Income Tax Appellate Tribunal - Bangalore
C. Chandrashekar, Mandya vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" BENCH : BANGALORE
BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER
AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER
ITA No.431/B/09
Assessment year : 2006-07
C. Chandrashekar,
Prop. M/s. Hotel Amaravathi,
Srinivasapura,
Mandya. : APPELLANT
Vs.
The Dy. Commissioner
of Income-tax,
Circle 1(2),
Mysore. : RESPONDENT
Appellant by : Shri Guruswamy
Respondent by : Smt. Jacinta Zimik Vashai
ORDER
Per A. Mohan Alankamony, Accountant Member
This appeal has been preferred by the assessee - an individual - aggrieved by the finding of the Ld.CIT (A), Mysore, for the assessment year 2006-07.
2. The assessee has raised fourteen exhaustive grounds of appeal which are rather in an illustrative form. While formulating the grounds of ITA No. 431/B/09 Page 2 of 14 appeal, utmost care should have been taken to construct the ground(s) in a concise and precise manner instead of in a narrative form. 2.1. On a perusal of the grounds, we find that the essence and crux of the grievance of the assessee can at best be construed in to only two issues. They are, therefore, reformulated in a concise manner, for the sake of convenience and clarity, as under:
(i) disallowance of Rs.19,91,790 u/s 37(1) of the Act being payments made to KSRTC and its personnel; &
(ii) claim of deduction of Rs.24000/- u/s 80C of the Act.
3. The assessee, being an hotelier, has been running a hotel, styled, "Hotel Amaravathi" at Srinivasapura on Bangalore - Mysore Highway. According to the assessee's version, as the business was not to his expectation, he approached the KSRTC authorities to facilitate for transitory halt of its buses at his hotel premises which would enable him to pick up the business and for such an understanding, he had agreed for a payment of Rs.25/- each bus per trip to KSRTC. The assessee had maintained a list containing the number of buses made halts at his hotel premises during the previous year ending on 31/3/06, according to which, 56495 KSRTC buses have halted in his premises and thus, he made a payment of Rs.14,12,390 [Rs.14,12,375/- to be precise] to the KSTRTC through its conductors as agreed upon. The assessee's further claim is that he had also paid tips to the extent of Rs.10,04,150/- to KSTRC personnel (drivers and conductors). The expenditure so incurred has been recorded in the ledger on day-to-day basis. The expenditure of Rs.2416540/- was claimed as deduction u/s 37(1) of the Act which has been denied by the AO on the ground that - ITA No. 431/B/09 Page 3 of 14
(i) as per the enquiries caused, though the KSRTC authorities have confirmed such an understanding, but, the payment of prescribed amount was not confirmed as per their communication dt: 16/12/2008;
(ii) the payments were opposed to public policy as the KSRTC drivers being Government servants, they were not entitled to accept such unlawful payments as the same was against to the service rules of KSRTC employees;
(iii) the claim is not allowable as per Explanation to s.37(1) of the Act; &
(iv) with regard to tuition fees claim of Rs.24000/-, the cryptic reasoning of the AO was that "tuition fees-receipt not produced for Rs.24000/- as claimed, not considered".
4. Aggrieved, the assessee had approached the Ld.CIT(A) for redressal. After due consideration of the contentions raised by the assessee with regard to (i) "Oppose to public Policy"; and (ii) "Payment of commission or mamool" and also analyzed the umpteen number of case laws on which the assessee had placed strong reliance, the CIT(A) has observed thus -
"Page 7:.......As stated earlier, the expenditure is not fully substantiated and in the absence of full details, an estimate of only Rs.976925/- can be made going by the details furnished by the appellant. However, even the above expenditure of Rs.976925/- has to be within the parameters laid down by sec.37 (1). This brings us to the question of legality of expenditure and the applicability of Explanation to sec.37 (1). The decisions cited by the appellant are with respect to position of law prior to insertion of Explanation to sec.37(1) by which illegal payments were excluded from the scope of sec.37(1). As regards the sum of Rs.424750 (being Rs.25/- per bus for 16990 buses), since the same has been authorized by KSRTC as mentioned by the AO in the order, the same cannot be considered illegal and is, therefore, deductible. However, the balance amount of Rs.552175 [976925 - 424750] represents the payments by way of tips etc. to drivers. These payments cannot be considered legal. Had these payments been made to employees of a private business, it would not have been hit by the Explanation. However, the recipients of the so-called tips are, for all practical purposes, ITA No. 431/B/09 Page 4 of 14 government employees and, therefore, it cannot be said that the payments are legal. It is, therefore, held that the Explanation to sec.37 (1) applies in this case and, therefore, any payments above the sum of Rs.424750/- can not be allowed. As already held earlier, the expenditure over and above Rs.976925/- are not fully substantiated either and are, therefore, disallowable for that reason too.
In view of the foregoing, the expenditure of Rs.424750/- out of Rs.2416540/- claimed by the appellant is considered allowable and the disallowance to the extent of Rs.424750/- is deleted. The balance disallowance is confirmed."
4.1. With regard to disallowance of Rs.24000/- being tuition fees, the CIT (A) confirmed the action of the AO on the ground that no evidence was forth- coming.
5. Agitated, the assessee has come up with the present appeal. During the course of hearing, the Ld.A R had furnished a voluminous paper book containing 1 - 73 pages which consists of, inter alia, lengthy written submissions, copies of various judicial pronouncements etc. The forceful arguments of the Ld. A R are summarized as under:
(a) the CIT(A) had restricted the expenditure in respect of 16990 buses as stated by the AO as against 56495 [58488 - 1993] buses made trips to the hotel premises. The AO had admitted in the assessment order that 58488 buses have halted in the hotel premises as per the evidence produced before him during assessment proceedings, but, had held in the assessment order that the payments was made in respect of 16990 buses;
(b) Relying on the finding of the AO, the CIT(A) restricted the claim to 16990 buses @ Rs.25/bus allowed only Rs.424750 as against Rs.1424250/- on 56495 buses as claimed;
(c) Denied the claim of deduction in respect of the remaining amount of expenditure as it was opposed to Explanation to s.37(1) of the Act. Held that the payment of Rs.424750 @ the rate of Rs.25/bus for 16990 buses was legal as it was authorized by the KSRTC and the remaining amount represents tips etc. to the drivers/conductors cannot be allowed as legal in view of Expln. to s.37(1) of the Act;ITA No. 431/B/09 Page 5 of 14
(d) The CIT(A) had accepted the contention that the KSRTC authorities have authorised the payment of Rs.25/bus, but restricted the expenditure only to 16990 as against 56495 buses. The number of buses was not the dispute either before the AO or the CIT(A). The AO had disallowed the entire expenditure on the ground that such expenditure was opposed to the public policy which was the subject matter before the CIT(A).It was contended before the CIT(A) that the AO had disallowed the claim on the ground that it was opposed to the public policy and as such, the CIT(A) was not justified in restricting the number of buses for allowance of expenditure;
(e) With regard to tips to the KSRTC personnel, the CIT(A) was of the view that the payments made to them cannot be considered legal. Had these payments been made to employees of the private business, it would not have been hit by the Explanation;
- the claim for expenditure was not hit either by main s.37(1) or the Explanation provided. The main conditions of s.37(1) required to be satisfied are that the expenditure claimed shall not be either in the nature of capital expenditure or personal expenditure and such expenditure should have been laid down wholly and exclusively for the purpose of business. The explanation provides that such 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 and no deduction shall be made in respect of such expenditure;
- the payments made to the KSRTC and also to its personnel were not in the nature of capital expenditure, personal expenditure and such expense was not offensive or prohibited by law;
- the authorities have not brought on record any material to establish that the expenditure claimed was opposed to public policy except stating that KSRTC employees being Government servants were not entitled to receive any payments such as tips/sales promotion expenses; that he had incurred the expenditure for the benefits of his business under the principles of commercial expediency; that the expenditure so incurred and claimed was neither an offence nor was it prohibited by any law;
- Reliance was placed on the following case laws: ITA No. 431/B/09 Page 6 of 14
(i) Dr T.A.Querashy v. CIT (2006) 287 ITR 547
(SC);
(ii) CIT v. Armugam Chettiar (1980) 125 ITR
753 (Mad);
(iii) CIT v. Sigma Paints Ltd. (1991) 188 ITR 06 (Bom);
(iv) CIT v. Coimbatore Salem Transport Pvt.
Ltd. (1996) 61 ITR 480 (Mad);
(v) DCIT v. Super Tannery (India Limited)(2005)274 ITR 338 (All);
(vi) DCIT v. Pure Pharma Pvt. Ltd. (2005)277 ITR 273 (MP);
(vii) Shri Venkatasathyanarayan Rice Mill Contractors Company v. CIT (1997) 223 ITR 101 (SC);
(viii) J.K.Commercial Corporation ltd. v. CIT (1969) 72 ITR 296 (ALL);
(ix) CIT v. Motor Industries Company Ltd. (1997) 223 ITR 112 (Kar);
(x) CIT v. Walchand and Company pvt. Ltd.
(1967) 65 ITR 381 (SC);
(xi) Board's Circular No.6/2007 dt.l11/10/2007
- the assessee had maintained computerized ledger extract of day-to-day expenses incurred towards the payments to the KSRTC and its personnel. Though the break-up figures as to the quantum of fee paid to KSRTC/its personnel were not separately recorded, the aggregate day-to-day expenditure was recorded in the corresponding ledger account. As the expenditure was incurred in the interest of the assessee's business, the same is qualified for deduction u/s 37(1) of the Act without hitting by the explanation provided there- under;
(f) the disallowance of tuition fee claim u/s 80C was confirmed by the CIT(A)on the ground that no evidence was produced. However, the AO was approached with an application dt.2.4.09 along with the original tuition receipts. However, the AO had refused to entertain the claim on the ground that the said receipts were not produced either during the course of assessment proceedings or before the appellate authority;
- the AO be directed to consider the deduction admissible u/s 80C of the Act.
ITA No. 431/B/09Page 7 of 14 5.1. On the other hand, the Ld. D R had vehemently argued that the lower authorities have dealt with the issue in a judicious manner, after analyzing various aspects which requires no interference at this stage. She had, therefore, pleaded that the stand of the lower authorities requires to be upheld in toto. During the course of hearing, the ld. D R furnished a paper book containing 1 - 27 pages which consists of, inter alia, copy of ledger extract, copy of letter to KSRTC authorities etc.,
6. We have carefully considered the spirited arguments of either party. We have also duly perused the paper books furnished and also the relevant records.
6.1. The bone of the contention of the assessee is that during the period under dispute, he had incurred expenditure to the tune of Rs.24.16 lakhs being royalty said to have been paid to KSRTC and tips to its personnel which he had claimed as business expenditure. After considering the submission of the assessee, the AO had conceded that the KSRTC may be collecting only Rs.25/bus and that there was no additional collection whatsoever. After scrutinizing the list of buses halted at the assessee's premises, the number of buses halted has been shot down to 16990 and, thus, worked out the expenditure to Rs.424750 [16990x25] only. Taking shelter under Explanation to s. 37(1), the AO was of the view that there was no guarantee that the money had actually been paid to KSRTC through its drivers. Thus he resorted to deny the entire claim of the assessee on the ground that neither the assessee did ITA No. 431/B/09 Page 8 of 14 have any proof nor the KSRTC confirmed the same. On an appeal, after considering the rival submissions, the Ld. CIT (A) has observed thus -
"(On page 7).................the appellant has also given several case laws in support of the proposition that business expenses are allowable and it is the appellant who is the best judge of the expenditure required to conduct any business coming to the latter contention, it must be said that the contention is general in nature. As stated earlier, he expenditure is not fully substantiated and in the absence of full details, an estimate of only Rs.976925/- can be made going by the details furnished by the appellant. However, even the above expenditure of Rs.976925/- has to be within the parameters laid down by sec.37(1). This brings us to the question of legality of expenditure and the applicability of the Explanation to sec.37(1). The decisions cited by the appellant are with respect to position of law prior to insertion of Explanation to sec.37(1) by which illegal payments were excluded from the scope of sec.37(1). As regards the sum of Rs.424750/- (being Rs.25/bus for 16990 buses), since the same has been authorised by KSRTC as mentioned by the AO in the order, the same cannot be considered illegal and is, therefore, deductible. However, the balance amount of Rs.552175 [976925 - 424750] represents the payments by way of tips etc., to drivers. These payments cannot be considered legal. Had these payments been made to employees of a private business, it would not have been hit by the Explanation. However, the recipients of the so called tips are, for all practical purposes, government employees and therefore, it cannot be said that the payments are legal............................."
On a perusal of the impugned assessment order, we find that there were inconsistencies the stand taken by the AO. To cite a few -
(i) On page 4 - "As discussed earlier the KSRTC, if taken as really happened in this case, may be collecting only Rs.25/- per bus and in that event the amount that would have been officially collected by KSRTC may be at the rate of Rs.25/- per bus for 16990 buses......"
- the AO in his communication dated: 19/12/08 to the Chief Traffic Manager (Commercial), KSRTC Central Office had acknowledged that "In this regard, please refer to my telephonic conversation with you, wherein you were kind enough inform me that an amount of Rs.25 per bus was being collected from Hotel Amaravathi, Srinivasapura, ITA No. 431/B/09 Page 9 of 14 Mandya and no other payments of whatsoever were collected......." [source Page 23 of Paper Book of Ld.D.R]
- In his Reminder @ dated: 26/12/08 to the Chief Traffic Manager, the AO had further emphasized that - "In this regard, please refer to my telephonic conversation with you, wherein you were kind enough inform me that an amount of Rs.25 per bus was being collected from Hotel Amaravathi, Srinivasapura, Mandya and no other payments of whatsoever were collected......." [source Page 24 of Paper Book of Ld.D.R];
- The Managing Director of KSRTC, Bangalore, vide letter dt:16/12/2008 had acknowledged that -
"[Page 5 of assessment order] "The KSRTC has made arrangement for the convenience of the travelers, who travel to long distances for their food etc. For this purpose, KSRTC takes the use/facility of road side hotels. The owners of such hotels have to pay some payment for bus to KSRTC. The hotel owners have to make spot payment of such payments to the bus conductor. The bus conductor has to credit such amounts along with the trip collections. However, the KSRTC is not maintaining any records in respect of the payments made by the hotel owners and also in respect of the money's credited by the KSRTC drivers with the KSRTC authorities. In the circumstances, the KSRTC does not have any records in respect of the payment made by the Amaravathi Hotel, Mandya."
6..2. When the Managing Director of KSRTC had in fact admitted that the way side hotels have been made to pay certain amounts to KSRTC for their buses being halted in such hotel premises and the quantum of such payment [Rs.25/bus] for each bus has been acknowledged by none other than the CTM (Commercial) of KSRTC referred supra, in our considered view, the AO was not justified in taking indifferent stand in not allowing the expenditure incurred at Rs.25/bus. ITA No. 431/B/09 Page 10 of 14 6.3. With regard to the number of buses halted in the assessee's hotel premises was arrived by the AO at 16990 as against 56495 [58488 - 1993 (other than KSRTC buses)]. We have perused the list of buses halted at the hotel premises of the assessee [page 4 of PB of D.R] which shows 58488 buses, whereas, the AO had arrived at the figure of 16990. However, we are at a loss to understand what were the criteria adopted by the ITO to arrive at such a figure. The cryptic reasoning of the AO is that, "In fact, the actual number of buses to which payments have been made is counted from the above list and the same has been worked out at 16990 buses only..........."
6.4. Since the KSRTC authorities have admitted the very fact that they have been collecting a halt fee of Rs.25/bus, we are of the considered view that the assessee is entitled for such expenditure incurred. However, we are not in agreement with the AO's view that the numbers of buses halted at the hotel premises of the assessee were 16990 only. In view of the above, we are of the unanimous opinion that this issue should be remitted back on the file of the AO to quantify the numbers of buses halted at the hotel premises. The assessee is advised, through his counsel, to furnish the details of buses halted etc. before the AO which would facilitate him to arrive at the actual numbers of buses halted. The AO, is, further, directed to admit the assessee's claim of expenditure incurred at Rs.25/bus. 6.5. With regard to Rs.1004150/- being tips/sale promotions expenses to KSRTC personnel, we have carefully considered the spirited argument put- forth by the Ld.A.R. With respects, we have also perused the umpteen ITA No. 431/B/09 Page 11 of 14 numbers of judicial pronouncements on which the Ld. A R had placed strong reliance to drive home his point.
It is very prudent to look into what Explanation to s.37 (1) says?
"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."
6.6. Let us now analyze the legal precedents:
In the case of Dr.T.A.Quereshi v. CIT reported in (2006) 287 ITR 547, the Hon'ble Apex Court had held that "that the Explanation to section 37 had no relevance as this was not a case of business expenditure but was one of business loss. Business loss was allowable on ordinary commercial principles in computing the profits".
6.6.1. With due respects, we would like to point out that the ruling of the Hon'ble Apex Court has no relevance to the facts of the case on hand.
In that case, there was a business loss whereas in the present case, there was no instance of any business loss. With high respects, we are of the view that the finding of the Hon'ble Court is distinguishable. 6.6.2. In the case reported in (1980) 125 ITR 753, the issue before the Hon'ble Madras High Court was that of mamool paid to crew of a ship to obtain "No Damage Certificate" from Captain of ship for obtaining payment of bills whereas in the issue on hand, the so called tips were alleged to have been paid to KSRTC personnel [Government of Karnataka under-taking] who were governed by Service Rules-prohibited by taking any gratification which is an offence punishable under a Court of law]. ITA No. 431/B/09 Page 12 of 14 Thus, the ruling of the Madras High Court is not applicable to the present case.
6.6.3. We have also duly perused the case laws on which strong reliance was placed by the assessee. With respects, we would like to point out that none of the Hon'ble Courts have legalized the illegal gratification or mamool, as the case may be, payable/receivable to/by the Government servants either employed in Government service or in Government undertaking. If the gratification or mamool or tips or in any other nomenclature, receivable by the peoples' servants [Government servants] for rendering services to the mankind were to be legalized by any Court of law, the economy of our country, do doubt, would be in shambles. 6.7. Reverting back to the issue on hand, the very intention of the Legislature to insert Explanation to s.37 (1) that too retrospectively, to our mind, was to put a full stop/to curb the gratification to a possible extent. If the gratification/mamool were to be encouraged / legalized that too with the Government servants, we are afraid, the very purpose of the intention of Legislature to bring Explanation to s.37 (1) to statute would be defeated. As rightly pointed out by the Ld. CIT(A), had the payments been made to the employees of private undertaking/business, the assessee would not have been brought under the ambit of Explanation to s.37(1) in the eyes of law.
6.8. In view of the above, we are not in agreement with the assessee's contention. Thus, assessee fails on this count. ITA No. 431/B/09 Page 13 of 14
7. The assessee's other grievance pertains to the claim u/s 80C of the Act. It was brought to our reference that the assessee had approached the AO vide his application dt.2.4.2009 along with the original tuition fee receipts for allowance of deduction u/s 80C of the Act. Perhaps, the AO had declined to entertain the assessee's request on the ground that the said receipts were not produced either during the assessment proceedings or before the appellate authority. If that were to be so, the AO was not justified in rejecting the rightful claim of the assessee. Under the provisions of the Income-tax Act, the assessee is entitled to claim any deduction with a proof even after the conclusion of the assessment proceedings. The rightful claim of an assessee can not be denied, though he is entitled to as provided in the Act, the enforcing authority cannot reject such a legitimate claim on flimsy ground. The AO is directed to admit the claim of the assessee and to take appropriate action in accordance with law. The assessee, through his A.R, is advised to present his claim with proof before the AO for needful.
8. In the result, the assessee's appeal is partly allowed.
Pronounced in the open court on this 4th day of September, 2009.
Sd/- Sd/-
(SHAILENDRA KUMAR YADAV ) (A. MOHAN ALANKAMONY )
Judicial Member Accountant Member
Bangalore,
Dated, the 4th September, 2009.
Ds/-
ITA No. 431/B/09
Page 14 of 14
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file (1+1)
By order
Assistant Registrar
ITAT, Bangalore.