2004 (1) TMI 350 - AT - Income Tax

Tribunal disallows claim for mamool and commission payments, deeming them illegal and against public policy.

Income Tax Officer. Versus MS Kumaraswamy.

The Tribunal upheld the CIT(A)'s deletion of the addition concerning withheld amounts claimed as deductions by the assessee. However, the Tribunal ... - Issues Involved:1. Deletion of the addition by CIT(A) on account of withheld amounts.2. Allowance of the assessee's claim of mamool and commission payments.Detailed Analysis:1. Deletion of the Addition by CIT(A) on Account of Withheld Amounts:The first issue in the Departmental appeals concerns the deletion of the addition by the CIT(A) regarding withheld amounts claimed as deductions from the total contract receipts by the assessee. The Department argued that the CIT(A) erred in deleting the addition as the assessee was maintaining a cash system of accounting. The Department contended that the assessee became entitled to the total contract receipt as a revenue receipt immediately upon passing the bill, and the withheld amounts constituted deposits of a capital nature held by the departmental authorities.The assessee, a PWD contractor, was showing contract receipts on a receipt basis and had a mixed system of accounting. For the assessment years 1993-94 and 1994-95, the AO added withheld payment accounts of Rs. 2,85,771 and Rs. 2,71,403, respectively, to the returned income. The AO did not accept the assessee's plea and included these amounts in the income. However, the CIT(A) deleted the addition, citing that the withheld amounts were shown on an actual receipt basis, and the assessee had no way of knowing whether the withheld amount would be reimbursed.Upon hearing the rival submissions, the Tribunal found that the assessee had claimed deductions on account of withheld payments and showed these amounts as income upon actual receipt. Consequently, the Tribunal upheld the CIT(A)'s order and dismissed the Departmental appeal on this issue.2. Allowance of the Assessee's Claim of Mamool and Commission Payments:The second issue involves the allowance of the assessee's claim of mamool and commission payments. The Department contended that the CIT(A) erred in allowing the assessee's claim of mamool and commission payments to the extent of Rs. 2,57,970 without any vouchers or supporting evidence. The assessee argued that the expenditure towards commission, etc., should not have been restricted to 1% of the total contract receipts and should have been allowed in full.The respondent assessee, a contractor, claimed expenditure on commissions and mamools totaling Rs. 3,33,970. The AO disallowed Rs. 2,33,970 of this amount, arguing that the tendering process was secret and the award of tenders did not depend on secret commissions. The AO cited that the expenditure was unvouched and claimed under the head 'commission and mamools.'The CIT(A), however, allowed the expenditure towards commissions and mamools at Rs. 2,57,970, considering the reasonableness of 1% of the total contract amount. The CIT(A) referenced the decision of the Madras High Court in CIT vs. Coimbatore Salem Transport (P) Ltd., which allowed similar expenses.The Department argued that the payments were made to Government servants, which is opposed to public policy, and cited the Explanation to Section 37(1) of the Income Tax Act, which disallows deductions for expenditures incurred for any purpose that is an offence or prohibited by law. The Tribunal agreed with the Department, stating that the payments were illegal and opposed to public policy. The Tribunal found that the CIT(A) should not have allowed the relief based on the increase in contract receipts and the percentage of gross contract amounts.The Tribunal concluded that the expenditure towards commission and mamools was for illegal gratification and opposed to public policy. Consequently, the Tribunal allowed the Departmental appeal on this issue and dismissed the cross-appeal by the assessee.Conclusion:The Tribunal upheld the CIT(A)'s deletion of the addition on account of withheld amounts but reversed the CIT(A)'s decision on allowing the assessee's claim of mamool and commission payments. The second issue was decided in favor of the Department, disallowing the expenditure towards commission and mamools as it was deemed illegal and opposed to public policy.