Keeping doctors in good humour increases tax liability
THE purpose of incorporating an Explanation in section 37 of the Income Tax Act had been explained by the Central Board of Direct Taxes in Circular No. 772, dated December 23, 1998 thus -
"20. Disallowance of illegal expenses.
20.1 Section 37 of the Income-tax Act is amended to provide that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purposes of business or profession and no deduction or allowance shall be made in respect of such expenditure. This amendment will result in disallowance of the claims made by certain assessees in respect of payments on account of protection money, extortion, hafta, bribes, etc., as business expenditure. It is well decided that unlawful expenditure is not an allowable deduction in computation of income.
20.2 This amendment will take effect retrospectively from 1st April, 1962, and will, accordingly, apply in relation to the assessment year 1962-63 and subsequent years."
In this context, the case before the ITAT was whether the expenses incurred of Rs. 76,54,986/- for sponsoring the Doctors overseas Tour were allowable as deduction u/s 37 of the Act.
The ITAT, Mumbai held -
++ these expenses are clearly hit by regulation 6.4.1 of the Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 which existed during the previous year 2008-09 which created bar on the physicians on receiving gifts , gratuities, commissions or bonus in consideration of or return for the referring , recommending or procuring of any patients for medical, surgical or other treatment.
++ The expenditure has been admittedly incurred by the assessee with an objective to keep doctors in good humor to seek favours from them by way of recommending the pharmaceutical products dealt within by the assessee to the patients so that sales and profitability of the assessee company increases more and more which clearly reflect that these are illegal gratification against public policy being unethical prohibited by law.
++ Invoice which pertained to air tickets and hotel arrangements of Doctors for Istanbul Trip (indicated) that spouses of the Doctors also accompanied the Doctors to overseas trip to Istanbul and these expenses claimed by the assessee as revenue/business expenditure included the costs incurred for travel overseas to Istanbul of spouses of Doctors also, and also the arrangements included cruise travels to island, gala dinners, cocktails, gala entertainment etc. which clearly reflect that these overseas trips are merely to entertain doctors abroad and lure doctors to solicit business for the assessee by unethical , illegal and prohibited means which is an offence under the regulation 6.4.1 … and hence is clearly hit by explanation to Section 37 of the Act and is not allowable as revenue/business expenditure in the hands of the assessee.
As for free samples worth Rs.1,26,75,000/- distributed to the physicians, the ITAT viewed -
++ If the free samples of pharmaceutical products are distributed to physicians / doctors at the initial stage of introduction to test the efficacy of the products, the same are incurred wholly and exclusively for the purposes of the business of the assessee, while if the free samples of pharmaceutical products are distributed to doctors/physicians after the products are introduced in the market and its uses are established, giving of free samples will be a measure of sales promotion which will be hit by regulation 6.4.1…and the expenses cannot be allowed as deduction…
See
Also see -
Call girls hired by employees - Should company reimburse? Eligible as tax deduction?
When you say it is the world's oldest profession and when you are not able to curb it by laws, why don't you legalise it?