Commissioner of Income Tax, Dehradun vs Tehri Steel Ltd.

K.M. Joseph, C.J—The substantial question of law, which is projected in this Appeal under Section 260A of the Income Tax Act (hereinafter referred to as ''the Act'') reads as follows:

"Whether the ITAT was correct in holding that the payment was not illegal expenditure and was a regular business expenditure inspite of the admitted fact that K.P. Steel Products Ltd. had used its contacts in the Government to ensure that the contract was awarded to the assessee''s principal, thereby suggesting that unfair means had been used for procuring the contract and the Commission had been paid for an unlawful purpose?"

The factual position would appear to be brought out in the Appeal memorandum of the appellant as follows:

"3. Because the assessee filed an appeal before the Ld. CIT(A), Dehradun. The Ld. CIT (A) allowed the appeal of the assessee and held that "I have gone through the order of the AO and the submissions of the AR very carefully. According to the appellant, M/s. Pharma Ventures approached the appellant company in helping M/s. Pharma Ventures in getting the contract from the Ministry of Health. M/s. Pharma Ventures vide its letter dated 12/08/2001 appointed M/s. Tehri Steels Ltd., the appellant as the authorized liasioning agent to pursue its case in the tender of supplying of cotton bandages floated by Ministry of Health and Family Welfare through Hindustan Latex Ltd. with following terms and conditions:-

You shall purchase the above tender documents in our name.

Assisting in preparation of bid.

Shall attend tender opening.

Day to day follow-up on our behalf and intimating us the progress, arranging good share of business for us and other connected services till the order is finalized.

Help us in getting the inspection, release of dispatch clearance and collection of payments etc.

COMMISSION

As discussed and agreed, we shall pay you a commission @ 28% of the total order value. The commission shall be payable only after receipt the award of contract, supply of goods and collection of payments.

3.4. M/s. K.P. Steel vide their letter dated 14/08/2001 approached the appellant with the offer that because of the very good contacts in the Ministry of Health and Family Welfare, M/s. K.P. Steels was in a position of getting the order in favour of M/s. Pharma Ventures. M/s. Tehri Steels vide their letter dated 25/08/2001 appointed M/s. K.P. Steels as authorized liaisoning agent to look after the interest of M/s. Pharma Ventures on the following terms and conditions:-

i) M/s. K.P. Steels shall purchase the tender documents in M/s. Pharma Ventures name.

ii) Assist in preparation of bid.

iii) Attend tender meeting.

iv) Will do day to day follow up on behalf of M/s. Pharma Ventures till the order is finalized.

v) Help the appellant in getting the inspection, release of dispatch clearance and collection payments.

COMMISSION

As discussed and agreed, we shall pay you a commission @ 13% of the total order value. The commission shall be payable only after receipt the award of contract, supply of goods and collection of payments.

3.5 As can be seen from above, M/s. Tehri Steels Ltd. Appointed M/s. K.P. Steels as their authorized liaisoning agent on the same terms and conditions mentioned above except that the commission payable to M/s. K.P. Steels was to be 13% of the total value of the order. Finally, Ministry of Health and Family Welfare gave a supply order vide its order dated 26/04/2002 to M/s. Pharma Ventures for supplying 78189 packs of cotton bandages @ Rs. 288/- per unit and another order for supply of 55285 unit packs also @ Rs. 288/-. The total value of the first order was Rs. 2,25,18,432/- and the value of the second order was Rs. 1,59,22,080/-. The appellant received commission of Rs. 1,07,63,343/- @ 28% and credited the same by way of journal entry in the commission account The appellant also debited Rs. 49,97,266/- in the name of M/s. K.P. Steels also by journal entry. The appellant received the total amount of commission by cheques as under:-

The appellant, in turn, paid commission of Rs. 49,97,266/- as under:-

Amount of Rs. 18,44,791/- has been shown as payable to M/s. K.P. Steels as on 31/03/2003.

3.6 The AO and the Addl. CIT have held that using ''contacts'' to obtain the contract is an illegal activity and expenses on illegal activity cannot be allowed as deduction. There is no merit in the observation made by the A.O. Liasion work cannot be said to be an illegal activity. Illegal activity is one which is prohibited by law. There is no infraction of any law and payments made for liaison work are considered legitimate business expenditure. Coming to the merits of the case, there can be, in my opinion, three possibilities, taking into account the entire facts and circumstances of the case."

Thus, in short, the respondent assessee was assured of 28% commission for doing liaisoning work to get the contract in favour of M/s. Pharma Ventures International Private Limited. In turn, the respondent assessee paid 13% commission to M/s. K.P. Steel Products (P) Ltd. for getting the contact and it is in such circumstances, the amount was claimed as revenue expenditure. The Assessing Officer took the view that the ''contacts'' to obtain the contract was an illegal activity and expenses on illegal activities could not be allowed as deduction drawing support from the explanation of Section 37 of the Act, but the Commissioner (Appeals) overturned the decision of the Assessing Officer. The said view of the Appellate Authority was affirmed by the Tribunal in the Appeal filed by the Revenue and the Tribunal took the view that the activity of entering into a contract paying commission was not one, which is prohibited by any law and hence the Appeal.

Though the notice was issued and served, there is no appearance for the respondent assessee.

We heard Sri H.M. Bhatia, learned counsel for the Revenue.

Learned counsel for the Revenue would refer to the facts and press the substantial question of law. Undoubtedly, under Section 37 of the Act, with a view to prevent claim of revenue expenditure which is inter alia prohibited by any law, the explanation has come into effect from 01.04.1962. As far as this case is concerned, the payment of the commission by the respondent assessee, who had entered into a contract with the M/s. Pharma Ventures International Private Limited, apparently to liaison and, thereby, ending up paying commission to M/s. K.P. Steel Products (P) Ltd., by which, the parties, apparently, succeeded in getting a contract awarded in favour of M/s. Pharma Ventures International Private Limited. It cannot be found faulted with in the context of the explanation as being one which is prohibited by any law; no law has been bought to our notice also by the learned counsel for the Revenue prohibiting the kind of activities, which the respondent assessee indulged in. The only obstacle in the path of the respondent assessee claiming it as revenue expenditure is the premise that it is illegal. As already noted, we have not been shown any law, under which, the commission paid was prohibited. In the light of this, we would think that the view taken by the Tribunal is justified and we answer the question of law against the appellant.

Consequently, the Appeal will stand dismissed. No order as to costs.