2015 (7) TMI 296 - HC - Income Tax

Disallowance of expenditure - ITAT held Payment was not illegal expenditure and was a regular business expenditure - assessee was assured of 28% commission for doing liaisoning work to get the contract in favour of M/s Pharma Ventures International Private Limited. In turn, the respondent assessee paid 13% commission to M/s K.P. Steel Products (P) Ltd. for getting the contact and it is in such circumstances, the amount was claimed as revenue expenditure.- Held that - Undoubtedly, under Section 37 of the Act, with a view to prevent claim of revenue expenditure which is inter alia prohibited by any law, the explanation has come into effect from 01.04.1962. As far as this case is concerned, the payment of the commission by the respondent assessee, who had entered into a contract with the M/s Pharma Ventures International Private Limited, apparently to liaison and, thereby, ending up paying commission to M/s K.P. Steel Products (P) Ltd., by which, the parties, apparently, succeeded in getting a contract awarded in favour of M/s Pharma Ventures International Private Limited. It cannot be found faulted with in the context of the explanation as being one which is prohibited by any law; no law has been bought to our notice also by the learned counsel for the Revenue prohibiting the kind of activities, which the respondent assessee indulged in. The only obstacle in the path of the respondent assessee claiming it as revenue expenditure is the premise that it is illegal. As already noted, we have not been shown any law, under which, the commission paid was prohibited. In the light of this, we would think that the view taken by the Tribunal is justified and we answer the question of law against the appellant. - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of Section 37 of the Income Tax Act regarding the deductibility of expenses.
2. Legitimacy of commission payments made for liaisoning work.
3. Determination of whether the commission payment was illegal expenditure or regular business expenditure.

Analysis:
1. The appeal raised the issue of whether the ITAT was correct in considering the payment as a regular business expenditure despite the allegation that unfair means were used to secure the contract. The appellant argued that the commission paid to secure the contract should not be considered a legitimate business expense due to the alleged use of contacts in the Government to influence the contract award.

2. The factual background revealed that the appellant company was appointed as a liaisoning agent by M/s Pharma Ventures to secure a contract for supplying cotton bandages from the Ministry of Health. The appellant, in turn, appointed M/s K.P. Steels as another liaisoning agent and paid them a commission for their services. The Ministry awarded the contract to M/s Pharma Ventures, leading to the commission payments.

3. The Assessing Officer and the Addl. CIT contended that using contacts to obtain the contract constituted an illegal activity, and expenses related to illegal activities could not be allowed as deductions. However, the Commissioner (Appeals) and the Tribunal disagreed, stating that liaison work does not amount to illegal activity and that payments made for such services are considered legitimate business expenditures.

4. The High Court, after hearing arguments from the Revenue's counsel, emphasized that for an expense to be disallowed under Section 37 of the Act, it must be prohibited by law. In this case, no law was presented to show that the commission payments for liaisoning work were illegal. Therefore, the High Court upheld the Tribunal's decision, ruling in favor of the respondent assessee and dismissing the appeal.

5. The judgment concluded that the commission payments made by the respondent assessee for liaisoning work were not illegal expenditures and could be considered regular business expenses. As there was no law prohibiting such payments, the High Court affirmed the Tribunal's decision and dismissed the appeal, with no order as to costs.