The existing section 37 of the Income Tax Act, 1961 provides that any expenditure which has been incurred for the purpose of business or profession shall be allowed as expenditure. To claim the deduction under section 37 following ingredients should be present

  1. The expenditure should not be a capital expenditure
  2. The expenditure should not be covered under any heads in section 30 to 36
  3. The expenditure should be incurred for the purpose of business or in the course of business
  4. The expenditure should not be a personal expenditure
  5. The expenditure incurred should not be in nature mentioned under sub section 2A of section 37 i.e. advertisement expenses supporting any political
  6. The Expenditure incurred should not be for any purpose which is an offence or which is prohibited by

This section serves as a residuary section for claiming of the expenses which do not fall under section 30 to 36 and thus the Objective of Section 37 of the Act is to claim business expenditure incurred by assessee.

This article deals with only the last limb of the above i.e Expenditure incurred should not be for any purpose which is an offence or which is prohibited by law alongwith the Hon’ble Supreme court decision in the case of M/s. Apex Laboratories Pvt. Ltd. vs. DCIT [2022] S.L.P. (Civil) No. 23207 of 2019. 

Background of amendment in section 37(1)

The Finance [No. 2] act, 1998 introduced an explanation 1 to section 37(1) w.r.e.f 01-04-1962 which reads as follows

“Explanation 1 – For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence of which is prohibited by law shall not be deemed to have been incurred for the purposes of business or profession and no deduction or allowance shall be made in respect of such expenditure.”

The CBDT also issued a circular No. 05/2012 dated 01-08-2012 and stated that the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 imposes 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.

Accordingly, the CBDT clarified that claim of any expenses incurred in providing abovementioned or similar beliefs benefits are in violation of the regulations of the Indian Medical Council (Professional Conduct, Etiquette And Ethics)

Regulations, 2002 shall be inadmissible under section 37(1) being expenses prohibited by law.

This circular was challenged in Himachal Pradesh High Court in the case of Confederation of Indian Pharmaceutical Industry vs. CBDT (2013) 335 ITR 388 (HP), in which the High Court rejected the petition and the validity of the CBDT circular was upheld by holding.

“The regulation of the Medical Council prohibiting medical practitioners from unveiling a freebies is a very salutary regulation which is in the interest of patients and the public. This court is not oblivious to the increasing complaints that the medical 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) comes into play. The petitioners contention that they circular goes beyond the section is not acceptable. In case the assessing authorities are not properly understanding the circular then the remedy lies for each individual assessee to file an appeal but the circular which is totally in line with section 37 (1) cannot be said to be illegal to satisfy the AO that the expense is not in violation of the Medical Council regulations.”

The very Genesis of this Circular was also challenged in Delhi High court in the case of Max hospital vs. Medical Council of India in WP no. 1334 of 2013 in which it was held that the provisions of Medical Council of India only mind the medical professionals and not others, such as hospitals and pharmaceutical companies. In this given case a complaint was filed with the Ethics Committee of Medical Council of India alleging that the death of the patient was caused due to medical negligence of the doctor. The Ethics Committee passed an order punishing the erring doctors but this order had certain adverse remarks against the Max hospital as well.

Aggrieved by the adverse remarks, Max hospital filed writ petition contending that the Medical Council of India (Professional Conduct, Etiquette And Ethics) Regulations, have been framed in exercise of the power confirmed under section 20-A read with section 33(m) of the Indian Medical Council Act, 1956 and these regulations do not govern or have any concern with the facilities, infrastructure or running of the hospitals and secondly, that the Ethics Committee of the MCI acting under the regulations had no jurisdiction to pass any direction of judgment on the infrastructure of any hospital which power rests solely with the concerned state government. While dealing with this grievances, Hon’ble Delhi High Court noted and held that the respondent i.e the Ethics Committee had no jurisdiction to pass any order against the petitioner hospital under the 2002 Regulations.

Based on the aforesaid  judgments,  there have been various Decision’s of the Income Tax Appellate Tribunals and in some of these decisions have held that these expenses to be not allowable under section 37 (1) the Act, while in some it has been held it to be allowable.

Analysis and comments by the Hon’ble Supreme Court in Apex Laboratory’ Case

The Hon’ble Supreme Court Observed the following

  1. Section 37 of the act is the residuary provision and any business or professional expenditure it does not ordinarily fall under section 30 to 36 of the IGT act which are not in the nature of capital expenditure or personal expenses can claim the benefit of this exemption. However, the same is not
  2. The explanation one which has been inserted in 1998 r.e.f 1st April, 1962, Restricts the application of such exemption for, “any purpose which is an offence or which is prohibited by law.”

However they Income Tax Act does not provide the definition of these terms and therefore one has to look the following

  1. The General Clauses Act, 1897, which interalia defines “offence” as “any act or omission made punishable by any law for the time being in ”; &
  2. The Indian Penal code, section 40 defines it as “a thing punishable by this code”, read with section 43 which defines “illegal” as being applicable to “everything which is an offence or which is prohibited by law or which furnishes ground for civil action”
  1. Thus, the Hon’ble court held that Explanation 1 contains within its ambits all such activities which are illegal prohibited by law and/or
  2. It further held that the circular 05/2012 dated 01-08-2012 issued by CBDT is clarificatory in nature, was in effect from the date of implementation of regulation 6.8 of 2002 regulations which inter alia were published in the Official Gazette on 14th December 2009 Shall become effective from the date of it’s publication in the Official Gazette.
  1. It further held that though the Memorandum of Finance Bill, 1998 elucidated within its ambit of Explanation 1 to include “Protection money extortion, hafta, bribes, ”, yet ipso facto by no means is the embargo envisaged restricted to those examples. Such a narrow interpretation of explanation 1 to section 37(1) of the act defeats the purpose for which it was inserted, i.e. to disallow a taxpayer from claiming a tax benefit for its participation in an illegal activity and thus held that It is logical that when acceptance of freebies is punishable by the Medical Council of India (The range of penalties and sanctions extending to ban imposed on the medical 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.
  1. Howsoever, the Hon’ble Supreme Court accepted the contention that the petitioner did not indulge in any illegal activity by committing an offence, as there was no corresponding penal provisions in the 2002, Regulations applicable to it, but it held that there is no doubt that the action of the petitioner fell within the purview of “prohibited by law” by observing as under:-

“27. It is also a settled principle of law that no court will lend its aid to a party that roots it’s cause of action in an immoral or illegal act (ex dolo malo non ortitur 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 profession, a comprehensive view must be adopted to regulate their conduct in view of the contemporary statutory regimes and regulations. Therefore, denial of tax benefits cannot be construed as penalising the assessee pharmaceutical company. Only its participation in what is plainly an action prohibited by law, preclude the assessee from claiming it is deductible expenditure.”

  1. The Hon’ble SC further held that that one arm of the law cannot be utilised to defeat the other arm of law and doing so would be opposed to public policy and bring the law into ridicule and further fortified the views taken in judgements of the High Court in CIT vs. Kap Scan and Diagnostic Center Pvt. Ltd. (2012) 344 ITR 476 (P & H) and Confederation of Indian Pharmaceutical Industry (SSI) CBDT (2013) 353 ITR 388( HP) where in it was held that it will be against public policy to allow the benefit of deduction under one statue, of any expenditure incurred in violation of the provisions of another statute or any penalty imposed under another statue.
  1. The Hon’ble court further observed the following from its own judgment in the case of T. Girish vs. Y. Subba Raju (D) by
  2. Rs. & Ors. (2022) SCC Online SC 60

“79. The illegality goes to the root of the matter. the illegality is not trivial or venial. …The illegality cannot be skirted nor got around. the plant if is confronted with it and he must face its consequence. the 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 terms….”

  1. In coming to the conclusion that the 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) of the act.


  1. There have been numerous Judgments wherein it has been held that the CBDT cannot provide “casus omissus”, i.e for a situation omitted from or not provided for by statute or regulation and therefore governed by the common law, 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 “contemporaneous expositio” 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 and 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 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 different regulation issued under a different act so as to impose any kind of hardship or liability to assessee. It is a trite law that the CBDT circular which creates a burden or a liability or imposes a new kind of imparity, the same cannot be reckoned retrospectively. the beneficial circular may apply retrospectively but a circular imposing a burden has to be applied prospectively only.
  1. It appears that to overcome the above, an Explanation 3 has been inserted by Finance Act, 2022 w.e.f 01-04-2022 which inter alia is for the removal of doubts, & thus it is clarified that the expression “expenditure incurred by and assessee for any purpose which is an offence or which is prohibited by law” under Explanation 1, shall include and shall be deemed to have always included the expenditure incurred by an assessee –
    1. For any purpose which is an offence under, or which is prohibited by, any law for the time being in force, in India or outside India; or
    2. to provide any benefit or perquisite, in whatever form to a person, whether or not carrying on a business or exercising a profession and acceptance of such benefit or perquisite by such person is in violation off any law or rule or regulation or guideline, as the case may be for the time being in force,governing the conduct of such person; or
    3. to compound offence under any law for the time being in force, in India or outside (emphasis provided)
  1. At the same time, The Finance Act 2022, has also inserted a new section 194R, which requires any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall before providing such benefit or perquisite, as the case may be, 2 such resident ensure that tax has been deducted in respect of such benefit or perquisite…..
  2. Further, clause (iv) of section 28 requires any person in receipt of such benefit or perquisite, whether convertible into money or not, arising from the business or the exercise of the profession to be included as income in that person’s
  3. The government has blown hot and cold at the same time by inserting an explanation for disallowance of expenditure incurred by way of providing any benefit or perquisite which is in violation of any law or rule or regulation or guideline governing the conduct of such person and at the same time the person providing such benefit or perquisite also has to ensure a tax has to be deducted before providing such benefit or benefit which was always taxable in the hands of the recipient. Thus now such benefits will not only be taxed in the Hands of the recipient but also be disallowed in the hands of the provides of such benefits, leading to double
  4. Further, many of the issue’s, which were more or less settled, the illustrative list of which is as under
    1. Payment of Ransom money.
    2. Payment of money for settlement upon infringements of extra territorial laws.
    3. Payments for Fines and penalties which are compensatory in Nature.
    4. Expenses incurred on goods which have been imported without valid licences.
    5. Payment of Secret commission.
    6. Payment for Regularisation/ Violation of Procedures.
    7. Legal Expenses incurred to for defending any issues which is an offence or which is prohibited by


  1. With due respect to the Judgment of the Hon’ble SC, the Question now arises, has this judgment given a legal sanctity that circulars or notification issued by the CBDT will have a legal binding precedent more particularly when there was no law in respect of the same e. whether the circulars or notifications issued when there is no law, can override the Act?
  2. In view of this new development and find an answer, in my opinion the same will have to be tested before the Hon’ble courts, when there have been numerous judgements on the point that CBDT cannot provide “casus omissus” i.e. it cannot provide a supplement to a statute or notification or any regulation which has not been expressly provided therein prior to the enactment of the law.

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