Ita/551/2009 Of Commissioner Of Income Tax, Kottayam v. M/S Hotel Meriya

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE P.S.GOPINATHAN WEDNESDAY, THE 26TH MAY 2010 / 5TH JYAISHTA 1932 ITA.No. 551 of 2009() --------------------- ITSSA.54/2005 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT:- --------------------------------------- COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/APPELLANT:- --------------------------------------- M/S.HOTEL MERIYA PALA, KOTTAYAM. ADV. SRI.T.M.SREEDHARAN FOR R1 SRI.V.P.NARAYANAN FOR R1 SMT.C.K.SHERIN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 3/2/2010, THE COURT ON 26/05/2010 DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR & P.S.GOPINATHAN, JJ. = = = = = = = = = = = = = I.T.Appeal No.551 of 2009. = = = = = = = = = = = = =Dated this the 26th day of May, 2010. J U D G M E N T Gopinathan, J. This is an appeal preferred by the Department underSection 260A of the Income Tax Act (hereinafter referred toas 'IT Act') against the assessee. The assessee M/s.HotelMeriya, Pala is running a bar attached hotel and wassubjected to assessment with PAN.FV.4140. On 28.6.2001 asearch was conducted under Sec.132 of the IT Act. Duringthe search, though no material was disclosed to show thatthere was suppression of business, it was revealed that therewas suppression of sale outcome. Cash book was seenrecorded upto 25.6.2001. Cash book showed a cash balanceof Rs.21,31,523/-. But, the physical balance was only I.T.Appeal No.551 of 2009. -: 2 :- Rs.34,552/-. On interrogation of the Managing Partner andthe employees it was revealed that only 80% of the actualsales turnover in respect of liquors are recorded in the cashbook. Consequently, the respondent was served notice tofile return under Sec.158BC of IT Act. In response to thenotice, a return was filed on 4.1.2002 as Sl.No.866.Subsequently, a modified return was filed on 5.2.2006. Inthe return a negative income of Rs.29,770/- was disclosedfor the assessment year 2002-'03. In respect of earlierassessment years of the block period, it was declared thatthere was no undisclosed income for assessment underSec.158BC. 2.The assessing officer after perusing the returnfiled under Sec.158BC and hearing the assessee arrived at aconclusion that there was concealing of income amountingto 20% of the disclosed turnover. Accordingly, the totalundisclosed income was determined at Rs.2,37,68,975/-.Consequently, a sum of Rs.1,47,28,446/- including -: 3 :- surcharge at the rate of 2% along with interest at the rateof 1.25% under Sec.158BFA(1) of the IT Act was assessed. 3.Aggrieved by the said assessment, respondentpreferred appeal before the CIT (Appeals). Though CIT(Appeals) concurred with the assessment officer that therewas concealment of income, it didn't agree with theassessment officer that there was suppression of 20%income for the entire block period. Taking into account thatin the hotel there is sale of food items and no suppression ofsale in respect of food items was disclosed, CIT (Appeals)held that there was 5% suppression of turnover of liquor forthe assessment years 1996-'97 to 2000-'01. For theassessment year 2001-'02 the concealment of income wasdetermined at 7% of the turnover and for the assessmentyear 2002-'03 upto 20.6.2001 the concealment wasestimated at the rate of 15%. Thus the total undisclosedincome was determined at Rs.57,93,652/-. 4.The Department and the respondent were I.T.Appeal No.551 of 2009. -: 4 :- 4.The Department and the respondent were I.T.Appeal No.551 of 2009. -: 4 :- aggrieved of the order of the CIT (Appeals). Both preferredappeals before the Appellate Tribunal, Cochin Bench. TheAppellate Tribunal by a common order arrived at a findingthat no evidence was disclosed in the search to show thatthere was suppression of sales for the assessment year1996-'97 to 2000-'01. Hence the addition sustained by theCIT (Appeals) in respect of those assessment years weredeleted. For the assessment years 2001-'02 and 2002-'03upto 28.6.2001 the Appellate Tribunal directed theAssessing Officer to work out the undisclosed income bytaking the profit at 25% on the sale suppression as workedout by the CIT (Appeals)) on Rs.13,77,329/- for theassessment year 2001-2002 and on Rs.8,20,205/- for 2002-2003. Assailing that order this appeal is preferred.5.We heard either side. During the search itwas revealed that the respondent was not issuing bills forsale of the liquor. But, paper slips were issued tothe consumers showing the price. Though a carbon -: 5 :- copy is maintained it didn't contain the price of the articlessold. The Partner of the respondent, who is in-charge of thebusiness, as well as the person in-charge of the accountshad given statements that only 80% of the actual sales out-turn is recorded in the cash book and such practice wasfollowed from the beginning. It was also revealed that intrading and profit and loss account and balance sheetfurnished to the Kerala Financial Corporation for thefinancial years 1998-1999 and 1999-2000 certified by theChartered Accountant showed much higher amount asgross profit and net profit than that was shown in the returnsubmitted by the respondent during the relevant period. Itwas further revealed that on 20.3.2001, Intelligence Squadof the Sales Tax Department of the Government of Keralaconducted an inspection and found that the respondent wasnot maintaining true and correct accounts. The cashbalance as per the cash book was Rs.21,31,523/-. Onphysical verification the cash available was only Rs.34,552/-. I.T.Appeal No.551 of 2009. -: 6 :- The cash books were also not written up-to-date, but upto25.6.2001. On the basis of the above materials, theassessing officer had arrived at a finding that the accountsare not properly maintained and that there is concealmentof income. That finding was upheld by the first appellateauthority as well the second appellate tribunal. This is afinding on facts. The finding of the appellate tribunal onthat aspect was not at all challenged by the respondent. Inthe above circumstance, we find that there is concealmentof income and the respondent is liable to be assessed for theblock period as contemplated under Chapter XIV B of theIncome Tax Act. The dispute is only regarding the mode ofassessment. 6.As we mentioned earlier, the assessing officer onthe basis of the materials collected during the searchconcluded that there was 20% suppression of the income. Itis on that basis the block assessment was made by him. CIT(Appeals) adopted different rates ie, at the rate of 5% I.T.Appeal No.551 of 2009. 6.As we mentioned earlier, the assessing officer onthe basis of the materials collected during the searchconcluded that there was 20% suppression of the income. Itis on that basis the block assessment was made by him. CIT(Appeals) adopted different rates ie, at the rate of 5% I.T.Appeal No.551 of 2009. suppression of turnover during 1996-1997 to 2000-2001, atthe rate of 7% for the year 2001-2002 and 15% for the year2002-2003. The appellate tribunal deleted the additionsustained by the CIT (Appeals) for the years 1996-1997 to2000-2001 with a reasoning that no evidence was found outas a result of the search and such other materials orinformation for making assessment during that period. Itwas also observed by the appellate Tribunal that thestatement under Sec.132(4) of the IT Act has very limitedapplication and that the power to interrogate on oathconferred by Sec.132(4) is not for purpose of generalinvestigation but for the limited purpose of seekingexplanation or information in respect of the documents,articles or things found during the course of search.However, the appellate Tribunal concurred with theauthorities below that there was suppression of sales andfound that 25% of the same being the profit alone is liableto be assessed. I.T.Appeal No.551 of 2009. -: 8 :- 7.The learned counsel for the respondentcanvassing our attention to the decisions reported in C.I.T.v. Dr.M.K.E.Menon (2001 (248) ITR 310), C.I.T. v. FaqirChand Chaman Lal (2003 (262) ITR 295) and C.I.T. v.Nirmal H.Phopalia (2003 (262) ITR 522) and argued thatthe order of the appellate tribunal which is now impugned isbased upon facts and no question of law is involved andhence not liable to be re-appreciated or interfered with.Relying upon the decision reported in C.I.T. v. PresidentIndustries (2002 (258) ITR 654) it was argued that theappellate tribunal was justified in concluding that theconcealment of income is only to the extent of the profit ofthe suppressed sales and that the appellate tribunal wasfully justified in limiting the concealment of income at 25%of the suppressed sales. Having gone through the fact ofthe case in the reported decision and the facts of the caseon hand and the nature of dispute involved, we find that theset of facts involved in the decisions referred above have no I.T.Appeal No.551 of 2009. -: 9 :- similarity with the case on hand and that hence the rulingsof the case are not applicable to the case on hand. 8.In the appeal memorandum, the appellant hadraised as many as 8 questions of law. Having gone throughthe questions of law raised and the dispute involved, we findthat many of the questions of law raised are relating to thequestion of facts and that in fact, the following questions oflaw would arise for consideration in this appeal: (i)Whether the statement of the partner of therespondent as well as of the employees alongwith the documents seized would tantamountto evidence under Sec.158BB of the IncomeTax Act or whether the statement recordedunder Sec.132(4) has only very limitedapplication?respondent as well as of the employees alongwith the documents seized would tantamountto evidence under Sec.158BB of the IncomeTax Act or whether the statement recordedunder Sec.132(4) has only very limitedapplication? (ii)Whether the evidence found as a result ofsearch or other such materials or informationis sufficient enough to conclude that therewas concealment of income for theassessment years 1996-1997 to 2000-2001?search or other such materials or informationis sufficient enough to conclude that therewas concealment of income for theassessment years 1996-1997 to 2000-2001? (iii) Whether the concealment of income duringthe search is liable to be taxed as such or25% or any other turnover thereof as profitthe search is liable to be taxed as such or25% or any other turnover thereof as profit I.T.Appeal No.551 of 2009. -: 10 :- (ii)Whether the evidence found as a result ofsearch or other such materials or informationis sufficient enough to conclude that therewas concealment of income for theassessment years 1996-1997 to 2000-2001?search or other such materials or informationis sufficient enough to conclude that therewas concealment of income for theassessment years 1996-1997 to 2000-2001? (iii) Whether the concealment of income duringthe search is liable to be taxed as such or25% or any other turnover thereof as profitthe search is liable to be taxed as such or25% or any other turnover thereof as profit I.T.Appeal No.551 of 2009. -: 10 :- is liable to be taxed; if so at what rate? (iv) Whether the respondent is liable forsurcharge?surcharge? Question No.(i): The assessing officer during the search had seized certain sale slips, copy of the same, copyof certain bills and recorded statements of Mathew Cyriac,a partner of the respondent, Santhosh Scaria, an employeein-charge of the bar and others. The assessing officerfinalised the block assessment on the basis of the abovematerials collected. The appellate tribunal had observedthat the statements so recorded and the materials collectedwould not amount to evidence as contemplated underSec.158BB and that the statement recorded under Sec.132(4) of the IT Act has only very limited application. What isevidence? We shall examine it first. Evidence is defined inSec.3 of the Evidence Act as follows: "Evidence":- "Evidence" means and includes- (1)all statements which the Court permits orrequires to be made before it by witnesses,requires to be made before it by witnesses, -: 11 :- in relation to matters of fact under inquiry, such statements are called oral evidence; (2)all documents including electronic recordsproduced for the inspection of the Court,produced for the inspection of the Court, such documents are called documentaryevidence." evidence." The 'Court' mentioned above in the definition of evidence would include all persons, except arbitrators, legallyauthorised to take evidence as defined under Sec.3. InSec.3, Court is defined as follows: "Court" - "Court" includes all Judges and Magistrates, and all persons, exceptarbitrators, legally authorised to takeevidence." A reading of Sec.131 of the IT Act would show that theassessing officer is vested with the same powers as arevested in a court under the Code of Civil Procedure, 1908 inrespect of (a) discovery and inspection,(b) enforcing theattendance of any person, including any officer of a bankingcompany and examining him on oath and (c) compelling theproduction of books of account and other documents. It is I.T.Appeal No.551 of 2009. -: 12 :- not disputed that the assessing officer recorded thestatement of the partner of the respondent as well as theemployees in exercise of the powers vested by him underSec.131 of the IT Act. The documents were also seized inexercise of such powers. In the above circumstance, thestatement of the partner and the employees recorded by theassessing officer as well as the documents seized wouldcome within the purview of the evidence under Sec.158BBof the IT Act r/w.Sec.3 of the Evidence Act and Sec.131 ofIT Act. Therefore, such evidence would be admissible forthe purpose of block assessment. 9.It appears that the tribunal had arrived at aconclusion that the statements recorded by the assessingofficer under Sec.132(4) of the IT Act has only very limitedapplication without applying the mind. Explanation toSec.132(4) of IT Act would make it very clear that theevidence so collected would be relevant for all purposes ofany investigation connected with any proceeding under the I.T.Appeal No.551 of 2009. -: 13 :- IT Act. We find that a reading of Sec.132(4) withexplanation would be relevant. Hence we quote the samefor easy reference: 9.It appears that the tribunal had arrived at aconclusion that the statements recorded by the assessingofficer under Sec.132(4) of the IT Act has only very limitedapplication without applying the mind. Explanation toSec.132(4) of IT Act would make it very clear that theevidence so collected would be relevant for all purposes ofany investigation connected with any proceeding under the I.T.Appeal No.551 of 2009. -: 13 :- IT Act. We find that a reading of Sec.132(4) withexplanation would be relevant. Hence we quote the samefor easy reference: "Sec.132(4): The authorised officermay, during the course of the search orseizure, examine on oath any person who isfound to be in possession or control of anybooks of account, documents, money, bullion,jewellery or other valuable article or thingand any statement made by such personduring such examination may thereafter beused in evidence in any proceeding underthe Indian Income-tax Act, 1922 (11 of 1922),or under this Act. Explanation:-For the removal ofdoubts, it is hereby declared that theexamination of any person under this sub-section may be not merely in respect of anybooks of account, other documents or assetsfound as a result of the search, but also inrespect of all matters relevant for thepurposes of any investigation connected withany proceeding under the Indian Income-taxAct, 1911 (11 of 1922), or under this Act." Going by the above provision along with its explanation wefind that the statement of the partner and employeesrecorded and documents collected are relevant and I.T.Appeal No.551 of 2009. -: 14 :- admissible in respect of all matters for the purpose of anyinvestigation connected with any proceedings under the ITAct. Hence, we are of the opinion that the statements sorecorded and documents collected by the assessing officercannot be brushed aside as done by the appellate Tribunalstating that it is having only very limited application. Weanswer the question in favour of the appellant. Question No.(ii):As we mentioned earlier, allauthorities below concurrently found that during searchunder Sec.132 of the IT Act concealment of income wasdetected. The partner of the respondent as well asSanthosh Scaria, an employee in-charge of the bar hadgiven statement on oath that only 80% of the actual salesare recorded in the cash book. They had given voluntarystatements on oath. Their statement is supported by thesale slips, copy of the same and the cash book. Theassessing officer had in lucid style elaborated in hisassessment order about the materials disclosed during the I.T.Appeal No.551 of 2009. -: 15 :- search. Basing upon the documents seized and thestatement of the partner as well as the employees, theassessing officer arrived a conclusion that the suppressionof sale out-turn varies between 20 and 22%. It is on suchdocumentary basis supported by the oral statement, theassessing officer had determined the suppression of saleout-turn at 20%, the minimum rate, of the total turnover.Going by the various provisions under Chapter XIV B, wefind that Sec.158B defines block period. Sec.158BAauthorise block assessment in the event concealment ofincome is detected. Sec.158BB and Sec.158BC prescribesthe method and procedure for block assessment subject toother provisions. None of the provisions under Chapter XIVB mandates that for making block assessment there shall beevidence regarding the concealment of income for everyyear in the block period. It cannot be expected that theassessee would retain documents regarding theconcealment of income. If documents for every I.T.Appeal No.551 of 2009. -: 16 :- I.T.Appeal No.551 of 2009. -: 16 :- concealment are insisted to be searched, practically theprovision for block assessment would be defeated. Wecannot shut our eyes to the legislative intent. Here, whatwas disclosed that for sale, no bills are issued, but paperslips are issued with the price. Though carbon copy isretained it didn't contain the sale price. Sale slips aredestroyed then and there. Cash books are maintained byrecording the 80% of the price of liquor at a later date.When such practices are adopted, nobody can expectevidence for every year in a block period. What is possibleis only to have a best judgment assessment on the basis ofthe evidence collected during search. The assessing officeris authorised and empowered to make block assessment in ajudicious manner on the basis of the materials disclosedduring the search under Sec.132 of the IT Act. 10.No person other than the partner of therespondent had in unambiguous terms stated that 20% ofthe sales out turn is suppressed and only 80% is recorded in I.T.Appeal No.551 of 2009. -: 17 :- the account books and it was the practice from the verybeginning. So, it is just and appropriate to presume thatthere was uniform concealment of income in all assessmentyears during the block period. There is no material onrecord to show that the concealment of the sales out turnduring any of the assessment year in the block period islesser than the concealment detected under Sec.132 of theIT Act. There is no whisper in the statement given by thepartner of the respondent or any of the employees thatthere was any change of the rate of concealment in any yearduring the block period. No good reason was given toreject the above mentioned statement of the partner andemployees recorded during search. Oral evidence wascorroborated by the documentary evidence. So, it is justand appropriate to conclude that the concealment was samein all the years during the block period. Adding to that wefind that when it is revealed in a search under Sec.132 of ITAct that the assessee was following a particular method to I.T.Appeal No.551 of 2009. -: 18 :- conceal the income, it is just and reasonable to presumethat the same practice was followed by the assesseethroughout all the assessment years in the block period forthe purpose of block assessment. Of course, thepresumption is rebuttable. In such circumstances, it is forthe assessee to establish that the same method ofconcealment was not followed in the earlier assessmentyears in the block period or that the method of concealmentdetected was practiced only from a particular period. Here,regarding that, assessee had not adduced any evidence torebut the presumption or to come to a contrary finding. Onthe other hand, in unambiguous terms it was stated by thepartner of the respondent, who is in charge of the bar thatonly 80% of the sales out-turn is recorded in the cash booksand that is the practice followed from the beginning of thebusiness. In the light of the above statement it is just andappropriate to presume that what is detected out in searchis the practice followed throughout the block period to I.T.Appeal No.551 of 2009. -: 19 :- I.T.Appeal No.551 of 2009. -: 19 :- conceal the income. The first appellate authority adopteddifferent slabs with good no explanation. We find that thereis no material to adopt an assessment in any year during theblock period at a lesser rate than that was assessed for theassessment year during which search was conducted. Theappellate Tribunal was not justified in arriving a conclusionthat there is no evidence regarding concealment of theincome for the assessment years 1996-1997 to 2000-2001.The procedure adopted by the first appellate authority incalculating the concealment of income at different rates isalso without any supporting materials and against theintention of the legislature expressed in Chapter XIV B ofthe IT Act. Hence, we answer the question in favour of theappellant and find that the respondent is liable to beassessed during the block period at uniform rate. Question No.(iii):The assessing officer had madeassessment under Sec.158BC, as if the suppressed sale outturn is the income concealed. The first appellate authority I.T.Appeal No.551 of 2009. -: 20 :- had found that in the hotel run by the respondent, inaddition to the liquor sale there is sale of soft drinks, fooditems, snacks etc. The statement of the partner as well asthat of the person in-charge of the bar and the documentsseized would reveal that concealment of income was only inrespect of the sale out turn of the liquor alone. There is nomaterial disclosed to show that the concealment of sale outturn is also in respect of the other food items ie., snacks,food items, soft drinks etc. In this view of the matter, theassessing officer was not justified in making blockassessment at flat rate of 20% of total turnover, becausedisclosure of the sale out turn at an average rate of 20% isonly in respect of liquors. So, it is just and appropriate tohave a block assessment only in respect of the liquor saleout turn. We also notice that in addition to liquorconsumption people also go to the hotel, though barattached, for food other than the liquors. There isabsolutely no evidence regarding the sale proportion in I.T.Appeal No.551 of 2009. -: 21 :- respect of the liquors and non liquor items. In the abovecircumstances, only a guess work with a margin in favour ofthe assessee alone is possible. Taking into account thatthere would be business of food other than liquors and therewould be customers other than liquor consumers, we findthat the share of the liquor sales can be determined at 70%of the total turnover and taking into account that 20%liquor turnover is suppressed, we find that 14% of the totalturnover can be determined as the income concealed. Theappellate Tribunal has held while retaining assessment foryear 2001-2002 and 2002-2003 that undisclosed incomeshould be determined at 25% of sale suppression. Theundisputed facts would show that in fact there is nosuppression of sale or business. The suppression is onlyregarding the sale out-turn. For example, when one peg ofTC Brandy was sold as per sale slip No.876 dated28.6.2001 for Rs.27/-, the amount accounted was onlyRs.21/-. Therefore, it is evident that income alone was I.T.Appeal No.551 of 2009. -: 22 :- suppressed and not the sale or business as such. In otherwords, what was concealed, if not done so, should havebeen directly added to the net profit. The order of theappellate tribunal as if there is suppression of sale orbusiness and direction to add 25% of the concealment asprofit are contrary to the facts disclosed. Neither is thereany prudence worked out. Therefore, it is unsustainable.Question answered accordingly. Question No.(iv). This issue is already ruled by theApex Court in favour of the revenue in CIT v. SureshN.Gupta (2008 (297) ITR 322). At para.23, Apex Courtheld:- I.T.Appeal No.551 of 2009. -: 22 :- suppressed and not the sale or business as such. In otherwords, what was concealed, if not done so, should havebeen directly added to the net profit. The order of theappellate tribunal as if there is suppression of sale orbusiness and direction to add 25% of the concealment asprofit are contrary to the facts disclosed. Neither is thereany prudence worked out. Therefore, it is unsustainable.Question answered accordingly. Question No.(iv). This issue is already ruled by theApex Court in favour of the revenue in CIT v. SureshN.Gupta (2008 (297) ITR 322). At para.23, Apex Courtheld:- "[w]e hold that even without the provisoto section 113 (inserted vide Finance Act,2002, with effect from June 1, 2002) theFinance Act 2001, was applicable to blockassessment under Chapter XIV-B in relation tothe search initiated on January 17, 2001, andaccordingly surcharge was leviable on thetax ... ... ... ." It was further ruled that insertion of proviso to section 113 I.T.Appeal No.551 of 2009. -: 23 :- is mere clarification. Following the ruling of the Apex Court(supra), we answer this question in favour of the appellantand against the assessee-respondent. The assessee is liablefor surcharge. So found. For the forgoing reasons the appeal is allowed in part. While setting aside the orders in first and second appeal,the assessment order is restored with modification reducingthe concealment of income at 14% of the total turnover.The appellant shall revise the block assessment accordingly.There will be no order as to costs. C.N.RAMACHANDRAN NAIR (Judge) P.S.GOPINATHAN (Judge) kvs/-