CBDT Circular Disallowing Expenses Incurred On Granting Freebies To Doctors, Not Applicable To A/Y 2008-09: Bombay High Court

The bench of Justices Dhiraj Singh Thakur and Kamal Khata noted that Regulation 6.8 of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, which bars the medical practitioners from receiving any gift, cash or monetary grant from any pharmaceutical and allied healthcare industry, is incorporated vide an amendment, with effect from 10^th December 2009.

Holding that the CBDT Circular was introduced in view of the amended Regulations of 2002, the Court concluded that neither the CBDT Circular nor Regulation 6.8 of the 2002 Regulations, would be applicable to the assessment year 2008-09.

In its Income Tax Return filed for the assessment year 2008-2009, the petitioner, Abbott India, claimed deduction for the expenditure incurred by it on gifts and towards the distribution of samples of medicines manufactured by it. The said expenses were allowed in the assessment order passed by the Assessing Officer (AO).

Thereafter, the petitioner’s case was selected for scrutiny assessment. In 2015, a notice under Section 148 of the Income Tax Act was issued on the petitioner, seeking to re-assess its income for the assessment year 2008-09, on the ground that the AO had reason to believe that petitioner’s income for the relevant assessment year had escaped assessment, within the meaning of Section 147 of the Income Tax Act.

The revenue department opined that under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, the medical practitioners and their professional associations were prohibited from taking any Gifts, Cash, or monetary grants from the pharmaceutical and allied health sector industries. Further, the Central Board of Direct Taxes (CBDT) had issued a Circular No.5/2012 (F.No.225/142/2012-ITA.II), dated 01.08.2012, disallowing the expenses incurred on the same.

Since the expenses claimed by the petitioner were prohibited by law, they were inadmissible in view of Explanation 1 to Section 37(1) of the Income Tax Act, the department concluded. The department thus, sought to reopen the assessment for the relevant assessment years.

Explanation 1 to Section 37 denies claim of any expense, if the same has been incurred for a purpose which is either an offence or is prohibited by law.

Challenging the notice issued by the Assistant Commissioner of Income Tax (ACIT) under Section 148 of the Act, the petitioner, Abbott India, filed a writ petition before the Bombay High Court.

Perusing the reasons for reopening the assessment, as furnished to the petitioner by the Income Tax Authority, the Court said, “..while the assessing officer had alleged that that the assessee had failed to disclose fully and truly all material facts necessary for assessment, the reasons do not at all reflect as to what were those material facts, which had not been disclosed by the Petitioner, which if disclosed would have led the assessing officer to bring to tax such income in the scrutiny assessment.”

The bench further held, “The Petitioner was only obliged to disclose the material primary facts and was certainly not obliged to refer to the statutory provisions or the regulations of 2002 at the time of fling the return or during the course of the assessment proceedings.”

Referring to the relevant provisions of the Income Tax Act, the Court noted that as per Section 147, if any income chargeable to tax in the case of an assessee has escaped assessment for any assessment year, the Assessing Officer (AO) may, subject to the provisions of Sections 148 to 153, assess or reassess such income.

Section 148 of the Income Tax Act requires the AO to serve notice on the assessee before making reassessment/ precomputation of Income. As per the proviso to Section 148, no notice under Section 148 shall be issued unless there is information with the AO which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the relevant assessment year.

While holding that it cannot be said that the petitioner, Abbott India, had not disclosed the relevant material facts during the assessment proceedings, the Court reiterated that the assessment under Section 143(3) can be re-opened only in terms of Section 147 of the Income Tax Act and not otherwise.

The argument that the claim was allowed contrary to the CBDT Circular issued in the year 2012, would not by itself authorize the AO to reassess the income, unless the jurisdictional conditions prescribed under the proviso to Section 148 had been satisfied, the Court said. The bench added that the same, in the present case, were not satisfied at all. “The impugned notice is liable to be quashed and set aside on this ground alone,” the Court ruled.

While reckoning that vide notification dated 10^th December, 2009, the Regulations of 2002 were amended to include Clause 6.8, the bench observed, “It was in the aforementioned backdrop that the Board issued the Circular No.5/2012 dated 1 August 2012 for sensitizing its officers that receipt of gifts, cash, travel facilities and hospitality from the pharmaceutical or allied health sector being prohibited under the regulations of 2002 would be inadmissible under Section 37 being prohibited by law.”

Observing that the Circular No.5/2012 issued by the CBDT, referred to the amended Regulations of 2002, the bench concluded that neither the CBDT Circular nor Regulation 6.8 incorporated in the 2002 Regulations with effect from 10^th December 2009, would be applicable to the assessment year 2008-09.

The Court added that it is settled that the law to be applied is the one that is in force in the relevant assessment year, unless otherwise provided expressly or by necessary implication.

“In our opinion, since the CBDT Circular No.5/12 as also Regulation 6.8 of 2002, were not applicable to the case of the Petitioner for the relevant assessment year 2008-09, there would be no tangible material or basis for the assessing officer to have ‘reason to believe’ that income for the said assessment year 2008-09 had escaped assessment,” the Court ruled.

The Court thus allowed the petition and set aside the Section 148 notice issued by the revenue department.

Case Title: Abbott India Ltd versus Assistant Commissioner of Income Tax & Ors.

Citation: 2023 LiveLaw (Bom) 100

Dated: 10.02.2023

Counsel for the Petitioner: Mr. Madhur Agarwal i/b Atul K. Jasani

Counsel for the Respondent: Mr. Suresh Kumar

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