Vijay Solvex Ltd. v. Commissioner of Income-tax, Alwar
[Citation -2015-LL-0224-36]

Citation 2015-LL-0224-36
Appellant Name Vijay Solvex Ltd.
Respondent Name Commissioner of Income-tax, Alwar
Court HIGH COURT OF RAJASTHAN
Relevant Act Income-tax
Date of Order 24/02/2015
Judgment View Judgment
Keyword Tags mercantile system of accounting • eligible industrial undertaking • profits and gains of business • best judgment assessment • assessment proceeding • method of accounting • gross profit rate • cogent evidence • sales turnover • stock-in-trade • closing stock • opening stock • raw material • market price • actual cost • book result
Bot Summary: In view of these factors, and specially the fact that the assessee had maintained the books of accounts properly, the books of accounts of the assessee were rightly not rejected by the Assessing Officer, but the addition of Rs.5 lacs, on the unexplained reduction of profit rate was justified. The reduction in the profit rate in the absence of any defect in accounts, cannot be a ground to made addition in income. The Assessing Officer did not reject the books of accounts wholly, and even after accepting the method of accounting, made an addition of Rs.5 lacs on the ground that the profit rate shown by the assessee was much lower than the previous year. The income chargeable under the head Profits and gains of business or profess or Income from other sources is provided to be computed in accordance with the method of accounting, subject to provisions of sub-section in accordance with either cash 8 or mercantile system of accounting regularly employed by the assessee. Sub-section of Section 145 provides that where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section or accounting standards as notified under sub-section, have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provide in Section 144. In our view, following an accepted method of accounting and the consistency in maintaining such accounts, does not ensure the correctness or completeness of the accounts. Even if, the method of accounting is correct, the accounts may be maintained in a manner, in which without creating any doubt over the method of maintaining of the accounts, the Assessing Officer, for good and sufficient reasons recorded by him, find that the computation is in such a manner, which does not accurately records the profits and gains.


1 IN HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JAIPUR BENCH, JAIPUR D.B. Income Tax Appeal No.125/2004 Vijay Solvex Ltd. vs. Commissioner of Income Tax, Alwar Date of Judgment : 24.02.2015 REPORTABLE HON'BLE ACTING CHIEF JUSTICE MR.SUNIL AMBWANI HON'BLE MR. JUSTICE PRAKASH GUPTA Mr. Sanjay Jhanwar, counsel for appellant. Ms. Parinitoo Jain, counsel for respondent-department. 1. This Income Tax Appeal, under Section 260A of Income Tax Act, 1961, was admitted on questions of law as follows: (i) Whether Income Tax Appellate Tribunal was justified in reversing categorical finding of first appellate authority that books have not been rejected under section 145 of Act in present case and in absence of such rejection, book result cannot be substituted? (ii) Whether term 'Profit and Gains' used in section 80HH & 80I of Income Tax Act, 1961 with reference to eligible industrial undertaking have same meaning as term 'income' whereas statute uses both terms independently in different provisions of Act? 2. On question No.1, it is submitted that books of accounts of assessee were not rejected, nor they were found to be inaccurate, incorrect or incomplete, and thus Assessing Officer was not justified in adding Rs.5 lacs, only on ground that profit rate shown by assessee was much lower than previous year. It is submitted that appellate authority found, after it was held by Assessing Officer, that regular books of accounts have been 2 maintained, and purchase and sales are fully vouched, and quality details were also maintained and produced before Assessing Officer, and on such findings books of accounts could not be disbelieved. observation of Assessing Officer that appellant was trying to suppress his real profit, was not supported by any material, appellate authority held that in instant case, books of accounts are properly maintained and unless books are rejected, estimation could not be made. He found that Assessing Officer has nowhere found any defect in books of accounts of appellant, therefore, lump sum addition of Rs.5 lacs cannot be sustained. 3. Income Tax Appellate Tribunal allowed second appeal with findings that assessee-company derives income from crushing of oil seeds through oil mill, and solvent plant and also by trading of its products. Assessing Officer observed that in view of crushing of different kind of oil seeds and oil cakes proper comparison cannot be visualised in business of assessee company. assessee company deals in purchase of various oil seeds, out of which certain oil seeds give more and better yield rate, whereas lower quality of oil seeds and oil cakes give lower yield rate, which cannot be compared with others. Tracing history of profits, Assessing Officer found that despite continuous profits, profit rate started decreasing from 19.84% in 3 assessment year 1990-91 to 11.18% in assessment year 1993- 94. In view of these factors, and specially fact that assessee had maintained books of accounts properly, books of accounts of assessee were rightly not rejected by Assessing Officer, but addition of Rs.5 lacs, on unexplained reduction of profit rate was justified. 4. Learned counsel appearing for appellant-assessee submits that books of accounts were not rejected by Assessing Officer. He had simply raised doubt over it, without any material or findings with regard to proper maintenance of books of accounts. He submits that no error was detected in books of accounts, and they were accepted by Assessing Officer, and thus, there could be no reason for addition of Rs.5 lacs. reduction in profit rate in absence of any defect in accounts, cannot be ground to made addition in income. He has relied on judgment of this Court in Commissioner of Income Tax vs. Maharaja Shree Umed Mills Ltd. [(1991) 192 ITR 565 (Raj.)], in which it was held in para 3 as follows: 3. ........ assessee was asked to give reasons for abrupt fall in gross profit rate to which reply was given that it was due to increase in expenditure on salaries and wages, fuel consumption and stores consumption. assessee was directed to furnish details of percentage of consumption of different items but, in spite of repeated reminders, he failed to furnish same. It was held by IAC that assessee-company had failed to discharge onus of proof regarding fall in gross profit rate to extent of 6.4 per cent and conclusion was that expenses under 4 various heads had been inflated. On appeal, learned CIT took into consideration change in gross prifit rate for 11 years and various other factors including maintenance of accounts, which have not been rejected and that IAC had not pointed out any single instance of inflation in expenditure. appeals of assessee were allowed in part. In appeal, Tribunal did not discuss matter, but simply stated that opinion of CIT was correct and that IAC had been unduly influenced by action of his predecessor and had not applied his judicial mind in proper perspective. reasoning of CIT was adopted. 5. Reliance has also been upon judgment of Gauhati High Court in Aluminium Industries (P) Ltd. vs. Commissioner of Income Tax [(1995) 80 TAXMAN 184 (Gau.)], in which it was held in para 5 as follows: 5. ......Similarly, mere fact that profits were low is not circumstance or material to justify addition of profits. It would be seen from both orders Annexures-A and C as passed by ITO and Tribunal that sheet anchor of this order is fall in profit. Even in cases of best judgment it must be based on adequate and relevant material. It is now well-settled that ITO while making best judgment assessment should make intelligible well grounded estimate and such estimate must be based on adequate and relevant material, inasmuch as, such estimate, is to be made in case of default committed by assessee either in not making return or not complying with all terms of notice under s. 143 (2) of Act of direction made under s. 142(2A). It is on any one or more of this default that ITO has to make best judgment assessment after taking into account all relevant materials which may be derived from records or which may have come into his possession into course of assessment proceeding and which assessee does not explain or contradict in respect of particulars given to him. conditions enumerated in cls. (a), (b) and (c) under s. 144 of Act relating to best judgment assessment must be fulfilled before taking recourse to best judgment assessment. order Annexure-A and C do not reflect such considerations although Tribunal at 5 one stage has observed: 'In our opinion, ITO was justified in making addition of Rs.50,000 which marginally increased rate of gross profit of assessee. There is no justification for deleting this amount of Rs.50,000. Now going through ITO's order, it would be evident that essential requirement of s.144 have not at all been complied with. 6. Learned counsel appearing for appellant-assessee has also referred to judgment of Delhi High Court in Commissioner of Income Tax vs. Smt. Poonam Rani [(2010) 41 DTR (Del) 194], in which Delhi High Court has held in para 9 as follows: 9. fall in GP ratio could be for various reasons such as increase in cost of raw material, decrease in market price of finished product, increase in cost of processing by assessee etc. There is no finding that actual cost of raw material purchased by assessee was less than what was declared in account books. There is no finding that actual cost of processing carried out by assessee was less than what had been declared in her account books. No particular expenditure shown in account books has been disallowed by Assessing Officer. There is no finding by Assessing Officer that actual quantity of finished product produced by assessee was more than what it was shown in accounts books. There is no finding that assessee had made any such sale of finished product which was not reflected in accounts books. There is no finding by AO that finished product was sold by assessee at price higher than what was declared in accounts books. In these circumstances, CIT(A) and Tribunal, in our view, were justified in holding that Assessing Officer could not have increased GP profit ratio merely because it was low as compared to GP ratio of preceding year. 7. Learned counsel appearing for respondent-department submits that increasing turn over and gross profits from 1990-91 to 1993-94, did not justify reduction in profit 6 rate. assessee-company had declared profit rate of 11.18% as against last years gross profit rate of 13.78%. 8. Assessing Officer had given figures of gross profit rates of assessee-company for last three years as follows: A.Y. Sales Turnover Gross Profit Gross Profit rate 1990-91 Rs.4,58,31,787/- Rs.90,95,300/- 19.84% 1991-92 Rs.19,78,12,367/- Rs.3,43,80,517/- 17.38% 1992-93 Rs.39,76,59,696/- Rs.5,48,20,047/- 13.78% 1993-94 Rs.33,63,27,190/- Rs.3,76,25,958/- 11.18% 9. Assessing Officer, on analysis of above table, recorded trend of assessee-company for adopting decreasing low profit rates. reasons given for low profit rate, despite increase of turnover and gross profits, was not accepted. Assessing Officer, therefore, did not reject books of accounts wholly, and even after accepting method of accounting, made addition of Rs.5 lacs on ground that profit rate shown by assessee was much lower than previous year. 10. Learned counsel appearing for respondent-department has relied on Commissioner of Income Tax vs. British Paints India Ltd. [(1991) 188 ITR 0044], in which Supreme Court has observed as follows: Section 145 of Income-tax Act, 1961, confers sufficient power upon officer-nay it imposes duty upon him-to make such computation in such manner as he determines for deducing correct profits and gains. This means that where, accounts are prepared without disclosing real cost of stock-in-trade, albeit on sound expert advice in interest of efficient administration of company, it is duty of Income-tax Officer to determine 7 taxable income by making such computation as he thinks fit. Any system of accounting which excludes, for valuation of stock-in-trade, all costs other than cost of raw materials for goods-in- process and finished products, is likely to result in distorted picture of true state of business for purpose of computing chargeable income. Such system may produce comparatively lower valuation of opening stock and closing stock, thus showing comparatively low difference between two. In period of rising turnover and rising prices, system adopted by assessee, as found by Tribunal, is apt to diminish assessment of taxable profit of year. profit of one year is likely to be shifted to another year which is incorrect method of computing profits and gains for purpose of assessments Each year being self- contained unit, and taxes of particular year being payable with reference to income of that year, as computed in terms of Act, method adopted by assessee has been found to be such that income cannot properly be deduced therefrom. It is therefore, not only right but duty of Assessing Officer to act in exercise of his statutory power, as he has done in instant case, for determining what, in his opinion, is correct taxable income. Tribunal's order, affirming that of Assessing Officer, was based on findings of fact made on cogent evidence and in accordance with correct principles. High Court was clearly wrong in interfering with those findings. Accordingly, we set aside judgment of High Court and allow appeals of Revenue with costs throughout. Appeals allowed . 11. Section 145 of Income Tax Act provides for method of accounting at time of making assessment. income chargeable under head Profits and gains of business or profess or Income from other sources is provided to be computed in accordance with method of accounting, subject to provisions of sub-section (2) in accordance with either cash 8 or mercantile system of accounting regularly employed by assessee. Sub-section (3) of Section 145 provides that where Assessing Officer is not satisfied about correctness or completeness of accounts of assessee, or where method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by assessee, Assessing Officer may make assessment in manner provide in Section 144. 12. In our view, following accepted method of accounting and consistency in maintaining such accounts, does not ensure correctness or completeness of accounts. Even if, method of accounting is correct, accounts may be maintained in manner, in which without creating any doubt over method of maintaining of accounts, Assessing Officer, for good and sufficient reasons recorded by him, find that computation is in such manner, which does not accurately records profits and gains. In present case, substantial increase in turnover from 4.58 to 33.63 crores, and gross profits from Rs.90 lacs to 3.76 crores, did not justify gradual fall in gross profit rates. reasons, given by assessee-company explaining reduction of gross profit rates, were not accepted by Assessing Officer, and thus he made lump sum addition of Rs.5 lacs, which has been upheld by Tribunal. We do not find any error of law in computation of income in manner in absence of 9 valid justification of reduction of gross profit rate, marginal addition of Rs.5 lacs was made. 13. question No.1 is thus, decided in favour of department and against assessee-company. 14. question No.2 is covered by judgment of Division Bench of this Court in Vijay Solvex Ltd. vs. Commissioner of Income Tax, Alwar [D.B.Income Tax Appeal No.185/2004, decided on 06.01.2014 alongwith two connected appeals], following judgment of Apex Court in Motilal Pesticides (I) Pvt. Ltd. vs. Commissioner of Income Tax [(2000) 9 SCC 63], in which it was observed as follows: Both sections 80HH and 80M fall in Chapter VI-A relating to deductions to be made in computing total income. It will be seen that language of sections 80HH and 80M is same. It was held in Cloth Traders (P.) Ltd.'s case : [1979] 118 ITR 243 (SC) that deduction is to be allowed on gross total income and not on net income. But then decision in Cloth Traders (P.) Ltd.'s case: [1979] 118 ITR 243 (SC) was overruled in Distributors (Baroda) P. Ltd. v. Union of India: [1985] 155 ITR 120 (SC) . After decision in Cloth Traders (P.) Ltd.'s case [1979] 118 ITR 243 (SC) , two sections 80AA and 80AB were introduced by Finance (No. 2) Act, 1980. While Section 80AA was to have retrospective effect with effect from April 1, 1968, Section 80AB was to have operation with effect from April 1, 1981. Section 80AA had effect of effacing decision of this court in Cloth Traders (P.) Ltd.'s case : [1979] 118 ITR 243 (SC) , which had interpreted Section 80M. Section 80AB was made applicable to all sections in Chapter VI-A except Section 80M. In Distributors (Baroda) P. Ltd.'s case: [1985] 155 ITR 120 (SC) , however, this court specifically overturned its earlier decision in Cloth Traders (P.) Ltd.'s case: [1979] 118 ITR 243 (SC) and held that deduction is to be allowed only on net income and not on gross income. 10 With reference to Section 80AB, this court said it was merely of clarificatory nature and decision of this court in Distributors (Baroda) P. Ltd.'s case: [1985] 155 ITR 120 (SC) is thus irrespective of Section 80AB of Act. High Court, therefore, relying on decision of this court in Distributors (Baroda) P. Ltd.'s case : [1985] 155 ITR 120 (SC) answered question in favour of Revenue and against assessee. Division Bench also found that Apex Court in M/s. Himatsingka Seide Ltd. vs. CIT [Civil Appeal Nos.1501/2008, decided on 19.09.2013] also took similar view. 15. Thus, question No.2, in present case, in respect of same assessee, has been decided by Division Bench of this Court, with which we do not find any reason to disagree. question No.2 is also decided in favour of department and against assessee-company. 16. We are informed that Apex Court in M/s. Vijay Industries vs. Commissioner of Income Tax [Civil Appeal Nos.1581-1582 of 2005, decided on 05.11.2014] has expressed doubt on opinion expressed in Motilal Pesticides (I) Pvt. Ltd. vs. Commissioner of Income Tax (supra), and has referred question to Hon'ble Chief Justice of India to constitute Larger Bench to consider correctness of opinion. 17. Any doubt, expressed by Hon'ble Supreme Court on correctness of opinion in case which has been followed in case of assessee for previous year, may not persuade 11 us to take different view in matter, unless Supreme Court decides otherwise. 18. Learned counsel appearing for appellant-assessee prays for liberty to file appeal in Supreme Court. In our opinion, this case does not raise any question of law, which in our opinion, may be considered and decided by Hon'ble Supreme Court. prayer is rejected. 19. Income Tax Appeal is dismissed. (PRAKASH GUPTA),J. (SUNIL AMBWANI),ACTING C.J. Mohit M/7 All corrections made in judgment/order have been incorporated in judgment/order being emailed. Mohit Tak, P.A. Vijay Solvex Ltd. v. Commissioner of Income-tax, Alwar
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