PRINCIPAL COMMISSIONER INCOME TAX, SURAT 2 V. MEHUL T DESAI, PROP. OF YASH CLINICAL LABORATORY

TAXAP/315/2019

AI Insights

The case revolves around a dispute concerning the addition of Rs.2,57,41,751/- as unexplained receipts to the income of Mehul T Desai, the proprietor of Yash Clinical Laboratory, for the Assessment Year 2014-15. The Income Tax Department challenged the decision of the Appellate Tribunal, Surat Bench, which had deleted this addition. The Tribunal's decision was based on the finding that the actual profits on the unrecorded receipts were reasonable and that only the profits, not the entire receipts, should be considered for tax purposes. The High Court, after reviewing the materials and arguments presented, concurred with the Tribunal's decision and dismissed the appeal.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 728271 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 08-07-2019
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax Vs. President Industries, Commissioner of Income Tax Vs. Samir Synthetics Mills, Commissioner of Income Tax Vs. Gurubachhan Singh, Commissioner of Income Tax Vs. Balchand Ajit Kumar, Kishor Mohnalal Telwala Vs. AC/T, Sairam Multi Speciality Hospital Vs. ACIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: KALPANA RAVAL
• Keywords: Assessment Year 2014-15; Best Judgment Assessment; Income Tax; Rejection of Books; Unexplained receipts
• Section: 145; 260-A

Judgement Text

"C/TAXAP/315/2019 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 315 of 2019 ============================================= PRINCIPAL COMMISSIONER INCOME TAX, SURAT 2 Versus MEHUL T DESAI, PROP. OF YASH CLINICAL LABORATORY ============================================= Appearance: MRS KALPANAK RAVAL(1046) for the Appellant(s) No. 1 for the Opponent(s) No. 1 ============================================= CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR.JUSTICE A.C. RAO Date : 08/07/2019 ORAL ORDER (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1. This Tax Appeal under Section 260-A of the Income Tax Act, 1961 (for short “the Act, 1961”) is at the instance of the Revenue and is directed against the order passed by the Appellate Tribunal Surat Bench, dated 13.12.2018 in ITA No.350/Ahd/2017 for the Assessment Year 2014-15. 2. The Revenue has proposed the following question as the substantial question of law in its memorandum of the Tax Appeal : “Whether on the facts and circumstances of the case and in law, Hon’ble ITAT has erred in deleting the addition of Rs.2,57,41,751/- in respect of unexplained receipts?” Page 1 of 9 C/TAXAP/315/2019 ORDER 3. The findings recorded by the Tribunal as regards the proposed question are as under : “7. A bare reading of Section 145 would reveal that it provide the mechanism how to compute the income of the Assessee. According to sub-section 1, the income chargeable under the head profit and gains of business or profession or income from other source shall be computed in accordance with the method of accountancy employed by an Assessee regularly, subject to sub- section 2 of Section 145 of the Act. Sub-section 2 provides that the Central Government may notify in the official gazette from time to time, the Accounting Standard required to be followed by any class of Assessee in respect of any class of income. Thus, it indicates that income has to be computed in accordance with the method of accountancy followed by an Assessee i.e. cash or mercantile, such method has to be followed keeping in view the Accounting Standard notified by the Central Government from time to time./ Sub-clause 3 provides a situation, that is, if the Assessing Officer is unable to deduce the true income. On the basis of method of accountancy followed by an Assessee than he can reject the book result and the assessee’s income according to his estimation or according to his best judgment. The Assessing Officer in that case is required to point out the defects in the accounts of Assessee and required to seek explanation of the Assessee qua those defects. If the assessee failed to explain the defects than on the basis of the book result, income cannot be determined and Assessing Officer would compute the income according to his estimation keeping in view the Page 2 of 9 C/TAXAP/315/2019 ORDER guiding factor for estimating such income. 8. In the light of the above, let us examine the facts of the present case. A perusal of the record would indicate that evidence exhibiting unrecorded receipts was found for the period starting from 1.9.2013 upto 3.3.2014. It means books of accounts maintained by the assessee were not depicting true picture. The income of the assessee on the basis of these books could not be determined. Book results deserve to be rejected. Books have been rejected and no one has challenged rejection of that books before the Tribunal. This finding has been accepted by the assessee as well as by the Revenue. Short question is that, after rejection of the books, whether gross receipt are to be treated as income of the assessee or only profit embedded in those receipts? Once the ld.AO has worked out unaccounted receipts for the whole year on the basis of evidence found for the period of six months, then such working is based on an estimate and assumption, and in the same manner corresponding expenditure ought to be assumed and estimated, because no entity could earn gross receipts. This fold of dispute has been ignored by the AO on the ground that evidence was not submitted by the assessee exhibiting incurrence of expenditure. To our mind, this was not correct approach at the end of the AO. The ld.CIT(A) has appreciated the controversy in right perspective and in placing reliance upon the judgment of Hon’ble jurisdictional High Court. It is worth to take note of finding recorded by the ld.CIT(A). It reads as under : “7. Having gone through the nature of seized documents, the final accounts, the assessment Page 3 of 9 C/TAXAP/315/2019 ORDER orders, the submissions and the decided law; the following pertinent observations and decisions are culled out; a) The comparison of the transactions recorded on the registers etc. seized with the books of account and bills, clearly shows that the actual receipts are substantially more than that recorded in the regular books; b) The total receipts worked by the AO are also disputed, and the appellant did not agree with the figures worked out. I have carefully gone through the seized register and the regular books. The following facts and observations are very relevant to the issue : 1) the receipts in the regular books are taken into different heads; (i) Consulting fees (where fees received with respect to collection center like Me & Mummy etc. are recorded; the total of this amount recorded in the books of account for A.Y. 2014-15 is Rs.38,84,048/-. The other receipts of the nature corresponding to fee income register Rs.40,40,998/-. Out of these, payments received from Jeevanshaili in form of test fees, Rs.21,79,420/- (Ledger polio 158) and in form of consultancy fee, Rs.60,000/- (LF 157); consultancy fees received from Doctors Clinical Lab (LF 154) Rs.5,76,750/- and testing fees received from Miraj Health Care (LF 163) Rs.4,17,000/- do not form part Page 4 of 9 C/TAXAP/315/2019 ORDER of the Kachha Register of receipts in cash seized during the search. Therefore, out of Rs.79,25,046/- (Rs.38,84,048/- plus Rs.40,40,998/-) only Rs.46,91,876/- (Rs.79,25,046/- minus Rs.21,79,420/- minus 60,000/- minus Rs.576750/- minus 4,17,000/-) could be set off against the receipts recorded in the Kachha Registers seized. (ii) Fees register included in regular books are also reflected though party in the Kachha Registers seized and have to be given a set off in regular books fees register receipts Rs.65,72,014/- are recorded. (iii) I fully agree with the total receipts of the appellant worked out by the AO. She has correctly extrapolated the receipts found recorded for a period of 6 months to 1 year. The appellant had not reflected a huge amount of receipts in his books of accounts and therefore the accounts are not correct and complete. Therefore, these are liable to rejected 145(3) and the assessment is to be made to the best of judgment applying provision of section 144. The extrapolation to complete year where record of last six months has been found and seized is fully justified. It cannot be said that suddenly the whole system was devised in the middle of the year. Reliance is placed on the decision of Hon’ble Andhra Pradesh High court in the case of Rajnik & Co. 251 ITR 0561 and Hon’ble Supreme Court in the case of K.Y. Pillash & Sons 63 ITR 411. However, the total unaccounted receipts would have to be worked out subtracting the Page 5 of 9 C/TAXAP/315/2019 ORDER corresponding recorded receipt as discussed in points (i) and (ii) above. Therefore, the total unrecorded receipts for the year is worked out at Rs.2,12,91,706/- (Rs.3,25,55,596/- minus Rs.46,91,8767- minus Rs.65,72,014/-). c) The only issue which remains is the quantum of profits to be worked out on the basis of actual and suppressed receipts of the appellant’s profession. d) The courts have time and again held that what is to be added is the profit embedded in the suppressed receipts, by way of the suppression and not the entire receipts. I agree with the appellant on this count. The following decisions of superior Courts are relied upon and taken guidance from : 1) Commissioner of Income Tax Vs. President Industries (2002) 124 Taxman 654 (Gujarat High Court) 2) Commissioner of Income Tax Vs. Samir Synthetics Mills (2001) 326ITR 410 (Gujarat High Court) 3) Commissioner of Income Tax Vs. Gurubachhan Singh (2008) 171 Taxman 406 (Gujarat High Court) 4) Commissioner of Income Tax Vs. Balchand Ajit Kumar 135 Taxman 180 (Madhya Pradesh) 5) Kishor Mohnalal Telwala Vs. AC/T (1999) ^7 foxmann.com 86 (Ahd) The decision in the case of Sairam Multi Speciality Hospital Vs. ACIT, (2014) 40 CCH 0132 Hyd. Trib. which relates to similar business also supports this view. Page 6 of 9 C/TAXAP/315/2019 ORDER The final accounts of past years and the ratio of receipts to the variable expenses (excluding the fixed or fully disclosed expenses like interest, depreciation, electricity bills etc.) would give a very good guidance to the actual profits on average additional receipts of the business and therefore, the suppression of profits which have been done by the appellant in the relevant previous year. I have worked out the net profit on total receipts, for A.Y. 2009-10 to 2013-14, excluding the following fixed or fully disclosed expenses like interest, depreciation, electricity bills etc.:- 1) Rent 2) Insurance Charges 3) Electricity expense 4) Municipal and Professional tax 5) Financial charges & Vehicle loan and House loan interest expenses 6) Depreciation as per Income Tax Act 7) Telephone bill (Landline) Therefore, the net profits for different years considering only the variable expenses is worked out as under : Direct income A.Y. 2013-14 A.Y. 2012-13 A.Y. 2011-12 A.Y. 2010- 11 A.Y. 2009-10 Total receipts 14,117869 10,338355 9,472351 7,341923 6,370621 Net Profit as per books of account 11.42 10.26 12.32 14.94 16.52 Net Profit ratio after removing fixed expenses 14.49 13.83 16.18 19.42 21.69 Page 7 of 9 C/TAXAP/315/2019 ORDER The average net profit excluding the fixed expenses works out at 17.12% and maximum net profit was 21.69% 5 years back and has shown a decreasing trend. The appellant has disclosed additional 50 ac rupees in its return filed. The net profit of 50 lac on unrecorded-receipts for the year worked out at Rs.2,12,91,706/-; gives a net profit rate of 23.48%. Therefore, the profits declared are held reasonable looking to the profit in the business even after reducing the fixed expense. Without prejudice to the above, even otherwise, if unrecorded receipts as worked out by the AO at Rs.2,57,41,751/- were considered the net profit rate on undeclared receipts comes to 19.42% which is much above the average of last 5 years and is reasonable considering the decreasing trend. I have already held that the actual profits and not the entire suppressed receipts are to be added. The profits declared on suppressed receipts (extrapolated for the whole year) at Rs.50 lac are held reasonable and therefore, any further addition is uncalled for. The addition made is therefore, directed to be deleted. The ground of appeal is allowed.” 9. After going through the above well reasoned order of the ld.CIT(A), we do not find any error in the order of the ld.CIT(A). In view of the above discussion, the appeal of the Revenue is devoid of any merit. It is dismissed.” 4. Having heard Ms. Kalpana Raval, the learned senior Page 8 of 9 C/TAXAP/315/2019 ORDER standing counsel appearing for the Revenue and having gone through the materials on record, we do not find any error not to speak of any error of law could be said to have been committed by the Tribunal in recording the aforesaid findings. 5. In view of the aforesaid, this Tax Appeal fails and is hereby dismissed. (J. B. PARDIWALA, J) (A. C. RAO, J) Dolly Page 9 of 9 "