High Court Of Rajasthan
CIT vs. Gotan Lime Khanij Udhyog
Sections 43B, 145
Asst. year 1986-87
Rajesh Balia & H.R. Panwar, JJ.
IT Ref. No. 84 of 1995
21st July, 2001
Counsel Appeared : None, for the Revenue : Anjay Kothari, for the Assessee
RAJESH BALIA, J. :
This is a reference submitted by Tribunal, Jaipur Bench, Jaipur, at the instance of CIT, Jodhpur, referring the following two questions of law arising out of its order in ITA No. 96/Jp/90 and cross-objection No. 13/Jp/90 for the asst. yr. 1986-87 in the case of respondent-assessee :
Question No. 1 : “In the facts and circumstances of the case and in law, was the Tribunal right, after holding that the proviso to s. 145(1) was applicable, in deleting the entire addition to the trading results ?”
Question No. 2 : “Whether, on the facts and in the circumstances of the case the Tribunal was legally justified in holding that the amount of unpaid sales-tax liability was not disallowable under s. 43B of the IT Act if the same was paid within the stipulated time under the sales-tax law ?”
The facts relating to question No. 1 are that the assessee is a dealer in marble. The AO having found that the trading accounts are not backed up with quantitative and qualitative stock details and that there is a considerable fall in G.P. rate invoked the provisions of s. 145(1). The assessee refuted the charge in so far as that the state of affairs as regards maintenance of accounts being the same as in earlier years and the same having been accepted by the Department, there was no justification to invoke the provisions of s. 145(1). The AO, however, not being convinced with this explanation made a trading addition of Rs. 3,34,960 by increasing G.P. rate. The CIT(A) though upheld the invocation of s. 145(1), sustained an addition of Rs 34,000 only and deleted the balance on the ground that it was on a higher side. The Tribunal, on further appeal, upheld that s. 145(1) has rightly been invoked but did not sustain the additions retained by CIT(A). It was held that while CIT(A) has found that assessee has made out a case for giving relief, but no basis has been given for sustaining additions of Rs. 34,000.
We have perused the statement of case and the finding recorded by the Tribunal in the light of observations made in the statement of case and heard learned counsel. Sec. 145 as it stood at the relevant time, read as under : 145. Method of accounting.â(1) Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall be computed in accordance with the method of accounting regularly employed by the assessee : Provided that in any case where the accounts are correct and complete to the satisfaction of the AO but the method employed is such that in the opinion of the AO the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the AO may determine : Provided further that where no method of accounting is regularly employed by the assessee, any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee : Provided also that nothing contained in this sub-section shall preclude an assessee from being charged to income-tax in respect of any interest on securities received by him in a previous year if such interest had not been charged to income-tax for any earlier previous year. (2) Where the AO is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the AO may make an assessment in the manner provided in s. 144.” A perusal of the aforesaid provision goes to show that the ordinary mandate of the statute is that where income chargeable under the head “Profit and gains of business or profession” or “Income from other sources” is returned on the basis of accounts maintained by the assessee by employing a method of accounting regularly, such income is to be computed in accordance with the method regularly employed by the assessee. With effect from 1st April, 1997, by the Finance Act, 1995, the position has been altered by directing that the income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall subject to the provisions of sub-s. (2) in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Thus, for the purpose of computing income on the basis of method of accounting adopted by the assessee is confined to maintenance of accounts on cash basis or mercantile system of accounting i.e., to say on accrual basis. No other system, even if employed regularly by the assessee is acceptable for computing the income as per the provisions of IT Act. However, this provision ipso facto does not mean that rejection of books of accounts of an assessee must yield to different conclusion in the computation of income as returned by the assessee on the basis of accounts made by him employing any other method of accounting.
Be that as it may, the provision which was in force in the accounting period relevant to assessment year in question envisaged that where the accounts are correct and complete to the satisfaction of the AO but the method employed is such that in the opinion of the AO, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the AO may determine. It also envisaged that where no method of accounting is regularly employed by the assessee, any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee, that is to say on accrual basis. Thus, sub-s. (1) deals with method of accounting employed by the assessee with reference to computing income chargeable under the head “Profit and gains of business or profession” or “Income from other sources” on the basis of method of accounting employed by the assessee. It does not deal with correctness of completeness of accounts, but with defect in method of accounts. On the other hand, sub-s. (2) envisaged that where AO is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the AO may make assessment in the manner provided in s. 144 that is to say as per best of his judgment. Both these provisions do not envisage that by resorting to best judgment assessment the assessing authority must reach to a different figure of income and profit than what has been disclosed by the assessee. Best judgment is also to be based on the material available on record. Therefore, notwithstanding rejection of books of account the material disclosed by the assessee along with other material that may be collected by the ITO forms the basis of computation of income. On that basis what conclusions are to be reached is independent of results shown in the books of accounts, if any maintained by the assessee. Sec. 145 only provides the basis on which computation of income is to be made for the purpose of determining the amount of tax payable by an assessee. The provision by itself does not deal with additions or deletion in the income. Therefore, merely because there is some deficiency in the books of account or merely because of rejection of books of account it does not mean that it must lead necessarily to additions in the returned income of the assessee. What changes in either case is the basis for computing the income chargeable under the head “Profit and gains of business or profession” or “Income from other sources”. The result would depend on the other principles of computing the income. Therefore, we hold that merely changing the basis or method of arriving at end result of working out the computation of taxable income under the IT Act, necessarily does result in devising at profit or gains from business or other sources different from one returned by assessee, where he has returned his income and different from the result reached by assessee as per method of accounting employed by him, by adopting different basis by the assessing authority.
6. On the merit of the case, we find that the ITO while recording a finding that the trading version declared by the assessee is unacceptable and the same is rejected by rejecting the explanation of the assessee for decrease in the G.P. rate disclosed in the books of account, has made additions to the tune of Rs. 3,34,960 by adopting a higher G.P. rate on the turnover disclosed by the assessee. The CIT(A) accepted the explanation furnished by the assessee for the reduced return of G.P. rate in his books of account substantially but was not satisfied about the verifiability of accounts in all respects, and held as under : “After due consideration, it appears that the plea of the appellant cannot fully succeed inasmuch as the different facts referred to in the impugned assessment order relating to showing the closing stock on estimate basis, the stock being not inventorised, lack of quantitative and qualitative stock details, unverification of different expenses debited to “Kankari-turai”, excavation etc. would clearly prove a basis to come to a conclusion that the books of accounts maintained by the appellant were not fully susceptible to verification and there was no justification in giving full credence to the version returned by the appellant. That apart, the sale rate has also increased as referred to in the impugned assessment order and in view of the same coupled with the fact that the profit returned by the appellant was not susceptible to verification in all expenses, an addition was well called for to cover up possible leakage that otherwise cannot be denied due to unverifiable expenses, etc. However, the facts cannot be lost sight of that the increase in transportation expenses, turai expenses, etc. along with the increase in the sales would have affected the profit margin to a great extent and that too when the major part of the sales was to TISCO at a fixed sale rate on the basis of certain agreement arrived at in the preceding assessment year while there was also increase in other expenses during the year under consideration. In view of this, the addition so made appears to be a very high side and it would be fair and reasonable if the same is directed to be restricted to a sum of Rs. 34,000 only to cover up the possible leakages in the books of accounts on account of unverifiability, non-maintenance of quantitative and qualitative details, etc. and excess thereof stand deleted.”
7. The Tribunal, on appeal, while agreed with the CIT(A) that recourse to s. 145(1) was justified, came to the conclusion : “In our opinion, after having come to this conclusion he was justified in giving relief to the assessee but we find no basis for his sustaining an addition of Rs. 34,000. The addition has been sustained merely “to cover up the possible leakages in the books of account of unverifiability”. In our view it was perhaps only account of possible leakages that the AO had made the impugned additions. But the learned CIT(A) did not find them to be unreasonable yet he has not given any justification for coming to the conclusion that sustaining an addition of Rs. 34,000 would be justified.” Thus, the finding has been reached on the ground that in the absence of recording any finding by the CIT(A) that the expenses incurred on any account appears to be unreasonable or excessive, the additions sustained merely on suspicion of pilferage or leakage was not justified. This conclusion, in our opinion, is a finding of fact keeping in view that the additions in the profits and gains returned by the assessee is not necessary concomitant of an order made under s. 145(1) or 145(2).
8. Likewise, the appeal of Revenue before the Tribunal has been rejected on the ground of having invoked the provisions of s. 145 by adopting the methodology of his own. The AO by rejecting the explanation furnished by him for returning the income at the reduced G.P. rate has made additions on estimate basis. The CIT(A) while substantially accepting the explanation furnished by the assessee for reduction in G.P. rate over its turnover during the year in question, was justified in not sustaining the additions made by the ITO and having come to that conclusion the formation of estimation fell within the domain of CIT(A). That part of the order of the Tribunal, in our opinion, does not give rise to any question of law. As a result of the aforesaid discussion, our answer to question No. 1 is that there was no error in the order of Tribunal in deleting the entire additions to the trading results after holding that proviso to s. 145 was applicable. That being the position, the question No. 1 is answered in affirmative i.e., in favour of the assessee and against the Revenue.
9. The second question pertains to allowability of unpaid sales-tax under s. 43B of the Act of 1961. During the relevant time the assessee was maintaining his books of account in which the accounting year ended on Dipawali each year. As on the date the previous year ending on 12th Nov., 1985, a sum of Rs. 24,537 was due on account of sales-tax liability which became payable but remained yet to be paid. The assessee has deposited Rs. 24,092 on 10th Dec., 1985, i.e., within the time allowed under sales-tax law, for that liability. The assessing authority disallowed the expenses on account of sales-tax liability amounting to Rs. 24,537 by having recourse to s. 43B(1)(a). The Tribunal has ultimately allowed the deduction on account of payment of sales-tax to the extent it was paid on 10th Dec., 1985, relying on decision of Andhra Pradesh High Court in Srikakollu Subba Rao vs. CIT (1988) 71 CTR (AP) 34 : (1988) 173 ITR 708 (AP) : TC 19R.791 that when statutory liability is paid within the stipulated period permitted under the respective tax law, it has to be allowed.
10. The controversy which earlier existed on account of different view taken by the High Court of Delhi in Escorts Ltd. vs. Union of India (1991) 93 CTR (Del) 169 : (1991) 189 ITR 81 (Del) : TC 19R.714 and Sanghi Motors vs. Union of India (1991) 91 CTR (Del) 15 : (1991) 187 ITR 703 (Del) : TC 19R.708 stood resolved by reversing the Delhi High Court judgment in Escorts Ltd. and overruling Sanghi Motors case in Allied Motors (P) Ltd. vs. CIT (1997) 139 CTR (SC) 364 : (1997) 224 ITR 677 (SC) : TC S19.2151. The apex Court held that Expln. II to s. 43B shall not be overriding proviso to s. 43B(a) as in force, during all relevant time read with first proviso and Expln. II are to be read together harmoniously so as not to make the provisions of s. 43B unduly harsh and clarified the scope and ambit of proviso to s. 43B which makes it abundantly clear that nothing contained in cl. (a) shall be applicable in respect of previous year in which liability to pay such sum was incurred as aforesaid and is actually paid by the assessee on or before the due date for furnishing return of income under sub-s. (1) of s. 139. This matter also received attention of this Court in two recent decisions rendered in CIT vs. Shree Laxmi Industrial Co. (IT Ref. No. 14 of 1994, decided on 18th April, 2001 and CIT vs. Mahaveer Polymers (IT Ref. No. 3 of 1994, decided on 18th April, 2001). This Court has opined : “Proviso 1 in fact provides an exception to the general provision that even where tax which has become payable during the previous year relevant to assessment year in question is not paid within the previous year, but is paid within the previous year, but is paid before return under s.
139(1) is due, still the assessee shall not be deprived of claiming allowance in respect of such payment by excluding the operation of cl. (a) of s. 43B in such event. Reading of the Expln. II as the Revenue contends and has been accepted by Delhi High Court, shall render the first proviso to s. 43B otiose, and meaningless while enacting Expln. II, first proviso to s. 43B has not been deleted. Nor Expln. II is a non obstante clause.” In view of the aforesaid judgments, question No. 2 is also answered in affirmative that is to say in favour of the assessee and against the Revenue. There shall be no orders as to costs.
[Citation : 256 ITR 243]