Peerless Hospitex Hospital And Research Center Limited v. Principal Commissioner Of Income Tax-4, Kolkata & Ors

IN THE HIGH COURT AT CALCUTTA CONSTITUTIONAL WRIT JURISDICTION ORIGINAL SIDE Present :- Hon’ble Mr. Justice Md. Nizamuddin WPO 398 of 2018 Peerless Hospitex Hospital and Research Center Limited Vs Principal Commissioner of Income Tax-4, Kolkata & Ors. With WPO 399 of 2018 Peerless Hospitex Hospital and Research Center Limited Vs Principal Commissioner of Income Tax-4, Kolkata & Ors. For the Petitioner :- Mr. Abhijit Chatterjee, Sr. Adv. Mr. Gopal Ram Sharma, Adv. Mr. Gopal Ram Sharma, Adv. For the Respondent :- Mr. P.K. Bhowmick, Adv. Mr. Radhamohan Roy, Adv. Mr. Radhamohan Roy, Adv. Judgment On :- 19.04.2022 MD. NIZAMUDDIN, J. The Court: Heard learned advocates appearing for the parties. These two Writ Petitions filed by the petitioners against the impugned notices dated 27[th] July, 2017, under Section 148 of the Income Tax Act, 1961 relating to assessment year 2011-12 and 2012-13 respectively are heard together by the consent of the parties in view of similarity of facts and questions of law the same are disposed of by this common judgment and order. On perusal of both the Writ Petitions, affidavit-in-opposition and reply filed in the matter, relevant records and considering the submission of the parties I am of the view that following common questions 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 (ii) (iii) and Ethics) Regulation, 2002 introduced w.e.f 14.12.2009 read with Circular No. 5/2012 dated 1[st] 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? Whether Circular No. 5/2012 dated 1[st] 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 22[nd] February, 2022 in Special Leave Petition (Civil) No. 23207 of 2019 in the case of M/s Apex Laboratories Pvt. Ltd. –vs- Deputy Commissioner of Income Tax, Large Tax Payer Unit – II reported in 2022 SCC OnLine SC 221? Whether action of the petitioner/assessee Hospital participating/indulging in making payment of fee to doctors as ‘referral to doctors’ for referring patients to its hospital fall within the purview of expression ‘prohibited by law’ in Explanation I to Section 37 (1) of the Income Tax Act, 1961 and is not allowable for deduction since acceptance of which by the medical practitioner is prohibited under the aforesaid Regulation of the Indian Medical Council and the view taken by the Hon’ble Supreme Court in its decision dated 22[nd] February, 2022 in Special Leave Petition (Civil) No. 23207 of 2019 in the case of M/s Apex Laboratories Pvt. Ltd. –vs- Deputy Commissioner of Income Tax, Large Tax Payer Unit – II reported in 2022 SCC OnLine SC 221 and in view of Circular No.5/2012 dated 1[st] August, 2012 issued by the CBDT? (iv)Whether on the facts and in the circumstances of the case initiation of impugned proceeding of reopening of assessment under Section 147 of the Income Tax Act, 1961 and issuance of notices under Section 148 of the Act after the expiry of 4 years from the end of the relevant assessment year are based on the self-same material which were already available before the Assessing Officer during the course of regular assessment under Section 143 (3) of the Act and can invoking of Section 147 of the Act on the selfsame material be called a mere change of opinion and is bad and not sustainable in law? (v) Whether on the facts and in the circumstances of the case impugned action of the assessing officer initiating proceeding for reopening of assessment relating to relevant assessment years 2011-12 and 2012-13 after the expiry of 4 years from the end of the relevant assessment year, under Section 147 of the Act without recording either in the impugned notices under Section 148 of the Act or in the recorded reason that there was any omission or failure on the part of the assessee/petitioner to disclose fully and truly all material facts necessary for assessment, is bad and not sustainable in law? Since the facts and questions of law involved in both the Writ Petitions are similar, for the sake of convenience, facts in the case in W.P. No. 398 of 2018, is discussed in brief hereunder: 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 27[th] 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 2[nd] August, 2017 and against which petitioner had filed an objection on 16[th] March, 2018 which was rejected by the Assessing Officer concerned on 16[th] 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 8[th] August, 2019 and its reply dated 26[th] April, 2013 filed with the Assessing Officer. Admittedly initiation of reopening of the assessment in question has been made after expiry of four years from the end of relevant assessment year. Petitioner also submits that the impugned action of initiation of proceeding of reopening of assessment in question under Section 147 of the Act is merely on change of opinion and neither there is any new material which came to the notice or knowledge of the Assessing Officer nor there is any case made out or recorded by the Assessing Officer either in the impugned notice under Section 148 of the Act or in the recorded reason for reopening of assessment that there was any omission or failure on the part of the assessee/petitioner to disclose fully and truly all material facts necessary during the assessment proceeding for the relevant assessment year. Petitioner contends that it is aggrieved by the action of the Assessing Officer forming opinion in his recorded reason that the aforesaid expenditure on account of payment in question as ‘referral to doctors’ being an expense prohibited by law and is disallowable under explanation 1 to Section 37 (1) of the Income Tax Act, 1961 in relevant assessment years and in view of regulation under the amended Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation, 2002 introduced w.e.f. 10[th] December, 2009 and Circular No. 5/2012 dated 1[st] August 2012 issued by the Central Board of Direct Taxes (CBDT) by applying the same retrospectively w.e.f. 10.12.2009. Petitioner submits that such opinion of the Assessing Officer concerned is misconceived and in total misinterpretation of the Regulation 6.4.1 of the aforesaid Regulation of the Indian Medical Council. In addition petitioner submits that the aforesaid Circular of the board dated 1[st] August, 2012 is not applicable to the case of the assessee/petitioner since it is engaged in the business of running a multi-speciality hospital and is not a medical practitioner and secondly it relates to assessment year 2011-12 (financial year 2010-11) and assessment year 2012-13 (financial year 2011-12) and the aforesaid circular of the CBDT dated 1[st] August, 2012 can’t be applied retrospectively in relevant assessment years since nowhere it says that it is retrospective in nature. Petitioner further submits that in assessee’s own case relating to assessment years 2009-10 & 2013-14, the tribunal by its order dated 11[th]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 18[th] 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 necessary for its assessment in course of regular assessment proceeding relating to relevant assessment year and thus it does not fulfil the condition precedent/criteria for reopening of assessment after expiry of four years from the end of relevant assessment year. Petitioner has relied on the following several judgments, on the proposition of law that for reopening of assessment after the expiry of four years from the end of the relevant assessment year, Assessing Officer will have to specifically make out a case that at the time of regular assessment there was any omission or failure on the part of the assessee in disclosing fully and truly all material facts necessary for the assessment in respect of relevant assessment year. Petitioner has relied on the decision of this Court in the case ofCalcutta Club Ltd. –vs- Income Tax Officer & Ors. reported in [2020] 426 ITR 157 (Cal) and relevant Paragraph No. 30 of the said decision is quoted hereunder: Petitioner has relied on the following several judgments, on the proposition of law that for reopening of assessment after the expiry of four years from the end of the relevant assessment year, Assessing Officer will have to specifically make out a case that at the time of regular assessment there was any omission or failure on the part of the assessee in disclosing fully and truly all material facts necessary for the assessment in respect of relevant assessment year. Petitioner has relied on the decision of this Court in the case ofCalcutta Club Ltd. –vs- Income Tax Officer & Ors. reported in [2020] 426 ITR 157 (Cal) and relevant Paragraph No. 30 of the said decision is quoted hereunder: “Considering the submission of the parties, relevant records, Provisions of law and the decisions relied upon by the parties, in my considered view the impugned notices under Section 148 of the Income Tax Act, 1961 and the proceedings under Section 147 of the Act are not sustainable in law and should be quashed for the reason that admittedly impugned proceeding initiated under Section 147 and notices issued under Section 148 of the Income Tax Act, 1961, which were issued after the expiry of four years from the end of the relevant assessment year and in view of the fact that there is no whispering in the recorded reason that there was any omission or failure on the part of the assessee in disclosing fully and truly material facts for assessment and in view of the fact that the Assessing Officer could not establish that the information of alleged escaped income was not within his knowledge and was not considered at the time of passing of the assessment order under Section 143 (3) of the Income Tax Act, 1961 and it came to his knowledge subsequent to the assessment order passed under Section 143 (3) of the Income Tax Act, 1961 and that subsequent decision of the Hon'ble Supreme Court reversing the legal position prevailing at the time of regular assessment cannot be called an omission or failure on the part of the assessee in disclosing fully and truly the material facts necessary for relevant 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. Wadkar reported in [2004] 137 Taxman 479 (BOM.) and relevant Paragraph being Nos. 20 and 21 of the said decision are quoted hereunder: Petitioner has also relied on the decision of Bombay High Court in the case of Hindustan Lever Ltd. –vs- R.B. Wadkar reported in [2004] 137 Taxman 479 (BOM.) and relevant Paragraph being Nos. 20 and 21 of the said decision are quoted hereunder: “20. The reasons recorded by the assessing officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is needless to mention that the reasons are required to be read as they were recorded by the assessing officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the assessing officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the assessing officer to reach to the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the assessing officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. Reasons are the manifestation of mind of the assessing officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide link between conclusion and evidence. The reasons recorded must be based on evidence. The assessing officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the assessing officer cannot be supplemented by filing affidavit or making oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches to the Court, on the strength of affidavit or oral submissions advanced. 21. Having recorded our finding that the impugned notice itself is beyond the period of four 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: 21. Having recorded our finding that the impugned notice itself is beyond the period of four 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 assessment by reason of any omission or failure on the part of the assessee to disclose fully and truly all relevant facts with regard to the particular year. The absence of this belief with regard to the omission or failure OH the part of the assessee, in my view, is a fatal infirmity of the impugned notices. Consequently, it must be held that the impugned notices having been issued without the condition precedent having been complied with they are without jurisdiction and void. This point of Dr. Pal, therefore, succeeds.” Petitioner has relied on the decision of this Court in the case of Mercury Travels Ltd. –vs- Deputy Commissioner of Income Tax reported in [2003] 133 Taxman 283 (Cal) and relevant Paragraph being No. 13 of the said decision is quoted hereunder: “13. My reading of Section 147 of the said Act is that a proceeding for reopening of an assessment, made under Sub-section (3) of Section 143 of the said Act, can be initiated when any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for that assessment year. Where expressly deduction under Section 80HHD was claimed and it was examined and granted by the assessing authority, there was no omission or failure on the part of the assessee to disclose any material fact necessary for the assessment. In the case in hand, at the time of submission of the original returns, as per the requirements of the law, the assessee submitted certificates from the chartered accountant in the prescribed forms claiming such exemptions. Thus, the primary facts were before the AO when he made the assessments under Sub-section (3) of Section 143 and it was not open to him to invoke the provisions of Section 147 of the said Act to reopen the assessments because he might have omitted to notice certain facts by oversight. For change of opinion, the provisions of Section 147 of the said Act cannot be put to service. In the reasons for reopening the assessments it has not been alleged that there has been any omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessments for those assessment years. It is not even noted in the recorded reasons as to what other primary facts were required to be 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 jurisdiction under Section 147 were not fulfilled, the notices under Section 148 of the Act were uncalled for and warrant interference by appropriate orders. In my view, if an authority assumes jurisdiction illegally which is not vested under the law it would be fit and proper for the writ court to intervene. 17. In the instant case, as there was no omission or failure on the part of the assessee to disclose truly and fully all material facts in the return, as the Assessing Officer sought to reopen the assessments due to wrong interpretation of accounts by the Assessing Officer which was not permissible under Section 147 of the Act to assume jurisdiction and in view of the settled position of law laid down by the apex court in Calcutta Discount Co. Ltd. [1961] 41 ITR 191 and Parashuram Pottery , the writ petitioner was justified in invoking the writ jurisdiction.” Mr. Bhowmick Learned Advocate appearing for the respondents opposing the Writ Petitions submits that even if there is no omission or failure on the part of the assessee/petitioner to disclose fully and truly all material facts necessary for the regular assessment in question at the time of relevant regular assessments still if there is escapement of any income, notice under Section 148 of the Act can be issued after expiry of four years from the end of relevant assessment year. On the issue of change of opinion he submits that there is no change of opinion but he could not demonstrate from any materials on record that the documents or materials on the basis of which the respondent Assessing Officer has formed the opinion was not disclosed by the assessee/petitioner or the same were not available before the assessing officer at the time of regular assessment under Section 143 (3) of the Act. Mr. Bhowmick submits that the assessee Writ Petitioner which is running a hospital is not entitled for deduction on payment of ‘referral to doctors’ made to the medical practitioner in relevant assessment years in view of the aforesaid Circular of the CBDT. Mr. Bhowmick submits that the assessee Writ Petitioner which is running a hospital is not entitled for deduction on payment of ‘referral to doctors’ made to the medical practitioner in relevant assessment years in view of the aforesaid Circular of the CBDT. Before dealing with the issues involved in the Writ Petitions and contention of the parties I would like to refer the relevant amended Regulation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation, 2002 particularly Regulation 6.4.1, 6.4.2 & 8.1. which are quoted as hereunder: “6.4 Rebates and Commission 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 by issuing this notice the Medical Council of India and/or State Medical Councils are in no way preclude from considering and dealing with any other form of professional misconduct on the part of a registered practitioner. Circumstances may and do arise from time to time in relation to which there may occur questions of professional misconduct which do not come within any of these categories. Every care should be taken that the code is not violated in letter or spirit. In such instances as in all others, the Medical Council of India and/or State Medical Councils have to consider and decide upon the facts brought before the Medical Council of India and/or State Medical Councils.” ………………………………………. In my view aforesaid circular of the CBDT dated 01.08.2012 is also relevant to this case which is quoted hereunder: “CIRCULAR NO. 5/2012, DT. 1 AUGUST, 2012 Inadmissibility of expenses incurred in providing freebees to medical practitioner by pharmaceutical and allied health sector industry 01/08/2012 Business Expenditure Section 37 (1), 1.It has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional in violation of the regulations issued by Medical Council of India (the ‘Council’) which is a regulatory body constituted under the Medical Council Act, 1956. pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional in violation of the regulations issued by Medical Council of India (the ‘Council’) which is a regulatory body constituted under the Medical Council Act, 1956. 01/08/2012 Business Expenditure Section 37 (1), 1.It has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional in violation of the regulations issued by Medical Council of India (the ‘Council’) which is a regulatory body constituted under the Medical Council Act, 1956. pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional in violation of the regulations issued by Medical Council of India (the ‘Council’) which is a regulatory body constituted under the Medical Council Act, 1956. 2.The council in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries. Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries. 3.Section 37 (1) of Income Tax Act provides for deduction of any revenue expenditure (other than those failing under Sections 30 to 36) from the business Income if such expense is laid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by lay. expenditure (other than those failing under Sections 30 to 36) from the business Income if such expense is laid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by lay. Thus, the claim of any expense incurred in providing 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. 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. 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 for the assessment year 2012-13 which according to me is also relevant and quoted as hereunder: “The reasons for reopening for the assessment proceedings of A.Y. 2011-12 is given as under:- “The aforesaid assessee company filed it s return of income for the Assessment Year 2011-12 on 28.09.2011 at a returned income/loss of (-) Rs. 5,33,14,806/-. The case was selected for scrutiny and the assessment order u/s 143 (3) of the IT Act was passed on 28.02.2014 at an assessed income/loss of (-) Rs. 4,87,24,396/-. On perusal of the assessment record it is seen that the assessee had paid an amount of Rs. 51,76,992/- (approximately) as ‘Referral to Doctors’ and the same was allowed during the assessment. The assessee was engaged in the business of Hospital services. Hence, the above expenditure is not an allowable expenditure vide departmental circular No 5/2012, dated 01.08.2021 issued by CBDT following the amended Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulation, 2002 dated December 10, 2009. Based on the judgment of Hon’ble Punjab and Haryana High Court on similar issue in CIT vs KAP scan and Diagnostic centre [2012] 344 ITR 476 and many other judicial pronouncements it was held that commission or referral paid by Diagnostic centre/hospitals to private Doctors for referring patients for treatment /diagnosis is not an allowable expenditure. This was an expenditure illegally given as kickback to the Doctors and covered by the explanation to the Section 37 (1) of the Income Tax Act, 1961. In view of the above facts and circumstances, I have reason to believe that income of the assessee company (with PAN – ) to the extent of Rs. 51,76,992/- has escaped assessment for the A.Y 2011-12 within the meaning of section 147 of the Income Tax Act 1961” Before coming to the final conclusion with reasons in deciding the issues and questions of law involve in these Writ Petitions I would like to indicate an important development which took place after conclusion of hearing of this matter and making the judgment reserved on 16[th] February, 2022. It came to my notice a judgment delivered by the Hon’ble Supreme Court on 22[nd] February, 2022 in the case of M/s Apex Laboratories Pvt. In view of the above facts and circumstances, I have reason to believe that income of the assessee company (with PAN – ) to the extent of Rs. 51,76,992/- has escaped assessment for the A.Y 2011-12 within the meaning of section 147 of the Income Tax Act 1961” Before coming to the final conclusion with reasons in deciding the issues and questions of law involve in these Writ Petitions I would like to indicate an important development which took place after conclusion of hearing of this matter and making the judgment reserved on 16[th] February, 2022. It came to my notice a judgment delivered by the Hon’ble Supreme Court on 22[nd] February, 2022 in the case of M/s Apex Laboratories Pvt. Ltd. –vs- Deputy Commissioner of Income Tax, Large Tax Payer Unit-II, (Civil Appeal No./2022) (Special Leave Petition (Civil) No. 23207 of 2019) reported in 2002 SCC OnLine SC 221. Thereafter parties were further heard and judgment was made reserved on 07[th] 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 1[st] 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 expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. [Explanation 1].—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.] (emphasis supplied) Section 37 is a residuary provision. Any business or professional expenditure which does not ordinarily fall under Sections 30-36, and which are not in the nature of capital expenditure or personal expenses, can claim the benefit of this exemption. But the same is not absolute. Explanation 1, which was inserted in 1998 with retrospective effect from 01.04.1962, restricts the application of such exemption for “any purpose which is an offence or which is prohibited by law”. The IT Act does not provide a definition for these terms. Section 2(38) of the General Clauses Act, 1897 defines ‘offence’ as “any act or omission made punishable by any law for the time being in force”. Under the IPC, Section 40 defines it as “a thing punishable by this Code”, read with Section 43 which defines ‘illegal’ as being applicable to “everything which is an offence or which is prohibited by law, or which furnishes ground for a civil action”. It is therefore clear that Explanation 1 contains within its ambit all such activities which are illegal/prohibited by law and/or punishable. 18. Regulation 6.8. of the 2002 Regulations states as follows: “6.8. Code of conduct for doctors in their relationship with pharmaceutical and allied health sector industry. 18. Regulation 6.8. of the 2002 Regulations states as follows: “6.8. Code of conduct for doctors in their relationship with pharmaceutical and allied health sector industry. 6.8.1 In dealing with Pharmaceutical and allied health sector industry, a medical practitioner shall follow and adhere to the stipulations given below:— (a) Gifts: A medical practitioner shall not receive any gift from any pharmaceutical or allied health care industry and their sales people or representatives. (b) Travel facilities: A medical practitioner shall not accept any travel Facility inside the country or outside, including rail, road, air, ship, cruise tickets, paid vacation, etc. from any pharmaceutical 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 consequences. 19. The CBDT circular dated 01.08.2012 is set out below: 1. It has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional associations in violation of the regulations issued by Medical Council of India (the 'Council') which is a regulatory body constituted under the Medical Council Act, 1956. and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional associations in violation of the regulations issued by Medical Council of India (the 'Council') which is a regulatory body constituted under the Medical Council Act, 1956. 2. The council in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries. Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries. 3. Section 37(1) of Income Tax Act provides for deduction of any revenue expenditure (other than those failing under sections 30 to 36) from the business Income if such expense is laid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law. 3. Section 37(1) of Income Tax Act provides for deduction of any revenue expenditure (other than those failing under sections 30 to 36) from the business Income if such expense is laid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law. Thus, the claim of any expense incurred in providing above mentioned orsimilar freebees in violation of the provisions of Indian Medical Council(Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall beinadmissible under section 37(1) of the Income Tax Act being an expenseprohibited by the law. This disallowance shall be made in the hands ofsuch pharmaceutical or allied health sector Industries or other assesseewhich has provided aforesaid freebees and claimed it as a deductableexpense in its accounts against income.similar freebees in violation of the provisions of Indian Medical Council(Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall beinadmissible under section 37(1) of the Income Tax Act being an expenseprohibited by the law. This disallowance shall be made in the hands ofsuch pharmaceutical or allied health sector Industries or other assesseewhich has provided aforesaid freebees and claimed it as a deductableexpense in its accounts against income. 4. It is also clarified that the sum equivalent to value of freebees enjoyedby the aforesaid medical practitioner or professional associations is alsotaxable as business income or income from other sources as the case maybe depending on the facts of each case. The Assessing Officers of suchmedical practitioner or professional associations should examine the sameand take an appropriate action. This may be brought to the notice of all the officers of the charge for necessary action. (emphasis supplied) 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 Bench of this Court in P.V. Narasimha Rao v. State (CBI/SPE)21. Prior to the 2018 amendment22, the PC Act only punished the bribe-taker who was a public servant, and not the bribe-giver. Reliance was placed on this to acquit the appellant bribe-giver. Rejecting such an interpretation, this Court held: 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 Bench of this Court in P.V. Narasimha Rao v. State (CBI/SPE)21. Prior to the 2018 amendment22, the PC Act only punished the bribe-taker who was a public servant, and not the bribe-giver. Reliance was placed on this to acquit the appellant bribe-giver. Rejecting such an interpretation, this Court held: “145. Mr Rao submitted that since, by reason of the provisions of Article 105(2), the alleged bribe-takers had committed no offence, the alleged bribe-givers had also committed no offence. Article 105(2) does not provide that