COMMISSIONER OF INCOME-TAX VS VENKATESWARA TIMBER DEPOT, 1998 PTD-ANDHRA-PRADESH-HIGH-COURT-INDIA 2838 (1996)

Income-tax---

----'Appeal to Appellate Tribunal---Additional ground of appeal---Rate of gross profit increased by CIT (Appeals) at appellate stage---Assessee could raise additional plea before Tribunal for set off of cash credits against such addition---Tribunal justified in allowing such set off---Indian Income Tax Act, 1961, S.254.

The assessee-firm carried on business as a forest contractor. In respect of the assessment year 1976-77, it disclosed a turnover of Rs.25,74,087 and a gross profit of 13.2 per cent. The Assessing Officer considered the gross profit to be on the low side having regard to the fact that in the earlier years, the assessee disclosed profit at 20 per cent. However, he did not choose to make an addition on that score. After examining the accounts of the firm, the Income-tax Officer found that there was an understatement of closing stock to an extent of Rs.2,11,246 and that expenses in regard to the earlier years were unvouched. He eventually made an addition of Rs.2,11,246 towards closing stock not brought into the books. He then found from the books of account that the assessee had disclosed several cash credits. After examining such cash credits, the Assessing Officer found that Rs.1,31,000 was to be added to the income as "unproved cash credits". On appeal, the Commissioner of Income-tax agreed with the plea of the assessee that there was no warrant for making the addition for the closing stock not accounted for, viz., Rs.2,11,146. However, he estimated the gross profit at 20 per cent. instead of 13 per cent. as accepted by the Assessing Officer and so made an addition of Rs.1,74,350 as against the addition of Rs.2,11,246 made by the Income-tax Officer as understated closing stock. The cash credit addition of Rs.1,31,000 was reduced by the Commissioner to Rs.1,21,000 after accepting the plea of the assessee in respect of one transaction. On further appeal, the Income-tax Appellate Tribunal reduced the gross profit addition to Rs.1,50,000 but confirmed the cash credit addition of Rs.1,21,000. The assessee then advanced an alternative argument that the cash credit addition should be telescoped into the gross profit addition. The Tribunal agreed with that and allowed a set off of Rs.1,21,000 against the addition of Rs.1,50,000. On a reference:

Held, (i) that as the addition on the ground of increase in the rate of profit was made by the Commissioner of Income-tax at the appellate stage, the assessee could not have raised the plea of set off except before the Tribunal in the appeal. The Tribunal was justified in law in accepting the assessee's alternative argument raised for the first time before it;

(ii) that, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in telescoping the unexplained credits with the estimated addition to the business income towards deficiency in gross profits.

Anantharam Veerasinghaiah & Co. v. CIT (1980) 123 ITR 457 (SC); CIT v. Maduri Rajaiahgari Kistaiah (1979) 120 ITR 294 (AP); CIT v. Kulwant Kaur (1980) 121 ITR 914 (Delhi) and CIT v. Nelliappan (S.) (1967) 66 ITR 722 (SC) ref.

D. Srinivas for S.R. Ashok for the Commissioner.

Y. Ratnakar for the Assessee.

JUDGMENT

M.N. RAO, J.---As directed by this Court, the Income-tax Appellate Tribunal, Hyderabad, referred the following two questions under . section 256(2) of the Income Tax Act, 1961, for consideration of this Court:

(1)Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in accepting the assessee's alternative argument raised for the first time before them for set off of the unexplained cash credits against the estimated addition to the assessee's business income? and '

(2)Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in telescoping the unexplained credits with the estimated addition to the business income towards deficiency in gross profit, especially in view of the Delhi High Court's decision in CIT v. Kulwant Kaur (1980) 121 ITR 914 and that of the Andhra Pradesh High Court in CIT v. Maduri Rajaiahgari Kistaiah (1979) 120 ITR 294?"

The assessee is a registered firm carrying on business as "forest contractor". In respect of the assessment year 1976-77, it disclosed a turnover of Rs.25,74,087 and a gross profit of 13.2 per cent. The Assessing Officer considered the gross profit to be on low side having regard to the fact that in the earlier years, the assessee disclosed profit at 20 per cent. However, he did not choose to make an addition on that score. After examining the accounts of the firm, the Income-tax Officer found that there was an understatement of closing stock to an extent of Rs.2,11,246 and that expenses in regard to the earlier years were unvouched. He, eventually made an addition of Rs.2,11,246 towards closing stock not brought into the books. He then found from the books of account that the assessee had disclosed several cash credits. After examining such cash credits, the Assessing Officer found that Rs.1,31,000 was to be added to the income as "unproved cash credits.' On appeal, the Commissioner of Income-tax agreed with the plea of the assessee that there was no warrant for making the addition for the closing stock not accounted for, viz., Rs.2,11,246. However, he estimated the gross profit at 20 per cent. instead of 13 per cent. as accepted by the Assessing Officer and so made an addition of Rs.1,74,350 as against the addition of Rs.2,11,246 made by the Income-tax Officer as understated closing stock. The cash credit addition of Rs.1,31,000 was reduced by the Commissioner to Rs.1,21,000 after accepting the plea of the assessee in respect of one transaction. On further appeal, the Income-tax Appellate Tribunal reduced the gross profit addition to Rs.1,50,000 but confirmed the cash credit addition of Rs.1,21,000. The assessee then advanced an alternative argument based upon the ruling of the Supreme Court in Anantharam Veerasinghaiah & Co. v. CIT (1980) 123 ITR 457 that the cash credit addition should be telescoped into the gross profit addition. The Tribunal agreed with that and allowed a set off of Rs.1,21,000 against the addition of Rs.1,50,000.

At the instance of the Revenue, this Court has directed the Tribunal to refer the questions for consideration under section 256(2) of the Income tax Act.

Learned counsel for the Revenue contends that the Tribunal should not have entertained the plea of set off for the first time before them and that there was nothing wrong in making both the additions, i.e., cash credits and unaccounted gross profit. We are not inclined to agree with this contention. The question of allowing the plea of set off was held to be a question of fact. The Supreme Court ruled in CIT v. S. Nelliappan (1967) 66 ITR 722 (at page 724):

"In hearing an appeal, the Tribunal may give leave to the assessee to urge grounds not set forth in the memorandum of appeal, and in deciding the appeal, the Tribunal is not restricted to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal. The Tribunal was, therefore, competent to allow the assessees to raise the contention relating to the cash credits which was not made the subject-matter of a ground in the memorandum of appeal. It cannot be said that in accepting the contention of the assessees that the cash credits represented income from the business withheld from the books, the Tribunal made out a new case inconsistent with the assessee's own plea. In any event, the Tribunal is not precluded from adjusting the tax liability of the assessee in the light of its findings merely because the findings are inconsistent with the case pleaded by the assessees.

The first question raised in the application for reference is a question of fact. It is true that there is no direct evidence of any connection between the cash credit entries and the income withheld from the books of account by the assessees. But if the Tribunal inferred that there was a connection between the profits withheld from the books and the cash credit entries, it cannot be said that the conclusion is based upon speculation. The first question sought to be raised is, therefore, purely one of fact and could not be referred under section 66. "

As the addition on the ground of increase in the rate of profit was made by the Commissioner of Income-tax at the appellate stage, the assessee could not have raised the plea of set off anywhere else except before the Tribunal in the appeal. The contention that the plea should not have been allowed to be raised at that stage is, therefore, untenable.

In the circumstances, both the questions are answered in the affirmative, in favour of the assessee and against the Revenue. No costs.

M.B.A./1591/FC Reference answered.