M/s Apex Laboratories Pvt. Ltd vs Deputy Commissioner of Income Tax, Large Tax Payer Unit - II

M/s Apex Laboratories Pvt. Ltd vs Deputy Commissioner of Income Tax, Large Tax Payer Unit - II

M/s Apex Laboratories Pvt. Ltd. …Appellant
Deputy Commissioner of Income Tax,
Large Tax Payer Unit - II …Respondent
1. Leave granted. The appellant (hereinafter, “Apex”) is aggrieved by a
judgment of the High Court of Judicature of Madras1
, wherein the Division Bench
upheld an order of the Income Tax Appellate Tribunal2
(hereinafter, “ITAT”),
which in turn upheld an order of the Commissioner of Income Tax (Appeals)3
(hereinafter, “CIT(A)”). The CIT(A) had partly allowed an appeal from an order
of the respondent Deputy Commissioner of Income Tax4
, 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
, which clarified that
expenses incurred by pharmaceutical and allied health sector industries for
distribution of incentives (i.e., “freebies”) to medical practitioners are ineligible
1 Tax Case Appeal No. 723 of 2018, dated 18.03.2019.
IT ACT No. 1153/Mds/2014, dated 29.01.2018.
I.TA. No. 10/13-14/LTU(A), dated 29.01.2014.
4 G.I. No./PAN AAACA5174G, dated 21.03.2013.
5 Circular No. 5/2012 [F. No. 225/142/2012-ITA.II].
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 ₹
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 amendment6
to the Medical Council Act, 1956 (now repealed) through the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 Acceptance of such freebies could result in a range of sanctions
against the medical practitioners, from ‘censure’ for incentives received up to ₹
5,000/-, to removal from the Indian Medical Register or State Medical Register
for periods ranging from three months to one year.8 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
6 No. MCI-211(1)/2009(Ethics)/5567.
Id., Regulation 6.8, Code of Conduct for Doctors in their Relationship with Pharmaceutical and Allied Health
Sector Industry.
8 Regulation 6.8.1, inserted by Notification No. MCI-211(1)/2010(Ethics)/163013, issued on 01.02.2016.
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 v.
Medical Council of India9
(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, and adverse observations made
against the hospital by MCI were quashed. Equally, in Dr. Anil Gupta v. Addl.
Commissioner of Income Tax10
, a Division Bench of the Rajasthan High Court
gave benefit of Section 37(1) to the appellant as Explanation 1 could not be raised
by the respondent for the first time at an appellate stage, observing:
“Even otherwise in income tax proceedings the medical ethics will not be
taken into consideration. At the most even if it is a professional misconduct,
it is to be dealt with by Medical Council of India. The income tax authority
cannot decide the medical ethics when the original authority has partly
allowed the expenses.”
The Counsel urged that as these decisions were not challenged by the revenue
authorities, and thereby accepted by them, the present matter was not open for
7. The Counsel further submitted that it was not open to the revenue to deny
a tax benefit on the ‘nature’ of expenses incurred. This Court, in T.A. Quereshi v.
Commissioner of Income Tax, Bhopal12 (hereinafter, “T.A. Quereshi”) allowed
the appellant to deduct the cost of heroin seized as a business loss, holding that:
9 W.P. (C) No. 1334/2014 / ILR (2014) 1 Delhi 620, dated 10.01.2014.
10 Income Tax Appeal No. 485/2008, decided on 18.07.2017.
11 See Berger Paints Ltd. v Commissioner of Income Tax, (2004) 12 SCC 42 and South India Bank Ltd. v
Commissioner of Income Tax, Civil Appeal No. 9606 of 2011 / 2021 SCCOnline SC 692, dated 09.09.2021.
12 (2007) 2 SCC 759.
“In our opinion, the High Court has adopted an emotional and moral
approach rather than a legal approach. We fully agree with the High Court
that the assessee was committing a highly immoral act in illegally
manufacturing and selling heroin. However, cases are to be decided by the
court on legal principles and not on one's own moral views. Law is different
from morality, as the positivist jurists Bentham and Austin pointed out.”
8. It was argued that similarly, in Commissioner of Income Tax v. M/s
Khemchand Motilal Jain13
, a Division Bench of the Madhya Pradesh High Court
allowed ransom money paid to the kidnappers of an employee of the respondent
company on a business trip as business expenditure under Section 37(1), holding
“The aforesaid section provides that kidnapping a person for ransom is an
offence and any person doing so or compelling to pay is liable for the
punishment as provided in the Section, but nowhere it is provided that to
save a life of the person if a ransom is paid, it will amount to an offence. No
provision is brought to our notice that payment of ransom is prohibited by
any law. In absence of it, the Explanation of sub-section (1), section 37 will
not be applicable in the present case.”
“Sukhnandan Jain remained in custody for a period of nearabout 20 days.
The police were also informed and after waiting 20 days for the police
action. If the respondents to save his life paid the aforesaid amount, then
the aforesaid amount cannot be treated as an action, which prohibited
under the law. No provision could be brought to our notice that payment of
ransom is an offence. In absence of which, the contention of the petitioner
that it is prohibited under Explanation of section 37(1) of the Income Tax
Act has no substance. The entire tour of Sukhnandan Jain was for purchase
of Tendu leaves of quality and for this purpose, he was on business tour and
during his business tour, he was kidnapped and for his release the aforesaid
amount was paid.”
 (emphasis supplied)
9. Counsel brought this Court’s attention to the Memorandum Explaining the
Provisions of the Finance (No. 2) Bill, 1998 which stated that the introduction of
Explanation 1 to Section 37(1) would disallow tax payers from claiming
“protection money, extortion, hafta, bribes, etc.” as business expenditures,14 from
13 2011 (4) MPLJ 691.
14 Memorandum Explaining the Provisions of the Finance (No. 2) Bill, 1998, Section 15. Later adopted by CBDT
Circular No. 772 ([1999] 235 ITR (St.) 35, 53), dated 23.12.1998.
which it could be inferred that the intention of the Parliament was to only bring
into the ambit of Explanation 1 ‘illegal’ activities which were deigned as
‘offences’ under relevant statutes. The IT Act not being a social reform statute,
needed to be interpreted strictly, and not in a wide manner so as to include in its
scope an act by a pharmaceutical company not recognized as ‘illegal’ by any
statute – doing so would be against the canons of public law.
10. Finally, Counsel submitted that the CBDT circular dated 01.08.2012
enlarged the scope of the 2002 Regulations, and made it operable beyond medical
practitioners, i.e., to pharmaceutical companies and allied health sector industries,
which, in the absence of any enabling provision, was outside its dominion.
Arguendo, if the CBDT circular had to be brought into effect, it could be done so
only ‘prospectively’, and not ‘retrospectively’, i.e., from the date of publication
of the CBDT circular on 01.08.2012, and not the date of publication of the 2002
Regulations on 14.12.2009. Reliance was placed on various decisions of this
Court to show that beneficial circulars had to be applied retrospectively, however
oppressive circulars could only be applied prospectively.15
Contentions of Revenue Authorities
11. Mr. Sanjay Jain, Additional Solicitor General appearing for the respondent
revenue authorities, submitted that while the act of pharmaceutical companies
gifting freebies to medical practitioners for promotion of their products may not
be classified as an ‘offence’ under any statue, it was squarely covered within the
scope of Explanation 1 to Section 37(1) by use of the words “prohibited by law”,
as it was specifically prohibited by the amended 2002 Regulations. While Apex
could not be ‘punished’, it should not be allowed to benefit by claiming a tax
exemption on the freebies distributed.
15 See for e.g., Director of Income-tax v. S.R.M.B Dairy Farming (P.) Ltd., (2018) 13 SCC 239.
12. Further, the ASG submitted that Parliament’s intention to disincentivize
the practice of receiving extravagant freebies in exchange for prescribing
expensive branded medication over its equally effective generic counterparts,
thereby burdening patients with unnecessary costs, was apparent not only from
the amended 2002 Regulations, but also the Prevention of Corruption Act, 1988
(hereinafter, “PC Act”). A government doctor receiving any illegal gratification
amounting to malpractice or any other offence was liable to be charged under PC
Act and the Indian Penal Code, 1860 (hereinafter, “IPC”).
13. In the present instance, the medical practitioners were provided expensive
gifts such as hospitality, conference fees, gold coins, LCD TVs, fridges, laptops,
etc. by Apex to promote its nutritional health supplement ‘Zincovit’. It was
argued that receiving these, clearly - in letter and spirit, constituted professional
misconduct on part of the medical practitioner. The scope of the 2002 Regulations
was not limited to a finite list of instances of professional misconduct, but broad
enough to cover those instances not specifically enumerated as well.
17 The
menace of prescribing expensive branded medication as a quid pro quo
arrangement had a direct bearing on public policy, which was implicit in the 2002
Regulations itself.
14. To elucidate the same, reliance was placed on two High Court decisions.
In Commissioner of Income-Tax v. Kap Scan and Diagnostic Centre P. Ltd.,
18 a
Division Bench of the Punjab and Haryana High Court disallowed the benefit of
the exemption for commission provided to doctors engaged in private practice for
referring their patients to the assessee’s diagnostic centre, holding that:
“It, thus, emerges that an assessee would not be entitled to deduction of
payments made in contravention of law. Similarly, payments which are
opposed to public policy being in the nature of unlawful consideration
cannot equally be recognized. It cannot be held that businessmen are
entitled to conduct their business even contrary to law and claim deductions
16 Kanwarjit Singh Kakkar v. State of Punjab, (2011) 13 SCC 158.
17 See regulation 8 of the 2002 Regulations.
18 (2012) 344 ITR 476 (P&H HC).
of payments as business expenditure, notwithstanding that such payments
are illegal or opposed to public policy or have pernicious consequences to
the society as a whole.”
“If demanding of such commission was bad, paying it was equally bad. Both
were privies to a wrong. Therefore, such commission paid to private doctors
was opposed to public policy and should be discouraged. The payment of
commission by the assessee for referring patients to it cannot by any stretch of
imagination be accepted to be legal or as per public policy. Undoubtedly, it is
not a fair practice and has to be termed as against the public policy.”
Further, the High Court referred to Section 23 of the Contract Act, 1872
(hereinafter, “Contract Act”) to hold the consideration or object of the agreement
between the assessee and private doctors as unlawful, and the agreement therefore
void, as it was opposed to public policy.
15. A Division Bench of the Himachal Pradesh High Court decided along
similar lines in Confederation of Indian Pharmaceutical Industry (SSI) v. Central
Board of Direct Taxes19( hereinafter, “Confederation”), holding:
“This regulation is a very salutary regulation which is in the interest of the
patients and the public. This court is not oblivious to the increasing
complaints that the medical practitioners do not prescribe generic
medicines and prescribe branded medicines only in lieu of the gifts and
other freebies granted to them by some particular pharmaceutical
industries. Once this has been prohibited by the Medical Council under the
powers vested in it, section 37(1) of the Income-tax Act comes into play”
The High Court also upheld the legality of the CBDT circular dated 01.08.2012,
stating that it was for the assessee to establish to the Assessing Officer that the
expenditure incurred was not in violation of 2002 Regulations:
“Shri Vishal Mohan, advocate, on behalf of the petitioner, contends that the
circular goes beyond the section itself. We are not in agreement with this
submission. The Explanation to section 37(1) makes it clear that any
expenditure incurred by an assessee for any purpose which is prohibited by
law shall not be deemed to have been incurred for the purpose of business
or profession. The sum and substance of the circular is also the same. In
case the assessing authorities are not properly understanding the circular
19 (2013) 353 ITR 388 (HP HC).
then the remedy lies for each individual assessee to file appeals under the
Income-tax Act but the circular which is totally in line with section 37(1)
cannot be said to be illegal. In fact paragraph 4 of the circular quoted
hereinabove itself clarifies that the value of the freebies enjoyed by the
medical practitioner is also taxable as business income or income from
other sources depending on the facts of each case. Therefore, if the assessee
satisfies the assessing authority that the expenditure is not in violation of
the regulations framed by the Medical Council then it may legitimately
claim a deduction, but it is for the assessee to satisfy the Assessing Officer
that the expense is not in violation of the Medical Council Regulations
referred to above”.
 (emphasis supplied)
16. Lastly, the ASG submitted that had the Assessing Officer allowed Apex to
claim tax benefit, the authorities would have been deprived of revenue in the form
of tax amount leviable on ₹ 4,72,91,159/-, which was a crucial omission. Thus,
on a holistic reading of the statutes and regulations, Apex could not be allowed
to claim deduction under Section 37(1).
Analysis and Conclusions
17. An examination of the relevant provisions is first necessary. Section 37 of
the IT Act states as follows:
Section 37. General.—(1) Any expenditure (not being expenditure of the
nature described in Sections 30 to 36 and not being in the nature of capital
expenditure or personal expenses of the assessee), laid out or expended
wholly and exclusively for the purposes of the business or profession shall
be allowed in computing the income chargeable under the head “Profits
and gains of business or profession”.
[Explanation 1].—For the removal of doubts, it is hereby declared 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 purpose of business or profession and no deduction or allowance
shall be made in respect of such expenditure.]
 (emphasis supplied)
Section 37 is a residuary provision. Any business or professional expenditure
which does not ordinarily fall under Sections 30-36, and which are not in the
nature of capital expenditure or personal expenses, can claim the benefit of this
exemption. But the same is not absolute. Explanation 1, which was inserted in
1998 with retrospective effect from 01.04.1962, restricts the application of such
exemption for “any purpose which is an offence or which is prohibited by law”.
The IT Act does not provide a definition for these terms. Section 2(38) of the
General Clauses Act, 1897 defines ‘offence’ as “any act or omission made
punishable by any law for the time being in force”. Under the IPC, Section 40
defines it as “a thing punishable by this Code”, read with Section 43 which
defines ‘illegal’ as being applicable to “everything which is an offence or which
is prohibited by law, or which furnishes ground for a civil action”. It is therefore
clear that Explanation 1 contains within its ambit all such activities which are
illegal/prohibited by law and/or punishable.
18. Regulation 6.8. of the 2002 Regulations states as follows:
“6.8. Code of conduct for doctors in their relationship with pharmaceutical
and allied health sector industry.
6.8.1 In dealing with Pharmaceutical and allied health sector industry, a
medical practitioner shall follow and adhere to the stipulations given
(a) Gifts: A medical practitioner shall not receive any gift from any
pharmaceutical or allied health care industry and their sales people or
(b) Travel facilities: A medical practitioner shall not accept any travel Facility
inside the country or outside, including rail, road, air, ship, cruise tickets,
paid vacation, etc. from any pharmaceutical or allied healthcare industry
or their representatives for self and family members for vacation or for
attending conferences, seminars, workshops, CME Programme, etc. as a
(c) Hospitality: A medical practitioner shall not accept individually any
hospitality like hotel accommodation for self and family members under any
(d) Cash or monetary grants: A medical practitioner shall not receive any
cash or monetary grants from any pharmaceutical and allied healthcare
industry for individual purpose in individual capacity under any pretext.
Funding for medical research, study etc. can only be received through
approved institutions by modalities laid down by law / rules / guidelines
adopted by such approved institutions, in a transparent manner. It shall
always be fully disclosed.”
The regulation further lays down corresponding action or sanction which can be
taken against, or imposed upon, the medical practitioner for violation of each
stipulation, based on the monetary value of the same. Thus, acceptance of
freebies given by pharmaceutical companies is clearly an offence on part of the
medical practitioner, punishable with varying consequences.
19. The CBDT circular dated 01.08.2012 is set out below:
1. It has been brought to the notice of the Board that some pharmaceutical
and allied health sector Industries are providing freebees (freebies) to
medical practitioners and their professional associations in violation of
the regulations issued by Medical Council of India (the 'Council') which is
a regulatory body constituted under the Medical Council Act, 1956.
2. The council in exercise of its statutory powers amended the Indian Medical
Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002
(the regulations) on 10-12-2009 imposing a prohibition on the medical
practitioner and their professional associations from taking any Gift,
Travel facility, Hospitality, Cash or monetary grant from the
pharmaceutical and allied health sector Industries.
3. Section 37(1) of Income Tax Act provides for deduction of any revenue
expenditure (other than those failing under sections 30 to 36) from the
business Income if such expense is laid out/expended wholly or exclusively
for the purpose of business or profession. However, the explanation
appended to this sub-section denies claim of any such expense, if the same
has been incurred for a purpose which is either an offence or prohibited
by law.
 Thus, the claim of any expense incurred in providing above mentioned or
similar freebees in violation of the provisions of Indian Medical Council
(Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be
inadmissible under section 37(1) of the Income Tax Act being an expense
prohibited by the law. This disallowance shall be made in the hands of such
pharmaceutical or allied health sector Industries or other assessee which
has provided aforesaid freebees and claimed it as a deductable expense in
its accounts against income.
4. It is also clarified that the sum equivalent to value of freebees enjoyed by
the aforesaid medical practitioner or professional associations is also
taxable as business income or income from other sources as the case may
be depending on the facts of each case. The Assessing Officers of such
medical practitioner or professional associations should examine the same
and take an appropriate action.
This may be brought to the notice of all the officers of the charge for necessary
 (emphasis supplied)
The CBDT circular being clarificatory in nature, was in effect from the date of
implementation of Regulation 6.8 of the 2002 Regulations, i.e., from 14.12.2009.
20. In Dy. CIT 8(2) Mumbai v PHL Pharma P. Ltd.20 the ITAT reiterated Max
Hospital’s (supra) decision to conclude that the 2002 Regulations were
inapplicable to pharmaceutical companies, and that in absence of requisite
jurisdiction, it could not be said that the pharmaceutical companies had violated
any law or regulation. Further, it held that there was no enabling provision to
allow the CBDT to bring pharmaceutical companies within the fold of the 2002
Regulations, and even if such an act were to be permitted, it could be only be
done so prospectively:
“Adverting to the contention of the Ld. CIT DR that CBDT is well
empowered to issue such clarification, it is seen that the CBDT Circular
dated 01.08.2012 (supra) in its clarification has enlarged the scope and
applicability of 'Indian Medical Council Regulation 2002' by making it
applicable to the pharmaceutical companies or allied health care sector
industries. Such an enlargement of scope of MCI regulation to the
pharmaceutical companies by the CBDT is without any enabling provisions
either under the provisions of Income Tax Law or by any provisions under
the Indian Medical Council Regulations. The CBDT cannot provide casus
omissus to a statute or notification or any regulation which has not been
expressly provided therein. The CBDT can tone down the rigours of law
and ensure a fair enforcement of the provisions by issuing circulars and by
clarifying the statutory provisions. CBDT circulars act like
'contemporanea expositio' in interpreting the statutory provisions and to
ascertain the true meaning enunciated at the time when statute was enacted.
However the CBDT in its power cannot create a new impairment adverse
to an assessee or to a class of assessee without any sanction of law. The
circular issued by the CBDT must confirm to tax laws and for purpose of
giving administrative relief or for clarifying the provisions of law and
cannot impose a burden on the assessee, leave alone creating a new burden
by enlarging the scope of a different regulation issued under a different act
so as to impose any kind of hardship or liability to the assessee. In any case,
it is trite law that the CBDT circular which creates a burden or liability or
imposes a new kind of imparity, same cannot be reckoned retrospectively.
The beneficial circular may apply retrospectively but a circular imposing a
burden has to be applied prospectively only. Here in this case the CBDT
has enlarged the scope of 'Indian Medical Council Regulation, 2002' and
made it applicable for the pharmaceutical companies. Therefore, such a
CBDT circular cannot be reckoned to have retrospective effect. The same
CBDT circular had come up for consideration before the co-ordinate Bench
20 ITA No. 4605/Mum/2014, dated 12.01.2017.
of the ITAT, Mumbai Bench in the case of Syncom Formulations (I) Ltd. (in
ITA Nos. 6429 & 6428/Mum/2012 for A.Ys. 2010-11 and 2011-12, vide
order dated 23.12.2015), wherein Tribunal held that CBDT circular would
not be not be applicable in the A.Ys. 2010-11 and 2011-12 as it was
introduced w.e.f. 1.8.2012.”
 (emphasis supplied)
21. PHL Pharma (supra) further discussed the High Court decisions of Kap
Scan and Confederation (supra), holding the even though they were decided
against the assessee, they did not lay down a blanket ban on pharmaceutical
companies claiming tax benefit under Section 37(1), and made it subject to the
satisfaction of the Assessing Officer on a case-to-case basis. Subsequent
decisions by ITATs across states have placed heavy reliance on PHL Pharma to
grant relief to the assessee pharmaceutical companies.
22. This Court is of the opinion that such a narrow interpretation of
Explanation 1 to Section 37(1) defeats the purpose for which it was inserted, i.e.,
to disallow an assessee from claiming a tax benefit for its participation in an
illegal activity. Though the memorandum to the Finance Bill, 1998 elucidated the
ambit of Explanation 1 to include “protection money, extortion, hafta, bribes,
etc.”, yet, ipso facto, by no means is the embargo envisaged restricted to those
examples. It is but logical that when acceptance of freebies is punishable by the
MCI (the range of penalties and sanction extending to ban imposed on the medical
practitioner), pharmaceutical companies cannot be granted the tax benefit for
providing such freebies, and thereby (actively and with full knowledge) enabling
the commission of the act which attracts such opprobrium.
23. The illogicality and completely misconceived nature of such an
interpretation was dealt with in a similar interpretation of the provisions of PC
Act, by a Constitution Bench of this Court in P.V. Narasimha Rao v. State
(CBI/SPE)21. Prior to the 2018 amendment22, the PC Act only punished the bribe21 (1998) 4 SCC 626.
22 Subs. Section 8, Act 16 of 2018, w.e.f. 26.07.2018.
taker who was a public servant, and not the bribe-giver. Reliance was placed on
this to acquit the appellant bribe-giver. Rejecting such an interpretation, this
Court held:
“145. Mr Rao submitted that since, by reason of the provisions of Article
105(2), the alleged bribe-takers had committed no offence, the alleged
bribe-givers had also committed no offence. Article 105(2) does not provide
that what is otherwise an offence is not an offence when it is committed by
a Member of Parliament and has a connection with his speech or vote
therein. What is provided thereby is that a Member of Parliament shall not
be answerable in a court of law for something that has a nexus to his speech
or vote in Parliament. If a Member of Parliament has, by his speech or vote
in Parliament, committed an offence, he enjoys, by reason of Article 105(2),
immunity from prosecution therefor. Those who have conspired with the
Member of Parliament in the commission of that offence have no such
immunity. They can, therefore, be prosecuted for it.
147. Mr Rao submitted that the alleged bribe-givers had breached
Parliament's privilege and been guilty of its contempt and it should be left
to Parliament to deal with them. By the same sets of acts the alleged bribetakers and the alleged bribe-givers committed offences under the criminal
law and breaches of Parliament's privileges and its contempt. From
prosecution for the former, the alleged bribe-takers, Ajit Singh excluded,
enjoy immunity. The alleged bribe-givers do not. The criminal prosecution
against the alleged bribe-givers must, therefore, go ahead. For breach of
Parliament's privileges and its contempt, Parliament may proceed against
the alleged bribe-takers and the alleged bribe-givers.
150. To repeat what we have said earlier, Mr Rao is right, subject to two
caveats, in saying that Parliament has the power not only to punish its
Members for an offence committed by them but also to punish others who
had conspired with them to have the offence committed : first, the actions
that constitute the offence must also constitute a breach of Parliament's
privilege or its contempt; secondly, the action that Parliament will take and
the punishment it will impose is for the breach of privilege or contempt.
There is no reason to doubt that the Lok Sabha can take action for breach
of privilege or contempt against the alleged bribe-givers and against the
alleged bribe-takers, whether or not they were Members of Parliament, but
that is not to say that the courts cannot take cognizance of the offence of the
alleged bribe-givers under the criminal law.
 (emphasis supplied)
24. Even if Apex’s contention were to be accepted - that it did not indulge in
any illegal activity by committing an offence, as there was no corresponding
penal provision in the 2002 Regulations applicable to it - there is no doubt that its
actions fell within the purview of “prohibited by law” in Explanation 1 to Section
25. Furthermore, if the statutory limitations imposed by the 2002 Regulations
are kept in mind, Explanation (1) to Section 37(1) of the IT Act and the insertion
of Section 20A of the Medical Council Act, 195623 (which serves as parent
provision for the regulations), what is discernible is that the statutory regime
requiring that a thing be done in a certain manner, also implies (even in the
absence of any express terms), that the other forms of doing it are impermissible.
26. In this regard the decision of this Court in Jamal Uddin Ahmad v. Abu Saleh
Najmuddin & Anr24 is of some relevance. There, the scope of Section 81 of the
Representation of the People Act, 1951 was examined in the light of powers of
the High Court to administer election petitions by invoking the rule of implied
prohibition. The Court observed that:
“Dealing with "Statutes conferring power; implied conditions, judicial
review", Justice G.P. Singh states in the Principles of Statutory
Interpretation (Eight Edition 2001, at pp. 333, 334) that a power conferred
by a statute often contains express conditions for its exercise and in the
absence of or in addition to the express conditions there are also implied
conditions for exercise of the power. An affirmative statute introductive of
a new law directing a thing to be done in a certain way mandates, even if
there be no negative words, that the thing shall not be done in any other
way. This rule of implied prohibition is subserved to the basic principle that
the Court must, as far as possible, attach a construction which effectuates
the legislative intent and purpose. Further, the rule of implied prohibition
does not negative the principle that an express grant of statutory power
carries with it by necessary implication the authority to use all reasonable
means to make such grant effective. To illustrate, an Act of Parliament
conferring jurisdiction over an offence implies a power in that jurisdiction
to make out a warrant and secure production of the person charged with
the offence; power conferred on Magistrate to grant maintenance under
Section 125 of the Code of Criminal Procedure 1973 to prevent vagrancy
implies a power to allow interim maintenance; power conferred on a local
authority to issue licences for holding 'hats' or fairs implies incidental
power to fix days therefore; power conferred to compel cane growers to
23 Inserted vide Medical Council (Amendment) Act, 1964.
24 (2003) 4 SCC 257.
supply cane to sugar factories implies an incidental power to ensure
payment of price. In short, conferment of a power implies authority to do
everything which could be fairly and reasonably regarded as incidental or
consequential to the power conferred.
Herbert Broom states in the preface to his celebrated work on Legal
Maxims --"In the Legal Science, perhaps more frequently than in any other,
reference must be made to first principles." The fundamentals or the first
principles of law often articulated as the maxims are manifestly founded in
reason, public convenience and necessity. Modern trend of introducing
subtleties and distinctions, both in legal reasoning and in the application of
legal principles, formerly unknown, have rendered an accurate
acquaintance with the first principles more necessary rather than
diminishing the values of simple fundamental rules. The fundamental rules
are the basis of the law; may be either directly applied, or qualified or
limited, according to the exigencies of the particular case and the novelty
of the circumstances which present themselves. In Dhannalal vs.
Kalawatibai and Ors.25 this court has held that:
"When the statute does not provide the path and the precedents abstain to
lead, then sound logic, rational reasoning, common sense and urge for
public good play as guides of those who decide".”

27. It is also a settled principle of law that no court will lend its aid to a party
that roots its cause of action in an immoral or illegal act (ex dolo malo non oritur
action) meaning that none should be allowed to profit from any wrongdoing
coupled with the fact that statutory regimes should be coherent and not selfdefeating. Doctors and pharmacists being complementary and supplementary to
each other in the medical profession, a comprehensive view must be adopted to
regulate their conduct in view of the contemporary statutory regimes and
regulations. Therefore, denial of the tax benefit cannot be construed as penalizing
the assessee pharmaceutical company. Only its participation in what is plainly an
action prohibited by law, precludes the assessee from claiming it as a deductible
28. This Court also notices that medical practitioners have a quasi-fiduciary
relationship with their patients. A doctor’s prescription is considered the final
word on the medication to be availed by the patient, even if the cost of such
25 (2002) 6 SCC 16.
medication is unaffordable or barely within the economic reach of the patient –
such is the level of trust reposed in doctors. Therefore, it is a matter of great public
importance and concern, when it is demonstrated that a doctor’s prescription can
be manipulated, and driven by the motive to avail the freebies offered to them by
pharmaceutical companies, ranging from gifts such as gold coins, fridges and
LCD TVs to funding international trips for vacations or to attend medical
conferences. These freebies are technically not ‘free’ – the cost of supplying such
freebies is usually factored into the drug, driving prices up, thus creating a
perpetual publicly injurious cycle. The threat of prescribing medication that is
significantly marked up, over effective generic counterparts in lieu of such a quid
pro quo exchange was taken cognizance of by the Parliamentary Standing
Committee on Health and Family Welfare26 which made the following
“The Committee also notes that despite there being a code of ethics in the
Indian Medical Council Rules introduced in December 2009 forbidding
doctors from accepting any gift, hospitality, trips to foreign and domestic
destinations etc from healthcare industry, there is no let-up in this evil
practice and the pharma companies continue to sponsor foreign trips of
many doctors and shower with high value gifts like air conditioners, cars,
music systems, gold chains etc. to obliging prescribers who then prescribe
costlier drugs as quid pro quo. Ultimately all these expenses get added up
to the cost of drugs. The Committee’s attention was drawn to a news item
in Times of India dated July 1, 2010 by Reema Nagarajan giving specific
instances of violations of MCI code. The Committee calls upon the
Government to take strict and speedy action on such violations. Since MCI
has no jurisdiction over drug companies, the Government should take
parallel action through DCGI and the Income Tax Department to penalize
those companies that violate MCI rules by cancelling drug manufacturing
licences and/or disallowing expenses on unethical activities.”
 (emphasis supplied)
Interestingly, a similar conclusion was arrived at by the US Department of Health
and Human Services Office of the Assistant Secretary for Planning and
Evaluation, in a report called Savings Available Under Full Generic Substitution
26 45th Report on Issues Relating to Availability of Generic, Generic-Branded and Branded Medicines, their
Formulation and Therapeutic Efficacy and Effectiveness), dated 04.08.2010.
of Multiple Source Brand Drugs in Medicare Part D (dated 23.07.2018).27 The
report noticed inter alia, that an empirical study conducted in respect of 20 odd
(out of the 600 drugs which were the subject matter of the research paper) brand
medications dispensed for a particular period, were capable of generic
substitution and would have resulted in substantial benefit to the patients:
“Beneficiaries could have saved over $600 million in out of pocket
payments had they been dispensed generic equivalent drugs. A significant
amount of this spending occurred among the top 20 multiple source
brands. Substituting these drugs for generic competitors at their median
prices would have saved the program and beneficiaries $1.8 billion.”
Likewise, in a previous study by ProPublica (an independent, non-profit
newsroom that does investigative journalism) titled “Dollars for Doctors: Now
27 Extracted from https://aspe.hhs.gov/reports/data-point-savings-available-under-full-generic-substitutionmultiple-source-brand-drugs-medicare accessed at 16:37 on 13.02.2022. The report states, inter alia, that:
“More 600 brand name drugs were dispensed and paid for by Part D plans in 2016, despite the presence of
generic competition. Plans and beneficiaries paid $8.7 billion for multiple source brands and $34.0 billion for
generics. Full substitution of multiple source brands would have resulted in total spending on generic drugs of
$39.9 billion, saving the Part D program and its beneficiaries $2.8 billion in 2016. These estimates do not account
for manufacturer rebates paid to Part D plans or pharmacy benefit managers (PBMs) or statutory discounts paid
by manufacturers for brand name drugs, and thus may overstate savings to the program after accounting for the
effects that rebates often have on premiums. See Figure 1.
Of this $2.8 billion, $2.25 billion is for brand name drugs that have faced generic competition for at least a full
year (e.g. the first generic was available in 2015 or earlier). A further $584 million in savings is estimated for
substituting generics that were first launched in 2016 and therefore on the market for less than a full year. These
12 Single source includes payments for brand drugs prior to generic entry, e.g. $1.13 billion of Crestor spending
in the example used in the Methods section. savings are likely to grow as additional generic competitors enter the
market. Beneficiaries spent $1.1 billion out-of-pocket in cost-sharing for brand drugs with comparable generics,
averaging twice as much out-of-pocket than for comparable generics. In 2016, multiple source brand drug costsharing averaged $39.15, while generic cost-sharing for substitutable products was $17.04. Beneficiaries could
have saved over $600 million in out of pocket payments had they been dispensed generic equivalent drugs. A
significant amount of this spending occurred among the top 20 multiple source brands. Substituting these drugs
for generic competitors at their median prices would have saved the program and beneficiaries $1.8 billion. See
Appendix Table A for these drugs, and figure 2 below for an example. In terms of beneficiary cost-sharing, we
find similar results as for the overall calculation. Average per beneficiary spending is significantly higher for
these brands than for the substitutable generics. (See Appendix Table A, also.) Brand drug cost-sharing averaged
$30.69, compared to $22.41 for their generic equivalents. For 17 of the top 20 drugs, the ratio of brand to
comparable generic out-of-pocket spending ranges from 117% (Namenda) to 1,476% (Lamictal) indicating
significant per-drug savings are available for beneficiaries. In three cases (Abilify, Lovenox, and Tricor),
beneficiary out-of-pocket costs are marginally higher for the generic than the brand drug. We believe this is due
to the interaction of total drug costs and plan coverage in the coverage gap for generics (42% in 2016), meaning
patients paid 58% coinsurance for generics that year. This compares to 25% plan coverage and a 50% statutory
manufacturer discount for brand drugs in 2016.”
There’s Proof: Docs who Get Company Cash Tend to Prescribe More BrandName Meds” (dated 17.03.2016)28 stated that:
“…doctors who receive payments from the medical industry do indeed tend
to prescribe drugs differently than their colleagues who don’t. And the more
money they receive, on average, the more brand-name medications they
Data is now available publicly, in the United States, by reason of the Physician
Payment Sunshine Act, 2010 i.e., Section 6002 of the Affordable Care Act, 2010.
This law compels manufacturers of drugs, devices, biologics, and medical
supplies covered by Medicare, Medicaid, or the Children's Health Insurance
Program to report to the Centers for Medicare & Medicaid Services on three
broad categories of payments or "transfers of value". These categories cover
general payments or transfers of value such as meals, travel reimbursement, and
consulting fees. These include expenses borne by manufacturers, such as speaker
fees, travel, gifts, honoraria, entertainment, charitable contribution, education,
grants and research grants, etc.
29. The impugned judgment, along with the judgments of Punjab & Haryana
High Court (Kap Scan) and Himachal Pradesh High Court (Confederation)
(supra) have correctly addressed the important public policy issue on the subject
of allowance of benefit for supply of freebies. The impugned judgment’s
reasoning is quoted as follows:
“A perusal of the decision of Co-ordinate Bench of this Tribunal in the
assessee's own case as also the decision of the Hon'ble Himachal Pradesh
High Court clearly shows that the basic intention of the decision was that
the receiving of the gifts/freebies by Professionals is against public policy
as also against the law in so far as the amendment by the Medical Council
Act, 1956 to the Indian Medical Council (Professional Conduct, Etiquette
and Ethics) Regulations, 2002, once receiving of such gifts have been held
to be unethical obviously the corollary to this would also be unethical, being
giving of such gifts or doing such acts to induce such Doctors and Medical
Professionals to violate the Medical Council Act, 1956.”
 (emphasis supplied)
28 https://www.propublica.org/article/doctors-who-take-company-cash-tend-to-prescribe-more-brand-namedrugs accessed at 16:45 on 13.02-2022
30. Thus, one arm of the law cannot be utilised to defeat the other arm of law
– doing so would be opposed to public policy and bring the law into ridicule.29 In
Maddi Venkataraman & Co. (P) Ltd. v. CIT30
, a fine imposed on the assessee
under the Foreign Exchange Regulation Act, 1947 was sought to be deducted as
a business expenditure. This Court held:
“Moreover, it will be against public policy to allow the benefit of deduction
under one statute, of any expenditure incurred in violation of the provisions
of another statute or any penalty imposed under another statute. In the
instant case, if the deductions claimed are allowed, the penal provisions of
FERA will become meaningless”.
 (emphasis supplied)
31. It is crucial to note that the agreement between the pharmaceutical
companies and the medical practitioners in gifting freebies for boosting sales of
prescription drugs is also violative of Section 23 of the Contract Act, 1872 (as
also noted by the Punjab and Haryana High Court in Kap Scan (supra)). The
provision is as follows:
“23. What considerations and objects are lawful, and what not.—The
consideration or object of an agreement is lawful, unless—
it is forbidden by law; or
is of such a nature that, if permitted, it would defeat the provisions of any
law; or
is fraudulent; or
involves or implies injury to the person or property of another; or the Court
regards it as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said
to be unlawful. Every agreement of which the object or consideration is
unlawful, is void.
 (emphasis supplied)
32. Before us, Apex has continually stressed on the need to divorce
interpretation of tax provisions from a perceived immorality / violation of public
policy. Apex repeatedly relied on T.A. Quereshi (supra), M/s K.M. Jain (supra)
and CIT v. Pt. Vishwanath Sharma31
. We find that none of these judgments find
29 Biharilal Jaiswal v. CIT, (1996) 1 SCC 443.
30 (1998) 2 SCC 95.
31 I.T.R. No. 27 of 1999, Allahabad HC, dated 21.02.2008.
much favour with the case of the appellant. T.A. Quereshi addressed a business
‘loss’, not a business ‘expenditure’ as envisioned under Section 37(1). In M/s
K.M. Jain, the ransom money paid to kidnappers of the employee of the assessee
company was allowed deduction primarily based on the fact that the assessee was
helpless and coerced to pay the amount in order to save its employee’s life. Thus,
the assessee was not a wilful participant in commission of an offence or activity
prohibited by law. The same is not applicable to the present facts. Pharmaceutical
companies have misused a legislative gap to actively perpetuate the commission
of an offence. In Pt. Vishwanath Sharma, a Division Bench of the Allahabad High
Court was faced with the question of whether payment of commission to
government doctors could be exempted under Section 37(1). At the time, there
was no statutory provision prohibiting doctors engaged in private practice from
accepting such commission. Hence, the High Court held that while the Assessing
Officer had correctly allowed such deduction for private doctors, the same could
not be allowed for Government doctors:
“In the present case, payment of commission to Government Doctors
cannot be placed on the same pedestal. A distinction has already been made
by the authorities while allowing deduction to the assessee in respect to
commission which the assessee has paid to private doctors since in their
case, payment of commission cannot be said to be an offence under any
statute but in respect to Government doctors such payment could not have
been allowed as it is an offence under the Statutes as stated above.”
“We are, therefore, clearly of the opinion that payment as commission to
Government doctors for obtaining a favour therefrom by prescribing
medicines in which the assessee was dealing cannot be said to be a
“business expenditure” and no deduction can be allowed thereof under the
 (emphasis supplied)
The 2002 Regulations, applicable to all medical practitioners (including doctors
in private practice), was introduced w.e.f. 14.12.2009.
33. Thus, pharmaceutical companies’ gifting freebies to doctors, etc. is clearly
“prohibited by law”, and not allowed to be claimed as a deduction under Section
37(1). Doing so would wholly undermine public policy. The well-established
principle of interpretation of taxing statutes – that they need to be interpreted
strictly – cannot sustain when it results in an absurdity contrary to the intentions
of the Parliament. A Bench of this Court in C.W.S. (India) Ltd. v. CIT32 held as
“While a literary construction may be the general rule in construing taxing
enactments, it does not mean that it should be adopted even if it leads to a
discriminatory or incongruous result. Interpretation of statutes cannot be a
mechanical exercise. Object of all the rules of interpretation is to give effect
to the object of the enactment having regard to the language used”.
Justice Oliver Wendell Holmes had once said:
“A word is not a crystal, transparent and unchanged; it is the skin of a
living thought and may vary greatly in colour and content according to the
circumstances and the time in which it is used." 33
Holmes thus summed up the elusive nature of words, which lies at the heart of
the many issues concerning interpretation of statutes.
34. Interpretation of law has two essential purposes: one is to clarify to the
people governed by it, the meaning of the letter of the law; the other is to shed
light and give shape to the intent of the law maker. And, in this process the courts'
responsibility lies in discerning the social purpose which the specific provision
subserves. Thus, the cold letter of the law is not an abstract exercise in semantics
which practitioners are wont to indulge in. So viewed the law has birthed various
ideas such as implied conditions, unspelt but entirely logical and reasonable
obligations, implied limitations etc. The process of continuing evolution,
refinement and assimilation of these concepts into binding norms (within the
body of law as is understood and enforced) injects vitality and dynamism to
statutory provisions. Without this dynamism and contextualisation, laws become
irrelevant and stale.
32 1994 Supp (2) SCC 296.
33 Tomne v. Eispzer, 245 U.S. 418 (1918).
35. In Bihari Lal Jaiswal & Ors. v. Commissioner of Income Tax & Ors34, the
issue of what is “prohibited by law” was considered by this Court, in the context
of interpretation of a condition in a statutory license (for vending liquor) which
prohibited transfer of the license by way of sub-letting or entering into a
partnership agreement. While dealing with the recognition of such a partnership
under the IT Act, this Court held that allowing the same would attract the very
mischief sought to be avoided:
“This object will be defeated if the licencee is permitted to bring in
strangers into the business, which would mean that instead of the licencee
carrying on the business, it would be carried on by others - a situation not
conducive to effective implementation of the excise law and consequently
deleterious to public interest. It is for this very reason that transfer or subletting of licence is uniformly prohibited by several State Excise enactments.
It, therefore, follows that any agreement whereunder the licence is
transferred, sub-let or a partnership is entered into with respect to the
privilege/business under the said licence, contrary to the prohibition
contained in the relevant excise enactment, is an agreement prohibited by
law. The object of such an agreement must be held to be of such a nature
that if permitted it would defeat the provisions of the excise law within the
meaning of Section 23 of the Contract Act. Such an agreement is declared
by Section 23 to be unlawful and void. The question is whether such an
unlawful or void partnership can be treated as a genuine partnership within
the meaning of Section 185(1) and whether registration can be granted to
such a partnership under the provisions of the Income Tax Act and the Rules
made thereunder. We think not. When the law prohibits the entering into a
particular partnership agreement, there can be in law no partnership
agreement of that nature. The question of such an agreement being genuine
cannot, therefore, arise.
It is also a known principle that what cannot be done directly, cannot be achieved
indirectly. As was said in Fox v. Bishop of Chester35 that it is a:
"Well-known principle of law that the provisions of an Act of Parliament
shall not be evaded by shift or contrivance"
And that:
34 (1995) Supp (5) SCR 285.
 (1824) 2 B & C 635, quoted and applied in Jagir Singh v. Ranbir Singh & Ors. 1979 (2) SCR 282.
"To carry out effectually the object of a Statute, it must be construed as to
defeat all attempts to do, or avoid doing, in an indirect or circuitous manner
that which it has prohibited or enjoined"
This Court, in an appeal arising from an action for specific performance, in G.T.
Girish v. Y. Subba Raju (D) by L. Rs & Ors36, held that giving the relief would
imply doing something prohibited by law (bar against conveyance, for a specific
period) – it had the effect of defeating the provisions of the law. It was held that:
“Taking the agreement as it is, it necessarily would be in the teeth of the
obligation in law of the first Respondent to put up the construction. The
agreement to sell involved clearly terms which are impliedly prohibited by
law in that the first Defendant was thereunder to deliver title to the site and
prevented from acting upon the clear obligation under law. This is a clear
case at any rate wherein enforcing the agreement unambiguously results in
defeating the dictate of the law. The 'sublime' object of the law, the very soul
of it stood sacrificed at the altar of the bargain which appears to be a real
estate transaction. It would, in other words, in allowing the agreement to
fructify, even at the end of ten-year period of non-alienation, be a case of
an agreement, which completely defeats the law for the reasons already
78. Going by the recital in the agreement entered into between the Plaintiff
and the first Defendant, possession is handed over by the first Defendant to
the Plaintiff. The original Possession Certificate is also said to be handed
over to the Plaintiff. The agreement, even according to the Plaintiff,
contemplated that within three months of conveyance of the site in favour
of the first Defendant, the first Defendant was to convey her rights in the
site to the Plaintiff. It is quite clear that the parties contemplated a state of
affairs which is completely inconsistent with and in clear collision with the
mandate of the law. On its term, it stands out as an affront to the mandate
of the law.
79. The illegality goes to the root of the matter. It is quite clear that the
Plaintiff must rely upon the illegal transaction and indeed relied upon the
same in filing the suit for specific performance. The illegality is not trivial
or venial. The illegality cannot be skirted nor got around. The Plaintiff is
confronted with it and he must face its consequences. The matter is clear.
We do not require to rely upon any parliamentary debate or search for the
purpose beyond the plain meaning of the law. The object of the law is set
out in unambiguous term. If every allottee chosen after a process of
selection under the Rules with reference to certain objective criteria were
to enter into bargains of this nature, it will undoubtedly make the law a
hanging (sic laughing) stock.”
36 2022 SCC Online SC 60.
36. In the present case too, the incentives (or “freebies”) given by Apex, to the
doctors, had a direct result of exposing the recipients to the odium of sanctions,
leading to a ban on their practice of medicine. Those sanctions are mandated by
law, as they are embodied in the code of conduct and ethics, which are normative,
and have legally binding effect. The conceded participation of the assessee- i.e.,
the provider or donor- was plainly prohibited, as far as their receipt by the medical
practitioners was concerned. That medical practitioners were forbidden from
accepting such gifts, or “freebies” was no less a prohibition on the part of their
giver, or donor, i.e., Apex.
37. In view of the foregoing discussion, the impugned judgment cannot be
faulted with. The appeal is dismissed without order on costs. Pending
application(s), if any, also stand disposed of.
New Delhi
February 22, 2022.

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