Referral commission to doctors is non-deductible when it violates medical ethics and becomes expenditure prohibited by law.

Referral commission paid to doctors was treated as a financial inducement that violated the medical ethics regulations and compromised fiduciary duties; such expenditure was regarded as incurred for a purpose prohibited by law and, therefore, not deductible under section 37(1) of the Income-tax Act, 1961. The disallowance was upheld. On the alleged additional receipts, the material said to support the assessee's claim had not been examined by the lower authorities, so the issue was restored for fresh consideration at the assessment stage. The result was only partial relief, with the deduction claim failing and the receipt issue remanded.

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Issues: (i) whether referral commission paid to doctors, being in violation of the medical ethics regulations, was hit by the bar on expenditure prohibited by law and was therefore not deductible under section 37(1) of the Income-tax Act, 1961; (ii) whether the addition made on account of alleged additional receipts required fresh examination and restoration to the Assessing Officer.

Issue (i): whether referral commission paid to doctors, being in violation of the medical ethics regulations, was hit by the bar on expenditure prohibited by law and was therefore not deductible under section 37(1) of the Income-tax Act, 1961.

Analysis: Payment made to a medical practitioner as referral fee was treated as a monetary inducement capable of influencing the doctor's advice to patients. Such inducement was held to compromise the doctor's fiduciary duties and to fall within the prohibition contained in Rule 6.8.1(d) of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. The assessee was regarded as part of the pharmaceutical and allied healthcare industry in the relevant context, and the expenditure was viewed as one incurred for a purpose forbidden by law. The principle drawn from the governing Supreme Court ruling on unethical inducements to doctors was applied to hold that such payments do not qualify for deduction.

Conclusion: The disallowance of referral commission was upheld and the claim for deduction under section 37(1) failed.

Issue (ii): whether the addition made on account of alleged additional receipts required fresh examination and restoration to the Assessing Officer.

Analysis: The material relied upon for the claim that the receipt had already been accounted for was stated to be newly available and had not been examined by the lower authorities. In view of the absence of prior examination of that material and with consent of the parties, the issue was considered fit for fresh adjudication at the assessment stage.

Conclusion: The matter was restored to the Assessing Officer for fresh consideration.

Final Conclusion: The appeal did not succeed on the disallowance of referral commission, but the dispute concerning the alleged additional receipt was sent back for fresh examination, leaving the overall relief only partial and of a statistical nature.

Ratio Decidendi: Expenditure incurred by way of financial inducement to a doctor, where it violates the governing medical ethics code and compromises fiduciary duties, is an expenditure for a purpose prohibited by law and is not deductible under section 37(1) of the Income-tax Act, 1961.

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