2010 (2) TMI 792 - AT - Income Tax

Commission payment by the assessee to the Directors of other company for procurement of orders. - Held that - Payment of this nature even if it is disclosed in their accounts, cannot be allowed. The payer induces the other party to deceive its shareholders. - The other party is a public limited company. Even if this is treated not as an offence as such, within the meaning of the section, it clearly falls within the meaning of expenditure incurred, which is prohibited by law. The directors of the company are holding the post in trust. - By making the payment, the payer induces the directors its shareholders. This amounts to an abetment of not only an unethical business practice but also amounts to abetting to commit a breach of trust by the directors of the recipient company, which is clearly an offence - prohibited by law. - decided against Assessee.

Issues Involved:
1. Legitimacy of commission payments.
2. Deductibility of commission payments as business expenditure.
3. Applicability of Section 40A(3) of the IT Act.
4. Timing of liability for commission payments.
5. Nature of commission payments as expenditure or income sharing.

Issue-wise Detailed Analysis:

1. Legitimacy of Commission Payments:
The Tribunal examined whether the commission payments made by the assessee to the Mehta group were legitimate. The Tribunal held that the commission payments were indeed made and were offered for taxation by the recipients. The High Court noted that the payments were made in cash and were not recorded in the assessee's books, raising questions about their legitimacy.

2. Deductibility of Commission Payments as Business Expenditure:
The core issue was whether the commission payments could be deducted as business expenditure under Section 37 of the IT Act. The Tribunal initially allowed the deduction, reasoning that the payments were made for business purposes. However, the High Court emphasized the Explanation to Section 37(1), which disallows deductions for expenditures incurred for purposes that are an offense or prohibited by law. The High Court remanded the issue back to the Tribunal to reconsider in light of this Explanation.

3. Applicability of Section 40A(3) of the IT Act:
The Tribunal concluded that the cash payments of commission were not hit by Section 40A(3), which restricts cash payments exceeding a certain limit. The High Court did not specifically address this point but focused on the broader legality and deductibility of the payments.

4. Timing of Liability for Commission Payments:
The Tribunal held that the liability for the commission payments arose when the assessee recorded the bogus steel purchases in its books, not when the commission agreement was made or when the payments were actually disbursed. The High Court did not challenge this timing but focused on the nature and legality of the payments.

5. Nature of Commission Payments as Expenditure or Income Sharing:
The Tribunal viewed the commission payments as business expenditure. However, the High Court questioned whether these payments were actually a sharing of income obtained through a conspiracy to cheat Karnataka Ball Bearings Ltd. The High Court's focus was on whether the payments were lawful and deductible under the IT Act.

Conclusion:
The High Court remanded the case to the Tribunal to reconsider the deductibility of the commission payments in light of the Explanation to Section 37(1) of the IT Act, which disallows deductions for expenditures incurred for purposes that are an offense or prohibited by law. The Tribunal, upon reconsideration, dismissed the assessee's appeal, holding that the payments were not allowable as they induced unethical business practices and amounted to abetment of a breach of trust by the directors of the recipient company. The appeals were dismissed, and the Tribunal's order was pronounced on February 16, 2010.

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