2019 (12) TMI 968 - AT - Income Tax

Rectification petition u/s 154 - rectify the computation of adjusted book profits and allow the deduction being lower of brought forward loss and unabsorbed depreciation - HELD THAT - The assessee had actually carried forward the amount of ₹ 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 the debit balance of profit and loss account would have been adjusted against General Reserve in the FY 2007-08 (AY 2008-09), then the opening balance as on 01-04-2008 would not have been ₹ 18,69,57,957/-. As such, it is clear that the assessee had not adjusted the brought forward losses of earlier years with the General Reserves. Hence, the observation of the learned CIT(A) that the entire brought forward losses has been adjusted against General Reserve in books of accounts is not correct. 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 surplus on account of waiver of loan in no way can be recorded as operational profit or profit which is to be included in the profit loss account. See M/S. JSW STEEL LIMITED 2017 (4) TMI 47 - ITAT MUMBAI as held 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 section 115-JB is a stand-alone provision which does not contain any provision 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 assessee had never adjusted the brought forward losses/debit balance of Profit and Loss account with the General Reserve. Sum of ₹ 18,69,57,957/- credited in the General Reserve account was a Capital Receipt hence, it should not 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, contained 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 ₹ 2,95,24,689/- with the book profits under section 115-JB of the Act, for the year. Payment of Referral fees to the Doctors by the Appellant - allowable deduction u/s 37 - HELD THAT - The action as had been suggested on the violation of the code of conduct is only for the medical practitioners and not for the pharmaceutical companies 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 companies. 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 debar the doctors or the registered medical practitioners and not the pharmaceutical companies and the allied healthcare sector for claiming the same as an expenditure. In view of the above judicial precedents, the expenditure incurred 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 paid to the Doctors as referral fees.

Summary

Issues Involved:
1. Rejection of the assessee's rectification petition for set-off of brought forward unabsorbed business losses in computing Adjusted Book Profit under Section 115JB of the Income Tax Act.
2. Disallowance of referral fees paid to doctors as a business expense under Section 37(1) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Set-off of Brought Forward Unabsorbed Business Losses:

The assessee appealed against the rejection of their rectification petition concerning the computation of Adjusted Book Profit for the assessment year 2009-10. The primary contention revolved around the non-allowance of brought forward unabsorbed business losses from assessment years 1996-97, 1997-98, and 1998-99, totaling ?2,95,24,689, in terms of Section 115JB of the Income Tax Act.

The Assessing Officer (AO) rejected the claim on the ground that these losses arose more than 8 years back and thus could not be set off against the net profit for the assessment year 2009-10. The AO's decision was based on the provisions of Section 72, which restricts the carry forward of business losses beyond 8 years. The CIT(A) upheld the AO's decision but on different grounds, stating that the unabsorbed losses had been adjusted against the General Reserve in the assessee's books of accounts.

The tribunal noted that Section 115JB starts with a non-obstante clause ("Notwithstanding anything contained in any other provisions of this Act"), indicating that the provisions of Section 72 do not apply to the computation of book profits under Section 115JB. The tribunal also found that the CIT(A) misunderstood the accounting treatment of the General Reserve. The tribunal clarified that the waiver of a loan, which was credited to the General Reserve, is a capital receipt and should not be considered in the computation of book profit. Consequently, the tribunal directed the AO to allow the set-off of the unabsorbed business losses totaling ?2,95,24,689 against the book profits for the assessment year 2009-10.

2. Disallowance of Referral Fees to Doctors:

The second issue pertained to the disallowance of referral fees amounting to ?39,38,184 paid to doctors by the assessee hospital for the assessment year 2013-14. The AO disallowed the expense under Section 37(1) of the Income Tax Act, citing that such payments were in violation of the Indian Medical Council (Professional Conduct, Etiquette, and Ethics) Regulations, 2002, as amended in 2009. The CIT(A) upheld the AO's decision, relying on CBDT Circular No. 5/2012, which disallowed expenses on freebies to doctors.

The tribunal examined the applicability of the MCI regulations and noted that these regulations apply only to medical practitioners and not to hospitals or pharmaceutical companies. The tribunal referred to the judgment in the case of Max Hospital vs. MCI, where it was held that the MCI regulations govern the conduct of individual medical practitioners and not hospitals. The tribunal also cited the judgments of the ITAT Mumbai in the cases of Aristo Pharmaceuticals (P.) Ltd. vs. ACIT and DCIT vs. PHL Pharma (P.) Ltd., which held that the MCI regulations do not apply to pharmaceutical companies and that expenses incurred for business promotion are allowable under Section 37(1).

Based on these precedents, the tribunal concluded that the referral fees paid to doctors by the assessee hospital were incurred wholly and exclusively for the purpose of business and were not prohibited by law. Therefore, the tribunal directed the AO to allow the deduction of ?39,38,184 as a business expense under Section 37(1).

Conclusion:

The tribunal allowed both appeals of the assessee, directing the AO to:
1. Allow the set-off of unabsorbed business losses totaling ?2,95,24,689 against the book profits for the assessment year 2009-10.
2. Delete the disallowance of ?39,38,184 paid as referral fees to doctors for the assessment year 2013-14.