2013 (9) TMI 152 - AT - Income Tax

Preliminary expenditure or not - expenditure relating to acquisition of land - Capital or Revenue expenditure - Section 35D - Held that - As per the scheme of deduction laid out under section 35D of the Act, the concerned expenditure to be eligible for deduction should qualify the alternate condition stipulated in section 35D(1) and should be one of the items of expenditure specified in section 35D(2). In the present case, evidently the expenses have been incurred after the commencement of business and therefore in order to qualify for deduction under section 35D of the Act, the expenses have to be incurred in connection with the extension of the undertaking or in connection with the setting up of a new unit. As can be seen from the detailed breakup of the expenditure in question at pages 4 to 7 of the order of assessment, these expenses are, essentially towards payment of professional fees related to acquisition of land for setting up of hospitals. As the assessee is already in the business of running hospitals, the expenditure related to setting up of new hospitals are ostensibly only for expansion of the existing business of the assessee - Decided against Revenue. Revenue Expenditure or Capital Expenditure - Expenditure on recruitment of manpower - through an agency - AO was of the view that no company would be interested in spending money on recruitment repeatedly and recruitment made through agencies is not easily terminated because a lot of screening is done at the stage of recruitment itself and as this expenditure is for a long time benefit, held it to be capital in nature. - Held that - AO has not questioned the genuineness of the expenses or the fact of the expenditure having been incurred and appears to have disallowed the said expenses only on conjectures and suspicion, for which there is no basis, nor is his finding established by any evidence. We are therefore of the considered view that the learned CIT(Appeals) has rightly held that the expenses of Rs.23,57,487 incurred towards recruitment of manpower are attributable to the appellant s business and that recruitment is an ongoing exercise in the assessee s nature of business and therefore is allowable as a revenue expenditure. Loss on disposal of fixed assets - Without any discussion or assigning any reasons, the Assessing Officer observing that the assessee has charged an amount of Rs.39,41,007 to the profit and loss account on account of loss on disposal of fixed assets and proceeded to make the disallowance in a summary manner. The learned CIT(Appeals) has verified the issue and found that since the assessee has made no such claim for deduction in the period relevant to Assessment Year 2008-09 which is the subject-matter of this appeal, no disallowance was called for and therefore deleted the disallowance. Before us, revenue has not been able to bring on record any evidence to controvert the finding of the learned CIT(Appeals) that since no such claim for deduction of Rs.39,41,007 on account of loss on sale of fixed assets was made by the assessee in Assessment Year 2008-09, no disallowance was called for. Deduction u/s 36(1)(vii) - Held that - Merely because this is the second year of the assessee s operations and the period between the revenue recognition and the decision to write off the debts is short, it does not automatically lead to the conclusion that the debt cannot be claimed as irrevocable, as has been wrongly presumed by the Assessing Officer. We also do not find that the Assessing Officer has disputed the transactions, constituting the debts written off, as not being genuine. The learned CIT(Appeals), on the other hand, has examined the details of these transactions and found them to be comprising of small amounts receivable from various patients who have been discharged and agreed with the claim of the assessee that the amounts totalling Rs.71,228 claimed as bad debts are to be allowed under section 36(1)(vii) of the Act, after recording the finding that the Assessing Officer has not brought on record any specific reason for making the disallowance - Amount claimed as bad debts by the assessee are allowable under section 36(1)(vii) of the Act - Decided against Revenue.

Issues Involved:
1. Disallowance of Depreciation
2. Disallowance of Revenue Expenditure
3. Disallowance of Business Expenditure
4. Disallowance under Section 14A & Rule 8D
5. Treatment of Expenditure on Leased Property
6. Disallowance of Brand Building Expenses
7. Disallowance of Bad Debts
8. Disallowance of Loss on Disposal of Fixed Assets
9. Disallowance of Payment for Recruitment of Manpower

Detailed Analysis:

1. Disallowance of Depreciation:
The CIT (Appeals) upheld the disallowance of depreciation amounting to Rs. 73,514 made by the Assessing Officer for the Assessment Year 2007-08.

2. Disallowance of Revenue Expenditure:
The CIT (Appeals) upheld the disallowance of revenue expenditure amounting to Rs. 29,60,093 made by the Assessing Officer for the Assessment Year 2007-08.

3. Disallowance of Business Expenditure:
The CIT (Appeals) allowed deduction under section 35D of the Act to the extent of Rs. 18,67,207 for the disallowed business expenditure amounting to Rs. 93,36,039. The Tribunal concurred with the CIT (Appeals) that the expenditure was in connection with the expansion of the assessee's business and qualified for deduction under section 35D of the Act, thereby allowing the expenditure equally over five years.

4. Disallowance under Section 14A & Rule 8D:
For Assessment Year 2007-08, the CIT (Appeals) upheld the disallowance of Rs. 37,802 under section 14A & Rule 8D. For Assessment Year 2008-09, the CIT (Appeals) found that the disallowance worked out by the Assessing Officer at Rs. 19,31,371 included Rs. 1,36,000 already disallowed by the assessee. Therefore, the additional disallowance should have been Rs. 17,95,371. The Tribunal dismissed the revenue's ground on this issue as frivolous.

5. Treatment of Expenditure on Leased Property:
The CIT (Appeals) treated the expenditure of Rs. 19,21,000 on taking leased property as business expenditure, relying on the decision of the Karnataka High Court in the case of CIT v. H.M.T. Ltd. The Tribunal upheld this finding, agreeing that the expenditure was allowable as business/revenue expenditure.

6. Disallowance of Brand Building Expenses:
For Assessment Year 2008-09, the CIT (Appeals) upheld the disallowance of brand building expenses amounting to Rs. 58,63,651 made by the Assessing Officer.

7. Disallowance of Bad Debts:
For Assessment Year 2008-09, the CIT (Appeals) allowed the disallowance of bad debts amounting to Rs. 71,228. The Tribunal concurred with the CIT (Appeals) that the amounts written off were small amounts due from patients and were allowable under section 36(1)(vii) of the Act.

8. Disallowance of Loss on Disposal of Fixed Assets:
For Assessment Year 2008-09, the CIT (Appeals) found that the assessee had not claimed any deduction for loss on disposal of fixed assets amounting to Rs. 39,41,007 in the current year. The Tribunal upheld the CIT (Appeals)'s finding and dismissed the revenue's ground on this issue.

9. Disallowance of Payment for Recruitment of Manpower:
For Assessment Year 2008-09, the CIT (Appeals) allowed the disallowance of Rs. 23,57,487 incurred for recruitment of manpower through an agency. The Tribunal upheld this finding, agreeing that the expenditure was attributable to the business of running a hospital and was allowable as revenue expenditure.

Conclusion:
The Tribunal dismissed the revenue's appeals for both Assessment Years 2007-08 and 2008-09, upholding the findings of the CIT (Appeals) on all disputed issues.

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