Prohibited freebies to medical professionals are disallowable as business expenditure when the recipient cannot lawfully accept them.

Expenditure by a pharmaceutical company on freebies for medical professionals is treated as hit by the prohibition on acceptance of such benefits under medical ethics regulations, so it is not deductible as business expenditure. Gifts, travel, hospitality, gift cards, journals, books, magazines and medical instruments fall within the kinds of benefits doctors are barred from receiving. Because the payment is incurred for a purpose prohibited by law, the Explanation to section 37(1) denies deduction. A CBDT circular cannot override the statutory position, and the contrary coordinate bench view was not treated as binding in light of higher judicial authority and earlier precedent.

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Issues: Whether expenditure on freebies extended by a pharmaceutical company to medical professionals is hit by the prohibition in the medical ethics regulations and, for that reason, is not deductible under section 37(1) of the Income-tax Act, 1961.

Analysis: The expenses in question consisted of gifts, travel facilities, hospitality, cash-equivalent gift cards, journals, books, magazines and medical instruments provided to medical professionals. Medical practitioners are prohibited under section 20A of the Indian Medical Council Act, 1956 read with rule 6.8.1 of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 from accepting such gifts and benefits. Expenditure incurred for extending benefits that cannot lawfully be accepted is expenditure for a purpose prohibited by law, and Explanation to section 37(1) denies deduction for such expenditure. The CBDT circular could not override the true scope of the statutory provision, and the contrary coordinate bench view was treated as not binding in the presence of higher judicial authority and earlier contrary precedent.

Conclusion: The expenditure on freebies to medical professionals is not allowable under section 37(1) because it is incurred for a purpose prohibited by law, and the view favours the Revenue.

Final Conclusion: The matter was referred for consideration by a larger bench, but the legal view recorded was that such freebies attract disallowance under the income-tax provisions.

Ratio Decidendi: Expenditure incurred for a purpose that is prohibited by law is barred from deduction under Explanation to section 37(1), even if the prohibition arises from regulations governing the recipient class rather than the payer directly.

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