2014 (11) TMI 507 - HC - Income Tax

Secret commission to promote business disallowed u/s 37(1) Genuineness and quantum of deductions - Held that - It is difficult to discern from it that a principle was laid to the effect that the secret commission as such cannot be paid at all, and if paid, cannot be deducted u/s 37 (1) of the Act - Some cloud on the meaning of the expression secret commission needs to be cleared - it may give an impression that the expenditure was incurred for undertaking some clandestine activities - The secret commission referred to in the orders of assessment or the subsequent judgments, is the amount, which is paid to certain individuals or agencies, that provide transport business to the respondent. The payment itself is not established and secondly it is not the case of the assessee before the assessing authority that the particulars of the persons to whom secret commission was paid could not be supplied without detriment to the business of the assessee having regard to the nature of the business of transport of cargo carried on by the assessee-company thus, the deduction cannot be claimed as a matter of course, and it can only be on complying with the two requirements as to the particulars of the amounts paid as commission are furnished transaction-wise and ultimately they are correlated to the turnover and the names of the recipients are (i) furnished in the returns or (ii) a plea is raised to the satisfaction of the Assessing Authority that the disclosure of the names of the recipients is detrimental to the interest of the assessee - Those two important factors have not been addressed by the Appellate Authority thus, the matter is to be remitted back for fresh consideration Decided in favour of revenue.

Summary

Issues:
1. Disallowance of deduction claimed under Section 37(1) of the Income Tax Act for secret commissions.
2. Interpretation of the term "secret commission" and its treatment as an allowable deduction.
3. Compliance requirements for claiming deductions related to secret commissions.

Analysis:
1. The appeal was filed by the Revenue against the order of the Income Tax Appellate Tribunal disallowing a deduction claimed by the respondent for secret commissions paid to promote its business for the assessment year 1988-89. The Tribunal had allowed the deduction based on previous orders in favor of the respondent. The appellant contended that secret commissions are not allowable deductions under the Act, citing a previous judgment. The respondent argued that the disallowance in the previous case was due to lack of particulars and not due to the nature of the expenditure.

2. The main dispute revolved around the nature of the secret commission claimed by the respondent and whether it qualifies as a deductible expense under Section 37(1) of the Act. The Assessing Officer and the appellant argued that such commissions are impermissible in law, while the respondent maintained that there is no prohibition on claiming them as deductions. The Tribunal and Commissioner allowed the deduction based on the availability of payment particulars and recipients' names, emphasizing compliance with disclosure requirements.

3. The High Court clarified that the term "secret commission" referred to payments made to individuals or agencies providing transport business, devoid of illegality or secrecy beyond that context. Citing a Bombay High Court judgment, the Court highlighted the importance of genuine payments for business purposes, even if the disclosure of recipients' names could be detrimental to the assessee's interest. The Court emphasized the need for furnishing transaction-wise payment details correlated to turnover and disclosing recipients' names to claim deductions successfully.

4. Ultimately, the High Court set aside the Tribunal and Commissioner's orders, remanding the matter for fresh consideration and disposal. The Court stressed the importance of complying with disclosure requirements for claiming deductions related to secret commissions, ensuring transparency in expenditure documentation. The judgment underscored the significance of providing necessary particulars and justifications to support deduction claims under Section 37(1) of the Income Tax Act.