Reva Khetrapal, J.@mdashThis is an appeal filed by the Department relating to the assessment year 1994-95 and 1998-99 in which the following substantial questions of law arise:
(a) Whether, on the facts and in the circumstances of the case, the Tribunal was correct, both on facts and in law, in deleting the addition made by the AO, in the absence of books of account, by estimating the income of the Assessee on the basis of the financial results of the succeeding year?
(b) Whether the Ld. ITAT was correct in law in holding that since the additions made in the case of sister concern of the Assessee have been deleted therefore the statement of account as filed by the Assessee should be accepted and no adverse inference can be drawn?
(c) Whether the order of the Ld. ITAT is vitiated as the Ld. ITAT and the CIT(A) have failed to appreciate and consider that when there were no account books and other details available with the Assessee, how and on what basis the accounts of the Assessee, without verification would be accepted as correct?
2. Briefly delineated, the facts of the case relevant to the assessment year 1994-95 are as follows.
3. The Assessee-Respondent firm was engaged in the business of manufacturing andtrading of footwear under the brand name of "WOODLAND" and "WOODS" during therelevant financial year. The said firm was constituted during the financial year1992-93 as a partnership firm. On 21.07.1999, a survey operation u/s 133A of the Act was conducted at the business premises of the Assessee firm and itsaccountants M/s A.K. Dua and Associates. During the course of the said survey, itcame to the notice of the Department that the Assessee had not filed its return ofincome after the assessment year 1993-94. Necessary legal proceedings wereinitiated against the Assessee for non-filing of the returns of the assessment years 1994-95, 1995-96, 1996-97, 1997-98, 1998-99 and 1999-2000. A notice u/s 148 of the Act after recording reasons was issued and served upon theAssessee on 25.11.2000 requiring it to file its return of income within the timeallowed. The said notice was not complied with and no return was filed by theAssessee. Again, a notice u/s 142 of the Act along with questionnairedated 12.07.2001 was issued to the Assessee. Thereafter, again on 29.11.2001 and12.12.2001, notices u/s 143(2) were issued to the Assessee. Yet again,notice u/s 142 dated 14.01.2002 was issued and served upon the Assessee. The Assessee finally filed its return of income for the assessment year 1994-95 on17.01.2005 declaring taxable income of ` 6,60,883/-. In the said return, tradingresults were declared as audited on 01.10.1996, however no audit report underSection 44AB was annexed with the said return. The Assessing Officer took theview that such a return of income was defective and since the return was neitherfiled within the time allowed u/s 139(1) nor u/s 148 of the Act, no sanctity could be attached to such a return of income.
4. The Assessee''s case before the A.O. was that it was prevented due to reasonsbeyond its control in not filing the returns within the stipulated time. It wasstated that the accountancy, legal and income tax work of the group companies ofthe Assessee was being handled by the accountants M/s A.K. Dua. All the recordsof the Assessee and its group companies were in the custody of the saidaccountants, who, for their own pecuniary benefit, misled the Assessee in makingVDIS declarations for the years 1995-96, 1996-97 and 1997-98, even though theAppellant had incurred losses in all these years. Later, a dispute arose betweenthe Assessee and its accountants, which assumed such proportions that a criminalcomplaint had to be filed by the Assessee against the accountants, in consequencewhereof the police authorities conducted a search at the residence and businesspremises of the accountants and seized the entire records of the Assessee and itsgroup companies. The Assessee could not receive the copies of the seized materialand neither could it inspect the records.
5. The Assessing Officer has noted in his order that no documents/books ofaccount relating to the Assessee and its group concerns were found from thepossession of the said accountants. The Assessing Officer further noted that thefirst FIR was filed against the said accountants by the Assessee on 21.02.2000,i.e., almost five months after the date of the survey on 21.07.1999. There wasalso no evidence to suggest that the Assessee had made sufficient efforts till thedate of the survey to obtain its records/books of account from these accountants. The Assessing Officer took the stand that the Assessee could not plead ignorance oflaw as a defence, and further that this state of affairs has arisen not due to anyreasonable cause beyond the control of the Assessee but due to gross negligence onits part. The Assessing Officer accordingly proceeded to estimate the profits for the assessment year in question on a fair and reasonable basis in the absence ofbooks of account, audit report and other details in respect of the audited accountsin the following manner:
The Assessee made declaration under the VDIS 1997 in respect of the A. Ys. 1995-96,1996-97 and 1997-98 of the above said amounts as income from the firm invested inthe same business. Taxes were duly paid for the above said VDIS made for whichnecessary certificate was also issued by the jurisdictional CIT u/s 68(2) of the Act. Since the Assessee has already made declaration under the VDIS declaring moretaxable income than now, refund as claimed for the above said assessment years onaccount of income estimated at a lower figure now without any supporting evidenceor record cannot be entertained. Being fair and reasonable, the declaration madeearlier by the Assessee under the VDIS has not been disturbed in the assessmentorders passed u/s 144 of the Act for the said years. Further, as worked out in theabove said chart, the profit percentage declared under VDIS against sales comes outto 2.5%, 3.38% and 2.4% for the A. Ys. 1995-96, 1996-97 and 1997-98 respectively. Taking average of the said three years, the average profit percentage works out to2.75% (2.5 + 3.38 + 2.4/3).
...By applying the same for the ATY 1994-95 also, the taxable income for the above said assessment year works out at ` 17,28,389/- (Sales * 2.75%) (62850494 * 2.75%). Thus, the income of the Assessee is adopted at ` 17,28,389/- as against the declared income of ` 6,60,883/- on the basis of material on record and circumstances of the case discussed above to the best of my judgment as per the provisions of Section 144 of the Act.
6. Before the CIT(A), the delay in filing the FIR against the accountants wassought to be explained by the reasoning that had the Assessee shown any haste infiling the FIR the accountants would have removed the records from their premisesand that would have caused irreparable loss to the Assessee. It was submitted thatduring the intermittent period the Assessee was trying by all possible means toretrieve as much record as possible from the custody of the accountants in adiscrete manner. The voluminous seizure made by the police as a result of thesearch at the accountants'' premises, it was submitted, confirmed the Assessee''scontention that the books of account and other documents relating to the Assesseeand its group companies were in the possession of the accountants. Contesting theestimation of profits by the Assessing Officer, it was argued on behalf of theAssessee that this method of estimation on the basis of ad-hoc declaration made inthe VDIS was neither rationale nor reasonable. The Assessee was not given a showcause notice in this respect. It was stated that the Assessee''s group was merelyin the business of exports to USSR, and after its disintegration, the Assessee hadstarted the business of local manufacture and sales. This being the initial yearof business, the turnover was low. It was not even at the break even point and theAssessee was incurring losses. It was pointed out by citing the comparable case ofM/s. Bata India Limited that in the year 1994 the declared profit before tax was0.19%, and if this rate was applied to the turnover of the Assessee as accepted bythe Assessing Officer, the net profit in the case of the Assessee would come to `1,19,415/-, whereas the Assessee had declared a profit of ` 6,60,883/- in itsaudited profit and loss account. In view of the aforesaid submissions made beforethe CIT(A), this data along with the written submissions of the Assessee were sentto the Assessing Officer for his comments by the CIT(A). The Assessing Officer inhis remand report did not make any comments on the comparable date of M/s. BataIndia Limited, however stuck to the stand taken by him in the assessment order.
7. The Assessee also drew the attention of the CIT(A) to the case of M/s. Aero Traders Pvt. Ltd. - a sister concern of the Assessee - for the assessment years 1993-94 to 1996-97, wherein the CIT(A) had accepted identical explanation of the Assessee regarding his inability to produce the records/books of account. The Assessee also filed before the CIT(A) a copy of the order dated 28.02.2000 in the case of its sister concern M/s. Aero Traders Pvt. Ltd.
8. On the basis of the aforesaid contentions raised by the Assessee before theCIT(A), the CIT(A) concluded that though there was no doubt that as a result of theAssessee''s dispute with the accountants it could not file any return of income for the assessment years 1994-95 to 1999-2000, but the dispute with the accountants,filing of the FIR and the police raids were much later developments. These werenot "the only dominating circumstances during the relevant period, preventing theAppellant from filing its return of income as required by law for the assessmentyear 1994-95." That being so, it could not be said that the Assessee was preventedby a reasonable cause from filing the required return in time. However, the bestjudgment assessment framed by the Assessing Officer should have been based on somematerial facts rather than on the arbitrary basis of the average percentage of thenet taxable income for the three subsequent years declared by the Assessee underthe VDIS. The CIT(A) consequently held that the net profit as declared by theAssessee were not required to be disturbed. It observed as under:
The Assessing Officer has not disputed that the Appellant has filed a copy of theBalance Sheet and Profit & Loss Accounts alongwith the return of income. TheBalance Sheet has been audited by the Chartered Accounts (sic. Accountants) andprovides various details in its annexure. The audited accounts show a profit of `6,60,883/-. The Assessing Officer has not adopted the same for his calculation. It is a settled law that while making the best judgment assessment the AssessingOfficer has to make (sic. take) all relevant material before him and gathered during the course of assessment proceedings and after giving an adequateopportunity of being heard to the Assessee. The best judgment assessment shouldneither be capricious nor arbitrary and should be based on facts on record. The A Ohas also not brought on record any comparable case wherein the net profit declaredby a tax payer in the similar business was higher than the one declared by theAppellant. On the other hand the Assessing Officer in his Remand Report has notcommented on the comparable case of M/s. Bata India Limited, relied upon by theAppellant. It is also a settled law that profit margins of a tax payer as declaredby him, could be varied and disturbed only, if the profit margins in the case ofother Assessee engaged in the similar business are higher. The Appellant insupport of his contentions has been able to bring on record the evidence that inthe case of a company doing similar business, the declared profits were in factlower than the profits declared by the Appellant. Under these circumstances andlooking at the facts on records, I am of the view that the net profit as declaredby the Appellant need not be disturbed. Consequently the addition made by theAssessing Officer stands deleted.
9. Against the aforesaid order of the CIT(A), the Department inter alia filed anappeal before the Income Tax Appellate Tribunal (in short "ITAT"). The ITAT, afternoting that the aforesaid findings could not be controverted by the learneddepartmental representative who had placed strong reliance on the order of theAssessing officer only, concurred with the findings of the CIT(A) as follows:
The CIT(A) has taken into consideration the comparable case in case of Bata IndiaLtd. and the appellate order in case of M/s. Aero Traders, sister concern of theAssessee wherein also the similar additions made by AO were deleted and thenallowed the appeal of the Assessee by deleting the ad hoc addition of ` 10,67,506/-. He further noted that against the order of CIT(A) in case of Aero Traders P. Ltd. for asstt. years 1993-94 to 1996-97, the department filed appeal beforeTribunal taking ground that deduction u/s 80HHC were wrongly allowed by the CIT(A). The appeals of the department have been disposed of by the Tribunal whereby theappeals of the department were dismissed by holding that no deduction u/s 80HH Cwere allowed by the CIT(A). The explanation given by the Assessee has beenaccepted by the ld. CIT(A) and the order of CIT(A) on merit has not been objectedby the department before the Tribunal. The CIT(A) has taken into considerationthis order of the CIT(A) and then came to conclusion that audited account of theAssessee were correct, therefore, AO was wrong in drawing adverse inference againstthe Assessee. In view of these facts and circumstances and in view of the detailedreasonings given by CIT(A), we confirm his order asstt. year 1994-95.
10. As regards the assessment year 1998-99, the ITAT recorded that the facts ofthis assessment year were similar to the facts involved for the assessment year1994-95. The difference in the facts was only of the figure of profits. TheAssessing Officer on the basis of the results of the assessment year 1999-2000proceeded to make the estimation of the profit of the year 1998-99. On the basisof profits of 1.96%, the taxable income of ` 1,47,73,246/- was computed as againstthe declared income of ` 50,95,949/-, thereby making a total addition of `96,77,297/-. In appeal, the CIT(A) again found that there was no justification fordisturbing the trading results shown by the Assessee. The detailed reasoning givenby the CIT(A) is as under:
I have considered the submissions of the Appellant, the facts of the case and thecontents of the remand report. The veracity of the facts relating to theAppellant''s dispute with its erstwhile accountants and the later developments likeFIR and police search etc. has not been disputed by the AO. The facts andcircumstances of the Appellant''s case prima facie indicate that the Appellant wasprevented by a sufficient cause from filing the audited accounts and the return ofincome within the stipulated time. I am, therefore, of the opinion that theAppellant, for the reasons mentioned in the affidavit filed before me was preventedby a sufficient cause from filing the audited accounts and the return of incomewithin stipulated time. The next argument of the Appellant is that when the return for the asstt. year 1999-00 having identical facts and circumstances was acceptedby the AO as correct but when he came to the asstt. year 1998-99 he did not acceptthe audited accounts and made variations in the accountants (sic. accounts) basedon the comparative analysis of the profit and loss account of the year under appealwith that of the succeeding year and that too without giving any opportunity to theAppellant. Objecting to the procedure adopted by the AO as well as additions madeby him the Appellant has explained that the difference between the two asstt. yearswas primarily due to the write off of the stocks amounting to ` 3.20 crores. Thesestocks comprising of unsaleble half manufacturer shoe uppers and leather rejectsdeteriorated due to their lying in stock since 1992, were written off during theprevious year relevant to the asstt. year under appeal as these had NIL realizablevalue. Due to the said write off the higher cost of consumption was reported inthe audited accounts even though in quantum terms the consumption was almostsimilar to the subsequent years. The AO in his remand reports has neither made anycomments on the claim of the Appellant for excess consumption of material due tothe write off of stock nor he has refuted the contentions of the Appellant in thisrespect. Further, the Appellant has shown through the statistical statementssubmitted before me and remanded to the AO that it has reached its break even pointonly in the asstt. year 1999-2000 when it achieved the turnover of ` 90 croreswhile in the asstt. year under appeal it has a turnover of ` 75.35 crores which wasmuch below its break even point. Looking at the facts and circumstances of the case and the reasons given higher consumption of raw material shown in this regardviz-a-viz the subsequent year not refuted by the AO, I am of the opinion that thebook results of the Appellant as per its audited accounts should not have beendisturbed and the AO should not have resorted to the statistical extrapolationexercise in increasing the sales by 21% on the basis of the trading results of thesubsequent year. The business profits are not determined by mathematicalprecision. It was, therefore, not a fair and reasonable exercise on the part ofthe AO to estimate the profits of the Appellant for the year under appeal. The adhoc additions so made are thus deleted.
11. An appeal filed before the ITAT for this assessment year met with the same fate and the Tribunal noting that the facts for the year under consideration were similar to the facts for the assessment year 1994-95 confirmed the order of the CIT(A) on the reasoning given by the CIT(A). Resultantly, the appeal of the department was dismissed.
12. Before us, it was contended by Mr. M.P. Sharma in respect of the assessmentyear 1994-95 that the return was filed belatedly by the Assessee only after noticeunder Section 148 of the Act as well as several notices under Sections 143(2)/142(1) had been issued to the Assessee. As per this return, the Assesseehad declared an income of ` 6,60,883/-. In support of this, however, the Assesseecould not produce the books of account, though filed a copy of the balance-sheetand the profit and loss account along with the return of income. In the absence ofthe books of account, the Assessing Officer had been compelled to make bestjudgment assessment u/s 144 of the Income Tax Act, 1961. The basis formaking the said assessment by the Assessing Officer was the percentage of profitsdisclosed by the Assessee itself in the subsequent years as per the declarationmade under the Voluntary Disclosure of Income Scheme, 1997 (VDIS) and no faultcould be found with the same.
13. Mr. Ashish Mohan, the learned Counsel for the Respondent-Assessee, on theother hand, vehemently contended that the Assessing Officer was not entitled torely upon the information given by the Assessee in the declaration filed under theVDIS. Such a course of action was not at all permissible for the Assessing Officerhaving regard to the provisions of Section 72 of the Finance Act, 1997incorporating the text of VDIS, 1997. Even otherwise, both the appellateauthorities had rightly concluded that the net profit declared by the Assessee wasnot liable to be disturbed in view of the fact that the Assessing Officer had notdisputed that the Assessee had filed a copy of the balance sheet and profit andloss account along with the return of income and the said balance sheet had been duly audited by the chartered accountants and contained various details in itsannexures. The audited accounts showed a profit of ` 6,60,883/-, which was muchhigher than the profit margins in the case of other Assessees engaged in similarbusiness. There was, therefore, no justifiable cause for rejecting the return ofincome filed by the Assessee.
14. In view of the contention raised by Mr. Mohan that the Assessing Officer was not entitled to rely upon the profit percentages declared by the Assessee itself in the subsequent assessment years as per the declaration made under the Voluntary Disclosure of Income Scheme, 1997 (VDIS), it is deemed expedient to reproduce Section 72 of the Finance Act, 1997, which act incorporates the text of VDIS, 1997:
"Secrecy of declaration.
72. (1) All particulars contained in a declaration made under Sub-section (1) of Section 64 shall be treated as confidential and, notwithstanding anything contained in any law for the time being in force, no court or any other authority shall be entitled to require any public servant or the declarant to produce before it any such declaration or any part thereof or to give any evidence before it in respect thereof.
(2) No public servant shall disclose any particulars contained in any such declaration except to any officer employed in the execution of the income tax Act or the Wealth-tax Act, or to any officer appointed by the Comptroller and Auditor General of India or the Board to audit income tax receipts or refunds."
15. Sub-section (1) of the said Section refers to the confidential nature of thedeclaration made u/s 64(1) and indubitably lays down that no Court or anyother authority shall be entitled to require any public servant or the declarant toproduce before it any such declaration or any part thereof or to give any evidencebefore it in respect thereof. Significantly also, a non-obstante clause has alsobeen inserted in the Sub-section. Sub-section (2) of Section 72 is, however, inour view, in the nature of an exception to Sub-section (1), though not couched asan exception. The said Sub-section in effect states that it shall be open to apublic servant to disclose the particulars of the declaration to an officeremployed in the execution of the IT Act or the Wealth-tax Act or to any officerappointed by the Comptroller and Auditor-General of India or the Board to audit I Treceipts or refunds.
16. We are buttressed in coming to the above conclusion from the fact that we find on a perusal of the Voluntary Disclosure of Income Scheme, 1997 and in particular Section 70(1) of the Scheme that though nothing contained in the declaration made under Sub-section (1) of Section 64 shall be admissible in evidence against a declarant relating to the imposition of penalty or for purposes of prosecution under the Income Tax Act, the Wealth Tax Act, the Foreign Exchange Regulation Act, 1973, or the Companies Act, 1956, the scheme does not contain any provision declaring as inadmissible in evidence against the declarant the particulars contained in the declaration filed for the purpose of proceedings under the Income Tax Act. Thus, in our view, it is not open to the Assessee to contend that the declarations filed by him could not have been looked into by the Assessing Officer for the purpose of estimating his income for the assessment year in question.
17. We also concur with the findings of the CIT(A) and the Income Tax Appellate Tribunal that the Assessee was not prevented by circumstances beyond its control from filing the required return in time and this being so, the Assessing Officer was not estopped from framing the best judgment assessment, if so warranted. The issue before us, however, is as whether the Assessing Officer was entitled to draw adverse inference against the Assessee even after the Assessee had filed its return of income duly supported with the balance sheet and the profit and loss account, certified to be audited by the auditOrs.
18. It is well settled that while making the best judgment assessment, the Assessing Officer should do so on a rational basis and without any bias. The scope of "best judgment" assessment under the Income Tax law came up for consideration before the Judicial Committee as early as 1937 in Commissioner of Incom-tax v. Laxminarain Badridas. Therein, the Lord Russell of Killowen, speaking for theJudicial Committee, observed:
The Officer is to make an assessment to the best of his judgment against a personwho is in default as regards supplying information. He must not act dishonestly orvindictively or capriciously because he must exercise judgment in the matter. Hemust make what he honestly believes to be a fair estimate of the proper figure ofassessment, and for this purpose he must, their Lordships think, be able to takeinto consideration local knowledge and repute in regard to the Assessee''scircumstances, and his own knowledge of previous returns by and assessments of theAssessee, and all other matters which he thinks will assist him in arriving at afair and proper estimate; and though there must necessarily be guess-work in thematter, it must be honest guess-work. In that sense, too, the assessment must be tosome extent arbitrary.
19. In Ganga Ram Balmokand v. Commissioner of income tax, the following pertinent observations were made by Din Mohammad, J.:
It cannot be denied that there must be some material before the income tax Officer on which to base his estimate, but no hard and fast rule can be laid down by the court to define what sort of material is required on which his estimate can be founded.
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21. Thus, even assuming for the sake of argument that the Assessee''s profit andloss account was rightly discarded by the Assessing Officer, it is for this Courtto examine whether a rational basis was adopted by the Assessing Officer. Theanswer is our opinion must be an emphatic No. In our opinion, the CIT(A) and the Income Tax Appellate Tribunal rightly set aside the "best judgment" assessment ofthe Assessing Officer on the ground that the Assessing Officer had "not brought onrecord any comparable case wherein the net profit declared by a tax payer in thesimilar business was higher than the one declared by the Assessee." We also concurwith the findings of the Income Tax Appellate Tribunal that the profit margins of atax payer as declared by him, could be varied and disturbed only if the profitmargins in the case of other assesses engaged in similar business are higher. Inthe instant case, the Assessee has brought on record evidence that in the case of acompany having similar business, the declared profits were in fact lower than theprofits declared by the Assessee. The Assessing Officer in his Remand Report wasalso unable to comment on the comparable case of M/s. Bata India Limited and AeroTraders relied upon by the Assessee. In the circumstances, we are of the view thatthe Tribunal rightly held that the net profit as declared by the Assessee was notrequired to be disturbed.
22. We accordingly answer the questions framed above in the negative, that is, in favour of the Assessee and against the revenue.
