TaxTMI 
TaxTMI 
2011 (7) TMI 1274
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....evenue were dismissed. The issue, in these appeals, is whether the best judgment assessment made by the Income-tax Officer, Kakinada, estimating the gross profit from the assessees' arrack business at 40 per cent. of the purchase value is sustainable in law and if not what would be the estimate of gross profit as per the principles of best judgment assessment ? 2. The fact of the matter is not in serious dispute. The respondent-assessees (the arrack contractors), at the relevant point of time, were engaged in the business of selling arrack. For the assessment years 1993-94 and 1995-96, these assessees assessed either as individuals, partnership firms or association of persons (AoPs), filed their returns of income admitting a net loss. The Assessing Officer did not accept the returns. He took up assessment under section 143(3) of the Act. Objections were invited with regard to the nature of the concern ƒ_" whether it is a firm or an association of persons ; justification for the expenditure claimed ; and profit/loss shown in the return. The assessees filed their explanation. They contended that, due to prohibition on the sale of arrack introduced from September 30, 1993, b....
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....tch), wherein the Tribunal held that estimation of turnover at eight (8) times of the purchase price and 1 per cent. thereon as profit would be reasonable. Indeed there is no dispute that this order was followed in all the other common orders by which the appeals of the assessees were allowed and those of the Revenue were dismissed. 6. The senior standing counsel, Sri S. R. Ashok, submits that, when estimation of income under section 145 of the Act was held to be justified by the Tribunal, interference with the estimation of gross profit by the Assessing Officer as confirmed by the Commissioner of Income-tax (Appeals) is uncalled for. The senior counsel would further submit as follows. The best judgment assessment involves an element of guess work. When the assessee has not proved the correctness of the books of account, or has not produced any record to support his claim as to the taxable income, it is always open to the Assessing Officer to estimate the income and profit therein as per similar business data. In the arrack business the profit margin is very high and the expenditure and facilities are minimal. The Assessing Officer is justified in disallowing the expenditure claim....
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....e provisions of the Act for the relevant assessment year in determining the income-tax liability of an assessee who is liable to pay tax under the Act. In computing the income, sections 5 and 7 and the provisions in Chapter IV of the Act provide the modalities. While doing so, deductions to be made in computing the total income are enumerated in Chapter VI-A. Chapter VIII deals with rebates and reliefs to be allowed in computing income-tax. 11. The law mandates that every person shall furnish a return of the total income if it exceeds the maximum amount which is not chargeable to income-tax. Chapter XIV contains the procedure for assessment and Chapter XIV-B contains the procedure for block assessment pursuant to search and seizure taken in cases of tax evasion. Besides these provisions, the Income-tax Act contains the machinery provisions for collection and recovery of tax (Chapter XVII), refunds (Chapter XIX), settlement of cases (XIX-A), appeal/revision system (Chapter XX) and penalties imposable under the Act (Chapter XXI). 12. In determining the income-tax liability of a person, computation of the total income of the assessee is the first stage which is sometimes complex. Th....
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....n the case of section 113 or, vide the Finance Act. As long as the charge is on 'total income' of the previous year and so long as the rate relates to the subject-matter of the tax, there is nothing to prevent Parliament from fixing the rate. But the rate must be applied to the 'total income' and the tax that an assessee has to pay must be at the rate in respect of the total income of the previous year." 14. The term "assessment" is an inclusive definition. "Assessment" includes reassessment (section 2(8) of the Act). The understanding of the scope of "assessment" is necessary as, in these cases, we are concerned with the computation of income for the purpose of determining or assessing income-tax payable by the respondent-assessees. In C. A. Abraham v. ITO [1961] 41 ITR 425, the Supreme Court quoted with approval the observations of the Privy Council in CIT v. Khemchand Ramdas [1938] 6 ITR 414, to the effect that "the word "assessment" is used as meaning sometimes the computation of income, sometimes the determination of the amount of tax payable and sometimes the whole procedure laid down in the Act for imposing liability upon the taxpayer". The word "assessment"....
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....e tax payable and sometimes the whole procedure laid down in the Act for imposing liability upon the taxpayer. The word "assessment" would certainly take within its fold, "computation of income as well as determination of tax payable thereon". The immediate question, therefore, would be on what basis income is computed although the determination of the tax liability would depend on the Finance Act passed by Parliament to be applicable for each assessment year. The computation of income, unless specifically provided for by the Act is ordinarily left to the choice and option of the person liable to pay the income-tax. Every taxpayer is expected to disclose all types of income contemplated under the Act, namely, income from salary, income from other sources, etc. If any assessee fails to disclose various types of income truthfully or the Assessing Officer comes to a conclusion that the income is either not fully disclosed or improperly computed, he can then himself compute the income of a person liable to pay the tax. Sections 144 and 145 of the Act are relevant and are quoted hereunder. "144. Best judgment assessment.-(1) If any person- (a) fails to make the return required under....
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....ided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144." 18. The above two provisions empower the Assessing Officer to make assessment of the total income to the best of his judgment and determine the tax payable by the assessee. If a case falls under any of the three categories under section 144(1) of the Act, it is mandatory for the Assessing Officer to make a best judgment assessment. In a case falling under section 145(3) of the Act, discretion is given to the Assessing Officer to make a best judgment assessment in the manner provided under section 144 of the Act. For more clarity, we shall indicate different situations hereinbelow. 19. The mandatory best judgment assessment is to be made in any of the four cases : (a) If any person fails to make the return under section 139(1) of the Act and has not made a return or a revised return under section 139(4) or (5) of the Act ; (b) if any person fails to comply with all the terms of a notice issued under section 142(1) of the Act ; (c) if any person fails to comply with a....
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.... Deo [1970] 76 ITR 690 (SC), the scope of the best judgment assessment power has been explained by the Supreme Court in a number of decisions. In Raghubar Mandal Harihar Mandal v. State of Bihar AIR 1957 SC 810, the assessee was engaged in bullion business. It was assessed to sales tax for seven quarters under the Bihar Sales Tax Act, 1944. For three quarters the assessee did not file returns. The Sales Tax Officer (STO), in exercise of the power under section 10(4) of the said Act, assessed the tax applying the principle of best judgment assessment. In respect of four quarters, though returns were filed, the STO rejected them and passed separate assessment orders. The assessee lost the appeal and, therefore, moved a revision before the Board of Revenue. The same was dismissed observing that the books of account filed by the assessee were not dependable and, therefore, the Assessing Officer was bound to assess the tax. At the assessee's instance, the case was referred to the High Court of Patna. The High Court upheld the contention of the State that the Sales Tax Officer is entitled to make an assessment on any figures of gross turnover. Before the Supreme Court, the issue was ....
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....g Officer to adduce proof in support of his estimate. After reviewing the case law, the Supreme Court did not agree with the view taken by the High Court that the assessing authority must have material before it to prove the exact turnover suppressed. It was held that if there is a reasonable nexus between the basis adopted by the assessing authority and the estimate of escaped income, it would suffice the test of validity of best judgment assessment. It is apt to quote the following relevant observations (page 277 of 90 ITR): "The task of the assessing authority in finding out the escaped turnover was by no means easy. In estimating any escaped turnover, it is inevitable that there is some guess-work. The assessing authority while making the 'best judgment' assessment no doubt should arrive at its conclusion without any bias and on rational basis. That authority should not be vindictive or capricious. If the estimate made by the assessing authority is a bona fide estimate and is based on a rational basis, the fact that there is no good proof in support of that estimate is immaterial. Prima facie, the assessing authority is the best judge of the situation. It is his '....
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....laimed even though they were unvouched and unverifiable. The method adopted for allowing expenses has some rationality, but estimating the gross profit at 40 per cent. of the purchases is utterly unreasonable and arbitrary, and does not fit into any of the known principles of best judgment assessment. Even a microscopic examination of the assessment order in all the cases does not even give a clue as to how an arrack contractor would be able to reap profit at 40 per cent. of the purchase price of arrack. 28. The Commissioner of Income-tax (Appeals) affirmed the findings of the Assessing Officer treating the assessee as an association of persons following the decision of the Supreme Court in Biharilal Jaiswal (supra). The estimation of gross profit at 40 per cent. of the purchase price of arrack was also affirmed observing that there is nothing wrong as the books of account were rejected on account of non-substantiation of the turnover, and all major expenses. The reasons for adopting such a method of estimation of profit at 40 per cent. of the purchase price are not forthcoming even from the appellate authority. The rejection of books of account and non-substantiation of the turno....
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....ooks properly ; but that is not an insuperable difficulty. If the books are not properly maintained, or are suspicious or unacceptable otherwise, they can away be rejected and a best judgment assessment made. The level of profits in such trade in a given area, region or State can always be kept in mind while making a best judgment assessment and/or while determining the truth or genuineness of accounts. The existence of some honest traders even in the specified goods cannot be ruled out." 30. The Supreme Court, while affirming the High Court judgment, observed that section 44AC of the Act denies equality of treatment, unfair and arbitrary as the arrack contractors are denied the reliefs under sections 28 to 43C of the Act, which contain the procedure for computation of income from business. Impugned order of the Income-tax Appellate Tribunal 31. In all the orders impugned in these appeals, the learned Tribunal followed its earlier decision in the case of Anakapalle Municipal Units Arrack Shops (supra). In some of the cases, the Tribunal followed the order dated August 31, 2001, in I. T. A. No. 17/H/1997 against which I. T. T. A. No. 253 of 2003, which is one of the cases in this....
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....nditure is arbitrary and excessive. We further hold that sales, which are admittedly unverifiable should be estimated at eight times of purchase price and net profit should be estimated at 1 per cent. of such estimated sales or declared sales, whichever is more, clear of all deductions and allowances, and if the profit so estimated is less than the profit declared should be accepted." 33. From the above observations, we are convinced that the Tribunal considered (i) the sales shown by the assessees vis-a-vis the purchase price for estimating the sales at eight (8) times the purchase price ; (ii) various orders passed by the Revenue authorities as well as the Income-tax Appellate Tribunal, Hyderabad ; and (iii) estimated the net profit at 1 per cent. of the estimated sales or declared sales, whichever is higher, after considering all kinds of deductions and allowances. There is no dispute before us that the Revenue did not choose to file an appeal against the consolidated order dated May 30, 2009, in Anakapalle Arrack Shops. Be that as it is, for the reasons infra, we are of the considered opinion that estimation of net profit at 1 per cent. in arrack business is certainly on the l....
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....ess and the expenses involved like cost of arrack paid to the Government, royalty paid to the Government, payment of taxes to the Government, rentals paid for setting of shops and all other miscellaneous expenses, estimation of net profit at 1 per cent. of the estimated sales is reasonable. The senior counsel for the Revenue, however, disputes this. 35. What would be a reasonable estimate of the profit with reference to purchase and/or the total sale value Section 44AD of the Act is a special provision for computing profits and gains in civil construction business. It mandates a sum equal to 8 per cent. of the gross receipts paid or total to the assessee in the previous year on account of construction business or a higher sum that may be declared by the assessee in his return of income shall be deemed to be the profits and gains from the business. The counsel would commend to us that, applying the principle in section 44AD of the Act, the rate of percentage of profit assessed at 8 per cent. of the cost of purchase of arrack, as is done by the Tribunal, is reasonable. We are, however, not in agreement with this. Section 44AD of the Act does not put a ceiling at 8 per cent. of gross....