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Section 72A(7) Hospitals can’t be treated as an Industrial Undertaking for Set Off of Unabsorbed Depreciation

The Bangalore bench of Income Tax Appellate Tribunal recently rejected the plea for setting off of unabsorbed depreciation since Hospitals can’t be treated as an industrial undertaking for the purpose of section Section 72A(7) of the Income Tax Act, 1961.

M/s. Healthcare Global Enterprises Ltd. Vs. JCIT (ITAT Bangalore)

Hon’ble Madras High Court  in the case of ACIT Vs. Apollo Hospitals Enterprises Ltd., which was the same as the the present case decided on the issue as to whether the hospital can be considered as an industrial undertaking under clause (aa) of sub section 7 of section 72A of the IT Act. In that case, a scheme was approved to amalgamate M/s. Deccan Hospital Corporation Limited (in short ‘DHCL’), running a Hospital at Jubilee Hills, Hyderabad with the assessee company i.e. Apollo Hospitals Enterprises Ltd. of Chennai and the issue in dispute was regarding the set off of unabsorbed depreciation of Rs. 11.60 crores on account of amalgamation of DHCL with Apollo Hospitals Enterprises Ltd. and it was held by Hon’ble Madras High Court that neither Apollo Hospitals Enterprises Ltd. nor DHCL are industrial undertaking within the meaning of section 72A of the IT Act and therefore, the set off of unabsorbed depreciation is not allowable.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

Both these appeals are filed by the assessee which are directed against two separate orders of ld. CIT (A)-3, Bangalore both dated 31.08.2016 for Assessment Years 2009-10 and 2010-11. Both the appeals were heard together although argued by two different counsels and are being disposed of by way of this common order for the sake of convenience.

2. The grounds raised by the assessee in both years are as under.

Grounds raised for Assessment Year 2009-10 in ITA No. 1900/Bang/2016

1. The learned AO and CIT(A) have erred in disallowing the entire expenditure of Rs. 25,00,000/-towards due diligence audit for equity related investment to be made by investors on the contention that expenditure has not been incurred by your appellant, by holding that the liability to pay the said expenditure was not that of the appellant company and also concluding that the same was capital in nature;

2. The learned AO and CIT(A) grievously erred in denying carry forward of business losses of previous years of Rs. 2,00,60,988/- by invoking the provisions of section 79 of the Income Tax Act, 1961, on the ground that 51% voting power in the appellant company as at 31 March 2009 was not held by persons holding 51% of the voting power in the years in which the losses were incurred; and

3. For these and other grounds that may be adduced at the time of hearing, the order of the Joint Commissioner of Income Tax, to the extent upheld by the CIT(A), may be set aside and this appeal be allowed.”

Grounds raised for Assessment Year 2010-11 in ITA No. 1901/Bang/2016

1. The learned AO and CIT(A) have grievously erred in denying carry forward of unabsorbed depreciation loss of Rs. 3,70,22,124/- under section 72A of the Income Tax Act, 1961, on the ground that the amalgamating company, M/s Banashankari Medical Oncology Research Center Limited is not an “industrial undertaking” as per the provisions of the said section.

2. For these and other grounds that may be adduced at the time of hearing, the order of the Additional Commissioner of Income Tax, Range 5, Bangalore, to the extent upheld by the CIT(A), may be set aside and this appeal be allowed.”

3. Regarding ground no. 1 in Assessment Year 2009-10, it was submitted by ld. AR of assessee that the dis allowance made is not justified. He submitted that in Para no. 4 of the order of CIT (A), he has noted various judgments on which reliance was placed by assessee before the CIT (A). In addition to those judgments, he placed reliance on a Tribunal order rendered in the case of ACIT vs. Intercontinental Hotels Group India (P.) Ltd. as reported in 57 SOT 120 (Delhi), copy available on pages 24 to 27 of the paper book. The ld. DR of revenue supported the orders of authorities below and reliance was placed by him on the judgment of Hon’ble Apex Court rendered in the case of Brooke Bond India Ltd. vs. CIT as reported in 225 ITR 798.

4. We have considered the rival submissions. We find that it is noted by CIT (A) in Para no. 4.1 of his order that the assessee company had sought private equity investment from different investors and the prospective investors had conducted various audits and due diligence study to ensure the viability of such investment. It is also noted by CIT(A) that M/s. Napean Trading and Investment Co Pvt. Ltd. was engaged by the prospective investors for making such due diligence study and the assessee had apparently reimbursed the expenses incurred in this regard to the investors. From these facts, it comes out that the expenses in question are incurred in respect of increase in capital base of the assessee company. Under these facts, the judgment of Hon’ble Apex Court rendered in the case of Brooke Bond India Ltd. vs. CIT (Supra) is squarely applicable and as per this judgment, the expenses relatable to increase in Share Capital are not allowable as revenue expenditure because the same are capital expenditure. Now, we examine the applicability of the Tribunal order cited by ld. AR of assessee having been rendered in the case of ACIT vs. Intercontinental Hotels Group India (P.) Ltd. (supra). In that case, as per the facts noted by the Tribunal, it is noted that the assessee’s business model was to provide various support services to its parent company located in USA and the concerned Services Agreement clearly provides that the assessee company would be reimbursing the expenditure incurred with a markup of 8%. It is also noted that in the course of service provided to the parent company which is in the hotel business, the assessee has availed the services of Control Risk Group, Singapore in order to carry out the due diligence and risk analysis of the target hotels. Under these facts, it was held by CIT (A) in that case that these expenses are incurred in the normal course of business and accordingly, are revenue in nature. Under these facts the Tribunal confirmed the order of CIT (A) in that case. In the present case, the facts are totally different. In the present case, due diligence was not carried out in regular course of business but it was carried out for the purpose of inviting investments from prospective investors. Hence in the present case, this Tribunal order is not applicable.

5. Regarding various other judgments on which reliance has been placed before CIT (A) as noted by CIT (A) in Para no. 4 of its order, it is seen that in none of these cases, the expenditure was in respect of inviting investment from prospective investors and therefore, these judgments are not applicable in the present case. Hence respectfully following this judgment of Hon’ble Apex Court rendered in the case of Brooke Bond India Ltd. vs. CIT (Supra), we decline to interfere in the order of CIT (A) on this issue. Ground no. 1 of the assessee’s appeal for Assessment Year 2009-10 is rejected.

6. Regarding ground no. 2 in Assessment Year 2009-10, it was submitted that the facts are noted by CIT(A) in Para no. 6.1 of his order as per which, this is the basis of decision of authorities below that the Assessing Officer has taken into consideration the shareholding pattern in the company for Assessment Years 2008-09 and 2009-10 and had inferred that the key shareholders who held around 51.44% of the shares during the Assessment Year 2008-09 were holding less than 50% of the shares during the subsequent year. He submitted that the details of shareholders as on 31.03.2008 is available on pages 28 and 29 of the paper book and the same for year ending on 31.03.2009 is available on pages 30 and 31 of paper book. He submitted that as on 31.03.2008, Dr. BS Ajai Kumar was holding 38.81% and India Development Fund of IDFC PE was holding 29.41% of the shares total of which comes to 68.22%. He pointed out that the share holding of these two persons as on 31.03.2009 was 31.83% and 24.07% respectively total of which comes to 55.90%. He submitted that at least to the extent of 55.90% of the total shareholding, the shareholders are common. He drawn our attention to provisions of section 79 of the IT Act as per which if 51% of shareholders is same on the last day of the year in which loss was incurred and on the last day of year in which set off of loss is being claimed, set off is to be allowed. He submitted that as per the provisions of section 79 of the IT Act and in the facts of the present case, set off of brought forward business loss should be allowed. The ld. DR of revenue supported the orders of authorities below.

7. We have considered the rival submissions and gone through the orders of authorities below. We find that the AO has invoked the provisions of section 79 of the IT Act for the purpose of disallowing the set off of brought forward business loss and depreciation. In the facts of the present case as noted above, we find that more than 51% of shares, in fact, to the extent of 55.90% of the total shares, only two persons were holding those shares as on 31.03.2008 being the year in which loss was incurred and as on 31.03.2009 being the year in which the set off of brought forward depreciation is being claimed and hence, the claim of the assessee cannot be disallowed by invoking the provisions of section 79 of the IT Act. Therefore, on this issue, we decide the issue in favour of the assessee. This ground of the assessee is allowed.

8. In the result the appeal of the assessee for Assessment Year 2009-10 is partly

9. Now we take up the appeal of the assessee for Assessment Year 2010-11. The only issue involved in this year is regarding denial of carry forward of unabsorbed depreciation loss of Rs. 3,70,22,124/- u/s. 72A of the IT Act on the ground that the amalgamating company, M/s. Banashankari Medical Oncology Research Center Limited (BMORCL) is not an industrial undertaking as per the provisions of the said section. Regarding this issue, it was submitted by ld. AR of assessee that in respect of the provisions of section 72A of the IT Act, clause (aa) of sub section 7 of section 72A is relevant which says that the company owning an industrial undertaking or a ship or a hotel with another company, then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for depreciation of the amalgamated company for the previous year in which the amalgamation was effected. Thereafter he submitted that the term “industrial undertaking” is defined in clause (aa) of sub section 7 of section 72A as per which industrial undertaking means any undertaking which is engaged in the manufacture or processing of goods or manufacture of computer software or other items which are not relevant in the present case. He submitted that to find out whether the assessee can be accepted as an industrial undertaking or not, it has to be seen as to whether the assessee is engaged in the business of manufacture or processing of goods or not. Regarding the date of merger, he submitted that as per the judgment of Hon’ble Karnataka High Court sanctioning scheme of amalgamation available on pages 72 to 86 of paper book, date of merger is 01.04.2009. Reliance was placed on the following judicial pronouncements in support of this contention that in the present case, the assessee has to be accepted as an industrial undertaking

A) ITO vs. Arihant Tiles and Marbles P. Ltd. 320 ITR 79 (SC)

B) CIT v. Datacons (P) Ltd. 155 ITR 66 (Kar)

C) CIT Vs. Commercial Laws of India (P.) Ltd. 107 ITR 822 (MAD.)

D) CIT Vs. Suresh Amin Family Trust 288 ITR 101 (Gujarat)

10. As against this, ld. DR of revenue supported the orders of authorities below. He placed reliance on a judgment of Hon’ble madras High Court rendered in the case of ACIT Vs. Apollo Hospitals Enterprises Ltd. as reported in 171 TAXMAN 397.

11. We have considered the rival submissions. First of all, we reproduce the provisions of sub section 1 and 7 of section 72A of the IT Act, 1961. The same are as under.

Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc.

72A. (1) Where there has been an amalgamation of—

(a) a company owning an industrial undertaking or a ship or a hotel with another company; or

(b) a banking company referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a specified bank; or

(c) one or more public sector company or companies engaged in the business of operation of aircraft with one or more public sector company or companies engaged in similar business,then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.

(7) For the purposes of this section,—

(a) “accumulated loss” means so much of the loss of the predecessor firm or the proprietary concern or the private company or unlisted public company before conversion into limited liability partnership or the amalgamating company or the demerged company, as the case may be, under the head “Profits and gains of business or profession” (not being a loss sustained in a speculation business) which such predecessor firm or the proprietary concern or the company or amalgamating company or demerged company, would have been entitled to carry forward and set off under the provisions of section 72 if the reorganization of business or conversion or amalgamation or demerger had not taken place;

(aa) “industrial undertaking” means any undertaking which is engaged in—

(i) the manufacture or processing of goods; or

(ii) the manufacture of computer software; or

(iii) the business of generation or distribution of electricity or any other form of power; or

(iiia) the business of providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services; or

(iv) mining; or

(v) the construction of ships, air crafts or rail systems;

(b) “unabsorbed depreciation” means so much of the allowance for depreciation of the predecessor firm or the proprietary concern or the private company or unlisted public company before conversion into limited liability partnership or the amalgamating company or the demerged company, as the case may be, which remains to be allowed and which would have been allowed to the predecessor firm or the proprietary concern or the company or amalgamating company or demerged company, as the case may be, under the provisions of this Act, if the reorganization of business or conversion or amalgamation or demerger had not taken place;

(c) “specified bank” means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955) or a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959) or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980).

12. From the above provisions, it comes out that in order to hold that the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss of the amalgamated company, it has to be seen that it is the case of amalgamation of a company owning an industrial undertaking as has been defined as per clause (aa) of sub section 7 of section 72A as reproduced above. As per this definition, it has to be seen that the undertaking should be engaged in manufacture or processing of goods. In our considered opinion, an undertaking to be considered as an industrial undertaking, the total activities of the undertaking should be that of manufacturing or processing of goods and even if the undertaking is engaged in some other activities also, the primary activity of the said undertaking should be that of manufacturing or processing of goods. As per the judgment of Hon’ble Karnataka High Court rendered in respect of merger of M/s. Banashankari Medical and Oncology Research Centre Pvt. Ltd. with the assessee company available on pages 72 to 86 of paper book, it is noted in Para no. 2 of the judgment that this company M/s. Banashankari Medical and Oncology Research Center Pvt. Ltd. is having main object to carry on the business of establishing developing, leasing, managing, operating and running of medical service centers such as nursing care homes, hospitals, polyclinics, health resorts, health clubs, in-patient and out-patient wards, laboratories, therapy units, theaters and allied consultation centers etc. among st others. Now in the light of these facts, we examine the applicability of various judgments cited before us by ld. AR of assessee.

13. The first judgment cited before us is judgment of Hon’ble Apex Court rendered in the case of ITO vs. Arihant Tiles and Marbles P. Ltd. (supra). In that case, the assessee company was engaged in the business of manufacture/ production of polished slabs and tiles which the assessee exported (partly). The question before Hon’ble Apex Court was this as to whether the activities undertaken by the assessee would fall within the meaning of the words “manufacturer or production”. In that case, it was held in Para no. 19 of the judgment that blocks converted into polished slabs and tiles after undergoing the process indicated emergence of a new and distinct commodity. In the present case, this judgment is not applicable because no such thing or item is produced in the present case as per the main objects of the amalgamating company noted by Hon’ble Karnataka High Court on page no. 74 of the paper book while rendering the judgment of merger of that company into the assessee company. Even the primary activity is not to do any manufacturing or processing. The primary activity is to carry on the business of establishing developing, leasing, managing, operating and running of medical service centers such as nursing care homes, hospitals, polyclinics, health resorts, health clubs, in-patient and out-patient wards, laboratories, therapy units, theaters and allied consultation centers etc. among st others. At the best, one of these activities i.e. laboratories may involve some processing but this is not a primary activity. Therefore, this judgment is not applicable.

14. The second judgment cited before us is the judgment of Hon’ble Karnataka High Court rendered in the case of CIT v. Datacons (P) Ltd. (supra). In that case, the issue was this as to whether processing of basic data for customers on computer machines amounts to ‘processing of goods’ and company engaged in this activity is an industrial company. Under these facts, it was held that the company is an industrial company and such activity amounts to processing of goods. In the present case, as per the main objects of the amalgamating company noted by Hon’ble Karnataka High Court in its judgment in respect of merger of that company with the assessee company, copy available on page no. 74 of the paper book, the assessee has not carried out any such activity and the only activity which can be said to be near to this activity is the activity of laboratories where for the purpose of carrying out certain diagnostic tests, it can be said that some processing is involved but this is not a primary activity. Therefore, this judgment also is not applicable.

15. The next judgment cited before us is a judgment of Hon’ble Madras High Court rendered in the case of CIT Vs. Commercial Laws of India (P.) Ltd. (supra). In that case, the assessee company was publisher of fortnightly journal and actual printing was done by a different concern and assessee was engaged in folding and stitching of printed sheets so as to be used as parts of journal which were later on dispatched to subscribers. Under these facts, it was held that the assessee was engaged in processing of goods. We have already seen that the only activity of the amalgamating company which can be equated with processing of goods is regarding its activity of laboratory but this is not a primary activity of the amalgamating company. Therefore it cannot be said that the amalgamating company is an industrial undertaking.

16. The next judgment cited before us is judgment of Hon’ble Gujarat High Court rendered in the case of CIT Vs. Suresh Amin Family Trust (supra). In that case, the assessee was engaged in a profession of pathological laboratory and under these facts, it was held that the assessee was carrying on a business as an industrial undertaking, which produced an article or thing and was thus entitled to investment allowance u/s. 32A of the Act on the new machinery installed in the clinic. Hence it is seen that in that case, the entire activity of the assessee was pathological laboratory and not a small portion of the total activities was laboratory as in the present case and therefore, for the same reasons that laboratory in the present case is not a primary activity of the amalgamating company, this judgment is also not helping the assessee in the present case.

17. The ld. AR of assessee has furnished certain additional evidences being copy of order dated 30.09.2015 passed by the Commissioner of Central Excise which is available on pages 232 to 285 of paper book. It was submitted by ld. AR of assessee that as per this order, it was held by Commissioner of Central Excise that in respect of FDG cleared by the assessee company, excise duty is payable. He submitted that even excise duty is payable on some products being sold by the assessee and therefore, it has to be accepted that the assessee is engaged in manufacture of goods or processing of goods. It was pointed out that as per paper  book page no. 274 during Financial Year 2009- 10, the turnover was Rs. 131.75 lakhs during 01.11.2009 to 26.02.2010 and Rs. 49.46 lakhs during 27.02.2010 to 31.03.2010 and similarly for Financial Year 2010-11, the turnover was noted was at Rs. 140.87 lakhs. For the period from 01.04.2009 to 31.10.2009, it was held that the assessee is not liable to pay excise duty because of SSI exemption.

18. Regarding this contention, we find that even if it is held that the assessee is engaged in small activity of some manufacturing also, it cannot be said that the assessee is an industrial undertaking because in our considered opinion, as per the definition of term industrial undertaking as per clause (aa) of sub section 7 of section 72A, the primary activity of the assessee undertaking should be of manufacture and processing of goods and merely because a supporting or ancillary activity is such, it cannot be said that it is an industrial undertaking. Hence, even after considering the additional evidence, the assessee does not get any help.

19. Now we consider the applicability of the judgment cited by ld. DR of revenue rendered in the case of ACIT Vs. Apollo Hospitals Enterprises Ltd. (supra). In this case, the issue before Hon’ble Madras High Court was the same as in the present case as to whether the hospital can be considered as an industrial undertaking under clause (aa) of sub section 7 of section 72A of the IT Act. In that case, a scheme was approved to amalgamate M/s. Deccan Hospital Corporation Limited (in short ‘DHCL’), running a Hospital at Jubilee Hills, Hyderabad with the assessee company i.e. Apollo Hospitals Enterprises Ltd. of Chennai and the issue in dispute was regarding the set off of unabsorbed depreciation of Rs. 11.60 crores on account of amalgamation of DHCL with Apollo Hospitals Enterprises Ltd. and it was held by Hon’ble Madras High Court that neither Apollo Hospitals Enterprises Ltd. nor DHCL are industrial undertaking within the meaning of section 72A of the IT Act and therefore, the set off of unabsorbed depreciation is not allowable. Respectfully following this judgment of Hon’ble Madras High Court, we decline to interfere in the order of CIT (A). Accordingly this ground is rejected.

20. In the result, the appeal filed by the assessee for Assessment Year 2010-11 is dismissed.

21. In the combined result, the assessee’s appeal for Assessment Year 2009-10 is partly allowed whereas the appeal for Assessment Year 2010-11 is dismissed.

Order pronounced in the open court on the date mentioned on the caption page.

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