Gauhati H.C : the accounts of the appellant were not correct and complete and/or that the income cannot be properly deduced from the accounting method employed by the appellant

High Court Of Gauhati

Pyarelal Mittal vs. Assistant Commissioner Of Income Tax

Section 145(2), 260A

Asst. Year 1993-94

D. Biswas & M.B.K. Singh, JJ.

IT Appeal No. 4 of 2003

25th September, 2006

Counsel Appeared : Dr. A.K. Saraf, D. Baruah & Ms. K.K. Jain, for the Assessee : U. Bhuyan & B. Das, for the

Revenue

JUDGMENT

D. Biswas, J. :

This appeal under s. 260A of the IT Act, 1961, has been preferred challenging the order dt. 31st May, 2002, passed by the Tribunal, Guwahati Bench, in ITA No. 49/Gau/1998, relevant for the asst. yr. 1993-94.

2. The appeal was admitted on 10th Jan., 2003, for hearing on the following questions of law :

“(a) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the addition of Rs. 20,51,718 to the profits of the appellant on the only premise that the percentage of brokerage was reasonably estimated by the AO on the basis of the prevailing practice in the recognised stock exchange, without giving a specific finding that the accounts of the appellant were not correct and complete and/or that the income cannot be properly deduced from the accounting method employed by the appellant ?

(b) Whether, on the facts and circumstances of the case, the Tribunal was justified in upholding the determination of notional profits by the AO on the basis of pure estimates ?

(c) Whether, on the facts and circumstances of the case, the order impugned against was perverse and for which reason the order dt. 31st May, 2002, to the extent appealed against is liable to be set aside and quashed ?”

We have heard Mr. A.K. Saraf, learned senior counsel for the appellant, and also Mr. U. Bhuyan, learned counsel for the Revenue. The appellant carries on the business of stock and share brokership having its office at Fancy Bazar, Guwahati, and owns two firms, namely—M/s Tokofin & Associate and M/s Mittal Investors. In pursuance of the search conducted in the business as well as residential premises of the appellant on 22nd Oct., 1992, and 23rd Oct., 1992, books of account, share certificates, cash amounts were found. The appellant filed his return of income on 30th March, 1995, showing a total income of Rs. 1,28,030. Notices under s. 143(2) were issued whereupon the representative of the appellant appeared and explained the return of income with reference to the seized documents and other materials on record. The AO assessed the total income at Rs. 25,66,270 and computed the tax payable at Rs. 23,40,409 inclusive of surcharge and interest. The AO also directed initiation of penalty proceeding under s. 271(1)(c). The AO computed the total income in the following manner : The appellant being aggrieved preferred appeal No. 202/1996-97 before the CIT(A), Guwahati. The CIT(A) held that the addition of Rs. 3,86,543 was on misconception of the actual state of affairs without reference to the documents and papers, and the explanations submitted by the appellant.

The decision to add has been dubbed as high-pitched assessment based on illogical and erroneous conclusion. The CIT(A) directed deletion of the addition of Rs. 3,86,543 as income from share transaction business. The CIT(A) also deleted the addition of Rs. 20,51,718 on account of profit assessed by the AO based upon turnover of the clients and brokers. The CIT(A) was of the opinion that the appellant was following a proper and regular accounting method and the profits could be properly deduced from the books of account. It was also held that the accounts were complete and correctly maintained and the AO could not detect any discrepancy. The Revenue being aggrieved approached the learned Tribunal in ITA No. 49/Gau/1998. The learned Tribunal by the order dt.31st May, 2002, partly allowed the appeal. The learned Tribunal remanded the issue relating to addition of Rs. 3,86,435 on account of undisclosed investments on shares for decision afresh by the AO. As regards addition of Rs. 20,51,718 by the AO on account of profit, the learned Tribunal reversed the findings of the CIT(A). The Tribunal held that the AO was justified in taking 1 per cent and 1/2 per cent as profits on transactions of shares of the clients and brokers. In this appeal, the assessee has challenged the order of the learned Tribunal confirming the assessment order insofar it relates to addition of Rs. 20,51,718 on account of profits based upon turnover from clients and brokers. Dr. Saraf argued that the addition of Rs. 20,51,718 has not been consistent with the books of account duly kept and maintained by the assessee. The books of account were produced before the AO and the AO after examination of the same could not detect any discrepancy or error. No objection was raised as to the admissibility of the contents of the books of account. According to Dr. Saraf, no brokerage was involved for the transactions amongst the brokers and in the present case, huge transactions took place between brokers to brokers without involvement of any brokerage. Therefore, Dr. Saraf submitted that the question of assessment on brokerage in respect of such transactions is not permissible. In support of this contention, Dr. Saraf has relied upon regulation 14, Appendix A of the Gauhati Stock Exchange Ltd. and a certificate issued by the general manager.

The certificate reads as follows :

“This is to certify that the member brokers of the stock exchange are at liberty to charge any brokerage to their clients but not exceeding the scale prescribed in Appendix A to the regulation 14 of this stock exchange. Further, no brokerage is involved in the transactions entered into by one broker with the other at the floor of the stock exchange.” From the above, it is apparent that brokers of the Gauhati Stock Exchange are permitted to charge brokerage to their clients not exceeding the rate prescribed in Appendix A to regulation 14 and that they are not allowed to charge any brokerage in respect of transactions made by one broker with another at the floor of the stock exchange.

7. The AO observed that the assessee did not furnish trading account along with the return of income from which the total turnover was not ascertainable. But, during the course of hearing, the assessee submitted details of the turnover and the AO relying upon the same assessed notional profit @ 1 per cent in respect of transactions with the clients and 1/2 per cent in respect of transactions with the brokers. Thus, net notional profit has been assessed at Rs. 17,53,650 and Rs. 5,50,586, respectively. Out of this, net profits on secondary market operation and brokerage on new issues were deducted and the sum of Rs. 20,51,718 worked out. The AO did not express any doubt about the correctness of the turnover. In fact, he had accepted the same and acted upon it. Merely because he could not detect any variation in the total income shown in the turnover cannot be a ground for assessment on the basis of notional profit. There is no dispute that the brokerage charged from clients is variable and it may differ from client to client and scrip to scrip. The rate may also vary upon the volume of transactions with a particular client. There cannot be any fixed jacket formulae for assessment of income. The CIT(A) found that the appellant was employing a proper and regular accounting method and his profits could be deduced from the books of account which were complete and correct, and no discrepancy could be detected by the AO. Therefore, there was no scope for any notional assessment of profits at a fixed rate. The relevant observation of the CIT(A) is quoted below :

“I have considered the submissions of the Authorised Representative in detail and find that the appellant was employing a proper and regular accounting method and his profit could be properly deduced from the books of account. The accounts were complete and correctly maintained and no discrepancy was detected by the AO. Therefore, the AO does not appear to be at all justified in making an addition merely on the basis of other parties, moreso he has not detected any defect in the accounts maintained by the appellant which had been regularly maintained and following the same accounting method. Reliance can be placed on the Hon’ble Supreme Court judgment in the case of CIT vs. A. Raman & Co. (1968) 67 ITR 11 (SC), wherein the apex Court have observed : ‘The law does not oblige a trader to make the maximum profit that he can out of his trading transactions. Income which accrues to a trader is taxable in his hands : income which he could have, but has not earned, is not made taxable as income accrued to him.’

In view of the foregoing discussion and respectfully following the pronouncement of the apex Court and after due consideration of the whole aspect of the case in its entirety, I am of the opinion that the appellant’s profit has to be deduced from his accounts. The AO ought to have kept in mind that low profit, in the absence of any specific defect found in the account books of the appellant, can never be a sufficient and valid ground for making an addition on his own motion. I, therefore, delete the addition of Rs. 20,51,718.” The learned Tribunal in para 6 of the impugned judgment and order observed that at the time of hearing the details of turnover were submitted before the AO. The AO calculated commission earned on the basis of the details of turnover filed by the assessee and estimated the profits from the turnover with clients @ 1 per cent and with the brokers @ 1/2 per cent. Relying upon the submission made on behalf of the Revenue that no share ledger scrip-wise gain or loss for secondary market transactions was produced before the AO, Tribunal reversed the finding of the CIT(A) though the CIT(A) has categorically stated that the share ledger had been produced before the AO which shows scrip-wise gain or loss. That apart, the CIT(A) also held that for better understanding copies of such ledger in respect of certain scrips at random were also submitted before it to place the same on record. This observation of the CIT(A) has not been verified by the learned Tribunal. The learned Tribunal had acted upon a sweeping remark made by the Departmental Representative that no share ledger showing scrip-wise gain or loss for secondary market transactions was produced before the AO.

The observation of the learned Tribunal about the percentage of profit appears to be contrary to Appendix A to regulation 14 as well as the established practice of the Gauhati Stock Exchange Ltd. that no brokerage is involved for transactions between one broker with another at the floor of the stock exchange. Therefore, outright rejection of the assessee’s case appears to be contrary to the established principles of law. The AO was apparently in error in computing profits in respect of the transactions with other brokers at 1/2 per cent since the provisions of regulation 14 and the established practice of the Gauhati Stock Exchange have not been taken into consideration. Similarly, the computation of profit @ 1 per cent in respect of transactions with clients on notional basis is also not sustainable in law. Mr. Bhuyan, learned counsel for the Revenue, submitted that the Tribunal being the final authority of facts has decided the matter in favour of the Revenue and that this Court in exercise of its powers under s. 260A may not interfere with the findings of fact as it involves no substantial question of law. Mr. Bhuyan relied upon the judgment in Dy. CIT vs. Marudhar Hotels (P) Ltd. (1999) 155 CTR (Raj) 437 : (2000) 245 ITR 138 (Raj) in order to show that findings of fact, howsoever erroneous, cannot be disturbed by the High Court in exercise of powers under s. 260A. He has also relied upon a judgment of the Bombay High Court in CIT vs. Tata Chemicals Ltd. (2002) 175 CTR (Bom) 443 : (2002) 256 ITR 395 (Bom) in order to show that the question formulated based on facts finally decided by the Tribunal cannot be a question of law. Mr. Bhuyan also relied upon a decision of this Court in CIT vs. Down Town Hospital Ltd. (2001) 171 CTR (Gau) 462 : (2001) 251 ITR 683 (Gau), to show that remand to the Tribunal for rehearing on factual issues is not permissible under s. 260A.

To counter the above submissions, Dr. Saraf relied upon a judgment of this Court in Aluminium Industries (P) Ltd. vs. CIT (1995) GLR 216. From this judgment, we find that addition of any amount to the gross profit on the ground that the assessee has declared low profit as compared to the previous year cannot be justified in the absence of adequate and relevant materials. For best judgment assessment under s. 144, the ITO should make an intelligible well grounded estimate. The question formulated on this factual matrix was answered in favour of the assessee and against the Revenue. In M. Durai Raj vs. CIT (1972) 83 ITR 484 (Ker), the Kerala High Court was of the view that the relevant consideration is whether the assessee’s accounts are maintained according to the method regularly employed by him, whether such method is correct and complete and whether income can be properly computed from the accounts. If these criteria are satisfied, in that case the question of best judgment assessment could not arise. In Kejriwal Enterprises vs. CIT (2003) 181 CTR (Cal) 305 : (2003) 260 ITR 341 (Cal), the Calcutta High Court was of the view that a conclusion by the authority which otherwise could not have been drawn by any reasonable person is perverse in law. In Dhakeswari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775 (SC), the Hon’ble Supreme Court was of the view that the ITO is not fettered by technical rules of evidence and pleadings, and he is entitled to act on material which cannot be accepted as evidence in a Court of law. But, the officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be some evidence than mere suspicion. In Santosh Hazari vs. Purushottam Tiwari (2001) 170 CTR (SC) 160 : (2001) 251 ITR 84 (SC), the Hon’ble Supreme Court observed that if the appraisal of evidence by the trial Court suffers from material irregularities and is based on inadmissible evidence or on conjectures and surmises, the appellate Court is entitled to interfere with the findings of fact. The Supreme Court held that the first appeal is a valuable right of the parties and unless restricted by law, the whole case therein is open for rehearing both on questions of fact and law. The judgment of the appellate Court must, therefore, reflect its conscious application of mind and the findings supported by reasons on all the issues. It has further been observed that as a matter of law if the appraisal of the evidence by the trial Court suffers from a material irregularity and is based on inadmissible evidence, or on conjectures and surmises, the appellate Court is entitled to interfere with the findings of fact. This judgment was rendered in the context of interpretation of s. 100 of the CPC. In CIT vs. A. Raman & Co. (1968) 67 ITR 11 (SC), relied upon by the CIT(A). It has been made clear by the Hon’ble Supreme Court that the law does not oblige a trader to make the maximum profit that he can out of his transactions. It is the income in the hands of the trader which is taxable. Any income he could have, but not earned, is not exigible to tax as income. In Highways Construction Co. (P) Ltd. vs. CIT (1993) 111 CTR (Gau) 143 : (1992) 2 GLR 385, a Division Bench of this Court found fault with levy of notional interest on a loan given by the assessee without interest. The Division Bench held that the addition of notional interest is not justified since the assessee did not bargain for interest nor had calculated interest. In such a situation, the Division Bench held that the addition of notional interest as due could not form part of the income.

The ratio available from the above judgment would show that in a case where the findings of fact by the Tribunal are perverse and contrary to materials on record and based on surmises and conjectures, the High Court under s. 260A would be competent to interfere. The other feature that emerges is that the income has to be deduced from the books of account and other documents furnished and there is no scope for any conjectures and surmises. If the method of accounting is not faulty and there is no suppression of material facts, the authority cannot embark upon a speculative assessment of notional profit. In the instant case, from the discussion made hereinbefore, it would appear that the AO did not find any fault with the books of account and the method of accounting employed by the assessee, and that there has been suppression of any material fact which deterred him from computing the actual net profit. The AO has not pointed out any defect in the detailed turnover submitted during the assessment, and from this point of view, the appeal at hand cannot be dismissed for want of substantial question of law. Therefore, the judgment and order of the Tribunal in upholding the addition of Rs. 20,51,718 to the profits of the assessee is not sustainable on the facts.

13. In the result, the appeal is allowed, the judgment and order of the learned Tribunal is set aside and that of the CIT(A) is restored. The questions of law formulated in this appeal are answered accordingly in favour of the assessee and against the Revenue.

[Citation : 291 ITR 214]

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