Kerala High Court
Commissioner Of Income Tax vs Hotel Ambassador on 29 November, 2001
Author: C.N. Ramacharan Nair
Bench: P.K. Balasubramanyan, C.N. Ramachandran Nair
JUDGMENT C.N. Ramacharan Nair, J.
1. All the Income Tax Reference Cases pertain to the same assessee and issues are also common. Therefore we have heard them together and proceed to dispose them of by this common judgment.
2. ITR Nos. 22 and 23 of 1998 at the instance of the revenue, arise out of the order of the tribunal disposing of appeals against the assessments for the assessment years 1981-82 and 1982-83, while ITR No. 20 of 1996 also at the instance of the revenue arises out of the order of the Tribunal disposing of assessment appeal of the assessee for the assessment year 1984-85. ITR Nos. 31 to 33 of 1998 at the instance of the revenue arise out of the two separate orders of the Tribunal dismissing penalty appeals filed by the Department for the corresponding assessment years 1981-82, 1982-83 and 1984-85. The only reference case at the instance of the assessee, namely, ITR No. 21 of 1998, arises out of the order of the Tribunal dismissing the assessment appeal of the assessee for the assessment year 1986-87.
3. The assessee is a partnership firm, running a bar hotel at Kottayam. The business premises of the assessee and the residential premises of the partners were searched by the Income-tax Department on 9.4.1986 and records relevant for the assessment years 1982-83 to 1986-87 were recovered. Prior to the issue of notice on 13.1.1987 proposing income-escaped assessments under Section 148 of the Income Tax Act, the assessee filed revised returns on 30.9.1986 for the assessment years 1981-82 and 1982-83, claiming to be returns under the Amnesty Scheme. However, assessments were completed under Section 147 for the assessment years 1981-82, and 1982-83 and under Section 143(3) for the assessment years 1984-85 and 1986-87 by making further additions to the income returned by the assessee and penalty under Section 271(1) (c) was also levied after rejecting the assessee's claim for immunity under the Amnesty Scheme for all the years except for the year 1986-97. The first appeals filed against assessments completed under Sections 147 and 143(3) of the Income Tax Act were dismissed by the Commissioner of Income-Tax (Appeals). In the second appeals before the Tribunal the only dispute that was agitated was whether the assessee was entitled to writ-off of bad debts for all the assessment years and was eligible for the benefit of the Amnesty Scheme for claiming protection against penalty on the ground that true and full disclosure of income was made voluntarily, before the same was detected by the department. Though the assessee's claim for write off of bad debts was rejected by the assessing officer as well as by the first appellate authority, the Tribunal accepted the claim of the assessee that it was entitled to claim the benefit of write-off of bad debts under Section 36(1) (vii) of the Income Tax Act in reassessment proceedings under Section 148 of the Income Tax Act. Further, on facts, the Tribunal found that the writing off of bad debts for the assessment year 1981-82, which were not accepted by the department on the ground that the same is not reflected by charging profit and loss account, was allowable for the reason that the assessee had written off the same in personal account of the debtors. For the assessment years 1982-83 and 1984-85, the Tribunal found that even though bad debts were not written-off by the assessee, as there is no time specified for writing-of bad debts, the assessee can be given an opportunity to write-off of bad debts especially because the assessee did not have the books of account, as the same was in the custody of the department after seizure. Based on the orders of the Tribunal in the appeals against assessment the Commissioner of Income Tax (Appeals) cancelled the penalty orders for all the three years, 1981-82, 1982-83 and 1984-85. In the second appeals filed by the department in the penalty matter the Tribunal found that the assessee voluntarily, and in good faith, filed returns disclosing escaped income before the same was detected by the department, and therefore the assessee is entitled to immunity under the Amnesty Scheme. On this line of reasoning, the Tribunal confirmed the orders of the Commissioner of Income Tax (Appeal) cancelling the penalties for the assessment years 1981-82, 1982-83 and 1984-85. Questions referred to this Court at the instance of the revenue are against the finding of the Tribunal on these issues in favour of the assessee, whether bad debts were ordered to be allowed, and penalties were cancelled by the Tribunal for all these assessment years. Though the assessment for the assessment year 1986-87 was also completed pursuant to the date gathered on the same inspection, the Tribunal declined to allow write off of bad debts claimed by the assessee, for the reason that the assessee has not in fact written-off the bad debts, nor did it file details of bad debts either before the assessing officer or before the Tribunal. According to the assessee, it was entitled to the same opportunity granted by the Tribunal for the earlier assessment years 1982-83 and 1984-85, and so much so the assessee questions the liability and propriety of the order of the Tribunal in declining to grant an opportunity to them to write-off the bad debts for the assessment year 1986-87. Accordingly, the question referred at the instance of the assessee in I.T.R. No. 21 of 1998 is for the purpose of getting bad debts written off.
4. We have heard Sri. P.K.R. Menon, senior counsel for the revenue, and Sri, Pathrose Mathai, learned counsel for the assessee.
5. For the sake of completencess, we give below the specific questions referred by the Tribunal for the opinion of this Court:
ITR No. 20 of 1996 (At the instance of revenue)
1. Whether on the facts and in the circumstances of the case and considering the search that was conducted in the premises of the assessee under Section 132 of the Income Tax Act, was the Tribunal right in law in holding that the revised return filed by the assessee subsequent to the search is to be considered as a return under the Amnesty Scheme?
2. Was the Tribunal right in law in holding that an opportunity should be given to the assessee to write off the "irrecoverable amounts" in the books of accounts?
3. Was the Tribunal justified in giving the above directions having regard to the fact that the claim for bad debts was made for the first time in the revised return filed after the search?
ITR Nos. 22 and 23 of 1998 (at instance of the revenue)
1. Whether on the facts and in the circumstances of the case and considering the search that was conducted in the premises of the assessee under Section 132 of the Income Tax Act, was the Tribunal right in law in holding that the revised return filed by the assessee subsequent to the search is to be considered as a return under the Amnesty Scheme?
2. Whether the Appellate Tribunal was justified in finding that the bad debts for the assessment year 1981-82 were written off in the assessee's books and that the assessee was entitled to deduction of bad debts for a sum of Rs. 1,97,208?
3. Was the Appellate Tribunal right in law in directing the Income Tax Officer to permit the assessee to write off the bad debts for the year 1982-83 when the claim was put forward for the first time during the re-assessment proceedings?
ITR Nos. 31 to 33 of 1998 (at the instance of the revenue)
1. Whether, on the facts and in the circumstances of the case will the "revised return" filed subsequent to the search come within the purview of the Amnesty Scheme?
2. Whether, on the facts and in the circumstances of the case and in the light of the circulars including the questions and answers, all them together forming the Amnesty Scheme, the assessee who had invoked the Amnesty Scheme subsequent to the search and seizure, is entitled to the benefit of the Amnesty Scheme?
3. Whether, on the fats and in the circumstances of the case, the Tribunal is right in holding that the disclosure made by the assessee in the 'amnesty returns' could be considered as having been made voluntarily and in good faith and are not the findings, such as 'amnesty returns'; 'voluntarily'; 'good faith'; wrong, unreasonable and against law and logic?
4. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in confirming the cancellation of penalty levied under Section 271(1)(c)?
ITR No. 21 of 1998 (at the instance of the assessee) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in not giving the assessee the benefit of write off of bad debts in the books of accounts even though the Tribunal had given the benefit of such write off in the assessee's own case for the assessment years 1985-86 and earlier years?
6. Broadly speaking, the issue can be summarised as follows:
1. Whether the assessee is entitled off of bad debts in re-assessment proceedings initiated under Section 147 of the Income Tax pursuant to search conducted by the department?
2. If the answer to the above question is in the affirmative, whether the Tribunal was justified in allowing bad debts for the assessment year 1981-82 and directing the department to permit the assessee to write off bad debts for the assessment years 1982-83 and 1984-85?
3. Whether the Tribunal was justified in not permitting the assessee to write off bad debts for the assessment year 1986-87?
4. Whether the Tribunal was justified in finding that the assessee has made true and full disclosure of its income prior to detection by the department under the Amnesty Scheme to claim immunity from penalty under Section 271(1)(c) of the Income Tax Act.
7. We will first deal with the question arising in the assessments of 1981-82, 1982-83 and 1984-85. The question is whether the Tribunal is justified in allowing the claim for 1981-82 and directing the department to allow the claim for 1982-83 and 1984-85 after giving assessee an opportunity to write off bad debts. Bad debt is a claim of deduction allowable under Section 36(1)(vii) of the Income Tax Act provided the assessee proves that the debt has become bad and the same is written off in the accounts. This obviously means that the assessee should be satisfied on materials that the debt is irrecoverable and that it has become bad and consequently has decided to write off the same, and in fact the same is written off at the time of finalisation of the accounts for the previous year relevant to the assessment year. In this particular case, the assessee had already finalised its accounts, filed returns and assessments were also completed. However, the department got information that the assessee was practising inflation in purchases and suppression in sales and search was conducted on 9.4.1986 much after the relevant years are over which led to the seizure of accounts. In fact, the finding of the Tribunal is that the assessee has written off the bad debts after the search in the personal accounts of the debtors for the assessment year 1981-82 as against writing off of bad debts by charging the same to Profit and Loss Account. In other words, admittedly the assessee has not properly carried out the write off of bad debts which should have been reflected in the Profit and Loss Account. The assessee after finalising it's accounts for the relevant previous year filed returns and even assessment was completed and therefore writing off of bad debts in re-assessment proceedings is against the scheme contemplated in the Act. However, the Tribunal accepted the assessee's case stating that write off of bad debts in the personal account of the debtors is sufficient for claiming deduction under Section 36(1)(vii) of the Income Tax Act. The assessee has placed reliance on the decision of the Andhra Pradesh High Court in State Bank of Hyderabad v. C.I.T., (1988) 171 ITR 232. This, of course, is not a case of claim of bad debts after finalisation of accounts. Apart from this, the Supreme Court in C.I.T. v. Sun Engineering Works Private Ltd., (1992) 198 ITR 297 (SC) disapproved the view expressed in the decision of the Andhra Pradesh High Court. We feel writing off of bad debts, without charging the same in the Profit and Loss Account is not a write off at all because assessment is made based on audited accounts and Profit and Loss Account and Balance Sheet filed along with the returns. It is not enough, if the assessee writes off the same in some of the books maintained by them, which do not form part of the audited accounts including Profit and Loss Account based on which assessment is made. Unless the write off took place at the time of finalisation of the accounts and reflected in the books of accounts, it cannot be treated as a write off at all. We do not find any special circumstances under which the Tribunal has accepted the write off stated to have been done by the assessee in the personal account of the debtors maintained by the assessee, as against the normal practice of charging the same to the Profit and Loss Account. We are also of the view that re-assessment proceedings under Section 147 of the Income Tax Act is income-escaped assessment where the department has reopened the assessment for the purpose of assessment of escaped-income. Whatever claims may be eligible for deduction in re-assessment proceedings, we are of the view that a deduction of bad debts is not permissible in re-assessment proceedings because in re-assessment proceedings, there is no finalisation of accounts to write off bad debts. The assessee's account were once finalised and the same was filed before the department. Writing off of bad debts is to be made in the finalisation of the accounts of the previous year in which the debt has become bad. It is for the assessee to conduct investigation or make effort to recover the amounts during the previous year and to decide to write off, if is satisfied that the debts had in fact become bad. The claim made in re-assessment proceedings is a belated claim only to off-set the suppressed income detected by the department on search. Therefore the writing off of bad debts allowed by the Tribunal for the assessment year 1981-82 is not permissible under the Income Tax Act. Moreover, the method of writing off adopted by the assessee which is not reflected in the profit and loss account does not make it eligible for deduction under Section 36(1)(vii) of the Income Tax Act. We accordingly reverse the finding of the Tribunal for the year 1981-82 allowing this claim. It is the admitted fact that the assessee has not written off the bad debts for the subsequent years, 1982-83 and 1984-85. The reason given by the Tribunal for giving an opportunity to the assessee to write off the bad debts is that the books were with the department after seizure. The search was conducted on 9.4.1986, much after all the relevant previous years are over and finalisation of accounts was made by the assessee, and the same was furnished before the department. The Tribunal has pointed out that there is no time limit for writing off of bad debts. We cannot agree with this proposition. We have already held that writing off of bad debts should be done at the time of finalisation of accounts for the previous year in which the debt had become bad, and there cannot be finalisation of accounts several times. This is a case of detection of suppressed income and consequently re-assessment proceedings were initiated for assessment of escaped-income. At this stage, the assessee is not entitled to conduct an investigation about the debts, declare them bad and decide to write it off, years after the end of the relevant previous year. In fact, the debts that had become bad in the relevant previous year only can be written off at the time of finalisation of the accounts for that year. Therefore the Tribunal's observation that there is no time limit for writing off of bad debts cannot be accepted, and is against the scheme of according relevant for the income-tax assessment. Obviously, if the assessee is allowed to write off the bad debts after the close of the accounts for the relevant year, it is as if debt has become bad at a later time and the same can be written off only in the finalisation of accounts for the relevant year in which the assessee found that the debt had become bad. Therefore the permission granted by the Tribunal is against the scheme of Section 36(1)(vii) of the Income Tax Act. We are of the view that the writing off of bad debts cannot be permitted in re-assessment proceedings initiated after the finalisation of accounts. Therefore the Tribunal went wrong in directing the department to permit the assessee to write off the bad debts for the assessment years 1982-83 and 1984-85 and in allowing the appeals. We therefore reverse the finding of the Tribunal for the years 1982-83 and 1984-85 also.
8. The next issue in the department's reference cases is whether the Tribunal is justified in confirming the orders of the Commissioner of Income Tax (Appeals) cancelling the penalty levied under Section 271(1)(c) of the Income Tax Act for the assessment years, 1981-82, 1982-83 and 1984-85. In order to appreciate the issues raised, it is necessary to refer to the following facts and figures relating to the three assessment years:
Assessment year Income originally returned Income additionally offered in the return filed on 30.9.86 Further income offered vide letter dated 215.87 Income assessed as per assessment (S. 147) orders after search 1981-82 Rs.67,300/-
Rs.2,16,633/-
Rs.3,00,782/-
Rs.4,98,810/-
1982-83 Rs.98,750/-
Rs.2,58.750/-
Rs.3,82,653/-
Rs.7,37,440/-
1984-85 Rs.62,120/-.
Rs.62,150/-
(return on 30.3.1987) By letter dt. 26.11.87 denied suppression Rs.2,06,560/-
The assessee did not file any serious objection before the assessing officer against the proposal for penalty, but only tried to protract the matter by requesting for time again and again. The assessing authority, however, considered the entire facts and circumstances and held that income assessed is based on material gathered on search and the assessee is not entitled to the benefit of immunity claimed because the assessee did not make a true and full disclosure. Accordingly the levied penalty under Section 271(1)(c) of the Act for the years 1981-82, 1982-83 and 1984-85. The first appellate authority based on the Tribunal's orders in the assessment appeals cancelled the penalty holding that the assessee is entitled to the benefit of immunity. The Tribunal on second appeals by the department held that the assessee has made a true and full disclosure of income before detection under the Amnesty Scheme under circular No. 453 dated 4.4.1986. The Tribunal has noticed that the assessee filed revised returns for the assessment years 1981-82 and 1982-83 on 30.9.1986, much before the issue of notice under Section 147 of the Income Tax Act on 13.1.1987. According to the Tribunal, the mere search and seizure of books of accounts is not sufficient for taking the view that the department has detected suppressed income. Counsel for the revenue contended that the returns filed disclosing the income after search and detection are not voluntary disclosure to entitle the assessee for the benefit of Amnesty Scheme under Circular No. 453 dated 4.4.1986. He has also relied on the decision of this Court in P.C. Joseph & Brothers v. C.I.T., (2000) 243 ITR 818 (Ker.), and that of the Bombay High Court in Natwarlal Joitram Raval v. C.I.T. On the other hand, counsel for the assessee has relied on the decision in C.I.T. v. Mayank Rotoplast Industries, wherein it was held that if the survey yielded no incriminating materials the assessee will still be entitled to the benefit of Amnesty Scheme for the disclosure made after survey. He has also relied on the decision of the Calcutta High Court in Anand Kumar Saraf v. C.I.T., (1995) 211 ITR 562 (Cal.) to content that the disclosure after search will entitled the assessee for the benefit of Amnesty Scheme. Another decision cited by the assessee is a decision of this Court in A.V. Joy Alukkas Jewellery v. C.I.T., (1990) 185 ITR 638 (Ker). We do not think it necessary to decide whether the declaration subsequent to search will entitle the assessee for the benefit of the Amnesty Scheme under the circular referred to above, because on facts we find that the assessee has not made any bona fide declaration in the returns filed within the time provided for under the Amnesty Scheme introduced by Circular No. 453 dated 4.4.1986. Though the assessee filed returns before issue of notice under Section 147 after search for the assessment years 1981-82 and 1982-83 on 30.9.1986, the disclosure made therein was not full and complete is evidence from the figures furnished in paragraph 8 above. The assessee has put up belated claim of write off of bad debt to depress the concealment noticed after search and besides all this, as against the income of Rs. 2,16,633 declared by the assessee as coming under Amnesty Scheme, the assessment sustained was at Rs. 4,98,810/- for the assessment year 1981-82. Similarly, for the assessment year 1982-83, the assessee filed an Amnesty return disclosing Rs. 2,58,750/- as against the assessment sustained at Rs. 7,37,440/-. The Amnesty Scheme introduced by the above circular though extended ended on 31.3.1987. Therefore the letter filed by the assessee on 21.5.1987 agreeing for further additions over and above the income stated to have been declared voluntarily on 30.9.1986 is after the last date prescribed for declaration under the Amnesty Scheme. Therefore, the offer of additional income for assessment vide letter dated 21.5.1987 is not covered by the Amnesty Scheme. Apart from this, it is evident from the penalty orders that the assessee was involved in manipulations and it was only when the Department detected the same from assessee's own accounts recovered on search and substantial the extent of concealment proved the assessment agreed for the assessment. In paragraph 3 of the order for the year 1981-82, the assessing officer has shown the details of concealment detected search. Admittedly, the assessee had not conceded these amounts until it was confronted with eh proof of concealment noticed by the department. Similar is the position for the assessment year 1982-83, wherein the assessing officer has found out massive inflation in the purchase account and suppression in the sales account. Therefore it is not a case of the assessee voluntarily disclosing the income, but the Department detected the concealment in the course of search and the assessee did not contest the same. For the assessment year 1984-85 the assessee filed original return disclosing an income of Rs. 62,120/-. After search and after assessee was called upon to file a return, the assessee again filed a return on 30.3.1987 disclosing almost the same income, ie., Rs. 62,150/-. The department found out inflation in the purchase account and suppression in the sales account, and ultimately the income assessed was Rs. 2,06,560/-. Therefore, on facts, we find that the assessee has not made true and complete disclosure voluntarily at any stage much less within the time provided for declaration under the Amnesty Scheme, which expired on 31.3.1987. We find that the assessment of the escaped-income is clearly attributable to the effort made by the department in the search and the concrete proof obtained by them. The assessee at no stage has made true and full disclosure of income. But what the assessee has done was that it agreed for the additions when the department confronted it with the data gathered on search. Therefore the finding the C.I.T. (Appeals) and the Income Tax Tribunal was that the assessee is entitled to immunity under the Amnesty Scheme as the assessee has made true and full disclosure before detection, is not sustainable. We are of the view that the cancellation of penalty by the first appellate authority and the order of the Tribunal confirming it are not tenable. However, we feel that for the assessment years 1981-82 and 1982-83 the assessee had filed revised returns on 30.9.1986 disclosing the additional income. This was done before notice under Section 147 was issued on 13.1.1987 for these two years. We feel that the additional amounts offered under these two revised returns filed on 30.9.1986 are entitled to immunity under the Amnesty Scheme under Circular 453 dated 4.4.86. But we make it clear that the income assessed over and above the income originally assessed and returned on 30.9.1986 is concealed income on which penalty is payable under Section 271(1)(c) of the Income Tax Act. It is a fact that the assessment has not made true and full disclosure even for these two years also. However, we feel that at least to the extent of income voluntarily disclosed by the assessee, the assessee should get immunity from penalty. Therefore, penalty for 1981-82 and 1982-83 have to be recomputed after excluding from the concealed income originally fixed. The income additionally offered by the assessee vide its revised returns filed on 30.9.1986. The assessee is not entitled to any relief against the penalty levied for 1984-85 because on facts, concealment is proved and only minimum penalty is levied. We, therefore, reverse the orders of the C.I.T. (Appeals) and the Tribunal for 1984-85 and for 1981-82 & 1982-83 with the modification as above.
9. In the assessee's reference (ITR 21/98) for 1986-87 there is a question on claim of bad debts. Admittedly, the assessee has not written off the bad debts for the assessment year 1986-87. The assessee's case is that bad debts could not be written off because the books were with the department. The Tribunal rejected the assessee's claim for the reason that the assessee has not proved that the debts have become bad, and the assessee has not written off the bad debts, and the assessee has also not furnished details of bad debts either before the assessing officer or before the Tribunal to justify the claim of an opportunity. Obviously the order of the Tribunal is contradictory to its order for the assessment years 1982-83 and 1984-85, wherein the Tribunal has allowed such an opportunity to the assessee. We have already found that the assessee cannot get the benefit of write off of bad debts after accounts are finalised and returns are filed. Our reasoning for those years stated above apply for this year also. Therefore we feel that the Tribunal rightly rejected the claim of the assessee, and we sustain the order of the Tribunal.
10. In the result, we answer the questions referred at the instance of the department, in both the assessment and penalty cases with the modification indicated above in favour of the revenue and against the assessee. The question referred at the instance of the assessee for the assessment year 1986-87 is also answered against the assessee and in favour of the revenue.