Commissioner of Income Tax, Tamil Nadu-IV vs Arumugham Chettiar

Sethuraman, J.—In compliance with the direction of this court, the Appellate Tribunal has referred the following three question:

(1) Whether, on the fact and in the circumstances of the case, the Appellate Tribunal was right in holding that the alleged commissioner payments

were expenditure incurred by the assesses wholly and exclusively for his business and should be allowed as a deduction u/s 37 of the Income Tax

Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, there was any evidence before the Tribunal to come to the conclusion that the

payments of mamool were made by the assessee ?

(3) Whether the Appellate Tribunal''s allowance of deduction without verifying the genuineness of payment is sustainable in law ?

The assessee is a registered firm carrying on business as stevedoring contractors to M/s. Scindia Steam Navigation Company Ltd. and Food

Corporation of India at the Madras port. It claimed deduction of payments of commissioner said to have been made to the crew of various ships

calling at the port. The ITO took the expenditure to be in the nature of entertainment expenditure and limited the deduction to a sum of Rs. 5,000

for the assessment years 1968-69 to 1970-71, accordance with law then in force in relation to such expenditure and disallowed the whole of it in

1971-72 and 1972-73, in accordance with provisions then in force. On appeal, the AAC confirmed the order of the ITO. The assessee went by

way of further appeal to the Tribunal and contended that the captain of the ship had to issue a ""no damage"" certificate before it could claim the bills

from its constituents and that the payments which were claimed as deductions represented the customary payments or mamool prevailing in this line

of business and since such customary payments were inevitable in this line of business and were not in any manner illegal, the entire claim of the

assessee should been allowed as a deduction. The revenue disputed this claim.

The Tribunal, after referring to the total contract receipts and the commissioner claimed to have been paid, come to the conclusion that, in the

absence of details regarding the total tonnage of cargo cleared by the assessee for each year, the amount as calmed by the assessee could not be

allowed as deduction. It restricted the disallowance to 15% of the commission payments made for each one of the assessment years under

reference. The disallowance so made is disputed by the revenue and the matter is, therefore, now reference to this court.

From the facts mentioned above, it would be clear and it has not been disputed by the I.T. authorities, that the assessee had to obtain a ""no

damage"" certificate from the captain of the ship before it could claim the bills from its constituents. In order to preserve proper relationship with the

staff in the ship so as to enable such certificates being obtained, the assessee, it was claimed, made these payments for the several years. The ITO

himself has, in the course of the assessment order, observed about the inevitable nature of this expenditure in this trade. The Tribunal also has

apparently drawn on the treatment of the claim made in similar cases. It was in that context that the Tribunal estimated 15% of the commission

payments as claimed by the assessee as inadmissible. The balance of 85% was taken to be admissible. This 15% was to cover any inflation in the

nature of the claim made by assessee.

The learned counsel for the Commissioner contended that no materials had absolutely been brought or record to show that the assessee had to

make these payments in order to carry on its business. The observation of the ITO himself about the inevitable nature of the expenditure in this kind

of business is a piece of material and his allowance of Rs. 5,000 on the basis that it was an entertainment expenditure is to show that this kind of

expenditure is ordinary and usually incurred in this line of business. The fact that the expenditure was incurred is not in dispute. The ITO proceeded

on the basis that it was entertainment expenditure. However, the question whether it could be classified so, is not before us. The case now

proceeds before us on the basis that it is an ordinary expenditure which would have to be allowed provided the assessee furnishes some proof

thereof and provided also the assessee establishes some connection between the payment and its business. As far as the connection is concerned,

it has been already indicated that the ITO himself was satisfied about the inevitable nature of these payments having to be made. From the nature of

things, it would not be possible to obtain proof for these payments. The payments cannot be said to be illegal payments. In the course of the

Tribunal''s order, there is reference to the fact that the customary payment is about 25 paise for every tonnage cleared. The assessee did not have

any proper account regarding the total tonnage cleared. It is only in the absence of the records that the Tribunal had to estimate the disallowable

portion of the payment and restricted the disallowance to 15%. We consider that in coming to this conclusion the Tribunal cannot be said to have

committed any error of law.

The third question proceeds as it the evidence of the payment if disputed. Even the ITO had not questioned the genuineness of the payment. He

allowed a part of it with reference to the first three years on the basis that it was entertainment expenditure and disallowed the rest in accordance

with the law then in force. He did not allow any part of the expenditure for the later two years because s. 37(2A) contemplated disallowance of the

entertainment expenditure. He did not dispute the factum of payment. Now, that the question of the expenditure being entertainment expenditure is

out of the way, the only point to be examined is whether the payment was at any time disputed by the I.T. authorities. We do not find that the ITO

disputed the genuineness of the payment and, therefore, the third question cannot be said to be arise out of the Tribunal''s order. The other two

questions are answered in the affirmative and in favour of the assessee. The assessee will be entitled to its costs. Counsel fee is Rs. 500.