High Court Of Orissa
Tarini Tarpuline Productions vs. CIT
Section 37(1), Explanation
Asst. Year 1987-88
R.K. Patra & Ch. P.K. Misra, JJ.
S.J.C. No. 39 of 1994
20th April, 2001
Counsel Appeared
S.N. Ratho, S.R. Panigrahi, S. Rath & S. Tripathy, for the Petitioner : None, for the Respondent
JUDGMENT
R.K. PATRA, J. :
On being moved under s. 256(1) of the IT Act, 1961, by the assessee, the Tribunal has referred the following questions of law arising out of its order dt. 26th July, 1993, in ITA No. 404/CTK of 1989 for our opinion :
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the secret commission paid by the assessee amounting to Rs. 1,14,450 was not an allowable deduction under s. 37(1) of the IT Act ?
(2) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the secret commission paid by the assessee in order to procure business was based on relevant evidence, or has been arrived at by ignoring or misreading relevant evidence or based on partly relevant and partly irrelevant evidence or otherwise perverse, illogical and unreasonable?”
As both the questions are interrelated, we have framed the question as follows:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in disallowing the secret commission alleged to have been paid by the assessee to persons whose names it could not disclose or evidence of any such payment was not adduced ?”
2. The facts of the case may be briefly stated : The assessee is a partnership firm deriving income from manufacture and sale of tarpaulin to various Departments of the State Government, State Government undertakings, semi-Government bodies like municipalities, N.A.Cs. and also to the Central Government bodies like municipalities, N.A.Cs. and also to the Central Government Departments. During the asst. yr. 1987-88, its sale amounted to Rs. 9,59,576.14 against which an expenditure of Rs. 1,14,467.59 was claimed under the head “agent commission”. On being asked to explain the claim, the assessee submitted that there was keen competition in the open market for such products and the commission was paid to different agents which was absolutely necessary in the interest of business as it was not possible to push up the sales without making such payments. In support of such claim, the assessee produced vouchers. The AO on an examination found them to be self-made. He also required the assessee to furnish names and addresses of the agents and also to co-relate the payment of commission in each case with the sale. The assessee came forward to state that in the interest of business it was not possible to disclose the identities of the agents. It also expressed its inability to co-relate the payments with the orders procured or sales effected. In view of this, the AO did not accept the claim of the assessee that the payments on account of commission to the agents were for business purpose and accordingly disallowed the claim as inadmissible. The assessee appealed to the CIT (A), but without success. Undaunted with the dismissal of the appeal, the assessee moved the Tribunal in second appeal. The Tribunal declined to interfere with the matter and confirmed the orders appealed against.
3. Shri S.N. Ratho relying on the judgments 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, CIT vs. Goodlas Nerolac Paints Ltd. (1990) 90 CTR (Bom) 184 : (1991) 188 ITR 1 (Bom) : TC 17R.541 and CIT vs. Sigma Paints Ltd. (1992) 103 CTR (Bom) 305 : (1991) 188 ITR 6 (Bom) : TC 54R.863 contended that in the commercial circles payment of secret commission is recognised as a matter of practice and accordingly the amount claimed by the assessee as payment towards commission of the agents is an allowable deduction within the meaning of s. 37(1) of the IT Act, 1961.
Learned counsel for the Revenue, on the other hand, submitted that no judicial notice can be taken of such substandard morality on the part of the assessee.
We need not examine the rival contentions in view of the recent amendment made to s. 37 of the Act as per s. 15 of the Finance (No. 2) Act, 1998, which was brought to our notice by Mr. Ratho fairly. By the aforesaid amendment, the following Explanation has been inserted after sub-s. (1) of s. 37 with retrospective effect from 1st April, 1962. “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.”
As it appears, the aforesaid amendment has been effected in order to clarify that no allowance shall be made in respect of expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law. The above Explanation to s. 37(1) was inserted with retrospective effect from 1st April, 1962, by the Finance (No.2) Act, 1998 (i.e., for the asst. yr. 1962-63) and subsequent years, which results in disallowance of the claim made by certain taxpayers to deduction of payments on account of production money, extortion, hafta, bribes, etc. as business expenditure.
In view of the aforesaid amendment, we answer the question in favour of the Revenue and against the assessee.
[Citation : 254 ITR 495]
