Delhi High Court

Commissioner Of Income Tax vs M/S. Chadha Automobiles (India) on 24 January, 2011

Author: A.K.Sikri

*              IN THE HIGH COURT OF DELHI AT NEW DELHI

+                                ITA No. 730 of 2008

                                          with

                                ITA No. 660 of 2004

                                              RESERVED ON: JANUARY 7, 2011
%                                         PRONOUNCED ON: 24 JANUARY, 2011


    1) ITA No. 730 of 2008

       COMMISSIONER OF INCOME TAX                                    ...Appellant

                              through :          Ms. Prem Lata Bansal, Advocate.


                                     VERSUS


       M/s. CHADHA AUTOMOBILES (INDIA)                           . . .Respondent

                              through:           Mr. M.S. Syali, Sr. Advocate with
                                                 Mr. Mayank Nagi, Ms. Madhavi
                                                 Swaroop and Ms. Husnal Syali,
                                                 Advocates for the respondent.

    2) ITA No.660 of 2004

       COMMISSIONER OF INCOME TAX                                    ...Appellant

                              through :          Ms. Prem Lata Bansal, Advocate.


                                     VERSUS


       M/s. CHADHA AUTOMOBILES (INDIA)                           . . .Respondent

                              through:           Mr. M.S. Syali, Sr. Advocate with
                                                 Mr. Mayank Nagi, Ms. Madhavi
                                                 Swaroop and Ms. Husnal Syali,
                                                 Advocates for the respondent.


CORAM :-
    HON'BLE MR. JUSTICE A.K. SIKRI
    HON'BLE MR. JUSTICE M.L. MEHTA

       1.      Whether Reporters of Local newspapers may be allowed
               to see the Judgment?

       2.      To be referred to the Reporter or not?

       3.      Whether the Judgment should be reported in the Digest?




ITA Nos. 730 of 2008 & 660 of 2004                                     Page 1 of 10
 A.K. SIKRI, J.

1. Both these appeals pertain to same assessment year in respect of

same assessee. Even the question of law raised is identical. It so

happened that two appeals, one preferred by the Revenue and

the other by the assessee, were decided by the tribunal on

different occasions by passing two orders and that is the reason

that two appeals are before us. ITA 660/2004 was admitted on 8th

November, 2004. Since decision in the second appeal was

rendered subsequently by the tribunal, the appellant filed ITA

730/2008 which was admitted on 26th October 2010. Identical

question of law was framed while admitting the two appeals. This

question of law is as under :

"Whether the Tribunal is justified in not making any addition on account of trading result in spite of rejecting books of accounts and recording specific findings that in the pre-survey period trading results were in the negative and assessee had no explanation for the same."

2. The aforesaid question has cropped up for consideration in the

following factual backdrop.

In the premises of the respondent assessee, which is in the

business of sale of automobile accessories, a survey was

conducted by the income tax department on 7.1.2000. Certain

discrepancies were found in the stock which was physically

verified and the stock which was shown in the books of accounts.

There was a difference of `15 lakhs on this account. The assessee

accepted this discrepancy and surrendered a sum of `15 lakhs on

account of unexplained stock. Likewise there was an unexplained

cash to the tune of `5 lakhs during of survey. The assessee made

a surrender of this amount also during the survey. In this manner

the total amount surrendered during the survey was to the tune

of `20 lakhs.

3. By due date the assessee filed income tax return for the

assessment year 2000-01 declaring an income of `20,30,048/-.

During the assessment proceedings the assessee produced the

account books. The Assessing Officer found various discrepancies

therein and thus rejected those account books. In such a

scenario, for the purpose of ascertaining the income of the

assessee, the Assessing Officer undertook the exercise of finding

the GP rate. The Assessing Officer took up case of one M/s Kohli &

Co. which was trading in the same commodities. As per the AO, it

was found that GP rate disclosed by the said M/s Kohli & Co. was

13.04%. As per the Assessing Officer since M/s Kohli & Co. was a

comparable example, the GP rate declared by M/s Kohli & Co.

was adopted as the basis of computation of the income of the

assessee as well. Taking this GP rate of 13% on the trading

results shown, trading addition of `33,06,687/- by the Assessing

Officer was made and on this basis the assessment order was

framed.

4. The assessee herein challenged the aforesaid order of the

Assessing Officer by preferring appeal before the CIT(A). The

assessee challenged the adoption of GP rate at 13%. The

assessee also challenged the order of the Assessing Officer

rejecting the books of accounts. It was also the case of the

assessee that in any case the assessee had surrendered income

of `20 lakhs during the survey and that had to be telescoped in

the trading addition made by the Assessing Officer which the

Assessing Officer omitted to do. The CIT(A) after hearing the

appeal upheld the finding of the Assessing Officer whereby the

books of accounts of the assessee were rejected. The CIT (A) also

accepted the GP rate of 13% arrived at by the Assessing Officer

on the basis of comparison made with M/s Kohli & Co. However,

the CIT (A) was of the view that the assessee was entitled to

telescope the amount already surrendered during survey.

5. The matter was carried out further by the assessee before the

Income Tax Appellate Tribunal. As mentioned above the assessee

filed appeal against that part of the order of CIT (A) whereby CIT

(A) had rejected books of accounts and affirmed the GP rate of

13%. On the other hand, the department also filed the appeal

whereby deletion of `20 lakhs was made by the CIT (A) in the

manner indicated above. Appeal of the assessee came up for

consideration first and has been decided by the Tribunal vide

orders dated 16.4.04. Since in the second appeal which was

preferred by the tribunal this order is followed, it would be safe to

refer to the decision rendered by the tribunal vide order dated

16.4.2004.

6. The Tribunal after detailed discussion upheld the order of CIT(A)

insofar as it pertains to the rejection of the books of accounts of

the assessee. Since account books of the assessee were rejected,

it became necessary to examine the orders of the authorities

before fixing the GP rate. The Tribunal dealt with the issue as to

whether the GP rate of 13% adopted by the Assessing Officer and

affirmed by the CIT(A) was proper or not. After detailed

discussion, it came to the conclusion that comparison with M/s

Kohli & Co. was inappropriate inasmuch as the line of business of

said M/s Kohli & Co. was different from the assessee. This finding

necessitated the Tribunal to fix the GP rate. In such a scenario,

proceeding further, the Tribunal observed that the past history of

the results shown by the assessee, and accepted by the

department in earlier assessment years was relevant basis for

arriving at GP rate. The Tribunal looked into the GP rate declared

by the assessee in last five years and on that basis came to the

conclusion that it was fair and reasonable to apply a GP rate of

3.25% to estimated GP of the assessee for pre-survey period.

Challenging this approach and conclusion, present appeals are

filed.

7. Before we take note of the nature of challenge laid by the

Revenue, we may state some more details. As pointed out above

the survey was carried out on 7th January, 2000. During this

period the assessee had shown a trading loss of `7,66,333/- by

adopting GP rate of 3.25%. The Tribunal calculated that the GP of

the assessee for this pre-survey period would come to `7,40,503/.

On this basis the tribunal opined that a trading addition of

`15,06,836/- would be required. Since the assessee had already

surrendered a sum of `20 lakhs on account of excess stock and

excess cash, telescoping the same the tribunal held that no

further addition was required to be made as the trading addition

sustained by the tribunal were to the tune of `15,06,836/-. We

may also note at this stage that for the post-survey period of the

assessment year the assessee had shown a sale of `1,66,46,688/-

on which Gross Profits of `10,85,728/- was declared by the

assessee in the income tax return which would show G.P. rate of

8 to 9%. This was accepted by the ITAT as reasonable holding

that no interference in the GP shown by the assessee in the post

survey period was necessary.

8. Mrs. Bansal, learned counsel appearing for the Revenue has

contended that the tribunal has grossly erred in arriving at the GP

rate of 3.25% on the basis of past history namely GP rate

declared by the assessee in the last five years' returns prior to

the date of survey. Her submission is that during the survey it

was found that there was discrepancy in the stocks in as much as

on actual physical verification stock was in excess of `15 lakhs of

what was reflected in the books of accounts. There was even a

discrepancy regarding the cash. Because of this reason the GP

declared by the assessee in the previous years was not the safe

basis for arriving at the GP rate of year in question as it cannot be

presumed that in last five years, proper books were maintained.

She further tried to demonstrate, on the basis of post survey

period GP declared by the assessee himself, that the GP rate

should have been much more and this aspect was totally glossed

over by the Tribunal. Dilating on this aspect she pointed out that

as far as post survey period is concerned the assessee had

himself shown sales of `1.66 Crores and GP of `10.85 lakhs

thereupon. She further pointed out that the assessee was in the

business of sale of truck accessories earlier and during this year,

as per the assessee himself, the business was switched over to

the sale of car accessories. Referring to the order passed by the

Assessing Officer she pointed out that when the sale of car

accessories during this period and the profitability thereupon is

reduced from the total sales, the GP rate for this post survey

period relating to the sale of truck accessories and freight

containers would come to around 10%. In the alternative her

submission was that sale and GP ratio was to be taken as it is

without any adjustment of the aforesaid nature still it would be in

the neighbourhood of 8 to 9%. According to Mrs. Bansal this post

survey period GP rate declared by the assessee himself was the

safest indicator to arrive at GP rate for the pre-survey period as

well and on this basis also the fixation of the GP rate of 3.25%

was grossly under rated.

9. Mr. Syali, Sr. Advocate appearing for the assessee submitted at

the outset that the question of fixing GP rate was entirely factual

and no substantial question of law would arise on this aspect. In

this behalf, Mr. Syali referred to the judgment of this court in the

case of Anil Bagla Vs. Commissioner of Income Tax in IT

Appeal No.882/2007 (2008) 215 CTR (Del) 444. Predicated

on this, his submission was that no substantial question of law

has arisen in this case and the appeal required to be dismissed

on this ground itself. In the alternative, Mr. Syali's submission on

merits was that the exercise undertaken by the ITAT in the given

case was perfectly justified and legally in order. He countered the

submission of Mrs. Bansal qua the adoption of past history of the

assessee, by contending that the assessment in those years were

complete and accepted by the department. Therefore, it was not

open to the department now to contend that the GP which was

declared by the assessee in those years could not be the basis of

fixing GP rate in the year in question. He also submitted that if

the department was of the opinion that no such argument was

ever raised even before the tribunal or the CIT(A) and in any case

if Department was of the opinion that the assessee had

suppressed the income in the earlier years, no steps for

reopening those assessments were ever taken by the

department. He further submitted that the GP rate for post

survey period was higher because of the change in the line of

business from truck accessories to the lack accessories and the

shift had been occasioned because of the policy of Govt. of Delhi

prohibiting the entry of heavy vehicles like trucks. He also

pointed out that for the assessment years 2001-02, 2002-03 and

2003-04, the assessee had filed the return declaring the GP rate

of 4.59% to 5.39% which was duly accepted by the department.

On this basis, his submission was that the GP rate of 13% arrived

at by the Assessing Officer or the CIT (A) was totally out of tune

whether it be compared with the past history of the returns filed

by the assessee or the subsequent.

10. The aforesaid factual information would clearly demonstrate that

in so far as books of accounts of the assessee are concerned

these have been rejected by all the authorities below and this

issue has attained finality. Furthermore, the CIT(A) as well as the

Tribunal has allowed telescoping of `20 lakhs surrendered by the

assessee at the time of survey and this cannot be questioned by

the Department as this aspect was rejected at the time of appeal

and no question of law has been framed. The entire dispute, in

these circumstances, revolves around the GP rate that has been

arrived at by the learned Tribunal.

11. After analyzing the peculiar facts of this case as well as the

material on record, we intend to take the view that neither the

Department nor the assessee is wholly correct. It would also

follow that the approach of the Tribunal is not without blemish.

We are inclined to agree with the submission of the learned

counsel for the Revenue to the extent that the Tribunal could not

have made the returns of last five years as the sole basis for

arriving at GP rate in the year in question. We say so because of

the following circumstances:

(a) In the year in question, the books of accounts of the

assessee are specifically rejected finding

discrepancies therein. During the survey, discrepancy

was also found in the stock as entered into books of

the accounts and actual stocks found at the premises

on physical verification. Discrepancy was found even

in respect of cash. The assessee had accepted this

discrepancy and offered a sum of `15 lacs on account

of unexplained stock and also unexplained cash to the

tune of `5 lacs.

(b) On the one hand, the Tribunal takes into consideration

the GP declaration in last five assessment years, but

conveniently ignores the GP shown by the assessee

himself in this very year pertaining to post survey

period. Since post survey period is of the same

assessment year, that would provide better guide for

fixing the GP rate for pre-assessment period.

12. For a moment, we are not suggesting that the GP rate declared in

the earlier five years should not be taken into consideration at all,

as the assessment for those years have been completed and the

GP rate is accepted by the Department. At the same time, there

is some question mark on the said GP rate in those years which

becomes more apparent and visible when that is compared with

the post survey period of the assessment year in question.

Therefore, the proper methodology should have been to take into

consideration the GP rate of the previous period, but at the same

time GP rate of post survey period was also relevant to determine

the GP rate for pre-survey period more so, when both these

periods pertain to the same assessment year. We have also to