Income Tax Appellate Tribunal - Mumbai
Ito V.D.B. Taraporevala Sons & Co. (P) ... vs Unknown on 26 August, 2004
Equivalent citations: [2005]1SOT123(MUM)
ORDER
I.P. Bansal, JM.
The above mentioned ITAs were decided by the Tribunal vide its order dated 31-3-1986. The assessee in its appeal before CIT (A) had disputed the addition made on account of payment of Secret Commission. Secret commissions claimed by the assessee are Rs. 1,31,029, Rs. 1,22,407 for the assessment years 1979-80 & 1980-81 respectively. It was the case of the assessee that only 1/4th secret commission could be disallowed while computing total income. The reliance in this regard was placed on the past practice as per decisions of the Tribunal in the case of the assessee. It was the case of the revenue that the decision of the Tribunal was not accepted by the revenue and Special Leave Petition was pending before the Honble Supreme Court. Therefore, the assessing officer disallowed the entire commission. The CIT (A) allowed the claim of the assessee. Aggrieved, the department disputed the said deletion before the Tribunal and Tribunal following its earlier years' orders confirmed the view of the CIT (A). On reference Application filed by the revenue, the Tribunal referred the following questions of law for the esteemed opinion of the Honble Jurisdictional High Court "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?"
Before Honble High Court, reliance by the revenue was placed on the explanation added to section 37(1) with retrospective effect from 1-4-1962 which read as follow:-
"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."
After considering the submissions of both the sides, their Lordships of Bombay High Court had remitted the matter to the file of this Tribunal for ex-examination afresh. The observations of Hon'ble High Court as contained in para 4 are as under:
"4. 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 insertion of explanation with retrospective effect from the inception of the Act i.e. 1-4-1962, 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 1-4-1962. In these circumstances, we are of the opinion that the Tribunal was not right in holding that the secret commission claimed to have been paid by the assessee byway 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 1-4-1962, we remit the matter to the Tribunal re-examine afresh in the light thereof." (These observations are as per the oral judgment) For the reasons recorded in oral judgments, it has further been observed by Hon'ble High Court as under:-
"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 insertion of explanation with retrospective effect from the inception of the Act i.e. 1-4-1962, 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 1-4-1962. In these circumstances, we are of the opinion that the Tribunal was not right in holding that the secret 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 1-4-1962, we remit the matter to the Tribunal re-examine afresh in the light thereof.
Reference stands disposed of accordingly with no order as to costs.' According to directions of Honble High Court, to examine the claim, various opportunities were given to the assessee for hearing. The dates are as follows :-
1. 11-1-2002
2. 8-2-2002
3. 5-4-2002
4. 10-5-2002.
2. On 14th June, the appeals were adjourned to 12-7-2002 at the request of the assessee and the last and final chance was given to the assessee. Vide letter dated 11-7-2002, the adjournment sought by the assessee on the ground that Mr. R.J. Taraporevalla, who is handling the matter has undergone a Bypass surgery on 23-6-2002, therefore, it was prayed that four months time to be given. Accordingly, the proceedings were adjourned. Finally, the assessee filed written submission vide letter dated 4-5-2004, the contents of which are as follows:
"Re: D.B. Taraporevala Sons & Co. Private Ltd.
Appeal Nos. ITA 5447 and 5448/M/83 for Assessment Years 1979-80 & 1980-81 Under instructions of our above names client, we have the honour to address you as under:
We enclose herewith the copy of letter of general authority issued by our client in our favour to represent them in their tax matter. The original thereof will be produced before you as and when demanded.
We refer to the above appeal which was fixed for hearing on 10-5-2002 before you. Mr. R.J. Taraporevala, accompanied by our Mr. R.R. Dalal appeared before you.
The said appeal is in respect of order of the Bombay High Court to be given effect under section 260(1), The Hon High Court has referred the matter to you in view of the explanation under section 37(1) which was added by Finance No. 2 Act, 1998 with retrospective effect from coming into force from 1-4-1962.
In this connection we were informed that the decision of the Bombay High Court in the case of the CIT of Income Tax v. Gill & Co. Private Ltd. is binding and accordingly your appeal would have no merit. You had therefore asked Mr. Taraporevala to submit in writing the arguments in the above matter.
We say that the Bombay High Court judgment never dealt with the type of payment made by the assessee company. The judgment is that the legislature clearly intended to disallow the claim in respect of secret commission with retrospective effect, that is from 1-4-1962. It never dealt with the type of payment clearly made by the assessee and remitted the matter back to the Tribunal with direction to decide this point of the facts, keeping in mind the object of the above amendment.
We also refer to the judgment of the Orissa High Court in the matter of Tarini Tarpuline Production v. CIT which was decided on 20-4-2001. The court decided that the secret commission paid by the assessee to procure business was not deductible under section 37 because the payment was made in said case to various departments of said government, said government undertaking, semi-government bodies like Municipality, N.A.Cs., and also to be Central Government Departments. Such payments were clearly hit by explanation to section 37 as the explanation is in respect of the disallowance of the claim, made by certain tax payers to the deduction of payment of account of protection money, extortion, hafta, bribe, etc. as business expenditure.
In this matter, we direct your attention to orders of Income Tax Appelate Tribunal of the earlier year, which is as per the paper book, already submitted during the course of last hearing. You will find that the appellant company started paying secret commission only after it entered into business of text books. This fact has been explained by I.T.O./ITA all along for so many assessment years as this was also explained by the assessing officer. The payment of secret commission for sale of such tax books cannot be given to any of the government departments or other similar departments which can be treated as bribe. Text books are sold by private schools and college cooperative books shops and other book shops. It has nothing to do with the legislature to disallow the claim of business expenditure on the pretext of protection money, extortion, hafta, bribe, etc. We therefore say, that in our case, the said explanation is not applicable and therefore request you to pass the order in conformity with the High Court order. You may pass the order on this written representation.
Yours faithfully, Sd/-
To provide opportunity to revenue the case was adjourned to 4th June and then for 2nd July. Written submissions were submitted by department vide letter dated 6-7-2004 which are as under---
"Sub. M/s. D.B. Taraporevala Sons Co. Pvt. Ltd. ITA 5447 & 5448/B/1983 for assessment years 1979-80 and 1980-81 Kindly refer to the above.
2. Copy of the assessee's written submission has not been made available to the undersigned. The reply is on the basis of the records available w ith the undersigned i.e. Income Tax Appelate Tribunal order and order of the High Court.
3. The assessee company claimed secret commission of Rs. 1,31,209 and Rs. 1,22,407 for assessment years 1979-80 and 1980-81 respectively for the purpose of securing business. Since the assessee had not filed necessary evidence of payment of commission, the assessing officer disallowed. the same. However, the CIT (A) accepted the claim of the assessee for deduction of secret commission and disallowed only 1/4th of the secret commission claimed by the assessee. The appeal of the department was dismissed by the Hon'ble Income Tax Appellate Tribunal by order dated 31-3-1986. The Income Tax Appellate Tribunal, however, had referred the following questions of law for opinion of the Hon'ble High Court under section 256(1).
"Whether, on the facts and in the circumstances of the case, the secret commission paid by the assesee is deductible as business expenditure under section 37 of the Income Tax Act, 1961 ?"
4. Honble High Court, however, took note of the amendment to section 37(1) of the Income Tax Act i.e insertion of explanation with retrospective effect from inception of the Act and pointed out that the Tribunal had upheld the deduction of secret commission without satisfying itself that the expenditure was not incurred (or any purpose which is an offence of which is prohibited by law. Explanation was added to section 37(1) by the Finance No. (2) Act, 1998, with retrospective effect from l-4-1962. The matter has therefore been remitted back to the Tribunal for fresh examination in the light of the amended law.
5. Allowability of deduction of secret commission has to be decided in the light of explanation inserted with retrospective effect from 1-4-1962. It is to be examined whether the secret commission claimed to have been paid y the assessee was an expenditure laid out or expended wholly and exclusively for business purpose within the meaning of section 37(1) read with explanation appended thereto. It may be mentioned that secret commission for the above two years were disallowed by I.T.O. since no evidence was adduced by the assessee to show that it had made an suchpayment.
Even before the amendment came into force, the Hon'ble jurisdictional High Court in the case of Goodlas Nerolac Paints Ltd. 137 ITR 58 (Bom) has also held that secret commission not proved as actually paid is not deductible. It was held that burden of proving that the amount was actually expended lay on the assessee. Since it has not discharged its claim, deduction was not tenable. The Honble A.P. High Court in the case of CIT v. Transport Corpn. of India Ltd. (256 ITR 701) has held that mere payment of secret commission by itself would not entitle the assessee to deduction of the expenditure unless the same was proved to be paid for commercial considerations. The burden of proof is always upon the assessee. It is for the taxpayer to establish by evidence that a particular allowance is justified. It is not for the Income Tax Officer to independently collect evidence and prove that deduction claimed by the assessee is baseless.
6. Similar view was taken by the Hon'ble A.P. High Court earlierin the case of CIT v. Kodandarama & Co. 144 ITR 395 where the Hon'ble court held that assessee would not be entitled to deduction of contribution or payment made in contravention of law or which are opposed to public policy. The claim for deduction of expenditure will have to be examined with regard to public policy and the purpose of the expenditure. Section 23 of the Indian Contract Act equates an agreement or contract opposed to public policy with an agreement or contract fore bidden by law.
7. In view of the above f actual position and legal authorities, it is requested that the Hon'ble Income Tax Appellate Tribunal may decide the issue in favour of the department and sustain the addition made by the assessing officer."
We may mention here that assessee did not represent the proceedings after filing of written submissions and in the written submissions it has been mentioned that order may be passed on the basis of written representations. Therefore, we proceed to decide these appeals as per directions of Hon'ble Jurisdictional High Court and after taking into consideration of written submissions of both the sides.
3. We have carefully considered the rival submissions in the light of material placed before us. As mentioned above, the assessee in the present case was provided with many opportunities by us but no attempt has been made on behalf of assessee to bring any detail with respect to expenditure claimed. The claim of assessee is mainly based on the fact that in the past, a similar claim of the assessee had been allowed in our opinion, such fact alone cannot be ground to admit the claim of the assessee and allow the expenditure. The explanation to section 37 inserted by Finance (No. 2) Act, 1998 with retrospective effect from 1-4-1962 has clearly removed the earlier doubts, if any, not to admit any claim of expenditure claimed to have been incurred wholly and exclusively for the purpose of business, if these were payments, which are viewed as an offence or which are prohibited by law and no deduction or allowance can be made in respect of such expenditure. Even otherwise, any expenditure being allowable under section 37(1), it must be an expenditure not in the nature of capital expenditure or personal expenses of the assessee but it should also be laid out or expended wholly and exclusively for the purposes of business or profession which the assessee is carrying on. In the absence of basic details, that to whom these amounts were paid, in respect of which sale these amounts were paid, the expenditures cannot be said to have been incurred wholly and exclusively for the purposes of the business of the assessee. The law is well settled that if the assessee is claiming certain expenditure or deduction, the burden is on the assessee to prove that such expenditure was actually incurred and if incurred, it was wholly and exclusively for the purposes of business. Unless assessee proves that such expenditure was actually incurred or it was incurred wholly and exclusively for the purposes of its business, the expenditure cannot be allowed being an expenditure under section 37(1) of the Act. In other words, any expenditure which is not proved to be actually incurred (in the absence of any details, it can be presumed that these were not even incurred by the assessee), and it is not shown by bringing some evidence on record that it was incurred wholly and exclusively for the purposes of business of the assessee, such expenditure cannot be held allowable under section 37(1) of the Act. The case laws cited before us duly support the above proposition.
4. In the case of CIT v. Gill& Co. (P) Ltd. (2001) 248 ITR 362, the Hon'ble Jurisdictional High Court has observed as under :-
"As regards the claim for deduction in respect of secret commission paid by the assessee, it may be mentioned that the appellate authority and the Tribunal have merely proceeded to allow the claim on the ground that, in the past, a similar claim of the assessee had been allowed. However, it may be mentioned that, in the past, when the claim of the assessee was allowed, the Explanation to section 37 which was incorporated by the Finance (No. 2) Act, 1998, with retrospective effect from 1-4-1962, was not there. One cannot lose sight of the fact that the Legislature clearly intended to disallow such claims with retrospective effect, i.e., from 1-4-1962. Under the circumstances, reliance could not have been placed on the orders passed in favour of the assessee in the past. In the circumstances, we remit the matter back to the Tribunal with a direction to decide this point on the facts, keeping in mind the object of the above amendment."
5. From the above observations, it is clear that the fact that the orders passed in past are in favour of assessee has little relevance for allowability of the claim of present years in the light of above-mentioned Explanation inserted with retrospective effect from 1-4-1962. So, the claim of the assessee cannot be admitted only on the ground that in the past, such claim of the assessee was accepted. Thus, therefore, this argument is not available to the assessee.
6. In support of the proposition that the burden is on the tax payer to establish by evidence that particular allowance is justified and it is not for the Income Tax Officer to independently collect the evidence and prove that the deduction claimed by the assesset is baseless; the reference can be made to the decision of Hon'ble Andhra Pradesh High Court in the case of CIT v. Transport Corporation of India Ltd. (2002) 256 ITR 701 (AP). In the ,said case, the assessee even having filed self prepared vouchers in respect of secret commission, the Honble High Court held that the payment itself was not established. In the present case, the assessee even did not take care to produce any evidence to establish that payment was actually made. Thus, even the initial burden was not discharged by the assessee with reference to any evidence for detail produced.
7. We also do not find any force in the argument of the assessee that the application of Explanation to section 37(1) is only limited to protection money, extortion, hafta, bribe etc., This argument is also not acceptable on the ground that for any expenditure to be an allowable expenditure, it must has to be proved as actually incurred as well as that it was wholly and exclusively laid out for the purposes of assessee's business. In the absence of any detail, these expenditures are not allowable as being not proved to be actually incurred or to be laid out wholly and exclusively for the purposes of business.
8. In view of the above factual and legal discussion, we hold that the expenditure claimed by the assessee on account of secret commission for the years under consideration are not allowable under section 37(1) of the Act and therefore, we direct the assessing officer to disallow the entire expenditure claimed by assessee on account of secret commission. The order of Tribunal dated 31-3-1986 is, therefore, modified to the above extent and departmental appeals are considered to be allowed in the above mentioned terms.