DCIT, CIRCLE-1 & TPS, HUBBALLI vs. HUBLI SCAN CENTRE PVT. LTD., DHARWAD

ITA No. 554/Bang/2025 is filed by Deputy Commissioner of Income Tax, Circle-1 & TPS, Hubballi against the Appellate Order passed by the National Faceless Appeal Centre, Deli (the Ld. CIT(A)) for Assessment Year 2018-19 on 22.01.2025 wherein the appeal filed by Hubli Scan Center Private Limited [the Assessee] against the Assessment order dated 17.03.2021 passed u/s. 143(3) of the Income Tax Act, 1961 (the Act) passed by the National Faceless Assessment Centre (the Ld. Assessing Officer) , was partly allowed. Page 2 of 17

The Ld AO is aggrieved with the Appellate Order and has preferred this Appeal.

The grounds of appeal states that, that the Ld. CIT(A) has wrongly deleted the addition of Rs. 4,19,61,906/- by disallowing the expenditure debited to profit and loss account under the head administrative expenses being deposits with M/s. Suchirayu Health Care Solutions Limited, written off by relying on a settlement agreement reached between the Assessee and that party. The claim of the Revenue is that there was a private settlement agreement between two related parties showing it as a business transaction and then such advances are written off as revenue expenditure whereas actually the amount advanced was to acquire a capital asset in the form of an MRI machine. The Ld. CIT(A) has wrongly relied upon the decision of the Hon’ble Supreme Court in 100 ITR 240 despite the facts are distinguishable and not considering the decision of Hon’ble Supreme Court in case of PCIT vs. Khyati Realtors Pvt. Ltd. The Revenue also challenges that the amount of claim for write off is for a colorable device.

The briefly stated facts shows that, that the Assessee is a company engaged in the business of medical diagnostic services with MRI, CT scan etc., It is also having a pathological lab and ambulance services. It filed its return of income on 30.10.2018 at a total loss of Rs. 2,65,89,808/-. This return of income was selected for scrutiny and necessary notices were issued. The Ld. Assessing Officer examined the accounts of the Assessee and found that Assessee has debited an amount of Rs. 4,19,61,906/- to the profit and loss account under the head administrative expenses being deposits written off. The Assessee was questioned that how the same was allowable. The Assessee explained that, that the Assessee Company has written off the deposits made to M/s. Page 3 of 17

The Ld. AO held that the above deduction of business loss is not allowable and disallowed the same to Rs. 4,19,61,906/- holding as under:- "8.1 The above reply of the assessee does not actually touch the real issue as pointed out through the Show Cause Notice i.e., nature & purpose of deposit, loan how it was for the purpose of business etc., but instead the assessee has preferred to recite various judicial pronouncements on the issue. First of all, assessee’s submission on wholly for the purpose of business is to be dealt with.

1.1 It is pertinent to note that, the words/ frazes such as wholly & exclusively for the purpose of Business, A trading Loss etc. in assessee’s context and in the context of n number of parties associated with the assessee have their own meaning and have to be seen on the basis of facts and circumstances of each case. Though it is correct that for the purpose of business is wider in scope, the word “Business” has not been defined in the taxing statute. Yet it postulates the existence of certain elements in the activity of an assessee which would invest it with the character of business. According to well established interpretation of business as found in taxing statutes, it is the sense of occupation or professions which occupies the time, attention and labour of the person normally with the object of making profit. To record the activity as business there must be of course dealing either actually continued or contemplated to be continued with a profit motive and not for support. Thus, if it is the contention of the assessee that, there was no profit motive behind the advancing of deposit & loan to M/s. Suchirayu but only to support it, then the said advancement cannot be termed “ for the purpose of business” . It would never be the intention of the businessman borrowing huge amounts, investing it or advancing it to associate without earning anything from it and ultimately loose it for no reasons. Moreover, in support of the contention that the deposit & loan given to Suchirayu are not voluntary but for the purpose of business, assessee has furnished nothing to establish that it was actually for the purpose of business.

1.2 Further ,Assessee’s contention that it is incorrect to state that asseessee has diverted its borrowings for non-business purposes, it can be very well seen from the Financials of the assesse for the year under consideration as well it is assessee’s Page 7 of 17

1.3 Assessee’s contention that, “the connection of having given deposits earlier and claimed it as expenditure or business loss on settlement of all dues and loans by virtue of an agreement is not only real in the course of business. The Writing off of the deposit is not remote or illusory just because of the related party matter between both the companies. As the commercial expediency must be decided from the businessman point of view.” Is merely a statement without any supporting evidence. It is pertinent to note here that, both these Associate Companies i.e., the Assessee and M/s. Suchirayu entered into the settlement) agreement, the terms of which have no basis. Since transactions of huge amounts of advancing loans and deposits to associate are concerned, certainly it invites attention to the provisions of Arm’s length. It is the value of the transactions entered into by and between the parties which should be at Arm’s length which prima facie appears to have ignored while deciding the terms of the settlement agreement & thus the contention of the assesse that, “It does not matter Arm’s length transactions while claiming such loss” is misplaced statement.

1.4 The moot question which remains unattended is with regard to the status of the associate Co i.e. M/s. Suchirayu Health Care Solutions Ltd. Assessee has not established that, the Company has become bankrupt or seek or wound-up its Page 8 of 17

1.5 Since the assesses are Companies, the information pertaining to their activities are available in Public Domain. Likewise, the press release as available in public domain with regard to Suchirayu Health Care Services Pvt. Ltd. is perused. It has not shut down its operations but has been rebranded. Thus, assessee’s contention that, the deposit given to Suchirayu has become irrecoverable has no legs to stand and cannot be accepted.

1.6 Thus assessee has failed to substantiate that, the amounts written off were advanced in the regular course of business. As well looking into the volume of the Associate Company which was quite huge & it cannot just go out of the business taking all its assets overnight & become seek. The burden of proof lies on the assessee company to clearly establish and furnish all the particulars regarding the claim made in the Return of Income. Except the One Time settlement agreement entered into by and between the assessee and its Associate, without establishing the reasonable cause & basis on which the settlement amount was arrived at it cannot be said that assessee has discharged its burden. Page 9 of 17

1.7 Assessee has further failed to establish that, the amounts written off were the payments made out of business compulsion of a genuine nature and not voluntary one or incidental to the business of the assessee, neither the assessee has established that, the said amounts were ever part of its income during any Previous years. Thus, the amounts written off being Deposit and loan advanced to the Associate concern cannot be treated “the business purpose “as well assessee has not derived any benefit out of the same.

1.8 Further, as assessee with liquidity cannot claim that it can give interest free advances to its Associates and then borrow funds from banks on interest for business purposes, such borrowings will not be for business purposes but for supplementing the amounts diverted by the assessee without benefit to it.

1.9 In view of the above, assessee’s contention in response to the Show Cause Notice on the issue of allowability of written of Deposit & loan amounting to Rs. 3,81,50,000/- & Rs.38,11,906/- respectively as Revenue Expenditure is not acceptable and hence disallowance to that effect amounting in total to Rs. 4,19,61,906/- is made and added to the total income of the assesse."

Accordingly, the Assessing Order was passed determining the total income of the Assessee at Rs. 1,58,41,252/- against the written losses of Rs. 2,65,89,808/-.

The Assessee being aggrieved with the same preferred the appeal before the Ld. CIT(A) who deleted the disallowance as under:-

The appellant assessee in its submission's states that, “….The transactions as entered into by the assessee company with associate company or for the purpose of business only. In the assessment order it is stated that the assessee Company diverted borrowed funds for the nonbusiness purpose which is factually wrong. The assessee company did enter into an agreement for doing long term business. Having realized that full settlement has happened including all outstanding dues as well as loans except Page 10 of 17

The appellant assessee states that, the claim the company diverted borrowed funds for the nonbusiness purpose is factually wrong. The assessee company did enter into an agreement for doing long term business. Having realized that the full settlement has happened including all outstanding dues as well as loans, except repayment of loan to Tata Capital Ltd., the assessee Company made a decision to write off the not recovered deposit as a business loss u/s 37(1) of the Act. The appellant assessee has also provided the following documents to this Appellate authority:

This Appellate authority has considered the said documentary evidence provided by the appellant assessee and a glimpse of the said copy of agreement entered into w.r.t these deposits given for business purposes to M/s Suchirayu is being produced hereunder for reference :

The appellant assessee has also provided a settlement agreement which was done between the Appellant assessee M/s Hubli Scan Centre Limited and M/s Suchirayu Health Care Solutions Limited and the from the settlement agreement this Appellate authority has noted the following points:

The appellant assessee has also provided ledger account which are reproduced hereunder:

This Appellate authority from the aforesaid ledger’s provided by the appellant assessee has noted that, the amount of Rs 3,81,50,000/- and amount of Rs 38,11,906/- have been written off by the appellant assessee and the same has been shown by the appellant assessee in its BS and P&L account.

The appellant assessee has also provided its BS and P&L Account, which have also been considered by this Appellate authority. From the said BS and P&L account as provided by the appellant assesse, this Appellate authority has noted that, the appellant assessee has shown the amount of Rs 4,19,61,906/- as deposits written off in Note-23; Sr No.-11 under the head administration expenses, and a screenshot of the same is reproduced hereunder:

The Ld AO in its submission's states that, “….Thus assessee has failed to substantiate that, the amounts written off were advanced in the regular course of business. As well looking into the volume of the Associate Company which was quite huge & it cannot just go out of the business taking all its assets overnight & become seek. The burden of proof lies on the assessee company to clearly establish and furnish all the particulars regarding the claim made in the Return of Income. Except the One Time settlement agreement entered into by and between the assessee and its Associate, without establishing the reasonable cause & basis on which the settlement amount was arrived at it cannot be said that assessee has discharged its burden…”. The AO states that, theassessee has failed to substantiate that, the amounts written off were advanced in the regular course of business. As well as looking at the volume of the Associate Company which was quite huge & it cannot just go out of the business taking all its assets overnight & become seek. The burden of proof lies on the assessee company to clearly establish and furnish all the particulars regarding the claim made in the Return of Income. Page 12 of 17

This Appellate authority sent specific queries to the appellant assessee for providing the evidence and the appellant assessee provided all the evidences asked for. Thus, on considering the evidence provided by the appellant assessee the above contention of the Assessing officer that,“…The burden of proof lies on the assessee company to clearly establish and furnish all the particulars regarding the claim made in the Return of Income. Except the One Time settlement agreement entered into by and between the assessee and its Associate”,does not carry enough weight and it does not prove the assessee’s contention otherwise.

The Appellant assessee along with its submissions hasrelied upon the Judgment of the theHon’ble Supreme Court in case of CIT V/s Dhanrajgiriji Raja NarsingGiriji (1973)91 ITR 544 that, the department cannot dictate the circumstances in which expenditure is to be incurred. Every businessman knows his interest best. Similarly, the department cannot consider expediency factor, but must confine its examination to the reality aspect of the expenditure i. e. whether the amount claimed as a deduction was factually expended or laid out and whether it was wholly and exclusively for the purpose of business.

In CIT V/s Gobald Moto Services Pvt. Ltd. (1975) 100 ITR 240 (MAD), in RamanandSagar V/s Deputy CIT (2002) 255 ITR 134 (BOM HC) held that, the Assessing Officer can decide whether the expenditure is relating to business, whether it is wholly spent for the purpose.

These Judgment’sas relied upon by the appellant assesse, have similar facts to the present appeal case of the appellant. Thus, they are consideredfavorable.

Therefore, aggrieved, the ld AO is in appeal before us. The learned departmental representative vehemently submitted that the Page 13 of 17

The learned departmental representative vehemently supported the argument with the decision of the honourable Supreme Court in 447 ITR 167 (SC) in case of principal Commissioner of income tax versus Khyati Realtors private limited. It was further claimed that when it is not in the ordinary course of business that the assessee has given advance to the associated concern, same is not deductible in the hands of the assessee as expenditure or as a Page 14 of 17

The learned authorized representative vehemently supported the order of the learned CIT – A and submitted that the assessee has given a deposit for purchase of an MRI from which revenue was to be shared by the assessee. The assessee could not recover the sum for the reason that the associated enterprises become a non- performing asset and therefore the settlement agreement was entered into and part of the amount of the loan given to that party was written off. It is rightly claimed by the assessee as business expenditure.

During the course of hearing the bench asked the assessee to produce that when the MRI was purchased by the associate company and what is the revenue sharing agreement entered into and whether any revenue is received by the assessee at all are not, no such document was produced before us. Except agreements of loan and revised agreement and settlement agreement nothing was produced before us, and complete reliance was made on the order of the learned CIT – A.

We have carefully considered the rival contention and perused the orders of the learned lower authorities.

In this case the assessee entered into an agreement on 1 July 2013 along with another associated concern according to which the second party was also having a hospital business and the assessee was also into the hospital business. The associated concerns expressed its desire to that a medical resonance imaging [ MRI ] machine for which the assessee has an expertise running MRI Page 15 of 17

This agreement was revised on 1 January 2015 wherein the date of installing the new machine was extended to 31st of December 2016. 15. On 30th day of June 2017 settlement agreement was entered into wherein it was noted that the associated enterprises has become a non-performing asset by the banks and therefore the associated enterprises would not be able to pay any sum to the assessee and therefore the outstanding deposit of ₹ 5 crores were settled for ₹ 80 Lacs. And thus, the balance sum was written off and claimed as expenditure by the assessee.

The learned CIT – A allowed the claim of the assessee for the reason stated hereinabove. He neither examined that whether it is an expenditure incurred by the assessee or not. He also did not examine whether the loss incurred by the assessee is arising during the course of the carrying on of the business of the assessee and is not a capital loss. In fact, he also never enquired whether the company to whom the advances were given at all made an attempt to purchase MRI machine. He also did not look into the dates of the agreements at the time of giving loan, at the Page 16 of 17

The Decisions relied up on by assessee were accepted by the ld CIT (A) which are also not on the facts and issues in the appeal before him. The Ld AR also could not shows any similarity of facts in the case of the assessee with those decisions.

Provisions of section 37 (1) were not at all examined by the ld CIT (A) before negating the arguments of the ld AO and he did not consider at all whether the provision of section 28 applies to the claim of loss of the assessee. It is not shown before him that assessee is in the business of advancing loans.

In view of this we restore the whole issue back to the file of the learned CIT – A to examine the whole issue again and how it is allowable under section 37 (1) of the act or under section 28 of the act. The learned CIT – A also required to note that the learned departmental representative has relied upon the decision of the honourable Supreme Court in 447 ITR 167 which is also required to be considered by him. In the result the grounds raised by the learned assessing officer are allowed as indicated above Page 17 of 17

In the result appeal filed by the learned assessing officer is allowed for statistical purposes.

Appellant

Respondent 3. CIT

DR, ITAT, Bangalore

CIT(A)