TMI Blog2010 (2) TMI 792X X X X Extracts X X X X X X X X Extracts X X X X ..... These appeals are by the assessee pertaining to Assessment Years 1983-84 and 1984-85. 2. These appeals by the assessee was decided originally by the Tribunal in the first innings on 31.3.1990 and for the second time by its order dated 8.7.1997. On both the occasions, the matter travelled to the High Court. Brief, chequered history of the case is as follows. 3. The assessee is a registered firm engaged in the business of engineering contracts which had executed a contract for Karnataka Ball Bearings Ltd., Mysore. It filed returns of income for assessment years 1983-84 and 1984-85 along with a profit and loss account and balance sheet and the assessments were completed. Thereafter the revenue initiated action under section 132 of the Income-tax Act, in July 1986 and during enquiry it was noticed that the assessee had inflated the steel purchases debited in its books and claimed it as an allowable expenditure. The assessee admitted that he had obtained the computation bills from steel vendors and, therefore, the assessments were reopened u/s.147. The assessee filed revised returns and claimed that it had paid commission in cash to the Mehta group who were instrumental in award ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chairman and Jairaj Mehta, the Managing Director. The company was controlled by the Mehta group. The contract was awarded to the assessee firm subject to payment of a commission to the Chairman and MD i.e., the Mehta group of Karnataka Ball Bearings Ltd., This was achieved by agreeing to pay a suitable additional sum on the bills prepared for the work done by the assessee which additional payments shall be made by way of commission to Mehtas. In the books of account of the assessee firm, certain debit entries were made as expenditure towards steel purchase for the construction, although in fact, steel was to be supplied by the principals i.e., Karnataka Ball Bearings Ltd., During the search the assessee stated that the amounts were not spent for steel purchases but was used for paying commission as quid pro quo. The commission was paid only for the purpose of business and that the amount was deductible from the income which was claimed by the assessee. A. P. Mehta was examined on oath. The understanding and the receipt was confirmed. It was for awarding contract. It was claimed that for the two assessment years 1983-84 and 1984-85 an amount equal to the receipt of commission was de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bursed in later years ? 5. Whether, on the facts and circumstances of the case, the ITAT was right in coming to the conclusion that the purported commission payment claimed by the assessee represented was an expenditure and not a sharing of income obtained by the firm in pursuance of a conspiracy with the Mehtas to cheat the Karnataka Ball Bearings Co. Ltd.,?" The Hon'ble High Court observed that the questions referred by the Tribunal as above were questions based on facts. 9. Vide para 9 of its order the Hon'ble High court taking cognizance of the assessment order and the facts noted therein briefly, held that the assessee has not purchased any goods from M/s. Chimanlal R. Mehta and Manish and Co., but obtained purchase bills by paying the commission. The debits of steel purchase recorded in the books of account of the assessee were bogus purchases escaping the assessment and hence notice u/s.148 was issued. An amount of Rs.2,15,456/- was added to the returned income for the assessment year 1984-85. Penalty proceedings were initiated u/s.271(1)(c) for both the assessment years. The difference between the particulars in respect of the return filed on 30.1.1985 and 30.9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n offence and, therefore, the Tribunal vide its order dt.8.7.1996 was right in permitting the assessee to deduct the amount of commission by way of expenditure. 14. With regard to the above, their Lordships observed in para 19 of their order, as under: "If is seen that the explanation to sub-section I of section 37 was inserted with effect from 1.4.1962. Subsection (1) of section 37 basically states that what expenditure, laid out wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "profits and gains of business or profession". For the removal of doubts an explanation was added with effect from 1.4.1962 declaring 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. It is significant that the explanation has been added by way of a declaration specifically mentioning the words "offence" and prohibited by law and the said explanation is in the nature of a deeming provision which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above facts their Lordships remanded the issue back to the tribunal, and the Tribunal is called upon to decide the issue for the third time. 18. While remanding the order, the Hon'ble High Court took note of the decision of the Hon'ble Bombay High Court in the case of CIT vs. Gill and Co. P. Ltd., (2001) 248 ITR 362 which dealt with secret commission paid by the assessee and in respect of which deduction was sought and which was allowed in the past, but the legislature clearly intended to disallow such claims w.e.f. 1.4.1962 and which aspect escaped the consideration of the Tribunal. Their Lordships also took into cognizance the decision of the Orissa High Court in the case of Tarini Tarpauline Productions vs. CIT (2002) 254 ITR 495, in which the High Court held the payment of secret commission paid by the assessee to procure business is not deductible u/s.37 of the Act in view of the amendment effected from 1.4.1962 by insertion of Explanation. 19. Hearing the rival submissions and going through the decisions cited, we are of the view that appeal by the assessee is liable to be dismissed. The learned representative for the assessee produced a copy of the speeches of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trust. By making the payment, the payer induces the directors its shareholders. This amounts to an abetment of not only an unethical business practice but also amounts to abetting to commit a breach of trust by the directors of the recipient company, which is clearly an offence - prohibited by law. 22. The learned representative for the assessee relied on the decision of the Tribunal, Bombay Bench in the case of ITO v. VRM Share Broking P. Ltd., (2009) 27 SOT 469 for the proposition that penalty paid on account of failure to maintain margin money and not recovered from client, was an allowable loss. In this case the Tribunal held the penalty paid to SEBI for excess utilization of limits is an allowable business expenditure. We are afraid this decision stands on a different footing. The Tribunal in this case held "From the perusal of notifications issued by SEBI, it was apparent that they were issued mainly in the context of risk management rather than as penal provisions for punishing the defaulters or deeming the transactions as illegal." It was for this reason the Tribunal allowed this as a business expenditure, whereas in the instant case of the assessee by making the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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