2018 (1) TMI 1671 - AT - Income Tax

Disallowance of Medical Practitioner Gifts Expenses upheld under Income Tax Act - Section 37(1)

M/s. Apex Laboratories (P) Ltd., Versus The Dy. Commissioner of- Income Tax, Large Taxpayer Unit-II, Chennai and vice-versa

The Tribunal upheld the CIT(A)'s decision to disallow expenses on gifts/freebies to medical practitioners from 14.12.2009 onwards, in accordance with the ... Addition u/s 37(1) - gifts/freebies to Doctors and Medical Practitioners - expenses claimed by the assessee under the head ‘Sales Promotion Expenses’ and under the head ‘Other Selling Expenses’ - disallowance on the ground that the same were with regard to providing gifts/freebies to Doctors and Medical Practitioners and the same was against the Medical Council Act, 1956 in view of the amendment made to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 - whether the Medical Council Act, 1956 apply to the assessee? - scope of amendment - HELD THAT:- The receiving of the gifts/freebies by Professionals is against public policy as also against the law in so far as the amendment by the Medical Council Act, 1956 to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, once receiving of such gifts have been held to be unethical obviously the corollary to this would also be unethical, being giving of such gifts or doing such acts to induce such Doctors and Medical Professionals to violate the Medical Council Act, 1956. Consequently, we are of the view that the expenditure incurred by the assessee which has resulted in the violation of the amendment to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 under the Medical Council Act, 1956, is not an allowable expenditure and hit by the explanation to Sec.37(1) of the Act. Coming to the issue as to whether the same is operative prospectively or retrospectively or as to whether the said amendment is clarificatory in nature. A perusal of the said amendment notification dated 10.12.2009 under Clause-1(ii) specifies that it shall come into force from the date of their publication in the Official Gazette. The said amendment came to be published in the Official Gazette on 14.12.2009. Consequently, the said amendment cannot be treated as operating retrospectively nor can it be treated as clarificatory in nature, clearly the said amendment is prospective in nature and operative from 14.12.2009. CIT(A) has granted the assessee the benefit of the expenditure till 14.12.2009 and has restricted the disallowance by invoking the explanation to Sec.37(1) of the Act for the period from 14.12.2009. This being so, we find no error in the findings of the Ld.CIT(A) which calls for any interference. Issues Involved:1. Disallowance of expenses under Section 37(1) of the Income Tax Act.2. Applicability of the Medical Council Act, 1956 to the assessee.3. Prospective or retrospective operation of the amendment to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002.Issue-wise Detailed Analysis:1. Disallowance of Expenses under Section 37(1) of the Income Tax Act:The primary issue in this case was whether the expenses incurred by the assessee on providing gifts/freebies to Doctors and Medical Practitioners could be disallowed under Section 37(1) of the Income Tax Act. The Assessing Officer (AO) disallowed Rs. 2,31,93,985/- under 'Sales Promotion Expenses' and Rs. 2,40,97,174/- under 'Other Selling Expenses' on the grounds that these were prohibited by the Medical Council Act, 1956, following the amendment to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. The Commissioner of Income Tax (Appeals) [CIT(A)] partially upheld this disallowance, allowing expenses incurred before 14.12.2009, the date the amendment came into effect. The Tribunal confirmed the CIT(A)'s decision, emphasizing that expenses incurred in violation of the Medical Council Act are not allowable as they are prohibited by law.2. Applicability of the Medical Council Act, 1956 to the Assessee:The assessee argued that the Medical Council Act, 1956, did not apply to it as it was not engaged in the manufacturing of pharmaceutical products but healthcare supplements. However, the CIT(A) and the Tribunal rejected this argument, stating that the prohibition extends to all allied products, including healthcare supplements. The Tribunal referenced its own earlier decision and the Himachal Pradesh High Court's decision in Confederation of Indian Pharmaceutical Industry (SSI) v. CBDT, which supported the view that expenses incurred for providing freebies to medical practitioners are disallowed under Section 37(1) of the Income Tax Act.3. Prospective or Retrospective Operation of the Amendment:The Tribunal examined whether the amendment to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, was prospective or retrospective. The amendment, notified on 10.12.2009 and published in the Official Gazette on 14.12.2009, was deemed prospective. Thus, expenses incurred before 14.12.2009 were not disallowed, while those incurred after this date were disallowed. The Tribunal found no error in the CIT(A)'s decision to allow expenses incurred before 14.12.2009 and disallow those incurred after, confirming the prospective nature of the amendment.Conclusion:The Tribunal dismissed both the assessee's and the Revenue's appeals, upholding the CIT(A)'s decision. The expenses on gifts/freebies to medical practitioners were disallowed from 14.12.2009 onwards, in line with the prospective application of the amendment to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. The decision reinforces the principle that expenses violating public policy and law, such as those prohibited by the Medical Council Act, are not allowable under Section 37(1) of the Income Tax Act.