The Hindu Business Line : Glaring omission in a commission case

TAX law has been grappling with the problem of assessing illegal business incomes. Income tainted with illegality is assessable. Even in an illegal business, it is the profits, and not the gross receipts, that are taxable. Expenses, though tainted with illegality , are deductible.

There are number of court rulings which have held that where the entire business is illegal and the income is sought to be taxed, then the expenditure incurred in the illegal activities will also have to be allowed as deduction, but otherwise, the payment tainted with illegality cannot be claimed as deduction. Illegal payments made to the police and other government officers have been held to be not deductible even though the payment may be in the course of legal business.

Amendment to the law

The Explanation to Section 37(1) of the Income-Tax Act, 1961, inserted by the Finance (No. 2) Act 1998 with retrospective effect from April 1, 1962, provides 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 all such cases, the question whether there is an infraction of law, or whether the expenditure is incurred for any purpose which is an offence or which is prohibited by law, is to be decided by the authority or the court empowered to do so under the respective law and not by the income-tax authorities or the tribunal functioning under this Act.

In the Super Tannery case (Deputy Commissioner of Income Tax vs Super Tannery (India) Ltd — 274 ITR 338), the Allahabad High Court held thus: "The court takes judicial notice of the fact that nowadays it is very difficult to get back lawful amount from the Government and other departments without incurring unavoidable expenses. Apart from it, a lot of harassment is also caused... "

No reference was made in the course of arguments to the provisions of the amended law under Section 37. Nor was any mention made of cases decided with regard to commission under the amended law.

Judicial notice

Black's Law dictionary has this to say about judicial notice: "The act by which a court, in conducting a trial, or framing its decision, will of its own motion or on request of a party, and without the production of evidence, recognise the existence and truth of certain facts, having a bearing on the controversy at bar, which, from their nature, are not properly the subject of testimony, or which are universally regarded as established by common notoriety, e.g., the laws of the state, international law, historical events, the constitution and course of nature, main geographical features etc., the cognisance of certain facts which judges and jurors may properly take and act upon without proof, because they already know them. Such notice excuses the party having burden of establishing fact from necessity of producing formal proof."

It is one thing to take judicial notice of the difficulties involved in getting refunds from government departments. But that does not mean that provisions of law can be ignored.

The Allahabad ruling flies in the face of the amended Section 37 of the Income-Tax Act.

(The author is a former Chief Commissioner of Income-Tax.)

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