M/S Chhabra Sweets And Cafeteria, Jalandhar v. Commissioner Of Income Tax, Jalandhar & Another

[.T_A. No.163 of 1999 IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH (1) LTA. No.163 of 1999.Decided on:-April 4[th], 2014. M/s Chhabra Sweets and Cafeteria, Jalandhar. ....... Appellant, Versus Commissioner of Income Tax, Jalandhar & another woe KRESpondents. (2) LT.A. No. 164 of 1999| M/s Chhabra Sweets and Cafeteria, Jalandhar. ....... Appellant, Versus Commissioner of Income Tax, Jalandhar & another woe KRESpondents. CORAM: Hon'ble Mr. Justice Rajive BhallaHon'ble Mr. Justice Dr. Bharat Bhushan Parsoon. ///// Argued by:- Mr. Akshay Bhan, Advocate for the appellant Mr. Vivek Sethi, Advocate for the respondents, Dr. Bharat Bhushan Parsoon, J. The aforesaid two appeals under Section 260-A of the Income TaxAct, 1961 (hereinafter referred to as the Act) are directed against a commonorder (Annexure P-3) dated 31.5.1999 passed by the Income Tax Appellate [.T_A. No.163 of 1999 -)- Tribunal, Amritsar Bench, Amritsar (hereinafter referred to as the Tribunal)in ITA Nos.1193 and 1233(ASR)/1992 for the assessment year 1989-90. As the matter in issue involved in both the appeals is the same,therefore, the same are being taken up together for adjudication. 3 |For convenience and clarity, facts of ITA No.163 of 1999 arebeing taken up for discussion. 4The appellant firm-assessee had posed the following substantialquestions of law for adjudication;questions of law for adjudication; (a)Whether in the facts and circumstances of the case,Annexures P-1, P-2 and P-3 are legally sustainable?Annexures P-1, P-2 and P-3 are legally sustainable? (b)Whether the [TAT was justified in enhancing the salesfrom Rs.40 lakhs to Rs.70 lakhs without any basis andmaterial on record?from Rs.40 lakhs to Rs.70 lakhs without any basis andmaterial on record? (c)Whether the ITAT was right in accepting that provisoto section 145(1) of the Income Tax Act, 1961 wasattracted in the present case?to section 145(1) of the Income Tax Act, 1961 wasattracted in the present case? (d)Whether in the facts and circumstances of the case, theITAT was justified in adopting gross profit rate at11.5% without any material or evidence on record?ITAT was justified in adopting gross profit rate at11.5% without any material or evidence on record? (e)Whether in the facts and circumstances of the case,ITAT was right in upholding disallowances of packingcharge from the gross profit of the assessee?ITAT was right in upholding disallowances of packingcharge from the gross profit of the assessee? (f)Whether in the facts and circumstances of the case, theITO, CIT(A) and ITAT were justified in relying uponthe case of M/s Lovely Sweets House (P) Limitedwhich was not comparable and thus conclusion arrivedat 1S vitiated?ITO, CIT(A) and ITAT were justified in relying uponthe case of M/s Lovely Sweets House (P) Limitedwhich was not comparable and thus conclusion arrivedat 1S vitiated? (g)Whether in the facts and circumstances of the case theorders Annexures P-1, P-2 and P-3 are vitiated beingresult of wrong conclusions from material andevidence on record and based on misreading of theevidence on record?orders Annexures P-1, P-2 and P-3 are vitiated beingresult of wrong conclusions from material andevidence on record and based on misreading of theevidence on record? -3- 5 |Hearing has been provided to the counsel for the parties whilegoing through the paper books. 6_The assessee-appellant firm for the previous year ending|31.3.1989 relevant to assessment year 1989-90 had filed its return declaringan income of Rs.63,560/- from theHalwalbusiness of selling sweets,Paneer, Pakoras, Samosas etc. Quantum of sales were shown atRs.26,87,741.80 Ps. giving the gross profit rate of 16.85%. (g)Whether in the facts and circumstances of the case theorders Annexures P-1, P-2 and P-3 are vitiated beingresult of wrong conclusions from material andevidence on record and based on misreading of theevidence on record?orders Annexures P-1, P-2 and P-3 are vitiated beingresult of wrong conclusions from material andevidence on record and based on misreading of theevidence on record? -3- 5 |Hearing has been provided to the counsel for the parties whilegoing through the paper books. 6_The assessee-appellant firm for the previous year ending|31.3.1989 relevant to assessment year 1989-90 had filed its return declaringan income of Rs.63,560/- from theHalwalbusiness of selling sweets,Paneer, Pakoras, Samosas etc. Quantum of sales were shown atRs.26,87,741.80 Ps. giving the gross profit rate of 16.85%. yd Large scale discrepancies were found in maintenance of booksof accounts. Pointedly mentioning these embellishments in maintenance ofthe books of accounts. Invoking provisions of Section 145 of the Act, theaccounts were rejected. The Assessing Officer (hereinafter referred to as theAO) applied gross profit rate of 12% on the estimated sales of Rs.1 crore anddisallowing packing and electricity charges, had adjudicated liability of theassessee tO pay income tax to the tune of Rs.10,03,780/-. Penaltyproceedings under Section 271 (1)(c) of the Act were also ordered to beinitiated for concealing income by furnishing inaccurate particulars ofincome vide order (Annexure P-1). S|Aggrieved with this order (Annexure P-1) passed by the AO,the assessee approached the Commissioner of Income Tax (Appeals),Jalandhar [hereinafter referred to as the CIT(A)]. Concurring with thefindings of the AO regarding rejection of the accounts of the assessee, pleaof the assessee that books of accounts had been maintained in the regularcourse of business, was also rejected by the CIT(A). However, on facts, theCIT(A) made departure from the findings of the AO and noticed that theSales of the assessee could not have been pegged at Rs.1 crore. The CIT(A)observed that such high estimate of sales as also gross profit rate aspropounded by the AO, was not proper. Observations of the CIT(A) culledout from the impugned order, are as given on the next page: S|Aggrieved with this order (Annexure P-1) passed by the AO,the assessee approached the Commissioner of Income Tax (Appeals),Jalandhar [hereinafter referred to as the CIT(A)]. Concurring with thefindings of the AO regarding rejection of the accounts of the assessee, pleaof the assessee that books of accounts had been maintained in the regularcourse of business, was also rejected by the CIT(A). However, on facts, theCIT(A) made departure from the findings of the AO and noticed that theSales of the assessee could not have been pegged at Rs.1 crore. The CIT(A)observed that such high estimate of sales as also gross profit rate aspropounded by the AO, was not proper. Observations of the CIT(A) culledout from the impugned order, are as given on the next page: EThe Assessing Officer has mentioned various defects inthe maintenance ofbooks ofaccount because ofwhich rejectionof trading results could be justified. Even the counsel of theappellant conceded that rejection of trading results was notentirely unjustified. His main objection was regarding theestimate of sales and application of G.P. rate. It may bementioned here that the Assessing Officer had also noticed thatthere was a percentage increase in packing expenses ascompared with the preceeding assessment year. In _ tassessment year 1988-89 packing expenses amounted to 4.48%of the sales, whereas in the year under consideration these are6.02% of the sales made. Though the counsel of the appellanthas tried to justify the increase in packing expenses, this doesindicate that sales during the year under consideration wouldhave been higher than that had been disclosed in the books ofaccount. Fact that the counsel of the appellant, during thecourse of discussion, had himself suggested that even tf salesare estimated according to the percentage ofpacking expensesin the previous year, this would not exceed about Rs.30 to 35/-lakhs as against the estimate ofsales ofRs. One crore made bythe Assessing Officer. In case the sales are estimated keepingthe percentage of packing expenses the same as is in thepreceding assessment year, this would work out toRs.37,23,777/- in the year under — considerati(100/4.4x167570. The Assessing OfficerS estimate is based onthe projection of sales based on consumption of sugar. In thisregard also after considering the submissions made by thecounsel of the appellant, it can only be profitable whenbarf1Smade double the quantity ofsugar used. On that basis the sales@ Rs.20/- per kg. would work out to Rs.44,80,000/-considering these two estimates, in my view it would befair andreasonable to estimate sales ofRs.44,00,000/- as against Rs. Icrore estimated by the Assessing Officer. It may be mentionedhere that this estimate would include sales of item in whichsugar is not used like Samosa, Paneer Pakora etc. which hasbeen considered separately. QOAs regards application of gross profit rate, the CIT(A) found nojustification in applying a higher gross profit rate. It was reduced. Followingobservations of the CIT(A) are noteworthy: “The appellant had been showing higher G.P. rate in theyear when the sales were low. In the year under considerationsales have been estimated at Rs.40 lakhs and accordingly QOAs regards application of gross profit rate, the CIT(A) found nojustification in applying a higher gross profit rate. It was reduced. Followingobservations of the CIT(A) are noteworthy: “The appellant had been showing higher G.P. rate in theyear when the sales were low. In the year under considerationsales have been estimated at Rs.40 lakhs and accordingly margin ofprofit is bound to be low. Considering all thesefacts|hold that application of G.P. rate of 11% in the case of theappellant would be justified. This rate would be applicableafter considering the packing expenses claimed separately inthe P&L A/C. Even in the case ofM/s Lovely Sweet House (P)Limited packing expenses have been debited in the tradingaccount and still resultant G.P. rate is 10.5% coming to thedisallowance of electricity expenses. In my _ view, nodisallowance would be warranted as this cannot be treated asmanufacturing expenses. To conclude the Assessing Officer 1sdirected to estimate income, taking sales at Rs.40,00,000/- andapplying G.P. rate of 11%. No deduction from the profit soarrived at should be allowed on account ofpacking expensesclaimed at Rs.1,67,570/- however, electricity expenses shouldbe allowed in full alongwith other expenses claimed in the P&LA/C.” 10.When the matter was taken up by the Tribunal, though it hadaffirmed the findings of the CIT(A) which earlier in turn had affirmed thefindings of the AO regarding rejection of books of accounts and hadspecifically noted that there were discrepancies in the books of accounts ofthe assessee, and it had taken into account all the facts and circumstancesand had come to the conclusion that estimated sales of the assessee were atRs.70 lacs. Relevant findings of the Tribunal in this regard are appended asbelow: “TO 7 |We are of the opinion that definitely sales ofRs.1,10,57,035/- 1s on higher side. Now we come to the logicadopted by the AO for estimating sales of the appellant. TheAO has taken into account the consumption of sugar by theappellant during the year under’ consideration. Thconsumption of sugar is to the tune of 4,435,000 Kgs. He hataken base that 25% of sugar issued for conversion of sugarinto sweets and if that formula is adopted, the average rate istaken at Rs.20 per Kg. then sales will come to Rs.89,60,000/-on the other hand the appellant has pleaded that half of thesugar in weight is used in sweets and more than that 1s used inRasgulla, Gulabjamun etc. We have gone through the entirecase and we are satisfied that accounts are not satisfactorilymaintained as 1s clear by various defects mentioned by the -6- -6- authorities below. We are of the opinion that a logical andreasonable estimation of sale is called for. We are alsoconscious that consumption ofsugar will give us information ofarriving at a reasonable estimate ofsale. Even iffor argumentssake, we agree with the AO that 50% of the sugar is used formanufacturing sweets, even then the sale will be to the tune ofRs.45 lakhs approximately. The learned counsel has notchallenged that Rs.20/- per kg. 1s price of sweets during theyear under consideration. It is a matter of record that apartfrom sweets, the appellant is also dealing in sale of snacks likePaneer Pakoras, Samosas, Purrees and other milkproducts likeLassi, curd and Paneer etc. He has also observed that there arepurchases of ghee made itemsl which were not entered intobooks of account as observed by the Ld. CIT(A). Apart fromthis controversy, the sale of non-sweet items which do notcontain sugar 1s an accepted fact. We are, therefore, of theopinion that sales reflected by the appellant at Rs.2,69,87,741/-is definitely not a true and correct picture of the assessee.Similarly, sales estimated by the Ld. CIT(A) at Rs.40,00,000/-(fourty lakhs) is not reasonable and logical estimate. However,we are of the opinion that the method of estimation adopted bythe AO ts on the higher side. We, therefore, feel that reasonableestimate by taking note of the submissions of the appellant’regarding sweets will be to the tune of Rs.45 lakhs and forother products reasonable estimated will be the tune of Rs.25lakhs. The reasonable estimation on _ the facts acircumstances of the case will be Rs.70 lakhs. The AO will,therefore, recalculate the trading addition by applying the G.P.rate at 11.5% on estimated sales ofRs.70 lakhs.” 11.)From the discussion of entire facts and circumstances, itis evident that the entire controversy revolves around the facts,circumstances and the attending milieu. When the findings of rejection ofbooks of accounts have been approved throughout and there is concurrentfinding of the AO as well as of the two appellate authorities, there is nothingto question other findings of fact. Rejection of accounts is based on factualsituation and circumstances available in the case in hand. 12. From the canvass of entire factual matrix, we find that the [.T_A. No.163 of 1999 entire controversy being based on facts, there being no question of law muchless substantial, these questions need not be answered. 12.Sequelly, both the appeals, being without any merit, aredismissed. (Dr. Bharat Bhushan Parsoon)Judge April 4[th], 2014,‘Yag Dutt} (Rajive Bhalla)Judge 1.|Whether Reporters of local papers may be allowed to see the judgment? Yes |2Whether to be referred to the Reporters or not? YescwWhether the judgment should be reported in the Digest? Yes2Whether to be referred to the Reporters or not? YescwWhether the judgment should be reported in the Digest? Yes