Decided on January 31,1994



G. Santhanam, Accountant Member - (1.) THIS Is an appeal by the assessee.
(2.) The assessee is an unregistered firm vending arrack. It had also toddy business. For arrack business it maintained books of accounts. For toddy business no books of accounts were maintained. The profit and loss account in the arrack business showed a net loss of Rs. 8,15,940. However, in the return of income the assessee applied the provisions of Section 44AC of the Income-tax Act, 1961, and admitted an income of Rs. 1,96,536, by estimating the profit at a presumptive rate of 40% on the purchase price of arrack totalling Rs. 4,91,341 as provided for under Section 44AC of the Act. This was accepted by the Income-tax Officer on which there is no dispute before us. On a scrutiny of the cash book and the ledger produced in respect of arrack business, the Income-tax Officer noticed credits in the names of 10 partners as detailed in Annexure A to the assessment order as follows : JUDGEMENT_8510_TLIT0_19940.htm In addition to the above, loans were shown against the following partners as follows : JUDGEMENT_8510_TLIT0_19941.htm There was also difference in cash book on various dates to the extent of Rs. 2,18,850 as noticed in Annexure B to the assessment order. The assessee was asked to explain the credits amounting in all to Rs. 10,20,050 consisting of credits in the partners' current accounts amounting to Rs. 7,21,200, loan accounts of the partners in a sum of Rs. 80,000 and difference in cash book balances of Rs. 2,18,850. The assessee was unable to explain. Hence the Income-tax Officer made an addition of Rs. 10,20,050 to the income of the assessee as computed by him under Section 44 AC of the IT Act and the amount thus added was assessed under "other sources". There is no dispute before us in respect of the toddy business for which no accounts were maintained. The dispute is only with regard to the addition of Rs. 10,20,050 under the head "other sources". The assessee carried the matter in appeal and contended that the sum of Rs. 10,20,050 should be adjusted against the loss of Rs. 8,15,941 and the net balance alone is assessable under arrack business. Even in such a case, in view of the provisions of Section 44AC only a sum of Rs. 1,96,536 could be assessed and thus there was no case for assessing the sum of Rs. 10,20,050 under the head "other sources". The assessee had no other source of income except the income from arrack business, for which accounts were maintained and in which the impugned amounts were reflected. For toddy business it had loss only, but that loss was reduced to 'nil' on agreed basis. Therefore, there was no scope for assessing the impugned amounts under "other sources". The CIT (Appeals) held that if the impugned amounts stood credited directly to the profit and loss account, the assessee would be right in all its contentions. However, the impugned amounts were found credited to the accounts of the partners and there was nothing to show that such credits have come out of the business of the assessee and, therefore, they are rightly assessed under the head "other sources". The assessee is on second appeal. Sri C.K. Nair, the learned Counsel for the assessee contended that the assessee had only two known sources of income viz., arrack business and toddy business. In toddy business it had returned a loss of Rs. 1,56,264. As no books of accounts were maintained for that business the assessee had agreed for "no loss no gain" in toddy business. In arrack business the provisions of Section 44AC stood attracted and therefore whatever be the real profit earned in arrack business, the Legislature had mandated estimation of profit on a presumptive basis. Therefore, the Income-tax Officer is precluded from looking Into the accounts of the business, once he finds that the provisions of Section 44AC stand attracted and once it is seen that the accounts maintained by the assessee were in respect of that business only. In cases where the assessee maintained consolidated accounts for arrack business as well as for other business, then the Income-tax Officer is empowered to look into the accounts to apportion the income as between the two businesses in terms of Section 44AC(3). Such is not the case with the assessee. Hence, after applying the provisions of Section 44AC, to make further additions, that too, on the basis of the books maintained for the arrack business, would be to exceed the mandate of Section 44AC. Assuming that the Income-tax Officer had such powers to look into the accounts of arrack business, notwithstanding the provisions of Section 44AC, Sri Nair contended that the credits were recorded in the books of accounts maintained for arrack business. For toddy business no books were maintained. There was no other source of income for the assessee and the department has not pointed out any such source. Therefore, the credits found in the books relating to the arrack business must be deemed to be the business income, but because of the presumption created under Section 44AC, there cannot be any further addition to the income from arrack business. As the source had been identified in the business, it cannot be assessed under other sources. Alternatively he contended that if the credits are to be assessed at all, they are to be assessed in the hands of the partners and not in the hands of the firm as the credits are found in their respective accounts. Finally he relied on the following decisions: (i) G.M. Chenna Basappa v. CJT [1958] 34 ITR 576 (AP), (ii) Sundar Lal Jain v. CIT [1979] 117 ITR 316 (All.), (iii) CIT v. Maduri Rajaiahgari Kistaiah [1979] 120 ITR 294 (AP) and also on the commentaries found in Chaturvedi & Pithisaria's Income-tax Law, Vol. 2, 7th Edition, p. 1908, Vol. 7 page 6297, Kanga & Palkhivala's Income-tax, Eighth Edition, Vol. I, p. 866 and V.S. Sundaram's Commentary in law of Income-tax in India (12th Edition), Vol. 3, page 235.
(3.) SRI C. Abraham, the learned senior departmental representative submitted that though credits were found in the account books of arrack business, the assessee was unable to explain the source and, therefore, the provisions of Section 68 of the IT Act stood attracted. Section 44AC is applicable only for computation of income from arrack business. Merely because the credits were found in the books maintained for arrack business, it cannot be presumed that the credits are referable to the business profits. It is for the assessee to show that they came out of the business or trading transactions. In this case that has not been established. Section 44AC, though has prescribed the mode of computation of profits from arrack business on a presumptive basis, does not preclude the Income-tax Officer from going into the accounts of the assessee to determine the income of the assessee. The expression 'income' is in an inclusive definition. Profits and gains of business is only one of the constituent units and not the only unit of income.;

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