M/s Apex Laboratories Pvt. Ltd. vs Deputy Commissioner of Income Tax, Large Tax Payer Unit- II

Court

Supreme Court of India

Date

22 February 2022

Case No.

Civil Appeal No. 1554

Result

Dismissed

Bench

Uday Umesh Lalit, S. Ravindra Bhat

Citation

[2022] 2 S.C.R. 126 : 2022 INSC 216

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not allowed to be claimed as a deduction under s.37(1) of the Act – An amendment to the Medical Council Act, 1956 (now repealed) through the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 published in the Official Gazette on 14.12.2009, disallowed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 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.

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 Madras 1, wherein the Division Bench upheld an order of the Income Tax Appellate Tribunal 2 (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 Inc

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