If disallowance relating to Speed Money restricted to only 25% of expenditure, same is to be complied with even for Future Cases: ITAT [Read Order]

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The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) in DCIT vs. J.M. Baxi & Co., held that If disallowance relating to speed money has been restricted to only 25% of expenditure, same is to be complied with even for future cases.

In the instant case, during the assessment the Assessing Officer (A.O.) noted that the assessee had collected certain fees or service charges from its clients. A portion of this is spent for making payments to Port employees, and other such payments which are otherwise not sanctioned as per law. These amounts are neither credited nor debited in the profit and loss account but routed through the balance sheet. The assessee had disallowed Rs.82.27 Lacs, which is 25% of the expenditure on account of sundry expenses under section 37(1) of the Income Tax Act, 1961 and added the same which was not offered in the original return of income filed under section 139 of the Income Tax Act.

The AO found that such ‘sundries/sundry expenses/miscellaneous expenses’ do not have any supporting documents e.g. bills/invoices etc. and that these quotations and copy of invoices raised to clients do not suggest or do not even indicate that the assessee would incur or has incurred such illegal expenses/speed money payments on behalf of its clients and would claim the same. He also found that the assessee’s claim that its clients were aware of such speed money payments/illegal expenses was not based on any evidence and it was merely the assessee’s assumption.

The AO observed that there was no provision under the Act to partially allow any expenditure incurred by the assessee. Referring to section 37(1), the AO held that the expenditure incurred by the assessee should be wholly and exclusively for the purpose of business and should not be for the purpose which was an offence prohibited by law. The assessee has disallowed in its return of income only 25%, therefore, the AO made a disallowance of the balance 75%. Appeal was filed before the Commissioner of Income Tax (Appeals) (CIT(A)). The CIT(A) noted that in the assessee’s own case disallowance made by the A.O was restricted to 25% by an order of the Tribunal. The CIT(A), therefore, allowed the appeal and restricted the disallowance to 25%. Revenue appealed before the ITAT.

The bench comprising of Judicial Member C.N. Prasad & Accountant Member N.K. Pradhan found that the expenditure incurred by the assessee in the nature of ‘Speed Money’ was also the issue before the Tribunal in assessee’s own case for AY 1998-99 and from AY 2002-03 to AY 2009-10 and that for all these years the Tribunal had directed the AO to restrict the disallowance to 25% of such expenses.

“Facts being identical, we follow the order of the Co-ordinate Bench in the case of the assessee for the above assessment years and uphold the order of the Ld. CIT(A).” observed the Bench.

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