Apex Laboratories Pvt. Ltd. v. Deputy Commissioner of Income Tax

Case snapshot

Sections / provisions: 37(1)

Questions before the Court / Tribunal

• S. 37(1) : Business expenditure-Explanation 1-Freebies given to doctors-Prohibited by law-Disallowed as expense-Interpretation-Taxing statutes to be interpreted strictly. [Medical Council Act, 1956, S. 20A , Medical Council (professional Conduct, Etiquette and Ethics) Regulations, 2002, R. 6.8, Contract Act, 1872, S. 23, General Clauses Act, 1897, S.2(38), Indian Penal Code, 1860, S. 40, 43] Honourable Supreme Court held that pharmaceutical companies’ gifting freebies to doctors, etc. is clearly “prohibited by law”, and not allowed to be claimed as a deduction under Section 37(1) of the Act. Doing so would wholly undermine public policy. The well-established principle of interpretation of taxing statutes is that they need to be interpreted strictly and cannot sustain when it results in an absurdity contrary to the intentions of the Parliament. (SLP (Civil) 23207 of 2019 dated February…
• Which factual, statutory and procedural conditions controlled the requested relief?
• How did the forum apply the governing provisions to the evidence and procedural history recorded in this case?

Material facts and procedural background

M/s Apex Laboratories Pvt. Ltd. …Appellant Versus Deputy Commissioner of Income Tax, Large Tax Payer Unit - II …Respondent

O R D E R S. RAVINDRA BHAT, J. 1. Leave granted. The appellant (hereinafter, “Apex”) is aggrieved by a judgment of the High Court of Judicature of Madras1, wherein the Division Bench upheld an order of the Income Tax Appellate Tribunal 2 (hereinafter, “ITAT”), which in turn upheld an order of the Commissioner of Income Tax (Appeals) 3 (hereinafter, “CIT(A)”). The CIT(A) had partly allowed an appeal from an order of the respondent Deputy Commissioner of Income Tax4, which partially allowed amounts claimed by Apex as ‘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 Central Board of Direct Taxes (hereinafter, “CBDT”) issued a circular 5, wh ich clarified that expenses incurred by pharmaceutical and allied health sector industries for distribution of incentives (i.e., “freebies”) to medical practitioners are ineligible

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 AAACA5174G, dated 21.03.2013. 5 Circular No. 5/2012 [F. No. 225/142/2012-ITA.II].

for the benefit of Explanation 1 to Section 37(1), which denies the application of the benefit for any purpose which is an ‘offence’ or ‘prohibited by law’. 3. After the circular was issued , on 22.11.2012, Apex was issued a notice under Section 142(1) of the IT Act , to explain why the expenditure of ₹ 4,72,91,159/- incurred towards gifting freebies such as hosp itality, conference fees, gold coins, LCD TVs, fridges, laptops, etc. to medical practitioners for creating awareness about the health supplement ‘Zincovit’, should not be added back to the total income of Apex. 4. The reason for only a partial allowance by the authorities below was that an amendment6 to the Medical Council Act, 1956 (now repealed) through the Indian Medical Coun cil (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (hereinafter, “ 2002 Regulations”), published in the Official Gazette on 14.12.2009, disallowed medical practitioners from accepting emoluments in the form of inter alia gifts, travel facilities, hospitality, cash or monetary grants.7 Acceptance of such freebies could result in a range of sanctions against the medical practitioners, from ‘censure’ for incentives received up to ₹ 5,000/-, to removal from the Indian Medical Register or State Medical Register for periods ranging from three months to one year.8 Therefore, only the expenses incurred till 14.12.2009 were eligible for the benefit of Section 37(1), and not for the entirety of the Assessment Year 2010-2011, as claimed by Apex.

in the form of any binding norm was imposed on the pharmaceutical companies gifting them. In the absence of any express prohibition by law, Apex could not be denied the benefit of seeking exclusion of the expenditure incurred on supply of such freebies under Section 37(1). 6. Counsel placed reliance on rulings by different High Court to establish that the 2002 Regulations were enforceable only against medical practitioners and not the donors, i.e. , pharmaceutical companies. In Max Hospital Pitampura v. Medical Council of India 9 (hereinafter, “Max Hospital”) the Delhi High Court held that the Medical Council of India (hereinafter, “MCI”) had no jurisdiction to pass any orders against the appellant hospital, and adverse observations made against the hospital by MCI were quashed.

Appellant / petitioner / assessee submissions

The judgment does not separately label this side’s submissions in an independently extractable passage. No contention is inferred; read the full record.

Revenue / respondent submissions

Arguendo, if the CBDT circular had to be brought into effect, it could be done so only ‘prospectively’, and not ‘retrospectively’, i.e., from the date of publication of the CBDT circular on 01.08.2012, and not the date of publication of the 2002 Regulations on 14.12.2009. Reliance was placed on various decisions of this Court to show that beneficial circulars had to be applied retrospectively, however oppressive circulars could only be applied prospectively.15 Contentions of Revenue Authorities 11. Mr. Sanjay Jain, Additional Solicitor General appearing for the respondent revenue authorities, submitted that while the act of pharmaceutical companies gifting freebies to medical practitioners for promotion of their products may not be classified as an ‘offence’ under any statue, it was squarely covered within the scope of Explanation 1 to Section 37(1) by use of the words “prohibited by law”, as it was specifically prohibited by the amended 2002 Regulations .

Court / Tribunal analysis and reasoning

“In our opinion, the High Court has adopted an emotional and moral approach rather than a legal approach. We fully agree with the High Court that the assessee was committing a highly immoral act in illegally manufacturing and selling heroin. However, cases are to be decided by the court on legal principles and not on one's own moral views. Law is different from morality, as the positivist jurists Bentham and Austin pointed out.”

of payments as business expenditure, notwithstanding that such payments are illegal or opposed to public policy or have pernicious consequences to the society as a whole.” *** “If demanding of such commission was bad, paying it was equally bad. Both were privies to a wrong. Therefore, such commission paid to private doctors was opposed to public policy and should be discouraged. The payment of commission by the assessee for referring patients to it cannot by any stretch of imagination be accepted to be legal or as per public policy. Undoubtedly, it is not a fair practice and has to be termed as against the public policy.” *** Further, the High Court referred to Section 23 of the Contract Act, 1872 (hereinafter, “Contract Act”) to hold the consideration or object of the agreement between the assessee and private doctors as unlawful, and the agreement therefore void, as it was opposed to public policy.

then the remedy lies for each individual assessee to f ile appeals under the Income-tax Act but the circular which is totally in line with section 37(1) cannot be said to be illegal. In fact paragraph 4 of the circular quoted hereinabove itself clarifies that the value of the freebies enjoyed by the medical pr actitioner is also taxable as business income or income from other sources depending on the facts of each case. Therefore, if the assessee satisfies the assessing authority that the expenditure is not in violation of the regulations framed by the Medical C ouncil then it may legitimately claim a deduction, but it is for the assessee to satisfy the Assessing Officer that the expense is not in violation of the Medical Council Regulations referred to above”. (emphasis supplied)

It is therefore clear that Explanation 1 contains within its ambit all such activities which are illegal/prohibited by law and/or punishable. 18. Regulation 6.8. of the 2002 Regulations states as follows: “6.8. Code of conduct for doctors in their relationship with pharmaceutical and allied health sector industry. 6.8.1 In dealing with Pharmaceutical and allied health sector industry, a medical practitioner shall follow and adhere to the stipulations given below:— (a) Gifts: A medical practitioner shall not receive any gift from any pharmaceutical or allied health care industry and their sales people or representatives. (b) Travel facilities: A medical practitioner shall not accept any travel Facility inside the country or outside, including rail, road, air, ship, cruise tickets, paid vacation, etc. from any pharmaceutical or allied healthcare industry or their representatives for self and family members for vacati on or for attending conferences, seminars, workshops, CME Programme, etc. as a delegate.] (c) Hospitality: A medical practitioner shall not accept individually any hospitality like hotel accommodation for self and family members under any pretext.

In any case, it is trite law that the CBDT circular which creates a burden or liability or imposes a new kind of imparity, same cannot be reckoned retrospectively. The beneficial circular may apply retrospectively but a circular imposing a burden has to be applied prospectively only . Here in this case the CBDT has enlarged the scope of 'Indian Medical Council Regulation, 2002' and made it applicable for the pharmaceutical companies. Therefore, such a CBDT circular cannot be reckoned to have retrospective effect. The same CBDT circular had come up for consideration before the co-ordinate Bench

If a Member of Parliament has, by his speech or vote in Parliament, committed an offence, he enjoys, by reason of Article 105(2), immunity from prosecution therefor. Those who have conspired with the Member of Parliament in the commission of that offence have no such immunity. They can, therefore, be prosecuted for it. *** 147. Mr Rao submitted that the alleged bribe -givers had breached Parliament's privilege and been guilty of its contempt and it should be left to Parliament to deal with them. By the same sets of acts the alleged bribetakers and the alleged bribe -givers committed offences under the criminal law and breaches of Parliament's privileges and its contempt.

Operative decision and relief

The operative relief must be read from the final paragraphs of the complete packaged judgment.

Ratio and legal principle

The narrow proposition associated with Apex Laboratories Pvt. Ltd. v. Deputy Commissioner of Income Tax concerns s. 37(1) : business expenditure-explanation 1-freebies given to doctors-prohibited by law-disallowed as expense-interpretation-taxing statutes to be interpreted strictly. [medical council act, 1956, s. 20a , medical council (professional conduct, etiquette and ethics) regulations, 2002, r. 6.8, contract act, 1872, s. 23, general clauses act, 1897, s.2(38), indian penal code, 1860, s. 40, 43] honourable supreme court held that pharmaceutical companies’ gifting freebies to doctors, etc. is clearly “prohibited by law”, and not allowed to be claimed as a deduction under section 37(1) of the act. doing so would wholly undermine public policy. the well-established principle of interpretation of taxing statutes is that they need to be interpreted strictly and cannot sustain when it results in an absurdity contrary to the intentions of the parliament. (slp (civil) 23207 of 2019 dated february… The proposition cannot be separated from the judgment’s facts, the governing statutory version, the forum’s jurisdiction, and the exact relief recorded in Civil Appeal No. 1554 of 2022.

For working-paper purposes, the decision should be cited only after matching the material facts and reading the passages under the judgment-grounded record above. The editorial outcome label “Disposed / relief as recorded” is a navigation aid; it does not replace the operative order or explain every issue in a multi-issue case.

Why this judgment matters

This decision is relevant when a file raises the same central question identified in the source headnote: S. 37(1) : Business expenditure-Explanation 1-Freebies given to doctors-Prohibited by law-Disallowed as expense-Interpretation-Taxing statutes to be interpreted strictly. [Medical Council Act, 1956, S. 20A , Medical Council (professional Conduct, Etiquette and Ethics) Regulations, 2002, R. 6.8, Contract Act, 1872, S. 23, General Clauses Act, 1897, S.2(38), Indian Penal Code, 1860, S. 40, 43] Honourable Supreme Court held that pharmaceutical companies’ gifting freebies to doctors, etc. is clearly “prohibited by law”, and not allowed to be claimed as a deduction under Section 37(1) of the Act. Doing so would wholly undermine public policy. The well-established principle of interpretation of taxing statutes is that they need to be interpreted strictly and cannot sustain when it results in an absurdity contrary to the intentions of the Parliament. (SLP (Civil) 23207 of 2019 dated February… Its practical value lies in the way the Supreme Court of India connected the governing provisions—37(1)—to the procedural posture and evidence before it.

The authority level is Supreme Court. That affects persuasive or binding weight, but authority level alone is never enough. Territorial jurisdiction, statutory period, the identity of the challenged order, and later appellate treatment must all be checked before the case is used in advice, a submission, or litigation strategy.

Practitioner action points

• Begin with the complete judgment and mark the paragraphs supporting the exact proposition relied upon.
• Match the statutory version of 37(1) and the decision date 2022-02-22; do not assume the current text is identical.
• Compare the notice, assessment, appeal or other procedural sequence with the chronology recorded in this case.
• Verify the stated later-history status and any review, appeal, SLP, curative or rectification proceedings before citation.
• Record why the client’s evidence is materially similar, and also record any fact capable of distinguishing the result.

Does this case match your facts?

Detailed reliance and distinction analysis

Identity check. Confirm that the cited cause title is Apex Laboratories Pvt. Ltd. v. Deputy Commissioner of Income Tax, the proceeding is Civil Appeal No. 1554 of 2022, and the decision is dated 2022-02-22. These fields are taken from the judgment record and should appear exactly in the citation note.

Bench check. The judgment identifies the coram as Hon'ble Mr. Justice Uday Umesh Lalit; Hon'ble Mr. Justice S. Ravindra Bhat. A later order by another bench, a larger bench, or a higher forum may alter the weight or interpretation of the proposition.

Provision check. The source associates the dispute with 37(1). The practitioner should place the historical statutory text next to the current text and identify every amendment, proviso, explanation, rule or notification that could change the analysis.

Fact check. The source issue is not a free-standing abstract rule. It arises from the concrete record summarized above. A reliable application note should list the common facts, the different facts, and whether each difference affects jurisdiction, admissibility, limitation, burden, computation or relief.

Remedy check. The recorded result is Disposed / relief as recorded. Where a matter is remanded, set aside, partly allowed, or disposed with directions, the exact operative language is more important than a binary winner/loser label.

History check. The current closure state is REVIEW_CURATIVE_DOCKET_CHECK_PENDING. If that state is pending, the page does not assert that no later case exists. It means the check remains open and must be completed at the point of professional reliance.

Section / provision impact

• 37(1) — apply the exact version considered in the judgment.

Case network

• State of Karnataka & Anr etc v. State of Meghalaya & Anr etc — Supreme Court of India · Disposed / relief as recorded
• Rena Sahakari Sakhar Karkhana Ltd v. Pr CIT-2 Aurangabad — ITAT Pune · Disposed / relief as recorded
• Murthy & Ors v. Saradambal & Ors — Supreme Court of India · Disposed / relief as recorded
• The CIT, Chennai v. Mohammed Meeran Shahul Hameed — Supreme Court of India · Disposed / relief as recorded

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