The DCIT, Circle-1(1)(1), Vadodara V. Baroda Medicare Pvt. Ltd., Vadodara

ITA 469/AHD/2020

AI Insights

The case involves an appeal by the Revenue against the order of the CIT(A) which had allowed deductions under section 80IB(11C) for Baroda Medicare Pvt. Ltd., a multi-specialist hospital, for the assessment year 2012-13. The main issues revolved around the eligibility of deductions for profits from trading in medicines and surgical equipments, and the disallowance of interest on loans given to group companies. The Tribunal found that the profits from trading activities were integral to the hospital's operations and thus eligible for deductions. However, the matter of interest-free loans to group companies was remanded back to the Assessing Officer to determine the source of the funds used for these loans.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131556 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 9 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-07-2023
• Appeal Filed By: Department
• Order Result: PartlyAllowed
• Bench Allotted: D
• Next Hearing Date: 03-07-2023
• Assessment Year: 2012-2013
• Appeal Filed On: 21-09-2020
• Other Referred Cases: Cambay Electronic Supply Industrial vs. CIT, Eureka Medicare (P) Ltd, Hero Cycles (P) Ltd, Chettinad Logistics (P.) Ltd, Oil Industry Development Board, S.A. Builders vs. Union of India
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business income; Revision of order; Depreciation; Earning of tax free income; Proportionate interest; Commercial expediency; Rule 8D; Set aside
• Section: 131; 263; 143(3); 11A; 142(1); 14A; 250; 113

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “D” BENCH Before: Shri Waseem Ahmed, Accountant Member And Shri Siddhartha Nautiyal, Judicial Member Th e DCIT, Circle-1 (1 )(1), Vadodara (Appellant) Vs Baroda Medicare Pvt. Ltd, Vadodara PAN: AAD CB229 5A (Resp ondent) Asses see b y : Shri Alok Shah , A. R. Revenue by : Shri Atul Pandey , S r. D. R. Date of hearing : 04-07 -2 023 Date of pronouncement : 19-07 -2 023 आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:- This is an appeal filed by the Revenue against the order of the ld. Commissioner of Income Tax, Appeals-1, Vadodara, in proceeding u/s. 250 vide order dated 11/03/2020 passed for the assessment year 2012-13. 2. The Department has taken the following grounds of appeal:- ITA No. 469/Ahd/2020 Assessment Year 2012-13 I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 2 “1. Whether on facts and circumstances of the case and in law, the ld. CIT(A) is justified in deleting the addition relating to trading in medicines and surgical equipments amounting to Rs.2,47,82,051/- without appreciating the fact that the disallowance is rightly made as per provisions of section 8OIB(11C) of the Act." 2. “Whether on facts and circumstances of the case and in law, the Ld. CIT(A) in justified in allowing the appeal on disallowance u/s 14A of the Income tax Act, 1961, without appreciating the fact that the disallowance is rightly made as per provisions of Rule 8D by the AO vis-a-vis CBDT Circular No.5/2014." 3. “Whether on facts and circumstances of the case and in law, the Ld. CIT(A) is justified in. allowing the appeal on proportionate disallowance of interest, without appreciating the fact that the assessee failed to prove the commercial expediency of interest free loans to its group companies, as against its claim of interest expenses on borrowed funds. 2. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary. Relief claimed in appeal It is prayed that the order of the CIT (Appeals) be set aside and that of the Assessing Officer be restored.” Ground No. 1 (CIT(A) erred in deleting addition relating to trading in medicines and surgical equipments amounting to Rs. 2,47,82,051/-) 3. The brief facts in relation to this ground of appeal are that the assessee is engaged in the business of running multi-specialist hospital. The assessee claimed deduction of Rs. 28,27,384/- u/s. 80IB(11C) of the Act being profits from operating and maintaining hospital. During the course of assessment, the Assessing Officer observed that these profits included profits of Rs. 2,47,82,051/- from trading in medicines surgical equipments from in house medical store. Thus, the Assessing Officer observed that the assessee had suffered losses to the tune of Rs. 2,19,54,667/- (Rs. 28,27,384/- - Rs. 2,47,82,051/-) from the business of running hospitals and it claimed deduction u/s. 80IB(11C) after merging profits/losses from both the I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 3 activities i.e. running hospitals and trading in medicines and surgical equipments. Thus, the assessee claimed deduction u/s. 80IB(11C) on profits of Rs. 2,47,82,051/- from trading in medicines etc. and no such deduction was available in respect of activities of operating and maintaining hospitals as no profit was actually earned from this activity. After taking the submission of the assessee on record, the Assessing Officer held that the assessee is not eligible for claim of deduction u/s. 80IB(11C) since on a plain reading of statutory provision, the deduction is provided in respect of profits “derived from” business of operating and maintaining eligible hospital only and not for all the profits “attributable to” such business. Thus, the deduction is restricted strictly to the extent of profits earned from the limited activities which are essential for operating and maintaining hospital and not any other ancillary activity. The Assessing Officer placed reliance in the case of Hon’ble Supreme Court in the case of Cambay Electronic Supply Industrial vs. CIT 113 ITR 84 (SC), wherein the Supreme Court held that expression “attributable to” is certainly wider in scope than the expression “derived from”. The Hon’ble Supreme Court pointed out that whenever the legislature wanted to give a restricted meaning it has used the expression “derived from”. Accordingly, with the above observations, the Assessing Officer held that profits from trading in medicines and surgical equipments cannot be considered as profits derived from operating and maintaining eligible hospital. Accordingly, the Assessing Officer disallowed the deduction of Rs. 2,47,82,051/- claimed in respect of trading in medicines and surgical equipments. I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 4 4. In appeal, the ld. CIT(A) allowed the appeal of the assessee by holding that profit earned from trading in medicines etc. is nothing but profit earned from business of operating and maintenance of hospitals. While allowing the assessee’s appeal on this issue, the ld. CIT(A) made the following observations:- “I have carefully considered the material facts and submissions of the appellant. The AO by going through the financial of the company opined that the sale of products comprising sale on account of medicines and surgical equipments were distinct from the business of hospitals as the appellant separately reported the revenue from sale of medicines etc and sale of service comprising receipt from hospital services. The AO also analyzed the trading results of sale of medicines and surgical equipments and noticed that the profit reported was abnormal. The AD held that trading in medicines and surgical equipments is a separate business and the profits of the same are not eligible to claim deduction u/s 8016(11C) of the Act. The AO disallowed the claim of the appellant and also brought profits on sale of medicines etc to tax. The AO held that profits attributable to the business are not eligible to claim deduction u/s 801B(11C) of the Act as the phrase used in that section is derived from and the profits from trading in medicines etc being not derived from the business of operating and maintaining hospitals deduction cannot be granted. During the appellate proceedings the Ld. AR argued that profits from trading in medicines etc cannot be seen as distinct business to disallow the claim of the appellant. It was also stated that pharmacy is very much required to run multi specialty hospital. The Ld. AR relied on the decision of Hon'ble ITAT, Nagpur, In the case of Eureka Medicare (P) Ltd. and stated that the Hon'ble tribunal held the rent received from the pharmacy medical store is also eligible to claim deduction u/s 80IB(11C) of the Act. The Ld. AR explained that the requirement of having pharmacy attached to the hospital was also discussed by the Hon'ble Tribunal in order to comply with the Government stipulations, In view of this the Ld. AR requested to consider the decision of Hon'ble ITAT, Nagpur and grant relief. I have carefully considered the decision and facts considered by the Hon'ble Tribunal. The AO treated the profits from trading in medicines etc as profits from a separate business keeping in view the entries made by the appellant In the financials separately from the receipts of services. This conclusion of the AO appears to be incorrect and Impermissible. The accounting treatment given in the books of accounts by the appellant cannot be a conclusive proof to say that these profits are from distinct business as held by several judicial pronouncements. The AD arrived at net profit from trading in medicines etc considering opening stock, closing stock & purchases and sales but not considered the indirect expenses. To I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 5 this extent the finding of the AO is also not as per accounting principles The AG is also accepting that the patients are required medicines and surgical equipments for the treatment. Simply because the profits as determined by the AD without considering the expenses were abnormal that should not have led the AO to conclude that the appellant merged the profits of two businesses to claim deduction. It is essentials to have pharmacy either own or leased one to cater the need of the patients. In view of this the reasons put forth by the AD for disallowing the claim appears to be on wrong footing, I have also gone through the decision of Hon'ble ITAT IITA No.153/Nag./2017 dated 01.08.20181, which was rendered the context of order u/s 263 of the Act. The Hon'ble Tribunal elaborately discussed the issue Including the definition of hospitals and held that as per Clinical Establishment Act 2010, under Level-2, Hospital is mandatorily required to have pharmacy. It was also held that rent received from the medical store and fee received on account of nursing college are also eligible to claim deduction u/s 8018(11C) of the Act as these activities are inextricably linked to the activity of operating and maintaining of hospital. The relevant part of the order of the Hon'ble Tribunal is reproduced as under for better appreciation of the issue. "6. We have heard both the counsel and perused the records. The ld. Come of the anemone of the assessee has summarized his submissions as under: A) Assessee company has set up 100 bedded hospital at Yavatmal and complied with requisite conditions for grant of deduction u/s BOIB(11C). A.O. after examining the relevant record in detail and after inspection of business premises has allowed the deduction u/s BOIB(11C). B) Assessee has paid tax u/s 11518 @ 20% on book profit. C) Assessee has started its operation in the month of May Assessee is thus eligible for deduction u/s 801B(110) from Asstt. Year 2009-10 onwards. In Asstt. Year 2009-10 and 2010-11 assessee had no gross income as a result of which no deduction was claimed u/s D) Assessee has claimed deduction u/s 80IB(11C) for the first time in Asstt. Year 2011-12. Requisite conditions for grant of deduction u/s 80IB(11C) were examined and on being satisfied. A.O. had allowed deduction u/s 801B(11C) in assessment framed u/s 143(3) A.0. in the assessment framed had examined the income from activity of nursing, rent, referral and interest income while allowing deduction u/s 80IB(11C) (i) Computation of Income & Ack of return and Audit Report (ii) Financial statement Asstt. Year 2011-12 (iii) Assessment order u/s 143(3) of IT Act 1961 for for Asstt. Year I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 6 2011-12 (iv) Notice u/s 142(1) for Asstt. Year 2011-12. (v) W/s before A.O. for Asstt. Year 2011-12 E) Assessment for Asstt. Year 2011-12 has achieved finality and has not been disturbed by revenue authority till date. Deduction u/s BOIB(11C) allowed in the case of assessee thus has achieved finality Including on receipts in the nature of referral income, nursing receipts, Interest Income and rental income as income derived from operation and maintenance of hospital. F) The referral income, nursing receipts, interest Income and usage charges for Pharmacy is inextricably linked /direct nexus with the operations and maintenance of hospital and are business receipts derived from operating and maintaining hospital. Claim in respect to aforesaid income was already accepted by revenue authorities in the assessment framed for Asstt, Year 2011-12,and there was no scope for A.O. to take any different view in the matter during Asstt. Year 2012- 13. Assumption of jurisdiction u/s 263 is bad in law. G) Issue in dispute is covered in favour of assessee by decision of Hon'ble ITAT, Nagpur Bench, Nagpur in ITA No.250/Nag/2000 in the case of Dinshaw Frozen Foods, Nagpur vide order dated 16/10/2002 by following decision of Hon’ble Bombay High Court in the case of Paul Bros, reported at 216 ITR 548 (Bom). Ratio laid down by Hon’ble ITAT squarely applies to the facts in the present case. In view of above order passed u/s 263 is unsustainable. H) Asstt. Year 2012-13 is not initial year for grant of deduction u/s 801B(11C). It is settled proposition of law the deduction u/s 801B(11C) cannot be disturbed if the initial year for grant of deduction u/s 801B(11C) is not disturbed. Assessee for this proposition places reliance on the following decisions. 1) Hon'ble Bombay High Court order in ITA No. 27/2010 in the case of Simple Food Products Pvt. Ltd. vide order dated 12/07/2017 ii) (1995) 216 ITR 0548 (Dom.) CIT vs. Paul Brothers (a) Hon'ble Bombay High Court order in ITA No. 59/2004 in the case of M/s. Dinshaw Frozen Foods vide order dated 21/11/2007. iv) Hon'ble Bombay High Court order in ITA No. 39/2004 in the case of M/s. Dinshaw Dairy Foods Ltd. vide order dated 21/11/2007. Ratio laid down by aforesaid decisions squarely applies to the facts in the case of assessee. Deduction u/s 8018(11C) having been accepted in Asstt. Year 2011-12 in respect to referral income, interest, rent and nursing receipts same cannot be withheld in the year under consideration. In view of above, assumption of jurisdiction u/s 263 by CIT is bad in law. Thus liable to be cancelled. I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 7 1) In Asstt. Year 2012-13 A.O. has examined the details as well as eligibility of claim of deduction u/s BOIB(LIC). A.O. in fact had issued summon u/s 131 for examining the eligibility condition for grant of deduction u/s 8018(11C) on 18/12/2014 during the course of assessment proceedings. A.O. has carried out Inspection of business. premises in order to examine and verify the claim of assessee and allowed the deduction u/s 8018(11C). J) A.O. In the present assessment year after due verification of evidence on record and after inspection of hospital premises had accepted the claim of assessee in respect to quantum of deduction u/s 8018(11C). Evidences on record thus clearly demonstrate that the deduction u/s 801B(11C) has been granted after verification and examination of the claim. Observation of CIT as to non verification of claim is factually Incorrect. The conclusion of CIT that order passed by A.O. Is erroneous is on incorrect factual assumption and is unjustified. K). Income from interest, rent, referral income and receipts from nursing activity were considered as income inextricably linked to the activity of operating of hospital and accordingly deduction u/s B01B(11C) was allowed in the assessment framed u/s 143(3). View adopted by A.O. for allowing deduction u/s 8018(11C) is in accordance with law and only possible view of the matter considering the fact that In Asstt. Year 2011-12 such income was held to be income from of hospital L) Order passed by A.O. is after due verification and thus order cannot be termed as erroneous and prejudicial to interest of revenue. Order passed by A.O. being not erroneous and prejudicial to the interest of revenue same cannot be a subject matter of exercise of power u/s 263 of IT. Act 1961. Order passed by CIT u/s 263 being not In accordance with law is liable to be cancelled. Reliance on: 1) 203 ITR 108 (Bom.) CIT vs. Gabrial India Ltd. 2) ii) 295 ITR 282 (SC) CIT vs. Max India Ltd. M)Assesses has received interest of Rs.5.99 lacs which is credited in Profit & Loss Account. Interest paid debited in Profit & Loss is Rs.40.06 lacs. Interest received would go to reduce the interest paid and there would be no interest income which can be excluded for the purpose of deduction u/s 8018(11C). Reliance placed on the decision of Hon'ble ITAT in case of M/s Plastic Surge Industries Ltd. in ITA No.79/Nag/2010 vide order dated 19/10/2012 Aforesaid decision of Hon'ble ITAT has been challenged by revenue before Mon'ble Bombay High Court, Nagpur. Hon'ble Bombay High Court has not admitted question of law in respect aforesaid issue as is evident from order of Bombay High Court and Memo of Appeal placed in paper book ITA No.153/Nog/2017 M/s Eureka Medicare Private Limited N)Hon'ble Bombay High Court in case of Shri Jagdishprasad M. Joshi reported at 318 ITR 420 I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 8 (Bom.) has held that the interest received would be eligible for deduction u/s SOLA/8018. Deduction granted by A.O. in respect to interest is in accordance with the decision of Hon'ble Bombay High Court and cannot be termed as erroneous. O) Assessee hospital requires supply of medicine, pharmaceutical and surgical consumables for treatment of patients admitted in the hospital. As per Clinical Establishment Act 2010, 100 bedded hospital falls under Level-2 Hospital. As per Clinical Establishment Act Level-2 Hospital is mandatorily required to have pharmacy. As statutorily required assessee hospital has pharmacy division which caters to supply of medical and surgical consumables required by patients in the hospital. Hospital is not defined under the provisions of Income Tax Act 1961. The meaning provided under Clinical Establishment Act would be relevant for giving meaning for the purpose of 801B(11C)of.T.Act1961. sec 80IB(11C) of I.T. Act, 1961. P) Assesses considering the administrative convenience has engaged the service of Shri Rajkumar Agrawal to operate and maintain Medical and Pharmaceutical Stores, at the premises of assessee. Assessee is receiving revenue in the shape of referral charges in respect to various supplies made by him to the patients administering treatment at hospital premises. Price at which medicines and consumables are to be sold in hospital is as per directives of assessee company. It is worthwhile to submit that activities of Shri Rajkumar Agrawal are restricted to make supplies of Medical, Pharmaceutical and Surgical Consumable within the hospital itself. He has not made any supplies outside the hospital. Assessee in the project report submitted to bank for obtaining term loan for construction of Hospital Building has considered income from pharmacy to determine total projected revenue of Hospital. Project report submitted by assessee has been appraised by bank authority before sanctioning loan. This clearly shows that income from pharmacy is integral part of total revenue of hospital. R) Activities of running Pharmacy is not an independent activity as the same is statutory required for supply of Medicine, Pharmaceutical and Surgical Consumables required for treatment of patients admitted in the hospital It constitutes an integral part of business of operating and taining hospital This revenue derived is inextricably linked/nexus with the operating and maintaining of hospital and is clearly eligible me from business of operating and maintain of hospital. It is part of source of revenue derived from patients admitted in the hospital for treatment Revenue is thus revenue from operating and maintenance of postal Thus allowance of deduction u/s 8010(11C) on above undisputed factual position on record cannot be faulted Reliance on: i) ITAT, Chennal Bench in the case of Franciscan Sisters of St. Joseph Society vs JCIT reported at 152 ITD 485 (Chennai) dated 06/01/2014. I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 9 s) Assessee has also received nominal usage charges of Rs.2.04,000/- from Medical Store towards use of hospital building in the course of operating and maintenance of hospital. Amount of usage charges received is much less than the depreciation and maintenance of hospital building which has been given to aforesaid person for which assessee has received usage charges. No positive income in respect to usage charges. Revenue for use of hospital premises is inextricably Bnked to the activity of operating and maintenance of hospital and thus income derived there from is Income from business of operating and maintenance of hospital eligible for deduction u/s 8018(11C). Reliance on ITAT, Pune Bench A, Pune in the case of Sameer Rajendra Shah vs. JCIT in ITA NO.1061/PN/2013 order dated 29/04/2016. ii) ITAT order in 1.T.(T.P.JA. No.799/Bang/2015 in the case of M/s. Infosys Umited vide order dated 10/11/2017. T) Assessee is operating and maintaining hospital in rural area. Hospital being of 100 bedded rendering 24/7 facilities requires lot of human resources for nursing patients treated in the hospital. Trained nurses are not readily available and therefore Inhouse training of nurses is undertaken in the hospital itself which has been observed by A.O. to be Nursing College. In this process assessee company as received Rs.11.46 lacs for training provided to nursing stair. Assessee Company has incurred direct expenses for training nurses at Rs.8.68 lacs. Assessee company has also incurred Indirect expenses for providing training to nurses which are part of administrative and other expenses. There is no positive income which can be excluded for the purpose of deduction u/s 801B(11C) after considering the share of indirect expenses. U) Activity of training of nurses is not an independent activity. Activity of training nurses is undertaken to meet the requirement of business of operating and maintaining hospital as trained nurses are employed by hospital for day to day operation In view of above, activity of training nurses is inextricably linkest to the activity of operating and maintaining of hospital. Thus income if any would arise out of such activity would the eligible for benefit of deduction u/s. 80IB(11C). v)Order passed by A.O. cannot be termed as erroneous and prejudicial to the interest of revenue. It is humbly prayed to cancel and set aside the order passed by CIT u/s 263 of IT Act 1961 7. Per contra, the ld. Departmental Representative relied upon the orders of the Commissioner of Income Tax. 8. We have carefully considered the submission and perused the records. Upon careful consideration, we note that the Commissioner of Income Tax in this I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 10 case has directed the Assessing Officer to ascertain whether the referral Income, Income from running a nursing college, Interest, rental income from medical store are to be allowed as deduction u/s.8010(11C) of the Income Tax Act, 1961 In this regard, we note that us. 6010(11C) of the Act, the deduction will be available in case of an undertaking which derives profits from business of operating and maintaining the hospital located anywhere in India. Now it is undisputed that the assessee is in the business of operating and maintaining the hospital. In this regard, we note that in the preceding assessment year, i.e., for assessment year 2011-12, under a scrutiny assessment u/s. 143(3), for all the above mentioned items of income noted, the assessee was granted deduction u/s. BOID(11C). There is no mention anywhere that there is any change in the facts and circumstances of the case from that prevailing in the previous assessment year. In this regard, we note that the present assessment year 2012-13, is not the initial year for grant of deduction u/s. B01B(11C). It is the settled proposition of law that this deduction cannot be disturbed if the initial year for scrutiny of said deduction is not disturbed. This proposition duly follows the exposition from the following Hon'ble Bombay High Court decisions; i) Hon'ble Bombay High Court order in ITA No. 27/2010 in the case of Simple Food Products Pvt. Ltd. vide order dated 12/07/2017. ii) (1995) 2016 ITR 0548 (Bom.) CIT vs. Paul Brothers iii) by High Court order in 11A No: 59/2004 in the case of M/s. Dinshaw Frozen Foods vide order dated 21/11/2007 iv) Hon'ble Bombay High Court order in ITA No. 39/2004 in the case of M/s. Dinshaw Dairy Foods Ltd. vide order dated 21/11/2007. 9. In this view of the matter, in our considered opinion, the Commissioner of Income Tax assumes jurisdiction u/s. 263, is not at all sustainable in law. 10. We further note that in forming his opinion that the assessee's claim for deduction needs further enquiry by the Assessing Officer, the Commissioner of Income Tax has given a reasoning that the Assessing Officer has not made necessary enquiry. In this regard, we note that it is the claim of the assessee that due scrutiny was done by the Assessing Officer. The Assessing Officer had issued necessary questionnaires. He also issued summons u/s. 131 of the Act. All these requirements by the Assessing Officer were duly complied with. In this regard, the Commissioner of Income Tax has given a very strange reasoning that accepting the statement filed by the assessee in the absence of any supporting material and without making any enquiry, the order is erroneous. This proposition has been found by the Commissioner of Income Tax to be irresistible in this regard, we find that in coming to this Irresistible proposition, the Commissioner of Income Tax has not spelt out any cogent reason. As it is noted that the items referred by the I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 11 Commissioner of Income Tax are the same as prevailing in the previous assessment year on which deduction u/s. 801B(11C) was allowed, there is not a whisper anywhere that there is any change in the facts and circumstances of the case. Hence, on what basis the Assessing Officer was supposed to negate the assessee's claim is not emanating from available records. 11. Furthermore, it is interesting to note that as regards the referral income received by the assessee company, the Commissioner of Income Tax has observed that it is not on record as from whom and for what purpose the referral Income was received. We find that this observation of the Commissioner of Income Tax reflects the total lack of application of mind. Why an Assessing Officer while examining the books of accounts of a hospital/medical facility provider would keep with himself in the assessment records the details of referral Income as to from whom and for what purpose it was received, defies any logical explanation. Referral income in case of medical facility provider is a very common phenomenon. It is undoubtedly linked to the business of running and operating medical facility. Over and above, the co-relation of the Income from Interest, rent from medical store, referral income and receipt from nursing activity were explained in detail before the Commissioner of Income Tax and it was averred that the same were Inextricably linked to the hospital. In fact, the Commissioner of Income Tax has elaborated the submissions of the assessee in his order u/s. 263 itself. However, there is no whisper from the Commissioner of Income Tax as to why the same were not acceptable. As regards the Inextricably linkage of the interest income, the assessee has quoted various decisions including the decision from the ITAT In the case of M/s Plastic Surge Industries Ltd. (supra) the Bombay High Court in the case of Shin Jagdishplasad M. Joshi Supra wherein it was held that Interest received would be eligible for deduction u/ss. 801A and 801B. As regards the rental income from medical store, it has been submitted that the hospital requires supply of medicine, pharmaceutical and surgical consumables for treatment of patients, As per Clinical Establishment Act 2010, under Level-2 Hospital is mandatorily required to have pharmacy. It has further been submitted that the assessee considering the administrative convenience has engaged the service of Shri Rajkumar Agrawal to operate and maintain Medical and Pharmaceutical Stores at the premises of assessee. the assessee is receiving revenue in the shape of referral charges in respect to various supplies made by him to the patients administering treatment at hospital premises. Price at which medicines and consumables are to be sold in hospital is as per directives of assessee company. It has been submitted that activities of Shri Rajkumar Agrawal are restricted to make supplies of Medical, Pharmaceutical and Surgical Consumables within the hospital itself. It has further been submitted that in the project report submitted by the hospital to bank for obtaining term loan income from pharmacy was considered an integral part. Hence, it has been claimed that running Pharmacy is not an Independent activity and the same is statutorily required and inextricably linked to the operation and maintenance of hospital. The assessee has referred to various case laws in the submissions referred above I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 12 which are germane. Further, the assessee has referred to various case laws as mentioned above where it has been accepted that running a hospital requires a lot of human resources for nursing patients treated in the hospital. Trained nurses are not readily available and therefore in-house training of nurses is undertaken in the hospital itself. In this process, the assessee company had received Rs.11.46 lacs for training provided to nursing staff. It has been claimed that the assessee has incurred direct expenses for training nurses at Rs.8.68 lacs. It has been submitted that the assessee company has also incurred indirect expenses for providing training to nurses which are part of administrative and other expenses. Hence, it has been said that actually there is no positive income in this regard. Overall it has been claimed that the activity of training of nurses is not an independent activity. 12. We find that the above submissions amply explain that the items of receipt mentioned and questioned by the Commissioner of Income Tax are inextricably linked to the operating and maintaining of the hospitals. Even at the cost of repetition, we may add that these activities were found to be inextricably so linked and the assessee was allowed deduction u/s.801B(11C) in the immediate preceding year." In the present case the appellant earned profit from trading in medicines etc which is nothing but profit earned from the business of operating and maintenance of hospitals. Considering the above decision the activity of running hospitals and running medical stores cannot be seen as distinct business activities and hence they have to be treated as the activities inextricably linked to each other. In that case rent received from the pharmacy was considered as eligible for deduction u/s 801B(11C) of the Act. In such circumstance the profit earned by the appellant from the trading of medicines and surgical equipments on its own cannot be denied deduction u/s 801B(11C) of the Act. In view of this it is held that the appellant is entitled to claim deduction u/s 801B(11C) of the Act against the profits of the business. However, the interest, non- operating income etc at Rs.7,76,119/- cannot be treated as the income/profit derived from the business of operating and maintaining hospitals. Hence, the AO is hereby directed to re- workout the deduction and allow the same. This ground of appeal is partly allowed.” 5. The Department is in appeal before us against the aforesaid relief granted by ld. CIT(A). The ld. Departmental Representative submitted that the words used in section 80IB(11C) are “derived from” and not “attributable to”. Since pharmacy is an integral part of running of hospitals, looking to that instant facts, the Assessing Officer has correctly disallowed I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 13 the deduction in respect of income earned from trading in medicines. In response, the counsel for the assessee placed reliance on the observations by ld. CIT(A) in the appellate order. The counsel for the assessee submitted that the assessee is a multi-specialist hospital having over 100 beds. In such cases, running of inhouse pharmacy is essential for running of hospitals since substantial medicines are required on day to day basis in treating the patients. A hospital of such large operations cannot run unless and until there is inhouse pharmacy to cater to the needs of inhouse patients. Further, the counsel for the assessee also placed reliance on the case of Eurka Medical Pvt. Ltd. in ITA No. 90 and 153/Nagpur/2017 dated 01-08- 2018. 6. We have heard the rival contentions and perused the material on record. In our considered view, we find no infirmity in the observations made by the ld. CIT(A), while allowing the appeal of the assessee on this issue. Further, respectfully following the observations made by Nagpur ITAT in the case of Eureka Medical Pvt. Ltd. supra, we are of the considered view that the assessee is eligible to claim deduction u/s. 80IB(11C) of the Act in respect of inhouse pharmacy maintained by the assessee within the premises of hospital. We are in agreement with the documents taken by the counsel for the assessee that in case of multi-speciality hospital having over 100 beds, it is not feasible to efficiently run the hospital, without having an inhouse pharmacy to cater to the needs of inhouse patients. 7. In the result, Ground no. 1 of the Department’s appeal is dismissed. I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 14 Ground No. 2 (ld. CIT(A) erred in allowing the appeal on disallowance u/s. 14A of the Act) 8. The brief facts in relation to this ground of appeal are that during the course of assessment, the Assessing Officer observed that the assessee had invested in equities of private companies of its own group but it had not disallowed any expenditure in respect of these investments, which would result in exempted income. Accordingly, the Assessing Officer made disallowance u/s. 14A of the Act amounting to Rs. 19,25,400/-. The ld. CIT(A) allowed the appeal of the assessee on the ground that during the year under consideration, the assessee had not earned exempt income during the year under consideration. Accordingly, the ld CIT(A) allowed the appeal of the assessee on this issue with the following observations:- “I have carefully considered the material facts and also the submissions of the appellant. It is a fact that the appellant company has not earned exempt income during the year under consideration. This fact is borne out from the financials of the appellant for the year under consideration. The appellant relied on the special bench decision of Hon'ble ITAT, Delhi which is on the issue. This decision is in favour of the appellant. The Hon'ble Supreme Court in the case of Chettinad Logistics (P.) Ltd. (95 taxmann.com 250) approved the decision of Hon'ble High Court wherein it was held that Sec 14A of the Act cannot be invoked where no exempt income was earned by the assessee in the relevant assessment year, by dismissing the SLP filed by the department. Similarly, in the case of Oil Industry Development Board [103 taxmann.com 326] the SLP filed was also dismissed holding the same due. It is settled principle now that there cannot be any disallowance if the appellant not earned exempt income during the year. There are umpteen numbers of decisions holding the same view. Hence, respectfully following the above decisions and also considering the material facts of not earning exempt income during the year under consideration by the appellant, the disallowance made by the AO is hereby deleted and this ground of appeal is allowed.” I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 15 9. Before us, the Department is in appeal before us against the aforesaid relief provided by the ld. CIT(A) on this issue. Before us, the ld. counsel for the assessee drew our attention to recently introduced explanation to section 14A of the Act, which has clarified that provisions of section 14A shall apply irrespective of the fact whether or not exempt income has accrued or arisen or has not been received during the year and expenditure has been incurred in relation to such income not forming part of the total income. The ld. Departmental Representative submitted that this explanation which was inserted by Finance Act, 2022 is clarificatory in nature and would apply to the impugned assessment year 2012-13 as well. In response, the counsel for the assessee placed reliance on the observations made by ld. CIT(A) in the appellate order. 10. We have heard the rival contentions and perused the material on record. We are of the considered view that there is no infirmity in the order of ld. CIT(A) as during the year under consideration no exempt income was earned by the assessee. In a recent ruling passed by the Delhi High Court in the case of Era Infrastructure India Ltd. 141 taxman.com 289 (Delhi High Court), it has been held that the amendment brought in by the Finance Act, 2022, to section 14A by inserting a non-obstante clause and Explanation will take effect from 01-04-2022 and cannot be presumed to have retrospective effect. Therefore, for assessment year 2013-14, no disallowance could be made u/s. 14A if no exempt income was earned by the assessee. Also in the case of Lodha Developers Ltd 143 taxmann.com 442 (Mumbai - Trib.), the Mumbai ITAT held that amendment made by Finance Act, 2022 to section 14A would take effect I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 16 from 1-4-2022 and would be prospective in nature. Further, various High Courts and Tribunals have held, on similar facts that no disallowance could be made u/s. 14A r.w.r. 8 if no exempt income was earned by the assessee. We are of the considered view that it is a well-settled law on the subject that no disallowance can be made under section 14A in case the assessee has not earned any exempt income or in excess of income claimed to be exempt. The Hon'ble Supreme Court in the case of State Bank of Patiala [2018] 99 taxmann.com 286 (SC) held that where High Court took a view that amount of disallowance under section 14A could be restricted to amount of exempt income only, SLP filed against said order was to be dismissed. The Hon'ble Supreme Court in the case of Chettinad Logistics (P.) Ltd.[2018] 95 taxmann.com 250 (SC)dismissed SLP against High Court ruling that section 14A cannot be invoked where no exempt income was earned by assessee in relevant assessment year. The Gujarat High Court in the case of Dipesh Lalchand Shah [2022] 143 taxmann.com 419 (Gujarat) held that where in relevant assessment year, assessee-individual earned profits from partnership firm and made investments in shares of a company, since its income from partnership was negative and no exempt income was earned, in such case disallowance under section 14A could not be made. In the case of Corrtech Energy (P.) Ltd. [2014] 45 taxmann.com 116 (Gujarat), the Gujarat High Court held that where assessee did not make any claim for exemption of any income from payment of tax, disallowance under section 14A could not be made. The Delhi High Court in the case of Delhi International Airport (P.) Ltd. [2022] 144 taxmann.com 80 (Delhi) held that section 14A would not be applicable if no exempt income was received or receivable during relevant previous year. The Delhi High Court in the I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 17 case of Amadeus India (P.) Ltd.[2022] 145 taxmann.com 311 (Delhi), held that section 14A envisages that there should be an actual receipt of income which is not includible in total income; hence, section 14A will not apply where no exempt income is received or receivable during relevant previous year. The Ahmedabad ITAT in the case of Edelweiss Financial Advisors Ltd. [2021] 124 taxmann.com 361 (Ahmedabad - Trib.) held that disallowance of expenses under section 14A read with rule 8D could not exceed amount of exempted income. The Ahmedabad ITAT in the case of Addlife Investments (P.) Ltd.[2021] 124 taxmann.com 572 (Ahmedabad - Trib.) held that disallowances made under section 14A read with rule 8D could not exceed amount of exempt income earned by assessee during year. In the case of Asian Grantio India Ltd [2020] 113 taxmann.com 445 (Ahmedabad - Trib.), the Ahmedabad ITAT held that Disallowance of expenses under section 14A read with rule 8D of 1962 Rules cannot be made in absence of exempt income. Further, as observed by the Delhi High Court in the case of Era Infrastructure supra amendment made by the Finance Act, 2022 to section 14A by inserting a non-obstante clause and Explanation will take effect from 01-04-2022 and cannot be presumed to have retrospective effect and therefore will not apply to the impugned assessment year under consideration. 11. In the result, ground no. 2 of the Department’s appeal is dismissed. Ground No. 3 (ld. CIT(A) erred in allowing the appeal on proportionate disallowance Rs. 15,56,788/-) 12. The brief facts in relation to this ground of appeal are that during the course of assessment, the Assessing Officer observed that assessee had I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 18 advanced interest free loans to its group companies i.e. M/s. Harmony Medicare Pvt. Ltd. and M/s. D.R. Healthcare Pvt. Ltd. as the assessee claimed interest expenses of Rs. 1,30,22,692/-. The assessee was asked as to why proportionate interest should not be disallowed in respect of such loans advanced to these companies. The assessee placed reliance on the decision of Hon’ble Supreme Court in the case of S.A. Builders 158 taxman 74 (SC) and submitted that it is for the assessee to decide what expenses are required to be incurred for running of its business. However, the Assessing Officer rejected this argument on the ground that on perusal of facts it was observed that such loans are being used by the group company for day to day incidental expenses i.e. payments to trust, repair and maintenance, payment of rent etc, secondly the assessee has not given any explanation as to what was the commercial expediency in advancing such loans to group companies and what business objectives was achieved by the assessee in advancing such loan to group companies. Thirdly, the Assessing Officer held that it is a well established principle that any expenditure is allowable only if such expenditure is incurred wholly and exclusively for the purpose of business of the assessee. Accordingly, the Assessing Officer made proportionate disallowance of interest amounting to Rs. 15,56,788/- 13. In appeal, the ld. CIT(A) allowed the appeal of the assessee with the following observations:- “During the appellate proceedings as an abundant precaution the IT returns, books of accounts of the subsidiary companies were called for and examined. It was noticed that as stated by the AO loans given by the appellant were utilized by those two companies for their day to day operations only. There is no evidence for siphoning of the funds by any of the Directors for their personal benefits. In view of these, there is no gain saying on the part of the AO that the appellant failed to establish the commercial expediency. The decision rendered by the Hon'ble Apex I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 19 Court in the case of Hero Cycles (P) Ltd (63 taxmann.com 308) also support the view point of the appellant. The Hon'ble Apex Court held that once it is established that there is nexus between expenditure and purpose of business revenue cannot justifiably claim to put itself in arm-chair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case. The appellant in the present case has given the reasons for advancing the loans which are found to be reasonable. The appellant company stated that the business was expanded in other geographical areas by establishing subsidiary companies and hence the loans and advances made even out of borrowed funds are to be allowed. The appellant also stated that the most of the funds were advanced out of profit accrued to the appellant company and also from the business receipts of the year. The loan funds were advanced at the fag end of the year hence the appellant requested to consider the material facts and grant relief. Having regard to the material facts, it is clear that the appellant used borrowed funds for advancing to the subsidiary companies at the fag end of the year. It is also a fact that subsidiary companies utilized the said funds in their day to day business operations. In view of the facts, it is held that loans and advances given by the appellant company are on account of commercial expediency only. Hence, respectfully following the decisions as above the addition made by the AO is hereby deleted and the ground raised by the appellant is allowed.” 14. Before us, the ld. Departmental Representative submitted that in the instant facts, there is apparently, no commercial expediency in advancing the aforesaid loan by the assessee to its group companies. Accordingly, the ld. CIT(A) erred in facts and in law in allowing the assessee’s appeal on this issue. In response, the counsel for the assessee submitted that the assessee has substantial interest free loans available with it and the aforesaid loans were not advanced out of interest bearing funds to its group companies. 15. We have heard the rival contentions and perused the material on record. Looking into the facts of the case, in the interest of justice, the issue is being restored to the file of Assessing Officer to ascertain whether the aforesaid amount of interest free loan given by the assessee to its group companies is out of own funds or out of interest bearing funds. In the result, I.T.A No. 469/Ahd/2020 A.Y. 2012-13 Page No. DCIT vs. Baroda Medicare Pvt. Ltd. 20 the issue is being restored to the file of the Assessing Officer with the above directions. 16. In the result, ground no. 3 of Department’s appeal is allowed for statistical purposes. 7. In the result, the appeal of the Department is partly allowed for statistical purposes. Order pronounced in the open court on 19-07-2023 Sd/- Sd/- (WASEEM AHMED) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 19/07/2023 आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/ आदेश से, उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद