Brief of the Case:
In the case of M/s Sharma East India Hospitals & Medical Research Ltd vs. DCIT, ITAT Jaipur held that disallowance out of unverifiable purchases may be restricted to 15% following the consolidated order in the cases of Sh. Anuj Kumar Varshney and ors. Vs. ITO, ITA No. 187/JP/2012 in which disallowance for of unverifiable purchases of semi precious stones is been restricted to 15% by holding the same as reasonable estimate.
Facts about the Case:
The assessee was a public limited company running a Hospital mainly in the field of orthopaedic and cardiac care. On 08.06.2011, search operations u/s 132 of the Income Tax Act, 1961 were carried out at the business premises and also at the residence of its directors and associate doctors. During the course of search, some loose papers and documents were found from the possession of directors which were seized and their statements were also recorded. Thereafter in response to notice u/s 153A, the assessee filed its return of income at the same total income which was originally filed u/s 139(1). However the assessment u/s 143(3) r.w.s. 153A was completed by A.O. by making the additions in respect of bogus purchases of consumable material from one of the supplier and disallowance of interest alleged to be attributable to diversion of interest bearing funds. Aggrieved assessee preferred first appeal and the ld. CIT(A) by detailed order allowed part relief by deleting the disallowance of interest u/s 36(1)(iii) held by the AO for non business purpose and sustain the additions against unverifiable purchases of consumable goods. Aggrieved on the orders of ld. CIT(A), the assessee as well as the department both filed cross appeal before the ITAT.
Contention of Revenue:
Ld CIT (DR) relied on the orders of lower authorities on this issue. It was contended that the statement about unverifiable purchases and plough back of the cheque amount has been admitted by way of statements of MD, accountant and proprietor of SKS. These statements are admissible piece of evidence and no effective rebuttal thereof has been offered by assessee. With respect to interest it was contented that assessee is a hospital and huge land bank has been invested in, it failed to explain how the land was related to activities of its medical business. Substantial amounts have been advanced to sister concerns as interest free advances and the interest has been borne by the assessee. Since the impugned interest free advances are not demonstrated to be for business purpose the corresponding claim u/s 36(1)(iii) has been rightly disallowed.
Contention of the Assessee:
Ld. Counsel for the assessee contended that the additions in this behalf have been sustained solely on the basis of 132(4) statement of MD who being a medical professional was not at all well versed with the accounting and other financial aspects of the company. Further statement of Shri Jayant Khandelwal was recorded behind its back neither copy thereof nor cross examination was provided, consequently this statement has no evidential value. All the goods received from M/s Shree Krishna Surgical were duly recorded in the books of accounts which have not been doubted at all and the payments were made through payees account cheque through banking channels. The allegation of the Ld. AO that the payment made through cheque was returned back in cash is completely baseless in as much as neither any incriminating material in this behalf nor a rupee of excess cash was found during the course of search. Without there being any incriminating material and without verifying the extent of consumption of cotton gauge and merely on the basis of these statements, the entire purchases made from SKS were held as unverifiable and added to income. For an orthopedic and cardiac care hospital consumption of copious quantity of cotton and gauge is undeniable. If the consumption is viewed on the scale of normal medical practice and compared with the company’s own consumption of cotton and gauge in preceding years, it would be found reasonable and comparable. Thus even if a reasonable estimate of consumption of consumables cotton gauge is made, it will leave no room for any disallowance. Unless books of accounts are rejected or disturbed, no addition on account of alleged unverifiable purchases is justifiable. It was explained that consumable expenses claimed in these years were in parity with similar expenses allowed in preceding years when there were no purchases from SKS. Without prejudice to these submissions, in the alternative it was submitted that Ld. AO has not questioned the consumption and held the purchases made from SKS as unverifiable. Cheques have gone from assessee’s books. In this situation entire amount of purchases cannot be disallowed and an appropriate NP rate on unverifiable purchases may be added as held by Hon’ble Bench by a consolidated order in the cases of Sh. Anuj Kumar Varshney and ors. Vs. ITO, ITA No. 187/JP/2012 wherein the bench restricted the disallowance made out of unverifiable purchases of semi precious stones @ 15% thereof by holding the same as reasonable estimate. Therefore, if the assessee’s other pleas on merits are rejected then disallowance out of unverifiable purchases may be restricted to 15%, following this judgement.
With respect to disallowability of interest it was contended that ld. AO has firstly failed to appreciate the real nature of impugned investment/advances and secondly failed to appreciate the crucial facts that, the assessee was having at its disposal sufficient amount in the shape of interest free funds. Ld. AO grossly ignored that assessee’s financial statements reflected sufficient interest free funds appearing under the head ‘Current Liabilities’ which have been utilized in making the impugned advances/investments. The list of current liabilities includes a sum of Rs. 3.00 crores received from M/s Modest Builders Ltd. as interest free security on account of a joint venture agreement entered into by the assessee company in respect to a piece of land at Kalwar Road owned by assessee company and appearing in its balance sheet wherein total investment of Rs. 1,56,84,000/- was made and incidentally this amount is also included by Ld. AO in the list of alleged non-business advances/asset/investments while making disallowance. If the amount of Rs. 3.00 Crores is further added to the other interest free funds available with the assessee and as allowed by Ld.AO i.e. Rs. 463.66 lacs (Share capital and free reserves), the total interest free funds available with the assessee come to Rs. 763.66 lacs which is more than the total alleged non-business advances/assets/investments of Rs. 722.88 lacs. Further, total alleged non-business advances/assets/investments includes a sum of Rs. 3,17,24,035/- which were made to a sister concern namely M/s Sharma Memorial Hospital and Research Institute which is solely and exclusively for the purpose of business and in consideration of the commercial relations between assessee and the said concern. Sharma Memorial Hospital Research Institute is a public charitable trust running a Nursing College and physiotherapy training center. The assessee is a private limited company running hospitals where multiple medical services are provided in various fields and for day-to-day running of a hospital, it requires human resources including the nursing staff and other trained assistants to attend the patients. As Sharma Memorial Hospital Research Institute runs a Nursing College and physiotherapy training centre. As per the understanding between the assessee company and this associated institution, their students were provided to assessee hospital. This arrangement is based on a quid pro quo as their services were obtained without incurring any expenditure. Thus the appellant hospital provided the impugned advances to the trust as a prudent business decision and for economically smooth medical facilities. This arrangement is clearly commercial and made for the business interests of assessee. In this regard reliance was placed on the decision of Hon’ble Madras High Court which has upheld the contentions of assessee in CIT Vs. M/s. Sambandham Spinning Mills reported in 298 ITR 306.
Held by Tribunal:
After hearing the rival contentions and on perusal of the material available on record the Hon’ble Tribunal observed that authorities below have relied on the statements of MD, Accountant and Prop. of SKS Shri Jayant Khandelwal. Statement of Shri Khandelwal was neither supplied nor the cross examination was given to the assessee, consequently the statement of Shri Khandelwal may not be held as reliable evidence against assessee. However the statements of the MD and accountant have neither been retracted nor effectively controverted, consequently they remain valid piece of evidence in this behalf. Since the assessee has endeavoured to demonstrate that the copious consumption of cotton gauge, bandages etc. has not been disputed, books of accounts are properly maintained and not rejected by lower authorities. Further, as compared to AY 2009-10 assessee’s gross receipts, GP and NP % have gone up and at the same time % consumption of cotton had gone down which also has not been disputed in any manner by revenue. The assessee also claims that no cotton was purchased from SKS in 2009-10. Looking at the entirety of facts and circumstances i.e. the books of accounts being not rejected & consumption of cotton having comparatively decreased, the tribunal inclined to follow its judgment in the case of Anuj Kumar Varshney (relied upon by the assessee) and directed to restrict the disallowance to 15% of purchases from SKS. Thus assessee’s appeals are partly allowed.
On revenue appeal about relief in respect of claim of interest u/s 36(1)(iii), the tribunal further observed that from the financial statements and assessee’s submission following facts clearly emerge from the record:-
In view of the above findings and observations, no disallowance of interest u/s 36(1)(iii) was justified. Order of CIT(A) in this regard was upheld and the revenue grounds in this behalf were dismissed.