K C RAJU MULTI SPECIALITY HOSPITAL,BANGALORE vs. DCIT, CENTRAL CIRCLE-2(4), BANGALORE

In any case, the addition as made/confirmed is erroneous and excessive. 7. The appellant denies the liability to pay incremental interest levied U/s. 234B of the Act. The interest levied being erroneous is liable to be deleted. 8. In view of the above and on other grounds to be adduced at the time of hearing, it is requested that the impugned order be quashed or at least the Addition of unexplained income as made/confirmed be ITA Nos.1055 - 1056/Bang/2025

The Ground Nos. 1 to 6 of the assessee’s appeal are interconnected and pertain to the addition of Rs. 66,56,660/- made on account of alleged suppressed receipt.

The relevant facts are that the assessee, a partnership firm, having 4 partners namely Dr. KC Raju Reddy, Dr. Kalavathi Reddy (wife of KC Raju Reddy), Dr. Mangladevi (daughter of KC Raju) and Dr. Bharat Reddy (son of KC Raju), is running Multi-Speciality Hospital which consist following facilities: 1. Out-Patient Department – OPD 2. In-Patient Department- IPD 3. Laboratory 4. Operation Theatre -OT 5. Smile Baby IVF Centre 4.1 The receipts under all the facilities are received through cash or card. The record of receipt under OPD facility is maintained manually and in IPD the records are maintained in HMS software. The cashier or the receptionist at the end of the day prepared the details of all the receipts of the day in excel spread sheet which is handed over to the managing partner along with the cash collected. The impugned sheet is also shared with the accountant to make entries in tally.

2 For the year under consideration, the assessee filed return of income u/s 139(1) of the Act, dated 30th October 2017 declaring total income at Rs. 23,12,680/- only. Subsequently, the assessee was subject

4 Besides two set of tally data, there were cash aggregating to Rs. 1.34 crore also found from the premises of the partners of the assessee firm.

5 In respect of two sets of tally data for the year under consideration, the statement of accountant Shri Prashant Kini was recorded under section 132(4) of the Act. The accountant admitted that ITA Nos.1055 - 1056/Bang/2025

6 The statement of the accountant was confronted to the managing partner Shri KC Raju to which he admitted that he asked the accountant to reduce the receipt and profit to maintain similarity with income reported in the previous years. Shri KC Raju also admitted that modus operandi of supressing the receipt has been followed since the last 5 years and sales has been supressed nearly 40%. Accordingly, the managing partner agreed to offer additional income at 40% of the turnover for A.Ys. 2013-14 to 2017-18 (year under dispute). The assessee for the A.Y. 2017-18 quantified the amount representing additional income at Rs. 79,21,661/- only.

7 In consequent to search, assessment proceeding under section 153A of the Act was initiated and assessee filed return of income under section 153A of the Act for the year under dispute, wherein offered additional income of Rs. 30 lakhs instead of the income admitted at the time of search.

8 However, the AO during the assessment proceedings observed that in the two set of tally data, the net profit difference stands at Rs.

9 In response, the assessee submitted that the Profit and Loss Account and Balance Sheet initially found during the search for FY 2016– 17 were only draft statements. These drafts were prepared for review by the management and do not represent the correct or final financial position.

10 The assessee explained that during the relevant year, the firm had employed more than two accountants. Most of them were new and were not fully aware of the hospital’s accounting procedures. Further, there was no single person exclusively responsible for maintaining the books of accounts. Due to frequent changes in accounting staff and lack of coordination, certain bills, receipt books, and registers were not properly accounted for, resulting in accounting mistakes.

11 The assessee explained the hospital’s system of billing and collections. In the case of IPD, advance amounts are collected at the time of admission, and the final bill is generated at the time of discharge. In insurance cases, receipts are first accounted under insurance and later adjusted upon receipt of the insurance claim. In the case of OPD, receipts are collected at the reception and recorded in the receipt books, while doctors maintain separate patient registers for consultation and billing purposes. These records are later handed over to the accounts team for posting.

13 Further, in many cases patients initially visit in OPD and later get admitted in IPD. The amount first paid at the reception gets recorded in OPD receipts and the same amount also gets included in the final IPD bill at the time of discharge. Due to lack of awareness, such amounts were not adjusted properly, resulting in double accounting entries.

14 Similarly, in IVF cases, injections given to patients were recorded under OPD injection receipts. However, IVF treatment is offered as a package, which includes the cost of injections. When the IVF bill was settled, these amounts were again accounted under IVF receipts. Due to this, small injection amounts ranging from ₹2,000 to ₹3,000 per day were recorded twice under outpatient and IVF collections.

15 Because of these accounting and procedural issues, the OPD reflected in the draft Profit and Loss Account were incorrect and inflated. These draft figures, without proper verification and supporting evidence, cannot be considered as actual income or as suppression of income. It is further submitted that during post-search proceedings, due to lack of time and to buy peace, the assessee offered additional income calculated at 40% of receipts. This percentage had no factual basis and ITA Nos.1055 - 1056/Bang/2025

16 Without prejudice, the assessee has already offered a sum of ₹30,00,000/- as additional income on account of difference in IPD receipts in the return filed under section 153A for AY 2017–18. Over and above this amount, there has been no suppression of income by the assessee.

17 The assessee therefore submits that the draft financial statements cannot be relied upon for making further additions and requests that the explanation furnished may kindly be accepted.

However, the AO observed that during the course of search proceedings under section 132 of the Act, discrepancies were found in the books of account maintained by the assessee hospital. The books were maintained in Tally ERP, but it was admitted that the accounts were not properly maintained due to the absence of a permanent accountant and frequent change of accounting staff. As a result, there were differences between the actual state of affairs and what was reflected in the books of account.

1 During the search, a register containing details of OPD receipts for June 2015 was found and confronted to Dr. K.C. Raju Reddy, partner of the firm. On verification, it was noticed that the actual receipts as per the daily collection register were higher than the receipts recorded in the ITA Nos.1055 - 1056/Bang/2025

2 The AO further noted that the partner Dr. K.C. Raju Reddy admitted suppression of receipts for the past several years. He stated that the extent of suppression was around 35% to 40% of the total turnover reflected in the profit and loss account for various assessment years. Based on this admission, year-wise details of total receipts and 40% of such receipts were furnished by the assessee during the search proceedings, and the assessee agreed to offer the suppressed portion as additional income.

3 It was also observed that during the search, unaccounted cash of ₹1.34 crore was found at the residence of the partner. The partner admitted that this cash was out of hospital receipts and was utilized by him and his family members. This clearly indicated that the assessee was in possession of unaccounted receipts on the date of search.

4 The AO further relied on the statement of the accountant, Shri Prashanth Kini, recorded under section 132(4) of the Act, wherein he admitted that two sets of Tally data were maintained to suppress hospital receipts. The AO noted that neither the accountant nor the partner retracted their statements at the earliest point of time. Even during post-search proceedings and subsequent statements, no allegation of coercion or pressure was made.

6 Relying on judicial precedents, the AO concluded that admission made during search is an important piece of evidence and the burden lies on the assessee to prove it as incorrect. Since the assessee failed to do so, the AO treated the difference in two sets of tally profit for Rs. 96,56,660/- as suppressed income and, after adjusting the amount already offered (Rs. 30 lakh), Rs. 66,56,660/- was brought to tax as undisclosed income of the assessee.

The aggrieved assessee preferred an appeal before the learned CIT(A).

Before the learned CIT(A), the assessee submitted that the AO erred in placing complete reliance on the oath statement recorded under section 132(4) of the Act, ignoring the subsequent explanation and retraction made by the assessee. The statement was obtained under stressful conditions, late at night (3 AM), when the partner, an elderly (70 year) person, was not in a proper physical and mental state. Therefore, such a statement cannot be treated as conclusive or binding evidence.

2 The assessee also submits that the disclosure of income was made only to buy peace and to conclude the search proceedings. The amount of ₹30,00,000 offered in the return filed under section 153A of the Act was a voluntary disclosure to resolve the matter amicably and should not be treated as unexplained income. There was no independent evidence to justify treating the balance amount of ₹96,56,660 as undisclosed income.

3 It is a settled position of law that an admission is an important piece of evidence, but it is not conclusive. The person making the admission has a right to explain or retract the same by showing the correct state of affairs. Judicial precedents and CBDT instructions clearly state that additions should not be made merely on the basis of forced or uncorroborated confessions during search.

4 The learned CIT(A) after considering the facts in totality observed that the search and seizure operation clearly brought out incriminating materials in the form of two parallel sets of Tally data for the same period. One set reflected lower receipts as per the return of income,

5 The learned CIT(A) noted that the statement of Dr. K.C. Raju Reddy was recorded under section 132(4) of the Act and that he had clearly admitted suppression of receipts. He also confirmed the accountant’s statement that cash vouchers relating to OPD and IPD were deleted. The learned CIT(A) held that these statements were voluntary and were not retracted at the earliest opportunity. The plea of stress or pressure was rejected, as the assessee had sufficient time during post- search proceedings and assessment proceedings to retract the statements with supporting evidence, which was not done.

6 The ld. CIT(A) further observed that the assessee’s explanation that the difference between the two Profit and Loss Accounts arose due to accounting errors, duplication, and reconciliation issues was not supported by any documentary evidence. No OPD registers, IPD records, Excel sheets, or reconciliation statements were produced either during the search, assessment proceedings, or appellate proceedings to substantiate the claim of double counting or accounting mistakes. On the contrary, the statement of the accountant supported the finding that receipts were intentionally reduced.

7 The learned CIT(A) also took note of the fact that substantial cash was found at the residence of the partner and that the partner himself admitted that cash collections of the hospital were periodically taken

8 The ld. CIT(A) further observed that the pattern of net profit declared by the assessee in earlier years remained consistently low and that there was a sudden and abnormal increase in profits (200% surges) only in the year following the search, when the seized cash was included in the gross receipts. This supported the conclusion that receipts were being systematically suppressed in earlier years. In view of the above facts, the learned CIT(A) held that the addition made by the AO was not based solely on the statement recorded during the search but was supported by seized material, parallel books of account, cash found during search, and consistent admissions by the assessee. The explanation offered by the assessee was found to be unsatisfactory and unsubstantiated. Accordingly, the learned CIT(A) confirmed the action of the AO in bringing to tax the difference between the two Profit and Loss Accounts amounting to ₹66,56,660/- and dismissed the relevant grounds of appeal.

Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.

The learned AR before us filed a paper book running from pages 50 to 93, a caselaw compilation having pages from 94 to 139 and submitted that the addition merely based on the draft profit and loss account found during the search cannot be made to the total income of the assessee. According to the ld. AR, there has to be some

On the other hand, the learned DR before us reiterated the findings contained in the order of the AO and the learned CIT-A.

We have carefully considered the rival submissions, perused the assessment order, the order of the learned CIT(A), the material seized during the course of search, and the books of account and explanations placed before us. We have also examined the specific factual aspects highlighted before us regarding the comparison of the two sets of Tally data and the final audited books of account.

1 At the outset, it is important to note that there are three different Profit & Loss accounts on record, namely (i) first set of Tally data extracted during search, (ii) second set of Tally data extracted during search, and (iii) the final audited Profit & Loss account filed along with the return of income. On comparison, we find that while the difference in net profit between the first and second Tally data is ₹96.56 lakh, the difference between the first Tally data and the final audited accounts is ₹99.21 lakh. This itself shows that the final audited accounts do not fully tally with either of the two draft Tally extracts found during the search.

2 On the expense side also, we notice that major expenses which are normally incurred and paid through banking channels—such as audit fees, equipment insurance, equipment maintenance, hospital rent, partner salary, staff welfare expenses, telephone charges, and license fees—remain unchanged across all three versions of the accounts. The changes are noticed only in the expenses such as purchases, driver salary, and other routine expenses, which involve cash payments. This pattern strongly supports the assessee’s explanation that the variations arose due to cash-related accounting errors and adjustments, and not due to deliberate inflation or suppression across the board.

3 Another important fact which cannot be ignored is that certain statutory and necessary expenses like depreciation of ₹18.89 lakh were claimed only in the final audited accounts, and such depreciation was not claimed in either of the two sets of Tally data extracted during search. This clearly establishes that the Tally data found during search were incomplete and draft in nature and could not have been the final

4 We also find merit in the assessee’s submission that the two sets of Tally data were only draft working files, prepared at different points of time for internal review and reconciliation. Merely because two draft versions exist, it cannot be conclusively held that one represents “true income” and the other represents “suppressed income”, particularly when the final audited accounts differ from both drafts and include additional legitimate expenses like depreciation.

5 Coming to the reliance placed by the lower authorities on statements recorded under section 132(4) of the Act, it is a settled position of law that a statement, though relevant, is not conclusive and must be supported by corroborative material. In the present case, the addition is substantially founded on statements of the partner and the accountant, without a corresponding scientific reconciliation of receipts,

6 We also note that the assessee has already offered ₹30 lakh as additional income in the return filed under section 153A of the Act. Beyond this, the Assessing Officer has merely adopted the arithmetical difference between two draft Tally profit figures, without examining whether such difference survives after removing duplication, accounting errors, and considering legitimate expenses missing in draft accounts. Such an approach, in our view, is not sustainable.

7 Importantly, the addition made is not based on rejection of books of accounts under section 145 of the Act, nor is there any estimation of income based on comparable cases or profit ratios. The books of account as finally audited have not been rejected. Once the audited books are accepted, a mechanical addition based on draft working files cannot be sustained.

8 In these facts and circumstances, we are of the considered view that the assessee has successfully demonstrated that the two sets of Tally data were draft and incomplete, that the variations arose mainly due to duplication of cash receipts and accounting inconsistencies, and that the addition made by the Assessing Officer is largely based on statements without adequate corroboration. The explanation offered by the assessee appears reasonable and supported by surrounding facts. Accordingly, we hold that the addition of ₹66,56,660/- sustained by the learned CIT(A) is not justified. The same is directed to be deleted.

The issue raised in the grounds of appeal are interconnected which pertains to the addition made for Rs. 1.2 crore by treating the cash found as unexplained money under 69A of the Act.

The relevant facts are that the AO during assessment proceeding observed that at the time of search proceedings dated 29th November 2017 at the residence of partner of the assessee firm Dr. KC Raju Reddy, cash amounting to Rs. 1,34,89,610/- was found from the possession of different persons which are detailed as under: S. No. Person whose possession cash found Quantum of cash Cash seized out of total 1 Dr. KC Raju Reddy & Dr Kalavathi Rs. 44,46,820/- Rs. 43,00,000/- 2. Dr. Mangaldevi & Dr. Uday Shankar Rs. 66,15,590/- Rs. 65,00,000/- 3. Dr. Bharath Kumar Reddy & Dr Darshana Rs. 24,27,200/- Rs. 9,40,000/-

2 Likewise, Dr. Bharath Kumar Reddy was asked to explain the sources of cash found to which he stated that out of total cash of Rs. 24,27,200/- an amount of Rs. 14 Lakh belong to Shishuka Children’s Hospital which meant to be deposited in bank. Similarly, an amount of Rs. 6 Lakh was given by DR KC Raju Reddy to Dr. Darshana.

3 Finally, DR. KC Raju Reddy admitted that out of total cash an amount aggregating to Rs. 1.2 crore belong the assessee firm representing daily cash collection which will be offered to tax as additional income.

4 However, the additional income of Rs. 1.2 as admitted during the search was not offered to tax in the return field for the year in dispute. Accordingly, the AO issued show cause notice proposing to make addition of Rs, 1.2 crores.

The assessee replied that out of the total cash found only Rs. 1.08 crore belong the assessee firm. The assessee further claimed that cash belonging to the firm is part of regular books of account being duly recorded under cash book. At the time of search operation, the ITA Nos.1055 - 1056/Bang/2025

On the issue of source of cash, the AO rejected the explanation that the cash was accumulated over time (April 2017 to November 2017). He pointed out that the assessee was holding very high cash balances month after month without satisfactory reasons, which was not normal or prudent, especially after demonetisation. He also observed that only small amounts were deposited in the bank despite availability of large cash balances. The AO further noted a sharp increase in revenue receipts, which according to him appeared to accommodate unaccounted cash. The assessee also failed to produce books of account during search and post-search proceedings to substantiate the source.

1 The AO further held that the assessee’s retraction of the statement made under section 132(4) was not valid, as it was made after a long delay and not at the earliest opportunity. Relying on various

The aggrieved assessee preferred an appeal before the learned CIT(A).

Before the learned CIT(A), the assessee submitted that the entire addition is based mainly on the statement recorded under section 132(4) of the Act during the course of search, without proper appreciation of facts.

At the outset, the assessee submits that the statement recorded during search was not voluntary. The statement was recorded at around 3.00 AM after a long and stressful day. The partner, being a senior citizen of about 70 years, was not physically or mentally fit at that point of time. The admission was made under pressure and fatigue. Such a statement cannot be treated as conclusive evidence. It is a settled position of law that an admission is an important piece of evidence, but it is not conclusive and the person making the admission has a right to explain or retract the same by bringing the correct facts on record.

1 Without prejudice, the assessee submits that the cash of ₹1,20,00,000 found during the search is fully explained. Out of the said

2 Further, cash of ₹9,40,000/- belonged to Dr. Bharath Kumar Reddy and Dr. Darshana, which was found in their respective rooms. The said cash was earned by them from their own professional sources and was duly reflected in their books of account. Though their books were not updated on the exact date of search, the income was offered to tax by them in AY 2018-19. Copies of their cash ledgers were furnished, but the AO wrongly treated this cash as income of the assessee-firm without any basis.

3 After excluding the above amounts, only ₹1,08,00,000 pertained to the assessee. The assessee submitted that this cash was generated from regular business receipts of the hospital during the period April 2017 to November 2017. The hospital is in existence for several years and has regular cash and card collections. The cash collections were recorded day-to-day in receipt books and collection registers. Due to non-availability of permanent accounting staff, the tally software was not updated on a real-time basis. However, the books of account were duly completed before filing the return of income and the cash balance as on the date of search was reflected therein.

4 It is further submitted that merely because the cash was not deposited immediately in the bank, it cannot be concluded that the cash is unexplained. There is no prohibition in law to hold cash in hand. The assessee is free to manage his affairs in the manner he considers appropriate. The AO cannot sit over the business decisions of the assessee. Increase in gross collections, by itself, cannot be a ground for making addition when such collections are duly recorded in the books and offered to tax.

5 The assessee further submits that section 69A of the Act can be applied only when all the conditions prescribed therein are cumulatively satisfied. The AO must first establish that the assessee is the owner of the money, that such money is not recorded in the books of account, and that the assessee has failed to explain the nature and source of such money. In the present case, though the assessee is the owner of the cash, the same is duly recorded in the books of account and properly explained. Therefore, the basic conditions for invoking section 69A of the Act are not satisfied.

6 The AO has also accepted the books of account and has not rejected them. The gross receipts shown in the income and expenditure account have been accepted while computing the total income. Once the receipts are accepted as business income, the same amount cannot again be taxed as unexplained money. This results in double taxation of the same income, which is impermissible in law.

8 In view of the above facts and legal position, the assessee respectfully submitted that the addition of ₹1,20,00,000/- made under section 69A of the Act is unsustainable in law and on facts. The cash found during search is fully explained and already offered to tax as part of regular business income. Therefore, the assessee prays that the learned CIT(A) may kindly delete the addition in full and grant appropriate relief.

The learned CIT(A) carefully examined the grounds of appeal, the written submissions of the assessee, the assessment order, and the material available on record. On an overall consideration of the facts, the learned CIT(A) was not convinced with the explanations offered by the assessee regarding the source of cash found during the search. The learned CIT(A) observed that during the course of search, two sets of Tally data were found. One set reflected lower net profit as per the return of income, whereas the other showed higher receipts. When confronted, the assessee admitted that the accounts with gross receipts of about ₹2.41 crores were prepared and that the gross receipts were reduced to lower the net profit. The learned CIT(A) noted that this admission clearly showed suppression of receipts and manipulation of ITA Nos.1055 - 1056/Bang/2025

2 The claim of the assessee that cash collections were recorded in receipt books and registers on a day-to-day basis was also rejected. The learned CIT(A) noted that none of these basic records, such as receipt registers, bill books, vouchers, or supporting documents, were found during the search or produced during post-search proceedings. In the absence of these primary records, the explanation that the cash was already accounted for could not be accepted.

3 The learned CIT(A) also rejected the explanation that delay in updating the Tally data was due to temporary staff and accounting difficulties. It was observed that even after the search, when ample time was available, the assessee failed to reconcile the cash found with the books of account. This conduct indicated that the cash was not part of the regularly accounted business income.

4 Another important factor noted by the learned CIT(A) was that the cash was not found at the hospital premises, where daily cash collections are normally kept, but at the residence of the partner.

5 With regard to the claim that part of the cash belonged to family members and doctors, the learned CIT(A) observed that the books of account or contemporaneous records supporting such claims were not found during the search. These explanations were raised only during appellate proceedings and were therefore treated as fresh claims without evidentiary support.

6 The learned CIT(A) further noted that mere filing of cash books or reconstructed records at a later stage does not discharge the burden placed on the assessee, especially when such records were neither available nor produced during search or post-search proceedings. The increase in gross receipts without a corresponding increase in income offered to tax also strengthened the findings of the AO.

7 In view of the above facts, the learned CIT(A) held that the AO was justified in treating the cash of ₹1,20,00,000 as unaccounted receipts of the hospital. The reliance placed by the assessee on judicial decisions was found to be distinguishable on facts. Accordingly, the learned CIT(A) confirmed the addition made by the Assessing Officer and rejected the grounds raised by the assessee.

Being aggrieved by the order of the learned CIT(A) the assessee is in appeal before us.

The learned AR before us submitted that the provisions of section 69A of the Act cannot be applied in the given facts and circumstances. It is for the reason that the cash was duly recorded in the books of accounts. According to the ld. AR the source of cash found from the premises of the partners was from the business of the partnership firm which was duly disclosed in the audited financial statement. Furthermore, the statement furnished under section 132(4) of the Act could not be relied upon without any collaborative material.

On the other hand, the learned DR before us vehemently supported the order of the authorities below.

We have heard the rival contentions of both the parties and perused the materials available on record. The issue before us relates to the addition of ₹1.20 crore made under section 69A of the Act by treating the cash found during search as unexplained money.

1 The undisputed fact is that the cash was found during the search conducted on 29th November 2017 at the residence of the partners of the assessee firm. Out of the total cash found, different amounts were found from the possession of different family members and doctors. Statements were recorded during the search, wherein it was stated that the cash represented daily collections of the hospital. It is also a matter of record that the assessee firm is a running hospital having substantial cash collections from OPD and IPD patients.

3 On facts, we note that the AO has not rejected the books of account of the assessee. The gross receipts disclosed in the income and expenditure account have been accepted. Once the books of account are accepted and the receipts are treated as business receipts, the same amount cannot again be brought to tax as unexplained money under section 69A of the Act. Such an approach would result in taxing the same income twice, which is not permissible in law.

4 We also find force in the argument that section 69A can be invoked only when the money found is not recorded in the books of account and the assessee fails to explain the nature and source of such money. In the present case, the assessee has consistently claimed that the cash belonged to the hospital and was generated from regular business activity. The cash book produced shows availability of sufficient cash balance. Merely because the cash was not deposited in the bank immediately or was kept at the residence of the partner cannot, by itself, lead to the conclusion that the cash is unexplained.

6 We also note that part of the cash was found from the possession of other family members and doctors. The AO has not brought any material on record to conclusively prove that such cash belonged to the assessee firm. Mere suspicion or inference cannot take the place of proof.

7 The approach of the AO and the learned CIT(A) is largely based on assumptions, such as high cash holding and increase in gross receipts. It is a settled principle that additions cannot be made on the basis of suspicion, conjectures, or surmises, without bringing cogent material on record.

Considering the totality of facts and circumstances, we are of the view that the assessee has satisfactorily explained the source of cash found during the search. The conditions prescribed under section 69A of the Act are not cumulatively satisfied in this case. Therefore, the addition of ₹1.20 crore made under section 69A cannot be sustained. Accordingly, we set aside the order of the learned CIT(A) on this issue and direct the Assessing Officer to delete the addition of ₹1,20,00,000. ITA Nos.1055 - 1056/Bang/2025

In the combined result, both the appeals of the assessee are allowed.

The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file