THE COMMISSIONER OF INCOME TAX V. JAYESH S MEHTA

ITA/545/2008

AI Insights

The case involves two appeals by the Revenue against the order of the Income Tax Appellate Tribunal, Bangalore, which estimated the gross profit of the assessee, M/s.Shantilal O Mehta, at 2% based on the average of subsequent three years' profits. The Revenue challenged this estimation, arguing that the Tribunal had no basis for reducing the profit margin from 4% to 2%. The Tribunal's decision followed a search and seizure operation where undisclosed income was admitted by the assessee, leading to a dispute over the correct profit margin to be applied for tax assessments over several years. The High Court's decision affirmed the Tribunal's estimation, rejecting the Revenue's appeals.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 701489 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 25-07-2014
• Assessment Year: misc
• Other Referred Cases: M/s. SRV and Sons
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: A SHANKAR
• Assessee Lawyers: K V ARVIND
• Keywords: Block assessment period; Gross profit estimation; Search and seizure; Undisclosed income
• Section: 143(3); 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 25TH DAY OF JULY, 2014 PRESENT HON' BLE MR. JUSTICE N.KUMAR AND HON' BLE MR. JUSTICE B.MANOHAR ITA.NO.545/2008 C/W ITA NO.595/2008 ITA.NO.545/2008 BETWEEN: 1. The Commissioner of Income-tax Central Circle, C.R Building, Queens Road, Bangalore 2. The Assistant Commissioner of Income-Tax, Central Circle – 1(1), C.R. Building, Queens Road, Bangalore. …Appellants (By Sri.K.V.Arvind, Advocate) AND: Shri.Jayesh S.Mehta, Prop. M/s.Shantilal O. Mehta, No.6, RMC Yard, Tiptur. …. Respondent 2 (By Sri.A.Shankar, Advocate) ITA filed u/S.260-A of I.T.Act, 1961 arising out of order dated 17-12-2007 passed in ITA.No.37/BNG/2007, for the Assessment Year 01.04.1996 to 23.01.2003, praying that this Hon’ble Court may be pleased to i. formulate the substantial questions of law stated therein, ii. allow the appeal and set aside the order passed by the ITAT Bangalore in ITA.No.37/BNG/2007, dated 17-12-2007 confirm the orders of the Appellate Commissioner and confirm the order passed by the Assistant Commissioner of Income Tax, Central Circle -1(1), Bangalore in the interest of justice and equity. ITA.NO.595/2008 BETWEEN: 1. The Commissioner of Income-tax Central Circle, C.R Building, Queens Road, Bangalore 2. The Assistant Commissioner of Income-Tax, Central Circle – 1(1), C.R. Building, Queens Road, Bangalore. …Appellants 3 (By Sri.K.V.Arvind, Advocate) AND: M/s. Shantilal O. Mehta, No.6, RMC Yard, Tiptur. …. Respondent (By Sri.A.Shankar, Advocate) ITA filed u/S.260-A of I.T.Act, 1961 arising out of order dated 17-12-2007 passed in IT(SS)A.No.19/BNG/2007, for the Assessment Year 01.04.1996 to 30.03.1999, praying that this Hon’ble Court may be pleased to i. formulate the substantial questions of law stated therein, ii. allow the appeal and set aside the order passed by the ITAT Bangalore in IT(SS)A.No.19/BNG/2007, dated 17-12-2007 confirm the orders of the Appellate Commissioner and confirm the order passed by the Assistant Commissioner of Income Tax, Central Circle -1(1), Bangalore in the interest of justice and equity. These appeals are coming on for Hearing this day, N.Kumar J., delivered the following: J U D G M E N T These two appeals are preferred by the Revenue challenging the order dated 17-12-2007 passed by the 4 Income Tax Appellate Tribunal, Bangalore Bench ‘B’ (hereinafter referred to as ‘the Tribunal’ for short) wherein the Tribunal held that it is reasonable to estimate the gross profit in the range of 2% taking the average of subsequent three years. 2. The assessees are Jayesh S Mehta and Shanthilal O Mehta. Sri.Jayesh S Mehta is in individual and M/s.Shanthilal O Mehta is a partnership firm doing the business of sale of Copra and Coconuts. In the course of search, certain bank accounts were found. Sri.Jayesh Mehta admitted in course of search that the amounts deposited in those bank accounts represented the part of sale proceeds that was not offered to tax in the returns of income filed by him and the firm M/s.Shanthilal O Mehta. Further in the course of search itself, Sri.Jayesh Mehta offered Rs.62,27,305/- as undisclosed income earned from unaccounted trade in Copra. He also explained how that undisclosed 5 income was invested in various assets that were outside the books of account. 3. The firm, M/s.Shanthilal O Mehta was carrying on business from 1-4-1995 to 31-3-1999 on which date it was dissolved. The said business was carried over by its partner Sri. Jayesh Mehta from 1-4-1999 to 31-3-2003. Therefore, in the block period, for the earlier portion, the assessment was made in the name of firm and for the subsequent period, it was made in the made of an individual as proprietor. 4. The Assessing Authority assessed a sum of Rs.2,67,58,592/- in the hands of Jayesh Mehta for the assessment years 1999-2000 to 2002-03. He assessed the undisclosed income of Rs.41,40,870/- in the hands of M/s.Shanthilal O Mehta for the earlier periods. Therefore the total undisclosed income assessed was Rs.3,08,99,462/-. The assessee objected the proposed consideration of the entire credits found in the 6 unaccounted bank accounts as undisclosed income. According to the assessee, the gross profit ratio has to be apportioned to the undisclosed profit proposed equally to four assessment years which was not accepted by the Assessing Officer. On the contrary, the Assessing Authority took all profits earned by another firm M/s. SRV and Sons and concluded Rs.2,67,58,592/- as the undisclosed income and levied tax. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals) (hereinafter referred to as ‘the First Appellate Authority’ for short) 5. The First Appellate Authority held that it certainly defies logic to treat entire gross profit as income. The income has to be worked out on profit basis. Considering the fact that, there is only one case of S R V and Sons brought on record by the learned Assessing Officer and all other cases relied on by the assessee 7 does not have a margin in excess of 3.2%. The Appellate Authority estimated the gross profit at 4% midway between the figures shown by the assessee and taken by the Assessing Officer. Accordingly, allowed the appeal partly and held that the gross profit margin has to be taken at 4%. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. 6. The Tribunal on reconsideration of the entire material on record held that for the assessment year 2003-04, on gross sales of 2.12 crores, gross profit of Rs.14.00 lakhs was shown which was in the range of 2%. The said order came to be passed after discussion with the assessee and has attained the finality. Similarly for the assessment year 2004-05, the gross sales of 8.65 crores is taken into consideration and the gross profit was shown as Rs.15.71 lakhs which is less than 2% and the same was accepted after discussion with the assessee. Similarly, for the assessment year 8 2005-06, on gross sales of Rs.11.14 crores, the gross profit was shown as Rs.31.00 lakhs which is little more than 2%. These assessment orders have been passed subsequent to the block period much after the search. The Tribunal further held that in the comparable cases have not been shown to be comparable by the Department, which assessments have been framed much after the search in the case of the assessee and therefore they declined to accept 4% adopted by the Commissioner of Income Tax. In those circumstances, the Tribunal was of the view that it would be reasonable to estimate the gross profit in the range of 2% taking the average of subsequent three years. Therefore, directed the Assessing Officer to recalculate the addition on that basis. Aggrieved by the said order, the Revenue has preferred these two appeals. 7. Learned counsel appearing for the Revenue assailing the impugned order contended that when the First Appellate Authority took 4% as the profit margin 9 based on comparable cases, the Tribunal without any basis or justification has reduced it to 2% and therefore he submits that the impugned order passed by the Tribunal is required to be set aside. 8. Per contra, learned counsel appearing for the assessee supported the impugned order. 9. In the light of the aforesaid facts and rival contentions, the substantial question of law that arise for our consideration is as framed in the appeal memo, which reads thus: Whether the Tribunal was correct in holding that the net profit should be estimated at 2% of the turnover, as against computation of undisclosed income by the Assessing Officer based on the deposits discovered in search in undisclosed bank accounts in respect of suppressed sales?” 10. The facts are not in dispute. The assessee admits during the search that a portion of profit is not 10 accounted for and it is deposited in various banks. He submitted that he shall calculate the profit component of this under billed quantity for the block period and shall pay the tax accordingly. However, the Assessing Authority took that amount in deposit as profit and levied tax. On that basis the First Appellate Authority found fault with the way the Assessing Authority had calculated the undisclosed income and profit thereon. After carefully examining the turnover for 1996-97, 1997-98 and 1998-99 and comparing with the turnover of 1999-2000, 2000-01, 2001-021, 2002-03 and also taking into consideration the profit earned by another firm M/s.SRV and Sons, he was of the view that 4% would be the gross profit of the firm and he wanted the tax to be levied on that basis. The Tribunal found fault with the said finding on the ground that when the First Appellate Authority is relying on comparable cases, first there should be factual foundation showing the total turnover of that business and then the profit margin. In 11 the instant case, there is no material to show as to what is the total turnover of M/s.SRV and Sons and therefore, the Tribunal was not prepared to accept the said basis. On the contrary it took note of the orders passed in the case of the assessee for the assessment years 2003-04, 2004-05 and 2005-06 under Section 143(3) of the Income Tax Act, 1961. When the total turnover was much more than the turnover for the assessment years 1996-97, 1997-98 and 1998-99, 2% was held to be the gross profit. The Tribunal held that 2% gross profit has to be taken for the relevant assessment years during the block period. We find from the aforesaid material on record, the approach of the Tribunal is just and proper. Even though the higher margin of turnover is shown for the subsequent years and the very same Assessing Officer has recorded the finding of 2% profit margin for the period earlier to that where the total turnover is less, the Tribunal was justified in taking the gross profit at 2%. 12 11. In that view of the matter, we do not find any error committed by the Tribunal in passing the impugned judgment. The substantial question of law framed in these appeals is answered in favour of the assessee and against the Revenue. No merits. The appeals are dismissed. Sd/- JUDGE Sd/- JUDGE mpk/-* "