Judgment:
Both these appeals by the assessee are arising out of the common order of the learned Commissioner of Income Tax (A-II), Bangalore, dated 26-2-2001.
Facts : The assessee-firm is engaged in the business of trading in liquor on wholesale basis. The assessee filed return of income declaring loss. The original assessment was completed under section 143 read with. Section 147 on 29-3-1996 estimating an income at Rs. 40,000 after ignoring the loss. The assessing officer also added a sum of Rs. 92,000 on account of under statement of closing stock. The matter was carried in appeal before the learned, CIT(A). Learned CIT(A) vide order dated 20-3-1997 set aside the order with directions to verify the books of account and determine the total income. The set aside assessment was taken up wherein the learned counsel for assessee appeared and furnished the details required. Pending the completion of set aside assessment a survey was conducted at the premises of one Mr. Valerian Pinto, the Managing Partner of the firm. The assessing officer completed the assessment under section 158BC read with section 158BD for the block period, which also include the years in the present appeal before us. The assessing officer as per the block assessment estimated the total income at 2% of the turnover for both the years under appeal. For the assessment year 1989-90, he also, added Rs. 92,000 by way of understatement of closing stock. Learned CIT(A) confirmed the assessments on the ground that the assessment was made taking into account the net profit disclosed by various assessees carrying on similar business. He also held that the assessee did not produce any material evidence to substantiate the profit and loss account field by it along with the return of income. However, he deleted the addition of Rs. 92,000 pertaining to assessment year 1989-90 as the income was estimated on the basis of turnover. The assessee is in further appeal before us for both the years.
The learned counsel for assessee Shri Srinivasa Kamat submitted that the assessee had filed audited profit and loss account and balance sheet Along with return of income. The reason for rejection of books of account is not mentioned. Even in original assessment for not producing vouchers in respect of expenses, a sum of Rs. 40,000 was added. There is a huge reduction in turnover. The comparable case was never made available to the assessee. There is no dispute regarding the gross profit declared. The majority of the expenses are to wards salary, rent, interest to the bank, excise license fee, sales tax and insurance premium. All these vouchers are verifiable. The basis on which 2% is treated as the net profit for the block period cannot be the basis for the years under appeal also. The assessing officer himself have noted that the assessee appeared from time-to-time and furnished required details. Thus, there are no basis either to reject the books of account or to estimate the net profit as high as 2%. Thus, in the absence of any justification and in the absence of any material to hold that the books of account are not reliable, the loss declared by the assessee should be accepted.
Learned departmental Representative Shri Manjunatha Swamy heavily relied upon the orders of authorities below. He submitted that the assessee has huge turnover. The reasons are properly given in block assessment order and accordingly the appeals are to be dismissed.
We have carefully considered rival submissions and relevant facts of the case. Section 145 gives the power to reject the book results and estimate the income in certain circumstances. As the assessing officer examines the accounts of an assessee, he has to consider the following questions : (ii) Even if regular adoption of a method of accounting is there, whether the annual profits can properly be deduced from the method employed? (iv) Whether the accounts maintained are complete in the sense that there is no significant omission therein? If the assessing officers finding on all the four questions is in the affirmative (yes), assessees profits are to be computed on the basis of his accounts. In such a case, neither the first proviso to section 145(1) nor section 145(2) can be invoked [SeeMd. Umer v. CIT (1975) 101 ITR 525 (Pat)]. If, however, the finding on question Nos. (1), (3) and (4) is in the affirmative (yes), but the finding on question No. 2 is in the negative (no), the first proviso to section 145(1) comes in and the computation of income has to be made on such basis and in such manner as the assessing officer may determine. Still, there must be a basis and a manner, which is subject to scrutiny by the higher authorities or even by the Court. On the other hand, if the finding on any of the question No. (1), (3) or (4) is in the negative (no), section 145(2) applies and the assessing officer may make a best judgment assessment in the manner provided in section 144. Even, there the books may not be disregarded altogether. The assessment may be adjusted to cure the extent of the infirmity found, so as to make it a best judgment assessment. Since the assessing officer failed to point towards any defect in the accounts whereby he was of, the opinion that income cannot be Properly deduced there from, the assessing officer is not justified in rejecting the book results. We, accordingly, set-aside the assessment order and direct the assessing officer to accept the loss declared by the assessee and allow the same in accordance with law.