1989 (9) TMI 178 - AT - Income Tax

Account Books Assessee Carrying On Business Assessment Year Best Judgment Assessment Cash Payments In Part Rejection Of Accounts Sales Tax Total Income

Summary

Issues Involved:
1. Inflation of Purchases
2. Disallowance under Section 40A(3)
3. Provision for Sales Tax
4. Best Judgment Assessment

Issue-wise Detailed Analysis:

1. Inflation of Purchases:
The assessee firm, engaged in the business of tanning skins and selling hides and skins, declared a turnover of Rs. 23,81,817 with a gross profit of Rs. 2,17,960 (9.2%) for the assessment year 1979-80. The Income Tax Officer (I.T.O.) initially made an addition of Rs. 1,75,000, noticing discrepancies in purchases from seven parties amounting to Rs. 1,40,000 due to overwritings and erasures in the books. The I.T.O. added Rs. 1,40,000 to the income, concluding that the purchases were deliberately inflated. The assessee's explanation that the corrections were made to rectify an accountant's mistake was deemed unproven due to the lack of supporting evidence.

2. Disallowance under Section 40A(3):
The I.T.O. examined whether disallowances could be made under Section 40A(3), which pertains to cash payments exceeding Rs. 2,500. An addition of Rs. 2,19,121 was made for purchases not paid by account payee cheque. The I.T.O. did not accept the plea that the assessee's case fell under exceptions mentioned in Rule 6DD, which includes purchases of animal husbandry products. The assessee argued that the provisions of Section 40A(3) should not apply as the purchases were genuine and from shandies or commission agents. The I.T.O. also disallowed Rs. 70,857 for cash payments to three parties, M/s Universal Trading Co., M/s Mudasser Leather Co., and M/s Harris Faiz & Co.

3. Provision for Sales Tax:
The I.T.O. disallowed Rs. 45,000 on account of provision for sales tax, stating that the provision appeared arbitrary and did not pertain to the accounting year. The assessee appealed, and the Commissioner of Income Tax (Appeals) [C.I.T.(A)] directed the I.T.O. to allow deduction of the actual sales tax liability out of the provision made.

4. Best Judgment Assessment:
The Tribunal considered whether the provisions of Section 145(2) should be invoked due to the unreliability of the assessee's accounts. It was noted that the accounts were not correct and complete, and an assessment should be made to the best of judgment. The Tribunal referred to various judicial precedents and provisions under the Income Tax Act, emphasizing that the I.T.O. has the authority to make a best judgment assessment when the accounts are not satisfactory. The Tribunal concluded that the total income should be computed to the best of judgment, considering the discrepancies and the need to ensure that only tax legitimately due to the State is collected.

The Tribunal decided to compute the total income under Section 145(2) as follows:
- Income as admitted: Rs. 88,240
- Inflation in purchases: Rs. 1,40,000
- Provision for sales tax: Rs. 45,000

The gross profit, after adding Rs. 1,40,000 for inflated purchases, was Rs. 3,57,960, which is about 15% of the turnover. Considering the historical gross profit rates and the absence of evidence proving that the parties were fictitious, the Tribunal fixed the total income assessable at Rs. 3,00,000 in round figures.

Conclusion:
The appeal was allowed in part, with the Tribunal making a best judgment assessment and determining the total income assessable at Rs. 3,00,000.