TaxTMI 
TaxTMI 
2014 (7) TMI 83
X X X X Extracts X X X X
X X X X Extracts X X X X
....t renewal approval from Central Government. Subsequent to the closure of financial year the company has got necessary approval from Central Government for the period 06.04.2009 to 31.03.2012 offence relating to the period 01.04.2007 to 05.04.2009 has been compounded by the Company Law Board on an application made by the Company in this respect." 3. On the perusal of the Note, the Assessing Officer noticed that the assessee entered into transactions of payment of job work charges to a related party, viz., M/s Razormed Inc. during the financial year relevant to assessment year under consideration without obtaining prior approval of the Central Government in accordance with the provisions of section 297 of the Companies Act, 1956. On being called upon to explain as to why such job work charges be not disallowed in accordance with the provisions of Explanation to section 37(1) of the Income-tax Act, 1961 (hereinafter also called 'the Act'), the assessee submitted that the post facto approval for the transactions with the related parties undertaken during the year, was obtained from the Company Law Board on payment of compounding charges for the condonation of delay and hence t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ss than rupees one crore, no such contract shall be entered into except with the previous approval of the Central Government. (2) Nothing contained in clause (a) of sub-section (1) shall affect- (a) the purchase of goods and materials from the company, or the sale of goods and materials to the company, by any director, relative, firm, partner or private company as aforesaid for cash at prevailing market prices; or (b) any contract or contracts between the company on one side and any such director, relative, firm, partner or private company on the other for sale, purchase or -supply of any goods, materials and services in which either the company or the director, relative, firm, partner or private company, as the case may be, regularly trades or does business. Provided that such contract or contracts do not relate to goods and materials the value of which, or services the cost of which, exceeds five thousand rupees in the aggregate in any year comprised in the period of the contract or contracts; or (c) in the case of a banking or insurance company any tr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....72 states that : 'An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.' The essence of sub-section (5) is that when there is a violation of sub-section (1) of section 297 of the Companies Act, the contract does not automatically become void ab initio, but voidable at the option of the Board. The expression 'voidable at the option of the Board' postulates that if the Board, despite no prior sanction, gives green signal and agrees to go ahead with the contract referred to in sub-section (1) of section 297 of the Companies Act, such contract would be valid. It is only when the Board exercises its option against validating the contract as per sub-section (1), that the contract becomes void ab initio. Turning to the facts of the instant case, it is observed that the Board has not objected to the contracts between the assessee and Razormed Inc., thus, making such contract for doing of job work as valid. Viewing from this perspective, it becomes vivid that there is no violation of section 297 of the Companies Act inasmuch as the so-called violation as per sub-sect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as it is commonly called is one whose mandate does not exist but for such provision. Because of such provision alone, the given imaginary state of affairs is taken as reality despite it being at variance with the scope of the relevant provision of the enactment. It is trite that the scope of a deeming provision has to be restricted to what is expressly stated in such a provision. There can be no inference or intendment as regards such a provision. The Hon'ble Supreme Court in CIT v. Amarchand N. Shroff [1963] 48 ITR 59 (SC)considered the ambit of a deeming provision and held that the fiction cannot be extended beyond the object for which it is enacted. In CIT Vs. Mother India Refrigeration Industries P.Ltd. (1985) 155 ITR 711 (SC) the same view was reiterated by holding that the "legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond their legitimate field." The Hon'ble Bombay High Court in CIT v. Ace Builders P. Ltd. [2006] 281 ITR 210 (Bom.) considered a case in which the assessee was a partner in a firm which was dissolved in the year 1984 and the assessee was allotted a flat towards its credi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....icted to ascertaining the purpose of the expenditure. In simple words, the investigation should be carried out to see the object and consideration for the expenditure incurred. If the purpose of the expenditure is either an offence or is prohibited by law, then it would suffer disallowance. If, however, the purpose of the expenditure is neither to commit an offence nor is prohibited by any law, then there can be no question of disallowance. It means that the offence or prohibition under law should be judged with the 'purpose' of the expenditure on a standalone basis divorced from the fulfillment or otherwise of the procedural formalities attached with and necessary for the incurring of such expenditure. To put it in simple words, if the expenditure is otherwise lawful and neither amounts to offence nor is prohibited by law, but the procedural provisions attached for incurring it are not complied with, no doubt irregularity will creep in, but such irregularity would not make the expenditure itself as unlawful so as to be brought within the scope of the Explanation. At the cost of repetition, we state that the Explanation, being a deeming provision, is required to be strictly....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r is that the 'purpose' of the expenditure incurred should be viewed in isolation unbothered by anything else for determining whether or not the Explanation is attracted. 11. At this stage, it will be relevant to note the judgment of the Hon'ble Punjab & Haryana High Court in CIT v. Dhanpat Rai & Sons [2014] 98 DTR (P&H) 209. In that case, the assessee, a publisher of books claimed deduction of expenditure incurred on account of secret nature of commission paid to the educational institutions, teachers and individuals for promotion of sales of books and supply of specimen copies of books to teachers. The disallowance made of such secret commission by the AO was deleted by the CIT (A) as well as the Tribunal. However, the Hon'ble High Court set aside the tribunal order and remitted the matter to the Tribunal for deciding the allowability of deduction of secret commission on the anvil of the Explanation added to section 37(1) by observing that any secret transaction/payment made to secure unfair advantage would necessarily be repugnant to law. The Hon'ble High Court held that such expenditure, if allowed, is likely to encourage illegal payment, evasion of tax and....