Rupa & Co. Ltd. Versus CIT (Calcutta HC)- Honorable High Court has held that in the absence of any finding that any portion of the books of account maintained by the assessee was fictitious or contained wrong entry, the Assessing Officer was not entitled to make an average of discount without discarding the actual discount given by the assessee for the relevant year as appearing from the books of account. An assessee has a right to give different rates of discount to his different customer depending upon his relation with such customer or on the basis of business policy depending upon the time of sale, particular item of sale or the region or the place of sale and unless, any of the entries relating to such discounts is found to be wrong, the Assessing Officer is bound to accept the actual discount given by the assessee.
It was also held that If AO accepts the physical quantity of the stock and also the books, no undisclosed income can be determined under section 158(b) read with Section 158BB on the allegation of undervaluation of stock in the absence of any material and/or finding that the books of account were not correct.
IN THE HIGH COURT AT CALCUTTA
Special Jurisdiction (Income-Tax)
The Hon’ble Mr. Justice Bhaskar Bhattacharya And
The Hon’ble Mr. Justice Sambuddha Chakrabarti
I.T.A. No. 28 of 2005
Rupa & Co. Ltd.
Commissioner of Income-Tax (Central) – I, Kolkata
For the Appellant: Mr. J. P. Khaitan.
For the Respondent: Md. Nizamuddin.
Heard on. 10.05.2011
Judgment on: 19th May, 2011.
Bhaskar Bhattacharya, J.:
This appeal under Section 260A of the Income-tax Act, 1961 is at the instance of an assessee and is directed against order dated October 8, 2004 passed by the Income-tax Appellate Tribunal, “A” Bench, Kolkata, in I.T. (SS) A. No. 53 (Kol) of 2004 and C.O. No.61 (Kol) of 2004 for the block period April 1, 1990 to January 24, 2001.
The facts giving rise to filing of this appeal may be summed up thus:
a) The assessee is a public limited liability company within the meaning of the Companies Act, 1956 and is a manufacturer of hosiery goods and has branches at various places in the country.
b) On January 24, 2001, officials of the Income-tax Department conducted searches at various places of the office of the assessee and in course of such searches, various books of records were seized. Inventory was prepared of the stock at some of the locations and the portion of the stock was also seized. The assessee of its own provided details of the stock at the locations which was not visited by the officials.
c) The assessee submitted its return for the period from April 1, 2000 till the date of commencement of the search, namely, January 24, 2001. According to the accounts, the cost of the assessee’s closing stock as on January 24, 2001 was Rs. 18,87,000/-.
d) The Assessing Officer after due examination found that the quantity of physical stocks was fully in agreement with the books of account.
e) The Assessing Officer, however, required the assessee to furnish the value of the closing stock at the wholesale price of the stock and after making certain corrections, the same was determined by the Assessing Officer at Rs. 33,01,24,963/-. It appears that the Assessing Officer sought to estimate the cost of the said closing stock with reference to the wholesale price by deducting therefrom the discounts allowed by the assessee to its customers and the gross profit ratio.
f) The gross profit rate was determined by the Assessing Officer at 20.44%. In respect of discounts, the assessee worked out the average discount allowed on the basis of its books of account for the Financial Years 1999-2000 and 2000-2001 at 25.53% and 29.13% respectively.
g) In course of inquiry by the Income-tax Department, it was established that the discounts offered by the assessee varied between 18.5% and 33.81%. The Income-tax Department also verified the accounts of the buyers in which the full discount received from the assessee was duly disclosed. However, instead of taking into consideration the average discount of 29.13% for the Financial Year 2000-0 1 as per the books of account, the Assessing Officer deducted the average discount of 25.53% of the Financial Year 1999-2000 to estimate the cost of the closing stock as on January 24, 2001. By the said process, the Assessing Officer estimated the cost of the stock as on January 24, 2001 at Rs. 19,55,93,534/- and the difference between the said figure and the figure of Rs. 18,87,00,000/- reflected in the accounts was assessed as undisclosed income on the allegation of suppression of valuation of stock.
h) Being aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) and the said authority by order dated February 16, 2004 held that the Assessing Officer should have accepted the discount of 29.13% since the books of accounts were found to be correct. He held since the stock physically found was in agreement with the books of account, there was no scope for holding that there was any suppression. The Commissioner Income tax (Appeals) deleted the addition made by the Assessing Officer. He, however, did not deal with the assessee’s contention against the levy of surcharge.
i) Against the said order dated February 16, 2004, the Revenue preferred an appeal before the Income-tax Appellate Tribunal and the assessee also filed a cross-objection in the said appeal in respect of the ground relating to levy of surcharge which was not adjudicated by the Commissioner (Appeals).
j) The Tribunal by the order impugned herein held that the stock should be valued by allowing discount @27% being the average of the years 1999-2000 and 2000-200 1 and income should be recomputed accordingly. With regard to levy of surcharge, the Tribunal following an order dated October 8, 2004 passed in the case of another assessee held that the surcharge was leviable according to the provisions of the Finance Act.
k) Being dissatisfied, the assessee has come up with the present appeal.
A Division Bench of this Court at the time of admission of this appeal formulated the following substantial questions of law:
“i) Whether in a case where stock physically found is in agreement with the books of account and is valued at cost which is also reflected in the books of account, any undisclosed income within the meaning of Section 158(b) read with Section 158BB of the Income Tax Act, 1961 can be determined on the allegation of undervaluation of stock in the absence of any material and/or finding that the books of account were not correct or did not include and/or reflect any element making up the cost.
“ii) Whether and in any event, the Tribunal was justified in law in holding that for estimating the cost of the stock of the financial year, the average of the average discounts of the financial years 1999-2000 and 2000-200 1 should be deducted and not the average discount for the financial year 2000-01 as per books of account and its purported findings in that behalf are arbitrary, unreasonable and perverse.
“iii) Whether and in any event, any allegation of undervaluation or any addition could be made in a case where negligible difference is found between the cost of the stock as per books of account and the estimated cost sought to be arrived at by deducting from the whole sale price the average discount and gross profit rate.
“iv) Whether on a true and proper interpretation of the provisions of Section 1 58BA read with Section 113 of the Income Tax Act, 1961 and the provisions of the Finance Act, the Tribunal was justified in law in holding that the rate of tax specified in Section 113 was liable to be increased by the surcharge levied under the Finance Act even prior to the insertion of the proviso in Section 113 of the Act by the Finance Act, 2002 with effect from June 01, 2002.”
Mr. Khaitan, the learned Senior Advocate appearing on behalf of the appellant, has strenuously contended before us that the authorities below having found no fault in the books of account of the assessee placed before the Assessing Officer and at the same time, no irregularity having been found in the stock at the time of search and seizure, the authorities below acted without jurisdiction in assessing the income of his client on the basis of average profit. Mr. Khaitan contends that if the books of account are not found to be fictitious or containing false entry, in such a case, the Assessing Officer is left with no other alternative but to accept the amount shown in the books of account. In support of such contention, Mr. Khaitan relies upon the following decisions:
1. Commissioner of Income-Tax Vs. Hindustan Zinc Ltd., reported in  291 ITR 391 (SC);2. Sargam Cinema Vs. Commissioner of Income-Tax, reported in  328 ITR 513 (SC);
3. Chainrup Sampatram Vs. Commissioner of Income-Tax, West Bengal, reported in  ITR Vol. XXIV SC 481;
4. Commissioner of Income-Tax Vs. Pratapsingh Amrosingh Rajendra Singh and Deepak Kumar, reported in  Vol. 200 ITR 788;
5. Unit Construction Co. Ltd. Vs. Joint Commissioner of Income-Tax, reported in  Vol. 260 ITR 189;
6. K. K. Seshaiyer Vs. Commissioner of Income-Tax, reported in  Vol. 246 ITR 351.
Mr. Nizamuddin, the learned Advocate appearing on behalf of the Revenue, however, opposed the aforesaid contention of Mr. Khaitan and supported the order of the Tribunal by contending that this Court should not interfere with the discretion exercised by the Tribunal below.
He, therefore, prays for dismissal of the appeal.
Therefore, the first question that arises for determination in this appeal is whether in the absence of any finding that the books of account of the assessee contained any fictitious entry or that those did not reflect the correct state of affairs, the authorities below committed substantial error of law in making assessment on the basis of average profit or average discount granted by the assessee to its customers.
After hearing the learned counsel for the parties and after going through the materials on record, we find that the search party did not visit all the business branches of the appellant and the valuation made by the Department covered only the Kolkata and some of the branches of Tirupur. The figures of the stock at Mumbai, Tirpur (not covered by the Department), Delhi and stocks in transits were supplied by the appellant. The Assessing Officer has accepted the position that the books of account of the appellant were found to be correct. He has further found that the Trial balance sheet and the Profit and Loss account. tallied and has further noted that the gross profit rate of the appellant was acceptable. It further appears that the Department had not found the entire stock but it was the appellant who volunteered to give the full facts on those stocks not covered by the search operation. The Assessing Officer also found from examining the third parties that the discount rates varied between 18.5% and 33. 81% and it varied from party to party, region to region and even from product to product. But none of any of such instances was found to be incorrect. In such a situation, we find that the Commissioner of Income Tax (Appeals) rightly held that as the stocks were found to be as per the books there was no scope of suppression of stocks or estimation of discount percentage.
The learned Tribunal below has not disturbed the aforesaid findings of the CIT (A) but has reduced the percentage of discount to 27.33% on the basis of the average of discount for the two years.
In our opinion, in the absence of any finding that any portion of the books of account maintained by the assessee was fictitious or contained wrong entry, the Assessing Officer was not entitled to make an average of discount without discarding the actual discount given by the assessee for the relevant year as appearing from the books of account. An assessee has a right to give different rates of discount to his different customer depending upon his relation with such customer or on the basis of business policy depending upon the time of sale, particular item of sale or the region or the place of sale and unless, any of the entries relating to such discounts is found to be wrong, the Assessing Officer is bound to accept the actual discount given by the assessee.
Thus, the learned Tribunal erred in law in modifying the order of the Commissioner of Income tax (Appeals) by fixing an average of discount for the two years. We, therefore, set aside the aforesaid portion of the order of learned Tribunal below.
As regards the question of imposition of surcharge on the block assessment, we find that the said point is concluded by two decisions of the Supreme Court in the cases of CIT Vs. Suresh N. Gupta reported in  297 ITR 322 (SC) and CIT Vs. Rajiv Bhatara, reported in  310 ITR 105 (SC) holding the same view taken by the Tribunal. Mr. Khaitan, however, drew our attention to a subsequent two-judge-bench decision of the Supreme Court in the case of CIT Vs. Vatika Township P. Ltd., reported in  314 ITR 338 (SC) where the said Bench doubted the correctness of the decisions in the case of Suresh N. Gupta and Rajiv Bhatara (supra), and referred the matter for constitution of a larger Bench. In our view, so long the said reference is not answered disapproving the view taken in Suresh N. Gupta and Rajiv Bhatara (supra), those two decisions are binding upon us as a precedent and thus, we approve the decision of the Tribunal on the question of imposition of the surcharge.
In the result, the appeal succeeds in part. The order passed by the Tribunal on the question of reduction of discount to 27.33% is set aside and the order passed by the CIT (A) on that question is restored but the order of the Tribunal on the question of surcharge is affirmed.
We, thus, answer the first three questions formulated by the Division Bench in the negative and against the Revenue and the forth point in the affirmative in favor of the Revenue.
In the facts and circumstances, there will be, however, no order as to costs.
(Bhaskar Bhattacharya, J.)
(Sambuddha Chakrabarti, J.)