2014 (1) TMI 897 - AT - Income Tax

Disallowance of M&D expenses - Genuineness of the claim of consumption of the medicine and disposables for the patients and the recording of the same Held that - The paper books contains sample copies of the patients records - there is some noting relating to prescription of the medicines by the doctors - they do not indicate that the prescribed medicines are supplied by the assessee the details furnished are not exhaustive for all the medicines consumed - the assessee is not maintaining the records relating to consumption of medicine - AO has not demonstrated the need for maintaining any records in this regard - it is trite law that the assessee is under obligation to demonstrate the claim of expenditure made in the return/financial statements thus, the AO is justified in resorting to make disallowance on account of consumption of medicine and disposables. The basis adopted by both the authorities rejected, ie flat rate of 20% or 5% of the claim - some amount of guesswork is accepted in such estimation based additions and however, complete guesswork is unacceptable - considering the failures of the assessee in discharge of the onus and to establish that said medicine and disposables are consumed for the patients, making round sum disallowance out of the claim in the return, must meet the needs of the justice - Such a measure may motivate the assessee in directing his accounting staff to maintain proper records or evidences on this account of consumption of medicine and disposables too - The disallowance is restricted to round sum amount of Rs. 1 lakh - Thus, the AO is directed to restrict the disallowance Decided Partly in favour of Assessee.

Summary

Issues:
Disallowance of 5% of M&D expenses for the assessment year 2008-2009.

Analysis:

Issue 1: Disallowance of 5% of M&D expenses
The appellant, a General Surgeon owning a hospital, filed an appeal against the CIT(A)'s order confirming the disallowance of 5% of Medicine and Disposables (M&D) expenses. The AO disallowed Rs. 7,68,833 due to the failure of the assessee to produce records on the consumption of medicine. The CIT(A) reduced the disallowance to 5%, noting that the AO did not point out specific defects in the stock maintenance. The appellant argued that the entire expenditure on M&D was recovered from patients and shown as income under Medicines Charges Recovery. The CIT(A) found the 20% disallowance excessive and reduced it to 5%. The appellant contested this, presenting patient records as evidence of medicine consumption. The Revenue Authorities argued that the appellant failed to maintain necessary records, justifying the disallowance. The Tribunal noted the absence of exhaustive records on medicine consumption and rejected the appellant's consistency argument. While agreeing with the need for records, the Tribunal found the flat rate disallowances of 20% and 5% arbitrary. Instead, they imposed a round sum disallowance of Rs. 1 lakh to motivate proper record-keeping. Consequently, the appeal was partly allowed, modifying the disallowance amount.

This detailed analysis covers the issues involved in the legal judgment regarding the disallowance of M&D expenses, providing a comprehensive overview of the arguments presented by both parties and the Tribunal's reasoning leading to the final decision.