TMI Blog2019 (8) TMI 567X X X X Extracts X X X X X X X X Extracts X X X X ..... rd of the said benefit, which could be termed as excessive and not a reasonable estimate. The CIT(A), without there being anything on record, thought fit to take the view that the estimate by the appellant at 3% translates to 1% of the benefit derived, which could be termed as too low, and in such circumstances, estimated at 2%, which would translate to about 6.7% of the benefit alleged to have been derived by M/s.PACL India Limited. This is nothing but pure guesswork without there being any material or basis for arriving at the same. Ordinarily, we would not have entertained the appeal of the present nature having regard to the fact that the income has been assessed based on estimation. However, the way the authorities have proceeded with the guesswork, it cannot be approved. In view of the above, this Tax Appeal succeeds and is hereby allowed. The question of law is answered in favour of the assessee - R/TAX APPEAL NO. 1203 of 2018 - - - Dated:- 15-7-2019 - MR J. B. PARDIWALA AND MR A. C. RAO, JJ. For The Appellant (s) : MR TUSHAR HIMANI with MS VAIBHAVI K PARIKH For The Opponent (s) : MRS KALPANA K RAVAL ORAL J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sources under Section 56 of the Act. The appellant, vide his reply dated 21st March 2014, explained that he had only received commission of ₹ 0.30 on ₹ 100/-, i.e. ₹ 3,60,000/- on ₹ 12,00,02,100/- which had already been included in the net profit and reflected in the profit loss account. The Assessing Officer rejected the books of accounts under Section 145(3) of the Act and estimated the income at 10% of the gross receipts. The Assessing Officer made an addition of ₹ 1,20,00,210/- as income from other sources under Section 56 of the Act. 4. The appellant, being aggrieved by the order passed by the Assessing Officer, preferred an appeal before the Commissioner of Income Tax (Appeals). 5. The appellant submitted before the CIT(A) that the estimation of net profit at 10% was on the higher side and he had received commission at 0.45% only. He also pointed out that the returned income included the profit of ₹ 4,13,742/- from the labour contract receipts and set-off should have been granted against the addition of commission income by the Assessing Officer. The appellant also submitted that the commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2% by the CIT(A) is also without any basis. Mr.Himani submitted that the CIT(A) estimated the commission at 2% on erroneous basis that the appellant had derived benefits of ₹ 12,00,02,100/- from the accommodation entries. It is pointed out that it is not even the case of the CIT(A) that the appellant had derived such benefits. Mr.Himani submitted that the Appellate Tribunal ought to have deleted the addition of ₹ 22,53,100/- having regard to the following : ( a) The appellant has not derived a benefit of more than 0.3% of the transaction, and the same has already been declared by the appellant in its return of income. ( b) The amount of benefit derived by PACL India Ltd. has no bearing on the income of the appellant and cannot be a basis for making addition in the hands of the appellant, especially when even the benefit derived by PACL India Ltd. is itself an assumption pending the investigation at various forums. ( c) In any case, the estimation of 2% of the transaction is on the higher side. 10. In the last, Mr.Himani submitted that the Appellate Tribunal, in the alternative, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istent sales, non-existent purchases, and bogus expenses. In the present appeal, it is for bogus expenses. The benefit derived therefrom is tax avoidance of approximately 30% of the amount of accommodation entries. Therefore, the benefit derived from accommodation entries by M/s.PACL India Ltd. is approximately 30% of ₹ 12,00,02,100/-. The estimation of commission @ 10% by the assessing officer is 1/3rd of the said benefit, which is excessive and cannot be considered a reasonable estimate. 7.3 On the other hand, the estimate by the appellant at . 3% translates to 1% of the benefit derived, which is too low to justify the nature of activities and the risk undertaken by the appellant. Considering the same, the commission in the case of the appellant for giving accommodation entries is estimated at 2% on ₹ 12,00,02,100/-. This translates to about 6.7% of the benefit derived by M/s.PACL India Ltd and therefore, is a reasonable estimate. As a result, the estimate made by the assessing officer at ₹ 1,20,00,210/- is reduced to ₹ 24,00,042/- subject to para 8 of this order. 15. We may also look into the findings recorded by the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question. It is not known whether the mills which had disclosed these rates were situate in Bengal or elsewhere, and whether these mills were similarly situated and circumstanced. Not only did the Tribunal not show the information given by the representative of the department to the appellant, but it refused even to look at the trunk load of books and papers which Mr.Banerjee produced before the Accountant Member in his chamber. No harm would have been done if after notice to the department the trunk had been opened and some time devoted to see what it contained. The assessment in this case and in the connected appeal ; we are told, was above the figure of ₹ 55 lakhs and it was meet and proper when dealing with a matter of this magnitude not to employ unnecessary haste and show impatience, particularly when it was known to the department that the books of the assessee were in the custody of the Sub-Divisional Officer, Narayanganj. We think that both the Income-tax Officer and the Tribunal in estimating the gross profit rate on sales did not act on any material but acted on pure guess and suspicion. It is thus a fit case for the exercise of our power under article 136. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary for us to decide it an assessment made under cl.(b) of sub-s.(2) of S.10 of the Act, when the account books of the assessee are disbelieved stands exactly on the same footing as an assessment made under sub-s.(4) of S.10 when the assessee has failed to furnish his returns. In some decisions relating to the corresponding provisions of the Indian Income-tax Act, it has been said that the difference between the two is one of degree only, the one being more summary than the other. These are questions which do not really fall for decision in the present appeal, which is confined to interpreting the true nature and scope of cl.(b) of sub-s.(2) of S.10 of the Act. With regard to the corresponding provision in sub-s.(3) of S.23 of the Indian Income-tax Act, there is a decision of this Court which in our opinion, answers the question before us. The decision is that of Dhakeswari Cotton Mills Ltd. v. Commissioner of Income Tax, West Bengal 1955-1 S.C.R. 941 at p. 949: (s) A.I.R. 1955 S.C. 65 at p.69) (A). This Court observed: As regards the second contention, we are in entire agreement with the learned Solicitor-General when he says that the Income-tax O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt orders in question, which form part of the statement of the case. It is clear to us that what the Sales Tax Officer and the Commissioner did was to hold, for certain reasons, that the returns made by the assessee and the books of account filed by it were incorrect and undependable. It is not necessary to repeat those reasons, because we must accept the finding of fact arrived at by the assessing authorities that the returns and the books of account were not dependable. The assessing authorities rightly pointed out that several transactions were not entered in the books of account; and a surprise inspection made on 15th July 1947, disclosed certain transactions with a Bombay firm known as Messrs. Kishundas Lekhraj, which were not mentioned in the books of account; and finally the assessee was importing silver in the name of five confederates in order to suppress the details of the transactions etc. The assessing authorities further pointed out that there was a discrepancy between the return filed for the quarter ending 30th June 1946, and the accounts filed in support of it; the return showed a gross turnover of ₹ 2,28,370-12-0 while the accounts revealed a gross turnover o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 guesswork in the matter, it must be honest guess-work. We find nothing in those observations which runs counter to the observations made in 1955-1 SC R 941: (S) AIR 1955 SC 65) (A). No doubt it is true that when the returns and the books of account are rejected, the assessing officer must, make an estimate, and to that extent he must make a guess: but the estimate must be related to some evidence or material and it must be something more than mere suspicion. To use the words of Lotds Russell of Killowen again, he must make what he honestly believes to be a fair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -Tax, Madras, 1939-7 ITR 21: (AIR 1939 Mad 371) (SB) (D). This decision also does not help the respondent. It was held in that decision that though there is nothing in the Indian Income-tax Act which imposes a duty on an Income-tax Officer, who makes an assessment under S.23 (3), to disclose to the assessee the material on which he proposes to act, natural justice requires that he should draw the assessee's attention to it and give him an opportunity to show that the officers information is wrong and he should also indicate in his order the material on which he has made his estimate. This decision is really against the respondent and does not lay down any rule which may be said to be inconsistent with the observations made by this Court in 1955-1 SC R 941: (S) AIR 1955 SC 65) (A). 9. The decision of the Lahore High Court in Gurumukh Singh v. Commissioner of Income-tax, Lahore, 1944-12 ITR 393; (AIR 1944 Lah 353(2) (FB) (E) was specifically approved by this Court in 1955-1 SCR 941: (S) AIR 1955 SC 65) (A). The rules laid down in that decision were these; (1) While proceeding under sub-s.(3) of S.23 of the Income-tax Act, the Income Tax Officer is not bound to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by him and the surplus of such stores/material, if any, that remained was required to be and was actually returned by the contractor to the Department and this being the true nature of the supply of such stores/material, the cost or the value thereof could not be included or added to the total cash payment received bythe contractor under the contract for computing his income or profits from the said contract. In support of his contention reliance was placed upon M. P. Alexander's case (1973-92 ITR 92) (Ker) (supra), Madras High Court's decision in Commissioner of Incometax, Madras v. K. S. Guruswami Gounder, 92 ITR 90's (1974 Tax LR 157); Gujarat High Court's decision in Trilokchand Chunilal v. Commissioner of Income-tax, Gujarat, 104 ITR 732 : (1977 Tax LR 143) and Full Bench decision of the Andhra Pradesh High Court in Addl. Commr. of Income-tax v. Trikamji Punia and Sons, 106 ITR 597 : (1977 Tax LR 222) (Andh Pra). 5. On the other hand, counsel for the Revenue contended that not only the cash payments received by the assessee under the contract but also the cost of the stores/material supplied by the Department to the contractor - both together ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t confer a mere discretionary power; in the context, it imposes a statutory duty on the Income-tax Officer to examine in every case the method of accounting employed by the assessee and to see whether or not it has been regularly employed and to determine whether the income, profits and gains of the assessee could properly be deduced therefrom ...... If, therefore, there is a system of accounting regularly employed and by appropriate adjustments from the accounts maintained taxable profit may properly be deduced, the Income-tax Officer is bound to compute the profits in accordance with the method of accounting. But where in the opinion of the Income-tax Officer the profits cannot properly be deduced from the system of accounting adopted by the assessee it is open to him to adopt a more suitable basis for computation of the true profits. 23. It must be noted that although clause (3) of Section 145 gives discretion to the Assessing Officer to make an assessment in the manner provided in Section 144 of the Act, yet this discretion cannot be exercised arbitrarily. The question to determine in every such case is, whether there is any material for the basis adopted by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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