ACIT Vs Devananda Shetty (ITAT Bangalore)
“Speed Money” Paid to Port Labourers Is Business Expenditure, Not Automatically an Illegal Payment: ITAT Upholds Restriction of Disallowance to ₹5 Lakh
Summary: The Bangalore Bench of the Income Tax Appellate Tribunal has upheld the allowability of “speed money” paid through subcontractors to labourers working at New Mangalore Port Trust, following the Karnataka High Court’s decision in CIT v. Konkan Marine Agencies [2009] 313 ITR 308 (Karnataka). The Tribunal held that similar expenditure had already been considered in the assessee’s own case for the immediately preceding year. As the facts remained unchanged, there was no reason to depart from the earlier decision restricting the disallowance to ₹5 lakh.
Facts of the case
The assessee was an individual carrying on the business of a clearing and forwarding agent at New Mangalore Port Trust. For Assessment Year 2007-08, he filed his return declaring total income of ₹91,01,150.
During the assessment proceedings under Section 143(3), the Assessing Officer noticed that the assessee had debited an amount of ₹2,10,10,245 as “speed money” paid through 13 subcontractors.
The Assessing Officer called upon the assessee to explain the nature of the payments and the necessity of engaging the subcontractors.
The assessee explained that in the clearing and forwarding business at the port, labourers were paid an additional amount over and above the wages fixed by New Mangalore Port Trust. The additional payment was made to ensure prompt handling of goods and smooth conduct of the clearing and forwarding operations.
The amount was described in the trade as “speed money” and was paid to the labourers through subcontractors.
Disallowance by the Assessing Officer
The Assessing Officer was not fully satisfied with the supporting evidence. According to him, the assessee had failed to conclusively establish that the entire amount recorded in the vouchers had actually reached the labourers.
Relying on the Mumbai Tribunal’s decision in APL India (P.) Ltd. v. DCIT [2005] 96 ITD 227, the Assessing Officer disallowed 25% of the speed-money expenditure on an estimated basis.
The Revenue’s position was that the labourers were employed by some other person or authority, and the assessee had no contractual obligation to pay them additional incentives. It was also argued that the assessee had not established the purpose of the payments or proved that the subcontractors had ultimately passed the money to the labourers.
Relief granted by CIT(A)
The assessee challenged the estimated disallowance before the CIT(A).
The CIT(A) followed the order passed by the Tribunal in the assessee’s own case for Assessment Year 2006-07. In that year, the Tribunal had considered an identical claim and, following the Karnataka High Court’s judgment in Konkan Marine Agencies, accepted the commercial practice of paying speed money.
Following the earlier decision, the CIT(A) restricted the disallowance to ₹5 lakh, instead of sustaining the Assessing Officer’s disallowance of 25% of the total expenditure.
The Revenue carried the matter in appeal before the Tribunal.
Karnataka High Court decision in Konkan Marine Agencies
The assessee relied upon the jurisdictional High Court’s decision in CIT v. Konkan Marine Agencies [2009] 313 ITR 308 (Karnataka).
In that case, the Karnataka High Court recognised that payments made to port labourers to expedite loading, unloading and related operations could constitute expenditure incurred in the course of business.
The expression “speed money” was not treated as conclusive proof that the payment represented a bribe or an expenditure incurred for an illegal purpose. Its character had to be determined with reference to the actual nature of the payment, trade practice and business necessity.
Where the payment was an additional incentive to labourers for expeditious work and was incurred in connection with the assessee’s business, the expenditure could qualify for deduction.
The Tribunal had already applied this principle in the assessee’s case for Assessment Year 2006-07 and upheld the CIT(A)’s approach in that year.
Decision of the Tribunal
The Tribunal found that the facts and circumstances for Assessment Year 2007-08 were substantially similar to those prevailing in Assessment Year 2006-07.
The CIT(A) had not granted relief on a new or independent basis. He had merely followed the Tribunal’s order in the assessee’s own case for the preceding year, which itself followed the binding judgment of the Karnataka High Court.
In the absence of any distinguishing facts or change in law, the Tribunal held that there was no justification for interfering with the order of the CIT(A).
The Revenue’s appeal was accordingly dismissed, and the restriction of the disallowance to ₹5 lakh was sustained.
Author’s comments
The case highlights that the nomenclature used in the accounts is not decisive. The description “speed money” may ordinarily suggest a questionable or illegal payment. However, in the port-handling industry, it was used to describe additional incentives paid to labourers for faster loading, unloading and movement of cargo.
For purposes of Section 37(1), the real enquiry is whether the payment was incurred wholly and exclusively for business and whether it was for a purpose that constituted an offence or was prohibited by law.
If the payment is made as a bribe to a public servant, an illegal gratification or an amount prohibited by law, the Explanation to Section 37(1) would deny deduction irrespective of business expediency. On the other hand, a lawful incentive paid to labourers or subcontractors for expeditious work does not become illegal merely because it is colloquially described as “speed money.”
The ruling should therefore not be read as granting a blanket deduction for every expenditure recorded under that description. The assessee must establish the identity of the subcontractors, actual payment, commercial necessity, applicable trade practice and, as far as possible, evidence that the amount ultimately reached the labourers.
The partial disallowance of ₹5 lakh also shows that recognition of the business practice does not dispense with the requirement of substantiation. Where vouchers are self-made, recipients are not identifiable or the payment trail is incomplete, a reasonable disallowance may still be sustained.
The ruling is also an application of the principle of consistency. The same expenditure had been considered in the assessee’s own case for the preceding year, and the Revenue did not demonstrate any material change in facts. Therefore, the earlier view, supported by the jurisdictional High Court, was rightly followed.
The decisive proposition is that a lawful labour incentive incurred for commercial expediency is deductible; an illegal gratification is not. The substance of the payment—not the label “speed money”—determines its tax treatment.
Cases Discussed
- CIT v. Konkan Marine Agencies [2009] 313 ITR 308 (Karnataka) — relied upon concerning the allowability of speed-money payments made in the course of port-related business operations.
- APL India (P.) Ltd. v. DCIT [2005] 96 ITD 227 — relied upon by the Assessing Officer concerning estimated disallowance of speed-money expenditure where actual payment to labourers was not established.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT BANGALORE
This appeal is by the revenue directed against the order of the CIT(A), Mangalore dated 20-04-2010 relating to assessment year 2007-08. In this appeal, the revenue has raised the following grounds;
1. The ld.CIT(A) erred on the facts and in the circumstances of the case in deleting the disallowance of speed money.
2. The ld. CIT(A) failed to appreciate the fact that the labourers are employed by somebody else for services and there is no necessity or obligation to give money by the businessmen an incentives.
3. The Hon’ble ITAT, Mumbai Bench in APL India (P) Vs DCIT, Range-8(1) 96 ITD has held that where the assessee failed to establish that actually payment has been made to the extent indicated in vouchers, 25% of expenses incurred by was of speed money was to be disallowed on estimate basis. In the present case, since the assessee has failed to establish that the speed money has been actually received by the labourers, the AO has disallowed it, which the ld. CIT(A)) has failed to appreciate.
3.1 The assessee craves, leave to add, alter or amend all or any of the grounds of appeal before or at the time of hearing.
3.2 For these and such other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) may be cancelled and that of the AO restored.
2. The brief facts of the case are that the assessee is an individual engaged in the business of clearing and forwarding agent at New Mangalore Port Trust (NMPT). The return of income was filed on 31-10-2007, declaring a total income of Rs.91,01,150/-. During the assessment proceedings u/s 143(3), the AO observed that the assessee has paid an amount of Rs.2,10,10,245/- as speed money to 13 sub-contractors. He asked the assessee to give reasons for employment of these sub-contractors. The assessee submitted that in his line of business this is a practice and in order to run the business smoothly the labourers are paid the extra money in addition to their wages fixed by NMPT and this is known as speed money which is paid through sub-contractors. The AO disallowed 25% of the speed money by holding that the assessee has failed to establish the actual payments made to the extent indicated in vouchers.
Aggrieved, the assessee filed an appeal before the CIT(A), who allowed the same by following the decision of ITAT in the assessee’s own case for the assessment year 2006-07 and restricted the disallowance to Rs.5.00 lacs.
Aggrieved, the revenue is in appeal before us.
3. The learned DR placed reliance on the order of AO and submitted that the assessee has failed to establish the purpose for which this money has been paid to the sub-contractors and also that the sub-contractors have paid the speed money to the labourers.
4. The learned counsel for the assessee on the other hand, relied upon the order of the CIT(A) and also placed before us a copy of the order in ITA No.8(B)/2010 for the assessment year 2006-07, wherein by following the decision of the jurisdictional High Court in the case of CIT Vs Konkan Marine Agencies (2009) 313 ITR 308(Kar.), whereby the Hon’ble High Court has recognized the payment of speed money and has held that the expenditure incurred is in the course of business and that the assessee is entitled to deduction, the Tribunal confirmed the order of the CIT(A) in the aforesaid case for the assessment year 2006-07 as reasonable and justified.
5. As the facts and circumstances of the case for the assessment year 2006-07 are also similar to the facts and circumstances of the case before us for the assessment year 2007-08, and also as the CIT(A) had only followed the order of ITAT in the assessee’s own case for the assessment year 2006-07, we do not find any reason to interfere with the same.
6. In the result, the appeal of the revenue is dismissed.
Order pronounced in the open court on the
