Commissioner of Income Tax and Another vs Swastik India

V.G. Sabhahit, J.—This appeal by the revenue is filed being aggrieved by the order passed by the Income Tax Appellate Tribunal, Bangalore Bench "B" (hereinafter called as "the Tribunal" for short) in I.T.A. No. 1458/Bang/2003 for the assessment year 2000-01. The Tribunal has allowed the appeal and set aside the order passed by the Commissioner (Appeals), Hubli (hereinafter called as the "appellate authority" for short) in I.T.A. No. 18/HBL/CIT(A)/HBL/2003-04 dated 30-9-2003 confirming the order of assessment dated 26-3-2003.

The Respondent-firm filed its return of income for the assessment year 2000-01 on 30-10-2007 declaring the income of Rs. 1,95,400 and notice was issued u/s 143(2) of the Act, 1961 (hereinafter called as "the Act" for short) on 9-4-2001, and the Assessee was asked to produce the books of account and furnish the details and explanation for the queries raised. The Assessee is a manufacturer and dealer in wheat products. A survey was conducted on 3-10-2000 and during the course of survey, it is found that the Assessee had absolutely no stock book and separate manufacturing account. A sworn statement of Sri A.L. Kampli, partner of the Assessee-firm was recorded and it was stated by him that stock book is not maintained for raw materials and finished products. Besides, it was also stated by him that wheat was bought from Northern India, APMC Market, Hubli and also from villagers mostly on credit and out of total purchases 5 per cent, is on cash basis. Within 90 days the creditors including the villagers are paid off. Since the registered office is in Hubli and factory is in Shiraguppi village on Gadag Road, a sworn statement of Sri Nagaraj Narayan Kampli at factory premises was recorded who has also categorically stated that in the factory, on the spot sales are also made and purchase of wheat is done from farmers and they are paid cash within 10 days from purchase date. It was also found during the survey that cash book was written up to 24-3-2000 only and between 9-5-1999 to 8-12-1999 cash deficiency was found. The Assessee admitted the discrepancies and offered a sum of Rs. 10,95,000 to tax and filed return on October 31, 2000 and in the profit and loss account a sum of Rs. 11,50,000 is shown as income from other sources. Including this sum, the net result shown comprised of Rs. 1,91,040 over the income offered as per survey of Rs. 11,50,000, the trading results would be loss of Rs. 9,59,000. The firm had not incurred loss on any of the earlier assessing years and on close scrutiny of the books of account, the assessing officer found that total income of the Assessee-firm was computed as under:

Rs. Rs.

Income returned 1,95,400

Add:

For low G.P. declared (para 3) 3,72,080

Excess quantity obtained and sold (para 4) 2,69,050

Under job work (para 5) 37,080

Loss disallowed in respect of sales of bran to sister 1,02,420

concern (SPF) (para 6)

Difference in valuation of closing stock (para 7) 63,999

Trade discount disallowed (para 8) 1,52,154

Interest disallowed on account of diversion of funds sister concern (para 9) 37,716 10,34,499

Total income 12,29,899

Round off to 12,29,900

Tax thereon 4,30,465

Add: Surcharge at 10% 43,047

4,73,512

Add: Interest u/s 234B 2,21,516

Interest u/s 234C 4,174

6,99,202

Less: Tax as per 143(1) 75,229

Payable 6,23,972

Assessed u/s 143(3). Issue demand notice and challan accordingly. Penalty proceedings u/s 271(1)(c) initiated separately.

Being aggrieved by the said assessment order, the Assessee preferred an appeal before the appellate authority in I.T.A. No. 18/HBL/Commissioner (Appeals)/HBL/ 2003-04 and the appellate authority by order dated 30-9- 2003 dismissed the appeal and confirmed the order of assessment. Being aggrieved by the order passed by the appellate authority dated 30-9-2003, the Assessee preferred appeal before the Appellate Tribunal and the Tribunal by order dated 25-5-2005, allowed the appeal deleting the additions made by the assessing officer. Being aggrieved by the said order of the Appellate Tribunal, the revenue has preferred this appeal.

The appeal was admitted on 19-10-2006 for consideration of the following substantial questions of law:

(i) Whether the Tribunal was correct in holding that there were no irregularities pointed out by the assessing officer in order to reject the books of account and estimate the gross profit based on the previous years despite the fact that in the survey it was found that the Assessee did not maintain stock books, no separate books indicating the raw materials and finished goods, discrepancies found in cash book, etc., and on oath the Assessee had undisclosed income of Rs. 10,94,000 which he came forward to offer for tax and consequently recorded a perverse finding?

(ii) Whether the Tribunal was correct in holding that a sum of Rs. 2,69,050 held by the assessing officer as excessive quantity obtained and sold based on the actual procurement of rava, bran, atta by ascertaining the actual wastage was nothing but excessive wastage claimed which was not taken into consideration and consequently, recorded a perverse finding?

(iii) Whether the Tribunal was correct in holding that a sum of Rs. 37,080 paid to the sister concern for job work had not been correctly disallowed despite the assessing officer holding that there was no evidence to support such a claim and consequently recorded a perverse finding?

(iv) Whether the Tribunal was correct in holding that a sum of Rs. 1,02,420 added to the total income of the Assessee which was found by the assessing officer that purchase and sales from sister concerns M/s. New Swastik Flour Mills, M/s. Swastik Poultry Feeds and one other had taken place and only one bill, used in three cases dated 31-3-2001 which clearly indicated that it was mere adjustment entry in order to avoid tax?

(v) Whether the Tribunal was correct in holding that if the value of the closing stock is increased then the assessing officer had to reduce the gross profit in the next year and therefore addition of Rs. 63,999 the difference in valuation of closing stock could not be added without basing such finding on any cogent reason and consequently recorded a perverse finding?

(vi) Whether the Tribunal was correct in proceeding to hold that the trade discount of Rs. 1,52,154 which had been disallowed by the assessing officer on the ground that the credit notes or any evidence to show that such discount had been extended to various parties should be made available had not been produced therefore, the same had been disallowed cannot be dispensed with when granting relief and consequently, recorded a perverse finding?

We have heard the learned Counsel appearing for the Appellants and learned Counsel appearing for the Respondent.

The learned Counsel appearing for the Appellants/Revenue submitted that the assessment order would clearly show that the partner of the Assessee-firm has, vide an affidavit offered income of Rs. 11,50,000. However, on the basis of the scrutiny of accounts and also having regard to the fact that the stock book of raw materials and proper books of account had not been maintained, even as per the affidavit filed, it is found that an addition of Rs. 10,34,499 which is lesser than the amount offered by the Assessee to be shown as income and the same had been rightly confirmed by the Appellate authority and the Tribunal without considering the said fact that the partner of the Assessee-firm had filed an affidavit stating that stock book of raw materials purchased and finished products had not been maintained had offered to show income of Rs. 11,50,000 and on verification of the materials available on record, the assessing authority had added income of Rs. 10,34,499 which is less than the amount offered by the partner of the Assessee himself. Therefore, the very basis upon which the Tribunal has proceeded to consider the appeal is baseless and contrary to material on record, as the Tribunal has proceeded on the basis that the books of account had been maintained in accordance with law and therefore, the order of the Tribunal cannot be sustained and all questions of law have to be answered in favour of the revenue and the order passed by the Tribunal is liable to be set aside.

On the other hand, the learned Counsel appearing for the Respondent-Assessee submitted that the Assessee would not have filed the appeal if he had offered to include income of Rs. 11,50,000. Books of account had been maintained and the impugned order passed by the Tribunal is based upon the material on record and does not call for interference in this appeal and questions of law may be answered in favour of the Respondent and against the Appellants.

We have given careful consideration to the contentions of the learned Counsel appearing for the parties and scrutinized the material on record. The material on record would clearly show that the order passed by the Tribunal impugned in this appeal is perverse and arbitrary as the very basis upon which the Tribunal has proceeded to consider the appeal is without reference to the material on record and the fact that before the assessing officer the partner of the Respondent/Assessee-firm had filed an affidavit stating that stock of raw materials and finished goods had not been maintained and that he had offered to include income of Rs. 11,50,000. The Tribunal has overlooked the said fact and proceeded on the basis that neither low rate of gross profit nor absence of stock register justifies making an addition on an arbitrary basis. In order to reject the entries made in books of account there must be definitive evidence to show that either wrong entries are made or certain entries are not made to record the transactions. The Tribunal has failed to note that the additions made by the assessing officer was on the basis that no stock book of raw materials and finished goods has been maintained as stated by the partner of the Assessee-firm on oath and entries as shown in the return was not reflected in the account books and were not entered in the record of transactions. Therefore, it is clear that the very basis on which the Tribunal has proceeded on the presumption that the Assessee had maintained all the books of account including the stock book of raw materials and finished products and other books of account and that the return entries made in the return were based upon the account books produced is baseless and the finding arrived on such presumption cannot at all be sustained in the eyes of law as the finding of the Tribunal is based upon the presumption and therefore contrary to material on record and perverse and arbitrary. However, since the Tribunal is the final authority on the question of fact and this Court cannot go into the question of fact in this appeal filed u/s 260A of the Act, it would be appropriate that I.T.A. No. 1458/(Bang)/2003 (assessment year 2000-01) is remitted to the Income Tax Appellate Tribunal, Bangalore Bench "B" for passing fresh order in accordance with law. Accordingly we answer all the questions of law in favour of the revenue and against the Assessee and pass the following order.

The appeal is allowed. The order passed by the Income Tax Appellate Tribunal, Bangalore Bench "B" in I.T.A. No. 1458(Bang)/2003 (assessment year 2000-01) dated 24-4-2005, is set aside and the appeal is remitted to the Income Tax Appellate Tribunal, Bangalore Bench "B" for fresh disposal in accordance with law.