M/S. PODIKUNJU MUSALIAR MEMORIAL EDUCATIONAL& CHARITABLE TRUST V. COMMISSIONER OF INCOME TAX

ITA/133/2014

AI Insights

This case involves appeals filed by the Podikunj Musaliar Memorial Educational & Charitable Trust against the orders of the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal, Kochi, concerning the assessment years 2006-07 to 2009-10. The appeals were related to the rejection of the trust's books of accounts and the estimation of income by the Assessing Officer following a search and seizure operation under Section 132 of the Income-tax Act. The High Court found that the Assessing Officer had not disclosed the materials relied upon for estimating the income and had not afforded the trust an opportunity to rebut those materials, which was a violation of statutory provisions and principles of natural justice.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 761350 (HC-KERALA)
• Appeal Type: Others
• Pronouncement Date: 19-09-2014
• Assessment Year: misc
• Other Referred Cases: Yaggina Veeraraghavulu and Mavuleti Somaraju & Co. v. Commissioner of Income-tax, S.Sarabhaiah Setty & Sons v. Commissioner of Income-tax, Joseph Thomas & Bros. v. Commissioner of Income-tax
• Laws Referred To: Income-tax Act
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: P K R MENON; JOSE JOSEPH
• Assessee Lawyers: S RAJ
• Keywords: Assessment Year; Estimation of income; Income tax appeal; Natural Justice; Rejection of books of accounts; Search and seizure
• Section: 132; 153A; 145; 44AB; 142(3)

Judgement Text

"IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC & THE HONOURABLE MR. JUSTICE ANIL K.NARENDRAN FRIDAY, THE 19TH DAY OF SEPTEMBER 2014/28TH BHADRA, 1936 ITA.No. 133 of 2014 () ----------------------- AGAINST THE ORDER IN ITA 40/COCH/2013 OF I.T.A.TRIBUNAL,COCHIN BENCH DATED 31-01-2014 APPELLANT/RESPONDENT/ASSESSEE: -------------------------------------------------------- M/S. PODIKUNJU MUSALIAR MEMORIAL EDUCATIONAL& CHARITABLE TRUST CHANDANATHOPE, KOLLAM. BY ADV. SRI.S.ARUN RAJ RESPONDENT/APPELLANT/REVENUE: ------------------------------------------------------ COMMISSIONER OF INCOME TAX AAYAKAR BHAVAN, KOWDIAR, THIRUVANANTHAPURAM. SRI P.K.R.MENON(SR.) SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 19-09-2014, ALONG WITH ITA. 134/2014, ITA. 135/2014, ITA. 136/2014, ITA. 137/2014, ITA. 139/2014, ITA. 140/2014 & ITA. 142/2014, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: APPENDIX IN ITA.NO.133/2014 PETITIONER'S ANNEXURES: ANNEXURE A: COPY OF ASSESSMENT ORDER DT.29.12.2010 PASSED BY THE ASSESSING OFFICER FOR THE A.Y.2006-07. ANNEXURE B: COPY OF ORDER DT.30.1 1.2012 PASSED BY THE COMMISSIONER OF INCOME-TAX(APPEALS)-II, KOCHI FOR THE A.Y.2006-07. ANNEXURE C: COPY OF ORDER DT.31.1.14 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN THE ASSESSEE'S APPEAL FOR THE A.Y.2006-07. RESPONDENT'S ANNEXUES: NIL TRUE COPY P.S.TO. JUDGE dsn ANTONY DOMINIC & ANIL K.NARENDRAN, JJ. -------------------------------------------------- I.T.Appeal Nos.133, 134, 135, 136, 137, 139, 140 and 142 of 2014 -------------------------------------------------- DATED THIS THE 19th DAY OF SEPTEMBER, 2014 JUDGMENT ANTONY DOMINIC , J . These are appeals filed by the assessee under the Income-tax Act, challenging the orders of the Commissioner of Income-tax (Appeals), Kochi and the Income-tax Appellate Tribunal, Kochi concerning the assessment years 2006-07, 2007-08, 2008-09 and 2009-10. There was a search and seizure under Section 132 of the Income-tax Act, in the premises of the assessee on 6.1.2009. After completing all procedural formalities, assessments for the years 2003-04 to 2009-10 were reopened. However, these appeals are concerning the assessment years 2006-07 to 2009-10 only. Accordingly, the assessments were completed by Annexure A orders where, rejecting the books of accounts of the assessee and relying on comparable cases, the Assessing Officer estimated the gross profit at 40% of the gross receipts and estimated the net profit at 15% of the gross receipts. The Assessing Officer also found that there was undisclosed investment and disallowed depreciation I.T.Appeal No.133/14 & con.cases. -2- claimed. 2. The appeals filed before the Commissioner of Income- tax were disposed of deleting addition of undisclosed investment and depreciation claimed by the assessee was also allowed. In all other respects, the assessment orders were confirmed. 3. The Revenue and the assessee filed appeals challenging the orders passed by the first appellate authority before the Tribunal. The Tribunal disposed of those appeals by Annexure C orders. The appeals filed by the Revenue were allowed and among the appeals filed by the assessee, Appeal No.136/2014 was disposed of ordering a limited remand. It is in these circumstances, the assessee has filed these appeals challenging the aforesaid orders passed by the Tribunal. 4. We heard the counsel for the appellant and also the learned Senior Standing Counsel appearing for the Revenue. 5. Among the various contentions raised by the appellant, the first one is that the Assessing Officer acted illegally in rejecting the books of accounts of the assessee. However, the pre-assessment notice, a copy of which has been made available by the learned counsel for the appellant, itself shows that the I.T.Appeal No.133/14 & con.cases. -3- Assessing Officer has given cogent reasons for his conclusion that the books of accounts produced by the assessee were to be rejected. In the said notice, it was stated thus: “ The hospital run by the trust has started earning income from the year 2002-03 onwards. The material evidences gathered at the time of search relating to building investments are far in excess of what has been shown in the balance sheet of the trust. The gross receipts from medical college and hospital from A.Yr.2006-07 onwards exceed 40,00,000/-. In view of ₹ the fact that the assessee trust has not been granted exemption u/s 11 or 10(23C) of the IT Act, the accounts of the trust are liable to be audited as per the provisions of the Sec.44AB of the IT Act. During the course of hearing held on 14.12.2010, it is admitted that statutory audit as per the provisions of Sec.44 AB has not been carried out by the trust in any of the relevant assessment years. It is also noted that the deficit arrived at by the trust after setting off revenue as well as capital expenditure on estimate basis and hence, does not represent true and correct facts relating to the income of the respective assessment years. For instance, an amount of Rs.(-)97885815 is shown as the excess of expenditure over income for the A.Y.2009-10. The gross collection from the hospital during this year exceeds Rs.9 crores. A total of Rs.15,06,65,679/- is claimed as revenue expenditure I.T.Appeal No.133/14 & con.cases. -4- without getting the accounts audited as per the provisions of Sec.44AB. The assessee has also not filed the balance sheet for the A.Y. 2009-10 till date. Similarly, an estimated amount of Rs.2 crores is shown as excess of expenditure over income for the assessment year 2009-10. The assessee is also not eligible for setting off capital expenditure in view of the fact that the trust is not enjoying exemption either under section 11 or 10(23C) of the IT Act. Some of the credits introduced in the balance sheet of the trust also remain unexplained. For instance, the source for an amount of Rs.1,61,800/- shown as the amount introduced by the Chairman was not explained with supporting documentary evidences. Every year the assessee has been claiming huge amounts, as capital expenditure against the collection of hospital and income from other sources. In view of the discrepancies detected in the accounts and financial statements filed by the assessee as cited, it is hereby proposed to invoke the prov.of Sec.145 and reject the books of accounts furnished by the assessee along with the returns of income filed in response to notice u/s 153A. Hence, the loss claimed by the assessee for various assessment years are rejected. It is, therefore, proposed to adopt the income from the activity of running the hospital and medical college carried out by the assessee trust @ 40% of the gross collection. I.T.Appeal No.133/14 & con.cases. -5- Income by way of interest income and rental income and other miscellaneous income, etc. are assessed to tax separately under the head income from other sources for all the assessment years for which assessment proceedings are pending u/s 153A.” 6. In the light of the above factual position, the correctness of which are not seen contradicted either before the Assessing Officer or before the statutory appellate authorities, we find no reason to accept the contention raised by the counsel for the appellant that the Assessing Officer ought not to have been rejected the books of accounts. Therefore, the first contention raised before us by the counsel for the appellant is rejected. 7. The second main contention raised by the learned counsel for the appellant was regarding the estimation of the income. From the submissions made by both sides, we notice that parties are in agreement that once the books of accounts are rejected by the Assessing Officer, the income of the assessee can be estimated either by taking recourse to the orders pertaining to the previous assessment years or by relying on cases which are comparable in nature. 8. Insofar as these cases are concerned, reading of the I.T.Appeal No.133/14 & con.cases. -6- assessment orders reveal that the assessee's case has been compared with similar other assessees running hospitals in the same region. According to the Assessing Officer, the gross profit rate of such comparable well established hospital concerns was found to be at an average of 50 to 55% and it was on that basis, he has proposed to assess profit at 40%. However, neither the order of the Assessing Officer, nor the orders of the appellate authorities show that before relying on the aforesaid comparable cases and estimating the income of the assessee on that basis, the Assessing Officer disclosed to the assessee, the materials that were relied on by him. Further, the Assessing Officer has also not afforded the assessee any opportunity to rebut those materials. 9. The right of the assessee to have such an opportunity is statutorily recognised in Section 142(3) of the Income-tax Act and also in the judgments in Yaggina Veeraraghavulu and Mavuleti Somaraju & Co. v. Commissioner of Income-tax (1962 ITR 528), S.Sarabhaiah Setty & Sons v. Commissioner of Income-tax (1964 ITR 175) and Joseph Thomas & Bros. v. Commissioner of Income-tax (1968 ITR I.T.Appeal No.133/14 & con.cases. -7- 796). 10. Therefore, we must certainly accept the case of the assessee that the estimation of income made by the Assessing Officer without disclosing the materials relied on and also denying them an opportunity as stated by us above was not only in violation of the statutory provisions, but also in violation of the principles of natural justice. For that reason, we cannot sustain the estimation of income made by the Assessing Officer. Necessarily, therefore, the proceedings will have to continue afresh from the stage of estimation of the income and the Assessing Officer disclosing to the assessee the materials that are relied on by him and after affording the assessee an opportunity to rebut those materials. 11. However, we notice from the assessment order for the year 2007-08 that 30 lakhs received by the assessee on ₹ 06.01.2007 has been added to the income of the assessee. This was contested by the assessee throughout by contending that the said amount was received in instalments towards fees and that the document evidencing receipt of this amount was retrieved from the computer on 06.01.2009. Therefore, according to the I.T.Appeal No.133/14 & con.cases. -8- assessee, the said amount of 30 lakhs was added to the income ₹ for the assessment year 2007-08. This, according to them was illegal. However, not even a scrap of paper has been produced by the assessee before any one of the authorities, evidencing that the said amount has been accounted in any of the previous years, in the manner now contended. Not only that, if as contended by the assessee, the amount was received in instalments, the assessee could have proved the contention by producing bank records, which also was not done. In such circumstances, we confirm the addition made by the Assessing Officer, which was confirmed by the statutory appellate authorities also. In the result, we set aside the assessment orders, except to the extent indicated hereinabove, and remand the matter back to the Assessing Officer for the limited purpose of estimating the income, after disclosing the materials relied on by him to the assessee and also after affording the assessee an opportunity to rebut the same. Appeals are disposed of accordingly. SD/- I.T.Appeal No.133/14 & con.cases. -9- ANTONY DOMINIC, JUDGE SD/- ANIL K.NARENDRAN, JUDGE dsn "