AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2021 (1) TMI 557
X X X X Extracts X X X X
X X X X Extracts X X X X
....neous 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 submitted that the payments made to professionals is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 considering 'net asset value' in deleting disallowance u/s 14A read with ru....
X X X X Extracts X X X X
X X X X Extracts X X X X
....thDecember, 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 following observations i) The claim of the Assessee that the details of payment of professional fee amount to Rs. 70.89 Crores paid to doctors were filed before the AO during the course of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 was involved in running chain of pathological laboratories. It was seen that apart from paying the salary of 31,87,87,001 62 it has also debited the sum of rupees 70,89,37,290 as professional fees to doctors to other expenditure schedule. The details of professional ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der, 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 individuals who approach the Assessee. The consideration paid by the Assessee to the pathologist/doctors are for services rendered by them to the Petitioner. The Assessee had furnished a copy of its financial statements to the AO, which elaborately describe the business activities of the Assessee. 17.4. He submitted that the payment ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he 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 guidelines issued by the Medical Council of India. Evidently, Circular of the CBDT is founded on erroneous basis. 19. Fifth Submission: 19.1. He submitted that the correctness of Circular No 5 of 2012 was dealt with by this Hon'ble Tribunal in Solvay Pharma India Ltd v. PCIT E20181 192 TTJ 394 (Mum).Again, the Mumbai Tribunal in DCIT v. PHL Pharma ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urt, 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 given in line with the above classification. 21.2. He submitted that out of Rs. 70.82 Crores, Rs. 6.90 Crores was incurred by the assessee at its Kolkata lab. The assessee maintains its lab in Kolkata under the brand name of "Drs. Tribedi &Roy" (Lab). The lab has been serving the people of Kolkata and its surrounding areas. The lab providing services in the various fields of pathology like the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 upon on special needs, (for special tests and in case of non availability of retainer doctors) 148-167 4. Payment to professionals Payment to CAs, accountant, ESI consultant, etc. 168-181 5. Payment to Classicare Diagnostics Service provider for collection of sample and delivery of reports 182-199 21.5. Thus, he submitted, when the entire payment to the professionals is made for services rendered by them and not in the nature of freebees as alleged by the PCIT, the PCIT could not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 himself conducting an independent enquiry and recording a finding that the order of the AO was prima facie erroneous. The observation of the High Court in this regard are as under; "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 to the interests of the Revenue has to be preceded by some minimal inquiry. In fact, if the Principal Commissioner of Income-tax is of the view that the Assessing Officer did not und....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der 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 made in the following judgments ITO v. D.G. Housing Projects Ltd [2012] 343 ITR 329 (Delhi) (para 6) Infinity Infotech Park Ltd. v. Dy. CIT [2017] SX TTR (Trib.) 486 Sterling Biotech Ltd. v. PCIT [ITA Appeal No. 2750 (Mum.) of 2015, dated 29-6-2016], 23. Ld AR further submitted that Ld. PCIT erred in exercising jurisdiction under section 263 in relation to dis-allowance u/s 14A of the Act (Ground of Appeal No 2 and 4) 23.1. He submitted that the Assessee had invested into equity shares of DDRC SRL Diagnostics Pvt. Ltd (DSDPL) as well ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Tribunal in the ease of Geojit Investment Services Ltd. vs. ACIT [2015] 67 SOT 37 (Cochin - Trib.). In that ease, the assessee contended that the ITO, in computing the disallowance u/s 14A, had erred in taking the gross current assets as against the value of net current assets. The Tribunal allowed this contention of the assessee and held that net current assets were to be considered while applying the formula prescribed in rule 8D. However, the said decision does not provide any factual clarity into what was actually claimed by the assessee and what would be meant by net current assets and gro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he 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 found that letters dated 22.02.16 and 08.03.16 claimed to have filed by the assessee are not available on the assessment records. He submitted that even in the notice issued u/s 142(1), AO has not called for any such detail in this regard. There is no indication of any submissions made by the assessee. He submitted that no such details were filed before Ld. PCIT also. He brought to our notice assessment order in which there is no reference of any of such expenditure verified by the AO. He submitted that this itself shows that assessment order is erroneous and further he submitted with reference to amendmen....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Tribunal in a. Solvay Pharma India Ltd v. PCIT [2018] 192 TTJ 394 (Mum) b. Cadila Phamiaceuticals Ltd v. DCIT [2017] 85 taxmann.com 354 (Ahmedabad - Trib.) 29. He further submitted that in both the judgments referred to by the Ld. DR, there has been a finding of fact that the expenditure incurred was in the nature of freebees given to doctors. In the facts of the present case, there is not even an iota of evidence to suggest that the professional fee paid to doctors in the nature of freebees. In fact, the detailed evidences filed by the Assessee (Paperbook II and III) clearly shows that the payment to doctors were for services rendered by them. The PCIT has not do....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 available on record, it cannot be contended that the AO has not applied his mind. 36. He further submitted that even assuming that the AO has failed to apply his mind, that by itself would not give jurisdiction to the PCIT to review the order. Admittedly, the Assessee has filed all the details before the PCIT, including contracts with the doctors,sample reports issued by them, etc. Without conducting an independent enquiry and recording a prima facie mistake in the claim of the Assessee, the PCIT could not have exercised jurisdiction u/s 263 of the Act. This principle has time and again been laid down in the following judgments:- a. CIT v. Delhi Airport Metro Express (P.) Ltd [IT. Appeal No. 705 of 2017, dated 5-9-2017] b. Sadhana Stock....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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. PCIT in 263 proceedings. Ld. AR brought to our notice Ld. PCIT has initiated the proceedings on borrowed information and without applying his independent mind. We notice that none of these information was available nor coming out of any proceedings relating to assessment year 2013-14. 41. In our considered view, even if the information relating to the payments to doctors were not found in the assessment records, Ld. PCIT has determined and came to conclusion that the assessment order is erroneous. But mere finding the assessment order is erroneous does not give power to Ld. PCIT to annul the assessment order. It is duty imposed by the provision of section 263 that Ld. PCIT has to determine and satisfy both the conditions that the order passed by AO is erroneous i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 to the interests of the Revenue has to be preceded by some minimal inquiry. In fact, if the Principal Commissioner of Income-tax is of the view that the Assessing Officer did not undertake any inquiry, it becomes incumbent on the Principal Commissioner of Income-tax to conduct such inquiry. All that the Principal Commissioner of Income-tax has done in the impugned order is to refer to the circular of the Central Board of Direct Taxes and conclude that "in the case of the assessee-company, the Assessing Officer was duty-bound to calculate and allow depreciation on the BOT in conformity of the Central Board of Direct Taxes Circular No. 9 of 2014 but the Assessing Officer failed to do so. Therefore, the order of the Assessing Officer is erroneous insofar as prejudicial to the inte....