2022 (2) TMI 1114 - SC - Income Tax

Business expenditure under Section 37(1) - pharmaceutical companies gifting freebies to doctors, etc . - what is prohibited by law ? -agreement between the pharmaceutical companies and the medical practitioners in gifting freebies for boosting sales of prescription drugs - HELD THAT - It is a settled principle of law that no court will lend its aid to a party that roots its cause of action in an immoral or illegal act (ex dolo malo non oritur action) meaning that none should be allowed to profit from any wrongdoing coupled with the fact that statutory regimes should be coherent and not self-defeating. 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. The incentives (or freebies ) given by Apex, to the doctors, had a direct result of exposing the recipients to the odium of sanctions, leading to a ban on their practice of medicine. Those sanctions are mandated by law, as they are embodied in the code of conduct and ethics, which are normative, and have legally binding effect. The conceded participation of the assessee- i.e., the provider or donor- was plainly prohibited, as far as their receipt by the medical practitioners was concerned. That medical practitioners were forbidden from accepting such gifts, or freebies was no less a prohibition on the part of their giver, or donor, i.e., Apex. In view of the foregoing discussion, the impugned judgment cannot be faulted with. The appeal is dismissed without order on costs

Issues Involved:
1. Applicability of Explanation 1 to Section 37(1) of the Income Tax Act, 1961.
2. Interpretation of the Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002.
3. Scope and validity of the CBDT Circular dated 01.08.2012.
4. Public policy considerations in tax deductions for business expenditures.
5. Jurisdiction and applicability of regulations to pharmaceutical companies.

Detailed Analysis:

1. Applicability of Explanation 1 to Section 37(1) of the Income Tax Act, 1961:
The primary issue was whether the expenditure incurred by the appellant (Apex) on gifting freebies to medical practitioners could be allowed as a business expenditure under Section 37(1) of the Income Tax Act. Explanation 1 to Section 37(1) disallows any expenditure incurred for purposes which are an "offence" or "prohibited by law." The Court examined the definition of 'offence' and 'illegal' under various statutes and concluded that Explanation 1 includes all activities that are illegal or prohibited by law and/or punishable.

2. Interpretation of the Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002:
The 2002 Regulations, particularly Regulation 6.8, prohibit medical practitioners from accepting any gifts, travel facilities, hospitality, or cash grants from pharmaceutical companies. The Court noted that these regulations are binding on medical practitioners and accepting such freebies is an offence punishable by various sanctions. Therefore, the expenditure incurred by Apex on such freebies falls within the ambit of "prohibited by law."

3. Scope and validity of the CBDT Circular dated 01.08.2012:
The CBDT Circular clarified that expenses incurred by pharmaceutical companies on freebies to medical practitioners are inadmissible under Section 37(1) as they are prohibited by the 2002 Regulations. The Court upheld the validity of the CBDT Circular, stating that it was clarificatory in nature and effective from the date of implementation of Regulation 6.8 of the 2002 Regulations, i.e., from 14.12.2009. The Court rejected the argument that the circular enlarged the scope of the 2002 Regulations or that it could only be applied prospectively.

4. Public policy considerations in tax deductions for business expenditures:
The Court emphasized that allowing tax deductions for expenses incurred on activities prohibited by law would be against public policy. The Court cited previous judgments to support the view that no court should aid a party that roots its cause of action in an immoral or illegal act. The Court also highlighted the detrimental impact of such freebies on public health and the trust placed by patients in their doctors, which could be compromised by such practices.

5. Jurisdiction and applicability of regulations to pharmaceutical companies:
The Court rejected the narrow interpretation that the 2002 Regulations only apply to medical practitioners and not to pharmaceutical companies. The Court held that pharmaceutical companies cannot claim tax benefits for expenses incurred in providing freebies that are prohibited for medical practitioners to accept. The Court noted that the statutory regime implies that if something is prohibited for one party, it is equally prohibited for the other party involved in the transaction.

Conclusion:
The Supreme Court dismissed the appeal, upholding the judgment of the High Court and the orders of the Income Tax Appellate Tribunal and the Commissioner of Income Tax (Appeals). The Court concluded that the expenditure incurred by Apex on gifting freebies to medical practitioners was prohibited by law and could not be claimed as a deductible business expenditure under Section 37(1) of the Income Tax Act. The Court emphasized the importance of maintaining public policy and the integrity of the medical profession.

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