2004 (8) TMI 629 - AT - Income Tax

Summary

Issues Involved:
1. Deductibility of secret commission as business expenditure under Section 37 of the Income Tax Act, 1961.
2. Applicability of the explanation added to Section 37(1) with retrospective effect from April 1, 1962.
3. Burden of proof regarding the expenditure incurred by the assessee.

Detailed Analysis:

1. Deductibility of Secret Commission:
The primary issue was whether the secret commission paid by the assessee was deductible as business expenditure under Section 37 of the Income Tax Act, 1961. The assessee argued that only 1/4th of the secret commission should be disallowed based on past practice and previous Tribunal decisions. However, the Assessing Officer (A.O.) disallowed the entire commission, and the CIT(A) allowed the assessee's claim. The Tribunal initially upheld the CIT(A)'s decision, but the matter was referred to the High Court, which remitted it back to the Tribunal for reconsideration in light of the explanation added to Section 37(1).

2. Applicability of Explanation to Section 37(1):
The explanation added to Section 37(1) with retrospective effect from April 1, 1962, states that any expenditure incurred for any purpose which is an offense or prohibited by law shall not be deemed to have been incurred for business purposes. The High Court emphasized that the Tribunal had upheld the deduction without ensuring that the expenditure was not incurred for any illegal purpose. The Tribunal was directed to reconsider the allowability of the deduction in light of this explanation.

3. Burden of Proof:
The Tribunal noted that the assessee was provided with multiple opportunities to present evidence regarding the expenditure but failed to do so. The Tribunal emphasized that the burden of proving that the expenditure was actually incurred and was wholly and exclusively for business purposes lies with the assessee. The Tribunal cited several legal precedents, including the Bombay High Court's decision in Goodlas Nerolac Paints Ltd. and the Andhra Pradesh High Court's decision in CIT v. Transport Corporation of India Ltd., which held that the taxpayer must establish the expenditure with evidence.

Conclusion:
The Tribunal concluded that the assessee did not provide sufficient evidence to prove that the secret commission was actually incurred and was wholly and exclusively for business purposes. The Tribunal held that the expenditure claimed by the assessee on account of secret commission for the years under consideration was not allowable under Section 37(1) of the Act. Consequently, the Tribunal directed the Assessing Officer to disallow the entire expenditure claimed by the assessee on account of secret commission, modifying its earlier order and allowing the departmental appeals.