Smt.Dr.R.Indira Gouri,, Hyderabad vs Department Of Income Tax

This appeal preferred by the Revenue is directed against the Order of the Ld. CIT(A), Vijayawada dated 27.03.2013.

2. Ground Nos. 1 and 6 raised by the Revenue in this appeal are general in nature which do not require any specific adjudication. Ground No.2 (as revised) and ground No.3 involve a common issue relating to the deletion by the Ld. CIT(A) of the addition made by the A.O. by way of disallowance under section 40(a)(ia) on account of payments made by the assessee on account of consultancy charges to anesthetist and architect/contractor.

3. The assessee in the present case is an individual who is in the business of running a hospital under the name 2 ITA.No.984/Hyd/2013 Smt. Dr. R. Indira Gouri, Shamshabad, R.R. Dist.,

and style of her proprietary concern M/s. Indira Hospitals. The return of income for the year under consideration was filed by the assessee on 02.09.2008 declaring a total income of Rs.4,26,354. A survey under section 133A was carried out in the case of the assessee. Subsequent to search, the case of the assessee was taken-up by the A.O. for scrutiny. During the course of assessment proceedings, it was noticed by the A.O. that the assessee has paid consultancy charges to various Doctors amounting to Rs.75,800. According to the A.O., assessee was liable to deduct tax at source from the payment of such consultancy charges made to various Doctors as per the provisions of section 194J of the Act and since no such tax was deducted by the assessee, he disallowed the consultancy charges of Rs.75,800 claimed by the assessee by invoking the provisions of section 40(a)(ia).

3.1. As found during the course of survey, the hospital building was being constructed by the assessee and in this connection, a sum of Rs. 4 lakhs was paid by the assessee to her husband Mr. R. Srinivas. According to the A.O., this payment made by the assessee was in the nature of payment to contractor and tax at source therefore was liable to be deducted by the assessee. In this connection, the explanation offered by the assessee that the amount of Rs. 4 lakhs was paid to Mr. R. Srinivas towards reimbursement of construction expenses actually incurred by him while supervising the construction work was not found acceptable by the A.O. He also overlooked the contention raised on behalf of the assessee that the amount in question being in the nature of capital expenditure not charged to P & L account, the same could not be disallowed by invoking the provisions of section 40(a)(ia). He 3 ITA.No.984/Hyd/2013 Smt. Dr. R. Indira Gouri, Shamshabad, R.R. Dist.,

accordingly proceeded to make a disallowance under section 40(a)(ia) on account of payment of Rs. 4 lakhs made by the assessee to Mr. R. Srinivas for the failure of the assessee to deduct tax at source from the said payment.

4. The disallowance made by the A.O. by invoking the provisions of section 40(a)(ia) on account of consultancy charges of Rs.75,800 and construction expenses amounting to Rs. 4 lakhs was challenged by the assessee in the appeal filed before the Ld. CIT(A). During the course of appellate proceedings before the Ld. CIT(A), various submissions were made by the assessee on this issue which were forwarded by the Ld. CIT(A) to the A.O. for his comments. Accordingly, the A.O. submitted his remand report to the Ld. CIT(A) offering his comments and after considering the same as well as the other material available on record, the Ld. CIT(A) deleted the disallowance made by the A.O. under section 40(a)(ia) on account of consultancy charges and construction expenses for the following reasons given in his impugned order.

"The contention of the learned A.R. is that the consultancy charges are mostly paid to the anesthetists. The entire amount so collected from the patients was paid to the anesthetists by the patients themselves. The patients chose their won anesthesia's and fix the fees payable. The same is paid by them. Therefore, the said amount does not represent expenditure. It is also the contention of the learned A.R. that the amount was actually paid during the previous year and, therefore, disallowance u/s.40(a)(ia) cannot be made. I find force in the contentions of the learned A.R. The anesthetists are engaged by the patients themselves and the amounts collected were paid to them. The contract is between the patients and anesthetist. Further, the actual payment of this amount was made to the anesthetists. In view of the decision of the Visakhapatnam Special Bench of the Hon'ble ITAT in the case of Merilyn Shipping and 4 ITA.No.984/Hyd/2013 Smt. Dr. R. Indira Gouri, Shamshabad, R.R. Dist.,

Transports vs. ACIT in ITA.No.477/Viz/2008 and in view of the fact that this amount does not represent the expenditure of the appellant, the addition made of Rs.75,800 is directed to be deleted."

"The learned A.R. brought to my notice that the amount of Rs.4,00,000/- was paid to the appellant's husband Sri R. Srinivas; that Sri Srinivas is an Engineer and an Architect and is associated with construction activity of the hospital building and that the amount was paid to him for undertaking the construction activity of the hospital building on behalf of the appellant. The A.O. is of the view that disallowance can be made as the amount paid represents the other expenditure. I find that the amount so paid is not debited to the profit and loss account. The amount does not represent the amount paid towards contract and, therefore, the provisions of section 40(a)(ia) have no application. In any case, the addition made by the A.O. was not sustainable and the same is accordingly deleted."

5. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that both the amounts in question on account of consultancy charges and construction expenses were fully paid by the assessee during the year under consideration and there being no amount payable on these accounts, the Ld. CIT(A), in our opinion, was fully justified to hold that the disallowance under section 40(a)(ia) could not be made by relying on the decision of the Special Bench of this Tribunal at Visakhapatnam in the case of M/s. Merlyn Shipping and Transports vs. ACIT, Range- 1, Visakhapatnam vide ITA No.477/Viz/2008 dt. 29-03-2012. Moreover, as rightly submitted on behalf of the assessee before the authorities below as well as before us, the amount of Rs. 4 lakhs paid towards construction expenses constituted capital expenditure which was not claimed by the assessee as deduction and the same therefore even otherwise could not be disallowed by invoking the provisions of section 40(a)(ia). We 5 ITA.No.984/Hyd/2013 Smt. Dr. R. Indira Gouri, Shamshabad, R.R. Dist.,

therefore find no merit in ground Nos. 2 and 3 raised by the Revenue in this appeal and dismiss the same.

6. In Ground Nos. 4 and 5, the Revenue has challenged the action of the Ld. CIT(A) in sustaining the addition of Rs.25,38,893 made by the A.O. on account of unexplained investment allegedly made by the assessee in the construction of hospital building only to the extent of Rs.3,67,387.

6.1. As found during the course of survey, the hospital building was being constructed by the assessee. The matter relating to the valuation of the building being constructed by the assessee was referred by the A.O. to the DVO. As mentioned by the A.O. in the assessment order, construction of second floor of the hospital building was completed by the assessee during the year under consideration and the cost of construction of the said floor as estimated by the DVO was Rs.38,08,340. According to the A.O., expenditure on construction of hospital building to the extent of Rs.25,38,893 was not disclosed by the assessee and he therefore required the assessee to show cause as to why the same should not be added to her total income treating the same as unexplained investment made by her in the construction of hospital building. In reply, it was submitted by the assessee that the basis of the construction of second floor stated to be taken by the A.O. on the basis of DVO's report at Rs.38.08,340 was not understandable. It was also pointed out by the assessee that the work of construction of hospital building was in progress over the relevant years and expenditure of Rs.10,81,200, Rs.25,28,800 Rs.16,83,000 and Rs.7,23,463 was incurred by him during the previous years relevant to A.Ys. 2004-05, 2005- 6 ITA.No.984/Hyd/2013 Smt. Dr. R. Indira Gouri, Shamshabad, R.R. Dist.,

06, 2008-09 and 2009-10 respectively. It was submitted that the total expenditure of Rs.60,16,463 thus was incurred on the construction of building and the same was duly reflected in the books of accounts of the assessee regularly maintained. It was contended that there was thus no basis to say that any unexplained investment was made by the assessee in the construction of hospital building warranting any addition under section 69. The A.O. did not find merit in this contention of the assessee and proceeded to make addition of Rs.25,38,893 to the total income of the assessee on account of unexplained investment allegedly made by the assessee in the construction of hospital building.

7. The addition made by the A.O. under section 69 on account of unexplained investment allegedly made by the assessee in the construction of hospital building was challenged by the assessee in the appeal filed before the Ld. CIT(A) and after considering the submissions made by the assessee, the remand report submitted by the A.O. and the counter comments offered by the assessee, the Ld. CIT(A) restricted the addition of Rs.25,38,897 made by the A.O. on this issue to Rs.3,67,387 for the following reasons given in his impugned order.

"The Assessing Officer mentioned that the matter of cost of construction was referred to the Valuation Cell and the Valuation Officer fixed the total cost at Rs.1,34,46,000/-. The A.O. arrived at an addition of Rs.25,38,893/-. I find that the construction of the building was undertaken in two phases. The first phase of construction ended on 31.03.2005 and an expenditure of Rs.36,10,000/- was incurred and that during the second phase of construction an amount of Rs.19,32,313/- was incurred. The A.O. referred to the valuation of the property for the entire period vide 7 ITA.No.984/Hyd/2013 Smt. Dr. R. Indira Gouri, Shamshabad, R.R. Dist.,

his letter dated 11.04.20098. the Valuation Cell fixed the value of the property for both the phases together at Rs.1,34,45,607/-. The contentions of the learned AR are as under:

a) The provisions of Sec.142A can be made applicable only when the Assessing Officer rejects the books of account. It is the contention of the learned AR that the books are not rejected and, therefore, the reference to the Valuation Cell is not validly made

b) As an alternate submission, the learned AR furnished various details and submitted that the valuation is not correctly made. The learned AR also pointed out that if R&B rules were to be adopted, there would not be any difference.

On perusal of the contentions of the learned AR with reference to the information on record, I find that the Assessing Officer did not reject the books of account and when the books of account are not rejected, the Assessing Officer can not resort to an estimation of the cost of construction. I also find that there is no requirement to reject the books of account as all such details are furnished by the appellant. The Assessing Officer also did not mention the manner in which he arrived at the addition of Rs.25,38,893/-.

Even in the remand report, the Assessing Officer did not clarify as to how such an addition is arrived at. The appellant brought to my notice that according to the DVO the cost is Rs.51,31,267/- according to the rates applicable to R&B, the cost of construction would be Rs.27,05,429/-; as per the rates published by the Commissioner and Inspector General of Stamps, the cost would be Rs.31,24,229/- and the cost as per the detailed estimates method would be Rs.23,44,583/-. In so far as the value fixed by Supdt Engineer, CPWO is concerned, the appellant submitted that there are various inconsistencies in the report and, therefore, cannot be relied on. The rates by the Commissioner and Inspector General of Registration have no relevance for determining the cost and the detailed estimated method can be relied upon when the books are not rejected. The only other remaining method of valuation is adopting the rates 8 ITA.No.984/Hyd/2013 Smt. Dr. R. Indira Gouri, Shamshabad, R.R. Dist.,

of R&B. The Hon'ble ITAT, Chennai Bench in the case of M. Selvaraj vs. ITO reported in 2 SOT 330 held that where the PWD rates are available, the said rates are to be applied instead of CPWD rates. Taking into account, the rates as per the R & B, the total cost during the previous year works out to Rs.27,05,429/- . The amount for self-supervision in the case of the appellant can be allowed at 15% as the appellant's husband is an Engineer and was looking after the construction work. The cost would work out to Rs.22,99,700/-. This is adopted as this is almost nearer to the detailed estimates method. After giving credit to the amount already admitted as the cost at Rs.19,32,313/-, the addition would work out to Rs.3,67,387/-."

8. We have heard the arguments of both the sides and also perused the relevant material on record. Besides the specific finding given by the Ld. CIT(A) to restrict the addition of Rs.25,38,893 made by the A.O. under section 69 on account of unexplained investment allegedly made by the assessee in the construction of building, which have remained un-rebutted or uncontroverted by the learned D.R., we find that a preliminary issue was raised by the assessee before the Ld. CIT(A) by contending that the expenses incurred on construction of hospital building having been duly recorded in the books of account and the said books of account having been not rejected by the A.O., a reference made by the A.O. to the DVO itself was invalid and no addition on the basis of the DVO's report obtained in such invalid reference could be made on account of unexplained investment allegedly made by the assessee in the construction of hospital building. In this regard, the Ld. CIT(A) also found that the books of accounts of the assessee were not rejected by the A.O. but even after recording this finding in his impugned order, he still proceeded to decide the issue on merit after observing that there is no 9 ITA.No.984/Hyd/2013 Smt. Dr. R. Indira Gouri, Shamshabad, R.R. Dist.,

such requirement to reject the books of accounts. We are unable to subscribe to this view of the Ld. CIT(A).

9. It is by now well settled that if the expenses incurred on construction are duly recorded by the assessee in the books of accounts regularly maintained and such books of accounts are produced for verification before the A.O., no reference can validly made by the A.O. to the DVO for estimating the cost of construction unless the books of account maintained by the assessee are rejected by him after pointing out specific and material defects therein. In the present case, the books of accounts reflecting the construction expenses regularly maintained by the assessee were produced for verification before the A.O. and since the same were not rejected by the A.O. by pointing out specific and material defects, we find merit in the contention of the Ld. Counsel for the assessee that reference made by the A.O. to the DVO for estimating the cost of construction itself was invalid and no addition on the basis of such invalid report could be made on account of unexplained investment allegedly made by the assessee in the construction of building. Although, this issue is decided by the Ld. CIT(A) against the assessee and no appeal has been preferred by the assessee before the Tribunal contesting this issue, Rule-27 of the Appellate Tribunal Rules, 1963 allows the assessee as a respondent, though he is not appealed, to support the order appealed on any of the grounds decided against him. Accordingly, relying on the said Rule, we uphold the impugned order of the Ld. CIT(A) restricting the addition of Rs.25,38,893 made by the A.O. on account of unexplained investment allegedly made by the assessee in the 10 ITA.No.984/Hyd/2013 Smt. Dr. R. Indira Gouri, Shamshabad, R.R. Dist.,

construction of hospital building to Rs.3,67,387, although on a different ground.

10. In the result, appeal of the Revenue is dismissed.

Order pronounced in the open Court on 03.06.2015.

Sd/- Sd/- (SAKTIJIT DEY) (P.M. JAGTAP) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated 03rd June, 2015.

VBP/-

Copy to

1. The Income Tax Officer, Ward 8(2), 8th Floor, D-Block, I.T. Towers, A.C. Guards, Hyderabad.

2. Smt. Dr. R. Indira Gouri, Indira Hospital, H.No.7, Shamshabad, Ranga Reddy District.

3. Commissioner of Income Tax (Appeals), Vijayawada.

4. Commissioner of Income Tax-II, Hyderabad.

5. D.R. I.T.A.T. "B" Bench, Hyderabad.

6. Guard File