1974 (11) TMI 29 - HC - Income Tax

Rejection of book profit: tribunal's unverifiable-sales finding held arbitrary, book profits restored and costs awarded to assessee.

Rejection of book profits under the proviso to the accounting rule is permissible only where accounts are incorrect, no bona fide method of accounting is ... Rejection of book profits - verifiability of sales - proviso to sub section (1) of section 145 - regularity of method of accounting - estimation of income by resort to proviso - reliance on suspicion and surmise in tax assessment - assessment vitiated for lack of materialRejection of book profits - reliance on suspicion and surmise in tax assessment - assessment vitiated for lack of material - The Tribunal's finding upholding rejection of the book profit shown by the assessee was vitiated by reliance upon suspicion, surmises and irrelevant material. - HELD THAT: - The Court examined whether there was material to justify ignoring the assessee's trading results. The Income tax Officer had examined the books and recorded only two defects: absence of cash memos (affecting verifiability of sales) and some lump sum entries, and had not found the accounts to be irregular or the accounting method unacceptable. There was no finding that entries were untrue or that the method of accounting was irregularly employed. Where accounts are correct and complete and a regularly employed method permits proper deduction of income, the proviso to sub section (1) of section 145 cannot be invoked to reject the book results. In the absence of material justifying non acceptance of the books, the Tribunal and revenue erred in relying on suspicion and surmise to reject the book profits, rendering their finding vitiated.Answered in favour of the assessee; the Tribunal's upholding of rejection of book profits was vitiated.Verifiability of sales - proviso to sub section (1) of section 145 - regularity of method of accounting - estimation of income by resort to proviso - The Tribunal's finding that the sales made by the assessee during the relevant year were unverifiable was not based on the materials on record and was arbitrary. - HELD THAT: - The assessee produced books showing purchases, sales, opening and closing stocks; the commodity dealt in was a rationalised excisable article with sale price fixed by the excise authorities, so sales quantities and amounts could be verified from excise records. The authorities did not record any finding that the accounting method was irregular or that entries were incorrect. The proviso to sub section (1) of section 145 requires a definite finding that income cannot be properly deduced from the regularly employed method of accounting before resorting to estimation; no such finding or material existed here. Accordingly the Tribunal's conclusion of unverifiability was arbitrary and unsupported by record.Answered in favour of the assessee; the finding of unverifiability of sales was arbitrary and unsupported by record.Final Conclusion: Both questions referred were answered in favour of the assessee and against the department: the Tribunal wrongly rejected the book profits and erroneously held the sales unverifiable, the assessments being vitiated for want of material to displace the assessee's regularly maintained accounts; costs awarded to the assessee. Issues involved: The judgment involves the rejection of book profit shown by the assessee and the estimation of profit, as well as the verifiability of sales made by the assessee during the relevant year.Relevant Details:Rejection of Book Profit:The assessee, deriving income from the sale of country liquor, filed a return for the assessment year 1966-67 showing a total turnover of Rs. 12,90,678 and a net profit of Rs. 22,218. The Income-tax Officer rejected the book profits due to unverifiable sales, noting transactions in lump sums, and inadequate personal expenses. The Appellate Assistant Commissioner upheld this decision. The Tribunal dismissed the assessee's appeal, citing defects from the previous year. The Tribunal's rejection was based on suspicion and surmises rather than concrete evidence, as the sales were verifiable with complete data available. The Tribunal's reliance on previous year's defects was deemed erroneous as the current year's accounts were not found to have the same issues.Estimation of Profit:The Income-tax Officer estimated sales at Rs. 12,95,000 and assessed a flat rate of 2.5% on net profit of Rs. 29,875. The Tribunal's decision to uphold this estimation was found to be arbitrary and not based on the materials on record. The assessee's argument that sales were verifiable due to control by the excise department and fixed sale prices was not considered by the Tribunal. The rejection of book profits was not u/s 145(2) but u/s 145(1) of the Income-tax Act, and the method of accounting employed by the assessee was not found to be irregular.Conclusion:The High Court held in favor of the assessee, stating that the Tribunal's finding upholding the rejection of book profit was vitiated by reliance on suspicion and irrelevant material. The Tribunal's conclusion that the sales were unverifiable was deemed arbitrary and not supported by the evidence. The assessee was awarded costs for the reference.