TMI Blog2017 (4) TMI 757X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee-company is that since the amount was disallowed under the provisions of section 40(a)(ia), the same should not form part of direct cost - Held that:- This contention of the assessee-company does not hold good for the simple reason that on account of disallowance of transport expenditure, business profits have been inflated to that extent and the same was considered for exemption u/s 80-HHC and in order to maintain parity, the same requires to be reduced from the direct cost. Thus, we do not find any merit in the submission of the assessee-company. - Decided against assessee Addition on account of valuation of closing stock - Held that:- No evidence was filed substantiating the explanation for discrepancy in valuation of the closing stock. Even before us, altogether different argument was advanced saying that domestic sales were not taken into consideration while valuating closing stock. It is altogether a new submission and does not emanate from the orders of the lower authorities and no evidence was filed even in respect of this argument. Hence, the ground of appeal cannot be accepted and dismissed as such.- Decided against assessee Eligibility for deduction u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the books of account without any supporting material - Held that:- It is settled principle of law that no expenditure can be allowed on mere provision in the accounts unless and until it is established that liability has actually incurred wholly and exclusively for purpose of business of the assessee-company. In the present case, except making a provision in the books of account, assessee-company had failed to establish crystallisation of the liability but also actually the liability has been incurred. While making journal entry for alleged expenditure of transport in the name of Kavitha and Sandhya, assessee-company had not furnished details of transport when they incurred it for the purpose of transport of the material etc. A mere entry in the books of account does not enable the assessee-company to claim deduction. It is trite law that onus lies on the assessee to prove that claim is allowable as deduction.- Decided against assessee Disallowance of depreciation on machinery of crushing plant - no processing or manufacturing or production of material was carried on by the assessee-company and therefore machinery was not put to use - Held that:- An asset is eligible for depre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that no such payments were made. Thus, we have no hesitation to uphold the addition.- Decided against assessee Addition on account of valuation of closing stock - Held that:- No doubt it is trite law that stock can be valued at cost or market value whichever is less. While valuing closing stock at nil, appellant had not brought on record any evidence suggesting that realizable value of the closing stock lying at Belekeri Port is nil, nor the assessee-company brought on record any independent valuation from technical experts in the field. Thus, in absence of evidence on record, we are unable to appreciate the contention of the assessee - Decided against assessee - ITA No.767 to 771/Bang/2014, ITA Nos.1008 & 1009/Bang/2015 - - - Dated:- 20-9-2016 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER For the Appellant : Zain Ahmed Khan, CA. For the Respondent : Shri Sanjay Kumar, CIT(DR) ORDER Per BENCH : All these appeals are filed by the assessee directed against the respective orders of the CIT(A) for the assessment years 2004-05, 2007-08 to 2011-11. ITA No.1008/Bang/2015 (Asst.year: 2004-05): 2. This is an appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oneous. Inclusion in Direct Cost ₹ 49,80,906 disallowed u/s. 40(a) 4.3 The Ld. AO erred in including Transportation charges of ₹ 49.80 lacs under the head Direct Cost while computing deduction u/s. 8oHHC despite disallowing the same u/s. 40(a) of the IT Act. 4.4 The Lower Authorities failed to appreciate that 'profit of the business for the purpose of deduction u/s. 8oHHC shall be computed in accordance with provision of Sec. 28 to 44 of the IT Act as provided in Explanation to Sec. 8oHHC. Deduction of Freight Charges from Export Turnover 4.5 The Ld. AO erred in reducing a sum of ₹ 1.64 Crore from the export turnover of the Appellant and the Ld. CIT(A) erred in confirming the same. 4.6 The Ld. AO erred in coming to the conclusion that the sum of ₹ 1.64 Crore is in the nature of freight insurance charges when in fact it was in the nature of stewarding and clearing forwarding charges. 4.7 The Lower Authorities failed to appreciate that the expenses were incurred with the custom station despite furnishing evidence in this regard. 4.8 Without prejudice, the Ld. CIT(A) erred in ignoring the judgement of the Calcutta High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of ₹ 1.65 crore from export turnover on the ground that this expenditure related to freight and insurance attributable to transport of goods beyond customs station whereas it is the contention of the assessee-company is that this expenditure was incurred within the premises of the customs station and therefore, it is not required to be reduced from export turnover. However, assessee-company has not filed any evidence in support of this contention. Learned AR of the assessee has not led any evidence on record in support of the contention that the expenditure was incurred as a clearing and forwarding charges within the customs station. It is a mere bald assertion and therefore, we are not unable to appreciate the submissions made by the assessee-company. 6.3 As regards transport charges of ₹ 49.8 lakhs disallowed u/s 40(a)(ia) of the Act, the contention of the assessee-company is that since the amount was disallowed under the provisions of section 40(a)(ia), the same should not form part of direct cost. This contention of the assessee-company does not hold good for the simple reason that on account of disallowance of transport expenditure, business profits have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO] made the following disallowances: 1 Disallowance of transportation charges Rs.15,54,39,229/- 2 disallowance of transportation charges ₹ 61,28,628/- 3 Disallowance of deduction u/s 10B ₹ 2,24,88,659/- 4 Disallowance of depreciation ₹ 24,86,425/- 9.2 Being aggrieved, an appeal was preferred before the CIT(A) who, vide impugned order, dismissed the appeal. 9.3 Being aggrieved, assessee-company is before us in the present appeal raising the following grounds of appeal: 1. The Order of the Ld. Commissioner of Income Tax (Appeals) is opposed to law, facts and circumstances of the case. 2. The Order is passed against the principle of natural justice and thus liable to be quashed. Disallowance of exemption u/s. 108 of the IT Act 3. The Ld. CIT erred in confirming the order of Ld. AO who denied the exemption under section 108 of the Act despite the appellant satisfying all the conditions prescribed thereto. 4. The Ld. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,628 14. The Ld. AO erred in disallowing transportation expenses payable to T. Kavitha and K. Sandhya aggregating to ₹ 61,28,628 and the Ld. CIT(A) erred in confirming the same. 15. The Ld. CIT(A) ought to have noted that the above two parties are assessed to tax, holds PAN and have declared the income in their returns. 16. The Ld. CIT ought to have noted that in mercantile system of accounting, provisions are allowable as deduction. 17. The Ld. CIT ought to have noted that u/s. 41(2), the term 'paid includes paid or incurred' as per method of accounting followed. Disallowance of depreciation on crushing plant - ₹ 24,86,425 18. The Ld. AO erred in disallowing depreciation on crushing plant amounting to ₹ 24,86,425 and Ld. CIT(A) erred in confirming the same. 19. The Ld. CIT erred in ignoring that the depreciation had been allowed on this machinery in the preceding year. 20. The Ld. CIT ought to have noted that crushing being an essential process; the Appellant has necessarily used the machinery. The Appellant seeks your leave to add, alter, amend or delete any of the grounds urged at the time or hearing 10. Grounds No.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the process of washing the silica and shale particles being lower in density than lump ore they get diluted with H2O and form a layer of slurry over the lump. The lump then automatically improves din ferrous content. Then the same is crushed and dressed to the required saleable products by the above process of beneficiation and blending with the ores of varying Fe content resulting into the products called iron ore fines and calibrated iron ore of various Fe contents which are different marketable commodities. The ROM is subjected to change at every stage of above operations. It is a cumulative effect of various changes to which the ROM is subjected to emerges into saleable iron ore commodity with a distinctive name which are recognised as different commercial distinguishable commodities. II. Transportation of ROM to Plant:- This involves movement of ROM from the place of supply to the place of production at our EOU Plant. lIl. Production Process includes the following steps:- Unloading of ROM at plant Conveying the ROM for Screening:- The ROM is conveyed into the Plant for Primary filtration and screening wherein the initial separation of below 4mm is made to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Fe content results in Iron Ore Lumps, Iron Ore fines, Calibrated Iron Ore, etc of various Fe content which are different marketable commodities. He further submitted that the process undertaken by the assessee-company amounts to manufacture or production of excisable goods. He submitted that the assessee procures ROM. 11.3 Learned AR of the assessee further submitted that the assessee-company procures ROM (Run of Mines) and same are brought into EOU. ROM contains various impurities and is subjected to process of screening, sieving, washing, blending of various grades to arrive at the required grade of Iron Ore products. The improvement in Fe content is achieved either by using Magnetic Separator (Dry Screening) or washing (Wet Screening). This beneficiation process and blending with Iron Ores of varying Fe content results in Iron Ore Lumps, Iron Ore fines, Calibrated Iron Ore, etc of various Fe content which are different marketable commodities. Thus, according to him, the activity undertaken by the assessee-company amounts to manufacture or process of goods, which qualifies for deduction under the provisions of sec.10B of the Act. In this connection, he relied on the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the process undertaken by the assessee amounts to manufacture . The term manufacture has not been defined in the provisions of the Income-tax Act during the relevant period. The definition of the term manufacture was inserted by section 2(29BA) of the Act only from 01/04/2009. Therefore, meaning of the term manufacture has to be ascertained with reference to judicial rulings. 12.1 The Hon ble Supreme Court had an occasion to interpret the term manufacture in the context of deduction u/s 80HH of the Act in the case of CIT vs. N.C.Budharaja Co.(1993)(204 ITR 412) wherein Hon ble Supreme Court had deprecated the tendency to enlarge the meaning of the word manufacture widely. The Hon ble Supreme Court also held that for determining whether manufacturing can be said to have taken place is where the commodity which is subject to the process of manufacturing can no longer be regarded as the original commodity but is recognized in a trade as a new and distinct commodity. The relevant part of the judgment is as follows: ...........The only question, therefore, is whether the assessee has begun to manufacture or produce articles after the specified date in an area ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t defined in the Act or the Rules. It must, therefore, be understood in its normal connotation - the sense in which it is understood in commercial world. It is equally well to keep in mind the context since a word takes its colour from the context. The word 'articles' is preceded by words 'it has begun or begins to manufacture or produce'. Can we say that the word 'articles' in the said clause comprehends and takes within its ambit a dam - a bridge, a building, a road, a canal and so on? We find it difficult to say so. Would any person who has constructed a dam say that he has manufactured an article or that he has produced an article? Obviously not. If a dam is an article, so would be a bridge, a road, an underground canal and a multi-storeyed building. To say that all of them fall within the meaning of word 'articles' is to overstrain the language beyond its normal and ordinary meaning. It is equally difficult to say that the process of constructing a dam is a process of manufacture or a process of production. It is true that a dam is composed of several articles; it is composed of stones, concrete, cement, steel and other manufactured articles lik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of its own, an independent market after the commodity is subjected to the process of manufacture. The nature and extent of process would vary from case to case, and in a given case, there may be only one stage of processing, while in another case, there may be several stages of processing, and perhaps, a different kind of process at every stage. That with every process, the commodity would experience a change, but ultimately, it is only when the change, or a series of changes, bring about a result so as to produce a new and distinct article, that it can be said that the commodity used as raw material has been consumed in the manufacture of the end-product. To put it differently, the final product does not retain the identity of the raw material after it has undergone the process or processes of manufacture. 12.4 Even in the context of provisions of Central Excise Act, the term manufacture has been held to have been taken place only when the process results in commercial or different commodity. A five-member Constitution Bench of the Hon ble Supreme Court in the case of Union of India v. Delhi Cloth and General Mills Co. Ltd. [1963] AIR 1963 SC 791, held that manufacture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Superintendent, Central Excise [1984] 15 ELT 7, 11 (Ker). The court referred to Corpus Juris Secundum Vol. 55 p. 667 and Vol. 72 page 1208). 12.7 Very recently, in the context of provisions of Central Excise Act, Hon ble Supreme Court in the case of Maruti Suzuki India Ltd. vs. CCE (2015) 32 GSTR 28 (SC), held that only that activity as a result of which a transformation has taken place viz., new different article emerges having a distinct name, character or use, can only said to be a manufacturing activity. The Hon ble Supreme Court further held that mere value addition without change in name, character or end-use of goods cannot possibly constitute criteria to decide as to what is manufacturing. 12.8 Again, in the case of Satnam Overseas Ltd. vs. CCE (2015) 32 GSTR 121(SC), the Hon ble Supreme Court held that the process would be treated as manufacture only if a new product known to market comes into existence with original product losing its original character. It was held that: ......a distinction has to be drawn between manufacture and marketability . A duty of excise is levied on the manufacture of excisable goods. Excisable goods are those goods w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich was already in existence will serve no purpose but for a certain process must be understood in its true perspective. It is only when a different and/or finished product comes into existence as a result of a process which makes the said product commercially usable that the second test laid down in the judgment leads to manufacture. Thus understood, this judgment does not lead to the result that merely because the unsterilised syringe and needle is of no commercial use without sterilisation, the process of sterilisation which would make it commercially useable would result in the sterilisation process being a process which would amount to manufacture. If the original commodity, i.e. syringes and needles, continue as such post-sterilisation, the second test would not lead to the conclusion that the process of sterilization is a process which leads to manufacture. This is because, in all cases, there has first to be a transformation in the original article, which transformation brings about a distinctive or different use in the article. The Supreme Court after taking into account the views expressed in various cases came to the following conclusions : (1) Where the good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen a different and finished product comes into existence as a result of process which makes the said product commercially usable the second test laid down in the judgment leads to manufacture. 13. Applying the above legal position, the factual matrix of the process undertaken by the assessee, as narrated by him, even without doubting for a moment the veracity of the factual matrix of the process, as a result of the process undertaken by the assessee, it cannot be said that as a result of such process a new and different commercial product has come into existence which is known to the market. It cannot also be said that the original product i.e. ROM has lost its identity and will serve no purpose. As a result of the process undertaken by the assesseecompany, iron ore remains as iron ore only. Its primary and essential conditions still remain the same as it is continued to be known in the market as iron ore and as sold as iron ore only. There was no transformation taken place in the process. The process undertaken by the assessee is only to make it convenient to use and the end use of the first product i.e. ROM continues to be the same. Therefore, it cannot be said that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses incurred in cash appeared to be artificially made. Further, there is no TDS effected on these payments. In view of failure on the part of the assessee to substantiate these expenses, the entire expenses incurred in cash under the head transportation charges etc. to the extent of ₹ 15,5439; 225/ - has been disallowed. 15. On appeal before the CIT(A), the CIT(A) confirmed the addition by holding that the assessee-company had failed to establish the genuineness of the expenditure and also failed to discharge the onus of proving that the expenditure was incurred only in respect of non EOU business. 16. Being aggrieved, the assessee-company is in appeal before us. 16.1 Learned AR of the assessee vehemently contended that the assessee-company has filed details of transport expenditure as to name of the party, vehicle number, date, amount, origin, cargo etc. during the course of assessment proceedings. Learned AR of the assessee also submitted that ledger extracts of the expenditure was filed showing details during the course of the assessment proceedings. Without verifying genuineness of this expenditure, the AO merely had chosen to disallow the same. 16.2 On t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 17 relates to disallowance of transport expenditure of ₹ 61,28,628/- shown as payable to Ms Kavitha and Sandhya. The AO disallowed the transport expenditure shown as payable to Ms.Kavitha and Sandhya as he found that only journal entries were being passed in the books of account without any supporting material. The CIT(A) also confirmed the addition as no evidence was filed as showing that the expenditure was actually incurred. 18. Being aggrieved, the assessee-company is in appeal before us in the present appeal. 18.1 Learned AR of the assessee contended before us that expenditure which is incurred though not paid during the previous year should be allowed as deduction. 18.2 On the other hand, learned CIT(DR) submitted that failure of the assessee-company to prove conclusively that the expenditure was incurred entails the addition. 19. We heard rival submissions and perused the material on record. The issue in these grounds of appeal is whether the expenditure can be allowed based on mere entry in the books of account. It is settled principle of law that no expenditure can be allowed on mere provision in the accounts unless and until it is established that li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry ground on which the AO denied depreciation was that no processing or manufacturing or production of material was carried on by the assessee-company and therefore machinery was not put to use. In our considered opinion, an asset is eligible for depreciation even if it is used in business though it is not employed in the course of manufacturing or production of an article within the strict meaning as used in general parlance and moreover keeping in view that depreciation on the same machinery was allowed in earlier years, we set aside the issue to the file of the AO to examine whether the machinery in question was put to use in course of carrying on business of the assessee and if so, allow admissible depreciation in accordance with law. Accordingly, these grounds of appeal are set aside to the file of the AO for de novo assessment. 23. In the result, the appeal filed by the assessee is partly allowed. ITA Nos.767 to 769/Bang/2014 (Asst years: 2007-08 2009-10): 24. The assessee raised the following grounds of appeal for assessment year 2007-08. 1. The order of the learned CIT (A) is opposed to law, facts and circumstances of the case. 2. The order is passed in ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lete any of the grounds urged at the time of hearing. Same grounds of appeal (except change in figure) are raised by the assessee for assessment years 2008-09 and 2009-10. 25. We heard rival submissions and perused the material on record. The only issue raised in the grounds of appeal for the assessment years 2007-08 to 2009-10 is about eligibility of the appellant for deduction u/s 10B of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short]. For the detailed reasons given by us supra i.e ITA No.1009/Bang/2015, we hold that the appellant is not entitled for deduction under the provisions of section 10B of the Act. 26. In the result, the appeals filed by the assessees are dismissed. ITA No.770/Bang/2014 (Asst.year: 2010-11): 27. This is an appeal filed by the assessee directed against the order of the Commissioner of Income-tax (Appeals)-VI, [CIT(A)], Bangalore, dated 28/3/2014 for the assessment year 2010-11. 28. The assessee raised the following grounds of appeal: Principle of Natural Justice 1. Ld CIT (A) ought to have held that the order of the learned Assessing Officer is opposed to law, facts and circumstances of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llate proceedings, which was denied to the appellant during the course of assessment proceedings. 15. Ld CIT A ought to have appreciated that the purchases disallowed in appellant's case on: taxes as sales in the respective suppliers case. legality, If any, Is in the case of miners and not in the case of traders of iron ore. DMG and Forest Permits 16. The AO erred in insisting on production of DMG and forest permits inspite of his clear knowledge of the business that the copies of the permits ought to be handed over 10 the respective departments after shipment of the iron ore to the destination (point no VIII, page 31 of the assessment order). 17, The Ld ClT ought to have held that there is. no requirement for the appellant under any law of the State to preserve DMG and forest permits and more over this is not the document pertaining to the appellant. 18. Before deciding that these purchases are without permit, the Id CIT AOught to have summoned the suppliers and sought the details of the permits from them for the supplies made to the appellant.The suppliers are required to maintain permits not the appellant. Other Grounds 19. Without prejudice to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CPU of the computer and enclosed to the assessment order as Annexure AK/CPUA - 13 pages. From the information so retrieved, it revealed that GJR had sold to the appellant company 941,336 MT of iron ore for a consideration of ₹ 111,05,32,933/-. The AO also discussed the modus operandi adopted by GJR vide para.4.2 of the assessment order. Then, AO had discussed the nature of transaction appellant had with said GJR and his concerns vide para.4.4 of the assessment order which is reproduced below: 4.4 TRANSACTIONS RELATING TO ASSESSEE COMPANY : 4.4.1 The seized hard disk discussed above contains data of the illegal mining activity carried at various mines, production and dispatch of the iron ore extracted illegally through henchmen companies. One of the folders in the CPU found and seized at Mr. Ali Khan's residence has the details of iron ore extracted illegally and sold to the assessee company. 4.4.2 The spreadsheet COMMITMENTS MOVEMENTS contains the details of commitment and dispatch of the material to the two major buyers, i.e. M/s ILC and Eagle Traders. It gives the quantity of iron ore committed to them from where this material was to be sourced from and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om CPU seized from AK and also the admission of the director of the assessee-company Mr.Somasekar that transactions with GJR and also having regard to the fact that payments were made to GJR and is concern, though iron ore was lifted from mines situated at V.Nag, Vyasankar NEB A Block and MBT. The CIT(A) has confirmed the action of the AO vide para.6.2 to 6.14 as under: 32. Being aggrieved, assessee-company is before us in the present appeal. 32.1 Learned AR of the assessee argued that the assesseecompany was in the business of export of iron ore right from the year 2000 and enjoyed good reputation in the business circle. It is further submitted that the assessee-company is not an associate of GJR. The appellant had only business transactions with GJR and has never indulged in any illegal mining activity. It is further submitted that the Central Bureau of Investigation (CBI), Hyderabad which conducted investigation into illegal mining activity, had not filed any charge sheet against the appellant or its directors. Addition on account of purchase of illegal iron ore is based on information retrieved from CPU from the premises of one AK who is a pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant is that the assessment u/s 143(3) r.w.s. 153A is illegal as the AO had no material of incriminating nature. The contention of the appellant cannot be accepted as it is amply clear that regular assessment proceedings for assessment year 2010-11 are still open before the AO. Therefore, the AO is empowered to make addition based on evidence gathered either as a result of search and seizure or otherwise. The additions need not be confined to the material seized as a result of search and seizure proceedings. Therefore, the contention of the appellant cannot be accepted. The mere fact that the AO mentioned wrong section in the assessment order does not invalidate the order in view of the specific provisions of section 292B of the Act which reads as under: Return of income, etc., not to be invalid on certain grounds. 292B. No return of income, assessment, notice, summons or other proceeding, furnished or made or issued or taken or purported to have been furnished or made or issued or taken in pursuance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such return of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Government make Rules for regulation of mineral being transported from the area granted under a prospecting license or a mining lease or a quarrying license or a permit, in whatever name the permission to excavate minerals, has been given. 34.1 Thus from the above provision, it is clear that the buyer of iron ore is clearly made aware of from which permit the iron ore was mined. It cannot be said that the buyer of iron ore is ignorant of the permit in which area iron ore is mined. The excavation, storage and transport of iron ore is regulated by the State Government under the Rules framed there-under. Therefore, even assuming that the appellant is unaware of illegal mining activity of GJR, it logically follows that he has purchased the iron ore in flagrant violation of provisions of MMDR Act and Rules framed there-under. Had he purchased the iron ore which is legally mined, he would have shown the compliance of the Act and Rules there-under. Failure on the part of the appellant to do so automatically imply that the appellant had purchased the iron ore illegally mined. Furthermore, this is a fact which is within the special knowledge of the appellant and he cannot expec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in Circular No. 772, dated December 23, 1998 ([1999] 235 ITR (St.) 35, 53) as under : 20. Disallowance of illegal expenses. 20.1 Section 37 of the Income-tax Act is amended to provide 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 purposes of business or profession and no deduction or allowance shall be made in respect of such expenditure. This amendment will result in disallowance of the claims made by certain assessees in respect of payments on account of protection money, extortion, hafta, bribes, etc., as business expenditure. It is well decided that unlawful expenditure is not an allowable deduction in computation of income. 20.2 This amendment will take effect retrospectively from 1st April, 1962, and will, accordingly, apply in relation to the assessment year 1962-63 and subsequent years. It, thus, emerges that an assessee would not be entitled to deduction of payments made in contravention of law. Similarly, payments which are opposed to public policy being in the nature of unlawful consideration cannot equally be recognized. It cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch held as follows: . 9. A careful reading of this passage leaves no one in doubt about the distinction between an infraction of the law committed in the carrying on of a lawful business, and an infraction of the law committed in a business inherently unlawful, and constituting a normal incident of it. More than once in this passage, the Supreme Court reiterates the said distinction. Further, the words emphasized by me in the above passage show that the disallowability, pointed out by the Supreme Court is not confined to penalties alone. Applying the above principle to the facts of the present case, it must be held that the payment made in furtherance of an illegal transaction, cannot be deducted. As pointed out by the Supreme Court in Haji Aziz (supra) with respect to the business of importing dates, the business of export of tobacco carried on by the assessee before us, is also a lawful business; but the particular transaction is an unlawful one. Since infraction of law cannot be said to be a normal incident of business, any amount lost of expended in furtherance of such illegal transaction, cannot equally be treated as a business loss, or business expenditure, as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be treated as money spent wholly and exclusively for the purpose of business. A long line of decisions was noted in the judgment under appeal. It is not necessary to refer to all of them. We shall refer to three cases decided by this Court. 8. In the case of Haji Aziz Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 (SC), a Bench of three Judges of this Court held that the expenses which were permitted as deduction were such as were made for the purpose of carrying on the business. It was not enough that the disbursements are made in the course of, or arose out of or were connected with the trade. No deduction can be allowed if the expenditure fell on the assessee in some character other than that of a trader. If a sum has to be paid by an assessee because in conducting his business, he had acted in a manner which had rendered liable for penalty for infraction of law, it could not be claimed as a deduction because it could not be called in commercial sense as incurred in carrying on the business. It was emphasised in that judgment by Kapoor, J., that infraction of law is not a normal incidence of business. 9. The point that the expenditure incurred for the purpose of unl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken away. The prosecution, however, ended in acquittal. The assessee claimed deduction of a sum of money spent in defending the case. The Tribunal found that the expenditure was incurred solely for the purpose of maintaining the assessee's name as a good businessman and to save his stock from being undersold if the Court held that the prices charged by him were unreasonable. The High Court rejected the reference application on the ground that the decision of the Tribunal was based on finding of fact. On appeal, this Court held that the findings of the Tribunal were vitiated by its failure to consider the possibility of criminal proceedings terminating in the conviction and imprisonment of the assessee. It was held that the deductibility of such expenses must depend upon the purpose and nature of legal proceedings and could not be affected by the final outcome of the proceedings. It was also pointed out that the income-tax assessment had to be made for every year and could not be held up until the final result of the legal proceedings which pass through several Courts was announced. 13. In the instant case, the assessee had indulged in transactions in violation of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy. 35.3 The issue with regard to the amount illegally paid to the police authorities for running their business came up for consideration before the Hon ble Madhya Pradesh High Court in Gwalior Road Lines v. CIT [1998] 234 ITR 230 wherein it was held that after insertion of the Explanation to section 37(1) by the Finance Act, 1998, with effect from April 1, 1962, the assessee could not claim such payment as expended for commercial exigency and, therefore, the same was not an allowable deduction. 35.4 The Hon ble Allahabad High Court in CIT vs. Pt. Vishwanath Sharma (316 ITR 419)(All) while considering the issue relating to commission paid to Government doctors for prescribing the assessee's medicines to patients held it to be contravening public policy and an inadmissible expenditure. However, no distinction can be made in respect of Government doctors and private doctors as has been canvassed by the learned counsel for the assessee. 35.5 Following the principles enunciated by the Hon ble Courts cited supra to the facts of the case, it can be very well said that payments made for purchase of illegal iron ore cannot be allowed as a deduction as the payments were made i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mity with or according to the intent and purpose of this Act. Thus, the assessment order passed by the AO is valid in law and thus, we dismiss grounds of appeal Nos.4 to 8. 42. Ground Nos. 9 10 deals with addition on account of unexplained cash payment outside books of account. It is the case of the AO that the appellant made cash payment outside books of account as per seized material inventorized as A/OV/1 and this material was put forth to the appellant and in fact, director of the appellant was examined u/s 132 of the Act by the AO. During the course of such examination, director of the appellant gave evasive replies and had not given any reply. Therefore, AO concluded that the appellant had made cash payment outside books of account and brought to tax a sum of ₹ 2,46,50,257/-. 43. On appeal before the CIT(A), the CIT(A) confirmed the addition as the appellant had failed to demonstrate before him that payments have been made out of explained source of income. 44. Being aggrieved, assessee is before us in the present appeal. 45. We heard rival submissions and perused the material on record. The AO has found material suggesting that appellant made cash ..... X X X X Extracts X X X X X X X X Extracts X X X X
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