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Saturday, Aug 31, 2002

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Opinion - Taxation

Noose on mamools

T. C. A. Ramanujam

Secret commissions supported by `signed' vouchers may not be enough for the taxman, says T. C. A. Ramanujam

MORE than three decades back, the Madras High Court delivered a shocking judgment, allowing tips and mamools as business expenditure. In CIT vs Coimbatore Salem Transport (P) Ltd (1966 61 ITR 480), it was held that in the very nature of the expenditure, there can be no documentary evidence to prove it.

It did not appear to the court at that time that "greasing the palm of the RTO staff or RTO gang" would not only be an illegal act, but amounted to illegal gratification. Such illegal gratification can never be allowed as business expenditure when a business is expected to be run on lawful lines.

Can bribes be taken as deductible? Several High Courts dissented from the Madras High Court view. Infraction of law is not normal to business. Payments which are opposed to public policy, being in the nature of unlawful consideration for discharging an official duty otherwise than on merits, cannot be recognised.

Section 23 of the Indian Contract Act equates an agreement/contract opposed to public policy with an agreement/contract forbidden by law (144 ITR 395 AP and 234 ITR 230 MP).

CIT vs Transport Corpn

In this case (2002 123 Taxman 806 AP), Transport Corporation of India Ltd (TCIL) was having more than 600 branches scattered throughout the country.

During the course of assessment proceedings for the assessment years (AYs) 1981-82 to 1984-84, the company claimed to have paid commissions exceeding Rs 1,00,00,000 each year. TCIL happened to be one of the largest cargo movers in India. The company, in order to survive and sustain in the highly competitive goods transport business, had to pay commission to the employees of the contracting parties and customers as an inducement to garner more business.

The company claimed that it had to pay secret commission and that this should be allowed under Section 37 of the I-T Act, 1961. The ITO disallowed such claim for want of evidence. The company, however, went to the ITAT and succeeded.

The Department took the matter in reference to the AP High Court. In a lengthy judgment, the court went into the entire question of deductibility both on general principles and with reference to the case law.

The court pointed out that the burden of proving that a particular expenditure was laid out or expended wholly and exclusively for the purposes of business is on the assessee.

The mere object of incurring expenditure is not decisive for judging whether it is capital or revenue in nature. 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. It is not for the assessing officer (AO) to collect independent evidence in this regard. If the assessee fails to produce sufficient materials, he will not be entitled to allowance under Section 37.

In the above case, the Tribunal had allowed deduction of secret commission after being satisfied that stamped receipts signed by at least two employees of the company in each of the 600 branches were available. The very fact that secret commission payment was handled by so many people all over the country was proof of such payment.

Auditors did not raise any doubt about the payment of secret commission. (When did they ever have doubts on such payments!)

It was on these facts that the Tribunal considered secret commission as incidental to business.

But the AP High Court observed thus: "All the reasons stated by the Tribunal to record the finding of fact, in our considered opinion, is totally irrelevant and perverse to the decision-making.

"The whole approach of the Tribunal is erroneous. 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.

"Any number of such vouchers to falsely demonstrate payment of secret commission can be prepared and manufactured by the assessee company unilaterally to defraud the exchequer. 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 and, therefore, it is a perverse finding."

The amended law

Parliament introduced an Explanation to Section 37(1), declaring that any expenditure incurred 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.

The amendment was made retrospective from April 1, 1962. The Bombay High Court took note of the amendment in CIT vs Taraporvala Sons Co (P) Ltd (1999 239 ITR 319).

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