THE PR. COMMISSIONER OF INCOME TAX, RAJKOT 3 vs. GANGA GLAZED TILES PVT. LTD

Facts

The Revenue (Principal Commissioner of Income Tax, Rajkot) filed this Tax Appeal against an order of the Income Tax Appellate Tribunal (ITAT) dated August 10, 2018, for Assessment Year 2008-09. The appeal concerns additions made to the income of Ganga Glazed Tiles Pvt. Ltd. based on material collected by the Excise Department regarding suppressed sales. The Assessing Officer (AO) had rejected the assessee's books of accounts and estimated profit at 25% of suppressed sales, adding Rs. 1.11 crores. The CIT(A) reduced the profit margin to 9%. The ITAT allowed the assessee's appeal and rejected the Revenue's appeal. This appeal by the Revenue challenges the ITAT's order. The High Court notes that a coordinate bench had dealt with similar issues in the case of Vrundavan Ceramics (P.) Ltd.

Held

The High Court held that the Assessing Officer did not have sufficient material to make additions. The Excise Department's show-cause notices merely presented the department's view, which was yet to be established through adjudication proceedings. The AO had done little else besides confronting the assessee with the show-cause notice and eliciting a response. The AO did not bring independent material on record; the statements accompanying the show-cause notices did not automatically get established. The AO virtually shifted the burden of proving evasion to the assessee. The Court noted that the Excise proceedings were not finalized and that relying on them before adjudication was problematic. Therefore, the AO lacked the basis for making additions. The question of the percentage of sales for additions became redundant. The appeal was dismissed.

Key Issues

1. Whether, on the facts and circumstances, the Appellate Tribunal was justified in law and on facts in not appreciating the provisions of Section 145 of the Income Tax Act, 1961, which requires rejection of book results when the Assessing Officer is not satisfied about their correctness or completeness? 2. Whether, on the facts and circumstances, the Appellate Tribunal was justified in law and on facts in deleting the addition made on account of suppressed sales, using material collected by the Excise Department, including witness statements recorded during a search? 3. Whether, on the facts and circumstances, the Appellate Tribunal was justified in deciding the tax appeal against the Revenue despite setting aside the issue with a direction to verify the finality of proceedings by the Excise Department and assess the correct profit on suppressed sales? Assessee's contentions (as inferred from the judgment and the cited Vrundavan Ceramics case): The material collected by the Excise Department was not verified, statements were recorded behind the assessee's back, and the makers were not offered for cross-examination. The Excise show-cause notices were not adjudicated, and therefore, the AO could not rely on them. The AO shifted the burden of proof to the assessee. Revenue's contentions: The AO was justified in rejecting the book results under Section 145 and making additions based on the Excise Department's material, as there was evidence of suppressed sales.