Karnataka H.C : The appellant recovered from the licensees by way of sale price the whole of the excise duty of Re. 0.2 per sachet that would have been payable had the liquor been purchased by them from Government sources

High Court Of Karnataka

J.P. Narayanswamy, Major vs. DCIT, Central Circle-1(2), Bangalore

Block Assessment Years : 1992-93 To 2002-03

Section : 158BB

V.G. Sabhahit And Ravi Malimath, JJ.

IT Appeal Nos. 3027 And 3136 Of 2005

August 11, 2011

JUDGMENT

Sabhahit, J. – These two appeals arise out of and are directed against the order passed by the Income-tax Appellate Tribunal (hereinafter referred to as ‘the Tribunal’), Bangalore Bench ‘B’, Bangalore, in IT(SS)A No. 152/BANG/04, dated 26-5-2005 for the block assessment years 1992-93 to 2002-03. I.T.A. No. 3027/2005 is filed by the assessee being aggrieved by the said order of the Tribunal and I.T.A. No. 3136/2005 is filed by the Commissioner of Income-tax against the same order passed by the Tribunal.

2. I.T.A. No. 3027/2005 has been admitted on 14-3-2007 for consideration of the following substantial questions of law:

“1.Whether on the facts and in the circumstances of the case the Tribunal was justified in law in estimating the profits from the sale by the appellant of manufactured liquor on the basis that it was sold at the rate of Rs. 3.60 per sachet of 100ml?.

2.Whether the Tribunal was justified in law in coming to the conclusion that the appellant recovered from the licensees by way of sale price the whole of the excise duty of Re. 0.2 per sachet that would have been payable had the liquor been purchased by them from Government sources ?

3.Whether on the facts and in the circumstances of the case the finding of the Tribunal that the entire excise duty at the rate of Re. 0.2 per sachet though not paid by the appellant was reimbursed to him as a part of sale price by the licensees in the unlicensed territories is perverse and contrary to the normal course of human conduct ?”

3. I.T.A. No. 3136/2005 has been admitted on 18-9-2006 for consideration of the following substantial questions of law:

“1.Whether the Tribunal committed an error in holding that the sale price of arrack should be taken at was Re. 0.9 as against Re. 0.12 disclosed by the assessee in his regular books of account where the assessee had vending rights to sell arrack ?

2.Whether the Tribunal committed an error in holding that the rate of unaccounted sale of arrack sachets sold outside the territory was Re. 3.60 per sachet and not Re. 0.12 without any basis in arriving at such an erroneous conclusion ?

3.Whether the Tribunal failed to take into consideration the unaccounted sale of arrack sachets made outside the territory which was to the licensed dealers and not directly to the consumers ?

4.Whether the Tribunal committed an error in holding that a sum of Rs. 6,00,00,000 representing undisclosed income of the assessee has to be set off against the miscellaneous receipts of Rs. 8,76,75,000 declared by the assessee in the regular return as the miscellaneous receipts shown by the assessee is nothing but income in respect of unaccounted arrack business ?

5.Whether the Tribunal committed an error on facts and in law in holding that the miscellaneous receipts offered by the assessee in his regular return of income was the undisclosed income earned out of unaccounted sale of arrack on mere surmises & conjectures & recorded a perverse finding ?

6.Whether the Tribunal was justified in treating the entire sum of Rs. 6,00,00,000 as miscellaneous receipts consisting of only unaccounted sale of arrack when the assessee himself has clarified that the miscellaneous receipts consists of various items such as goodwill, arbitration fees etc.?

7.Whether the Tribunal has erred in law in holding that the undisclosed income determined on the basis of seized materials are the miscellaneous receipts disclosed in the regular return of income?

8.Whether the Tribunal committed an error in directing the Assessing Officer to compute the undisclosed income for the assessment year 2001-02 after giving set off of Rs. 41,56,587 ?

9.Whether the Tribunal was correct in holding that no surcharge for the block assessment period 1-4-1991 to 27-4-2011 could be levied as proviso to section 113 of the Act came into effect from 1-5-2002 and as the search in the present case had taken place on 27-4-2001 before the proviso was introduced.

10.Whether the proviso to section 113 of the Act should be read along with the Finance Act for each of the earlier assessment years for the entire block period and surcharge should be levied from the inception of Chapter XI-VB of the Act ?”

Since both the appeals arise out of the common order passed by the Tribunal, these two appeals are disposed of by this common order. Though the appeals have been admitted for consideration of the above substantial questions of law, the learned counsel appearing for the revenue and the learned counsel appearing for the assessee submitted that they would only argue in respect of the substantial questions of law pertaining to the price fixed for sachet of arrack by the appellate authority and also the inclusion of excise duty for the purpose of determining the price and the validity of the set off given to the assessee.

4. The material facts necessary for answering the abovesaid substantial questions of law in both the appeals are as follows:-

4.1 The assessee, being a recognized arrack vending contractor is engaged in the liquour business in Karnataka. He is a licence holder from the Excise department for retail vending of arrack. His territory comprises of 10 Taluks, which will be hereinafter referred to as ‘the own territory’. The assessee also sells arrack outside his own territory at Shimoga, Sagar, Udupi and Bangalore Taluks, hereinafter called as “sale outside his own territory”. There was a search conducted in the business premises of the assessee on 27-4-2001 and it was found that the assessee had sold 1,97,74,000 sachets of 100 ml. each outside his own territory and wherefore, notice was issued to the assessee. The assessee did not dispute that he had sold the said quantity of sachets outside his own territory. But, his contention is that he had sold the sachets outside his own territory as there is no bar to sell the same at a price of Rs. 1.20 Ps., per sachet and excise duty cannot be included in the price and he is entitled to set off of undisclosed income in view of the miscellaneous receipts produced by him, which represents the amount realized by sale of arrack outside his own territory.

4.2 The Assessing Officer held that the assessee had admittedly sold 1,97,74,000 sachets of unaccounted arrack as per the incriminating material found during the search and he assessed the value of the unaccounted arrack at Re. 0.12 per sachet as against Re. 0.9 submitted by the assessee for computing the undisclosed profit generated by unaccounted sale of arrack in respect of assessee’s own territory as well as sale outside assessee’s own territory. The Assessing Officer rejected the claim of the assessee for set off on the ground that he failed to establish that the income shown as miscellaneous income in the returns was the one representing the income realized by unaccounted sale of arrack and also held that the said amounts to be added with the excise duty, surcharge and interest and accordingly, passed the assessment order on 30-4-2003 with the prior approval of the Additional Commissioner of Income-tax, Central Range – I, Bangalore, under section 158BC read with section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’).

4.3 The assessee, being aggrieved by the abovesaid order of the Assessing Officer preferred appeal before the Commissioner of Income-tax (Appeals)-VI, Bangalore, in ITA No. 211/DCIT-CC-1(2)/CIT(A)-VI/03-04 and the appellate authority by order dated 28-9-2004, upheld the order of the Assessing Officer determining the sale price of unaccounted arrack at Re. 0.12 per sachet and also upheld the order of the Assessing Officer regarding the inclusion of Excise duty of Re. 0.2 per sachet, interest and surcharge.

4.4 The assessee, being aggrieved by the said order passed by the appellate authority, preferred appeal before the Tribunal in IT(SS)A No. 152/BANG/04. The Tribunal by order dated 26-5-2005, held that the Assessing Officer was not justified in adopting a flat rate of Re. 0.12 for the entire quantity of unaccounted arrack and directed the Assessing Officer to compute the undisclosed income considering the sale value of the unaccounted arrack at Rs. 9 per sachet in respect of sale in assessees own territory and regarding sale of arrack outside assessee’s own territory, the Assessing Officer was directed to adopt the sale price at Rs. 1.60 plus the Excise duty per sachet, after verifying the same. So far as the set off of the miscellaneous receipts against the undisclosed income for the assessment year 2001-02 is concerned, the Tribunal held that part of the miscellaneous receipts represent goodwill and income other than the arrack business and accordingly, directed the Assessing Officer that an amount of Rs. 6,00,00,000 be adjusted against the undisclosed income from arrack business against Rs. 8,76,75,000 claimed by the assessee under the miscellaneous receipts. The Tribunal upheld the finding of the Assessing Officer regarding levy of surcharge for the block period and with regard to charging of interest under section 158BFA of the Act, the Assessing Officer was directed to reconsider the issue after giving effect to the order passed by the Tribunal.

4.5 The assessee, being aggrieved by the abovesaid order of the Tribunal dated 26-5-2005, has preferred I.T.A. No. 3027/2005 stating that the sale price of unaccounted arrack fixed by the Tribunal is excessive and set off claimed by the assessee ought to have been given by the Tribunal and the lower authorities and excise duty ought not to have been included by the authorities while arriving at the sale price of the unaccounted arrack and the authorities were also not justified in charging interest and surcharge.

4.6 The Revenue, being aggrieved by the said order of the Tribunal has preferred I.T.A. No. 3136/2005 contending that the finding of the Tribunal that the sale price of unaccounted arrack outside assessee’s own territory adopted by the Tribunal at Rs. 1.60 Ps. per sachet instead of Rs. 12 is without any basis and the Tribunal has also erred in giving set off of Rs. 6,00,00,000 against the undisclosed income from arrack business outside assessee’s own territory, which is baseless as the assessee has not established that the miscellaneous receipts produced by him represented the income earned out of sale of arrack outside his own territory.

5. We have heard the learned counsel appearing for the revenue and the learned counsel appearing for the assessee.

6. The learned counsel appearing for the revenue submitted that the Tribunal was not at all justified in fixing the sale price of unaccounted arrack outside assessee’s own territory at Rs. 1.60 plus the Excise Duty and the same ought to have been fixed at Rs. 12 per sachet as taken by the lower authorities and in the absence of any material produced by the assessee to show that the income shown as miscellaneous receipts pertained to the income earned by the assessee by sale of arrack sachets outside his own territory, the Tribunal was not justified in giving set off of Rs. 6,00,00,000 against the undisclosed income. Therefore, the learned counsel submitted that the impugned order of the Tribunal may be set aside.

7. The learned counsel appearing for the assessee submitted that the procedure for search and seizure for the block assessment under section 158BC is contained in Chapter XIV-B of the Act and the other provisions of the Act are not applicable. He submitted that the Tribunal ought to have granted the set off as claimed by the assessee and he is not liable to include the excise duty in the sale price. The learned counsel, in support of his contention, has relied upon the decision of the Hon’ble Supreme Court in CIT v. Ravi Kant Jain [2001] 250 ITR 141 /117 Taxman 28 (Delhi), wherein it is held as under:

“The special procedure of Chapter XIV-B is intended to provide a mode of assessment of undisclosed income, which has been detected as a result of search. As the statutory provisions go to show, it is not intended to be a substitute for regular assessment. Its scope and ambit is limited in that sense to materials unearthed during search. It is in addition to the regular assessment already done or to be done. The assessment for the block period can only be done on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the Assessing Officer. Evidence found as a result of search is clearly relatable to sections 132 and 132A.”

8. In reply, the learned counsel appearing for the revenue has relied upon the decision of the Hon’ble Supreme Court in CIT v. Rajiv Bhatara [2009] 310 ITR 105 / 178 Taxman 285 wherein it is held that in search and seizure proceedings, even without the proviso to section 113 of the Act inserted vide Finance Act, 2002, with effect from 1-6-2002, surcharge was leviable on the tax and proviso to section 113 of the Act is clarificatory in nature.

9. The learned counsel appearing for the assessee submitted that the said decision has been referred to a Larger Bench and wherefore, surcharge could not have been levied by the Tribunal and the lower authorities.

10. We have given careful consideration to the contentions of the learned counsel appearing for the parties and scrutinized the material on record.

Regarding sale price of unaccounted arrack:

11. Scrutiny of the material on record would clearly show that the material seized from the premises of the assessee revealed that 1,97,74,000 sachets of arrack had been sold unaccounted and out of the same, 1,03,52,000 sachets were sold in assessee’s own territory and 94,22,000 sachets were sold outside the assessee’s own territory. The assessee submitted that the sale price of the unaccounted arrack in respect of his own territory may be taken at Rs. 9 per sachet. He also submitted that the said price is not inclusive of Excise duty and other incidental expenses. However, the Assessing Officer, having regard to the quantum of unaccounted arrack sachets sold in assessee’s own territory and outside the assessee’s own territory, rejected the contention of the assessee that the maximum rate prescribed by M/s. Mysore Sales International Limited (MSIL) for sale of arrack is less than Rs. 9 per sachet and wherefore, sale price of unaccounted arrack in his own territory should be taken as Rs. 9 per sachet and held that the sale price of the unaccounted arrack can be taken at Rs. 12 per sachet. The said finding of the Assessing Officer was confirmed by the appellate authority. However, the Tribunal, having regard to the material available on record, held that the price of sachets sold in assessee’s own territory should be taken as Rs. 9 per sachet and in respect of the sachets sold outside the assessee’s own territory, Rs. 1.60 per sachet plus the excise duty of Rs. 2 should be taken by the Assessing Officer and thereby, modified the order passed by the appellate authority and the Assessing Officer.

11.1 It is well-settled that the Tribunal is the final authority on the question of fact and law. The Tribunal, having regard to the admitted fact that the search material revealed sale of 1,97,74,000 sachets within assessee’s own territory and outside assessee’s own territory as referred to above and the fact that the maximum price fixed by M/s. MSIL for sale of sachets was less than Rs. 9 and in view of the notification issued by the Excise Department fixing sale price of arrack at Rs. 85 per litre i.e., 8.50 per sachet of 100 ml. held that adoption of Rs. 9 per sachet by the assessee in respect of unaccounted sale of arrack in his own territory was in order. The said finding of the Tribunal fixing the sale price of unaccounted arrack in assessee’s own territory at Rs. 9 per sachet, which is based upon: the notification issued by the Government fixing the sale price of arrack; the rate at which M/s. MSIL, fixed price of the sachets of arrack and also the price at which arrack was sold in the neighbouring areas, cannot be said to be perverse or arbitrary.

11.2 So far as the sale price of unaccounted arrack outside the assessee’s own territory is concerned, the Tribunal has fixed the same at Rs. 1.60 Ps. plus Excise duty of Rs. 2 per sachet. The assessee has admitted that he has not included the Excise duty in the sale price. Having regard to the fact that the assessee cannot sell arrack directly to the consumers outside his own territory and the same has to be sold to the contractors outside his own territory, the sale price taken by the Tribunal at Rs. 1.60 Ps. per sachet plus excise duty of Rs. 2 per sachet cannot at all be said to be arbitrary or perverse. The appellate authority and the Assessing Officer proceeded on the basis that since the assessee had shown in the books of account that the sachets were sold at Rs. 12 per sachet in respect of his own territory, the same price had to be adopted in respect of unaccounted sale of arrack outside the assessee’s own territory. Having regard to the notification issued by the Excise department, Government fixing the rate of arrack at Rs. 8.50 Ps. per sachet and the rate at which arrack was sold by MSIL, and the contractors in the neighbouring area of Pavagada and other places and prices prevalent outside the assessee’s own territory, wherein the assessee has sold the unaccounted arrack, it is clear that the said finding of the Tribunal is justified and does not suffer from any arbitrariness or perversity as to call for interference in these appeals and accordingly, the said finding of the Tribunal is entitled to be confirmed.

Regarding the set off claimed by the assessee:

12. The assessee claimed that he is entitled to set off of the undisclosed income computed in respect of unaccounted sale of arrack against the income shown as miscellaneous income for the assessment year 2001-02 amounting to Rs. 8,76,75,000 and during the block period, he had assigned miscellaneous income amounting to Rs. 37,34,44,099 for the assessment years 1989-90 to 2001-02. The Assessing Officer and the appellate authority held that the assessee is not entitled to set off of the said amount as the said Miscellaneous income is shown as income from other source and not from arrack business and there is no material produced to show that there was link between the unaccounted sale of arrack and the miscellaneous income shown in the books of account by the assessee. Cogent reasons have been assigned by the Assessing Officer for rejecting the said claim of the assessee. The Assessing Officer held that the assessee has failed to provide any link, which would show that the income shown under the miscellaneous receipts in the books of account is related to the unaccounted sale of arrack and this is a case, wherein the matter has to be decided on probability because direct evidence of clinching nature is not available and the assessee did not produce any material to show the break-up of the miscellaneous income, in respect of which set off was claimed for the assessment year 2001-02 and for the block period. The appellate authority has also assigned cogent reason that though the assessee has disclosed miscellaneous receipts in the regular books of account and has declared miscellaneous receipts year after year in the returns of income filed for the assessment years 1989-90 to 2001-02, such declaration itself in no way establishes the fact that the source of such miscellaneous receipts irrespective of the same being accounted under the head ‘Other sources’ was from the parallel excise business of the appellant more so when no detail whatsoever was available on record or has been furnished by the appellant in that regard and the appellant’s claim remains a mere assertion as no evidence whatsoever was furnished to correlate the miscellaneous income declared in the returns with the suppressed profit/income from the unaccounted sale of sachets of arrack. It is for the appellant to prove that the said miscellaneous income was earned from the unaccounted sale of arrack and apart from the self-serving statement of the assessee, there is no material whatever to hold that the assessee established that the income derived from the unaccounted sale of arrack was included in the miscellaneous income i.e., ‘income from other sources’. The appellate authority held that the proposal made in respect of K.G. Hanumantha Raju for proceedings under section 263 of the Act and subsequent, dropping of the proceedings against him in view of the explanation submitted by him in that case, would not be helpful to the assessee in the present case as in the present case, no material whatever is produced to show that there is link between the amount received from unaccounted sale of arrack and the miscellaneous income shown during the assessment year 2001-02 and admittedly, the assessee has not furnished the break-up of the miscellaneous receipts or the basis for such break-up. However, without considering the said reasons assigned by the appellate authority and the Assessing Officer, the Tribunal has arrived at the finding that the assessee is entitled to set off of Rs. 6,00,00,000 against the undisclosed income from arrack business for the year 2001-02 and also for the block period, on the ground that in respect of similar matter, where proceedings were initiated under section 263 of the Act, the same were dropped appellate authority holding that what was shown by the assessee in the said case as miscellaneous income was the one received by unaccounted sale of arrack and that in the instant case, the revenue has not produced any material to show that the said miscellaneous income shown by the assessee did not represent the income realized by unaccounted sale of arrack. The said reasoning of the Tribunal is clearly erroneous and cogent and consistent reasons had been given by the Assessing Officer and the appellate authority for rejecting the said claim of the assessee for set off. Therefore, the benefit of set off given to the assessee by the Tribunal cannot at all be sustained and the same is liable to be set aside as it is perverse and arbitrary and not based on the material on record and to that extent, the substantial question of law has to be answered in favour of the revenue.

Regarding inclusion of Excise duty in the sale price of sachet as also the levy of surcharge:

13. Since the assessee himself admitted that he has not included the Excise duty in the sale price, which is Rs. 2 per sachet, the inclusion of the said Excise Duty is unassailable and levy of surcharge and interest is also justified in view of the decision of the Hon’ble Supreme Court in Rajiv Bhatara’s case ( supra), wherein it is held that in search and seizure proceedings in respect of block assessment, levy of surcharge even without the proviso to section 113 inserted vide Finance Act, 2002, with effect from 1-6-2002 is justified and the proviso to section 113 is clarificatory in nature. The Tribunal has failed to note that the assessee had not disclosed the income received by sale of unaccounted arrack and wherefore, he is liable to pay interest under section 158BFA of the Act and the finding of the Assessing Officer to that effect cannot be interfered with. Therefore, the assessee is liable to pay interest for two months as held by the Assessing Officer and the finding of the Tribunal directing the Assessing Officer to reconsider the issue with regard to levy of interest after giving effect to the order of the Tribunal is set aside. However, since the abovesaid decision in Rajiv Bhatara’s case (supra) is referred to a Larger Bench, the finding regarding surcharge would be subject to the Larger Bench decision of the Hon’ble Supreme Court. Accordingly, we answer the substantial questions of law and pass the following Order:-

I.T.A. No.3136/2005 is allowed in part. I.T.A. No. 3027/2005 is dismissed. The finding of the Tribunal regarding the fixation of sale price of unaccounted arrack is confirmed. However, the set off allowed by the Tribunal in favour of the assessee is set aside and the order passed by the appellate authority and the Assessing Officer rejecting the claim of the assessee for set off is restored. The Inclusion of Excise duty in the sale price of unaccounted arrack sold outside the assessee’s own territory is upheld and levy of interest for two months under section 158BFA of the Act and surcharge as ordered by the Assessing Officer is also upheld and it is made clear that levy of surcharge shall be subject to Larger Bench decision of the Hon’ble Supreme Court.

[Citation : 340 ITR 193]

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