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2019 (3) TMI 1134 - AT - Income TaxProportionate disallowance of the salary - Capitalization of cost incurred during the construction of Medanta Hotel project - commencement of business activity before construction of hospital - HELD THAT - CIT (A) was incorrect in holding that 20% of the salary out of ₹ 6 crore was to be capitalized. Accordingly, we allow ground no. 1(a) of the assessee s appeal and hold that no part of the salary out of ₹ 6 crore requires any capitalization in view of the fact that the business of the assessee company had already commenced prior to 31.10.2009. This also takes care of Revenue s ground No. 1 and we dismiss the same by holding that no portion of the salary of ₹ 6 crores needs to be capitalized in view of the specific acceptance of the department in earlier assessment years that the business activity of the assessee company had started w.e.f. 01/06/2007. Second limb of the disallowance wherein the Ld. CIT (A) has held that the remaining salary of ₹ 3.3 crore was to be allowed in assessment year 2011-12 as the Board Resolution was passed in assessment year 2011-12, it has been submitted by the Ld. AR that the assessee accepts the finding of the Ld. CIT (A) and has only prayed that the AO may be directed to give effect to this direction. The Department is not in appeal against this direction. Accordingly, we direct the AO to give effect to the direction of the Ld. CIT (A) that the balance amount of ₹ 3.33 crores be allowed as deduction in AY 2011- Addition of outreach programme as preoperative expenditure on the ground that this amount was spent before 31.10.2009 - HELD THAT - CIT(A) has himself accepted, while dealing with the assessee s ground relating to remuneration to Dr. Naresh Trehan, that the assessee s business operations had commenced prior to 31.10.2009, there remains no basis for making/confirming any disallowance on account of preoperative expenditure. We also note that the Assessing Officer, while passing assessment orders for assessment year 2008-09 and 2009-10, has also accepted that the business activities of the assessee company were being carried out through Apollo and other hospitals. Therefore, we are unable to agree with the Ld. CIT (A) and direct AO to allow the expenditure Addition under the head research and development expenditure - HELD THAT - Fact remains that the assessee had not been able to provide any details in the year under consideration. However, since the Assessing Officer has allowed similar expenditure in assessment years 2008-09 and 2009-10, which remains undisputed, in our considered opinion, interest of justice would be served if this issue is restored to the file of the Assessing Officer to examine it afresh Recruitment expenses as preoperative expenditure - disallowance upheld by the CIT (A) on the ground that since this amount was spent before 31.10.2009, therefore, the same was preoperative in nature - HELD THAT - CIT (A) s categorical finding while adjudicating the assessee s ground on remuneration paid to Dr. Naresh Trehan that the business operations of the assessee company had commenced before 31.10.2009, there is no reason for him to have upheld this disallowance. A perusal of the assessment orders for assessment years 2008-09 and 2009-10 also shows that the assessee company had been carrying on business activities through Apollo and other hospitals in earlier years also and this fact remains uncontroverted. Therefore, we are unable to concur with the findings of the Ld. CIT (A) on this issue also and while setting aside his order, we direct the Assessing Officer to allow the impugned amount Interest on terms loan - capital expenditure - HELD THAT - AR has stated that the assessee has no objection in the treatment of the impugned amount as capital expenditure but has prayed that direction may be given that the interest pertaining to term loan on machinery which falls under the category of life saving devices attracting higher rate of depreciation should be allowed higher rate of depreciation. The Ld. Sr. DR also has no objection to this prayer of the assessee. We direct the Assessing Officer to allow depreciation at the applicable rates on life saving devices in accordance with law after affording due opportunity to the assessee. Treating the bank charges on issuance of bank gurarantee for EPCG Licence as preoperative expenses - HELD THAT - It has again been stated by the Ld. AR that this ground is not being pressed, however, with the prayer that for the expenditure which pertains to term loan on machinery falling under the category of life saving device attracting higher rate of depreciation it may be directed that higher rate of depreciation be given on such expenditure. As the Ld. Sr. DR has no objection to the prayer of the Ld. AR, while dismissing ground no. 7, we direct the Assessing Officer to allow depreciation at the applicable rates on the life saving devices after giving proper opportunity to the assessee. Ad hoc disallowance of salary @ 20% being expenses in the nature of capital expenditure - HELD THAT - Since this ground is identical to ground no. 1 of the assessee s appeal which we have already decided in favour of the assessee by holding that the Ld. CIT (A) had erred in sustaining an estimated disallowance out of salary expenses of ₹ 6 crore to the tune of 20% on account of being capital expenditure in nature, on the same reasoning, we dismiss ground no. 1 of the department s appeal. Depreciation on value of fixed assets to be disallowed. Addition on account of repairs and maintenance, installation, commissioning of IT equipment - HELD THAT - We find no reason to interfere with the findings of the Ld. CIT (A) that only an amount was to be treated as capital expenditure and the rest was allowable as revenue expenditure being payment made towards annual maintenance contract for various medical equipments. Disallowance as being expenses pertaining to a period prior to November 2009 - HELD THAT - DR could not substantiate with any evidence to the contrary that this categorical finding of the Ld. CIT (A) was factually incorrect and, therefore, we have no option but to dismiss the ground raised by the department in this regard and, accordingly, based on the findings of the Ld. CIT (A), which the department has not been able to controvert, we dismiss ground no. 4 raised by the department. Disallowance pertaining to recruitment expenses pertained to the year under consideration - claim allowable in this year under appeal - HELD THAT - CIT (A) has also noted that as per the mercantile system of accounting, the income and expenses are to be booked for the period during which the relevant services were rendered. Thus, CIT (A) has given a categorical finding in this regard which the department has not been able to controvert by leading any evidence to the contrary. Apparently, it is not the case of the department that the services were not rendered in terms of the contract and the only dispute is regarding the year of allowability of expenditure. Since CIT (A) has given a categorical finding in this regard after duly referring to the recruitment services agreement, we find no reason to interfere with the order of the CIT (A) on this issue also
Issues Involved:
1. Disallowance of salary of Dr. Naresh Trehan. 2. Depreciation disallowance. 3. Capitalization of repair and maintenance expenses. 4. Disallowance under Section 40A(iii) of the Income Tax Act. 5. Capitalization of miscellaneous expenditure. 6. Disallowance of research and development expenditure. 7. Treatment of recruitment expenses. 8. Capitalization of interest on term loan and bank charges. Detailed Analysis: 1. Disallowance of Salary of Dr. Naresh Trehan: The assessee claimed ?9,33,33,333/- as salary paid to Dr. Naresh Trehan. The Assessing Officer (AO) disallowed ?7,82,35,255/- treating it as capital expenditure. The CIT (A) held that 20% of the salary for the period 1.6.2007 to 31.10.2009 should be capitalized, and the balance was revenue in nature. The ITAT found no cogent reason for the ad hoc capitalization of 20% and allowed the entire salary as revenue expenditure, acknowledging that the business operations had commenced prior to 31.10.2009. The remaining ?3.33 crore was directed to be allowed in AY 2011-12 as per the Board Resolution passed in that year. 2. Depreciation Disallowance: The AO added back excess depreciation of ?5,95,970/- due to differences in fixed asset values under the Companies Act and the Income Tax Act. The CIT (A) deleted this disallowance, accepting the reconciliation chart provided by the assessee. The ITAT upheld the CIT (A)'s decision. 3. Capitalization of Repair and Maintenance Expenses: The AO capitalized certain repair and maintenance expenses, treating them as pre-operative. The CIT (A) allowed most of these expenses as revenue, except for a proportionate amount of ?2,16,004/- for the AMC period prior to 31.10.2009. The ITAT upheld the CIT (A)'s decision, noting the lack of evidence to support the AO's capitalization. 4. Disallowance under Section 40A(iii): The AO disallowed ?1,39,980/- for cash payments exceeding ?20,000/- to Artemis Hospital. The CIT (A) confirmed this disallowance, and the ITAT upheld the decision, agreeing that business expediency was not sufficiently demonstrated. 5. Capitalization of Miscellaneous Expenditure: The AO capitalized various miscellaneous expenses, treating them as pre-operative. The CIT (A) allowed part of these expenses as revenue, while capitalizing others. The ITAT upheld the CIT (A)'s decision, except for the outreach program expenses of ?2,48,939/-, which were allowed as revenue since the business had commenced prior to 31.10.2009. 6. Disallowance of Research and Development Expenditure: The AO disallowed ?1,04,58,266/- for lack of details. The CIT (A) confirmed the disallowance. The ITAT remanded the issue to the AO for fresh examination, noting that similar expenses were allowed in previous years. 7. Treatment of Recruitment Expenses: The AO treated ?1,14,90,580/- as capital expenditure. The CIT (A) allowed ?96,91,023/- as revenue expenditure based on agreements and invoices, while capitalizing the balance. The ITAT upheld the CIT (A)'s decision. 8. Capitalization of Interest on Term Loan and Bank Charges: The AO capitalized ?1,28,60,000/- as pre-operative. The CIT (A) upheld this, but the ITAT directed the AO to allow higher depreciation rates for life-saving devices. The ITAT also upheld the CIT (A)'s decision on bank charges, directing the AO to bifurcate charges related to pre and post-installation periods. Conclusion: The ITAT partly allowed both the assessee's and the department's appeals, providing specific directions for each issue based on the findings and evidence presented. The judgment emphasized the need for detailed examination and factual accuracy in capitalizing or disallowing expenses.
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