M/S NEK RAM SHARMA AND CO. V. COMMISSIONER OF INCOME TAX AND ANR.

ITA/9/2006

AI Insights

The case involves M/s Nek Ram Sharma & Co., a partnership firm engaged in the timber trade, which entered into a bulk purchase contract with the Jammu and Kashmir State Forest Corporation. The firm faced scrutiny from the Income Tax Department regarding the gross profit rate applied to its sales for the assessment year 1986-87. The ITAT had previously remitted the matter to the CIT(A) to determine a reasonable gross profit rate, but the CIT(A) and ITAT applied a rate based on subsequent years' data, which the High Court found inappropriate. The court emphasized that the gross profit rate should be determined based on positive evidence specific to the assessment year in question, not on generalizations or data from unrelated years.

• Counselvise Citation: [2017] 140 COUNSELVISE.COM (IT) 756419 (HC-JAMMU_AND_KASHMIR)
• Appeal Type: Others
• Pronouncement Date: 19-08-2017
• Assessment Year: misc
• Other Referred Cases: Pandit Bros v. CIT, Dhakeshwari Cotton Mills Ltd. V. CIT, Sri Ramlinga Choodambikai Mills Ltd. V. CIT, Minister of National Revenue v. Anaconda American Brass, Raghubar Mandal Harihar Mandal v. The State of Bihar, Lalchand Bhagat Ambica Ram v. CIT, R. M. P. Perianna Pillai & Co. Vs. CIT, CIT v. A. Krishnaswami Mudaliar and Ors., Parimisetti Seetharamamma Vs. CIT, Mysore Fertiliser Co. Vs. CIT, Udhav Al Ram Vs. CIT, Patiala Biscuit Manufacturers Pvt. Ltd. Vs. CIT, CIT Vs. A. Raman & Co., CIT Vs. Calcutta Discount Co. Ltd., R B Jessaram Fetegchand (Sugar Dept) Vs. CIT, K.P. Vargese Vs. ITO & Anr, CIT Vs. Hari Charann Shyam Sunder Pvt. Ltd., State of Orissa v. Maharaja Shri B.P. Singh Deo, CIT Vs. Simon Carves Ltd., International Forests Co. Vs. CIT, CIT vs. Nathekkattu Constructions, CIT Vs. Rajni Kant Dave, CIT Vs. Padam Chand Ram Gopal, Madani Construction Corporation Vs. CIT, Pajaralal Mittal Vs. Asst. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K D S KOTWAL
• Assessee Lawyers: SUBASH DUTT
• Keywords: Assessment Year; Books of Accounts; Gross Profit Rate; Income Tax; Underbilling; Timber Purchase Contract
• Section: 145; 144A

Judgement Text

"1 ITA No.9/2006 Page 1 of 11 HIGH COURT OF JAMMU AND KASHMIR AT JAMMU ITA No.9/2006 Date of order: 19.08.2017 M/s Nek Ram Sharma & Co. V. Commissioner of Income Tax and ors. Coram: Hon'ble Mr. Justice Alok Aradhe, Judge Hon'ble Mr. Sanjeev Kumar, Judge Appearing counsel: For the applicant (s) : Mr. SubashDutt, Senior Advocate. For the respondent(s) : Mr. KDS Kotwal, Advocate. Per-AlokAradhe, J:- This appeal was admitted for hearing by a Bench of this Court vide order dated 01.02.2016 and following substantial questions of law were framed: (i) Whether on the facts and circumstances of the case, there is implied limitation of no enhancement beyond earlier assessed income in the direction of the Tribunal to apply proper and reasonable GP rate. (ii) Whether under the facts and circumstances of the case, the finding of the Tribunal that books of accounts are liable to be rejected u/s 145, is per se also a finding that gross profit shown is false or less and addition of GP is required, though, tax authorities have not recorded any finding that gross profit shown by the appellant is less or unreasonable. (iii) Whether addition on account of GP can only be made if there is positive finding of the Income Tax Authorities that gross profit shown by the assesse is less or unreasonable and there exist 2 ITA No.9/2006 Page 2 of 11 similar comparable case for that assessment year for application of GP. (iv) Whether on the facts and circumstances of the case the Hon‟ble Tribunal and misdirected itself in law in applying 10% G.P. rate for assessment year 1986-87 sales by taking 12.5% GP rate of assessment year 1990-91 as the base when GP of a future year (four years later) is irrelevant for computation of GP of earlier year as trading conditions of each years are distinct and separate.” In order to answer the aforesaid substantial questions of law, we set out the facts which are stated hereinafter. 2. The appellant firm is a partnership firm which was constituted for the purpose of execution of purchase contract of bulk timber worth over Rs. Three crores from Jammu and Kashmir State Forest Corporation (hereinafter referred to as „the Corporation‟). It entered into an agreement with the corporation on 19.10.1984. The main terms and conditions of the agreement inter alia were that the Corporation shall supply to the assesse the timber for a period of nearly six months till end of March, 1985 and the assessee shall remit the cost of timber to the Corporation in the form of CDR/ Bank Drafts for not less than three crores till 31.03.1985.In the Assessment Year 1986-87, the assessee besides bulk purchases from the Corporation also made nominal purchases in auction from State Forest Corporation as well as from private parties, the details of which are as under. (i) Bulk Purchases Rs.3,28,36,911.00 (ii) Auction Purchases Rs.9,47,062.00 (iii) Local Purchases Rs.12,10,663.00 3 ITA No.9/2006 Page 3 of 11 3. The appellant for the Assessment Year 1986-87 filed its income tax return disclosing the income of Rs.4,19,220/-. In the course of assessment proceedings, the Income Tax Officer (for short „ITO‟) found that out of 539 bills produced by the appellant, under 40 bills, the appellant had made the sales below the cost price and came to the conclusion that there was under billing. He therefore made a reference under Section 144A of the Income Tax Act, 1961 to the Assistant Commissioner of Income Tax and sought his guidance, who directed the ITO to find out the facts in view of the submissions made by the appellant before the Assistant Commissioner of Income Tax. It is the case of the appellant that in order to buy peace with the department and to avoid litigation, the appellant revised the return of income under the Amnesty Scheme by disclosing additional sum of Rs.8,00,000/- in the revised return. Thereupon, the ITO suggested additional of Rs.69,848/- by application of Gross Profit Rate of 4.465 % on the Sales relating to the auction sales to which appellant agreed so that assessment is closed. However, the ITO continued the assessment on 08.01.1988. The ITO directed the list of 28 parties and directed the appellant to furnish address of the aforesaid parties which were supplied by the appellant. Thereafter, by communication dated 14.01.1988, the ITO informed the appellant that out of 28 parties, 14 could not be traced out and the appellant was asked to furnish details of aforesaid 14 parties on 15.01.1988. The appellant on 20.01.1988 supplied the available information. The ITO calculated addition of Rs.28,72,295 and sought approval from the Assistant Commissioner of Income Tax, Jammu Range for making the aforesaid addition. 4 ITA No.9/2006 Page 4 of 11 4. The Assistant Commissioner of Income Tax by communication dated 20/23rd March, 1989 inter alia issued the directions that addition is not warranted in respect of the parties which are identifiable and which have confirmed the purchases from the appellant at the same price as shown in the sale voucher and in respect of other parties which are not identifiable or which have not confirmed the sales as shown by the appellant, the addition as proposed should be retained and the original amount surrendered by the appellant of Rs.8,68,848 should be included in the total income of the assessee. By communication dated 27.03.1989, ITO directed the appellant that 16 parties be produced on 28.03.1989. The appellant supplied the available information as the time given to it was very short. The ITO passed an order of Assessment in March, 1989 by which income of the appellant was assessed at Rs.32,29,482/-. Being aggrieved, the appellant filed an appeal before Commissioner of Income Tax (Appeals), hereinafter referred to as CIT(A). The appeal preferred by the appellant was allowed vide order dated 30.03.1990 and it was inter alia held that ITO had not brought on record any credible or convincing material to establish the case of under billing. It was further held that appellant had carried out 539 sales transactions during the year and loss has been incurred only in 40 transactions for which appellant had given cogent and plausible reasons and for doubting the same, no independent corroborative material was available on record. It was also held that the appellant had furnished evidence in respect of all unidentifiable parties and many of them are regular assessees and only a day‟s opportunity was given to the appellant to produce them. Accordingly, only additions of Rs.8,68,848/- was sustained 5 ITA No.9/2006 Page 5 of 11 and the balance addition of Rs.19,20,915/- was deleted by the CIT(A). 5. The revenue challenged the aforesaid order before the Income Tax Appellate Tribunal Amritsar Bench (hereinafter referred to as the „the ITAT‟). The ITAT vide order dated 31.08.1999, inter alia held that it is unable to agree with the finding recorded by CIT(A) that sale below cost price to unidentifiable parties will not amount to the finding that sales are not verifiable. It was further held that it is a case where books of accounts are not prone to verification but application of reasonable and proper gross profit or net profit rate depending upon the facts and circumstances of the case and comparison with similar dealers in Jammu. Accordingly, the order passed by the CIT(A) was set aside and the matter was remitted to the aforesaid authority with the direction that the revenue can explain the reasonableness of gross profit with positive evidence and not in generalistic manner. The appellant filed an application under Section 154(2) of the Act which was rejected vide order dated 20.06.2000. The appellant also assailed the validity of the order dated 31.08.1999 passed by ITAT before this Court. The Division Bench of this court vide order dated 07.12.2000 dismissed the writ petition and held that no question of law arises for consideration. 6. The CIT(A) by a communication asked the ITO to furnish the details of comparable cases and the gross profit rate, thereupon the ITO sent a communication in which inter alia it was stated that returns of income for Assessment Year 1986-87 were not made available by the Central Record Room and returns for Assessment Year 1989-90 to 1991-92 have been provided. On the basis of the information furnished by the ITO, CIT(A) issued a notice dated 6 ITA No.9/2006 Page 6 of 11 14.11.2003 by which the appellant was asked to show cause as to why gross profit rate of 14 % should not be adopted for ascertaining the true profit earned by the appellant. The CIT(A) by order dated 28.11.2003 applied the GP rate of 12.25 %. Being aggrieved, the appellant preferred an appeal before the ITAT, which by an order dated 31.01.2006 partly allowed the appeal of the appellant and reduced the GP rate from 12.5 percent to 10 percent. In the aforesaid factual background, this appeal has been filed. 7. Learned counsel for the appellant submitted that once purchases and sales shown by the appellant were accepted, no addition could be made and the profit cannot be determined on hypothetical basis. It is further submitted that the addition has been made on wrong premises without fulfillment of the conditions mentioned in Section 145(3) of the Act inasmuch as the ITO has neither doubted the correctness or completeness of the accounts of the assessee nor has recorded a finding that accounting standards have not been regularly followed by the appellant. It is submitted that in any case, while applying the gross profit rate, the returns of subsequent years could not have been taken into account and the burden was on the revenue to explain the reasonableness of gross profit with positive evidence and not in a generalistic manner. It is also pointed out that no positive evidence was led. In support of his submissions, learned Senior counsel for the appellant has referred to decisions in the cases of Pandit Bros v. CIT, (1954) 26 ITR 159 (PUNJ), Dhakeshwari Cotton Mills Ltd. V. CIT, (1954) 26 ITR 775 (SC), Sri RamlingaChoodambikai Mills Ltd. V. CIT, (1955) 28 ITR 952, Minister of National Revenue v. Anaconda American Brass, (1956) 28 ITR 952 (MAD), 7 ITA No.9/2006 Page 7 of 11 RaghubarMandalHariharMandal v. The State of Bihar, (1957) AIR 810 (SC), LalchandBhagatAmbica Ram v. CIT, (1959) 37 ITR 0288 (SC), R. M. P. Perianna Pillai & Co. Vs. CIT, (1961) 42 ITR 370 (MAD), CIT v. A. KrishnaswamiMudaliarandn Ors., (1964) 53 ITR 122 (SC), ParimisettiSeetharamamma Vs. CIT, (1965) 57 ITR 532 (SC), Mysore Fertiliser Co. Vs. CIT, (1966) 59 ITR 268, Udhav Al Ram Vs. CIT, (1967) 66 ITR 462 (SC), Patiala Biscuit Manufacturers Pvt. Ltd. Vs. CIT, (1976) 103 ITR 208 (P&H), CIT Vs. A. Raman & Co., (1968) 67 ITR 208 (P&H), CIT Vs. Calcutta Discount Co. Ltd., (1973) 91 ITR 0008 (SC), R B JessaramFetegchand (Sugar Dept) Vs. CIT, (1969) 75 ITR 0288 (SC), K.P. Vargese Vs. ITO & Anr, (1981) 131 ITR 597(SC), CIT Vs. Hari CharannShyam Sunder Pvt. Ltd., (1986) 159 ITR 703 (CAL), State of Orissa v. Maharaja Shri B.P. Singh Deo, (1970) 76 ITR 0690 (SC), CIT Vs. Simon Carves Ltd., (1976) 105 ITR 212 (SC), International Forests Co. Vs. CIT, (1975) 101 ITR 721 (J&K), CIT vs. Nathekkattu Constructions (2004) 269 ITR 346(KER), CIT Vs. Rajni Kant Dave, (2006) 281 ITR 0006 (ALL), CIT Vs. Padam Chand Ram Gopal, (1970) 76 ITR 719 (SC), Madani Construction Corporation Vs. CIT, (2008) 296 ITR 0045 (Gauhati H.C.) and Pajaralal Mittal Vs. Asst. CIT, (2007) 291 ITR 0214 (Gaughati). 8. On the other hand, learned counsel for the revenue has submitted that the directions contained by the ITAT in the order dated 31.08.1999 are binding on the parties as the same as attained finality. It is further submitted that the submissions made by learned senior counsel for the appellant are barred by constructive res judicata and ITAT has taken a reasonable view and has reduced 8 ITA No.9/2006 Page 8 of 11 the GP rate from 12.5 % to 10% which is just and reasonable in the fact situation of the case. 9. We have considered the submissions made by learned counsel for the parties and have perused the record. The ITAT in the order dated 31.08.1999 while remitting the matter to CIT (A), inter alia held as under: “ We are of the opinion that this is a case where proper and reasonable G.P. rate or N.P. rate should have been applied. This exercise was not done by the Ld. CIT(A) we, therefore gibe finding that this is a case where books of accounts are not prone to verification but application of reasonable and proper gross profit or Net profit rate depending upon the facts and circumstances of the case and comparison with similar dealers at Jammu. We, therefore, refer this matter back to the file of the Ld. CIT(A) who will decide the proper gross profit rate to be applied after giving an opportunity of being heard to both the assessee as well as to the A.O. He will pass fresh order after deciding the issue of gross profit rate to be applied on the sale. While working the gross profit rate, he should include Rs.8,68,848/- as part of the G.P. shown by the assessee in addition to the Gross profit reflected in the books of accounts. The appellant can explain reasonableness of Gross profit with positive evidence and not in generalistic manner.” Thus, the burden of proof was on revenue to explain reasonableness of Gross profit with positive evidence and not in a generalistic manner. The aforesaid order was upheld by Division Bench of this court vide order dated 07.12.2000 passed in OWP (IT) No.823/2000. Thus, the order passed by the ITAT has attained finality and is binding on the parties. The only issue which survives for consideration is whether while applying the gross profit rate, the positive evidence has been led by the revenue or the same has been applied in a generalistic manner. 10. In the case of Minister of National Revenue (supra), it was held that profit of a trade or business is the surplus by which receipts 9 ITA No.9/2006 Page 9 of 11 from the trade or business exceed the expenditure necessary for the purposes of earning those receipts. In State of Orissa v. Maharaja Shri B P Singh Deo (supra), the Supreme Court has held that the assessment must be based on some relevant material and the power to assess cannot be exercised under the sweet will and pleasure of the concerned authorities and the Tribunal has to give cogent reasons for upholding the order passed by the authorities. Similar view was taken by the Supreme Court in Commissioner of Income Tax v. Simon Carves Ltd. (supra). In International Foprest Co. v. Commissioner of Income Tax (supra),a Division Bench of this Court has held that even if ITO considers the material placed before him by the assessee to be unreliable, keeping in view the comparative statement of accounts of previous years, he could not proceed to make an arbitrary addition and base his conclusion purely on guess work. In RaghuvarMandalHariharMandal (supra), the Supreme Court held that in case the returns of the assessee and his books of accounts are rejected, the assessing authority must make an estimate but this must be based on such evidence or material as assessing authority has before him including the assessee‟s circumstances, knowledge of previous returns and all other matters which the assessing authority think will assist him in arriving at a fair and proper estimate. 11. On the touchstone of aforesaid well settled legal principles, facts of the case in hand may be examined.In the instant case, the ITAT by an order dated 31.08.1999 held that revenue can explain the reasonableness the gross profit rate with positive evidence and not in a generalistic manner. Thus the reasonableness of gross profit had to be proved by the revenue by positive evidence. The ITO by 10 ITA No.9/2006 Page 10 of 11 the communication had informed the CIT(A) that the returns of income of Assessment Year 1986-87 were not made available by the Central Record Room and returns for Assessment Year 1989- 90 to 1991-92 have been provided and the copies of the trading account of the parties were sent. Thus, it is evident that returns of income of Assessment Year 1986-87 were not available before the CIT(A). However, the Gross Profit rate was computed with reference to the returns of the subsequent Assessment years i.e. 1989-90 to 1991-92. Thus, there was no positive evidence before the CIT(A) to assess the Gross Profit rate. The ITAT however fail to appreciate the aforesaid aspect of the matter. The ITAT ought to have appreciated that only reasonable and proper gross profit rate was to be applied and the appellant was the only dealer who had entered into bulk purchases of timber with State Forest Corporation. Merely because M/s JaswantRaiArora deals in timber, it could not have been put in the category of similar dealers as it has not made bulk purchases of timber with State Forest Corporation. The returns of the subsequent years i.e. 1989-90 to 1991-92 could not have been taken into account for computing the gross profit rate in respect of Assessment Year 1986-87. Thus, the finding with regard to gross profit rate is based on surmises and conjectures and in fact has been arrived at in contravention of the directions contained in the order dated 31.08.1999 passed by the ITAT. 12. In view of preceding analysis, substantial question of law No. (iii) and (iv) are answered in the affirmative and in the favour of the appellant. In view of our answer to aforesaid substantial questions of law, it is not necessary to deal with substantial questions of law No. (i) and (ii), as we have already held that the order dated 11 ITA No.9/2006 Page 11 of 11 31.08.1999 passed by the ITAT has attained finality and is binding on the parties. In the result, the impugned order dated 28.11.2003 passed by the CIT(A) and order dated 31.01.2006 passed by the ITAT are hereby quashed. Needless to state that in case, CIT(A) comes across any positive evidence to determine the Gross Profit rate for Assessment Year 1986-87 as directed by ITAT vide order dated 31.08.1999, he shall be at liberty to do so after affording an opportunity of hearing to the appellant. Accordingly, the appeal is disposed of. (Sanjeev Kumar) (AlokAradhe) Judge Judge Jammu: 19.08.2017 Raj Kumar "