PENMATSA RAMA KRISHNA VARMA,BHIMAVARAM vs. ACIT, CIRCLE-1, RAJAHMUNDRY

PER S. BALAKRISHNAN, Accountant Member :

2 2. Brief facts of the case are that the assessee is an individual and proprietor of Varma Hospitals, Bhimavaram. The assessee filed his return of income declaring a total income of Rs. 2,02,45,230/- for the AY 2017-18 on 25/10/2017. Subsequently, the case was selected for scrutiny under CASS and a notice U/s. 143(2) was issued on 28/09/2018 and the same was duly served on the assessee. In response to the notice u/s. 143(2) and 142(1) of the Act, the assessee submitted various information called for by the Ld. AO. The Ld. AO observed from the submissions that the assessee has received the employee’s contribution of Provident Fund from its employees amounting to Rs. 6,52,269/- and which was paid to the relevant fund account after stipulated due date under respective Act. Similarly, the Ld. AO also observed that the employee’s contribution from ESI was not deposited in the relevant account on or before the stipulated due date under the relevant Act. The Ld. AO therefore disallowed a sum of Rs. 6,52,269/- and Rs. 95,693/- towards employees contribution of PF and ESI respectively. The Ld. AO also further disallowed a sum of Rs. 4,93,020/- claimed by the assessee towards vehicle maintenance expenses. Further, the Ld. AO also observed that the assessee has deposited Rs. 93,43,840/- in cash during the demonetization period in three different bank

3 accounts. Out of the above mentioned cash deposits the Ld. AO found that an amount of Rs. 47,43,840/- was deposited in specified bank notes (SBNs). The Ld. AO considered the opening balance in the books of accounts of the assessee on 8/11/2016 at Rs. 35,92,085/- and the personal cash of Rs. 3,35,840/- at the residence of Dr. PRK Varma (the assessee) kept at his home to meet the personal expenditure and treated the balance Rs. 8,16,000/-as unaccounted cash and added it to the total income of the assessee U/s. 68 of the Act. It is the case of the Ld. AO that SBNs ceased to be a legal tender w.e.f 8/11/2016 vide Notification in S.O. No. 3407(E), dated 8/11/2016 and hence considered the amount deposited as unexplained and taxed u/s. 68 of the Act. Aggrieved by the order of the Ld. AO, the assessee filed an appeal before the Ld. CIT(A), NFAC.

3. Before the Ld. CIT(A), the assessee’s representative argued that Rs. 8,16,000/- cannot be treated as unexplained because it is accounted in the books of accounts and it cannot be covered u/s 68 of the Act. Further, the Ld. Assessee’s Representative also argued before the Ld. CIT (A) regarding the belated payment of employee’s contribution of PF and ESI and cited various judicial decisions. Considering the above submissions, the 4 Ld.CIT (A) partly allowed the appeal of the assessee. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us.

“1. The order of the Ld. CIT(A) is contrary to the facts and also the law applicable to the facts of the case.

4. The Ld. CIT(A) is not justified in upholding the action of the Assessing Officer in treating the fee of Rs. 8,16,000 collected from patients in SBNs after demonetization as ‘income from other sources’ and bringing the same to tax U/s. 115BBE of the Act.

5. Any other grounds may be urged at the time of hearing.”

“54. In the opinion of this Court, the reasoning in the impugned judgment that the non-obstante clause would not in any manner dilute or override the employer’s obligation to deposit the amounts retained by it or deducted by it from the employee’s income, unless the condition that it is deposited on or before the due date, is correct and justified. The non-obstante clause has to be understood in the context of the entire provision of Section 43B which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, cannot apply in the case of amounts which are held in trust, as it is in the case of employees’ contributions- which are deducted from their income. They are not part of the assessee 6 employer’s income, nor are they heads of deduction per se in the form of statutory pay out. They are others’ income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted, the non-obstante clause under Section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee’s contribution on or before the due date as a condition for deduction.

The Ld. AR relied on the decision of the Coordinate Bench of the Tribunal in the case of ITO vs. Sri Tatiparti Satyanarayana in ITA

7 No. 76/Viz/2021, dated 16/3/2022 regarding the acceptance of the SBNs. The Ld. AR pleaded that the order of the Ld. CIT (A) be set-aside on this issue.

Per contra, the Ld. DR submitted that the hospital is a multi-specialty facility hospital and the patients had multiple ways other than cash to make payments to the hospital. The Ld. DR further submitted that the patients who can afford to receive the services of the multi-specialty hospital also possess the means to pay their fees through electronic modes. The Ld. DR therefore pleaded that the order of the Ld. Revenue Authorities be upheld.

Section 5 of the Specified Bank Notes (Cessation of Liabilities Act, 2017) Act (herein referred as “SBN Act”) clearly states that on and from the appointed day, no person shall, knowingly or voluntarily, hold, transfer or receive any specified bank note.

Section 2(1)(a) of the Specified Bank Notes (Cessation of Liabilities Act, 2017) also defines “appointed day” which means the 31st Day of December, 2016. As per the SBN Act, no person is prohibited from receiving/accepting the SBNs on or before 31/12/2016. Further, the guarantee of the Central Government and the liability of the Reserve Bank of India do not cease to exist till 31/12/2016. A person receiving SBNs after the announcement of demonetization where the SBNs ceased to be a legal tender, solely depends on the discretion of the person accepting such payment. The assessee has therefore accepted such SBNs as professional fees and accounted for in the books of accounts and deposited the SBNs into the bank account on or before the specified date. We therefore find the contention of the Ld. Revenue Authorities considering the receipt of SBNs from fees

9 collected as illegal and thereby invoking the provisions of section 68 is not valid in law. We are therefore inclined to quash the decision of the Ld. CIT(A) on this ground and allow the ground raised by the assessee.