2009 (2) TMI 510 - AT - Income Tax

Summary

Issues Involved:
1. Claim for secret commission/kickbacks of Rs. 43,50,616 as business expenditure.
2. Justification and verification of the expenditure.
3. Applicability of Explanation to section 37(1) of the Income Tax Act.
4. Assessment of the genuineness and necessity of the expenditure.
5. Consistency and pattern of the claimed expenditure.
6. Compliance with tax deduction at source (TDS) provisions.

Detailed Analysis:

1. Claim for Secret Commission/Kickbacks:
The assessee, engaged in the business of Cargo Marketing Agency for Airlines, claimed Rs. 43,50,616 as secret commission/kickbacks for business purposes. The claim was made under three heads: sundry expenses, incentives, and rate difference. The assessee argued that the payments were a normal practice in their line of business, necessary for increasing business volume and were not ad hoc or arbitrary.

2. Justification and Verification of the Expenditure:
The Assessing Officer (AO) found that the expenditure was inflated and not supported by proper details or verifiable vouchers. During a survey, it was noted that the assessee had inflated expenditure under various heads. The AO did not accept the assessee's justification, citing the inability to establish the identity of the payees and the lack of verifiable vouchers.

3. Applicability of Explanation to Section 37(1):
The AO invoked the Explanation to section 37(1), which disallows expenses incurred for purposes that are an offence or prohibited by law. The assessee contended that the secret commission was not illegal and was necessary for business, citing various case laws. However, the AO and CIT(A) did not accept this argument, referencing the decision in Patel Bros. v. Dy. CIT and other relevant cases.

4. Assessment of the Genuineness and Necessity of the Expenditure:
The CIT(A) and the Tribunal found that the assessee failed to justify the expenditure as wholly and exclusively for business purposes. It was noted that the expenditure was booked under different heads and lacked consistent patterns. The Tribunal highlighted that secret commissions varied significantly across different centers and were not uniformly adopted, making the justification implausible.

5. Consistency and Pattern of the Claimed Expenditure:
The Tribunal observed that the secret commission varied from 13.5% in Mumbai to 2.15% in Kolkata, with no consistent pattern. The assessee's justification that the payments were necessary for business was not supported by consistent evidence. The Tribunal found that the claimed secret commission was disproportionately high compared to the additional incentives received.

6. Compliance with TDS Provisions:
The Tribunal noted that the assessee did not deduct tax at source on the claimed secret commission, which would have been required if the payments were legitimate business expenses. This non-compliance further questioned the genuineness of the expenditure.

Conclusion:
The Tribunal upheld the orders of the AO and CIT(A), disallowing the claim for secret commission/kickbacks. It was concluded that the assessee failed to justify the expenditure as necessary and wholly for business purposes, and the payments were not verifiable. The appeal was dismissed.