Ita/109/2007 Of Dr. R.p. Patel v. Commissioner Of Income Tax, Kottayam

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.SURENDRA MOHAN FRIDAY, THE 3RD APRIL 2009 / 13TH CHAITHRA 1931 ITA.No. 109 of 2007() --------------------- ITA.197/COCH/2005 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT: ------------------------------ DR.R.P. PATEL, HAHNAMAN HOUSE, KOTTAYAM. BY ADV. SRI. SARANGAN, SENIOR COUNSEL & BY ADV. SRI.RAMESH CHERIAN JOHN RESPONDENT(S): --------------- COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL,GOI(TAXES) AND BY ADV. SRI. JOSE JOSEPH THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 03/04/2009, ALONG WITH ITA NO. 95 OF 2007 AND CONNECTED CASES THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C .N. RAMACHANDRAN NAIR &K. SURENDRA MOHAN, JJ. --------------------------------------------I.T.A. Nos. 109, 94, 95, 98,103, 104, 106 & 108 No. OF 2007--------------------------------------------Dated this the 3rd day of April, 2009 JUDGMENT Ramachandran Nair,J. These connected appeals filed by the assessee arise from thecommon order of the Income Tax Appellate Tribunal disposing ofassessee's appeals for the assessment years 1991-92 to 1998-99. Theassessee is a renowned Homoeo doctor engaged in medical practice atKottayam. Besides income from profession, the assessee is engaged insale of medicines and books. Admittedly assessee was not maintainingbooks of accounts for his professional income and income was returnedon estimation basis. Search was conducted in the professional-cum-residential premises of the assessee on 30.12.1994. During the courseof search substantial amount of cash, Indira Vikas Patras (IVP) valuedat substantial amount and promissory notes were recovered. From thelocker maintained by the assessee in the State Bank of India, JawaharNagar, Baroda, the Department seized IVPs of face value Rs. 67.60 lakhs out of which IVPs of Rs. 90,000/- was found to be purchased bythe assessee's son and balance Rs. 66.70 lakhs was found to be theinvestment of the assessee. Based on the recovered cash, IVPs. andpromissory notes and other recovered documents, the assessing officerrevised assessments already completed under Section 147 of theIncome Tax Act, hereinafter called the "Act", and regular assessmentswere completed for later years. From the records, it was found that theassessee was maintaining Patients Register and assessee charges initialamount of Rs. 30/- towards consultation fee and all charges laterrecovered are towards value of medicines supplied. However, theDepartment noticed that instead of writing the full amount, the assesseewas using N for 90, S for 60, F for 50, etc. After decoding the entriesin the seized books, entire amount recovered was found out and theassessing officer while assessing the income from profession grantedan estimated expenditure of 20% from the total receipts. It was thefinding of the assessing officer that assessee would have drawnmedicines from the trading division maintained by him as proprietorand so much so no deduction is called for towards purchase value of medicines. However, in first appeal, the CIT (Appeals) differed fromthe view taken by the assessing officer and held that assessee wouldhave made unaccounted purchase of medicines and so much so he isentitled to deduction of cost of medicines. He estimated 85% of thetotal receipt towards cost of medicines and out of the same he permittedaddition of only 32% which is gross profit received by the assessee intrading of medicines. When the matter went in appeal before theTribunal, Tribunal granted further deduction in estimating professionalincome on the ground that assessee would have incurred overheadexpenditure. medicines. However, in first appeal, the CIT (Appeals) differed fromthe view taken by the assessing officer and held that assessee wouldhave made unaccounted purchase of medicines and so much so he isentitled to deduction of cost of medicines. He estimated 85% of thetotal receipt towards cost of medicines and out of the same he permittedaddition of only 32% which is gross profit received by the assessee intrading of medicines. When the matter went in appeal before theTribunal, Tribunal granted further deduction in estimating professionalincome on the ground that assessee would have incurred overheadexpenditure. 2. The assessee raised a contention that investment in IVPs iscapital in nature and therefore interest in IVPs should be assessedtowards capital gain on encashment. This claim was turned down byall the authorities including the Tribunal. The assessee alternativelyraised a contention that even if IVPs are not capital in nature, interestshould be treated as income only on receipt, that is on encashment ofthe IVPs and should not be taken on year to year basis, based onaccrual of interest. This claim was also rejected by all the authorities, including the Tribunal. The last issue pertains to assessee's challengeagainst charging of interest under Section 234B of the Act. Theassessee pointed out that except for the assessment years 1996-97 and1998-99, the assessing officer has not mentioned anything aboutchargeability of interest under Section 234B in the body of the order,and for other years he has worked out interest in the last portion of theassessment order. Therefore the demand of interest is unauthorised, isthe case of the assessee. However, all the authorities, including theTribunal, upheld in principle the assessee's liability for interest fordefault in payment of advance tax under Section 234B of the Act.However, on the quantum of interest, Tribunal took note of theassessee's argument that Post Offices have not deducted tax at sourceand remanded the matter to determine the quantum of interest. It isagainst these findings of the Tribunal, that the assessee has filed theseappeals under Section 260A of the Act raising the following commonquestions: 1. Whether on the facts and circumstances o the case, theAppellate Tribunal being the final authority on questions of fact was justified in law in disallowing the claim of espenseof salaries to doctors, staff and depreciation of car incomputing the professional income by not entertaining theground, treating the issue as factual and without dealingwith the judgment of the Supreme Court in (1992) 84 STC383. 2. Whether on the facts and circumstances of the case theAppellate Tribunal is justified in holding that IVPs are notbonds and hence not capital asset inspite of the judgment ofthe Supreme Court in 2006 (2) K.L.T. 423 holding thatIVPs are bearer bonds. 3. Whether on the facts and circumstances of the case theTribunal is justified in holding that there is no market valuefor IVP and it cannot be termed as capital asset by nonconsidering the decisions relied on and by stating that theyare irrelevant. 4. Whether on the facts and circumstances of the case theAppellate Tribunal was justified in holding that the onlydecisions available on IVP i that of the Mumbai Bench ofthe Tribunal in 89ITD 282 and in view of the said decisionIVP is neither a capital asset nor there can be any transferon maturity of the IVP by treating the Apex Court decisionin (2006) 2 KLT 423 as irrelevant and by misreading theTribunal order. 5. Whether on the facts and circumstances of the case theAppellate Tribunal was justified in holding that it was heldin 29 ITD 282 that IVP is not a capital asset while the veryassessment was made by holding that IVP is a capital asset. 6. Whether on the facts and circumstances of the case theAppellate Tribunal was justified in law in holding that thereis no transfer when the assessee gets back the money from 5. Whether on the facts and circumstances of the case theAppellate Tribunal was justified in holding that it was heldin 29 ITD 282 that IVP is not a capital asset while the veryassessment was made by holding that IVP is a capital asset. 6. Whether on the facts and circumstances of the case theAppellate Tribunal was justified in law in holding that thereis no transfer when the assessee gets back the money from post office and as such IVP is not a capital asset withoutdealing with the Supreme Court judgment in 219 ITR 478and treating the said judgment as not relevant. 7. Whether on the facts and circumstances of the case theAppellate Tribunal was justified in law in holding that it isa condition precedent as per IVP rules that IVP will beissued on condition that interest shall be deemed to haveaccrued at the end of each for Income Tax Payable and theassessee is bound by such rule even though such IVP rulehas not been incorporated in the Income Tax Act or Rules. 8.Whether on the facts and circumstances of the case theIncome Tax Appellate Tribunal was justified in law onholding that vy virtue of rule 8(3) of the IVP rules interestaccrued ;every year and is taxable under the Income Taxover looking the provisions of Section 2(24) and Sections 4and 5 of the Income Tax Act. 9. Whether on the facts and circumstances of the case theAppellate Tribunal was justified in law in holding that thecash system of accounting followed is not acceptable, sincethe sheets as per KPA1 is not book maintained withoutdealing with the judgment in 110 STC 59. 10. Whether on the facts and circumstances of the case theAppellate Tribunal was justified in confirming the levy ofinterest under Section 234B after admitting that no order ismade in the assessment order for charging interest and thereis no question of ITNS 150 without following the SupremeCourt judgment in 247 ITR 209 and 278 ITR 1 and also theTribunal decision in ITA 355/Coch/1999 and the judgmentin 183 CTR 473. 11. Whether on the facts and circumstances of the case theAppellate Tribunal was justified in law in holding that there is no deficiency in the assessment order in respect ofchargeability of sintrest under Section 234B when bonafide dispute was pending as to income estimated and levywas without hearing and reasons. 12. Whether on the facts and circumstances of the case isnot the order of the Tribunal perverse in as much as theTribunal has decided the issues not on the basis of law laiddown by the Apex Court/High Court but on the basis ofwhat the Tribunal decided by holding that the principlesarising out of the precedents are not relevant. We have heard Sri. G. Sarangan, senior counsel appearing for theassessee and standing counsel appearing for the revenue. 3. The first question pertains to disallowance of assessee's claimof deduction on salary paid to doctors, staff and depreciation for car,furniture, etc. in the determination of professional income of theassessee. The assessee's grievance is that the Tribunal rejected theclaim for the reason that the claim was made for the first time beforethe Tribunal and the assessee never raised the issue in assessmentbefore the officer or in first appeal before the first appellate authority. Admittedly the assessee did not make such a claim in the assessmentor in first appeal. According to the assessee the claim pertains to salarypaid to two doctors and staff members and the depreciation allowable 3. The first question pertains to disallowance of assessee's claimof deduction on salary paid to doctors, staff and depreciation for car,furniture, etc. in the determination of professional income of theassessee. The assessee's grievance is that the Tribunal rejected theclaim for the reason that the claim was made for the first time beforethe Tribunal and the assessee never raised the issue in assessmentbefore the officer or in first appeal before the first appellate authority. Admittedly the assessee did not make such a claim in the assessmentor in first appeal. According to the assessee the claim pertains to salarypaid to two doctors and staff members and the depreciation allowable on furniture, fixtures, car, etc. However, the assessee's claim before theTribunal was only on estimation basis and not on actuals. The Tribunalrejected the claim on the ground that the claim made for the first timebefore it cannot be entertained. The assessee has relied on the decisionin P.P. VARKEY & COMPANY V. DY. CST (LAW), BOARD OFREVENUE (TAXES), 84 STC 383 and that of the Supreme Court inCIT V. STEPWELL INDUSTRIES LTD., 228 ITR 171. However, wenotice that the Tribunal has relied on the Larger Bench decision of theSupreme Court in NATIONAL THERMAL POWER CO. LTD. V.CIT, 229 I.T.R. 383 and held that Tribunal can allow a new legal issueto be raised before it for the first time, if the facts are already availableon record. Since facts pertaining to remuneration paid to doctors, staffand claim of depreciation were not available on record, the Tribunaldeclined to entertain the claim made before it for the first time. TheTribunal in their order noted that assessee has not produced any proofof payment to doctors and staff. We do not think the assessee isentitled to succeed on this issue not only for the reason stated by theTribunal, but also for the reason that professional income of the assessee is refixed by the Tribunal on estimation basis whereunder overand above the relief granted in first appeal, the Tribunal has granteddeduction towards overhead expenditure. Admittedly assessee did notmaintain any books of accounts and assessee himself returnedprofessional income on estimation basis from total receipts. If assesseehas regular employees we see no reason why the assessee could notmaintain proper accounts showing the payments made to them and toclaim eligible deductions, such as remuneration paid to staff,depreciation earned, etc and return the actual income for assessment.On the other hand, assessee himself returned only estimation of incomefrom gross receipts and therefore he cannot at the second stage ofappeal before the Tribunal come forward with claims of deductionstowards remuneration paid to employees, including doctors,depreciation for furniture, fixtures, etc. In fact, the officer himselfallowed 20% of earnings towards expenditure without any evidence atall and over and above this, the first appellate authority estimatedadditional expenditure of Rs. 60,000/- per year, which was increased bythe Tribunal on a percentage basis of the turnover, thereby granting substantial deduction. Therefore this is not a question of law asprojected by the assessee, but only a question of fact, that is, whetherthis Court will be justified in interfering with the order of the Tribunalrefixing the income of the assessee on estimation basis after grantingfurther deductions, that too in a case where return of income itself isfiled by the assessee on estimation basis. We are of the view that nosubstantial question of law arises in the claim of deduction made by theassessee towards salary paid to doctors, and staff and depreciation in acase where the assessee has not maintained books of accounts and hasreturned his professional income on estimation basis. In our viewwhen assessee returns net income from gross receipts on estimationbasis, and the same is substituted by granting deductions on percentagebasis in assessment and further deductions of estimated expenditure asgranted by first appellate authority and the Tribunal, all suchdeductions granted cover eligible deductions, allowances, and rebatesadmissible under the Act in full. In other words, assessees maintainingbooks of accounts only can claim deductions, allowances and rebatesprovided in the Statute. In any case in view of the larger Bench decision of the Supreme Court in NTPC's case, relied on by theTribunal, the Tribunal is perfectly justified in rejecting the claim as theclaim was raised for the first time before it. We therefore decide thisissue against the assessee. 4. Question Nos. 2 to 6 pertain to one and the same issue, that is,whether IVP is a capital asset or not. It is seen from the orders of theTribunal that investment in IVP is assessed in the case of the assesseeas unexplained investment only to the extent of fresh investment madein the respective year and reinvestment after encashment of earlierdeposits was in fact allowed. The assessee's claim that IVP is a capitalasset is only for the purpose of evading payment of interest accrued onyearly basis in accordance with the scheme of IVP. The specificcontention raised by the assessee is that IVP is a capital asset andtherefore interest accrued is profit assessable as capital gains. TheTribunal rejected the claim by holding that IVP is nothing but a depositwith the Post Office which entitles the assessee to a specific rate ofinterest on compoundable basis and assessee can encash the depositonly for the maturity value which is pre-determined. The assessee has relied on several Courts' decisions for the proposition that IVP is acapital asset. IVP is admittedly a deposit scheme framed by theGovernment of India for making deposits in the Post Offices. Purchaseof IVP amounts to depositing a specific amount in Post Office for aspecific period at specified rate of interest. On maturity the holder canencash the same from the very same post office. The rate of interest forIVPs purchased before 31.3.1987 was 14.97 per cent per annumcompounded on the initial sale value. For certificates purchased after1.4.1987 the rate of interest was reduced to 13.43% per annum.Government while framing IVP Rules of 1986 has provided fortreatment of tax liability for the interest earnings. Rule 8(3) of the IVPRules 1986 is as follows: 8(3). In the case of certificate purchased on or before 31stMarch, 1987, interest at the rate of 14.97 per cent perannum compounded on the initial sale value of thecertificate shall be deemed to have accrued at the end ofeach year, calculated from the date of initial purchase of thecertificate from the Post Office up to the end of the fifthyear for the purpose of tax payable by a holder in therelevant assessment year under any law for the time beingin force. 8(3). In the case of certificate purchased on or before 31stMarch, 1987, interest at the rate of 14.97 per cent perannum compounded on the initial sale value of thecertificate shall be deemed to have accrued at the end ofeach year, calculated from the date of initial purchase of thecertificate from the Post Office up to the end of the fifthyear for the purpose of tax payable by a holder in therelevant assessment year under any law for the time beingin force. Under sub-rule (4) the above scheme is retained for deposits made after1.4.1987 but with reduced rate of interest at 13.43 per cent per annum.Even though assessee contended that IVP Rules cannot be read into thescheme of the Income Tax Act or Rules, we are unable to accept thiscontention because Rule referred to in the IVP pertaining to tax canonly be related to income tax payable under the Income Tax Act, 1961.Standing counsel appearing for the department referred to the decisionof the Supreme Court in CIT V. BAGYALAKSHMI & CO., A.I.R.1965 SC. 1708 and contended that other statutory law not inconsistentwith the Income-tax Act should be applied for the purpose of incometax. we are in agreement with this contention more so because postoffice deposits under IVP Rules specifically refer to tax on interest.So long as the Rule is not in derogation of the scheme of IT Act it isapplicable for the purpose of the I.T. Act. Section 2(14) defines"capital asset" as property of any kind. Clauses (iv), (v) and (vi)specifically excludes certain bonds from the definition of "capitalasset". Relying on these definition clauses, the assessee contended thatall other bonds are capital assets and therefore IVPs are also in the nature of capital asset. The assessee has relied on the decision in M.P.FINANCIAL CORPORATION'S case, 132 I.T.R. 884 and contendedthat bonds are capital assets. However, we do not think IVPs can betreated as bonds because it has no sale value or market value as such. Itis nothing but a deposit made in the Post Office which entitles thedepositor to receive pre-fixed specific rate of interest and on maturityonly the principal amount with accrued interest will be paid. Eventhough it is transferable it has no market value as such and has onlymaturity value which is nothing but invested amount with accruedinterest. Further, the Tribunal rightly pointed out that the scheme oflong term capital gains providing for granting benefits of indexed costof acquisition under Explanation (iii) to Section 48 of the Act cannotapply to IVP. We are of the view that repayment of the depositedamount with interest on maturity by the Post Office cannot be treated asconsideration for transfer of IVP by the holder. Therefore the Tribunalrightly rejected the assessee's claim that IVP is a capital asset. Wetherefore dismiss the assessee's appeals on this issue. 5. Questions 7 to 9 pertain to assessee's claim that interest under 5. Questions 7 to 9 pertain to assessee's claim that interest under IVP scheme is assessable on receipt basis that is on encashment of IVPon maturity. We have extracted above Rule 8(3) of the IVP Rules,1986 which provides for treatment of interest accrued on IVP on yearlybasis at the rate prescribed in the Rules. However, assessee'scontention before the Tribunal and before us is that there is noincorporation of the IVP Rules in the IT Act and Rules and thereforeIVP Rule has no application. The only question to be considered iswhether in the absence of incorporation of Rule 8(3) of the IVP Rulesin the Income Tax Act and Rules the assessment of interest annually onaccrual basis is permissible. In the first place, assessee has not paidany tax on interest received on IVP on receipt basis. On the otherhand, entire investment in IVPs and interest earned thereon were keptout of income tax return filed and only after search the assessee offeredinterest for assessment while filing return and revised return for theyear 1995-96. We are of the view that the assessee who does not evenmaintain books of accounts can canvass for assessment of interestincome on cash basis which applies only to assessees who maintainbooks of accounts. Charging Section under the Income Tax Act, namely,Section 4, Section 2(24), which defines "income" and Section5,which provides for total income, authorise assessment of incomeeither received or deemed to be received or income accrued or deemedto be accrued in India. The assessee cannot raise the contention thatconditions of issue of IVP do not bind him. In fact, conditions of issueof IVP are exhaustively provided in the IVP Rules above referred,which under Rule 8(3) provides for assessment of interest income forthe purpose of income tax. We have already held that tax referred to inRule 8(3) can only be the income tax liability under the Income TaxAct, 1963. Further by virtue of the decision of the Supreme Court inBAGYALAKSHMI'S case referred above, IVP Rules apply forincome tax purposes. Since Rule 8(3) of the IVP Rules binds all thedepositors, and the assessee as well. The assessee after making depositin IVPs cannot contend that interest on deposit does not accrue interms of Rule 8(3). Even though assessee contended that no deductionof tax at source was made by the department on accrual basis, we donot think the same will entitle the assessee for exemption from paymentof tax on interest income on accrual basis. We do not know whether specific provision for payment of tax by holder is made in the Rulesonly because recovery of tax at source on interest on accrual on yearlybasis is practically impossible and further by virtue of transferability,the holder of IVP may keep on changing. The scheme of IVP Rulesprovide for one time payment on maturity and under no circumstanceIVP can be encashed before maturity. However, the contention ofassessee that interest income can be assessed to tax only on maturityand after encashment cannot be accepted because Rule 8(3) binds andobliges every investor in IVPs to pay tax on accrued interest inaccordance with the rule. Even though assessee has relied on therecent decision of this Court in CIT V. FEDERAL BANK LTD.,(2008) 1 K.L.T. 982, we find that Government security referred totherein is not comparable to IVPs which is issued with specific clauseproviding for accrual of interest on yearly basis. We therefore upholdthe finding of the Tribunal and reject the assessee's appeals on thisissue. 6. Question Nos. 10 and 11 pertain to assessee's challengeagainst levy of interest under Section 234B of the Act for non-payment 6. Question Nos. 10 and 11 pertain to assessee's challengeagainst levy of interest under Section 234B of the Act for non-payment of advance tax. The assessee has relied on the decision of the SupremeCourt in CIT V. RANCHI CLUB LTD., 247 I.T.R. 209 and decision ofthe Delhi High Court in CIT v. INCHCAPE INDIA (P) LTD., 179I.T.R. 212 (Del.) and the decision of this Court in CIT V.TRAVANCORE TITANIUM PRODUCTS, 183 CTR 473 andcontended that interest cannot be levied under Section 234B. However,Tribunal relying on the special Bench decision of the Tribunal inMOTOROLA V. DY. CIT, 95 ITD 269 (Del.) upheld the levy inprinciple though remanded the matter for recomputation of the actualinterest liability. Standing counsel for the department has contendedthat Sections 234A, 234B and 234C are mandatory in nature and theyrelied on the decision of the Supreme Court in CIT V. ANJUM M.H.GHASWALA, 252 I.T.R. 1 and that of this Court in CIT v R.RAMALINGAIR, 241 I.T.R. 753. The main contention raised by theassessee is that except for the assessment years 1996-97 and 1998-99,there is no statement in the assessment order about interest chargedunder Section 234B of the Act. However, assessee admits that in thecomputation portion, the assessing officer has worked out the interest due under Section 234B in all the assessment orders . We do not thinkthe assessee's contention is tenable because after the amendment to theprovisions in the statute by Direct Tax Laws (Amendment) Act, 1987with effect from 1.4.1989 interest payable under Sections 234A, B andC are mandatory in nature and no discretion is vested in the assessingofficer in this regard. In fact provisions prior to amendment gavediscretion in regard to waiver of interest. Once interest is mademandatory, the liability falls automatically on the assessee on default.The balance is only working out the amount due. The Supreme Courtin KALYAN KUMAR RAY V. CIT (1996) 191 I.T.R. 654 held thatcalculation part of tax payable need not be done in the assessment orderitself, but can be done separately in form No. ITNS 150, subject to thecondition that the said form is signed or initialed by the Income-taxOfficer. In this case, the omission in the assessments except for twoyears is that assessing officer does not say that interest is charged, buthe has worked out the interest in the assessment order itself. Wheninterest which is mandatory under the Act, falls automatically ondefault, there is no need for the assessing officer to write in the assessment order that he is charging interest. In fact there is a need topass such an order only if he has the discretion about interest. Sinceliability is statutory on default, officer is left with only the duty towork out the interest which admittedly he has done in the assessmentorder itself. Therefore technical objection raised by the assessee wasrightly found to be untenable by the Tribunal. So far as quantum ofinterest demanded is concerned, Tribunal has remanded the matter forfresh consideration by the assessing officer. We do not find anyground to interfere with the order of the Tribunal on this issue also. 7. The last question is only of general nature, which does notdeserve any independent consideration. In view of our above findings, we dismiss the appeals filed by theassessee. (C.N.RAMACHANDRAN NAIR)Judge.Judge. (K. SURENDRA MOHAN) Judge.