Circulars not binding on the Assessee - A Practical Analysis

HI! Friends and respected seniors, greetings of the day to all of you.

Introduction-

The revenue Departments have been empowered to issue circulars to clarify the position of law and these circulars are binding on the department (except CIT Appeals) but not on the assessee, however the assessee  may claim any benefit of circular so issued. In CIT vs. UCO Bank, (SC) it has been  held by the SC that power of CBDT to issue circulars cannot allow them to issue circulars which has effect of overriding, modifying or amending the provisions of the Act. If any such circular has been issued by the revenue Deptts. which is not in consonance (in agreement) with law then such circular stands void.

Contents of recent circular issued by CBDT-

CBDT has issued circular No.5/2012 dated 01-08-2012 wherein it has been specified that expenditure incurred by the Pharmaceutical and Allied Health Sector Industries on giving gift to doctors, giving traveling facility, providing hospitality (i.e. arranging free trips  & boarding  in hotels etc.), giving  cash or monetary grant to doctors will not be allowed as expenditure considering the provisions of Section 37(1) of the I.T. Act,1961.

Let’s Analyze weather circular can be contested by Pharmacy & Allied Health Industries –

Friends, With due respect to all medical practitioners, jaise ki hum sab jante h ki doctor kush to company kush i.e. When Pharmacy Companies get succeeded in making doctors to prescribe its products (medicines & others) it means it means it has created a market for it. Convincing, doctors  to recommend its products by a company is just a sales promotion and companies generally incurs expenditures like gifts to doctors & medical practitioners, arranging free travel facility, providing hospitality etc. which can be well understood as per prevailing trade practices. 

Let’s have a quick recap of Section 37(1) of the I.T. Act, 1961,

The Section provides for deduction of any revenue expenditure (other than those falling under sections 30to 36) from the Business Income if such expense have incurred wholly or exclusively for the purpose of business or profession. Further Explanation to Sec 37(1) provides that NO expense is allowed as deduction from Business Income, which is incurred by the assessee for a purpose which is  either a offence or prohibited under  any  law for the time being in force.

Friends, please pay attention, that the explanation says that any EXPENDITURE INCURRED BY AN ASSESSEE  FOR  ANY PURPOSE  WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY THE LAW IS DISALLOWED FROM THE BUSINESS INCOME.

It is also necessary to know that what is provided in Indian Medical Council Regulations, 2002.These regulations as a matter of Professional Ethics prohibit a medical practitioner to receive different benefits (as discussed above) from the Pharmacy & Allied Industries as a consideration of prescribing the products of a company. (In short Regulations convey that the practice should be that Pharma Companies just approach to medical practitioners with their products, doctor will apply its intelligence as to whether the same product will be effective and can accordingly prescribe to patients if he thinks its fit.)

Conclusion-

It is the doctors who are the members of Indian Medical Council have violated the provisions of the Indian Medical council Regulations (Professional Conduct, Etiquette and Ethics)[ by accepting the said benefits from Pharma Companies]s and, not the  Pharma Companies which have violated the law. In fact, the expenditure incurred by the assessee(Pharma Co.) are not prohibited under the provisions of Indian Medical Council Regulations  because IMC only means ethical conduct by its members and it does not regulate Pharma companies which may go to any extent for promoting its products. 

Therefore, the said expenditures will be allowed as deduction to Pharma companies as the contents of the circular is not in consonance with the provisions of explanation to sec 37(1) to I.T Act,1961 and hence circular is not binding on the assessee.

Note-The article have focused on the possible litigations which may arise due to this circular.

Your feedback on this article are most welcomed. Thanks for reading.

Saurabh Chokhra (Maheshwari)

CA Final, CRO0310510

Ahmedabad