High Court Of Andhra Pradesh
CIT vs. Transport Corporation Of India Ltd.
Sections 37(1), 256
Asst. Year 1981-82, 1982-83, 1983-84, 1984-85
S.R. Nayak & S. Ananda Reddy, JJ.
Case Refd. Nos. 55 & 124 of 1991 and 132 of 1997
6th June, 2002
Counsel Appeared
S.R. Ashok, for the Applicant : Y. Ratnakar, for the Respondent
JUDGMENT
S.R. NAYAK, J. :
In these referred cases, the Tribunal, Hyderabad Bench ‘B’, has referred the following questions of law to this Court under s. 256(2) of the IT Act, 1961 (‘the Act’) at the instance of the Revenue arising out of the orders made by the Tribunal for the asst. yrs. 1981-82 to 1984-85. “1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in allow in coming to the conclusion that the payment claimed to have been made under the head ‘Secret commission’ is not opposed to public policy and is an admissible item of deduction in the computation of the total income of the assessee?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure by way of secret commission was deductible under s. 37(1) of IT Act, 1961, in computing the business income of the assessee?” In addition to the above two questions referred by the Tribunal, this Court by its order dt. 1st Nov., 1995 in IT Case Nos. 36 of 1992 and 22 of 1993 directed the Tribunal to refer the following question which, for convenience sake, be described as question No. 3 “3. Whether, on the materials available in the case, the findings given by the Tribunal with regard to the genuineness and quantum of deduction to be allowed under the head of ‘secret commission’ are perverse and based on irrelevant consideration ?” 2. The facts of the case be noted first. The assessee, viz., Transport Corpn. of India Ltd., Secunderabad is one of the largest Cargo movers in the country and it has more than 600 branches scattered throughout the country during the relevant previous years. According to the assessee, the business of transport of goods is highly competitive and in order to survive in the business and sustain the regular business flow, it had to pay commission to the employees of the contracting parties-customers as an inducement to garner more business. During the course of assessment proceedings, the assessee claimed that it paid commission called ‘secret commission’ to the employees of the customers as an inducement for granting business to the transport operators and such a practice is well known practice in the transport business and, therefore, is ‘secret commission’ paid by them is allowable under s. 37(1) of the Act. The claim of the assessee was not allowed by the ITO and according to the ITO, the ‘secret commission’ claimed to have been paid by the assessee as imaginary and false and there is no evidence to substantiate the claim. The ITO in view of the fatual finding and also placing reliance on the judgment of this Court in CIT vs. Kodandarama & Co. (1983) 35 CTR (AP) 346 : (1983) 144 ITR 395 (AP) : TC 17R.1505 and judgment of the Bombay High Court in Goodlas Nerolac Paints Ltd. vs. CIT (1982) 28 CTR (Bom) 186 : (1982) 137 ITR 58 (Bom) : TC 17R.541, disallowed the claim of the assessee. The assessee being aggrieved by the order of the ITO preferred appeals before the CIT(A) who, in turn, agreeing with the factual findings recorded by the ITO and placing reliance on the judgments of this Court in Kodandarama & Co.’s case (supra) and that of the Bombay High Court in Goodlas Nerolac Paints Ltd.’s case (supra) dismissed the appeals and confirmed the assessments made by the ITO. While doing so, the CIT also held the ‘secret commission’ claimed to have been paid by the assessee is opposed to public policy. The assessee being aggrieved by the order of the CIT(A) preferred further appeal to the Tribunal. The Tribunal having noticed that the ITO had allowed the expenditure incurred by the assessee towards ‘secret commission’ under s. 37(1) till the asst. yr. 1981-82 and it was only from the asst. yr. 1981-82, the ITO chose to disallow the secret commission paid by the assessee and since it did not find any change of circumstances after the asst. yr. 1981-82, allowed the appeals in part.
3. Shri S.R. Ashok, the learned senior standing counsel for the IT Department assailed the validity of the opinion of the Tribunal by contending that in the first place, the assessee had utterly failed to place any satisfactory materials and evidence before the assessing authority to show that as a matter of fact, it paid secret commission as claimed by it during the relevant assessment years and that the Tribunal had wrongly placed the burden on the Department. The learned counsel contended that it is well-settled that when an assessee claims disallowance under s. 37(1) it is his or its burden to prove that the payment was made by him or it. The learned standing counsel contended that the alleged payment made by the assessee-company is opposed to public policy and, therefore, not allowable under s. 37(1). The learned standing counsel contended that the judgment of this Court in Kodandarama & Co.’s case (supra) and judgment of the Bombay High Court in Goodlas Nerolac Paints Ltd.’s case (supra) clinch the controversy as regards the questions referred to this Court and that the questions have to be answered in favour of the Revenue and against the assessee in the light of those judgments. On the other hand, Shri Y. Ratnakar, the learned counsel appearing for the assessee at the threshold contended that the Tribunal is that final fact-finding authority under the Act and the correctness of the factual finding recorded by the Tribunal that the assessee had paid the secret commission which was incidental to its business cannot be canvassed in reference and since the secret commission paid by the assessee-company does not violate any public law, the assessee is entitled to claim disallowance under s. 37(1).
It is trite, if the supplemental question No. 3, referred to this Court as directed by the Court in the order dt. 1st Nov., 1995 in IT case Nos. 36 of 1992 and 22 of 1993, is answered affirmatively, the other questions would not survive for decision. In that view of the matter we proceeded to decide the supplemental question No. 3 in the first instance. Sub-s. (1) of s. 37 reads as follows : “General.—(1) Any expenditure (not being expenditure of the nature described in ss. 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out 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.” In order to claim deduction of expenditure under s. 37(1) at the relevant point of time and in the light of the judgments in Indian Molasses Co. Ltd. vs. CIT (1959) 37 ITR 66 (SC) : TC 16R.205, CIT vs. Indian Molasses Co. (P) Ltd. (1970) 78 ITR 474 (SC) : TC 16R.579, Sassoon J. David & Co. (P.) Ltd. vs. CIT (1979) 10 CTR (SC) 383 : (1979) 118 ITR 261 (SC) : TC 16R.320, Madhav Prasad Jatia vs. CIT (1979) 10 CTR (SC) 375 : (1979) 118 ITR 200 (SC) : TC 15R.823, CIT vs. Ballarpur Industries Ltd. (1979) 9 CTR (Bom) 258 : (1979) 119 ITR 817 (Bom) : TC 16R.1029, CIT vs. Navsari Cotton & Silk Mills (1981) 23 CTR (Guj) 292 : (1982) 135 ITR 546 (Guj) : TC 16R.1032, Chenab Forest Co. vs. CIT (1974) 96 ITR 568 (J&K) : TC 17R.1254, the following conditions should be satisfied : (i) the expenditure in question should not be of the nature described under the specific provisions of ss. 30 to 36 and 80VV of the Act (section 80VV was omitted w.e.f. 1st April, 1986); (ii) the expenditure should not be of nature of capital expenditure; (iii) it should not be a personal expenditure; and (iv) the expenditure should have been laid out or expended wholly and exclusively for the purposes of business or profession. It is, thus, clear that conditions at (i), (ii) and (iii) above are negative conditions whereas condition at (iv) above is a positive condition. If the expenditure satisfies the negative conditions, it has to satisfy the positive condition in order to the eligible for deduction under s. 37(1). Thus s. 37(1) allows deduction of any ‘expenditure’ subject to conditions noticed above.
In Indian Molasses Co. (P) Ltd.’s case (supra) the Supreme Court pointed out that the word ‘expenditure’ is equal to ‘expense’ and ‘expense’ is money laid out by calculation and intention. But the idea of ‘spending’ in the sense of ‘paying out or away’ money is the primary meaning and it is with this meaning that one is concerned ‘Expenditure’ is, thus, what is paid out or away and is something which is gone irretrievably. The apex Court in CIT vs. Nainital Bank Ltd. (1966) 62 ITR 638 (SC) : TC 16R.230 held that in its normal meaning, the expression ‘expenditure’ denotes ‘spending’ or ‘paying out or away’ i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not ‘expenditure’; it is only when he satisfies the obligation by delivery of cash or property or by settlement of accounts, that there is expenditure. The burden of proving that a particular expenditure has been laid out or expended wholly and exclusively for the purposes of business so that the assessee may be entitled to claim deduction is on the assessee. The position is well-settled by the judgments of the apex Court in CIT vs. Calcutta Agency Ltd. (1951) 19 ITR 191 (SC) : TC 16R.587 and CIT vs. Imperial Chemical Industries (I) (P) Ltd. (1969) 74 ITR 17 (SC) : TC 17R.950. The mere object of incurring expenditure is not decisive whether it is of a capital nature or revenue nature. Therefore, the onus is on the assessee to prove inter alia, that the item of expenditure in question for admissibility to deduction is not in the nature of capital expenditure. Further, mere payment by itself would not entitle the assessee to deduction of the said expenditure unless the same was proved to be paid for commercial consideration. The onus of proof is always upon the assessee. It cannot be said that even if the taxpayer does not produce any evidence in support of the claim for deduction, the AO himself independently is to collect evidence and decide that the deduction claimed is baseless having regard to the legitimate business needs of the assessee, as the Tribunal seems to think in the present case. It is for the taxpayer to establish by evidence that a particular allowance is justified. But as held by the Supreme Court in CIT vs. C. Parakh & Com. (India) Ltd. (1956) 29 ITR 661 (SC) : TC 16R.275 whether an assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto, and not on the view which he might take of his rights. At the same time, the onus is on the assessee to establish that there are facts in existence which entitle it to a deduction and it is for the assessee to adduce necessary evidence in this regard. Therefore, if the assessee fails to place sufficient materials, he is not entitled to claim allowance under s. 37(1). In CIT vs. Chandravilas Hotel (1986) 56 CTR (Guj) 182 : (1987) 164 ITR 102 (Guj) : TC 17R.1048 it is held that if the expenditure is doubted by the assessing authority, it is the duty of the assessee to prove by leading evidence that the expenditure was in fact, incurred.
In the premise of the above noticed well established principles, let us proceed to examine whether these necessary conditions existed to claim disallowance under s. 37(1) and whether the assessee discharged the burden cast on it. The details of the total receipts, commission payments and amount of commission disallowed for the asst. yrs. 1981-82 to 1984-85 are as under : The ITO, considering the fact that there was a sharp increase in commission payments from the asst. yr. 1981-82 onwards, conducted detailed enquiries and the AO himself personally visited branches of the assessee Delhi, Jaipur, Chandigarh and recorded sworn statements from the employees of the assessee-company. The ITO in his detailed order after threadbare discussion of the whole facts and onconsideration of the materials placed before him, recorded the factual finding that the claim put forth by the assessee is not genuine and the assessee did not disclose the necessary details as to whom the alleged payment was made as secret commission. Since the claim of the assessee is not verifiable, the ITO disallowed the claim. His view was affirmed by the CIT(A). When this is the factual position, the Tribunal quite curiously, without addressing itself to the question of burden cast on the assessee, placed the burden on the Department. The Tribunal has observed thus : “In our view, the entire amount of secret commission cannot be disallowed in view of the fact that the ITO did not conclusively prove that the payment was not made by the assessee-company to the employees of its customers as commission. The ITO has merely doubted the commission payment. As a matter of fact, he has given a finding that the commission payment is not verifiable in view of the fact that the assessee has failed to furnish the names and addresses of the recipients. The finding of the ITO goes to show that the payment perhaps might have been made but he is not sure about the quantum of payment.” The above reasoning is strange and that the view of the Tribunal has no legs to stand in law. The law is otherwise. As noticed supra the burden is on the assessee who claims disallowance under s. 37(1) to place necessary materials and establish his claim and it is not for the ITO to independently collect evidence and prove that the deduction claimed by the assessee is baseless. Nextly, the mere fact that before the asst. yr. 1981-82 the ITO had allowed similar claims of the assessee cannot be a ground to allow disallowance without examining whether necessary conditions existed to allow allowance under s. 37 in terms of the statute or not and whether the assessee had discharged the burden cast on him with regard to the subsequent assessment years. Allowance or disallowance of a claim under s. 37(1) should depend upon the existence or nonexistence of the four conditions stated above and depending upon the answer to the question whether the assessee has discharged the burden cast on him or not. Therefore, it is not open for the Tribunal or for the Court to allow disallowance solely on the ground that in respect of certain previous years such disallowance was allowed though such disallowance was contrary to law. The Tribunal is also not right in observing that the facts of the case relating to the assessment years prior to the asst. yr. 1980-81 and facts of the case for the asst. yr. 1981-82 and onwards are similar. As could be seen from the records placed before us, there was a very sharp increase of commission of payments from the asst. yr. 1981-82. According to the assessee itself, the commission paid during the asst. yrs. 1976-77 to 1980-81 is Rs. 10,75,410, Rs. 14,57,766, Rs. 21,16,115, Rs. 27,26,604 and Rs. 45,60,521 respectively, whereas for the asst. yr. 1981-82, commission paid is Rs. 1,18,52,724 and from the assessment year onwards, the commission paid up to the asst. yr. 1984-85, is between the range of Rs. 1,18,52,724 and Rs. 1,33,22,009. Looking from that angle also, it cannot be said that the facts of the case before the asst. yr. 1981-82 and after the asst. yr. 1980-81 are similar.
It is true that one of the settled principles of law is that the High Court while answering any question referred to it shall not record its own findings on issues of fact. However, it can, undoubtedly, see whether there is any irrelevant material taken into consideration or any relevant material has been omitted and not taken into consideration while recording findings on facts. In other words, the Court can consider the question whether the factual finding recorded by the Tribunal is perverse, in the sense, that it is based on ‘no evidence’. Such a question is a question of law and not a question of fact. The High Court in a reference under s. 256 exercise advisory jurisdiction in regard to question of law. It is only when it has before it a question that asks whether the Tribunal has, upon evidence on record before it come to a conclusion which is perverse, that it may go into facts, for this is a question of law. A conclusion is perverse only if it is such that no person duly instructed, could upon the record before him, have reasonably come to it. It is the Tribunal that find facts. The Tribunal sets the facts out in the statement of the case whereby it refers to questions of law to the High Court. It is true that the Supreme Court in Smt. Kilasho Devi Burman vs. CIT (1996) 132 CTR (SC) 173 : (1996) 219 ITR 214 (SC) : TC 54R.348, held that the High Court, in reference proceedings, cannot go beyond the facts found. However, the apex Court in the said decision was pleased to observe that where the High Court is of the view that it is requisite that facts other than those found need to be ascertained, it must call upon the Tribunal to submit a supplemental statement of the case. In the instant case, as noticed above, this Court by its order dt. 1st Nov., 1995 in IT case Nos. 36 of 1992 and 22 of 1993 directed the Tribunal to refer question-No. 3 extracted above for its opinion as a supplemental question, and accordingly, the Tribunal has referred the supplemental question No. 3. Therefore, the decisions cited by the learned counsel for the assessee reported in CIT vs. A.S.K. Rathinasamy Nadar (1995) 126 CTR (Mad) 400 : (1995) 212 ITR 527 (Mad) and CIT vs. Goodlas Nerolac Paints Ltd. (1990) 90 CTR (Bom) 184 : (1991) 188 ITR 1 (Bom) : TC 17R.541 that this Court cannot go beyond the finding of fact recorded by the
Tribunal in deciding these references are of no help to the assessee in the context of this case, where the Court finds that the finding of fact recorded by the Tribunal is perverse in the sense that it is not based on any legal evidence. Further, the Tribunal has wrongly placed burden of proof on the Department, though the burden of proof in law is cast on the assessee. In CIT vs. Greaves Cotton & Co. Ltd. (1968) 68 ITR 200 (SC) : TC 16R.446 and Imperial Chemical Industries (India) (P) Ltd.’s case (supra), the Supreme Court held that the question whether a certain expenditure is laid out or expended wholly or exclusively for the purpose of the assessee’s business is a question which involves, in the first place, the ascertainment of facts by the Tribunal and, in the second place, the application of the correct principle of law to the facts so found. The question, therefore, is mixed question of fact and law. It is a question of law because the Tribunal has to determine what is the meaning of the statutory phrase expenditure laid out or expended wholly or exclusively for the purpose of business’. The proper construction of the statutory language is always a matter of law, and, therefore, the claim of the assessee in any particular case that he is entitled to deduction of certain items of expenditure involves the application of the law to the facts found in the setting of the particular case. But this does not mean that in the hearing of a reference on this question, the High Court is entitled to go beyond the findings of fact recorded by the Tribunal unless the findings of fact are based on ‘no evidence’. This view is in consonance with the view taken by the Supreme Court in CIT vs. Chari & Chari Ltd. (1965) 57 ITR 400 (SC) : TC 54R.1048 and CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC) : TC 54R.859. It will, thus, depend upon the facts and nature of each case whether a question of law or a mixed question of fact and law arises or whether the conclusion involved is purely one of fact.
11. The Tribunal has also observed that deduction of secret commission was made by the managers of over 600 branches of the assessee-company, authenticated by stamped receipts signed by at least two of the employees of the assessee-company; that if the payment of secret commission was not genuine, it was unlikely that the assessee- company would have taken into confidence so many employees and that the very fact that the deduction of secret commission was handled by so-many people would show that the assessee-company had paid secret commission to the employees of the customers. The Tribunal has further stated that the accounts of the assesseecompany was subjected to audit and the auditors, in their reports, did not raise any doubt about the payment of secretcommission; the auditor’s report did not contain any whisper or doubt regarding payment of secret commission. So opening, the Tribunal has recorded the findings that the assessee had paid the secret commission which was incidental to its business. If the above finding of the Tribunal is not based on evidence or is based or irrelevant materials and factors, such a finding, though a finding of fact, cannot be a basis to allow deduction under s. 37(1). The finding recorded by the Tribunal is solely based on surmises and conjectures. All the reasons stated by the Tribunal to record the finding of fact, in our considered opinion, are totally irrelevant and perverse to the decision-making. The Tribunal has not addressed itself to the relevant questions properly to see whether the necessary condition existed or not to allow deduction under s. 37(1) and whether the assessee has discharged burden cast on it. The whole approach of the Tribunal is erroneous. The Tribunal, in recording the above finding, has also not taken into account the relevant factors. It is the admitted case that the payment of secret commission in question is supported by the vouchers signed only by the employees of the assessee-company and those vouchers are not signed by the recipients, namely, the employees of its customers much less the details of the recipients are set out in the receipts.
It is the specific stand of the Department that such vouchers signed only by the employees of the assessee-company cannot be accepted as genuine, obviously because, any number of such vouchers to falsely demonstrate payment of secret commission can be prepared or manufactured by the assessee-company unilaterally to defraud the exchequer. This stand of the Department is, in a way, supported by the Jaipur Branch Manager, who in his statement, specifically stated that after he took over as the manager of Jaipur Branch, no secret commission was paid to anyone. When this was pointed out to the Tribunal, the Tribunal has brushed aside that contention stating that the said manager had a very limited knowledge which could not be made the basis to disallow the claim of the assessee under s. 37(1) and that the said manager had only stated that after he took over as the manager of Jaipur Branch, no payment of secret commission was made, but he has not stated that this was not the trade practice followed by the assessee-company. This reasoning is indeed quite strange. If the practice in the company was to pay secret commission to the employees of the contracting parties, the practice should have been resorted to even by the Jaipur Branch Manager after he took over charge of the office of manager of Jaipur Branch. Therefore, it is reasonable to infer that since after the witness-manager took over charge of manager of Jaipur Branch, he did not pay secret commission to anyone, it was not the practice of the assessee-company to pay secret commission. Therefore, we hold that the finding recorded by the Tribunal that the assessee had paid the secret commission is based on ‘no evidence’ in the first place, and that finding is based on irrelevant factors as noticed above and, therefore, it is a perverse finding.
The Tribunal, dealing with the question whether the necessary conditions to allow deduction under s. 37(1) did exist, placing reliance on the judgment of the Supreme Court in Sassoon J. David & Co.(P) Ltd.’s case (supra) held that the necessary conditions did exist and that the expression ‘wholly and conclusively’ occurring in sub-s. (1) of s. 37 does not mean ‘necessarily’. In other words, according to the Tribunal, ordinarily it is for the assessee to discharge whether any expenditure should be incurred in the course of his business or trade and such expenditure may be incurred voluntarily and without any necessity and if such expenditure is incurred, even voluntarily for promoting the business interest and to earn profits, the assessee is entitled to claim deduction under sub-s. (1) of s. 37, though there is no compelling necessity to incur such expenditure. There cannot be any quarrel with the above proposition. But the question is whether such payment is made either to the petty brokers or to the employees of the customers of the assessee-company. The assessing authority, after appreciation of the entire materials collected by him and placed before him, has recorded the finding that the payment of secret commission is not established. Such a finding recorded by the assessing authority and affirmed by the appellate authority, could be upset by the Tribunal, being the final fact-finding authority under the Act, only if the findings recorded by the original authority and affirmed by the appellate authority cannot be sustained on the basis of the relevant materials and the evidence on record. As already pointed out supra, as a matter of fact, the factual finding recorded by the Tribunal, is based on ‘no evidence’, but is based on irrelevant considerations whereas the finding recorded by the assessing authority
is based on relevant materials and evidence. However, Shri Y. Ratnakar, the learned counsel for the assessee placing reliance on the judgment of the Bombay High Court in CIT vs. Sigma Paints Ltd. (1992) 103 CTR (Bom) 305 : (1991) 188 ITR 6 (Bom) : TC 54R.863, would contend that though the assessee did not divulge the particulars of the persons to whom the secret commissions are paid, the assessee is entitled to seek deduction of such payments from the computation of the income under s. 37(1). We do not think that that judgment of the Bombay High Court-would, in anyway, advance the case of the assessee in this case. In that case, decided by the Bombay High Court, there was a complete tally between the commission paid and the expenditure of business done by the mill-company. Details were also available of the exact transactions in respect of which the assessee had to pay the secret commission. The assessee had given complete list showing the turnover and the amount, of secret commission paid from year to year. The percentage of secret commission was minimum. The full details of payment on the above basis in respect of every party were available. They were correlated to the transactions which the assessee had with those persons and the period during which the transactions were entered into. The only missing item was stated to be the names of the parties to whom the payments were made. In that case, the stand of the assessee was that the particulars of the parties to whom the payments were made could not be supplied without detriments to the business of the assessee in the very nature of things. This contention of the assessee found favour with the Tribunal and, therefore, the Tribunal held that the secret commission amounting to Rs. 1,41,346 paid by the assessee was an allowable deduction under s. 37(1) in the reference, the Bombay High Court opined that no question of law arose from the orders of the Tribunal. We are at loss to understand how this opinion of the Bombay High Court would, in anyway, aid the contention of the learned counsel for the assessee. In the instant case, as noticed supra firstly the payment itself is not established and, secondly, it is not the case of the assessee before the assessing authority that the particulars of the persons to whom secret commissions were made could be supplied without detriment to the business of the assessee having regard to the nature of the business of transport of cargo carried on by the assesseecompany. Looking from that angle, the above judgment of the Bombay High Court has no bearing to the facts of this case.
14. In the result and for the foregoing reasons, supplemental question No. 3 is answered in the affirmative and in favour of the Revenue. Since supplemental question No. 3 is answered in the affirmative and in favour of the Revenue, there is no need for us to answer question Nos. 1 and 2 referred to us, and accordingly, we decline to answer question Nos. 1 and 2 the reference cases are accordingly, disposed of with no order as to costs.
[Citation : 256 ITR 701]
