2013 (6) TMI 285 - AT - Income Tax

Legal and professional charges - whether the expenditure is capital and is eligible for amortisation u/s.35D? - Assessee is a company running a hospital got amalgamated with its sister concern with the approval of Hon ble High Court - As per AO in the absence of project wise classification, bills against which payments are made, services in specific obtained, the AO disallowed the expenditure on estimate basis - Held that - Order of the CIT(Appeals) is silent on the real nature of expenses. Since there is no finding on the basis of the material available on record that these expenses are revenue expenses, it would be just and proper to set aside the order of the CIT(A) and remand the issue to the AO for fresh consideration. The assessee will be at liberty to substantiate its claim for deduction by filing additional evidence. Disallowance on account of interest claimed - CIT(A) deleted the addition - Held that - The order of assessment is silent as to the basis on which the AO made the impugned disallowance. The submissions made before the CIT(A) by the assessee have not been controverted,thus it appears that the loans on which the interest was paid by the assessee were all used for the purpose of business and therefore no disallowance of interest could be made. It has not been demonstrated by the revenue that the borrowed funds on which interest was paid and claimed as deduction while computing the total income had not been used for the purpose of business of the assessee. In favour of assessee.

Issues Involved
1. Deletion of addition under the head legal and professional charges.
2. Deletion of disallowance on account of interest claimed.

Detailed Analysis

1. Deletion of Addition under the Head Legal and Professional Charges
Background:
The revenue appealed against the order of the CIT(A) relating to the assessment year 2008-09, challenging the deletion of an addition made by the Assessing Officer (AO) under the head legal and professional charges amounting to Rs.1,89,42,139/-. The AO had disallowed a sum of Rs.2,01,61,139/- out of the total legal and professional charges claimed by the assessee, due to lack of detailed information and contracts for the services rendered.

Assessee's Argument:
The assessee, a company running a hospital, explained that the increase in legal and professional charges was due to the expansion of its business and setting up new cancer care centers in various locations. The major expenses included remuneration to medical doctors, final settlement with a consultant doctor, retainer fees for various consultants, and professional fees to financial consultants. The assessee argued that these expenses were necessary for business operations and were not capital in nature.

CIT(A) Decision:
The CIT(A) allowed the claim of the assessee, stating that the expenses were incurred for the purpose of business expansion and were thus revenue expenses. However, a sum of Rs.15.24 lakhs was classified under section 35D of the Act, which allowed only 1/5th of this amount to be deducted in the current year, with the balance to be carried forward.

Revenue's Argument:
The revenue argued that the nature of the expenses was not properly analyzed by the CIT(A) and that some expenses, such as the payment to Dr. Vivek Sama, appeared to be capital in nature as they were related to acquiring shares.

Tribunal's Decision:
The Tribunal found that the CIT(A)'s order lacked detailed findings on the nature of the expenses and remanded the issue back to the AO for fresh consideration. The AO was directed to examine the issue afresh, allowing the assessee to provide additional evidence.

2. Deletion of Disallowance on Account of Interest Claimed
Background:
The AO disallowed interest expenses of Rs.58,64,449/- claimed by the assessee on the grounds that interest-free advances were made to sister concerns despite having interest-bearing borrowings.

Assessee's Argument:
The assessee argued that the advances to sister concerns were made out of its own funds, which included share capital, share premium, share application money, and reserves and surplus. These funds were sufficient to cover the advances, and the borrowings were for specific purposes, not available for general use.

CIT(A) Decision:
The CIT(A) accepted the assessee's explanation and deleted the disallowance, stating that the advances were made from the assessee's own funds and no interest was borne on these advances.

Revenue's Argument:
The revenue contended that the AO's disallowance was justified as the assessee had made interest-free advances despite having interest-bearing borrowings.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, noting that the AO did not provide a basis for the disallowance and the assessee had demonstrated that the borrowed funds were used for business purposes. The Tribunal dismissed the revenue's grounds on this issue.

Conclusion
The appeal by the revenue was partly allowed for statistical purposes, with the issue of legal and professional charges being remanded to the AO for fresh consideration, while the disallowance of interest expenses was upheld in favor of the assessee.

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