2010 (2) TMI 176 - HC - Income Tax

Business Expenditure- The assessee in his return for the assessment year 1992-93, claimed deduction of a sum of Rs. 86,000 paid to the local police and local gundas towards the maintenance of the theatre run by the assessee. The Assessing Officer disallowed the deduction but the Tribunal allowed deduction of Rs. 50,000. Held that- allowing the appeal, that the payment had been made to the police and rowdies to keep away from the business premises, which payments were illegal. Such illegal payment were not deductible.

Summary

Issues:
- Allowability of payment made to local police and rowdies as a business expenditure.

Analysis:
The High Court of Karnataka, in the case at hand, was presented with the issue of whether the payment made by the assessee to local police and rowdies could be considered an allowable business expenditure. The court noted that the assessee had claimed an expenditure of Rs. 86,000 for payments made to maintain two cinema theatres, Vinayaka Touring Talkies and Sri Krishna Theatre. The Assessing Officer disallowed this expenditure, a decision upheld by the Commissioner of Income-tax (Appeals). Subsequently, the Income-tax Appellate Tribunal partially allowed the appeal, permitting a deduction of Rs. 50,000 out of the claimed amount.

Upon deliberation, the court emphasized that if payments were made for security purposes related to the business, they would qualify as allowable deductions. However, in this case, the payments were made to the police and rowdies to keep them away from the business premises, which the court deemed illegal. The court highlighted that payments made to the police illegally constituted bribery and were not permissible as deductions. Similarly, payments made to rowdies as a precautionary measure to prevent disturbances were also considered illegal and non-deductible. The court concluded that the payments in question were not legitimate security expenses and, therefore, could not be allowed as business expenditures.

In light of the above analysis, the court ruled in favor of the Revenue and against the assessee. Consequently, the court set aside the order of the Income-tax Appellate Tribunal and reinstated the orders of the Assessing Officer and the Commissioner of Income-tax (Appeals). The judgment underscored the importance of legitimate business expenses and the disallowance of payments made illegally, such as those to the police and rowdies in this case, as deductible expenditures.