1988 (3) TMI 106 - AT - Income Tax

Summary

Issues Involved:
1. Bogus Purchases and Inflation of Purchases
2. Gross Profit Rate and Estimation of Income
3. Embezzlement by Accountant
4. Application of Section 145(2) of the IT Act
5. Addition of Unclaimed Credit Balance under Section 41(1)

Issue-Wise Detailed Analysis:

1. Bogus Purchases and Inflation of Purchases:
The primary issue pertains to the addition made by the Income Tax Officer (ITO) for the assessment years 1976-77 and 1977-78 on account of bogus purchases amounting to Rs. 19,763 and Rs. 1,23,391 respectively. The assessee admitted that these purchases were never made, and the goods were not received. The ITO and the Commissioner of Income Tax (Appeals) [CIT(A)] sustained the additions, concluding that the purchases were fictitious, thus inflating the purchases and reducing the income. The ITO justified the additions by pointing out that the purchases were not supported by vouchers and the sellers were non-existent.

2. Gross Profit Rate and Estimation of Income:
The assessee argued that adding the bogus purchases would result in an abnormally high gross profit rate of 28.9% for the assessment year 1977-78, which was disproportionate to the historical gross profit rates, which never exceeded 18.5%. The Tribunal noted that the gross profit rate is a guiding parameter but not an unalterable standard. The ITO's acceptance of the credit side of the trading account (sales and closing stock) was justified as they were verifiable. The addition was made to reflect the real income, which was lying in the assessee's pocket, camouflaged by false entries.

3. Embezzlement by Accountant:
The assessee claimed that the bogus entries were made by their accountant, Sh. M. M. Tora, who intended to defraud the firm. The assessee filed an FIR against Tora for other instances of embezzlement but did not produce him as a witness or provide evidence linking him to the fictitious purchases. The Tribunal found that the assessee's argument about the accountant's embezzlement did not hold, as the amounts remained unpaid and were still reflected in the balance sheets as liabilities.

4. Application of Section 145(2) of the IT Act:
The assessee contended that the books of account should be discarded under Section 145(2) due to the bogus purchases, and the income should be estimated based on past and future gross profit rates. The Tribunal held that once the books are found to be concocted, the ITO must make a best judgment assessment under Section 145(2), taking into account the real transactions and ignoring the false ones. The ITO's method of adding the inflated purchases to the income was deemed appropriate, as it reflected the real income.

5. Addition of Unclaimed Credit Balance under Section 41(1):
For the assessment year 1976-77, an additional issue involved the addition of Rs. 5,600 under Section 41(1) for an unclaimed credit balance in the name of M/s Ambassador & Co. The ITO added this amount, assuming it was no longer a liability. The Tribunal found that the addition was not sustainable if the purchase was made in 1972 and remained unpaid. However, if the purchase was inflated in March 1976, it required re-examination. The matter was remanded to the ITO for further verification.

Separate Judgments:
The Tribunal's decision was not unanimous. The Judicial Member suggested re-examining the matter, considering the possibility of purchases from the black market and the overall trading results over 20 years. The Accountant Member, however, supported the ITO's approach, emphasizing that the addition was justified based on the admitted inflation of purchases. The Third Member, President Ch. G. Krishnamurthy, agreed with the Accountant Member, stating that the addition should be made to reflect the real income, irrespective of the resultant high gross profit rate.

Conclusion:
The Tribunal confirmed the additions for the assessment years 1976-77 and 1977-78, rejecting the assessee's plea regarding the embezzlement by the accountant and the argument for estimating income based on historical gross profit rates. The matter of the unclaimed credit balance for the assessment year 1976-77 was remanded to the ITO for re-examination. The appeal for the assessment year 1976-77 was partly allowed, while the appeal for the assessment year 1977-78 was dismissed.