THE COMMISSIONER OF INCOME TAX vs M/S KEYENCEE HOTELS & ENGG

- 1 - IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 18TH DAY OF DECEMBER 2013 P R E S E N T THE HON’BLE MR. JUSTICE N. KUMAR A N D THE HON’BLE MRS. JUSTICE RATHNAKALA INCOME TAX APPEAL NO.146 OF 2007

BETWEEN:

THE COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE, C.R. BUILDING QUEENS ROAD, BANGALORE.

DEPUTY COMMISSIONER OF INCOME-TAX CENTRAL CIRCLE-2(1), C.R. BUILDING QUEENS ROAD, BANGALORE.

... APPELLANTS

(BY SRI K.V. ARAVIND, ADV.)

AND:

M/S. KEYENCEE HOTELS & ENGG. ENTERPRISES (HOTEL KANISHKA) GANDHINAGAR, BANGALORE-560 009.

...RESPONDENT

(BY SRI A. SHANKAR & SRI M. LAVA, ADVS.)

THIS ITA IS FILED UNDER SEC.260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 15-06-

- 2 - 2006 PASSED IN IT(SS)A 71/BANG/2003 & IT(SS)A NO.104/BANG/2003 FOR THE BLOCK ASSESSMENT PERIOD 1988-89 TO 22-07-98, PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO:

I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN,

II. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN IT(SS)A 71/BANG/2003 & IT(SS)A NO.104/BANG/2003 DATED 15-06-2006 AND THAT PART OF THE ORDER OF THE APPELLATE OMMISSIONER AGAINST THE REVENUE AND CONFIRM THE ORDER PASSED BY THE ASSESSING OFFICER, IN THE INTEREST OF JUST ICE AND EQUITY.

THIS APPEAL IS COMING ON FOR HEARING THIS DAY, N. KUMAR, J., DELIVERED THE FOLLOWING: -

JUDGMENT

This appeal is preferred by the revenue challenging the order passed by the Tribunal, which has not only granted relief to the assesee but also confirmed the order passed by the lower authority in respect of the inflation of expenditure for the block period 1988 – 89 to 22.07.1998.

The assessee is running a hotel by name ‘Kanishka Hotel’, at Gandhi Nagar, Bangalore. One Sri A.S.Kupparaju is the Chairman and Managing Director of the assessee Company. Consequent to the search,

- 3 - block assessment proceedings under Chapter IXV - B of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) were initiated and following additions were made:-

(i) Inflation of expenditure as per documents seized for the assessment years 1997-98, 1998-99 & 1999-00 Rs. 73,17,942 (ii) Inflation of expenses for assessment years 1989-90 to 1996-97 relating to Cheques payments Rs. 41,38,608 (iii) Inflation of expenses for assessment years 1989-90 to 1996-97 relating to cash payments Rs.18,39,543

Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals). The Commissioner granted relief in respect of item Nos.2 and 3 and also a sum of Rs.5,75,516/- which comprises in the first item. Still aggrieved, the assessee preferred an appeal before the Tribunal. The subject matter of the appeal before the Tribunal was Rs.51,93,124/- on account of inflation of expenses for the assessment year 1997 – 98 and Rs.15,49,302/- on account of inflation of expenses for assessment year

- 4 - 1998 – 99. The revenue also preferred an appeal against the order of the appellate authority to the extent that the appellate authority granted relief to the assessee. Both the appeals were heard together by the Tribunal. The Tribunal dismissed the appeal preferred by the revenue and allowed the appeal preferred by the assessee and held that the presumption regarding inflation of expenses by the assessing officer is incorrect and contrary to the evidence seized and therefore, no addition should have been made and therefore, directed deletion of the addition made. Aggrieved by the said order, the revenue is in the appeal.

Learned Counsel for the revenue assailing the impugned order contended that in the course of search, not only the vouchers were seized in respect of the expenditure but the statement of the person in charge of the business by name one Nagaraju, who is the son of the Managing Director of the hotel was recorded, who has categorically stated that there is inflation of expenditure. Further, the Tribunal was in error in ignoring the legal evidence and in holding that the

- 5 - inflation is not established and in granting relief to the assessee. He submitted that insofar as the other additions are concerned, though no incriminating documents were seized, from the materials available on record, it could be inferred that it is a case of inflation of expenses and therefore, the assessing authority was justified in adding the said amount to the income of the assessee which has been erroneously deleted by the first appellate authority and confirmed by the Tribunal.

Per contra, learned Counsel for the assessee submitted that there is no material on record to show that these vouchers were bogus. Nagaraju who has examined is not the competent person to speak about the vouchers and expenses incurred by the assessee. In fact, payment were made by cheques and all these amounts are reflected in the books of accounts and the finding recorded by the assessing authority as well as the first appellate authority is purely based on suspicion which is unsustainable. However, he supported the finding recorded by the Tribunal and first

- 6 - appellate authority and submits that there is no case for interference. He added the addition would lead to absurd percentage of profits.

In the light of the aforesaid facts and rival contentions, the substantial questions of law which arise for consideration are as follows:- 1. Whether the Tribunal was correct in holding that the addition made by the Assessing Officer based on the search material in respect of inflation of expenditure for the assessment year 1997-98, 1998-99 and 1999-2000 of Rs.73,17,942/- and based on the statement of Sri. Nagaraju son of the Managing Director and accountant which was not supported by any vouchers and was classified as to contrary to actual entry cannot be allowed.

Whether the Tribunal was correct in holding that the inflation of expenses of assessment year 1989-90 to 1996-97 relating to cheque payments of Rs.41,38,608/- cannot be added by despite these cheque payments had been manipulated to inflate expenditure and these payments by cheque were encashed by employees of assessee company are credited to the accounts of the assessee’s sisters concern without establishing the nature of expenditure.

. Whether the Tribunal was correct in holding that the inflation of expenses of

- 7 - assessment year 1989-90 to 1996-97 relating to cash payments of Rs.18,39,543/- cannot be added back as held by the Assessing Officer despite the Assessing Officer having held that the same were bogus and were not supported by any vouchers.

The material on record discloses that the assessee has filed its return of income for the assessment year 1997 – 98 and accounts were audited for 31/03/1998 before the date of search. A search took place in the premises of the assessee on 22/07/1998 and 14/10/1998 and a statement & vouchers were seized for 31.03.1997 and 31.03.1998. Sri Nagaraju is the son of the Managing Director A.S.Kupparaju, who is also the shareholder of the assessee – Company. He has stated that the amounts drawn from the company by him and by his father were not accounted and vouchers were prepared after the end of the year by claiming the expenditure under various heads as shown in the profit and loss account. It is on that basis the assessing authority proceeded to hold that the expenses which are reflected in the books of the accounts as well as in the vouchers which are

- 8 - seized at the time of search did not represent the true facts. Admittedly, there is a inflation of the expenditure. Therefore, he directed addition of the said amount of Rs.51,93,124/- for the assessment year 1997 – 98 and Rs.15,49,302/- for the assessment year 1998 – 99 and Rs.5,75,516/- for the assessment year 1999 – 2000 till the date of search in all Rs.73,17,942/-. He also directed addition of Rs.41,38,608/- for the period 1989 – 90 to 1996-97, relating to cheque payment and a sum of Rs.18,39,543/- for the assessment year 1989 – 90 to 1996-97 relating to cash payments. Aggrieved by the said order, the assessee preferred the appeal before the Commissioner of Income Tax (Appeals).

The Commissioner directed the deletion of expenses for the assessment year 1989-90 to 1996-97, relating to cheque payments and also relating to cash payments, on the ground that no material was seized during the search in support of the finding recorded by assessing authority, which was a condition precedent for block assessment. He also directed the deletion of Rs.5,75,516/- which is for the year 1998 – 99 as nothing was seized pertaining

- 9 - to this period and the due date prescribed for filing the returns has not expired as the search was done on 22.07.1998. Aggrieved by the said order, both the revenue and the assessee preferred these two appeals. Insofar as deletion of Rs.41,38,608/- and 18,39,543/- are concerned, the first appellate authority has given good reasons which is in accordance with law. Therefore, the Tribunal declined to interfere with the said order. As the preconditions for block assessment was not found in respect of these additions, as estimation is not permitted in block assessment, both the appellate authority as well as the tribunal were justified in deleting the said amounts. Therefore, we do not find any error committed by both the appellate authorities. The substantial question of law framed in respect of 2 and 3 are answered in favour of the assessee and against the revenue.

Insofar as addition of Rs.51,93,124/- and 15,49,302/- are concerned, the Tribunal holds that the search materials contradict the statement of Sri Nagaraju, in as much as it is misconceived on the part

- 10 - of the person who has prepared accounts at the end of the year and during the accounting year which are supported by vouchers. It is impossible that after the end of the year payments could be made by cheques to an extent of Rs.40,35,443/- for the year ended 31.03.1997, which are fully supported by vouchers. Accordingly, the Tribunal held that the presumption regarding inflation of expenses as assessed by assessing officer is incorrect, and the additions should not have been made. Insofar as cash vouchers are concerned, they are all supported by vouchers and entries for the year ended 31.03.1997 & 31.03.1998. Therefore, the Tribunal held that there is no justification to make an addition of Rs.51,93,124 and Rs.15,49,302/- for the assessment years 1997 – 98 and 1998 – 99 respectively.

In the first place, the assessing authority was wrong in directing the addition of the entire amount. When the finding recorded in these vouchers and entries in the accounts book represent an inflated figure, it does not mean that the voucher were bogus. The amounts mentioned therein and also the amount

- 11 - mentioned in the cheques, which are encashed by their own employees or sister concern did not actually represent the amount spent towards expenditure. Therefore, the assessing authority should have directed only the excess amount and not the entire amount to be added. It is a mistake committed by the assessing authority, which is also confirmed by the appellate authority.

But the Tribunal has not properly appreciated the case of the revenue in proper prospective. It proceeded with the assumption that these vouchers are prepared after the financial year and the payments were made by cheques during the course of financial year. These vouchers which are prepared subsequently cannot refer to the cheque payments made during the past year. If we understand the statement of Nagaraju and the other material on record, what transpires is that the assessee incurred expenditure but he has inflated the figure. Cheques have been issued to the employees who are also having their accounts in the very same bank and they have encashed the cheques either through their account or

- 12 - they have collected the cash from the banks. The amounts paid to the employees represent the amounts in excess of the actual expenses. Therefore, the reasoning given that the vouchers are prepared after the financial year and voucher payment is made by cheques and therefore, genuineness of the cheques cannot be doubted and does not represent the inflation is incorrect. The payments are made to the sister concern are supported by the material on record, which shows that they have encashed the cheques but no corresponding entries are recorded in the accounts to show that what is the actual expenditure incurred. It is in this context, the assessing authority acted on the admission of Nagaraju and Narasimha Reddy, the accountant coupled with the fact that the cheques were issued to the employees and sister concern, which came to the conclusion that the case of inflation is established. The evidence on record shows that Nagaraju is the son of the Managing Director and who is also a shareholder. He was the person incharge of the running of the hotel on day to day basis and therefore,

- 13 - his statement was accepted by the assessing authority and who has categorical terms admitted the inflated figures. In the light of the aforesaid material, the assessing authority holding that the vouchers represent the inflated figure cannot be found fault with. However, the entire amount cannot be treated as inflated figure and added to the income of the assessee. That aspect has been completely missed by the assessing authority. The assessee may be heard by the assessing authority to substantiate his claim and add only that amount which represent the inflated figure, which would meet the ends of justice.

10.

In the light of the aforesaid facts and circumstances, we pass the following order:

ORDER

a. The appeal is allowed in part. b. The finding recorded by the Tribunal is hereby set aside. c. The matter is remitted back to the assessing authority to find out Rs.51,93,124/- for the

- 14 - assessment year 1997 – 98 and Rs.15,49,302/- for the assessment year 1998 – 99, what quantum represent the inflation and only to add the said inflation amounts to the income of the assessee and assess the assessee accordingly.

In that view of the matter, the substantial question No.1 is remanded to the file of the Assessing Officer to consider in terms of the above order. In other aspects, the order of the Tribunal is confirmed. Ordered accordingly.

Sd/- JUDGE

nvj

THE COMMISSIONER OF INCOME TAX vs. M/S KEYENCEE HOTELS & ENGG