TaxTMI 
TaxTMI 
1988 (3) TMI 106
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....76-77, had been admitted by the assessee as having never been made by the firm and so, according to the assessee, the question of the said purchases being reflected in the closing stocks or in the stocks pledges with the banks in nay of the aforesaid two years did not arise. The assessee's plea, however, has been that the addition to the above extent on account of purchases having been if late should not be made to the assessee's trading results because that would yield a gross profit rate in respect of asst. year 1977-78 of 28,9 per cent, which according to him, would be entirely disproportionate to the sedimented gross profit position of the assessee in earlier and subsequent years. In this connection, the assessee filed a chart before us, being SI. No. 5 of the assessee's paper book, which indicated that, beginning from asst. year 1966-67 right up to asst. year 1985-86, the assessee declared gross profit has never been more than 18.5 per cent. The addition in question of Rs. 1,23,391 in assessment year 1977-78 could not therefore, be justifies. At the best the assessee's trading results could be estimated taking into account the past and the future history of the assessee's case....
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....orementioned purchases but the said FIR did bring out that the said Sh. M. M. Tora was trying to defraud the assessee-firm. The submissions made by he assessee on this point were, inter alia, as below : "Taking advantage of the confines and innocence of the partners of the firm, he manipulated accounts of the firm. He did not record purchases faithfully and instead inserted various items of purchases which have been found to be fictitious.... If the firm had even the least idea about these vouchers being factious, it would not have produced the same before the ITO...... It is the trade practice in this line of business that payment against purchases are made within a short time from the date of their respective purchases. In these circumstances, no such payment was made and the credit balance of these parties were allowed to stand and carried over from time to time. It may be pointed out that M. M. Tora made a number of attempts of making payments to these parties but the proprietors were always insisting on issue of only a/c payee's cheques and, there was no occasion of him to get such cheques signed by the partners. These amounts remained unpaid except to the extent indicated ab....
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....said findings of the authorities below. The learned counsel for the assessee very fairly gave up the plea of loss by embezzlement before us. We had asked the assessee to place on record its balance sheets for the years under consideration and, from a perusal thereof, it appears, and it was conceded to by the assessee, that, in the books of the assessee, when purchases account was debited by the entries referred to above on a account of alleged purchases, the corresponding credits were passed in the respective accounts of alleged suppliers and these accounts of alleged suppliers continued to be in the balance sheets of the company as on 31-3-1976 and 31-3-1977. This position is in fact clear from the copies of accounts of Bhatia Iron Store, Khalsa Iron & Steel Work's, Narang Iron Syndicate appearing at page 2 of the assessee's paper book in paragraph 6 of the submissions made by the assessee before the IAC in proceedings under section 144B of the IT Act. 1961. The assessee had in fact admitted this much at page 4 of the above submission when it had written that M. M. Tora made a number of attempts of aiming payments to these parties but the proprietors were always insisting on issue....
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....t by the CIT(A) in his order, when he observed that the assessee had not proved this assertion by leading cogent evidence including one of Sh. M. M. Tora. According to the learned D. R. the assessee all along knew the bogus nature of the entries and yet did not declare them when the filed his original returns of income. He was forced to accept the bogusness of the entire in question on account of various enquiries made by the ITO. The Inspector of Income-tax went to the sales-tax Department also to enquiry whether the sales-tax number slotted against the various alleged suppliers of the goods were genuine and he learnt form the sales-tax Department that no sales-tax number had been allotted to the parties in question. The results of these enquiries made by the purchases were bogus. At no stage had the assessee taken the stand that its sales and closing and opining stock figures were wrong. In the circumstances, the ITO was justifies in not disturbing the figures of sales or opening stock and closing stock, but correct the mistake, which had been detected in the form of inflation of purchases, and to debit the trading account with the figures of actual purchases. The above state of ....
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.... to the debit side of the trading account, the ITO did not dispute the payment of cartage, wages, machinery rapiers, electricity expenses, labour charges and the figure of opening stock. He, however, found that the purchases were inflated. This fact was admitted by the assessee-firm unequivocally. He, therefore, adjusted these purchases by eliminating the bogus purchases, which were admitted by the assessee. In doing so, again, the ITO cannot be said to have acted wrongly. If he is not able to find any fault with regard to the payments of wages, labour charges, etc., and when it is also not the allegation of the assessee, that they are erroneous or inflated or that Thai have been understated, the ITO would not be acting against the material on record in accepting the correctness of the figures in question and adopting them, while finding out the real profits derived by the assessee from its trading during the year in question. 10. Apart from the above, there is another reason on account of which the additions question cannot, in our opinion, be deleted. It represents the real income which is lying in the pocket of the assessee, and which cannot, therefore, be ignored for the purpo....
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....d, whether in the accounts or outside them. It may be camouflaged in the accounts themselves (1) in the form of the increase in the partner' capital accounts as per their declaration, or (2) in the form of fictitious liabilities. Once the reality is discovered it has to be taken note of. The resort to the estimate of gross profit and the estimate of sales is not the only method of computing the income of the assessee in every given situation. Resort to it is had (sic). when circumstances so warrant. But when other parameters be available to make a more reliable estimate of income, they have to be taken into account. What method would yield the best result will have to be determined with reference to the facts of that case. In the present appeals, we have seen that, after examination of the accounts produced by the assessee, the ITO found correct the assessee's assertion that the sales are all vouched and verifiable and that the closing stock of the assessee is also correct. When this was the factual setting, it would be unrealistic to direct the ITO that he should nonetheless estimate the assessee's sales at a figure different from what the finds to be correct. Similar will be the ....
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.... for estimating the assessee's income. Ignoring it will be ignoring the reality and the tangible evidence of existence of the assessee's undisclosed income. No case law has been brought to our attention by the assessee's learned counsel which might stipulate as an invariable principle the proposition that once the books of account of an assessee are shown to have been falsified on one specific issue, the only way to estimate the assessee's income under/section 145(2) is to resort to g. p. rate application on estimated sales, and all the rest of the evidence, howsoever tangible and relevant it may be, must be ignored merely because the same has come in contact with the tainted books. If the other evidence is available and is independently verifiable, and provides a much more realistic estimate of the assessee's income, it can and must be resorted No. case law says that it cannot be done. Then, the g. p. rate in earlier and later years has been accepted by the revenue because in those years events as in the present years, were not detected. Once these events are detected and they go to show positively that there is not only inflation of purchases, but there is creation of assets to t....
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....se made by the assessee for Ambassador & Co. during the previous year under consideration Copy of the account of Ambassador & Co. given in paragraph 6 of the said letter also shown that the said purchase was made in March 1976. It is further the assertion of the assessee that the said purchase was in fact never made and that the purchases were inflated to the above extent in respect of asstt. year 1976-77. Following submission made by the assessee in the aforesaid context as sum relevance : "There are purchases in the earlier year ending31-3-1976as well which are apparently not genuine- Rs. Bhatia Iron Stores 19,763 M/s Ambassador & Co. 5,600 Copies of accounts of the parties thus named are as under : ............." In the context of the above....
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....p; 25-9-76 36,059.60 Mandi 2. M/s Navrang Iron Syndicate, 11628, 32318 15-10-76 33,911.80 Lohamandi, Motia Khan, Rani Jhansi Road, New Delhi 3. -do- 36482 9-12-76 7,300.00 4. M/s Khalasa Iron & Steel Works, Plot No. 42, Opp. Gali No. 4, near Anand Parbat, New Rohtak Road, New Delhi 23145 9-11-76 38,419.40 5.  ....
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....the first information report had been filed for drawing funds for the two fictitious payments, and that the ITO in his submissions was quite correct in spotting out that the 5 aforesaid purchasers were not tick marked by the auditor who had audited the account. It was for this reason the learned conceal for the assessee-firm Mr. Harnam Shanker claimed that the account written by Mr. M. M. Tora being unreliable should be ignored and the provision contained in sub-section (2) of section 145 was to be applied to work out the reasonable profit of the trade in operation carried on during the years. Judicial Member Mr. Vyas who was one of the Members of the earlier Bench constituted to dispose of the appeal by an order dictated by him was also of the view that the books being unreliable recourse to section 145(2) was to be made to determine the profit of the trading operations. 3. This approach put forward by the assessee and on his behalf by the learned counsel representing him has been countered by the revenue, the ITO as well as the CIT (A) who found that except for the aforesaid 5 entries of purchases, the accounts were verifiable and correct. In para 8 of the order of the learned a....
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.... to the 5 purchase entries, aggregating in value to Rs. 1,23,391 would it answer the needs of the situation squarely if a straight disallowance of the claim for deduction of purchase for Rs. 1,23,391 it made, and a corresponding addition is caused to the profit shown or is the alternative as proposed by the learned counsel for the assessee to disregard the account altogether which on account of 5 unvouched purchase entries are unreliable and recourse to the provisions contained in sub-section (2) of section 145 of the IT Act is called for to make reasonable and fair estimate of profit. 6. We examine first the stand of revenue in the matter. The revenue undoubtedly seeks the disallowance of the unvouched purchases and the consequent add back of Rs. 1,23,391 to the profit disclosed in the account. 7. The assessee-firm is a manufacturer of horizontal single screw, semi-automatic plastic injection and rotary fully automatic machines, etc. He has, in this connection, furnished a table appearing on page 5 of the paper book containing trading results for 20 years comprising of both preceding and subsequent years right form assessment year 1965-66 to assessment year 1985-86. It will be n....
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....23,391 and ignore the history of the business altogether in making the assessment of the fair and reasonable profit. In my view, there must be some material brought on record to justify the adoption of gross profit rate of 29 per cent for the trading of the year. Detection of unvouched expenses is not enough when the history of the business shows that its gross profit rate in the last 20 years comprising both of preceding and subsequent years have never gone over 16 per cent and revenue has never found that the gross profit rate shown by the assessee was not fair. It is not the case of the ITO either that the trading results shown by the assessee called for an adverse view. 9. Although, on the one hand, we have the five purchase entries of the year totalling at Rs. 1,23,391, on the other hand, we have the trading results of the twenty year in view to consider. In my consideration, we would not be justified in rejecting the trading results of 20 years in relying only on the 5 purchase entries of the year to determine the profit of the year and adopt a gross profit rate of with fictitious reasons. One reason which is, however, not the case here can be to bring down the rate of gross....
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....derives support from the fact that although Mr. M. M. Tora on whose shoulder the assessee-firm shifted the responsibility for making the false entries caused those entries to be made in the accounts to enable the payment to these incognito supplier by drawing fictitious bills. There is further support available from a careful consideration of these fictitious entries themselves. Both revenue authorities, the ITO and the CIT (A) testified that no cheque had been issued to make payments to the suppliers in the accounting period in issue. The omissions of the bills although indicate that payment of such amounts normally could be made only by cheque the failure to make payment of these bills in the year in appeal and after wards by cheque does indicate that entries were most probably made to facilitate withdrawals of such amounts in further to make the payments for the constituents. For the view that purchases were from such supplier who wanted to be incognito, there is another circumstance also which supports the proposition. Both the lower authorities noticed that after the First Information Report, had been filed by the assessee-firm regarding earlier embezzlement of funds age getti....
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.... lower authorities made without understanding the true import of the five unachieved entire and, therefore, based on misappraisal of facts. It is fair also to both parties that they approach the subject-how to deal with the five unvouched entire-after making a proper appraisal of facts. The Tribunal should not jump to a conclusion at this stage and repeat the same error which lower authorities have already done by jumping to a finding without understanding the true purport of the entries. I, therefore, vacate the finding of both the authorities and direct the ITO to record a fresh finding after making a proper apparel of facts in the light of the observation made by the Tribunal. 11. In the result, appeal shall be considered allowed only for statistical purpose. As Per Bench 1. As it has not been possible for us to come to awn agreed conclusion in the present appeals, we refer the following question for the valued opinion of the Hon'ble Third Member : "Whether, on the facts and in the circumstances of these, the CIT (Appeals) was justified in sustaining the addition of Rs. 1,23,391 representing five entries of unvouched purchases ?" THIRD MEMBER ORDER Per Shri Ch. G. Krishnam....
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....ng with 31st of March every year. In the assessment year 1976-77 the Income-tax Officer noticed that the assessee made purchases during the year from one Bhatia Iron Store amounting to Rs. 19,763. No purchase vouchers were produced before him. The Income-tax Officer also noted that M/s Bhatia Iron Store was a bogus firm. The Income-tax Officer, therefore, concluded that the purchase recorded by the assessee was bogus and treated the same as income of the assessee from undisclosed sources and added as such. In the assessment year 1977-78 also the Income-tax Officer found that the assessee made purchased from the following parties, which were admittedly bogus in the sense that neither the parties did exist nor purchase vouchers were produced : Sl.No. Name of the party Bill No. Date Amount 1. M/s Bhatia Iron store, 12143 Kabar Mandi 16720 25-9-1....
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....the partners of the assessee Shri H. R. Kochhar, who admitted that the goods relating to the above purchases were never received by the assessee firm and that the sellers were bogus and non-existing. The Income-tax Officer also noted that in the purchase account, these purchases appeared at the end of each page. The partner also admitted before the Income-tax Officer that he came to know about the bogus nature of the purchases only when the books of account were impounded by the Income-tax Officer on March 1980. It was stated that the partners of the firm not knowing accounts relied entirely upon the accountant Shri M. M. Tora and that he made those entries with a view to misappropriate the funds at an appropriate and proper time and that the partners came to know that the said accountant encashed cheque for about Rs. 20,855 but accounted only for Rs. 18,855, thus misappropriated Rs. 2,000 which was debited to his account and embezzled funds in some other cases, that no FIR was loaded as it was thought useless. After stating that as a reason for the innocence of the partners, it was pointed out before the Income-tax Officer that the gross profit shown by the assessee was more than ....
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....l as to how these purchases came to be entered in the books of account and with what motive. The other pleas taken before the Tribunal were that these entire were made by Shri M. M. Tora with a view to embezzle the assessee's funds and that the assessee was innocent of these entire and that no addition should have been made on that account to ht income of the assessee. It was further pointed out that as the rate of gross profit in any case being very fair and compared reasonably with the rate of gross profit shown and accepted in the earlier years, no addition should have been made on account of these purchases, which had pushed up the rate of gross profit to a very high percentage, which was abnormal and unattainable in a business of this kind. Another ground taken before the Tribunal was that even though the purchases were not supported by the purchases vouchers, the purchases were not fictitious had that the goods actually formed part of the manufactured goods and were therefor reflected either in sales or in closing stock and therefore no addition should be made separately for it. 6. The matter was heard by a Bench of the Tribunal and after hearing and reserving the orders, as....
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....to ITO for re-examining the matter and recording a fresh finding. Whatever has been brought up in the above analysis about the reality of consumption of constituents to achieve the turnover and maintain the rate of profit, and the possibility of purchases having been made not from the open but from the closed market also calls for re-examination of the issue and recording of fresh finding. Therefore, I would vacate the finding of the lower authorities made without understanding the true import of the five unvouched entire and, therefore, based on misappraisal of facts." He therefore vacated the findings of the authorities below and directed the Income-tax Officer to record a fresh finding after making proper appraisal of the facts. 8. As I have already mention the learned Accountant Member was of a totally difference opinion. After narrating the facts of the case and quoting from the orders passed by the Inspecting Asstt. Commissioner under section 144B and after referring to the assessee's arguments, replies filed and the arguments addressed before the Bench, The learned Accountant Member took the view that the assessee admitted in unequivocal terms that these purchases were nev....
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....this line of business. The argument was that the reasonable rate of gross profit disclosed should be considered that all the purchases including these unvouched purchases were those made in the ordinary course of business and no addition was called for more so when the rate of gross profit that would result by the addition of this unvouched purchases would push the rate of gross profit to such a figure, which was never comparable. He placed reliance upon an order of the Tribunal, where under similar circumstances the Tribunal held that in such circumstances only the rate of gross profit should be estimated and the addition should not be confined to the in terms found to have been in faulted. He further submitted that when the assessee was stating that it was on account of the misbehaviour of the accountant that these purchases came to be debited in the accounts, the accountant should have been examined to find out the truth. Without examining the accountant, it cannot be said that truth was established. This factor vitiated the assessment. Secondly the high gross profit syndrome, which according to him, proved that no addition was called for and thirdly the Income-tax Officer shoul....
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....e was such that it is not correct and complete. Therefore he has to fall back upon section 144, which permits him to make a best judgment assessment. In that process it is open to him to make the assessment to the best of his judgment, which includes either confining the addition to the extent of inflation found, keeping the inflation in view estimate the gross profit in such a way as to cover the inflation. Having found inflation, he cannot stop from making the addition of the inflation in purchases by looking to the reasonableness of the rate of gross profit. The assessment made by the Income-tax Officer on the facts of this case can be said to be an assessment made on the basis of admission because the partners admitted before the authorities below that these purchases were inflated and fictitious. In a case of this nature, no other argument can either be advanced or countenanced other than the addition to the book results the extent of the purchases found to be fictitious. She also placed reliance upon a judgment of the Karnataka High Court in the case of IAC v. Laxminchand (1986) 159 ITR 730 as against the reliance placed upon on behalf of the assessee on the cases in Laxminar....
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.... because the rate of gross profit was reasonable. When the Income-tax Officer finds that the method of accounting of the assessee was incorrect and incomplete, he is empowered to make a best judgment assessment and to bring the income to the correct levels by making an addition as to off-set the effect of inflation in purchases. 12. To neutralize the effect of inflation in purchases, the only course open to the Income-tax Officer is to add back that amount to the income irrespective of the fact whether the rate of gross profit has gone up and whether the resultant gross profit was higher than the gross profit normally shown the earlier years. This consideration at this stage and on these facts becomes, in my opinion, irrelevant; the relevant being to make that addition on account of inflation in purchases found or admitted. The learned Judicial Member is, therefore, in my opinion, wrong in stating that the gross profit should be seen even though the inflation in purchases was found to be existing and no addition should be made, if it results in a higher rate of gross profit. I am unable to commend this approach. The learned Judicial Member was also not correct, in my opinion, on f....