2012 (6) TMI 615 - HC - Income Tax

Expenditure - illegal gratification commission paid to directors for awarding construction contract In the revised return filed by the assessee the said commission was shown under commission account - seizure of books of account by the Department Income-tax Officer disallowed the said claim for commission Held that - expenditure incurred in such immoral acts cannot be construed as expenditure incurred for the purpose of profits and gains of business or profession and the benefit of deduction or allowance under Parliamentary legislation cannot be extended to such persons or to such expenditure - commission not deductible under section 37 of the Act - appeals are dismissed.

Issues Involved:
1. Validity of the revised return filed by the assessee.
2. Deductibility of commission payments claimed by the assessee.
3. Applicability of Section 37 of the Income-tax Act.
4. Legal and moral implications of the payments made by the assessee.

Detailed Analysis:

1. Validity of the Revised Return Filed by the Assessee:
The assessee, a registered firm of construction engineers and designers, filed multiple returns for the assessment years 1983-84 and 1984-85. Initially, a return was filed on January 30, 1985, disclosing an income of Rs. 3,95,430. Subsequently, a revised return was filed on September 3, 1986, after a search under section 132 was conducted on July 29, 1986. The Income-tax Officer refused to take cognizance of the revised return, deeming the changes as not bona fide omissions or errors. Consequently, the revised return was not treated as valid under section 139(5) of the Act.

2. Deductibility of Commission Payments Claimed by the Assessee:
The assessee claimed that the commission payments were made to the directors of Karnataka Ball Bearings Corporation Ltd. (KBBC Ltd.) for awarding the construction contract. The payments were initially shown under materials account and later revised to commission account without changing the income returned. The Income-tax Officer disallowed the commission claim of Rs. 45,84,851, which was upheld by the appellate authority and the Appellate Tribunal. The Tribunal concluded that such payments, even if disclosed, cannot be allowed as they induce unethical business practices and abet breach of trust by the directors of the recipient company.

3. Applicability of Section 37 of the Income-tax Act:
Section 37(1) allows deductions for any expenditure laid out wholly and exclusively for the purposes of the business, provided it is not capital expenditure or personal expenses. The Explanation to Section 37 disallows any expenditure incurred for purposes that constitute an offence or are prohibited by law. The assessee argued that the payments were made for commercial expediency and should be deductible. However, the court emphasized that the payments were not for any services rendered but were essentially kickbacks or bribes, which are prohibited by law and thus not deductible under Section 37.

4. Legal and Moral Implications of the Payments Made by the Assessee:
The court highlighted that the payments made by the assessee were not genuine commissions but were intended to siphon off money belonging to the company. Such payments are deemed illegal gratification and are contrary to public policy. The court referenced various judgments to support the view that payments tainted with illegality cannot be treated as business expenses. The doctrine of pari delicto (equal fault) was cited, indicating that courts will not assist in enforcing illegal agreements. The court concluded that such immoral and illegal acts cannot be granted the benefit of deduction or allowance under the Income-tax Act.

Conclusion:
The appeals were dismissed, affirming that the payments made by the assessee were illegal and immoral, and thus not deductible under Section 37 of the Income-tax Act. The court emphasized the importance of upholding legal and moral standards in business practices.

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