Ita/51/1999 Of The Commissioner Of Income Tax v. M/S Dhanpat Rai And Sons

IN THE HIGH COURT FOR THE STATES OF PUNJAB ANDHARYANA AT CHANDIGARH ITA No.51 of 1999Date of decision: January 10, 2014. The Commissioner of Income Tax, Jalandhar Appellant Vi M/s Dhanpat Rai & Sons, Jalandhar Respondent CORAM:HON'BLE MR. JUSTICERAJIVE BHALLAHON'BLE MR. JUSTICE DR. BHARAT BHUSHAN PARSOON Argued by: Shri Vivek Sethi, Advocate, for the appellantShri Alok Mittal, Advocate for therespondent §_J Dr. Bharat Bhushan Parsoon This income tax appeal under Section 260-A oftheIncome Tax Act, 1961(hereinafter mentioned as, the Act), filedby the Commissioner of Income Tax, Jalandhar against orderdated 11.2.1999 (Annexure P-3) of theIncome Tax AppellateTribunal, Amritsar passed in ITA No.261(ASR)/1993, wasadmitted for hearing on the following substantial questions oflaw:- aWhetheron the facts and in the circumstances ofthe case, the Tribunal is justified in law in dismissingthe appeal of the revenue whereby upholding theaction of learned CIT(A) directing deletion thedisallowance of expenditure of Rs.10,36,879/- andRs.4,29,485/- incurred by the assessee as_ secretcommission and specimen distribution respectively? oOWhether on the facts and in the circumstances ofthe case, the incurring of expenses like secret commission and specimen distribution to publicservants was not an offence or was not prohibited bylaw e.g. Under the Prevension of Corruption Act,1988 and/or the Indian Penal Code, 1860/ the Codeof Criminal Procedure, 1973 whereby attracting itsdeemed disallowance in view of the newly insertedExplanation to Section 37 of the Income Tax Act,1961 though retrospectively? ° 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 onaccount of commission paid to the tune of Rs.10,36,379/-claiming that these expenses were of secret nature and paymentswere made to educational institutions, teachers and individualsfor promotion of sales of books. Similarly expenses ofRs.8,61,900/- had been claimed by the assessee as having beenincurred with regard to supply of specimen copies of books(published by them) to the teachers. | The Assessing Officerdisallowed the expendituremade on payment of commission of secret nature to variousschools for promotion of sales, but so far as the matter ofexpenses incurred on supplying specimen of books published bythem was concerned, only expenses @ 2% of the turnover wereallowed. Consequently, disallowance of Rs.4,29,.485/- out oftotal amount claimed as expenses of supplying copies ofspecimen of books, was made. Sequelly, expenses ofRs.10,36,879/- of commission allegedly paid to the teachers ofvarious schools and part expenses of Rs.4,29,485/- allegedlyincurred on supply of specimen of copies of books published,were disallowed to the assessee in assessment order finalized bytheAssessing Officer vide order dated 20.12.1991 (Annexure A-1), In the first appeal filed by the assessee, vide orderdated 21.10.1992, Commissioner of Income Tax (Appeals)>Jalandhar, following the order in the case of the same assessee ofIncome Tax Appellate Tribunal, Amritsar of 14.10.1992 in ITANo.568 to 570(ASR) 1991 and 571 to 574(ASR)/1991 for theassessment years 1982-83 to 1984-88 and 1985-86 to 1988-89respectively, deleted addition made by theAssessing Officer andthus relief of Rs.10,36,879/- was granted to the assessee.Thisorder Annexure A-2 dated 21.10.1992 was _ unsuccessfulchallenged by the revenue before theIncome Tax AppellateTribunalwhich announced its order on 11.2.1999 (AnnexureA3), In the first appeal filed by the assessee, vide orderdated 21.10.1992, Commissioner of Income Tax (Appeals)>Jalandhar, following the order in the case of the same assessee ofIncome Tax Appellate Tribunal, Amritsar of 14.10.1992 in ITANo.568 to 570(ASR) 1991 and 571 to 574(ASR)/1991 for theassessment years 1982-83 to 1984-88 and 1985-86 to 1988-89respectively, deleted addition made by theAssessing Officer andthus relief of Rs.10,36,879/- was granted to the assessee.Thisorder Annexure A-2 dated 21.10.1992 was _ unsuccessfulchallenged by the revenue before theIncome Tax AppellateTribunalwhich announced its order on 11.2.1999 (AnnexureA3), Claim of the revenue is that the expenditure made onpayment of secret commissions in the name of sales promotion asalso incurred on distribution of free specimen copies of bookspublished by the assessee is no more permissible in law in viewof introduction of Explanation to Section 37 of the Act videFinance (No.2) Act, 1998. It is claimed that such practice ofspending on secret commissions and on distribution of freespecimen books is an offence and there is specific prohibition inlaw with introduction of Explanation to Section 37 of the Actwhich has been made applicable retrospective, i.e., with effectfrom 1.4.1962. It is urged that even otherwise, there is no properaccounts for secret commissions nor of expenditure incurred ondistribution of free books published by the assessee and, thus,order of the Tribunal is bad in law requiring reversal. Plea of the assessee in defending the expenses madeon payment of secret commissions to various schools is that in the face of tough competition, such commission is necessary and1S part of the business practices. Similarly, supporting expensesincurred on supply of specimen of books, it is claimed that freebooks are supplied to teachers of the concerned subjects so thatafter reading the books, if they find it useful for the students,recommendation may come from them for the students who thenwould purchase the same from the market. It is claimed by theassessee that there 1s nothing new in the assessment year underconsideration, as such expenditure is regularly made by theassessee year after year since many years and return furnisheddepicting such expenditure has always been accepted by theauthorities. We have heard counsel for the parties while perusingthe paper book, When rival claims of the parties are evaluated in theinterface of facts and attending circumstances, it transpires thatthe revenue had all along been accepting return with expenditure“commission account” as also “specimen account” without aquestion mark. In)CIT v. M/s Dhanpat Rai & Sons, (1996)222ITR 0668, 12 income tax cases of this very assessee, wherein allalong expenditure on commission account as also on specimenaccount was shown to have been made by the assessee, weredecided. Primarily endorsing findings of the Tribunal based onconsideration of the evidence and material available to it, that theincurring of expenditure by the assessee on both the heads wasneither in dispute nor was unreasonable, this Court 1n appeal,affirming findings of the Tribunal to the effect that the entireamount claimed by the assessee had 1n fact been spent and wasreasonable, and being a pure finding of fact, had rejected the claim of the revenue. In short, this Court had come to theaffirmed finding that no referable question of law had arisen,Consequently, the income tax references had been dismissed. In the present case, there 1s a marked difference whencomparison 1s made to the assessment made 1n earlier assessmentVCaIs. claim of the revenue. In short, this Court had come to theaffirmed finding that no referable question of law had arisen,Consequently, the income tax references had been dismissed. In the present case, there 1s a marked difference whencomparison 1s made to the assessment made 1n earlier assessmentVCaIs. There are two issues. One concerns expenditure oncommission paid secretly and the other one 1s about expendituremade on distribution of specimen copies of books published bythe assessee. Yet another aspect concurrently relatable to theseissues 1S aS to whether payment of such secret commission orexpenditure made on distribution of specimen books wouldconstitute an offence or comes within the prohibition of thecriminal laws, referred to in question No.2 on which presentappeal was admitted for hearing. At this stage, Explanation appended to Section 37 ofthe Act by way of Finance (No.2) Act, 1998 introducedretrospectively with effect from 1.4.1962 may be reproduced, asbelow:- “For the removal ofdoubts, it ts hereby declared thatany expenditure incurred by an assessee for anypurpose which is an offence or which is prohibitedby law shall not be deemed to have been incurredforthe purpose of business or profession and nodeduction or allowance shall be made in respect ofsuch expenditure. The impugned order of the Tribunal is of 11.2.1999(Annexure A-3). This amendment had come in force in the year1998. Itis, thus, clear that this amendment had been introducedearlier to the date of passing of the impugned order by theTribunal. Despite the fact that this amendment had already seen the light of the day earlier to the passing of the impugned orderand its operation was also made retrospective with effect from1.4.1962, this major change in law did not engage the attention itdeserved from the Tribunal. Looking from another angle, undulyswayed by the concept of judicial consistency, the Tribunalwithout even going through the vouchers and accounts books ofthe assessee and without even appraising and evaluating thequantum of expenditure under these two heads in relation to thegross turnover, decided the matter in a sweeping and generalTnanne_ Any secret transaction/payment that is made to securean unfair advantage, would necessarily be repugnant to law.Transaction which is not transparent, offends normal businesspractice, must suffer scrutiny. Such unexplained and unvouchedexpenditure, if allowed, is likely to encourage illegal payments,evasion of tax and unscrupulous practices ushering in at bothends. The expenditure incurred on secret commissions wouldnecessarily fall within the mischief of the explanation added toSection 37 of the Act. | In the case in hand, without evaluating the evidenceand approaching the attending circumstances,Commissioner ofIncome Tax (Appeals)as also |Income Tax Appellate Tribunaldeleted the additions made by theAssessing Officerto the extentof expenses of Rs.10,36,879/- on secret commission andexpenses of Rs.4,29,485/- allegedly incurred on supply ofspecimen copies of books published by the assessee. It is alsoworth notice that in addition of lack of proper accounts, probityis also prominently lacking in findings of the higher income taxauthorities. Unlike any in framing of assessments of the earlier assessment years, where findings that expenditure incurred onsuch counts was reasonable, are also prominently missing fromthe impugned order of the Tribunal. In short, the impugnedorder neither discusses the evidence nor takes into account anyother facts and attending circumstances but there 1s onlysweeping reference to its earlier judgments as also decision ofthis Court in CIT v. Dhanpat Rai & Sons (ibid) whereby appealof the revenue was dismissed. When neither the incurring ofexpenditure as a fact under the two given heads has beenproperly accounted for nor application, in their relation andimpact of Explanation added to Section 37 of the Act has beentaken into consideration, the impugned order 1s legally vitiated. assessment years, where findings that expenditure incurred onsuch counts was reasonable, are also prominently missing fromthe impugned order of the Tribunal. In short, the impugnedorder neither discusses the evidence nor takes into account anyother facts and attending circumstances but there 1s onlysweeping reference to its earlier judgments as also decision ofthis Court in CIT v. Dhanpat Rai & Sons (ibid) whereby appealof the revenue was dismissed. When neither the incurring ofexpenditure as a fact under the two given heads has beenproperly accounted for nor application, in their relation andimpact of Explanation added to Section 37 of the Act has beentaken into consideration, the impugned order 1s legally vitiated. At this stage, reference may also be made toCIT v.Taraporvala Sons Co. (P) Ltd.(reported as (1999) 239 ITR 319(Bomb) wherein, in similar circumstances the matter had beenremitted by the High Court of Bombay to the Income TaxAppellate Tribunal. Para 5 of this judgment, for ready reference,is reproduced as below:- CWe have perused the newly added Explanation andconsidered the above submissions. We find merit inthe submission ofMr. Desai, learned counselfor theRevenue that in view of the amendment to s.37(1) ofthe Act by the insertion of Explanation withretrospective effectfrom the inception of the Act, i.e.$[Si]April 1962, the matter requires consideration bythe Tribunal. The Tribunal in this case has upheldthe deduction ofsecret commission without satisfyingitself that it was not incurred by the assessee for anypurpose which is an offence or which is prohibitedby law. Allowance of deduction under s.37(1) of theAct in respect of secret commission without a clearfinding in this regard, in our opinion is not correct.The Tribunal will have to decide the question ofallowability of deduction ofsecret commission in the light of the Explanation inserted with retrospectiveeffect from I[Sf]April, 1962. In these circumstances,we are of the opinion that the Tribunal was not rightin holding that the commission claimed to have beenpaid by the assessee by way of secret commission asan expenditure laid out or expended wholly andexclusively for the purpose of its business within themeaning of 8. 3/(1) of the IT Act, 1961, read with theExplanation appended thereto. However, havingregard to the fact that the Tribunal could not haveexamined at the time it passed the order thecontroversy in the light of the Explanation which wasinserted in the year 1998 with retrospective effectfrom I[Sf]April, 1962, we remit the matter to theTribunal to re-examine afresh in the light thereof.D As a sequel to the discussion already made, theimpugned order 1s set aside; the case 1s remitted to the Tribunalfor deciding the question of allowability of deduction on secretcommissions as also expenditure allegedly made on distributionof free books in the light of Explanation introduced andappended to Section 37(1) of the Act while evaluating andprobing evidence of incurring of expenses on both the counts soas to give a finding with regard to reasonableness of suchexpenditure, |Dr. Bharat Bhushan ParsoonDJudge January 10, 2014. kadyan |Rajive BhallaDJudge