1. A violation under Section 37 (1) of the income tax act: A CBDT Circular No. 5/2012 [F. No. 225/142/2012-ITA.II], dated 1-8-2012 was issued as under
" 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 assesse which has provided aforesaid freebees and claimed it as a deductible 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 action."
High court upheld the IT circular: The Himachal high court had upheld the income-tax department's decision to tax the amount pharmaceutical and allied health sector industries spend on freebies for medical practitioners and their professional associations. (March 2013)
High Court’s Ruling " The explanation to Section 37(1) makes it clear that any expenditure incurred by the taxpayer 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 do not properly understand the circular then the remedy lies for each individual taxpayer to file appeal under the Act but the Circular which is totally in line with Section 37(1) cannot be said illegal."
The Circular also 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 taxpayer 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 taxpayer to satisfy the assessing authority that the expenditure is not in violation of the Medical Council Regulations. Accordingly, the High Court rejected the petition.
Hospitals are not under MCI regulations: Max hospital had challenged the decision of the MCI where the Ethics Committee had made adverse observations against the hospital, by filing a writ petition being W.P.(C) 1334/2013 – Max Hospital, Pitampura Vs. Medical Council of India.
On behalf of Max Hospital, it was, inter alia, contended before the Hon’ble Delhi High Court that the MCI regulations do not govern or have any concern with the facilities, infrastructure or running of the Hospitals and that the Ethics Committee of the MCI acting under the Regulations had no jurisdiction to pass any direction or judgment on the infrastructure of any hospital which power rests solely with the concerned State Govt.
The MCI had filed an affidavit in this writ petition filed by Max Hospital before the Hon’ble Delhi High Court. In the MCI affidavit, it had been, inter alia, submitted as under:- “………..(iii) That the jurisdiction of MCI is limited only to take action against the registered medical professionals under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (hereinafter the 'Ethics Regulations') and has no jurisdiction to pass any order affecting rights/interests of any Hospital, therefore the MCI could not have passed and has not passed, any order against the petitioner which can be assailed before this Hon'ble Court in writ jurisdiction……………”
After consideration of the legal position and the affidavit submitted on behalf of the MCI, the Hon’ble High Court in its judgment dt. 10.01.14, in the above-mentioned writ petition filed by Max Hospital – held as under:- “………7. It is clearly admitted by the Respondent that it has no jurisdiction to pass any order against the Petitioner hospital under the 2002 Regulations. In fact, it is stated that it has not passed any order against the Petitioner hospital. Thus, I need not go into the question whether the adequate infrastructure facilities for appropriate postoperative care were infact in existence or not in the Petitioner hospital and whether the principles of natural justice had been followed or not while passing the impugned order. Suffice it to say that the observations dated 27.10.2012 made by the Ethics Committee do reflect upon the infrastructure facilities available in the Petitioner hospital and since it had no jurisdiction to go into the same, the observations were uncalled for and cannot be sustained.
Medical Associations are not under MCI regulation: In the High Court of Delhi; W.P.(C) 7987/2010 and CM 18254/2014; HARAM PRAKASH Vs UOI and W.P.(C) 8188/2010 and CM 18242/2014- IMA vs MCI HON'BLE MR. JUSTICE VIBHU BAKHRU ordered as under “ These are applications filed by the petitioners inter alia praying as under: a).Quash/set aside order dated 23.11.2010 passed by the respondent approving the recommendations of the Ethics Committee of Medical Council of India dated 09.11.2010. b). Allow/dispose of the captioned writ petition in terms of letter dated 24.05.2010 of Government of India, judgment dated 10.01.2014 in Writ Petition No. 1334/2013 titled “Max Hospital Vs. Medical Council of India” and resolutions of 2nd Session (continued 138th Session) General Body meeting of MCI held on 28.03.14.
The petitioner submits that the subject matter of the petition is covered by a judgment of this court titled “Max Hospital Vs. Medical Council of India” in W.P.(C) 1334/2013 decided on 10.01.2014.
It is asserted by the applicant that the Government of India had by a letter dated 24.05.2010 deleted the words ‘and professional association of doctors’ from the regulation 6.8 of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002.
The approval for deletion of the aforesaid words was granted by the Central Government under Section 33 of the Indian Medical Council Act, 1956.
In addition, it is submitted that the MCI at its General Body meeting held on 28.03.2014 had accepted the recommendation of the Executive Committee and resolved as under:- In view of the above, the Council unanimously decided that the amendment to title of section 6.8 of the Indian Medical Council (Professional Conduct Etiquette and Ethics) Regulations, 2002vide notification dated 10/12/2009 and further amended by deletion of the words ‘and professional association of doctors’ duly approved, and authenticated by the Govt. of India vide their communication dated 24/5/2010 be notified forthwith in the official gazette of the Government of India.The aforesaid contentions are not disputed by the MCI. In view of the stand of the MCI as recorded in the General Body Resolution dated 28.03.2014 the present petitions are liable to be allowed. Accordingly, the order of MCI dated 23.11.2010 accepting the recommendation of the Ethical Committee of 09.11.2010 is set aside”.
2. Violation of Section 28 in The Income- Tax Act, 1995: Recently the office of the Assistant Director of Income Tax (investigation) Unit-IV (2), Jhandewalan Extn., New Delhi procured information from MCI under Section 131 of the Income Tax Act, 1961.
The investigating agency took cognizance of the a news titled “Graft charge puts 300 does under MCI lens” reported in times of India on page no. 8 dated 18.11.2014 that the Medical Council of India is in possession of an anonymous complaint in regard to bribes paid by an Ahmedabad based pharma company to Doctors in the form of money as well as gifts in return for prescribing its medicines.
As per the IT department this prima facie is a case of Income Tax evasion as the Doctors seemed to have received benefits in exercise of their profession. As per the IT department the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession is taxable as per section 28(iv) of the Income Tax Act. 1961.
Section 28 in The Income- Tax Act, 1995: Profits and gains of business or profession: The following income shall be chargeable to income- tax under the head" Profits and gains of business or profession",- (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;]
[The author Dr K K Aggarwal is Senior National Vice President Indian Medical Association and President Heart Care Foundation of India]
" 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 assesse which has provided aforesaid freebees and claimed it as a deductible 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 action."
High court upheld the IT circular: The Himachal high court had upheld the income-tax department's decision to tax the amount pharmaceutical and allied health sector industries spend on freebies for medical practitioners and their professional associations. (March 2013)
High Court’s Ruling " The explanation to Section 37(1) makes it clear that any expenditure incurred by the taxpayer 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 do not properly understand the circular then the remedy lies for each individual taxpayer to file appeal under the Act but the Circular which is totally in line with Section 37(1) cannot be said illegal."
The Circular also 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 taxpayer 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 taxpayer to satisfy the assessing authority that the expenditure is not in violation of the Medical Council Regulations. Accordingly, the High Court rejected the petition.
Hospitals are not under MCI regulations: Max hospital had challenged the decision of the MCI where the Ethics Committee had made adverse observations against the hospital, by filing a writ petition being W.P.(C) 1334/2013 – Max Hospital, Pitampura Vs. Medical Council of India.
On behalf of Max Hospital, it was, inter alia, contended before the Hon’ble Delhi High Court that the MCI regulations do not govern or have any concern with the facilities, infrastructure or running of the Hospitals and that the Ethics Committee of the MCI acting under the Regulations had no jurisdiction to pass any direction or judgment on the infrastructure of any hospital which power rests solely with the concerned State Govt.
The MCI had filed an affidavit in this writ petition filed by Max Hospital before the Hon’ble Delhi High Court. In the MCI affidavit, it had been, inter alia, submitted as under:- “………..(iii) That the jurisdiction of MCI is limited only to take action against the registered medical professionals under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (hereinafter the 'Ethics Regulations') and has no jurisdiction to pass any order affecting rights/interests of any Hospital, therefore the MCI could not have passed and has not passed, any order against the petitioner which can be assailed before this Hon'ble Court in writ jurisdiction……………”
After consideration of the legal position and the affidavit submitted on behalf of the MCI, the Hon’ble High Court in its judgment dt. 10.01.14, in the above-mentioned writ petition filed by Max Hospital – held as under:- “………7. It is clearly admitted by the Respondent that it has no jurisdiction to pass any order against the Petitioner hospital under the 2002 Regulations. In fact, it is stated that it has not passed any order against the Petitioner hospital. Thus, I need not go into the question whether the adequate infrastructure facilities for appropriate postoperative care were infact in existence or not in the Petitioner hospital and whether the principles of natural justice had been followed or not while passing the impugned order. Suffice it to say that the observations dated 27.10.2012 made by the Ethics Committee do reflect upon the infrastructure facilities available in the Petitioner hospital and since it had no jurisdiction to go into the same, the observations were uncalled for and cannot be sustained.
Medical Associations are not under MCI regulation: In the High Court of Delhi; W.P.(C) 7987/2010 and CM 18254/2014; HARAM PRAKASH Vs UOI and W.P.(C) 8188/2010 and CM 18242/2014- IMA vs MCI HON'BLE MR. JUSTICE VIBHU BAKHRU ordered as under “ These are applications filed by the petitioners inter alia praying as under: a).Quash/set aside order dated 23.11.2010 passed by the respondent approving the recommendations of the Ethics Committee of Medical Council of India dated 09.11.2010. b). Allow/dispose of the captioned writ petition in terms of letter dated 24.05.2010 of Government of India, judgment dated 10.01.2014 in Writ Petition No. 1334/2013 titled “Max Hospital Vs. Medical Council of India” and resolutions of 2nd Session (continued 138th Session) General Body meeting of MCI held on 28.03.14.
The petitioner submits that the subject matter of the petition is covered by a judgment of this court titled “Max Hospital Vs. Medical Council of India” in W.P.(C) 1334/2013 decided on 10.01.2014.
It is asserted by the applicant that the Government of India had by a letter dated 24.05.2010 deleted the words ‘and professional association of doctors’ from the regulation 6.8 of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002.
The approval for deletion of the aforesaid words was granted by the Central Government under Section 33 of the Indian Medical Council Act, 1956.
In addition, it is submitted that the MCI at its General Body meeting held on 28.03.2014 had accepted the recommendation of the Executive Committee and resolved as under:- In view of the above, the Council unanimously decided that the amendment to title of section 6.8 of the Indian Medical Council (Professional Conduct Etiquette and Ethics) Regulations, 2002vide notification dated 10/12/2009 and further amended by deletion of the words ‘and professional association of doctors’ duly approved, and authenticated by the Govt. of India vide their communication dated 24/5/2010 be notified forthwith in the official gazette of the Government of India.The aforesaid contentions are not disputed by the MCI. In view of the stand of the MCI as recorded in the General Body Resolution dated 28.03.2014 the present petitions are liable to be allowed. Accordingly, the order of MCI dated 23.11.2010 accepting the recommendation of the Ethical Committee of 09.11.2010 is set aside”.
2. Violation of Section 28 in The Income- Tax Act, 1995: Recently the office of the Assistant Director of Income Tax (investigation) Unit-IV (2), Jhandewalan Extn., New Delhi procured information from MCI under Section 131 of the Income Tax Act, 1961.
The investigating agency took cognizance of the a news titled “Graft charge puts 300 does under MCI lens” reported in times of India on page no. 8 dated 18.11.2014 that the Medical Council of India is in possession of an anonymous complaint in regard to bribes paid by an Ahmedabad based pharma company to Doctors in the form of money as well as gifts in return for prescribing its medicines.
As per the IT department this prima facie is a case of Income Tax evasion as the Doctors seemed to have received benefits in exercise of their profession. As per the IT department the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession is taxable as per section 28(iv) of the Income Tax Act. 1961.
Section 28 in The Income- Tax Act, 1995: Profits and gains of business or profession: The following income shall be chargeable to income- tax under the head" Profits and gains of business or profession",- (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;]
[The author Dr K K Aggarwal is Senior National Vice President Indian Medical Association and President Heart Care Foundation of India]
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