2023 (10) TMI 1446 - HC - Income Tax

Disallowance made u/s 40A(2) - Slump Sale Transfer of hospital as a going concern - amount spent on projects for establishing and operating hospitals - Nature of expenditure on hospital projects as revenue or capital expenditure - Disallowance of service charges paid to a company - Disallowance of expenditure for inflow of equity - disallowance towards non-recoverable projects cost by holding that the expenditure is in the nature of revenue expenditure - disallowance of legal and professional charges by holding that the same is in the nature of capital expenditure - ITAT set aside the Disallowance/addition made - HELD THAT - Question Nos. 1 and 4 are covered by the judgment of this Court in 2023 (10) TMI 1362 - KARNATAKA HIGH COURT Question No. 2 is covered by the judgment in 2023 (11) TMI 134 - KARNATAKA HIGH COURT Question Nos. 3 and 6 are covered by the judgment in 2023 (10) TMI 1444 - KARNATAKA HIGH COURT . Question No. 7 is covered by the judgment in 2023 (3) TMI 1527 - KARNATAKA HIGH COURT as kept open for consideration in appropriate case. Questions No. 1, 2, 3, 4, 6 have been answered in favour of the assessee and against the Revenue in the respective appeals referred to above.

Summary

Issues:
1. Disallowance under Section 40A(2) of the Act
2. Transfer of hospital as a going concern
3. Nature of expenditure on hospital projects
4. Disallowance of service charges paid to a company
5. Disallowance of expenditure for inflow of equity
6. Treatment of non-recoverable projects cost
7. Disallowance of legal and professional charges

Analysis:
1. The first issue pertains to the disallowance made under Section 40A(2) of the Act. The Tribunal set aside the disallowance, stating that the assessing authority did not doubt the payment and did not find it excessive. However, Section 40A(2) allows only expenditure related to the legitimate needs of the business. The Tribunal's decision was challenged by the Revenue.

2. The second issue revolves around the transfer of the hospital as a going concern. The Tribunal held that the assessee correctly treated the transfer as a going concern with a net worth of 'nil,' not constituting a 'Slump Sale.' The Revenue contended that necessary assets for the hospital business were transferred in one go, and the agreement itself referred to it as a 'Slump Sale.'

3. The third issue concerns the nature of expenditure on projects for establishing and operating hospitals. The Tribunal considered the expenditure as revenue expenditure, despite the assessing authority treating it as capital expenditure. The agreement related to the projects was terminated, leading to a dispute over the nature of the expenditure.

4. The fourth issue involves the disallowance of service charges paid to a company under Section 40A(2) of the Act. The Tribunal set aside the disallowance, even though the conditions for invoking the provision were met. The Revenue challenged this decision, arguing that the disallowance was justified.

5. The fifth issue pertains to the disallowance of expenditure for the inflow of equity, which the assessing authority treated as capital expenditure. The Tribunal, however, considered it as revenue expenditure, leading to a disagreement over the classification of the expenditure and the lack of substantiation by the assessee.

6. The sixth issue addresses the treatment of non-recoverable projects cost. The Tribunal set aside the disallowance, deeming the expenditure as revenue expenditure, while the Revenue argued that the enduring benefits from the construction/expansion of the hospital warranted treating it as capital expenditure.

7. The seventh issue involves the disallowance of legal and professional charges. The Tribunal set aside the disallowance, viewing it as revenue expenditure, contrary to the assessing authority's classification as capital expenditure. The enduring benefit to the assessee from the charges was a point of contention between the parties.

Overall, the High Court dismissed the appeal, upholding the Tribunal's decisions on various issues, except for question No. 5, which was not answered, and question No. 7, which was kept open for consideration in a future case.