T.C.A.Nos.467 & 470 of 2019 IN HIGH COURT OF JUDICATURE AT MADRAS DATED : 04.09.2020 CORAM: HONOURABLE MR.JUSTICE T.S.SIVAGNANAM and HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Judgment Reserved On Judgment Pronounced On 18.08.2020 04.09.2020 Tax Case Appeal Nos.467 & 470 of 2019 M/s.New Woodlands Hotel Pvt. Ltd., 72-73, Dr.Radhakrishnan Road, Mylapore, Chennai-600 034. [PAN: AAACN2043D] .. Appellant in both Appeals -vs- Assistant Commissioner of Income Tax, Company Circle-VI(2), Chennai. .. Respondent in both Appeals Tax Case Appeals filed under Section 260A of Income Tax Act, 1961, against order dated 30.01.2019 made in I.T.A.Nos.2412& 2413/Chny/2017 on file of Income Tax Appellate Tribunal 'B' Bench, Chennai for assessment years 2013-14 and 2014-15. 1/14 http://www.judis.nic.in T.C.A.Nos.467 & 470 of 2019 For Petitioner : Mr.G.Baskar (In both Appeals) For Respondent : Mr.Rajesh, Junior Standing Counsel (In both Appeals) for Mr.Karthik Ranganathan, Senior Standing Counsel COMMON JUDGMENT T.S.Sivagnanam, J. These appeals, filed under Section 260A of Income Tax Act, 1961 (hereinafter referred to as Act ) by assessee, company in Hospitality Business, are directed against common order dated 30.01.2019, passed by Income Tax Appellate Tribunal 'B' Bench, Chennai (for brevity Tribunal ) in I.T.A.Nos.2412 & 2413/Chny/2017 for assessment years 2013-14 and 2014-15. 2.There were two other appeals filed by assessee against very same order in T.C.A.Nos.468 and 469 of 2019 challenging that portion of order passed by Tribunal, which rejected entire case of assessee and allowed Revenue's appeals on issue, which was never canvassed 2/14 http://www.judis.nic.in T.C.A.Nos.467 & 470 of 2019 by Revenue. These appeals were disposed of by order dated 16.03.2020 and in this judgment, we are concerned about correctness of order passed by Tribunal in I.T.A.Nos.2412 & 2413/Chny/2017. appeals are entertained on following substantial questions of law:- 1. Whether on facts and in circumstances of case, order of Income Tax Appellate Tribunal was perverse in concluding that Appellant failed to lead any evidence to prove claim; 2. Whether on facts and in circumstances of case, Income Tax Appellate Tribunal was right in law in not allowing genuine expenditure incurred by Appellant as service charges to its employees in full; and 3.Whether on facts and in circumstances of case, Income Tax Appellate Tribunal was right in law in holding that Commissioner of Income Tax (Appeals) had not examined whether Service Charges 3/14 http://www.judis.nic.in T.C.A.Nos.467 & 470 of 2019 are really collected by Appellant when such ground was not even raised before Tribunal by Appellant and also was not questioned by Assessing Officer or Commissioner of Income Tax in their orders. 3.Heard Mr.G.Baskar, learned counsel for appellant/assessee and Mr.S.Rajesh, learned Junior Standing Counsel for Mr.Karthik Ranganathan, learned Senior Standing Counsel for respondent/Revenue. 4.The assessee filed their return of income for assessment years under consideration, viz., 2013-14 and 2014-15 on 27.09.2013 and 25.09.2014, respectively. For assessment year 2013-14, assessee admitted total income of Rs.76,16,990/- and for assessment year 2014- 15, it admitted loss of Rs.3,87,017/-. returns were processed under Section 143(1) of Act and subsequently, assessments were selected for scrutiny and notices were issued under Section 142(1) of Act on 08.06.2015/09.06.2016 calling for details. After books of accounts were 4/14 http://www.judis.nic.in T.C.A.Nos.467 & 470 of 2019 produced by assessee and information was furnished, assessment was completed under Section 143(3) on 15.03.2016 by making addition of Rs.2,16,80,648/- towards inflation of expenditure under head Service Charges and addition of Rs.3,06,509/- towards interest on I.T. Refund for assessment year 2013-14. assessment for year 2014-15 was completed under Section 143(3) of Act on 30.09.2016 making addition of Rs.2,03,68,410/- stating to be bogus expenditure claimed towards service charges and Rs.19,87,094/- towards employees contribution to Provident Fund and ESI remitted beyond due date. 5.The assessee challenged assessment orders before Commissioner of Income Tax (Appeals) (CIT(A)), who by common order dated 26.07.2017, partly allowed appeals by restricting disallowance of service charges to Rs.1,22,70,445/- as against Rs.2,16,80,648/- and deleting interest on I.T.Refund for assessment year 2013-14 and restricting disallowance of service charges to Rs.1,17,79,582/- as against 5/14 http://www.judis.nic.in T.C.A.Nos.467 & 470 of 2019 Rs.2,03,68,410/- and deleting addition in respect of employees contribution to Provident Fund/ESI for assessment year 2014-15. Against said orders of CIT(A), assessee and Revenue preferred appeals to Tribunal. Tribunal, by impugned order, dismissed appeals filed by assessee and allowed appeals filed by Revenue. Challenging said order, assessee is before this Court. 6.The question of law to be answered has factual connotation to it with regard to service charges paid by assessee to its employees. Tribunal held that CIT(A) while partly allowing assessee's appeals has not examined whether service charges were really collected by assessee, nor any evidence was discussed in orders in support of claim for expenditure and therefore, held that Assessing Officer was justified in drawing adverse inference on claim and CIT(A) ought not to have granted relief in absence of any evidence in support of claim. During course of assessment, Assessing Officer pointed out that assessee has debited amount towards service charges. assessee was called upon to 6/14 http://www.judis.nic.in T.C.A.Nos.467 & 470 of 2019 explain same, who had stated that service charges are paid in lieu of tips. Since tips were received by room boys only whereas, other employees were not able to avail same and ultimately, matter was discussed with employees and agreement was entered into. assessee furnished breakup of service charges to three category of employees, viz., permanent employees, managerial and other employees and administrative/temporary employees. Assessing Officer examined few of employees of assessee and also recorded statement after which, show cause notice dated 20.09.2016 was issued. assessee submitted their reply dated 24.09.2016 giving additional details including breakup of service charges, Memorandum of Settlement arrived at between assessee and workers union dated 02.08.2012 and details of columns and contents of registers produced during scrutiny proceedings. Assessing Officer held that assessee had resorted to this modus operandi for inflation expenditure by showing same under head service charges and transaction was disbelieved. 7/14 http://www.judis.nic.in T.C.A.Nos.467 & 470 of 2019 7.When matter was dealt with by CIT(A), factual position was reiterated, documents, which were placed before Assessing Officer including registers, were relied on. For assessment year 2013-14, assessee claimed that sum of Rs.24,10,203/- was amount of service charge collected during year. Service charges paid to permanent employees through banking channel was Rs.55,45,911/-. CIT(A), therefore, held that possible service charge distributed among temporary employees would be Rs.38,64,292/-. For assessment year 2014-15, total amount of service charge collected was Rs.85,88,828/-, paid to permanent employees through banking channel Rs.63,32,289/- and possible service charges distributed to temporary employees and others Rs.22,56,539. Thus, out of total amount of service charges of Rs.1,61,34,737/- claimed by assessee for assessment year 2013-14, CIT(A) accepted payment of Rs.38,64,292/- and disallowed Rs.1,22,70,445/-. For assessment year 2014-15, total amount of service charges claimed to have been paid is Rs.1,40,36,121/- of which, CIT(A) granted relief to extent of Rs.22,56,539/- and made disallowance of Rs.1,17,79,582/-. In 8/14 http://www.judis.nic.in T.C.A.Nos.467 & 470 of 2019 opinion of Tribunal, orders of CIT(A) were merely based on presumption that assessee company would not have paid to employees to extent of service charges collected. There are two aspects to it. Firstly, whether Assessing Officer was right in concluding that assessee had adopted this modus operandi for inflating its expenditure. Under normal circumstances, expression modus operandi is used when assessee resorts to something which is illegal. Law recognises tax planning and penalizes tax avoiders. 8.Considering material, which was placed by assessee before Assessing Officer, which was placed before CIT(A), Tribunal and before us, we are of firm view that Assessing Officer should not have used expression modus operandi to mean that assessee had adopted dubious tactics to inflate its expenditure. We have come to such conclusion because of nature of material placed by assessee before Assessing Officer, CIT(A) and in paper book filed before Tribunal. documents being, annual accounts; statement of income; copy of 9/14 http://www.judis.nic.in T.C.A.Nos.467 & 470 of 2019 letter dated 23.08.2016 to Assistant Commissioner of Income Tax enclosing register of wages of persons employed (Form No.16 under Payment of Wages Act) for relevant period evidencing payment of service charges to permanent employees; copies of vouchers for payment of service charges paid in cash to administrative/management/other employees; copy of service charges register for relevant month evidencing payment to administrative/temporary employees; copy of letter dated 09.05.2017 of Chartered Accountant filed explaining payment of service charges to employees; and Memorandum of Settlement between assessee and Anna Thozhilalar Sangam dated 02.08.2012 under Section 18(1) of Industrial Disputes Act, 1947. 9.The Assessing Officer while rejecting assessee's contention has not disbelieved any of these documents. payments effected in cash were sought to be substantiated by assessee by producing vouchers. If Assessing Officer was of view that vouchers are fabricated documents, then all of such employees should have been examined and statements should 10/14 http://www.judis.nic.in T.C.A.Nos.467 & 470 of 2019 have been recorded and if same was done, assessee is entitled to opportunity of cross examination. This having not been done, assessment order is flawed on this aspect. Assessing Officer has referred to statements of four persons and on reading of selected portions of statement, as extracted in assessment order, does not lead to inference that entire transaction is bogus. assessee's explanation is that tips were being given to room boys and they alone were benefited and other employees/workers raised objection and matter was discussed in several meetings and ultimately, settlement was arrived at between employees union and assessee management. 10.Due credence should be given to Memorandum of Settlement dated 02.08.2012 recorded in presence of Labour Officer. If according to Assessing Officer, this statement is also bogus document, then he ought to have recorded such finding. However, law prohibits him from doing so because of binding effect of settlement on management and workmen. Therefore, in our considered view, settlement could not 11/14 http://www.judis.nic.in T.C.A.Nos.467 & 470 of 2019 have been brushed aside. register of wages of persons employed is statutory form under Payment of Wages Act and there is presumption to its validity. bulk of materials produced by assessee before Assessing Officer could not have been rejected. CIT(A), though accepts documents produced by assessee, holds that there is no justification for payment in cash for temporary employees. In our view, this finding is not sufficient because vouchers have been produced, register has been produced, where concerned temporary employees have signed. Therefore, to out rightly reject these vouchers and register, is incorrect. If according to CIT(A), vouchers and registers, insofar as temporary employees are concerned, are not admissible, then there should have been finding to said effect, which is conspicuously absent in orders passed by CIT(A). 11.The Tribunal erred in observing that orders of CIT(A) to extent it grants relief to assessee are on presumption. This finding is incorrect because relief granted by CIT(A) was in respect of payments, which were verifiable. It is not in dispute that vouchers and registers were 12/14 http://www.judis.nic.in T.C.A.Nos.467 & 470 of 2019 produced before Assessing Officer and originals are also shown to have been produced at time of assessment. Assessing Officer merely going by statements of few employees, cannot disbelieve statutory registers and forms, as there is presumption to its validity and onus is on person, who disputes validity or genuinity of document. Therefore, in our considered view, Tribunal ought not to have interfered with relief granted by CIT(A) and CIT(A) ought to have interfered with orders passed by Assessing Officer in its entirety and not restricted same to partial relief. 12.In result, appeals are allowed and substantial questions of law are answered in favour of appellant-assessee. No costs. (T.S.S., J.) (V.B.S., J.) 04.09.2020 abr Speaking Order/Non-Speaking Order Index :Yes/No 13/14 http://www.judis.nic.in T.C.A.Nos.467 & 470 of 2019 T.S.Sivagnanam, J. and V.Bhavani Subbaroyan, J. (abr) To Income Tax Appellate Tribunal B Bench, Chennai. Pre-delivery Judgment made in Tax Case Appeal Nos.467 & 470 of 2019 04.09.2020 14/14 http://www.judis.nic.in New Woodlands Hotel Pvt. Ltd. v. Assistant Commissioner of Income-tax, Company Circle-VI(2), Chennai