Case Law Details
ITAT BANGALORE BENCH ‘C’
Deputy Commissioner of Income-tax
versus
Columbia Asia Hospitals (P.) Ltd.
IT Appeal Nos. 1146 (Bang.) of 2011 & 449 (Bang.) of 2012
[ASSESSMENT YEARS 2007-08 & 2008-09]
FEBRUARY 15, 2013
ORDER
Jason P. Boaz, Accountant Member
These two appeals by revenue are directed against the orders of Commissioner of Income Tax (Appeals)-II, Bangalore for Assessment Year 2007-08 and 2008-09 dt.18.1.2012 and 5.9.2011 respectively. As these appeals were heard together, they are being disposed off together by this consolidated order.
ITA No.449/Bang/2012 (A.Y. 2007-08)
2. The facts of the case, in brief, in respect of this appeal are as under :
2.1 The assessee, a leading hospital in the city, filed its return of income for Assessment Year 2007-08 on 31.10.2007 declaring loss of Rs. 8,71,58,141. The return was processed under section 143(1) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) and was subsequently taken up for scrutiny by issue of notice under section 143(2) of the Act. The Assessing Officer completed the assessment by an order under section 143(3) of the Act on 21.12.2009 determining the loss of the assessee at Rs. 7,27,79,693 by making the following disallowances.
|
Rs. |
||
|
(i) |
Disallowance of Depreciation |
73,514 |
|
(ii) |
Revenue expenditure disallowed |
29,60,093 |
|
(iii) |
Business expenditure disallowed |
93,36,039 |
|
(iv) |
Revenue expenditure disallowed |
19,71,000 |
|
(v) |
Disallowance under section 14A & rule 8D |
37,802 |
|
Total : |
1,43,78,448 |
2.2 Aggrieved by the order of assessment for Assessment Year 2007-08 dt.21.12.2009, the assessee went in appeal before the learned CIT (Appeals). The learned CIT (Appeals) disposed off the assessee’s appeal by order dt.18.1.2012 wherein the assessee’s grounds raised in respect of the disallowances made at S.No.(i) and (v) were upheld; the disallowance at S.No.(iv) was deleted. In respect of the disallowance made at (iii) above deduction under section 35D of the Act was allowed to the extent of Rs.18,67,207. The disallowance made by the Assessing Officer at S.No.(ii) above was accepted and not agitated by the assessee before the learned CIT (Appeals). In sum and substance, the assessee was allowed partial relief by the learned CIT (Appeals) in its appeal for Assessment Year 2007-08.
3. Aggrieved by the order of the learned CIT(Appeals), revenue is now in appeal before us in which it has raised the following grounds :
” 1. The order of the CIT (Appeals) is opposed to the facts of the case.
2. The learned CIT (Appeals) has erred in concluding that the items of expenditure of Rs.93,36,039 are in connection with expansion of business.
3. The learned CIT (Appeals) has erred in not upholding the Assessing Officer’s action of treating the amount of Rs.93,36,039 as capital expenditure.
4. The learned CIT (Appeals) erred in allowing the expenditure of Rs.93,36,039 over 5 years as provided under section 35D of the Income-tax Act, 1961.
5. The learned CIT (Appeals) has erred in treating the expenditure of Rs.19,21,000 on taking leased property as business expenditure relying on the decision of Karnataka High Court in the case of CIT v. H.M.T. Ltd. reported in 203 ITR 820.
6. For these and such other grounds that may be urged at the time of hearing the appeal, the order of the learned CIT (Appeals) may be set aside and that the order of the Assessing Officer may be restored.”
4. On perusal, we find that the grounds raised at S.Nos.1 and 6 above, are general in nature and therefore no adjudication is called for thereon.
5.1 In the grounds raised at S.Nos.2 to 4 above, revenue contends that the findings of the learned CIT(Appeals) holding that items of expenditure amounting to Rs.93,36,039 were expended in connection with the expansion of the assessee’s business and in allowing deduction of this expenditure under section 35D over a period of 5 years was erroneous. The learned Departmental Representative reiterated the arguments put forth in the grounds raised and pleaded that the order of the learned CIT(Appeals) be reversed and that the finding of the Assessing Officer that the said expenditure was capital in nature be restored.
5.2 Per contra, the learned counsel for the assessee supported the finding in the order of the learned CIT(Appeals) on this issue.
5.3.1 We have heard both sides and have perused and carefully considered the material on record and the orders of the authorities below. In the course of assessment proceedings the Assessing Officer noticed that the assessee had incurred expenditure towards professional fees paid to various advocates and law firms and such other expenses amounting to Rs.95,66,039 which are listed out at pages 4 to 7 of the order of assessment. On examination thereof the Assessing Officer was of the view that out of the total amount of Rs.95,66,039 except for expenditure amounting to Rs.2,80,000 which he held to be revenue in nature, the remaining portion related directly to the acquisition of capital assets; were not in the nature of preparation of feasibility reports or market surveys and hence were classified as capital expenditure and disallowed by the Assessing Officer.
5.3.2 After having held that these expenditures to the extent of Rs.93,36,039 were capital in nature and disallowing the same, the Assessing Officer rejected the assessee’s claim for deduction of 1/5th of the said expenditure under section 35D of the Act, imposed a condition that if any of the appellate authorities were to hold the said expenditure as revenue in nature, these expenditures are protectively held as attracted under section 35D of the Act and accordingly a deduction thereon of 1/5th viz. Rs.18,67,207 out of Rs.93,36,939 is to be allowed and the amount of Rs.74,68,831 be allowed in the future years.
5.3.3 The learned CIT(Appeals), after examining the items of expenditure, came to the conclusion that these expenses are incurred in connection with expansion of business and hence are covered under section 35D of the Act thereby allowing the assessee 1/5th of the said expenditure of Rs.18,68,208 in the current year with the direction that the remaining expenditure of Rs.74,68,831 is to be allowed equally in the next four assessment years.
5.3.4 On careful consideration of the submissions made and the factual matrix of the issue as laid out above and perusal of the provisions of section 35D of the Act, it is seen that section 35D(1) of the Act relating to amortization of certain preliminary expenses, allows deduction for expenditure incurred.
(i) before the commencement of business; or
(ii) after the commencement of business, in connection with the extension of his undertaking or in connection with his setting up of a new unit.
Section 35D(2) specifies the expenditures that are eligible for deduction under this section, namely (a) expenditure incurred for,
(i) Preparation of feasibility report;
(ii) preparation of project report;
(iii) conducting market survey or any other survey necessary for the business of the assessee;
(iv) engineering services relating to the business of the assessee;
(b) legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee;
(c) where the assessee is a company, also expenditure –
(i) by way of legal charges for drafting the Memorandum and Articles of Association of the company;
(ii) on printing of the Memorandum and Articles of Association;
(iii) by way of fees for registering the company under the provisions of the Companies Act, 1956.
(iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage, and charges for drafting, typing, printing and advertisement of the prospectus;
(d) Such other items (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed.
As per the scheme of deduction laid out under section 35D of the Act, the concerned expenditure to be eligible for deduction should qualify the alternate condition stipulated in section 35D(1) and should be one of the items of expenditure specified in section 35D(2). In the present case, evidently the expenses have been incurred after the commencement of business and therefore in order to qualify for deduction under section 35D of the Act, the expenses have to be incurred in connection with the extension of the undertaking or in connection with the setting up of a new unit. As can be seen from the detailed breakup of the expenditure in question at pages 4 to 7 of the order of assessment, these expenses are, essentially towards payment of professional fees related to acquisition of land for setting up of hospitals. As the assessee is already in the business of running hospitals, the expenditure related to setting up of new hospitals are ostensibly only for expansion of the existing business of the assessee. We are therefore of the view that the condition stipulated in section 35D(1) of the Act is satisfied. Further, we also find that since the expenditure in question are mainly professional fees paid to advocates and legal firms, which are related to the expansion of the assessee’s existing business of running hospitals, the condition stipulated in section 35D(2) of the Act is also satisfied. In this view of the matter, we concur with the finding of the learned CIT(Appeals) that the expenditure in question qualifies for deduction under section 35D of the Act and therefore direct the Assessing Officer that this expenditure amounting to Rs.93,36,039 be allowed as a deduction equally over a period of five years as provided under section 35D of the Act. We, therefore, dismiss grounds raised at S.Nos.2 to 4 above by revenue.
6.1 In the grounds raised at S.No.5, revenue contends that the learned CIT (Appeals) erred in treating the expenditure of Rs.19,21,000 on taking leased property as business expenditure by relying on the decision of the Hon’ble Karnataka High Court in the case of CIT v. H.M.T Ltd. [1993] 203 ITR 820.
6.2 The assessee, in the relevant period, has incurred an expenditure of Rs.19,60,000 and Rs.2,32,000 towards registration of the building that it had taken on long lease (viz. for an initial period of 5 plus 5 years which was renewable for further periods of 5 years six times) for its hospital at Bellary Road, Near Hebbal Flyover, Bangalore vide lease deed dt.29.6.2006 and claimed as these lease rent charges as revenue expenses. The Assessing Officer did not accept the claim of the assessee that these expenses were revenue in nature. On the contrary, the Assessing Officer held that, in view of the long period of 40 years for which the lease would run, the said expenditure was capital in nature and allowed depreciation of Rs.2,19,000 thereon.
6.3 The learned CIT(Appeals) relying on the decision of the Hon’ble Karnataka High Court in the case of H.M.T. Ltd. (supra), held that this expenditure of Rs.21,90,000 are allowable as a business expenditure without elaborating on the reasons for her finding.
6.4 The learned counsel for the assessee supported the findings in the orders of the learned CIT(Appeals) on this issue inter alia placing reliance on the decision in the case of H.M.T. Ltd. (supra) and sought the dismissal of the grounds raised by revenue.
6.5 We have heard both parties, carefully perused, considered the material on record and the judicial decisions relied on by the learned CIT (Appeals) and the assessee. In order to appreciate the respective contentions, it is necessary to examine the nature of the transaction. It is not disputed by revenue that the said lease agreement dt.29.6.2006 entered into by the assessee give rise to a lease in favour of the assessee and no other legal rights in the hospital building are granted to the assessee. As such, the view of the Assessing Officer that the said lease agreement brings into existence an asset of enduring nature is, in our opinion, misplaced. The Hon’ble Apex Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 has laid down certain guidelines to determine whether, in a given case, the expenditure incurred is in the nature of revenue or capital expenditure. The Hon’ble Karnataka High Court in the case of H.M.T. Ltd. (supra) has referred to this decision of the Hon’ble Apex Court to hold that expenditure related to lease arrangement is in the nature of advance rent and the premium was allowable as business/revenue expenditure. We are, therefore, of the considered opinion that the reliance placed by the learned CIT(Appeals) on the decision of the jurisdictional High Court in the case of H.M.T. Ltd. (supra) on this issue is in order and finding no reason to interfere therein, uphold the finding of the learned CIT(Appeals). Consequently, the ground raised by revenue is dismissed.
7. In the result, Revenue’s appeal for Assessment Year 2007-08 is dismissed.
ITA No.1146/Bang/2011 for Assessment Year 2008-09 .
8. The facts of the case, in brief, are as under :
8.1 The assessee, a leading hospital in Bangalore, filed its return of income for Assessment Year 2008-09 on 29.9.2008 declaring a loss of Rs.7,20,80,875. The return was processed under section 143(1) of the Act, and the case was subsequently taken up for scrutiny by issue of notice under section 143(2) of the Act. A survey under section 133A of the Act was conducted at the business premises of the assessee on 13.9.2010. The assessment was completed by an order under section 143(3) of the Act on 30.12.2010 determining the loss of the assessee at Rs. 5,90,88,701 by making the following disallowances :
|
Rs. |
||
|
(i) |
Disallowance under section 14A & Rule 8D |
19,31,371 |
|
(ii) |
Brand building expenses |
58,63,651 |
|
(iii) |
Bad Debts |
71,228 |
|
(iv) |
Loss on disposal of Fixed Assets |
39,41,007 |
|
(v) |
Payment for recruitment of Manpower |
23,57,487 |
|
Total : |
1,29,92,174 |
8.2 Aggrieved by the order of assessment for Assessment Year 2008-09 dt.30.12.2010, the assessee went in appeal before the CIT(Appeals). The learned CIT(Appeals) disposed off the assessee’s appeal by order dt.5.9.2011 wherein the grounds raised by the assessee in respect of disallowances made at S.No.(iii), (iv) and (v) above were fully allowed in favour of the assessee, the disallowance made at S.No.(ii) by the Assessing Officer was upheld and the disallowance made at S.No.(i) above was partly allowed to the extent of Rs. 1,36,000. In the manner as laid out above, the assessee’s appeal for Assessment Year 2008-09 was partly allowed.
9. Aggrieved by the order of the learned CIT(Appeals), for Assessment Year 2008-09 dt.5.9.2011, revenue is now in appeal before us raising the following grounds :
“1. The order of the CIT (Appeals) is opposed to the facts of the case.
2. The learned CIT (Appeals) has erred in deleting the addition to the extent of Rs.65,05,722.
3. The learned CIT (Appeals) has failed to appreciate the fact that the assessee had submitted the sum of Rs.1,36,000 as direct cost.
4. The CIT (Appeals) has failed to appreciate the fact that the previous year relevant to the assessment year 2008-09 is first year where the expenditure is made for the first time to an agency that is into the business of identifying manpower and arranging manpower for the company.
5. The learned CIT (Appeals) has failed to take cognizance of the fact that recruitment made through agencies is not easily terminated because at the time of recruitment itself a lot of screening is done to verify suitability and no company would be interested in spending money on recruitment repeatedly.
6. The learned CIT (Appeals) has failed to appreciate the fact that loss on disposal of fixed assets is not admissible.
7. The learned CIT (Appeals) has failed to appreciate the fact that the previous year relevant to the assessment year 2008-09 is the second year of operation and it is premature to declare the debts as bad debts though no efforts for recovery have been found feasible and hence not done.
8. For these and such other grounds that may be urged at the time of hearing the appeal, the order of the learned CIT (Appeals) may be set aside and that the order of the Assessing Officer may be restored.”
10. On perusal, we find that grounds raised at S.Nos. 1, 2 and 8 above are general in nature and therefore no adjudication is called for thereon.
11.1 In the ground raised at S.No.2, revenue contends that the learned CIT(Appeals) failed to appreciate the facts that the assessee had admitted a sum of Rs.1,36,000 as direct cost. Though it is not mentioned as to which expenditure this ground pertains to, it appears to be in respect of the issue related to the disallowance under section 14A r.w. Rule 8D.
11.2 Per contra, the learned counsel for the assessee supported the finding in the order of the learned CIT(Appeals) on this issue. It is submitted that the learned CIT(Appeals) had rightly held that when the assessee itself had disallowed Rs.1,36,000 under section 14A of the Act, as being attributable to the investment made in the earning of exempt income, the Assessing Officer on working out the disallowance under section 14A r.w. Rule 8D at Rs.19,31,371 ought to have restricted the disallowance at Rs.17,95,371 (viz. Rs.19,31,371 less Rs.1,36,000). In view of this, it is the plea of the learned counsel for the assessee that the ground of revenue be dismissed.
11.3 We have heard both parties and carefully perused the material on record. It appears that revenue has not comprehended the order of the learned CIT(Appeals) in this regard. We find that the learned CIT(Appeals) has fully upheld the both the actions of the Assessing Officer in invoking Rule 8D and also the disallowance made by the Assessing Officer of Rs.19,31,371. We find from the details, on record that out of the total expenditure of Rs.2,71,39,502, the assessee itself had attributed sum of Rs.1,36,000 as expended towards the earning of exempt income and made the disallowance to this extent. In this view of the matter, it is evident that quantum of disallowance worked out by the Assessing Officer at Rs.19,31,371 includes the sum of Rs.1,36,000 already disallowed by the assessee and therefore the additional disallowance that ought to have been made by the Assessing Officer was Rs.17,95,371 (viz. Rs.19,31,371 less Rs.1,36,000). In fact at para 2 of the order of assessment, the Assessing Officer has narrated this very position as ” …… this office is constrained to disallow Rs.19,31,371 which includes the direct cost of Rs.1,36,000 submitted by the assessee and the disallowance amounting to Rs.17,95,371 is determined by this office under section 8D.” However, in the computation of income / loss at the end of the order of assessment, the amount of disallowance has been erroneously taken by the Assessing Officer at Rs,19,31,371. The learned CIT(Appeals) has only sought to point out this mistake and direct that the correct amount of Rs.17,95,371 taken for disallowance. This ground raised by revenue being frivolous, is dismissed.
12.1 In the grounds raised at S.Nos.4 and 5, revenue contends that the learned CIT(Appeals) failed to appreciate the fact that the period relevant to Assessment Year 2008-09 is the first year in which expenditure has been incurred to an agency for identifying and recruitment of manpower for the company and also failed to take cognizance that recruitment made through agencies is not easily terminated because at the stage of recruitment itself a lot of screening is done to verify suitability of candidates and no company would be interested in spending money on recruitment repeatedly. The learned Departmental Representative supported the grounds raised.
12.2 Per contra, the learned counsel for the assessee supported the finding of the learned CIT(Appeals) on this issue and sought dismissal of the grounds raised by revenue.
12.3 We have heard both parties and carefully perused and considered the material on record including the orders of the authorities below. In the course of assessment proceedings the Assessing Officer found that the assessee had incurred expenditure of Rs.23,57,487 for the recruitment of manpower through an agency and had claimed it as revenue expenditure as recruitment is an ongoing exercise. The Assessing Officer, however, was of the view that no company would be interested in spending money on recruitment repeatedly and recruitment made through agencies is not easily terminated because a lot of screening is done at the stage of recruitment itself and as this expenditure is for a long time benefit, held it to be capital in nature. The learned CIT(Appeals) after examining the expenditure involved came to the conclusion that it was attributable to the recruitment of manpower for the assessee’s business of running a hospital and therefore held the said expenditure to be revenue in nature and therefore allowable. We find from the record that the Assessing Officer has not questioned the genuineness of the expenses or the fact of the expenditure having been incurred and appears to have disallowed the said expenses only on conjectures and suspicion, for which there is no basis, nor is his finding established by any evidence. We are therefore of the considered view that the learned CIT(Appeals) has rightly held that the expenses of Rs.23,57,487 incurred towards recruitment of manpower are attributable to the appellant’s business and that recruitment is an ongoing exercise in the assessee’s nature of business and therefore is allowable as a revenue expenditure. We, therefore, uphold the decision of the learned CIT(Appeals) and consequently dismiss the grounds raised by revenue on this issue.
13.1 In the ground raised at S.No.6, revenue contends that the learned CIT(Appeals) failed to appreciate the fact that loss on disposal of fixed assets is not admissible. The learned Departmental Representative reiterated the ground raised.
13.2 Per contra, the learned counsel for the assessee supported the findings of the learned CIT(Appeals) on this issue. It is the contention of the learned counsel for the assessee that the Assessing Officer without giving any reason disallowed the loss on disposal of fixed assets amounting to Rs.39,41,007 in spite of the fact that the same was not debited to the profit and loss account for the period relevant to the current year i.e. for Assessment Year 2008-09. The learned counsel for the assessee therefore submits that the grounds raised by revenue be rejected.
13.3 We have heard both parties and perused and carefully considered the material on record. We find that without any discussion or assigning any reasons, the Assessing Officer observing that the assessee has charged an amount of Rs.39,41,007 to the profit and loss account on account of loss on disposal of fixed assets and proceeded to make the disallowance in a summary manner. The learned CIT(Appeals) has verified the issue and found that since the assessee has made no such claim for deduction in the period relevant to Assessment Year 2008-09 which is the subject-matter of this appeal, no disallowance was called for and therefore deleted the disallowance. Before us, revenue has not been able to bring on record any evidence to controvert the finding of the learned CIT(Appeals) that since no such claim for deduction of Rs.39,41,007 on account of loss on sale of fixed assets was made by the assessee in Assessment Year 2008-09, no disallowance was called for. In this view of the matter, we uphold the finding of the learned CIT(Appeals) on this issue and consequently dismiss this ground raised by revenue.
14.1 In the ground raised at S.No.7, revenue contends that the learned CIT(Appeals) has failed to appreciate the fact that being the second year of operation it was premature to declare the debts as bad, particularly when no efforts for recovery were made. The learned Departmental Representative was heard in support of the grounds raised by revenue.
14.2 Per contra, the learned counsel for the assessee supported the findings of the learned CIT(Appeals) on this issue and urged for dismissal of the grounds raised by revenue.
14.3.1 We have heard both parties and carefully perused and considered the material on record. In the current year, the Assessing Officer, noted that the assessee had written off bad debts to the extent of Rs.71,228. Observing that it was premature to be declared / treated as a bad debt since this was only the second year of operations by the assessee and noting that no efforts for its recovery have been made, the Assessing Officer disallowed the assessee’s claim. We find that the learned CIT(Appeals) after examining the details thereof agreed with the assessee’s contention that the sum of Rs.71,228 consisted of smaller amounts due from patients which were not recoverable. Holding that this expenditure was allowable under section 36(1)(vii) of the Act, the learned CIT(Appeals) deleted the disallowances made by Assessing Officer.
14.3.2 As per the provisions of section 36(1)(vii) of the Act and it now stands, the following conditions have to be cumulatively satisfied for claiming deductions for bad debts :-
(i) there must be a debt, an obligation to pay an ascertainable sum of money;
(ii) such debt must be revenue in nature.
(iii) such debt must be incidental to the business of the assessee;
(iv) such debt must have been taken into account while computing the income of the assessee;
(v) It must have been written off in the books of the assessee.
After the amendment to the law w.e.f. 1.4.1989 in order to obtain deduction in relation to bad debts all that the assessee has to show was that the bad debt was written off as irrecoverable in its books of account. There was no need for the assessee to establish that the debt, in fact, had become bad. This proposition has been upheld by Hon’ble Apex Court in the case of T.R.F. Ltd. v. CIT [2010] 323 ITR 397.
14.3.3 In the instant case, it is not disputed that the amounts claimed as bad debts have been shown as ‘receipts’ and offered to tax earlier. Merely because this is the second year of the assessee’s operations and the period between the revenue recognition and the decision to write off the debts is short, it does not automatically lead to the conclusion that the debt cannot be claimed as irrevocable, as has been wrongly presumed by the Assessing Officer. We also do not find that the Assessing Officer has disputed the transactions, constituting the debts written off, as not being genuine. The learned CIT(Appeals), on the other hand, has examined the details of these transactions and found them to be comprising of small amounts receivable from various patients who have been discharged and agreed with the claim of the assessee that the amounts totalling Rs.71,228 claimed as bad debts are to be allowed under section 36(1)(vii) of the Act, after recording the finding that the Assessing Officer has not brought on record any specific reason for making the disallowance. In these facts and circumstances of the case as discussed above and respectfully following the decision of the Hon’ble Apex Court in the case of T.R.F. Ltd. (supra), we concur with the finding of the learned CIT (Appeals) that the amount of Rs.71,228 claimed as bad debts by the assessee are allowable under section 36(1)(vii) of the Act. Consequently, this ground raised by revenue is dismissed.
15. In the result, revenue’s appeal for Assessment Year 2008-09 is dismissed.
We renewed the Lease Agreement with SBI in FY 2017-18 and have paid 50% of registration charges to Sub-Registrar’s Office(Rs. 2,25000/-). Is this deductible under Income Tax rules? Kindly advise.