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2021 (10) TMI 794 - AT - Income TaxExpenditure on account of freebies to medical professionals - deduction u/s 37(1) - opposed schools of thought - Scope of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002- as amended from time to time, read with section 20A of the Indian Medical Council Act 1956 - whether it can be allowed as a deduction under section 37(1) in the hands of the pharmaceutical companies? HELD THAT - In any case, the coordinate bench decision relied upon by the learned CIT(A) did not take into account another coordinate bench decision in the case of Liva Healthcare 2016 (9) TMI 856 - ITAT MUMBAI and Hon ble HP High Court s judgment in the case of Confederation of Indian Pharmaceutical Industry 2013 (7) TMI 387 - HIMACHAL PRADESH HIGH COURT , which were rendered prior to that date but not taken into account by the coordinate bench. As to what should be precedence value of such a coordinate bench decision, we find guidance from Hon ble AP High Court s full bench decision in the case of CIT Vs B R Constructions 1992 (6) TMI 13 - ANDHRA PRADESH HIGH COURT wherein Their Lordships has observed that a precedent ceases to be a binding precedent (iii) when it is inconsistent with the earlier decisions of the same rank; and (iv) when it is rendered per incuriam . Clearly, therefore, the decisions which disregard earlier binding decisions on the same issue, cease to be a binding judicial precedent , and the coordinate bench decision in assessee s own case thus ceases to be a binding precedent. As the regulations prohibiting the acceptance of freebies by the medical professionals provide, under section 20A of the Indian Medical Council Act 1956 read with rule 6.8 of Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002, as amended from time to time, that such freebies cannot be lawfully accepted by medical professionals, and, therefore, any expenditure incurred for extending these freebies to the medical professionals is for a purpose which is prohibited by law . On these facts, therefore, Explanation to Section 37(1) is clearly attracted. It is an open secret, secret if it is, that all these freebies extended by the pharmaceutical companies to the medical professionals, more often than not, come with strings attached, and that is what makes the expenditure in question for a purpose which is, as discussed earlier, prohibited by law . The plea of the learned counsel that these regulations do not bind pharmaceutical companies, and, therefore, extending these freebies to medical professionals canot be treated as prohibited by law is thus wholly irrelevant in the present context. What is material is that the expenditure in question is incurred for the purposes which are prohibited in law, and that is what disqualifies the expenditure in question from deduction under section 37(1) by virtue of Explanation thereto. The freebies from pharmaceutical companies cannot, under section 20A of the Indian Medical Council Act 1956 read with rule 6.8 of Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002, as amended from time to time, be lawfully accepted by medical professionals and, therefore, an extension of such freebies is for a purpose prohibited by law . The stand of the Assessing Officer cannot, therefore, be faulted. The more we ponder about the rationale of PHL Pharma decision 2017 (1) TMI 771 - ITAT MUMBAI the more convinced we are that this decision calls for reconsideration by a larger bench. In our humble understanding, conclusions arrived in the said decision do not reflect the correct legal position, and the same is the position with respect to a large number of other coordinate bench decisions following the said decision or following the line of reasoning in the said decision- as discussed above. There is, thus, no meeting ground between these two diametrically opposed schools of thought- one followed by PHL Pharma (supra), and the other followed by Liva Healthcare 2016 (9) TMI 856 - ITAT MUMBAI . As a coordinate bench of equal strength, it is not for us to disregard the decisions in the case of PHL Pharma 2017 (1) TMI 771 - ITAT MUMBAI but, with due respect though without the slightest hesitation, we do indeed have our considered reservations on its correctness. Taking a cue from the path so guided by Hon ble Supreme Court in the case of Paras Laminates 1990 (8) TMI 140 - SUPREME COURT we recommend constitution of a bench of three or more Members to consider the question as to whether or not an item of expenditure on account of freebies to medical professionals, which is hit by rule 6.8.1 of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002- as amended from time to time, read with section 20A of the Indian Medical Council Act 1956, can be allowed as a deduction under section 37(1) of the Income Tax Act, 1961 read with Explanation thereto, in the hands of the pharmaceutical companies. Matter referred to larger bench.
Issues Involved:
1. Whether the CIT(A) erred in deleting the disallowance of expenses on account of freebies to doctors. 2. Whether such expenses can be allowed as a deduction under section 37(1) of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Deletion of Disallowance by CIT(A): The primary issue raised by the Assessing Officer (AO) was whether the CIT(A) was correct in deleting the disallowance of ?111,11,70,500 for the assessment year 2011-12 and ?137,62,61,659 for the assessment year 2012-13, aggregating to ?248,74,32,259, on account of freebies to doctors. The AO argued that these expenses, which included corporate gifts, sponsorships, gift cards, medical instruments, and books, were in violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, and therefore should not be allowed as deductions under section 37(1) of the Income Tax Act, 1961. 2. Allowability under Section 37(1): The AO's stance was based on the CBDT circular No. 05/2012 dated 1st August 2012, which clarified that expenses prohibited by law, such as freebies to doctors, are not allowable as business expenses under section 37(1). The AO cited several judicial precedents, including decisions from the Himachal Pradesh High Court and the Punjab & Haryana High Court, to support the disallowance. The AO emphasized that the Medical Council of India regulations prohibit medical practitioners from accepting such freebies, thus making the expenses inadmissible under section 37(1). CIT(A)'s Approach: The CIT(A) granted relief to the assessee by relying on a coordinate bench decision in the assessee's own case, which held that the CBDT circular was applicable only from the assessment year 2013-14 and not for prior years. The CIT(A) concluded that the expenses were incurred wholly and exclusively for business purposes and thus allowed the deductions. Tribunal's Analysis: The Tribunal noted that the CIT(A)'s approach was flawed as it treated the disallowance as solely based on the CBDT circular, ignoring other judicial precedents and the broader legal context. The Tribunal emphasized that the disallowance was not just based on the CBDT circular but also on the interpretation of Explanation to Section 37(1) and the Medical Council regulations, which prohibit such freebies. Judicial Precedents and Legal Interpretation: The Tribunal referred to the Himachal Pradesh High Court's decision in the Confederation of Indian Pharmaceutical Industry case, which upheld the CBDT circular's interpretation of Explanation to Section 37(1). The Tribunal also cited the Supreme Court's stance that CBDT circulars cannot impose a higher burden on taxpayers than the law itself. Therefore, the Tribunal concluded that the disallowance was valid, irrespective of the CBDT circular's applicability date. Conclusion and Recommendation: The Tribunal found that the expenses on freebies to doctors were for purposes prohibited by law and thus not allowable under section 37(1). The Tribunal recommended the constitution of a larger bench to consider the question of whether such expenses can be allowed as deductions, given the conflicting judicial precedents and the significant legal implications. Order: The registry was directed to place the case records for appropriate consideration by the Hon’ble President, recommending the constitution of a special bench to resolve the issue definitively.
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