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2022 (8) TMI 684 - AT - Income TaxDisallowance of Sales Promotion Expenses - allowable expenditure u/s. 37 - assessee assailed the assessment on legal grounds by submitting that in the absence of any incriminating material as found during the course of search, no such addition could be made - HELD THAT:- The payments were made with the knowledge of the assessee on monthly basis. Besides this, the assessee has paid incentive to its own sales force also. The incentive was paid on secondary sales on monthly basis to depot managers / retail outlet employees of Tasmac on the basis of category of brand. The scheme is stated to have covered all the 42 depots throughout Tamil Nadu. It also emerges that all such payments are made in cash since the cash was handed over to head of marketing department who, in turn, would hand over the cash to Area sales officers which is thereafter paid to depots managers / retail employees based on targets fixed by the assessee. The monthly expenditure was stated to be in the range of Rs.20 Lacs to Rs.25 Lacs. The incentive paid to own sales force was stated to be in the range of Rs.1 Lac per month. The only explanation adduced was that these payments were made as per trade practices notwithstanding the facts that the same were paid in gross violation of provisions of Sec.40A(3) and also in violation of TDS provisions which mandate tax deduction at source on such payment. The argument that these were mere reimbursements could not be accepted in the light of the fact that such payments constitute expenditure for the assessee and has been debited in the Profit & Loss Account. Another argument that there was increase in turnover would also not be relevant, in this regard. In another statement recorded during the course of assessment proceedings, the position as aforesaid was maintained. The statement of Area Sales Manager further confirmed the modus operandi of such payments. The argument that these were mere reimbursements could not be accepted in the light of the fact that such payments constitute expenditure for the assessee and has been debited in the Profit & Loss Account. Another argument that there was increase in turnover would also not be relevant, in this regard. In another statement recorded during the course of assessment proceedings, the position as aforesaid was maintained. The statement of Area Sales Manager further confirmed the modus operandi of such payments. Proceeding further, it could also be noted that the assessee is not able to identify the payees of such payments. No details of payees could be submitted and the quantification of the expenditure remained elusive. Nothing was shown that the payments so made were offered to tax by the payees thereof. The only supporting document given by the assessee was self-made vouchers without their being any supporting third-party vouchers. The assessment order framed by Ld. AO, on this issue and as confirmed by CIT(A) could not be faulted with. It could be well said that the expenditure was not laid out exclusively and wholly for the purpose of business. The explanation to Sec.37(1) was certainly applicable to the case of the assessee since the payments made to Tasmac employees would not be allowable since it is a Public Sector Undertaking of State of Tamil Nadu. The payment so made would not be allowed in terms of explanation to Sec. 37(1). The code of conduct of Tasmac clearly prohibits this kind of payment. This binds both the streams i.e. i.e., persons on the pay roll of assessee as well as Tasmac and private parties including Tasmac bars, suppliers and contractors etc. We concur with the observations made by Ld. AO as well as CIT(A) in their respective orders. A narrow interpretation of Explanation 1 to section 37(1) defeats the purpose for which it was inserted, i.e., to disallow an assessee from claiming a tax benefit for its participation in an illegal activity. It is also held that a settled principle of law is that no court will lend its aid to a party that roots its cause of action in an immoral or illegal act (ex dolo malo non oritur action) meaning that none should be allowed to profit from any wrongdoing coupled with the fact that statutory regimes should be coherent and not self-defeating. Therefore, denial of the tax benefit cannot be construed as penalizing the assessee pharmaceutical company. Only its participation in what is plainly an action prohibited by law, precludes the assessee from claiming it as a deductible expenditure. Further, one arm of the law cannot be utilized to defeat the other arm of law - doing so would be opposed to public policy and bring the law into ridicule. It will be against public policy to allow the benefit of deduction under one statute of any expenditure incurred in violation of the provisions of another statute or any penalty imposed under another statute. Finally, the expenditure as claimed by the assessee was held to be not deductible. We are of the considered opinion that the ratio of this decision squarely applies to the facts of present case before us. So far as the legality of quantum additions is concerned, we find that incriminating material was found during the course of search operations. A huge difference in cash as per books and physical cash was noted and the statement of a responsible representative was recorded which has been maintained all along. Therefore, it could not be said that the additions were not based on incriminating material found during the course of search. Computation of Short-Term Capital Gains and penal interest for belated tax payments - CIT(A) has deleted the disallowance on the ground that this addition was not based on any incriminating material found during the course of search action - HELD THAT:- We find that the assessee was searched on 11.05.2012. The return of income filed by the assessee on 13.10.2008 was already scrutinized u/s 143(3) on 31.12.2010. Evidently, no proceedings were pending against the assessee and this year was not abated assessment year. It is also a fact that both these additions are not based on any incriminating material found during the search operations. Therefore, no infirmity could be found in the impugned order considering the ratio of decision in CIT V/s Continental Warehousing Corporation [2015 (5) TMI 656 - BOMBAY HIGH COURT] wherein it was held that unless any incriminating material was unearthed, no additions could be sustained in the hands of the assessee. The other case laws as enumerated in the impugned order also support this proposition. Therefore, the corresponding grounds raised by the revenue stand dismissed. The revenue’s appeal stands dismissed.
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