JUDGMENT
Rajesh Balia, J.
1. This is a reference submitted by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, at the instance of the Commissioner of Income-tax, Jodhpur, referring the following two questions of law arising out of its order in I. T. A. No. 96/JP of 1990 and Cross-Objection No. 13/JP of 1990 for the assessment year 1986-87 in the case of the respondent-assessee :
Question No. 1.
“In the facts and circumstances of the case and in law, was the Tribunal right, after holding that the proviso to Section 145(1) was applicable, in deleting the entire addition to the trading results ?”
Question No. 2.
“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was legally justified in holding that the amount of unpaid sales tax liability was not disallowable under Section 43B of the Income-tax Act if the same was paid within the stipulated time under the sales tax law ?”
2. The facts relating to question No. 1 are that the assessee is a dealer in marble. The Assessing Officer having found that the trading accounts are not backed up with quantitative and qualitative stock details and that there is a considerable fall in gross profit rate invoked the provisions of Section 145(1). The assessee refuted the charge in so far as that the state of affairs as regards maintenance of accounts being the same as in earlier years and the same having been accepted by the Department, there was no justification to invoke the provisions of Section 145(1). The Assessing Officer, however, not being convinced with this explanation made a trading addition of Rs. 3,34,960 by increasing the gross profit rate. The Commissioner of Income-tax (Appeals) though upheld the invocation of Section 145(1), sustained an addition of Rs. 34,000 only and deleted the balance on the ground that it was on the higher side. The Tribunal on further appeal upheld that Section 145(1) has rightly been invoked but did not sustain the additions retained by the Commissioner of Income-tax (Appeals). It was held that while the Commissioner of Income-tax (Appeals) has found that the assessee has made out a case for giving relief, no basis has been given for sustaining addition of Rs. 34,000.
3. We have perused the statement of case and the finding recorded by the Tribunal in the light of the observations made in the statement of case and heard learned counsel. Section 145 as it stood at the relevant time, read as under :
“145. Method of accounting.–(1) Income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’ shall be computed in accordance with the method of accounting regularly employed by the assessee,
Provided that in any case where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that, in the opinion of the Assessing Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Assessing Officer may determine :
Provided further that where no method of accounting is regularly employed by the assessee, any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee :
Provided also that nothing contained in this sub-section shall preclude an assessee from being charged to income-tax in respect of any interest on securities received by him in a previous year if such interest had not been charged to income-tax for any earlier previous year.
(2) Where the Assessing Officer is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the Assessing Officer may make an assessment in the manner provided in Section 144.”
4. A perusal of the aforesaid provision goes to show that the ordinary mandate of the statute is that where income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” is returned on the basis of accounts maintained by the assessee by employing a method of accounting regularly, such income is to be computed in accordance with the method regularly employed by the assessee. With effect from April 1, 1997, by the Finance Act, 1995, the position has been altered by directing that the income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall be subject to the provisions of Sub-section (2) be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Thus, for the purpose of computing the income on the basis of method of accounting adopted by the assessee it is confined to maintenance of accounts on cash basis or mercantile system of accounting, i.e., to say, on accrual basis. No other system, even if employed regularly by the assessee is acceptable for computing the income as per the provisions of the Income-tax Act. However, this provision ipso facto does not mean that rejection of books of account of an assessee must yield to different conclusion in the computation of income than returned by the assessee on the basis of accounts made by him employing any other method of accounting.
5. Be that as it may, the provision which was in force in the accounting period relevant to the assessment year in question envisaged that where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that, in the opinion of the Assessing Officer, the income cannot properly be deduced thereform, then the computation shall be made upon such basis and in such manner as the Assessing Officer may determine. It also envisaged that where no method of accounting is regularly employed by the assessee, any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee, that is to say, on accrual basis. Thus Sub-section (1) deals with the method of accounting employed by the assessee with reference to computing the income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” on the basis of method of accounting employed by the assessee. It does not deal with correctness or completeness of accounts, but with defect in method of accounting.
6. On the other hand, Sub-section (2) envisaged that where the Assessing Officer is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the assessing authority may make an assessment in the manner provided in Section 144, that is to say, as per best of his judgment.
7. Both these provisions do not envisage that by resorting to best judgment assessment, the assessing authority must reach a different figure of income and profit than what has been disclosed by the assessee. Best judgment is also to be based on the material available on record. Therefore, notwithstanding the rejection of the books of account, the material disclosed by the assessee along with other material that may be collected by the Income-tax Officer forms the basis of computation of income. On that basis what conclusions are to be reached is independent of the results shown in the books of account, if any maintained by the assessee. Section 145 only provides the basis on which computation of income is to be made for the purpose of determining the amount of tax payable by an assessee. The provision by itself does not deal with addition or deletion in the income. Therefore, merely because there is some deficiency in the books of account or merely because of rejection of the books of account it does not mean that it must lead necessarily to additions in the returned income of the assessee. What changes in either case is the basis for computing the income chargeable under the head “Profits and gains of business or profession” or “Income from other sources”. The result would depend on the other principles of computing the income. Therefore, we hold that merely changing the basis or method of arriving at the end result of working out the computation of taxable income under the Income-tax Act, necessarily does not result in devising profits or gains from business or other sources different from one returned by the assessee, where he has returned his income and different from the result reached by the assessee as per the method of accounting employed by him, by adopting a different basis by the assessing authority.
8. On the merits of the case, we find that the Income-tax Officer while recording a finding that the trading version declared by the assessee is unacceptable and the same is rejected by rejecting the explanation of the assessee for decrease in the gross profit rate disclosed in the books of account, has made additions to the rune of Rs. 3,34,960 by adopting a higher gross profit rate on the turnover disclosed by the assessee. The Commissioner of Income-tax (Appeals) accepted the explanation furnished by the assessee for the reduced return of gross profit rate in his books of account substantially but was not satisfied about the verifiability of accounts in all respects, and held as under : “After due consideration, it appears that the plea of the appellant cannot fully succeed inasmuch as the different facts referred to in the impugned assessment order relating to showing the closing stock on estimate basis, the stock being not inventorised, lack of quantitative and qualitative stock details, unverification of different expenses debited to ‘kankari-turai’, excavation, etc., would clearly prove a basis to come to a conclusion that the books of account maintained by the appellant were not fully susceptible to verification and there was no justification in giving full credence to the version returned by the appellant. That apart, the sale rate has also increased as referred to in the impugned assessment order and in view of the same coupled with the fact that the profit returned by the appellant was not susceptible to verification in all expenses, an addition was well called for to cover up possible leakage that otherwise cannot be denied due to unverifiable expenses, etc. However, the facts cannot be lost sight of that the increase in transportation expenses, turai expenses, etc., along with the increase in the sales would have affected the profit margin to a great extent and that too when the major part of the sales was to TISCO at a fixed sale rate on the basis of certain agreement arrived at in the preceding assessment year while there was also increase in other expenses during the year under consideration. In view of this, the addition so made appears to be a very high side and it would be fair and reasonable if the same is directed to be restricted to a sum of Rs. 34,000 only to cover up the possible leakages in the books of account on account of unverifiability, non-maintenance of quantitative and qualitative details etc., and excess thereof stand deleted.”
9. The Tribunal, on appeal, while agreeing with the Commissioner of Income-tax (Appeals) that recourse to Section 145(1) was justified, came to the conclusion ;
“In our opinion, after having come to this conclusion he was justified in giving relief to the assessee but we find no basis for his sustaining an addition of Rs. 34,000. The addition has been sustained merely ‘to cover up the possible leakages in the books of account of unverifiability’. In our view it was perhaps only on account of possible leakages that the Assessing Officer had made the impugned additions. But the learned Commissioner of Income-tax (Appeals) did not find them to be unreasonable yet he has not given any justification for coming to the conclusion that sustaining an addition of Rs. 34,000 would be justified.”
10. Thus, the finding has been reached on the ground that in the absence of recording any finding by the Commissioner of Income-tax (Appeals) that a expenses incurred on any account appear to be unreasonable or excessive, the additions sustained merely on suspicion of pilferage or leakage were not justified. This conclusion, in our opinion, is a finding of fact keeping in view that the additions in the profits and gains returned by the assessee are not a necessary concomitant of an order made under Section 145(1) or 145(2).
11. Likewise, the appeal of the Revenue before the Tribunal has been rejected on the ground of having invoked the provisions of Section 145 by adopting a methodology of his own. The Assessing Officer by rejecting the explanation furnished by him for returning the income at the reduced gross profit rate has made additions on estimate basis. The Commissioner of Income-tax (Appeals) while substantially accepting the explanation furnished by the assessee for reduction in gross profit rate over its turnover during the year in question, was justified in not sustaining the additions made by the Income-tax Officer and having come to that conclusion the formation of estimation fell within the domain of the Commissioner of Income-tax (Appeals). That part of the order of the Income-tax Appellate Tribunal, in our opinion, does not give rise to any question of law.
12. As a result of the aforesaid discussion, our answer to question No. 1 is that there was no error in the order of the Tribunal in deleting the entire additions to the trading results after holding that the proviso to Section 145 was applicable. That being the position, question No. 1 is answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
13. The second question pertains to allowability of unpaid sales tax under Section 43B of the Act of 1961. During the relevant time the assessee was maintaining his books of account in which the accounting year ended on Dipawali each year. As on the date of the previous year ending on November 12, 1985, a sum of Rs. 24,537 was due on account of sales tax liability which became payable but remained yet to be paid. The assessee has deposited Rs. 24,092 on December 10, 1985, i.e., within the time allowed under the sales tax law, for that liability. The assessing authority disallowed the expenses on account of sales tax liability amounting to Rs. 24,537 by having recourse to Section 43B(a). The Tribunal has ultimately allowed the deduction on account of payment of sales tax to the extent it was paid on December 10, 1985, relying on the decision of Andhra Pradesh High Court in Srikakollu Subba Rao and Co. v. Union of India [1988] 173 ITR 708, that when statutory liability is paid within the stipulated period permitted under the respective tax law, it has to be allowed.
14. The controversy which earlier existed on account of different view taken by the High Court of Delhi in Escorts Ltd. v. Union of India [1991] 189 ITR 81 and Sanghi Motors v. Union of India [1991] 187 ITR 703 (Delhi) stood resolved by reversing the Delhi High Court judgment in Escorts Ltd. v. Union of India [1991] 189 ITR 81 and overruling Sanghi Motors’ case [1991] 187 ITR 703 (Delhi) in Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677 (SC). The apex court held that Explanation 2 to Section 43B shall not be overriding proviso to Section 43B(a) as in force, during all relevant time read with the first proviso and Explanation 2 are to be read together harmoniously so as not to make the provisions of Section 43B unduly harsh and clarified the scope and ambit of the proviso to Section 43B which makes it abundantly clear that nothing contained in Clause (a) shall be applicable in respect of the previous year in which liability to pay such sum was incurred as aforesaid and is actually paid by the assessee on or before the due date for furnishing the return of income under Sub-section (1) of Section 139 . This matter also received attention of this court in two recent decisions rendered in CIT v. Shree Laxmi Industrial Co. (D. B. Income-tax Reference No. 14 of 1994, decided on April 18, 2001) and CIT v. Mahaveer Polymers (D. B. Income-tax Reference No. 3 of 1994, decided on April 18, 2001). This court has opined :
“First proviso in fact provides an exception to the general provision that even where tax which has become payable during the previous year relevant to the assessment year in question is not paid within the previous year, but is paid before return under Section 139(1) is due, still the assessee shall not be deprived of claiming allowance in respect of such payment by excluding the operation of Clause (a) of Section 43B in such event. Reading of the Explanation 2 as the Revenue contends and has been accepted by the Delhi High Court, shall render the first proviso to Section 43B otiose, and meaningless while enacting Explanation 2, first proviso to Section 43B has not been deleted, nor Explanation 2 is a non obstante clause.”
15. In view of the aforesaid judgments, question No. 2 is also answered in the affirmative, that is to say, in favour of the assessee and against the Revenue. There shall be no orders as to costs.