2013 (10) TMI 839 - HC - Income Tax

Allowability of commission expense paid to sister concern for its licence for importing furnace oil - Held that - Sister concern since had a licence for importing the furnace oil the assessee diverted its contractual obligation for averting the payment of damages nothing comes on the record to explain as to how the sum termed as commission for performing the contract obligation was needed to be paid to the sister concern. Reliance has been placed upon the judgment in the case of Prakash Cotton Mills v. CIT 1993 (4) TMI 3 - SUPREME Court - In the said case the assessee had paid statutory due imposed by way of damages or penalty or interest and claimed it as an allowable expenditure under section 37 (1) of the Act. The Supreme Court held that the authority has to allow deduction under Section 37 (1) wherever such examination reveals that the concern impost to be purely compensatory in nature. However such imports wherever is found to be of composite in nature that is partly of compensatory and partly of penal nature the authority has to bifurcate the two components of the impost and give deduction of that component which is compensatory in nature and refuse to give deduction of that component which is penal in nature In the present case appellant has failed to show as to how this amount of commission is compensatory in nature which would entitle the appellant to avail the benefit of this decision Decided against the Assessee. Allowance of expenditure amounting 1, 65, 172/- for sending mangoes to one Narayan V. Thosar through Air Wings Held that - Reliance has been placed upon the judgment in the case of Sayaji Iron & Engineering Company v. CIT reported in 2001 (7) TMI 70 - GUJARAT High Court wherein it had permitted expenditure in maintenance of vehicles used by the Directors for personal purposes. The Directors remuneration includes any expenditure incurred in providing benefit free of charges. The Court reversed the decision of the Tribunal on the ground that the Directors of the assessee company who are entitled to use the vehicles for their personal use in accordance with the terms and conditions on which they were appointed and the perquisites given to the directors formed part of their remuneration under the Explanation to section 198 of the Companies Act 1956 for the purpose of determining their remuneration under section 309 of that Act. It further held that once such remuneration was fixed as provided under section 309 it was not possible to state that the assessee incurred the expenditure for the personal use of the Directors. Since it was as per the terms and conditions of service it must be held as a business expenditure In the present case no ground comes forth nor there is any rationale for such huge business promotion expenditure incurred for supplying mangoes to a particular person this authority will not come to the rescue of the assessee Decided against the Assessee.

Summary

Issues Involved:
1. Disallowance of commission of Rs. 28,37,500/-
2. Disallowance of business promotion expenses of Rs. 1,65,172/-

Issue-wise Detailed Analysis:

1. Disallowance of Commission of Rs. 28,37,500/-:

The appellant assessee, engaged in trading various goods, entered into a contract with SSOE for importing 12500 MT of Fuel Oil 180 CST. The acquisition, storage, and sale of solvents without a license were prohibited under the Solvent, Raffinate & Slop Order, 2000. The appellant, lacking the necessary license, requested its sister concern, BGH Exim Limited, to undertake the contractual obligations. The assessee claimed a commission of Rs. 28,37,500/- paid to BGH Exim Limited. The Assessing Officer disallowed this claim, deeming it bogus. The CIT (A) allowed the claim, but the Tribunal reversed this decision, citing the prohibition under the Solvent Order, 2000, and the explanation to Section 37 (1) of the Income Tax Act, which disallows expenditure for purposes prohibited by law.

The High Court upheld the Tribunal's decision, noting that the commission was paid for transferring contractual obligations, which were illegal without a license. The court emphasized that the payment of commission for an illegal purpose is not allowable under Section 37 (1). The court further noted that even though the sister concern had a license, the subsequent transactions by the appellant violated the Solvent Order, 2000. The court concluded that the disallowance was justified as the transaction contravened the law, and no valid claim for the commission was established.

2. Disallowance of Business Promotion Expenses of Rs. 1,65,172/-:

The appellant claimed Rs. 1,65,172/- as business promotion expenses for sending mangoes to a supplier company in Singapore. The CIT (A) allowed the claim, considering it necessary for maintaining good business relations. However, the Tribunal disallowed the claim, questioning the business purpose and the feasibility of consuming such a large quantity of mangoes. The Tribunal found no material evidence to support the business expediency of this expenditure.

The High Court agreed with the Tribunal's decision, emphasizing the lack of evidence to justify the business promotion claim. The court referred to a previous judgment in Sayaji Iron & Engineering Company v. CIT, which allowed expenses for directors' personal vehicle use as business expenditure. However, the court found no parallel in the present case, as no rationale or evidence supported the expenditure on mangoes. The court concluded that the claim was factually unsupported and dismissed the appeal on this ground.

Conclusion:

The High Court dismissed the tax appeal, upholding the Tribunal's decisions on both issues. The court found no substantial question of law and deemed the disallowances justified based on the facts and legal provisions involved.