1995 (6) TMI 48 - AT - Income Tax

Tribunal overturns income estimation, emphasizing evidence requirement for sales and profits

DHANRAJ RESTAURANT. Versus ASSISTANT COMMISSIONER OF INCOME TAX.

DHANRAJ RESTAURANT. Versus ASSISTANT COMMISSIONER OF INCOME TAX. - TTJ 055, 390, Issues Involved:1. Addition of Rs. 29,31,157 to the income of the assessee.2. Validity of using seized materials from a subsequent year (1991-92) for estimating income for the earlier year (1990-91).3. Confirmation of additions by CIT(A) based on sales of liquor and beer.4. Partial retraction of the assessee's statement made during search and seizure.5. Estimation of sales and profits of beer and whisky.6. Basis for estimation of suppressed profits.7. Impact of seized paper indicating unaccounted investments by M/s Vishesh Developers.8. Justifiability of the estimation of income at Rs. 18,59,183.9. Charging of interest based on the additions.Detailed Analysis:1. Addition of Rs. 29,31,157 to the income of the assessee:The Assessing Officer (AO) made an addition of Rs. 29,31,157 to the income of the assessee for the assessment year 1990-91, based on seized materials from the subsequent year 1991-92. The CIT(A) accepted the accounts for foodstuff but not for liquor and beer sales, confirming Rs. 18,59,183 for liquor and beer sales and Rs. 14,50,000 based on seized materials from M/s Vishesh Developers, a sister concern.2. Validity of using seized materials from a subsequent year (1991-92) for estimating income for the earlier year (1990-91):The tribunal noted that the AO's estimation was based on seized materials from the subsequent year and was not supported by evidence found at the time of the search. The tribunal cited several decisions, including Delhi Iron Syndicate (P) Ltd. and Krishna Bricks Fields, to support the contention that materials from a subsequent year cannot be the basis for estimating income for an earlier year.3. Confirmation of additions by CIT(A) based on sales of liquor and beer:The CIT(A) confirmed the additions based on an estimation of sales of liquor and beer, despite accepting that even 5-star hotels cannot maintain perfect accounts in this line of business. The tribunal found that the CIT(A) did not have sufficient supporting evidence to confirm that the assessee's real income was different from the accounts maintained.4. Partial retraction of the assessee's statement made during search and seizure:The assessee retracted the statement made during the search and seizure on the very next day. The tribunal referred to the Supreme Court judgment in Shri Krishna vs. Kurukshetra University, which held that retracted confessions not supported by independent corroboration can extend the benefit of doubt to the accused.5. Estimation of sales and profits of beer and whisky:The AO estimated sales and profits based on a few days' sales records from the subsequent year. The tribunal found that this estimation was not well-founded and lacked a proper basis. The CIT(A) also noted that the ratio of recorded and unrecorded sales for a few days in the subsequent year could not be applied to the entire year under appeal.6. Basis for estimation of suppressed profits:The tribunal emphasized that some support is required for estimating profits and sales at higher rates. The CIT(A) observed that the estimation made by the AO was excessively high-pitched and not justified in the absence of supporting material.7. Impact of seized paper indicating unaccounted investments by M/s Vishesh Developers:The CIT(A) considered a seized paper indicating unaccounted investments of Rs. 14,50,000 by M/s Vishesh Developers, a sister concern. However, the tribunal noted that the partner who purchased the land should have been examined to determine the source of funds. The tribunal found that this could not justify the estimation of sales and profits at a higher rate.8. Justifiability of the estimation of income at Rs. 18,59,183:The tribunal concluded that the estimation of income at Rs. 18,59,183 was not fair and reasonable. The presumption that the source of funds for purchasing land was from unaccounted income was beyond doubt, but this could not be the basis for making an addition or estimating sales at a higher rate.9. Charging of interest based on the additions:The tribunal noted that if the additions themselves are knocked down, the charging of interest consequently becomes untenable.Conclusion:The tribunal allowed the appeal, finding that the estimation made by the AO and confirmed by the CIT(A) was not justified. The use of seized materials from a subsequent year for estimating income for an earlier year was not a reasonable yardstick. The tribunal emphasized the need for supporting evidence for any estimation of sales and profits.