2023 (7) TMI 981 - AT - Income Tax

Deduction u/s 80IB(11C) - addition relating to trading in medicines and surgical equipments - CIT-A deleted the addition - As per DR the words used in section 80IB(11C) are derived from and not attributable to - HELD THAT - Since pharmacy is an integral part of running of hospitals looking to that instant facts the Assessing Officer has correctly disallowed the deduction in respect of income earned from trading in medicines. In response the counsel for the assessee placed reliance on the observations by ld. CIT(A) in the appellate order. The counsel for the assessee submitted that the assessee is a multi-specialist hospital having over 100 beds. In such cases running of inhouse pharmacy is essential for running of hospitals since substantial medicines are required on day to day basis in treating the patients. A hospital of such large operations cannot run unless and until there is inhouse pharmacy to cater to the needs of inhouse patients No infirmity in the observations made by the CIT(A) while allowing the appeal of the assessee on this issue. As respectfully following the observations in the case of Eureka Medical Pvt. Ltd. 2018 (8) TMI 267 - ITAT NAGPUR we are of the considered view that the assessee is eligible to claim deduction u/s. 80IB(11C) of the Act in respect of inhouse pharmacy maintained by the assessee within the premises of hospital. We are in agreement with the documents taken by the counsel for the assessee that in case of multi-speciality hospital having over 100 beds it is not feasible to efficiently run the hospital without having an inhouse pharmacy to cater to the needs of inhouse patients. Disallowance u/s. 14A - CIT(A) allowed the appeal of the assessee on the ground that during the year under consideration the assessee had not earned exempt income during the year under consideration - HELD THAT - We are of the considered view that there is no infirmity in the order of CIT(A) as during the year under consideration no exempt income was earned by the assessee. In a recent ruling passed in the case of Era Infrastructure India Ltd. 2022 (7) TMI 1093 - DELHI HIGH COURT it has been held that the amendment brought in by the Finance Act 2022 to section 14A by inserting a non-obstante clause and Explanation will take effect from 01-04-2022 and cannot be presumed to have retrospective effect. Therefore for assessment year 2013-14 no disallowance could be made u/s. 14A if no exempt income was earned by the assessee. In the case of Asian Grantio India Ltd 2019 (10) TMI 1193 - ITAT AHMEDABAD the Ahmedabad ITAT held that Disallowance of expenses under section 14A read with rule 8D of 1962 Rules cannot be made in absence of exempt income. Decided in favour of revenue. Proportionate disallowance - assessee had advanced interest free loans to its group companies - HELD THAT - Looking into the facts of the case in the interest of justice the issue is being restored to the file of AO to ascertain whether the aforesaid amount of interest free loan given by the assessee to its group companies is out of own funds or out of interest bearing funds. In the result the issue is being restored to the file of the Assessing Officer with the above directions.

Summary

Issues Involved:
1. Deletion of addition relating to trading in medicines and surgical equipment.
2. Allowance of appeal on disallowance under Section 14A of the Income Tax Act, 1961.
3. Allowance of appeal on proportionate disallowance of interest.

Summary:

Issue 1: Deletion of addition relating to trading in medicines and surgical equipment
The assessee, engaged in running a multi-specialist hospital, claimed a deduction under Section 80IB(11C) of the Income Tax Act for profits from operating and maintaining the hospital. The Assessing Officer (AO) disallowed the deduction for profits amounting to Rs. 2,47,82,051 from trading in medicines and surgical equipment, arguing that such profits were not derived from the business of operating and maintaining the hospital. The AO relied on the Supreme Court's decision in Cambay Electronic Supply Industrial vs. CIT, which distinguished between profits "derived from" and "attributable to" a business. On appeal, the CIT(A) allowed the deduction, stating that the pharmacy is integral to the hospital's operations and citing the ITAT Nagpur's decision in Eureka Medicare (P) Ltd. The Tribunal upheld the CIT(A)'s decision, agreeing that in-house pharmacy profits are essential for hospital operations and thus eligible for deduction under Section 80IB(11C).

Issue 2: Allowance of appeal on disallowance under Section 14A of the Income Tax Act, 1961
The AO disallowed Rs. 19,25,400 under Section 14A, arguing that the assessee had invested in equities without disallowing related expenses. The CIT(A) allowed the appeal, noting that the assessee did not earn exempt income during the year. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's rulings in Chettinad Logistics (P.) Ltd. and other cases, which established that Section 14A cannot be invoked if no exempt income was earned during the relevant assessment year. The Tribunal also noted that the amendment to Section 14A by the Finance Act, 2022, is prospective and not applicable to the assessment year in question.

Issue 3: Allowance of appeal on proportionate disallowance of interest
The AO disallowed Rs. 15,56,788 of interest, arguing that the assessee advanced interest-free loans to group companies without proving commercial expediency. The CIT(A) allowed the appeal, stating that the loans were used for the day-to-day operations of the group companies and were commercially expedient. The Tribunal restored the issue to the AO to verify whether the loans were given out of the assessee's own funds or interest-bearing funds, emphasizing the need for a factual determination.

Conclusion:
The Tribunal dismissed the Department's appeal on the first two issues and restored the third issue to the AO for further verification. The appeal of the Department was partly allowed for statistical purposes.