ACIT CENTRAL CIRCLE-1(3), HYDERABAD vs. KIRAN INFERTILITY CENTRE PRIVATE LIMITED, HYDERABAD

This appeal filed by the Revenue is directed against the order dated 08.03.2022 of the learned CIT (A)-11, relating to A.Y.2017-18.

Facts of the case, in brief, are that the assessee is a company engaged in providing medical services in connection with infertility among women/men and surrogacy treatment and is deriving income from business and other sources. A Search and Seizure operation u/s 132 of the Income Tax Act, 1961 was conducted on 10.01.2017 in the case of the assessee. The assessee filed its return of income for the year under consideration on 6.11.2017 declaring total income of Rs.6,28,71,960/-. The case was selected for compulsory manual scrutiny (being the specified year for the search assessments) following the guidelines issued by the CBDT. Accordingly, statutory notices u/s 143(2) and 142(1) were issued and served on the assessee in response to which the assessee filed the requisite details from time to time.

During the course of assessement proceedings , the Assessing Officer noted that the assessee company is engaged in treatment options for Infertility such as Surrogacy, I.V.F, 1.C.S.., IUI, Egg/ Oocyte Donation, PGS/Embryo Donation, Oocyte/Embryo Freezing. During the year under consideration, the assesee has total receipts from medical services of Rs.14,39,94,684/- and other income of Rs 92,80,354/-. The company is recognizing income under following sub heads of revenue: 1) Consultancy 2) Hysteroscopy 3) Investigation 4) IUI 5) IVE/ICSI 6) Misc. treatments 7) Scanning 8) Surrogacy

The Assessing Officer noted that out of the above, the income from surrogacy is Rs 11,90,47,249 and the rest is from other sources. After claiming all expenses, the profit before tax is shown at Rs 5,91,15,388/-. In the computation of income, the assessee has shown income of Rs 45,90,235/ being on account of "ICDS effect" and after considering adjustments on account of depreciation etc. the net income from business is shown at Rs 6,28,71,957/-.

From the details furnished by the assessee, the Assessing Officer noted that the assessee derives most of the revenue from surrogacy. The other treatments referred to above also form part of the Surrogacy program but depends on case-to- case basis depending on the issues involved. The customers opt for Surrogacy program by signing Surrogacy Agreement. Thereafter it involves multiple persons such as Oocyte donor, genetic mother, genetic father, surrogate mother and the new born baby. After birth of baby the clinic facilities, arranging birth certificate, various declarations and affidavits, DNA test for paternity, passport for the baby, exit visa for the baby and arranging for the parental order for the baby etc., are also involved. The IVF process is a necessary component of any surrogacy arrangement. The entire process is spread over a period of time.

From the details furnished by the assessee the Assessing Officer further noted that the assessee is recognizing income from surrogacy from the clients once the surrogate child is born. However, during the course of search and seizure operation conducted on 10.01.2017 at the premises of the assessee company, it was found that even though in some of the cases the surrogate child is born, and full payments have been received from such patients, still the assessee was showing them as Advances from Surrogacy Clients in its Books of Accounts instead of recognizing them as revenue. Some of such cases identified during search and seizure operation are as follows:

The Assessing Officer also noted that the assessee was showing substantial "Advances from Surrogacy clients" of Rs 15.88 crores as on 1/4/2016 and Rs 14.47 crores as on 10/1/2017 (date of search) and the assessee appeared to be not following even his own method of recognizing revenue in proper and complete manner and appearing to be deferring the revenue to subsequent periods. He further noted that in these surrogacy treatment cases, which is spread over a period of time across different years, while the assessee is debiting the expenses related to surrogacy treatment in various cases in the profit and loss account but the revenue is not recognized proportionately and being deferred. When these specific discrepancies in the above cases were pointed out during the search and seizure operation the assessee admitted in the sworn statement stating that “surrogate child was born in many cases and full payment has been received from such patients." Further to cover up the above discrepancies, the Director of the company Dr. Samit Shekar had voluntarily admitted additional income of Rs.8.04 crores, out of the outstanding advances of Rs 14.47 crores for FY 2016-17.

During the course of search assessment proceedings, when the assessee was asked to clarify as to how he has reflected the admission of additional income in the declaration made u/s 132(4) during the search, the assessee vide letter dated 16/11/2018 submitted as under:

However, the Assessing Officer was not satisfied with the above reply. He noted that the books of accounts seized from the assessee's premise during the course of search and seizure operation on 10.01.2018 show that, the assessee before the search and seizure operation itself has already recognized an amount of Rs. 8,31,71,560/- as revenue from surrogacy cases for the period 01.04.2016 to 09.01.2017.

He noted that when there is no progress in these cases and assessee itself submitted that “most of them were not completed on account of change in guidelines by Govt. of India by way of circulars”, then the onus lies on assessee to establish that treatment is still in progress and refund is due to the clients if there is no favourable change in the guidelines, by way of confirmation letters from the clients in this regard.

The Assessing Officer, on perusal of the agreement copies that the assessee entered with the clients for surrogacy treatment observed that there is no clause for the refund of the fees collected in the case of any contingency. Also, the fees are not collected at one go, they are collected based on the treatment provided at various stages. From the analysis of the cases, he noted that there is only a part receipts from the patients, that means there was commencement of treatment and to the extent of treatment given the fees were collected and subsequent treatment must have got halted due to change in guidelines by the Govt. of India by way of circulars and medical reasons as stated by the assessee. The assessee has already claimed the corresponding expenditure in the relevant years for the partial treatment carried out in the above mentioned cases, therefore, he held that no fresh expenditure on the same can be allowed.

Thus, considering all the above peculiar aspects of these cases and considering that some expenditure would have already been booked by the assessee in the partial treatment in these cases in the earlier years (but no revenue recognized from the same due to the revenue recognition method followed by the assessee) and also considering that the treatment itself is not permitted by law in these cases and no refund clause in the agreement itself and in any case, when the treatment for such patient itself has been banned by law and yet the assessee not having refunded the money to these patients and continues to show the same as advances from clients for more than three to four years now but has not recognized any revenue from the same, the Assessing Officer held that this amount now represents business revenue of the assessee for the year under consideration. Further, the assessee itself has recognized these receipts of Rs 2,62,04,660/ as revenue from surrogacy clients in the books of accounts maintained by it as seized from the assessee's premises on 10/1/2017 during the search operation and it is only on a subsequent date that the assessee has reversed these entries. Thus, considering all the above aspects, the Assessing Officer treated the amount of Rs.2,62,04,660/- appearing as advance from surrogacy clients as income of the year. Since, the assessee would have already claimed expenditure for the partial treatment in these cases in earlier years, he did not allow any expenditure from the above income.

The Assessing Officer also asked the assessee to furnish the list and the status of cases outstanding as on 31.03.2017. From the details so furnished, he noted that an amount of Rs. 5,28,09,291/- is outstanding in certain cases due to change of guidelines by way of government circulars in 2012 & 2015, as per Supreme Court Verdict and on medical Grounds. On verification of the above-mentioned list of cases where the advances outstanding are aggregating to Rs. 5,28,09,291/-, with the Books of accounts the Assessing Officer found that it includes those cases whose outstanding advances summing up to Rs 2,62,04,660/- as mentioned earlier.

The remaining outstanding Advances cases shows that in 24 cases, totaling to Rs 2,66,04,631/- are almost same as that of 37 cases totaling to Rs 2,62,04,660/- except that in those 37 cases the assessee itself has recognized as revenue as per the seized books of account and later reversed but the facts of these cases otherwise are also almost same. Rejecting the explanation given by the assessee, the Assessing Officer made addition of Rs.2,66,04,631/- being advances from surrogacy clients as income of the year.

The Assessing Officer further made addition of Rs.55,46,136/- under ICDS in respect of 54 cases by estimating the income @ 15% on 3,69,74,242/- on the ground that the assessee itself has declared income under ICDS in respect of 32 cases as income from surrogacy.

The Assessing Officer further made addition of Rs.1,91,750/- on account of disallowance of ROC expenses which is not in dispute before us. He accordingly determined the total income of the assessee.

In appeal, the learned CIT (A) sustained the addition/ disallowance made on account of ROC expenses. So far as the remaining additions are concerned, he gave part relief to the assessee by observing as under:

Aggrieved with such order of the learned CIT (A) the Revenue is in appeal before the Tribunal by raising the following grounds:

The learned DR strongly challenged the order of the learned CIT (A) in deleting the addition. He submitted that when the Assessing Officer had given categorical finding that the assessee itself recognized the receipts of Rs.2,62,04,660/- as revenue from the same in the books of account maintained which was seized from the assessee’s premises on 10.01.2017 during the search operation and the assessee has on a subsequent date reversed these entries, the learned CIT (A) is not justified in deleting the addition of Rs.2,62,04,660/- and Rs.2,66,04,631/- respectively. Further, the learned CIT (A) is not justified in deleting an amount of Rs.37,06,936/- out of the addition of Rs.55,46,136/- made by the Assessing Officer under ICDS. She submitted that the when treatment could not have been carried out by the assessee again due to the government guidelines and when there was neither any provision for reviewing the surrogacy agreement nor any clause for refund of the advance therefore, the advances were assessable income.

The learned Counsel for the assessee, on the other hand, while supporting the order of the learned CIT (A) drew the attention of the Bench to the following written submission to support his case:

It is the submission of the learned Counsel for the assessee that when the liability to repay the advances received still exists, therefore, the advances cannot be termed as income of the assessee as they are still representing the liability to genetic parent. It is his argument that when the advances received are kept in the books of account mostly from the year 2013 and onwards and that such advances are due to the foreign nationals, as long as the liability to pay the amount subsists, it continue to be a liability and does not become income of the assessee. It is his argument that such advances do not partake the character of income unless the foreign national, who paid the advance surrenders his rights. It is also his submission that in subsequent years, the assessee has repaid most of the advances and therefore, making addition of the same to the total income of the assessee during the impugned assessment year is not justified.

A perusal of the order of the learned CIT (A) shows that he granted relief to the assessee on the ground that the matter is subjudice before the Hon'ble Supreme Court where the Rule notified by the Central Government was under challenge. We find the learned CIT (A) decided the appeal assuming the pendency of the writ petition. However, the record shows that the Hon'ble Supreme Court had already dismissed the writ petition before passing of the appellate order. Therefore, the order of the learned CIT (A) which is based on wrong fact is liable to be set aside. At the same the time, it is an admitted fact that the advances were received in the past years and do not pertain to the impugned A.Y. It is on account of the circular issued by the Govt. of India debarring the foreign nationals from commission of surrogacy in India, that the procedures could not take place and further the assessee had shown the amounts as advance outstanding in its books of account. We find merit in the argument of the learned Counsel for the assessee that when the advances are received in the books of account mostly from 2013 onwards and such advances received are from the foreign nationals, hence the liability to pay the amount subsists, it continues to be a liability and does not become the income of the assessee. At the same time when the assessee after doing certain procedures has recognized part of the income received from those foreign nationals as income of the assessee, the accounts of the assessee cannot be said to be true and correct. Since it is the submission of the learned Counsel for the assessee that it has recognized most of the amounts due to the foreign nationals as well as the persons of Indian origins as income in subsequent A.Ys, therefore, considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the Assessing Officer with a direction to give one more opportunity to the assessee to substantiate with evidence to his satisfaction that (a) the assessee has refunded the amounts to the foreign nationals where a request has been made and (b) whenever certain procedures have been conducted, the assessee has recognized part of such income as his income in the concerned assessment year and (c) the assessee has recognized such advances as income due to cessation of liability in any of the later years. The Assessing Officer shall decide the issue as per fact and law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The grounds raised by the Revenue are accordingly allowed for statistical purposes.

In the result, appeal filed by the Revenue is allowed for statistical purposes.