Disallowance of expenditure for Freebies to doctors provided by pharma companies – retrospective; but facts need to be weighed with MCI regulations

[Vivek Jalan]

Explanation 1 to Sec 37(1) of the Income Tax Act declares that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. Explanation 3 to section 37(1) has been inserted with effect from 1/4/22 to clarify that the expression “expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law” under Explanation 1, shall include and shall be deemed to have always included the expenditure incurred by an assessee for any purpose which is an offence under, or which is prohibited by, any law for the time being in force, in India or outside India;

In the decision of the Hon’ble Apex Court in the case of M/S APEX LABORATORIES PVT. LTD. VERSUS DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAX PAYER UNIT - II - 2022 (2) TMI 1114 - SUPREME COURT, it was held that since acceptance of freebies by medical practitioners was punishable as per Circular issued by Medical Council of India under MCI regulations, 2002, gifting of such freebies by - pharmaceutical company to medical practitioners would also be prohibited by law and thus, expenditure incurred in distribution of such freebies would not be allowed as a deduction in terms of Explanation 1 to section 37(1).

Hence, freebies provided to doctors by Pharma Companies, which are disallowed by MCI regulations would be considered to have always been disallowed. However, the MCI regulations need scrutinized and the allowable expenditures need to be so treated. This was held in the case of MEDLEY PHARMACEUTICALS LTD VERSUS DCIT, C-44, MUMBAI - 2023 (5) TMI 1054 - ITAT MUMBAI and the ratio would be applicable for pharma companies who incur such expenses.