TaxTMI 
TaxTMI 
1989 (9) TMI 178
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....------------------------------------------------------------------------------------- Dt. of Name of party No. of Original Revised figure Inflation entry in pieces tanned figure after erasure the books ---------------------------------------------------------------------------------------------- &nb....
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....p; 17,808 27,808 10,000 ---------- Total 1,40,000  ....
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....etting aside of the original assessment by the order of the C.I.T(A) dt. 23-5-83. 5. The assessee is a firm of four partners. The I.T.O. has set out the background which we have already adverted to and thereafter he considered the aspect of inflation of purchases amounting to Rs. 1,40,000. He again made an addition of Rs. 1,40,000 in the assessment now under consideration observing as under :--- " The erasures and corrections in the figures were not denied, but it was stated that the value shown in the bills related to the purchase from these parties in the earlier year were wrongly entered by the accountant in the day book due to oversight and when the mistake was found out on verification, the corrections were made. When the representative was asked as to whether he could produce the bills and the relevant books relating to the earlier year, he readily agreed to do so. But later a letter dated 18-2-86 was sent by the assessee stating that the bills and books of accounts relating to the earlier year had become rot due to dampness and white ants had spoiled the complete set of books of account. Later, at the time of visit by this office Inspector, partner Shri K. M. Noorullah....
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....sp; Rs. Rs. 1. Sheik Haroon, Jolarpet 13-7-78 38,000 24-3-79 30,000 68,000 2. M. Sultan, Jolarpet 6-10-78 ------ 15,168 3. Syed Jaffar Khan, Dharmapuri 11-5-78 &n....
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....nbsp; Total 2,49,121 -------------------------------------------------------------------------------------------- From this the I.T.O. substracted Rs. 30,000 which related to the squared-up account of Sheik Haroon, and arrived at the balance of Rs. 2,19,121. He did not accept the plea that the assessee's case fell outside the purview of sec. 40A(3) in view of the fact that it came under the exceptions mentioned in Rule 6DD and one of such sub-rule related to purchase of the products of animal husbandry (including hides and skins). According to the I.T.O., the purchases were from commission agents and the shandy purchases did not contain the names of any of the purchasers excepting Farooq Ahmed. 6. The I.T.O. also went into the question of cash payments made to M/s Universal Trading Co., M/s Mudassar Leather Co., and M/s Harris Faizas & Co. In respect of M/s Universal Trading Co., the I.T.O. by applying....
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....ow under consideration and the assessment year 1980-81 and that the highest gross profit was only about 9.6%. According to the learned counsel, even assuming that there were defects in the accounts, an assessment should have been made to the best of the judgment and when the turnover had not been interfered with, viz., the sales had not been disputed, arriving at a gross profit rate of 25% on the basis of additions made, invoking the provisions of sec. 40A(3), etc. were not warranted. He also sought to urge that the provisions of sec.40A(3) itself would not be applicable because the assessee was purchasing hides and skins, etc., and the purchases made were from shandies or from parties, who were genuine. He, therefore, pleaded for a reasonable quantum of income being determined. 9. The learned departmental representative, on the other hand, stated that the ITO had made specific additions and these additions should not have been interfered with. The mere fact that by disallowing a portion of the purchases u/s 40A(3), which resulted in large additions, he submitted, would not be a justification for reducing the quantum when the assessee was clearly hit by the provisions of the afo....
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....ses from these parties may be fictitious. Obviously, the subsequent elaborate enquiries made showed that these parties were genuine and at least in the case of M/s Universal Trading Co., even a sales tax order has been produced. Also no addition has been made on the score that the purchases from these parties were fictitious or the amounts borrowed from these parties were fictitious. There is, therefore, no reason to suspect that payments aggregating to Rs. 70,857 to these three parties were not genuine. So also in respect of payments aggregating to Rs. 2,19,121 it is stated admittedly that the purchases were from Shandies, commission agents, etc., and, in our view, there is nothing to doubt the genuineness of these payments. The disallowance made u/s 40A(3) on this score was Rs. 2,19,121. 11. However, this brings us to a very important aspect of the books of account. We have already set out the reasons which weighed with the ITO in making the addition of Rs. 1,40,000 towards inflation in purchases. There were clear erasures and corrections and overwritings whereby the difference of Rs. 1,40,000 occurred. This is what the ITO could detect on scrutiny of the accounts. There is....
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....not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the Income-tax Officer may make an assessment in the manner provided in section 144." In the Full Bench decision of the Madras High Court in the case of P. S. Subramaniam Chettiar & Sons v. Joint CTO [1966] 18 STC 357, it has been stated at page 362 as under : " Broadly speaking, in the taxation laws of this country, be it income-tax or sales-tax, assessment by best judgment as a distinct category of power has come into practice and wherever the Legislature thought fit, it expressly conferred that power upon the Assessing Authority." (Emphasis supplied) The above observations are clear authority for the proposition that a distinct category of power has been conferred by the Legislature upon the assessing officer to make a best judgment assessment (see section 145(2)] where he is not satisfied about the correctness or completeness of the accounts of the assessee. It has also been stated by the aforesaid provision that such an assessment is to be made in the manner provided u/s 144, i.e., all relevant material ....
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....ng Factory [1966] 60 ITR 95(SC). In the case of M.M. Ipoh v. CIT [1968] 67 ITR 106 (SC), the discretion given to the I.T.O. to bring, to tax either the income of the association collectively or the shares of the members of the association separately, was challenged as offending Article 14 of the Constitution of India. In the course of the judgment Shah, J. speaking for the Supreme Court, observed at pages 112 and 113 as under :--- " Section 3 of the Income-tax Act does not, it is true, expressly lay down any policy for the guidance of the Income-tax Officer in selecting the association or the members individually as entities in bringing to tax the income earned by the association. Guidance may still be gathered from the other provisions of the Act, its scheme, policy and purpose, and the surrounding circumstances which necessitated the legislation. In considering whether the policy or principles are disclosed, regard must be had to the scheme of the Act. Under the Act of 1922, the Income-tax Officer is required to issue a general notice calling upon all persons whose total income during the previous year exceeds the minimum nor chargeable, to tax to submit a return of income, Th....
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....er section 34 and section 35 are mutually exclusive in their operation, but whether in a given case, the statutory requirements are satisfied. If in a given case the requirements of both section 34 and section 35 are satisfied, the Income-tax Officer can have recourse to either. That in such a case there is overlapping will not bar recourse to either section at the choice of the assessing authority." (Emphasis supplied) 14. In the case of State Bank of Travancore v. CIT [1986] 158 ITR 102/24 Taxman 337 (SC), Sabyasachi Mukharji, J. with whom Ranganath Misra, J. concurred, has formulated in the course of the judgment certain propositions relating to the concept of real income and adoption of the same for assessment purposes. The propositions, which are relevant from the judgment of his Lordship in so far as the present case is concerned, are the following :--- (a) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (b) The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well-recognised limits. Thereafter hi....
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....tracted. The Act clearly provides in such cases that the I.T.O. may make an assessment in the manner provided u/s 144, i.e., to the best of his judgment. In coming to this conclusion that this is the more preferable method to be followed in this case, we have not read the Act so as to defeat any provisions thereof, and in our view, we have given due regard to the concept of real income and applied it with care and within the well-recognised limits, which does not defeat any fundamental principle of law of income-tax as developed, as enjoined by the Supreme Court in the case of State Bank of Travancore. Merely because a best judgment assessment is made, it does not mean that any relevant material in the books of account should be discarded or ignored. In the present case, we proceed to compute u/s 145(2) the total income to the best of our judgment as under :--- Income as admitted Rs. 88,240 Inflation in purchases as culled out from the entries in the Rs. 1,40,000 books of account which we have considered as constituting only material relevant for making a best judgment assess- ment since the accounts are not correct and complete in view of the facts detailed earli....