No deduction u/s 37(1) for expenses incurred by doctor on organizing musical programme, sponsoring garba event and gifts to fellow doctors

Keyur Parikh Vs DCIT (ITAT Ahmedabad)

Conclusion: Expenses incurred by assessee-doctor on organizing musical programme for his professional colleagues, sponsoring garba event organized in the society where he resided and gifts given to fellow doctors on the occasion of marriage or diwali could not be said to be allowable under section 37 for computing his taxable income as all these expenses, could not be said to have been incurred wholly and exclusively for the profession of the assessee so as to qualify for deduction u/s 37(1).

Held: The issue to be adjudicated is whether expenses incurred by the assessee, a doctor by profession, on organizing musical programme for his professional colleagues, sponsoring garba event organized in the society where he resided and gifts given to fellow doctors on the occasion of marriage or diwali could be said to be allowable under section 37 of the Act for computing his taxable income. It was held that as rightly pointed out by AO the Garba event was organized for the benefit of persons limited to those residing in his society. It was a religious programme conducted in the assesses society which he had sponsored as a resident of the society. The sole purpose for incurring the expense was not for the purpose of his profession but also on account of the fact that being a resident of the society he felt obliged to contribute towards the programme. Also by sponsoring the programme, the assessee was allowed to put up hoarding of the hospital where he rendered his services. Therefore, as rightly pointed out by the AO, the immediate beneficiary of the sponsorship was the hospital and not the assessee. Similarly musical program organized for fellow colleagues was nothing but a social event which though helps in promoting the assessee but not only on his professional front but also personal front. This fact cou ldnot be denied. So also the gifts given on marriages and diwali which had been rightly pointed out by the Revenue authorities as being incurred out of social obligations and conventions. All these expenses, could not be said to have been incurred wholly and exclusively for the profession of the assessee so as to qualify for deduction u/s 37(1). Thus, the expenses were not found to have been incurred wholly and exclusively for the profession of the assessee.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

Present appeal has been filed by the assessee against order passed by the ld. Commissioner of Income-Tax (Appeals)-4, Ahmedabad [hereinafter referred to as “ld. CIT(A)”] dated 17/5/2017 passed under section 250(6) of the Income Tax Act, 1961 [hereinafter referred to as “the Act” for short] for the Asst. Year 2013-14.

2. The assessee is aggrieved by the disallowance of various expenses claimed by it which were disallowed on the ground that they were found by the Revenue authorities to be personal in nature. The assessee, we have noted from orders of the authorities below, is a medical professional earning professional income, income from salary, house property and capital gain and from other sources. The expenses which were disallowed on being found to be personal in nature are the following:

i) Professional development expenses 7,49,560/-

ii) Advertisement expenses 61,000/-

iii) Telephone & Vehicle expenses 20,000/-

3. The effective grounds raised by the assessee in this regard are as under:

2. The Learned Commissioner (Appeal) erred in confirming the disallowance of professional development expenditure of Rs.7,49,560/- are the invalid ground that said expenditure are of personal in nature and not allowable as deduction.

3. The Learned Commissioner (Appeal) erred in confirming the disallowance of Rs. 61,000/- being expenditure incurred for advertisement even though the same is incurred for professional purpose.

4. The Learned Commissioner (Appeal) erred in confirming the disallowance of Rs 20,000 as an personal expenses in spite assessee has maintained separate books of accounts for personal purpose and already disallowed telephone and petrol expenditure as per Audit report.”

4. Vis-à-vis disallowance of professional development expenses of Rs.7,49,560/-, raised in Ground No.2 , the details of the same ,as noted in para-5 of the CIT(A)’s order, are as under:

i) Musical programme expenditure Rs.52,000/-

ii) Sponsorship of garba at Satyagraha Chavni, Rs.3,00,000/-

iii) 50% of balance professional development expenses incurred by the assessee Rs.3,97,560/- i.e. 50% of Rs.7,95,120/-

5. The assessee was found to have incurred and claimed Rs.13,90,620/- Professional development expenses , out of which details of expenses relating to musical programme and garba were submitted by the assessee as under:

Re; Musical program

Assesses organized and sponsored musical program for refreshment and providing entertainment to his professional colleagues/subordinates. In the s were aid event the banner of the Dr. Keyur Parikh & CIMS Hospital was there. By these types of events assessee has made publicity of the Hospital from where he has earned professional fees. Such, event enhances his profession network. There is no personal benefit to assessee by organizing such events.

Re: Garba

During the previous year assessee sponsored garba festival. In consideration sponsorship payment assessee has get the right to make the advertisement by way of hoarding/banner for medical services and clinical services in the name of CIMS Hospital Pvt. Ltd. from where assessee receives professional fees. These are the indirect benefits available to assessee.”

6. The balance expenses amounting to Rs.7,95,120/-, were stated by the assessee to have been incurred for giving gifts to the Doctors on the occasion of marriage or Diwali.

Noting these facts, the AO found the expenses to be personal in nature and disallowed expenses pertaining to musical programme and garba event and  50% of the remaining amounting to Rs.3,97,560/-.

7. The contention of the assessee before the authorities below and also before us is that this expenditure was incurred for promoting and publicizing his professional network, that the gifts had been given to doctors who were in the professional circle associated with the assessee and the purpose was maintaining and strengthening relationship with the concerned persons, thus entirely incurred for purposes of the profession carried out by the assessee. That musical programme was organized and sponsored by the assessee for providing entertainment to the professional colleagues under his banner and under the banner of the hospital where he was carrying out his profession. That by incurring expenditure, he had made publicity of the hospital and enhanced his professional identity. Similar arguments were made for the expenditure incurred on garba event sponsored by the assessee. The contention of the assessee was that there were no personal benefits to the assessee by incurring this expenditure. It was further contended that the primary purpose for incurring this expenditure was to strengthen his professional net work and any incidental personal benefit was of no relevance while determining whether the claim was allowable to the assessee under the Income Tax Act. In this regard, he placed reliance on the decision of Hon’ble jurisdictional High Court in the case of CIT Vs. Khambhatta Family Trust, (2013) 34 taxmann.com 36 (Guj). He drew our attention to the head-note of the above decision containing gist of the aforesaid proposition of law laid down as under:

Section 37(1) of the Income-tax Act, 1961 – Business expenditure – Allow ability of [Advertising expenses] – Whether once it is found that expenditure has been incurred by assessee for publicity or advertisement, it is not for department to consider what commercial expediency justify such expenditure; mere fact that on account of expenditure incurred by assessee wholly and exclusively for its own business, incidentally some third party is also benefited is no ground to disallow any part of such expenditure – Held, yes -Assessee procured usage rights for brand “Rasna” for a valuable consideration and incurred advertisement expenses in respect of products manufactured by it under such brand name – Assessing Officer noted that by advertising said brand, other parties were also benefited and an intangible asset was created, which was not even owned by assessee and, therefore, expenses relatable thereto were not for business purpose of assessee but were capital in nature – He disallowed said claim – Whether since said expenditure was expended exclusively for assessee’s business, merely because by virtue of such advertisements brand value of Rasna was enhanced and other manufacturers of brand were also indirectly benefited, it could not be said that expenditure incurred by assessee was not wholly and exclusively for its own business – Held, yes – Whether, therefore, disallowance was to be deleted – Held, yes [Para 9] [In favour of assessee]

8. The ld.DR countered by stating that authorities below had rightly held the said expenditure to be personal in nature. He pointed out that giving gifts to Doctors on marriages or otherwise would not lead to professional development of the assessee but was an important social and religious aspect of being a social person, and therefore, was personal expenditure of the assessee only. In this regard, the ld.DR relied on the decision of Hon’ble Bombay High Court in the case of Dhimant Hiralal Thakkar Vs. CIT, 64 taxmann.com 177 (Bom) pointing out that in the said case Hon’ble High Court had held that the expenditure on the medical treatment on eyes could not be held to be a business expenditure wholly and exclusively for the profession of the assessee,since eyes were essential and important not only for the business or profession, but for other purposes as well. The ld.DR contended that under section 37(1) of the Act, for allowance of claim of expenses the condition to be fulfilled was that the expenditure ought to have been incurred “wholly and exclusively” for the purpose of business of the assessee, and in the impugned case, the expenditure incurred by the assessee for organizing musical programme, garba events and giving gifts to the members on the occasion of marriage etc. could not be said to have been incurred “wholly and exclusively” for the purpose of business of the assessee, and therefore, had been rightly disallowed by the authorities below. Submissions in this regard were filed before us which are reproduced as under:

“It is respectfully submitted that giving gift to Doctor on marriage or otherwise would not lead to professional development of Dr.Keyur Parikh. The nature of such expenses is such that it cannot be linked directly with the professional development of any Doctor and especially Dr. Parikh who is a very well known doctor in Town. At best, it can be categorized as important social and religious aspect of being a social person having a position of Doctor. The Income Tax Act, 1961 do not contain any provision for allowing such expenses. The reliance is placed on the Drumant Hiralal Thakar vs. Commissioner of Income-tax, B.C. III^[2015] 64 taxmann.com 177 (Bombay) wherein, it has been held that :-

Section 37(1) of the Income-tax Act, 1961 – Business expenditure – Allowability of (Personal Expenses/Medical expenses) – Assessment year 1986-87 – Whether expenditure on medical treatment of eyes is a personal expenditure and, it is not in nature of expenditure wholly and exclusively incurred for profession of assessee since eyes are essential not only for business or profession but for other purposes as well – Held, yes – Whether such expenditure, cannot be allowed as deduction – Held, yes [Para 17]

Hon’ble Court also observed that If submission of assessee is taken to its logical conclusion, then every and all expense incurred on daily living and food would be allowable as expenditure under section 37. Thus, we find no substance in the contention that it is not a personal expenditure incurred by the appellant.

The above decision very lucid has held that ‘Wholly and exclusively’ as used under section 37 of Income-tax Act, 1961 is the key aspect in allowing an expense related to a business or profession otherwise every and all expenses incurred in daily life would be allowable as expenditure under section 37. This ratio is totally applicable to the fact of the case and it cannot be said that the nature of expenses are wholly and exclusively for the profession. (The copy of the above Authority is attached for perusal). Hence, the action of the assessing officer and Ld. CIT(A) doesn’t need any interference and same need to be confirmed.

It is also submitted that the Musical and Garba events and advertisement has been made in the name of the hospital (CIMS) and the expenses has been claimed in the name of Dr. Keyur Parikh. Both are separate legal entity and as per I.T Act, the expense made for the purpose of hospital cannot be claimed in the individual capacity of the Doctor. There is no legal permission for the same. It is possible that Hospital and Individual Doctor fall in the same tax bracket, but the expense done by one legal entity cannot be claimed by other legal entity under provision of the I.T Act and it is also covered with the fact that these expenses are not wholly and exclusively for the purpose of profession as provided in section-37 of the I.T Act. Hence, the claim of expenses is not justified on this ground as the same is not legally tenable and permissible.”

9. Our attention was also drawn to the findings of the AO at para 3.1 page 4 of the order wherein he had pointed out that the assessee being a renowned cardiovascular doctor there was no need for him to advertise being well known to all and moreover the expenses were incurred for the benefit of people in his society where he lived and for medical circle and not for general public .No benefit could be said to accrue from these expenses therefore it was contended.

The Ld. Counsel for the assessee responded by relying on the decision of ITAT, Ahmedabad Bench in the case of Sayaji Industries Ltd., 100 Taxman 110 (Ahd-ITAT) for the proposition that expenses incurred towards social obligations in respect of staff members during the course of business would be allowed as business expenditure.

10. The ld. DR countered by saying that the nature of expenditure incurred in the said case was different having been incurred by an assessee-company for its staff ,though by way of social obligation. The same was found to be for welfare of the staff and thus held to be allowable by the ITAT.

11. We have heard the rival contentions and gone through the orders of the authorities below. The issue to be adjudicated is whether expenses incurred by the assessee, a doctor by profession, on organizing musical programme for his professional colleagues, sponsoring garba event organized in the society where he resided and gifts given to fellow doctors on the occasion of marriage or diwali can be said to be allowable under the Act for computing his taxable income.

12. Undoubtedly this claim of the assessee has to pass the test of section 37(1) of the Act, having been claimed by him as incurred for the purpose of his profession. Section 37(1) restricts allow ability of claim to only those expenses incurred wholly and exclusively for the purposes of Business/ Profession. The section is clearly worded so as under:

37. (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”.

13. In the present case, we agree with the authorities below that these expenses are in the nature of personal expenses. They cannot be said to be incurred wholly and exclusively for the profession of the assessee. Organizing musical parties for fellow colleagues or garba event in the society where the assessee resides or for that matter giving gifts on marriages of fellow colleagues is done primarily out of social obligations or practices and predominantly for personal reasons. As rightly pointed out by the AO the Garba event was organized for the benefit of persons limited to those residing in his society. It was a religious programme conducted in the assesses society which he had sponsored as a resident of the society. The sole purpose for incurring the expense was not for the purpose of his profession but also on account of the fact that being a resident of the society he felt obliged to contribute towards the programme. Also by sponsoring the programme, the assessee was allowed to put up hoarding of the hospital where he rendered his services. Therefore, as rightly pointed out by the AO, the immediate beneficiary of the sponsorship was the hospital and not the assessee. Similarly musical program organized for fellow colleagues is nothing but a social event which though helps in promoting the assessee but not only on his professional front but also personal front. This fact cannot be denied. So also the gifts given on marriages and diwali which have been rightly pointed out by the Revenue authorities as being incurred out of social obligations and conventions. All these expenses, cannot be said to have been incurred wholly and exclusively for the profession of the assessee so as to qualify for deduction u/s 37(1) of the Act. The case law relied on by the Ld.DR in the case of Dhimant Hiralal Thakkar(supra) applies squarely to the present case wherein expenses incurred on medical treatment of eyes of a solicitor was held to be personal in nature and not wholly and exclusively for the business/profession of the assessee while denying such claim. The decision relied on by the Ld. Counsel for the assessee in the case of Khambatta Family Trust (supra) we find is distinguishable as in the said case the proposition laid down by the Hon’ble Bombay High Court was that expenses incurred for the purposes of business cannot be disallowed merely because other parties incidentally derived benefit from the same. In the facts of the said case assessee had procured usage right for brand “Rasna” and incurred advertisement expenses for promoting the brand. Other parties were found to have benefited by the said expenses. The Hon’ble high court held in such facts that where expenditure was incurred wholly and exclusively for business of the assessee merely because other parties benefited the claim of said expenditure could not be denied to the assessee. In the said case the assessee was found to have incurred expenditure wholly and exclusively for its business. In the present case before us the expenses are not found to have been incurred wholly and exclusively for the profession of the assessee. The proposition laid down in the said case therefore will not apply to the present case. The decision of the ITAT, Ahmedabad Bench in the case of Sayaji Industries Ltd., 100 Taxman 110 (Ahd-ITAT), relied upon by the Ld. Counsel for the assessee for the proposition that expenses incurred towards social obligations in respect of staff members during the course of business would be allowed as business expenditure, we find has been rightly distinguished by the Ld. DR pointing out that the nature of expenditure incurred in the said case was different having been incurred by an assessee-company for its staff ,though by way of social obligation. The same was found to be for welfare of the staff and thus held to be allowable by the ITAT.

14. In view of the above we uphold the order of the Ld. CIT(A) disallowing Professional expenditure claimed by the assessee amounting to Rs.7,49,560/-. Ground of appeal No.2 raised by the assessee is dismissed.

15. With regard to the expenditure incurred on advertisement amounting to Rs.61,000/- disallowed, raised vide Ground No3 by the assessee, the facts as emanate from the order of the AO are that the payment of Rs.51,000/- out of the said expenditure was made to Satyagrah Chhavni Co-op Hsg. Society, where the assessee resided, for advertising the assessee’s name in the society members’ directory and Rs.10,000/- was paid to the B.J. Medical College, Ahmedabad for the event “B.J. Beats, 2012.

16. Arguments from both the sides were identical as in the case of professional development expenditure. Besides, the ld.DR also pleaded that guidelines by the Controlling Body of Doctors’ Association i.e. IMA prohibited self-promotion by way of advertisement. Reference was made to Chapter-VI of guidelines as under:

Chapter-6

6.0 UNETHICAL ACTS ; A physician shall not aid or abet or commit any of the following acts which shall be construed as unethical –

6.6.1 Advertising: 6.1.1 Soliciting of patients directly or indirectly, by a physician, by a group of physicians or by institutions or organisations is unethical A physician shall not make use of hint / her (or his her name) as subject of any form or manner of advertising or publicity through any mode either aloneor in conjunction with others which is of such a character as to invite attention to him or to his professional position, skill appointments, associations, affliations or honours 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:-

1) On starting practice

2) On change of type of practice

3) On changing address

4) Temporary absence from duty

5) On resumption of another practice

6) On succeeding to another practice

7) Public declaration of charges.

6.1.2 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 hot be treated as unethical.

Further, section”6.8 Code of conduct for doctors enumerate the relationship of doctor with pharmaceutical and allied health sector industry”. It lucidly mentions that gift taking and giving is prohibited and one should not indulge in such practices. (The complete guidelines of IMA are attached with the submission for perusal). Hence, a code which clearly specifies the legal and ethical conduct for their professional, the digressing from such point is not permissible. Even, section 37 of the I.T Act specifically prohibits any expenses which have no legal sanction. These expenses are hit by this exception provided in section 37 of the I.T Act.

Hence, the expense claimed under the professional development expenses are personal in nature and the same is not wholly and exclusively connected with the profession is not an allowable expenses as per provision of the I.T Act. It is also submitted that conduct which is specifically barred by IMA cannot be allowed under the provision of the I.T Act. Hence, it is respectfully submitted that order passed by Ld. Assessing Officer and endorsed by Ld. CIT(A) completely as per law and the same should be sustained.

17. We have heard both the parties. The advertisement expenses claimed, we find also do not qualify as incurred wholly and exclusively for the profession of the assessee. In the backdrop of facts that these expenses were incurred for advertising in the members directory of the society where he resided and for sponsoring a musical event in a medical college, the nature of expenditure we find is similar to that dealt with by us with regard to professional development expenses in ground no 2 above in our order. Our decision rendered therein will apply to the impugned advertisement expenses also. Accordingly, we hold that the advertisement expenses incurred by the assessee amounting to Rs.61,000/- are personal in nature and not incurred wholly and exclusively for the purpose of profession of the assessee and hence not allowable as per section 37(1) of the Act.

18. Even otherwise as rightly pointed out by the Ld. CIT(A) and the Ld. DR before us, advertising is an unethical act as per guidelines of the controlling body of medical professionals. For this reason also the expenses incurred on carrying out such unethical activities cannot be allowed as deduction.

The order of the Ld.CIT(A) therefore upholding the disallowance of advertisement expenses of Rs.61,000/- is upheld.

Ground of appeal No.3 is dismissed.

19. With respect to disallowance of expenses pertaining to telephone and vehicle expenditure, raised vide ground No.4, holding them to be personal in nature, the ld. counsel for the assessee pointed out that the AO had disallowed 20% of the telephone, vehicle, petrol, repairs and depreciation on vehicles, and professional expenses incurred by the assessee, which amounted in all of Rs.7,80,888/- holding the same as attributable to personal expenditure. Thus an amount of Rs 1,56,178/- was held to be disallowable. Further, noting that the assessee himself had disallowed 10% of the telephone and vehicle expenses amounting to Rs.36,340/-,the balance of Rs.1,19,838/- was disallowed by the AO.

20. The ld.counsel for the assessee pointed out that it had been contended to the authorities below that in the tax audit report filed by the assessee as per section 44AB of the Act, the auditor had reported that no personal expenditure had been debited to P&L account and out of telephone expenses, 10% had been treated as for personal call purpose by the assessee and out vehicle expenses, similarly 10% had been treated as personal in nature, and the assessee accordingly disallowed suo moto 36,340/-. He pointed out that it had also been clarified to the AO that the assessee had one car for personal use, on which expenditure incurred had not been claimed in the books of the assessee.

21. The ld.DR on the other hand, relied on the orders of the authorities below. He drew our attention to the finding of the AO at page no.2 of his order as under:

“Submission of the assessee considered. The same is seen to be contradictory in nature. As per the auditors remarks, 10% of expenses for specific vehicle considered for personal use has been disallowed which shows that expense of vehicle used for personal use are debited in profit & loss account. On the other, assessee also says that one car is kept for personal use and its expenditure has not been claimed in professional books of accounts. Therefore, submission of the assessee is not acceptable. Since, it cannot be derived that motor car, telephone/mobile are not used for personal use, 20% of expenses related to them, are disallowed same are worked out as under:

In view of the aforesaid amount of Rs.1,19,838/- is disallowed and added back to the total income of the assessee.

and the ld.CIT(A) upheld the order of the AO at para 7 of his order as under:

7. Third ground of appeal is against the addition of Rs.1,19,838/- by the AO by disallowing 20% expenditure debited on telephone, vehicles etc. considering the same as incurred for personal purposes On going through the facts of the case, it is found that part depreciation disallowance is not justified. The appellant is maintaining personal car for which no expenditure has been debited. Looking to the overall of the case, a lump sum additions of Rs.20,000/- is confirmed on this account and remaining additions of Rs.99,838/- are deleted. This ground of appeal partly allowed.”

22. We have heard the rival contentions. On careful consideration of the orders passed by the authorities below and the contention of the Ld. Counsel for the assessee before us, we find merit in the contention of the Ld. Counsel for the assessee that the disallowance of telephone and car expenses of Rs.1,19,838/- was unwarranted and unjustified.

23. Undisputedly the assessee himself had disallowed these expenses suo moto, being 10% of telephone and 20% of car petrol and repair amounting in all to Rs.36,340/-. The tax audit auditors in their report furnished as per section 44AB 0f the Act, had certified this fact along with stating that no personal expenses were debited by the assessee in its Books. The auditors had also stated that the assessee had one car used for personal purposes which expenses were not claimed by it. The AO however went on to disallow 20% of the entire expenses incurred on telephone and car including depreciation claimed thereon, without any basis and without giving any reason as to why he found the assesses explanation of personal expenses included in its claim as not correct.

24. We therefore hold that the disallowance of telephone and car expenses of Rs. 1,19838/- was wholly unjustified and not in accordance with law. The disallowance so made is therefore directed to be deleted. Ground of appeal No.3 of the assessee is allowed.

25. In view of the above, appeal of the assessee is partly allowed.

Order pronounced in the Court on 23^rd November, 2022 at Ahmedabad.