(O&M) COMMISSIONER OF INCOME TAX,LDH vs. M/S MAHESHWARI SYNTHETICS,HOSHIARPUR
What did the High Court hold?
The High Court upheld the ITAT's order of remand. It clarified that while a mere remand order might not raise a substantial question of law, directions within such an order can give rise to such questions. The Court answered Question Nos. 1, 3, and 4 in favour of the appellant (Revenue) to the extent indicated by the judgment. Regarding Question No. 2, the Court directed that the gross profit rate shall be re-calculated upon remand. The reasoning for answering questions in favour of the Revenue implies that the ITAT's observations on the estimation of suppressed sales and the deletion of additions were considered to be in error, necessitating a re-evaluation. The principle is that directions in a remand order can be subject to appeal if they raise substantial questions of law. The operative direction is that the assessment shall be done on the basis of this judgment upon remand, with specific re-calculation of the GP rate.
What were the facts?
The appeals by the Commissioner of Income-tax (Central), Ludhiana, are against the order of the Income Tax Appellate Tribunal (ITAT) which remanded the matter to the Assessing Officer (AO) for re-working undisclosed income for the block period 01.04.1986 to 30.08.1996. The ITAT directed the AO to separately calculate and segregate income for each block year. A search under Section 132 of the Income Tax Act, 1961, was conducted on 30.08.1996, leading to the seizure of cash, jewellery, assets, and voluminous records from the Maheshwari Group, involved in manufacturing paints and related products. The AO passed assessment orders under Section 158BC, identifying suppressed sales and income. The ITAT, while rejecting the contention that proceedings were void ab initio, considered submissions regarding incorrect estimation of suppressed sales and erroneous Gross Profit (GP) rates.
What were the issues?
1. Whether, on the facts and in the circumstances of the case, the ITAT was right in law in observing that suppressed sales in a particular area or month should be taken into account, and not that the estimation process should extend to all areas and months, and that the Supreme Court's decision in CIT Vs. H.M. Essufali and H.M. Abdullali (90 ITR 271) is not applicable? (Assessee: Yes, Revenue: No) 2. Whether, on the facts and in the circumstances of the case, the ITAT was right in law in rejecting the application of a gross profit rate of 16.93% based on information from the search operation on both disclosed and undisclosed sales for working out suppressed profit, and further directing the AO to work out undisclosed income by applying a net profit rate on undisclosed sales? (Assessee: No, Revenue: Yes) 3. Whether, on the facts and in the circumstances of the case, the ITAT was right in law in deleting the addition of Rs.15,03,107/- made on account of unaccounted investment involved in unrecorded sales? (Assessee: Yes, Revenue: No) 4. Whether, on the facts and in the circumstances of the case, the ITAT was right in law in holding that no addition on account of undisclosed income in respect of sales reflected in the books of account should be made? (Assessee: Yes, Revenue: No) The Revenue argued that the ITAT's observations regarding the estimation of suppressed sales and the GP rate were incorrect. The Assessee contended that a mere order of remand does not raise a substantial question of law, but if directions in the remand order raise such questions, an appeal is maintainable.
Which sections of the Income-tax Act were involved?
Section 132,Section 158BC,Section 145(2),Section 158B(b),Section 260-A
AI-generated summary — verify with the full judgment below
Cause title — parties, addresses and appearances
an equally detailed order. The Tribunal rejected the contention that the assessment proceedings were void ab initio, but considered the submission that the estimation of suppressed sales was based on incorrect presumptions and incorrect appreciation of the material on record as well as the submission that the G.P. rate was erroneous. The Tribunal referred to Section 158B(b), which reads as under: “Undisclosed income” includes any money, bullion, jewellery or other valuable article of thing or any income based on any entry in the books of account or other documents or transactions, where such money bullion, jewellery, valuables article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purpose of this Act.” The following words were inserted at the end by Finance Act, 2002 with retrospective effect from 01.07.1995: “or any expense, deduction or allowance claimed under this Act which is found to be false.” Whether the amendment applies or not is irrelevant for the purpose of this appeal.
As we mentioned earlier, Mr. Katoch, the learned counsel appearing on behalf of the appellant/revenue did not have any objection to the matter being remanded per se. He, however, challenged certain observations in the order. If the challenge is well-founded, it would be necessary to set aside the observations as the assessment order, upon remand, was bound to be based upon or at least influenced by such directions. As this is the main aspect in this appeal, we find PARKASH CHAND 2016.07.27 15:12 integrity of this document
ITA-206-2001 it necessary to set out in extenso the portions of the impugned order of the Tribunal. They read as under:- “33. To conclude the discussions we have define (sic) undisclosed income and we have also given observations, that the A.O. has to assess undisclosed income based on the material collected by the authorised officer under section 132 & 132-A of the Act. The A.O. has not to disturb the accepted position of the assessment which includes the assessment of the income and other relevant issues with such assessment. The only exception to change the accepted position is if there is complete leading evidence available with him for change of opinion or change of position. To clarify by an example, if a cash credit is appearing in the books of account and such detail and balance sheet is filed alongwith the return followed by passing an order under sec. 143 & 143(1)(a) such cash credit cannot be disturbed unless and until there is a leading evidence that the credit itself was bogus.
We have taken pains in perusing the photocopies of the relevant seized material filed by the appellant as well as by the department. After going though (sic) the voluminous material, we are of the opinion that only information related to undisclosed income is unrecorded sales. There is a leading and direct evidence collected by the authorised officer which prima-facie indicate that the appellant was putting various symbols which indicate that the sale bill was not as per the face value but was to be taken different based upon the interpretation and understanding of the symbols. The appellant co-operated with the A.O. for decodification of symbol and detail of the symbols is mentioned in para-8 of the order. There is dispute regarding interpretation of the symbol and working out of undisclosed sales on such interpretation. This dispute came before us and we thought advisable to remand this issue to the A.O. and the appellant attended the proceedings before the A.O. and worked out a figure of undisclosed sales. The A.O. filed report after such long
discussion which is placed in the paper book of the department but the appellant was still having objection to the figure worked out by the A.O.
We are of the opinion that the undisclosed income was only related to the income earned out of undisclosed sales. The A.O. has tried to work out the undisclosed income but he has adopted the method which constitutes the grounds which we are discussing separately and each method and ground will be separately discussed in various paras of this order.
The Ld. DR as well as the A.O. has relied on the decision of the Hon’ble Supreme Court in the case of 2016.07.27 15:12 integrity of this document
ITA-206-2001 Esufali H.M. Abdulali, 90-ITR-275 (SC)(90). The facts of the case are not applicable to the present case. The A.O. can adopt reasonable estimate but the same is to be linked with the evidence available on record, he cannot start presuming things. If suppose, there is a entry of cash credit on a particular day amounting to Rs.5000/-, he has to decide this very entry and he cannot be presume (sic) that on each and every day assessee is taking cash credit of Rs.5000/-. If there are suppressed sales in a particular area or in a particular month, he has to take into account only such sales belonging to a particular area. He cannot presume that such type of action is required to be estimated for all the areas and for all the months. That will give total distortion of the undisclosed income because such undisclosed income has to be matched with undisclosed assets.
The search and seizure operations’ provisions have given exceptional powers to the Tax Authorities to collect evidence in cases where they suspect the existence of undisclosed income. After this power is exhausted by the Department, they cannot resort to and they should not resort to estimation/guess work, surmises and conjectures. They should strictly go by evidence collected which are directly related to the undisclosed income. The legislature has put heavy burden on undisclosed income by charging this income to tax at 60%. Under no circumstances, disclosed income should be part of undisclosed income
After allowing opportunity to both sides for arriving at a correct figure of sale, we are of the opinion that this area was such where sufficient opportunity was not granted to the appellant. Inspite of our efforts to get the matter resolved the difference between the A.O. and the appellant remained unresolved regarding correct working of the suppressed sales. We, therefore, feel that this issue requires to be referred back to the file of the Assessing Officer who will allow sufficient and reasonable opportunity to the appellant and the appellant will produce all the evidence for working out undisclosed sales regarding this firm as well as other firms and companies of Maheshwari Group.
This will mean that Ground No.4,5 & 11 are referred back to the file of the Assessing Officer.”
Firstly, the observation that the only information related to undisclosed income is unrecorded sales is incorrect. This is contrary to the record. As we mentioned earlier, the voluminous material disclosed not merely unrecorded sales but also under-invoicing. The sales, PARKASH CHAND 2016.07.27 15:12 integrity of this document
ITA-206-2001 therefore, were recorded, but recorded wrongly. Under- invoicing is not a case of a sale not being recorded, but being recorded wrongly. This is, in fact, clear even from the third sentence in paragraph-34 of the order of the Tribunal where it is observed that the evidence prima facie indicated that the assessee used various symbols which indicated that the sale bills were not as per the face value. They were to be taken differently based upon the interpretation and understanding of the symbols. Thus, the rate or quantum may differ depending upon the interpretation of the symbols. However, the sale is recorded. Thus, in addition to unrecorded sales there is also a case of sales wrongly recorded, that is to say, it is a case of under-invoicing.
Further, even if the observation was meant as one of law, it is incorrect and contrary to Section 158B(b). The words “undisclosed income” in the section are not restricted to any “money …. or any income” etc. based on entries in the books of account. The “money …. or any income” may also be based on “other documents or transactions”. This is so where the same represent wholly or partly income or property, which has not been or would not have been disclosed for the purpose of this Act. This is clear from the words “…… … based on any entry in the books of account or other documents or transactions …… …” If the intention of the legislature was to restrict the ambit of the words undisclosed income to entries in the books of account, it would not have added the words “or other documents or transactions”. The ambit of the words “undisclosed income” is understandably wider than income based only on entries in the assessee’s books of account. The PARKASH CHAND 2016.07.27 15:12 integrity of this document
ITA-206-2001 suppressed income has indeed not been disclosed for the purpose of the Act.
The observations inter alia in paragraphs 34 and 35 to the effect that the undisclosed income was related only to the income earned out of undisclosed sales is, therefore, perverse being contrary to the record.
The following observations in paragraph-36 of the Tribunal’s order are far too wide:- “The A.O. can adopt reasonable estimate but the same is to be linked with the evidence available on record, he cannot start presuming things. If suppose, there is a entry of cash credit on a particular day amounting to Rs.5000/-, he has to decide this very entry and he cannot be presume (sic) that on each and every day assessee is taking cash credit of Rs.5000/-.”
There is a difference between an inference or a presumption and mere conjecture. While computing the suppressed income under Section 158B(b), it is permissible to draw a reasonable and justified inference based upon all the facts and circumstances of the case including the material seized during the search and seizure and the answer to the information sought in the block assessment proceedings. The observation that if there is an entry of cash credit on a particular day, the Assessing Officer is bound to decide this very entry and cannot presume that on each and every day the assessee was taking such cash credit is erroneous. If the facts and circumstances of the case warranted such a presumption, the Assessing Officer is bound to draw such an inference or presumption. We will presume that the mere existence of the entry is not sufficient to draw a presumption that such entries exist each day. However, if there are other PARKASH CHAND 2016.07.27 15:12 integrity of this document
ITA-206-2001 circumstances, which the Assessing Officer is entitled to take into consideration in block assessment proceedings, which indicate the same, such a presumption must be drawn. For instance, if in an answer to the requisition in such proceedings, it is revealed that such entries are made on various occasions, the computation of suppressed income can be made after drawing an inference that similar entries existed even on other days. The frequency of such entries is another matter altogether. That would also depend upon an appreciation of the evidence. It is impossible to stipulate a formula or any inflexible guidelines in this respect. The amount of such an entry would also depend upon other relevant evidence. The quantum of the entry of a particular day may not be the same as the quantum of an entry on another day. If, for instance, it is revealed that the value of the entries bears a proportion to the actual sales of a particular day, the addition must be made proportionately. It could be higher or lower.
We find the following observations in paragraph-36 to be far too wide and contrary to the settled principles:- “If there are suppressed sales in a particular area or in a particular month, he has to take into account only such sales belonging to a particular area. He cannot presume that such type of action is required to be estimated for all the areas and for all the months. That will give total distortion of the undisclosed income because such undisclosed income has to be matched with undisclosed assets.”
There cannot be an inflexible rule that suppressed sales in a particular area are of no relevance to the assessment of sales in other areas. This too would depend upon the facts and circumstances of each case. If the evidence PARKASH CHAND 2016.07.27 15:12 integrity of this document
ITA-206-2001 reveals a practice of suppressed sales generally and not limited to any particular area, the Assessing Officer would be entitled to draw an inference that the assessee suppresses sales even in other areas. If the evidence indicates the suppression of sales only in certain other areas, he may limit the assessment in this regard to such areas. Here again, it is impossible to stipulate a formula or any fixed criteria. The Assessing Officer must take into consideration the evidence. Absent anything else, the suppression of sales in one case may not justify an inference of a consistent pattern or conduct of suppression of sales. However, if other factors indicate otherwise, there is no reason why the Assessing Officer cannot draw such an inference and assume that sales were suppressed in other areas as well. The quantum of suppression again would vary from case to case and even from area to area.
Our view is supported by the judgment of the Supreme Court in Commissioner of Sales Tax, Madhya Pradesh vs. M/s. H.M. Esufall, H.M. Abdulali, Siyaganj, Indore, 1973 ITR 271. In that case, the appeals were from the decision of the High Court of Madhya Pradesh in a reference under Section 44 of the of the Madhya Pradesh General Sales Tax Act, 1958. One of the questions was whether a best judgment assessment could at all be made under S. 19(1) of that Act or whether revision of the assessment should be confined to the quantum of proved or admitted escaped turnover. The Supreme Court held as under:- “The law relating to “best-judgment” assessment is the same both in the case of Income Tax assessment as well as in the case of sales tax assessment. The scope of PARKASH CHAND 2016.07.27 15:12 integrity of this document
ITA-206-2001 “best-judgment” assessment under the Income Tax law came up for consideration before the Judicial Committee as early as 1937 in Commissioner of Income Tax, Central and U.P. v. Laxminarain Badridas. [(1937) 5 ITR 170]. Therein Lord Russel of Killowen speaking for the Judicial Committee observed: “The Officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly, or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, Their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate, and though there must necessarily be guess-work in the matter, it must be honest guess-work. In that sense, too, the assessment must be to some extent arbitrary.” In Raghubar Mandal Harihar Mandal v. State of Bihar [1957] 8 STC 770] a case arising under the Bihar Sales Tax Act, 1944, the law relating to “best-judgment” assessment was examined at length by this Court. Therein S.K. Das, J., speaking for the Court observed: “No doubt it is true that when the returns and the books of account are rejected, the assessing officer must make an estimate, and to that extent he must make a guess; but the estimate must be related to some evidence or material and it must be something more than mere suspicion. To use the words of Lord Russel of Killowen again, ‘he must make what he honestly believes to be a fair estimate of the proper figure of assessment’ and for this purpose he must take into consideration such materials as the assessing officer has before him, including the assessee's circumstances, knowledge of previous returns and all other matters which the assessing officer thinks will assist him in arriving at a fair and proper estimate.”(emphasis supplied) Proceeding further the learned judge quoted with approval the observations of Din Mohammad, J., in Ganga Ram Balmokand v. Commissioner of Income-tax [(1937] 5 I.T.R. 464(Lah.): “It cannot be denied that there must be some material before the Income Tax Officer on which to base his estimate, but no hard and fast rule can be laid down by the Court to define what sort of material is required on which his estimate can be founded.” After quoting those observations, the learned judge proceeded to observe: “With that observation we generally agree. If, in this case, the Sales Tax Authorities had based their estimate on some material before them, no objection could have been taken.” PARKASH CHAND 2016.07.27 15:12 integrity of this document
ITA-206-2001 Applying the rule laid down in Raghubar Mandal Harihar Mandal case, to the facts of the present case, it is seen that the Sales Tax Officer had material before him to find out, how much turnover had escaped assessment during a period of 19 days. On the basis of that material he estimated the escaped turnover for the entire year.
Hence it cannot be said that there was no basis for the estimate made by the Sales Tax Officer. It may be that his estimate was an over-estimate or an under-estimate but it cannot be said that the estimate was without any basis. In making that estimate, there was an element of guess-work which was inevitable in the circumstances of the case. If the Sales Tax Officer was compelled to adopt a rule of thumb which in a sense is an arbitrary rule, assessee was entirely responsible for that situation. In State of Kerala V.C. Velukutty [(1966) 17 STC 465] this Court speaking through Subba Rao, J., (as he then was) observed: “The limits of the power are implicit in the expression “best of his judgment”. Judgment is a faculty to decide matters with wisdom truly and legally. Judgment does not depend upon the arbitrary caprice of a judge, but on settled and invariable principles of justice. Though there is an element of guess-work in a “best-judgment' assessment, it shall not be a wild one, but shall have a reasonable nexus to the available material and the circumstances of each case.” The question before us is whether there is a reasonable nexus between the basis adopted by the assessing authority and the estimate of escaped turnover made. We have no doubt that there is such a nexus.” (emphasis supplied)
Mr. Jain, the learned senior counsel appearing on behalf of the respondents, submitted that a mere order of remand does not raise a question of law much less a substantial question of law. We will assume that to be correct. However, when an order of remand is made with a direction or an order specifying the manner in which or the principles upon which the order ought to be passed, it is not a simplicitor order of remand. If a question of law arises out of the direction issued, a question of law and even a substantial question of law can always arise from and on account of the direction issued by the appellate authority. For instance, when the appellate authority decides a question PARKASH CHAND 2016.07.27 15:12 integrity of this document
ITA-206-2001 of law and remands the matter to the lower authority whether it is the Assessing Officer or the CIT (Appeals) with a direction to decide the matter afresh in accordance with the judgment and it is found that the direction raises a substantial question of law, can always be the subject matter of an appeal under Section 260-A.
In the result, the order of remand passed by the Tribunal is upheld. Upon remand, the assessment shall be done on the basis of this judgment. Question Nos.1,3 and 4 are answered in favour of the appellant to the extent indicated above. As regards question No.2, the gross profit rate shall be re-calculated upon remand.
The appeal is accordingly disposed of. (S.J. VAZIFDAR) ACTING CHIEF JUSTICE 21.07.2016 (DEEPAK SIBAL) parkash* JUDGE Note: Whether reportable: YES PARKASH CHAND 2016.07.27 15:12 integrity of this document
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