Chhabra Sweets and Cafeteria, Jalandhar V. Commissioner of Income Tax, Jalandhar & another

ITA/163/1999

AI Insights

The case involves M/s Chhabra Sweets and Cafeteria, Jalandhar, the appellant, contesting the decisions made by the Commissioner of Income Tax, Jalandhar, and the Income Tax Appellate Tribunal, Amritsar. The primary issues revolved around the rejection of the appellant's books of accounts and the subsequent estimation of sales and gross profit rate by the tax authorities for the assessment year 1989-90. The appellant challenged the enhancements made to their reported sales and the application of a higher gross profit rate, arguing that these actions were unjustified and lacked proper basis or evidence. However, both the CIT(A) and the Tribunal upheld the Assessing Officer's decisions, leading to the dismissal of the appeals by the High Court.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 795546 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 04-04-2014
• Assessment Year: misc
• Other Referred Cases: M/s Lovely Sweets House (P) Limited
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: VIVEK SETHI
• Assessee Lawyers: AKSHAY BHAN
• Keywords: Assessment Year 1989-90; Disallowances; Estimated sales; Gross Profit Rate; Income Tax; Rejection of books of accounts
• Section: 271(1)(c); 145(1); 260-A

Judgement Text

"I.T.A. No.163 of 1999 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH (1) I.T.A. No.163 of 1999. Decided on:-April 4th, 2014. M/s Chhabra Sweets and Cafeteria, Jalandhar. .........Appellant. Versus Commissioner of Income Tax, Jalandhar & another .........Respondents. (2) I.T.A. No.164 of 1999. M/s Chhabra Sweets and Cafeteria, Jalandhar. .........Appellant. Versus Commissioner of Income Tax, Jalandhar & another .........Respondents. CORAM: Hon'ble Mr. Justice Rajive Bhalla Hon'ble Mr. Justice Dr. Bharat Bhushan Parsoon. ***** Argued by:- Mr. Akshay Bhan, Advocate for the appellant. Mr. Vivek Sethi, Advocate for the respondents. Dr. Bharat Bhushan Parsoon, J. The aforesaid two appeals under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as the Act) are directed against a common order (Annexure P-3) dated 31.5.1999 passed by the Income Tax Appellate Yag Dutt 2014.04.07 18:17 I attest to the accuracy and integrity of this document I.T.A. No.163 of 1999 -2- Tribunal, Amritsar Bench, Amritsar (hereinafter referred to as the Tribunal) in ITA Nos.1193 and 1233(ASR)/1992 for the assessment year 1989-90. 2. As the matter in issue involved in both the appeals is the same, therefore, the same are being taken up together for adjudication. 3. For convenience and clarity, facts of ITA No.163 of 1999 are being taken up for discussion. 4. The appellant firm-assessee had posed the following substantial questions of law for adjudication: (a) Whether in the facts and circumstances of the case, Annexures P-1, P-2 and P-3 are legally sustainable? (b) Whether the ITAT was justified in enhancing the sales from Rs.40 lakhs to Rs.70 lakhs without any basis and material on record? (c) Whether the ITAT was right in accepting that proviso to section 145(1) of the Income Tax Act, 1961 was attracted in the present case? (d) Whether in the facts and circumstances of the case, the ITAT was justified in adopting gross profit rate at 11.5% without any material or evidence on record? (e) Whether in the facts and circumstances of the case, ITAT was right in upholding disallowances of packing charge from the gross profit of the assessee? (f) Whether in the facts and circumstances of the case, the ITO, CIT(A) and ITAT were justified in relying upon the case of M/s Lovely Sweets House (P) Limited which was not comparable and thus conclusion arrived at is vitiated? (g) Whether in the facts and circumstances of the case the orders Annexures P-1, P-2 and P-3 are vitiated being result of wrong conclusions from material and evidence on record and based on misreading of the evidence on record? Yag Dutt 2014.04.07 18:17 I attest to the accuracy and integrity of this document I.T.A. No.163 of 1999 -3- 5. Hearing has been provided to the counsel for the parties while going through the paper books. 6. The assessee-appellant firm for the previous year ending 31.3.1989 relevant to assessment year 1989-90 had filed its return declaring an income of Rs.63,560/- from the Halwai business of selling sweets, Paneer, Pakoras, Samosas etc. Quantum of sales were shown at Rs.26,87,741.80 Ps. giving the gross profit rate of 16.85%. 7. Large scale discrepancies were found in maintenance of books of accounts. Pointedly mentioning these embellishments in maintenance of the books of accounts. Invoking provisions of Section 145 of the Act, the accounts were rejected. The Assessing Officer (hereinafter referred to as the AO) applied gross profit rate of 12% on the estimated sales of Rs.1 crore and disallowing packing and electricity charges, had adjudicated liability of the assessee to pay income tax to the tune of Rs.10,03,780/-. Penalty proceedings under Section 271 (1)(c) of the Act were also ordered to be initiated for concealing income by furnishing inaccurate particulars of income vide order (Annexure P-1). 8. Aggrieved with this order (Annexure P-1) passed by the AO, the assessee approached the Commissioner of Income Tax (Appeals), Jalandhar [hereinafter referred to as the CIT(A)]. Concurring with the findings of the AO regarding rejection of the accounts of the assessee, plea of the assessee that books of accounts had been maintained in the regular course of business, was also rejected by the CIT(A). However, on facts, the CIT(A) made departure from the findings of the AO and noticed that the sales of the assessee could not have been pegged at Rs.1 crore. The CIT(A) observed that such high estimate of sales as also gross profit rate as propounded by the AO, was not proper. Observations of the CIT(A) culled out from the impugned order, are as given on the next page: Yag Dutt 2014.04.07 18:17 I attest to the accuracy and integrity of this document I.T.A. No.163 of 1999 -4- “The Assessing Officer has mentioned various defects in the maintenance of books of account because of which rejection of trading results could be justified. Even the counsel of the appellant conceded that rejection of trading results was not entirely unjustified. His main objection was regarding the estimate of sales and application of G.P. rate. It may be mentioned here that the Assessing Officer had also noticed that there was a percentage increase in packing expenses as compared with the preceeding assessment year. In the assessment year 1988-89 packing expenses amounted to 4.48% of the sales, whereas in the year under consideration these are 6.02% of the sales made. Though the counsel of the appellant has tried to justify the increase in packing expenses, this does indicate that sales during the year under consideration would have been higher than that had been disclosed in the books of account. Fact that the counsel of the appellant, during the course of discussion, had himself suggested that even if sales are estimated according to the percentage of packing expenses in the previous year, this would not exceed about Rs.30 to 35/- lakhs as against the estimate of sales of Rs. One crore made by the Assessing Officer. In case the sales are estimated keeping the percentage of packing expenses the same as is in the preceding assessment year, this would work out to Rs.37,23,777/- in the year under consideration (100/4.4x167570. The Assessing Officer’s estimate is based on the projection of sales based on consumption of sugar. In this regard also after considering the submissions made by the counsel of the appellant, it can only be profitable when barfi is made double the quantity of sugar used. On that basis the sales @ Rs.20/- per kg. would work out to Rs.44,80,000/- considering these two estimates, in my view it would be fair and reasonable to estimate sales of Rs.44,00,000/- as against Rs. 1 crore estimated by the Assessing Officer. It may be mentioned here that this estimate would include sales of item in which sugar is not used like Samosa, Paneer Pakora etc. which has been considered separately.” 9. As regards application of gross profit rate, the CIT(A) found no justification in applying a higher gross profit rate. It was reduced. Following observations of the CIT(A) are noteworthy: “The appellant had been showing higher G.P. rate in the year when the sales were low. In the year under consideration sales have been estimated at Rs.40 lakhs and accordingly Yag Dutt 2014.04.07 18:17 I attest to the accuracy and integrity of this document I.T.A. No.163 of 1999 -5- margin of profit is bound to be low. Considering all these facts I hold that application of G.P. rate of 11% in the case of the appellant would be justified. This rate would be applicable after considering the packing expenses claimed separately in the P&L A/C. Even in the case of M/s Lovely Sweet House (P) Limited packing expenses have been debited in the trading account and still resultant G.P. rate is 10.5% coming to the disallowance of electricity expenses. In my view, no disallowance would be warranted as this cannot be treated as manufacturing expenses. To conclude the Assessing Officer is directed to estimate income, taking sales at Rs.40,00,000/- and applying G.P. rate of 11%. No deduction from the profit so arrived at should be allowed on account of packing expenses claimed at Rs.1,67,570/- however, electricity expenses should be allowed in full alongwith other expenses claimed in the P&L A/C.” 10. When the matter was taken up by the Tribunal, though it had affirmed the findings of the CIT(A) which earlier in turn had affirmed the findings of the AO regarding rejection of books of accounts and had specifically noted that there were discrepancies in the books of accounts of the assessee, and it had taken into account all the facts and circumstances and had come to the conclusion that estimated sales of the assessee were at Rs.70 lacs. Relevant findings of the Tribunal in this regard are appended as below: “10.1. We are of the opinion that definitely sales of Rs.1,10,57,035/- is on higher side. Now we come to the logic adopted by the AO for estimating sales of the appellant. The AO has taken into account the consumption of sugar by the appellant during the year under consideration. The consumption of sugar is to the tune of 4,48,000 Kgs. He has taken base that 25% of sugar issued for conversion of sugar into sweets and if that formula is adopted, the average rate is taken at Rs.20 per Kg. then sales will come to Rs.89,60,000/- on the other hand the appellant has pleaded that half of the sugar in weight is used in sweets and more than that is used in Rasgulla, Gulabjamun etc. We have gone through the entire case and we are satisfied that accounts are not satisfactorily maintained as is clear by various defects mentioned by the Yag Dutt 2014.04.07 18:17 I attest to the accuracy and integrity of this document I.T.A. No.163 of 1999 -6- authorities below. We are of the opinion that a logical and reasonable estimation of sale is called for. We are also conscious that consumption of sugar will give us information of arriving at a reasonable estimate of sale. Even if for arguments sake, we agree with the AO that 50% of the sugar is used for manufacturing sweets, even then the sale will be to the tune of Rs.45 lakhs approximately. The learned counsel has not challenged that Rs.20/- per kg. is price of sweets during the year under consideration. It is a matter of record that apart from sweets, the appellant is also dealing in sale of snacks like Paneer Pakoras, Samosas, Purrees and other milk products like Lassi, curd and Paneer etc. He has also observed that there are purchases of ghee made itemsl which were not entered into books of account as observed by the Ld. CIT(A). Apart from this controversy, the sale of non-sweet items which do not contain sugar is an accepted fact. We are, therefore, of the opinion that sales reflected by the appellant at Rs.2,69,87,741/- is definitely not a true and correct picture of the assessee. Similarly, sales estimated by the Ld. CIT(A) at Rs.40,00,000/- (fourty lakhs) is not reasonable and logical estimate. However, we are of the opinion that the method of estimation adopted by the AO is on the higher side. We, therefore, feel that reasonable estimate by taking note of the submissions of the appellant’s regarding sweets will be to the tune of Rs.45 lakhs and for other products reasonable estimated will be the tune of Rs.25 lakhs. The reasonable estimation on the facts and circumstances of the case will be Rs.70 lakhs. The AO will, therefore, recalculate the trading addition by applying the G.P. rate at 11.5% on estimated sales of Rs.70 lakhs.” 11. From the discussion of entire facts and circumstances, it is evident that the entire controversy revolves around the facts, circumstances and the attending milieu. When the findings of rejection of books of accounts have been approved throughout and there is concurrent finding of the AO as well as of the two appellate authorities, there is nothing to question other findings of fact. Rejection of accounts is based on factual situation and circumstances available in the case in hand. 12. From the canvass of entire factual matrix, we find that the Yag Dutt 2014.04.07 18:17 I attest to the accuracy and integrity of this document I.T.A. No.163 of 1999 -7- entire controversy being based on facts, there being no question of law much less substantial, these questions need not be answered. 12. Sequelly, both the appeals, being without any merit, are dismissed. (Dr. Bharat Bhushan Parsoon) Judge (Rajive Bhalla) Judge April 4th, 2014 'Yag Dutt' 1. Whether Reporters of local papers may be allowed to see the judgment? Yes 2. Whether to be referred to the Reporters or not? Yes 3. Whether the judgment should be reported in the Digest? Yes Yag Dutt 2014.04.07 18:17 I attest to the accuracy and integrity of this document "