Ajay Kumar Mittal, J.:— This order shall dispose of I.T A. Nos. 445, 522, 533, 549 of 2006 as common questions of law are involved therein. For brevity, the facts are being extracted from I.T A. No. 445 of 2006.
2. I.T.A No. 445 of 2006 has been filed by the Revenue under section 260A of the Income-tax Act, 1961 (in short “the Act”) against the order of the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar dated December 8, 2005, passed in I.T.A No. 408(ASR)/2004 for the assessment year 1997-98 claiming the following substantial question of law:
“Whether, on the facts and in the circumstances of the case and in law, the Income-tax Appellate Tribunal was right in holding that the commission paid by the assessee to the doctors was allowable as it was in keeping with a trade practice and thus ignoring the fact that it was an illegal payment hot allowable as per the Explanation to section 37(1) of the Act?”
3. Briefly stated the facts for adjudication as narrated in the appeal are that the assessee is a private limited company doing the business of CT scan, ultra sound and X-rays. It filed its return on November 28, 1997 for the assessment year 1997-98 declaring ‘loss of Rs,. 24; 40, 650. During the assessment proceedings, it was found ‘that the assessee had debited a sum of Rs. 3,68,400 to the profit and loss account as expenditure on account of commission stated to have been paid to the practising doctors who referred the patients to the assessee for various tests. The Assessing Officer, vide order dated December 31, 1999, disallowed the claim’ of such commission to the assessee and assessed Rs. 1,68,870 as deemed income under section 115JA of the Act. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income-tax. (Appeals) (in short “the CIT(A)”). ‘The Commissioner of Income-tax (Appeals) allowed the appeal and deleted the addition made on account of the commission, vide order dated March 10, 2004. Against the order of the Commissioner of Income-tax (Appeals), the Revenue filed an appeal before the Tribunal who, vide order dated December 8, 2005, while dismissing the appeal has held that the commission paid to the doctors was an allowable expenditure being a trade practice and this gave rise to the Department to approach this court by way of instant appeal. We have heard learned counsel for the assessee.
4. Learned counsel for the assessee has raised three fold submissions.
5. Firstly, that the question of admissibility regarding the aforesaid deduction under section 37(1) was never raised before the Tribunal and, therefore, the same cannot be raised before this court for the first time. He relied upon a judgment of this court in CIT v. Bank of Punjab Ltd., [2006] 286 ITR 630 (P&H) in support of the said submission.
6. Secondly, that 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 April 1, 1962. He cited the judgment in CIT v. Pt. Vishwanath Sharma, [2009] 316 ITR 419 (All) to support the submission that payment of commission for soliciting patients for diagnosis in case of private doctors would not be against law.
7. Lastly, the learned counsel urged that the Revenue had not shown, proved or argued that the commission which was paid by the assessee was illegal practice and was not admissible as deduction. In this regard, reliance was placed on the judgments in Commissioner Of Income-Tax v. Sigma Paints Ltd., [1991] 188 ITR 6 (Bom), Dr. G.G Joshi v. CIT, [1994] 209 ITR 324 (Guj) and CIT v. Septu India P. Ltd., [2008] 305 ITR 295 (P&H).
8. Effort was also made by the learned counsel to draw support from the apex court judgment in Dr. T.A Quereshi (Dr.) v. Commissioner Of Income Tax, Bhopal., [2006] 287 ITR 547 (SC); [2006] 206 CTR 489 (SC) to his aforesaid submissions.
9. We have given our thoughtful consideration to the submissions of learned counsel for the assessee but do not find any merit in the same. A perusal of the orders passed by the Assessing Officer, the Commissioner of Income-tax (Appeals). arid 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. The argument, thus, does not carry any weight.
10. Adverting to the second and third arguments, the payment of commission to the private doctors for having referred the business for diagnosis to its centre requires examination with reference to section 37 of the Act.
11. Section 37 is a residuary provision. An assessee is entitled to deduction of all expenditure which is wholly and exclusively laid out or expended for the purposes of the business which has not been expressly covered by any other specific provision of the Act.
12. In order to be eligible for an allowance under this residuary provision, the following conditions are required to be fulfilled:
“(i) The expenditure must not be governed by the provisions of sections 30 to 36.
(ii) The expenditure must have been laid out wholly and exclusively for the purposes of the business of the assessee.
(iii) The expenditure must not be personal in nature.
(iv) The expenditure must not be capital in nature.”
13. The Explanation to sub-section (1) was inserted by the Finance (No. 2) Act, 1998, with retrospective effect from April 1, 1962, which reads thus:
“Explanation. —For the removal of doubts, it is hereby 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.”
14. The purpose for incorporation of this Explanation had been explained by the Central Board of Direct Taxes in Circular No. 772, dated December 23, 1998 ([1999] 235 ITR (St.) 35, 53) as under:
“20. Disallowance of illegal expenses.
20.1 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.
20.2 This amendment, will take effect retrospectively from 1st April, 1962, and will, accordingly, apply, in relation to the assessment year 1962-63 and subsequent years.
15. It, thus, emerges that an assessee would not be entitled to deduction of payments made in contravention of law. Similarly, payments which are opposed to public policy being in the nature of unlawful consideration cannot equally be recognized. It cannot be held that businessmen are entitled to conduct their business even contrary to law and claim deductions of payments as business expenditure, notwithstanding that such payments are illegal or opposed to public policy or have pernicious consequences to the society as a whole.
16. Now, we proceed to examine whether soliciting of business by the assessee by paying commission to the private doctors is unethical, against public policy and forbidden by law.
17. The Medical Council of India in exercise of powers conferred under section 20A read with section 33(m) of the Indian Medical Council Act, 1956 has made “The Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, which describes unethical acts under Chapter 6 of the said regulations. Regulation 6.4 provides that no physician shall give, solicit, receive, or offer to give, solicit or receive, any gift gratuity, commission or bonus in consideration of a return for referring any patient for medical treatment. Regulation 6.4 reads thus:
“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 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.”
18. 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 by any stretch of imagination be accepted to be legal or as per public policy. Undoubtedly, it is not a fair practice and has to be termed as against the public policy.
19. Further, section 23 of the Contract Act equates an agreement or contract opposed to public policy, with an agreement or contract forbidden by law. section 23 of the Contract Act reads thus:
“23. What consideration and objects are lawful, and what not. —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.”
20. The judgments relied upon by the assessee cannot be of any assistance to the assessee as they are prior to insertion of the Explanation to subsection (1) of section 37 of the Act. Reference may also be made to the apex court judgment in Dr. T.A Quereshi's case, [2006] 287 ITR 547 (SC) on which reliance has been placed by the learned counsel, for the assessee. The hon'ble Supreme Court in that case was seized of the matter where heroin forming part of the stock of the assessee's trade was confiscated by the State authorities and the assessee claimed the same to be an allowable deduction. The hon'ble Supreme Court held that seizure and confiscation of such stock-in-trade has to be allowed as a business loss and Explanation to section 37 has nothing to do as that was not a. case of business expenditure. Since the present case is not a case of business loss but of business expenditure, that judgment is distinguishable and does not help, the assessee.
21. The issue with regard to the amount illegally paid to the police authorities for running their business came up for consideration before the Madhya Pradesh High Court in Gwalior Road Lines v. CIT, [1998] 234 ITR 230 (MP) wherein it was held that after insertion of the Explanation’ to section 37(1) by the Finance Act, 1998, with effect from April 1, 1962, the assessee could not claim such payment as. expended for commercial exigency and, therefore, the same. was not an allowable, deduction.
22. The Allahabad High Court in Pt. Vishwanath Sharmas case, [2009] 316 ITR 419 (All) while considering the issue-relating. to commission paid to. Government doctors for prescribing the assessee's. medicines to patients held it to be contravening public policy and an inadmissible. expenditure. However, no distinction can be made in respect of Government doctors and private doctors as has been canvassed by the learned counsel for the assessee.
23. Thus, the commission paid to private doctors for referring patients for diagnosis could not be allowed as a business expenditure. The amount which can be allowed as business expenditure has to be legitimate and not unlawful and against public policy. Consequently, the order passed by the Commissioner of Income-tax (Appeals) and the Tribunal whereby deduction had been allowed to the assessee cannot be sustained.
24. In view of the above, the appeals are allowed and the substantial question of law is answered in favour of the Revenue and against the assessee.
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