Grand Lilly Motels Limited V. Income Tax Appellate Tribunal, Amritsar Bench, Amritsar and Others

ITA/355/2013

AI Insights

Grand Lilly Motels Limited filed an appeal against the order of the Income Tax Appellate Tribunal, Amritsar, which had dismissed their earlier appeal. The primary contention in the appeal was the rejection of their claim for wastage allowance and the estimation of their income by the tax authorities. The Assessing Officer had rejected the books of account due to non-maintenance of stock registers and discrepancies in the trading results, leading to an estimation of income based on historical data and ratios applied in previous years. The Tribunal and CIT(A) upheld this decision, leading to the present appeal.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 795591 (HC-MISC)
• Appeal Type: Others
• Pronouncement Date: 09-01-2014
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Assessee Lawyers: R K BAJAJ
• Keywords: Estimation of income; Income tax appeal; Rejection of Books; Wastage allowance; Mis-reading and Mis-appreciation of Law
• Section: 143(2); 143(1); 145(3); 260A

Judgement Text

"ITA No. 355 of 2013 -1- IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH ITA No. 355 of 2013 (O&M) Date of Decision: 9.1.2014 Grand Lilly Motels Limited ....Appellant Versus Income Tax Appellate Tribunal, Amritsar Bench, Amritsar and others ...Respondents. CORAM:- HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. HON'BLE MRS. JUSTICE ANITA CHAUDHRY. PRESENT: Mr. R.K. Bajaj, Advocate for the appellant. AJAY KUMAR MITTAL, J. 1. The assessee has preferred this appeal under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 12.8.2013 passed by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (hereinafter referred to as “the Tribunal”), claiming the following substantial questions of law:- i) Whether the impugned orders are result of mis- reading and mis-appreciation of law and evidence? ii) Whether the respondent No.1 being final court of fact ought to have dealt with each and every aspect/pleadings of the appellant while affirming and findings of authorities below? iii) Whether the impugned orders are erroneous, Singh Gurbachan 2014.03.19 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 355 of 2013 -2- perverse and not sustainable in the eyes of law? iv) Whether the respondent No.1 should have allowed 15% wastage especially when the AO has allowed 15% wastage in subsequent years? v) Whether the respondent No.1 has ignored the material evidence? vi) Whether the respondent No.1 has failed to refer to the relevant pleading and evidence on record while passing the impugned order?” 2. Briefly stated the facts as narrated in the appeal may be noticed. The return of income was filed on 29.9.2008 declaring loss of ` 1,34,853/-. The said return was processed under Section 143(1) of the Act and the case was selected for scrutiny and notice under Section 143 (2) of the Act was issued on 23.9.2009. Subsequently, the case was taken up for scrutiny by the Additional CIT, Range-III, Jalandhar and notices under Sections 143(2) and 142(1) of the Act along with questionnaire dated 24.11.2009 were issued to the assessee. The assessee had shown receipts amounting to ` 9,25,265/- on account of food sales. The purchase against the food sales was ` 39,12,897/- and the opening and closing stock of good items were shown at ` 72,82,615/- and ` 73,18,326/-, respectively. The Assessing Officer vide order dated 29.11.2010 (Annexure A-1) computed the total income of the assessee at ` 40,71,805/-. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [For brevity “the CIT(A)] who vide order dated 30.3.2012 (Annexure A-2) partly Singh Gurbachan 2014.03.19 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 355 of 2013 -3- allowed the appeal. Still dissatisfied, the assessee approached the Tribunal by way of an appeal. The Tribunal vide order dated 12.8.2013 (Annexure A-3) dismissed the appeal. Hence, the present Income Tax Appeal. 3. Learned counsel for the assessee-appellant submitted that the Assessing Officer, the CIT(A) and the Tribunal had erred in not allowing the claim of the assessee on account of wastage while determining the income of the appellant. According to the learned counsel, the Assessing Officer had allowed 15% on account of wastage in the next year after applying the same formula as has been applied for the current assessment year and, therefore, the approach of the authorities below was unsustainable in law. 4. After hearing learned counsel for the appellant, we do not find any merit in the appeal. The Assessing Officer, CIT(A) and the Tribunal had sustained the rejection of books of account under Section 145(3) of the Act. The Assessing Officer while disallowing the claim of the assessee had recorded as under:- “4.2 From the reply of the assessee's AR reproduced above, it is obvious that the assessee is not maintaining any stock register of daily consumption of various items used in the business. It is stated in the said reply that the details of opening and closing stock were prepared at the end of the year. However, not even the inventory of opening and closing stock has been furnished leave aside the valuation of the same. It is the contention of the assessee's AR that the consumption of grocery items Singh Gurbachan 2014.03.19 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 355 of 2013 -4- to food sales cannot be worked out because the items used by the assessee company are numerous, but even if this contention is considered, it cannot be understood as to why even the inventories of opening and closing stock could not be furnished, and in the absence thereof, it is absolutely not understandable as to how the figures and valuation of opening and closing stock have been arrived at. It is, therefore, obvious that the trading account prepared by the assessee company is incorrect and incomplete, and cannot be relied upon. Moreover, the assessee's AR has himself stated in his reply reproduced above that the items used for consumption by the assessee company are perishable and if not consumed within the requisite time, have to be thrown away. In such circumstances, it is not understandable as to how and why the assessee is maintaining opening and closing stock of huge sums like Rs.72,82,615/- and Rs.73,18,376/- as against which, sales of only Rs.92,25,262/- have been shown. The very figures of opening stock, closing stock and sales are enough to show that the books of account of the assessee company are being manipulated, and the trading results shown do not present the true and correct picture of state of affairs of the assessee. In view of all these facts, the assessee's AR vide order sheet noting dated 16th November, 2010, was required to Singh Gurbachan 2014.03.19 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 355 of 2013 -5- show cause as to why the book results of the assessee may not be rejected u/s 145(3) of the Income Tax Act, 1961. 4.3 XX XX XX XX 4.4 Therefore, in view of the detailed discussion in the preceding paras, being not satisfied about the correctness and completeness of the accounts of the assessee company, I reject the same u/s 145(3) of the Income-tax Act, 1961. Having thus rejected the book results of the assessee company, it is fair and logical to estimate the income of the assessee, keeping in view the past history of the case. The past history of the case shows that the assessee is in the habit of suppressing and under-reporting its food sales. Further, the facts on record show that the assessee is continuing with the same practice during the year under consideration. In A.Y. 2005-06 and earlier assessment years, the food sales of the assessee company had been estimated by the AO by taking the same to be 5 times of the grocery/provisions consumed. However, in appeal before the Hon'ble CIT(A), the assessee had got part relief and the ratio of 1:3 was applied by the CIT(A) as against the ratio 1:5 applied by the AO. This ratio of 1:3 was subsequently confirmed by the Hon'ble ITAT, Amritsar Bench, Amritsar, which therefore, became final. Vide order sheet notings dated 21st October, 2010, 1st Singh Gurbachan 2014.03.19 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 355 of 2013 -6- November, 2010 and 11th November, 2010, the assessee's AR was repeatedly given opportunities to show cause as to why the same ratio of 1:3 should not be applied to the year under consideration. The reply furnished by the assessee's AR vide his written submission filed on 16th November, 2010, is reproduced as under:- “Regarding explanation called for alleging that why no addition under head sales of food be made by applying the ratio of 1:3 of grocery consumed as confirmed by ITAT in your case in earlier years. In this regard, it is respectfully submitted that, firstly, in latest order dated 6 June, 2008 of Hon'ble ITAT in appeal No. ITA No. 407/ASR/2008, for A.Y. 2005-06 filed by department against sustaining of addition of Rs.65785/- in food sales after restricting the exorbitant addition of Rs.56,80,792/-. In food sales by CIT(A), this ground of appeal of the department has been rejected and finally only addition of Rs.65785/- remained sustained and has become final order as no further appeal is pending against these findings. It is evident from perusal of this judicial order that this alleged ratio of 1:3 has never been applied, not been sustained and further it is evident from the order that the petty addition of Rs.65785/- in Singh Gurbachan 2014.03.19 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 355 of 2013 -7- food sales has been sustained only considering the subsequent events. So, the application of alleged grocery to food sales ration of 1:3 does not arise from final latest ITAT's order.” The reply of the assessee's AR, as reproduced above,is to say the least, ridiculous. The assessee's AR has referred to the Hon'ble ITAT's order for A.Y. 2005-06 but has contended that the ratio of 1:3 has never been applied, and not been sustained. It appears that the assessee's AR is neither aware of the facts of the case or its past history, and nor has he bothered to read the assessment order, CIT(A)'s order and ITAT's order for the said assessment years. The relevant portion of the CIT(A)'s order for A.Y. 2005-06 is reproduced hereunder for ready reference:- “I have carefully considered the submissions of the appellant and have gone through the findings of the AO as incorporated in the order. It is seen from the order that the facts and material based on which the addition was made by AO were similar to the one involved in the case of appellant for the asstt. years 2002-03 and 2004-05 appeals wherein were decided vide order dated 31.03.22006 bearing appeal No. 531/04-05/CIT (A)/Jal and order dated 30.05.2007 vide Appeal No. 518/06-07/CIT(A)/ Jal. Neither the appellant nor the AO have Singh Gurbachan 2014.03.19 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 355 of 2013 -8- pointed out any distinguishing facts to the facts as operating in this case for the assessment years 2002-03 and 2004-05. Therefore, following my decision in the case of appellant dated 30.05.2007 (supra) the ratio of 1:3 is applied as against 1:5 applied by the AO and the sales are estimated at a sum of Rs.1,12,30,014/- which results in addition of Rs.65,785/- with relief of Rs.56,15,007/- to the appellant.” From the order of the Hon'ble CIT(A) reproduced above, it is clear beyond doubt that the ratio of 1:3 has been sustained by the CIT(A) as against ratio of 1:5 applied by the AO. It is this ratio of 1:3 which has been sustained by the Hon'ble ITAT vide its order No. ITA No. 378 (ASR)/2008 dated 23.09.2008, relevant portion of which is reproduced hereunder:- “The AO has recorded the finding of fact that the accounts of the assessee are not correct and complete and as such, the same stood rejected. This finding stands confirmed by the ld. CIT(A). No challenge thereto has been made by the assessee in appeal before us...... ..... the ld. CIT(A) can be said to be justified in reaching the conclusion that the estimation of sales at five times of the consumption of materials is excessive which needed a Singh Gurbachan 2014.03.19 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 355 of 2013 -9- reasonable basis of estimation with reference to material on record......... ....... In the light of findings reached by the ld. CIT(A), no interfernece is called for in his decision as he has merely corrected the estimation made by the assessing authority and adopted reasonable basis in doing so.” 5. The aforesaid findings were affirmed on appeal by the CIT (A) with the following observations:- “5.1 As per the assessment order for the AZY 2008- 09, in respect of receipts from sale of food, the AO noticed that the assessee had shown receipts amounting to Rs.92,25,265/- on account of food sales. The purchase against the food sales was Rs.39.12.897/- an opening and closing stock of food items were shown at Rs.72,82,615/- and Rs.73,18,326/- respectively. The AO asked the assessee to furnish the quantitative details of the opening and closing stock and to explain the method of valuation of the stock with evidence. Since this information was not submitted by the assessee despite reminders, the AO gave another opportunity to the assessee to submit the requisite information, as well as to produce the stock register containing the inventory of opening and closing stock and day to day consumption of the provisions and the groceries purchased and month-wise particulars of opening Singh Gurbachan 2014.03.19 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 355 of 2013 -10- stock, purchases, consumption and closing stock of the groceries or the provisions. The month-wise break-up of the purchases and sales was also asked for along with the month-wise ratio of consumption of groceries/provisions to food sales. The assessee submitted before the AO that it was not maintaining day to day stock register of consumption of groceries due to various reasons. It was submitted that maintenance of consumption register was not feasible for the reason that there was 250 items which were consumed and that there were numerous perishable items purchased items purchased which if not consumed within the requisite time, had to be thrown away. It was submitted that numerous items became obsolete and outdated if not consumed within the stipulated time and had to be destroyed. It was submitted that for this reason no consumption register could be maintained by the assessee during the year and, therefore, consumption ratios could not be derived. The assessee submitted that though the quantitative details of the opening stock had been prepared and valued, these details/lists could not be found. 5.2 The AO was not satisfied with the assessee's reply, because, apart from not submitting the consumption ratios, even the inventory of the opening and closing stocks was not furnished. She, therefore, Singh Gurbachan 2014.03.19 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 355 of 2013 -11- held that the trading account prepared by the assessee was incorrect and incomplete and could not be relied upon. The AO also noted that though the assessee had contended that the items used for consumption were perishable and had to be thrown away if not consumed within the requisite time, it was maintaining huge opening and closing stock of around Rs.73 Lacs each against which sales of only Rs.92.25 Lacs had been shown. As per the AO, the figures of opening stock, closing stock and sales were themselves enough to show that the books of accounts of the assessee were being manipulated and that the trading results shown did not present the true and correct picture of the state of affairs of the assessee. The AO referred to several judicial decisions for the proposition that on account of non- maintenance of stock register and not giving details of opening and closing stock and the day-to-day records of consumption of raw material, the trading results could not be relied upon and that the book results could be rejected, and rejected the book results of the assessee u/s 145(3) of the Act. She, thereafter, proceed to estimate the income of the assessee keeping in view the past history of the case. She noted that past history of the assessee showed that it was in the habit of suppressing and under-reporting its food sales. She noted that in A.Y. 2005-06 and Singh Gurbachan 2014.03.19 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 355 of 2013 -12- earlier assessment years, the food sales of the assessee company had been estimated by the AO by taking the same to be 5 times of the grocery/ provision consumed but that the Ld. CIT(A) had allowed part relief and estimated the sales by applying the ratio of 1:3. She noted that the 1:3 ratio was subsequently confirmed by the Hon'ble ITAT, Amritsar Bench, Amritsar. Hence, the AO gave a show cause notice to the assessee to explain as to why the ratio of 1:3 may not be applied in the assessment year under consideration. The assessee submitted that in the latest order dated 6th June, 2008 of the ITAT for the A.Y. 2005-06 in its case filed by the department against sustaining addition of Rs.65,785/- in food sales after restricting the exorbitant addition of Rs.56,80,792/- in food sales by CIT(A), this ground of appeal was rejected and thus only addition of Rs.65,785/- remained. It was, therefore, contended that the alleged ratio of 1:3 had never been applied nor been sustained by the CIT(A) or by the Hon'ble ITAT. The AO, however, referred to the relevant portion of the Ld. CIT(A) for A.Y. 2005-06 in which he had clearly mentioned that he was applying the ratio of 1:3 as against the ratio of 1:5 applied by the AO and that the assessee had got relief of Rs.56,15,007/- on the application of the said ratio by the learned CIT (A). The AO further noted that the Hon'ble ITAT had Singh Gurbachan 2014.03.19 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 355 of 2013 -13- noted that the assessee had not challenged the rejection of the books results by the AO which had been confirmed by the Ld. CIT(A), and had upheld the estimation of the sales by the ld. CIT(A) by applying the ratio of 1:3 between grocery contention and sales holding that it was a reasonable basis. Hence, the AO held that the ratio of 1:3 was to be applied for estimating the sales made by the assessee. Taking into account the value of the purchases, opening and closing stock, the consumption by the assessee was worked out to Rs.38,77,186/- and the sales were estimated at 3 times this figure at Rs.1,16,31,558/-. Since this was in excess of the declared sales of Rs.92,25,262/-, the difference in two figures was added to the total income as undeclared sales.” 6. The Tribunal while rejecting the appeal of the assessee had noticed as under:- “2.1 The AO being not satisfied with assessee's reply because apart from not submitting the consumption ratios, even the inventory of the opening and closing stocks was not furnished. The AO, therefore, held that the trading account prepared by the assessee was incorrect and incomplete and could not be relied upon. The AO also noted that though the assessee had contended that the items used for consumption were perishable and had to be thrown away if not consumed within the requisite item, it was Singh Gurbachan 2014.03.19 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 355 of 2013 -14- maintaining huge opening and closing stock of around Rs.73 lacs each against which sales of Rs.92.25 lacs had been shown. According to AO, the figures of opening stock, closing stock and sales were themselves enough to show that the books of accounts of the assessee were being manipulated and that the trading results shown did not present the true and correct pictures of the rates of affairs of the assessee. The AO referred to several judicial decisions for the proposition that on account of non- maintenance of stock register and not giving details of opening and closing stock and day to day records of consumption of raw material, the trading results could not be relied upon and that the book results could be rejected and rejected the books results of the assessee u/s 145(3) of the Act. The AO, thereafter, proceeded to estimate the income of the assessee keeping in view the past history of the case. She noted that past history of the assessee showed that it was in the habit of suppressing and under-reporting its food sales. It was noted that in A.Y. 2005-06 and earlier assessment years, the food sales of the assessing company had been estimated by the AO by taking the same to be 5 times of the grocery/provision consumed but the ld. CIT(A) had allowed part relief and estimated the sales by applying the ratio of 1:3. She noted that the 1:3 ratio was subsequently Singh Gurbachan 2014.03.19 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 355 of 2013 -15- confirmed by the ITAT, Amritsar Bench. Hence, the AO gave a show cause notice to the assessee to explain as to why the ratio of 1:3 may not be applied in the assessment year under consideration. The assessee submitted that in the latest order dated 6th June, 2008 of the ITAT for the A.Y. 2005-06 in its case filed by the department against sustaining addition of Rs.65,785/- in food sales after restricting the exorbitant addition of Rs.56,80,792/- in food sales by CIT(A), this ground of appeal was rejected and thus only addition of Rs.65,785/- remained. It was, therefore, contended that the alleged ratio of 1:3 had never been applied nor been sustained by the CIT(A) or by the ITAT. The AO, however, referred to the relevant portion of the order of the Ld. CIT(A) for A.Y. 2005-06 in which he had clearly mentioned that he was applying the ratio of 1:3 between grocery contention and sales holding that it was a reasonable basis. Hence, the AO held that the ratio of 1:3 was to be applied for estimating the sales made by the assessee. Taking into account the value of the purchases, opening and closing stock, the consumption by the assessee was worked out to Rs.38,77,186/- and the sales were estimated at 3 times this figure at Rs.1,16,31,558/-. Since this was in excess of the declared sales of Rs.92,25,262/- by Rs.24,06,296/-, the difference in two figures was Singh Gurbachan 2014.03.19 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 355 of 2013 -16- added to the total income as undeclared sales.” 7. The aforesaid findings as recorded by the Assessing Officer, the CIT(A) and the Tribunal were not shown to be erroneous or perverse. The assessee had not maintained proper books of account and the same were rejected under Section 145(3) of the Act. The claim of wastage in each year depends upon various factors and cannot be applied uniformly unless the comparable circumstances are analyzed and found to be identical. This would primarily be a question of fact. Thus, there is no weight in the plea that the claim of wastage allowed to the assessee in the subsequent year be adopted. 8. In view of the above, no substantial question of law arises in this appeal. Accordingly, finding no merit in the appeal, the same is hereby dismissed. (AJAY KUMAR MITTAL) JUDGE January 9, 2014 (ANITA CHAUDHRY) gbs JUDGE Singh Gurbachan 2014.03.19 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh "