2014 (3) TMI 763 - AT - Income Tax

Disallowance of interest expenses property purchased in the name of partners - Held that - The contentions of the assessee is accepted - Under the Partnership Act the partners are individually known as Partners and collectively known as Firm - Hence the partners are entitled to hold the properties belonging to the partnership firm in their individual name provided it is explicitly made clear that the partner is so holding the asset - the assets of M/s Venkiteswara Hospital were purchased in the name of three persons who are also partners of the assessee firm - The intention to transfer the assets and liabilities purchased from M/s Venkiteswara Hospital to the assessee firm were made clear by the agreement dated 28.5.2005 entered between the three persons (in whose name the assets of M/s Venkiteswara Hospital was purchased) and all the partners of the assessee firm. The value of assets brought in by the partners need not always be credited to their respective capital account - It is only one of the methods of accounting for bringing the assets and liabilities into the books of the firm - the assessee has paid the net value assets of Rs.35.00 lakhs directly to the concerned partners - Thus it amounts to crediting the partners account with their respective share and immediately making payment of the same to them - the submissions made by the assessee require verification at the end of the assessing officer thus the matter is remitted back to the AO for fresh adjudication Decided in favour of Revenue. Disallowance of depreciation Held that - The AO had disallowed the claim of depreciation on the reasoning that the assessee firm cannot be considered as the beneficial owner of the assets purchased from M/s Venkiteswara Hospital - while dealing with the issue relating to the disallowance of interest claim the matter of verification of submissions made by the assessee is remitted to the assessing officer thus this matter is also required to be remitted back to the AO for fresh adjudication Decided in favour of Revenue. Disallowance of depreciation on assets purchased from old welcare hospital Held that - It is not necessary that the assets of a partnership firm should be distributed only upon the dissolution of the firm i.e. even during the currency of the partnership firm the partners may take over the assets with the concurrence of the all other partners - according to the assessee the two partners of the assessee firm have taken over the assets and have also introduced them in the books of the assessee firm - When the partners bring the assets and introduce the same as the assets of the assessee firm then the assessee firm shall become owner of those assets - the conditions prescribed u/s 32 of the Act have been satisfied there is no reason to disallow the claim of depreciation - all the assets have been brought into the books of the assessee firm at the WDV value it is not clear as to whether this fact was examined by CIT(A) - this aspect requires verification at the end of the AO thus the matter is remitted back to the AO for fresh adjudication Decided in favour of Revenue. Disallowance of repairs and maintenance expenses Held that - The decision in assessee s own case for the earlier assessment year has been followed the expenditure incurred by the assessee is for the purpose of expansion of profit making apparatus - the expenditure has to fall within the capital field the Tribunal has already given a finding that the expenditure incurred on renovation of the building is a capital expenditure thus the order of the CIT(A) set aside and the matter is remitted back to the AO for adjudication Decided in favour of Revenue. Unexplained sundry creditors balances Differences in closing balances Held that - All the creditors are trade creditors i.e. they are not cash credits though the CIT(A) may not be empowered to set aside the matter yet in the absence of any other details relating to this creditor requires fresh consideration - the closing balance shown in the accounts of the assessee and the statement furnished by the parties did not tally - the decision taken by the CIT(A) is reasonable - Since the assessee did not prefer appeal against the said direction the assessee is not aggrieved by the decision of CIT(A) - the outstanding balance to the extent shown in the statements of accounts furnished by the parties have to be considered as proved thus there is no reason to interfere in the order of the CIT(A) - Decided partly in favour of Revenue. Disallowance u/s 40(a)(ia) of the Act Interest u/s 234B of the Act - Held that - The assessee has furnished copy of letter furnished by Dr. Pradeep and also copy of return of income filed by him to show that Dr. Pradeep had disclosed the receipts from the hospital of the assessee - The documents were filed to show that the responsibility to declare the OP & IP collections noticed in the seized records lie upon the concerned doctors - these documents were not considered by the AO the matter requires adjudication as to the applicability of section 40(a)(ia) of the Act thus the matter remitted back to the AO for fresh adjudication Decided in favour of Revenue.

Summary

Issues Involved:
1. Disallowance of interest expenses claimed by the assessee.
2. Disallowance of depreciation claimed on assets purchased from Venkiteswara Hospital.
3. Disallowance of depreciation claimed on assets purchased from Old Welcare Hospital.
4. Disallowance of repairs and maintenance expenses.
5. Addition of unexplained sundry creditors balances.
6. Disallowance under Section 40(a)(ia) of the Act.
7. Interest charged under Section 234B of the Act.

Issue-wise Analysis:

1. Disallowance of Interest Expenses Claimed by the Assessee:
The first common issue across all years relates to the disallowance of interest expenses claimed by the assessee. The Assessing Officer (AO) disallowed the interest expenses on the grounds that the loan taken by the assessee-firm from Catholic Syrian Bank was used to repay the loan liability of Venkiteswara Hospital, which was purchased by three partners in their personal capacity. The AO considered this as a diversion of funds and disallowed the interest claimed. However, the assessee argued that the assets and liabilities of Venkiteswara Hospital were brought into the books of the assessee-firm through a journal entry and an agreement dated 28.05.2005. The Tribunal found force in the assessee's contentions but noted that the AO did not examine the journal entries and the agreement. Therefore, the issue was remitted to the AO for fresh examination.

2. Disallowance of Depreciation Claimed on Assets Purchased from Venkiteswara Hospital:
The second issue pertains to the disallowance of depreciation on the building and equipment purchased from Venkiteswara Hospital. The AO disallowed the claim on the grounds that the assessee-firm was not the beneficial owner of the assets. The CIT(A) allowed the claim, noting that the assets were brought into the books and used for business purposes. The Tribunal, however, remitted the issue back to the AO for fresh examination along with the interest disallowance issue.

3. Disallowance of Depreciation Claimed on Assets Purchased from Old Welcare Hospital:
The third issue involves the disallowance of depreciation on assets purchased from Old Welcare Hospital. The AO disallowed the claim, citing that the dissolution deed of Old Welcare Hospital was not valid and the assets were not brought into the books of the assessee-firm. The CIT(A) allowed the claim, accepting the assessee's submission that the assets were brought into the books and used for business. The Tribunal noted that the AO's presumption regarding the dissolution deed was incorrect and remitted the issue back to the AO for fresh examination.

4. Disallowance of Repairs and Maintenance Expenses:
The fourth issue relates to the disallowance of repairs and maintenance expenses claimed by the assessee in assessment years 2008-09 and 2009-10. The AO disallowed the expenses, considering them as capital expenditure due to the significant increase in the amounts compared to previous years and the lack of supporting bills/vouchers. The CIT(A) allowed the claim, following a Tribunal decision in a similar case. The Tribunal, however, noted that the issue of the nature of expenditure had already been decided in a revision order, treating it as capital expenditure. Therefore, the Tribunal restored the addition made by the AO for building repairs and remitted the issue of repairs on other assets back to the AO for fresh examination.

5. Addition of Unexplained Sundry Creditors Balances:
The fifth issue involves the addition of unexplained sundry creditors balances. The AO added the balances as income due to the lack of confirmation letters from the creditors. The CIT(A) accepted some of the balances based on the remand report and remitted the matter of one creditor back to the AO. The Tribunal upheld the CIT(A)'s decision to assess the difference between the balances as the income of the assessee and remitted the matter of the remaining creditor back to the AO for fresh consideration.

6. Disallowance under Section 40(a)(ia) of the Act:
The sixth issue pertains to the disallowance under Section 40(a)(ia) for non-deduction of tax at source on payments made to doctors. The AO disallowed the payments based on seized documents and sworn statements indicating that the collections were handed over to the doctors. The CIT(A) accepted the assessee's contention that the collections were not hospital income and directed the AO to take necessary action against the doctors. The Tribunal remitted the issue back to the AO for fresh examination, considering the legal position and the documents submitted by the assessee.

7. Interest Charged under Section 234B of the Act:
The final issue involves the interest charged under Section 234B. The CIT(A) directed the AO to compute interest under Section 234B(3) based on a jurisdictional High Court decision. The revenue contended that the facts of the case were distinguishable. The Tribunal remitted the issue back to the AO for fresh examination, considering the High Court decision.

Conclusion:
The Tribunal set aside and remitted several issues back to the AO for fresh examination, including the disallowance of interest expenses, depreciation claims, repairs and maintenance expenses, unexplained sundry creditors balances, and disallowance under Section 40(a)(ia). The Tribunal upheld the CIT(A)'s decision on the difference in sundry creditors balances and remitted the issue of interest charged under Section 234B back to the AO for fresh consideration. The appeals for assessment years 2006-07 to 2008-09 were allowed, and the appeal for assessment year 2009-10 was partly allowed.