2022 (10) TMI 1106 - AT - Income Tax

Disallowance u/s 37(1) - allowable business expenditure - payment of compensation for the negligence of the assessee company to provide proper treatment to the patient amounts to breach of contract and the payment of compensation made therefore - HELD THAT - On perusal of the above finding of ld. CIT(A) and also considering the plethora of judgments filed by the assessee in the paper book so far as the proposition of ld. Counsel for the assessee is concerned that the said amount is not a penalty for an offence or for being any act prohibited by law, we find merit since the said compensation was awarded for the negligence on the part of the hospital in providing proper treatment to the patient named Anuradha Saha but there is lack of mensrea. There is no reference in the litigation before us that the assessee has committed any offence prohibited under the law. Therefore, so far as the finding of ld. CIT(A) that explanation 1 to Section 37 of the Act is not applicable on the assessee is found to be correct and to this extent that the alleged sum is not in the nature of any penalty paid for committing an offence prohibited under the law, the finding of ld. CIT(A) is confirmed. Whether the said sum is a revenue expenditure is still in doubt and the first appellate authority has also not adjudicated this issue which has been observed by ld. AO in the assessment order for making the alleged disallowance. The alleged sum is admittedly not a penalty in nature but whether it a revenue or capital expenditure still needs to be examined. We, therefore, are of the considered view that this issue that whether the alleged sum i.e. compensation paid by the assessee company on the direction of Hon'ble Supreme Court of India to the relative of a patient who died due to the negligence of the doctors and the hospital authority is in the nature of capital expenditure or revenue expenditure needs to be restored to ld. CIT(A) for necessary adjudication. Needless to mention that the assessee shall be provided fair opportunity of being heard and to file necessary submissions as well as to place reliance on judicial pronouncements if considered necessary so that ld. CIT(A) can decide the issue in accordance with law. We therefore, restore the issue raised by the Revenue in ground nos. 1 to 4 to the file of ld. CIT(A). In the result, ground nos. 1 to 4 are allowed for statistical purposes. Correct head of income - rent received from IBS tower is Income from house property or Income from other sources - HELD THAT - CIT(A) following the decision of the Coordinate Bench of this Tribunal in assessee s own case for AY 2010-11 held it as an Income from house property. Ld. D/R failed to controvert that the issue is covered in favour of the assessee by the decision of this Tribunal in assessee s own case by placing before us any binding precedence in Revenue s favour. We therefore, respectfully following the decision of this Tribunal, hold that the alleged rental income from installation of IBS tower has been rightly offered to tax as Income from house property. Thus, no interference is called for in the finding of ld. CIT(A) and ground nos. 5 to 7 raised by the Revenue are dismissed. Business advance written off - assessee claimed the said amount expenditure by writing it off from the profit loss account.- AO disallowed the sum treating it as capital in nature - HELD THAT - We find merit in the finding of ld. CIT(A) who has rightly observed that the said advance was given in relation to the business transaction for setting up a hospital project and since the project was abandoned and the advance given could not be recovered, the said sum is a business loss u/s 28(1) and for this view he placed reliance on the judgment Woodward Governor 2009 (4) TMI 4 - SUPREME COURT Thus, no inference in the finding of ld. CIT(A) allowing the said sum as revenue expenditure. Thus, ground nos. 8 to 10 raised by the Revenue are dismissed.

Issues Involved:
1. Allowability of compensation paid as business expenditure under Section 37(1) of the Income Tax Act.
2. Classification of compensation as capital or revenue expenditure.
3. Classification of rental income from IBS tower as income from house property or other sources.
4. Allowability of business advance written off as revenue expenditure.

Detailed Analysis:

1. Allowability of Compensation Paid as Business Expenditure under Section 37(1):
The primary issue revolves around whether the compensation of Rs. 10.81 Crore paid by the assessee for medical negligence should be allowed as a business expenditure under Section 37(1) of the Income Tax Act. The Revenue contended that the compensation was a penalty for infringement of medical norms and thus not allowable. However, the Tribunal found merit in the assessee's argument that the compensation was not a penalty for an offense or an act prohibited by law. The Tribunal noted that the compensation was awarded due to negligence without any mens rea, and thus, Explanation 1 to Section 37 was not applicable. Consequently, the compensation was not considered a penalty and was allowable as a business expenditure.

2. Classification of Compensation as Capital or Revenue Expenditure:
The Tribunal observed that the CIT(A) had not adjudicated on whether the compensation was a capital or revenue expenditure. The Tribunal noted that the compensation paid had no direct nexus with the revenue earned during the year and was more related to maintaining the hospital's goodwill. The Tribunal highlighted that capital expenditure is generally used to acquire, upgrade, and maintain physical assets, whereas revenue expenditure is for ongoing operational costs. Given the nature of the compensation, the Tribunal remanded the issue back to the CIT(A) for a detailed examination to determine whether the compensation should be classified as capital or revenue expenditure.

3. Classification of Rental Income from IBS Tower:
The Tribunal addressed the issue of whether the rental income of Rs. 25,50,462/- from IBS towers should be classified as income from house property or other sources. The CIT(A) had ruled in favor of the assessee, classifying it as income from house property, following a prior decision of the Tribunal in the assessee's own case. The Revenue failed to provide any binding precedent to overturn this decision. Therefore, the Tribunal upheld the CIT(A)'s decision, confirming that the rental income from IBS towers was correctly classified as income from house property.

4. Allowability of Business Advance Written Off:
The Tribunal examined the disallowance of a business advance of Rs. 4,41,000/- written off by the assessee. The assessee had advanced this sum for a hospital project in Siliguri, which was later abandoned. The CIT(A) allowed the write-off as a business loss under Section 28(1) of the Act, relying on the Supreme Court's judgment in CIT vs. Woodward Governor. The Tribunal found the CIT(A)'s decision to be correct, noting that the advance was related to a business transaction and, upon the project's abandonment, became a business loss. Thus, the Tribunal upheld the CIT(A)'s decision to allow the write-off as revenue expenditure.

Conclusion:
The Tribunal partly allowed the Revenue's appeal for statistical purposes, specifically remanding the issue of whether the compensation paid was capital or revenue expenditure back to the CIT(A) for further adjudication. The Tribunal upheld the CIT(A)'s decisions on the allowability of compensation as a business expenditure, classification of rental income from IBS towers as income from house property, and the allowability of business advance written off as revenue expenditure.

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