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Issues Involved:
Income-tax reference u/s 256(1) of the Income-tax Act, 1961 - Deduction of expenses from illegal sale of liquor - Disallowance of claimed deduction - Interpretation of legality of expenses. Judgment Details: The judgment pertains to an income-tax reference u/s 256(1) of the Income-tax Act, 1961, involving the deduction of expenses from the illegal sale of liquor. The primary question raised was whether the assessee was entitled to a deduction of Rs. 52,589 paid as bribes to officials in computing the net income from illegal liquor sales, especially when the same amount had been claimed against legal sales previously and disallowed. The assessee, a firm involved in the purchase and sale of country liquor, incurred expenses for illegal transactions paid to police staff and officers, which the Income-tax Officer disallowed as a deduction. The Commissioner of Income-tax (Appeals) rejected the assessee's appeal against the disallowance, leading to a second appeal before the Tribunal. The Tribunal, however, allowed the claim of Rs. 52,589 as a deduction for the assessee, prompting the Revenue to seek a reference before the High Court. The court examined various decisions, including those of the Supreme Court and High Courts, emphasizing that expenses incurred for illegal purposes, such as bribes, are not legitimate business expenditures and cannot be allowed as deductions. Referring to precedents like S. C. Kothari [1971] 82 ITR 794 and Rajdev Kirana Stores [1990] 181 ITR 285, the court reiterated that expenses paid for unlawful activities are against public policy and cannot be considered as legitimate deductions. The court upheld the view of the Income-tax Officer, ruling that the assessee was not entitled to the deduction of Rs. 52,589 for illegal purposes. Consequently, the reference was answered in favor of the Revenue, affirming the disallowance of the claimed deduction for expenses related to illegal transactions.
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