Karnataka High Court
Commissioner Of Income-Tax vs A.J. Shetty & Co. P. Ltd. on 5 December, 2001
Equivalent citations: (2002)173CTR(KAR)375, ILR2002KAR906, [2002]255ITR180(KAR), [2002]255ITR180(KARN), [2002]122TAXMAN389(KAR)
Author: D.V. Shylendra Kumar
Bench: A.M. Farooq, D.V. Shylendra Kumar
JUDGMENT D.V. Shylendra Kumar, J.
1. In this reference at the instance of the Revenue, the Income-tax Appellate Tribunal, Bangalore Bench, has referred the following question of law said to be arising out of the order dated December 5, 1994, in I. T. A. No. 819 of 1999 for our opinion :
"Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that 50 per cent, of the raid expenses and 75 per cent, of the amounts paid to informants are allowable under Section 37(1) ?"
2. The statement of case furnished by the Tribunal indicates the following facts :
The assessment year concerned is 1985-86 and the assessee is a private limited company engaged in the business of excise contract. In the return of income filed by the assessee for the assessment year in question, the assessee had claimed two items of expenditure, namely, (1) an expenditure in a sum of Rs. 1,53,863 incurred towards helping the excise authorities in conducting raids on illegal manufacturers of liquor and an expenditure in a sum of Rs. 75,925 incurred towards payment/donation to informants providing information regarding illicit brewing of liquor and also to charitable organisations.
3. In this reference, we are concerned with only these two items of expenditure which were claimed as expenditure necessary and incidental for the carrying on of its business by the assessee and which had come to be disallowed by the Assessing Officer as well as the Appellate Commissioner in the first appeal by the assessee, but which had come to be allowed in the second appeal by the Income-tax Appellate Tribunal purporting to follow its earlier view taken in respect of a sister concern of the assessee involving Similar issues and thereby allowing the appeal and directing deduction of an amount of 50 per cent, in respect of the raid expenses and 75 per cent., an expense towards donation/awards paid by the assessee to informants. The Tribunal having held this to be an item of expenditure allowable under Section 37(1) of the Act, the Revenue had sought for referring the question of law referred to above and the Tribunal has accordingly referred this question for our opinion under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act" for short).
4. Sri M. V. Seshachala, learned standing counsel appearing for the Revenue, has drawn the attention of the court to the assessment order as well as the appellate order passed by the Commissioner of Income-tax (Appeals). Learned counsel has then drawn our attention to the order of the Appellate Tribunal on this aspect of the matter.
5. The submission of learned counsel for the Revenue is two-fold. Firstly, the assessing authority and the first appellate authority having recorded a clear finding of fact that the assessee has not been able to prove the actual incurring of this expenditure, without any reliable material, the same was rightly rejected and the Appellate Tribunal has not gone into this aspect of the matter, but merely reversed the same purporting to follow its earlier view on the similar question, tendered in I. T. A. No. 771 of 1989 and 1. T. A. No. 818 of 1999 dated October 3, 1994, in the case of A. J. Shetty Family Trust, Mangalore, which is a sister concern of the assessee and thereafter allowing the expenditure as one deductible under Section 37(1) of the Act, is an unsupportable conclusion in law and not based on any finding of fact recorded by the Tribunal indicating that the assessee had in fact incurred such an expenditure for the purpose of claiming it as a deduction under Section 37 of the Act. The second submission is that the assessee admittedly having paid such amounts to the officials of the Department and incurred expenditure for the purpose of entertaining or providing facilities to the officials of the Department for conducting raids on the illicit brewing, etc., it was not an "expenditure" which the assessee was required to incur as part of its business activity, but an extra legal payment to appease or woo the officials of the Excise Department and definitely not an "expenditure" approved in law and amounts to an illegal expenditure. Payments of this nature are in fact prohibited in law as it is not the function of an excise contractor either to maintain or to pay for the expenses of the Departmental officials and an expenditure of this nature is as such prohibited in law. In so far as the expenditure by way of reward or donations to informers or charitable organisation is concerned, learned counsel submits that here again the question of the assessee incurring such expenditure does not arise as prevention of illegal acts amounting to offence under the Excise Act is the responsibility of the Excise Department which is the enforcing agency and the information, if at all by any informers, is to the Department, who, if found fit and proper, may reward such informers. It is submitted that the question of the assessee making or paying amounts by way of reward, does not arise. It is also submitted that if any amounts are given by way of donation to any charitable organisations, it definitely is not an "expenditure" incurred for the purpose of its business and that can be claimed to the extent permitted under law as an amount contributed by way of donations to such charitable organisations.
6. In so far as the expenditure incurred towards conduct of raids by the Department, learned counsel for the Revenue draws the attention of the court to the Explanation under Section 37 of the Act which has been inserted by the Finance (No. 2) Act of 1998 with retrospective effect from 1st April, 1962. For the purpose of convenience, Section 37 of the Act is reproduced.
"37. General.-- (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'.
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.
(2) and (2A) Omitted by the Finance Act, 1997, with effect from 1st April, 1998.
(2B) Notwithstanding anything contained in Sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.
(3), (4) and (5) Omitted by the Finance Act, 1997, with effect from 1st April, 1998."
7. The submission of learned counsel for the Revenue in the light of such an amendment is that the expenditure incurred being one prohibited by law and the Explanation having retrospective effect from April 1, 1962, any other view by the Tribunal is of no consequence and the Tribunal ought to have followed the same and ought to have dismissed the appeal.
8. On the other hand, Sri George Mathan for Sri K. R. Prasad, learned counsel appearing for the assessee, has submitted that the question is now covered by the answer given by this court on an earlier reference involving an identical question in the case of a sister concern of the assessee, in which the identical question arose for the assessment year 1984-85 and the question therein having been answered against the Revenue, the above reference is also required to be answered in favour of the assessee. It is also the submission of learned counsel for the assessee that the Tribunal in fact having followed the view taken in the appeal out of which these references had arisen and the reference having been answered in favour of the assessee and against the Revenue, this reference also has to follow the same fate. The earlier decisions of this court referred to and relied upon by learned counsel for the assessee is the order dated January 24, 2000, passed in I. T. R. C. No. 47 of 1998 in the case of CIT v. A. Janardhana Shetty [2002] 254 ITR 281 involving assessment year 1984-85 and the order dated February 11, 2000, passed in I. T. R. C. No. 630 of 1998 in the case of A. J. Shetty Family Trust, Mangalore, another sister concern of the present assessee and also for the assessment year 1984-85. Learned counsel for the assessee has also made available copies of this order before the court.
9. Such submission apart, learned counsel for the assessee further submits that the Revenue had not taken the stand at any time earlier that the expenditure incurred by the assessee for which deduction was claimed, was in the nature of illegal expenditure and if the Revenue had not agitated this aspect before the Tribunal, a finding to the effect that the expenditure incurred is in the nature of illegal expenditure, cannot be sought to be projected by the Revenue for the first time while answering a reference made by the Tribunal on the question of law and submits that a finding of fact which is concluded before the Tribunal and any question before the Tribunal and not stated to be agitated as a finding not based on facts or evidence on record, cannot be raised for the purpose of questioning the correctness of the same in a reference. Learned counsel submits that if a specific question has not been sought for reference by the Revenue on this aspect and if the Revenue has not referred a question covering the correctness or otherwise of the finding of fact on the accepted principles of law based on which a finding could be recorded, the same cannot be gone into by the High Court while answering a reference. The sum and substance of the submission of learned counsel is that the finding of facts get concluded at the level of the Tribunal which is the highest fact-finding authority unless the finding is specifically attacked as a perverse finding, not one which could have been arrived at on the available material on record or even a finding not based on any material on record.
10. Learned counsel submits that in this view of the matter, it is not open to the Revenue to invoke the provisions of the Explanation to Section 37 of the Act which has been introduced by the Finance (No. 2) Act of 1998, though with retrospective effect from April 1, 1962.
11. We have heard learned counsel for the Revenue and the assessee at considerable length and we have also perused the records. The original records of the Tribunal were called for and learned standing counsel for the Revenue has made available the same.
12. We are also conscious of the decisions of this court in CIT v. A. Janardhana Shelly [2002] 254 ITR 281 in I. T. R. C. No. 47 of 1998 and I. T. R. C. No. 630 of 1998 in the case of sister concerns of the assessee and on similar questions. However, the question is as to our answer to the question referred to us in the present case has to follow the answer in the above two cases or not. For this purpose, we have looked into the orders of the assessing authority, the appellate authority and the Tribunal in some detail. In so far as the assessing authority is concerned, the finding on the question of allowing the expenditure incurred towards maintenance and providing facilities to the officials of the Department for conducting raids on illicit brewing who constituted business rivalry to the assessee and the payments in the nature of reward and credits to informers are found in the following paras of the assessment order and are as under :
"(3.1) It is seen that a sum of Rs. 1,53,863 has been shown as incurred on what is called 'raid expenses'. This is stated to be expenses incurred to assist the excise staff to raid the illicit distillery. As this item of expenditure cannot be proved by the assessee, I hold that this is not admissible.
(3.2) Further a sum of Rs. 75,925 is shown as donation. These donations are stated to have been made to maintain good relations with people by liberally donating to charitable and religious causes. This item is also not admissible as not proved."
13. The assessing authority having disallowed the claim, the assessee had appealed to the Commissioner of Income-tax (Appeals). The finding of the first appellate authority at this point of time is to be found in para. 3.2 of the appellate order dated December 30, 1998, which is as under :
"3.2 The appellant claimed deduction in respect of Rs. 75,925 shown as donation for maintaining good relations with people and for obtaining essential information in the manufacture of illicit liquor. The claim was disallowed by the Assessing Officer on the ground that the expenditure was not proved and information, if any, had to be given to the State Excise Department and not to the assessee. Even on appeal, no further evidence was produced to show that the expenditure to the tune of Rs. 2,29,788 was incurred for the purposes of business during the year of account. At the time of hearing, the appellant's authorised representative tried to explain that the expenditure was incurred by the assessee for maintaining strong men to safeguard its business interest by detecting illicit distillation within the allotted territory. For such an expenditure to be allowed, two things have to be established, i.e., (a) that there should be justification for incurring such an expenditure for performing functions which are otherwise the duties of the law enforcement authorities of the State Government; and (b) genuineness of the expenditure has to be established. In the instant case, neither the justification for the expenditure nor its genuineness has been established. In the circumstances, I find no infirmity in the order of the Assessing Officer in this regard. The assessee's contentions are accordingly rejected."
14. Both the assessing authority and the appellate authority held that the assessee is not entitled to claim this item of expenditure as a deductible expenditure under Section 37 of the Act on the facts as well as on law. The assessing authority as well as the first appellate authority have categorically held that the assessee has failed to establish or prove these items of expenditure and they have not been proved. Both the authorities have held that legally also such expenditure is not allowable as a deduction by holding that it is not an administrative expenditure and there is no justification for allowing the same.
15. In the appeal by the assessee as against this aspect of the matter, the Appellate Tribunal has merely brushed aside the contentions urged on behalf of the Revenue and has simply recorded a finding that by following its earlier views as per the order dated October 3, 1994, in I. T. A. No. 771 (Bang) of 1989 in the case of a sister concern of the assessee, the appeal of the assessee is to be allowed on this aspect
16. It is interesting to note that the Revenue had raised further objections before the Appellate Tribunal by placing two decisions. The stand of the Revenue was that the "raid expenses" claimed as deduction being payments to the excise officials, was clearly against public policy and placing reliance in the case of CIT v. Kodandarama and Co. , a decision of the Andhra Pradesh High Court, the expenditure was sought to be disallowed. The alternative submission was that the assessee having incurred the expenditure for the purpose of eliminating rivalry to the trade, was an expenditure incurred for the benefit of enduring nature and as such the expenditure could be characterised as "capital expenditure" and in this regard reliance was placed on the decision of the Supreme Court in the case of CIT v. Coal Shipments P. Ltd. . However, the Tribunal negatived both these submissions of the Revenue by distinguishing the decisions relied upon and ultimately went back to its view in an earlier case. The view of the Tribunal on this aspect of the matter is found in para. 1.4 of the order of the Income-tax Appellate Tribunal and reads as under :
"1.4. Finally, therefore, we would like to stick to our earlier decision as ' given in the case of A. J, Shetty family Trust, as mentioned above, and would direct that 50 per cent, of the raid expenses and 75 per cent, of the expenses towards donations/rewards paid to the informants be allowed."
17. On a perusal of the orders passed by the assessing authority, the first appellate authority and the Income-tax Appellate Tribunal, we find that the Income-tax Appellate Tribunal has not recorded any finding of fact including that the assessee has in fact incurred and proved such expenditure as "raid expenses" and "donations/rewards to informers". The Income-tax Appellate Tribunal has not recorded any positive finding by reversing the finding of fact recorded by the first two authorities. In fact, the Income-tax Appellate Tribunal has not recorded any finding at all on this aspect and its decision merely proceeds on the basis of its earlier view in respect of a sister concern of the assessee. A finding of fact recorded in some other case cannot be relied on as a precedent for the purpose of recording a finding in the instant case. The question of law that is referred for our opinion is as to the justification of the view taken by the Tribunal in allowing 50 per cent, of the raid expenses and the amounts paid to the informers as allowable expenditure under Section 37(1) of the Act.
18. For claiming any expenditure as allowable expenditure under Section 37 of the Act, the basic requirement is, it should be an expenditure, which is actually laid down, or expenditure wholly and exclusively incurred for the purpose of the business of the assessee. We find there is no recording by the Tribunal on this basic fact that the assessee has in fact actually laid out an expenditure and has proved the same. On the other hand, the lower authorities have given a categorical finding that the assessee has not been able to prove the same. In this view of the matter, the reliance placed by learned counsel for the assessee on the decision of this court in C1T v. A. Janardhana Shelly [2002] 254 ITR 281-1. T. R. C No. 47 of 1998 and I. T. R. C No. 630 of 1998 does not conclude the matter in these cases. The assessee being different the facts of each case will have to be proved on their own. For this very reason, the contention of learned counsel for the assessee that on the finding of facts the Tribunal is the final authority, recedes to the background. Also, we are not required to examine the scope of the applicability of the Explanation to Section 37 of the Act, which has been given retrospective effect from April 1, 1962.
19. On the material placed before the court and in the light of the question that is posed, we have no hesitation and dearly hold that the Tribunal has committed an error in holding that the items of expenditure are allowable as deductible expenditure under Section 37(1) of the Act.
20. The material before the court is sufficient to hold that it is in fact not an expenditure as has been proved under Section 37(1) of the Act for claiming deduction and as such the question is answered in the negative and against the assessee.
21. Thus, the Reyenue succeeds in the reference. No order as to costs.