1999 (3) TMI 54 - HC - Income Tax

High Court clarifies secret commission deductibility under Income-tax Act

The High Court of Bombay addressed the deductibility of secret commission as business expenditure under section 37 of the Income-tax Act, 1961. The Court ... Business Expenditure Issues involved: The issue involves the deductibility of secret commission as business expenditure under section 37 of the Income-tax Act, 1961.Summary: The High Court of Bombay addressed a reference under section 256(1) of the Income-tax Act, 1961, regarding the deductibility of secret commission as business expenditure. The assessee claimed to have paid secret commissions in the assessment years 1979-80 and 1980-81, but lacked evidence. The Income-tax Officer initially disallowed the deduction, which was later partially allowed by the Commissioner of Income-tax (Appeals) and upheld by the Income-tax Appellate Tribunal. The Revenue challenged this decision, leading to the reference.During the hearing, the Revenue argued that the newly added Explanation to section 37(1) of the Act, with retrospective effect from April 1, 1962, required the assessee to demonstrate that the secret commission was not paid for any illegal purpose. The Tribunal's decision to allow the deduction without considering this aspect was deemed incorrect by the Court. Therefore, the matter was remitted back to the Tribunal for re-examination in light of the Explanation.The Court concluded that the Tribunal's decision to allow the deduction of secret commission without ensuring it was not for an illegal purpose was not appropriate. Given the retrospective effect of the Explanation, the Tribunal needed to re-evaluate the allowability of the deduction. Consequently, the reference was disposed of with a direction to the Tribunal for a fresh examination.This judgment highlights the importance of considering legal amendments retrospectively and ensuring compliance with the law while determining the deductibility of expenses under the Income-tax Act, 1961.