Bombay High Court
Commissioner Of Income-Tax vs Taraporvala Sons Co. Pvt. Ltd. on 6 March, 1999
Equivalent citations: [1999]239ITR319(BOM)
Author: S.H. Kapadia
Bench: S.H. Kapadia
JUDGMENT B.P. Saraf, J.
1. By this reference under Section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred the following question of law for the opinion of this court at the instance of the Revenue :
"Whether, on the facts and in the circumstances of the case, the secret commission paid by the assessee is deductible as business expenditure under Section 37 of the Income-tax Act, 1961 ?"
2. This reference pertains to the assessment years 1979-80 and 1980-81. In the above assessment years, the assessee-company claimed to have paid secret commission of Rs. 1,31,209 and Rs. 1,22,407, respectively, allegedly, for the purpose of securing business. Since the assessee had not filed the relevant evidence regarding payment of commission, the Income-tax Officer did not allow the claim of the assessee for deduction of the above amount under Section 37(1) of the Act in the computation of its income. The assessee preferred an appeal to the Commissioner of Income-tax (Appeals) who accepted the claim of the assessee for deduction of secret commission and allowed the appeal of the assessee. He, however, disallowed 1/4th of the secret commission claimed by the assessee. The appeal of the Revenue against the above order was dismissed by the Income-tax Appellate Tribunal. Hence, this reference at the instance of the Revenue.
3. We have heard Mr. R. V. Desai, learned counsel for the Revenue, and Mr. J. D. Mistry, learned counsel for the assessee. Seventy-five per cent. of the secret commission claimed to have been paid by the assessee has been allowed by the Commissioner of Income-tax (Appeals) as a deduction in the computation of the income of the assessee under Section 37(1) of the Act. This decision of the Commissioner (Appeals) has been upheld by the Tribunal. Mr. Mistry, learned counsel for the assessee, contended that it is now well-settled that secret commission is allowable as a deduction under Section 37(1) of the Act in the computation of business income as business expenditure. Mr. Desai, learned counsel for the Revenue, however, drew our attention to the explanation added to Section 37(1) with retrospective effect from April 1, 1962, which reads as follows :
"Explanation,--For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence 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."
4. Mr. Desai submits that in view of the insertion of the above Explanation with retrospective effect from April 1, 1962, in order to claim deduction under Section 37(1), the assessee has to show that the amount paid allegedly as secret commission has been paid for any purpose which is not an offence or which is not prohibited by law. Mr. Desai submits that as the Explanation was inserted by the Finance (No. 2) Act, 1998, with retrospective effect from the date of coming into force of the Income-tax Act, 1961, i.e., April 1, 1962, the income-tax authorities, including the Tribunal, had no occasion to examine the claim of the assessee for deduction of secret commission from this angle. He submits that in view of the above, this is a fit case where the matter should be remitted back to the Tribunal to decide the claim of the assessee for deduction of secret commission afresh in the light of the Explanation set out above. He submits that the assessee will not be entitled to get deduction for the secret commission paid by him if it is paid for a purpose which is an offence or which is prohibited by law. In that event, he submits, that such an expenditure shall not be deemed to be incurred for the purpose of business or profession and no deduction or allowance shall be made in respect thereof.
5. We have perused the newly added Explanation and considered the above submissions. We find merit in the submission of Mr. Desai, learned counsel for the Revenue, that in view of the amendment to Section 37(1) of the Act by the insertion of Explanation with retrospective effect from the inception of'the Act, i.e., April 1, 1962, the matter requires reconsideration by the Tribunal. The Tribunal in this case has upheld the deduction of secret commission without satisfying itself that it was not incurred by the assessee for any purpose which is an offence or which is prohibited by law. Allowance of deduction under Section 37(1) of the Act in respect of secret commission without a clear finding in this regard, in our opinion, is not correct. The Tribunal will have to decide the question of allowability of deduction of secret commission in the light of the Explanation inserted with retrospective effect from April 1, 1962. In these circumstances, we are of the opinion that the Tribunal was not right in holding that the commission claimed to have been paid by the assessee by way of secret commission was an expenditure laid out or expended wholly and exclusively for the purpose of its business within the meaning of Section 37(1) of the Income-tax Act, 1961, read with the Explanation appended thereto. However, having regard to the fact that the Tribunal could not have examined at the time it passed the order the controversy in the light of the Explanation which was inserted in the year 1998 with retrospective effect from April 1, 1962, we remit the matter to the Tribunal to re-examine afresh in the light thereof.
6. Reference stands disposed of accordingly with no order as to costs.
7. C. C. expedited.