TMI Blog2013 (8) TMI 326X X X X Extracts X X X X X X X X Extracts X X X X ..... 70 - MADHYA PRADESH HIGH COURT] - Decided against Revenue. - I.T.A. No. 2951/Del/2007 - - - Dated:- 31-7-2013 - Shri J. S. Reddy And Shri C. M. Garg,JJ. For the Petitioner : Ms. Jyoti Legha, Sr.DR For the Respondent : Shri. Ashwani Taneja, Adv. Sh. Somil Agarwal, CA. ORDER Per J. S. Reddy, AM:- This is an appeal filed by the revenue directed against the order of ld. CIT (A)-I, Dehradun, dated 28.03.2007 for the A.Y. 2003-04. 2. The facts as brought out at page 2 of the CIT (A) order are as follows. The brief facts of the case are that appellant, a company engaged in manufacture and sale of round steel bars, filed its return, declaring income of ₹ 2,47,674/-. It was noticed by the AO that during the year under consideration, appellant company has shown to have received commission of ₹ 1,07,63,343/- from M/s Pharma Ventures International (P) Ltd. and that it also paid commission of ₹ 49,97,266/- lakhs to M/s K.P. Steel Products (P) Ltd. The AO did not allow the amount of commission paid by treating the same as bogus and he further disallowed ISO audit fee of ₹ 97,238/- as capital expenditure. 3. Aggrieved the assessee carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tehri Steel Ltd. to M/s K.P. Steel Pvt. Ltd, a copy of which is page 41 and 42 of the paper book. He submitted that the assessee got a contract for rendering of services and has received 28% commission and this income was taxed by accepting the fact that the assessee had rendered services and earned commission income. While so he submitted that the expenditure incurred for the very same services for which income is earned, is sought to be disallowed on illegal grounds. 9. The ld. counsel submitted that there is no proof that anything illegal was done, he referred to Para 3.2 and 3.3 of the order of the CIT (A) and the same relied on. 10. He relied on the judgment of the Supreme Court in the case of CIT, Patiala Vs. Piara Singh 124 ITR 40 for the proposition that even in an illegal business, the loss which sprang directly from the carrying on of the illegal business and which was incidental to such business has to be allowed as a deduction. 11. He also relied on the decision of the Hon'ble Supreme Court in the case of Dr. T.A.Quereshi Vs. CIT 287 ITR 547 that the Explanation-2 Section 37 has no relevance when it was not the case of business expenditure but was one of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der is finalized. V) Help the appellant in getting the inspection, release of dispatch clearance and collection payments. COMMISSION As discussed and agreed, we shall pay you a commission @ 13% of the total order value. The commission shall be payable only after receipt the award of contract, supply of goods and collection of payments. 15. Thereafter we observed at Para 3.6 as follows: 3.6 The AO and the Addl. CIT have held that using 'contacts' to obtain the contract is an illegal activity and expenses on illegal activity can not be allowed as deduction. There is no merit in the observation made by the AO. Liaison work can not be said to be an illegal activity. Illegal activity is one which is prohibited by law. There is no infraction of any law and payments made for liaison work are considered legitimate business expenditure. Coming to the merits of the case, there can be, in my opinion, three possibilities, taking into account the entire facts and circumstances of the case. i) It was a genuine arrangement between M/s Pharma Ventures and M/s Tehri Steels Ltd. ii) It was a genuine arrangement wherein entire services have been carried ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidences. The clear and unambiguous language of the said Explanation rules out the applicability of the same, to the present case, as held by the CIT (A). The CIT (A) after considering assessment order and submissions made before him passed an speaking and detailed order and categorically held that the AO invoked the Explanation to s. 37(1), purely on surmises and suspicion and no cogent material was brought on record to justify the validity of such approach adopted in the assessment order. The CIT (A) specifically held that the AO failed to adduce material evidence to establish that the payment is prohibited by law. Mere assertion without any corroboration cannot be substitute for credible evidence leading to invocation of the said Explanation by the AO. It remains to be demonstrated by plausible justification that the payment of commission to identifiable parties, through account payee cheques who are assessed to tax, for the services rendered as defined in the agreement, in the absence of colorable or collusive nature of transactions, payments made for the purpose of business, cannot be termed as against public policy, as construed by the AO. No evidence has been placed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Tribunal was that the ground taken by the assessee before the CIT (A) against the order of assessment stood revived before him, which had challenged the disallowance made by the AO. Therefore, it cannot be said that the learned CIT (A) had no jurisdiction to go into the disallowance made by the AO. 17. The Hon'ble M.P. High Court in the case of CIT Vs. Khemchand Motilal Jain, P. Ltd. 340 ITR 99 held as follows: Held, That section 364A of the Indian Penal Code provides that kidnapping a person for ransom is an offence and any person doing so or compelling to pay, is liable to the punishment as provided in the Section, but nowhere is it provided that to save a life of the person if a ransom is paid, it will amount to an offence. There is no provision that the payment of ransom is prohibited by any law. In the absence of it, the Explanation to sub-section (1) of Section 37 would not be applicable. The Tribunal was justified in law in holding that the amount of ₹ 5,50,000 paid as ransom money to the kidnappers of one of the directors was an allowable deduction under section 37(1). 18. Applying the proposition laid down these cases laws to the facts of the c ..... 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