The Hindu Business Line : Allowability of commission paid to govt employees

The Allahabad High Court has held that commission paid to government doctors cannot be said to be “business expenditure” and no deduction can be allowed therefor.

T. N. Pandey

Section 37(1) of the Income-Tax Act, 1961 is a residuary provision stipulating that the expenditure laid out or expanded wholly and exclusively for business or profession by an assessee shall be deducted in computing the income liable to tax provided (i) it is not deductible under Sections 30 to 36 of the Act; (ii) is not in the nature of capital expenditure, or (iii) personal expenditure of the assessee.

An explanation was added to this provision by the Finance (No. 2) Act, 1998 w.e.f. April 1, 1962.An interesting issue in the context of this explanation has been decided by the Allahabad High Court in the CIT vs Pandit Vishwanath Sharma (2008 21 I ITCL 238 Allahabad HC). The assessee in this case was dealing in ayurvedic medicines. For the assessment year (AY) 1989-1990, he claimed that he spent Rs 2,46,254 as business expenditure by paying commission to various doctors for prescribing his medicines to the patients. The said doctors/vaids were involved in private or government practice.

The assessing officer (AO) disallowed the aforesaid amount as business expenditure, but the Commissioner (Appeals), while allowing payment made to private doctors/vaids, disallowed a sum of Rs 1,08,678 claimed to have been paid to government doctors. The assessee claimed that payment of said commission was a business necessity and a practice followed by him over the years.

Tribunal upholds claim

The Tribunal upheld the contention of the assessee with respect to the Rs 1,08,678 to be treated as business expenditure, observing that the payment was not disputed by the Revenue, and as it was evident that such amount was paid over the years, it was a business necessity and was allowable as business expenditure.

The case of the Revenue was that the amount paid as commission to government doctors is nothing but an illegal gratification/bribe. No such payment in a legal manner was permissible to any government servant and, therefore, a payment made illegally, which amounts to an offence under the statute, cannot be treated to be a business expenditure under Section 37 of the I-T Act.

Revenue’s view accepted

The High Court accepted the Revenue’s view. According to the court, Section 37(1) allows an expenditure wholly and exclusively incurred for the business or the profession in computing the income chargeable under the head ‘profits or gains of business or profession’.

The Explanation thereof disallows an expenditure, which is incurred by an assessee for a purpose which is an offence or which is prohibited by law. The Explanation thus makes it clear that such an expenditure shall not be treated to be a business or professional expenditure.

A government servant is not entitled to receive any amount in consideration of discharge of his official duty unless provided/permitted by the rules and regulations applicable to his conditions of service. The amount paid to the government doctors by the assessee clearly comes within the category of ‘illegal gratification’ or ‘bribe’, which is an offence under the Prevention of Corruption Act, 1988.

Earlier, it was an offence under Section 161 IPC. The conduct rules applicable to government servants also prohibit such realisation of money and any amount, if so received, is a serious misconduct. Without going to the question of whether the payment made as ‘commission’ to government doctors is moral or not, there is no doubt that such commission is an offence in law.

Both the persons, namely, the one who gives such illegal gratification/bribe as well as the one who receives it, are offenders under law. That being so, by virtue of Explanation to Section 37, the aforesaid expenditure cannot be treated to be as one incurred for the purpose of business or profession.

Legal approach

The High Court observed that the taxability of an assessee under the I-T Act should not be decided based on emotions/morals but on a legal approach.

A distinction has already been made by the authorities while allowing deduction to the assessee in respect to commission which the assessee has paid to private doctors since in their case, payment of commission cannot be said to be an offence under any statute but in respect of government doctors such payment could not be allowed as it is an offence under the statute.

Payment of commission to government doctors for obtaining a favour from them, in this case by prescribing medicines in which the assessee was dealing in, cannot be said to be a “business expenditure” and no deduction can be allowed thereof under the Act.

Thus the commission paid to government doctors was disallowed by the High Court in accordance with the language and sprit of the Explanation to Section 37(1).

(The author is a former chairman of CBDT.)

More Stories on : Income Tax | Economic Offences

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Sweet and sour

Penalty under transfer pricing regulations

Taxes causing `turbulence' for domestic airline companies

NRI deposits?

Allowability of commission paid to govt employees

UNDP study on corruption — Retarding economic development

Collaborative CSR

Entrepreneurship