In Commissioner of Income Tax Vs. Lakshmi Hospital, 2011 (3) KLT SN 80 (C.No.80) the respondent/assessee is a major hospital located in the middle of Cochin city. During search conducted by the department, they noticed unaccounted collection of fees in the name of doctors and distribution of the same to various doctors serving the hospital whether as regular employees or as consultants.
Section 69C of the IT Act
In the course of enquiry, the respondent/assessee accepted the collections but contended before the department that they have distributed the entire amounts to the doctors in whose name the collections were made and no part of it is retained as their income. However, the department rejected the explanation offered by the respondent and assessed the entire amount as unexplained expenditure falling under Section 69C of the IT Act.
On appeal filed by the respondent/assessee the CIT (Appeal) though in principle confirmed the addition, granted a reduction of 25% against which the assessee as well as the department filed second appeal. The Tribunal allowed the assessee’s appeal completely cancelling the addition and dismissed the department’s appeal.
It is against the common orders of the Tribunal passed for the four years 2000-2001 to 2003-2004, the department has filed these 8 appeals raising the same question as to whether the entire amount collected in the name of doctors by the respondent could be assessed as unexplained expenditure under Section 69C, on account of the failure of the respondent to prove the expenditure.
A bench comprising of Justice C.N. Ramachandran Nair and Justice P.S. Gopinathan heard Mr. Jose Joseph, the standing counsel appearing for the appellant in detail who tried to justify the assessment under Section 69C which is as follows:
“69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year.
Provided that,notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.”
After hearing the standing counsel and after going through the records, the Court finds that this is not a case of failure of the respondent/assessee to explain the expenditure. Infact the respondent on being confronted with the accounts seized from them conceded that the entire amounts were collected by them for payment to doctors serving the hospital.
Obviously, the payment made to a single doctor in a day does not exceed Rs.20,000/- because in such cases the department could have made disallowance of expenditure under Section 40A (3) of the IT Act.
On the other hand, the entire amount is collected without bringing into the regular accounts and the payments were also made by the respondent without accounting the same. When receipt is not accounted obviously payment also cannot be accounted by the assessee.
Cases falling under Section 69C are essentially expenditure accounted as such by the assessee but assessee fails to prove on demand by the department. It may so happen that when unaccounted income is disclosed in search, the assessee may claim expenditure against the same and if proved, department will be bound to accept it.
In this case also assessee conceded that the unaccounted receipts were collected for payment to doctors attending to patients in the hospital. The Court noticed that the department has not made any effort to confront the doctors with the unaccounted payments stated to have been made to them by the hospital which engaged them.
The Court viewed that the question of addition in the hands of the respondent/assessee arises only when the doctors deny having received the amount. The department did not venture to confront the doctors with the explanation offered by the respondent/assessee with regard to the payments made to them.
In fact, the Court noticed that the Tribunal while allowing the assessee’s claim left freedom to the department to proceed against the doctors for assessment. The High Court in complete agreement with the finding of the Tribunal because addition under Section 69C in this case can be sustained only in respect of the income not proved to have been received by the doctors.
The respondent/assessee, prima facie, discharged their burden or atleast shifted the same to the Revenue when they gave particulars of payments made to the doctors. The Court viewed that the department should have issued notice to the doctors for confirmation of the payments and if they confirm receipts, to make assessments on doctors and if they deny, to proceed against the respondent/assessee and direct them to prove the payment as having been made and in the absence of proof of payment, to make assessment of the amount under Section 69C.
Since this exercise has not been done, the Court did not think the assessment is tenable in the hands of the respondent/assessee which obviously cannot be expected to give receipt or voucher from the doctors to whom unaccounted payments were made.
The information received in search enables the department to assess assessees other than the searched assessee both under Section 147 of the Act as well as under Section 153D (previously 158BD) i.e., block assessment followed by search. So much so, the Court feels that escapement of income from assessment is essentially on account of the lapses on the part of the department. Consequently, the Court dismissed all the appeals.