M/s. Peerless Hospitex Hospital & Research Centre Ltd., Kolkata V. DCIT, Circle - 11(2), KOLKATA, Kolkata

ITA 737/KOL/2018

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 1768 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 7 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-12-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 19-04-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RANU BISWAS
• Assessee Lawyers: PUJA SOMANI; S K TULSIYAN SHRI S DEY
• Keywords: Capital asset; Gift; Depreciation; Business expenditure; Opportunity of being heard; Principle of natural justice; Period of limitation; Retrospective amendment; Capital receipt; Commercial expediency; Time period of passing order; Unabsorbed depreciation; TDS; Set aside
• Section: 143(3); 72(1); 115JB; 40(a)(ia); 37(1); 143(1); 251; 73; 72; 13; 37; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B, BENC H KOLKATA BEFORE SHRI A.T.VARKEY, JM &DR. A.L.SAINI, AM ./ITA NOS.737 & 738/KOL/2018 ( / ASSESSMENT YEARS:2009-10 & 2013-14) M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD. 360, PANCHSAYAR, KOLKATA-700084 VS. DCIT, CIRCLE-11(2), KOLKATA ./ ./PAN/GIR NO.: AABCP 7225 L (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI S. K. TULSIYAN, ADVOCATE, SHRI S. DEY, CA & MS. PUJA SOMANI, CA RESPONDENT BY :SMT. RANU BISWAS, ADDL. CIT / DATE OF HEARING : 15/10/2019 /DATE OF PRONOUNCEMENT : 11/12/2019 / O R D E R PER DR. A. L. SAINI: THE CAPTIONED TWO APPEALS FILED BY THE ASSESSEE, PE RTAINING TO ASSESSMENT YEARS 2009-10 AND 2013-14, ARE DIRECTED AGAINST THE SEPARATE ORDERS PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-4, KOL KATA (IN SHORT THE LD. CIT(A)], IN APPEAL NO. 525/CIT(A)-4/C-11/(2)/201 5-16 AND 1369/CIT(A)-4/C- 11(2)/15-16, WHICH IN TURN ARISE OUT OF SEPARATE AS SESSMENT ORDERS PASSED BY THE ASSESSING OFFICER U/S 154/ 251/ 143(3) OF THE INCOM E TAX ACT, 1961 ( IN SHORT THE ACT). 2.SINCE, THE ISSUES INVOLVED IN THESE TWO APPEALS A RE COMMON AND IDENTICAL; AND THESE APPEALS PERTAIN TO THE SAME ASSESSEE,THEREFOR E, THESE APPEALS HAVE BEEN CLUBBED AND HEARD TOGETHER AND A CONSOLIDATED ORDER IS BEING PASSED FOR THE SAKE OF CONVENIENCE AND BREVITY. M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 2 22 2 3. FIRST WE TAKE ASSESSEES APPEAL IN ITA NO. 737/ KOL/2018, FOR A.Y. 2009-10. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE AS FOLLOWS: 1. THAT ON DIFFERENT GROUNDS BOTH THE LD.A.O. AND THE LD.CIT(A) ERRED IN REJECTING THE ASSESSEE'S RECTIFICATION PETITION CLA IMING THAT IN COMPUTING ITS ADJUSTED BOOK PROFIT FOR ASSTT. YEAR 2009-10 IN TER MS OF SEC.115JB OF THE I.T.ACT, ITS BROUGHT FORWARD UNABSORBED BUSINESS LOSSES RELA TING TO ASSTT. YEARS 1996- 97,1997-98 AND 1998-99 TOTALING RS.2,95,24,689/- SH OULD HAVE BEEN SET OFF WITH ITS NET PROFIT AS PER ITS PROFIT & LOSS ACCOUNT FOR THE SAID ASSESSMENT YEAR IN TERMS OF EXPLANATION (III) BELOW SEC. 115JB OF THE I.T.ACT. 2. THAT THE LD. A.O. ERRED IN REJECTING THE ASSESSE ES ABOVE-MENTIONED CLAIM ON THE GROUND THAT SINCE THE UNABSORBED BUSINESS LOSSE S RELATING TO ASSTT. YEARS 1996-97,1997-98 AND 1998-99 AROSE MORE THAN 8 YEARS BACK, THE SAID LOSSES COULD NOT BE SET OFF WITH THE NET PROFIT RELATING T O ASSTT. YEAR 2009-10. 2.(A) THAT WHILE REJECTING THE ASSESSEES CLAIM OF SET OFF OF BROUGHT FORWARD UNABSORBED BUSINESS LOSSES, THE LD. A.O. FAILED TO TAKE INTO ACCOUNT THAT THE RESTRICTION, CONTAINED IN SEC.72 OF THE I.T. ACT ON CARRYING FORWARD THE UNABSORBED BUSINESS LOSSES FOR MORE THAN 8 YEARS, D OES NOT APPLY IN COMPUTING THE ADJUSTED BOOK PROFIT U/S 115JB IN VIEW OF THE F ACT THAT SEC.L15JB(1) STARTS WITH THE WORDS NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PROVISIONS OF THIS ACT. 2.(B) THAT THE LD.CIT(A) ERRED IN NOT DECIDING THE OBJECTIONS RAISED BY THE LD. A.O. AS IN GROUND NO.2 ABOVE BUT ERRONEOUSLY REJECT ED THE ASSESSEES CLAIM OF SET OFF THE UNABSORBED LOSSES ON A DIFFERENT GROUND. 3. THAT IN PARA-3.2.3 OF HIS ORDER THE LD.CIT(A) ER RED IN HOLDING THAT SINCE THE ASSESSEE HAD NO BOOK LOSS OR UNABSORBED DEPRECIATIO N AFTER SETTING OFF, THE A.O. HAD RIGHTLY NOT ALLOWED SET OFF OF BOOK PROFIT AGAI NST THE SO CALLED UNABSORBED LOSSES. 3.(A) THAT IN PARA-3.2 OF HIS ORDERS THE LD.CIT(A) WAS NOT JUSTIFIED IN OBSERVING THAT THE ENTIRE BROUGHT FORWARD LOSSES AND DEPRECIA TION HAD BEEN ADJUSTED AGAINST ITS GENERAL RESERVE IN THE ASSESSEES BOOKS OF ACCO UNTS AND THEREFORE, AS FAR AS ITS BOOKS OF ACCOUNTS WERE CONCERNED, THERE WAS NO UNABSORBED LOSSES OR DEPRECIATION REMAINING AS ON 31.03.2009 IN ITS ACCO UNT PREPARED UNDER THE COMPANIES ACT. 3.(B) THAT THE LD.CIT(A) ERRED IN HOLDING THAT THER E WAS NO BROUGHT FORWARD UNABSORBED LOSSES IN THE ASSESSEES BOOKS OF ACCOUN T AS ON 31.03.2009 MERELY BECAUSE THE ASSESSEES STATUTORY AUDITOR SET OFF SU CH BROUGHT FORWARD BUSINESS LOSSES WITH ITS GENERAL RESERVE INSTEAD OF SHOWING THESE TWO ITEM SEPARATELY. 4. THAT SINCE BOTH THE LD. A.O. AND THE LD.CIT(A) E RRED IN REJECTING THE ASSESSEES CLAIM OF SET OFF ITS UNABSORBED BUSINESS LOSSES REL ATING TO ASSTT. YEARS 1996- 97,1997-98 AND 1998-99 TOTALING RS.2,95,24,689/- ON DIFFERENT GROUNDS WHICH WERE BOTH UNTENABLE, THE LD. A.O. MAY KINDLY BE DIR ECTED SET OFF ITS BROUGHT FORWARD UNABSORBED BUSINESS LOSSES WITH THE NET PRO FIT RELATING TO ASSTT. YEAR M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 3 33 3 2009-10 AND RE-COMPUTE ITS ADJUSTED BOOK PROFIT FOR ASSTT. YEAR 2009-10 AS PER LAW. 5. THAT, THE APPELLANT CRAVES LEAVE TO ALTER, AMEND , RESCIND AND SUBSTITUTE ANY OF THE ABOVE-MENTIONED GROUNDS AND ADD ANY FURTHER GRO UNDS BEFORE OR AT THE TIME OF HEARING OF THE APPEAL. 4. THE FACTS OF THE CASE WHICH CAN BE STATED QUITE SHORTLY ARE AS FOLLOWS: T HE ASSESSEE COMPANY IS RUNNING A HOSPITAL AND PROVIDIN G TREATMENT TO THE PATIENTS. THE ASSESSEE FILED ITS RETURN OF INCOME ON 23-09-2009 S HOWING A TOTAL INCOME OF RS. NIL. THE RETURN OF INCOME WAS PROCESSED U/S 143(1) OF THE AC T. LATER, THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY, AND LD AO FRAMED ASSESSMENT UNDER SECTION 143(3) OF THE ACT WHEREIN HE DISALLOWED A SUM OF RS. 1,25,83,682/- U/ S 40(A)(IA) OF THE ACT ON ACCOUNT OF NON-DEDUCTION OF TDS ON PAYMENTS MADE TO NATIONAL N EUROSCIENCE CENTRE. 5. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LEARNED CIT(A). THE LEARNED CIT(A) VIDE HIS ORDER DATED 04-03-2014 ENHANCED THE DISALLOWANCE TO RS. 1,70,28,307/-, THU S AN ADDITIONAL SUM OF RS.44,44,625/- (RS.1,70,28,307- RS.1,25,83,682), WAS DISALLOWED BY HIM. 6. THEREAFTER, IN PURSUANCE OF THE LEARNED CIT(A) O RDER DATED 04-03-2014, THE LEARNED AO PASSED THE ORDER U/S 251/143(3) OF THE ACT DATED 12-08-2014 WHEREIN THE BENEFIT OF DEDUCTION OF RS.2,95,24,689/- ON ACCOUNT OF BROUGHT FORWARD LOSSES IN THE COMPUTATION OF BOOK PROFITS AS PER ITEM NO.(III) OF EXPLANATION 1 TO SECTION 115JB OF THE ACT WAS NOT ALLOWED. SINCE THIS WAS A MISTAKE APPARENT FROM REC ORDS, THEREFORE, THE ASSESSEE FILED A RECTIFICATION PETITION U/S 154 OF THE ACT DATED 02- 09-2014 REQUESTING THE LEARNED AO TO RECTIFY THE COMPUTATION OF ADJUSTED BOOK PROFITS AN D ALLOW THE DEDUCTION OF RS.2,95,24,689/-, BEING LOWER OF BROUGHT FORWARD LO SS AND UNABSORBED DEPRECIATION. A COPY OF FORM 29B ISSUED BY AN INDEPENDENT CHARTERED ACCOUNTANT WAS ALSO SUBMITTED BEFORE THE AO ALONG WITH THE PETITION. A COPY OF TH E PETITION AND FORM 29B IS ENCLOSED AS PAGE 1 TO 5 OF THE PAPER BOOK. THE BREAK UP OF R S. 2,95,24,689/- IS AS FOLLOWS: FY UNABSORBED LOSS BEFORE DEPRECIATION 1996-97 77,20,905/- 1997-98 1,38,28,783/- 1998-99 79,75,001/- 2,95,24,689/- M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 4 44 4 7. SUBSEQUENTLY, ORDER U/S 154 / 251 / 143(3) OF TH E ACT DATED 01.04.2015 WAS PASSED. IN THE SAID ORDER, THE BENEFIT OF DEDUCTION OF RS. 2,95,24,689/- ON ACCOUNT OF BROUGHT FORWARDS LOSSES IN THE COMPUTATION OF BO OK PROFITS AS PER ITEM NO. (III) OF EXPLANATION 1 TO SECTION 115JB OF THE ACT WAS NO T ALLOWED FOR THE REASON THAT THE UNABSORBED LOSSES AROSE MORE THAN 8 YEARS BACK. THE ASSESSING OFFICER HELD AS FOLLOWS: IN RETURN OF INCOME FILED BY THE ASSESSEE COMPANY FOR A.Y. 2009-10, THE ASSESSEE COMPANY HAD CLAIMED DEDUCTION OF RS. 2,95,24,869/- IN COMPUTATION OF MAT U/S 115JB, ON VERIFICATION OF RECORDS IT IS SEEN THAT T HE AMOUNT CLAIMED BY THE ASSESSEE IS RELATED TO THE LOSS BROUGHT FORWARD OR UNABSORBED DEPRECIATION FOR A.Y. 1996-97, 1997-98, 1998-99. AS THE UNABSORBED L OSS ARISES MORE THAN 8 YEARS BACK, THEREFORE THE CLAIM OF THE ASSESSEE IS NOT AC CEPTED. THEREAFTER, THE AO COMPUTED BOOK PROFIT UNDER SECTI ON 115JB OF THE ACT, AS FOLLOWS: AS PER U/S 143(3) DATED 28/12/2011 BOOK PROFIT U/S 115JB RS. 2,80,83,898/- ADD PROVISION FOR DOUBTFUL DEBT RS. 49,03,249/- ADJUSTED BOOK PROFIT RS. 3,29,87,147/- TAX ON ABOVE RS. 32,98,715/- HENCE TAX ON BOOK PROFIT IS MORE THAN NORMAL TAX, H ENCE TAX WILL BE CHARGED ON BOOK PROFIT. 8. AGGRIEVED BY THE STAND SO TAKEN BY THE ASSESSING OFFICER, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) WHO HAS CONFIRMED THE ACTION OF THE ASSESSING OFFICER. THE FINDINGS OF THE LD CIT(A) IS GIVEN BELOW: 3.2.3 IN VIEW OF THE ABOVE DISCUSSION IT IS CLEAR THAT SINCE THE ASSESSEE HAS NO BOOK LOSS OR UNABSORBED DEPRECIATION AFTER SETTING OFF, THEREFORE, THE ASSESSING OFFICER HAS RIGHTLY NOT ALLOWED SET OFF OF BOOK PRO FIT AGAINST SO CALLED UNABSORBED LOSSES. THOUGH THE ASSESSING OFFICER HAS NOT ALLOWE D THE SAME ON DIFFERENT REASONING. 9. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE AS SESSEE IS IN APPEAL BEFORE US. 10. BEFORE US, LD. COUNSEL SHRI. S.K. TULSIYAN SUBM ITTED THAT, THE B/F BUSINESS LOSSES OF RS. 2,95,24,869/- RELATING TO ASSTT. YEAR S 1996-97,1997-98 AND 1998- 99,WERE ELIGIBLE FOR DEDUCTION IN COMPUTING THE AD JUSTED BOOK PROFIT OF THE ASSESSEE FOR ASSTT. YEAR 2009-10.THE BROUGHT FORWAR D(B/F) BUSINESS LOSSES CANNOT M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 5 55 5 BE ADJUSTED AFTER 8 YEARS IN VIEW OF THE PROVISIONS OF SECTION 72 OF THE INCOME TAX ACT, IS APPLICABLE FOR COMPUTATION OF INCOME TAX UN DER NORMAL PROVISIONS OF THE ACT. SECTION 115JB DOES NOT CONTAIN THE PROVISIONS OF BROUGHT FORWARD(B/F) BUSINESS LOSSES AND THERE SET OFF. SECTION 115JB(1) OF THE ACT STARTS WITH THE WORD 'NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PR OVISION OF THIS ACT'. THEREFORE, THE B/F BUSINESS LOSSES CANNOT BE CARRIE D FORWARD FOR MORE THAN 8 YEARS IS NOT APPLICABLE IN COMPUTING THE BOOK PROFIT U/S 115JB OF THE ACT. THE LD COUNSEL ALSO SUBMITTED THAT ONLY FOR THE PUR POSE OF PRESENTATION AND DISCLOSURE, THE ASSESSEE COMPANY HAS BEEN SHOWING C APITAL RECEIPT OF RS.18,69,57,957/- (RECEIVED BY THE ASSESSEE ON ACCO UNT OF WAIVER OF LOAN) EVERY YEAR UNDER THE HEAD RESERVE AND SURPLUS AND THE S AID CAPITAL RECEIPT HAS NEVER BEEN ADJUSTED AGAINST UNABSORBED LOSSES. THEREFORE, FINDINGS LD CIT(A) THAT SAID CAPITAL RECEIPT OF RS.18,69,57,957/- HAS BEEN ADJUS TED WITH UNABSORBED LOSSES, IS WRONG. IT IS THEREFORE PRAYED BY THE LD COUNSEL THA T THE LD .A.O MAY BE DIRECTED TO DEDUCT THE B/F BUSINESS LOSSES, OF RS. 2,95,24,869/ - WHILE COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT. 11. ON THE OTHER HAND, THE LD. DR FOR THE REVENUE HAS PRIMARILY REITERATED THE STAND TAKEN BY THE ASSESSING OFFICER WHICH WE HAVE ALREADY NOTED IN OUR EARLIER PARA AND THE SAME IS NOT BEING REPEATED FOR THE SAK E OF BREVITY. 12. WE HEARD BOTH THE PARTIES AND CAREFULLY GONE TH ROUGH THE SUBMISSION PUT FORTH ON BEHALF OF THE ASSESSEE ALONG WITH THE DOCUMENTS FURNISHED AND THE CASE LAWS RELIED UPON, AND PERUSED THE FACT OF THE CASE INCLU DING THE FINDINGS OF THE LD CIT(A) AND OTHER MATERIAL AVAILABLE ON RECORD. WE N OTE THAT SOLITARY GRIEVANCE OF THE ASSESSEE IN THIS APPEAL IS THAT LD. ASSESSING O FFICER ERRED IN REJECTING ITS CLAIM OF DEDUCTION OF RS. 2,95,24,689/- ON ACCOUNT OF BRO UGHT FORWARD BUSINESS LOSSES IN TERMS OF ITEM NO. (III) OF EXPLANATION 1 BELOW SECT ION 115JB(1) OF THE I.T. ACT, IN COMPUTING THE ADJUSTED BOOK PROFIT OF RS.3,29,87,14 7/-. WE NOTE THAT THE LEARNED AO HAD DISALLOWED THE CLAIM OF THE ASSESSEE ON THE PRETEXT THAT THE BROUGHT FORWARD LOSSES CANNOT BE SET OFF AFTER A PERIOD OF 8 YEARS SINCE THE LOSSES OF M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 6 66 6 RS.2,95,24,689/- PERTAINS TO FY 1996-97, 1997-98 AN D 1998-99. WITH RESPECT TO THE ALLEGATION OF THE LEARNED AO THAT THE BROUGHT F ORWARD LOSSES CANNOT BE SET OFF AFTER A PERIOD OF 8 YEARS IT WAS SUBMITTED BY THE A SSESSEE BEFORE THE LEARNED CIT(A) THAT THE LIMITATION PERIOD OF 8 YEARS DO NOT APPLY TO MAT PROVISIONS CONTAINED IN CHAPTER XII-B (SECTION 115J TO 115JB) OF THE ACT SINCE THE SAID SECTIONS STARTS WITH A NON-OBSTANTE CLAUSE. WE NOTE THAT THE SUBMISSIONS OF THE ASSESSEE IN THIS RESPECT WERE NOT AT ALL DISCUSSED BY THE LEARNED CIT(A) IN HIS ORDER. INSTEAD, HE DISMISSED THE APPEAL OF THE ASSE SSEE ON AN ALTOGETHER NEW GROUND THAT THE ENTIRE BROUGHT FORWARD LOSSES HAS B EEN ADJUSTED AGAINST GENERAL RESERVE IN THE BOOKS OF ACCOUNTS. WE NOTE THAT LD. A.O. HAS REJECTED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE AFORESAID BUSINESS LOSSES AROSE MORE THAN 8 YEARS B ACK AND HENCE THE ASSESSEE COULD NOT BE BROUGHT FORWARD AND SET OFF IN ASSESSM ENT YEAR 2009-10. WE NOTE THAT THE PERIOD OF 8 YEARS, WHICH IS MENTIONED IN S ECTION 72 OF THE ACT, IN RESPECT OF B/F BUSINESS LOSSES, IS APPLICABLE TO COMPUTE TH E NORMAL TAX UNDER THE INCOME TAX ACT AND IT DOES NOT APPLY TO SECTION 115 JB OF THE ACT. SECTION 115JB OF THE ACT IS A CODE ITSELF. SECTION 115-JB(1) STARTS WITH THE WORD 'NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PROVISION OF THIS A CT'. IF SO, SECTION 72 IN TERMS OF WHICH THE B/F BUSINESS LOSSES CANNOT BE CARRIED FOR WARD FOR MORE THAN 8 YEARS IS NOT APPLICABLE IN COMPUTING THE BOOK PROFIT U/S 115 -JB, IN AS MUCH AS THERE IS NO SIMILAR PROVISION IN SEC. 115JB ITSELF. SECTION 115 -JB OF THE ACT IS A STAND-ALONE PROVISION WHICH DOES NOT CONTAIN ANY PROVISION ABOU T CARRY FORWARD OF B/F BUSINESS LOSSES, WHILE COMPUTING THE BOOK PROFIT U/ S 115-JB OF THE ACT. THEREFORE, IT IS ABUNDANTLY CLEAR BY READING THE PROVISIONS OF SECTION 115JB OF THE ACT THAT WHILE COMPUTING BOOK PROFIT THE ASSESSEE COMPANY IS ENTITLED, TO DEDUCT THE B/F BUSINESS LOSSES RELATING TO ASSTT. YEARS 1996-97,19 97-98 AND 1998-99 ALL TOTALING TO RS.2,95,24,689/-. 13.WE NOTE THAT LEARNED CIT(A) HAS MISUNDERSTOOD TH E FACTS OF THE CASE AND THE PRESENTATION OF GENERAL RESERVE IN THE AUDITED ACCO UNTS. THE ASSESSEE WAS NOT AFFORDED AN OPPORTUNITY DURING APPELLATE PROCEEDING S TO CONTROVERT THE FINDINGS OF THE LEARNED CIT(A). THE ASSESSEE CAME TO KNOW ABOUT THE DISMISSAL OF THE APPEAL, ONLY AFTER RECEIVING THE APPELLATE ORDER ENTIRE BROUGHT FORWARD LOSSES OF RS. 2,95,24,689/ GENERAL RESERVE . THE LD COUNSEL SUBMITTED BEFORE OF RS.2,95,24,689/- WERE NEVER ADJUSTED WITH THE GENERAL RESERVE I PREVIOUS YEARS. THE SCHEDULE ACCOUNTS OF THE ASSESSEE COMPANY AS ON MARCH AS ON MARCH 31,2009 ARE GIVEN BELOW: POSITION OF GENERAL RESERVE AS ON MARCH 31, 2007 POSITION OF GENERAL RESERVE AS ON MARCH 31, 2008 M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS. 737 & 738 ASSESSMENT YEARS: 2009 ONLY AFTER RECEIVING THE APPELLATE ORDER , ON AN ALTOGETHER NEW GROUND THAT THE ENTIRE BROUGHT FORWARD LOSSES OF RS. 2,95,24,689/ - HAS BEEN ADJUSTED AGAINST . THE LD COUNSEL SUBMITTED BEFORE US THAT BROUGHT FORWARD LOSSES WERE NEVER ADJUSTED WITH THE GENERAL RESERVE I THE SCHEDULE -II OF GENERAL RESERVE AS PER AUDITED BOOKS OF ACCOUNTS OF THE ASSESSEE COMPANY AS ON MARCH 31,2007, AS ON MARCH 31,2008, AND AS ON MARCH 31,2009 ARE GIVEN BELOW: POSITION OF GENERAL RESERVE AS ON MARCH 31, 2007 POSITION OF GENERAL RESERVE AS ON MARCH 31, 2008 M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . 737 & 738 /KOL/2018 2009 -10 & 2013-14 P PP PA AA AG GG GE EE E | || | 7 77 7 ALTOGETHER NEW GROUND THAT THE HAS BEEN ADJUSTED AGAINST BROUGHT FORWARD LOSSES WERE NEVER ADJUSTED WITH THE GENERAL RESERVE I N THE PRECEDING AS PER AUDITED BOOKS OF 31,2007, AS ON MARCH 31,2008, AND POSITION OF GENERAL RESERVE AS ON MARCH 31, 2009 WE NOTE THAT T HE UNABSORBED ASSESSEE COMPANY IN THE FINANCIAL YEARS 1996 THERE WAS NO GENERAL RESERVE IN THESE YEARS AS EVID ENT FROM THE AUDITED ACCOUNTS OF THE ASSESSEE COMPANY BOOK. NOW WE SHALL EXAMINE THE AUDITED FIGURES OF GENERAL RESERVE OF THE ASSESSEE COMPANY, AS NOTED ABOVE. ASSESSEE COMPANY IN AUDITED ACCOUNTS I CONTAIN ANY BALANCE IN THE HEAD GENERAL RESERVE T ILL 31.03.2006. 2006-07 (RELATI NG TO AY 2007 OFRS.18,69,57,957/- IN THE GENERAL RESERV SECURED LOAN PURSUANT TO SCHEME RS.13,23,50,897/- ON ACCOUNT OF DEBIT BALANCE IN THE HENCE, THE CLOSING BALANCE OF GENERAL RESERVES WAS RS.5,46,07,060/ 2017.IN THE IMMEDIATELY NEXT YEAR (FY 2007 04- 2007, THE AMOUNT OF RS.18,69,57,957/ ) WAS BROUGHT FORWARD AND SHOWN UNDER THE HEAD GEN ERAL RESERVE PER LAST ACCOUNT. THIS CLEARLY TRANSPIRES THAT THE ASSESSEE HAD NOT ADJUSTED THE BROU GHT FORWARD LOSSES/DEBIT BALANCE OF PROFIT AND LOSS M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS. 737 & 738 ASSESSMENT YEARS: 2009 POSITION OF GENERAL RESERVE AS ON MARCH 31, 2009 HE UNABSORBED BUSINESS L OSS BEFORE DEPRECIATION AROSE TO THE ASSESSEE COMPANY IN THE FINANCIAL YEARS 1996 -97, 1997- 98 AND 1998 THERE WAS NO GENERAL RESERVE IN THESE YEARS AS EVID ENT FROM THE AUDITED ACCOUNTS OF THE ASSESSEE COMPANY FOR THESE YEARS AS ENCLOSED AT PAGE 8 - NOW WE SHALL EXAMINE THE AUDITED FIGURES OF GENERAL RESERVE OF THE ASSESSEE COMPANY, AS NOTED ABOVE. WE NOTE THAT RESERVES AND SURPLUS SHOWN BY THE ASSESSEE COMPANY IN AUDITED ACCOUNTS I N SCHEDULE- II, AS NOTED ABOVE, DOES NOT CONTAIN ANY BALANCE IN THE HEAD GENERAL RESERVE T ILL 31.03.2006. NG TO AY 2007 -08),THE ASSESSEE COMPANY CREDITED A SUM IN THE GENERAL RESERV E ACCOUNT ON ACCOUNT OF WAIVER OF SECURED LOAN PURSUANT TO SCHEME OF ARRANGEMENT AND DEBITED A SUM OF ON ACCOUNT OF DEBIT BALANCE IN THE PROFIT AND LOSS ACCOUNT. HENCE, THE CLOSING BALANCE OF GENERAL RESERVES WAS RS.5,46,07,060/ 2017.IN THE IMMEDIATELY NEXT YEAR (FY 2007 - 08 RELATING TO AY 2 2007, THE AMOUNT OF RS.18,69,57,957/ - (AND NOT THE AMOUNT OF RS.5,46,07,060/ ) WAS BROUGHT FORWARD AND SHOWN UNDER THE HEAD GEN ERAL RESERVE PER LAST ACCOUNT. THIS CLEARLY TRANSPIRES THAT THE ASSESSEE HAD NOT ADJUSTED THE GHT FORWARD LOSSES/DEBIT BALANCE OF PROFIT AND LOSS ACCOUNT WITH THE GENERAL M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . 737 & 738 /KOL/2018 2009 -10 & 2013-14 P PP PA AA AG GG GE EE E | || | 8 88 8 OSS BEFORE DEPRECIATION AROSE TO THE 98 AND 1998 -99. HOWEVER, THERE WAS NO GENERAL RESERVE IN THESE YEARS AS EVID ENT FROM THE AUDITED ACCOUNTS - 62 OF THE PAPER NOW WE SHALL EXAMINE THE AUDITED FIGURES OF GENERAL RESERVE OF THE ASSESSEE RESERVES AND SURPLUS SHOWN BY THE II, AS NOTED ABOVE, DOES NOT CONTAIN ANY BALANCE IN THE HEAD GENERAL RESERVE T ILL 31.03.2006. IN THE YEAR CREDITED A SUM ON ACCOUNT OF WAIVER OF OF ARRANGEMENT AND DEBITED A SUM OF PROFIT AND LOSS ACCOUNT. HENCE, THE CLOSING BALANCE OF GENERAL RESERVES WAS RS.5,46,07,060/ - AS ON 31-03- 08 RELATING TO AY 2 008-09) ON 01- (AND NOT THE AMOUNT OF RS.5,46,07,060/ - ) WAS BROUGHT FORWARD AND SHOWN UNDER THE HEAD GEN ERAL RESERVE BALANCE AS PER LAST ACCOUNT. THIS CLEARLY TRANSPIRES THAT THE ASSESSEE HAD NOT ADJUSTED THE WITH THE GENERAL M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 9 99 9 RESERVE IN THE FINANCIAL YEAR 2006-07. THE CLOSING BALANCE OF GENERAL RESERVES AS ON 31-03-2008 WAS RS.5,78,30,647/- AFTER MAKING THE ADJUSTMENT FOR DEBIT BALANCE IN THE PROFIT AND LOSS A/C FOR THAT YEAR. A GAIN, IN THE IMMEDIATELY NEXT YEAR (FY 2008-09 RELATING TO AY 2009-10)ON 01-04- 2 008, THE AMOUNT OF RS. 18,69,57,957/- (AND NOT THE AMOUNT OF RS.5,78,30,64 7/-) WAS BROUGHT FORWARD AND SHOWN UNDER THE HEAD GENERAL RESERVE - BALANCE AS PER LAST ACCOUNT. THIS CLEARLY TRANSPIRES THAT THE ASSESSEE HAD NOT ADJUST ED THE BROUGHT FORWARD LOSS/DEBIT BALANCE OF PROFIT AND LOSS ACCOUNT WITH THE GENERAL RESERVE IN THE FINANCIAL YEAR 2007-08 RELATING TO AY 2008- 09. THE LD COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT EVEN IN FY 2017-18, THE AMOUNT OF RS.18,69,57,957/- WAS BROUGHT FORWARD AND SHOWN UNDER THE HEAD GENERAL RESERVE - BALANCE AS PER LAST ACCOUNT. A SUM OF RS.30,00,00,000/- WAS TRANSFERRED TO GENERAL RESERVES FROM RETAINED EARNI NGS AND THE CLOSING BALANCE AS ON 31-03-2018 WAS RS.21,69,57,957/-. IN FY 2018-19, THE OPENING BALANCE OF GENERAL RESERVES WAS RS.21,69,57,957/- AND AFTER TR ANSFERRING A SUM OF RS.1,30,42,043/- TO GENERAL RESERVES FROM RETAINED EARNINGS, THE BALANCE AS ON 31-03-2019 WAS RS.23,00,00,000/-.THE ABOVE AUDITED ACCOUNTS OF THE COMPANY CLEARLY SUGGESTS THAT THE ASSESSEE HAD NEVER ADJUST ED THE BROUGHT FORWARD LOSSES/DEBIT BALANCE OF PROFIT AND LOSS ACCOUNT WIT H THE GENERAL RESERVE TILL 31- 03-2019, BEING THE LAST AUDITED ACCOUNTS AS ON DATE . 14. WE NOTE THAT ALTHOUGH THE ASSESSEE HAS REDUCED THE AMOUNT OF DEBIT BALANCE OF PROFIT AND LOSS A/C FROM OPENING BALANCE OF RS. 18,69,57,957/- STANDING IN GENERAL RESERVES IN AYS 2007-08, 2008-09 AND 2009-1 0, HOWEVER THE SAME WAS DONE ONLY FOR ACCOUNTING PURPOSES TO CONFORM WITH T HE PRESENTATION OF ACCOUNTS GUIDELINES STIPULATED IN SCHEDULE VI OF THE COMPANI ES ACT, 1956. THE SCHEDULE VI OF THE COMPANIES ACT, 1956 STIPULATES THAT THE D EBIT BALANCE OF THE PROFIT AND LOSS ACCOUNT NEEDS TO BE REDUCED FROM GENERAL RESER VES AND THE CREDIT BALANCE OF THE PROFIT AND LOSS ACCOUNT TO BE ADDED TO THE GEN ERAL RESERVES. THE RELEVANT FORM OF BALANCE SHEET AS PER SCHEDULE VI OF THE COM PANIES ACT, 1956 IS REPRODUCED BELOW: M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 1 11 10 00 0 RESERVES AND SURPLUS: CAPITAL RESERVES. CAPITAL REDEMPTION RESERVE. SHARE PREMIUM ACCOUNT (CC). OTHER RESERVES SPECIFYING THE NATURE OF EACH RESERV E AND THE AMOUNT IN RESPECT THEREOF LESS: DEBIT BALANCE IN PROFIT AND LOSS ACCOUNT (IF ANY) SURPLUS, I.E. BALANCE IN PROFIT AND LOSS ACCOUNT AF TER PROVIDING FOR PROPOSED ALLOCATIONS,NAMELY:- DIVIDEND, BONUS OR RESERVES. PROPOSED ADDITIONS TO RESERVES. SINKING FUNDS.] AS EVIDENT FROM THE ABOVE, THE ASSESSEE HAD ACTUALL Y CARRIED FORWARD THE AMOUNT OF RS.18,69,57,957/- TO THE NEXT YEARS AND NOT THE NET AMOUNT AFTER ADJUSTMENT OF DEBIT BALANCE IN THE PROFIT AND LOSS ACCOUNT. IF TH E DEBIT BALANCE OF PROFIT AND LOSS ACCOUNT WOULD HAVE BEEN ADJUSTED AGAINST GENERAL RE SERVE IN THE FY 2007-08 (AY 2008-09), THEN THE OPENING BALANCE AS ON 01-04- 2008 WOULD NOT HAVE BEEN RS. 18,69,57,957/-. AS SUCH, IT IS CLEAR THAT THE A SSESSEE HAD NOT ADJUSTED THE BROUGHT FORWARD LOSSES OF EARLIER YEARS WITH THE GE NERAL RESERVES. HENCE, THE OBSERVATION OF THE LEARNED CIT(A) THAT THE ENTIRE B ROUGHT FORWARD LOSSES HAS BEEN ADJUSTED AGAINST GENERAL RESERVE IN BOOKS OF ACCOUN TS IS NOT CORRECT. 15. NOW WE SHALL EXAMINE WHETHER WAIVER OF A LOAN IS CAPITAL RECEIPT OR REVENUE RECEIPT? WE NOTE THAT THIS ISSUE IS NO LONGER RES INTEGRA . WAIVER OF A LOAN CERTAINLY CANNOT BE RECKONED AS TRANSACTION OF A KIND USUALLY TAKEN BUT IT IS AN ITEM OF EXCEPTIONAL AND NON-RECURRING NATURE. A CAPITAL SUR PLUS ON ACCOUNT OF WAIVER OF LOAN IN NO WAY CAN BE RECORDED AS OPERATIONAL PROFI T OR PROFIT WHICH IS TO BE INCLUDED IN THE PROFIT & LOSS ACCOUNT. FOR THAT WE RELY ON THE JUDGMENT OF THE COORDINATE BENCH OF ITAT, MUMBAI IN THE CASE OF JSW STEEL LTD VS ACIT REPORTED IN [2017] 82 TAXMANN.COM 210 (MUMBAI - TRI B.) WHEREIN IT WAS HELD AS FOLLOWS: CLAUSE (3)(XII)(B) OF PART II OF SCHEDULE ALSO SHOW S THAT WHAT IS TO BE INCLUDED IN THE PROFIT & LOSS ACCOUNT IS IN RESPECT OF TRANSACT IONS OF AN ACCOUNT, NOT USUALLY UNDERTAKEN BY THE COMPANY OR UNDERTAKEN IN CIRCUMST ANCES OF AN EXCEPTIONAL OR NON-RECURRING NATURE, IF MATERIAL IN AMOUNT. THIS C LEARLY INDICATES THAT ONLY THOSE ITEMS CAN BE REGARDED AS PART OF THE PROFIT & LOSS ACCOUNT WHICH IS IN RESPECT OF SIMILAR TYPE OF TRANSACTION AND NOT WHICH ARE EXCEP TIONAL IN NATURE. WAIVER OF A LOAN CERTAINLY CANNOT BE RECKONED AS TRANSACTION OF A KIND USUALLY TAKEN BUT IT IS M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 1 11 11 11 1 AN ITEM OF EXCEPTIONAL AND NON-RECURRING NATURE. A CAPITAL SURPLUS ON ACCOUNT OF WAIVER OF LOAN IN NO WAY CAN BE RECORDED AS OPERATI ONAL PROFIT OR PROFIT WHICH IS TO BE INCLUDED IN THE PROFIT & LOSS ACCOUNT. THERE CAN BE ABSOLUTELY NO QUESTION FOR ACCOUNTING IN THE PROFIT AND LOSS ACCOUNT SOMET HING WHICH CANNOT BE REGARDED AS INCOME, PROFIT OR GAIN. THIS VIEW IS FU RTHER REITERATED BY THE INTERPRETATION CLAUSE 7 APPEARING IN PART III OF SC HEDULE VI OF THE COMPANIES ACT. [PARA 15] A CAPITAL SURPLUS THUS, IN RESPECT OF WAIVER OF LOA N AMOUNT CANNOT BE REGARDED AS AMOUNT AVAILABLE FOR DISTRIBUTION THROUGH THE PROFI T & LOSS ACCOUNT. THIS FOLLOWS FROM THE VERY DEFINITION OF EXPRESSION CAPITAL RES ERVE' THAT IT MUST BE ACCOUNTED DIRECTLY TO THE CREDIT OF THE CAPITAL RESERVE ACCOU NT INSTEAD OF BEING CREDITED TO THE PROFIT & LOSS ACCOUNT SO AS TO ENSURE THAT IT IS NO T LEFT FOR BEING DISTRIBUTED THROUGH THE PROFIT AND LOSS ACCOUNT. [PARA 15] FROM ABOVE ANALYSIS AND DISCUSSION OF THE VARIOUS P ROVISIONS OF THE COMPANIES ACT AS WELL AS ACCOUNTING STANDARDS IT CAN BE OSTEN SIBLY DEDUCED THAT AN ITEM OF 'CAPITAL SURPLUS' CAN NEVER BE A PART OF PROFIT & L OSS ACCOUNT ALBEIT IT IS A PART OF A CAPITAL RESERVE AS THE WAIVER OF A LOAN TAKEN FOR A CQUISITION OF A CAPITAL ASSET IS A CAPITAL RECEIPT FALLING WITHIN THE CATEGORY OF CAPI TAL SURPLUS WHICH IS NON- RECURRING AND EXCEPTIONAL ITEM WHICH IS TO BE DISCL OSED AS PER THE REQUIREMENT OF THE COMPANIES ACT. FURTHER IT IS QUITE PERTINENT TO NOTE THAT, CLAUSE (II) OF EXPLANATION -I OF SECTION 115JB IS ALSO AN INDICATO R OF THE INTENTION OF THE LEGISLATURE AND ALSO THE SCHEME OF THE SECTION THAT THE INCOMES WHICH ARE TREATED AS EXEMPT UNDER THE ACT ARE TO BE EXCLUDED FROM THE PROFIT & LOSS ACCOUNT. [PARA 16] WAIVER OF LOAN, UTILIZED FOR PURCHASING PLANT AND M ACHINERY, REPRESENTED CAPITAL RECEIPT FORMING PART OF CAPITAL RESERVE AND, THUS, IT COULD NOT BE ADDED BACK WHILE COMPUTING BOOK PROFIT UNDER SECTION 115JB. AMOUNT B ORROWED BY A COMPANY ON CAPITAL ACCOUNT, I.E. FOR ACQUISITION OF A CAPITAL ASSET CANNOT BE RECKONED AS A NATURE OF TRADING LIABILITY AS ENVISAGED IN SECTION 41(1), AND, THEREFORE, ITS SUBSEQUENT REMISSION CANNOT BE DEEMED AS INCOME UND ER SAID PROVISION. IT IS ABUNDANTLY CLEAR FROM THE JUDGMENT OF THE CO ORDINATE BENCH (SUPRA) THAT WAIVER OF A LOAN IS A CAPITAL RECEIPT THEREFORE, IT CANNOT BE ADJUSTED WITH BROUGHT FORWARD BUSINESS LOSSES. BASED ON THE FACTS NARRATED ABOVE, WE NOTE THAT SEC TION 115-JB OF THE ACT IS A STAND-ALONE PROVISION WHICH DOES NOT CONTAIN ANY PR OVISION ABOUT CARRY FORWARD OF B/F LOSSES, WHILE COMPUTING THE BOOK PROFIT U/S 115 -JB OF THE ACT. AUDITED ACCOUNTS OF THE COMPANY CLEARLY SUGGESTS THAT THE A SSESSEE HAD NEVER ADJUSTED THE BROUGHT FORWARD LOSSES/DEBIT BALANCE OF PROFIT AND LOSS ACCOUNT WITH THE GENERAL RESERVE. IN VIEW OF THE ABOVE, IT IS CLEAR THAT THE SUM OF RS. 18,69,57,957/- CREDITED IN THE GENERAL RESERVE ACCOUNT WAS A CAPIT AL RECEIPT HENCE, IT SHOULD NOT M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 1 11 12 22 2 TO BE CONSIDERED IN COMPUTATION OF BOOK PROFIT U/S 115JB OF THE ACT.THE LD. A.O. FAILED TO TAKE INTO ACCOUNT THAT THE RESTRICTION, C ONTAINED IN SEC.72 OF THE I.T. ACT ON CARRYING FORWARD THE UNABSORBED BUSINESS LOSSES FOR MORE THAN 8 YEARS, DOES NOT APPLY IN COMPUTING THE ADJUSTED BOOK PROFIT U/S 115JB OF THE ACT.THEREFORE, WE DIRECT THE AO TO ALLOW THE CLAIM OF THE ASSESSEE FOR ADJUSTING THE UNABSORBED LOSSES OF RS.2,95,24,689/- WITH THE BOOK PROFITS UN DER SECTION 115-JB OF THE ACT, FOR THE YEAR. 16. IN THE RESULT, APPEAL OF THE ASSESSEE (IN ITA N O.737) IS ALLOWED. 17. NOW WE TAKE ASSESSEES APPEAL IN I.T. A. NO. 73 8/KOL/2018 FOR A.Y. 2013-14 WHEREIN THE GROUNDS OF APPEAL RAISED BY THE ASSESSE E ARE AS FOLLOWS: 1. THAT, ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD.CIT(A) ERRED IN SUSTAINING THE LD. A.O.S ORDER DISALLOWING PAYMENT OF REFERRAL FEES OF RS.39,38,184 TO THE DOCTORS BY THE APPELLANT. 1(A)THAT, WHILE DISMISSING THE APPELLANTS GROUND O N THIS ISSUE, THE LD.CIT(A) FAILED TO NOTICE THAT THE MEDICAL COUNCIL REGULATIO NS WERE APPLICABLE TO THE DOCTORS IN MEDICAL PROFESSION AND REGISTERED WITH T HE SAID COUNCIL AND NOT TO OTHERS LIKE THE APPELLANT HOSPITAL. 1(B)THAT SINCE NEITHER THE LD. A.O. NOR THE LD.CIT( A) ESTABLISHED THAT THE PAYMENT OF THE REFERRAL FEES TO THE DOCTORS BY THE APPELLANT WAS AN OFFENCE OR PROHIBITED BY ANY LAW AS PROVIDED IN EXPLANATION-2 BELOW SEC.37(L) OF THE I.T. ACT, THE LD.CIT(A) WAS NOT JUSTIFIED IN UPHOLDING T HE DISALLOWANCE OF RS.39,38,184 PAID BY THE APPELLANT TO THE DOCTORS F OR REFERRING THEIR PATIENTS TO THE APPELLANT HOSPITAL. 1(C)THAT THE CBDT CIRCULAR NO.5/2012 DATED 01.08.20 12 REFERRED TO AND RELIED ON BY THE LD.CIT(A) IN HIS APPELLATE ORDER DOES NOT REFLECT THE CORRECT LEGISLATIVE INTENTION OF THE EXPLANATION-2 BELOW SEC.37(L) OF T HE I.T. ACT AND THEREFORE THE SAME WAS NOT BINDING ON HIM. 1(D) THAT AS THE REFERRAL FEES PAID TO THE DOCTORS BY THE APPELLANT HOSPITAL WERE UNDOUBTEDLY FOR THE PROMOTION OF ITS BUSINESS INTER EST I.E. FOR COMMERCIAL EXPEDIENCY, THE LD.CIT(A) ERRED IN NOT DELETING THE DISALLOWANCE OF RS.39,38,184 MADE BY THE LD A.O. 1(E) THAT THE REQUIREMENTS OF COMMERCIAL EXPEDIENCY OVERRIDE EVEN THE ILLEGALITY OF EXPENSES AS PROVIDED IN EXPLANATION-2 BELOW SEC. 37(L) OF THE I.T. ACT AS HELD BY THE HONBLE TRIBUNAL IN THE CASE OF PRANAV CONSTRUC TION CO.-VS.-ACIT REPORTED IN 61-TTJ-145 (MUM.) AND CONSEQUENTLY THE REFERRAL FEE S PAID BY THE APPELLANT ON ACCOUNT OF COMMERCIAL EXPEDIENCY SHOULD HAVE BEEN H ELD AS ADMISSIBLE BY THE LD.CIT(A). M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 1 11 13 33 3 2. THAT, THE APPELLANT CRAVES LEAVE TO ALTER, AMEN D, RESCIND AND SUBSTITUTE ANY OF THE ABOVE-MENTIONED GROUNDS AND ADD ANY FURTHER GRO UNDS BEFORE OR AT THE TIME OF HEARING OF THE APPEAL. 18. BRIEF FACTS QUA THE ISSUE ARE THAT DURING THE S CRUTINY PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAD DEBITED RS. 55,65,464 /- IN PROFIT AND LOSS ACCOUNT ON ACCOUNT OF REFERRAL TO DOCTORS, UNDER THE HEAD M ISCELLANEOUS EXPENSES INCLUDED IN OTHER EXPENSES (VIDE NOTE NO. 28 TO TH E AUDITED FINANCIAL STATEMENTS). IN THIS REGARD, THE ASSESSEE WAS ASKED TO FURNISH DETAILED NOTES ON REFERRAL FEES PAID TO DOCTORS. THE ASSESSEE VIDE ITS WRITTEN SUBMISSION DATED 07.09.2015, STATED THAT: THIS TYPE OF EXPENSES GENERALLY INCURRED BY HOSPIT AL FOR ENCASHMENT OF IN-PATIENT AND OUTDOOR COLLECTION THR OUGH THOSE DOCTORS WHO ARE OFTEN REFER THE NAME OF THIS HOSPITAL TO THEIR PATI ENT FOR AVAILABLE OF BETTER TREATMENT. A LIST SHOWING NAME OF SUCH DOCTORS AND PAYMENTS MA DE TO THEM WAS ALSO SUBMITTED. FROM PERUSAL OF EXPLANATION AND DET AILS FURNISHED BY THE ASSESSEE IN RESPECT OF FEES PAID TO REFERRAL DOCTORS, IT W AS OBSERVED BY AO THAT THE PAYMENTS MADE TO THOSE DOCTORS FOR PROFESSIONAL SER VICES RENDERED BY THEM. ACCORDINGLY, A SHOW CAUSE NOTICE WAS ISSUED TO ASSE SSEE STATING THAT WHY SUCH PAYMENTS TO DOCTORS MAY NOT BE DISALLOWED U/S 37(1) OF THE I T ACT, 1961 BEING EXPENSES PROHIBITED BY LAW. IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE COMPANY FURNISHED A WRITTEN SUBMISSION STATING AS F OLLOWS: 'AT THE OUTSET, IT IS SUBMITTED THAT THE ENTIRE SUM OF RS. 55,65,464/- WAS NOT PAID TO THE DOCTORS. KINDLY FIND ENCLOSED TWO LISTS AS L IST-1 & LIST-2. AS PER LIST-1, A TOTAL AMOUNT OF RS. 39,38,184/- WAS PAID TO THE DOC TORS AND AS PER LIST-2 A TOTAL SUM OF RS. 16,27,280/- WAS PAID TO OTHERS CONSISTIN G OF INDIVIDUALS AS WELL AS AGENCIES WHO ARE NOT FROM MEDICAL PROFESSION. IT MA Y BE MENTIONED THAT A LARGE NUMBER OF PATIENTS FROM BANGLADESH COME TO KOLKATA FOR BETTER TREATMENT. THE AGENCIES/INDIVIDUALS CONTACT THEM FOR ARRANGING TRE ATMENT OF PATIENTS IN HOSPITAL AND SHELTER FOR THEIR ESCORTS AT REASONABLE PRICES. THEY GET COMMISSION FROM BOTH THE PATIENTS AND HOSPITALS. THE PERSONS WHO ARE NOT IN MEDICAL PROFESSION ( AS PER LIST-2) ARE NOT COVERED BY INDIAN MEDICAL COUNC IL REGULATION OR EXPLANATION BELOW SEC 37(1) OF THE I T ACT. THE CBDT CIRCULAR N O-5/2012 REFERRED TO BY YOU IS ALSO NOT APPLICABLE TO THEM. THE PAYMENTS TO SUC H AGENCIES/INDIVIDUALS BY THE ASSESSEE ARE FOR COMMERCIAL EXPEDIENCY. CONSEQUENTL Y, SUCH EXPENSES SHOULD BE ALLOWED AS BUSINESS PROMOTION EXPENSES. THE ASSESSEE SUBMITTED BEFORE AO THAT A TOTAL AMOUN T OF RS. 39,38,184/- WAS PAID TO THE DOCTORS ENGAGED IN MEDICAL PROFESSION WHO HA D RECOMMENDED THEIR OWN PATIENTS TO THE HOSPITAL FOR BETTER TREATMENT AND S UCH PAYMENTS ARE NOT COVERED BY M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 1 11 14 44 4 EXPLANATION BELOW SECTION 37(1) OF THE I. T. ACT AN D CONSEQUENTLY THE SAME SHOULD NOT BE DISALLOWED. HOWEVER, LD AO REJECTED THE CONT ENTION OF THE ASSESSEE AND HELD THAT PAYMENTS TO DOCTORS IS A CLEAR VIOLATION OF PROHIBITION MANDATED BY THE INDIAN MEDICAL COUNCIL VIDE THE AMENDMENT TO THE IM C (PROFESSIONAL CONDUCTS, ETIQUETTE AND ETHICS) REGULATION, 2012 DATED 10.12. 2009, AND, ACCORDINGLY, REFERRAL FEES PAID TO DOCTORS AMOUNTING TO RS. 55,6 5,464/- WAS DISALLOWED AND ADDED BACK TO TOTAL INCOME OF THE ASSESSEE. 19. ON APPEAL, LD. CIT(A) CONFIRMED THE ADDITION MA DE BY ASSESSING OFFICER. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE ASSES SEE IS IN APPEAL BEFORE US. 20. SHRI S.K. TULSIYAN, LD. COUNSEL FOR THE ASSESSE E, SUBMITTED BEFORE US THAT THE ENTIRE SUM OF RS. 55,65,464/- WAS NOT PAID TO THE D OCTORS. OUT OF TOTAL AMOUNT OF RS. 55,65,464/-, THE AMOUNT OF RS. 39,38,184/- WAS PAID TO THE DOCTORS AND A SUM OF RS. 16,27,280/- WAS PAID TO OTHERS CONSISTING OF INDIVIDUALS AS WELL AS AGENCIES WHO ARE NOT FROM MEDICAL PROFESSION. THE LD COUNSEL STATED THAT A LARGE NUMBER OF PATIENTS FROM BANGLADESH COME TO KOLKATA FOR BET TER TREATMENT. THE AGENCIES/INDIVIDUALS CONTACT THEM FOR ARRANGING TRE ATMENT OF PATIENTS IN HOSPITAL AND SHELTER FOR THEIR ESCORTS AT REASONABLE PRICES. THEY GET COMMISSION FROM BOTH THE PATIENTS AND HOSPITALS. THE PERSONS WHO ARE NOT IN MEDICAL PROFESSION ARE NOT COVERED BY INDIAN MEDICAL COUNCIL REGULATION OR EXP LANATION BELOW SEC 37(1) OF THE I. T. ACT. THE PAYMENTS TO SUCH AGENCIES/INDIVI DUALS BY THE ASSESSEE ARE FOR COMMERCIAL EXPEDIENCY. CONSEQUENTLY, SUCH EXPENSES SHOULD BE ALLOWED AS BUSINESS PROMOTION EXPENSES. THE ASSESSEE ADMITS TH AT A TOTAL AMOUNT OF RS. 39,38,184/- WAS PAID TO THE DOCTORS ENGAGED IN MEDI CAL PROFESSION WHO HAD RECOMMENDED THEIR OWN PATIENTS TO THE HOSPITAL FOR BETTER TREATMENT, SUCH PAYMENTS ARE NOT COVERED BY EXPLANATION BELOW SECTI ON 37(1) OF THE I T ACT AND CONSEQUENTLY THE SAME SHOULD NOT BE DISALLOWED. 21. ON THE OTHER HAND, THE LD. DR HAS PRIMARILY REI TERATED THE STAND TAKEN BY THE ASSESSING OFFICER WHICH WE HAVE ALREADY NOTED IN OU R EARLIER PARA AND THE SAME IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. 22. WE HEARD BOTH THE PARTIES AND CAREFULLY GONE TH ROUGH THE SUBMISSION PUT FORTH M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 1 11 15 55 5 ON BEHALF OF THE ASSESSEE ALONG WITH THE DOCUMENTS FURNISHED AND THE CASE LAWS RELIED UPON, AND PERUSED THE FACT OF THE CASE INCLU DING THE FINDINGS OF THE LD CIT(A) AND OTHER MATERIALS AVAILABLE ON THE RECORD. THE LD COUNSEL SUBMITTED THAT REFERRAL FEES OF RS.39,38,184/- WAS PAID TO THE DOC TORS WHO REFERRED THEIR PATIENTS TO THE ASSESSEE HOSPITAL AND THE SAID REFERRAL FEES WAS PAID ON ACCOUNT OF SALES PROMOTION OF THE ASSESSEE HOSPITAL AND AS SUCH THE SAID EXPENSE WAS FULLY ALLOWABLE U/S 37 OF THE ACT. THE LD COUNSEL FURTHER SUBMITTED THAT THE AMOUNT OF RS.39,38,184/- DEBITED UNDER THE ACCOUNT HEAD REFE RRAL TO DOCTORS HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE COMPANY WHICH, IN THE PRESENT CASE, RUNS AND OPERAT ES A HOSPITAL AND IS ACCORDINGLY ALLOWABLE AS DEDUCTION U/S 37 OF THE AC T WHILE COMPUTING ITS TOTAL INCOME FOR THE YEAR UNDER CONSIDERATION. ON THE OTHER HAND, LD DR SUBMITTED BEFORE US THAT A SSESSING OFFICER HAD RIGHTLY PLACED RELIANCE ON CIRCULAR NO.5/2005 DATED 01-08-2 012 ISSUED BY CBDT WHEREIN IT WAS CATEGORICALLY STATED THAT ANY KIND OF FREEBI ES GIVEN TO DOCTORS AND OTHER MEDICAL PROFESSIONALS BY A PHARMACEUTICAL COMPANY W AS NOT ALLOWABLE U/S 37(1) OF THE INCOME-TAX ACT. THE AO FURTHER HELD THAT PAY MENT OF REFERRAL FEES TO DOCTORS IS A CLEAR VIOLATION OF PROHIBITION MANDATE D BY THE INDIAN MEDICAL COUNCIL AND ACCORDINGLY HELD THAT REFERRAL FEES PAID TO THE DOCTORS AMOUNTING TO RS.39,38,184/- IS NOT ALLOWABLE EXPENDITURE U/S 37 OF THE ACT. THE LD COUNSEL STATED BEFORE US THAT AS PER THE RE GULATIONS FRAMED BY THE MEDICAL COUNCIL OF INDIA (HEREINAFTER REFERRED TO AS THE M CI) NAMELY, INDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS ) REGULATION, 2002 AND THE AMENDMENT MADE THERETO FROM TIME-TO- TIME, IT IS VE RY CLEAR THAT A MEDICAL PRACTITIONER SHALL NOT RECEIVE INTER ALIA ANY CASH OR MONETARY GRANT FROM ANY PHARMACEUTICAL AND ALLIED HEALTHCARE INDUSTRY IN IN DIVIDUAL CAPACITY UNDER ANY PRETEXT. HOWEVER, THE SAID RESTRICTION LIMITS ITSEL F AT THAT AND DOES NOT FURTHER PROHIBIT A PHARMACEUTICAL AND ALLIED HEALTHCARE INDUSTRY FROM MAKING PAYMENTS OF SUCH SUM ETC. TO MEDICAL PRACTITIONERS. THE MCI REGULATIONS HAS THUS PUT AN ETHICS PROHIBITION UPON THE MEDICAL PRACTITIONERS NOT TO A CCEPT FREEBIES LIKE GIFTS, FEE, M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 1 11 16 66 6 TRAVEL ARRANGEMENT ETC. BUT THE SAID MCI REGULATION S IS COMPLETELY SILENT SO FAR AS MEDICAL COMPANIES ( LIKE THE ASSESSEE COMPANY IN THE PRESENT CASE WHO R UNS A HOSPITAL) INCURRING EXPENSES ARE CONCERNED. THEREFORE, IT DO ES NOT PROHIBIT THE SAID COMPANIES FROM INCURRING SUCH EXPENDITURE FOR THE P URPOSE OF FURTHERANCE OF THEIR BUSINESS. NOWHERE IN THE SAID REGULATION IT HAS BEE N MENTIONED THAT SUCH REGULATION OR CODE OF CONDUCT WILL COVER PHARMACEUT ICAL OR HEALTHCARE SECTOR OR OTHER ALLIED INDUSTRY IN ANY MANNER. HENCE, THE AFO RESAID REGULATIONS OF MEDICAL COUNCIL APPLY ONLY IN CASE OF MEDICAL PRACTITIONERS AND NOT IN CASE OF HOSPITALS/PHARMACEUTICAL COMPANY. THE LD COUNSEL SU BMITTED THAT MCI ITSELF HAS ADMITTED BEFORE THE HONBLE DELHI HIGHCOURT THE CAS E OF MAX HOSPITAL US. MCI [IT APPEAL NOS. 6429 & 6428 (MUMBAI) OF 2012], THAT THE MCI REGULATIONS. 2002 HAS JURISDICTION TO TAKE ACTION ONLY AGAINST MEDICA L PRACTITIONERS AND NOT TO HEALTH SECTOR INDUSTRY. THE RELEVANT EXTRACT OF THE JUDGME NT IS QUOTED BELOW : THE PETITIONER'S GRIEVANCE IS TWOFOLD. FIRSTLY, TH AT SINCE THE MEDICAL COUNCIL OF INDIA (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002 (THE REGULATIONS) HAVE BEEN FRAMED IN EXERCISE OF THE PO WER CONFERRED UNDER SECTION 20-A READ WITH SECTION 33 (M) OF THE INDIAN MEDICAL COUNCIL ACT,1956, THESE REGULATIONS DO NOT GOVERN OR HAVE ANY CONCERN WITH THE FACILITIES, INFRASTRUCTURE OR RUNNING OF THE HOSPITALS AND SECONDLY, THAT THE ETHICS COMMITTEE OF THE MCI ACTING UNDER THE REGULATIONS HAD NO JURISDICTION TO PASS ANY DIRECTION OR JUDGMENT ON THE INFRASTRUCTURE OF ANY HOSPITAL WHIC H POWER RESTS SOLELY WITH THE CONCERNED STATE GOVT. THE CASE OF THE PETITIONER IS THAT THE PETITIONER HOSPITAL IS GOVERNED BY THE DELHI NURSING HOMES REGISTRATION AC T, 1953. IT IS URGED THAT IN FACT, AN INSPECTION WAS ALSO CARRIED OUT ON 22.07.2 011 BY DR. R.N. DASS, MEDICAL SUPERINTENDENT (NURSING HOME) UNDER THE DIR ECTORATE OF HEALTH SERVICES, GOVT, OF NCT OF DELHI AND THE NECESSARY E QUIPMENTS AND FACILITIES WERE FOUND TO BE IN ORDER WHICH NEGATES THE OBSERVA TIONS DATED 27.10.2012 OF THE ETHICS COMMITTEE OF THE MCI. IT IS ALSO THE PLE A OF THE PETITIONER HOSPITAL THAT THE PETITIONER WAS NOT PROVIDED AN OPPORTUNITY OF BEING HEARD AND THUS THE PRINCIPLES OF NATURAL JUSTICE WERE VIOLATED. 7. IN THE COUNTER AFFIDAVIT FILED BY THE RESPONDENTS, IT IS NOT DISPUTED THAT THE MCI UNDER THE 2002 REGULATIONS HAS JURISDICTION LIMITED TO TAKING ACTION ONLY AGAINST THE REGISTERED MEDICAL PRACTITIONERS. ITS PLEA HOWEVER, IS THAT IT HAS NOT PASSED ANY ORD ER AGAINST THE PETITIONER HOSPITAL THEREFORE; THE PETI TIONER CANNOT HAVE ANY GRIEVANCE AGAINST THE IMPUGNED 8. IT IS CLEARLY ADMITTED BY THE RESPONDENT THAT IT HA S NO JURISDICTION TO PASS ANY ORDER AGAINST THE PETITIONER HOSPITAL UNDER THE 2002 REGU LATIONS. IN FACT, IT IS STATED THAT IT HAS NOT PASSED ANY ORDER AGAINST THE PETITIONER HOS PITAL. THUS, I NEED NOT GO INTO THE QUESTION WHETHER THE ADEQUATE INFRASTRUCTURE FACILI TIES FOR APPROPRIATE POST-OPERATIVE CARE WERE IN FACT IN EXISTENCE OR NOT IN THE PETITI ONER HOSPITAL AND WHETHER THE PRINCIPLES OF NATURAL JUSTICE HAD BEEN FOLLOWED OR NOT WHILE PASSING THE IMPUGNED ORDER. SUFFICE IT TO SAY THAT THE OBSERVATIONS DATE D 27.10.2012 MADE BY THE ETHICS COMMITTEE DO REFLECT UPON THE INFRASTRUCTURE FACILI TIES AVAILABLE IN THE PETITIONER M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 1 11 17 77 7 HOSPITAL AND SINCE IT HAD NO JURISDICTION TO GO INT O THE SAME, THE OBSERVATIONS WERE UNCALLED FOR AND CANNOT BE SUSTAINED. 23. HAVING GONE THROUGH THE ABOVE NOTED JUDGMENT IN THE CASE OF MAX HOSPITAL (SUPRA), WE THAT REGULATION ISSUED BY MEDICAL COUNCIL OF IN DIA IS QUA THE DOCTORS/MEDICAL PRACTITIONERS AND NOT FOR THE PHARM ACEUTICAL COMPANIES. AS A LOGICAL COROLLARY TO IT, IF THERE IS ANY VIOLATION OR PROHIBITION AS PER MCI REGULATION IN TERMS OF SECTION 37(1), R.W. EXPLANATION 1, THEN IT IS ONLY MEANT FOR MEDICAL PRACTITIONERS AND NOT FOR PHARMACEUTICAL CO MPANIES OR OTHER ALLIED HEALTH CARE INDUSTRIES FOR CLAIMING THE EXPENDITURE. ACCOR DINGLY, INSOFAR AS THE ASSESSEE COMPANY IS CONCERNED THE IMPUGNED EXPENDITURE ON PA YMENT OF REFERRAL FEES TO THE DOCTORS CANNOT BE SAID TO BE IN VIOLATION TO THE AFORESAID REGULATIONS OF THE INDIAN MEDICAL COUNCIL. THE SAID EXPENDITURE HAS BE EN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF CARRYING ON ITS BUSI NESS. AT THE COST OF REPETITION, WE STATE THAT IN THE INS TANT CASE, THE LEARNED AO HAS DISALLOWED THE SAID PAYMENTS ON THE ALLEGED NOTION THAT THE SAID EXPENSE IS A CLEAR VIOLATION OF PROHIBITION MANDATED BY THE INDI AN MEDICAL COUNCIL. WE NOTE THAT AT THIS JUNCTURE IT WOULD BE BEFITTING TO DISC USS SECTION 37(1) OF THE ACT. SECTION 37 OF THE INCOME TAX ACT, 1961 IS A RESIDUA RY SECTION FOR ALLOWABILITY OF BUSINESS EXPENDITURE AND THE SAME IS GIVEN BELOW: 37. (1) ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CA PITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHO LLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALL OWEDIN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUS INESS OR PROFESSION. EXPLANATION 1.FOR THE REMOVAL OF DOUBTS,IT ISHEREB Y DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BEDEEMED TO HAVE BEEN INCURRED FOR THE PU RPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANC E SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE. EXPLANATION 2.FOR THE REMOVAL OF DOUBTS, IT IS HER EBY DECLARED THAT FOR THE PURPOSES OF SUBSECTION (1), ANY EXPENDITURE INCURRE D BY AN ASSESSEE ON THE ACTIVITIES RELATING TO CORPORATE SOCIAL RESPONSIBIL ITY REFERRED TO IN SECTION 135 OF THE COMPANIES ACT, 2013 (18 OF 2013) SHALL NOT BE D EEMED TO BE AN EXPENDITURE INCURRED BY THE ASSESSEE FOR THE PURPOSES OF THE BU SINESS OR PROFESSION. CONDITION FOR ALLOWANCE UNDER SECTION 37(1) OF THE ACT ARE AS FOLLOWS: M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 1 11 18 88 8 A. SUCH EXPENDITURE SHOULD NOT BE COVERED UNDER THE SP ECIFIC SECTION I.E. SECTIONS 30 TO 36. B. EXPENDITURE SHOULD NOT BE OF CAPITAL NATURE C. THE EXPENDITURE SHOULD BE INCURRED DURING THE PREVI OUS YEAR. D. THE EXPENDITURE SHOULD NOT BE OF PERSONAL NATURE. E. THE EXPENDITURE SHOULD HAVE BEEN INCURRED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OR PROFESSION. F. THE BUSINESS SHOULD BE COMMENCED. IF ALL THE ABOVE CONDITIONS ARE SATISFIED, THE ASSE SSEE IS ENTITLED TO CLAIM DEDUCTION U/S 37 OF THE ACT. FURTHER, THE DISALLOWANCE UNDER EXPLANATION 1 RESTS ON THE FOLLOWING CONDITIONS PRECEDENT: (1) IT SHOULD BE AN EXPENDITURE; AND (2) IT SHOULD HAVE BEEN INCURRED FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. THE WORD OFFENCE AND PROHIBITED BY LAW ARE NOT DEFINED UNDER THE INCOME-TAX ACT, 1961 HOWEVER, IT IS DEFINED IN SECTION 3(38) O F THE GENERAL CLAUSES ACT, 1897. IN THIS REGARD IT WOULD BE RELEVANT TO REFER HERE, THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS DESICCANT ROTORS INTERNATIONAL PVT. LTD [2012] 347 ITR 32 (DEL). IN THIS CASE, THE COURT OBSERVED AS FOLLOWS: DILATING ON THIS SUBMISSION, SHE ARGUED THAT THE E XPRESSION 'OFFENCE' AND 'PROHIBITED BY LAW' OCCURRING IN THE EXPLANATION TO SECTION 37(1) OF THE ACT ARE NOT DEFINED IN THE ACT. HOWEVER, SECTION 3(38) OF T HE GENERAL CLAUSES ACT, 1897, DEFINES 'OFFENCE' TO MEAN 'ANY ACT OR OMISSION MADE PUNISHABLE BY LAW FOR THE TIME BEING IN FORCE'. THE CALCUTTA HIGH COURT IN TH E CASE OF SUSANTA MUKHERJEE V. UNION OF INDIA [1975] 94 CWN 412 AFTER REFERRING TO SECTION 3(38) OF THE GENERAL CLAUSES ACT READ WITH ARTICLES 13(3), 366(10) AND 3 72(1) OF THE CONSTITUTION OF INDIA AND THE DECISION OF THE SUPREME COURT IN THE CASE OF EDWARD MILLS CO. LTD. V. STATE OF AJMER, AIR 1955 SC 25, OBSERVED IN PARA GRAPH 13 OF THE JUDGMENT: '13. IT IS ABUNDANTLY CLEAR FROM THE FOREGOING REFE RENCES TO VARIOUS PROVISIONS OF THE CONSTITUTION THAT A PERSON CANNOT BE CONVICTED OF AN OFFENCE EXCEPT FOR VIOLATION OF LAW IN FORCE AT THE TIME OF COMMISSION OF THE ACT CHARGED AS AN OFFENCE. THEREFORE, IN MY OPINION, THE WORD 'ANY LA W FOR THE TIME BEING IN FORCE' AS M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 1 11 19 99 9 OCCURRING IN SECTION 3(38) OF THE GENERAL CLAUSES A CT, 1897, MUST BE CONSTRUED AS 'ANY LAW FOR THE TIME BEING IN FORCE' IN INDIA. OBV IOUSLY, IT HAS NO REFERENCE TO ANY LAW OF OTHER COUNTRIES OF THE WORLD. 14. ACCORDING TO HER, SIMILARLY, THE EXPRESSION 'PR OHIBITED BY TAW' CAN ONLY MEAN PROHIBITED BY LAW IN FORCE IN INDIA. THE EXPRESSION 'PROHIBITED BY LAW' AS USED IN THE EXPLANATION TO SECTION 37(1) HAS THE SAME CONTEXTUAL IMPORT AS THE EXPRESSION 'FORBIDDEN BY LAW ' AS USED IN SECTION 2 3 OF THE INDIAN CONTRACT ACT, 1872. THEREFORE, LD COUNSEL SUBMITTED BEFORE US THAT IN T HE PRESENT CASE, ALL THE CONDITIONS PRESCRIBED IN SECTION 37 OF THE ACT ARE COMPLIED WITH. THE EXPLANATION TO SECTION 37(1) OF THE ACT IS NOT APPL ICABLE SINCE THE PAYMENT OF REFERRAL FESS IS NEITHER AN OFFENCE NOR PROHIBITED BY LAW. HENCE, THE SAID PAYMENT OF REFERRAL FEES TO DOCTORS IS AN ALLOWABLE EXPENSE U/S 37(1) OF THE ACT. 24. THE LD COUNSEL STATED THAT CBDT CIRCULAR REFER RED BY THE LEARNED AO HAS NO RELEVANCE IN THE PRESENT CASE SINCE THE SAID CIR CULAR IS NOT BACKED BY ANY ENABLING PROVISION EITHER UNDER THE INCOME TAX ACT OR UNDER THE INDIAN MEDICAL COUNCIL REGULATIONS AND AS SUCH IMPINGES ON THE CON DUCT OF THE PHARMACEUTICAL AND ALLIED HEALTH SECTOR INDUSTRIES IN CARRYING OUT ITS BUSINESS. FOR THAT LD COUNSEL RELIED ON THE JUDGMENT OF THE COORDINATE BE NCH OF THE ITAT, MUMBAI IN THE CASE OF ARISTO PHARMACEUTICALS (P.) LTD. VS ACIT REPORTED I N [2019] 107 TAXMANN.COM 119 (MUMBAI - TRIB.). IN THIS CASE, THE ENTIRE ISSUE OF PAYMENT OF REFERRAL FEES TO DOCTORS BY HEALTH INDUSTRY WAS DIS CUSSED IN DETAIL AND IT WAS HELD AS FOLLOWS: ON PERUSING THE REGULATIONS ISSUED BY THE MEDICAL C OUNCIL OF INDIA, IT IS FOUND THAT THE SAME LAYS DOWN THE CODE OF CONDUCT IN RESP ECT OF THE DOCTORS AND OTHER MEDICAL PROFESSIONALS REGISTERED WITH IT, AND ARE N OT APPLICABLE TO THE PHARMACEUTICALS OR ALLIED HEALTH SECTOR INDUSTRIES. THE SCHEME OF THE INDIAN MEDICAL COUNCIL ACT, 1956 NEITHER DEALS WITH NOR PR OVIDES FOR ANY CONDUCT OF ANY ASSOCIATION/SOCIETY AND DEALS ONLY WITH THE CON DUCT OF INDIVIDUAL REGISTERED MEDICAL PRACTITIONERS. IN THE BACKDROP OF THE AFORE SAID FACTS, IT EMERGES THAT THE APPLICABILITY OF THE MCI REGULATIONS WOULD ONLY COV ER INDIVIDUAL MEDICAL PRACTITIONERS AND NOT THE PHARMACEUTICAL COMPANIES OR ALLIED HEALTH SECTOR INDUSTRIES. PERUSAL OF THE CBDT CIRCULAR NO. 5/2012,DATED 1-8-2 012 REVEALS THAT THE FREEBIES' PROVIDED BY THE PHARMACEUTICAL COMPANIES OR ALLIED HEALTH SECTOR M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 2 22 20 00 0 INDUSTRIES TO MEDICAL PRACTITIONERS OR THEIR PROFES SIONAL ASSOCIATIONS IN VIOLATION OF THE PROVISIONS OF INDIAN MEDICAL COUNCIL (PROFES SIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002 SHALL BE INADMISSIBLE UND ER SECTION 37(1), AS THE SAME WOULD BE AN EXPENSE PROHIBITED BY THE LAW. HOWEVER, THE CENSURE/ACTION AS HAD BEEN SUGGESTED ON THE VIOLATION OF THE CODE OF COND UCT IS ONLY FOR THE MEDICAL PRACTITIONERS AND NOT FOR THE PHARMACEUTICAL COMPAN IES OR ALLIED HEALTH SECTOR INDUSTRIES. THUS, IT IS VIEWED THAT THE REGULATIONS ISSUED BY MCI ARE QUA THE DOCTORS/MEDICAL PRACTITIONERS REGISTERED WITH MCI, AND THE SAME SHALL IN NO WAY IMPINGE UPON THE CONDUCT OF THE PHARMACEUTICAL COMP ANIES. AS A LOGICAL COROLLARY TO IT, IF THERE IS ANY VIOLATION OR PROHI BITION AS PER MCI REGULATION IN TERMS OF EXPLANATION TO SECTION 37(1), THEN THE SAM E WOULD DEBAR THE DOCTORS OR THE REGISTERED MEDICAL PRACTITIONERS AND NOT THE PH ARMACEUTICAL COMPANIES AND THE ALLIED HEALTHCARE SECTOR FOR CLAIMING THE SAME AS AN EXPENDITURE. THE CBDT AS PER ITS CIRCULAR NO. 5/2012, DATED 1-8- 2012 HAD ENLARGED THE SCOPE AND APPLICABILITY OF INDIAN MEDICAL COUNCIL REGULAT ION, 2002, BY MAKING THE SAME APPLICABLE EVEN TO THE PHARMACEUTICAL COMPANIE S OR ALLIED HEALTHCARE SECTOR INDUSTRIES. IT IS VIEWED THAT SUCH AN ENLARG EMENT OF THE SCOPE OF MCI REGULATION TO THE PHARMACEUTICAL COMPANIES BY THE C BDT IS WITHOUT ANY ENABLING PROVISION EITHER UNDER THE INCOME TAX ACT OR UNDER THE INDIAN MEDICAL COUNCIL REGULATIONS. THE BURDEN IMPOSED BY THE CBDT VIDE ITS AFORESAID C IRCULAR NO. 5/2012, DATED 1-8-2012 ON THE PHARMACEUTICAL OR ALL IED HEALTH SECTOR INDUSTRIES, DESPITE ABSENCE OF ANY ENABLING PROVISION UNDER THE INCOME TAX LAW OR UNDER THE INDIAN MEDICAL COUNCIL REGULATIONS, CLEARLY IMP INGES ON THE CONDUCT OF THE PHARMACEUTICAL AND ALLIED HEALTH SECTOR INDUSTRIES IN CARRYING OUT ITS BUSINESS. THUS, IN THE ABSENCE OF ANY SANCTION OR AUTHORITY O F LAW ON THE BASIS OF WHICH IT COULD SAFELY BE CONCLUDED THAT THE EXPENDITURE INCU RRED BY THE ASSESSEE- COMPANY ON SALES PROMOTION EXPENSES BY WAY OF DISTRIBUTION OF ARTICLES TO THE STOCKISTS, DISTRIBUTORS, DEALERS, CUSTOMERS AND DOCTORS, IS IN THE NATURE OF AN EXPENDITURE WHICH HAD BEEN INCURRED FOR ANY PURPOSE WHICH IS EI THER AN OFFENCE OR PROHIBITED BY LAW IT IS CONCLUDED THAT THE SAME WOULD NOT BE H IT BY THE EXPLANATION TO SECTION 37(1). ALTERNATIVELY, IT IS VIEWED THAT IT IS A TR ITE LAW THAT A CBDT CIRCULAR WHICH CREATES A BURDEN OR LIABILITY OR IMPOSES A NEW KIND OF IMPARITY, CANNOT BE RECKONED RETROSPECTIVEL Y. IT A VIEWED THAT THOUGH A BENEVOLENT CIRCULAR MAY APPLY RETROSPECTIVELY, BUT A CIRCULAR IMPOSING A BURDEN HAS TO BE APPLY PROSPECTIVELY ONLY. THUS, IN THE BACKDROP OF THE AFORESAID SETTLED POSI TION OF LAW AS REGARDS THE PROSPECTIVE APPLICABILITY OF AN OPPRESSIVE CIRCULAR , IT IS VIEWED THAT AS THE CBDT AS PER ITS CIRCULAR NO. 5/2012, DATED 1-8-2012 HAD ENLARGED THE SCOPE OF INDIAN MEDICAL COUNCIL REGULATION, 2002, AND HAD MADE THE SAME APPLICABLE TO THE PHARMACEUTICAL COMPANIES, THUS THE SAME CANNOT BE R ECKONED TO HAVE A RETROSPECTIVE EFFECT. THUS, IN TERMS OF AFORESAID O BSERVATIONS IT IS VIEWED THAT THE AFOREMENTIONED CBDT CIRCULAR NO. 5/2012, DATED 1-8- 2012 WOULD NOT BE APPLICABLE TO THE CASE OF THE ASSESSEE FOR ASSESSME NT YEAR 2011-12. THUS, IN TERMS OF AFORESAID OBSERVATIONS IT IS CONC LUDED THAT THE ASSESSEE WAS DULY ENTITLED FOR CLAIM OF SALES PROMOTION EXPENSES INCU RRED ON THE DISTRIBUTION OF ARTICLES TO THE STOCKISTS, DISTRIBUTORS, DEALERS, C USTOMERS AND DOCTORS. THUS, THE ORDER OF THE COMMISSIONER (APPEALS) SUSTAINING THE DISALLOWANCE OF THE SALES PROMOTION EXPENSES IS SET ASIDE. M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 2 22 21 11 1 IN THIS VIEW OF THE MATTER AND CONSISTENT WITH VIEW TAKEN BY THE COORDINATE BENCH IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2011-12, IT IS VIEWED THAT THERE IS NO ERROR IN THE FINDINGS RECORDED BY THE COMMISSIONER (APPEALS) INSOFAR AS DELETION OF ADDITION MADE BY THE ASSESSING OFFICER TOWARDS S ALES PROMOTION EXPENSES AND HENCE, THE FINDINGS OF THE COMMISSIONER (APPEALS) A RE UPHELD AND THE APPEAL FILED BY THE REVENUE IS DISMISSED. [PARA 10] AS REGARDS APPEAL FILED BY THE ASSESSEE, SINCE THE TRIBUNAL HAD ALREADY CONSIDERED THE ISSUE AND DELETED TOTAL ADDITION MAD E BY THE ASSESSING OFFICER, BY FOLLOWING THE ORDER OF THE TRIBUNAL FOR ASSESSMENT YEAR 2011-12, THE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITION SUSTAINE D BY THE COMMISSIONER (APPEALS). [PARA 11] IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLO WED AND APPEAL FILED BY THE REVENUE IS DISMISSED. [PARA 12] 25. SIMILARLY, THE COORDINATE BENCH OF ITAT MUMBAI IN THE CASE OF DCIT VS PHL PHARMA (P.) LTD. REPORTED IN [2017] 78 TAXMANN.COM 36 (MUMBAI - TRI B.) HELD THAT REFERRAL FEES PAID TO DOCTORS IS AN ALLOWABLE EXPENSE U/S 37 OF THE ACT. RELEVANT EXTRACT OF THE JUDGMENT IS QUOTED BELOW: SECTION 37(1) OF THE INCOME-TAX ACT, 1961 - BUSINE SS EXPENDITURE - ALLOWABILITY OF (ILLEGAL EXPENSES) - ASSESSMENT YEAR 2010-11 - A SSESSEE WAS A PHARMACEUTICAL COMPANY ENGAGED IN BUSINESS OF PROVIDING PHARMA MAR KETING CONSULTANCY AND DETAILING SERVICES TO DEVELOP MASS MARKET FOR PHARM A PRODUCTS - DURING ASSESSMENT PROCEEDINGS, ASSESSING OFFICER NOTED THA T ASSESSEE HAD DEBITED ADVERTISEMENT AND SALES PROMOTION EXPENSES, CUSTOME R RELATIONSHIP MANAGEMENT EXPENSES, KEY ACCOUNT MANAGEMENT EXPENSES, GIFT ART ICLES AND COST OF FREE SAMPLES IN PROFIT AND LOSS ACCOUNT - ASSESSING OFFICER DISA LLOWED ABOVE EXPENDITURE IN TERMS OF EXPLANATION TO SECTION 37(1) IN VIEW OF CI RCULAR NO. 5 OF 2012; WHEREIN CBDT REFERRED TO AMENDMENT TO 'INDIAN MEDICAL COUNC IL REGULATIONS, 2002', BROUGHT FROM 10-12-2009, IMPOSING PROHIBITION OF ME DICAL PRACTITIONER AND THEIR PROFESSIONAL ASSOCIATIONS FROM TAKING ANY GIFT, TRA VEL FACILITY, HOSPITALITY, CASH OR MONETARY GRANT FROM PHARMACEUTICAL AND ALLIED HEALT H SECTOR INDUSTRIES - WHETHER MCI REGULATION 2002 PROVIDES LIMITATION/CURB/PROHIB ITION ONLY FOR MEDICAL PRACTITIONERS AND NOT FOR PHARMACEUTICAL COMPANIES AND HENCE IT COULD NOT HAVE HAD ANY PROHIBITORY EFFECT ON PHARMACEUTICAL COMPAN Y LIKE ASSESSEE - HELD, YES - WHETHER EXPENSES INCURRED BY ASSESSEE COULD NOT BE RECKONED AS FREEBIES GIVEN TO DOCTORS AS THEY WERE PURELY PROMOTIONAL MATERIALS W HICH WERE DISTRIBUTED TO DOCTORS FOR BRAND RECOGNITION AND NOT FOR PURPOSE O F GRANTING GIFT OR ANY OTHER FORM OF INDUCEMENT TO DOCTORS - HELD, YES WHETHER THUS EXPENDITURE BEING PURELY FOR BUSINESS PURPOSE HAD TO BE ALLOWED AS BU SINESS EXPENDITURE AND WERE NOT IMPAIRED BY EXPLANATION 1 TO SECTION 37(1) HE LD, YES [PARAS 6,8, 10 & 11] [IN FAVOUR OF ASSESSEE] FROM THE ABOVE JUDGMENTS OF THE COORDINATE BENCHES, WE NOTE THAT THE ACTION AS M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 2 22 22 22 2 HAD BEEN SUGGESTED ON THE VIOLATION OF THE CODE OF CONDUCT IS ONLY FOR THE MEDICAL PRACTITIONERS AND NOT FOR THE PHARMACEUTICAL COMPAN IES OR ALLIED HEALTH SECTOR INDUSTRIES. THUS, IT IS VIEWED THAT THE REGULATIONS ISSUED BY MCI ARE QUA THE DOCTORS/MEDICAL PRACTITIONERS REGISTERED WITH MCI, AND THE SAME SHALL IN NO WAY IMPINGE UPON THE CONDUCT OF THE PHARMACEUTICAL COMP ANIES. AS A LOGICAL COROLLARY TO IT, IF THERE IS ANY VIOLATION OR PROHIBITION AS PER MCI REGULATION IN TERMS OF EXPLANATION TO SECTION 37(1), THEN THE SAME WOULD D EBAR THE DOCTORS OR THE REGISTERED MEDICAL PRACTITIONERS AND NOT THE PHARMA CEUTICAL COMPANIES AND THE ALLIED HEALTHCARE SECTOR FOR CLAIMING THE SAME AS A N EXPENDITURE. IN VIEW OF THE ABOVE JUDICIAL PRECEDENTS, THE EXPENDITURE INCURRE D ON ACCOUNT OF REFERRAL FEES PAID TO DOCTORS IS ALLOWABLE AS DEDUCTION U/S 37(1) OF THE ACT. HENCE, WE DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS. 39,38,184/- PAID TO THE DOCTORS AS REFERRAL FEES. 26. IN THE RESULT, BOTH APPEALS OF THE ASSESSEE( IN ITA NO. 737 & 738/KOL/2018) ARE ALLOWED. ORDER PRONOUNCED IN THE COURT ON 11.12.2019 SD/- ( A.T.VARKEY ) SD/- (A.L.SAINI) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / DATE: 11/12/2019 ( SB, SR.PS ) COPY OF THE ORDER FORWARDED TO: 1. M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD. 2. DCIT, CIRCLE-11(2), KOLKATA 3. C.I.T(A)- 4. C.I.T.- KOLKATA. 5. CIT(DR), KOLKATABENCHES, KOLKATA. 6. GUARD FILE. TRUE COPY BY ORDER ASSIST ANT REGISTRAR ITAT, KOLKAT A BENCHES M/S PEERLESS HOSPITEX HOSPITAL & RESEARCH CENTRE LTD . ITA NOS.737 & 738/KOL/2018 ASSESSMENT YEARS:2009-10 & 2013-14 P PP PA AA AG GG GE EE E | || | 2 22 23 33 3