2016 (7) TMI 1230 - HC - Income Tax

Court affirms ITAT's trading addition decision under sec 145(3), rejects sec 44AA & rule 6F in liquor trade

Chaturbhuj Manoj Kumar, Rajaram, Hazariram and others Versus Commissioner of Income-Tax and another

The court upheld the ITAT's decision to sustain the trading addition following the rejection of the books of account under section 145(3). The additions ... Application of provisions of section 145 - enhanced turnover ignored - GP rate adoption - Held that:- What we notice is that the Commissioner of Income-tax (Appeals) as well as the Tribunal both ignored or did not consider the turnover and there is no finding by both the Commissioner of Income-tax (Appeals) as well as the Tribunal as to why the enhanced turnover was not considered for applying a particular gross profit rate. We are conveyed that there are several checks and balances and order of the Commissioner of Income-tax (Appeals) as well as the Tribunal is sent to number of authorities up to the Commissioner of Income-tax, Chief Commissioner of Income-tax and others but none appears to have brought this fact to the knowledge about the mistake committed by the Commissioner of Income-tax (Appeals) as well as the Tribunal. As noticed earlier, the Revenue used to file appeals in similar matters like this involving matters relating to liquor trade not only earlier but now as well but for the reasons best known, no action was taken by the Revenue in preferring appeal though 95 per cent. of the addition was deleted by the Commissioner of Income-tax (Appeals) and upheld by the Tribunal resulting into a relief of ₹ 6.58 crores and ₹ 10.25 crores respectively. Equally important is the fact that when the question of law was admitted by this court on October 22, 2008, notices were sent to the Revenue and the Revenue had a chance to file cross-objection then too none cared to file. Even this factum was noticed by us while examining the records and was not brought to the notice of this court by the counsel for the Revenue. Issues Involved:1. Sustaining trading addition due to rejection of books of account under section 145(3).2. Legality of addition made without basis of computation or nexus with available facts.3. Justification of rejection of books of account for want of stock register and sale bills.4. Applicability of provisions of sections 44AA and 145(3) and rule 6F of the Income-tax Rules, 1962.5. Telescoping benefit of addition sustained on account of disallowance of expenses.Detailed Analysis:1. Sustaining Trading Addition Due to Rejection of Books of Account under Section 145(3):The court examined whether the ITAT was justified in sustaining the trading addition following the rejection of the books of account under section 145(3). The assessees, engaged in liquor trade, had their books rejected due to non-production of sales vouchers and other discrepancies. The Assessing Officer (AO) noted that the sales figures were manipulated and not verifiable, leading to the rejection of the books under section 145(3). The ITAT upheld this decision, referencing similar cases where books were rejected due to similar defects. The court agreed with this approach, emphasizing that the books were rightly rejected due to the lack of reliable sales data and proper maintenance.2. Legality of Addition Made Without Basis of Computation or Nexus with Available Facts:The court addressed whether additions made without a clear basis of computation or nexus with the available facts were permissible under section 145(3) read with section 144. The AO had estimated sales and applied a gross profit rate based on comparable cases in the liquor trade. The court found that some estimation or guesswork is necessary in such cases, provided it is based on material and not arbitrary. The ITAT's decision to apply a particular gross profit rate was supported by references to similar cases, making the estimation reasonable and justified.3. Justification of Rejection of Books of Account for Want of Stock Register and Sale Bills:The court considered whether the rejection of books for the lack of a stock register and sales bills was justified. The AO noted that the assessees did not maintain brand-wise and size-wise quantitative details of bottles/pouches, and stock registers were not produced. This lack of documentation rendered the books unreliable. The court upheld the rejection, noting that proper maintenance of books is essential for accurate profit determination, and the absence of critical records justified the AO's decision.4. Applicability of Provisions of Sections 44AA and 145(3) and Rule 6F of the Income-tax Rules, 1962:The court examined the relevance of sections 44AA and 145(3) and rule 6F. The assessees argued that these provisions were overlooked. However, the court clarified that section 44AA pertains to professions like legal, medical, engineering, etc., and not to liquor trade. The court emphasized that all businesses must maintain proper books and vouchers. The audit of accounts presupposes proper maintenance of records, and the lack of sales vouchers indicated that the audit was not thorough. Thus, the court found that the arguments regarding sections 44AA and rule 6F were inapplicable and rejected them.5. Telescoping Benefit of Addition Sustained on Account of Disallowance of Expenses:The court considered whether the ITAT was justified in not giving the telescoping benefit of the addition sustained on account of disallowance of expenses. The assessees contended that the trading addition should be adjusted against disallowed expenses. However, the court did not find sufficient grounds to interfere with the ITAT's decision, as the overall findings were based on a reasonable comparison with similarly situated traders.Conclusion:The court upheld the ITAT's decision to sustain the trading addition following the rejection of the books of account under section 145(3). The additions were based on reasonable estimation and comparison with similar cases in the liquor trade. The arguments regarding the applicability of sections 44AA and rule 6F were rejected as inapplicable to the liquor trade. The court found no reason to remand the matter, as the ITAT's findings were detailed and supported by material evidence. The appeals were dismissed, and the order of the ITAT was deemed just and proper.