2024 (8) TMI 1016 - AT - Income Tax

Medical institution's advertisement expenses fully disallowed under section 37(1) for violating professional conduct regulations

Chalasani Hospitals (P.) Ltd. Versus Asst. Commissioner of Income Tax Central Circle – 1 (1), Andhra Pradesh And Vice –Versa

ITAT Visakhapatnam dismissed the assessee's appeal regarding advertisement expenses disallowed under section 37(1). The assessee, a medical institution, ... Addition u/s 37(1) - disallowance of advertisement expenses - allowability of expenditure as per Indian Medical Council Guidelines, 2002 - CIT(A) erred in restricting the disallowances to 50% without any verification and providing reasons for such estimation of partial relief - as per AO assessee was specifically asked with respect to the claim of the advertisement expenditure during the assessment proceedings to substantiate the same that does not fall under “unethical Acts” under the professional conduct, Etiquette and Ethics Regulations, 2002 of Indian Medical Council HELD THAT:- Assessee has failed to respond to any of the notices during the assessment proceedings. Subsequently, during the First Appellate Proceedings, assessee submitted various documents before the CIT(A) for which the Remand Report was obtained from the AO regarding verification of allowability of such expenditure. AO in his Remand Report objecting to such expenditure which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business. In addition to the above the AO also objected to the non submission of bank statements to prove the payments made to the advertisers. Further, in the Remand Report we find that AO has objected to the non-submission of details of TDS on the various payments made to the advertisers including the bank statements in support of the payments made to the advertisers. We also find that the assessee has not substantiated the claim of expenditure which are to be allowed under the Indian Medical Council professional conduct, Etiquette and Ethics Regulations, 2002. CIT(A) has also not adjudicated the case with respect to allowability of expenditure as per Indian Medical Council Guidelines, 2002. Chapter – 6 of the Indian Medical Council Act, 1956 professional conduct, Etiquette and Ethics Regulations, 2002 prohibits even the institutions and organizations to solicit patients either directly or indirectly. We are therefore of the considered view that the assessee has violated the provisions of Indian Medical Council Act 1956, professional conduct, Etiquette and Ethics Regulations, 2002. There is no merit in the arguments of assessee has made public only the services offered by the assessee which in our opinion construes advertisement. Further, we also find that CIT(A) has erred in estimating the disallowances and restricting to 50% of the expenditure claimed by the assessee without providing any valid reasoning and hence we are inclined to set aside the order of the CIT(A), thereby restoring the order of the AO on this issue. Accordingly the appeal of the assessee is dismissed. Issues:1. Disallowance of advertisement expenses under section 37(1) of the Income Tax Act, 1961.2. Adjudication of the allowability of expenditure as per Indian Medical Council Guidelines, 2002.Analysis:1. The appeal and cross objection were filed against the order of the Learned Commissioner of Income Tax (Appeals) regarding the disallowance of advertisement expenses. The assessee failed to respond to notices during assessment proceedings, leading to disallowance of a sum under section 37(1) of the Act. The Assessing Officer requested justification for the claimed expenses under Indian Medical Council regulations. The First Appellate Authority partially allowed the appeal by restricting the disallowances to 50% of the expenses claimed.2. The appellant challenged the order, arguing that the expenses were genuinely incurred for business purposes and should be allowed under section 37(1) of the Act. The Departmental Representative contended that the Assessing Officer's observations were valid and objected to the Ld. CIT(A) restricting the disallowances without proper verification. The Tribunal examined the case, noting the failure of the assessee to substantiate the nature of expenses in compliance with Indian Medical Council regulations.3. The Tribunal observed that the appellant did not discharge the onus to prove the expenses were solely for business purposes under section 37 of the Act. The Ld. CIT(A) was criticized for not providing categorical findings and arbitrarily restricting the disallowances to 50%. The Tribunal found that the appellant violated the Indian Medical Council Act regulations by engaging in advertisement activities prohibited by the guidelines. Consequently, the order of the Ld. CIT(A) was set aside, and the appeal of the assessee was dismissed.4. The Tribunal also addressed the cross objection filed by the revenue, which was allowed due to the dismissal of the assessee's appeal. The final judgment was pronounced on 12th August, 2024, dismissing the appeal of the assessee and allowing the cross objection of the revenue.