TMI Blog1996 (1) TMI 148X X X X Extracts X X X X X X X X Extracts X X X X ..... us the additions sustained and the relief granted by the first appellate authority. Assessee runs a leading Chinese Restaurant in a prime area of this megametropolis which is known as 'Chinese Garden'. 4. The premises of the assessee were subjected to a search on 18th Sept. 1989 which falls during the assessment year 1990-91. On the basis of the material collected during the search operations as well on the consideration of certain facts that took place during the assessment proceedings, the Assessing Officer rejected the sales results of the assessee by invoking the provisions of the proviso appended to sub section (1) of section 145 of the IT Act (hereinafter referred to as the 'Act' for brief). 5. The main considerations that weighed with the Assessing Officer in discarding the assessee's books of account and making estimates instead are two-fold as detailed out below :--- (i) a piece of paper seized on the 18th Sept. 1989, the day of the search which gives out the sales figures of two particular dates which were found to be at variance with the sales figures that were recorded in the books; (ii) Manipulations in the sales figures arrived at by employing decoy custome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer and contended that there was no justification even for the grant of relief by the learned CIT(A). 10. We have very carefully gone through the entire gamut of the relevant materials that were relied on behalf of the assessee as well as the Department and the oral submissions made by the rival parties. 11. The main considerations which prevailed with the revenue authorities in sustaining the disputed additions as stated are manifold. They are a paper seized on 8-9-1989 from the premises of the assessee showing actual sale figures of 2 days found to be at variance with the recorded figures; some manipulation in the sales bills found by sending decoy customers to the assessee's business premises; bills below Rs. 50 each found to be bogus and alteration made in the bills of the customers who left such bills in the restaurant. On the basis of these deficiencies, the Assessing Officer ascertained the average per bill which was then applied to the total number of sales bills of that period, thereby determining the estimated sales for the said period. This figure estimated by him along with average cost of food consumed for that quarter was used by him to come to a "c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of this document that the Assessing Officer took the average of cost of food to sales ratio at 34% for all the three years. The same was increased from 34% to 39%,38% and 37% respectively by the learned Commissioner, which is in serious challenge by the assessee before us. 17. The assessee's contention is that they are the leaders in supplying and serving excellent Chinese food in this metropolis. About their credentials, they also made reference to the communication referred to supra from the Institute of Hotel Management, as per which they were a Grade I exclusive Chinese restaurant located in a posh locality and catering to the need of the elitist clientele. Reference was thereafter made by the assessee to a variety of documents and testimonials in their support. The first among such documents could be said to contain the opinion of various eminent customers including leading stars of the country, available at pages 347 to 351 of the Paper Book. A few such opinions may need a brief mention here. According to the noted industrialist Shri J.R.D. Tata, the assessee was providing with "very good food and service". As per Shri Amitabh Bachchan "this garden is going places for sur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it may be Shri Harish submitted that the cost of food ratio to the sales figure had nothing to do with the establishment expenses inasmuch as the cost of food comprised only of the cost price of the inputs, that is the raw-material required in the preparation of various dishes and the cooking material used therein. 21. There is incidentally no rebuttal and perhaps there could be none to the assessee's claim that they are one of the leading-most Chinese restaurant in Bombay comparable only to the Golden Dragon, run by Taj. In these circumstances, we find sufficient force in the submissions made on behalf of the assessee that the opinion of the catering institute referred to supra as per which the cost of food to sales ratio would be much lower than claimed by the assessee was not very relevant. In any case, even as per this opinion, such cost would range between 30 to 40%, which too was not applied by the revenue authorities, as the Assessing Officer estimated it at 34% which was increased by the learned Commissioner (Appeals) to 39%, 38% and 37%. What seems to be more appropriate is that the yardstick in arriving at this ratio should have been the figures supplied by the Taj Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imself, as is evident from pg. 258 of the paperbook Vol. II in his own hand worked out this ratio as '40.04: 40%', which fact was omitted by the CIT (A). Secondly, during the continuous survey conducted, the Assessing Officer found percentage of small bills at 16.3596. On this basis, the food cost ratio works out at 43.57% as reflected at pg. 259-260, of Vol. II of the paperbook. This vital factor was also omitted by the CIT(A). C. Further, the Assessing Officer who had himself called for the food cost ratio from the Taj group which mentioned it at 40 to 50% and the assessee's claiming that they were even superior insofar as the quality of food was concerned to the Golden Dragon Chinese Restaurant of the Taj group, as was manifest and evident by the various testimonials, a few referred by us above, the CIT(A) did not appreciate these facts, for determining the food cost ratio and not alone this, whimsically discarded the communication from the Taj group, which had been sought by the Department itself. D. Fourthly, certificate given by another Food Institute, viz. Sophia Basant Kumar Somani Memorial Polytechnique, Bombay, available at pg. 342 certifying much higher cost of foo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... small bills was not properly taken into consideration by the CIT(A). As per their sales summary for the assessment year 1990-91, percentage of such bills approximately came to 30. During the Departmental survey, this percentage came to be 16 (Refer to p. 277 to 280 of the paperbook). 27. Further, it was vehemently submitted that strangely enough, this percentage while working out the quantum of suppression and food cost ratio was arbitrarily reduced without assigning reason. If the percentage found during survey was applied, the extent of suppression would have gone down considerably. 28. Further, the reasons for and the circumstances under which small amount bills had to be raised though explained properly in a letter to the Assessing Officer (available at p. 182 to 183 of the paperbook) were omitted to be considered by the CIT(A). Another vital factor ignored by the CIT(A) in arriving at the food cost ratio is that the sales effected by the assessee are partly on credit basis. 29. These credit sales were allowed on Credit Cards, Diners Cards and Membership Cards of "Chinese Garden'. Members would sign these bills give their credit card particulars. Such bills are sent to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Technology and Applied Nutrition. Incidentally, this certificate also gives the percentage at 30 to 40%, although for no discernable reasons, the Assessing Officer estimated this percentage at 34. This, as pointed out by us above, was raised to 39,38 and 37% by the first appellate authority. 34. A careful consideration made by us to the issue leads us to the feeling that the percentage of food cost ratio adopted by the Revenue authorities has been, to say the least, low. There is no material or reasoning available on record to discard the opinion of the Taj group running the Golden Dragon, and the same being ignored by the opinion of the Catering Institute. The standard of Golden Dragon is undoubtedly more comparable with the assessee's case. Even if the claim of the assessee that their good quality is superior to that of Golden Dragon, to which there is no rebuttal from the Department, and in fact which is supported by the various encomiums on record is ignored, and not given due weightage, there is no legal reason whatsoever as to why the really comparable case of Taj group is not followed and preferred over the opinion of Catering Institute which is more of a routine nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty meals - to charitable institutions, VIPs and film people, etc. This plea of the assessee is certainly not an after-thought and in the absence of any rebuttal, we find some force that the omission of such expenses from consideration by the learned CIT(A) despite the specific report from the Assessing Officer is not legally tenable and has to be borne in mind by fixing the food cost ratio. Same is the case with respect to certain other points, such as, supply of the food by the assessee to its staff from the same kitchen free of cost, etc. 38. A special mention needs by us to the survey made by the Assessing Officer in relation to the percentage of small bills. In respect of the assessment year 1990-91, this percentage came to 16 as against 30 shown by the assessee in its sales summary. Interestingly, this percentage despite the results of the continuous survey has been reduced by the Revenue authorities without assigning any reasons. Naturally, this would also affect the food cost ratio. 39. Another vital point which needs a mention is that the assessee has a system of providing food on credit cards. As stated above, approximate percentage of such credit cards for reasons of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 650 approximately. 44. These two instances impelled the department to carry out an exercise. A team of officers visited the restaurant on 31st January, 1991 as decoy customers to take lunch. The total bill came to Rs. 553 before making the payment, a zerox copy of the bill was taken by one of the officers by going out. The bill, after making the payment, was left on the table with deliberate intent. Later on, it was found that this bill was shown by the assessee for Rs. 42 alone. 45. In respect of the aforesaid discrepancies, in the first instance, it was submitted by the learned counsel for the assessee that none of the customers, including the decoy ones, was offered by the department for cross-examination. The case as put by the learned Departmental Representative has been that the assessee did not show any anxiety to cross-examine the witnesses. We find some force in the submission of the learned counsel that no specific opportunity was provided by the Assessing Officer to cross-examine the witnesses. Secondly, these statements were not recorded in the presence of the assessee or his representative and, as such, the question of instant cross-examination did not arise. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sociates of the assessee or to his personal activities with which the assessee-appellant is not concerned. Incidentally, out of the aforesaid amount of Rs. 13 lacs, Rs. 5 lacs offered for 1990-91 has been capitalised while Rs. 8 lacs offered for 1989-90 is not capitalised. Incidentally, the details of the remaining Rs. 47 lacs is also found at pages 140-142 of the paper book. It is in this context that it was vehemently submitted that once the assessee had satisfactorily explained the income arising to them from undisclosed sources, there was no room for making any further addition. 50. In respect of the discrepancies found by the department in the preparation of bills by the assessee, apart from the submissions made by them which have already been referred by us, reference was specifically made to a complaint made by the assessee to the Police on the 6th of February, 1991, a copy of which is available at page 167 of the compilation, whereby a fraud going on in the restaurant in the billing was reported. This complaint specifically gives the instance of a bill dated 31st January, 1991, wherein the bill originally made for Rs. 553 was shown by the staff for Rs. 42 alone. We were t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m time to time submitted the necessary details called for also produced the books of accounts sales registers/bill books, etc., whatever lying in its possession. Some of the records were seized at the time of search or impounded during the course of asst. proceedings since then lying in the custody of the Assessing Officer. In spite of producing all the records including the sales Register and sales bills, available with the appellant for the Asst. Years 1988-89 1989-90 the A.O. deliberately put adverse remark in the asst. order that 'assessee has something to hide as far as its sales of relevant period are concerned'. We enclose xerox copy of Annexure A page 2, Panchnama dated 18-9-1989 order u/s. 131(3) dated 25-1-1991 which shows that daily sales Register pertaining to part period of Asst. Year 1989-90 were lying in the possession of the A.O. but he did not bother to see the same. On verification of proceeding sheet and case record your honour would notice that in the earlier hearing dates the A.O. noted his requirement about production for sales bills sales Register granted adjournment. But since later on the AO's requirement regarding production of Sales record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar as the search carried on in the assessee's premises was concerned, as against a deficiency found of Rs. 41,000, a declaration of Rs. 13 lacs was made. 57. Insofar as the department's case is concerned, basically their reliance is on the additions made by the assessing officer which though meakly submitted, were justified. 58. We have given our careful consideration to the entire gamut of evidence, facts and circumstances of the case and the submissions made by both the sides. 59. As is evident, certain material which ought not be considered by the department for the present assessment years, have been taken into account. They have also drawn all adverse inference against the assessee about the non-production of certain books of accounts and the sales registers about which there is no warrant. Similarly, they have unjustifiably taken the cost of food to sales ratio at a low percentage which too, as discussed by us in great detail, is not justified. Inasmuch as they have not even followed the percentage intimated to them on enquiry by the only comparable case of Taj Group of Hotels, who are providing similar excellent chinese food in their Golden Dragon Restaurant. About th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecute this task as precisely and correctly as possible. In our considered view, on a consideration of all the relevant factors for and against the assessee, the following additions could finally be sustained: Asstt. Year Amount 1988-89 Rs. 7,00,000 1989-90 Rs. 10,00,000 1990-91 Rs. 10,00,000 62. We order accordingly. 63. In the result, while the appeals by the department fail, the appeals by the assessee are partly allowed. Per G.E. Veerabhadrappa, Accountant Member --- I have gone through the order proposed by my learned brother. However, I have not been able to agree with the conclusion reached therein. 2. The assessee, a private limited company, is engaged in the business of running a Chinese Food Restaurant. The restaurant specialises in gourmet chinese food and is a prime eating place in the city. Some of the discussions made in paragraphs 15,16 and 17 of the order of the learned Judicial Member as also the various letters of appreciation filed in volume VI of the assessee's paper-book, clearly bring out the extreme popularity of this restaurant. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on made by Revised addition assessing officer u/s. 154 of the Act 1988-89 Rs. 54,79,200 Rs. 47,04,198 1989-90 Rs. 1,10,10,950 Rs. 83,64,767 1990-91 Rs. 82,80,285 Rs. 72,31,585 Respective 154 orders were passed by the assessing officer to rectify certain mistakes in the calculation on the sales disclosed by the assessee in its regular books of account. 8. In appeal before the Commissioner (Appeals), the Commissioner (Appeals) had adopted the food cost ratio to sales at 39 per cent for the assessment year 1988-89; at 38 per cent for the assessment year 1989-90 and at 37 per cent for the assessment year 1990-91. The additions that remained in each of the assessment year as a result of the order of the Commissioner (Appeals) are Assessment year 1988-89 Rs. 28,48,574 Assessment year 1989-90 Rs. 49,27,755 Assessment year 1990-91 Rs. 54,47,737 9. In respect of the relief granted, the department is in appeal and in respect of the add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer in all these paragraphs give an interesting revelation about the modus operandi adopted by the assessee for suppression of' sales, they are not extracted here for the sake of maintaining brevity. 14. In paragraph XI of his order, the assessing officer arrived at cost of food ratio to sales at 34 per cent on the basis of average of genuine bills and bogus bills. In paragraph XII the assessing officer exhaustively dealt with the assessee's explanation about the food cost ratio of 34 per cent, which was taken as the basis for at-riving at the suppressed sales, for the purpose of assessment. The cumulative effect of all these gives a very clear picture how the assessee manipulated its sales bills. In my view, the books results disclosed by the assessee cannot be accepted and, therefore, the assessing officer- was justified in applying the provisions of section 145(1) for making the assessment of the assessee for the years under consideration. In the accounting period relevant to the assessment years 1988-89 and 1989-90, the assessee-company was having manual billing. The manual billing has its own advantages in tampering, altering and even duplicating the bills. In the accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ach of the year. Even if one were to consider such estimation made by the Commissioner (Appeals), despite proper disposal of all the contentions of the assessee, is conservative at best the food cost ratio to sales cannot be more than 40 per cent to the sales. I am, therefore, giving due weightage to all the contentions and claims of the assessee, direct the assessing officer to recompute the addition by taking the food cost ratio to sales at 40 percent for all the years. I have also considered the fact that the assessee might, in some year, not be able to revise the food tariff as and when the prices of raw material go up. Likewise, the tariff might not have been reduced as and when the cost of food items undergoes a downward changes. 16. Before painting with I may mention that the learned counsel for the assessee has relied upon the various case-laws tabulated in pages 282 to 297 of the assessee's paper-book. The assessing officer has established, in the facts of this case, that there has been a deliberate manipulation of sales. The department, after exposing the assessee's modus operandi has provided a basis for arriving at the proper ratio of cost of material to sales, from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be made at Rs. 7,00,000 for the assessment year 1988-89 and at Rs. 10,00,000 for the assessment years 1989-90 and 1990-91 on the reasoning given by the Judicial Member or should be arrived at on the basis of food cost ratio to sales on the reasoning given by the Accountant Member ?' THIRD MEMBER ORDER This is a Third Member case referred to me u/s 255(4). The original difference of opinion is on the following question which was framed by both the Members constituting the Division Bench and referred to the President on 3-12-1993: "What addition should be sustained in each of the three assessment years considering the facts, circumstances of the case and the material on record ?" 2. Again on 8-4-1994, under the same provision, namely, 255(4) of the I.T. Act, 1961 a revised point of difference was formulated and sent to the then President for appointment of a Third Member. The point of difference expressed was the following: "Whether, on consideration of the facts of the case and the material on record, the addition should be made at Rs. 7,00,000 for the assessment year 1988-89, and at Rs. 10,00,000 for the assessment years 1989-90 and 1990-91 on the reasoning given by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the references was made on 3-12-1993. After referring the said difference on 3-12-1993 with a request to appoint a Third Member would the Division Bench retain any more powers to revise the said reference. In my opinion this is not permissible under the provisions of section 255(4) of the Income-tax Act. I hold that when once the difference of opinion between Members was referred to the opinion of the President u/s. 255(4) and both the Members constituting the Bench requested to appoint a Third Member to resolve the difference which arose between them, the difference referred to should be taken to be the ultimate and final and cannot be allowed to be revised by the same Bench later. Their difference cannot be allowed to be revised on a subsequent date. Therefore, I take the difference referred to the President oil 3-12-1993 as the real difference between the Members. I ignore the second reference dated 8-4-1994 from consideration. 6. The first three appeals are by the assessee and the next three appeals are by the Department. These appeals relate to assessment years 1988-89, 1989-90 and 1990-91. For assessment year 1988-89, the accounting year was from 1-5-1986 to 30-4-1987. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir position as they stand now before me: ----------------------------------------------------------------------------------- Sl. No. Particulars Asst. Year Asst. year Asst. Year 1988-89 1989-90 1990-91 ----------------------------------------------------------------------------------- 1. Sales as per books Rs. 97,69,692 Rs. 2,42,86,863 Rs. 1,46,25,775 2. Food cost as per books Rs. 49,21,124 Rs. 1,11,01,555 Rs. 74,31,739 3. Food cost ratio 50% 46% 51% 4. Food/cost ratio taken 34% 34% 34% by the A.O. 5. Addition in suppressed Rs. 47,04,198 Rs. 83,64,767 Rs. 72,31,585 sales by A.O. 6. Food/cost ratio by the 39% 38% 37% CIT(A) 7. Addition sustained by Rs. 28,48,574 Rs. 49,27,755 Rs. 54,47,338 the CIT(A) 8. Food cost ratio by the 46% 46% 46% J.M. I.T.A.T. 9. Addition made by the Rs. 7 lacs Rs. 10 lacs Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two dates namely 6-8-1989 and 7-8-1989. 2. The personal testimony of the Assessing Officer himself. 3. The zerox copy of the sales bill which was obtained by the Officers of the Department by going to the assessee's Restaurant as decoy customers. 4. A copy of the reservation chart of the appellant's Restaurant. 5. An expert opinion from a catering Institute (Institute of Hotel Management, Catering Technology and Applied Nutritions). 9. A comprehensive and reasoned assessment order was passed for the assessment year 1990-91. The conclusions reached in that assessment order were also applied, inter alia, to assessment years 1988-89 and 1989-90. For assessment year 1988-89, the cost of inputs was shown at Rs. 51,21,855. The cost of material consumed to sales ratio is shown at 57.3. For the elaborate reasons and investigations carried on while making assessment for assessment year 1990-91, the Assessing Officer came to the conclusion that the food cost to sales ratio cannot be more than 34%. He also came to the conclusion that the Restaurant's working cost of raw material to sales ratio remains more or less constant. When the costs increase, he observed that the tariffs in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment for 1990-91, the issue of utmost importance was once again recognised as the ratio of cost of material consumed to sales. For assessment year 1990-91, the said ratio shown by the assessee was 58%. The Assessing Officer carried out investigations to ascertain the correct figure of true sales with the help of the correct ratio of cost of material consumed to recorded sales. The Assessing Officer had stated that the ratio of cost of material consumed to sales is a true reflection of the Restaurant's working and it does not change from time to time. He further stated that if the costs of inputs go up the tariffs are raised by Restaurants so as to maintain their profitability. Therefore, the Assessing officer opined that the investigations carried out in assessment year 1990-91 to determine the correct ratio of cost of material consumed to sales would be applicable to all the years of operation of Restaurant. 13. Firstly, he took up the examination of the sales bills of the Restaurant and he had noticed something unusual in them. Many of the bills were found to be of Rs. 50 or less than that amount. According to those bills only one item had been ordered. According to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Shri H.S. Saigal who also visited Chinese Garden along with his brother on 27-1-1991. In fact it was the claim of Shri Bhupinder Singh that he reserved the table in the name of his brother Shri H.S. Saigal. He stated on oath confirming that the payment made by them was approximately Rs. 700. His statement on oath was annexed as Annexure 'D' to the assessment order. 15. Dr. Manoj Mashru was another person who reserved a table for five persons on 27-1-1991. He came alongwith his wife and friends to the Restaurant and they occupied table No. 2. When contacted on telephone Dr. Mashru stated on oath that he and his friends had paid Rs. 650 approximately. However, an examination of bill No. 70045 which is only the bill made for table No. 2 during lunch time was for Rs. 48. The statement of Dr. Mashru on oath was made as annexure 'E' to the assessment order for 1990-91. 16. On 31-1-1991, the Assessing Officer came alongwith three other officers - Shri S. Sarkar, A.C. Circle 5(2), Kum. V. Sinha, A.C. Cir. 5(3) and Smt. R.S. Puri, A.C. Cir. 5(1) as decoy customers and took lunch in the assessee's Restaurant. The Bill No. 70378 for an amount of Rs. 553 was given to them. Before paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal sales for 6th 7th August, 1989 as Rs. 67,434 and Rs. 48,850 respectively. However the books of account record sale of Rs. 39,975 and Rs. 34,432 respectively for those two days. The Assessing Officer stated that an amount of Rs. 41,877 was siphoned off just in two days. 19. Previously there used to be manual billing. However, subsequently a computer was installed for billing. After the computer was installed, the method adopted by the assessee was found to be to tamper with the bills on computer. Previous to the computer being set up and when the manual billing was in practice, it used to be very easy to manipulate sales. The Assessing Officer came to the conclusion that there was suppression of sales and that was the reason why the ratio of cost of material to sales disclosed by the assessee was much higher than the actual. The Assessing Officer held that the cost of material consumed to sales ratio as presented by the assessee company, inter alia, for assessment years 1988-89 and 1989-90 and 1990-91 cannot be relied upon. 20. A survey was conducted on 4-2-1991. Shri Nelson Wang, Managing Director of the assessee company was examined and his statement on oath was recorde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take it on phone and ask for the number of persons and their names and time and date they are likely to come to the Hotel. Sometimes they take reservation personally in the same manner. When asked how many times the guests ask for change of table, she replied 'rarely'. 23. The Assessing Officer found that normally tables are allotted on reservation and would not be changed. When Bill No. 70378 dated 31-1-1991 was confronted with Shri Nelson Wang stated that all the bills must have been recorded correctly by his staff to the best of his knowledge and he was made to look to Bill No. 70378 whereupon he admitted that the Bill was made for Rs. 42. When he was made aware about the decoy customers coming to his Restaurant on 31-1-1991 and after taking food, the bill amount came to Rs. 553, they noted the number of the bill which was 70378. Shri Wang replied that he does not understand how this had happened and when a specific question was asked, whether he suspect that the money was pinched, the answer given is categorical and it is as follows: "Definitely not my bill clerk or cashier because this staff has been selected by me. But this could have been happened, it could have happene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, some person in their group may like to have some additional items like cold drink/ice cream, etc. In such a case, also separate bill is prepared which may be below Rs. 50. They also take parcels as per the requirements of the customers and in such a case also the bills may be for below Rs. 50. Under the circumstances, the conclusion that sales below Rs. 50 are all bogus is unwarranted and unjustified. 25. The explanation was considered by the Assessing Officer and he was at a loss to understand how many number of times such circumstances can occur when people go to Chinese Garden just to have liquor and only snacks and no food or when people take only cold drinks/soup in Chinese Garden and when people waiting in Chinese Garden order for ice cream cold drinks etc., and when parcels from Chinese Garden are made for Rs. 50 or below. In any case, the Assessing Officer ascertained that it could not be 40% of the total clientele as the sales summary sheet of any day (for at least 2 years) could suggest. The Assessing Officer found that the timing of the assessee's Restaurant is between 12 to 3 P.M. and 7 to 12 P.M. 26. Having regard to the admission that billing is always done at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bills unlike the situation before 4-2-1991, when such tampering of bills was freely resorted to. Further the Assessing Officer concluded that the contention of the assessee that treating sales of Rs. 50 or below are bogus is unjustified stands fully exposed in view of the working of the Restaurant before and after 4-2-1991. A comparison of the sale bills for one week prior to 4-2-1991 and subsequent to 4-2-1991 could conclusively prove that most of the sale bills of around Rs. 50 as shown by the assessee company are bogus and fabricated. When the statement of Shri Bhupinder Singh dated 30-1-1991 was confronted, the assessee-company came forth stating that his statement cannot be relied upon as the table was booked not in his name but in the name of Shri H.S. Saigal. When the statement of Dr. Manoj Mashru was brought to the notice of the assessee company it came forth with the version that the cash bill for more than Rs. 600 stated to have been paid by Dr. Manoj R. Mashru has not been made available to them to enable them to locate the mistake and reconcile the discrepancy. Dr. Manoj did not say in his statement that the bill issued to him is in his possession or not. It is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 25-12-1990, bill Nos. 649 650 for Rs. 17 and Rs. 42 respectively were shown. Since the Bills are consecutive bills, they pertain to one customer it is understood. The Assessing Officer writes as to how on table No. 1 which has a capacity of 10 persons an amount of Rs. 59 only was spent. When the decoy customers visit to the assessee's Restaurant on 31-1-1991 was brought to the notice of the assessee company, it had come forth with the possibility of collusion between the bearers, the billing clerk or the cashier. It also came forth with the version that after coming to know the instance pointed out, it is stated that the assessee company was keeping a watch, on the bearers, billing clerk and the cashier to identify the employees who may be making money by resorting to such methods. At this juncture the Assessing Officer reminded about the statement of Shri Nelson Wang dated 4-2-1991 where he had vehemently and categorically stated that if tampering of bills had happened, his billing clerk and cashier had no hand in it. However, he makes a complete about turn from his previous deposition. The Assessing Officer had brought out the instance of the seized paper on the date of sea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e total bills. The said paper revealed the sales summary on two dates namely 6-8-1989 and 7-8-1989 on bill-to-bill basis. On those two dates out of 77 total bills only six bills were found to be of small amounts of below Rs. 50. Thus he inferred that 10% of the small amount bills are actually small amount bills and are not fabricated. He had found out the total number of bills for the three months (December, 1989, January, 1990 and February, 1990) as 8,833. The average amount of the genuine bill was found out to be 553. Thus the total amount of genuine bills was found out at Rs. 50,61,309 for three months. This is according to the computer billing. It is admitted that for these three months manual billing also was in practice and the total of the manual billing for these three months was Rs. 4,42,875. Thus the gross billing amount for three months was found out to be Rs. 55,04,184 and the average correct sales billing per day in this manner worked out to be Rs. 62,547. The Assessing Officer observes that this figure of average sales per day compares itself well with the average sales of two dates namely 6-8-1989 and 7-8-1989 which also came to Rs 58,142. 30. Then the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no corresponding sales. The assessee company took an objection that no comparable cases were referred to show that percentage of cost of sales in a Restaurant of their type is about 34%. Commenting upon the points raised by the assessee company, the Assessing Officer stated that he had no objection to enhance the sales figures on account of free food, discounts etc., provided similar enhancement is taken while computing correct sales of these sample three months also on the basis of which the cost of food to sales ratio has been worked out at 34%. According to him, the three months period taken as sample period cannot be treated as exclusive from the remaining nine months of the year and when once the sale of three sample months period is enhanced the cost of food to sales ratio would work out lower than 34%. 31. The Assessing Officer also found that several parties which took place in the assessee's Restaurant (Chinese Garden) as can be seen from the party details produced by the assessee company for the period from 1-4-1989 to 30-3-1990, it is seen that only 26 parties have been shown. The Assessing Officer felt that the number of parties disclosed by the assessee was low. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77,776 would give the figure of Rs. 82,80,285 as the figure of suppressed sales. It is stated that the assessee suppressed its income by tampering and fabricating sale bills but also evaded the sales-tax contained in the suppressed sales amounts. Approximately Rs. 5.2 lacs of sales-tax collected from its customers have not been paid to the Government. Thus the assessment order for 1990-91 was passed on 21-3-1991. 32. Aggrieved against assessments passed for assessment years 1988-89, 1989-90 and 1990-91, the assessee went in appeal before the CIT (Appeals) VI, Bombay. The learned CIT (Appeals) Bombay consolidated the appeals of all the three assessment years and passed a consolidated order dated 25-11-1991. The learned CIT (Appeals) after evaluating the evidence on record gathered by the Assessing Officer agreed with the conclusion arrived at by the Assessing Officer that most of the small bills were bogus. He also agreed with him that most of the small bills shown by the assessee company are manipulated ones and the actual amount received against these bills must have been much higher. The learned CIT (Appeals) held that in such a situation, the rejection of book results so far a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 lacs declared u/s 132(4)], the gross estimated food sales worked out to be Rs. 2,00,73,113. The total cost of food consumed during the whole year is Rs. 74,31,739. Both these figures of cost of food consumed and the gross estimated sales give the cost of food to sales ratio at 37.02 i.e., 37%. The learned CIT (Appeals) had worked out the concealment for assessment year 1990-91 at Rs. 54,47,338. 34, The assessee contended that the percentage of small bills to the total number of bills should be taken at 16.5% based upon the sales summary sheet dated 5-3-1991 on which date the Inspector of Income-tax was present at the premises of the appellant and on which date there could not have been any manipulation. This argument was rejected by the learned CIT (Appeals). He found that in fact the seized paper at the time of search on 18-9-1989 which recorded genuine sales on 6-8-1989 7-8-1989, the total sales were 79 out of which only 7 were for small amounts of Rs. 50 or less. This works out to be approximately 9%. Since the said document was complete and correctly recorded the sales for two days, it must be taken to be most reliable document. The Inspector of Income-tax indeed went on v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peals) did not agree with the Golden Dragon run by Taj is not a comparable case. He held that the assessee's Restaurant is the one with high turnover whereas Taj Restaurant cannot have that high turnover in quantity terms and in terms of number of people visiting there. The Taj Restaurant being a 5-Star Delux category Restaurant, suffers from the expenditure tax which is charged from the customers. This detriment is enough to distract many number of people. There is always economy in numbers. Hence the lower turnover results in higher cost of food and which results in higher cost to sales ratio. 37. He further held that comparison with any other Restaurant would not be a correct proposition in a situation where the working of the Restaurant in question itself is different. He further held that in the assessee's Restaurant day-to-day management is controlled by the Managing Director himself personally whereas it is not so in Taj. He further observed that the most important factor is that in Taj Restaurant no incidence of manipulation of bills is noticed whereas in the assessee's Restaurant many such incidents have been shown. Further, it is stated that no detailed enquiry had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... everage Manager of the assessee company, the following is what is stated: "I wish to inform you that it is very difficult to specify a food cost percentage for a restaurant. The food cost percentage, varies from one to another restaurant. On an average the food cost percentage for a good Chinese restaurant should be around 35 to 40%. This is dependent on the quality of the ingredients (meat, sea food, imported sauces) used in the food production. The supporting garnishes and accompaniments for sure increase the average food cost. Since Chinese Garden is using imported ingredients like oyster, sauce, seasame oil, black mushrooms and baby corn for food production. I am sure the average food cost would be around 65%. Our costing at the Institute is based on a training restaurant and not on a Gourmet restaurant." 41. When the proceedings were pending before the CIT(A) it was contended that the technical opinion evidence in the letter dated 7-2-1990, referred to above, should be followed as against the two technical opinions mentioned above secured by the Assessing Officer. Rejecting this argument the learned CIT (Appeals) stated that this contradiction between experts can best be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant assessment year and even correctly applied to determine suppression of sales. He found that when June, 1989 to 4-2-1991 yields a pattern and a ratio, there is no reason why the ratio cannot be applied to the case of the assessee for earlier assessment years. He further found that when the assessee himself pleads that comparable cases namely Taj and gross profit, etc., are relevant it will be queer to argue that the assessee's own case and ratio of one year cannot be compared with earlier assessment years in its own case. It is argued that for assessment years 1989-90 and 1990-91 the Assessing Officer has no concrete evidence to show manipulation in sales. The CIT (Appeals) rejected this argument stating that still it is a fact that the assessee company itself has returned an income of Rs. 8,00,000 for 1989-90 being undisclosed income declared u/s 132(4). Hence there is no denial of the fact that there was some concealment on account of sales in 1989-90 also. The same also is true for assessment year 1990-91 where the assessee had included Rs. 5,00,000 of undisclosed income in the return. The correct ratio between cost of food and sales is one characteristics of any Restaurant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment years. Thus the appeals of the Department as well as of the assessee for assessment years 1988-89 to 1990-91 came up before this Tribunal for decision. 46. The learned Judicial Member in para 59 of his orders rejected the contention of the assessee that no addition is called for. He held that the additions are called for but of a different figure. He found there is always an element of some guess work in an estimate and in doing so things cannot be measured with mathematical precision. However, he found that a judicial authority always tries to execute this task as precisely and correctly as possible. On a consideration of all the relevant facts and circumstances for and against the assessee, he determined that the following additions have to be sustained: Asst. Year 1988-89 Rs. 7,00,000 1989-90 Rs. 10,00,000 1990-91 Rs. 10,00,000 47. The learned Accountant Member did not agree with the conclusion reached by the learned Judicial Member. The learned Accountant Member held that the Commissioner (Appeals) after appreciating all the contentions of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of opinion among the learned Judicial Member and the learned Accountant Member, a reference is made for appointment of a Third Member and the difference of opinion was projected in the shape of a question which is already extracted in the opening paras of this order. 49. After hearing arguments of both sides I quite agree with the finding of all the authorities that the assessee's books of account are to be discarded and estimate of correct turnover is to be made. The Assessing Officer had taken into consideration the papers seized on the day of search i.e., on 18-9-1989 which, gives out the sale figures of two particular dates namely 6-8-1989 and 7-8-1989 which sale figures are found at variance with the sale figures that were recorded in the books. On examination of these sale figures of these two dates, 77 bills, their numbers and amounts were recorded in the seized papers. I agree with the Assessing Officer that this should be taken to be a true document on which the total sales can be computed. Out of 77 bills only 6 bills were found to be below Rs. 50. Therefore, the deduction was that 8.3% of the total bills only should be accepted as genuine small bills of below Rs. 50. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who gave certificate dated 19-3-1990. Before granting the Certificate about the cost of purchases to sales, they have taken the special characteristics of the assessee's Restaurant like that it is a Grade-I Exclusive Chinese Restaurant, that it has Elitist clientele, that the Restaurant is situated in a posh locality, besides examining the sales data, purchase data, as well as the Menu card maintained by the assessee company. Further, they have examined the purchases to sales relationship from October 1984 to April 1985 and from May 1985 to April 1986. For the first period, the cost of purchases to sales ratio was found out to be 76.79% whereas for the second period the cost of purchases of sales was found out to be 66.93%. The Institution found that the above percentage should be considered very high and normal industry average for similar establishments, the cost of purchases to sales would range from 30% to 40%. 52. The assessee very much relied upon the certificate granted by the Indian Hotels Co. Ltd. which was running a high class Chinese Restaurant called 'Chinese Dragon' in Taj Mahal Hotel, at Bombay. According to the certificate given the cost of food to sales would vary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh priced items which go into the production of food. There is no evidence on record that the special quality items of food mentioned above were purchased by the assessee. 54. Further at page 222 of 2nd paper book, filed on behalf of the assessee, the actual fresh bazar purchases were stated for the month of December 1989, January 1990 and February 1990 as follows: ------------------------------------------------------------------------------ From bank book Daily fresh bazar + Total and purchase register petty cash book Rs. Rs. Rs. ------------------------------------------------------------------------------ Dec. 89 2,25,700 3,03,383 5,29,083 Jan. 90 2,59,921 3,00,996 5,60,917 Feb. 90 2,30,886 2,59,095 4,89,981 ------------------------------------------------------------------------------ The details of fresh bazar purchases for the month of Dec. 89 were given at page 223 of 2nd paper book. Similarly, the details of the purchases made for the month of Janua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting period from 1-4-1989 to 31-3-1990 was given at page 257 of the 2nd paper book. The average of small bills was found out at Rs. 31 per bill. The average of large bills was found out at Rs. 553 per bill. 8.3% of the total bills were taken to be the genuine small bills. The average of the genuine total bills was found out to be Rs. 492 and the estimated sales were found out to be Rs. 492 x 32,677 = Rs. 1,60,77,084 and the suppression was found out to be Rs. 44,34,351. 57. At page 258 of the 2nd paper book, the gross food billing as per books was taken at Rs. 1,41,25,775 and suppression of Rs. 44,34,351 was added taking the estimated gross bills at Rs. 1,85,60,126. The food cost for the year as noted in the accounts was taken at Rs. 74,31,739 and the cost of food sales ratio was found out to be. Rs. 74,31,739 ---------------- = 40.04 or 40%. Rs. 1,85,60,126 The food cost ratio for assessment year 1990-91 was again revised as per the calculation sheets found at pages 259 and 260 and the cost of food to sales ratio was found out to be 43.57%. As can be seen from page 259 of the 2nd paper book, the tole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d giving free breakfast, lunch and dinner to the staff of the assessee. It was further contended that there were some loss making items sold by the assessee which also adversely affect their profitability. In the Taj Mahal Hotel, the cost of food to sales ratio is shown to be 45 to 5096. Since the menu prices in the assessee's Restaurant are lower than the Golden Dragon prices their cost of food to sales ratio is bound to be higher than that of Taj. All these objections were considered by the learned CIT (Appeals) and they were rejected. He held that the free and discounted food to various people is taken care of in the working of the cost of food to sales ratio. In any case, the learned CIT (Appeals) held that suppression in sales has been ascertained by applying the actual figures of the total cost of food of the assessee's Restaurant. The learned CIT(A) further held that in his opinion the data base of 12 months adopted now to determine the suppression is large enough to eliminate any defect which a small data base may suffer from. The concealment, the learned CIT (Appeals) held has been determined on the basis of actual billing figures and applying certain irrefutable conclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old drinks cannot be thrown out to be untenable. Further the possibility that the customers waiting in the lobby ordering certain cold drinks, etc., cannot also be said to be unusual. Human behaviour being what it is there may be various kinds of customers and their eating habits will also be peculiar. Therefore, I feel that taking 10% of the total bills as reflecting genuinely small bills for Rs. 50 or below will be more realistic. I may mention here that I accept the correctness of the calculation given at pages 261 and 262. However, at page 262, we have to add a sum of Rs. 5,00,000 surrendered by the assessee towards suppressed sales u/s 132(4) proceedings for assessment year 1990-91. If the suppressed sales of Rs. 5,00,000 also were added, the estimated gross billing would come to Rs. 1,87,00,659 but not Rs. 1,82,00,659 as noted at page 262. In order to find out the cost of food to sales ratio, the formula is cost of food divided by gross estimated billing, i.e.: Rs. 74,31,739 ---------------- = 39.7% or 40% approx. RS. 1,87,00,659 62. It is significant that the learned Accountant Member had determined the food cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluded that the assessee has definitely something to hide as far as its sales for relevant period are concerned. Though, it was the case of the assessee that all the books relating to assessment year 1988-89 were seized by the department itself it had not produced any of the books. Further it could have taken return of the seized books or draw the attention of the Assessing Officer to point out the particulars of the bill books as well as the daily sale books from out of the seized material. At the time of seizure a seizure memo listing out the particulars of the books seized would be given to the assessee and from out of the list of seized books, the assessee could have pointed out the bill books as well as the sales books to the Assessing Officer. It was never the case of the assessee that it had produced the bill books or sale books for verification of the Assessing Officer. 65. In fact the same argument was advanced before the learned CIT (Appeals) that the findings of one year cannot be applied to another or that the evidence collected "January', February 1990-91 in respect of applying the cost of food to sales ratio should not be applied to earlier years. Rejecting the arg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in the accounting year relevant to assessment year 1990-91 can be presumed to exist in back years also or retrospectively also is the question. In Woodroffe and Amirali's Law Evidence, 14th Edition, 1980 in the commentary u/s 114(a) held the following: "In some cases, it has been said that there is no presumption to operate retrospectively. The rule of evidence is in favour of presuming the continuity of things shown to exist at a prior date. There is no rule of evidence by which one can presume backwards and, this section does not enable the Court to presume that the present state of things existed in the past without proof; in other words, the presumption is prospective rather than retrospective in operation. But the Supreme Court has held that if a thing or a state of thing is shown to exist, an inference of its continuity within a reasonably proximate time goes forwards and backwards and may sometimes be drawn. [See Ambika Prasad v. Ram Ekbal Rai [1962] 1 SCR 758 equivalent to AIR 1966 SC 605]. When a person was tenant in 1957 and his name was also found entered in 1961, the presumption is that he continued to be the tenant in the period between 1957 and 1961. The stateme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 1986-87, there were 26 people working, in the restaurant. Estimated food cost for 6 months operation on staff food comes to Rs. 70,000 by taking cost per person at 15%. In the assessment year 1987-88, there were 70 staff /workers in the restaurant. The total expenditure on such food cost for whole of the year comes to Rs. 4 to Rs. 5 lakhs by taking aver-age cost of Rs. 15 to Rs. 20 per person. The assessee is serving complimentary meal to various charitable institutions for example Blind Association, Cancer Aid Association, etc. It also invites its clients VIP guests, film stars to celebrate wedding anniversary, complimentary food is supplied to them free of cost of 8 to 10 persons at a time. Expenditure for whole year on such invitation comes approx. to Rs. 60,000 to Rs. 70,000. This is a sort of indirect advertisement / publicity of Restaurant in the various sections of the community. It is also explained that assessee is using best quality of raw material for preparation of food, which results in higher costing. The total expenditure incurred on Advt. publicity is shown as under: Asst. Year: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------- Rs. 14,62,891 14,62,891 ----------------------------------- 1,04,03,862 Less: Liquor sales 6,34,170 ------------------------------ Net sales of food as per profit loss account 97,69,692 ------------------------------ Cost of material debited to books of account 50,79,775 Less: Liquor purchases 1,58,651 ------------------------------ 49,21,124 Taking cost of material to sales ratio at 42% the gross food sales should be : 49,21,124 X 100 Rs. 1,17,16,962 ---- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1,63,17,684 Less : Liquor Sales Rs. 16,91,908 ------------------ Sales as per books: Rs. 1,46,25,776 ------------------ Cost of material debited to books of account: Rs. 79,83,700 Less: Liquor purchases: Rs. 5,51,961 ------------------ Cost of food as per books: Rs. 74,31,739 Taking the cost of material to sales at 40% the gross food sales should be: Rs. 74,31,739 X 100 = Rs. 1,85,79,347.5 ----------------------- ------------------ 40 Sales as per books: Rs. 1,46,25,776.0 Thus the suppressed sales are: Rs. 1,85,79,347.5 - Rs. 1,46,25,776.0 = Rs. 39,53,571.5 73. Now the matter will go back to the Division Bench to decide the issue according to majority opinion. - - Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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