M/S Ashok Kumar Gulshan Rai & Prty v. Commissioner Of Income Tax, Central, Ncrb Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 209 / 2005 M/S Ashok Kumar Gulshan Rai & Prty, through its Member Shri Shiv Dayal Thekadar S/o Shri Bajrang Lal Thekadar, aged about 50 years, R/o 56, Gulab Bari, Jawahar Nagar, Sawaimadhopur. ----Appellant Versus Commissioner of Income Tax, Central, NCRB Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Sanjay Jhanwar.For Respondent(s) : Mrs. Parinitoo Jain. _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VINIT KUMAR MATHURJudgment Per Hon’ble Jhaveri J. 24/01/2017 1. By way of this appeal the appellant has challenged thejudgment and order of the Tribunal whereby the Tribunal haspartly allowed the appeal of both sides, the assessee as well asdepartment and modified the order of CIT(A). 2.The brief facts of the case are that the return was fileddeclaring loss of Rs.70,940/- on 30.10.1996 along with auditreport in Form No. 3CB with ITO, Sawai Madhopur. Later on due tochange of jurisdiction, the assessment records of the assesseewere transferred to ACIT, Central Circle-I, Jaipur in 1997. Noticeunder Section 143(2) along with a questionnaire was issued.Books of accounts consisting of cash book, ledger book, purchasevouchers, vouchers of expenses partly produced. The assessee’s AOP is engaged in the business of purchase and sale of liquor. Ithas been awarded the contract by the Excise department to salecountry liquor, IMFL/Beer on retail basis in the area of Peepaldawhere 13 shops were for sale of country liquor and 3 shops werepermitted to sale of IMFL/beer on retail basis, On examination ofthe books of accounts and the details filed following pointsemerges for disucssion. 3.This Court while admitting the appeal on 19.09.2005 has framed the following substantial question of law: “1.Whether it is justified to make specificdisallowance of expenses us. 40A(3) ofRs.8,10,630/- as well as Trading Addition ofRs.10,00,499/- by rejecting complete booksof accounts u/s.145 simultaneously andwhether this would not amount to doubleaddition?”disallowance of expenses us. 40A(3) ofRs.8,10,630/- as well as Trading Addition ofRs.10,00,499/- by rejecting complete booksof accounts u/s.145 simultaneously andwhether this would not amount to doubleaddition?” 4.Identical issue came up for consideration before this Courton 04.10.2016 in DB Income Tax Appeal No.35/2003 in case ofMalpani House of Stones, vs. Commissioner of Income Tax-II, wherein this court has held as under in para 5-10: “5. The Allahabad High Court in the case ofCommissioner of Income Tax Vs. BabbanPandey- (1970) 77 ITR 601 (All) has heldas under: “The word “undisclosed source”means a source which has not beendisclosed by the assessee. It may refer toany of the sources mentioned in S.6 of1922 Act, not excluding “profits and gainsof business, profession, or vocation”. Themere fact that the explanation of theassessee as to the source of the amount inquestion was rejected and that he did notset up the plea in his grounds of appeal thatit formed part of his business profit, did notpreclude the Tribunal from finding out thecorrect source thereof. The finding of the Tribunal that the item in question standscovered by the addition of Rs.18,000 madeby the ITO in the trading account obviouslymeans that it came out of the profits of thebusiness. It was competent on the part ofthe Tribunal to come to that finding,although no such ground was set forth inthe memorandum of appeal by theassessee. The Tribunal was competent tohold that the sum of Rs.6,531 came out ofand was covered by the addition ofRs.18,000 to the business profits. Thefinding of the Tribunal in point is a finding offact which this Court cannot interfere.” Tribunal that the item in question standscovered by the addition of Rs.18,000 madeby the ITO in the trading account obviouslymeans that it came out of the profits of thebusiness. It was competent on the part ofthe Tribunal to come to that finding,although no such ground was set forth inthe memorandum of appeal by theassessee. The Tribunal was competent tohold that the sum of Rs.6,531 came out ofand was covered by the addition ofRs.18,000 to the business profits. Thefinding of the Tribunal in point is a finding offact which this Court cannot interfere.” 6. The Andhra Pradesh High Court in thecase of Maddi Sudarsanam Oil Mills Co. Vs.Commissioner of Income Tax- (1959) 37ITR 369 (AP) has held as under: “Accounts-Rejection- Profit estimated at flat rate-Further addition on account of cash credits-IT authorities cannot adopt a flat rate tocompute gross profit as well as rely on thebooks for purpose of adding unexplainedcash credit which were part of the schemeof balancing the accounts. The Tribunal wascareful in emphasising that it is basing itscomputation on the estimate of 9.5% andnot upon any of the items which 5 weretaken into account by the IT authorities.The scrutiny by the Tribunal of the items ofaddition made by the IT authorities wasmerely for the purposes of showing that theaccounts could not be relied upon. Thecontention that the Tribunal having adoptedas the basis of assessment a gross profit of9.5% instead of 5.1% had computed thefigure Rs.1,37,189 wrongly is valid. Havingcomputed the gross profit at 9.5% the AACfurther added a sum of Rs.56,345 onaccount of unaccounted for profit on sale ofpermits restricted to the unproved cashcredits. This addition is obviously wrongwhen a flat rate of 9.5% on the totalturnover is being adopted in computing thegross profits. The assessee had recourse tothe several entries of cash credits only forthe purposes of balancing the accounts witha view to reducing the rate of gross profits.If once the IT authorities have rejected thebooks, they cannot have it both ways,namely, adopting a flat rate to computegross profit as well as rely on the books forthe purposes of adding unexplained cash credits which were part of the scheme ofbalancing the accounts. Having regard tothe categorical observations of the Tribunalthat the addition should be unitary wherethe proviso to S.113 is applied by makingan estimate it cannot be assumed that theTribunal intended to negative the statementby also adding cash credits in computingthe gross profits.” credits which were part of the scheme ofbalancing the accounts. Having regard tothe categorical observations of the Tribunalthat the addition should be unitary wherethe proviso to S.113 is applied by makingan estimate it cannot be assumed that theTribunal intended to negative the statementby also adding cash credits in computingthe gross profits.” 7. The Andhra Pradesh in yet another casein Indwell Constructions Vs. Commissionerof Income Tax- (1998) 232 ITR 776 (AP)has held as under: “The pattern ofassessment under the IT Act is given bys.29 which states that the income fromprofits and gains of business shall becomputed in accordance with the provisionscontained in ss. 30 to 43D. Sec.40 providesfor certain disallowances in certain casesnotwithstanding that those amounts areallowed generally under other sections. Thecomputation under s.29 is to be madeunder s.145 on the basis of the booksregularly 6 maintained by the assessee. Ifthose books are not correct or complete,the ITO may reject those books andestimate the income to the best of hisjudgment. When such an estimate is madeit is in substitution of the income that is tobe computed under s.29. In other words, allthe deductions which are referred to unders.29 are deemed to have been taken intoaccount while making such an estimate.This will also mean that the embargo placedin s.40 is also taken into account. No doubtthere is big difference between profitearned with own capital and profit earnedwith borrowed capital and such a differencecould have been taken into account by theITO while making an estimate. If the CIThad set aside the estimate on the groundthat the vital fact that the business wascarried on with own capital and not withborrowed capital has been ignored by theITO, there may not have been any difficultyin upholding that order. But, when heproposes to add back an exact item in theP&L a/c, he was relying on the rejectedbooks which he could not do. There is also afurther difficulty if s.40 is to be taken intoaccount even after making an estimate.When there are certain other deductionswhich are to be disallowed such as wealthtax payment in s.40, can it be saidthat after making an estimate, the wealth-tax charged in the P&L a/c should again beadded back to the profit. This exampleillustrates how the contention of theRevenue, that s.40(b) makes a difference inthe situation, is untenable. Therefore, it isnot correct in law to make a separateaddition representing the interest andremuneration paid to partners, to theincome already estimated and assessedfrom contracts.- Maddi Sudarsanam Oil MillsCo. Vs. CIT (1959) 37 ITR 369 (A)): TC42R.1310 followed.” 8. Mr. Singhi, counsel for the respondent,has contended that in view of theconcurrent findings of both the authoritiesfor which no question has been framed andthe 7 assessment made by the authority isjust and proper, no interference is called for. 9. We have heard counsel for the appellantand the counsel for the respondent. 10. In view of the well settled principle oflaw that when income is estimated andwhile assessing the same and rejecting thebooks of accounts, it would not beappropriate to rely on the books of accountsfor any addition other than estimate madeby A.O.” 5.Mr. Jhanwar counsel for the appellant has contended that theappeal deserves to be allowed. 6.Counsel for the respondent is not in apposition to dispute theproposition made by Mr. Jhanwar. 7.In that view of the matter, trading addition is sustained andthe order of the CIT(A) is restored. In para 5.2 CIT(A) hasobserved as under: “5.2 I have carefully considered the facts ofthe case and the rival submissions. Theappellant in all its shops has declared sales 10. In view of the well settled principle oflaw that when income is estimated andwhile assessing the same and rejecting thebooks of accounts, it would not beappropriate to rely on the books of accountsfor any addition other than estimate madeby A.O.” 5.Mr. Jhanwar counsel for the appellant has contended that theappeal deserves to be allowed. 6.Counsel for the respondent is not in apposition to dispute theproposition made by Mr. Jhanwar. 7.In that view of the matter, trading addition is sustained andthe order of the CIT(A) is restored. In para 5.2 CIT(A) hasobserved as under: “5.2 I have carefully considered the facts ofthe case and the rival submissions. Theappellant in all its shops has declared sales at Rs. 10,56,467/- and has declared a GPrate of 30.68% which the AO found to below relying upon the results declared by M/sSurgain Ali Panwar who had disclosed a GPrate of 36.6% on total sales at Rs.1,95,96,901/- and M/s Megh Raj SurendraSingh & Party Bundi who had disclosed theGP rate of 34.13% on turnover of Rs.3,16,12,055/-. The AO rejected the booksof accounts and estimated the sales at Rs.1126640/- and applied GP rate of 35% andthereby making an addition of Rs. 70,713/-.The rejection of books of accounts hasalready been upheld by me against groundNo. 1 supra. Reliance of the AO on thereported case laws of Hon’ble SupremeCourt in the case of CIT Vs. British PaintsLtd. 188 ITR 44, CIT V Krishna Mudaliar 53ITR 122 (SC), S N Namrivyam Chattiar Vs.CIT 38 ITR 579(SC), CIT Vs Mc Millan & Co.33 ITR 182 (SC) and M/s Lal Chand WalaitiRam Vs CIT (1978) 111 ITR 244 (PB), M/sBombay Cycle Stores Co. Ltd. Vs. CIT(1958) 33 ITR 13 (Bombay) is well founded.He should base his estimate on resultsdeclared by the other contractor operatingin the same or nearby areas. It has beenheld in a number of cases that even thebest judgment assessment should bebased on some material facts. It should notbe capricious or arbitrary or a punitiveassessment. In this connection thefollowing decided cases which cover theissue are referred:- Brij Bhushan Lal Parduman Kumar Vs. CIT(1978) 115 ITR 524 (SC) “Estimate must be honest and fair.” The State of Kerala Vs. C. Veliukutty (1966)60 ITR 239 (SC). “Best judgment assessment must havereasonable nexus to the available material.” Ganga Prasad Sharma Vs. CIT (1981) 127ITR 27 (MP) “Best judgment assessment must not bearbitrary.” CIT Vs Ranicherra Tea Co. Ltd (1994) 207ITR 979 “In making a best judgment assessment theAO does not passes absolute arbitraryauthority to assess any figure he likes andalthough he is not bound by strict judicialprinciples, he should be guided by rule of justice, equity and good conscience.” Sri Shankar Khandasari Sugar Mills Vs. CIT(1992) 193 ITR 669 (Ker) “Best Judgment assessment out to bebased on a fair and proper estimate ofassessee’s income and inference to bedrawn from available material should beproperly inferable inference.” State of Orissa Vs. Maharaja Shri B P SinghDeo (1979) 76 ITR 690 (SC). “Merely because material placed by theassessee was not unreliable assessmentcannot be made arbitrarily.” Choughmal Aggarwala Vs. CIT (1962) 46ITR 262 (Assam) “Best Judgment assessment based onsuspicion and conjecture is not valid.” Chetan Dass Gulabichand Vs. CIT (1963) 49ITR 951 (Pat.) “In making best judgment assessment allrelevant material is to be considered.” justice, equity and good conscience.” Sri Shankar Khandasari Sugar Mills Vs. CIT(1992) 193 ITR 669 (Ker) “Best Judgment assessment out to bebased on a fair and proper estimate ofassessee’s income and inference to bedrawn from available material should beproperly inferable inference.” State of Orissa Vs. Maharaja Shri B P SinghDeo (1979) 76 ITR 690 (SC). “Merely because material placed by theassessee was not unreliable assessmentcannot be made arbitrarily.” Choughmal Aggarwala Vs. CIT (1962) 46ITR 262 (Assam) “Best Judgment assessment based onsuspicion and conjecture is not valid.” Chetan Dass Gulabichand Vs. CIT (1963) 49ITR 951 (Pat.) “In making best judgment assessment allrelevant material is to be considered.” In view of the above plethora of judicialpronouncements, the material relied uponthe AO and its applicability to the facts ofthe appellant case is analyzed. Both thecases cited by the appellant are those ofliquor contract operating in similar territoryas the appellant. In both the casessubstantial turnover has been declaredwhich is more than the turnover declaredby the appellant. The GP rate declared bythem is 36.6% and 34.13% whereas theappellant has declared the GP rate at30.03% only. The appellant on the otherhand had relied upon some other cases ofM/s Manoharlal & Party, M/s Ashok KumarZakir Hussian &Party, M/s Shiv Dayal AshokKumar & Party where GP rate of 25% and28% and 28.5% has been applied by theAO himself. The appellant however has notfurnished any details regarding the turnoverand the contrary in which these parties hadoperated and therefore the case relied uponby the appellant and only serve asguidelines while estimating the income, thesame percentage cannot be applied to thefacts of the appellant’s case. Another factorwhich has got to be considered in the caseof the appellant is that the appellant hasmade cash payment exceeding Rs. 10,000/-of over Rs. 40,53,148/- and thesepayments are not verifiable and also attract the provisions of section 40A(3) of the ITAct, 1961 which the AO has invoked andhas made an addition of Rs. 8,10,630/-.The Hon’ble Allahabad High Court in thecase of CIT Vs Bansarilal Bansidhar 1998229 ITR 229 (ALL) has held that where thebooks of accounts are rejected no additionsu/s 40A(3) would be separately called for inaddition to the GP rate addition. Similarview has been reiterated by the JaipurBench of the ITAT in the cases MohtaConstruction Company XXI Tax World 257(JP) and Rajendra Kumar Kedia V.DCIT XXIITax World 506 (JP). In View the above case law the tradingaddition to be made in all the accounts ofcountry liquor, IMFL and Beer. The fact thatthe appellant had in addition to nonverifiable nature of the sales the appellanthad also incurred huge expenditure of overRs. 40,00,000/- in cash in contravention ofthe provisions of section 40A (3) of the ITAct, 1961 and therefore keeping in view thecase law cited by the appellant and thedisallowance u/s 40A(3) of the IT Act,1961, the action of the AO in estimating Rs.1126640/- and applying GP rate of 35% isfair and reasonable and the resultantaddition Rs.707713/- would not call for anyinterference. However, this addition wouldbe telescoped with the addition required tobe made u/s 40A (3) of the It Act, 1961and therefore, the resultant trading additionin all the three accounts are of about Rs.1,90,000/- only considering the hugeturnover of over Rs. 2.25 crores is veryreasonable. The appellant’s appeal to thisextent is therefore not maintainable and isdismissed. In the trading account I have sustained anaddition of Rs. 55,385/- in the countryliquor account and Rs. 8,73,941/- in theIMFL account and Rs. 70,713/- in the Beeraccount totaling in all Rs. 10,00,039/-(55385+8,73,941+70,713). In view of thecited case law separate addition of Rs.8,10,630/- u/s 40A (3) of the IT Act, 1961is not justified and is therefore nosustainable and is deleted. In the result, theappellant gets a relief of Rs. 8,10,630/-.” 8.In that view of the matter, the issue is answered in favour of the assessee and against the department. 9.The appeal stands allowed. (VINIT KUMAR MATHUR)J. (K.S. JHAVERI)J. Asheesh Kr. Yadav/60