Holding

Expenses incurred by a pharmaceutical company for providing gifts and other incentives to doctors are not deductible under Section 37(1) as they are prohibited by law under Explanation 1.

Summary

Apex Laboratories, a pharmaceutical company, claimed a deduction under Section 37(1) of the Income Tax Act for expenses incurred in providing gifts, travel, hospitality and other "freebies" to doctors to promote its product Zincovit. The Assessing Officer, on the basis of a CBDT circular dated 01‑08‑2012 and the 2002 Medical Council Regulations prohibiting doctors from accepting such benefits, disallowed the deduction. Apex argued that the regulations applied only to doctors and not to the donor company, and that the circular could not be applied retrospectively. The Supreme Court held that the regulations, though framed for medical practitioners, made the act of providing freebies a prohibited activity, bringing the donor within the ambit of "prohibited by law" under Explanation 1 to Section 37(1). Consequently, the expenses could not be treated as business expenditure and the deduction was denied. The appeal was dismissed.

Issues considered

The applicability of Explanation 1 to Section 37(1) of the Income Tax Act to expenses incurred by a pharmaceutical company for gifting freebies to doctors.
Whether the 2002 Medical Council Regulations and the CBDT circular of 01‑08‑2012 extend to the donor (pharmaceutical company) and render such expenses "prohibited by law".
The prospective or retrospective effect of the CBDT circular on the tax year in question.

Legislation cited

Subjects

Income TaxSection 37(1)Explanation 1Pharmaceutical freebiesMedical Council RegulationsTax deductionProhibited by lawPublic policy

Judgment

126 SUPREME COURT
[2022]REPORTS
2 S.C.R. 126 [2022] 2 S.C.R.

A M/S APEX LABORATORIES PVT. LTD.
v.
DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAX
PAYER UNIT- II
B (Civil Appeal No. 1554)
FEBRUARY 22, 2022
[UDAY UMESH LALIT AND S. RAVINDRA BHAT, JJ.]
Income Tax Act, 1961: s.37(1), Explanation 1 –
Pharmaceutical companies gifting freebies to doctors etc. is clearly
C
prohibited by law and not allowed to be claimed as a deduction
under s.37(1) of the Act – An amendment to the Medical Council
Act, 1956 (now repealed) through the Indian Medical Council
(Professional Conduct, Etiquette and Ethics) Regulations, 2002
published in the Official Gazette on 14.12.2009, disallowed medical
D practitioners from accepting emoluments in the form of inter alia
gifts, travel facilities, hospitality, cash or monetary grants – On
01.08.2012, CBDT also issued a circular, which clarified that
expenses incurred by pharmaceutical and allied health sector
industries for distribution of incentives (i.e., “freebies”) to medical
practitioners are ineligible for the benefit of Explanation 1 to s.37(1),
E
which denies the application of the benefit for any purpose which
is an ‘offence’ or ‘prohibited by law’ – 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
F providing such freebies, and thereby (actively and with full
knowledge) enabling the commission of the act which attracts such
opprobrium – 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 –
G
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 expenditure – Medical practitioners
have a quasi-fiduciary relationship with their patients – Therefore,
H it is a matter of great public importance and concern, when it is
126
M/S APEX LABORATORIES PVT. LTD. v. DEPUTY COMMISSIONER OF 127
INCOME TAX, LARGE TAX PAYER UNIT- II

demonstrated that a doctor’s prescription can be manipulated, and A
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
B
into the drug, driving prices up, thus creating a perpetual publicly
injurious cycle – The 2002 Regulations, applicable to all medical
practitioners (including doctors in private practice), was introduced
w.e.f. 14.12.2009 – Thus, pharmaceutical companies’ gifting freebies
to doctors, etc. is clearly “prohibited by law”, and not allowed to
be claimed as a deduction under s.37(1) – Doing so would wholly C
undermine public policy.
Interpretation of statutes: Interpretation of taxing statutes –
Taxing statutes need to be interpreted strictly – Income Tax Act,
1961.
Jamal Uddin Ahmad v. Abu Saleh Najmuddin & Anr. D
(2003) 4 SCC 257 : [2003] 2 SCR 473 - relied on.
Dy. CIT 8(2) Mumbai v PHL Pharma P. Ltd. 20 ITA No.
4605/Mum/2014, dated 12.01.2017; Max Hospital
Pitampura v. Medical Council of India Income Tax
Appeal No. 485/2008 decided on 18.07.2017; Max E
Hospital Pitampura v. Medical Council of India W.P.
(C) No. 1334/2014 / ILR (2014) 1 Delhi 620, dated
10.01.2014; Dr. Anil Gupta v. Addl. Commissioner of
Income Tax, Income Tax Appeal No. 485/2008, decided
on 18.07.2017; Berger Paints Ltd. v Commissioner of F
Income Tax (2004) 12 SCC 42 : [2004] 2 SCR 502;
South India Bank Ltd. v Commissioner of Income Tax,
Civil Appeal No. 9606 of 2011 / 2021 SCC Online SC
692, dated 09.09.2021; T.A. Quereshi v. Commissioner
of Income Tax, Bhopal (2007) 2 SCC 759 : [ 2006] 10
Suppl. SCR 311; Commissioner of Income Tax v. M/s G
Khemchand Motilal Jain 2011 (4) MPLJ 691; Director
of Income-tax v. S.R.M.B Dairy Farming (P.) Ltd., (2018)
13 SCC 239 : [2017] 11 SCR 1118; Kanwarjit Singh
Kakkar v. State of Punjab (2011) 13 SCC 158 : [2011]
H
128 SUPREME COURT REPORTS [2022] 2 S.C.R.

A 6 SCR 895; P.V. Narasimha Rao v. State (CBI/SPE)
(1998) 4 SCC 626 : [1998] 2 SCR 870; Biharilal
Jaiswal v. CIT (1996) 1 SCC 443 : [1995] 5 Suppl. SCR
285; Maddi Venkataraman & Co. (P) Ltd. v. CIT (1998)
2 SCC 95 : [1997] 6 Suppl. SCR 67; CIT v. Pt.
Vishwanath Sharma I.T.R. No. 27 of 1999, Allahabad
B
HC dated 21.02.2008 (31); C.W.S. (India) Ltd. v. CIT
1994 Supp (2) SCC 296; Bihari Lal Jaiswal & Ors. v.
Commissioner of Income Tax & Ors. (1995) Supp (5)
SCR 285; Jagir Singh v. Ranbir Singh & Ors. [1979] 2
SCR 282; G.T. Girish v. Y. Subba Raju (D) by L. Rs &
C Ors. 2022 SCC Online SC 60; Commissioner of Income-
Tax v. Kap Scan and Diagnostic Centre P. Ltd. (2012)
344 ITR 476 (P&H HC); Confederation of Indian
Pharmaceutical Industry (SSI) v. Central Board of Direct
Taxes (2013) 353 ITR 388 (HP HC) – referred to.
D Case Law Reference
[2004] 2 SCR 502 referred to Para 6
[2006] 10 Suppl. SCR 311 referred to Para 7
[2017] 11 SCR 1118 referred to Para 10
E [2011] 6 SCR 895 referred to Para 12
[1998] 2 SCR 870 referred to Para 23
[2003] 2 SCR 473 relied on Para 26
[1995] 5 Suppl. SCR 285 referred to Para 30
F [1997] 6 Suppl. SCR 67 referred to Para 30
[1994] Supp 2 SCC 296 referred to Para 33
[1995] Supp 5 SCR 285 referred to Para 35
[1979] 2 SCR 282 referred to Para 35
G
CIVIL APPELLATE JURISDICTION: Civil Appeal No.1554 of
2022.
From the Judgment and Order dated 18.03.2019 of the High Court
of Judicature at Madras in Tax Case Appeal No.723 of 2018.
H
M/S APEX LABORATORIES PVT. LTD. v. DEPUTY COMMISSIONER OF 129
INCOME TAX, LARGE TAX PAYER UNIT- II

S. Ganesh, Sr. Adv., T. Sundar Ramanathan, M. P. Devanath, A
Vivek Pandey, Ms. Harshapreetha Sridharan, Ishaan Chakrabarti, Advs.
for the Appellant.
Sanjay Jain, ASG, Ms. Rashmi Malhotra, Saurabh Mishra, Deepak
Goel, Sughosh Subramanyam, Advs. for the Respondent.
The Order of the Court was passed by B
S. RAVINDRA BHAT, J.
1. Leave granted. The appellant (hereinafter, “Apex”) is aggrieved
by a judgment of the High Court of Judicature of Madras 1, wherein the
Division Bench upheld an order of the Income Tax Appellate Tribunal 2
(hereinafter, “ITAT”), which in turn upheld an order of the Commissioner C
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 claimedby Apexas
‘business expenditure’ under Section 37(1) of the Income Tax Act, 1961
(hereinafter, “IT Act”). D
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 for the benefit of Explanation 1 to Section
E
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 F
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
G
1
Tax Case Appeal No. 723 of 2018, dated 18.03.2019.
2
IT ACT No. 1153/Mds/2014, dated 29.01.2018.
3
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].
6
No. MCI-211(1)/2009(Ethics)/5567. H
130 SUPREME COURT REPORTS [2022] 2 S.C.R.

A 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
B
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-
C 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
D medical practitioners were expressly prohibited from accepting freebies,
no corresponding prohibition 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
E 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 India 9
F (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
G
7
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.
9
W.P. (C) No. 1334/2014 / ILR (2014) 1 Delhi 620, dated 10.01.2014.
10
H Income Tax Appeal No. 485/2008, decided on 18.07.2017.
M/S APEX LABORATORIES PVT. LTD. v. DEPUTY COMMISSIONER OF 131
INCOME TAX, LARGE TAX PAYER UNIT- II [S. RAVINDRA BHAT, J. ]

1 could not be raised by the respondent for the first time at an appellate A
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 B
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 reconsideration.11 C
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: D
“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 E
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 F
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 that:
“The aforesaid section provides that kidnapping a person for
ransom is an offence and any person doing so or compelling G

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.
13
2011 (4) MPLJ 691. H
132 SUPREME COURT REPORTS [2022] 2 S.C.R.

A 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.”
B
***
“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
C 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
D 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.”
E
(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
F tax payers from claiming “protection money, extortion, hafta, bribes,
etc.” as business expenditures,14 from 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
G
an act by a pharmaceutical company not recognized as ‘illegal’ by any
statute – doing so would be against the canons of public law.

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.
H
M/S APEX LABORATORIES PVT. LTD. v. DEPUTY COMMISSIONER OF 133
INCOME TAX, LARGE TAX PAYER UNIT- II [S. RAVINDRA BHAT, J. ]

10. Finally, Counsel submitted that the CBDT circular dated A
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’,
B
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 C
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 D
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. E
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 F
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”).16
13. In the present instance, the medical practitioners were provided G
expensive gifts such as hospitality, conference fees, gold coins, LCD
TVs, fridges, laptops, etc. by Apex to promote its nutritional health

15
See for e.g.,Director of Income-tax v. S.R.M.B Dairy Farming (P.) Ltd., (2018) 13
SCC 239.
16
Kanwarjit Singh Kakkar v. State of Punjab, (2011) 13 SCC 158. H
134 SUPREME COURT REPORTS [2022] 2 S.C.R.

A 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
B
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
C 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,
D 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 of payments as business expenditure,
E 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
F 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.
G Undoubtedly, it is not a fair practice and has to be termed as
against the public policy.”
***

17
See regulation 8 of the 2002 Regulations.
18
H (2012) 344 ITR 476 (P&H HC).
M/S APEX LABORATORIES PVT. LTD. v. DEPUTY COMMISSIONER OF 135
INCOME TAX, LARGE TAX PAYER UNIT- II [S. RAVINDRA BHAT, J. ]

Further, the High Court referred to Section 23 of the Contract A
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 B
(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 C
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
D
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:
E
“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
F
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 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 G
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

19
(2013) 353 ITR 388 (HP HC). H
136 SUPREME COURT REPORTS [2022] 2 S.C.R.

A 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
B
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
C 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
D 17. Anexamination 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
E 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
F
any purpose which is anoffence 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)
G 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
H 01.04.1962, restricts the application of such exemption for “any purpose
M/S APEX LABORATORIES PVT. LTD. v. DEPUTY COMMISSIONER OF 137
INCOME TAX, LARGE TAX PAYER UNIT- II [S. RAVINDRA BHAT, J. ]

which is an offence or which is prohibited by law”. The IT Act does A
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
B
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:
C
“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 below:— D
(a) Gifts: A medical practitioner shall not receive any gift
from any pharmaceutical or allied health care industry
and their sales people or representatives.
(b) Travel facilities: A medical practitioner shall not accept
any travel Facility inside the country or outside, E
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, F
etc. as a delegate.]
(c) Hospitality: A medical practitioner shall not accept
individually any hospitality like hotel accommodation
for self and family members under any pretext.
(d) Cash or monetary grants: A medical practitioner shall G
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
H
138 SUPREME COURT REPORTS [2022] 2 S.C.R.

A 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
B 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:
C 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
D 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
E 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
F
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
G 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
H Conduct, Etiquette and Ethics) Regulations, 2002 shall
M/S APEX LABORATORIES PVT. LTD. v. DEPUTY COMMISSIONER OF 139
INCOME TAX, LARGE TAX PAYER UNIT- II [S. RAVINDRA BHAT, J. ]

be inadmissible under section 37(1) of the Income Tax A
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
B
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 C
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 action. D

(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. E
20
20. In Dy. CIT 8(2) Mumbai v PHL Pharma P. Ltd. 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 F
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
G
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

20
ITA No. 4605/Mum/2014, dated 12.01.2017. H
140 SUPREME COURT REPORTS [2022] 2 S.C.R.

A 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
B
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’
C 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
D
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
E 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,
F
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
of the ITAT, Mumbai Bench in the case of Syncom
G 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.”
H (emphasis supplied)
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INCOME TAX, LARGE TAX PAYER UNIT- II [S. RAVINDRA BHAT, J. ]

21. PHL Pharma (supra) further discussed the High Court A
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
B
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 C
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 D
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 E
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 bribe-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:
F
“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 G
with his speech or vote therein. What is provided thereby is
that a Member of Parliament shall not be answerable in a

21
(1998) 4 SCC 626.
22
Subs. Section 8, Act 16 of 2018, w.e.f. 26.07.2018.
H
142 SUPREME COURT REPORTS [2022] 2 S.C.R.

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
B
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
C and it should be left to Parliament to deal with them. By the
same sets of acts the alleged bribe-takers 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.
D 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.
***
E
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
F 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
G 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)
H
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24. Even if Apex’s contention were to be accepted - that it did not A
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 37(1).
25. Furthermore, if the statutory limitations imposed by the 2002 B
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, 1956 23
(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 C
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 D
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) E
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
F
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 G
that an express grant of statutory power carries with it by
necessary implication the authority to use all reasonable

23
Inserted vide Medical Council (Amendment) Act, 1964.
24
(2003) 4 SCC 257. H
144 SUPREME COURT REPORTS [2022] 2 S.C.R.

A 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
B
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 supply cane to
sugar factories implies an incidental power to ensure payment
C 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.
***

D 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
E 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
F 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:
G “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”.”

25
H (2002) 6 SCC 16.
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INCOME TAX, LARGE TAX PAYER UNIT- II [S. RAVINDRA BHAT, J. ]

27. It is also a settled principle of law that no court will lend its aid A
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 self-defeating. Doctors and pharmacists being
complementary and supplementary to each other in the medical
B
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 expenditure. C
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 medication is unaffordable or barely within the
economic reach of the patient– such is the level of trust reposed in D
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 E
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 F
Family Welfare26 which made the following observations:
“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 G
healthcare industry, there is no let-up in this evil practice and
the pharma companies continue to sponsor foreign trips of

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. H
146 SUPREME COURT REPORTS [2022] 2 S.C.R.

A 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
B
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
C 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
D 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 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
E 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:

27
Extracted from https://aspe.hhs.gov/reports/data-point-savings-available-under-full-
F generic-substitution-multiple-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
G 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
H competition for at least a full year (e.g. the first generic was available in 2015 or
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INCOME TAX, LARGE TAX PAYER UNIT- II [S. RAVINDRA BHAT, J. ]

“Beneficiaries could have saved over $600 million in out of A
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.”
B
Likewise, in a previous study by ProPublica (an independent, non-
profit newsroom that does investigative journalism) titled “Dollars for
Doctors: Now There’s Proof: Docs who Get Company Cash Tend to
Prescribe More Brand-Name Meds” (dated 17.03.2016)28 stated that:
“…doctors who receive payments from the medical industry C
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 prescribe.”

earlier). A further $584 million in savings is estimated for substituting generics that D
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 cost-sharing averaged $39.15, while generic cost-sharing for
E
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 F
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 G
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.”
28
https://www.propublica.org/article/doctors-who-take-company-cash-tend-to-
prescribe-more-brand-name-drugs accessed at 16:45 on 13.02-2022 H
148 SUPREME COURT REPORTS [2022] 2 S.C.R.

A 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
B
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.
C 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:
D “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
E 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
F to violate the Medical Council Act, 1956.”
(emphasis supplied)
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
G
fine imposed on the assessee under the Foreign Exchange Regulation
Act, 1947 was sought to be deducted as a business expenditure. This
Court held:

29
Biharilal Jaiswal v. CIT, (1996) 1 SCC 443.
H 30
(1998) 2 SCC 95.
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“Moreover, it will be against public policy to allow the benefit A
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”.
B
(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 C
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—
D
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
E
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. F
(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. G
We find that none of these judgments find 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.

31
I.T.R. No. 27 of 1999, Allahabad HC, dated 21.02.2008. H
150 SUPREME COURT REPORTS [2022] 2 S.C.R.

A 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
B
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
C 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
D 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
E 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
F 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 Act.”
(emphasis supplied)
G 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
H policy. The well-established principle of interpretation of taxing statutes
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– that they need to be interpreted strictly – cannot sustain when it results A
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 follows:
“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 B
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: C
“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 D
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 E
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 F
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.
35. In Bihari Lal Jaiswal & Ors. v. Commissioner of Income
G
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

32
1994 Supp (2) SCC 296.
33
Tomne v. Eispzer, 245 U.S. 418 (1918).
34
(1995) Supp (5) SCR 285. H
152 SUPREME COURT REPORTS [2022] 2 S.C.R.

A 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:
B “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
C sub-letting 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
D 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
E 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
F 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
G 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”

35
(1824) 2 B&C 635, quoted and applied in Jagir Singh v. Ranbir Singh & Ors. 1979
H (2) SCR 282.
M/S APEX LABORATORIES PVT. LTD. v. DEPUTY COMMISSIONER OF 153
INCOME TAX, LARGE TAX PAYER UNIT- II [S. RAVINDRA BHAT, J. ]

And that: A
“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 B
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 C
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 D
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, E
be a case of an agreement, which completely defeats the law
for the reasons already mentioned.
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 F
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 G
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.
36
2022 SCC Online SC 60. H
154 SUPREME COURT REPORTS [2022] 2 S.C.R.

A 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
B
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
C criteria were to enter into bargains of this nature, it will
undoubtedly make the law a hanging (sic laughing) stock.”
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.
D 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
E 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.

F
Devika Gujral Appeal dismissed.

G

H