1989 (9) TMI 181 - AT - Income Tax

Summary

Issues Involved:
1. Inflation of purchases.
2. Disallowance under Section 40A(3).
3. Addition of sales-tax liability.
4. Correctness and completeness of accounts.
5. Best judgment assessment.

Detailed Analysis:

1. Inflation of Purchases:
The assessee's records showed discrepancies in purchases from seven parties, with a difference of Rs. 1,40,000 due to overwritings and corrections. The ITO initially added this amount to the income, and the CIT(A) upheld this addition, noting that the assessee failed to provide adequate evidence to support the corrections. The ITO observed that the explanations given by the assessee were unconvincing, particularly the claim that the relevant books were damaged and could not be produced. Consequently, the ITO added Rs. 1,40,000 to the income, concluding that the purchases had been deliberately inflated.

2. Disallowance under Section 40A(3):
The ITO disallowed Rs. 2,19,121 under Section 40A(3) for payments exceeding Rs. 2,500 not made by account-payee cheque. The assessee argued that these payments were for purchases from shandies and commission agents, which should be exempt under Rule 6DD. The ITO, however, did not accept this plea, stating that the purchases were from commission agents and not directly from shandies, thereby not qualifying for the exemption. The ITO further 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., under the same section.

3. Addition of Sales-Tax Liability:
The ITO added Rs. 45,000 to the income, representing a provision for sales-tax liability that did not pertain to the accounting year. The CIT(A) directed that only the actual sales-tax liability should be deducted from this provision.

4. Correctness and Completeness of Accounts:
The ITO noted significant erasures and corrections in the books, leading to the conclusion that the accounts were neither correct nor complete. This invoked the provisions of Section 145(2), allowing the ITO to make a best judgment assessment. The ITO's detailed scrutiny revealed that the books were unreliable, and thus, the income had to be computed to the best of his judgment.

5. Best Judgment Assessment:
Given the discrepancies and the unreliability of the accounts, the Tribunal decided that a best judgment assessment under Section 145(2) was appropriate. The Tribunal considered the historical gross profit rates and the specific issues in the current assessment year. The Tribunal concluded that an addition of Rs. 1,40,000 for inflated purchases was warranted, raising the gross profit to about 15% of the turnover. The Tribunal also considered the provision for sales-tax of Rs. 45,000 as inadmissible. Ultimately, the Tribunal fixed the total income assessable at Rs. 3,00,000 in round figures, taking into account possible other inadmissibles and ensuring a fair estimate of income.

Conclusion:
The appeal was allowed in part, with the Tribunal setting the total assessable income at Rs. 3,00,000, reflecting a best judgment assessment that considered the unreliability of the accounts, historical profit rates, and specific disallowances and additions.