9911796707
TMI Blog1997 (4) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... s. It was also mentioned therein that the assessee-firm had been dissolved with effect from 23-10-1985. Notices under section 142(1) and under section 143(2) of the Act were issued to the assessee fixing the hearing of assessment proceedings on 20-2-1989. Apparently, along with the said notices a detailed questionnaire was also issued to the assessee requiring the assessee to produce trading account, profit and loss account, balance sheet, quantity wise analysis of otherwise sales and purchases, details of opening and closing stock etc. On 20-2-1989 the assessee addressed a letter to the Assessing officer (hereinafter referred to as 'the Assessing Officer') vide which the Assessing Officer was requested to grant a further period 15 days to file the above mentioned details. On the same date the Assessing Officer issued another notice to the assessee refixing the hearing of the case on 2-3-1989. There was no compliance with the notice. Subsequently, on 13-3-1989 the Assessing Officer issued an order under section 142(2A) after obtaining prior permission of the CIT and vide the said order the assessee was required to get its books of account audited by an appointed auditor and submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer noted that according to the sales register of the assessee, which was in possession of the department, being seized during the course of search and which was for the period from 1-4-1985 to 31-5-1985 i.e. for 2 months the sales as per the sales register came to Rs.90,92,953. Since the assessee had stated that the firm was dissolved on 22-10-1985 and that there was no closing stock on the said date, the Assessing Officer estimated the sales for the remaining period of the previous year i.e. for 4 months and 22 days at Rs.2 crores. The total sales of the assessee were, therefore, estimated at a sum of Rs.2,90,92,953. Taking note of the rate of gross profit in similar firms, the Assessing Officer applied a gross profit of 6.5% on such estimated turnover to arrive at the gross profit for the year. He thereafter proceeded to bifurcate various expenses claimed by the assessee in three sections, viz. (i) expenses directly related to the sales; (ii) expenses not relating to the sales; and (iii) Misc. expenses. The Assessing Officer thereafter proceeded to disallow 40% of such expenses after recording his reasons for doing so at length. After adopting the various steps as indicate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.1,76,09,450 respectively. Reading all these facts in view, in my opinion the estimate of turn over of somewhere around Rs.2.90 crores appears to be rather excessive, particularly when the previous year in question extended to a period of 6 months and 2 days only. In this view of the matter and having regard to the fact that there was a downward tendency in the turn over in the lean period in respect of earlier years, a fact which cannot be ignored or lost sight of in a best judgment assessment, I am of the opinion that it would suffice if the turnover of the balance period is estimated at a round figure of Rs. 1.10 crores or in other words, it would be fair to estimate the turn over of the appellant firm for the entire year at a sum of Rs.2,00,00,000." After estimating the turn over at Rs.2 crores, the learned CIT(A) proceeded to make a reasonable estimate of the income of the assessee. He noted that in the AY 1985-86 the assessee had declared net profit of 0.35% which was accepted by the Revenue on the declared turn over. He therefore, concluded that "taking all these circumstances into consideration, I deem if fit to apply a net profit rate of 0.50% of the total turn over of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------ 6.15% 2.85% 3.75% ------------------------------------------------------------------------- Expenses - 13,83,631 10,09,450 6,14,494 ------------------------------------------------------------------------- 5.80% 2.70% 3.50% ------------------------------------------------------------------------- Net Profit 1,00,000 &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of State of Kerala v. C. Velukutty[1965] STC 465: "Judgment is a faculty to decide matters with wisdom truly and legally, though there is an element of guess work in a best judgment assessment it shall not be wild one but shall have a reasonable nexus." It is an undisputed fact that the assessee-firm was disallowed and the income is to be estimated for a period of 6 months and 22 days. From the chart reproduced above filed by the assessee it is evident that in the asst. year 1983-84 net profit stood at Rs.45,075, for AY 1984-85 at Rs.561,630 and at Rs.85,066 for assessment year 1985-86. Thus maximum profit for a full year in the earlier years stood at Rs.85,066. The chart also shows that the sales had dropped to Rs.2,31,61,435 in AY 1985-86 from Rs.3,37,14,290 in AY 1984-85. Accordingly, in our opinion, the estimate of sales by the Assessing Officer for the period of 6 months and 22 days during the year under appeal at Rs.2,90,92,853 is highly excessive. In a case like this where the books of account are not available the best method will be to estimate the income by taking into consideration the facts and circumstances of the case and in our opinion, the CIT(A) was justified in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books of account were released to the assessee on 13-3-1989 (some confusion in dates and it should be some other date) and auditors Shah Dalal Shroff and Associates were appointed to conduct the audit. The assessee, however, vide letter dated 15-4-1989 received in the office of Assessing Officer on 17-4-1989 informed that all the books of account have been lost on 10-3-1989 as the same were being taken back from the office of Assessing Officer after verification. The auditors also submitted their reports to the effect that audit was not possible for want of the books of account which were said to have been lost. The Assessing Officer examined the factum of loss of books of account and examined the concerned persons and concluded that assessee itself has caused loss of books of account and virtually the story set up by assessee-firm about loss of books of account was concocted one. He was left with no other alternative but to proceed under section 144 of the Act and he issued a notice to the assessee on 19-6-1989 to show cause why the assessment should not be completed on the basis of past records of assessee-firm. He also gave out the details of total sales effected by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net profits @ 0.50% of the total turnover of Rs.2 crores which he estimated as the correct in place of Rs. 2.90 crores worked out by Assessing Officer and arrived at Rs. 1 lac at the total income of the assessee. This order of ld. CIT(A) is subject-matter of this appeal preferred by the revenue. 11. The ld. D.R. Shri M.S. Rai submitted that story of loss of books of account was concocted one and Assessing Officer has rightly disbelieved it on the basis of elaborate reasonings given in his order running from P. 4 to p. 11 of the assessment order and none of the factors out of it was considered by the ld. CIT(A) nor the assessee firm has been able to rebut the findings arrived at by the Assessing Officer on this point. He justified the conclusion of Assessing Officer on the basis of these findings of Assessing Officer and further submitted that the amount of total sales arrived at by Assessing Officer at Rs.2.90 crores was based on the material available on record as Assessing Officer did find the total sales of Rs.90 lacs for two months and for remaining 4 months 22 days Assessing Officer rightly estimated the total sale at Rs.2 crores and in all Rs.2.90 crores. He also invited ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by Assessing Officer and if it was so then what was them motive of assessee firm for setting up of such a concocted story. 14. The begin with the theory of the assessee, it was asserted by the assessee firm that books were taken to the office of Assessing Officer on 10-3-1989 and when the same were being taken back to assessee's premises in a auto-rickshaw then said driver of the auto-rickshaw fled away with all books of account of assessee firm as well as other four firms of the same group on account of some dispute on payment of fare of auto rickshaw. The matter was brought to the notice of Assessing Officer next working day i.e, 13-3-1989 and even reported to Police Station on 17-3-1989 and even a note was published in newspaper "Sandesh" dated 24-3-1989, regarding the loss of books and the same were not traceable. The ld Assessing Officer has examined each and every aspect of this theory in detail from p. 4 onwards to p. 11 of assessment order and the first point relating to it is about the date of hearing when books were brought to the office of Assessing Officer. In para 4 of his order, Assessing Officer specifically mentioned that 10-3-1989 was not the date fixed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 99 and after loss of the books, the factum of loss was reported on that very day at 1.15 p.m. as stated by Tahilram Parimal on 26-5-1989 while the earlier plea of the assessee on this point through letter dated 15-4-1989 was that factum of loss of books of account was informed to Assessing Officer orally on the immediate next working day i.e. 13-3-1989. This was material contradiction that shows the different view adopted by assessee in relation to the fact of information given by assessee to Assessing Officer and rightly concluded by Assessing Officer that no information was actually given by assessee on 10-3-1989 nor on 13-3-1989. 17. The above conclusion of Assessing Officer is supported by another important circumstance that in case books were lost on 10-3-1989 then assessee firm should have reported this fact to auditors also in their correspondence but in the letter dated 27-3-1989 issued by the assessee firm in response to letter dated 20-3-1989 of Shah Dalal Shroff & Associates, the assessee stated to have maintained all the books and nowhere stated that books had since been lost. In spite of 17 days passed the assessee did not bring the fact to the note of auditors even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -5-1985 of the assessee-firm which were seized during the course of search. He proposed on the basis of rough cash books and sales register referred to above, the total sales for the period from 1-4-1985 to 22-10-1985 during which period the firm was in existence, at Rs. 2.9 crores as sales register for the period from 1-4-1985 to 31-5-1985 revealed the total sales of Rs.90,92,953 and for remaining periods of 4 months 20 days, he estimated sales at Rs. 2 crores. The reply of the assessee on this point as mentioned by Assessing Officer in para 6 of his order was that sales of June, July and August months were lower than the sales of April and May and he proposed the sales at Rs.10 lacs per month for June, July and August, 1985 and Rs.15 lacs for September and Rs.13 lacs for October, 1985. However, the Assessing Officer has observed that there was no documentary evidence or other materials in support of this contention to believe that sale which was at Rs.33.66 lacs in April 1985 and Rs.57.26 lacs in May 1985 (as per sales register in the possession of Assessing Officer) fell down to Rs.10 lacs in the month of June, July and August, 1985. The assessee could have furnished comparative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer relates to the expenses which were to be deducted to work out the total income. The Assessing Officer was having rough cash books and some debit notes for the period from 1-4-1985 to 20-5-1985 and out of those some expenses in debit notes were found unstamped and unsigned. The Assessing Officer called upon the assessee as to why the expenses relating to unstamped/unsigned debit notes should not be disallowed. The Assessing Officer also worked out the expenses for remaining period on the basis of those expenses. The assessee gave reply thereof vide letter dated 23-6-1989 in which he divided the expenses into the following categories:-- 1. Expenses directly relating to the figures of sales; 2. Expenses not relating to the sales; and 3. Misc. petty expenses. The assessee also furnished a detailed working of the percentage-wise calculation of each type of expenses along with its relation to the figures of sales for A.Y. 1983-84, A.Y. 1984-85 and A.Y. 1985-86. It was further asserted by assessee that as its expenses were unverifiable and unvouched, 25% of the expenses claimed, may be disallowed and rest may be allowed as worked out. The Assessing Officer considered each of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer's view about treating the amount of sales at Rs.2.90 crores and rate of G.P. at 6.5% stands confirmed subject to allowability of the expenses to be worked out without any deduction. The order of Assessing Officer stands restored to that modification and appeal of the revenue is allowed to that extent. ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 The Members having differed we refer the following question for the opinion of the Hon'ble President:-- "Whether, on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) is justified in reducing the business income from Rs.14,16,912 to Rs. 1 lakh?" THIRD MEMBER ORDER Per Shri Nathu Ram, AM -- There being difference of opinion between the learned Accountant Member and the learned Judicial Member on the issue involved following question has been referred for opinion of the Third Member:-- "Whether, on the facts and in the circumstances of the case, the learned CIT(A) is justified in reducing the business income from Rs.14,16,912 to Rs.1,00,000?" 2. I have the privilege to go through the orders recorded by the learned Accountant Member and learned Judicial member ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on 10-3-1989 in seven bundles in autorikshaw and after making the payment of Rs.15 for hire charges of the autorikshaw he went to seek assistance for carrying the 7 bundles to the office of the Assessing Officer the autorikshaw driver drove away taking the said books in seven bundles. The assessee filed a F.I.R. about the loss of the books with the police authorities on 17-3-1989 and advertisement was also given in the local daily newspaper 'Sandesh' on 24-3-1989. According to the assessee the accountant Shri Motwani reported the incident to the Assessing Officer on 10-3-1989 and again on 13-3-1989. When the books of account could not be found even on police complaint and advertisement it was treated as lost and the Assessing Officer was informed in the letter dated 15-4-1989. The books of account having been lost the audit as required under section 143(2) could not be carried out. 3. The Assessing Officer did not accept the explanation so given about the losts of books and according to him the books of account were deliberately withheld and not produced before the department. Under the circumstances the Assessing Officer completed the assessment under section 144 on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocuments and statements placed in the compilation relevant for the purpose. 9. I have given careful consideration to the facts, material on record and rival submissions. It is evident from the facts given that books of account prepared by the assessee for the period from 1-4-1985 to 22-10-1985 was not available before the Assessing Officer for whatever reason so as to enable him to ascertain and assess the correct income as reflected from the books of account maintained. The Assessing Officer had therefore no alternative but to estimate the income based on such records available for the current year and the past trading results. But the basis adopted for determining the income on estimate basis has to be fair, reasonable and judicious and not arbitrary or capricious. In the present case there being no books of account available necessary details of opening stock, purchases, sales and expenses incurred under various heads for the current year were not available. The Assessing Officer under such situation could determine the income only by estimating the sales and applying a profit rate thereon. The Assessing Officer therefore had to estimate the sale for the full accounting year i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; 23,42,100.66 42,45,090 July 1983 17,62,559.13 17,57,910 August 1983 19,39,221.73 9,55,460 September 1983 25,97,520.79 3,66,570 October 1983 (1 to 15) 16,25,555.46 9,350 --------------- ----------- &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 1,13,21,747 1984-85 1,53,75,481 1985-86 1,09,51,266 ------------------------------------------------------------- It appears from the sale figures available of earlier years that there was a peak season in the months of April and May for sales and thereafter there was a downward trend in sales. Moreover the accounting year for the current year comprised only of 6 months and 22 days whereas the earlier accounting years were of 12 months. Looking to the sales effected by the assessee in the preceding three years and also succeeding three years the sales adopted by the first appellate authority for the period of six months and 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit rate of 5% based on the results of the earlier 3 years on the sales estimated. The learned Judicial Member has sustained application of GP rate at 6.5% on the sales estimated and has further directed the Assessing Officer to allow the expenses as claimed and to work out the amount of expenses on the same percentage for the remaining period without making deduction at 25% or 40%. As mentioned above the vouchers in the custody of the department for a period of about 2 months are not complete as these contain no details for vatav, interest, depreciation etc. Further certain deductions are claimed by way of adjustment at the close of the accounting year by way of commission etc. or certain expenses committed but not paid during the year. Thus the expenses relating to the P & L account to be computed in the manner indicated would not be complete and adequate to arrive at the correct income. Under the circumstances it would be fair and reasonable if net profit rate is applied on the sales estimated as based on the past records, I note that in the preceding three assessment years the net profit rate declared by the assessee was as under:-- 1983-84 &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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