1979-VIL-07-ITAT-CHN

Equivalent Citation: TTJ 007, 573,

Income Tax Appellate Tribunal COCHIN

Date: 04.05.1979

INCOME TAX OFFICER.

Vs

M. SREEDHARA PANICKER.

BENCH

Member(s)  : C. KOCHUNNI NAIR., K. S. VISHWANATHAN.

JUDGMENT

2. In appeal, the AAC limited the addition to Rs.10,000 in each of the three accounts, the aggregate addition being Rs. 30,000. He also made a separate disallowance for the first time of Rs. 23,856 under the provisions of s. 40A(3) of the IT Act, 1961, on the ground that those payments are in cash exceeding Rs. 2,500. The four questions that arise in this appeal of the assessee are dealt with as follows:

3. Cement: The assessee deals only in cement manufactured by India Cements Ltd. The assessee showed a purchase figure of 11,640 bags of cement. But as per purchase invoice obtained from India Cement by the Department it was seen that the assessee had purchased only 10,280 bags of cement. So the ITO brought this deficit of 1360 bags to the notice of the assessee by letter dt. 11th March, 1975 as well as by the letter dt. 16th May, 1975 and called for his explanation. The assessee explained that the accounts maintained by him are defective and, therefore, the income may be estimated. The ITO did not make any estimates of income as such. He only made a specific disallowance. He held that there is inflation in purchase to the extent of 1360 bags. So he added back the purchase price of Rs. 14,851 for 1360 bags.

4. In appeal, the AAC found that there are actual sales on physical terms but there are not corresponding verifiable purchases. He held that it is a physical impossibility to sell without there being purchases. He also observed that the addition by the ITO for inflation in purchase would certainly lead to an absurd proposition of the assessee obtaining impossible gross profit. He then concluded that the assessee had purchased the goods from somewhere and this is only a case where at best the account can be rejected as unreliable. He then stated categorically that because there is physical quantity tally it cannot be said that there was inflation in purchases. However, he did not delete the addition. He said that the ITO can make estimated additions for possible manipulation of accounts. So he sustained the addition to the extent of Rs. 10,000.

5. What we think is that even this Rs. 10,000 sustained has to be deleted. The A.A.C has found that there is physical quantitative tally. The fact is not questioned by the Departmental Representative before us. That being the position, no addition can be made for inflation in purchases. The representative of the assessee pointed out that the assessee has, after the order of the AAC collected from India Cements details of the purchases and had found out from such details that there are invoices for all the 11,640 bags purchased by the assessee. The assessee has also furnished such details of such invoices in his paper book furnished before us. But now we need not go into all that question of proof of purchase because the AAC has categorically ruled out the case of inflation on the ground that he was satisfied with the physical quantity tally. He has ruled out the possibility for any addition on the basis of inflation of purchases. So, the only question is whether even though there is no inflation in purchases, can there be still an addition. The AAC has sustained the addition only for possible manipulation of account. But in our view this is not supportable. The ITO has not taken that as a ground for addition. The ITO or even the AAC has not stated that the Gross profit rate is low. In fact, the assessee required the ITO to make an estimate of income. But he declined to do that and made a specific addition by way of disallowance only on inflation. He did not even manipulations in accounts or any other reasons for addition.

6. What the AAC had in mind is that though there is quantitative tally, there is no qualitative tally. He has given expression to that aspect in para 9 of his order that the quantitative tally does not necessarily mean qualitative tally. What he has in mind is this. There is a physical quantity tally. Hence no inflation in purchases. But the AAC is suspicious about the qualitative tally. A bag of cement can be opened and its contents filled into two bags. So two bags can be shown as sold whereas actually the purchase is only of one bag. In the trading account he can show purchase of two bags and sale of two bags. This is physical quantity tally. But quality wise it is only one bag. So he has inflated the purchase by one bag. It is only on this line of reasoning that the AAC has sustained Rs. 10,000. And we may add that when there is physical quantity tally one can, if one wants to make an addition, make it only on the basis of the absence of qualitative tally or other reasons like low gross profit. The question is how far it is warranted the facts and circumstances of the case. The method indicated by the AAC may be possible in other commodities but not in cement. It was then a controlled and scarce commodity. The consumers are not mere rustic, timid villagers but persons who know what is what. The will not tolerate any such mischief. The cement is purchased in bags by the assessee and sold in bags. It cannot easily be opened and filled in bags more than one. Consumers will protest against this. If the commodity is what or chilly, then this trick can be performed. It may also be noted that where the method is making one bag into two that is sale in short measure or increase in weight or volume by adulteration, it will be generally be a case of inflation in purchase of bags but only a case of unaccounted sales of the surplus bags unless it be a case where all sales of extra bags obtained are also vouched. Then the other method is adulteration. But that also is not possible because cement is purchased and sold in bags. So the qualitative tally cannot be introduced in the sale of cement particularly to the extent of 1360 bags in one year. Even if the leakage by way of cement dust from bags or pilferage in small quantity is collected and sold, it will not amount to 1360 bags out of a purchase of 10,280 bags. Such quantity if any will be only sold unvouched. So the quality theory is found only on mere suspicion and speculation. There is absolutely no basis for it. Even the ITO who could have made an estimate of income did not envisage any such possibility. So what we find is that when there is physical quantity tally the addition made by the ITO should be deleted. When there is such a physical quantity tally, in the trading account, an addition to the trading account is possible only for reasons like low gross profit rate or inflation in purchase rate per bag or understatement of sales price per bag or such other similar reasons. Hence the addition is deleted.

7. Diesel: The assessee purchases the stock only from Indian Oil Corporation. The accounts of the assessee showed a purchase of 1208 K. Litres. But the ITO stated that according to the accounts of the Indian Oil Corpn. it is only 1159 Ltrs. Here it may be stated that in the first letter of the ITO it was only 11,39,830 Ltrs. In the second letter the purchase from Indian Oil Corpn. was raised to 1159 K. Ltrs., thus reducing the difference of unaccounted purchase to 49 K. Ltrs. The ITO had also some suspicion about the replenishment of diesel to the extent of 3330 Ltrs. But he seems to have got satisfied about it and has abandoned that suspicion. The ITO also stated that as far as the assessee's trading accounts are concerned, he has tallied the total of opening stock and purchases with the figures of sales and closing stock, Inspite of it, the ITO has made the addition only on the basis of the inflation. The amount added was Rs. 46,396, that being the value of 49 K. Ltrs. of diesel. The AAC reduced it to Rs. 10,000. The reasoning was just like the one given for cement.

8. Here also what we think is that no addition is permissible. Our reasoning are similar to the one given for cement. The assessee has in his paper book furnished just like for cement, the details of invoices collected after the order of the AAC and which details cover all purchases except for 25 K. Ltrs. which 25 K. Ltrs. we will also discuss in the context of s. 40A and payment by cheques for such purchases covered by invoices. But we need not go into the proof of purchase because the AAC has categorically ruled out as in cement, the case of inflation in purchase. He has only gone by qualitative tally as in cement. In diesel, just like in cement, we find it is not possible to dilute it with some other adulterant, so that say after purchase of 10 K. Ltrs. it can be sold as 12 K. Ltrs. with trading account cast for purchase of 12 K. Ltrs. and sale of 12 K. Ltrs. As this is sold through the mechanical pumps either in short measures of unaccounted sales may not be there. So if the case of purchase inflation is to be supported by lack of qualitative tally only dilution by adulteration can be thought off. But all that are speculation. The ITO, has gone only by inflation and if that is not there, the addition should fail. Resort the other method to sustain a portion of the addition is quite improper and not warranted by facts and circumstances of the case. One point which can possibly be taken up in favour of addition is that even according to the details furnished by the assessee in paper book there is no documentary evidence about purchase of about 25 K. Ltrs of diesel oil and that, therefore, to that extent atleast it is obtained by adulteration or sale in short measures. But that also is not an acceptable proposition. The possibility of adulteration is very remote. Equally so the sale in short measures. Taking into consideration the nature of the commodity sold, the way in which it is purchased and sold and the nature of consumers it is difficult, unless there is some material to that effect to think that there was lack of qualitative tally. So even this addition sustained has to be deleted. Addition deleted.

9. Kerosene: Here also the pattern of assessment and reduction by the AAC is the same as in diesel and cement. In the first letter of the ITO the difference was only 2 K. Ltrs, whereas, it has been got enhanced by 38 K. Ltrs. by the time of the second letter. The addition was for 38 K. Ltrs. The ITO has stated that as far as the assessee's trading results are concerned, he has tallied the total of the opening stock and purchase with the figures of closing stock and sales. It was on qualitative defects that the AAC sustained the addition of Rs. 10,000. Here also the assessee, as in cement and diesel, has furnished full details for all the purchases of 1464 K. Ltrs. shown in the accounts. But there is no necessity to go into such proof of purchases by verifying the genuineness of all the materials in the paper book, because the AAC has categorically ruled out the cases of inflation. The addition has to be deleted for the same reasons which we gave for cement and particularly diesel. Here the sale is not through pumps or in full tins. So there is a possibility of adulteration or sale in short measures. But there is equal facility unlike in cement and diesel for unaccounted sales. So the extra quantity obtained will be generally sold only outside the accounts without proper bills. Under such circumstances, no body will ordinarily resort to inflection in purchase. So in Kerosene the qualitative tally will not fit in at all when the case is purchase inflation.

10. s. 40A(3) Disallowance made by the AAC : The ITO did not make any such disallowance. In the diesel purchase account of the assessee there were three entries:

So, the AAC disallowed these three payments already referred to in discussion under diesel.

11. We doubt very much whether the AAC by himself has the power to initiate for the first time a disallowance like this, which was not done by the ITO. But we are not going into that question. The disallowance cannot be upheld for another reason. S. 40A(3) is for disallowance of specific items of expenditure exceeding Rs. 2,500 when such items are claimed as deductions. This is not a case where accounts of the assessee are accepted as true and correct. This is a case where the accounts are rejected and assessment made under s. 145(2) of the IT Act, which provides that the officer may make an assessment in the manner provided under s. 144 relating to best judgment assessment. So, the income is computed not on the basis of specific items of expenditure allowed as deduction. It is an estimate made on the basis as to what is the reasonable profit, when certain quantity of diesel is sold. It is true that even in that estimate made we have reached the same result as in the accounts maintained by the assessee. But that does not mean that the assessment is made on the basis of accounts after fully accepting each item of receipt and each item of expenditure. Additions were not made to the returned figures, not because the entries in the account books were acceptable as true and correct, but only because the trading results were fair and proper. There is no rule that when accounts are rejected, an addition to the trading account is inevitable. The returned gross profit was quite fair. There was no case by the ITO or AAC that the gross profit was low. The case of qualitative manipulations were not established. So, we thought that when certain quantity of diesel was sold, and when it becomes necessary to determine the reasonable profits, in such sale the assessee should be given credit for purchase of so much quantity of diesel. It is on that basis that we deleted the addition. How the assessee made these purchases, whether it was on one day or on various dates and what quantity and for what price, whether by cheque or cash and whether payments exceeded Rs. 2,500, were not at all matters for our consideration. Those are alien to an estimate of reasonable profit. When estimates are made, it is not possible to say that specific items of expenditure exceeding Rs. 2,500 in cash have gone into the computation of those estimates. So that such items can be disallowed under s. 40A(3). In holding that there is no reason or material to cause disturbance to trading account in diesel we have not contravened the provisions of s. 40A(3)because we have not allowed any expenditure in respect of which payment is made in a sum exceeding Rs. 2,500, otherwise than by crossed cheques as a deduction in the computation of business income. In other words, it is not because we thought that these three items of expenditure (listed above as on 20th Jan., 1973 and 31st March, 1973) are true and genuine and therefore ought to be allowed as a deduction that we came to the conclusion that the returned profit is acceptable. It is only because we thought that it conforms to a reasonable standard in estimates of profit in this line of business, particularly when the ITO or AAC has not questioned its reasonableness. So, we find no scope for disallowance under s. 40A(3). That disallowance is also, therefore, deleted. The fact that the representative of the assessee has before the AAC given a statement that s. 40A(3) is attracted to these things does not mean that disallowance should be made and sustained. What the assessee's representative stated is that for purposes of s. 40A(3) there are three entries in the accounts showing cash payments exceeding Rs. 2,500. Whether those are to be added back in the computation of business income is another matter depending on the nature, manner and method of assessment, so this disallowance has also to be deleted.

12. The appeal is allowed. All the additions, by way of add-backs and disallowance's are deleted.

 

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