1. These are cross-appeals-three by the assessee and three by the Department in respect of the assessment years 1988-89 to 1990-91, which arise out of a consolidated order dated November 29, 1991, by the Commissioner of Income-tax (Appeals).
2. The main thrust of these appeals revolves round the following additions made by the Assessing Officer on account of suppressed sales by the assessee.
3. The first appeals filed by the assessee were partly allowed by the learned Commissioner of Income-tax (Appeals) as a result of which the additions which survive now are tabled below : 4. Thus, the two sets of appeal assail before us the additions sustained and the relief granted by the first appellate authority.
5. The assessee runs a leading Chinese restaurant in a prime area of this megametropolis which is known as "Chinese Garden".
6. The premises of the assessee were subjected to a search on September 18, 1989, which falls during the assessment year 1990-91. On the basis of the materials collected during the search operations as well as on the consideration of certain facts that took place during the assessment proceedings, the Assessing Officer rejected the sales results of the assessee by invoking the provisions of the proviso appended to Sub-section (1) of Section 145 of the Income-tax Act, 1961 (hereinafter referred to as "the Act" for brief).
7. The main consideration that weighed with the Assessing Officer in discarding the assessee's books of account and making estimates instead are twofold as detailed out below : (i) a piece of paper seized on September 18, 1989, the day of the search which gives out the sales figures of two particular dates which were found to be at variance with the sales figures that were recorded in the books ; (ii) manipulations in the sales figures arrived at by employing decoy customers to the restaurant.
8. On the basis of the above, the Assessing Officer came to the conclusion that the assessee was manipulating the sales bills that were left by the customers after making payment. Such bills which were of higher figures were shown as amounting to a figure below Rs. 50 has been held to be the modus operandi of the assessee.
9. After collating these figures, the Assessing Officer determined by estimate the average cost of food consumed by the assessee which in his opinion came to be at 34 per cent.
10. It may also be pointed out that during the search action on September 18, 1989, the assessee-appellant and other persons of the group declared a sum of Rs. 60 lakhs as their concealed income, which in the case of the present assessee, on apportionment, came to Rs. 8 lakhs and Rs. 5 lakhs, respectively, for the assessment years 1989-90 and 1990-91.
11. The findings of the Assessing Officer, substantially confirmed by the Commissioner of Income-tax (Appeals), have been strenuously assailed by Sri D. M. Harish, learned counsel for the assessee.
According to him, inter alia, there were no legal premises on the basis of which the assessee's books of account could be rejected and estimates made of sales and profits ; equally there was no justification with the Assessing Officer in discarding the cost of food ratio declared by the assessee at 57 per cent., 53 per cent. and 58 per cent. for the assessment years 1989-90 to 1990-91 and determining it at 34 per cent. for all the years on the strength of a certification from the Institute of Hotel Management, Catering Technology and Applied Nutrition, altogether overlooking the figures given by the Indian Hotels Co. Ltd. running the Taj Mahal Hotel, Bombay, the only case comparable on merits with that of the assessee and certain other evidence ; similarly, the declaration aggregating to Rs. 60 lakhs made by the group at the time of the search though only to buy peace not considered and not taking into consideration the action taken by the assessee management against their delinquent senior personnel responsible for certain mistakes in the bills and the sales shown in the account books ; the disregard made by the Assessing Officer as well as the learned Commissioner of Income-tax (Appeals) to the effect that in the past years, no defects in the books were found, etc., etc., the whole of the addition was liable to be deleted.
12. As against this, the learned senior Departmental Representative mainly supported the view taken by the Assessing Officer and contended that there was no justification even for the grant of relief by the learned Commissioner of Income-tax (Appeals).
13. We have very carefully gone through the entire gamut of the relevant materials that were relied on on behalf of the assessee as well as the Department and the oral submissions made by the rival parties.
14. The main considerations which prevailed with the Revenue authorities in sustaining the disputed additions, as stated are manifold. They are a paper seized on September 18, 1989, from the premises of the assessee showing actual sale figures of two days found to be at variance with the recorded figures ; some manipulation in the sales bills found by sending decoy customers to the assessee's business premises ; bills below Rs. 50 each found to be bogus and alteration made in the bills of the customers who left such bills in the restaurant. On the basis of these deficiencies, the Assessing Officer ascertained the average per bill which was then applied to the total number of sale bills of that period, thereby determining the estimated sales for the said period. This figure estimated by him along with average cost of food consumed for that quarter was used by him to come to a "cost of food to sales ratio" of 34 per cent.
15. It would thus be seen that the cost of food to sales ratio at 34 per cent. is an extremely vital factor taken into consideration by the Assessing Officer in making the additions. We propose to take it as a starting point for reaching our finding as to what addition, if any, is warranted in the facts and circumstances of the case.
16. The assessee claimed the cost of food to sales ratio at 50 per cent., 46 per cent. and 51 per cent. for the three years under consideration before us.
17. The Assessing Officer made enquiries from the Indian Hotel Company Ltd. running the Taj Mahal Hotel, Bombay, which runs a specialised Chinese restaurant known as "Golden Dragon" enquiring from them about the ratio of food cost to turnover. The reply from the Indian Hotels Company Ltd. to the Assessing Officer is available at page 148 of the paper book, according to which their food cost to turnover ratio in running the Golden Dragon restaurant varied between 45 and 50 per cent., which in their reckoning depended upon the variations in raw material cost and revisions in the menu prices from time to time. In respect of this document, it was contended on behalf of the assessee that the enquiry was made by the Assessing Officer behind the assessee's back.
18. It may be pointed out that the basis of the Assessing Officer in taking this ratio at 34 per cent. emanates out of an enquiry made by him from the Institute of Hotel Management Catering Technology and Applied Nutrition, whose reply is found in annexure "A" appended to the assessment order for the assessment year 1990-91, as per which although the assessee were an establishment of Grade I exclusive Chinese restaurant with elitist clientele and located in a posh locality, the cost of the principal ingredient in every dish prepared by them was not likely to be more than one-third of the selling price. According to this reply, the cost of purchases to sales shown at 76.79 per cent. for October, 1984, to April, 1985, and 66.93 per cent. for the period May, 1985, to April, 1986, was quite high. The following observations made by the Institute are quite relevant : "Under normal circumstances, for a luxury restaurant with a commercial objective, the above percentage would be considered very high. Normally, industry average for similar establishments, the cost of purchases to sales would range from 30 to 40 per cent." 19. It is primarily, rather exclusively, on the basis of this document that the Assessing Officer took the average of cost of food to sales ratio at 34 per cent. for all the three years. The same was increased from 34 per cent. to 39 per cent., 38 per cent. and 37 per cent., respectively, by the learned Commissioner, which is in serious challenge by the assessee before us.
20. The assessee's contention is that they are the leaders in supplying and serving excellent Chinese food in this metropolis. About their credentials, they also made reference to the communication referred to supra from the Institute of Hotel Management, as per which they were a Grade I exclusive Chinese restaurant located in a posh locality and catering to the need of the elitist clientele. Reference was thereafter made by the assessee to a variety of documents and testimonials in their support. The first among such documents could be said to contain the opinion of various eminent customers including leading stars of the country, available at pages 347 to 351 of the paper book. A few such opinions may need a brief mention here. According to the noted industrialist, Shri J. R. D. Tata, the assessee was providing with "very good food and service". As per Shri Amitabh Bachchan "this garden is going places for sure". In the opinion of Shri Bal Thackerey "it was fantastic. It is a paradise". As per Shri Murali Deora, M. P., both the food and decor were excellent. Shri Nana Chudasama, former Mayor, described it as "delightful coming here, makes a day complete". As per the noted cricketer, Shri Sunil Gavaskar "the food was super and most delicious". Even certain foreign dignitaries, such as Princess Cristina of Spain and Princess Alexia of Greece found the meals lovely and delicious. A customer also described it "a six-star restaurant".
21. Certain advertisements appearing in various newspapers and hoardings available at pages 350 to 357 of the paper book described the assessee restaurant as "very much No. 1". Comments from Busybee described the appellant restaurant even taking on the famous Golden Dragon run by Taj. Several documents available at pages 360 to 375 which also include a letter of appreciation from the Principal of Institute of Hotel Management, and a certificate from Citibank Diners Club go to describe the catering as fantastic and excellent.
22. In addition to the above, learned counsel for the assessee placed special reliance on a letter dated February 7, 1990, received from Hotel Administration and Food Technology Department of the Sophia Polytechnic on the food cost ratio of the assessee restaurant, which is available at page 342 of the paper book. As per this, since the China garden was using imported ingredients like oyster sauce, sesame oil, block mushrooms and babycorn for food production, the average food cost would come to around 65 per cent. According to them, the restaurant was not only extremely popular in Bombay, but all over the country.
23. It is in the wake of some of these documents and testimonials that learned counsel for the assessee strenuously urged before us that the cost of food to sales ratio taken by the Assessing Officer, increased a bit by the learned Commissioner was abysmally low. In his submissions, the only case which could have been taken for comparison for arriving at such ratio would be that of the Golden Dragon, an exclusive Chinese restaurant run by the famous Taj group, which gave the cost of food to sales ratio between 45 to 50 per cent. When told that the establishment cost of a restaurant run by the Taj group was bound to be higher than a comparatively smaller restaurant, howsoever exclusive and excellent in food and decor it may be, Shri Harish submitted that the cost of food ratio to the sales figure had nothing to do with the establishment expenses inasmuch as the cost of food comprised only the cost price of the inputs, that is the raw material required in the preparation of various dishes and the cooking material used therein.
24. There is incidentally no rebuttal and perhaps there could be none to the assessee's claim that they are one of the leading most Chinese restaurants in Bombay comparable only to the Golden Dragon run by the Taj. In these circumstances, we find sufficient force in the submissions made on behalf of the assessee that the opinion of the catering institute referred to supra as per which the cost of food to sales ratio would be much lower than claimed by the assessee was not very relevant. In any case, even as per this opinion, such cost would range between 30 to 40 per cent., which too was not applied by the Revenue authorities, as the Assessing Officer estimated it at 34 per cent. which was increased by the learned Commissioner (Appeals) to 39 per cent., 38 per cent. and 37 per cent. What seems to be more appropriate is that the yardstick in arriving at this ratio should have been the figures supplied by the Taj group of hotels rather than the catering institute which may not even be consciously aware of the excellence maintained by such top food centres and may be providing the figures based on the ratio applicable to the tens of scores of Chinese food centres found in this city of gold. No doubt, we feel that the average coming in the Taj group, even other things remaining the same, may be still higher or so to say the asses see-company running only one Chinese restaurant may be able to secure their inputs at a more economical price. Thus, what to say of the ratio adopted by the Assessing Officer, even the one adopted by the first appellate authority appears to be a bit inadequate. As to what percentage should be taken as cost of food to sales ratio, will certainly remain in the domain of an estimate cannot be disputed. However, the actual percentage which we may finally adopt as the second appellate authority may be influenced by certain other facts and circumstances of the case, which we propose to take one after the other hereinafter.
25. Learned counsel for the assessee urged before us that the impugned order suffered from several legal vices inasmuch as it failed to take into consideration the following amongst other vital factors : A. In the first instance, dealing with the piece of paper seized by the Department on the 18th of September, 1989, i.e., day of search which gives out the sales figures of two particular dates found to be at variance with the sales figures that were found recorded in the books, heavily relied upon by the Department, it was contended that this paper was legally incapable of being acted upon, firstly for the reason that during the assessment years 1988-89 and 1989-90, no independent material whatsoever was found to justify the drawal of any similar inference that there was any suppression of sales during those years and in any event, the possible small discrepancy stood offset with the additional income of Rs. 8 lakhs and Rs. 5 lakhs voluntarily declared by the assessee in respect of these two assessment years which aspect was not appreciated in its proper perspective by the learned Commissioner of Income-tax (Appeals).
B. Challenging the food cost ratio, it was vehemently argued that the ratio adopted by the first appellate authority was capricious and arbitrary, for the following amongst other reasons : Firstly, during the appeal proceedings, the Assessing Officer himself, as is evident from page 258 of the paper book, Vol. II, in his own hand worked out this ratio as "40.04 : 40 per cent.", which fact was omitted by the Commissioner of Income-tax (Appeals).
Secondly, during the continuous survey conducted, the Assessing Officer found percentage of small bills at 16.35 per cent. On this basis, the food cost ratio works out at 43.57 per cent. as reflected at pages 259-260, of Vol. II of the paper book. This vital factor was also omitted by the Commissioner of Income-tax (Appeals).
C. Further, the Assessing Officer who had himself called for the food cost ratio from the Taj group which mentioned it at 40 to 50 per cent. and the assessee's claiming that they were even superior in as far as the quality of food was concerned to the Golden Dragon Chinese Restaurant of the Taj group, as was manifest and evident by the various testimonials, a few referred by us above, the Commissioner of Income-tax (Appeals) did not appreciate these facts, for determining the food cost ratio and not alone this, whimsically discarded the communication from the Taj Group, which had been sought by the Department itself.
D. Fourthly, certificate given by another Food Institute, viz., Sophia Basant Kumar Somani Memorial Polytechnic, Bombay, available at page 342 certifying a much higher cost of food ratio, was also altogether ignored by the Commissioner of Income-tax (Appeals).
Fifthly, while calculating the quantum of suppression and food cost ratio, the Commissioner of Income-tax (Appeals) lost sight of some other glaring facts, such as, that membership fee of the exclusive Aristocrat Club run by the assessee and the guest collection charges were separately credited in the profit and loss account at Rs. 3,82,070 for 1989-90 and Rs. 16,35,531 for 1990-91. The impact of this system, very much conducive to the stand of the assessee that there was no hanky-panky in the accounts, it was contended, was not taken into consideration.
26. The assessee, as per the membership contract, it was submitted by learned counsel was required to incur additional food cost against the said collection. As such, the same should have been treated as part of sales, consequently reducing the quantum of the alleged suppression correspondingly. Reference was made to pages 206, 249-250 and 299 of the paper book in this connection.
27. Further, the Assistant Commissioner in his report dated July 31, 1990 (available at pages 143 to 147) to the Commissioner clearly certified that total expenditure on such food cost came to Rs. 4 to Rs. 5 lakhs. This expenditure was over and above the expenditure incurred by the assessee on complimentary and publicity meals-charitable institutions, V. I. Ps. and film peoples, etc., as also claimed by them in a communication dated November 21, 1990, addressed to the Assistant Commissioner, available at page 149 of the paper book. The omission of such expenses from consideration by the Commissioner despite a report from the Assessing Officer, available at pages 143 to 145, it was submitted, resulted in a gross miscarriage of justice.
28. Similarly, the Commissioner also ignored the impact of food cost incurred by the assessee on its staff. Unlike other restaurants, it was stated before us, the assessee provided food to its over 3 scores of staff from the same kitchen totally free, which clearly, put an extra substantial burden on its kitty of profits. It was also submitted that many leading restaurants in the town and other metropolis either provide some inferior food to their staffers, or pay them a cash allowance known as food allowance which was much less onerous than the system adopted by the assessee.
29. Next, factually data recorded during the course of continuous survey by the Assessing Officer in relation to percentage of small bills was not properly taken into consideration by the Commissioner of Income-tax (Appeals). As per their sales summary for the assessment year 1990-91, percentage of such bills approximately came to 30. During the Departmental survey, this percentage came to be 16 (refer to pages 277 to 280 of the paper book).
30. Further, it was vehemently submitted that strangely enough, this percentage while working out the quantum of suppression and food cost ratio was arbitrarily reduced without assigning any reason. If the percentage found during survey was applied, the extent of suppression would have gone down considerably.
31. Further, the reasons for and the circumstances under which small amount bills had to be raised though explained properly in a letter to the Assessing Officer (available at pages 182 to 183 of the paper book) were omitted to be considered by the Commissioner of Income-tax (Appeals). Another vital factor ignored by the Commissioner of Income-tax (Appeals) in arriving at the food cost ratio is that the sales effected by the assessee are partly on credit basis.
32. These credit sales were allowed on credit cards, diners cards and membership cards of "Chinese Garden". The members would sign these bills give their credit card particulars. Such bills are sent to the respective credit sponsors and payments received directly from them.
Any suppression of sales for these bills was impossible. The approximate percentage of such credit bills due to the use of the restaurant by the elite and high class gentry was very high, as much as 40 per cent. The assessee's plea on this count was brushed aside without any cogent reason, despite a specific ground taken by them before the Commissioner of Income-tax (Appeals).
33. If all these factors were properly appreciated and duly considered, it was submitted that the alleged percentage of sales, if any, would come down to zero or to a negligible amount ; which stood neutralised by the voluntary disclosure made by the assessee, detailed out above.
34. As against the aforesaid submission, the learned Departmental Representative reiterated that even the relief granted by the learned Commissioner of Income-tax (Appeals) was not justified and that the additions made by the Assessing Officer be restored.
35. On our part, we have considered all the submissions made before us with the strength of the material to which our attention was invited by the learned representatives of both the sides.
36. At the outset, we shall deal with the various defects and omissions pointed out by the assessee.
37. The most major item of challenge by the assessee has been the food cost ratio adopted by the Revenue authorities.
38. As stated earlier, while this ratio was taken uniformly by the Assessing Officer at 34 per cent. for all the three years, the learned Commissioner of Income-tax (Appeals) took it at 39, 38 and 37 per cent.
for the three years under appeal before us.
39. There is no quarrel about the fact that the Taj group running the Golden Dragon Restaurant for Chinese food on being inquired by the Assessing Officer mentioned this ratio at 40 to 50 per cent. It is the assessee's case that in so far as the Chinese food is concerned, they were even superior to Golden Dragon as was reflected by not only their general reputation but the various testimonials issued to them by the leading personalities, institutions, and even foreigners, some of which find mention by us in the preceding paragraphs. Over and above this, the assessee placed reliance on the certificate issued by Sophia Basant Kumari Memorial Polytechnic as per which this ratio would be in the vicinity of 65 per cent. As against all these materials, in so far as the Department's case is concerned, it solely rests on the certificate from the Institute of Hotel Management, Catering Technology and Applied Nutrition. Incidentally, this certificate also gives the percentage at 30 to 40 per cent., although for no discernible reasons, the Assessing Officer estimated this percentage at 34. This, as pointed out by us above, was raised to 39, 38 and 37 per cent. by the first appellate authority.
40. A careful consideration made by us of the issue leads us to the feeling that the percentage of food cost ratio adopted by the Revenue authorities has been, to say the least, low. There is no material or reasoning available on record to discard the opinion of the Taj group running the Golden Dragon, and the same being ignored by the opinion of the Catering Institute. The standard of Golden Dragon is undoubtedly more comparable with the assessee's case. Even if the claim of the assessee that their good quality is superior to that of Golden Dragon, to which there is no rebuttal from the Department, and in fact which is supported by the various encomiums on record is ignored, and not given due weightage, there is no legal reason whatsoever as to why the really comparable case of the Taj group is not followed and preferred over the opinion of the Catering Institute which is more of a routine nature than clinching the issue ; such opinions treating the lion and a goat alike.
41. It may also be pointed out that the food cost ratio was fixed by the Revenue authorities consciously and unconsciously taking into consideration several other factors against the assessee, many of which, as would be seen hereinafter cannot stand judicial scrutiny.
Stopping here, therefore, we pass on to other aspects of the case before fixing the actual food cost ratio, which shall be done by us after considering the totality of the circumstances.
42. The assessee also challenges the inference drawn by the Department in respect of the piece of paper seized by them on September 18, 1989, i.e., the day of search, which gives out the sales figures of two particular dates showing them at variance with the sales figures recorded in the. books of the assessee. There is no dispute that the aforesaid dates fall within the assessment year 1990-91 and, as such, as a matter of course, it cannot be presumed that such a defect must be existing in the previous years too. In this connection, two other factors need mention, firstly, that the assessee eventually reported the matter to the police and sacked its general manager and, secondly, that the deficiency/the defect got at least partly compounded by the fact that the assessee had declared income of Rs. 8,00,000 and Rs. 5,00,000 voluntarily in respect of the assessment years 1989-90 and 1990-91.
43. We also find some force in the assessee's plea that while fixing the food cost ratio, the learned Commissioner of Income-tax (Appeals) did not take into consideration certain facts, such as, that membership fee of the exclusive Aristocrat Club run by the assessee and the guest collection charges were separately credited in the profit and loss account at Rs. 3,82,070 for 1989-90 and Rs. 16,35,531 for 1990-91.
Further, as per the membership contract, the assessee was required to incur additional food cost against the said collection and, therefore, the same should have been treated as part of the sales, consequently, reducing the quantum of alleged suppression correspondingly. It is in this connection that the report dated July 31, 1990, from the learned Assistant Commissioner was pressed into service which vouchsafes that the total expenditure on such food came to Rs. 4 to Rs. 5 lakhs. This expenditure was over and above the expenditure incurred by the assessee on complimentary/publicity meals--to charitable institutions, V. I. Ps.
and film people, etc. This plea of the assessee is certainly not an afterthought and in the absence of any rebuttal, we find some force that the omission of such expenses from consideration by the learned Commissioner of Income-tax (Appeals) despite the specific report from the Assessing Officer is not legally tenable and has to be borne in mind by fixing the food cost ratio. The same is the case with respect to certain other points, such as, supply of the food by the assessee to its staff from the same kitchen free of cost, etc.
44. A special mention needs by us to the survey made by the Assessing Officer in relation to the percentage of small bills. In respect of the assessment year 1990-91, this percentage came to 16 as against 30 shown by the assessee in its sales summary. Interestingly, this percentage despite the results of the continuous survey has been reduced by the Revenue authorities without assigning any reasons. Naturally, this would also affect the food cost ratio.
45. Another vital point which needs a mention is that the assessee has a system of providing food on credit cards. As stated above, approximate percentage of such credit cards for reasons of the restaurant being used by the people coming from higher strata of society came to as high as 40. Though the assessee took a specific ground that since such bills were sent to the respective credit sponsors and payments received directly by the assessee from them, there was no room for any manipulation ; it was ignored by the learned Commissioner of Income-tax (Appeals) without assigning any reason. We do feel impressed by this submission too. Using common knowledge and taking judicial note that whenever a service is used on the strength of a credit card, the bill is signed by the customer which is sent to the sponsor of the credit card for debiting in the customer's account and remit to the supply of the facility the corresponding amount, as to how any bungling is possible in such a transaction we are unable to appreciate.
46. We shall now deal with certain points not covered by our above discussion on which reliance has been placed by the Department.
47. One of the considerations which weighed heavily with the Assessing Officer emanates out of the visits made by him to the assessee's premises on January 26, 1991, and January 28, 1991.
48. On January 26, 1991, he took lunch with a person when a bill of Rs. 380 was paid. On verification, this hill was shown to be for Rs. 28 alone during his second visit on January 28, 1991. That day, he went through the reservation chart maintained by the restaurant, It was noticed that on the previous day, one Shri H. H. Saigal had reserved a place for lunch in a group of four persons. The group was allotted table No. 18. When contacted on telephone, Sri Saigal stated that they had made a payment of approximately Rs. 700. On checking, it was found that for January 27, 1991, in respect of table No. 18, only two bills had been shown and none of them was in the vicinity of the amount of Rs. 700 stated to have been paid by Sri Saigal. Instead, a bill for Rs. 24 alone was shown for table No. 18 which amount was ridiculously low.
The statement of Sri Saigal confirming that his group made a payment of Rs. 700 was obtained.
49. Likewise, Dr. Manoj Masur who too had booked a table for lunch on January 27, 1991, and had visited the restaurant along with his wife and friends and who was allotted table No. 2, was also contacted as the bill for this table showed a payment of Rs. 48 alone. Dr. Masur stated on oath that they had made a payment of Rs, 650 approximately.
50. These two instances impelled the Department to carry out an exercise. A team of officers visited the restaurant on January 31, 1991, as decoy customers to take lunch. The total bill came to Rs. 553.
Before making the payment, a xerox copy of the bill was taken by one of the officers by going out. The bill, after making the payment, was left on the table with deliberate intent. Later on, it was found that this bill was shown by the assessee for Rs. 42 alone.
51. In respect of the aforesaid discrepancies, in the first instance, it was submitted by learned counsel for the assessee that none of the customers, including the decoy ones, was offered by the Department for cross-examination. The case as put by the learned Departmental Representative has been that the assessee did not show any anxiety to cross-examine the witnesses. We find some force in the submission of learned counsel that no specific opportunity was provided by the Assessing Officer to cross-examine the witnesses. Secondly, these statements were not recorded in the presence of the assessee or his representative and, as such, the question of instant cross-examination did not arise.
52. Apart from this, it may also be pointed out that all these dates fall outside the accounting period under consideration before us. It was submitted in this respect that these events on which reliance has been placed by the Department should not form consideration in the completion of these assessments.
53. We have given our thought to the issue. The accounting period covering all the three years, which is under consideration before us, runs from May 1, 1986, up to March 31, 1990. The visits paid by the Assessing Officer and other Departmental officers clearly pertain to a period posterior to it. The assessment for the relevant period, as we were told, is still not complete. In these circumstances, it will not be judicially proper on our part to make observations as second appellate authority which may prejudice either the assessee's or the Department's case, much less record a clear finding. In these circumstances, we simply make a note of the allegations levelled by the Department and the assessee's objection, namely, that witnesses were not tendered for cross-examination ; they were not even enquired as to whether there was any change in the seating arrangement, i.e., were they given seats different than what the reservation chart showed and the fact that as per the assessee reservations were made only for the internal convenience of the restaurant of which the customers were never informed on telephone, who were allotted seats on the basis of the timings of their arrival and the availability of space qua the number of a particular group. We would, therefore, stop at that.
54. In so far as the bills of smaller amounts are concerned, we may make a reference to the consideration of this aspect by us in paragraphs 24 onwards reminding ourselves that the Department did not even apply the percentage of such bills found during the continuous survey carried out by them.
55. It may also be pointed out, partly at the cost of repetition, that during the search at the premises of the assessee which was carried out on September 18, 1989, an amount of Rs. 60 lakhs was offered as undisclosed income. This, in the submission of the assessee, was offered mainly to buy peace. Out of the amount of Rs. 60 lakhs, in so far as the assessee is concerned, it offered Rs. 8 lakhs towards 1989-90 and Rs. 5 lakhs for 1990-91, the remaining amount relating to the other associates of the assessee or to his personal activities with which the assessee-appellant is not concerned. Incidentally, out of the aforesaid amount of Rs. 13 lakhs, Rs. 5 lakhs offered for 1990-91 has been capitalised while Rs. 8 lakhs offered for 1989-90 is not capitalised. Incidentally, the details of the remaining Rs. 47 lakhs is also found at pages 140-142 of the paper book. It is in this context that it was vehemently submitted that once the assessee had satisfactorily explained the income arising to them from undisclosed sources, there was no room for making any further addition.
56. In respect of the discrepancies found by the Department in the preparation of bills by the assessee, apart from the submissions made by them which have already been referred by us, reference was specifically made to a complaint made by the assessee to the police on February 6, 1991, a copy of which is available at page 167 of the compilation, whereby a fraud going on in the restaurant in the billing was reported. This complaint specifically gives the instance of a bill dated January 31, 1991, wherein the bill originally made for Rs. 553 was shown by the staff for Rs. 42 alone. We were thereafter taken to the reminder to the police sent by the assessee, a copy of which is available at page 177 of the compilation.
57. We will now make a reference to certain submissions made by learned counsel before us in support of the submission that with the voluntary disclosure made by the assessee in a sum of Rs. 60 lakhs for the entire group (Rs. 13 lakhs for the assessee), no more addition was called for.
58. From the chart available at page 326 of the paper book, it is clear that not a single instance of discrepancy regarding suppressed sales or for any other defects have been pointed out by the Assessing Officer in respect of the assessment year 1988-89.
59. For the assessment year 1989-90, similar situation existed excepting that the Assessing Officer for these two years stated that the daily sales bills and the sales book were not produced.
60. Dealing with this grievance of the Department, learned counsel, stoutly defending the assessee, submitted that there was no warrant for making such observation. According to him, the position was well explained by the assessee in their written submissions made to the learned Commissioner (Appeals), a copy of which is available at pages 204 to 211 of the paper book. Elaborating, it was stated that the compulsory tax audit was completed and no discrepancy pointed out.
Similarly, no deficiency was found by the Department during the assessment years 1986-87 to 1987-88, as was evident from the chart available at page 299 of the compilation. We were, thereafter, taken to the notices sent by the Assessing Officer to the assessee in respect of all the three assessment years, which are available at pages 329, 330 and 331 of the paper book. These are dated March 13, 1991, while the assessments were completed on March 21, 1991. It was vehemently contended that in none of the notices, there is any mention by the Assessing Officer about the production of the sales registers and, therefore, it was not proper on his part to make a grievance out of it.
Apart from this, learned counsel for the assessee also drew our attention to page 210, paragraph VII, complaining against the unwarranted observations made by the Assessing Officer about the non-production of books of account. The averments made by the assessee run as under : " VII. During the course of assessment proceedings, the appellant's representative attended from time to time and submitted the necessary details called for and also produced the books of account and sales registers/bill books, etc., whatever was lying in its possession. Some of the records were seized at the time of search or impounded during the course of assessment proceedings and since then are lying in the custody of the Assessing Officer.
In spite of producing all the records including the sales register and sales bills available with the appellant for the assessment years 1988-89 and 1989-90, the Assessing Officer deliberately put an adverse remark in the assessment order that 'the assessee has something to hide as far as its sales of the relevant period are concerned'. We enclose xerox copies of annexure 'A', page 2, panchnama dated September 18, 1989 and order under Section 131(3) dated January 25, 1991, which show that the daily sales register pertaining to part period of the assessment year 1989-90 was lying in the possession of the Assessing Officer, but he did not bother to see the same.
On verification of proceeding sheet and case record your honour would notice that in the earlier hearing dates, the Assessing Officer noted his requirement about the production of sales bills and sales register and granted adjournment. But since later on the Assessing Officer's requirement regarding production of sales records/sales bills for the assessment years 1988-89 and 1989-90 was fulfilled, he has not repeated the said requirement in any of the subsequent notices issued under Section 142(1) and under Section 143(2) of the Income-tax Act, 1961. We enclose a xerox copy of such notice dated March 13, 1991. Even for the records lying in his possession also he put an adverse remark 'not produced'. Thus, your honour would appreciate that the Assessing Officer's whole attitude was totally perverse and mischievous." 61. In these circumstances, it was submitted that the assessee never withheld any account books or details from the Assessing Officer and, in fact, co-operated with him.
62. In respect of the assessment year 1990-91, during which period a raid was conducted on September 18, 1989, learned counsel submitted that the deficiencies found out were fully explained, the matter was reported by them to the police, and some staff sacked and, therefore, there were no legal premises on the basis of which any complicity of the management is proved, which could lead to any inference against them. Reference was also made by learned counsel to the assessment year 1992-93 and a submission made that not a single instance of discrepancy was found out by the Department. This period is not for consideration before us and, as such, we shall not make any observations in respect of this submission.
63. Making a reference to the law relied upon by the assessee, a case in Delhi Iron Syndicate (P.) Ltd. v. CST [1979] TLR 1775 ; [1979] 44 STC 228, wherein the High Court of Allahabad held that it was erroneous on the part of the appellate authority to have considered the conduct of the assessee in subsequent years for even if the assessee had suppressed his turnover in those years, it did not follow that he acted likewise in the assessment year in question, learned counsel submitted that each assessment year is a unit by itself and although the assessment record of the assessee may be relevant for some purposes, the appellate authority has to be cautious that its decision is not influenced by factors found in other assessment years which have no relevance in the assessment under appeal. It is in the context of the ratio of this decision that learned counsel for the assessee strenuously contended that their case was stronger than Delhi Iron Syndicate's case [1979] 44 STC 228 inasmuch as in their case, the assessment for the subsequent year was not completed and in so far as the search carried on in the assessee's premises was concerned, as against a deficiency found of Rs. 41,000, a declaration of Rs. 13 lakhs was made.
64. In so far as the Department's case is concerned, basically their reliance is on the additions made by the Assessing Officer which, they meekly submitted, were justified.
65. We have given our careful consideration to the entire gamut of evidence, facts and circumstances of the case and the submissions made by both the sides.
66. As is evident, certain materials which ought not to be considered by the Department for the present assessment years, have been taken into account. They have also drawn an adverse inference against the assessee about the non-production of certain books of account and the sales registers/about which there is no warrant. Similarly, they have unjustifiably taken the cost of food to sales ratio at a low percentage which too, as discussed by us in great detail, is not justified, inasmuch as they have not even followed the percentage intimated to them on enquiry by the only comparable case of Taj group of hotels, who are providing similar excellent Chinese food in their Golden Dragon Restaurant. About the bills for small amounts too, the Department has not followed the percentage disclosed by the continuous survey. Certain other vital factors were also not properly appreciated by the Revenue authorities. They are the incurring of additional food cost against the membership contract entered into by the assessee with its regular members, certain expenditure incurred by the assessee on complimentary and publicity meals, the food provided free of cost to their staffers, and the factum of substantial sales of the assessee through credit cards in which no hanky-panky is possible.
67. Certainly, as has been observed by us, these factors, if taken in the proper perspective, would have affected the food cost ratio. Even independent of the factors pointed out by us, the food cost ratio taken by the Assessing Officer at 34 per cent. and increased by the learned Commissioner (Appeals) to 39, 38 and 37 per cent. for the three years under consideration, is below the mark. This ratio, it appears to us, was arrived at by the two Revenue authorities, mainly for the reason that some factors in favour of the assessee were ignored while certain others, which ought not to be taken into consideration for these assessment years, were made a basis for their finding. The food cost ratio, considering all the relevant evidence on record, has to be between 45 to 50 per cent., as stated by the Taj group of hotels. It is, however, a matter of estimate and some plus or minus is always possible. This percentage be fixed at 46 (forty-six).
68. Now, coming to the additions made, as has been shown by us at page 1 of our order, the addition sustained is Rs. 28 lakhs, Rs. 49 lakhs and Rs. 54 lakhs odd, respectively, for the three assessment years.
Primarily, the change in the food cost ratio and, thereafter the non-consideration of certain relevant factors, and taking into account certain factors not relevant or in an exaggerated manner, the additions are bound to be affected. Taking the overall position, in our view, including the disclosure made by the assessee, in the first instance, we disagree with learned counsel that no addition is called for.
Additions are called for, but of a different figure. As already pointed out that there is always an element of some guess in an estimate, as in doing so, things cannot be measured with metes and bounds. However, a judicial authority always tries to execute this task as precisely and correctly as possible. In our considered view, on a consideration of all the relevant factors for and against the assessee, the following additions could finally be sustained : 70. In the result, while the appeals by the Department fail, the appeals by the assessee are partly allowed.
71. I have gone through the order proposed by my learned brother.
However, I have not been able to agree with the conclusion reached therein.
72. The assessee, a private limited company, is engaged in the business of running a Chinese food restaurant. The restaurant specialises in gourmet Chinese food and is a prime eating place in the city. Some of the discussions made in paragraphs 15, 16 and 17 of the order of the learned Judicial Member as also the various letters of appreciation filed in Volume VI of the assessee's paper book, clearly bring out the extreme popularity of this restaurant.
73. In these appeals, we are concerned with the assessment year 1988-89, whose previous year ended on April 30, 1987 ; with the assessment year 1989-90, whose previous year consisted of a period of 23 months from May 1, 1987, to March 31, 1989, and with the assessment year 1990-91, whose previous year ended on March 31, 1990.
74. The restaurant started its functioning in October, 1984, and the first previous year ended on April 30, 1985 (assessment year 1986-87).
The assessments for the assessment years 1986-87 and 1987-88 were completed under Section 143(3) of the Act. While framing these assessments, the Assessing Officer observed that the ratio of the cost of material consumed to sales was on a much higher side. In these years also, the Assessing Officer made some addition on the ground that there was inflation of purchases/suppression of sales. But the Commissioner (Appeals) had restored these assessments to the Assessing Officer for de novo adjudication.
75. In the meantime, on September 18, 1989, there was a search action under Section 132(1) on the assessee. During the search proceedings, the director of the assessee-company admitted that there was suppression of sales and he offered Rs. 60 lakhs as concealed income.
The director, however, did not disclose the modus operandi adopted for suppression of sales by the assessee.
76. In this background, the assessment proceedings for the assessment years 1988-89, 1989-90 and 1990-91 were taken up. The Assessing Officer in all these years held that the ratio of the cost of material consumed to sales was on the high side. The books of the assessee, according to the Assessing Officer, disclosed the following ratio of cost of material to the sales : 77. Reference was made to the Institute of Hotel Management, Catering Technology and Applied Nutrition for their opinion in the matter. They confirmed that the cost of the food to sale ratio in the restaurant like Chinese Garden should be in the ratio of 30 to 40 per cent.
Elaborate discussions are made by the Assessing Officer in his order for the assessment year 1990-91, which is the lead order, and on the basis of those discussions additions were made taking the food cost ratio at 34 per cent. in the following manner : 78. Respective Section 154 orders were passed by the Assessing Officer to rectify certain mistakes in the calculation on the sales disclosed by the assessee in its regular books of account.
79. In appeal before the Commissioner (Appeals), the Commissioner (Appeals) had adopted the food cost ratio to sales at 39 per cent. for the assessment year 1988-89 ; at 38 per cent. for the assessment year 1989-90 and at 37 per cent. for the assessment year 1990-91. The additions that remained in each of the assessment years as a result of the order of the Commissioner (Appeals) are- 80. In respect of the relief granted, the Department is in appeal and in respect of the additions sustained the assessee is in appeal before us.
81. Learned counsel for the assessee and the learned Departmental Representative were extensively heard. The arguments advanced by the parties are elaborately discussed in the order of the learned Judicial Member.
82. Apart from relying upon the certificate issued by the Institute of Hotel Management, Catering Technology and Applied Nutrition, the Assessing Officer made elaborate discussion at pages 3, 4 and 5 of his assessment order about the method adopted by the assessee-company in tampering with the sale bills which were left behind by the customers.
All these discussions adequately support the action of the Assessing Officer in rejecting the book results disclosed by the assessee. To maintain brevity in this order they are not extracted.
83. Again to establish the above fact beyond doubt and to collect necessary sustainable evidence, the Assessing Officer arranged for decoy customers to take lunch in the restaurant of the assessee. The bills were left behind and the assessee was found to have tampered with those bills. The Assessing Officer in paragraph IV discussed how the assessee siphoned sales of Rs. 41,877 in just two days with the help of loose paper found in the course of the search. The Assessing Officer at page 8 of the assessment order recorded the following finding : " For all these years the modus operandi has remained the same, that is to tamper with the sales bills. From the time the computer was installed for billing, the method was to tamper with the bills on computer. For the times when it was not there, the manoeuvrability to manipulate sales was still greater.
In such a situation when there is suppression of sales, ratio of cost of material to sales would always come out to be much higher than the actual. Cost of material consumed to sales ratio as presented by the assessee-company for all these years thus cannot be relied upon." 84. In paragraph VI of his order, the Assessing Officer confronted the director of the assessee-company about the method of billing adopted by the assessee and in paragraphs VII, VIII, IX and X of his order, he discusses the explanation given by the assessee and reached the conclusion that there had been suppression of. sales by resorting to systematic tampering of bills left behind by the customers. Although the discussions made by the Assessing Officer in all these paragraphs give an interesting revelation about the modus pperandi adopted by the assessee for suppression of sales, they are not extracted here for the sake of maintaining brevity.
85. In paragraph XI of his order, the Assessing Officer arrived at cost of food ratio to sales at 34 per cent. on the basis of average of genuine bills and bogus bills. In paragraph XII, the Assessing Officer exhaustively dealt with the assessee's explanation about the food cost ratio of 34 per cent., which was taken as the basis for arriving at the suppressed sales, for the purpose of assessment. The cumulative effect of all these gives a very clear picture how the assessee manipulated its sales bills. In my view, the books results disclosed by the assessee cannot be accepted and, therefore, the Assessing Officer was justified in applying the provisions of Section 145(1) for making the assessment of the assessee for the years under consideration. In the accounting period relevant to the assessment years 1988-89 and 1989-90, the assessee-company was having manual billing. The manual billing has its own advantages in tampering, altering and even duplicating the bills. In the accounting year relevant to the assessment year 1990-91, the manual billing was also there for some transactions. There is a finding in the assessment order for this year that the assessee was asked to produce the original sale bills and sale book for the purpose of assessment. The assessee's representative failed to produce the bill book of any of the days relating to the assessment year. The daily sales book was also not produced before the Assessing Officer. The Assessing Officer, therefore, came to the conclusion that the assessee had definitely something to hide as far as its sales of relevant year were concerned.
86. In my view, the Assessing Officer has rightly appreciated the assessee's business, the modus operandi adopted by it in suppressing the sales and has also taken due care to support the basis for arriving at what he considered as a reasonable food cost ratio to sales. The Institute of Hotel Management, Catering Technology and Applied Nutrition, which is an independent organisation, has clearly given an expert opinion that such food cost ratio to sales in the nature of assessee's business should be between 30 and 40 per cent. The Commissioner (Appeals) has elaborately disposed of the assessee's contention about the service of food in respect of membership fees received. The Commissioner (Appeals), in my view, has properly disposed of the cost food ratio to sale disclosed by Golden Dragon, a similar restaurant run by Taj group of hotels. It is surprising to note that the cost of food to sale ratio claimed by the assessee is more than what has been claimed by Golden Dragon, a restaurant of a five star hotel. About the credit sales in respect of credit cards, Diners card and membership cards of "Chinese Garden", the same, in my opinion, has properly been disposed of by the Commissioner (Appeals). I entirely agree with the finding reached by him on all these issues. Even if one were to consider the sales on credit cards and Diners cards, I do not see how they are vital to affect the ratio of food cost to the sales.
Even if they were to affect the food cost ratio, the effect would only have a marginal bearing having regard to the volume of such sales. In my view, the Assessing Officer had a definite basis for estimating the suppression. The Commissioner (Appeals), after appreciating all the contentions of the assessee, has arrived at such ratio of 39 per cent., 38 per cent., and 37 per cent. for each of the years. Even if one were to consider such estimation made by the Commissioner (Appeals), despite proper disposal of all the contentions of the assessee, is conservative, at best the food cost ratio to sales cannot be more than 40 per cent. to the sales. I am, therefore, giving due weightage to all the contentions and claims of the assessee, direct the Assessing Officer to recompute the addition by taking the food cost ratio to sales at 40 per cent. for all the years. I have also considered the fact that the assessee might, in some year, not be able to revise the food tariff as and when the prices of raw material go up. Likewise, the tariff might not have been reduced as and when the cost of food items undergoes a downward change.
87. Before parting I may mention that learned counsel for the assessee has relied upon the various case-laws tabulated in pages 282 to 297 of the assessee's paper book. The Assessing Officer has established, in the facts of this case, that there has been a deliberate manipulation of sales. The Department, after exposing the assessee's modus operandi, has provided a basis for arriving at the proper ratio of cost of material to sales from the records, loose slips found with the assessee and from the opinion of an independent technical body like the Institute of Hotel Management, Catering Technology and Applied Nutrition. In the background of these, the cases relied upon by the assessee can hardly be of any help in advancing its case. The decision has been arrived at having regard to the manipulative technique employed by the assessee to suppress the profit and not on interpretation of some provisions of law. What stands out in this case is that the assessee has manipulated its accounts for the purpose of securing some mileage in the income-tax proceedings. The assessee's stand is totally exposed. My attempt in this connection is to quantify the suppressed income by applying a reasonable basis partly relying upon the books and other documents maintained by the assessee, loose slips seized from it and partly on the material gathered by the Assessing Officer in the course of assessment.
88. I would like to emphasise that having regard to the fact of this case, the only reasonable method to determine the sales would be one based on food cost ratio and it is for this reason that I have avoided the temptation of making any ad hoc addition to the disclosed results.
89. In view of my finding that the food cost ratio to sales should be 40 per cent., the Departmental appeals would not survive, as the Commissioner (Appeals) has adopted a lower food cost ratio to sales.
The Departmental appeals are, therefore, dismissed and the assessee's appeals are partly allowed.
90. Since there is a difference of opinion amongst us on the point at issue, the following question, on which there is a difference, is referred to the hon'ble President for reference to a Third Member as laid down in Section 255(4) of the Act : "Question : What addition should be sustained in each of the three assessment years considering the facts, circumstances of the case and the material on record ?" 91. Since there is a difference of opinion amongst us on the point at issue, the following question, on which there is a difference, is referred to the hon'ble President for reference to a Third Member as laid down in Section 255(4) of the Act : " Whether, on consideration of the facts of the case and the material on record, the addition should be made at Rs. 7,00,000 for the assessment year 1988-89 and at Rs. 10,00,000 for the assessment years 1989-90 and 1990-91 on the reasoning given by the Judicial Member or should be arrived at on the basis of food cost ratio to sales on the reasoning given by the Accountant Member ?" 92. This is a Third Member case referred to me under Section 255(4) of the Income-tax Act, 1961. The original difference of opinion is on the following question which was framed by both the Members constituting the Division Bench and referred to the President on December 3, 1993 : " What addition should be sustained in each of the three assessment years considering the facts, circumstances of the case and the material on record ?" 93. Again on April 8, 1994, under the same provision, namely, Section 255(4) of the Income-tax Act, 1961, a revised point of difference was formulated and sent to the then President for appointment of a Third Member. The point of difference expressed was the following : " Whether, on consideration of the facts of the case and the material on record, the addition should be made at Rs. 7,00,000 for the assessment year 1988-89, and at Rs. 10,00,000 for the assessment years 1989-90 and 1990-91 on the reasoning given by the Judicial Member or should be arrived at on the basis of food cost ratio to sales on the reasoning given by the Accountant Member ?" 94. Originally the then President constituted himself as a Third Member in this case. After his retirement, by virtue of my designation as successor-in-office, this case came up before me as a Third Member case. Ultimately, the matter was heard by me at Bombay, on July 31, 1995. Shri R. Ganesan, learned chartered accountant appeared for the assessee, and S/Shri R. K. Rai and K. L. Tilak Chand appeared for the Department.
95. Curiously the point of difference framed on December 3, 1993, as well as April 8, 1994, extracted above bears the signatures of both the Members constituting the Bench. On June 13, 1994, the following note under the signatures of the Deputy Registrar, Shri N. N. Nayak, is found in the files. The note is addressed to the assessee-company. In the subject portion of the letter I. T. A. Nos. 1490, 1491 and 1492/(Bom) of 1992 were mentioned and the text of the letter is as follows : " In the aforementioned appeals, there has been difference of opinion between the Members, which has been served on you along with dissenting orders.
2. Now, our record shows that the point of difference of opinion was served on you was not correct and the real point of difference as recorded by the Members was elsewhere in the file and by mistake, was not seen by this office. Hence, it could not be served on you.
3. I hereby serve the correct point of difference of opinion in place of the earlier one. The case will now be heard on the next date of hearing on the said correct point of difference of opinion." 96. A copy of this letter was forwarded, inter alia, to the Departmental Representative, C-Bench, Bombay. The alleged correct point of difference of opinion was recorded to have been received by the parties concerned. By the above letter, it is not known which is the correct point of difference between the Members and which was intended to be referred to the President for constituting the Third Member under Section 255(4).
97. Necessary proceedings on the administrative side started to ascertain which among the two differences cited above constitute the difference of opinion between the Members. For the present, it is enough to presume that all official acts should be deemed to have been done in the regular course and the dates put under the references mentioned above are correct. The earliest of the references was made on December 3, 1993. After referring the said difference on December 3, 1993, with a request to appoint a Third Member would the Division Bench retain any more powers to revise the said reference. In my opinion, this is not permissible under the provisions of Section 255(4) of the Income-tax Act. I hold that when once the difference of opinion between Members was referred to the opinion of the President under Section 255(4) and both the Members constituting the Bench requested to appoint a Third Member to resolve the difference which arose between them, the difference referred to should be taken to be ultimate and final and cannot be allowed to be revised by the same Bench later. Their difference cannot be allowed to be revised on a subsequent date.
Therefore, I take the difference referred to the President on December 3, 1993, as the real difference between the Members. I ignore the second reference dated April 8, 1994, from consideration.
98. The first three appeals are by the assessee and the next three appeals are by the Department. These appeals relate to the assessment years 1988-89, 1989-90 and 1990-91. For the assessment year 1988-89, the accounting year was from May 1, 1986, to April 30, 1987. For the assessment year 1989-90, the accounting year comprised 23 months from May 1, 1987, to March 31, 1989, whereas the accounting year relevant to the assessment year 1990-91 was from April 1, 1989, to March 31, 1990.
99. The assessee is a company engaged in the business of running a Chinese food restaurant which specialises in gourmet Chinese food and earned fame in the mega city of Bombay as a prime eating place. The assessee's restaurant was situated at an important place in Bombay called Kemp's Corner. The restaurant started working in October, 1984, and the first previous year ended by April 30, 1985 (1986-87). The assessments for 1986-87 and 1987-88 were completed under Section 143(3) on March 27, 1989, and August 31, 1989, respectively. When the assessment for the assessment year 1990-91 was taken up, the assessments for 1988-89 and 1989-90 were still pending. The following particulars show the additions made in the assessments of the assessee-company for the assessment years 1986-87 and 1987-88 : No further appeal filed by the Depart-ment before the Income-tax Appellate Tribunal against the Commissioner of Income-tax (Appeals) order dated 24-1-1994 No further appeal filed by the Department before the Income-tax Appellate Tribunal against the Commissioner of Income-tax (Appeals) order dated 24-1-1994.
100. The particulars of the matters given in the Table below would show their position as they stand now before me : 101. A search on the business premises of the assessee-company took place on September 18, 1989, under Section 132(1) of the Income-tax Act. During the search proceedings, the director of the assessee-company admitted that there had been suppression of sales and he offered Rs. 60 lakhs as concealed income. However, he did not disclose the actual modus operandi adopted for suppression of sales.
Later, Shri Nelson Wang, the director of the assessee-company, by his letter dated addressed to the Commissioner of Income-tax, XI, surrendered Rs. 8 lakhs for the assessment year 1989-90 and Rs. 5 lakhs for the assessment year 1990-91 in the case of the assessee-company. In the background of the search operations dated September 18, 1989, the assessment proceedings for the assessment years 1988-89, 1989-90 and 1990-91 were taken up. The Assessing Officer identified that the main point which helps finding out the sales as well as the gross profit derived by the assessee's business would become easy when once the ratio of the cost of material consumed to the sales is found out. The assessee-company declared the ratio of the cost of material consumed to sales at 57 per cent. for the assessment year 1988-89, 53 per cent. for the assessment year 1989-90 and at 58 per cent. for the assessment year 1990-91, respectively. The Assessing Officer determined the ratio of the cost of material consumed to the turnover at 34 per cent. for each of the three assessment years now before me. After thus determining the cost of food to the sales ratio, the Assessing Officer proceeded to determine the actual sales by applying this ratio to the actual cost of food consumed in the three accounting periods under consideration. It is this ratio of the cost of food to sales which has been vehemently contested by the assessee. The Assessing Officer relied upon five kinds of separate independent evidences to determine the ratio of the cost of food to sales for each of the assessment years under consideration. The broad heads of evidences gathered by the Assessing Officer are the following : 1. The seized paper which is marked annexure-24 at page 18 of the panchnama which reflected the sales of two dates, namely, August 6, 1989, and August 7, 1989.
3. The xerox copy of the sales bill which was obtained by the Officers of the Department by going to the assessee's restaurant as decoy customers.
5- An expert opinion from a Catering Institute (Institute of Hotel Management, Catering Technology and Applied Nutrition).
102. A comprehensive and reasoned assessment order was passed for the assessment year 1990-91. The conclusions reached in that assessment order were also applied, inter alia, to the assessment years 1988-89 and 1989-90. For the assessment year 1988-89, the cost of inputs was shown at Rs. 51,21,855. The cost of material consumed to sales ratio is shown at 57.3 per cent. For the elaborate reasons and investigations carried on while making assessment for the assessment year 1990-91, the Assessing Officer came to the conclusion that the food cost to sales ratio cannot be more than 34 per cent. He also came to the conclusion that the restaurant's working cost of raw material to sales ratio remains more or less constant. When the costs increase, he observed that the tariffs in the assessee's restaurant also increased to maintain the same level of profitability.
103. On September 18, 1989, there was a search conducted in the business premises of the assessee-company. The managing director, Mr.
Nelson Wang, had admitted that there had been suppression of sales in his restaurant during the time of the search. He surrendered Rs. 8 lakhs for the assessment year 1989-90 and Rs. 5 lakhs for the assessment year 1990-91. In the assessment order for 1988-89, the Assessing Officer noted that despite the fact that he had asked the assessee's representative to produce the original sale bills and the sale books from their records, the assessee failed to produce the bill book of any of the days of the relevant period. The daily sales book was also never produced before the Assessing Officer. The Assessing Officer ultimately rejected the book results and also the turnover as well as gross profit declared. He found that the gross food sales as per books was mentioned in the assessee's books at Rs. 89,94,090 for the accounting year relevant to the assessment year 1988-89. For the same period, the cost of material debited to books of account is Rs. 50,79,775. Deducting the liquor purchases of Rs. 1,58,651 from the above figure the cost of material debited to the books of account was found out to be Rs. 49,21,124. Taking the cost of material to the sales ratio at 34 per cent., the gross food sales was estimated at Rs. 1,44,73,890 (Rs. 49,21,124 x 100 + 34). Thus, the addition he made represents the difference between the disclosed sales in the books and the sales estimated as mentioned above. The difference was found out to be Rs. 54,79,200 and this he had added to the income returned for 1988-89.
104. For 1989-90, similarly the gross food sales as per books were found out to be Rs. 2,16,40,680. The cost of material debited to the books of account was Rs. 1,16,01,664 out of which the liquor purchases constitute Rs. 5,00,109. Deducting the said amount, the Assessing Officer arrived at the cost of food material as debited in the books of account at Rs. 1,11,01,555. By applying the cost of material to sales ratio at 34 per cent., the gross food sales was estimated at Rs. 3,26,51,630 (Rs. 1,11,01,555x100/ 34). The difference between estimated sales and the actual sales recorded in the books of account, namely, Rs. 1,10,10,950 was found out to be the sum of suppressed sales for the assessment year 1989-90.
105. During the assessment for 1990-91, the issue of utmost importance was once again recognised as the ratio of cost of material consumed to sales. For the assessment year 1990-91, the said ratio shown by the assessee was 58 per cent. The Assessing Officer carried out investigations to ascertain the correct figure of true sales with the help of the correct ratio of cost of material consumed to recorded sales. The Assessing Officer had stated that the ratio of the cost of material consumed to sales is a true reflection of the restaurant's working and it does not change from time to time. He further stated that if the costs of inputs go up the tariffs are raised by restaurants so as to maintain their profitability. Therefore, the Assessing Officer opined that the investigations carried out in the assessment year 1990-91 to determine the correct ratio of the cost of material consumed to sales would be applicable to all the years of operation of the restaurant.
106. Firstly, he took up the examination of the sales bills of the restaurant and he had noticed something unusual in them. Many of the bills were found to be of Rs. 50 or less than that amount. According to those bills only one item had been ordered. According to the Assessing Officer, it Was a strange phenomenon and he feels that in a restaurant like China Garden which is famous for its gourmet cuisine in which it is not easy to get a place to eat even after a long wait, more than 40 per cent. of its clientele would order only one item like pan-cakes, cold drinks or other insignificant snacks. This led the Assessing Officer to suspect that the sale bills must have been manipulated or tampered with. In order to verify this suspicion, the Assessing Officer visited the restaurant along with one more person on January 26, 1991.
Both of them had taken lunch and the amount charged was Rs. 380 under bill No. 69945. The Assessing Officer noted down the serial number but deliberately left the bill on the table itself. On January 28, 1991, he again visited the restaurant with his inspector to verify What amount was recorded under the bill No. 69945 in the assessee's books. However, to his utter surprise bill No. 69945 placed on the records of the assessee-company was of Rs. 28 only. By the time of his visit, the total sales of January 26, 1991, were already noted in the regular books. Thus, it was clear that sale bill No. 69945 under which the real bill amount was Rs. 380 was tampered with and converted into mere Rs. 107. The restaurant maintains a reservation chart at its reception.
Whenever any customer wants to reserve a place in the restaurant, the receptionist books the reservation on the telephone and records the name of the person, the number of people to be covered, the table number allotted and the telephone number. During the visit of the Assessing Officer on January 28, 1991, the reservation chart for January 27, 1991, was found and it was made annexure 'B' to the assessment order for 1990-91. According to the said chart, Shri H. S.Saigal had reserved table No. 18 for four persons in the restaurant on January 27, 1991. His telephone number was also mentioned in the chart.
When contacted on the telephone, Shri Saigal stated that the total amount of payment made by him was approximately Rs. 700. However, on going through the sale bills only two were found to have been made for table No. 18 and none of the bills was made for any amount nearing Rs. 700. The bill made for table No. 18 during lunch time showed a paltry amount of Rs. 24. All the sale bills made for the day, namely, January 27, 1991, were enclosed as annexure "C" to the assessment order 1990-91. Shri Bhupinder Singh is the brother of Shri H. S. Saigal who also visited China Garden along with his brother on January 27, 1991.
In fact, it was the claim of Shri Bhupinder Singh that he reserved the table in the name of his brother, Shri H. S. Saigal, He stated on oath confirming that the payment made by them was approximately Rs. 700. His statement on oath was annexed as annexure "D" to the assessment order.
108. Dr. Manoj Mashru was another person, who reserved a table for five persons on January 27, 1991. He came along with his wife and friends to the restaurant and they occupied table No. 2. When contacted on the telephone, Dr. Mashru stated on oath that he and his friends had paid Rs. 650 approximately. However, an examination of bill No. 70045 which is only the bill made for table No. 2 during lunch time was for Rs. 48.
The statement of Dr. Mashru on oath was made annexure "E" to the assessment order for 1990-91.
109. On January 31, 1991, the Assessing Officer came along with three other officers-Shri S. Sarkar, A. C. Circle 5(2), Kum. V. Sinha, A. C.Circle 5(3) and Smt. R. S. Puri, A. C. Circle 5(1), as decoy customers and took lunch in the assessee's restaurant. The bill No. 70378 for an amount of Rs. 553 was given to them. Before payment one of the officers went out and took a xerox copy of the said bill. It is now found as annexure "F" to the assessment order for the assessment year 1990-91.
After making the payment they deliberately left behind the customer copy of the bill on the table itself. On February 4, 1991, it was found out that Bill No. 70378 dated January 31, 1991, was shown to be for an amount of only Rs. 42 in the records of the assessee-company. The altered bill for Rs. 42 is made as annexure "G" to the assessment order. Only one item was mentioned as having been consumed by the customers. This, in the opinion of the Assessing Officer, established beyond doubt that the assessee-company had been tampering with the sale bills, which were paid and left behind by the customers and they have been shown for much lesser amounts than the actuals.
110. The Assessing Officer took into consideration the search conducted on September 18, 1989, and the material gathered on that occasion. At the time of the search, it was admitted by the director of the assessee-company that there was suppression of sales and he had declared Rs. 60 lakhs as undisclosed income. However, he did not choose to disclose the modus operandi followed by the company to suppress the sales.
111. One of the seized documents was marked as annexure "A-24" at page 18 of the panchnama which was enclosed as annexure "H" to the assessment order for the assessment year 1990-91. This paper was written on both sides and on the right hand top corner two dates were mentioned, namely, August 6, 1989, and August 7, 1989. There are two columns on each page in which the last two digits of the bill number and the amount received against each bill were found noted. The bill numbers and the figures in the seized documents dated August 6, 1989, and August 7, 1989, were compared with the sale sheet maintained by the assessee-company for their restaurant on August 6, 1989, and August 7, 1989. Further, the bill number and the amount mentioned in the seized document (loose paper) as well as the corresponding entries in the books of account of the assessee-company were mentioned side by side for the purpose of comparison in the assessment order for the assessment year 1990-91. A copy of the sales summary sheet of August 6, 1989, and August 7, 1989, is enclosed as annexure "I" to the assessment order, When a comparison as stated above was made, it is seen that though the amounts tally in respect of certain bill numbers in many others they do not. Thus, the seized papers reflect the total sales for August 6 and 7, 1989, as Rs. 67,434 and Rs, 48,850, respectively.
However, the books of account record sales of Rs. 39,975 and Rs. 34,432, respectively, for those two days. The Assessing Officer stated that an amount of Rs. 41,877 was siphoned off just in two days.
112. Previously there used to be manual billing. However, subsequently a computer was installed for billing. After the computer was installed, the method adopted by the assessee was found to be to tamper with the bills on the computer. Previous to the computer being set up and when the manual billing was in practice, it used to be very easy to manipulate sales. The Assessing Officer came to the conclusion that there was suppression of sales and that was the reason why the ratio of the cost of material to sales disclosed by the assessee, was much higher than the actual. The Assessing Officer held that the cost of material consumed to sales ratio as presented by the assessee-company, inter alia, for the assessment years 1988-89 and 1989-90 and 1990-91 cannot be relied upon.
113. A survey was conducted on February 4, 1991. Shri Nelson Wang, the managing director of the assessee-company, was examined and his statement on oath was recorded and is now found as annexure "J" to the assessment order. In the statement of Shri Wang, it is stated that whenever an order is given by a customer, three copies of KOT (kitchen order tickets) are prepared. One is sent to the billing department, one to the kitchen and one remains with the steward. As and when the customer wants to leave, the bill is prepared by the billing clerk on the computer and is presented to the customer. He said that the cashier collects the cash and gives it to him at the end of the day. When questioned about the copy of bills prepared by the billing clerk, he stated that the original is either taken by the customer or is thrown out. A copy (red one) is retained by the billing clerk. Next day when the cash is handed over by the cashier, the copies retained by the billing clerk are tallied with the cash handed over. Oswald D'Souza was the billing clerk. His statement recorded on oath was annexed as annexure "K". He says that he prepares the bill in duplicate, the original bill is given to the customer for payment and duplicate is retained with him. All the duplicate copies of bills which he had prepared used to be kept with him and he prepares also a summary report and present these bills to the accountant in the following morning.
114. Mr. Anthony, the cashier is examined on oath and his statement was found as annexure "L" to the assessment order. He stated that the cash received during the day is totalled towards the end of the day and given to Mr. Nelson Wang, the managing director of the assessee-company. The payments made on credit are recorded separately and the statement is presented to the office, i.e., accountant on the following day. After examining the system adopted by Shri Nelson Wang for billing and collecting moneys under the bills, the Assessing Officer found that such a system was foolproof in which none of his employees can cause mischief or steal money. He also found that there is an elaborate system of checks and balances and he also found that if the bills are tampered with, it is obvious that they must have been done only with the concurrence and connivance of the managing director or his confidants.
115. Miss Rozella, the receptionist in the assessee's company, was also examined on oath and her statement was found as annexure "M" to the assessment order. Elaborating about the method of making reservation, she stated that they take it on phone and ask for the number of persons and their names and time and date they are likely to come to the hotel.
Sometimes they take reservation personally in the same manner. When asked how many times the guests ask for change of table, she replied "rarely".
116. The Assessing Officer found that normally tables are allotted on reservation and would not be changed. When bill No. 70378 dated January 31, 1991, was confronted with, Shri Nelson Wang stated that all the bills must have been recorded correctly by his staff to the best of his knowledge and he was made to look to bill No. 70378, whereupon he admitted that the bill was made for Rs. 42. When he was made aware about the decoy customers coming to his restaurant on January 31, 1991, and after taking food, the bill amount came to Rs. 553, they noted the number of the bill which was 70378. Shri Wang replied that he does not understand how this had happened and when a specific question was asked, whether he suspect that the money was pinched, the answer given is categorical and it is as follows : " Definitely not my bill clerk or cashier because this staff has been selected by me. But this could have happened, it could have happened by mischief by waiters." 117. From the result of the investigation conducted, the Assessing Officer found out the modus operandi followed by the assessee-company as follows : There are two copies of sales bills made by the billing clerk on the basis of KOT (kitchen order tickets) received from the steward.
After payment, one copy is meant for the customer for his retention and one is for the assessee's record. Most of the times, the customers do not take their copy of sales bill and leave it behind.
It is these bills which undergo change. The original bill (both copies) are destroyed and in their place a new fabricated bill is prepared which shows much less an amount than actually received.
118. The findings and conclusions were communicated to the assessee through letter dated February 11, 1991, and the explanation of the assessee was sought for within seven days. The assessee was provided with copies of all the statements recorded and copies of all the documentary evidence in the possession of the Assessing Officer which was relied upon in reaching the conclusions. The assessee-company filed its reply dated February 28, 1991. It is important to note that at no point of time, the assessee-company had expressed their desire to cross-examine the persons whose statement or depositions are being used against the assessee. In the reply dated February 28, 1991, the assessee in a bid to explain many of the bills having been found for less than Rs. 50 came forth with the explanation that all the customers who visit their restaurant did not always take full lunch or dinner.
Many of the items as per the menu card prices are sold below Rs. 50.
Many times the customers are taking only beer or liquor and along with the drinks they prefer to take only small snack and no lunch or dinner.
The bill for liquor is being prepared separately and bill for snacks is prepared separately which may be below Rs. 50. It is also possible that a person accompanying this type of group may only take cold drink or soup, etc., for which also separate bill may be for less than Rs. 50.
When the restaurant is crowded and customers are waiting in the lobby, then many of the children accompanying may like to have cold drinks/ice-cream, etc., before they get the table. In such a case, a separate bill for the same has to be prepared. Many a time when the customers finish their lunch or dinner and after the bill is prepared, some person in their group may like to have some additional items like cold drink/ ice-cream, etc. In such a case also separate bill is prepared which may be below Rs. 50. They also take parcels as per the requirements of the customers and in such a case also the bills may be for below Rs. 50. Under the circumstances, the conclusion that sales below Rs. 50 are all bogus is unwarranted and unjustified.
119. The explanation was considered by the Assessing Officer and he was at a loss to understand how many number of times such circumstances can occur when people go to China Garden just to have liquor and only snacks and no food or when people take only cold drinks/soup in China Garden and when people waiting in China Garden order for icecream/cold drinks, etc., and when parcels from China Garden are made for Rs. 50 or below. In any case, the Assessing Officer ascertained that it could not be 40 per cent. of the total clientele as the sales summary sheet of any day (for at least two years) could suggest. The Assessing Officer found that the timing of the assessee's restaurant is between 12 to 3 p.m. and 7 to 12 p.m.
120. Having regard to the admission that billing is always done at the end when the customer was leaving, the Assessing Officer found that if at all there are additional bills for additional items consumed, the bills given for those additional items would be numbered consecutively, whereas it can be seen that the sale bills of small amounts claimed by the assessee as additional bills are never in continuation to the main bill. For coming to this conclusion, he had taken the bills of four days (December 25, 1990, to December 28, 1990). Further, the Assessing Officer had recorded that on January 25, 1991, he conducted a survey for a limited purpose and took the sales summary sheet of that day for the time from 12 noon to 3 p.m. and he left the place at 5 p.m. by which time all lunch time sales were recorded. Copies of the sales summary on that day were furnished as annexure "0" to the assessment order. It can be seen that none of the bills made on January 25, 1991, during the lunch hour is Rs. 50 or below. The minimum bill on that day during the lunch was Rs. 90.
121. He further records that on September 18, 1989, a search was conducted on the assessee's premises, the sales summary sheet prepared for that day was enclosed as annexure "P" to the assessment order. Here also none of the bills is of the amount of Rs. 50 or below. The minimum bill recorded on that day was of Rs. 109. Thus, peculiarly the sales of the company whenever they were surveyed or monitored by the Department, there was no bill of Rs. 50 or below. However, when there was nobody to check this aspect of the restaurant's working, there is wholesale tampering of bills.
122. The sales summary sheets of one week prior to February 4, 1991, and the sales summary sheets of one week subsequent to February 4, 1991, were taken up for comparison by the Assessing Officer. On February 4, 1991, the managing director of the assessee-company, Mr.
Nelson Wang, was shown for the first time the result of investigations so far conducted by the Assessing Officer. Whereas the sales report for one week before February 4, 1991 (January 14, 1991, to January 20, 1991), shows that out of 736 total bills, 312 were of Rs. 50 or below (42.3 per cent.), from the sale bills for one week after February 4, 1991, it is evident that out of 661 total bills, only 55 bills are of Rs. 50 or below (8.3 per cent.). From the above position, the Assessing Officer deduced that after February 4, 1991, the director of the assessee-company knowing that his bills are under scrutiny, chose not to take any risk and, therefore, did not tamper with the bills, unlike the situation before February 4, 1991, when such tampering of bills was freely resorted to. Further, the Assessing Officer concluded that the contention of the assessee that treating sales of Rs. 50 or below are bogus is unjustified stands fully exposed in view of the working of the restaurant before and after February 4, 1991. A comparison of the sale bills for one week prior to February 4, 1991, and subsequent to February 4, 1991, could conclusively prove that most of the sale bills of around Rs. 50 as shown by the assessee-company are bogus and fabricated. When the statement of Shri Bhupinder Singh dated January 30, 1991, was confronted, the assessee-company came forth stating that his statement cannot be relied upon as the table was booked not in his name but in the name of Shri H. S. Saigal. When the statement of Dr.
Manoj Mashru was brought to the notice of the assessee-company, it came forth with the version that the cash bill for more than Rs. 600 stated to have been paid by Dr. Manoj R. Mashru has not been made available to them to enable them to locate the mistake and reconcile the discrepancy. Dr. Manoj did not say in his statement that the bill issued to him is in his possession or not, It is not correct to say that tables reserved in advance are not at all changed under any circumstance. The copy of the reservation chart dated January 27, 1991, was also not provided to them. The Assessing Officer records in his assessment order that the company maintains a reservation register, copy of the reservation chart dated January 27, 1991, was taken from that register and it was presumed that the original would be lying with the assessee and hence no copy was sent along with the show-cause notice. However, a copy of the reservation chart was also given to the assessee's representative on January 28, 1991. On January 27, 1991, not only Shri H. S. Saigal and Dr. Manoj Mashru but also Mr. Narendra Goenka and Mr. V. Sethu also figured as customers as per the reservation chart. Mr. Goenka was seated on table No. 3. From the sales summary sheet of January 27, 1991, there was only one bill made for table No. 3 during the whole day that was bill No. 70047. This bill was only for Rs. 42. Mr. Sethu's party consisted of two persons. Mr. Sethu was seated at table No. 7 on January 27, 1991. During the entire day only three bills were made for table No. 7. All the bills for table No.7 show only one amount, namely, Rs. 42. The Assessing Officer states that when two persons take lunch in China Garden, it would be impossible that the bill amount would be for a paltry amount of Rs. 42.
Similarly, Mr. Goenka was seated at table No. 3. From the sales summary sheet dated January 27, 1991, only one bill was made for table No. 3 (No. 70047) during the whole day and it was for Rs. 42. Five persons having lunch at China Garden and spending only Rs. 42 is impossible, says the Assessing Officer. The Assessing Officer also found that the reservation chart is destroyed systematically on the very next day in order not to leave any trace of evidence which could be related to sales billing. It is a sheer coincidence that reservation chart for January 27, 1991, was found and was acted upon. Similarly, every day all the KOTs of the previous day are destroyed so that no evidence remains with which one can ascertain correct sales of food. The map of the assessee's restaurant was provided as annexure 'E' to the assessment order. In the assessee's restaurant, it was stated that tables bearing Nos, 1, 4, 21 and 28 are the ones on which ten persons can be accommodated and these are prime tables of the restaurant.
However, on table No. 1 on Christmas day, i.e., on December 25, 1990, bills Nos. 649 and 650 for Rs. 17 and Rs. 42, respectively, were shown.
Since the bills are consecutive bills, they pertain to one customer, it is understood. The Assessing Officer writes as to how at table No. 1 which has a capacity of ten persons an amount of Rs. 59 only was spent.
When the decoy customer's' visit to the assessee's restaurant on January 31, 1991, was brought to the notice of the assessee-company, it had come forth with the possibility of collusion between the bearers, the billing clerk or the cashier. It also came forth with the version that after coming to know the instance pointed out, it is stated that the assessee-company was keeping a watch on the bearers, billing clerk and the cashier to identify the employees who may be making money by resorting to such methods. At this juncture, the Assessing Officer reminded about the statement of Shri Nelson Wang dated February 4, 1991, where he had vehemently and categorically stated that if tampering of bills had happened, his billing clerk and cashier had no hand in it. However, he makes a complete about turn from his previous deposition. The Assessing Officer had brought out the instance of the seized paper on the date of search which took place on September 18, 1989. He also brought out the admission of the director of the assessee-company about the suppression of sales. However, he reminded that the modus operand! of suppression was not made known. With the investigations carried on, subsequently, the Assessing Officer feels that he was able to find out the modus operand! adopted by the assessee-company clearly. A regular pattern in recording of bogus sales is revealed during the course of investigation and he feels that with the modus operandi having been known the correct estimate of sales suppression can be made. He further states that whatever disclosure was made under Section 132(4) pertains only up to September 18, 1989.
However, the assessee-company had continued with the same pattern of suppression of sales even after September 18, 1989. The manner in which the sales were being suppressed prior to the search continued even up to February 4, 1991, holds the Assessing Officer. He also holds that the unaccounted money which was generated after the date of search up to the closing of the accounting year, i.e., March 31, 1990, has not been disclosed. He concluded that most, if not all, of the small amount bills are fabricated and the actual amounts received against these bills must have been many times higher than shown in the accounts. Once a sale bill is tampered with it cannot be known with certainty as to how much amount was actually received against it. The actual amount received may be Rs. 200 to Rs. 2,000 or even more. In such circumstances, it is difficult to say with certainty as to how suppression of sales had taken place in the whole year. To ascertain the correct cost to sales ratio and thereby to estimate the correct sales is the only correct method and for this it is imperative that an estimation is done based upon the sample picked up from the records of the assessee-company.
123. To determine the correct sales and the correct cost of material consumed to sales ratio, he had chosen the months of December, 1989, January, 1990, and February, 1990. The sale bills charts for the above three months were annexed as annexure "Q" to the assessment order. The summary of the sales bills of the above three months is provided in the assessment order. The Assessing Officer had taken the seized paper on the date of search, namely, September 18, 1989, to be the sheet anchor or the basis which reveals the truth about percentage of small bills to the total bills. The said paper revealed the sales summary on two dates, namely, August 6, 1989, and August 7, 1989, on bill to bill basis. On those two dates out of 77 total bills only six bills were found to be of small amounts of below Rs. 50. Thus, he inferred that ten per cent. of the small amount bills are actually small amount bills and are not fabricated. He had found out the total number of bills for the three months (December, 1989, January 1990, and February, 1990) as 8,833. The average amount of the genuine bill was found out to be 553.
Thus, the total amount of genuine bills was found out at Rs. 50,61,309 for three months. This is according to the computer billing. It is admitted that for these three months manual billing also was in practice and the total of the manual billing for these three months was Rs. 4,42,875. Thus, the gross billing amount for three months was found out to be Rs. 55,04,184 and the average correct sales billing per day in this manner worked out to be Rs. 62,547. The Assessing Officer observes that this figure of average sales per day compares well with the average sales of two dates, namely, August 6, 1989, and August 7, 1989, which also came to Rs. 58,142.
124. Then the Assessing Officer had taken the total cost of material consumed for the year ending March, 1990, which came to Rs. 79,83,700.
The liquor cost was found out to be Rs. 5,51,961 and excluding this, the total cost of food consumed for one year was found out to be Rs. 74,31,739. The average cost of food consumed in three months was found out to be Rs. 18,57,934. Hence, the cost of food to sales ratio is arrived at : Rs. 18,57,934 x 100/55,04,184 = 33.75 per cent. or 34 per cent. approximately. Thus, the correct cost of food to sales ratio was found out to be 34 per cent. as against 58 per cent. shown by the assessee. The Assessing Officer had put to the assessee-company his intention to adopt 34 per cent. as cost of food to sales ratio. The assessee objected for the said move and the assessee made the following submissions : (1) There is only Chinese Restaurant and they serve the best possible quality of food and for that purpose they always buy best quality of materials and ingredients for the preparation of food.
(2) The assessee had already explained during the course of assessment proceedings for 1988-89, the reasons for higher costing in their restaurant as compared with the Chinese restaurant in a five-star hotel.
(3) It is a matter of general observation that the taste and quality of the food in their restaurant is very much liked and appreciated by the people in comparison with other Chinese restaurants, which itself justifies and proves that they are using better quality of material for preparation of food.
(4) They give free food to ten people on the wedding anniversary of V. I. Ps. guests/customers, etc.
(5) In November, 1988, they have started Piano Bar (Nelson Club) for which members subscription has been collected. In the assessment years 1989-90 and 1990-91, the collection credited to the profit and loss account was Rs. 3,82,070 and Rs. 14,35,268, respectively. These amounts should be added to the sales figures. They give 20 per cent.
discount on all the lunches and dinners given to the members of the club. Free lunch dinner and wine to ten persons on wedding anniversary of each member of the club.
-- According to the assessee, the above factors are responsible for increasing the cost of food.
(6) They are providing free breakfast, lunch and dinner to their staff/workers.
125. For the expenditure incurred towards providing food for the staff/ workers, there was no corresponding sales. The assessee-company took an objection that no comparable cases were referred to to show that the percentage of cost to sales in a restaurant of their type is about 34 per cent.
126. Commenting upon the points raised by the assessee-company, the Assessing Officer stated that he had no objection to enhance the sales figures on account of free food, discounts, etc., provided similar enhancement is taken while computing the correct sales of these sample three months also on the basis of which the cost of food to sales ratio has been worked out at 34 per cent. According to him, the three month period taken as the sample period cannot be treated as exclusive from the remaining nine months of the year and when once the sale of the three sample months period is enhanced the cost of food to sales ratio would work out to lower than 34 per cent.
127. The Assessing Officer also found that several parties took place in the assessee's restaurant (China Garden) as can be seen from the party details produced by the assessee-company for the period from April 1, 1989, to March 30, 1990. It is seen that only 26 parties have been shown. The Assessing Officer felt that the number of parties disclosed by the assessee was low. It is improbable that there would be only 26 parties throughout the year in China Garden. There are 300 members in the Piano Club and they would definitely be taking the benefit of their membership to organise their parties. The reasonable expectation at every party would be between 40 and 50 persons and if all of them were to take meals in Chinese Restaurant, the bill would be ranging between Rs. 8,000 and Rs. 10,000. If the party sales are also taken into account the food cost to sales ratio would work out to be much lower than 34 per cent. as proposed in his order. The percentage of cost of material consumed to sales has been based upon the total food cost incurred by the company. Whatever is provided free of cost or with discount is taken care of in the total cost of food consumed for these three months which have been taken as samples. The director, Mr.
Nelson Wang, takes personal interest in the working of the restaurant.
The possibilities of pilferage from purchases have to be minimum as the director himself makes the purchases and sometimes even goes to purchase vegetables, fish, prawns, etc. At the same time, the sales are also closely monitored and controlled by him and, therefore, the possibility of pilferage by persons other than himself are non-existent. In the case of 5-star hotels, the day-to-day purchases are not so closely monitored. The book results as well as the assessee's contentions in respect of sales are rejected by the Assessing Officer. He had taken the total cost of food consumed to be correctly debited to the profit and loss account for the purposes of determining the correct sales. For the assessment year 1990-91, the sum debited towards the cost of material consumed was Rs. 79,83,700 which includes liquor cost of Rs. 5,51,961 which is to be excluded for determining the cost of food at Rs, 74,31,739. Taking the cost of food to gross sales billing at 34 per cent. the estimated gross sales would come to Rs. 2,18,58,055. As against the said estimated sales, the sales as per profit and loss account were only Rs. 1,37,32,125. The sales tax collected was Rs. 10,36,859, total Rs. 1,47,68,984. Less liquor sales of Rs. 16,91,908 the gross billing for food as per books is Rs. 1,30,77,776. Then income offered under Section 132(4) was Rs. 5,00,000 total recorded sales were Rs. 1,35,77,776. The difference between the estimated sale bills of Rs. 2,18,58,055 minus the recorded sales of Rs. 1,35,77,776 would give the figure of Rs. 82,80,285 as the figure of suppressed sales. It is stated that the assessee suppressed its income by tampering and fabricating sale bills but also evaded the sales tax contained in the suppressed sales amounts. Approximately, Rs. 5.2 lakhs of sales tax collected from its customers have not been paid to the Government. Thus, the assessment order for 1990-91 was passed on March 21, 1991.
128. Aggrieved against the assessments passed for the assessment years 1988-89, 1989-90 and 1990-91, the assessee went in appeal before the Commissioner of Income-tax (Appeals)-VI, Bombay. The learned Commissioner of Income-tax (Appeals), Bombay, consolidated the appeals of all the three assessment years and passed a consolidated order dated November 25, 1991. The learned Commissioner of Income-tax (Appeals) after evaluating the evidence on record gathered by the Assessing Officer agreed with the conclusion arrived at by the Assessing Officer that most of the small bills were bogus. He also agreed with him that most of the small hills shown by the assessee-company are manipulated ones and the actual amount received against these bills must have been much higher. The learned Commissioner of Income-tax (Appeals) held that in such a situation, the rejection of book results so far as sales is concerned was the only logical action which the Assessing Officer has resorted to.
129. It was contended on behalf of the assessee during the appeal proceedings before the Commissioner of Income-tax (Appeals) that after survey of February 4, 1991, it was found by the Assessing Officer that the manipulation of sales bills was discontinued and the percentage of genuine small bills was 8.3 per cent. of the total bills. However, the Assessing Officer had taken ten per cent. of the small bills while working. It was claimed that while computing the average amount per genuine bill, the tolerance should be given of 8.3 per cent. of total bills instead of ten per cent. of small bills. Later, the assessee submitted a revised figure of Rs. 22,27,904 being the purchases of three sample months selected by the Assessing Officer. The assessee contended that if the actual figure of purchases was taken at Rs. 22,27,904 and a tolerance of 8.3 per cent. of total bills is given, then the cost of food to sales ratio works out to 42.7 per cent. as against 34 per cent. worked out by the Assessing Officer. The above contention of the assessee was rejected by the learned Commissioner of Income-tax (Appeals) stating that the method suggested by the assessee suffered from two serious defects. The first being that the figure taken by the Assessing Officer for three sample months is for raw materials consumed and not purchases for computing cost of food to sales ratio. Secondly, if the percentage arrived at by the assessee is taken at 42.74 per cent. (or 43 per cent.), then the total concealment works out to be only Rs. 32 lakhs approximately whereas the assessee had accepted that the suppressed sales in the sample three months could be approximately Rs. 15 lakhs. At least on the figure of Rs. 15 lakhs suppression for the sample three months, there was no computational dispute. It defies logic if suppression of Rs. 15 lakhs is there for three months, how the suppression could be of Rs. 32 lakhs only for the whole year when the uniform method is adopted. To overcome the difficulties and the defects of computation, the assessee was asked to do the working for the whole year as done by the Assessing Officer for three sample months. The working given for the whole year by the assessee was found noted at the end of page 17 and the beginning of page 18 of the Commissioner of Income-tax (Appeals) order. According to that method, the suppression was found out to be Rs. 54,47,338. When this is added to the accounted sales of Rs. 1,46,25,775 (including the sum of Rs. 5 lakhs declared under Section 132(4)), the gross estimated food sales worked out to be Rs. 2,00,73,113. The total cost of food consumed during the whole year is Rs. 74,31,739. Both these figures of the cost of food consumed and the gross estimated sales give the cost of food to sales ratio at 37.02, i.e., 37 per cent. The learned Commissioner of Income-tax (Appeals) had worked out the concealment for the assessment year 1990-91 at Rs. 54,47,338.
130. The assessee contended that the percentage of small bills to the total number of bills should be taken at 16.5 per cent. based upon the sales summary sheet dated March 5, 1991, on which dates the Inspector of Income-tax was present at the premises of the appellant and on which date there could not have been any manipulation. This argument was rejected by the learned Commissioner of Income-tax (Appeals). He found that in fact the seized paper at the time of search on September 18, 1989, which recorded genuine sales on August 6, 1989, and August 7, 1989, the total sales were 79 out of which only seven were for small amounts of Rs. 50 or less. This works out to be approximately nine per cent. Since the said document was complete and correctly recorded the sales for two days, it must be taken to be the most reliable document.
The Inspector of Income-tax indeed went on various dates to the assessee's restaurant during the assessment proceedings but he was there not more than two or three hours in a day. Further, he did not check with each and every customer for which he was instructed not to disturb the smooth functioning of the assessee's business. Hence, the mere presence of the inspector for a very short while in the assessee's restaurant does not ensure the reliability of the sales records.
131. Further, it was argued by the Assessing Officer before the Commissioner of Income-tax (Appeals) that after survey of February 4, 1991, since the assessee knew that they will have to defend the small bills during the continuing assessment proceedings, they must have made increased . number of small bills deliberately to support their contentions before the Department. The learned Commissioner of Income-tax (Appeals) found that the most reliable piece of evidence is the paper seized in the search conducted on September 18, 1989. The said paper shows the normal course of business of the restaurant and it is the only evidence not tainted by any extraneous considerations.
132. On behalf of the assessee, the cost of Golden Dragon Restaurant run by the Taj Mahal Hotel, wherein the cost of food to sales is shown to be 45 per cent. to 50 per cent. was brought in and it was contended that since the menu prices of the assessee's restaurant are lower than the Golden Dragon prices, their cost of food to sales ratio is bound to be higher than the Taj. The free meals for V. I. Ps., discount given to members of Nelson's Club, free food given to staff were also factors highlighted as responsible for the high cost of food to sales ratio.
However, the assessee's contention that a higher cost of food to sales ratio is to be adopted than in the case of Golden Dragon Restaurant run by the Taj group was rejected. Firstly, the learned Commissioner of Income-tax (Appeals) held that the contention that the assessee's restaurant provides free and discounted food to various people is taken care of in the working of the cost of food to sales ratio. In the opinion of the learned Commissioner of Income-tax (Appeals), the data base of 12 months adopted now to determine the suppression is large enough to eliminate any defect that a small data base may suffer from.
The concealment has been determined on the basis of actual billing figures and applying certain irrefutable conclusions. Free and discounted food are taken care of automatically, when actual cost of food for the year is taken into account. The learned Commissioner of Income-tax (Appeals) did not agree with the Golden Dragon run by Taj is not a comparable case. He held that the assessee's restaurant is the one with high turnover whereas Taj restaurant cannot have that high turnover in quantity terms and in terms of number of people visiting there- The Taj restaurant being a 5-star delux category restaurant, suffers from the expenditure tax which is charged from the customers.
This detriment is enough to distract many number of people. There is always economy in numbers. Hence, the lower turnover results in higher cost of food and which results in higher cost to sales ratio.
133. He further held that comparison with any other restaurant would not be a correct proposition in a situation where the working of the restaurant in question itself is different. He further held that in the assessee's restaurant day-to-day management is controlled by the managing director himself personally whereas it is not so in Taj. He further observed that the most important factor is that in the Taj restaurant no incidence of manipulation of bills is noticed whereas in the assessee's restaurant many such incidents have been shown. Further, it is stated that no detailed enquiry had been conducted regarding cost sale ratio of Taj and, therefore, the said ratio cannot be adopted as definitive and applicable to the assessee's case which was thoroughly examined deeply. He further held that when the correct estimation of sales can be made from the records of the assessee itself, there is no justification in looking for the same elsewhere. Ultimately, the Commissioner of Income-tax (Appeals) justified the food cost to sales ratio applicable for the assessment year 1990-91 at 37 per cent. which he held to be fair and reasonable in the facts and circumstances of the assessee's case.
134. There are three expert opinions available on record. The first of the opinions is from the Institute of Hotel Management, Catering Technology and Applied Nutrition dated March 19, 1989. Before giving the opinion, the above authority had taken into consideration these factors ; 135. The purchase to sales relationship, according to the above authority should be as follows ; " Under normal circumstances for a luxury restaurant with a commercial objective, the percentage of purchase to sales would range from 30 per cent. to 40 per cent." 136. The second of the technical opinion obtained was from the Indian Hotels Company Ltd., which runs the Taj Mahal Hotel at Bombay. They have tendered their technical opinion on September 28, 1990, to the Assessing Officer with reference to the cost of food to sales ratio of the assessee's restaurant. They have informed in that letter that their company runs a specialist Chinese restaurant "Golden Dragon" where they have experienced that the food cost to turnover varies between 45 per cent. and 50 per cent. depending upon the variations in raw material cost and revisions in the menu prices from time to time. They have stated that the prices of inputs fluctuate quite moderately and, therefore, it is not always possible to define a particular timely mark in food cost ratio especially when various kinds of materials are used for the Chinese restaurant.
137. A third technical opinion was elicited by the assessee himself.
The said opinion was sent in a letter dated February 7, 1990, addressed by Sophia--Shree Basant Kumar Somani Memorial Polytechnic--Head--Hotel Administration and Food Technology Department. In the second and third paragraphs of the letter addressed to the food and beverage manager of the assessee-company, the following is what is stated : " I wish to inform you that it is very difficult to specify a food cost percentage for a restaurant. The food cost percentage, varies from one to another restaurant. On an average the food cost percentage for a good Chinese restaurant should be around 35 to 40 per cent. This is dependent on the quality of the ingredients (meat, sea food, imported sauces) used in food production. The supporting garnishes and accompaniments for sure increase the average food cost.
Since China Garden is using imported ingredients like oyster sauce, sesame oil, black mushrooms and baby corn for food production, I am sure the average food cost would be around 65 per cent. Our costing at the Institute is based on a training restaurant and not on a gourmet restaurant." 138. When the proceedings were pending before the Commissioner of Income-tax (Appeals), it was contended that the technical opinion evidence in the letter dated February 7, 1990, referred to above, should be followed as against the two technical opinions mentioned above secured by the Assessing Officer. Rejecting this argument, the learned Commissioner of Income-tax (Appeals) stated that this contradiction between experts can best be an argument for ignoring them and going to the facts and circumstances of the assessee's case.
139. Another argument advanced on behalf of the assessee before the Commissioner of Income-tax (Appeals) was that the membership fee received by the restaurant from its customers should be considered as part of sales for arriving at any conclusion regarding cost of food to sales ratio. It was argued that since the restaurant is providing discounted food to its members, the membership fee collected is in effect forming part of the sales. The learned Commissioner of Income-tax (Appeals) found that this argument does not affect the working of concealment in the assessment year 1990-91 as the same had been determined on actual bill to bill basis, He also found that the ratio of cost of food to sales would reduce to 35.4 per cent. if the membership fee collected by the assessee's restaurant is also added to the estimated sales. The learned Commissioner of Income-tax (Appeals) found that if the membership fee is considered to be part of sales and if cost of food to sales ratio was determined on that basis, it will adversely affect the assessee's case for the assessment years 1988-89 and 1989-90, since there was no membership fee there at all in the accounting periods relevant to those two assessment years. In any case, he does not find any merit in the argument since the membership fee and sales billing stand on a different footing altogether. This argument of the assessee does not affect the assessment year 1990-91. In fact, the said argument adversely affects the assessee's case for earlier assessment years as the cost to sale ratio to be applied will be even less.
140. Another contention before the Commissioner of Income-tax (Appeals) was that the findings of one year cannot be applied to another. In respect of evidence collected in January/February, 1990-91, and also in respect of applying the cost of food to sales ratio to earlier assessment years, this contention was raised. The learned Commissioner of Income-tax (Appeals) rejected this argument by observing that the same pattern is seen in all the summary sheets whether before the search or after the search. He found that this pattern is continued till the date of survey on February 4, 1991. The computer was installed in the assessee's restaurant in early 1989 and till the date of survey, the same pattern is seen of billing sales. Evidences pertaining to any of this period (worked on a fair sample period) are applicable to the entire period irrespective of the relevant assessment year and even correctly applied to determine suppression of sales. He found that when June, 1989, to February 4, 1991, yields a pattern and a ratio, there is no reason why the ratio cannot be applied to the case of the assessee for earlier assessment years. He further found that when the assessee himself pleads that comparable cases, namely, Taj and gross profit, etc., are relevant it will be queer to argue that the assessee's own case and ratio of one year cannot be compared with earlier assessment years" in its own case. It is argued that for the assessment years 1989-90 and 1990-91, the Assessing Officer has no concrete evidence to show manipulation in sales. The Commissioner of Income-tax (Appeals) rejected this argument stating that still it is a fact that the assessee-company itself has returned an income of Rs. 8,00,000 for 1989-90 being undisclosed income declared under Section 132(4). Hence, there is no denial of the fact that there was some concealment on account of sales in 1989-90 also. The same also is true for the assessment year 1990-91 where the assessee had included Rs. 5,00,000 of undisclosed income in the return. The correct ratio between the cost of food and sales is one characteristic of any restaurant which remains largely unchanged over a period of time, finds the Commissioner of Income-tax (Appeals). He further found that the assessee's clientele and the quality of food had remained the same over the period of time.
Periodic revision of tariff has also been done by the restaurant to accommodate rising costs. It is contended on behalf of the assessee that the book results of the assessee-company should be compared with the restaurant run by the Taj. However, they objected that the book results of one assessment year in the case of the assessee's own restaurant should not be compared with the book results of another assessment year. The learned Commissioner of Income-tax (Appeals) found that the comparison between the results of two assessment years of the same assessee are much more valid than the comparison with other assessee's results particularly so when the main characteristics, namely, the clientele and the quality of food remained unchanged for all these three years. The cost of food to sales ratio determined at 37 per cent. for the assessment year 1990-91 can rightly be applied for the assessment years 1988-89 and 1989-90 also. However, the learned Commissioner of Income-tax (Appeals) held that certain factors may lead to higher ratio for earlier years, namely, more free food and bouquet to publicise and attract clientele. Secondly, in the earlier years, the efficiency of the assessee's kitchen is a little less. Thirdly to attract clients, sales are at a lower rate in the earlier assessment years. Taking all the above factors into consideration, the learned Commissioner of Income-tax (Appeals) raised the cost of food to sales ratio for the assessment year 1988-89 to 39 per cent. and 1989-90 to 38 per cent. Ultimately, the concealment on account of sales for the assessment year 1988-89 was determined at Rs. 28,48,574 and at Rs. 49,27,755 for the assessment year 1989-90.
141. I have already stated that the Commissioner of Income-tax (Appeals) passed a consolidated order dated November 29, 1991, disposing of all the three appeals. However, in pursuance of the consolidated order separate orders were passed for the assessment years 1988-89 and 1989-90. Thus, the appeals of the assessee. were partly allowed for these three assessment years by the Commissioner of Income-tax (Appeals).
142. Having been aggrieved against the sustained additions by the learned Commissioner of Income-tax (Appeals), the assessee came up in second appeals whereas having been aggrieved by the reliefs granted by the Commissioner of Income-tax (Appeals), the Department came up in second appeals before this Tribunal for these three assessment years.
Thus, the appeals of the Department as well as of the assessee for the assessment years 1988-89 to 1990-91 came up before this Tribunal for decision.
143. The learned Judicial Member in paragraph 59 of his orders rejected the contention of the assessee that no addition is called for. He held that the additions are called for but of a different figure. He found there is always an element of some guess work in an estimate and in doing so things cannot be measured with mathematical precision.
However, he found that a judicial authority always tries to execute this task as precisely and correctly as possible. On a consideration of all the relevant facts and circumstances for and against the assessee, he determined that the following additions have to be sustained : 144. The learned Accountant Member did not agree with the conclusion reached by the learned Judicial Member. The learned Accountant Member held that the Commissioner (Appeals) after appreciating all the contentions of the assessee has arrived at such ratio of 39 per cent., 38 per cent. and 37 per cent. for each of the years under consideration. Even if one were to consider such an estimation made by the Commissioner of Income-tax (Appeals), despite proper disposal of all the contentions of the assessee as conservative at best the food cost ratio to sales cannot be more than 40 per cent. to the sales.
Giving due weightage to the contentions and claims of the assessee, he directed the Assessing Officer to recompute the sustainable additions by taking the food cost ratio to sales at 40 per cent. for all the years. He further found that the Assessing Officer has established in the facts of the case that there has been a deliberate manipulation of sales. The Department after exposing the assessee's modus operandi had provided a basis for arriving at the proper ratio of cost of material to sales from the records, loose slips found with the assessee and from the opinion of the independent technical body like the Institute of Hotel Management, Catering Technology and Applied Nutrition. In the background of these, the cases relied upon by the assessee can hardly be of any help in advancing its case. The decision has been arrived at having regard to the manipulation technology applied by the assessee to suppress the profit and not on interpretation of any provision of law.
What stands out in this case is that the assessee has manipulated its accounts for the purpose of securing some mileage in the income-tax proceedings. The assessee's stand has totally been exposed. He states that his attempt in this connection is to quantify the suppressed income by applying a reasonable basis partly relying upon the books and other documents maintained by the assessee, loose slips seized from it and partly on the material gathered by the Assessing Officer in the course of assessment. He further stated that he likes to emphasise that having regard to the facts of this case, the only reasonable method to determine the sales would be the one based on the food cost ratio and it is for this reason that he had avoided the temptation of making any ad hoc addition to the disclosed results. In view of the finding that the food cost ratio to sales should be 40 per cent., the Departmental appeal would not survive as the Commissioner of Income-tax (Appeals) has adopted a lower food cost ratio to sales. Thus, he dismissed the Departmental appeals and allowed partly the assessee's appeals.
145. Since there is divergence of opinion among the learned Judicial Member and the learned Accountant Member, a reference is made for appointment of a Third Member and the difference of opinion was projected in the shape of a question which is already extracted in the opening paragraphs of this order.
146. After hearing arguments of both sides, I quite agree with the finding of all the authorities that the assessee's books of account are to be discarded and estimate of correct turnover is to be made. The Assessing Officer had taken into consideration the papers seized on the day of search, i.e., on September 18, 1989, which gives out the sale figures of two particular dates, namely, August 6, 1989, and August 7, 1989, which sale figures are found at variance with the sale figures that were recorded in the books. On examination of these sale figures of these two dates, 77 bills, their numbers and amounts were recorded in the seized papers. I agree with the Assessing Officer that this should be taken to be a true document on which the total sales can be computed. Out of 77 bills only six bills were found to be below Rs. 50.
Therefore, the deduction was that 8.3 per cent. of the total bills only should be accepted as genuine small bills of below Rs. 50. The small bills above this percentage should be treated as bogus bills. This test adopted with reference to the seized papers was cross-verified after taking into consideration the sale bills for one week prior to February 4, 1991, and one week subsequent to February 4, 1991. On February 4, 1991, the director of the assessee-company was shown for the first time the results of the investigation conducted so far by the Assessing Officer. For one week prior to February 4, 1991, i.e., beginning from January 14, 1991, to January 20, 1991, the total sale bills were 736 out of them 312 were found to have been prepared for sums below Rs. 50, i.e., 42.3 per cent. of total bills were found to be below Rs. 50.
However, after February 4, 1991, the assessee-company perhaps had taken due care to avoid manipulating the sales bills. For one week immediately next to February 4, 1991, the total sale bills were 661, and out of them 55 bills only were found to be for values less than Rs. 50. That means only 8.3 per cent. of the total bills were found to be genuine small bills. Thus, the Assessing Officer had taken only ten per cent. of the total bills as genuine small bills. I completely agree with this finding.
147. Further, this is again test checked by examining the sale bills for three consecutive months, namely, December, 1989, January, 1990, and February, 1990, When the test is carried out taking ten per cent.
of the total bills as genuine small bills, the average correct sales billing per day worked out to Rs. 62,547. This result is again test checked by taking the average sales of the two days for which correct data was furnished by the seized document where all the sale bills dated August 6, 1989, August 7, 1989, and the bill amounts were also noted. The total of the sales bills on August 6, 1989, and August 7, 1989, came to Rs. 1,16,284. For each day the average worked out was Rs. 58,142. This figure of Rs. 58,142 was quite comparable with Rs. 62,547 revealed as the average sales per day when the results of three months of December, 1989, January and February, 1990. were taken into consideration and only ten per cent. of the small bills were adjusted.
Thus, I hold that the estimated sales for the three accounting years in question made by the Assessing Officer are quite in order.
148. Now, comes the question of cost of food to sales ratio. The Revenue in this connection had relied upon the certificate of one of the specialist institutions, namely, the Institute of Hotel Management, Catering Technology and Applied Nutrition, who gave a certificate dated March 19, 1990. Before granting the certificate about the cost of purchases to sales, they have taken the special characteristics of the assessee's restaurant like that it is a Grade I, exclusive Chinese restaurant, that it has an elitist clientele, that the restaurant is situated in a posh locality, besides examining the sales data, purchase data, as well as the menu card maintained by the assessee-company.
Further, they have examined the purchases to sales relationship from October, 1984, to April, 1985, and from May, 1985, to April, 1986. For the first period, the cost of purchases to sales ratio was found out to be 76.79 per cent., whereas for the second period the cost of purchases to sales was found out to be 66.93 per cent. The institution found that the above percentage should be considered very high and the normal industry average for similar establishments, the cost of purchases to sales would range from 30 per cent. to 40 per cent.
149. The assessee very much relied upon the certificate granted by the Indian Hotels Co. Ltd. which was running a high class Chinese restaurant called "Chinese Dragon" in Taj Mahal Hotel, at Bombay.
According to the certificate given the cost of food to sales would vary between 45 per cent. and 50 per cent. The Indian Hotels Co. Ltd. had clarified through certificate previously given in their letter dated September 28, 1990. Copy of the letter dated February 1, 1991, was filed by the learned Departmental Representative on July 31, 1995. In that letter, it is stated by the Indian Hotels Co. Ltd. that it is no doubt true that they have conveyed that the ratio of purchases to sales fluctuates between 45 per cent. and 50 per cent., but after adjusting the sales tax on food sales, the ratio worked out to a range of 39 per cent. to 43 per cent. only. Thus, it is clear that the food cost ratio to sales varies between 34 per cent. and 43 per cent. and not 45 per cent. and 50 per cent.
150. The assessee relied upon the certificate dated February 7, 1990, given by the Hotel Administration and Food Technology Department in Sofia--Shree Besant Kumar Somani Memorial Polytechnic, Bombay. In the letter dated February 7, 1990, the said institute put the average food cost ratio to sales at 65 per cent. Therefore, it was argued that 34 per cent. food cost to sales ratio taken by the Assessing Officer or the enhanced ratio considered by the learned Commissioner of Income-tax (Appeals) for these three assessment years is quite inadequate and it should be further enhanced. The certificate dated February 7, 1990, should be read subject to the limitations which are already prescribed by the very institute while granting the letter. They have stated firstly that it is very difficult to specify a food cost percentage for a restaurant. Secondly, they said that the food cost percentage varies from one to another restaurant. Thirdly, they have stated that for an average good Chinese restaurant, the food cost percentage should be around 35 per cent. to 40 per cent., and this is dependent upon the quality of ingredients (meat, seafood, imported sauces, etc.) used in food production. It is further stated that their institute's certificate is based on running of a training restaurant and not in a gourmet restaurant.
151. It is significant that the assessee's restaurant is a gourmet restaurant and not a training restaurant for which only perhaps the certification granted by the institute holds good. Further, the said institute did not visit the assessee's restaurant at any time. They have gathered the fair name of the assessee's restaurant not only in Bombay but all over India, and on a representation made to it, it had believed that the assessee was using ingredients like meat, sauce, seasame oil, black mushroom and baby corn for food production which are all high priced items which go into the production of food. There is no evidence on record that the special quality items of food mentioned above were purchased by the assessee.
152. Further at page 222 of the second paper book, filed on behalf of the assessee, the actual fresh bazar purchases were stated for the month of December, 1989, January, 1990, and February, 1990, as follows : 153. The details of fresh bazar purchases for the month of December, 1989, were given at page 223 of the second paper book. Similarly, the details of the purchases made for the month of January, 1990, were given at pages 224 and 225 of the second paper book and the details of purchases for the month of February, 1990, were given at pages 226 and 227 of the second paper book filed on behalf of the assessee.
Similarly, the details of provisions for the month of December, 1989, were given at pages 228 and 229 of the second paper book. The details of purchases of provisions for the month of January, 1990, were given at pages 230 and 231 of the second paper book and the details of purchase of provisions for the month of February, 1990, were given at pages 232, 233 and 234 of the second paper book. Similarly, the details of purchases of cold drinks for the month of December, 1989, January, 1990, and February, 1990, were given at pages 233 to 237 of the second paper book filed on behalf of the assessee.
154. The results of these three months were examined as per the calculation sheet found at page 238 of the second paper book. The total sale bills for these three months (December, 1989, January, 1990, and February, 1990) came to 8,833. Out of them 8.3 per cent. of the total bills, namely, 733 bills, were taken to be genuine small bills of Rs. 50 or below. The average of genuine bills and the bogus bills works out as follows :_______________________ = Rs. 539.55 or Rs. 540 approx.
5,115 + 733 The average of the genuine bills works out to be Rs. 540 during this period of three months.____________________ = 41.19, say 41 per cent.
55,12,695 155. For the whole of the accounting year, relevant to the assessment year 1990-91, i.e., from April, 1989, to March, 1990, a full chart disclosing the number of total bills, the number of small bills, the amount covered by the small bills, the number of other bills, the amount covered by the number of other bills on each of the months during the accounting period from April 1, 1989, to March 31, 1990, was given at page 257 of the second paper book. The average of small bills was found out at Rs. 31 per bill. The average of large bills was found out at Rs. 553 per bill. 8.3 per cent. of the total bills were taken to be the genuine small bills. The average of the genuine total bills was.
found out to be Rs. 492 and the estimated sales were found out to be Rs. 492 x 32,677 = Rs. 1,60,77,084 and the suppression was found out to be Rs. 44,34,351.
156. At page 258 of the second paper book, the gross food billing as per books was taken at Rs. 1,41,25,775 and suppression of Rs. 44,34,351 was added taking the estimated gross bills at Rs. 1,85,60,126. The food cost for the year as noted in the accounts was taken at Rs. 74,31,739 and the cost of food sales ratio was found out to be Rs. 74,31,739 157. The food cost ratio for the assessment year 1990-91 was again revised as per the calculation sheets found at pages 259 and 260 and the cost of food to sales ratio was found out to be 43.57 per cent. As can be seen from page 259 of the second paper book, the tolerance percentage of genuine small bills to total bills were taken at 16 per cent. At pages 261 and 262 another calculation was made on the basis that only ten per cent. of the total bills should be taken to be genuine small bills. Taking genuine small bills at ten per cent. to total bills, the gross sales were estimated and the food cost ratio was found out at 41 per cent. as per the calculation sheet furnished at page 262 of the second paper book.
158. The learned Commissioner of Income-tax (Appeals) had taken the calculation sheet at page 262 of the second paper book into consideration. According to the figures furnished on that sheet, he found out that the suppressed sales as per the calculation given was Rs. 54,47,338. But when this is added to the accounted sales, he found that the total sales (including the sum of Rs. 5 lakhs declared under Section 132(4) comes to Rs. 2,00,73,113. Thus, if the surrendered amount of Rs. 5 lakhs also is included in the gross sales made in the year then the cost of food to sales ratio comes to only 37.02 or 37 per cent. It is argued for the assessee that the tolerance limit of small genuine bills should be enhanced from ten per cent. to 16.5 per cent.
of the total bills based on the sales summary sheet of March 5, 1991.
However, this argument was not accepted by the learned Commissioner of Income-tax (Appeals) and I fully agree with the reasoning given by the learned Commissioner of Income-tax (Appeals) on this point at page 19 of the impugned orders. The learned Commissioner of Income-tax (Appeals) had taken the seized paper disclosing the sales on August 6, 1989, and August 7, 1989, to be a reliable piece of evidence and the percentage of small bills should be based upon the data found to be present in that paper only.
159. It is argued that the Golden Dragon run by the Taj Mahal Hotel at Bombay is a comparable case with that of the assessee and the cost of food to sales ratio as disclosed by the Taj Mahal Hotel was between 45 and 50 per cent. The learned Commissioner of Income-tax (Appeals) had rejected the argument and held that the Taj Hotel cannot be taken to be a comparable case with that of the assessee. I fully agree with the reasoning given by him at page 20 of his impugned orders.
160. The assessee also reiterated his objection for adopting the cost to food sales ratio at 37 per cent. for the assessment year 1990-91.
According to the assessee, this determination of 37 per cent. does not take into consideration the free meals given to up to ten members on the birthdays and marriage days of V. I. Ps., discounted sales to members of the Nelson Club (Piano Club) and giving free breakfast, lunch and dinner to the staff of the assessee. It was further contended that there were some loss making items sold by the assessee which also adversely affected their profitability. In the Taj Mahal Hotel, the cost of food to sales ratio is shown to be 45 to 50 per cent. Since the menu prices in the assessee's restaurant are lower than the Golden Dragon prices their cost of food to sales ratio is bound to be higher than that of Taj. All these objections were considered by the learned Commissioner of Income-tax (Appeals) and they were rejected. He held that the free and discounted food to various people is taken care of in the working of the cost of food to sales ratio. In any case, the learned Commissioner of Income-tax (Appeals) held that suppression in sales has been ascertained by applying the actual figures of the total cost of food of the assessee's restaurant. The learned Commissioner of Income-tax (Appeals) further held that in his opinion the data base of 12 months adopted now to determine the suppression is large enough to eliminate any defect which a small data base may suffer from. The concealment, the learned Commissioner of Income-tax (Appeals) held has been determined on the basis of actual billing figures and applying certain irrefutable conclusions arrived at after looking into series of evidences, He held that free and discounted food, etc., are taken care of automatically when actual cost of food for the year is taken into account. I fully agree with this reasoning of the learned Commissioner of Income-tax (Appeals). While discarding the theory propounded that Taj is a comparable case with that of the assessee's restaurant, the learned Commissioner of Income-tax (Appeals) found that the turnover of the Taj restaurant cannot have been that high in quantitative terms and in terms of people visiting there. The Taj restaurant being a five-star deluxe category restaurant suffers from expenditure tax which is charged from the customers. This is enough deterrent to distract many of the customers. There is always economy in numbers and hence the lower turnover results in higher cost of food and which results in higher cost to sales ratio. I fully agree with this conclusion of the learned Commissioner of Income-tax (Appeals). He further held that the comparison with any other restaurant would not be a correct proposition in a situation where the working of the restaurant itself is quite different. He held that in the assessee's restaurant, the day-to-day management is controlled by the managing director himself whereas it is not so in Taj. In Taj restaurant, no question of manipulation of bills is noticed whereas in the assessee's restaurant many such incidents have been shown and proved. Further, no detailed enquiry had been conducted regarding cost sale ratio of Taj. Therefore, the ratio suggested, namely, 45 to 50 per cent. cannot be adopted as definitive and applicable to the assessee's case also. In the assessee's case full scale enquiries have been held or made before determining the cost of food to sales ratio. The learned Commissioner of Income-tax (Appeals) held that when a correct estimate of sales can be made from the assessee's records themselves there can be no justification in looking for the same anywhere else.
161. However, in the seized paper the sales of only two dates, namely, August 6, 1989, and August 7, 1989, were found and out of a total of 77 bills only six were found to be small bills for amounts below Rs. 50.
Taking that into consideration, the genuine small bills were determined at 8.3 per cent. only. However, in my opinion, the data furnished for two days only cannot be taken to be reflecting a reasonably wide data available throughout the year. Further, the possibility of some of the customers taking only small snacks or cold drinks cannot be thrown out to be untenable. Further, the possibility that the customers waiting in the lobby ordering certain cold drinks, etc., cannot also be said to be unusual. Human behaviour being what it is there may be various kinds of customers and their eating habits will also be peculiar. Therefore, I feel that taking ten per cent. of the total bills as reflecting genuinely small bills for Rs. 50 or below will be more realistic. I may mention here that I accept the correctness of the calculation given at pages 261 and 262. However, at page 262, we have to add a sum of Rs. 5,00,000 surrendered by the assessee towards suppressed sales under Section 132(4) proceedings for the assessment year 1990-91. If the suppressed sales of Rs. 5,00,000 also were added, the estimated gross billing would come to Rs. 1,87,00,659 but not Rs. 1,82,00,659 as noted at page 262. In order to find out the cost of food to sales ratio, the formula is cost of food divided by gross estimated billing, i.e. : Rs. 74,31,739162. It is significant that the learned Accountant Member had determined the food cost to sales ratio at 40 per cent. for all the years. I entirely agree with his percentage of food cost ratio (40 per cent.) for the assessment year 1990-91. The addition for the assessment year 1990-91 should be worked out taking the food cost ratio at 40 per cent.163. It is significant that for the assessment year 1989-90 also the assessee surrentiered a sum of Rs. 8,00,000 towards suppressed sales. However, no such surrender was made for the assessment year 1988-89. It is argued by learned counselfor the assessee that the result of the investigation done on the accounts of aparticular assessment year should not automatically be applied to the previous assessment years also, without there being independent evidence in support of such conclusion. As far as assessment year 1989-90 is concerned, this argument is felt to be strange, since the assessee himself on the date of the search, i.e., on September 18, 1989, came forward and surrendered not less than Rs. 8,00,000 towards suppressed sales for the assessment year 1989-90. Having himself agreed on the suppression of sales by his letter dated January 9, 1990, how can he successfully argue that his accounts maintained for the assessment year 1989-90 are foolproof and should be depended upon and the true profits earned by the assessee-company should be deduced therefrom. The learned Commissioner of Income-tax (Appeals) also mentioned that the director of the assessee-company had admitted suppression of sales. The suppression of sales billing to a period prior to the date of search, i,e., on September 18, 1989, and whatever disclosures were made under Section 132(4) they should be taken to have been made up to September 18, 1989, but the assessee-company had continued with the same pattern of suppression of sales even after that date. The manner in which the suppression of sales took place prior to September 18, 1989, continued in the same manner up to February 4, 1991. However, the unaccounted money which was generated after the date of search up to the closing of the accounting year had not been disclosed.164. While completing the assessment for 1988-89, the Assessing Officer had clearly stated that during the assessment proceedings, the representatives of the assessee-company were repeatedly told to produce the original sale bills and salebooks from their records and the assessee failed to produce the bill book of any of the days falling in the relevant accounting period. The daily sales books were also not produced before him at all and, therefore, he concluded that the assessee has definitely something to hide as far as its sales for the relevant period are concerned. Though, it was the case of the assessee that all the books relating to the assessment year 1988-89 were seized by the Department itself it had not produced any of the books. Further it could have taken return of the seized books or drawn the attention of the Assessing Officer to point out the particulars Of the bill books as well as the daily sale books from out of the seizedmaterial. At the time of seizure a seizure memo listing out the particulars of the books seized would be given to the assessee and from out of the list of seized books, the assessee could have pointed out the bill books as well as the sales books to the Assessing Officer. It was never the case of the assessee that it had produced the bill books or sale books for verification of the Assessing Officer.165. In fact, the same argument was advanced before the learned Commissioner ofIncome-tax (Appeals) that the findings of one year cannot be applied to anotheror that the evidence collected in January, February, 1991, in respect of applying the cost of food to sales ratio should not be applied to earlier years. Rejecting the argument, the learned Commissioner of Income-tax (Appeals) found as follows at page 22 of his impugned orders : " The same pattern is seen in all sales summary sheets whether before the search or after the search. This pattern is continued till the date of survey on February 4, 1991. The computer was installed in the appellant's restaurant in early 1989 and till the date of survey, the same pattern is seen of billing sales. Evidences pertaining to any day of this period (worked on a fair sample period) are applicable to the entire period irrespective of the relevant assessment year and have been correctly applied to determine suppression of sales. When June, 1989, to February 4, 1991, yields a pattern and a ratio, there is no reason why the ratio cannot be applied to the appellant's own earlier assessment years." 166. The assessee's restaurant started in 1984 and the assessment year 1986-87 is the first assessment year. Originally sales billing was made manually. Later, in the middle of the accounting year, relevant to the assessment year 1990-91, the computer billing was introduced. Even after computer billing was introduced side by side manual sale bills also were issued. Shri Nelson Wang was the managing director of the assessee-company, From the beginning, he had introduced systematic service of food articles to the customers as well as systematic billing system. It was never the case of the assessee that this system of either billing or receiving cash at the counter as per bills was ever changed during any of the accounting years relevant to these three assessment years under consideration. When the same system is being practised in all the three accounting years, the modus operandi adopted while manipulating bills even though found out while investigating the case for the assessment year 1990-91 applies to back assessment years also since the nature of the business as well as the nature of establishment and the method of billing followed by them remain the same in all these accounting years.
167. Under Section 114(d) of the Indian Evidence Act, there is a presumption that a thing or state of things which has been shown to be in existence within a period shorter than that within which such things or state of things usually ceases to exist, is still in existence.
168. Now, the question in this case is whether the presumption which arises under Section 114(d) runs retrospectively, i.e., a particular state of things found obtaining in the accounting year relevant to the assessment year 1990-91 can be presumed to exist in back years also or retrospectively also is the question. In Woodroffe and Amirali's Law of Evidence, 14th edition, 1980, in the commentary under Section 114(d) held the following (at page 2620) : " In some cases, it has been said that there is no presumption to operate retrospectively. The rule of evidence is in favour of presuming the continuity of things shown to exist at a prior date.
There is no rule of evidence by which one can presume backwards and, this Section does not enable the court to presume that the present state of things existed in the past without proof ; in other words, the presumption is prospective rather than retrospective in operation. But the Supreme Court has held that if a thing or a state of things is shown to exist, an inference of its continuity within a reasonably proximate time both forwards and backwards may sometimes be drawn. (See Ambika Prasad Thakur v. Ram Ekbal Rai [1966] 1 SCR 758) equivalent to AIR 1966 SC 605. When a person was tenant in 1957 and his name was also found entered in 1961, the presumption is that he continued to be the tenant in the period between 1957 and 1961.
The statement that there is no rule of evidence by which one can presume the continuity of things backwards, it has been said, : cannot be supported. The presumption of continuity weakens with the passage of time. How far the presumption may be drawn both backward and forward depends, it has been held, upon the nature of things and the surrounding circumstances. Wigmore considers it a fallacy to say that 'Presumptions do not run backward.'.... Presumption can be made both backwards and forwards within a reasonably proximate time." 169. Thus, a particular habit or bad habit of manipulating sale bills was found to be existing or was found to be practised by the assessee in the assessment year 1990-91, the same state of things can be found to be existing even in the earlier accounting years. That means the habit of manipulation of sale bills can be presumed to be existing even in the assessment year 1988-89. Therefore, coupled with the fact that none of the sale bills were produced and none of the sales registers were also produced for the assessment year 1988-89, a presumption can be drawn that the habit of manipulation of sale bills can be presumed to be existing even in the assessment year 1988-89, and can be stated to be a legitimate presumption which can be drawn under law.
170. At pages 143 to 147 of paper book No. 1 filed by the assessee, we come across the Assistant Commissioner of Income-tax report dated July 31, 1990, submitted to the Commissioner of Income-tax (Appeals)-VI, Bombay, relating to the assessment years 1986-87 and 1988-89. In that it is stated that the business of the assessee-restaurant started effectively in October, 1984. At page 144 of the report, -it is stated as follows : " As required by your officer, the assessee has also submitted one more statement on July 23, 1990, showing cost of material issued, by taking the same quantity issued in the one week May 24, 1990, to May 30, 1990, at the rates prevailing in 1986-87 and which has been verified and the gross profit worked out at 34 per cent.
approximately. The cost statement is further verified with reference to masala and other ingredients used in the preparation of various dishes in one week. The percentage of masala consumed comes to 19 per cent. approximately of the total cost. The total cost of food includes the food cost on account of free tea/breakfast, lunch and dinner served to staff. The assessee is not recovering the food cost from the workers/staff. This is one of the reasons for increase in total food cost.
In the assessment year 1986-87, there were 26 people working in the restaurant. Estimated food cost for six months operation on staff food comes to Rs. 70,000 by taking cost per person at 15 per cent.
In the assessment year 1987-88, there were 70 staff/workers in the restaurant. The total expenditure on such food cost for the whole of the year comes to Rs. 4 to Rs. 5 lakhs by taking the average cost of Rs. 15 to Rs. 20 per person.
The assessee is serving complimentary meals to various charitable institutions, for example, Blind Association, Cancer Aid Association, etc.
It also invites its clients VIP guests, film stars to celebrate wedding anniversaries, complimentary food is supplied to them free of cost to eight to ten persons at a time. Expenditure for the whole year on such invitation comes approximately to Rs. 60,000 to Rs. 70,000. This is a sort of indirect advertisement/publicity of the restaurant in the various Sections of the community. It is also explained that the assessee is using the best quality of raw material for preparation of food, which results in higher costing.
The total expenditure incurred on advertisement/publicity is shown as under : It is explained that initially the business promotion strategy was to invite people of various communities and Sections directly for complimentary food instead of heavy expenditure on advertisement and in newspaper and publicity. Therefore, the advertisement expenditure in the earlier years was less.
The officer also reports that the assessee's restaurant serves high quality food of specialist variety exclusively to elitist clients involving special menus and items. In short, it is more of a gourmet type using creative efforts of publicity." 171. In my understanding, a restaurant, in order to come to the limelight needs publicity, mostly in its initial years. After it secures the patronage of particular type of clients, in the subsequent years, the restaurant does not need as much publicity as it used to have in its initial years. This is a case where in two or three years, the assessee's restaurant shot into fame and an elitist clientele like politicians, big business bosses, cinema actors, etc., became its customers and they recognised the assessee's restaurant as one of the best in Bombay, if not in India. Having regard to the necessity of building up its fame in the initial years, I feel that for publicity purposes and towards supply of free meals to various Sections, it is but just to conceive at least one per cent. of cost to food sales ratio towards advertisement. Therefore, I feel that the food cost to sales ratio for the assessment year 1989-90 should be at 41 per cent. and for the assessment year 19'88-89, it should be taken at 42 per cent. I direct that after applying this cost of food to sales ratio, the total sales as well as the suppressed sales should be found out and the correct additions should be worked out and made for each of these three assessment years, namely, 1988-89, 1989-90 and 1990-91, respectively.
172. In answer to the question posed to the Third Member, the following is my answer. The sustainable addition for each of the assessment years should be as follows : Taking cost of material to sales ratio at 42 per cent. the gross food sales should be : Taking cost of material to sales ratio at 41 per cent, the gross food sales should be : Taking the cost of material to sales ratio at 40 per cent, the gross food sales should be : 173. Now, the matter will go back to the Division Bench to decide the issue according to the majority opinion.