COMMISSIONER OF INCOME-TAX VS SAUSER LIQUOR TRADERS
1998 P T D 2356
[222 I T R 33]
[Madhya Pradesh High Court (India)]
Before A. K. Mathur C. J. and S. K. Kulshrestha, J
COMMISSIONER OF INCOME-TAX
versus
SAUSER LIQUOR TRADERS
M. C. C. Nos.72 of 1989 and 344 of 1992, decided on 15/02/1996.
Income-tax-----
----Business expenditure---Liquor Business---Expenditure on illegal transactions---Not deductible---Indian Income Tax Act, 1961, S.37.
Even though illegal transactions might have resulted in profits which may be taxable no deduction for the amount paid by the assessee for illegal purposes can be allowed.
Held accordingly, that the assessee was not entitled to deduction of Rs.52,589 paid by the assessee for illegal purposes.
CIT (Addl.) v. Badrinarayan Shrinarayan Akodiya (1975) 101 ITR 317 (MP); CIT v. Coimbatore-Salem Transport (Pvt.) Ltd. (1966) 61 ITR 480 (Mad.); CIT v. Kodandarama & Co. (1983) 144 ITR 395 (AP); CIT v. Rajdev Kirana Stores (1990) 181 ITR 285 (MP) and Sanghi Bros. v. CIT (1993) 201 ITR 303 (Raj.) fol.
CIT v. Kothari (SC) (1971) 82 ITR 794 (SC); CIT (Addl.) v. Kuber Singh Bhagwandas (1979) 118 ITR 379 (MP); CIT v. Piara Singh (1980) 124 ITR 40 (SC); CIT v. Shri Ram Chander (1986) 159 ITR 689 (P & H); Madhya Pradesh State Industries Corporation v. CIT (1968) 69 iTR 824 (MP) and Shri Vishnu Kumar Soni v. CIT (1985) 155 ITR 34 (MP) ref.
V.K. Tankha for the Commissioner.
G.N. Purohit for the Assessee.
JUDGMENT
A. K. MATHUR, C. J.---Both the reference applications involve a common question of law; therefore, they are disposed of by this common judgment.
This is an income-tax reference under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the I.T. Act") at the instance of the Revenue and the following question of law has been referred by the Tribunal for answer of this Court, which reads as under:
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that in computing the net income of the assessee from illegal sale of liquor the assessee was entitled to deduction of Rs.52,589 alleged to have been paid as bribes to officials, particularly when the same amount of Rs.52,589 had been claimed as deduction against legal sales and disallowed for want of verification?"
The brief facts giving rise to this reference are thus: The assessee/non-applicant is a firm deriving income from the purchase and sale of country liquor, after obtaining the liquor contracts through the procedure prescribed by the Madhya Pradesh Government. The assessee filed an original income-tax return on September 13, 1982, declaring therein its income at Rs.1,54,940. Subsequently, this return was revised down to Rs.1 lakh. On February 4, 1981, the business and residential premises of the assessee were searched and therein certain books, vouchers etc., were seized. The said books revealed that the assessee had made some of the purchases of liquor from certain unauthorised sources. All these purchases were, according to the assessee, duly incorporated by it in the books of accounts, seized by the Department in the search. In order to enable it to make the aforesaid unauthorised purchases and sales thereafter the assessee had to incur certain expenses amounting to Rs.52,589 which were illegal transactions paid to the police staff, sub-inspector, D.E.O., and other officers. The Income-tax Officer brought to tax income arising from the said purchases and sales from unauthorised sources, but he rejected the assessee's claim with regard to deduction of the said illegal expenses.
The assessee, aggrieved against the order of the Income-tax Officer, preferred an appeal before the Commissioner of Income-tax (Appeals), who rejected the appeal.
Aggrieved against the order of the Commissioner of Income-tax (Appeals), the assessee preferred second appeal before the Tribunal, which allowed the claim of Rs.52,589 of the assessee. Hence, the Revenue has moved an application before the Tribunal for making a reference and, accordingly, the aforesaid question of law has been referred by the Tribunal for answer of this Court.
We have heard learned counsel for the parties and perused the records. Learned counsel for the parties has invited our attention to various decisions of the Supreme Court as well as that of the High Courts in the case of CIT v. Coimbatore-Salem Transport (Pvt.) Ltd. (1966) 61 ITR 480 (Mad.); M.P. State Industries Corporation v. CIT (1968) 69 ITR 824 (MP); CIT v. Kothari (S.C.) (1971) 82 ITR 794 (SC); CIT (Addl.) v. Badrinarayan Shrinarayan Akodiya (1975) 101 ITR 817 (MP); CIT (Addl.) v. Kuber Singh 8hagwandas (.1979) 118 ITR 379 (MP) (FB); CIT v. Piara Singh (1980) 124 ITR 40 (SC); CIT v. Kodandarama & Co. (1983) Co. (1983) 144 ITR 395 (MP); Shri Vishnu Kumar Soni v. CIT (1985) 155 ITR 34 (MP); CIT v. Shri Ram Chander (1986) 159 ITR 689 (P & H); CIT v. Rajdev Kirana Stores ;1990) 181 1TR 285 (MP) and Sanghi Bros. v. CIT (1993) 201 ITR 303 Raj.) Suffice it to say that the amount of Rs.52,589 which was claimed by the assessee as a revenue expenditure, was disallowed by the Income-tax Officer, being illegal. As a matter of fact, this amount was paid by the assessee towards a bribe, which is against the public policy. All the expenditure which can be allowed, is legitimate and not illegal. In series of decisions the Supreme Court as well as other High Courts have taken the view that if the penalty is paid by the assessee for unlawful purpose, then such amount has not been deducted as a business expenditure. In order to procure illegal benefit or for doing any illegal thing, certain penalty was imposed, then such penalty cannot be exempted. In the case of S. C. Kothari (1 971) 82 ITR 794, their Lordships of the Supreme Court held (headnote):
"(i) that the contracts in respect of which the loss of Rs.3,40,443 was incurred by the assessee were illegal contracts;
(ii) that the assessee was not entitled to a set-off under the first proviso to section 24(I) of the Indian Income-tax Act, 1922, of the loss of Rs.3,40,443 against its profit in speculative transactions;
(iii) that however if the business in which the loss was sustained was the same as the business in which the profits was derived, then the loss had to be taken into account while computing the profits of the business under section (10(1)."
In that case also, their Lordships of the Supreme Court found that the certificate granted by the High Court was defective and, therefore, the matter was remitted to the High Court to decide the point whether the profits and losses were incurred in the same business even though that business involved the entering into of contracts, some of which were, under the eye of the law, illegal. Therefore, the ratio is that such illegal transaction has not been countenanced. Similarly, in the case of Rajdev Kirana Stores (1990) 181 ITR 285, their Lordships of this court observed (headnote).
"The amount paid by the assessee on account of penalty under the provisions of the Madhya Pradesh General Sales Tax Act, 1958, for breach of the law cannot be allowed deduction as business expenditure as such expenditure cannot be held to be laid out wholly and exclusively for the purpose of the business of the assessee."
In a large number of decisions referred to above, a consistent view has been taken that though the illegal transaction might have resulted in profit and which may be taxable, but no deduction for such unlawful means employed for this purpose can be given. It is true that under the Income Tax Act, the income is, of course, taxed, but the illegal ways and means employed by the assessee for procuring such illegal profit cannot be countenanced and it is against the public policy. Therefore, we are of the opinion that the view taken by the Income-tax Officer is correct and the assessee is not entitled to deduction of Rs.52,589 paid by the assessee for illegal purpose and the same has rightly been disallowed by the Income-tax Officer and affirmed by the Commissioner of Income-tax (Appeals). The view taken by the Tribunal is not correct. Hence, this reference is answered against the assessee and in favour of the Revenue.
M.B.A./1509/FC Reference answered.