ACIT, Jabalpur V. Shri Pawan Sthapak, Jabalpur

ITA 80/JAB/2010

• Counselvise Citation: 8022914 RSA 2010
• Duration Of Justice: 3 year(s) 1 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-09-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2007-2008
• Appeal Filed On: 05-08-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business expenditure; Charitable institution; Commercial expediency; Revenue expenditure
• Section: 143(3); 194C; 37; 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, JABALPUR BENCH, JABALPUR BEFORE SHRI JOGINDER SINGH,(JM) AND SHRI R.C. SHAR MA (AM) I.T.A. NO.80/JAB/2010 ASSESSMENT YEAR:2007-0 8 ACIT, CIRCLE 1(1), JABALPUR VS. SHRI PAWAN STHAPAK, PROP. JAN JYOTI EYE HOSPITAL, RANITAL CHOWK, GOLE BAZAR, JABALPUR PAN/GIR NO. : ARMPS 2647 C APPELLANT ) .. RESPONDENT ) C.O.NO.09/JAB/2010 (ARISING OUT OF I.T.A NO.80/JAB/2010) ASSESSMENT YEAR: 2007-08 SHRI PAWAN STHAPAK, PROP. JAN JYOTI EYE HOSPITAL, RANITAL CHOWK, GOLE BAZAR, JABALPUR VS. ACIT, CIRCLE 1(1), JABALPUR APPELLANT BY : SHRI ABHISHEK SHUKLA CROSS OBJECTOR BY : SHRI A.P.SRIVASTAVA & SAPAN USRETHE DATE OF HEARING : 13/9/20 13 DATE OF PRONOUNCEMENT : 16/09/2013 O R D E R PER R.C.SHARMA, JM: THE APPEAL FILED BY THE REVENUE AND CROSS OBJECTIO N FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF LD COMMIS SIONER OF INCOME TAX 2 (APPEALS) DATED 5.4.2010 FOR THE ASSESSMENT YEAR 20 07-08, IN THE MATTER OF ORDER PASSED UNDER SECTION 143(3) OF THE I.T.ACT. 2. THE DEPARTMENT HAS RAISED THE FOLLOWING GROUNDS IN ITS APPEAL: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS. 6,26,368/- ON ACCOUNT OF DISALLOWANCE OF INTEREST PAYMENT U/S 36(1)(II). 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS.78,761/- ON AC COUNT OF UNCLAIMED LIABILITIES. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD CIT (A) HAS ERRED IN DELETING THE AMOUNT OF RS.13,46,880/- BEIN G PREPARED EXPENSES DISALLOWED OF EXPENSES U/S 40(A)(IA). 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD CIT (A) HAS ERRED IN DELETING THE ADDITION OF 2,50,000/- ON ACC OUNT OF UNDER VALUATION OF CLOSING STOCK OF CONSUMABLES AND MEDIC INES. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD CIT (A) HAS ERRED IN DELETING THE ADDITION OF 3,52,000/- ON ACC OUNT OF WITHDRAWALS. 3. THE ASSESSEE IS A DOCTOR AND CARRYING ON MEDICAL PROFESSION SPECIALIZED IN EYE CARE SINCE 10/09/1992. ASSESSEE CARRIES OUT HIS PROFESSION FROM TWO BUSINESS PREMISES NAMELY M/S. J AN JYOTI HOSPITAL, RANITAL CHOWK, JABALPUR AND M/S. JABAL HOSPITAL & R ESEARCH CENTRE, NEPLER TOWN, JABALPUR. 4. IN RESPECT OF GROUND NO.1 OF APPEAL, BRIEFLY STA TED THE RELEVANT FACTS ARE THAT DURING THE COURSE OF SCRUTINY ASSESS MENT, THE ASSESSING OFFICER OBSERVED THAT ASSESSEE HAS CLAIMED INTEREST PAID TO BANK 3 AMOUNTING TO RS.6,26,365/-. THE ASSESSING OFFICER OBSERVED THAT ASSESSEE HAS DEBITED INTEREST ON LOAN OF RS.65 LAKH S OBTAINED FROM BANK OF MAHARASHTRA, WHICH HAD BEEN SANCTIONED AND DISBU RSED IN THE NAME OF THE WIFE OF THE ASSESSEE SMT ANUPAMA STHAPAK. A SSESSING OFFICER FURTHER OBSERVED THAT THE LOANS SO DISBURSED HAD BE EN UTILIZED IN ACQUIRING A PROPERTY, WHICH WAS RESIDENTIAL IN NATU RE. ON THE PLEA THAT THE INTEREST WAS PAID IN RESPECT OF LOAN TAKEN BY T HE WIFE OF THE ASSESSEE, THE ASSESSING OFFICER DISALLOWED THE ASSE SSEES CLAIM OF INTEREST U/S.36(1)(III) OF THE ACT. IN THE IMPUGNE D ORDER, LD COMMISSIONER OF INCOME TAX (APPEALS) DELETED THE DI SALLOWANCE, INTER ALIA, AFTER HAVING THE FOLLOWING OBSERVATION: NOW THE CONTENTION OF THE APPELLANT IS FOUND TO B E CORRECT. THERE IS NO DISPUTE IN RESPECT OF THE FACT THAT THE LOAN OF RS.65 LACS WAS PROCURED BY THE APPELLANT HIMSELF AGAINST SECURITIE S OF HIS OWN PROPERTIES. THIS WAS ADVANCED BY HIM TO HIS WIFE AS LOAN WITH SPECIFIC AND CLEAR-CUT AIMS OF USING SUCH PROPERTY FOR THE P URPOSE OF HIS PROFESSION. THE AGREEMENT DTD. 1.11.2006 BETWEEN TH E APPELLANT AND HIS WIFE, SMT, ANUPAMA STHAPAK MAKES IT ABUNDANTLY CLEAR THAT THE FUND WAS GIVEN AS LOAN SO THAT THE PROPERTY COULD B E PURCHASED IN THE NAME OF HIS WIFE AND IT WAS FOR THE PURPOSE OF USE OF THE APPELLANT FOR HIS PROFESSIONAL PURPOSES, EYE CAMPS STAY BY PATIEN TS AND SIMILAR OTHER PURPOSE RELATED TO THE PROFESSIONAL USE OF DR. PAWA N STHAPAK. HAD THIS LOAN NOT BEEN GIVEN TO SMT. ANUPAMA STHAPAK THE PRO PERTY COULD BE DIRECTLY PURCHASED BY THE APPELLANT IN HIS OWN NAME AND ONCE USED SUCH PROPERTY FOR THE PURPOSES AS LAID DOWN IN THE AGREEMENT, STILL THE 4 FUNDS WOULD HAVE BEEN STATED TO HAVE BEEN UTILIZED FOR THE PURPOSE OF HIS PROFESSION AND THUS INTEREST CLAIMED AS EXPENDI TURE WOULD HAVE BEEN ALLOWED. SIMILARLY IF THE LOAN OF RS.65,00,000 /- WAS NOT ADVANCED TO SMT. STHAPAK, BUT THE PROPERTY WAS PURCHASED IN HER NAME AND WAS UTILIZED FOR PROFESSIONAL PURPOSES OF THE APPELLANT , STILL THE EXPENDITURE INCURRED ON ACCOUNT OF INTEREST PAYMENT ON SUCH LOA N WOULD HAVE BEEN ALLOWABLE AS PER LAW. THEREFORE IT IS NOT MATERIAL WHETHER THE BORROWED FUND WAS UTILIZED BY THE APPELLANT HIMSELF DIRECTLY IN HIS NAME OR INDIRECTLY IN THE NAME OF HIS WIFE, SO LONG AS IT W AS MEANT FOR THE PURPOSE OF HIS PROFESSION. SINCE THE PROPERTY WAS P URCHASED WITHIN LAST FIVE MONTHS OF THE FINANCIAL YEAR, ITS REGULAR USE FOR THE PURPOSE OF PROFESSION SPECIFICALLY FOR CHARITABLE PURPOSES HAD NOT STARTED BUT THE EYE CAMP HELD BY THE APPELLANT IN THE NAME OF SWAMI RAMCHANDRA DAS MAHA NETRA PRATYARPAN SHIBIR, WHICH WAS EXTENSI VELY REPORTED IN THE LOCAL NEWS PAPERS ON 25 TH FEBRUARY 2007 (SUNDAY) MAKES IT AMPLY CLEAR THAT THE PROPERTY PURCHASED BY HIM IN THE NAM E OF HIS WIFE WAS UTILIZED FOR HIS PROFESSION AND THAT TOO FOR CHARIT ABLE PURPOSES. IT WAS HELD IN THE HOSPITAL OF THE APPELLANT STYLED AS JAN JYOTI CHIKICHHALAYA SITUATED AT GOL BAZAR, JABALPUR AND WAS PARTICIPATE D NOT ONLY BY THE PROMINENT CITIZENS OF THE JABALPUR BUT ALSO BY MANY OTHER PROMINENT DOCTORS. AS REPORTED IN NEWSPAPERS 800 PATIENTS WER E EXAMINED, 65 PATIENTS WERE OPERATED BY THE APPELLANT AND EYE LEN S WERE IMPLANTED. SUCH EYE OPERATION CONTINUED EVEN ON 18 TH MARCH ALSO. THIS ALL WAS CARRIED OUT WITH THE HELP OF THE PROPERTY PURCHASED FOR SUCH PURPOSE WHICH HAS BEEN WELL EQUIPPED WITH BEDS, MATTRESSES, KITCHEN AND STORAGE ROOMS ETC. AND USED FOR ADMITTING THE PATIE NTS, FOR THEIR STAY FOR PROVIDING THEM MEALS DURING THEIR STAY, FOR PRO VIDING MEDICINES AND NURSING ATTENDANCE AND FOR PROVIDING ALL HELP FOR ' AFTER-SURGERY-CARE'. SIMILARLY AN AMBULANCE IS REGULARLY STATIONED THERE FOR USE IN EMERGENCY CALLS AND FOR BRINGING AND DROPPING BACK THE PATIENTS FOR THE ANNUAL CAMPS. CHECK-UP IN THE SAID PREMISES HAS BEEN MADE A REGULAR FEATURE AND ON EVERY 3 RD SUNDAY OF EACH MONTH IT IS CONDUCTED 5 REGULARLY. THREE PATIENT-REGISTERS MAINTAINED IN TH IS REGARD WERE ALSO PRODUCED SHOWING THE NAMES OF THE PATIENTS WHO WERE CHECKED ON EVERY 3 RD SUNDAY SO AS TO PROVE THE USE OF THE PROPERTY. THI S IS ONLY ONE ILLUSTRATION ABOUT THE USE OF THE PROPERTY FOR THE PURPOSE OF PROFESSION. AS THE INVESTMENT MADE IN SUCH PROPERTY WAS FOR THE PROFESSIONAL EXPEDIENCY OF THE APPELLANT, THE APPE LLANT WAS ENTITLED TO CLAIM EXPENDITURE U/S 36(L)(III) ON ACCOUNT OF PAYM ENT OF INTEREST ON SUCH LOAN. AS HELD BY THE A.O. THAT THE EYE CAMP WA S A CHARITABLE ACTIVITY AND NO INCOME WAS EARNED THERE FROM, THERE FORE THE APPELLANT COULD NOT BE ALLOWED DEDUCTION OF THIS SPECIFIC EXP ENDITURE ON PAYMENT OF INTEREST U/S 36(L)(III) WAS NOT A CORRECT CONCL USION. IT IS SO BECAUSE EARNING OF INCOME WAS NOT IMPORTANT, THE MATERIAL R EQUIREMENT OF LAW WAS THE APPLICATION OF FUND FOR PROFESSIONAL EXPED IENCY. THUS SUCH EYE CAMP WAS IN FURTHERANCE OF HIS PROF ESSION, THOUGH WITHOUT IMMEDIATE GAIN, THE EXPENDITURE CLAIMED ON INTEREST WAS AN ALLOWABLE EXPENDITURE. AS HELD BY THE HON'BLE SUPRE ME COURT IN THE CASE OF MADHAV PRASAD JATIA VS. CIT- AIR 1979 SC 12 91 THAT 'EXPRESSION FOR THE PURPOSE OF BUSINESS OCCURRING UNDER THE PROVISION OF SECTION 36(1)(III) IS WIDER IN COPE THAN THE EX PRESSION FOR THE PURPOSE OF EARNING INCOME, PROFITS OR GAINS, IN THE INSTANT CASE ALSO SUCH INTERPRETATION OF LAW IS APPLICABLE IN FULL FO RCE. IN THAT CASE IT WAS FOUND BY THE APEX COURT THAT THE ASSESSEE HAD BORRO WED FUNDS FROM THE BANK AND LENT SOME OF IT TO ITS SISTER CONCERN (SUBSIDIARY) ON INTEREST FREE LOAN. THE TEST IN SUCH A CASE WAS REALLY WHETHER THIS WAS DONE AS A MEASURE OF COMMERCIAL EXPEDIE NCY. IT WAS HELD THAT THE EXPRESSION 'COMMERCIAL EXPEDIENCY' IS EXPR ESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDE NT BUSINESSMAN INCURS FOR THE PURPOSE OF HIS BUSINESS. THE EXPEN DITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION BUT YE T IT WAS ALLOWABLE AS A BUSINESS EXPENDITURE, IF IT WAS INCURRED ON THE G ROUNDS OF 'COMMERCIAL EXPEDIENCY'. SINCE THERE WAS A NEXUS WELL ESTABLISHED BETWEEN THE EXPENDITURE FOR THE PURPOSE OF THE BUSI NESS, IT WAS 6 ALLOWABLE AS PER LAW. AS HELD BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. DALMIYA CEMENT (BHARAT) LTD. 2002 254 ITR 377 THAT 'NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE ITS PROFIT ...... THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEW POINT BUT THAT OF A PRUDENT BUSINESSMAN. A S ALREADY STATED ABOVE, WE HAVE TO SEE THE TRANSFERRED BORROWED FUND TO A SISTER CONCERN FROM THE POINT OF VIEW OF 'COMMERCIAL EXPED IENCY' AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT SO ADVANC ED FOR EARNING PROFITS. AND AS THIS WAS ADOPTED BY THE HON'BLE SUP REME COURT IN THE CASE OF S.A.BUILDERS LTD. VS. COMMISSIONER OF INCOM E-TAX (APPEALS), CHANDIGARH (2007) 158 TAXMANN 74 (SC), THE APPELLAN T'S CASE BEING ALMOST ON IDENTICAL FOOTING, HE WAS ALSO ENTITLED F OR DEDUCTION ON ACCOUNT OF PAYMENT OF INTEREST. ACCORDINGLY ADDITIO N OF RS.6,26,368/- IS HEREBY DELETED. 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND FOU ND FROM THE RECORD THAT THE AMOUNT BORROWED WAS UTILIZED FOR TH E PURCHASE OF PROPERTY WHICH WAS USED BY THE ASSESSEE FOR HIS PRO FESSIONAL PURPOSES. LD COMMISSIONER OF INCOME TAX (APPEALS) HAS RECORDE D A CLEAR FINDING TO THE EFFECT THAT THE BORROWED FUND WAS USED FOR T HE SPECIFIC PURPOSE OF PURCHASING THE PROPERTY FOR THE PURPOSE OF HIS P ROFESSION. THE ASSESSEE HAS USED THE SAID PREMISES WHOLLY AND EXCL USIVELY FOR HIS PROFESSIONAL PURPOSE, I.E. STAY OF PATIENTS, EYE C AMPS AND SIMILAR OTHER PURPOSES RELATED TO THE PROFESSIONAL USE OF THE ASS ESSEE. THE DETAILED FINDINGS RECORDED BY LD COMMISSIONER OF INCOME TAX (APPEALS) AS REPRODUCED HEREINABOVE, HAVE NOT BEEN CONTROVERTED BY THE DEPARTMENT 7 BY BRINGING ANY POSITIVE MATERIAL ON RECORD. ACCOR DINGLY, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LD COMMISSIONER OF IN COME TAX (APPEALS) FOR DELETING THE DISALLOWANCE OF INTEREST OF RS.6,2 6,368/-. HENCE, GROUND NO.1 OF APPEAL IS DISMISSED. 6. APROPOS GROUND NO.2 OF APPEAL, FACTS ARE THAT TH E ASSESSING OFFICER HAS DISALLOWED A SUM OF RS.78,761/- INCURRE D TOWARDS STAMP CHARGES AND VALUATION FEES. ASSESSING OFFICER OBSE RVED THAT THESE AMOUNTS OF EXPENSES PERTAINED TO THE PROPERTY PURCH ASED BY THE ASSESSEE IN THE NAME OF HIS WIFE AND SUCH PROPERTY WAS PURELY RESIDENTIAL IN NATURE. BY THE IMPUGNED ORDER, LD C OMMISSIONER OF INCOME TAX (APPEALS) DELETED THE DISALLOWANCE AFTER MAKING THE FOLLOWING OBSERVATION: APPARENTLY BOTH THE EXPENDITURE WERE INC URRED TOWARDS THE PURCHASE OF PROPERTY IN THE NAME OF THE APPELLANT'S WIFE, SMT. ANUPAMA STHAPAK AND AS THE EXPENDITURE WAS REVENUE IN NATURE, IT WAS ALLOWABLE U/S 37. AS ALREADY HELD ABOVE, SINCE THE INVESTMENT IN PROPERTY WAS MADE FOR THE PURPOSE OF PROFESSIONAL EXPEDIENCY OF THE APPELLANT, ANY CO-RELATED EXPENDITURE WAS A LLOWABLE AS THE PART OF REVENUE EXPENDITURE INCURRED IN NORMAL COURSE OF PROFESSION. WITHOUT THE VALUATION DONE, THE LOAN COULD NOT HAVE BEEN GRANTED BY THE BANK AND WITHOUT STAMP FEE CHARGES THE PROPERTY COULD NOT HAVE BEEN REGISTERED. AS BOTH THE EXPENDITURES WERE IMPERATIVE AND CLOSELY LINKED WITH THE APPELLANT'S PROFESSION, THE Y WERE ALLOWABLE. ACCORDINGLY THE ADDITION OF RS.78,761- IS HEREBY DE LETED. 8 7. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PER USED THE RECORD AND FOUND THAT THE EXPENDITURE SO INCURRED WAS REVE NUE IN NATURE. LD COMMISSIONER OF INCOME TAX (APPEALS) HAS RECORDED A CLEARING CUT FINDING THAT THE EXPENDITURES WERE REVENUE IN NATUR E AND IMPERATIVE & CLOSELY LINKED WITH THE ASSESSEES PROFESSION, SUCH FINDING WAS NOT CONTROVERTED BY THE DEPARTMENT. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LD COMMISSIONER OF INCOME TAX (APPEALS) FOR DELETING SUCH ADDITION OF RS.78,761/-. HENCE, GROU ND NO.2 OF APPEAL IS DISMISSED. 8. WITH REGARD TO GROUND NO.3 OF APPEAL, FACTS ARE THAT THE ASSESSING OFFICER DISALLOWED A SUM OF RS.13,46,880/- BEING PR E-PAID EXPENSES INCURRED ON ACCOUNT OF COMPREHENSIVE INSURANCE. T HE A.O. IN HIS ORDER OBSERVED THAT IN THE INCOME AND EXPENDITURE ACCOUNT , ASSESSEE HAD DEBITED THIS AMOUNT OF RS. 13,46,880/-FOR A.Y. 2007 -08 WITH NAME 'TO COMPREHENSIVE INSURANCE'. WHEN ASKED TO FURNISH DET AILS ALONG WITH ALL DOCUMENTS, IT WAS STATED THAT THE ASSESSEE HAD PURC HASED ZYOPTIC MACHINE FOR EYE'S OPERATION FROM BAUSCH & LOMB EYE CARE(I) PVT. LTD., AND PAID COMPREHENSIVE INSURANCE PREMIUM FOR ONE YE AR IN FOUR EQUAL QUARTERLY INSTALLMENTS OF RS.3,36,720/-EACH TOTALIN G TO RS. 13,46,880/-. 9 COPY OF LEDGER ACCOUNT AND COMPANY LETTER FOR INSUR ANCE WAS FILED FOR VERIFICATION. FROM THE LETTER OF BAUSCH & LOMB, THE ASSESSING OFFICER INFERRED THAT THE ASSESSEE PAID RS. 13,46,880/-AS C OMPREHENSIVE SERVICE AGREEMENT FOR ONE YEAR W.E.F. 17.1.07 WHICH CLEARLY INDICATED THAT THE WHOLE AMOUNT OF RS. 13,46,880/-DID NOT PERTAIN TO T HE A.Y. 07-08 BUT THE PERIOD RELEVANT WAS 17.1.07 TO 31.3.2007 ONLY. AS THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THE WHOL E AMOUNT SHOULD HAVE BEEN BIFURCATED PROPORTIONATELY AND THE PROPOR TION PERTAINING TO FUTURE PERIOD SHOULD HAVE BEEN SHOWN IN BALANCE-SHE ET AS PREPAID EXPENSES. IN VIEW OF THIS THE ASSESSING OFFICER A SKED THE ASSESSEE TO EXPLAIN AS TO WHY PROPORTIONATE AMOUNT BE NOT DISAL LOWED AS NOT PERTAINING TO A.Y. 07-08. IN RESPONSE THE ASSESSEE SUBMITTED AS UNDER: 'THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF AC COUNTING. THE CONTRACT WITH M/S BAUSCH & LOMB WAS EXECUTED ON 17. 1.07 AND INVOICE NO.613100086 OF RS. 13,46,880/- WAS RAISED ON THAT DATE. AS PER MERCANTILE SYSTEM OF ACCOUNTING, A LIABILITY INCURRED IS IMMEDIATELY DEBITED EVEN BEFORE IT IS ACTUALLY DISB URSED. THE LIABILITY OF RS. 13,46,880 BECAME ASCERTAINABLE AND ENFORCEABLE ON 17.01.07 AND THEREFORE, THE ENTIRE EXPENDITURE WAS DEBITED AS PER MERCANTILE SYSTEM OF ACCOUNTING. THE ASSESSEE RELIE D UPON THE FOLLOWING CASES: 10 (1) THERE IS 'MERCANTILE' SYSTEM IN WHICH ENTRIES ARE P OSTED N THE BOOKS OF ACCOUNT ON THE DATE OF THE TRANSACTION, I. E. ON THE DATE ON WHICH RIGHTS ACCRUE OR LIABILITIES ARE INCU RRED, IRRESPECTIVE OF THE DATE OF PAYMENT. CIT V. A. KRIS HNASWAMI MUDLIAR - AIR 1964 SC 18431 (1964) 53 ITR 122(SC). (2). THE MERCANTILE SYSTEM OF ACCOUNTING DIFFERS SU BSTANTIALLY FROM THE CASH SYSTEM OF BOOK-KEEPING. UNDER THE CAS H SYSTEM, ONLY ACTUAL CASH RECEIPTS AND PAYMENTS ARE RECORDED AS CREDITS AND DEBTS; WHEREAS, UNDER THE MERCANTILE SYSTEM, CR EDIT ENTRIES ARE MADE IN RESPECT OF AMOUNTS DUE IMMEDIAT ELY THEY BECOME LEGALLY DUE AND BEFORE THEY ARE ACTUALLY REC EIVED. SIMILARLY, THE EXPENDITURE ITEMS FOR WHICH LEGAL LI ABILITY IS INCURRED ARE IMMEDIATELY DEBITED EVEN BEFORE THEY A RE ACTUALLY DISBURSED. MORVIS INDUSTRIES LTD. V. CIT, AIR 1971 SC 2396. (3) IN THE CASE OF KESHAV MILLS LTD VS. CIT, AIR 1953 SC 187, IT WAS HELD THAT THE MERCANTILE SYSTEM BRINGS INTO CRE DIT WHAT IS DUE, IMMEDIATELY IT BECOMES DUE AND BEFORE IT IS AC TUALLY RECEIVED AND IT BRINGS INTO DEBIT THE AMOUNT FOR WH ICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY D ISBURSED. HOWEVER, NOT CONVINCED WITH ASSESSEES REPLY, THE ASSESSING OFFICER DISALLOWED THE SAME. 9. BY THE IMPUGNED ORDER, LD COMMISSIONER OF INCOME TAX (APPEALS) DELETED THE DISALLOWANCE, INTER ALIA, OBSERVING AS UNDER: 11 .. THE APPELLANT MAINTAINED MERCANTILE SYSTEM OF ACCO UNTING AND THEREFORE AS SOON AS A PARTICULAR LIABILITY WAS INC URRED OR CRYSTALLIZED, IT BECAME AN ALLOWABLE EXPENDITURE. THERE MAY BE A SITUATION WHERE THE EXPENDITURE SO INCURRED MAY PARTLY RELATE TO ON E YEAR AND PARTLY TO ANOTHER YEAR BUT IN SUCH A SITUATION, AS PER MERCAN TILE SYSTEM OF ACCOUNTING IT BECOMES ALLOWABLE THE MOMENT IT IS IN CURRED. THEREFORE THAT PART OF EXPENDITURE ALSO, WHICH RELATES TO THE COMING YEAR ALSO BECOMES ALLOWABLE BECAUSE AS PER THE SAME SYSTEM AN Y INCOME ACCRUED BUT NOT ACTUALLY RECEIVED DURING THE YEAR A LSO BECOMES THE PART OF THE INCOME OF THE APPELLANT. THE A.O. HAS STRESSED UPON APPLYING THE CASH SYSTEM OF ACCOUNTANCY THEREBY ALL OWING ONLY THAT PORTION OF EXPENDITURE WHICH WAS INCURRED DURING TH E YEAR AND DISALLOWING THE REST WHICH, ACCORDING TO HIM, WO ULD BE INCURRED IN FUTURE. HOWEVER, IF SUCH TREATMENT IS GIVEN TO ANY EXPENDITURE IN RESPECT OF MERCANTILE SYSTEM OF ACCOUNTING, IT WOUL D GIVE ABSURD RESULT AND NOT BE IN ACCORDANCE WITH THE PRINCIPLE S OF ACCOUNTING. IT SEEMS BECAUSE OF SUCH MISCONCEPTION ONLY PART OF SU CH EXPENDITURE OF RS.2,80,600/- WAS ALLOWED U/S 37 AND BALANCE WAS PURPORTED TO HAVE BEEN DISALLOWED AMOUNTING TO RS.L0,66, 280/-.AS IT IS AN ACCEPTED PRINCIPLE THAT THE MOMENT AN EXPENDITURE I S ASCERTAINED, IT BECOMES ALLOWABLE THE DISALLOWANCE ON THIS GROUND W AS ALSO NOT CORRECT AND IN ACCORDANCE WITH THE LAW. HOWEVER, TH E ENTIRE EXPENDITURE OF RS.13,46,880/- WAS DISALLOWED U/S 40 A(IA). NOW THE PROVISION IN RESPECT OF THE INDIVIDUAL'S LIABILITY TO DEDUCT TAX AT SOURCE IN RESPECT OF CONTRACTS AS PER SECTION 194C WAS BROU GHT INTO THE STATUTE BOOK BY THE FINANCE ACT 2007 W.E.F. 1.6.2007. UNDER SUCH CIRCUMSTANCES THE PROVISION OF SECTION 40A(IA) WA S NOT APPLICABLE IN THE CASE OF THE APPELLANT FOR THE PRESENT ASSES SMENT YEAR AND THEREFORE THE ENTIRE EXPENDITURE WAS ALLOWABLE. A CCORDINGLY THE ADDITION OF RS.L3,46,880/- IS HEREBY DELETED. 12 10. RIVAL CONTENTIONS HAVE BEEN CONSIDERED AND RECO RD PERUSED. DURING THE YEAR, ASSESSEE HAS PURCHASED ZYOPTIC MAC HINE FOR EYE'S OPERATION FROM BAUSCH & LOMB EYE CARE(I) PVT. LTD., GURGASSESSING OFFICERN AND PAID COMPREHENSIVE INSURANCE PREMIUM F OR ONE YEAR IN FOUR EQUAL QUARTERLY INSTALLMENTS OF RS.3,36,720/- EACH TOTALING TO RS. 13,46,880/-. THE INSURANCE PREMIUM PAID IS REVENUE IN NATURE; ACCORDINGLY, NO DISALLOWANCE IS WARRANTED FOR THE E XPENDITURE SO INCURRED. EVEN AS PER MERCANTILE SYSTEM OF ACCOUNT ING BEING FOLLOWED BY THE ASSESSEE, WHOLE EXPENDITURE WAS CRYSTALISED AND PAID DURING THE YEAR ITSELF. HENCE, WE CONFIRM THE ORDER OF LD COM MISSIONER OF INCOME TAX (APPEALS) FOR DELETING THE DISALLOWANCE OF RS. 13,46,880/- TOWARDS INSURANCE PREMIUM. GROUND NO.3 OF APPEAL IS DISMIS SED. 11. IN RESPECT OF GROUND NO.4 OF APPEAL, FACTS ARE THAT THE ASSESSING OFFICER MADE AN ADDITION OF RS.2,50,000/- ON ACCOUN T OF UNDER-VALUATION OF CLOSING STOCK OF CONSUMABLES AND MEDICINES. BY THE IMPUGNED ORDER, LD COMMISSIONER OF INCOME TAX (APPEALS) DELETED THE SAID ADDITION, INTER ALIA, OBSERVING AS UNDER: NOW THE CONTENTION OF THE APPELLANT IS FOUND TO BE CORRECT. FIRSTLY, THE APPELLANT HAS BEEN MAINTAINING THE SYSTEM OF ACCOUN TING WHERE SUCH CONSUMABLE STORE IS TREATED AS REVENUE EXPENSE AND THIS IS BEING FOLLOWED BY HIM CONSISTENTLY YEAR AFTER YEAR FOR TH E PAST 15 YEARS. SUCH 13 SYSTEM OF ACCOUNTING HAS ALSO BEEN ACCEPTED BY THE DEPARTMENT IN THE PAST AND AS THERE IS NO CHANGE IN THE METHOD, THE A SSESSEE CANNOT BE COMPELLED ALL OF A SUDDEN TO CHANGE THE SAME SO AS TO SUIT IT TO THE REVENUE. SECONDLY, EVEN IF THE VALUE OF THE STOCK I S TAKEN INTO ACCOUNT FOR THE PRESENT YEAR, THE CLOSING STOCK OF THE PRES ENT YEAR WOULD BECOME THE OPENING STOCK OF THE IMMEDIATELY SUCCEED ING YEAR AND THEREFORE IT WOULD REDUCE THE PROFIT OF THE SUCCEED ING YEAR BY THAT AMOUNT AND ULTIMATELY THERE WOULD BE NO GAIN TO THE REVENUE. SIMILARLY IF THE VALUE OF CLOSING STOCK IS TAKEN INTO ACCOUNT FOR THE PRESENT ASSESSMENT YEAR, THE VALUE OF THE CLOSING STOCK OF THE IMMEDIATELY PRECEDING YEAR WHICH BECOMES OPENING STOCK OF THE P RESENT YEAR WILL ALSO HAVE TO BE TAKEN INTO ACCOUNT AND THE END RESU LT WOULD ALMOST BE 'NIL' OR NEGLIGIBLE AND THUS THE ENTIRE EXERCISE WO ULD BE FUTILE. THIRDLY, THE CONSUMABLE STORES IS NOT A PART OF TRADING STOC K SO FAR AS THE APPELLANT IS CONCERNED BUT USED IN HIS PROFESSION B Y HIMSELF. THIS BEING THE CASE, THE CONSUMABLE STORES HAS TO BE TREATED A S REVENUE EXPENDITURE AND HENCE NO QUESTION OF VALUATION OF C LOSING STOCK. FOURTHLY, AS PER THE POLICIES OF THE COMPANIES THE BASIC MATERIAL OF CONSUMABLE MATERIAL BEING EYE LENSE, ONCE SOLD TO T HE PRACTICING DOCTOR, CANNOT BE SOLD BY THAT DOCTOR IN THE OPEN M ARKET. IT IS IMPERATIVE FOR HIM TO USE SUCH A STOCK IN HIS PROFE SSION ITSELF AND THEREFORE SO FAR AS THE MARKET VALUE OF SUCH STOCK IS CONCERNED, IT BECOMES ZERO. AS PER THE STANDARD OF ACCOUNTING THE STOCK MAY BE VALUED ON THE BASIS OF COST OR MARKET PRICE WHICHEV ER IS LOWER AND THE MARKET PRICE BEING LOWER, THE VALUE OF SUCH A STOCK FOR THE APPELLANT WOULD BE NIL. BECAUSE OF THESE REASONS, THE ADDITIO N OF RS.2,50,000/- WAS NOT WELL FOUNDED AND CORRECT AND IN ACCORDANCE WITH THE PRINCIPLES OF ACCOUNTANCY. ACCORDINGLY THE ADDITION OF RS.2,50 ,000/- IS HEREBY DELETED. 14 12. RIVAL CONTENTIONS HAVE BEEN CONSIDERED AND RECO RD PERUSED. FROM THE RECORD, WE FOUND THAT ASSESSEE WAS CONSISTENTLY FOLLOWING THE ACCOUNTING SYSTEM OF DEBITING THE EXPENSES INCURRED ON CONSUMABLES AND MEDICINES IN THE YEAR OF EXPENSES. AS PER EXPE NDITURE WAS REVENUE IN NATURE, ENTIRE PURCHASED COST OF SUCH CONSUMABLE S AND MEDICINES WERE CORRECTLY CHARGED BY THE ASSESSEE IN HIS PROFI T AND LOSS ACCOUNT. SINCE THE MARKET PRICE WAS LOWER, ASSESSE HAS VALUE D THE STOCK ON CONSUMABLE AT MARKET PRICE. AFTER RECORDING THE DE TAILED FINDING AT PAGES 24 & 25, LD COMMISSIONER OF INCOME TAX (APPEA LS) HAS DELETED THE ADDITION. THESE FINDINGS OF LD COMMISSIONER OF INCOME TAX (APPEALS) HAVE NOT BEEN CONTROVERTED BY THE DEPARTM ENT BY BRINGING ANY PLAUSIBLE MATERIAL ON RECORD. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LD COMMISSIONER OF INCOME TAX (APPEALS) FOR DELETING THE ADDITION OF RS.2,50,000/- AND UPHOLD T HE SAME. GROUND NO.4 OF APPEAL IS DISMISSED. 13. GROUND NO.5 OF APPEAL RELATES TO DELETION OF AD DITION OF RS.3,52,000/- MADE ON ACCOUNT OF LOW WITHDRAWALS. IN THIS REGARD, THE ASSESSING OFFICER HAS OBSERVED AS UNDER: ASSESSEE HAS MADE WITHDRAWALS FOR HOUSEHOLD EXPENS ES TO THE TUNE OF RS.1,48,000/- ONLY. CONSIDERING THE STATUS OF T HE ASSESSEE HOUSE 15 HOLD WITHDRAWALS @ RS.12,000/- PER MONTH APPEARS MI NISCULE AND NOT IN CONSONANCE WITH THE LIFE STYLE HE IS MAINTAINING . IT IS EVIDENT THAT AS PER RECORDS ASSESSEE HAS VISITED FOREIGN COUNTRIES ALONGWITH HIS SPOUSE. ASSESSEE IS A FAMILY OF FOUR INCLUDING TWO SIBLINGS AND HIS WIFE, AND THERE ARE NO WITHDRAWALS FROM ANY OTHER A CCOUNT OTHER THAN RS.1,48,000/- FROM ASSESSEE'S OWN ACCOUNT. FOR A FA IR ESTIMATION ASSESSEE MUST BE SPENDING AT LEAST RS.48,000/- ON E DUCATION OF HIS SIBLINGS I.E. RS. 1.000/- PER MONTH SCHOOL FEES AND RS. 1,000/- PER MONTH ON TRANSPORTATION AND OTHER EXPENSES. THAT CO NSIDERING SIXTH PAY COMMISSION ASSESSEE MUST SPEND AN AMOUNT @ RS.4 0,000/- PER MONTH FOR HIS HOUSE HOLD EXPENSES AS CALCULATED @4 0% OF THE SALARY OF A CLASS I OFFICER SERVING FOR 15 YEARS. THEREFOR E, THERE IS NO DOUBT THAT ASSESSEE HAS SUPPRESSED WITHDRAWAL FROM CAPITA L ACCOUNT AND MUST HAVE AT LEAST SPENT RS.5,00,000/- PER ANNUM FO R FAMILY EXPENSES INCLUDING EXIGENCIES AND CELEBRATIONS IN HIS FAMILY . IN VIEW OF THIS, AN AMOUNT OF RS.3,52,000/- IS ADDED TO THE INCOME OF T HE ASSESSEE FROM UNKNOWN SOURCES. 14. LD COMMISSIONER OF INCOME TAX (APPEALS) HAS DEL ETED THE SAME JUST BY OBSERVING THAT THE EXPENSES OF RS.12,000/- PER MONTH FOR A FAMILY OF FOUR PERSONS SEEMS TO BE FAIR AND REASONA BLE AND THERE IS NO EVIDENCE ON RECORD THAT ASSESSEE HAS INCURRED MUCH MORE EXPENSES THAN THIS. 15. HAVING HEARD BOTH PARTIES, WE DO NOT FIND ANY M ERIT IN LD COMMISSIONER OF INCOME TAX (APPEALS)S ACTION INSOF AR AS THE ASSESSING OFFICER HAS GIVEN CLEAR FINDING WITH REGARD TO THE EXPENDITURE INCURRED 16 ON CHILDREN FOR EDUCATION, TRANSPORTATION AND OTHER EXPENSES. KEEPING IN VIEW THE LIVING STANDARD OF THE ASSESSEE, WE MOD IFY THE ORDERS OF LOWER AUTHORITIES AND DIRECT THE ASSESSING OFFICER TO RE-COMPUTE THE ADDITION AFTER CONSIDERING HOUSEHOLD EXPENSES AT RS .30,000/-PER MONTH. WE DIRECT ACCORDINGLY. GROUND NO.5 OF APPEAL IS AL LOWED IN PART. 16. IN THE CROSS OBJECTION, ASSESSES IS AGGRIEVED F OR THE DISALLOWANCE OF RS.1,01,000/- ON ACCOUNT OF FEE PAID TO CGHS. 17. DURING THE YEAR, ASSESSES HAS PAID CGHS REGISTR ATION FEE OF RS.1,01,000/-. ASSESSING OFFICER DISALLOWED THE SA ME BY OBSERVING THAT EXPENDITURE SO INCURRED WAS NON-REVENUE TRANSACTION . IN THE FIRST APPEAL, LD COMMISSIONER OF INCOME TAX (APPEALS) CON FIRMED THE SAME. 18. RIVAL CONTENTIONS HAVE BEEN CONSIDERED AND RECO RD PERUSED. WE FOUND THAT PAYMENT OF CGHS FEE IS NECESSARY FOR TRE ATMENT OF CENTRAL GOVERNMENT EMPLOYEE AND FOR REIMBURSEMENT OF THE EX PENSES SO INCURRED FOR THE TREATMENT. SUCH EXPENDITURE WAS IN CURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ASSESSEES PROFESSIO N, WHICH PERTAINED TO RECOGNITION OF HIS HOSPITAL/EYE CENTRE. AS THE EXPE NDITURE SO INCURRED WAS REVENUE IN NATURE, WE DO NOT FIND ANY JUSTIFICA TION IN THE ORDER OF 17 LOWER AUTHORITIES FOR DISALLOWING THE CLAIM OF CGHS FEES, WHICH IS ESSENTIALLY REVENUE IN NATURE. HENCE, WE ALLOW CRO SS OBJECTION AND DIRECT THE ASSESSING OFFICER TO DELETE THE DISALLOW ANCE OF CLAIM OF THE ASSESSES OF RS.1,01,000/-. 19. IN THE RESULT, APPEAL FILED BY THE REVENUE IS A LLOWED IN PART AND THE CROSS OBJECTION FILED BY THE ASSESSES IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 16TH SEPTEMB ER, 2013. SD/- SD/- (JOGINDER SINGH) (R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER JABALPUR DATED 16 / 09/2013 B.K.PARIDA, SR. PS COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT: THE ACIT1, JABALPUR. 2. / THE CROSS OBJECTOR : SHRI PAWAN STHAPAK, PROP. JAN JYOTI EYE HOSPITAL, RANITAL CHOWK, GOLE BAZAR, JABALPUR 3. ( ) / THE CIT(A)-, JABALPUR 4. / CIT ,1, JABALPUR 5. , , / DR, ITAT, JABALPUR 6. / GUARD FILE. / BY ORDER, //TRUE COPY// SR.PRIVATE SECRETARY,ITAT CAMP AT JABALPUR 18 1. DATE OF DICTATION 13.9.2013 SR.PS 2. DATE ON WHICH ORDER PLACED BEFORE THE AUTHOR 14.9.2013 SR.PS 3. DATE ON WHICH ORDER SIGNED BY THE AUTHOR JM 4. DATE ON WHICH ORDER SENT TO V.P. AM 5. DATE ON WHICH ORDER RECEIVED BY SR.PS 6. DATE ON WHICH ORDER KEPT FOR PRONOUNCEMENT 7. DATE ON WHICH FILE SENT TO BENCH CLERK SR.PS 8. DATE ON WHICH ORDER SEND TO H.C. 9. DATE OF DISPATCH OF ORDER