Karnataka H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that raid expenses is allowable under s. 37(1)?

High Court Of Karnataka

CIT vs. A. Janardhana Shetty

Sections 37(1)

Asst. Year 1984-85

V.K. Singhal & T.N. Vallinayagam, JJ.

ITRC No. 47 of 1998

24th January, 2000

Counsel Appeared

M.V. Seshachala, for the Applicant : K.R. Prasad, for the Respondent

ORDER

V.K. SINGHAL, J. :

The Tribunal has referred the following question of law arising out of its order dt. 25th Nov., 1994, for the asst. yr. 1984-85.

“Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that raid expenses is allowable under s. 37(1)?”

2. Facts as stated by the Tribunal are that the assessee had done arrack business in the previous year relevant to the asst. yr. 1984-85. The assessee had incurred certain expenditures in helping the excise authorities in organising the raids to reduce illicit trade, and claimed the expenditure towards raids in connection with the business for allowing deduction under s. 37. The ITO disallowed the claim of the assessee on the ground that it is the duty of the State excise staff to unearth illicit brewing, for which they have got their own machinery. He furthermore stated that the assessee could not adduce any evidence as to how exactly the amount claimed had been spent and other details had also not been supplied. On this basis, he disallowed the claims of the assessee in this regard. The first appellate authority agreed with the contention of the ITO that neither justification for the expenditure nor its genuineness had been established. The assessee went on appeal to the Tribunal and the Tribunal upheld the contention of the assessee and allowed 50 per cent of raid expenses relying on the decision of the Tribunal in IT Appeal No. 818/Bang/1989, dt. 3rd Oct., 1994, in the case of Sri A.J. Shetty Family Trust.

3. It is submitted that the raid conducted by the excise department was on the basis of illicit distilling. Reliance is placed on the decision given in the case of Maddi Venkataraman & Co. (P) Ltd. vs. CIT (1998) 144 CTR (SC) 214 : (1998) 229 ITR 534 (SC) : TC S17.1863, it was observed that the expense incurred in transaction carried out for violation of FERA are not deductible. This judgment does not help the Revenue because conducting the raid was an act of the Department and not an act of the assessee. The raid may be conducted to find out the transactions which are carried out in violation of the provisions of the Act. It is only the raid expenses which are to be considered which was conducted by the Department. It was an act of the Department and the assessee has to contest the proceedings. Ultimately in the raid violation of law may be proved or may not be proved and it was keeping these facts in mind that the Tribunal has allowed only 50 per cent of the expenses.

4. Argument of both the learned counsel for the parties heard. Assessee is no doubt engaged in the business of vending of arrack. In order to run the business effectively the activities of illicit manufacture and sale which were affecting the trade of the assessee were to be checked and certain expenses were incurred for arranging the raids on others who are engaged in such other illicit trade. The expenses so incurred by the assessee was not relating to any illicit trade carried on by the assessee, he has only taken steps to carry on his trade effectively and smoothly. The expenses were for the purpose of business and on the commercial expediency to carry out such business effectively and as such we are of the view that the Tribunal was right in law in holding that raid expenses is allowable under s. 37(1).

Reference is accordingly answered in favour of the assessee and against the Department.

[Citation : 254 ITR 281]

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