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TMI Blog2019 (12) TMI 968X X X X Extracts X X X X X X X X Extracts X X X X ..... kind usually taken but it is an item of exceptional and non-recurring nature. A capital surplus on account of waiver of loan in no way can be recorded as operational profit or profit which is to be included in the profit loss account. See M/S. JSW STEEL LIMITED [ 2017 (4) TMI 47 - ITAT MUMBAI] as held that waiver of a loan is a capital receipt therefore, it cannot be adjusted with brought forward business losses. Based on the facts narrated above, we note that section 115-JB is a stand-alone provision which does not contain any provision about carry forward of B/F losses, while computing the Book Profit u/s 115-JB of the Act. Audited accounts of the company clearly suggests that the assessee had never adjusted the brought forward losses/debit balance of Profit and Loss account with the General Reserve. Sum of ₹ 18,69,57,957/- credited in the General Reserve account was a Capital Receipt hence, it should not to be considered in computation of book profit u/s 115JB of the Act.The Ld. A.O. failed to take into account that the restriction, contained in Sec.72 of the I.T. Act on carrying forward the unabsorbed business losses for more than 8 years, does not apply in comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er is being passed for the sake of convenience and brevity. 3. First we take assessee s appeal in ITA No. 737/Kol/2018, for A.Y. 2009-10. The Grounds of appeal raised by the assessee are as follows: 1. That on different grounds both the Ld.A.O. and the Ld.CIT(A) erred in rejecting the assessee's rectification petition claiming that in computing its Adjusted Book Profit for Asstt. Year 2009-10 in terms of Sec.115JB of the I.T.Act, its brought forward unabsorbed business losses relating to Asstt. Years 1996- 97,1997-98 and 1998-99 totaling ₹ 2,95,24,689/- should have been set off with its Net Profit as per its Profit Loss Account for the said Assessment Year in terms of Explanation (iii) below Sec. 115JB of the I.T.Act. 2. That the Ld. A.O. erred in rejecting the assessee s above-mentioned claim on the ground that since the unabsorbed business losses relating to Asstt. Years 1996-97,1997-98 and 1998-99 arose more than 8 years back, the said losses could not be set off with the Net Profit relating to Asstt. Year 2009-10. 2.(a) That while rejecting the assessee s claim of set off of Br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts of the case which can be stated quite shortly are as follows: The assessee company is running a hospital and providing treatment to the patients. The assessee filed its return of income on 23-09-2009 showing a total income of Rs. Nil. The return of income was processed u/s 143(1) of the Act. Later, the case of the assessee was selected for scrutiny, and Ld AO framed assessment under section 143(3) of the Act wherein he disallowed a sum of ₹ 1,25,83,682/- u/s 40(a)(ia) of the Act on account of non-deduction of TDS on payments made to National Neuroscience Centre. 5. Aggrieved by the order of the assessing officer the assessee carried the matter in appeal before the learned CIT(A). The learned CIT(A) vide his order dated 04-03-2014 enhanced the disallowance to ₹ 1,70,28,307/-, thus an additional sum of ₹ 44,44,625/- (₹ 1,70,28,307- ₹ 1,25,83,682), was disallowed by him. 6. Thereafter, in pursuance of the learned CIT(A) order dated 04-03-2014, the learned AO passed the order u/s 251/143(3) of the Act dated 12-08-2014 wherein the benefit of deduction of ₹ 2,95,24,689/- on account of brought forward losses in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tful debt ₹ 49,03,249/- Adjusted Book Profit ₹ 3,29,87,147/- Tax on above ₹ 32,98,715/- Hence tax on book profit is more than normal tax, hence tax will be charged on book profit. 8. Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has confirmed the action of the assessing officer. The findings of the Ld CIT(A) is given below: 3.2.3 In view of the above discussion it is clear that since the assessee has no book loss or unabsorbed depreciation after setting off, therefore, the Assessing Officer has rightly not allowed set off of book profit against so called unabsorbed losses. Though the Assessing Officer has not allowed the same on different reasoning. 9. Aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us. 10. Before us, Ld. Counsel Shri. S.K. Tulsiyan submitted that, the B/F busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /-. We note that the learned AO had disallowed the claim of the assessee on the pretext that the brought forward losses cannot be set off after a period of 8 years since the losses of ₹ 2,95,24,689/- pertains to FY 1996-97, 1997-98 and 1998-99. With respect to the allegation of the learned AO that the brought forward losses cannot be set off after a period of 8 years it was submitted by the assessee before the learned CIT(A) that the limitation period of 8 years do not apply to MAT provisions contained in Chapter XII-B (section 115J to 115JB) of the Act since the said sections starts with a Non-Obstante Clause. We note that the submissions of the assessee in this respect were not at all discussed by the learned CIT(A) in his order. Instead, he dismissed the appeal of the assessee on an altogether new ground that the entire brought forward losses has been adjusted against General Reserve in the books of accounts. We note that Ld. A.O. has rejected the claim of the assessee on the ground that the aforesaid business losses arose more than 8 years back and hence the assessee could not be brought forward and set off in Assessment Year 2009-10. We note that the per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Reserve of the assessee company, as noted above. We note that Reserves and Surplus shown by the assessee company in audited accounts in Schedule-II, as noted above, does not contain any balance in the head General Reserve till 31.03.2006. In the year 2006-07 (relating to AY 2007-08), the assessee company credited a sum of ₹ 18,69,57,957/- in the General Reserve account on account of waiver of secured loan pursuant to Scheme of Arrangement and debited a sum of ₹ 13,23,50,897/- on account of Debit Balance in the profit and loss acount. Hence, the closing balance of General Reserves was ₹ 5,46,07,060/- as on 31-03-2017. In the immediately next year (FY 2007-08 relating to AY 2008-09) on 01-04-2007, the amount of ₹ 18,69,57,957/- (and not the amount of ₹ 5,46,07,060/-) ws brought forward and shown under the heard 'General Reserve-'Balance as per Last Account'. This Clearly transpires that the assessee had not adjusted the brought forward losses/debit balance of Profit and Loss account with the General Reserve in the financial year 2006-07. The closing balance of General Reserves as on 31-03-2008 was ₹ 5,78,30,647/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ach reserve and the amount in respect thereof Less: Debit balance in profit and loss account (if any) Surplus, i.e. balance in profit and loss account after providing for proposed allocations,namely:- Dividend, bonus or reserves. Proposed additions to reserves. Sinking Funds.] As evident from the above, the assessee had actually carried forward the amount of ₹ 18,69,57,957/- to the next years and not the net amount after adjustment of debit balance in the Profit and Loss account. If the debit balance of profit and loss account would have been adjusted against General Reserve in the FY 2007-08 (AY 2008-09), then the opening balance as on 01-04-2008 would not have been ₹ 18,69,57,957/-. As such, it is clear that the assessee had not adjusted the brought forward losses of earlier years with the General Reserves. Hence, the observation of the learned CIT(A) that the entire brought forward losses has been adjusted against General Reserve in books of accounts is not correct. 15. Now we shall examine whether waiver of a loan is capital receipt or revenue receipt? We n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital reserve as the waiver of a loan taken for acquisition of a capital asset is a capital receipt falling within the category of capital surplus which is nonrecurring and exceptional item which is to be disclosed as per the requirement of the Companies Act. Further it is quite pertinent to note that, clause (ii) of Explanation -I of section 115JB is also an indicator of the intention of the legislature and also the scheme of the section that the incomes which are treated as exempt under the Act are to be excluded from the profit loss account. [Para 16] Waiver of loan, utilized for purchasing plant and machinery, represented capital receipt forming part of capital reserve and, thus, it could not be added back while computing book profit under section 115JB. Amount borrowed by a company on capital account, i.e. for acquisition of a capital asset cannot be reckoned as a nature of trading liability as envisaged in section 41(1), and, therefore, its subsequent remission cannot be deemed as income under said provision. It is abundantly clear from the judgment of the Coordinate Bench (supra) that waiver of a loan is a capital receipt therefore, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 dated 01.08.2012 referred to and relied on by the Ld.CIT(A) in his appellate order does not reflect the correct legislative intention of the Explanation-2 below Sec.37(l) of the I.T. Act and therefore the same was not binding on him. 1(d) That as the Referral fees paid to the Doctors by the Appellant Hospital were undoubtedly for the promotion of its business interest i.e. for commercial expediency, the Ld.CIT(A) erred in not deleting the disallowance of ₹ 39,38,184 made by the Ld A.O. 1(e) That the requirements of commercial expediency override even the illegality of expenses as provided in Explanation-2 below Sec.37(l) of the I.T. Act as held by the Hon ble Tribunal in the case of Pranav Construction Co.-vs.-ACIT reported in 61-TTJ-145 (Mum.) and consequently the Referral fees paid by the Appellant on account of commercial expediency should have been held as admissible by the Ld.CIT(A). 2. That, the appellant craves leave to alter, amend, rescind and substitute any of the above-mentioned grounds and add any further grounds before or at the time of hearing of the appeal. 18. Brief facts qua the issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness promotion expenses. The assessee submitted before AO that a total amount of ₹ 39,38,184/- was paid to the Doctors engaged in medical profession who had recommended their own patients to the hospital for better treatment and such payments are not covered by Explanation below section 37(1) of the I. T. Act and consequently the same should not be disallowed. However, Ld AO rejected the contention of the assessee and held that payments to doctors is a clear violation of prohibition mandated by the Indian medical Council vide the amendment to the IMC (Professional Conducts, Etiquette and Ethics) Regulation, 2012 dated 10.12.2009, and, accordingly, referral fees paid to Doctors amounting to ₹ 55,65,464/- was disallowed and added back to total income of the assessee. 19. On appeal, Ld. CIT(A) confirmed the addition made by assessing officer. Aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us. 20. Shri S.K. Tulsiyan, ld. Counsel for the assessee, submitted before us that the entire sum of ₹ 55,65,464/- was not paid to the Doctors. Out of total amount of ₹ 55,65,464/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the other hand, ld DR submitted before us that assessing officer had rightly placed reliance on Circular No.5/2005 dated 01-08-2012 issued by CBDT wherein it was categorically stated that any kind of freebies given to doctors and other medical professionals by a pharmaceutical company was not allowable u/s 37(1) of the Income-tax Act. The AO further held that payment of referral fees to doctors is a clear violation of prohibition mandated by the Indian Medical Council and accordingly held that referral fees paid to the doctors amounting to ₹ 39,38,184/- is not allowable expenditure u/s 37 of the Act. The ld Counsel stated before us that as per the regulations framed by the Medical Council of India (hereinafter referred to as the MCI ) namely, Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation, 2002 and the amendment made thereto from time-to- time, it is very clear that a medical practitioner shall not receive inter alia any cash or monetary grant from any pharmaceutical and allied healthcare industry in individual capacity under any pretext. However, the said restriction limits itself at that and does not further prohibit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the MCI. It is also the plea of the Petitioner hospital that the Petitioner was not provided an opportunity of being heard and thus the principles of natural justice were violated. 7. In the counter affidavit filed by the Respondents, it is not disputed that the MCI under the 2002 Regulations has jurisdiction limited to taking action only against the registered medical practitioners. Its plea however, is that it has not passed any order against the Petitioner hospital therefore; the Petitioner cannot have any grievance against the impugned 8. It is clearly admitted by the Respondent that it has no jurisdiction to pass any order against the Petitioner hospital under the 2002 Regulations. In fact, it is stated that it has not passed any order against the Petitioner hospital. Thus, I need not go into the question whether the adequate infrastructure facilities for appropriate post-operative care were in fact in existence or not in the Petitioner hospital and whether the principles of natural justice had been followed or not while passing the impugned order. Suffice it to say that the observations dated 27.10.2012 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al of doubts, it is hereby declared that for the purposes of subsection (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. Condition for allowance under section 37(1) of the Act are as follows: a. Such expenditure should not be covered under the specific section i.e. sections 30 to 36. b. Expenditure should not be of capital nature c. The expenditure should be incurred during the previous year. d. The expenditure should not be of personal nature. e. The expenditure should have been incurred wholly or exclusively for the purpose of the business or profession. f. The business should be commenced. If all the above conditions are satisfied, the assessee is entitled to claim deduction u/s 37 of the Act. Further, the disallowance under Explanation 1 rests on the following conditions precedent: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation to section 37(1) of the Act is not applicable since the payment of referral fess is neither an offence nor prohibited by law. Hence, the said payment of referral fees to doctors is an allowable expense u/s 37(1) of the Act. 24. The Ld Counsel stated that CBDT Circular referred by the learned AO has no relevance in the present case since the said circular is not backed by any enabling provision either under the Income Tax Act or under the Indian Medical Council Regulations and as such impinges on the conduct of the pharmaceutical and allied health sector industries in carrying out its business. For that ld Counsel relied on the judgment of the Coordinate Bench of the ITAT, Mumbai in the case of Aristo Pharmaceuticals (P.) Ltd. vs ACIT reported in [2019] 107 taxmann.com 119 (Mumbai - Trib.). In this case, the entire issue of payment of referral fees to doctors by health industry was discussed in detail and it was held as follows: On perusing the regulations issued by the Medical Council of India, it is found that the same lays down the code of conduct in respect of the doctors and other medical professionals registered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax law or under the Indian Medical Council Regulations, clearly impinges on the conduct of the pharmaceutical and allied health sector industries in carrying out its business. Thus, in the absence of any sanction or authority of law on the basis of which it could safely be concluded that the expenditure incurred by the assessee- company on sales promotion expenses by way of distribution of articles to the stockists, distributors, dealers, customers and doctors, is in the nature of an expenditure which had been incurred for any purpose which is either an offence or prohibited by law it is concluded that the same would not be hit by the Explanation to section 37(1). Alternatively, it is viewed that it is a trite law that a CBDT Circular which creates a burden or liability or imposes a new kind of imparity, cannot be reckoned retrospectively. It a viewed that though a benevolent circular may apply retrospectively, but a circular imposing a burden has to be apply prospectively only. Thus, in the backdrop of the aforesaid settled position of law as regards the prospective applicability of an oppressive circular, it is viewed that as the CB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts - During assessment proceedings, Assessing Officer noted that assessee had debited advertisement and sales promotion expenses, customer relationship management expenses, key account management expenses, gift articles and cost of free samples in profit and loss account - Assessing Officer disallowed above expenditure in terms of Explanation to section 37(1) in view of Circular No. 5 of 2012; wherein CBDT referred to amendment to 'Indian Medical Council Regulations, 2002', brought from 10-12-2009, imposing prohibition of medical practitioner and their professional associations from taking any gift, travel facility, hospitality, cash or monetary grant from pharmaceutical and allied health sector industries - Whether MCI Regulation 2002 provides limitation/curb/prohibition only for medical practitioners and not for pharmaceutical companies and hence it could not have had any prohibitory effect on pharmaceutical company like assessee - Held, yes - Whether expenses incurred by assessee could not be reckoned as freebies given to doctors as they were purely promotional materials which were distributed to doctors for brand recognition and not for purpose of ..... 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