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2010 Supreme(Kar) 848
High Court of Karnataka
THE HONOURABLE MR. JUSTICE N. KUMAR & THE HONOURABLE MR. JUSTICE H.S. KEMPANNA
M/s J.K. Panthaki & Co., Bangalore, Represented by its Partner, Neville Panthaki
Versus
Income Tax Officer (Inv), Circle-IV, Bangalore
I.T.A. No.213 of 2010 & I.T.A. No.214 of 2010
Decided on : 07-09-2010
For the Appellant:Udaya Holla, Senior Counsel for M/s. Holla and Holla, Advocate.
Headnote:
INCOME TAX - DEDUCTION - COMMISSION PAID TO DIRECTORS OF COMPANY - HELD, PAYMENT OF COMMISSION TO DIRECTORS OF COMPANY IS AN ILLEGAL GRATIFICATION AND NOT AN EXPENDITURE INCURRED FOR THE PURPOSE OF BUSINESS.
Fact of the Case:
The assessee, a registered firm of construction engineers and designers, claimed a deduction for commission paid to the directors of a company in order to secure a contract. The Income Tax Officer disallowed the deduction, holding that the commission was not a genuine business expense but rather an illegal gratification. The assessee appealed to the Commissioner of Appeals, who upheld the Income Tax Officer's order. The assessee then appealed to the Appellate Tribunal, which also dismissed the appeal. The assessee then filed an appeal to the High Court.
Finding of the Court:
The High Court held that the payment of commission to the directors of the company was an illegal gratification and not an expenditure incurred for the purpose of business. The Court noted that the commission was paid in order to secure a contract, and that the directors of the company had no role in the performance of the contract. The Court also noted that the commission was not disclosed in the assessee's accounts, and that the assessee had not provided any evidence to support the claim that the commission was a genuine business expense. The Court concluded that the Income Tax Officer was correct to disallow the deduction.
Issues: Whether the payment of commission to the directors of the company was an illegal gratification and not an expenditure incurred for the purpose of business.
Ratio Decidendi: The payment of commission to the directors of the company was an illegal gratification and not an expenditure incurred for the purpose of business because: * The commission was paid in order to secure a contract, and the directors of the company had no role in the performance of the contract. * The commission was not disclosed in the assessee's accounts. * The assessee had not provided any evidence to support the claim that the commission was a genuine business expense.
Final Decision: The High Court dismissed the assessee's appeal.
1. These two appeals arise out of the orders passed in respect of two assessment years 1983-84 and 1984-85. The question involved in both these appeals is one and the same and therefore, they are taken up for consideration together and disposed of by this common order.
2. The assessee is a Registered Firm of construction Engineers and Designers. On 29.9.1984, assessee filed a return admitting an income of Rs.4,00,000/-. On 30.1.1985 the assessee again filed a return disclosing an income of Rs.3,95,430/-. Another revised return was filed on 3.9.1986. In the interregnum between the filing of the return on 30.1.1985 and 3.9.1986, a search under section 132 was conducted in the assessee’s premises on 29.7.1986. The assessee’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 29.3.1982 for civil work for the aforesaid company to their architects Master and Associates, Bangalore. On 16.7.1982, the assessee was intimated about the allotment of the work. According 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 16.7.1982. At the relevant point of time, Sri. A.P. Mehta was the Chairman and his son Sri. Jairaj P. Mehta was the Managing Director. There were other relatives of Sri. Mehta in the Board.
3. On the date of search the assessee’s main partner Sri. J.K. Panthaki was questioned, inter-alia in respect of purchases of steel from M/s. Maneesh & Co., and M/s. Chimanlal R. Mehta. It was pointed out that there are no delivery or sales tax check post seals or evidence of lorry Numbers. Sri. Panthaki’s answer gave no indication of the bogus nature of bills. Later partner Sri. J.S. Dave of M/s. Ashok Trading Corporation and M/s. Maneesh & Co., purchased steel admitted in the sworn deposition that he did not supply any goods to the parties. On 8.8.1986, the two parties admitted in their petitions that they did not purchase steel but only obtained bills on payment of commission of 1% and in turn they issued bills without delivery of goods to Sri. J.K. Panthaki for a consideration of payment of commission at 3½% on the value of the sale bills. In the return that was filed on 30.1.1985, no claim for the above commission was made. Nor did the accounts indicate any cash balance representing the funds received back from the said suppliers. In the revised return filed on 3.9.1986 after the date of the search and after the department came into the possession of materials indubitably showing the bogus nature of purchases claimed as deduction in the original return, the assessee accepted that the goods were not delivered, the bills were havala bills only and transactions to the extent of Rs.45,84,815.62 were not made. However, it was claimed that the moneys involved in the aforesaid transaction represented commission agreed to be paid to Sri. A.C. Mehta and his group for awarding the contract. In paras-2 and 3 of the statement of facts, the assessee explained their stand as under:
“The aforesaid contract was awarded and the works started around August 1982. During the course of negotiations in connection with the awarding of the contract, there were some changes in the structural designs of the building which resulted in a cost reduction of around Rs.48 lakhs compared to the original estimates recommended by the Architects. The Directors of the KBBC Ltd., Viz., Mr. A.P. Mehta (Chairman of KBBC Ltd.), Mr. Jayaraj P. Mehta (Managing Director of KBBC Ltd.,) and other relative 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 ag
