2022 (4) TMI 1022 - HC - Income Tax

Reopening of assessment u/s 147 - recorded reason that the 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) - HELD THAT - Considering the submission of the parties, aims and object of the amended Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, Explanation 1 to Section 37 (1) of the Income Tax Act, 1961, Circular No. 5/2012 dated 1st April, 2012 issued by Central Board of Direct Taxes and the judgment of the Hon ble Supreme Court in the case of M/s Apex Laboratories Pvt. Ltd. 2022 (2) TMI 1114 - SUPREME COURT our answer is in negative to the question as to whether Petitioner hospital is eligible and entitled to get deduction on expenditure by way of commission to the doctors as referral to doctors for referring patients for treatment in its hospital as business expenditure under Section 37 (1) of the Income Tax Act, 1961? It is not entitled for deduction on such expenditure as a business expenditure and in view of the relevant regulations of amended Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 under which receiving of the same by the medical practitioner is prohibited and violation of which invites punishment and disciplinary proceedings against doctors. In my considered opinion petitioner being a participant in an act which is an offence and is prohibited by law is not entitled for any deduction under Section 37 (1) of the Income Tax Act, 1961, and the aforesaid nature of expenses are disallowable under Explanation 1 to Section 37. Legality and validity of initiation of impugned proceeding for reopening of assessment under Section 147 and issuance of notices under Section 148 - Admittedly after expiry of four years from the end of relevant assessment year on the selfsame material facts which were already available before the assessing officer at the time of regular assessment and without recording of any omission or failure on the part of the petitioner to disclose fully and truly any material fact necessary for assessment before the assessing officer in course of regular assessment proceeding - in the facts and circumstances of the case initiation of the impugned proceeding under Section147 of the Income Tax Act, 1961, is bad and not sustainable in law and is liable to be quashed. Thus since condition precedent for invoking Section 147 of the Income Tax Act, 1961, for reopening of assessments after expiry of four years from the end of relevant assessment years has not been fulfilled and the impugned reopening of assessment is on mere change of opinion, the impugned notices under Section 148 of the Income Tax Act, 1961 in both the Writ Petitions relating to assessment year 2011-12 and 2012-13 are held as bad and not sustainable in law - Decided partly in favour of assessee.

Issues Involved:
1. Eligibility for deduction of expenditure on payments to doctors as 'referral to doctors'.
2. Retrospective applicability of CBDT Circular No. 5/2012.
3. Legality of payments to doctors under Explanation I to Section 37(1) of the Income Tax Act, 1961.
4. Validity of reopening assessment under Section 147 of the Income Tax Act after four years.
5. Requirement of omission or failure by the assessee to disclose material facts for reopening assessment.

Issue-wise Detailed Analysis:

Issue (i): Eligibility for Deduction of Expenditure on Payments to Doctors as 'Referral to Doctors'
The petitioner, a multi-speciality hospital, claimed deductions for payments made to doctors as 'referral to doctors' under Section 37(1) of the Income Tax Act, 1961. The Court held that such payments are disallowable under Explanation I to Section 37(1) as they are prohibited by law. The amended Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, prohibit doctors from accepting such payments, making the hospital's participation in such payments illegal and ineligible for tax deductions.

Issue (ii): Retrospective Applicability of CBDT Circular No. 5/2012
The Court ruled that CBDT Circular No. 5/2012, which clarifies the inadmissibility of expenses incurred in providing freebies to medical practitioners, is retrospective from 14.12.2009. This is in line with the Supreme Court's decision in M/s Apex Laboratories Pvt. Ltd. vs. Deputy Commissioner of Income Tax, which held that the circular applies from the date of the amended regulations.

Issue (iii): Legality of Payments to Doctors under Explanation I to Section 37(1)
The Court concluded that payments to doctors as 'referral to doctors' are illegal under Explanation I to Section 37(1) of the Income Tax Act. The explanation disallows any expenditure incurred for purposes that are an offence or prohibited by law. The Court emphasized that allowing such deductions would encourage corruption in the medical field and increase the cost of treatment for patients.

Issue (iv): Validity of Reopening Assessment under Section 147 after Four Years
The Court found that the reopening of assessment under Section 147 after four years from the end of the relevant assessment year was invalid. The Assessing Officer did not record any omission or failure by the assessee to disclose fully and truly all material facts necessary for assessment. The reopening was based on the same material that was already available during the regular assessment, amounting to a mere change of opinion, which is not permissible.

Issue (v): Requirement of Omission or Failure by the Assessee to Disclose Material Facts
The Court held that for reopening assessment after four years, the Assessing Officer must specifically record that there was an omission or failure by the assessee to disclose fully and truly all material facts necessary for the assessment. In this case, no such omission or failure was recorded, making the reopening of assessment invalid.

Conclusion:
The Court ruled partly in favor of the revenue and partly in favor of the assessee. The hospital's payments to doctors as 'referral to doctors' are not eligible for tax deductions under Section 37(1) of the Income Tax Act. However, the reopening of assessment under Section 147 after four years was invalid due to the absence of any recorded omission or failure by the assessee to disclose material facts. The impugned notices under Section 148 and subsequent proceedings were quashed.

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