ITAT recommends constitution of larger bench to decide allowability of freebies to medical professionals as a deduction

The coordinate bench of the Hon’ble Income Tax Appellate Tribunal, Mumbai ("the ITAT Mumbai") in the case of Deputy Commissioner of Income Tax v. Macleods Pharmaceuticals Ltd. [ITA Nos. 5168 & 5169/Mum/2018 decided on October 14, 2021] has recommended constitution of a larger bench to decide on whether expenditure for providing freebies to medical professionals can be allowed as a deduction in accordance with Section 37(1) of the Income Tax Act, 1961 ("the Act").

Macleods Pharmaceuticals Ltd. ("the Respondent") had preferred an appeal before the Commissioner of Income Tax (Appeals) ("the CIT (A)") against the order of the Assessing Officer whereby a deduction of Rs 111,11,70,500 for the assessment year 2011-12 and of Rs 137,62,61,659 for the assessment year 2012-13 was disallowed on account of the expenditure being for providing freebies to the doctors. The CIT (A) had overturned the said order and had allowed the expenditure as a deduction. As a result, the Assessing Officer preferred the present Appeal.

The Assessing Officer had based his decision to deny deduction on the basis of Central Board of Direct Taxes ("the CBDT") Circular No. 05/2012 dated 01.08.2012, the amendment in the Medical Council of India regulations vide Gazette notification dated 10.12.2009, and the Explanation 1 to Section 37(1) of the Act. It was stated that a combined reading of the Explanation 1 to Section 37 of the Act, the guidelines issued by Medical Council of India and the Circular issued by the Central Board of Direct Taxes explain that the sales promotion expenses made by the Respondent are prohibited in law as the medical practitioners have been barred from accepting freebies and consequentially, these expenses shall be deemed to have been not incurred for the purpose of business and profession making them non-deductible.

The stand of the Respondent was that a coordinate bench, in the Respondent’s own case, had allowed such expenditure by accepting the plea that "no disallowance of such sales promotion expenses could be made by applying the CBDT circular dated 01.08.2012 insofar as the CBDT circular was effective from Assessment Year 2013-14", and that, in view of the decision of another coordinate bench in the case of DCIT Vs PHL Pharma Pvt Ltd [(2017) 163 ITD 10 (Mum)] the disallowance could not be sustained as the Medical Council of India regulations vide Gazette notification dated 10.12.2009 bind only the medical professionals and not the pharmaceutical companies.

The coordinate bench of the Hon’ble ITAT Mumbai reiterated that in the present Appeal, they are of the view that the Assessing Officer deserves to succeed on this issue. However, as there are several decisions of coordinate benches in favour of the Respondent on this issue, the coordinate bench of the Hon’ble ITAT Mumbai observed that the present Appeal is a fit case for the constitution of a special bench of three or more members of the ITAT Mumbai to decide on the issue of whether expenditure for providing freebies to medical professionals can be allowed as a deduction in accordance with Section 37(1) of the Act. Accordingly, the registry was ordered to place the case records of the present Appeal for consideration by the Hon’ble President of the ITAT Mumbai.