2015 (11) TMI 395 - HC - Income Tax

Determination of unaccounted turnover - Whether the Tribunal was right in holding that the turnover determined by the Commissioner of Central Excise in his de novo adjudication proceedings consequent to the remand order of the CESTAT can be adopted for the purpose of determining the unaccounted turnover? - Held that - The finding of the Commissioner of Income-tax (Appeals) as well as the Tribunal that merely on the basis of the show-cause notice issued by the Central Excise Department, determination of tax under the Income-tax Act cannot be made, as it is not incumbent on the Income-tax authorities to take into consideration only the materials made available by the Central Excise Department but the authorities are bound to make an independent enquiry, before passing any order, which enquiry has not happened in the present case. There is no provision to simply incorporate the demand made in the show-cause notice issued under the central excise laws for the purpose of computation of tax under the Income-tax laws. The provisions under the two laws, viz., the Central Excise Act and the Income-tax Act, operate in two different fields. Without there being an independent enquiry by the concerned taxing authorities the demand made under the provisions of the Central Excise Act cannot be incorporated as such, more so when the notice of demand has been modified by the adjudicating authority. See K. T. M. S. Mohammed v. Union of India 1992 (4) TMI 6 - SUPREME Court - . Thus no hesitation to hold that the method adopted by the Commissioner of Income-tax (Appeals) with regard to taxation under the Income-tax Act, as affirmed by the Tribunal, is the correct method of determining the income based on the unaccounted turnover. - Decided against revenue Disallowance under section 40A(3) - CIT(Appeals) held that the additions made under section 40A(3) of the Act are to be deleted since the basis of the additions had been faulted and are no more valid and since the income is estimated, no disallowance on this account can be made affirmed by the Tribunal - Held that - As already held in the former portion of the order that the assessment order came to be passed only on the basis of the show-cause notice issued by the Central Excise Department and no independent enquiry has been conducted by the Assessing Officer. The order of the Tribunal in concurring with the Commissioner of Income-tax (Appeals) on this issue is justified and this court finds no reason to differ with the same. - Decided against revenue

Summary

Issues Involved:
1. Whether the Tribunal was right in holding that the turnover determined by the Commissioner of Central Excise in his de novo adjudication proceedings can be adopted for determining the unaccounted turnover of the assessee.
2. Whether the Tribunal was right in holding that the provisions of section 40A(3) cannot be applied when no deduction was sought on the expenditure and the assessable income was arrived at by applying a percentage rate on the unaccounted turnover.

Issue-wise Detailed Analysis:

1. Adoption of Turnover Determined by Commissioner of Central Excise:
The Revenue challenged the Tribunal's decision to adopt the turnover determined by the Commissioner of Central Excise for determining the unaccounted turnover of the assessee. The Tribunal's decision was based on the fact that the Assessing Officer (AO) did not conduct an independent enquiry and relied solely on the show-cause notice issued by the Central Excise Department. The Tribunal noted that the AO's reliance on the show-cause notice was improper, especially since the CESTAT had found the evidence unreliable and remanded the matter for de novo adjudication. The Commissioner of Income-tax (Appeals) (CIT(A)) had directed the AO to make independent enquiries, which were not carried out. The Tribunal affirmed the CIT(A)'s decision to adopt the turnover determined by the Commissioner of Central Excise in the de novo order and to compute the gross profit accordingly, after giving deductions for power and labor charges. The High Court upheld the Tribunal's decision, emphasizing that tax determination under the Income-tax Act must be based on independent enquiry and cogent material, not merely on the findings of another department.

2. Application of Section 40A(3):
The Tribunal also held that the provisions of section 40A(3) could not be applied when no deduction was sought on the expenditure, and the assessable income was determined by applying a percentage rate on the unaccounted turnover. The CIT(A) had relied on the judgment in CIT v. S. Mohammed Dhurabudeen, which held that when income is computed by applying a gross profit rate, there is no need to consider section 40A(3) for disallowance of expenditure. The Tribunal concurred with this view, noting that since the gross profit rate applied takes care of all expenditures, including purchases, there was no need for further scrutiny under section 40A(3). The High Court agreed with the Tribunal, reiterating that when income is estimated by applying a percentage rate, it encompasses all expenditures, and there is no need for additional disallowance under section 40A(3).

Conclusion:
The High Court dismissed the Revenue's appeals, affirming the Tribunal's findings that:
1. The turnover determined by the Commissioner of Central Excise in the de novo adjudication proceedings should be adopted for determining the unaccounted turnover.
2. The provisions of section 40A(3) cannot be applied when the assessable income is arrived at by applying a percentage rate on the unaccounted turnover, as the gross profit rate applied already accounts for all expenditures.

The High Court emphasized the necessity of independent enquiry by the Income-tax authorities and the inadmissibility of relying solely on findings from other departments without corroborative evidence.