Karnataka High Court
Pr Commissioner Of Income Tax vs M/S Ennoble Construction on 20 July, 2022
Bench: Krishna S Dixit, P.Krishna Bhat
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ITA No. 383 of 2016
IN THE HIGH COURT OF KARNATAKA, DHARWAD BENCH
DATED THIS THE 20TH DAY OF JULY, 2022
PRESENT
THE HON'BLE MR JUSTICE KRISHNA S.DIXIT
AND
®
THE HON'BLE MR JUSTICE P.KRISHNA BHAT
INCOME TAX APPEAL NO. 383 OF 2016
BETWEEN:
1. PR. COMMISSIONER OF INCOME TAX,
CENTRAL BMTC COMPLEX,
KORMANGALA, BANGALORE.
2. THE DEPUTY COMMISSIONER OF
INCOME TAX
CIRCLE-1(3), BANGALORE
...APPELLANTS
(BY SRI. SANMATHI E.I. & Y.V.RAVIRAJ, ADVOCATES)
AND:
M/S ENNOBLE CONSTRUCTION
NO.6/4, ENNOBLE HOUSE,
RAGHAVACHARI ROAD,
BELARY-583101
PAN: AFJPA5974P
...RESPONDENT
(BY SRI. MAYANK JAIN, ADVOCATE)
THIS ITA IS FILED UNDER SECTION 260-A OF THE
INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED
27.11.2015 PASSED IN ITA NO.449/BANG/2014, FOR THE
ASSESSMENT YEAR 2009-2010 PRAYING TO DECIDE THE
FOREGOING QUESTION OF LAW AND/OR SUCH OTHER
QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE
COURT AS DEEMED FIT AND ETC.
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ITA No. 383 of 2016
THIS ITA HAVING BEEN HEARD AND RESERVED FOR
JUDGMENT ON 14.07.2022, COMING ONF OR
PRONOUNCEMENT THIS DAY, KRISHNA S.DIXIT, J, DELIVERED
THE FOLLOWING.
JUDGMENT
This appeal by the Revenue seeks to lay a challenge
to the order dated 27.11.2015 made by the Income Tax
Appellate Tribunal, 'B' Bench, Bangalore (hereinafter
'ITAT'), whereby the statutory appeal of the Assessee in
ITA No.449/BANG/2014 having been favoured the addition
made by the Assessment Officer on account of transport
creditors, is set at naught, and to that extent the Assessee
has been relieved of tax liability.
2. The Revenue in its Memorandum of Appeal filed
under Section 260A of the Income Tax Act, 1961
(hereinafter '1961 Act') had framed the following question,
as the substantial question of law:
"Whether on the facts and in the circumstances
of the case, the Tribunal is justified in law in
setting aside the disallowance of
Rs.5,89,49,503/- claimed as Transport Creditors
by following decisions in cases of CIT V/s Usha
Stud Agricultural Farms (301 ITR page 384) and
CIT V/s Prameshwar Bohra decided by Rajasthan
ITA No. 383 of 2016
High Court though credit worthiness of the
transport creditors was not established by the
assessee and not appreciating that the assessee
had not provided even the identity of the
Transport Creditors in the absence of which the
assessing authority was not in a position to
conduct further enquiries"?
Subsequently, vide memo dated 22.03.2019, it had
proposed the following "Redrafted Substantial Question of
Law":
"Whether in the facts and circumstances of
the case, the Tribunal is justified in setting aside
the addition made by the assessing authority
towards the unsubstantiated transport creditors
by holding that these pertain to earlier years
accepted by the assessing authority as genuine,
which is incorrect and as such order of the
Tribunal perverse?"
A Co-ordinate Bench of this Court vide order dated
22.03.2019 admitted the appeal on the redrafted
substantial question of law.
3. After service of notice, the Assessee having
entered appearance through its counsel opposed the
appeal making submissions in justification of the impugned
order and the reasons on which it has been constructed:
ITA No. 383 of 2016
that, the addition could not have been made by the AO
without rejecting the books of accounts and sans making a
best judgment assessment even in the failure to produce
the material evidencing the business expenditure; that the
question re-framed by the Revenue on which the appeal
has been admitted lacks characteristics of a 'question of
law' and much less a 'substantial question of law'; that
when all the records & documents having been seized
were in the custody of CBI, the AO ought to have
summoned the same & examined, if they could support
the claim of Assessee; this having not been done, the
appeal is liable to be dismissed; lastly, that in any
circumstance, the AO could not have made use of
proceedings for the preceding Assessment Year. So
arguing, he seeks dismissal of the appeal.
II. BRIEF FACTS OF THE CASE:
(a) The Assessee, a partnership firm was engaged in the
business of construction & transport operations during
the relevant period. It had filed IT Return for the
Assessment Year 2009-10 claiming an expenditure of
ITA No. 383 of 2016
Rupees 70,68,28,574/- allegedly paid to 'Transport
Creditors'. During the course of Scrutiny Assessment
Proceedings, the Assessment Officer (hereinafter 'AO')
had asked the Assessee to furnish details of Transport
Creditors to whom the payment was made. The
Assessee expressed his inability to produce any
documents contending that his entire business office
having been raided all books files, registers, etc have
been seized by the CBI.
(b) The AO rejected the explanation offered by the
Assessee as above observing that for the Assessment
Year 2008 - 2009, a similar addition was made based
on the declaration of excessive trade liability by the
Assessee which worked out to 8.39% and therefore,
the same should be taken as the ratio for the
Assessment Year in question as well; on that basis, he
worked out the sum at Rupees 5,89,49,503/- and
added it to the income of the Assessee, for the
purpose of levy.
ITA No. 383 of 2016
(c) The Assessee had called in question the said addition in
the subject appeal inter alia contending that unless
the books of accounts were rejected under Section
145 of the 1961 Act, the AO acting under Section
143(3) could not have made the ad hoc disallowance;
the fact that for the Assessment Year 2008 - 09 some
addition was made under the said head, cannot be the
sole basis for making such an addition for the
subsequent Assessment Year, each assessment being
an independent compact. He also pleaded about CBI
raid & seizure of all documents, not even a piece of
paper being in his custody or power.
(d) The ITAT substantially upheld the version of Assessee
and granted relief by setting aside the addition made
by the AO. Aggrieved thereby, the Revenue has
preferred this appeal under the provisions of the 260A
of the 1961 Act with the substantial questions of law
hereinabove mentioned.
ITA No. 383 of 2016
III. Having heard the learned counsel for the parties and
having perused the appeal paper-book, we decline
indulgence in the matter for the following reasons:
A. THE RIGHT OF APPEAL U/S 260A; ITS SCOPE &
CONTENT:
(i) The Kerala High Court in CIT vs. WOONDUR JUPITAR
CHITS (P) LIMITED1 had pointed out that the
provisions of 1961 Act providing for reference on a
question of law arising out of an order of the Tribunal
were 'Archaic' and therefore there was an eminent
need for rationalisation of the same. Accordingly, the
Parliament vide Finance (2) Act, 1998 inserted inter
alia Sections 260A & 260B in Chapter - XX of the
1961 Act to provide for an appeal against the orders
of Tribunal directly to the High Court, within whose
jurisdiction, Office of the AO is situate. Sub-section
(1) of Section 260A reads as under:
"S. 260A. (1) An appeal shall lie to the
High Court from every order passed in
appeal by the Appellate Tribunal [before
the date of establishment of the National
213 ITR 73
ITA No. 383 of 2016
Tax Tribunal], if the High Court is satisfied
that the case involves a substantial
question of law."
(Other sub-sections not being much relevant
are not reproduced)
Appeal lies only if the case involves a substantial
question of law, which the memorandum of appeal,
ideally speaking, has to precisely state. However, if
the High Court is satisfied that a substantial question
of law is otherwise involved, it may itself formulate
such question and admit the appeal. Appeal shall be
ordinarily heard on the question so formulated.
However, there is nothing, in the Act which would
abridge the power of Court to hear, for reasons to be
recorded, the appeal on any other substantial
question of law, in addition to or substitution of the
one framed in the appeal memo, if it is satisfied that
the case involves such other question.
(ii) The appeal, be it of the Revenue or the Assessee, lies
only "... if the High Court is satisfied that the case
involves a substantial question of law ..." Sub-Section
ITA No. 383 of 2016
(7) of Section 260A states that the provisions of Code
of Civil Procedure, 1908 relating to appeals to the
High Court, as far as may be, apply to these appeals.
This Section is analogous to Section 100 of CPC.
Noticeably, both these Sections i.e., Section 260A of
1961 Act and Section 100 of CPC do not define the
expression 'substantial question of law'. The Apex
Court vide SANTOSH HAZARI vs. PURUSHOTTAM2 is
of the view that the word 'substantial' qualifies the
term 'question of law'; it means a question having
substance, essential, real, of sound worth, important
or considerable. The substantial question of law on
which an appeal shall be heard need not necessarily
be a question of law of general importance. To be
'substantial', a question of law must be debatable and
it must have a material bearing on the decision of the
case in the sense that if answered either way insofar
as the rights of the parties are concerned.
251 ITR 84
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ITA No. 383 of 2016
(iii) It is profitable to see what Kanga & Palkhivala's 'Law
and Practice of Income Tax', Vol. II, Eleventh Edn.,
Lexis Nexus at pages 3316 - 17 states:
"...A question is a substantial question of
law if: (i) it directly or indirectly affects
substantial rights of the parties; or (ii) it
is of general importance; (iii) it is an
open question in the sense that the
issue has not been settled by a
pronouncement of the Supreme Court;
(iv) it is not free from difficulty; or (v) it
calls for a discussion for alternative
view... The findings are based on no
evidence; (vii) relevant admissible
evidence has not been taken into
consideration; (viii) inadmissible
evidence has been taken into
consideration; (ix) legal principles have
not been applied in appreciating the
evidence; or (x) the evidence has been
misread..."
These tests are stated to be illustrative and in no way
exhaustive of the powers of the High Court to entertain an
appeal, if there is other substantive ground of law. It
hardly needs to be stated that a provision for appeal
should be liberally construed and read in a reasonable &
practical manner.
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ITA No. 383 of 2016
B. AS TO SUBSTANTIAL QUESTION OF LAW IN THIS
CASE:
(i) A Co-ordinate Bench of this Court vide order dated
22.03.2019 has admitted this appeal on the question
as 'Redrafted' vide Memo dated 22.03.2019 filed by
the Revenue. The said question needs to be
construed keeping in view sub-section (1) of Section
37 of the Act. This provision apparently is the
residuary section extending the allowance to the
items of expenditure not covered by other sections.
'Expenditure' inter alia in the text & context of
Section 37 primarily denotes the idea of spending or
paying out or paying away. It is something that has
gone irretrievably. Expenditure is not necessarily
confined to the money which has been actually paid
out, but it covers a liability which has accrued due or
incurred, although it may have to be discharged at a
future date.
(ii) The AO appears to have proceeded on the premise
that the payment made towards transport has not
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ITA No. 383 of 2016
been established by producing the evidentiary
material. What he failed to see that the business
premises of the assessee having been admittedly
raided by the CBI, all books of accounts, registers &
files were not in his custody or power. The question
of failing to produce evidence would have arisen only
if the assessee with due diligence could produce
some evidence that was in his custody or power and
still failed to, sans any plausible explanation therefor;
in a case where, he is disabled from producing any
such evidentiary material because of raid & seizure
by the statutory body like CBI, no blame can be laid
at his door step. There is another related aspect
touching the duty of the AO, which we would advert
to, a bit later.
(iii) Now, let us examine the nature of 'substantial
question of law' as redrafted by the Revenue on
which the Co-ordinate Bench admitted this appeal.
The said question which is already reproduced above,
has been framed keeping in view the provisions of
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ITA No. 383 of 2016
sub section (1) section 37, which has the following
text:
"Any expenditure (not being expenditure of
the nature described in section 30 to 36
and not being in the nature of capital
expenditure or personal expenses of the
assessee) laid out or expended wholly and
exclusively for the purpose of the business
or profession shall be allowed in computing
the income chargeable under the head
"Profits and gains of business or
profession...".
The text of this sub section shows its building blocks
such as: 'expenditure', 'wholly and exclusively' and
'incurred for the business'. The burden of proving
that the expenditure is incurred 'wholly and
exclusively for the purpose of business is on the
Assessee' vide JASWANT vs. CIT3. The question
whether an item of expenditure was wholly and
exclusively laid out for the purpose of Assessee's
business has to be decided on the basis of
evidentiary material that prima facie establishes
these 'building blocks'.
212 ITR 24
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ITA No. 383 of 2016
(iv) The question on which the appeal is admitted involves,
in the first place, the ascertainment of facts as to the
business expenditure in question, and in the second,
the application of the correct principle of law to the
fact so ascertained. Therefore, essentially such a
question is only a mixed question of fact & law as
observed by the Apex Court in COMMISSIONER OF
INCOME TAX vs. GREAVES COTTON4. Therefore, we
are not sure if the Revenue could maintain this
appeal on the subject question. Added, there is a
certain difference between an ordinary question of
law on the one hand and a mixed question of fact &
law, on the other vide JANARDHANA RAO vs. JCIT5.
Ordinarily, to answer a question of law of the kind,
there is no need to consult the statute book; such a
question can be answered just by turning the pages
of evidentiary record of the Assessment Proceedings
concerned. Therefore, the said question is miles away
68 ITR 200 (207)
273 ITR 50
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ITA No. 383 of 2016
from the precincts of Section 260A which employs
the expression 'substantial question of law'.
C. AS TO BURDEN OF PROOF AND IMPOSSIBILITY OF ITS
DISCHARGE:
(i) As already mentioned above, the burden of proving
the expenditure incurred 'wholly and exclusively' for
the purpose of business, is on the Assessee. This
burden needs to be discharged by the preponderance
of probability. What should be the quantum & quality
of evidentiary material to discharge such a burden is
a matter lieing in the discretion of AO and that the
said discretion, as any, has to be exercised in
accordance with the rules of reason & justice. It was
the specific case of Assessee that his business
premises having been raided, the CBI had seized &
taken into custody all the registers, files, record &
documents concerning the business in question and
therefore he was disabled from producing any
material to prove the payment towards transport
credit. The factum of CBI raid & seizure are not in
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ITA No. 383 of 2016
dispute. Even proceedings of the preceding
Assessment Year mention that. When all the
documents are in the custody of CBI Police, asking
the Assessee to produce the same, virtually amounts
to asking him to do the near impossible. Broom's
Legal Maxims, Tenth Edn., (Universal) at page 162
says:
"Lex Non Cogit Ad Impossibilia. (Co. Litt.
231 b.) - The law does not compel a man
to do that which he cannot possibly
perform..."
Sir Walter Scott (1771 - 1832) said: "...the law in its
most positive and peremptory injunctions is
understood to disclaim as it does in its general
aphorisms, all intention of compelling to
impossibilities..."
(ii) Section 131 of the 1961 Act vests powers of Civil
Court in the AO inter alia for compelling the
production of books of account & other documents;
for this purpose the section, in so, many words
equates him with the Civil Court. The arguable
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ITA No. 383 of 2016
enormity of this power can be seen in the
observations of a learned Single Judge of this Court
in SAI RAMAKRISHNA KATURIA vs. UNION OF INDIA6
that it avails even against a Consular Head of a
foreign country who otherwise enjoys diplomatic
immunity under the Diplomatic Relations (Vienna
Convention) Act, 1962. Exercising the powers of a
Civil Court under the provisions of O. XIII of CPC, the
AO can send for the books of accounts & documents
that are seized (by a Magistrate) in other
proceedings vide UNION OF INDIA vs. STATE7.
Courts have held that this power is coupled with a
public duty, to call for the Assessee's books of
accounts which are in the custody of a public
authority vide EMC vs. INCOME TAX OFFICER8. There
is absolutely no explanation as to why the AO did not
choose to invoke this provision in the fitness of
things. Nothing prevented him from summoning the
402 ITR 7 KAR
42 ITR 753
49 ITR 650
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ITA No. 383 of 2016
books of accounts/documents or at least copies
thereof from the custody of CBI. The AO having not
done his duty, could not have recorded a finding that
the claim of Assessee as to transport expenditure
was not substantiated.
(iii) There is yet another aspect, which merits a bit
deliberation. The books of accounts & documents
being in the exclusive custody of the CBI Police, the
Assessee except pleading this could not have done
anything beyond. Arguably, in a sense, the case of
Assessee was one of lack of evidence for proving the
expenditure. Absence of evidence at hands is not the
evidence of absence. If the Assessee fails to produce
cogent evidence to prove the entirety of the claim, it
is the duty of the AO to assess the allowable part of
the expenditure to the best of his judgment vide CIT
vs. S.P. NAIK9. It is more so because the Assessment
Order was made under Section 143(3) without
rejecting the books of account under Section 145 of
235 ITR 94
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ITA No. 383 of 2016
the Act. The ITAT at paragraph 10 of the impugned
order has rightly observed as under:
"10. In the case in hand, except
excess trade liability addition made for the
assessment year 2008-09, there was no
other basis to arrive at the conclusion that
8.39% of the transport creditors are not
genuine and the same are added by the AO
to the income of the assessee. This is no
doubt an ad hoc addition and based on
estimate but without any basis. .... In case
the creditors are brought forward balance
from the earlier year, then there is no
question of treating the same as non-
genuine simply because the said creditors
were subject to the scrutiny of the AO for
the assessment year 2008-09 and after
making a disallowance of Rs.15 crores, the
AO accepted the rest of the creditors as
genuine. Having accepted the balance
creditors as genuine, if carried forward to
the subsequent assessment year, cannot be
treated as non-genuine. ... Therefore, where
the creditors are carried forward to the next
year, the genuineness of the same cannot
be doubted having been subject to scrutiny
in the earlier assessment year and once the
AO accepted the creditors as genuine in the
earlier year, the same cannot be treated as
non-genuine in the subsequent assessment
year."
In the above circumstances, this Appeal being devoid
of merits, is liable to be rejected and accordingly it is,
costs having been made easy.
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ITA No. 383 of 2016
Before parting with this case, this court places on
record, its deep appreciation for the able assistance and
research rendered by its official Law Clerk Cum Research
Assistant, Mr. Faiz Afsar Sait.
Sd/-
JUDGE
SD/-
JUDGE
KMS
