Chapter 3
REVIEW ON ASSESSMENTS OF PRIVATE HOSPITALS AND NURSING HOMES

Review Summary

-    Out of 21,103 private hospitals and nursing homes, as many as 13,963 (66%) private hospitals and nursing homes were not on the records of the Income Tax Department. The position of non-filers was alarmingly high particularly in respect of Maharashtra (87%), Bihar (84%) and Delhi (83%).

(Para 3.7)

-    Based on the information collected by CIB, only 18 private hospitals and nursing homes were brought to tax net during 1997-98 to 1999-2000.

(Para 3.8)

-    As a result of surveys undertaken by the Department during 1997-98 to 1999-2000, only 145 private hospitals and nursing homes were added to the tax net.

(Para 3.9)

-    Incorrect allowance of inadmissible expenditure resulted in short levy of tax amounting to Rs. 536.70 lakh.

(Para 3.10)

-    Incorrect deduction of capital expenditure resulted in short levy of tax amounting to Rs. 180.19 lakh.

(Para 3.11)

-    Failure to examine unexplained investments and cash credits resulted in non-levy of tax of Rs. 31.33 lakh.

(Para 3.13)

-    Mistakes in allowance of depreciation resulted in short levy of tax of Rs. 70.60 lakh.

(Para 3.14)

-    Incorrect/excess carry forward and set off of business losses resulted in non levy of tax of Rs. 91.71 lakh

(Para 3.15)

-    Incorrect computation of rental income from house property, etc., resulted in non-levy of tax of Rs. 126.06 lakh.

(Para 3.18)

-    Non-compliance with the provisions regarding tax deduction at source resulted in non-recovery of tax of Rs. 289.31 lakh.

(Para 3.19)

3.1    Introduction

The growth in the service sector over the recent years has been on the rise in the Indian economic scenario. An important visible activity in the tertiary sector is in the health and medical services. The topic of assessment of private hospitals and nursing homes has been selected for audit review keeping in view the potential of these services providers from revenue angle.

In the wake of liberalization and globalization and the expansion of economic activities, the paradigm of resource mobilization has under gone a shift from higher taxation to widening of the tax base. This has been an avowed policy of the government and tax administration. With a view to tapping the potential areas for widening of tax base, powerful tools are available to the department such as mandatory provision in law for enforcing filing of returns, powers of survey, penal provisions for non-compliance. Investigation Wing and separate Central Information Branch (CIB) are the agencies specifically entrusted with the task of ensuring compliance issues and widening of tax base. It is in this background that audit sought an assurance if all the private hospitals and nursing homes have been comprehensively and adequately brought into the tax net.

3.2    Definition

The definition of the private hospitals and nursing homes has not been laid down under the Income Tax Act, 1961. However, in common parlance, private hospitals and nursing homes are meant for reception and treatment of persons suffering from ailments and their objective is to earn profits. Private hospitals and nursing homes pool the services of several specialists and make them available at one place. Private hospitals and nursing homes are a common feature of urban agglomerations.

3.3    Legal Provisions

There are no special legal provisions laid down in the Income Tax Act, 1961 in respect of assessment of private hospitals and nursing homes. The private hospitals and nursing homes can be run by any entity i.e. companies, firms, association of persons, Hindu Undivided families, individuals etc. and therefore, all the provisions of the Income Tax Act, 1961 are applicable to these entities.

3.4    Objectives of the review

The review has been conducted to examine, verify and ascertain the following:

  1. Whether all the private hospitals and nursing homes are on the records of the Income Tax Department and are subjected to assessment.
  2. Whether adequate steps were taken by the Department to bring the private hospitals and nursing homes into the tax net and results of their efforts are quantified.
  3. Whether the private hospitals and nursing homes were complying with the provisions of the Income Tax Act, 1961 and whether there is any escapement of tax at any stage of their assessment.

3.5    Period of Review

For the purpose of review, the assessments completed during the period 1997-98 to 1999-2000 were covered and subjected to audit.

3.6    Quantum of audit for review

The following quantum of audit was adopted for the review:

TABLE NO. 1 : (A)    ASSESSING OFFICER-WISE COVERAGE

Assessing officers

Percentage of
coverage of cases

Joint Commissioners of Income Tax

100

Dy. Commissioners of Income Tax

50

Asstt. Commissioners of Income Tax

50

Income Tax Officers

10

(B)    ASSESSED INCOME OR LOSS-WISE SELECTION

Returned income or loss
(in Rs.)

Quantum of check

More than 50 lakh

100 per cent

25 lakh but less than 50 lakh

50 per cent

10 lakh but less than 25 lakh

25 per cent

Less than 10 lakh but more than 2 lakh

10 per cent

3.7    Database of Hospitals and Nursing Homes - Existing position

There is no central agency in the Income Tax Department having records of all Private Hospitals and Nursing Homes. In order to ascertain whether all the private hospitals and nursing homes are complying with the requirement of filing the return of income and are subject to assessment, the Audit adopted different methods to ascertain the actual number of private hospitals and nursing homes operating in different states. The information was collected from the following different sources: -

  1. Chief Medical Officer,
  2. Medical Associations,
  3. Nagar Nigam Records,
  4. Telephone Directories of the Cities,
  5. Tata Yellow Pages,
  6. Records of Polio Immunization Authorities, etc.

After collecting the information from above sources, a master list of private hospitals and nursing homes was prepared. However, this list may not be exhaustive but gave fair idea of these hospitals and nursing homes operating in the state. These names were, thereafter, plotted district-wise and other entity wise (companies, firms, HUFs etc) and the resultant list was sent to assessing officers for providing the information as to whether these private hospitals and nursing homes are actually subject to tax assessment. Based on the information received from the assessing officers, the list was bifurcated as follows:

  1. List A of private hospitals and nursing homes which are subject to assessment as per information provided by the Department;
  2. List B of private hospitals and nursing homes that are not being assessed.

While the assessment records of the private hospitals and nursing homes in List A were called for audit scrutiny, the list B was sent to the assessing officers for reconfirmation of the facts.

3.7.1    RESULTS OF AUDIT

The state-wise position of actual number of private hospitals and nursing homes, those filing return of income and are subject to assessment and those not filing return of income and are not on the records of the Income Tax Department are as follows:

TABLE NO. 2    STATUS OF NON-FILERS

State

Actual number of private hospitals and
nursing homes as ascertained from different sources

Actual number of private hospitals and
nursing homes subject to assessment (as confirmed by the Department)

Number of private hospitals and nursing homes not subject to assessment

%age (4 to 2)

1

2

3

4

5

Andhra Pradesh

975

378

697

71

Assam & NE States

132

36

96

72

Bihar & Jharkand

320

50

270

84

Delhi

536

93

443

83

Gujarat

3746

783

2963

79

Haryana

1228

667

561

46

Karnataka & Goa

1861

1037

824

44

Kerala

1537

492

1045

68

Maharashtra

4564

575

3989

87

Madhya Pradesh

788

501

287

36

Orissa

299

84

215

72

Punjab

941

410

531

56

Rajasthan

530

290

240

45

Tamil Nadu & Pondicherry

1168

966

202

18

UT Chandigarh

48

26

22

46

Uttar Pradesh & Uttaranchal

1202

486

716

60

West Bengal

1228

366

862

70

Total

21103

7240

13963

 

It is evident from the above, that out of 21,103 private hospitals and nursing homes, as many as 13,963 (or 66%) private hospitals and nursing homes were not on the records of the Income Tax Department. The position of non-filers was alarmingly high particularly in respect of Maharashtra (87%), Bihar (84%) and Delhi (83%).

The Department was not aware, whether all the private hospitals and nursing homes are subjected to assessment or not. The list ‘B’ of the private hospitals and nursing homes containing names and other details were issued to assessing officers, CsIT and CCIT for reconfirmation but replies from them had not been received except from CIT, Gwalior who confirmed that 66 nursing homes were not subjected to assessment in his charge. It is pertinent to highlight that on one hand the Department has taken measures to widen the tax net by making filing of return compulsory, by the persons who fulfill one out of six conditions but on the other hand the Department is not vigilant about the non-filers for mopping up the tax revenue.

STEPS TAKEN FOR WIDENING THE TAX BASE OF HOSPITALS AND NURSING HOMES

3.8    Role of Department (CIB) in bringing in the private hospitals and nursing homes in tax net and results of audit.

Prevention of tax evasion and widening of the tax base are two important functions of tax administration. With increasing reliance on voluntary compliance by the taxpayers at large, it is priority for the department to collect, disseminate and utilize information from various sources to curb evasion of tax by unscrupulous assessees.

Keeping in view the twin objectives of widening the tax base and preventing evasion of tax, the Central Board of Direct Taxes (Board), with effect from 1.7.97, had introduced revised procedures for working of Central Information Branch (CIB) in the Department. The work of collection of data has been assigned to the Central Information Branch under the Directors General (Investigation Wing) from different sources e.g. telephone directory, yellow pages, trade journals (under code 023) and forward it to the jurisdictional Addl/Joint CsIT through the respective Commissionerates. The assessing officers were required to carry out this work by issuing notices under Section 133(6) of the Act. The DsGIT (Inv) were also made responsible for reporting to the Board regarding ultimate use of the information.

In order to ascertain the impact of the efforts of the Department particularly in respect of private hospitals and nursing homes, the role of the Central Information Branch (C.I.B.) in this respect was also examined.

The information about private hospitals and nursing homes collected and passed on to assessing officers by CIB, number of private hospitals and nursing homes actually brought into the tax net based on the information collected by CIB and the revenue realized from them during 1997-98 to 1999-2000 is shown below:

TABLE NO. 3    RESULTS OF CIB’s EFFORTS

Year

No. of cases wherein
information collected and passedon to assessing officers by CIB

No. of cases actually
brought into tax net based on information by CIB

(%age)
3 to 4

Revenue realized Amount
(Rs. in lakhs)

1

2

3

4

5

1997-98

211

10

4.74

2.86

1998-99

731

4

0.55

20.03

1999-00

492

4

0.81

6.32

Total

1434

18

1.26

29.21

In the year 1997-98, the Department could collect the information only in the charges of Andhra Pradesh. In 1998-99, out of 731 cases, the information in 711 cases was collected in the charges of Kerala, 17 in the charges of Andhra Pradesh and in 3 cases in the charges of Gujarat. Out of 492 cases in the year 1999-00, the information in 405 cases collected in the charges of Kerala and the information in 37, 29, 20 and 1 cases were collected in the charges of West Bengal, Andhra Pradesh, Orissa and Gujarat respectively. Further in the charges of Assam & NE, Bihar and Jharkhand, Delhi, Haryana, Himachal Pradesh, Karnataka, Maharashtra, Madhya Pradesh, Punjab, Rajasthan, Tamil Nadu (information from 7 CsIT not received), UT Chandigarh, Uttar Pradesh no such information was collected and passed on to the assessing officers by the Central Information Branch.

3.8.1    Audit Analysis

The revenue collected during the period 1997-98 to 1999-00 because of CIB’s role was only Rs. 29.21 lakh, which does not portray any significant contribution towards widening the tax base of the private hospitals and nursing homes.

3.9    Survey operations

Under the Income Tax Act, 1961, the Department has been empowered to conduct survey on the business premises of the taxpayer and to locate new assessees and unearth unaccounted income. While survey under Section 133A (1) of the Act is a specific survey of the business premises of the taxpayer, the survey under Section 133-B of the Act is to locate new assessees. In order to ascertain the impact of the efforts of the Department in bringing the private hospitals and nursing homes in the tax net, the role of the Department through the powers granted under Section 133A and 133B of the Act for conducting the survey was examined. Relevant information was collected from the Department for audit analysis.

3.9.1    Results of audit of survey operations

The consolidated position of the number of surveys conducted under Section 133A and 133B of the Act, number of private hospitals and nursing homes brought into the tax net as a result of these surveys and the revenue realized as a result of survey from such private hospitals and nursing homes during 1997-98 to 1999-00 is shown below:

TABLE NO. 4 RESULTS OF SURVEY OPERATIONS

Year

No. of surveys
conducted under Section 133A/133B

No. of private
hospitals and nursing homes brought into tax net

Percentage
col.(3) to (2)

Revenues collected
(Rs. in lakhs)

1

2

3

4

5

1997-98

8714

33

0.38

126.14

1998-99

2752

36

1.31

41.44

1999-00

3626

76

2.10

175.13

Total

15358

145

0.95

342.71

No survey was undertaken in charges of Himachal Pradesh, Kerala, Maharashtra, Madhya Pradesh, Punjab, Tamil Nadu and U.T. Chandigarh. In Tamil Nadu, information from 7 CsIT was not furnished.

The efforts of the Department are negligible in this area. The powers conferred on the Department under the Income Tax Act have not been used effectively and in an efficient manner and as a result, an important area capable of generating potential revenue remained outside the tax net.

ASSESSMENT OF PRIVATE HOSPITALS AND NURSING HOMES - COMPLIANCE ISSUES

During the course of review, the assessments completed by the Department during the period 1997-98 to 1999-00 were audited to ascertain escapement of revenue due to non-application of the provisions of the Act. Some of the findings are given in the succeeding paragraphs.

3.10    Incorrect allowance of inadmissible expenditure

Under the Income Tax Act, 1961, any expenditure not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head profits and gains of business or profession. Further, in respect of certain expenses incurred by an assessee prior to commencement of business, the admissible deduction is limited to 2.5 per cent of the cost of the project or capital employed, at the option of the assessee and is allowed in equal instalments spread over ten years. The expenses interalia include expenditure connected with preparation of feasibility report and project report conducting market survey, share issue expenses etc. It has also been judicially held (MFL Vs CIT 1994) 209 ITR 174 (MAD) that expenditure on advertisement and sales promotion are covered for deduction

Test check of assessment records revealed that in 32 assessment cases deduction of inadmissible expenditure was allowed as revenue expenditure while completing the assessment by the Department in charges of Tamil Nadu, Maharashtra, Andhra Pradesh, Assam, Kerala and Uttar Pradesh. The mistake resulted in short levy of tax amounting to Rs. 536.70 lakh. Some illustrative cases are narrated below:

(a)    In Tamil Nadu, CIT-III, Chennai Charge, M/s Apollo Hospitals Enterprises Ltd., in their returns for the assessment years 1994-95 to 1997-98 had claimed Rs. 1400.75 lakh towards expenditure pertaining to interest on borrowings and related revenue expenditures incurred in connection with expansion projects as revenue expenditure. The amounts claimed were allowed after scrutiny (in March 1997, March 1999 and March 2000 for the assessment years 1994-95 to 1997-98 respectively). Audit scrutiny of assessments revealed that in assessment years 1994-95 and 1997-98, the amount claimed as revenue expenditure for the income tax purposes exceeded the total amount capitalized and amount treated as deferred revenue expenditure by Rs. 370.79 lakh, while in two assessment years 1995-96 and 1996-97, the amount claimed as revenue expenditure for income tax purposes was less by Rs. 69.97 lakh. Thus the net excess claimed as revenue expenditure during these assessment years was Rs. 300.82 lakh involving net tax effect of Rs. 153.10 lakh.

(b)    Further, in this case for the assessment years 1994-95 to 1998-99 the assessee had claimed deduction as revenue expenditure incurred in connection with expansion projects such as share issue expense (Rs. 75.84 lakh), consultation charges towards project and feasibility study (Rs. 124.90 lakh) and Advertisement and publicity expenses (Rs. 311.39 lakh). The assessments were completed after scrutiny in March 1997, March 1998, March 1999, March 2000 and March 2001 and the assessee’s claims were allowed in full as revenue expenditure excepting the share issue expenses of Rs. 75.84 lakh which was allowed as per provisions of section 35 D of the Income Tax Act. However, the deductions on share issue expenses were not restricted to 2.5% of the cost of the project. Further, the other expenses amounting to Rs. 436.29 lakh on consultation, advertisement and publicity should have been restricted to 2.5% of cost of project instead of being allowed in full as revenue expenditure. The omission to restrict the claim as per provisions of the Act resulted in short levy of tax by Rs. 200.27 lakh.

(c)    In Tamil Nadu, CIT-IV Chennai charge, M/s Malar Hospitals limited, for the assessment year 1996-97, a deduction of Rs. 176.55 lakh was allowed towards interest accrued and outstanding as on 31.3.1996 but paid before October 1996. The assessment was completed after scrutiny in February 1999 allowing the interest as claimed. Audit scrutiny, however, revealed that interest debited to profit and loss accounts indicated that the payment towards interest on loan during the financial year 1996-97 (assessment year 1997-98) was to the extent of Rs. 42.92 lakh only. Thus, the excess deduction allowed was Rs. 133.63 lakh involving potential tax effect of Rs. 61.47 lakh including surcharge. On this being pointed out (June 2001) the department stated (July 2001) that the difference was due to the fact that a loan from M/s Indian Bank was not covered. The reply is not tenable, as the sum of Rs. 176.55 lakh does not include any payment of interest to this bank.

(d)    Further in this charge, in the case of M/s Srisesava Hospitals (P) Limited, expenditure towards interest on secured loan amounting to Rs. 41.60 lakh during the assessment year 1997-98 and Rs. 77.25 lakh during the assessment year 1998-99 was claimed by the assessee as against payment of Rs. 16 lakh and Rs. 20.60 lakh respectively as evidenced from the Annual Reports enclosed to the return of income of the concerned assessment years. The returns for these assessment years were processed summarily in February 1999 and March 1999 respectively admitting the claim. The mistake resulted in potential tax effect of Rs. 30.84 lakh.

3.11    Incorrect deductions of capital expenditure

Under the Income Tax Act, 1961 capital expenditure is not allowed as deduction in computing the income chargeable under the head ‘profits and gains or business or profession’.

Test check of assessment records revealed that in 26 assessments deduction of capital expenditure was allowed as revenue expenditure while completing the assessment in charges of Tamil Nadu, Karnataka, Gujarat, Maharashtra and Uttar Pradesh. The mistake resulted in short levy of tax amounting to Rs. 180.19 lakh. Some illustrative cases are shown below:

(i)    In Tamil Nadu, CIT III Chennai charge, the assessment of M/s Apollo Hospitals Enterprises Ltd., for the assessment year 1995-96 was completed under Section 143(3) (March 1988) after allowing the cost of software component purchased amounting to Rs. 111.73 lakh as revenue expenditure. Audit scrutiny (July 1998) revealed that the software purchased was an integral part of the original equipment viz. Radio Therapy System and was not a replacement or addition to the existing equipment. Thus, the expenditure constituted a capital expenditure against which depreciation of Rs. 13.97 lakh only was allowable. The incorrect allowance had resulted in short levy of tax of Rs. 57.44 lakh including interest.

(ii)    Audit scrutiny further revealed that similar purchases of software components made by M/s Apollo Hospitals Enterprises Ltd., amounting to Rs. 20.60 lakh and Rs. 125.54 lakh during the assessment years 1996-97 and 1997-98 were claimed and allowed as revenue expenditure. The incorrect allowance of capital expenditure as revenue expenditure resulted in short levy of tax of Rs. 8.29 lakh for assessment year 1996-97 and excess carry forward of minimum alternate tax credit under Section 115JAA to the extent of Rs. 38.55 lakh.

(iii)    In Maharashtra, CIT Pune charge, the assessment of M/s Poona Diagnostic Services for the assessment year 1999-2000 was assessed summarily in August 2000. Audit scrutiny revealed that an amount of Rs. 10.15 lakh was debited in profit and loss account towards repair of CT scan. Its opening written down value was Rs. 1.48 lakh as per schedule of fixed assets.. It was recorded in the Directors First Annual Report that the cost of Rs. 10.50 lakh was incurred for replacement of laser camera on the CT scan machine. As the expenditure incurred on replacement/extensive repairs was of capital nature the same was to be added back to the income of the assessee. Omission to do so resulted in under assessment of income of Rs. 9.19 lakh (after allowing depreciation @12.5%) involving short levy of tax of Rs. 4.37 lakh including interest.

3.12    Incorrect allowance of remuneration or salary and interest to partners

Under the Income Tax Act, 1961, the payment of salary or remuneration or interest to partners will be allowed as a deduction only if it is authorised by and is in accordance with the terms of partnership deed. As per CBDT instruction from the assessment year 1997-98 onwards no deduction shall be admissible unless the partnership deed either specified the amount of remuneration etc payable to each individual working partner or lays down the manner of quantifying such remuneration.

During the course of review audit scrutiny revealed that in 26 assessments, incorrect allowance of remuneration or salary and interest to partners was allowed in charges of Andhra Pradesh, Bihar and Jharkhand, Kerala, Orissa, Maharashtra and West Bengal which resulted in short levy of tax of Rs. 21.32 lakh including interest. Two illustrative cases are narrated below:-

(i)    In Maharashtra, Mumbai City II charge, in case of a firm M/s Irla Nursing Home and Polyclinic assessments for the assessment years 1996-97 and 1997-98 were done under scrutiny and assessment for 1998-99 assessed under summary. Audit scrutiny of records revealed that the assessee was allowed expenditure on account of interest to partners even through there was no provision in the partnership deed for such payment. This had resulted in underassessment of income by Rs. 5.49 lakh and short levy of tax of Rs. 2.88 lakh including interest.

(ii)    In Kerala CIT Ernakulam charge, the assessments of a firm, M/s Elite Mission Hospital for the assessment year 1997-98 and 1998-99 were finalized summarily. Audit scrutiny of the records revealed that the assessee claimed an amount of Rs. 6.08 lakh and Rs. 4.50 lakh as expenditure on account of salary paid to the partners in assessment years 1997-98 and 1998-99 respectively which was allowed. In the revised deed, filed with the return of income, executed on 1.4.93 the names of the working partners and the quantum of salary payable to each partner were not mentioned. Thus expenditure on account of payment of salary to partners was not admissible. The mistake resulted in short levy of tax aggregating to Rs. 4.80 lakh including additional tax.

3.13    Failure in examining unexplained investments and cash credits

Under the Income Tax Act, 1961 where in the financial year immediately preceding the assessment year, if the assessee has made investments which are not recorded in the books of account and the assessee offers no explanation about the nature and source of investments or the explanation offered by the assessee is not found satisfactory, the value of such investments may be deemed to be the income of the assessee.

Test check of assessment records revealed that in 7 cases unexplained investments were not brought to tax in charges of Andhra Pradesh, Madhya Pradesh and Tamil Nadu resulting in non levy of tax of Rs. 31.33 lakh including interest. Two illustrative cases are narrated below:

(i)    In Andhra Pradesh, CIT I, Hyderabad charge, M/s Aditya Hospitals (P) Ltd., a company declared the cost of construction of building at Rs. 96.96 lakh and the matter was referred to the valuation cell for confirmation of the cost. The valuation cell could not value the building before 31.3.99 and therefore, the assessment was completed by 31.3.99 with a “note” that action, if necessary, has to be taken after receipt of the valuation report. The valuation report was received vide letter dated 30.6.99 valuing the building at Rs. 109.19 lakh. The cost of Rs. 96.96 lakh declared by the assessee included the capitalised value of pre-operative expenses of Rs. 12.05 lakh and a sum of Rs. 0.82 lakh towards medical and hospital equipments and staff welfare expenses. Thus the actual cost of construction as indicated by the assessee was only Rs. 84.08 lakh while it was valued by the valuation officer at Rs. 109.19 lakh. Though the assessing officer indicated that the assessment would be revised on receipt of valuation report, the difference of Rs. 24.39 lakh was not brought to tax. The inaction on the part of the assessing officer resulted in escapement of Rs. 24.39 lakh with a potential tax effect of Rs. 9.60 lakh.

(ii)    In Tamil Nadu, CIT Coimbatore charge, M/s Noble Medical & Research Centre (P) Ltd., has constructed a building and included the capitalised value of the building as Rs. 284.76 lakh in the fixed assets schedule for the assessment year 1996-97 which included pre-operative expenses of Rs. 29.51 lakh. Excluding these pre-operative expenses, the cost of the construction of the building works out to Rs. 255.25 lakh only. As per the valuation report obtained by the assessee, the value of the building constructed was Rs. 286.96 lakh. Thus the investment made in the construction of the building was understated by Rs. 31.71 lakh. While completing the assessment after scrutiny in March 1999, this sum of Rs. 31.71 lakh was omitted to be brought to tax. The omission resulted in short levy of tax of Rs.15.60 lakh including potential tax on account of excess carry forward of losses to subsequent years.

(iii)    In Tamil Nadu, CIT IV Chennai charge, M/s Kay Pee Kay Medical services (P) Ltd., exhibited in their accounts for the assessment year 1995-96 an outstanding loan liability of Rs. 2.69 crores due to the Managing Director of the Company. Audit scrutiny revealed that out of this loan, a sum of Rs. 2.59 crore was provided by the individual during the assessment year 1994-95 and as on 31.3.98, the outstanding balance was Rs. 1.64 crore. Though the assessment was completed after scrutiny in February 1998, the source for such a huge investment was not investigated. Further under the same charge, M/s Santosh Hospitals (P) Ltd, returned an interest income of Rs. 97.51 lakh during the assessment year 1996-97. Such huge interest income was not reported in other assessment years and the source of the investment wherefrom this huge interest income was received in one year alone was not examined. Similarly, during the assessment year 1998-99, the assessee company offered Rs. 22.39 lakh as miscellaneous income without any details and it was noted that the assessing officer had not examined the source of this income for tax purposes.

3.14    Mistakes in allowance of depreciation

Under the Income Tax Act, 1961, in computing the business income of an assessee, deduction on account of depreciation on buildings, plant and machinery, furniture and fittings and ships is admissible at the prescribed rates provided these are owned by the assessee and used for the purpose of his business during the relevant previous year. Depreciation is calculated on the cost or written down value of the assets according to the rates prescribed in the Income Tax Rules, 1962. Further, where any assets falling within a block of assets is acquired by the assessee during the previous year and is put to use for the purpose of business or profession for a period of less than 180 days in that previous year, the deduction on account of depreciation in respect of such assets shall be restricted to fifty per cent of the amount calculated at the percentage prescribed in respect of the assets comprising such block.

During the course of review, test check of records revealed mistakes in allowance of depreciation in the assessment of 43 private hospitals and nursing homes in charges of Assam, Delhi, Kerala, Karnataka, Maharashtra, Rajasthan, Uttar Pradesh and Tamil Nadu which resulted in short levy of tax of Rs. 70.60 lakh. Some of the illustrative cases are shown below:-

(i)    In Delhi CIT charge VIII, the assessment of M/s Sarvodaya Hospital for the assessment year 1998-99 was completed in summary manner during March 1999. Audit scrutiny revealed that during the assessment year 1998-99 the assessee had claimed an amount of Rs. 3.43 lakh as depreciation on fixed assets which also included depreciation of Rs. 1.89 lakh on hospital equipments which was not in the name of assessee firm and as such the same was not allowable. Failure to add back the same resulted in under assessment of income of Rs. 1.89 lakhs involving short levy of income tax including interest of Rs. 0.79 lakh.

(ii)    In Uttar Pradesh, CIT Meerut charge, the assessment of M/s Yashoda Hospital and Research Centre (Pvt) Ltd., for the assessment year 1999-2000 was processed in a summary manner in February 2000. Audit scrutiny revealed that an excess amount of depreciation amounting to Rs. 13.68 lakh was allowed by adopting incorrect rate of depreciation in respect of furniture and fixtures, equipment and machinery, electricity and water installation and wooden structure. The mistake resulted in short levy of tax of Rs. 6.51 lakh including interest.

3.15    Incorrect/excess carry forward and set off of business losses and unabsorbed depreciation

Under the Income Tax Act, 1961, where for any assessment year, depreciation could not be set off against any other income in the relevant year such unabsorbed depreciation shall be carried forward to the subsequent years and could be set off against the profits of the year up to a maximum of eight assessment years immediately succeeding the assessment year for which it was first computed.

Similarly, in the case of business losses that could not be set off against income from any other head in accordance with the provisions of the Income Tax Act, 1961, the loss shall be carried forward to the subsequent years up to a maximum of eight assessment years for set off against the profits of those years.

During the course of review, test check of records revealed that in 18 cases in charges of Assam, Andhra Pradesh, Kerala, Maharashtra, Uttar Pradesh and Tamil Nadu the provisions of the Act relating to carry forward and set off of losses and depreciation were not correctly applied resulting in non-levy of tax of Rs. 91.71 lakh. One illustrative case is narrated below:

In Tamil Nadu, CIT-I Chennai charge, the assessment of M/s Agarwal Eye Hospitals Ltd., a company for the assessment year 1997-98 was finalized under scrutiny in March 2000 allowing the setting off of carried forward depreciation of Rs. 16.46 lakh relating to assessment year 1996-97 as claimed by the assessee. Audit scrutiny relating to assessment order finalized under scrutiny (dated 19.11.98) for the assessment year 1996-97 revealed that actual depreciation allowed to be carried forward was Rs. 2.09 lakh. The mistake resulted in excess amount carried forward and setting off of depreciation by Rs. 14.37 lakh and short levy of tax amounting to Rs. 10.32 lakh including interest.

3.16    Incorrect allowance of expenditure on scientific research

Under the Income Tax Act, 1961 where the assessee himself carries on scientific research and incurs capital expenditure during the previous years, deduction is allowed for such expenditure only if the research relates to the business, provided the deduction is limited to an amount certified by the prescribed authority.

In Uttar Pradesh, CIT Agra charge, the assessment of M/s Asopa Hospital Pvt. Ltd., a company, for the assessment year 1996-97 was completed under scrutiny in January 1999. Audit scrutiny revealed that the assessee was allowed deduction of an expenditure amounting to Rs. 8.00 lakh incurred as capital expenditure on library for scientific research without obtaining the approval of the Director General (IT Exemption) and concurrence of the Secretary, Department of scientific and Industrial Research, Govt of India. The mistake resulted in underassessment of income of Rs. 8.00 lakh involving tax of Rs. 3.20 lakh and interest amounting to Rs. 3.54 lakh.

3.17    Incorrect computation of book profits and deemed income

Under the Income Tax Act, 1961, in the case of an assessee being a company, if the total income as computed under the provisions of the Act in any previous year is less than thirty per cent of its book profit, the income chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit and tax would be levied. The tax so paid shall be allowed as credit in subsequent assessment years subject to the provisions of the Act.

During the course of review, test check of records revealed that in 10 cases the provisions of the Act were not applied correctly in charges of Bihar and Jharkhand, Kerala, Karnataka and Tamil Nadu resulting in non-levy of tax of Rs. 36.47 lakh. One illustrative case is given below:

In Tamil Nadu, CIT Coimbatore charge, M/s Kovai Medical Centre and Hospitals Ltd., understated the book profit for the assessment years 1997-98 to 1999-2000 by way of incorrect adjustment of carried forward losses by Rs. 36.49 lakh in assessment year 1998-99, non adjustment of provisions towards unascertained liabilities by Rs. 8.70 lakh in assessment years 1997-98 to 1999-2000 and adjustment of prior period expenses from the net book profit for the year by Rs. 38.15 lakh in assessment years 1997-98 to 1999-2000. These understated book profits were accepted in assessments made under scrutiny for the assessment year 1997-98 and in summary manner for the assessments made for the assessment years 1998-99 to 1999-2000. The under statement of book profits in these years by Rs. 136.34 lakh resulted in incorrect working out of taxable income under the special provisions of the Act and consequent short levy of tax of Rs. 29.60 lakh.

3.18    Understatement of rental income from house property & incorrect allowance of expenditure on repairs etc.

Under the Income Tax Act, 1961 annual value of house property which is chargeable to tax under the head “income from house property” shall be deemed to be the sum for which property might reasonably be expected to be let’ or the annual rent received or receivable whichever is higher.

Audit scrutiny of assessment records in Tamil Nadu revealed that provisions of the Act were not enforced by the assessing officers resulting in non-levy of tax amounting to Rs. 126.06 lakh.

(a)    In CIT-IV, Chennai charge, as per lease deed of March 1991, M/s Devaki Hospitals Ltd. was paying a monthly rent of Rs. 70 thousand per month for the building taken on lease from a sister concern M/s Eskaycee Medical Foundation Ltd. Apart from rent, an interest free lease deposit of Rs. 120 lakh was also paid which was increased to Rs. 140 lakh during the assessment year 1998-99. The interest free advance was justified by the assessee on the grounds that lease rental paid was Rs. 8.40 lakh as against market rent of Rs. 75 lakh per annum. Cross verification of the assessment records of M/s Eskaycee Medical Foundation Ltd., revealed that they had offered the actual rent of Rs. 8.40 lakh received under the head “Business Income” instead of correct head as “income from house property”. Thus taking into account the lease rent of Rs. 75 lakh per annum which the property was expected to earn and the actual of Rs. 8.4 lakh there was a leakage of revenue to the tune of Rs. 66 lakh per annum having a potential tax effect of Rs. 82.58 lakh during the assessment years 1996-97 to 1998-99. However, while finalizing the assessments for these years the assessing officer failed to examine this aspect.

(b)    In another case in CIT-IV Chennai charge, M/s Bharani Hospitals (P) Ltd., had taken on lease a portion of land and building belonging to partnership firm (M/s Bharani Pictures). The partners of the firm have substantial interest in assessee’s business as Directors. The lease rent was abnormally low at Rs. 1.14 lakh per annum in relation to the area actually leased out and the assessee by sub letting a part of the building received a huge rental income of Rs. 42.43 lakh during the assessment year 1998-99 as against Rs. 1.14 lakh paid towards the entire area. However, M/s Bharani Pictures had offered a rental and service income of Rs. 6.48 lakh only during the same assessment year 1998-99. The income included rental income from other sources also and was shown as business income. Thus the partnership firm had indirectly diverted its income amounting to Rs. 120.26 lakh during the assessment years 1995-96 to 1998-99 involving a tax effect of Rs. 43.84 lakh.

(B)    Under the Income Tax Act, 1961 a deduction at the prescribed rate from the net adjusted annual value of the property computed in accordance with the provisions of the Act is allowable in respect of repairs and collection of rent from the property. If an assessee had occupied property as a tenant and has undertaken to bear the cost of repairs, the cost of such repairs would be allowable as deduction in the hands of the tenant as business expenditure.

In Tamil Nadu, CIT-I Chennai charge, Dr. Agarwal Eye Hospital Ltd., had taken on lease a building and in accordance with the provisions of lease deed, it was meeting the cost of repairs and maintenance and claimed those charges as business expenditure (Rs. 21.70 lakh in the assessment year 1997-98 as against rent payment of Rs. 24 lakh). However, cross verification in audit revealed that the owner of the building was also claiming deduction towards repairs. Thus double deduction for the same expenditure resulted in non-levy of tax of Rs. 21.84 lakh during the assessment years 1996-97 and 1999-2000.

3.19    Non-compliance with the provisions regarding deduction of tax at source

As per provisions of the Income Tax Act, 1961, tax is required to be deducted at source in respect of certain payments at the prescribed rates. Tax so deducted is required to be remitted to the credit of Government account within a prescribed time limit. If a person responsible for deduction of tax at source fails to deduct the tax at appropriate rate or after making the deduction fails to credit the tax into Government account, he is liable to pay the amount of tax deductible and is required to remit the amount to Government account together with simple interest of 15 per cent (18 percent with effect from 1.6.99). Such assessee is also be liable to levy of penalty and prosecution.

Audit review of assessments records revealed that in 128 assessments in charges of Assam, Bihar & Jharkhand, Delhi, Gujarat, Kerala, Karnataka, Orissa, Maharashtra, Punjab, Rajasthan, Tamil Nadu, UT Chandigarh, Uttar Pradesh and West Bengal non deduction of tax at source, short deduction of tax at source and non/ belated/short remittance of tax deducted to the credit of Government account. The failure of the assessing officer to take action for the defaults resulted in non-recovery of tax of Rs. 289.31 lakh including penalty and interest. Some illustrative cases are narrated below:

(i)    In Delhi CIT IX charge, the assessment of M/s Shroff Eye Centre for the assessment year 1997-98 was processed under summary manner in March 1998 and for the assessment year 1998-99 was completed under scrutiny in December 2000. Audit scrutiny revealed that the assessee had debited an amount of Rs 24.96 lakh and Rs 34.61 lakh in the P&L A/c for the years 1997-98 and 1998-99 respectively under the head “Professional fee” but the tax at source @ 5% aggregating to Rs 2,98 lakh was not deducted. Though the fact of non-deduction of tax at source was evident from Tax Audit Report the assessing officer failed to take action against the assessee. The mistake resulted in non-deduction of tax amounting to Rs. 7.92 lakh including penalty and interest.

(ii)    In Delhi CIT III charge, the assessment of M/s Umkal Hospitals (P) Ltd. for the assessment years 1997-98 and. 1998-99 were completed in summary manner in March 1998 and May 1999 respectively. Audit scrutiny of the assessment records revealed that the assessee had debited an amount of Rs 9.61 lakh and Rs 19.50 lakh in the profit and loss accounts for these years respectively under the head “Consultancy” but the T.D.S. @ 5% aggregating to Rs.1.46 lakh was not deducted and the assessing officer failed to take action against the assessee. The omission resulted in loss of tax amounting to Rs. 3.16 lakh including penalty and interest.

(iii)    In Bihar, CIT Patna charge, the assessment of M/s Laxmi Nursing Home Pvt. Ltd, Patna, a private company, for the assessment year 1999-2000 was completed summarily in June 2000. Audit scrutiny revealed that the assessee company made payment of Rs. 7.20 lakh on account of rent but did not deduct tax at source. Failure of the assessing officer to levy interest and penalty for the default resulted in loss of revenue of Rs. 1.90 lakh.

(iv)    In Uttar Pradesh, CIT Meerut charge, the assessments of M/s Sumitra Nursing & Maternity Home, a company for the assessments years 1997-98 to 1999-2000 were completed summarily in November 1997, November 1998 and November 1999 respectively. Scrutiny of records revealed that the assessee had paid the amount aggregating to Rs. 44.31 lakh to the doctors as professional charges but tax at source aggregating to Rs. 2.22 lakh was not deducted. Failure of the assessing officer to levy interest and penalty for the default resulted in loss of revenue of Rs. 5.48 lakh.

3.20    Non- deduction of tax on distributed profits of domestic companies

The Finance Act, 1997 has introduced a new system of taxation of dividend. Accordingly any dividend declared, distributed or paid on or after 1.6.97 is subject to additional tax at 10 per cent which shall be paid within 14 days from the date of declaration of any dividend or distribution or its payment whichever is earlier. Failure to pay the whole or any part of additional tax attracts interest of 2 per cent per month for the delay in payment and penalty of an amount equal to tax which assessee has failed to pay.

In Tamil Nadu, CIT IV Chennai charge and CIT Coimbatore charge, two company assessees M/s Apollo Hospitals Enterprises Ltd., and M/s Vedanayagam Hospitals (Pvt) Ltd respectively declared dividends of Rs. 398.27 lakh for 1997-98 and Rs. 0.50 lakh for 1998-99 and provided for 10 per cent towards tax payable under Section 115-O amounting to Rs. 39.87 lakh. However, details of payments of additional tax to Government account were not available in the assessment records and the assessing officers failed to verify this aspect.

3.21    Non-deduction of tax in respect of dividend payments to non-residents

Under the Income Tax Act, 1961, a person responsible for making payment to a non-corporate, non-resident assessee or to a foreign company, of any interest (other than interest on securities) or any other sum is required to deduct income tax at the prescribed rates, at the time of payment.

In Tamil Nadu, CIT III, Chennai charge, M/s Apollo Hospitals Ltd., had declared dividend to share holders at 20%, 22.5% and 25% on equity share capital for the years ending March, 1994, 1995 and 1996 which included equity share capital of Rs. 98.08 lakh, Rs. 112.52 lakh and Rs. 105.96 lakh respectively held by non-residents. The dividend payable to non-residents shareholders amounted to Rs. 19.62 lakh, Rs. 25.32 lakh and Rs. 26.49 lakh for the assessment years 1994-95, 1995-96 and 1996-97 respectively. However, no information was available in the assessment record to indicate that the assessee had deducted the income tax in respect of dividend payments to non-residents. The assessing officer failed to verify this aspect though the assessments were completed under scrutiny. The tax effect in this case works out to Rs. 14.28 lakh at the minimum rate of 20% tax applicable to non-residents.

3.22    Non-levy of penalty/interest

Under the Income Tax Act, failure to get the account audited and to furnish the report before the prescribed date is liable to a minimum penalty of half per cent of the total sales turnover/gross receipts subject to a maximum penalty of Rs. one lakh.

Audit scrutiny of records revealed that in charges of Maharashtra and Tamil Nadu penalty for non furnishing of audit report in terms of provisions of the Act was not levied in 15 assessment cases resulting in non-levy of penalty of Rs. 6.96 lakh.

Under the Income Tax Act, 1961, no person shall take or accept from any other person any loan or deposit otherwise than by an account payee cheque or bank draft if the amount is more than Rs. 20000. Similarly, no company shall repay to any person deposit and interest thereon otherwise than by an account payee cheque or bank draft subject to conditions laid down in the Act. Failure to comply with these provisions attracts levy of penalty that is equal to the amount of loan/deposit accepted or paid.

In the following cases penalty amounting to Rs. 5.00 lakh was leviable but not levied.

(Rs. in lakh)

TABLE NO. 5    NON-LEVY OF PENALTY/INTEREST

Sl. No

Name of assessee

Assessment year

CIT charge

Nature of mistake

Tax Effect

1

2

3

4

5

6

1

Dr. Geeth Raghunath

1999-2000

Coimbatore

Loan accepted in cash.

4.50

2.

M/s Coimbatore Kidney Care & Research (P) Ltd.

1996-97

Coimbatore

Repayment of deposit in cash

0.50

3.23    OTHER POINTS OF INTEREST

3.23.1    Suppression of income

During the course of review, in Delhi, a test check of 22 cases assessed in summary manner brought out glaring instances of suppression of income. The cases brought out that while the total credits transferred to profit and loss account were to the extent of Rs. 272.85 lakh, an expenditure of Rs. 265.80 lakh was shown in the profit and loss account under various heads of account. The income offered for taxation was a paltry sum of Rs. 7.52 lakh on which a tax of Rs. 1.72 lakh was levied, which was 0.63 per cent of gross income. Investigation into the reasons as to why more cases of this sector could not be brought under scrutiny category revealed that due to absence of recognition of this sector as a separate entity, coverage has so far been a matter of chance. This being the case, the existing arrangement would not be sufficient to bring the full potential of the sector into the ambit of taxation. In pursuance of the observation of audit, the Department directed the assessing officers to take the cases listed by audit to their control register and then issue necessary instructions for issuing statutory notices to them which until now escaped assessment.

3.23.2    Scrutiny cases and Search and Seizure cases

In Karnataka, test check of 13 assessments completed under scrutiny revealed that additional income generated and tax levied in these cases worked out to Rs. 31.18 lakh and 11.23 lakh respectively. The percentage of additional income brought out in scrutiny assessment and consequential taxes levied in comparison with the income returned and tax paid by the assessees were 28.28 per cent and 26.61 per cent respectively. However, in three cases of search and seizure, where block assessments were completed, it was found that additional income generated was Rs. 167.82 lakh with a consequent tax effect of Rs. 100.69 lakh. The percentage of additional income yielded and tax levied worked out to 232.92 per cent and 398.13 per cent respectively. These facts clearly indicate that incidence of suppression of income in this sector is high.

3.23.3    Incorrect exhibition in accounts resulting in suppression of factsb

In Tamil Nadu, CIT-IV charge, M/s Devaki Hospitals Ltd., has shown a huge amount as outstanding under the head capital works in progress. These balances ranged between Rs. 1.19 crore and 1.98 crore during the assessment years 1993-94 to 1999-2000 stated to be advance payments made to a company and an individual for purchase of land and building. Thus, the amounts advanced towards purchase of fixed assets (capital in nature) was incorrectly shown as capital works in progress. The fact that the advances reportedly paid by the assessee towards purchase of land and building remains outstanding for the assessment years 1993-94 to 1999-2000 and considering the fact that the advance was interest free and paid to related persons covered by Section 40A(2)(b), the assessing officer should have obtained the agreement evidencing purchase of land and building. However, the assessing officer failed to ascertain the true nature of transaction.

3.23.4    Non-compliance with the provisions relating to conversion of investments into stock in trade

Under the Income Tax Act, 1961, in case of investments of a owner, converted into stock in trade of a business carried on by him and subsequent sale of such stock as business transaction, the capital gain arising from the transfer on the date of conversion of such assets as well as the business profit out of the sale calculated with reference to the transfer value (at the time of conversion) and sale value shall be included in the income of the previous year in which the sale transaction take place.

In Tamil Nadu, CIT Coimbatore charge, an individual assessee, Dr. S. Vijayakumari in assessment year 1997-98 was showing investments in share worth Rs. 28.91 lakh. From the assessment year 1998-99, the investments were shown in the accounts as stock in trade. Audit scrutiny revealed that losses of Rs. 5.5 lakh and Rs. 0.32 lakh were shown during the assessment years 1998-99 and 1999-2000 respectively towards sale transaction of the stock in trade and adjusted against other income without complying with the provisions of the Act. The assessing officer while completing the assessments relating to these assessment years failed to examine this aspect.

3.23.5    Diversion of income

In Tamil Nadu, CIT IV Chennai charge an individual, Dr. K. Jagadeesan and another assessee company M/s K.J. Hospitals (P) Ltd, CIT-II Chennai charge, in which the individual had substantial interest were mutually enjoying the hospital building and facilities owned by other i.e. both owners rented the property to the other mutually. Based on a technical evaluation, the rent payable by each of the two persons was determined at Rs. 7,000 per month. However, a comparison in audit of the expenses incurred on repairs and maintenance of building, etc. revealed that during the assessment years 1994-95 to 1998-99, the company assessee incurred an amount of Rs. 81.01 lakh as against Rs. 11.40 lakh only incurred by individual assessee during the same period towards these expenses. As both the persons enjoying the property equally, the expenses should also be equally shared by the two assessees. Thus there was an indirect benefit accrued to the individual assessee amounting to Rs. 34.80 lakh. On the other hand the assessee company could claim these expenses as business expenditure and its income got reduced. The Department failed to correlate these cases and to retrieve the loss of revenue in these cases.

3.23.6    Non-verification of sale transaction of high value

In Tamil Nadu, scrutiny of assessment records of two assessees viz. M.I.O.T Hospitals Ltd., under CIT-IV Chennai charge and M/s Coimbatore Kidney Care and Research (P) Ltd, under CIT Coimbatore charge, revealed that the assessees had purchased land valued at Rs. 3.15 crore in assessment year 1995-96 and Rs. 2.12 crore in assessment year 1999-2000 respectively. Despite the huge value of transaction, no action was taken to ascertain whether the transaction would result in income from capital gain at the hands of the owners of the land and whether any tax was actually paid on the capital gains.

3.24    Audit conclusions

The income tax department has failed to ensure that all the private hospitals and nursing homes have been brought on their records for assessment purposes.

  • Out of 21,103 private hospitals and nursing homes, as identified by Audit, the Department could confirm that only 7240 (or 34%) private hospitals and nursing homes were subjected to tax.
  • The Department failed to widen the tax net in respect of private hospitals and nursing homes despite availability of resources and tools in the shape of CIB, powers of survey & search under the IT Act. During the years 1997-98 to 1999-2000, only 163 private hospitals and nursing homes were brought in the tax net through these tools.
  • Non-deduction of TDS, incorrect deduction of capital expenditure, incorrect computation of income tax from house property, irregularity in allowance of depreciation, omission to tax the unexplained investments etc. resulted in short levy of tax amounting to Rs. 14.57 crore as revealed in test check of a few assessment cases.