M/S.new Woodlands Hotel Pvt. Ltd.,72 v. The Assistant Commissioner Of Income Tax,Company Circle-Vi(2),Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 04.09.2020 CORAM: THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMand THE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Judgment Reserved On Judgment Pronounced On 18.08.202004.09.2020 M/s.New Woodlands Hotel Pvt. Ltd.,72-73, Dr.Radhakrishnan Road,Mylapore, Chennai-600 034.[PAN: AAACN 2043D].. Appellant in bothAppeals -vs- The Assistant Commissioner of Income Tax,Company Circle-VI(2),Chennai. .. Respondent in bothAppeals Tax Case Appeals filed under Section 260A of the Income TaxAct, 1961, against the order dated 30.01.2019 made inI.T.A.Nos.2412& 2413/Chny/2017 on the file of the Income TaxAppellate Tribunal 'B' Bench, Chennai for the assessment years2013-14 and 2014-15. Against the order of the Commissioner of Income Tax(Appeals)-8, Chennai -34 dated 26.07.2017 and made in ITA.No. 33& 246/16-17 for the assessment year 2013-14 & 2014-15 andagainst the order of the Assistant Commissioner of Income TaxCorporate Circle 4 (2), Chennai, dated 15.03.2016. For Petitioner :Mr.G.Baskar(In both Appeals) For Respondent :Mr.Rajesh, Junior Standing Counsel(In both Appeals)for Mr.Karthik Ranganathan,Senior Standing Counsel https://hcservices.ecourts.gov.in/hcservices/ COMMON JUDGMENT T.S.Sivagnanam, J. These appeals, filed under Section 260A of the Income TaxAct, 1961 (hereinafter referred to as “the Act”) by theassessee, a company in Hospitality Business, are directedagainst the common order dated 30.01.2019, passed by the IncomeTax Appellate Tribunal 'B' Bench, Chennai (for brevity “theTribunal”) in I.T.A.Nos.2412 & 2413/Chny/2017 for the assessmentyears 2013-14 and 2014-15. 2.There were two other appeals filed by the assessee againstthe very same order in T.C.A.Nos.468 and 469 of 2019 challengingthat portion of the order passed by the Tribunal, which rejectedthe entire case of the assessee and allowed the Revenue'sappeals on an issue, which was never canvassed by the Revenue.These appeals were disposed of by order dated 16.03.2020 and inthis judgment, we are concerned about the correctness of theorder passed by the Tribunal in I.T.A.Nos.2412 & 2413/Chny/2017.The appeals are entertained on the following substantialquestions of law:-“1. Whether on the facts and in thecircumstances of the case, order of the IncomeTax Appellate Tribunal was perverse in concludingthat the Appellant failed to lead any evidence toprove the claim;2. Whether on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal was right in law in notallowing the genuine expenditure incurred by theAppellant as service charges to its employees infull; and 3.Whether on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal was right in law in holdingthat the Commissioner of Income Tax (Appeals) hadnot examined whether the Service Charges arereally collected by the Appellant when suchground was not even raised before the Tribunal bythe Appellant and also was not questioned by theAssessing Officer or the Commissioner of IncomeTax in their orders.” 3.HeardMr.G.Baskar,learnedcounselfortheappellant/assessee and Mr.S.Rajesh, learned Junior StandingCounsel for Mr.Karthik Ranganathan, learned Senior StandingCounsel for the respondent/Revenue. https://hcservices.ecourts.gov.in/hcservices/ 3.Whether on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal was right in law in holdingthat the Commissioner of Income Tax (Appeals) hadnot examined whether the Service Charges arereally collected by the Appellant when suchground was not even raised before the Tribunal bythe Appellant and also was not questioned by theAssessing Officer or the Commissioner of IncomeTax in their orders.” 3.HeardMr.G.Baskar,learnedcounselfortheappellant/assessee and Mr.S.Rajesh, learned Junior StandingCounsel for Mr.Karthik Ranganathan, learned Senior StandingCounsel for the respondent/Revenue. https://hcservices.ecourts.gov.in/hcservices/ assessment years under consideration, viz., 2013-14 and 2014-15on 27.09.2013 and 25.09.2014, respectively. For the assessmentyear 2013-14, the assessee admitted a total income ofRs.76,16,990/- and for the assessment year 2014-15, it admitteda loss of Rs.3,87,017/-. The returns were processed underSection 143(1) of the Act and subsequently, the assessments wereselected for scrutiny and notices were issued under Section 142(1) of the Act on 08.06.2015/09.06.2016 calling for details.After the books of accounts were produced by the assessee andinformation was furnished, the assessment was completed underSection 143(3) on 15.03.2016 by making an addition ofRs.2,16,80,648/- towards inflation of expenditure under the head“Service Charges” and addition of Rs.3,06,509/- towards intereston I.T. Refund for the assessment year 2013-14. The assessmentfor the year 2014-15 was completed under Section 143(3) of theAct on 30.09.2016 making an addition of Rs.2,03,68,410/- statingto be bogus expenditure claimed towards service charges andRs.19,87,094/- towards employees contribution to Provident Fundand ESI remitted beyond the due date. 5.The assessee challenged the assessment orders before theCommissioner of Income Tax (Appeals) (CIT(A)), who by commonorder dated 26.07.2017, partly allowed the appeals byrestricting the disallowance of service charges toRs.1,22,70,445/- as against Rs.2,16,80,648/- and deleting theinterest on I.T.Refund for the assessment year 2013-14 andrestricting the disallowance of service charges toRs.1,17,79,582/- as against Rs.2,03,68,410/- and deleting theaddition in respect of employees contribution to ProvidentFund/ESI for the assessment year 2014-15. Against the saidorders of CIT(A), the assessee and the Revenue preferred appealsto the Tribunal. The Tribunal, by the impugned order, dismissedthe appeals filed by the assessee and allowed the appeals filedby the Revenue. Challenging the said order, the assessee isbefore this Court. 6.The question of law to be answered has a factualconnotation to it with regard to the service charges paid by theassessee to its employees. The Tribunal held that the CIT(A)while partly allowing the assessee's appeals has not examinedwhether service charges were really collected by the assessee,nor any evidence was discussed in the orders in support of theclaim for expenditure and therefore, held that the AssessingOfficer was justified in drawing adverse inference on the claimand the CIT(A) ought not to have granted relief in the absenceof any evidence in support of the claim. During the course ofassessment, the Assessing Officer pointed out that the assesseehas debited amount towards service charges. The assessee wascalled upon to explain the same, who had stated that the service 6.The question of law to be answered has a factualconnotation to it with regard to the service charges paid by theassessee to its employees. The Tribunal held that the CIT(A)while partly allowing the assessee's appeals has not examinedwhether service charges were really collected by the assessee,nor any evidence was discussed in the orders in support of theclaim for expenditure and therefore, held that the AssessingOfficer was justified in drawing adverse inference on the claimand the CIT(A) ought not to have granted relief in the absenceof any evidence in support of the claim. During the course ofassessment, the Assessing Officer pointed out that the assesseehas debited amount towards service charges. The assessee wascalled upon to explain the same, who had stated that the service charges are paid in lieu of tips. Since the tips were receivedby the room boys only whereas, the other employees were not ableto avail the same and ultimately, the matter was discussed withthe employees and an agreement was entered into. The assesseefurnished breakup of the service charges to the three categoryof employees, viz., permanent employees, managerial and otheremployees and administrative/temporary employees. The AssessingOfficer examined a few of the employees of the assessee and alsorecorded statement after which, show cause notice dated20.09.2016 was issued. The assessee submitted their reply dated24.09.2016 giving additional details including the breakup ofservice charges, the Memorandum of Settlement arrived at betweenthe assessee and the workers union dated 02.08.2012 and detailsof the columns and contents of the registers produced during thescrutiny proceedings. The Assessing Officer held that theassessee had resorted to this modus operandi for inflationexpenditure by showing the same under the head “service charges”and the transaction was disbelieved. 7.When the matter was dealt with by the CIT(A), the factualposition was reiterated, the documents, which were placed beforethe Assessing Officer including registers, were relied on. Forthe assessment year 2013-14, the assessee claimed that a sum ofRs.24,10,203/- was the amount of service charge collected duringthe year. Service charges paid to permanent employees throughbanking channel was Rs.55,45,911/-. The CIT(A), therefore, heldthat the possible service charge distributed among the temporaryemployees would be Rs.38,64,292/-. For the assessment year2014-15, the total amount of service charge collected wasRs.85,88,828/-, paid to permanent employees through bankingchannel Rs.63,32,289/- and possible service charges distributedto temporary employees and others Rs.22,56,539. Thus, out ofthe total amount of service charges of Rs.1,61,34,737/- claimedby the assessee for the assessment year 2013-14, the CIT(A)acceptedpaymentofRs.38,64,292/-anddisallowedRs.1,22,70,445/-. For the assessment year 2014-15, the totalamount of service charges claimed to have been paid isRs.1,40,36,121/- of which, the CIT(A) granted relief to theextent ofRs.22,56,539/-andmadedisallowance ofRs.1,17,79,582/-. In the opinion of the Tribunal, the orders ofthe CIT(A) were merely based on presumption that the assesseecompany would not have paid to the employees to the extent ofservice charges collected. There are two aspects to it.Firstly, whether the Assessing Officer was right in concludingthat the assessee had adopted this modus operandi for inflatingits expenditure. Under normal circumstances, the expression“modus operandi” is used when an assessee resorts to somethingwhich is illegal. Law recognises tax planning and penalizes taxavoiders. 8.Considering the material, which was placed by the assesseebefore the Assessing Officer, which was placed before the CIT(A), the Tribunal and before us, we are of the firm view thatthe Assessing Officer should not have used the expression “modusoperandi” to mean that the assessee had adopted dubious tacticsto inflate its expenditure. We have come to such conclusionbecause of the nature of material placed by the assessee beforethe Assessing Officer, CIT(A) and in the paper book filed beforethe Tribunal. The documents being, the annual accounts; thestatement of income; copy of the letter dated 23.08.2016 to theAssistant Commissioner of Income Tax enclosing the register ofwages of persons employed (Form No.16 under Payment of WagesAct) for the relevant period evidencing payment of servicecharges to permanent employees; copies of vouchers for paymentofservicechargespaidincashtoadministrative/management/other employees; copy of servicecharges register for the relevant month evidencing payment toadministrative/temporary employees; copy of the letter dated09.05.2017 of the Chartered Accountant filed explaining thepayment of service charges to the employees; and Memorandum ofSettlement between the assessee and the Anna Thozhilalar Sangamdated 02.08.2012 under Section 18(1) of the Industrial DisputesAct, 1947. 9.The Assessing Officer while rejecting the assessee'scontention has not disbelieved any of these documents. Thepayments effected in cash were sought to be substantiated by theassessee by producing vouchers. If the Assessing Officer was ofthe view that the vouchers are fabricated documents, then all ofsuch employees should have been examined and statements shouldhave been recorded and if the same was done, the assessee isentitled to an opportunity of cross examination. This havingnot been done, the assessment order is flawed on this aspect.The Assessing Officer has referred to statements of four personsand on reading of selected portions of the statement, asextracted in the assessment order, does not lead to theinference that the entire transaction is bogus. The assessee'sexplanation is that tips were being given to the room boys andthey alone were benefited and the other employees/workers raisedobjection and the matter was discussed in several meetings andultimately, a settlement was arrived at between the employeesunion and the assessee management. 10.Due credence should be given to the Memorandum ofSettlement dated 02.08.2012 recorded in the presence of theLabour Officer. If according to the Assessing Officer, thisstatement is also a bogus document, then he ought to haverecorded such a finding. However, law prohibits him from doingso because of the binding effect of the settlement on themanagement and the workmen. Therefore, in our considered view, the settlement could not have been brushed aside. The registerof wages of persons employed is a statutory form under thePayment of Wages Act and there is a presumption to its validity.The bulk of the materials produced by the assessee before theAssessing Officer could not have been rejected. The CIT(A),though accepts the documents produced by the assessee, holdsthat there is no justification for payment in cash for temporaryemployees. In our view, this finding is not sufficient becausevouchers have been produced, register has been produced, wherethe concerned temporary employees have signed. Therefore, toout rightly reject these vouchers and register, is incorrect.If according to the CIT(A), the vouchers and registers, insofaras temporary employees are concerned, are not admissible, thenthere should have been a finding to the said effect, which isconspicuously absent in the orders passed by the CIT(A). 11.The Tribunal erred in observing that the orders of theCIT(A) to the extent it grants relief to the assessee are onpresumption. This finding is incorrect because the reliefgranted by the CIT(A) was in respect of payments, which wereverifiable. It is not in dispute that the vouchers andregisters were produced before the Assessing Officer and theoriginals are also shown to have been produced at the time ofassessment. The Assessing Officer merely going by statements ofa few employees, cannot disbelieve statutory registers andforms, as there is a presumption to its validity and the onus ison the person, who disputes the validity or genuinity of thedocument. Therefore, in our considered view, the Tribunal oughtnot to have interfered with the relief granted by the CIT(A) andthe CIT(A) ought to have interfered with the orders passed bythe Assessing Officer in its entirety and not restricted thesame to a partial relief. 12.In the result, the appeals are allowed and thesubstantial questions of law are answered in favour of theappellant-assessee. No costs. Sd/- Assistant Registrar (CS-III) //True Copy// Sub Assistant Registrar abr https://hcservices.ecourts.gov.in/hcservices/ To 1.Income Tax Appellate Tribunal “B” Bench, Chennai. Chennai. 2.The Commissioner of Income Tax (Appeals)-8, Room No, 222, Aayakar Bhavan, Main Buildings II Floor, 121, Mahatma Gandhi Road, Nungambakkam, Chennai 600 034. Room No, 222, Aayakar Bhavan, Main Buildings II Floor, 121, Mahatma Gandhi Road, Nungambakkam, Chennai 600 034. 3.The Deputy Commissioner of Income Tax, Corporate Circle 4 (2), 4[th] Floor, Main Buildings, 121, Mahatma Gandhi Road, Nungambakkam, Chennai 600 034. Corporate Circle 4 (2), 4[th] Floor, Main Buildings, 121, Mahatma Gandhi Road, Nungambakkam, Chennai 600 034. +1cc to Mr.G.Baskar, Advocate, S.R.No. 28866 Tax Case Appeal Nos.467 & 470 of 2019 MP(CO)GN(28/10/2020)