THE COMMISSIONER OF INCOME TAX vs. M/S BAHUBALI NEMINATH MUTTIN

1 IN THE HIGH COURT OF KARNATAKA KALABURAGI BENCH DATED THIS THE 13TH DAY OF JULY, 2016 PRESENT THE HON’BLE MR.JUSTICE ANAND BYRAREDDY AND THE HON’BLE MR.JUSTICE RAGHVENDRA S. CHAUHAN INCOME TAX APPEAL NO. 5026/2011 C/W INCOME TAX APPEAL NO. 5025/2011 INCOME TAX APPEAL NO.5026/2011: BETWEEN: 1. The Commissioner of Income Tax Khemjibai Complex, Dr. Ambedakar Road, Belgaum. 2. Assistant Commissioner of Income Tax Central Circle –1, Belgaum. … APPELLANTS (Shri Ameet Kumar Deshpande, Advocate) AND: M/s. Bahubali Neminath Muttin Main Road at Post Chandachan

2 Taluk Indi, District Bijapur – 586 205. … RESPONDENT (Shri Ashok Kulkarni & Shri K.R. Prasad, Advocates) This Income Tax Appeal is filed Under Section 260A of the Income-Tax Act, 1961 against order passed in Income Tax Appeal No.169/PNJ/2010 dated 06-06-2011 on the file of the Income Tax Appellate Tribunal, Panaji Bench, Panaji, dismissing the appeal filed by the Revenue. INCOME TAX APPEAL NO.5025/2011: BETWEEN: 1. The Commissioner of Income Tax Khemjibai Complex, Dr. Ambedakar Road, Belgaum. 2. Assistant Commissioner of Income Tax Central Circle –1, Belgaum. … APPELLANTS (Shri Ameet Kumar Deshpande, Advocate) AND: M/s. Bahubali Neminath Muttin Main Road at Post Chandachan Taluk Indi, District Bijapur – 586 205. … RESPONDENT (Shri Ashok Kulkarni & Shri K.R. Prasad, Advocates) This Income Tax Appeal is filed Under Section 260A of the Income-Tax Act, 1961 against order passed in Income Tax Appeal

3 No.159/PNJ/2010 dated 06-06-2011 on the file of the Income Tax Appellate Tribunal, Panaji Bench, Panaji, dismissing the appeal filed by the Revenue. These appeals having been reserved on 14.6.2016 and coming on for ‘Pronouncement of Judgement’ this day, Anand Byrareddy J., delivered the following: JUDGMENT These appeals are disposed of by this common judgment in view of the fact that these appeals are filed by the revenue aggrieved by the common order of the Income Tax Appellate Tribunal (ITAT) passed on appeals filed by the assessee as well as the Revenue in ITA No.159/2010 and ITA 169/2010, respectively, the former filed by the assessee and the latter by the Revenue and in view of the questions arising for consideration being similar. 2. The facts are as follows: The respondent assessee is said to be a partnership firm carrying on business as wholesale cloth merchants. Consequent upon a search conducted under Section 132 of the Income Tax Act, 1961 (Hereinafter referred to as the ‘I.T. Act’, for brevity) the assessee is said to have filed a return of income declaring a total

4 income of Rs.7,60,000/-. However, based on the material seized by the assessing authority and on completion of the assessment, the following additions were said to have been made: (i) Undisclosed income to the account of Trade Creditors at Rs.2,67,560/-; (ii) Undisclosed income, namely, the unexplained investments towards purchases under Section 69B of the I.T.Act. at Rs.50,18,873/-; and (iii) Gross profit on suppressed sales at Rs.13,33,242/-. 3. The assessee is said to have filed an appeal before the Commissioner of Income Tax (Appeals) against the above order. The said authority had confirmed the addition to the account of Trade Creditors. However, the addition under Section 69B of the I.T. Act was deleted, holding that on the date when the unaccounted purchases were made, the money from unaccounted sales was available for making such purchases. 4. In dealing with the issue of the addition on account of gross profit on suppressed sales made by the Assessing Officer, the

5 Appellate authority had increased the addition to Rs.90,96,818/-. It was observed that the Assessing Officer had erred in adopting the closing stock of Rs.1,89,25,248/- as against the amount disclosed in the audited statement of accounts at Rs.2,80,21,787/-. 5. As against the said order of the Appellate authority, the assessee, as well as the Revenue, are said to have filed appeals before the ITAT. The Tribunal, in turn, had deleted the entire additions made by the Assessing Officer as well as the enhancement made by the CIT (Appeals). However, the addition on account of gross profit was confirmed. On the issue of addition of Rs.2,67,556/- made on account of difference in the Trade Creditors accounts, it was claimed as a discount given by the said parties and which was not accounted for by the assessee, the Tribunal held that the correctness of accounts as appearing in the books of a supplier itself was not based on any evidence. 6. Further, the next addition made on account of unaccounted purchases at Rs.50,18,173/-, which was deleted by the CIT

6 (Appeals), the Tribunal held that no interference was required as regards those findings. As regards the addition made as gross profit on account of suppressed sales at Rs.13,33,242/- which was increased to Rs.90,96,818/- by the CIT (Appeals), the Tribunal held that the sales declared by the assessee and the unaccounted sales worked out by the Assessing Officer had not been disputed by the CIT (Appeals). It was further observed that when the Gross Profit Rate is applied, there was a clear explanation and hence there was no need for the scrutiny of the amount incurred on purchases by the assessee. 7. It was also observed by the Tribunal that there was no material available to the CIT (Appeals) to draw an inference that the assessee had earned gross profit at a rate more than declared on the turn over, or at the rate at which assessment had been made by the assessing officer. It was further held that re-casting of trading account itself was inappropriate and contrary to known principles of accountancy. It was thus concluded that Assessing Officer had

7 estimated the income in a just and proper manner and hence confirmed the addition made by the Assessing Officer. It is against those findings, that the present appeals are filed by the revenue. 8. The common substantial questions of law as framed by the Revenue are as follows: “1. Whether the ITAT is justified in deleting the amount on account of difference in trade creditors account, ignoring the fact that the assessing officer has brought on record the ledger extract of the assesse as appearing in the books of the supplies in whose books no such outstanding balance is reflected? 2. Whether the ITAT is justified in not upholding the addition made on account of ‘unaccounted purchases’, by ignoring the provisions of section 69B of the Income Tax Act, 1961? 3. Whether the ITAT is justified in deleting the addition made by the CIT(A) on account of ‘unaccounted sales/suppressed sales’, when the ITAT has not disbelieved the amount of closing stock arrived at by the CIT(A)?”

8 9. The learned Counsel Shri Ameet Kumar Deshpande appearing on behalf of the Revenue would contend that the Tribunal had erred in deleting the addition of Rs.2,67,556/- made on account of the difference in trade creditors as the Assessing Officer had brought on record, the ledger extracts of the assessee as appearing in the books of the supplier and the assessee had failed to reconcile the differences in the statement of accounts. The Tribunal was also in error in not taking into account the fact that the assessee had indulged in unaccounted business transactions and payments having been made outside the books of accounts, as a result there was outstanding balance against the trade creditors in the assessee’s books whereas in the books of the trade creditors, no outstanding balance was reflected. 10. Further it is contended that the Tribunal was also in error in confirming the order of the CIT (Appeals) deleting the addition of Rs.50,18,173/- on account of unaccounted purchases. It ought to have been noted by the Tribunal that from the records it was

9 evident that the assessee had indulged in unaccounted purchases and sales, year after year, as evident during the course of the search. 11. It is further contended that the Tribunal’s observations that the assessee was found to have been carrying on business for over two decades and had indulged in carrying on sales out of purchases which were recorded as well as purchases which were not recorded and that the unrecorded purchases as on 09.06.2004 was Rs.15,01,204/- as evident from Annexure-C to the assessment order and therefore the Tribunal alternatively ought to have confirmed the addition as unaccounted purchases under Section 69B of the I.T. Act at Rs.15,01,204/- representing the amount of peak purchase. 12. It is contended that the Tribunal has failed to consider the fact that the Assessing Officer had merely recast the day book and had accurately added the unaccounted purchases and the gross profit on suppressed sales. Therefore, the Tribunal ought to have noted the addition made under Section 69B of the I.T. Act would have no bearing on the estimation of profit on suppressed sales. It is

10 contended that the Tribunal was also in error in holding that when gross profit rate is applied there is a clear explanation for discrepancies. In that, there was no need for the Assessing Officer to scrutinize the amounts incurred on purchases and thereby concluded that there was no factual or legal justification in the CIT (Appeals) having enhanced the income at Rs.90,96,818/-. It is in this vein that the learned Counsel would seek to urge grounds in support of the substantial questions of law as framed by the revenue. 13. On the other hand Shri Ashok Kulkarni, the learned Counsel appearing for the assessee – respondent, would submit that in the assessment proceedings that followed the search under Section 132 of the I.T. Act the Assessing Officer had found that the books of accounts of the assessee were not reliable. Therefore, after considering the respondent’s explanation had rejected the books and had invoked the provisions of Section 145 (3) of the I.T. Act. The Assessing Officer estimated the income by applying the Gross

11 Profit Rate of 8.63% on the unaccounted sales over and above the declared sales and determined the income accordingly to the best of his judgment in the manner provided under the I.T. Act. It is pointed out that the rejection of the books of account under Section 145 (3) of the I.T. Act the total sales determination and the gross profit rate at 8.63% adopted by the Assessing Officer has not been disputed by the respondents and therefore has attained finality. Pursuant to the appeals before the CIT (Appeals) and the further appeals before the ITAT and the present appeals having been filed by the Revenue, the substantial questions of law that have been framed in the present appeals would have to be viewed in the background that the appellate Tribunal on a scrutiny of the entire factual material on record has passed the impugned order and now an attempt is being made by the Revenue to seek re-appreciation of the evidence on factual aspects and the conclusions drawn in the order of the appellate tribunal, which according to the learned Counsel is impermissible under Section 260A of the I.T. Act.

12 14. It is further contended that there are clear findings of fact by the ITAT, on all the issues raised in the present appeals. It is significant that no additional material is placed before this Court to demonstrate that the findings of fact arrived at by the Tribunal are perverse. It is emphasized that the cardinal principle is that the Tribunal which is the final fact finding authority and if such findings of fact are to be assailed, it would require a substantial question, as to there being a perverse finding of fact by the Tribunal, to have been raised. In the absence of any such question having been raised, it cannot be said that any question of law arises for consideration, and much less a substantial question of law, as contemplated under Section 260A of the I.T. Act. Reliance is placed on the following authorities by the learned Counsel in support of the above proposition: 1. 330 ITR 1 (SC) @ 7-9 (Vijay Kumar Talwar vs. Commissioner of Income Tax) 2. 378 ITR 640 (SC) @ 648 (Mangalore Ganesh Beedi Works vs. Commissioner of Income Tax and Another)

13 3. 273 ITR 50 (SC) @ 55 (M. Janardhan Rao vs. Joint Commissioner of Income Tax) 4. 300 ITR 205 (SC) @ 211,212 (Sudarshan Silks and Sarees vs. Commissioner of Income Tax) 5. 247 ITR 178 @ 180, 181, 182 (K. Ravindranathan Nair vs. Commissioner of Income Tax) 15. Alternatively, and without prejudice to the preliminary objections raised above, he would submit that, on merits it should be noted that admittedly the books of accounts of the respondent have been rejected by the assessing authority. The profit of the respondent is estimated as provided under Section 145 (3) of the I.T. Act. When the gross profit rate is applied, it would cover any infirmity and there was no need for the Assessing Officer to make a scrutiny of the amounts incurred on the purchases by the respondent. In any event, the revenue would not be in a position to rely on the rejected books of accounts for making the additions on account of trade creditors and also for the purpose of arriving at a closing stock. This is the view taken by atleast four High Courts in the following reported judgments:

14 1. 232 ITR 776 (AP) @ 778, 779 (Indwell Constructions vs. Commissioner of Income Tax) 2. 229 ITR 229 (All) @ 232 (Commissioner of Income Tax vs. Banwari Lal Banshidhar) 3. 302 ITR 246 (P & H) @ 249 (Commissioner of Income Tax vs. Aggarwal Engineering Company) 4. 377 ITR 568 @ 580 (Commissioner of Income Tax vs. Amman Steel and Allied Industries) 16. In the light of the above contentions and on a perusal of the impugned orders, we notice that the learned Counsel for the appellants has re-worded the substantial questions of law as framed in the memoranda of appeals and as framed by this Court at the stage of admission, as on 14.06.2016 at the final hearing as above. 17. It is evident from a reading of Section 260A of the I.T. Act that an appeal would lie to this Court from an order of the ITAT, only if there is a substantial question of law that arises for consideration. In Vijay Kumar Talwar’s case supra, the Supreme Court has held that it is mandatory for the High Court to formulate the substantial question of law on which the appeal would be

15 considered. But that the expression “a substantial question of law,” is not defined in the I.T. Act. However, it has acquired a definite connotation through various judicial pronouncements. In Shri Chunilal V. Mehta and Sons Ltd. vs. Century Spinning and Manufacturing Company Limited, AIR 1962 SC 1314, a Constitution Bench of the Apex Court has held as follows: “18. The proper test for determining whether a question of law raised in the case is substantial would, in our opinion, be whether it is of general public importance or whether it directly and substantially affects the rights of the parties and if so whether it is either an open question in the sense that it is not finally settled by this court or by the Privy Council or by the Federal Court or is not free from difficulty or calls for discussion of alternative views. If the question is settled by the highest court or the general principles to be applied in determining the question are well settled and there is a mere question of applying those principles or that the plea raised is palpably absurd the question would not be a substantial question of law.”

16 18. Similarly, in Santosh Hazari vs. Purushottam Tiwari [2001] 3 SCC 179, a three-judge Bench of the Apex Court has observed that: “A point of law which admits of no two opinions may be a proposition of law but cannot be a substantial question of law. To be ‘substantial’ a question of law must be debatable, not previously settled by law of the land or a binding precedent, and must have a material bearing on the decision of the case, if answered either way, insofar as the rights of the parties before it are concerned. To be a question of law ‘involving in the case’ there must be first a foundation for it laid in the pleadings and the question should emerge from the sustainable findings of fact arrived at by court of facts and it must be necessary to decide that question of law for a just and proper decision of the case. An entirely new point raised for the first time before the High Court is not a question involved in the case unless it goes to the root of the matter. It will, therefore, depend on the facts and circumstance of each case whether a question of law is a substantial one and involved in the case, or not; the paramount overall consideration being the need for striking a judicious balance between the indispensable obligation to do justice at all stages and impelling necessity of avoiding prolongation in the life of any lis.”

17 19. In Hero Vinoth (Minor) Vs. Seshammal, [2006] 5 SCC 545, 556, the Apex Court has observed that: "The general rule is that High Court will not interfere with the concurrent findings of the courts below. But it is not an absolute rule. Some of the well-recognised exceptions are where (i) the courts below have ignored material evidence or acted on no evidence; (ii) the courts have drawn wrong inferences from proved facts by applying the law erroneously; or (iii) the courts have wrongly cast the burden of proof. When we refer to ‘decision based on no evidence’, it not only refers to cases where there is a total dearth of evidence, but also refers to any case, where the evidence, taken as a whole, is not reasonably capable of supporting the finding.” 20. In Vijay Kumar Talwar’s case the Supreme Court has observed thus: “21. A finding of fact may give rise to a substantial question of law, inter alia, in the event the findings are based on no evidence and/or while arriving at the said finding, relevant admissible evidence has not been taken into consideration or inadmissible evidence has been taken into consideration or legal principles have not been

18 applied in appreciating the evidence, or when the evidence has been misread. (See: Madan Lal Vs. Mst. Gopi & Anr. [19800 4 SCC 255; Narendra Gopal Vidyarthi Vs. Rajat Vidyarthi [2009] 3 SCC 287; Commissioner of Customs (Preventive) Vs. Vijay Dasharath Patel [2007] 4 SCC 118; Metroark Ltd. Vs. Commissioner of Central Excise, Calcutta [2004] 12 SCC 505; West Bengal Electricity Regulatory Commission Vs. CESC Ltd. [2002] 8 SCC 715).” 21. Further, in Mangalore Ganesh Beedi works case supra the Supreme Court has held as follows: “19. xxx There is a clear finding of fact by the Tribunal that the legal expenses incurred by the assessee were for protecting its business and that the expenses were incurred after November 18, 1994. There is no reason to reverse this finding of fact particularly since nothing has been shown to us to conclude that the finding of fact was perverse in any manner whatsoever. That apart, if the finding of fact arrived at by the Tribunal were to be set aside, a specific question regarding a perverse finding of fact ought to have been framed by the High Court. The Revenue did not seek the framing of any such question. In this regard, reference may be made to K. Ravindranathan

19 Nair v. Commissioner of Income Tax [2001] 247 ITR 178, 181 (SC) wherein it was observed: “The High Court overlooked the cardinal principle that it is the Tribunal which is the final fact-finding authority. A decision on fact of the Tribunal can be gone into by the High Court only if a question has been referred to it which says that the finding of the Tribunal on facts is perverse, in the sense that it is such as could not reasonably have been arrived at on the material placed before the Tribunal. In this case, there was no such question before the High Court. Unless and until a finding of act reached by the Tribunal is canvassed before the High Court in the manner set out above, the High Court is obliged to proceed upon the findings of fact reached by the Tribunal and to give an answer in law to the question of law that is before it.” 20. Accordingly, we hold that the High Court was not justified in upsetting a finding of fact arrived at by the Tribunal, particularly in the absence of a substantial question of law being framed in this regard. Therefore, we set aside the conclusion arrived at by the High Court on this question and restore the view of the Tribunal and answer the question in favour of the Assessee and against the Revenue.”

20 22. In M. Janardhan Rao’s case, Sudarshan Silks and Sarees case and K. Ravindranathan Nair’s case supra, the Apex Court has again reiterated the principles laid down in the aforesaid decisions. 23. The principle that if a finding of fact is not challenged as being perverse, the High Court is bound to accept such finding. Therefore, as no such substantial question of law has been framed and the questions pertain to findings of fact, which cannot be said to be perverse as it is evident that the books of accounts of the respondent had been rejected by the assessing authority, in which case the same books of accounts could not be relied upon in an addition on account of trade creditors and also for arriving at the closing stock. This is an established principle as has been held in the decisions relied upon by the respondent namely Indwell Constructions case, Banwari Lal Banshidhar’s case, Aggarwal Engineering Company’s case and Amman Steel and Allied Industries, case supra.

21 24. In the light of the above, there is no substantial question of law that arises for consideration and the findings of the Tribunal cannot be said to be perverse, as the reasons assigned by the Tribunal are certainly acceptable and do not warrant interference. Consequently, the appeals are dismissed. Sd/- JUDGE Sd/- JUDGE swk