The Hindu Business Line : Can greasy palms slip through `business'

There have been decisions on this subject which also prompted amendment to law with retrospective effect in the Finance Act, 1998 clarifying that any payment prohibited by law shall not be deemed to be incurred for the purpose of business.

Recently, the Jharkhand High Court, in the Indraprastha Agencies vs Commissioner of Income-tax (2004 266 ITR 320), had to consider whether bribes paid to officials can be allowed in computing business profits.

Facts, issues

The assessee filed returns and it was assessed. Subsequently, notices under Section 148 of the Income-Tax Act, 1961 were issued on the basis that the income had escaped assessment within the meaning of Section 147 of the Act. A notice was also served on the assessee under Section 142(1) of the Act.

The annexure to that notice informed the assessee that information had been received that the assessee had received payment of different sums relating to different years from the animal husbandry department of the Bihar Government during the relevant accounting years and calling upon the assessee to furnish the relevant information based on the queries made in that communication.

Essentially, the assessee admitted that it had received those amounts from the animal husbandry department but raised the contention that 80-90 per cent of the amounts thus received had to be paid by way of bribe to the officials of the department, ministers and others and, hence, that part of the amount received by the assessee was not liable to be taxed as income at the hands of the assessee.

But the assessee did not furnish the information sought for and ultimately admitted that the amounts had been received from the department during the respective years and also admitted that pursuant to the receipt of those amounts, no supplies had been made by the assessee to the husbandry department.

The assessee took the stand that the entire amount received was not its income and should not be assessed at the hands of the assessee.

The assessee had paid back the amount to the persons concerned and had earned only 10-20 per cent of the amount received from the animal husbandry department.

The assessing authority took the view that the assessee, having admitted receipt of the amount and having failed to prove the expenditure as claimed by it, the entire amount was liable to be assessed at the hands of the assessee.

The appellate authorities and the tribunal agreed with the order of the assessing authority and the matter reached the High Court.

Court decision

The Jharkhand High Court held that the assessee is not entitled to claim these payments, which were in the nature of bribes, as a business deduction.

The High Court reasoned that "the assessee is in business. Payments were received in the course of its business against bills for supply of cattle-feed and other things to the animal husbandry department. Therefore, there cannot be any doubt that this is the income of the assessee. The only plea of the assessee was that the entire amount could not be treated as its income since a substantial part of it, up to 80-90 per cent, had to be distributed among the officers of the animal husbandry department and others by way of bribe or illegal gratification.

"An attempt to show generally that there was a cattle-feed scam in the State of Bihar and investigations by the Central Bureau of Investigation (CBI) and that it indicated the modus operandi, are not sufficient to enable the assessee to claim that out of the income received by it, a substantial portion should be excluded on the basis that it is a business expenditure or that it had not actually come to the credit of the assessee."

The court further held that "even when it got the opportunity, the assessee failed to disclose the persons to whom the amounts were allegedly paid or to substantiate the fact of payment out of the amounts it received. Mere production of a passbook showing some withdrawals by the assessee cannot be a substitute for evidence of payments to specified persons.

"If the assessee had disclosed the relevant details, then, it might have been a case for further investigation by the Department or for resorting to the power available under Section 131 of the Act.

"On the failure of the assessee to furnish any material or lead any specific evidence in that regard, nothing turns on the alleged question of law sought to be raised regarding the absence of opportunity or on the so-called investigation report of the CBI regarding the scam."

The court accordingly held that the assessee was not entitled to claim this payment as a business deduction.

Other decisions

In CIT vs Sauser Liquor Traders (1996 222 ITR 33), the Madhya Pradesh High Court held that any amount paid as bribe is against public policy.

All the expenditure that can be allowed is legitimate and should not be illegal. In Commissioner of Income tax vs Cheran Transport Corporation Ltd (1995 219 ITR 203), the Madras High Court, on the basis of the facts of the case, observed that the assessee had contributed to the Chief Minister's Drought Relief Fund voluntarily in response to an appeal and not for getting any favour from the Government.

Such contribution was not opposed to any public policy and, therefore, the payment had to be allowed as business expenditure.

One may also note that an explanation has been added to Section 37(1) of the Act by the Finance (No.2) Act, 1998 with effect from April 1, 1962, which stated thus:

"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."

This has effectively sealed the controversy but still cases keep coming up on different set of facts.

No doubt there cannot be a straitjacket formula to deal with such matters. Payments for getting favours are the order of the day. Allowability or otherwise in tax assessments is only the incidental issue on the subject.

After the amendment to the law such disputes will disappear into oblivion. But then the core issue will remain: How to curb such payments through systemic corrections?

(The author is a Chennai-based chartered accountant.)