M/S Apex Laboratories Pvt. Ltd v. Deputy Commissioner Of Income Tax, Large Tax Payer Unit - Ii

126 SUPREME COURT REPORTS [2022] 2 S.C.R. M/S APEX LABORATORIES PVT. LTD. DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT- II (Civil Appeal No. 1554) FEBRUARY 22, 2022 [UDAY UMESH LALIT AND S. RAVINDRA BHAT, JJ.] Income Tax Act, 1961: s.37(1), Explanation 1 –Pharmaceutical companies gifting freebies to doctors etc. is clearlyCprohibited by law and not allowed to be claimed as a deductionunder s.37(1) of the Act – An amendment to the Medical CouncilAct, 1956 (now repealed) through the Indian Medical Council(Professional Conduct, Etiquette and Ethics) Regulations, 2002published in the Official Gazette on 14.12.2009, disallowed medicalDpractitioners from accepting emoluments in the form of inter aliagifts, travel facilities, hospitality, cash or monetary grants – On01.08.2012, CBDT also issued a circular, which clarified thatexpenses incurred by pharmaceutical and allied health sectorindustries for distribution of incentives (i.e., “freebies”) to medicalpractitioners are ineligible for the benefit of Explanation 1 to s.37(1),Ewhich denies the application of the benefit for any purpose whichis an ‘offence’ or ‘prohibited by law’ – When acceptance of freebiesis punishable by the MCI (the range of penalties and sanctionextending to ban imposed on the medical practitioner),pharmaceutical companies cannot be granted the tax benefit forFproviding such freebies, and thereby (actively and with fullknowledge) enabling the commission of the act which attracts suchopprobrium – Doctors and pharmacists being complementary andsupplementary to each other in the medical profession, acomprehensive view must be adopted to regulate their conduct inview of the contemporary statutory regimes and regulations –GTherefore, denial of the tax benefit cannot be construed as penalizingthe assessee pharmaceutical company – Only its participation inwhat is plainly an action prohibited by law, precludes the assesseefrom claiming it as a deductible expenditure – Medical practitionershave a quasi-fiduciary relationship with their patients – Therefore,Hit is a matter of great public importance and concern, when it is demonstrated that a doctor’s prescription can be manipulated, anddriven by the motive to avail the freebies offered to them bypharmaceutical companies, ranging from gifts such as gold coins,fridges and LCD TVs to funding international trips for vacationsor to attend medical conferences – These freebies are technicallynot ‘free’ – The cost of supplying such freebies is usually factoredinto the drug, driving prices up, thus creating a perpetual publiclyinjurious cycle – The 2002 Regulations, applicable to all medicalpractitioners (including doctors in private practice), was introducedw.e.f. 14.12.2009 – Thus, pharmaceutical companies’ gifting freebiesto doctors, etc. is clearly “prohibited by law”, and not allowed tobe claimed as a deduction under s.37(1) – Doing so would whollyundermine public policy. Interpretation of statutes: Interpretation of taxing statutes –Taxing statutes need to be interpreted strictly – Income Tax Act,1961. Jamal Uddin Ahmad v. Abu Saleh Najmuddin & Anr.(2003) 4 SCC 257 : [2003] 2 SCR 473 - relied on. 126 127 2022. 129 Dy. CIT 8(2) Mumbai v PHL Pharma P. Ltd. 20 ITA No.4605/Mum/2014, dated 12.01.2017; Max HospitalPitampura v. Medical Council of India Income TaxAppeal No. 485/2008 decided on 18.07.2017; MaxHospital Pitampura v. Medical Council of India W.P.(C) No. 1334/2014 / ILR (2014) 1 Delhi 620, dated10.01.2014; Dr. Anil Gupta v. Addl. Commissioner ofIncome Tax, Income Tax Appeal No. 485/2008, decidedon 18.07.2017; Berger Paints Ltd. v Commissioner ofIncome Tax (2004) 12 SCC 42 : [2004] 2 SCR 502;South India Bank Ltd. v Commissioner of Income Tax,Civil Appeal No. 9606 of 2011 / 2021 SCC Online SC692, dated 09.09.2021; T.A. Quereshi v. Commissionerof Income Tax, Bhopal (2007) 2 SCC 759 : [ 2006] 10Suppl. SCR 311; Commissioner of Income Tax v. M/sKhemchand Motilal Jain 2011 (4) MPLJ 691; Directorof Income-tax v. S.R.M.B Dairy Farming (P.) Ltd., (2018)13 SCC 239 : [2017] 11 SCR 1118; Kanwarjit SinghKakkar v. State of Punjab (2011) 13 SCC 158 : [2011] 128SUPREME COURT REPORTS A6 SCR 895; P.V. Narasimha Rao v. State (CBI/SPE)(1998) 4 SCC 626 : [1998] 2 SCR 870; BiharilalJaiswal v. CIT (1996) 1 SCC 443 : [1995] 5 Suppl. SCR285; Maddi Venkataraman & Co. (P) Ltd. v. CIT (1998)2 SCC 95 : [1997] 6 Suppl. SCR 67; CIT v. Pt.Vishwanath Sharma I.T.R. No. 27 of 1999, AllahabadBHC dated 21.02.2008 (31); C.W.S. (India) Ltd. v. CIT1994 Supp (2) SCC 296; Bihari Lal Jaiswal & Ors. v.Commissioner of Income Tax & Ors. (1995) Supp (5)SCR 285; Jagir Singh v. Ranbir Singh & Ors. [1979] 2SCR 282; G.T. Girish v. Y. Subba Raju (D) by L. Rs &COrs. 2022 SCC Online SC 60; Commissioner of Income-Tax v. Kap Scan and Diagnostic Centre P. Ltd. (2012)344 ITR 476 (P&H HC); Confederation of IndianPharmaceutical Industry (SSI) v. Central Board of DirectTaxes (2013) 353 ITR 388 (HP HC) – referred to. Case Law Reference From the Judgment and Order dated 18.03.2019 of the High Courtof Judicature at Madras in Tax Case Appeal No.723 of 2018. S. Ganesh, Sr. Adv., T. Sundar Ramanathan, M. P. Devanath,Vivek Pandey, Ms. Harshapreetha Sridharan, Ishaan Chakrabarti, Advs.for the Appellant. Sanjay Jain, ASG, Ms. Rashmi Malhotra, Saurabh Mishra, DeepakGoel, Sughosh Subramanyam, Advs. for the Respondent. The Order of the Court was passed by S. RAVINDRA BHAT, J. 1. Leave granted. The appellant (hereinafter, “Apex”) is aggrievedby a judgment of the High Court of Judicature of Madras[1], wherein theDivision Bench upheld an order of the Income Tax Appellate Tribunal[2](hereinafter, “ITAT”), which in turn upheld an order of the Commissionerof Income Tax (Appeals)[3] (hereinafter, “CIT(A)”).The CIT(A) had partlyallowed an appeal from an order of the respondent Deputy Commissionerof Income Tax[4], which partially allowed amounts claimedby Apexas‘business expenditure’ under Section 37(1) of the Income Tax Act, 1961(hereinafter, “IT Act”). 2. The facts in brief are as follows: On 01.08.2012, the CentralBoard of Direct Taxes (hereinafter, “CBDT”) issued a circular[5], whichclarified that expenses incurred by pharmaceutical and allied health sectorindustries for distribution of incentives (i.e., “freebies”) to medicalpractitioners are ineligible for the benefit of Explanation 1 to Section37(1), which denies the application of the benefit for any purpose whichis an ‘offence’ or ‘prohibited by law’. 3. After the circular was issued, on 22.11.2012, Apex was issueda notice under Section 142(1) of the IT Act, to explain why the expenditureof 4,72,91,159/- incurred towards gifting freebies such as hospitality,conference fees, gold coins, LCD TVs, fridges, laptops, etc. to medicalpractitioners for creating awareness about the health supplement‘Zincovit’, should not be added back to the total income of Apex. 130 131 4. The reason for only a partial allowance by the authoritiesbelow was that an amendment[6] to the Medical Council Act, 1956 (now 1 Tax Case Appeal No. 723 of 2018, dated 18.03.2019. 2 IT ACT No. 1153/Mds/2014, dated 29.01.2018. 3 I.TA. No. 10/13-14/LTU(A), dated 29.01.2014. 4 G.I. No./PAN , dated 21.03.2013. 5 Circular No. 5/2012 [F. No. 225/142/2012-ITA.II]. 6 No. MCI-211(1)/2009(Ethics)/5567. Arepealed) through the Indian Medical Council (Professional Conduct,Etiquette and Ethics) Regulations, 2002 (hereinafter, “2002Regulations”), published in the Official Gazette on 14.12.2009,disallowed medical practitioners from accepting emoluments in the formof inter alia gifts, travel facilities, hospitality, cash or monetary grants.[7]Acceptance of such freebies could result in a range of sanctions againstBthe medical practitioners, from ‘censure’ for incentives received up to 5,000/-, to removal from the Indian Medical Register or State MedicalRegister for periods ranging from three months to one year.[8] Therefore,only the expenses incurred till 14.12.2009 were eligible for the benefitof Section 37(1), and not for the entirety of the Assessment Year 2010-C2011, as claimed by Apex. Contentions of Apex 5. It was argued by the counsel for Apex, Mr. S. Ganesh, SeniorAdvocate, that the amended 2002 Regulations were not applicable toApex, i.e., pharmaceutical companies were not bound by them. WhileDmedical practitioners were expressly prohibited from accepting freebies,no corresponding prohibition in the form of any binding norm was imposedon the pharmaceutical companies gifting them. In the absence of anyexpress prohibition by law, Apex could not be denied the benefit ofseeking exclusion of the expenditure incurred on supply of such freebiesEunder Section 37(1). 6. Counsel placed reliance on rulings by different High Court toestablish that the 2002 Regulations were enforceable only againstmedical practitioners and not the donors, i.e., pharmaceuticalcompanies. In Max Hospital Pitampura v. Medical Council of India[9]F(hereinafter, “Max Hospital”) the Delhi High Court held that the MedicalCouncil of India (hereinafter, “MCI”) had no jurisdiction to pass anyorders against the appellant hospital, and adverse observations madeagainst the hospital by MCI were quashed. Equally, in Dr. Anil Gupta v.Addl. Commissioner of Income Tax[10], a Division Bench of the RajasthanHigh Court gave benefit of Section 37(1) to the appellant as ExplanationG 7 Id., Regulation 6.8, Code of Conduct for Doctors in their Relationship withPharmaceutical and Allied Health Sector Industry. 8 Regulation 6.8.1, inserted by Notification No. MCI-211(1)/2010(Ethics)/163013,issued on 01.02.2016. 9 W.P. (C) No. 1334/2014 / ILR (2014) 1 Delhi 620, dated 10.01.2014. H10 Income Tax Appeal No. 485/2008, decided on 18.07.2017. M/S APEX LABORATORIES PVT. LTD. v. DEPUTY COMMISSIONER OFINCOME TAX, LARGE TAX PAYER UNIT- II [S. RAVINDRA BHAT, J. ] 1 could not be raised by the respondent for the first time at an appellatestage, observing: “Even otherwise in income tax proceedings the medical ethicswill not be taken into consideration. At the most even if it is aprofessional misconduct, it is to be dealt with by MedicalCouncil of India. The income tax authority cannot decide themedical ethics when the original authority has partly allowedthe expenses.” The Counsel urged that as these decisions were not challengedby the revenue authorities, and thereby accepted by them, the presentmatter was not open for reconsideration.[11] 2K>K>K 133 7. The Counsel further submitted that it was not open to therevenue to deny a tax benefit on the ‘nature’ of expenses incurred. ThisCourt, in T.A. Quereshi v. Commissioner of Income Tax, Bhopal[12](hereinafter, “T.A. Quereshi”) allowed the appellant to deduct the costof heroin seized as a business loss, holding that: “In our opinion, the High Court has adopted an emotionaland moral approach rather than a legal approach. We fullyagree with the High Court that the assessee was committing ahighly immoral act in illegally manufacturing and sellingheroin. However, cases are to be decided by the court on legalprinciples and not on one’s own moral views. Law is differentfrom morality, as the positivist jurists Bentham and Austinpointed out.” 8. It was argued that similarly, in Commissioner of Income Taxv. M/s Khemchand Motilal Jain[13], a Division Bench of the MadhyaPradesh High Court allowed ransom money paid to the kidnappers of anemployee of the respondent company on a business trip as businessexpenditure under Section 37(1), holding that: “The aforesaid section provides that kidnapping a person forransom is an offence and any person doing so or compelling 11 See Berger Paints Ltd. v Commissioner of Income Tax,(2004)12 SCC 42 and SouthIndia Bank Ltd. v Commissioner of Income Tax, Civil Appeal No. 9606 of 2011 / 2021SCCOnline SC 692, dated 09.09.2021.12 (2007) 2 SCC 759.13 2011 (4) MPLJ 691. to pay is liable for the punishment as provided in the Section,but nowhere it is provided that to save a life of the person if aransom is paid, it will amount to an offence. No provision isbrought to our notice that payment of ransom is prohibitedby any law. In absence