TaxTMI 
TaxTMI 
2022 (4) TMI 1022
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....uestions of law and issues are involved which require adjudication in both these Writ Petitions:- (i) Whether on the facts and in the circumstances of the case and as per Provisions of regulations 6.4.1 & 6.4.2 read with 8.1 of the amended Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulation, 2002 introduced w.e.f 14.12.2009 read with Circular No. 5/2012 dated 1st August, 2012 issued by the Central Board of Direct Taxes (CBDT), claim of deduction on expenditure made by the assessee/petitioner who is engaged in the business of running multi-speciality hospital, for the purpose of making payment to doctors as 'referral to doctors' for referring patients for treatment in its hospital acceptance of which is an offence and prohibited by law is disallowable under the explanation I of Section 37 (1) of the Income Tax Act, 1961? (ii) Whether Circular No. 5/2012 dated 1st August, 2012 issued by the Central Board of Direct Taxes (CBDT) is explanatory and retrospective in nature and is effective from 14.12.2009 in view of decision of the Hon'ble Supreme Court dated 22nd February, 2022 in Special Leave Petition (Civil) No. 23207 of 2019 in the case o....
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....nder: It is the case of the petitioner that it is a company within the meaning of Companies Act, 1956, engaged in the business of running a multi-speciality hospital and it intends to challenge the impugned notice dated 27th July, 2017 issued by the Assessing Officer concerned under Section 148 of the Income Tax Act, 1961, relating to assessment year 2011-12 (financial year 2010-11) which was served on the petitioner on 2nd August, 2017 and against which petitioner had filed an objection on 16th March, 2018 which was rejected by the Assessing Officer concerned on 16th July, 2018. Dispute in this case according to the petitioner relates to a payment of Rs. 51,76,992/- as 'referral to doctors' which was claimed by it as business expense in its return of income filed for the assessment year 2011-12 and according to the petitioner this expense was referred in schedule -18 to the audited profit and loss account and that the petitioner had already explained the same in course of regular assessment proceeding and the Assessing Officer had allowed such deduction after due consideration of the relevant materials placed on record particularly Item No. 15 of the questionnaire dated 8th ....
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....n case relating to assessment years 2009-10 & 2013-14, the tribunal by its order dated 11th December, 2019, has allowed the assessee/petitioner such payment of referral fee to the doctors for referring their patients to the assessee hospital/petitioner, as deduction under Section 37 (1) of the Act. Petitioner submits that following the aforesaid judgment of the Tribunal, the CIT (Appeal) has also allowed the aforesaid deduction by its order dated 18th March, 2021 relating to assessment year 2010-11 in assessee/petitioner's own case and the department has not gone in further appeal against the said order of CIT (Appeal). Petitioner submits that in view of the aforesaid admitted position that the initiation of the impugned reassessment proceeding is after the expiry of four years from the end of the relevant assessment year and since the Assessing Officer concerned has nowhere made out a case either in its impugned notice under Section 148 of the Act or in the recorded reason or in the impugned order of rejection of its objection to Section 148 of the Act that there was any omission or failure on the part of the assessee/petitioner in disclosing fully and truly all material facts ....
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....evant assessment." Petitioner has relied on the decision of this Court in the case of East India Hotels Ltd. -vs- Deputy Commissioner of Income Tax & Ors. reported in [1993] 204 ITR 435 (Cal) and relevant portion of the said decision is quoted hereunder: "It has been urged on behalf of the respondents that when excessive depreciation allowance was given by the Income-tax Officer, that will be treated as escapement of income within the meaning of Explanation 2 to Section 147 of the Act. But that does not resolve the dispute. The Explanation by itself will not turn every case of excessive depreciation allowance into a case of omission or failure to disclose fully and truly all material facts. If the reopening is to be done after the prescribed period of four years, failure to disclose fully and truly material fact by the assessee has to be established. Merely because an underassessment has taken place because excessive depreciation was allowed on a wrong understanding of law will not make it a case of omission to disclose fully and truly all material facts." Petitioner has also relied on the decision of Bombay High Court in the case of Hindustan Lever Ltd. -vs- R.B....
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....our years from the end of the assessment year 1996-97 and does not comply with the requirements of proviso to section 147 of the Act, the assessing officer had no jurisdiction to reopen the assessment proceedings which were concluded on the basis of assessment under section 143(3) of the Act. On this short count alone the impugned notice is liable to be quashed and set aside." Petitioner has relied on the decision of this Court in the case of Asoka Marketing & Ors. -vs- Income Tax Officer & Ors. reported in [1978] 111 ITR 783 (Cal) and relevant portion of the said decision is quoted hereunder: "I am unable to accept the contentions of Mr. Balai Lal Pal on this point. Entry No. 7 in the covering sheet of the recorded reasons in my view does not amount to a formation of belief that any income has escaped, assessment. Even assuming that by an over-generous interpretation in favour of the revenue, this entry may be construed to amount to the formation of a belief by the Income-tax Officer that income has escaped assessment, there is nothing in the recorded reasons to show that there was the formation of belief by the Income-tax Officer that such income escaped assess....
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....disclosed by the assessee before the AO at the time of assessments made under Sub-section (3) of Section 143. I am, therefore, clearly of the view that the assessee disclosed all the primary facts before the AO at the time of original assessments under Sub-section (3) of Section 143 of the Act and there was no omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment for those assessment years. Therefore, the notice issued under Section 148 was illegal and without jurisdiction as the conditions precedent to reopen the assessment are not available in the recorded reasons. I hold that no income chargeable to tax had escaped assessment for those assessment years due to failure of the assessee to disclose fully and truly all material facts necessary for its assessment." Petitioner has relied on the decision of this Court in the case of Amiya Sales and Industries -vs- Assistant Commissioner of Income Tax reported in [2005] 274 ITR 25 (Cal) and relevant Paragraph being Nos. 16 and 17 of the said decision are quoted hereunder: "16. In the case in hand, as already noted, since the conditions for assumption of....
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....mission 6.4.1 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 party to act of division, transference, assignment, subordination, rebating, splitting or refunding of any fee for medical, surgical or other treatment. 6.4.2 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 purpose 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. 8. PUNISHMENT AND DISCIPLINARY ACTION 8.1 It must be clearly understood that the instances of offences and of Professional misconduct which are given above do not constitute and are not intended to constitute a complete list of the infamous acts which calls for disciplinary action, and that....
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....ding above mentioned or similar freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under Section 37 (1) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebees and claimed it as a deductable expense in its accounts against income. 4. It is also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from other sources as the case may be depending on the facts of each case. The Assessing Officers of such medical practitioner or professional associations should be examine the same and take an appropriate action. This may be brought to the notice of all the officers of the charge for necessary action. [F. No. 225/142/2012-ITA.II]" Recorded reason for the assessment year 2011-12 for the reopening of the assessment under Section 148 of the Act which is similar to the reason given ....
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....vil) No. 23207 of 2019) reported in 2002 SCC OnLine SC 221. Thereafter parties were further heard and judgment was made reserved on 07th March, 2022. On perusal of the said judgment, in my considered opinion some of the issues involved and law laid down therein has very much relevance to this case particularly the issue of claim of deduction of expense incurred on freebies/payment of commission offered or paid to the doctors by the allied health care industry like hospitals Diagnostic Centres, clinical Laboratories as 'referral to doctors' for referring patients to its hospital for treatment, under Section 37 (1) and Explanation 1 thereunder, under the Income Tax Act, 1961, and in view of the aforesaid regulations of the Indian Medical Council and circular of CBDT, dated 1st August, 2012. Relevant paragraphs of the said judgment of the Hon'ble Supreme Court are quoted hereinbelow: "17. An examination of the relevant provisions is first necessary. Section 37 of the IT Act states as follows: Section 37. General.-(1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal ex....
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....maceutical or allied healthcare industry or their representatives for self and family members for vacation or for attending conferences, seminars, workshops, CME Programme, etc. as a delegate.] (c) Hospitality: A medical practitioner shall not accept individually any hospitality like hotel accommodation for self and family members under any pretext. (d) Cash or monetary grants: A medical practitioner shall not receive any cash or monetary grants from any pharmaceutical and allied healthcare industry for individual purpose in individual capacity under any pretext. Funding for medical research, study etc. can only be received through approved institutions by modalities laid down by law / rules / guidelines adopted by such approved institutions, in a transparent manner. It shall always be fully disclosed." The regulation further lays down corresponding action or sanction which can be taken against, or imposed upon, the medical practitioner for violation of each stipulation, based on the monetary value of the same. Thus, acceptance of freebies given by pharmaceutical companies is clearly an offence on part of the medical practitioner, punishable with varying consequen....
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....sp; The CBDT circular being clarificatory in nature, was in effect from the date of implementation of Regulation 6.8 of the 2002 Regulations, i.e., from 14.12.2009. 22. This Court is of the opinion that such a narrow interpretation of Explanation 1 to Section 37(1) defeats the purpose for which it was inserted, i.e., to disallow an assessee from claiming a tax benefit for its participation in an illegal activity. Though the memorandum to the Finance Bill, 1998 elucidated the ambit of Explanation 1 to include "protection money, extortion, hafta, bribes, etc.", yet, ipso facto, by no means is the embargo envisaged restricted to those examples. It is but logical that when acceptance of freebies is punishable by the MCI (the range of penalties and sanction extending to ban imposed on the medical practitioner), pharmaceutical companies cannot be granted the tax benefit for providing such freebies, and thereby (actively and with full knowledge) enabling the commission of the act which attracts such opprobrium. 23. The illogicality and completely misconceived nature of such an interpretation was dealt with in a similar interpretation of the provisions of PC Act, by a Constitution....
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....t it will impose is for the breach of privilege or contempt. There is no reason to doubt that the Lok Sabha can take action for breach of privilege or contempt against the alleged bribe-givers and against the alleged bribe-takers, whether or not they were Members of Parliament, but that is not to say that the courts cannot take cognizance of the offence of the alleged bribe-givers under the criminal law. (emphasis supplied) 24. Even if Apex's contention were to be accepted - that it did not indulge in any illegal activity by committing an offence, as there was no corresponding penal provision in the 2002 Regulations applicable to it - there is no doubt that its actions fell within the purview of "prohibited by law" in Explanation 1 to Section 37(1). 25. Furthermore, if the statutory limitations imposed by the 2002 Regulations are kept in mind, Explanation (1) to Section 37(1) of the IT Act and the insertion of Section 20A of the Medical Council Act, 195623 (which serves as parent provision for the regulations), what is discernible is that the statutory regime requiring that a thing be done in a certain manner, also implies (even in the absence of any express terms), that t....
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....es continue to sponsor foreign trips of many doctors and shower with high value gifts like air conditioners, cars, music systems, gold chains etc. to obliging prescribers who then prescribe costlier drugs as quid pro quo. Ultimately all these expenses get added up to the cost of drugs. The Committee's attention was drawn to a news item in Times of India dated July 1, 2010 by Reema Nagarajan giving specific instances of violations of MCI code. The Committee calls upon the Government to take strict and speedy action on such violations. Since MCI has no jurisdiction over drug companies, the Government should take parallel action through DCGI and the Income Tax Department to penalize those companies that violate MCI rules by cancelling drug manufacturing licences and/or disallowing expenses on unethical activities." (emphasis supplied) Interestingly, a similar conclusion was arrived at by the US Department of Health and Human Services Office of the Assistant Secretary for Planning and Evaluation, in a report called Savings Available Under Full Generic Substitution of Multiple Source Brand Drugs in Medicare Part D (dated 23.07.2018). The report noticed inter alia, that an empirica....
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....s that the basic intention of the decision was that the receiving of the gifts/freebies by Professionals is against public policy as also against the law in so far as the amendment by the Medical Council Act, 1956 to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, once receiving of such gifts have been held to be unethical obviously the corollary to this would also be unethical, being giving of such gifts or doing such acts to induce such Doctors and Medical Professionals to violate the Medical Council Act, 1956." (emphasis supplied) 30. Thus, one arm of the law cannot be utilised to defeat the other arm of law - doing so would be opposed to public policy and bring the law into ridicule. In Maddi Venkataraman & Co. (P) Ltd. v. CIT30, a fine imposed on the assessee under the Foreign Exchange Regulation Act, 1947 was sought to be deducted as a business expenditure. This Court held: "Moreover, it will be against public policy to allow the benefit of deduction under one statute, of any expenditure incurred in violation of the provisions of another statute or any penalty imposed under another statute. In the instant case, if the ....
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....is supplied) The 2002 Regulations, applicable to all medical practitioners (including doctors in private practice), was introduced w.e.f. 14.12.2009. 33. Thus, pharmaceutical companies' gifting freebies to doctors, etc. is clearly "prohibited by law", and not allowed to be claimed as a deduction under Section 37(1). Doing so would wholly undermine public policy. The well-established principle of interpretation of taxing statutes - that they need to be interpreted strictly - cannot sustain when it results in an absurdity contrary to the intentions of the Parliament. A Bench of this Court in C.W.S. (India) Ltd. v. CIT held as follows: "While a literary construction may be the general rule in construing taxing enactments, it does not mean that it should be adopted even if it leads to a discriminatory or incongruous result. Interpretation of statutes cannot be a mechanical exercise. Object of all the rules of interpretation is to give effect to the object of the enactment having regard to the language used". Justice Oliver Wendell Holmes had once said: "A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in....
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.... object of such an agreement must be held to be of such a nature that if permitted it would defeat the provisions of the excise law within the meaning of Section 23 of the Contract Act. Such an agreement is declared by Section 23 to be unlawful and void. The question is whether such an unlawful or void partnership can be treated as a genuine partnership within the meaning of Section 185(1) and whether registration can be granted to such a partnership under the provisions of the Income Tax Act and the Rules made thereunder. We think not. When the law prohibits the entering into a particular partnership agreement, there can be in law no partnership agreement of that nature. The question of such an agreement being genuine cannot, therefore, arise. It is also a known principle that what cannot be done directly, cannot be achieved indirectly. As was said in Fox v. Bishop of Chester35 that it is a: "Well-known principle of law that the provisions of an Act of Parliament shall not be evaded by shift or contrivance" And that: "To carry out effectually the object of a Statute, it must be construed as to defeat all attempts to do, or avoid doing, in an in....
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....y upon any parliamentary debate or search for the purpose beyond the plain meaning of the law. The object of the law is set out in unambiguous term. If every allottee chosen after a process of selection under the Rules with reference to certain objective criteria were to enter into bargains of this nature, it will undoubtedly make the law a hanging (sic laughing) stock." 36. In the present case too, the incentives (or "freebies") given by Apex, to the doctors, had a direct result of exposing the recipients to the odium of sanctions, leading to a ban on their practice of medicine. Those sanctions are mandated by law, as they are embodied in the code of conduct and ethics, which are normative, and have legally binding effect. The conceded participation of the assessee- i.e., the provider or donor- was plainly prohibited, as far as their receipt by the medical practitioners was concerned. That medical practitioners were forbidden from accepting such gifts, or "freebies" was no less a prohibition on the part of their giver, or donor, i.e., Apex." Considering the submission of the parties, aims and object of the amended Indian Medical Council (Professional Conduct, Etiquette....
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....In my considered opinion when under the aforesaid regulations of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, receiving of any freebies, bonus or commission etc by physician/medical practitioners from allied health industry for referring any patient by them for medical investigation, surgical or other treatment purposes is prohibited under Regulation 6.4.1. and 6.4.2. and violation of the same is a punishable offence and invites disciplinary action under Regulation 8 of the aforesaid amended Regulations of Indian Medical Council then how can action of any allied health care industries including hospitals who are indulging or participating in commission of such prohibited and punishable act be called legal or legitimate and be allowed to take advantage of any lacuna or loopholes in the statute and be allowed to take benefit of deduction of such expenditure as allowable business expenditure under Section 37 (1) of the Income Tax Act by accepting their contention that though accepting by the physicians or medical practitioners from allied health care industries/hospitals such freebies, commission, bonus etc. may be prohibited and punishable un....
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....al practitioner is prohibited by law, are not entitled for deduction under Section 37 (1) of the Income Tax Act, 1961, as business expenditure and the same should be disallowable under Explanation 1 to Section 37 (1) of the Act and in view of decision of the Hon'ble Supreme Court in the case of M/s Apex Laboratories Pvt. Ltd. (supra) where a similar nature of defence was taken by the Appellant that it was a Laboratory and was not a medical practitioner and as such payment or offer of these nature of commission/bonus/freebies etc. to the Doctors are not an offence by them under the law though acceptance of the same may be punishable offence for doctors or medical practitioners under the aforesaid Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, such defence of the appellant laboratory was not accepted by the Hon'ble Supreme Court in the said case. (vi) The aforesaid regulations of the Medical Council is a very salutary regulation and is in the interest of the patients and the public and once acceptance of this nature of payments are prohibited by the Indian Medical Council under the power vested in it, such expenditure should not be all....
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....ociety and to protect the poor and middle class patients from bearing the burden of these unnecessary hidden additional costs of these natures of commission, bonus, freebies etc. for their treatment, investigations etc. shall bring similar appropriate legislation or regulations like Indian Medical Council Regulations, 2002, to prevent or curb this misusing of legislative gap or loopholes by them including hospitals and to deter them from perpetuating commission of such offence since once receiving of such 'referral to doctors' have been held to be prohibited and unethical obviously the corollary to this would be unethical being giving of such commission/bonus/gifts etc. to induce such doctors and medical practitioners to violate the Medical Council Act, 1956 and Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation, 2002, and they should also be equally penalized like medical practitioners who accept the same and only disallowance of such nature of expense under the Income Tax Act would not deter them from indulging and participating in these nature of prohibited, unethical and immoral act. The second issue is about the legality and validity of initiatio....