Karnataka High Court
The Pr. Commissioner Of Income Tax, Cit ... vs M/S. Manipal Health Systems Pvt. Ltd on 12 October, 2023
Author: P.S. Dinesh Kumar
Bench: P.S. Dinesh Kumar
I.T.A No. 822/2018
1
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 12TH DAY OF OCTOBER 2023
PRESENT
THE HON'BLE MR. JUSTICE P.S. DINESH KUMAR
AND
THE HON'BLE MR. JUSTICE C.M. POONACHA
INCOME TAX APPEAL NO. 822 OF 2018
BETWEEN :
1. THE PR. COMMISSIONER
OF INCOME TAX, CIT(A)
5TH FLOOR, BMTC BUILDING
80 FEET ROAD, KORMANGALA
BENGALURU-560 095.
2. THE ASST. COMMISSIONER
OF INCOME TAX, CIRCLE-2(3)(1)
2ND FLOOR, BMTC BUILDING
80 FEET ROAD, KORMANGALA
BENGALURU-560 095. ....APPELLANTS
(BY SHRI. E.I. SANMATHI, STANDING COUNSEL)
AND :
M/S. MANIPAL HEALTH SYSTEMS PVT. LTD.
NO.14, MANIPAL TOWERS
OLD AIRPORT ROAD
BENGALURU-560 008.
PAN: AACCM 2872M. ...RESPONDENT
(BY SHRI. R.V. EASWAR, SENIOR ADVOCATE FOR
SHRI. S. SHARATH, ADVOCATE)
....
THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961,
ARISING OUT OF ORDER DATED 27.06.2018 PASSED IN ITA NO.
I.T.A No. 822/2018
2
1208/BANG/2017, FOR THE ASSESSMENT YEAR 2009-2010, PRAYING TO
FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN
AND ETC.
THIS ITA, HAVING BEEN HEARD AND RESERVED FOR JUDGMENT
ON 05.10.2023 COMING ON FOR PRONOUNCEMENT OF JUDGMENT THIS
DAY, P.S.DINESH KUMAR, J., PRONOUNCED THE FOLLOWING:-
JUDGMENT
This appeal by the Revenue, directed against the order dated June 27, 2018 in ITA No. 1208/Bang/2017 passed by the ITAT1 has been admitted to consider the following two questions of law:
(i) Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the amount spent on projects for establishing and operating hospitals is revenue expenditure though the same was in the nature of capital expenditure and agreement was terminated?
(ii) Whether on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside the disallowance of Rs.25,34,10,284/- towards non-
recoverable projects cost by holding that the expenditure is in the nature of revenue expenditure even though the expenditure on the construction / expansion of the hospital gave rise to an enduring benefit to the assessee in generating income and, as such, the same was rightly treated as 'capital expenditure'?
1 Income Tax Appellate Tribunal I.T.A No. 822/2018 3
2. Heard Shri. E.I. Sanmathi, learned Standing Counsel for the Revenue and Shri. R.V. Easwar, learned Senior Advocate for the Assessee.
3. Briefly stated the facts of the case are, assessee is a multi-specialty Hospital. Assessee filed its returns for A.Y.22009-10 declaring a loss of Rs. 32,45,78,569. The AO3 disallowed Rs.3,95,19,428/- towards non-recoverable projects cost holding it as capital expenditure. On appeal, the CIT(A)4 partly allowed assessee's appeal. On further appeal by both assessee and Revenue, ITAT5 allowed assessee's appeal treating the expenditure as revenue in nature. Hence, this appeal by the Revenue.
4. Shri. Sanmathi, for the Revenue, praying to allow the appeal, submitted that the ITAT has erred in setting aside the disallowance towards non-recoverable project cost holding that the expenditure is in the nature of revenue expenditure, 2 Assessment Year 3 Assessing Officer 4 Commissioner of Income Tax (Appeals) 5 Income Tax Appellate Tribunal I.T.A No. 822/2018 4 though the expenditure on the construction/expansion of the hospital gave rise to enduring benefit to assessee in generating income. Hence, the expenditures have to be treated as 'capital expenditure'.
5. Shri. Easwar, for the assessee, supporting the ITAT's order, submitted that assessee entered into a Collaboration Agreement with the Guru Harikishan Medical Trust ('GHMT' for short) and Delhi Sikh Gurudwara Management Committee ('DSGMC' for short) for expansion, operation and establishing the existing hospitals. Later the agreement was terminated without acquiring any capital asset for assessee's benefit. The expenditure was incurred during the course of the business of the assessee and therefore, has to be treated as revenue expenditure. With the above submissions, Shri.Easwar prayed for dismissal of this appeal.
6. We have carefully considered rival contentions and perused the records.
I.T.A No. 822/20185
7. Undisputed facts of the case are, assessee is a multi-specialty hospital. Assessee had entered into a Collaboration agreement dated 23.11.2007 with GHMT and DSGMC for the purpose of expansion, operation and management of the hospitals belonging to GHMT. The said agreement was terminated on 16.10.2009 and assessee had agreed to discharge its obligations. Under the Agreement, assessee had incurred certain expenses in relation to the projects. The AO treated the expenditures as capital in nature. However, the CIT(A) and the ITAT have recorded a concurrent finding holding the expenditures as revenue in nature.
8. It was urged by Shri. Sanmathi that, admittedly, assessee had entered into a collaboration agreement with GHMT and DSGMC. The investment made was towards building and equipments. Therefore, the AO had rightly held the expenditure as capital in nature.
9. Shri. Easwar's reply is that the agreements were entered in the course of assessee's business for the purpose I.T.A No. 822/2018 6 of managing the hospitals and not for new or separate business. The expenditures were incurred to meet the continuing operational costs for running the business activities.
10. In Assam Bengal Cement Co. Ltd. Vs. CIT6, while considering the question as to the line of demarcation between capital expenditure and revenue expenditure, the Apex Court has held thus:
"...If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically..."
11. Admittedly, the agreement between assessee and GHMT and DSGMC was terminated and obligations under the 6 (1995) 27 ITR 34 (SC) I.T.A No. 822/2018 7 agreement were discharged. Though expenditure was incurred, no capital asset or advantage of 'enduring benefit' was brought in by the assessee after the termination of the agreement.
12. In Assam Bengal Cement, it is held that if the expenses are incurred not for the purpose of bringing in the asset or advantage for the 'enduring benefit' but for running the business, such expenses are treated as revenue expenditures. Therefore, the expenses incurred in entering into an agreement merely for expansion of existing business and not for setting up of a new business, are to be treated as 'revenue expenditures'.
13. In view of the findings recorded hereinabove, we find no error in the order passed by the CIT(A) and the ITAT.
14. Hence, the following:
ORDER
(i) Appeal is dismissed.I.T.A No. 822/2018 8
(ii) The questions of law are answered in favour of the assessee and against the Revenue.
(iii) The order dated 29.07.2016 in Appeal No. 790/828/DCIT-4(1)(2)/CIT(A)-4/11-12 passed by CIT(A) and order dated 27.06.2018 in ITA No.1208/Bang/2017 passed by the ITAT are confirmed.
No costs.
Sd/-
JUDGE Sd/-
JUDGE SPS