1986 (3) TMI 141 - AT - Income Tax

Tribunal upholds partnership firm's income calculation, rejects arbitrary estimation methods, and directs proper expense evaluation.

The tribunal set aside the CIT (A)'s order reducing income for a partnership firm in the country liquor contract business. The tribunal rejected the ... - Issues:1. Reduction of income by the CIT (A) in the case of a partnership firm deriving income from country liquor contract business.Analysis:The appeal involved the reduction of income by the CIT (A) in the case of a partnership firm engaged in a country liquor contract business. The firm paid a license fee for nine shops at Ujjain, and the assessing officer estimated the income on an arbitrary basis due to lack of verifiable trading results. The CIT (A) disagreed with the assessing officer's approach, considering the rate of gross profit (GP) and the system of accounting. The CIT (A) found that the profitability and sales varied across locations and that the method used by the assessing officer was not suitable for the current case. The CIT (A) applied a 5% rate to estimated sales to grant relief to the firm.The firm argued against the applicability of the proviso to section 145(1) of the IT Act, emphasizing its accounting practices and business operations. The firm maintained that its sales were conducted through salesmen under strict supervision, with verifiable purchases from the Excise Department. The firm contended that the only deficiency was the non-maintenance of sales vouchers, which should not invalidate the entire accounting system.The tribunal upheld the firm's arguments and set aside the CIT (A)'s order. The tribunal found that the assessing officer's estimation method based on the proportion of sales to license fee was erroneous and misleading. The tribunal considered the historical performance of the firm, the impact of external factors on business, and the reliability of the firm's accounting system. The tribunal directed the assessing officer to accept the firm's book results and reevaluate any expense disallowances, if necessary, based on proper evidence.In the cross-objection filed by the firm, challenges were raised against the invocation of the proviso to section 145(1), the arbitrary estimation of sales and net profit rate, and the biased enhancement of profit. The tribunal addressed these issues in its judgment, dismissing the appeal filed by the Revenue and partially allowing the cross-objection filed by the firm for statistical purposes.