THE
COMMISSION PAID TO PRIVATE DOCTORS FOR REFERRING PATIENTS FOR DIAGNOSIS COULD
NOT BE ALLOWED AS A BUSINESS EXPENDITURE.
Section 37 of the Income Tax Act, 1961 is a residuary
provision. In order to eligible for an allowance under this residuary
provision the following conditions are required to be fulfilled:
·
The
expenditure must not be governed by the provisions of Sections 30 to 36;
·
The
expenditure must have been laid out wholly and exclusively for the purpose of
the business of the assessee;
·
The
expenditure must not be personal in nature;
·
The
expenditure must not be capital in nature.
The
explanation to Sec. 37(1) was inserted by Finance Act, 1998 with
retrospective effect from 01.04.1962 which provides that it is declared that
any expenditure incurred by an assessee for any purpose which is an offence or
which is prohibited by law shall not be deemed to have been incurred for the
purpose of business or profession and no deduction or allowance shall be made
in respect of such expenditure.
The CBDT in Circular No. 772, dated 23.12.1998 explained the
above explanation as Section 37 of the Income Tax Act is amended to provide that any expenditure
incurred by an assessee for any purpose which is an offence or which is
prohibited by law shall not be deemed to have been incurred for the purposes of
business or profession and no deduction or allowance shall be made in respect
of such expenditure. This amendment will result in disallowance of
the claims made by certain assessees in respect of payments on account of
protection money, extortion, hafta, bribes etc., as business
expenditure. It is well decided that unlawful expenditure is not an
allowable deduction in computation of income. This amendment will take
effect retrospectively from 01.04.1962 and will, accordingly, apply in relation
to the assessment year 1962-63and subsequent years.
The issue to be discussed in this article is whether soliciting patients for
diagnosis by paying commission to the private doctor is unethical, against
public policy and forbidden by law with reference to decided case law..
In ‘Commissioner of Income Tax V. KAP Scan and Diagnostic Centre Private
Limited’ – (2012) 344 ITR 476 (P&H) the assessee is a private limited
company doing the business of CT scan, ultra sound and X-rays. During the
assessment proceedings for the assessment year 1997-98 in which the assessee
filed its return declaring a loss of Rs. 24,40,650/-,
it was found that the assesee had debited a sum of Rs. 3,68,400/- to the Profit and Loss
Account as expenditure on account of commission paid to the practicing doctors
who referred the patients to the assessee for various tests. The
Assessing Officer disallowed the said claim and considered it as deemed income
under Section 115J of the Act. On appeal by the
assessee the Commissioner of Income Tax (Appeals) allowed the appeal and
deleted the addition made on account of the commission. The Revenue filed
appeal before the Tribunal which dismissed the appeal holding that the
commission paid to the doctors was an allowable expenditure being a trade
practice and this gave rise to the Department to approach the High Court in the
present appeal.
The assessee, before the High Court put forth the following arguments:
·
The
question of admissibility regarding the deduction under Section 37(1) was never raised before the
Tribunal and therefore the same cannot be raised before the High Court for the
first time;
·
Giving
of commission to the private doctors referring the patients for various medical
tests was a trade practice which could not be termed to be illegal and,
therefore, the same cannot be disallowed under Section 37(1) of the Act even after insertion of
the Explanation to the said section by the Finance Act, 1998 with effect from
01.04.1962;
·
The
Revenue had not shown, proved or argued that commission which was paid by the
assessee was illegal practice and was not admissible as deduction.
The
High Court considered the arguments of both sides. To answer the first
objection of the assessee the High Court held that the perusal of the orders
passed by the Assessing Officer, the Commissioner of Income Tax (Appeals) and
the Tribunal shows that the issue was with regard to admissibility of deduction
of the commission paid by the assessee to the doctors for having referred the
business to its diagnostic centre. Once that is so, it cannot be said that
the point with regard to Section 37(1) of the Act was never raised though
it was only under the said provision. Therefore the argument of the
assessee does not carry weight.
The High Court further analyzed the provisions of Section 37, regulations of Medical Council of
India in ‘The Indian Medical Council (Professional Conduct, Etiquette and
Ethics), Regulations, 2002’ and Section 23 of the Contract Act.
The ‘The Medical Council (Professional Conduct, Etiquette and Ethics)
Regulations 2002, describes some of the unethical acts under Chapter 6 as follows:
·
Regulation
6.4 provides that no physician shall give, solicit, receive, or offer to five,
solicit or receive, any gift gratuity, commission or bonus in consideration of
a return for referring any patient for medical treatment;
·
Regulation
6.4.1 provides that a physician shall not give, solicit or receive nor shall he
offer to give solicit or receive, any gift, gratuity, commission or bonus in
consideration of or return for the referring, recommending or procuring of any
patient for medical, surgical or other treatment. A physician shall
not directly or indirectly, participate in or be a part to act of division,
transference, assignment, subordination, rebating, splitting or refunding of
any fee for medical, surgical or other treatment;
·
Regulation
6.4.2 provides that the provisions of para 6.4.1 shall apply with equal force
to the referring, recommending or procuring by a physician or any person,
specimen or material for diagnostic purposes or other study/work.
Nothing in this section, however, shall prohibit payment of salaries by a
qualified physician to other duly qualified person rendering medical care under
his supervision.
On
analysis the High Court held that if demanding of such commission was bad,
paying it was equally bad. Both were privies to a
wrong. Therefore, such commission paid to private doctors was
opposed to public policy and should be discouraged. The payment of
commission by the assessee for referring patients to it cannot be any stretch
of imagination be accepted to be legal or as per public policy.
Undoubtedly the High Court held that it is not a fair practice and has to be
termed as against the public policy.
The High Court analyzed Section 23 of Contract Act which provides that the
consideration or object of an agreement is lawful, unless-
·
it
is forbidden by law; or
·
is
of such a nature that, if permitted, it would defeat the provisions of any law;
or
·
is
fraudulent; or
·
involves
or implies, injury to the person or property of another; or the court regards
it as immoral, or opposed to public policy.
In
each of these cases, the consideration or object of an agreement is said to be
unlawful. Every agreement of which the object or consideration is
unlawful is void.
The
High Court held that Section 23 of the Contract Act equates an agreement or
contract opposed to public policy, with an agreement or contract by law.
Thus the commission paid to private doctors for referring patients for
diagnosis could not be allowed as business expenditure. The amount which
can be allowed as business expenditure has to be legitimate and not unlawful
and against public policy. The High Court allowed the appeal
of the
Revenue.
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