NEW PLAZA RESTURANT vs. INCOME TAX OFFICER
What did the High Court hold?
The High Court held that the Tribunal was not correct in upholding the addition. While the question of the correctness of an estimation is usually a question of fact, it becomes a substantial question of law when authorities apply different yardsticks to similar cases, rendering the action arbitrary and capricious, thus hit by Article 14. The Court found that the Tribunal and CIT had dealt with three restaurant cases in Shimla. In Baljees' Restaurant and Alfa Restaurant, the estimation was based on a multiple of 2.2 times the raw material cost. The CIT applied a multiple of 2.5 for the assessee, considering a higher proportion of raw material consumption in sweet items sold from the counter in Baljees' case. However, the assessee's restaurant and Alfa Restaurant were engaged in the same business, and the assessee had provided gross profit percentages (36.92%, 36.33%, 37.13%) for the previous three years, which were similar to Alfa Restaurant's case. Therefore, there was no plausible reason for the Tribunal to deviate from the norm established in Alfa Restaurant's case. The revenue's contention that gross profit figures were not declared was incorrect as the assessee had submitted a letter with this information. The appeal was allowed, setting aside the Tribunal's order. However, since the assessee's appeal before the Tribunal was dismissed in default, the order of the CIT was restored, and no further benefit could be granted to the assessee.
What were the facts?
The assessee, M/s. New Plaza Restaurant, filed a return for Assessment Year 1993-94 showing an income of Rs. 24,350/- based on its books of accounts. The Assessing Officer (AO) rejected the books and enhanced the income by Rs. 3,74,387/- through estimation. The Commissioner of Income Tax (Appeals) partly allowed the assessee's appeal, reducing the addition to Rs. 1,20,000/-. Both the assessee and the revenue filed further appeals before the Appellate Tribunal. The assessee's appeal was dismissed in default, while the revenue's appeal was allowed, restoring the AO's order of addition. The assessee then filed the present appeal before the High Court.
What were the issues?
1. Whether the Tribunal was correct in upholding the addition of Rs. 3,74,387/- made by the AO without any basis or substantiating material? 2. Whether the Tribunal was justified in allowing the revenue's appeal solely on the ground that the gross profit figures for the current and preceding years were not tendered before the Income Tax Authorities, without considering other merits? Assessee's Contention: The estimation, even if made on an arbitrary basis, should have been rational. The methodology followed in the case of Alfa Restaurant, where a multiple of 2.2 times the raw material cost was used for estimation, should have been applied. A judicial authority must exercise discretion judiciously. Revenue's Contention: No substantial question of law arises as the estimation is based on evidence. The question of whether an estimate is correct is a pure question of fact. The revenue relied on Safiullah vs. Commissioner of Income Tax, Assam, AIR 1957 Assam 18. Both parties relied on M/s. Brij Bhushan Lal Parduman Kumar etc., vs. The C.I.T. Haryana, Himachal Pradesh and New Delhi, AIR 1979 SC 209, regarding the principles of best judgment assessment.
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
Cause title — parties, addresses and appearances
Both the parties aggrieved by the said order observations of the Apex Court in M/s.Brij Bhushan Lal court are extremely relevant: “7.It will appear clear from what has been said above that the authority making a best judgment assessment must make an honest and fair estimate of the income of the assessee and though arbitrariness cannot be avoided in such estimate the same must not be capricious but should have a reasonable nexus to the available material and the circumstances of the case…..”
It is in the light of the aforesaid observations by the Apex Court that we proceed to decide the case.
The admitted facts are that the Tribunal as well as the Commissioner, Income Tax had dealt with three cases of estimation of different restaurants in Shimla. In the case of Baljees’ Restaurant, the Mall, Shimla, the Commissioner of Income Tax had come to the conclusion that while estimating the total sales the proper method would be to estimate the sales at 2.2 times the value of the raw material purchased by the assessee. In the case of Alfa Restaurant which is also situated on the Mall Road the estimation was also made at 2.2 times of the cost of raw material by the Tribunal. The Commissioner of Income Tax did not apply the principle applied in Baljees’ case on the ground that in the case of Baljees’ Restaurant large proportion of the sales were in respect of sweet items sold from the counter in which the consumption of the raw material is bound to be on the lower side. The Commissioner of Income Tax therefore estimated the
5 sales of the assessee by applying a multiply of 2.5 qua the cost of raw material.
The assessee in appeal relied upon the judgment of the Tribunal itself wherein in the case of Alfa Restaurant the multiple applied was 2. 2. Ms.Kuthiala has contended that the Tribunal had applied the multiple of 2.2 by accepting the gross profit declared by the assessee and accepted by the Revenue for the previous four assessment years.
At the outset we may observe that even while making an estimation the Assessing Officer must follow some principles. The estimation cannot be arbitrary or capricious. The Assessing Officer is bound to follow the same yardstick for similar sorts of businesses. Admittedly, Alfa Restaurant and the Assessee’s Restaurant are engaged in the same business. There was no difference like the one in Baljees’ case wherein a large proportions of sales were from the counter. The Commissioner of Income Tax had followed a better system and had enhanced the multiple a little over 2.2 and fixed it a 2.5 even though in the case of Alfa Restaurant it was 2. 2. The contention of Ms.Vandana Kuthiala that the principle applied in Alfa Restaurant’s case cannot be applied in the present case because in the present case
6 the assessee has not declared his gross profit is also incorrect. We find that the assessee had sent a latter to the Income Tax Office, Ward No.1 Shimla on 7th July, 1994 that is much before the assessment was completed, clearly showing that his comparative gross profits in the 3 previous years were 36.92%, 36.33% and 37.13%. Therefore, this material was also available before the Tribunal. The rates of profit depicted for the previous three years are similar to the rates of profit in the case of Alfa Restaurant. Therefore, we find that there was no plausible reason for the Tribunal to deviate from the norm laid down in Alfa Restaurant’s case.
It is no doubt true that the question as to whether the estimation made by the Assessing Officer is correct or not is normally treated as a question of fact. However, when the concerned authority like in the present case, does not follow a uniform practice and applies different yardsticks in similar cases then such action is hit by Article 14 and becomes arbitrary and capricious. This itself leads to the inference that the case involves a substantial question of law.
In view of the above discussion, the appeal filed by the assessee is allowed. The Order of the learned Tribunal is set-aside. Since the assessee’s appeal against the order of Commissioner of Income Tax has
7 already been dismissed in default, no further benefit can be granted to the assessee and the order of the Commissioner of Income Tax is restored. The appeal is allowed in the aforesaid terms. No costs.
( Deepak Gupta ), J.
July 30, 2008
( V. K. Ahuja ), J.
PV
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