ADDITIONAL COMMISSIONER OF INCOME TAX Vs. CHANDRAVILAS HOTEL

JUDGEMENT

(1.) THE assessee, a registered partnership firm, is running a hotel. It disclosed sales of Rs. 19,55,651 in the previous year relevant to the asst. year 1967 68 and the gross profit disclosed by the assessee worked out to 24 per cent The sales during the previous year relevant to the asst. yr. 1968 69 were shown at Rs. 23,49,434 and the gross profit disclosed by the assessee worked out to 28 per cent The assessee was maintaining the accounts by following the mercantile method and it was its case that this method of accounting was regularly employed by it from year to year. In the course of assessment proceedings for the asst. year 1967 68, the ITO noticed that the assessee's auditors had observed in their report that " daily collection slips or cash memos have not been produced to us for our verification ". In other words, the receipts did not admit of check. The ITO further noticed that there was no check on closing stock either. In the course of assessment proceedings for the asst. year 1968 69, the ITO observed that the state of the books of account was the same as in the earlier years. He noticed the following defects in the maintenance of accounts :

(2.) THE ITO, therefore, refused to accept the book result in both the said assessment years. He held that the sales disclosed and the income returned for the said assessment years were not reliable and that position was admitted by the assessee. The ITO further pointed out that the book results were not accepted from year to year. Under the circumstances, the ITO refused to accept the book results and computed profits under S. 145(2) of the IT Act, 1961 (hereinafter referred to as the " Act "). The ITO, since he did not find the book result reliable and consequently not acceptable, estimated sales at Rs. 20 lakhs and worked out gross profit at 30 per cent of the estimated sales in the asst. year 1967 68. This resulted in an addition of Rs. 1,31,291 in that year. So far as the asst. yr. 1968 69 was concerned, the ITO estimated the sales at Rs. 24 lakhs and applying the gross profit rate of 30per cent, addition for that year was worked out at Rs. 2,11,535. The rejection of the book results and estimates of sales and gross profit and additions made by the ITO were accepted by the assessee. In other words, the assessee did not challenge the additions by preferring appeals against the assessment made by the ITO in both the assessment years, namely, 1967 68 and 1968 69. The ITO initiated penalty proceedings under S. 271(1)(c) of the Act and as the minimum penalty leviable exceeded Rs. 1,000, he referred the matter to the IAC under S. 274 of the Act as it stood then. In response to the notice issued by the IAC, calling upon the assessee to show cause why penalty should not be levied under S. 271(1)(c) of the Act, the explanation of the assessee was as follows :

(3.) THE Tribunal observed that the Revenue found that the book version disclosed by the assessee was not amenable to verification and the profits disclosed by it were found to be low. The books of account were maintained in the same manner as before. Since the Revenue authorities were not satisfied that the book version was amenable to verification, the provisions of S. 145 were invoked and the total income was determined by applying a gross profit rate of 30per cent to the estimated turnover. The Tribunal then went on to observe that on the above facts, no finding can be recorded that the assessee was guilty of any fraud or gross or wilful neglect. All that has happened, the Tribunal observed, is that the book version of the assessee's profits had been held by the Revenue authorities as not amenable to verification and the proviso to S. 145(1) was invoked and the assessee's income was determined by estimate. Under the circumstances, the Tribunal was of the view that the assessee's contention that the Explanation to S. 271(1)(c) had been wrongly invoked had to be accepted and no finding could be recorded that the assessee was guilty of any fraud or gross or wilful neglect which resulted in the income being returned at a figure less than 80 per cent of the assessed income. In the result, the Tribunal cancelled the penalties imposed on the assessee in the asst. yrs. 1967 68 and 1968 69. The Revenue being dissatisfied with the findings recorded by the Tribunal, the following questions have been referred to us for our opinion at its instance for each of the aforesaid assessment years, namely, 1967 68 and 1968 69: Assessment year 1967 68 (IT Ref. No. 125 of 78).