TaxTMI 
TaxTMI 
2022 (2) TMI 1114
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....der of the Commissioner of Income Tax (Appeals) I.TA. No. 10/13-14/LTU(A), dated 29.01.2014 (hereinafter, "CIT(A)"). The CIT(A) had partly allowed an appeal from an order of the respondent Deputy Commissioner of Income Tax G.I. No./PAN AAACA5174G, dated 21.03.2013, which partially allowed amounts claimed by Apex as '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 circular Circular No. 5/2012 [F. No. 225/142/2012-ITA.II], 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 Rs. 4,72,91,159/- incurred towards gifting freebies such as hospitality, conference fees, gold coins, LCD TVs, fridges, ....
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....tion 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 Tax Income Tax Appeal No. 485/2008, decided on 18.07.2017, a Division Bench of the Rajasthan High Court gave benefit of Section 37(1) to the appellant as Explanation 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. 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 7. The Counsel further submitted that it was....
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....t 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, 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 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. 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 enabl....
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....ough to cover those instances not specifically enumerated as well. See regulation 8 of the 2002 Regulations 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., (2012) 344 ITR 476 (P&H HC) 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 ....
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....the Income-tax 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 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 Rs. 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. An examination of the relevant provisions is first necessary. Section 37 o....
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....tives. (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 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....
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....ations 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. ITA No. 4605/Mum/2014, dated 12.01.2017 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 'I....
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....(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 knowledg....
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....s 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 bribe-takers, 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) 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 S....
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....al power to ensure payment of price. In short, conferment of a power implies authority to do everything which could be fairly and reasonably regarded as incidental or consequential to the power conferred. *** Herbert Broom states in the preface to his celebrated work on Legal Maxims --"In the Legal Science, perhaps more frequently than in any other, reference must be made to first principles." The fundamentals or the first principles of law often articulated as the maxims are manifestly founded in reason, public convenience and necessity. Modern trend of introducing subtleties and distinctions, both in legal reasoning and in the application of legal principles, formerly unknown, have rendered an accurate acquaintance with the first principles more necessary rather than diminishing the values of simple fundamental rules. The fundamental rules are the basis of the law; may be either directly applied, or qualified or limited, according to the exigencies of the particular case and the novelty of the circumstances which present themselves. In Dhannalal vs. Kalawatibai and Ors. (2002) 6 SCC 16 this court has held that: "When the statute does not provide the pat....
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....ng a code of ethics in the Indian Medical Council Rules introduced in December 2009 forbidding doctors from accepting any gift, hospitality, trips to foreign and domestic destinations etc from healthcare industry, there is no let-up in this evil practice and the pharma companies continue to sponsor foreign trips of many doctors and shower with high value gifts like air conditioners, cars, music systems, gold chains etc. to obliging prescribers who then prescribe costlier drugs as quid pro quo. Ultimately all these expenses get added up to the cost of drugs. The Committee's attention was drawn to a news item in Times of India dated July 1, 2010 by Reema Nagarajan giving specific instances of violations of MCI code. The Committee calls upon the Government to take strict and speedy action on such violations. Since MCI has no jurisdiction over drug companies, the Government should take parallel action through DCGI and the Income Tax Department to penalize those companies that violate MCI rules by cancelling drug manufacturing licences and/or disallowing expenses on unethical activities." (emphasis supplied) Interestingly, a similar conclusion was arrived at by the US Department of H....
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....ies $1.8 billion. See Appendix Table A for these drugs, and figure 2 below for an example. In terms of beneficiary cost-sharing, we find similar results as for the overall calculation. Average per beneficiary spending is significantly higher for these brands than for the substitutable generics. (See Appendix Table A, also.) Brand drug cost-sharing averaged $30.69, compared to $22.41 for their generic equivalents. For 17 of the top 20 drugs, the ratio of brand to comparable generic out-of-pocket spending ranges from 117% (Namenda) to 1,476% (Lamictal) indicating significant per-drug savings are available for beneficiaries. In three cases (Abilify, Lovenox, and Tricor), beneficiary out-of-pocket costs are marginally higher for the generic than the brand drug. We believe this is due to the interaction of total drug costs and plan coverage in the coverage gap for generics (42% in 2016), meaning patients paid 58% coinsurance for generics that year. This compares to 25% plan coverage and a 50% statutory manufacturer discount for brand drugs in 2016." The report noticed inter alia, that an empirical study conducted in respect of 20 odd (out of the 600 drugs which were the subject matte....
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....Himachal Pradesh High Court clearly shows that the basic intention of the decision was 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." (emphasis supplied) 30. Thus, one arm of the law cannot be utilised to defeat the other arm of law - doing so would be opposed to public policy and bring the law into ridicule. Biharilal Jaiswal v. CIT, (1996) 1 SCC 443 In Maddi Venkataraman & Co. (P) Ltd. v. CIT (1998) 2 SCC 95, a fine imposed on the assessee under the Foreign Exchange Regulation Act, 1947 was sought to be deducted as a business expenditure. This Court held: "Moreover, it will be against public policy to allow the benefit of deduction under one statute, of any expenditure incurred in violation of the p....
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.... 37(1). At the time, there was no statutory provision prohibiting doctors engaged in private practice from accepting such commission. Hence, the High Court held that while the Assessing Officer had correctly allowed such deduction for private doctors, the same could not be allowed for Government doctors: "In the present case, payment of commission to Government Doctors cannot be placed on the same pedestal. A distinction has already been made by the authorities while allowing deduction to the assessee in respect to commission which the assessee has paid to private doctors since in their case, payment of commission cannot be said to be an offence under any statute but in respect to Government doctors such payment could not have been allowed as it is an offence under the Statutes as stated above." *** "We are, therefore, clearly of the opinion that payment as commission to Government doctors for obtaining a favour therefrom by prescribing medicines in which the assessee was dealing cannot be said to be a "business expenditure" and no deduction can be allowed thereof under the Act." (emphasis supplied) The 2002 Regulations, applicable to all medi....
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.... & Ors (1995) Supp (5) SCR 285, the issue of what is "prohibited by law" was considered by this Court, in the context of interpretation of a condition in a statutory license (for vending liquor) which prohibited transfer of the license by way of sub-letting or entering into a partnership agreement. While dealing with the recognition of such a partnership under the IT Act, this Court held that allowing the same would attract the very mischief sought to be avoided: "This object will be defeated if the licencee is permitted to bring in strangers into the business, which would mean that instead of the licencee carrying on the business, it would be carried on by others - a situation not conducive to effective implementation of the excise law and consequently deleterious to public interest. It is for this very reason that transfer or sub-letting of licence is uniformly prohibited by several State Excise enactments. It, therefore, follows that any agreement whereunder the licence is transferred, sub-let or a partnership is entered into with respect to the privilege/business under the said licence, contrary to the prohibition contained in the relevant excise enactment, is an agree....
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....s, in allowing the agreement to fructify, even at the end of ten-year period of non-alienation, be a case of an agreement, which completely defeats the law for the reasons already mentioned. 78. Going by the recital in the agreement entered into between the Plaintiff and the first Defendant, possession is handed over by the first Defendant to the Plaintiff. The original Possession Certificate is also said to be handed over to the Plaintiff. The agreement, even according to the Plaintiff, contemplated that within three months of conveyance of the site in favour of the first Defendant, the first Defendant was to convey her rights in the site to the Plaintiff. It is quite clear that the parties contemplated a state of affairs which is completely inconsistent with and in clear collision with the mandate of the law. On its term, it stands out as an affront to the mandate of the law. 79. The illegality goes to the root of the matter. It is quite clear that the Plaintiff must rely upon the illegal transaction and indeed relied upon the same in filing the suit for specific performance. The illegality is not trivial or venial. The illegality cannot be skirted nor got aroun....