Case Law Details
RELEVANT EXTRACTS
8. We have considered the issue. It is the assessee 1s contention that the assessee is paying secret commission and the amount is allowable as business expenditure under section 37(1}. Provisions of section 37(1), which are applicable are as under: –
“37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid but or expended wholly and. exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession’.
[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. ]”
9. As can be seen’ from the above any expenditure not being in the nature of capital expenditure or personal expenditure of the assessee laid out or expended wholly and exclusively for the purpose f business shall be allowed.’ Therefore any claim under section 37 (1) is to be justified before the Assessing Officer that the expenditure is laid out or expended wholly and exclusively for the purpose of business. In order to consider an expenditure under section 37(1) the assessee has to justify the expenditure by furnishing necessary details and purpose for which n in spent and justify the claim that the amount is wholly and exclusively spent for the purpose of business. The Explanation will come into picture only when the amounts were proved that they were spent for business purpose, but a purpose which is an offence/ prohibited by law. Invoking the provisions of Explanation will come into picture only when the amount is proved to be justified otherwise. In this case the A.O. gave a clear finding that the assesses has not proved the genuineness as the vouchers were not verifiable at all. The assessee is able to correlate various expenditures vis-a-vis the receipt of incentives and the purpose for which it is paid but the fact is that these expenditures have been booked under different heads and prima facie the Assessing Officer has come to doubt the expenditure as it was found during the survey that the assessee has indulged in inflating the expenditure. The other aspect which is to be considered is whether the assessee is able to justify the expenditure. Even though the assessee was able to correlate various expenditures which are booked in the books of account as secret commission but they are not verifiable as the payee’s signatures are not available nor any details of the ratio in which it is paid. We are also not in a position to accept assessee’s contention that the amounts are paid as kickbacks. Generally only a small portion “of the amount is paid as kickbacks. In this case the amounts are varying from 13.5% in Mumbai to as low as 2.15% in Kolkata when considered the total billings. The assessee is neither consistently paying similar rate nor a particular percentage is’ uniformly adopted so as to consider that a fixed rate is paid as kickback. It is also interesting to note that the assessee is justifying the secret commission over the total billing receipts whereas if one goes by the statements given for the additional incentives received, amounts paid as kickbacks conies to almost 66% in many cases. For example, out of the gross amount of Rs. 13,49,792/-received as sundry income in various centers the assessee paid a total of Rs.3,29,494/ – as secret commission at only one place, i.e., in Coimbatore from which center the amount of income was Rs. 4,61,762/-. There is no expenditure of similar nature in other centers. It is also surprising to note that out of Rs. 4,61,762/ – received, Rs. 3,29,494/ – was claimed as secret commission whereas only Rs. 1,32,268/- was taken to the P & L Account Details in page 133 in paper book). With reference to the incentive amount the gross amount of incentives received was to the tune of Rs. 27,89,689/ -and the secret commission1 claimed was Rs. 16,81,257/-. Further other amount paid was also to an extent of Rs.l,567091/ -. Only a net amount of Rs. 9,52,350/ – was taken to the P & L Account and total secret commission claimed was Rs. 18,37,348/- which is almost 66% of the incentive received (details in page 142). In the case of rate difference also, the assessee is stated to have received gross amount of Rs.45,31,927/ – whereas the payment made as secret commission and kickbacks was to the tune of Rs.27,49,056. The payment of kickbacks is almost to the tune of 61%. The assessee has accounted only Rs.17,82,871/ – as additional incentive income in the P & L Account. This indicates that even though the assessee is trying to justify that overall secret commission paid is only 8%, the percentage of secret commission paid out of the additional incentive was to the tune of 60 -66% which indicates that the assessee is in fact claiming most of the expenditure on additional incentives received in the form of kickbacks or secret commission which could not be verified. It is to be noted that the assessee’s basic commission is only 5% which she gets on regular business. It is as if the entire additional incentive is being earned for the purpose of passing on as secret commission to the employees of the courier companies. Explanation of the assessee could not be accepted as secret commission paid was of very high percentage and no consistent pattern was noticed when verified center wise or head wise. In most of the case laws relied upon by the assessee, it was on record that secret commission was being paid regularly and that constitute a small percentage. The learned CIT(A) also has distinguished various case laws elaborately in the order which we do not intend to repeat here again. Suffice to say that on the facts of the case, we are of the opinion that the assessee has not justified the payment of secret commission. Further the learned CIT(A) also relied upon the decision of the Ahmedabad ITAT “A” Bench in the case of M/s. Patel Brothers vs. DCIT 75 TTJ 421. In this decision the Hon’ble Coordinate Bench has considered the decisions of the Hon’ble Bombay High Court in the case of C1T vs. Good lass Nerolac Paints Ltd. 188 ITR 1 and CIT vs. Sigma Paints Lui. V”; !TR 6 and the decision of the Hon’ble Gujarat High Court in the case of Dr. G. G. Joshi vs. CIT 209 ITR 324. The findings of the learned CIT(A) on this issue in para 21 is as under: –
“21. Reference in this context may also be made to the decision of the Hon’ble Ahmedabad ITAT `A’ Bench in the case of M/s. Patel Brothers vs DCTT reported in 75 TTJ 421. The Hon’ble ITAT has referred to various decision on this subject including the decisions of the Hon’ble Bombay High Court in the case of Good lass Nerolac Paints (188 ITR 1) and Sigma Paints (188 ITR 6), and the decision of the Hon’ble Gujarat High Court in the case of Dr. G.G. Joshi (209 ITR 324) on which the assessee had reduced. In this case too the assessee had claimed secret commission as business expenditure without furnishing the names and address of the recipients. Even though the assessee had been claiming such secret commission in the earlier years, the ITAT held that this fact would not establish that such a trade practice exists in the, line of business of the assessee. It was also noted by the Tribunal that the payment of secret commission in that case was 3 times the total income declared for the year. In the case of the appellant the total income declared amounts to Rs.25,65,430/ -whereas the payment dawned as secret commission amounts to Rs. 43,50,616/ -. The Hon’ble ITAT, Ahmedabad held that the Revenue Authorities were not precluded from looking into the genuineness of payment particularly when the quantum of secret commission is substantially higher compared to earlier years and the assessee had failed to adduce satisfactory evidence to establish the genuineness of the payment In regard to the applicability of section 37(1) proviso, it was held that such payments would evidently constitute a breach of trust on the part of recipients towards their own employers which constitutes an offence u/s. 408 of lPC. In a detailed judgement, the Hon’ble ITAT held that the assessee’s claim of allow ability of secret commission as business expenditure had to be rejected.”
10. The learned counsel also submitted that the expenditure was per se verified by the A.O. and disallowed the amount invoking Explanation to section 37(1) and provisions Explanation to section 37 (1) are not applicable. It is true that Explanation was inserted as there was some issues in which the secret commission, hawala payment and protection money were claimed as expenditure and the Act was amended. In this case the secret commission paid by the assessee has not been proved to be a genuine and necessary business expenditure .The assessee paid a large amount of Rs. 43.50,616/ – without deducting any tax on the amount which was paid to various persons. If the commission amount was paid as business expenditure in routine course the same would have been covered by the provisions of TDS and if the other persons has received it officially it could have been added to their incomes. Since the identity and genuineness of the expenditure was not proved, it is not possible to verify whether the expenditure is covered by the Explanation. Further the assessee also has not justified that there is trade practice of similar payment. In fact the assessee is also having group concerns in the form of a private limited company and another firm, as seen from the statement recorded from Shri Gaurav Ghuwalewala under section 133A. The assessee’s proprietary concern is in the name of Express Delivery Systems whereas ED’s Cargo Pvt. Ltd. in which assessee’s husband was Director and there is another concern M/s. Anjalin Enterprise in the same premises. The assessee’s business was run in the name of Air Cargo Agencies from 1996 which became a proprietary concern of the assessee once, the private limited comply by the name ED’s Cargo Pvt. Ltd was formed. The assessee has not justified whether similar expenditure was paid in-the case of ED’s Cargo Pvt. Ltd. which is also a group concern. The assessee was only justifying that similar is the business practice and the increase in volume as a justification for claiming the expenditure. However, there is nothing on record to prove that other companies in similar business were also paying kickbacks/ secret commission. As seen from the percentage of payment made, one can only conclude that additional incentive was earned only to be passed on as kickbacks to various persons. Even though the claim is towards obtaining business from cargo movers one is not sure whether the amounts were paid to the Airline companies as well. The assessee justifies only that these are paid for the cargo obtained but the identity of the real recipients has not been explained at all* Considering the claim being very high on the income received, we are not satisfied’ that the secret commission is justified for earning the additional business. In view of this we are not in agreement with assessee’s contentions. Orders of the A.O. and the learned CIT (A) on this issue are upheld.
