IN THE HIGH COURT OF GUJARAT
R/Tax Appeal No. 1203 Of 2018
M/s SUNIT TRADING COMPANY
THE INCOME TAX OFFICER
J B Pardiwala & A C Rao, JJ
Dated: July 15, 2019
Appellant Rep by: Mr Tushar Himani With Ms Vaibhavi K Parikh
Respondent Rep by: Mrs Kalpana K Raval
Income Tax – Sections 144 & 145
Keywords – Best judgment assessment – Guesswork – Method of accounting
The assessee filed its revised return after the return originally filed was already subjected to scrutiny assessment. The revised return declared the scale of income more than the previous return in addition to claim of refund out of TDS deducted from labour payments. The AO, considering the submissions of the assessee and information gathered from the search of one M/s PACL Ltd, came to the conclusion that dealings of the assessee with M/s PACL were accommodation entries. Treating the labour receipt income as income from other sources and estimating the commission receipts, the addition was made while rejecting the books of accounts. The CIT(A) partly confirmed the addition by restricting the commission from 10% to 2%. The ITAT, at Department’s behest, confirmed the part of CIT(A)’s order where it estimated the commissions but confirmed the rest of addition on the basis that the benefit derived.
Having heard the parties, the High Court held that,
Whether a substantial question before the writ court arises when the lower Revenue forums arbitrarily reject the method of accounting adopted by the assessee to reach an estimated income purely on guesswork – YES: HC
++ clause (3) of Section 145 gives discretion to the AO to make an assessment in the manner provided in Section 144, yet this discretion cannot be exercised arbitrarily. The question to determine in every such case is, whether there is any material for the basis adopted by the AO or the Tribunal, as the case may be, for computing the income of the assessee. The material which is irrelevant or which amounts to mere guesswork or conjecture is no material;
++ in the present case, the AO thought fit to estimate 10% commission. The CIT(A) took the view that the estimation of commission @ 10% by the AO is not a reasonable estimate and without there being anything on record, thought fit to take the view that the estimate at 2%. This is nothing but pure guesswork without there being any material or basis for arriving at the same. Hence, the way the authorities have proceeded with the guesswork, it cannot be approved. Thus, the Tax Appeal succeeds and is allowed.
Lalchand Bhagat Ambica Ram v. Commissioner of Income-tax – 2002-TIOL-1177-SC-IT-LB
Commissioner of Income-tax v. A.Krishnaswami Mudaliar – 2002-TIOL-1115-SC-IT-LB
Per: J B Pardiwala:
1. This Tax Appeal under Section 260A of the Income Tax Act, 1961 (for short, ‘the Act 1961’) is at the instance of the assessee 1. This Tax Appeal under Section 260A of the Income Tax Act, 1961 (for short, ‘the Act 1961’) is at the instance of the assessee
2. The appellant has proposed the following substantial question of law :
“Whether in the facts and circumstances of the case, the Income-tax Appellate Tribunal was right in law in confirming addition of Rs.22,53,100/- on account of alleged commission income @ 2% without there being any evidence or material on record for making such estimate ?”
3. It appears from the materials on record that the appellant had filed his return of income on 15th September 2011 declaring the total income at Rs.5,34,342/-. The return was processed under Section 143(1) of the Act. The case was selected for scrutiny and notice under Section 143(2) of the Act was issued dated 31st July 2012. The appellant filed his revised return of income on 30th March 2012, declaring the total income of Rs.7,44,070/- and claimed refund of Rs.23,26,700/-. The notice under Section 142(1) of the Act was issued on 24th May 2013. According to the appellant, he derived income from civil contract (labour job work). The appellant showed gross business receipts of Rs.12,00,02,100/- and a net profit of Rs.5,37,942/-. The refund of Rs.23,26,700/- out of the prepaid taxes contained tax deducted by M/s.PACL Limited against the payment for labour. The appellant showed labour receipts income account of Rs.12,00,02,100/-. The Assessing Officer, relying on the statement of the appellant recorded under Section 131 of the Act and the information received subsequent to the search in the case of M/s.PACL India Limited, came to the conclusion that the dealings of the appellant with M/s.PACL India Limited were accommodation entries. The Assessing Officer issued showcause notice dated 14th March 2014, calling upon the appellant to show-cause as to why the labour receipt income or Rs.12,00,02,100/- should not be treated as income from other sources under Section 56 of the Act. The appellant, vide his reply dated 21st March 2014, explained that he had only received commission of Rs.0.30 on Rs.100/-, i.e. Rs.3,60,000/- on Rs.12,00,02,100/- which had already been included in the net profit and reflected in the profit & loss account. The Assessing Officer rejected the books of accounts under Section 145(3) of the Act and estimated the income at 10% of the gross receipts. The Assessing Officer made an addition of Rs.1,20,00,210/- as income from other sources under Section 56 of the Act.
4. The appellant, being aggrieved by the order passed by the Assessing Officer, preferred an appeal before the Commissioner of Income Tax (Appeals).
5. The appellant submitted before the CIT(A) that the estimation of net profit at 10% was on the higher side and he had received commission at 0.45% only. He also pointed out that the returned income included the profit of Rs.4,13,742/- from the labour contract receipts and set-off should have been granted against the addition of commission income by the Assessing Officer. The appellant also submitted that the commission for accommodation entries should have been within the range of 0.15% to 0.25%. The CIT(A) took the view that 0.3% of commission as declared by the appellant was on a lower side as it translated to 1% of the benefit derived. The CIT(A) estimated the commission at Rs.24,00,042/-, i.e. 2% on the basis that the same is 6.7% of the tax benefit derived by the PACL India Limited, i.e. 30%, and the same was a reasonable estimate. The CIT(A) took the view that the set-off of only the net income from the fictitious contract receipts could be granted. The CIT(A) reduced the interest income and retail sales from the net profit to grant the set-off. The set-off granted by the CIT(A) came to only Rs.1,46,942/- [Rs.5,37,942/- (net profit) – Rs.1,20,000/- (interest income) – Rs.2,71,000/- (retail sales)]. Thus, the CIT(A) partly confirmed the addition to the extent of Rs.22,53,100/-.
6. Being dissatisfied with the order passed by the CIT(A), the department preferred an appeal before the Income Tax Appellate Tribunal bearing ITA No.2287/AHD/2015. The appellant preferred Cross Objection bearing CO No.161/AHD/2015. The Appellate Tribunal, vide its impugned order dated 23rd March 2018, confirmed the order of the CIT(A), estimating the commission at 2%. However, the Appellate Tribunal confirmed the addition on the basis that the benefit derived was of Rs.12,00,02,100/-.
7. Being dissatisfied with the order passed by the Appellate Tribunal, the appellant has come up with the present Tax Appeal.
SUBMISSIONS ON BEHALF OF THE APPELLANT :
8. Mr.Tushar Himani, the learned counsel appearing for the appellant, vehemently submitted that after the rejection of the books of accounts of the appellant under Section 145(3) of the Act, the Assessing Officer could not have proceeded to estimate the income of the appellant without any material or basis. Mr.Himani submitted that it is a settled position of law that the estimation of income cannot be made without any material or merely on guesswork.
9. Mr.Himani submitted that the Assessing Officer made an addition of 10% of the gross receipts as commission. There was no cross-inquiry with M/s.PACL India Limited to determine the amount of commission paid to the appellant. According to Mr.Himani, the estimation of commission at 2% by the CIT(A) is also without any basis. Mr.Himani submitted that the CIT(A) estimated the commission at 2% on erroneous basis that the appellant had derived benefits of Rs.12,00,02,100/- from the accommodation entries. It is pointed out that it is not even the case of the CIT(A) that the appellant had derived such benefits. Mr.Himani submitted that the Appellate Tribunal ought to have deleted the addition of Rs.22,53,100/- having regard to the following :
“(a) The appellant has not derived a benefit of more than 0.3% of the transaction, and the same has already been declared by the appellant in its return of income.
(b) The amount of benefit derived by PACL India Ltd. has no bearing on the income of the appellant and cannot be a basis for making addition in the hands of the appellant, especially when even the benefit derived by PACL India Ltd. is itself an assumption pending the investigation at various forums.
(c) In any case, the estimation of 2% of the transaction is on the higher side.”
10. In the last, Mr.Himani submitted that the Appellate Tribunal, in the alternative, ought to have granted a set-off of the contract receipts declared by the appellant considering the following :
“(a) The CIT(A) has grossly erred in computing the set off amount by reducing gross interest income and gross income from retail sales from the net profit of the appellant.
(b) If at all, net profit from interest income and retail sales ought to be reduced from the net income.”
11. Mr.Himani, in support of his submissions, has placed strong reliance on the following four decisions :
(i) Dhankeswari Cotton Mills Limited v. CIT (1954) 26 ITR 775 (SC) = 2002-TIOL-835-SC-IT-CB
(ii) Raghubar Mandal Harihar Mandal v. State of Bihar (1957) 8 STC 770
(iii) Brij Bhushan Lal Parduman Kumar v. CIT (1978)115 ITR 524 (SC) = 2002-TIOL-900-SC-IT
(iv) Steels worth Limited v. CIT (1968) 69 ITR 366 (Assam)
SUBMISSIONS ON BEHALF OF THE REVENUE :
12. Ms.Raval, the learned standing counsel appearing for the Revenue, has vehemently opposed this Tax Appeal. Ms.Raval submitted that, no error, not to speak of any error of law, could be said to have been committed by the Appellate Tribunal in passing the impugned order. According to Ms.Raval, the substantial question of law as proposed cannot be held to be question of law as there is no inflexible rule that the books of accounts must either be accepted or rejected. The making of assessment differs from case to case and there cannot be any rigid principle.
13. Ms.Raval, in support of her submissions, placed strong reliance on a decision of this Court rendered in the case of Mayank Diamonds Pvt. Ltd. v. I.T.Officer (Tax Appeal No.200 of 2003, decided on 7th November 2014) = 2014-TIOL-2041-HC-AHM-IT.
14. The CIT(A) recorded the following findings :
“7.2 At the outset, it needs to be mentioned that accommodation entries can be of different types and the quantum of commission will depend on the nature of accommodation entries provided, the benefit derived there from and the logistics/paperwork, etc. involved. Accommodation entries are provided for bogus profit in the form of fictitious capital gain. Accommodation entries are also provided for bogus share capital, bogus share capital, bogus unsecured loan, non-existent sales, non-existent purchases, and bogus expenses. In the present appeal, it is for bogus expenses. The benefit derived there from is tax avoidance of approximately 30% of the amount of accommodation entries. Therefore, the benefit derived from accommodation entries by M/s.PACL India Ltd. is approximately 30% of Rs.12,00,02,100/-. The estimation of commission @ 10% by the assessing officer is 1/3rd of the said benefit, which is excessive and cannot be considered a reasonable estimate.
7.3 On the other hand, the estimate by the appellant at . 3% translates to 1% of the benefit derived, which is too low to justify the nature of activities and the risk undertaken by the appellant. Considering the same, the commission in the case of the appellant for giving accommodation entries is estimated at 2% on Rs.12,00,02,100/-. This translates to about 6.7% of the benefit derived by M/s.PACL India Ltd and therefore, is a reasonable estimate. As a result, the estimate made by the assessing officer at Rs.1,20,00,210/- is reduced to Rs.24,00,042/- subject to para 8 of this order.”
15. We may also look into the findings recorded by the Tribunal in its impugned order, which read thus :
“8. We have considered the facts, heard rival submissions and perused the material on record. It is not in dispute between parties that the assessee has provided accommodation entries amount to Rs.12,00,02,100/- of M/s.PACL India Ltd. By considering these aspects, the ld. CIT(A), has estimated commission receipt @ 6.7% of such accommodation entries. Moreover, reliance placed by ld. Counsel on aforesaid two decisions is not applicable to present case. In case of Gold Star Finvest (P) Ltd (supra), commission @ 0.15% was considered reasonable, as the case pertained to business dealings in shares and securities. Similarly, in the case of Shri Deepak Kumar Mistry (supra) the commission payment rate @ 0.25% was found recorded in impounded material. Hence, their ratio on same cannot be applied to present case. In such circumstances, on careful consideration, we do not find any infirmity in the order of ld. CIT(A). Accordingly, same is upheld, Ex-consequnti, appeal of Revenue, is therefore, dismissed.”
16. Before adverting to the rival submissions canvassed on either side, we may look into the four decisions relied upon by Mr.Himani, the learned counsel appearing for the appellant.
17. In Dhakeswari Cotton Mills Ltd (supra), the Supreme Court observed as under :
“In this case we are of the opinion that the Tribunal violated certain fundamental rules of justice in reaching its conclusions. Firstly, it did not disclose to the assessee what information had been supplied to it by the departmental representative. Next, it did not give any opportunity to the company to rebut the material furnished to it by him, and lastly, it declined to take all the material that the assessee wanted to produce in support of its case. The result is that the assessee had not had a fair hearing. The estimate of the gross rate of profit on sales, both by the Income-tax Officer and the Tribunal, seems to be based on surmises, suspicions and conjectures. It is somewhat surprising that the Tribunal took from the representative of the department a statement of gross profit rates of other cotton mills without showing that statement to the assessee and without giving him an opportunity to show that that statement had no relevancy whatsoever to the case of the mill in question. It is not known whether the mills which had disclosed these rates were situate in Bengal or elsewhere, and whether these mills were similarly situated and circumstanced. Not only did the Tribunal not show the information given by the representative of the department to the appellant, but it refused even to look at the trunk load of books and papers which Mr.Banerjee produced before the Accountant Member in his chamber. No harm would have been done if after notice to the department the trunk had been opened and some time devoted to see what it contained. The assessment in this case and in the connected appeal ; we are told, was above the figure of Rs.55 lakhs and it was meet and proper when dealing with a matter of this magnitude not to employ unnecessary haste and show impatience, particularly when it was known to the department that the books of the assessee were in the custody of the Sub-Divisional Officer, Narayanganj. We think that both the Income-tax Officer and the Tribunal in estimating the gross profit rate on sales did not act on any material but acted on pure guess and suspicion. It is thus a fit case for the exercise of our power under article 136.
In the result we allow this appeal, set aside the order of the Tribunal and remand the case to it with directions that in arriving at its estimate of gross profits and sales it should give full opportunity to the assessee to place any relevant material on the point that it has before the Tribunal, whether it is found in the books of account or elsewhere and it should also disclose to the assessee the material on which the Tribunal is going to found its estimate and then afford him full opportunity to meet the substance of any private inquiries made by the Income-tax Officer if it is intended to make the estimate on the foot of those enquiries. It will also be open to the department to place any evidence or material on the record to support the estimate made by the Incometax Officer or by the Tribunal in its judgment. The Tribunal if it thinks fit may remit the case to the Income-tax Officer for making a fresh assessment after taking such further evidence as is furnished by the assessee or by the department. The costs of these proceedings will abide the result.”
18. In Raghubar Mandal Harihar Mandal (supra), the Supreme Court observed as under :
“4. The point for our consideration is can the assessing authority, purporting to act under S.10(2)(b) of the Act, assess the amount of tax due from a dealer more or less arbitrarily or without basing the assessment on any materials whatsoever? In the question referred to the High Court, the expression used is, “make an assessment on any figure of gross turnover without giving any basis to justify the adoption of that figure.” That expression is perhaps a little ambiguous, but read in the context of the statement of the case, the question can only mean this: can the assessing authority adopt a figure of gross turnover by pure guess and without referring to any materials on which the figure is based? It is clear to us that, understood in that sense, the High Court has answered the question incorrectly. The High Court went into an elaborate consideration, by way of comparison and contrast, of sub-s.(4) and cl.(b) of sub-s.(2) of S.10 of the Act. It is unnecessary for us to make any pronouncement in this appeal with regard to the precise scope of sub-s.(4) of S.10 of the Act which corresponds more or less to sub-s.(4) of S.23 of the Indian Income-tax Act; nor is it necessary for us to decide it an assessment made under cl.(b) of sub-s.(2) of S.10 of the Act, when the account books of the assessee are disbelieved stands exactly on the same footing as an assessment made under sub-s.(4) of S.10 when the assessee has failed to furnish his returns. In some decisions relating to the corresponding provisions of the Indian Income-tax Act, it has been said that the difference between the two is one of degree only, the one being more summary than the other. These are questions which do not really fall for decision in the present appeal, which is confined to interpreting the true nature and scope of cl.(b) of sub-s.(2) of S.10 of the Act. With regard to the corresponding provision in sub-s.(3) of S.23 of the Indian Income-tax Act, there is a decision of this Court which in our opinion, answers the question before us. The decision is that of Dhakeswari Cotton Mills Ltd. v. Commissioner of Income Tax, West Bengal 1955-1 S.C.R. 941 at p. 949: (s) A.I.R. 1955 S.C. 65 at p.69) (A) = 2002-TIOL-835-SC-IT-CB. This Court observed:
“As regards the second contention, we are in entire agreement with the learned Solicitor-General when he says that the Income-tax Officer is not fetered by technical rules of evidence and pleadings, and that he is entitled to act on material which my not be accepted as evidence in a Court of law but there the agreement ends; because it is equally clear that in making the assessment under sub-s.(3) of S.23 of the Act, the Income-tax 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 something more than bare suspicion to support the assessment under S.23 (3).”
In our view, the aforesaid observations clearly show that the High Court was in error in answering the question in the affirmative. Firstly the High Court treated the question referred to it as a pure question of fact; if that were so, then the High Court should have rejected the reference on the ground that it was not competent to answer a question of fact. Then, the High Court proceeded to consider certain decisions relating to the interpretation of sub-s.(3) and (4) of S.23 of the Indian Income-tax Act, and held that there was no difference between an assessment under sub-s.(3) and an assessment under sub-s.(4) of S.23. The High Court applied the same analogy and on that footing held that there being no difference between an assessment under cl. (b) of sub-s.(2) and an assessment under sub-s.(4) of S.10 of the Act, the answer to the question must be in the affirmative. In our view, the approach of the High Court to the question referred to it was erroneous and the answer given to the question by it solely on the basis of sub-s.(4) of S.10 of the Act was vitiated by that wrong approach. It was not sub-s.(4) of S.10 of the Act which the High Court had tov consider; it had to consider the true scope and effect of cl.(b) of sub-s.(2) of S.10 of the Act.
5. Learned counsel for the respondent has strongly urged two points in support of the answer which the High Court gave. Firstly, he has contended that on a proper reading of the assessment orders and the orders of the Commissioner, it would appear that the gross turnover for the quarters in question was based on certain materials; therefore, the argument of learned counsel is that it is not correct to say that the figure of gross turnover was arbitrarily adopted or was adopted without reference to any evidence or any material at all. We have examined the assessment orders in question, which form part of the statement of the case. It is clear to us that what the Sales Tax Officer and the Commissioner did was to hold, for certain reasons, that the returns made by the assessee and the books of account filed by it were incorrect and undependable. It is not necessary to repeat those reasons, because we must accept the finding of fact arrived at by the assessing authorities that the returns and the books of account were not dependable. The assessing authorities rightly pointed out that several transactions were not entered in the books of account; and a surprise inspection made on 15th July 1947, disclosed certain transactions with a Bombay firm known as Messrs. Kishundas Lekhraj, which were not mentioned in the books of account; and finally the assessee was importing silver in the name of five confederates in order to suppress the details of the transactions etc. The assessing authorities further pointed out that there was a discrepancy between the return filed for the quarter ending 30th June 1946, and the accounts filed in support of it; the return showed a gross turnover of Rs.2,28,370-12-0 while the accounts revealed a gross turnover of Rs.1,48,204. All these we must accept as correct. Having rejected the returns and the books of account, the assessing authorities proceeded to estimate the gross turnover. In so estimating the gross turnover, they did not refer to any materials at all. On the contrary, they indulged in a pure guess and adopted a figure without reference to any evidence or any material at all. Let us take, for example, the assessment order for the quarter ending 30th June 1946. The sales Tax Officer said: “I reject the dealer’s accounts and estimate a gross turnover of Rs.4,00,000. I allow a deduction at 2% on the turnover and assess him on 3,92,000 to pay sales tax of Rs.6,125.” For the quarter ending on 30th September 1946, the Sales Tax Officer said: “I reject his irregular account and estimate a gross turnover of Rs.3,00,000 for the quarter and assess him on Rs.2,94,000 to pay tax of Rs.4,593-12-0.” These and similar orders do not show that the assessment was made with reference to any evidence or material; on the contrary, they show that having rejected the books of account, the assessing authorities indulged in pure guess and made an assessment without reference to any evidence or any material at all. This the assessing authorities were not entitled to do under cl.(b) of sub-s.(2) of S.10 of the Act.
6. Secondly, learned counsel for the respondent has referred us to several decisions on which the High Court relied and has argued that on the basis of those decisions, it must be held that the answer given by the High Court to the question referred to it was a correct answer. We propose to examine briefly some of those decisions, though as we have stated earlier, the question is really answered by the observations made by this Court in 1955-1 SC R 941: ((S) AIR 1955 SC 65) (A). The first decision is the Privy Council decision in Commissioner of Income Tax U.P. and C.P. v. Badridas Ramrai Shop, Akola 64 Ind App. 102 at pp. 114- 115: (AIR 1937 PC 133 at p. 1328) (B) = 2003-TIOL-111-ITAT-NAGPUR. Lord Russel of Killowen in delivering the judgment of their Lordships made the following observations as respect a “best of judgment” assessment within the meaning of S.23(4) of the Indian Income-Tax Act:
“The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly, or vindictively or capriciously, because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee’s circumstances and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate: and though there must necessarily be guesswork in the matter, it must be honest guess-work.”
We find nothing in those observations which runs counter to the observations made in 1955-1 SC R 941: (S) AIR 1955 SC 65) (A). No doubt it is true that when the returns and the books of account are rejected, the assessing officer must, make an estimate, and to that extent he must make a guess: but the estimate must be related to some evidence or material and it must be something more than mere suspicion. To use the words of Lotds Russell of Killowen again, “he must make what he honestly believes to be a fair estimate of the proper figure of assessment” and for this purpose he must take into consideration such materials as the assessing officer has before him, including the assessees circumstances, knowledge of previous returns and all other matters which the assessing officer thinks will assist him in arriving at a fair and proper estimate. In the case under our consideration, the assessing officer did not do so, and that is where the grievance of the assessee arises.
7. The next decision is Ganga Ram Balmokand v. Commissioner of Income Tax, 1937-5 ITR 464: (AIR 1937 Lah 721) (C). It was held therein that where the income-tax authorities were not satisfied with the correctness or completeness of the assessee’s account and, taking into consideration the state of affairs in general, and the fact that the assessee had a large business and the profit shown by them was abnormally low in comparison with that of other persons carrying on the same business in the locality, calculated the taxable income by applying a flat rate 7 per cent., the authorities were justified in applying such a flat rate and the burden was on the assessee to displace the estimate. There again, the estimate made was not a pure guess and was based on some materials which the Incometax Officer had before him, Din Mohammad, J. who gave the leading judgment, observed: “It cannot be denied that there must be some material before the Income-tax Officer on which to base his estimate, but no hard and fast rule can be laid down by the Court to define what sort of material is required on which his estimate can be founded.” With that observation we generally agree. If, in this case, the Sales Tax authorities had based their estimate on some material before them, no objection could have been taken; but the question which was referred to the High Court and which arose out of the orders of assessment, was whether it was open to the said authorities to make an assessment on a figure of gross turnover, without referring to any materials to justify the adoption of that figure. In answering that question in the Affirmative, the High Court has given a carte blanche to the sales Tax authorities and has, in our opinion, misdirected itself as to the true scope and effect of cl.(b) of sub-s.(2) of S.10 of the Act.
8. The next decision is Gunda Subbayya v. Commissioner of Income-Tax, Madras, 1939-7 ITR 21: (AIR 1939 Mad 371) (SB) (D). This decision also does not help the respondent. It was held in that decision that though there is nothing in the Indian Income-tax Act which imposes a duty on an Income-tax Officer, who makes an assessment under S.23 (3), to disclose to the assessee the material on which he proposes to act, natural justice requires that he should draw the assessee’s attention to it and give him an opportunity to show that the officers information is wrong and he should also indicate in his order the material on which he has made his estimate. This decision is really against the respondent and does not lay down any rule which may be said to be inconsistent with the observations made by this Court in 1955-1 SC R 941: (S) AIR 1955 SC 65) (A).
9. The decision of the Lahore High Court in Gurumukh Singh v. Commissioner of Income-tax, Lahore, 1944-12 ITR 393; (AIR 1944 Lah 353(2) (FB) (E) = 2003-TIOL-296-HC-LAHORE-IT was specifically approved by this Court in 1955-1 SCR 941: (S) AIR 1955 SC 65) (A). The rules laid down in that decision were these; (1) While proceeding under sub-s.(3) of S.23 of the Income-tax Act, the Income Tax Officer is not bound to rely on such evidence produced by the evidence as he considers to be false; (2) if he proposes to make an estimate in disregard of the evidence oral or documentary, led by the assessee, he should in fairness disclose to the assessee the material on which he is going to found that estimate. (3) He is not however debarred from relying on private sources of information, which sources he may not disclose to the assessee at all; and (4) in case he proposes to use against the assessee the result of any private inquiries made by him, he must communicate to the assessee the substance of the information so proposed to be utilised to such an extent as to put the assessee in possession of full particulars of the cases he is expected to meet and should further, give ample opportunity to meet it, if possible, The decision does not lay down that it is open to the Income-tax Officer to make an estimate on pure guess and without reference to any material or evidence before him.”
19. In Brij Bhushan Lal Parduman Kumar (supra), the Supreme Court observed in paragraphs 4 and 5 thus :
“4. In support of these appeals counsel for the appellants has contended that it was well settled that even while making a best judgment assessment the Income-tax Officer must make an honest and fair estimate of the income of the assessee and that having regard to the terms and conditions of the contract (a specimen whereof was produced during the hearing before us) and particularly the terms on which the stores/materials were supplied by the military authorities to the assessee for being used in the works undertaken by the firm, it was clear that no element of profit was embedded in such stores/materials that were made available to the contractor for being used in the works entrusted to the contractor and as such the cost or value of such stores/materials could not be added to the total cash payments received by the contractor from the Department under the contract for the purpose of estimating the income or profits derived by the contractor from such contract. He pointed out that under the terms and conditions of the contract such stores/material was never ‘sold’ by the Department to the contractor but the same always remained the property of the Department and the contractor had merely handled, manipulated or used the same in the works completed by him and the surplus of such stores/material, if any, that remained was required to be and was actually returned by the contractor to the Department and this being the true nature of the supply of such stores/material, the cost or the value thereof could not be included or added to the total cash payment received by the contractor under the contract for computing his income or profits from the said contract. In support of his contention reliance was placed upon M. P. Alexander’s case (1973-92 ITR 92) (Ker) (supra), Madras High Court’s decision in Commissioner of Income tax, Madras v. K. S. Guru swami Gounder, 92 ITR 90’s (1974 Tax LR 157); Gujarat High Court’s decision in Trilokchand Chunilal v. Commissioner of Income-tax, Gujarat, 104 ITR 732 : (1977 Tax LR 143) and Full Bench decision of the Andhra Pradesh High Court in Addl. Commr. of Income-tax v. Trikamji Punia and Sons, 106 ITR 597 : (1977 Tax LR 222) (Andh Pra).
5. On the other hand, counsel for the Revenue contended that not only the cash payments received by the assessee under the contract but also the cost of the stores/material supplied by the Department to the contractor – both together represented the real value of the contract to the contractor and as such since the book results were rejected, the Taxing Authorities and the High Court were right in coming to the conclusion that the income or profit derived by the contractor from such contracts was liable to be determined by applying the flat rate to the entire value of the contract. In other words, it was contended by him that the cost of the stores/material supplied by the Government to the contractor was liable to be taken into account while estimating the income or profits of the contractor under such contract and in that behalf he pressed for our acceptance the view of the Punjab and Haryana High Court in Brij Bhushan Lal’s case (1971 Tax LR 388) (supra).”
20. Having heard the learned counsel appearing for the parties and having gone through the materials on record, the only question that falls for our consideration is, whether the Appellate Tribunal committed any error in passing the impugned order.
21. Section 145 of the Act reads as follows :
“145.Method of accounting. (1) Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
(2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessee or in respect of any class of income.
(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144.”
22. The law, as far as Section 145 of the Act is concerned, is summed up in the case of Commissioner of Income-tax v. A.Krishnaswami Mudaliar, (1964)53 ITR 122 = 2002-TIOL-1115-SC-IT-LB, as follows :
“……the expression in the opinion of the Income-tax Officer in the proviso to section 13 of the Indian Income-tax Act, 1922, does not confer a mere discretionary power; in the context, it imposes a statutory duty on the Income-tax Officer to examine in every case the method of accounting employed by the assessee and to see whether or not it has been regularly employed and to determine whether the income, profits and gains of the assessee could properly be deduced there from …… If, therefore, there is a system of accounting regularly employed and by appropriate adjustments from the accounts maintained taxable profit may properly be deduced, the Income-tax Officer is bound to compute the profits in accordance with the method of accounting. But where in the opinion of the Income-tax Officer the profits cannot properly be deduced from the system of accounting adopted by the assessee it is open to him to adopt a more suitable basis for computation of the true profits.”
23. It must be noted that although clause (3) of Section 145 gives discretion to the Assessing Officer to make an assessment in the manner provided in Section 144 of the Act, yet this discretion cannot be exercised arbitrarily. The question to determine in every such case is, whether there is any material for the basis adopted by the Assessing Officer or the Tribunal, as the case may be, for computing the income of the assessee. The material which is irrelevant or which amounts to mere guesswork or conjecture is no material. The law in this connection has been laid down by the Supreme Court in several cases and the following observations made by it in the case of Lalchand Bhagat Ambica Ram v. Commissioner of Income-tax, (1959)37 ITR 288 = 2002-TIOL-1177-SC-IT-LB, is apposite
“The limits of our jurisdiction to interfere with the finding of fact reached by the courts or tribunals of facts have been laid down by us in various decisions of this court. In Dhirajlal Girdharilal v. Commissioner of Income tax we observed that when a court of fact arrives at its decision by considering material which is irrelevant to the enquiry, or acts on material, partly relevant and partly irrelevant, where it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its decision, a question of law arises : Whether the finding of the court of fact is not vitiated by reason of its having relied upon conjectures, surmises and suspicions not supported by any evidence on record or partly upon evidence and partly upon inadmissible material. We also observed in Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax, West Bengal that an assessment so made without disclosing to the assessee the information supplied by the departmental representative and without giving any opportunity to the assessee to rebut the information so supplied and declining to take into consideration all materials which the assessee wanted to produce in support of the case constituted a violation of the fundamental rules of justice and called for interference on our part.”
24. The Assessing Officer thought fit to estimate 10% commission for providing accommodation entries to the tune of Rs.12,00,02,100/-. The CIT(A) took the view that the estimation of commission @ 10% by the Assessing Officer is 1/3rd of the said benefit, which could be termed as excessive and not a reasonable estimate. The CIT(A), without there being anything on record, thought fit to take the view that the estimate by the appellant at 3% translates to 1% of the benefit derived, which could be termed as too low, and in such circumstances, estimated at 2%, which would translate to about 6.7% of the benefit alleged to have been derived by M/s.PACL India Limited. This is nothing but pure guesswork without there being any material or basis for arriving at the same.
25. Ordinarily, we would not have entertained the appeal of the present nature having regard to the fact that the income has been assessed based on estimation. However, the way the authorities have proceeded with the guesswork, it cannot be approved.
26. In view of the above, this Tax Appeal succeeds and is hereby allowed. The question of law is answered in favour of the assessee and against the Revenue. The impugned order passed by the Income Tax Appellate Tribunal is hereby quashed and setaside.