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TMI Blog2012 (6) TMI 402X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Appellate Tribunal, Visakhapatnam Bench. The learned Tribunal passed various common orders in all the appeals filed by the assessees as well as the Revenue. The appeals by the assessees were partly allowed and those of the Revenue were dismissed. The issue, in these appeals, is whether the best judgment assessment made by the Income-tax Officer, Kakinada, estimating the gross profit from the assessees' arrack business at 40 per cent. of the purchase value is sustainable in law and if not what would be the estimate of gross profit as per the principles of best judgment assessment ? 2. The fact of the matter is not in serious dispute. The respondent-assessees (the arrack contractors), at the relevant point of time, were engaged in the business of selling arrack. For the assessment years 1993-94 and 1995-96, these assessees assessed either as individuals, partnership firms or association of persons (AoPs), filed their returns of income admitting a net loss. The Assessing Officer did not accept the returns. He took up assessment under section 143(3) of the Act. Objections were invited with regard to the nature of the concern ƒ_" whether it is a firm or an associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purchase price as the gross profit is without any basis. Reliance was placed on a consolidation order dated May 30, 2001, of the learned Tribunal in the case of Anakapalle Municipal Units Arrack Shop and others (I. T. A. Nos. 1418 to 1424/Hyd/1996 and batch), wherein the Tribunal held that estimation of turnover at eight (8) times of the purchase price and 1 per cent. thereon as profit would be reasonable. Indeed there is no dispute that this order was followed in all the other common orders by which the appeals of the assessees were allowed and those of the Revenue were dismissed. 6. The senior standing counsel, Sri S. R. Ashok, submits that, when estimation of income under section 145 of the Act was held to be justified by the Tribunal, interference with the estimation of gross profit by the Assessing Officer as confirmed by the Commissioner of Income-tax (Appeals) is uncalled 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 the books of account, or has not produced any record to support his claim as to the taxable income, it is always open to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt.Provisions and precedents 10. As per the charging section of the Act, income shall be charged at any rate or rates as per the Central Act for that year. Section 2(24) defines "income" inclusively and elaborately. As per section 2(43) "tax" means the income-tax chargeable under the provisions of the Act for the relevant assessment year in determining the income-tax liability of an assessee who is liable to pay tax under the Act. In computing the income, sections 5 and 7 and the provisions in Chapter IV of the Act provide the modalities. While doing so, deductions to be made in computing the total income are enumerated in Chapter VI-A. Chapter VIII deals with rebates and reliefs to be allowed in computing income-tax. 11. The law mandates that every person shall furnish a return of the total income if it exceeds the maximum amount which is not chargeable to income-tax. Chapter XIV contains the procedure for assessment and Chapter XIV-B contains the procedure for block assessment pursuant to search and seizure taken in cases of tax evasion. Besides these provisions, the Income-tax Act contains the machinery provisions for collection and recovery of tax (Chapter XVII) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If Parliament has power to fix tax at a rate which has no connection with the 'total income', then the machinery set up under the 1961 Act becomes infructuous. In our view, section 4(1) prescribes the subject-matter of the tax and the rate of that tax is prescribed by the Legislature, either under the Act as in the case of section 113 or, vide the Finance Act. As long as the charge is on 'total income' of the previous year and so long as the rate relates to the subject-matter of the tax, there is nothing to prevent Parliament from fixing the rate. But the rate must be applied to the 'total income' and the tax that an assessee has to pay must be at the rate in respect of the total income of the previous year." 14. The term "assessment" is an inclusive definition. "Assessment" includes reassessment (section 2(8) of the Act). The understanding of the scope of "assessment" is necessary as, in these cases, we are concerned with the computation of income for the purpose of determining or assessing income-tax payable by the respondent-assessees. In C. A. Abraham v. ITO [1961] 41 ITR 425 (SC) ; AIR 1961 SC 609, the Supreme Court quoted with approval the obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determined which would include income-tax, surcharge, super tax, etc." On this reasoning, the apex court ruled that the expression "assessment order" occurring in section 35(1) of the 1922 Act would include an order made under section 23A of the said Act. 17. It may, therefore, be taken as well settled that the word "assessment" used in various provisions of the Act connotes different meanings, namely, the computation of income, the determination of the amount of the tax payable and some times the whole procedure laid down in the Act for imposing liability upon the taxpayer. The word "assessment" would certainly take within its fold, "computation of income as well as determination of tax payable thereon". The immediate question, therefore, would be on what basis income is computed although the determination of the tax liability would depend on the Finance Act passed by Parliament to be applicable for each assessment year. The computation of income, unless specifically provided for by the Act is ordinarily left to the choice and option of the person liable to pay the income-tax. Every taxpayer is expected to disclose all types of income contemplated under the Act, namely, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sources' shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from 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 the correctness 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), have not been regularly followed by the assessee, the Assessing Officer may make an assess-ment in the manner provided in section 144." 18. The above two provisions empower the Assessing Officer to make assessment of the total income to the best of his judgment and determine the tax payable by the assessee. If a case falls under any of the three categories under section 144(1) of the Act, it is mandatory for the Assessing Officer to make a best judgment assessment. In a case falling under section 145(3) of the Act, discretion is given to the Assessing Officer to make a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and subjectivity in arriving at the taxable income is not contemplated under law. The word "assessment" is, therefore, to be understood in each section with reference to the context in which it has been used. In some sections it has a comprehensive meaning and in some sections it has a restrictive meaning (A. N. Lakshman Shenoy v. ITO [1958] 34 ITR 275 (SC) ; AIR 1958 SC 795). The power to make best judgment assessment is not an arbitrary power. These principles of law are well settled. 22. As observed by the Supreme Court in State of Orissa v. Maharaja Shri B. P. Singh Deo [1970] 76 ITR 690 (SC) ; [1971] 3 SCC 52, the scope of the best judgment assessment power has been explained by the Supreme Court in a number of decisions. In Raghubar Mandal Harihar Mandal v. State of Bihar [1957] 8 STC 770 ; AIR 1957 SC 810, the assessee was engaged in bullion business. It was assessed to sales tax for seven quarters under the Bihar Sales Tax Act, 1944. For three quarters the assessee did not file returns. The Sales Tax Officer (STO), in exercise of the power under section 10(4) of the said Act, assessed the tax applying the principle of best judgment assessment. In respect of four qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ves to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate ; and though there must necessarily be guess-work in the matter, it must be honest guess-work." 24. In CST v. H. M. Esufali, H. M. Abdulali [1973] 90 ITR 271 (SC) ; AIR 1973 SC 2266, the Supreme Court considered the question whether it is the duty of the Assessing Officer to adduce proof in support of his estimate. After reviewing the case law, the Supreme Court did not agree with the view taken by the High Court that the assessing authority must have material before it to prove the exact turnover suppressed. It was held that if there is a reasonable nexus between the basis adopted by the assessing authority and the estimate of escaped income, it would suffice the test of validity of best judgment assessment. It is apt to quote the following relevant observations (page 277 of 90 ITR) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessment by the Department officials 27. The Income-tax Officer, Ward-3, Kakinada, rightly rejected the loss return of income filed in most of the cases by the arrack contractors. Presumably opining that the arrack business is highly profitable, he rejected the book results disclosed by the assessees and estimated the gross profit at 40 per cent. of the purchase price. The licence fee and bank commission were totally allowed as expenses. Out of the expenses claimed, the interest paid to partners was disallowed relying on the decision of the Supreme Court in Bihari Lal Jaiswal v. CIT [1996] 217 ITR 746 (SC). The Assessing Officer, however, allowed 50 per cent. of the expenses claimed even though they were unvouched and unverifiable. The method adopted for allowing expenses has some rationality, but estimating the gross profit at 40 per cent. of the purchases is utterly unreasonable and arbitrary, and does not fit into any of the known principles of best judgment assessment. Even a microscopic examination of the assessment order in all the cases does not even give a clue as to how an arrack contractor would be able to reap profit at 40 per cent. of the purchase pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s names, or in the names of faceless persons, or persons of no means. The tax collected is already with the State. An assessment can be made in accordance with the provisions of law. If the tax assessed is more than the tax already collected, may be there is little likelihood of such collection ; but, even with these provisions, the situation is the same. There is no reason behind saying that even where a person actually earns less profit than the specified one, or incurs loss, even then his profits and gains should be arbitrarily fixed at 40 per cent. of the purchase price, or that he should not be allowed to establish his real income from the said business or trade. May be these persons do not maintain the books properly ; but that is not an insuperable difficulty. If the books are not properly maintained, or are suspicious or unacceptable otherwise, they can away be rejected and a best judgment assessment made. The level of profits in such trade in a given area, region or State can always be kept in mind while making a best judgment assessment and/or while determining the truth or genuineness of accounts. The existence of some honest traders even in the specified goods cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (series) in the case of GRK Prasad disposed of today. We find that in the cases under consideration the facts are almost identical and, therefore, the decision taken in our earlier orders referred to above (i.e., May 30, 2001, August 31, 2001, and January 31, 2002) is also applicable to the present cases at hand under group A and group B. No worthwhile material or fact was also brought in record by the learned Departmental representative to justify a different finding. Therefore, following the same, under the circumstances we hold that though the Assessing Officer was justified to reject the book results, estimate of gross profit at 40 per cent. of purchase price and disallowances of expenditure is arbitrary and excessive. We further hold that sales, which are admittedly unverifiable should be estimated at eight times of purchase price and net profit should be estimated at 1 per cent. of such estimated sales or declared sales, whichever is more, clear of all deductions and allowances, and if the profit so estimated is less than the profit declared should be accepted." 33. From the above observations, we are convinced that the Tribunal considered (i) the sales shown by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales at eight (8) times the purchase price, the Tribunal considered the actual purchase price and the actual sales as disclosed by the assessees. For instance, in I. T. T. A. No. 3 of 2003, admittedly, the purchase price of arrack was Rs. 21,16,276 and the sales turnover was Rs. 1,41,63,666. In I. T. T. A. No. 172 of 2003 as against the purchase price of Rs. 5,26,260 the sales recovery was Rs. 32,17,544. In I. T. T. A. No. 253 of 2003 the purchase price of arrack stood at Rs. 15,12,000 and the admitted sale amount at Rs. 1,38,30,500. Thus, the average estimated sale is about 7 or 8 times the purchase price. This aspect the assessees did not seriously dispute. But, according to them, given the nature of business and the expenses involved like cost of arrack paid to the Government, royalty paid to the Government, payment of taxes to the Government, rentals paid for setting of shops and all other miscellaneous expenses, estimation of net profit at 1 per cent. of the estimated sales is reasonable. The senior counsel for the Revenue, however, disputes this. 35. What would be a reasonable estimate of the profit with reference to purchase and/or the total sale value ? Section 44 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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