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TMI Blog2011 (7) TMI 1274X X X X Extracts X X X X X X X X Extracts X X X X ..... unt arrived at after some guess work and the facts of the case. Estimation of Income u/s 145 - CIT(A) held that, though the AO was justified to reject the book results, estimate of gross profit at 40 per cent. of purchase price and disallowances of expenditure is arbitrary and excessive, thereby estimated the gross profit at 1 percent of estimated sales or declared sales, whichever is more, clear of all deductions and allowances, and if the profit so estimated is less than the profit declared should be accepted. HELD THAT:- We are convinced that the Tribunal estimated the net profit at 1 per cent. Though, we are of the considered opinion that estimation of net profit at 1 per cent. in arrack business is certainly on the lower side and, therefore, it needs to be re-estimated. 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. Indeed, in the case of A SANYASI RAO AND ANOTHER VERSUS GOVERNMENT OF ANDHRA PRADESH AND OTHERS [ 1989 (3) TMI 116 - ANDHRA PRADESH HIGH COURT] which was affirmed by Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessing Officer did not accept the returns. He took up assessment under section 143(3) of the Act. Objections were invited with regard to the nature of the concern _ whether it is a firm or an association of persons ; justification for the expenditure claimed ; and profit/loss shown in the return. The assessees filed their explanation. They contended that, due to prohibition on the sale of arrack introduced from September 30, 1993, by the Government, the whereabouts of the partners were not known ; it was not possible to maintain or issue sale bills ; there was no practice at any time to maintain the books of complete accounts ; and the expenses claimed were nominal. The Assessing Officer rejected the books of account wherever they were produced and estimated the gross profit at 40 per cent. of the purchases. 3. In the appeals, before the Commissioner of Income-tax (Appeals), it was, inter alia, contended that the additions/disallowance of expenditure made by the Assessing Officer, after computing gross profit at 40 per cent. of the purchase price of arrack, were arbitrary and excessive. It was urged that arrack business suffered unforeseen set back due to State-wide ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f guess work. When the assessee has not proved the correctness of the books of account, or has not produced any record to support his claim as to the taxable income, it is always open to the Assessing Officer to estimate the income and profit therein as per similar business data. In the arrack business the profit margin is very high and the expenditure and facilities are minimal. The Assessing Officer is justified in disallowing the expenditure claimed to the extent of 50 per cent. 7. Sri Y. Ratnakar and Sri A. V. Krishna Koundinya made submissions for the assessees. They would contend that estimation of 40 per cent. of the purchase price as gross profit is unreasonable, arbitrary and without any basis. The Tribunal was, therefore, correct in estimating the sales turnover at eight (8) times of the purchase price and then estimating the net profit at 1 per cent. of such estimated sales. They would point out that in all the cases the assessees had filed returns showing the price for the purchase of arrack which were verifiable and non-variable, and the assessees had also admitted certain amount as total sales. The total sales were found to be approximately eight (8) times the purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seizure taken in cases of tax evasion. Besides these provisions, the Income-tax Act contains the machinery provisions for collection and recovery of tax (Chapter XVII), refunds (Chapter XIX), settlement of cases (XIX-A), appeal/revision system (Chapter XX) and penalties imposable under the Act (Chapter XXI). 12. In determining the income-tax liability of a person, computation of the total income of the assessee is the first stage which is sometimes complex. The next stage is determination or computation of the sum payable by the assessee on the basis of such assessment towards income-tax. While determining the sum payable, it might become necessary for the assessee, or the competent Assessing Officer, to take into consideration the income received or is deemed to be received keeping in view the definition of income. While doing so, the deductions to be made and rebates and reliefs to be allowed cannot be ignored. The last and ultimate exercise is only the determination of the tax on the total income as per the Central Act for the relevant assessment year read with section 4 of the Act. 13. In CIT v. Suresh N. Gupta [2008] 297 ITR 322/166 Taxman 313, the Supreme Court conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able by the respondent-assessees. In C. A. Abraham v. ITO [1961] 41 ITR 425, the Supreme Court quoted with approval the observations of the Privy Council in CIT v. Khemchand Ramdas [1938] 6 ITR 414, to the effect that the word assessment is used as meaning sometimes the computation of income, sometimes the determination of the amount of tax payable and sometimes the whole procedure laid down in the Act for imposing liability upon the taxpayer . The word assessment , as used in the Indian Income-tax Act, 1922 (the 1922 Act), includes a proceeding for imposition of penalty (CIT v. Kirkend Coal Co. [1969] 74 ITR 67 (SC). 15. Asstt. Collector of Central Excise v. National Tobacco Co. of India Ltd. AIR 1972 SC 2563, is a case which arose under the Central Excise Rules, 1944. It was argued that there would be no levy in the eye of law unless there is assessment for the purpose of determining the value of excisable goods. While observing that article 265 of the Constitution makes a distinction between levy and collection , it was held that the term levy does not extend to collection although levy is wider than assessment . The Supreme Court also held that, the term & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come from salary, income from other sources, etc. If any assessee fails to disclose various types of income truthfully or the Assessing Officer comes to a conclusion that the income is either not fully disclosed or improperly computed, he can then himself compute the income of a person liable to pay the tax. Sections 144 and 145 of the Act are relevant and are quoted hereunder. 144. Best judgment assessment.-(1) If any person- (a) fails to make the return required under sub-section (1) of section 139 and has not made a return or a revised return under sub-section (4) or sub-section (5) of that section, or (b) fails to comply with all the terms of a notice issued under sub-section (1) of section 142 or fails to comply with a direction issued under sub-section (2A) of that section, or (c) having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143, the Assessing Officer, after taking into account all relevant material which the Assessing Officer has gathered, shall, after giving the assessee an opportunity of being heard, make the assessment of the total income or loss to the best of his judgment and determine the sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 144 of the Act. For more clarity, we shall indicate different situations hereinbelow. 19. The mandatory best judgment assessment is to be made in any of the four cases : (a) If any person fails to make the return under section 139(1) of the Act and has not made a return or a revised return under section 139(4) or (5) of the Act ; (b) if any person fails to comply with all the terms of a notice issued under section 142(1) of the Act ; (c) if any person fails to comply with a direction issued under section 142(2A) of the Act ; or (d) if a person having made a return fails to comply with all the terms of a notice issued under section 143(2) of the Act. 20. Section 145(2) of the Act confers discretionary power on the Assessing Officer to make a best judgment assessment in two situations, namely, where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee ; and where the assessee has not followed regularly any method of accounting provided in sub-section (1) of section 145 of the Act (cash system or mercantile system of accounting). 21. What is the scope of best judgment assessment ? The mandatory and discreti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and, therefore, moved a revision before the Board of Revenue. The same was dismissed observing that the books of account filed by the assessee were not dependable and, therefore, the Assessing Officer was bound to assess the tax. At the assessee's instance, the case was referred to the High Court of Patna. The High Court upheld the contention of the State that the Sales Tax Officer is entitled to make an assessment on any figures of gross turnover. Before the Supreme Court, the issue was whether the Assessing Officer had assessed the tax amount due arbitrarily without basing the assessment on any material whatever. The Supreme Court referred to section 23 of the 1922 Act, which was substantially similar to section 10 of the Bihar Sales Tax Act. The issue was held in favour of the assessee and the relevant observations are as follows (page 774 of 8 STC) : Sub-section (3) of section 23 of the Indian Income-tax Act requires the Income-tax Officer to assess the total income of the assessee and determine the sum payable by him on the basis of such assessment, by 'an order in writing' ; but clause (b) of sub-section (2) of section 10 of the Act requires the Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is some guess-work. The assessing authority while making the 'best judgment' assessment no doubt should arrive at its conclusion without any bias and on rational basis. That authority should not be vindictive or capricious. If the estimate made by the assessing authority is a bona fide estimate and is based on a rational basis, the fact that there is no good proof in support of that estimate is immaterial. Prima facie, the assessing authority is the best judge of the situation. It is his 'best judgment' and not of any one else's . . . If the basis adopted is held to be a relevant basis even though the courts may think that it is not the most appropriate basis, the estimate made by the assessing authority cannot be disturbed. 25. In S. M. Hasan, STO v. New Gramophone House AIR 1977 SC 1788, a Division Bench of the Supreme Court held that, if the conditions for the best judgment assessment are present, the Assessing Officer will make it not on speculative or fanciful grounds, but on reasonable guess since the best judgment assessment does not negate the exercise of judgment on the part of the officer . . . a tax officer who makes a best judgment assessment sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in Biharilal Jaiswal (supra). The estimation of gross profit at 40 per cent. of the purchase price of arrack was also affirmed observing that there is nothing wrong as the books of account were rejected on account of non-substantiation of the turnover, and all major expenses. The reasons for adopting such a method of estimation of profit at 40 per cent. of the purchase price are not forthcoming even from the appellate authority. The rejection of books of account and non-substantiation of the turnover as well as the major expenses appears to be the reason for adopting 40 per cent. as the gross profit. The disturbance of business in extremist areas, and the general agitation demanding prohibition did not weigh with the Commissioner of Income-tax (Appeals) and, therefore, he affirmed the assessment order disallowing 50 per cent. of the expenditure claimed although some relief was given by deleting the addition made towards bank interest by the Assessing Officer. 29. The adoption of 40 per cent. as gross profit of purchase price of arrack, in our considered opinion, is arbitrary and irrational. Our finding also receives support from the decision of the Division Bench o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enied the reliefs under sections 28 to 43C of the Act, which contain the procedure for computation of income from business. Impugned order of the Income-tax Appellate Tribunal 31. In all the orders impugned in these appeals, the learned Tribunal followed its earlier decision in the case of Anakapalle Municipal Units Arrack Shops (supra). In some of the cases, the Tribunal followed the order dated August 31, 2001, in I. T. A. No. 17/H/1997 against which I. T. T. A. No. 253 of 2003, which is one of the cases in this batch, is filed. It is, therefore, necessary to notice the Tribunal's decision in Anakapalle Municipal Units Arrack Shops (supra). Though a copy of the same is not placed before us, the sum and substance of the order is found in the impugned order in I. T. T. A. No. 172 of 2003 and other appeals. 32. After coming to the conclusion that estimation of profits at 40 per cent. of the purchase price is without reason and arbitrary, the Tribunal observed as follows : On the very identical facts and circumstances as in the present case, this Bench in its consolidated order dated May 30, 2001, had the occasion to consider the issue of estimation of profit in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax Appellate Tribunal, Hyderabad ; and (iii) estimated the net profit at 1 per cent. of the estimated sales or declared sales, whichever is higher, after considering all kinds of deductions and allowances. There is no dispute before us that the Revenue did not choose to file an appeal against the consolidated order dated May 30, 2009, in Anakapalle Arrack Shops. Be that as it is, for the reasons infra, we are of the considered opinion that estimation of net profit at 1 per cent. in arrack business is certainly on the lower side and, therefore, it needs to be re-estimated. As these cases pertain to the assessment years 1989-90, 1992-93 and 1993-94, we are, however, not inclined to remand the matters. While agreeing with the submission of the counsel for the assessees, we may also take judicial notice of the fact that under the relevant provisions of the Andhra Pradesh Excise Act, 1968, a retail licence for vending arrack was given for a period of one year renewable every year for a period of five years. It is also not uncommon that most of the arrack contractors, due to heavy competition for procuring licence, may not either seek continuation of licence after expiry of the ini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eipts paid or total to the assessee in the previous year on account of construction business or a higher sum that may be declared by the assessee in his return of income shall be deemed to be the profits and gains from the business. The counsel would commend to us that, applying the principle in section 44AD of the Act, the rate of percentage of profit assessed at 8 per cent. of the cost of purchase of arrack, as is done by the Tribunal, is reasonable. We are, however, not in agreement with this. Section 44AD of the Act does not put a ceiling at 8 per cent. of gross receipts as profit in a construction business. It could be higher as per the return of income. More often than not, contractors in civil construction business claim loss of profit arising out of diminution in turnover on account of delay in the matter of completion of work or breach of contract or illegal termination of contract. In such cases the Supreme Court has upheld award of 15 per cent. of the contract value or gross value of the contract towards loss of profit (see Mohd. Salamatullah v. Government of Andhra Pradesh AIR 1977 SC 1481 and A. T. Brij Paul Singh v. State of Gujarat AIR 1984 SC 1703. Therefore, we are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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