Expenses for free samples to doctors violating Medical Council Regulations are not deductible under Section 37(1) of Income-tax Act

Confederation of Indian Pharmaceutical Industry (SSI) Versus Central Board of Direct Taxes and Union of India

Confederation of Indian Pharmaceutical Industry (SSI) Versus Central Board of Direct Taxes and Union of India - [2013] 353 ITR 388

ISSUES:

Whether Circular No. 5 of 2012 issued by the Central Board of Direct Taxes, which disallows deduction of expenses incurred in violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, is legally valid.Whether expenses incurred by pharmaceutical or allied health sector industries providing gifts, travel facilities, hospitality, cash or monetary grants to medical practitioners, prohibited under the Medical Council Regulations, are deductible under section 37(1) of the Income-tax Act.Whether the value of freebies enjoyed by medical practitioners or their professional associations is taxable as business income or income from other sources.

RULINGS / HOLDINGS:

The Court held that the Circular is "totally in line with section 37(1)" of the Income-tax Act and is not illegal, affirming that expenses incurred for purposes "which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession."Expenses incurred by pharmaceutical or allied health sector industries in providing prohibited freebies are inadmissible as deductions under section 37(1) since such expenses violate the Indian Medical Council Regulations and are therefore "prohibited by law."The value of freebies enjoyed by medical practitioners or professional associations is taxable as business income or income from other sources, depending on the facts of each case, and Assessing Officers should examine and take appropriate action accordingly.

RATIONALE:

The Court applied section 37(1) of the Income-tax Act, which allows deduction of revenue expenditure "wholly and exclusively for the purposes of the business or profession," but excludes any expenditure "incurred for any purpose which is an offence or which is prohibited by law" as clarified by the Explanation to the section.The Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, as amended, prohibit medical practitioners from accepting gifts or benefits from pharmaceutical and allied health sector industries, thereby rendering such expenses prohibited by law.The Court emphasized that the Circular merely reiterates the statutory provision and the Medical Council Regulations, and does not exceed the legislative mandate, rejecting the argument that the Circular goes beyond the statute.The Court noted that if an assessee can satisfy the Assessing Officer that the expenditure is not in violation of the Medical Council Regulations, the deduction may be legitimately claimed, preserving procedural safeguards under the Income-tax Act.