Ad hoc additions & disallowances cannot be sustained without any specific defect in the books of accounts

Business Expenditure Salary paid to MD Disallowance Validity Assessee company was engaged in business of providing health care facility through super-specialty hospital During assessment proceedings, AO observed that assessee had appointed Dr. N as its MD w.e.f. 1.6.2007 but no remuneration was paid to him or provided in financial statements in earlier AYs However, in year under consideration an amount of Rs. 9,33,33,333/- was shown as salary for period 1.6.2007 to 31.3.2010 On being asked to explain, assessee submitted that company’s Board of Directors had passed a resolution, where an amount of Rs. 6 crore was approved as salary to Dr. N for period 1.6.2007 to 31.10.2009 It was also submitted before AO that liability towards payment of salary had crystallized only upon passing of relevant resolution approving payment of salary by Board of Directors and was, therefore, allowable in year under consideration It was also submitted that, although, Hospital had started functioning from 1.11.2009 only, assessee company had already been providing health care services w.e.f. 1.6.2007 by entering into arrangements with various hospitals where all cardiac operations were performed by a team led by Dr. N It was also submitted before AO that salaries for other doctors had been fixed and paid w.e.f. 1.6.2007 which had been allowed by AO also in his order for AY 2008-09 but since salary of Dr. N could not be paid until BoD approved it, same was claimed as an expenditure in year under consideration However, AO was of opinion that salary of Dr. N, he being Chairman and MD, was paid for giving overall business directions/framing business policy which was in development stage before November 2009 and, therefore, salary for period prior to November 2009 should have been capitalized Accordingly, entire salary paid to Dr. N for period prior to 1.11.2009 was capitalized by AO which resulted in an amount of Rs. 8,23,52,900/- being treated as pre-operative expenditure which was amortized @10% and, accordingly, a net addition of Rs. 7,82,35,255/- was made On appeal, CIT(A) partly allowed same and held that only 20% of salary should have been capitalized Held, CIT(A) had not given any reasoning as to how that ad hoc percentage of 20% was arrived at His findings were contradictory inasmuch as on one hand, he had given a categorical finding that it could not be said that assessee company was not having any kind of business operation prior to 31.10.2009 and on other hand, he had proceeded to estimate capital cost component in salary at 20% Ad hoc additions/disallowances could not be sustained without tax authorities pointing out any specific defect in books of accounts of assesse Reasoning of CIT (A) in directing that only 20% of salary should be disallowed as being capital in nature could not be accepted Once it is accepted that business operations of company had commenced prior to 31.10.2009, there remains no basis for making a disallowance for estimated capital component without any cogent finding of fact and/or evidence Therefore, CIT(A) was incorrect in holding that 20% of salary out of Rs. 6 crore was to be capitalized Assessee’s ground allowed.

GLOBAL HEALTH PVT. LTD. & ANR. vs. DEPUTY COMMISSIONER OF INCOME TAX & ANR.

(2019) 55 CCH 0266 DelTrib