The Income Tax Appellate Tribunal(ITAT) at Delhi has recently observed in a major denial of relief against assessee, Mankind Pharma Ltd. that, freebies given to doctors are illegal and does not fall under the head “Business Promotion Expenses”, disallowing a claim of Rs.1,06,78,600/-.
The bench comprising Anil Chaturvedi and Challa Nagendra Prasad, heard the appeal against the revenue by the assessee, that no justification was given by the department in disallowing the sales promotion expenses incurred by the assessee, in the form of freebies given to doctors.
The Tribunal considered the nature of promotion expenses to decide whether the addition by the Assessing Officer(AO) was justified. The AO, during the assessment proceedings had noticed that the assessee had made payments to the Doctors by way of gift cards which could be exchanged for cash/merchandise from various locations and the same was debited to “Business Promotion Expenses”.
The AO was of the view that payment of all gratification money by Pharmaceutical Companies to the Doctors is prohibited as per the guidelines issued by Medical Council of India (MCI). It was also noticed by the AO that such expenses were covered under Explanation to Section 37(1) of the Income Tax Act, 1961, making such transactions illegal and any deductions so claimed, disallowable as such expenses shall not be deemed to have been incurred.
The Tribunal identified that, the recent ruling in M/s. Apex Laboratories Pvt. Ltd. vs. DCIT (2022) by the Supreme Court of India was squarely applicable in this matter.
The tribunal, placing reliance on the said case, observed that, “acceptance of freebies by medical practitioners was punishable as per Circular issued by Medical Council of India under MCI Regulations, 2022, gifting of such freebies to medical practitioners would also be prohibited by law and therefore expenditure incurred in distribution of freebies would not be allowed as deduction in view of Explanation – 1 to Section 37(1) of the Income Tax Act” and concurred with the order of the Commissioner of Income Tax (Appeals).
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