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2018 (4) TMI 135 - HC - Income TaxG.P. estimation - whether on the facts and circumstances of the case, there is implied limitation of no enhancement beyond earlier assessed income in the direction of the Tribunal to apply proper and reasonable GP rate? - Held that - It is evident that returns of income of Assessment Year 1986-87 were not available before the CIT(A). However, the Gross Profit rate was computed with reference to the returns of the subsequent Assessment years i.e. 1989-90 to 1991-92. Thus, there was no positive evidence before the CIT(A) to assess the Gross Profit rate. ITAT however fail to appreciate the aforesaid aspect of the matter. ITAT ought to have appreciated that only reasonable and proper gross profit rate was to be applied and the appellant was the only dealer who had entered into bulk purchases of timber with State Forest Corporation. Merely because M/s JaswantRa iArora deals in timber, it could not have been put in the category of similar dealers as it has not made bulk purchases of timber with State Forest Corporation. The returns of the subsequent years i.e. 1989-90 to 1991-92 could not have been taken into account for computing the gross profit rate in respect of Assessment Year 1986-87. Thus, the finding with regard to gross profit rate is based on surmises and conjectures and in fact has been arrived at in contravention of the directions contained in the order dated 31.08.1999 passed by the ITAT.
Issues Involved:
1. Implied limitation on income enhancement beyond earlier assessed income. 2. Rejection of books of accounts under Section 145 and its implications on gross profit. 3. Conditions for addition on account of gross profit. 4. Relevance of gross profit rate from future years for earlier assessment years. Detailed Analysis: Issue 1: Implied Limitation on Income Enhancement The court examined whether there was an implied limitation on enhancing income beyond the earlier assessed amount when the Tribunal directed the application of a proper and reasonable gross profit (GP) rate. The court did not specifically address this issue as it was rendered moot by the resolution of other issues. Issue 2: Rejection of Books of Accounts Under Section 145 The court evaluated whether the Tribunal's finding that the books of accounts were liable to be rejected under Section 145 implied that the gross profit shown was false or less, necessitating an addition to the GP. The court noted that the Tribunal had directed the application of a reasonable GP rate due to the books being unreliable, but emphasized that this must be based on positive evidence rather than general assumptions. The Tribunal's decision to reject the books of accounts was upheld, but the subsequent GP rate application was questioned. Issue 3: Conditions for Addition on Account of Gross Profit The court considered whether an addition to the GP could only be made if there was a positive finding by the tax authorities that the gross profit shown by the assessee was less or unreasonable, and if there existed comparable cases for that assessment year. The court concluded that the burden of proof was on the revenue to justify the reasonableness of the GP rate with positive evidence. It was found that the revenue failed to provide such evidence, as the GP rate was calculated based on returns from subsequent years (1989-90 to 1991-92) rather than the relevant assessment year (1986-87). This reliance on future years' data was deemed inappropriate, leading to the quashing of the orders by the CIT(A) and ITAT. Issue 4: Relevance of Gross Profit Rate from Future Years The court assessed whether the Tribunal and CIT(A) erred in applying a 10% GP rate for the assessment year 1986-87 based on the GP rate of 12.5% from the year 1990-91. The court held that the trading conditions of each year are distinct and separate, and the GP rate from future years should not influence the computation for earlier years. The application of the GP rate from subsequent years was found to be based on conjecture and not supported by positive evidence, thereby invalidating the Tribunal's and CIT(A)'s findings. Conclusion: The court answered substantial questions of law (iii) and (iv) in favor of the appellant, affirming that the GP rate must be justified with positive evidence and that future years' data should not influence earlier assessments. The orders dated 28.11.2003 by the CIT(A) and 31.01.2006 by the ITAT were quashed. The court allowed for the possibility of reassessment if positive evidence for the GP rate for the assessment year 1986-87 is found, ensuring the appellant is given an opportunity to be heard. The appeal was disposed of accordingly.
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