Commissioner of Income Tax vs Sanjay Chhabra, Proprietor of Sanjay Chhabra Traders

Ajay Kumar Mittal, J.—This appeal u/s 260A of the income tax Act, 1961 (for short "the Act"), has been filed by the Revenue against the order dated April 28, 2005, passed by the income tax Appellate Tribunal Chandigarh Bench "B", Chandigarh (in short "the Tribunal") in I.T.A. No. 264/Chandi/2004, relating to the assessment year 1999-2000.

The appeal was admitted by this Court for determination of the following substantial question of law:

Whether the Tribunal erred in law in taking only profit of unexplained transactions as undisclosed income instead of taking investment in the said transactions into account ?

The facts, in brief, necessary for adjudication as narrated in the appeal are that the Assessee is engaged in the business of a commission agent and he derives income by way of commission from the sale of vegetables and fruits on behalf of farmers and traders. During the course of survey u/s 133A of the Act, carried out at the business premises of one Jagdish Chawla, the proprietor of M/s. Sai Baba Fruit Company, Chandigarh, certain documents were seized. From the seized documents it transpired that the Respondent-Assessee had made sales of apples to the rune of Rs. 5,75,654 to the aforesaid Jagdish Chawla. It was further noticed that as on October 6, 1998, the Assessee had the debit balance of Rs. 4,20,856 in the name of Jagdish Chawla. Since the sales were not found to be verifiable, the Assessee was asked to explain why addition of the amount of Rs. 5,75,654, being the peak investment, be not made to the returned income on account of unaccounted sales to Jagdish Chawla. The Assessing Officer did not accept the explanation of the Assessee and made addition of Rs. 5,75,654, vide order dated March 21, 2002, holding that the Assessee had made sales to Jagdish Chawla and invested his own unexplained money in the purchase of apples.

Appeal filed by the Assessee before the Commissioner of income tax (Appeals) (in short "the CIT(A)") was allowed by order dated December 23, 2003 and the addition of Rs. 5,75,654 made by the Assessing Officer was deleted. A direction was, however, given to the Assessing Officer to assess the commission earned by the Assessee on the aforesaid sales, at the rate of 5 per cent. The Commissioner of income tax (Appeals) while allowing the appeal, relied upon a decision of the Gujarat High Court in CIT v. President Industries (2002) 258 ITR 654 (Guj).

The Tribunal, in the appeal carried by the Revenue, affirmed the order of the Commissioner of income tax (Appeals) by order dated April 28, 2005.

This is how the Revenue is in appeal before us.

We have heard Learned Counsel for the parties and have perused the record.

The sole point for consideration in this appeal is that once the Revenue had come to the conclusion that the Assessee had made sales of apples amounting to Rs. 5,75,654 to one Jagdish Chawla, whether it was the entire amount, or the 5 per cent, profit thereof, being commission on such sale, that was to be added to the income of the Assessee.

According to the Revenue, the judgment of the Gujarat High Court reported in President Industries'' case (2002) 258 ITR 654 (Guj), was not applicable and the entire sale amount was assessable in the hands of the Assessee. On the other hand, Learned Counsel for the Assessee on the strength of the aforesaid decision argued that only 5 per cent, profit on the sale amount as commission was exigible to tax.

We find force in the contention of the Learned Counsel for the Revenue. The Assessing Officer while holding that the Assessee had invested his unexplained money in the purchase of apples which were sold to Jagdish Chawla had in para 3.1 of the assessment order recorded as under:

3.1 As per document No. l, the Assessee has a debit balance of Rs. 4,20,856 as on October 6,1998 in the name of Sh. Jagdish Chawla. As per documents Nos. 1 and 3, the Assessee has sold apples worth Rs. 1,30,540 and Rs. 74,528 on October 6, 1998 and December 26, 1998, respectively. The total sales were made at Rs. 6,25,654. The Assessee has also received Rs. 50,000 on October 6, 1998 from Sh. Jagdish Chawla against the sales made. Since these sales were not recorded in the books of account, vide order sheet entry dated March 21, 2002, the Assessee was asked to explain as to why addition amounting to Rs. 6,75,654 to the extent of peak investment may not be made to the returned income on account of unaccounted sales: of apples to Shri Jagdish Chawla. On March 21, 2002, Shri Sanjay Chhabra attended this office and his statement was recorded. The extract of his statement is as follows:

Question: As per documents found during the course of survey operation carried out at the business premises of Sh. Jagdish Chawla, Prop. M/s. Sai Baba Fruit Company, SCF 23, Sector 26, Chandigarh on November 6, 1998, you have sold apples worth Rs. 5,75,654. An examination of books of account shows that all the sales made to Sh. Jagdish Chawla have not been entered. I am also showing you the documents which are on the writing pad of your concern, M/s. Sanjay Chhabra Traders. All the sales made to Sh. Jagdish Chawla are entered on these documents. What you have to say in this regard ?

Answer: In this regard I am to submit that from SCF 22, Sector 26, Chandigarh, my father Sh. Mangal Sain and brother Sh. Hemant Kumar were also running business besides my business. The details of which are as under:

Sr. No

Name of Proprietor

Name of the concern

1.

Sh. MangalSain (Prop) (father)

M/s. MangalSain and Sons, SCF 22, Sector 26, SM, Chandigarh

2.

Sh. Sanjay Chhabra (Prop) (myself)

M/s. Sanjay Chhabra Traders, SCF 22, Sector 26, SM, Chandigarh

3.

Sh. Hemant Kumar (brother)

M/s. Hemant Kumar and Sons, SCF 22, Sector 26, SM, Chandigarh

The writing pads of all the above concerns are kept together. Any person who needs the writing pad can use the writing pad of another concern. As far as these documents which are shown to me today are concerned, I have not made any sale of apples to Sh. Jagdish Chawla, Prop. M/s. Shri Sai Baba Fruit Company, SCF 22, Sector 26, Chandigarh. Hence, these transactions are not entered in my books of account, however, my father Sh. Mangal Sain has made sale of apples during the financial years 1997-98 and 1998-99 to Sh. Jagdish Chawla. My father has surrendered the income on these transactions in his return of income filed in your office.

The Commissioner of income tax (Appeals), however, upheld the finding that the transactions entered by the Assessee with Jagdish Chawla had taken place but held that only profit on sale at 5 per cent, of the total value could be taxed in the hands of the Assessee. The observations recorded by the Commissioner of income tax (Appeals) in paras 2.2 and 2.3 of the order read thus:

2.2 The submissions of the Appellant have been considered carefully and I have gone through the facts of the case. It is observed that the Appellant has not been able to discharge the onus by bringing any concrete evidence to substantiate the claim that the transactions were not made by him. However, at the same time, I find force in the contentions of the Appellant that at best, it is only the profit arising from the sale of the goods, which can be added. In this context, the Appellant has rightly drawn my attention to the judgment of the hon''ble Gujarat High Court in the case of CIT v. President Industries (2002) 258 ITR 654 (Guj), wherein it has been held that (headnote):

''The amount of sales could not represent the income of the Appellant who had not disclosed the sales. The sales only represented the price received by the seller of the goods; only the realisation of the excess over the cost incurred could form part of the profit included in the consideration for the sales.''

2.3 In the instant case, the Appellant is a commission agent and gets 7 per cent, commission on sales. From this, 2 per cent, is passed on to the market committee and the balance 5 per cent, remains in the hands of the Appellant as income. Respectfully following the latest judgment of the hon''ble Gujarat High Court, quoted supra and after considering the totality of the facts, I am of the considered view that the profit on sales at 5 per cent, may be taxed in the hands of the Appellant. This is so because the sales are outside the books and in my view expenses against sales have duly been taken care of in the regular profit and loss account prepared by the Appellant.

The aforesaid findings were affirmed by the Tribunal.

A perusal of the order passed by the Assessing Officer clearly establishes that the Assessee had made unexplained investment in the purchase of apples which he had sold to Jagdish Chawla and in such circumstances, it was not justified that only 5 per cent, profit on sale consideration was taxed in the hands of the Assessee. The Commissioner of income tax (Appeals) and the Tribunal had reversed the order of the Assessing Officer holding that the commission on the sales made to Jagdish Chawla could be added. The Commissioner of income tax (Appeals) and the Tribunal had nowhere, after appreciation of material on record, concluded that the investment in the purchase of apples was accounted for in the books of account of the Assessee. Learned Counsel for the Assessee was asked to show whether the amount which was involved in the value of the apples, i.e., Rs. 5,75,654, was entered in the books of account or whether the father of the Assessee, Shri Mangal Sain had made sales of apples during the financial years 1997-98 and 1998-99 to Jagdish Chawla and had surrendered the income earned by means of those transactions, in his return of income filed with the income tax Department. The Learned Counsel was unable to substantiate his claim and to show that the amount was either entered in the books of account or was ever surrendered by Shri Mangal Sain as claimed by him. Accordingly, the findings recorded by the Commissioner of income tax (Appeals) and the Tribunal are vitiated and are set aside.

Reference is now made to the judgment reported as President Industries'' case (2002) 258 ITR 654 (Guj). In that case, the Commissioner of income tax (Appeals) and the Tribunal had found as a fact that there was no material on record to indicate that any investment was made outside the books of account to make the sales and in such circumstances the entire sale proceeds could not be added as undisclosed income of the Assessee but the addition could be only of the profits embedded in the sales. The High Court in the light of the aforesaid finding of fact while dismissing the reference application u/s 256(2) of the Act filed by the Revenue had held that no question of law arose for consideration. In the present case, in the absence of any clear cut and unambiguous rinding recorded by the Commissioner of income tax (Appeals) and the Tribunal on the basis of the material on record, that the investment in the apples was accounted for in the books of account of the Assessee, no advantage or support can be gathered by the Assessee from the said decision.

Accordingly, the substantial question of law is answered in favour of the Revenue and against the Assessee.

In view of the above, the appeal stands allowed.