The Chennai bench of the Income Tax Appellate Tribunal (ITAT) has held that freebies to medical practitioners are prohibited by law and deduction under section 37(1) of the Income Tax Act,1961 is not allowable.
Fourrts (India) Labs Pvt. Ltd., the assessee company is engaged in the business of manufacturing of harmless medicines, and filed its return of income declaring a total income of Rs. 9,35,97,686/-. The assessment has been completed under section 143(3) of the Income-tax Act, 1961 (“the Act”) on 27.12.2016.
The AO determined the total income of Rs. 13,46,47,790/- by making various additions including additions towards sales promotion expenses under section. 37(1) of the Act, towards freebies paid to Doctors amounting to Rs. 21,08,795/-, disallowance of deduction claimed under section 35(1) & (2) of the Act amounting to Rs. 75,69,617/-, disallowance of excess depreciation in addition to fixed assets amounting to Rs. 3,82,489/- and also the AO has recomputed book profit under section 115JB of the Act, by making additions towards provision for gratuity and leave encashment amounting to Rs. 2,32,57,147/-.
The AO has disallowed sale promotion expenses like freebies distributed to Doctors and other medical professionals on the ground that said expenditure is not deductible under Section 37(1) of the Act.
It was observed that the Supreme Court in the case of Apex Laboratories Pvt Ltd vs DCIT (2002) has held that since the acceptance of freebies by medical practitioners was punishable as per the circular issued by Medical Counsel of India under MCI Regulations, 2002, gifting of such freebies by assessee Pharma Companies to medical practitioners would also be prohibited by law and thus, expenditure incurred for such freebies would not be allowed as deduction in terms of section 37(1) of the Act.
While rejecting the appeal, A Coram comprising of Shri Mahavir Singh, Vice President and Shri G Manjunatha, Accountant Member upheld the order of CIT(A). Further on the issue where the AO has disallowed R&D expenditure incurred by the assessee under section 35(1) of the Income Tax Act on the ground that the R&D facility was approved only from the period 26.12.2014 to 31.03.2015 which is not covered in the impugned assessment year.
The Tribunal held that the assessee has admitted the mistake and accepted the disallowance of expenses. The bench upheld the additions made by the AO towards the disallowance of deduction claimed u/s. 35(1) & (2) of the Act towards R&D expenditure amounting to Rs.76,69,617/-.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
