High Court Of Madras
CIT vs. T.T. Krishnamachari & Co.
Sections 40A(2), 251
Asst. Year 1974-75
Thanikkachalam & N.V. Balasubramanian, JJ.
Tax Case No. 176 of 1982
14th February, 1996
Counsel Appeared
C.V. Rajan, for the applicant : P.P.S. Janarthana Raja, for the Respondent
THANIKKACHALAM, J.:
In pursuance of the direction given by this Court in Tax Case No. 96/80, the Tribunal referred the following question for the opinion of this Court under s. 256(2) of the IT Act, 1961 : “Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the AAC had travelled beyond his jurisdiction and exceeded his powers in going into the question of price factor and making an addition of Rs. 14,55,500 in respect of purchase made from M/s Tamil Nadu Printers & Traders (P) Ltd., Madras.”
The assessee is a registered firm with three partners, namely Shri T.T. Narasimhan, Shri T.T. Rangaswami and Shri T.T. Vasu. The ITO made two additions. The first addition was Rs. 25,72,142 representing alleged income of the assessee diverted to M/s Tamil Nadu Printers & Traders (P) Ltd., a sister-concern of the assessee. According to the ITO, part of the business of distribution of gripewater was transferred by the assessee w.e.f. January, 1973, only to be retransferred back to the assessee in 1976. This was considered to be an arrangement solely with a view to avoid tax liability. M/s Tamil Nadu Printers & Traders (P) Ltd., had carried forward a loss and the object of arrangement, it was considered, was to enable M/s Tamil Nadu Printers & Traders (P) Ltd. to avail the benefit of set off of the profits of the concern against such loss. That arrangement for distribution was considered to be collusive because of the common interest. The fact that the agreement was terminated a little later in 1976 was used by the ITO for the inference that it was really not necessary. The arrangement was treated as collusive and sham one.
Aggrieved, the assessee filed an appeal before AAC. The AAC narrated in detail the arguments of the ITO as well as that of the assessee. He reviewed the evidence and also the case law relating to the diversion of profits and found that there is evidence to show that M/s Tamil Nadu Printers & Traders (P) Ltd. did purchase and sell gripewater from M/s Orient Pharma Pvt. Ltd. and this was not a case where the entire operations were done by M/s T.T. Krishnamachari & Co. and the profits were enjoyed by M/s Tamil Nadu Printers and Traders (P) Ltd. and there was not much to be said in favour of the theory of division of profits. He also found that M/s Tamil Nadu Printers and Traders (P) Ltd. had sold gripewater at the rate of Rs. 228.09 per gross to M/s Herbertsons Ltd. and at Rs. 254.09 to M/s T.T. Krishnamachari & Co.. He found that there was no need for the assessee to pay heavier price of Rs. 254.09 per gross to its sister-concern, when it could have got the grapewater at a lesser price of Rs. 183 from the manufacturers themselves. The AAC found that the assessee has paid to M/s Tamil Nadu Printers and Traders (P) Ltd. an extra price of Rs. 71 per gross and that there was no commercial expediency in this and no benefit or advantage accrued to the assessee in this process and, hence, to the extent of Rs. 71 per gross, the expenditure was disallowed, which works out to Rs. 14,55,500. He also rejected the alternative argument of the assessee that the disallowance should be at least restricted to the difference of rate charged by M/s Tamil Nadu Printers and Traders (P) Ltd. to M/s Herbertsons Ltd. The addition, therefore, came to Rs. 14,55,500 as against Rs. 20,82,178 made by the ITO.
Aggrieved by the order passed by the AAC, both the assessee as well as the Department went on appeal before the Tribunal. In respect of the Departmental appeal,k as far as the main addition is concerned, the Tribunal found that there was a contradiction of the assessee’s business and benefit to M/s Tamil Nadu Printers and Traders (P) Ltd., M/s T.T. Narasimhan, T.T. Rangaswami and T.T. Vasu were partners in the assessee-firm, while they were Directors in the company. All the same, it was found that there was no positive evidence to show that diversion of income merely because some other entity got benefit of an arrangement. There was absolutely no material with the Department to suggest that the assessee-firm derived any benefit directly or indirectly or that it was the assessee, which carried on the actual business and the profits accrued to it. The Tribunal held that as long as it has not been shown that the assessee-firm has received any benefit, the Departmental appeal, it was hold, cannot be sustained and there was no justification for holding that the income earned in the gripewater transactions by M/s Tamil Nadu Printers and Traders (P) Ltd. should be assessed in the hands of the assessee-firm.
5. As regards the assessee’s appeal, the Tribunal found that the question of part of the disallowance of payment of price for gripewater was not a question in issue before the AAC. It was not a matter considered and processed in the assessment order. According to the Tribunal, it was not open to the AAC to consider the question of disallowance of any part of the purchase price in view of the bar laid down by the Supreme Court in the case of Addl. CIT vs. Gurjargravures P. Ltd. 1978 CTR (SC) 1 : (1978) 111 ITR 1 (SC) : TC 7R.367. Hence, the assessee’s appeal was allowed on technical ground. However, the Tribunal also proceeded to consider the question on merits. The Tribunal stated that regarding the applicability of s. 40A(2)(a) of the IT Act, it was submitted that this is not the provision on the basis of which the AAC has proceeded and while it was conceded that the category of persons in this case are those mentioned in s. 40A, still the disallowance was not warranted in this case as there was no excess payment. But, the Tribunal held that though the application of s. 40A(2)(a) was not specifically invoked by the AAC, it was open to the Departmental Representative to support the order of the AAC on the application of s. 40A(2). The Tribunal further held that the assessee’s counsel was not able to satisfy the Tribunal as to how the AAC could not be said to have taken an objective view as to the excessive nature of the rate of Rs 254.09 and that the AAC’s finding that excess price paid is not borne out of his taking a subjective point of view. The Tribunal was of the view that the AAC should not have taken the price at Rs. 183.57 as the fair market price as that was the price at which the goods were supplied by Orient Pharma Pvt. Ltd. to M/s Tamil Nadu Printers and Traders (P) Ltd. also and M/s Tamil Nadu Printers and Traders (P) Ltd. must have its own margin of profits, besides covering its normal expenditures. The Tribunal held that the price paid to M/s Herbertsons Ltd. is different entity and not connected with the assessee-firm or M/s Tamil Nadu Printers and Traders (P) Ltd. could be considered as normal market price prevailing at that time and if its finding on the legal issue is not found to be acceptable on merits, the assessee should succeed to the extent of the difference between the price charged to M/s Herbertsons Ltd. and the assessee. The Tribunal ultimately held that in view of its finding on jurisdiction, no part of disallowance towards price made by the AAC can be sustained.
6. Before us the learned standing counsel for the Department submitted as under : The jurisdiction of the AAC is coterminous with that of the ITO. Once an appeal was filed, the entire assessment was thrown open before the AAC. The AAC has got the power to correct and revise the assessment, even to the extent of causing prejudice to the assessee. The AAC is not confined to the subject-matter in appeal. The AAC can consider the whole assessment. Restrictions in disallowance cannot be said to be based on new source of income. What was considered by the ITO was the income from purchase and sale of gripewater. With reference to that source of income, the AAC has got power to modify or correct the assessment. Assessment based on price factors cannot be said to be relating to a different source. Addition was made by the AAC on the basis of restricting the disallowance made by the ITO. In fact, there is no enhancement in this case. The disallowance made by the ITO in accordance with the provisions contained in s. 40A(2) of the Act, can be corrected by the AAC in view of the decision in CIT vs. McMillan & Co. (1958) 33 ITR 182 (SC) : TC 7R.653.
7. The fact that the Department can exercise its power under s. 147 or under s. 263 of the Act would not preclude the Department, viz., the AAC to exercise his jurisdiction in the matter of making assessment inasmuch as his jurisdiction is coterminous with that of the ITO. Purchase price plays a major part in making the assessment with regard to the profit made in the business of manufacture, purchase and sale of gripewater. Hence, applying the provisions of s. 40A(2) in disallowing certain price as excessive cannot be said to be an assessment made on a different source, which was not considered by the ITO. It was, therefore, submitted that the Tribunal was not correct in holding that disallowance made on the basis of the price factors is processing the assessment with regard to a different source. In order to support his contentions, the learned standing counsel for the Department relied upon various decisions.
8. On the other hand, the learned counsel appearing for the assessee submitted as under: While completing the assessment in the case of the assessee, the ITO made two additions, one based upon diversion of profits and another on the basis of the commission paid by the assessee. Aggrieved by the order of the ITO, the assessee preferred an appeal before the AAC. The AAC in his order held that there is no question of diversion of profits or income arising in this case. The assessee filed a paper book disclosing the materials on the basis of which the return was filed. On perusing the paper book and a discussion with the chartered accountant, the AAC collected various facts and found that there was purchase difference and on the basis of the purchase difference, a new addition was made, which was not considered by the ITO in his assessment. Therefore, the addition was made on a new source which was not considered by the ITO. The ITO accepted the income returned and made additions on account of diversion of profits. The price factor does not form part of the return. The profit made by the other firm, which is a private limited company was added in the hands of the assessee. The AAC found that both the firm and the company are genuine and the transactions done by them are also found to be genuine. The ITO did not consider the provisions of s. 40A(2). According to the AAC, the addition made on the basis of diversion of profits is not correct. The price factor emerges first before the AAC, after the paper book was filed by the assessee. Therefore, assessment made on the basis of the price factor is assessment made on a new source, which was not considered by the ITO. Reliance was placed upon the decision in CIT vs. Shapoorji Pallonji Mistry (1962)
44 ITR 891 (SC) : TC 7R.576, wherein it was held that the AAC has no power to enhance the assessment by discovering new sources of income not mentioned in the return or considered by the ITO in his order. By this process, the AAC made the assessee to loose his right of appeal granted by a statute. When the AAC found that there is a new source for making addition, he could have either directed to reopen the assessment under s. 147 of the Act or the CIT could have exercised his jurisdiction under s. 263 of the Act for revising the assessment. The income returned by the assessee was acceptable. The assessee was doing various businesses and one of his businesses is manufacturing, buying and selling gripewater. The income was returned pertaining to various businesses done by the assessee. Therefore, on the basis of the price factor with regard to the sale and purchase of grapewater, addition is not sustainable. According to the learned counsel, there is no nexus between what was found in the paper book and what was stated in the return. In order to support his contentions, the learned counsel for the assessee relied upon the decisions reported in CIT vs. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443 (SC) : TC 7R.590, Addl. CIT vs. Gurjargravures P. Ltd. (supra) and CIT vs. National Co. Ltd. (1993) 199 ITR 445 (Cal) : TC 7R.595.
9. We have heard both the learned standing counsel appearing for the Department as well as the learned counsel appearing for the assessee.
10. The point for consideration is whether addition made on the basis of price factors would amount to addition made on a new source, which was not considered by the ITO.
11. As against the order passed by the AAC, both the Department and the assessee went in appeal. In the Departmental appeal, the Tribunal expressed its view that the ITO has correctly drawn the inference that a portion of the business in the dealings of gripewater has been diverted. But the Tribunal was not willing to extend this inference to the conclusion that the income or benefit reached the firm directly or indirectly. According to the Tribunal, such inference is far-fetching. The Tribunal further held that the introduction of M/s Tamil Nadu Printers and Traders (P) Ltd. into the picture may be considered superfluous. But the intending part of the business and taking the financial responsibilities of payment for supplies intended by them cannot be disputed because the materials placed before the authorities below and the Tribunal show that this has not been done by M/s T.T.K. & Co. and has been done only by M/s Tamil Nadu Printers and Traders (P) Ltd. Therefore, the Tribunal was of the view that there is no justification for holding that the income relating to transactions in gripewater earned by M/s Tamil Nadu Printers should be assessed in the hands of the assessee-firm. In the assessee’s appeal, the assessee questioned the disallowance of purchases made by the assessee-firm from M/s Tamil Nadu Printers. According to the Tribunal, the AAC was not competent to go into the question. Disallowance of purchases was not the subject- matter of consideration by the ITO and the subject-matter of consideration purely related to the question of inclusion of income earned by M/s Tamil Nadu Printers in the hands of the assessee. According to the Tribunal, the ITO never applied his mind to the question of higher price having been paid to M/s Tamil Nadu Printers in respect of supplies of gripewater by the latter company. Therefore, it was outside the scope of the AAC to go into that question. The Tribunal pointed out that the AAC should have confined only to the ground raised before him in respect of the matter over which the assessee was aggrieved. The aggrieved matter over which the assessee went on appeal related to the inclusion of the said income. According to the Tribunal, the AAC should have jurisdiction on the item that should be one considered and processed by the ITO and not on every matter, which never was the subject-matter of consideration by the ITO.According to the Department, the AAC has got wide powers and further herein is not a case where he was going into a new source of income. The source of income is already found in the order of the ITO, i.e., the business income of M/s TTK & Co., which included income in dealings in gripewater. On merits, the case of the assessee was that the AAC should have considered from an objective angle and should have found that there was nothing to show that the price paid for purchases could be said to be not falling within the scope of the business needs of the company and was excessive. According to the assessee, even if certain expenses were found to be excessive, there should not be any disallowance, because excessiveness should be adjudged from the businessman’s point of view and not based on an arbitrary view and, therefore, this matter should be considered from an objective angle. On the other hand, according to the Department, provisions of s. 40A(2)(a) of the IT Act, 1961 would apply to the facts of this case. According to the Department, when the goods were available in the market at the rate of Rs. 183.57 per gross, the assessee need not purchase the goods for Rs. 254.09 per gross. Therefore, the Department pointed out that the AAC has adopted only an objective standard and has come to the conclusion that there has been an abnormal price paid for the gripewater.
According to the Tribunal, insofar as the jurisdiction of the AAC is concerned, it is no doubt true that the powers of the AAC are wide, but they are not so wide as to travel outside the matter and not considered and processed by the ITO. The price factor in making addition was not considered by the ITO. The ITO was mainly concentrating on the diversion of the business and in that process, his efforts were to gather as much material as to include the income in the hands of the assessee. Therefore, according to the Tribunal, the AAC had travelled beyond his jurisdiction and his consideration of the matter, which was not considered and processed by the ITO cannot fall for a decision and, therefore, the Tribunal held that the AAC fell into an error in going into that point and making the addition.,
It was pointed out before the Tribunal that s. 40A(2) was challenged only on the limited ground that this was not the provision on the basis of which the AAC has proceeded. However, the Tribunal was of the view that though the application of s. 40A(2)(a) of the Act was not specifically invoked by the AAC, still when that section is in the statute, the Department can certainly canvass for pressing that section into service in support of the AAC’s order. The Tribunal further pointed out that the AAC has taken an objective view in coming to the conclusion that the price paid by the assessee-firm to M/s Tamil Nadu Printers at Rs. 254.09 per gross was excessive, when he has specifically brought out that there was no material to show that the assessee was not able to obtain at the price at which either M/s Herbertsons Ltd. had purchased or M/s Tamil Nadu Printers could purchase from M/s Orient Pharma Pvt. Ltd. However, the Tribunal was of the view that the AAC should not have taken the price at Rs. 183.57 as the fair market price at which M/s Orient Pharma supplied to M/s Tamil Nadu Printers. The price charged by M/s Orient Pharma at Rs. 183.57 is to M/s Tamil Nadu Printers and it is obvious that M/s Tamil Nadu Printers cannot supply at that rate, because it must have its own margin of profits, besides covering its normal expenditure like interest and other expenses. The Tribunal was also of the view that the price paid to M/s Herbertsons, which is a different entity not connected with the firm of M/s Tamil Nadu Printers, could be considered as normal market price prevailing at that time. Hence, the Tribunal ultimately held that the AAC was not correct in making addition on the basis of the new source. On merits the Tribunal pointed out that the assessee should succeed to the extent of the difference between the price charged to M/s Herbertsons and the assessee.
17. Therefore, according to the Tribunal the price factor was not considered by the ITO, while making the addition. But, that was taken into consideration by the AAC in making the addition.
18. Reliance was placed upon a decision in the case of CIT vs. McMillan & Co. (supra) wherein the Supreme Court held that : “Whether the income, profits and gains can properly be deduced from the assessee’s method of accounting is undoubtedly a matter which the AAC can go into when he has seisin of the appeal from the order of assessment of the ITO. If the ITO has failed to apply his mind to the proviso to s. 13 or has come to a wrong determination for or against the assessee in the computation of the income, the AAC can correct that error when he has seizin of the assessment on an appeal filed by the assessee. Whether in a particular case a remand will be the proper order depends on the circumstances of each case; the AAC has the power to correct the error in the way most suitable in the circumstances of the case”.
19. The jurisdiction of the AAC in disposing of the appeal filed before him came up for consideration before the Supreme Court in the case of CIT vs. Rai Bahadur Rardutroy Motilal Chamaria (supra), where the Supreme Court held as under: “The AAC has no jurisdiction under s. 31(3) of the Indian IT Act, 1922, to assess a source of income which is not disclosed either in the returns filed by the assessee or in the assessment order. It is not, therefore, open to the AAC to travel outside the record, i.e. the return made by the assessee or the assessment order of the ITO, with a view to finding out new sources of income and the power of enhancement under s. 31(3) is restricted to the sources of income which have been the subject-matter of consideration by the ITO from the point of view of taxability. In this context “consideration” does not mean “incidental” or “collateral” examination of any matter by the ITO in the process of assessment. There must be something in the assessment order to show that the ITO applied his mind to the particular subject-matter or the particular source of income with a view to its taxability or to its non- taxability and not to any incidental connection”.
20. In CIT vs. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC) : TC 7R.475, while considering the provisions of s.
33(4) of the Indian IT Act, 1922 the Supreme Court held that “The AAC has plenary powers in disposing of an appeal. The scope of his powers is coterminous with that of the ITO. He can do what the ITO can do and can also direct him to do what he has failed to do”.
21. In CIT vs. Scindia Steam Navigation Co. Ltd. (1971) 80 ITR 589 (Bom) : TC 7R.456, the Bombay High Court while considering the powers of the AAC held that: “Powers conferred upon the AAC by the IT Act are much wider than the powers of an ordinary Court of appeal. Under the IT Act, once an assessment comes before the AAC, his competence is not restricted to examining these aspects of the assessment which are complained of by the assessee, but ranges over the whole assessment and it is open to him to correct the ITO not only with regard to a matter raised by the assessee in the appeal but also with regard to any other matter which has been considered by the ITO and determined in the course of the assessment”.
22. In Parameswara Oil Mill vs. CIT (1972) 85 ITR 151 (AP) : TC 7R.452, the Andhra Pradesh High Court while considering s. 31 of the Indian IT Act, 1922 held that : “The powers of the AAC under s. 31 are not confined to the subject-matter of the appeal but extends to the subject-matter of the assessment and that the AAC is entitled to sustain the addition made by the ITO on a ground different from the one which has been made by him”.
23. In Indermal Natwarlal vs. CIT (1987) 64 CTR (MP) 337 : (1987) 166 ITR 494 (MP) : TC 7R.439, the Madhya Pradesh High Court while considering the provisions of s. 251 of IT Act, 1961, held that “the AAC by his order of remand had not introduced any new source of income, not processed by the ITO. The question as to whether any expenditure could not be deductible in view of the provisions of s. 40A(3), was a matter which directly arose in the course of assessment and as the ITO had failed to examine that aspect of the matter, the AAC had directed him to do so. Therefore, the Tribunal was justified in holding that the AAC had not exceeded his jurisdiction in passing the remand order”.
24. In Jute Corporation of India Ltd. vs. CIT (1990) 88 CTR (SC) 66 : (1991) 187 ITR 688 (SC) : TC 7R.343, the Supreme Court while considering s. 251(1)(a) of the IT Act, 1961 came to the following conclusions: “(i) The power to tax on discovery of a new source of income is quite different from granting deduction on the admitted facts fully supported by the decision of the Supreme Court. (ii) An Appellate Authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter, and (iii) The observations in the case of Addl. CIT vs. Gurjargravures (P) Ltd. 1978 CTR (SC) 1 : (1978) 111 ITR 1 (SC) : TC 7R.367, do not rule out a case for raising an additional ground before the AAC if the ground so raised could not have been raised at the stage when the return was filed or when the assessment order was made or if the ground became available on account of change of circumstances or law”.
25. The Gujarat High Court while considering the powers of the AAC in Smt. Vijaykunverba vs. CIT (1993) 114
CTR (Guj) 94 : (1994) 208 ITR 312 (Guj) : TC 7PS.45 held that : “The powers of the AAC are not confined to the subject-matter of the appeal but extend to the subject-matter of the assessment. The entire assessment is thrown open before the AAC and so long as he does not travel outside the matters considered and determined by the ITO, he can correct any decision of the ITO in the course of the assessment even if the assessee is satisfied with it and has not challenged it in the appeal”.
26. So also, the Calcutta High Court in CIT vs. Ranicherra Tea Co. Ltd. (1995) 124 CTR (Cal) 113 : (1994) 207 ITR 979 (Cal) : TC 7PS.46, held that : “In disposing of an appeal from an assessment under s. 144 of the IT Act, 1961, the first appellate authority need not confine itself only to the materials on record at the time of assessment. It may make such enquiries as it thinks fit. The first appellate authority has all the powers which the original authority may have. In the absence of any statutory provision to the contrary, the appellate authority is vested with all the plenary powers which the subordinate authority has in the matter”.
27. On behalf of the assessee reliance placed upon the decision of the Supreme Court in the case of CIT vs. Shapoorji Pallonji Mistry (supra) was brought to our notice, wherein the Supreme Court held that: “In an appeal filed by the assessee the AAC has no power to enhance the assessment by discovering new sources of income not mentioned in the return of the assessee or considered by the ITO in the order appealed against”.
28. The assessee’s counsel also relied upon the decision of the Supreme Court in the case of Addl. CIT vs. Gurjargravures (P) Ltd. (supra) wherein the Supreme Court while considering the powers of the AAC held as under:— “If, as held in this case, an item of income noticed by the ITO but not examined by him from the point of view of its taxability or non-taxability cannot be said to have been considered by him, it is not possible to hold that the ITO examining a portion of the profits from the point of view of its taxability only, should be deemed to have also considered the question of its non-taxability. As we have pointed out earlier, the statement of case drawn up by the Tribunal does not mention that there was any material on record to sustain the claim for exemption which was made for the first time before the AAC. We are not here called upon to consider a case where the assessee failed to make a claim though there was evidence on record to support it, or a case where a claim was made but no evidence or insufficient evidence was adduced in support. In the present case neither any claim was made before the ITO, nor was there any material on record supporting such a claim”. It was further held in the abovesaid decision that “consideration” does not mean incidental or collateral examination of any matter of the ITO in the process of assessment. There must be something in the assessment order to show that the ITO applied his mind to the particular subject-matter of the particular source of income with a view to its taxability or to its non-taxability and not to any incidental connection.
29. Lastly, the counsel for the assessee also placed reliance on the decision of the Calcutta High Court in the case of CIT vs. National Company Ltd. (supra) wherein, while considering the powers of the AAC, the Calcutta High Court took the following view: “In enhancing the assessment for any year, the AAC cannot travel outside the record, that is to say, the return made by the assessee and the assessment order passed by the ITO. There are other provisions which enable escaped income from a new source to be brought to tax after following the special procedure. The power of the AAC extends to matters considered by the ITO, and if a new source is to be considered, then the power of remand should be exercised. By the exercise of the power to assess fresh sources of income, the assessee is deprived of the finding by two Tribunals and one right of appeal”.
30. Thus a combined reading of the decisions cited by the learned standing counsel for the Department as well as the learned counsel appearing for the assessee will go to show that the AAC is having a plenary power in an appeal filed before him. The entire assessment is thrown open. The AAC cannot travel outside the record, that is to say, the return made by the assessee and the assessment order passed by the ITO. The first appellate authority need not confine itself only to the materials on record at the time of assessment. It may make such enquiries as it thinks fit. The first appellate authority has all the powers which the original authority may have. In the absence of any statutory provision to the contrary, the appellate authority is vested with all the plenary powers which the subordinate authority has in the matter. An item of income noticed by the ITO, but not examined by him from the point of view of its taxability or non-taxability, cannot be said to have been considered by him. Consideration does not mean incidental or collateral examination of any matter by the ITO in the process of assessment. There must be something in the assessment order to show that the ITO applied his mind to the particular subject-matter or the particular source of income with a view to its taxability or to its non-taxability and not to any incidental connection. M/s T.T. Krishnamachari & Co. is the assessee. The assessee filed a return for the asst. yr. 1974-75 disclosing an income of Rs. 4,90,081 under the head “business income”. According to the ITO, the profit to be made by the assessee through purchase and sale of gripewater was transferred to the company, M/s Tamil Nadu Printers and Traders (P) Ltd. Therefore, the profit earned by the company, M/s Tamil Nadu Printers and Traders (P) Ltd., was assessed in the hands of the assessee. The subject matter in the assessment before the ITO was the business income earned by the assessee through purchase and sale of gripewater. On appeal, the AAC did not want to go into the question of diversion of profit. According to the AAC, the assessee itself made the profit out of its own business in manufacturing, purchasing and selling of gripewater. The ITO accepted the income returned under the head “business income”. The AAC called for the records in the appellate proceedings and on going through the paper book filed by the assessee and after discussions with the chartered accountant, came to the conclusion that the assessee purchased gripewater for a higher price when the same goods were available in the market for a lower price. The difference between the above said two prices was made as an addition by the AAC. In the process, we have to see whether the AAC travelled beyond or outside the record, that is to say, the return filed by the assessee and the assessment order passed by the ITO. While accepting the returned income under the head “business income”, the ITO did not question on what basis the returned income was arrived at. But, it remains to be seen that the income returned relates to the profit made out of manufacture, purchase and sale of gripewater. While accepting the business income returned by the assessee, though the ITO has not questioned on what basis the income was arrived at, definitely the business income would have been arrived at on the basis of the purchase price and sale price in order to ascertain the business profit. When the ITO accepted the returned business income, he accepted the profit arrived at by the assessee in its business on the basis of the purchase price and the sale price furnished by the assessee. Without adverting to the sale price and the purchase price, the profit could not have been arrived at and, therefore, when the ITO accepted the business income returned by the assessee, it cannot be said that the ITO has not considered the business profit made out of the sale and purchase of the commodity in question. After accepting the business income returned by the assessee, the ITO sought to tax the same by processing the assessment. On appeal, the AAC also on the basis of the sale price and the purchase price as furnished by the assessee tried to modify the assessment made by the ITO by reducing the allowance made by the ITO. On the materials available on record, the AAC reduced the permissible deduction since they are unreasonable and excessive, according to him. Under such circumstances, it cannot be said that the AAC has travelled outside the return filed or outside the assessment order made or outside the materials available on record, or it cannot also be said that the AAC found out a new source, which was not considered by the ITO for reducing the allowance. Therefore, on materials available on record, we are coming to the conclusion that the AAC has not exceeded his jurisdiction, while reducing the allowance on the basis of the price factors, which was deemed to have been considered by the ITO while accepting the income returned under the head “business income” returned by the assessee.
It is seen from the facts that M/s Tamil Nadu Printers and Traders (P) Ltd. purchased from M/s Orient Pharma the gripewater at the rate of Rs. 183-57 per gross. So also, the Tamil Nadu Printers and Traders (P) Ltd. sold gripewater to M/s Herbertsons Ltd. for Rs. 228-09 per gross. M/s T.T.K. & Co. purchased from M/s Tamil Nadu Printers and Traders (P) Ltd. gripewater at the rate of Rs. 25409 per gross. According to the AAC, when the goods were available at the rate of Rs. 183-57 per gross, there is no necessity to purchase the goods at Rs. 254-09 per gross. Therefore, the AAC sustained an addition on the basis of the price difference between Rs. 254-09 and Rs. 183-57 amounting Rs. 71 per gross. According to the Tribunal, price paid to M/s Herbertsons Ltd., which is a different entity not connected with the firm of M/s Tamil Nadu Printers, could be taken as normal market price prevailing at that time. Therefore, the Tribunal took the difference between Rs. 22809 per gross and Rs. 254-09 per gross, which comes to Rs. 26 per gross and the addition was directed to be made on this basis. The assessee has not filed any reference questioning the order passed by the Tribunal on merits as on alternative measure.
33. For these reasons, we hold that the Tribunal was not correct in coming to the conclusion that the AAC has erred in making an addition by reducing the allowance by travelling outside the assessment records and thereby exceeded his jurisdiction and materials available on record, by finding out a new source. We also hold that the Tribunal’s alternative approach on merits to make addition at the rate of Rs. 26 per gross appears to be in order. In that view of the matter, we answer the question referred to us in the negative and in favour of the Department. There will be no order as to costs.
[Citation : 223 ITR 224]
