ACIT, Ernakulam V. Sri.T.M.Kuruvilla, Ernakulam

ITA 1046/COCH/2005

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 58288 (ITAT-COCHIN)
• Duration Of Justice: 6 year(s) 4 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-03-2012
• Appeal Filed By: Department
• Bench Allotted: DB
• Next Hearing Date: 15-02-2012
• Assessment Year: 2002-2003
• Appeal Filed On: 13-10-2005
• Court: TRIBUNAL
• Department Lawyers: VIJAYAPRABHA
• Assessee Lawyers: R KRISHNA IYER
• Keywords: Rejection of books of accounts; Business income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND B.R.BASKAR AN, AM I.T.A. NO. 1046/COCH/2005 ASSESSMENT YEAR : 2002-03 THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-2(2), ERNAKULAM. VS. SHRI T.M. KURUVILLA, PADATH HOUSE KADUNGAMANGALAM P.O., THIRUVANKULAM, ERNAKULAM. [PAN: AFEPK 3336K] (REVENUE-APPELLANT) (ASSESSEE- RESPONDENT) REVENUE BY SMT. VIJAYAPRABHA, JR. DR ASSESSEE BY SHRI R.KRISHNA IYER, CA DATE OF HEARING 16/02/2012 DATE OF PRONOUNCEMENT 02/03/2012 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THIS APPEAL HAS BEEN RESTORED TO THE TRIBUNAL BY H ONBLE JURISDICTIONAL KERALA HIGH COURT, VIDE ITS ORDER DATED 03-12-2009 WITH A DIRECTION TO CALL FOR BOOKS OF ACCOUNTS AND EXAMINE WHETHER INADEQUACIES OF THE ACCOUNTS AN D REASONS STATED BY ASSESSING OFFICER FOR REJECTION OF IT EXIST AND THEN DECIDE THE APPEA L. ACCORDINGLY THIS CASE WAS POSTED FOR HEARING. 2. THE FACTS RELATING TO THE CASE ARE STATED IN BRIEF. THE ASSESSEE IS ENGAGED IN THREE TYPES OF BUSINESSES VIZ., CONSTRUCTION BUSINESS, RU NNING OF A HOTEL AND RUNNING OF A RESTAURANT. THE ASSESSING OFFICER REJECTED THE BOO KS OF ACCOUNT OF ALL THE THREE BUSINESSES AND PROCEEDED TO ESTIMATE THE INCOME THERE FROM ON SOME BASIS. SINCE THE LD CIT(A) ALLOWED THE APPEAL FILED BY THE ASSESSEE, THE REVEN UE CAME UP IN APPEAL BEFORE THE TRIBUNAL. THE REVENUE CHALLENGED THE ORDER PASSED BY THE TRIBUNAL BEFORE THE HONBLE I.T.A. NO.1046/COCH/2005 2 KERALA HIGH COURT AND THE HIGH COURT, AS STATED IN THE PRECEDING PARAGRAPH, HAS RESTORED THE APPEAL TO THE TRIBUNAL. 3. WE HAVE HEARD BOTH THE PARTIES AND PERUSED T HE RECORD. WE SHALL FIRST TAKE UP THE ISSUE OF REJECTION OF BOOKS OF ACCOUNT OF THE THREE BUSINESSES DISCUSSED ABOVE. THE LD COUNSEL FOR THE ASSESSEE PRODUCED THE BOOKS OF ACCO UNT OF ALL THE THREE BUSINESSES FOR THE EXAMINATION OF THE TRIBUNAL. AFTER EXAMINATION OF THE SAME, FOLLOWING FINDINGS ARE GIVEN:- (A) IN RESPECT OF THE CONSTRUCTION BUSINESS, WE NO TICE THAT THE ASSESSEE COULD NOT PRODUCE THE DAY BOOK, I.E. THE BOOKS OF ORIGINAL ENTRY, ON THE PLEA THAT THE SAME COULD NOT BE READILY TRACEABLE. WITH REGARD TO THE VOUCHERS MAINTAINED BY THE ASSESSEE, THE AO HAD OBSERVED THAT THEY WERE NOT PR OPERLY MAINTAINED AND FURTHER MOST OF THE VOUCHERS WERE SELF MADE. THE COUNSEL F OR THE ASSESSEE COULD NOT REBUT THE SAID OBSERVATIONS OF THE AO. ACCORDINGLY, WE A RE OF THE VIEW THAT THE AO WAS RIGHT IN REJECTING THE BOOKS MAINTAINED BY THE ASSE SSEE IN RESPECT OF THE CONSTRUCTION BUSINESS. (B) IN RESPECT OF THE HOTEL BUSINESS NAMED PRA SANTH HOTEL LOCATED AT THRIPUNITHURA, THE AO HAD OBSERVED THAT THE CASH BA LANCES WERE NOT FOUND DRAWN DATE WISE. HOWEVER, ON VERIFICATION OF BOOKS WE FI ND THE SAID OBSERVATION TO BE WRONG. THE AO HAS POINTED OUT THAT THE ASSESSEE HA D OMITTED TO ACCOUNT FOR CERTAIN RECEIPTS TOWARDS ROOM RENT AND ALSO HAS FAI LED TO MAINTAIN CERTAIN STATUTORY REGISTER, WHICH IS REQUIRED TO BE MAINTAINED FOR RE CORDING THE DETAILS OF GUESTS. WE NOTICE THAT THE AO HAS FAILED TO POINT OUT ANY DEFE CT IN THE BOOKS OF ACCOUNTS EXCEPT THE FACT OF OMISSION OF ROOM RENT RECEIPTS. HENCE, WE DO NOT FIND ANY MERIT IN REJECTION OF BOOKS OF ACCOUNTS IN RESPECT OF HOT EL BUSINESS. (C) IN RESPECT OF RESTAURANT BUSINESS, IT IS SEEN THAT THE ASSESSEE DID NOT MAINTAIN BILL BOOKS FOR SALES INCLUDING TEA, COFFEE. THE CL OSING STOCK OF RS.7,500/- DECLARED BY THE ASSESSEE WAS ALSO NOT SUBJECT TO VERIFICATIO N. IT IS ALSO OBSERVED THAT THE I.T.A. NO.1046/COCH/2005 3 EXPENSES INCURRED FOR PURCHASES ARE ALSO NOT VERIFI ABLE. BEFORE US, THE LD COUNSEL FOR THE ASSESSEE COULD NOT REBUT THE ABOVE SAID OBS ERVATIONS OF THE AO. HENCE, WE ARE OF THE VIEW THAT THE AO WAS RIGHT IN REJECTING THE BOOK RESULTS IN RESPECT OF RESTAURANT BUSINESS. 4. NOW WE PROCEED TO DISPOSE OF THE ISSUES RELA TING TO THE DETERMINATION OF INCOME FROM ALL THESE BUSINESSES. DURING THE YEAR UNDER C ONSIDERATION, THE ASSESSEE HAD EXECUTED CONTRACTS FOR M/S KOCHI REFINERIES LTD AND ALSO FOR OTHER PARTIES. THE AO HAD ESTIMATED THE INCOME ON CONTRACT PERTAINING TO M/S KOCHI REFI NERIES LTD AT 4% OF THE CONTRACT RECEIPTS AND FOR OTHER PARTIES AT 8% OF THE CONTRAC T RECEIPTS. AFTER DISCUSSION WITH BOTH THE PARTIES AND ON CONSIDERATION OF VARIOUS FACTORS SURROUNDING THE ISSUE, WE ARE OF THE VIEW THAT THE NET INCOME ON CONTRACT WORKS PERTAINI NG TO M/S KOCHI REFINERIES LTD MAY BE FIXED AT 3% OF THE CONTRACT RECEIPTS AND THE INC OME FROM OTHER CONTRACT WORKS MAY BE FIXED AT 6% OF THE CONTRACT RECEIPTS. IN OUR VIEW, THE ABOVE SAID ESTIMATES WOULD MEET THE ENDS OF JUSTICE AND WE ORDER ACCORDINGLY. THE ORD ER OF LD CIT(A) ON THIS ISSUE STANDS REVERSED. 5. THE AO HAD ALSO ASSESSED THE INCOME FROM MAC HINERY RECEIPTS AMOUNTING TO RS.1,47,601/- SEPARATELY. THE LD COUNSEL FOR THE A SSESSEE CONTENDED THAT THE SAID INCOME SHOULD BE DEEMED TO HAVE BEEN CONSIDERED WHI LE ESTIMATING THE INCOME FROM CONTRACT WORKS FOR THE REASON THAT THE IMPUGNED MAC HINERIES WERE LET OUT DURING IDLE PERIODS. HOWEVER, IT CANNOT BE DENIED THAT THE LET TING OUT OF MACHINERY IS ALTOGETHER DIFFERENT ACTIVITY, WHICH IS NOT CONNECTED WITH THE CARRYING OUT OF CONTRACT WORKS. WE ALSO NOTICE THAT THE AO HAD ALREADY ALLOWED 1/3 RD OF THE GROSS MACHINERY RECEIPTS TOWARDS RELATED EXPENSES AND HAS ASSESSED THE BALANCE AMOUN T ONLY. ACCORDINGLY, WE ARE OF THE VIEW THAT THE AO WAS RIGHT IN ASSESSING THE MACHINE RY RECEIPTS SEPARATELY. ACCORDINGLY, WE REVERSE THE ORDER OF LD CIT(A) ON THIS ISSUE AND RESTORE THAT OF THE AO. I.T.A. NO.1046/COCH/2005 4 6. IN RESPECT OF HOTEL BUSINESS, WE HAVE HELD T HAT THERE IS NO NECESSITY TO REJECT THE BOOKS OF ACCOUNT. THE ONLY DEFECT POINTED OUT BY T HE AO RELATES TO THE SUPPRESSION OF CERTAIN RECEIPTS. ON THE BASIS OF AVAILABLE MATERI ALS, THE AO HAS ESTIMATED THE GROSS RECEIPTS FOR THE YEAR UNDER CONSIDERATION AT RS.12, 76,444/-. AS AGAINST THIS, THE ASSESSEE HAS SHOWN RECEIPTS AT RS.11,62,696/-. HENCE, IN OU R VIEW, THE ADDITION CAN BE MADE ONLY ON THE DIFFERENCE BETWEEN THE TWO FIGURES, VIZ., RS .1,13,748/-. ACCORDINGLY, WE REVERSE THE ORDER OF LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO ADD THE ABOVE SAID DIFFERENCE OF RS.1,13,748/- TO THE BOOK RESULTS. 7. IN RESPECT OF RESTAURANT BUSINESS NAMED M/S PREETHI RESTAURANT, THE ASSESSEE HAD DECLARED A NET PROFIT OF 1.02% ON A TURNOVER OF RS. 23.20 LAKHS. HOWEVER, THE AO REJECTED THE BOOK RESULTS AND ESTIMATED THE TURNOVE R AT RS.25.00 LAKHS, ON WHICH HE ESTIMATED THE INCOME AT 10%. WE HAVE ALREADY UPHEL D THE REJECTION OF BOOKS OF ACCOUNTS AND HENCE THE INCOME NEEDS TO BE ESTIMATED. THE LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ESTIMATE OF 10% ON THE SALES IS VERY MUCH ON THE HIGHER SIDE WHEN COMPARED TO THE RATE OF 1.02% DECLARED BY THE ASSESSEE. HE FUR THER SUBMITTED THAT THE IMPUGNED RESTAURANT IS LOCATED IN THRIPUNITHURA, WHICH WAS A DEVELOPING AREA AT THE RELEVANT POINT OF TIME. ON THE OTHER HAND, THE LD DR SUBMITTED THA T THE PROFIT RATE IN RESTAURANT BUSINESS IS USUALLY HIGH AND ACCORDINGLY CONTENDED THAT THE NET PROFIT RATE OF 10% ADOPTED BY THE AO WAS REASONABLE. ON CONSIDERATION OF RIVAL CONT ENTIONS AND THE RECORD, WE ARE OF THE VIEW THAT THE NET PROFIT RATE OF 10% APPEARS TO BE ON A HIGHER SIDE WHEN COMPARED TO THE RATE OF 1.02% DISCLOSED BY THE ASSESSEE, PARTICULAR LY IN VIEW OF THE SUBMISSION OF THE ASSESSEE THAT THE IMPUGNED RESTAURANT WAS LOCATED I N A DEVELOPING AREA. AT THE SAME TIME, IT IS TO BE NOTICED THAT THE BOOK RESULTS HAD TO BE REJECTED DUE TO THE DEFECTS IN ITS MAINTENANCE. HENCE, ON A CONSPECTUS OF THE MATTER, WE ARE OF THE VIEW THAT THE INCOME FROM RESTAURANT BUSINESS MAY BE ESTIMATED @ 8% ON T HE TURNOVER OF RS.25.00 LAKHS ESTIMATED BY THE AO. IN OUR VIEW, IT WOULD MEET TH E ENDS OF JUSTICE AND WE ORDER ACCORDINGLY. I.T.A. NO.1046/COCH/2005 5 8. THE LAST ISSUE PERTAINS TO THE ASSESSMENT OF INTEREST INCOME FROM EMD DEPOSITS SEPARATELY. THE AO ASSESSED THE INTEREST INCOME OF RS.75,970/- FROM EMD DEPOSITS SEPARATELY BY HOLDING THAT THE SAID INCOME IS NOT C ONNECTED WITH THE CONTRACT WORKS. IT IS PERTINENT TO NOTE THAT THE IMPUGNED EMD DEPOSITS HA D BEEN GIVEN TO THE PRINCIPALS IN THE FORM OF BANK FIXED DEPOSIT RECEIPTS (FDRS) AND THE INTEREST INCOME WAS REALISED FROM THE SAID FIXED DEPOSITS MAINTAINED WITH THE BANKS. THE LD CIT(A) HELD THAT THE IMPUGNED INTEREST INCOME IS PART OF TURNOVER AND AC CORDINGLY DIRECTED THE AO TO INCLUDE THE SAME IN THE BUSINESS TURNOVER. 8.1 BEFORE US, THE LD A.R SUBMITTED THAT THE EM D IN THE FORM OF BANK FIXED DEPOSIT RECEIPTS HAD TO BE SUBMITTED TO THE VARIOUS PRINCIP ALS AS PER THE TERMS AND CONDITIONS OF CONTRACT AND HENCE THE INCOME FROM THE SAID FDRS HA S TO BE CONSIDERED AS PART OF BUSINESS RECEIPTS ONLY. ON THE OTHER HAND, THE LD DR SUBMITTED THAT THE IMPUGNED INTEREST INCOME HAS BEEN RECEIVED FROM BANK FIXED D EPOSITS, WHICH IS NOT ON ACCOUNT OF EXECUTION OF CONTRACT WORKS AND HENCE THE SAME IS A SSESSABLE SEPARATELY UNDER THE INCOME FROM OTHER SOURCES. 8.2 WE HAVE HEARD THE RIVAL CONTENTIONS. THE F ACT REMAINS THAT THE IMPUGNED INTEREST INCOME HAS BEEN RECEIVED FROM BANKS ON THE FIXED DE POSITS MAINTAINED WITH THEM. THE CONTENTION OF THE LD A.R IS THAT THE SAID FIXED DEP OSIT RECEIPTS WERE GIVEN TO THE PRINCIPALS IN ACCORDANCE WITH THE TERMS AND CONDITI ONS BETWEEN THEM AND HENCE THERE IS BUSINESS CONNECTION BETWEEN THE FDRS (IN THE FORM O F EMD) AND THE CONTRACT BUSINESS. IN OUR VIEW, THE DEPOSITING MONEY WITH BANKS IN THE FORM OF FIXED DEPOSITS IS ONE THING AND UTILISING THE SAID FDRS FOR BUSINESS PURPOSES I S ANOTHER THING. WE WERE TOLD THAT THE EARNET MONEY DEPOSIT (EMD) IS NORMALLY GIVEN AS PER THE TERMS AND CONDITION IN ORDER TO ENSURE PROPER EXECUTION OF CONTRACT WORKS. THE INTEREST INCOME IS EARNED FROM OUT OF FIXED DEPOSITS MADE WITH BANKS. IN OUR VIEW, THE C HARACTER OF INTEREST INCOME WOULD NOT CHANGE SIMPLY BECAUSE THE RELEVANT FDRS WERE GIVEN ONLY AS SECURITY IN THE FORM OF EARNEST MONEY DEPOSIT (EMD), AS THE PRIMARY SOURCE OF INTEREST INCOME IS THE BANK AND NOT THE CONTRACT. ACCORDINGLY, WE ARE OF THE VIEW THAT THE AO WAS RIGHT IN ASSESSING THE I.T.A. NO.1046/COCH/2005 6 INTEREST RECEIVED ON FDRS MAINTAINED WITH BANKS UND ER THE HEAD INCOME FROM OTHER SOURCES. THE ORDER OF LD CIT(A) ON THIS ISSUE STA NDS REVERSED. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS PARTLY ALLOWED. PRONOUNCED ACCORDINGLY ON 02-03-2012 SD/- SD/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 2ND MARCH, 2012 GJ COPY TO: 1. SHRI T.M. KURUVILLA, PADATH HOUSE KADUNGAMANGALA M P.O., THIRUVANKULAM, ERNAKULAM. 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -2(2), ERNAKULAM. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-II, KOC HI. 4. THE COMMISSIONER OF INCOME-TAX, KOCHI. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE . BY ORDER (ASSISTANT REGISTRAR) I.T.A.T, COCHIN