2018 (9) TMI 1414 - HC - Income Tax

Depreciation on machinery not listed in New Appendix-I Depreciation Schedule Part-III (xia) eligible for depreciation @ 40% - Held that - The manner in which the Assessing Officer and the CIT(A) have dealt with the issue is incorrect. When the assessee takes a specific stand stating that all the equipments are forming part of the life saving equipments, the Department would not be justified to high-off few of the equipments stating that the computer software, server, etc., will not form part of life saving equipments. If such a narrow interpretation is to be given, then the purpose and purport of granting higher rate of depreciation at 40% itself would stand defeated. Furthermore, we find that AO nor the CIT (A) has rendered a finding that the stand taken by the assessee stating that the tabulated items form part of the listed items in the schedule is either factually incorrect or a wrong submission. AO as well as the CIT (A) did not examine the issue from that point of view. This exercise was done by the Tribunal and the Tribunal has gone through the paper book submitted by the assessee running about 224 pages explaining the nature of equipment, purchase of equipment, various write-up of the equipments, bills, vouchers, etc., and after having been satisfied that they all form part of the life saving equipments, granted the relief. Thus, we find that the Tribunal was fully justified in granting the relief of depreciation at 40%. Hence, the finding rendered by the Tribunal on the said issue is confirmed. Deduction of payments made to doctors, who referred patients for diagnosis, as they are illegal payments and prohibited under the Medical Council (Professional Conduct, Etiquette and Ethics) - assessee contended that the disallowance of the expenses incurred especially the component of expenses relatable to providing gifts to medical doctors cannot be made straightaway by applying the Board s circular without examination of the income tax file of the beneficiary medical doctors - Held that - Tribunal was not justified in directing the Assessing Officer to delete the addition. The learned counsel for the assessee would submit that the assessee has got entire details with them and they are ready to produce the details before the Assessing Officer. In the light of the above, so far as the second question is concerned, we are of the view that the matter requires to be remanded to the Assessing Officer to consider the materials that will be placed by the assessee to establish their stand that gifts were given to their doctors and it is not a prohibited practice and it is not for the purpose of referring or canvassing patients. The assessing Officer shall afford an opportunity to the assessee and re-do the assessment under the said head.Regulations, 2002. Disallowance made under Section 40A(3) - Tribunal allowed the assessee s appeal solely on the ground that the expenditures were negligible considering the turnover of the assessee being ₹ 39.00 crores - Held that - Tribunal failed to note that the assessee themselves stated that they have incurred expenses towards consumables, repairs and maintenance, for which bills and vouchers are available. Therefore, the Tribunal should have remanded the matter for fresh consideration to examine the documents available with the assessee towards the expenditures and ought not to have straightaway deleted the disallowance by referring to the turnover for the relevant assessment year. Therefore, the disallowance under Section 40A(3) is required to be re-done by the Assessing Officer.

Summary

Issues Involved:

1. Eligibility for depreciation at 40% for machinery not listed in New Appendix-I Depreciation Schedule – Part-III (xia) of Income Tax Rules.
2. Deduction of payments made to doctors for referring patients for diagnosis, considering the legality under Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002.
3. Disallowance under Section 40A(3) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Eligibility for Depreciation at 40% for Machinery Not Listed in New Appendix-I Depreciation Schedule – Part-III (xia) of Income Tax Rules:

The Tribunal held that machinery not listed in the New Appendix-I Depreciation Schedule – Part-III (xia) of Income Tax Rules are eligible for depreciation at 40%. The Assessing Officer disallowed the higher depreciation on the grounds that the equipment was not listed under the specified life-saving medical equipment. The CIT (A) concurred with the Assessing Officer, stating that the items claimed were not expressly stated in the definition of 'life-saving equipment'. However, the Tribunal found that the machines acquired by the assessee, although not identical to those listed, appeared to be similar in nature. The Tribunal emphasized that depreciation is a beneficial provision and should be broadly applied. The Tribunal's decision was based on the examination of detailed documentation provided by the assessee, concluding that the equipment formed part of life-saving medical equipment. The High Court confirmed the Tribunal's finding, stating that the narrow interpretation by the Assessing Officer and CIT (A) was incorrect and the Tribunal was justified in granting the relief of depreciation at 40%.

2. Deduction of Payments Made to Doctors for Referring Patients for Diagnosis:

The Tribunal allowed the deduction of payments made to doctors, which were classified as 'marketing expenses'. The Assessing Officer disallowed these expenses, citing a CBDT circular that prohibits freebies to doctors, and classified these payments as illegal under the Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. The CIT (A) upheld this disallowance. However, the Tribunal found that the payments could be construed as fees in kind for services rendered by the doctors, and there was no evidence to support the presumption that the payments were for canvassing patients. The High Court noted that the CIT (A) and the Tribunal failed to verify the details of these payments. Consequently, it remanded the matter to the Assessing Officer to examine the materials provided by the assessee and determine if the gifts were given to their doctors and not for referring or canvassing patients.

3. Disallowance under Section 40A(3) of the Income Tax Act, 1961:

The Tribunal deleted the disallowance under Section 40A(3) on the ground that the expenditures were negligible compared to the assessee's turnover of ?39 crores. The Tribunal did not examine the documents related to the expenditures. The High Court found that the Tribunal should have remanded the matter for fresh consideration to verify the expenditures' documents. It held that the disallowance under Section 40A(3) needed to be re-examined by the Assessing Officer, who should consider the available documents and provide an opportunity for a personal hearing to the assessee.

Conclusion:

The High Court's judgment provided the following outcomes:
1. The first question of law was answered against the Revenue, confirming the Tribunal's decision to allow 40% depreciation.
2. The second question of law was remanded to the Assessing Officer for re-examination of the materials provided by the assessee regarding payments to doctors.
3. The third question of law was also remanded to the Assessing Officer for fresh consideration and verification of documents related to the disallowance under Section 40A(3).

The appeal was partly allowed, and the substantial questions of law regarding the second and third issues were left open for reconsideration.