INCOME TAX ACT, 1961

--Accounting methodRejection Estimation of profit--The assessee was a partnership-firm engaged in the business of Hing. It also carries on the processing of Hing under which edible Hing is produced from pure/ raw Hing by subjecting the same to a process. The partners of the assessee-firm are : A (HUF) and S (HUF). On 13-12-2005 there was search of the assessee's premises under section 132. In the course of the search, certain documents were found which according to the assessing officer suggested gross under invoicing of sales and suppression of production/ yield of Hing. As required by section 153A, the assessment for the assessment years 2000-01 to 2006-07 was completed by the assessing officer in which additions were made on account of suppressed sale value of Hing and compound Hing and suppression on account of input – output ratio of process of Hing. A perusal of the assessment orders shows that the gross profit rate had shown an abnormal volatility. This can be seen from the chart set out in the assessment order for the assessment year 2000-01. The assessing officer also noted that the documents seized during the search showed that the assessee was indulging in under-invoicing of sales and purchases of Hing and that the seized papers related to business transactions between 1-11-2005 and 18-11-2005. It was noticed that some of the sale transactions recorded in these papers exactly matched with the sale bill issued to various persons, except the rate of sale of Hing. The assessing officer referred to several such instances from the seized material at pages 21 to 23 of the assessment order for the assessment year 2000-01. In addition, he also referred to 7 instances of sales where two rates of sale were mentioned in the papers. This is also set out at pages 23-24 of the aforesaid assessment order. One of these rates was higher than the other. According to the assessing officer, the sales were made at the higher rate whereas bills were issued only for lower rate. On the basis of these papers, the assessing officer made the additions for suppressed sale value of Hing and compound Hing. The assessee carried the matter in appeal to the Commissioner (Appeals) who examined the facts, evidence and contentions in considerable details and recorded the findings in his orders which are substantially the same for all the assessment years. The Commissioner (Appeals) held that though the seized papers related only to November, 2005, it indicates the practice of the assessee to suppress the real sales and such practice was also admitted by the partner during the search. Therefore, the rejection of books is justified and estimate of profit is also justified. The Commissioner (Appeals) has also recognized the right of the assessing officer to estimate the profits, having rejected the books of account. He thereafter proceeded to consider what in his opinion would be a reasonable rate of profit earned by the assessee in the business. As far as the Hing is concerned, he enhanced the gross profit by 2% of the sales and added the difference to the profits. In doing so, he has taken the sales as disclosed by the assessee. With regard to the Hing compound he held that there is no record or evidence to show that the assessee did produce the alleged quantity of Hing compound and sold them in the market. He found that the assessing officer had assumed that there can be a production of 10 to 25 kgs. of Hing compound out of 1 kg. of pure Hing. The assessing officer has also assumed that there is no manufacturing account for production of compound Hing. He found fault with the procedure adopted by the assessing officer which according to him had no basis. The estimated turnover computed by the assessing officer was found to be without any record or evidence. He, therefore, took the sales as disclosed by the assessee as correct. However, he found justification for a higher estimate of gross profit than what was shown by the assessee. He adopted the same rate of gross profit in respect of Hing compound which he adopted in the case of Hing and thus added the difference to the profits. As regards the depreciation on the car which was disallowed by the assessing officer, the Commissioner (Appeals) examined the invoices to verify whether the vehicle was purchased in India or imported from abroad. He found that it was purchased from the authorized dealer in India by obtaining finance from the bank. He, therefore, held that though the vehicle was a foreign brand, it was purchased from the authorized dealer in India and, therefore, the claim of depreciation cannot be disallowed. He accordingly allowed the same. Held: The Act has constituted the Tribunal as the final fact finding body and that role requires to be fulfilled, more particularly in a case such as the present one. It is particularly so because the additions made by the assessing officer were huge by any standards and they have been scaled down by the Commissioner (Appeals) against which the revenue was in appeal before the Tribunal Court is not to be understood as conveying an impression that the decision of the Commissioner (Appeals) and the endorsement thereof by the Tribunal was on merits not justified. What court is pointing out is that there is precious little in the order of the Tribunal to show that it had undertaken an examination of the seized material in order to test the soundness of the findings of the Commissioner (Appeals). The decision making process is as important as the correctness of the decision itself. Merely because the correctness of the decision appears unquestionable, the serious flaws or gaps in the steps that constitute the judicial decision making process, cannot be overlooked. The Tribunal in a different context has been held to be an institution of correction.