Commission payments to private doctors held illicit and not deductible u/s37(1); deduction disallowed, allowances set aside

Whether commission payments to private doctors were deductible under s.37(1): HC held the payments were illicit, contrary to public policy and unethical solicitation of patients; relying on the statutory prohibition in the Explanation to s.37(1) and ordinary principles that unlawful payments cannot constitute legitimate business expenditure, the court reasoned both payer and payee were privies to a wrong. Outcome: deduction disallowed. Consequence on departmental orders: the allowances granted by the CIT(A) and the Tribunal were held unsustainable and set aside.

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Issues: Whether the commission paid by the assessee to private doctors for referring patients is allowable as a deduction under section 37(1) of the Income-tax Act, 1961 in view of the Explanation to section 37(1) declaring expenditure for an offence or prohibited by law not deductible.

Analysis: Section 37 is a residuary provision permitting deduction of expenditure wholly and exclusively laid out for the purposes of business, subject to exclusions. The Explanation to section 37(1), inserted with retrospective effect from April 1, 1962, provides that any expenditure incurred 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 and no deduction shall be made. The Medical Council Regulations (2002) expressly prohibit physicians from giving or receiving any commission or bonus in consideration of referring patients for treatment; an agreement or practice opposed to public policy is equated under section 23 of the Indian Contract Act, 1872, with an agreement forbidden by law and hence void. The court rejected the assessee's reliance on authorities decided prior to the Explanation and distinguished decisions concerning business loss rather than business expenditure. Applying the statutory Explanation and relevant regulatory prohibition, the payment of commission for patient referrals was held to be contrary to public policy and thus unlawful for the purposes of section 37(1).

Conclusion: The commission paid to private doctors for referring patients is not an allowable deduction under section 37(1) of the Income-tax Act, 1961; decision is against the assessee and in favour of the Revenue.

Ratio Decidendi: Expenditure incurred for a purpose that is an offence or is prohibited by law, or which is opposed to public policy (including payments of commission for patient referrals prohibited by medical regulations), is not deductible under section 37(1) of the Income-tax Act, 1961 as per the Explanation to that section.

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