ORDER :

1. Leave granted. The appellant (hereinafter “Apex”) is aggrieved by a judgment of the High Court of Judicature of Madras¹ [Tax Case Appeal No. 723 of 2018, dated 18.03.2019] wherein the Division Bench upheld an order of the Income Tax Appellate Tribunal² [IT ACT No. 1153/Mds/2014, dated 29.01.2018] (hereinafter “ITAT”) which in turn upheld an order of the Commissioner of Income Tax (Appeals)³ [I.T.A. No. 10/13-14/LTU(A), dated 29.01.2014] (hereinafter, “CIT[A]”). The CIT(A) had partly allowed an appeal from an order of the respondent Deputy Commissioner of Income Tax⁴ [G.I. No. PAN AAACA5174G, dated 21.03.2013] 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 circular⁵ [Circular No. 5/2012 (F. No. 225/142/2012-ITA/II)] which clarified that expenses incurred by pharmaceutical and allied health sector industries for distribution of incentives (i.e. “freebies”) to medical practitioners are ineligible 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 Rs. 4,72,91,159/- incurred towards gifting freebies such as hospitality, 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the authorities below was that an amendment ⁶ [No. MCI-211(1)/2009 (Ethics)/5567] to the Medical Council Act, 1956 (now repealed) through the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (hereinafter “2002 Regulations”) published in the Official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 [I.D. Regulation 6.8, Code of Conduct for Doctors in their Relationship with Pharmaceutical and Allied Health Sector Industry]. Acceptance of such freebies could result in a range of sanctions against the medical practitioners, from ‘censure’ for incentives received up to Rs. 5,000/- to removal from the Indian Medical Register or State Medical Register for periods ranging from three months to one year.⁸ [Regulation 6.8.1, inserted by Notification No. MCI-211(1)/2010 (Ethics)/163013, issued on 01.02.2016]. 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.

Contentions of Apex

5. It was argued by the counsel for Apex, Mr. S. Ganesh, Senior Advocate, that the amended 2002 Regulations were not applicable to Apex, i.e. pharmaceutical companies were not bound by them. While medical practitioners were expressly prohibited from accepting freebies, no corresponding prohibition 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 vs. Medical Council of India [W.P. (C) No. 1334/2014 and ILR (2014) 1 Delhi 620, dated 10.01.2014] (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,