balance between the indispensableobligation to do justice at all stages and impellingnecessity of avoiding prolongation in the life of any lis.” 18.In Hero Vinoth (Minor) Vs. Seshammal, [2006] 5 SCC 545,556, the Apex Court has observed that: "The general rule is that High Court will notinterfere with the concurrent findings of the courts below.But it is not an absolute rule. Some of the well-recognisedexceptions are where (i) the courts below have ignoredmaterial evidence or acted on no evidence; (ii) the courtshave drawn wrong inferences from proved facts byapplying the law erroneously; or (iii) the courts havewrongly cast the burden of proof. When we refer to‘decision based on no evidence’, it not only refers to caseswhere there is a total dearth of evidence, but also refers toany case, where the evidence, taken as a whole, is notreasonably capable of supporting the finding.” 19.In Vijay Kumar Talwar’s case the Supreme Court hasobserved thus: “21. A finding of fact may give rise to a substantialquestion of law, inter alia, in the event the findings arebased on no evidence and/or while arriving at the saidfinding, relevant admissible evidence has not been takeninto consideration or inadmissible evidence has been takeninto consideration or legal principles have not been 19.In Vijay Kumar Talwar’s case the Supreme Court hasobserved thus: “21. A finding of fact may give rise to a substantialquestion of law, inter alia, in the event the findings arebased on no evidence and/or while arriving at the saidfinding, relevant admissible evidence has not been takeninto consideration or inadmissible evidence has been takeninto consideration or legal principles have not been applied in appreciating the evidence, or when the evidencehas been misread. (See: Madan Lal Vs. Mst. Gopi & Anr.[19800 4 SCC 255; Narendra Gopal Vidyarthi Vs. RajatVidyarthi [2009] 3 SCC 287; Commissioner of Customs(Preventive) Vs. Vijay Dasharath Patel [2007] 4 SCC 118;Metroark Ltd. Vs. Commissioner of Central Excise,Calcutta [2004] 12 SCC 505; West Bengal ElectricityRegulatory Commission Vs. CESC Ltd. [2002] 8 SCC715).” 20.Further, in Mangalore Ganesh Beedi works case supra theSupreme Court has held as follows: “19. xxx There is a clear finding of fact by the Tribunalthat the legal expenses incurred by the assessee were forprotecting its business and that the expenses were incurredafter November 18, 1994. There is no reason to reversethis finding of fact particularly since nothing has beenshown to us to conclude that the finding of fact wasperverse in any manner whatsoever. That apart, if thefinding of fact arrived at by the Tribunal were to be setaside, a specific question regarding a perverse finding offact ought to have been framed by the High Court. TheRevenue did not seek the framing of any such question. Inthis regard, reference may be made to K. Ravindranathan Nair v. Commissioner of Income Tax [2001] 247 ITR 178,181 (SC) wherein it was observed: “The High Court overlooked the cardinalprinciple that it is the Tribunal which is thefinal fact-finding authority. A decision onfact of the Tribunal can be gone into by theHigh Court only if a question has beenreferred to it which says that the finding ofthe Tribunal on facts is perverse, in the sensethat it is such as could not reasonably havebeen arrived at on the material placed beforethe Tribunal. In this case, there was no suchquestion before the High Court. Unless anduntil a finding of act reached by the Tribunalis canvassed before the High Court in themanner set out above, the High Court isobliged to proceed upon the findings of factreached by the Tribunal and to give ananswer in law to the question of law that isbefore it.” 20. Accordingly, we hold that the High Court was notjustified in upsetting a finding of fact arrived at by theTribunal, particularly in the absence of a substantialquestion of law being framed in this regard. Therefore, weset aside the conclusion arrived at by the High Court onthis question and restore the view of the Tribunal andanswer the question in favour of the Assessee and againstthe Revenue.” 21.In M. Janardhan Rao’s case, Sudarshan Silks and Sarees caseand K. Ravindranathan Nair’s case supra, the Apex Court has againreiterated the principles laid down in the aforesaid decisions. 22.The principle that if a finding of fact is not challenged asbeing perverse, the High Court is bound to accept such finding.Therefore, as no such substantial question of law has been framedand the questions pertain to findings of fact, which cannot be saidto be perverse as it is evident that the books of accounts of therespondent had been rejected by the assessing authority, in whichcase the same books of accounts could not be relied upon in anaddition on account of trade creditors and also for arriving at theclosing stock. This is an established principle as has been held inthe decisions relied upon by the respondent namely IndwellConstructions case, Banwari Lal Banshidhar’s case, AggarwalEngineering Company’s case and Amman Steel and AlliedIndustries,case supra. 22.The principle that if a finding of fact is not challenged asbeing perverse, the High Court is bound to accept such finding.Therefore, as no such substantial question of law has been framedand the questions pertain to findings of fact, which cannot be saidto be perverse as it is evident that the books of accounts of therespondent had been rejected by the assessing authority, in whichcase the same books of accounts could not be relied upon in anaddition on account of trade creditors and also for arriving at theclosing stock. This is an established principle as has been held inthe decisions relied upon by the respondent namely IndwellConstructions case, Banwari Lal Banshidhar’s case, AggarwalEngineering Company’s case and Amman Steel and AlliedIndustries,case supra. 23.In the light of the above, there is no substantial question oflaw that arises for consideration and the findings of the Tribunalcannot be said to be perverse, as the reasons assigned by theTribunal are certainly acceptable and do not warrant interference.Consequently, the appeals are dismissed. Sd/- JUDGE Sd/- JUDGE swk