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Anjaneya Brick Works v. Assistant Commissioner of Income-tax (Inv.)
Concise Analytical Summary of the Opinion (Anjaneya Bricks & related appeals)
Factual and Procedural Background
These consolidated appeals concern assessment years 1991-92 and 1992-93 in respect of two sister concerns engaged in brick manufacture and sale: M/s. Anjaneya Brick Works (three partners) and M/s. Anjaneya Table Mould Bricks (ATMB) (three female partners). A search under section 132 of the Income-tax Act, 1961 was carried out on 2-6-1992 in the case of M/s. Anjaneya Brick Works. During the search several documents were seized showing quantities of raw bricks cut over specified periods, including documents marked "A-10" and "A-13" (relating to ATMB) and "A-19" (relating to Anjaneya Brick Works for the period 6-4-1991 to 5-10-1991).
Before the search, the assessee had filed returns for the relevant accounting year showing declared sales, opening and closing stock and net profit. On the basis of the seized documents the Assessing Officer issued notices under section 148 and estimated suppressed production and income. The Appellants challenged those estimations before the Commissioner (Appeals) and subsequently in these appeals to the Tribunal. The appeals were heard together because they raise common questions of law and fact.
Legal Issues Presented
- Whether the seized document marked "A-19", which records production for 6-4-1991 to 5-10-1991, could be used as incriminating material to estimate and assess income for assessment year 1991-92 (the year under appeal).
- Whether production and sales could be estimated on the basis of seized documents of a sister concern (ATMB) or of a subsequent accounting period, and whether such materials can justify uniform application of a 52-week production estimate.
- Whether it is permissible to apply a uniform rule of production (90,000 bricks per week for 52 weeks) absent direct evidence that uniform production actually occurred throughout the year.
- Whether estimating gross profit at 64% on alleged suppressed turnover is reasonable where admitted gross profit rates for nearby years are significantly lower and no comparable evidence is furnished.
- Whether additional innovations in assessment (allegations of transportation business and unaccounted investments) could be sustained in the absence of supporting evidence on the record.
Arguments of the Parties
Appellants' Arguments
- In the case of M/s. Anjaneya Brick Works (AY 1991-92) the document "A-19" relates to the period 6-4-1991 to 5-10-1991 and is relevant to assessment year 1992-93, not 1991-92; therefore it cannot be used to estimate income for AY 1991-92.
- The Assessing Officer wrongly estimated production on the basis of 52 weeks; in this business production varies with climate and labour availability and should be considered on a realistic basis (the appellant suggested a shorter productive period such as 26 weeks in submissions).
- In the case of ATMB (AY 1991-92) no production took place outside books during February and March 1991 because of lack of demand and existing stock; seized documents relate to other months and do not justify extrapolating production for the months in question.
- There is no evidence on record of the appellant undertaking transportation as a business, nor of unaccounted investments for AYs 1991-92 and 1992-93; hence such additions cannot be sustained.
- For ATMB, the declared gross profit on books (25%) having been accepted by the Department for the disclosed turnover, the same rate should be applied to any unaccounted sale rather than the 64% adopted by the Assessing Officer.
- Labour patterns and customary festive leave (e.g., Makara Sakranti) mean production is not uniform throughout the year; this factual explanation should be taken into account when estimating production.
Department/Revenue's Contentions (as reflected in the order)
- The Assessing Officer relied on seized documents (including A-19 and A-10) to estimate suppressed production and income for relevant years, applying a uniform production rate of 90,000 bricks per week for 52 weeks to arrive at total production estimates.
- The Assessing Officer fixed sales value, applied estimates for wastage, and adopted a gross profit rate of 64% on alleged suppressed turnover to compute additional income; for ATMB the AO also treated a part of suppressed turnover as representing capital (1/3rd) for additions.
- The Assessing Officer and CIT(A) adopted computations which the Tribunal characterizes as not sufficiently supported by the record (as described in the opinion); CIT(A) confirmed additions in part though the Tribunal found CIT(A)'s approach inconsistent in places.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Homi Jehangir Gheesta v. Commissioner Of Income Tax, Bombay [1961] 41 ITR 135 | That every material fact for and against the assessee is to be considered fairly with due care in reaching the final conclusion without being coloured by irrelevant consideration or prejudice. | The Tribunal relied on this principle to require that all material facts be fairly considered and to reject arbitrary inferences such as using seized documents of another year/concern to estimate income for the year under appeal. |
| CIT v. Biju Patnaik [1986] 58 CTR (SC) 65 / 160 ITR 674 (SC) | Reiterated the principle that authorities must consider material facts fairly and not be influenced by irrelevant considerations or prejudice. | The Tribunal invoked this authority to reinforce its conclusion that the Assessing Officer and the CIT(A) adopted an approach that was legally untenable because it was based on irrelevant or generalized material rather than evidence specific to the assessment year and assessee. |
| Gupta Bros. v. Asstt. CIT [1997] 93 Taxman 218 (Gau.) | Support for applying the declared/accepted gross profit rate from regular books to unaccounted sales where comparable evidence for a higher GP is not available. | The Tribunal relied on this Tribunal/authority to hold that in ATMB's case the gross profit of 25% (declared and accepted) should be applied to unaccounted sales instead of the 64% assumed by the Assessing Officer. |
Court's Reasoning and Analysis
The Tribunal proceeded step-by-step, adhering strictly to the evidence on record and established legal principles:
- Relevance of seized document A-19: The Tribunal observed that document A-19 recorded production for 6-4-1991 to 5-10-1991 and thus related to the accounting period relevant to assessment year 1992-93 rather than assessment year 1991-92. Consequently, the Tribunal held that the Assessing Officer's reliance on A-19 to estimate suppressed production for AY 1991-92 was unjustified. The Tribunal emphasized that evidence for a subsequent year cannot be used as a sound basis to infer suppression in the earlier year.
- Use of sister concern's records and extrapolation: The Tribunal noted the firms are distinct legal entities with different constitution and that, apart from family relationships of partners, there was no demonstrated interconnection of business transactions. Therefore seized documents of the sister concern (ATMB) could not automatically be treated as evidence against Anjaneya Brick Works for the year under appeal.
- Rejection of uniform 52-week production estimate: The Tribunal criticized the Assessing Officer's uniform application of a production rate of 90,000 bricks per week for all 52 weeks as arbitrary and unsupported by direct evidence. The opinion explained that brick manufacture is climate- and labour-dependent, with predictable interruptions (rain, festivals, labour migration) making continuous year-round production unlikely in the ordinary course. The Tribunal held that the rule of uniformity cannot be mechanically applied without direct evidence demonstrating uniform production in the case at hand.
- Gross profit estimate at 64% unsustainable: The Tribunal found the AO's adoption of a 64% gross profit rate on alleged suppressed turnover unreasonable, particularly where the admitted gross profit rates in nearby accepted years were 29% and 22% and no comparables or evidence were furnished to substantiate a much higher GP. The Departmental Representative failed to justify the 64% rate with evidence.
- Other innovations (transportation business, unaccounted investments): The Tribunal held that these were not supported by evidence on record. As a quasi-judicial authority, the Revenue must base conclusions on available evidence in each case; generalized knowledge about the industry cannot substitute for case-specific proof.
- For ATMB (ITA No. 684) the Tribunal found seized document A-10 covered the period up to January 1991. ATMB argued there was no production outside books for February–March 1991 due to stock and lack of demand; the Tribunal accepted that such factual explanations (including customary labour leave around Makara Sakranti) required the Department to reconsider the computations rather than apply blanket extrapolations. The Tribunal directed that unaccounted production be recomputed in light of these observations.
- Standard of review of CIT(A): The Tribunal criticized the CIT(A) for failing to apply judicial mind consistently and for appearing to rely on personal knowledge rather than facts on record in parts; this contributed to upholding some additions that the Tribunal found unsustainable.
Holding and Implications
APPEALS PARTLY ALLOWED / DISPOSED OF
Holding (direct outcomes as stated in the opinion):
- In respect of M/s. Anjaneya Brick Works (ITA No. 685, AY 1991-92) the Tribunal accepted the appellant's contention that the seized document A-19 related to the period relevant to AY 1992-93 and therefore could not justify additions for AY 1991-92. The Tribunal set aside the estimation based on that document and accepted the appellant's plea that there was no evidence of suppression of income for AY 1991-92 on the materials relied upon by the AO.
- Estimates of production made uniformly at 90,000 bricks per week for 52 weeks and the adoption of an assumed gross profit of 64% were held to be arbitrary and unsupported; those particular additions were rejected or required recomputation consistent with the Tribunal's analysis.
- Allegations of transportation business and unaccounted investments were not sustained for lack of evidence and were rejected.
- In the case of ATMB (ITA No. 684, AY 1991-92) the Tribunal accepted that the AO must reconsider unaccounted production for February–March 1991 in the light of the assessee's explanation (stock on hand and lack of demand) and that accepted gross profit rate of 25% (as reflected in books and accepted by Department for disclosed turnover) should be applied to any recomputed unaccounted sales instead of 64%. The Tribunal expressly relied on the Tribunal order in Gupta Bros. for that approach.
- The appeals for AY 1992-93 (IT Appeal Nos. 262 and 263) raise almost identical issues and were decided in line with the findings in the appeals for AY 1991-92.
Implications:
- The immediate effect is that several additions made by the Assessing Officer (and in parts affirmed by the CIT(A)) were disallowed or remitted for recomputation consistent with the Tribunal's findings: specifically, use of A-19 for AY 1991-92, the 52-week uniform production estimate, and the 64% gross profit estimate were struck down where unsupported.
- The Tribunal directed that where recomputation is required it should be done taking into account the factual explanations (e.g., seasonal labour absence, stock and demand conditions) and applying the accepted bookkeeping GP where appropriate (25% for ATMB), rather than arbitrary inflations unsupported by record evidence.
- The opinion did not purport to lay down any novel legal principle beyond application of established authorities (Homi Jehangir Gheesta and CIT v. Biju Patnaik) requiring fair consideration of all material facts; therefore no new precedent was created by these orders beyond their application to the facts of these cases.
This summary is based exclusively on the information contained in the provided opinion and does not introduce any facts or conclusions not present in that text.
Hari Om Maratha, J.M. : All the above appeals deal with common question of law and facts and, therefore, they are decided together by this order. The assessment years involved in these appeals are 1991-92 and 1992-93. M/s Anjaneya Bricks and M/s. Anjaneya Brick Works are two sister concerns.
2. The facts of all these appeals are almost identical but the facts in ITA No. 685 are mentioned hereinbelow for the sake of convenience.
3. The appellant M/s. Anjaneya Brick Works is a firm of three partners namely Shri G. Ramaiah Reddy and two HUFs with Kartas Raghava Reddy (S/o G. Ramaiah Reddy) and Dasarath (S/o G. Ramaiah Reddy). It is engaged in the manufacture and sale of bricks.
4. There is another firm by the name M/s. Anjaneya Table Mould Bricks ("ATMB" for short) which is also engaged in the same line of business i.e., manufacture and sale of bricks. The partners in this firm are, namely,
Smt. Rathnamma (wife of Ramaiah Reddy),
Smt. H. Varalakshmi (wife of Raghava Reddy), and
Smt. R. Asha (wife of R. Dasarath).
On 2-6-1992, search operation under section 132 of the Income-tax Act, 1961 (hereinafter referred to as "the Act") was carried out in the case of M/s. Anjaneya Brick Works. During the course of search, several incriminating documents showing the details of number of raw bricks cut in different periods were found. These documents included—
Document marked "A-10"-showing quantity of bricks cut in the case of ATMB for the period 3-2-1990 to 5-1-1991 aggregating to 53,93,000 bricks.
"A-13"-showing quantity of bricks cut in the case of ATMB for the period of 6-4-1991 to 31-3-1992, aggregating to 40,69,550 bricks.
"A-19"-showing quantity of bricks cut in the case of M/s. Anjaneya Brick Works for the period from 6-4-1991 to 5-10-1991 aggregating to 24,59,740 bricks.
Before the search, the assessee had filed a return on 29-8-1991 along with P&L account showing :
Rs.
Opening stock1,77,400
By sale19,36,168
Transportation loading/Unloading13,16,168
Closing stock2,64,530
Net profit1,66,707
On the basis of seized documents, the Assessing Officer took action under section 148 of the Act. To which the assessee/appellant replied that production has been considered by the learned Assessing Officer for 52 weeks, whereas, in this line of business, where there can be no uniformity depending on the climate and labour, instead production should be considered for 26 weeks.
5. Now, we would take the appeals year-wise. First we would take appeal No. 685 itself.
(i)The plea of the appellant in this regard is that for the assessment year 1991-92 no incriminating documents were seized by the DI because the document marked "A-19" relates to the period from 6-4-1991, to 5-10-1991, which may be relevant for the assessment year 1992-93 and not for the assessment year 1991-92.
After hearing the rival submissions regarding this appeal we come to the conclusion that the appellant has a good case on merits. In the assessment order dated 31-3-1994 for assessment year 1991-92, in the case of the appellant M/s. Anjaneya Brick Works, an estimation of production had been made relying on the seized document marked "A-19" which relates to assessment year 1992-93 and not the accounting year under consideration. The assessee/appellant’s plea is that in the absence of any incriminating document, its accounts as per the returned income should have been accepted. The Assessing Officer calculated the suppressed production as follows :
| Opening stock | Nil | |
| Production for 52 weeks at 90,000 bricks per week | 46,80,000 | |
| Less : 35 per cent for wastage, etc. | 16,38,000 | |
| 30,42,000 | ||
| Less : Closing stock | 50,000 | |
| Production of finished bricks | 29,92,000 | |
| Less : Sales disclosed to Department | 22,79,436 | |
| Suppressed production | 7,12,564 |
The Assessing Officer also estimated the additional gross profit of 64 per cent thus, enhancing income to Rs. 5,35,023.
(iii)The first limb of arguments of the learned authorised representative is that so far as the assessment year 1991-92 in the case of M/s. Anjaneya Brick Works is concerned, there is no evidence of suppression of income. We are convinced by the arguments of learned authorised representative to that effect. This is almost settled principle of law that mere existence of evidence to support concealment of income for the next assessment year (i.e. 1992-93 in this case) cannot be made a basis judiciously to estimate the income for the current year or any other assessment year for that matter. On the basis of materials related to assessment year 1992-93, we cannot conclude that there existed unaccounted sales and income for the previous year relevant to assessment year 1991-92 which is the subject-matter of this appeal. The order of the CIT(A) based on this presumption alone cannot be sustained in the eyes of law. Moreover, there is not a whit of evidence regarding the unaccounted investment for the years 1991-92 and 1992-93. And also the other circumstance that the appellants are also managing the activities of the other firm, which is a sister concern, can also be concluded to be in favour of the appellants, because when both the businesses are related to one family, it is immaterial in which of the kiln, irrespective of the fact whether it is having more or less chambers, the work was got done. When two views are possible, the one which is in favour of the assessee/appellant is to be given effect to. We accept this plea of the appellant.
6. The next issue relates to the estimation done by the Department regarding unaccounted production, applying the rule of uniformity of production for the entire year comprising of 52 weeks.
This estimation has been done only on the basis of evidence of suppression in production of bricks found in the case of ‘sister concern’ M/s. Anjaneya Table Mould Bricks, which is admittedly different firm with different constitution. There is no interconnection or intermingling of business transactions, except that the partners belong to the same family.
The Hon’ble Supreme Court has held in the case of Homi Jehangir Gheesta v. Commissioner Of Income Tax, Bombay [1961] 41 ITR 135 and also reiterated the same ratio in the case of CIT v. Biju Patnaik [1986] 58 CTR (SC) 65/ 160 ITR 674 (SC) :
"every material fact for and against the assessee is to be considered fairly with due care in reaching the final conclusion without being coloured by irrelevant consideration or matter of prejudice."
We accept the plea of the learned authorised representative that both the Assessing Officer and CIT(A) adopted an approach which is untenable in law but may be tenable in logic. We are to decide a matter in dispute as per law to the true and final facts of a case. The authorities below estimated the unaccounted production uniformly at the rate of 90,000 bricks per week for the entire year of 52 weeks. This estimate is purely on a notional basis and seems to be arbitrary and devoid of any merits. There cannot be uninterrupted production on all days round the year in this line of business; where rains and other climatic conditions play a major role. Moreover, this is a business which is 100 per cent dependent on the availability of labour, who in turn are more tempted to go to their native places on the major festivals. It is also a common place knowledge that once these people go to their native homes, they take some time to come back because they come to the place of work along with their bag and baggages and go back to perform other important activities of their life including marriages, etc., of their grown-ups. So the rule of uniformity cannot be and should not be applied on the estimate basis. We concede that there can be time and times when the uniformity can be maintained but for that case there should be some direct evidence available in a given case.
Likewise the estimation done by the Department so far as the gross profit is concerned that also seems to be unreasonable in the absence of the comparable cases and in the presence of the admitted GP for the assessment years 1990-91, 1991-92 which are stated to have been accepted by the Department at 29 per cent and 22 per cent respectively. So the estimate at 64 per cent on alleged suppressed turnover of Rs. 5,70,091 is totally unreasonable to our mind. The learned Departmental Representative has not been able to substantiate this estimation by any evidence.
7. The next issue again seems to be innovation added by the Department because they worked with preoccupied mind in that direction, that the appellant was also doing transportation, because there is no evidence on the file. The Department can be correct in its knowledge regarding the nature of business in this line but being quasi judicial authority, it is bound to base its conclusions on evidence available on record in each and every case. Applicability of law cannot be done on generalized facts. It is to be applied to a particular set of facts only. Likewise, the innovation of unaccounted investment for the assessment year 1991-92 and 1992-93 is also not all supported by any evidence. The learned Departmental Representative could not demonstrate this fact by any evidence before us. We are left with no option but to accept the plea of the appellant.
8. Now, we will take up ITA No. 684 in which M/s. Anjaneya Table Mould Bricks is the appellant and the appeal pertains to assessment year 1991-92.
"(i)Admittedly, certain documents were seized by the Department during the course of search which are marked as "A-10" (mentioned in para 4 above) for the period from 1-4-1990 to January 1991. The case of the appellant is that no production took place during the months of February and March 1991 outside the books, as there was no demand and there was stock on hand.
(ii)The learned Assessing Officer estimated the unaccounted production for February and March 1991 at 7,39,200 bricks and fixed the annual unaccounted production at 52,79,940 bricks. Finally he determined the unaccounted production at 14,51,966 bricks after taking into consideration the usual wastage etc., and fixed its sale price at 0.80 paise per brick and arrived at a turnover of Rs. 11,61,573. He estimated the GP at 64 per cent.
(iii)The learned Assessing Officer accepted the regular books of account containing the disclosed turnover of Rs. 15,94,265 on sale of 19 lakhs bricks with a capital of Rs. 3 lakhs. But confirmed for unaccounted production and sale of 11,61,573 bricks; a capital of 1/3rd of the suppressed turnover of Rs. 11,61,573/3 = 3,87,191. The CIT(A) came to his own different computation by working out the unaccounted production at 5883 lakhs for the period 1-4-1990 to 31-3-1991, as against 52.79 lakhs worked out by the Assessing Officer for entire year. He worked out the income at Rs. 9,29,579 as against Rs. 7,43,047 worked out by the Assessing Officer. But ultimately confirmed the addition of Rs. 7,43,047 which was made by the learned Assessing Officer.
(iv)The sequence of all these events go to suggest that the CIT(A) had one thing in mind and even after applying the same confirmed the other thing which was done by the learned Assessing Officer. It seems that the learned CIT(A) did not properly apply his judicial mind. With due respect, we would like to say it again that the CIT(A) applied his personal knowledge in this line of business instead of available facts and figures. This is not permitted to any quasi judicial authority to confuse like that.
(v)The learned CIT(A) should have considered the facts brought to his notice by the appellant that during the month of January labourers leave for Makara Sakranti on a long leave. This is quite obvious and natural as we have discussed in earlier part of our order. This is also a noticeable fact that the production of bricks is to be taken only when there is demand in excess of the stock. But in the case of this appellant the documents were seized, so the Department is at liberty to make estimation for the remaining months, but after considering the reasonable explanation of the assessee the unaccounted production thus should be recomputed in the light of our above observation in this case.
(vi)So far as gross profit estimate is concerned, it cannot be 64 per cent in the absence of comparable cases. When the declared GP as per the regular books on the disclosed turnover of Rs. 15,94,265 has been only 25 per cent and the same has been accepted we hold that GP of 25 per cent should be adopted on the unaccounted sale. We find support from the order of the Tribunal in Gupta Bros. v. Asstt. CIT [1997] 93 Taxman 218 (Gau.).
(vii)So far as the IT Appeal Nos. 262 and 263 relating to assessment year 1992-93 are concerned, the issues are almost identical as have been decided by us in Appeal Nos. 684 and 685 relating to these assessees. Our findings are also to the same effect so far as undisclosed production, unaccounted production and GP rates, etc., are concerned. These issues are decided in the light of our above observation.
9. As a result, we dispose of these appeals and hold accordingly by partly accepting the appeals of the appellants.
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