In Rampur Arvind v. ACIT, the ITAT, Bengaluru bench held that secret commission/ incentives paid to executives of business houses by the assessee for the purpose of business promotion are rightly treated as “bribe” by the assessing officer.
Dismissing a second appeal filed by the assessee, the bench clarified that deduction under section 37 of the Income Tax Act is not available to such payments in the absence of primary details and documentary evidence.
Assessee, a civil contractor, earns income from taking apartments on lease from their owners and let them out as service apartments. During the year under consideration, assessee had incurred expenses by way of commission or incentive to the Executives of the business houses to get the business from the business houses and claimed deduction of this expenditure under Section 37 of the Income Tax Act. Assessing Officer characterized the same as bribe and disallowed the same.
On appeal, the appellant-assessee maintained that the payment is made to higher officers in the Human Resources Department to ensure that these people extend the business to the appellant. He claimed that the amount is incurred wholly and exclusively for the conduct of the business. The assessee vehemently contended that the payment is at best a secret commission and it is not prohibited by any law to constitute a bribe to warrant disallowance under section 37(1) of the Income Tax Act.
The bench noted that an expenditure is deductible under section 37 of the Income Tax Act if it satisfies the following three conditions, i.e, Firstly, it must be an expenditure in the nature of revenue expenditure and not in the nature of capital expenditure. Secondly, it must be laid out or expended wholly and exclusively for the purpose of the business or profession. Lastly, it must not be of the nature described in sections 30 to 36 and section 80W (which is enforced with effect from 1/4/1976).
The bench placed reliance on the Kerala High Court decision in the case of Ram Bahadur Thakur v. CIT, wherein the Court laid down certain principles to allow a particulare expenditure under section 37.
Relying on the said decision, the bench said that as per the above decision, the onus of proving that the expenditure claimed is permissible as a deduction is on the assessee. “In the present case, admittedly, no evidence is in the possession of the appellant for the deduction claim. The appellant has not furnished the basic information i.e. name and address of the party to whom the alleged commission was paid, date and mode of payments, etc. neither during the course of assessment proceedings nor during the appellate proceedings. In the absence of these primary details and also documentary evidence, I am constrained to uphold the AO’s act ion. Therefore, the disallowance of Rs. 53,48,852/- is confirmed.”
Read the full text of the Order below.
