The Commissioner Of Income Tax, Rajahmundry v. $ M/S.r.narayanarao & Others,Mg. Pr. Sri R.dasaradha Ramaiah Goud, Kakinadaand Others

* THE HON’BLE SRI JUSTICE V.V.S.RAOAND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN INCOME TAX TRIBUNAL APPEAL Nos.3, 6, 7, 10, 12, 13, 14, 15, 22, 36, 57,58, 61, 64, 76, 77, 81, 82, 83, 87, 88, 106, 108, 118, 119, 126, 128, 129, 131,137, 141, 143, 147, 151, 167, 169, 170, 171, 172, 176, 179, 183, 185, 187,188, 193, 194, 197, 206, 208, 210, 227, 240, 253, 259, 272, 278, 294, 302,304, 305, 309, 314, 333 of 2003;INCOME TAX TRIBUNAL APPEAL Nos.74, 126 of 2004; andINCOME TAX TRIBUNAL APPEAL No.393 of 2005 % 21.6.2011 The Commissioner of Income Tax, Rajahmundry ... Appellant VERSUS $ M/s.R.Narayanarao & others,Mg. Pr. Sri R.Dasaradha Ramaiah Goud, KakinadaAnd others ... Respondents < GIST: > HEAD NOTE: ! Counsel for Appellants: M/s.S.R.Ashok and V.R. Badri ^Counsel for Respondents: M/s.Y.Ratnakar, A.V.Krishna Koundinya ? Cases referred THE HON’BLE SRI JUSTICE V.V.S.RAOAND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN INCOME TAX TRIBUNAL APPEAL Nos.3, 6, 7, 10, 12, 13, 14, 15, 22, 36, 57,58, 61, 64, 76, 77, 81, 82, 83, 87, 88, 106, 108, 118, 119, 126, 128, 129, 131,137, 141, 143, 147, 151, 167, 169, 170, 171, 172, 176, 179, 183, 185, 187,188, 193, 194, 197, 206, 208, 210, 227, 240, 253, 259, 272, 278, 294, 302,304, 305, 309, 314, 333 of 2003; INCOME TAX TRIBUNAL APPEAL Nos.74, 126 of 2004;andINCOME TAX TRIBUNAL APPEAL No.393 of 2005 June 21, 2011 Between:The Commissioner of Income Tax, Rajahmundry ANDM/s.R.Narayanarao & others,Mg. Pr. Sri R.Dasaradha Ramaiah Goud, KakinadaAnd others … Appellant … Respondents THE HON’BLE SRI JUSTICE V.V.S.RAOAND THE HON’BLE SRI JUSTICE RAMESH RANGANATHANINCOME TAX TRIBUNAL APPEAL Nos.3, 6, 7, 10, 12, 13, 14, 15, 22, 36, 57,58, 61, 64, 76, 77, 81, 82, 83, 87, 88, 106, 108, 118, 119, 126, 128, 129, 131,137, 141, 143, 147, 151, 167, 169, 170, 171, 172, 176, 179, 183, 185, 187,188, 193, 194, 197, 206, 208, 210, 227, 240, 253, 259, 272, 278, 294, 302,304, 305, 309, 314, 333 of 2003;INCOME TAX TRIBUNAL APPEAL Nos.74, 126 of 2004; andINCOME TAX TRIBUNAL APPEAL No.393 of 2005 COMMON JUDGMENT:(Per Hon’ble Sri Justice V.V.S.Rao) This group of Income Tax Tribunal Appeals is filed underSection 260A of the Income-tax Act, 1961 (the Act) by theCommissioner of Income Tax (CIT), Rajahmundry against differentcommon orders passed by the Income Tax Appellate Tribunal,Visakhapatnam Bench. The learned Tribunal passed variouscommon orders in all the appeals filed by the assessees as well asthe Revenue. The appeals by the assessees were partly allowedand those of Revenue were dismissed. The issue, in theseappeals, is whether the best judgment assessment made by the Income Tax Officer, Kakinada estimating the gross profit from theassessees’ arrack business at 40% of the purchase value issustainable in law and if not what would be the estimate of grossprofit as per the principles of best judgment assessment? This group of Income Tax Tribunal Appeals is filed underSection 260A of the Income-tax Act, 1961 (the Act) by theCommissioner of Income Tax (CIT), Rajahmundry against differentcommon orders passed by the Income Tax Appellate Tribunal,Visakhapatnam Bench. The learned Tribunal passed variouscommon orders in all the appeals filed by the assessees as well asthe Revenue. The appeals by the assessees were partly allowedand those of Revenue were dismissed. The issue, in theseappeals, is whether the best judgment assessment made by the Income Tax Officer, Kakinada estimating the gross profit from theassessees’ arrack business at 40% of the purchase value issustainable in law and if not what would be the estimate of grossprofit as per the principles of best judgment assessment? The fact of the matter is not in serious dispute. Therespondent asseessees (the arrack contractors), at the relevantpoint of time, were engaged in the business of selling arrack. Forthe assessment years 1993-94 and 1995-96 these assessees,assessed either as individuals, partnership firms or Association ofPersons (AoPs), filed their returns of income admitting a net loss. The assessing officer did not accept the returns. He took upassessment under Section 143(3) of the Act. Objections wereinvited with regard to the nature of the concern – whether it is a firmor AoP; justification for the expenditure claimed; and profit/lossshown in the return. The assessees filed their explanation. Theycontended that, due to prohibition on the sale of arrack introducedfrom 30[th] September, 1993 by the Government, the whereabouts ofthe partners were not known; it was not possible to maintain orissue sale bills; there was no practice at any time to maintain thebooks of complete accounts; and the expenses claimed werenominal. The assessing officer rejected the books of accountswherever they were produced and estimated the gross profit at 40%of the purchases. In the appeals, before the CIT (Appeals), it was inter aliacontended that the additions/disallowance of expenditure made bythe assessing officer, after computing gross profit at 40% of thepurchase price of arrack, were arbitrary and excessive. It wasurged that arrack business suffered unforeseen set back due toState wide agitation which preceded imposition of prohibition of saleof arrack in the State. In addition it was also contended that arrackbusiness in agency areas and other places, where extremistactivities were at the peak, the arrack contractors suffered loss. The CIT (Appeals) upheld adoption of gross profit at 40% ofthe purchase price taking into consideration the agitation whichpreceded introduction of prohibition in the State as well asdisturbance in certain areas due to extremist activities. He alsotook into consideration the question of loss due to agitation. TheCommissioner agreed with the assessing officer in restricting theexpenditure claimed at 50% on the ground that the assessee did notplace any evidence on both the aspects. The purchase value,rental payments, licence fee and bank commission were acceptedand allowed as deduction. Addition made to bank interest was alsodeleted. Thus the assesses got some relief before the CIT(Appeals). The CIT (Appeals) upheld adoption of gross profit at 40% ofthe purchase price taking into consideration the agitation whichpreceded introduction of prohibition in the State as well asdisturbance in certain areas due to extremist activities. He alsotook into consideration the question of loss due to agitation. TheCommissioner agreed with the assessing officer in restricting theexpenditure claimed at 50% on the ground that the assessee did notplace any evidence on both the aspects. The purchase value,rental payments, licence fee and bank commission were acceptedand allowed as deduction. Addition made to bank interest was alsodeleted. Thus the assesses got some relief before the CIT(Appeals). As already noticed supra, there were a number ofassessments of arrack contractors in East Godavari District by thesame assessing officers and orders by the same CIT (Appeals). Various groups of appeals were filed before the Tribunal. In allthese matters the assesses contended that taking 40% of thepurchase price as the gross profit is without any basis. Reliancewas placed on a consolidation order dated 30.5.2001 of the learnedTribunal in the case of Anakapalle Municipal Units Arrack Shopand others (ITA Nos.1418 to 1424/Hyd/1996 and batch), whereinthe Tribunal held that estimation of turnover at eight (8) times of thepurchase price and 1% thereon as profit would be reasonable. Indeed there is no dispute that this order was followed in all theother common orders by which the appeals of the assesses wereallowed and those of the Revenue were dismissed. The Senior Standing Counsel, Sri S.R.Ashok, submits that,when estimation of income under Section 145 of the Act was held tobe justified by the Tribunal, interference with the estimation of grossprofit by the assessing officer as confirmed by the CIT (Appeals) isuncalled for. The Senior Counsel would further submit as follows. The best judgment assessment involves an element of guess work. When the assessee has not proved the correctness of thebooks of accounts, or has not produced any record to support hisclaim as to the taxable income, it is always open to the assessingofficer to estimate the income and profit therein as per similarbusiness data. In arrack business the profit margin is very highand the expenditure and facilities are minimal. The assessingofficer is justified in disallowing the expenditure claimed to theextent of 50%. S ri Y.Ratnakar and Sri A.V.Krishna Koundinya madesubmissions for the assesses. They would contend that estimationof 40% of the purchase price as gross profit is unreasonable,arbitrary and without any basis. The Tribunal was, therefore,correct in estimating the sales turnover at eight (8) times of thepurchase price and then estimating the net profit at 1% of suchestimated sales. They would point out that in all the cases theassesses had filed returns showing the price for the purchase ofarrack which were verifiable and non-variable, and the assesseeshad also admitted certain amount as total sales. The total saleswere found to be approximately eight (8) times the purchase price. In the background facts and, in view of the rivalsubmissions, the only question that would arise for consideration iswhether the learned Income-tax Appellate Tribunal is justified inholding that profit shall be adopted at 1% of the total sale value? There is no dispute that in all the cases the assessees hadshown the turnover sales without producing books of accounts. Even when the books of accounts were produced they were notverifiable. The maximum retail price of arrack was not fixed by thegovernment and it was for the arrack contractor to sell the liquor atwhatever price the contractor would get. After receivingassessments in all the cases the assessing officer issued showcause notice; the assessees filed their objections and producedbooks of accounts. When they were not produced the assessingofficer disbelieved the turnover of sales as they were not supported There is no dispute that in all the cases the assessees hadshown the turnover sales without producing books of accounts. Even when the books of accounts were produced they were notverifiable. The maximum retail price of arrack was not fixed by thegovernment and it was for the arrack contractor to sell the liquor atwhatever price the contractor would get. After receivingassessments in all the cases the assessing officer issued showcause notice; the assessees filed their objections and producedbooks of accounts. When they were not produced the assessingofficer disbelieved the turnover of sales as they were not supported by vouchers or books of accounts and, wherever the books ofaccounts were produced, they were rejected. The assessing officerthen, indisputably, took up best judgment assessment underSection 145(3) read with 144(1) of the Act. The best judgmentassessment resorted to by the assessing officer is not challengedeither before the learned Tribunal or before us. Therefore, what isrequired to be examined are the principles of best judgmentassessment. Provisions and Precedents As per the charging Section of the Act, income shall becharged at any rate or rates as per the Central Act for that year.Section 2(24) defines ‘income’ inclusively and elaborately. As perSection 2(43) tax means the income tax chargeable under theprovisions of the Act for the relevant assessment year indetermining the income tax liability of an assessee who is liable topay tax under the Act. In computing the income, Sections 5 and 7and the provisions in Chapter IV of the Act provide the modalities.While doing so, deductions to be made in computing the totalincome are enumerated in Chapter VIA. Chapter VIII deals withrebates and reliefs to be allowed in computing income tax. The law mandates that every person shall furnish a return ofthe total income if it exceeds the maximum amount which is notchargeable to income tax. Chapter XIV contains the procedure forassessment, and Chapter XIVB contains the procedure for blockassessment pursuant to search and seizure taken in cases of taxevasion. Besides these provisions, the Income Tax Act containsthe machinery provisions for Collection and Recovery of Tax(Chapter XVII), Refunds (Chapter XIX), Settlement of Cases(XIXA), Appeal/Revision System (Chapter XX) and Penaltiesimposable under the Act (Chapter XXI). In determining the income tax liability of a person,computation of the total income of the assessee is the first stage which is sometimes complex. The next stage is determination orcomputation of the sum payable by the assessee on the basis ofsuch assessment towards income tax. While determining the sumpayable, it might become necessary for the assessee, or thecompetent assessment officer, to take into consideration theincome received or is deemed to be received keeping in view thedefinition of income. While doing so, the deductions to be made andrebates and reliefs to be allowed cannot be ignored. The last andultimate exercise is only the determination of the tax on the totalincome as per the Central Act for the relevant assessment yearread with Section 4 of the Act. In CIT v Suresh N.Gupta[[1]], the Supreme Court consideredthe charging Section and made observations which are apt to quotebelow. which is sometimes complex. The next stage is determination orcomputation of the sum payable by the assessee on the basis ofsuch assessment towards income tax. While determining the sumpayable, it might become necessary for the assessee, or thecompetent assessment officer, to take into consideration theincome received or is deemed to be received keeping in view thedefinition of income. While doing so, the deductions to be made andrebates and reliefs to be allowed cannot be ignored. The last andultimate exercise is only the determination of the tax on the totalincome as per the Central Act for the relevant assessment yearread with Section 4 of the Act. In CIT v Suresh N.Gupta[[1]], the Supreme Court consideredthe charging Section and made observations which are apt to quotebelow. The rate at which a charge on the total income of theprevious year is imposed under Section 4(1) of the 1961 Act isnot laid down in the Income Tax Act and, therefore, the saidsection provides that the charge has to be fixed by the CentralAct. It is because of this, that income tax is levied at differentrates under the Finance Act. ... ... It must be borne in mindthat the Income Tax Act deals with tax on income and nothingelse. Therefore, in order that the charge should be a legalcharge under Section 4, it must be a tax on the income of theassessee. If the charge is the tax on anything else, then itwould not be a valid charge. This is the only limitation upon thepower or authority of Parliament to fix any rate it pleases. Solong as the charge is on “total income” of the previous year,there is no limitation upon the power or authority of Parliamentto fix any rate it pleases. However, if “rate” is understood tomean the fixing of the tax irrespective of “total income” andunconnected with “total income”, then, in our view, Parliamentwould be travelling outside the ambit of Section 4(1). TheIncome Tax Act, therefore, contains an elaborate machinery forascertaining “total income” of an assessee. If Parliament haspower to fix tax at a rate which has no connection with the “totalincome”, then the machinery set up under the 1961 Actbecomes infructuous. In our view, Section 4(1) prescribes thesubject-matter of the tax and the rate of that tax is prescribedby the legislature, either under the Act as in the case of Section113 or vide the Finance Act. As long as the charge is on “totalincome” of the previous year and so long as the rate relates tothe subject-matter of the tax, there is nothing to preventParliament from fixing the rate. But the rate must be applied to the “total income” and the tax that an assessee has to paymust be at the rate in respect of total income of the previousyear. The term ‘assessment’ is an inclusive definition.‘Assessment’ includes re-assessment (Section 2(8) of the Act).The understanding of the scope of ‘assessment’ is necessary as, inthese cases, we are concerned with the computation of income forthe purpose of determining or assessing income tax payable by therespondent – assessees. In C.A.Abraham v I.T.Officer[[2]], theSupreme Court quoted with approval the observations of the PrivyCouncil in Commissioner of Income Tax v Khemchand Ramdas,[[3]]to the effect that “the word ‘assessment’ is used as meaningsometimes the computation of income, sometimes the determination ofthe amount of tax payable and sometimes the whole procedure laiddown in the Act for imposing liability upon the tax payer”. The word“assessment”, as used in the Income Tax Act, 1922 (the 1922 Act),includes a proceeding for imposition of penalty (CIT v Kirkend CoalCompany[[4]]). Asst. Collector of Central Excise v National Tobacco Co.Ltd[[5]]is a case which arose under the Central Excise Rules,1944. It was argued that there would be no ‘levy’ in the eye of lawunless there is ‘assessment’ for the purpose of determining thevalue of excisable goods. While observing that Article 265 of theConstitution makes a distinction between ‘levy’ and ‘collection’, itwas held that the term ‘levy’ does not extend to ‘collection’ although‘levy’ is wider than ‘assessment’. The Supreme Court also heldthat, “the term ‘assessment’ is generally used for the actualprocedure adopted in fixing the liability to pay a tax on account ofparticular goods or property or whatever may be the object of thetax in a particular case and determining its amount”. Section 35 of the 1922 Act conferred power on theCommissioner or the Appellate Commissioner to suo motu rectify any mistake apparent on the record, appeal, revision, assessmentor refund within four years from the date of such order. I n I.T.Commissioner v J.K. Commercial Corporation[[6]], the SupremeCourt was required to consider whether the expression‘assessment order’ in Section 35 of the 1922 Act includes an ordermade under Section 23A which authorized the Income Tax officer tolevy super tax at specified rates. Referring to KhemchandRamdas as approved in C.A.Abraham, the Supreme Court heldthat, “the word ‘assessment’ is capable of bearing a verycomprehensive meaning; it can comprehend the whole procedure forascertaining and imposing liability on the tax payer and literallyspeaking … … the assessment is of the total income of the assesseeand then in the same order sum payable by the assessee is determinedwhich would include income tax, surcharge, super tax etc”. On thisreasoning, the Apex Court ruled that the expression ‘assessmentorder’ occurring in Section 35(1) of the 1922 Act would include anorder made under Section 23A of the said Act. It may, therefore, be taken as well settled that the word‘assessment’ used in various provisions of the Act connotesdifferent meanings, namely, the computation of income, thedetermination of the amount of the tax payable and some times thewhole procedure laid down in the Act for imposing liability upon thetax payer. The word ‘assessment’ would certainly take within itsfold, “computation of income as well as determination of taxpayable thereon”. The immediate question, therefore, would be onwhat basis income is computed although the determination of thetax liability would depend on the Finance Act passed by theParliament to be applicable for each assessment year. Thecomputation of income, unless specifically provided for by the Act,is ordinarily left to the choice and option of the person liable to paythe income tax. Every tax payer is expected to disclose all typesof income contemplated under the Act, namely, income from salary, income from other sources etc. If any assessee fails to disclosevarious types of income truthfully or the assessing officer comes toa conclusion that the income is either not fully disclosed orimproperly computed, he can then himself compute the income of aperson liable to pay the tax. Sections 144 and 145 of the Act arerelevant and are quoted hereunder. 144. Best judgment assessment. (1) If any person— (a) fails to make the return required under sub-section (1) ofSection 139 and has not made a return or a revised return under sub-section (4) or sub-section (5) of that section, or (b) fails to comply with all the terms of a notice issued under sub- section (1) of Section 142 or fails to comply with a directionissued under sub-section (2A) of that section, or income from other sources etc. If any assessee fails to disclosevarious types of income truthfully or the assessing officer comes toa conclusion that the income is either not fully disclosed orimproperly computed, he can then himself compute the income of aperson liable to pay the tax. Sections 144 and 145 of the Act arerelevant and are quoted hereunder. 144. Best judgment assessment. (1) If any person— (a) fails to make the return required under sub-section (1) ofSection 139 and has not made a return or a revised return under sub-section (4) or sub-section (5) of that section, or (b) fails to comply with all the terms of a notice issued under sub- section (1) of Section 142 or fails to comply with a directionissued under sub-section (2A) of that section, or (c) having made a return, fails to comply with all the terms of anotice issued under sub-section (2) of Section 143, theAssessing Officer, after taking into account all relevantmaterial which the Assessing Officer has gathered, shall,after giving the assessee an opportunity of being heard,make the assessment of the total income or loss to the bestof his judgment and determine the sum payable by theassessee on the basis of such assessment: Provided that such opportunity shall be given by the AssessingOfficer by serving a notice calling upon the assessee to showcause, on a date and time to be specified in the notice, why theassessment should not be completed to the best of hisjudgment : Provided further that it shall not be necessary to give suchopportunity in a case where a notice under sub-section (1) ofsection 142 has been issued prior to the making of anassessment under this section. (2) The provisions of this section as they stood immediatelybefore their amendment by the Direct Tax Laws (Amendment)Act, 1987 (4 of 1988), shall apply to and in relation to anyassessment for the assessment year commencing on the 1stday of April, 1988, or any earlier assessment year andreferences in this section to the other provisions of this Actshall be construed as references to those provisions as for thetime being in force and applicable to the relevant assessmentyear. 145. Method of accounting. (1) Income chargeable under the head “Profits and gains ofbusiness or profession” or “Income from other sources” shall,subject to the provisions of sub-section (2), be computed inaccordance with either cash or mercantile system ofaccounting regularly employed by the assessee.(2) The Central Government may notify in the Official Gazettefrom time to time accounting standards to be followed by any class of assessees or in respect of any class of income.(3) Where the Assessing Officer is not satisfied about thecorrectness or completeness of the accounts of the assessee,or where the method of accounting provided in sub-section (1)or accounting standards as notified under sub-section (2), havenot been regularly followed by the assessee, the AssessingOfficer may make an assessment in the manner provided inSection 144. The above two provisions empower the assessing officer tomake assessment of the total income to the best of his judgmentand determine the tax payable by the assessee. If a case fallsunder any of the three categories under Section 144(1) of the Act, itis mandatory for the assessing officer to make a best judgmentassessment. In a case falling under Section 145(3) of the Act,discretion is given to the assessing officer to make a best judgmentassessment in the manner provided under Section 144 of the Act. For more clarity, we shall indicate different situations herein below. The above two provisions empower the assessing officer tomake assessment of the total income to the best of his judgmentand determine the tax payable by the assessee. If a case fallsunder any of the three categories under Section 144(1) of the Act, itis mandatory for the assessing officer to make a best judgmentassessment. In a case falling under Section 145(3) of the Act,discretion is given to the assessing officer to make a best judgmentassessment in the manner provided under Section 144 of the Act. For more clarity, we shall indicate different situations herein below. The mandatory best judgment assessment is to be made inany of the four cases. (a) If any person fails to make the returnunder Section 139(1) of the Act and has not made a return or arevised return under Section 139(4) or (5) of the Act; (b) if anyperson fails to comply with all the terms of a notice issued underSection 142(1) of the Act; (b) if any person fails to comply with adirection issued under Section 142(2A) of the Act; or (d) if a personhaving made a return fails to comply with all the terms of a noticeissued under Section 143(2) of the Act. Section 145(2) of the Act confers discretionary power on theassessing officer to make a best judgment assessment in twosituations, namely, where the assessing officer is not satisfiedabout the correctness or completeness of the accounts of theassessee; and where the assessee has not followed regularly anymethod of accounting provided in subsection (1) of Section 145 ofthe Act (cash system or mercantile system of accounting). “What is the scope of best judgment assessment”? Themandatory and discretionary best judgment assessment under Sections 144(1) and 145(3) of the Act provide some guidelines. Asper Section 144(1) of the Act, the assessing officer has to take intoaccount all relevant material which he has gathered and shouldmake assessment after giving the assessee an opportunity of beingheard. Therefore the best judgment assessment is not to be anarbitrary assessment. Whatever the computation of income andtax thereon, it shall have some bearing with reference to thematerial gathered by the assessing officer and, if there is nomaterial, the question of best judgment assessment would notarise. The availability of material or availability of material gatheredby the assessing officer is crucial for making a best judgmentassessment. It is not the ipse dixit of the assessing officer tocompute the income of an assessee either under Section 144(1) or145(3) of the Act. Nor the computation and determination can be asper the whims and fancies of an assessing officer. The language ofSection 144(1) and 145(3) of the Act indicate that the computationof total income should be by adopting an objective method, andsubjectivity in arriving at the taxable income is not contemplatedunder law. The word ‘assessment’ is, therefore, to be understoodin each Section with reference to the context in which it has beenused. In some Sections it has a comprehensive meaning and insome Sections it has a restrictive meaning (A.N. LakshmanShenoy v I.T.Officer[[7]]). The power to make best judgmentassessment is not an arbitrary power. These principles of law arewell settled. As observed by the Supreme Court in State of Orissa vMaharaja Shri B.P.Sing Deo[[8]], the scope of the best judgmentassessment power has been explained by the Supreme Court innumber of decisions. In Raghubar Mandal Harihar Mandal v Stateof Bihar[[9]], the assessee was engaged in bullion business. It wasassessed to sales tax for seven quarters under the Bihar Sales TaxAct, 1944. For three quarters the assessee did not file returns. As observed by the Supreme Court in State of Orissa vMaharaja Shri B.P.Sing Deo[[8]], the scope of the best judgmentassessment power has been explained by the Supreme Court innumber of decisions. In Raghubar Mandal Harihar Mandal v Stateof Bihar[[9]], the assessee was engaged in bullion business. It wasassessed to sales tax for seven quarters under the Bihar Sales TaxAct, 1944. For three quarters the assessee did not file returns. The Sales Tax Officer (STO), in exercise of the power underSection 10(4) of the said Act, assessed the tax applying theprinciple of best judgment assessment. In respect of four quarters,though returns were filed, the STO rejected them and passedseparate assessment orders. The assessee lost the appeal and,therefore, moved a revision before the Board of Revenue. Thesame was dismissed observing that the books of accounts filed bythe assessee were not dependable and, therefore, the assessingofficer was bound to assess the tax. At the assessee’s instance,the case was referred to the High Court of Patna. The High Courtupheld the contention of the State that the STO is entitled to makean assessment on any figures of gross turnover. Before theSupreme Court, the issue was whether the assessing officer hadassessed the tax amount due arbitrarily without basing theassessment on any material whatever. The Supreme Courtreferred to Section 23 of the 1922 Act, which was substantiallysimilar to Section 10 of the Bihar Sales Tax Act. The issue washeld in favour of the assessee and the relevant observations are as follows. Sub-section (3) of Section 23 of the Indian Income TaxAct requires the Income Tax Officer to assess the total incomeof the assessee and determine the sum payable by him on thebasis of such assessment, by “an order in writing”; but clause(b) of sub-section (2) of Section 10 of the Act requires theCommissioner to assess the amount of tax due from the dealerand does not impose any liability as to “an order in writing”. Inspite of these differences, the two provisions are substantiallythe same and impose on the assessing authority a duty toassess the tax after hearing such evidence as the dealer mayproduce and such other evidence as the assessing authoritymay require on specified points. The Supreme Court pointed out that the best judgmentassessment cannot be made rejecting the books of account byindulging in pure guess work without any evidence or material atall. The Supreme Court relied on the following observations of LordRussel Killoven in CIT U.P. & C.P. v Badridas Ramrai Shop, Akola[[10]]held as follows. The officer is to make an assessment to the best of hisjudgment against a person who is in default as regardssupplying information. He must not act dishonestly, orvindictively or capriciously, because he must exercisejudgment in the matter. He must make what he honestlybelieves to be a fair estimate of the proper figure ofassessment, and for this purpose he must, their Lordshipsthink, be able to take into consideration local knowledge andrepute in regard to the assessee’s circumstances, and his ownknowledge of previous returns by and assessments of theassessee, and all other matters which he thinks will assist himin arriving at a fair and proper estimate: and though there mustnecessarily be guess-work in the matter, it must be honestguess-work. I n Commissioner of Sales Tax v H.M.Esufali[[11]]theSupreme Court considered the question whether it is the duty of theassessing officer to adduce proof in support of his estimate. Afterreviewing the case law, the Supreme Court did not agree with theview taken by the High Court that the assessing authority musthave material before it to prove the exact turnover suppressed. Itwas held that if there is a reasonable nexus between the basisadopted by the assessing authority and the estimate of escapedincome, it would suffice the test of validity of best judgmentassessment. It is apt to quote the following relevant observations. I n Commissioner of Sales Tax v H.M.Esufali[[11]]theSupreme Court considered the question whether it is the duty of theassessing officer to adduce proof in support of his estimate. Afterreviewing the case law, the Supreme Court did not agree with theview taken by the High Court that the assessing authority musthave material before it to prove the exact turnover suppressed. Itwas held that if there is a reasonable nexus between the basisadopted by the assessing authority and the estimate of escapedincome, it would suffice the test of validity of best judgmentassessment. It is apt to quote the following relevant observations. The task of the assessing authority in finding out theescaped turnover was by no means easy. In estimating anyescaped turnover, it is inevitable that there is some guess-work. The assessing authority while making the “best-judgment” assessment no doubt should arrive at its conclusionwithout any bias and on rational basis. That authority should notbe vindictive or capricious. If the estimate made by theassessing authority is a bona fide estimate and is based on arational basis, the fact that there is no good proof in support ofthat estimate is immaterial. Prima facie, the assessingauthority is the best judge of the situation. It is his “best-judgment” and not of any one else’s. .... If the basis adopted isheld to be a relevant basis even though the courts may thinkthat it is not the most appropriate basis, the estimate made bythe assessing authority cannot be disturbed. I n S.M.Hasan, S.T.O v New Gramophone House[[12]]a Division Bench of the Supreme Court held that, “if the conditions forthe best judgment assessment are present, the assessing officer willmake it not on speculative or fanciful grounds, but on reasonable guesssince the best judgment assessment does not negate the exercise ofjudgment on the part of the officer ... ... a Tax Officer who makes abest judgment assessment should make an intelligent well groundedestimate rather than launch upon pure surmises”. From the decisions referred to hereinabove, we may sum upthe principles to be followed when best judgment assessment isundertaken by a Taxing Officer as follows. (1) The power to levyassessment on the basis of best judgment is not an arbitrarypower. It is an assessment on the basis of best judgment of theofficer; (2) When best judgment assessment is undertaken it cannotbe as per the whims and fancies of the assessing officer and itshould base on some material either produced by the assessee orgathered by the Taxing Officer. If for any reason the material likebooks of accounts produced by the assessing is rejected asunreliable or unsatisfactory, there should be some valid reasons fordoing so; and (3) Whenever best judgment assessment is made,the Court would not call for proof from the officer if there is somenexus between the amount arrived at after some guess work andthe facts of the case. Assessment by the department officials The ITO, Ward-3, Kakinada rightly rejected the loss return ofincome filed in most of the cases by the arrack contractors. Presumably opining that the arrack business is highly profitable, herejected the book results disclosed by the assessees andestimated the gross profit at 40% of the purchase price. Thelicense fee and bank commission were totally allowed asexpenses. Out of the expenses claimed, the interest paid topartners was disallowed relying on the decision of the SupremeCourt in Bihari Lal Jaiswal v CIT[[13]]. The assessing officer, however, allowed 50% of the expenses claimed even though they wereunvouched and unverifiable. The method adopted for allowingexpenses has some rationality, but estimating the gross profit at40% of the purchases is utterly unreasonable and arbitrary, anddoes not fit into any of the known principles of best judgmentassessment. Even a microscopic examination of the assessmentorder in all the cases does not even give a clue as to how an arrackcontractor would be able to reap profit at 40% of the purchase priceof arrack. allowed 50% of the expenses claimed even though they wereunvouched and unverifiable. The method adopted for allowingexpenses has some rationality, but estimating the gross profit at40% of the purchases is utterly unreasonable and arbitrary, anddoes not fit into any of the known principles of best judgmentassessment. Even a microscopic examination of the assessmentorder in all the cases does not even give a clue as to how an arrackcontractor would be able to reap profit at 40% of the purchase priceof arrack. The CIT (Appeals) affirmed the findings of the assessingofficer treating the assessee as an AoP following the decision of theSupreme Court in Bihari Lal Jaiswal.The estimation of gross profitat 40% of the purchase price of arrack was also affirmed observingthat there is nothing wrong as the books of accounts were rejectedon account of non-substantiation of the turnover, and all majorexpenses. The reasons for adopting such a method of estimationof profit at 40% of the purchase price are not forthcoming even fromthe appellate authority. The rejection of books of accounts andnon-substantiation of the turnover as well as the major expensesappears to be the reason for adopting 40% as the gross profit. Thedisturbance of business in extremist areas, and the generalagitation demanding prohibition did not weigh with the CIT (Appeals)and, therefore, he affirmed the assessment order disallowing 50%of the expenditure claimed although some relief was given bydeleting the addition made towards bank interest by the assessingofficer. The adoption of 40% as gross profit of purchase price ofarrack, in our considered opinion, is arbitrary and irrational. Ourfinding also receives support from the decision of the DivisionBench of this Court in A.Sanyasi Rao v Government of AndhraPradesh[[14]]which was affirmed by the Supreme Court in Union ofIndia v A.Sanyasi Rao[[15]].These decisions dealt with the constitutional validity of Sections 44AC and 206C of the Act[[16]].Section 44AC of the Act inter alia stipulated that the profits andgains of purchaser of goods in the nature of alcoholic liquor forhuman consumption shall be deemed to be equal at 40% of thepurchase price. The Division Bench of the High Court of AndhraPradesh read it down holding that the provision was intended tocheck evasion of tax as guidance for deduction of tax at source. The Division Bench also held that it is irrational. The relevant observations are as follows. Once the tax is collected, based upon the purchase price ofthe specified goods, it is really immaterial whether the businessis carried on in the names of dummies, in fictitious names, or inthe names of faceless persons, or persons of on means. Thetax collected is already with the State. An assessment can bemade in accordance with the provisions of law. If the taxassessed is more than the tax already collected, may be thereis little likelihood of such collection; but, even with theseprovisions, the situation is the same. There is no reason behindsaying that even where a person actually earns less profit thanthe specified one, or incurs loss, even then his profits andgains should be arbitrarily fixed at 40% of the purchase price,or that he should not be allowed to establish his real incomefrom the said business or trade. May be these persons do notmaintain the books properly; but that is not an insuperabledifficulty. If the books are not properly maintained, or aresuspicious or unacceptable otherwise, they can away berejected and a best judgment assessment made. The level orprofits in such trade in a given area, region or State can alwaysbe kept in mind while making a best judgment assessmentand/or while determining the truth or genuineness of accounts.The existence of some honest traders even in the specifiedgood cannot be ruled out. The Supreme Court while affirming the High Court judgmentobserved that Section 44AC of the Act denies equality of treatment,unfair and arbitrary as the arrack contractors are denied the reliefsunder Sections 28 to 43C of the Act, which contain the procedurefor computation of income from business. Impugned order of the Income Tax Appellate Tribunal In all the orders impugned in these appeals, the learnedTribunal followed its earlier decision in the case of Anakapalle Arrack Shops. In some of the cases, the Tribunal followed theorder dated 31.8.2001 in ITA No.17/H/1997 against which ITTANo.253 of 2003, which is one of the cases in this batch, is filed. Itis, therefore, necessary to notice the Tribunal’s decision inAnakapalle Arrack Shops. Though a copy of the same is notplaced before us, the sum and substance of the order is found inthe impugned order in ITTA No.172 of 2003 and other appeals. After coming to the conclusion that estimation of profits at40% of the purchase price is without reason and arbitrary, theTribunal observed as follows. On the very identical facts and circumstances as in thepresent case, this Bench in its consolidated order dated30.5.2001 had the occasion to consider the issue of estimationof profit in the cases of assessees engaged in the arrackbusiness in the case of Anakapalle Municipal Units ArrackShop & Others in ITA No.1420/HYD/1996 (series) as referredto above and relied on by the learned AR of the assessee,wherein after considering the various orders passed by theRevenue authorities and also the orders passed by the ITAT,Hyderabad in which different yardsticks had been adopted forestimating profit and also after considering the sales shown bythe assessees vis-à-vis purchase price, it was held fair andreasonable to first estimate sales at eight times of purchasesand then to estimate the net profit at 1% of such estimatedsales or declared sales whichever is more after considering allkinds of deductions and allowances. The very same view hasalso been taken by this Bench in the group casesM/s.K.Bhaskar Rao & others in ITA Nos.17/H/97 series(consolidated order dt.31.8.2001) and also in another batch ofcases in ITA No.467/HYD/1997 (series) in the case of GRKPrasad & others disposed of to-day. We find that in the casesunder consideration the facts are almost identical andtherefore, the decision taken in our earlier orders referred toabove (i.e., 30.5.2001, 31.8.2001 and 31.1.2002) is alsoapplicable to the present cases at hand under Group ‘A’ andGroup ‘B’. No worthwhile material or fact was also brought inrecord by the learned DR to justify a different finding. Therefore, following the same, under the circumstances wehold that though the AO was justified to reject the book results,estimate of gross profit @ 40% of purchase price anddisallowances of expenditure is arbitrary and excessive. Wefurther hold that sales, which are admittedly unverifiable shouldbe estimated at eight times of purchase price and net profitshould be estimated at 1% of such estimated sales or declaredsales whichever is more clear of all deductions andallowances, and if the profit so estimated is less than the profit From the above observations, we are convinced that theTribunal considered (i) the sales shown by the assessees vis-à-visthe purchase price for estimating the sales at eight (8) times thepurchase price; (ii) various orders passed by the Revenueauthorities as well as ITAT, Hyderabad; and From the above observations, we are convinced that theTribunal considered (i) the sales shown by the assessees vis-à-visthe purchase price for estimating the sales at eight (8) times thepurchase price; (ii) various orders passed by the Revenueauthorities as well as ITAT, Hyderabad; and (iii) estimated the net profit at 1% of the estimated sales ordeclared sales whichever is high, after considering all kinds ofdeductions and allowances. There is no dispute before us that theRevenue did not choose to file an appeal against the consolidatedorder dated 30.5.2009 in Anakapalle Arrack Shops. Be that as itis, for the reasons infra, we are of considered opinion thatestimation of net profit at 1% in arrack business is certainly on thelower side and, therefore, it needs to be re-estimated. As thesecases pertain to the assessment years 1989-90, 1992-93 and 1993-94, we are, however, not inclined to remand the matters. Whileagreeing with the submission of the Counsel for the assessees, wemay also take judicial notice of the fact that under the relevantprovisions under the Andhra Pradesh Excise Act, 1968, a retaillicense for vending arrack was given for a period of one yearrenewable every year for a period of five years. It is also notuncommon that most of the arrack contractors, due to heavycompetition for procuring license, may not either seek continuationof license after expiry of the initial period of five years or some ofthem may call it a day and leave the arrack business. We mayfurther take judicial notice of the fact that preceded by generalagitation for imposing prohibition, the State of Andhra Pradeshenacted the Andhra Pradesh Prohibition Act, 1995 barringmanufacturing, possession, sale and consumption of arrack orcountry-made liquor or illicitly distilled liquor, making thecontravention a cognizable offence. Therefore, from September, 1994, the arrack business of the assessees was abruptly closed. As rightly pointed out by the Counsel, most of them might beuntraceable. These are certainly relevant in the best judgmentassessment of income-tax. How has the Tribunal arrived at 1% of estimates sales as grossprofit? We may give an illustration. If the purchase price of one unitof arrack is ` 100/-, at eight (8) times of purchase price theestimated sales would be ` 800/-. 1% thereof would be `8/- or 8%. For arriving at the estimated sales at eight (8) times the purchaseprice, the Tribunal considered the actual purchase price and theactual sales as disclosed by the assessees. For instance in ITTANo.3 of 2003,