TREATMENT OF EXPENDITURE ON ADVERTISEMENT INCURRED BY HOSPITAL UNDER INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Regulations

The Medical Council of India, with the prior approval of the Central Government made the ‘Indian Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 with effect from 11.03.2022. The medical professionals shall comply with the regulations.

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Regulation 6 provides that soliciting of patients directly or indirectly, by a physician, by a group of physicians or by institutions or organizations is unethical. A physician shall not make use of him / her (or his / her name) as subject of any form or manner of advertising or publicity through any mode either alone or in conjunction with others which is of such a character as to invite attention to him or to his professional position, skill, qualification, achievements, attainments, specialties, appointments, associations, affiliations or honors and/or of such character as would ordinarily result in his self-aggrandizement. A physician shall not give to any person, whether for compensation or otherwise, any approval, recommendation, endorsement, certificate, report or statement with respect of any drug, medicine, nostrum remedy, surgical, or therapeutic article, apparatus or appliance or any commercial product or article with respect of any property, quality or use thereof or any test, demonstration or trial thereof, for use in connection with his name, signature, or photograph in any form or manner of advertising through any mode nor shall he boast of cases, operations, cures or remedies or permit the publication of report thereof through any mode. A medical practitioner is however permitted to make a formal announcement in press regarding the following:

• On starting practice;
• On change of type of practice;
• On changing address;
• On temporary absence from duty;
• On resumption of another practice;
• On succeeding to another practice;
• Public declaration of charges.

Printing of self-photograph, or any such material of publicity in the letter head or on sign board of the consulting room or any such clinical establishment shall be regarded as acts of self-advertisement and unethical conduct on the part of the physician. However, printing of sketches, diagrams, picture of human system shall not be treated as unethical.

Issue

The issue to be discussed in this article as to whether the expenditure incurred by the hospital is eligible for deduction from its income under the Income Tax Act, 1961 (‘Act’ for short) with reference to decided case law. Regulation 6 prohibits the soliciting of patients directly or indirectly, by a physician, by a group of physicians or by institutions or organizations. It considered such activity is as unethical.

Case law

In CHALASANI HOSPITALS (P.) LTD. VERSUS ASST. COMMISSIONER OF INCOME TAX CENTRAL CIRCLE – 1 (1) , ANDHRA PRADESH AND VICE –VERSA - 2024 (8) TMI 1016 - ITAT VISAKHAPATNAM , the appellant hospital filed income tax return declaring income to the tune of Rs.4.80 crores for the assessment year 2018 – 19. The said return was processed on 06.11.2019. Since the PF contributions and ESI payments were made belatedly the Authorities enhanced the income to Rs.4.94 crore. The case was selected for scrutiny to consider the issues – default of TDS and refund.

Notices were issued to the appellant hospital under Section 142(1) and 143(2) of the Income Tax Act, 1961 (‘Act’ for short), calling for details. The appellant did not furnish the same. The Assessing Officer, in the scrutiny, found that the appellant claimed advertisement expenditure to the tune of Rs.36.52 lakhs. The Assessing Officer directed the appellant to give justification for the said claim. The Assessing Officer categorized this expenditure as ‘unethical Acts’ under the Professional Conduct, Etiquette and Ethics Regulations, 2002 of Indian Medical Council. Since the appellant hospital did not respond to the notices the Assessing Officer disallowed the said Rs.36.52 lakhs and added the same to the income of the appellant hospital.

Being aggrieved against the order of Assessing Officer, the appellant hospital filed an appeal before the Commissioner of Income Tax (Appeals). The appellant submitted the documentary evidences in regard to advertisement expenditure before the Commissioner of Income Tax (Appeals), who, in turn, forwarded the same to the Assessing Officer to submit his remand report. The said report was filed before the Commissioner of Income Tax (Appeals) by the Assessing Officer on 08.03.2023. The Commissioner of Income Tax (Appeals) forwarded the remand report to the appellant for giving the rejoinder of the appellant. The Commissioner of Income Tax (Appeals), after considering the rejoinder of the appellant, allowed the appeal partly by restricting 50% of the expenses claimed by the appellant.

The appellant also aggrieved against the order of Commissioner of Income Tax (Appeals) and therefore filed the present appeal before the Income Tax Appellate Tribunal (‘ITAT’ for short). The appellant raised the following grounds of appeal-

• The order of Commissioner of Income Tax (Appeals) is contrary to the facts and the law applicable to the facts of the case.
• The Commissioner of Income Tax (Appeals) is not justified in partly sustaining a sum of Rs.18,26,031/- out of the total addition Rs.36,52,061/- made by the Assessing Officer under Section 37(1) of the Act towards disallowance of advertisement expenses.

The appellant further submitted before the ITAT-

• The appellant has produced the copies of documentary evidences for the expenditure incurred by the appellant with respect to the advertisement expenditure.
• The remand report submitted by the Assessing Officer did not discuss about expenses prohibited by law.
• The Assessing Officer in his Remand Report has not discussed about the allowability of such expenditure which are not permissible under the Guidelines of the Indian Medical Council Act, 1956.
• The expenses are genuinely incurred in the nature of carrying out the business of the appellant and therefore entitled to be allowed under section 37(1) of the Act.
• The balance 50% of the expenditure may be allowed to the appellant.

The Revenue contended the following before ITAT-

• The Commissioner of Income Tax (Appeals) has accepted the fact that the appellant has not substantiate the exact nature of expenditure.
• The appellant did not submit any counter regarding the findings of the Assessing Officer on the violation of Medical Council Act.
• The Commissioner of Income Tax (Appeals) restricted the disallowances to 50% without verification and providing reasons for such partial relief.

The Revenue prayed the ITAT to uphold the orders passed by the Assessing Officer.

The ITAT considered the submissions of the appellant and the Revenue. The ITAT analyzed the entire facts of the case and also the arguments put forth by the parties to the present appeal. The ITAT observed that the Assessing Officer, in his remand report, objected to the non-submission of the bank accounts for making payments to the advertisement expenditure. The appellant has not substantiated the expenditure that are to be allowed under the Indian Medical Council Professional Conduct, Etiquette and Ethics Regulations, 2002. The Commissioner of Income Tax (Appeals) has also not adjudicated the case with respect to allowability of expenditure as per Indian Medical Council Guidelines, 2002. Even the said Regulations prohibit even the institutions and organizations to solicit patients either directly or indirectly. Therefore, the ITAT was of the view that the appellant has violated the provisions of the above said regulations. The Commissioner of Income Tax (Appeals) also has erred in estimating the disallowances and restricting to 50% of the expenditure claimed by the appellant without providing any valid reasoning. The ITAT set aside the order of Commissioner of Income Tax (Appeals) allowing 50% deduction in advertisement expenditure and restored the order of Assessing Officer. The ITAT dismissed the appeal filed by the appellant.