2020 (9) TMI 914 - AT - Income Tax

Disallowance of discount and amount written off - addition @ 50% - Difference between rate charged from these institutions and normal rate of hospitals and Percentage wise discount on the bill amount - HELD THAT - All the details were available but since the details were bulky (109 pages/more than 4000 entries) and further furnishing addresses would have made the details further bulkier which results into wastage of stationery and manpower unnecessary. Assessee is running Heart General Hospital and due to medico legal reason assessee Company is expected to have address of each patient. Complete books of accounts along with supporting vouchers, bills containing addresses of the patients and other evidences were produced on 6th, 14th 21st October, 4th, 12th November, 2008. The AO could have very well cross verified the details and found out the addresses from the bills produced has he so desired. However, no proper verification was made with respect to books produced before him and arbitrarily disallowed 50% of such discount. Even before the ld. CIT(A), copies of bills raised and some page of patient register evidencing that complete details of patients were available with the company were filed - it is general practice in any profession to allow discounts to the relative and known, which cannot be denied and can t be termed as perquisites in the hands of doctors. No merit in the observation of the A.O. to the effect that when Company was in losses it was not justifiable for the Company to allow discount to patients. The AO has transgressed into the arena of businessman. How business is to be conducted is the sole prerogative of the assessee. The AO cannot sit in the arm chair of the businessman and dictate the terms at which business is to be conducted. Even the past history of the assessee, where the assessments were framed U/s 143(3) of the Act and no disallowance was made in the A.Y. 2004-05 and 2005-06. Thus discount claimed by the assessee Company is justified which deserves to be allowed. Disallowance of orthopedic consumption expenses - HELD THAT -Since the complete expense is fully verifiable as evident from above table, AO as well as CIT(A) has wrongly observed that consumption declared in the month of June have not been used for business purpose. In view of above, orthopedic expense claimed by the assessee Company is fully verifiable. Disallowance of Cath Lab Expenses - AO estimating Cash Lab Receipts based on ratio between Cath Lab Income and Cath Lab Expense - HELD THAT - AO has estimated the Gross Cath Lab Income on the basis of ratio of Cath Lab expense and Cath Lab income for the month of May. He has failed to co-relate the expense incurred with the income recorded in the month of May. Most of the expenses which have actually been incurred in May month were booked in the month of June - expenditure in relation to any particular income was not necessarily booked in the same month. Therefore, month wise correlation done by the AO between Cath Lab incomes and expenditures is baseless. The AO ignoring the above facts applied the ratio of 175% Although applied by AO 150%), to the Cath Lab expense for determining Cath Lab receipts which is not justified. During the month of May some specific procedures were also carried out, for which doctors were called for from Mumbai. Professional Fees paid to these doctors were also recovered from the patients and credited to Cath Lab Income A/C. Since the amount paid to doctors was separately considered under the head Professional fees paid, it resulted into enhancement of ratio between Cath lab Income and Cath Lab Expense. No merit in the disallowance so made by the A.O. Disallowance of salary u/s 40A(2)(b) - salary paid to director of the Company as assessee failed to justify this expenditure - HELD THAT - The above director was looking after the administration work of the assessee Company. He was 83 years old and earlier working as administrator at M/s Heart Hospital Research Centre and Purchase executive in M/s Capstan Meters India Ltd. For more than 40 years and looking to his vast experience, salary paid to him was reasonable - in view of the above factual position and keeping in view the work undertaken by Shri Guman Mal Tongia, there is no justification for disallowance of salary of ₹ 1,09,300/-. Disallowance of rent paid to Shri Guman Mal Uongia and M/s Heart Hospital research Centre u/s 40A(2)(b) - HELD THAT - Rent to M/s Heart hospital research Centre was paid for accommodation for keeping records and for providing residence to Dr. Ravindra Tongia, Director of the Company. Salary paid to Shri Ravindera Tongia, we observe that the premise is situated at 8/A, Yudhister Marg, C-scheme, Jaipur which is near to hospital of the assessee Company Looking to the area occupied by the assessee Company. The proximity to the Hospital and posh locality of the premises, the rent paid is reasonable. The services of Dr. R.K. Tongia are required by the assessee Company on 24 hours basis. The area occupied for Dr. R.K. Tongia s residence is approximately 4000 sq. ft. And area occupied for record keeping is approximately 188 sq. ft. Assessee Company has also paid the same rent in AY 2005-06 which was allowed by in the assessment made u/s 143(3) of the Act. In view of the above, there is no justification for the disallowance made by the A.O. amounting to ₹ 2,76,000/-. Disallowance of Job paid Charges - HELD THAT - After going through the details of job charges paid and reasoning given by the A.O., we restrict the disallowance on account of job paid charges to ₹ 25,000/-.

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145(3) of the Income Tax Act, 1961.
2. Disallowance of discount expenses.
3. Disallowance of orthopedic consumption expenses.
4. Disallowance of Cath Lab expenses.
5. Disallowance of salary to director under Section 40A(2)(b).
6. Disallowance of rent paid to director under Section 40A(2)(b).
7. Disallowance of job charges paid.
8. Trading addition by applying a higher Gross Profit (GP) rate.

Detailed Analysis:

1. Rejection of Books of Accounts:
The assessee's books of accounts were rejected under Section 145(3) of the Income Tax Act, 1961. The Assessing Officer (AO) disbelieved the trading results and estimated a higher GP rate of 32.74% against the declared GP rate of 27.15%, resulting in a differential GP estimation of ?47,08,357/-. However, since specific additions were made regarding expenditure claims, the estimated GP was not added separately.

2. Disallowance of Discount Expenses:
The AO disallowed 50% of the discount expenses amounting to ?21,03,380/-, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee provided detailed records of the discounts given, including patient names, registration numbers, treatment periods, bill numbers, amounts, and reasons for concessions. The AO’s disallowance was deemed arbitrary as complete details were available, and the assessee’s business practice of providing discounts was justified. The Tribunal quashed the disallowance of ?21,03,380/-.

3. Disallowance of Orthopedic Consumption Expenses:
The AO disallowed orthopedic consumption expenses of ?2,91,000/- incurred in June, suspecting they were not used for business purposes. The assessee provided evidence that the expenses were related to treatments conducted in April, with materials accounted for in June. The Tribunal found the expenses verifiable and directed the AO to delete the disallowance of ?2.91 lakhs.

4. Disallowance of Cath Lab Expenses:
The AO disallowed ?19,39,062/- by estimating Cath Lab receipts based on the ratio of expenses and income for May. The Tribunal observed that the AO failed to correlate expenses with income accurately, as expenses incurred in one month could be booked in another. The Tribunal found the estimation baseless and quashed the disallowance of ?19,39,062/-.

5. Disallowance of Salary to Director:
The AO disallowed a salary of ?1,09,300/- paid to the director under Section 40A(2)(b), questioning the justification of the expenditure. The Tribunal noted the director’s administrative responsibilities and vast experience, deeming the salary reasonable. The disallowance of ?1,09,300/- was deleted.

6. Disallowance of Rent Paid to Director:
The AO disallowed rent of ?2,76,000/- paid to the director and M/s Heart Hospital & Research Centre under Section 40A(2)(b). The Tribunal found the rent reasonable considering the premises' location and usage for business purposes. The disallowance of ?2,76,000/- was deleted.

7. Disallowance of Job Charges Paid:
The AO disallowed job charges of ?1,02,750/-. The Tribunal, after reviewing the details, restricted the disallowance to ?25,000/-.

8. Trading Addition by Applying Higher GP Rate:
The AO applied a higher GP rate of 32.74%, leading to a trading addition of ?47,08,357/-. However, since specific disallowances were made, the GP addition was not separately added.

Conclusion:
The Tribunal allowed the appeal in part, quashing several disallowances made by the AO and CIT(A). The detailed analysis of each issue provided clarity on the justifications for expenses and the arbitrariness of the AO’s disallowances. The order was pronounced on 11th September 2020.