DCIT, CIRCLE-2, TRICHY vs. M/S. MC HOSPITAL, NAGAPATTINAM

O R D E R

PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:

“1. The Ld.CIT(A) has erred in holding that assessee has shown huge amount of Rs.3.83 crores without considering the facts that the assessee has not submitted full details of the cash bills for sale of medicine, hospital receipts from OPD & IPD, nursing fees either during assessment proceedings or during remand report proceedings.

2. The Ld.CIT(A) has erred in holding that only 4% of cash deposit in SBN should be treated as income of the assessee without considering the facts that assessee has not submitted full details of sales of medicine which is stated to be the source for the cash receipts.

3. For these and such other grounds that may be adduced at the time of hearing it is prayed that the order of the CIT(A) may be reversed and that of the Assessing Officer restored.”

4.1 Grounds of Cross Objection raised by the assessee are reproduced as under: “1. The learned CIT(A) erred in directing to make addition of Rs.13.32 lacs as business income even though no such addition was made by A.O.

3 ITA 11/Chny/2021 & CO 6/Chny/2022 M/s. M. C. Hospital AY 2017-18 2. The learned CIT(A) erred in directing to make addition at Rs.13.32 lacs without giving opportunity of heard before making addition. 3. That the addition made by learned CIT(A) of Rs.13,32,000/- under the head business income is unjustified, unwarranted and excessive.”

5.1 While dealing with the issue raised in respect of cash deposit during the demonetization period, ld. AO embarked on the assessment proceedings and findings relating to the preceding year i.e. AY 2016-17 and observed that opening cash balance of Rs.57,11,651/- for the year under consideration cannot be taken into account. It is a fact on record that the regular assessment for AY 2016-17 was completed u/s. 143(3) of the Act vide order dated 28.12.2018, copy of which is placed in the paper book at page 193 to 195. For the assessment order of AY 2016- 17, reason for its selection for scrutiny assessment u/s. 143(3) of the Act was “large difference in cash in hand shown in Balance sheet as per return of income and revised return of income (part A-BS of the return) & revised return filed after 07.11.2016 and cash deposit reported in SFT 14”. In the said assessment, ld. AO after verification of books of account accepted the cash in hand as on 31.03.2016 at Rs.57,11,652/- which is 4 ITA 11/Chny/2021 & CO 6/Chny/2022 M/s. M. C. Hospital AY 2017-18 evident from para 5 and 6 of the said order. Assessment for AY 2016-17 was completed by accepting the returned income of Rs.93,91,690/-. Despite this acceptance of cash in hand of Rs.57,11,652/- as on 31.03.2016 and completion of assessment at returned income for AY 2016-17, ld. AO in the present case noted that credit of Rs. 57,11,651/- cannot be given for the opening cash balance as per revised return of AY 2016-17 as it is a non-est return and to this extent, the amount is to be brought to tax u/s. 69A of the Act as unexplained money.

5.2 Further, in respect of the impugned year, ld. AO noted that assessee had cash balance of Rs.3.83 Cr. as on the date of announcement of demonetization i.e. on 08.11.2016. Ld. AO held the said cash balance as undisclosed money/investment u/s. 69A of the Act to bring it to tax read with section 115BEE, after making the following observations, which are as follows: (i) that assessee has made cash deposits into bank at least sixteen times between 01.04.2016 and 08.11.2016; (ii) that one doctor single-handedly increased the turnover of assessee firm by 202%; (iii) that increase in cash receipts is also not accepted as the bills copies submitted does not give details of patients which are incomplete in details; (iv) that increasing in pharmacy sales is beyond human probabilities ; (v) that books are unreliable and prepared in such a manner so as to regularize the undisclosed income by recording it as cash sales. 5.3 Aggrieved, assessee went in appeal before the Ld. CIT(A).

5 ITA 11/Chny/2021 & CO 6/Chny/2022 M/s. M. C. Hospital AY 2017-18 gross receipt which has been duly accounted and reported in its financial statement, based on which total income of Rs.84,71,670/- has been shown in the return. It was very strongly pointed out before the Ld. CIT(A) that once the revised return for AY 2016-17 was accepted in the assessment made u/s. 143(3) of the Act, there was no reason to doubt the authenticity of the closing figures of that year in the present assessment which have been brought as opening figures in the year under consideration and, therefore, it cannot be a ground to doubt the assessment of succeeding financial year which is AY 2017-18.

6.1 It was submitted by the assessee in the first appellate stage that cash deposited in the bank account is duly recorded in its regular books of account which have been subjected to audit. Tax Audit Report was on record along with the return. Further, books of account were examined in detail in the assessment proceedings. Also, that gross receipts and expenses as declared and recorded in the books of account have been accepted by the Ld. AO without finding any fault therein.

6.2 It was also pointed out to the Ld. CIT(A) that during the demonetization period, Department of Economic Affairs had issued a notification dated 09.11.2016 vide notification no. SO 3416 E whereby in pharmacy, the assessee firm could accept ‘Specified Bank Notes’ (SBN) during the period of demonetization. It was also submitted that the gross receipts shown in P&L Account was a source of cash deposited in bank accounts and, therefore, there was no cash which remained unexplained or undisclosed as held by the Ld. AO. It was also contended that once the amount has been recorded in the books of account, no addition can be made u/s. 69A of the Act. Assessee also submitted before the Ld. CIT(A) that its gross income before interest and remuneration to partners is assessed at Rs.1,93,84,546/- and thus,

6 ITA 11/Chny/2021 & CO 6/Chny/2022 M/s. M. C. Hospital AY 2017-18 cash balance as on 08.11.2016 is based on considering gross receipts recorded in the books which have not been disputed and accepted.

6.3 Based on submissions made by the assessee and by considering that the issue involved is purely of factual in nature, Ld. CIT(A) called for a remand report from the Ld. AO. Remand report is annexed to the order of Ld. CIT(A) as annexure. From the perusal of the remand report, ld. AO has made the following observations, which are extracted as under:

(i) On verification of the case records, it is seen that various details which in the course of assessment proceedings by issue of notice u/s. 142(1) has been submitted by the assessee from time to time. From the details available on record, it is seen that complete cash book for the period from 01.04.2016 to 31.03.2017 was submitted in the course of assessment proceedings.

(ii) The bank account statements were directed to be submitted and assessee submitted the same during the course of the assessment proceedings.

(iii) Details of gross receipts, copy of pharmacy sales and hospital receipts along with supportive receipts on sample basis have been placed on record.

(iv) Details of purchase of medicines and expenses called for are available on record.

(v) On verification of purchase of medicine and major items it was found that it is not matching with the quarterly P&L Account but matched in toto for the full year at Rs.1,21,10,580/-.

7 ITA 11/Chny/2021 & CO 6/Chny/2022 M/s. M. C. Hospital AY 2017-18 (vi) On verification of sales of pharmacy and hospital receipts of OPD and IPD, it was seen that on three dates i.e. on 09.12.2016, 03.11.2017 and 11.02.2017 as recorded in cash book were not tallying with the hospital receipts submitted by the assessee.

6.4 Based on the submissions of the assessee and the remand report of the Ld. AO, Ld. CIT(A) gave his fact based observations and findings which are noted below:

(i) Assessee had submitted and produced detailed records maintained by it for pharmacy sales including the details of patients’ diagnosis and prescription of purchase of medicines.

(ii) Business income of the assessee has to be assessed as per the method of accounting regularly employed by the assessee in accordance with section 145 of the Act.

(iii) Section 69A of the Act provides that amount recorded in the books of account cannot be subjected to addition under the said section. In the present case, the amount of Rs.3.83 Cr. is the balance of cash in hand in the cash book on the date of demonetization announcement, which is duly recorded in the books of account. The receipts recorded in the cash book which has given rise to the cash in hand balance are the very same receipts for which the return of income has been filed by the assessee.

(iv) Once the revised return for AY 2016-17 has been accepted in the assessment made u/s. 143(3) of the Act, there is no occasion for the Ld. AO to question the authenticity of the closing figures for their consideration in the impugned assessment i.e. AY 2017-18. Accordingly, the opening cash in 8 ITA 11/Chny/2021 & CO 6/Chny/2022 M/s. M. C. Hospital AY 2017-18 hand of Rs.57.11 lakh stands explained as accepted in the assessment completed for Ay 2016-17.

(v) It is also a fact that total cash deposit in SBN is of Rs.3.30 Cr. whereas the addition made is of Rs.38.3 lakh which is the balance of cash in hand in the cash book of the assessee on the date of announcement of demonetization.

(vi) In respect of discrepancy noted by Ld. AO in the remand report for the three dates it was pointed out that the difference arose because Ld. AO took the receipts both of cash and cheque together for these three dates. If the amount of cheque receipts for these three dates are removed, then the receipts for these three dates in cash tallies as recorded in the cash book. It was thus demonstrated that there is no difference/mistake as observed by AO in the remand report for which reference was made to the cash book placed on record.

(vii) Opening stock of medicines was verified from the audited trading account which has been accepted in the assessment for AY 2016-17 and expenditure in the current year has not been doubted or disputed by the Ld. AO. Further, in this respect it was pointed out that aggregate purchase for all the quarters taken together are matching and minor variations in purchases on quarterly basis has no bearing on the computation of total income for the year.

(viii) In respect of increase in creditors, the gross receipts in the year under consideration are Rs.616.76 lakh as compared to gross receipts of Rs.242.89 lakh in the immediately preceding assessment year.

9 ITA 11/Chny/2021 & CO 6/Chny/2022 M/s. M. C. Hospital AY 2017-18 (ix) Reliance was placed on certain decisions of the coordinate bench including ITAT Mumbai in the case of DCIT v. M/s. Karthik Construction Co. in dated 23.02.2018 wherein it was held in respect of section 69A of the Act that addition can only be made when the assessee is found to be in possession of money, bullion, jewellery etc. not recorded in his books of account. Further, reliance was placed on the decision of coordinate bench of ITAT, Ahmedabad in Shree Sanand Textiles Industries Ltd. Vs. DCIT in ITA No. 995/Ahd/2014 dated 06.01.2020 wherein it was noted that the impugned amount had been taxed twice, firstly the same was treated as sales and secondly, the same was treated as unexplained cash credit u/s. 68 of the Act. The coordinate bench opined that the provisions of section 68 of the Act could not be applied in relation to sales receipt shown by the assessee in its books of accounts as the sale receipts had already been shown in the books of account as income at the time of sale itself and once the purchases had been accepted by the authorities, then the corresponding sales could not be disturbed without giving any conclusive evidence or finding. Reference was also made to the decision of coordinate bench of ITAT Indore in the case of Dewas Soya Ltd. Vs. ITO in ITA No. 336/Ind/2012 wherein it has been held that the assessee had already offered the sales for taxation, hence the onus has been discharged by it and the same income cannot be taxed again.

(x) In respect of opinion expressed by the Ld. AO in his assessment order that books of account are unreliable and prepared in such a manner so as to regularize the undisclosed income by recording it as cash sales, reference was made by 10 ITA 11/Chny/2021 & CO 6/Chny/2022 M/s. M. C. Hospital AY 2017-18 the Ld. CIT(A) to the decision of Hon’ble jurisdictional High Court of Madras in the case of R. C. Auto Centre (S.I) v. ITO (2014) 46 taxmann.com 258 (Mad) according to which audited books of account cannot be rejected without pointing out any specific mistake.

9.1 Admittedly, it is a fact that Ld. AO has made the addition of balance of cash in hand on the date of announcement of demonetization i.e. on 08.11.2016 which is of Rs.3,83,33,860.74 as appearing in the cash book for the relevant date, placed on record at page 76 of the paper book. It is also a fact on record that the deposit of cash in SBNs by the assessee is of Rs.3.30 Cr. Further, Department of Economic

11 ITA 11/Chny/2021 & CO 6/Chny/2022 M/s. M. C. Hospital AY 2017-18 Affairs vide its notification dated 09.11.2016 in SO 3416 E had permitted acceptance of SBNs in pharmacy during the period of demonetization. It is also important to note that Ld. AO in his remand report dated 25.08.2020 forming part of the order of Ld. CIT(A) as annexure, has observed that assessee had submitted all the details called from time to time and produced books of account and other relevant documents and records for which no specific mistake or defect has been noted or found on verification of the same by the Ld. AO both in the course of assessment proceedings and remand proceedings.

9.2 During the course of hearing before us, ld. Counsel took us through sample discharge cards placed on record in the paper book at pages 184 to 189, to demonstrate that complete details of patients and treatments were furnished. On the query by the bench to the Ld. Counsel for the assessee in respect of its VAT returns and any revision thereon, reference was made to the VAT audit report placed on record in the paper book, to corroborate the sales and purchase as reflected in the trading account. A reference was also made to the certificate issued by the Sales Tax Authorities which certified the total taxable turnover and the output tax as well as input tax credit available to the assessee. The said certificate dated 11.03.2020 is placed in the paper book at page 190.

9.3 In respect of discrepancy pointed out by Ld. AO in the remand report relating to the three dates, Ld. Counsel for the assessee took the bench through the relevant material placed in the paper book to demonstrate that by excluding the cheque receipt from the sum total of pharmacy sales and hospital receipts, there is no difference in recording of receipt in cash book.

9.4 We also note that the opening cash balance of Rs.57.11 lakhs is an accepted amount which has been subject to assessment u/s. 143(3)

12 ITA 11/Chny/2021 & CO 6/Chny/2022 M/s. M. C. Hospital AY 2017-18 of the Act for AY 2016-17 and thus, there is no occasion to doubt on this opening balance of cash in hand. We find force in the submission of the Ld. Counsel so also the finding given by the Ld. CIT(A) in respect of addition made u/s. 69A of the Act whereon it is a settled principle of law that entries recorded in the books of account cannot be brought to tax u/s. 69A of the Act. It is also important to note that SBNs were allowed to be accepted at pharmacy by the government during the demonetization period. Assessee has deposited cash out of its balance cash in hand, duly recorded in its books of account which were the results of pharmacy sales and hospital receipts. In this respect a useful reference is made to the decision of Hon’ble Supreme Court in the case of Lalchand Bhagat Ambica Ram v. CIT [1959] 37 ITR 288 (SC) wherein it has been held as under:

“21. The position as it obtained in this case was closely analogous to that which obtained in Messrs. Mehta Parikh & Co. v. The Commissioner of Income-tax, Bombay (1). In that case the assessee had to satisfactorily explain the possession of 61 High Denomination Notes of Rs. 1,000 each and the Tribunal came to the conclusion that the assessee had satisfactorily explained the possession of 31 of these notes and not of the remaining 30. The High Court had treated the finding of the Tribunal as a finding of fact. It was held by this Court that the entries in cash-book and the statements made in the affidavit in support of the explanation, which were binding on the Revenue and could not be questioned, clearly showed that it was quite within the range of possibility that the assessee had in their possession the 61 High denomination notes on the relevant date and their explanation in that behalf could not be assailed by a purely imaginary Calculation of the nature made by the income-tax officer or the Appellate Assistant Commissioner. It further held that the Tribunal made a wrong approach and while accepting the assessee's explanation with regard to 31 of the notes, it had absolutely no reason to exclude the rest as not covered by it in the absence of any evidence to show that the excluded notes were profits earned by the assessee from undisclosed sources. The assessee having given a reasonable explanation the Tribunal could not, by applying a rule of thumb discard it so far as the rest were concerned and act on mere surmise. In arriving at its decision this Court referred to the case of Chunilal Ticamchand Coal Co. Ltd. v. Commissioner of Income-tax, Bihar and Orissa (1955) 27 ITR 602 (SC): TC42R.740 and stated that the case before it should also have been similarly decided by the High Court in favour of the assessee.

13 ITA 11/Chny/2021 & CO 6/Chny/2022 M/s. M. C. Hospital AY 2017-18 22. A decision of the Allahabad High Court reported in in Kanpur Steel Co. Ltd. v. Commissioner of Incometax, (1957) 32 ITR 56 (All) may also be noted in this context. The assessee there encashed 32 currency notes of Rs. 1,000 each on January 12, 1946, when the High Denomination Bank Notes (Demonetisation) Ordinance, 1946, came into force, and when the Income-tax Officer called upon it to explain how these currency notes came into its possession, the assessee claimed that the notes represented part of its cash balance which, on that date, stood at Rs. 34,313. The Income-tax Officer rejected the explanation and assessed the amount of Rs. 32,000 represented by these currency notes as suppressed income of the assessee from some undisclosed source. The Tribunal took into account the statement of sales relating to a few days preceding the date of encashment and found that the highest amount of any one single transaction was only Rs.

14 ITA 11/Chny/2021 & CO 6/Chny/2022 M/s. M. C. Hospital AY 2017-18 23. It is, therefore, clear that the Tribunal in arriving at the conclusion it did in the present case indulged in suspicions, conjectures and surmises and acted without any evidence or upon a view of the facts which could not reasonably be entertained or the facts found were such that no person acting judicially and properly instructed as to the relevant law could have found, or the finding was, in other words, perverse and this Court is entitled to interfere.” 9.5 In the present case before us, what the Ld. AO has added is the balance of cash in hand on the date of announcement of demonetization though factually, the deposit of cash in SBNs during the demonetization period was of Rs.3.30 Cr. From the books of account and corroborative documents placed on record, we find that there is no dispute about the availability of cash balance and its source with the assessee. Thus, once availability of cash in hand is proved, assessee cannot be asked to furnish proof of acquisition of such amount in currency notes of particular denomination. Hon’ble High Court of Bombay in the case of Narendra G. Goradia (HUF) v. CIT [1998] 234 ITR 571 (Bom) observed and held as under:

“It appears from the order of the Tribunal that the Tribunal itself was conscious of the fact that once the cash balance on the crucial date was sufficient to cover the value of high denomination notes tendered by the assessee for encashment on demonetisation, no further enquiry was required about the source of high denomination notes. The Tribunal, however, felt that in the instant case, the Income-tax Officer, having verified from the banks the receipt of the amount in high denomination notes by the assessee and having considered other possible sources of receipt of Rs. 1,000 denomination notes, was justified in adding the balance amount of Rs. 1,04,000 as income from undisclosed sources. The Tribunal observed that the Income-tax Officer had discharged the initial burden cast upon him by collecting specific information about the acquisition of high denomination notes by the assessee and it was for the assessee to dislodge such finding by means of appropriate evidence. Since, according to the Tribunal, the assessee failed to do so, there was no justification for interfering with the order of the Commissioner (Appeals). We find it difficult to agree with this finding of the Tribunal. In our opinion, the Tribunal took a wholly erroneous approach in the matter. What the assessee is required to prove in such cases is the source of money and once he is successful in proving the same, he cannot be put to further proof of acquisition of such amount in the currency notes of particular denomination. If the explanation shows that the receipt was 15 ITA 11/Chny/2021 & CO 6/Chny/2022 M/s. M. C. Hospital AY 2017-18 not of income nature, the Revenue cannot reject the explanation of the assessee to hold that it was income. Where the business and the state of accounts and dealings of the assessee justify a reasonable inference that he might have for convenience kept the whole or a part of a particular sum in high denomination notes, the assessee, prima facie, discharges his initial burden when he proves the cash balance and that it might have been kept in high denomination notes. Before the Department rejects such evidence, it must either show an inherent weakness in the explanation or rebut it by putting to the assessee some information or evidence which it has in its possession. The Department cannot by merely rejecting unreasonably a good explanation, convert good proof into no proof.” 9.6 In furtherance to the above observation and finding, we note that balance of cash in hand as on 08.11.2016 is out of opening cash balance (duly subject to assessment in AY 2016-17) and receipts during the year on account of sale of medicines and hospital receipts. Income derived from sale of medicines and hospital receipts have been subject to tax while accepting the income returned at Rs.84.71 lakhs. Thus, we find that cash balance being part of sale of medicines and hospital receipts, cannot be brought to tax at the hands of the assessee again which will otherwise lead to taxing the same amount twice. In this respect, coordinate bench of ITAT, Visakhapatnam in the case of ACIT v. Hirapanna Jewellers & Anr. [2021] 189 ITD 608 (Visakhapatnam) held that – “9. In view of the foregoing discussion and taking into consideration of all the facts and the circumstances of the case, we have no hesitation to hold that the cash receipts represent the sales which the assessee has rightly offered for taxation. We have gone through the trading account and find that there was sufficient stock to effect the sales and we do not find any defect in the stock as well as the sales. Since, the assessee has already admitted the sales as revenue receipt, there is no case for making the addition u/s. 68 or tax the same u/s. 115BEE again. This view is also supported by the decision of Hon’ble Delhi High Court in the case of Kailash Jewellery House (Supra) and the Hon’ble Gujarat High Court in the case of Vishal Exports Overseas ltd. (supra). Hence, we do not see any reason to interfere with the order of the Ld. CiT(A) and the same is upheld.”

16 ITA 11/Chny/2021 & CO 6/Chny/2022 M/s. M. C. Hospital AY 2017-18 and the Revenue, remand report of the ld. AO, judicial precedents, notification issued by the Department of Economic Affairs and other corroborative material placed on record, we find no reason to interfere with the finding of the Ld. CIT(A) in respect of deletion of addition of Rs.3.83 Cr. relating to balance of cash in hand on the date of announcement of demonetization. Accordingly, the addition so made by the Ld. AO of Rs.3.83 Cr. stands deleted. Grounds of appeal raised by the revenue are dismissed.

11. Coming to Cross Objection filed by the assessee, challenging the enhancement done by the ld. CIT(A) by estimating the business income of Rs. 13,32,000/- @ 4% of the SBNs of Rs.3.30 Cr. deposited by the assessee in its bank account. In this respect, the first and primary objection of the assessee is that deposit of SBNs is from the hospital and pharmacy receipts, on which tax is paid by the assessee on the income embedded in such receipts. Thus, on such receipts, further estimation of income is unjustified and tantamounting to double addition.

11.1 Further, without complying with the provisions of section 251(2) of the Act, Ld. CIT(A) proceeded to make the enhancement i.e. without providing an opportunity to the assessee. Ld. Counsel of the assessee placed reliance on the decision of Hon’ble jurisdiction High Court in Madras in the case of CIT v. Lotte India Corporation Ltd. [2007] 290 ITR 248 (Mad). Further, it was submitted that estimated addition on account of trading was not a matter of assessment and thus, it is beyond the scope of powers of Ld. CIT(A) to make such an addition, for which reliance was placed on the decision of Hon’ble High Court of Delhi in the case of CIT v. Union Tyres [1999] 240 ITR 556 (Del).

11.2 It was also submitted that for the minor discrepancies which were pointed out in the remand report, they have all been clarified through

17 ITA 11/Chny/2021 & CO 6/Chny/2022 M/s. M. C. Hospital AY 2017-18 corroborative evidence and accepted. Therefore, the expression of lingering doubt by the ld. CIT(A) while resorting to impugned estimation of addition is totally misplaced.

11.3 We do find force in the submissions made by the Ld. Counsel in the above respect and are inclined to direct for the deletion of the addition of Rs. 13,32,000/- made by the ld. CIT(A) on an estimate basis, more particularly when the doubts referred by him have been cleared by the assessee by reference to corroborative material placed on record which we have discussed above while dealing with the appeal of the Revenue. Accordingly, the direction by the Ld. CIT(A) to the ld. AO for making the addition of Rs.13.32 lakh @ 4% of Rs.3.30 Cr. is set aside. Accordingly, grounds of cross objection of the assessee are allowed.

Order is pronounced in the open court on 19th August, 2022.