2006 (9) TMI 149 - HC - Income Tax

Powers u/s 260 - Profits based upon turnover from clients and brokers - discrepancy or error - books of account - percentage of brokerage on the basis of the prevailing practice in the recognised stock exchange - HELD THAT - The observation of the learned Tribunal about the percentage of profit appears to be contrary to appendix A to regulation 14 as well as the established practice of the Gauhati Stock Exchange Limited that no brokerage is involved for transactions between one broker with another at the floor of the stock exchange. Therefore, outright rejection of the assessee's case appears to be contrary to the established principles of law. The Assessing Officer was apparently in error in computing profits in respect of the transactions with other brokers at 1/2 per cent. since the provisions of regulation 14 and the established practice of the Gauhati Stock Exchange have not been taken into consideration. Similarly, the computation of profit at the rate of 1 per cent. in respect transactions with clients on notional basis is also not sustainable in law. The ratio available from the judgment of Santosh Hazari v. Purushottam Tiwari 2001 (2) TMI 131 - SUPREME COURT would show that in a case where the findings of fact, by the Tribunal are perverse and contrary to materials on record and based on surmises and conjectures, the High Court u/s 260A would be competent to interfere. The other feature that emerges is that the income has to be deduced from the books of account and other documents furnished and there is no scope for any conjectures and surmises. If the method of accounting is not faulty and there is no suppression of material facts, the authority cannot embark upon a speculative assessment of notional profit. In the instant case, from the discussion made, it would appear that the Assessing Officer did not find any fault with the books of account and the method of accounting employed by the assessee, and that there has been suppression of any material fact which deterred him from computing the actual net profit. The Assessing Officer has not pointed out any defect in the detailed turnover submitted during the assessment, and from this point of view, the appeal at hand cannot be dismissed for want of substantial question of law. Therefore, the judgment and order of the Tribunal in upholding the addition to the profits of the assessee is not sustainable on the facts. In the result, the appeal is allowed, the judgment and order of the learned Tribunal is set aside and that of the CIT(A) are restored. The questions of law formulated in this appeal are answered accordingly in favour of the assessee and against the Revenue.

Summary

Issues Involved:
1. Justification of the Tribunal in upholding the addition of Rs. 20,51,718/- to the appellant's profits based on brokerage estimates.
2. Justification of the Tribunal in upholding the determination of notional profits by the Assessing Officer based on pure estimates.
3. Whether the impugned order was perverse, warranting its setting aside and quashing.

Issue-Wise Detailed Analysis:

1. Justification of the Tribunal in upholding the addition of Rs. 20,51,718/- to the appellant's profits based on brokerage estimates:

The appellant, a stock and share broker, challenged the addition of Rs. 20,51,718/- to their profits by the Assessing Officer, which was upheld by the Tribunal. The Assessing Officer had estimated brokerage profits based on prevailing practices in the recognized stock exchange without finding any specific discrepancies in the appellant's accounts. The Commissioner of Income-tax (Appeals) found the appellant's accounts to be properly maintained and complete, with no detected discrepancies, and thus deleted the addition. However, the Tribunal reversed this finding, supporting the Assessing Officer's estimation of profits at 1% for client transactions and 0.5% for broker transactions. The High Court found that the Tribunal's outright rejection of the appellant's case was contrary to established principles, as no brokerage was involved in broker-to-broker transactions as per the Gauhati Stock Exchange regulations. The High Court concluded that the Assessing Officer's computation of profits on a notional basis was not sustainable in law.

2. Justification of the Tribunal in upholding the determination of notional profits by the Assessing Officer based on pure estimates:

The Tribunal's decision to uphold the Assessing Officer's determination of notional profits was challenged. The Assessing Officer had assessed notional profits based on turnover details provided by the appellant, despite finding no discrepancies in the appellant's accounts. The Commissioner of Income-tax (Appeals) held that the appellant's profits could be properly deduced from the maintained books of account, and thus, there was no basis for a notional assessment of profits. The High Court supported this view, emphasizing that the law does not require a trader to make the maximum profit possible, and only actual income is taxable. The High Court found that the Assessing Officer's reliance on notional profits without detecting any defects in the accounts was unjustified.

3. Whether the impugned order was perverse, warranting its setting aside and quashing:

The High Court examined whether the Tribunal's order was perverse and warranted setting aside. The Tribunal had acted on a sweeping remark by the departmental representative without verifying the Commissioner of Income-tax (Appeals)'s observation that the share ledger showing scripwise gain or loss was produced before the Assessing Officer. The High Court found that the Tribunal's decision was based on conjectures and surmises, contrary to the established practice of the Gauhati Stock Exchange and the principles of law. The High Court concluded that the findings of the Tribunal were perverse and not sustainable on the facts, and thus, the impugned order was set aside.

Conclusion:

The High Court allowed the appeal, set aside the Tribunal's judgment, and restored the order of the Commissioner of Income-tax (Appeals). The questions of law were answered in favor of the appellant and against the Revenue, emphasizing that income must be deduced from properly maintained accounts without speculative assessments of notional profits.