The only effective ground raised in this appeal by the Revenue reads as under : "The learned CIT(A) has erred in law and on facts in reducing the addition from Rs. 14,16,912 to Rs. 1,00,000 holding that net business income should be estimated at 0.50 per cent on the turnover of Rs. 2 crores." 2. The assessee is a partnership firm dealing in cloth on wholesale basis. A return of income was filed by the assessee on 24th June, 1987, showing a total income of Rs. 60,000 on estimate. In the statement of total income filed by the assessee mentioned that since there was a search under s. 132 at the business premises of the assessee on 10th July, 1985, and since the books of accounts and other relevant documents were seized by the Department, the said return of income was being filed on estimate and that a revised return of income would be filed after obtaining copies of necessary records. It was also mentioned therein that the assessee firm had been dissolved w.e.f. 23rd October, 1985. Notices under s. 142(1) and under s. 143(2) of the Act were issued to the assessee fixing the hearing of assessment proceedings on 20th February, 1989. Apparently, along with the said notices a detailed questionnaire was also issued to the assessee requiring the assessee to produce trading account, P&L a/c, balance sheet, quantitywise analysis of monthwise sales and purchases, details of opening and closing stock, etc. On 20th February, 1989, the assessee addressed a letter to the AO vide which the AO was requested to grant a further period of 15 days to file the abovementioned details. On the same date the AO issued another notice to the assessee refining the hearing of the case on 2nd March, 1989. There was no compliance with the notice. Subsequently, on 13th March, 1989 the AO issued an order under s. 142(2) after obtaining prior permission of the CIT and vide the said order the assessee was required to get its books of accounts audited by an appointed auditor and submit a report of the auditor in the prescribed form being Form No. 6B. On 12th June, 1989, the assessee forwarded a report from the said appointed auditor from which it transpired that the auditors in a forwarding letter written by them, stated that "no audit report in any manner and more particularly in Form No. 6B as required under r. 14A of the IT Rules can be prepared in view of the facts that the books of accounts had been claimed to have been lost by the assessee". In the meantime, vide letter dt. 15th April, 1989 received by the AO on 17th April, 1989, the assessee intimated to the AO that the books of accounts of the assessee relevant to the year under question were lost while in transit in an auto-rickshaw. It was also stated therein that a police complaint in regard to loss of such books had already been lodged and that an advertisement in regard to such loss of books had been published in a local Gujarati paper. In the said letter it was also mentioned that the said books of accounts were lost during transit from ITO to the assessees place of business on 10th March, 1989 and that on the next working day i.e. on 13th March, 1989, the said fact was intimated to the AO orally. The AO was of the opinion that the loss of books was a concocted story. He observed that whereas the assessee addressed a letter to the appointed auditors on 27th March, 1989, in response to a letter dt. 20th March, 1989, from the said auditors requiring the assessee to furnish a list of complete books of accounts, stating that the assessee firm had been maintaining cash book, purchase register, sales register, general ledger and debtors "register, the assessee nowhere mentioned in the said letter the fact in regard to the loss of books. He further observed that it was only on 3rd April, 1989, that the assessee chose to inform the auditors in regard to the above-mentioned fact of loss of books. The AO also noted several discrepancies in that the complaint with the police was lodged on 17th March, 1989, and that the advertisement published in the newspaper was even later, i.e. on 24th March, 1989. The AO was further of the opinion that the complaint lodged with the police was inadequate. In the absence of books of accounts, the AO proceeded to complete the assessment ex parte under s. 144 of the IT Act, 1961. The AO noted that according to the sales register of the assessee, which was in possession of the Department, being seized during the course of search and which was for the period from 1st April, 1985, to 31st May, 1985, i.e., for 2 months the sales as per the sales register came to Rs. 90,92,953. Since the assessee had stated that the firm was dissolved on 22nd October, 1985 and that there was no closing stock on the said date, the AO estimated the sales for the remaining period of the previous year i.e., for 4 months and 22 days at Rs. 2 crores. The total sales of the assessee were, therefore, estimated at a sum of Rs. 2,90,92,953. Taking note of the rate of gross profit in similar firms, the AO applied a gross profit of 6.5 per cent on such estimated turnover to arrive at the gross profit for the year. He thereafter proceeded to bifurcate various expenses claimed by the assessee in three sections, viz.
(iii) miscellaneous expenses. The AO thereafter proceeded to disallow 40 per cent of such expenses after recording his reasons for doing so at length. After adopting the various steps as indicated above, the AO computed the total income of the assessee-firm at Rs. 10,90,853.
3. On appeal, the learned CIT(A) reduced the income to Rs. 1 lakh observing as under : "3.3. I have given a careful consideration to the issue at hand. I must admit that in the instant case a piquant situation exists. However, the said facts shall not and cannot detract any attention to decide the appeal one way or the other. The fact remains that the books of accounts are not available for examination on scrutiny. In my opinion, in such circumstances, it would not be material for the completion of the assessment or for that matter, for the purpose of deciding the appeal to dwell on it any further. It is not as if setting aside the assessment will serve any purpose either. I shall, perforce, have to proceed on the materials as available on the records including the past records of the appellant. In this view of the matter I must proceed to examine the appellants case in the perspective that are available. The CIT(A) AC has taken certain steps to arrive at the business income of the appellant. The first such step taken by the CIT(A) is in regard to estimation of the turnover of the assessee. No doubt, in the circumstances of the case an estimation is definitely called for. In doing so, however, one must admit that the appellants contention that the past records must not be ignored, cannot be brushed aside. The turn over of the appellant as per records which is stated to be in the possession of the Department for the immediately preceding two years are as under : In this behalf it has been pointed out before me that the total sales for asst. yrs. 1982-83 and for asst. yr. 1983-84 are Rs. 1,06,59,508 and Rs. 1,76,09,450 respectively. Reading all these facts in view, in my opinion the estimate of turnover of somewhere around Rs. 2.90 crores appears to be rather excessive, particularly when the previous year in question extended to a period of 6 months and 2 days only. In this view of the matter and having regard to the fact that there was a downward tendency in the turnover in the lean period in respect of earlier years, a fact which cannot be ignored or lost sight of in a best judgment assessment, I am of the opinion that it would suffice if the turnover of the balance period is estimated at a round figure of Rs. 1.10 crores or in other words, it would be fair to estimate the turnover of the appellant firm for the entire year at a sum of Rs. 2,00,00,000".
After estimating the turn over at Rs. 2 crores, the learned CIT(A) proceeded to make a reasonable estimate of the income of the assessee.
He noted that in the asst. yr. 1985-86 the assessee had declared net profit at 0.35 per cent which was accepted by the Revenue on the declared turnover. He, therefore, concluded that "Taking all these circumstances into consideration, I deem if fit to apply a net profit rate of 0.50 per cent of the total turnover of Rs. 2 crores as estimated earlier. This will give a figure of Rs. 1,00,000 in round figures. The CIT(A) is, therefore, directed to adopt the said figure for the income under the head "business etc." and to modify the assessment accordingly".
4. Shri H. S. Rai, the learned Departmental Representative submitted that the story of loss of books of accounts was a concocted one and no credence should be given to it. According to the Departmental Representative the preponderance of circumstances indicated that the assessee-firm was having substantial income and in order to reduce its tax liabilities it destroyed its books of accounts and put up a story that these were lost in transit. He submitted that the estimate of income by the CIT(A) at Rs. 1 lakh was arbitrary and on the lower side and the same deserves upward revision in view of peculiar circumstances of the case.
5. Shri S. H. Talati, the learned counsel for the assessee, submitted that there is nothing unnatural about the loss of books of accounts.
The books of accounts were lost in transit; a complaint was lodged with the police and an advertisement was published in local Gujarati newspaper and even till today the books of accounts have not been traced. He submitted that the estimate of income by the AO at Rs. 10,90,853 was arbitrary and highly excessive. In support of his contention he placed before us the following comparable chart : Pointing to the figures in the chart the assessees counsel submitted that only in one year in the past the net profit exceeded Rs. 85,000 and the chart further shows that there was declining trend in the business of the assessee. He therefore submitted that the estimate of income by the CIT(A) at Rs. 1 lakh was fair and reasonable.
6. We have considered the rival submissions and perused the facts on record. In this case there was a search and the books of accounts were seized. Later on books were released and the assessee was asked to get the same audited under r. 14A of the IT Rules. Thereafter the assessee informed the AO that the books of accounts had been lost in transit and the necessary proofs in the form of police complaint and an advertisement in the newspaper, etc. were also produced before the AO.The AO was not satisfied and held that the loss of books was a concocted story to destroy the books/evidence. The learned counsel for the assessee has made a statement at the Bar that the books of accounts have not been traced so far. Thus, it is a fact that the books of accounts were neither available before the AO nor before the CIT(A) and nor before us. Under the circumstances the only course left before the authorities below was to estimate the income taking into consideration the facts and circumstances of the case. The AO has completed the assessment under s. 144. It is well settled that assessment under s.
144 is a quasi-judicial process. We are aware of the fact that in a best judgment assessment there is an element of guess work/estimate but the same cannot be arbitrary and excessive. It will be worthwhile reproducing the following observations of the Honble Supreme Court in the case of State of Kerala vs. C. Velukutty "Judgment is a faculty to decide matters with wisdom, truly and legally, though there is an element of guess work in a best judgment assessment it shall not be wild one but shall have a reasonable nexus." It is an undisputed fact that the assessee-firm was dissolved and the income is to be estimated for a period of 6 months and 22 days. From the chart reproduced above filed by the assessee it is evident that in the asst. yr. 1983-84 net profit stood at Rs. 45,075, for asst. yr.
1984-85 at Rs. 51,630 and at Rs. 85,066 for asst. yr. 1985-86. Thus maximum profit for a full year in the earlier years stood at Rs. 85,066. The chart also shows that the sales had dropped to Rs. 2,31,61,435 in asst. yr. 1985-86 from Rs. 3,73,14,290 in asst. yr.
1984-85. Accordingly, in our opinion, the estimate of sales by the AO for the period of 6 months and 22 days during the year under appeal at Rs. 2,90,92,853 is highly excessive. In a case like this where the books of accounts are not available the best method will be to estimate the income by taking into consideration the facts and circumstances of the case and in our opinion, the CIT(A) was justified in estimating such income at Rs. 1 lakh for a period of 6 months and 22 days as against the income of Rs. 85,066 for a complete year i.e. asst. yr.
1985-86. Under the circumstances we decline to interfere.
8. I have the privilege to go through the order prepared by Shri B. L.
Chhibber, learned Accountant Member, but I do not subscribe to the findings on the only ground involved in this appeal of the Revenue and proceed to give out the facts of the case and reasons for arriving at different findings.
9. The only effective ground raised in this appeal by the Revenue is as under : "The learned CIT(A) has erred in law and on facts in reducing the addition from Rs. 14,16,912 to Rs. 1,00,000 holding that net business income should be estimated at 0.50 per cent on the turnover of Rs. 2 crores." 10. The facts relating to this are given in detail by learned Accountant Member. To sum up, it is mentioned that assessee-firm was engaged in cloth business on whole-sale basis in the year under consideration i.e., asst. yr. 1986-87. There was a search under s. 132 of the IT Act, 1961 (herein after referred to as the Act) at the business premises of the assessee on 10th July, 1985 and the books of accounts and other relevant documents were seized by the Department.
The assessee filed return of income for asst. yr. 1986-87 on 24th June, 1987 at a total income of Rs. 60,000 with a note that it is being filed on estimate basis as books were under custody of the Department and the same shall be revised after obtaining copies of the necessary records.
During assessment proceedings the AO issued a detailed questionnaire calling upon the assessee to produce trading a/c, P&L a/c, balance sheet, quantitywise analysis of monthwise sales & purchases details of opening and closing stock, etc. On 20th February, 1989, the date fixed by the AO assessee sought time to file the requisite details but the same were not filed. As AO was of the opinion that seized books of accounts of assessee firm were written in Sindhi scripts and accounts upto the date of search were not complete nor trading account, P&L a/c, balance sheet, etc. were submitted with the return of income, he sought permission of CIT for audit of the assessees accounts under s. 142(2A) of the Act. After that permission of CIT the books of accounts were released to the assessee on 13th March, 1989, (some confusion in dates and it should be some other date) and auditors Shah Dalal Shroff and Associates were appointed to conduct the audit. The assessee, however, vide letter dt. 15th April, 1989, received in the office of AO on 17th April, 1989, informed that all the books of accounts have been lost on 10th March, 1989, as the same were being taken back from the office of AO after verification. The auditors also submitted their reports to the effect that audit was not possible for want of the books of accounts which were said to have been lost. The AO examined the factum of loss of books of accounts and examined the concerned persons and concluded that assessee itself has caused loss of books of accounts and virtually the story set up by assessee firm about loss of books of accounts was concocted one. He was left with no other alternative but to proceed under s. 144 of the Act and he issued a notice to the assessee on 19th June, 1989, to show cause why the assessment should not be completed on the basis of past records of assessee-firm. He also gave out the details of total sales effected by the assessee for asst. yrs. 1984-85 and 1985-86 along with rate of GP for both the years. As the firm was dissolved on 22nd October, 1985, the AO estimated the sales for the period from 1st April, 1985 to 22nd October, 1985 at 2.9 crores as sale of Rs. 90 lacs were shown by assessee in its sales-register for April, 1985 and May, 1985. Later on he proceeded to estimate the GP. He proposed the rate of GP of 6.5 per cent on the total sales as in asst.
yr. 1984-85 the assessee had shown the GP at 2.84 per cent and in asst.
yr. 1985-86 it was 6.14 per cent. He considered the submissions of the assessee and confirmed the above estimate of total sales of Rs. 2.9 crores and rate of GP at 6.5 per cent. He further examined the factum of expenses. He was having in possession the rough cash books and debit notes of the assessee firm from 1st April, 1985, to 20th March, 1985, in which details of expenses were mentioned and some of debit-notes were found unstamped/unsigned. He took into consideration the reply of assessee dt. 23rd June, 1989, in which expenses were divided into three categories and after considering all the facts, he worked out the expenses for all the period from 1st April, 1985, to 22nd October, 1985, and deducted 40 per cent thereof in view of the facts that some of the debit notes were not signed nor stamped and 25 per cent deduction in expenses was being effected in all other related concerns of its group of assessee firm. He accordingly worked out GP of Rs. 18.91 lacs out of which he made the deduction of expenses giving out in para 9 of his order and net profits/total income was assessed at Rs. 14,16,912. The assessee came in appeal before CIT(A) who considered the facts which were brought on record. According to him the factum of loss of books is proved on record and he was to proceed on the materials which were available on record. He conceded to the submissions of the assessee-firm that past record of assessee should be considered to arrive at the total sales, rate of GP and the total income. He considered the fact that in asst. yrs. 1982-83, 1983-84, 1984-85, the assessee had shown the net profits @ 0.50 per cent, 0.25 per cent and 0.15 per cent of the respective turnover of the accounting period relevant to above referred to assessment years. He went on observing that net profit disclosed by the appellant in asst. yr. 1985-86, just preceding year to the year under consideration was 0.25 per cent which has been accepted by the Department and considering all other relevant facts, he deemed it fit to take net profits @ 0.50 per cent of the total turn over of Rs. 2 crores which he estimated as the correct in place of Rs. 2.90 crores worked out by AO and arrived at Rs. 1 lac at the total income of the assessee. This order of learned CIT(A) is subject-matter of this appeal preferred by the Revenue.
11. The learned Departmental Representative, Shri H. S. Rai submitted that story of loss of books of accounts was concocted one and AO has rightly disbelieved it on the basis of elaborate reasonings given in his order running from p. 4 to p. 11 of the assessment order and none of the factors out of it was considered by the learned CIT(A) nor the assessee-firm has been able to rebut the findings arrived at by the AO on this point. He justified the conclusion of AO on the basis of these findings of AO and further submitted that the amount of total sales arrived at by AO at Rs. 2.90 crores was based on the material available on record as AO did find the total sales of Rs. 90 lacs for two months and for remaining 4 months 22 days AO rightly estimated the total sale at Rs. 2 crores and in all Rs. 2.90 crores. He also invited our attention that rate of GP at 6.5 per cent was also rightly followed by AO on the basis of assessees own earlier rate of GP as well as on the basis of rate of GP shown by other firms of the same group which were working in the same business and from the same premises. He defended the action of the AO for deduction of 40 per cent of expenses and concluded that he is placing heavy reliance on the order of AO who has taken into consideration all relevant facts and circumstances. He also attacked the reasonings of learned CIT(A) to reduce the quantum of total sale to 2 crores and for adoption of net profit rate in disregard to the scientific analysis of all these facts made by AO.12. As against it, the learned counsel for assessee, Shri S. H. Talati has placed reliance on the order of CIT(A) and submitted one chart giving out the sales, purchase, GP expenses and net profit for asst.
yrs. 1983-84 to 1986-87 of assessee-firm and it was pointed out that net profit in respect of assessee firm was below 0.35 per cent prior to the year under consideration and CIT(A) was justified to increase it to 0.50 per cent and in such cases there was no justification for the order of AO which was based on mere surmises and conjectures.
13. To proceed with the fact of the case, undisputedly it is a case of search under s. 132 of the Act at the business premises of the assessee as well as other 5 related firms of this group. The books of accounts of the assessee and other documents as well as of other firms were seized by the Department. The assessee filed return of income at a total income of Rs. 60,000 on the basis of estimate with a note that the same shall be revised after books of accounts are available or copies thereof are made available to assessee-firm. In this case AO has observed that assessees books of accounts were in Sindhi scripts and audit under s. 142(2A) of the act was must and accordingly he released the books of accounts to assessee on 13th March, 1989, after getting approval of CIT, Gujarat-II, with a direction to get the audit done by Shah Dalal Shroff & Associates. Undisputedly audit could not be completed for alleged loss of books. The first point which requires scrutiny is whether theory of assessee that books of accounts were lost, is true account of affairs or it is a concocted story as observed by AO and if it was so then what was the motive of assessee-firm for setting up of such a concocted story.
14. To begin with the theory of the assessee, it was asserted by the assessee-firm that books were taken to the office of AO on 10th March, 1989, and when the same were being taken back to assessees premises in a auto-rickshaw then said driver of the auto-rickshaw fled away with all books of accounts of assessee-firm as well as other four firms of the same group on account of same dispute on payment of fare of auto-rickshaw. The matter was brought to the notice of AO next working day i.e., 13th March, 1989, and even reported to police station on 17th March, 1989, and even a note was published in newspaper "Sandesh" dt.
24th March, 1989, regarding the loss of books and the same were not traceable. The learned AO has examined each and every aspect of this theory in detail from p. 4 onwards to p. 11 of assessment order and the first point relating to it is about the date of hearing when books were brought to the office of AO in para 4 of his order, AO specifically mentioned that 10th March, 1989, was not the date fixed in the case of assessee. He referred to statement of Tahilram Parimal recorded on 26th May, 1989, under s. 131(1) in which he admitted that 10th March, 1989, was not the date fixed in the case. Even on prior dates no books of accounts of assessee were called by AO nor were presented. On account of these facts it was concluded by him that it was highly improbable that AO would be calling for the books of accounts on 10th March, 1989, which was not even the date fixed nor even the necessity for books of accounts. Further, Mr. Manchhani is said to have taken the books of accounts to the office of AO on 10th March, 1989 but when he was examined on this point, he was not able to give out the correct name of the building where he allegedly took the books of accounts. On the basis of discussions made by AO in para 5(II); it was concluded by AO that Mr. Manchhani had not taken the books nor he was aware of the building and he has been set up by assessee to give support to a false theory of loss of books.
15. The other aspect dealt by AO is that Laxman B. Manchhani was said to have brought the books to the office of AO and took the same back to the assessees premises in a auto-rickshaw and there was some dispute relating to payment of fare. As he went inside, the driver of auto-rickshaw fled away along with the books. This theory of dispute between said Laxman B. Manchhani and auto-rickshaw-driver about payment of fare has been dealt by the AO in para 5(I) of his order in detail and pointed out the relevant contradictions. I am also in full agreement with the findings of AO that if already Rs. 15 was paid by Mr. Manchhani to auto-rickshaw driver which he had demanded then where was the question of dispute relating to fare and what must have prompted the rickshaw driver to fled away with books of accounts which were valueless to him or to any one except the assessee and the Department. It strengthen the view of the AO that this Manchhani must have not come with the books to ITO building or returned in any rickshaw as alleged by him.
16. Not only this, other circumstances are also material which go to prove that this theory of loss of books is cock and bull story. It is the case of the assessee that books were called for by AO on 10th March, 1989, and after loss of the books, the factum of loss was reported on that very day at 1.15 p.m. as stated by Tahilram Parimal on 26th May, 1989, while the earlier plea of the assessee on this point through letter dt. 15th April, 1989, was that factum on loss of books of accounts was informed to AO orally on the immediate next working day i.e. 13th March, 1989. This was material contradiction that shows the different view adopted by assessee in relation to the fact of information given by assessee to AO and rightly concluded by AO that no information was actually given by assessee on 10th March, 1989, nor on 13th March, 1989.
17. The above conclusion of AO is supported by another important circumstance that in case books were lost on 10th March, 1989, then assessee-firm should have reported this fact to auditors also in their correspondence but in the letter dt. 27th March, 1989, issued by the assessee-firm in response to letter dt. 20th March, 1989, of Shah Dalal Shroff & Associates, the assessee stated to have maintained all the books and nowhere stated that books had since been lost. Inspite of 17 days passed the assessee did not bring the fact to the note of auditors even though auditors called for the books, goes to show that this theory was not believable one.
18. Further in para 5(IV), the AO has dealt with the statement of Pratap L. Avtani recorded on 30th May, 1989, and in reply to question No. 24 he stated that audit of all the five firms in relation to asst.
yr. 1986-87 was being done by Arvind Kr. R. Shah. It shows that on 30th May, 1989, itself the audit of books of assessee-firm which is one of those five firms was in progress. This creates high doubts in the theory of assessee.
19. Lastly the AO has dealt with the alleged FIR of assessee lodged at P. S. Naranpura, Ahmedabad, on 17th March, 1989, and note published in "Sandesh" news paper dt. 24th March, 1989. If the books of accounts were actually lost on 10th March, 1989, then why FIR was lodged on 17th March, 1989, and why complete details of loss of books and assessee-firm were not given in the note published in the newspaper.
Copy of FIR or newspaper have not been furnished before us. I am in agreement with the view of AO for disbelieving the factum of vagueness of FIR and note published in newspaper as well as delay caused in lodging of FIR and publishing of note.
20. On the basis of above and what has been mentioned by AO in para Nos. 4 & 5 of his detailed order, I also conclude that books of assessee-firm along with four other firms were not lost as mentioned in the story put up before authorities by the assessee-firm and it is for some ulterior motives that books of accounts have been withheld by the assessee and that has to be discussed in preceding paras.
21. After concluding that books of accounts have been withheld by the assessee-firm then AO was left with no other alternative except to go for best judgment on the basis of whatever material and books of accounts were available with him as audit was also not possible on account of wilful alleged loss of books of accounts, the AO proceeded to complete the assessment under s. 144(b) of the Act and that was the correct procedure adopted. The AO was expected to work out the approximate turnover, the rate of GP and total income of the assessee.
He rightly issued a show-cause notice, dt. 19th June, 1989, to assessee-firm mentioning that he was in possession of rough cash book from 1st April, 1985, to 9th July, 1985 and sales register written from 1st April, 1985, to 31st May, 1985, of the assessee-firm which were seized during the course of search. He proposed on the basis of rough cash books and sales register referred to above, the total sales for the period from 1st April, 1985, to 22nd October, 1985, during which period the firm was in existence, at Rs. 2.9 crores as sales register for the period from 1st April, 1985, to 31st May, 1985, revealed the total sales of Rs. 9,92,953 and for remaining periods of 4 months 20 days, he estimated sales at Rs. 2 crores. The reply of the assessee on this point as mentioned by AO in para 6 of his order was that sales of June, July and August months were lower than the sales of April & May and he proposed the sales at Rs. 10 lacs per month for June, July and August, 1985, and Rs. 15 lacs for September and Rs. 13 lacs for October, 1985. However, the AO has observed that there was no documentary evidence or other materials in support of this contention to believe that sale which was at Rs. 33.66 lacs in April, 1985 and Rs. 57,26 lac in May, 1985 (as per sales register in the possession of AO) fell down to Rs. 10 lac in the month of June, July and August, 1985.
The assessee could have furnished comparative chart of such stiff fall in the earlier years but nothing was done and AO was justified in estimating sales of Rs. 2 crores for five months approximately, on the basis of figures of sales in the months of April & May, 1985 which were not disputed by the assessee and his action is in conformity with the law laid down by their Lordships of Honble Supreme Court in the case of CST vs. H. M. Yusuf Ali (1973) 90 ITR 271 (SC) that ITO can make an estimation of suppressed turnover on the basis of materials before him.
I have nothing on record to differ from the said findings of AO for working out the estimated sales of Rs. 2.90 crores based on correct appreciation of facts and I confirm it.
22. Now comes the question of working out of GP. AO in his show-cause notice dt. 19th June, 1989, mentioned that assessee itself had shown GP at 2.84; in asst. yr. 1984-85 and 6.14; in asst. yr. 1985-86. He called upon the assessee to show cause why the GP @ 6.5 per cent should not be adopted as rate of GP was at increase side. The contention of the assessee was that GP at 6.5 per cent should not be treated but it should be taken on an average basis i.e. of last three years. The AO has rightly repelled this contention of assessee also. He has mentioned that the other connected firms of the assessee had been showing GP, at more than 6 per cent and he mentioned that in asst. yr. 1985-86 the rate of GP of the other two firms of that group operating from the same premises from where the assessee firm operates is as under : This approach of the AO was most appropriate one as the assessee firm as well as other two firms of same group have shown the rate of GP more than 6; then the rate of GP if taken at 6.5 per cent it should be treated as justified one and keeping in view the important aspect that books of accounts have been wilfully and intentionally withheld by the assessee by concocting a story of loss of books. I, therefore, confirm that view of the AO also and conclude that GP rate at 6.5 per cent was justified one.
23. The last point discussed by the AO relates to the expenses which were to be deducted to work out the total income. The AO was having rough cash books and some debit notes for the period from 1st April, 1985, to 20th May, 1985, and out of those some expenses in debit notes were found unstamped and unsigned. The AO called upon the assessee as to why the expenses relating to unstamped/unsigned debit notes should not be disallowed. The AO also worked out the expenses for remaining period on the basis of those expenses. The assessee gave reply thereof vide letter dt. 23rd June, 1989, in which he divided the expenses into the following categories : The assessee also furnished a detailed working of the percentage wise calculation of each type of expenses along with its relation to the figures of sales for asst. yr. 1983-84, asst. yr. 1984-85 and asst. yr.
1985-86. It was further, asserted by assessee that as its expenses were unverifiable and unvouched, 25 per cent of the expenses claimed may be disallowed and rest may be allowed as worked out. The AO considered each of the contention of the assessee relating to expenses directly connected to the figures of sales, expenses not related to the sales and those miscellaneous petty expenses and made a disallowance of 25 per cent of expenses as contended by assessee but further made 15 per cent cut in all the expenses on the basis that nothing was brought on record by assessee for working out the figures of expenses.
24. I have considered the submissions of the assessee before AO as well as perused the order of AO and learned CIT(A) has not discussed this aspect at all.
25. It is relevant to point out that I have confirmed the view of the AO for arriving at the estimated amount of sales for the period from 1st April, 1985, to 22nd October, 1985, on the basis that approach of AO to arrive at figures of Rs. 2.90 crores as estimated sale for that period is correct as AO was having details of sales as per sales-register of assessee from 1st April, 1985, to 31st May, 1985, amounting to Rs. 91 lacs approximately and further confirmed the view of AO about the rate of GP at 6.5 per cent on the basis of GP shown by assessee and sister concerns at the assessee-firm in the just preceding year and once that view of estimating of sale and GP is confirmed, it will be improper AO is allowed to make deduction in expenses @ 40 per cent. The amount of expenses available for 2 months were shown by the assessee and out of those some expenses were not only supported with initialled/stamped voucher(s) but those deductions of 25 per cent as conceded to by the assessee and in all 40 per cent deduction made by AO would have been justified in case we were taking exact figures of sales on the basis of books of accounts as well as rate of GP worked out on those figures but in the case in hand, as referred to above, its estimate of sales figures as well as of rate of GP though based on appropriate analysis of figures then no deduction in the amount of expenses is called for either in expenses relating to sales or not connected to sales or to miscellaneous petty expenses. Accordingly, I direct AO to give credit to assessee to all the amount of expenses as claimed by it and to work out amount of expenses on the same percentage for remaining amount for remaining period without any deduction what to say of 40 per cent and 25 per cent.
26. The result is that AOs view about treating the amount of sales at Rs. 2.90 crores and rate of GP at 6.5 per cent stands confirmed subject to allowability of the expenses to be worked out without any deduction.
The order of AO stands restored to that modification and appeal of the Revenue is allowed to that extent.
The Members having differed we refer the following question for the opinion of the Honble President : "Whether, on the facts and in the circumstances of the case, the learned CIT(A) is justified in reducing the business income from Rs. 14,16,912 to Rs. 1 lakh ?" There being difference of opinion between the learned Accountant Member and the learned Judicial Member on the issue involved following question has been referred for opinion of the Third Member : "Whether on the facts and in the circumstances of the case the learned CIT(A) is justified in reducing the business income from Rs. 14,16,912 to Rs. 1,00,000 ?" 2. I have the privilege to go through the orders recorded by the learned Accountant Member and learned Judicial Member. The relevant facts have been brought out and discussed at length in their orders and I need not repeat them for the sake of brevity. However, while recapitulating the facts in brief I find that there was a search at the business premises of the assessee on 10th July, 1985, and during the course of search the Department seized a rough cash book written for the period from 1st April, 1985, to 20th May, 1985, sales register for the period from 1st April, 1985, to 31st May, 1985, and certain vouchers. The assessee followed financial year as the accounting year.
The firm was closed on 22nd October, 1985. The assessee filed a return showing an income of Rs. 60,000 on estimate basis on 24th June, 1987, with a note in the statement of income to the fact that since books of accounts and other documents were seized, the return of income was filed on estimate basis and the revised return of income would be filed after obtaining copies of seized records. The AO issued notices under s. 142(1) and 143(2) on 20th February, 1989, along with a detailed questionnaire requiring the assessee to produce P&L a/c, balance sheet, trading account, quantitywise analysis of monthwise sales and purchases, details of opening and closing stock, etc. on 2nd March, 1989. According to the assessee as submitted in its letter dt. 22nd June, 1989, addressed to the AO xerox copies of certain seized books were given to the assessee on 2nd November, 1988, and copies of certain vouchers and other records were given as late as 26th May, 1989, and 29th May, 1989, and it was for this reason the assessee could not finalise the books of accounts of the period involved and also could not file the P&L a/c, balance sheet, and auditors report and revised return based thereon. On 2nd March, 1989, as per the assessee the AO was informed that the books of accounts are almost at the stage of finalisation. Subsequently on 13th March, 1989, the AO issued an order under s. 142(2A) after obtaining prior approval of the CIT requiring the assessee to get its books of accounts audited by an appointed auditor and to submit audit report in the prescribed Form No. 6B.Meanwhile the AO alleged to have asked the accountant of the assessee on 9th March, 1989, to produce the completed books of accounts and as per his directions an employee of the assessee brought the completed books of five concerns of the group to the Income tax office on 10th March, 1989, in seven bundles in auto-rikshaw and after making the payment of Rs. 15 for hire charges of the auto-rikshaw he went to seek assistance for carrying the 7 bundles to the office of the AO. The auto-rikshaw driver drove away taking the said books in seven bundles.
The assessee filed a FIR about the loss of the books with the police authorities on 17th March, 1989, and advertisement was also given in the local daily newspaper Sandesh on 24th March, 1989. According to the assessee the accountant Shri Motwani reported the incident to the AO on 10th March, 1989, and again on 13th March, 1989. When the books of accounts could not be found even on police complaint and advertisement it was treated as lost and the AO was informed in the letter dt. 15th April, 1989. The books of accounts having been lost the audit as required under s. 142(2) could not be carried out.
3. The AO did not accept the explanation so given about the loss of books and according to him the books of accounts were deliberately withheld and not produced before the Department. Under the circumstances the AO completed the assessment under s. 144 on the basis of the material available.
4. The AO noted that as per the sale register seized for the period from 1st April, 1985 to 31st May, 1985, sales recorded were of Rs. 90,92,953. As the firm was dissolved on 22nd October, 1985, the sales for the balance period of four months and 22 days was required to be estimated. The AO estimated for this period sales of Rs. 2 crores proportionate to that found recorded for two months. The AO thus estimated the total sales for the period from 1st April, 1985, to 22nd October, 1985, at Rs. 2,90,92,953 and applying a GP rate at 6.5 per cent thereon on the basis of the last years GP shown worked out the GP at Rs. 18,91,041.
5. The AO further noted that the various vouchers seized for the period from 1st April, 1985 to 20th May, 1985, contained certain vouchers unstamped and unsigned and on that count he held 40 per cent thereof as not allowable being not genuine. He then estimated the expenses under various heads for the balance period based on the expenses of last year and disallowing 40 per cent therefrom he estimated the allowable expenses from the gross profit at Rs. 4,74,129 and deducting the same from the GP adopted, he assessed the net profit at Rs. 14,16,912.
6. The learned CIT(A) for the detailed reasons given in his order adopted the sales at Rs. 2 crores and applying thereon a net profit rate at 5 per cent net profit was worked out and adopted at Rs. 1 lakh.
7. The learned Accountant Member in his order has upheld the order of the CIT(A) whereas the learned Judicial Member has concurred with the sales estimated by the AO at Rs. 2,90,92,953 and also application of GP rate thereon at 6.5 per cent. He has however directed the AO to allow the expenses as per the vouchers found for the limited period and the amount of expenses for the remaining period at the same percentage without making any deduction at 40 per cent.
8. I have heard the representatives of the Revenue as well as the assessee. The learned Departmental Representative advanced arguments in support of the order of the AO whereas the learned counsel for the assessee submitted that income adopted by the first appellate authority at Rs. 1 lac for a period of six months and 22 days is most fair and reasonable looking to the past history of the assessee as well as results for other concerns of the same group dealing in cloth on wholesale basis. He also invited attention to various documents and statements placed in the compilation relevant for the purpose.
9. I have given careful consideration to the facts, material on record and rival submissions. It is evident from the facts given that books of accounts prepared by the assessee for the period from 1st April, 1985, to 22nd October, 1985, was not available before the AO for whatever reason so as to enable him to ascertain and assess the correct income as reflected from the books of accounts maintained. The AO had therefore no alternative but to estimate the income based on such records available for the current year and the past trading results.
But the basis adopted for determining the income on estimate basis has to be fair, reasonable and judicious and not arbitrary or capricious.
In the present case there being no books of accounts available necessary details of opening stock, purchases, sales and expenses incurred under various heads for the current year were not available.
The AO under such situation could determine the income only by estimating the sales and applying a profit rate thereon. The AO therefore had to estimate the sale for the full accounting year in the first instance. The question that arises is what should be the fair and reasonable estimate of the sales for the period based on the records for the current year available and results of earlier years. I find that as per the sale register in the custody of the Department for the period from 1st April, 1985 to 31st May, 1985 the total sales are at Rs. 90,92,953. The sales for the balance period of 4 months and 22 days therefore required to be estimated. I find that sales declared by the assessee for earlier years was as under : The figures of sales for the asst. yrs. 1984-85 and 1985-86 for the first seven months are also available in the compilation and the same are as under : I also find from the monthwise details given for these years that the sales during first two/three months were higher whereas the sales in the remaining months had a downward trend. The sales figures for later assessment years are also available in the compilation and the same are as under : According to the assessee it had also sister concerns engaged in similar business of dealings in cloth on wholesale basis. Sales declared in the cases of sister concerns in the preceding years are as under : It appears from the sale figures available of earlier years that there was a peak season in the months of April and May for sales and thereafter there was a downward trend in sales. Moreover the accounting year for the current year comprised only of 6 months and 22 days whereas the earlier accounting years were of 12 months. Looking to the sales effected by the assessee in the preceding three years and also succeeding three years the sales adopted by the first appellate authority for the period of six months and 22 days in the current year at Rs. 2 crores are most fair and reasonable. The AO estimated the sales for remaining period of 4 months and 22 days proportionate to the sales disclosed for two months is not considered to be reasonable for the reason that the sales in the months of April and May were the maximum being the peak season whereas in the later months from June onwards the sales had shown a downward trend. There is also nothing on record to show that the assessee effected sales in the remaining period of 4 months and 22 days at the same proportion as found recorded for the months of April and May in sales register. The past records in such a situation are the best guide and the same cannot and should not be ignored unless there is a positive material to prove to the contrary.
There being no such material we have to fall upon the past records for estimate of sales. In this view of the matter I concur with the view taken by the learned Accountant Member upholding the estimate of sales at Rs. 2 crores.
10. Having estimated the sales a profit rate is to be applied thereon to determine the income. The details relating to purchases and expenses relating to trading account and also expenses relating to P&L a/c for the accounting year are not fully available. The vouchers seized give details in respect of majoori commission, dalali, salary, post and stamp, etc. for a limited period but necessary details about vatav, interest, purchases, etc. are not available even for the limited period. The AO has applied a GP rate on the sales estimated at 6.5 per cent. In other words he has estimated expenses relating to trading account in the shape of purchases, freight, majoori, etc. at 93.5 per cent of the sales. The expenses relating to P&L a/c in the shape of salary, stationary, dalali, commission, vehicle expenses, rent, postages, etc. for the full accounting period are also not available.
The AO, therefore, estimated the expenses relating to the P&L a/c partly on the basis of the vouchers available and partly on the basis of the last years expenses. The AO has thus firstly estimated the expenses relating to trading account and then expenses relating to P&L a/c to determine the total income. The first appellate authority found such a method adopted as cumbersome and faulty. He, therefore, applied a net profit rate of, 5 per cent based on the results of the earlier 3 years on the sales estimated. The learned Judicial Member has sustained application of GP rate at 6.5 per cent on the sales estimated and has further directed the AO to allow the expenses as claimed and to work out the amount of expenses on the same percentage for the remaining period without making deduction at 25 per cent or 40 per cent. As mentioned above the vouchers in the custody of the Department for a period of about 2 months are not complete as these contain no details for vatav, interest, depreciation, etc. Further, certain deductions are claimed by way of adjustment at the close of the accounting year by way of commission, etc. or certain expenses committed but not paid during the year. Thus the expenses relating to the P&L a/c to be computed in the manner indicated would not be complete and adequate to arrive at the correct income. Under the circumstances it would be fair and reasonable if net profit rate is applied on the sales estimated as based on the past records. I note that in the preceding three assessment years the net profit rate declared by the assessee was as under : I also find that in the cases of sister concerns the net profit rate declared for the preceding 3 assessment years is as under : The average net profit rate for the preceding three assessment years in the case of K. Tahilram is 0.37 per cent and in the case of Tahilram P.is 0.43 per cent. I also note that in the case of the assessee the net profit declared for the preceding 3 assessment years was less than 86,000 as per details below : Looking to the results of earlier three years in the case of the assessee as well as in the cases of 2 sister concerns where the business carried on was identical the net profit rate applied at 0.5 per cent on the estimated sales of 2 crores thereby determining the net income at Rs. 1 lac for the current accounting period of six months and 22 days is considered to be most fair and reasonable.
11. I accordingly concur with the view taken by the learned Accountant Member upholding the order of the first appellate authority wherein net income is adopted at Rs. 1 lakh applying a net profit rate of 0.5 per cent estimated sales of 2 crores.
12. This matter will now be placed before the Division Bench who heard the appeal for passing the majority view.