TaxTMI 
TaxTMI 
2021 (1) TMI 557
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....s which rendered the assessment order as erroneous and prejudicial to the interest of revenue were mentioned in the show cause letter dated 07.12.2017 issued to the assessee. 3. In response, assessee filed written submission alongwith enclosures on 22.12.17. Ld. PCIT observed from the submission made by assessee on 22.12.2017 that the assessee had submitted details of payments made to professionals including dentists and general physicians during assessment proceedings vide letter dated 22.02.16 and 08.03.16. It was submitted by the assessee that disallowance of expenditure u/s 14A vide letters dated 01.02.2016 and 08.03.2016 and was further submitted by the assessee that these aspects were already examined by the AO during the course of assessment and jurisdiction u/s 263 cannot be exercised by Ld. PCIT. 4. Further, assessee explained to Ld. PCIT vide letter dated 22.12.2017 that it also offers wellness packages, pre job and post job health check-ups, etc. to its corporate clients and has made payment to dentists and general physicians for their respective services, assessee denied that the payments made by them are not in violation of the Circular No. 5 of 2012. It was subm....
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....f professional fees paid to doctors amounting to Rs. 70.89 crores and allowability under the provision of Income Tax Act especially keeping in view the guidelines contained in Circular No. 5of 2012 issued by the CBDT. He also directed the AO to examine the nature of all the assets held by the assessee and work out the disallowance u/s 14A of the Act. Further, he directed the AO to examine the disallowance made u/s 43B of the Act after obtaining details of actual payments of expenses covered u/s 43B of the Act. 9. Aggrieved with the above order, assessee is in appeal before us raising the following grounds of appeal;- A. GROUNDS IN RELATION TO INITIATION OF 263 PROCEEDINGS: 1. The Ld. Principal CIT erred in seeking to exercise jurisdiction u/s 263 of the Act on the premise that payments by the assessee to dentists/general physician is by itself hi violation of Circular 5 of 2012 issued by CBDT and thus forming an incorrect belief that the order passed u/s 143(3) by the AO is erroneous in so far as it is prejudicial to the interests of the revenue. 2. The Ld. Principal CIT erred in seeking to exercise jurisdiction u/s 263 of the Act on the premise that c....
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....O made certain additions, which were not challenged by the assessee. 11. He further submitted that the Ld. PCIT issued a notice under section 263 of the IT Act dated 7thDecember, 2017seeking to exercise jurisdiction u/s 263 of the Act, on the following grounds; i) A company running pathology labs making payments to dentists, general physicians, etc, and not pathologists, is prima facie in the nature of freebies to the payee, and is in violation of CBDT Circular No 5 of 2012, which has not been examined during assessment proceeding. ii) In determining dis-allowance u/s 14A of the Act, value of average investments has been determined, considering the net value of investments as against the gross value of investment as required in the section. 12. Further assessee appeared before the Pr.CIT on 22ndDecember, 2017 and filed its detailed objections to the exercise of jurisdiction u/s 263 of the Act. However, without appreciating the submissions of the Assessee, the PCIT vide order dated 20thFebruary, 2018 held that the assessment order passed by the AO is erroneous and prejudicial to the interest of the revenue. In the said order, the PCIT inter alia made the foll....
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....during the course of assessment proceedings. Therefore, the further claim of the assessee that it had explained the nature of the professional fees paid to doctors during the course of assessment proceedings to AO is also erroneous and tenable on the records". 15.2. He submitted that the above observation of the PCIT is factually incorrect. This is established beyond doubt, from the evidence available on record itself relating to the appellate proceedings of AY 2014-15. 15.3. He submitted that the assessee was vigorously pursuing the authorities for early hearing of an appeal for A.Y. 2014-15 pending before CIT (A). In that context, A.O vide letter No. DCIT 7(3)(1)/Appeal/SRL/2019-20 dated 22.5.2019 addressed the Ld. PCIT. He brought to our notice the letter dated 22.05.2019, which is reproduced below; "xxx "iii. In Assessee 's own case, revenue audit party raised the objection for AY 2013-14 vide objection No ITRA/PA On Hosp. ETC/ DCIT - 7(3)(1)/AB/ Mumbai AQ No. 126 dt. 16.11.2016 and the same is reproduced below; In the assessment of the assessee completed under 115JB determining the income of rupees 4,74,98,996, it was seen that the assessee....
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....when the notice was based on audit objection and not on independent examination of assessment record by the CIT. 16.4. Ld AR submitted, the notice dated 7.12.2017 for initiation of revision proceedings, evidently being solely based on audit objection is therefore clearly illegal. Consequentially, the impugned order, would have to be quashed. 17. Third submission 17.1. He submitted that the AO, in para 3 of his assessment order dated 22nd March, 2016 notes that the assessee company is engaged in the business of providing testing, diagnostics and prognostics monitoring screening tests on human being. The AO was thus very well aware about the business activities of the Assessee. 17.2. He submitted that the tests are to be conducted by pathologists who are qualified doctors as well. A pathologist is a doctor who specializes in diagnosing diseases by examining tissue samples. A pathologist is a medical healthcare provider who examines bodies and body tissues. He or she is also responsible for performing lab tests. 17.3. He submitted that the Assessee had engaged the pathologists/ doctors to undertake testing activities and to provide their opinion/ reports to individua....
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....rofessional association of doctors in their relationship with pharmaceutical and allied health sector industry. 18.3. Further he submitted that on a plain reading of the aforesaid notification, it is quite apparent that the code of conduct enshrined therein is meant to be followed and adhered by medical practitioners/doctors. It illustrates the various kinds of conduct or activities which a medical practitioner should avoid while dealing with pharmaceutical companies and allied health sector industry. It provides guidelines to the medical practitioners of their ethical codes and moral conduct. Nowhere the regulation or the notification mentions that such a regulation or code of conduct will cover health care sector or pathological labs in any manner. 18.4. He submitted that before the Delhi High Court in the case of Max Hospital v. MCI in [WPC 1334 of 2013, dated 10-1-2014], the Medical Council of India filed an affidavit to the effect that the Indian Medical Council Regulation of 2002 has jurisdiction to take action only against the medical practitioners and not to health sector industry. 18.5. The Circular No.5 of 2012 of CBDT dated 1-8-2012 has solely based on the guide....
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....matter of dispute before various Courts. The CBDT vide Circular No. 200/79/2000-IT(A-I), dated 23-1-2001 opined that expenditure on VRS should be treated as capital expenditure. The CIT exercised his jurisdiction u/s 263 of the Act to treat the order passed by the AO as erroneous, for the reason that the AO failed to examine applicability of the Circular to the assessee. The High Court, setting aside the order of the CIT, held that power u/s 263 cannot be exercised to force upon an officer to follow a Circular that expresses a view contrary to law laid down by Courts. 20.2. He submitted that Solvay Pharma case 2018 192 ITJ 384 (Mumbai) relate to exercise of revision under Section 263 itself. Hence, that decision fully covers the present matter. 21. Seventh Submission 21.1. Ld AR Submitted that during this year, the assessee had incurred Rs. 70.82 Crores towards professional services availed by it. For internal accounting and management purposes, the assessee classified its business under three different heads, Drs. Tribedi and Roy Labs at Kolkata, Dr. Phadke Labs at Mumbai and other independent labs across India, including Mumbai. The details of expenditure has been giv....
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....on availability of retainer doctors) 74-76 4. Payment to professionals Payment to CAs, accountant, ESI consultant, etc. 77-84 5. Payment to Classicare Diagnostics Service provider for collection of sample and delivery of reports 85-94 21.4. He submitted that out of Rs. 70.82 crore, Rs. 49.99 crore was incurred by the assessee at its other labs. The other labs are mainly Pathology and Radiology lab at various locations such as Jhankaria Imagine center - Mumbai, Mysore Lab, Gurmeet Lab - Mumbai, Delhi, Coimbatore, Indore, Surat, Vadodara, Guwahati etc. Pathology Business refers to business related to blood samples. Radiology Business refers refer to the business of X-rays, Ultrasound, MRI and CT to the walk in client. The break up of these is as under: Sr. No. Particulars Remarks Page No.-Paper book II 1. Payment to doctors functioning as Center heads These doctors manage the 5 Centers in Mumbai and undertake the actual diagnostic activities at the labs of the assessee 96- 128 2. Payments to retainers Retainer doctors, marketing personnel, etc. 129-147 3. Payment to visiting doctors These doctors are called up....
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....9;page 16 to 29 of paperbook Volume III).These evidences were furnished by the Assessee to the PCIT. These evidences clearly establish that the consideration paid by the Assessee to dentists and general physicians were in the course of conducting its business, for the services rendered by the said dentists and general physicians. He submitted that the PCIT however completely ignored these evidences while passing the impugned order, and without giving any independent finding but remanded the entire matter to the AO. 22.6. He submitted, it is now a well settled principle of law that, when the PCIT alleges that there is failure on the part of the AO to carry out an examination, it is obligatory on the PCIT to prima facie show that claim made by the assessee in its return is incorrect. Without such exercise, the condition of the order being prejudicial to the interest of the Revenue for invocation of Section 263 would not be satisfied. The Delhi High Court in CIT v. Delhi Airport Metro Express (P.) Ltd [I.T. Appeal No. 705 of 2017, dated 5-9-2017] held that the power vested with the CIT u/s 263 of the Act cannot be used as tool to remand a matter for reassessment, without he, PCIT h....
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.... inquiry himself in the manner indicated hereinbefore. He submitted that this aspect is missing in the present case. 22.9. Further, he submitted that the Tribunal in Sadhana Stocks & Securities (P.) Ltd. vs. PCIT [2018] 168 ITD 499 (Kolkata - Trib.) has also held that the PCIT has to form a prima facie view that claim of assessee is erroneous before setting aside order of Assessing Officer. In holding so, the Tribunal made the following observation; "9. ... ... It is observed that although the ld. Principal CIT in his impugned order passed under section 263 reproduced the submission made by the assessee, he did not give any finding or observation thereon and without arriving at any conclusion to show how the order of Assessing Officer was erroneous on the issue on merit, he simply set aside the same on the ground that the claim of the assessee was accepted by the Assessing Officer without making enquiries or verification, which should have been made by him..... 22.10. He submitted that after making these observations, the Tribunal held that an order passed by the PCIT without showing the claim of the assesses to be incorrect is invalid. Similar observations have been....
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.... in relation to said investment can't he disallowed u/s 14A of the Act." 23.3. He brought to our notice, Page 69 of Volume I contains the computation of disallowance made under Section 14A, as filed before A.O. He submitted that in view of these detailed and cogent submission and A.O having invoked and disallowed under Section 14A, there is no scope for invoking Section 263 in the present matter. 23.4. He brought to our notice, in Para 8 of the order u/s 263 of the Act, the Ld. PCIT has held that the Ld. AO has failed to examine the nature of the assets held by the Assessee and exclude fictitious assets if any, for the purpose of disallowance u/s 14A of the Act. The Ld. PCIT noted that the disallowance has to be worked out on the basis of net assets, after excluding fictitious assets. However, the Ld. PCIT fails to describe or define the terms 'net assets' and 'fictitious assets' either in the SCN or impugned order. Also, these have no relevance to the present matter. 23.5. He submitted that the computation of disallowance u/s 14A of the Act on the basis of 'net assets' was the question of appeal before the Cochin Bench of this Hon'ble Tribu....
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....sdiction is clearly in violation of principles of natural justice and hence has to be set aside. 24.2. The assessee relies upon the judgment of the Punjab and Haryana High Court in CIT v. Roadmaster Industires of India Ltd [2014]223 Taxmann 13 (P&H) (page 285 to 287 of paperbook V, relevant part at page 287 para (4) wherein the High Court has clearly observed that the PCIT will not have jurisdiction to revise the order of the AOon a ground other than the ground communicated to the assessee. In the facts of the above referred judgment, a show cause notice was issued by the CIT, seeking to revise the assessment order in relation to claims made u/s 32AB and 80 HHC of the Act. The CIT however passed an order in respect of other matters in respect of which, the assessee was not given any opportunity of hearing. 24.3. Further he submitted that even otherwise, there is no whisper in the impugned order as to why the order of AO is erroneous or prejudicial to the interest of the revenue on this count. The order of the PCIT should therefore be set aside on this point as well. 25. On the other hand, Ld. DR brought to our notice para 6 of PCIT order in which Ld. PCIT has primarily fou....
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.... No 5 of 2012 binds the AO, and hence payments made by the Assessee to doctors are to be dis-allowed. In this regard, he placed reliance on the following decisions:- a. ACIT v. Liva Healthcare Ltd [2016] 73 taxmann.com 171 (Mumbai - Trib.) b. CIT v. Kap Scan and Diagnostic Centre (P.) Ltd [2012] 25 taxmann.com 92(P&H). and finally he submitted that all the cases relied by Ld. AR are before the amendment to section 263 of the Act. With regard to disallowance u/s 14A, he relied in the decision of Hon'ble Supreme Court in the case of Maxopp Investment Ltd. vrs. CIT (Civil Appeal No. 104-109 of 2015). 28. In rejoinder, Ld AR submitted that Ld DR in his submission submitted, CBDT circular binds the AO and payment made to Doctors is to be disallowed and placed reliance on cases Liva Healthcare (supra) and Kap Scan (supra). He submitted that both the above said judgments have been extensively considered by the Mumbai Tribunal in DCIT v. PHL Pharma Pvt Ltd [2017] 163 ITD 10 (Mum).The Tribunal, after considering these judgments concluded that the CBDT Circular No 5 of 2012 would not apply to allied medical companies. PHL Pharma has consistently been followed by the T....
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.... the order in Solvay Pharma (supra) pertained to a period prior to Explanation 2 to Sec. 263, is incorrect. 34. He further submitted, Ld DR mentioned in his argument that AO has not examined the claim of the Assessee on allowability of deduction for payment of professional fee to doctors. The PCIT has therefore rightly exercised jurisdiction u/s 263 and Ld. DR placed reliance on the following decisions:- a. Rajmandir Estates (P.) Ltd v. PCIT [2016] 70 taxmann.com 124 (Calcutta) -para 28 (affirmed by SC in [2017] 77 taxmann.com 285 (SC)) b. CIT v. Ballarpur Industries Ltd [2017] 85 taxmann.com 10 (Bombay) c. Jagdish Kumar Gulati v. CIT [2004] 139 TAXMAN 369 (ALL.) d. Malabar Industrial Co. Ltd. v CIT [2000] 109 Taxman 66 (SC) 35. With reference to above, he submitted that the objection of the Revenue Audit Party shows that the details of the doctors to whom professional fee was paid by the Assessee was available on record. The show cause notice dated 07th December, 2017 issued by the PCIT is itself based on the details furnished by the Assessee relating to doctors to whom professional fee was paid by the Assessee. When the details were avail....
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....ined and in particular in view of guidelines contained in Circular No. 5 of 2012. Apart from the above critical observations of Ld. PCIT, he also observed that AO failed to examine the nature of all assets held for the purpose of disallowance u/s 14A of the Act. 39. We observe that the above said issues based on which Ld. PCIT has quashed the assessment order and gave direction to AO to carry out the verification of the nature of professional fees paid to the doctors and disallowance u/s 14A and also gave another direction to AO to examine the allowability of expenses u/s 43B of the Act. 40. With the above said background, we observe that Ld. AR brought to our notice several alternative submissions highlighting that all the relevant information to claim the expenditure relating to professional fees paid to doctors and 14A issues were in fact submitted before the AO and he brought to our notice relevant references of revenue audit and relevant replies to the revenue audit party. Assessee has come across these information during assessment year 2014-15 proceedings. It is brought to our notice the issues raised by revenue audit party and similarity of the issues raised by Ld. PC....
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.... has proceeded with the view that there are regular consultancy fees and accepted the submissions of assessee. AO did not discuss anything in his order. The department taking clue from audit query, they are presuming that the payments are relating to freebees. There is no evidence brought on record by the revenue authorities to substantiate that there were actually freebees. Mere presumption without any cogent material to indicate that these payments are actually freebees is far fetched. 44. Therefore, in our view, Ld. PCIT has not determined the other condition how it is prejudicial to the interest of revenue. As discussed above, the payments were made to doctors, is it freebees or not is the issue. If it is freebees, it is the duty of Ld. PCIT to bring on record that these payments are in fact disallowable under section 37 of the Act. In this regard, we draw attention to the decision of Hon'ble Delhi High Court in the case of CIT vrs. Delhi Airport Metro Express Pvt. Ltd. (supra), which is reproduced below:- "10. For the purposes of exercising jurisdiction under section 263 of the Act, the conclusion that the order of the Assessing Officer is erroneous and prejudicial....