Shhe Commissioner Of Income Tax, Delhi Ii, New Delhi v. M/S U.g.hospitals Pvt. Limited

IN THE HIGH COURT OF PUNJAB AND HARYANA AT |CHANDIGARH ITA No.680ot 2010 Date of decision: 16.3.2016 shhe Commissioner of Income Tax, Delhi II, New Delhi Appellant Vs. M/s U.G.Hospitals Pvt. Limited ..Respondent CORAM: HON’ BLE MR. JUSTICK AJAY KUMAR MITTAL HON’ BLE MRS. JUSTICK RAJ RAHUL GAR 1. Whether Reporters of local papers may be allowed to see the judgment?2. To be referred to the Reporters or not?YES 3. Whether the judgment should be reported in the Digest? Present: Ms. Urvashi Dhugga, Advocate for the appellant-revenue.Mr. Ajay Vohra, Sr. Advocate with Mr. Rohit Jain, Advocatefor the assessee in ITA Nos.680 and 730 of 2010)Mr. Ajay Vohra, Sr. Advocate with Mr. Rohit Jain, Advocatefor the assessee in ITA Nos.680 and 730 of 2010) Mr. Ashim Aggarwal, Advocate for the assessee in ITA No.288 of2O11.— Ajay Kumar Mittal,J. inThis order shall dispose of ITA Nos.680, 730 of 2010 and 288of 2011. ITA No.680 of 2010 has been filed by the revenue and ITA No.730of 2010 has been filed by the assessee against the same assessment orderdated 24.9.2009, Annexure A.III for the same assessment year 1.e. 2005-06whereas ITA No.288 of 2011 has been filed by the assessee against theorder dated 28.2.2011, Annexure A.3 for the assessment year 2006-07. The facts have been extracted from [TA No.680 of 2010. ?)ITA No.680 of 2010 has been filed by the revenue underSection 260A of the Income Tax Act, 1961 (in short, “the Act”) against theorder dated 24.9.2009, Annexure A.III passed by the Income Tax AppellateTribunal, Chandigarh Bench 'B' Chandigarh (in short, “the Tribunal”) inITA No.1057/CHANDI/2008, for the assessment year 2005-06, claimingfollowing substantial questions of law:- “Il. Whether, on the facts and in the circumstances of the case and inlaw, the Hon'ble Income Tax Appellate Tribunal was legallyjustified in deleting the entire disallowances under section 30(1)without adjudicating on Explanation | to Section 30?law, the Hon'ble Income Tax Appellate Tribunal was legallyjustified in deleting the entire disallowances under section 30(1)without adjudicating on Explanation | to Section 30? II. Whether, on the facts and in the circumstances of the case and inlaw, the Hon'ble Income Tax Appellate Tribunal was legallyjustified in deleting 50% of the disallowance sustained by theCIT(A) without giving a finding as to what was legally/factuallywrong in the order of the CIT(A). The Hon'ble ITAT 1s the lastfact finding authority and is bound to give an order which goesinto all the aspects of the case?law, the Hon'ble Income Tax Appellate Tribunal was legallyjustified in deleting 50% of the disallowance sustained by theCIT(A) without giving a finding as to what was legally/factuallywrong in the order of the CIT(A). The Hon'ble ITAT 1s the lastfact finding authority and is bound to give an order which goesinto all the aspects of the case? Ill. Whether, on the facts and in the circumstances of the case and inlaw, the Hon'ble Income Tax Appellate Tribunal was legallyjustified in deleting/giving relief of “a7,26,477/- of the quantumamount disallowed by the Assessing Officer under section36(1)(u1) when factually nothing was brought forward by theassessee that any amount was his own money and therefore 1ssquarely covered by the ratio laid down in M/s AbhishekIndustries Limited,OQX6 TTR 1?’law, the Hon'ble Income Tax Appellate Tribunal was legallyjustified in deleting/giving relief of “a7,26,477/- of the quantumamount disallowed by the Assessing Officer under section36(1)(u1) when factually nothing was brought forward by theassessee that any amount was his own money and therefore 1ssquarely covered by the ratio laid down in M/s AbhishekIndustries Limited,OQX6 TTR 1?’ 3.The primary issue in ITA No.730 of 2010 at the behest of theassessee 1S regarding disallowance of interest under Section 36(1 )(111) of thAct for the assessment year 2005-06. The same order has been followed inITA No.288 of 2011 filed by the assessee for the assessment year 2006-07. ITA No.680 of 2010 3.The primary issue in ITA No.730 of 2010 at the behest of theassessee 1S regarding disallowance of interest under Section 36(1 )(111) of thAct for the assessment year 2005-06. The same order has been followed inITA No.288 of 2011 filed by the assessee for the assessment year 2006-07. ITA No.680 of 2010 4AA few facts relevant for the decision of the controversy involvedas narrated in ITA No.680 of 2010 may be noticed. Return of incomedeclaring income of an2,27,/2,100/- was filed on 30.10.2005 by theassessee. The assessment was completed vide order under section 143(3) ofthe Act dated 18.12.2007, Annexure A.! at a total mcome of=3,24,71,901/-. The Assessing Officer made total addition of|96,99,80 1/(i.e. disallowance under section 37(1) - |VC67,28,214/-, borrowed capitalunder section 36(1)(i11) - |=a24, 21,587/-, mterest of |a50,000/- as capitalexpenditure and <a> lakhs on account of personal and inadmissibleexpenses). Aggrieved by the order, the assessee filed appeal before theCommissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated15.10.2008, Annexure A.II, the CIT(A) partly allowed the appeal of theassessee giving relief on disallowance of expenditure incurred on repair andrenovation of building at Lajpat Nagar amounting toTL33,64,107/- G.e. 50%of|a67,28,214/-) and relief on account of disallowance of interest undersection 36(1)(111) -LT7,26,477/- (out of=a24,21,587/-) and also a relief of=15,000/- out ofLT50,000/- was given. Aggrieved by the order, the revenueas well as the assessee filed appeals before the Tribunal. The Tribunal videorder dated 24.9.2009, Annexure A.III partly allowed the appeal of theassessee and dismissed the appeal filed by the revenue observing thatexpenses ofLT67,28,214/- incurred for the purpose of renovation of LajpatNagar Hospital, New Delhi were of revenue nature. In the matter ofdisallowance ota24,21,587/- made by the Assessing Officer on account ofclaim of interest expenses, the Tribunal affirmed the view taken by theCIT(A) and also confirmed the disallowance to the extent ofLT16,95,110/- and deleted the balance amount of|L7,26,477/-. According to the revenue,the assessee had taken huge unsecured loans ofLv21.78 crores by payinginterest on the same at the rate of 10.75%. However, at the same time, it hadnot charged the interest on the loans and advances given to various persons.Hence the instant appeals by the revenue and the assessee. 5.|We have heard learned counsel for the parties.6.The first two questions are inter-related and are regarding claimof expenditure of|a67,28,214/- incurred on repair and renovation of theLajpat Nagar Hospital. In respect of claim of expenditure ofa67,28,214/-incurred on repair and renovation of Lajpat Nagar Hospital, it has beencategorically recorded by the Tribunal that the expenditure had beenincurred by the assessee on the hospital building which had been taken onlease under an agreement dated 25.2.2004 between the assessee andMalhotra Heart Institute and Medical Research Centre Private Limited. Thisexpenditure had not been incurred either by way of demolition of oldstructure or construction of a new hospital, as recorded by the CIT(A). Afterexamining the entire material on record and the case law on the point, itwas concluded by the Tribunal that where the expenses are incurred towardsrepair of the premises taken on lease so as to make it fit for its businessactivity, such expenditure would fall within the expression of repair asappearing in section 30(a)(1) of the Act. In the present case, the impugnedexpenditure was held to be revenue in nature. The relevant findingsrecorded by the Tribunal read thus:- 78"We have considered the rival submissions, perused thematerial on record and the orders of the authorities below.The controversy as raised before us, essentially involves the 78"We have considered the rival submissions, perused thematerial on record and the orders of the authorities below.The controversy as raised before us, essentially involves the claim of expenditure of“a67,28,214/- representingexpenditure incurred on repair and renovation of LajpatNagar hospital. This expenditure has not been incurred eitherby way of demolition of old structure or construction of anew hospital, as brought out by the CIT(A). The revenue hasnot assailed the above finding before us in any manner,There is no specific plea in the grounds raised in the memoof appeal. Even the learned DR in the course of hearingbefore us has not disputed the above factual conclusionrecorded by the CIT(A) on the basis of any cogent material,Moreover, even the details of the expenditure as statedbefore us do not lead us to infer that such expenditure hasbeen incurred for construction of a new hospital..... 8.|It is not in dispute that the above expenditure had beenincurred on the hospital building which has been taken onlease by the assessee under an agreement dated 25.2.2004between assessee (party of the second part) and MalhotraHeart Institute & Medical Research Centre Pvt. Limited(Party of the first part)........... 10.On consideration of the above provisions, we find thatwhat has to be disallowed 1s capital expenditure. However,in the instant case, expenditure 1s towards repair of hospitaland not capital expenditure. ...... 15,From the above said judicial pronouncements, anirresistible conclusion is that where the expenses areincurred by the assessee towards repairs of the premisestaken on lease so as to make it fit for its business activity,such expenditure would fall within the expression of repairaS appearing in section 30(a)(1) of the Act. In the instantcase, there 1s nothing to distinct from the plea set up by theassessee that the impugned expenditure has not resulted in demolition of old structure and construction of a newstructure. The assessee has, therefore, been successful inestablishing that the impugned expenditure was revenue innature. The case laws referred to by the learned DR areprimarily in the context of the expression ‘current repairs’ asappearing in section 30(a)(11) of the Act whereas the instantcase 1S to be considered 1n the light of section 30(a)(iv) ofthe Act. Infact, the distinction between the presence ofexpression ‘repairs’ 1n section 30(a)(11) which covers the caseof rented premises and the expression “current repairs” 1nsection 30(a)(11) has been elaborately brought out by theHon'ble Delhi High Court in the case ofHigh Line Pens (P) Limited|(supra).” Ty.Nothing was shown that the said findings of the Tribunal areperverse. Accordingly, the first and second questions are answered againstthe revenue. 8.|With regard to the third question qua disallowance of interestot|=a24,21,587/- claimed by the assessee under section 36(1)(111) of the Act,which 1s common in all the three appeals, in the light of the judgment of theApex Court in Hero Cycles (P) Limited vs. CIT, Ludhiana,(2015) 281CTR 481 and judgment of this Court inCommissioner of Income Tax vs.Kapsons Associates,(2016) 381 ITR 204, the matter 1s remanded to theTribunal to decide afresh in accordance with law. In Hero Cycles (P)Limited'scase (supra), the Apex Court was considering the issue withregard to interest on borrowed capital (interest free loans). It was held thatonce it 1s established that there 1s nexus between the expenditure andpurpose of business, revenue cannot justifiably claim to put itself in armchair of businessman or in position of Board of Directors and assume role to circumstances of the case. It was recorded as under:- circumstances of the case. It was recorded as under:- "26. The expression "commercial expediency" 1s an expression owide import and includes such expenditure as a prudentbusinessman incurs for the purpose of business. Theexpenditure may not have been incurred under any legalobligation, but yet it 1s allowable as a business expenditure ifit was incurred on grounds of commercial expediency,wide import and includes such expenditure as a prudentbusinessman incurs for the purpose of business. Theexpenditure may not have been incurred under any legalobligation, but yet it 1s allowable as a business expenditure ifit was incurred on grounds of commercial expediency, 27. No doubt, as held in Madhav Prasad Jatia v. CIT [1979 (118)ITR 200 (SC)], 1f the borrowed amount was donated for somesentimental or personal reasons and not on the ground ofcommercial expediency, the interest thereon could not havebeen allowed under section 36(1)(111) of the Act. In MadhavPrasad's case [1979 (118) ITR 200 (SC)|, the borrowedamount was donated to a college with a view tocommemorate the memory of the assessee's deceased husbandafter whom the college was to be named, it was held by thiscourt that the interest on the borrowed fund in such a casecould not be allowed, as it could not be said that it was forcommercial expediency.ITR 200 (SC)], 1f the borrowed amount was donated for somesentimental or personal reasons and not on the ground ofcommercial expediency, the interest thereon could not havebeen allowed under section 36(1)(111) of the Act. In MadhavPrasad's case [1979 (118) ITR 200 (SC)|, the borrowedamount was donated to a college with a view tocommemorate the memory of the assessee's deceased husbandafter whom the college was to be named, it was held by thiscourt that the interest on the borrowed fund in such a casecould not be allowed, as it could not be said that it was forcommercial expediency. 28. Thus, the ratio of Madhav Prasad Jatia's case [1979 (118) ITR200 (SC)] 1s that the borrowed fund advanced to a third partyShould be for commercial expediency if it 1s sought to beallowed under section 36(1 )(111) of the Act200 (SC)] 1s that the borrowed fund advanced to a third partyShould be for commercial expediency if it 1s sought to beallowed under section 36(1 )(111) of the Act 29. In the present case, neither the High Court nor the Tribunalnor other authorities have examined whether the amountadvanced to the sister concern was by way of commercialexpediency. 30. It has been repeatedly held by this court thatthe expression "for the purpose of business" 1s wider 1n scopethan the expression "for the purpose of earning profits” videCIT v. Malayalam Plantations Ltd. [1964 53 ITR 140 (SC),CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [197182 ITR 166 (SC)], etc."nor other authorities have examined whether the amountadvanced to the sister concern was by way of commercialexpediency. 30. It has been repeatedly held by this court thatthe expression "for the purpose of business" 1s wider 1n scopethan the expression "for the purpose of earning profits” videCIT v. Malayalam Plantations Ltd. [1964 53 ITR 140 (SC),CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [197182 ITR 166 (SC)], etc." In the process, the Court also agreed that the view taken by the Delhi High Court in ‘CIT v. Dalmia Cement (B.) Ltd.’[2002 (254) ITR 377] wherein the High Court had held thatOnce it 1S established that there 1s nexus between theexpenditure and the purpose of business (which need notnecessarily be the business of the assessee itself), theRevenue cannot justifiably claim to put itself in the arm-chairof the businessman or in the position of the Board ofDirectors and assume the role to decide how much 1sreasonable expenditure having regard to the circumstances ofthe case. It further held that no businessman can be compelled tomaximize his profit and that the income tax authorities mustput themselves in the shoes of the assessee and see how aprudent businessman would act, In the process, the Court also agreed that the view taken by the Delhi High Court in ‘CIT v. Dalmia Cement (B.) Ltd.’[2002 (254) ITR 377] wherein the High Court had held thatOnce it 1S established that there 1s nexus between theexpenditure and the purpose of business (which need notnecessarily be the business of the assessee itself), theRevenue cannot justifiably claim to put itself in the arm-chairof the businessman or in the position of the Board ofDirectors and assume the role to decide how much 1sreasonable expenditure having regard to the circumstances ofthe case. It further held that no businessman can be compelled tomaximize his profit and that the income tax authorities mustput themselves in the shoes of the assessee and see how aprudent businessman would act, The authorities must not look at the matter from their ownview point but that of a prudent businessman.” 9Further, 1n Kapson Associates'scase (supra), while considering|disallowance of interest under section 36(1)(111) of the Act, it was recordedas under:- “The Commissioner of Income Tax (Appeals) and theTribunal found as a matter of fact that the company hadinterest free advances from its directors/shareholders and themembers of their families amounting tov315.11 lakhs asagainst the interest free advances made by the companyageregating to.Ly219.72 lakhs as on March 31, 2008. In viewthereof, it was rightly inferred that the respondent/assesseehad enough interest free funds which would cover theadvances also made interest free. The matter 1s covered against the appellant in thisregard by our order and judgment dated July 16, 2015 inITA No.413 of 2014, Gurdas Garg vs. CIT(Appeals) [2016]6 ITR-OL 101 (P&H) where we held as under (page 108):- 10. “It is a little difficult to understand these observations. Ithas not been denied that interest free funds wereavailable. Nor has it been denied that interest freeadvances were made by the appellant. In fact, the latterhas been accepted by the Assessing Officer. Thecontention that the appellant has not established that itwas the interest free funds that were actually advancedas interest free advances is without substance. Moneyhas no identity. So long it 1s established that the interestfree advances are made by an assessee who hasadequate free reserves, it 1s sufficient to establish thatthe amounts advanced interest free cannot be added tothe assessee's income. It was not contended that theinterest free advances exceeded the interest free fundsavailable with the appellant. Nor was it established thata particular advance received was in turn advanced bythe assessee interest free. Questions Nos. | to 3 are therefore, answered against theappellant.” In view of the above, all the appeals are disposed of in the manner indicated above. (Ajay Kumar Mittal)Judge March 16, 2016 (Raj Rahul Garg)Judge