2015 (11) TMI 427 - AT - Income Tax

Disallowance of purchase of consumable goods, i.e., cotton, gauze and bandage, etc. - ingenuine and unverifiable purchases - Held that - The authorities below have relied on the statements of managing director, accountant and proprietor of SKS Shri Jayant Khandelwal. Statement of Shri Khandelwal was neither supplied nor the cross-examination was given to the assessee, consequently the statement of Shri Khandelwal may not be held as reliable evidence against the assessee. However the statements of the managing director and accountant have neither been retracted nor effectively controverted, consequently they remain valid piece of evidence in this behalf. The assessee has endeavoured to demonstrate that the copious consumption of cotton gauze, bandages, etc., has not been disputed ; books of account are properly maintained and not rejected by the lower authorities. As compared to the assessment year 2009-10 the assessee s gross receipts, gross profit and net profit percentage have gone up and at the same time percentage consumption of cotton has gone down ; this data also has not been disputed in any manner by the Revenue, the assessee claims that no cotton was purchased from SKS in 2009-10. In this circumstance an alternate plea is advanced that a suitable estimate of disallowance be adopted instead of total disallowance. Reliance is placed on our consolidated order in the case of Anuj Kumar Varshney (supra) ; in this case the addition qua unverifiable purchases of semi-precious stones has been held to be at 15 per cent. of such unverifiable purchases. Looking at the entirety of facts and circumstances, i.e., the books of account being not rejected and consumption of cotton having comparatively decreased, we are inclined to follow our judgment in the case of Anuj Kumar Varshney (2015 (4) TMI 533 - ITAT JAIPUR) and direct to restrict the disallowance to 15 per cent. of purchases from SKS. Thus the assessee s appeals are partly allowed. Claim of interest under section 36(1)(iii) disallowed - Held that - The assessee had at its disposal sufficient funds available in the form of share capital, reserves and other interest-free funds, etc., which are more than alleged advances/investments.The nature of such advances/investments as explained and considered by the learned Commissioner of Income-tax (Appeals) leave no room for any doubt that the alleged advances/investments were for the purposes of the assessee s hospital activities and medical professions. Thus no disallowance of interest under section 36(1)(iii) is justified. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of purchase of consumable goods.
2. Deletion of disallowance of interest under section 36(1)(iii).

Issue-wise Detailed Analysis:

1. Disallowance of Purchase of Consumable Goods:

The assessee contested the disallowance of purchases of consumable goods (cotton, gauze, and bandage) amounting to Rs. 27,28,014 for the assessment year 2010-11 and Rs. 30,13,125 for the assessment year 2011-12. The Commissioner of Income-tax (Appeals) upheld the disallowance on the grounds that the purchases from M/s. Krishna Surgicals were not genuine, despite payments being made through account payee cheques. The assessee argued that no incriminating evidence was found during the search indicating any cash received back, and the statement of Shri Jayant Khandelwal, Prop. M/s. Krishna Surgicals, was relied upon without providing the assessee with a copy or cross-examination, thus violating principles of natural justice.

During the search, statements from the managing director and accountant of the assessee-company admitted that part of the purchases were not genuine. However, no incriminating material was found to corroborate these statements. The assessee maintained that the consumption of cotton and gauze was reasonable and comparable to prior years, and the books of account were not rejected or disturbed by the Assessing Officer. The Tribunal noted that the statements of the managing director and accountant were not retracted or effectively controverted, making them valid evidence. However, the statement of Shri Khandelwal was not supplied or cross-examined, rendering it unreliable.

The Tribunal acknowledged the necessity of consumable goods in the hospital's operations and noted that the percentage consumption of cotton had decreased despite higher receipts and profits. Following the precedent in Anuj Kumar Varshney v. ITO, the Tribunal directed to restrict the disallowance to 15% of the purchases from M/s. Krishna Surgicals, partly allowing the assessee's appeals.

2. Deletion of Disallowance of Interest under Section 36(1)(iii):

The Revenue appealed against the deletion of disallowance of interest amounting to Rs. 31,10,640 for the assessment year 2010-11 and Rs. 26,81,520 for the assessment year 2011-12. The Assessing Officer had disallowed the interest on the grounds that interest-bearing funds were diverted for non-business purposes. The Commissioner of Income-tax (Appeals) deleted the disallowance, noting that the assessee had sufficient non-interest-bearing funds available, including a substantial amount received as a security deposit from M/s. Modest Builders Ltd. for a joint venture project.

The Tribunal upheld the deletion, agreeing with the Commissioner of Income-tax (Appeals) that the assessee had sufficient interest-free funds to cover the advances and investments. The Tribunal also noted that the advances to Sharma Memorial Hospital Research Institute were for commercial expediency, as the institute provided trained staff to the assessee's hospital without any payment. The Tribunal cited various judgments supporting the principle that interest-free advances made for commercial expediency or from own funds do not warrant disallowance of interest under section 36(1)(iii).

Conclusion:

The Tribunal partly allowed the assessee's appeals by restricting the disallowance of unverifiable purchases to 15% and dismissed the Revenue's appeals, upholding the deletion of disallowance of interest under section 36(1)(iii). The order was pronounced in the open court on June 5, 2015.