AI Drafter 
TaxTMI 
TaxTMI 
2019 (9) TMI 768
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....d the facts and circumstances of the ease and the provisions 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 calcula....
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....search Payment, 26510492 175097905 The summarization rendered by the assessee was not found acceptable 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 re....
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....has any manpower to carry out any such research work. Further, the detail of infrastructure provided by CIMS to CCCPL under the so-called agreement does not include any machinery or equipment through which 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 hospi....
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....cal trial. The 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. (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 pa....
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....rginal rate and, therefore it cannot be said that the service charge was paid to the assessee company at an unreasonable rate to evade tax. 7. In the case of the assessee, due to carried forward losses, tax is paid on book profit u/s 115JB of the Income Tax Act, 1961 whereas the CCCPL and the doctors are liable to tax at maximum 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 appel....
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....t has relied on the decision of Hon'ble Gujarat High Court in case of Commissioner of Income Tax vs. Gujarat Gas Financial Services Limited. 4.4. After going through the facts of the case, it is seen that CIMS has claimed to have paid Rs. 2,65,40,195/- to CCCIPL as research fees. A careful perusal of the so-called MOU, it can be seen that 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 ....
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....ce to reduce the tax incidence of the appellant company by entering into MOU with CCCPL. The case law cited by the appellant company is on different note and the facts of the appellant case are entirely different from the case of Gujarat Gas Financial Services Limited. However, the CCCPL neither has incurred any expenses related to research work nor has any assets to justify services rendered as research 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 resear....
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....y the assessee has not been pointed out by the Learned AO. Neither the same has been taken into consideration by the first appellate authority. It is a clear position of law that the provision of section 14A r.w.r. 8D requires that to make the disallowance the books of accounts are to be considered. In the instant case, the books of accounts has not been referred by the authorities below and therefore it can 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 asse....
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....te such addition. 19. In the result, assessee's appeal in ITA No.3213/Ahd/2016 is partly allowed. 20. ITA No. 3299/Ahd/2016 for A.Y. 2012-13 : Revenue has filed following grounds of appeals: "That the Learned CIT(A) erred in law and on facts in deleting the addition of Rs. 3,75,36,923/- made u/s 40A(2)(b) of the I.T. Act on account of professional fees." 21. The assessee company a multispecialty hospital accredited 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 co....
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.... The Learned AO was of the opinion that though the CCCPL will render and conduct healthcare, professional, clinical research and clinical services for which the assessee will pay necessary fees as agreed upon. But the MOU relied upon by the assessee is silent on such remunerations payable by CIMS for such services rendered by the professional of CCCPL. Therefore, according to the Learned AO, the memorandum has been prepared as a tool to divert the income from one entity to another to reduce tax incidence. Though this is a joint venture 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 n....
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....en not notarized. 24. Apart from that it was further observed that the MOU does not include any machinery or equipment through which it can carry out any research work. Neither it is available from the Balance Sheet of the CCCPL that it has shown any asset much less research equipment. No infrastructure to carry out any clinical research has been found in CCCPL, neither the same has been provided by the CIMS. Ultimately, the Learned AO opined that the entire payment was an arrangement to reduce the assessee's real income and thus the assessee's claim for expenditure of Rs. 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 sinc....
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....spect of specified business for assessment year 2011-12. The copy of statement of total income and the assessment order passed u/s 143(3) of the IT. Act, 1961 for assessment year 2011-12 is enclosed herewith. (Refer Page no 62 to 72 of the paper book.) In short the assessee have carried forward losses of Rs. 51,79,33,611/- in respect of deduction u/s 35AD of the Income Tax Act, 1961. As per provisions of section 73A of the Income Tax Act, 1961the loss computed in respect of any specified business referred to in section 35AD can be set off against the profit of the specified business and 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 paym....
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.... 2 above. The rates as would be decided mutually are subject to revision on a timely basis as would be agreed by both the parties." On the basis of the same MOU payments had been made in immediate preceding year which has been accepted by then assessing officer while passing assessment order u/s 143(3) of the Income Tax Act, 1961. Therefore, it is not correct that the MOU is prepared as a tool to divert the income from one entity to another to reduce the tax incidence. 6. The disallowance has been made u/s 40A(2)(b) of the Income Tax Act, 1961. As per provisions of said section the assessing officer should 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....
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....re incurred by the CCCPL and doctors for earning the income. It may be noted that the assessment of the CCCPL has been made u/s 143(3) and the payment to doctors have been accepted as reasonable and no disallowance has been made by invoking provisions of section 40A(2)(b). The copy of assessment order of the CCCPL is enclosed herewith. (Refer Page no 88 to 90 of the paper book.) Further in case of most of doctors, the assessments are made under section 143(3) and the expenditure claimed by them has been accepted by the respective Assessing Officers. In other words the learned Assessing Officer has disallowed the payment of professional fees to the CCCPL 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....
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....ed the copy of the MOU between CCCPL and the appellant. A careful perusal of the so-called MOUs entered into between CIMS and CCCPL, it is seen by the A.O. that both the documents are signed by Dr. Milan Chag for and on behalf of CIMS and Dr. Anish Chandarana for and on behalf of CCCPL who are common directors of CIMS and CCCPL Further, it is seen that the MOUs are made in a plain paper not even on a stamp paper or even notarized. A.O. has noticed that CIMS has debited Rs. 17,50,97,905/- as professional fees paid to CCCPL mainly under two heads (1) Professional Fees of Rs. 14,17,87, 410/- and (2) Research Expenses of Rs. 2,65,1 0.495/-. CCCPL in its return of income filed for the F.Y-2012-13 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. ....
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....tors by their respective Assessing Officer. It is also to be noted that in CCCPL and the assesses both corporate assesses 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 higher income and get set off of the unabsorbed loss u/s 35AD. In other words, had the assessee not paid professional fees to CCCP then it could have set off of the carried forward losses and on the other hand CCPL/doctors could have saved taxes. The assessee relies on the recent decision on Honourable Gujarat High Court in case of CIT vs. 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 resp....
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....e for AY 2012-13 of the two directors and other Doctors. It is evident from the same that all the employees/directors have paid taxes in the highest tax bracket of 30 percent 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, even on the grounds of revenue neutrality, disallowing the income in hands of the Appellant Company when it was already taxed in the hands of directors and employees would tantamount to double taxation. Hence, based on the facts of the case and the various judicial precedents cited by the Appellant, the AO is directed to delete Rs. 3,75,36,923/-. The A.O. is directed 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 margi....