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Petitioner: HOTEL AND ALLIED TRADES (P.) LTD. VS Respondent: COMMISSIONER OF INCOME-TAX
Court Name: Kerala High Court Judge(s): G. Sivarajan, V. V. Kamat Title: HOTEL AND ALLIED TRADES (P.) LTD. vs COMMISSIONER OF INCOME-TAX Case No.: Income-tax References Nos.187 to 190 of 1989 Date of Judgment:1996-02-15 Reported As: 1998 PTD 590 Result: Order accordingly
JUDGMENT
JUDGMENT ' G. SIVARAJAN, J.---These four reference cases arise out of a common order of the Income-tax Appellate Tribunal, Cochin Bench, referring the following questions of law for decision by this Court, both at the instance of the assessee and at the instance of the Revenue. ' The questions referred at the instance of the assessee are as follows:--- "On the basis of materials available before it in the penalty proceedings, was the Appellate Tribunal justified in holding that there was no material or evidence before them to come to the conclusion, 'that the findings of the Tribunal rendered in quantum proceedings that there was unexplained investment to the extent of Rs,2,60,000' required any alteration or modification ? ' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that after the introduction of the Explanation to section 271(1)(c) of the Act, the burden is not on the Revenue to establish that the amount concealed was of income nature ? Did the Appellate Tribunal interpret section 271(1)(c) of the Act properly and apply the proper law regarding the penalty in the instant case ? Is not the reasoning and conclusion of the Appellate Tribunal against the ratio of the decisions reported in. Gumani Ram Sri Ram v. CIT (1972) 85 ITR 67 (P & H); CIT (Addl.) v. Karnail Singh v. Kaleran (1974) 94 ITR 505 (P & H) ; 14 CTR (P & H) 92 (sic); Sohinder Singh & Bros. v. CIT (1980) 121 ITR 834 (P & H); CIT (Addl.) v. Sawan Motor Stores (1977) 109 ITR 660 (AP); CIT v. S. P. Bhatt (1974) 97 ITR 440 (Guj.); CIT v. Vinay Chand Harilal (1979) 120 ITR 752 (Guj) and Khemka & Co. (Agencies) (Pvt.) Ltd. v. State of Maharashtra, AIR 1975 SC 1549; 35 STC 571 and hence unsustainable? ' As in the instant case, where the estimated addition regarding unexplained investments, is bifurcated and spread over a period of years is any penalty under 271(1)(c) of the Act exigible ?
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Does not the reasoning and conclusion of the Appellate Tribunal militate against the ratio of the decisions of the Madras High Court reported in CIT (Addl.) v. E. Bhoopathy (1978) 113 ITR 188 (Mad.); CIT v. Gordhandas MOolchand (1979) 116 ITR 823 (Mad) and CIT (Addl.) v. V. Kanakammal (Smt.) (1979) 118 ITR 94 (Mad) and so unsustainable ?" ' The question referred at the instance of the Revenue is as follows:--- "Whether, on the facts and in the circumstances of the case, where more than one return is filed, one before April 1, 1968, and the other after April 1, 1968, and where some income is concealed in both the returns, the penalty is to be levied on the basis of the law in force on the date on which the first return was filed or on the basis of the law in force on the date on which the second return was filed?" ' The assessee is a private limited company. The assessment years concerned are 1966-67, 1967-68 and 1968-69. The assessee is a hotelier carrying on business in Willington Island in the name and style of "Casino Hotel". During 1958, it was running a restaurant. An addition of three rooms to locate a bar and to serve for lodging purpose were made in the first instance. Later, the assessee decided to construct an additional building and for that purpose, he acquired 100 cents of land adjacent to the old block, which was taken from the Cochin Port Trust on lease and a new hotel building with 36 rooms, lounge, dining hall, etc., were constructed. The construction of the said building was started in February, 1964, and was completed in December, 1966. In order to finance the construction, the assessee applied for a loan from the Kerala Financial Corporation by its letter dated February 5, 1965. In the said letter, the assessee stated that the estimated cost of the additional construction will be to the tune of Rs,7,33,469 of which the assessee had already spent Rs, 1.5 lakhs and in support of the application for loan, the assessee also annexed an estimate prepared by Vellappally Brothers, construction engineers, and an expert in the line. The Corporation, while considering the assessee's application made in the spot valuation by one of their own engineers, one Sri K. B. Menon, a retired chief engineer, and approved valuer, for the Corporation. Sri K. B. Menon had conducted on the spot inspection on four occasions, i,e,, on March 19, 1965, November 11, 1965, March 30, 1966, and July 23, 1966, and submitted four reports regarding the cost of construction as estimated by the assessee. According to the first report, dated March 19, 1965, the cast of construction incurred till that date came to Rs,2,60,000 and estimated the cost of construction of the building alone at Rs,5.58 lakhs and also certified that the total cost of construction would be about Rs,7.33 lakhs. The Corporation on the basis of the said report, sanctioned a loan of Rs,4,00,000 on June 19, 1965. As per clause 13 of the indenture executed by the assessee in favour of the Corporation, true and regular accounts were to be maintained by the assessee and duly audited, and such audited annual statements were to be forwarded to the Corporation within six months. On the basis of the periodical statements submitted by Sri K. B. Menon, the Corporation had paid the entire loan amount sanctioned. Sri K. B. Menon had also conducted inspection in regard to the expenditure for the period from July 23, 1966, to September 5, 1966, and the additional constructions and fittings during this period were valued at Rs,53,463. The ledger shows that Rs,95,846 had been spent from September 6, 1966, to November 3, 1966, placing the total cost of construction according to these reports at Rs,8,52,359. ' For the assessm ent year 1967-68, the Income-tax Officer on verification of the books found that the books of account showed the cost of construction to be Rs, 6,07,133. The Income-tax Officer did not accept the book value of the construction as representing the correct cost. He then adverted to the estimate made by Vellappally Bros. As well as the reports submitted by Sri K. B. Menon, and in the light of these materials, he took the view that the total cost of construction must have been Rs,9,00,000. The difference of Rs,3,00,000, according to the officer, was due to understatement of the cost of construction.
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' The Income-tax Officer then called upon the assessee to explain the difference. The assessee then filed another valuation report prepared by one, Sri Zacharia, a consulting engineer, showing the total estimated cost of construction at Rs,4,72,572. The Income-tax Officer was not prepared to accept his valuation report, as according to him, the said report is a perfunctory one and is prepared long after the construction- was over. The officer was struck by the contemporaneous nature of the reports of Sri K. B. Menon and also the estimate initially made by Vellappally Bros. Since the assessee's explanation regarding the difference of Rs,3,00,000 was not acceptable to the Income-tax Officer, he treated the same as undisclosed income of the assessee. As the cost of construction had occupied three different accounting years, the amount of Rs,3,00,000 was spread over on the basis of the total cost of construction in each of the years in the ratio of 2:7:2. This worked out to an addition of Rs,55,000 for the assessment year 1966-67 and Rs,1,90,000 for the assessm ent year 1967-68 and Rs,55,000 for the assessment year 1968-69. On appeal, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer and on further appeal, the Income-tax Appellate Tribunal reduced the amount to Rs,2,60,000 `This was spread over among the three years in the same ratio as adopted by the Income-tax Officer. ' Against the said order of the Income-tax Appellate Tribunal, the assessee sought reference of the question as to whether the Tribunal was justified in law in holding that there was understatement of the cost of construction of the building and other capital expenditure to the extent of Rs,2,60,000. On reference of the aforesaid question to this Court in Income-tax References Nos. 76,77 and 78 of 1975 by judgment, dated November 11, 1977, this Court after due consideration of the entire matter answered the question in the affirmative and in favour of the Department. ' In the referred case, this Court was of the view that the valuation of the cost of construction and determination of the undisclosed income are essentially questions of fact and it is somewhat difficult to find out a question of law in the process. But counsel for the assessee submitted that there was a total inadvertence to certain material aspects of the evidence and that this would justify this Court calling for a supplemental statement of the case from the Tribunal. It was submitted before this Court that the assessee had produced a certificate of Vellappally Bros., marked as Annexure 'M' in that case. But the Tribunal did not refer to the said certificate in the appellate order. With reference to the said submission made on behalf of the assessee, this Court considered the matter and observed as follows:--- "But it is seen that this report (Annexure 'M') was filed only before the Income-tax Appellate Tribunal. We do not know whether the document was received by the Appellate Tribunal as additional evidence, nor have we been vouch-safed the grounds on which the document was tendered as additional evidence to the Tribunal and received if it ever was as such by the Tribunal. No reference is found to the document in the Tribunal's order. No reference is found to it either in the statement of the case, which refers to documents upto Annexure 'L', but omits any reference to Annexure 'M'. That is seen as item 13 of the list of Annexures to the statement of the case and is also being cited as an annexure by the Tribunal. We are not in the circumstances impressed with the assessee's objection of the Tribunal not having referred to Annexure M' certificate. Counsel for the Revenue pointed out that the Tribunal and the other two authorities had relied on the reports by Sri K. B. Menon, who had made an on the spot study and investigation; and so long as the Tribunal's conclusions were based on some acceptable materials, there was no ground for this Court to find that any question of law arises for determination of the Court. We think that in the circumstances there is no scope to apply the principle of the decision in CIT v. Seshasayee Bros. (Travancore) (P.) Ltd. (1976) 102 ITR 372 (Ker.), and we reject the assessee's prayer to do so." ' Regarding the overlooking of the other material, namely, the discarding of the balance-sheet of the assessee for the assessm ent years, this Court observed that the Tribunal was aware of the existence of the balance-sheet and, therefore, the assessee's contention based on the same was
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not acceptable. This Court also considered the submissions made on behalf of the assessee that an inflated figure of the cost of construction had to be shown in the correspondence with the Kerala Financial Corporation in order to persuade it to part with the loan actually required by the assessee and, therefore, it may not be appropriate to accept the figures stated to bring about this inducement as representing the correct cost of construction and also the decision in State of Tamil Nadu v. Indian Crafts and Industries (1970) 25 STC 466 (Mad.) and observed that a different trend of thought is discernible in the same High Court in the decision in Coimbatore Spinning and Weaving Co. Ltd. v. CIT (1974) 95 ITR 375 (Mad) and again in V. Rajan v. CIT (1974) 96 ITR 64 (Mad.) and further observed that whatever be the purpose of inflation, on an examination of the details of the estimate furnished and a perusal of the on the spot study and reports, the Tribunal had worked out the cost of construction, on the basis of which, it proceeded to tax the assessee. This Court further held that no question of law arises from the course pursued by the Tribunal. ' On the basis of the additions made by the Income-tax Officer and confirmed by the Appellate Assistant Commissioner, the Inspecting Assistant Commissioner of Income-tax initiated penalty proceedings under section 271(1)(c) read with section 274 (2) of the Income Tax Act, 1961, for the assessm ent years 1966-67, 1967-68 and 1%8-69. The Inspecting Assistant Commissioner rejected the contention of the assessee regarding the imposition of penalty on the ground that the addition made by the Income-tax Officer is on a sound basis. It was also observed that the said addition made by the Income-tax Officer was confirmed by the Appellate Assistant Commissioner. The Inspecting Assistant Commissioner, therefore, took the view that this is a case to which the provisions of the Explanation to section 271(1)(c) of the Act are attracted and observed that it is for the assessee to establish that the failure to return the correct income did not arise from Any fraud or any gross or wilful neglect on his part. He also held that the assessee has not discharged the burden. Accordingly, for the assessm ent year 1968-69 by order dated March 20, 1971, he imposed a penalty of Rs,55,000 on the assessee under section 271(1)(c) of the Income-tax Act. Similarly, for the assessm ent years 1967-68. And 1966-67 by orders, dated March 20, 1971, and June 9, 1972 (Annexures "A-2" and "A-1"), respectively, the Inspecting Assistant Commissioner imposed penalty of Rs,50,000 and Rs,47,270, respectively. ' Aggrieved by the orders (Annexures "A-1" to "A-3") the assessee filed appeals before the Income- tax Appellate Tribunal, Cochin Bench. Before the Income-tax Appellate Tribunal the assessee submitted that he filed a reply to the penalty notice before the Inspection Assistant Commissioner on May 9, 1972, relating to the assessment year 1966-67, wherein the assessee had brought to the notice of the Inspecting Assistant Commissioner that the assessee had filed before the Tribunal a report from Vellappally Bros. In which they had stated that there could have been possible savings to the extent of about Rs,2,60,000 and, therefore, the addition made in the assessment was on pure surmise and no penalty was exigible. It was contended that this contention had not been dealt with by the Inspecting Assistant Commissioner. The assessee further asserted before the Tribunal that if the certificate given by Mr. Alexander Vellappally, the then managing director, was acceptable, there could be no question of concealment at all. ' The Tribunal noticed the fact that the certificate had been filed in the quantum proceedings before the Tribunal only on November 30, 1971, and it was a certificate obtained by the assessee just about two days earlier. The Tribunal was of the view that as the Inspecting Assistant Commissioner had not considered the certificate relied on, it was necessary that the certificate should be examined and the assessee should be heard on the submissions he had to make on it. The Tribunal, accordingly, passed a remand order, dated June 29, 1979, and called upon the Inspecting Assistant Commissioner to submit a report after making any enquiries he considered necessary to arrive at a proper finding on the evidentiary value of the certificate sought to be relied on by the assessee.
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' In this connection, it will be advantageous to refer to the order of remand passed by the Tribunal. The Income-tax Appellate Tribunal after quoting the observations of this Court regarding the reliance to be placed on the certificate issued by Vellappally Bros. In Income-tax References Nos.76, 77 and 78 of 1975 stated thus: "It is trite law that the assessee is entitled to rely on evidence not relied on in assessment proceedings in penalty proceedings. The assessee has relied on this certificate before the Inspecting Assistant Commissioner in penalty proceedings and the Inspecting Assistant Commissioner has not discussed the same. There is, therefore, no question of our admitting any fresh evidence if we ask the Inspecting Assistant Commissioner to examine the certificate with reference to the contentions of the assessee. ' We consider it necessary that the Inspecting Assistant Commissioner should examine this certificate (copy annexed) and hear the assessee on the submissions that the assessee has to make on it. It would be also open to the Inspecting Assistant Commissioner to make such enquiries as he deems fit or cause such enquiries to be done to test the veracity of such certificate, in particular, with reference to the earlier estimate given by Vellappally Bros, which was one of the items of evidence considered in arriving at the estimate of about Rs,9 lakhs. The Inspecting Assistant Commissioner will also examine any parties whom the assessee may require to be examined or whom he himself may consider necessary to examine to arrive at a proper finding on the evidentiary value of the certificate sought to be relied on by the assessee." ' It is clear from the passage quoted above that the Income-tax Appellate Tribunal had clearly borne in mind the fact that the assessee is entitled to rely on evidence (not relied on in assessment proceedings) in penalty proceedings. In that view of the matter, since the assessee had relied on the certificate issued by Vellappally Bros. Before the Inspecting Assistant Commissioner in penalty proceedings, it is necessary that the Inspecting Assistant Commissioner should examine the certificate and hear the assessee on the submissions that the assessee has to make on it. It is in that context that the Tribunal observed that it would be open to the Inspecting Assistant Commissioner to make such enquiries as he deems fit or cause such enquiries to be done to test the veracity of such certificate. ' Based on this remand order, it is seen that the Inspecting Assistant Commissioner had referred the matter to the Executive Engineer (Valuation), Income-tax Department, Cochin, and gave a copy of the estimate, dated November 16, 1964, prepared by Vellappally Bros. As well as the certificate issued by Sri Alexander Vellappally to him and requested him to make a verification to the extent possible of the actual construction and submit his remarks on the assertions made by Sri Alexander Vellappally in the certificate and to submit a report regarding the same. The report submitted by the Executive Engineer (Valuation) is available as Annexure "IV' to the remand report dated November 29, 1979, submitted by the Inspecting Assistant Commissioner to the Income-tax Appellate Tribunal. The Inspecting Assistant Commissioner, after obtaining the said report, considered the certificate issued by Vellappally Bros. Before proceeding to consider the correctness of the certificate, the Inspecting Assistant Commissioner observed that " only if the reports submitted by Sri K.B. Menon were found to be defective on material points, could there arise a case for examining the question of savings pointed out by Vellappally Bros. In their report". It is with this observation in mind that the Inspecting Assistant Commissioner proceeded to consider the veracity of the certificate issued by Vellappally Bros. With reference to the report submitted by the Executive Engineer (Valuation) and the original estimate submitted by Vellappalry Bros. The Inspecting Assistant Commissioner, after referring to the various discrepancies in the certificate issued by Vellappally Bros. Came to the conclusion that the certificate issued by Vellappally Bros. Has little evidentiary value in the ascertainment of any savings in the construction of the building with reference to the original estimate dated November 16, 1964.
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' After obtaining the remand report, the Income-tax Appellate Tribunal proceeded to consider the matter on the merits. In paragraph 15 of the appellate order, the Income-tax Appellate Tribunal has noticed the fact that the Inspecting Assistant Commissioner had referred the matter to the Executive Engineer (Valuation) who was given a copy of the original estimate as well as the subsequent certificate of Sri Alexander Vellappally to make a verification to the extent possible of the actual cost of construction and the fact that the Executive Engineer (Valuation) inspected the building on October 26,1979, and that he was of the view that the actual construction was at variance with the original estimate on several aspects. According to the Executive Engineer, there could be certain savings. The Tribunal also noticed the fact that according to the Executive Engineer the aggregate savings possible was Rs,2,08,490. The Tribunal then considered the fact that the Inspecting Assistant Commissioner had examined the Executive Engineer's certificate along with the other materials on record and finally reached the conclusion that the certificate issued by Vellappally Bros. Has little evidentiary value in the ascertainment of any savings in the construction of the building with reference to the original estimate, dated November 16, 1964. The Appellate Tribunal also noticed the fact that the assessee filed a detailed statement of objections, dated January 10,1980, to the remand report and stressed therein that the certificate of Vellappally Bros. Was substantially confirmed by the inspection by the Executive Engineer (Valuation) of the Income-tax Department itself. This aspect is particularly made mention of by the Tribunal in paragraph 16 of its order. ' The Income-tax Appellate Tribunal thereafter considered the matter in the light of the remand report and the materials furnished and the Annexures thereto and observed as follows: "In deciding the quantum proceedings the plea of the assessee that inflated figures were given in the estimate has not been accepted by the Tribunal. We cannot also accept that the estimate was given without reference to actual facts. The actual facts were all available by the time that estimate on November 16, 1964, was made and the plea that there would be probable savings from that estimate in respect of foundation is in our view with reference to the date of the structural drawings, etc., not acceptable. The subsequent certificate of Alexander Vellappally, therefore, has no evidentiary value since it has been possible to establish by independent evidence that the estimate of November 16, 1964 was made after due consideration of all relevant data. Out of the total savings of Rs,2,73,151 according to the certificate Rs,58,322 are to be found as probable savings in foundation. This we have established conclusively is not acceptable. The plea that there could be savings for contractor's profit which is the other large amount of Rs,1,10,000 is a general one and was considered by the Tribunal in paragraph 12 of its order in quantum proceedings where they had categorically stated that no evidence was available to support the plea and further had pointed out how the Income-tax Officer had shown to the assessee that certain figures given were erroneous. We have to state that Sri K. B. Menon, a retired Chief Engineer of the Kerala Government came to the scene after the foundation stage had been completed and was submitting periodical reports to the Corporation, dated March 19, 1965, November 11, 1965, March 30, 1966, and July 23, 1966, and he had corroborated the claims regarding the expenditure spent from time to time. As observed by the Tribunal there was no warrant to assume that Sri K. B. Menon was also acting in collusion with the assessee and furnishing highly inflated figures to the Corporation and as a matter of fact the Tribunal stated that this was not even the case of the assessee before the Tribunal. We, therefore, come to the final conclusion that the subsequent certificate of Vellappally Bros. Dated November 30, 1971, has no evidentiary value for the reason stated by us." ' Regarding the evidentiary value of the report of the Executive Engineer (Valuation), which is a report submitted at the instance of the Inspecting Assistant Commissioner of Income-tax with reference to the original estimate submitted by Vellappally Bros. And the certificate issued by
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Vellappally Bros. Regarding the possible savings and on inspection by an array of officer, the Income-tax Appellate Tribunal observed as follows: "In. This background merely because the Executive Engineer(Valuation) may have considered with reference to some trial pits, etc, taken that there would have been savings it could not in our view, lead to acceptance of the pale of counsel for the assessee that it would take the case outside the place of the penalty provisions. This is…
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