Income Tax, Issue Update

Applicability of MCI circular (prohibiting the medical practitioners from taking any gift) to pharmaceutical companies: Consistency of the MCI circular with the circular issued by CBDT on this subject

Case: Medley Pharmaceuticals Ltd vs. Dy. CIT, Mumbai ITAT

Outcome: Partial

Facts

  • The Assessee had claimed a deduction of Rs.5.37 crores as expenses related to doctor’s gifts/ expenses under Section 37 of the Income Tax Act, 1961 during the year under consideration.
  • However, the Assessing Officer disallowed the said expenses under Section 37(1) of the Act as per Medical Council of India regulations (as amended on 14.12.2009) and the CBDT Circular No. 5/2012 dated 01.08.2012.

Key points

  • The expenses incurred wholly and exclusively by a pharmaceutical company in the normal course of its business towards gifts, travel facility, conference expenses or similar freebies to medical practitioners or their professional associations would not be hit by the Explanation 1 to Section 37 of the Act.
  • Further, the Tribunal placed reliance on the decision in the case of Aristo Pharmaceuticals Pvt. ltd. Vs. Assistant Commissioner of Income Tax, wherein it was observed that the scope and ambit of the statutory provisions relating to professional misconduct of registered medical practitioners under the Indian Medical Council Act, 1956 was restricted only to the persons registered as medical practitioners with the State Medical Council and whose name was entered in the Indian Medical Register maintained under Section 21 of the said Act.
  • Further, it was observed that the scheme of the Indian Medical Council Act, 1956 neither deals with nor provides for any conduct of any association/ society and only regulates the conduct of registered medical practitioners and not the pharmaceutical companies or allied health sector industries.
  • The enlargement of the scope of Medical Council of India regulation to the pharmaceutical companies by the CBDT is de hors any enabling provision either under the Income Tax Act or under the Indian Medical Council Regulations. Though the CBDT can tone down the rigors of law in order to ensure a fair enforcement of the provisions by issuing circulars for clarifying the statutory provisions, however, it is divested of its powers to create a new impairment adverse to an Assessee, or to a class of Assesses, without any sanction or authority of law.
  • The CBDT is divested of it powers to enlarge the scope of Medical Council of India regulation by extending the same to pharmaceutical companies without any enabling provision either under the Income tax Act or the Indian Medical Regulations.
  • Therefore, the expenditure incurred on gifts given to doctors would not be hit by the Explanation 1 to Section 37 of the Act.

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