The recent amendment to Section 37 of the Income Tax Act clarified that no allowance shall be made in respect of expenditure incurred for any purpose which is an offence or prohibited by law, resulting in disallowance of certain claims for business expenditure.

JUDGMENT :

R.K. Patra, J. - On being moved u/s 256(1) of the Income Tax Act, 1961, by the assessee, the Income Tax Appellate Tribunal has referred the following questions of law arising out of its order dated July 26, 1993, in I. T. A. No. 404/CTK of 1989 for our opinion :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the secret commission paid by the assessee amounting to Rs. 1,14,450 was not an allowable deduction u/s 37(1) of the Income Tax Act ?

(2) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the secret commission paid by the assessee in order to procure business was based on relevant evidence, or has been arrived at by ignoring or misreading relevant evidence or based on partly relevant and partly irrelevant evidence or otherwise perverse, illogical and unreasonable ?"

2. As both the questions are interrelated, we have framed the question as follows :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in disallowing the secret commission alleged to have been paid by the assessee to persons whose names it could not disclose or evidence of any such payment was not adduced ?"

3. The facts of the case may be briefly stated :

The assessee is a partnership firm deriving income from manufacture and sale of tarpaulin to various departments of the State Government, State Government undertakings, semi Government bodies like municipalities, N. A. Cs. and also to the Central Government Departments. During the assessment year 1987-88, its sale amounted to Rs. 9,59,576.14 against which an expenditure of Rs. 1,14,467.59 was claimed under the head "Agent commission". On being asked to explain the claim, the assessee submitted that there was keen competition in the open market for such products and the commission was paid to different agents which was absolutely necessary in the interest of business as it was not possible to push up the sales without making such payments. In support of such claim, the assessee produced vouchers. The Assessing Officer on an examination found them to be self-made. He also required the assessee to furnish names and addresses of the agents and also to co-relate the payment of commission in each case with the sale. The assessee came forward to state that in the interest of business it was not possible to disclose the identities of the agents. It also expressed its inability to co-relate the payments with the orders procured or sales effected. In view of this, the Assessing Officer did not accept the claim of the assessee that the payments on account of commission to the agents were for business purpose and accordingly disallowed the claim as inadmissible. The assessee appealed to the Commissioner of Income Tax (Appeals), but without success. Undaunted with the dismissal of the appeal, the assessee moved the Tribunal in second appeal. The Tribunal declined to interfere with the matter and confirmed the orders appealed against.

4. Shri S. N. Ratho relying on the judgments of the Bombay High Court in Goodlas Nerolac Prints Ltd. Vs. Commissioner of Income Tax, Bombay City-II, ; Commissioner of Income Tax Vs. Goodlass Nerolac Paints Ltd., and Commissioner of Income Tax Vs. Sigma Paints Ltd., contended that in the commercial circles payment of secret commission is recognised as a matter of practice and accordingly the amount claimed by the assessee as payment towards commission of the agents is an allowable deduction within the meaning of Section 37(1) of the Income Tax Act, 1961.

5. Learned counsel for the Revenue, on the other hand, submitted that no judicial notice can be taken of such substandard morality on the part of the assessee.

6. We need not examine the rival contentions in view of the recent amendment made to Section 37 of the Act as per Section 15 of the Finance (No. 2) Act, 1998, which was brought to our notice by Mr. Ratho fairly. By the aforesaid amendment,