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TMI Blog2012 (6) TMI 615X X X X Extracts X X X X X X X X Extracts X X X X ..... der. 2. The assessee is a registered firm of construction engineers and designers. On September 29, 1984, the assessee filed a return admitting an income of Rs. 4 lakhs. On January 30, 1985, the assessee again filed a return disclosing an income of Rs. 3,95,430. Another revised return was filed on September 3, 1986, In the interregnum between the filing of the return, on January 30, 1985, and September 3, 1986, a search under section 132 was conducted in the assessee's premises on July 29, 1986. The asses- see's main income during the year is from the contract receipts for civil construction from M/s. Karnataka Ball Bearings Corporation Ltd. The material on record disclose that the assessee submitted a tender for Rs.1,28,18,413 dated March 29, 1982, for civil work for the aforesaid com- pany to their architects, Master and Associates, Bangalore. On July 16, 1982, the assessee was intimated about the allotment of the work. Accord- ing to the assessee, the work commenced in August whereas the Income- tax Officer refers to the assessee's own letter wherefrom it could be detected that the commencement of work is on July 16, 1982. At the relevant point of time, Sri A. P. Mehta was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative directors of the chairman have insisted our managing partner, Mr. J. K. Panthaki, to pay such cost reduction of Rs. 48 lakhs as commission to them in consideration of awarding the construction contract of KBBC Ltd., to the assessee. Further, as per the mutual oral agreement, the said commission of Rs. 48 lakhs has to be remitted to A. P. Mehtas and group in cash and it has to he removed from the books of account of the assessee during the finan- cial years ended March 31, 1983, and March 31, 1984. Initially, A. P. Mehta and group were refusing to acknowledge any commission due or cash receipts. Therefore, it was mutually decided to remove the said commission from the books of account during the aforesaid financial years by debiting materials accounts in the form of fictitious steel bills procured from Chimanlal R. Mehta and Manish and Co. The commission of around three-and-half per cent. payable to Chimanlal R. Mehta and Manish and Co. for procurement of such fic- titious steel bills was borne by A. P. Mehta and group and the asses- see was remitting such commission to the said steel bill suppliers on behalf of A. P. Mehta and group. In the original return filed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though the construction of the factory building as per the revised structural design results in cost reduction of Rs. 48 lakhs. This cost reduction has to be paid by M/s. J. K. Panthaki and Co. as commission in cash to Mr. A. P. Mehta and other family members for awarding the construction contract of M/s. Karnataka Ball Bearings Ltd. The said commission is to be withdrawn from the books of account of M/s. J. K. Panthaki and Co. during the finan- cial years ended March 31, 1983, and March 31, 1984. The time, mode, quantum and place of remittance is left to be decided by Mr. J. K. Panthaki and Mr. A. P. Mehta on behalf of other partners. Remittance is in the following manner : Mr. A. P. Mehta, Rs. 13.80 lakhs ; Mr. Jayaraj A. Mehta, Rs. 12.85 lakhs ; Mrs. Prabhavathi A. Mehta, Rs 7.5 lakhs ; Mrs. Susheela J. Mehta, Rs. 9.75 lakhs and Miss. Raksha A. Mehta, Rs. 4.45 lakhs. Thus, there is a first oral agreement confirmed by the minutes dated January 2, 1987. 5. The appellate authority, after carefully considering the case of the asses- see and scrutinizing the documents produced, upheld the order of the Income-tax Officer in disallowing the deduction of the said commission paid. Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the per- son to whom the commission is paid has declared the same in his return and paid income-tax and, therefore, it is an expenditure under section 37 of the Act and he is entitled to deduction. Section 37 of the Act reads as under : 8. "37. General.-(1) Any expenditure (not being expenditure of the nature described, in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended, wholly and exclusively for the purposes of the business or profession shall be allowed, in computing the income chargeable under the head 'Profits and gains of business or profession'. Explanation.-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred, for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits of the business. It must be a com- mercial loss and in its nature must be contemplable as such. The mere fact that the assessee establishes the existence of an agreement between him and his agents and the fact of actual payment, the discretion of the Income-tax Officer to consider whether the expenditure was made exclu- sively for the purpose of the business is not taken away. 11. The expenditure incurred must be for commercial expediency. In applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of busi- ness. The expenditure may not have been incurred under any legal obli- gation, but yet it is allowable as a business expenditure, if it was incurred on the grounds of commercial expediency. 12. The apex court in the case of S. A. Builders Ltd. v. CIT (Appeals) reported in [2007] 288 ITR 1 (SC) held, at para 26 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P. Ramanatha Aiyar as under : "In Commercial law, commission is a compensation to a factor or other agent for services to be rendered in making a sale or otherwise ; a sum allowed, as compensation to a servant factor or agent who manages the affairs of others, in recompense for his services. It is an allowance, recompense or reward, made to agents, factors, brokers and others for effecting sales or carrying out business transactions. It is generally calculated, as a certain percentage on the amount of the transaction or on the profit to the principals." 16. In Blacks Law Dictionary, sixth edition, the word "commission" has been defined as under : "The recompense, compensation or reward of an agent, salesman executor, trustee, receiver, factor, broker, or bailee, when the same is calculated as a percentage on the amount of his transactions or on the profit to the principal." 17. The word "commission" is used occasionally to mean "discount". What is called "commission", is a percentage deducted in the case of goods which are consigned the ordinary invoice price. It is in the nature of com- pensation paid to a person who has rendered service instead of payin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m money has been paid by mistake must repay or return it. The doctrine of unjust enrichment is attracted. Therefore, what is repaid by the assessee cannot be construed as commission at all, as contended by him. It is a case of return of the advantage which he obtained under the contract, to the person who is lawfully entitled to the same. Instead of restoring the advantage to the company which paid him the amount, he has repaid the said amount to the directors of the company. The said payment is not made for any services rendered by them. Therefore, the said amount can- not be construed as commission or expenditure incurred under section 37 of the Act so as to be eligible for being deducted in arriving at income of the assessee under the head "Profits and gains of business or profession" because it is not an expenditure laid out or expended fully and exclusively for the purpose of business. 20. Yet another way of looking at things is, there is a clear case of collusion between the directors of the company and the assessee. In the tender which is floated, they have submitted prices which are higher than the normal price. Accordingly, the payment is made. After awarding the contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade thereunder before we can come to the conclusion that the appellant was liable to assessment as contended by the sales tax authorities. 24. Reliance was placed on the judgment of the Madras High Court in the case of CIT v. Coimbatore Salem Transport (Private) Limited reported in [1966] 61 ITR 480 (Mad) wherein, the Madras High Court dealing with the question as to whether the payment of tips or presents and mamools are illegal or allowable deduction, has held as under (headnote) : "It upheld the order of the Tribunal which has held that the expenditure was inevitable if the assessee had to run its business, that they were 'greases to run the bus business smoothly' and since in the very nature of the expenditure there could be no documentary evi- dence, the amounts claimed to have been expended, were reasonable having regard to the large collection and the income returned and hence allowable. With regard to the resolution allowing the manager and cashier to receive the commissions or rebates and sale proceeds of tyres, the Tribunal interpreted the resolution as one enhancing the salary of the manager and cashier . . . Though tips may be improper, they were not illegal and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not on one's own moral views. Law is different from morality, as the positivist jurists Bentham and Austin pointed out." 29. Dr. T. A. Quereshi, the assessee claims that since the heroin seized from him forms part of his stock-in-trade hence its loss on account of seizure is an allowable deduction while computing his profits and gains of business/ profession. The High Court wrongly applied section 37 to the facts of the said case and the deduction was not allowed. It is in that context, the Supreme Court held that the High Court has adopted emotional and moral approach rather than a legal approach. In fact, in paragraph 18 of the said judgment, the Supreme Court has categorically stated that the Explanation to section 37 has really nothing to do with the present case as it is not a case of business expenditure, but of business loss. Business losses are allowable on ordinary commercial principles in computing profits. There- fore, the said judgment has no application to the facts of the case as in the instant case, the assessee is not claiming deduction as business loss, he is claiming deduction as business expenditure, which is not permissible in law. 30. It is true that c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y statute for the purpose of preventing something from being done on some ground of public policy, the thing prohibited, if done, will be treated as void even though the penalty, if imposed, is not enforceable. 33. The Delhi High Court in the case of Virender Singh v. Laxmi Narain reported in [2007] AIR 2007 (NOC) Delhi 2039 has held as under : "11. The doctrine or rule of pari delicto is the embodiment of the principle that the courts will refuse to enforce an illegal agreement at the instance of a person who is himself a party to an illegality or fraud. As per Blacks' Law Dictionary (fifth edition), the maxim-pari delicto portior est conditio possidentis (defendentis) means : 'in a case of equal or mutual fault (between two parties) the con- dition of the party in possession (or defending) is the better one. Where each party is equally in fault the law favours him who is actu- ally in possession. Where the fault is mutual the law will leave the case as it finds it. In Herbert Broom's "A Selection of Legal Maxims (10th edition) the maxim is explained as follows : "The maxim, in pari delicto portior est conditio possidentis, is as thoroughly settled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... launched against him for an infraction of the law can- not be called commercial losses incurred by an assessee in carrying on his business. Infraction of the law is not a normal incident of business and, therefore, only such disbursements can be deducted as are really incidental to the business itself. They cannot be deducted if they fall on the assessee in some character other than that of a trader. There- fore, where a penalty is incurred for the contravention of any specific statutory provision, it cannot be said to be a commercial loss falling on the assessee as a trader the test being that the expenses which are for the purpose of enabling a person to carry on trade for making profits in the business are permitted but not if they are merely connected with the business. It was argued that unless the penalty is of a nature which is per- sonal to the assessee and if it is merely ordered against the goods imported it is an allowable deduction. That, in our opinion, is an erro- neous distinction because disbursement is deductible only if it falls within section 10(2)(xv) of the Income-tax Act and no such deduction can be made unless it falls within the test laid down in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y incomprehensible how such a contract would not fall directly within the ambit of the first part of section 23 of the Indian Contract Act which deals with consideration or object of an agreement which is forbidden by law. Such consideration or object would be unlawful according to the pro- visions of that section and the agreement would consequently be void. The High Court did not decide the point whether the contracts which contravened the provisions of section 15(4) of the Act were illegal. It did not consider it material to decide whether the impugned contracts were illegal. In its opinion what was material was that the impugned contracts had been entered into unlawfully and the ques- tion was whether the loss sustained in the unlawful business could be taken into account in computing the business income of the assessee. We consider that the first question which was referred to the High Court stands concluded by the law laid down by this court in Sunder Lal and Son v. Bharat Handicrafts P. Ltd. [1968] 1 SCR 608 ; AIR 1968 SC 406. It was laid down that the prohibition imposed by sec- tion 15(4) of the Act was not imposed in the interest of the Revenue. That provision was conceiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act of 1922, and a penalty cannot be regarded as an expenditure wholly and exclusively laid for the purpose of the business. Moreover, disburse- ment or expenses of a trader is something 'which comes out of his pocket. A loss is something different. That is not a thing which he expends or disburses. That is a thing which comes upon him ab extra' (Finlay J. in Allen v. Farquharson Brothers and Co. [1932] 17 TC 59 (KB)). If the business is illegal neither the profits earned nor the losses incurred would be enforceable in law. But, that does not take the profits out of the taxing statute. Similarly, the taint of illegality of the business cannot detract from the losses being taken into account for computation of the amount which can be subjected to tax as 'profits' under section 10(1) of the Act of 1922. The tax collector cannot be heard to say that he will bring the gross receipts to tax. He can only tax profits of a trade or business. That cannot be done without deducting the losses and the legitimate expenses of the business. We concur in the view of the High Court that for the purpose of section 10(1) the losses which have actually been incurred in carrying on a particular i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid for the purpose of the business. 39. If the business is illegal neither the profits earned nor the losses incurred would be enforceable in law. But, that does not take the profits out of the taxing statute. Similarly, the taint of illegality of the business cannot detract from the losses being taken into account for computation of the amount which can be subjected to tax as "profits". Only profits of a trade or busi- ness can he taxed. That cannot be done without deducting the losses and the legitimate expenses of the business. The losses which have actually been incurred in carrying on a particular illegal business must he deducted before the true figure relating to profits which have to be brought to tax can be computed or determined. The distinction between an infraction of the law committed in the carrying on of a lawful business, and an infraction of the law committed in a business inherently unlawful, and constituting a normal incident of it has to be kept in mind. Not every immoral act is criminal, it is an abuse of the process of a court, to attempt to create a new crime in order to compel men to conform to a high standard of probity in business dealings or to forc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involves or implies injury to the person or property of another ; or the court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or con- sideration is unlawful is void." 43. Therefore, it is clear that the consideration or object of an agreement is lawful, unless the court regards it as immoral or opposed to public policy. If the consideration or object of an agreement is unlawful, then the said agreement is void. Then the said agreement is not enforceable by law. Illustration (J) to section 23 brings home the point explicitly, where it is stated as under : "(J) A, who is B's Mukhtar, promises to exercise his influence, as such, with D in favour of C, and C promises to pay 1,000 rupees to A. The agreement is void because it is immoral." 44. Therefore, under the Indian law, an agreement to pay illegal gratification is expressly declared as immoral and consequently such an agreement is void and not enforceable. It is not the judge or the court which is declaring such act as immoral. The law declares it as immoral. Though la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where these illegal acts have been accepted as a normal practice and the attempt to prevent, let alone eradicate corruption, is beyond reach. If the courts were to accord their approval to such transactions, that would be the end of the rule of law and amounts to upholding immoral actions by law courts. Such an action get credibility and respect and it will be perpetuated with the support of the court orders. When receipt of bribe and payment of bribe by public servants is held to be an offence and Parliament has passed legislation for preventing the same, merely because those laws are not applicable to private persons, it cannot be said that it is moral. Receiving or paying bribe is a crime, persons indulging in the same cannot be protected by law courts. The courts cannot extend their aid to uphold such transactions. In that view of the matter, even if it is not an offence as contended, certainly, it is immoral and it causes injury to public and, therefore, the 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 legislatio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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