2022 (11) TMI 1163 - AT - Income Tax

Genuine business expenditure - allowability of referral fees paid to doctors and nursing home by the appellant company - AO was of the opinion that the payment of referral fees to doctors and nursing home would amount to violation of the provisions of Medical Council (Professional Conducts, Etiquettes and Ethics) Regulation Act, 2002 - HELD THAT - Issue squarely hit by the Explanation 1 to section 37 of the Act. We find that an identical issue was dealt in the case of Apex Laboratories (P.) Ltd. vs. DCIT, 2022 (2) TMI 1114 - SUPREME COURT wherein, the Hon ble Apex Court held that gifting freebies, and payment of referral fees etc. is clearly prohibited by law and cannot be allowed as deduction u/s 37(1) of the Act. We are of the considered opinion that referral fees paid to doctors and nursing home cannot be allowed as deduction while computing the business income of an assessee. Accordingly, we confirm the orders of the lower authorities. Thus, we do not find any merit in the ground of appeal filed by the appellant-assessee.

Summary

Issues:
- Disallowance of genuine business expenditure related to referral fees paid to doctors and nursing homes.

Analysis:
The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2015-16. The appellant, a company engaged in medical diagnostics services, filed its return of income declaring a loss. The assessing officer disallowed a sum of money paid as referral fees to doctors and nursing homes, citing a violation of the Medical Council (Professional Conducts, Etiquettes and Ethics) Regulation Act, 2002. This disallowance led to a reduced loss in the assessment. The Commissioner of Income Tax (Appeals) upheld this disallowance based on a decision of the Punjab & Haryana High Court. The appellant challenged this decision before the Appellate Tribunal.

The key issue in the appeal was the allowability of the referral fees paid by the appellant company to doctors and nursing homes. The assessing officer contended that such payments violated the provisions of the Medical Council Act and were not deductible under Section 37 of the Income Tax Act, 1961. The Tribunal referred to a Supreme Court judgment in the case of Apex Laboratories (P.) Ltd. vs. DCIT, where it was held that giving freebies and paying referral fees were prohibited by law and could not be allowed as deductions under Section 37(1) of the Act. Relying on this authoritative pronouncement, the Tribunal concurred that the referral fees paid were not allowable as deductions in computing the business income of the assessee.

Ultimately, the Tribunal dismissed the appeal filed by the assessee, upholding the decisions of the lower authorities. The judgment emphasized that based on the Supreme Court's ruling, referral fees paid to doctors and nursing homes could not be considered as deductible business expenditure. The decision was pronounced on September 26, 2022.