M/s.Cochin Residency, Cochin V. The DCIT, Cochin

ITA 454/COCH/2016

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7558 (ITAT-COCHIN)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-01-2016
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 10-01-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 22-09-2016
• Court: TRIBUNAL
• Department Lawyers: DHANARAJ A
• Assessee Lawyers: THOMAS JOSEPH
• Section: 143(3); 145

Judgement Text

ITA NO.454/C/2016 1 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH (SMC) KOCHI BEFORE SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NO 454/COCH/2016 (ASST YEAR 2006-07 ) M/S COCHIN RESIDENCY, KK PADMANABHAN ROAD, AYYAPPANKAVU, KOCHI-19 VS THE DY COMMR OF INCOME TAX CIRCLE 2(1), ERNAKULAM ( APPELLANT) (RESPONDENT) PAN NO. AADFC3299E ASSESSEE BY SH THOMAS JOSEPH REVENUE BY SH DHANARAJ A., SR DR DATE OF HEARING 10 TH JAN 2017 DATE OF PRONOUNCEMENT 12 TH JAN 2017 ORDER THIS APPEAL, AT THE INSTANCE OF THE ASSESSEE, IS DI RECTED AGAINST THE CIT(A)S ORDER DATED 30.6.2016. THE RELEVANT ASSESS MENT YEAR IS 2006-07. 2 THE BRIEFLY STATED THE FACTS OF THE CASE ARE AS F OLLOWS: THE ASSESSEE IS A PARTNERSHIP FIRM. IT IS ENGAGED IN THE BUSINESS OF RUNNING TWO BAR ATTACHED HOTELS. FOR THE RELEVANT ASSESSM ENT YEAR, THE RETURN OF INCOME WAS FILED ON 22.11.2006 DECLARING THE TOTAL INCOME AT RS. 11,72,140/-. THE ASSESSMENT WAS TAKEN UP FOR SCRUTINY BY ISSUANCE OF NOTICE U/S 143(2) OF THE ACT. THE ASSESSMENT U/S 143(3) WAS COMPLETED VIDE ORDER DATED 27.11.2008 BY FIXING ITA NO.454/C/2016 2 A TOTAL INCOME OF RS. 25,12,140/-. THE ASSESSING OF FICER HAD MADE THE FOLLOWING ADDITIONS: I) DISALLOWANCE OF THE REMUNERATION AMOUNTING TO RS. 8 ,40,000/- PROVIDED TO THE WORKING PARTNERS. II) LUMP SUM ADDITION OF RS. 5 LAKHS MADE FOR THE DIFFE RENCE IN THE NET PROFITS OF THE TWO BRANCH UNITS OF THE ASSESSEE AND ALSO FOR THE ALLEGED DEFICIENCY OF RENTAL INCOME FROM ROOMS AND RESTAURANT. 3 AGGRIEVED BY THE ADDITIONS MADE, THE ASSESSEE PRE FERRED AN APPEAL TO THE FIRST APPELLATE AUTHORITY. THE CIT(A) DELETED T HE FIST ADDITION AND SUSTAINED THE SECOND ADHOC ADDITION OF RS. 5 LACS. 4 THE ASSESSEE BEING AGGRIEVED BY THE ORDER OF THE CIT(A) SUSTAINING THE ADHOC ADDITION OF RS. 5 LAKHS HAS FILED THE PRESENT APPEAL BEFORE THE TRIBUNAL RAISING THE FOLLOWING GROUNDS: 1. THE ORDER OF THE LEARNED HON. COMMISSIONER OF INC OME TAX, (APPEALS) II, COCHIN IS AGAINST THE LAW, FACTS AND THE CIRCUMSTANCES PREVAILING IN THE APPELLANT'S CASE. 2. THE LEARNED APPELLATE COMMISSIONER ERRED IN WRONGL Y COMPARING THE NET PROFIT RATIOS OF THE TWO UNITS IGNORING THE FACT THAT THE GROSS PROFITS OF THESE UNITS WERE ALMOST SAME AND ALSO THE FACT THAT THE TURNOVER IN CHER AI UNIT IS RS. 379.91 LAKHS WHEREAS THE TURNOVER IN COCHIN UNIT IS ONLY RS. 172.75IA KHS. HE ERRED IN OVERLOOKING THE FACT THAT BECAUSE OF CERTAIN FIXED EXP ENSES TO BE INCURRED IN HOTEL, IT IS ONLY NATURAL THAT THE NET PROFIT IN THE UNIT WHERE THE TURNOVER IS LESS WILL BE LOWER COMPARED TO THE PERCENTAGE OF NET PROFIT IN THE UNIT WHERE THE TURNOVER IS HIGHER IN SPITE OF THE FACT THAT THE GROSS P ROFIT RATES ARE THE SAME. THEREFORE, THE LEARNED ASSESSING OFFICER WENT WRONG IN TAK ING THE DIFFERENCE IN THE NET PROFIT PERCENTAGE, AS A REASON FOR THE ADHOC ADDI TION STATING THAT THE EXPLANATION FURNISHED IS 'NOT FULLY CONVINCING'. 3. THE LEARNED APPELLATE AUTHORITY OUGHT TO HAVE CONSID ERED THAT CHERAI IS A REMOTE NON-URBAN AREA AND THE 10 ROOMS IN THE HOTEL ARE MA INTAINED ONLY TO MEET THE REQUIREMENT OF BAR LICENSE. THE ROOMS ARE NOT GIVEN ON RENT AND ITA NO.454/C/2016 3 WHATEVER RECEIPTS ACCOUNTED AS RENT RELATES TO SMALL S ERVICE CHARGES RECEIVED FROM CUSTOMERS FOR TAKING THE FOOD AND DRINKS IN THE ROOM S. 4. THE LEARNED APPELLATE AUTHORITY OUGHT TO HAVE FOUND THAT EVEN DURING THE PREVIOUS YEARS, THERE ARE NO CONSIDERABLE RENT RECEIPT S IN THE CHERAI UNIT AND THEREFORE THE ASSESSING OFFICER WENT WRONG IN CONSIDERING THE LOW RENT RECEIPTS IN CHERAI UNIT AS A REASON FOR THE ADHOC ADDITION OF RS. 5 LAKHS STATING THAT THE ARGUMENT OF THE ASSESSEE IS NOT 'FULLY CONVINCING'. 5. THE LEARNED APPELLATE AUTHORITY OUGHT TO HAVE FOUND THAT BOTH COCHIN AND CHERAI UNITS ARE SITUATED OUTSIDE THE CITY LIMITS AND BOTH THE UNITS ARE SURVIVING ON THE BAR SALES AND THE SALES IN RESTAURANT ARE INSIGNIFIC ANT AND SIMILAR WAS THE CASE DURING THE PREVIOUS YEARS ALSO. THEREFORE THE LEARNED A SSESSING OFFICER WENT WRONG IN TAKING THE LOW SALES IN RESTAURANT SECTION AS A REASON FOR THE ADHOC ADDITION OF RS 5 LAKHS STATING THAT THE ARGUMENT OF THE ASSESSEE IS 'NOT FULLY CONVINCING'. 6. . THE LEARNED APPELLATE AUTHORITY WENT WRONG IN SUSTA INING THE AD-HOC ADDITION OF RS 5 LAKHS WHICH WAS MADE WITHOUT ASSIGNING ANY SPEC IFIC REASONS OR INSTANCES SUCH AS INFLATION IN EXPENSES OR SUPPRESSION IN TURNOVER, AT THE SAME TIME MERELY STATING THAT SOME OF THE EXPLANATIONS FURNISHED BY THE A PPELLANT WERE 'NOT FULLY CONVINCING'. FROM THE STATEMENT OF THE ASSESSING OFFICER ITSELF, IT IS CLEAR THAT EXPLANATION FURNISHED WAS CONVINCING AND THERE WERE NO SPEC IFIC INSTANCES WHICH WARRANTED A LUMP SUM ADDITION OF RS 5 LAKHS TO THE TAXABLE INCOME. MOREOVER THE ASSESSING OFFICER HAD NOT REJECTED THE BOO KS OF THE APPELLANT BEFORE MAKING THE AD HOC ADDITION. 7. FOR THE ABOVE AND OTHER GROUNDS THAT MAY BE PERMITTE D TO BE RAISED AT THE TIME OF HEARING, IT IS REQUESTED THAT THE AMOUNT OF RS 5 ,00,0001- BEING THE ADDITION SUSTAINED BY THE FIRST APPELLATE AUTHORITY M AY KINDLY BE DELETED AND IT IS PRAYED ACCORDINGLY. 5 THE LD COUNSEL FOR THE ASSESSEE REITERATED THE SU BMISSIONS MADE BEFORE THE IT AUTHORITY AND HAS ALSO FILED A COMPARATIVE S TATEMENT FOR AY 2004-05 TO AY 2008-09 OF LIQUOR SALES, FOOD SALES BETWEEN THE TWO UNITS OF THE ASSESSEE, ITS GROSS PROFIT, NET PROFIT AND THE RECEIPTS ON ACCOUNT OF R OOM RENT. IT WAS SUBMITTED THAT THE GROSS PROFIT AND NET PROFIT FOR ABOVE AYS ARE REASONABLE AND WAS ACCEPTED. THE LD DR, ON THE OTHER HAND, STRONGLY S UPPORTED THE ORDERS OF THE INCOME TAX AUTHORITIES. ITA NO.454/C/2016 4 6 I HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. THE ADHOC DISALLOWANCE OF RS.5 LAKHS WAS MADE BY TH E ASSESSING OFFICER FOR THE FOLLOWING THREE REASONS: I) THE NET PROFIT DECLARED IN THE COCHIN UNIT IS ONLY 2.62% WHICH IS LOW COMPARED TO THE NET PROFIT DECLARED IN THE CHERAI U NIT; II) THE ROOM RENT RECEIVED FROM THE CHERAI UNIT IS LOW COMPARED TO THE COCHIN UNIT. III) THE RESTAURANT SALES DECLARED FOR THE COCHIN UNIT I S LOW. 6.1 THE TURNOVER IN THE CHERAI UNIT WAS MORE THAN DOUBLE COMPARED TO THE TURNOVER OF THE COCHIN UNIT. THE NET PROFIT RATIO OF THE TWO UNITS WILL DEPEND ON THE FIXED EXPENSES OF EACH UNIT AND WILL BE DIFFERE NT EVEN IF THE GROSS PROFIT RATIO ARE THE SAME. IT IS ONLY NATURAL THAT THE NET PROFIT OF THE CHERA I UNIT WOULD BE HIGHER SINCE THERE IS A HIGHER TURNOVER. HENCE DIF FERENCE IN NET PROFIT RATIO CANNOT BE A REASON FOR ADHOC ADDITION. 6.2 AS REGARDS LOW ROOM RENT SHOWN IN THE CHERAI U NIT, I FIND FROM THE COMPARATIVE CHART THAT NO CONSIDERABLE RENT RECEIPT S WAS SHOWN FROM CHERAI UNIT FOR ANY OF THE ASSESSMENT YEARS. FOR ALL THE A SSESSMENT YEARS EXCEPT FOR AY 2006-07, THE TRADING RESULTS WERE ACCEPTED. THEREF ORE, I HAVE NO REASON TO DISBELIEVE THE ASSESSEES CONTENTION THAT THE ROOMS ARE NOT GIVEN ON RENT AND ITA NO.454/C/2016 5 WHATEVER RECEIPTS ACCOUNTED AS RENT RELATES TO SM ALL SERVICE CHARGES RECEIVED FOR TAKING FOOD AND DRINKS IN THE ROOMS. MOREOVER, THE ROOM RENT COLLECTION DEPENDS ON VARIOUS FACTORS WHICH INCLUDE ALSO LOCAT ION OF THE UNIT, AND HENCE THE ROOM RENT RECEIPTS OF THE TWO UNITS CANNOT BE A REASON FOR ANY ADHOC ADDITION. 6.3 THE ASSESSING OFFICER HAS ALSO COMPARED THE RE STAURANT SALES WITH LIQUOR SALES. ACCORDING TO HIM IT IS ONLY 2.73% OF THE LI QUOR TURNOVER IN ONE UNIT AND 3.62% OF THE LIQUOR SALES IN THE OTHER UNIT AND THI S IS AGAINST THE GENERAL TREND IN THIS LINE OF BUSINESS. THE LEARNED AR HAS ARGUED TH AT BOTH THE UNITS ARE SITUATED OUTSIDE THE CITY LIMITS AND BOTH THE UNITS ARE SURV IVING ON THE BAR SALES AND THE SALES IN THE RESTAURANT ARE INSIGNIFICANT AND SIMIL AR WAS THE CASE DURING THE PREVIOUS YEARS ALSO. I HAVE GONE THROUGH THE COMPA RISON STATEMENT FOR THE PERIOD FROM AY 2004-05 TO AY 2008-09 AND OBSERVED T HAT THE PERCENTAGE OF FOOD TO LIQUOR SALES IS MORE OR LESS SAME AND IT IS EVIDENT THAT LIQUOR SALES ARE BEING THE MAIN SALES AND THE FOOD SALES IS ONLY A S ECONDARY SALE IN ALL THESE YEARS. 6.4 MOST IMPORTANTLY, THE BOOKS OF ACCOUNT HAVE BEEN DULY AUDITED AND THE AUDIT REPORT HAS NOT POINTED OUT ANY IRREGULARITY. THE BOOKS HAVE ALSO BEEN ACCEPTED BY THE SALES TAX DEPARTMENT. THE ASSESSIN G OFFICER HAS NOT FOUND ANY IRREGULARITIES IN THE BOOKS OF ACCOUNT AND HAS NOT REJECTED THE BOOK RESULTS ITA NO.454/C/2016 6 BY RESORTING TO SECTION 145 OF THE IT ACT, 1961. I T IS SETTLED POSITION OF LAW THAT THE ASSESSING OFFICER HAVING ACCEPTED THE BOOKS OF ACCO UNT AS CORRECT, HE CANNOT DISTURB THE NET PROFIT WITHOUT ASSIGNING VALID REAS ON/EVIDENCE. THEREFORE, THE ADHOC ADDITION CANNOT BE SUSTAINED AND THE SAME IS HEREBY DELETED. IT IS ORDERED ACCORDINGLY. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 12 TH DAY OF JAN 2017. SD/- ( GEORGE GEORGE K) JUDICIAL MEMBER COCHIN: DATED 12 TH JAN 2017 RAJ* COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT, 5. DR 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, COCHIN 1 DATE OF DICTATION 10 JAN 2017 2 DT ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 10 JAN 2017 3 DT ON WHICH THE APPROVED DRAFT COMES TO THE SR P S/PS 11/01/2017 4 DT ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER 11/01/2017 & 12/01/2017 5 DT OF PRONOUNCEMENT 6 DT ON WHICH THE FILE GOES TO THE BENCH CLERK 12/0 1/2017 7 DT ON WHICH THE FILE GOES TO THE HEAD CLERK 8 DT ON WHICH THE FILE GOES TO AR 9 DT OF DISPATCH OF THE ORDER ITA NO.454/C/2016 7