1. This appeal is instituted by the assessee against the order of the CIT(A) for the asst. yr. 1994-95 on the ground that the CIT(A) erred in law and on the facts in holding that s. 44AE is applicable in the case of the assessee though the assessee owns more than 10 trucks and that the additions confirmed by the CIT(A) including addition of Rs. 41,030 on account of silver are bad in law and on the facts and circumstances of the case.
2. A search operation under s. 132 of the IT Act, 1961 was conducted on 27th July, 1992 in the business and residential premises of the assessee. The assessee's main source of income is from truck plying and the assessee owns 14 trucks. In the previous year relevant to this assessment year the assessee has shown gross receipt at Rs. 35,01,643 and the expenses at Rs. 28,91,435, excluding the depreciation on trucks and payment of interest. The income works out to Rs. 6,10,208 and after considering depreciation on trucks and payment of interest as claimed by the assessee the net income works out to Rs. 35,658 from 14 trucks.
The AO came to the conclusion that only the gross receipts received from M/s Bombay Goods Transport Garrage, Nagpur are verifiable and the expenses shown by the assessee are totally unverifiable as no other supporting documents/vouchers are maintained. According to him, it cannot be said that the assessee has maintained any books of account.
He, therefore, estimated the net income truck plying business at the rate of Rs. 24,000 per truck per annum totalling to Rs. 3,36,000 as against Rs. 35,658 shown by the assessee.
3. Before the CIT(A) it was submitted that since the assessee has maintained more than 10 trucks, provisions of s. 44AE are not attracted and income cannot be computed by taking a resort to that section. It was also submitted that the assessee has maintained books of account and details of expenses were given to the AO and that it was because of heavy interest liability and benefit of 40 per cent depreciation that the net income has been reduced. It was further pleaded that the assessments for the asst. yrs. 1992-93 and 1993-94 were made although they were covered by search operation and income returned was accepted although the state of account was the same. The assessee also gave comparative figures for the asst. yrs. 1992-93, 1993-94 and 1994-95 and pleaded that the assessee has shown more income for the asst. yr.
1994-95. It was also argued that no incriminating materials were found which could show that either the accounts maintained were wrong or income had been concealed by manipulation of account.
4. The AO was also heard by the CIT(A) and he stated that except filing certain details on books of account were produced and no vouchers were produced for verification. He further argued that the provisions of s.
44AE are mandatory and are applicable when trucks owned are 10 or less and that the assessee gets a premium if income returned is accepted and, therefore, the Art. 14 of the Constitution is violated.
5. The CIT(A) considered the submissions and arguments and perused the entire materials on record and came to the conclusion that the assessee's case is not covered by s. 44AE as he derives income from more than 14 trucks but at the same time he observed that it does not mean that the basis for computing income as given in that section cannot be applied in assessee's case. He also found that the assessee has not maintained proper books of account and the accounts are not correct and complete and that mere giving details of expenses is not enough. According to him, as the expenses are unverifiable, income from truck plying has to be estimated on some realistic basis. He entirely agreed with the AO's argument and held that any interpretation other than his interpretation would be violation of Article 14 of the Constitution, which guarantees equality before law. He also pointed out that the returned income of last two years was accepted because provisions of s. 44AE were then not operative. He, therefore, confirmed the estimation of income by applying the same yardstick of s. 44AE i.e., at the rate of Rs. 24,000 per truck per annum.
6. Being aggrieved, the assessee has preferred this appeal to the Tribunal. The learned counsel for the assessee submitted that all receipts are admittedly vouched and are verifiable. He further submitted that the AO did not verify the expenses although vouchers were available as per paras 10 and 11 of the assessee's submission placed at p. 2 of the paper book. He also invited our attention to assessee's note placed at p. 5 of paper book and assessee's letter to AO placed at p. 7 of paper book and submitted that the assessee has maintained accounts, but no attempt was ever made to examine the accounts and verify the expenses. The representative of the assessee reiterated before us as well that the assessment in past assessment years, i.e., 1992-93 and 1993-94 were completed after search and returned income was accepted and that the assessee has shown better results for asst. yr. 1994-95. It was further submitted that the CIT(A) was unduly influenced by the AO's oral remark that the assessee was uncooperative and for that neither the record nor the assessment order speaks of it. He invited our attention to para 2 of the CIT(A)' order and contended that the Department has taken contradictory stand as on one hand the CIT(A) has mentioned that the books of account and documents were seized and on the other hand the AO has remarked that it cannot be said that the assessee has maintained any books of account.
The learned counsel for the assessee also contended that the provisions of s. 44AE are not applicable to the assessee and that the CIT(A) himself records a finding that last two years" income were accepted as provisions of s. 44AE did not then operate. According to the representative of the assessee such provisions do not apply to the assessee even this year as 14 trucks are owned by the assessee. It was further contended that the provisions of s. 44AE are not mandatory but they are subject to the provisions of sub-s. (6) of s. 44AE. He also pointed out and contended that the CIT(A) is not competent to comment on the intention of the legislation and cannot call in question the classification of assessees made by the legislation. In order to support his argument and contention, he placed reliance on following decisions :Union of India vs. A. Sanyasi Rao 7. In view of this he urged that the income shown by the assessee should not have been disturbed by the Department.
8. The learned Departmental Representative, on the other hand, submitted that the Department's case is not that the provisions of s.
44AE are applicable but only rationale and yardstick laid down in that section are followed. He clarified that the AO has not invoked the provisions of the s. 44AE. He pleaded that only details of expenses were filed but no supporting evidence were either filed or produced by the assessee. He vehemently argued and strongly supported the order of the AO and the CIT(A).
9. In reply, the learned counsel for the assessee submitted that no materials have been found and seized and no reasons have been assigned for estimating the higher income and that no comparative cases are given by the Department while assessee's own case is the best guide.
10. We have carefully considered the rival contentions, relevant facts and materials placed on the record and we have also gone through the case laws on which reliance is placed by the learned counsel for the assessee.
11. This is a search and seizure case and while making assessment the AO has admittedly issued notices under ss. 142(1) and 143(2) and he has also mentioned the compliance thereof by the assessee, as it is evident from para 2 of the assessment order. The AO has estimated the income on the ground that the expenses are unverifiable and it cannot be said that the assessee has maintained any books of account. Thus, he has denied the maintenance of the books of account itself. As contrary to that, the CIT(A) has mentioned in his order that the books of account and documents were seized in the course of search and seizure operation. We find that to that extent the assessee's contention is correct. The CIT(A) has also pointed out that according to the AO regular books of account were not maintained. This simply means that books of account were maintained. He has further observed that the accounts are not correct and complete as they are not properly maintained and as only gross receipts are verifiable. Thus the CIT(A) has accepted the maintenance and existence of the books of account irrespective of their position. According to him, they are not correct and complete as only gross receipts are verifiable. In our opinion, directly or indirectly he also agrees with the AO and intends to convey that the expenses were not verifiable. Except this, neither the AO nor the CIT(A) has pointed out any defects or any infirmity in the books of account of the assessee. As against the observations made by the AO and the CIT(A) we find that the assessee has filed a note along with the return which is placed at p. 5 of the paper book and in which it is mentioned that this year the assessee has maintained the accounts. Part of the note is extracted as under : "The income from the very beginning was shown on an estimation basis. However, this year we have maintained accounts from which we furnish herewith the details of gross freight received and the expenses incurred. The truck plying income for the year is Rs. 6,10,208.06 which has been rounded off to Rs. 6,10,000 as shown in the computation of income. We have not deducted the depreciation (non-cash expenditure) and interest on instalments paid from this, which has been separately calculated and deducted in the computation of income. The working of depreciation and interest has already been submitted. Further, details if required shall be furnished." 12. Before the CIT(A) also the assessee has stated in a written submission placed at p. 1 of the paper book that the assessee is in possession of all documentary evidence to support his income and expenditure. The relevant paras 10 and 11 of the submission are reproduced as under : "10. That the learned AO suo motu came to the conclusion that no expenses are verifiable, and working under the shadow of s. 44AE, without mentioning the section directly in the assessment order, computed income under s. 44AE of the IT Act. No attempt was ever made to try and verify the expenses. It seems that as soon as the return was filed; the learned AO had made up his mind that he would complete the assessments by applying the provisions of s. 44AE of the IT Act.
11. That the appellant is in possession of all documentary evidence including statements of expenditure under various heads to support the income and expenditure." 13. It is noticed that in spite of all these submissions made by the assessee neither the AO nor the CIT(A) has pointed out as to how the expenses are not verifiable, which expenses are not verifiable and how the books of account maintained by the assessee are not correct and complete or not properly maintained. In our opinion, it was a statutory duty of the AO and the CIT(A) to examine the method of accounting employed by the assessee and (i) to see whether or not it is regularly employed and (ii) to determine whether the income or profit or gains of the assessee can properly be deducted therefrom. It is settled principle that the power of rejection of books of account is to be reasonably and judicially exercised. But in this case we find that this had not been done so.
14. It is also pertinent to note that the authorities below have failed to give strong and sufficient reasons to indicate that the books of account of the assessee are unreliable, incorrect and incomplete before rejecting the same. They have also not given reasonable opportunity to the assessee of being heard and for offering explanation regarding defects in the accounts. In our opinion, therefore, in the absence of finding in respect of method of accounting employed by the assessee, that the income could not be properly deduced therefrom and also in the absence of granting reasonable opportunity to the assessee of being heard, the accounts of the assessee could not have been rejected and no addition could have been made to the income returned by the assessee.
Our view is duly supported by the following decisions : 15. In the case of McMillan & Co. (supra), the Hon'ble Supreme Court has held as under : "The words 'in the opinion of the ITO' in the provision to s. 13 of the Indian IT Act, 1922, do not confer a mere discretionary power, but in their context impose a statutory duty on the ITO to examine in every case the method of accounting employed by the assessee and (i) to see whether or not it is regularly employed and (ii) to determine whether the income, profit or gains of the assessee can properly be deduced therefrom. The decisions as to the method of accounting is to be arrived at first by the ITO after a careful scrutiny of the accounts whether they be simple or complicated, and the power is to be reasonably and judicially exercised, which excludes any subjective or arbitrary decision by the ITO but the power so exercised is not clothed with finality and is not excluded from review by the AAC and in reviewing the order of the appellate authority can exercise the same powers which the ITO could exercise." "Accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. The Department has to prove satisfactorily that the account books are unreliable, incorrect or incomplete before it can reject the accounts. Rejection of accounts should not be done light-heartedly." "And since there was no finding that the method of accounting employed by the assessee was such that the income could not be properly deduced therefrom, the accounts of the assessee could not be rejected and no addition could be made to the income returned by the assessee." 18. On merit also we find that neither the AO nor the CIT(A) has pointed out any particular item of expenditure which is not vouched. In the light of claim of the assessee before the authorities below in writing that the assessee has maintained books of account this year and is also in possession of all documentary evidence to support his income and expenditure, it was the bounded duty of the AO and the CIT(A) to verify and indicate the particulars of expenditure which were not vouched. In that case also it would have been a good case for separate addition and not for rejection of books of account. Our view is duly supported by following decision : (1) In the case of R. B. Jessaram Fatehchand vs. CIT (1970) 75 ITR 33 (Bom) where addresses of purchases were not shown in the case of cash transaction and books of account were rejected, the Hon'ble Bombay High Court held : : "In our opinion, the assessee's account books are to be accepted, unless, on verification, they disclosed any faults or defects, which cannot be reasonably and satisfactorily explained by the assessee." In the instant case neither any faults nor defects in the books of account are pointed out by the Department nor any opportunity of explaining such defect has been granted by the authorities below.
(2) In the case of C. M. Francis & Co. (P) Ltd. vs. CIT (1970) 77 ITR 449 (Ker), where purchases of arecanuts were supported only by assessee's bought notes and books of account were rejected, the Hon'ble Kerala High Court held that the fact that the purchases of arecanuts were supported only by the assessee bought note was no ground for the application of either the proviso to s. 13 of the 1922 Act or the proviso to s. 145 of the 1961 Act.
(3) In the case of Shri Ram Arora vs. CIT (1971) 80 ITR 78 (All) the Hon'ble Allahabad High Court held as under : "If the ITO finds that certain charges and Commission were claimed, though such expenditure had not in fact been incurred by the assessee, that may be a good ground for disallowing such expenditure but from that circumstances it cannot be said that the income of the assessee cannot be deduced from the accounts maintained by him." 19. In the case of the assessee also the Department had not made out a case for rejection of books of account although it would have been a good case for disallowing such expenditure which were not vouched according to the AO. But unfortunately the authorities below have failed to point out the items which are not vouched.
20. In the case of Md. Umer vs. CIT (1975) 101 ITR 525 (Pat) where in the absence of cash memos the sales were not verifiable and where certain transactions were noted in lump sum the Department estimated the assessee's sale, Hon'ble Patna High Court held as under : "that the only two defects found by the ITO for rejecting the book profits were that, in the absence of cash memos, the sales were not verifiable and that certain transactions were noted in lump sums. No finding was recorded by the Departmental authorities as to the unacceptability of the method and irregularity of the account kept by the assessee. It is well settled that in the absence of such a finding recorded by the authorities, the book results cannot be ignored or brushed aside. It was not a case of rejection of the assessee's accounts under s. 145(2) of the IT Act, 1961; it was a case under the provisions of the proviso to sub-s. (1) of s. 145.
Once, therefore, the method of accounting employed by the assessee has been regularly employed and income, profits and gains could properly be deduced from such regularly employed method of accounting, that is the end of the matter for the purpose of the proviso to sub-s. (1) of s. 145. There was no finding with present case that any of the entries in the books of account was not correct, there was no finding that the assessee was not employing a method of accounting and there was no finding that such a method of accounting had been irregularly employed by the assessee. In the absence of such finding, there being no reason germane to the unacceptability of the book results, it had to be held that the Tribunal and the authorities below had no materials before them, on the basis of which it could be said that the trading results were not verifiable and that, therefore, they should not be acceped, nor was it their case that the trading results could not be deduced from the entries of the books of account regularly employed.
Consequently, the assessment made in pursuance of the proviso to s.
145(1) would be vitiated." 21. It is also seen that the AO and the CIT(A) have completely ignored the assessee's note submitted along with the return and the written submission filed before the CIT(A) and have jumped to the conclusion that the expenses are not verifiable and books of account are not correct and complete without giving a specific reason, itemwise, disallowable, details and particulars of expenses not vouched and without giving any reason for books of account being incorrect and incomplete. In fact that allegation of assessee is that although the books of account are maintained and vouchers are kept as given in writing by the assessee, the AO did not verify the expenses. Before the CIT(A) also the assessee gave in writing that the AO suo motu came to the conclusion that no expenses are verifiable. To our surprise the CIT(A) has also completely ignored the written submission of the assessee as quoted above and failed to face the challenge or failed to confront the AO with the same, when the AO appeared before him to represent the Department. Mere allegation of non-co-operation on the part of the assessee without mentioning in the order and without any evidence is only an afterthought because the contention of the assessee that neither the record nor the assessment order speaks of non-co-operation, is not controverted by the learned Departmental Representative by producing any material or evidence. We also notice that although statutory notices under s. 142(1) and under s. 143(2) were issued by the AO nowhere in the assessment order it is mentioned that the assessee has not complied with the terms of notices or has not co-operated with the Department. In view of all these and also in the absence of any evidence and material such allegations deserve to be ignored.
22. The assessee has also brought to our notice the particulars and details of the assessment for asst. yrs. 1992-93, 1993-94 and 1994-95 and has pleaded that the returned income for the asst. yrs. 1992-93 and 1993-94 was accepted by the Department but although the assessee has shown better results for the asst. yr. 1994-95 under consideration the Department has estimated the income at a very high figures. On perusal of assessment order for asst. yr. 1992-93 placed at p. 10 to 12 of paper book we find that the income disclosed by the assessee is accepted by the Department. It is also observed that the assessee has shown comparatively better results than the results shown in asst. yrs.
1992-93 and 1993-94 which are accepted by the Department. This is also not a case of the Department that any incriminating books of account and documents or materials were found in the course of the search and, therefore, the conclusion arrived at by them is based on any such material. As no material was found in the course of search to suggest the higher income and as better results are shown in this year on the basis of books of account maintained, the action of the authorities below for estimating higher income cannot be justified.
23. In his order the CIT(A) has stated that the returned income of last two assessment years was accepted because provision of s. 44AE were then not operative. While commenting in such a manner the CIT(A) has contradicted himself. In the beginning of para 3 of his order on one hand he has mentioned that since the assessee derives income from more than 14 trucks his case is not covered by s. 44AE while on the other hand in the same very para he has observed that the returned income of last 2 assessment years was accepted because provisions of s. 44AE were not operative. Since the assessee was owning 11 trucks in asst. yr.
1992-93 and 12 trucks in 1993-94 the provisions of s. 44AE would not have been applicable had the same section been in operation.
24. Although it is a futile exercise on our part to deal with applicability of provisions of s. 44AE, yet because much has been argued by both the sides, it has become imperative and essential on our part to decide the matter on merit. We have already held that the Department has not made out a case either under s. 145(1) or 145(2) to enable it to estimate the income of the assessee. Without making out such a case for estimating the income the Revenue authorities have jumped to the conclusion to estimate the income as per rationale and yardstick laid down in s. 44AE. Thus, the Department has placed much more emphasis on mode and manner in which the income of the assessee is to be estimated and while doing so their conclusion has become subjective and suffers from several legal infirmities. It is noticed that the AO has applied the provisions of s. 44AE without mentioning this section in his order and the CIT(A) has confirmed the estimate at the rate of Rs. 24,000 per truck per annum although according to him the assessee's case is not covered by the provisions of s. 44AE.According to the CIT(A) a person having more number of trucks cannot be at premium as compared to a person having less number of trucks, for tax purposes and any interpretation other than this would be violation of Art. 14 of the Constitution, which guarantees equality before law.
Like CIT(A) the learned Departmental Representative has also justified the action of the AO on the ground that the provisions of s. 44AE are not invoked by the AO but only rationale and yardstick laid down in that section has been adopted.
25. We cannot approve the view taken by the Departmental authorities firstly because it is not a case of estimation of income and, therefore, the mode and manner in which the income is to be estimated is immaterial and irrelevant and secondly as the assessee owns more than 10 trucks, provisions of s. 44AE are not applicable. Provisions of s. 44AE are not mandatory as claimed by the Department. Thus applicability is subject to provisions of sub-s. (6), which says if the evidence is produced, book results are to be accepted. Moreover, the CIT(A) is not competent to comment on legislative intents and has no jurisdiction to interpret the Act as firstly he is a creature of the Act and secondly there is no ambiguity in the statutory provisions.
26. In the case of Keshavji Ravji & Co. (supra) the Hon'ble Supreme Court has held as under : "As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the legislature cannot then be appealed to whittle down the statutory language which is otherwise unambiguous." According to the ratio of this decision the interpretation of legislative intent is not permissible as statutory provisions under s. 44AE are unambiguous." 27. Then the CIT(A) says that any interpretation other than his own is in violation of Art. 14 of the Constitution which guarantees equality before law. In our opinion, the CIT(A) is not correct as provisions of s. 44AE are very clear and unambiguous and, therefore, they did not need any other interpretation as made by the CIT(A).
28. In the case of Madho Pd. Jatia (supra), Hon'ble Supreme Court has held as under : "It is well settled that there is no equity about tax. If the provisions of a taxing statute are clear and unambiguous, full effect must be given to them irrespective of any consideration of equity. Where, however, the provisions are couched in language which is not free from ambiguity and admits of two interpretations a view which is favourable to the subject should be adopted."Union of India & Anr. vs.
A. Sanyasi Rao & Anr. (supra) also helps the cause of the assessee and goes against the Department as Hon'ble Supreme Court has held that s.
44AC is a valid piece of legislation and is an adjunct to and explanatory to s. 206C and it does not dispense with the regular assessment as provided in accordance with ss. 28 to 43C of the Act. It is in this contest that sub-s. (6) of s. 44AE provides for an assessment under s. 143(3).
30. In our opinion the legal fiction created in s. 44AE is applicable only to the persons who own not more than 10 goods carriage or trucks and this fiction cannot be extended to others. In the case of Arvind Bhogilal (supra) Hon'ble jurisdictional High Court has held as under : "The principle is well-settled that a legal fiction is to be limited for the purpose for which it has been created and cannot be extended beyond that legitimate field." 31. Respectfully following the decisions of jurisdictional High Court as well as of the apex Court we hold that the CIT(A) was not justified in confirming the estimation of income by the AO on these grounds as well.
32. Thus looking to the issue under consideration from all angles we come to the conclusion that the Departmental authorities were not justified in estimating the income of the assessee. In view of this, considering all the facts and circumstances of the case and for the reasons given above, we hold that the AO was not justified in making such assessment on estimate basis and the CIT(A) was not justified in confirming the same and, therefore, their orders to that extent cannot be sustained in the eyes of law. Accordingly, the addition is deleted.
33. Ground Nos. 2 and 3 relate to the addition of Rs. 41,030 on account of silver. During the course of search silver articles weighing 8,440 kgs. valuing Rs. 54,707 was found. Assessee's explanation was that the silver articles represent partly articles of Pujaghar some are not pure silver and some are received as gifts by assessee, his wife and children from time to time on different occasions. According to the AO these articles are not shown in the assessee's wealth statement as on 31st March, 1993. He, therefore, considered the status of the assessee and other factors and treated 25 per cent of silver articles as explained and for balance he added Rs. 41,030 to the total income of the assessee.
34. Before the CIT(A) the assessee raised the same arguments which were put forth before the AO. The CIT(A) confirmed the addition as the explanation of the assessee was not supported by any evidence and the relief given by the AO was quite reasonable.
35. Learned counsel for the assessee submitted that looking to the status of the assessee having more than 14 trucks, etc. the possession of 8 kgs. of silver articles is quite normal and reasonable. The learned Departmental Representative, on the other hand, relied on the orders of the authorities below.
36. Considering all the facts and circumstances of the case as well as the status of the assessee we hold that the possession of 5 kgs. of silver articles for such an assessee would be fair and reasonable. In the absence of evidence the addition on account of balance silver articles is upheld.