Commissioner of Income Tax vs Sri Ramakrishna Nursing Home

Ismail, J.—The Income Tax Appellate Tribunal, Madras Bench, has stated a case and referred the following question of law to this court u/s

256(1) of the Income Tax Act, 1961, for its opinion :

Whether, on the facts and in the circumstances of the case, the deed of partnership dated April 1, 1961, could be said to be illegal or opposed to

public policy and hence the firm could be refused registration ?

One Dr. Sudhakar Rao, an eminent doctor of Coimbatore and his two sons, Jayakar Rao and Pradeep Rao, entered into a partnership by deed

dated 1st April, 1961, and started running a nursing home under the name and style of ""Sree Ramakrishna Nursing Home"". Dr. Sudhakar Rao was

the senior partner and his two sons, at the time when the partnership was entered into, were studying in the medical colleges, one at Udipi and the

other at Pondicherry. The partnership deed constituted Dr. Sudhakar Rao as the senior partner as well as the managing partner. The deed stated

that the object of the nursing home was mainly to do surgical work under the guidance of Dr. Sudhakar Rao who would also be the surgeon-in-

chief of the nursing home. The deed also provided that he shall conduct all operations in the nursing home as he may choose, to have such paid

assistants as and when required and the remuneration to be paid to them shall be fixed by him of his own discretion from time to time. The deed

referred to the bed strength of the nursing home and also provided that 1/3rd of them shall be free of all charges and it shall be for the use of poor

patients. The senior partner, namely. Dr. Sudhakar Rao, was to receive a monthly remuneration of Rs. 500. The net profits or losses of the nursing

home as per the balance-sheet were to be shared by the three partners in the ratio of 4 : 3 : 3. The firm applied for registration with the Income

Tax Officer for the years 1962-63, 1963-64 and 1964-65. The Income Tax Officer granted registration for the year 1962-63 and he renewed the

registration of the firm for the year 1963-64. However, for the year 1964-65, when the assessee filed a declaration as required under the

provisions of Section 184(7) of the Act of 1961, the Income Tax Officer took the view that there was no genuine firm in existence and that the

partnership contravened certain ethical code of medical profession. According to him, a qualified medical practitioner could not, under the medical

code of ethics, enter into partnership with unqualified persons. In view of this, he cancelled the registration granted by the Income Tax Officer for

the preceding two years, namely, 1962-63 and 1963-64, and refused registration for the year 1964-65. The appeal preferred by the assessee to

the Appellate Assistant Commissioner proved unsuccessful. However, further appeal preferred by the assessee with the Income Tax Appellate

Tribunal proved successful. The Tribunal held that it was not as if Dr. Sudhakar Rao asked unqualified persons to perform any operation or to

attend to patients or to treat them and only Dr. Sudhakar Rao could attend and did attend to patients for rendering professional services and other

eminent doctors were also, at request, rendering professional services and even dressing and other allied works were carried on only under the

immediate supervision of Ur. Sudhakar Rao. In view of this finding of the Tribunal, the Tribunal took the view that there was nothing unethical or

opposed to medical code in the constitution or functioning of the partnership and, therefore, the Income Tax Officer as well as the Appellate

Assistant Commissioner erred in cancelling the registration granted for the earlier two years and refusing to grant the registration for the current

year. It must be mentioned that even though the Income Tax Officer and the Appellate Assistant Commissioner took the view that the partnership

itself was not genuine, before the Tribunal it was conceded by the learned counsel appearing for the department that he would not be able to

sustain the objection that the firm was not genuine. Consequently, the Tribunal had to consider only one question, namely, whether there was

anything illegal about the partnership so as to disentitle the same to get a registration under the Act. In view of the conclusion it came to, it set aside

the orders of the Income Tax Officer as well as the Appellate Assistant Commissioner and directed the restoration of the registration for the

previous two years and registration for the current year. It is, therefore, at the instance of the department, the Tribunal has referred to this court the

question which we mentioned earlier.

From the very frame of the question, it is clear that two things had to be considered and answered. One is whether the partnership deed dated

April 1, 1961, could be said to be illegal at all. The other is, whether the said partnership could be said to be opposed to public policy. As far as

the first part is concerned, the partnership can be said to be illegal only if it is in contravention or violation of any provision of law in this behalf and

the learned counsel for the department had to very fairly admit that he could not contend that the partnership was in violation or contravention of

any provision or principle of law. Therefore, there is nothing in the partnership deed from which it could be said that the partnership was illegal. The

result is, we are only left with the latter alternative, namely, whether the partnership could be said to be opposed to public policy. We asked the

learned counsel for the department to state what exactly the public policy to which the provisions contained in the partnership can be said to be

opposed. The learned counsel drew our attention to Clause 10 of the partnership deed and contended that it will have a harmful tendency

inasmuch as it involved unqualified persons doing professional work along with the qualified person, namely, Dr. Sudhakar Rao. In other words,

according to the learned counsel, there had been certain warning notices issued by the medical council warning registered medical practitioners that

they should not associate unqualified persons with their professional work and what Clause 10 of the partnership deed does is to go against such

warnings. For the purpose of examining this contention, we shall now extract Clause 10 of the partnership deed which is as follows :

The partners shall help each other professionally or otherwise in the maintenance of the nursing home and also for the benefit of the patients.

While considering this clause, it should not be forgotten that at the relevant time, namely, 1961, the two sons of Dr. Sudhakar Rao were

students of medical colleges studying medicine. Under such circumstances, the reference to the partners helping each other professionally need not

necessarily be that the sons also were to engage themselves in performing surgical operations as the father. The professional help can be rendered

at different levels and there is absolutely nothing to prevent a medical student rendering help to a surgeon, in the fields and spheres in which he is

capable of doing as a medical student. It has also to be remembered that this expression ""professionally"" does not stand alone and it is followed by

the expression ""or otherwise"" and also the other expression is ""in the maintenance of the nursing home and also for the benefit of the patients"".

Thus, Clause 10 is a comprehensive one and not confined only to the rendering of assistance by the two sons to the father in the performance of

surgical operations, but assisting the father in the maintenance of nursing home generally, the said nursing home being for the benefit of the patients

who come to the nursing home. There is absolutely nothing unnatural or unethical in a qualified doctor taking assistance from a medical student to

the extent to which such medical student is capable of rendering assistance in the discharge of his professional work. That is far different from

stating that a professionally qualified man associates himself with an unqualified person to do a professional work which such person is not qualified

to do. In addition to this, we have already referred to the finding of the Tribunal that it was Dr. Sudhakar Rao who was doing all the operations in

the nursing home and other eminent doctors were also, at request, rendering professional services and even dressing and other allied works were

carried out only under the immediate supervision of Dr. Sudhakar Rao.

There is yet another circumstance which should be taken note of with regard to Clause 10 of the partnership deed. As we pointed out already,

the document came into existence on April 1, 1961, and at that time, the two sons were studying in the medical colleges. Clause 10 of the

partnership deed was intended not only to apply to the situation then prevailing but also to apply in future and by that time, certainly the father

expected his sons to become qualified medical practitioners. This aspect also should not be missed in construing the total effect of Clause 10 of the

partnership deed. Further, Clause 10 has to be read along with the opening clause to which we have already made reference, namely, the surgical

work should be done under the guidance of Dr. Sudhakar Rao who will also be the surgeon-in-chief of the nursing home. Having regard to these

circumstances, we are unable to see any substance in the contention of the department that the partnership is opposed to public policy.

With reference to the argument of the learned counsel for the department, we may also refer to one significant fact admittedly present in this

case. On November 24, 1967, the assessee wrote to the Secretary of the State Medical Council, Madras, setting out the details as regards the

assessee-firm and asking the opinion of the State Medical Council as to whether the medical code or ethics or the law regulating the medical

profession (Allopathy) in India contained any provision which prohibited the formation of any partnership containing the provisions referred to. On

26th June, 1968, the Registrar of the Madras Medical Council wrote to the chartered accountants of the assesses as follows :

I am directed to state that your above letter and the connected papers were placed before the Madras Medical Council at the meeting held on

15th April, 1968, and the Council decided that there is nothing unethical in the partnership referred to in the reference.

Once the medical council itself which was a professional body has taken this view and given the opinion, it is rather strange that the department

should indirectly question that opinion by raising this question, namely, that the partnership was opposed to public policy.

In passing, we may also refer to one position emerging from the statutory provisions themselves, namely, once it is conceded that the partnership

was a genuine one and there was no illegality, was there anything within the powers of the Income Tax Officer to question the partnership and

refuse to grant registration on the ground that the partnership was opposed to public policy? Section 185 of the Income Tax Act, 1961, is the

statutory provision dealing with the procedure on receipt of applications. Sub-section (1) of that section states :

On receipt of an application for the registration of a firm, the Income Tax Officer shall inquire into the genuineness of the firm and its constitution

as specified in the instrument of partnership, and-

(a) if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order

in writing registering the firm for the assessment year ;

(b) if he is not so satisfied, he shall pass an order in writing refusing to register the firm.

From this it can be inferred that what was meant to be within the jurisdiction of the Income Tax Officer was to enquire into and decide about the

genuineness as well as the legality of the firm; but certainly not the question whether a firm is opposed to public policy or not. Though the law

relating to public policy must change with the passage of time, since it cannot remain immutable, the duty of the court is to expound and not expand

public policy and the doctrine should be involved only in clear cases in which the harm to the public is substantially incontestable and does not

depend upon the idiosyncratic inferences of a few judicial minds. It is well settled that the doctrine of public policy is only a branch of common law,

and, just like any other branch of common law, it is governed by precedents and the principles have been crystallised under different heads and

though it is permissible for courts to expound and apply them to different situations, it should only be invoked in clear and incontestable cases of

harm to the public; though the heads are not closed and though theoretically it may be permissible to evolve a new head under exceptional

circumstances of a changing world, it is advisable in the interest of stability of society not to make any attempt to discover new heads in these days.

The Supreme Court in Gherulal Parakh Vs. Mahadeodas Maiya and Others, observed :

Public policy or the policy of the law is an illusive concept; it has been described as ''untrustworthy guide'', ''variable quality'', ''uncertain one'',

''unruly horse'', etc; the primary duty of a court of law is to enforce a promise which the parties have made and to uphold the sanctity of contracts

which form the basis of society, but in certain cases, the court may relieve them of their duty on a rule founded on what is called the public

policy....

Having regard to such a concept of a public policy, it could not have been the intention of the statute to confer a power on the Income Tax

Officer to refuse to register a partnership which is held to be genuine and legal, on the ground that it was opposed to public policy. From this point

of view also, it can be said that the Income Tax Officer as well as the Appellate Assistant Commissioner exceeded their jurisdiction in holding that

the firm was opposed to public policy and, therefore, was not entitled to registration and it is this error committed by them that was rectified by the

Income Tax Appellate Tribunal.

Under these circumstances, we answer the question in the negative and against the revenue. The assessee is entitled to its costs of this

reference and the counsel''s fee is fixed at Rs. 250.