2002 (2) TMI 299 - AT - Income Tax

Summary

Issues Involved:
1. Sustaining the disallowance of 'secret commission' claimed by the assessee.
2. Applicability of trade practice for payment of secret commission.
3. Applicability of the principle of res judicata.
4. Genuineness and legality of the expenditure under Section 37(1) of the IT Act.
5. Applicability of Explanation to Section 37(1) regarding expenditures prohibited by law.

Detailed Analysis:

1. Sustaining the disallowance of 'secret commission' claimed by the assessee:
The assessee challenged the CIT(A)'s order which allowed only Rs. 2,82,200 out of Rs. 19,85,255 claimed as secret commission. The CIT(A) disallowed Rs. 17,03,055 on the grounds that the assessee failed to provide adequate evidence supporting the payment of secret commission. The assessee provided cash vouchers signed by the partner, lacking names, addresses, and signatures of recipients, and no receipts were obtained. The AO disallowed the entire amount, and the CIT(A) confirmed the disallowance to the extent of Rs. 17,03,055, allowing only 1% of the total sales as secret commission.

2. Applicability of trade practice for payment of secret commission:
The CIT(A) and Tribunal examined whether there was an accepted trade practice in the assessee's line of business for making such payments. The assessee failed to demonstrate that similar businesses made such payments. The Tribunal noted that the assessee did not provide evidence of other businesses in the same trade making similar payments, nor did it substantiate that the payments were made for business purposes.

3. Applicability of the principle of res judicata:
The assessee argued that the principle of res judicata should apply, as secret commission payments were allowed in previous years. However, the Tribunal held that each assessment year is independent, and the AO is entitled to scrutinize the claims for each year. The Tribunal emphasized that the principle of res judicata does not fully apply to tax proceedings, especially when new facts or higher quantum of claims are involved.

4. Genuineness and legality of the expenditure under Section 37(1) of the IT Act:
The Tribunal scrutinized the genuineness of the secret commission payments under Section 37(1). The assessee failed to provide satisfactory evidence, such as names and addresses of recipients or specific orders procured due to the commission. The Tribunal concluded that the self-serving cash vouchers lacked evidentiary value, and the assessee did not discharge the onus of proving the genuineness of the expenditure.

5. Applicability of Explanation to Section 37(1) regarding expenditures prohibited by law:
The Tribunal considered whether the secret commission payments violated the Explanation to Section 37(1), which disallows expenditures incurred for purposes that are an offence or prohibited by law. The Tribunal held that secret commissions paid to employees of customers without their employers' knowledge constituted a breach of trust and could be considered an offence under IPC Sections 408 and 409. Additionally, such payments were deemed immoral and against public policy under Section 23 of the Indian Contract Act. The Tribunal also noted that the payments violated provisions of the IT Act, such as Section 40A(3) and Section 194H, which mandate proper documentation and tax deduction at source for such payments.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to disallow Rs. 17,03,055 out of the claimed secret commission, concluding that the payments were not genuine business expenses and were prohibited by law. The appeal of the assessee was dismissed.