Assessee's appeals partly allowed, disallowance restricted to 15%. Revenue's appeals dismissed. Interest disallowance deleted.

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) for the assessment years 2010-11 and 2011-12.

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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.

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