2022 (10) TMI 980 - AT - Income Tax

Assessment of trust - addition as made by the AO by doubting the genuineness of the expenditure incurred on free distribution of medicines to patients and other social organizations - only on the basis of statements recorded u/s 131 of the office bearers of the social organization, AO disallowed the expenses incurred by the assessee for supplying free medicines to social organizations - HELD THAT - We note that the AO recorded the statement of Dr. Chatterjee on 01.12.2016 wherein he stated that he associated with Anandalok Hospital as resident medical officer since 1997 but due to personal issues, he left Anandalok in March 2013 and again joined in July 2015 and so he did not attend any medical camps for Anandalok. However on 25.02.2014 in the remand proceedings, Dr. T. N. Chatterjee was again recorded u/s 131 of the Act wherein he stated that on his recommendation the assessee trust scrapped assets worth Rs. 17,32,99,000/-which were not usable / or obsolete. He stated that he was associated since 1997 and was getting contractual fee of Rs. 1,00,000/- per month and in March 2014 on request of other doctors and staff members of the hospital, he verified the medical equipments lying inside of hospital premises and advised the Managing Trustee Mr. Deo Kumar Saraf to discard the old machines/equipments. There is conflict in the statement by Dr. T.N. Chatterjee as in the statement recorded on 01.12.2016 he stated that he left the hospital in March 2013 and again joined in July, 2015 whereas in the statement recorded in the remand proceedings on 02.05.2018 Dr. Chatterjee stated that he was working in the hospital since 1997 and in March 2014, he stated that on request of doctors and staff member of Anandalok Hospital certain equipments / marchinaries which were obsolete and outdated ,he recommended the scrapping of the same after carrying out the necessary examination. So therefore find a merit in the contention of A.R that first statement was recorded under pressure. Therefore on this account also the addition of Rs. 2,21,95,113/- for free distribution of medicine to affected people is wrongly made by the AO. The statements/material cannot be used on the back of the assessee and if done so it is against the principles of natural justice as has been held in the case of Andaman Timber Industries 2015 (10) TMI 442 - SUPREME COURT wherein the Hon ble Apex Court has held that failure to give assessee the cross-examination of witnesses whose statements were relied upon to take an adverse view results in breach of principles of natural justice. In our viewthis is a serious flaw and renders the action of AO as nullity. We are inclined to set aside the order of Ld. CIT(A) and direct the AO to delete the addition. In the result the ground no. 1 is allowed. Addition by estimating @ 5% of the cost of scrapped assets - HELD THAT - The said scrapping/discarding of asset was done on the recommendation of Dr. T. N. Chatterjee who after inspecting these plants or machineries/equipments submitted a report that the said assets were not usable and should be discarded. Thereafter a committee of two employees Shri Sudam Maity and Bhavesh Jhawas constituted who were assigned the job of discarding of the said assets lying in the hospital premises located at Salt Lake. The said committee sold them and utilized the same in a party of all the staff of the assessee trust. We also note that both the authorities have not brought any material/evidence on record which corroborate that these assets were sold for more than Rs. 85,000/- . CIT(A) also agreed to the contentions of the assessee that these obsolete machineries which were not usable and thus directed the AO to make the addition @ 5% which comes to Rs. 86,64,950/-. But in our view by doing so the Ld. CIT(A) has merely acted on surmises and conjectures sans any concrete basis. The said action of the ld CIT(A) is wrong and cannot be sustained. Under these facts and circumstances we are inclined to set aside the order of Ld. CIT(A) and direct the AO to delete the addition. Consequently the ground no. 2 is allowed.

Summary

Issues Involved:
1. Confirmation of addition of Rs. 3,84,55,428/- by doubting the genuineness of the expenditure on free distribution of medicines.
2. Part confirmation of addition of Rs. 86,64,950/- by estimating 5% of the cost of scrapped assets.

Issue-wise Detailed Analysis:

1. Confirmation of addition of Rs. 3,84,55,428/- by doubting the genuineness of the expenditure on free distribution of medicines:

The assessee, a trust engaged in charitable activities, claimed to have distributed medicines worth Rs. 3,84,55,428/- during a flood in Purba Medinipur district. The AO doubted this claim, citing statements from social organizations denying receipt of medicines and the absence of a flood. The AO disallowed the expenditure and added the amount to the assessee's income.

In appellate proceedings, the Ld. CIT(A) affirmed the AO's order, stating the assessee failed to provide sufficient evidence, such as confirmation letters from recipients, doctors, or patient registers. The Ld. CIT(A) emphasized the lack of documentation and the improbability of distributing such a large volume of medicines daily without proper records.

The assessee countered by presenting the Annual Flood Report for 2013, confirming the flood in the district, and argued that the trust had genuinely distributed medicines through medical camps and social organizations. The assessee also highlighted procedural lapses, such as the AO's refusal to allow cross-examination of the social organizations' office bearers.

The Tribunal examined the flood report, confirming the flood's occurrence, and noted the trust's undisputed charitable activities. It criticized the AO for relying solely on statements without allowing cross-examination, citing the Hon'ble Supreme Court's decision in the case of M/s Andaman Timber Industries, which emphasizes the necessity of cross-examination to uphold natural justice. Consequently, the Tribunal set aside the Ld. CIT(A)'s order and directed the AO to delete the addition, allowing the assessee's appeal on this ground.

2. Part confirmation of addition of Rs. 86,64,950/- by estimating 5% of the cost of scrapped assets:

The assessee scrapped obsolete machinery worth Rs. 17,32,99,000/- and claimed a realization of only Rs. 85,000/-. The AO, suspecting underreporting, added the entire original cost to the assessee's income. The Ld. CIT(A) partly allowed the appeal, estimating the scrap value at 5% of the original cost, resulting in an addition of Rs. 86,64,950/-.

The Tribunal reviewed the evidence, including statements from employees and the recommendation of Dr. T. N. Chatterjee, who certified the assets as obsolete. It noted the lack of contrary evidence from the authorities to prove higher realizations. The Tribunal found the Ld. CIT(A)'s estimation based on conjecture and not concrete evidence. It set aside the Ld. CIT(A)'s order and directed the AO to delete the addition, allowing the assessee's appeal on this ground.

Conclusion:

The Tribunal allowed the assessee's appeal, directing the deletion of both the additions related to the free distribution of medicines and the scrapped assets. The judgment emphasized the importance of procedural fairness and the necessity of concrete evidence to substantiate claims of income additions.