TaxTMI 
TaxTMI 
2019 (9) TMI 768
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....rovisions of law. (2) The Learned Commissioner (Appeal) erred in fact and in law in confirming disallowance of Rs. 2,65.40,195/- u/s 40A(2)(b) of the Income 'fax Act. 1961 considering it as diversion of income by the appellant to CCCPL and from CCCPL to ('('('PL's directors. (3) The Learned Commissioner (Appeal) erred in fact and in law in confirming the disallowance of Rs. 35,825/- being 0.5% of average investments as administrative expenditure u/s 14A of Income Tax Act by applying rule 8D though assessee has not incurred such expenditure. (4) The Learned Commissioner (Appeal) erred in fact and in law in confirming the disallowance of Rs. 134863/- being late payment of employee's contribution to PF/ESIC u/s 2(24)(x) of Income Tax Act though there is no substantial delay. (5) The Learned Commissioner (Appeal) erred in fact and in law in not adjudicating the additional ground of appeal raised vide letter dated 26/10/2015: "The Learned Assessing Officer erred in fact and in law in adding back Rs. 35,825/- as disallowance u/s 14A of the Income Tax Act, 1961 while calculating Book Profit for the purpose of MAT u/s 115JB of Income Tax Act, 1961 even th....
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....eptable and therefore entire expenditure to the tune of Rs. 2,65,40,195/- was disallowed by the Learned AO which was in turn confirmed by the Learned CIT(A). Hence, the instant appeal before us. 6. At the time of hearing of the instant appeal, the Learned Senior Counsel appearing for the assessee reiterated the submissions of the assessee before us. In terms of the service mentioned in the MOU entered into by the two Corporate Companies the payment for research expenses has been paid by the assessee. On this aspect he further relied upon the judgments passed by the Jurisdictional High Court in the matter of Hemato Oncology Clinic (Ahmedabad) (P.) Ltd. reported in 93 taxmann.com 272 (Ahd). On the other hand, Learned DR submitted before us that the MOU does not have any legal sanctity since the same has been documented on a plain paper not even notarized. He further relied upon the order passed by the authorities below. 7. We have heard the respective parties, we have perused the relevant materials available on record. It appears from the records that in spite of repeated direction issued by the authorities below the assessee has failed to justify its claim by supporting evidence....
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....it can carry out any research work. Apart from the above, it is also verified from the balance sheet of CCCPL and it is found that the CCCPL has not show assets much less research equipment. From the above it is crystal clear that so-called agreement entered into only a device to divert the income of one entity to another." Before the Learned CIT(A) the assessee submitted as follows: "4.2. The submission of the appellant before the CIT(A) is as under: 1. Vide 3(b) on page no 8 to 10 of the assessment order, the learned assessing officer has disallowed the Research payment of Rs. 2,65,10,492/- made to Clinical Care Consultants Pvt. Ltd in pursuant to the Memorandum of Understanding dated 02/08/2010. During the year under consideration the assessee has earned research income of Rs. 4,17,26,830/- from the various pharmaceutical companies on various research projects given by them. The clinical trials are given to the qualified doctors. The assessee being a hospital possesses necessary infrastructure facilities for carry out the research activities. CCCPL have manpower in the form of professional doctors having a research projects in their names. The gross receipts from researc....
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....l services rendered by doctors to CCCPL. (ii) In view of above CCCPL is not require any machinery or equipment for research work. All the research related infrastructure facilities has been provided by the assessee. (iii) The MOU is not any legal document which requires any legal formalities. But it the receding of the understanding between the two persons agreed by them. Except those parties, no body has any interest in the said documents. (iv) As per procedure of clinical trial the pharmaceutical company who require the research of new drugs has to obtain license for the purpose. Therefore, CCCPL has not to hold any license for research work carried out by it. (v) The CCCPL having the team of professional doctors to carry out research work and the said professional doctors have carried out the research work in the hospital of the assessee and for that the payment has been made to CCCPL. (vi) From the profit & loss account of the CCCPL it is proved that against the payment received from the assessee in respect of research work, the CCCPL has made payment of professional fees to doctors. For the research work the CCCPL has not employed permanent employees. But it has....
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....m marginal tax. Therefore, so called diversion of income has not for any evasion of tax liability by the assessee. The payment has been made for services received by the assessee. 8. The Learned CIT(A) in appeal rejected the case of the assessee with the following observations: "4.3. I have gone through the facts and the submission of the appellant carefully. In the assessment order A.O. has observed that the appellant has paid Rs, 2,65,40,195/- to CCCPL (Clinical Care Consultants Pvt. Ltd) as research fees. Further, it is seen that CCCPL will render and conduct all their health care and clinical research services and engagements at CIMS, but after verification of balance sheet & P &L A/c. of CCCPL it is found that neither has any assets/facilities for research work nor has debited an research expenditure. Thereafter, MOD furnished by the appellant on plain paper, which cannot be considered and which does not clarify the type of research work. Further, It pertinent to note that appellant has entered into other MOU with CCCPL on the san date to carry out certain other health care services. Further, the appellant has failed provide any documentary proof and any manpower in respe....
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....at the CCCPL will render and conduct all their health care and clinical research services and engagements at CIMS. However, on verification of Sheet & P&L A/c of CCCPL for the A. Y-2012-13, it is seen that CCCPL neither has any assets/facilities for research work nor has debited any research expenditure. Whereas the appellant has vehemently put up that appellant has submitted that appellant has necessary infrastructure facilities to carry out research work and doctors have formed a company namely CCCPL for the purpose of carrying on medical profession in group. Therefore, the research work received by the individual doctors have been carried out by them at the hospital of the assessee and directed to make payment for the professional services rendered by doctors to CCCPL In view of above CCCPL does not require any machinery or equipment for research work. For the research work the CCCPL has not employed permanent employees. But it has hired the professional doctors to carry out research work at CIMS Hospital Pvt. Limited. I am not convinced with the arguments of the appellant for the reason and find merit in the findings of the A.O. The findings are as under:- i) From the MOU, i....
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....ch work. As such, the expenses debited by the assessee as a research expenditure paid to CCCPL appears to be only paper entry/bogus without being any actual service rendered by the CCCPL. In view of the above, the appellant claim for expenditure of Rs. 2,65,10,195/- in respect of research expense disallowed and added to the total income by the A.O. is confirmed. The ground! of the appellant is dismissed." 9. It appears from the finding of the Learned CIT(A) that the authorities below has not been provided with any documentary proof that CCCPL is having any manpower to carry out any research work as mentioned in the Memorandum of Understanding. The MOU further does not specify the type of research work it would undertake. Documentary proof that CCCPL is competent to carry out research work as specified by MOU has been failed to be submitted by the assessee. It was further found that no asset has been shown by the CCCPL in their balance sheet for research equipment though the MOU particularly envisaged that CCCPL would render and conduct all their health care and clinical research services and engagement at CIMS. Thus in the absence of necessary infrastructure facilities to carry o....
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.... be inferred that no satisfaction was recorded in terms of section 14A r.w.r. 8D of the Act. Hence we reverse the addition made by the Revenue and further direct the Learned AO to delete the said disallowance. In the result, assessee's ground of appeal is allowed. 13. Ground No.4 Admittedly this ground of appeal is covered against the assessee by and under a judgment pronounced by the Jurisdictional High Court in the case of GSRTC Ltd. reported in 366 ITR 170 (Guj.). Since PF/ESIC contribution u/s 2(24)(x) of the Act of Rs. 1,34,863/- has been paid by the assessee even beyond the grace time, prescribed by the concerned Act, the same has been disallowed by the authorities below. 14. At the time of hearing of the instant appeal, the Learned Sr. Counsel appearing for the assessee fairly submitted before us that the issue has been decided against the assessee and hence we confirm the order passed by the authorities below. Thus this ground of appeal preferred by the assessee is dismissed. 15. Ground No.5 The assessee has challenged the adjudication of the disallowance under section 14A while computing book profit u/s 115JB of the Act by the Revenue. 16. This additional ground ha....
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....ed by National Accreditation Board for Hospital & Health Care Providers and National Accreditation Board for Testing & Calibration Laboratories, filed its return of income through electronic media on 29.09.2012 declaring total income at Rs. 10,20,000/- for A.Y. 2012-13 where total receipt of Rs. 87,28,26,274/- was shown and net profit of Rs. 3,26,36,457/- was declared which was processed u/s 143(1) of the Act. Subsequently, upon scrutiny relevant notice u/s 143(2) dated 12.08.2013 was issued followed by a detailed questionnaire along with the notice u/s 142(1) dated 28.07.2014 due to change of jurisdiction. 22. During the course of assessment proceeding, it was observed that the assessee has debited a sum of Rs. 25,83,45,108/- as professional fees to consultant. It was further observed from the details mentioned at Clause-18 of Form No.3CD that out of the said amount a sum of Rs. 17,50,97,905/- was paid to Clinical Care Consultant Pvt. Ltd. (hereinafter referred as 'CCCPL') a concern covered u/s 40A(2)(b) of the Act. Notice u/s 142(1) dated 13.08.2014 was served upon the assessee directing to furnish the details of professional fees and consultant charges paid to the persons cove....
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....nture of two corporate entities the aspect of income sharing is lacking in the MOUs. He also made an observation that both the memorandum of understanding were signed by Dr. Milan Chag for and on behalf of CIMS and Dr. Anish Chandarana for and on behalf of CCCPL who are the common directors of both the companies. Further that, the MOU made on a plain paper instead of stamp paper; neither the same was notarized. The Learned AO, therefore, questioned the huge payment of Rs. 17.50 crore to CCCPL. It was further observed that though the assessee has debited an amount of Rs. 2,65,10,495/- on research expenditure which were again paid to CCCPL, the said CCCPL neither has incurred any expenses related to research work nor has any asset to justify services rendered as research work. Thus such expenditure is nothing but a paper entry without being any actual service rendered by the CCCPL. The said professional fees paid by the assessee to CCCPL was finally ploughed to the doctors who are the common directors to the both the companies who in turn again after claiming various expenses finally offered income for taxation at a lower amount. It appears from the records that the assessee has sh....
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..... 2,65,10,495/- in the garb of research expenses was disallowed and added to the total income of the assessee. The total income of disallowance was worked out at Rs. 6,40,47,418/- (3,75,36,923 + 2,65,10,495). In appeal, the professional fees to the tune of Rs. 3,75,36,923 disallowed u/s 40A(2)(b) was reversed by the Learned CIT(A). The revenue has challenged such deletion of disallowance made u/s 40A(2)(b) by the Learned CIT(A) before us. 25. At the time of hearing of the instant appeal, the Learned Senior Counsel appearing for the assessee submitted before us that it is the case of the appellant that since there was sufficient carried forward loss u/s 35AD in respect of A.Y. 2011-12, there was no requirement of diverting the income to evade payment of tax by the appellant. When both the assessee and CCCPL are corporate assessee and are paying 30% tax, there is no tax benefit to the assessee to transfer profit to CCCPL. In fact the directors and employees were also assessed to tax at the highest rate of 30% and thus the entire issue is revenue neutral. The question of making higher payment to the director under CCCPL has also sought to be justified by the Learned Senior Counsel....
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....nd any unabsorbed loss is to be carried forward and set off against profit of the specified business in succeeding assessment year. Therefore, in view of carried forward losses in respect of specified business, the assessee is not liable to tax under the normal provisions of the tax and the assessee is not required to divert the income to evade payment of tax. On the contrary, the CCCPL and the doctors have paid income tax on the professional fees received from the assessee and the CCCPL. Therefore, the finding of the learned assessing officer in respect of diversion of income by assessee to evade payment of tax is totally incorrect. (ii) The assessee has not made any payment directly to the doctors. The assessee company has deducted the discounts given to patients on the instruction of the doctors from the professional fees payable to the CCCPL. The assessee has made such deductions from the professional fees payable to doctors through CCCPL as the discount to patients not borne by the assessee but it is to be deducted from the concerned doctor's payments. It may be noted that such deduction does not mean that the assessee has made direct payment to doctors as understood by....
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....d have opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the services for which payment is made or the legitimate needs of the business of the assessee or the benefits derived by or accruing to the assessee. Therefore, for determining the excessive or unreasonable expenditure, the learned assessing officer has to consider the following: (a) Fair market value of the professional services received by the assessee, (b) legitimate needs of the business of the assessee (c) benefits derived by or accruing to the assessee 7. From the assessment order it appears that there are no such findings arrived at by the learned assessing officer. On page no 5 of the assessment order the learned assessing officer has merely listed the payment made by CCPL to the common directors of CIMS & CCCPL and other professionals. It is submitted that the learned assessing officer has compared only the payments made. He has not compared the other factors which affect the quantum of professional fees paid i.e. the qualification of the doctors, nature of services rendered, time given to attend the hospital, numbers of "patients examined or treated, nat....
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....PL to the extent of expenditure which have been accepted/ allowed in case of the doctors by their respective Assessing Officer. 9. The learned Assessing Officer has framed .the assessment order on going through the case record of the CCCPL and doctors. The observations made by the learned Assessing Officer have not been disclosed to the assessee during the course of assessment proceedings or no show cause notice in this regard was issued. The submission made vide letter dated 4th March, 2015 has not been considered in the assessment order. The said letter was personally handed over by the authorized representative of the assessee to the learned Assessing Officer. Copy of the said letter is enclosed here with. (Refer Page no 91 to 92 of the paper book.) Thus the learned Assessing Officer failed to provide sufficient opportunity to the assessee. 10. It is also to be noted that in CCCPL and the assessee both corporate assessee and are paying tax @ 30% and there is no tax benefit to the assessee to transfer profit to CCCPL. Further the assessee has huge carried forward loss u/s 35AD in respect of assessment year 2011-12. Therefore, it is in the interest of the assessee to declare h....
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....12-13 has debited Rs. 16,89,42,973/- as payments to professionals as professional fees which includes Rs. 13,52,54,296/-. Further, verification of return of income filed by the individual directors, for the F.Y.- 2012-13 and from the details, it is found that the total income offered by said common directors in their respective return of income is only at Rs. 9,25,19,447/- as against total payments shown by CIMS towards professional fees at Rs. 14,1 7,87,410/-. Thus, there is leakage of Rs. 3,75,36,923/- as avoidance of tax. It is also important to mention here that, on perusal of Form No. 3CD, clause 18, filed along with the return of income by the assesses, it is seen that very nominal sum has been paid to other Doctors namely (a) Dr. Sneha Sax/- Rs. 1,28,900/-, (b) Dr. Prawn Chandarana Rs. 13,53,970/- (c) Dr. Manisha Shah- Rs. 15,85,060/-. So even a plain reading can observe that, just to cover the huge payments to Doctors/Directors under professional fees, the assessee has made payments u/s. 40A(2)(b) to CCCPL 3.4. The appellant has submitted that the assessee company is engaged in the specified business i.e. building and operating a new hospital having 100 beds for patients....
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....s. Gujarat Gas Financial Services Ltd, reported at 233 Taxman 0532 (2015). 3.5. From the facts of the case, it is seen that the A.O. has made disallowance under Section 40A(2)(b)of the Act for Rs. 3,75,36,923/- in respect of professional fees, verification of return of income filed by the individual directors, for the F.Y.-2012-13 and details as complied above in the assessment order(supra), it is found that the total income offered by said common directors in their respective return of income is only at Rs. 9,25,19,447/- as against total payments shown by CIMS towards professional fees at Rs. 14,17,87,410/-. Thus, there is leakage of Rs. 3,75,36,923/- as avoidance of tax. The appellant has submitted that it has sufficient loss carried forward so there is not required to divert the income to evade payment of tax. It is also to be noted that in CCCPL and the assessee both corporate assessee and are paying tax @30% and there is no tax benefit to the assessee to transfer profit to CCCPL. This substantiates that both Appellant company as well as its Directors and employees were assessed to tax at the highest rate of 30% and hence, this entire issue is revenue neutral. Accordingly, e....
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....cted to give relief accordingly. The ground of the appeal is allowed." 28. It appears that the ground of Revenue neutrality has been take into consideration mainly by the Learned CIT(A) and therefore relied upon the judgment passed by the Jurisdictional High Court in the matter of CIT-vs- Gujarat Gas Financial Services Ltd. reported in 233 Taxman 0532 (2015) wherein it has been held that when both the assessees are assessed the income tax at a maximum marginal rate, it cannot be said that the service charge paid by the assessee company was at unreasonable rate to evade income tax and thus deleted the addition of Rs. 3,75,36,923/-. We also carefully considered the judgment passed by the Jurisdictional High Court in the matter of PWS Engineers Limited-vs-DCIT in Tax Appeal No.209 of 2015 wherein it was held that if once the income is being charged in the hands of the directors in the highest tax bracket, taxing the same in the hands of the company would amount to double taxation. In the case in hand before us the employees and/or directors has paid their tax at the highest tax bracket of 30% and therefore entire issue is revenue neutral. We, therefore, find no justification in disa....