Secretive commission payment not allowable us 37(1). It was in the nature of bribe to procure business which is prohibited under explanation to Section 37(1)
ABCAUS Case Law Citation:
ABCAUS 1221 (2017) (04) ITAT
The Grievance:
The appellant assessee was aggrieved by the order passed by the Commissioner of Income Tax (Appeals) in confirming the order of the Assessing Officer (AO) whereby he disallowed the ‘secretive commission” u/s 37(1) of the Income tax Act, 1961 (‘the Act’).
Assessment Year : 2009-10
Date/Month of Pronouncement: April, 2017
Important Case Laws Cited/relied upon:
Ram Bahadur Thakur vs . CIT
Commissioner of Income Tax. vs Dhanpat Rai And Sons
Brief Facts of the Case:
The appellant assessee was an individual civil contractor, who had taken apartments on lease from their owners and let them out as service apartments. In the assessment made for the relevant year, the AO inter alia disallowed Rs. 53,48,842/-, being the expenses incurred towards business promotion by treating them bribe u/s 37(1).
Aggrieved by the order of the AO, the assessee filed an appeal before the CIT (A) and submitted that the appellant had incurred these expenses by way of commission or incentive to the Executives of the business houses to get the business from the business houses. This payment was made to higher officers in the Human Resources Department to ensure that these people extend the business to the appellant. This amount was incurred wholly and exclusively for the conduct of the business and was not in the nature of bribe to warrant disallowance under explanation to Section 37(1) of the Act. It was submitted that at best the expenses was a secret commission and not prohibited by any law to constitute a bribe to warrant disallowance u/s 37(1) of the Act and those persons were not employees of any Government or quasi-Government establishments but pure business houses.
The CIT(A) place reliance on the judgment of Hon’ble Kerala High Court wherein to determine that the expenditure falls within the ambit of section 37(1) the following broad principles have been laid down:
CIT(A) opined that as per the decision of the Hon’ble High Court, where an assessee seeks to deduct from his or its business profits certain items of expenditure, the onus of proving that such expenditure is permissible as a deduction is on the assessee. In the instant case, no evidence was in the possession o f the appellant for the deduction claim. The appellant had not furnished the basic information i.e. name and address of the party to whom the alleged commission was paid, date and mode of payments, etc. Accordingly CIT(A) upheld the AO’s order confirming the disallowance.
Observations made by the Tribunal:
The Tribunal observed that the main defence advanced by the assessee was that the payments made was in the nature of secret commission and not prohibited by any law to constitute a bribe to warrant disallowance u/s 37(1) and these persons are not employees of any Government or quasi Government establishments but pure business houses.
The ITAT observed that this suggested that but for Government or quasi-Government establishments, others could indulge in this type of action.
The tribunal noted that the Explanation appended to Section 37 of the Act by way of Finance (No.2) Act, 1998 which was introduced retrospectively with effect from 1.4.1962 prohibits any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law to be considered as incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.
Further The Punjab & Haryana High Court in Dhanpat Rai And Sons case had examine the scope of this provision and held that
“any secret transaction/payment that is made to secure an unfair advantage, would necessarily be repugnant to law. Transaction which is not transparent, offends normal business practice, must suffer scrutiny. Such unexplained and unvouched expenditure, if allowed, is likely to encourage illegal payments, evasion of tax and unscrupulous practices ushering in at both ends. The expenditure incurred on secret commissions would necessarily fall within the mischief of the explanation added to Section 37 of the Act.”
The Tribunal observed that the assessee’s action clearly fell within the mischief of the explanation added to Section 37 of the Act.
Held:
The disallowance under challenge was sustained and the assessee’s appeal was dismissed.
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