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SHARMA EAST INDIA HOSPITALS AND MEDICAL RESEARCH LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX & ASSISTANT COMMISSIONER OF INCOME-TAX

2015 (11) TMI 427 - ITAT JAIPUR

Disallowance of purchase of consumable goods, i.e., cotton, gauze and bandage, etc. - ingenuine and unverifiable purchases - Held that:- The authorities below have relied on the statements of managing director, accountant and proprietor 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 the assessee. However the statements o .....

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p and at the same time percentage consumption of cotton has gone down ; this data also has not been disputed in any manner by the Revenue, the assessee claims that no cotton was purchased from SKS in 2009-10. In this circumstance an alternate plea is advanced that a suitable estimate of disallowance be adopted instead of total disallowance. Reliance is placed on our consolidated order in the case of Anuj Kumar Varshney (supra) ; in this case the addition qua unverifiable purchases of semi-precio .....

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er section 36(1)(iii) disallowed - Held that:- The assessee had at its disposal sufficient funds available in the form of share capital, reserves and other interest-free funds, etc., which are more than alleged advances/investments.The nature of such advances/investments as explained and considered by the learned Commissioner of Income-tax (Appeals) leave no room for any doubt that the alleged advances/investments were for the purposes of the assessee's hospital activities and medical profession .....

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and the Revenue for the assessment years 2010-11 and 2011- 12 against two different orders of the learned Commissioner of Income-tax (Appeals)-Central, Jaipur dated September 12, 2014. Respective grounds raised are as under : 2. The concise common grounds raised by the assessee in its both appeals, i.e., I. T. A. Nos. 718 and 719/JP/2014 for the assessment year 2010-11 and 2011-12 are as under : "The learned Commissioner of Income-tax (Appeals) has erred in upholding the disallowance of pur .....

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g the course of search indicating the receiving back of any amount in this behalf as alleged. (iii) Relying on the statement of Shri Jayant Khandelwal, Prop. M/s. Krishna Surgicals without appreciating the fact that the copy of the statement or cross-examination thereof was not accorded to the assessee ; thereby the addition has been sustained in utter violation of principles of natural justice. (iv) The addition can be made solely on the basis of uncorrobo rated statement of the managing direct .....

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,81,520 for the assessment year 2011-12 made by the Assessing Officer under section 36(1)(iii) of the Income- tax Act. Ground No. 2. of the Revenue is only for the assessment year 2010-11 wherein the Revenue is aggrieved that the learned Commis sioner of Income-tax (Appeals) is not justified by ignoring the fact that the assessee has failed to prove that advances given and investments made in immovable properties are for the purpose of the business of the assessee." 4. The brief facts are t .....

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s and also at the residence of its directors and associate doctors. During the course of search some loose papers and documents were found and seized from the possession of directors and the statements of directors and their family members were also recorded. Thereafter in response to notices under section 153A, returns of income were filed by the assessee on July 24, 2012 at same total income which was declared by the assessee in its regular returns filed under section 139(1) of the Income-tax .....

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Commissioner of Income-tax (Appeals) by detailed orders allowed part relief sustaining the additions qua alleged unverifiable purchases of consumable goods and deleted the disallowance of interest under section 36(1)(iii) qua diversion of interest bearing funds held by the Assessing Officer for non-business purposes. Aggrieved on the orders of the learned Commissioner of Income-tax (Appeals), the assessee as well as the Department both are before us. 6. Learned counsel for the assessee contends .....

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the search to corroborate this state of affairs. The learned Assessing Officer treated the entire purchases of ₹ 27,28,014 and ₹ 30,13,175 for the assessment years 2010- 11 and 2011-12 from SKS as unverifiable. The learned Assessing Officer also referred to the statement of one Shri Tara Prakash Sharma, accountant of the assessee-company admitting these purchases as non-genuine. Reliance was made on statement of one Shri Jayant Khandelwal proprietor of SKS who also is alleged to have .....

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rifiable and disallowed. If the consumption is viewed on the scale of normal medical practice and compared with the company's own consumption of cotton and gauze in preceding years, it would be found reasonable and comparable. Thus even if a reasonable estimate of consumption of consumables cotton gauze is made, it will leave no room for any disallowance. The assessee being a public limited company, maintains regular books of account along with full record and vouchers not only from Income-t .....

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ll versed with the accounting and other financial aspects of the company. It is an admitted fact that, during the course of treatment in outdoor as well as in-door patients for surgery the operation theatre usage of medical cotton, gauze and dressing bandage are one of the major consumable items without which dressing and surgery is not possible more specifically in the case of the assessee-hospital where major orthopedic surgeries are performed on day-to-day basis in large number. These consuma .....

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h went on up to midnight of June 10, 2011. The statements were recorded after passage of almost 42 hours in the midnight of June 9, 10, 2011. The statements of Dr. Shailendra Sharma were taken at various times firstly at the time of starting of the search on June 8, 2011 and lastly in the late midnight of June 10, 2011 after physical search and verification of the entire house and business places, i.e., at the time of conclusion of the search. All the goods received from M/s. Shree Krishna Surgi .....

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parity with similar expenses allowed in preceding years when there were no purchases from SKS. Even on the compulsory requirement of consumable material is allowed on an estimate looking at the more number of surgeries, consumption of items like cotton, bandage, gauze etc. is reasonable, thus on the estimate basis also expenditure was allowable. It is common knowledge that in orthopedic treatment and surgery, the use of cotton and bandages is maximum ; a single plaster requires a lot of cotton a .....

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40 % 1,55,15,163 17.03% 2011-12 11,20,12,997 4,56,28,730 43.48 40,73,135 3.64 % 1,92,42,278 17.18% 7. It is evident from the perusal of the table above that despite better receipts and results the percentage of consumables has decreased which demonstrates that on estimate also the expenditure in this behalf cannot be disallowed ; more so when these details are not controverted by the learned Assessing Officer. Without prejudice to these submissions, in the alternative it is submitted that the le .....

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us stones at 15 per cent. thereof by holding the same as reasonable estimate. In these cases also facts reflects that the suppliers admitted having given accommodation bills. Therefore, if the assessee's other pleas on merits are rejected then disallowance out of unverifiable purchases may be restricted to 15 per cent., following this judgment. 8. The learned Commissioner of Income-tax (Departmental representative) Ms. Rolee Agrawal relied on the orders of the lower authorities on this issue .....

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ere was pressure and for other part there was no pressure. 9. Learned counsel for the assessee contends that statement of Shri Jayant Khandelwal was recorded behind its back, neither copy thereof nor cross- examination was provided consequently this statement has no evidentiary value. 10. Adverting to the Revenue's appeals the learned Commissioner of Income-tax (Departmental representative) contends that the assessee was having following borrowings and liabilities in respective years : Asses .....

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d by the assessee. Interest so incurred was claimed by the assessee as deduction under section 36(1)(iii), these funds are claimed to be borrowed by the assessee solely for the business purpose. The Assessing Officer found that some interest bearing advances were used for non-business purposes. After reducing the interest-free funds available with the assessee, i.e., share capital ₹ 415.75 lakhs and reserves and surplus of ₹ 47.91 lakhs, applied interest rate of 12 per cent. on the b .....

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entative. It has been submitted and verified from the return filed by the appellant that it had funds to the extent of ₹ 3,96,54,321 as current liabilities which amount has not been considered by the Assessing Officer while calculating the amount of interest-bearing funds given as inter est-free advances. On a perusal of the details of current liability it is seen that there were advances from patients and expenses which were in the nature of working capital of the appellant-company but th .....

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0 Axis Bank Ltd. Cheque 517421 30.12.2008 20,00,000 Axis Bank Ltd. Cheque 517442 11.5.2009 10,00,000 Axis Bank Ltd. Cheque 517443 21.5.2009 5,00,000 Axis Bank Ltd. Cheque 517444 21.5.2009 5,00,000 Axis Bank Ltd. Cheque 517445 31.5.2009 5,00,000 Axis Bank Ltd. Cheque 517453 7.7.2009 5,00,000 Axis Bank Ltd. Total 3,00,00,000 As per this contract the developer was required to develop a composite project on the property of the appellant located at village Gokulpura at Kalwar Road, Jaipur. The amount .....

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have made interest-free advances of ₹ 259.22 lakhs. Moreover, the advances of ₹ 3,17,24,035 and ₹ 4,46,041 to Sharma Memorial Hospital Research Institute were in the nature of business transactions and were given for commercial expediency in so far that it was obtaining trained staff from this institute without making any payment to them. Given these facts the interest disallowance at 12 per cent. under section 36(1)(iii) of ₹ 31,10,640 is deleted." 11. The learned C .....

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een rightly disallowed. Reliance is placed on the Assessing Officer's order. 12. Learned counsel for the assessee contends that the learned Assessing Officer 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. They have not been taken into consideration by the learned Assessing Officer while making the disallowan .....

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Hos. P. Ltd. 2,69,890 7. Sharma Memorial Hospital Research Institute 3,17,24,035 8. Sharma Memorial Hospital Research Institute 4,46,041 9. Sharma Hospital P. Ltd. 1,33,431 10. Noncurrent investments in quoted/unquoted shares of various companies 31,46,490 11. Noncurrent investments in immovable properties 1,56,84,000 Total 7,22,88,901 13. It is contended that for the assessment year 2010-11, the learned Assessing Officer has treated a sum of ₹ 259.22 lakhs out of total 722.88 lakhs (after .....

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arned Assessing Officer has failed to appreciate the effect of availability of share capital ; reserves and other interest-free funds which were applied in the acquisition of assets which are necessarily connected with its business and in making interest-free advances. It was demonstrated to the learned Commissioner of Income-tax (Appeals) that before drawing any adverse inference in this behalf, the learned Assessing Officer did not even whisper any such proposal. The learned Assessing Officer .....

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ted a gross error of leaving out/skipping other interest-free funds available with the assessee to meet out these advances/investments which are grouped under the head "current liabilities" totalling to ₹ 3,96,54,321, detail of which is as under : Particulars Amount Sundry creditors for goods and expenses 14,23,464 Advances from patients 13,46,954 Other current liabilities 11,21,452 Outstanding liabilities expenses 50,64,887 Staff security deposit 3,02,399 Modest Builders Ltd. 3, .....

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bilities" totalling to ₹ 4,16,91,596, detail of which is as under) : Particulars Amount Sundry creditors for goods and expenses 8,09,377 Advances from patients 16,93,168 Other current liabilities 12,37,820 Outstanding liabilities expenses 68,65,226 Staff security deposit 3,28,931 Modest Builders Ltd. 3,00,00,000 Pharmed Ltd. 25,000 Duties and taxes 7,25,824 Rajendra Sharma 6,250 Total 4,16,91,596 14. The above list includes a sum of ₹ 3 crores received from M/s. Modest Builders .....

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o the other interest-free funds available with the assessee and as allowed by the learned Assessing Officer, i.e., ₹ 463.66 lakhs, the total interest- free funds available with the assessee come to ₹ 763.66 lakhs which is more than the total alleged non-business advances/assets/investments of ₹ 722.88 lakhs. Thus there is no question of application of interest bearing funds in non-business advances/assets/investments. It was further submitted to the learned Commissioner of Inco .....

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charitable trust duly registered under section 12AA of Income-tax Act, 1961 having registered office at H-1, Chitranjan Marg, C-scheme, Jaipur. This trust is running a nursing college and physiotherapy training centre. The trust has also obtained approval from the Government of Rajasthan, Indian Nursing Council, and Rajasthan University of Health Science. The assessee is a private limited company running hospitals where multiple medical services are provided in various fields for day-to-day runn .....

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-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 the assessee. In this regard reliance is placed on the decision of the hon'ble Madras High Court has upheld the aforementioned contentions of the assessee in CIT v. Sambandham Spinning Mills Ltd. reported in [2008] 298 ITR 306 (Mad), wherein addressing to the question of "commer .....

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measure of commercial expediency." 15. Further reliance is also placed on the following : (1) Munjal Sales Corporation v. CIT [2008] 298 ITR 298 (SC) (head note) : "Held also, that since the opening balance of the profits of the assessee-firm as on April 1, 1994, was ₹ 1.91 crores, and the profits were sufficient to cover the loan given to a sister concern of ₹ 5 lakhs only, the Appellate Tribunal ought to have held that the loan given was from the assessee's own funds. .....

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from bank and financial institutions and claimed deduction on amount of interest paid on borrowed capital-Assessing Officer disallowed amount towards proportionate interest on said advances-Tribunal deleted disallowance of interest on ground that there was sufficient fund available with assessee-company in form of share capital reserve and surplus other than borrowed money for diverting a sum of ₹ 17.19 lakhs to its sister concern-Whether in view of findings recorded by Tribunal, assessee- .....

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s export business and the borrowed funds were utilized in the course of business itself-Thus, no part of interest paid to the bank could be disallowed." (5) CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom) "Interest on borrowed capital-Investments by assessee-Finding that investments were from interest-free funds available with asses see-Borrowed capital used for purposes of business-Interest deductible-Income-tax Act, 1961, s. 36(1)(iii)." It is submitted that th .....

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n the statements of managing director, accountant and proprietor 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 the assessee. However the statements of the managing director and accountant have neither been retracted nor effectively controverted, consequently they remain valid piece of evidence in this behalf. The assess .....

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