Case Law Details
Explanation to section 37(1) provides :” 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.” A bare perusal of this provision indicates that incurring of any expenditure for a purpose which is an offence or prohibited by law cannot be allowed as deduction.
When we advert to the facts of the instant case, it is noticed that this expenditure was incurred as a professional fees to defend two directors of the assessee company who were arrested under NDPS Act on being found guilty of the offences under the relevant sections of the said Act. The Ld. AR argued that since the two directors were released on bail, it indicated that they were not at fault. On a specific query, it was stated that no final order on their conviction or acquittal was passed so far. It shows that the charge is still continuing, which is otherwise an offence under the NDPS Act. Under such circumstances, we are of the considered opinion that there can be no reason for allowing deduction towards such an expenditure which has been incurred for the purpose of an offence prohibited by law, squarely covered within the meaning of the Explanation to section 37(1) of the Act.
The second ground of the assessee about there being no nexus between the professional fees paid and breach of law, is not sustainable. Mandate of the Explanation is crystal clear that, any expenditure’ incurred for any purpose which is an offence or which is prohibited by law cannot be allowed as deduction. It does not make any difference, whether expenditure is direct or indirect. So long as there exists a nexus of the expenditure with the offence, it will continue to be hit by the Explanation. The reliance of the Ld. AR on certain decisions is misconceived because those decisions are based on the facts which are altogether different from those prevailing before us. Recently the Hon’ble H.P. High Court in Confederation of Indian Pharmaceuticals Industry vs. CBDT & Ors, vide its judgment dated 26.12.2012, has upheld the validity of CBDT circular No. 5/12 prohibiting Medical Practitioners from availing of freebies, thereby covering such amount under Explanation to section 37(1). In view of the foregoing discussion, we are of the considered opinion that there is no infirmity in the impugned order warranting any interference. These two grounds are therefore, not allowed.
INCOME TAX APPELLATE TRIBUNAL, “C” Bench, Mumbai
Before Shri R.S. Syal, Accountant Member and
Dr. S.T.M. Pavalan, Judicial Member
ITA No. 1350/Mum/2012 (Assessment year: 2008-09)
Ms OPM International Pvt. Ltd.
Vs.
Dy. Commissioner of Income Tax, Range 2(2)
Date of Pronouncement: 05/06/2013
ORDER
Per R.S. Syal, A.M
This appeal by the assessee arises out of the order passed by CIT(A) on 09.11.2011 in relation to the assessment year 2008-09.
2. The first ground is against the confirmation of addition of Rs. 53,86,538/- for the reason that such expenditure was incurred for a purpose which is an offence. The second ground, which is an offshoot of the first ground, assails the finding of the Ld. CIT(A) on the premise that the immediate purpose of incurring the expenditure was ignored by him.
3. Briefly stated that the facts of these grounds are that the assessee debited a sum of Rs. 53.86 lacs as professional fees which was in fact, legal expenses relating to narcotics case. The assessee was called upon to explain as to why such expense should not be disallowed. The assessee tendered explanation stating that this amount was spent as legal fees for securing release of the professional Director and the Managing Director of the assessee company on bail. The assessee contended that the very fact that the bail was granted fairly indicated that no offence was committed by it. Not convinced, the AO made the addition, which came to be upheld in the first appeal.
4. We have heard the rival submissions and perused the relevant material on record. The assessee is engaged in the business of imports of Timber and Heavy Metal Scrap since 2003-04. It placed an order for supply of approximately 1000 CBM of teak wood with certain party from South America. On 17.05.2006, a specific information was received by Narcotics Control Bureau (NCB) that a 40 ft. Container of Maersk Line bearing a specific number was suspected to contain a narcotic drug. Accordingly, the Vessel of Maersk Line was intercepted mid sea on 03.06.2006 by the NCB officers, which was found to contain contraband items in a large quantity. This container was destined to be delivered to the assessee. Statement of all the concerned including the directors of the assessee company were recorded. Thereafter, Shri Omprakash Daulatram Nogaja, CMD and Shri Umesh Bangur, Professional Director of the company were arrested on 13.07.2006 by NCB. There is no denying the fact that the amount in question was incurred to defend both the above Directors of the company in this case.
5. Explanation to section 37(1) provides :” 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.” A bare perusal of this provision indicates that incurring of any expenditure for a purpose which is an offence or prohibited by law cannot be allowed as deduction. When we advert to the facts of the instant case, it is noticed that this expenditure was incurred as a professional fees to defend two directors of the assessee company who were arrested under NDPS Act on being found guilty of the offences under the relevant sections of the said Act. The Ld. AR argued that since the two directors were released on bail, it indicated that they were not at fault. On a specific query, it was stated that no final order on their conviction or acquittal was passed so far. It shows that the charge is still continuing, which is otherwise an offence under the NDPS Act. Under such circumstances, we are of the considered opinion that there can be no reason for allowing deduction towards such an expenditure which has been incurred for the purpose of an offence prohibited by law, squarely covered within the meaning of the Explanation to section 37(1) of the Act. The second ground of the assessee about there being no nexus between the professional fees paid and breach of law, is not sustainable. Mandate of the Explanation is crystal clear that, any expenditure’ incurred for any purpose which is an offence or which is prohibited by law cannot be allowed as deduction. It does not make any difference, whether expenditure is direct or indirect. So long as there exists a nexus of the expenditure with the offence, it will continue to be hit by the Explanation. The reliance of the Ld. AR on certain decisions is misconceived because those decisions are based on the facts which are altogether different from those prevailing before us. Recently the Hon’ble H.P. High Court in Confederation of Indian Pharmaceuticals Industry vs. CBDT & Ors, vide its judgment dated 26.12.2012, has upheld the validity of CBDT circular No. 5/12 prohibiting Medical Practitioners from availing of freebies, thereby covering such amount under Explanation to section 37(1). In view of the foregoing discussion, we are of the considered opinion that there is no infirmity in the impugned order warranting any interference. These two grounds are therefore, not allowed.
6. Ground No.3 was not pressed by the Ld. AR. The same is therefore, dismissed.
7. Last Ground of the appeal is against the confirmation of dis allowance of a sum of Rs. 4,23,816/- based on certain discrepancy in the assessee’s ledger Account and the AIR Report. The facts apropos this ground are that on verification of the AIR Report and tallying the same with the ledger account of the assessee, the AO found certain discrepancies which have been tabulated on page 3 of the assessment order. A total sum of Rs. 4,23,816/- was found out as an items representing interest income credited by banks but not offered by the assessee for taxation in its return. When the matter came before the Ld. CIT(A), the assessee filed a letter dated 03.09.2011 from HSBC Bank and a letter dated 12.09.2011 from ICICI Bank giving certain details about the interest paid by them to the assessee. The Ld. CIT(A) noticed that both the Banks had mentioned that the revised returns would be filed by them at the earliest, but the same was not filed thereby keeping AIR details unchanged. He, therefore, upheld the dis allowance. The assessee is against the sustenance of this dis allowance.
8. After considering the rival submissions and perusing the relevant material on record, it is noticed that the AO made dis allowance towards the interest income which was allegedly not accounted for by the assessee in its books of account. The case of the assessee is that there was no such interest income received from the Banks which was not accounted for. It is seen from the impugned order that certain details were promised to be filed by HSBC Bank and ICICI Bank, which appear not to have been filed in time. Under such circumstances, we are of the considered opinion that it would be in the interest of justice if the impugned order on this issue is set aside and the matter is restored to the file of AO. We order accordingly and direct him to decide this issue afresh in the light of material which the assessee now proposes to file to show that there was no interest income which was not offered for taxation.
9. In the result the appeal is partly allowed for statistical purposes.
Order pronounced in the open court on 5th June, 2013
