2016 (6) TMI 640 - AT - Income Tax

Disallowance of loss - Intention of shifting the tax liability to charitable institution for the purpose of reducing the tax liability - assessee-company is engaged in the business of providing management and other hospital services to the general hospital run by Rajah Muthiah Chettiar Charitable and Educational Trust - sham transaction - Held that - As rightly submitted by the ld. Counsel for the assessee, it is the initial year of the agreement between the parties, therefore, the assessee may not anticipate the expenditure that might have been incurred in providing the service. Earning profit is the motive of the company. However, in some circumstances, loss is also inevitable. This Tribunal is of the considered opinion that it is the initial year of providing services, therefore, as observed earlier, the assessee could not have anticipated the expenditure in providing the services. When the assessee entered into the agreement for providing services at Rs. 1 lakhs/Rs. 2 lakhs per month for these assessment years, it is expected that the assessee has to discharge its obligation as per the agreed terms. If there was any breach of agreement, the assessee has to compensate for the breach of the conditions as agreed between the parties. When the agreement entered into between the parties are not in dispute, merely because one of the trustee Smt. Geetha Muthaiah is a director in the assessee-company that cannot be a reason to doubt the genuineness of the transaction between the assessee-company and Rajah Muthiah Chettiar Charitable and Educational Trust. When the assessee carried out its obligations as per the agreement in providing the services and incurred loss, this Tribunal is of the considered opinion that the loss suffered by the assessee is a business loss and therefore, it has to be allowed as claimed by the assessee. Therefore, we set aside the orders of the lower authorities and direct the Assessing Officer to allow the claim of loss as claimed by the assessee for all the three assessment years. - Decided in favour of assessee

Summary

Issues:
Assessment of loss claimed by the assessee for providing services to a hospital under an agreement.

Analysis:
The appeals of the assessee were directed against the orders of the Commissioner of Income-tax (Appeals) for assessment years 2008-09, 2009-10, and 2010-11. The assessee, a company providing management and hospital services, entered into an agreement with Chettinad Academy of Research and Education to provide services to a general hospital. The consideration for the services was fixed at Rs. 12 lakhs per annum for 2008-09 and Rs. 24 lakhs per annum for subsequent years. The Assessing Officer disallowed the claim of set off of loss by the assessee, alleging the agreement was a sham to evade tax. The assessee contended that the heavy expenditure incurred in fulfilling the agreement resulted in a loss, not tax evasion. The dispute centered on whether the agreement was genuine and whether the loss claimed was a legitimate business loss.

The Departmental Representative argued that the agreement was a device to evade tax, emphasizing the fixed consideration received by the assessee was inadequate for the services provided. The Assessing Officer contended that the agreement was a colorable device to shift income to a charitable trust to reduce tax liability. The Tribunal considered the agreement and the circumstances, noting that the assessee incurred heavy expenses in providing services to the hospital. The Tribunal observed that the initial years of providing services might result in unforeseen expenditures, and earning profit was the company's motive. The Tribunal found that the loss suffered by the assessee was a business loss incurred in fulfilling the obligations under the agreement, not a means to evade tax. The Tribunal held that the loss claimed should be allowed as legitimate business loss for all three assessment years.

In conclusion, the Tribunal allowed all three appeals of the assessee, setting aside the orders of the lower authorities and directing the Assessing Officer to allow the claim of loss as legitimate business loss for the assessment years in question.