2012 (6) TMI 620 - HC - Income Tax

Commission paid by the assessee to the doctors - illegal payment Held that - 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 - In favour of the Revenue

Summary

Issues:
- Interpretation of section 37(1) of the Income-tax Act, 1961 regarding the admissibility of commission paid to doctors.
- Determining whether the commission paid to doctors for referring patients is a legitimate business expenditure.
- Analysis of the legal implications of paying commission to private doctors in the medical profession.

Analysis:

1. The judgment dealt with the admissibility of commission paid by an assessee to doctors for referring patients under section 37(1) of the Income-tax Act, 1961. The Revenue challenged the Tribunal's decision allowing the deduction of commission, arguing that it was illegal and not in line with trade practices.

2. The Tribunal held that the commission paid to doctors was a legitimate business expenditure as it was a common trade practice. The Revenue contended that such payments were illegal under section 37(1) of the Act, citing the Explanation inserted by the Finance Act, 1998.

3. The court examined the provisions of section 37 of the Act, which allow deductions for expenditures wholly and exclusively laid out for business purposes. The court emphasized that any expenditure incurred for illegal purposes or prohibited by law cannot be considered for deduction.

4. The judgment highlighted the Indian Medical Council regulations, which prohibit physicians from receiving commissions for patient referrals. The court noted that paying commissions to doctors for referrals goes against public policy and is unethical, leading to the conclusion that such expenditures are not legitimate business expenses.

5. The court differentiated this case from precedents where illegal payments were disallowed as business deductions. It emphasized that payments opposed to public policy or law cannot be recognized as legitimate business expenses, regardless of whether they are made to private or government doctors.

6. Ultimately, the court ruled in favor of the Revenue, disallowing the deduction of commission paid to doctors for referring patients. The judgment underscored the importance of ensuring that business expenditures are lawful, legitimate, and not contrary to public policy to be eligible for deductions under the Income-tax Act, 1961.