TMI Blog1988 (3) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... t. year 1976-77, had been admitted by the assessee as having never been made by the firm and so, according to the assessee, the question of the said purchases being reflected in the closing stocks or in the stocks pledges with the banks in nay of the aforesaid two years did not arise. The assessee's plea, however, has been that the addition to the above extent on account of purchases having been if late should not be made to the assessee's trading results because that would yield a gross profit rate in respect of asst. year 1977-78 of 28,9 per cent, which according to him, would be entirely disproportionate to the sedimented gross profit position of the assessee in earlier and subsequent years. In this connection, the assessee filed a chart before us, being SI. No. 5 of the assessee's paper book, which indicated that, beginning from asst. year 1966-67 right up to asst. year 1985-86, the assessee declared gross profit has never been more than 18.5 per cent. The addition in question of Rs. 1,23,391 in assessment year 1977-78 could not therefore, be justifies. At the best the assessee's trading results could be estimated taking into account the past and the future history of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said Sh. M. M. Tora was trying to defraud the assessee-firm. The submissions made by he assessee on this point were, inter alia, as below : "Taking advantage of the confines and innocence of the partners of the firm, he manipulated accounts of the firm. He did not record purchases faithfully and instead inserted various items of purchases which have been found to be fictitious.... If the firm had even the least idea about these vouchers being factious, it would not have produced the same before the ITO...... It is the trade practice in this line of business that payment against purchases are made within a short time from the date of their respective purchases. In these circumstances, no such payment was made and the credit balance of these parties were allowed to stand and carried over from time to time. It may be pointed out that M. M. Tora made a number of attempts of making payments to these parties but the proprietors were always insisting on issue of only a/c payee's cheques and, there was no occasion of him to get such cheques signed by the partners. These amounts remained unpaid except to the extent indicated above.". Earlier, the assessee had made out that Sh. M. M. To ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel for the assessee very fairly gave up the plea of loss by embezzlement before us. We had asked the assessee to place on record its balance sheets for the years under consideration and, from a perusal thereof, it appears, and it was conceded to by the assessee, that, in the books of the assessee, when purchases account was debited by the entries referred to above on a account of alleged purchases, the corresponding credits were passed in the respective accounts of alleged suppliers and these accounts of alleged suppliers continued to be in the balance sheets of the company as on 31-3-1976 and 31-3-1977. This position is in fact clear from the copies of accounts of Bhatia Iron Store, Khalsa Iron Steel Work's, Narang Iron Syndicate appearing at page 2 of the assessee's paper book in paragraph 6 of the submissions made by the assessee before the IAC in proceedings under section 144B of the IT Act. 1961. The assessee had in fact admitted this much at page 4 of the above submission when it had written that M. M. Tora made a number of attempts of aiming payments to these parties but the proprietors were always insisting on issue of only a/c payee's only cheques and, there was no occa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee had not proved this assertion by leading cogent evidence including one of Sh. M. M. Tora. According to the learned D. R. the assessee all along knew the bogus nature of the entries and yet did not declare them when the filed his original returns of income. He was forced to accept the bogusness of the entire in question on account of various enquiries made by the ITO. The Inspector of Income-tax went to the sales-tax Department also to enquiry whether the sales-tax number slotted against the various alleged suppliers of the goods were genuine and he learnt form the sales-tax Department that no sales-tax number had been allotted to the parties in question. The results of these enquiries made by the purchases were bogus. At no stage had the assessee taken the stand that its sales and closing and opining stock figures were wrong. In the circumstances, the ITO was justifies in not disturbing the figures of sales or opening stock and closing stock, but correct the mistake, which had been detected in the form of inflation of purchases, and to debit the trading account with the figures of actual purchases. The above state of the accounts of the assessee was material, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TO did not dispute the payment of cartage, wages, machinery rapiers, electricity expenses, labour charges and the figure of opening stock. He, however, found that the purchases were inflated. This fact was admitted by the assessee-firm unequivocally. He, therefore, adjusted these purchases by eliminating the bogus purchases, which were admitted by the assessee. In doing so, again, the ITO cannot be said to have acted wrongly. If he is not able to find any fault with regard to the payments of wages, labour charges, etc., and when it is also not the allegation of the assessee, that they are erroneous or inflated or that Thai have been understated, the ITO would not be acting against the material on record in accepting the correctness of the figures in question and adopting them, while finding out the real profits derived by the assessee from its trading during the year in question. 10. Apart from the above, there is another reason on account of which the additions question cannot, in our opinion, be deleted. It represents the real income which is lying in the pocket of the assessee, and which cannot, therefore, be ignored for the purpose of determining the assessee's real income. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be camouflaged in the accounts themselves (1) in the form of the increase in the partner' capital accounts as per their declaration, or (2) in the form of fictitious liabilities. Once the reality is discovered it has to be taken note of. The resort to the estimate of gross profit and the estimate of sales is not the only method of computing the income of the assessee in every given situation. Resort to it is had (sic). when circumstances so warrant. But when other parameters be available to make a more reliable estimate of income, they have to be taken into account. What method would yield the best result will have to be determined with reference to the facts of that case. In the present appeals, we have seen that, after examination of the accounts produced by the assessee, the ITO found correct the assessee's assertion that the sales are all vouched and verifiable and that the closing stock of the assessee is also correct. When this was the factual setting, it would be unrealistic to direct the ITO that he should nonetheless estimate the assessee's sales at a figure different from what the finds to be correct. Similar will be the position with regard to the various expenses d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng it will be ignoring the reality and the tangible evidence of existence of the assessee's undisclosed income. No case law has been brought to our attention by the assessee's learned counsel which might stipulate as an invariable principle the proposition that once the books of account of an assessee are shown to have been falsified on one specific issue, the only way to estimate the assessee's income under/section 145(2) is to resort to g. p. rate application on estimated sales, and all the rest of the evidence, howsoever tangible and relevant it may be, must be ignored merely because the same has come in contact with the tainted books. If the other evidence is available and is independently verifiable, and provides a much more realistic estimate of the assessee's income, it can and must be resorted No. case law says that it cannot be done. Then, the g. p. rate in earlier and later years has been accepted by the revenue because in those years events as in the present years, were not detected. Once these events are detected and they go to show positively that there is not only inflation of purchases, but there is creation of assets to the corresponding extent with no corresponding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . during the previous year under consideration Copy of the account of Ambassador Co. given in paragraph 6 of the said letter also shown that the said purchase was made in March 1976. It is further the assertion of the assessee that the said purchase was in fact never made and that the purchases were inflated to the above extent in respect of asstt. year 1976-77. Following submission made by the assessee in the aforesaid context as sum relevance : "There are purchases in the earlier year ending31-3-1976as well which are apparently not genuine- Rs. Bhatia Iron Stores 19,763 M/s Ambassador Co. 5,600 Copies of accounts of the parties thus named are as under : ............." In the context of the above averment, the matter deserves to be given a second look. It is possible that the aforesaid amount is different from the amount considered by the ITO but from the copy of the account filed by the assessee, the above position does not appear to be so. In the absence of correct facts, we find it difficult to adjudicate on this controversy properly, We, therefore, consider it in the interest of justic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------- 2. No doubt, these purchases as recorded in accounts have been admitted by the principal partner Mr. H. R. Kochhar to be bogus. I may add further that in. his connection to keep himself out from liability arising for the corresponding entries in the account, he made out that being an illiterate person, he allowed his accountant Sh. M. M. Tora to maintain accounts and that it was he who had caused these false entries to be made in the account books. It was further added by him that Mr. Tora had been accused of at least two instances of misappropriating funds of the firm by drawing two cheques dated15-3-1979and29-10-1979for Rs. 17,000 and Rs. 2,000 respectively aggregating to Rs. 20,000. He further had submitted that the first information report had been filed for drawing funds for the two fictitious payments, and that the ITO in his submissions was quite correct in spotting out that the 5 aforesaid purchasers were not tick marked by the auditor who had audited the account. It was for this reason the learned conceal for the assessee-firm Mr. Harnam Shanker claimed that the account written by Mr. M. M. Tora being unreliable should be ignor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial on record in accepting the correctness of the figures in question and adopting them, while finding out the real profits derived by the assessee from its trading during the year in question." 4. The learned D. R. also certified that except for the aforesaid 5 entries of purchases, other entire were verifiable and correct. The villains of the situation, according to him, were only the 5 purchase entire vouchers which could not be verifies by the ITO concerns from which the alleged purchases were claimed to have been made. The assessee-firm had also accepted that these entries were not correct and that the aforesaid purchases as entered in the account had not been made. 5. It is just here the crux of the question arises as to what treatment should be accorded to the 5 purchase entries, aggregating in value to Rs. 1,23,391 would it answer the needs of the situation squarely if a straight disallowance of the claim for deduction of purchase for Rs. 1,23,391 it made, and a corresponding addition is caused to the profit shown or is the alternative as proposed by the learned counsel for the assessee to disregard the account altogether which on account of 5 unvouched purchase entrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar in issue was in any way different from the trading of the last 20 years to warrant adoption of the gross profit rate of 29 per cent. 8. The primary aim of assessment is not to cause add back for infirmity in the accounts but make a reasonable and fair determination of profit only. It is from this consideration that an ITO has been given powers to undertaken the enquiry and make the assessment of the profit. The main objective of examination of accounts and assessment is to bring out and determine a fair and reasonable estimate of profit. Proceedings from this angle it does not follow that one can justify the adoption of gross profit rate at 29 per cent on the facts and in the circumstances of the case by merely adding the value of the unvouched expenses of Rs. 1,23,391 and ignore the history of the business altogether in making the assessment of the fair and reasonable profit. In my view, there must be some material brought on record to justify the adoption of gross profit rate of 29 per cent for the trading of the year. Detection of unvouched expenses is not enough when the history of the business shows that its gross profit rate in the last 20 years comprising both of preced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onscious of the fact that consumption of such constituents does not find and support from the 5 unvouched purchase entries nor from the stock register maintained by the assessee-firm. Yet I am unable to entertain the view that the assessee-firm could manufacture the articles produced without the consumption of the constituents. As already pointed doubt, it is a fact of life in the world of commerce and business as indicated above that a businessman has to make purchases both from the open market and also from the close market to obtain his supply. Without making such purchases from both markets, the assessee could not have maintained either his turnover or the rate of gross profit. It was from the closed market that purchases referred to appear to have been made. This derives support from the fact that although Mr. M. M. Tora on whose shoulder the assessee-firm shifted the responsibility for making the false entries caused those entries to be made in the accounts to enable the payment to these incognito supplier by drawing fictitious bills. There is further support available from a careful consideration of these fictitious entries themselves. Both revenue authorities, the ITO and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... call the accounts correct and complete recourse to sub-section (2) of section 145 cannot be avoided. A mere add back on account of 5unvouched entries without understanding the true import will not answer the needs of the situation towards the objective of better application of sub-section (2) of section 145 needs the issue to be sent back to ITO for re-examining the matter and recording a fresh finding. Whatever has been brought up in the above analysis about the reality of consumption of constituents to achieve the turnover and maintain the rate of profit, and the possibility of purchases having been made not from the open but from the closed market also calls for re-examination of the issue and recording of a fresh finding. Therefore, I would vacate the finding of the lower authorities made without understanding the true import of the five unachieved entire and, therefore, based on misappraisal of facts. It is fair also to both parties that they approach the subject-how to deal with the five unvouched entire-after making a proper appraisal of facts. The Tribunal should not jump to a conclusion at this stage and repeat the same error which lower authorities have already done by ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not enlarge it even though the mistake is very apparent from the difference of opinion. However, since the points involved for both these years are identical, the opinion I express with regard to the assessment year 1977-78 can, if the Bench so considers, be regarded as covering the assessment year 1976-77 also and the Bench may like to dispose it of on that basis. With these preliminary observations, I now proceed to narrate the facts of the present case, which gave rise to this Third Member reference. 3. As I mentioned earlier, these appeals relate to assessment years 1976-77 and 1977-78 and relate to a firm manufacturing horizontal single screw, semi-automatic plastic injection and rotary fully automatic machines. The accounting year of the assessee is the financial year ending with 31st of March every year. In the assessment year 1976-77 the Income-tax Officer noticed that the assessee made purchases during the year from one Bhatia Iron Store amounting to Rs. 19,763. No purchase vouchers were produced before him. The Income-tax Officer also noted that M/s Bhatia Iron Store was a bogus firm. The Income-tax Officer, therefore, concluded that the purchase recorded by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Officer that the gross profit shown by the assessee was more than fair and compared to the gross profit shown in the earlier years and if these amounts were added to the trading account, the gross profit would shoot up to 28.9 per cent, which according to any standard is normal and therefore even though these purchases were bogus, gross profit rate disclosed was otherwise fair and reasonable. Rejecting these contentions as of no consequence and holding that the rate of gross profit was not an unalterable percentage and would vary from year to year depending upon the market conditions and that in any case a rate of 29 per one should not be considered high in a manufacturing operation, the Income-tax Officer added the sum of Rs. 1,23,391. 4. Aggrieved by these additions, the assessee appealed to the Commissioner (Appeals) and repeated the same contentions. The Commissioner (Appeals) agreed with the Income-tax Officer and dismissed the appeal with the following observations : "After going through the facts on record as well as the papers filed by the appellant firm during these proceedings, there is no doubt that the firm itself had accepted that the purchase vouchers w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s heard by a Bench of the Tribunal and after hearing and reserving the orders, as one of the Members who heard the appeals happened to retire, the case was reported for hearing and another bench heard the matter. The learned accountant Member was common to both the Benches. This Bench heard the matter for quite sometime but could not come to an agree conclusion. After hearing the parties and considering the arguments addressed and the facts of the case the learned Accountant Member came to the view that there was nothing more for the assessee to argue in this case when it accepted unequivocally that these purchases were never made and that they were bogus and that the material was never received, the amount clearly resulted in the inflation of purchases and reduction in income and therefore the addition was rightly made. He did not find merit in the argument addressed based upon the resultant higher rate of gross profit. He held that the rate of gross profit was only a mean to arrive at the income and merely because the rate of gross profit happened to be higher, that by it else could not preclude adding back the inflation in purchases to the extent it was found and admitted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he view that the assessee admitted in unequivocal terms that these purchases were never made, the goods were never received by the assessee and in those circumstances, the addition to that extent had got to be made even if it results in enhancing the rate of gross profit to a much higher figure than shown and accepted in the earlier years. It was on account of this difference of opinion, the learned Members drew up the point of difference of opinion as stated above and submitted it to the President for the opinion of the Third Member. 9. Shri O. P. Dua, the learned counsel for the assessee submitted that this case was originally heard by a Bench consisting of Shri Anand Prakash and Shri D. D. Vyas, that Shri D. D. Vyas wrote the order and forwarded it to Shri. Anand Prakash for his perusal and signature, that Shri Anand Prakash kept the order deliberately with him till Shri D. D. Vyas retired and that the delay committed by Shri Anand Prakash had resulted in the case being posted again for a fresh hearing. The order passed by Shri D. D. Vyas was on the file where he accepted the assessee's contention. If those views are counted, then it would mean that as against one Accountant M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o him, proved that no addition was called for and thirdly the Income-tax Officer should have verified the consumption of materials along with the cost of consumption to ascertain whether they compared favourably with the figures in the earlier years and only in case such a caparison revealed any abnormality, an adverse view against the assessee could be drawn. Placing reliance upon the order of the learned Judicial Member, which according to him is identical to the views expressed by Shri D. D. Vyas who retired, the course adopted by the department of adding back these purchases should be discarded and addition should be made only by estimating the rate of gross profit at a reasonable rate comparing favourable with the rate of gross profit shown and accepted in earlier and subsequent years. 10. The learned Departmental Representative, on the other hand, contended that both the learned Accountant Member and the learned Judicial Member agree that the purchases were never made. They also agree that materials never came to the assessee's premises. In any case this was the admission made by the assessee before the authorities below. The authorities below proceeded on the basis of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as against the reliance placed upon on behalf of the assessee on the cases in Laxminarain Badridas, State of Kerala v. C. Velukutty (1966) 60 ITR 239 (SC) and 8 STC 770. 11. I have considered the arguments very carefully, perused the records and I did not any difficulty in agreeing with the view expressed by the learned Accountant Member. In a way this can be said to be a case where assessment was made to admission basis. It is no doubt true that the assessee after admitting before the authorities below that these purchases were fictitious, bogus and material was never received in the premises, made a submission that these entire were made by the accountant with a view to falsify the accounts and later withdrew the money and misappropriated or embezzled. These purchases were said to be credit purchases. Whenever the accountant made an attempt to make payments of these parties in cash, the partners objected to it and insisted upon payments being made by account payee cheque. All this might mean that the accountant might have entertained an evil and malicious motive to defraud the assessee for his gain. The assessee might also have succeeded in foiling his terms in withdrawing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mend this approach. The learned Judicial Member was also not correct, in my opinion, on facts to assume that the materials covered by these fictitious purchases was received by the assessee in his premises, used for manufacture and the finished goods sold were included in the turnover. This appears to be against the facts proved on record. Without going into the case law cited for and against, on facts I am of the opinion that in a case where the Income-tax Officer finds clear and unambiguous and unimpeachable proof of inflation of purchases, he has unfettered discretion to make the addition of the entire amount on inflation in purchases. He need not bother about the resultant rate of gross profit or worry about as to how the resultant gross profit would compare favourably with the rate of gross profit shown in the earlier years as we all know the rate of gross profit is only an indication about the trend in the trade and not a conclusive proof of the profit. In appropriate circumstances, the Income-tax Officer may reject the book results and may make an addition by estimating the gross profit in such a way a to cover up the inflation in purchases. That does not meant hat merely be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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