Validity of order passed by majority as per section 255(4) of IT

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI SPECIAL BENCH “E”, MUMBAI

Before SHRI G.E.Veerabhadrappa, President,

Shri D.K.Agarwal, J.M. and Shri P.M.Jagtap, A.M.

ITA Nos.6490 and 6491/Mum/2008

(Asst.Years 2004-05 and 2005-06)

M/s Tulip Hotels Pvt. Ltd.

Chandramukhi(Basement)

Behind The Oberoi,

Mumbai-400 021.

(PAN: AAACT9446Q)

Appellant

Vs.

Deputy Commissioner of

Income Tax,

Central Circle 36,

Mumbai.

Respondent

Date of Hearing: 1.2.2012

Date of Pronouncement: 30.3.2012

Appellant by: Shri Arvind Sonde

Respondent by: Shri B.Jaikumar

O R D E R

Per Bench:

The Hon’ble President of the Income Tax Appellate Tribunal, on a reference made by a Division Bench, has constituted this Special Bench vide order dated 14.5.2010 and the fol lowing question has been referred for our consideration and decision:-

“Whether on a proper interpretation of subsection (4) of section 255 of the Income Tax Act, the order proposed by the learned AM while giving effect to the opinion of the majority  consequent to the opinion expressed by the learned Third Member, can be said to be a valid or lawful order passed in accordance with the said provision”

2. The factual matrix of the case leading to the recommendation for the constitution of this Special Bench by the Division Bench is as fol lows:

3. The assessee company is engaged in the business of operation and management of hotels owned by third parties. The assessee has taken over the management of the hotel property, viz. Tulip Star Mumbai, situated at Juhu Tara Road, Juhu, Mumbai. The assessee was redeveloping the said property into a multi product hospitability destination and was also developing international standard Service Apartments. The assessee offered the space in the same property to Shri Somendra Khosla of UAE on a 99 years lease basis. After negotiation, Shri Khosla agreed to acquire the space admeasuring 12700 sq. ft. at the rate of Rs.7,500/- per sq. ft. In pursuance to such booking of the property, Shri Khosla advanced the sum of Rs.4,78,12,403/- during the accounting year relevant to assessment year 2004- 05 and the sum of Rs.1,02,91,176/- in the accounting year relevant to assessment year 2005-06. During the assessment  proceedings, the assessee produced the copies of correspondence between the assessee and Shri Khosla; confirmation of Shri Khosla with regard to advance given by him; complete details with regard to remittance in USD; the correspondence showing why the property could not be developed as stipulated and the termination of the agreement with the liability on the assessee to refund the money. The assessee also produced the certificate from Citibank, Mumbai, certifying the receipt of inward foreign remittance by the assessee, which was sent by Shri Khosla. The Assessing Officer, not being satisfied with the evidences furnished before him held that the assessee has not established the identity, creditworthiness and genuineness of the transaction and accordingly added an amount of Rs.4,78,12,403/- u/s 68 of the Income Tax Act, 1961 (the Act) to the total income of the assessee. In the assessment year 2005-06 also, the assessee had received a sum of Rs.1,02,91,176/- from Shri Khosla and for the same reasons given in the assessment order for the assessment 2004-05, the AO added the sum of Rs.1,02,91,176/- as income of the assessee u/s 68 of the Act. On appeal before the CIT(A), the assessee furnished various additional  evidence in the form of certificate from a Chartered Accountant, giving the detai ls of the properties owned by Shri Khosla; copy of his Passport; the Trade License issued to the company of Shri Khosla, viz. Dome Services (FZC); copy of his telephone bi l l, electricity bi ll; newspaper cuttings showing the voluminous business being done by the company named as New World Real Estate (NWRE), whose President is Shri Somendra Khosla; the Heath Card and other Cards issued by the Government of UAE. The ld. CIT(A) whi le observing that these documents were not produced before the Special Auditor during the special audit conducted u/s 142(2A) of the Act or the AO at the time of assessment , held that the same cannot be admitted being fresh evidence at the appel late stage as the appellant has failed to explain the reasons for not producing these documents before the AO or Special Auditor. He further held that since no evidence of creditworthiness of Shri Somendra Khosla was produced during the assessment proceedings, the AO was justified in making addition u/s 68 of the Act Rs.4,78,12,403/- for the assessment year 2004-05 and Rs.1,02,91,176/- for the assessment year 2005-06.

4. With regard to the second issue of disallowance of payments, the brief facts are that the assessee has entered into an agreement with M/s Tulip Hospitality Services Ltd.(THSL) for operating their Hotel Tulip Star, Mumbai for which the assessee is entitled to operating fee @ 3% and reimbursement of actual expenditure incurred by it on operating the hotel. The assessee entered into another contract with M/s Tulip Star Hotels Pvt. Ltd. (TSHL) for operating the Hotel

Tul ip Star, Mumbai, by which TSHL is to get 3% of the gross hotel receipt. Thus, whatever the amount assessee is entitled to receive from THSL is to be passed on to TSHL. The assessee also entered into an agreement with M/s Cox & King (India) Pvt. Ltd. (CKIL) for using their network of of f ice and infrastructure for brand awareness and marketing of Tul ip Star hotel for which CKIL is entitled to reimbursement of expenses actual ly incurred by them. CKIL raised monthly debit note upon the assessee for expenditure incurred by them. In turn, the assessee raised debit note of identical amount upon THSL. During the whole year, CKIL raised debit note of Rs.7,56,16,910/- and in turn, similar debit note is raised by the assessee. The amount received from   THSL is paid to CKIL. In its profit and loss account, the assessee has not claimed any deduction in respect of debit note raised by CKIL, because the same was already reimbursed by THSL.

With regard to the operating fee of Rs.61,93,015/- is concerned it entered into an agreement with THSL for operating their hotel namely Tulip Star. Simultaneously, the assessee entered into another agreement with THSL for operating the said hotel. The entire operating fee receivable by the assessee for operating the hotel was passed on to TSHL. Therefore, in effect, the assessee has not claimed expenditure of Rs.61,93,015/-. The AO however, did not accept the claim. It was observed by him that the auditors had clearly stated that the assessee had claimed the expenditure in P & L account. It was observed by him that the assessee had understanding with TSHL & CKIL to provide various services and therefore question of reimbursement did not arise and even if the services were actual ly provided by CKIL and TSHL the assessee was required to deduct tax at sources in respect of payments made to them as the same were in the nature of contractual payments. The AO accordingly disal lowed the claim of deductions of Rs.7,56,16,910/- and Rs.61,93,015/- for assessment year 2004-05. Simi lar deduction had also been claimed in assessment year 2005-06 i.e. sum of Rs.7,95,73,902/- on account of brand awareness activities paid to CKIL and Rs.37,03,683/- on account of operating fees paid to THSL. For the reasons given in the assessment order for the assessment year 2004-05 the AO disal lowed the said claims in assessment year 2005-06 also. In appeal CIT(A) confirmed the above disal lowances made by the AO.

5. On appeal before the Tribunal, on the issue of sustenance of addition u/s 68 of the Act, both learned Members have considered the evidence produced before the AO as well as the additional evidence. The learned Judicial Member, after considering al l the evidence, i.e. the evidence produced before the Assessing Officer as well as the additional evidence, came to the conclusion that the assessee has discharged the onus of proving the cash credit lay upon it and accordingly he ordered for deletion of addition; whi le the learned Accountant Member was of the opinion that even after considering the additional evidence the assessee has not been able to discharge the onus of proving the cash credit and hence upheld the order of ld.CIT(A) sustaining the addition made by the AO.

6. On the second issue of disal lowance of payments, the ld. Judicial Member while observing that there is only incoming and outgoing entries in the books and for this reason neither the assessee has shown in its prof it and loss account any incoming entry/ income nor outgoing entry/ expenditure, deleted the disal lowance of Rs.7,56,16,910/- and Rs.61,93,015/- for the assessment year 2004-05 and for the same reasons he also deleted the disallowance of Rs.7,95,73,902/- and Rs.37,03,683/- for the assessment year 2005-06. However, the ld. Accountant Member whi le observing that there is no evidence for services rendered by CKIL and mere agreement or payment by cheque is not enough, the claim has to be disallowed in view of the provisions of section 40(1)(ia) of the Act on the ground of non deduction of tax, conf irmed the above disal lowances made by the AO.

7. Since there was a dif ference of opinion between the members constituting the Bench, a Reference was made to the Hon’ble President under section 255(4) of   the Income Tax Act, 1961, for referring the points of difference to the ld. Third Member for adjudication of the following points of difference: -

“Whether on the facts and circumstances of the case:

i) the additions of Rs.4,78,12,403/- and Rs.1,02,91,176/- made and confirmed by the lower authorities u/s 68 for AYs 2004-05 and 2005-06 respectively are liable to be deleted or to be confirmed?

ii) the addition made and confirmed by the CIT(A) on account of reimbursement of expenses to M/s Cox & King (India) Pvt. Ltd. and to M/s Tulip Star Hotels Pvt. Ltd. for AYs 2004-05 and 2005-06 are liable to be deleted or confirmed?”

8. The ld. Third Member on the first point of difference vide paragraphs 22 and 23 of his order dated 27.11.2009 held as under:

“22. Considering the totality of the above facts namely that Shri Somendra Khosla is a NRI, he is in the business of development of real estate and he is a man of substantial means, in my opinion, if he has decided to invest in the real estate in India, the genuineness cannot be doubted unless there is any evidence to the contrary. The Revenue has doubted the genuineness merely on the basis of presumption and suspicion ignoring the documentary evidences produced by the assessee, which establish the genuineness of transaction.

23. In view of the above, in my opinion, the assessee has duly establ ished the identity of the creditor, creditworthiness of the creditor and also genuineness of the transaction. Thus, the onus of proving the cash credit which lays upon the assessee is duly discharged. Accordingly, I answer  question no.1 in favour of the assessee and hold that the addition of Rs.4,78,12,403/- and

Rs.1,02,91,176/- made and conf irmed by the lower authorities under section 68 of the Income Tax Act are liable to be deleted.”

On the second point of difference, the ld. Third Member vide paragraphs 27, 28 and 29 of his order has held as under :

“27..….The assessee has furnished the profit and loss account in its paper book and from the perusal of which it is evident that the total expenditure debited in the profit and loss account was only Rs.86,97,337/-. When the total expenditure incurred by the assessee during the year under consideration was Rs.86,97,337/-, by no stretch of imagination, it can include the expenditure incurred by CKIL for which debit note amounting to Rs.7,56,16,910/- was raised by the assessee. When the assessee has not claimed the deduction in respect of the expenditure of Rs.7,56,16,910/-, the question of disal lowing the same in the case of the assessee cannot arise.

28. With regard to the operating fee of Rs.61,93,015/- is concerned, I find that the assessee received the identical amount from THSL and paid the same to TSHL. Here again, in real terms, the assessee has neither received any income nor incurred any expenditure. It entered into an agreement with THSL for operating their hotel namely Tulip Star. Simultaneously, the assessee entered into another agreement with THSL for operating the said hotel. The entire operating fee receivable by the assessee for operating the hotel was passed on to TSHL.

Therefore, in effect, the assessee has not claimed expenditure of Rs.61,93,015/-. As I have mentioned earl ier that in the prof it and loss account, the assessee debited total expenditure of only Rs.86,97,337/- the detai ls of which is given in the Schedule ‘G’ to the prof it and loss account which is as under :

 “SCHEDULE ANNEXED TO AND FORMING PART OF THE ACCOUNTS FOR THE YEAR ENDED 31 ST MARCH 2004

Previous

Year

29. From the above details of the expenditure, it is evident that the assessee has not claimed any deduction in respect of operating fees paid by it to TSHL. When no deduction is claimed, the question of disallowing the same does not arise. Before I part with the matter, I may clarify that the expenditure was actual ly incurred by TSHL and whether such expenditure is al lowable or not is to be examined in the case of THSL. So far as the assessee’s case is concerned, in my opinion, when no deduction was claimed, the question of any disallowance does not arise. Simi lar is the fact in assessment year 2005-06 except variation in the amount. Therefore, my f inding for the assessment year 2004-05 would be squarely applicable to assessment year 2005-06. Accordingly, I answer the question no.2 also in favour of the assessee and hold that the addition made and confirmed by the CIT(A) on account of reimbursement of expenses to M/s. Cox & King (India) Pvt. Ltd. and to M/s.Tulip Star Hotels Pvt. Ltd. for the assessment years 2004-05 and 2005-06 are liable to be deleted.”

Accordingly the ld. Third Member while agreeing with the opinion of ld. Judicial Member, has decided both the issues in favour of the assessee.

9. While giving effect to the opinion of the ld. Third Member, the ld. Judicial Member passed the

conformity order in February 2010. However, the ld. Accountant Member observed that it is not possible to give effect to the order of the ld. Third Member as the order of the ld. Third Member is contrary to his own expressed opinion and has also not considered various points of differences arising from the proposed orders of the members of the bench. There is also diff iculty in forming the majority of opinion. The difficulty, it appears has arisen partly because of the question framed being too general without specifying the point of differences in deciding the issue and partly because some of the vital facts have been omitted to be considered in the order of the ld. Third Member. The ld. Accountant Member, after considering the arguments of both the sides observed that it would be appropriate for the Division Bench to refer the matter back to the Hon’ble President, ITAT than to pass perverse order so that the controversy could be resolved properly and accordingly, he framed following new questions:

“1. Whether on the facts and in the circumstances of the case, the additional evidence which had not been filed before AO, can be admitted by the tribunal in deciding the issue of cash credit and if so whether the tribunal can decide the issue based on fresh evidence or the issue is required to be restored to the file of the AO for fresh adjudication after examining the detailed evidence and after necessary inquiries and opportunities to the assessee.

2. Whether on the facts and circumstances of the case, as highlighted in the proposed order of the AM and particularly the fact that the assessee produced no evidence to show that the foreign remittances credited in the accounts of the assessee had been made out of funds belonging to the creditor, the cash credit can be taken as explained satisfactorily only on the ground that the assessee was doing business and owned several properties.

3. Whether considering the finding of the AO and the auditor’s note and al l other relevant material it can be said that the assessee had not claimed any expenditure in relation to the payment made to Cox & Kings and Tulip Star Hotels Ltd. and whether the claim of expenditure can be allowed considering the facts and circumstances of the case.”

10. The ld. Judicial Member has expressed his disagreement with the course adopted by the ld. Accountant Member and in a note dated 23.2.2010 has proposed the following question to be referred to the Special Bench or Larger Bench to resolve the controversy:

 “Whether on the facts and circumstances of the case, the Members of the Bench, could comment

on the order of the Third Member, instead of passing a confirmatory order in terms of section 255(4) of the Act?”

11. However, the Hon’ble President on careful perusal and consideration of the issue observed that a Special Bench consisting of three or more Members may have to be constituted to resolve the issue. It involves interpretation of sub-section (4) of section 255 which provides that the point on which difference arose shall be decided in accordance with the opinion of the majority. The question to be considered is whether at that stage (i.e., the stage of giving effect to the opinion of the ld.Third Member) it is legally permissible, having regard to the statutory provision, for a Member who is in the minority to decline to give effect to the opinion of the majority whatever be his reasons. In addition to the question of interpretation, it also involves the issue of judicial decorum. The questions proposed by the ld. Accountant Member touche upon the merits of the decision of the ld.Third Member. The question proposed by the ld. Judicial Member touches upon the duty/power of the Bench sitting to give effect to the majority opinion u/s 255(4) and accordingly he constituted this Special Bench to resolve the controversy on the question referred in page 1 of this order.

12. At the time of hearing, the ld. Counsel for the assessee after referring to the relevant provisions of section 255(4) of the Act submits that in view of the findings recorded by the ld. Judicial Member in paragraphs 14.1, 30, 31, 35, 41 and 42 of the draft order dated February 2009 and paragraphs 23 and 29 of the opinion of the ld. Third Member, there is a majority of opinion in favour of the assessee, therefore, the order passed by the ld. Judicial Member be upheld. He further submits that the ld. Third Member after considering the questions which have been agreed and signed by both the Members has answered the questions in favour of the assessee, therefore, there is clear majority of opinion in favour of assessee. He further submits that the ld. Accountant Member in the order giving effect to the order of the ld. Third Member has observed that the questions framed being too general without specifying point of dif ference in deciding the issue and particularly because some of the vital facts have been omitted to be considered in the order of the ld.Third Member, therefore, he has framed three new questions which were not there at the time of reference to the ld. Third Member. In other words, he has taken a Uturn which is not permissible under the provisions of section 255(4) of the Act. He further submits that it has been observed by the ld. Third Member, at page 3 of his order, that the additional evidence has been considered by both the ld. Members. The ld. Judicial Member on the evidence produced before the AO as wel l as the additional evidence came to the conclusion that the assessee has discharged the onus of proving the cash credit laid upon it. Whereas according to the ld. Accountant Member even after considering the additional evidence the assessee has not been able to discharge the onus of proving the cash credit. He further submits that once it has been held by the majority of opinion that the assessee has duly established the identity of the creditor, creditworthiness of the creditor and also genuineness of the transaction, the onus of proving the cash credit which lay upon the assessee is ful ly discharged, therefore, the order passed by the ld. Judicial Member attained the majority and hence the questions which have been framed by the ld. Account Member in his order dated 18.2.2010 are against the provisions of section 255(4) of the Act. He further submits that while giving the effect to the opinion of the ld.Third Member under the provisions of section 255(4), we have to ascertain the majority view and not to consider the correctness of the view, therefore, the ld. Accountant Member is not justif ied in doubting the correctness of the opinion of the majority.

13. The ld. Counsel for the assessee whi le referring to the decision in A.N.Seth V/s CIT (1969) 74 ITR 852 (Del) submits that the duty of the ld. Third Member is to decide the point of difference which the Members of the Bench original ly heard the case differed. He cannot himself formulate a new point on which he could base his decision. In the case before us, the ld. Third Member has decided the issues on the basis of reference jointly signed by both the Members, therefore, the opinion expressed by the ld. Third Member is a val id opinion in the eyes of the law.

14. The ld. Counsel for the assessee whi le referring to the decision in Niraj Petrochemicals Ltd. V/s ITO (2001) 248 ITR (AT) 1(Hyd) submits that the ld.Third Member cannot alter the referred questions to him or cannot modify the questions and/or reframe the questions and then decide the reframed questions instead of the original questions. He further submits that the ld. Third Member whi le deciding the issue can take a dif ferent route but cannot alter the questions framed and he has to agree either with the opinion of the ld. Judicial Member or with the ld. Accountant Member.

15. The ld. Counsel for the assessee whi le referring to the decision in Jain Irrigation System Ltd. V/s DCIT(2004) 266 ITR (AT) 31 (Pune) submits that the duty of the ld.Third Member is to resolve the dispute and point involved shal l be decided according to the opinion of majority. The ld.Third Member is competent to decide only the point on which the members of the bench original ly hearing the case differed. He cannot himself formulate a new point on which he could base his decision.

16. The ld. Counsel for the assessee further submits that in view of the decision in ITO V/s Vice-President, Income Tax Appel late Tribunal (1985) 155 ITR 310 (Mad) the powers of the ld.Third Member of the Tribunal to whom any case is referred u/s 255(4) of the Act is confined to the giving of a decision on the points on which the members of the Tribunal had differed and which has been formulated by them as the question for the decision of the ld. Third Member.

He further submits that according to this decision the ld. Third Member cannot remit the matter back to the two Members who original ly heard the appeal to rehear the matter which is beyond his jurisdiction. 17. The ld. Counsel for the assessee further refers to the decision of the Tribunal in Rameshwar Soni V/s ACIT (Invst.) (2005) 279 ITR (AT) 60 (Jodhpur) to contend that the jurisdiction of the Tribunal u/s 255(4) is conf ined to deciding the points of difference according to the majority of the Members of the Tribunal and not beyond that.

18. The ld. Counsel for the assessee further refers to the decision of the Tribunal in H.P. Agro Industries Corporation Ltd. V/s DCIT (1999) 240 ITR (AT) 62 (Chd) to submit that the ld.Third Member is ful ly empowered in law to arrive at the same end result as done by any of the Members constituting the Division Bench although he may do it by a dif ferent route and all that is necessary is that he must agree with one  of the members constitution the Division Bench and who have disagreed on the point at issue.

19. The ld. Counsel for the assessee whi le referring to the decision of the Hon’ble Delhi High Court in CIT V/s Sudhir Choudhrie (2005) 278 ITR 490(Delhi) submits that the duty of the Tribunal is to pronounce its judgments and orders in open hearing upon enlisting them for a given date. Since in this case, there is no f inal order and only opinions were expressed by the Members constituting the Bench and the ld.Third Member, therefore, the order passed by the respective Members/ Third Member is merely an opinion which cannot be said that the Tribunal has passed any order so far. Therefore, the contention of the Revenue that there is a mistake in the order passed by the ld.Third Member is devoid of any merit.

20. He, therefore, submits that since in this case opinion of the majority has been arrived at on the questions referred to by both the Members who original ly heard the appeal, therefore, the effect may be given in view of the provisions of section 255(4) of the Act as per opinion of majority which is in favour of the assessee and the opinion expressed by the ld. Accountant Member, whi le giving the ef fect to the order of the ld. Third Member is not in accordance with the provisions of section 255(4) of the Act as he is in the minority.

21. On the other hand, the ld. DR, at the outset, submits that there is a technical mistake in the question referred to Special Bench wherein it has been mentioned “the order proposed by the ld. Accountant Members”, whereas there is no such order and only an opinion, therefore, the question referred should suitably be amended. The ld. DR while referring to the opinion expressed by the ld.Third Member dated 27.11.2009 submits that even according to the ld. Third Member on the issue of admission of additional evidence it has been observed by him that “In principle I agree with the learned DR that when the Income Tax Appellate Tribunal admits additional evidence, it should al low a reasonable opportunity to the Assessing Off icer to examine such additional evidence and to produce any evidence or document in rebuttal of such additional evidence. For this purpose, either the ITAT can call for the Remand Report from the Assessing Of ficer or may set aside the matter to the Assessing Officer for examination of additional evidence and thereafter re-adjudication. Admittedly, it has not been done by the ITAT in this case”. Therefore, the order passed by the ld. Third Member admitting the additional evidence is not a val id order in the eyes of law. He further submits that it is borne out from the assessment order that the assessee has never filed any such evidence before the AO in support of the said credits. Therefore, the AO was fully justif ied in making the addition u/s 68 of the Act.

22. He further submits that it has been held in Abhay Kumar Shrof f V/s ITO (1997) 63 ITD (Pat) 144 that where additional evidence enables the Tribunal to pass orders or for any other substantial cause it could require the parties to do so. There is no gain saying that while this power could be exercised by the Appellate Tribunal suo motu the jurisdiction vested in the Tribunal could be got invoked at the instance of one of the parties before it. Relying on the said decision he submits that it was the duty of the Tribunal to exercise his power to provide a reasonable opportunity of being heard to the department for examining the evidence submitted by the assessee which has not been done in this case, therefore, in the interests of justice the matter may be set aside to the file of the AO.

23. The ld. DR further submits that in ITO V/s Baker Technical Services (P) Ltd. (2009) 126 TTJ(Mumbai)(TM) 455 it has been held that when a majority opinion has not been formed it was

suggested by the ld. Third Member that a reference may be made to the Hon’ble President for making a further reference to a Member or Members for resolving the difference of opinion in accordance with law. Relying on the same view the ld.DR submits that both the Members while giving effect to the opinion of the ld. Third Member have passed two separate orders, therefore, the opinion of the majority has not been formed in this case and therefore, the issue may be decided fresh.