DCIT, Thrissur V. M/s.Welcare hospital, Palakkad

ITA 181/COCH/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73907 (ITAT-COCHIN)
• Duration Of Justice: 10 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-03-2014
• Appeal Filed By: Department
• Bench Allotted: DB
• Next Hearing Date: 18-12-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 15-04-2013
• Court: TRIBUNAL
• Department Lawyers: K K JOHN
• Assessee Lawyers: C B M WARRIER
• Keywords: Revision of order; Depreciation; Search and seizure; Document seized; Commercial expediency; Documents seized; Revenue expenditure; Capital expenditure
• Section: 143(3); 153A; 234B; 32; 263; 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND B.R.BASKAR AN, AM I.T.A. NOS. 181-183 & 310/COCH/2013 ASSESSMENT YEARS : 2006-07-2009-10 THE DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE, TRICHUR. VS. M/S. WELCARE HOSPITAL, NEAR MERCY COLLEGE, KALLIKKAD, PALAKKAD. [PAN: AAAFW 7013P] (REVENUE -APPELLANT) (ASSESSEE-RESPONDEN T) REVENUE BY SHRI K.K. JOHN, SR. DR ASSESSEE BY SHRI C.B.M. WARRIER, CA DATE OF HEARING 18/12/2013 DATE OF PRONOUNCEMENT 07/03/2014 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: ALL THE APPEALS FILED AT THE INSTANCE OF THE REVEN UE IN THE HANDS OF THE ASSESSEE ARE DIRECTED AGAINST THE ORDERS PASSED BY THE LD CIT(A)-I KOCHI AND THEY RELATE TO THE ASSESSMENT YEARS 2006-07 TO 2009 -10. 2. SOME OF THE ISSUES URGED IN THESE APPEALS ARE ID ENTICAL IN NATURE AND HENCE THESE APPEALS WERE HEARD TOGETHER AND ARE BEI NG DISPOSED OF BY THIS COMMON ORDER, FOR THE SAKE OF CONVENIENCE. 3. THE FACTS RELATING TO THE CASE ARE STATED IN BRI EF. THE ASSESSEE IS A PARTNERSHIP FIRM RUNNING A HOSPITAL IN PALAKKAD DIS TT. THE DEPARTMENT CARRIED OUT SEARCH AND SEIZURE OPERATIONS U/S. 132 OF THE A CT ON 04-03-2009 AT THE BUSINESS PREMISES OF THE ASSESSEE-FIRM AND ALSO AT THE RESIDENCE OF A PARTNER NAMED SHRI A.V. MANAF. CONSEQUENT TO THE SEARCH, T HE ASSESSING OFFICER I.T.A. NOS.181-183 & 310/COCH/2013 2 COMPLETED THE ASSESSMENTS U/S. 143(3) R.W.S 153A OF THE ACT BY MAKING VARIOUS ADDITIONS. THE ASSESSEE PREFERRED THE APPEALS BEFO RE THE LD. CIT(A) CHALLENGING THE ADDITIONS AND THE APPEALS WERE PARTLY ALLOWED. AGGRIEVED BY THE ORDERS OF THE LD. CIT(A), THE REVENUE HAS PREFERRED THESE APP EALS BEFORE US. 4. THE FIRST COMMON ISSUE CONTESTED IN ALL THE YEAR S RELATES TO THE DISALLOWANCE OF INTEREST EXPENSES CLAIMED BY THE AS SESSEE. THE FACTS RELATING THERETO ARE STATED IN BRIEF. THE ASSESSING OFFICER NOTICED THAT THE PARTNERS OF THE FIRM SHRI A.V. MANAF, SHRI A.V. SATHAR AND SHRI A.V . NAZAR HAD PURCHASED A HOSPITAL BUILDING AND LAND APPURTENANT THERETO NAME D VENKITESWARA HOSPITAL VIDE DOCUMENT NO. 3802/2005 DATE 25-05-2005. IT WA S NOTICED THAT THE ASSESSEE FIRM HAD AVAILED A LOAN OF RS. 1.00 CRORE FROM THE CATHOLIC SYRIAN BANK FOR THE PURPOSE OF RE-PAYING THE LOAN LIABILITY OF VENKITESWARA HOSPITAL. THE ASSESSING OFFICER TOOK THE VIEW THAT VENKITESWARA H OSPITAL HAS BEEN PURCHASED BY THE PARTNERS MENTIONED ABOVE IN THEIR PERSONAL C APACITY. SINCE THE LOAN AVAILED BY THE ASSESSEE-FIRM FROM CATHOLIC SYRIAN B ANK WAS USED FOR RE-PAYING THE LOAN LIABILITY OF THE VENKITESWARA HOSPITAL, TH E ASSESSING OFFICER TOOK THE VIEW THAT THERE IS DIVERSION OF FUNDS OF THE ASSESSEE-FI RM TO THE PARTNERS. ACCORDINGLY THE AO TOOK THE VIEW THAT THE INTEREST PAID ON THE LOAN TAKEN FROM CATHOLIC SYRIAN BANK IN ALL THE FOUR YEARS IS LIABLE TO BE D ISALLOWED. THE DETAILS OF INTEREST EXPENDITURE DISALLOWED BY THE AO ARE DETAILED BELOW : ASSESSMENT YEAR AMOUNT (RS.) 2006-07 3,56,349/- 2007-08 11,83,390/- 2008-09 13,38,834/- 2009-10 2,72,748/- IN THE APPELLATE PROCEEDINGS, THE LD CIT(A) DELETED THIS DISALLOWANCE AND HENCE THE REVENUE IS CONTESTING THE SAID DECISION OF LD C IT(A). 5. THE LD. DR SUBMITTED THAT THE ASSETS OF VENKITES WARA HOSPITAL WAS PURCHASED IN THE NAME OF THREE PARTNERS, NAMELY, SH RI A.V. MANAF, SHRI A.V. SATHAR AND SHRI A.V. NAZAR, WHEREAS THE PRESENT ASS ESSEE-FIRM HAS GOT SIX I.T.A. NOS.181-183 & 310/COCH/2013 3 PARTNERS. HENCE, THE ASSESSING OFFICER TOOK THE VIE W THAT THE ASSETS HAVE BEEN PURCHASED BY THREE PERSONS CITED ABOVE IN THEIR PER SONAL CAPACITY. SINCE THE LOAN AVAILED BY THE ASSESSEE-FIRM FROM CATHOLIC SYR IAN BANK WAS USED FOR PAYING THE LOAN LIABILITY OF VENKITESWARA HOSPITAL, THE AS SESSING OFFICER CONSIDERED THE SAME AS DIVERSION OF INTEREST BEARING FUNDS AND ACC ORDINGLY, DISALLOWED THE INTEREST CLAIMED THEREON. 6. ON THE CONTRARY, THE LD. AR SUBMITTED THAT THE V ENKITESWARA HOSPITAL WAS AGREED TO BE PURCHASED FOR A SUM OF RS. 1.35 CORES SUBJECT TO THE REPAYMENT OF LIABILITY OF RS. 1.05 CRORES OF FEDERAL BANK. ACCO RDINGLY, THE CONVEYANCE DEED WAS EXECUTED FOR A SUM OF RS. 30.00 LAKHS ON 25-05- 2005. THE ASSESSEE ALSO INCURRED EXPENSES OF RS. 5.00 LAKHS TOWARDS TRANSFE R. ACCORDINGLY, THE TOTAL COST OF PURCHASE OF VENKITESWARA HOSPITAL WORKED OUT TO RS. 1.40 CRORES AS DETAILED BELOW: 1. VALUE AS PER DOCUMENT V RS. 30,00,000/- 2. LIABILITIES TO FEDERAL BANK LTD. TAKEN OVER RS.1,05,00,000/- 3. EXPENSES OF TRANSFER RS. 5,00,000/- TOTAL RS.1,40,00,000/- ========== THE LD. COUNSEL SUBMITTED THAT THE ASSESSING OFFICE R DID NOT CONSIDER THE AGREEMENT DATED 28.5.2005 ENTERED BETWEEN THE PARTN ERS OF THE ASSESSEE-FIRM (ALL 6 PARTNERS) AND THE THREE PARTNERS, IN WHOSE N AMES CONVEYANCE DEED WAS EXECUTED. AS PER THE SAID AGREEMENT, ALL THE MOVAB LE AND IMMOVABLE PROPERTIES PURCHASED FROM VENKITESWARA HOSPITAL, VIDE DOCUMENT NO. 3802/05 ALONG WITH THE LIABILITY PAYABLE TO FEDERAL BANK LTD., WAS AGR EED TO BE TRANSFERRED TO THE ASSESSEE-FIRM. ACCORDINGLY, THE ASSESSEE-FIRM HAS TAKEN OVER ALL THE ASSETS AND LIABILITIES OF VENKITESWARA HOSPITAL AND ACCOUNTED THE SAME BY PASSING JOURNAL ENTRY AND ALSO BY PAYING THE AMOUNT OF RS. 35.00 LA KHS (RS. 30.00 LAKHS + RS. 5.00 LAKHS) TO THE THREE PARTNERS IN WHOSE NAMES TH E CONVEYANCE DEED WAS EXECUTED. THE LD. COUNSEL INVITED OUT ATTENTION TO PAGE NO. 44 OF THE PAPER I.T.A. NOS.181-183 & 310/COCH/2013 4 BOOK, WHEREIN A COPY OF JOURNAL ENTRY PASSED BY THE ASSESSEE FIRM IS PLACED. IN ORDER TO REPAY THE LOAN LIABILITY OF FEDERAL BANK L TD, WHICH WAS BROUGHT INTO THE BOOKS OF THE ASSESSEE FIRM, A LOAN OF RS. 1.00 CROR E WAS AVAILED FROM CATHOLIC SYRIAN BANK AND THE PROCEEDS OF THE SAID LOAN AND A LSO FURTHER FUNDS OF RS.8.00 LAKHS BELONGING TO THE ASSESSEE FIRM WERE U TILISED TO REPAY THE LOAN LIABILITY OF FEDERAL BANK. THE LD COUNSEL FURTHER SUBMITTED THAT PARTNERS AND THE PARTNERSHIP FIRM IS ONE AND THE SAME PERSON UNDER T HE PARTNERSHIP ACT AND HENCE THE PARTNERSHIP ASSETS CAN BE HELD BY THE PAR TNERS IN THEIR INDIVIDUAL NAMES. 7. THE LD. COUNSEL SUBMITTED THAT THE ASSESSING OFF ICER DID NOT ACCEPT THE CONTENTIONS OF THE ASSESSEE THAT THE ASSETS AND LIA BILITIES OF VENKITESWARA HOSPITAL HAVE BEEN BROUGHT INTO THE BOOKS OF THE AS SESSEE-FIRM, FOR THE REASON THAT THE PARTNERS ACCOUNTS HAVE NOT BEEN CREDITED WITH THE NET ASSET VALUE. THE LD. COUNSEL SUBMITTED THAT THE CREDITING THE PA RTNERS ACCOUNT WITH THE NET ASSET VALUE IS ONLY ONE OF THE SEVERAL METHODS FOR ACCOUNTING THE ASSETS AND LIABILITIES SO BROUGHT IN. IN THE INSTANT CASE, TH E ASSESSEE HAS DIRECTLY PAID THE VALUE OF NET ASSET TO THE PARTNERS, INSTEAD OF CRED ITING THE SAME TO THE CAPITAL ACCOUNT OF THE PARTNERS. HENCE THE ASSESSING OFFIC ER DID NOT FIND ANY CREDIT TOWARDS THE VALUE OF ASSETS IN THE CAPITAL ACCOUNT OF THE PARTNERS. SINCE ALL THE ASSETS AND LIABILITIES OF THE VENKITESWARA HOSPITAL HAVE BEEN BROUGHT INTO THE BOOKS OF THE ASSESSEE-FIRM, THE LIABILITY OF FEDERA L BANK BECAME THE LIABILITY OF THE ASSESSEE FIRM, WHICH HAD TO BE REPAID OUT OF TH E FUNDS OF THE ASSESSEE-FIRM ONLY. ACCORDINGLY, THE ASSESSEE AVAILED LOAN FROM CATHOLIC SYRIAN BANK AND REPAID THE SAME. ACCORDINGLY, THE LD A.R CONTENDED THAT THERE WAS NO DIVERSION OF FUNDS AS PRESUMED BY THE ASSESSING OFFICER. 8. IN THE REJOINDER, THE LD D.R SUBMITTED THAT THE ASSESSING OFFICER DID NOT EXAMINE THE JOURNAL ENTRIES PASSED BY THE ASSESSEE AND ALSO THE AGREEMENT REFERRED TO BY THE LD A.R. I.T.A. NOS.181-183 & 310/COCH/2013 5 9. WE HAVE HEARD THE RIVAL CONTENTIONS ON THIS ISSU E AND PERUSED THE RECORD. IT IS AN ADMITTED FACT THAT THE ASSETS BELONGING TO M/S VENKITESWARA HOSPITAL WAS PURCHASED IN THE NAME OF THREE PERSONS, WHO ARE ALS O THE PARTNERS OF THE ASSESSEE FIRM. THE AO HAS TAKEN THE VIEW THAT THEY HAVE PURCHASED THE SAME IN THEIR PERSONAL CAPACITY SINCE:- (A) IT WAS NOT PURCHASED IN THE NAME OF THE ASSES SEE FIRM OR (B) THE ASSETS WERE NOT BROUGHT INTO THE BOOKS OF THE ASSESSEE FIRM BY CREDITING THEIR VALUE IN THE CAPITAL ACCOUNT OF THE THREE PARTNERS, I.E., ACCORDING TO THE AO, WHILE DEBITING THE ASSETS ACCO UNT WITH THE VALUE OF ASSETS OF M/S VENKITESWARA HOSPITAL, CORRESPONDING CREDIT SHOULD HAVE BEEN GIVEN TO THE CAPITAL ACCOUNT OF THE CONCERNED PARTNERS. SINCE THE ABOVE MENTIONED TWO PROCEDURES HAVE NOT B EEN DONE, THE AO HAS TAKEN THE VIEW THAT THE ASSETS OF M/S VENKITESWARA HOSPITAL WERE NOT BROUGHT INTO THE BOOKS OF ACCOUNT OF THE ASSESSEE FIRM. 10. HOWEVER, ACCORDING TO THE ASSESSEE, IT HAS BROU GHT ALL THE ASSETS PURCHASED AND LIABILITIES UNDERTAKEN FROM M/S VENKI TESWARA HOSPITAL BY PASSING A JOURNAL ENTRY. IT WAS FURTHER SUBMITTED THAT THE N ET VALUE OF ASSETS PURCHASED WAS RS.30.00 LAKHS AND THE EXPENSES INCURRED WERE R S.5.00 LAKHS, THUS BOTH AGGREGATING TO RS.35.00 LAKHS AND THE SAID AMOUNT W AS PAID BY WAY OF CASH TO THE CONCERNED PARTNERS. ACCORDINGLY, IT WAS SUBMIT TED THAT THERE WAS NO NECESSITY FOR THE ASSESSEE FIRM TO CREDIT THE PARTN ERS ACCOUNT WITH THE NET VALUE OF ASSETS, SINCE THE PAYMENT WAS EFFECTED TO THEM D IRECTLY. IN THIS REGARD, THE LD A.R INVITED OUR ATTENTION TO PAGE NO. 44 OF THE PAPER BOOK, WHEREIN THE COPY OF JOURNAL ENTRY PASSED BY THE ASSESSEE FIRM IS PLA CED. THE LD A.R ALSO CONTENDED THAT THE ASSETS OF PARTNERSHIP FIRM CAN B E HELD IN THE PARTNERS NAME, SINCE THE PARTNERS AND PARTNERSHIP FIRM ARE ONE AND SAME PERSON UNDER THE PARTNERSHIP ACT. THE LD A.R ALSO SUBMITTED THAT TH E ASSESSEE FIRM HAS TAKEN OVER THE LIABILITY OF RS.1.05 CRORES DUE TO M/S FED ERAL BANK BY M/S VENKITESWARA I.T.A. NOS.181-183 & 310/COCH/2013 6 HOSPITAL AND IT WAS ALSO BROUGHT INTO ITS BOOKS. I N ORDER TO REPAY THE SAID LOAN, THE ASSESSEE FIRM AVAILED A LOAN OF RS.1.00 CRORES FROM M/S CATHOLIC SYRIAN BANK AND DREW A FURTHER SUM OF RS.8.00 LAKHS FROM ITS BA NK ACCOUNT AND THUS REPAID THE LOAN OF RS.1.08 CRORES (THE OUTSTANDING AMOUNT INCREASED TO RS.1.08 CRORES FROM RS.1.05 CRORES BY THE TIME THE LOAN LIABILITY WAS SETTLED) TO M/S FEDERAL BANK LTD. ACCORDINGLY, HE CONTENDED THAT THERE WAS NO DIVERSION OF FUNDS AS PRESUMED BY THE AO AND HENCE HE WAS NOT RIGHT IN DI SALLOWING THE INTEREST CLAIMED BY THE ASSESSEE ON THE LOAN TAKEN FROM M/S CATHOLIC SYRIAN BANK LTD. 11. WE FIND FORCE IN THE CONTENTIONS OF THE ASS ESSEE. UNDER THE PARTNERSHIP ACT, THE PARTNERS ARE INDIVIDUALLY KNOWN AS PARTNER S AND COLLECTIVELY KNOWN AS FIRM. HENCE, THE PARTNERS ARE ENTITLED TO HOLD T HE PROPERTIES BELONGING TO THE PARTNERSHIP FIRM IN THEIR INDIVIDUAL NAME, PROVIDED IT IS EXPLICITLY MADE CLEAR THAT THE PARTNER IS SO HOLDING THE ASSET. IN THE INSTAN T CASE, THE ASSETS OF M/S VENKITESWARA HOSPITAL WERE PURCHASED IN THE NAME OF THREE PERSONS, WHO ARE ALSO PARTNERS OF THE ASSESSEE FIRM. THE INTENTION TO TRANSFER THE ASSETS AND LIABILITIES PURCHASED FROM M/S VENKITESWARA HOSPITA L TO THE ASSESSEE FIRM WERE MADE CLEAR BY THE AGREEMENT DATED 28.5.2005 ENTERED BETWEEN THE THREE PERSONS (IN WHOSE NAME THE ASSETS OF M/S VENKITESWA RA HOSPITAL WAS PURCHASED) AND ALL THE PARTNERS OF THE ASSESSEE FIRM. THE COP Y OF SAID AGREEMENT IS PLACED AT PAGES 7 TO 12 OF THE PAPER BOOK FILED BY THE ASS ESSEE. 12. ACCORDING TO THE ASSESSEE, IT HAS ALSO BROU GHT ALL THE ASSETS AND LIABILITIES IN ITS BOOKS OF ACCOUNT BY PASSING A JOURNAL ENTRY AND MAKING PAYMENT OF NET ASSET VALUE. ACCORDING TO THE ASSESSEE, THE NET AS SET VALUE OF RS.30.00 LAKHS PLUS EXPENSES AMOUNT OF RS.5.00 LAKHS WAS PAID TO T HE CONCERNED PARTNERS INSTEAD OF CREDITING THEIR RESPECTIVE CAPITAL ACCOU NT. WE AGREE WITH THE CONTENTIONS OF LD A.R THAT THE VALUE OF ASSETS BROU GHT IN BY THE PARTNERS NEED NOT ALWAYS BE CREDITED TO THEIR RESPECTIVE CAPITAL ACCOUNT. IT IS ONLY ONE OF THE METHODS OF ACCOUNTING FOR BRINGING THE ASSETS AND L IABILITIES INTO THE BOOKS OF THE I.T.A. NOS.181-183 & 310/COCH/2013 7 FIRM. IN THE INSTANT CASE, THE ASSESSEE HAS PAID T HE NET VALUE ASSETS OF RS.35.00 LAKHS DIRECTLY TO THE CONCERNED PARTNERS. THUS IT AMOUNTS TO CREDITING THE PARTNERS ACCOUNT WITH THEIR RESPECTIVE SHARE AND IM MEDIATELY MAKING PAYMENT OF THE SAME TO THEM. 13. HOWEVER, AS SUBMITTED BY LD D.R, IT IS NOT C LEAR AS TO WHETHER THE AGREEMENT DATED 28.05.2005 (REFERRED ABOVE) WAS EXA MINED BY THE AO OR NOT. IT IS ALSO NOT CLEAR AS TO WHETHER THE ASSESSING OFFIC ER HAS EXAMINED THE JOURNAL ENTRY PASSED BY THE ASSESSEE FIRM TO BRING THE ASSE TS AND LIABILITIES OF M/S VENKITESWARA HOSPITAL IN ITS BOOKS. HENCE, THE SUB MISSIONS MADE BY THE ASSESSEE REQUIRE VERIFICATION AT THE END OF THE ASS ESSING OFFICER. HENCE, THIS ISSUE NEEDS TO BE EXAMINED AFRESH IN THE LIGHT OF S UBMISSIONS MADE BY THE ASSESSEE. ACCORDINGLY, WE SET ASIDE THE ORDER OF L D CIT(A) ON THIS ISSUE IN ALL THE YEARS AND RESTORE THE SAME TO THE FILE OF THE A SSESSING OFFICER WITH THE DIRECTION TO EXAMINE THIS ISSUE AFRESH IN THE LIGHT OF DISCUSSIONS MADE SUPRA BY DULY EXAMINING THE BOOKS OF ACCOUNT AND OTHER MATER IALS AND TAKE APPROPRIATE DECISION IN ACCORDANCE WITH THE LAW. 14. THE NEXT COMMON ISSUE CONTESTED IN ALL THE YEARS RELATES TO THE DISALLOWANCE OF DEPRECIATION CLAIMED BY THE ASSESSE E ON THE ASSETS PURCHASED FROM M/S VENKITESWARA HOSPITAL. THE ASSESSEE CLAIM ED DEPRECIATION ON THE BUILDING AND EQUIPMENTS TRANSFERRED FROM M/S VENKIT ESWARA HOSPITAL AS DETAILED BELOW:- ASST. YEAR DEPN. ON BUILDING DEPN. ON EQUIPMENT 2006-07 4,40,000 6,84,400 2007-08 3,96,000 5,89,800 2008-09 3,56,400 5,08,584 2009-10 33,20,760 4,64,800 I.T.A. NOS.181-183 & 310/COCH/2013 8 THE ASSESSING OFFICER DISALLOWED THE CLAIM OF DEPRE CIATION ON BUILDING AND EQUIPMENTS TRANSFERRED FROM M/S VENKITESWARA HOSPIT AL ON THE GROUND THAT THE ASSESSEE FIRM IS NOT THE BENEFICIAL OWNER OF THE HO SPITAL BUILDING AND EQUIPMENTS. THE LD CIT(A), HOWEVER, ACCEPTED THE C ONTENTIONS OF THE ASSESSEE THAT THE ASSETS HAVE BEEN BROUGHT INTO THE BOOKS OF THE ASSESSEE FIRM. IN THIS REGARD, THE LD CIT(A) ALSO TOOK NOTE OF THE AGREEME NT DATED 28.5.2005 ENTERED BETWEEN S/SRI A.V. MUNAF, A.V. SATHAR & A.V. NAZAR AND THE SIX PARTNERS OF THE FIRM. THE LD CIT(A) ALSO TOOK NOTE OF THE FACT THA T THE HOSPITAL BUILDING AND EQUIPMENTS HAVE BEEN UTILIZED BY THE ASSESSEE FIRM. ACCORDINGLY, HE ALLOWED THE CLAIM OF DEPRECIATION ON BUILDING AND EQUIPMENTS IN ALL THE YEARS. THE REVENUE IS AGGRIEVED BY THE SAID DECISION OF LD CIT(A). 15. WE HAVE HEARD RIVAL CONTENTIONS ON THIS ISS UE. WE NOTICE THAT THE AO HAD DISALLOWED THE CLAIM OF DEPRECIATION ON THE REASONI NG THAT THE ASSESSEE FIRM CANNOT BE CONSIDERED AS THE BENEFICIAL OWNER OF THE ASSETS PURCHASED FROM M/S VENKITESWARA HOSPITAL. HOWEVER, THE CONTENTION OF THE ASSESSEE IS THAT IT HAS BROUGHT ALL THE ASSETS AND LIABILITIES TAKEN OVER F ROM M/S VENKITESWARA HOSPITAL INTO ITS BOOKS BY VIRTUE OF AGREEMENT ENTERED ON 28 .5.2005 BETWEEN THE PARTNERS OF THE ASSESSEE FIRM AND THE THREE PARTNERS IN WHOS E NAME THE PURCHASE WAS REGISTERED. HOWEVER, WHILE DEALING WITH THE ISSUE RELATING TO THE DISALLOWANCE OF INTEREST CLAIM, WE HAVE SET ASIDE THE MATTER OF VER IFICATION OF SUBMISSIONS MADE BY THE ASSESSEE TO THE FILE OF THE ASSESSING OFFICE R. HENCE, IN OUR VIEW, THIS ISSUE SHOULD ALSO BE EXAMINED BY THE AO AFRESH ALONG WITH THE ISSUE RELATING TO THE DISALLOWANCE OF INTEREST CLAIM. ACCORDINGLY, WE SE T ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE IN ALL THE YEARS AND RESTORE IT TO TH E FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO EXAMINE THIS ISSUE ALSO ALONG WITH THE ISSUE RELATING TO INTEREST CLAIM. 16. THE NEXT COMMON ISSUE CONTESTED IN ALL THE YEARS RELATES TO THE DISALLOWANCE OF DEPRECIATION CLAIMED ON ASSETS PURC HASED FROM OLD WELCARE I.T.A. NOS.181-183 & 310/COCH/2013 9 HOSPITAL. THE FACTS RELATING TO THE SAME ARE DISC USSED IN BRIEF. ACCORDING TO THE ASSESSEE ANOTHER FIRM NAMED WELCARE HOSPITAL (HER EINAFTER OLD WELCARE HOSPITAL) WAS STARTED ON 19.4.2001 WITH FOUR PARTN ERS VIZ., SHRI A.V. MUNAF, SHRI A.V.SATHAR, SHRI SHAHUL HAMEED AND SHRI KADALAYIL H USSAIN. THE SAID FIRM WAS DISSOLVED IN 2005 AND THE HOSPITAL EQUIPMENTS WERE TAKEN OVER BY SHRI A.V. MUNAF AND SHRI A.V. SATHAR AND THEY WERE BROUGHT IN TO THE BOOKS OF PRESENT ASSESSEE FIRM AND USED FOR ITS BUSINESS. ACCORDING LY, THE ASSESSEE CLAIMED DEPRECIATION ON THE EQUIPMENTS SO BROUGHT IN, AS DE TAILED BELOW:- ASSESSMENT YEAR DEPN. CLAIMED 2006-07 13,04,486 2007-08 8,85,252 2008-09 4,41,396 2009-10 3,75,186 THE AO ASKED THE ASSESSEE TO PRODUCE DISSOLUTION DE ED OF THE OLD WELCARE HOSPITAL. THE DISSOLUTION DEED PRODUCED BY THE AS SESSEE FIRM DID NOT CONTAIN THE SIGNATURES OF ONE OF THE PARTNERS NAMED SRI KAD AYIL HUSSAIN. HENCE, THE AO TOOK THE VIEW THAT THE SAID DISSOLUTION DEED CANNOT BE CONSIDERED AS A VALID DEED. THE AO ALSO TOOK THE VIEW THAT THERE CANNOT BE A DISTRIBUTION OF ASSETS OF THE OLD WELCARE HOSPITAL AMONGST THE PARTNERS, IN T HE ABSENCE OF VALID DISSOLUTION DEED. THE AO ALSO RECORDED A STATEMENT FROM SRI KADAYIL HUSSAIN, WHEREIN HE CATEGORICALLY STATED THAT HE WAS NEVER A PARTNER IN THE OLD WELCARE HOSPITAL AND HIS SIGNATURE WAS FORGED IN THE PARTNE RSHIP DEED. IN THIS REGARD, IT WAS NOTICED THAT SRI KADAYIL HUSSAIN HAD FILED A WR IT PETITION BEFORE THE HONBLE HIGH COURT OF KERALA AND THE HONBLE HIGH COURT IN W.P.(C) NO.25063 OF 2007(H), VIDES ITS ORDER DATED 20-09-2007 HAS DISPO SED THE WRIT PETITION IN HIS FAVOUR. THE RELEVANT PORTION OF THE ORDER OF THE H IGH COURT HAS BEEN EXTRACTED BY THE AO IN THE ASSESSMENT ORDER AND WE ALSO EXTRA CT THE SAME:- 2. TODAY THE LEARNED STANDING COUNSEL, APPEARING FOR THE RESPONDENTS SUBMIT ON INSTRUCTIONS THAT THE INCOME TAX DEPARTME NT HAS DECIDED TO I.T.A. NOS.181-183 & 310/COCH/2013 10 IGNORE THE PARTNERSHIP DEED AND NOT TO PROCEED AGAI NST THE PETITIONER ON THAT BASIS. IN VIEW OF THIS, PETITIONER CANNOT INS IST THAT INCOME TAX DEPARTMENT SHOULD TAKE ACTION AGAINST WHO HAVE PROD UCED THAT DEED, BASED ON HIS COMPLAINT. IF THE PETITIONER IS SO ADVISED, HE WILL BE AT LIBE RTY TO PROCEED AGAINST THOSE WHO HAVE ALLEGEDLY FABRICATED THE DOCUMENT. WITH THAT LIBERTY, THIS WRIT PETITION IS CLOSED. THE AO ALSO NOTICED THAT THE ASSESSMENTS OF OLD WEL CARE HOSPITAL WERE COMPLETED IN THE STATUS OF A.O.P. ACCORDINGLY, THE AO CAME TO THE CONCLUSION THAT THERE WAS NO SUCH FIRM IN EXISTENCE AS OLD WE LCARE HOSPITAL AND CONSEQUENTLY THE QUESTION OF DISSOLUTION OF PARTNER SHIP AND DISTRIBUTION OF ASSETS AMONGST ITS PARTNERS WILL NOT ARISE. FURTHER THE A O ALSO OBSERVED THAT THE ASSETS HAVE NOT BEEN BROUGHT INTO THE BOOKS OF THE ASSESSE E FIRM. ACCORDINGLY HE REJECTED THE CLAIM OF DEPRECIATION ON ASSETS OF OLD WELCARE HOSPITAL IN ALL THE YEARS. 17. BEFORE THE LD CIT(A), THE ASSESSEE SUBMITTED THAT THE ASSETS OF OLD WELCARE HOSPITAL HAVE BEEN BROUGHT INTO THE BOOKS O F ASSESSEE FIRM, WHICH IS EVIDENT FROM SCHEDULE G OF THE BALANCE SHEET. IT WAS ALSO SUBMITTED THAT THE ASSESSEE ALSO BROUGHT INTO ITS BOOKS THE LIABILITIE S OF THE OLD WELCARE HOSPITAL AND THEY WERE PAID OUT THE FUNDS OF THE ASSESSEE FIRM, WHICH FACT IS NOT DISPUTED BY THE AO. THE LD CIT(A) WAS CONVINCED WITH THE SAID SUBMISSIONS AND FURTHER HE NOTICED THAT THE ASSETS WERE USED FOR THE PURPOSE O F HOSPITAL BUSINESS AND THE INCOME GENERATED ON USAGE OF THOSE ASSETS HAVE BEEN OFFERED FOR ASSESSMENT. ACCORDINGLY, HE DELETED THE DISALLOWANCE OF DEPRECI ATION IN ALL THE YEARS. THE REVENUE IS AGGRIEVED BY THE SAID DECISION. 18. WE HAVE HEARD RIVAL CONTENTIONS ON THIS ISS UE. WE NOTICE THAT THE ASSESSING OFFICER HAS REFUSED TO ALLOW DEPRECIATION MAINLY ON TWO GROUNDS, VIZ., (A) THE ASSESSEE DID NOT PRODUCE PROPER DISSOLUTIO N DEED PERTAINING TO OLD WELCARE HOSPITAL. I.T.A. NOS.181-183 & 310/COCH/2013 11 (B) THE ASSETS OF OLD WELCARE HOSPITAL HAVE NOT B EEN BROUGHT INTO THE BOOKS OF THE ASSESSEE FIRM. BUT ACCORDING TO THE ASSESSEE, IT HAS DULY BROUGHT ALL THE ASSETS INTO THE BOOKS OF THE ASSESSEE FIRM AT ITS WDV VALUE AND THE SAME IS SHOWN IN SCHEDULE G OF THE BALANCE SHEET. THIS SUBMISSION OF THE ASSESSEE IS ACCEPTED BY LD CIT(A). HOWEVER, IT IS NOT CLEAR AS TO WHETHER THE LD CIT(A ) EXAMINED THE BOOKS OF ACCOUNTS TO VERIFY THE ABOVE SAID SUBMISSION OF THE ASSESSEE. 19. FURTHER, WE NOTICE THAT THE DEPARTMENT HAS GIVEN AN UNDERTAKING TO HONBLE HIGH COURT OF KERALA IN CONNECTION WITH THE WRIT PETITION FILED BY SHRI KADAYIL HUSSAIN THAT THEY WILL IGNORE THE PARTNERSH IP DEED OF OLD WELCARE HOSPITAL. IF THE PARTNERSHIP DEED WAS AGREED TO BE IGNORED AND ON THAT BASIS THE ASSESSMENT OF THE OLD WELCARE HOSPITAL HAS BEEN D ONE IN THE STATUS OF A.O.P, IN OUR VIEW, THERE IS NO POINT IN CONSIDERING THE D ISSOLUTION DEED. ACCORDINGLY, IN OUR VIEW, THE AO WAS NOT JUSTIFIED IN COMMENTING UP ON THE DEFICIENCIES OF THE DISSOLUTION DEED. IN ANY CASE, THE PRESENCE OR ABS ENCE OF THE DISSOLUTION DEED OF OLD WELCARE HOSPITAL MAY NOT BE A MATTER TO BE CONSIDERED FOR ALLOWING DEPRECIATION IN THE HANDS OF THE ASSESSEE U/S 32 OF THE ACT, SINCE THE CONDITIONS PRESCRIBED U/S 32 OF THE ACT ARE:- (A) THE ASSETS ARE OWNED WHOLLY OR PARTLY BY THE A SSESSEE AND (B) THEY ARE USED FOR THE PURPOSES OF BUSINESS OR PROFESSION. IT APPEARS THAT THE AO HAS PRESUMED THAT THERE MAY NOT BE DISTRIBUTION OF ASSETS OF OLD WELCARE HOSPITAL WITHOUT A PROPER DISSOLUTIO N DEED. THIS PRESUMPTION, IN OUR VIEW, IS NOT CORRECT. IT IS NOT NECESSARY THAT THE ASSETS OF A PARTNERSHIP FIRM SHOULD BE DISTRIBUTED ONLY UPON THE DISSOLUTION OF THE FIRM, I.E., EVEN DURING THE CURRENCY OF THE PARTNERSHIP FIRM, THE PARTNERS MAY TAKE OVER THE ASSETS WITH THE CONCURRENCE OF THE ALL OTHER PARTNERS. IN THE INST ANT CASE, ACCORDING TO THE ASSESSEE THE TWO PARTNERS OF THE ASSESSEE FIRM HAVE TAKEN OVER THE ASSETS AND HAVE ALSO INTRODUCED THEM IN THE BOOKS OF THE ASSES SEE FIRM. FURTHER THE FACT THAT THEY HAVE BEEN USED IN THE HOSPITAL IS NOT DIS PUTED. WHEN THE PARTNERS I.T.A. NOS.181-183 & 310/COCH/2013 12 BRING THE ASSETS AND INTRODUCE THE SAME AS THE ASSE TS OF THE ASSESSEE FIRM, THEN THE ASSESSEE FIRM SHALL BECOME OWNER OF THOSE ASSET S. ACCORDINGLY, WE NOTICE THAT THE CONDITIONS PRESCRIBED U/S 32 OF THE ACT HA VE BEEN SATISFIED AND HENCE, WE FIND NO REASON TO DISALLOW THE CLAIM OF DEPRECIA TION. HOWEVER, ACCORDING TO THE ASSESSING OFFICER, THESE ASSETS HAVE NOT BEEN B ROUGHT INTO THE BOOKS OF THE ASSESSEE FIRM, WHICH IS IN CONTRADICTION TO THE SUB MISSIONS MADE BY THE ASSESSEE, I.E., ACCORDING TO THE ASSESSEE, ALL THE ASSETS HAVE BEEN BROUGHT INTO THE BOOKS OF THE ASSESSEE FIRM AT THE WDV VALUE. W E HAVE ALREADY NOTICED THAT IT IS NOT CLEAR AS TO WHETHER THIS FACT WAS EXAMINE D BY LD CIT(A). HENCE, THIS ASPECT REQUIRES VERIFICATION AT THE END OF THE ASSE SSING OFFICER. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO EXAMINE THIS ISSUE AFRESH IN THE LIGHT OF DISCUSSIONS MADE SUPRA AND TAKE APPROPRIATE DECISIO N IN ACCORDANCE WITH THE LAW. 20. THE NEXT COMMON ISSUE CONTESTED BY THE REVEN UE IN ASSESSMENT YEARS 2008-09 AND 2009-10 RELATES TO THE DISALLOWANCE OF REPAIRS AND MAINTENANCE EXPENSES. THE ASSESSEE HAD CLAIMED EXPENSES TOWARD S REPAIRS AND MAINTENANCE AS DETAILED BELOW IN ALL THE FOUR YEARS :- ASST. YEAR AMOUNT 2006-07 2,46,665 2007-08 2,80,707 2008-09 32,03,087 2009-10 22,03,750 ACCORDING TO THE ASSESSEE, THE EXPENDITURE HAD BEEN INCURRED TOWARDS REPAIRS OF BUILDING AND OTHER ASSETS. IT MAY BE RECALLED THAT A HOSPITAL NAMED M/S VENKITESWARA HOSPITAL WAS ACQUIRED IN THE NAME OF F OUR PARTNERS AND LATER IT WAS TRANSFERRED TO THE PARTNERSHIP FIRM BY AN AGREEMENT DATED 28.5.2005. ACCORDING TO THE ASSESSEE, IT HAD INCURRED EXPENSES IN REFURB ISHING THE OLD HOSPITAL. THE AO ACCEPTED THE CLAIM OF REPAIRS IN ASSESSMENT YEAR S 2006-07 AND 2007-08. IN I.T.A. NOS.181-183 & 310/COCH/2013 13 ASSESSMENT YEARS 2008-09 AND 2009-10, THE REPAIRS T O BUILDING WAS TAKEN AT RS.31,48,237/- AND RS.21,62,310/- AND THE AO DISALL OWED THE SAID CLAIM ON THE FOLLOWING REASONS:- (A) THE ASSESSEE FIRM CANNOT BE TREATED AS THE BENEFICI AL OWNER OF THE HOSPITAL BUILDING. (B) THE ASSESSEE HAD INCURRED MEAGER AMOUNTS AS EXPENDI TURE ON REPAIRS DURING THE FINANCIAL YEARS 2005-06 AND 2006-07 WHEN COMPARED TO THAT INCURRED IN THE SUBSEQUENT TWO YEARS. HENCE, THE EXPENDITURE INCURRED IN F.YS 2007-08 AND 2008-09 RELEVANT TO TH E ASSESSMENT YEARS 2008-09 AND 2009-10 IS CAPITAL EXPENDITURE AN D HENCE CANNOT BE ALLOWED AS REVENUE EXPENDITURE. (C) THE ASSESSEE HAS NOT PRODUCED BILLS/VOUCHERS TO SUP PORT THE CLAIM. 21. BEFORE LD CIT(A), THE ASSESSEE SUBMITTED TH AT THE BUILDING PURCHASED FROM M/S VENKITESWARA HOSPITAL WAS CONSTRUCTED IN T HE YEAR 1974-75 AND DUE TO FINANCIAL DIFFICULTIES IT REMAINED CLOSED FOR ABOUT TWO YEARS. HENCE, AT THE TIME THE ASSESSEE FIRM PURCHASED THE BUILDING, IT WAS NO T PROPERLY MAINTAINED. IT COMMENCED OPERATIONS IN THE YEAR RELEVANT TO THE AS SESSMENT YEAR 2006-07, THOUGH THE FLOORINGS, TOILETS, PIPE FITTINGS, ELECT RICAL FITTINGS ETC. WERE NOT IN PROPER CONDITION. IT WAS ALSO SUBMITTED THAT THE E XISTING BUILDING ONLY WAS REPAIRED IN ALL THE YEARS AND THE SAME HAS NOT RESU LTED IN INCREASE OF THE SIZE OF THE BUILDING, I.E., NO ADDITIONAL CONSTRUCTION WAS PUT UP. THE LD CIT(A) WAS CONVINCED WITH THE SAID EXPLANATIONS. THE LD CIT(A ) ALSO NOTICED THAT THE TRIBUNAL HAD ALLOWED CLAIM OF REPAIRS IN THE CASE O F LAXMI HOSPITAL (ITA NO. 20 & 21/COCH/2008). ACCORDINGLY, BY FOLLOWING THE DECIS ION OF THE TRIBUNAL, THE LD CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE. THE REVE NUE IS AGGRIEVED BY THE SAID DECISION. I.T.A. NOS.181-183 & 310/COCH/2013 14 22. AT THE TIME OF HEARING, IT WAS BROUGHT TO OUR NOTICE THAT THE ADMINISTRATIVE COMMISSIONER HAD INITIATED REVISION PROCEEDINGS U/S 263 OF THE ACT IN RESPECT OF REPAIRS EXPENSES IN ALL THE FOUR Y EARS UNDER CONSIDERATION AND THE APPEALS FILED BY THE ASSESSEE BEFORE THE TRIBUN AL CHALLENGING THE REVISION ORDERS HAVE BEEN DISMISSED. THE LD A.R SUBMITTED T HAT THE REPAIRS EXPENSES INCLUDE BOTH BUILDING REPAIRS AND OTHER REPAIRS AND THE REVISION ORDERS PERTAIN TO BUILDING REPAIRS ONLY. 23. WE NOTICE FROM THE ORDER DATED 24-05-2013 PASSE D BY THIS BENCH OF TRIBUNAL IN THE ASSESSEES OWN CASES IN ITA NOS. 38 2 TO 385/COCH/2012 PASSED AGAINST THE REVISION ORDERS PASSED BY THE LD. COMMI SSIONER (REFERRED SUPRA), THE TRIBUNAL HAS EXAMINED THE ISSUE OF NATURE OF EXPEND ITURE AND HAS GIVEN A FINDING. FOR THE SAKE OF CONVENIENCE, WE EXTRACT B ELOW THE OPERATIVE PORTION OF THE ORDER OF THE TRIBUNAL: 8. THE QUESTION ARISES FOR CONSIDERATION IS WHEN T HE TAXPAYER PURCHASED A NEW BUILDING FOR ESTABLISHING HOSPITAL AND INCURRED EXPENDITURE FOR MAKING THE BUILDING FIT FOR THE PURPOSE OF ITS BUSINESS OR PROFESSION, WHETHER SUCH EXPENDITURE COULD BE TREATED AS REVENUE EXPENDITURE OR CAPITAL EXPENDITURE? WE FIND THAT THE KERALA HIGH COURT IN THE CASE OF V EERARAGHAVAN VS. CIT (1967) 64 ITR 63 (KER) HAD AN OCCASION TO CONSIDER AN IDENTICAL ISSUE. IN THE CASE BEFORE THE KERALA HIGH COURT, THE TAXPAYER INC URRED EXPENDITURE FOR RECLAIMING A PIECE OF LAND OVER WHICH LICENCE WAS G RANTED TO INSTALL A PETROL PUMP BY BURMAH SHELL OIL DISTRIBUTING CO. THE KERA LA HIGH COURT FOUND THAT THE EXPENDITURE INCURRED BY THE TAXPAYER FOR RECLAI MING THE PIECE OF LAND HAS TO BE TREATED AS CAPITAL EXPENDITURE. IN VIEW OF T HE JUDGMENT OF THE KERALA HIGH COURT IN THE CASE OF VEERARAGHAVAN (SUPRA), TH IS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE EXPENDITURE INCURRED BY THE TAXPAYER HAS TO BE TREATED AS CAPITAL IN NATURE. THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LOWER AUTHORITY. ACCORDINGLY, THE SAME IS CONFIRMED. 9. FURTHER, THE PURCHASE AND RENOVATION OF THE BUI LDING EXPANDS THE CAPITAL BASE/PROFIT MAKING APPARATUS OF THE ASSESSEE. THE E XPENDITURE INCURRED BY THE ASSESSEE IS FOR THE PURPOSE OF EXPANSION OF PRO FIT MAKING APPARATUS. THEREFORE, THE EXPENDITURE HAS TO FALL WITHIN THE C APITAL FIELD. I.T.A. NOS.181-183 & 310/COCH/2013 15 THUS IT CAN BE SEEN THAT THE TRIBUNAL HAS ALREADY G IVEN A FINDING THAT THE EXPENDITURE INCURRED ON RENOVATION OF THE BUILDING IS A CAPITAL EXPENDITURE. IN VIEW OF THE SAME, WE SET ASIDE THE ORDER OF THE LD. CIT(A) ON THIS ISSUE AND RESTORE THE ADDITION MADE BY THE ASSESSING OFFICER IN RESPECT OF THE BUILDING REPAIRS. THE LD A.R CLAIMED THAT THE REPAIR EXPE NSES CLAIMED BY THE ASSESSEE INCLUDE REPAIRS INCURRED ON OTHER ASSETS ALSO. IN RESPECT OF REPAIRS ON OTHER ASSETS, WE ARE OF THE VIEW THE SAME REQUIRES FRESH EXAMINATION AT THE END OF THE ASSESSING OFFICER. ACCORDINGLY, WE SET ASIDE THE O RDER OF LD CIT(A) IN RESPECT OF REPAIRS ON OTHER ASSETS AND RESTORE THE SAME TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO EXAMINE THE SAME AFRESH AND TAK E AN APPROPRIATE DECISION IN ACCORDANCE WITH LAW AFTER GIVING REASONABLE OPPORTU NITY TO THE ASSESSEE. 24. WE SHALL TAKE UP THE ISSUES CONTESTED IN THE AS SESSMENT YEAR 2009-10. THE FIRST ISSUE RELATES TO THE ADDITION OF UNEXPLAI NED SUNDRY CREDITORS BALANCES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSING OFFICER ASKED THE ASSESSEE TO FURNISH THE DETAILS RELATING TO FOLLOWI NG SUNDRY CREDITORS:- (A) WELCARE HOSPITAL A.Y. 2009-10 NAME OF SUNDRY CREDITORS AMOUNT (RS.) 1. DADWINGS 362547 2. KAV SHAIKRAWTHAR 254850 3. MEDICO IMAGING CO. LTD. 390200 TOTAL 1007597 (B) WELCARE PHARMACY A.Y. 2009-10 NAME OF SUNDRY CREDITORS AMOUNT (RS.) 1. DORAI AGENCIES 171816 2. FATHIMA DRUG HOUSE 367750 3. PHARMA AGENCIES 161348 4. RUDRA AGENCIES 100422 5. SHANTHI RAJ DISTRIBUTORS 210935 6. URBAN EDGE 255497 7. VINAYAKA MEDICALS 100061 8. THRISSUR COMBINES 109385 TOTAL 1477214 I.T.A. NOS.181-183 & 310/COCH/2013 16 HOWEVER, THE ASSESSEE DID NOT PRODUCE EITHER THE CR EDITORS OR THE CONFIRMATION LETTERS OBTAINED FROM THEM. HENCE THE ASSESSING OFF ICER ASSESSED THE AGGREGATE AMOUNT OF RS. 24,84,811/- (10,07,597 + 14,77,214) A S THE INCOME OF THE ASSESSEE. 25. HOWEVER, BEFORE LD. CIT(A), THE ASSESSEE FILED THE CONFIRMATION LETTERS OBTAINED FROM THE CREDITORS. HENCE, THE LD. CIT(A) CALLED FOR A REMAND REPORT FROM THE ASSESSING OFFICER. IN THE REMAND REPORT, THE ASSESSING OFFICER ACCEPTED THE FOLLOWING ITEMS OF SUNDRY CREDITORS: DADWINGS PALAKKAD RS.3,62,547 RUDRA AGENCIES RS.1,00,422 SHANTIRAJ DISTRIBUTORS RS.2,10,935 VINAYAKA MEDICALS RS.1,00,061 TRICHUR COMBINES RS.1,09,385 IN RESPECT OF THE REMAINING CREDITORS, THERE WAS DI FFERENCE IN THE BALANCE BETWEEN THE ASSESSEES ACCOUNTS AND THE ACCOUNTS OF THE CREDITORS IN RESPECT OF THE FOLLOWING THREE CREDITORS: (A) KAV SHAIKRAWTHAR (B) DORAI AGENCIES (C) PHARMA AGENCIES THE AO STATED THAT THE ASSESSEE DID NOT FILE THE CO NFIRMATION LETTERS IN RESPECT OF THE FOLLOWING THREE CREDITORS BEFORE HIM. (A) MEDICO IMAGING CO. LTD. (B) FATHIMA DRUG HOUSE (C) URBAN EDGE HOWEVER, IT APPEARS THAT THE ASSESSEE HAS FILED THE CONFIRMATION LETTERS OBTAINED FROM THE M/S MEDICO IMAGING CO. LTD AND M/S FATHIMA DRUG HOUSE ALSO BEFORE THE LD. CIT(A), SINCE THE FIRST APPELLATE AUTHORITY HAS DISCUSSED ABOUT THE SAME IN HIS ORDER. AFTER CONSIDERING THE REMAND REPORT, THE LD. CIT(A) REMITTED THE MATTER RELATING TO M/S. URBAN EDGE TO THE FILE OF TH E ASSESSING OFFICER FOR TAKING I.T.A. NOS.181-183 & 310/COCH/2013 17 NECESSARY ACTION. IN RESPECT OF OTHER FIVE CREDITO RS, THE LD. CIT(A) HELD THAT THE DIFFERENCE BETWEEN THE ASSESSEES ACCOUNTS AND THE ACCOUNTS OF THE CREDITORS SHOULD ASSESSED AS THE INCOME OF THE ASSESSEE. THE REVENUE IS AGGRIEVED BY THE DECISION OF THE LD. CIT(A). 26. WE HAVE HEARD THE RIVAL CONTENTIONS ON THIS ISS UE AND PERUSED THE RECORD. WE NOTICE THAT ALL THESE CREDITORS ARE TRADE CREDIT ORS, I.E., THEY ARE NOT CASH CREDITS. IN THE REMAND PROCEEDING, THE ASSESSING O FFICER HIMSELF HAS ACCEPTED THE CORRECTNESS OF FIVE CREDITORS BALANCES OUT OF THE 11 CREDITORS NOTED BY HIM. THE LD. CIT(A) HAS REMITTED THE MATTER RELATING TO M/S. URBAN EDGE TO THE FILE OF THE ASSESSING OFFICER FOR TAKING NECESSARY ACTION. IT IS SEEN THAT M/S URBAN EDGE HAS SUPPLIED FURNITURE AND FIXTURES TO THE ASSESSEE . ACCORDING TO THE ASSESSEE, THE PAYMENT WAS NOT MADE TO THEM DUE TO SOME DISPUT E. HENCE, THE LD CIT(A) ALSO COULD NOT DECIDE THE ISSUE AND HE HAS SENT THE MATTER TO THE FILE OF THE AO FOR TAKING NECESSARY ACTION. THOUGH THE LD CIT(A) MAY NOT BE EMPOWERED TO SET ASIDE THE MATTER, YET IN THE ABSENCE OF ANY OTH ER DETAILS RELATING TO THIS CREDITOR, WE ARE ALSO OF THE VIEW, THE SAME REQUIRE S FRESH CONSIDERATION AT THE END OF THE ASSESSING OFFICER. 27. IN RESPECT OF THE REMAINING FIVE CREDITORS, THE LD. CIT(A) HAS NOTICED THAT THERE WERE DIFFERENCES IN THE CLOSING BALANCES, I.E ., THE CLOSING BALANCE SHOWN IN THE ACCOUNTS OF THE ASSESSEE AND THE STATEMENT FURN ISHED BY THE PARTIES DID NOT TALLY. HENCE, THE LD CIT(A) HAS DIRECTED THE ASSES SING OFFICER TO ASSESS THE DIFFERENCE BETWEEN THE BALANCES AS THE INCOME OF TH E ASSESSEE. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE DECISIO N TAKEN BY THE LD. CIT(A) IS REASONABLE. SINCE THE ASSESSEE DID NOT PREFER APPE AL AGAINST THE SAID DIRECTION, THE ASSESSEE IS NOT AGGRIEVED BY THE DECISION OF LD CIT(A). SINCE THESE PARTIES HAVE FURNISHED THE ACCOUNT STATEMENT, IN OUR VIEW A LSO, THE OUTSTANDING BALANCE TO THE EXTENT SHOWN IN THE STATEMENTS OF ACCOUNTS F URNISHED BY THE PARTIES HAVE TO BE CONSIDERED AS PROVED. HENCE, THE LD. CIT(A) HAS DIRECTED THE ASSESSING I.T.A. NOS.181-183 & 310/COCH/2013 18 OFFICER TO ASSESS THE DIFFERENCE BETWEEN THE BALANC ES AS THE INCOME OF THE ASSESSEE. UNDER THESE SET OF FACTS, WE DO NOT FIND ANY REASON TO INTERFERE WITH HIS ORDER ON THIS ISSUE. 28. THE NEXT ISSUE CONTESTED BY THE REVENUE IN T HE APPEAL FILED FOR ASSESSMENT YEAR 2009-10 RELATES TO THE DISALLOWANCE MADE U/S 40(A)(IA) OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICE D THAT THE ASSESSEE HAS BEEN MAKING PAYMENTS OF IP AND OP COLLECTIONS TO TH E DOCTORS, WHICH WERE ALSO EVIDENCED BY THE SEIZED DOCUMENTS NUMBERED AS MVR-A 1 TO MVR-A3 AND APCM2 TO APCM9. DURING THE COURSE OF SEARCH PROCEEDINGS, SWORN STATEMENTS WERE RECORDED FROM ONE OF THE EMPLOYEES NAMED SMT. ANITH A AND ALSO FROM THE MANAGING PARTNER OF THE ASSESSEE FIRM SHRI A.V. SAT HAR. BOTH OF THEM CONFIRMED THAT THE OP & IP COLLECTIONS PERTAINING TO VARIOUS DOCTORS ARE PUT INTO A COVER AT THE END OF THE DAY AND HANDED OVER TO THE CONCERNED DOCTORS. THE AO NOTICED THAT THE ASSESSEE HAS NOT ACCOUNTED FOR BOTH THE RE CEIPTS AND PAYMENTS MADE TO THE DOCTORS IN ITS BOOKS OF ACCOUNT. THE ASSESSEE SUBMITTED BEFORE THE AO THAT IT WAS COLLECTING FEES ON BEHALF OF THE DOCTORS ONL Y AND THEY ARE NOT HOSPITAL COLLECTIONS. ACCORDINGLY IT WAS SUBMITTED THAT THE ASSESSEE DID NOT ACCOUNT FOR BOTH THE COLLECTIONS AND PAYMENTS. BUT, SINCE THE REGISTERS SEIZED DURING THE COURSE OF SEARCH (APCM -2 TO APCM-9) CONTAINED THE DETAILS OF COLLECTIONS, THE AO TOOK THE VIEW THAT THE ASSESSEE HAD DELIBERATELY OMITTED TO ACCOUNT FOR THESE COLLECTIONS. THE AO ALSO TOOK THE VIEW THAT THE AS SESSEE SHOULD HAVE DEDUCTED TAX AT SOURCE U/S 194J OF THE ACT ON THE PAYMENT MA DE TO THE DOCTORS. THE AO DID NOT ACCEPT THE CONTENTIONS OF THE ASSESSEE THAT NO PART OF THE SAID COLLECTION BELONGS TO IT. THE AMOUNT ON WHICH TDS SHOULD HAVE BEEN DEDUCTED WAS WORKED OUT AT RS.86,01,173/- AND THE SAME WAS DISAL LOWED BY THE AO U/S 40(A)(IA) OF THE ACT. 29. BEFORE LD CIT(A), THE ASSESSEE TOOK SUPPORT OF THE SWORN STATEMENTS GIVEN BY THE EMPLOYEE AND THE MANAGING PARTNER, WHE REIN BOTH OF THEM HAD I.T.A. NOS.181-183 & 310/COCH/2013 19 STATED THAT THE COLLECTIONS WERE HANDED OVER TO THE CONCERNED DOCTORS. ACCORDINGLY, IT WAS SUBMITTED THAT THE ASSESSEE DOE S NOT HAVE ANY RIGHT OVER THE SAID INCOME. THE ASSESSEE ALSO SUBMITTED THAT THE S AID COLLECTIONS BELONG TO THE CONCERNED DOCTORS. IN SUPPORT OF THE SAME, THE ASSE SSEE FILED COPY OF RETURN FILED BY ONE OF THE DOCTORS NAMED DR. PRADEEP AND ALSO A CONFIRMATION LETTER OBTAINED FROM HIM. THE ASSESSEE ALSO SUBMITTED THAT IT HAS NOT CLAIMED THE PAYMENTS MADE TO THE DOCTORS AS EXPENDITURE AND HENCE THE QU ESTION OF DISALLOWING THE SAME U/S 40(A)(IA) DOES NOT ARISE. THE LD CIT(A) W AS CONVINCED WITH THE SUBMISSIONS MADE BY THE ASSESSEE AND ACCORDINGLY HE LD THAT THE ASSESSEE FIRM IS NOT LIABLE TO DEDUCT TAX AT SOURCE IN RESPECT OF P AYMENTS MADE TO DR. PRADEEP. IN RESPECT OF OTHER DOCTORS ALSO, THE LD CIT(A) DIR ECTED THE AO TO TAKE NECESSARY ACTION TO BRING TO TAX THE PAYMENT MADE TO THEM BY THE ASSESSEE. ACCORDINGLY, HE DIRECTED THE AO TO GRANT RELIEF TO THE ASSESSEE. 30. THE LD D.R SUBMITTED THAT THE ASSESSEE DID NOT ACCOUNT FOR THE RECEIPTS AND THE PAYMENTS MADE TO THE DOCTORS IN ITS BOOKS O F ACCOUNT. THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE U/S 194J OF THE ACT IN RES PECT OF PAYMENTS MADE TO THE DOCTORS AND HENCE THE AO HAS DISALLOWED THE SAME BY INVOKING THE PROVISIONS OF SEC. 40(A)(IA) OF THE ACT. 31. THE LD COUNSEL FOR THE ASSESSEE, HOWEVER, SU BMITTED THAT THE ASSESSEE HAS PROVIDED FACILITIES TO THE VISITING DOCTORS AND HAS COLLECTED THE OP & IP FEE ON THEIR BEHALF. AT THE END OF THE DAY, THE ASSESSEE HAS HANDED OVER THE COLLECTIONS TO THE RESPECTIVE DOCTORS. HE SUBMITTED THAT THE A SSESSEE FIRM WAS NOT ENTITLED TO ANY PART OF SUCH COLLECTIONS. HENCE THERE WAS NO NECESSITY FOR THE ASSESSEE TO ACCOUNT FOR EITHER THE COLLECTIONS MADE ON BEHALF O F THE DOCTORS OR THE PAYMENTS MADE TO THEM. THE LD COUNSEL SUBMITTED THAT THE EM PLOYEE OF THE ASSESSEE AS WELL THE MANAGING PARTNER HAVE CLARIFIED THIS FACTU AL POSITION IN THE SWORN STATEMENT TAKEN FROM EACH OF THEM SEPARATELY. FURT HER, THE ASSESSEE HAS ALSO FILED A LETTER OBTAINED FROM ONE OF THE MAIN DOCTOR S NAMED DR. PRADEEP TO I.T.A. NOS.181-183 & 310/COCH/2013 20 SUBSTANTIATE THIS FACTUAL POSITION. THE LD COUNSEL FURTHER SUBMITTED THAT THE DOCTORS ARE NOT EMPLOYEES OF THE ASSESSEE FIRM AND THEY WERE ALLOWED TO PRACTICE IN THE HOSPITAL OF THE ASSESSEE IN THE BES T OF INTEREST OF THE HOSPITAL, I.E., ON COMMERCIAL EXPEDIENCY. HE FURTHER SUBMITTED THA T THERE IS NO CONTRACT BETWEEN THE ASSESSEE AND THE CONCERNED DOCTORS FOR SHARING OF COLLECTIONS. THEY ARE FREE LANCING DOCTORS GOING TO MANY HOSPITA LS. THE ASSESSEE FIRM DID NOT HAVE ANY SAY IN THE MATTER OF EITHER FIXING OR COLLECTION OF FEES. THE FEE IS DECIDED BETWEEN THE CONCERNED DOCTORS AND THE PATIE NTS AND THE ASSESSEE FIRM HAS ONLY TAKEN THE RESPONSIBILITY TO COLLECT THE FE ES SO FIXED AND REMIT THE TOTAL COLLECTION AT THE END OF THE DAY. ACCORDINGLY, TH E LD COUNSEL SUBMITTED THAT THE DOCTORS HAVE NOT RENDERED ANY PROFESSIONAL SERVICES TO THE ASSESSEE FIRM. FURTHER THE ASSESSEE FIRM HAS NOT CLAIMED THE PAYME NTS MADE TO THE DOCTORS AS EXPENDITURE AT ALL. UNDER THESE CIRCUMSTANCES, ACC ORDING TO THE LD A.R., THE QUESTION OF APPLICATION OF SEC. 194J AND SEC. 40(A) (IA) OF THE ACT DOES NOT APPLY AT ALL. 32. WE HAVE HEARD RIVAL CONTENTIONS ON THIS ISS UE. THE SEIZED MATERIALS HAVE REVEALED ABOUT THE COLLECTIONS MADE FROM THE OP & I P PATIENTS UNDER VARIOUS DOCTORS NAMES. ON THE DATE OF SEARCH, SWORN STATE MENTS WERE RECORDED FROM AN EMPLOYEE NAMED SMT. ANITHA AND ALSO FROM THE MAN AGING PARTNER SRI A.V. SATHAR. IT IS PERTINENT TO NOTE THAT BOTH OF THEM STATED THAT THE AMOUNT COLLECTED FROM OP & IP PATIENTS ARE HANDED OVER TO THE CONCERNED DOCTORS AT THE END OF THE DAY. WE NOTICE THAT THE ASSESSING OFFIC ER HAS DISBELIEVED THE STATEMENT OF BOTH THE PARTIES (REFERRED ABOVE) ONLY FOR THE REASON THAT THE REGISTERS SEIZED DURING THE COURSE OF SEARCH CONTAI NED DATE WISE COLLECTIONS. APART FROM THIS, THE AO HAS NOT TAKEN ANY STEP TO D ISPROVE THE STATEMENTS GIVEN BY THE EMPLOYEE AS WELL AS THE MANAGING PARTNER U/S 132(4) OF THE ACT. ON THE CONTRARY, THE ASSESSEE HAS FURNISHED, BEFORE THE LD CIT(A), A LETTER OBTAINED FROM ONE OF THE DOCTORS NAMED DR. PRADEEP AND ALSO A COPY OF INCOME TAX RETURN FILED BY HIM, WHEREIN HE HAD DISCLOSED ADDIT IONAL INCOME. HOWEVER, WE I.T.A. NOS.181-183 & 310/COCH/2013 21 NOTICE THAT THE LETTER WAS FURNISHED BY DR. PRADEEP SUBSEQUENT TO THE COMPLETION OF THE ASSESSMENT IN THE HANDS OF THE ASSESSEE FIRM . HENCE, THERE WAS NO OCCASION FOR THE ASSESSING OFFICE TO CONSIDER THE S AME. 33. IT IS ALSO AN ADMITTED FACT THAT THE ASSESSE E DID NOT ACCOUNT FOR BOTH THE FEE COLLECTIONS AND THE PAYMENTS MADE TO THE CONCER NED DOCTORS. HENCE, THE LD A.R CONTENDED THAT THE QUESTION OF INVOKING PROVISI ONS OF SEC. 40(A)(IA) DOES NOT ARISE SINCE THE ASSESSEE DID NOT CLAIM THE PAYMENTS MADE TO THE DOCTORS AS ITS EXPENDITURE , I.E., ACCORDING TO LD A.R, THE PROVIS IONS OF SEC. 40 OF THE ACT LISTS OUT THE EXPENDITURE WHICH SHALL NOT BE DEDUCTED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUS INESS OR PROFESSION. 34. WE HAVE ALREADY NOTICED THAT THE ASSESSEE H AS FURNISHED COPY OF LETTER FURNISHED BY DR. PRADEEP AND ALSO COPY OF RETURN OF INCOME FILED BY HIM TO SHOW THAT DR. PRADEEP HAD DISCLOSED THE RECEIPTS FROM TH E HOSPITAL OF THE ASSESSEE. THE SAID DOCUMENTS WERE FILED TO SHOW THAT THE RESP ONSIBILITY TO DECLARE THE OP & IP COLLECTIONS NOTICED IN THE SEIZED RECORDS LIE UPON THE CONCERNED DOCTORS. ADMITTEDLY, THESE DOCUMENTS WERE NOT CONSIDERED BY THE AO. FURTHER THE LD CIT(A) HAS GIVEN DIRECTION TO THE AO TO TAKE NECESS ARY ACTION AGAINST OTHER DOCTORS ALSO. THOUGH THERE IS MERIT IN THE OBSER VATIONS MADE BY LD CIT(A) THAT THE SWORN STATEMENTS GIVEN BY THE EMPLOYEE, SWORN S TATEMENT GIVEN BY THE MANAGING PARTNER AND THE DOCUMENTS PERTAINING TO DR . PRADEEP SUPPORT THE STAND OF THE ASSESSEE, YET IN VIEW OF THE FACT THAT THE ASSESSING OFFICER HAS MADE THE ADDITION U/S 40(A)(IA) OF THE ACT IN A HASTY MA NNER WITHOUT PROPERLY EXAMINING THE FACTS AND THE LEGAL POSITION SURROUND ING THE ISSUE. HENCE, IN OUR VIEW, THIS MATTER REQUIRES TO BE REMITTED TO THE A O FOR CONSIDERING ABOUT THE APPLICABILITY OF PROVISIONS OF SEC. 40(A)(IA) OF TH E ACT IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND ALSO THE LEGAL POSITI ON CONTESTED BEFORE US. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE AO WITH THE DIRECTION TO EX AMINE THIS ISSUE AFRESH IN THE I.T.A. NOS.181-183 & 310/COCH/2013 22 LIGHT OF DISCUSSIONS MADE SUPRA AND TAKE APPROPRIAT E DECISION IN ACCORDANCE WITH THE LAW. 35. THE NEXT ISSUE CONTESTED BY THE REVENUE REL ATES TO THE INTEREST CHARGED U/S 234B OF THE ACT. THE AO HAD LEVIED INTEREST U/ S 234B(1) OF THE ACT. HOWEVER, THE LD CIT(A) DIRECTED THE ASSESSING OFFIC ER TO LEVY INTEREST U/S 234B(3) OF THE ACT AND IN THIS REGARD, THE LD CIT(A ) PLACED RELIANCE ON THE DECISION OF HONBLE JURISDICTIONAL KERALA HIGH COUR T IN THE CASE OF CIT VS. B. LAKSHMIKANTHAN (ITA NO.559 TO 564/COCH/2009 DATED 2 0.06.2011). 36. THE CONTENTION OF THE REVENUE IS THAT THE RAT IO LAID DOWN BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF LAKSHMIKAN THAN (SUPRA) SHALL NOT APPLY TO THE INSTANT CASES. ACCORDING TO THE REVENUE THE IM PUGNED ASSESSMENTS ARE THE FIRST ASSESSMENTS AND THE EXPLANATION 2 TO SEC. 234B (1) SHALL APPLY IN THESE CASES. 37. WE ALSO HEARD THE LD A.R IN THIS REGARD. W E NOTICE THAT THE LD CIT(A) HAS DIRECTED THE AO TO COMPUTE INTEREST U/S 234B(3) OF THE ACT WITHOUT BRINGING THE PARITY OF FACTS BETWEEN THE INSTANT CASES AND THE C ASE OF LAKSHMIKANTHAN (SUPRA). ACCORDING TO THE REVENUE THE FACTS PREVA ILING IN THE INSTANT CASES ARE DISTINGUISHABLE. HENCE, IN OUR VIEW, THE ISSUE OF CHARGING OF INTEREST U/S 234B MAY BE EXAMINED AFRESH AT THE END OF THE AO BY DULY CONSIDERING THE DECISION RENDERED BY THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF LAKSHMIKANTHAN (SUPRA). ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE ASSESSING OFFIC ER WITH THE DIRECTION TO COMPUTE THE INTEREST U/S 234B BY DULY CONSIDERING THE DECIS ION OF JURISDICTIONAL HIGH COURT REFERRED SUPRA. I.T.A. NOS.181-183 & 310/COCH/2013 23 38. IN THE RESULT, THE APPEALS FILED BY THE REVENUE FOR ASSESSMENT YEARS 2006- 07 TO 2008-09 ARE TREATED AS ALLOWED. THE APPEAL F ILED FOR ASSESSMENT YEAR 2009-10 IS TREATED AS PARTLY ALLOWED. PRONOUNCED ACCORDINGLY ON 07-03-2014 SD/- SD/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 7TH MARCH, 2014 GJ COPY TO: 1. M/S. WELCARE HOSPITAL, NEAR MERCY COLLEGE, KALLI KKAD, PALAKKAD. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL C IRCLE, TRICHUR. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS)-I, KOCHI . 4. THE COMMISSIONER OF INCOME-TAX, CENTRAL, KOCHI 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T, COCHIN