M/S. RAGA vs. DIAGNOSTIC & RESEARCH CENTRE PRIVATE LIMITED,BENGALURUVS.THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(4), BANGALORE

This appeal by the assessee is against the order of the CIT(Appeals)-11, Bengaluru dated 18.03.22 the assessment year 2018-19.

The Appellant submits that as per the regular return of income, there is substantial loss carried forward against which the amount declared at the time of Search as business income should have been adjusted and loss reduced.

The learned Assessing Officer was wrong to consider the same as unexplained cash credit and bringing the same to tax u/s.115BBE of Income Tax Act, instead of reducing the same from business loss of the year.

The assessee is a private limited company engaged in the business of running medical diagnostic centre. The assessee filed the return of income for the year under consideration declaring a loss of Rs.3,88,23,311. There was a search in the premises of assessee u/s. 132 of the Income-tax Act, 1961 [the Act] on 29.11.2017. At the time of search, the assessee agreed to offer an income of Rs.5,39,50,000 spread over from AY 2012-13 till AY 2017-18 i.e. upto the date of search. The assessment for AYs 2012-13 to 2017-18 was completed u/s. 143(3) r.w.s. 153A where the additional income as agreed was offered and assessed as the business income of the assessee. The residual amount of Rs.53,85,000 pertaining to the AY 2018-19 was erroneously missed to be offered to tax while filing the return of income.

The case was selected for scrutiny and during the course of assessment proceedings, the AO noticed that the assessee has missed to include the residual additional income agreed to be offered. The assessee submitted that the Chartered Accountant who was taking care of the tax related affairs of the assessee fell sick due to which the mistake of not including the additional income of Rs.53,85,000 occurred. The assessee filed a revised return before the AO including the additional income thereby reducing the loss returned in the original return to that extent. The AO treated the additional income as a separate item of income and taxed the same as per the provisions of section 115BBE and therefore recomputed the business loss to be carried forward without adjusting the additional income. Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(Appeals).

Before us, the ld. AR reiterated the submissions made before the lower authorities with respect to offering additional income of Rs.53,85,000 in the revised return manually submitted before the AO. It was submitted that the assessee has only one source of income i.e., business income from running the diagnostic centre and even in the statement recorded during the search proceedings, the additional income was offered from the same source. The ld. AR further submitted in the assessment made u/s. 153A of the Act for the AYs 2012-13 to 2017-18, the revenue authorities have not questioned the source of additional income and have accepted the same to be assessed as business income. He therefore submitted that Rs.53,85,000 which is residual amount out of the total additional income offered during the search proceedings, cannot take a different colour and cannot be taxed u/s. 69C of the Act.

The ld. DR supported the orders of the lower authorities.

We have considered the rival submissions and perused the material on record. We notice that during the course of search proceedings, a statement u/s. 131 of the Act was recorded from Dr. K.

In Q. 17 of the same sworn statement, Dr. Ranganath agreed to offer the said amount of Rs.5.395 crores as additional income over the years from AYs 2012-13 to 2017-18. From the perusal of the records, it is noticed that the additional income offered is assessed under the head ‘business income’ while completing the assessment u/s. 143(3) r.w.s. 153A of the Act for AYs 2012-13 to 2017-18.

In answer to Q.14 (extracted above), Dr. Ranganath has clearly stated that the source of cash spent for referral fees is the receipts from the patients who come to the assessee company for various scans and tests. It is also stated that these receipts were booked as sales in the books of accounts (in answer to Q.15). From the above, it is clearly established by the assessee that the unaccounted expenditure of Rs.5.395 crores paid towards referral fees is sourced through the business receipts of the assessee during the course of business.

The CIT(Appeals) while upholding the order of the AO has observed that the source for unaccounted cash payments is unaccounted cash receipts and that the assessee has not provided the details of patients from whom cash receipts were received and therefore the impugned amount was rightly brought to tax u/s. 69C of the Act.

We will look at the provisions of section 69C which are as follows:-

From the plain reading of the section, it is clear that when an assessee offers no explanation or the explanation offered is not satisfactory in the opinion of the AO, then the amount of such expenditure is to be taxed as income u/s. 69C of the Act. The satisfaction to be recorded by the AO should not be objective satisfaction exercised at his discretion, but a subjective satisfaction based on the facts of the case. It would then mean that justification for exercise of the power has to be found by the authority by making a subjective satisfaction on the basis of objective material and such satisfaction must be reflected in the reasons recorded in writing while exercising the power. (Vide: Dee Vee Projects Ltd. v/s. Union of India & Ors., Writ Petition No.2693/2021, dated 11.02.2022 (Bombay High Court)). In the present case, the assessee is in the business of running a diagnostic centre and the only source of income is the receipts from patients which is stated to be the source for unexplained expenditure. That being the case the AO has not brought any contrary material on record to state that the source for the expenditure was other than from business income and has formed the opinion based on conjectures and surmises. While exercising the quasi-judicial functions, the administrative authorities have to reach satisfaction on the basis of material available and not on conjectures and surmises. The test of reasonableness has to be satisfied which in our view failed in the case under consideration. Therefore, we are of the view that the additional income offered cannot be taxed u/s. 115BBE and the impugned addition is hereby deleted. Accordingly the assessee is allowed to set off the current year loss against the additional income offered to tax as business income.

In the result, the appeal by the assessee is allowed.