TaxTMI 
TaxTMI 
2010 (2) TMI 792
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....x Act, in July 1986 and during enquiry it was noticed that the assessee had inflated the steel purchases debited in its books and claimed it as an allowable expenditure. The assessee admitted that he had obtained the computation bills from steel vendors and, therefore, the assessments were reopened u/s.147. The assessee filed revised returns and claimed that it had paid commission in cash to the Mehta group who were instrumental in awarding the contract to the assessee by Karnataka Ball Bearings Ltd., by inflating the contract cost and it was also admitted by the assessee that the inflated contract cost were handed over to the Mehta group as commission, the figures being Rs.2,15,456/- for the assessment during 1983-84 and Rs.45,84,851/-for the assessment year 1984-85. But no entry was made in the assessee's books of account for the alleged commission paid. The Assessing Officer however held the payment of commission was only a device to escape and avoid tax and he therefore completed the assessment by making additions of the aforesaid amounts for the two years respectively. Being aggrieved by the said assessment order, appeal No.ITA 30/C-IV(CIT)(A)-III/1987-88 was filed in respect ....
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....for steel purchases but was used for paying commission as quid pro quo. The commission was paid only for the purpose of business and that the amount was deductible from the income which was claimed by the assessee. A. P. Mehta was examined on oath. The understanding and the receipt was confirmed. It was for awarding contract. It was claimed that for the two assessment years 1983-84 and 1984-85 an amount equal to the receipt of commission was declared by various family members of Mehta group in their returns and, therefore, no escapement of income either. 6. According to the department, the payment purportedly made cannot be termed as commission as the amount involved is not paid for any services rendered as such and it was only for obtaining the contract. The contract with Karnataka Ball Bearings Ltd., was entered into on 16.7.1982 and thus this is not a liability which accrued in the course of running a business. Commission, it was contended was for tainted purpose and it cannot be allowed. Whereas according to the assessee, the commission was paid for obtaining the contract and, therefore, is an allowable expenditure. 7. The Tribunal held the assessee paid com....
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....R. Mehta and Manish and Co., but obtained purchase bills by paying the commission. The debits of steel purchase recorded in the books of account of the assessee were bogus purchases escaping the assessment and hence notice u/s.148 was issued. An amount of Rs.2,15,456/- was added to the returned income for the assessment year 1984-85. Penalty proceedings were initiated u/s.271(1)(c) for both the assessment years. The difference between the particulars in respect of the return filed on 30.1.1985 and 30.9.1986, i.e., Rs.56,72,010.33 which was shown as materials in the return filed on 30.1.1985 was split up and Rs.10,87,159.71 was shown as materials and Rs.45,84,850.62 was shown as commission. The Assessing Officer held the changes in the return filed on 30.9.1986 could not be treated to be bonafide omission as contemplated u/s. 139(5) of the Act and the assessment was processed on the basis of the return filed on 30.1.1985 which was based on the books of account. The facts that these manipulations in the accounts etc., were shown to camouflage the commission payment to Mehtas. 10. Thus the issue for consideration by the Hon'ble High Court was framed and reads as under:  ....
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....ts an explanation was added with effect from 1.4.1962 declaring 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 purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. It is significant that the explanation has been added by way of a declaration specifically mentioning the words "offence" and prohibited by law and the said explanation is in the nature of a deeming provision which bars a deduction or allowance in respect of an expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law. What is an offence or what is prohibited by law has not been explained and, therefore, the scope for interpretation or bringing under the explanation any expenditure in respect of which no deduction or allowance can be made is vast." 15. The standing counsel for the revenue referring to section 37 contended before the Hon'ble High court that the payment of commission of Rs.48 lakhs for obtaining contract of Rs.1,28,18,413/-by the assessee was made not to the company, i.e., Karnataka Ba....
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....s also took into cognizance the decision of the Orissa High Court in the case of Tarini Tarpauline Productions vs. CIT (2002) 254 ITR 495, in which the High Court held the payment of secret commission paid by the assessee to procure business is not deductible u/s.37 of the Act in view of the amendment effected from 1.4.1962 by insertion of Explanation. 19. Hearing the rival submissions and going through the decisions cited, we are of the view that appeal by the assessee is liable to be dismissed. The learned representative for the assessee produced a copy of the speeches of the Hon'ble Finance Minister on the 'Notes on Clauses' introducing of the Explanation to the section 37(1) which reads as under: "Disallowance of Illegal expenses It is proposed to insert an explanation after sub-section (1) of section 37 to clarify that no allowance shall be made in respect of expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law. This proposed amendment will result in disallowance of the claim made by certain tax payers of payments on account of protection money, extortion, hafta, bribes, etc., as business expenditure. ....