Payment of Referral fees to Doctors and Nursing home is illegal and unethical and hence cannot fall under legitimate deductions - IT Appellate Tribunal, Pune rejected Pune based Diagnostic Centre's appeal to the tune of Rs.1 Crore. Adv. ROHiT ERANDE. ©

 Payment of Referral fees to Doctors and Nursing home is illegal and unethical and hence cannot fall under legitimate deductions - IT Appellate Tribunal, Pune rejected Pune based Diagnostic Centre's appeal to the tune of Rs.1 Crore. 

Adv. ROHiT ERANDE. ©

Case Details :

Fidelity Diagnostics P. Ltd. Pune V/s, DCIT, Circle-1(2), Pune.

Before  THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “A”, PUNE

Coram: SHRI S. S. GODARA, JUDICIAL MEMBER   &

SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER

आयकर अपील सं. / ITA No.189/PUN/2021 Order dt. 26/09/2022.

For judgment, you may check the following link :

https://itat.gov.in/judicial/judicialdetail

Facts in Short :

1. The Assesses –Appellant filed the present appeal  against the order of ld. Commissioner of Income Tax (Appeals)- National Faceless Appeal Centre, Delhi [‘the CIT(A)’] dated 18.03.2021 for the assessment year 2015-16.

2. The appellant company is engaged in the business of Medical diagnostics services in Pune.  In its ITR Returns  for the assessment year 2015-16 it declared the loss of Rs.1,97,90,141/-. Against the said return of income, the assessment was completed by the Dy. Commissioner of Income Tax, Circle- 1(2), Pune (‘the Assessing Officer’) vide order dated 27.12.2017 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at loss of Rs.97,44,751/-. While doing so, the Assessing Officer disallowed a sum of Rs.99,79,768/- by holding that the appellant company had paid referral fees to doctors and nursing homes in violation of provisions of Medical Council (Professional Conducts, Etiquettes and Ethics) Regulation Act, 2002.

3. Being aggrieved by the above addition, an appeal was filed before the ld. CIT(A), who vide impugned order confirmed the addition placing reliance on the decision of the Hon’ble Punjab & Haryana High Court in the case of CIT vs. Kap Scan and Diagnostic Centre (P.) Ltd, 25 Taxman.com 92 (P&H). Being aggrieved by the decision of the ld. CIT(A), the appellant is in appeal before us in the present appeal.

Held :

1. The issue in the present appeal relates to allowability of referral fees paid to doctors and nursing home by the appellant company. It was observed that the Assessing Officer 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. Therefore, squarely hit by the Explanation 1 to section 37 of the Act. 

2. The CHAPTER 6.6 of the aforesaid code deals with UNETHICAL ACTS and it prohibits referral fees. Clause 6.4 deals with it precisely and it has been reproduced as under :

6.4 Rebates and Commission: 6.4.1 A physician shall not give, solicit, or receive nor shall he offer to give solicit or receive, any gift, gratuity, commission or bonus in consideration of or return for the referring, recommending or procuring of any patient for medical, surgical or other treatment. A physician shall not directly or indirectly, participate in or be a party to act of division, transference, assignment, subordination, rebating, splitting or refunding of any fee for medical, surgical or other treatment. 

6.4.2 Provisions of para 6.4.1 shall apply with equal force to the referring, recommending or procuring by a physician or any person, specimen or material for diagnostic purposes or other study / work. Nothing in this section, however, shall prohibit payment of salaries by a qualified physician to other duly qualified person rendering medical care under his supervision.

3. The Bench observed that an identical issue was dealt by the Hon’ble Apex Court in the case of Apex Laboratories (P.) Ltd. vs. DCIT, 442 ITR 1 (SC) (Judgment link : https://indiankanoon.org/doc/43893743/,) wherein, the bench comprising of Hon. Justice U.U. Lalit and Hon. Justice S. Ravindra Bhat of 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.

4. Thus the Bench dismissing the Appeal observed that in the light of authoritative pronouncement of law by the Hon’ble Supreme Court on the issue on hand, 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. 

This case has once again underlined the of quoted issue for which the Medical Fraternity is often criticised. The doctor -patient relationship is going through a turmoil. The medicos would agree to the following proposition 

a. If the test result is normal, then Doctors unnecessarily prescribe tests.

b. If Doctors don't' prescribe tests and something goes wrong take the Doctor to the Consumer Courts for compensation.

It would not be out of place to mention the landmark judgment of 5 judges bench of Hon. Supreme court in the case of Mc Dowell & Company Limited vs The Commercial Tax Officer , reported in AIR 1986 SC 649, wherein while dealing with the difference between "law avoidance v/s. law Evasion", it was observed that 

"Each person is entitled to manage his affairs so as to lessen  he tax liability attached under the appropriate act,’ 

"The cardinal principle that ‘if a transaction is genuine the court cannot go beyond its substance’" 

It would be wrong to apply one test for all the Doctors. nevertheless, this judgment is an eye opener for all the concerned professionals. 

With kind regards

(Adv. ROHiT ERANDE. ©)