2013 (7) TMI 387 - HC - Income Tax

Deduction u/s 37(1) - Distributing free articles / samples to doctors - Held that - The claim of any expense incurred in providing the freebees in violation of the provisions of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, shall be inadmissible under section 37(1) of the Income-tax Act being an expense prohibited by the law - Explanation to section 37(1) makes it clear that any expenditure incurred by an assessee for any purpose which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession - the sum and substance of the circular is also the same - paragraph 4 of the circular itself clarifies that the value of the freebies enjoyed by the medical practitioner is also taxable as business income or income from other sources- 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 appeal decided against assesse.

Summary

Issues:
1. Validity of Circular No. 5 of 2012 issued by the Central Board of Direct Taxes.
2. Interpretation of Section 37(1) of the Income-tax Act in relation to the Circular.
3. Compliance of medical practitioners with the Indian Medical Council regulations regarding gifts from pharmaceutical industries.

Analysis:
1. The petitioner sought to quash Circular No. 5 of 2012, which prohibited medical practitioners from accepting gifts from pharmaceutical industries. The Circular aligned with the Indian Medical Council regulations, aiming to prevent unethical practices in the medical field. The court noted the importance of such regulations in safeguarding patient interests and public welfare. The Circular clarified that expenses on prohibited items would be inadmissible under Section 37(1) of the Income-tax Act, emphasizing that any expenditure against the law would not be considered for business deductions.

2. Section 37(1) of the Income-tax Act allows for business expenses to be deducted if incurred wholly and exclusively for business purposes. The Explanation to this section explicitly states that expenses for unlawful purposes are not deductible. The petitioner argued that the Circular exceeded the scope of the section, but the court disagreed, highlighting that the Circular's essence aligned with the statutory provision. The court emphasized that if an assessee can prove compliance with the Medical Council regulations, deductions may be claimed, subject to satisfying the Assessing Officer.

3. The court rejected the petitioner's claim, affirming the legality and alignment of Circular No. 5 of 2012 with Section 37(1) of the Income-tax Act. It emphasized that medical practitioners must adhere to the regulations prohibiting acceptance of gifts from pharmaceutical industries to ensure ethical practices. The judgment clarified that if expenses are not in violation of the Medical Council regulations, deductions can be claimed by satisfying the Assessing Officer. Overall, the court upheld the Circular's validity and its role in promoting ethical conduct in the medical profession.