2012 (6) TMI 402 - HC - Income Tax

Whether Tribunal is right in holding that Gross profit from the assessees arrack business at 40 per cent. of the purchase value is sustainable in law and if not what would be the estimate of gross profit as per the principles of best judgment assessment Held that - The adoption of 40 per cent. as gross profit of purchase price of arrack, in our considered opinion, is arbitrary and irrational. As seen from the purchase price and sales recoveries, there is a wide variation. In some cases, it is more than nine (9) times and in some other cases less than seven (7) times. Given the fact that there is no price fixed by the Government for sale of arrack and it is generally a seller s market, to assume that the gross profit would be at 1 per cent. of the estimated sales, in our considered view, is low. Accepting the total sale price at eight (8) times of the purchase price, we feel it appropriate to hold that 2 per cent. of the estimated sale value, after considering all types of deductions mentioned hereinabove, would be reasonable. Net profit be estimated at 2 per cent. of the estimated sales or 16 per cent. of the purchase value, whichever is higher.

Issues Involved:
1. Sustainability of the best judgment assessment estimating gross profit at 40% of purchase value.
2. Justification for the estimation of gross profit and the method adopted.
3. Validity of the Tribunal's estimation of sales turnover and net profit.
4. Principles and standards for best judgment assessment.
5. Judicial precedents and statutory provisions relevant to the assessment.

Detailed Analysis:

1. Sustainability of the Best Judgment Assessment Estimating Gross Profit at 40% of Purchase Value:
The primary issue was whether the best judgment assessment made by the Income-tax Officer, estimating the gross profit from the assessees' arrack business at 40% of the purchase value, was sustainable. The Assessing Officer rejected the books of account and estimated the gross profit at 40% of the purchases due to the lack of verifiable records and the nature of the business.

2. Justification for the Estimation of Gross Profit and the Method Adopted:
The Commissioner of Income-tax (Appeals) upheld the estimation of gross profit at 40% of the purchase price, considering the disturbances due to agitation and extremist activities. However, the Tribunal found this estimation arbitrary and without basis, noting that the estimation did not align with any known principles of best judgment assessment.

3. Validity of the Tribunal's Estimation of Sales Turnover and Net Profit:
The Tribunal, in its earlier decision in the case of Anakapalle Arrack Shops, estimated sales turnover at eight times the purchase price and net profit at 1% of such estimated sales. This method was followed in the present cases, where the Tribunal found the estimation of 40% gross profit unreasonable and instead adopted the estimation of sales turnover at eight times the purchase price and net profit at 1%.

4. Principles and Standards for Best Judgment Assessment:
The judgment elaborated on the principles of best judgment assessment, emphasizing that it should be based on relevant material and not arbitrary. The assessment must be honest and fair, considering local knowledge, previous returns, and other relevant factors. The judgment cited several precedents, including Raghubar Mandal Harihar Mandal v. State of Bihar and CST v. H. M. Esufali, H. M. Abdulali, which highlighted the need for a rational basis in best judgment assessments.

5. Judicial Precedents and Statutory Provisions Relevant to the Assessment:
The judgment referenced various statutory provisions, including sections 144 and 145 of the Income-tax Act, which empower the Assessing Officer to make a best judgment assessment. It also cited the decisions in A. Sanyasi Rao v. Government of Andhra Pradesh and Union of India v. A. Sanyasi Rao, which dealt with the constitutional validity of sections 44AC and 206C of the Act, relevant to the estimation of profits in arrack business.

Conclusion:
The High Court concluded that the estimation of gross profit at 40% of the purchase price was arbitrary and unsustainable. Instead, it held that estimating the net profit at 2% of the estimated sales or 16% of the purchase value, whichever is higher, would be reasonable. The judgment emphasized the need for a rational and fair approach in best judgment assessments, aligning with statutory provisions and judicial precedents. The appeals were disposed of accordingly, with no order as to costs.

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