Commissioner Of Income Taxcorporate Circle 3 (2), Chennai v. M/S.vasantha Subramanian Hospitals Private Limited, New

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 04.09.2018 CORAM : The Hon'ble Mr.JUSTICE T.S.SIVAGNANAM ANDThe Hon'ble Mrs.JUSTICE V.BHAVANI SUBBAROYAN T.C. No.885 of 2016 Commissioner of Income TaxCorporate Circle 3 (2), Chennai. .. Appellant -vs- M/s.Vasantha Subramanian Hospitals Private Limited, New No.13, Old No.7,East Spur Tank Road, Chetpet, Chennai 600 031. .. Respondent Appeal filed under Section 260A of the Income Tax Act, 1961,againsttheorderdated22.04.2016passedinI.T.A.No.2345/Mds/2015 by the Income Tax Appellate Tribunal, 'A'Bench, Chennai, for the Assessment Year 2012-13 preferredagainst the order of the Commissioner of Income Tax (Appeals)-II, 121, Mahatma Gandhi Road, Chennai-34 dated 30/11/2015 in ITANo.415/2014-15-CIT(A)-11 against the order of the DeputyCommissioner of Income Tax Corporate Circle 3(2) Chennai-34dated 26/02/2015 in GIR No/PAN for the AssessmentYear 2012-2013. For Appellant:Mr.M.SwaminathanStng. CounselFor Respondent:M/s.P.Gnanasekaranand P.Madhavan (Judgment of the Court was delivered by T.S.SIVAGNANAM, J.) This appeal by the Revenue is against the order passed bythe Income Tax Appellate Tribunal, 'A' Bench, Chennai, inI.T.A.No. 2345/Mds/2015 for the Assessment Year 2012-13. Theappeal has been admitted vide order dated 11.01.2017 on thefollowing substantial questions of law: i. Whether on the facts and circumstances of the caseand in law, Tribunal was right and justified inholding that machinery not listed in New Appendix-I Depreciation Schedule – Part-III (xia) of IncomeTax Rules are also eligible for depreciation @40%? ii.Whether on the facts and circumstances of thecase and in law, Tribunal was right and justifiedin allowing deduction on payments made to doctorsfor referring patients for diagnosis as they areillegal payments prohibited by Indian MedicalCouncil (Professional Conduct, Etiquette andEthics) Regulations, 2002 ? iii.Whether on the facts and circumstances of thecase, the tribunal was right in deleting thedisallowance made under section 40A(3), holdingthat the turnover is huge and the expensesincurred by the assessee is meager and deleted theaddition without giving any reasons ? 2.The respondent-assessee is a private limited companyregistered under the Companies Act, 1956 and runs a multi-speciality hospital and in particular, specializing in cancertreatment. The assessee filed revised return of income dated25.09.2013 for the Assessment Year 2012-13 admitting taxableincome of Rs.3,35,22,730/-. The case was selected for scrutinyand assessment was completed under Section 143(3) of the IncomeTax Act, 1961 (hereinafter referred to as 'the Act'), vide orderdated 26.02.2015. In the said order, the Assessing Officerdisallowed higher depreciation on Life Saving Equipments;disallowed ESI payments; disallowed expenses incurred for giftof gold coins to Doctors; and disallowed cash payment aboveRs.20,000/- in a single day to the tune of Rs.3,25,000/- under Section 40A (3) of the Act. Aggrieved by the said assessmentorder, the assessee preferred appeal before the Commissioner ofIncome Tax (Appeals) [in short 'CIT (A)'], who by order dated30.11.2015 confirmed the order passed by the Assessing Officer.The assessee preferred appeal before the Tribunal and theTribunal by the order dated 22.04.2016 allowed the assessee'sappeal. This order is impugned before us. 3.We have heard Mr.M.Swaminathan, learned counsel for theappellant and M/s.P.Gnanasekaran and P.Madhavan, learnedcounsels appearing for the respondent-assessee. 4.Though the Assessing Officer had made disallowances underfour heads, only three issues have been raised by the Revenuebefore this Court, on which substantial questions of law havebeen framed. Section 40A (3) of the Act. Aggrieved by the said assessmentorder, the assessee preferred appeal before the Commissioner ofIncome Tax (Appeals) [in short 'CIT (A)'], who by order dated30.11.2015 confirmed the order passed by the Assessing Officer.The assessee preferred appeal before the Tribunal and theTribunal by the order dated 22.04.2016 allowed the assessee'sappeal. This order is impugned before us. 3.We have heard Mr.M.Swaminathan, learned counsel for theappellant and M/s.P.Gnanasekaran and P.Madhavan, learnedcounsels appearing for the respondent-assessee. 4.Though the Assessing Officer had made disallowances underfour heads, only three issues have been raised by the Revenuebefore this Court, on which substantial questions of law havebeen framed. 5.The first question to be decided is whether the Tribunalwas right and justified in holding that machinery not listed inNew Appendix-I Depreciation Schedule – Part-III (xia) of IncomeTax Rules are also eligible for depreciation. The AssessingOfficer held that the equipments on which depreciation at 40%was claimed are not listed in the list of Life Saving MedicalEquipments under the new Appendix-I Schedule Part-III, (xia) ofthe Income Tax Rules. The Assessing Officer held that there isno provision in the Act for allowing depreciation for like orsimilar things and the word 'being' used while listing the LifeSaving Equipments in the Act clearly shows that only equipmentsmentioned in the list alone can claim 40% depreciation. 6.The CIT (A) concurred with the Assessing Officer andpointed out that the assessee is not correct in stretching theclaim for any item even though it may be attached to a lifesaving equipment, as such items claimed are not expressly statedin the definition of 'life saving equipments'. 7.On appeal before the Tribunal, the Tribunal analysed theinformation placed before it in the form of a paper book and thecontention advanced by the assessee stating that the equipmentspurchased by the aseessee are life saving equipments even thoughthey may be slightly different from the items specified underthe Rules prescribing the rates of depreciation. The Tribunal,after examining the paper book and submissions, held that themachines acquired by the assessee though may not be identical tothe machinery mentioned in the Rules specifying the rates ofdepreciation, they appear to be similar in nature and sincedepreciation is a beneficial provision to the assessee, it has to be broadly viewed and applied beneficially to the assesseeand the equipments will either become obsolete in a short timeor will have a short life span. Therefore, the Tribunaldirected the Assessing Officer to allow the claim ofdepreciation at 40%. to be broadly viewed and applied beneficially to the assesseeand the equipments will either become obsolete in a short timeor will have a short life span. Therefore, the Tribunaldirected the Assessing Officer to allow the claim ofdepreciation at 40%. 8.Mr.M.Swaminathan, learned standing counsel, is right tothe extent that the Schedule under the Income Tax Rulesprescribing the rates of depreciation does not contain the itemsof machinery and equipments furnished by the assessee. Thequestion would be as to how the entry requires to beinterpreted. By way of illustration, if we take up one of theequipments listed in Part A III 3(xia) (d), the equipment isCobalt Therapy Unit. It is submitted by the learned counsel forthe assessee that the Cobalt Therapy Unit has no longer beenused and much advanced technology has come into place foreffective treatment of radiotherapy. It is the case of theassessee that they have procured the 5[th] generation linearparticle accelerator and the entire write-up of the equipmentwere placed before the Assessing Officer as well as the CIT (A)and the specific case of the assessee was that the tabulateditems furnished by the assessee were part of multi-specialityhospital and used in the life saving treatments provided forvarious patients. The tabulated items were part of life savingequipments used in the hospital and hence, should have beenconstrued as part of such equipments thereby vitiating thedecision in not granting a higher rate of depreciation.Further, the assessee pointed out that the items including thesoftware were used as part and parcel of the Cobalt TherapyUnit, which equipment is used for providing radiation treatmentand which equipment is finding place in the life savingequipment category for higher depreciation in the depreciationschedule. Though such a stand was taken by the assessee, noattempt was made by the appellate authority to examine thecorrectness of the statement nor perused the materials whichwere placed by the assessee before it. The CIT (A) merely wentby the schedule of equipment as found in the Appendix to theIncome Tax Rules. 9.In our considered view, the manner in which the AssessingOfficer and the CIT(A) have dealt with the issue is incorrect.When the assessee takes a specific stand stating that all theequipments are forming part of the life saving equipments, theDepartment would not be justified to high-off few of theequipments stating that the computer software, server, etc.,will not form part of life saving equipments. If such a narrowinterpretation is to be given, then the purpose and purport ofgranting higher rate of depreciation at 40% itself would standdefeated. Furthermore, we find that the Assessing Officer northe CIT (A) has rendered a finding that the stand taken by the assessee stating that the tabulated items form part of thelisted items in the schedule is either factually incorrect or awrong submission. Thus, the Assessing Officer as well as theCIT (A) did not examine the issue from that point of view. Thisexercise was done by the Tribunal and the Tribunal has gonethrough the paper book submitted by the assessee running about224 pages explaining the nature of equipment, purchase ofequipment, various write-up of the equipments, bills, vouchers,etc., and after having been satisfied that they all form part ofthe life saving equipments, granted the relief. Thus, we findthat the Tribunal was fully justified in granting the relief ofdepreciation at 40%. Hence, the finding rendered by theTribunal on the said issue is confirmed. assessee stating that the tabulated items form part of thelisted items in the schedule is either factually incorrect or awrong submission. Thus, the Assessing Officer as well as theCIT (A) did not examine the issue from that point of view. Thisexercise was done by the Tribunal and the Tribunal has gonethrough the paper book submitted by the assessee running about224 pages explaining the nature of equipment, purchase ofequipment, various write-up of the equipments, bills, vouchers,etc., and after having been satisfied that they all form part ofthe life saving equipments, granted the relief. Thus, we findthat the Tribunal was fully justified in granting the relief ofdepreciation at 40%. Hence, the finding rendered by theTribunal on the said issue is confirmed. 10.The second issue for consideration is whether theTribunal was justified in allowing deduction of payments made todoctors, who referred patients for diagnosis, as they areillegal payments and prohibited under the Medical Council(Professional Conduct, Etiquette and Ethics) Regulations, 2002.The Assessing Officer held that the assessee purchased goldcoins by making payment in cash and the AuthorisedRepresentative (Chartered Accountant) during the personalhearing, stated that the gifts are given to doctors and it isthe routine practice in medical industry. However, the list ofdetails to whom such gifts were given were not furnished by theassessee. In this factual background, the Assessing Officerreferred to the circular of the Central Board of Direct Taxes(CBDT) dated 01.08.2012 and held that freebies provided bypharmaceutical companies, diagnostic centres and others inmedical business to doctors is illegal and accordingly,disallowed the expenses, which were classified as 'marketingexpenses'. 11.The CIT (A), though referred to the contentions raised bythe assessee, proceeded to confirm the finding of the AssessingOfficer by referring to the Board's circular dated 01.08.2012. 12.On appeal before the Tribunal, the Tribunal held thatthere is no prohibition under the Act to make payments todoctors for the services rendered by them and the assessee hasgiven gifts to doctors by way of gold coins in appreciation oftheir services and it can be construed as fees paid in kind forthe services rendered by the doctors in the hospital and thepresumption of the Assessing Officer that the payments are madeto doctors for canvassing the patients cannot be acceptedwithout any cogent evidence and accordingly, directed theAssessing Officer to delete the addition of Rs.71,62,741/- madeon account of disallowance. 12.On appeal before the Tribunal, the Tribunal held thatthere is no prohibition under the Act to make payments todoctors for the services rendered by them and the assessee hasgiven gifts to doctors by way of gold coins in appreciation oftheir services and it can be construed as fees paid in kind forthe services rendered by the doctors in the hospital and thepresumption of the Assessing Officer that the payments are madeto doctors for canvassing the patients cannot be acceptedwithout any cogent evidence and accordingly, directed theAssessing Officer to delete the addition of Rs.71,62,741/- madeon account of disallowance. 13.Before the CIT (A), the assessee contended that thedisallowance of the expenses incurred especially the componentof expenses relatable to providing gifts to medical doctorscannot be made straightaway by applying the Board's circularwithout examination of the income tax file of the beneficiarymedical doctors and prayed that the CIT (A) may issueappropriate direction to the Assessing Officer for cross-verification. Further, the assessee submitted that thedisallowance of such expenses should not be construed asautomatic and the nature and circumstances of making/ incurringsuch expenses should be the paramount consideration for allowingsuch expenses as wholly and exclusively incurred for the purposeof business within the scope of Section 37(1) of the Act.Further, the assessee pointed out that the Assessing Officer hasnot ventured into examining the break-up of the marketingexpenses and proceeded to disallow the sum in its entirety,which defies logic. Though such a stand was taken by theassessee before the CIT (A), the same was not even dealt with bythe CIT (A). Before the Tribunal, similar contention was raisedand it was stated that the gifts were given to doctors inappreciation of the services rendered to patients and suchpayments/gifts are not prohibited by any regulation and theassessee being a hospital is not prohibited to advertise theirservices they are capable of rendering to the public at large.Before us, the learned counsel for the assessee pointed out thatthe gifts were given to the doctors who are employed by theassessee and not for the purpose of canvassing the patients andthe assessee is not a diagnostic centre, but a multi-specialityhospital specialising in cancer treatment. 14.In the light of the stand taken by the assessee, we areof the view that the CIT (A) ought to have made an exercise toverify the details and if necessary, directed cause ofverification to the same. However, such exercise was not doneby the CIT (A) nor by the Tribunal. Thus, we are of the viewthat the Tribunal was not justified in directing the AssessingOfficer to delete the addition. The learned counsel for theassessee would submit that the assessee has got entire detailswith them and they are ready to produce the details before theAssessing Officer. In the light of the above, so far as thesecond question is concerned, we are of the view that the matterrequires to be remanded to the Assessing Officer to consider thematerials that will be placed by the assessee to establish theirstand that gifts were given to their doctors and it is not aprohibited practice and it is not for the purpose of referringor canvassing patients. The assessing Officer shall afford anopportunity to the assessee and re-do the assessment under thesaid head. 15.The last issue for consideration is with regard to thedisallowance made under Section 40A(3) of the Act. The Tribunalallowed the assessee's appeal solely on the ground that theexpenditures were negligible considering the turnover of theassessee being Rs.39.00 crores. However, the Tribunal failed tonote that the assessee themselves stated that they have incurredexpenses towards consumables, repairs and maintenance, for whichbills and vouchers are available. Therefore, the Tribunalshould have remanded the matter for fresh consideration toexamine the documents available with the assessee towards theexpenditures and ought not to have straightaway deleted thedisallowance by referring to the turnover for the relevantassessment year. Therefore, the disallowance under Section 40A(3) is required to be re-done by the Assessing Officer. 16.For the reasons stated above, the Tax Case Appeal filedby the Revenue is partly allowed on the following terms:(1)The first question of law is answered against theRevenue and in favour of the assessee;(1)The first question of law is answered against theRevenue and in favour of the assessee; (2)As regards the second question of law, the findingrendered by the Tribunal is set aside and the matter isremanded to the Assessing Officer to consider thematerials that will be placed by the assessee toestablish their stand that gifts were given to theirdoctors and it is not a prohibited practice and it is notfor the purpose of referring or canvassing patients. TheAssessing Officer shall afford an opportunity to theassessee and redo the assessment in accordance with law.The substantial question of law is left open.rendered by the Tribunal is set aside and the matter isremanded to the Assessing Officer to consider thematerials that will be placed by the assessee toestablish their stand that gifts were given to theirdoctors and it is not a prohibited practice and it is notfor the purpose of referring or canvassing patients. TheAssessing Officer shall afford an opportunity to theassessee and redo the assessment in accordance with law.The substantial question of law is left open. (3)As far as the third question of law is concerned, thefinding of the Tribunal is set aside and the matter isremanded to the Assessing Officer for fresh considerationand to examine the documents available with the assesseetowards the expenditures and after affording anopportunity of personal hearing to the assessee, re-dothe assessment in accordance with law. The substantialquestion of law is, thus, left open.finding of the Tribunal is set aside and the matter isremanded to the Assessing Officer for fresh considerationand to examine the documents available with the assesseetowards the expenditures and after affording anopportunity of personal hearing to the assessee, re-dothe assessment in accordance with law. The substantialquestion of law is, thus, left open.No costs. Sd/- Assistant Registrar(CS VIII) //True Copy// Sub Assistant Registrar sra To 1.The Assistant Registrar, Income Tax Appellate Tribunal, 'A' Bench, Chennai.2.The Commissioner of Income Tax (Appeals), 121, Mahatma Gandhi Road, Chennai 600 034. 3.The Deputy Commissioner of Income Tax. Corporate Circle-3(2), Chennai-34.+3cc to Mr.P.Gnana sekaran, Advocate Sr.61017+1cc to Mr.M.Swaminathan, Advocate Sr.61372T.C. (A) No.885 of 2016spd[co]srg 1/10/2018