Case Law Details
Contention of the Assessee
It is 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 is made to higher officers in the Human Resources Department to ensure that these people extend the business to the appellant. This amount is incurred wholly and exclusively for the conduct of the business. This is not in the nature of bribe to warrant disallowance under explanation to Section 37(1) of the Act. The A.O. characterised such payments as bribes and in fact made the representative accept such characterisation and disallowed it. This is at best a secret commission and it is not prohibited by any law to constitute a bribe to warrant disallowance u/s 37(1) of the Act and these persons are not employees of any Government or quasi-Government establishments but pure business houses.
Held by ITAT
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.
Full Text of the ITAT Order is as follows:-
This is an appeal filed by the assessee against the order of the CIT (A) –I, Bengaluru, dt.28.03.2014, for the assessment year 2009-10.
02. The assessee, an individual, is a civil contractor, who has taken apartments on lease from their owners and let them out as service apartments. In the assessment made for A. Y. 2009-10, the AO inter alia disallowed Rs.53,48,842/-, on which the assessee filed an appeal before the CIT (A)-I, Bengaluru.
3. The CIT (A) in his order, upheld the addition made by the AO. Against such order of the CIT (A), assessee has filed this appeal before the Tribunal, with the following grounds :
“2. The learned CIT (A) is not justified in upholding the disallowance of Rs.53,48,852/- being the expenses incurred towards business promotion under the facts and in the circumstances of the appellant’s case.
2.1.The learned AO failed to appreciate that the expenses were incurred wholly and exclusively for the purposes of the business and they are not in the nature of bribes as the payees are not employees of any Government or quasi-Government establishment and therefore, no disallowance was called for.
3. Without prejudice to the right to seek waiver with the Hon’ble CCIT / DG, the appellant denies himself liable to be charged to interest u/s.234A, 234B and 234C of the Act, which under the facts and in the circumstances of the appellant’s case and the levy deserves to be cancelled.”
4. On this issue, the assessee’s submission before the CIT(A) and her decision is extracted as under:
“4.2 The following submissions have been made in writing:
3. … It is 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 is made to higher officers in the Human Resources Department to ensure that these people extend the business to the appellant. This amount is incurred wholly and exclusively for the conduct of the business. This is not in the nature of bribe to warrant disallowance under explanation to Section 37(1) of the Act. The A.O. characterised such payments as bribes and in fact made the representative accept such characterisation and disallowed it. This is at best a secret commission and it is not prohibited by any law to constitute a bribe to warrant disallowance u/s 37(1) of the Act and these persons are not employees of any Government or quasi-Government establishments but pure business houses. The disallowance is unsustainable and deserves to be deleted.”
4.3. I have carefully considered the appellant’s submissions and the reasons given by the AO in the assessment order. Before an expenditure can be claimed u/s 37, the following essential conditions will have to be satisfied
i) It must be an expenditure in the nature of revenue expenditure and not in the nature of capital expenditure.
ii) It must be laid out or expended wholly and exclusively for the purpose of the business or profession.
iii) It must not be of the nature described in sections 30 to 36 and section 80W (which is enforced with effect from 1/4/1976).
4.4 In this context, it is relevant to mention the judgement of the Hon’ble High Court of Kerala in the case of Ram Bahadur Thakur v. CIT [(2003) 1 KLT.687(Ker)(FB) 257 ITR 289] wherein it was held that in order to constitute an expenditure falling u/s 37(1) of the Act, the broad principles have been summarised as under:
“(1) In order to constitute an expenditure falling under Section 37(1) of the Act, the six conditions, viz. (i) the expenditure should not be of the nature described in section 30 to 36, (ii) it should have been incurred in the accounting year, (iii) it should be in respect of a business which was carried on by the assessee and the profits of which are to be computed and assessed, (iv) it should not be in the nature of personal expenses of the assessee, (v) it should have been [aid out or expended wholly and exclusively for the: purpose of such business and (vi) it should not be in the nature of capital expenditure should occur.
(2) Though the expression ‘for the purposes of the business’ is wider in scope than the expression. ‘for the purpose of earning profits’ and may comprehend many acts incidental to the carrying on of a business its limits are implicit in it and the purpose shall be for trhe purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on of the business.
3) The expenditure incurred is on the around of commercial expediency and in order, indirectly, to facilitate the carrying on of the business.
(4) The fact that there was no compelling necessity to incur the expenditure on which deduction is claimed is irrelevant to constitute expenditure under Section 37(1) of the Act.
(5) Even an expenditure incurred by an assessee in the course of his or its business voluntarily and without necessity can be allowed as a deduction if it is incurred for promoting the business and to earn profits even though there was no compelling necessity to incur such expenditure.
(6) If the payment of expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may enure to the benefit of a third party also.
(7) In every case it is a question of act whether the expenditure was incurred wholly and exclusively for the purpose of trade or business of the assessee.
(8) Where an assessee seeks to deduct from his or its business profits certain items of expenditure the onus of proving that such deductions are permissible is on the assessee. This is particularly so when the claims are based on facts which are exclusively within the knowledge of the assessee. Thus, it is for the assessee to plead and prove before the authorities that the expenses are incurred wholly and exclusively for the purpose of the business of the assessee.
(9) When a claim for deduction of an expenditure under Section 37(1) of the Act is made by an assessee the Assessing Officer is bound to conduct an enquiry as to whether the assessee satisfied all the requirements of the section before either allowing or rejecting the claim. The officer cannot mechanically either• allow the deduction or deny the same. It is clear that these are not exhaustive and the application of these principles may vary from case to case and will depend on the facts and circumstances of each case.
4.5 A plain reading of the decision cited above shows that, 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 present case, admittedly, no evidence is in the possession of the appellant for the deduction claim. The appellant has 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. neither during the course of assessment proceedings nor during the appellate proceedings. In the absence of these primary details and also documentary evidence, I am constrained to uphold the AO’s action. Therefore, the disallowance of Rs. 53,48,852/- is confirmed.”
05. This being so, the AR argued that the AO has without understanding the nature of expenditure, characterised it as bribes and held that it is not allowable u/s 37(1). These payments are at best a secret commission and it is 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. Per contra, the DR submitted that the asseessee has not furnished any details viz name of the person, amount paid, vouchers or any other evidence and hence primary onus has not been placed either before the AO or before the CIT(A) or before the Tribunal and further relied on the CIT (A) order.
6. We heard the rival submissions. In this case , the CIT(A) applying the ratio of the Hon’ble High Court of Kerala in the case of Ram Bahadur Thakur v. CIT (supra), has correctly held that the assesseee has not discharged the primary onus and upheld the addition which on the facts and circumstances require no interference . Further in this case, the AR is making an attempt to say that secret commission is not prohibited by 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. By such an argument, he pleads that but for Government or quasi-Government establishments, others could indulge in this type of action. Let us examine this claim as under :
Explanation appended to Section 37 of the Act by way of Finance (No.2) Act, 1998 introduced retrospectively with effect from 1.4.1962 is reproduced below:
“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. “
7. The Punjab & Haryana High Court in the case of Commissioner Of Income Tax. vs Dhanpat Rai And Sons in 362 ITR 7 had an occasion to 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. “
Thus, it is clear that the assessee’s action clearly fell within the mischief of the explanation added to Section 37 of the Act and hence the impugned disallowance is sustained on this ground also.
08. In the result, the assessee’s appeal is dismissed.
Order pronounced in the open court on 21st day of April, 2017.
