# M/S APEX LABORATORIES PVT. LTD v. DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAX PAYER UNIT- II

- **Citation:** [2022] 2 S.C.R. 126
- **Court:** Supreme Court of India
- **Decided:** 2022-02-22
- **Case number:** Civil Appeal No.1554 of 2022
- **Bench:** Uday Umesh Lalit, S. Ravindra Bhat
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-s-apex-laboratories-pvt-ltd-v-deputy-commissioner-of-income-tax-large-tax-35829
- **Pages:** 29

## Headnote

Income Tax Act, 1961: s.37(1), Explanation 1 -
Pharmaceutical companies gifting freebies to doctors etc. is clearly
prohibited by law and not allowed to be claimed as a deduction
under s.37(1) of the Act - An amendment to the Medical Council
Act, 1956 (now repealed) through the Indian Medical Council
(Professional Conduct, Etiquette and Ethics) Regulations, 2002
published in the Official Gazette on 14.12.2009, disallowed medical
practitioners from accepting emoluments in the form of inter alia
gifts, travel facilities, hospitality, cash or monetary grants - On
01.08.2012, CBDT also issued a circular, which clarified that
expenses incurred by pharmaceutical and allied health sector
industries for distribution of incentives (i.e., "freebies") to medical
practitioners are ineligible for the benefit of Explanation 1 to s.37(1),
which denies the application of the benefit for any purpose which
is an 'offence' or 'prohibited by law' - When acceptance of freebies
is punishable by the MCI (the range of penalties and sanction
extending to ban imposed on the medical practitioner),
pharmaceutical companies cannot be granted the tax benefit for
providing such freebies, and thereby (actively and with full
knowledge) enabling the commission of the act which attracts such
opprobrium - 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 - Medical practitioners
have a quasi-fiduciary relationship with their patients - Therefore,
it is a matter of great public importance and concern, when it is
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demonstrated that a doctor's prescription can be manipulated, and
driven by the motive to avail the freebies offered to them by
pharmaceutical companies, ranging from gifts such as gold coins,
fridges and LCD TVs to funding international trips for vacations
or to attend medical conferences - These freebies are technically
not 'free' - The cost of supplying such freebies is usually factored
into the drug, driving prices up, thus creating a perpetual publicly
injurious cycle - The 2002 Regulations, applicable to all medical
practitioners (including doctors in private practice), was introduced
w.e.f. 14.12.2009 - Thus, pharmaceutical companies' gifting freebies
to doctors, etc. is clearly "prohibited by law", and not allowed to
be claimed as a deduction under s.37(1) - Doing so would wholly
undermine public policy.
Interpretation of statutes: Interpretation of taxing statutes -
Taxing statutes need to be interpreted strictly - Income Tax Act,
1961.
Jamal Uddin Ahmad v. Abu Saleh Najmuddin & Anr.
(2003) 4 SCC 257 : [2003] 2 SCR 473 - relied on.
Dy. CIT 8(2) Mumbai v PHL Pharma P. Ltd. 20 ITA No.
4605/Mum/2014, dated 12.01.2017; Max Hospital
Pitampura v. Medical Council of India Income Tax
Appeal No. 485/2008 decided on 18.07.2017; Max
Hospital Pitampura v. Medical Council of India W.P.
(C) No. 1334/2014 / ILR (2014) 1 Delhi 620, dated
10.01.2014; Dr. Anil Gupta v. Addl. Commissioner of
Income Tax, Income Tax Appeal No. 485/2008, decided
on 18.07.2017; Berger Paints Ltd. v Commissioner of
Income Tax (2004) 12 SCC 42 : [2004] 2 SCR 502;
South India Bank Ltd. v Commissioner of Income Tax,
Civil Appeal No. 9606 of 2011 / 2021 SCC Online SC
692, dated 09.09.2021; T.A. Quereshi v. Commissioner
of Income Tax, Bhopal (2007) 2 SCC 759 : [ 2006] 10
Suppl. SCR 311; Commissioner of Income Tax v. M/s
Khemchand Motilal Jain 2011 (4) MPLJ 691; Director
of Income-tax v. S.R.M.B Dairy Farming (P.) Ltd., (2018)
13 SCC 239 : [2017] 11 SCR 1118; Kanwarjit Singh
Kakkar v. State of Punjab (2011) 13 SCC 158 : [2011]
M/S APEX LABORATORIES PVT.

## Text

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SUPREME COURT REPORTS
[2022] 2 S.C.R.
[2022] 2 S.C.R. 126
126
M/S APEX LABORATORIES PVT. LTD.
v.
DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAX
PAYER UNIT- II
(Civil Appeal No. 1554)
FEBRUARY 22, 2022
[UDAY UMESH LALIT AND S. RAVINDRA BHAT, JJ.]
Income Tax Act, 1961: s.37(1), Explanation 1 -
Pharmaceutical companies gifting freebies to doctors etc. is clearly
prohibited by law and not allowed to be claimed as a deduction
under s.37(1) of the Act - An amendment to the Medical Council
Act, 1956 (now repealed) through the Indian Medical Council
(Professional Conduct, Etiquette and Ethics) Regulations, 2002
published in the Official Gazette on 14.12.2009, disallowed medical
practitioners from accepting emoluments in the form of inter alia
gifts, travel facilities, hospitality, cash or monetary grants - On
01.08.2012, CBDT also issued a circular, which clarified that
expenses incurred by pharmaceutical and allied health sector
industries for distribution of incentives (i.e., "freebies") to medical
practitioners are ineligible for the benefit of Explanation 1 to s.37(1),
which denies the application of the benefit for any purpose which
is an 'offence' or 'prohibited by law' - When acceptance of freebies
is punishable by the MCI (the range of penalties and sanction
extending to ban imposed on the medical practitioner),
pharmaceutical companies cannot be granted the tax benefit for
providing such freebies, and thereby (actively and with full
knowledge) enabling the commission of the act which attracts such
opprobrium - 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 - Medical practitioners
have a quasi-fiduciary relationship with their patients - Therefore,
it is a matter of great public importance and concern, when it is
A
B
C
D
E
F
G
H
127
demonstrated that a doctor's prescription can be manipulated, and
driven by the motive to avail the freebies offered to them by
pharmaceutical companies, ranging from gifts such as gold coins,
fridges and LCD TVs to funding international trips for vacations
or to attend medical conferences - These freebies are technically
not 'free' - The cost of supplying such freebies is usually factored
into the drug, driving prices up, thus creating a perpetual publicly
injurious cycle - The 2002 Regulations, applicable to all medical
practitioners (including doctors in private practice), was introduced
w.e.f. 14.12.2009 - Thus, pharmaceutical companies' gifting freebies
to doctors, etc. is clearly "prohibited by law", and not allowed to
be claimed as a deduction under s.37(1) - Doing so would wholly
undermine public policy.
Interpretation of statutes: Interpretation of taxing statutes -
Taxing statutes need to be interpreted strictly - Income Tax Act,
1961.
Jamal Uddin Ahmad v. Abu Saleh Najmuddin & Anr.
(2003) 4 SCC 257 : [2003] 2 SCR 473 - relied on.
Dy. CIT 8(2) Mumbai v PHL Pharma P. Ltd. 20 ITA No.
4605/Mum/2014, dated 12.01.2017; Max Hospital
Pitampura v. Medical Council of India Income Tax
Appeal No. 485/2008 decided on 18.07.2017; Max
Hospital Pitampura v. Medical Council of India W.P.
(C) No. 1334/2014 / ILR (2014) 1 Delhi 620, dated
10.01.2014; Dr. Anil Gupta v. Addl. Commissioner of
Income Tax, Income Tax Appeal No. 485/2008, decided
on 18.07.2017; Berger Paints Ltd. v Commissioner of
Income Tax (2004) 12 SCC 42 : [2004] 2 SCR 502;
South India Bank Ltd. v Commissioner of Income Tax,
Civil Appeal No. 9606 of 2011 / 2021 SCC Online SC
692, dated 09.09.2021; T.A. Quereshi v. Commissioner
of Income Tax, Bhopal (2007) 2 SCC 759 : [ 2006] 10
Suppl. SCR 311; Commissioner of Income Tax v. M/s
Khemchand Motilal Jain 2011 (4) MPLJ 691; Director
of Income-tax v. S.R.M.B Dairy Farming (P.) Ltd., (2018)
13 SCC 239 : [2017] 11 SCR 1118; Kanwarjit Singh
Kakkar v. State of Punjab (2011) 13 SCC 158 : [2011]
M/S APEX LABORATORIES PVT. LTD. v. DEPUTY COMMISSIONER OF
INCOME TAX, LARGE TAX PAYER UNIT- II
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6 SCR 895; P.V. Narasimha Rao v. State (CBI/SPE)
(1998) 4 SCC 626 : [1998] 2 SCR 870; Biharilal
Jaiswal v. CIT (1996) 1 SCC 443 : [1995] 5 Suppl. SCR
285; Maddi Venkataraman & Co. (P) Ltd. v. CIT (1998)
2 SCC 95 : [1997] 6 Suppl. SCR 67; CIT v. Pt.
Vishwanath Sharma I.T.R. No. 27 of 1999, Allahabad
HC dated 21.02.2008 (31); C.W.S. (India) Ltd. v. CIT
1994 Supp (2) SCC 296; Bihari Lal Jaiswal & Ors. v.
Commissioner of Income Tax & Ors. (1995) Supp (5)
SCR 285; Jagir Singh v. Ranbir Singh & Ors. [1979] 2
SCR 282; G.T. Girish v. Y. Subba Raju (D) by L. Rs &
Ors. 2022 SCC Online SC 60; Commissioner of IncomeTax v. Kap Scan and Diagnostic Centre P. Ltd. (2012)
344 ITR 476 (P&H HC); Confederation of Indian
Pharmaceutical Industry (SSI) v. Central Board of Direct
Taxes (2013) 353 ITR 388 (HP HC) - referred to.
Case Law Reference
[2004] 2 SCR 502
referred to
Para 6
[2006] 10 Suppl. SCR 311
referred to
Para 7
[2017] 11 SCR 1118
referred to
Para 10
[2011] 6 SCR 895
referred to
Para 12
[1998] 2 SCR 870
referred to
Para 23
[2003] 2 SCR 473
relied on
Para 26
[1995] 5 Suppl. SCR 285
referred to
Para 30
[1997] 6 Suppl. SCR 67
referred to
Para 30
[1994] Supp 2 SCC 296
referred to
Para 33
[1995] Supp 5 SCR 285
referred to
Para 35
[1979] 2 SCR 282
referred to
Para 35
CIVIL APPELLATE JURISDICTION: Civil Appeal No.1554 of
2022.
From the Judgment and Order dated 18.03.2019 of the High Court
of Judicature at Madras in Tax Case Appeal No.723 of 2018.
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S. Ganesh, Sr. Adv., T. Sundar Ramanathan, M. P. Devanath,
Vivek Pandey, Ms. Harshapreetha Sridharan, Ishaan Chakrabarti, Advs.
for the Appellant.
Sanjay Jain, ASG, Ms. Rashmi Malhotra, Saurabh Mishra, Deepak
Goel, Sughosh Subramanyam, Advs. for the Respondent.
The Order of the Court was passed by
S. RAVINDRA BHAT, J.
1. Leave granted. The appellant (hereinafter, "Apex") is aggrieved
by a judgment of the High Court of Judicature of Madras1, wherein the
Division Bench upheld an order of the Income Tax Appellate Tribunal2
(hereinafter, "ITAT"), which in turn upheld an order of the Commissioner
of Income Tax (Appeals)3 (hereinafter, "CIT(A)").The CIT(A) had partly
allowed an appeal from an order of the respondent Deputy Commissioner
of Income Tax4, which partially allowed amounts claimedby Apexas
'business expenditure' under Section 37(1) of the Income Tax Act, 1961
(hereinafter, "IT Act").
2. The facts in brief are as follows: On 01.08.2012, the Central
Board of Direct Taxes (hereinafter, "CBDT") issued a circular5, which
clarified that expenses incurred by pharmaceutical and allied health sector
industries for distribution of incentives (i.e., "freebies") to medical
practitioners are ineligible for the benefit of Explanation 1 to Section
37(1), which denies the application of the benefit for any purpose which
is an 'offence' or 'prohibited by law'.
3. After the circular was issued, on 22.11.2012, Apex was issued
a notice under Section 142(1) of the IT Act, to explain why the expenditure
of 4,72,91,159/- incurred towards gifting freebies such as hospitality,
conference fees, gold coins, LCD TVs, fridges, laptops, etc. to medical
practitioners for creating awareness about the health supplement
'Zincovit', should not be added back to the total income of Apex.
4. The reason for only a partial allowance by the authorities
below was that an amendment6 to the Medical Council Act, 1956 (now
1 Tax Case Appeal No. 723 of 2018, dated 18.03.2019.
2 IT ACT No. 1153/Mds/2014, dated 29.01.2018.
3 I.TA. No. 10/13-14/LTU(A), dated 29.01.2014.
4 G.I. No./PAN AAACA5174G, dated 21.03.2013.
5 Circular No. 5/2012 [F. No. 225/142/2012-ITA.II].
6 No. MCI-211(1)/2009(Ethics)/5567.
M/S APEX LABORATORIES PVT. LTD. v. DEPUTY COMMISSIONER OF
INCOME TAX, LARGE TAX PAYER UNIT- II
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repealed) through the Indian Medical Council (Professional Conduct,
Etiquette and Ethics) Regulations, 2002 (hereinafter, "2002
Regulations"), published in the Official Gazette on 14.12.2009,
disallowed medical practitioners from accepting emoluments in the form
of inter alia gifts, travel facilities, hospitality, cash or monetary grants.7
Acceptance of such freebies could result in a range of sanctions against
the medical practitioners, from 'censure' for incentives received up to
 5,000/-, to removal from the Indian Medical Register or State Medical
Register for periods ranging from three months to one year.8 Therefore,
only the expenses incurred till 14.12.2009 were eligible for the benefit
of Section 37(1), and not for the entirety of the Assessment Year 20102011, as claimed by Apex.
Contentions of Apex
5. It was argued by the counsel for Apex, Mr. S. Ganesh, Senior
Advocate, that the amended 2002 Regulations were not applicable to
Apex, i.e., pharmaceutical companies were not bound by them. While
medical practitioners were expressly prohibited from accepting freebies,
no corresponding prohibition in the form of any binding norm was imposed
on the pharmaceutical companies gifting them. In the absence of any
express prohibition by law, Apex could not be denied the benefit of
seeking exclusion of the expenditure incurred on supply of such freebies
under Section 37(1).
6. Counsel placed reliance on rulings by different High Court to
establish that the 2002 Regulations were enforceable only against
medical practitioners and not the donors, i.e., pharmaceutical
companies. In Max Hospital Pitampura v. Medical Council of India9
(hereinafter, "Max Hospital") the Delhi High Court held that the Medical
Council of India (hereinafter, "MCI") had no jurisdiction to pass any
orders against the appellant hospital, and adverse observations made
against the hospital by MCI were quashed. Equally, in Dr. Anil Gupta v.
Addl. Commissioner of Income Tax10, a Division Bench of the Rajasthan
High Court gave benefit of Section 37(1) to the appellant as Explanation
7 Id., Regulation 6.8, Code of Conduct for Doctors in their Relationship with
Pharmaceutical and Allied Health Sector Industry.
8 Regulation 6.8.1, inserted by Notification No. MCI-211(1)/2010(Ethics)/163013,
issued on 01.02.2016.
9 W.P. (C) No. 1334/2014 / ILR (2014) 1 Delhi 620, dated 10.01.2014.
10 Income Tax Appeal No. 485/2008, decided on 18.07.2017.
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1 could not be raised by the respondent for the first time at an appellate
stage, observing:
"Even otherwise in income tax proceedings the medical ethics
will not be taken into consideration. At the most even if it is a
professional misconduct, it is to be dealt with by Medical
Council of India. The income tax authority cannot decide the
medical ethics when the original authority has partly allowed
the expenses."
The Counsel urged that as these decisions were not challenged
by the revenue authorities, and thereby accepted by them, the present
matter was not open for reconsideration.11
7. The Counsel further submitted that it was not open to the
revenue to deny a tax benefit on the 'nature' of expenses incurred. This
Court, in T.A. Quereshi v. Commissioner of Income Tax, Bhopal12
(hereinafter, "T.A. Quereshi") allowed the appellant to deduct the cost
of heroin seized as a business loss, holding that:
"In our opinion, the High Court has adopted an emotional
and moral approach rather than a legal approach. We fully
agree with the High Court that the assessee was committing a
highly immoral act in illegally manufacturing and selling
heroin. However, cases are to be decided by the court on legal
principles and not on one's own moral views. Law is different
from morality, as the positivist jurists Bentham and Austin
pointed out."
8. It was argued that similarly, in Commissioner of Income Tax
v. M/s Khemchand Motilal Jain13, a Division Bench of the Madhya
Pradesh High Court allowed ransom money paid to the kidnappers of an
employee of the respondent company on a business trip as business
expenditure under Section 37(1), holding that:
"The aforesaid section provides that kidnapping a person for
ransom is an offence and any person doing so or compelling
11 See Berger Paints Ltd. v Commissioner of Income Tax,(2004)12 SCC 42 and South
India Bank Ltd. v Commissioner of Income Tax, Civil Appeal No. 9606 of 2011 / 2021
SCCOnline SC 692, dated 09.09.2021.
12 (2007) 2 SCC 759.
13 2011 (4) MPLJ 691.
M/S APEX LABORATORIES PVT. LTD. v. DEPUTY COMMISSIONER OF
INCOME TAX, LARGE TAX PAYER UNIT- II [S. RAVINDRA BHAT, J. ]
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to pay is liable for the punishment as provided in the Section,
but nowhere it is provided that to save a life of the person if a
ransom is paid, it will amount to an offence. No provision is
brought to our notice that payment of ransom is prohibited
by any law. In absence of it, the Explanation of sub-section
(1), section 37 will not be applicable in the present case."
***
"Sukhnandan Jain remained in custody for a period of
nearabout 20 days. The police were also informed and after
waiting 20 days for the police action. If the respondents to
save his life paid the aforesaid amount, then the aforesaid
amount cannot be treated as an action, which prohibited
under the law. No provision could be brought to our notice
that payment of ransom is an offence. In absence of which,
the contention of the petitioner that it is prohibited under
Explanation of section 37(1) of the Income Tax Act has no
substance. The entire tour of Sukhnandan Jain was for
purchase of Tendu leaves of quality and for this purpose,
he was on business tour and during his business tour, he
was kidnapped and for his release the aforesaid amount
was paid."
(emphasis supplied)
9. Counsel brought this Court's attention to the Memorandum
Explaining the Provisions of the Finance (No. 2) Bill, 1998 which stated
that the introduction of Explanation 1 to Section 37(1) would disallow
tax payers from claiming "protection money, extortion, hafta, bribes,
etc." as business expenditures,14 from which it could be inferred that the
intention of the Parliament was to only bring into the ambit of Explanation
1 'illegal' activities which were deigned as 'offences' under relevant
statutes. The IT Act not being a social reform statute, needed to be
interpreted strictly, and not in a wide manner so as to include in its scope
an act by a pharmaceutical company not recognized as 'illegal' by any
statute - doing so would be against the canons of public law.
14 Memorandum Explaining the Provisions of the Finance (No. 2) Bill, 1998, Section
15.Later adopted by CBDT Circular No. 772 ([1999] 235 ITR (St.) 35, 53), dated
23.12.1998.
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10. Finally, Counsel submitted that the CBDT circular dated
01.08.2012 enlarged the scope of the 2002 Regulations, and made it
operable beyond medical practitioners, i.e., to pharmaceutical companies
and allied health sector industries, which, in the absence of any enabling
provision, was outside its dominion. Arguendo, if the CBDT circular
had to be brought into effect, it could be done so only 'prospectively',
and not 'retrospectively', i.e., from the date of publication of the CBDT
circular on 01.08.2012, and not the date of publication of the 2002
Regulations on 14.12.2009. Reliance was placed on various decisions of
this Court to show that beneficial circulars had to be applied
retrospectively, however oppressive circulars could only be applied
prospectively.15
Contentions of Revenue Authorities
11. Mr. Sanjay Jain, Additional Solicitor General appearing for the
respondent revenue authorities, submitted that while the act of
pharmaceutical companies gifting freebies to medical practitioners for
promotion of their products may not be classified as an 'offence' under
any statue, it was squarely covered within the scope of Explanation 1 to
Section 37(1) by use of the words "prohibited by law", as it was
specifically prohibited by the amended 2002 Regulations. While Apex
could not be 'punished', it should not be allowed to benefit by claiming a
tax exemption on the freebies distributed.
12. Further, the ASG submitted that Parliament's intention to
disincentivize the practice of receiving extravagant freebies in exchange
for prescribing expensive branded medication over its equally effective
generic counterparts, thereby burdening patients with unnecessary costs,
was apparent not only from the amended 2002 Regulations, but also the
Prevention of Corruption Act, 1988 (hereinafter, "PC Act"). A government
doctor receiving any illegal gratification amounting to malpractice or any
other offence was liable to be charged under PC Act and the Indian
Penal Code, 1860 (hereinafter, "IPC").16
13. In the present instance, the medical practitioners were provided
expensive gifts such as hospitality, conference fees, gold coins, LCD
TVs, fridges, laptops, etc. by Apex to promote its nutritional health
15 See for e.g.,Director of Income-tax v. S.R.M.B Dairy Farming (P.) Ltd., (2018) 13
SCC 239.
16 Kanwarjit Singh Kakkar v. State of Punjab, (2011) 13 SCC 158.
M/S APEX LABORATORIES PVT. LTD. v. DEPUTY COMMISSIONER OF
INCOME TAX, LARGE TAX PAYER UNIT- II [S. RAVINDRA BHAT, J. ]
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supplement 'Zincovit'. It was argued that receiving these, clearly - in
letter and spirit, constituted professional misconduct on part of the medical
practitioner. The scope of the 2002 Regulations was not limited to a
finite list of instances of professional misconduct, but broad enough to
cover those instances not specifically enumerated as well.17 The menace
of prescribing expensive branded medication as a quid pro quo
arrangement had a direct bearing on public policy, which was implicit in
the 2002 Regulations itself.
14. To elucidate the same, reliance was placed on two High Court
decisions. In Commissioner of Income-Tax v. Kap Scan and Diagnostic
Centre P. Ltd.,18 a Division Bench of the Punjab and Haryana High
Court disallowed the benefit of the exemption for commission provided
to doctors engaged in private practice for referring their patients to the
assessee's diagnostic centre, holding that:
"It, thus, emerges that an assessee would not be entitled to
deduction of payments made in contravention of law. Similarly,
payments which are opposed to public policy being in the
nature of unlawful consideration cannot equally be
recognized. It cannot be held that businessmen are entitled to
conduct their business even contrary to law and claim
deductions of payments as business expenditure,
notwithstanding that such payments are illegal or opposed to
public policy or have pernicious consequences to the society
as a whole."
***
"If demanding of such commission was bad, paying it was
equally bad. Both were privies to a wrong. Therefore, such
commission paid to private doctors was opposed to public
policy and should be discouraged. The payment of commission
by the assessee for referring patients to it cannot by any stretch
of imagination be accepted to be legal or as per public policy.
Undoubtedly, it is not a fair practice and has to be termed as
against the public policy."
***
17 See regulation 8 of the 2002 Regulations.
18 (2012) 344 ITR 476 (P&H HC).
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Further, the High Court referred to Section 23 of the Contract
Act, 1872 (hereinafter, "Contract Act") to hold the consideration or object
of the agreement between the assessee and private doctors as unlawful,
and the agreement therefore void, as it was opposed to public policy.
15. A Division Bench of the Himachal Pradesh High Court decided
along similar lines in Confederation of Indian Pharmaceutical Industry
(SSI) v. Central Board of Direct Taxes19 (hereinafter, "Confederation"),
holding:
"This regulation is a very salutary regulation which is in the
interest of the patients and the public. This court is not
oblivious to the increasing complaints that the medical
practitioners do not prescribe generic medicines and prescribe
branded medicines only in lieu of the gifts and other freebies
granted to them by some particular pharmaceutical industries.
Once this has been prohibited by the Medical Council under
the powers vested in it, section 37(1) of the Income-tax Act
comes into play"
The High Court also upheld the legality of the CBDT circular
dated 01.08.2012, stating that it was for the assessee to establish to the
Assessing Officer that the expenditure incurred was not in violation of
2002 Regulations:
"Shri Vishal Mohan, advocate, on behalf of the petitioner,
contends that the circular goes beyond the section itself. We
are not in agreement with this submission. The Explanation to
section 37(1) makes it clear that any expenditure incurred by
an assessee for any purpose which is prohibited by law shall
not be deemed to have been incurred for the purpose of
business or profession. The sum and substance of the circular
is also the same. In case the assessing authorities are not
properly understanding the circular then the remedy lies for
each individual assessee to file appeals under the Incometax Act but the circular which is totally in line with section
37(1) cannot be said to be illegal. In fact paragraph 4 of the
circular quoted hereinabove itself clarifies that the value of
the freebies enjoyed by the medical practitioner is also taxable
19 (2013) 353 ITR 388 (HP HC).
M/S APEX LABORATORIES PVT. LTD. v. DEPUTY COMMISSIONER OF
INCOME TAX, LARGE TAX PAYER UNIT- II [S. RAVINDRA BHAT, J. ]
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as business income or income from other sources depending
on the facts of each case. Therefore, if the assessee satisfies
the assessing authority that the expenditure is not in violation
of the regulations framed by the Medical Council then it may
legitimately claim a deduction, but it is for the assessee to
satisfy the Assessing Officer that the expense is not in violation
of the Medical Council Regulations referred to above".
(emphasis supplied)
16. Lastly, the ASG submitted that had the Assessing Officer
allowed Apex to claim tax benefit, the authorities would have been
deprived of revenue in the form of tax amount leviable on 4,72,91,159/
-, which was a crucial omission. Thus, on a holistic reading of the statutes
and regulations, Apex could not be allowed to claim deduction under
Section 37(1).
Analysis and Conclusions
17. Anexamination 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 anoffence 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 absolute.
Explanation 1, which was inserted in 1998 with retrospective effect from
01.04.1962, restricts the application of such exemption for "any purpose
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which is an offence or which is prohibited by law". The IT Act does
not provide a definition for these terms. Section 2(38) of the General
Clauses Act, 1897 defines 'offence' as "any act or omission made
punishable by any law for the time being in force". Under the IPC,
Section 40 defines it as "a thing punishable by this Code", read with
Section 43 which defines 'illegal' as being applicable to "everything
which is an offence or which is prohibited by law, or which furnishes
ground for a civil action". It is therefore clear that Explanation 1
contains within its ambit all such activities which are illegal/prohibited by
law and/or punishable.
18. Regulation 6.8. of the 2002 Regulations states as follows:
"6.8. Code of conduct for doctors in their relationship with
pharmaceutical and allied health sector industry.
6.8.1 In dealing with Pharmaceutical and allied health sector
industry, a medical practitioner shall follow and adhere to
the stipulations given below:-
(a)
Gifts: A medical practitioner shall not receive any gift
from any pharmaceutical or allied health care industry
and their sales people or representatives.
(b)
Travel facilities: A medical practitioner shall not accept
any travel Facility inside the country or outside,
including rail, road, air, ship, cruise tickets, paid
vacation, etc. from any pharmaceutical or allied
healthcare industry or their representatives for self and
family members for vacation or for attending
conferences, seminars, workshops, CME Programme,
etc. as a delegate.]
(c)
Hospitality: A medical practitioner shall not accept
individually any hospitality like hotel accommodation
for self and family members under any pretext.
(d)
Cash or monetary grants: A medical practitioner shall
not receive any cash or monetary grants from any
pharmaceutical and allied healthcare industry for
individual purpose in individual capacity under any
pretext. Funding for medical research, study etc. can
only be received through approved institutions by
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modalities laid down by law / rules / guidelines adopted
by such approved institutions, in a transparent manner.
It shall always be fully disclosed."
The regulation further lays down corresponding action or sanction
which 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 for deduction
of any revenue expenditure (other than those failing
under sections 30 to 36) from the business Income if
such expense is laid out/expended wholly or exclusively
for the purpose of business or profession. However, the
explanation appended to this sub-section denies claim
of any such expense, if the same has been incurred for
a purpose which is either an offence or prohibited by
law.
Thus, the claim of any expense incurred in providing
above mentioned or similar freebees in violation of the
provisions of Indian Medical Council (Professional
Conduct, Etiquette and Ethics) Regulations, 2002 shall
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be inadmissible under section 37(1) of the Income Tax
Act being an expense prohibited by the law. This
disallowance shall be made in the hands of such
pharmaceutical or allied health sector Industries or
other assessee which has provided aforesaid freebees
and claimed it as a deductable expense in its accounts
against income.
4.
It is also clarified that the sum equivalent to value of
freebees enjoyed by the aforesaid medical practitioner
or professional associations is also taxable as business
income or income from other sources as the case may
be depending on the facts of each case. The Assessing
Officers of such medical practitioner or professional
associations should examine the same and take an
appropriate action.
This may be brought to the notice of all the officers of the
charge for necessary action.
 (emphasis supplied)
The CBDT circular being clarificatory in nature, was in effect
from the date of implementation of Regulation 6.8 of the 2002 Regulations,
i.e., from 14.12.2009.
20. In Dy. CIT 8(2) Mumbai v PHL Pharma P. Ltd.20 the ITAT
reiterated Max Hospital's(supra) decision to conclude that the 2002
Regulations were inapplicable to pharmaceutical companies, and that in
absence of requisite jurisdiction, it could not be said that the
pharmaceutical companies had violated any law or regulation. Further, it
held that there was no enabling provision to allow the CBDT to bring
pharmaceutical companies within the fold of the 2002 Regulations, and
even if such an act were to be permitted, it could be only be done so
prospectively:
"Adverting to the contention of the Ld. CIT DR that CBDT is
well empowered to issue such clarification, it is seen that the
CBDT Circular dated 01.08.2012 (supra) in its clarification
has enlarged the scope and applicability of 'Indian Medical
Council Regulation 2002' by making it applicable to the
20 ITA No. 4605/Mum/2014, dated 12.01.2017.
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pharmaceutical companies or allied health care sector
industries. Such an enlargement of scope of MCI regulation
to the pharmaceutical companies by the CBDT is without any
enabling provisions either under the provisions of Income
Tax Law or by any provisions under the Indian Medical
Council Regulations. The CBDT cannot provide casus omissus
to a statute or notification or any regulation which has not
been expressly provided therein. The CBDT can tone down
the rigours of law and ensure a fair enforcement of the
provisions by issuing circulars and by clarifying the statutory
provisions. CBDT circulars act like 'contemporanea expositio'
in interpreting the statutory provisions and to ascertain the
true meaning enunciated at the time when statute was enacted.
However the CBDT in its power cannot create a new
impairment adverse to an assessee or to a class of assessee
without any sanction of law. The circular issued by the CBDT
must confirm to tax laws and for purpose of giving
administrative relief or for clarifying the provisions of law
and cannot impose a burden on the assessee, leave alone
creating a new burden by enlarging the scope of a different
regulation issued under a different act so as to impose any
kind of hardship or liability to the assessee. In any case, it is
trite law that the CBDT circular which creates a burden or
liability or imposes a new kind of imparity, same cannot be
reckoned retrospectively. The beneficial circular may apply
retrospectively but a circular imposing a burden has to be
applied prospectively only. Here in this case the CBDT has
enlarged the scope of 'Indian Medical Council Regulation,
2002' and made it applicable for the pharmaceutical
companies. Therefore, such a CBDT circular cannot be
reckoned to have retrospective effect. The same CBDT circular
had come up for consideration before the co-ordinate Bench
of the ITAT, Mumbai Bench in the case of Syncom
Formulations (I) Ltd. (in ITA Nos. 6429 & 6428/Mum/2012
for A.Ys. 2010-11 and 2011-12, vide order dated 23.12.2015),
wherein Tribunal held that CBDT circular would not be not
be applicable in the A.Ys. 2010-11 and 2011-12 as it was
introduced w.e.f. 1.8.2012."
(emphasis supplied)
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21. PHL Pharma (supra) further discussed the High Court
decisions of Kap Scan and Confederation (supra), holding the even
though they were decided against the assessee, they did not lay down a
blanket ban on pharmaceutical companies claiming tax benefit under
Section 37(1), and made it subject to the satisfaction of the Assessing
Officer on a case-to-case basis. Subsequent decisions by ITATs across
states have placed heavy reliance on PHL Pharma to grant relief to the
assessee pharmaceutical companies.
22. This Court is of the opinion that such a narrow interpretation
of Explanation 1 to Section 37(1) defeats the purpose for which it was
inserted, i.e., to disallow an assessee from claiming a tax benefit for its
participation in an illegal activity. Though the memorandum to the Finance
Bill, 1998 elucidated the ambit of Explanation 1 to include "protection
money, extortion, hafta, bribes, etc.", yet, ipso facto, by no means is
the embargo envisaged restricted to those examples. It is but logical that
when acceptance of freebies is punishable by the MCI (the range of
penalties and sanction extending to ban imposed on the medical
practitioner), pharmaceutical companies cannot be granted the tax benefit
for providing such freebies, and thereby (actively 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 bribegiver. 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
21 (1998) 4 SCC 626.
22 Subs. Section 8, Act 16 of 2018, w.e.f. 26.07.2018.
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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 offence, he enjoys,
by reason of Article 105(2), immunity from prosecution
therefor. Those who have conspired with the Member of
Parliament in the commission of that offence have no such
immunity. They can, therefore, be prosecuted for it.
***
147. Mr Rao submitted that the alleged bribe-givers had
breached Parliament's privilege and been guilty of its contempt
and it should be left to Parliament to deal with them. By the
same sets of acts the alleged bribe-takers and the alleged
bribe-givers committed offences under the criminal law and
breaches of Parliament's privileges and its contempt. From
prosecution for the former, the alleged bribe-takers, Ajit Singh
excluded, enjoy immunity. The alleged bribe-givers do not.
The criminal prosecution against the alleged bribe-givers
must, therefore, go ahead. For breach of Parliament's
privileges and its contempt, Parliament may proceed against
the alleged bribe-takers and the alleged bribe-givers.
***
150. To repeat what we have said earlier, Mr Rao is right,
subject to two caveats, in saying that Parliament has the power
not only to punish its Members for an offence committed by
them but also to punish others who had conspired with them
to have the offence committed : first, the actions that constitute
the offence must also constitute a breach of Parliament's
privilege or its contempt; secondly, the action that Parliament
will take and the punishment it will impose is for the breach
of privilege or contempt. There is no reason to doubt that the
Lok Sabha can take action for breach of privilege or contempt
against the alleged bribe-givers and against the alleged bribetakers, whether or not they were Members of Parliament, but
that is not to say that the courts cannot take cognizance of
the offence of the alleged bribe-givers under the criminal
law.
(emphasis supplied)
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24. Even if Apex's contention were to be accepted - that it did not
indulge in any illegal activity by committing an offence, as there was no
corresponding penal provision in the 2002 Regulations applicable to it -
there is no doubt that its actions fell within the purview of "prohibited
by law" in Explanation 1 to Section 37(1).
25. Furthermore, if the statutory limitations imposed by the 2002
Regulations are kept in mind, Explanation (1) to Section 37(1) of the IT
Act and the insertion of Section 20A of 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.
26. In this regard the decision of this Court in Jamal Uddin Ahmad
v. Abu Saleh Najmuddin & Anr24 is of some relevance. There, the
scope of Section 81 of the Representation of the People Act, 1951 was
examined in the light of powers of the High Court to administer election
petitions by invoking the rule of implied prohibition. The Court observed
that:
"Dealing with "Statutes conferring power; implied conditions,
judicial review", Justice G.P. Singh states in the Principles of
Statutory Interpretation (Eight Edition 2001, at pp.333, 334)
that a power conferred by a statute often contains express
conditions for its exercise and in the absence of or in addition
to the express conditions there are also implied conditions
for exercise of the power. An affirmative statute introductive
of a new law directing a thing to be done in a certain way
mandates, even if there be no negative words, that the thing
shall not be done in any other way. This rule of implied
prohibition is subserved to the basic principle that the Court
must, as far as possible, attach a construction which
effectuates the legislative intent and purpose. Further, the
rule of implied prohibition does not negative the principle
that an express grant of statutory power carries with it by
necessary implication the authority to use all reasonable
23 Inserted vide Medical Council (Amendment) Act, 1964.
24 (2003) 4 SCC 257.
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means to make such grant effective.