Income Tax Appellate Tribunal - Pune
Phadnis Clinic Pvt. Ltd.,, Pune vs Assessee on 10 April, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER
AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER
ITA Nos.2013 to 2016/PN/2013
(Assessment Years : 2001-02 & 2004-05 to 2006-07)
Income Tax Officer,
(Central)-II, Pune. .... Appellant
Vs.
M/s Phadnis Clinic Pvt. Ltd.,
1205/1-10, Shree Clinic,
Shivajinagar, Pune - 411 004.
PAN : AABCP0292K .... Respondent
ITA Nos.2059 to 2064/PN/2013
(Assessment Years : 2001-02 & 2003-04 to 2007-08)
Phadnis Clinic Pvt. Ltd.,
1205/1-10, Shree Clinic,
Shivajinagar, Pune - 411 005.
PAN : AABCP0292K .... Appellant
Vs.
Income Tax Officer,
(Central)-II, Pune. .... Respondent
ITA No.2192 to 2197/PN/2013
(Assessment Years : 2003-04 to 2008-09)
Dr. Avinash Ramchandra Phadnis,
"Shubhalaxmi", Opposite Shree Clinic,
Shivajinagar, Pune - 411 005.
PAN : ABQPP4715L .... Appellant
Vs.
Income Tax Officer,
(Central)-II, Pune. .... Respondent
Assessee by : Mr. Sunil Pathak
Department by : Mr. B. C. Malakar
Date of hearing : 23-02-2015
Date of pronouncement : 10-04-2015
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ORDER
PER G. S. PANNU, AM
The captioned appeals relate to two connected assessees involving certain common issues, therefore they have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity.
2. ITA No.2060/PN/2013 in the case of Phadnis Clinic Pvt. Ltd. relating to assessment year 2003-04 is taken as the lead case. This appeal is directed against the order of the Commissioner of Income Tax (Appeals)-Central, Pune dated 23.08.2013 which, in turn, has arisen from an order dated 31.12.2008 passed by the Assessing Officer u/s 143(3) r.w.s. 153C of the Income-tax Act, 1961 (in short "the Act").
3. In this appeal, the Abridged Grounds of Appeal raised by the assessee are as under :-
"1] The asst. u/s 153C r.w.s. 143(3) is bad in law and hence, the same may be declared as null and void.
2] The learned CIT(A) erred in disallowing the expenses of Rs.50,10,056/- claimed on account of depreciation, repairs and maintenance, interest on loan and electricity charges in respect of the property 'Shubhalaxmi'.
3] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal."
4. Before we proceed to adjudicate the specific Grounds of Appeal raised, it would be appropriate to refer to the background of the dispute. The captioned assessees comprise of a company incorporated under the provisions of the Companies Act, 1956 and one of its Directors, Dr. Avinash R. Phadnis. On 24.01.2007, a search action u/s 132(1) of the Act was carried out in the case of the Directors of Phadnis Clinic Pvt. Ltd., in the course of which 3 certain documents were seized, which also included documents belonging to the captioned assessee company. Simultaneously on 24.01.2007, a survey action u/s 133A of the Act was also carried out at the business premises of the captioned assessee company i.e. Phadnis Clinic Pvt. Ltd.. As a consequence of the aforesaid, assessments in the hands of the individual Director has been made u/s 153A r.s.w. 143(3) of the Act whereas in the case of assessee company, Phadnis Clinic Pvt. Ltd. assessments have been made u/s 153C r.w.s. 143(3) of the Act for the captioned assessment years.
5. In this background, the first issue raised before us is by way of Ground of Appeal No.1 wherein it is contended that the assessment made in the case of the company, Phadnis Clinic Pvt. Ltd. by invoking section 153C r.w.s. 143(3) of the Act is bad in law. In this context, the Ld. Representative for the assessee company submitted that the invoking of section 153C of the Act was bad in law because the necessary ingredients of the section were not fulfilled. The main plank of his argument is that no incriminating documents or material was seized from the individual Director in the course of search and therefore section 153C of the Act has been wrongly invoked. The Ld. Representative pointed out that on the basis of search on the individual Directors, the information or documents found can at best be said to be pertaining to assessee company's claim for depreciation and expenses relating to a residential building named "Shubhalaxmi". It was submitted that such information cannot be said to be incriminating or unearthed due to search because the said claim was already made in the returns of income filed by the assessee company in the normal course.
6. On this aspect, the Ld. Departmental Representative appearing for the Revenue argued that in the impugned assessments the disallowance of expenses/depreciation relating to the residential property as claimed by the 4 assessee company has been made based on the documents seized during the course of search action. Therefore, the plea raised by the assessee that there was no incriminating documents found so as to invalidate the invoking of section 153C of the Act is not justified.
7. We have carefully considered the aforesaid aspect of the controversy. The stand of the assessee is that the additions/disallowances with respect to the deprecation/expenses relating to the residential property, Shubhalaxmi has been made by the Assessing Officer in the impugned assessments on the basis of an information and material already on record and not on the basis of any incriminating evidence found during the course of search. It has also been pointed out that as regards the specific issue of depreciation/expenses of residential property, the same has been claimed by the assessee in the statement of accounts already with the Department alongwith the returns of income filed in the normal course.
8. In this context, we find that the CIT(A) has disagreed with the assessee by following the ratio of the judgement of the Hon'ble Delhi High Court in the case of SSP Aviation Ltd. vs. DCIT, (2012) 20 taxmann.com 214 (Delhi). The Hon'ble High Court in the case of SSP Aviation Ltd. (supra) has made the following observations in the context of section 153C of the Act :-
"There is no requirement in section 153C(1) that the Assessing Officer should also be satisfied that such valuable articles or books of account or documents belonging to the other person must be shown to conclusively reflect or disclose any undisclosed income."
9. If the facts of the present case are examined in the light of the aforesaid observations of the Hon'ble Delhi High Court, it would be noticed that the search in the case of the individual Directors resulted in seizure of documents which belonged to the assessee company. The assessee company has also 5 not disputed the aforesaid position but the claim setup is that the information in such documents was already available with the Revenue and was not of incriminating nature. The aforesaid objection of the assessee gets answered by the discussion made by the Hon'ble Delhi High Court wherein it is observed that there is no requirement in section 153C(1) of the Act that the Assessing Officer should also be satisfied that such documents found on the person searched must also be shown to reflect conclusively any undisclosed income of the other person. In this view of the matter, in our view, the CIT(A) made no error in dismissing assessee's plea challenging the validity of assessment u/s 153C r.w.s. 143(3) of the Act. The said decision of the CIT(A) is hereby affirmed and accordingly, assessee fails on Ground of Appeal No.1.
10. In so far as the Ground of Appeal No.2 is concerned, the dispute arises from the depreciation claimed by the assessee with respect to a residential building named "Shubhalaxmi" located at Survey No.569, CTS No.1205/1/3/4, Bhamburda, Off Apte Shirole Road, Shivaji Nagar, Pune. The Assessing Officer as well as the CIT(A) have denied assessee's claim for depreciation on the aforesaid property primarily on the ground that the ownership of the property did not vest with the assessee company as the said property was purchased by its Directors in their individual names.
11. In brief, the relevant facts and circumstances leading to the aforesaid dispute can be summarized as follows. The appellant is a Private Limited Company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of running a Gynaecology and Infertility Clinic/Hospital. Two of its Directors, namely, Dr. Avinash R. Phadnis and Dr. (Mrs.) Amita Avinash Phadnis are associated with the company in their professional capacity. The Assessing Officer noted that on 27.09.2002 the Directors of the company viz. Dr. Avinash R. Phadnis and Dr. (Mrs.) Amita 6 Avinash Phadnis purchased 9 and 5 apartments respectively in a residential property named, Shubhalaxmi which consisted of 14 apartments. The total cost of the property was 2,60,09,920/- and the source of investment was as detailed below :-
(i) Dr. Avinash R. Phadnis Rs.21,30,362/-
(Own Funds)
(ii) Dr. (Mrs.) Amita A. Phadnis Rs.30,79,558/-
(Own Funds)
(iii) ICICI Bank Home Loan Rs.2,08,00,000/-
TOTAL Rs.2,60,09,920/-
12. The loan from ICICI Bank was raised by the Director, Dr. Avinash R. Phadnis in his individual capacity. Once the property was acquired by the two Directors in their individual names, it was transferred/incorporated into the account books of the assessee company and taken as a part of its assets through a journal book entry. Simultaneously, the personal funds put into the purchase of property by the two Directors were transferred by way of book entries as liabilities of the assessee company. The ICICI Bank home-loan liability was also transferred by way of a book entry as a liability of the assessee company between the Director and the assessee company. The assessee company started reimbursing the repayment of installments of principal and interest which Dr. Avinash R. Phadnis was paying to the bank. Simultaneously, expenses on property tax, electricity bills, repairs and renovation, etc. were also incurred by the assessee company and claimed as an expenditure in its Profit & Loss Account. The interest paid on loan from ICICI Bank home-loan was also claimed as an expenditure in the Profit & Loss Account. In the return of income, assessee also claimed depreciation on the cost of the building on the ground that the building was owned and put to use for its business.
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13. The Assessing Officer required the assessee to justify its claim of depreciation and other related expenditure on the ground that the property was belonging to the two Directors in their individual capacity. The stand of the assessee has been lucidly detailed by the Assessing Officer in the assessment order and before us also the same has been reiterated. Firstly, the plea of the assessee was that the title of the property was not in the name of the assessee but in sum and substance assessee was the rightful owner of the property. It was pointed out that the extracts of the minutes of the Board meetings of the assessee company prior to the purchase of property as well as the subsequent efforts of the Directors vis-à-vis the assessee company showed that the intention was always to ensure that assessee alone was the beneficiary of the property. It has been explained before us that the reason for initiating the purchase of the new premises was to accommodate the growing business of the hospital and also to ensure that Dr. Avinash R. Phadnis and his family stayed in the vicinity of the hospital so that he was available round the clock. It was pointed out that Dr. Avinash R. Phadnis was working as a consultant with the assessee company and was also being paid professional fees for the services rendered. In the course of the hearing, the Ld. Representative emphasized that the Dr. Avinash R. Phadnis was the driving force behind the business of the assessee company and that the business is primarily dependent upon his expertise and round the clock availability. The assessee company was offering specialized infertility treatment and running a maternity hospital wherein emergencies are frequent and therefore it was a crucial business necessity that the Dr. Avinash R. Phadnis be accommodated in such a manner that he is available for emergencies round the clock. The Ld. Representative pointed out that the new building purchased was exactly opposite the hospital premises and the purchase was necessitated for the aforesaid reasons.
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14. It was also explained that the title of the property was in the name of the Directors because commercially it was found more beneficial to avail the home-loan from ICICI Bank in the personal name of the Director instead in the name of the assessee company. It was explained that Dr. Avinash R. Phadnis agreed to take the loan in his name on the condition that the assessee company took over the responsibility for the repayment of loan and interest thereon. All these aspects have been sought to be supported by the resolutions passed in the meeting of the Board of Directors of the assessee company, copies of which have also been placed in the Paper Book filed before us.
15. It was explained that as soon as the loan of Rs.208 lakhs was raised by Dr. Avinash R. Phadnis from the bank, the liability of the same was transferred to the books of the assessee company by way of a journal entry. The repayment of the principal amount of the loan as well as interest is being made by the assessee company by way of reimbursement to Dr. Avinash R. Phadnis. It was therefore emphasized that in reality and actually, property belongs to the assessee company and is in its possession, though the documents of purchase are executed in the name of individual Directors. It was pointed out that the premises have been allotted to Dr. Avinash R. Phadnis and his family for his residence. The Ld. Representative, at the time of hearing, pointed out that prior to shifting into new property Dr. Avinash R. Phadnis along with his family was staying in the hospital premises itself. It was also pointed out that apart from the being used as a residence for Dr. Avinash R. Phadnis and his family, property is being used for hospital business also, for instance waiting rooms for the patients, examination room for patients, rest room for staff/doctors in the night, place for the meeting of doctors, etc.. It was pointed out that almost 50% of the area in the new property was being directly used for the hospital business on account of the 9 aforesaid activities. All these submissions, which were advanced before the lower authorities have also been reiterated before us.
16. Before us, the Ld. Representative vehemently pointed out that the facts and circumstances of the case demonstrate that the funds for acquisition of the property are being provided by the assessee company and that the execution of Purchase Deed in the names of the Directors was merely to suit the commercial interest of assessee company by availing concessional loan from ICICI Bank in the individual name of the Director. In the course of the hearing, the Ld. Representative has also relied upon the following decisions in order to support the plea that that depreciation is allowable in the hands of the assessee :- (i) Rohan Builders (India) Pvt. Ltd. vs. ACIT (ITA No.813/PN/2004 dated 10.03.2007; (ii) ACIT vs. Choice Trading Corporation Ltd., 90 ITD 1 (Coch.); (iii) Gowersons Publishers (P) Ltd. vs. CIT, 240 ITR 191 (Del.); and,
(iv) CIT vs. Fazilka Dabwali TPT Co. Pvt. Ltd., 270 ITR 398 (P&H).
17. On the other hand, the Ld. Departmental Representative appearing for the Revenue has assailed the arguments put-forth by the assessee on the ground that the assessee could not be said to be owner of the property so as to be allowed depreciation u/s 32(1) of the Act. In this context, reference has been made to the discussion by the Assessing Officer in para 5.6 to 5.11 of the assessment order in support of the case of the Revenue. The Ld. Departmental Representative emphasized that in the present case the property has indeed being purchased by the individual Directors in their own name and by arranging funds in their individual capacity and that the property has also been transferred in their individual names. The title of the property is being held by the two individual Directors and it could not be said that assessee had purchased the property at any stage. According to the Ld. Departmental Representative, an immovable property cannot be transferred 10 otherwise than by way of registered deed of Conveyance on payment of appropriate stamp duty and that transfer by way of a journal/book entry would not act as a substitute for the statutorily required conveyance deed. Therefore, the Resolution passed at the meeting of the Board of Directors cannot be used to prove 'ownership' of the immovable property for the purposes of claiming depreciation u/s 32(1) of the Act.
18. We have carefully considered the rival submissions. Section 32(1) of the Act permits depreciation on the cost of the prescribed assets which are owned by the assessee and used for the purposes of business or profession. It is well understood that in order to claim the allowance for depreciation with respect to an asset, assessee is not only required to put it to use for the purposes of its business but also should be its owner. In the present case, the building in question named, "Shubhalaxmi" consists of 14 apartments which have been acquired by the two Directors of the assessee company in their individual names i.e. the title deeds in respect of 14 apartments in the building stand in the name of the two Directors, Dr. Avinash R. Phadnis and Dr. (Mrs.) Amita Avinash Phadnis. The cost of acquisition is stated to be 2,60,09,920/-. It is also not in dispute that the said property has been shown as an asset in the Balance Sheet of the assessee company and correspondingly on the liability side in the Balance Sheet the relevant amount has been shown payable to the two Directors on account of their own funds deployed for buying the property as also the amount of ICICI Bank home-loan raised by one of the Directors to acquire the property. The moot question is as to whether such an arrangement entitles the assessee to be understood as an 'owner' of the property qua the provisions of section 32(1) of the Act.
19. In this context, it is gainful to refer to the judgement of the Hon'ble Supreme Court in the case of Mysore Minerals Ltd. vs. CIT, (1999) 239 ITR 11 775 (SC). As per the Hon'ble Supreme Court, the terms 'own', 'ownership' and 'owned' are generic and relative terms and they would have wide as well as narrow connotation, depending on the context in which the terms have been used. Pertinently, the issue before the Hon'ble Supreme Court related to the claim of deprecation u/s 32(1) of the Act wherein the building in question was not registered in the name of the assessee. The Hon'ble Supreme Court referred to its earlier decision in the case of the CIT vs. Podar Cement (P) Ltd., (1997) 226 ITR 625 (SC) and observed that assistance can be taken from the law laid down in the aforesaid case for finding out the meaning of the term 'owned' as occurring in section 32(1) of the Act. It was held by the Hon'ble Supreme Court :-
"In our opinion, the term "owned" as occurring in section 32(1) of the Income tax Act, 1961, must be assigned a wider meaning. Anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded therefrom and having the right to use and occupy the property and/or to enjoy its usufruct in his own right would be the owner of the buildings though a formal deed of title may not have been executed and registered as contemplated by the Transfer of Property Act, the Registration Act, etc. "Building owned by the assessee" the expression as occurring in section 32(1) of the Income tax Act means the person who having acquired possession over the building in his own right uses the same for the purposes of the business or profession though a legal title has not been conveyed to him consistently with the requirements of laws such as the Transfer of Property Act and the Registration Act, etc., but nevertheless is entitled to hold the property to the exclusion of all others."
20. The aforesaid discussion by the Hon'ble Supreme Court shows that a formal deed of title may not have been executed and registered as contemplated by the Transfer of Property Act, Registration Act, etc. and yet an assessee can be said to be 'owner' of the property within the meaning of section 32(1) of the Act. So however, it is further explained by the Hon'ble Supreme Court that in the context of section 32(1) of the Act, an 'owner' means the person who acquires possession over the building in his own right, uses the same for the purposes of business though a legal title may not have been conveyed to him but he is otherwise entitled to hold the property "to the 12 exclusion of all others". In the background of the said legal position, now we may examine the facts in the present case so as to determine whether assessee can be understood as an owner for the purposes of section 32(1) of the Act.
21. No doubt, in the present case, the formal deed of title of the property is not executed and registered in the name of assessee company. The moot question is as to whether assessee can be said to have acquired possession over the property in its own right and is using it for the purposes of business and is entitled to hold the property to the exclusion of all others. In our considered opinion, the answer to the aforesaid question is No. We say so for the reason that in the present case, the assessee cannot be said to have acquired possession of the property in his own right or exercising such dominion over it as would enable others being excluded therefrom. Admittedly, the only mechanism in terms of which assessee is using the property is the arrangement with the individual Directors, which is supported by the resolutions of the Board of Directors. The individual Directors have acquired the property in their names and the transfer of the property into the account books of the assessee company is merely by way of a book entry supported by the resolution of the Board of Directors. Such arrangement ostensibly does not invest the assessee with the dominion over the property to the exclusion of all others. Therefore, in the light of the legal position laid down by the Hon'ble Supreme Court in the case of Mysore Minerals Ltd. (supra) and the fact-position in the present case, in our view, the lower authorities rightly held the assessee not entitled for depreciation u/s 32(1) of the Act with respect of the property in question.
22. Before parting, we may refer to the decisions which has been relied upon by the assessee before us. In the case of Rohan Builders (India) Pvt. 13 Ltd. (supra), the issue related to allowance of depreciation on vehicles which were purchased in the name of the individual Directors but were shown as assets of the assessee company. The Tribunal allowed the claim for depreciation on such vehicles although the registration of the vehicle stood in the name of the individual Directors. The Tribunal found that the assessee company had invested the initial amount on purchase of car and the loan was also repaid by the assessee company. The Tribunal also found that the assessee had stated before the RTO that the car actually belonged to the company and it paid differential road tax in respect of the car also. Considering the entirety of circumstances, the Tribunal came to conclude that assessee company was in possession of the car in its own rights and exercised a dominion to the exclusion of other and therefore allowed depreciation on the same. In the case before the Tribunal, the issue related to a movable property and considering the entirety of facts, it was concluded that the assessee company enjoyed dominion over the car to the exclusion of others. Whereas in the present case the factual findings are to the contrary and moreover the case before us relates to an immovable property and not a movable property being considered by the Tribunal in the case of Rohan Builders (India) Pvt. Ltd. (supra). Therefore, the ratio of the said decision is not applicable in the present case.
23. On the same analogy the decision of the Cochin Bench of the Tribunal in the case of Choice Trading Corporation Ltd. (supra) relied upon by the assessee is also not applicable in the present case as it related to a movable asset.
24. Similar is the situation with respect to the decision of the Hon'ble Punjab & Haryana High Court in the case of Fazilka Dabwali TPT Co. Pvt. Ltd. (supra).
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25. The only other decision relied upon by the assessee before us is the judgement of the Hon'ble Delhi High Court in the case of Gowersons Publishers (P) Ltd. (supra). In the case before the Hon'ble Delhi High Court, depreciation claimed by the assessee on a 'building' was denied on the ground that the formal sale deed was not executed in favour of the assessee. The Hon'ble High Court found it fit to allow the claim of depreciation by noticing that assessee company had taken over the building from a firm along with other assets and it was reflected in the Balance Sheet. The assessee had paid full price and was using the asset for its own business. The Hon'ble High Court found that for reason of some restrictions which were applicable for a specified period, a formal sale deed with respect to the property could not be executed in favour of the assessee. Therefore, it was held that mere absence of a duly registered document of title in favour of the assessee would not disentitle the assessee from the claim of depreciation; and, assessee can be said to be the owner of the property for the purposes of section 32(1) of the Act. The fact-situation in the case before the Hon'ble Delhi High Court stood on a completely different footing than the case before us. In the case before the Hon'ble Delhi High Court, only a delay in the execution of a formal sale deed in the property in favour of the assessee was the stumbling block for the claim of depreciation. Whereas in the present case, there is no such situation and rather it is a case where there is no scope for argument that a registered document of title is liable to be executed in favour of the assessee. Thus, the decision in the case of Gowersons Publishers (P) Ltd. (supra) stands on a qualitatively different footing than the present case and therefore the judgement of the Hon'ble Delhi High Court does not held the case of the assessee.
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26. For all the aforesaid reasons, we hereby affirm the action of the lower authorities in denying the assessee's claim of depreciation u/s 32(1) of the Act in respect of the property Shubhalaxmi. Thus, on this aspect, assessee fails.
27. In Ground of Appeal No.2, another aspect of dispute is in relation to the disallowance of various expenses, viz. repairs & maintenance, interest on loan and electricity charges incurred in relation to the property 'Shubhalaxmi'. The details of such expenses are as under :-
Interest on loan - Rs.10,27,165/-
Repairs & Maintenance - Rs.13,60,329/-
Electricity Charges - Rs.20,970/-
28. In this context, the Assessing Officer noted that the property in question was not being used for direct business operations of the assessee and therefore such expenditure cannot be allowed as deduction while computing assessee's business income. The CIT(A) has also affirmed such stand of the Assessing Officer against which assessee is in appeal before us.
29. On this aspect, the Ld. Representative for the assessee vehemently pointed out that the expenses incurred on the premises are allowable even if it is held that the property is not owned by the assessee as on the basis of the use for business such expenses are allowable. It was reiterated that the property in question was being used for the company's business purposes as residence of Dr. Avinash Phadnism medical consultant on whom the business of the assessee depends as well as for other business purposes. It was pointed out that on various occasions Dr. Avinash R. Phadnis examined the patients at his residence also the administrative matters relating to the hospital were also dealt with at the residence on many occasions. In any case, the Ld. Representative pointed out that it cannot be denied that a portion of the 16 property was indeed being used for the purposes of assessee's business as it was being put to use as waiting room for patients, examination room, rest room for staff/doctors on night duty, area for meetings of the doctors, etc..
30. On the other hand, the Ld. Departmental Representative appearing for the Revenue reiterated the stand of the Assessing Officer to the effect that as no direct business operation of the hospital were carried out from the impugned premises, therefore the aforesaid expenses are not an allowable deduction.
31. We have carefully considered the rival submissions. In so far as the allowability of expenses in relation to the impugned property is concerned, the insistence on its ownership being in the name of the assessee is not justified. What is required to be examined is as to whether the expenses in question have been incurred on the premises so as to facilitate carrying on of assessee's business. The appellant company has been consistently asserting before the Assessing Officer as well as before the CIT(A) that the premises are being used for the business of the assessee and even before us various functions have been enumerated to justify the usage of the property for the business of the assessee. Though, there is no clinching evidence in favour of the assertions of the assessee but at the same time the Assessing Officer has also not lead any material to prove any falsity in the assertions of the assessee; therefore, in our view, it would meet the ends of justice if it is to be understood that 50% of the expenses relating to repair, maintenance, electricity bills, municipal taxes and water expenses incurred on property are relatable to the carrying on of the hospital business of the assessee. Thus, we set-aside the order of the CIT(A) and direct the Assessing Officer to allow only 50% of the expenses on electricity bills, repair & maintenance, municipal 17 taxes and water expenses, and disallow the balance. Thus, in so far as the Ground of Appeal No.3 is concerned, assessee partly succeed.
32. In the result, appeal of the assessee is partly allowed.
33. In so far as the other captioned appeals of the assessee pertaining to assessment years 2001-02 and 2004-05 to 2007-08 are concerned, it was a common point between the parties that the issues raised therein are pari- materia to those considered by us in the appeal for assessment year 2003-04 in the earlier paras, therefore our decision in appeal for assessment year 2003-04 would apply mutatis-mutandis in the other aforestated appeals also.
34. In the result, the appeals of the assessee for assessment years 2001- 02 and 2003-04 to 2007-08 in the case of Phadnis Clinic Pvt. Ltd. are partly allowed.
35. Now, we take-up the appeals of the Revenue which relate to assessment year 2001-02, 2004-05 to 2006-07 vide ITA No.2013 to 2016/PN/2013 respectively in the case of M/s Phadnis Clinic Pvt. Ltd.. In all these appeals, a common issue has been raised by the Revenue arising out of the action of the CIT(A) in setting aside the action of the Assessing Officer of disallowing the deduction claimed by the assessee u/s 35(1)(iv) of the Act.
36. In brief, the relevant facts are that assessee had claimed deduction u/s 35(1)(iv) of the Act on account of expenditure of capital nature incurred on scientific research related to the business carried out by the assessee. The amount of such claim for the four assessment years was as under :- 18
Asst. Year Expenses Claimed u/s 35(1)(iv) 2001-02 58,26,895 2004-05 31,50,000 2005-06 5,33,894 2006-07 21,50,000
37. The Assessing Officer noted from the details of expenditure that it mostly related to cost of machineries and other accessories. The Assessing Officer further observed that the machinery in question appeared to be diagnostic equipment used by the assessee for the purposes of its business. The Assessing Officer show-caused the assessee to justify allowance of the claim u/s 35(1)(iv) of the Act. The Assessing Officer considered the submissions put-forth by the assessee and concluded that no systemic scientific research was carried out by the assessee and instead the machineries in question were being used only to carry out tests for the purposes of treatment of patients, an activity which was part and parcel of assessee's business in the normal course. Having reached the above conclusion, the Assessing Officer made a reference to the Board in terms of section 35(3)(b) of the Act as to whether such activity constituted scientific research or not? As at the time of completion of the assessment a response from the Board was awaited, the Assessing Officer passed an assessment order denying the benefit of exemption u/s 35(1)(iv) in the assessment years of 2001-02, 2004-05, 2005-06 and 2006-07 amounting to Rs.58,26,895/-, Rs.31,50,000/-, Rs.5,33,894/- and Rs.21,50,000/- respectively.
38. Assessee carried the matter in appeal before the CIT(A), who has affirmed the view of the Assessing Officer that the activity represented by the impugned expenditure could not be held to be constituting 'scientific research'. However, the CIT(A) noted that having regard to the mandatory provisions of section 35(3) of the Act, the Assessing Officer was not competent to decide 19 whether a given activity constitutes scientific research or whether an asset was being put to use for scientific research. As per the CIT(A), in the absence of a decision from the prescribed authority, the Board being the prescribed authority in terms of section 35(3) of the Act, the Assessing Officer could not have disallowed the expenditure. In coming to such conclusion, the CIT(A) followed the judgement of the Hon'ble Gujarat High Court in the case of DCIT vs. Mastek Ltd., (2012) 25 taxmann.com 133 (Guj.). In this context, the following discussion made by the CIT(A) in the context of assessment year 2001-02 is relevant :-
"6.7 In the present case, the AO no doubt referred the matter to the Board. However not having received any reply from the Board as of the date of passing the assessment order, (which in fact was the last day of the limitation period), he completed the assessment by denying the appellant the benefit of the said exemption. The remand report received from the learned AO which is dated 05.07.2013 is also silent on this issue, from which, it can be inferred that even as of that day no reply had been received from the Board to the aforesaid reference made by the learned AO. As such, since no adverse decision has evidently been given by the prescribed authority holding the activity carried on by the appellant not to be of the nature of 'scientific research', and such a decision being a mandatory requirement as held by the Hon. Gujarat High Court in the afore-cited decision, the addition of Rs.58,26,895/- made by the learned AO disallowing the claim of deduction under section 35(1)(iv) on account of capital expenditure on scientific research related to the business of the assessee is hereby deleted. Accordingly, this ground of appeal is hereby allowed."
39. Against the aforesaid decision of the CIT(A), Revenue is in appeal before us.
40. Ostensibly, the claim of the assessee was in terms of section 35(1)(iv) of the Act whereby assessee contended that the impugned sums of capital nature were expended on scientific research related to the business carried on by it. As per the provisions of section 35(3) of the Act, it is prescribed that if any question arises u/s 35 of the Act as to whether, and if so, to what extent, any activity constitutes or constituted, or any asset is or was being used for, scientific research, the Board shall refer the question to - (a) the Central 20 Government, when such question relates to any activity under clauses (ii) and
(iii) of sub-section (1), or (b) the prescribed authority, when such question relates to any activity other than the activity specified in clause (a) above. Section 35(3) further prescribes that the decision of the Central Government or the prescribed authority, as the case may be, shall be final in this regard. In view of the aforesaid specific intendment of section 35(3) of the Act, it was not open for the Assessing Officer to suo-motu decide the question as to whether the impugned activity constituted scientific research or whether impugned assets were being used for scientific research. Having regard to the provisions of clause (b) of section 35(3) of the Act, the question was required to be referred to the prescribed authority by the Board. It is emerging from the orders of the authorities below that the Assessing Officer before completion of assessment referred the matter to the Board and no reply had been received from the Board before completion of assessment or even when the CIT(A) passed the impugned order. Even in the course of hearing before us, when it was expressly put to the Ld. Departmental Representative, no assertion has been made to say that any reply from the Board has been received in this behalf. As a consequence, even in the course of proceedings before the Tribunal, evidently, no adverse decision has been given by the prescribed authority holding that the impugned activity carried out by the assessee does not constitute scientific research. In this factual background, the CIT(A) cannot be faulted for having applied the judgement of the Hon'ble Gujarat High Court in the case of Mastek Ltd. (supra) and setting-aside the disallowance made by the Assessing Officer. The Hon'ble Gujarat High Court noted that in the absence of the Assessing Officer having obtained any adverse decision from the prescribed authority, there was no justification in rejecting assessee's claim for deduction of expenditure incurred for scientific research. As a consequence of the aforesaid discussion, in our view, the CIT(A) was justified in setting-aside the action of the Assessing Officer 21 disallowing the claim of deduction u/s 35(1)(iv) of the Act relating to the capital expenditure income on scientific research. Thus, on this aspect, we hereby affirm the order of the CIT(A) and accordingly Revenue fails.
41. Resultantly, the captioned four appeals of the Revenue relating to assessment year 2001-02, 2004-05 to 2006-07 are dismissed.
42. Now, we may take-up the appeals in ITA Nos.2192 to 2197/PN/2013 which relate to Dr. Avinash Ramchandra Phadnis for assessment year 2003- 04 to 2008-09. All these appeals arise from a common order of the Commissioner of Income Tax (Appeals)-Central, Pune dated 27.09.2013 which, in turn, has arisen from the respective orders dated 31.12.2008 passed by the Assessing Officer u/s 143(3) r.w.s. 153A of the Act.
43. Firstly, we may take-up the appeal for assessment year 2003-04 vide ITA No.2192/PN/2013 wherein the Grounds of Appeal raised by the assessee, read as under :-
"1. The learned CIT(A) was not justified in holding that the assessment u/s 143(3) r.w.s. 153A was a valid assessment.
1.1) The learned CIT(A) failed to appreciate that:-
a. During the course of the search, on Dr. Avinash Phadnis' premises, there was no incriminating evidence found relating to the assessee and hence, the provisions of Section 153A could not be invoked against the Dr. Avinash Phadnis.
b. The additions made in completed assessments were not based on seized material found during the course of search. These additions could have been made during the course of normal assessments without the requirement of the search operations. But still search operation was carried out and assessment was made u.s. 153A even though no hidden income/ wealth or undisclosed sources of income was found
2. The learned CIT(A) erred in holding that the immovable property Shubhalaxmi" belongs to Dr. Avinash Phadnis and Dr Mrs. Amita Phadnis and not to Phadnis Clinic Pvt. Ltd. when the funds for its acquisition, renovation, maintenance are being borne by the company 22 i.e. Phadnis Clinic Pvt. Ltd.. Similarly, the company is also paying the interest on borrowing made and is also repaying the amount borrowed. 2.1 Without prejudice to the assessee's claim that the property "Shubhalaxmi" is owned by the company, Phadnis Clinic Pvt. Ltd., the learned CIT(A) has failed to appreciate that:-
The part of the property is used by the assessee, Dr. Avinash Phadnis and Or Mrs Amita Phadnis for their profession and part for their residence and hence a. As deduction of Rs.1,50,000/- is allowed by the (earned CIT(A) to Dr. Avinash Phadnis for his self-occupied area, therefore deduction of balance interest calculated on the basis of proportionate area used by him for his profession be allowed at 100%.
b Depreciation at appropriates rates be allowed for area used for profession by Dr. Avinash Phadnis and expenditure for maintaining the property be also allowed separately, i.e. 'repairs and maintenance, taxes, electricity, etc.
3. The appellant requests for admission of additional evidences, it any, required in the course of appeal hearing.
4. The assessee prays to add, alter, amend and for withdrawal of any of the grounds of appeal as and when the occasion demands."
44. In so far as the first Ground of Appeal is concerned, the same relates to the stand of the Assessing Officer to the effect that the assessment order passed by the Assessing Officer by invoking section 153A r.w.s. 143(3) of the Act was invalid because the search carried out u/s 132(1) of the Act did not unearth any hidden wealth or undisclosed sources of income. The said plea of the assessee is somewhat similar to what has been raised in the case of M/s Phadnis Clinic Pvt. Ltd. in ITA No.2060/PN/2013 dealt with by us in earlier paras. Though, in the case of M/s Phadnis Clinic Pvt. Ltd. (supra) the issue was raised in the context of the Assessing Officer having invoked section 153C r.w.s. 143(3) of the Act whereas in the present case, the Assessing Officer has invoked section 153A r.w.s. 143(3) of the Act. Ostensibly, a search action u/s 132(1) of the Act was conducted in the case of the assessee on 24.01.2007.
45. The stand of the Revenue is that the documents seized in the course of search revealed that the purchase of property 'Shubhalaxmi' was undertaken 23 in the name of the two individual Directors whereas financial statements of the company i.e. Phadnis Clinic Pvt. Ltd. showed it as an asset of the company. The Revenue has also justified invoking of section 153A of the Act on the ground the additions/disallowances in question have been made on the basis of the documents found in the course of search.
46. In the context of the above, we find that the CIT(A) noted that the factum of seizure of documents during the course of search is undeniable. As per the CIT(A), once a search/requisition is made u/s 132(1) of the Act, the Assessing Officer is bound to issue notice u/s 153A to the assessee calling for the return of income for each of assessment year falling within six immediately assessment years relevant to the previous year in which such search was conducted. By following the decision of the Mumbai Bench of the Tribunal in the case of Scope (P) Ltd. vs. DCIT, (2013) 33 taxmann.com 167 (Mumbai- Trib.) the CIT(A) observed that the initiation of proceedings u/s 153A is mandatory for all the aforesaid years falling within the six immediately preceding aforesaid assessment year. The following discussion in the order of the CIT(A) is relevant :-
"5.7 In this context, I have perused the legal position with regard to scheme of assessment in search cases to be completed under section 153A read with section 143(3). The appellant has relied upon a series of case laws. It is seen, however, that the decisions cited by the appellant are over a year old. In a more recent decision (dated 20th March, 2013) delivered by the ITAT (Mumbai) in the case of Scope (P) Ltd. v DCIT it has been held that [i] once a search/requisition is made u/s 132 of the IT Act, the AO is bound to issue notice u/s 153A to the assesses to furnish the return for each AY falling within six AYs immediately preceding the AY relevant lo the PY in which search conducted, [ii] initiation of proceedings u/s 153A is mandatory for all the assessment years falling within the six years immediately preceding the said AY; [iii] in the said proceedings, the AO is empowered to assess or reassess the total income of all the six AYs; [iv] where an assessment had been completed vide assessment order passed prior to the date of initiation of search, the case would fall under the category of 'reassessment' u/s 153A; [v] once the AO has issued notice u/s 153A inviting the return of income, he is duty-bound to proceed with the reassessment proceedings; [vi] where there is no incriminating material found during the course of search relating to the assesses for the AY under consideration, the question whether the AO can 24 make an addition in the reassessment proceedings u/s 153A depends on the nature of addition and the facts and circumstances of each case; [vii] where income, which was otherwise assessable to tax had escaped assessment, the same can be assessed during the proceedings u/s 153A."
47. In our considered opinion, the aforesaid discussion made by the CIT(A) does not justify the plea of the assessee challenging the validity of assessment u/s 153A r.w.s. 143(3) of the Act on the ground that additions to the income made by the Assessing Officer were not on the basis of any incriminating document. We hereby affirm the order of the CIT(A) on this aspect and accordingly assessee fails in Ground of Appeal No.1.
48. In so far as the Ground of Appeal No.2 is concerned, it arises from the action of the income-tax authorities in holding that the property at Shubhalaxmi belongs to the assessee individual and not to company, M/s Phadnis Clinic Pvt. Ltd.. Similar aspect of the matter has already been considered by us in the appeal relating to M/s Phadnis Clinic Pvt. Ltd. vide ITA No.2060/PN/2013 in the earlier part of this order. Following the said decision , it has to be held that the income-tax authorities were justified in holding that the property 'Shubhalaxmi' belongs to assessee Dr. Avinash Ramchandra Phadnis and partly to Dr. (Mrs.) Amita Avinash Phadnis and not to M/s Phadnis Clinic Pvt. Ltd., as contended by the assessee. Therefore, in so far as the Ground of Appeal No.2 is concerned, assessee fails.
49. In so far as the Ground of Appeal No.2.1 is concerned, therein it is contended by the assessee that if the property M/s Shubhalaxmi is held to be belonging to the assessee then appropriate relief as stated in the item (a) and
(b) of Ground of Appeal No.2.1 be allowed in the hands of the assessee. The aforesaid aspect of the matter, in our view, deserves to be appropriately considered in the hands of the assessee individual.
25
50. In this context, the relevant facts are that consequent to holding that the property Shubhalaxmi was owned by the individual Directors, Dr. Avinash Ramchandra Phadnis and Dr. (Mrs.) Amita Avinash Phadnis, the Assessing Officer treated the entire property to be a self-occupied property of the two individuals and allowed interest on borrowed capital subject to Rs.1,50,000/- specified in the second proviso to section 24 of the Act. The plea of the assessee on this aspect before the CIT(A) was that in case the property is held to be owned by him, the deduction for interest payment be not limited to Rs.1,50,000/- as allowed by the Assessing Officer but proportionate interest relatable to the portion of the property which is stated to be used for business purposes be allowed as deduction. It was also contended before the CIT(A) that the depreciation on the cost of the area of the property used for the purposes of business should also be allowed. This aspect of the matter have been rejected by the CIT(A) on the ground that assessee could not establish that the building in question was being partly used for the purposes of business or profession. Against such a decision of the CIT(A), assessee is in further appeal before us by way of Ground of Appeal No.2.1.
51. On this aspect, in our view, the matter deserves to be considered afresh by the lower authorities in view of our decision in the case of the company, i.e. M/s Phadnis Clinic Pvt. Ltd. for assessment year 2003-04 that 50% of the building can be said to have been used for the purposes of the business of the company itself. As a consequence of the aforesaid decision, the Assessing Officer is directed to re-visit the aforesaid pleas of the assessee afresh and allow appropriate relief as per law. Needless to say, the Assessing Officer shall allow the assessee a reasonable opportunity of being heard before passing an order on this aspect in accordance with law. 26
52. Thus, in so far as the Ground of Appeal No.2.1 is concerned, assessee succeeds for statistical purposes.
53. In the result, appeal of the assessee for assessment year 2003-04 is partly allowed.
54. The decision in the appeal of the assessee for assessment year 2003- 04 (supra) covers all the Grounds of Appeal raised in the other captioned appeals relating to assessment years 2004-05 to 2008-09 except the following Ground of Appeal No.3.1 in the appeal of the assessee for assessment year 2005-06 which reads as under :-
"3.1 The assessee had incurred the expenditure in accordance with an agreement with Jahangir Hospital for securing the right to practice at Jahangir Hospital. The assessee, by virtue of the agreement, had divested himself of the ownership rights of the machineries and other expenditure on restructuring of the IVF Lab at the hospital, and had given the same to the hospital. The expenditure, the appellant submits, was incurred wholly and exclusively for the furtherance/continuation of the business and did not create any capital asset and should be consequently allowable as business expenditure u/s 37."
55. In this context, brief facts are that in assessment year 2005-06, assessee claimed revenue expenditure of Rs.32,74,564/- under the head consultancy assignment cost for Jahangir Hospital, Pune. The details of the expenditure revealed that it was incurred for purchase of IVF machinery and renovation/restructuring of the IVF setup at Jahangir Hospital. As per the Assessing Officer, it was capital in nature and therefore he show-caused the assessee to justify the claim of such expenditure as a revenue expenditure u/s 37 (1) of the Act.
56. In response, it was explained that assessee was a well-known Gynecologist in India practicing since many years and was a Director of Phadnis Clinic Pvt. Ltd.. He was looking after all the major activities of the 27 hospital of Phandis Clinic Pvt. Ltd.. Apart therefrom, assessee was a visiting faculty at Jahangir hospital, which was a major hospital in Pune. For the purposes of maintaining close relationship with a large hospital and from a professional view point, assessee made an agreement with Jahangir Hospital which stipulated that in order to treat all the cases as a visiting faculty, assessee was to incur some expenditure for the Jahangir Hospital. In pursuance to such agreement, assessee spent the impugned sum of Rs.32,74,564/-. It was contended that such expenditure was incurred with the hope that the practice would grow substantially and assessee would get more business from a hospital other than Phandnis Clinic Pvt. Ltd.. The case of the assessee was that the expenditure was incurred in order to expand his business and therefore, it was to be allowed as a revenue expenditure. The Assessing Officer has rejected the plea of the assessee by making the following discussion in the assessment order :-
"5.2 The submissions of the assessee have been considered. In this case, it is clear that the assessee incurred the expenditure to derive a long term benefit. It is an admitted fact that the assessee expected his own business to improve in the long run because of his association with Jahangir Hospital and therefore, he has incurred the expenditure. This is, therefore, clearly a capital expenditure. Hence, the assessee's claim of revenue expenditure of Rs.32,74,564/- is disallowed. No depreciation allowance is worked out because the assessee handed over the related asset to Jahangir Hospital and is neither the owner of the asset nor did he use asset for his business."
57. The CIT(A) has also affirmed the stand of the Assessing Officer against which assessee is in further appeal before us.
58. The Ld. Representative for the assessee has vehemently canvassed that the assessee incurred such expenditure on business considerations. According to the Ld. Representative, the machinery in question was donated to Jahangir Hospital in terms of the agreement and that such expenditure provided assessee with prospects of expanding his business on account of his association with Jahangir Hospital. Therefore, such an expenditure is to be 28 viewed as having been incurred for the purposes of business and was allowable as a revenue expenditure.
59. On the other hand, Ld. Departmental Representative appearing for the Revenue has relied upon the orders of the authorities below and pointed out that the expenditure was capital in nature which provided the assessee with long term benefits and therefore the Assessing Officer was justified in treating it as a capital expenditure.
60. We have carefully considered the rival submissions. Factually speaking, the ownership of the asset represented by the impugned expenditure in the shape of IVF machinery and the renovation/restructuring of the IVF setup of the Jahangir Hospital vests with the Jahangir Hospital. On this aspect, there is no dispute. The Assessing Officer has also accepted the position that assessee incurred such expenditure with the expectation that his own business would improve in the long run because of the association with Jahangir Hospital.
61. Once the objective of the expenditure being improvement in business prospects is accepted, then it has to follow that such an enduring benefit is in the revenue field. If the benefit, though long term is in the revenue field, then the corresponding expenditure which has resulted in such benefit is liable to be considered revenue in nature following the parity of reasoning laid down by the Hon'ble Supreme Court in the case of Empire Jute Company Ltd. vs. CIT, 124 ITR 1 (SC). Therefore, on this aspect of the matter, we accept the plea of the assessee that the expenditure of Rs.32,74,564/- in question is liable to be treated as a revenue expenditure. Thus, Ground of Appeal No.3.1 is allowed. 29
62. In the result, the appeals of the assessee vide ITA Nos.2192 to 2197/PN/2013 for assessment years 2003-04 to 2007-08 are partly allowed.
63. Resultantly, all the captioned appeals of the two assessees are partly allowed and that of the Revenue are dismissed.
Order pronounced on 10 th April, 2015.
Sd/- Sd/-
(SUSHMA CHOWLA) (G.S. PANNU)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune, Dated: 10 th April, 2015.
Sujeet
Copy of the order is forwarded to: -
1) The Assessee;
2) The Department;
3) The CIT(A)-Central, Pune;
4) The CIT-Central, Pune;
5) The DR "B" Bench, I.T.A.T., Pune;
6) Guard File.
By Order
//True Copy//
Assistant Registrar
I.T.A.T., Pune