DCIT, NEW DELHI vs. M/S HERITAGE HOSPITAL LTD.,, NEW DELHI

Facts relating to Ground No. 1 which pertains to disallowance of Travelling and Conveyance Expenses are that the Assessing Officer observed that the assessee has claimed travelling and conveyance expenses during the year under consideration at Rs. 73,40,934/- paid to four directors of the assessee and Rs. 13,73,469/- to others.

The Assessing Officer observed that most of the expenses were siphoned off by the directors in the name of travelling and conveyance expenses intentionally taking care that the amount remained below monetary limit specified u/s 40A(3) of the Act. The Assessing Officer further observed that the vouchers were not only self-made but also prepared just for the sake of vouchers to create self-serving documentary evidence.

The Assessing Officer further observed that the petrol bills were prepared without giving any details of vehicles and how such huge quantity of petrol ranging from 159 liters to 319 liters was filled up in the vouchers. The vouchers did not bear CST No. and even no landline number was mentioned. Therefore, the Assessing Officer came to the conclusion that these self-serving vouchers have been stage managed by the assessee simply to siphon off the company’s money to non- business purposes of the company by creating a veneer of credibility by way of stage managed self serving vouchers.

Relying upon the decision of the Hon'ble Supreme Court in the case of CIT Vs. Durga Prasad More and decision of the Hon'ble Madras High Court in the case of Southern Sea Foods Ltd 215 ITR 176 and keeping in view the pragmatic functioning of the assessee’s business, the Assessing Officer gave relief to the assessee 50% of expense and disallowed 50% of the expenses which comes to Rs. 43,57,201/-.

Aggrieved, the assessee went in appeal before the ld. CIT(A).

The ld. CIT(A), after considering the submissions of the ld. counsel for the assessee, limited the disallowance to Rs 4,20,871/- i.e. 20% of expenses claimed by directors amounting to Rs. 21,04,353/-.

The ld. DR argued that the amount towards travelling was paid to related parties in cash. He further argued that there was no 3rd party bills and only self made vouchers. He drew our attention to the Assessing Officer’s findings that petrol bills were not verifiable as it had no suppliers names or CST No.

Per contra, the ld. counsel for the assessee relied on the orders of the ld. CIT(A).The ld AR of the assessee further submitted that the assessee operates in the region of the country where cash payment for petty services like for labour payments, vehicle hire charges, tent- wala, catering services, petrol pumps etc are a general norm. There are cities and hundreds of surrounding villages from where the assessee gets payment and business. He further submitted that the socio-economic conditions of the region should not be ignored in deciding any case.

We have heard the rival submissions and have perused the relevant material on record. We find no infirmity in the findings of the ld. CIT(A) who was of the view that without pointing out any specific defect or any bogus travelling expenses, disallowance of 50% travelling expenses due to availability of self-made vouchers as well as cash payment which is also below the limit allowed u/s 40A(3) of the Act was not justified. The CIT(A), however, considered that there were self made travelling bills of directors totaling to Rs 21,04,353/- and he was fair enough to limit the disallowance to Rs 4,20,871/- i.e. 20% of expenses claimed by directors amounting to Rs. 21,04,353/-.Ground No. 1 of the Revenue is therefore, is dismissed.

Facts relating to Ground No. 2 which pertains to disallowance of repair and maintenance expenses of Rs. 11,50,596/-.

The assessee company claimed repair and maintenance expenses at Rs. 15,93,296/-.From the perusal of the ledger of repair and maintenance of building, the Assessing Officer noticed that the assessee did not deduct TDS on certain expenses. The Assessing Officer was of the view that as per section 194C of the Act, the assessee is liable to deduct TDS on the expenses of Rs. 7,07,895/- and since the assessee company failed to deduct TDS, the Assessing Officer came to the conclusion that TDS is liable to be deducted u/s 40(a)(ia) of the Act and added a sum of Rs. 7,07,895 to the income of the assessee. The AO also disallowed Rs 4,42,701/- being 50% of Rs 9,21,908/- treating the same for non-business purposes.

When the assessee went in appeal before the ld. CIT(A), the ld. CIT(A) deleted the both the disallowances by holding that the expense was incurred for purchase of material and not for service. And as provisions of section 194C to 194J are attracted only on purchase of services, no TDS was required to be deducted from the said expense.

Before us, the ld. DR could not controvert the ld. CIT(A)’s finding that provisions of section 194C to 194J are attracted only on purchase of services and that the expenses were incurred for business purposes only.

Having heard the rival submissions, we are in agreement with the findings of the ld. CIT(A). The ld. CIT(A) has rightly held that provisions of section 194C to 194J are attracted only on purchase of services and that the expenses were incurred for business purposes only. Accordingly, Ground No. 2 of the Revenue is dismissed.

Ground No. 3 relates to disallowance of general expense of Rs. 11,55,156/-.

The Assessing Officer observed that the assessee company has claimed general expenses amounting to Rs. 11,55,156/-. From the details of these expenses the Assessing Officer observed that most of the expenses were in the nature of religious expenses, donations or donations to political parties. The Assessing Officer was of the view that the expenses were not wholly and exclusively incurred for the purpose of business. Relying upon the decision of the Hon'ble Madras High Court in the case of CIT Vs. Southern Sea Foods Ltd 215 ITR 176, the Assessing Officer disallowed the entire claim of Rs. 11,55,156/- and added the same to the income of the assessee. Penalty proceedings u/s 271(1)(c) of the Act were initiated separately.

Aggrieved, the assessee went in appeal before the ld. CIT(A).

On going through the allegation of the Assessing Officer as well as the objection raised by the assessee, the ld. CIT(A) was of the considered view that the addition made by the Assessing Officer was unjustified and without any specific remark and held that the expenses were incurred for business purposes only. Accordingly, the ld. CIT(A) deleted the addition.

After careful consideration of the facts and material available on record and hearing both the rival submissions where similar arguments as in Ground No. 1were presented. Having heard the submissions, we are of the considered view that the ld. CIT(A) has rightly deleted the addition. Accordingly, Ground No. 3 of the Revenue is dismissed.

Ground No. 4 relates to deletion of addition of Rs. 7,37,830/- on account of hoarding expenses being 50% expenses of Rs. 14,75,661/- incurred for advertisement and hoarding expenses.

The Assessing Officer was of the opinion that most of the expenses have been paid in cash and money was siphoned off by making self made vouchers and expenditure is not wholly and exclusively for the purpose of business.

However, the ld. CIT(A) was of the view that the Assessing Officer was not right in making disallowance on estimate basis and without adducing any specific finding and evidence on the bogus nature of the expenses. The ld. CIT(A) deleted the addition of Rs. 7,37,830/-.

After considering the rival submissions and perusing the orders of the authorities below and having heard the rival submissions where similar arguments as in Ground No. 1were presented. Having heard the submissions, we are in agreement with the findings of the ld. CIT(A).

Ground No. 5 is with regard to disallowance of Rs 10,43,117/- claimed as business promotion expenses.

Here also, the Assessing Officer made addition relying upon the decision of the Hon'ble Madras High Court in the case of CIT Vs. Southern Sea Foods Ltd 215 ITR 176. The Assessing Officer disallowed 50% of these expenses of Rs. 10,43,117/- out of total business promotion expenses of Rs. 20,86,234/- and added the same to the income of the assessee on the ground that the expenses have been paid in cash and money was siphoned off by making self made vouchers and expenditure is not wholly and exclusively for the purpose of business.

The ld. CIT(A), however, was of the view that the Assessing Officer was not right in making disallowance on estimate basis and without adducing any specific finding and evidence on the bogus nature of the expenses. The ld. CIT(A) deleted the addition of Rs. 10,43,117/-.

We have heard the rival submissions where both the parties presented similar arguments as in Ground No. 1 and have perused the relevant material on record. After considering the rival submissions and perusing the orders of the authorities below, we are in agreement with the findings of the ld. CIT(A). Accordingly, Ground No. 5 of the Revenue is dismissed.

Ground No. 6 relates to disallowance of doctor reporting fees of Rs. 2,19,425/-.

The assessee company was asked to furnish details of doctor reporting fees with TDS thereon. In compliance, the assessee company furnished a detailed list of Doctor reporting expenses and on perusal of the same the Assessing Officer observed that the amounts were not supported by any vouchers and were paid on different dates and total of the sum in individual cases exceeded Rs. 30,000/-.

Relying upon the decision of the Hon'ble Madras High Court in the case of Southern Sea Foods [supra], the Assessing Officer disallowed a sum of Rs. 2,19,625/- on the ground that it has been claimed as miscellaneous expenses where no TDS has been deducted.

When the assessee went in appeal before the ld. CIT(A), the CIT(A) accepted the assessee’s argument that all the amounts were paid to small technicians and different person and that not a single amount is paid which is more than the amount where TDS was to be deducted. Accordingly, the ld. CIT(A) deleted the disallowance stating that TDS is deducted only in cases where the single payment exceeds the threshold limit as per the provision of Chapter XVII of the IT Act.

We have gone through the facts and submissions and perused the orders of the authorities below. The ld DR could not controvert the findings of the ld. CIT(A) that payment of doctor fees do not require deduction of TDS as they were below threshold limit. Having heard the rival submissions, we are of considered opinion that the ld. CIT(A) has rightly deleted the addition made on this account. Accordingly, Ground No. 6 of the Revenue is dismissed.

Ground No. 7 is with regard to addition of Rs 11,65,772/-on account of income accrued.

The assessee company had shown advance payments from patients at Rs. 18,65,156/-. The AO noticed that this amount represented advance received from patients admitted from 26.03.2012 onwards till 31.03.2012 and taking treatment in the hospital. The AO held that as the assessee followed mercantile system of accounting, therefore 5 days income till 31st March should have been credited in the profit and loss account as various expense incurred on account of electricity, doctors fees and huge infrastructure during the last 5 days of the year, were debited by the assessee in its P&L A/c. Therefore, the Assessing Officer took a ratio of 5:3 and calculated the income out of the advance amount on accrual basis for the year and accordingly, an amount of Rs. 11,65,722/- was added to the total income of the assessee.

The assessee went in appeal before the ld. CIT(A).

After considering the facts and submissions, the ld. CIT(A) was of the view that segregation of amount for the purpose of income recognition is not possible. He further held that the assessee’s system of method of accounting being adopted from last so many years of recognizing the income from the patient on the basis of final bill prepared till 31stMarch, being closing of the year, should be acceptable. With this view the ld. CIT(A) deleted the addition.

The ld DR reiterated the arguments of the assessing officer. Per contra, the ld AR of the assessee submitted that the assessee follows a mercantile system where the bills of the patients are raised after competition of service. As per consistent practice, patients deposit advance at the time of admission which is adjusted at the final billing upon competition of service. The Ld AR argued that income becomes due only after services are rendered. The ld DR could not controvert the argument of the AR and relied on the Assessing Officer’s order.

We have gone through the facts and submissions and perused the orders of the authorities below. We have heard the rival submission.

Ground No. 8 relates to addition on account of professional expenses of Rs. 5,34,000/-.

During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed legal and professional fees paid to M/s Aventus Consulting, New Delhi. Not satisfied with the explanation of the assessee, the Assessing Officer observed that the assessee company did not furnish any proof either for providing works to M/s Aventus Consulting or any agreement or document signed for this purpose. Accordingly, the Assessing Officer made disallowance of Rs. 5,34,000/- and added the same to the income of the assessee.

Aggrieved, the assessee went in appeal before the ld. CIT(A) who deleted the disallowance.

Now the Revenue is aggrieved and is in appeal before us.

The ld DR relied on the orders of the assessing officer. Per contra, the ld AR of the assessee submitted that the consulting job was awarded to M/s Aventus Consulting Private Limited which is a renowned company in the field of medical services having office in Delhi. The job was awarded for Rs 20,00,000. But due to some issues the job was terminated in between and only part payment was made till the job remained with the party. The assessee deducted TDS on part payment.

In the circumstances, the ld AR argued when the identity of party is well established, documentary evidence in the form of Bill of Parties were available, TDS was deducted, payment was made by cheque, there is no reason to disallow the expense. He also submitted that if the AO had doubts about the genuineness of the party and its work and payment, the Assessing Officer should have made independent inquiry with Aventus Consulting Services to arrive at his decision that the expenses were not incurred only and exclusively for the business purpose. The learned AR further submitted that the expenses were genuine and was for the purpose of business. The ld DR could not controvert the argument of the ld AR.

We have gone through the facts and submissions and perused the orders of the authorities below. We have heard the rival submissions.

Ground No. 9 is with regard to disallowance of interest expenses Rs 1,80,78,877/- u/s 36(1)(iii).

During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee company has invested in tangible assets of Rs 26,21,08,334/- and also invested Rs. 22,18,27,200/- in the form of capital work in progress (CWIP) for new project and total investment is Rs 48,39,35,534/-. Against this investment the available funds with assessee in the form of share capital and Reserves and surplus were far less that investment in the fixed assets. On the basis of this, the AO held that the working capital loan funds were diverted by the assessee to fund CWIP and he disallowed the interest expense of Rs. 1,80,78,877/- invoking section 36(1)(iii).

The assessee went in appeal before the ld. CIT(A). The ld. CIT(A) was of the opinion that total funds available to the company are more than the investment in fixed assets and payment of interest has been made for day to day business of the company and, therefore, it cannot be disallowed. The CIT(A), therefore, deleted the addition on account of interest disallowed.

Now the aggrieved Revenue is in appeal before us.

The Ld DR while relying on the order of the AO argued that the CIT(A) did not examine whether interest free funds were available with the assessee for funding the CWIP and that the onus is on the assessee to demonstrate from the fund flow that the interest bearing funds have not been used for CWIP.

The ld AR of the assessee submitted that the entire amount of finance cost relating to working capital loans from banks of Rs. 1.80 crore debited in the P&L account has been disallowed by the Assessing officer. The ld AR of the assessee further submitted that assessee company has been in business for 20 years and is availing bank loan limits for its day-to-day operational needs. During last year (2010-11) also the finance cost was Rs 1.27 Crore and in the current year it was Rs 1.80 crore. The increase in finance cost was because of addition of MRI machine and increase in operations. The MRI machine has been installed and added to fixed asset. Secondly, there has been increase in the revenue by 12% and net profit by 0.7% in the current year vis a vis last year. As such, there is consistency with regard to the need and utilization of bank loans. Further, he argued that as a standard practice, the bank sanctioning the loan ensure the funds utilization towards need for which the loan was obtained. And Banks, as lenders, don't allow any diversion of funds.

The ld AR reiterated that the company did not borrow for acquisition of CWIP and that the AO should have verified the facts on the utilization of borrowings, directly from the bankers before taking severe action of disallowance. The assumption that loan funds were diverted towards capital work in progress is unfounded. Learned AR submitted further that the total investment in CWIP was Rs 22.18 Crore as on 31/3/2012 and last year it was Rs. 19.78 crore. The incremental increase was only Rs. 2.40 crore in CWIP. The net profit of the company post tax was Rs. 3.45 crore, which was itself sufficient enough to fund the needs of CWIP.

The ld. counsel for the assessee further argued that even on the overall basis, the availability of total shareholders and reserve fund is far in excess of investment in CWIP. As such, the internal funds were used by assessee for funding CWIP. The AR argued that the mischief of Section 36(1)(iii)are not triggered in the instant case. On the reliance of the AO on 8 case laws in his order, the Ld AR stated that these relate to disallowance of interest on account of giving interest free loan to sister concerns. The facts in instant cases are entirely different and as such, the AO’s reliance on these case laws is misplaced.

In its rejoinder, the Ld DR could not controvert the arguments of the AR and relied on the order of the AO.

We have gone through the facts and submissions and perused the orders of the authorities below. We have heard the rival submissions.

From the factual matrix of the case, we find that the AO’s case rest on the theory that the assessee has diverted its borrowings to fund its CWIP of Rs 22.18 crore for new project and hence interest expense debited in P&L a/c of Rs 1,80,78,877/- needs to be disallowed as capital expense under proviso to section 36(1)(iii).

To ascertain the factual matrix of interest payment and whether the proviso to section 36(1)(iii) can be invoked, we examined the details of finance cost. We find that the details of finance cost for two years are as under:

From the above table, the assessee’s contention gets support that the interest paid is for day to day working. The examination of the accounts of the assessee from its audited report also supports the argument that the balance sheet for FY 2010-11 and 2011-12 shows that CWIP increased from Rs 19.58 crore in FY 2010-11 to Rs 22.18 crore in FY 2011-12meaning there was an incremental increase of only Rs.2.40 crore as investment in CWIP in FY 2011-12. Therefore, there is force in the ld AR argument that this incremental increase in CWIP could easily be funded by the internal profit of Rs 3.45 crore of the instant FY. We also take cognizance of the fact that the ld DR could not point out any incidence of any such interest disallowance as capital expense in any previous year.

The discussion above, therefore, leads us to conclude, that merely stating that capital and reserve were less than investment in CWIP will not establish AO’s theory of borrowed funds being diverted towards investment in CWIP. The Assessing Officer cannot simply disregard the assessee’s explanation that the internal funds were used for funding the CWIP and that the interest was paid for the purposes of meeting day to day working. The AO should have verified from the bank as to how the borrowed fund was utilized to dispel the assessee’s contention as once the assessee has submitted its explanation, the onus shifts to the AO to disprove the assessee’s contention.

From the above narration it is but apparent that the interest of Rs 1.80 crore was paid for day-to-day operational needs and the same cannot be brought under the mischief of proviso of section 36(1)(iii).

In the result, the appeal of the Revenue in is dismissed.