1 IN HIGH COURT OF JUDICATURE AT MADRAS DATE : 10.02.2015 CORAM HONOURABLE MR. JUSTICE R.SUDHAKAR AND HONOURABLE MR. JUSTICE R.KARUPPIAH T.C.A. NOS. 1048 TO 1050 OF 2014 AND M.P. NOS. 1 OF 2014 (2 Nos.) Commissioner of Income Tax Trichy. .. Appellant in all appeals - Vs - M/s.Amman Steel & Allied Industries, Silambudayanpatti Nagamangalam, Trichy. .. Respondent in all appeals Appeals filed under Section 260-A of Income Tax Act against order dated 23.08.2011 passed by Income Tax Appellate Tribunal, Madras 'C' Bench, Chennai, made in ITA Nos.2058 to 2060/Mds/2010. For Appellant : Mr. J.Narayanaswamy COMMON JUDGMENT (DELIVERED BY R.SUDHAKAR, J.) Aggrieved by order passed by Tribunal in dismissing appeals filed by it, Revenue is before this Court by filing present appeals. In these appeals, following questions of law are sought to be canvassed before this Court :- i) Whether Tribunal was right in holding that 2 turnover determined by Commissioner of Central Excise in his de novo adjudication proceedings consequent to remand order of CESTAT can be adopted for purpose of determining unaccounted turnover of assessee for relevant years? ii) Whether Tribunal was right in holding that when no deduction was sought on expenditure, provisions of Section 40A (3) cannot be applied when assessable income was arrived by applying percentage rate on unaccounted turnover? 2. assessment in these appeals is relatable to assessment years 2002-2003, 2003-2004 and 2004-2005. facts, in nutshell, are as hereunder :- respondent/assessee is alleged to be engaged in business of manufacture and sale of steel ingots and billets. respondent/assessee filed return of income for above assessment years. It appears that Central Excise Department conducted search of premises of assessee on 24.6.04 and in course of said search, incriminating documents and evidence were seized, which were found in computer and floppy disks. On basis of seized materials, Central Excise Department issued show cause notice in which it was alleged that assessee indulged in evading central excise duty by making unaccounted purchase of raw materials, by suppressing production, indulged in clandestine removal of bars and rods without issue of invoice and without 3 payment of duty. In course of investigation, it was found that assessee was purchasing ingots and billets from certain persons and it was found to be unaccounted purchase. Based on abovesaid show cause notice, Assessing Officer concluded that documents seized indicate collection of sale proceeds of unaccounted bars/rods by assessee in cash and unaccounted sale proceeds collected by cash. Assessing Officer, based on show cause notice issued by Central Excise Department and documents in support of show cause notice, estimated gross profit at 16.36% and, accordingly, demanded tax on same. assessee, aggrieved by said order, moved Appellate Authority, viz., CIT (Appeals) by filing appeal. 3. It was contended by assessee before CIT (Appeals) that show cause notice and papers seized by Central Excise Department cannot be basis for addition/disallowance under Income Tax proceedings. CIT (Appeals), accepting contention, primarily directed assessing officer to collect materials seized by Central Excise department and further directed assessing officer to make independent enquiries on additions/disallowances made and submit report. 4. Pursuant to said order, assessee filed objections before assessing officer during remand proceedings and same was dismissed by assessing officer, who submitted remand report to 4 CIT (Appeals) and sought enhancement of income. 5. In meanwhile, show cause notice issued by Central Excise Department came to be adjudicated by Commissioner of Central Excise and against said order, assessee moved CESTAT. Tribunal, after elaborately discussing merits of case, came to hold that there was some inherent lacunae in adjudication order and, therefore, set aside adjudication order and remanded matter to Commissioner of Central Excise for de novo consideration. After remand, Commissioner of Central Excise considered matter and passed de novo order redetermining demand. 6. In interregnum, assessee, pursuing appeal before CIT (Appeals), contended that very basis for determining gross profit was show cause notice and adjudication order, which has now been set aside and matter remanded to Commissioner of Central Excise for de novo adjudication and in such circumstances, pleaded that on finding of Tribunal and materials filed in support thereof, demand for tax proposed cannot be justified, as those evidences were found to be unreliable and inadmissible in evidence. Nevertheless, it was submitted that in view of remand order, nothing survives for consideration for purpose of determining income as unaccounted transaction. On said submission, CIT (Appeals) came to conclusion that Assessing 5 Officer, without conducting independent enquiry, either at time of assessment or during remand proceedings, as directed by CIT (Appeals), has simply relied upon documents retrieved in course of proceedings initiated by Central Excise Department as gospel truth and, therefore, held that income should be brought to tax based on cogent material and evidence and order of assessing officer merely placing reliance on show cause notice, without making independent enquiry, pursuant to remand order, cannot be sustained. CIT (Appeals) further held that turnover was re-determined by Commissioner of Central Excise in de novo order and since direction as given by CIT (Appeals) in remand proceedings having not been carried out, CIT (Appeals) adopted re-determined turnover as unaccounted turnover of assessee by modifying rate of gross profit after giving deduction towards power and labour charges. findings of CIT (Appeals), for better clarity, are extracted hereinbelow :- 22. I have considered rival contentions. I am of considered opinion that any income can be brought to tax based only on cogent material buttressed by evidence. IN present instance Assessing Officer cannot claim to have any evidence to sustain additions. He speaks at length only about allegations contained in show cause and some of them in material not worthy of admission in evidence. Under these circumstances I am inclined to hold that turnover determined by Commissioner of Central Excise in his de novo order giving effect to directions of Tribunal shall be unaccounted turnover of appellant for 6 relevant years. gross profit on this turnover shall be determined as under and added to income returned. On rate of gross profit I am in agreement with contention of AR that power and labour charges have to be deducted in arriving at rate of gross profit. Accordingly rate of gross profit had been worked and I direct income as per following table be adopted and added to income returned and balance addition made by AO shall stand deleted. Asst. Net Rate of GP as Net Profit Year Turnover obtained each year Rs. Rs. Rs. Rs. 2002-03 21,17,688 14.67% 3,10,665 2003-04 96,13,485 8.22% 7,90,228 2004-05 4,82,55,983 7.33% 35,37,164 2005-06 2,56,18,539 7.00% 17,93,298 7. On question of disallowance under Section 40A (3) of Act, purchase of steel ingots from various persons in cash, quantum of purchases alleged in assessment order is based on show cause notice issued by Central Excise Department. On said issue, assessee contended that when income is estimated by estimating turnover no further expenditure can be separately considered. Reliance was placed by assessee on judgment of this Court in CIT Vs Mohammed Dhurabudeen (4 DTR 218). CIT (Appeals) held that since basis of additions itself is at fault, they are not valid and, therefore, disallowance on said income is not sustainable. 7 8. Aggrieved by said order of CIT (Appeals), Department preferred appeals before Tribunal. Tribunal, on consideration of entire matter and on considering allegations raised in show cause notice, issued by Central Excise Department, which came to be finally decided by CESTAT by way of remand and further de novo adjudication by Commissioner of Central Excise, held that CIT (Appeals) has rightly ordered that turnover as determined by Commissioner of Central Excise in de novo adjudication order shall be unaccounted turnover of appellant for relevant years and, accordingly, gross profit was worked out. Tribunal further took note of fact that such conclusion drawn by CIT (Appeals) is correct since mere reliance on show cause notice issued by Central Excise Department is of no avail and assessing officer has not made independent enquiries even pursuant to remand order passed by CIT (Appeals). Tribunal further held that assessing officer merely collected all documents and forwarded same with his report, which is not correct procedure. relevant portion of order of Tribunal, in our opinion, requires to be placed on record, for better clarity, and same is extracted hereunder :- 14. Undisputedly and admittedly, Assessing Officer in this case has not made any independent enquiries. When Hon'ble CESTAT has found those evidence unreliable and not good evidence for framing assessment, same cannot be made basis for making assessment under Income Tax Act. 8 In these circumstances, assessee is not required to explain documents in so far as income tax proceedings are concerned. It is found for fact that neither managing partners of firm nor any other person in-charge of business had ever admitted on oath that all materials seized by Central Excise Department could be used by th ITO in framing assessment order. On contrary relevant answer of managing partner clearly states that Hon'ble CESTAT had already found retrieved data to be unreliable and requested to rely only on de novo order made by Commissioner, Central Excise Department. In our considered opinion, the extent Hon'ble CESTAT has found documents/evidence to be unreliable, same cannot be used in maing assessment under Income-Tax Act, specially when not even whit of enquiry has been independently made by him despite directed by ld. CIT (A). assessee has clearly explained electricity charges and wages and has accounted same completely, and similar explanation has been accepted by same Assessing Officer, in his order made for assessment year 2002-03. Hon'ble Madras High Court in case of CIT Vs Vignesh Kumar Jewellers, 222 CTR 79, has clearly held that findings of another Department cannot be simply incorporated in assessment without any independent enquiry having been made. In this case, even modicum of enquiry has not been made independently by Assessing Officer. There is no corroborating or supporting evidence available on record. When main evidence on basis of which assessment was framed has been found to be not reliable by very same Department (Central Excise Department), cumulative effect of finding given in assessment order, remand report and submission of parties, would lead to 9 only one conclusion that no addition can survive on basis of unreliable evidence. addition made by Assessing Officer hinges on show cause notice of Central Excise Department which has been found to be unreliable to greater extent. It is very strange that remand report was sent after lapse of three years and that too after repeated reminders having snet by ld. CIT (A). In fact, Assessing Officer has not conducted any enquiry, let alone, any independent enquiry in this case. He has simply obtained copies of records from Central Excise Department and statements recorded by them from four persons despite fact that he was specifically directed by ld. CIT (A) to trace transaction-trails from square one upto end to establish generation of unaccounted income, if any, as had been alleged. In remand report, Assessing Officer has canvassed even enhancement of addition by way of withdrawal of deduction allowed for furnace oil as explained. We are convinced that additions which are made solely on basis of materials seized by Central Excise Department and which have been dubbed as unreliable by Hon'ble CESTAT, no addition can be made by Assessing Officer (Income Tax) in eyes of law. There is no doubt about legalk position that any income which is based on material evidence found or gathered by Assessing Officer can be brought to tax. In given case, there is no such evidence available with Assessing Officer to sustain impugned addition. allegations made in show cause notice no longer survive. But we have to accept facts which have been found by Hon'ble CESTAT to be correct and reliable and on basis of which de novo assessment has been made. turnover determined by Commissioner of Central Excise Department in his de novo order giving effect to 10 Hon'ble CESTAT's order has to be treated as unaccounted turnover of assessee for relevant years. gross profit on this turnover has to be determined and added to returned income for respective assessment years. power and labour charges have to be deducted in arriving at rate of gross profit. rate of gross profit worked out by ld. CIT (A) is as under :- Asst. Net Rate of GP as Net Profit Year Turnover obtained each year Rs. Rs. Rs. Rs. 2002-03 21,17,688 14.67% 3,10,665 2003-04 96,13,485 8.22% 7,90,228 2004-05 4,82,55,983 7.33% 35,37,164 2005-06 2,56,18,539 7.00% 17,93,298 15. Before us, ld. AR has not disputed addition of income as per above chart. balance addition made by Assessing Officer has been deleted by ld. CIT (A). We are of considered opinion that action of ld. CIT (A) is correct and affirm same. (Emphasis supplied) Tribunal concurred with findings of CIT (Appeals) in relation to Section 40A (3) and, accordingly, appeals filed by Department were dismissed. Aggrieved by said order of Tribunal, Department is before this Court by filing present appeals. 9. Learned standing counsel appearing for Department/appellant submitted that Tribunal erred in holding that materials seized by Central Excise Department cannot be basis to conclude that assessee had undisclosed income for purpose of making addition/disallowance. 11 Learned counsel further submitted that assessee maintained 2nd set of account books where falsification of entries was found and, thereby, concealment of income is evident from materials seized by Central Excise Department. Further, large scale unaccounted purchase, suppressed sales, which are evident from documents seized by Central Excise Department, have not been appreciated by Tribunal in its proper perspective. Further, it is contended by learned standing counsel for Department/appellant that assessing officer, during remand proceedings, had recorded statements of respondent/assessee, wherein admissions as to veracity of contents of seized materials are available, which have not been appreciated in proper perspective by CIT (Appeals) as well as Tribunal. Learned standing counsel, placing reliance on decision reported in 290 ITR 702 (Commissioner of Income Tax Vs Hynoup Food & Oil Industries P. Ltd.) submitted that payment in cash for expenditure not being disputed by assessee, Assessing Officer is justified in ordering disallowance under Section 40A(3) of Act, which has not been considered by Tribunal in its proper perspective and, therefore, order passed by Tribunal, in its entirety, is liable to be interfered with. 10. Heard Mr.Narayanaswamy, learned standing counsel appearing for appellant/Revenue and perused materials available on record as also decision relied on by learned counsel for appellant. 12 11. We have considered facts in issue. Here is case where entire assessment order is based on materials found in show cause notice issued by Central Excise Department. Thereafter, adjudication order passed by Commissioner of Central Excise came to be set aside by CESTAT and on remand de novo order was passed by Commissioner of Central Excise redetermining demand. CIT (Appeals) has ordered that said amount should be treated as unaccounted turnover of assessee for relevant years and gross profit on this turnover should be determined and added to income returned. procedure adopted by CIT (Appeals), as stated above, is logically correct way of determination of unaccounted turnover. reasoning of CIT (Appeals) and computation thereof being logically correct, Department cannot have any grievance on order passed by CIT (Appeals), which has also been confirmed by Tribunal. In absence of any independent enquiry by Assessing Officer concerned, as ordered by CIT (Appeals), question of placing reliance on demand made by Central Excise Department in its show cause notice, which has been redetermined in final adjudication order passed by Commissioner of Central Excise in de novo proceedings, does not arise for consideration. 12. This Court is of considered view that finding of CIT (Appeals) as well as Tribunal that merely on basis of show cause 13 notice issued by Central Excise Department, determination of tax under Income Tax Act cannot be made, as it is not incumbent on income tax authorities to take into consideration only materials made available by Central Excise Department, but authorities are bound to make independent enquiry, before passing any order, which enquiry has not happened in present case. There is no provision to simply incorporate demand made in show cause notice issued under Central Excise Laws for purpose of computation of tax under Income Tax Laws. provisions under two laws, viz., Central Excise Act and Income Tax Act, operate in two different fields. Without there being independent enquiry by concerned taxing authorities demand made under provisions of Central Excise Act cannot be incorporated as such, more so when notice of demand has been modified by adjudicating authority. above view of this Court is further fortified by decision of Supreme Court in K.T.M.S. Mohammed & Ors. Vs Union of India (AIR 1992 SC 1831), wherein Supreme Court while considering scope of provisions of Foreign Exchange Regulation Act and Income Tax Act, held as under:- 24. Needless to emphasise that Foreign Exchange Regulation Act and Income-tax Act are two separate and independent special Acts operating in two different fields. 25. This court in Rao Bahadur Ravulu Subba Rao v. CIT [1956] 30 ITR 163; AIR 1956 SC 604; [1956] SCR 577 (headnote of 30 ITR 163 ) has pointed out : 14 "The Indian Income-tax Act is self-contained code exhaustive of matters dealt with therein, and its provisions show intention to depart from common rule, qui facit per alium facit per se." 26. Further, in Pannalal Binjraj v. Union of India [1957] 31 ITR 565 AIR 1957 SC 397; [1957] SCR 233, it has been observed thus (at pages 583, 584 of 31 ITR) : "It has to be remembered that purpose of Act is to levy income-tax, assess and collect same. preamble of Act does not say so in terms, it being Act to consolidate and amend law relating to income- tax and super tax but that is purpose of Act, as disclosed in preamble to first Indian Income-tax Act of 1886 (Act II of 1886). It follows, therefore, that all provisions contained in Act have been designed with object of achieving that purpose." Coming to Foreign Exchange Regulation Act, it is special law which prescribes special procedure for investigation of breaches of foreign exchange regulations. Vide Shanti Prasad Jain v. Director of Enforcement [1963] 33 Comp Cas 231; [1963] 2 SCR 297. proceedings under Foreign Exchange Regulation Act are quasi-criminal in character. It is pellucid that ambit, scope and intendment of these two Acts are entirely different and dissimilar. above decision of Supreme Court is squarely applicable to facts of present case and, therefore, we have no hesitation to hold that method adopted by CIT (Appeals) with regard to taxation under Income Tax Act, as affirmed by Tribunal, is correct method of determining income based on unaccounted turnover. 15 12. next question raised by appellant/Revenue relates to disallowance under Section 40A (3) of Act. For better appreciation of issue, Section 40A (3) of Act is extracted hereinbelow :- 40A. Expenses or payments not deductible in certain circumstances. * * * * * * * * * (3)(a) Where assessee incurs any expenditure in respect of which payment is made in sum exceeding twenty thousand rupees otherwise than by account payee cheque drawn on bank or account payee bank draft, no deduction shall be allowed in respect of such expenditure; (b) where allowance has been made in assessment for any year in respect of any liability incurred by assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) assessee makes payment in respect thereof, otherwise than by account payee cheque drawn on bank or account payee bank draft, payment so made shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as income of subsequent year if amount of payment exceeds twenty thousand rupees: Provided that no disallowance shall be made and no payment shall be deemed to be profits and gains of business or profession under this sub-section where any payment in sum exceeding twenty thousand rupees is made otherwise than by account payee cheque drawn on bank or account payee bank draft, in such cases and under such circumstances as may be prescribed, having regard to nature and extent of banking facilities available, considerations 16 of business expediency and other relevant factors. 13. On issue relating to disallowance under Section 40A (3) of Act, same was considered by CIT (Appeals) by holding that income has been arrived at estimate of turnover and computed applying gross profit and, therefore, no expenditure shall be allowed, since gross profit applied would take care of amount incurred by purchases, etc. CIT (Appeals), to justify said stand, drew strength from decision of this Court in Mohammed Dhurabudeen's case (supra), wherein this Court has held thus :- question for consideration is when no deduction was sought and allowed under S. 40A (3), was there any need to go into S. 40A (3) and Rule 6DD (j). We see force in view taken by Tribunal that when income of assessee was computed applying GP rate and when no deduction was allowed in regard to purchases of assessee, there was no need to look into provisions of Section 40A (3) and Rule 6DD (j). No disallowance could have been made in view of provisions of S. 40A (3) read with Rule 6DD (j) as no deduction was allowed to and claimed by assessee in respect of purchases. When GP rate is applied, that would take care of everything and there was no need for A.O. to make scrutiny of amount incurred on purchases by assessee. 14. Following ratio laid down by this Court in abovesaid 17 decision, CIT (Appeals) held that additions made under Section 40A (3) of Act are to be deleted since basis of additions had been faulted and are no more valid and since income is estimated, no disallowance on this account can be made. said view of CIT (Appeals) has been affirmed by Tribunal. 15. This Court has already held in former portion of order, that assessment order came to be passed only on basis of show cause notice issued by Central Excise Department and no independent enquiry has been conducted by Assessing Officer. Further, ratio of decision of Supreme Court in K.T.M.S. Mohammed's case (supra), clearly applies to facts of present case. Such being case, in absence of any independent enquiry by Assessing Officer, disallowance sought to be made under Income Tax Act, by Assessing Officer, on basis of show cause notice, issued under Central Excise Act cannot be sustained. When assessable income was arrived at by applying percentage rate, as held by this Court in Mohammed Dhurabudeen's case (supra), said exercise would take care of everything and there is no need for Assessing Officer to make scrutiny of amount incurred on purchases by assessee for purposes of disallowance. Therefore, this Court is of considered view that order of Tribunal in concurring with CIT (Appeals) on this issue is justified and this Court finds no reason to differ with same. 18 15. In view of above findings and reasoning as recorded above, this Court is of considered view that no question of law, much less substantial question of law arises for consideration in these appeals. 16. In result, these appeals fail and same are dismissed. Consequently, connected miscellaneous petitions are also dismissed. (R.S.J.) (R.K.J.) 10.02.2015 Index : Yes/No Internet : Yes/No GLN To 1. Commissioner of Income Tax Trichy. 2. Income Tax Appellate Tribunal 'C' Bench, Chennai. 19 R.SUDHAKAR, J. AND R.KARUPPIAH, J. GLN T.C.A. NOS. 1048 TO 1050 OF 2014 10.02.2015 Commissioner of Income-tax, Trichy v. M/s. Amman Steel & Allied Industrie