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2010 DIGILAW 1104 (KAR)

Commissioner of Income Tax v. H. Dasappa and Sons

2010-10-23

B.V.NAGARATHNA, MANJULA CHELLUR

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JUDGMENT Manjula Chellur, J.— The following substantial questions of law are raised in this appeal: 1. Whether the Tribunal was correct in holding that the stock of rectified spirit of 33,980 litres worth Rs. 16,00,000 missing in the premises of the Assessee as detected by the search party which was included in the books of accounts cannot be treated as the income of the Assessee ? 2. Whether the Tribunal was correct in relying on certain extraneous material not relevant to facts of the present case and proceeded to form an opinion based on conjectures and surmises that there was no sales outside the books of accounts by accepting the unreasonable explanation offered by the Assessee without recording a finding as to whether the missing spirit could be treated as income of the Assessee and consequently recorded a perverse finding ? The Revenue is before the Court challenging the orders of the Tribunal, Bangalore Bench 'C in IT Appeal No. 665 of 1997, dt. 31st July, 2003. 2. The Respondent Assessee is a company carrying on its business in liquor. We are concerned with the asst. yr. of 1993-94. The return of the income for the assessment year was filed on 31st Dec, 1993 declaring a loss of Rs. 98,80,500. Return of the Assessee came to be processed under Section 143(1)(a) of the IT Act, 1961 (hereinafter referred to as 'the Act'). 3. On 6th Aug., 1992 a search was conducted in the business premises of the Assessee and missing rectified spirit of 33,980 litres was detected. It was valued at Rs. 16,00,000 (rupees sixteen lakhs) was missing (sic). The explanation offered by the executive director was found to be without substance as the claim of rectified spirit being converted to IMFL and sold could not be verified without any proof to substantiate the same. 4. The AO concluded during the course of regular assessment, that the rectified spirit referred to above has been sold by the Assessee outside the books of accounts. Hence entire Rs. 16,00,000 was treated as the income of the Assessee. Aggrieved by the same, an appeal came to be filed before the CIT(A)-I, Bangalore and the appellate authority accepted the conclusions of the AO. Therefore, the appeal of the Assessee was rejected on 6th June, 1997. Aggrieved by the same, an appeal came to be preferred to the Tribunal, Bangalore Bench. 16,00,000 was treated as the income of the Assessee. Aggrieved by the same, an appeal came to be filed before the CIT(A)-I, Bangalore and the appellate authority accepted the conclusions of the AO. Therefore, the appeal of the Assessee was rejected on 6th June, 1997. Aggrieved by the same, an appeal came to be preferred to the Tribunal, Bangalore Bench. The Tribunal held that the rectified spirit could not have been sold outside the books as the Assessee was under the constant supervision of the excise authorities. Therefore, the authorities were not justified in holding that no material was found during the search and that the stock had been removed by the Assessee. In other words, the Tribunal accepted the explanation offered by the Assessee and allowed the appeal of the Assessee on 31st July, 2003. 5. From the orders of the three authorities, we note that there is no dispute so far as search being conducted on 6th Aug., 1992 at the premises of the Assessee at Peenya. Observation of the search party regarding shortage of rectified spirit to the extent of 33,980 litres, was confirmed from the statements of Sri A.G.K. Shenoy, Distillery Manager and Sri S.K. Bhowmik, Brew Master, recorded during the course of search. On 10th Aug., 1992 the executive director of the company by name D. Ravindranath gave statement explaining that the deficiency of rectified spirit cannot be 33,980 litres but could be only 21,000 litres, since a portion of the rectified spirit would have been converted into other items and the same sold in different forms. The defence of the Assessee is that excise officials could not find any shortage of any rectified spirit, therefore, presumption is that there was no such shortage in fact, as otherwise the excise officials would have definitely taken action against the Assessee. 6. The assessing authority observed that the explanations offered by the Assessee much later i.e., by letters dt. 23rd Dec., 1994 and 27th Jan., 1995 were to be read in conjunction with the statements of the staff of the Assessee recorded on 6th Aug., 1992 and also the explanation given by the executive director dt. 10th Aug., 1992. The AO was justified in saying that by 10th Aug., 1992, the executive director had time to ponder over the matter and after necessary consultation has given the explanation. 10th Aug., 1992. The AO was justified in saying that by 10th Aug., 1992, the executive director had time to ponder over the matter and after necessary consultation has given the explanation. Therefore, he was right in saying it was a self-serving statement and did not reflect the correct state of affairs. He rightly opined that there was no claim to the effect that converted IMFL sold had been accounted for and there was no proof of the same. The excise officials no doubt were entrusted with the duty of overseeing the activities of the Assessee but it is not possible to conclude that each and every irregularity committed by the Assessee was taken note of by the excise officials. The appellate authority, the CIT(A) also was justified in holding that it was possible that the Assessee has devised ways and means to get over the irregularities committed by him concealing them from excise authorities. 7. On 6th Aug., 1992 when the search was made at the premises by the income-tax officials in the presence of responsible employees of the company and also Mahazar witnesses, the employees without any resistance or protest have accepted the shortage of stock of rectified spirit. If at all the employees knew that the quantity of the stock taken by the officials was not correct, they should have signed the statements and the Mahazar under protest. As a matter of fact, the stock was taken into account by the income-tax officials with the help of the employees of the Assessee only. Any deficits or defects in the method of the stock taken into account by the officials ought to have been objected to by the employees of the Assessee particularly when two officials were present, namely, Mr. A.J.K. Shenoy and Mr. S.K. Bhowmik, who knew about the entire business. The fact that the employees of the Assessee did not raise any objection would only lead to presumption that there was no error in the method of determination of stock determined by the officials. Much later on 10th Aug., 1992, though the executive director Mr. Ravindranath gave an explanation, the said explanation is not at all convincing as he had time to give a defensive explanation. Even to give the quantity of rectified spirit, he must have gone through the relevant details and the process with the assistance of his employees. Much later on 10th Aug., 1992, though the executive director Mr. Ravindranath gave an explanation, the said explanation is not at all convincing as he had time to give a defensive explanation. Even to give the quantity of rectified spirit, he must have gone through the relevant details and the process with the assistance of his employees. Hence, it cannot be said that he was inexperienced and therefore, was not able to give proper explanation on 10th Aug., 1992. 8. In the light of physical verification of the stock by the search party in the presence of responsible and knowledgeable officials, which was confirmed by the letter of the executive director later, would only go to show that after due deliberations the explanation was given. Therefore, the appellate authority CIT(A) was justified in concluding that the explanation given by the Assessee subsequently cannot be accepted as the truth. It is a just and proper conclusion and thus the shortage of rectified spirit as on the date of search was correctly determined. 9. On the other hand, the order of the Tribunal would indicate that it was based only on the explanation given by the Assessee nearly six months later. In the absence of any material indicating that at the relevant point of time excise officials had an occasion to certify the stocks in the course of their regular vigil over the premises of the Assessee, the conclusion of the Tribunal is only based on imagination and surmises. Therefore, the substantial questions of law are answered in favour of the Revenue holding that the Tribunal was not justified in placing reliance on extraneous material, which was not at all relevant for arriving at a conclusion in favour of the Assessee. 10. Accordingly, the appeal is allowed by setting aside the order of the Tribunal confirming the order of the CIT(A), who had confirmed the order of the assessing authority.