M/s Apex Laboratories Pvt. Ltd. vs Deputy Commissioner of Income Tax, Large Tax Payer Unit - II

Court/Forum: SC

Bench: S. Ravindra Bhat, J. and Uday Umesh Lalit, J.

Order Date: 2022-02-22

Outcome: Revenue

Sections: Section 37(1)

Core Ratio

Expenses incurred on activities prohibited by law, such as providing freebies to doctors, are not deductible under Section 37(1) of the Income Tax Act.

Outcome

The Supreme Court dismissed the appeal by M/s Apex Laboratories Pvt. Ltd., holding that expenses incurred on providing freebies to doctors are not deductible under Section 37(1) of the Income Tax Act, as they are prohibited by law.

Favourability

Revenue

Core Issue

The central legal question was whether the expenses incurred by pharmaceutical companies on providing freebies to doctors could be claimed as a business expenditure under Section 37(1) of the Income Tax Act.

Facts of the Case

Apex Laboratories Pvt. Ltd. claimed deductions for expenses incurred on providing freebies to doctors to promote their product 'Zincovit'. The tax authorities disallowed these deductions, citing a CBDT circular and the Medical Council regulations prohibiting such practices.

Arguments by Assessee

Apex argued that the Medical Council regulations applied only to doctors and not to pharmaceutical companies, and thus, the expenses should be deductible. They also contended that the CBDT circular could not be applied retrospectively.

Arguments by Revenue

The Revenue argued that the expenses were prohibited by law as per the Medical Council regulations and the CBDT circular, and thus, could not be allowed as deductions under Section 37(1).

Key Sections & Provisions

Section 37(1) of the Income-tax Act, 1961 - deals with general deductions for business expenditure, with Explanation 1 prohibiting deductions for expenses incurred on activities that are offenses or prohibited by law.

Ratio Decidendi

The court held that the provision of freebies to doctors is prohibited by the Medical Council regulations, and thus, such expenses cannot be claimed as a deduction under Section 37(1) of the Income Tax Act. The court emphasized that allowing such deductions would defeat the purpose of the law and public policy.

Court Reasoning & Analysis

• The court noted that the Medical Council regulations prohibit doctors from accepting freebies, which implies a prohibition on pharmaceutical companies from providing them.
• The CBDT circular clarified that such expenses are inadmissible under Section 37(1) as they are prohibited by law.
• The court emphasized the importance of public policy in interpreting tax statutes, stating that allowing such deductions would undermine the law.
• The court rejected the argument that the CBDT circular could not be applied retrospectively, stating that it was clarificatory in nature.

Key Observations

• The court observed that the provision of freebies to doctors is against public policy and the law.
• The court noted that the statutory regime requires that a thing be done in a certain manner, implying that other forms are impermissible.

Case Laws Cited

• Max Hospital Pitampura v. Medical Council of India
• Commissioner of Income-Tax v. Kap Scan and Diagnostic Centre P. Ltd.
• Confederation of Indian Pharmaceutical Industry (SSI) v. Central Board of Direct Taxes

Related Issues

• Tax treatment of illegal payments
• Interpretation of 'prohibited by law' in tax statutes
• Impact of regulatory compliance on tax deductions

Important Passages

• The court held that allowing such deductions would wholly undermine public policy.
• The court emphasized that the law should not be interpreted in a manner that results in an absurdity contrary to the intentions of the Parliament.

Not Decided / Remanded

No issues were explicitly left open or remanded.

Practical Takeaway

Practitioners should note that expenses incurred on activities prohibited by law, such as providing freebies to doctors, are not deductible under Section 37(1) of the Income Tax Act.

Supporting Judgments

• Maxopp Investment Ltd vs Commissioner of Income Tax, New Delhi (SC) — Section 14A mandates the disallowance of expenditure incurred in relation to exempt income, applying the principle of apportionment.

Contrary Judgments

• Kotak Mahindra Bank Limited vs DCIT (ITAT) — Claims for deductions not made in the original return cannot be entertained unless filed through a revised return.
• Nuvama Wealth Management Limited vs DCIT (ITAT) — ESOP discount represents consideration for services rendered by employees and is therefore deductible as business expenditure.
• DCIT-7(1)(1) vs Goldman Sachs (India) Securities Pvt. Ltd. (ITAT) — Discount on issue of employees stock options is allowable as deduction in computing the income under the head profits and gains of business.
• Sony Ericsson Mobile Communications India Pvt. Ltd. vs Commissioner of Income Tax – III (HC) — AMP expenses can be considered an international transaction if they benefit the foreign AE and require compensation at arm's length price.
• DCIT, Circle 13(1) vs M/s. National Fertilizers Ltd. (ITAT) — Demurrage and wharfage charges are compensatory and not penalties, and accrued interest is not taxable until it is realized.
• M/S. W. T. Suren & Co. Ltd. Vs. The Commissioner of Income Tax. Bombay (SC, 1998) — Payment of gratuity made by the assessee to Rallis India Ltd. was an allowable deduction as it was incurred wholly and exclusively for the purpose of business.