Kadungaparanbil Manuel George Joseph Vs ITO (Kerala High Court)
Books Lost in Floods Do Not Make Declared Profits Conclusive: Industry-Based Estimation Upheld Where Expenses Remained Unsubstantiated
Background of the Dispute
The assessee, an LPG-cylinder distributor, challenged assessments in which his business profits were estimated at 2.4% of turnover, against his claim that the profit margin disclosed in his accounts and returns was approximately 0.7%.
He explained that his books of account had been lost in the 2018 Kerala floods. Nevertheless, he relied on the profit and loss accounts and returns filed under the Value Added Tax framework, contending that the authorities could not disregard the declared results without first rejecting the returns.
The first appellate authority and the Cochin Bench of the Income Tax Appellate Tribunal rejected his challenge. The assessee then approached the Kerala High Court, principally questioning the validity of what he characterised as a best judgment assessment under section 144.
Assessee Insisted on Prior Rejection of the Returns
The assessee argued that, since returns accompanied by profit and loss accounts had been furnished, an assessment under section 144 could not be made without first rejecting those returns.
He sought to extend this argument to reassessment under section 147, submitting that the declared figures could not be displaced merely because the underlying books were unavailable.
The Revenue disputed the premise of this challenge. It submitted that the returns had not been filed within time but only following statutory notices, and that the orders were assessments under section 147, rather than best judgment assessments under section 144.
The Revenue further relied on the assessee’s failure to produce supporting records despite repeated opportunities and the substantial discrepancies in the expenses claimed.
Audit Conducted After the Floods Raised a Specific Concern
The assessment order recorded that the assessee appeared in response to summons but did not produce the books, explaining that they had been damaged in the floods and had been kept at his residence at Chellanam.
Although a stock register was subsequently produced, the books, purchase and sales bills, expense ledgers and supporting vouchers remained unavailable.
Significantly, the accounts had been audited on 27 November 2018—after the floods. The Assessing Officer therefore inferred that the audit had been conducted without the books and declined to accept the net profit shown in the profit and loss accounts.
The Court considered these circumstances alongside the financial variations. The claim of destruction explained the absence of records, but did not independently substantiate the expenses or establish the reliability of the declared results.
Expenses Rose Far Faster Than Turnover
The authorities identified substantial year-to-year variations in gross profit and expenses.
In one comparison, turnover increased by 8.55%, while expenses increased by approximately 285%. In another, turnover increased by 8.38%, while expenses rose by approximately 377%.
The assessment order also recorded that expenses varied from approximately 1.40% to 10.56% of turnover, while gross-profit percentages ranged from 1.45% to 11.87%.
The Court accepted that these disproportionate movements required a plausible explanation. With the underlying records unavailable, the figures in the profit and loss accounts could not be verified merely by relying on the statements themselves.
Court Rejected the Section 144 Premise
The High Court found that the impugned orders were issued within the combined ambit of sections 143 and 147, rather than under the best judgment method asserted by the assessee.
Consequently, the argument directed against section 144 did not correctly address the nature of the assessments before the Court.
The Court also rejected the broader contention that furnishing returns and profit and loss accounts prevented the Assessing Officer from arriving at different figures without a separate prior “rejection” of the returns.
Its conclusion rested on the actual assessment proceedings, the absence of supporting books and the unexplained financial inconsistencies.
Industry Yardsticks Were Justified on These Facts
The Court held that, where books were admittedly unavailable and the profit and loss accounts displayed substantial variations, the Assessing Officer could adopt other cogent yardsticks to determine income.
It approved the use of industry standards in the circumstances, emphasising that the assessee’s business involved commission earned from oil companies on LPG-cylinder distribution.
In such a business, differences in net profits would ordinarily depend substantially on differences in expenditure. Here, the claimed expenditure had increased disproportionately to turnover and could not be supported by books or vouchers.
Since both appellate authorities had reached corresponding conclusions, the High Court found no reason to interfere and dismissed the appeals.
Author’s Comments
Loss of books explains why evidence is unavailable; it does not prove that every expense claimed is correct. This distinction is central to the decision.
At the same time, the judgment does not prescribe 2.4% as a universal profit rate for LPG distributors. The estimation was upheld because of the particular business model, unavailable records and unexplained expenditure variations.
The audit conducted after the floods also required an explanation of its evidentiary foundation. An audit report cannot, by itself, resolve doubts about figures whose supporting records were unavailable.
For practitioners, the useful approach is to reconstruct evidence from available sources—bank records, supplier statements, commission records and duplicate vouchers—and reconcile unusual expenditure movements. A documented explanation addressing the figures would carry greater weight than relying solely on the fact that the books were destroyed.
The ruling ultimately supports reasoned estimation based on cogent material, where the declared results cannot be verified and substantial inconsistencies remain unexplained.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
These appeals relate to assessment years 2011-12, 2012-13, 2013-14, 2014-15, 2015-16 and 2017-18.
2. According to the appellant, his books of accounts for the aforesaid assessment years were lost in the floods of the year 2018; but that he filed his returns, under the Value Added Tax Act (the “Act”, for short), after having conducted an audit of his accounts. He says that, however, without “rejecting” the returns, the authorities have made a best judgment assessment under Section 144 of the Income Tax Act, 1961, assessing his profits to be 2.4% of his turnover; while his Profit and Loss accounts and the returns conceded only a profit margin of 0.7%. He says that he, therefore, filed an appeal before the 1st Appellate Authority; and on the same being rejected, he approached the learned Income Tax Appellate Tribunal (ITAT), Cochin Bench, with a further appeal, but which has also been dismissed. He says that he is thus constrained to approach this Court through these appeals.
3. Sri. A. Krishnan – learned counsel for the appellant in these cases, reiterated that, without the returns filed by his clients being rejected under Section 143(3) of the “Act”, a best judgment assessment under Section 144 of the “Act”, could not have been done. He asserted that, therefore, the impugned orders are in error.
4. We notice that the questions of law framed for consideration in these appeals are as under:
(a) Whether Annexures A, B and C orders are bad under Section 143(3) of the “Act”?
(b) Whether Annexures A, B and C orders are bad under Section 144 of the “Act”?
5. Interestingly, the response of Sri. Jose Joseph – learned Senior Standing Counsel for the respondents, was that the appellant had not filed his returns in time, but only consequent to a statutory notice issued to him by the Assessing Officer. He insisted that the assessments were not done under best judgment, but as per the provisions of Section 147 of the “Act”; and hence, that the questions of law framed would not require to be answered on its merits. He prayed that these appeals be, therefore, dismissed.
6. Sri. Jose Joseph, thereafter, submitted that, the Authorities under the “Act” have acted without error because, neither were the books of accounts produced before them by the appellant, in spite of having been given several opportunities; nor was there a plausible explanation on how the expenses for the relevant years was inflated to over 285% to 377%, when the turnover had an increase of less than 10% per year. He asserted that, therefore, the finding of the Assessing Officer, that the figures in the Profit and Loss account of the appellant, are incorrect, is fully justified.
7. We must say that we find force in the aforesaid submissions of Sri. Jose Joseph, as also in the findings contained in the assessment orders and the impugned orders.
8. The order of assessment itself records as under:
“4. In response to the summons, assessee appeared in person on 26.12.2018 but did not produce the Books of accounts, documents/details etc. but it was stated that all his books were damaged in flood which were kept at his house at Chellanam. There were no books of account available at the time of survey except VAT return. However assessee produced stock register for the relevant period on 28.12.2018. It is seen that assessee’s accounts were audited on 27.11.2018 i.e. after the flood affected Kerala. During the course of assessment proceedings, assessee was given several opportunities to furnish, the Books of account, purchase & sales bills and vouchers, the ledger copy & bills and vouchers of expenses etc, claimed in the P&L account but the same have not been furnished till date. From all these it is inferred that audit was conducted without books and therefore the net profit shown in the P&L A/c is not acceptable.
5. A comparison of figures as per Returns filed in response to Notice u/s. 148 it is seen that the Gross profit of the assessee varies from 1.45% to 11.87% and net profit from 0.76% to 1.31%. For same type of business, there is no possibility of gross turnover varying from 1.45% to 11.87%. A comparison of expenses claimed for A.Y. 2015-16 and A.Y. 2016-17, it is found that increase in turnover in A.Y. 2016-17 is only Rs. 42,75,657/- (8.55%) whereas increase in expenses is Rs. 42,46,976/- (285%) and on comparison expenses claimed for A.Y. 2012-13 and 2013-14, it is found assessee that increase in expenses of Rs. 27,90,061/- (377%) whereas increase in turnover is Rs. 36,54,819/- (8.38%) in A.Y. 2013-14 only. Further, it can be seen from table below that expenses claimed in P&L account is varied from Rs. 6,79,860/- (1.40% of turnover) to Rs. 57,35,403/- (10.56% of turnover) which shows that the expenses claimed in P&L account is not genuine.”
9. The afore facts are conceded; and Sri.A.Krishnan, in fact, admits that his clients could not produce the books of accounts on account of it having been allegedly lost in the floods. However, as already recorded, the specific submission of the appellant is that, when the returns have been filed accompanied by the Profit and Loss accounts, an assessment under Section 144, or even under Section 147 of the “Act”, could not have been done, without they being “rejected”.
10. It is not possible for us to accept the afore contention because, the assessment orders do not reveal itself to be ones settled by the Assessing Officer under best judgment method. As noticed above, the said orders have been issued under the combined ambit of Sections 143 and 147 of the “Act”.
11. That apart, when the books of accounts were admittedly not available, and when the Profit and Loss accounts showed the aforementioned variation, the Assessing Officer could have done nothing more, but to have adopted other cogent yardsticks, to arrive at the figures. This, we notice, the officer did, by adopting the industry standard of income and profits. This is wholly justified because, the appellant is a distributor of LPG cylinders, which business depends upon the commission he obtains from the oil companies. The only manner in which the profits can vary from business to business, in normal circumstances, is where the expenditure is vastly different. However, as mentioned above, the books of accounts are not available; and all with the Assessing Officer could rely upon was the Profit and Loss accounts, which showed the enhancement of the expenditure to be grossly in disproportionate to the increase in the turnover for the relevant years.
12. We notice that both the statutory Appellate Authorities have concluded as above; and hence, find no reason to interfere.
In the above circumstances, these appeals are dismissed; with both the questions of law answered against the appellant – though, as regards the second among them, it may not be relevant at all, for the reason that the assessment has been made under Section 147 of the Income Tax Act.
