2025 (4) TMI 659 - HC - Income Tax

Running stock method rejection for sales estimation doesn't raise substantial legal question, different methodologies equally valid

The Kerala HC held that the Appellate Tribunal's rejection of the running stock method for estimating sales turnover did not raise a substantial question ... Substantial question of law - Tribunal justification in rejecting the running stock method adopted by AO for estimating the sales turnover - HELD THAT:- We find that merely because the Appellate Tribunal had chosen a different method for estimation of the undisclosed income of the assessee during the block period, from the methodology that was adopted by the Assessing Authority and the First Appellate Authority, it cannot be said that the findings of the Appellate Tribunal give rise to a substantial question of law. This is more so because the methodologies adopted by the Assessing Authority and the First Appellate Authority on the one hand, and the Appellate Tribunal on the other, are merely different modes by which an estimation is done of the extent of the suppression of income detected by the authorities. Since any estimation involves an element of guess work, one cannot state with any degree of conviction that a particular methodology is the only one that can be legally adopted in a given case. We also find that this Court in C.C Jacob v. State of Kerala [1996 (12) TMI 427 - KERALA HIGH COURT] has found that, the choice of methods to be adopted for the purposes of estimation of turnover is a matter for an Assessing Authority to decide on the basis of the materials on record. It will always depend on the facts and circumstances of each case. It was also found that in the case of an assessee carrying on the business of jewellery, whose business premises are inspected by the Department and the difference in weighment and the number of items of gold ornaments is found to be minimal, as compared to the stock held on the date of inspection, or where the difference in the number of items is not very substantial, the method of determining turnover on average running stock basis is not reliable. Thus, there is no fixed method for arriving at the undisclosed income in cases such as the present, and it all depends upon the subjective satisfaction of the adjudicating authority concerned. We are therefore not persuaded to find that the methodology adopted by Appellate Tribunal was legally incorrect, or that the finding of the Appellate Tribunal on the said issue gives rise to a substantial question of law for our consideration in these appeals preferred by the revenue. Disallowance u/s 40A(3) - As we find that the Appellate Tribunal had only relied on its own earlier order in Eastern Retreads (I) Limited [1998 (11) TMI 148 - ITAT COCHIN] while arriving at a conclusion in favour of the respondent assessee. It is not in dispute before us that the revenue did not choose to carry the said order of the Appellate Tribunal in appeal before this Court in any proceedings. Under the said circumstances, we cannot sustain an argument to the contrary by the revenue in these appeals before us. ISSUES PRESENTED and CONSIDEREDThe primary issues considered in the judgment were: Whether the Income Tax Appellate Tribunal (the Tribunal) was justified in rejecting the running stock method adopted by the Assessing Officer for estimating the sales turnover and instead using a different methodology for estimating undisclosed income. Whether the Tribunal was correct in law in deleting the disallowance made under Section 40A(3) of the Income Tax Act during the block assessment. Whether the Tribunal's decision to estimate undisclosed income only for years with incriminating material was against the law and precedents. Whether the Tribunal's order was valid despite differences in opinion between the Accountant Member and the main order.ISSUE-WISE DETAILED ANALYSIS1. Methodology for Estimating Undisclosed IncomeRelevant legal framework and precedents: The estimation of undisclosed income during a block assessment involves determining the income that was not disclosed by the assessee. The Assessing Officer initially used the running stock method to estimate the income, which was partially modified by the First Appellate Authority.Court's interpretation and reasoning: The Tribunal rejected the running stock method and instead relied on the suppressed sales turnover to estimate the undisclosed income. The Tribunal held that the estimation should be based on the actual suppression detected through available material, which was a more accurate reflection of the income suppression.Key evidence and findings: The Tribunal found that the material evidence only pertained to specific years, and thus, estimation should be limited to those years. The Tribunal also restored the gross profit rate used by the Assessing Officer.Application of law to facts: The Tribunal's decision was based on the principle that estimation methods should be tailored to the specific facts and evidence of each case. The Court agreed with this approach, emphasizing that estimation involves an element of guesswork and subjective judgment.Treatment of competing arguments: The revenue argued for the running stock method, but the Tribunal found it less reliable in the context of the evidence available.Conclusions: The Court upheld the Tribunal's methodology, finding no substantial question of law in the choice of estimation method.2. Disallowance under Section 40A(3)Relevant legal framework and precedents: Section 40A(3) of the Income Tax Act deals with disallowance of expenditure where payments are made in cash exceeding prescribed limits, unless exceptions apply.Court's interpretation and reasoning: The Tribunal relied on its earlier decision in Eastern Retreads (I) Limited, which held that disallowance under Section 40A(3) should not be considered in block assessments, as these are typically addressed in regular assessments.Key evidence and findings: The Tribunal found that the disallowance was not applicable in the context of block assessments, which focus on undisclosed income rather than regular disallowances.Application of law to facts: The Court found that the Tribunal's reliance on its prior decision was appropriate, and the revenue's failure to appeal that decision further validated the Tribunal's stance.Treatment of competing arguments: The revenue's argument for including the disallowance was not supported by any new legal basis or precedent.Conclusions: The Court dismissed the revenue's appeal on this issue, affirming the Tribunal's deletion of the disallowance.3. Estimation Limited to Years with Incriminating MaterialRelevant legal framework and precedents: The Tribunal limited the estimation of undisclosed income to years where incriminating material was seized, which was challenged by the revenue as contrary to the decision in Hotel Meriya's case.Court's interpretation and reasoning: The Court emphasized that substantial questions of law arise only when there is a clear legal error or misapplication of legal principles. The Tribunal's decision was based on the specific evidence available for certain years, which did not contravene any binding precedent.Key evidence and findings: The Tribunal found that incriminating material was only available for specific years, justifying its limited estimation approach.Application of law to facts: The Court agreed that the Tribunal's approach was consistent with the principle that estimation should be evidence-based.Treatment of competing arguments: The revenue's reliance on a broader interpretation of the law was not supported by the facts of the case.Conclusions: The Court upheld the Tribunal's decision, finding no substantial question of law.SIGNIFICANT HOLDINGSThe Court held that the choice of estimation method by the Tribunal did not give rise to a substantial question of law, as estimation inherently involves subjective judgment based on the specific facts of each case. The Court also upheld the Tribunal's deletion of the disallowance under Section 40A(3) and its decision to limit estimation to years with incriminating material. The Court emphasized that substantial questions of law arise when there is a clear legal error or misapplication of legal principles, which was not the case here. Consequently, the appeals by the revenue were dismissed, affirming the Tribunal's order.