ACIT, New Delhi V. M/s. Max Healthcare Institute Ltd., New Delhi

ITA 3506/DEL/2014

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 1312 (ITAT-DELHI)
• Duration Of Justice: 8 year(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-06-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2004-2005
• Appeal Filed On: 09-06-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Earning of tax free income; Cost of acquisition; Capital Gains
• Section: 32; 6; 14A; 13

Judgement Text

Page | 1 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “E”: NEW DELHI BEFORE SHRI G.S.PANNU, HON‟BLE PRESIDENT AND SHRI ANUBHAV SHARMA, JUDICIAL MEMBER ITA No. 3506,3507, 3508 and 3510/Del/2014 (Assessment Years: 2004-05, 2005-06, 2006-07 and 2008-09) ACIT, Circle-6(1), New Delhi Vs. M/s. Max Healthcare Institute Ltd, 1, Dr. Jha Marg, Max House, Okhla Industrail Area, Phase-III, New Delhi PAN: AADCM0815B (Appellant) (Respondent) Assessee by : Shri Ajay Vohra, Sr. Adv. Shri Deepesh Jain, Adv Shri Shaurya Jain, CA Revenue by: Ms. Deepshikha Sharma Date of Hearing 19/05/2022 Date of pronouncement 30/06/2022 O R D E R PER ANUBHAV SHARMA, J. M.: 1. These appeals have been preferred by the revenue against the order dated 28.03.2014 of Ld Commissioner of Income Tax (Appeals)-IX, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. „FAA‟) in appeal No. 138/2008-09 arising out of a appeals before it against the order dated 19.12.2008 u/s 147/ 143(3) of the Income Tax Act, 1961 (hereinafter referred as „the Act‟) passed by the ld. Assessing Officer, Deputy commissioner of Income Tax, Circle-6(1), New Delhi (hereinafter referred as the Ld. AO). Page | 2 2. The facts in brief are the Assessee is a public limited company and in the assessment year 2003-04 Max India Ltd (MIL) being the parent company of the Assessee transferred its healthcare business to the Assessee, pursuant to the business transfer agreement dated 27.06.2002. In terms of said agreement all assets and liabilities were acquired by the Assessee from MIL on a going concern basis for lump-sum consideration of Rs. 68.10 crores. Since, the assets were transferred for a lumpsum consideration without independent values being assigned to each asset/ liability, during the FY 2002-03, the Assessee got the fixed asset valued from an independent Govt approved valuer, Kanwar & Co. Pvt. Ltd, chartered engineers. Accordingly, for Assessment Year 2003-04, the Assessee claimed depreciation on cost of depreciable asset so acquired and recorded in the books as on 31.03.2002, at values determined by the approved valuer. However, in the relevant Assessment Year 2003-04 the Ld/ AO did not accept the depreciation claimed on value of assets by the approved valuer and computed the claim of depreciation on the basis that the cost of assets in the hands of Assessee was taken at written down value (WDV) of such assets in the books of MIL invoking explanation 6 to section 43(1) read with Explanation 2 to section 43(6) of the Act on the ground that this transfer from holding company to a subsidiary company satisfied conditions for exemption u/s 47(iv) of the Act. Consequently, while computing WDV of assets in the hands of MIL as on 31.03.2002 the ld AO took notional WDV after reducing depreciation for Assessment Year 2002-03 invoking explanation 5 to section 32(1) of the Act. However, on appeal the ld CIT(A) deleted the disallowances of deprecation made by the ld AO holding that as no revaluation of assets was carried out by MIL prior to transfer of healthcare division and since MIL did not claim exemption u/s 47(iv)/ (v) and offered gain arising out of transfer of healthcare business of slump sale basis to capital tax u/s 50B the provision of explanation 6 to section 43(1) read with explanation 2 to Page | 3 section 43(6) of the Act were not attracted. Accordingly, the ld CIT(A) held that actual cost of acquisition in the hands of Assessee shall not be adopted for the purpose of claiming depreciation u/s 32 read with section 43(1) of the Act. 3. The revenue had challenged this before the ITAT but assessment for the year 2003-04 was settled in VSVS, 2020 scheme. The ld AO continued to apply the principles subsequent to Assessment Year for which now the matters is before this tribunal. 4. Apart from above in the relevant Assessment Years there were disallowances of management consultancy fee on adhoc basis and disallowance of preoperative expenses. Further, in Assessment Year 2005-06 and 2008-09 there was also disallowances of consultancy fee for charges paid to International Finance Corporation and Asian Development Bank in pursuant to loan agreement. Though loan did not materialize. Then, in the assessment year 2008-09 there was also a disallowances u/s 14A read with Rule 8D. The Ld. First Appellate Authority had deleted these. So now Revenue is in appeal against them. 5. Heard and perused the records. 6. On behalf of the revenue it was submitted that the ld CIT(A) has fallen an error in disagreeing with opinion of ld AO. It was submitted that the ld AO had considered all relevant factual and legal aspect while passing the assessment order. 7. On the other hand in regard to common grounds of disallowances of depreciation of assets acquired as part of slump sale it was submitted on behalf by the Assessee by the ld Sr. Counsel that the ld AO had fallen an error under misconceived notion that since MIL had revalued the assets before transfer to the Assessee so depreciation in the hands of the Assessee would not be available with reference to revalued amount by Approved Valuer. It was submitted that as it was the case of slump sale for the purpose of transfer so no individual values were assigned to the assets/ liabilities of the Page | 4 healthcare division of the transfer MIL. It was submitted that MIL gave effect to the slump sale in its book of account w.e.f. 01.04.2001 while reducing block of assets with the written down value of assets transferred, as appearing as on 31.03.2001. It was submitted that had the MIL undertaken the revaluation, it would have reinstituted the value of assets in its balance sheet before the sale. 7.1 The ld Sr. Counsel heavily relied upon the provision of explanation 2 to section 43(6) to contend that the same are not applicable in the present case because at the time of transfer, MIL was holding company of the Assessee and did not claim exemption of capital gains u/s 47(iv) of the Act and offered the same to short term capital gain tax in the return of income. So, the Assessee was not required to restrict actual cost of assets in its hand to the WDV, appearing in the income tax records of capital MIL. 7.2 The ld Sr. Counsel particularly referred to order of Mumbai Bench in case of ESSAR Oil Ltd Vs. DCIT 13 SOT 691 wherein, the similar situation was dealt with by the Tribunal and at the same time Ld. Sr. Counsel distinguished the judgment of Hon'ble Delhi High Court in case of Dalmia Ceramics Industries ltd Vs. CIT 277 ITR 219, contending that the judgment was referred without taking into account the provision of section 49(3) of the Act which has come into effect from 01.04.1985. 8. Now with regard to this controversy of disallowing depreciation, which is common to all the appeals in hand, it can be observed from the orders of the tax authorities below that the ld AO has reached the conclusion within the scope of provision of section 47 clause (iv), section 43(1) r/w explanation 6 and section 43(6) r/w explanation (2) of the Act but failed to take note of section 49(3) of the Act which distinguished the case of the Assessee. 8.1 Now taking into consideration these relevant provisions it can be observed that Clause (iv) and (v) of section 47 tenders certain Transfers between Holding and Subsidiary Companies as not Page | 5 amounting to Transfer u/s 2(47) wherein Capital Gain is not attracted on such transactions, section 47A(1) prescribe certain conditions on which the transactions shall not be considered as Transfer and if such conditions are not complied with, Capital Gain gets levied u.s. 45. If the Assets transacted between the Holding and Subsidiary Companies fall under prescribed conditions, then the exemption granted shall stand withdrawn and the transaction shall be chargeable to Capital Gain Tax in the previous year in which the original Transfer between the group Companies took place. Further, Section 49 (3) of the Act provides, where the capital gain arising from the transfer of a capital asset referred to in clause (iv) or, as the case may be, clause (v) of section 47 is deemed to be income chargeable under the head "Capital gains" by virtue of the provisions contained in section 47A, the cost of acquisition of such asset to the transferee company shall be the cost for which such asset was acquired by it. 9. It is admitted fact that the consideration of acquisition of healthcare business was discharged by the Assessee through issue of its equity shares in favor of the MIL. The Assessee company had later allotted shares of S&G Investments and Hamlet Investments on 28.11.2003, thereby ceasing to be wholly owned subsidiary of MIL. In view of the this changed of status, by virtue of Section 47A, MIL offered the capital gains of Rs. 15,08,53,716/- u/s 47(iv) of the Act. Therefore, strictly speaking the provision of section 49(3) of the Act became applicable and the cost of acquisition of the Assessee was to be construed to be the cost, for which assets were acquired by Assessee. Since, it was a slump sale, the Assessee in its wisdom, was right to get the assets revalued and thereafter claim depreciation upon it. 10. The ld CIT(A) has corrected this error committed by the ld AO. At the same time the tribunal appreciates the distinction brought on record by the ld Sr. Counsel for the Assessee, with regard to Page | 6 judgment of Hon'ble Delhi High Court in Dalmia Ceramics Industries ltd Case, on the fact of the case. Thus, the tribunal is inclined to dismiss the ground of appeal raised in the present appeals in regard to this controversy. 11. Now coming to the ground of disallowance of management consultancy fee on ad hoc basis. It was submitted on behalf of the Assessee that the ld CIT(A) has rightly deleted the ad hoc disallowances made by the ld AO while holding that the ld AO did not bring on record any evidence to suggest that the allocations of expenses made by MIL to the Assessee was not at fair market price or excessive or unreasonable. It was submitted that the Assessee company did not have any independent legal secretarial and managerial departments and thus the services of MIL were obtained on regular basis and MIL had estimated and credited only those expenses which was relatable to the business of the Assessee. 11.1 It was submitted on behalf of the revenue that the expenses did not pass the test of commercial expediency and accordingly it was submitted on behalf of the revenue by the ld DR the expenditure is not wholly and exclusively led out for the purpose of business. 12. In this context it can be observed that the ld AO has himself allowed 50% of the expenses. To disallow 50% of total expenses on ad hoc basis mere use of discretion cannot be sustained. Assessment order does not show that any subjective analysis of the matter was done but merely relaying the special audit report, adhoc disallowance was made. Even if special audit report referred in para 2 of the assessment order is considered same only mentioned that the services of Max India Ltd were not related to the business of the Assessee alone but also to the subsidiary of the Assessee, Max Medical Services Ltd(MMS). However, there is no iota of evidence on record to suggest the expenses of the Assessee relates to any extent Page | 7 to MMS. Thus, there is no error in the finding arrived by the ld CIT(A). 13. Coming to the disallowances of preoperative expenditure. In regard to this it was submitted that the ld AO has disallowed deduction holding that there is no provision in the act to provide for deduction for allowing revenue expenditure for purchase pending capitalization. However, the ld DR submitted, that the ld CIT(A) has deleted the disallowances on frivolous grounds. 13.1 It can be appreciated that there is no dispute that expenditure incurred are revenue in nature. The ld CIT(A) has rightly observed that Ld. AO has not doubted that expenditure were incurred for the healthcare business of the Assessee. Mere fact that expenditure were debited to the profit and loss account but were shown in balance sheet as preoperative expenditure pending capitalization cannot change the nature of expenses which was incurred wholly and exclusively for the expansion of the existing healthcare business, as acquired from MIL in the preceding year. Thus, the finding of the ld CIT(A) require no interference. 14. As regard to disallowance u/s 14A read with Rule 8D, the admitted state of affairs is that there was no exempt income during the relevant assessment years and based upon that the ld CIT(A) has deleted the addition. So same does not require any interference in the light of now settled proposition of law. 15. Lastly, taking up the disallowances of professional fees etc. for obtaining loan from International Finance Corporation or Asian Development Bank it can be observed that there is no dispute of the fact that the Assessee was in the course of expansion of business activity. Amount spent on appraisal of projects to check feasibility of granting loan does not bring into existence any new capital asset and thus cannot be treated as capital expenses. The ld CIT(A) has rightly deleted the addition made in that regard. Page | 8 In the light of aforesaid determination of the issues agitated in the appeal, against the revenue, all the appeals fail and same are dismissed. Order pronounced in the open court on 30/06/2022. -Sd/- -Sd/- (G.S.PANNU) (ANUBHAV SHARMA) HON‟BLE PRESIDENT JUDICIAL MEMBER Dated: 30/06/2022 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi