Shyam Bidi Works vs Commissioner of Income Tax

@DELETEUPPERDATA

Tarun Agarwala, J.—The appellant is engaged in the business of manufacture and sale of bidis having various products in the State of Uttar Pradesh, Madhya Pradesh, Bihar and West Bengal. According to the appellant, its products is an excisable commodity under the Central Excise Act. The records relating to stocks, raw materials, etc., are required to be maintained and subjected to inspection from time to time by the Central excise authorities. For the assessment year 1986-87, the Assessing Officer rejected the books of account and assessed the income at Rs. 42,21,498. The asses-see, being aggrieved, filed an appeal, which was allowed by an order dated March 29, 1993, and the assessment order was set aside with a direction to the Assessing Officer to decide the matter afresh. Based on the said direction, the Assessing Officer passed a fresh order under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act) dated February 29, 1996, again rejecting the books of account under section 145(2) of the Act. The Assessing Officer noticed that the gross profit of rate shown for the year in question by the assessee at 9.46 per cent, was less as compared to the previous years. The assessee was accordingly asked to explain the low gross profit rate. The assessee submitted that the gross profit rate for the previous year was 7.95 per cent, which was accepted by the Assessing Officer and, therefore, the gross profit rate of 9.46 per cent, shown for the year in question was correct indicating an increase in the gross profit rate roughly by 1.5 per cent. The Assessing Officer after comparing the gross profit rates for the last seven years from the assessment year 1980-81 onwards found that the gross profit rate for the assessment year 1982-83 was 10.38 per cent, and for the assessment year 1984-85 it was 9.98 per cent, and, therefore, held that the average gross profit rate for the year in question has to be treated above 9.46 per cent. The Assessing Officer accordingly estimated that the gross profit rate for the assessment year 1986-87 would be 10 per cent, and, consequently, added a sum of Rs. 6,05,421 on the turnover holding that this amount would also cover the likely additions towards income on account of certain specific defects pointed out by the Assessing Officer in its order, such as the absence of stock register for the tobacco leafs, packing material like bardana, craft paper, tissue papers, consumption of raw material, etc. The Assessing Officer found that the assessee had not maintained day-today stock register of various raw materials consumed by it for its manufacturing activity and that the scrutiny of books revealed that certain bills were posted on a later date.

The assessee, being aggrieved, filed an appeal, which was allowed by an order dated April 12, 1996, deleting the addition of Rs. 6,05,481. The appellate authority deleted the addition on the reasoning that in the immediately preceding assessment year, the gross profit rate disclosed was 7.95 per cent, which was virtually accepted by the appellate authority in that year in which various additions made on account of excess consumptions of tobacco leafs, craft papers, labels, gunny bags were deleted. On that reasoning, the appellate authority found that there was no reason to sustain the addition made by the Assessing Officer for the year in question on the same basis.

The Revenue, being aggrieved by the order of the Commissioner of Income-tax, filed an appeal before the Tribunal, which was allowed and the order of the Commissioner of Income-tax was set aside and the order of the Assessing Officer was restored. The Tribunal considered the gross profit rate of the assessee for the previous years, where it had exceeded more than 10 per cent, and also considered the gross profit rates of some assessment years, which was less than 10 per cent, and after considering the submissions of the parties held that the Assessing Officer''s order was liable to be upheld as it gave a better reasoning for arriving at the average gross profit rates than the reasoning given by the appellate authority. The Tribunal also found that once the account books has been rejected, which the appellate authority had also affirmed in which case, there was no reason for the appellate authority to depart with the reasoning given by the Assessing Officer if it was not found perverse. The Tribunal, accordingly, set aside the order of the appellate authority and confirmed the order of the Assessing Officer.

The assessee being aggrieved, filed the present appeal under section 260A of the Act, which was admitted on the following questions of law:

"(i) Whether the reasons given by the Income-tax Appellate Tribunal for setting aside the order of the Commissioner of Income-tax (Appeals) are legally sufficient to meet the requirement of ''reasoned order''?

(ii) Whether the reasons given by the Income-tax Appellate Tribunal for restoring the order of the Assessing Officer and not remanding the matter are legally sufficient?"

Admittedly, the books of account has been rejected by the Assessing Authority, which was affirmed by the appellate authority. Once the books of account are rejected, the turnover has to be estimated and, while estimating the turnover, the past record of the assessee, his method of accounting and his general reputation in the market becomes relevant. One such commercial practice to determine the turnover of a particular year is, to take into account the stock position of the raw material.

In P. Venkanna Vs. Commissioner of Income Tax, Mysore, it was held that the profits estimated during earlier period may in a proper case guide the estimation of a profit of a subsequent year. It was held that the earlier estimates will have relevance only if the conditions in which the business activity of the later period is conducted are similar to those of the earlier period.

In the light of the aforesaid, we find that the Assessing Officer has given a categorical finding with regard to the absence of stock register for tobacco leafs, packing material and consumption of raw material. The Assessing Officer found that the stock register of various raw materials consumed by it for its manufacturing activity was not maintained and the books of account were not maintained on a day-to-day basis. While rejecting the books of account, the Assessing Officer assessed the turnover based on the gross profit rates indicated by the assessee in his previous assessment years and found that the gross profit rates were above 10 per cent, for the assessment years 1982-83 and 1983-84 and found that in relation to the turnover, the gross profit rates has to be treated more than 9.46 per cent. On this reasoning and considering the average gross profit rates of the assessee from the assessment years 1980-81 to 1986-87 averaging 9.62 per cent, the Assessing Officer fixed the gross profit rate at 10 per cent, for the year in question, which would also cover any likely additions to income on account of certain specific defects found in the books of account as pointed out by the Assessing Officer. We consequently, find that the Assessing Officer had given adequate reasons for estimating the gross profit rate of the assessee at 10 per cent.

The appellate authority affirmed the rejection of the books of account as well as the defects pointed out by the Assessing Officer with regard to non-maintenance of the stock registers of various raw materials consumed by the assessee for its manufacturing activities. However, the Commissioner of Income-tax was swayed by the fact that the gross profit turnover for the immediately preceding assessment year was 7.95 per cent, and, in that assessment year, the appellate authority had also deleted the additions on account of excess consumption of tobacco leafs, craft papers, etc. In that scenario, the appellate authority found that the gross profit rate shown by the assessee at 9.46 per cent, was justified.

We are unable to subscribe with this view inasmuch as the appellate authority has nowhere held that the defects pointed out by the Assessing Officer with regard to the absence of stock registers for tobacco would have the same fate as was given by the appellate authority for the immediate previous assessment year. Consequently, the logic applied by the appellate authority for the assessment year in question was not correct, especially when the appellate authority had affirmed the rejection of the books of account.

We find that the business operation of the assessee is the same for the assessment year in question as compared with the previous assessment years. Consequently, profits estimated in the previous years is a safe-guide for estimation of the profits for the assessment year in question for estimating the turnover since the business activity conducted by the assessee remains the same. If we take the average, gross profit rates from assessment year 1980-81 to 1985-86, we find that the average gross profit rates comes to 9.62 per cent. On the other hand, if we take the average of the gross profit rates of the last three years that is from 1983-84 to 1985-86, we find that the average gross profit works out to 10.42 per cent. Consequently, we are of the opinion that the estimation of the gross profit at 10 per cent, by the Assessing Officer was perfectly correct, which requires no interference. We are also of the opinion that estimation of gross profits is a question of fact which normally should not be interfered unless the estimation is perverse and ill-logical and has no reasonable nexus with the business activity vis-a-vis the turnover of the assessee.

Normally, the Tribunal being the last fact finding authority is required to give its own reason howsoever brief it may be. The Tribunal is under a legal obligation to record its own finding on the submissions of the parties and where the order of the Tribunal does not contain any reason, in that case, such an order could not be allowed to stand as there would be no order in the eyes of law.

In the instant case, we find that the Tribunal has considered the submissions of both the parties and considered the findings of the assessing authority as well as the order of the appellate authority and, thereafter, concluded that the Assessing Officer''s order was based on reasoning in taking the average gross profit rate and that the reasoning adopted by the appellate authority was incorrect. We are of the opinion that the reasoning given by the Tribunal though in brief was not cryptic, which could result in non-application of mind. We are of the opinion that the Tribunal applied its mind and, thereafter, passed the order after considering the submissions of the parties.

Consequently, for the reasons stated aforesaid, we are of the opinion that the Tribunal had passed a reasoned order setting aside the order of the appellate authority and affirming the order of the Assessing Officer. We are also of the view that the Tribunal was justified in not remanding the matter, inasmuch as the reasoning adopted by the Assessing Officer was perfectly justified and in accordance with the average estimation of the gross profits after comparing it with the gross profit rates with the previous years. For the reasons stated aforesaid, the appeal fails and is dismissed. The questions of law are answered accordingly.