Dr. Bharat Bhushan Parsoon, J. - This income tax appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter mentioned as, the Act), filed by the Commissioner of Income Tax, Jalandhar against order dated 11.2.1999 (Annexure P-3) of the Income Tax Appellate Tribunal, Amritsar passed in ITA No.261(ASR)/1993, was admitted for hearing on the following substantial questions of law:-
| "1. |
Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in dismissing the appeal of the revenue whereby upholding the action of learned CIT(A) directing deletion the disallowance of expenditure of Rs. 10,36,879/- and Rs.4,29,485/- incurred by the assessee as secret commission and specimen distribution respectively? |
2. |
Whether on the facts and in the circumstances of the case, the incurring of expenses like secret commission and specimen distribution to public servants was not an offence or was not prohibited by law e.g. Under the Prevension of Corruption Act, 1988 and/or the Indian Penal Code, 1860/ the Code of Criminal Procedure, 1973 whereby attracting its deemed disallowance in view of the newly inserted Explanation to Section 37 of the Income Tax Act, 1961 though retrospectively?" |
2. The assessee, a partnership concern of eight persons, is engaged in publication of books. In the assessment year 1990-1991, the assessee inter-alia had sought/claimed deduction on account of commission paid to the tune of Rs.10,36,879/-claiming that these expenses were of secret nature and payments were made to educational institutions, teachers and individuals for promotion of sales of books. Similarly expenses of Rs.8,61,900/- had been claimed by the assessee as having been incurred with regard to supply of specimen copies of books (published by them) to the teachers.
3. The Assessing Officer disallowed the expenditure made on payment of commission of secret nature to various schools for promotion of sales, but so far as the matter of expenses incurred on supplying specimen of books published by them was concerned, only expenses @ 2% of the turnover were allowed. Consequently, disallowance of Rs.4,29,.485/- out of total amount claimed as expenses of supplying copies of specimen of books, was made. Sequelly, expenses of Rs.10,36,879/- of commission allegedly paid to the teachers of various schools and part expenses of Rs.4,29,485/- allegedly incurred on supply of specimen of copies of books published, were disallowed to the assessee in assessment order finalized by the Assessing Officer vide order dated 20.12.1991 (Annexure A-1).
4. In the first appeal filed by the assessee, vide order dated 21.10.1992, Commissioner of Income Tax (Appeals), Jalandhar, following the order in the case of the same assessee of Income Tax Appellate Tribunal, Amritsar of 14.10.1992 in ITA No.568 to 570(ASR) 1991 and 571 to 574(ASR)/1991 for the assessment years 1982-83 to 1984-88 and 1985-86 to 1988-89 respectively, deleted addition made by the Assessing Officer and thus relief of Rs.10,36,879/- was granted to the assessee. This order Annexure A-2 dated 21.10.1992 was unsuccessfully challenged by the revenue before the Income Tax Appellate Tribunal which announced its order on 11.2.1999 (Annexure A3).
5. Claim of the revenue is that the expenditure made on payment of secret commissions in the name of sales promotion as also incurred on distribution of free specimen copies of books published by the assessee is no more permissible in law in view of introduction of Explanation to Section 37 of the Act vide Finance (No.2) Act, 1998. It is claimed that such practice of spending on secret commissions and on distribution of free specimen books is an offence and there is specific prohibition in law with introduction of Explanation to Section 37 of the Act which has been made applicable retrospective, i.e., with effect from 1.4.1962. It is urged that even otherwise, there is no proper accounts for secret commissions nor of expenditure incurred on distribution of free books published by the assessee and, thus, order of the Tribunal is bad in law requiring reversal.
6. Plea of the assessee in defending the expenses made on payment of secret commissions to various schools is that in the face of tough competition, such commission is necessary and is part of the business practices. Similarly, supporting expenses incurred on supply of specimen of books, it is claimed that free books are supplied to teachers of the concerned subjects so that after reading the books, if they find it useful for the students, recommendation may come from them for the students who then would purchase the same from the market. It is claimed by the assessee that there is nothing new in the assessment year under consideration, as such expenditure is regularly made by the assessee year after year since many years and return furnished depicting such expenditure has always been accepted by the authorities.
7. We have heard counsel for the parties while perusing the paper book.
8. When rival claims of the parties are evaluated in the interface of facts and attending circumstances, it transpires that the revenue had all along been accepting return with expenditure "commission account" as also "specimen account" without a question mark. In CIT v. Dhanpat Rai & Sons [1996] 222 ITR 668 (Panj. & Har.), 12 income tax cases of this very assessee, wherein all along expenditure on commission account as also on specimen account was shown to have been made by the assessee, were decided. Primarily endorsing findings of the Tribunal based on consideration of the evidence and material available to it, that the incurring of expenditure by the assessee on both the heads was neither in dispute nor was unreasonable, this Court in appeal, affirming findings of the Tribunal to the effect that the entire amount claimed by the assessee had in fact been spent and was reasonable, and being a pure finding of fact, had rejected the claim of the revenue. In short, this Court had come to the affirmed finding that no referable question of law had arisen. Consequently, the income tax references had been dismissed.
9. In the present case, there is a marked difference when comparison is made to the assessment made in earlier assessment years.
10. There are two issues. One concerns expenditure on commission paid secretly and the other one is about expenditure made on distribution of specimen copies of books published by the assessee. Yet another aspect concurrently relatable to these issues is as to whether payment of such secret commission or expenditure made on distribution of specimen books would constitute an offence or comes within the prohibition of the criminal laws, referred to in question No.2 on which present appeal was admitted for hearing.
11. At this stage, Explanation appended to Section 37 of the Act by way of Finance (No.2) Act, 1998 introduced retrospectively with effect from 1.4.1962 may be reproduced, as below:—
"For the removal of doubts, it is hereby declared 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."
The impugned order of the Tribunal is of 11.2.1999 (Annexure A-3). This amendment had come in force in the year 1998. It is, thus, clear that this amendment had been introduced earlier to the date of passing of the impugned order by the Tribunal. Despite the fact that this amendment had already seen the light of the day earlier to the passing of the impugned order and its operation was also made retrospective with effect from 1.4.1962, this major change in law did not engage the attention it deserved from the Tribunal. Looking from another angle, unduly swayed by the concept of judicial consistency, the Tribunal without even going through the vouchers and accounts books of the assessee and without even appraising and evaluating the quantum of expenditure under these two heads in relation to the gross turnover, decided the matter in a sweeping and general manner.
12. Any secret transaction/payment that is made to secure an unfair advantage, would necessarily be repugnant to law. Transaction which is not transparent, offends normal business practice, must suffer scrutiny. Such unexplained and unvouched expenditure, if allowed, is likely to encourage illegal payments, evasion of tax and unscrupulous practices ushering in at both ends. The expenditure incurred on secret commissions would necessarily fall within the mischief of the explanation added to Section 37 of the Act.
13. In the case in hand, without evaluating the evidence and approaching the attending circumstances, Commissioner of Income Tax (Appeals) as also Income Tax Appellate Tribunal deleted the additions made by the Assessing Officer to the extent of expenses of Rs.10,36,879/- on secret commission and expenses of Rs.4,29,485/- allegedly incurred on supply of specimen copies of books published by the assessee. It is also worth notice that in addition of lack of proper accounts, probity is also prominently lacking in findings of the higher income tax authorities. Unlike any in framing of assessments of the earlier assessment years, where findings that expenditure incurred on such counts was reasonable, are also prominently missing from the impugned order of the Tribunal. In short, the impugned order neither discusses the evidence nor takes into account any other facts and attending circumstances but there is only sweeping reference to its earlier judgments as also decision of this Court in Dhanpat Rai & Sons (ibid) whereby appeal of the revenue was dismissed. When neither the incurring of expenditure as a fact under the two given heads has been properly accounted for nor application, in their relation and impact of Explanation added to Section 37 of the Act has been taken into consideration, the impugned order is legally vitiated.
14. At this stage, reference may also be made to CIT v. Taraporvala Sons Co. (P.) Ltd. [1999] 239 ITR 319/105 Taxman 438 (Bom.) wherein, in similar circumstances the matter had been remitted by the High Court of Bombay to the Income Tax Appellate Tribunal. Para 5 of this judgment, for ready reference, is reproduced as below:—
"We have perused the newly added Explanation and considered the above submissions. We find merit in the submission of Mr. Desai, learned counsel for the Revenue that in view of the amendment to s.37(1) of the Act by the insertion of Explanation with retrospective effect from the inception of the Act, i.e. 1st April 1962, the matter requires consideration by the Tribunal. The Tribunal in this case has upheld the deduction of secret commission without satisfying itself that it was not incurred by the assessee for any purpose which is an offence or which is prohibited by law. Allowance of deduction under s.37(1) of the Act in respect of secret commission without a clear finding in this regard, in our opinion is not correct. The Tribunal will have to decide the question of allowability of deduction of secret commission in the light of the Explanation inserted with retrospective effect from 1st April, 1962. In these circumstances, we are of the opinion that the Tribunal was not right in holding that the commission claimed to have been paid by the assessee by way of secret commission as an expenditure laid out or expended wholly and exclusively for the purpose of its business within the meaning of s. 37(1) of the IT Act, 1961, read with the Explanation appended thereto. However, having regard to the fact that the Tribunal could not have examined at the time it passed the order the controversy in the light of the Explanation which was inserted in the year 1998 with retrospective effect from 1st April, 1962, we remit the matter to the Tribunal to re-examine afresh in the light thereof."
15. As a sequel to the discussion already made, the impugned order is set aside; the case is remitted to the Tribunal for deciding the question of allowability of deduction on secret commissions as also expenditure allegedly made on distribution of free books in the light of Explanation introduced and appended to Section 37(1) of the Act while evaluating and probing evidence of incurring of expenses on both the counts so as to give a finding with regard to reasonableness of such expenditure.