Income Tax--Current Issues

Practice Update

V.K. Subramani

ALLOWANCE OF EXPENDITURE INCURRED BY PHARMACEUTICAL COMPANIES WHICH BENEFIT DOCTORS

Explanation 1 to section 37 says 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 thus is not eligible for deduction while computing the income under the head 'Profits and gains of business or profession'. This Explanation was inserted by the Finance (No.2) Act, 1998 but retrospectively applicable from 1-4-1962.

The Indian Medical Council in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 on 10-12-2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries.

The CBDT issued Circular No. 5/2012, dated 1-8-2012 to state that the claim of any expense incurred in providing above mentioned or similar freebees in violation of the provisions of 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. This disallowance shall be made in the hands of such pharmaceutical or allied health sector industries or other assessee which has provided aforesaid freebees and claimed it as a deductible expense. It also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional association is also taxable as business income or income from other sources as the case may be, depending on the facts of each case.

Prima facie, one may think that the expenditure incurred by way of freebees to medical practitioner is not allowable deduction. But Mumbai Tribunal in the case of M/s. Solvay Pharma India Ltd. v. CIT (ITA No. 3585/Mum/2016 for A.Y. 2011-12, Order, dated 11-1-2018) : 2018 TaxPub(DT) 0234 (Mum-Trib) has observed that the circular of CBDT has enlarged the scope and applicability of Indian Medical Council Regulation, 2002 by making it applicable to pharmaceutical companies or allied health care sectors. It observed that CBDT in its powers cannot create a new impairment adverse to the assessee or to a class of assessee without the sanction of law. Readers may refer to the decision in this regard.