XL TELCOM PVT LTD V. COMMNER OF INCOMETAX HD

ITTA/38/2001

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The case involves XL Telecom Pvt. Ltd., the appellant, contesting a decision by the Tribunal which disallowed a claim for business expenses amounting to Rs.48,18,594 paid as sales commissions to agents. The initial disallowance by the Assessing Officer was overturned by the Commissioner of Income Tax (Appeals), but the Tribunal reinstated the disallowance, citing public policy and violation of rules for obtaining and executing orders from government agencies. The High Court found the Tribunal's reasoning vague and lacking specific legal basis, particularly regarding the prohibition of such expenditures by law or public policy.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 695666 (HC-HYDERABAD)
• Appeal Type: Others
• Pronouncement Date: 03-07-2013
• Assessment Year: misc
• Other Referred Cases: Sassoon J David & Co. Pvt. Ltd. vs. Commissioner of Income Tax [1979] 118 ITR 261
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Keywords: Business expenses; Disallowance; Income Tax; Public policy; Sales commission
• Section: 37(1); 260-A

Judgement Text

"THE HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTI SENGUPTA AND THE HON’BLE Ms. JUSTICE G. ROHINI I.T.T.A.No.38 of 2001 DATED: 3.7.2013 Between: XL Telecom Pvt. Ltd., Secunderabad. … Appellant And Commissioner of Income Tax, Hyderabad. … Respondent THE HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTI SENGUPTA AND THE HON’BLE Ms. JUSTICE G. ROHINI I.T.T.A.No.38 OF 2001 Judgment: (per the Hon’ble the Chief Justice Sri Kalyan Jyoti Sengupta) This appeal is directed against the judgment and order of the learned Tribunal dated 16.10.2000 in relation to assessment year 1990-91. However, substantial question of law was not formulated on the date of admission. In order to comply with the mandatory provision of Section 260-A of the Income Tax Act, 1961 (for short ‘the Act’), before proceeding to hear the appeal, we have formulated the following substantial question of law: 1) Whether on the facts and circumstances of the case, the appellate Tribunal was justified in restoring the disallowance of the expenditure towards sales commissions of Rs.48,18,594/- paid to sales agents in respect of the assessment year 1990-91 in terms of the Explanation to Section 37(1) of the Income Tax Act, 1961 and as being opposed to public policy and in violation of the rules for obtaining and executing orders from Government agencies and on the ground that no services were rendered by the sales agents ? The short facts of the case are that the assessee is claimed to have paid sales commission to M/s. Dalmia Udyog and M/s. Dalmia Brothers Pvt. Ltd. 1) M/s. Dalmia Udyog (Prop. Dalmia Industries Limited) : Rs. 11,62,223 2) M/s. Dalmia Bros. Pvt Ltd. : Rs .36,56,370 --------------------- Total: Rs.48,18,594 -------------------- The aforesaid payment of commission to the above selling agents was disallowed by the Assessing Officer. But, the Commissioner of Income Tax (Appeals) has reversed the same and allowed the claim for business expenses under Section 37 of the Act. The learned Tribunal, however, reversed the decision of the Commissioner of Income Tax (Appeals) and disallowed the claim for business expenses. Learned counsel for the appellant submits that the finding of the learned Tribunal was based on the fact that the aforesaid agents were engaged and payments were made and it was also accepted that the payments were made in connection with the service rendered by the agents for procuring orders. It was found from the data or information given that during the period of engagement of the aforesaid two agents the turn-over of the company had gone high and after their dis-engagement, the turnover went down drastically. Therefore, business expediency was there. He relied on the judgment of the Supreme Court in the case of Sassoon J David & Co. Pvt. Ltd., vs. Commissioner of Income Tax reported in [1979] 118 ITR 261 to establish that the appellant incurred business expenditure. Learned counsel submits that it is not for the Assessing Officer to examine whether there was business expediency or not. If the Explanation under Section 37(2) is correctly read, then it would appear that the business expenditure will not be allowed where it was found to be an offence and further which is prohibited by law, and element of public policy as held by the Tribunal is totally unheard of in the above provision. The learned Tribunal has gone wrong in resorting to the so-called public policy, and what is the public policy is not explained in the judgment. He also submits that what is the rule that prohibit this expenditure is also not explained and elaborated in the judgment. Therefore, the finding of the learned Tribunal that engaging the services of the agents is not in accordance with the rules and is against public policy is totally incorrect. Learned counsel for the respondent contends that the learned Tribunal has come to the conclusion that such engagement of agents is prohibited by the rules and rules means law and therefore it is covered by the explanation and the impugned order of the Tribunal does not require any interference. We have heard the learned counsel for the parties and examined the judgment of the learned Tribunal. The learned Tribunal’s finding to disallow the claim is based on the following reasoning: “Further, while inviting tenders and also while awarding tenders, the Government agencies, in accordance with their set procedure, prohibit the existence of middlemen and canvassing in any form for award of tenders, among others. Hence, by claiming to have to incur huge expenditure through the sales agents in question, and engaging their services for procuring orders etc., besides acting against the public policy, assessee has violated the rules for obtaining and executing the orders. Expenditure incurred in the course of such violation of rules (emphasis supplied) etc., is not allowable as deduction in the computation of income of the assessee, in terms of Explanation below Section 37(1).” It appears from the finding of the learned Tribunal that what is the rule which contemplated such prohibition, was not mentioned by the Tribunal. Further whether the rule is correct offshoot the substantive law or the procedural law is not clear. According to us, this finding is vague. The learned counsel for the appellant has rightly argued that in the explanation to Section 37(1), there is no mention of public policy and hence the finding of the Tribunal is totally unacceptable. It is the settled position of law that any interpretation of the provision should stick to the expression as used in the statute and there cannot be any purposive interpretation when provision of statute is interpreted. While interpreting explanation, we are of the view that in two cases, disallowance can be made, firstly, where the expenses incurred itself is an offence, for example; for giving any illegal gratification to any public servant for procuring any works is itself an offence and, secondly, if the law specifically prohibits engaging this sort of agent, then it comes within the purview of the explanation. The learned Tribunal has not made any specific finding in this direction. We, therefore set aside the judgment and order of the Tribunal. However, we remand the matter to the learned Tribunal to find out whether there is any law which prohibits this sort of engagement of agents for procuring business or not, and come to the finding accordingly. This exercise shall be completed within a period of three months from the date of communication of this order. No order as to costs. The appeal is accordingly allowed. ___________________ K.J. SENGUPTA, CJ _________________ G. ROHINI, J 03.07.2013 pnb "