TMI Blog2012 (6) TMI 402X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 per cent. of the estimated sales or 16 per cent. of the purchase value, whichever is higher. - 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 of 2003 - - - Dated:- 21-6-2011 - 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; and INCOME TAX TRIBUNAL APPEAL No.393 of 2005 RAO V. V. S., RAMESH RANGANATHAN, JJ. JUDGMENT V. V. S. Rao J.- 1. This group of the Income-tax Tribunal appeals is filed under section 260A of the Income-tax Act, 1961 ( the Act ) by the Commissioner of Income-tax ( the CIT ), Rajahmundry, against different common orders passed by the Income-tax Appellate Tribunal, Visakhapatnam Bench. The learned Tribunal passed various c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peals) upheld the adoption of the gross profit at 40 per cent. of the purchase price taking into consideration the agitation which preceded introduction of prohibition in the State as well as disturbance in certain areas due to extremist activities. He also took into consideration the question of loss due to agitation. The Commissioner (Appeals) agreed with the Assessing Officer in restricting the expenditure claimed at 50 per cent. on the ground that the assessee did not place any evidence on both the aspects. The purchase value, rental payments, licence fee and bank commission were accepted and allowed as deduction. Addition made to bank interest was also deleted. Thus, the assessees got some relief before the Commissioner of Income-tax (Appeals). 5. As already noticed supra, there were a number of assessments of arrack contractors in East Godavari District by the same Assessing Officers and orders by the same Commissioner of Income-tax (Appeals). Various groups of appeals were filed before the Tribunal. In all these matters the assessees contended that taking 40 per cent. of the purchase price as the gross profit is without any basis. Reliance was placed on a consolidation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is no dispute that in all the cases the assessees had shown the turnover sales without producing books of account. Even when the books of account were produced they were not verifiable. The maximum retail price of arrack was not fixed by the Government and it was for the arrack contractor to sell the liquor at whatever price the contractor would get. After receiving assessments in all the cases the Assessing Officer issued show-cause notices ; the assessees filed their objections and produced books of account. When they were not produced the Assessing Officer disbelieved the turnover of sales as they were not supported by vouchers or books of account and, wherever the books of account were produced, they were rejected. The Assessing Officer then, indisputably, took up best judgment assessment under section 145(3) read with section 144(1) of the Act. The best judgment assessment resorted to by the Assessing Officer is not challenged either before the learned Tribunal or before us. Therefore, what is required to be examined are the principles of best judgment assessment.Provisions and precedents 10. As per the charging section of the Act, income shall be charged at any rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion provides that the charge has to be fixed by the Central Act. It is because of this, that income-tax is levied at different rates under the Finance Act. It must be borne in mind that the Income-tax Act deals with tax on income and nothing else. Therefore, in order that the charge should be a legal charge under section 4, it must be a tax on the income of the assessee. If the charge is the tax on anything else, then it would not be a valid charge. This is the only limitation upon the power or authority of Parliament to fix any rate it pleases. So long as the charge is on 'total income' of the previous year, there is no limitation upon the power or authority of Parliament to fix any rate it pleases. However, if 'rate' is understood to mean the fixing of the tax irrespective of 'total income' and unconnected with 'total income', then, in our view, Parliament would be travelling outside the ambit of section 4(1). The Income-tax Act, therefore, contains an elaborate machinery for ascertaining 'total income' of an assessee. If Parliament has power to fix tax at a rate which has no connection with the 'total income', then the machinery s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticular case and determining its amount . 16. Section 35 of the 1922 Act conferred power on the Commissioner or the Appellate Commissioner to suo motu rectify any mistake apparent on the record, appeal, revision, assessment or refund within four years from the date of such order. In CIT v. J. K. Commercial Corporation Ltd. [1976] 105 ITR 219 (SC) ; AIR 1977 SC 459, the Supreme Court was required to con-sider whether the expression assessment order in section 35 of the 1922 Act includes an order made under section 23A which authorized the Income-tax Officer to levy super tax at specified rates. Referring to Khem-chand Ramdas [1938] 6 ITR 414 (PC) as approved in C. A. Abraham [1961] 41 ITR 425 (SC), the Supreme Court held that : the word 'assessment' is capable of bearing a very comprehensive meaning ; it can comprehend the whole procedure for ascertaining and imposing liability on the taxpayer and literally speaking . . . the assessment is of the total income of the asses-see and then in the same order the sum payable by the assessee is determined which would include income-tax, surcharge, super tax, etc. On this reasoning, the apex court ruled that the expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment : Provided further that it shall not be necessary to give such opportunity in a case where a notice under sub-section (1) of section 142 has been issued prior to the making of an assessment under this section. (2) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1987 (4of 1988), shall apply to and in relation to any assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year and references in this section to the other provisions of this Act shall be construed as references to those provisions as for the time being in force and applicable to the relevant assessment year. 145. Method of accounting.-(1) Income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 144(1) of the Act, the Assessing Officer has to take into account all relevant material which he has gathered and should make assessment after giving the assessee an opportunity of being heard. Therefore, the best judgment assessment is not to be an arbitrary assessment. Whatever the computation of income and tax thereon, it shall have some bearing with reference to the material gathered by the Assessing Officer and, if there is no material, the question of best judgment assessment would not arise. The availability of material or availability of material gathered by the Assessing Officer is crucial for making a best judgment assessment. It is not the ipse dixit of the Assessing Officer to compute the income of an assessee either under section 144(1) or 145(3) of the Act. Nor the computation and determination can be as per the whims and fancies of an Assessing Officer. The language of section 144(1) and 145(3) of the Act indicate that the computation of total income should be by adopting an objective method, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and does not impose any liability as to 'an order in writing'. In spite of these differences, the two pro-visions are substantially the same and impose on the assessing authority a duty to assess the tax after hearing such evidence as the dealer may produce and such other evidence as the assessing authority may require on specified points. 23. The Supreme Court pointed out that the best judgment assessment cannot be made rejecting the books of account by indulging in pure guess work without any evidence or material at all. The Supreme Court relied on the following observations of Lord Russel Killoven in CIT v. Laxminarain Badridas [1937] 5 ITR 170 (PC) ; AIR 1937 PC 133, held as follows (page 180 of 5 ITR) : The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly, or vindictively or capriciously, because he must exercise judgment in the matter. He must make what he honestly believes 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n intelligent well grounded estimate rather than launch upon pure surmises . 26. From the decisions referred to hereinabove, we may sum up the principles to be followed when best judgment assessment is undertaken by a taxing officer as follows : (1) The power to levy assessment on the basis of best judgment is not an arbitrary power. It is an assessment on the basis of best judgment of the officer ; (2) when best judgment assessment is under taken it cannot be as per the whims and fancies of the Assessing Officer and it should base on some material either produced by the assessee or gathered by the taxing officer. If for any reason the material like books of account produced by the assessee is rejected as unreliable or unsatisfactory, there should be some valid reasons for doing so ; and (3) whenever best judgment assessment is made, the court would not call for proof from the officer if there is some nexus between the amount arrived at after some guess work and the facts of the case. 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. Pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Bench of this court in A.Sanyasi Rao v. Government of Andhra Pradesh [1989] 178 ITR 31 (AP) which was affirmed by the Supreme Court in Union of India v. A. Sanyasi Rao [1996] 219 ITR 330 (SC). These decisions dealt with the constitutional validity of sections 44AC and 206C of the Act. Section 44AC of the Act, inter alia, stipulated that the profits and gains of purchaser of goods in the nature of alcoholic liquor for human consumption shall be deemed to be equal at 40 per cent. of the purchase price. The Division Bench of the High Court of Andhra Pradesh read it down holding that the provision was intended to check 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 (pages 59, 60 of 178 ITR) : Once the tax is collected, based upon the purchase price of the specified goods, it is really immaterial whether the business is carried on in the names of dummies, in fictitious 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Anakapalle Municipal Units Arrack Shop in I. T. A. No. 1420/Hyd/1996 (series) as referred to above and relied on by the learned authorised representative of the assessee, wherein after considering the various orders passed by the Revenue authorities and also the orders passed by the Income-tax Appellate Tribunal, Hyderabad, in which different yardsticks had been adopted for estimating profit and also after considering the sales shown by the assessees vis-a-vis purchase price, it was held fair and reasonable to first estimate sales at eight times of purchases and then to estimate the net profit at 1 per cent. of such estimated sales or declared sales, whichever is more, after considering all kinds of deductions and allowances. The very same view has also been taken by this Bench in the group cases M/s. K. Bhaskar Rao in I.T. A. Nos. 17/H/97 series (consolidated order dated August 31, 2001) and also in another batch of cases in I. T. A. No. 467/Hyd/1997 (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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it a day and leave the arrack business. We may further take judicial notice of the fact that preceded by general agitation for imposing prohibition, the State of Andhra Pradesh enacted the Andhra Pradesh Prohibition Act, 1995, barring manufacturing, possession, sale and consumption of arrack or country-made liquor or illicitly distilled liquor, making the contravention 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 be untraceable. These are certainly relevant in the best judgment assessment of income-tax. How has the Tribunal arrived at 1 per cent. of estimates sales as gross profit ? 34. We may give an illustration. If the purchase price of one unit of arrack is ₹ 100, at eight (8) times of purchase price the estimated sales would be ₹ 800. 1 per cent. thereof would be ₹ 8 or 8 per cent. For arriving at the estimated 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the counsel that 8 per cent. of the purchase value as profit would be reasonable. 36. As seen from the purchase price and sales recoveries, there is a wide variation. In some cases, it is more than nine (9) times and in some other cases less than seven (7) times. Given the fact that there is no price fixed by the Government for sale of arrack and it is generally a seller's market, to assume that the gross profit would be at 1 per cent. of the estimated sales, in our considered view, is low. Accepting the total sale price at eight (8) times of the purchase price, we feel it appropriate to hold that 2 per cent. of the estimated sale value, after considering all types of deductions mentioned hereinabove, would be reasonable. Indeed, the Division Bench of this court in A. Sanyasi Rao's case [1989] 178 ITR 31 (AP) found that in some cases the profit margin was higher in arrack business. Therefore, estimating the net profit at 2 per cent. of the estimated sales or 16 per cent. of the purchase price (the Tribunal estimated at 8 per cent. of the purchase price) would not be unreasonable. 37. In the result, for the above reasons, we set aside the orders of the Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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