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(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.

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.

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.