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TMI Blog2019 (3) TMI 1134X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay 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 tow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny under CASS norms. During the course of assessment proceedings, the Assessing Officer observed that the assessee company had appointed Dr. Naresh Trehan as its Managing Director w.e.f. 1.6.2007 but no remuneration was paid to him/provided in the financial statements in the earlier assessment years whereas in the year under consideration an amount of ₹ 9,33,33,333/- was shown as salary for the period 1.6.2007 to 31.3.2010. On being asked to explain, the assessee submitted that the company s Board of Directors had passed a resolution in September, 2009, whereby an amount of ₹ 6 crore was approved as salary to Dr. Naresh Trehan for the period 1.6.2007 to 31.10.2009. It was submitted before the Assessing Officer that the liability towards payment of salary had crystallized only upon the passing of the relevant resolution approving the payment of salary by the Board of Directors and was, therefore, allowable in the year under consideration. It was also submitted that, although, the Medanta Hospital had started functioning from 1.11.2009 only, the assessee company had already been providing health care services w.e.f. 1.6.2007 by entering into arrangements with various hosp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee had capitalized repairs and maintenance expenses relating to engineering equipment amounting to ₹ 218,87,15,906/- towards addition/s to plant and machinery and a further amount of ₹ 8,44,63,990/- towards addition/s to computers. Apart from this, the Assessing Officer observed, that the assessee had also claimed repairs and maintenance expenses towards engineering equipment and repairs and maintenance of IT related equipment. The assessee was asked to explain as to why the repairs and maintenance expenses aggregating to ₹ 81,89,214/- may not be capitalized being pre-operative in nature. The assessee submitted before the Assessing Officer that out of this amount, an amount of ₹ 23,76,046/- was towards payment of Annual Maintenance Contract (AMC) for maintaining the IT facility and regarding the balance amount of ₹ 58,13,168/-, it was submitted that the same was in respect of the period starting from 1.11.2009 and, therefore, the same was not pre-operative in nature. However, the Assessing Officer, on examining the relevant invoices, observed that part of the AMC expenditure was related to the period prior to November, 2009. The Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in nature and, thereafter, after allowing depreciation thereon, a total disallowance of ₹ 1,04,58,266/- was made. 2.6 While examining the details of Recruitment expenses amounting to ₹ 1,93,55,261/-, the Assessing Officer observed that the same included an amount of ₹ 96,91,023/- in respect of various invoices issued on 31.3.2010 but pertaining to FY 2010-11. The Assessing Officer held that an amount of ₹ 18,94,197/- was preoperative in nature while an amount of ₹ 21,32,683/- was revenue in nature. Accordingly, after allowing benefit depreciation at the applicable rate, an addition of ₹ 1,14,90,580/- was made to the total income after treating the expenses of ₹ 96,91,093/- as pertaining to assessment year 2011-12. 2.7 The Assessing Officer further held that the interest on term loan amounting to ₹ 1,28,00,000/- had also an element of pre-operative expenses and, accordingly, an addition of ₹ 1,21,60,000/- was made on this account. Further, the Assessing Officer observed that the assessee had paid bank charges towards importing certain plant and machinery which, in the opinion of the Assessing Officer, should have been capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40A(iii) of the Act pertaining to cash payments made to Artermis Hospital towards special medical tests etc., the Ld. CIT (Appeals) was of the view that the case of business expediency was not successfully made out by the assessee and he, therefore, proceeded to confirm the disallowance of ₹ 1,39,980/-. v) With respect to capitalization done by the Assessing Officer with respect to miscellaneous expenditure, the Ld. CIT (Appeals) held that out of ₹ 14,29,613/- spent towards nursing hostel expenses, ₹ 5,10,761/- were allowable. With respect to the second component of miscellaneous expenditure amounting to ₹ 33,00,281/- , the Ld. CIT (Appeals) held that expenses amounting to ₹ 19,21,341/- were preoperative in nature and the disallowance to this extent was sustained. Further, with respect to amount of ₹ 14,59,122/- spent on community outreach programme, the Ld. CIT (Appeals) held that capitalization only to the extent of ₹ 2,48,939/- was to be sustained as only this amount had been spent prior to 31.10.2009. vi) With respect to the disallowance of ₹ 1,04,58,266/- being salaries paid under research and development expenditure, the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 2.9 Now, both the department as well as the assessee has approached the ITAT against the order of the Ld. CIT (Appeals). 2.10 The following grounds have been preferred by the assessee:- 1 (a) The learned CIT (A) erred in fact and in law in treating part salary of Dr. Naresh Trehan amounting to ₹ 1.20 crore as capital expenditure which is not only incorrect but also against the facts and circumstances of the case. (b) The learned CIT(A) erred in fact and in law in giving direction to DCIT To allow the salary amounting to ₹ 3.33 crore in subsequent year ( A.Y 2011-12) in spite of the fact that this was not the subject matter of appeal. (c) That Direction of CIT(A) as per ground l.(b) is not only illegal but void ab initio because no notice u/s 251 (2) was issued. 2. The learned CIT(A) erred in fact and in law in treating a sum of ₹ 19,21,341 under the head misc expenditure as pre operative expenditure which is not only incorrect but also against the facts and circumstances of the case. 3. The learned CIT(A) erred in fact and in law in treating a sum of ₹ 2,48,939 under the head out reach programe as pre operative expenditure wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... encement of business expenditure. 5. The Ld. CIT(A) has erred in allowing the expenditure of ₹ 96,91,093/- out of total disallowances of ₹ 1,14,90,580/- ignoring the fact that the assessee failed to substantiate its claim that these pertain to the assessment year under consideration and also the fact that these have been raised during the next F.Y.: 2010- 11 6. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing. 3.0 With respect to the assessee s appeal bearing caption ITA No. 3622/Del/2015, the Ld. AR made ground wise submissions as under: 3.1.1 With respect to ground no. 1 (a) that the learned CIT (A) had erred in fact and in law in treating part salary of Dr. Trehan amounting to ₹ 1.20 crore as capital expenditure which is not only incorrect but also against the facts and circumstances of the case, the Ld. AR submitted that out of ₹ 6,00,00,000/- the Ld. CIT(A) has allowed ₹ 4,80,00,000/- as revenue expenditure and has capitalized 20% of the salary on an ad hoc basis (being ₹ 1,20,00,000/-) towards the cost of the hospital project and also held it as being eligible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in fact and in law in treating a sum of ₹ 11,81,500/- out of ₹ 1,04,58,266/- under the head Research and Development as preoperative expenditure and confirmed the disallowance of ₹ 93,35,841/-, it was submitted by the Ld. AR that this confirmation was not only incorrect but was also against the facts and circumstances of the case. It was submitted that the Ld. CIT (A) had confirmed the disallowance of ₹ 93,35,841/- on the ground that no details were filed in this regard. It was submitted that this expenditure pertained to expenditure relating to specialist doctors who were employed by the assessee company and who not only performed their medical related functions including surgery etc. but also carried out research work which was a part and parcel of the medical activity. It was submitted that the assessee company had not employed separate Doctors for doing research related activities and a portion of their remuneration is transferred from Salary account to Research and Development account on a pro rata basis. It was further submitted that this methodology was followed in A.Y. 2008-09 and 2009-10 also where in the AO, while passing the orders, had accepte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld. AR submitted that with respect to the department s appeal bearing ITA No. 4587/Del/2015 he would, likewise, make ground wise submissions. His submissions in this regard were as under: 4.1 Regarding the first ground of the department s appeal that the learned CIT (A) had erred in estimating the salary of Dr. Naresh Trehan to be capitalized @ 20%, ignoring the fact that Dr. Naresh Trehan was not only paid for services rendered in the capacity of a doctor profession but remuneration was also paid for giving a direction to the overall business activities, it was submitted that this ad hoc disallowance was made without bringing on record any fact to support the reasoning behind capitalization @ 20%. It was further submitted that the last remuneration drawn by Dr. Naresh Trehan from Escorts Heart Institute was ₹ 8.40 crores per annum as against ₹ 6.00 crores in Global Health Pvt. Ltd. although he was not involved in the day to day management while he was in the Escorts Heart Institute. The Ld. AR also placed reliance on numerous judicial precedents to support his contention that ad hoc capitalization @ 20% without any sound reasoning and factual accuracy was not sust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as pre-operative and the balance was to be allowed as revenue expenditure. It was submitted that no interference was called for as this again was a pure finding of fact. 4.5 With respect to ground no. 5 raised by the Revenue that the learned CIT (A) had erred in allowing the expenditure of ₹ 96,91,093/- out of the total disallowance of ₹ 1,14,90,580/- ignoring the fact that the assessee had failed to substantiate its claim that these pertained to the assessment year under consideration and also the fact that these have been raised during the next financial year i.e. 2010-11, it was submitted by the Ld. AR that out of the total disallowance of ₹ 1,14,90,580/- pertaining to Recruitment expenses, the Ld. CIT (A) had allowed ₹ 96,91,023/- only as revenue expenditure after duly verifying the agreement with the service provider M/s IFAN Global India Pvt. Ltd. and, therefore, in view of the categorical finding recorded after due verification by the Ld. CIT (A), no interference was called for. 4.6 It was prayed that the departmental appeal deserved to be dismissed. 5.0 In response to the arguments of the Ld. AR, the Ld. Sr. DR with respect to the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to period 1.6.2007 to 31.3.2010 was to be capitalized as capital expenditure and the second limb is the action of the Ld. CIT (A) in holding that the salary of ₹ 3.33 crores was to be allowable in assessment year 2011-12 as the Board Resolution was passed in assessment year 2011-12. As far as the first limb is concerned, the perusal of the order of the Ld. CIT (A) shows that the Ld. CIT (A) has not given any cogent reason for holding that 20% of the salary expenses were to be capitalized. The Ld. CIT (A) has also noted that the assessee company was engaged in the business of providing health care services right from the inception by entering into agreement with other hospitals on 2.6.2007 and for which purpose, the company had made huge salary payments to more than 165 doctors even prior to the commencement of operation of the Medanta Hospital on 31.10.2009. The Ld. CIT (A) has also noted that it could not be held that the assessee company had started its business only w.e.f. 1.11.2009 i.e. when the super-specialty hospital Medanta started its operation. The Ld. CIT (A) has also given a categorical finding that the assessee company was already engaged in the business of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment in earlier assessment years that the business activity of the assessee company had started w.e.f. 01/06/2007. 7.1.2 Coming to the 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- 12. Thus, ground no. 1(b) stands dismissed but subject to our directions. 7.1.3 Coming to ground no. 1(c) of the assessee s appeal, since the Ld. AR has stated that this ground is not being pressed, the same is dismissed as not being pressed. 7.2 With respect to Ground no. 2 of the assessee s appeal, since the Ld. AR has stated that this ground is not being pressed, the same is also dismissed as not pressed. 7.3 Coming to ground n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure 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 and decide the issue after duly examining and verifying the pro rata apportionment after giving due opportunity to the assessee to present its case and also keeping in mind the assessee s claim that the same methodology for apportionment was applied by the assessee in assessment years 2008-09 and 2009-10 which had been allowed by the Assessing Officer. It is ordered accordingly. 7.4.2 The second limb of ground no. 4 is challenging the action of the Ld. CIT (A) in treating an amount of ₹ 11,81,500/- as preoperative expenses out of research and development expenses. As the Ld. CIT (A) has already noted that the business operations had started prior to 31.10.2009, which remains uncontroverted, we find that the Ld. CIT (A) had no basis for treating this expenditure as preoperative expenditure. Accordingly, we delete the disallowance of ₹ 11,81,500/- which has been confirmed by the Ld. CIT (A) as being preoperative in nature. 7.5 Ground no. 5 challenge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting 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. 8. In the result, the appeal of the assessee stands partly allowed. 9. ITA No. 4587/Del/2015 This is the department s appeal and ground no. 1 challenges the action of the Ld. CIT(A) in estimating the ad hoc disallowance of salary @ 20% being expenses in the nature of capital expenditure. 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. 9.2 Ground no. 2 of the department s appeal challenges the action of the Ld. CIT (A) in allowing depreciation on value of fixed assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d no. 4 challenges the action of the Ld. CIT (A) in deleting the addition of ₹ 45,28,499/- out of the total disallowance of ₹ 65,08,856/- as being expenses pertaining to a period prior to November 2009. In this regard again, it is seen that the Ld. CIT (A) has given a categorical finding on page 33 of the impugned order that only ₹ 21,61,280/- pertained to a period prior to 31st October, 2009 and, therefore, the balance amount of ₹ 45,28,499/- was allowable. The Ld. Sr. 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. 9.5 Ground no. 5 pertains to department s challenge to the action of the Ld. CIT (A) in holding that out of total disallowance of ₹ 1,14,90,580/- pertaining to recruitment expenses, ₹ 96,91,093/- pertained to the year under consideration and therefore, the same were allowable in this year ..... X X X X Extracts X X X X X X X X Extracts X X X X
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