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Income Tax Appellate Tribunal, ‘B’ BENCH: CHENNAI
Before: SHRI MAHAVIR SINGH, HON’BLE & SHRI GIRISH AGRAWAL, HON’BLE
आदेश / O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the assessee is arising out of the order of the learned Commissioner of Income Tax (Appeals)-3, Chennai, in dated 16.11.2018 against the Assessment Order framed by the Asst. Commissioner of Income Tax, Company Circle-1(2), Chennai, dated 31.12.2009, for the Assessment Year 2007-08, u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act').
M/s. Bharathi Rajaa Hospital & Research Center Pvt. Ltd. :: 2 ::
The assessee has taken as many as 11 grounds of appeal. Ground Nos.1 & 11 are general in nature. Ground Nos.2 & 3 are in respect of disallowance of Rs.5,22,415/- and Rs.36,107/- representing interest paid on unsecured loans and professional charges respectively for non-deduction of tax at source u/s.40(a)(ia) of the Act. Ground Nos.4 & 5 relates to disallowance of claim of depreciation in respect of lifts installed in the hospital premises of the assessee, amounting to Rs.1,84,090/-, issue being the rate of depreciation, whether @10% or 15%. Ground Nos.6 & 7 are in respect of disallowance of proportionate interest expenditure of Rs.3,39,970/- on the premises of diversion of fund for non-business purposes. Ground Nos.8 & 9 relates to disallowance of Rs.17,59,208/- in respect of advances received from patients.
3. In respect of Ground Nos.2 & 3, the ld.Counsel of the assessee, at the outset, submitted that the matter may be remitted back to the file of the AO for verification of the records in the case of recipient of the payments made by the assessee towards interest on unsecured loan and professional charges. To this effect, the ld.Counsel of the assessee assured the Bench that it will provide all the necessary details and documentary evidences, which will assist the AO in verifying the claim that tax due has been paid on the impugned payments made by the assessee, which have been disallowed u/s.40(a)(ia) of the Act, for want of tax deduction at source.
Accordingly, we remit this issue before the AO for the limited purpose of M/s. Bharathi Rajaa Hospital & Research Center Pvt. Ltd. :: 3 :: verification by the AO for conclusion of due taxes on the payments made by the assessee, which have been considered for disallowance. The AO may decide the matter in accordance with law after his due examination and verification. Needless to say that the assessee shall be co-operative for its effective disposal. Accordingly, Ground Nos.2 & 3 of this appeal are allowed for statistical purposes.
4. In respect of Ground Nos.4 & 5, the AO noted that the assessee has claimed depreciation of Rs.5,52,269/- @ 15% on the lifts installed in the Hospital building by treating it as part of buildings and not as plant & machinery. The AO also noted that any Hospital has to necessarily have a lift as per the National Building Construction Code and therefore, it is part and parcel of the building. Accordingly, he allowed the depreciation @10% applicable to “buildings” and added the balance of excess of Rs.1,84,090/- to the total income of the assessee. The Ld.CIT(A) confirmed the disallowance made by the AO. The ld.Counsel of the assessee before the Tribunal strongly submitted that lifts are part and parcel of the plant & machinery of the assessee as they are designed specifically and specially for carrying the patients and the medical professionals. In the course of the assessment, the ld.Counsel of the assessee placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT v. Dr. B.Venkata Rao reported in [2000] 243 ITR 81 (SC), wherein, he pointed out that the nursing home building was considered as a ‘plant’ and the depreciation was M/s. Bharathi Rajaa Hospital & Research Center Pvt. Ltd. :: 4 ::
accordingly, allowed at a higher rate as applicable to plant & machinery.
The Ld.DR on the contrary submitted that lifts are part and parcel of the building and the depreciation has been rightly allowed by the AO by applying the rate applicable to buildings. From the perusal of Para No.2 of the decision of the Hon’ble Supreme Court in the case of CIT v. Dr. B.Venkata Rao (supra), we note that reference has been made to the functional test to arrive at the decision for treating the nursing home as a plant. To this effect, a specific query was raised by the Bench to the ld.Counsel of the assessee to demonstrate the functional aspect of the lifts installed in the Hospital buildings, which have been designed specifically and specially so as to be treated as plant & machinery for higher rate of depreciation so claimed by the assessee. To this query, the ld.Counsel of the assessee requested and prayed for remitting the matter back to the file of the AO, before him necessary documentary evidences and details shall be furnished to establish and demonstrate the functional test as referred to in the decision of the Hon’ble Supreme Court (supra). The Ld.DR had no objection on the request so made by the ld.Counsel of the assessee.
Accordingly, we remit this matter to the file of the AO for limited purpose of verification of the documentary evidences to be furnished by the assessee to establish the functional test for treating the lifts as plant & machinery for claim of higher rate of depreciation @15% instead of 10% allowed by the AO. Accordingly, Ground Nos.4 & 5 of this appeal are allowed for statistical purposes.
M/s. Bharathi Rajaa Hospital & Research Center Pvt. Ltd. :: 5 ::
5. In respect of Ground Nos.6 & 7, the AO noticed that under the head “loans & advances” (on the assets side), the assessee has advanced amounts towards interest free loans which have remained uncollected for years which is tabulated as under:
Naem of the Debtor Loans & Advances (Rs.) D.Kamala 1,809,618 D.Krishnaveni 1,077,005 Jayalakshmi & Others 1,500,000 N. Rukmani 500,000 R. Mahendra Jothi 750,000 Total 5,636,623
The AO further noticed that the assessee has debited a sum of Rs.1,21,30,740/- towards interest payment on term loan and cash credit and required the assessee to clarify, as to why, the proportionate interest on the loans given to the persons tabulated above should not be disallowed since company itself is paying interest on the borrowed funds. In response, the assessee replied and submitted that the loans tabulated above were given by the assessee out of its own funds and not out of borrowed funds.
Further, it was submitted that except in the case of Jayalakshmi & others, in all other cases, they pertained to FY 2000-01, when the capital was much higher than the loans and advances granted by the company. It was also submitted that interest debited during the year were on term loan and working capital loan used during the year and have no nexus to the loans and advances given to the persons tabulated (supra). The AO proceeded to make a proportionate disallowance u/s.36(1)(iii) of the Act and added a sum of Rs.3,39,970/- to the total income of the assessee. The Ld.CIT(A)
M/s. Bharathi Rajaa Hospital & Research Center Pvt. Ltd. :: 6 :: confirmed the additions made by the AO. Before us, the ld.Counsel of the assessee submitted that a Paper Book containing 29 pages where from at Page Nos.4 & 7, he pointed out that the share capital of the assessee company as on 31.03.2007 was Rs.4,40,13,000/-. Against which, the loans and advances (on the assets side) was Rs.82,38,024/-, which was far in excess against the loans and advances given. Further, the ld.Counsel of the assessee demonstrated from the financial statement that the term loan and the working capital loan as detailed in Schedule-3 to the audited balance sheet forming part of the Paper Book, were used for these specific purposes, for which, these loans were sanctioned and in no case these were deployed for giving loans and advances to the persons tabulated (supra).
The ld.Counsel of the assessee submitted that the issue before the Hon’ble Bench is squarely covered by the decision of the co-ordinate Bench of ITAT Chennai in the case of M/s.Indonet Global Ltd., in pronounced on 04.03.2002, which is reproduced as under:
We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, the learned Counsel for the Assessee made a first submission that, there is no provision in the Act of charging of notional interest on the interest free loans advanced to its sister concern companies. He stated that the interest can be disallowed which has been claimed as expenses on interest bearing funds diverted towards interest free loans.
The second argument made by the learned Counsel for the Assessee was that it has ample interest free loans available in the shape of accruals, share funds and reserve and surplus to the tune of Rs.11,08,79,343/- as against advances made to group companies to the tune of Rs.3,37,82,106/-. The learned Counsel for the Assessee, before us filed the complete balance sheet, i.e. financial statement in its paper-book and drew our attention to the share capital and reserve and surplus. We noted that this issue is squarely covered by the decision of the Hon’ble Bombay High Court in the case of the Commissioner of Income Tax Vs. Reliance Utilities and Power Limited reported in [2009] 313 ITR 340 (Bombay), wherein in page no.16 it is held that if there are funds available, both interest free and overdraft and / or loans taken, then a presumption would arise that investments would be out of interest-free funds generated or available with the company, provided, the said funds
M/s. Bharathi Rajaa Hospital & Research Center Pvt. Ltd. :: 7 :: are sufficient to meet investments. Hon’ble Bombay High Court in paragraph no.10 has held as under:
“If there are funds available both, interest free and overdraft and / or less are taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds are sufficient to meet the investments. In the instant case, said presumption was established considering the findings of fact, both by the Commissioner (Appeals) and the Tribunal.”
Similar principle was considered by the Hon’ble Madras High Court in the case of Commissioner of Income-Tax Vs. Hotel Savera reported in [1999] 239 ITR 795 (Madras), wherein the Hon’ble Madras High Court has considered the identical issue vide paragraphs no.8 & 9, as under:
“8. Further, there is no finding by the ITO or the AAC that the money borrowed has been spent for non-business purposes. The addition made by the ITO was on the basis that the money advanced to Savera Hotels (P) Limited should carry notional interest of 10 percent and in that view he disallowed the amount of Rs.7,72,769. The AAC held that the advance to Savera Hotels (P.) Limited would have come proportionately out of the own funds as well as borrowed funds is not based on any principle of law. There is no finding even by the AAC that the money borrowed by the Assessee was actually diverted for non-business purposes. In the absence of any clear finding both the assessing authority and the finding of the appellate authority and in the absence of any such finding by the Tribunal, we have to hold that the ITO was not justified in disallowing the sum of Rs.72,769 or by the AAC a sum of Rs.30,063/-.
We hold that the Tribunal was correct in deleting the sum of Rs.30,063/- and it is also right in holding that no part of interest should be disallowed especially in the absence of any finding that the money borrowed was advanced to Savera Hotels (P) Limited, free of interest.”
No contrary decision was brought to our notice by the learned senior Departmental Representative.
7. After hearing both the sides, we are of the view that the Assessee has more interest free loans available in the shape of share capital and reserves and surplus to the tune of Rs.11,08,79,343/- as against the interest free advances made to the group companies to the tune of Rs.3,37,82,106/-. Once this is the factual position and the Assessing Officer is unable to brief the nexus between the interest bearing loan diverted towards the interest- free advances, no disallowance of interest expenses or no notional interest can be charged as interest income as in the present case. Hence, in the given facts, we delete the disallowance and allow the appeal of the Assessee.
Considering the facts and circumstances of the case, submissions made by the ld.Counsel of the assessee and the documents on record coupled with decision of the co-ordinate Bench of ITAT Chennai (supra), we are of the view that the assessee has more interest free funds available in the form of share capital against the interest free advances given by it.
Thus, on the present fact pattern and the decision of the co-ordinate Bench,
M/s. Bharathi Rajaa Hospital & Research Center Pvt. Ltd. :: 8 :: we find that no disallowance of interest expenses on proportionate basis as notional interest can be made in the present case. Accordingly, we delete the disallowance made by the AO and accordingly Ground Nos.6 & 7 of this appeal are allowed.
6. In respect of Ground Nos.8 & 9, the AO noted that a sum of Rs.52,71,624/- shown as advance received from patients. In this respect, in the course of the appellate proceedings and as noted in the assessment order, the Authorized Representative agreed for treating 1/3rd of the total advances for recognition as revenue for the year and the Accountant of the assessee in his sworn statement dated 31.12.2009 in answer to Q.No.8 had affirmed the acceptance of the ld.AR on this count. Accordingly, the AO made an addition of Rs.17,57,208/- in this respect. Before the Ld.CIT(A), the assessee could not furnish any verifiable evidence to support the ground taken before the Ld.CIT(A) against the addition made in this respect. The Ld.CIT(A), accordingly confirmed the addition. Before us, the ld.Counsel of the assessee could not controvert the observations and findings of the authorities below in this respect. Accordingly, we do not find any reason to interfere with the observations and findings of the authorities below and confirm the addition so made. Accordingly, Ground Nos. 8 & 9 of this appeal are dismissed.
The present appeal has been dealt with on the merits in respect of each of the issues involved out of which Ground Nos.2,3,4, & 5 have been M/s. Bharathi Rajaa Hospital & Research Center Pvt. Ltd. :: 9 ::
remitted back to the file of the AO for limited purpose in light of our observations and findings. Ground No.10 relating to affording of proper opportunity to the assessee needs no adjudication as the ld.Counsel of the assessee has made all the submissions as desired by him to substantiate the claims made by the assessee. There is no prejudice to the assessee in terms of our observations and findings based on the submissions made by the ld.Counsel of the assessee which has been afforded reasonable opportunity of being heard and accordingly, Ground No.10 of this appeal is dismissed.
In the result, the appeal filed by the assessee is partly allowed.
Order pronounced on the 23rd day of May, 2022, in Chennai.