ORDER
Joginder Pall, A.M.
1. These cross appeals–one by the assessee and another of the Revenue have been filed against the order of the CIT(A), Bhatinda, for the asst. yr. 2000-01. Since the issues involved in the cross appeals are interrelated and arise from the order of the CIT(A), these were heard together and are being disposed of by this consolidated order for the sake of convenience.
2. The assessee had made a request for admission of additional ground. However, at the time of hearing of the appeals, the learned Counsel for the assessee, Sh K.R. Jain, requested to withdraw such request. Therefore, the request is considered as withdrawn.
3. In the appeal filed by the assessee, the following three grounds have been taken:
1. That the learned CIT(A) has erred in law and on facts in confirming the addition of Rs. 17,89,488 on sale of vehicles and Rs. 5,01,132 on account of sale of spare parts without appreciating that the AO has not pointed out any defect in the books of accounts maintained in the regular course of business and duly audited by chartered accountant and has not been rejected by the AO.
2. That the learned CIT(A) has erred in law and on facts in confirming the addition of Rs. 22,90,620 on the basis of information received from third party by the AO without confronting the same to the assessee appellant and thereby not affording a reasonable and proper opportunity to the assessee appellant.
3. The addition confirmed of Rs. 22,90,260 be deleted.
4. In the cross objection filed by the Revenue, the following three grounds have been taken:
1. On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs. 5,01,132 by reducing the GP rate from 15 per cent to 2.63 per cent and excluded the figure of 8.8 per cent being sales-tax in the GP rate applied by the AO at 23.63 per cent when the books were rejected under Section 145(1) and particularly the assessee company could not offer any explanation/evidence despite the opportunity afforded.
2. The learned CIT(A) has also erred in deleting the addition of Rs. 28,47,948 made by the AO on account of undisclosed income in servicing of vehicles particularly the assessee company could not offer any explanation/evidence despite the opportunity afforded.
3. The learned CIT(A) further erred in deleting the addition of Rs. 6,00,000 made on account of wrong claim of loss due to theft particularly the assessee could not offer any explanation to the opportunity afforded.
5. The facts leading to the filing of the present appeals are that the assessee was a limited concern having agency of Maruti Udyog Ltd. (in short ‘the MUL’) and was engaged in the business of purchase and sale of vehicles manufactured by MUL, spare parts and service charges. For the assessment year under consideration, the assessee filed return declaring therein loss of Rs. 45,740 on 29th Nov., 2000. Thereafter, the assessee filed a revised return on 4th Feb., 2002 declaring therein income of Rs. 15,54,260 whereby an additional income of Rs. 16 lacs was included to cover the possible leakages in income or any other discrepancy in the return filed. The AO observed that revised return was filed on account of investigation made by the intelligence wing of the Department and information in their possession. Thereafter, the assessment was taken up under scrutiny. The AO, then referred to the information in possession of the Department where it was alleged that the assessee had understated the sales of vehicles and other products of MUL. The Sales-tax Department found that the assessee had shown sales of spare parts to registered dealers, who further sold the same to their customers. The assessee had issued certificates for sales to registered dealers on which sales-tax was not payable. However, the enquiries made by the sales-tax authorities revealed that the assessee had not made any sales to registered dealers and, therefore, the assessee was liable to pay sales-tax on the same. It also came to light that certificates submitted by the company for sales to registered dealers were fake. The IT authorities also obtained information from the MUL, Gurgaon, for sales made to the assessee and further information was also collected from the consumer’s forum and United India Insurance Co., Bhatinda. The AO observed that such information revealed that the assessee had understated its sales of MUL vehicles and spare parts. The information collected by the Department revealed that MUL had shown sales of vehicles to the assessee at Rs. 29,80,02,650 and as per books, the assessee had shown purchases amounting to Rs. 23,05,55,956. Thus, the AO observed that the assessee had understated sales of vehicles to the tune of Rs. 6,79,53,883. Similarly, the AO observed that as per MUL, the assessee had purchased spare parts amounting to Rs. 3,33,45,488 as against the purchases shown by the assessee in the books at Rs. 1,43,63,165. The difference in this account worked out to Rs. 1,89,82,323. The AO also observed that margin of profit on sale of spares was 15 per cent. In addition, the assessee had also collected sales-tax @ 8.8 per cent, which was not paid to the Sales-tax Department. Thus, the net gain to the assessee on sales of spare parts was @ 23.8 per cent (i.e., 15 per cent + 8.8 per cent). The AO observed that since the assessee had suppressed the sales of spare parts, there was also a suppression of corresponding service charges shown in the books. When the assessee was confronted with these facts, written submissions were filed before the AO stating therein that a copy of information supplied to the assessee was not authenticated and was incomplete. It was also stated that no addition could be made on the basis’ of incomplete information and the assessee had made purchases to the extent reflected in its books of account. The assessee denied having made purchases to the extent indicated in the copy of information supplied by the AO. The assessee also requested that the person from whom such information had been collected should be produced and an opportunity of cross-examination should be allowed. However, the AO observed that since the matter was getting time barred, the request of the assessee for allowing an opportunity of cross-examination could not be accepted. Thus, the AO concluded that book version of the assessee cannot be accepted. The AO, therefore, made an addition of Rs. 17,89,488 on account of profit on sale of vehicles, Rs. 45,17,792 on sale of spare parts and Rs. 28,47,948 being suppressed income from service charges. The addition made in this regard aggregated to Rs. 91,55,228.
6. Being aggrieved, the assessee filed an appeal before the CIT(A). It was submitted before the CIT(A) that the AO had not pointed out any defects in the books of account maintained by the assessee. The AO acted upon the information, which was unauthenticated, and no instance in respect of sales or purchase made outside the books of account was pointed out. The reliance was also placed on the judgment of Hon’ble Supreme Court in the case of CIT v. V.C. Shukla and Ors. (1998) 75 ECR 48 in support of its contention that no addition could be made by relying on entries found in the books of account of a third party. It was also argued that as against undisclosed purchases of Rs. 8,69,36,206 taken by the AO both for vehicles and spare parts, the sales-tax authorities had taken the suppressed purchases at Rs. 5.07 crores. It was also submitted that the addition has been made by taking an arbitrary rate of GP whereas profit on declared sales was at 2.63 per cent. The maximum addition liable to be made on this account worked out to Rs. 13,33,000 against which the assessee had already declared additional income of Rs. 16 lacs in the revised return. It was also argued that the findings of the sales-tax authorities that the assessee had not made sales to registered dealers and thereby evaded the sales-tax are being contested before the appellate authority and the appeal was pending for adjudication. Moreover, the assessee was a dealer on wholesale basis and not on retail basis. Therefore, the margin of profit to be applied in this case should be of a wholesaler. It was also submitted that the addition of Rs. 28,47,948 made on account of service charges was arbitrary and unreasonable. These submissions were considered by the CIT(A). The learned CIT(A) observed that the judgment of Hon’ble Supreme Court in the case of Jain Hawala case CIT v. V.C. Shukla and Ors. (supra) was not applicable to the facts of the present case because the entries on which the CBI built up a case did not pertain to regular books of account but a simple diary and loose paper entries. He also observed that there was no merit in the plea of the assessee that it was not allowed an opportunity to cross-examine MUL for the reasons that the assessee was a regular dealer and could have easily obtained such information from the MUL. Thus, the learned CIT(A) upheld the addition of Rs. 17,89,488 made on account of suppression of sales. However, as regards the sales of spare parts, the learned CIT(A) held that GP rate on the declared sales at 2.63 per cent was required to be applied for estimating the income. Thus, he applied GP rate of 2.63 per cent on the undisclosed sales of Rs. 1,89,82,323 and reduced the addition to Rs. 5,01,132. He also directed the AO to exclude the sales-tax at the rate of 8.8 per cent for making the addition. He further observed that the addition made on account of suppression of service charges was without any basis. Accordingly, he deleted the same. Thus, the learned CIT(A) upheld the addition of Rs. 22,90,260 (i.e., Rs. 17,89,488 + Rs. 5,01,132). The relevant findings recorded by the learned CIT(A) in the impugned order are as under:
I have considered the assessment order, the written submission filed by the assessee Sh. P.K. Singla and documentary evidence.
The first issue taken in the ground of appeal is regarding undisclosed income on the sale of vehicles. The appellant has taken the plea that the documents on the basis of which this addition has been made were unsigned and belongs to 3rd party. He has relied upon the decision of Hon’ble Supreme Court in case of Jain Hawala case CBI v. V.C. Shukla and Ors. 75 ECR 48 (SC). It has also been brought to my notice that no opportunity was given to cross-examine this 3rd party, the evidence of which is sought to be utilized by the Department.
I do not agree with the observations of the learned Counsel. The company M/s MUL are the principals of the appellant. The two parties are having day-to-day transactions with each other. This distinguishes the case law to Hon’ble Supreme Court quoted by the appellant. In the regular books of account but a simple diary and loose paper entries. Regarding the plea that the documents were unsigned and that no opportunity to cross-examine MUL was provided, I hold that since the appellant was in total and regular contact with the MUL, the onus rather lied on the appellant to contradict by bringing out the actual signed statements from MUL and written statement from MUL. The silence on their part establishes that there was nothing in their possession, which could contradict the information in the possession of the Department. On the similar lines I disagree that the reliance of the appellant on the cases like Chiranji Lal Steel Rolling Mills v. CIT and that of Pawan Kumar Sham Lal Bhikhi (Tribunal Amritsar).
Having found the plea of the appellant untenable, I hereby confirm the addition of Rs. 17,89,488 as per Annex. A-5 prepared by the AO. (In which case the GP is estimated as the same as disclosed by the appellant on its regular sales of the vehicles).
The next issue on undisclosed income attributable to sale of spare parts. On the above lines, I hold that the suppression, figure worked out by the AO at Rs. 1,89,82,323 is undisputed. However, the GP rate chosen by the AO at 23.8 per cent is unsustainable even on prima facie considerations. First of all the AO has never elaborated any specific information gathered from the market regarding the adoption of profit margin at 15 per cent.
Neither the name of the parties are given, nor the same were confronted to the appellant for necessary legal rebuttal on their part. In preceding paras the GP rate of irregular sale of vehicle is adopted at the same level, there is no reason why there should be any deviation for the purpose of sale of spare parts outside books of account. I, therefore, hold that the AO should choose the GP rate corresponding to one reflected in the books of accounts or regular part of overall business. This figure is observed by me at 2.63 per cent. As per this figure, the addition made should have been Rs. 5,01,132. The AO has also included sales-tax @ 8.8 per cent presumed to have been collected and not paid to the Sale-tax Department. In this regard I find that the AO has totally relied blindly on the inquiries conducted by the sales-tax authorities. No independent inquiries were conducted from the parties mentioned on page No. 2 para 7 (Sr. Nos. 1-11) of the assessment order. I am also inclined to accept the contentions of the appellant that sales-tax not collected in a transactions outside books of account. Particularly when the transactions are in a such bulk. This addition could only be sustained if the information actually gathered from the market might had been relied upon by the AO. As for as the inquiries conducted by the sales-tax authorities, the same has already been set aside by their own superiors. Moreover, the sales-tax authorities have not given any finding regarding the actual incidence of the collection of sales-tax by appellant. Their point is restricted only to the charge ability of such tax in their hands. Therefore, an independent inquiry was must by the IT Department. In the absence of the same, I direct the AO to exclude the figure of 8.8 per cent from the computation of the estimation of GP rate adopted for undisclosed sale of spares. Hence, I sustain the addition only to the extent of 2.63 per cent.
The 3rd issue revolves around the alleged undisclosed income in service charges. The AO has given a chart at the top of page No. 4 of the assessment order. There is total absence of any discussion or any logic. Similarly the figure of Rs. 28,47,948 has been mentioned without any basis whatsoever. This is a non-speaking order to this extent. In the absence of any logical conclusion on the part of the AO, I am inclined to delete the addition entirely.
Both the Revenue and the assessee are aggrieved with the order of the CIT(A). Hence, these cross appeals before this Bench.
The learned Counsel for the assessee submitted that the reasons given by the AO in the assessment order for making the additions are information received from consumer’s forum and United India Insurance Co. He submitted that no such information was confronted to the assessee. Therefore, no addition could be made by referring to the said information. He further submitted that the other reason given by the AO in respect of suppression of sales of spare parts and vehicles was the finding of the sales-tax authorities recorded in the orders for imposing penalties on the assessee. He drew our attention to a copy of order of the sales-tax Tribunal placed at pp. 5 to 8 of the paper book in appeal Nos. 592 and 593 of 2004-05, where the orders of the assessing authority for the asst. yrs. 1999-2000 and 2000-01 were set aside by observing that there was no material placed on record to prove that the assessee had suppressed the purchases made from MUL. The sales-tax Tribunal further observed that the correctness of the figures shown by the assessee in its account books, could not be doubted simply for the reasons that the same did not tally with the figures supplied by M/s MUL. Thus, the learned Authorised Representative submitted that the very basis of making the addition in this case does not survive. He further submitted that on p. 2 of the assessment order, the AO has mentioned the names of the parties with their RC Nos. without mentioning the amount of sales made to those parties and on what basis, it was concluded that no sales were made to those parties. Further, the AO referred to the information received from MUL for the purchases made from the said company. However, photocopy of the information supplied to the assessee was unsigned and unauthenticated. He submitted that this fact was pointed out to the AO. But the AO did not supply an authenticated copy. Thus, he submitted that no addition could be made by relying on such unauthentieate information. He relied on the judgment of Hon’ble Punjab & Haryana High Court in the case of Chiranji Lal 1 Steel Rolling Mills v. CIT . He submitted that the AO was also requested to call for the person from whom such information had been received and allow an opportunity of cross-examination. This opportunity was not allowed by the AO by observing that the limitation was involved. He submitted that the action of the AO for relying on the evidence collected at the back of the assessee without allowing an opportunity of cross-examination violated the principles of justice. He further submitted that the entire addition made by the AO was based on surmises and conjectures and therefore, deserves to be deleted.
8. The learned Departmental Representative, on the other hand, heavily relied on the order of the AO. She submitted that the IT authorities had obtained information from MUL which indicated that the assessee had suppressed the purchases of vehicles and spare parts. She further submitted that in the books of account, the assessee had shown sales to regiscred dealers and thereby claimed exemption from payment of sales-tax. The assessee also issued fake certificates to this effect. The sales-tax authorities levied heavy penalties on the assessee for these charges. She submitted that the AO had observed that the sales-tax on the spare parts was payable at the rate of 8.8 per cent. By showing sales to registered dealers, the assessee did not make payment of sales-tax. Therefore, the net gain to the assessee in respect of sales-tax difference was 8.8 per cent. Thus, the learned CIT(A) was not justified in reducing the GP to 2.63 per cent i.e., at the same rate as shown on the sales declared in the books of account. Thus, she submitted that the order of the CIT(A) may be set aside and that of the AO restored.
9. We have, heard both the parties and given our thoughtful consideration to the rival submissions, examined the facts, evidence and material placed on record. From the facts discussed above, it is obvious that in para 11 of the assessment order, the AO has recorded a finding that the book version of the assessee cannot be accepted and the provisions of Section 145(1) of the Act were applicable in this case. Accordingly, the AO had invoked such provisions. We have also gone through the grounds of appeal taken before the CIT(A). No specific ground relating to rejection of book results was taken before nim. Even before us, though the assessee has filed an appeal, yet no ground relating to rejection of book results is taken. Therefore, in the absence of specific ground taken before us, the plea taken by the assessee is devoid of any merit. Even otherwise, we find that the assessee had filed the original return on 29th Nov., 2000 declaring therein loss of Rs. 45,740. The revised return was filed on 4th Feb., 2002 i.e., after a period of 1 1/2 year surrendering an income of Rs. 16 lacs to cover up the possible leakages in income and another discrepancies in the return filed. The AO has observed that filing of revised return was necessitated because of the information in the possession of the intelligence wing of the Department. Be that as it may, it only shows that the entries in the books of account did not contain the correct record of transactions of purchases and sales. Therefore, the book version of the assessee was liable to be rejected and rightly done so. This plea of the assessee taken before us is rejected.
9.1 Now the next aspect of the case is that even if, book version is rejected, the AO is bound to make a fair and reasonable estimate of income based on evidence and material on record. No doubt, such estimation of income involves certain amount of guesswork. But the guesswork has to be fair and reasonable based on material and evidence on record. Reliance in this regard is placed on the judgment of Privy Council in the case of CIT v. Laxminarain Badridas (1937) 5 ITR 170 (PC) where it has been held as under:
Under Section 23(4) of the IT Act the officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly, or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must be able to take into consideration local knowledge and repute in regard to the assessee’s circumstances, and his own knowledge of previous returns by, and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guesswork in the matter, it must be honest guesswork. In that sense too the assessment must be, to some extent, arbitrary. The section places the officer in the position of a person whose decision has to amount in final and subject to no appeal, but whose decision, if it can be shown to have been arrived at without any honest exercise of judgment, may be revised or reviewed by the CIT under the powers conferred upon that official by Section 33.
9.2 Now in the present case, the AO has referred to the information in the possession of the Department collected from the sales-tax authorities, consumer’s forum, United India Insurance Co. Ltd. and information received from MUL. The learned Counsel for the assessee has emphatically contended before the Bench that the information gathered from the consumer’s forum and United Insurance Co. Ltd. was never confronted to the assessee nor the same has been specifically referred to in the assessment order. Therefore, we agree with the learned Authorised Representative that no adverse inference can be drawn against the assessee by relying on such evidence.
9.3 The AO has then referred to the heavy penalties imposed by the sales-tax authorities on the ground that it had suppressed the purchases/sales. The learned Counsel for the assessee produced before us a copy of order of sales-tax Tribunal, Punjab, Chandigarh (placed at pp. 5 to 8 of the paper book), where the order of the Dy. Excise and Taxation Commr., for sustaining the action of the assessing authority was set aside on the ground that the AO had not placed any material and concrete evidence to support the case of the Revenue. In the case of CIT v. K.S. Bhatia , the Hon’ble Punjab & Haryana High Court has held that if an addition to income has been made on the basis of order passed under the Sales-tax Act and such order of the sales-tax authorities is set aside in appeal, no addition to income could be made. We are, therefore, of the opinion that no adverse inference can be drawn against the assessee by referring to the order of the sales-tax authorities which already stands vacated by the Tribunal.
9.4 The next aspect of the case relates to information collected by the intelligence wing of the Department. It appears that the said information was collected from the MUL. Be that as it may, the fact remains that a copy of the information given to the assessee was unauthenticated and was incomplete. The assessee had pointed out this fact during the course of assessment proceedings and had also desired that an opportunity to cross-examine the person from whom such information was collected should be allowed. This request of the assessee was turned down by the AO on the ground that the limitation was involved. Such action of the AO violated the principles of natural justice. It is settled law that no information collected at the back of the assessee can be relied upon until the assessee is allowed an opportunity of cross examination. Reliance in this regard is placed on the celebrated judgment of Hon’ble Supreme Court in the case of Kishinchand Chellaram v. CIT . In the case of Chiranji Lal Steel Rolling Mills v. CIT (supra), the Hon’ble Punjab & Haryana High Court held that the ITO has power to collect evidence from any source. But it is his duty to put it to the assessee before making it the basis of his assessment. If the assessee denies the information collected by the ITO, it is the duty of the ITO to satisfy himself by making independent enquiry from sources considered reliable by him and decide whether the information passed on to him is true or not. If as a result of his own independent enquiry he comes to the conclusion that the information received by him is true, he is at liberty to act thereon after disclosing it to the assessee and affording him a reasonable opportunity of rebutting it. The Hon’ble High Court further observed that unproved copy of accounts obtained from the sales-tax authorities in the absence of original accounts not available for verification could not be used against the assessee particularly when these entries are denied by the assessee. In the present case also, a copy of the information given to the assessee was unsigned and unauthenticated. The assessee denied the entries. Therefore, it was the duty of the AO to furnish the authenticated copy of the information and allow an opportunity of cross-examination as desired by the assessee before relying on such evidence. The fact that the matter involved limitation, could not be held against the assessee. It was own lapse of the AO. He should have taken up the assessment well in time. Having not done so, the AO was not correct in drawing adverse inference against the assessee and for making the impugned addition.
10. Thus having regards to these facts and circumstances of the case and the legal position discussed above, we are of the considered opinion that income of Rs. 16 lacs surrendered by the assessee in the revised return deserved to be accepted. Therefore, the AO was not justified in making further addition by ignoring the point referred to above. Thus, we set aside the order of the CIT(A) and delete the trading addition made on account of suppression of sales on vehicles and spare parts by the AO. The grounds of appeal of the assessee are allowed.
11. As regards the appeal filed by the Revenue, the first ground relates to reducing the addition on sale of spare parts from Rs. 45,17,792 to Rs. 5,01,132. While dealing with the grounds of appeal of the assessee, we have already held that apart from income of Rs. 16 lacs surrendered in the revised return, no further addition was called for. Therefore, we find no merit in this ground of appeal of the Revenue and accordingly the same is dismissed.
12. The next ground of the Revenue’s appeal relates to deletion of an addition of Rs. 28,47,948. This ground is also linked with the ground relating to addition made on account of suppressed sales of spare parts. There is no further evidence or material referred to by the AO for making such addition. Since we have not maintained an addition made on account of suppressed sale of spare parts, no further addition in respect of service charge is also called for. Accordingly, we confirm the order of the CIT(A) and reject the ground of appeal of the Revenue.
13. The last ground of appeal of the Revenue relates to deletion of an addition of Rs. 6,00,000 made on account of wrong claim of loss due to theft. The facts of the case are that while completing the assessment, the AO disallowed loss of Rs. 6,00,000 by simply mentioning in the computation of income “wrong claim of loss due to theft”. No reasons for making such disallowance were discussed in the assessment order.
13.1 The assessee impugned the disallowance of loss in appeal before the CIT(A). It was submitted before the CIT(A) that the AO disallowed the claim for the reason that the insurance company had rejected such claim. It was, therefore, argued that the AO has rejected the claim of the assessee without any reason and justification. Accepting the contentions of the assessee, the learned CIT(A) allowed the claim of the assessee by recording following findings in the last para of the impugned order :
The claim of Rs. 6 lacs on account of loss due to the theft has not been entertained by the AO for the reasons that the insurance company M/s United India Insurance Company Ltd. Has rejected the claim. This not a sufficient reason. The insurance company can reject the claim for several reasons like no coverage of various items of loss or non-inclusion of the period in question for the policy. The AO has not given finding on the content of KIR and no observation on the rejection order issued by M/s United India Insurance Co. Ltd. This, therefore, constitutes another instance of non-speaker order. I, therefore, direct the AO to allow the claim of loss to the extent of Rs. 6 lacs.
The Revenue is aggrieved with the order of the CIT(A). Hence, this appeal before this Bench.
13.2 The learned Departmental Representative did not advance any specific arguments except relying on the order of the AO.
13.3 The learned Counsel for the assessee, on the other hand, relied on the order of the CIT(A).
14. We have heard both the parties and carefully considered the rival contentions with reference to facts, evidence and material placed on record. While making the impugned disallowance, the AO did not give any reason in the assessment order. In fact, he has not referred to any finding recorded by the United India Insurance Co. Ltd. for rejecting the claim of the assessee. He has also not discussed as to how the claim of the assessee was not allowable as per provisions of the Act. The learned CIT(A) was justified in observing that such action of the AO could not be sustained. No specific arguments have been advanced before the Bench. No reasons have been given as to how the said loss was not allowable as per provisions of the Act. Thus, we find no justification to interfere with the order of the CIT(A). The same is upheld and this ground of appeal is dismissed.
In the result, the appeal filed by the assessee is allowed and that of the Revenue is dismissed.