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MALAR HOSPITALS LTD. (now Fortis Malar Hospitals Ltd.) Versus ASSISTANT COMMISSIONER OF INCOME-TAX

2015 (11) TMI 793 - ITAT CHENNAI

Disallowance of payment made by the assessee to the third parties - advances written off - case of the assessee is that it has established two companies, i.e., M/s. Malar Finance Pvt. Ltd. and M/s. Malar Gautham Hotels Pvt. Ltd. for the purpose of borrowing funds from the market to expand the hospital of the assessee - Held that:- The assessee has repaid the amount in excess to the amount borrowed from the two companies, namely, M/s. Malar Finance Pvt. Ltd. and M/s. Malar Gautham Hotels Pvt. Ltd .....

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t been able to explain as to why the assessee has repaid the amounts to third party on behalf of the two companies. Learned counsel for the assessee says that the payment is made by the assessee in excess to the funds borrowed and therefore, there is an arbitration between the assessee and the two sister companies.

When we specifically asked about the directors of the sister concern and the director of the assessee-company, learned counsel for the assessee has fairly accepted that bot .....

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ct and no interference is required. - Decided against assessee. - I. T. A. No. 2117 /Mds/ 2012(assessment year 2009-10). - Dated:- 25-6-2015 - CHANDRA POOJARI (Accountant Member) and V. DURGA RAO (Judicial Member) T. Vasudevan for the appellant. S. Dasgupta for the respondent. ORDER The order of the Bench was delivered by 1. V. Durga Rao (Judicial Member).-This appeal filed by the assessee is directed against the order of the learned Commissioner of Income-tax (Appeals)-V, Chennai dated Septembe .....

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has observed that in the annual report submitted by the assessee for the previous year relevant to the assessment year 2009-10, it was found that the assessee has claimed an amount of ₹ 2,89,43,000 as "advances written off" in the profit and loss account after the net profit (Rs. 1,61,06,570). After deducting this extraordinary item from the net profit, the assessee has arrived at a loss of ₹ 1,28,36,588. Further, in the computation of statement, as per the Income-tax Act, .....

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amount of ₹ 289.43 lakhs as not recoverable in the books of account based on the conclusion of discussions and on the basis of the final award of arbitration (as accepted and approved by the board of directors). The company is confident of recovering the balance amount of ₹ 200 lakhs recoverable from the two companies as per the terms of the arbitration award . . . Since this amount is advance given to two companies and has been written off on the basis of a final award of arbitrati .....

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n off ₹ 2,89,43,158 as not recoverable from two companies, with whom we had financial transactions. These amounts were advanced in the ordinary course of business. All these transactions happened about more than 10 years prior to the financial year and the arbitration was pending for more than four years. Instead of carrying amount in the book as receivable, and not utilising the funds, it was agreed to settle the dispute and realise the money. Hence, during the course of the arbitration i .....

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was advanced. In response to the letter, the assessee has submitted reply vide letter dated December 23, 2011, which is reproduced as under : "1. During the project expansion stage, Malar Hospitals borrowed money from the said two companies, to finance the project. These two companies were raising short-term funds from the market and advancing the same to our company. Those companies only activity was to raise funds from the market and advance the funds to Malar as inter corporate deposit .....

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by both and Malar received ₹ 2 crores and written off the balance . . . From the explanation given by the assessee during the scrutiny proceedings as well as from the written submissions, the following facts were ascertained : Two companies Malar Finance P. Ltd. and Malar Gautham Hotels P. Ltd. had been established specifically to source funds for Malar Hospital for the hospitals project expansion. Funds were borrowed by these two companies as short-term funds from the market and advanced .....

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f of the two companies) has been held as 'receiv able' from these two companies in the balance-sheet. Out of which, the assessee-company has written off a sum of ₹ 2,98,43,000 during this year." 4. The Assessing Officer, after considering the explanations of the assessee, has observed that the sum is advanced in the ordinary course of business as submitted by the assessee is not acceptable and it is not a business loss of the assessee. As per the Income-tax Act, a bad debt is .....

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ter-concern is for the purpose of liquidating the short-term funds raised for Malar Hospital, which cannot be considered to be in the ordinary course of business. Hence, the expenses claimed do not satisfy the provisions under section 37 of the Act. Therefore, the entire claim of ₹ 2,89,43,000 was disallowed by the Assessing Officer. 5. The assessee carried the matter in appeal before the learned Commissioner of Income-tax (Appeals). The learned Commissioner of Income-tax (Appeals) confirm .....

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an laws. • These companies borrowed money from the market, a portion of which was advanced to the appellant-company. • Whatever money was borrowed by the appellant from the two companies has, admittedly, repaid by the appellant. • The liabilities of the aforesaid two companies vis-a-vis their creditors are their own liabilities and the appellant in no way can be said to be connected with the liabilities of these two companies even if the part purpose of these borrowings might have .....

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ration proceedings between the aforesaid two companies and their creditors and the participation of the appellant-company in the arbitration proceedings in a dispute for recovery between the aforesaid two companies and their creditors and acceptance of the arbitration award by the appellant-company cannot be said to be at arm's length. • The appellant has contended both before the Assessing Officer and also before me that the aforesaid loss is in the normal course of appellant's bus .....

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either under section 28 or under section 36(1)(vii) or even under section 37 of the Act. I therefore confirm the action of the Assessing Officer in disallowing the above said claim of the appellant and the grounds of appeal taken by the appellant are dismissed." 6. On being aggrieved, the assessee carried the matter in appeal before the Tribunal. 7. Learned counsel for the assessee has submitted that the assessee Malar Hospital to raise funds for expansion of capital, formed two group compa .....

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nds for the purpose of expansion of the hospital from 150 beds to 250 beds, which is for the purpose of capital acquisition. Therefore, it is a capital loss. Learned counsel for the assessee has further submitted that the repayment made by the assessee is not in respect of the funds borrowed by the assessee. It is only funds borrowed by two companies M/s. Malar Finance Pvt. Ltd. and M/s. Malar Gautham Hotels Pvt. Ltd. from third parties and the assessee paid amounts to those third parties. There .....

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