Supreme Court: In a case where the Division Bench comprising of Uday Umesh Lalit and S. Ravindra Bhat*, JJ., was to answer whether absence of express provision prohibiting the pharmaceutical companies from providing freebies to the medical practitioners be considered prohibited by law when acceptance of freebies by medical practitioners is expressly made an offence, answering in affirmative, the Bench observed,

“…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 genesis of the issue was that Apex Laboratories Pvt. Ltd., a pharmaceutical company was issued a notice under Section 142(1) of the Income Tax (IT) Act, 1961 to explain why the expenditure of Rs. 4,72,91,159 incurred towards gifting freebies such as hospitality, conference fees, gold coins, LCD TVs, fridges, laptops, etc. to medical practitioners for creating awareness about the health supplement ‘Zincovit’, should not be added back to the total income of Apex.

Noticeably, an amendment to the Medical Council Act, 1956 through the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 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. Consequently, on 01-08-2012, the Central Board of Direct Taxes 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 Section 37(1), which denies the application of the benefit for any purpose which is an ‘offence’ or ‘prohibited by law’.

Findings of the Courts Below

Therefore, CIT(A) had held that the amounts spend by Apex for distribution of freebies would not classify as ‘business expenditure’ under Section 37(1) of the IT Act, 1961. The order of CIT was concurrently upheld by the Income Tax Appellate Tribunal and the High Court. Relying on the Regulations, 2002, the High Court further held that 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 2010-2011, as claimed by Apex.

Contentions of the Parties

The Apex contended that while 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 under Section 37(1).

On the contrary, the State 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 from the amended Regulations, 2002 and the menace of prescribing expensive branded medication as a quid pro quo arrangement had a direct bearing on public policy, which was implicit in the Regulations, 2002.

Observations and Analysis

Section 37 of the IT Act is a residuary provision which states that 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 exemption. But the exemption is not absolute and Explanation 1, restricts the application of such exemption for “any purpose which is an offence or which is prohibited by law”.

Doubting the position as had been laid down in CIT 8(2) v. PHL Pharma P. Ltd. (ITA No. 4605/Mum/2014, dated 12.01.2017), that the 2002 Regulations were inapplicable to pharmaceutical companies, and 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, the Bench opined,

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.”

The Bench observed,

“It is but logical that when acceptance of freebies is punishable by the MCI, 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.”

Thus, the Bench noted that acceptance of freebies given by pharmaceutical companies is clearly an offence on part of the medical practitioner, punishable with varying consequences which falls within the purview of “prohibited by law” in Explanation 1 to Section 37(1).


Emphasising on the principle of law that no court will lend its aid to a party that roots its cause of action in an immoral or illegal act, the Bench opined that none should be allowed to profit from any wrongdoing coupled with the fact that statutory regimes should be coherent and not self-defeating. Observing that 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, the Bench noted,

“…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.”

The Bench noted that these freebies are technically not ‘free’ – the cost of supplying such freebies is usually factored into the drug, driving prices up, thus creating a perpetual publicly injurious cycle due to prescribing medication that is significantly marked up, over effective generic counterparts in lieu of such a quid pro quo exchange. Further, the agreement between the pharmaceutical companies and the medical practitioners in gifting freebies for boosting sales of prescription drugs was also held to be violative of Section 23 of the Contract Act, 1872 as Pharmaceutical companies misuse a legislative gap to actively perpetuate the commission of an offence.


In the instant case, the 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. Therefore, the Bench held that the medical practitioners being forbidden from accepting such gifts, or “freebies” was no less a prohibition on the part of their giver, or donor, i.e., Apex. Hence, the appeal was dismissed.

[Apex Laboratories Pvt. Ltd. v. CIT, 2022 SCC OnLine SC 221, decided on 22-02-2022]

*Judgment by: Justice S. Ravindra Bhat

Appearance by:

For the Appellant: S. Ganesh, Senior Advocate

For the Respondents: Sanjay Jain, ASG

Kamini Sharma, Editorial Assistant has put this report together 


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