Taxpublishers.in - Monday Corner Answer to the Quiz for the week (17 Mar 2025)

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Quiz for the week (17 Mar 2025): Dr. Tiwari a famous cardiologist returned to India in April, 2022 after remaining in the USA for about 20 years. He initially thought of joining a corporate hospital but later decided to start his own in Jaipur. He availed a bank loan of Rs.8 crores and contributed Rs.12 crores from his own sources to establish a 120 bed multi-speciality hospital. The cost of land was Rs.5 crore; the hospital building construction cost Rs.10 crore and hospital equipments were acquired for Rs.3 crore. The balance was kept for working capital purposes. The hospital became operational w.e.f. 1st May, 2024. Gross collections for the FY 2024-25 amounted to Rs.25 crores and net cash income (before depreciation) after deducting all business expenses was Rs.7 crores. Advise income-tax incentives, if any, for the assessment year 2025-26. Best Answer : The assessee in this case has net cash income of Rs.7 crores before depreciation. Since income before depreciation is given in the query, it is apparent that the interest on moneys borrowed from bank to the extent it is eligible for deduction has already been adjusted. Further, Dr.Tiwari can claim depreciation on hospital building @10% on Rs.10 crores and depreciation on hospital equipments based on the applicable rates. However, it is clear that Dr.Tiwari would end up in paying tax on the net income after depreciation. As Dr.Tiwari returned to India in April, 2022 after remaining outside India for 20 years his residential status has nothing to do with computation of total income since there is no income earned outside India in the financial year 2024-25 (assessment year 2025-26) and the income from hospital has accrued in India which is taxable regardless of his residential status. He can choose to avail section 35AD which allows a deduction in respect of any expenditure of capital nature incurred wholly and exclusively for the purposes of any specified business carried on by him during the previous year in which such expenditure is incurred by him. The proviso to section 35AD(1) says expenditure incurred prior to commencement of business and capitalized in the books account of the assessee on the date of commencement of its operation shall also be allowed as deduction. The specified business includes running of hospital also. Clause (ab) of sub-section (5) to section 35AD says ‘on or after 1st day of April, 2010 where the specified business is in nature of building and operating a new hospital with at least 100 beds for patients'. Since Dr.Tiwari has started a new hospital by making construction and it became operational during the financial year 2024-25 he can opt for section 35AD deduction. However, the cost of land will not be considered for the purpose of deduction under section 35AD. Hence, he can claim the entire cost of construction of the hospital building of Rs.10 crores and cost of equipments Rs.3 crores against the net income. In such case, there would be no income liable to tax for the assessment year 2025-26. However, he cannot claim depreciation in respect of hospital building and equipments for which deduction was claimed under section 35AD in view of sub-section (4) contained therein. He can carry forward the excess of capital expenditure of Rs.13 crores over the net income of Rs.7 crores being Rs.6 crores to be set off against his income from running of hospital in the subsequent assessment years i.e. assessment year 2026-27 onwards as per section 73A. This carry forward has no time limitation till it is fully set off.

Quiz for the week (17 Mar 2025):

Dr. Tiwari a famous cardiologist returned to India in April, 2022 after remaining in the USA for about 20 years. He initially thought of joining a corporate hospital but later decided to start his own in Jaipur. He availed a bank loan of Rs.8 crores and contributed Rs.12 crores from his own sources to establish a 120 bed multi-speciality hospital. The cost of land was Rs.5 crore; the hospital building construction cost Rs.10 crore and hospital equipments were acquired for Rs.3 crore. The balance was kept for working capital purposes. The hospital became operational w.e.f. 1st May, 2024. Gross collections for the FY 2024-25 amounted to Rs.25 crores and net cash income (before depreciation) after deducting all business expenses was Rs.7 crores. Advise income-tax incentives, if any, for the assessment year 2025-26.

Best Answer :

The assessee in this case has net cash income of Rs.7 crores before depreciation. Since income before depreciation is given in the query, it is apparent that the interest on moneys borrowed from bank to the extent it is eligible for deduction has already been adjusted. Further, Dr.Tiwari can claim depreciation on hospital building @10% on Rs.10 crores and depreciation on hospital equipments based on the applicable rates. However, it is clear that Dr.Tiwari would end up in paying tax on the net income after depreciation. As Dr.Tiwari returned to India in April, 2022 after remaining outside India for 20 years his residential status has nothing to do with computation of total income since there is no income earned outside India in the financial year 2024-25 (assessment year 2025-26) and the income from hospital has accrued in India which is taxable regardless of his residential status.

He can choose to avail section 35AD which allows a deduction in respect of any expenditure of capital nature incurred wholly and exclusively for the purposes of any specified business carried on by him during the previous year in which such expenditure is incurred by him. The proviso to section 35AD(1) says expenditure incurred prior to commencement of business and capitalized in the books account of the assessee on the date of commencement of its operation shall also be allowed as deduction.

The specified business includes running of hospital also. Clause (ab) of sub-section (5) to section 35AD says ‘on or after 1st day of April, 2010 where the specified business is in nature of building and operating a new hospital with at least 100 beds for patients'.

Since Dr.Tiwari has started a new hospital by making construction and it became operational during the financial year 2024-25 he can opt for section 35AD deduction. However, the cost of land will not be considered for the purpose of deduction under section 35AD. Hence, he can claim the entire cost of construction of the hospital building of Rs.10 crores and cost of equipments Rs.3 crores against the net income. In such case, there would be no income liable to tax for the assessment year 2025-26.

However, he cannot claim depreciation in respect of hospital building and equipments for which deduction was claimed under section 35AD in view of sub-section (4) contained therein. He can carry forward the excess of capital expenditure of Rs.13 crores over the net income of Rs.7 crores being Rs.6 crores to be set off against his income from running of hospital in the subsequent assessment years i.e. assessment year 2026-27 onwards as per section 73A. This carry forward has no time limitation till it is fully set off.