The Commissioner Of Income-Tax, Jalandhar v. M/S Kap Scan & Diagnostic Centre Pvt. Ltd

ITA No. 445 of 2006 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 445 of 2006 Date of Decision: 3.12.2010 The Commissioner of Income-tax, Jalandhar Versus M/s Kap Scan & Diagnostic Centre Pvt. Ltd. ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: None for the appellant. Mr. Rohit Sud, Advocate for the respondent,in ITA No. 445 of 2006 Mr. Akshay Bhan, Advocate for the respondentin ITA Nos. 522, 533, 549 of 2006. AJAY KUMAR MITTAL, J. 1.This order shall dispose of ITA Nos. 445, 522, 533, 549 of2006 as common questions of law are involved therein. For brevity, thefacts are being extracted from ITA No. 445 of 2006. 2.ITA No. 445 of 2006 has been filed by the revenue underSection 260A of the Income Tax Act, 1961 (in short “the Act”) againstthe order of the Income Tax Appellate Tribunal, Amritsar Bench,Amritsar dated 8.12.2005 passed in ITA No. 408(ASR)/2004 for theassessment year 1997-98 claiming the following substantial question oflaw:- “Whether, on the facts and in the circumstances of the case and in law, the ITAT was right in holdingthat the commission paid by the assessee to thedoctors was allowable as it was in keeping with atrade practice and thus ignoring the fact that it wasan illegal payment not allowable as per Explanationto section 37(1) of the Act?” 3.Briefly stated the facts for adjudication as narrated in theappeal are that the assessee is a private limited company doing thebusiness of CT scan, ultra sound and X-rays. It filed its return on28.11.1997 for the assessment year 1997-98 declaring loss ofRs.24,40,650/-. During the assessment proceedings, it was found thatthe assessee had debited a sum of Rs.3,68,400/- to the P&L account asexpenditure on account of commission stated to have been paid to thepractising doctors who referred the patients to the assessee for varioustests. The Assessing Officer vide order dated 31.12.1999 disallowedthe claim of such commission to the assessee and assessedRs.1,68,870/- as deemed income under Section 115JA of the Act.Feeling aggrieved, the assessee filed an appeal before theCommissioner of Income Tax (Appeals) [in short “the CIT(A)”]. The CIT(A) allowed the appeal and deleted the addition made on account of thecommission vide order dated 10.3.2004. Against the order of the CIT(A), the revenue filed an appeal before the Tribunal who vide orderdated 8.12.2005 while dismissing the appeal has held that thecommission paid to the doctors was an allowable expenditure being atrade practice and this gave rise to the department to approach thisCourt by way of instant appeal. 4.We have heard learned counsel for the assessee. 5.Learned counsel for the assessee has raised three foldsubmissions. 6.Firstly, that the question of admissibility regarding theaforesaid deduction under Section 37(1) was never raised before theTribunal and, therefore, the same cannot be raised before this Court forthe first time. He relied upon a judgment of this Court inCommissioner of Income-Tax v. Bank of Punjab Ltd., [2006] 286ITR 630(P&H) in support of the said submission. 7.Secondly, that giving of commission to the private doctorsreferring the patients for various medical tests was a trade practicewhich could not be termed to be illegal and, therefore, the same cannotbe disallowed under Section 37(1) of the Act even after insertion ofExplanation to said Section by Finance Act, 1998, w.e.f. 1.4.1962. Hecited the judgment in Commissioner of Income Tax v. Pt.Vishwanath Sharma, [2009] 316 ITR 419 (All) to support thesubmission that payment of commission for soliciting patients fordiagnosis in case of private doctors would not be against law. 7.Secondly, that giving of commission to the private doctorsreferring the patients for various medical tests was a trade practicewhich could not be termed to be illegal and, therefore, the same cannotbe disallowed under Section 37(1) of the Act even after insertion ofExplanation to said Section by Finance Act, 1998, w.e.f. 1.4.1962. Hecited the judgment in Commissioner of Income Tax v. Pt.Vishwanath Sharma, [2009] 316 ITR 419 (All) to support thesubmission that payment of commission for soliciting patients fordiagnosis in case of private doctors would not be against law. 8.Lastly, the learned counsel urged that the revenue had notshown, proved or argued that the commission which was paid by theassessee was illegal practice and was not admissible as deduction. Inthis regard, reliance was placed on the judgments in Commissioner ofIncome Tax v. Sigma Paints Ltd., [1991] 188 ITR 6 (Bom), Dr. G.G.Joshi v. Commissioner of Income Tax, [1994] 209 ITR 324 (Guj) andCommissioner of Income Tax v. Septu India P. Ltd. [2008] 305 ITR295 (P&H). ITA No. 445 of 2006-4- 9.Effort was also made by the learned counsel to drawsupport from the Apex Court judgment in Dr. T.A. Quereshi v.Commissioner of Income Tax, Bhopal, [2006] 206 CTR 489 (SC) tohis aforesaid submissions. 10.We have given our thoughtful consideration to thesubmissions of learned counsel for the assessee but do not find anymerit in the same. A perusal of the orders passed by the AssessingOfficer, the CIT(A) and the Tribunal shows that the issue was withregard to admissibility of deduction of the commission paid by theassessee to the doctors for having referred the business to itsdiagnostic centre. Once that is so, it cannot be said that the point withregard to Section 37(1) of the Act was never raised though it was onlyunder the said provision. The argument, thus, does not carry anyweight. 11.Adverting to the second and third arguments, the paymentof commission to the private doctors for having referred the business fordiagnosis to its centre requires examination with reference to Section 37of the Act. 12.Section 37 is a residuary provision. An assessee is entitledto deduction of all expenditure which is wholly and exclusively laid out orexpended for the purposes of the business which has not beenexpressly covered by any other specific provision of the Act.13.In order to be eligible for an allowance under this residuaryprovision, the following conditions are required to be fulfilled:- “(i)The expenditure must not be governed by theprovisions of Sections 30 to 36.provisions of Sections 30 to 36. ITA No. 445 of 2006-5- (ii)The expenditure must have been laid outwholly and exclusively for the purposes of thebusiness of the assessee.wholly and exclusively for the purposes of thebusiness of the assessee. (iii)The expenditure must not be personal innature.nature. (iv)The expenditure must not be capital in nature.”14.Explanation to sub-section (1) was inserted by the Finance(No.2) Act, 1998 with retrospective effect from 1.4.1962, which readsthus:- “Explanation.- For the removal of doubts, it is herebydeclared that any expenditure incurred by anassessee for any purpose which is an offence orwhich is prohibited by law shall not be deemed tohave been incurred for the purposes of business orprofession and no deduction or allowance shall bemade in respect of such expenditure.” 15.The purpose for incorporation of this Explanation had beenexplained by CBDT in circular No. 772 dated 23.12.1998 (1999) 235ITR (st.) 35 as under:- “20. Disallowance of illegal expenses.- 20.1 Section37 of the Income-tax Act is amended to provide thatany expenditure incurred by an assessee for anypurpose which is an offence or which is prohibited bylaw shall not be deemed to have been incurred forthe purposes of business or profession and nodeduction or allowance shall be made in respect of 15.The purpose for incorporation of this Explanation had beenexplained by CBDT in circular No. 772 dated 23.12.1998 (1999) 235ITR (st.) 35 as under:- “20. Disallowance of illegal expenses.- 20.1 Section37 of the Income-tax Act is amended to provide thatany expenditure incurred by an assessee for anypurpose which is an offence or which is prohibited bylaw shall not be deemed to have been incurred forthe purposes of business or profession and nodeduction or allowance shall be made in respect of such expenditure. This amendment will result indisallowance of the claims made by certainassessees in respect of payments on account ofprotection money, extortion, hafta, bribes, etc., asbusiness expenditure. It is well decided that unlawfulexpenditure is not an allowable deduction incomputation of income. 20.2 This amendment will take effect retrospectivelyfrom Ist April, 1962, and will, accordingly, apply inrelation to the assessment year 1962-63 andsubsequent years.” 16.It, thus, emerges that an assessee would not be entitled todeduction of payments made in contravention of law. Similarly,payments which are opposed to public policy being in the nature ofunlawful consideration cannot equally be recognized. It cannot be heldthat businessmen are entitled to conduct their business even contrary tolaw and claim deductions of payments as business expenditure,notwithstanding that such payments are illegal or opposed to publicpolicy or have pernicious consequences to the society as a whole. 17.Now we proceed to examine whether soliciting of businessby the assessee by paying commission to the private doctors isunethical, against public policy and forbidden by law. 18.Medical Council of India in exercise of powers conferredunder Section 20A read with Section 33(m) of the Indian MedicalCouncil Act, 1956 has made “The Indian Medical Council (ProfessionalConduct, Etiquette and Ethics) Regulation, 2002 which describes Unethical Acts under Chapter 6 of the said regulations. Regulations 6.4provides that no physician shall give, solicit, receive, or offer to give,solicit or receive, any gift gratuity, commission or bonus in considerationof a return for referring any patient for medical treatment. Regulation 6.4reads thus:- “6.4.1 A physician shall not give, solicit, or receive norshall he offer to give solicit or receive, any gift,gratuity, commission or bonus in consideration of orreturn for the referring, recommending or procuring ofany patient for medical, surgical or other treatment.A physician shall not directly or indirectly, participatein or be a party to act of division, transference,assignment, subordination, rebating, splitting orrefunding of any fee for medical, surgical or othertreatment. 6.4.2 Provisions of para 6.4.1 shall apply with equalforce to the referring, recommending or procuring bya physician or any person, specimen or material fordiagnostic purposes or other study/work. Nothing inthis section, however, shall prohibit payment ofsalaries by a qualified physician to other dulyqualified person rendering medical care under hissupervision.” 19.If demanding of such commission was bad, paying it wasequally bad. Both were privies to a wrong. Therefore, suchcommission paid to private doctors was opposed to public policy and ITA No. 445 of 2006 should be discouraged. The payment of commission by the assesseefor referring patients to it cannot by any stretch of imagination beaccepted to be legal or as per public policy. Undoubtedly, it is not a fairpractice and has to be termed as against the public policy. 20.Further, Section 23 of the Contract Act equates anagreement or contract opposed to public policy, with an agreement orcontract 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 anagreement is lawful, unless- it is forbidden by law; or ITA No. 445 of 2006 should be discouraged. The payment of commission by the assesseefor referring patients to it cannot by any stretch of imagination beaccepted to be legal or as per public policy. Undoubtedly, it is not a fairpractice and has to be termed as against the public policy. 20.Further, Section 23 of the Contract Act equates anagreement or contract opposed to public policy, with an agreement orcontract 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 anagreement 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 isfraudulent; or involves or implies, injury to the person orproperty of another; or the Court regards it as immoral, or opposed topublic policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Everyagreement of which the object or consideration isunlawful is void.” 21.The judgments relied upon by the assessee cannot be ofany assistance to the assessee as they are prior to insertion ofExplanation to sub section (1) of Section 37 of the Act. Reference mayalso be made to the Apex Court Judgment in Dr. T.A. Quereshi's case (supra) on which reliance has been placed by the learned counsel forthe assessee. The Hon'ble Supreme Court in that case was seized ofthe matter where heroin forming part of the stock of the assessee'strade was confiscated by the State authorities and the assesseeclaimed the same to be an allowable deduction. The Hon'ble SupremeCourt held that seizure and confiscation of such stock in trade has to beallowed as a business loss and Explanation to Section 37 has nothingto do as that was not a case of business expenditure. Since the presentcase is not a case of business loss but of business expenditure, thatjudgment is distinguishable and does not help the assessee. 22.The issue with regard to the amount illegally paid to thepolice authorities for running their business came up for considerationbefore the Madhya Pradesh High Court in Gwalior Road Lines v.Commissioner of Income-tax, [1998] 234 ITR 230 (MP) wherein itwas held that after insertion of Explanation to Section 37(1) by theFinance Act, 1998 w.e.f. 1.4.1962, the assessee could not claim suchpayment as expended for commercial exigency and, therefore, thesame was not an allowable deduction. 23.Allahabad High Court in Pt. Vishwanath Sharma's case(supra) while considering the issue relating to commission paid toGovernment doctors for prescribing assessee's medicines to patientsheld it to be contravening public policy and an inadmissible expenditure.However, no distinction can be made in respect of Government doctorsand private doctors as has been canvassed by the learned counsel forthe assessee. 24.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 belegitimate and not unlawful and against public policy. 25.Consequently, the order passed by CIT(A) and the Tribunalwhereby deduction had been allowed to the assessee cannot besustained. 26.In view of the above, the appeals are allowed and thesubstantial question of law is answered in favour of the revenue andagainst the assessee. (AJAY KUMAR MITTAL) JUDGE December 3, 2010gbs (ADARSH KUMAR GOEL)JUDGE -11- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 522 of 2006 Date of Decision: 3.12.2010 The Commissioner of Income-tax, Jalandhar Versus M/s Kap Scan & Diagnostic Centre Pvt. Ltd. ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: None for the appellant. Mr. Akshay Bhan, Advocate for the respondent. AJAY KUMAR MITTAL, J. The appeal is allowed. 26.In view of the above, the appeals are allowed and thesubstantial question of law is answered in favour of the revenue andagainst the assessee. (AJAY KUMAR MITTAL) JUDGE December 3, 2010gbs (ADARSH KUMAR GOEL)JUDGE -11- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 522 of 2006 Date of Decision: 3.12.2010 The Commissioner of Income-tax, Jalandhar Versus M/s Kap Scan & Diagnostic Centre Pvt. Ltd. ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: None for the appellant. Mr. Akshay Bhan, Advocate for the respondent. AJAY KUMAR MITTAL, J. The appeal is allowed. For reasons, see the detailed order of even date recorded in ITA No. 445 of 2006 (The Commissioner of Income-tax, Jalandhar v. M/s Kap Scan & Diagnostic Centre Pvt. Ltd). (AJAY KUMAR MITTAL) JUDGE December 3, 2010gbs (ADARSH KUMAR GOEL)JUDGE -12- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 533 of 2006 Date of Decision: 3.12.2010 The Commissioner of Income-tax, Jalandhar Versus M/s Kap Scan & Diagnostic Centre Pvt. Ltd. ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: None for the appellant. Mr. Akshay Bhan, Advocate for the respondent. AJAY KUMAR MITTAL, J. The appeal is allowed. For reasons, see the detailed order of even date recorded in ITA No. 445 of 2006 (The Commissioner of Income-tax, Jalandharv. M/s Kap Scan & Diagnostic Centre Pvt. Ltd). (AJAY KUMAR MITTAL) JUDGE December 3, 2010gbs (ADARSH KUMAR GOEL)JUDGE -13- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 549 of 2006 Date of Decision: 3.12.2010 The Commissioner of Income-tax, Jalandhar Versus M/s Kap Scan & Diagnostic Centre Pvt. Ltd. ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: None for the appellant. Mr. Akshay Bhan, Advocate for the respondent. AJAY KUMAR MITTAL, J. The appeal is allowed. For reasons, see the detailed order of even date recorded in ITA No. 445 of 2006 (The Commissioner of Income-tax, Jalandhar v. M/s Kap Scan & Diagnostic Centre Pvt. Ltd). (AJAY KUMAR MITTAL) JUDGE December 3, 2010gbs (ADARSH KUMAR GOEL)JUDGE