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TMI Blog2022 (4) TMI 1022X X X X Extracts X X X X X X X X Extracts X X X X ..... led 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 reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffence and prohibited by law is disallowable under the explanation I of Section 37 (1) of the Income Tax Act, 1961? (ii) Whether Circular No. 5/2012 dated 1st August, 2012 issued by the Central Board of Direct Taxes (CBDT) is explanatory and retrospective in nature and is effective from 14.12.2009 in view of decision of the Hon ble Supreme Court dated 22nd February, 2022 in Special Leave Petition (Civil) No. 23207 of 2019 in the case of M/s Apex Laboratories Pvt. Ltd. vs- Deputy Commissioner of Income Tax, Large Tax Payer Unit II reported in 2022 SCC OnLine SC 221? (iii) Whether action of the petitioner/assessee Hospital participating/indulging in making payment of fee to doctors as referral to doctors for referring patients to its hospital fall within the purview of expression prohibited by law in Explanation I to Section 37 (1) of the Income Tax Act, 1961 and is not allowable for deduction since acceptance of which by the medical practitioner is prohibited under the aforesaid Regulation of the Indian Medical Council and the view taken by the Hon ble Supreme Court in its decision dated 22nd February, 2022 in Special Leave Petition (Civil) No. 23207 of 2019 in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income filed for the assessment year 2011-12 and according to the petitioner this expense was referred in schedule -18 to the audited profit and loss account and that the petitioner had already explained the same in course of regular assessment proceeding and the Assessing Officer had allowed such deduction after due consideration of the relevant materials placed on record particularly Item No. 15 of the questionnaire dated 8th August, 2019 and its reply dated 26th April, 2013 filed with the Assessing Officer. Admittedly initiation of reopening of the assessment in question has been made after expiry of four years from the end of relevant assessment year. Petitioner also submits that the impugned action of initiation of proceeding of reopening of assessment in question under Section 147 of the Act is merely on change of opinion and neither there is any new material which came to the notice or knowledge of the Assessing Officer nor there is any case made out or recorded by the Assessing Officer either in the impugned notice under Section 148 of the Act or in the recorded reason for reopening of assessment that there was any omission or failure on the part of the assessee/petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the expiry of four years from the end of the relevant assessment year and since the Assessing Officer concerned has nowhere made out a case either in its impugned notice under Section 148 of the Act or in the recorded reason or in the impugned order of rejection of its objection to Section 148 of the Act that there was any omission or failure on the part of the assessee/petitioner in disclosing fully and truly all material facts necessary for its assessment in course of regular assessment proceeding relating to relevant assessment year and thus it does not fulfil the condition precedent/criteria for reopening of assessment after expiry of four years from the end of relevant assessment year. Petitioner has relied on the following several judgments, on the proposition of law that for reopening of assessment after the expiry of four years from the end of the relevant assessment year, Assessing Officer will have to specifically make out a case that at the time of regular assessment there was any omission or failure on the part of the assessee in disclosing fully and truly all material facts necessary for the assessment in respect of relevant assessment year. Petitioner has r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od of four years, failure to disclose fully and truly material fact by the assessee has to be established. Merely because an underassessment has taken place because excessive depreciation was allowed on a wrong understanding of law will not make it a case of omission to disclose fully and truly all material facts. Petitioner has also relied on the decision of Bombay High Court in the case of Hindustan Lever Ltd. vs- R.B. Wadkar reported in [2004] 137 Taxman 479 (BOM.) and relevant Paragraph being Nos. 20 and 21 of the said decision are quoted hereunder: 20. The reasons recorded by the assessing officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is needless to mention that the reasons are required to be read as they were recorded by the assessing officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the assessing officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of belief that any income has escaped, assessment. Even assuming that by an over-generous interpretation in favour of the revenue, this entry may be construed to amount to the formation of a belief by the Income-tax Officer that income has escaped assessment, there is nothing in the recorded reasons to show that there was the formation of belief by the Income-tax Officer that such income escaped assessment by reason of any omission or failure on the part of the assessee to disclose fully and truly all relevant facts with regard to the particular year. The absence of this belief with regard to the omission or failure OH the part of the assessee, in my view, is a fatal infirmity of the impugned notices. Consequently, it must be held that the impugned notices having been issued without the condition precedent having been complied with they are without jurisdiction and void. This point of Dr. Pal, therefore, succeeds. Petitioner has relied on the decision of this Court in the case of Mercury Travels Ltd. vs- Deputy Commissioner of Income Tax reported in [2003] 133 Taxman 283 (Cal) and relevant Paragraph being No. 13 of the said decision is quoted hereunder: 13. My r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l material facts necessary for its assessment. Petitioner has relied on the decision of this Court in the case of Amiya Sales and Industries vs- Assistant Commissioner of Income Tax reported in [2005] 274 ITR 25 (Cal) and relevant Paragraph being Nos. 16 and 17 of the said decision are quoted hereunder: 16. In the case in hand, as already noted, since the conditions for assumption of jurisdiction under Section 147 were not fulfilled, the notices under Section 148 of the Act were uncalled for and warrant interference by appropriate orders. In my view, if an authority assumes jurisdiction illegally which is not vested under the law it would be fit and proper for the writ court to intervene. 17. In the instant case, as there was no omission or failure on the part of the assessee to disclose truly and fully all material facts in the return, as the Assessing Officer sought to reopen the assessments due to wrong interpretation of accounts by the Assessing Officer which was not permissible under Section 147 of the Act to assume jurisdiction and in view of the settled position of law laid down by the apex court in Calcutta Discount Co. Ltd. [1961] 41 ITR 191 and Paras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an to other duly qualified person rendering medical care under his supervision. 8. PUNISHMENT AND DISCIPLINARY ACTION 8.1 It must be clearly understood that the instances of offences and of Professional misconduct which are given above do not constitute and are not intended to constitute a complete list of the infamous acts which calls for disciplinary action, and that by issuing this notice the Medical Council of India and/or State Medical Councils are in no way preclude from considering and dealing with any other form of professional misconduct on the part of a registered practitioner. Circumstances may and do arise from time to time in relation to which there may occur questions of professional misconduct which do not come within any of these categories. Every care should be taken that the code is not violated in letter or spirit. In such instances as in all others, the Medical Council of India and/or State Medical Councils have to consider and decide upon the facts brought before the Medical Council of India and/or State Medical Councils. . In my view aforesaid circular of the CBDT dated 01.08.2012 is also relevant to this case which is q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same and take an appropriate action. This may be brought to the notice of all the officers of the charge for necessary action. [F. No. 225/142/2012-ITA.II] Recorded reason for the assessment year 2011-12 for the reopening of the assessment under Section 148 of the Act which is similar to the reason given for the assessment year 2012-13 which according to me is also relevant and quoted as hereunder: The reasons for reopening for the assessment proceedings of A.Y. 2011-12 is given as under:- The aforesaid assessee company filed it s return of income for the Assessment Year 2011-12 on 28.09.2011 at a returned income/loss of (-) ₹ 5,33,14,806/-. The case was selected for scrutiny and the assessment order u/s 143 (3) of the IT Act was passed on 28.02.2014 at an assessed income/loss of (-) ₹ 4,87,24,396/-. On perusal of the assessment record it is seen that the assessee had paid an amount of ₹ 51,76,992/- (approximately) as Referral to Doctors and the same was allowed during the assessment. The assessee was engaged in the business of Hospital services. Hence, the above expenditure is not an allowable expenditure vide departmental cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quoted hereinbelow: 17. An examination of the relevant provisions is first necessary. Section 37 of the IT Act states as follows: Section 37. General.-( 1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . [Explanation 1].- For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.] (emphasis supplied) Section 37 is a residuary provision. Any business or professional expenditure which does not ordinarily fall under Sections 30-36, and which are not in the nature of capital expenditure or personal expenses, can claim the benefit of this exemption. But the same is not absolu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h can be taken against, or imposed upon, the medical practitioner for violation of each stipulation, based on the monetary value of the same. Thus, acceptance of freebies given by pharmaceutical companies is clearly an offence on part of the medical practitioner, punishable with varying consequences. 19. The CBDT circular dated 01.08.2012 is set out below: 1. It has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional associations in violation of the regulations issued by Medical Council of India (the 'Council') which is a regulatory body constituted under the Medical Council Act, 1956. 2. The council in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries. 3. Section 37(1) of Income Tax Act provides fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vely and with full knowledge) enabling the commission of the act which attracts such opprobrium. 23. The illogicality and completely misconceived nature of such an interpretation was dealt with in a similar interpretation of the provisions of PC Act, by a Constitution Bench of this Court in P.V. Narasimha Rao v. State (CBI/SPE)21. Prior to the 2018 amendment22, the PC Act only punished the bribe-taker who was a public servant, and not the bribe-giver. Reliance was placed on this to acquit the appellant bribe-giver. Rejecting such an interpretation, this Court held: 145. Mr Rao submitted that since, by reason of the provisions of Article 105(2), the alleged bribe-takers had committed no offence, the alleged bribe-givers had also committed no offence. Article 105(2) does not provide that what is otherwise an offence is not an offence when it is committed by a Member of Parliament and has a connection with his speech or vote therein. What is provided thereby is that a Member of Parliament shall not be answerable in a court of law for something that has a nexus to his speech or vote in Parliament. If a Member of Parliament has, by his speech or vote in Parliament, committed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Medical Council Act, 195623 (which serves as parent provision for the regulations), what is discernible is that the statutory regime requiring that a thing be done in a certain manner, also implies (even in the absence of any express terms), that the other forms of doing it are impermissible. 27. It is also a settled principle of law that no court will lend its aid to a party that roots its cause of action in an immoral or illegal act (ex dolo malo non oritur action) meaning that none should be allowed to profit from any wrongdoing coupled with the fact that statutory regimes should be coherent and not self-defeating. Doctors and pharmacists being complementary and supplementary to each other in the medical profession, a comprehensive view must be adopted to regulate their conduct in view of the contemporary statutory regimes and regulations. Therefore, denial of the tax benefit cannot be construed as penalizing the assessee pharmaceutical company. Only its participation in what is plainly an action prohibited by law, precludes the assessee from claiming it as a deductible expenditure. 28. This Court also notices that medical practitioners have a quasi-fiduciary relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the Assistant Secretary for Planning and Evaluation, in a report called Savings Available Under Full Generic Substitution of Multiple Source Brand Drugs in Medicare Part D (dated 23.07.2018). The report noticed inter alia, that an empirical study conducted in respect of 20 odd (out of the 600 drugs which were the subject matter of the research paper) brand medications dispensed for a particular period, were capable of generic substitution and would have resulted in substantial benefit to the patients: Beneficiaries could have saved over $600 million in out of pocket payments had they been dispensed generic equivalent drugs. A significant amount of this spending occurred among the top 20 multiple source brands. Substituting these drugs for generic competitors at their median prices would have saved the program and beneficiaries $1.8 billion. Likewise, in a previous study by ProPublica (an independent, non-profit newsroom that does investigative journalism) titled Dollars for Doctors: Now There s Proof: Docs who Get Company Cash Tend to Prescribe More Brand- Name Meds (dated 17.03.2016) stated that: doctors who receive payments from the medical industry do in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst public policy to allow the benefit of deduction under one statute, of any expenditure incurred in violation of the provisions of another statute or any penalty imposed under another statute. In the instant case, if the deductions claimed are allowed, the penal provisions of FERA will become meaningless . (emphasis supplied) 32. Before us, Apex has continually stressed on the need to divorce interpretation of tax provisions from a perceived immorality / violation of public policy. Apex repeatedly relied on T.A. Quereshi (supra), M/s K.M. Jain (supra) and CIT v. Pt. Vishwanath Sharma. We find that none of these judgments find much favour with the case of the appellant. T.A. Quereshi addressed a business loss , not a business expenditure as envisioned under Section 37(1). In M/s K.M. Jain, the ransom money paid to kidnappers of the employee of the assessee company was allowed deduction primarily based on the fact that the assessee was helpless and coerced to pay the amount in order to save its employee s life. Thus, the assessee was not a wilful participant in commission of an offence or activity prohibited by law. The same is not applicable to the present facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of the enactment having regard to the language used . Justice Oliver Wendell Holmes had once said: A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in colour and content according to the circumstances and the time in which it is used. Holmes thus summed up the elusive nature of words, which lies at the heart of the many issues concerning interpretation of statutes. 34. Interpretation of law has two essential purposes: one is to clarify to the people governed by it, the meaning of the letter of the law; the other is to shed light and give shape to the intent of the law maker. And, in this process the courts' responsibility lies in discerning the social purpose which the specific provision subserves. Thus, the cold letter of the law is not an abstract exercise in semantics which practitioners are wont to indulge in. So viewed the law has birthed various ideas such as implied conditions, unspelt but entirely logical and reasonable obligations, implied limitations etc. The process of continuing evolution, refinement and assimilation of these concepts into binding norms (within the body of law as is understo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rliament shall not be evaded by shift or contrivance And that: To carry out effectually the object of a Statute, it must be construed as to defeat all attempts to do, or avoid doing, in an indirect or circuitous manner that which it has prohibited or enjoined This Court, in an appeal arising from an action for specific performance, in G.T. Girish v. Y. Subba Raju (D) by L. Rs Ors , held that giving the relief would imply doing something prohibited by law (bar against conveyance, for a specific period) it had the effect of defeating the provisions of the law. It was held that: Taking the agreement as it is, it necessarily would be in the teeth of the obligation in law of the first Respondent to put up the construction. The agreement to sell involved clearly terms which are impliedly prohibited by law in that the first Defendant was thereunder to deliver title to the site and prevented from acting upon the clear obligation under law. This is a clear case at any rate wherein enforcing the agreement unambiguously results in defeating the dictate of the law. The 'sublime' object of the law, the very soul of it stood sacrificed at the altar of the barga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on the part of their giver, or donor, i.e., Apex. 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. (supra) my 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? In my considered opinion it is not entitled for deduction on such expenditure as a business expenditure in view of Explanation 1 to Section 37 (1) of the Income Tax Act, 1961, read with circular no. 5 dated 1st August, 2012 of the CBDT which is retrospective in nature with effect from 14th December, 2009, as per decision of the Hon ble Supreme Court in the case of M/s Apex Laboratories Pvt. Ltd. (supra) and in v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h accepting by the physicians or medical practitioners from allied health care industries/hospitals such freebies, commission, bonus etc. may be prohibited and punishable under the aforesaid Regulations but giving or offering the same to the medical practitioners/physicians and expenditure incurred by the petitioner hospital in such prohibited purpose or in participation of such punishable offence should be treated as legal and should be allowed as business expenditure under Section 37 (1) of the Income Tax Act, 1961 and should not be disallowed under Explanation 1 of Section 37 (1) of the Income Tax Act, 1961. Such interpretation and submission of the petitioner is not acceptable by this Court and is held not sustainable in law since allowing deduction of such nature of expense by treating the same as legal and valid business expenditure by these allied health care industry including hospitals would encourage and cause proliferation of corruption in medical field and will frustrate the very purpose and object of the aforesaid Indian Medical Council Regulations, 2002 and Explanation 1 of Section 37 (1) of the Income Tax Act, 1961, and the aforesaid Circular No. 5 of 2012 of the Cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blic and once acceptance of this nature of payments are prohibited by the Indian Medical Council under the power vested in it, such expenditure should not be allowed for deduction under Explanation 1 to Section 37 (1) of the Income Tax Act as business expenditure by the hospitals or other allied health care industry. (vii) I am not inclined to accept such contention and interpretation of the petitioner hospital that since their indulgence or participation in offering/paying the commission/bonus/freebies to the medical practitioner/doctors for referring the patients to their hospital for treatment is not prohibited for them and not punishable under the aforesaid Regulation of Indian Medical Council and that only accepting of the same by the medical practitioner/doctor is prohibited and punishable, such nature of expenditure by them should be allowable for deduction by treating it as business expenditure. In my considered opinion if such contention or interpretation of the petitioner is accepted it would amount to justify and legalise their action like legalizing bribe giving in spite of the legal position that the bribe taking or accepting is clearly prohibited and is a punisha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lging and participating in these nature of prohibited, unethical and immoral act. The second issue is about the legality and validity of initiation of impugned proceeding for reopening of assessment under Section 147 and issuance of notices under Section 148 of the Income Tax Act, 1961, 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. I am of the considered opinion that 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 for the following reasons: (i) It is admitted position as substantiated by record that the impugned notices under Section 148 of the Act were issued after the expiry of four years from the end of the relevant assessment years. (ii) Nowhere the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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