Case Law Details

Case Name : M/s SRL Diagnostics Pvt. Ltd. Vs PCIT (ITAT Mumbai)
Appeal Number : I.T.A. No. 1528/Mum/2018
Date of Judgement/Order : 08/01/2021
Related Assessment Year : 2013-14

M/s SRL Diagnostics Pvt. Ltd. Vs PCIT (ITAT Mumbai)

Mere finding the assessment order is erroneous does not give power to Ld. PCIT to annul the assessment order. It is duty imposed by the provision of section 263 that Ld. PCIT has to determine and satisfy both the conditions that the order passed by AO is erroneous in so far as it is prejudicial to the interest of revenue. It is settle position as per legal precedents that to initiate proceedings under section 263, both conditions i.e. order is erroneous and also it should be prejudicial to interest of revenue. Therefore, in the given case, even the information submitted by the assessee are not found place in the assessment order, Ld. PCIT has called for the information under notice u/s 263. Ld. AR submitted that all the informations were once again submitted before Ld. PCIT. However, Ld. DR denied that assessee has not filed any information.

We do not agree with the conclusion of the Ld. PCIT that he had concluded that the order was erroneous, but has not made further investigation to determine, whether the order passed by AO is prejudicial to the interest of revenue. Instead, he remitted this issue back to AO to verify and investigate the issue once again and finalize the assessment order. As discussed above, Ld. PCIT should have verified or investigated the issue afresh by asking the assessee to submit all relevant information. We also notice that assessee claims the payments were made to doctors on regular consultancy fees and not relating to freebees. It is the duty of Ld. PCIT to establish that these payments were in fact freebees and not regular consultation fees, without actually finding that these are freebees and payments are in violation of conditions specified in Circular No. 5 of 2012, he proceeded to annul the assessment order.

In our view, the issue involved in this appeal is, whether payments are consultancy fees or freebees. AO has proceeded with the view that there are regular consultancy fees and accepted the submissions of assessee. AO did not discuss anything in his order. The department taking clue from audit query, they are presuming that the payments are relating to freebees. There is no evidence brought on record by the revenue authorities to substantiate that there were actually freebees. Mere presumption without any cogent material to indicate that these payments are actually freebees is far fetched.

Therefore, in our view, Ld. PCIT has not determined the other condition how it is prejudicial to the interest of revenue. As discussed above, the payments were made to doctors, is it freebees or not is the issue. If it is freebees, it is the duty of Ld. PCIT to bring on record that these payments are in fact disallowable under section 37 of the Act.

Further we notice that there are various decisions submitted before us by Ld. AR that the payment made to doctors by the pharmaceutical companies and allied healthcare industries are not in violation of Circular No. 5 of 2012. It is applicable only to the practicing doctors. As discussed above, Ld. PCIT has not clearly brought on record that the payments were actually in contravention of circular and provision of section 37(1) of the act.

Even on disallowance under section 14A, from the records submitted before us, clearly indicate that the relevant information was submitted before AO and AO has accepted the submissions made by assessee and AO came to conclusion and taken one of the views, which may not be acceptable to Ld. PCIT.

In our considered view, Ld. PCIT has come to conclusion that the order passed by AO is erroneous, but has not verified nor investigated to determine the other condition i.e. how it is prejudicial to the interest of revenue. As held in numerous case law and it is settle position of law that to initiate proceedings under section 263, twin conditions has to be satisfied. In the given case, Ld. PCIT has not fulfilled second condition before initiating proceedings under section 263 of the Act. Therefore, we are inclined to set aside the order passed under section 263. Accordingly, the grounds raised by assessee are allowed.

FULL TEXT OF THE ITAT JUDGEMENT

The present Appeal has been filed by the assessee against the order of Ld. Pr. Commissioner of Income Tax (Appeals) – 7 in short referred as ‘Ld. PCIT(A)’, Mumbai, dated 20.02.18 for Assessment Year (in short AY) 2013-14 passed u/s 263 of the Act.

2. The brief facts of the case are, Ld. PCIT called for the assessment records and examined the same. He noticed that the original assessment order was passed on 22.03.2016. He observed that the assessment order passed but failed to carry out enquiries as warranted by the facts and circumstances of the case, the assessment was completed without examining all the aspects which required to be looked into for arriving at the correct taxable income of the assessee. He observed in his order that the omissions which rendered the assessment order as erroneous and prejudicial to the interest of revenue were mentioned in the show cause letter dated 07.12.2017 issued to the assessee.

3. In response, assessee filed written submission alongwith enclosures on 22.12.17. Ld. PCIT observed from the submission made by assessee on 22.12.2017 that the assessee had submitted details of payments made to professionals including dentists and general physicians during assessment proceedings vide letter dated 22.02.16 and 08.03.16. It was submitted by the assessee that disallowance of expenditure u/s 14A vide letters dated 01.02.2016 and 08.03.2016 and was further submitted by the assessee that these aspects were already examined by the AO during the course of assessment and jurisdiction u/s 263 cannot be exercised by Ld. PCIT.

4. Further, assessee explained to Ld. PCIT vide letter dated 22.12.2017 that it also offers wellness packages, pre job and post job health check-ups, etc. to its corporate clients and has made payment to dentists and general physicians for their respective services, assessee denied that the payments made by them are not in violation of the Circular No. 5 of 2012. It was submitted that the payments made to professionals is allowable deduction and it is incurred for the sole purpose of its business.

5. Further, Assessee explained to Ld. PCIT with regard to the disallowance u/s 14A of the Act that it had invested into equity shares of DDRC SRL Diagnostics Pvt. Ltd as well as preference shares of DDRC. It was argued by the assessee that investments in preference shares would not lead to earning of any exempt income and therefore, it is rightly not included in the working of disallowance u/s 14A of the Act.

6. Ld. PCIT considered the submission of the assessee and he found not to be acceptable. He observed that the claim of the assessee company that it had submitted the complete details of the professional fees amounting to Rs. 70.89 crore paid to doctors during the course of assessment proceedings vide letters dated 22.02.2016 and 08.03.2016 is factually incorrect and false. He further observed that no such details were found in the assessment records and never filed during the course of assessment proceedings. He further observed that the claim of the assessee that it had explained the nature of these professional fees paid to the doctors during the course of assessment to the AO, is also erroneous and not tenable on the records.

7. Ld. PCIT further observed that it is quite clear from above observation that AO has failed to exercise due diligence to examine the nature of the professional fees paid to doctors amounting to Rs. 70.89 crores debited to the P & L account. He observed that the allowability of these expenses as deduction in the computation of business income was not examined bythe AO and AO failed to examine as to whether any of these expenses are in the nature of expenses not allowable as deduction u/s 37 of the Act in general and also in view of guidelines contained in Circular No. 5 of 2012. He further observed that assessee was not able to provide the details of all such expenses during 263 proceedings and merely claimed that expenses are not in the nature of expenses in contravention of the guidelines contained in Circular No. 5 of 2012.

8. He further observed that AO has also failed to examine the nature of all the assets held by the assessee and has failed to exclude fictitious assets (if any) for the purpose of disallowance u/s 14A. Accordingly, He directed the AO to examine in detail the nature of professional fees paid to doctors amounting to Rs. 70.89 crores and allowability under the provision of Income Tax Act especially keeping in view the guidelines contained in Circular No. 5of 2012 issued by the CBDT. He also directed the AO to examine the nature of all the assets held by the assessee and work out the disallowance u/s 14A of the Act. Further, he directed the AO to examine the disallowance made u/s 43B of the Act after obtaining details of actual payments of expenses covered u/s 43B of the Act.

9. Aggrieved with the above order, assessee is in appeal before us raising the following grounds of appeal;-

A. GROUNDS IN RELATION TO INITIATION OF 263 PROCEEDINGS:

1. The Ld. Principal CIT erred in seeking to exercise jurisdiction u/s 263 of the Act on the premise that payments by the assessee to dentists/general physician is by itself hi violation of Circular 5 of 2012 issued by CBDT and thus forming an incorrect belief that the order passed u/s 143(3) by the AO is erroneous in so far as it is prejudicial to the interests of the revenue.

2. The Ld. Principal CIT erred in seeking to exercise jurisdiction u/s 263 of the Act on the premise that considering ‘net asset value’ in deleting disallowance u/s 14A read with rule 8D by itself makes the order passed u/s 143(3) by the AO as erroneous in so far as it is prejudicial to the interests of the revenue.

B. GROUNDS IN RELATION TO EXERCISE OF JURISDICTION U/S 263:

3. The Ld. Principal CIT erred in exercising jurisdiction u/s 263 of the Act in relation to expenditure claim for payments to doctors, without establishing any error in the order passed u/s 143(3) of the Act, merely on the erroneous presumption that the claims made by the Appellant was not examined during the course of assessment and on the erroneous presumption that the payments to doctors would be against the law.

4. The Ld. Principal CIT erred in exercising jurisdiction u/s 263 of the Act in relation to disallowance of expenditure u/s 14A of the Act, without establishing any error in the order passed u/s 143(3) of the IT Act, merely on the erroneous presumption that the claims made by the Appellant was not examined during the course of assessment and on the presumption that alleged error would is prejudicial to the interest of the revenue.

5. The Ld. Principal CIT erred in exercising jurisdiction u/s 263 of the Act in relation to dis­allowance u/s 43B of the Act:

a. In violation of principle of natural justice, in so far as the order has been passed without issuing any notice on this point to the assessee.

b. Without establishing any error in the order passed by the AO u/s 143(3) of the Act.

c. Without giving any reasons for holding the claims of the assessee as inadmissible.

C. GROUNDS ON MERITS:

6. The Ld. Principal CIT erred in holding that the payments made by the assessee to dentists/general physician is by itself in violation of Circular 5 of 2012 issued by CBDT.

7. The Ld. Principal CIT erred in holding that the disallowance u/s 14A of the Act in the case of the assessee has to be enhanced.

D. OTHER GROUND ON JURISDICTION:

8. The Ld. Principal CIT erred in setting aside the order of the AO passed u/s 143(3) of the Act without giving any specific direction to the AO.

10. Before us, Ld. AR appearing on behalf of the assessee submitted that the assessment was completed under section 143(3) of the IT Act vide order dated 20thMarch 2016 and in the assessment order, the AO made certain additions, which were not challenged by the assessee.

11. He further submitted that the Ld. PCIT issued a notice under section 263 of the IT Act dated 7thDecember, 201 7 seeking to exercise jurisdiction u/s 263 of the Act, on the following grounds;

i) A company running pathology labs making payments to dentists, general physicians, etc, and not pathologists, is prima facie in the nature of freebies to the payee, and is in violation of CBDT Circular No 5 of 2012, which has not been examined during assessment proceeding.

ii) In determining dis-allowance u/s 14A of the Act, value of average investments has been determined, considering the net value of investments as against the gross value of investment as required in the section.

12. Further assessee appeared before the Pr.CIT on 22ndDecember, 2017 and filed its detailed objections to the exercise of jurisdiction u/s 263 of the Act. However, without appreciating the submissions of the Assessee, the PCIT vide order dated 20thFebruary, 2018 held that the assessment order passed by the AO is erroneous and prejudicial to the interest of the revenue. In the said order, the PCIT inter alia made the following observations

i) The claim of the Assessee that the details of payment of professional fee amount to Rs.70.89 Crores paid to doctors were filed before the AO during the course of original assessment is factually incorrect and false. Therefore, the further claim of the Appellant that it had explained the nature of the professional fees paid to doctors during the course of assessment proceedings to AO is also erroneous and untenable on the records

ii) The AO had failed to examine as to whether any of these expenses are in the nature of expenses under Section 37 of the IT Act, and also the guidance issued Contained in Circular No. 5 of 2012;

iii) The AO has failed to examine the nature of the assets held by the Assessee and exclude fictitious assets if any, for the purpose of disallowance u/s 14A of the Act.

13. Accordingly, the PCIT, vide his order dated 20thFebruary, 2018 directed the AO to:

(i) Examine in detail the nature of professional fees paid to the doctors amounting to Rs. 70.89 crores and its allowability under the provisions of the IT Act, especially keeping in view the CBDT guidelines contained in Circular No. 5 of 2012;

(ii) Examine the nature of all the assets held by the assessee and work out the disallowance under section 14A of the IT Act afresh;

(iii) Examine the disallowance made under section 43B of the IT Act after obtaining details of actual payments of expenses covered under section 43B of the IT Act and rework the disallowance accordingly after verification.

14. Aggrieved by the Impugned Order of the PCIT, the assessee is submitting following submissions against the findings and conclusions of Ld PCIT.

15. First submission:

15.1. He submitted that Ld. PCIT has made the following observations in the impugned order.

“6 The submissions of the assessee company has been considered and the same is not found to be acceptable. The claim of the assessee company that, it had submitted the complete details of professional fees amount into Rs. 70.89 Crores paid to doctors, during the course of assessment proceedings wide letter dated 22.02.2016 and 08.03.2016 is factually incorrect and false. The perusal of the case records on the submissions filed during the course of assessment proceedings clearly shows that no such details as claimed by the assessee have been filed during the course of assessment proceedings. Therefore, the further claim of the assessee that it had explained the nature of the professional fees paid to doctors during the course of assessment proceedings to AO is also erroneous and tenable on the records”.

15.2. He submitted that the above observation of the PCIT is factually incorrect. This is established beyond doubt, from the evidence available on record itself relating to the appellate proceedings of AY 2014-15.

15.3. He submitted that the assessee was vigorously pursuing the authorities for early hearing of an appeal for A.Y. 2014-15 pending before CIT (A). In that context, A.O vide letter No. DCIT 7(3)(1)/Appeal/SRL/2019-20 dated 22.5.2019 addressed the Ld. PCIT. He brought to our notice the letter dated 22.05.2019, which is reproduced below;

“xxx

“iii. In Assessee ‘s own case, revenue audit party raised the objection for AY 2013-14 vide objection No ITRA/PA On Hosp. ETC/ DCIT – 7(3)(1)/AB/ Mumbai AQ No. 126 dt. 16.11.2016 and the same is reproduced below;

In the assessment of the assessee completed under 11 5JB determining the income of rupees 4,74,98,996, it was seen that the assessee was involved in running chain of pathological laboratories. It was seen that apart from paying the salary of 31,87,87,001 62 it has also debited the sum of rupees 70,89,37,290 as professional fees to doctors to other expenditure schedule. The details of professional fees paid to each doctor were available on file. Random search revealed that these payments were made to dentist general physician etc. among others and not to pathologists, to be disallowed

15.4. He brought to our notice the relevant portion of show cause notice dated 07thDecember, 2017 issued by the PCIT, reads as under:

Sub – Notice u/S 263 of the IT Act, 2961 – in the case of M/s SRL Diagnostics Pvt. Ltd for AY 2013-14

It is observed on perusal of records

a) It was seen that your company had debited an amount of Rs 7,089.37 Lakhs as professional fees to doctors in AY 2013-14 which was allowed during scrutiny proceedings by the assessing officer. Your company was involved in running a chain of pathological laboratories. However, as per details of professionals fees paid revealed that payments were made to dentists, general physicians, etc. and not pathologist. Therefore, the nature of these payments were not examined by AG in light of CBDT’s Circular No 5/2012″

15.5. Therefore, He submitted that Ld. PCIT’s observation in para 6 of the impugned order is plainly incorrect.

16. Second Submission:

16.1. He submitted with reference to the AO letter dated 22.05.2019 and show cause notice u/s 263, which was reproduced in the earlier paragraphs that the language employed by the Revenue audit party and in the SCN issued by Ld. PCIT is practically identical. It is obvious and self-evident that the Ld. PCIT issued notice u/s 263 of the Act, based only on the objection raised by the Revenue Audit Party.

16.2. He submitted by relying on the decision of Punjab and Haryana High Court in CIT v. Sohana Woollen Mills [2007] 207 CTR 178 (P&H), it is held that, mere audit objection and because a different view could be taken, are not enough to say that the order of the Assessing Officer was erroneous or prejudicial to the interests of the Revenue.

16.3. Further, He relied on the Calcutta High Court decision, in Jeevanlal (1929) Ltd v. ACIT [1977} 108 ITR 407 (Cal) and Hon’ble High Court quashed a notice initiating 263 proceedings, when the notice was based on audit objection and not on independent examination of assessment record by the CIT.

16.4. Ld AR submitted, the notice dated 7.12.2017 for initiation of revision proceedings, evidently being solely based on audit objection is therefore clearly illegal. Consequentially, the impugned order, would have to be quashed.

17. Third submission

17.1. He submitted that the AO, in para 3 of his assessment order dated 22nd March, 2016 notes that the assessee company is engaged in the business of providing testing, diagnostics and prognostics monitoring screening tests on human being. The AO was thus very well aware about the business activities of the Assessee.

17.2. He submitted that the tests are to be conducted by pathologists who are qualified doctors as well. A pathologist is a doctor who specializes in diagnosing diseases by examining tissue samples. A pathologist is a medical healthcare provider who examines bodies and body tissues. He or she is also responsible for performing lab tests.

17.3. He submitted that the Assessee had engaged the pathologists/ doctors to undertake testing activities and to provide their opinion/ reports to individuals who approach the Assessee. The consideration paid by the Assessee to the pathologist/doctors are for services rendered by them to the Petitioner. The Assessee had furnished a copy of its financial statements to the AO, which elaborately describe the business activities of the Assessee.

17.4. He submitted that the payment to pathologist and doctors is the single largest expenditure by the Assessee. This is so because the services of the pathologist and doctors are the foundation on which the Assessee’s laboratory functions. No Pathologist/ doctor is on the payroll of the Assessee as a salaried employee. They are independent service providers/professional. Without their services, the Assessee would not have earned any income. In this background, the AO allowed the expenditure incurred by the Assessee.

17.5. He submitted that the Assessing Officer had called for the details and the same were filed by the assessee. There may not be elaborate discussion in the assessment order. That would not lead to assumption of jurisdiction under Section 263.

17.6. He submitted, Assessee, as a part of its operating diagnostics centers, offers pre job and post job health check­ups, ‘wellness packages’, etc. to its corporate clients as well as walk inclients. The wellness packages offered by the Assessee which includes general physical check up and dental check can be seen from the brochure of the Assessee.

17.7. In view of these, he submitted that the assumption of audit party and show cause notice is entirely a conduit and Circular No. 5 of 2012 dated 1.8.20 12 has no relevance even remotely to the present matter.

18. Fourth Submission:

18.1. He submitted that the entire regulation ‘Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002’ deals with the professional conduct, etiquette and ethics for registered medical practitioners only. Chapter 6 of the said regulation/notification deals with unethical acts, whereby a physician or medical practitioners shall not aid or abet or commit any of the acts illustrated in clauses 6.1 to 6.7 of the said regulation which shall be construed as unethical.

18.2. He submitted that the clause 6.8 has been added (by way of amendment dated 10-12-2009) in terms of notification published on 14-12-2009 in Gazette of India laying down the code of conduct for doctors and professional association of doctors in their relationship with pharmaceutical and allied health sector industry.

18.3. Further he submitted that on a plain reading of the aforesaid notification, it is quite apparent that the code of conduct enshrined therein is meant to be followed and adhered by medical practitioners/doctors. It illustrates the various kinds of conduct or activities which a medical practitioner should avoid while dealing with pharmaceutical companies and allied health sector industry. It provides guidelines to the medical practitioners of their ethical codes and moral conduct. Nowhere the regulation or the notification mentions that such a regulation or code of conduct will cover health care sector or pathological labs in any manner.

18.4. He submitted that before the Delhi High Court in the case of Max Hospital v. MCI in [WPC 1334 of 2013, dated 10-1 -2014], the Medical Council of India filed an affidavit to the effect that the Indian Medical Council Regulation of 2002 has jurisdiction to take action only against the medical practitioners and not to health sector industry.

18.5. The Circular No.5 of 2012 of CBDT dated 1-8-2012 has solely based on the guidelines issued by the Medical Council of India. Evidently, Circular of the CBDT is founded on erroneous basis.

19. Fifth Submission:

19.1. He submitted that the correctness of Circular No 5 of 2012 was dealt with by this Hon’ble Tribunal in Solvay Pharma India Ltd v. PCIT E20181 192 TTJ 394 (Mum).Again, the Mumbai Tribunal in DCIT v. PHL Pharma (P.) Ltd [2017] 163 ITD 10 (Mum) held that Circular No 5 of 2012 is applicable for medical practitioners only and the censure/action which has been suggested by it is only on medical practitioners and not for pharmaceutical companies or allied health sector industries.

Further, he relied on:

Cadila Pharmaceuticals Ltd. v. DCIT [2017] 85 taxmann.com 354 (Ahmedabad – Trib.) – para 28

Dr. Reddy’s Laboratories Ltd. v. ACIT [2017] 81 taxmann.com 398 (Hyderabad – Trib.) – para 42 and 43

Aishika Pharma (P.) Ltd v. ITO /[2019] 177 ITD 238 (Delhi – Trib.) – para 6

19.2. He submitted that the question has been considered very recently by the Mumbai ITAT in the case of erstwhile parent company of the Assessee as well. The Assessee was earlier owned by Piramal Enterprises Ltd. The said Piramal Enterprises was also engaged in running of pathological laboratories. A question arose before the Tribunal (in DCIT v. Primal Enterprises Ltd [2020] 117 Taxmann.com 970 (Mum), as to whether payments made by the said Piramal Enterprises to doctors was barred by CBDT Circular No 5 of 2012. Following the earlier judgments, the Tribunal held that the Medical Council Regulations would not apply to a Company managing Pathological laboratories, and consequently the payments made to doctors would not be barred by CBDT Circular No. 5 of 2012.

20. Sixth Submission

20.1. He submitted, the order of the AO cannot be regarded as erroneous, for not having followed a Circular particularly which is contrary to law laid down by Courts/Tribunals. This principle was explained by Calcutta High Court in Bhartia Industries Ltd v. CIT [20131 353 ITR 486 (Calcutta), in the context of CBDT Circular relating to allowability of VRS compensation paid to employees. The AO in this case had allowed deduction for expenditure incurred by the assessee towards Voluntary Retirement Scheme framed by the assessee. The question of whether such expenditure was allowable in the year of payment or on accrual basis, was a subject matter of dispute before various Courts. The CBDT vide Circular No. 200/79/2000-IT(A-I), dated 23-1-2001 opined that expenditure on VRS should be treated as capital expenditure. The CIT exercised his jurisdiction u/s 263 of the Act to treat the order passed by the AO as erroneous, for the reason that the AO failed to examine applicability of the Circular to the assessee. The High Court, setting aside the order of the CIT, held that power u/s 263 cannot be exercised to force upon an officer to follow a Circular that expresses a view contrary to law laid down by Courts.

20.2. He submitted that Solvay Pharma case 2018 192 ITJ 384 (Mumbai) relate to exercise of revision under Section 263 itself. Hence, that decision fully covers the present matter.

21. Seventh Submission

21.1. Ld AR Submitted that during this year, the assessee had incurred Rs 70.82 Crores towards professional services availed by it. For internal accounting and management purposes, the assessee classified its business under three different heads, Drs. Tribedi and Roy Labs at Kolkata, Dr. Phadke Labs at Mumbai and other independent labs across India, including Mumbai. The details of expenditure has been given in line with the above classification.

21.2. He submitted that out of Rs 70.82 Crores, Rs 6.90 Crores was incurred by the assessee at its Kolkata lab. The assessee maintains its lab in Kolkata under the brand name of “Drs. Tribedi &Roy” (Lab). The lab has been serving the people of Kolkata and its surrounding areas. The lab providing services in the various fields of pathology like the Clinical Biochemistry, Serology, Haematology and Immunohematology. The lab offer modern and up-to-date laboratory facilities to help in the diagnosis and treatment of diseases. Further during the subject assessment year the Company has made a sale of Rs.49.35 crore and earned a EBITDA of Rs. 23.52 crore from this lab. The break up of the expenditure is as under:

Sr. No. Particulars Remarks Page No.-Paper book II
Payments to doctors These doctors undertake the actual diagnostic activities at the labs of the assessee 05 to 28
2.                   Payment to other labs The assessee avails services from other labs in relation to tests not performed by the assessee 29
1.                   Payment to other professionals Payments to CAs, accountant, ESI consultant, etc. 30-34

21.3 He submitted that out of Rs 70.82 Crores, Rs 13.99 Crores was incurred by the assessee at its Mumbai lab. The assessee operates in Mumbai under the brand name of “Dr. Phadke Lab”. The lab has been serving the people of Mumbai and its surrounding areas. The lab providing services in the various fields of pathology like the Clinical Biochemistry, Serology, Hematology, Immunohematology and pre and post-employment check-up. The lab offer modern and up-to-date laboratory facilities to help in the diagnosis and treatment of diseases further, during the subject assessment year, the company has made a sale of Rs.55.68 crore and earned a EBITDA of Rs.9.73 crore from this lab. The break up of the expenditure incurred is as under;

Sr. No. Particulars Remarks Page No.-Paper book II
1. Payment to doctors functioning as Center heads These doctors manage the 5 Centers in Mumbai and undertake the actual diagnostic activities at the labs of the assessee 35-49
2. Payments to retainers Retainer doctors, marketing personnel, etc. 50-72
3. Payment to visiting doctors These doctors are called upon on special needs, (for special tests and in case of non availability of retainer doctors) 74-76
1. Payment to professionals Payment to CAs, accountant, ESI consultant, etc. 77-84
2. Payment to Classicare Diagnostics Service provider for collection of sample and delivery of reports 85-94

21.4. He submitted that out of Rs.70.82 crore, Rs.49.99 crore was incurred by the assessee at its other labs. The other labs are mainly Pathology and Radiology lab at various locations such as Jhankaria Imagine center – Mumbai, Mysore Lab, Gurmeet Lab – Mumbai, Delhi, Coimbatore, Indore, Surat, Vadodara, Guwahati etc. Pathology Business refers to business related to blood samples. Radiology Business refers refer to the business of X-rays, Ultrasound, MRI and CT to the walk in client. The break up of these is as under:

Sr. No. Particulars Remarks Page No.-Paper book II
1 Payment to doctors  functioning as Center heads These doctors manage the 5 Centers in Mumbai and undertake the actual diagnostic activities at the labs of the assessee  96- 128
2. Payments to retainers Retainer doctors, marketing personnel, etc. 129-147
1. Payment to visiting doctors These doctors are called upon on special needs, (for special tests and in case of non availability of retainer doctors) 148-167
2. Payment to professionals Payment to CAs, accountant, ESI consultant, etc. 168-181
3. Payment to Classicare Diagnostics Service provider for collection of sample and delivery of reports 182-199

21.5. Thus, he submitted, when the entire payment to the professionals is made for services rendered by them and not in the nature of freebees as alleged by the PCIT, the PCIT could not have exercised jurisdiction to set aside the order of the A.O.

22. Eight Submission:-

22.1. He submitted that the PCIT has erred in completely brushed aside the evidences produced before him, and erred in passing the impugned order without rendering an independent finding on the order of the AO being erroneous and prejudicial to the interest of the revenue.

22.2. He submitted that in the show cause notice dated 7thDecember, 2017, the Pr.CIT has sought the explanation of the Assessee as to why payments were made to dentists and general physicians.

22.3. He submitted, the Assessee had explained vide letter dated 22.12.20 17 (page 1 to 6 of Volume III) before the PCIT that the Assessee, as a part of its operating diagnostics centers, offers pre job and post job health check-ups, ‘wellness packages’, etc. to its corporate clients as well as walk in clients. The corporate clients of the Assessee includes the Primal Group (copy of agreement at page 11 to 14 of paperbook Volume III), Reserve Bank of India (copy of agreement at page 10 of paperbook Volume III), A T Kearney Ltd ((copy of agreement at page 7 to 9 of paperbook Volume III), Air India, RCF, ONGC, etc. All these documents were filed before PCIT.

22.4. He submitted, these agreements specifically require the Assessee, in addition to perform general tests like diabetic screening, cardiac risk screening, general physical examination and review and dental consultation as well (specific scope of general physical check up and dental check up are contained in page 8 of the paperbook Volume III, as part of agreement with A T Kearny Ltd, and at page 13 of Volume III in relation to agreement with the Primal Group),

22.5. He submitted, the wellness packages offered by the Assessee which includes general physical checkup and dental checkup can be seen from the brochure of the Assessee (‘page 16 to 29 of paperbook Volume III).These evidences were furnished by the Assessee to the PCIT. These evidences clearly establish that the consideration paid by the Assessee to dentists and general physicians were in the course of conducting its business, for the services rendered by the said dentists and general physicians. He submitted that the PCIT however completely ignored these evidences while passing the impugned order, and without giving any independent finding but remanded the entire matter to the AO.

22.6. He submitted, it is now a well settled principle of law that, when the PCIT alleges that there is failure on the part of the AO to carry out an examination, it is obligatory on the PCIT to prima facie show that claim made by the assessee in its return is incorrect. Without such exercise, the condition of the order being prejudicial to the interest of the Revenue for invocation of Section 263 would not be satisfied. The Delhi High Court in CIT v. Delhi Airport Metro Express (P.) Ltd [I.T. Appeal No. 705 of 2017, dated 5-9-2017] held that the power vested with the CIT u/s 263 of the Act cannot be used as tool to remand a matter for reassessment, without he, PCIT himself conducting an independent enquiry and recording a finding that the order of the AO was prima facie erroneous. The observation of the High Court in this regard are as under;

“10. For the purposes of exercising jurisdiction under section 263 of the Act, the conclusion that the order of the Assessing Officer is erroneous and prejudicial to the interests of the Revenue has to be preceded by some minimal inquiry. In fact, if the Principal Commissioner of Income-tax is of the view that the Assessing Officer did not undertake any inquiry, it becomes incumbent on the Principal Commissioner of Income-tax to conduct such inquiry. All that the Principal Commissioner of Income-tax has done in the impugned order is to refer to the circular of the Central Board of Direct Taxes and conclude that “in the case of the assessee-company, the Assessing Officer was duty-bound to calculate and allow depreciation on the BOT in conformity of the Central Board of Direct Taxes Circular No. 9 of 2014 but the Assessing Officer failed to do so. Therefore, the order of the Assessing Officer is erroneous insofar as prejudicial to the interests of the Revenue”.

22.6. He submitted that in the considered view of the court, this can hardly constitute the reasons required to be given by the Principal Commissioner of Income-tax to justify the exercise of jurisdiction under section 263 of the Act. In the context of the present case if, as urged by the Revenue, the assessee has wrongly claimed depreciation on assets like land and building, it was incumbent upon the Principal Commissioner of Income-tax to undertake an inquiry as regards which of the assets were purchased and installed by the assessee out of its own funds during the assessment year in question and, which were those assets that were handed over to it by the DMRC. That basic exercise of determining to what extent the depreciation was claimed in excess has not been undertaken by the Principal Commissioner of Income-tax.

22.8. In the above case, Mr. Asheesh Jain then volunteered that the Principal Commissioner of Income-tax had exercised the second option available to him under section 263(1) of the Act by sending the entire matter back to the Assessing Officer for a fresh assessment. That option, in the considered view of the court, can be exercised only after the Principal Commissioner of Income-tax undertakes an inquiry himself in the manner indicated hereinbefore. He submitted that this aspect is missing in the present case.

22.9. Further, he submitted that the Tribunal in Sadhana Stocks & Securities (P.) Ltd. vs. PCIT [2018] 168 ITD 499 (Kolkata – Trib.) has also held that the PCIT has to form a prima facie view that claim of assessee is erroneous before setting aside order of Assessing Officer. In holding so, the Tribunal made the following observation;

“9. … … It is observed that although the ld. Principal CIT in his impugned order passed under section 263 reproduced the submission made by the assessee, he did not give any finding or observation thereon and without arriving at any conclusion to show how the order of Assessing Officer was erroneous on the issue on merit, he simply set aside the same on the ground that the claim of the assessee was accepted by the Assessing Officer without making enquiries or verification, which should have been made by him….

22.10. He submitted that after making these observations, the Tribunal held that an order passed by the PCIT without showing the claim of the assesses to be incorrect is invalid. Similar observations have been made in the following judgments

ITO v. D.G. Housing Projects Ltd [2012] 343 ITR 329 (Delhi) (para 6)

Infinity Infotech Park Ltd. v. Dy. CIT [2017] SX TTR (Trib.) 486

Sterling Biotech Ltd. v. PCIT [ITA Appeal No. 2750 (Mum.) of 2015, dated 29-6-2016],

23. Ld AR further submitted that Ld. PCIT erred in exercising jurisdiction under section 263 in relation to dis­allowance u/s 14A of the Act (Ground of Appeal No 2 and 4)

23.1. He submitted that the Assessee had invested into equity shares of DDRC SRL Diagnostics Pvt. Ltd (DSDPL) as well as Preference shares of DDRC. The Assessee had determined disallowance u/s 14A considering investment in equity shares alone. This is so because, it is only investment in equity shares that can earn exempt income to the Assessee inthe form of dividend. The preference shares are zero coupon and are not entitled to dividend. Being a Private Ltd. Company, any possible gains from the sale of the preference shares is subject to tax. Therefore, there is no question of earning exempt income from the investment in preference shares. The Assessee has accordingly rightly not included the investment in preference shares in computing disallowance u/s 14A.

23.2. Further he submitted that the assessee has filed detailed submission in this regard in its submission dated 1.2.2016 before A.O (page 65 of Volume I of paper book)Para 15 of the said submission is reproduced as below:

“In this regard, it is submitted that during the subject assessment year, the Company had investment of Rs 95,088,000 in equity shares and Rs 22,50, 000 in zero coupon preference shares. The Company has suo moto disallowed the proportionate interest expense of 13,296,198 under Section 14A of the Income Tax Act towards investment made in equity shares. The computation of the disallowance made under 14A of the Act is enclosed as Annexure 7.

In this regard, it is further submitted that according to Section 14A, for the purpose of computing the total income under this chapter, is that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Whereas the fact is that the Company has invested in Zero Coupon preference Shares which means that there will not (be) any income exempt from tax., therefore the cost incurred in relation to said investment can’t he disallowed u/s 14A of the Act.”

23.3. He brought to our notice, Page 69 of Volume I contains the computation of disallowance made under Section 14A, as filed before A.O. He submitted that in view of these detailed and cogent submission and A.O having invoked and disallowed under Section 14A, there is no scope for invoking Section 263 in the present matter.

23.4. He brought to our notice, in Para 8 of the order u/s 263 of the Act, the Ld. PCIT has held that the Ld. AO has failed to examine the nature of the assets held by the Assessee and exclude fictitious assets if any, for the purpose of disallowance u/s 14A of the Act. The Ld. PCIT noted that the disallowance has to be worked out on the basis of net assets, after excluding fictitious assets. However, the Ld. PCIT fails to describe or define the terms ‘net assets’ and ‘fictitious assets’ either in the SCN or impugned order. Also, these have no relevance to the present matter.

23.5. He submitted that the computation of disallowance u/s 14A of the Act on the basis of ‘net assets’ was the question of appeal before the Cochin Bench of this Hon’ble Tribunal in the ease of Geojit Investment Services Ltd. vs. ACIT [2015] 67 SOT 37 (Cochin – Trib.). In that ease, the assessee contended that the ITO, in computing the disallowance u/s 14A, had erred in taking the gross current assets as against the value of net current assets. The Tribunal allowed this contention of the assessee and held that net current assets were to be considered while applying the formula prescribed in rule 8D. However, the said decision does not provide any factual clarity into what was actually claimed by the assessee and what would be meant by net current assets and gross current assets. The judgement is silent on the same and does not provide for any guidance on the said calculation.

23.6. Further, he submitted, the issue whether the net current assets or gross current assets must be adopted for calculation of disallowance u/s 14A was considered by the Ahmedabad Tribunal in the case of Aditya Medisales Ltd. vs. ACIT [2016] 67 taxmann.com 270 (Ahd). In its order, the Tribunal has noted the decision of the co-ordinate bench of the Tribunal in Geojit Investments (supra).Thus, the allegation of the Ld. PCIT is vague, ambiguous and devoid of any merit. The Assessee therefore submits that there is no prejudice to revenue that has been pointed out by the PCIT in exercising jurisdiction u/s 263 of the Act.

24. Ld.AR submitted that Ld. PCIT directing consideration of disallowance of expenditure u/s 43 B of the Act is beyond the SCN and hence illegal (Ground of Appeal No 5)

24.1. He submitted that the PCIT, in his impugned order has set aside the assessment order to examine the disallowance u/s 43B of the Act as well. The Assessee submits that in the show cause notice dated 07thDecember, 2017 issued to the assessee, the PCIT sought to revise the order of the AO only on two grounds, namely (a) payments to doctors being allowed in violation of Circular 5 of 2012 and (b) dis-allowance of expenditure u/s 14A. being lesser. The assessee appeared before the PCIT on only one occasion and even on during that hearing, no notice, either written or oral, was given on seeking to exercise jurisdiction on any other ground. It is the foundation of natural justice that the assessee should be put to notice about the aspects on which an order is sought to be passed against him. When no such notice is given to the Assessee, the ground for exercising jurisdiction is clearly in violation of principles of natural justice and hence has to be set aside.

24.2. The assessee relies upon the judgment of the Punjab and Haryana High Court in CIT v. Roadmaster Industires of India Ltd[2014]223 Taxmann 13 (P&H) (page 285 to 287 of paperbook V, relevant part at page 287 para (4) wherein the High Court has clearly observed that the PCIT will not have jurisdiction to revise the order of the AOon a ground other than the ground communicated to the assessee. In the facts of the above referred judgment, a show cause notice was issued by the CIT, seeking to revise the assessment order in relation to claims made u/s 32AB and 80 HHC of the Act. The CIT however passed an order in respect of other matters in respect of which, the assessee was not given any opportunity of hearing.

24.3. Further he submitted that even otherwise, there is no whisper in the impugned order as to why the order of AO is erroneous or prejudicial to the interest of the revenue on this count. The order of the PCIT should therefore be set aside on this point as well.

25. On the other hand, Ld. DR brought to our notice para 6 of PCIT order in which Ld. PCIT has primarily found that letters dated 22.02.16 and 08.03.16 claimed to have filed by the assessee are not available on the assessment records. He submitted that even in the notice issued u/s 142(1), AO has not called for any such detail in this regard. There is no indication of any submissions made by the assessee. He submitted that no such details were filed before Ld. PCIT also. He brought to our notice assessment order in which there is no reference of any of such expenditure verified by the AO. He submitted that this itself shows that assessment order is erroneous and further he submitted with reference to amendment made to section 263 w.e.f. 01.06.15, as per Explanation-2 of 263 that the assessment is passed without making enquiries or verification which should have been made, were considered to be erroneous assessment order as in the given case under consideration. AO has not made any verification of expenses whether allowable or not. He submitted that the decision in the case of Sholvay Pharma India Ltd (supra) is not relevant to the present case, since it is adjudicated prior to the amendment made in section 263 of the Act. Therefore, it is clear that relief u/s 37(1) given to the assessee without any verification and also the Circular of CBDT is very much binding on the AO to verify the payments made by the assessee to the doctors whether it is contravention of the directions contained in Circular No. 5 of 2012. In support of the above submissions, he relied on the following decisions:-

i) Rajminder Estate Pvt. Ltd. vrs. PCIT (2007) 77 taxmann.com 285 (SC)

ii) ITO vrs. M/s Sunglow Dealcom Pvt. Ltd. 70 taxmann.com 124 (Kolkata)

iii) Malabar Industrial Co. Ltd. Vrs. CIT (2000) 109 taxmann.com 66 (SC)

iv) CIT vrs. Bllarpur Industries Ltd. (2017) 85 taxmann.com 10 (Bom)

v) Jagdish Kumar Gulati vrs. CIT (2004) 139 taxmann.com 369(All)

vi) Ambika Agro Suppliers vrs. ITO (2005) 95 ITD 326 (Pune)

26. He submitted that from the above decisions, it clearly shows that AO must have inquired and applied his mind. Therefore in the given case, no such enquiry was made and nothing is coming out of assessment order that AO has applied his mind on this issue of allowing expenditure which is allowable or not in line with the directions contained in the circular no 5/2012.

27. On merits, Ld. DR submitted that CBDT Circular No 5 of 2012 binds the AO, and hence payments made by the Assessee to doctors are to be dis-allowed. In this regard, he placed reliance on the following decisions:-

a. ACIT v. Liva Healthcare Ltd [2016] 73 taxmann.com 171 (Mumbai – Trib.)

b. CIT v. Kap Scan and Diagnostic Centre (P.) Ltd [2012] 25 taxmann.com 92(P&H).

and finally he submitted that all the cases relied by Ld. AR are before the amendment to section 263 of the Act. With regard to disallowance u/s 14A, he relied in the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vrs. CIT (Civil Appeal No. 104-109 of 2015).

28. In rejoinder, Ld AR submitted that Ld DR in his submission submitted, CBDT circular binds the AO and payment made to Doctors is to be disallowed and placed reliance on cases Liva Healthcare (supra) and Kap Scan (supra). He submitted that both the above said judgments have been extensively considered by the Mumbai Tribunal in DCIT v. PHL Pharma Pvt Ltd [2017] 163 ITD 10 (Mum).The Tribunal, after considering these judgments concluded that the CBDT Circular No 5 of 2012 would not apply to allied medical companies. PHL Pharma has consistently been followed by the Tribunal in

a. Solvay Pharma India Ltd v. PCIT [2018] 192 TTJ 394 (Mum)

b. Cadila Phamiaceuticals Ltd v. DCIT [2017] 85 taxmann.com 354 (Ahmedabad – Trib.)

29. He further submitted that in both the judgments referred to by the Ld. DR, there has been a finding of fact that the expenditure incurred was in the nature of freebees given to doctors. In the facts of the present case, there is not even an iota of evidence to suggest that the professional fee paid to doctors in the nature of freebees. In fact, the detailed evidences filed by the Assessee (Paperbook II and III) clearly shows that the payment to doctors were for services rendered by them. The PCIT has not doubted that the payments are for professional services rendered by them.

30. He further submitted that the judgment in Kap Scan (supra) was delivered on 03rd December, 2010, much before Circular 5 of 2012 dated 01.08.2012 was issued by the CBDT. The PCIT in the facts of the Assessee has solely relied on the CBDT Circular while the High Court has not considered the Circular at all. For this reason as well, reliance placed by the Ld. DR on the judgment of the High Court is not maintainable.

31. Further Ld AR submitted, Ld DR made submissions that once there is inadequate enquiry conducted by the AO, the PCIT, post 2015, can exercise jurisdiction u/s 263 read with Exp. 2. He submitted that the Judgment in Solvay Pharma pertains to a period prior to introduction of Explanation 2 to Sec. 263 of the Act.

32. Ld AR submitted that PCIT has not referred to Explanation 2 to Sec. 263 in his order, to exercise jurisdiction to review the order of the AO and Ld. DR cannot support the order of the PCIT based on the Explanation, when the PCIT himself has not referred to the Explanation. This principle has been explained in the following judgments-

a. Amira Pure Foods Pvt. Ltd v. PCIT [ITA 2035/Del/2017, decision dated 29.11.2017].

b. Narayan Tatu Rave v. PCIT [ITA 2690/Mum/ 2016, decision dated 06.05.2016].

33. He further submitted that the judgment in Solvay Pharma India Ltd v. PCIT [2018] 192 TTJ 394 (Mum) was infact related to an order passed by the PCIT after introduction of Explanation 2 to Section 263. The order of the AO for the AY 2011-12 was passed in the said case on 19.02.2015 and the order of the PCIT was passed on 30.03.2016. The claim of the Ld. DR that the order in Solvay Pharma (supra) pertained to a period prior to Explanation 2 to Sec. 263, is incorrect.

34. He further submitted, Ld DR mentioned in his argument that AO has not examined the claim of the Assessee on allowability of deduction for payment of professional fee to doctors. The PCIT has therefore rightly exercised jurisdiction u/s 263 and Ld. DR placed reliance on the following decisions:-

a. Rajmandir Estates (P.) Ltd v. PCIT [2016] 70 taxmann.com 124 (Calcutta) -para 28 (affirmed by SC in [2017] 77 taxmann.com 285 (SC))

b. CIT v. Ballarpur Industries Ltd [2017] 85 taxmann.com 10 (Bombay)

c. Jagdish Kumar Gulati v. CIT [2004] 139 TAXMAN 369 (ALL.)

d. Malabar Industrial Co. Ltd. v CIT [2000] 109 Taxman 66 (SC)

35. With reference to above, he submitted that the objection of the Revenue Audit Party shows that the details of the doctors to whom professional fee was paid by the Assessee was available on record. The show cause notice dated 07th December, 2017 issued by the PCIT is itself based on the details furnished by the Assessee relating to doctors to whom professional fee was paid by the Assessee. When the details were available on record, it cannot be contended that the AO has not applied his mind.

36. He further submitted that even assuming that the AO has failed to apply his mind, that by itself would not give jurisdiction to the PCIT to review the order. Admittedly, the Assessee has filed all the details before the PCIT, including contracts with the doctors,sample reports issued by them, etc. Without conducting an independent enquiry and recording a prima facie mistake in the claim of the Assessee, the PCIT could not have exercised jurisdiction u/s 263 of the Act. This principle has time and again been laid down in the following judgments:-

a. CIT v. Delhi Airport Metro Express (P.) Ltd [IT. Appeal No. 705 of 2017, dated 5-9-2017]

b. Sadhana Stocks & Securities (P.) Ltd. vs. PCIT [2018] 168 ITD 499 (Kolkata – Trib.)

37. He further submitted that assessee has debited hundreds of expenditure in its financial statements. The Assessment Order, as claimed by the Ld. DR. is as cryptic as it is for professional fee paid to doctors as it is for all other expenditure. The PCIT does not have any objection in relation to all other expenditure, but only the professional fee paid to doctors. These events clearly shows that the trigger for initiating the 263 proceedings is not the view expressed by the PCIT on the correctness of the Assessment order, but the CBDT Circular and Revenue Audit objection. When it has been categorically held by the Tribunal in many cases that the CBDT Circular will not be applicable on companies, the entire revision proceedings would not have any legs to stand.

38. Considered the rival submissions and material placed on record. We notice from the record that Ld. Pr.CIT has invoked the provisions of section 263 of the Act with the observations that AO failed to carry out enquiries as warranted by the facts and circumstances of the case and pointed out the fact that the details submitted by the assessee vide letter dated 22.02.16 and 08.03.16 was not found in the assessment records and observed that these letters were never filed during the assessment proceedings. Drawing the conclusion from the above observation, Ld. PCIT observed that AO has failed to exercise due diligence to examine the nature of professional fees paid to doctors and further allowability of the expenses as deduction in the computation of income has not been examined and in particular in view of guidelines contained in Circular No. 5 of 2012. Apart from the above critical observations of Ld. PCIT, he also observed that AO failed to examine the nature of all assets held for the purpose of disallowance u/s 14A of the Act.

39. We observe that the above said issues based on which Ld. PCIT has quashed the assessment order and gave direction to AO to carry out the verification of the nature of professional fees paid to the doctors and disallowance u/s 14A and also gave another direction to AO to examine the allowability of expenses u/s 43B of the Act.

40. With the above said background, we observe that Ld. AR brought to our notice several alternative submissions highlighting that all the relevant information to claim the expenditure relating to professional fees paid to doctors and 14A issues were in fact submitted before the AO and he brought to our notice relevant references of revenue audit and relevant replies to the revenue audit party. Assessee has come across these information during assessment year 2014-15 proceedings. It is brought to our notice the issues raised by revenue audit party and similarity of the issues raised by Ld. PCIT in 263 proceedings. Ld. AR brought to our notice Ld. PCIT has initiated the proceedings on borrowed information and without applying his independent mind. We notice that none of these information was available nor coming out of any proceedings relating to assessment year 2013-14.

41. In our considered view, even if the information relating to the payments to doctors were not found in the assessment records, Ld. PCIT has determined and came to conclusion that the assessment order is erroneous. But mere finding the assessment order is erroneous does not give power to Ld. PCIT to annul the assessment order. It is duty imposed by the provision of section 263 that Ld. PCIT has to determine and satisfy both the conditions that the order passed by AO is erroneous in so far as it is prejudicial to the interest of revenue. It is settle position as per legal precedents that to initiate proceedings under section 263, both conditions i.e. order is erroneous and also it should be prejudicial to interest of revenue. Therefore, in the given case, even the information submitted by the assessee are not found place in the assessment order, Ld. PCIT has called for the information under notice u/s 263. Ld. AR submitted that all the informations were once again submitted before Ld. PCIT. However, Ld. DR denied that assessee has not filed any information.

42. We do not agree with the conclusion of the Ld. PCIT that he had concluded that the order was erroneous, but has not made further investigation to determine, whether the order passed by AO is prejudicial to the interest of revenue. Instead, he remitted this issue back to AO to verify and investigate the issue once again and finalize the assessment order. As discussed above, Ld. PCIT should have verified or investigated the issue afresh by asking the assessee to submit all relevant information. We also notice that assessee claims the payments were made to doctors on regular consultancy fees and not relating to freebees. It is the duty of Ld. PCIT to establish that these payments were in fact freebees and not regular consultation fees, without actually finding that these are freebees and payments are in violation of conditions specified in Circular No. 5 of 2012, he proceeded to annul the assessment order.

43. In our view, the issue involved in this appeal is, whether payments are consultancy fees or freebees. AO has proceeded with the view that there are regular consultancy fees and accepted the submissions of assessee. AO did not discuss anything in his order. The department taking clue from audit query, they are presuming that the payments are relating to freebees. There is no evidence brought on record by the revenue authorities to substantiate that there were actually freebees. Mere presumption without any cogent material to indicate that these payments are actually freebees is far fetched.

44. Therefore, in our view, Ld. PCIT has not determined the other condition how it is prejudicial to the interest of revenue. As discussed above, the payments were made to doctors, is it freebees or not is the issue. If it is freebees, it is the duty of Ld. PCIT to bring on record that these payments are in fact disallowable under section 37 of the Act. In this regard, we draw attention to the decision of Hon’ble Delhi High Court in the case of CIT vrs. Delhi Airport Metro Express Pvt. Ltd. (supra), which is reproduced below:-

“10. For the purposes of exercising jurisdiction under section 263 of the Act, the conclusion that the order of the Assessing Officer is erroneous and prejudicial to the interests of the Revenue has to be preceded by some minimal inquiry. In fact, if the Principal Commissioner of Income-tax is of the view that the Assessing Officer did not undertake any inquiry, it becomes incumbent on the Principal Commissioner of Income-tax to conduct such inquiry. All that the Principal Commissioner of Income-tax has done in the impugned order is to refer to the circular of the Central Board of Direct Taxes and conclude that “in the case of the assessee-company, the Assessing Officer was duty-bound to calculate and allow depreciation on the BOT in conformity of the Central Board of Direct Taxes Circular No. 9 of 2014 but the Assessing Officer failed to do so. Therefore, the order of the Assessing Officer is erroneous insofar as prejudicial to the interests of the Revenue”.

11. In the considered view of the court, this can hardly constitute the reasons required to be given by the Principal Commissioner of Income-tax to justify the exercise of jurisdiction under section 263 of the Act. In the context of the present case if, as urged by the Revenue, the assessee has wrongly claimed depreciation on assets like land and building, it was incumbent upon the Principal Commissioner of Income-tax to undertake an inquiry as regards which of the assets were purchased and installed by the assessee out of its own funds during the assessment year in question and, which were those assets that were handed over to it by the DMRC. That basic exercise of determining to what extent the depreciation was claimed in excess has not been undertaken by the Principal Commissioner of Income-tax.

12. Mr. Asheesh Jain then volunteered that the Principal Commissioner of Income-tax had exercised the second option available to him under section 263(1) of the Act by sending the entire matter back to the Assessing Officer for a fresh assessment. That option, in the considered view of the court, can be exercised only after the Principal Commissioner of Income-tax undertakes an inquiry himself in the manner indicated hereinbefore. That is missing in the present case.

45. Further we notice that there are various decisions submitted before us by Ld. AR that the payment made to doctors by the pharmaceutical companies and allied healthcare industries are not in violation of Circular No. 5 of 2012. It is applicable only to the practicing doctors. As discussed above, Ld. PCIT has not clearly brought on record that the payments were actually in contravention of circular and provision of section 37(1) of the act.

46. Even on disallowance under section 14A, from the records submitted before us, clearly indicate that the relevant information was submitted before AO and AO has accepted the submissions made by assessee and AO came to conclusion and taken one of the views, which may not be acceptable to Ld. PCIT.

47. In our considered view, Ld. PCIT has come to conclusion that the order passed by AO is erroneous, but has not verified nor investigated to determine the other condition i.e. how it is prejudicial to the interest of revenue. As held in numerous case law and it is settle position of law that to initiate proceedings under section 263, twin conditions has to be satisfied. In the given case, Ld. PCIT has not fulfilled second condition before initiating proceedings under section 263 of the Act. Therefore, we are inclined to set aside the order passed under section 263. Accordingly, the grounds raised by assessee are allowed.

48. In the net result, the appeal filed by the assessee stands allowed.

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