2015 (5) TMI 1192 - AT - Income Tax

Addition on account of suppressed sales and profit - material collected by Excise Department relied to make addition - CIT-A restricted of profit on suppressed sale @ 9% as against 25% as determined by AO - HELD THAT - It is undisputed that Income Tax proceedings are arising from the rate of Excise Department and material collected during search proceedings culminated into issuance of show cause notice for recovery of unpaid Excise Department and penalty in given cases. Without prejudice to the finding of Custom, Excise Department, question before us is whether on mere show cause notice issued by Excise Department can be made basis of addition for the purpose of Income Tax Act. Income Tax Officer has utilized the material collected by Excise Department including statement of petitioner and other relevant persons as discussed above and on the basis of same. He would have been justified in making addition for the purpose of Income Tax Department in present case by independent enquiries by concern Income Tax Authorities. No such exercise was undertaken by Income Tax Department at all. AO has simply relied on show cause notice issued by Excise Department. Nowhere did he conclude that there was a large scale removal of goods without payment of tax under Income Tax Act. Merely because Excise Department issued show cause notice, that alone cannot be a ground to assume and conclude that there was evasion of Income Tax Act as well. It is not even the case of Department that such show cause notice proceeding has culminated into any final order against petitioner. This makes it clear that concern ITOhas acted upon in mechanical manner and passed order of assessment merely on premises of Excise Department issued show cause notice alleging large scale removal of goods - See FUTURA CERAMICS PVT. LIMITED VERSUS STATE OF GUJARAT THRO SECRETARY 2013 (11) TMI 1752 - GUJARAT HIGH COURT - Decided in favour of assessee.

Issues Involved:
1. Rejection of book results.
2. Estimation of profit on suppressed sales.
3. Validity of evidence from DGCEI for income tax proceedings.
4. Justification of profit percentage applied to suppressed sales.
5. Comparison with other similar cases and judicial precedents.

Detailed Analysis:

1. Rejection of Book Results:
The learned CIT(A) confirmed the rejection of book results by the Assessing Officer (AO) under section 145(3) of the Income Tax Act. The AO determined that the books of accounts did not reflect the true state of affairs, citing incriminating evidence from the Directorate General of Central Excise Intelligence (DGCEI) that showed the assessee had received and expended amounts not recorded in the books.

2. Estimation of Profit on Suppressed Sales:
The AO estimated the profit element on suppressed sales at 25%, relying on precedents like Vijay Proteins Ltd. vs. ACIT and Sanjay Oil Cake Industries vs. CIT. However, the CIT(A) reduced this to 9% based on the ITAT's decision in similar cases involving Vrundavan Ceramics P. Ltd. and Gokul Ceramics P. Ltd., where the average net profit rate of comparable cases was used to arrive at a fair estimation.

3. Validity of Evidence from DGCEI for Income Tax Proceedings:
The CIT(A) and ITAT both acknowledged the validity of using DGCEI's evidence for income tax proceedings. The DGCEI had conducted comprehensive investigations, revealing a modus operandi for evading excise duty and other taxes, which included under-invoicing, mis-declaration of MRP, and cash transactions not recorded in statutory books. The AO independently applied his mind to these findings to determine suppressed sales and profits.

4. Justification of Profit Percentage Applied to Suppressed Sales:
The CIT(A) initially found the AO's estimation of 25% profit on suppressed sales reasonable, considering the unrecorded expenses and the nature of the business. However, adhering to the ITAT's precedent, the profit was ultimately estimated at 9%. This was based on the average net profit rates of the assessee and comparable cases, ensuring a fair and reasonable estimation while considering the evasion of excise duty.

5. Comparison with Other Similar Cases and Judicial Precedents:
The judgment extensively referenced similar cases and judicial precedents. The ITAT's decision in Vrundavan Ceramics P. Ltd. and Gokul Ceramics P. Ltd. was pivotal, where a 9% profit rate on suppressed sales was determined fair. Additionally, the Gujarat High Court's rulings in Futura Ceramic Pvt. Ltd. vs. State of Gujarat highlighted that mere issuance of a show-cause notice by the Excise Department cannot be the sole basis for income tax additions without independent verification by the Income Tax Department.

Conclusion:
The appeals of the Revenue were dismissed, and those of the assessees were allowed. The ITAT upheld the CIT(A)'s decision to estimate the profit on suppressed sales at 9%, following judicial discipline and ensuring a fair estimation based on available evidence and comparable cases. The judgment reinforced the necessity for independent inquiry by the Income Tax Department when relying on evidence from other authorities like DGCEI.

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