Income Tax Appellate Tribunal - Jaipur
Assistant Commissioner Of Income-Tax vs Rajendra Kr. Dengayadh And Co. on 31 December, 1992
Equivalent citations: [1993]45ITD109(JP)
ORDER
M.A. Khan, Judicial Member
1. Since a common issue is involved in all these appeals by Revenue, these are disposed of by this common order.
2. The assessee is a R.F. engaged in transport business. In the original assessments, the ITO had not allowed expenses of Rs. 12,457, Rs. 7,695, Rs. 15,995 and Rs. 13,573 claimed by the assessee-firm under the head "Rasta Kharch" for assessment years 1985-86 to 1989-90 respectively. The matter came to the Tribunal and the Tribunal set aside the issue to the ITO with the following directions viz.:
(i) The Assessing Officer should examine whether the material seized by the department is sufficient to allow the claim of the assessee.
(ii) In addition to the scrutiny of the seized records the allowability of the expenditure should be considered in view of the decisions of Supreme Court in various High Courts relied upon by the department and the assessee.
3. On re-examination, the A.O. decided the issue in the following manner:
After a detailed discussion and verification of the seized records it has been found that as far as the evidence relating to the expenditure being payment to police is concerned the seized records i.e., bundles of loose papers do contain certain rough notes relating to police expenses. However, the loose papers do not indicate as to whether these payments have been born by the assessee or have been made by the driver out of his own pocket. It is a matter of common knowledge that during the course of journey drivers allow the passengers on the way to travel on their trucks for which fair is charged. This money is never paid to the owner but used by the drivers themselves for their personal expenses and meet other expenses including alleged tips to the policemen. Therefore, the entries made on the loose papers by themselves do not support the claim of the assessee.
As regards the allowability of the alleged police expenditure is concerned the position in this regard does not require any detailed arguments. The position in this regard has already been made clear by the Hon'ble Supreme Court and various High Courts. The decisions which have been referred to above clearly provide that any payment which is made against the Public Policy cannot be allowed as business expenditure.
The policemen being Government servants are paid salary and other allowances by the Government towards their duties and therefore they are not expected to accept any extra money even by way of tips. If any money is paid/accepted to/by them it would tantamount to bribe. The bribe being against the Public Policy and punishable offence under the law cannot be considered as an allowable expenditure. The illegal expenses are only allowable in the cases of the assessees who are earning their incomes by way of illegal means only. However, in the instant case admittedly the assessee is not earning any such income hence, its claim in this regard deserves to be disallowed and is accordingly disallowed.
4. In appeals, however, the learned DC (Appeals) following Madras High Court decision in the case of CIT v. Coimbatore Salem Transport (P.) Ltd. [1966] 61 ITR 480, deleted the additions. Hence these appeals by Revenue.
5. The parties were heard and the material brought on record was perused.
6. The learned D/R vehemently urged that payment of tips to the Policemen on waysides was immoral and illegal and unlawful and, therefore, the expenditure incurred thereupon was not allowable. Reliance was placed on the case of CIT v. Kodandarama & Co. [1983] 144 ITR 395 (AP). The person appearing for the assessee and whose request for adjournment was not accepted by the Tribunal, could advance no arguments.
6A. There seems to be a conflict of opinion between the Madras and Andhra Pradesh High Courts on the point presently before me in these appeals. In the case before the Madras High Court, as referred to by the DC (Appeals) in his order, the assessee-company, a transport operator running a fleet of buses, got commissions or rebate on its purchases of petrol and diesel oil and also received the proceeds of sales of tyres, tubes and empty barrels through its drivers and conductors who incurred certain wayside expenses and made payment of mamool which were in the nature of tips or presents to odd people on the bus routes, out of such receipts. On 31-3-1956, the board of directors of the assessee-company resolved that in view of the faithful services rendered by the manager and cashier, thenceforward the commissions, rebates and sale proceeds were to be received by the manager who was also to incur the wayside expenses and make payments of mamool and the surplus should be shared by him with the cashier. The departmental authorities added the receipts on the ground that the company could not give away part of its profits to its employees by merely passing a resolution and disallowed the expenditure on account of mamool and wayside. The Tribunal, however, held that the expenditure was inevitable if the assessee had to run its business, that they were "greases to run the bus business smoothly" and since in the very nature of the expenditure there could be no documentary evidence, the amounts claimed to have been expended were reasonable having regard to the large collection and the income returned and hence allowable. With regard to the resolution allowing the manager and cashier to receive the commissions or rebates and sale proceeds of tyres, the Tribunal interpreted the resolutions as one enhancing the salary of the manager and cashier.
7. When the matter came up before the Madras High Court on reference by Revenue, it was held that :
(i) though generally the onus of proving that the expenditure had been actually incurred for and in the course of the business for earning income therefrom was undoubtedly on the assessee in the instant case, the Tribunal was not wrong in its view that, in the very nature of the expenditure, there could not be any documentary evidence to prove it.
(ii) Though tips may be improper, they were not illegal and in view of the finding of the Tribunal that the expenditure sought to be deducted was inevitable if the assessee had to carry on its business and did not pertain to anything illegal or improper, the Tribunal was right in allowing the deduction.
(iii) The Tribunal was also justified in its view that the effect of the resolution of the board of directors was enhancement of the salary of the manager and cashier and the board could pass such a resolution from a business point of view.
(iv) Even assuming that expenditure incurred on illegal acts in the course of making profits of a lawful business cannot be allowed since there was nothing to show that the expenditure was incurred for illegal acts, the expenditure in question was allowable.
8. In arriving at the above conclusion the Hon'ble High Court referred to the view of the Punjab High Court [as expressed in the case of Raj Woollen Industries v. CIT [1961] 43 ITR 36 (Pun).)] that if the amount sought to be deducted as an expenditure was incurred to achieve what was prohibited by law and to carry out the business unlawfully, the assessee was not entitled to deduction of the amount under Section 10(2)(xv) of 1922 Act and also reproduced the following observations of Chagla, CJ of Bombay High Court made on the case of CIT v. Haji Aziz and Abdul Sakoor Bros. [1955] 28 ITR 266, which had been quoted with approval by the Punjab High Court in its above mentioned decision :
The true position appears to be that where the expenses which are claimed as deductions have a direct and proximate connection with an act which is an infringement of law or is contravention of it, they have not been allowed or regarded as deductions which can be granted under the income-tax law. With respect, the opinion expressed by Chagla CJ, in CIT v. Haji Aziz and Abdul Shakoor Bros. that he cannot be held entitled to deduction under Section 10(2)(xv), represents the correct statement of law on the point.
But the Madras High Court expressed its opinion on the point involved in the case before it in the following manner:
Here the transport business of the assessee is entirely a lawful one. It does not become illegal by reason only that the assessee paid out moneys by way of tips to certain people on the route. There is no evidence as to what exactly was the nature of the tips and as to whether they were legal or improper. All tips in one sense may be improper but not necessarily so always or are illegal. In the absence of evidence on this matter, we have to go by the factual observations of the Tribunal. As we said the Tribunal has remarked that such expenditures as are sought to be deducted in this case are inevitable if the assessee has to carry on its business. Learned counsel for the revenue addressed arguments to us on the assumption" that the expenditures sought to be deducted constituted improper or illegal acts and that expenditures incurred even in a lawful business are not eligible for deduction. One view may be that if profits derived from an illegal business are chargeable to tax, by the same logic the expenditure, be it illegal or improper, incurred in order to make such profits may legitimately be allowed as deduction. If the acts involved in the expenditure are in contravention of law, even so it may be a matter for consideration whether for purposes of revenue, it should really matter in considering and allowing deductions as business expenditure. But in the circumstances of this case, we are of the view that we are not called upon to decide this question. Assuming without deciding that expenditure incurred in illegal acts in the course of making profits in a lawful business is not permissible deduction, neither the statement of the case nor the Tribunal's order proceeds on the basis that the expenditure claimed to be deducted pertained to anything illegal or improper. The Tribunal is right in that. We hold that the receipts of the assessee by way of commission or rebate on purchase of petrol and diesel oil and sale of tyres etc. tubes and empty barrels constituted income and the exp. in each of the years is entitled to deduction.
[Emphasis supplied] It may be noted that the Madras High Court had decided the issue in favour of the assessee on the basis of merits of the facts in that case. Their Lordships had expressed no final opinion on the point that if the acts involved in the expenditure are in contravention of law, would the expenditure be still allowable as deductions. At best the opinion expressed by their Lordships was in the nature of obiter dicta as is inferred from the hypothetic language used by their Lordships and which has been italicised in the above passage. To my mind this case is not a specific authority on the point involved in these appeals.
9. In the case before the Andhra Pradesh High Court the assessees who were all dealer-cum-millers of Paddy, made contributions, at specified rates, to the Andhra pradesh Welfare Fund and in return were granted export permits by the Collector for exporting boiled rice to Kerala. The assessee claimed the amount as expenditure incurred wholly and exclusively in the course of business and claimed deduction under Section 37(1) of the IT Act. The ITO rejected the plea. On appeal, the AAC held that the payment was only voluntary. The assessee carried the matter in further appeal which was referred to the Full Bench of the Tribunal, in view of the conflict of opinion between two Benches of the Tribunal the Full Bench of the Tribunal while observing that there was no compulsion upon the assessees to make contributions and that the contributions were made in pursuance of the scheme evolved by the Rice Millers' Association in consultation with the District Collector, however, held that there was no nexus between the payment and the successful fulfilment of the association's scheme, which in turn, resulted in an added advantage to the members and as such the payments satisfied the requirements of Section 37(1) of the Act. It further held that the contributions were not opposed to public policy inasmuch as the benefit which was expected by the members of the association was only because of and through the association's role in the organisation of the scheme.
10. When the matter came up before the Hon'ble High Court, on reference by Department, it was held that:
...the finding of the Tribunal, in the instant case that the scheme had been evolved by the Rice Millers' Association and hence payments made by the members could not have been compulsory, was perverse. The payments were made by the assessees only because they were told that they would not get the export permit unless they made the contributions. The regularity and systematic manner in which the contributions were made, showed that contribution to the Welfare Fund was a pre-condition for grant of export permits. Therefore, the contributions were compulsory payments exacted from the assessees as a price for granting export permits. The permits were to be granted by the District Collector for export of rice having regard to the relevant facts and circumstances of the district and State, as the case may be. It was not open to the District Collector or any other authority for that matter to impose a condition like the present one, linking the grant of permits to the making of a particular contribution to a particular fund, society etc. Nor was it open to an authority to say that whosoever made such a contribution would be entitled to export permits. Such a scheme would definitely lead to invidious distinction between the persons who made the payments and those who did not; the person who paid would definitely get the permit while the others may or may not. This would certainly be subversive of public interest and good administration. If demanding of such contribution was bad, paying it was equally bad. Both were privies to a wrong. Therefore, such contributions made to such funds or schemes were opposed to public policy and should be discouraged. This was no different from paying bribes. Therefore, the payments made by the assessee to the Andhra Pradesh Welfare Fund for obtaining permits for export of rice, being in contravention of public policy, could not be allowed as a business expenditure.
Their Lordships also laid down that:
In order to claim deduction of a particular amount under Section 37(1) of the IT Act, 1961 the payment need not necessarily be mandatory or statutory; even a voluntary payment made, so long as it is made in the interest of the assessee's business, is entitled to be deducted as business expenditure. However, the assessees would not be entitled to deduction of contributions or payments made in contravention of law or which are opposed to public policy. Infraction of law is not a normal incident of the business. Similarly, payments which are opposed to public policy being in the nature of unlawful consideration for discharging an official duty otherwise than according to law, i.e., otherwise than on merits cannot equally be recognised. It would be short-sighted to hold that businessmen are entitled to conduct their business even contrary to law and claim deductions of payments as business expenditure, notwithstanding that such payments are illegal or opposed to public, or have pernicious consequences to the nation's life as a whole. Section 23 of the Contract Act equates an agreement or contract opposed to public policy, with an agreement or contract forbidden by law.
11. In arriving at the above conclusions, their Lordships considered a number of English and Indian decisions including those of the Madras High Court and the Supreme Court. Regarding the views of the Madras High Court, as was expressed in Coimbatore Salem Transport (P.) Ltd.'s case (supra) and also in other cases on the same point, their Lordships of the Andhra Pradesh High Court observed as under at pages 412 and 413:
Mr. Anjaneyulu then relied upon the decision in CIT v. Coimbatore Salem Transport (P.) Ltd. case (supra) where the Tribunal found that the 'tips' and mamools paid to the transport official were 'greases to run the bus business smoothly' and that they must be allowed as business deductions. The Madras High Court held that though tips may be improper, they were not illegal and in view of the finding of the Tribunal that the said expenditure was inevitable if the assessee had to carry on its business and did not pertain to anything illegal or improper the deduction was rightly allowed. Another decision of the Madras High Court to the similar effect is in CIT v. Arumugham Chettiar 125 ITR 753 (Mad.) where the court held that the 'commission' or mamool paid to the crew of the ship to obtain 'no damage certificate' from the captain of the ship for obtaining payment of the bills, was not illegal. It must, however, be noticed that the finding of the Tribunal in that case was that the payments were in the nature of general business expenditure and were inevitable in the circumstances.
The next decision of the Madras High Court relied upon is in CIT v. Ramakrishna Mills (Coimbatore) Ltd. 93 ITR 49 and another decision in CIT v. Rqjendra Mills Ltd. reported in the same volume at page 122, where it was held that even a payment made to the managing agent contrary to Section 348 of the Companies Act was eligible for deduction under Section 10(2)(xv) of the 1922 Act, so long as it was warranted by business expediency. So far as the last two cases are concerned, a Bench of this court has refused to allow the same in RC No. 73/1977, dated November 26, 1982 (CIT v. Maddi Venkataratnam & Co. (P.) Ltd. 144 ITR 373). Similarly if the first two decisions are understood as laying down the proposition that even an illegal payment is entitled to be deducted under Section 37, we must express our respectful dissent therefrom.
12. Agreeing with the view of Chagla, CJ of Bombay High Court as approved of by the Supreme Court in the case of Hqji Aziz & Abdul Sakoor Bros. (supra) their Lordships observed that the principle that infraction of law is not a normal incidence of business and in carrying on any such illegal activity a trader must be deemed to be acting in a capacity other than that of trader, is applicable where the expenditure is incurred for a purpose which is opposed to public policy.
13. Finally their Lordships summed up as under :
We are of the opinion that even if we take the finding of the Tribunal with respect to the nature of the contribution as correct, even then the result would be no different. If the payment is purely voluntary, then it cannot be said that it is an expenditure wholly and exclusively laid out for the purpose of the business. This is not a case where an employee or a tenant is sought to be kept in good humour in the interest of business. Mr. Anjaneyulu contended that even the Government officials have to be kept in good humour. If keeping in good humour means contributing compulsorily to the funds, organisations, societies or individuals, specified by the officials, we must say that we cannot recognise any such proposition. The public officials are expected to discharge their duties dispassionately and decide on the merits of each case; and not because somebody keeps them in good humour. In other words, either the contribution is a philanthropic one, or constitutes either a reason or consideration for the discharge of official duties. In the first eventuality it cannot be said to be an expenditure laid but wholly and exclusively for the purpose of the business; and, in the second case it would be disqualified as being opposed to public policy.
Mr. Anjaneyulu contended that 'where an assessee incurs expenditure in order to promote and advance the interests of the business and shares his prosperity with the society, courts should give up a doctrinaire approach and take a liberal attitude in directing deduction'. We have said enough on this aspect in the preceding paragraphs of our judgment. If 'doctrinaire approach' means adherence to law, we are happy to be doctrinaire; and if the expression 'liberal attitude' means ignoring the law and public interest, we would rather shun such a misguided 'liberal approach'.
Judged in the light of the discussion made so far, I have no hesitation in coming to the conclusion that making payments to the police personnel on the routes would be an act in contravention of the provisions of Indian Penal Code (Act XLV of 1860) and would accordingly amount to infraction of law besides being opposed to public policy. That would not be a normal incident of the business. It would, therefore, be disqualified as an allowable business expenditure on the ground of being in infraction of law and also being opposed to public policy. Therefore, the allowability of the expenditure in question in these appeals for various years cannot be accorded judicial recognition. The orders of the DC (Appeals) shall have therefore to be vacated.
14. In the result the DC (Appeals)'s order in all the appeals are vacated, those of the ITO restored and all appeals allowed.